<PAGE>
As filed with the Securities and Exchange Commission on March 20, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
__________
CALIFORNIA SILICON GAMING, INC. 77-0357939
(State or Other (Exact Name of Registrant (I.R.S. Employer
Jurisdiction as Specified in its Charter) Identification Number)
of Incorporation or
Organization)
2800 West Bayshore Road
Palo Alto, California 94303
(650) 842-9000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
__________________
DONALD J. MASSARO
President and Chief Executive Officer
SILICON GAMING, INC.
2800 West Bayshore Road
Palo Alto, California 94303
(650) 842-9000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
_____________________
Copy to:
James M. Koshland, Esq.
William A. Rodoni, Esq.
GRAY CARY WARE & FREIDENRICH LLP
400 Hamilton Avenue
Palo Alto, California 94301
(650) 328-6561
_____________________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to a dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective Act amendment filed pursuant to Rule
462(c) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==========================================================================================================================
<S> <C> <C> <C> <C>
Title of Each Class of Amount Proposed Maximum Proposed Maximum
Securities to be Registered to be Aggregate Price Per Aggregate Offering Amount of Registration Fee
Registered Security (1) Price (1)
- --------------------------------------------------------------------------------------------------------------------------
Common Stock,
$.001 par value (2) 375,000 shares (2) $9.875 $3,703,125 $1,093
=======================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
(2) Such number represents the number of shares of Common Stock offered hereby
and issuable upon exercise of the warrants issued by Silicon Gaming, Inc.
as more fully described herein.
_______________________________
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED MARCH 20, 1998
375,000 SHARES
SILICON GAMING, INC.
COMMON STOCK
The 375,000 shares of Common Stock of Silicon Gaming, Inc., a California
corporation ("SGI" or the "Company") offered by this Prospectus (the "Shares")
represent shares issuable upon exercise of warrants issued by SGI (the
"Warrants") in connection with the Company's sale of (i) $30,000,000 principal
amount of Senior Discount Notes due September 30, 2002 (the "Notes") and (ii)
the Warrants to B III Capital Partners, L.P., a Delaware limited partnership
(the "Selling Shareholder") which was consummated on September 30, 1997 (the
"Financing"). The Shares may be sold from time to time by or on behalf of the
Selling Shareholder who is described in this Prospectus under "Selling
Shareholder." As part of the Financing, the Company has agreed to register the
Shares under the Securities Act of 1933, as amended (the "Securities Act"). The
Company has also agreed to use its best efforts to cause the registration
statement covering the Shares to remain effective until the longer of (i)
twenty-four months following the date such registration statement is declared
effective by the Securities and Exchange Commission (the "Commission") or (ii)
if the holder of the Shares is an Affiliate of the Company, the date which is
three months after the date on which such holder ceases to be an Affiliate of
the Company, provided that the Company first provides such holder with an
opinion of counsel to such effect.
The Company has been advised by the Selling Shareholder that it intends to sell
all or a portion of the Shares from time to time in The Nasdaq National Market,
in negotiated transactions or otherwise, and on terms and at prices then
obtainable. The Selling Shareholder and any broker-dealers, agents or
underwriters that participate with the Selling Shareholder in the distribution
of any of the Shares may be deemed to be "underwriters" within the meaning of
the Securities Act, and any commission received by them and any profit on the
resale of the Shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The Company has agreed to
indemnify in certain circumstances the Selling Shareholder against certain
liabilities, including liabilities under the Securities Act. The Selling
Shareholder has agreed to indemnify in certain circumstances the Company against
certain liabilities, including liabilities under the Securities Act. See "Plan
of Distribution."
The Company will bear all out-of-pocket expenses incurred in connection with the
registration of the Shares, including, without limitation, all registration and
filing fees imposed by the Securities and Exchange Commission (the
"Commission"), the National Association of Securities Dealers ("NASD") and blue
sky laws, printing expenses, transfer agents' and registrars' fees, and the
reasonable fees and disbursements of the Company's outside counsel and
independent accountants and a single counsel for the Selling Shareholder, but
excluding underwriting discounts and commissions and transfer taxes and other
costs and expenses incident to the offering and sale of the shares to the public
which shall be borne by the Selling Shareholder.
THE SHARES HAVE NOT BEEN REGISTERED FOR SALE UNDER THE SECURITIES LAWS OF ANY
STATE OR JURISDICTION AS OF THE DATE OF THIS PROSPECTUS. BROKERS OR DEALERS
EFFECTING TRANSACTIONS IN THE SHARES SHOULD CONFIRM THE REGISTRATION OF THE
SHARES UNDER THE SECURITIES LAWS OF THE STATES IN WHICH SUCH TRANSACTIONS OCCUR,
OR THE EXISTENCE OF ANY EXEMPTIONS FROM SUCH REGISTRATION.
The Company's Common Stock is quoted on The Nasdaq National Market. On March
17, 1998, the last sales price of the Company's Common Stock as reported on The
Nasdaq National Market was $9.875.
________________________________
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR INFORMATION THAT SHOULD BE CONSIDERED
BY PROSPECTIVE PURCHASERS OF THE SHARES OFFERED HEREBY.
<PAGE>
________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
________________________________
NEITHER THE NEVADA GAMING COMMISSION, THE NEVADA STATE
GAMING CONTROL BOARD, THE MISSISSIPPI GAMING COMMISSION,
THE COLORADO LIMITED GAMING CONTROL COMMISSION, THE MISSOURI
GAMING COMMISSION, THE NEW JERSEY CASINO CONTROL COMMISSION NOR ANY OTHER
GAMING AUTHORITY HAS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFERING
MEMORANDUM OR THE INVESTMENT MERITS OF THE COMMON STOCK
HEREBY. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
________________________________
The date of this Prospectus is March __, 1998.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company can be inspected and copied at the Commission's public reference room at
450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the Regional
Offices of the Commission located at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60611 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can also be
obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed
by the Commission. SGI's Common Stock is traded on The Nasdaq National Market.
Reports and other information concerning SGI can also be inspected at the
offices of the National Association of Securities Dealers, Inc., Market Listing
Section, 1735 K Street, N.W., Washington, D.C. 20006. Such reports and other
information may also be inspected without charge at a Web site maintained by the
Commission. The address of the site is http:\\www.sec.gov.
The Company has also filed with the Commission a Registration Statement on
Form S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is made to the Registration Statement, copies of
which may be obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed
by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act are incorporated herein by reference:
1. The description of the Company's securities contained in the Company's
Registration Statement on Form 10 filed on April 24, 1996 as amended on June 13,
1996 and October 25, 1996;
2. Annual Report on Form 10-K for the year ended December 31, 1997; and
3. Quarterly Reports on Form 10-Q for the three month periods ended March
31, 1997, June 30, 1997 and September 30, 1997.
All documents and reports subsequently filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
of such documents or reports. Any statement contained in a document
incorporated by reference or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus. The Company will provide without charge to each person to
whom this Prospectus is delivered, upon written or oral request, a copy of any
or all of the foregoing documents incorporated by reference in this Prospectus
(other than any exhibits thereto). Requests for such documents should be
directed to Silicon Gaming, Inc. at 2800 West Bayshore Road, Palo Alto,
California 94303 (telephone number (650) 842-9000), Attn: Investor Relations.
3
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THE COMPANY
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. Actual results could differ materially from those projected in these
forward-looking statements as a result of a variety of factors, including those
set forth below and elsewhere in this Prospectus.
SGI 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/TM/, combines an advanced multimedia gaming platform with software-based
games that the Company believes will be more engaging and entertaining than
other gaming devices currently available and will, as a result, generate
increased gaming revenue per device ("win per machine") for the casino operator.
Odyssey features 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 Company is attempting to maximize the entertainment value offered on the
video screen by providing multiple levels of achievement within certain games,
so that, through successful play over a period of time, a player may advance to
a bonusing sequence and win additional jackpots. SGI believes that, by
utilizing these features, its products will encourage longer and more frequent
periods of play by existing slot machine customers and attract new gaming
customers who are seeking greater entertainment value than that offered by the
current generation of slot machines. The Company has designed its machines with
a number of unique player features, such as play stoppage entertainment. In
addition, Odyssey's modular components and Machine Management System/TM/
software provide easy-to-use diagnostics designed to minimize player
inconvenience and machine down-time.
The majority of today's slot machines are "hardware dominant," consisting of
a fixed and unvarying game played out on spinning reels or a small video screen
mounted within a large metal box. By contrast, Odyssey is "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 six different games on a single machine. Furthermore, Odyssey's 26-inch-
diagonal touchscreen display serves both as the play field when the machine is
in use and a source of attraction by displaying sample game highlights and
information when the machine is not in use. Another benefit of a "software
dominant" machine is that casino operators can quickly and easily change or
upgrade games. The Company expects that casino operators will be able to
upgrade SGI's machines simply by installing new software, rather than by
replacing an entire slot machine.
Odyssey features a number of sophisticated technology components, including
a 133-MHz Pentium processor, a 4-gigabyte hard drive, state-of-the-art video
processing devices and a high speed PCI bus. The software powering Odyssey is
significantly more complex and flexible than the software driving current
generation slot machines and video gaming devices. The Company believes that
the programs driving current generation gaming devices utilize approximately 0.1
megabytes of information. By contrast, each of the Company's games utilizes
several hundred megabytes of information, requiring storage on a high capacity
hard drive.
SGI was incorporated in California on July 27, 1993. Its principal offices
are located at 2800 W. Bayshore Road, Palo Alto, California 94303. The
Company's telephone number is (650) 842-9000.
4
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RISK FACTORS
The following risk factors should be considered in conjunction with the
other information included and incorporated by reference in its Prospectus
before purchasing the Common Stock offered hereby issuable upon conversion of
the Warrants.
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 will be accepted by slot players. There can be
no assurance that Odyssey 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 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, Odyssey's success 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 several casinos have agreed to purchase or to
install and evaluate 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.
Odyssey has been licensed for manufacture, distribution and sale in Nevada
and Missouri and the Company has only recently commenced installing its machines
on casino floors. 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, production delays or delays in product licensing.
The Company's success will depend 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. In
addition, Odyssey's success will also depend upon the Company's ability to
generate new and successful software-based games which are readily accepted in
the marketplace. Moreover, should Odyssey 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 September 30, 1997, the Company had net losses since inception, and
the Company expects to continue to incur substantial losses and negative cash
flows at least through mid-1998. There can be no assurance that the Company
will become profitable or cash flow positive at any time in the future. The
likelihood of the success of the Company must be considered in light of the
expenses, difficulties, complications and 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 or customer support. Accordingly, it is not possible to estimate
future operating expenses and revenue based upon historical operating
performance. Operating results will depend, in part, on
5
<PAGE>
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 and short-term
investments, will be sufficient to fund its capital and operating requirements
until the Company is capable of generating positive cash flow from operations.
The Company's Financing is intended primarily to fund its product roll-out,
expand operations, and fund the adoption of its revenue sharing plan. The cash
flow generated by sales under this 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 Financing, 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 roll-out, 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 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 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 1996. Because of its
extensive market presence, distribution capacity, player acceptance and
financial, technological and other resources, IGT represents formidable
competition. Several other companies, including Bally Gaming International,
Inc. ("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 gaming machines. Any success the Company might have may
benefit existing competitors and induce new competitors to enter the market. If
Odyssey 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.
MANAGEMENT OF GROWTH
Execution of the Company's plan of operation will require significant
growth. The Company's current plans for growth will place a significant strain
on the Company's financial, managerial and other resources. The Company's
ability to manage its growth effectively will require it to continue to improve
its operational, financial and management information systems and to attract,
motivate and train key employees. If the Company's executives are unable to
manage growth effectively, the Company's business, operating results and
financial condition would be materially and adversely affected.
6
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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 effectively to protect its
technology from misappropriation by competitors. In addition, the protections
offered by trademark, copyright and trade secret laws would not prevent a
competitor from designing games having appearance and functionality that closely
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 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.
7
<PAGE>
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 only recently begun to manufacture Odyssey for commercial
distribution and has had no prior experience in large-scale manufacturing of
gaming machines. The transition to large-scale manufacturing of Odyssey 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.
LEVERAGE, SUBORDINATION OF SHAREHOLDERS AND RESTRICTIONS ON FUTURE FINANCIAL
ACTIVITIES
In connection with the sale of the Notes in the Financing, the Company
incurred $30 million of indebtedness. The Company's principal and interest
obligations have increased substantially as a result of the Financing. The
degree to which the Company is leveraged could materially and adversely affect
the Company's ability to obtain future financing for working capital,
acquisitions or other purposes and could make it more vulnerable to industry
downturns and competitive pressures. The Company's ability to meet its debt
service obligations is dependent upon the Company's future performance, which
will be subject to financial, business and other factors affecting the
operations of the Company, many of which are beyond its control.
The Notes are secured by all of the Company's assets as well as all of the
assets of the Company's subsidiaries. As a result, in the event of bankruptcy,
liquidation or reorganization of the Company or certain other events, the assets
of the Company will be available to pay obligations on the Notes prior to any
payment to the Company's shareholders, and there may not be sufficient assets
remaining to pay amounts due to such shareholders then outstanding.
The Securities Purchase Agreement by and between the Company and the Selling
Shareholder (the "Securities Purchase Agreement") also contains various
covenants, restrictions and limitations on the Company's ability to undertake
future financial activities. Such restrictions and limitations could materially
and adversely affect the Company's ability to obtain future financing and could
limit or restrict the Company's ability to conduct future business transactions.
See "Description of Notes."
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
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largely limited to new projects in existing markets. 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.
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. The Company and certain of its subsidiaries have
received the requisite corporate approvals in Nevada, Mississippi, Missouri and
Colorado. The Company has also applied for corporate approval in New Jersey,
Minnesota and Indiana and intends to file for approval in other jurisdictions
where its product can be sold legally. Odyssey was approved for sale in Nevada
on March 20, 1997 and in Missouri on October 17, 1997 after review by Gaming
Laboratories International, Inc. ("GLI"), an independent testing facility. On
December 18, 1997, Odyssey was approved by the Mississippi Gaming Commission.
The Company has also submitted Odyssey for testing in New Jersey and to GLI for
approval in New Mexico. There can be no assurance that Odyssey will be approved
in any additional jurisdiction. 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. 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.
Any legal or 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 legal or 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. See "Business--Gaming Regulation and
Licensing."
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with such "Year 2000"
requirements. Although the Company believes that its products and systems are
Year 2000 compliant, the Company utilizes third-party equipment and software
that may not be Year 2000 compliant. Failure of such third-party equipment or
software to operate properly with regard to the Year 2000 and thereafter could
require the Company to incur unanticipated expenses to remedy any problems,
which could have a material adverse effect on the Company's business, operating
results and financial condition. The business, operating results and financial
condition of the Company's customers could be adversely affected to the extent
that they utilize third-party software products which are not Year 2000
compliant. Furthermore, the purchasing patterns of customers or potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct their current systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase products and
services such as those offered by the Company, which could have a material
adverse effect on the Company's business, operating results and financial
condition.
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POSSIBLE VOLATILITY OF COMMON STOCK PRICE
The market price of the Company's common stock has historically experienced
significant fluctuations and may continue to fluctuate significantly. Future
announcements concerning the Company or its competitors, quarterly variations in
operating results, announcements of technological innovations, the introduction
of new products or changes in product pricing policies by the Company or its
competitors, proprietary rights or other litigation, changes in earnings
estimates by analysts or other factors could cause the market price of the
Common Stock to fluctuate substantially, particularly on a quarterly basis. In
addition, stock prices for many technology-related companies fluctuate widely
for reasons which may be unrelated to operating results of such companies.
These fluctuations, as well as general economic, market and political conditions
such as recessions or military conflicts, may materially and adversely affect
the market price of the Company's Common Stock. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such companies. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
LIMITATIONS ON REPURCHASE OF NOTES
Upon a Change of Control, the holder of the Notes will have certain rights
including requiring the Company to redeem all or a portion of such holder's
Notes. If a Change of Control were to occur, there can be no assurance that the
Company would have or be able to obtain sufficient funds to pay the repurchase
price for all Notes tendered by the holder. In addition, any future credit
agreements or other agreements relating to other indebtedness to which the
Company becomes a party may contain restrictions and provisions which prohibit
the Company from repurchasing or redeeming any Notes or provide that a Change of
Control would constitute an event of default thereunder. In the event a Change
of Control occurs at a time when the Company is prohibited from repurchasing or
redeeming Notes, the Company could seek the consent of its lenders to the
repurchase of Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company would remain prohibited from repurchasing or redeeming
Notes. In such case, the Company's failure to repurchase tendered Notes may
constitute an Event of Default under and as defined in the Securities Purchase
Agreement, which may, in turn, constitute a further default under the terms of
other indebtedness that the Company may enter into from time to time. See
"Description of Notes--Redemption at Option of Holders upon a Change of
Control."
NO DIVIDENDS
The Company has not paid any cash dividends in the past and does not expect
to do so in the foreseeable future.
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BUSINESS -- GAMING REGULATION AND LICENSING
GENERAL REGULATION OF SHAREHOLDERS OF PUBLICLY TRADED CORPORATIONS
In most jurisdictions, any beneficial owner of the Company's Common Stock is
subject on a discretionary basis to being required to file applications with
gaming regulatory authorities, be investigated and found suitable or qualified
as such. In addition, shareholders whose holdings of Common Stock exceed
certain designated percentages are subject to certain reporting and
qualification requirements imposed by state and federal gaming regulators and,
any shareholder, if found to be unsuitable, may be required to immediately
dispose of its holdings of Common Stock. See "--Nevada Regulatory Matters," "--
Missouri Regulatory Matters," "--Colorado Regulatory Matters," "--New Jersey
Regulatory Matters," and "--Mississippi Regulatory Matters."
The Company must obtain a registration, license, approval or finding of
suitability, and equipment approval in all jurisdictions before it can offer
gaming devices for sale to licensed gaming operations within those
jurisdictions. The licensing process usually involves the licensing or approval
of certain officers, directors, and shareholders of the corporation, and
approval of the specific product that the Company wants to offer for sale.
NEVADA REGULATORY MATTERS
The manufacture, sale and distribution of gaming devices for use or play in
Nevada or for distribution outside of Nevada, the manufacture and distribution
of associated equipment for use in Nevada, and the ownership and operation of
slot machine routes in Nevada are subject to: (i) the Nevada Gaming Control Act
and the regulations promulgated thereunder (collectively, "Nevada Act"); and
(ii) various local ordinances and regulations. Such activities are subject to
the licensing and regulatory control of the Nevada Commission, the Nevada Board,
and various local, city and county regulatory agencies (collectively referred to
as the "Nevada Gaming Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming, or manufacturing or
distribution of gaming devices at any time or in any capacity; (ii) the strict
regulation of all persons, locations, practices, associations and activities
related to the operation of licensed gaming establishments and the manufacture
or distribution of gaming devices and equipment; (iii) the establishment and
maintenance of responsible accounting practices and procedures; (iv) the
maintenance of effective controls over the financial practices of licensees,
including the establishment of minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenue, providing reliable record keeping
and requiring the filing of periodic reports with the Nevada Gaming Authorities;
(v) the prevention of cheating and fraudulent practices; and (vi) the provision
of a source of state and local revenue through taxation and licensing fees.
Change in such laws, regulations and procedures could have an adverse effect on
the Company's operations.
On June 19, 1996 the Company was registered by the Nevada Commission as a
publicly-traded corporation (a "Registered Corporation"), and SGI-Nevada was
approved as a manufacturer, distributor and operator of a slot machine route.
On March 20, 1997, the Nevada Commission granted final approval of the Company's
product. Such gaming approvals require the periodic payment of fees and taxes
and are not transferable. As a Registered Corporation, the Company is required
periodically to submit detailed financial and operating reports to the Nevada
Commission and furnish any other information which the Nevada Commission may
require. No person may become a shareholder of, or receive any profit from SGI-
Nevada without first obtaining licenses and approvals from the Nevada Gaming
Authorities. The Company and SGI-Nevada have obtained the various
registrations, approvals, permits and licenses in order to engage in
manufacturing, distribution and slot route activities in Nevada.
All gaming devices that are manufactured, sold or distributed for use or
play in Nevada, or for distribution outside of Nevada, must be manufactured by
licensed manufacturers and distributed or sold by licensed distributors. All
gaming devices manufactured for use or play in Nevada must be approved by the
Nevada
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Commission before distribution or exposure for play. The approval process for
gaming devices includes rigorous testing by the Nevada Board, a field trial and
a determination as to whether the gaming device meets strict technical standards
that are set forth in the regulations of the Nevada Commission. Associated
equipment must be administratively approved by the Chairman of the Nevada Board
before it is distributed for use in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, a Registered Corporation
or its subsidiaries in order to determine whether such individual is suitable or
should be licensed as a business associate of a gaming licensee. Officers,
directors and certain key employees of the Company and SGI-Nevada are required
to file applications with the Nevada Gaming Authorities and may be required to
be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any cause which
they deem reasonable. A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Changes in licensed
positions must be reported to the Nevada Gaming Authorities and in addition to
their authority to deny an application for a finding of suitability or
licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position. On June 19, 1996 SGI's Chief Executive Officer,
Chief Financial Officer, the required directors and SGI-Nevada's sole officer
and director were found suitable by the Nevada Commission.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with SGI or SGI-Nevada, the Company would have to sever all
relationships with such person. In addition, the Nevada Commission may require
the Company or SGI-Nevada to terminate the employment of any person who refuses
to file appropriate applications. Determination of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.
The Company and SGI-Nevada are required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities and similar financing transactions by the Company
are required to be reported to or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by the Company or
SGI-Nevada, the registration and gaming licenses it holds could be limited,
conditioned, suspended or revoked, subject to compliance with certain statutory
and regulatory procedures. In addition, the Company, SGI-Nevada and the persons
involved could be subject to substantial fines for each separate violation of
the Nevada Act at the discretion of the Nevada Commission. Limitation,
conditioning or suspension of any gaming license could (and revocation of any
gaming license would) materially adversely affect the Company's gaming
operations.
Any beneficial holder of a Registered Corporation's voting securities,
regardless of the number of shares owned, may be required to file an
application, be investigated, and have his suitability determined as a
beneficial holder of the Registered Corporation's voting securities if the
Nevada Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the State of Nevada. The applicant
must pay all costs of investigation incurred by the Nevada Gaming Authorities in
conducting any such investigation.
The Nevada Act requires any person who acquires beneficial ownership of more
than 5% of a Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of a Registered Corporation's voting securities apply to
the Nevada Commission for a finding of suitability within thirty days after the
Chairman of the Nevada Board mails the written notice requiring such filing.
Under certain circumstances, an "institutional investor," as defined in the
Nevada Act, which acquires more than 10% but not more than 15%, of the
Registered Corporation's voting securities may apply to the Nevada Commission
for a waiver of such finding of suitability if such institutional investor holds
the voting securities for investment purposes only. An institutional investor
shall not be deemed to hold voting securities for investment purposes unless the
voting securities were acquired and are held in the ordinary course of business
as an institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies or operations of the Registered
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Corporation, or any of its gaming affiliates, or any other action which the
Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by shareholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent.
If the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any shareholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the Common Stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company will be subject to disciplinary
action if, after it receives notice that a person is unsuitable to be a
shareholder or to have any other relationship with the Company or SGI-Nevada,
the Company (i) pays that person any dividend or interest upon voting securities
of the Company, (ii) allows that person to exercise, directly or indirectly, any
voting right conferred through securities held by that person, (iii) pays
remuneration in any form to that person for services rendered or otherwise, or
(iv) fails to pursue all lawful efforts to require such unsuitable person to
relinquish his voting securities including, if necessary, the immediate purchase
of said voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
The Company is required to maintain a current stock ledger in Nevada which
may be examined by the Nevada Gaming Authorities at any time. If any securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the stock certificates of the Company to
bear a legend indicating that the securities are subject to the Nevada Act.
However, the Nevada Commission has not imposed such a requirement on the Company
to date, but it is unknown whether the Nevada Commission will impose such a
requirement on the Company in the future.
As a Registered Corporation, the Company may not make a public offering of
its securities, without the prior approval of the Nevada Commission if the
securities or proceeds therefrom are intended to be used to construct, acquire
or finance gaming facilities in Nevada, or to retire or extend obligations
incurred for such purposes. Approval of a public offering, if given, does not
constitute a finding, recommendation or approval by the Nevada Commission or the
Nevada Board as to the accuracy or adequacy of the prospectus or the investment
merits of the securities offered. Any representation to the contrary is
unlawful.
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person whereby he obtains control, may not occur
without the prior approval of the Nevada Commission. Entities seeking to
acquire control of a Registered Corporation must satisfy the Nevada Board and
the Nevada Commission in a variety of stringent standards prior to assuming
control of such Registered Corporation. The Nevada Commission may also require
controlling
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shareholders, officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire control, to be
investigated and licensed as part of the approval process relating to the
transaction.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's shareholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which gaming operations are to be conducted. Depending
upon the particular fee or tax involved, these fees and taxes are payable either
monthly, quarterly or annually and are based upon either: (i) a percentage of
the gross revenue received; or (ii) the number of gaming devices operated.
Annual fees are also payable to the State of Nevada for renewal of licenses as a
manufacturer, distributor and operator of a slot machine route.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities that
are harmful to the state of Nevada or its ability to collect gaming taxes and
fees, or employ a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
In the future, SGI intends to seek the necessary registrations, licenses,
approvals, and findings of suitability for the Company, its product and its
personnel in other jurisdictions throughout the world. However, there can be no
assurances that such registrations, licenses, approvals or findings of
suitability will be obtained. Many other jurisdictions in which the Company
wishes to do business require various licenses, permits, and approvals in
connection with the manufacture and/or distribution of gaming devices, typically
involving restrictions similar in most respects to those of Nevada.
MISSOURI REGULATORY MATTERS
Gaming was originally authorized in the state of Missouri in November 1992.
On April 29, 1993, new legislation (the "Missouri Act") was enacted which
replaced the 1992 legislation. In January 1994 the Missouri Supreme Court
handed down a decision which held that the operation of certain games of chance
such as traditional slot machines was prohibited by the constitution of the
state of Missouri. On November 8, 1994, the people of Missouri voted in favor
of an amendment to the Missouri constitution to allow slot machine gaming in the
state. Six months prior to the constitutional amendment, the state legislature
enacted a statute defining Mississippi and Missouri Rivers to include artificial
spaces located 1,000 feet or less from the closest edge of the
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main channel of the river. The constitutional amendment, however, authorized
games of change "only upon the Mississippi River and the Missouri River." In
August 1996, three Missouri taxpayers filed a lawsuit seeking to prevent the
licensing of a gaming facility in an artificial space not contiguous to the
river, but within 1,000 feet of the main channel. The lower court dismissed the
action summarily. On November 25, 1997 the Supreme Court of Missouri reversed
the lower court decision.
In Akin et. al. v. Missouri Gaming Commission, et. al., 956 S.W. 261 (Mo.
1997), the Supreme Court ordered the lower court to hear evidence and make
findings consistent with the Supreme Court opinion that "the 1994 constitutional
amendment authorizes games of chance to be conducted on excursion gambling boats
and floating facilities solely over and in contact with the surface of the
Mississippi and Missouri Rivers. Such gambling may occur in artificial spaces
that are contiguous to the surface stream (and thus river-based), but not in
other artificial spaces that are not contiguous to the surface stream of the
river (that are land-based)."
Without a state-wide referendum explicitly permitting games of chance to be
conducted adjacent to, as opposed to contiguous with, the Mississippi and
Missouri Rivers, six of Missouri's 11 casinos could lose their licenses to
operate slot machines and other games of chance within the state.
Currently, SGI-Missouri has an exclusive agreement with the Stations Casino
projects in Kansas City and St. Charles, Missouri, with 130 Odyssey's at the
Kansas City casino and 60 Odyssey's at the St. Charles casino. The Kansas City
facility would be impacted by a finding that it is not in compliance with the
requirement that the casino be "in contact" with the river. The St. Charles
facility is not one of the six Missouri casinos affected by the Supreme Court's
decision. The exclusive arrangement between SGI-Missouri and Stations Casinos
ends on October 30, 1998, at which time the other casinos operating in the state
become potential customers.
Irrespective of the challenge to the configuration of the state's gaming
facilities, the Missouri Act provides for the licensing and regulation of
excursion gambling boat operations on the Mississippi and Missouri Rivers in the
state of Missouri and the licensing and regulation of persons who distribute
gaming equipment and supplies to gaming licensees. An excursion gambling boat
is a boat, ferry or other floating facility on which gaming is allowed. The
Missouri Act limits the loss per individual on each excursion to $500, but does
not otherwise limit the amount which may be wagered on any bet or the amount of
space in the vessel which may be utilized for gaming.
The Missouri Act is to be implemented and enforced by a five-member Missouri
Commission. The Missouri Commission is empowered to issue such number of
riverboat gaming licenses as it determines to be appropriate. A gaming license
cannot be granted to any gaming operator unless the voters in such operator's
"home dock" city or county have authorized gaming activities on gaming
riverboats.
On September 1, 1993, the Missouri Commission adopted rules and regulations
(the "Missouri Regulations") governing the licensing, operation and
administration of riverboat gaming in the state of Missouri and the form of
application for such licensure. The Missouri Regulations generally provide for
four types of licenses--a Class A owner's license; a Class B operator's license;
a supplier's license; and an occupational license. In addition, the Missouri
Regulations remain subject to amendment and interpretation, and may further
limit or otherwise adversely affect the Company and its Missouri gaming
operations.
Directors and certain officers and key persons of the Company and Silicon
Gaming-Missouri ("SGI-Missouri"), a wholly-owned subsidiary of SGI, must file
personal disclosure forms with the gaming license application and must be found
suitable by the Missouri Commission. Further, the Missouri Regulations require
that all employees of SGI-Missouri who are involved in gaming operations and who
are employed on the licensed premises must file applications for and receive
Missouri gaming occupational licenses. The Missouri regulations require
disclosure by the Company and SGI-Missouri of any person or entity holding any
direct or indirect ownership interest in SGI- Missouri. SGI-Missouri is also
required to disclose the names of the holders of all of the Company's and SGI-
Missouri's debt including a description of the nature and terms of such debt.
The Missouri Commission may, in its sole discretion, request additional
information with respect to such holders. Missouri suppliers' gaming licenses
must be renewed annually for a fee of $5,000 or such greater amount as may
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be determined by the Commission. On November 8, 1996, SGI-Missouri was granted a
temporary supplier's license by the Missouri Commission.
Under Missouri law, gaming licenses are not transferable, and under the
Missouri Regulations the transfer of (i) any ownership interest in a privately
held business entity or (ii) a 5% or greater interest in a publicly traded
company directly or indirectly holding a Missouri gaming license is prohibited
without the approval of the Missouri Commission. Further, without the prior
approval of the Missouri Commission, the Missouri Regulations prohibit
withdrawals of capital, loans, advances or distribution of any assets in excess
of 5% of accumulated earnings by a license holder to anyone with an ownership
interest in the license holder.
The Missouri Regulations specifically provide that any action of the
Missouri Commission shall not indicate or suggest that the Missouri Commission
has considered or passed in any way on the marketability of the applicant or
licensee's securities, or on any other matter, other than the applicant or
licensee's suitability for licensure under Missouri law. A Missouri gaming
license holder can be disciplined in Missouri for gaming-related acts occurring
in another jurisdiction which result in disciplinary action in the other
jurisdiction.
The Missouri Commission has broad powers to require additional disclosure by
an applicant during the processing of a gaming application, to deny gaming
licensure and to administratively fine or suspend or revoke a gaming license for
failure to comply with or for violation of the Missouri Act or Missouri
Regulations.
COLORADO REGULATORY MATTERS
The State of Colorado created the Division of Gaming (the "Division") within
the Department of Revenue to license, implement, regulate and supervise the
conduct of limited gaming. The Director of the Division, under the supervision
of a five-member Colorado Commission, has been granted broad power to ensure
compliance with the Colorado Regulations. The Director may inspect, without
notice, impound or remove any gaming device. He may examine and copy any
licensee's records, may investigate the background and conduct of licensees and
their employees, and may bring disciplinary actions against licensees and their
employees. He also may conduct detailed background investigations of persons
who loan money to the Company.
The Colorado Commission is empowered to issue five types of gaming and
gaming-related licenses. The failure or inability of the Company or Silicon
Gaming-Colorado, Inc. (the "Colorado subsidiary"),or others associated with the
Company or the Colorado subsidiary, to obtain or maintain necessary gaming
licenses will have a material adverse affect on the operations of the Company.
All persons employed by the Company and the Colorado subsidiary and involved,
directly or indirectly, in gaming operations in Colorado also are required to
obtain a Colorado gaming license. The Colorado subsidiary's license must be
reviewed annually and those of its key and support employees every two years.
On January 24, 1997, Silicon Gaming-Colorado, Inc., was granted a manufacturer
and distributor license by the Colorado Limited Gaming Control Commission and
the Company was found suitable to be an associated person of the Colorado
subsidiary.
In addition, pursuant to the Colorado Regulations, no manufacturer or
distributor of slot machines may have an interest in any casino retailer or
operator, allow any of its officers or persons with a substantial interest in it
to have such an interest, employ any person if such person is employed by a
casino retailer or operator, or allow any casino retailer or operator or person
with a substantial interest therein to have an interest in a manufacturer's or
distributor's business. On December 15, 1997, the Division ruled that it is
unlawful for any officers, directors or persons holding a substantial interest
in a manufacturer/distributor to hold publicly traded stock in a corporation
operating as a retailer in Colorado, and vice versa.
Under the Colorado Regulations, any person or entity having any direct or
indirect interest in a gaming licensee or an applicant for a gaming license,
including, but not limited to, the Company and shareholders of the Company, may
be required to supply the Colorado Commission with substantial information,
including, but not limited to, background information, source of funding
information, a sworn statement that such person or entity is not holding his
interest for any other party, and fingerprints. Such information, investigation
and licensing as an "associated person" automatically will be required of all
persons (other than certain institutional investors
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discussed below) which directly or indirectly own ten percent (10%) or more of a
direct or indirect legal, beneficial or voting interest in the Colorado
subsidiary, through their ownership in the Company. Such persons must report
their interest and file appropriate applications within 45 days after acquiring
such interest. Persons directly or indirectly having a five percent (5%) or more
interest (but less than 10%) in the Colorado Subsidiary, through their ownership
in the Company, must report their interest to the Colorado Commission within ten
(10) days after acquiring such interest and may be required to provide
additional information and to be found suitable. If certain institutional
investors provide certain information to the Colorado Commission, such
investors, at the Colorado Commission's discretion, may be permitted to own up
to 14.99% of the Colorado Subsidiary, through their ownership in the Company,
before being required to be found suitable. All licensing and investigation fees
will have to be paid for by the person in question. The associated person
investigation fee currently is $48.00 per hour.
The Colorado Commission also has the right to request information from any
person directly or indirectly interested in, or employed by, a licensee, and to
investigate the moral character, honesty, integrity, prior activities, criminal
record, reputation, habits and associations of (i) all persons licensed pursuant
to the Colorado Limited Gaming Act, (ii) all officers, directors and
shareholders of a licensed privately held corporation, (iii) all officers,
directors and shareholders holding either a five percent (5%) or greater
interest or a controlling interest in a licensed publicly traded corporation,
(iv) all general partners and all limited partners of a licensed partnership,
(v) all persons who have a relationship similar to that of an officer, director
or shareholder of a corporation (such as members and managers of a limited
liability company), (vi) all persons supplying financing or loaning money to any
licensee connected with the establishment or operation of limited gaming, and
(vii) all persons having a contract, lease or ongoing financial or business
arrangement with any licensee, where such contract, lease or arrangement relates
to limited gaming operations, equipment, devices or premises.
In addition, under the Colorado Regulations, every person who is a party to
a "gaming contract" with an applicant for a license, or with a licensee, upon
the request of the Colorado Commission or the Director, promptly must provide to
the Colorado Commission or Director all information which may be requested
concerning financial history, financial holdings, real and personal property
ownership, interests in other companies, criminal history, personal history and
associations, character, reputation in the community, and all other information
which might be relevant to a determination whether a person would be suitable to
be licensed by the Colorado Commission. Failure to provide all information
requested constitutes sufficient grounds for the Director or the Colorado
Commission to require a licensee or applicant to terminate its "gaming contract"
(as defined below) with any person who failed to provide the information
requested. In addition, the Director or the Colorado Commission may require
changes in "gaming contracts" before an application is approved or participation
in the contract is allowed. A "gaming contract" is defined as an agreement in
which a person does business with or on the premises of a licensed entity.
An application for licensure or suitability may be denied for any cause
deemed reasonable by the Colorado Commission or the Director, as appropriate.
Specifically, the Colorado Commission and the Director must deny a license to
any applicant who (i) fails to prove by clear and convincing evidence that the
applicant is qualified, (ii) fails to provide information and documentation
requested; (iii) fails to reveal any fact material to qualification, or supplies
information which is untrue or misleading as to a material fact pertaining to
qualification; (iv) has been, or has any director, officer, general partner,
shareholder, limited partner or other person who has a financial or equity
interest in the applicant who has been, convicted of certain crimes, including
the service of a sentence upon conviction of a felony in a correctional
facility, city or county jail, or community correctional facility or under the
state board of parole or any probation department within ten years prior to the
date of the application, gambling-related offenses, theft by deception or crimes
involving fraud or misrepresentation, is under current prosecution for such
crimes (during the pendency of which license determination may be deferred), is
a career offender or a member or associate of a career offender cartel, or is a
professional gambler; or (v) has refused to cooperate with any state or federal
body investigating organized crime, official corruption or gaming offenses.
If the Colorado Commission determines that a person or entity is unsuitable
to own interests in the Company, then the Company or the Colorado Subsidiary may
be sanctioned, which may include the loss by the Company or the Colorado
Subsidiary of their respective approvals and licenses.
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<PAGE>
The Colorado Commission does not need to approve in advance a public
offering of securities, but rather requires a filing of notice and additional
documents with regard to such public offering prior to such public offering.
Under the regulations, the Colorado Commission may, in its discretion, require
additional information and prior approval of such public offering.
In addition, the Colorado Regulations prohibit a licensee or affiliated
company thereof, such as the Company, from paying dividends, interest or other
remuneration to any unsuitable person, or recognizing the exercise of any voting
rights by any unsuitable person. Further, the Company may repurchase the shares
of anyone found unsuitable at the lesser of the cash equivalent to the original
investment in the Company or the current market price. Further, the regulations
require anyone with a material involvement with a licensee, including a director
or officer of a holding company, such as the Company, to file for a finding of
suitability if required by the Colorado Commission.
In addition to its authority to deny an application for a license or
suitability, the Colorado Commission has jurisdiction to disapprove a change in
corporate position of a licensee and may have such authority with respect to any
entity which is required to be found suitable by the Colorado Commission. The
Colorado Commission has the power to require the Company and the Colorado
Subsidiary to suspend or dismiss managers, officers, directors and other key
employees or sever relationships with other persons who refuse to file
appropriate applications or whom the authorities find unsuitable to act in such
capacities, and may have such power with respect to any entity which is required
to be found suitable.
A person or entity may not sell, lease, purchase, convey or acquire a
controlling interest in the Company without the prior approval of the Colorado
Commission. The Company may not sell any interest in the Colorado Subsidiary
without the prior approval of the Colorado Commission.
Limited gaming facilities in Colorado must not exceed certain gaming square
footage limits as a total of each floor and the full building. Casinos in
Colorado may operate only between 8:00 a.m. and 2:00 a.m., and may permit only
individuals 21 years or older to gamble in the casino. The law permits slot
machines, blackjack and poker, with a maximum single bet of $5.00. Casinos may
not provide credit to their gaming patrons.
The Colorado Constitution permits a gaming tax of up to 40% on adjusted
gross gaming proceeds. The Colorado Commission currently has set a gaming tax
rate of 2% on adjusted gross gaming proceeds of up to and including $2 million,
4% over $2 million and including $4 million, 14% over $4 million up to and
including $5 million, 18% over $5 million and up to an including $10 million and
20% on adjusted gross gaming proceeds in excess of $10 million. The Colorado
Commission also has imposed an annual device fee of $75 per gaming device. The
Colorado Commission may revise the gaming tax rate and device fee from time to
time. Central City Black Hawk and Cripple Creek each have imposed annual device
fees of approximately $1,000 per gaming device and may revise the same from time
to time.
Colorado has certain unique regulatory laws which, if adversely interpreted
or not modified, may limit or adversely affect the ability of the Company to
enter in, or compete within, the Colorado market. First, as noted, gaming in
Colorado constitutionally is limited to slot machines, blackjack and poker.
Although no manufacturer or distributor has attempted to distribute the
Company's type of interactive game, it should be included within the definition
of "slot machine." In preliminary discussions, Division personnel have stated
that the device likely is a "slot machine," although neither the Division nor
the Commission have formally ruled on the issue and will not do so until the
product is submitted to the Division for approval.
Second, Colorado constitutionally limits the maximum single bet to $5.00.
Colorado statutes define a bet to be an amount placed as a wager in a game of
chance. If the Company's product permits multiple rounds of betting at $5.00
per round, it would be unclear whether Colorado would permit such betting. If
Colorado does not permit multiple round bets in excess of $5.00, then the
Company would need to adjust its machines to limit the total bets to $5.00,
including all rounds.
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<PAGE>
Third, Commission Regulations define the requirements of slot machines,
including limitations on the ability to alter the slot machine's program and the
internal requirements of the slot machine itself. The Company's proposed
machines do not comply with existing Commission Regulations. Although the
Company intends to seek a change in the Commission's Regulations, there can be
no assurance that such changes will be made. If the Regulations are not
changed, then the Company will need to modify its machines to conform to
Colorado requirements. Even as so modified, the Company's machines must be
approved by the Division as meeting existing Regulations and there is no
assurance that the Company will receive such approval or will receive such
approval in a timely basis.
NEW JERSEY REGULATORY MATTERS
Casino gaming in New Jersey is regulated by the New Jersey Casino Control
Act, N.J.S.A. 5:12-1 et seq., and regulations promulgated thereunder (the
"NJCCA"). The NJCCA created the New Jersey Casino Control Commission ("NJCCC"),
which is authorized to decide all license applications and other matters and to
promulgate regulations, and created the New Jersey Division of Gaming
Enforcement (the "NJDGE"), which is authorized to investigate all license
applications, make recommendations to the NJCCC, and prosecute violations of the
NJCCA. Under the NJCCA, any enterprise providing goods or services to a casino
must register with or be licensed by the NJCCC. The Company and its wholly-
owned subsidiary, Silicon Gaming-New Jersey, Inc., filed the necessary documents
in order to be licensed by the NJCCC.
Business enterprises providing goods or services directly related to casino
gaming or simulcast wagering must be licensed as a gaming related Casino Service
Industry ("CSI") prior to conducting business with New Jersey casino licensees
or must have filed a complete application for CSI licensure with the NJCCC and
received the permission of the NJCCC for each business transaction.
A CSI license application consists of a Business Entity Disclosure Form for
the applicant and each of its holding companies and Personal History Disclosure
Forms for each individual required to be found qualified. The application fee
consists of a non-refundable deposit of $5,000 and an obligation to pay an
additional $5,000 if the processing of the application requires more than 1,000
but less than 2,000 hours and a further $5,000 if the processing of the
application exceeds 2,000 hours. The same fee structure applies to any renewal
application.
In connection with a license application, the NJDGE conducts an
investigation of the Company to determine its suitability for licensure. In
order for the requisite CSI license to be issued by the NJCCC to the Company and
maintained, the Company's officers, directors and key employees and all
beneficial owners of more than five percent (5%) of the Company's Common Stock
must be found qualified by the NJCCC. In order to be found qualified, the
Company, its officers, directors, key employees and five percent (5%)
shareholders must demonstrate by clear and convincing evidence their good
character, honesty and integrity and their financial stability, integrity and
responsibility. Any other shareholder or other person associated with the
Company whom the NJCCC deems appropriate, in its discretion, is also required to
be qualified. If a person is required to and fails to submit to qualification
or submits to qualification and is found disqualified by the NJCCC, the NJCCC
may prohibit casinos in New Jersey from doing business with the Company.
However, "institutional investors" (as defined in the NJCCC) may be granted
a waiver of the requirement to be found qualified by the NJCCC. An
institutional investor includes any retirement fund administered by a public
agency for the exclusive benefit of federal, state or local public employees,
investment company registered under the Investment Company Act of 1940,
collective investment trust organized by banks under Part Nine of the Rules of
the Comptroller of the Currency, closed end investment trust, chartered or
licensed life insurance company or property and casualty insurance company,
banking and other chartered or licensed lending institution, and investment
advisor registered under The Investment Advisors Act of 1940. At the discretion
of the NJCCC, a waiver of qualification may be granted to such institutional
investors provided the securities are owned for investment purposes only and the
institutional investor certifies that it has no intention of influencing or
affecting the affairs of the issuer or its holding companies.
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<PAGE>
After 30 days following the filing of a CSI license application with the
NJCCC, the Company may seek permission from the NJCCC to conduct specific
business transactions with a New Jersey casino. Such "transactional waivers"
will only be granted in the absence of an objection by the NJDGE. Such
approvals are granted for a maximum term of six (6) months subject to renewal.
A CSI license is issued for an initial period of two years and is thereafter
renewable for four year periods. There is no guarantee that the Company will be
granted an initial license or that, following the issuance of an initial CSI
license or any renewal thereof, the Company will continue to be granted renewals
of the license. Additionally, upon application of the NJDGE, the NJCCC may at
any time review any license issued by it and determine to suspend, revoke or
place conditions on such license.
In addition to the required licensure from the NJCCC, the gaming equipment
manufactured, distributed or sold by the Company to New Jersey casinos is
subject to a technical examination by the NJDGE and approval by the NJCCC for,
at a minimum, quality, design, integrity, fairness, honesty and suitability.
The approval process includes the submission of a model of the machine to the
NJDGE for testing, examination and analysis and for comparison with
documentation of the schematics, block diagram, circuit analysis and written
explanation of the method of operation, odds determination and all other
pertinent information. The model remains in the custody of the NJDGE unless
otherwise directed by the NJCCC. All costs of such testing, examination and
analysis are borne by the Company. As part of this approval process, the NJCCC
may require that the manufacturer of any component of the gaming equipment which
the NJCCC, in its discretion, determines is essential to the gaming operation of
the device submit to licensing. Such components would include the computer
control circuitry which causes or allows the device to operate as a gambling
device. The failure or refusal of such a manufacturer to submit to licensing or
the denial of a license by the NJCCC to such manufacturer would result in the
inability of the Company to distribute and market that gambling device to New
Jersey casinos. Prior to a decision by the NJCCC to approve a particular model
of machine, it may require up to 60 days trial period to test the machine in a
licensed casino. During the trial period, the manufacturer or distributor of
the machine shall not be entitled to receive revenue of any kind whatsoever.
Once a model is approved by the NJCCC, all machines of that model placed in
operation in licensed casinos shall operate in conformity with the model tested
by the NJDGE. Any changes in the design, function or operation of the machine
are subject to prior approval by the NJCCC in consultation with the NJDGE.
MISSISSIPPI REGULATORY MATTERS
The manufacture, sale and distribution of gaming devices for use or play in
Mississippi are subject to the Mississippi Gaming Control Act and the
regulations promulgated thereunder (collectively, the "Mississippi Act"). Such
activities are subject to the licensing and regulatory control of the
Mississippi Gaming Commission (the "Mississippi Commission") and the Mississippi
State Tax Commission (collectively referred to as the "Mississippi Gaming
Authorities"). Although not identical, the Mississippi Act is similar to the
Nevada Gaming Control Act and regulations promulgated thereunder.
On June 20, 1996 the Company was registered by the Mississippi Commission as
a publicly traded corporation (a "Registered Corporation") and the holding
company of Silicon Gaming-Mississippi, Inc. (the "Mississippi Subsidiary").
Also on June 20, 1996 the Mississippi Subsidiary was licensed as a manufacturer
and distributor. SGI and the Mississippi Subsidiary are required to
periodically submit detailed financial and operating reports to the Mississippi
Commission and furnish any other information which the Mississippi Commission
may require. The Company and the Mississippi Subsidiary have received the
various registrations, approvals, permits and licenses in order to engage in
manufacturing, distribution and gaming activities as presently conducted in
Mississippi. Such licenses, registrations and approvals are not transferable,
are initially issued for a two-year period and must be renewed periodically
thereafter.
Similar to Nevada, the Mississippi Commission may investigate and find
suitable any individual who has a material relationship to, or material
involvement with, the Company or the Mississippi Subsidiary, including record or
beneficial holders of any of the voting securities of the Company, holders of
debt obligations, and officers, directors and employees of the Company and the
Mississippi Subsidiary. The Company and the
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<PAGE>
Mississippi Subsidiary are required to maintain a current stock ledger in
Mississippi which may be examined by the Mississippi Commission at any time. The
Company believes that all required findings of suitability currently required
have been applied for or obtained. Any applicant for a finding of suitability
must pay all investigative fees and costs of the Mississippi Commission in
connection with such an investigation.
The Mississippi Act requires any person who acquires beneficial ownership of
more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Mississippi Commission and such person may be required to be
found suitable. The Mississippi Act requires that beneficial owners of more
than 10% of a Registered Corporation's voting securities apply to the
Mississippi Commission for a finding of suitability. The Mississippi Commission
has generally exercised its discretion to require a finding of suitability of
any beneficial owner of more than 5% of a Registered Corporation's Common Stock.
Under certain circumstances, an "institutional investor," as defined by
Mississippi Commission policy, which acquires more than 5%, but not more than
10%, of the Registered Corporation's voting securities may apply to the
Mississippi Commission for a waiver of such finding of suitability if such
institutional investor holds the voting securities for investment purposes only.
The Company may not make a public offering of its securities without the
approval of the Mississippi Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Mississippi, or to retire or extend obligations incurred for such purposes.
If it were determined that the Mississippi Act was violated by the
Mississippi Subsidiary, the licenses it holds could be limited, condition,
suspended or revoked, subject to compliance with certain statutory and
regulatory procedures, which action, if taken, could materially adversely affect
the Company's manufacturing and distribution.
FEDERAL REGULATION
The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it
unlawful, in general, for a person to manufacture, deliver, or receive gaming
machines, gaming machine type devices and components across state lines or to
operate gaming machines unless that person has first registered with the
Attorney General of the United States. The Company is required to register and
renew its registration annually. The Company has complied with such
registration requirements. In addition, various record keeping equipment
identification requirements are imposed by the Federal Act. Violation of the
Federal Act may result in seizure and forfeiture of the equipment, as well as
other penalties.
NATIVE AMERICAN GAMING
Gaming on Native American lands, including the terms and conditions under
which gaming equipment can be sold or leased to Native American tribes, is or
may be subject to regulation under the laws of the tribes, the laws of the host
state, the Indian Gaming Regulatory Act of 1988 ("IGRA"), which is administered
by the National Indian Gaming Commission (the "NIGC") and the Secretary of the
U.S. Department of the Interior (the "Secretary"), and also may be subject to
the provisions of certain statutes relating to contracts with Native American
tribes, which are administered by the Secretary. As a precondition to gaming
involving gaming machines, IGRA requires that the tribe and the state have
entered into a written agreement (a "tribal-state compact") that specifically
authorizes such gaming, and that has been approved by the Secretary, with notice
of such approval published in the Federal Register. Tribal-state compacts vary
from state to state. Many require that equipment suppliers meet ongoing
registration and licensing requirements of the state and/or the tribe and some
impose background check requirements on the officers, directors, and
shareholders of gaming equipment suppliers. Under IGRA, tribes are required to
regulate all commercial gaming under ordinances approved by the NIGC. Such
ordinances may impose standards and technical requirements on gaming hardware
and software, and may impose registration, licensing and background check
requirements on gaming equipment suppliers and their officers, directors, and
shareholders.
21
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APPLICATION OF FUTURE OR ADDITIONAL REGULATORY REQUIREMENTS
In the future, the Company intends to seek the necessary registrations,
licenses, approvals and findings of suitability for the Company, its product and
its personnel in other U.S. and foreign jurisdictions in which the Company
identifies significant sales potential for its product. However, there can be
no assurance that such registrations, licenses, approvals or findings of
suitability will be obtained and will not be revoked, suspended or conditioned
or that the Company will be able to obtain the necessary approvals for its
future products as they are developed in a timely manner, or at all. If a
registration, license, approval or finding of suitability is required by a
regulatory authority and the Company fails to seek or does not receive the
necessary registration, license, approval or finding of suitability, the Company
may be prohibited from selling its product for use in the respective
jurisdiction or may be required to sell its product through other licensed
entities at a reduced profit to the Company.
22
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's consolidated ratio of earnings
to fixed charges for the periods shown.
<TABLE>
<CAPTION>
Period from Nine-months Year Year
inception Year ended ended ended ended
(July 17, 1993) March 31, December 31, December 31, December 31,
to March 31, 1994 1995 1995 1996 1997
---------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges
-- -- -- -- --
</TABLE>
For the purposes of calculating the ratio of earning to fixed charges, (i)
earnings consists of consolidated income (loss) before income taxes plus fixed
charges and (ii) fixed charges consists of interest expense incurred and the
portion of rental expense under operating leases deemed by the Company to be
representative of the interest factor. Earnings were inadequate to cover fixed
charges by $1,844,000, $13,557,000 and $21,746,000 for the year ended March 31,
1995 and the years ended December 31, 1996 and 1997, respectively. The Company
had no fixed charges during the period from inception (July 27, 1993) through
March 31, 1994 and the nine months ended December 31, 1995.
DESCRIPTION OF NOTES AND WARRANTS
The Notes were issued pursuant to the Securities Purchase Agreement. The
Warrants were issued pursuant to the Warrant Agreement (as defined below). A
copy of the form of Note, the Securities Purchase Agreement, the Warrant
Agreement, the form of Warrant and the Registration Rights Agreement (as defined
below) have been filed as exhibits to the Registration Statement of which this
Prospectus forms a part. The following summaries of certain provisions of the
Notes, the Securities Purchase Agreement, the Warrant Agreement, the Warrant and
the Registration Rights Agreement do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, all of the provisions
of the Notes, the Securities Purchase Agreement, the Warrant Agreement, the
Warrant and the Registration Rights Agreement, including the definitions therein
of certain terms which are not otherwise defined in this Prospectus. Wherever
particular provisions or defined terms of the Note, the Securities Purchase
Agreement, the Warrant Agreement, the Warrant or the Registration Rights
Agreement are referred to, such provisions or defined terms are incorporated
herein by reference. References in this section to the "Company" are solely to
Silicon Gaming, Inc., a California corporation, and not its Subsidiaries unless
otherwise noted.
DESCRIPTION OF NOTES
General
The Notes are senior discount obligations of the Company, in the aggregate
principal amount of $30 million secured by all of the assets of the Company and
its Subsidiaries. Of the $30 million, the Company has agreed to redeem $5
million in principal amount on September 30, 2001. The remaining $25 million
matures on September 30, 2002. The Notes bear interest at the rate of 12 1/2%
per annum from January 1, 1999, until maturity. Interest is payable
semiannually in cash on January 1, and July 1 of each year, commencing on July
1, 1999.
The Notes are redeemable (i) at the Company's option in whole or from time to
time in part at the various times and redemption prices set forth in
"Description of Notes--Redemption--Optional Redemption," and (ii) upon the
failure of the purchaser of the Notes (the "Purchaser"), the holders of the
Notes (the "Holders") or the beneficial owners of the Notes to be licensed,
qualified or found suitable under any gaming laws of any jurisdiction ("Gaming
Laws") as determined by any gaming governmental authority ("Gaming Authority").
Notwithstanding the foregoing, the Company has agreed to redeem $5 million in
principal amount of the Notes on September 30, 2001.
If not previously redeemed, the Notes are redeemable at the Holders' option
(i) in whole or in part, upon a Change of Control (as defined below) at any time
within 30 days after the completion of an Offer made as a result of a Change of
Control (as defined below), at a redemption price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest to the Purchase Date (as
defined below), subject to certain
23
<PAGE>
conditions set forth in the Securities Purchase Agreement or (ii) following a
Securities Sale or a Mezzanine Debt Financing, from the Net Cash Proceeds of
such Securities Sale or Mezzanine Debt Financing; provided that an Offer to make
a Securities Sale or Mezzanine Debt Financing Redemption shall be made by the
Company only if, and to the extent that, the aggregate amount of Net Cash
Proceeds from all such Securities Sales and Mezzanine Debt Financings exceeds
$40,000,000.
The Securities Purchase Agreement contains financial covenants, restrictions
and limitations on the Company, including, but not limited to, limitations on
the making of Restricted Payments, limitations on the incurrence of various
types of indebtedness described in the Securities Purchase Agreement
("Indebtedness"), limitations on Liens, limitations on the entering into of
certain transactions with Affiliates, limitations on the Company's Subsidiaries'
ability to agree to Payment Restrictions and the undertaking of various
issuances, dispositions or repurchases of securities or assets by the Company.
Redemption and Offers to Purchase
Optional Redemption
-------------------
The Notes are redeemable at the Company's option on at least 30 and not more
than 60 days' notice, in whole, or from time to time in part, at the price per
$1,000 principal amount at maturity set forth below (the "Accreted Value"),
together with accrued and unpaid interest to the Redemption Date.
Price Per $1,000
Period Principal Amount
------ ----------------
March 1998 $ 882.38
April 1998 $ 894.61
May 1998 $ 906.85
June 1998 $ 919.09
July 1998 $ 931.32
August 1998 $ 943.56
September 1998 $ 955.79
October 1998 $ 969.05
November 1998 $ 982.30
December 1998 $ 995.56
January 1999 $ 997.20
February 1999 $ 998.84
After February 28, 1999 $1,000.00
Notwithstanding any other redemption provision in the Notes or the Securities
Purchase Agreement, if any Gaming Authority requires that the Purchaser or any
Holder or beneficial owner of the Notes, Warrants or Shares must be licensed,
qualified or found suitable under any Gaming Laws in order to maintain any
material gaming license, registration or approval of the Company, or its Gaming
Subsidiaries under such Gaming Laws, and the Purchaser, Holder or beneficial
owner of the Notes, Warrants or Shares fails to apply for a license,
qualification or finding of suitability within 30 days after being requested to
do so by such Gaming Authority (or such lesser period that may be required by
such Gaming Authority), or if such Purchaser, Holder or beneficial owner is not
so licensed, qualified or found suitable, the Purchaser, Holder or beneficial
owner of such securities shall comply with any order by such Gaming Authority
that such Person dispose of any such securities held by it; provided, however,
that in the event the Purchaser, Holder or beneficial owner of such securities
does not comply with such order within the required period, the Company shall
have the option as its sole remedy with respect to the Notes to call for
redemption of the Notes of such Purchaser, Holder or beneficial owner at a price
in cash equal to the Accreted Value thereof on the Redemption Date, plus accrued
and unpaid interest to the Redemption Date, and except as may be required by any
Gaming Authority, the Company shall comply with the procedures contained in the
Notes for their redemption. The Company shall pay or reimburse any Purchaser,
Holder or beneficial owner
24
<PAGE>
of the Securities who is required to apply for a license, qualification or
finding of suitability, for the costs or expenses incurred therewith except with
respect to any Purchaser, Holder or beneficial owner of the Securities whose
affirmative actions have directly caused such Purchaser, Holder or beneficial
owner to so apply.
Mandatory Redemption on September 30, 2001
------------------------------------------
On September 30, 2001, the Company is required to redeem $5 million in
principal amount of the Notes (without prepayment penalty or premium) at 100% of
the principal amount so redeemed, plus any accrued and unpaid interest thereon
to the Redemption Date.
Mandatory Offer by the Company Upon a Change of Control, Securities Sale or
---------------------------------------------------------------------------
Mezzanine Debt Financing
------------------------
If not previously redeemed, the Notes will be subject to redemption (a "Change
of Control Redemption") at the Holders' option, in whole or in part, at any time
within 30 days after the completion of an Offer made as a result of a Change of
Control (but with respect to any partial tender of Notes, the Company shall only
be required to purchase principal amounts in integral multiples of $1,000), at a
redemption price in cash equal to 101% of the principal amount thereof, plus
accrued and unpaid interest to the Purchase Date, subject to certain conditions
set forth in the Securities Purchase Agreement.
In addition, if not previously redeemed, as soon as practicable, but in no
event later than 10 Business Days after any date (with respect to both a
Securities Sale or a Mezzanine Debt Financing, a "Repayment Trigger Date") that
the aggregate amount of Net Cash Proceeds from all Securities Sales and
Mezzanine Debt Financings exceed $40,000,000, the Company shall commence an
Offer to purchase the maximum principal amount of the Notes that may be
purchased out of such Net Cash Proceeds, at an offer price per $1,000 principal
amount equal to the Accreted Value in the period in which the Purchase Date
occurs, plus accrued and unpaid interest to the Purchase Date. To the extent
that any such Net Cash Proceeds remain after completion of an Offer, the Company
may use the remaining amount for any purpose permitted by the Securities
Purchase Agreement.
Within 10 days after any Change of Control, any Securities Sale or any
Mezzanine Debt Financing, the Company is obligated to give to each Holder all
instructions and materials necessary to enable them to tender the Notes pursuant
to any Offer, as provided in the Securities Purchase Agreement.
The term "Change of Control" means any transaction or series of transactions
in which any of the following occurs: (a) any Person or group (within the
meaning of Rule 13d-3 under the Exchange Act and Sections 13(d) and 14(d) of the
Exchange Act) becomes the direct or indirect "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act) of 25% or more of the issued and outstanding
shares of Capital Stock entitled to vote in the election of directors of the
Company or the Surviving Person (if other than the Company); or (b) individuals
who on September 30, 1997, constituted the Company's Board of Directors
(together with any new directors whose election by such Board of Directors or
whose nomination for election by the Company's stockholders was approved by a
vote of at least a majority of the Company directors then still in office who
were either directors on September 30, 1997, or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office.
The term "Offer" means the Company's irrevocable offer to repurchase the Notes
for cash after a Change of Control, Securities Sale or Mezzanine Debt Financing.
Upon a Change of Control, Securities Sale or Mezzanine Financing, each Holder
will have certain rights, at the Holder's option, to require the Company to
repurchase all or a portion of such Holder's Notes. If a Change of Control,
Securities Sale or Mezzanine Financing were to occur, there can be no assurance
that the Company would have or be able to obtain sufficient funds to pay the
purchase price for all Notes tendered by the Holders thereof. Any future credit
agreements or other agreements relating to other indebtedness (including Senior
Indebtedness) to which the Company becomes a party may contain restrictions and
provisions which prohibit the Company from repurchasing or redeeming any Notes
or provide that a Change of Control, Securities Sale or Mezzanine Financing
would constitute an event of default thereunder. If a Change of Control,
Securities Sale or Mezzanine Financing occurs at a time when the Company is
prohibited from repurchasing or redeeming Notes, the Company could seek the
consent of its lenders to the repurchase or redemption of Notes or could attempt
to
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refinance the borrowings that contain such prohibition. If the Company does
not obtain such a consent or repay such borrowings, the Company would remain
prohibited from repurchasing or redeeming Notes. In such case, the Company's
failure to repurchase tendered Notes would constitute an Event of Default under
the Securities Purchase Agreement, which could, in turn, constitute a further
default under the other Indebtedness that the Company may enter into from time
to time. In such circumstances, the subordination provisions in the Securities
Purchase Agreement would likely restrict payments to the Holders.
There is no sinking fund provided for the Notes.
Payment
The principal of, premium, if any, and interest (except defaulted interest)
on the Notes will be payable in money of the United States, against surrender
thereof of the Notes to the Company. The Company will pay interest on the Notes
(except defaulted interest) to the Person who is the registered Holder of the
Notes at the close of business on the record date for the next Interest Payment
Date even if such Notes are canceled after such record date and on or before
such Interest Payment Date. Holders must surrender Notes to the Company to
collect principal payments on such Notes. The Company will pay principal,
premium, if any, and interest in money of the United States that at the time of
payment is legal tender for payment of public and private debts. However, the
Company may pay principal, premium, if any, and interest by wire transfer of
Federal funds, or interest by check payable in such money, and any such check
may be mailed to a Holder's registered address. The Company shall pay interest
on overdue principal and premium, if any, from time to time on demand at the
rate of 1.5% per annum in excess of the interest rate then in effect and shall
pay interest on overdue installments of interest (without regard to any
applicable grace periods) from time to time on demand at the same rate to the
extent lawful. The Company shall also pay interest from time to time after
March 31, 1998, at the rate of 2.0% per annum in excess of the interest rate
then in effect if the Company fails to provide adequate evidence of the grant of
a security interest to the Holders. Interest will be computed on the basis of a
360-day year of twelve 30-day months.
Limitation on Restricted Payments
The Company and its Subsidiaries are restricted from directly or indirectly
making any Restricted Payment, except (i) payments, prepayments, repurchases,
redemptions and acquisitions with respect to Indebtedness not incurred in
violation of the Securities Purchase Agreement, and (ii) Restricted Payments by
the Company or its Subsidiaries if (A) at the time of and after giving effect to
the proposed Restricted Payment no Default or Event of Default shall have
occurred and be continuing or would occur as a consequence thereof, (B) at the
time of and immediately after giving effect to the proposed Restricted Payment,
the Company could incur at least $1.00 of additional Indebtedness pursuant to
the Securities Purchase Agreement and (C) at the time of and immediately after
giving effect to the proposed Restricted Payment (the value of any such payment
if other than cash, as determined by the Board of Directors, whose determination
shall be conclusive and evidenced by a Board Resolution, provided that in the
event such value exceeds $1,000,000, such determination shall be supported by a
fairness opinion of an Independent Financial Advisor) the aggregate amount of
all Restricted Payments (excluding all payments, investments, redemptions,
repurchases, retirements and other acquisitions specifically allowed for in the
Securities Purchase Agreement) does not exceed an amount equal to the sum of (A)
50% of the Consolidated Net Income accrued during the period (treated as one
accounting period) from the first day of the first month of the first fiscal
quarter after the date of the Securities Purchase Agreement in which
Consolidated Net Income is positive through the last full fiscal quarter for
which quarterly or annual financial statements are available prior to the date
of such Restricted Payment (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit), plus (B) an amount equal to 100% of the
aggregate Net Cash Proceeds received by the Company from the issuance and sale
(other than to a Subsidiary of the Company) of Qualified Capital Stock to the
extent that such proceeds are not used to redeem, repurchase, return or
otherwise acquire Capital Stock or any Indebtedness of the Company or any
Subsidiary pursuant to the redemption, repurchase, retirement or other
acquisition for value of any capital stock or any Indebtedness of the Company or
any Subsidiary in exchange for, or out of the Net Proceeds of, the substantially
concurrent sale (other than to the Company or a Subsidiary) of qualified Capital
Stock of the Company, plus (C) an amount equal to 100% of the aggregate
principal amount of any Indebtedness incurred after the date hereof converted
into Qualified Capital Stock. Notwithstanding the foregoing, the following
Restricted Payments may be made: (i) the payment of any dividend within 60 days
after the date of declaration thereof, if at said date of declaration such
payment would have complied with the provisions of the Securities Purchase
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Agreement; (ii) the payment of any dividend on the Company's Redeemable
Convertible Preferred Stock in accordance with the dividend provisions set forth
in the Company's Articles of Incorporation for such Redeemable Convertible
Preferred Stock as in effect on the date of the Securities Purchase Agreement;
(iii) the redemption, repurchase, retirement or other acquisition for value of
any Capital Stock or any Indebtedness of the Company or any Subsidiary in
exchange for, or out of the Net Cash Proceeds of, the substantially concurrent
sale (other than to the Company or a Subsidiary of the Company) of Qualified
Capital Stock of the Company; (iv) the redemption of the Notes under the
circumstances set forth in the Securities Purchase Agreement; and (v) Restricted
Payments which do not exceed an aggregate of $1,000,000.
Limitation on Transactions with Affiliates
The Company and its Subsidiaries are limited from entering into any
transaction or series of transactions to sell, lease, transfer, exchange or
otherwise dispose of any of their properties or assets to or to purchase any
property or assets from, or for the direct or indirect benefit of, an Affiliate
of the Company or of any Subsidiary of the Company, make any Investment in or
enter into any contract, agreement, understanding, loan, advance or Guarantee
with, or for the direct or indirect benefit of, an Affiliate of the Company or
of any Subsidiary of the Company (each, including any series of transactions
with one or more Affiliates, an "Affiliate Transaction"), unless the Board of
Directors of the Company or the relevant Subsidiary determines, as evidenced by
a Board Resolution, that the terms of such Affiliate Transaction are fair and
reasonable to the Company or the relevant Subsidiary and no less favorable to
the Company or the relevant Subsidiary than those that could have been obtained
at that time in a comparable arms-length transaction by the Company or such
Subsidiary with an unrelated Person. In addition, neither the Company nor any
of its Subsidiaries shall enter into an Affiliate Transaction involving or
having a potential aggregate value of more than $1,000,000 unless, in addition
to the requirements above, (i) such transaction has been approved by a majority
of the Board of Directors of the Company or the relevant Subsidiary who have no
direct or indirect interest in the Affiliate Transaction or in the Affiliate
that is a party to the Affiliate Transaction, or in any other party that is an
Affiliate of any such Affiliate, and (ii) the Company delivers to the Holders an
Officers' Certificate certifying that such conditions have been satisfied. In
addition, neither the Company nor any of its Subsidiaries shall enter into an
Affiliate Transaction involving or having a potential aggregate value of more
than $5,000,000 unless, in addition to all of the requirements above, the Board
of Directors of the Company or the relevant Subsidiary first has received a
written opinion from an Independent Financial Advisor for the benefit of the
Company and the Holders, which firm is not receiving any contingent fee or other
consideration directly or indirectly related to the successful completion of the
Affiliate Transaction, to the effect that the proposed Affiliate Transaction is
fair to the Company from a financial point of view.
The limitations on transactions with Affiliates shall not apply to (i) any
Restricted Payment that is made in compliance with the provisions in the
Securities Purchase Agreement referenced in "Limitations on Restricted
Payments," (ii) the reasonable and customary fees and compensation paid to or
indemnity provided on behalf of, officers, directors, employees or consultants
of the Company or any Subsidiary, as determined by the Board of Directors of the
Company or such Subsidiary or the senior management thereof in good faith, (iii)
transactions exclusively between or among the Company and any Wholly-Owned
Subsidiary or exclusively between or among Wholly-Owned Subsidiaries, provided
such transactions are not otherwise prohibited by the Securities Purchase
Agreement, and (iv) any Affiliate Transaction in existence as of September 30,
1997.
Limitation on Issuances and Dispositions of Capital Stock of Subsidiaries
The Company (a) is restricted from permitting any Subsidiary to transfer,
convey, sell, or otherwise dispose of any Capital Stock, or securities
convertible into or exercisable or exchangeable for, or options, warrants,
rights or any other interest with respect to, Capital Stock of such Subsidiary
to any Person (other than the Company or a Wholly-Owned Subsidiary) unless such
transfer, conveyance, sale, or other disposition is of 100% of the Capital Stock
of such Subsidiary held by the Company and the Net Cash Proceeds from such
transactions are applied in accordance with the limitation on the sale of assets
set forth in the Securities Purchase Agreement and (b) is restricted from
permitting any Subsidiary to issue shares of its Capital Stock (other than
directors' qualifying shares), or securities convertible into or exercisable or
exchangeable for, or options, warrants, rights or any other interest with
respect to, its Capital Stock to any Person other than to the Company or a
Wholly-Owned Subsidiary.
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Events of Default and Acceleration
The following constitute "Events of Default" under the Securities Purchase
Agreement: (i) failure by the Company to make any payment in respect of (A) the
principal of or premium, if any, on the Notes as the same shall become due,
whether at maturity, upon acceleration, redemption or otherwise, or (B) interest
on or in respect of the Notes as the same shall become due, and such failure
shall continue for a period of 15 Business Days; (ii) failure by the Company for
30 days after receipt of notice from the Holders of at least 25% of the
principal amount of the outstanding Notes to comply with any other provisions of
the Securities Purchase Agreement or the Notes; (iii) default under any
mortgage, agreement or instrument under which there may be Incurred or by which
there may be secured or evidenced any Indebtedness for money borrowed by the
Company or any of its Subsidiaries (or the payment of which is guaranteed by the
Company or any of its Subsidiaries) whether such Indebtedness now exists, or is
created after the date hereof if (A) such default results in the acceleration of
such Indebtedness prior to its express maturity or shall constitute a default in
the payment of such Indebtedness at final maturity of such Indebtedness, and (B)
the principal amount of any such Indebtedness that has been accelerated or not
paid at maturity, when added to the aggregate principal amount of all other such
Indebtedness that has been accelerated or not paid at maturity, exceeds
$1,000,000; (iv) failure by the Company or any of its Subsidiaries to pay final
judgments, the uninsured portion of which exceeds $1,000,000, which judgments
are not paid, discharged, bonded or stayed for a period of 90 days after the
date of entry thereof; (v) if under any Bankruptcy Law, (A) the Company or any
Subsidiary commences a voluntary case, consents to the entry of an order for
relief against it in an involuntary case, consents to the appointment of a
Custodian of it or for all or substantially all of its Property, or makes a
general assignment for the benefit of its creditors, or (B) a court of competent
jurisdiction enters an order or decree, and such order or decree remains
unstayed and in effect for 60 days, that is for relief against the Company or
any Subsidiary in an involuntary case, appoints a Custodian of the Company or
any Subsidiary or for all or substantially all of the Property of the Company or
any Subsidiary, or orders the liquidation of the Company or any Subsidiary; and
(vi) any of the Transaction Documents ceases, for any reason, to be in full
force and effect in any material respect, except as a result of an amendment,
waiver or termination thereof as contemplated or permitted thereby, or the
Company shall so assert in writing. Any notice of default delivered to the
Company by the Holders must be in writing and must specify the Event of Default,
demand that it be remedied and state that the notice is a "Notice of Default."
Acceleration
If an Event of Default (other than one that occurs in connection with a
bankruptcy) occurs and is continuing, the Holders of at least 25% in principal
amount of the then outstanding Notes may declare all outstanding Notes to be due
and payable immediately and, upon such declaration, the principal amount of, and
date of payment shall be due and payable immediately. The principal amount of,
and premium, if any, and any accrued and unpaid interest on, all outstanding
Notes shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of any Holder upon a bankruptcy event.
To the extent permitted under the Securities Purchase Agreement, the Holders
of a majority in aggregate principal amount of the then outstanding Notes by
notice to the Company may rescind any declaration of acceleration of the Notes
and its consequences if (i) the rescission would not conflict with any judgment
or decree, (ii) all existing Defaults and Events of Default (other than the
nonpayment of principal of, or premium, if any, or interest on, the Notes which
have become due by such declaration) shall have been cured or waived, and (iii)
the Company has delivered to the Holders an Officers' Certificate to the effect
of clauses (i) and (ii) above.
In the event of a declaration of acceleration because an Event of Default
related to a default under a mortgage agreement or instrument evidencing any
indebtedness for money borrowed by the Company or its Subsidiaries has occurred
and is continuing, such declaration of acceleration shall be automatically
rescinded and annulled if either (i) the holders of the Indebtedness which is
the subject of such Event of Default have waived such failure to pay at maturity
or have rescinded the acceleration in respect of such Indebtedness within 10
days of such maturity or declaration of acceleration, as the case may be, and no
other Event of Default has occurred during such 10-day period which has not been
cured or waived, or (ii) such Indebtedness shall have been discharged or the
maturity thereof shall have been extended such that it is not then due and
payable, or the underlying default has been cured within 10 days of such
maturity or declaration of acceleration as the case may be.
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The Company will be required to furnish to the Selling Shareholder a statement
as to the performance by the Company of certain of its obligations under the
Securities Purchase Agreement and as to any default in such performance.
Amendments, Modification and Waiver
The Company may amend or supplement the Securities Purchase Agreement or the
Notes without the consent of any Holder to: (i) cure any ambiguity, defect or
inconsistency; provided that such amendment does not adversely affect the rights
of any Holder; (ii) provide for uncertificated Notes in addition to or in place
of certificated Notes; (iii) provide for the assumption of the Company's
obligations to the Holders in the event of any Disposition involving the Company
that is permitted by the Securities Purchase Agreement in a merger or
consolidation in which the Company is not the Surviving Person; or (iv) make any
change that would (A) provide any additional rights or benefits to Holders or
(B) not adversely affect the legal rights under the Securities Purchase
Agreement of any Holder.
In general, the Securities Purchase Agreement and the Notes may be amended or
supplemented with the written consent of the Holders of at least a majority of
the aggregate principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for the Notes), and
any existing Default or Event of Default or compliance with any provision of the
Securities Purchase Agreement or the Notes may be waived with the consent of
Holders of at least a majority of the aggregate principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for the Notes). Without the consent of each Holder affected,
no amendment, supplement or waiver to the Securities Purchase Agreement is
allowed to: (i) reduce the principal amount of Notes whose Holders must consent
to an amendment, supplement or waiver; (ii) reduce the principal of or change
the fixed maturity of any Note, or alter the provisions with respect to the
redemption of the Notes in a manner adverse to the Holders; (iii) reduce the
rate of or change the time for payment of interest on any Note; (iv) waive a
Default or Event of Default in the payment of principal of, or premium, if any,
or interest on, the Notes (except that Holders of at least a majority in
aggregate principal amount of the then outstanding Notes may (A) rescind an
acceleration of the Notes that resulted from a non-payment default, and (B)
waive the payment default that resulted from such acceleration); (v) make any
Note payable in money other than that stated in the Notes; (vi) make any change
in the provisions of the Securities Purchase Agreement relating to waivers of
past Defaults or the rights of Holders to receive payments of principal of, or
premium, if any, or interest on, the Notes; (vii) waive a redemption payment
with respect to any Note; or (viii) make any change regarding a waiver of past
defaults or the rights of Holders to receive payments.
After an amendment or supplement becomes effective, the Company is required to
mail to each Holder affected thereby a notice briefly describing the amendment,
supplement or waiver. Any failure of the Company to mail such notice, or any
defect therein, shall not, however, in any way impair or affect the validity of
any such amended or supplemental Agreement or waiver.
Except as otherwise specified in the Securities Purchase Agreement, if any
consent or approval of the Holders is required pursuant to the terms of the
Securities Purchase Agreement, such consent or approval shall be deemed to have
been given if given by at least a majority of the aggregate principal amount of
then outstanding Senior Discount Notes.
Until an amendment, supplement or waiver becomes effective, a consent to it by
a Holder of a Note is a continuing consent by the Holder and every subsequent
holder of a Note or portion of a Note that evidences the same Indebtedness as
the consenting Holder's Note, even if notation of the consent is not made on any
such Note. However, any such Holder or subsequent Holder may revoke the consent
as to his or her Note or portion of a Note if the Company receives the notice of
revocation before the date on which the Company mails to the Holders an
Officers' Certificate certifying that the Holders of the requisite principal
amount of Notes have consented (and not theretofore revoked such consent) to the
amendment or waiver.
The Company may, but shall not be obligated to, fix a record date for the
purpose of determining the holders of Notes entitled to consent to any amendment
or waiver. If a record date is fixed, then notwithstanding the provisions of
the preceding paragraph, those Persons who were holders of Notes at such record
date (or their duly designated proxies), and only those Persons, shall be
entitled to consent to such amendment or
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waiver or to revoke any consent previously given, whether or not such Persons
continue to be holders of Notes after such record date. No consent shall be
valid or effective for more than 90 days after such record date.
Transfer and Exchange
When Notes are presented to the Company with a request to register a
transfer or to exchange them for an equal principal amount of Notes of other
authorized denominations, the Company shall register the transfer or make the
exchange if its requirements for such transaction are met; provided, however,
that any Note presented or surrendered for registration of transfer or exchange
shall be duly endorsed or accompanied by a written instruction of transfer in
form satisfactory to the Company or duly executed by the Holder of such Note or
by its attorney duly authorized in writing. The Company shall not be required
to issue, register the transfer of or exchange any Note (i) selected for
redemption, in whole or in part, except the unredeemed portion of any Note being
redeemed in part may be transferred or exchanged, or (ii) during an Offer if
such Note is tendered pursuant to such Offer and not withdrawn.
No service charge shall be made for any registration of transfer or exchange
(except as otherwise expressly permitted in the Securities Purchase Agreement),
but the Company may require payment of a sum sufficient to cover any transfer
tax or similar governmental charge payable in connection therewith (other than
any such transfer tax or similar governmental charge payable upon exchanges
pursuant to the Securities Purchase Agreement which the Company shall pay).
Prior to due presentment for registration of transfer of any Note, the Company
may deem and treat the Person in whose name any Note is registered as the
absolute owner of such Note (whether or not such Note shall be overdue and
notwithstanding any notation of ownership or other writing on such Note made by
anyone other than the Company) for the purpose of receiving payment of principal
of, and premium, if any, and interest on, such Note and for all other purposes,
and notice to the contrary shall not affect the Company.
DESCRIPTION OF WARRANTS
General
The Warrants give the holder thereof the right to purchase up to an aggregate
of 375,000 shares (subject to adjustment) of the Company's Common Stock at a
purchase price of $15.4375 per share (the "Initial Exercise Price"). The
Warrants may be exercised at any time prior to September 30, 2002 after (a)
March 30, 1998, (b) eleven (11) business days following the commencement of a
tender offer (as provided in Rule 14d-2 of the Exchange Act (as defined below))
with respect to the Common Stock pursuant to Regulation 14D promulgated under
the Securities Exchange Act of 1934, as amended, unless the Company has
published, sent or given to securityholders pursuant to Rule 14e-2(a) under the
Exchange Act a statement that the Company recommends rejection of such tender
offer (a "Rejection Recommendation"), (c) after a Rejection Recommendation, if
and upon the public announcement by the Company, a filing by the Company with
the Securities and Exchange Commission, or the sending by the Company to
securityholders of a statement pursuant to Rule 14e-2(b) under the Exchange Act,
in each case, which changes the Company's position with respect to such tender
offer to a recommendation of acceptance of such tender offer or an expression of
no opinion with respect to such tender offer, (d) immediately prior to
consummation by the Company of any consolidation or merger with any entity
(other than a wholly-owned subsidiary of the Company) other than a consolidation
or merger as a result of which each of the stockholders of the Company owns,
immediately after consummation of such consolidation or merger, directly or
indirectly, at least 70% of the percentage of the fully diluted capital stock of
the Company or the surviving entity of such consolidation or merger which such
stockholder owned immediately prior to the consummation of such consolidation or
merger, calculated without giving effect to the issuance as part of such
consolidation or merger of up to 375,000 shares of Common Stock upon exercise of
the Warrants, or (e) the consummation by the Company of any sale, transfer or
other disposition of all or substantially all of its property, assets or other
business, other than to a wholly-owned subsidiary of the Company.
Exercise
The Warrants may be exercised by surrendering the certificates representing
such Warrants to the Company at its headquarters, together with the Election to
Purchase form duly completed and executed, accompanied by payment in full, to
the Company of the Exercise Price for each Warrant Share in respect of which
such Warrants are being exercised. Such Exercise Price shall be paid in full by
(i) cash or a certified check or a
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wire transfer in same day funds in an amount equal to the Exercise Price
multiplied by the number of Warrant Shares then being purchased or (ii) delivery
to the Company of that number of shares of Common Stock having a Fair Market
Value (as defined) equal to the Exercise Price multiplied by the number of
Warrant Shares then being purchased. In the alternative, the Holder of a Warrant
Certificate may exercise its right to purchase some or all of the Shares subject
to such Warrant Certificate, on a net basis, such that, without the exchange of
any funds, such Holder receives that number of Warrant Shares subscribed to
pursuant to such Warrant Certificate less that number of shares of Common Stock
having an aggregate Fair Market Value at the time of exercise equal to the
aggregate Exercise Price that would otherwise have been paid by such Holder for
the number of Warrant Shares subscribed to pursuant to such Warrant Certificate
(a "Net Cashless Exercise").
Adjustment to Exercise Price
The Exercise Price of the Warrants shall be subject to adjustment subject to
the terms set forth in the Warrant Agreement in the event of (i) declarations by
the Company of dividends on its Common Stock or distributions on the outstanding
shares of its Common Stock in shares of its Common Stock, (ii) subdivision or
reclassification of the outstanding shares of its Common Stock into a greater
number of shares or (iii) combinations or reclassifications by the Company of
the outstanding shares of its Common Stock into a smaller number of shares. In
addition, the Exercise Price of the Warrants shall be subject to adjustment in
case (i) the Company fixes a record date for the issuance of rights, options,
warrants or convertible or exchangeable securities to all holders of its Common
Stock entitling them (for a period which, by its express terms, expires within
45 days after such record date) to subscribe for or purchase shares of its
Common Stock at a price per share less than the Current Market Price of a share
of Common Stock of the Company on such record date or (ii) the Company fixes a
record date for the making of a distribution to all holders of shares of its
Common Stock (i) of shares of any class other than its Common Stock or (ii) of
evidences of its indebtedness or (iii) of assets (excluding cash dividends or
distributions. The Exercise Price of the Warrants shall be subject to
adjustment as set forth in the Warrant Agreement in the event the Company issues
or sells any shares of Common Stock or any rights, options, warrants or
convertible or exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock (excluding Excluded Securities) at a price per
share less than the fair market value of the Common Stock on the date of such
issuance or sale. Lastly, the Exercise Price of the Warrants shall be subject
to adjustment as set forth in the Warrant Agreement in the case of any
Reorganizations (as defined) involving the Company.
Payment of Taxes and Charges
The Company will pay all taxes (other than income taxes) and other government
charges in connection with the issuance or delivery of the Warrants and the
initial issuance or delivery of the Shares upon the exercise of any Warrants and
payment of the Exercise Price. The Company shall not, however, be required to
pay any additional transfer taxes in connection with the subsequent transfer of
Warrants or any transfer involved in the issuance and delivery of the Shares in
a name other than the name in which the Warrants to which such issuance relates
were registered, and, if any such tax would otherwise be payable by the Company,
no such issuance or delivery shall be made unless and until the person
requesting such issuance has paid to the Company the amount of any such tax, or
it is established to the reasonable satisfaction of the Company that any such
tax has been paid.
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Registration Rights
The Company has entered into a Registration Rights Agreement with the Selling
Shareholder dated September 30, 1997 (the "Registration Rights Agreement"),
pursuant to which the Company has agreed to, at the Company's expense and for
the benefit of the holders of the Common Stock issuable upon exercise of the
Warrants, (i) file with the Commission within 270 days after the date of
original issuance of the Notes (the "Target Filing Date"), a registration
statement (the "Shelf Registration Statement") covering resales of the Shares,
(ii) use its best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act 30 days after the earlier of (a) the
Target Filing Date or (b) the date on which the Shelf Registration Statement is
filed with the Commission and (iii) use its best efforts to keep continuously
effective the Shelf Registration Statement until the longer of the period of
time between the date the Shelf Registration Statement is declared effective and
(a) the date which is 24 months following the date the Shelf Registration
Statement is declared effective, or (b) if such holder is an Affiliate of the
Company, the date which is three months after the date on which such holder of
the Shares ceases to be an Affiliate of the Company, provided that the Company
first provides such holder of the Shares with an opinion of counsel to such
effect (the "Effectiveness Period"). The Registration Statement of which this
Prospectus forms a part has been filed by the Company pursuant to the
Registration Rights Agreement. The Company will be permitted to suspend the use
of the prospectus which is part of the Shelf Registration Statement in
connection with the sales of the Registrable Securities during certain periods
of time under certain circumstances relating to pending corporate developments,
public filings with the Commission and other events.
In the event that during the Effectiveness Period the Company suspends the use
of the prospectus of which the Shelf Registration Statement is a part more than
three times during any period of twelve consecutive months or for more than 30
days, whether or not consecutive, then the Company shall pay liquidated damages
to each Holder in the amount of $3.25 per 1,000 Shares included in the Shelf
Registration Statement for each week during which the suspension is in effect.
The weekly liquidated damages payable by the Company to each holder as a result
of the continuance of a suspension period shall increase by an amount equal to
$3.25 per 1,000 Shares 60 days after receipt of the suspension notice. The
Company has agreed in the Registration Rights Agreement to use its reasonable
efforts to cause the Shares issuable upon exercise of the Warrants to be quoted
on the Nasdaq National Market, or, if the Common Stock is not then quoted on the
Nasdaq National Market, to be listed on such exchange or market in the United
States as the Common Stock is then listed, upon effectiveness of the Shelf
Registration Statement.
This summary of certain provisions of the Registration Rights Agreement does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Registration Rights Agreement, a copy of
which has been filed as Exhibit 4.3 to the Registration Statement of which this
Prospectus forms a part.
Governing Law
The Securities Purchase Agreement, the Notes, the Warrant Agreement, the
Warrant and the Registration Rights Agreement are governed by and construed in
accordance with the laws of the State of New York, United States of America.
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<PAGE>
SELLING SHAREHOLDER
The Warrants and the Shares issuable upon exercise thereof and offered hereby
were issued by the Company to the Selling Shareholder in the Financing, in a
transaction exempt from the registration requirements of the Securities Act, to
persons reasonably believed to be either (i) "qualified institutional buyers"
(as defined in Rule 144A under the Securities Act) or (ii) other institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act). The Selling Shareholder (which term includes its transferees,
pledgees, donees or its successors) may from time to time offer and sell
pursuant to this Prospectus any or all of the Common Stock issued upon exercise
of the Warrants.
The table below lists the Selling Shareholder, the number of shares of SGI
Common Stock which it beneficially owned as of March 1, 1998, the number of
Shares subject to sale pursuant to this Registration Statement, and the number
of the shares of SGI Common Stock which each would own assuming that such number
of Shares were offered and assuming the sale of all such Shares.
<TABLE>
<CAPTION>
Shares Beneficially Owned as of Shares To Shares Beneficially Owned
Selling Shareholder/(1)/ March 1, 1998 Be Offered Hereby After Offering/(2)/
- ----------------------------------- ------------------------------- ----------------- -------------------------
<S> <C> <C> <C>
B III Capital Partners, L.P./(3)/ 375,000 375,000 0
</TABLE>
- ----------------------
(1) The entity named in the table has sole voting and investment power with
respect to all shares of SGI Common Stock shown as beneficially owned by
them.
(2) Assumes that all Shares are sold by the Selling Shareholder.
(3) B III Capital Partners, L.P. is a Delaware limited partnership of which DDJ
Capital III, LLC is the general partner. The manager of DDJ Capital III,
LLC is DDJ Capital Management, LLC. The address of B III Capital Partners,
L.P. is c/o DDJ Capital Management, LLC, 141 Linden Street, Wellesley, MA
02181.
33
<PAGE>
PLAN OF DISTRIBUTION
The sale or distribution of the Shares may be effected directly to purchasers
by the Selling Shareholder as principals or through one or more underwriters,
brokers, dealers or agents from time to time in one or more transactions (which
may involve crosses or block transactions) (i) or on any exchange or in the
over-the-counter market, (ii) in transactions other than in the over-the-
counter market or (iii) through the writing of options (whether such options
are listed on an options exchange or otherwise) on, or settlement of short
sales of, the Shares. Any of the transactions may be effected at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at varying prices determined at the time of sale or at negotiated or
fixed prices, in each case as determined by the Selling Shareholder or by
agreement between the Selling Shareholder and underwriters, brokers, dealers,
or agents, or purchasers. If the Selling Shareholder effects such transactions
by selling Shares to or through underwriters, brokers, dealers or agents, such
underwriters, brokers, dealers, or agents may receive compensation in the form
of discounts, concessions or commissions from the Selling Shareholder or
commissions from purchasers of Shares for whom they may act as agent (which
discounts, concessions or commissions as to particular underwriters, brokers,
dealers or agents may be in excess of those customary in the types of
transactions involved). The Selling Shareholder and any brokers, dealers or
agents that participate in the distribution of the Shares may be deemed to be
underwriters, and any profit on the sale of Shares by them and any discounts,
concessions or commissions received by any such underwriters, brokers, dealers
or agents may be deemed to be underwriting discounts and commissions under the
Securities Act.
Under the securities laws of certain states, the Shares may be sold in such
states only through registered or licensed brokers or dealers.
The Company will pay all of the expenses incident to the registration,
offering and sale of the Shares to the public hereunder other than commissions,
fees and discounts of underwriters, brokers, dealers and agents. The Company
has agreed to indemnify the Selling Shareholder and any underwriters against
certain liabilities, including liabilities under the Securities Act. The
Company will not receive any of the proceeds from the sale of any of the Shares
by the Selling Shareholder.
The Company has agreed to use its best efforts to keep the Registration
Statement, of which this Prospectus constitutes a part, effective until the
longer of (i) twenty-four months following the date such registration statement
is declared effective by the Commission or (ii) if the holder of the Shares is
an Affiliate of the Company, the date which is three months after the date on
which such holder ceases to be an Affiliate of the Company, provided that the
Company first provides such holder with an opinion of counsel to such effect.
34
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares by the
Selling Shareholder.
LEGAL MATTERS
The legality of the Shares is being passed upon by Gray Cary Ware &
Freidenrich LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements incorporated in this prospectus by
reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated herein by reference,
and have been incorporated in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The statements as to matters of law and legal conclusion concerning Nevada
gaming laws included under the caption "Risk Factors--Regulatory Approval" and
the statements as to matters of law and legal conclusion concerning Nevada
gaming laws included under the caption "Business--Gaming Regulation and
Licensing--Nevada Regulatory Matters" have been prepared by Lionel Sawyer &
Collins, Las Vegas, Nevada, Nevada gaming counsel for the Company, and are
included in reliance upon such firm as experts in the gaming laws of the state
of Nevada.
The statements as to matters of law and legal conclusion concerning
Mississippi gaming laws included under the caption "Risk Factors--Regulatory
Approval" and the statements as to matters of law and legal conclusion
concerning Mississippi gaming laws included under the caption "Business--Gaming
Regulation and Licensing--Mississippi Regulatory Matters" have been prepared by
Phelps Dunbar, L.L.P., Jackson, Mississippi, Mississippi gaming counsel for the
Company, and are included in reliance upon such firm as experts in the gaming
laws of the state of Mississippi.
The statements as to matters of law and legal conclusion concerning Missouri
gaming laws included under the caption "Risk Factors--Regulatory Approval" and
the statements as to matters of law and legal conclusion concerning Missouri
gaming laws included under the caption "Business--Gaming Regulation and
Licensing--Missouri Regulatory Matters" have been prepared by Green, Schaaf &
Margo, P.C., St. Louis, Missouri, Missouri gaming counsel for the Company, and
are included in reliance upon such firm as experts in the gaming laws of the
state of Missouri.
The statements as to matters of law and legal conclusion concerning New Jersey
gaming laws included under the caption "Risk Factors--Regulatory Approval" and
the statements as to matters of law and legal conclusion concerning New Jersey
gaming laws included under the caption "Business--Gaming Regulation and
Licensing--New Jersey Regulatory Matters" have been prepared by Sterns &
Weinroth, A Professional Corporation, Atlantic City, New Jersey, New Jersey
gaming counsel for the Company, and are included in reliance upon such firm as
experts in the gaming laws of the state of New Jersey.
35
<PAGE>
===============================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR BY ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES, OR AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT PROSPECTUS
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
----
Available Information................................................. 3
Incorporation Of Certain Documents By Reference ...................... 3
The Company........................................................... 4
Risk Factors.......................................................... 5
Ratio of Earnings to Fixed Charges.................................... 23
Description of Notes and Warrants..................................... 23
Selling Shareholder................................................... 33
Plan Of Distribution.................................................. 34
Use Of Proceeds....................................................... 35
Legal Matters......................................................... 35
Experts............................................................... 35
================================================================================
================================================================================
PROSPECTUS
--------------
375,000 SHARES OF
COMMON STOCK
SILICON GAMING, INC.
March 20, 1998
--------------
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimates
except the Securities and Exchange Commission registration fees and Nasdaq
filing fee.
To be Paid
By The Registrant
-------------------
SEC Registration Fee.............. $ 1,093
Nasdaq Listing Fee................ $ 7,500
Accounting fees and expenses...... $ 5,000
Printing.......................... $10,000
Legal fees and expenses........... $20,000
Miscellaneous expenses............ $ 6,407
-------
Total..................... $50,000
=======
The Company will pay all expenses of registration, issuance and distribution
of the shares being sold by the Selling Shareholder, excluding fees and expenses
of counsel to the Selling Shareholder and any underwriting commissions and
discounts, filing fees and transfer or other taxes, which shall be borne by the
Selling Shareholder.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Section 204(a) of the California Corporation Law, the
Company's Articles of Incorporation eliminate a director's personal liability to
the Registrant for monetary damages, except for liability arising under Sections
310 and 316 of the California General Corporation Law or liability for (i) acts
or omissions that involve intentional misconduct or knowing and culpable
violation of law, (ii) acts or omissions that a director believes to be contrary
to the best interests of the Company or its shareholders or that involve the
absence of good faith on the part of the director, (iii) any transaction from
which a director derived an improper personal benefit, (iv) acts or omissions
that show a reckless disregard for the director's duty to the Company or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the Company or its shareholders and (v) acts or omissions
that constitute an unexercised patter of inattention that amounts to an
abdication of the director's duty to the Company or its shareholders. This
provision does not eliminate the directors' duty of care, and in appropriate
circumstances equitable remedies such as injunctive relief or other forms of
non-monetary relief would remain available under California law.
Sections 204(a) and 317 of the California General Corporation Law authorize a
corporation to indemnify its directors, officers, employees and other agents in
terms sufficiently broad to permit indemnification (including reimbursement for
expenses) under certain circumstances for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"). The Company's
Articles of Incorporation and Bylaws contain provisions covering indemnification
of corporate directors, officers and other agents against certain liabilities
and expenses incurred as a result of proceedings involving such persons in their
capacities as directors, officers, employees or agents, including proceedings
under the Securities Act of the Exchange Act. The Company has entered into
Indemnification Agreements with its directors and executive officers.
II-1
<PAGE>
These indemnification provisions and the indemnification agreements between
the Company and its officers and directors may be sufficiently broad to permit
indemnification of the Company's officers and directors for liabilities
(including reimbursement of expenses incurred) arising under the Securities Act.
The Registration Rights Agreement (Exhibit 4.3) provides for indemnification
by the Selling Shareholder of the Company and its officers and directors and
indemnification by the Company of the Selling Shareholder and its officers and
directors for certain liabilities arising under the Securities Act.
At present, there is no pending litigation or proceeding involving a director,
officer, employee or other agent of the Company in which indemnification is
being sought.
II-2
<PAGE>
ITEM 16. EXHIBITS.
The following exhibits are filed with this Registration Statement:
<TABLE>
<CAPTION>
Exhibit No. Description of Document
- ----------- -----------------------------------------------------------------------------------------------------------------------
<C> <S>
4.1 Securities Purchase Agreement, dated as of September 30, 1997, by and between the Company and B III Capital Partners,
L.P., a Delaware limited partnership
4.2 Form of Senior Discount Notes due September 30, 2002
4.3 Registration Rights Agreement dated September 30, 1997, by and between the Company and B III Capital Partners, L.P., a
Delaware limited partnership
4.4 Warrant Agreement including Form of Warrant dated September 30, 1997, by and between the Company and B III Capital
Partners, L.P., a Delaware limited partnership
5.1 Opinion and Consent of Gray Cary Ware & Freidenrich LLP
5.2 Opinion of Brownstein Hyatt Farber & Strickland, P.C., Colorado gaming counsel to the Company
10.1 Securities Purchase Agreement, dated as of September 30, 1997, by and between the Company and B III Capital Partners,
L.P., a Delaware limited partnership. Reference is made to Exhibit 4.1.
10.2 Registration Rights Agreement dated September 30, 1997, by and between the Company and B III Capital Partners, L.P.,
a Delaware limited partnership. Reference is made to Exhibit 4.3.
10.3 Warrant Agreement including Form of Warrant dated as of September 30, 1997, by and between the Company and B III
Capital Partners, L.P., a Delaware limited partnership. Reference is made to Exhibit 4.4.
12.1 Statement regarding Computation of Ratios
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Gray Cary Ware & Freidenrich LLP. Reference is made to Exhibit 5.1
23.3 Consent of Lionel Sawyer & Collins, Nevada gaming counsel to the Company.
23.4 Consent of Phelps Dunbar, L.L.P., Mississippi gaming counsel to the Company.
23.5 Consent of Green, Schaaf & Margo, P.C., Missouri gaming counsel to the Company.
23.6 Consent of Sterns & Weinroth, A Professional Corporation, New Jersey gaming counsel to the Company.
24.1 Power of Attorney (see signature page)
27.1 Financial Data Schedule
</TABLE>
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
B. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
C. The undersigned Registrant hereby undertakes to deliver or cause
to be delivered with the prospectus, to each person to whom the prospectus is
sent or given, the latest annual report to security holders that is incorporated
by reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
D. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
II-4
<PAGE>
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
E. The undersigned Registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Palo Alto, State of
California on the 19th day of March, 1998.
SILICON GAMING, INC.
By: /s/ Donald J. Massaro
---------------------
Donald J. Massaro
President, Chief Executive
Officer and Chairman of
the Board of Directors
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Donald J. Massaro and Thomas E. Carlson, or
either of them, as his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement on Form S-
3, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said attorney-
in-facts and agents, or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to
the requirements of the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
- --------------------- ----------------------------------- -----------------
/s/ Donald J. Massaro President, Chief Executive Officer March 19, 1998
- ---------------------- and Chairman of the Board of
Donald J. Massaro Directors (Principal Executive
Officer)
/s/ Thomas E. Carlson Vice President, Finance and Chief March 19, 1998
- ---------------------- Financial Officer (Principal
Thomas E. Carlson Financial Officer)
/s/ Robert Fell Director March 19, 1998
- ----------------------
Robert Fell
/s/ William Hart Director March 19, 1998
- ----------------------
William Hart
/s/ Kevin Harvey Director March 19, 1998
- ----------------------
Kevin Harvey
II-6
<PAGE>
/s/ David Morse Director March 19, 1998
- ----------------------
David Morse
/s/ Joseph Piemont Director March 19, 1998
- ----------------------
Joseph Piemont
/s/ Thomas Volpe Director March 19, 1998
- ----------------------
Thomas Volpe
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------------------------------------------------------------------------------------------------------
<C> <S>
4.1 Securities Purchase Agreement, dated as of September 30, 1997, by and between the Company and B III Capital Partners,
L.P., a Delaware limited partnership
4.2 Form of Senior Discount Notes due September 30, 2002
4.3 Registration Rights Agreement dated September 30, 1997, by and between the Company and B III Capital Partners, L.P., a
Delaware limited partnership
4.4 Warrant Agreement including Form of Warrant dated September 30, 1997, by and between the Company and B III Capital
Partners, L.P., a Delaware limited partnership
5.1 Opinion and Consent of Gray Cary Ware & Freidenrich LLP
5.2 Opinion of Brownstein Hyatt Farber & Strickland, P.C., Colorado gaming counsel to the Company
10.1 Securities Purchase Agreement, dated as of September 30, 1997, by and between the Company and B III Capital Partners,
L.P., a Delaware limited partnership. Reference is made to Exhibit 4.1.
10.2 Registration Rights Agreement dated September 30, 1997, by and between the Company and B III Capital Partners, L.P.,
a Delaware limited partnership. Reference is made to Exhibit 4.3.
10.3 Warrant Agreement including Form of Warrant dated as of September 30, 1997, by and between the Company and B III
Capital Partners, L.P., a Delaware limited partnership. Reference is made to Exhibit 4.4.
12.1 Statement regarding Computation of Ratios
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Gray Cary Ware & Freidenrich LLP. Reference is made to Exhibit 5.1
23.3 Consent of Lionel Sawyer & Collins, Nevada gaming counsel to the Company.
23.4 Consent of Phelps Dunbar, L.L.P., Mississippi gaming counsel to the Company.
23.5 Consent of Green, Schaaf & Margo, P.C., Missouri gaming counsel to the Company.
23.6 Consent of Sterns & Weinroth, A Professional Corporation, New Jersey gaming counsel to the Company.
24.1 Power of Attorney (see signature page)
27.1 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 4.1
-----------
================================================================================
SILICON GAMING, INC.
_________________________
SECURITIES PURCHASE AGREEMENT
_________________________
300 UNITS
EACH CONSISTING OF
$100,000 AGGREGATE PRINCIPAL AMOUNT OF
SENIOR DISCOUNT NOTES
DUE SEPTEMBER 30, 2002
AND
1,250 WARRANTS TO PURCHASE COMMON STOCK,
PAR VALUE $.001 PER SHARE,
OF
SILICON GAMING, INC.
DATED AS OF SEPTEMBER 30, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
----
<C> <S> <C>
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS....................................... 1
1.1 Definitions............................................................... 1
-----------
1.2 Accounting Terms.......................................................... 22
----------------
ARTICLE II PURCHASE AND SALE OF UNITS............................................ 22
2.1 Issuance of Units........................................................ 22
-----------------
2.2 Sale and Purchase of Units............................................... 23
--------------------------
2.3 Closing of Sale of Units................................................. 23
------------------------
ARTICLE III CONDITIONS TO CLOSING................................................ 23
3.1 Conditions Precedent to Obligations of the Purchaser on the Closing Date. 23
-------------------------------------------------------------------------
3.2 Conditions Precedent to Obligations of the Company on the Closing Date... 26
----------------------------------------------------------------------
ARTICLE IV REPRESENTATIONS AND WARRANTIES, ETC. ................................. 27
4.1 Organization and Qualification; Authority................................ 27
-----------------------------------------
4.2 Subsidiaries............................................................. 27
------------
4.3 Licenses................................................................. 28
--------
4.4 Corporate and Governmental Authorization; Contravention.................. 28
-------------------------------------------------------
4.5 Validity and Binding Effect.............................................. 28
---------------------------
4.6 Capitalization........................................................... 29
--------------
4.7 Litigation; Defaults..................................................... 29
--------------------
4.8 Outstanding Debt......................................................... 29
----------------
4.9 No Material Adverse Change............................................... 30
--------------------------
4.10 Employee Programs........................................................ 30
-----------------
4.11 Private Offering......................................................... 32
----------------
4.12 Broker's or Finder's Commissions......................................... 32
--------------------------------
4.13 Disclosure............................................................... 33
----------
4.14 Foreign Assets Control Regulation, Etc................................... 33
---------------------------------------
4.15 Federal Reserve Regulations and Other Matters............................ 33
---------------------------------------------
4.16 Investment Company Act................................................... 33
----------------------
4.17 Public Utility Holding Company Act....................................... 34
----------------------------------
4.18 Interstate Commerce Act.................................................. 34
-----------------------
4.19 Environmental Regulation, Etc............................................ 34
------------------------------
4.20 Properties and Assets.................................................... 35
---------------------
4.21 Insurance................................................................ 35
---------
4.22 Employment Practices..................................................... 36
--------------------
4.23 Financial Statements..................................................... 36
--------------------
4.24 Intellectual Property.................................................... 36
---------------------
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
SECTION PAGE
----
<C> <S> <C>
4.25 Taxes.................................................................... 38
-----
4.26 Transactions with Affiliates............................................. 38
----------------------------
4.27 Limitation on Subsidiary Payment Restrictions............................ 39
---------------------------------------------
4.28 No Other Business........................................................ 39
-----------------
ARTICLE V PURCHASE FOR INVESTMENT; SOURCE OF FUNDS............................... 39
5.1 Purchase for Investment.................................................. 39
-----------------------
5.2 Authority................................................................ 39
---------
5.3 Broker's or Finder's Commissions......................................... 39
--------------------------------
5.4 Acknowledgment of Gaming Restrictions.................................... 40
-------------------------------------
ARTICLE VI REDEMPTIONS AND OFFERS TO PURCHASE.................................... 40
6.1 Notice of Redemption..................................................... 40
--------------------
6.2 Selection of Senior Discount Notes to be Redeemed or Purchased........... 40
--------------------------------------------------------------
6.3 Effect of Notice of Redemption........................................... 41
------------------------------
6.4 Payment of Redemption Price.............................................. 41
---------------------------
6.5 Senior Discount Notes Redeemed in Part................................... 41
--------------------------------------
6.6 Optional and Mandatory Redemption........................................ 41
---------------------------------
6.7 Mandatory Offers......................................................... 43
----------------
ARTICLE VII COVENANTS............................................................ 44
7.1 Payment of Senior Discount Notes......................................... 44
--------------------------------
7.2 Reports.................................................................. 45
-------
7.3 Compliance Certificate................................................... 45
----------------------
7.4 Stay, Extension and Usury Laws........................................... 46
------------------------------
7.5 Limitation on Restricted Payments........................................ 47
---------------------------------
7.6 Corporate Existence...................................................... 47
-------------------
7.7 Limitation on Indebtedness............................................... 48
--------------------------
7.8 Limitation on Transactions with Affiliates............................... 50
------------------------------------------
7.9 Limitation on Liens...................................................... 51
-------------------
7.10 Payment of Taxes and Other Claims........................................ 51
---------------------------------
7.11 Restrictions Against Limitations on Upstream Payments.................... 52
-----------------------------------------------------
7.12 Change of Control........................................................ 52
-----------------
7.13 Redemption from the Proceeds of Securities Sales and Mezzanine Debt
-------------------------------------------------------------------
Financings............................................................... 52
----------
7.14 Maintenance of Properties................................................ 53
-------------------------
7.15 Maintenance of Insurance................................................. 53
------------------------
7.16 Compliance with Laws..................................................... 53
--------------------
7.17 Limitation on Issuances and Dispositions of Capital Stock of Subsidiaries 54
-------------------------------------------------------------------------
7.18 Limitation on Sale of Assets............................................. 54
----------------------------
ARTICLE VIII SUCCESSORS.......................................................... 56
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
SECTION PAGE
----
<C> <S> <C>
8.1 Merger or Consolidation.................................................. 56
-----------------------
8.2 Surviving Person Substituted............................................. 57
----------------------------
ARTICLE IX DEFAULTS AND REMEDIES................................................. 57
9.1 Events of Default........................................................ 57
-----------------
9.2 Acceleration............................................................. 58
------------
9.3 Other Remedies........................................................... 59
--------------
9.4 Waiver of Past Defaults.................................................. 59
-----------------------
9.5 Control by a Majority.................................................... 59
---------------------
9.6 Rights of Holders to Receive Payment..................................... 59
------------------------------------
9.7 Holders May File Proofs of Claim......................................... 60
--------------------------------
9.8 Undertaking for Costs.................................................... 60
---------------------
ARTICLE X AMENDMENTS............................................................. 60
10.1 Amendments and Supplements Permitted Without Consent of Holders.......... 60
---------------------------------------------------------------
10.2 Amendments and Supplements Requiring Consent of Holders; Other Consents.. 60
-----------------------------------------------------------------------
10.3 Revocation and Effect of Consents........................................ 61
---------------------------------
10.4 Notation on or Exchange of Senior Discount Notes......................... 62
------------------------------------------------
10.5 Board Approval........................................................... 62
--------------
ARTICLE XI THE SENIOR DISCOUNT NOTES............................................. 62
11.1 Form and Dating.......................................................... 62
---------------
11.2 Execution and Authentication............................................. 62
----------------------------
11.3 Transfer and Exchange.................................................... 63
---------------------
11.4 Replacement Senior Discount Notes........................................ 63
---------------------------------
11.5 Outstanding Senior Discount Notes........................................ 63
---------------------------------
11.6 Treasury Senior Discount Notes........................................... 64
------------------------------
11.7 Temporary Senior Discount Notes.......................................... 64
-------------------------------
11.8 Cancellation............................................................. 64
------------
11.9 Defaulted Interest....................................................... 64
------------------
11.10 Record Date.............................................................. 65
-----------
11.11 CUSIP Number............................................................. 65
------------
11.12 Restrictive Legends...................................................... 65
-------------------
11.13 Notice of Transfer; Opinions of Counsel.................................. 66
---------------------------------------
11.14 Security................................................................. 67
--------
ARTICLE XII INDEMNIFICATION...................................................... 69
12.1 Indemnification; Expenses, Etc........................................... 69
-------------------------------
ARTICLE XIII MISCELLANEOUS....................................................... 71
13.1 Survival of Representations and Warranties; Severability................. 71
--------------------------------------------------------
</TABLE>
(iii)
<PAGE>
<TABLE>
<CAPTION>
SECTION PAGE
----
<C> <S> <C>
13.2 Notices, Etc............................................................. 71
-------------
13.3 Successors and Assigns................................................... 73
----------------------
13.4 Descriptive Headings..................................................... 73
--------------------
13.5 Satisfaction Requirement................................................. 73
------------------------
13.6 Governing Law............................................................ 73
-------------
13.7 Service of Process....................................................... 73
------------------
13.8 Counterparts............................................................. 74
------------
13.9 Disclosure to Other Persons.............................................. 74
---------------------------
13.10 No Adverse Interpretation of Other Agreements............................ 74
---------------------------------------------
13.11 Waiver of Jury Trial..................................................... 74
--------------------
13.12 Merger................................................................... 75
------
13.13 Expenses................................................................. 75
--------
13.14 Cooperation with Gaming Authorities...................................... 76
-----------------------------------
13.15 Gaming Laws; Requisite Gaming Approvals.................................. 76
---------------------------------------
13.16 Nevada Gaming Collateral................................................. 77
------------------------
13.17 Assistance with Gaming Approvals......................................... 77
--------------------------------
</TABLE>
(iv)
<PAGE>
SCHEDULES
Schedule 4.1 -- Qualified Jurisdictions
Schedule 4.2 -- Subsidiaries
Schedule 4.4 -- Approvals
Schedule 4.6 -- Agreements Affecting Securities
Schedule 4.7 -- Litigation; Defaults
Schedule 4.8 -- Debt and Other Liabilities
Schedule 4.9 -- Material Developments
Schedule 4.10 -- ERISA
Schedule 4.19 -- Environmental
Schedule 4.20 -- Liens
Schedule 4.21 -- Insurance
Schedule 4.22 -- Employment Matters
Schedule 4.24 -- Intellectual Property
Schedule 4.25 -- Taxes
Schedule 4.26 -- Transactions with Affiliates
Schedule 4.27 -- Subsidiary Payment Restrictions
EXHIBITS
Exhibit A -- Form of Senior Discount Note
Exhibit B -- Form of Opinion of Gray Cary Ware & Freidenrich
Exhibit C -- Form of Registration Rights Agreement
Exhibit D -- Form of Warrant Agreement
(v)
<PAGE>
SILICON GAMING, INC.
THIS SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of September
30, 1997, is entered into by and between Silicon Gaming, Inc., a California
corporation (the "Company"), and the purchaser listed on the signature page
hereto (the "Purchaser"). Unless otherwise defined, capitalized terms used in
this Agreement are defined in Article I; references to a "Schedule" or an
"Exhibit" are, unless otherwise specified, to a Schedule or an Exhibit attached
to this Agreement; references to a "section" or a "subdivision" are, unless
otherwise specified, to a section or a subdivision of this Agreement.
The Company, in consideration of the mutual covenants and agreements set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, agrees with the Purchaser as
follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
1.1 Definitions. In addition to any terms defined elsewhere in this
-----------
Agreement, unless otherwise specifically provided herein, the following terms
shall have the following meanings for all purposes when used in this Agreement,
and in any note, agreement, certificate, report or other document made or
delivered in connection with this Agreement:
"Additional Interest" has the meaning ascribed thereto in Section 11.14(f)
hereof.
"Accreted Value" means, with respect to any Senior Discount Note and as of
any date before September 30, 2002, the sum of (a) the issue price of such
Senior Discount Note (which shall be equal to $730.58 per $1,000 principal
amount at maturity of the Senior Discount Notes) and (b) the amount which has
accreted at such time calculated by applying an accretion rate of 16.64% per
annum to such issue price, compounding semi-annually on March 31 and September
30 of each year, from the date of issuance of the Senior Discount Notes to the
date as of which the Accreted Value is being determined, in proportion to the
number of days elapsed (if calculated on any date other than March 31 or
September 30 of any year) and based on an annual period of twelve 30-day months.
As of the dates set forth below, each Senior Discount Note will have the
Accreted Value per $1,000 principal amount at maturity appearing opposite such
dates:
<TABLE>
<CAPTION>
Semi-annual Accretion Date Accreted Value
-------------------------- --------------
<S> <C>
Issue Date 730.58
March 31, 1998 791.37
September 30, 1998 857.21
March 31, 1999 897.29
September 30, 1999 909.45
March 31, 2000 922.62
</TABLE>
<PAGE>
<TABLE>
<S> <C>
September 30, 2000 936.89
March 31, 2001 952.34
September 30, 2001 962.90
March 31, 2002 980.52
September 30, 2002 1,000.00
</TABLE>
"Acquired Indebtedness" means, with respect to any specified Person, (a)
Indebtedness of an Acquired Person existing at the time of such acquisition,
including Indebtedness issued in connection with, or in contemplation of, such
acquisition, and (b) Indebtedness incurred by such Person or its Subsidiaries
(i) the proceeds of which have been used to finance an Investment in a Related
Business, and (ii) which is secured by a Lien solely on the assets or Property
constituting such an Investment in a Related Business.
"Acquired Person" means, with respect to any specified Person, any other
Person acquired by such specified Person, whether by purchase, merger,
consolidation, other business combination or otherwise.
"Affiliate" means, with respect to any specified Person, any other Person
(a) directly or indirectly controlling (including, but not limited to, all
directors and executive officers of such Person), controlled by or under direct
or indirect common control with such specified Person, or (b) that directly or
indirectly owns more than 10% of the voting securities of such Person. A Person
shall be deemed to control a corporation if such Person possesses, directly or
indirectly, the power to direct or cause the direction of the management and
policies of such corporation, whether through the ownership of voting
securities, by contract or otherwise.
"Affiliate Transaction" has the meaning ascribed thereto in Section 7.8
hereof.
"Agreement" means this Agreement, as amended, modified or supplemented from
time to time, together with any exhibits, schedules or other attachments
thereto.
"Approvals" means each and every approval, consent, filing or registration
by, or with any Governmental Body, or any creditor or shareholder of the
Company, necessary (a) to authorize or permit the execution, delivery or
performance by the Company of the Transaction Documents, and (b) for the
validity or enforceability of any of such Transaction Documents against the
Company.
"Asset Disposition" means any sale, lease, transfer, conveyance or other
disposition (in one or series of related transactions), including any such
disposition by means of a merger, consolidation or similar transaction, of
shares of Capital Stock of a Subsidiary (other than directors' qualifying
shares), Property or other assets (each referred to for the purposes of this
definition as a "disposition") by the Company or any of its Subsidiaries, but
excluding the following: (a) a disposition by a Subsidiary to the Company or by
the Company or a Subsidiary to a Wholly Owned Subsidiary, (b) a disposition of
tangible property or assets which have become obsolete or are otherwise not used
or useful, so long as such disposition is at fair market value (as
2
<PAGE>
determined by the Company in good faith) in the ordinary course of business, (c)
a disposition that constitutes a Restricted Payment or a Public Offering, in
each case so long as effected in accordance with all applicable provisions of
this Agreement, and (d) a disposition of inventory in the ordinary course of
business, in each case so long as effected in accordance with all applicable
provisions of this Agreement.
"Bankruptcy Law" means Title 11, United States Code, or any similar Federal
or state law for the relief of debtors.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or any committee of the Board of Directors of such
Person duly authorized, with respect to any particular matter, to exercise the
power of the Board of Directors of such Person.
"Board Resolution" means, with respect to any Person, a duly adopted
resolution of the Board of Directors of such Person.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Indebtedness arrangements
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability on
the face of a balance sheet of such Person in accordance with GAAP. The stated
maturity of such obligation shall be the date of the last payment of rent or any
other amount due under such lease prior to the first date upon which such lease
may be terminated by the lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares of, or interests,
rights, participations, and/or other equivalents in (however designated),
corporate stock or equity securities of such Person, including each class of
common stock and preferred stock of such Person and partnership or limited
liability company interests, whether general or limited, of such Person, and
including any securities convertible into or exercisable or exchangeable for, or
any right to acquire, any equity interest in such Person.
"Cash Equivalents" means: (a) marketable obligations issued or
unconditionally guaranteed by the United States government, in each case
maturing within 360 days after the date of acquisition thereof; (b) marketable
direct obligations issued by any state of the United States or any political
subdivision of any such state or any public instrumentality thereof maturing
within 360 days after the date of acquisition thereof and, at the time of
acquisition, having the highest rating obtainable from either Standard & Poor's
Corporation or Moody's Investors Service, Inc.; (c) commercial paper maturing no
more than 360 days after the date of acquisition thereof, issued by a
corporation organized under the laws of any state of the United States or of the
District of Columbia and, at the time of acquisition, having a rating in one of
the two highest rating categories obtainable from either Standard & Poor's
Corporation or Moody's Investors Service, Inc.; (d) money market funds whose
investments are made solely in securities described in clause
3
<PAGE>
(a) maturing within 360 days after the date of acquisition thereof; (e)
certificates of deposit maturing within 360 days after the date of acquisition
thereof, issued by any commercial bank that is a member of the Federal Reserve
System that has capital, surplus and undivided profits (as shown on its most
recent statement of condition) aggregating not less than $100,000,000 and is
rated A or better by Moody's Investors Service, Inc. or Standard & Poor's
Corporation; and (f) repurchase agreements entered into with any commercial bank
of the nature referred to in clause (e), secured by a fully perfected Lien in
any obligation of the type described in any of clauses (a) through (e), having a
fair market value at the time such repurchase agreement is entered into of not
less than 100% of the repurchase obligation thereunder of such commercial bank.
"Change of Control" means any transaction or series of transactions in
which any of the following occurs: (a) any Person or group (within the meaning
of Rule 13d-3 under the Exchange Act and Sections 13(d) and 14(d) of the
Exchange Act) becomes the direct or indirect "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act) of 25% or more of the issued and outstanding
shares of Capital Stock entitled to vote in the election of directors of the
Company or the Surviving Person (if other than the Company); or (b) individuals
who at the Closing constituted the Board of Directors of the Company (together
with any new directors whose election by such Board of Directors or whose
nomination for election by the stockholders of the Company was approved by a
vote of at least a majority of the directors of the Company then still in office
who were either directors at the Closing or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office.
"Change of Control Trigger Date" has the meaning ascribed thereto in
Section 7.12 hereof.
"Charter Documents" has the meaning ascribed thereto in Section 4.1 hereof.
"Closing" has the meaning ascribed thereto in Section 2.3 hereof.
"Closing Date" has the meaning ascribed thereto in Section 2.3 hereof.
"Code" means the Internal Revenue Code of 1986, as the same may be amended
from time to time, or any successor thereto, and the rules and regulations
issued thereunder, as from time to time in effect.
"Collateral" means all of the assets of the Company and its Subsidiaries,
including, without limitation, all right, title and interest of the Company and
its Subsidiaries now owned or hereafter acquired in and to the following: (a)
all equipment and fixtures (including, without limitation, furniture, vehicles
and other machinery and office equipment), together with all additions and
accessions thereto and replacements therefor; (b) all inventory (including,
without limitation, (i) all raw materials, work in progress and finished goods
and (ii) all such goods which are returned to or repossessed by the Company),
together with all additions and accessions thereto, replacements therefor,
products thereof and documents therefor; (c) all accounts, chattel paper,
contract rights and rights to the payment of money; (d) all general intangibles
(including, without
4
<PAGE>
limitation, (i) customer and supplier lists and contracts, books and records,
insurance policies, tax refunds, contracts for the purchase of real or personal
property, (ii) all copyrights, trademarks, tradenames and service marks, (iii)
all patents, and all registrations, recordings, reissues, continuations,
continuations-in-part and extensions thereof, and all pending applications
therefor, (iv) all licenses to use, applications for, and other rights to, such
patents, copyrights, trademarks, tradenames and service marks (other than
licenses whose terms prohibit the granting of a security interest therein), and
(v) all goodwill of the Company); (e) all deposit accounts, money, certificated
and uncertificated securities, instruments and documents; and (f) all proceeds
of the foregoing (including, without limitation, whatever is receivable or
received when Collateral or proceeds is sold, collected, exchanged, returned,
substituted or otherwise disposed of, whether such disposition is voluntary or
involuntary, including rights to payment and return premiums and insurance
proceeds under insurance with respect to any Collateral, and all rights to
payment with respect to any cause of action affecting or relating to the
Collateral).
"Commission" means the United States Securities and Exchange Commission or
any other Federal agency at the time administering the Securities Act.
"Common Stock" means the common stock, par value $.001 per share, of the
Company.
"Common Stock Purchase Warrants" means the warrants of the Company issued
pursuant to the Warrant Agreement representing the right to purchase shares of
Common Stock at the exercise price set forth therein.
"Company" means the party named as such above until a successor replaces it
and thereafter means the successor.
"Consolidated" or "consolidated," when used with reference to any
accounting term, means the amount described by such accounting term, determined
on a consolidated basis in accordance with GAAP, after elimination of
intercompany items.
"Consolidated EBIT" means, with respect to any Person, for any period, the
Consolidated Net Income of such Person and its consolidated Subsidiaries for
such period, plus or minus (a) a provision for taxes based on income or profits,
to the extent such provision for taxes was included in computing such
Consolidated Net Income, plus (b) Consolidated Interest Expense for such period,
all as determined on a consolidated basis in accordance with GAAP.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the Consolidated EBIT of such Person and its consolidated Subsidiaries for such
period, plus depreciation, amortization and all other non-cash charges, to the
extent such depreciation, amortization and other non-cash charges were deducted
in computing such Consolidated EBIT (including amortization of goodwill and
other intangibles), all as determined on a consolidated basis in accordance with
GAAP.
5
<PAGE>
"Consolidated Interest Coverage Ratio" means, as of any date of
determination, the ratio of (a) the Consolidated EBITDA for the period of the
most recent two consecutive fiscal quarters for which financial statements are
available to (b) Consolidated Interest Expense for such two fiscal quarters;
provided, however, that (i) if the Company or any Subsidiary has issued any
- -------- -------
Indebtedness since the beginning of such period that remains outstanding or if
the transaction giving rise to the need to calculate the Consolidated Interest
Coverage Ratio is an issuance of Indebtedness, or both, Consolidated EBITDA and
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to such Indebtedness as if such Indebtedness had
been issued on the first day of such period and with respect to the discharge of
any other Indebtedness refinanced, refunded, exchanged or otherwise discharged
with the proceeds of such new Indebtedness as if any such discharge had occurred
on the first day of such period, (ii) if since the beginning of such period the
Company or any Subsidiary shall have made any Asset Disposition, Consolidated
EBITDA for such period shall be reduced by an amount equal to the Consolidated
EBITDA (if positive) directly attributable to the assets which are the subject
of such Asset Disposition for such period, or increased by an amount equal to
the Consolidated EBITDA (if negative) directly attributable thereto for such
period and Consolidated Interest Expense for such period shall be reduced by an
amount equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Subsidiary refinanced, refunded, exchanged or
otherwise discharged with respect to the Company and its continuing Subsidiaries
in connection with such Asset Dispositions for such period (or if the Capital
Stock of any Subsidiary is sold, the Consolidated Interest Expense for such
period directly attributable to the Indebtedness of such Subsidiary to the
extent the Company and its continuing Subsidiaries are no longer liable for such
Indebtedness after such sale), and (iii) if since the beginning of such period
the Company or any Subsidiary (by merger or otherwise) shall have made an
Investment in any Subsidiary (or any person which becomes a Subsidiary) or an
acquisition of assets or stock, including any acquisition of assets or stock
occurring in connection with a transaction causing a calculation to be made
hereunder, which constitutes all of an operating unit of a business,
Consolidated EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto (including the issuing of any
Indebtedness), as if such Investment or acquisition occurred on the first day of
such period. For purposes of this definition, whenever pro forma effect is to
be given to an acquisition of assets, the amount of income or earnings relating
thereto, and the amount of Consolidated Interest Expense associated with any
Indebtedness issued in connection therewith, the pro forma calculations shall be
determined in good faith by a responsible financial or accounting Officer of the
Company. If any Indebtedness bears a floating rate of interest and is being
given pro forma effect, the interest on such Indebtedness shall be calculated as
if the rate in effect on the date of determination had been the applicable rate
for the entire period.
"Consolidated Interest Expense" means, with respect to any Person, for any
period, (a) the total aggregate amount of interest expense (including
amortization of original issue discount and non-cash interest payments or
accruals and the interest component of any Capital Lease Obligations, but
excluding any intercompany interest owed by any Subsidiary to any other
Subsidiary of such Person) of such Person and its consolidated Subsidiaries,
determined on a consolidated basis in accordance with GAAP, (b) all fees,
commissions, discounts and other
6
<PAGE>
charges of such Person and its consolidated Subsidiaries with respect to letters
of credit and bankers' acceptances, determined on a consolidated basis in
accordance with GAAP and (c) the product of (i) the total amount of dividends
declared on Disqualified Capital Stock other than common stock (whether accrued
or paid) of such Person and its consolidated Subsidiaries, times (ii) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local effective income tax
rate of such Person, expressed as a decimal, in each case, on a consolidated
basis and in accordance with GAAP (after consideration of any deferred tax
assets of such Person then available including without limitation, any amounts
of available net operating loss carryover).
"Consolidated Net Income," means, with respect to any Person, for any
period, the aggregate of the net income (or loss) of such Person and its
consolidated Subsidiaries for such period, before payment or accrual of
preferred dividends, on a consolidated basis, determined in accordance with
GAAP; provided that (a) the net income of any other Person in which such Person
--------
or any of its Subsidiaries has an interest (which interest does not cause the
net income of such other Person to be consolidated with the net income of such
Person and its Subsidiaries in accordance with GAAP) shall be included only to
the extent of the amount of dividends or distributions actually paid to such
Person or such Person's Subsidiaries by such other Person in such period; (b)
the net income of any Subsidiary of such Person that is subject to any Payment
Restriction shall be excluded to the extent such Payment Restriction actually
prevented the payment of an amount that otherwise could have been paid to, or
received by, such Person or a Subsidiary of such Person not subject to any
Payment Restriction, provided, however, that with respect to the Consolidated
-------- -------
Net Income of the Company, the Consolidated Net Income of the Company's
Subsidiaries shall not be so excluded, notwithstanding the existence of any such
Payment Restriction, so long as the terms of any such Payment Restriction
limiting the payment of dividends by the Company's Subsidiaries are not more
restrictive at the time of determination of Consolidated Net Income than the
Payment Restrictions limiting such payment of dividends in effect on the date
hereof; (c) the net income (or loss) of any other Person shall not be included
for any periods during which such other Person is not a consolidated subsidiary
of such Person and the net income (or loss) of any successor to such Person by
consolidation or merger or transfer of all or substantially all assets shall not
be included for any periods prior to such consolidation, merger, or transfer of
all or substantially all assets; and (d) there shall be excluded the following:
(i) such Person's share, determined in accordance with GAAP, of the net loss of
any other Person in which such Person or any of its Subsidiaries has an interest
(which interest does not cause the net loss of such other Person to be
consolidated with the net income or loss of such Person and its Subsidiaries in
accordance with GAAP), (ii) the net income of any other Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition, (iii) all gains realized upon or in connection with or as a
consequence of the issuance of the Capital Stock of such Person or any of its
Subsidiaries, any gains on pension reversions received by such Person or any of
its Subsidiaries, or any proceeds from life insurance policies received by such
Person or any of its Subsidiaries, (iv) all gains, together with any related
provision for taxes, realized in connection with any sale of assets by such
Person or any of its Subsidiaries during such period (including, without
limitation, dispositions pursuant to sale and leaseback transactions), (v) all
gains realized in connection with the acquisition of debt securities
7
<PAGE>
for a cost less than principal plus accrued interest, (vi) all extraordinary
gains, together with any related provision for taxes, realized by such Person or
any of its Subsidiaries during such period, and (vii) the cumulative effect of a
change in accounting principles in the year of adoption of such change.
"Consolidated Net Worth" means, with respect to any Person, as of the date
of determination, the Net Worth of such Person and its consolidated
Subsidiaries, determined in accordance with GAAP, as of the end of the most
recent fiscal quarter of such Person for which financial statements are
available prior to the taking of any action for the purpose of which the
determination is being made.
"Current Affiliate" has the meaning ascribed thereto in Section 4.10
hereof.
"Custodian" means any receiver, trustee, assignee, liquidator, sequestrator
or similar official under any Bankruptcy Law.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disposition" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such Person
is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of such Person's assets in one
transaction or a series of related transactions.
"Disqualified Capital Stock" means, (a) with respect to any Person, any
Capital Stock of such Person or its Subsidiaries that, by its terms, by the
terms of any agreement related thereto or by the terms of any security into
which it is convertible, puttable or exchangeable, is, or upon the happening of
an event or the passage of time would be, required to be redeemed or repurchased
by such Person or its Subsidiaries, including at the option of the holder, in
whole or in part, or has, or upon the happening of an event or passage of time
would have, a redemption or similar payment due, on or prior to the stated
maturity date of the Senior Discount Notes, or (b) any other Capital Stock of
such Person or its Subsidiaries designated as Disqualified Capital Stock by such
Person at the time of issuance.
"Dollars" and "$" mean lawful currency of the United States of America.
"Employee Program" has the meaning ascribed thereto in Section 4.10 hereof.
"Environment" means soil, surface waters, groundwater, land, stream
sediments, surface or subsurface strata and ambient air.
"Environmental Law(s)" means and includes any federal, state, local or
foreign statute, law, ordinance, rule, regulation, code, order, writ, judgment,
injunction, decree or judicial or agency interpretation, policy or guidance
relating to pollution or protection of the Environment, health,
8
<PAGE>
safety or natural resources, including, without limitation, those relating to
the use, handling, transportation, treatment, storage, disposal, release or
discharge of Hazardous Materials.
"ERISA" means the Employee Retirement Income Security Act of 1974, as the
same may be amended from time to time, or any successor thereto, and the rules
and regulations issued thereunder, as from time to time in effect.
"Event of Default" has the meaning ascribed thereto in Section 9.1 hereof.
"Excess Proceeds" has the meaning ascribed thereto in Section 7.18(b).
"Excess Proceeds Date" has the meaning ascribed thereto in Section 7.18(d).
"Exchange Act" means the Securities Exchange Act of 1934, as the same may
be amended from time to time, or any successor thereto, and the rules and
regulations issued thereunder, as from time to time in effect.
"Fair Market Value" or "fair market value" means, with respect to any
assets or properties, the amount at which such assets or properties would change
hands between a willing buyer and a willing seller, within a commercially
reasonable time, each having reasonable knowledge of the relevant facts, neither
being under a compulsion to sell or buy, as such amount is determined by (a) the
Board of Directors of the Company acting in good faith or (b) an appraisal or
valuation firm of national or regional standing selected by the Company, with
experience in the appraisal or valuation of properties or assets of the type for
which Fair Market Value is being determined.
"Financial Statements" has the meaning ascribed thereto in Section 4.23
hereof.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
entity as may be approved by a significant segment of the accounting profession,
which are applicable to the circumstances as of the date of determination, as in
effect 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 Company 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
9
<PAGE>
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 Company 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 Stock Restrictions" means the negative pledge (i.e.,
the agreement not to encumber pursuant to Section 7.9), and the restrictions on
transfers (i.e., pursuant to Sections 7.17, 7.18 and 8.1), of the capital stock
of the Company's Gaming Subsidiaries, in each case only to the extent such
negative pledge or restrictions require the approval of any Gaming Authority
pursuant to the Gaming Laws.
"Governmental Body" means any governmental or quasi-governmental authority
including, without limitation, any federal, state, territorial, county,
municipal or other governmental or quasi-governmental agency, board, branch,
bureau, commission, court, department or other instrumentality or political unit
or subdivision, whether domestic or foreign and any of the Gaming Authorities.
"Gross Proceeds" means, when used with respect to a Public Offering or a
private offering of Capital Stock, the number of shares of Capital Stock sold by
the Company in such offering multiplied by the price paid for such shares by the
purchasers thereof.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing any Indebtedness of any other Person (the "Primary
Obligor") in any manner, whether directly or indirectly, and including, without
limitation, any obligation of such Person, (a) to purchase or pay (or advance or
supply funds, for the purchase or payment of) such Indebtedness or to purchase
(or to advance or supply funds for the purchase of) any security for the payment
of such Indebtedness, (b) to purchase property, securities or services for the
purpose of assuring the holder of such Indebtedness of the payment of such
Indebtedness, or (c) to maintain working capital, equity capital or other
financial statement, condition or liquidity of the Primary Obligor so as to
enable the Primary Obligor to pay such Indebtedness (and "Guaranteed,"
"Guaranteeing" and "Guarantor" shall have meanings correlative to the
foregoing); provided, however, that the Guarantee by any Person shall not
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include endorsements by such Person for collection or deposit, in either case,
in the ordinary course of business.
"Hazardous Materials" means petroleum or petroleum products, by-products or
breakdown products, radioactive materials, asbestos-containing materials,
polychlorinated biphenyls and radon gas, and any other chemicals, materials or
substances designated, classified or regulated as hazardous or toxic or as a
pollutant or contaminant under any Environmental Law.
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"Hazardous Waste" means and includes any hazardous waste as defined or
regulated under any Environmental Law.
"Holder" means a Person in whose name a Senior Discount Note is registered.
"Illegal Transfer Notice" has the meaning ascribed thereto in Section 11.13
hereof.
"Incur" or "incur" means, with respect to any Indebtedness or other
obligation of any Person, to create, issue, incur (by conversion, exchange or
otherwise), assume, Guarantee or otherwise become liable in respect of such
Indebtedness or other obligation, including by way of merger or acquisition of
another Person, or the recording, as required pursuant to GAAP or otherwise, of
any such Indebtedness or other obligation on the balance sheet of such Person
(and "Incurrence," "Incurred," "Incurrable" and "Incurring" shall have meanings
correlative to the foregoing).
"Indebtedness" means, with respect to any Person, (a) all liabilities,
contingent or otherwise, of such Person (i) for borrowed money (whether or not
the recourse of the lender is to the whole of the assets of such Person or only
to a portion thereof and whether short-term or long-term, secured or unsecured),
(ii) evidenced by bonds, notes, debentures, drafts accepted or similar
instruments or letters of credit (including such liabilities representing the
balance deferred and unpaid of the purchase price of any property, other than
any such liability that represents an account payable or any other monetary
obligation to a trade creditor created, incurred, assumed or guaranteed by such
Person in the ordinary course of business in connection with obtaining goods,
materials or services, which account is not overdue according to the original
terms of sale, unless such account payable is being contested in good faith),
(iii) for the payment of money relating to Capital Lease Obligations; or (iv)
under the terms of any amendment, renewal, extension or refunding of any
liability of the types referred to in the preceding clauses (i), (ii) or (iii);
(b) the maximum fixed repurchase price of all Disqualified Capital Stock of such
Person or, if there is no such maximum fixed repurchase price, the liquidation
preference of such Disqualified Capital Stock, plus accrued but unpaid
dividends; (c) outstanding reimbursement obligations of such Person with respect
to letters of credit or bankers' acceptances issued for the benefit of such
Person; (d) net obligations of such Person with respect to Interest Rate or
Currency Protection Agreements; (e) all liabilities of others of the kind
described in the preceding clause (a), (b), (c) or (d) that such Person has
Guaranteed or that is otherwise its legal liability; and (f) all obligations of
others secured by a Lien to which any of the Property or assets of such Person
are subject (other than obligations of a lessor under any operating lease
pursuant to which the Company or any of its Subsidiaries leases Property, if
such lessor grants a Lien on such lease to secure such lessor's Indebtedness),
whether or not the obligations secured thereby shall have been assumed by such
Person or shall otherwise be such Person's legal liability (provided that if the
--------
obligations so secured have not been assumed by such Person or are not otherwise
such Person's legal liability, such obligations shall be deemed to be in an
amount equal to the fair market value of such Properties or assets, as
determined in good faith by the Board of Directors of such Person, which
determination shall be evidenced by a Board Resolution). For purposes of the
preceding sentence, the "maximum fixed repurchase price" of any Disqualified
Capital Stock
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that does not have a fixed repurchase price shall be calculated in accordance
with the terms of such Disqualified Capital Stock as if such Disqualified
Capital Stock were purchased on any date on which Indebtedness shall be required
to be determined pursuant to this Agreement, and if such price is based upon, or
measured by, the fair market value of such Disqualified Capital Stock (or any
equity security for which it may be exchanged or converted), such fair market
value shall be determined in good faith by the Board of Directors of such
Person, which determination shall be evidenced by a Board Resolution. For
purposes hereof, Indebtedness incurred by any Person that is a general
partnership (other than non-recourse Indebtedness) shall be deemed to have been
incurred by the general partners of such partnership pro rata in accordance with
their respective interests in the liabilities of such partnership unless any
such general partner shall, in the reasonable determination of the Board of
Directors of the Company, be unable to satisfy its pro rata share of the
liabilities of the partnership, in which case the pro rata share of any
Indebtedness attributable to such partner shall be deemed to be incurred at such
time by the remaining general partners on a pro rata basis in accordance with
their interests.
"Indemnified Party" or "Indemnified Parties" has the meaning ascribed
thereto in Section 12.1(a) hereof.
"Independent Financial Advisor" means a reputable accounting, appraisal or
a nationally recognized investment banking firm that is, in the reasonable
judgment of the Board of Directors of the Company, qualified to perform the task
for which such firm has been engaged hereunder and disinterested and independent
with respect to the Company and its Affiliates.
"Insolvency or Liquidation Proceeding" means, with respect to any Person,
(a) any insolvency or bankruptcy or similar case or proceeding, or any
reorganization, receivership, liquidation, dissolution or winding up of such
Person, whether voluntary or involuntary, or (b) any assignment for the benefit
of creditors or any other marshaling of assets and liabilities of such Person.
"Intellectual Property" has the meaning ascribed thereto in Section 4.24(a)
hereof.
"Interest Payment Date" means each January 1 and July 1 commencing July 1,
1999.
"Interest Rate or Currency Protection Agreements" means any interest rate
swap agreement, interest rate cap agreement, currency swap agreement or other
financial agreement or arrangement designed to protect the Company or any
Subsidiary against fluctuations in interest rates or currency exchange rates and
which shall have a notional amount no greater than the payments due with respect
to Indebtedness being hedged thereby.
"Investment" means any investment by any Person in any other Person,
whether by a purchase of assets, in any transaction or series of related
transactions, individually or in the aggregate, purchase of Capital Stock,
capital contribution, loan, advance (other than reasonable loans and advances to
employees for moving and travel expenses, as salary advances, and other similar
expenses incurred, in each case in the ordinary course of business consistent
with past
12
<PAGE>
practice) or similar credit extension constituting Indebtedness of such other
Person, and any Guarantee of Indebtedness of such other Person.
"IRS" means the Internal Revenue Service or any successor agency.
"Issue Date" means the date of original issuance of the Senior Discount
Notes.
"Legal Holiday" means a Saturday, Sunday or a day on which banking
institutions in New York City, New York, or Boston, Massachusetts, or at such
place of payment, are not required to be open.
"License" or "Licenses" has the meaning ascribed thereto in Section 4.3
hereof.
"Lien" means any mortgage, pledge, lien, encumbrance, charge or adverse
claim affecting title or resulting in an encumbrance against real or personal
property, or a security interest of any kind, whether or not filed, recorded or
otherwise perfected under applicable law (including any conditional sale or
other title retention agreement, any lease in the nature thereof, any option or
other agreement to sell which is intended to constitute or create a security
interest, mortgage, pledge or lien, and any filing of or agreement to give any
financing statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction); provided that in no event shall an operating lease (as
--------
opposed to a Capital Lease Obligation) or a license with respect to any
intangible asset with any Person who is not an Affiliate be deemed to constitute
a Lien hereunder.
"Losses" has the meaning ascribed thereto in Section 12.1(a) hereof.
"Material Adverse Effect" means a material adverse effect on the business,
Property, operations or condition (financial or otherwise) or prospects of the
Company and its Subsidiaries taken as a whole.
"Mezzanine Debt Financing" means the issuance, transfer, conveyance, sale,
or other disposition for cash by the Company or any of its Subsidiaries of
unsecured Subordinated Indebtedness.
"Multiemployer Plan" has the meaning ascribed thereto in Section 4.10
hereof.
"Net Cash Proceeds" means, with respect to (a) any Mezzanine Debt
Financing, (b) any Securities Sale, or (c) any Asset Disposition, as the case
maybe, the aggregate amount of cash or Cash Equivalents actually received from
time to time (whether as initial consideration or through payment or disposition
of deferred consideration) by or on behalf of the Person issuing the
Indebtedness or securities, as the case may be, in connection with such
transaction after deducting therefrom only (without duplication) (i) brokerage
commissions, underwriting fees and discounts, legal fees, finder's fees,
accountants' fee and expenses, printers' fees and expenses, road show expenses
and other similar transaction fees and commissions incurred in connection with
such transaction, and (ii) the amount of Taxes payable in connection with or as
a result of such
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<PAGE>
transaction as determined in accordance with GAAP, but only to the extent that
the amounts so deducted are properly attributable to such transaction and are,
in the case of clause (i), at the time of receipt of such cash, actually paid to
a Person that is not an Affiliate of such Person and, in the case of clause
(ii), on the earlier of the dates on which the tax return covering such taxes is
filed or required to be filed, actually paid to a Person that is not an
Affiliate of such Person.
"Net Worth" means, with respect to any Person, the total of the amounts
shown on the balance sheet of such Person, determined in accordance with GAAP,
as of the end of the most recent fiscal quarter of such Person ending at least
45 days prior to the taking of any action for the purpose of which the
determination is being made, as (a) the par or stated value of all outstanding
Capital Stock of such Person plus (b) paid-in capital or capital surplus
relating to such Capital Stock plus (c) any retained earnings or earned surplus
less (i) any accumulated deficit, and (ii) any amounts attributable to (A)
unamortized debt discount, (B) capitalized expenses associated with the issuance
of Indebtedness if such Indebtedness is incurred after the date hereof, or (C)
write-ups of assets subsequent to the date hereof other than in connection with
the acquisitions of such assets.
"Notice of Default" has the meaning ascribed thereto in Section 9.1(b)
hereof.
"Obligations" with respect to any instrument or agreement means any and all
principal, interest, penalties, premiums, fees, indemnifications,
reimbursements, damages and other charges, obligations and liabilities existing
from time to time under such instrument or agreement, whether direct or
indirect, joint or several, actual, absolute or contingent, matured or
unmatured, liquidated or unliquidated, secured or unsecured, arising by
contract, operation of law or otherwise, including any obligations or
liabilities to repay, redeem, repurchase, retire, acquire or defease any
Indebtedness under such instrument or agreement, or any obligation to establish
a sinking fund for any such purpose.
"Offer" means an irrevocable offer by the Company to repurchase for cash
Senior Discount Notes after any Change of Control Trigger Date, Repayment
Trigger Date or Excess Proceeds Date.
"Officer" means, with respect to any Person, the Chairman of the Board (if
an officer), the Chief Executive Officer, the President, any Vice President, the
Chief Financial Officer, the Treasurer or the Secretary of such Person.
"Officers' Certificate" means a certificate executed on behalf of the
Company by (a) two Officers of the Company or (b) or by an Officer and an
Assistant Secretary of the Company.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Purchaser.
"pari passu" means, when used with respect to the ranking of any
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Indebtedness of any Person in relation to other Indebtedness of such Person,
that each such Indebtedness (a) either
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(i) is not subordinated or junior in right of payment to any other Indebtedness
of such Person or (ii) is subordinate in right of payment to the same
Indebtedness of such Person as is the other and is so subordinate to the same
extent and (b) is not subordinate in right of payment to the other or to any
Indebtedness of such Person as to which the other is not so subordinate.
"Pari Passu Indebtedness" means any Indebtedness of the Company, other than
the Senior Discount Notes, whether outstanding on the date hereof or Incurred
hereafter, which (a) ranks pari passu with the Senior Discount Notes and (b) by
----------
its terms, or by the terms of any agreement or instrument pursuant to which such
Indebtedness is Incurred, (i) does not provide for payments of principal of such
Indebtedness at the final stated maturity thereof or by way of a sinking fund
applicable thereto or by way of any mandatory redemption, retirement or
repurchase thereof by the Company (including any redemption, retirement or
repurchase which is contingent upon events or circumstances, but excluding any
retirement required by virtue of acceleration of such Indebtedness upon an event
of default thereunder), in each case prior to the final stated maturity of the
Senior Discount Notes and (ii) does not permit redemption or other retirement
(including pursuant to an offer to purchase made by the issuer) of such other
Indebtedness at the option of the holder thereof prior to the final stated
maturity of the Senior Discount Notes, other than a redemption or other
retirement at the option of the holder of such Indebtedness (including pursuant
to an offer to purchase made by the issuer) which is conditioned upon the change
of control of the Company pursuant to provisions substantially similar to those
contained in Section 7.12 hereof.
"Payment Restriction" means, with respect to a Subsidiary of any Person,
any encumbrance, restriction or limitation, whether by operation of the terms of
its charter or by reason of any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation, on the ability of (a) such Subsidiary
to (i) pay dividends or make other distributions on its Capital Stock or make
payments on any obligation, liability or Indebtedness owed to such Person or any
other Subsidiary of such Person, (ii) make loans or advances to such Person or
any other Subsidiary of such Person, or (iii) transfer any of its properties or
assets to such Person or any other Subsidiary of such Person, or (b) such Person
or any other Subsidiary of such Person to receive or retain any such (i)
dividends, distributions or payments, (ii) loans or advances, or (iii) transfers
of properties or assets.
"Permitted Disposition" means (a) any transfer, conveyance, sale, lease,
license or other disposition (a "sale") by the Company or any of its
Subsidiaries of its inventory or license of its intangible Property in the
ordinary course of its business; (b) any sale by the Company or any of its
Subsidiaries in the ordinary course of its business of its equipment or other
tangible or intangible Property that is obsolete or no longer useful or
necessary to its business; (c) any sale by the Company or any of its
Subsidiaries in the ordinary course of its business, and in a manner consistent
with its customary and usual cash management practices, of its Permitted
Investments of the kind described in clause (c) of the definition thereof; (d)
the creation or Incurrence of any Liens in any Property of the Company or any of
its Subsidiaries that are permitted by this Agreement and (e) any sale of
Property by or at the direction of a secured party holding a Lien on such
Property, which Lien is permitted by this Agreement, pursuant to the exercise by
such secured party of its rights as a creditor.
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<PAGE>
"Permitted Investment" by any Person means (a) any Investment in a Related
Business which becomes a Subsidiary following such Investment (including any
Investments held by such Subsidiary (or any Subsidiaries thereof) on the date
such Subsidiary is acquired), (b) Investments in securities or other Property
not constituting cash or Cash Equivalents and received in connection with an
Asset Disposition, to the extent permitted hereunder, or any other disposition
of assets not constituting an Asset Disposition, (c) Investments in cash and
Cash Equivalents, (d) Investments existing on the date hereof, (e) Investments
by any Subsidiary in other Subsidiaries, (f) Investments by the Company in any
of its Subsidiaries required by any instrument or agreement governing
Indebtedness to the extent that such Investments consist of (i) performance
under Guarantees Incurred by the Company in compliance with this Agreement with
respect to Indebtedness of its Subsidiaries not Incurred in violation of this
Agreement or (ii) Liens securing the Company's Obligations with respect to any
Guarantee described in the foregoing clause (i), (g) Investments in the form of
accounts receivable arising from sales of goods or services in the ordinary
course of business, provided that for any accounts receivable that are more than
--------
120 days overdue, appropriate reserves or allowances have been established in
accordance with GAAP, (h) Investments in the form of advances or prepayments to
suppliers or employees in the ordinary course of business and (i) Strategic
Investments which do not exceed an aggregate of $5,000,000.
"Permitted Liens" shall mean (a) Liens for Taxes, assessments, and similar
governmental charges to the extent (1) not delinquent or (2) being contested in
good faith by appropriate proceedings and as to which reserves have been set
aside on the books of the Company to the extent required by GAAP; (b) statutory
Liens of landlords and carriers, warehousemen, mechanics, suppliers,
materialmen, repairmen, or other like Liens arising in the ordinary course of
business and with respect to amounts not yet delinquent or being contested in
good faith by appropriate process of law, and for which a reserve or other
appropriate provision, if any, as shall be required by GAAP shall have been made
on the books of the Company; (c) pledges or deposits in the ordinary course of
business to secure lease obligations or nondelinquent obligations under workers'
compensation, unemployment insurance or other social security benefits; (d)
Liens to secure the performance of public statutory obligations that are not
delinquent, appeal bonds, performance bonds or other obligations of a like
nature (other than for borrowed money); (e) zoning restrictions, easements,
rights-of-way, restrictions, minor defects or irregularities in title and other
similar charges or encumbrances not interfering in any material respect with the
business of the Company or any Subsidiary incurred in the ordinary course of
business; (f) Liens in respect of purchase money or similar acquisition
Indebtedness Incurred to acquire furniture, fixtures, equipment or other
operating assets, provided that the principal amount of the Indebtedness secured
by such Lien does not exceed the acquisition cost of such assets; (g) Liens
securing Indebtedness which secures assets leased pursuant to Capital Lease
Obligations; (h) Liens on any assets of any Acquired Person securing Acquired
Indebtedness which assets or Acquired Person are acquired by the Company or a
Subsidiary subsequent to the date of the Agreement, and which Liens were in
existence on or prior to the acquisition of such assets or Acquired Person (to
the extent that such Liens were not created in connection with or in
contemplation of such acquisition), provided that such Liens are limited to the
assets or Acquired Person so acquired and the proceeds thereof; (i) Liens
securing Senior Indebtedness permitted to be incurred by Section 7.7(c)(iv);
(j) Liens imposed pursuant to condemnation or eminent domain or substantially
similar
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proceedings; provided that in the case of clauses (f), (g) and (h), any
Indebtedness secured by such Liens was not Incurred in violation of Section 7.7;
and (k) the Securityholder Lien.
"Person" means any individual, corporation, limited or general partnership,
limited liability company, or Governmental Body.
"Pledge Date" has the meaning ascribed thereto in Section 11.14(a) hereof.
"Pledged Securities Requisite Gaming Approvals" has the meaning ascribed
thereto in Section 13.15 hereof.
"Post-Petition Interest" means, with respect to any Indebtedness of any
Person, all interest accrued or accruing on such Indebtedness after the
commencement of any Insolvency or Liquidation Proceeding against such Person in
accordance with and at the contract rate (including, without limitation, any
rate applicable upon default) specified in the agreement or instrument creating,
evidencing or governing such Indebtedness, whether or not, pursuant to
applicable law or otherwise, the claim for such interest is allowed as a claim
in such Insolvency or Liquidation Proceeding.
"Preferred Stock" as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) that is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Principal" of a debt security means the principal of the security
including the premium, if any, on the security.
"Property" or "property" means any assets or property of any kind or nature
whatsoever, real, personal, or mixed (including fixtures), whether tangible or
intangible.
"Public Offering" with respect to any Person, means a firm commitment
underwritten primary public offering of Capital Stock of such Person.
"Purchase Date" has the meaning ascribed thereto in Section 6.7 hereof.
"Purchaser" has the meaning ascribed thereto in the introduction hereof.
"Purchaser's Special Counsel" means Goodwin, Procter & Hoar LLP, a
partnership including professional corporations, acting as special counsel to
the Purchaser in connection with the transactions contemplated hereunder.
"Qualified Capital Stock" means, with respect to any Person, any and all
Capital Stock issued by such Person after the date hereof that is not
Disqualified Capital Stock.
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"Record Date" means a record date specified in the Senior Discount Notes
whether or not such record date is a Business Day.
"Redeemable Convertible Preferred Stock" means, with respect to the
Company, the Company's (a) Series A1 Preferred Stock, liquidation preference
$0.75 per share, and (b) Series B1 Preferred Stock, liquidation preference $1.14
per share.
"Redemption Date" means, when used with respect to any Senior Discount Note
to be redeemed, the date fixed for such redemption pursuant to this Agreement
and the Senior Discount Notes.
"Redemption Price" means, when used with respect to any Senior Discount
Note to be redeemed, the price fixed for such redemption pursuant to this
Agreement and the Senior Discount Notes, which shall include, without
duplication, in each case, accrued and unpaid interest to the Redemption Date
(subject to Section 6.4 hereof).
"Refinancing Indebtedness" means Indebtedness of the Company or any of its
Subsidiaries Incurred or given in exchange for, or the proceeds of which are
used to, extend, refinance, renew, replace, substitute, defease or refund any
other Indebtedness of the Company or any of its Subsidiaries (and related
interest, premium, penalties, breakage costs, fees, expenses and other amounts
owing in respect of such Indebtedness, to the extent permitted to be Incurred by
Section 7.7(c)(iii)) Incurred in accordance with the terms of this Agreement,
including Section 7.7.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated the Closing Date, by and between the Company and the Purchaser, as the
same may be amended, modified, or supplemented from time to time in accordance
with the terms thereof.
"Related Business" means the businesses conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the date hereof and any and
all businesses that in the good faith judgment of the Board of Directors of the
Company are materially related businesses. Without limiting the generality of
the foregoing, Related Business shall include the design, development,
production, marketing and sale of interactive slot machines.
"Release" means any releasing, spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, disposing, or
dumping into the Environment.
"Repayment Trigger Date" has the meaning ascribed thereto in Section
7.13(b) hereof.
"Restricted Payment" means, with respect to any Person, without
duplication: (a) any dividend or other distribution, whether in cash or in
Property or securities, declared or paid on any shares of such Person's Capital
Stock (other than (i) in the case of the Company, dividends or distributions
payable solely in shares of Qualified Capital Stock of the Company or options,
warrants or other rights to acquire Qualified Capital Stock of the Company and
(ii) any dividends,
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distributions or other payments in respect of any Capital Stock made by any
Subsidiary to the Company or a Wholly-Owned Subsidiary), or the making by such
Person or any of its Subsidiaries of any other distribution in respect of such
Person's Capital Stock or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock (other than exchangeable or
convertible Indebtedness of such person); (b) the redemption, repurchase,
retirement or other acquisition for value by such Person or any of its
Subsidiaries, directly or indirectly, of such Person's Capital Stock (and, in
the case of a Subsidiary, Capital Stock of the Company) other than Capital Stock
owned by the Company or a Wholly-Owned Subsidiary, or any warrants, rights or
options to purchase or acquire shares of any class of such Capital Stock (other
than exchangeable or convertible Indebtedness of such Person), and other than,
in the case of the Company, through the issuance in exchange therefor solely of
Qualified Capital Stock of the Company; (c) any payment to purchase, redeem,
defease or otherwise acquire or retire for value any Pari Passu Indebtedness or
Subordinated Indebtedness (other than with the proceeds of Refinancing
Indebtedness permitted under this Agreement), except in accordance with the
mandatory redemption or repayment provisions set forth in the original
documentation governing such Indebtedness; and (d) any Investment other than
Permitted Investments.
"Restricted Security" has the meaning ascribed thereto in Section 11.13
hereof.
"Rule 144" means Rule 144 as promulgated by the Commission under the
Securities Act, and any successor rule or regulation thereto.
"Rule 144A" means Rule 144A as promulgated by the Commission under the
Securities Act, and any successor rule or regulation thereto.
"Sale" means any sale, lease, conveyance, exchange, transfer, assignment,
pledge, hypothecation or other disposition of any Property.
"SEC Reports" means the Company's Annual Report on Form 10-K under the
Exchange Act for the fiscal year ended December 31, 1996, as filed with the
Commission, together with each other registration statement, periodic report,
proxy statement, and other filing made by the Company with the Commission on or
after January 1, 1997.
"Securities" means, collectively, the Senior Discount Notes and the Common
Stock Purchase Warrants.
"Securities Act" means the Securities Act of 1933, as the same may be
amended from time to time, or any successor thereto, and the rules and
regulations issued thereunder, as from time to time in effect.
"Securities Sale" means the issuance or sale by the Company or any of its
Subsidiaries, for cash, of shares of Capital Stock (other than directors'
qualifying shares) or other ownership interests, or any securities convertible
into or exercisable or exchangeable for, or options, warrants, rights or any
other interests with respect to, any shares of Capital Stock or other
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ownership interests of the Company or any such Subsidiary; provided, however,
-----------------
that the exercise of (a) warrants or (b) compensatory options to purchase
Capital Stock shall not constitute a Securities Sale.
"Security Date" has the meaning ascribed thereto in Section 11.14(a)
hereof.
"Security Documents" has the meaning ascribed thereto in Section 11.14(a)
hereof.
"Securityholder Lien" has the meaning ascribed thereto in Section 11.14(a)
hereof.
"Security Opinion Date" and "Pledge Opinion Date" mean the respective dates
on which the Company delivers to the Purchaser the opinion of counsel
contemplated in Section 11.14(c) hereof.
"Senior Indebtedness" means and includes all principal of, premium and
interest (including Post-Petition Interest) on and other Obligations with
respect to any Indebtedness of the Company (other than as otherwise provided in
this definition), whether outstanding on the date hereof or hereafter Incurred,
other than the Senior Discount Notes; provided, however, that the following
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shall not constitute Senior Indebtedness: (a) any Indebtedness which by the
terms of the instrument creating or evidencing the same is pari passu,
---- -----
subordinated or junior in right of payment to the Senior Discount Notes in any
respect; (b) that portion of any Indebtedness Incurred in violation of this
Agreement; (c) any Preferred Stock; or (d) any Indebtedness of the Company which
is subordinated to or junior in right of payment in any respect to any other
Indebtedness of the Company. Notwithstanding the foregoing, "Senior
Indebtedness" shall not include (i) Indebtedness evidenced by the Senior
Discount Notes, (ii) Indebtedness which when incurred and without respect to any
election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company, (iii) any liability for foreign, Federal, state, local
or other Taxes owed or owing by the Company, (iv) Indebtedness of the Company to
the extent such liability constitutes Indebtedness to a Subsidiary or any other
Affiliate of the Company or any of such Affiliate's Subsidiaries, (v)
Indebtedness for the purchase of goods or materials in the ordinary course of
business or (vi) Indebtedness owed by the Company for compensation to employees
or for services.
"Senior Discount Notes" means the Company's Senior Discount Notes due
September 30, 2002, as amended or supplemented from time to time in accordance
with the terms hereof, that are issued pursuant to this Agreement and each note
delivered in substitution or exchange for any such note.
"Strategic Investments" means any Investment which in the good faith
judgment of the Board of Directors of the Company (a) relates to a Related
Business and (b) adds strategic value or offers a potential competitive
advantage to the Company.
"Subordinated Indebtedness" means Indebtedness of the Company which is
subordinated or junior in right and priority of payment to the Senior Discount
Notes.
20
<PAGE>
"Subsidiary" of any Person means any other Person with respect to which
either (i) more than 50% of the interests having ordinary voting power to elect
a majority of the directors or individuals having similar functions of such
other Person (irrespective of whether at the time interests of any other class
or classes of such Person shall or might have voting power upon the occurrence
of any contingency), or (ii) more than 50% of the equity interests of such other
Person is at the time directly or indirectly owned or controlled by such Person,
by such Person and one or more of its other Subsidiaries or by one or more of
such Person's other Subsidiaries. When used herein without reference to any
Person, Subsidiary means a Subsidiary of the Company.
"Surviving Person" means, with respect to any Person involved in or that
makes any Disposition, the Person formed by or surviving such Disposition or the
Person to which such Disposition is made.
"Taxes" any present or future federal, state, county, local, foreign or
other income, Property, excise, franchise, sales, use, value added, employees'
income withholding, social security, unemployment and other taxes, of any nature
whatsoever now or hereafter imposed, levied, collected, withheld, or assessed by
any Governmental Body, which have become due or payable by the Company or any of
its Subsidiaries, or by any predecessors thereto, including any fines or
penalties with respect thereto or interest thereon, whether disputed or not.
"Threat of Release" means a substantial likelihood of a Release which under
applicable Environmental Laws requires action to prevent or mitigate damage to
the Environment which may result from such Release.
"Transaction Documents" means, collectively, this Agreement, the Senior
Discount Notes, the Common Stock Purchase Warrants, the Registration Rights
Agreement, the Warrant Agreement and any and all agreements, certificates,
instruments and other documents contemplated thereby or executed and delivered
in connection therewith.
"Units" has the meaning ascribed thereto in Section 2.1(c) hereof.
"Warrant Agreement" means the Warrant Agreement of even date herewith by
and between the Company and the Purchaser, as amended, modified or supplemented
from time to time in accordance with the terms thereof.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal, including payment at final maturity, in respect thereof, with (ii)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
aggregate principal amount of such Indebtedness.
21
<PAGE>
"Wholly-Owned Subsidiary" means, with respect to any Person, a Subsidiary
100% of the equity interests in which (however measured) are owned by such
Person or a Wholly-Owned Subsidiary of such Person or such Person and one or
more Wholly-Owned Subsidiaries of such Person taken together, except in any case
for the minimum equity interest required to be held by directors, if any, to
satisfy the requirements of any applicable statute requiring that directors own
qualifying shares.
1.2 Accounting Terms. All accounting terms used and not defined in this
----------------
Agreement shall be construed in accordance with GAAP and all financial data
required to be delivered hereunder shall be prepared in accordance with such
principles.
ARTICLE II
PURCHASE AND SALE OF UNITS
2.1 Issuance of Units.
-----------------
(a) The Company has authorized the issuance and sale of up to
$30,000,000 aggregate principal amount of its Senior Discount Notes, to be
issued pursuant to and in accordance with the terms of this Agreement. Each
Senior Discount Note will be issued in the principal amount of $100,000,
substantially in the form set forth in Exhibit A hereto, with such changes
---------
thereto, if any, as may be approved by the Purchaser and the Company.
(b) The Company has authorized the issuance and sale of up to 375,000
Common Stock Purchase Warrants, each exercisable to purchase one share of the
Common Stock of the Company, to be acquired by the Purchaser in accordance with
the terms of this Agreement. The Common Stock Purchase Warrants will be
substantially in the form of the Warrant Certificate as set forth in Exhibit A
---------
of the Warrant Agreement, with such changes thereto, if any, as may be approved
by the Purchaser and the Company.
(c) The Senior Discount Notes and the Common Stock Purchase Warrants
will be issued in attached units ("Units") each consisting of $100,000 principal
amount of Senior Discount Notes and 1,250 Common Stock Purchase Warrants,
subject to detachment of the Common Stock Purchase Warrants from the Senior
Discount Notes upon the terms and subject to the conditions set forth herein.
(d) The Company and the Purchaser hereby agree that for Federal income
tax purposes, including for purposes of determining original issue discount and
the issue price of the Senior Discount Notes under sections 1271-1275 of the
Code and the regulations issued thereunder, the $83,333.33 issue price of each
Unit shall be allocated $730.58 to each $1,000 of principal amount of the Senior
Discount Notes and $8.22 to each Common Stock Purchase Warrant. The Company and
the Purchaser hereby further agree that the allocation of the issue price
pursuant to the preceding sentence shall be binding on the Company for purposes
of any
22
<PAGE>
determination by the Company of the issue price of the Senior Discount Notes
pursuant to the first sentence of Treasury Regulations section 1.1273-2(f)(2).
2.2 Sale and Purchase of Units. At the Closing provided for in Section
--------------------------
2.3, the Company will issue and sell to the Purchaser and, subject to the terms
and conditions of this Agreement, the Purchaser will purchase from the Company,
the Units at the purchase price of $83,333.33 per Unit payable in cash by wire
transfer of immediately available funds.
2.3 Closing of Sale of Units. The purchase and delivery of the Units to
------------------------
be purchased by the Purchaser shall take place at the offices of Goodwin,
Procter & Hoar LLP, Exchange Place, Boston, Massachusetts, at a closing (the
"Closing") on September 30, 1997, or at such other place or on such other date
as the Purchaser and the Company may agree upon (such date on which the Closing
shall have actually occurred, the "Closing Date"). At the Closing, the Company
will deliver or cause to be delivered to the Purchaser the Units to be purchased
by it against payment of the purchase price therefor. Unless the Purchaser
otherwise notifies the Company at least two Business Days prior to the Closing
Date, the Units to be purchased hereunder shall be in the form of a single
Senior Discount Note and a single Common Stock Purchase Warrant certificate, in
each case dated the date of the Closing and registered in the Purchaser's name
or that of its nominee as set forth on the signature page hereto. If at the
Closing the Company shall fail to tender to the Purchaser any of the Units to be
purchased by it as provided in this Article II, or any of the conditions
specified in Article III for the benefit of the Purchaser or the Company, as the
case may be, shall not have been satisfied or waived in writing by the Purchaser
or the Company, as applicable, the Purchaser or the Company, as the case may be,
shall, at its election, be relieved of all further obligations under this
Agreement, without thereby waiving any other rights it may have by reason of
such failure or such non-fulfillment.
ARTICLE III
CONDITIONS TO CLOSING
3.1 Conditions Precedent to Obligations of the Purchaser on the Closing
-------------------------------------------------------------------
Date. The Purchaser's obligation to purchase and pay for the Units to be sold
- ----
to it at the Closing is subject to the fulfillment to its satisfaction, prior to
or at the Closing, of the following conditions, provided that any or all of the
following conditions may be waived, in whole or in part, by the Purchaser with
respect to this Agreement in its sole and absolute discretion:
(a) Representations and Warranties. The representations and
------------------------------
warranties of the Company and its Subsidiaries contained in this Agreement and
in the other Transaction Documents shall be correct in all material respects
when made and at the time of the Closing, after giving effect to the sale of the
Units, except that any representations and warranties that relate to a
particular date or period shall be correct in all material respects only as of
such date or for such period.
23
<PAGE>
(b) Performance; No Default. The Company shall have performed and
-----------------------
complied in all material respects with all agreements and conditions contained
in this Agreement and the other Transaction Documents required to be performed
or complied with prior to or at the Closing, and at the time of the Closing,
after giving effect to the sale of the Units, no Default or Event of Default
shall have occurred and be continuing.
(c) Compliance Certificate. The Company shall have delivered to the
----------------------
Purchaser an Officers' Certificate, dated the Closing Date, certifying on behalf
of the Company that the conditions specified in Sections 3.1(a) and (b) have
been fulfilled.
(d) Opinion of Counsel. The Purchaser shall have received from Gray
------------------
Cary Ware & Freidenrich, counsel for the Company, a favorable opinion
substantially in the form set forth in Exhibit B, addressed to the Purchaser,
---------
dated the Closing Date, and otherwise satisfactory in substance and form to the
Purchaser.
(e) Legal Investment. On the Closing Date, the Purchaser's purchase
----------------
of the Units shall be permitted by the laws and regulations of the jurisdiction
to which the Purchaser is subject (including, without limitation, Section 5 of
the Securities Act and Regulations G, T, U, or X of the Board of Governors of
the Federal Reserve System), and credit controls (whether voluntary or
mandatory) or similar restraints applicable to the Purchaser and shall not
subject the Purchaser to any tax, penalty, liability or other onerous condition
under or pursuant to any applicable law or governmental regulation (other than
applicable securities law restrictions on resale of the Units), and shall not be
enjoined (temporarily or permanently) under, prohibited by or contrary to any
injunction, order or decree applicable to the Purchaser.
(f) Compliance With Securities Laws. The offering, issuance and sale
-------------------------------
of the Units under this Agreement shall have complied with all applicable
requirements of the Federal securities laws and the Purchaser shall have
received evidence, if any, of such compliance in form and substance reasonably
satisfactory to the Purchaser.
(g) Proceedings and Documents. All corporate and other proceedings
-------------------------
contemplated by this Agreement, including, without limitation, the matters set
forth in the Transaction Documents and all of the other documents and
instruments incident thereto, shall be reasonably satisfactory to the Purchaser,
and the Purchaser shall have received all such counterpart originals or
certified or other copies of such documents as the Purchaser may reasonably
request.
(h) Completion of Other Transactions. Simultaneously with or prior to
--------------------------------
the issuance and sale to the Purchaser of the Units to be purchased by the
Purchaser at the Closing:
(i) the Company and the Purchaser shall have duly entered into
the Registration Rights Agreement substantially in the form of Exhibit C
---------
hereto, the Purchaser shall have received fully-executed counterparts of
the Registration Rights Agreement in such numbers reasonably requested by
it, and such agreement shall be in full force and effect;
24
<PAGE>
(ii) the Company and the Purchaser shall have duly entered into
the Warrant Agreement substantially in the form of Exhibit D hereto, the
---------
Purchaser shall have received fully-executed counterparts of the Warrant
Agreement in such numbers reasonably requested by it, and such agreement
shall be in full force and effect; and
(iii) each of the other Transaction Documents and any other
agreements and documents contemplated thereby and in connection therewith
shall have been executed and delivered by all respective parties thereto
and shall be in full force and effect.
(i) Related Matters. As of the Closing, the Company's Charter
---------------
Documents shall not have been modified or amended since the date delivered to
the Purchaser by the Company.
(j) No Adverse U.S. Legislation, Action or Decision. No legislation,
-----------------------------------------------
order, rule, ruling or regulation shall have been enacted or made by or on
behalf of any governmental body, department or agency of the United States, nor
shall any decision of any court of competent jurisdiction within the United
States have been rendered which, in the Purchaser's reasonable judgment, could
materially and adversely affect any of the Units or any part thereof as an
investment. There shall be no action, suit, investigation or proceeding pending
or threatened against or affecting the Purchaser, any of its properties or
rights, or any of its Affiliates, associates, officers or directors (in such
capacity), before any court, arbitrator or administrative or governmental body
which (i) seeks to restrain, enjoin, prevent the consummation of or otherwise
affect the transactions contemplated by this Agreement and the other Transaction
Documents, or (ii) questions the validity or legality of any such transactions
or seeks to recover damages or to obtain other relief in connection with any
such transactions, and, to the Purchaser's knowledge, there shall be no valid
basis for any such action, proceeding or investigation.
(k) Governmental and Third Party Permits, Consents, Etc. Except as
---------------------------------------------------
set forth on Schedule 4.4, the Company and its Subsidiaries shall have duly
------------
applied for and obtained all Approvals from each Governmental Body, or pursuant
to any agreement to which the Company or any of its Subsidiaries is a party or
to which any of them or any of their assets is subject, which are required in
connection with this Agreement, the other Transaction Documents or any other
agreements and documents contemplated thereby and in connection therewith.
(l) Secretary's Certificate. The Purchaser shall have received a
-----------------------
certificate, dated the Closing Date, of the Secretary or Assistant Secretary of
each of the Company and each of its Subsidiaries, on behalf of such entity, (i)
certifying as true, complete and correct its Charter Documents and in the case
of the Company, resolutions relating to the transactions contemplated hereby
attached thereto, (ii) in the case of the Company, as to the absence of
proceedings or other action for dissolution, liquidation or reorganization of
the Company, (iii) in the case of any Subsidiary, as to the absence of
proceedings or other action for dissolution, liquidation or reorganization of
such Subsidiary, (iv) as to the incumbency and specimen signatures of officers
who shall have executed instruments, agreements and other documents in
connection with the transactions contemplated hereby, (v) in the case of the
Company, as to the effect that certain
25
<PAGE>
agreements, instruments and other documents are in the form approved in the
resolutions referred to in clause (i) above, and (vi) covering such other
matters, and with such other attachments thereto, as Purchaser's Special Counsel
may reasonably request at least one Business Day before the Closing Date, which
certificates and attachments thereto shall be reasonably satisfactory in form
and substance to such Purchaser.
(m) Payment of Fees. The Company shall have paid (i)
---------------
contemporaneously with the Closing, the fees, expenses and disbursements of the
Purchaser's Special Counsel reflected in statements of such counsel rendered
prior to or on the Closing Date and agreed to pay such additional fees, expenses
and disbursements reflected in statements of such counsel rendered after the
Closing Date and (ii) contemporaneously with the execution hereof, a fee to the
Purchaser in the amount of $625,000 in consideration of Purchaser's execution of
the Transaction Documents.
3.2 Conditions Precedent to Obligations of the Company on the Closing
-----------------------------------------------------------------
Date. The Company's obligation to issue the Units at the Closing is subject to
the fulfillment to its satisfaction, prior to or at the Closing, of the
following conditions, provided that any or all of the following conditions may
be waived, in whole or in part, by the Company with respect to this Agreement in
its sole and absolute discretion:
(a) Representations and Warranties. The representations and
------------------------------
warranties of the Purchaser contained in this Agreement and in the other
Transaction Documents shall be correct in all material respects when made and at
the time of the Closing, after giving effect to the sale of the Units, except
that any representations and warranties that relate to a particular date or
period shall be correct in all material respects only as of such date or for
such period.
(b) Performance; No Default. The Purchaser shall have performed and
-----------------------
complied in all material respects with all agreements and conditions contained
in this Agreement and the other Transaction Documents required to be performed
or complied with prior to or at the Closing, and at the time of the Closing,
after giving effect to the sale of the Units, no Default or Event of Default
shall have occurred and be continuing.
(c) Related Matters. Contemporaneously with the Closing, the Company
---------------
shall have received payment in full for the Units to be issued pursuant to this
Agreement.
(d) No Adverse U.S. Legislation, Action or Decision. No legislation,
-----------------------------------------------
order, rule, ruling or regulation shall have been enacted or made by or on
behalf of any Governmental Body, nor shall any decision of any court of
competent jurisdiction within the United States have been rendered which, in the
Company's reasonable judgment, could materially and adversely affect any of the
Units or any part thereof as an investment. There shall be no action, suit,
investigation or proceeding pending or threatened in writing, against or
affecting the Company, any of its properties or rights, or any of its
Affiliates, associates, officers or directors, before any court, arbitrator or
administrative or governmental body which (i) seeks to restrain, enjoin, prevent
the consummation of or otherwise affect the transactions contemplated by this
Agreement and the other Transaction Documents, or (ii) questions the validity or
legality of any such
26
<PAGE>
transactions or seeks to recover damages or to obtain other relief in connection
with any such transactions, and, to the Company's knowledge, there shall be no
valid basis for any such action, proceeding or investigation.
(e) Governmental and Third Party Permits, Consents, Etc. The
---------------------------------------------------
Purchaser and its Subsidiaries shall have duly applied for and obtained all
Approvals from each Governmental Body, or pursuant to any agreement to which the
Purchaser is a party or to which its assets are subject, which may be required
in connection with this Agreement, the other Transaction Documents or any other
agreements and documents contemplated thereby and in connection therewith.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES, ETC.
In order to induce the Purchaser to purchase the Units, the Company
represents and warrants that the statements contained in this Article IV are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made and as though the Closing Date
were substituted for the date of this Agreement throughout Article IV):
4.1 Organization and Qualification; Authority. The Company is a
-----------------------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, has full corporate power and
authority to own and lease its properties and carry on its business as presently
conducted, is duly qualified, registered or licensed as a foreign corporation to
do business and is in good standing in each jurisdiction in which the ownership
or leasing of its properties or the character of its present operations makes
such qualification, registration or licensing necessary, except where the
failure so to qualify or be in good standing would not have a Material Adverse
Effect. The Company has heretofore delivered to Purchaser complete and correct
copies of the Articles of Incorporation and of the by-laws of the Company and
each of its Subsidiaries, each as amended to date and as presently in effect
(collectively, with respect to any such Person, "Charter Documents"). A list of
all jurisdictions in which the Company is qualified, registered or licensed to
do business as a foreign corporation is attached hereto as Schedule 4.1.
------------
4.2 Subsidiaries. The Company's Subsidiaries are set forth on Schedule
------------ --------
4.2 hereto. Each of the Subsidiaries is a corporation, limited liability
- ---
company or partnership duly incorporated or formed, validly existing and in good
standing under the laws of the jurisdiction of its organization, has full
corporate, limited liability company or partnership power and authority, as the
case may be, to own and lease its properties, and carry on its business as
presently conducted, is duly qualified, registered or licensed as a foreign
corporation, limited liability company or partnership to do business and is in
good standing in each jurisdiction in which the ownership or leasing of its
properties or the character of its present operations make such qualification,
registration or licensing necessary, except where the failure so to qualify or
be in good standing would not have a Material Adverse Effect. A list of all
jurisdictions in which
27
<PAGE>
each of the Subsidiaries is qualified, registered or licensed to do business as
a foreign corporation, limited liability company or partnership is attached
hereto as Schedule 4.2. Except as disclosed on Schedule 4.2, the Company owns,
------------ -----------
directly or indirectly, all of the outstanding shares of Capital Stock or other
evidences of equity ownership of each of its Subsidiaries free of any Lien,
restriction (other than restrictions generally applicable to securities under
federal, provincial or state securities laws) or encumbrance, and said shares
have been duly issued and are validly outstanding.
4.3 Licenses. The Company and its Subsidiaries hold all material
--------
licenses, franchises, permits, consents, registrations, certificates and other
approvals (including, without limitation, those relating to environmental
matters, public and worker health and safety, buildings, highways or zoning)
(individually, a "License" and collectively, "Licenses") required for the
conduct of its business as now being conducted, and is operating in substantial
compliance therewith, except where the failure to hold any such License or to
operate in compliance therewith would not have a Material Adverse Effect. The
Company and its Subsidiaries are in substantial compliance with all laws,
regulations, orders and decrees applicable to it, except in each case where the
failure so to comply would not have a Material Adverse Effect, or a material
adverse effect on the ability of the Company or any of its Subsidiaries to
perform on a timely basis any obligation that it has or will have under any
Transaction Document to which it is a party.
4.4 Corporate and Governmental Authorization; Contravention. Except as
-------------------------------------------------------
set forth on Schedule 4.4, the execution, delivery and performance by the
------------
Company of the Transaction Documents to which it is a party and all other
instruments or agreements to be executed at the Closing in connection therewith,
and the issuance and sale to the Purchaser of the Units pursuant to this
Agreement, are within the Company's corporate power, having been duly authorized
by all necessary corporate action on the part of the Company; do not require any
License, authorization, approval, qualification or formal exemption from, or
other action by or in respect of, or filing of a declaration or registration
with, any court, Governmental Body, agency or official or other Person (except
such as have been obtained or as may be required under the Securities Act or
state securities or Blue Sky laws); do not contravene or constitute a default
under or violation of (a) any provision of applicable law or regulation of any
Governmental Body, (b) the respective Charter Documents of the Company or any of
its Subsidiaries, (c) any agreement (or require the consent of any Person under
any agreement that has not been obtained) to which the Company or any of its
Subsidiaries is a party, or (d) any judgment, injunction, order, decree or other
instrument binding upon the Company, any of its Subsidiaries or any of their
respective properties, except where such contravention, default or violation
would not have a Material Adverse Effect; and do not and will not result in the
creation or imposition of any Lien on any asset of the Company or any of its
Subsidiaries, other than Permitted Liens.
4.5 Validity and Binding Effect. Each of the Transaction Documents has
---------------------------
been duly executed and delivered by the Company and is a valid and binding
agreement of the Company, enforceable against the Company in accordance with
their respective terms, except for (a) the effect upon the Transaction Documents
of bankruptcy, insolvency, reorganization, moratorium
28
<PAGE>
and other similar laws relating to or affecting the rights of creditors
generally, (b) limitations imposed by a court of competent jurisdiction under
general equitable principles upon the specific enforceability of any of the
remedies, covenants or other provisions of the Transaction Documents and upon
the availability of injunctive relief or other equitable remedies, and (c) any
applicable laws relating to the maximum permissible rate of interest.
4.6 Capitalization. Except as set forth in the SEC Reports or on Schedule
-------------- --------
4.6 hereto, there are no outstanding subscriptions, options, warrants, rights,
- ---
convertible or exchangeable securities or other agreements or commitments of any
character obligating the Company or its Subsidiaries to issue any securities.
Except as set forth in the SEC Reports or on Schedule 4.6, there are no voting
------------
trusts or other agreements or understandings to which the Company or its
Subsidiaries is a party with respect to the voting of the Capital Stock of the
Company or the Subsidiaries. Except as set forth in the SEC Reports or on
Schedule 4.6 or as contemplated by the Registration Rights Agreement, neither
- ------------
the Company nor any of its Subsidiaries has entered into any agreement to
register its equity or debt securities under the Securities Act.
4.7 Litigation; Defaults. Except as set forth on Schedule 4.7 or Schedule
-------------------- ------------ --------
4.19, there is no action, suit, proceeding or investigation pending or, to the
- ----
knowledge of the Company, threatened against or affecting the Company, any of
its Subsidiaries, or any properties of any of the foregoing, before or by any
court or arbitrator or any Governmental Body which (individually or in the
aggregate) could reasonably be expected to (i) have a Material Adverse Effect,
or (ii) impair the ability of the Company or any Subsidiary to perform fully on
a timely basis any material obligation which the Company or such Subsidiary has
or will have under any Transaction Document to which the Company or such
Subsidiary is a party. Except as set forth on Schedule 4.7 or Schedule 4.19,
------------ -------------
neither the Company nor any of its Subsidiaries is in violation of, or in
default under (and there does not exist any event or condition which, after
notice or lapse of time or both, would constitute such a default under), any
term of its respective Charter Documents, or of any term of any agreement,
instrument, judgment, decree, order, statute, injunction, governmental
regulation, rule or ordinance (including, without limitation, those relating to
zoning, city planning or similar matters) applicable to the Company or any of
its Subsidiaries or to which the Company or any of its Subsidiaries is bound, or
to any properties of the Company or any of its Subsidiaries, except in each case
to the extent that such violations or defaults, individually or in the
aggregate, could not reasonably be expected to (a) affect the validity of any
Transaction Document, (b) have a Material Adverse Effect, or (c) impair the
ability of the Company to perform fully on a timely basis any material
obligation which the Company has or will have under any Transaction Document to
which the Company is a party.
4.8 Outstanding Debt. Except as set forth in the SEC Reports or on
----------------
Schedule 4.8 hereto, neither the Company nor any of its Subsidiaries will have
- ------------
outstanding any debt for borrowed money, or obligations or liabilities evidenced
by bonds, debentures, notes or other similar instruments or under capital leases
other than short-term debt incurred in the ordinary course of business.
Schedule 4.8 contains a complete and accurate list of all material guarantees,
- ------------
assumptions, purchase agreements and similar agreements and arrangements whereby
the Company or any of its Subsidiaries is or may become directly or indirectly
liable or responsible
29
<PAGE>
for the indebtedness or other obligations of another Person other than the
Company or any of its Subsidiaries, except for negotiable instruments endorsed
for collection or deposit in the ordinary course of its business, identifying,
with respect to each of the respective parties, amounts and maturities.
4.9 No Material Adverse Change. Except as set forth on Schedule 4.9 or in
-------------------------- ------------
the SEC Reports, since June 30, 1997, there has been (a) no material adverse
change in the condition (financial or other), assets, business, or results of
operations of the Company or any of its Subsidiaries, (b) no obligation or
liability (contingent or other) incurred by the Company or any of its
Subsidiaries, other than obligations and liabilities incurred in the ordinary
course of business, and no Lien placed on any of the properties of the Company
or any of its Subsidiaries which remains in existence on the date hereof, other
than Permitted Liens and liabilities and Liens described on Schedule 4.20
-------------
hereto, and (c) no acquisition or disposition of any material assets by the
Company or any of its Subsidiaries (or any contract or arrangement therefor), or
any other material transaction, otherwise than (i) for fair value in the
ordinary course of business, or (ii) Permitted Dispositions.
4.10 Employee Programs. Schedule 4.10 sets forth a list of every Employee
----------------- -------------
Program maintained by the Company or any Current Affiliate at any time during
the five-year period ending on the Closing Date or with respect to which a
liability of the Company or an Affiliate (as defined below) exists. Each
Employee Program (other than a Multiemployer Plan) which has been maintained by
the Company during the five-year period ending on the Closing Date and which has
been intended to qualify under Section 401(a) or Section 501(c)(9) of the Code
has received a favorable determination or approval letter from the Internal
Revenue Service regarding its qualification under such section or the remedial
amendment period under Section 401(b) of the Code has not yet expired with
respect to such Employee Program and, to the knowledge of the Company, nothing
has occurred that would adversely affect such qualification since the date of
such letter or application for a determination or approval letter has been
timely made and to the knowledge of the Company, no reason exists why a
favorable determination or approval shall not be granted. Except as set forth
on Schedule 4.10, the Company has no knowledge of any failure of any party to
-------------
comply with any laws applicable with respect to the Employee Programs that have
been maintained by the Company or any Current Affiliate, and no such failure
will result from completion of the transactions contemplated hereby. With
respect to any Employee Program ever maintained by the Company or an Affiliate,
there has been no "prohibited transaction," as defined in Section 406 of ERISA
or Code Section 4975, or breach of any duty under ERISA or other applicable law
or any agreement which in any such case could subject the Company to material
liability either directly or indirectly (including, without limitation, through
any obligation of indemnification or contribution) for any damages, penalties,
or taxes, or any other loss or expense. No litigation or governmental
administrative proceeding (or investigation) or other proceeding (other than
those relating to routine claims for benefits) is pending or threatened with
respect to any such Employee Program (other than a Multiemployer Plan).
The Company and its Current Affiliates have not incurred any liability
under title IV of ERISA which has not been paid in full prior to the Closing.
Neither the Company nor any of its
30
<PAGE>
Current Affiliates is liable for any material "accumulated funding deficiency"
(whether or not waived) with respect to any Employee Program ever maintained by
the Company or any Affiliate and subject to Code Section 412 or ERISA Section
302. With respect to any Employee Program subject to title IV of ERISA, there
has been no (and the transactions contemplated by this Agreement will not result
in any) (a) "reportable event," within the meaning of ERISA Section 4043 or the
regulations thereunder (for which the notice requirement is not waived under 29
C.F.R. Part 2615) or (b) other event or condition which presents a material risk
of plan termination or any other event that may cause the Company or any Current
Affiliate to incur material liability or have a material Lien imposed on its
assets under title IV of ERISA. All payments and/or contributions required to
have been made by the Company and its Current Affiliates (under the provisions
of any agreements or other governing documents or applicable law) with respect
to all Employee Programs subject to title IV of ERISA ever maintained by the
Company or any Affiliate, for all periods prior to the Closing, have been timely
made. Except as described on Schedule 4.10, no Employee Program maintained by
-------------
the Company or an Affiliate and subject to title IV of ERISA (other than a
Multiemployer Plan) has any "unfunded benefit liabilities" within the meaning of
ERISA Section 4001(a)(18), as of the Closing Date. With respect to Multiemployer
Plans maintained by the Company or any Affiliate, Schedule 4.10 states the
-------------
aggregate amount of withdrawal liability or other termination liability that
would be incurred by the Company or any Affiliate if there were a withdrawal
from any such plan as determined by the most recent withdrawal liability
calculation prepared by such plan. Except as disclosed on Schedule 4.10, none of
-------------
the Employee Programs which is a welfare plan maintained by the Company or any
Affiliate provides health care or any other non-pension benefits to any
employees after their employment is terminated (other than as required by part 6
of subtitle B of title I of ERISA or comparable statutes or regulations) or has
ever promised to provide such post-termination benefits.
For purposes of this section:
(i) "Employee Program" means (A) any employee benefit plan within
the meaning of Section 3(3) of ERISA and employee benefit plans (such as
foreign or excess benefit plans) which are not subject to ERISA, and (B)
any stock option plans, bonus or incentive award plans, severance pay
policies or agreements, deferred compensation arrangements, supplemental
income arrangements, vacation plans, and all other employee benefit plans,
agreements, and arrangements not described in (A) above, and (C) any trust
used to fund benefits under the foregoing maintained by the Company or any
Affiliate.
(ii) For purposes of this Section 4.10, an entity is an
"Affiliate" of the Company if it would have ever been considered a single
employer with the Company under ERISA Section 4001(b) or part of the same
"controlled group" as the Company for purposes of ERISA Section
302(d)(8)(C); an entity is a "Current Affiliate" if it currently would be
considered a single employer with the Company under ERISA Section 4001(b)
or part of the same "controlled group" as the Company for purposes of ERISA
Section 302(d)(8)(C); and each reference to the Company includes its
Subsidiaries.
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<PAGE>
(iii) An entity "maintains" an Employee Program if such entity
sponsors, contributes to, or provides benefits under such Employee Program,
or has any obligation (by agreement or under applicable law) to contribute
to or provide benefits under such Employee Program, or if such Employee
Program provides benefits to or otherwise covers employees of such entity
(or, in respect of such employees, their spouses, dependents, or
beneficiaries).
(iv) "Multiemployer Plan" means a (pension or non-pension)
employee benefit plan to which more than one employer contributes and which
is maintained pursuant to one or more collective bargaining agreements.
4.11 Private Offering. No form of general solicitation or general
----------------
advertising, including, but not limited to, advertisements, articles, notices or
other communications, published in any newspaper, magazine or similar medium or
broadcast over television or radio, or any seminar or meeting whose attendees
have been invited by any general solicitation or general advertising, was used
by the Company or any of its Subsidiaries or any of the Company's or such
Subsidiary's representatives, or, to the knowledge of the Company, any other
Person acting on behalf of the Company or any of its Subsidiaries, in connection
with the offering of the Units being purchased under this Agreement. During the
six months prior to the Closing, neither the Company, any of its Subsidiaries
nor any Person acting on the Company's or such Subsidiary's behalf has directly
or indirectly offered the Units, or any part thereof or any other similar
securities, for sale to, or sold or solicited any offer to buy any of the same
from, or otherwise approached or negotiated in respect thereof with any Person
or Persons other than the Purchaser and other investors who the Company
reasonably believed had such knowledge and experience in financial and business
matters that they were capable of evaluating the merits and risks of purchasing
the Units. The Company further represents to the Purchaser that, assuming the
accuracy of the representations of the Purchaser as set forth in Section 5
hereof, neither the Company, any of its Subsidiaries nor any Person acting on
the Company's or such Subsidiary's behalf has taken or will take any action
which would subject the issue and sale of the Units to the provisions of Section
5 of the Securities Act, except as contemplated by the Registration Rights
Agreement. The Company has not sold the Units to anyone other than the
Purchaser designated in this Agreement. During the six months prior to the
Closing, no securities of the same class or series as the securities comprising
the Units have been issued and sold by the Company. Each Senior Discount Note
and Common Stock Purchase Warrant certificate shall bear substantially the same
legend set forth in Section 11.12 hereof, as applicable, for at least so long as
such restrictions apply.
4.12 Broker's or Finder's Commissions. Other than Deutsche Morgan Grenfell
--------------------------------
Inc., neither the Company nor any of its Subsidiaries has engaged any broker or
finder or has incurred or become liable for any broker's commission or finder's
fee relating to or in connection with the transactions contemplated by this
Agreement. In addition to and not in limitation of any other rights hereunder,
the Company and its Subsidiaries agree that they will indemnify and hold
harmless the Purchaser from and against any and all claims, demands or
liabilities for broker's, finder's, placement agent's or other similar fees or
commissions and any and all liabilities with respect to any taxes (including
interest and penalties) payable or incurred or alleged to have been
32
<PAGE>
incurred by the Company or any of its Subsidiaries or any Person acting or
alleged to have been acting on the Company's or such Subsidiary's behalf, in
connection with this Agreement, the issuance or sale of the Units or any other
transaction contemplated by any of the Transaction Documents.
4.13 Disclosure.
----------
(a) The historical financial and operating information delivered to
the Purchaser has been derived from the consolidated books and records of the
Company and its Subsidiaries prepared in accordance with GAAP.
(b) There is no material fact known to the Company which the Company
has not disclosed to the Purchaser in writing which has or, insofar as the
Company can reasonably foresee, may have or will have a Material Adverse Effect
or a material adverse effect on the ability of the Company to perform its
obligations under any of the Transaction Documents or in respect of the Units or
any document contemplated hereby or thereby.
4.14 Foreign Assets Control Regulation, Etc. Neither the issue and sale of
--------------------------------------
the Units by the Company nor its use of the proceeds thereof as contemplated by
this Agreement will violate the Foreign Assets Control Regulations, the
Transaction Control Regulations, the Cuban Assets Control Regulations, the
Foreign Funds Control Regulations, the Iranian Assets Control Regulations, the
Nicaraguan Trade Control Regulations, the South African Transactions Control
Regulations, the Libyan Sanctions Regulations, the Soviet Gold Coin Regulations,
the Panamanian Transactions Regulations, the Haitian Transactions Regulations,
or the Iraqi Sanctions Regulations of the United States Treasury Department (31
C.F.R., Subtitle B, Chapter V, as amended) or Executive Orders 12722 and 12724
(transactions with Iraq).
4.15 Federal Reserve Regulations and Other Matters. Neither the Company
---------------------------------------------
nor any of its Subsidiaries will, directly or indirectly, use any of the
proceeds from the sale of the Units for the purpose, whether immediate,
incidental or ultimate, of buying any "margin stock," or of maintaining,
reducing or retiring any indebtedness originally incurred to purchase any stock
that is currently a "margin stock," or for any other purpose which might
constitute the transactions contemplated hereby a "purpose credit," in each case
within the meaning of Regulations G or U of the Board of Governors of the
Federal Reserve System (12 C.F.R. 207 and 221, as amended, respectively), or
otherwise take or permit to be taken any action which would involve a violation
of such Regulation G or Regulation U or of Regulations T or X of the Board of
Governors of the Federal Reserve System (12 C.F.R. 220 and 224, as amended,
respectively) or any other regulation of such Board. No indebtedness that may
be maintained, reduced or retired with the proceeds from the sale of the Units
was incurred for the purpose of purchasing or carrying any "margin stock" and
neither the Company nor any of its Subsidiaries own any such "margin stock" or
have any present intention of acquiring, directly or indirectly any such "margin
stock."
4.16 Investment Company Act. Neither the Company nor any of its
----------------------
Subsidiaries is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
33
<PAGE>
4.17 Public Utility Holding Company Act. To the Company's knowledge,
----------------------------------
neither the Company nor any of its Subsidiaries is a "holding company," or a
"subsidiary company" of a "holding company," or an "affiliate" of a "holding
company" or of a "subsidiary company" of a "holding company," as such terms are
defined in the Public Utility Holding Company Act of 1935, as amended.
4.18 Interstate Commerce Act. To the Company's knowledge, neither the
-----------------------
Company nor any of its Subsidiaries is, nor will be, a "rail carrier," or a
Person controlled by or affiliated with a "rail carrier," within the meaning of
Title 49, U.S.C. Neither the Company nor any of its Subsidiaries is a "carrier"
or other Person to which 49 U.S.C. Section 11301(b)(1) is applicable.
4.19 Environmental Regulation, Etc.
------------------------------
(a) Except as set forth on Schedule 4.19, to the knowledge of the
-------------
Company, each of the Company and its Subsidiaries (i) has no liability under any
Environmental Law or common law cause of action relating to or arising from
environmental conditions which could have a Material Adverse Effect, and any
property owned, operated, leased, or used by the Company and its Subsidiaries
and any facilities and operations thereon comply with all applicable
Environmental Laws except to the extent that failure to comply could have a
Material Adverse Effect; (ii) has not entered into or been subject to any
judgment, consent decree, compliance order, or administrative order with respect
to any environmental or health and safety matter or received any request for
information, notice, demand letter, administrative inquiry, or formal or
informal complaint or claim with respect to any environmental or health and
safety matter or the enforcement of any Environmental Law which could have a
Material Adverse Effect; and (iii) has no reason to believe that any of the
items enumerated in clause (ii) of this paragraph will be forthcoming.
(b) Except as set forth on Schedule 4.19, to the knowledge of the
-------------
Company: (i) each of the Company and its Subsidiaries has not generated,
transported, used, stored, treated, disposed of, or managed any Hazardous Waste,
except in accordance with applicable Environmental Laws; (ii) the Company has no
knowledge of any Release or Threat of Release of a Hazardous Material at any
site presently or formerly owned, operated, leased, or used by the Company or
any of its Subsidiaries; (iii) the Company and its Subsidiaries have never had
Hazardous Material transported from any site presently or formerly owned,
operated, leased, or used by the Company or any of its Subsidiaries for
treatment, storage, or disposal at any other place, except in accordance with
applicable Environmental Laws except such noncompliance which could not
reasonably be expected to have a Material Adverse Effect; (iv) the Company and
its Subsidiaries do not presently own, operate, lease or use any site on which
underground storage tanks are or were located; (v) the Company and its
Subsidiaries have never placed underground storage tanks on any site owned,
operated, leased or used by the Company or any of its Subsidiaries; (vi) the
Company and its Subsidiaries have never removed underground storage tanks from
any site presently or formerly owned, operated, leased or used by the Company or
any of its Subsidiaries; and (vii) the Company and its Subsidiaries have never
had a Lien imposed by any
34
<PAGE>
Governmental Body on any property, facility, machinery, or equipment owned,
operated, leased, or used by the Company or any of its Subsidiaries in
connection with the presence of any Hazardous Material.
4.20 Properties and Assets. The Company and its Subsidiaries have good
---------------------
record and marketable fee title to (or, in the case of licensed Property, valid
licenses to) all real Property and all other Property and assets, whether
tangible or intangible, owned by them and reasonably necessary in the conduct of
business of the Company or such Subsidiaries, except defects in title which do
not and will not have a Material Adverse Effect. All of the leases necessary in
any material respect for the operation of their respective properties and
assets, under which the Company or any of its Subsidiaries holds any Property or
assets, real or personal, are valid, subsisting and enforceable and afford
peaceful and undisturbed possession of the subject matter of the lease, and no
material default by the Company or any of its Subsidiaries exists under any of
the provisions thereof. All buildings, machinery and equipment of the Company
and its Subsidiaries are in good repair and working order, except for ordinary
wear and tear, and except as would have a Material Adverse Effect. All material
current and proposed uses of such Property or assets of the Company and its
Subsidiaries are permitted as of right and no regulation or ordinance interferes
with such current or proposed uses. To the knowledge of the Company, there is
no pending or formally proposed change in any such laws, regulations and
ordinances which would have a Material Adverse Effect. Except as set forth on
Schedule 4.20, no condemnation proceeding is pending or, to the knowledge of the
- -------------
Company, threatened against the Company or any of its Subsidiaries. All
Property and assets of any kind (real or personal, tangible or intangible) of
the Company and its Subsidiaries are free from all Liens except for (a) Liens
which would not have a Material Adverse Effect; (b) Liens disclosed on Schedule
--------
4.20 hereto; and (c) Permitted Liens. Except as set forth on Schedule 4.20
- ---- -------------
hereto, neither the Company nor any of its Subsidiaries has signed any material
financing statement, as debtor or lessee, or any security agreement authorizing
any secured party thereunder to file any such financing statement.
4.21 Insurance. A list of all insurance policies and fidelity bonds
---------
covering the assets, business, equipment, properties, operations, employees,
officers and directors under which the Company or any of its Subsidiaries may
derive any material benefit is set forth on Schedule 4.21 hereof. There is no
-------------
claim by the Company or any of its Subsidiaries pending under any of such
policies or bonds as to which coverage has been questioned, reserved, denied or
disputed by the underwriters of such policies or bonds or their agents where
such question, reservation, denial or dispute would have a Material Adverse
Effect. All premiums due and payable under all such policies and bonds have
been paid, and the Company and its Subsidiaries are otherwise in full compliance
with the terms and conditions of all such policies and bonds. Except as set
forth on Schedule 4.21, such policies of insurance and bonds (or other policies
-------------
and bonds providing substantially similar insurance coverage) are and have been
in full force and effect for at least the last year or since the inception of
the Company or any of its Subsidiaries, as the case may be, and remain in full
force and effect. Such policies of insurance and bonds are of the type and in
amounts customarily carried by Persons conducting business similar to that
presently conducted by the Company and its Subsidiaries. The Company knows of
no threatened termination of any such policies or bonds.
35
<PAGE>
4.22 Employment Practices. Except as set forth on Schedule 4.22 hereto,
-------------------- -------------
neither the Company nor any of its Subsidiaries is a party to or in the process
of negotiating any collective bargaining or labor agreement or union contract.
As of the date of this Agreement, there is no (a) charge, complaint or suit
pending or, to the knowledge of the Company, threatened against the Company or
any of its Subsidiaries respecting employment, hiring for employment,
terminating from employment, employment practices, employment discrimination,
terms and conditions of employment, safety, wrongful termination, or wages and
hours, (b) unfair labor practice charge or complaint pending or, to the
knowledge of the Company, threatened against, or decision or order in effect and
binding on, the Company or any of its Subsidiaries before or of the National
Labor Relations Board, (c) grievance or arbitration proceeding arising out of or
under collective bargaining agreements pending or, to the knowledge of the
Company, threatened against the Company or any of its Subsidiaries, (d) strike,
labor dispute, slow-down, work stoppage or other interference with work pending
or, to the knowledge of the Company, threatened against the Company or its
Subsidiaries, or (e) to the knowledge of the Company, union organizing
activities or union representation question threatened or existing with respect
to any groups of employees of the Company or any of its Subsidiaries, which in
the case of (a)-(e) above could be reasonably expected to have a Material
Adverse Effect.
4.23 Financial Statements.
--------------------
(a) The consolidated financial statements contained in the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997, and
Annual Report on Form 10-K for the fiscal year ended December 31, 1996 together
with the notes thereto (the "Financial Statements") fairly present in all
material respects the financial position of the Company and its Subsidiaries on
a consolidated basis on the dates of such statements and the results of their
operations on the applicable basis for the periods covered thereby in accordance
with GAAP, except, with respect to unaudited financial statements, the absence
of notes thereto and statements of cash flows and subject to customary year-end
adjustments; and have been prepared in accordance with GAAP consistently
applied, except as otherwise stated therein.
(b) As of December 31, 1996 and as of the date hereof and the Closing
Date, and except as set forth in the Schedules hereto or in the SEC Reports,
there are no material liabilities or claims relating to the Company or its
Subsidiaries of any nature, whether accrued, absolute, contingent or otherwise,
asserted or, to the Company's knowledge, unasserted, except liabilities or
claims stated or adequately reserved against in the Financial Statements or
liabilities or claims incurred in the ordinary course of the Company's and its
Subsidiaries' operations which are not required to be reflected in the Financial
Statements or in the notes thereto under GAAP. Nothing has come to the
attention of the Company since the date of the Financial Statements which would
indicate that the Financial Statements did not fairly present in all material
respects the financial position of the Company and its Subsidiaries as of the
respective dates thereof.
4.24 Intellectual Property.
---------------------
(a) Except as described on Schedule 4.24, the Company and its
-------------
Subsidiaries
36
<PAGE>
have exclusive ownership of, or exclusive license to use, all patent, copyright,
trade secret, trademark, or other proprietary rights used in the business of the
Company or any of its Subsidiaries and material to the Company and its
Subsidiaries on a consolidated basis (collectively, "Intellectual Property").
There are no claims or demands of any other Person pertaining to any of such
Intellectual Property and no proceedings have been instituted, or are pending
or, to the knowledge of the Company, threatened, which challenge the rights of
the Company or any of its Subsidiaries in respect thereof. The Company and its
Subsidiaries have the right to use, free and clear of claims or rights of other
Persons, all customer lists, designs, manufacturing or other processes, computer
software systems, data compilations, research results and other information
required for or incident to their products or their business as presently
conducted or contemplated.
(b) All patents, patent applications, trademarks, trademark
applications and registrations and registered copyrights which are owned by or
licensed to the Company or any of its Subsidiaries or used or to be used by the
Company or any of its Subsidiaries in their business as presently conducted, and
which are material to the Company and its Subsidiaries on a consolidated basis
are listed on Schedule 4.24. All of such patents, patent applications,
-------------
trademarks, trademark applications and registrations and registered copyrights
have been duly registered in, filed in or issued by the United States Patent and
Trademark Office, the United States Register of Copyrights, or the corresponding
offices of other jurisdictions as identified on Schedule 4.24, and have been
-------------
properly maintained and renewed in accordance with all applicable provisions of
law and administrative regulations in the United States and each such
jurisdiction.
(c) All material licenses or other agreements under which the Company
or any of its Subsidiaries is granted rights in Intellectual Property are listed
on Schedule 4.24. Except as set forth on Schedule 4.24, all said licenses or
------------- -------------
other agreements are in full force and effect and there is no material default
by any party thereto.
(d) The Company and its Subsidiaries have taken all steps required in
accordance with sound business practice and business judgment to establish and
preserve their ownership of all material copyright, trade secret and other
proprietary rights with respect to their products and technology. The Company
and its Subsidiaries regularly require all professional and technical employees,
and other employees having access to valuable non-public information of the
Company or any of its Subsidiaries, to execute agreements under which such
employees are required to convey to the Company or any of its Subsidiaries, as
applicable, ownership of all inventions and developments conceived or created by
them in the course of their employment and to maintain the confidentiality of
all such information of the Company and its Subsidiaries. To the Company's
knowledge, neither the Company nor its Subsidiaries made any such information
available to any Person other than employees of the Company or any of its
Subsidiaries except pursuant to written agreements requiring the recipients to
maintain the confidentiality of such information and appropriately restricting
the use thereof. To the knowledge of the Company, there are no infringements by
others of any of its or any Subsidiary's Intellectual Property rights.
(e) To the knowledge of the Company, the present business, activities
and products of the Company or any of its Subsidiaries do not infringe any
intellectual property of any
37
<PAGE>
other Person, except where such infringement would not have a Material Adverse
Effect. No proceeding charging the Company or any of its Subsidiaries with
infringement of any adversely held Intellectual Property has been filed or is,
to the knowledge of the Company, threatened to be filed. To the Company's
knowledge, there exists no unexpired patent or patent application which includes
claims that would be infringed by or otherwise have a Material Adverse Effect.
Neither the Company nor any of its Subsidiaries is making unauthorized use of
any confidential information or trade secrets of any Person, including without
limitation any former employer of any past or present employee of the Company or
any of its Subsidiaries, except where such use would not have a Material Adverse
Effect. Except as set forth on Schedule 4.24, neither the Company or any of its
-------------
Subsidiaries nor, to the knowledge of the Company, any of its or any
Subsidiary's employees have any agreements or arrangements with any Persons
other than the Company or any of its Subsidiaries related to confidential
information or trade secrets of such Persons or restricting any such employee's
engagement in business activities of any nature. The activities of the Company
or any of its Subsidiaries or any of its or any Subsidiary's employees on behalf
of the Company or any of its Subsidiaries do not violate any such agreements or
arrangements known to the Company which any such employees have with other
Persons (to the extent that such agreements and arrangements are enforceable
under applicable law).
4.25 Taxes. The Company and its Subsidiaries, and any predecessors to the
-----
Company and any of its Subsidiaries, have filed or obtained extensions of all
Tax returns heretofore required by law to be filed by any of them. All material
Taxes have been paid in full or are adequately provided for in accordance with
GAAP on the financial statements of the applicable Person. All material
deposits, Taxes and other assessments and levies required by law to be made,
withheld, collected or provided for by the Company or any of its Subsidiaries
including deposits with respect to Taxes constituting employees' income
withholding taxes, have been duly made, withheld, collected or provided for and
have been paid over to the proper federal, state or local authority, or are held
by the applicable Person for such payment. No Liens arising from or in
connection with Taxes have been filed and are currently in effect against the
Company or any of its Subsidiaries, except for Liens for Taxes which are not yet
due. Except as set forth on Schedule 4.25 hereto, neither the Company nor any
-------------
of its Subsidiaries, nor any predecessors thereto, has executed or filed with
the IRS or any other taxing authority any agreement or document extending, or
having the effect of extending, the period for assessment or collection of any
Taxes. The federal income tax returns of the Company and each of its
Subsidiaries, and any predecessors thereto, have been examined by the IRS, or
the statute of limitations with respect to federal income taxes has expired, for
all tax years to and including the fiscal year ended December 31, 1994 and,
except as set forth on Schedule 4.25, any deficiencies have been paid in full or
-------------
are being contested in good faith by appropriate action or appropriate reserves
therefor in accordance with GAAP have been established on the Company's or
applicable Subsidiaries' books. Except as set forth on Schedule 4.25, neither
-------------
the Company nor any of its Subsidiaries is a party to any tax sharing agreement
or arrangement. Except as set forth on Schedule 4.25, no audits or
-------------
investigations are pending or, to the knowledge of the Company, threatened with
respect to any tax returns or taxes of the Company or any of its Subsidiaries,
or any predecessor thereto.
4.26 Transactions with Affiliates. Except as set forth on Schedule 4.26,
---------------------------- -------------
there are no
38
<PAGE>
material transactions, agreements or understandings, existing or presently
contemplated between or among the Company or any of its Subsidiaries and any of
its officers or directors or stockholders or any of their Affiliates or
associates.
4.27 Limitation on Subsidiary Payment Restrictions. Except as set forth on
---------------------------------------------
Schedule 4.27 hereto, neither the Company nor any of its Subsidiaries is subject
- -------------
to any consensual restriction on the ability of any such Subsidiary (a) to pay
dividends or make any other distributions on such Subsidiary's Capital Stock to,
or pay any indebtedness owing to, or repurchase or redeem any of such
Subsidiary's Capital Stock from, the Company or any other Subsidiary of the
Company, (b) to make any loans or advances to the Company or any other
Subsidiary of the Company, or (c) to transfer any of its Property or assets to
the Company or any other Subsidiary.
4.28 No Other Business. The Company has not and is not engaged in any
-----------------
material respect in any business other than the design, development, production,
marketing and sale of interactive slot machines.
ARTICLE V
PURCHASE FOR INVESTMENT; SOURCE OF FUNDS
5.1 Purchase for Investment. The Purchaser represents that (a) by reason
-----------------------
of its business and financial experience, and the business and financial
experience of those persons, if any, retained by it to advise it with respect to
its investment in the Units, it together with such advisers have such knowledge,
sophistication and experience in business and financial matters as to be capable
of evaluating the merits and risk of the prospective investment, (b) it is an
accredited investor as defined in Regulation D under the Securities Act and (c)
it is purchasing the Units for its own account or for one or more separate
accounts maintained by it or for the account of one or more institutional
investors on whose behalf the Purchaser has authority to make this
representation for investment and not with a view to the distribution or other
disposition thereof or with any present intention of distributing or selling any
of the Units except in compliance with the Securities Act and except to one or
more such institutional investors, provided that the disposition of the
Purchaser's or such investor's property shall at all times be within its
control. The Purchaser understands and agrees that the Units have not been
registered under the Securities Act and may be resold (which resale is not now
contemplated) only if registered pursuant to the provisions thereunder or if an
exemption from registration is available.
5.2 Authority. The Purchaser represents that it has full power and
---------
authority and has taken all action necessary to authorize it to enter into and
perform its obligations under this Agreement and all other Transaction Documents
and other documents or instruments contemplated hereby or thereby. This
Agreement is the legal, valid and binding obligation of such Purchaser, and is
enforceable against it in accordance with its terms.
5.3 Broker's or Finder's Commissions. In addition to and not in
--------------------------------
limitation of any other
39
<PAGE>
rights hereunder, the Purchaser agrees that it will indemnify and hold harmless
the Company and its Subsidiaries from and against any and all claims, demands or
liabilities for broker's, finder's, placement agent's or other similar fees or
commissions and any and all liabilities with respect to any taxes (including
interest and penalties) payable or incurred or alleged to have been incurred by
the Purchaser or any Person acting or alleged to have been acting on the
Purchaser's behalf, in connection with this Agreement, the issuance or sale of
the Units or any other transaction contemplated by any of the Transaction
Documents.
5.4 Acknowledgment of Gaming Restrictions. The Purchaser acknowledges
-------------------------------------
that pursuant to the Gaming Laws approvals from the Gaming Authorities shall be
required in order for the Purchaser or any Holder to acquire control (as defined
in the Gaming Laws) of the Company.
ARTICLE VI
REDEMPTIONS AND OFFERS TO PURCHASE
6.1 Notice of Redemption. If the Company elects or is required to redeem
--------------------
Senior Discount Notes pursuant to Section 6.6 hereof, at least 30 days but not
more than 60 days before any Redemption Date, the Company shall mail by first
class mail a notice of redemption to the registered address of each Holder of
Senior Discount Notes or portions thereof that are to be redeemed. With respect
to any redemption of Senior Discount Notes, the notice shall identify the Senior
Discount Notes or portions thereof to be redeemed and shall state: (i) the
Redemption Date; (ii) the Redemption Price for the Senior Discount Notes and the
amount of unpaid and accrued interest on such Senior Discount Notes as of the
date of redemption; (iii) if any Senior Discount Note is being redeemed in part,
the portion of the principal amount of such Senior Discount Note to be redeemed
and that, after the Redemption Date, upon surrender of such Senior Discount
Note, a new Senior Discount Note or Senior Discount Notes in principal amount
equal to the unredeemed portion will be issued; (iv) that Senior Discount Notes
called for redemption must be surrendered to the Company to collect the
Redemption Price for such Senior Discount Notes; (v) that, unless the Company
defaults in paying the Redemption Price, interest on Senior Discount Notes
called for redemption ceases to accrue on and after the Redemption Date and the
only remaining right of the Holders of such Senior Discount Notes is to receive
payment of the Redemption Price upon surrender to the Company of the Senior
Discount Notes redeemed; and (vi) if fewer than all the Senior Discount Notes
are to be redeemed, the identification of the particular Senior Discount Notes
(or portion thereof) to be redeemed, as well as the aggregate principal amount
of Senior Discount Notes to be redeemed and the aggregate principal amount of
Senior Discount Notes to be outstanding after such partial redemption.
6.2 Selection of Senior Discount Notes to be Redeemed or Purchased. If
--------------------------------------------------------------
less than all outstanding Senior Discount Notes are to be redeemed or if less
than all Senior Discount Notes tendered pursuant to an Offer are to be accepted
for payment, the Company shall select the outstanding Senior Discount Notes to
be redeemed or accepted for payment in compliance with the requirements of the
principal national securities exchange, if any, on which the Senior
40
<PAGE>
Discount Notes are listed or, if the Senior Discount Notes are not listed on a
securities exchange, on a pro rata basis, by lot or by any other method that the
Company deems fair and appropriate. The Company shall select for redemption or
purchase Senior Discount Notes or portions of Senior Discount Notes in principal
amounts of $1,000 or integral multiples thereof; except that if all of the
Senior Discount Notes of a Holder are selected for redemption or purchase, the
aggregate principal amount of the Senior Discount Notes held by such Holder,
even if not a multiple of $1,000, may be redeemed or purchased. Except as
provided in the preceding sentence, provisions of this Agreement that apply to
Senior Discount Notes called for redemption or tendered pursuant to an Offer
also apply to portions of Senior Discount Notes called for redemption or
tendered pursuant to an Offer.
6.3 Effect of Notice of Redemption. Once notice of redemption is mailed
------------------------------
to the Holders, Senior Discount Notes called for redemption become due and
payable on the Redemption Date at the Redemption Price. Upon surrender to the
Company, the Senior Discount Notes called for redemption shall be paid at the
Redemption Price on the Redemption Date.
6.4 Payment of Redemption Price. On or prior to any Redemption Date, the
---------------------------
Company shall segregate money sufficient to pay the Redemption Price of all
Senior Discount Notes to be redeemed on that date. Unless the Company defaults
in the payment of such Redemption Price, interest on the Senior Discount Notes
to be redeemed will cease to accrue on such Senior Discount Notes on the
applicable Redemption Date, whether or not such Senior Discount Notes are
presented for payment. If a Senior Discount Note is redeemed on or after an
interest Record Date but on or prior to the related Interest Payment Date, then
any accrued and unpaid interest shall be paid to the Person in whose name such
Senior Discount Note was registered at the close of business on such Record
Date. If any Senior Discount Note called for redemption shall not be so paid
upon surrender for redemption, interest will be paid on the unpaid principal,
premium, if any, and interest from the Redemption Date until such principal,
premium and interest is paid, at the rate of interest provided in the Senior
Discount Notes and Section 7.1. If a Redemption Date is a non-Business Day,
payment shall be made on the next succeeding Business Day and no interest shall
accrue for the period from the Redemption Date to such succeeding Business Day.
6.5 Senior Discount Notes Redeemed in Part. Upon surrender of a Senior
--------------------------------------
Discount Note that is redeemed in part, the Company shall issue to the Holder
thereof at the Company's expense a new Senior Discount Note equal in principal
amount to the unredeemed portion of the Senior Discount Note surrendered.
6.6 Optional and Mandatory Redemption.
---------------------------------
(a) The Senior Discount Notes will be subject to redemption, in whole
or from time to time in part (in multiples of $1,000 of principal amount) at the
option of the Company at the price per $1,000 principal amount at maturity with
respect to any Redemption Date appearing opposite the period in which such
Redemption Date occurs, plus any accrued and unpaid interest to the Redemption
Date:
41
<PAGE>
<TABLE>
<CAPTION>
Period Price per $1,000 Principal Amount
------ ---------------------------------
<S> <C>
October 1997 $ 833.33
November 1997 $ 837.19
December 1997 $ 848.49
January 1998 $ 859.78
February 1998 $ 871.08
March 1998 $ 882.38
April 1998 $ 894.61
May 1998 $ 906.85
June 1998 $ 919.09
July 1998 $ 931.32
August 1998 $ 943.56
September 1998 $ 955.79
October 1998 $ 969.05
November 1998 $ 982.30
December 1998 $ 995.56
January 1999 $ 997.20
February 1999 $ 998.84
After February 28, 1999 $1,000.00
</TABLE>
(b) Notwithstanding any other provision hereof, if any Gaming
Authority requires that the Purchaser or any Holder or beneficial owner of the
Securities must be licensed, qualified or found suitable under any Gaming Laws
in order to maintain any material gaming license, registration or approval of
the Company, or its Gaming Subsidiaries under such Gaming Laws, and the
Purchaser, Holder or beneficial owner of the Securities fails to apply for a
license, qualification or finding of suitability within 30 days after being
requested to do so by any Gaming Authority (or such lesser period that may be
required by such Gaming Authority), or if such Purchaser, Holder or beneficial
owner is not so licensed, qualified or found suitable, the Purchaser, Holder or
beneficial owner of the Securities shall comply with any order by such Gaming
Authorities that such Person dispose of any Securities held by it; provided,
however, that in the event the Purchaser, Holder or beneficial owner of the
Securities does not comply with such order within the required period, the
Company shall have the option as its sole remedy with respect to the Senior
Discount Notes to call for redemption of the Senior Discount Notes of such
Purchaser, Holder or beneficial owner at a price in cash equal to the Accreted
Value thereof on the Redemption Date, plus accrued and unpaid interest to the
Redemption Date, and except as may be required by any Gaming Authority, the
Company shall comply with the procedures contained in the Senior Discount Notes
for redemption of the Senior Discount Notes. The Company shall pay or reimburse
any Purchaser, Holder or beneficial owner of the Securities who is required to
apply for a license, qualification or finding of suitability, for the costs or
expenses incurred therewith except with respect to any Purchaser, Holder or
beneficial owner of the Securities whose affirmative actions have directly
caused such Purchaser, Holder or beneficial owner to so apply.
(c) On the date which is four years following the Closing Date, the
Company shall redeem $5.0 million in principal amount of the Senior Discount
Notes (without prepayment
42
<PAGE>
penalty or premium) at 100% of the principal amount so redeemed, plus any
accrued and unpaid interest thereon to the Redemption Date.
(d) Upon any partial prepayment or redemption of the Senior Discount
Notes, the principal amount so prepaid or redeemed shall be allocated to all
Senior Discount Notes at the time outstanding in proportion to the respective
outstanding principal amounts thereof, and a corresponding pro rata adjustment
shall be made in the minimum denomination of a Senior Discount Note pursuant to
Section 11.1.
6.7 Mandatory Offers.
----------------
(a) Within 10 Business Days after any Change of Control Trigger Date,
any Repayment Trigger Date or any Excess Proceeds Date, the Company shall mail a
notice to each Holder containing all instructions and materials necessary to
enable such Holders to tender Senior Discount Notes pursuant to the Offer and
stating: (i) that an Offer is being made pursuant to Section 7.12, 7.13 or
7.18, as the case may be, the length of time the Offer shall remain open, and
the maximum aggregate principal amount of Senior Discount Notes that the Company
is required to purchase pursuant to such Offer; (ii) the purchase price for the
Senior Discount Notes (as set forth in Section 7.12, 7.13 or 7.18, as the case
may be), the amount of accrued and unpaid interest on such Senior Discount Notes
as of the purchase date, and the purchase date (which shall be no earlier than
30 days nor later than 40 days from the date such notice is mailed (the
"Purchase Date")); (iii) that any Senior Discount Note not tendered will
continue to accrue interest if interest is then accruing; (iv) that, unless the
Company defaults in the payment of the purchase price on the Purchase Date,
interest shall cease to accrue on such Senior Discount Notes on the Purchase
Date; (v) that Holders electing to tender any Senior Discount Note or portion
thereof will be required to surrender their Senior Discount Note, with a form
entitled "Option of Holder to Elect Purchase" completed, to the Company at the
address specified in Section 13.2 hereof prior to the close of business on the
Business Day preceding the Purchase Date, provided that Holders electing to
--------
tender only a portion of any Senior Discount Note must tender a principal amount
of $1,000 or integral multiples thereof; (vi) that Holders will be entitled to
withdraw their election to tender Senior Discount Notes if the Company receives,
not later than the close of business on the second Business Day preceding the
Purchase Date, a telegram, telex, facsimile transmission or letter setting forth
the name of the Holder, the principal amount of Senior Discount Notes delivered
for purchase, and a statement that such Holder is withdrawing his election to
have such Senior Discount Notes purchased; (vii) that Holders whose Senior
Discount Notes are accepted for payment in part will be issued new Senior
Discount Notes equal in principal amount to the unpurchased portion of Senior
Discount Notes surrendered, provided that only Senior Discount Notes in a
--------
principal amount of $1,000 or integral multiples thereof will be accepted for
payment in part and (viii) if the Offer is made with respect to a Change of
Control, the circumstances and relevant facts regarding such Change of Control.
(b) On the Purchase Date for any Offer, the Company shall (i) in the
case of an Offer resulting from a Change of Control, accept for payment all
Senior Discount Notes or portions thereof tendered pursuant to such Offer, (ii)
in the case of an Offer resulting from one
43
<PAGE>
or more Securities Sales or Mezzanine Debt Financings the aggregate Net Cash
Proceeds of which exceed $40,000,000, accept for payment all Senior Discount
Notes or portions thereof tendered pursuant to such Offer that can be purchased
out of such Net Cash Proceeds and (iii) in the case of an Offer resulting from
an Asset Disposition pursuant to which the Company or any Subsidiary has Excess
Proceeds, accept for payment the maximum principal amount of Senior Discount
Notes that can be purchased out of such Excess Proceeds.
(c) With respect to any Offer, (i) if less than all of the Senior
Discount Notes tendered pursuant to an Offer are to be accepted for payment by
the Company for any reason, the Company shall select on or prior to the Purchase
Date the Senior Discount Notes or portions thereof to be accepted for payment
pursuant to Section 6.2; and (ii) unless the Company defaults in the payment of
the purchase price for such Senior Discount Notes on the Purchase Date, interest
shall cease to accrue on such Senior Discount Notes on the Purchase Date;
provided, however, that if the Company fails to purchase all Senior Discount
- -------- -------
Notes accepted for payment, the Company shall purchase on a pro rata basis all
Senior Discount Notes accepted for payment and interest shall continue to accrue
on all Senior Discount Notes not purchased.
(d) Promptly after the Purchase Date with respect to an Offer, (i) the
Company shall mail to each Holder of Senior Discount Notes or portions thereof
accepted for payment an amount equal to the purchase price for, plus any accrued
and unpaid interest on, such Senior Discount Notes, (ii) with respect to any
tendered Senior Discount Note not accepted for payment in whole or in part, the
Company shall return such Senior Discount Note to the Holder thereof, and (iii)
with respect to any Senior Discount Note accepted for payment in part, the
Company shall authenticate and mail to each such Holder a new Senior Discount
Note equal in principal amount to the unpurchased portion of the tendered Senior
Discount Note.
(e) The Company will (i) publicly announce the results of the Offer on
or as soon as practicable after the Purchase Date, and (ii) comply with Rule
14e-1 under the Exchange Act and any other securities laws and regulations to
the extent such laws and regulations are applicable to any Offer.
(f) Notwithstanding Section 7.12 and Section 6.7, upon the occurrence
of a Change in Control Trigger Date, in lieu of repurchasing Senior Discount
Notes as required by Section 7.12, the Company may elect, instead, to call for
redemption all Senior Discount Notes pursuant to Section 6.1 provided that the
related Notice of Redemption is mailed to all holders not later than the last
date that it would be required to commence a Mandatory Offer pursuant to Section
6.7 in respect of such Change in Control.
ARTICLE VII
COVENANTS
7.1 Payment of Senior Discount Notes. The Company shall pay the principal
--------------------------------
of, and premium, if any, and interest on, the Senior Discount Notes on the dates
and in the manner
44
<PAGE>
provided in the Senior Discount Notes. Holders must surrender their Senior
Discount Notes to the Company to collect principal payments. Principal, premium,
or interest shall be considered paid on the date due if, by 2:00 p.m., Boston,
Massachusetts time, on such date, the Company shall have executed wire transfers
in immediately available funds designated for and sufficient to pay such
principal, premium or interest. To the extent lawful, the Company shall pay
interest (including Post-Petition Interest) on overdue principal, premium and
interest (without regard to any applicable grace period) at a rate equal to 1.5%
per annum in excess of the then applicable interest rate on the Senior Discount
Notes.
7.2 Reports.
-------
(a) To the extent permitted by applicable law or regulation, whether
or not the Company is subject to the requirements of Section 13 or 15(d) of the
Exchange Act, the Company shall file with the Commission all quarterly and
annual reports and such other information, documents or other reports (or copies
of such portions of any of the foregoing as the Commission may by rules and
regulations prescribe) required to be filed pursuant to such provisions of the
Exchange Act. The Company shall mail to the holders of the Senior Discount
Notes and the Warrants at their addresses appearing in the register of Senior
Discount Notes or Warrants, as applicable, at the time of such mailing, within
10 days after it files the same with the Commission, all information, documents
and reports that it is required to file with the Commission pursuant to this
Section 7.2. If the Company is not permitted by applicable law or regulations
to file the aforementioned reports, the Company (at its own expense) shall mail
to the holders of the Senior Discount Notes and Warrants at their addresses
appearing in the register of Senior Discount Notes or Warrant, as applicable, at
the time of such mailing within 5 days after it would have been required to file
such information with the Commission, all information and financial statements,
including any notes thereto and with respect to annual reports, an auditors'
report by an accounting firm of established national reputation, and a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," comparable to the disclosure that the Company would have been
required to include in annual and quarterly reports, information, documents or
other reports, including, without limitation, reports on Forms 10-K, 10-Q and 8-
K, if the Company was subject to the requirements of such Section 13 or 15(d) of
the Exchange Act.
(b) At any time when the Company is not permitted by applicable law or
regulations to file the aforementioned reports, upon the request of a holder of
a Senior Discount Note or Warrant, the Company will promptly furnish or cause to
be furnished such information as is specified pursuant to Rule 144A(d)(4) under
the Securities Act (or any successor provision thereto) to such holder or to a
prospective purchaser of such Senior Discount Note or Warrant designated by such
holder, as the case may be, in order to permit compliance by such holder with
Rule 144A under the Securities Act.
7.3 Compliance Certificate.
----------------------
(a) The Company shall deliver to the Holders, within 135 days after
the end of each fiscal year of the Company, an Officers' Certificate stating
that (i) a review of the activities
45
<PAGE>
of the Company and its Subsidiaries during the preceding fiscal year has been
made to determine whether the Company has kept, observed, performed and
fulfilled all of its obligations under this Agreement and the Senior Discount
Notes, (ii) such review was supervised by the Officers of the Company signing
such certificate, and (iii) that to the best knowledge of each Officer signing
such certificate, (A) the Company has kept, observed, performed and fulfilled
each and every covenant contained in this Agreement and is not in default in the
performance or observance of any of the terms, provisions and conditions of this
Agreement (or, if a Default or Event of Default occurred, describing all such
Defaults or Events of Default of which each such Officer may have knowledge and
what action the Company has taken or proposes to take with respect thereto), and
(B) no event has occurred and remains in existence by reason of which payments
on account of the principal of, or premium, if any, or interest on, the Senior
Discount Notes are prohibited or if such event has occurred, a description of
the event and what action the Company is taking or proposes to take with respect
thereto.
(b) So long as not contrary to the then current recommendations of the
American Institute of Certified Public Accountants, the Officers' Certificate
delivered pursuant to Section 7.3(a) shall be accompanied by a written statement
of Deloitte & Touche LLP, the Company's independent public accountants (or
another independent accounting firm of established national reputation
reasonably satisfactory to the Holders), that in making the examination
necessary for certification of such financial statements nothing has come to
their attention that would lead them to believe that the Company has violated
any provisions of Sections 7.1, 7.5, 7.7, 7.10, 7.13, or Article VIII, or if any
such violation has occurred, specifying the nature and period of existence
thereof, it being understood that such accountants shall not be liable directly
or indirectly to any Person for any failure to obtain knowledge of any such
violation.
(c) The Company will, so long as any of the Senior Discount Notes are
outstanding, deliver to the Holders, promptly after any Officer of the Company
becomes aware of (i) any Default or Event of Default, or (ii) any default or
event of default under any other mortgage, agreement or instrument that could
result in an Event of Default under Section 9.1, an Officers' Certificate
specifying such Default, Event of Default or default and what action the Company
is taking or proposes to take with respect thereto.
7.4 Stay, Extension and Usury Laws. The Company covenants (to the extent
------------------------------
that it may lawfully do so) that it will not at any time insist upon, plead, or
in any manner whatsoever claim or take the benefit or advantage of, any stay,
extension or usury law wherever enacted, now or at any time hereafter in force,
that might affect the covenants or the performance of its obligations under this
Agreement and the Senior Discount Notes; and the Company (to the extent it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not, by resort to any such law, hinder, delay or
impede the execution of any power granted to the Holders pursuant to this
Agreement, but will suffer and permit the execution of every such power as
though no such law has been enacted.
46
<PAGE>
7.5 Limitation on Restricted Payments.
---------------------------------
(a) The Company shall not, and shall not permit any Subsidiary to,
directly or indirectly, make any Restricted Payment, except (i) payments,
prepayments, repurchases, redemptions and acquisitions with respect to
Indebtedness not incurred in violation of Section 7.7, and (ii) Restricted
Payments by the Company or the Subsidiaries if (A) at the time of and after
giving effect to the proposed Restricted Payment no Default or Event of Default
shall have occurred and be continuing or would occur as a consequence thereof,
(B) at the time of and immediately after giving effect to the proposed
Restricted Payment, the Company could Incur at least $1.00 of additional
Indebtedness pursuant to Section 7.7(b) and (C) at the time of and immediately
after giving effect to the proposed Restricted Payment (the value of any such
payment if other than cash, as determined by the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution, provided
--------
that in the event such value exceeds $1,000,000 such determination shall be
supported by a fairness opinion of an Independent Financial Advisor) the
aggregate amount of all Restricted Payments (excluding all payments,
investments, redemptions, repurchases, retirements and other acquisitions
described in clauses (ii), (iii) and (iv) of Section 7.5(b) below) declared or
made after the date hereof does not exceed an amount equal to the sum of (A) 50%
of the Consolidated Net Income accrued during the period (treated as one
accounting period) from the first day of the first month of the first fiscal
quarter after the date hereof in which Consolidated Net Income is positive
through the last full fiscal quarter for which quarterly or annual financial
statements are available prior to the date of such Restricted Payment (or, in
case such Consolidated Net Income shall be a deficit, minus 100% of such
deficit), plus (B) an amount equal to 100% of the aggregate Net Cash Proceeds
received by the Company from the issuance and sale (other than to a Subsidiary
of the Company) of Qualified Capital Stock to the extent that such proceeds are
not used to redeem, repurchase, return or otherwise acquire Capital Stock or any
Indebtedness of the Company or any Subsidiary pursuant to clause (iii) of
Section 7.5(b), plus (c) an amount equal to 100% of the aggregate principal
amount of any Indebtedness incurred after the date hereof converted into
Qualified Capital Stock.
(b) Notwithstanding Section 7.5(a), the following Restricted Payments
may be made: (i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of this Agreement; (ii) the payment of any dividend
on the Company's Redeemable Convertible Preferred Stock in accordance with the
dividend provisions set forth in the Company's Articles of Incorporation for
such Redeemable Convertible Preferred Stock as in effect on the date hereof;
(iii) the redemption, repurchase, retirement or other acquisition for value of
any Capital Stock or any Indebtedness of the Company or any Subsidiary in
exchange for, or out of the Net Cash Proceeds of, the substantially concurrent
sale (other than to the Company or a Subsidiary of the Company) of Qualified
Capital Stock of the Company; (iv) the redemption of the Senior Discount Notes
under the circumstances set forth in this Agreement and (v) Restricted Payments
which do not exceed an aggregate of $1,000,000 after the date hereof.
7.6 Corporate Existence. Subject to Article VIII, the Company will do or
-------------------
cause to be done all things necessary to preserve and keep in full force and
effect its corporate existence and
47
<PAGE>
the corporate or similar existence of each of its Subsidiaries in accordance
with the respective organizational documents of each of its Subsidiaries and the
rights (charter and statutory), licenses and franchises of the Company and each
of its Subsidiaries; provided, however, that the Company shall not be required
-------- -------
to preserve any such right, license or franchise, or the corporate or similar
existence of any Subsidiary, if the Company's Board of Directors shall determine
that the preservation thereof is no longer desirable in the conduct of the
business of the Company and its Subsidiaries taken as a whole and that the loss
thereof is not adverse in any material respect to the holders of the Senior
Discount Notes and the Warrants.
7.7 Limitation on Indebtedness.
--------------------------
(a) Except as set forth in this Section 7.7, the Company shall not,
and shall not permit any Subsidiary, after the date hereof, directly or
indirectly, to Incur any Indebtedness (including Acquired Indebtedness). For
purposes of this Agreement, Indebtedness of any Acquired Person that is not a
Subsidiary, which Indebtedness is outstanding at the time such Person is
acquired by the Company or a Subsidiary or becomes, or is merged into or
consolidated with, a Subsidiary, shall be deemed to have been Incurred by the
Company or the acquiring Subsidiary at the time such Acquired Person becomes, or
is merged into or consolidated with, a Subsidiary.
(b) Notwithstanding Section 7.7(a) and in addition to Indebtedness
permitted to be Incurred under Section 7.7(c), the Company or any Subsidiary may
Incur Pari Passu Indebtedness or Subordinated Indebtedness if (i) no Default or
Event of Default shall have occurred and be continuing at the time or as a
consequence of the Incurrence of such Indebtedness, (ii) on the date of the
Incurrence of such Indebtedness, the Consolidated Interest Coverage Ratio of the
Company and its Subsidiaries at the time of such Incurrence, after giving pro
forma effect thereto, is not less than 2.0 to 1, and (iii) any Subordinated
Indebtedness so Incurred under this Section 7.7(b) by its terms, or by the terms
of any agreement or instrument pursuant to which such Subordinated Indebtedness
is Incurred, (A) does not provide for payments of principal of such Indebtedness
at the stated maturity thereof or by way of a sinking fund applicable thereto or
by way of any mandatory redemption, defeasance, retirement or repurchase thereof
by the Company (including any redemption, retirement or repurchase which is
contingent upon events or circumstances, but excluding any retirement required
by virtue of acceleration of such Indebtedness upon an event of default
thereunder), in each case prior to the final stated maturity of the Senior
Discount Notes and (B) does not permit redemption or other retirement thereof
(including pursuant to an offer to purchase made by the Company) at the option
of the holder thereof prior to the final stated maturity of the Senior Discount
Notes, other than a redemption or other retirement at the option of the holder
of such Subordinated Indebtedness (including pursuant to an offer to purchase
made by the Company) which is conditioned upon a change of control of the
Company pursuant to provisions substantially similar to those contained in
Section 7.12.
48
<PAGE>
(c) Notwithstanding Section 7.7(a) and in addition to Indebtedness
permitted to be Incurred under Section 7.7(b), the Company and its Subsidiaries
may Incur, after the date hereof, any of the following Indebtedness:
(i) Indebtedness outstanding at the date hereof as set forth on
Schedule 4.8, including the Indebtedness evidenced by the Senior Discount
------------
Notes;
(ii) Indebtedness to any Wholly-Owned Subsidiary of the Company
or Indebtedness of any Subsidiary to the Company (provided that such
Indebtedness is at all times held by the Company or a Wholly-Owned
Subsidiary of the Company); provided, however, that for purposes of this
-------- -------
Section 7.7, upon either (A) the transfer or other disposition by any such
Wholly-Owned Subsidiary of any Indebtedness so permitted to a Person other
than the Company or another Wholly-Owned Subsidiary of the Company or (B)
the issuance, sale, lease, transfer or other disposition of shares of
Capital Stock (including by consolidation or merger) of such Wholly-Owned
Subsidiary to a Person other than the Company or another such Wholly-Owned
Subsidiary, the provisions of this clause (ii) shall no longer be
applicable to such Indebtedness and such Indebtedness shall be deemed to
have been Incurred by the Company at the time of such transfer or other
disposition;
(iii) Refinancing Indebtedness with respect to Indebtedness that
was Incurred prior to the date hereof or, if incurred after the date
hereof, was Incurred in compliance with the provisions of this Agreement;
provided, however, that (A) the principal amount of such Refinancing
-------- -------
Indebtedness shall not exceed the principal amount (or accreted value, in
the case of Indebtedness issued at a discount) of the Indebtedness so
extended, refinanced, renewed, replaced, substituted, defeased or refunded
(plus the amount of fees, costs and expenses incurred and the amount of any
premium, penalties, breakage costs and other similar amounts required to be
paid in connection with such refinancing pursuant to the terms of the
instrument governing the Indebtedness so extended, refinanced, renewed,
replaced, substituted, defeased or refunded or the amount of any premium
reasonably determined by the Company as necessary to accomplish a
refinancing by means of a tender offer or privately negotiated repurchase,
which determination shall be supported by a fairness opinion from an
Independent Financial Advisor, plus the fees, costs and expenses of such
tender offer or repurchase); and (B) the Refinancing Indebtedness shall (1)
have a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of the Indebtedness being extended,
refinanced, renewed, replaced, substituted, defeased or refunded; (2) not
have a final scheduled maturity earlier than the final scheduled maturity
of the Indebtedness being extended, refinanced, replaced, renewed,
substituted, defeased or refunded; (3) not permit redemption at the option
of the holder earlier than the earliest date of redemption at the option of
the holder of the Indebtedness being extended, refinanced, renewed,
replaced, substituted, defeased or refunded; and (4) rank no more senior or
be at least as subordinated, as the case may be, in right of payment to the
Senior Discount Notes as the
49
<PAGE>
Indebtedness being extended, refinanced, replaced, renewed, substituted,
defeased or refunded;
(iv) Senior Indebtedness of the Company not to exceed an
aggregate of $10,000,000 Incurred in connection with the Company's
establishment of a senior secured credit facility with a bank or other
lending institution; and
(v) Indebtedness of the Company or any Subsidiary in an aggregate
amount not exceeding $10,000,000, whether or not secured by a Lien, the
proceeds of which are used solely to purchase assets acquired in the
ordinary course of business.
7.8 Limitation on Transactions with Affiliates.
------------------------------------------
(a) Neither the Company nor any of its Subsidiaries shall enter into
any transaction or series of transactions to sell, lease, transfer, exchange or
otherwise dispose of any of its properties or assets to or to purchase any
property or assets from, or for the direct or indirect benefit of, an Affiliate
of the Company or of any Subsidiary of the Company, make any Investment in or
enter into any contract, agreement, understanding, loan, advance or Guarantee
with, or for the direct or indirect benefit of, an Affiliate of the Company or
of any Subsidiary of the Company (each, including any series of transactions
with one or more Affiliates, an "Affiliate Transaction"), unless the Board of
Directors of the Company or the relevant Subsidiary determines, as evidenced by
a Board Resolution, that the terms of such Affiliate Transaction are fair and
reasonable to the Company and no less favorable to the Company or the relevant
Subsidiary than those that could have been obtained at that time in a comparable
arms-length transaction by the Company or such Subsidiary with an unrelated
Person.
(b) Neither the Company nor any of its Subsidiaries shall enter into
an Affiliate Transaction involving or having a potential aggregate value of more
than $1,000,000 unless, in addition to the requirements of (a) above, (i) such
transaction has been approved by a majority of the Board of Directors of the
Company or the relevant Subsidiary who have no direct or indirect interest in
the Affiliate Transaction or in the Affiliate that is a party to the Affiliate
Transaction, or in any other party that is an Affiliate of any such Affiliate,
and (ii) the Company shall have delivered to the Holders an Officers'
Certificate certifying that the conditions set forth in clause (b)(i) above have
been satisfied.
(c) Neither the Company nor any of its Subsidiaries shall enter into
an Affiliate Transaction involving or having a potential aggregate value of more
than $5,000,000 unless, in addition to the requirements of (a) and (b) above,
the Board of Directors of the Company or the relevant Subsidiary shall first
have received a written opinion from an Independent Financial Advisor for the
benefit of the Company and the Holders, which firm is not receiving any
contingent fee or other consideration directly or indirectly related to the
successful completion of the Affiliate Transaction, to the effect that the
proposed Affiliate Transaction is fair to the Company from a financial point of
view.
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(d) The provisions of this Section 7.8 shall not apply to (i) any
Restricted Payment that is made in compliance with the provisions of Section
7.5, (ii) the reasonable and customary fees and compensation paid to or
indemnity provided on behalf of, officers, directors, employees or consultants
of the Company or any Subsidiary, as determined by the Board of Directors of the
Company or such Subsidiary or the senior management thereof in good faith, (iii)
transactions exclusively between or among the Company and any Wholly-Owned
Subsidiary or exclusively between or among Wholly-Owned Subsidiaries provided
such transactions are not otherwise prohibited by this Agreement, and (iv) any
Affiliate Transaction in existence as of the date hereof, the terms of which are
listed on Schedule 4.26.
-------------
7.9 Limitation on Liens. The Company shall not, and shall not permit any
-------------------
of its Subsidiaries to, Incur, assume, suffer to exist, create or otherwise
cause to be effective any Lien on any asset now owned or hereafter acquired, or
any income or profits therefrom or assign or convey any right to receive income
therefrom to secure any Indebtedness except: (a) Permitted Liens (other than
Permitted Liens described in clause (i) of the definition thereof), (b) Liens
existing as of the date hereof (and any extension, renewal or replacement Liens
upon the same Property subject to such Liens, provided the principal amount of
Indebtedness secured by each Lien constituting such an extension, renewal or
replacement Lien shall not exceed the principal amount of Indebtedness secured
by the Lien theretofore existing, plus amounts described in Section
7.7(c)(iii)(A) with respect to permitted Refinancing Indebtedness), (c) after
the Security Opinion Date, Liens securing Indebtedness of any Subsidiary of the
Company, provided that (i) such Liens are limited to Property or assets of such
--------
Subsidiary, (ii) the Indebtedness secured by such Liens was not Incurred in
violation of this Agreement and (iii) the Indebtedness secured by such Liens is
not subordinated to or junior in right or priority of payment in any respect to
any other Indebtedness of such Subsidiary; (d) after both the Security Opinion
Date and the Pledge Opinion Date, Liens as defined in clause (i) of the
definition of Permitted Liens; and (e) Liens replacing, extending or renewing,
in whole or in part, any Lien described in the foregoing clauses (a) through
(d), including in connection with any refinancing of the Indebtedness, in whole
or in part, secured by any such Lien effected in accordance with Section 7.7,
provided that if any such clauses limit the amount secured by or the Property or
- --------
assets subject to such Liens, no such replacement, extension or renewal shall
increase the amount of Indebtedness or the Property or assets subject to such
Liens.
7.10 Payment of Taxes and Other Claims. The Company shall, and shall cause
---------------------------------
each of its Subsidiaries to, pay or discharge, before the same shall become
delinquent, (a) all Taxes, assessments and governmental charges (including
withholding taxes and penalties, interest and additions to taxes) levied or
imposed upon it or any of its Subsidiaries or properties of the Company or any
of its Subsidiaries and (b) all lawful claims for labor, materials and supplies
that, if unpaid might by law become a Lien upon the Property of it or any of its
Subsidiaries; provided, however, that the Company shall not be required to pay
-------- -------
or discharge or cause to be paid or discharged any such Tax, assessment, charge
or claim if either (i) the amount, applicability or validity thereof is being
contested in good faith by appropriate proceedings and an adequate reserve has
been established therefor to the extent required by GAAP or (ii) the failure to
make
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such payment or effect such discharge (together with all other such failures)
would not have a Material Adverse Effect.
7.11 Restrictions Against Limitations on Upstream Payments. The Company
-----------------------------------------------------
shall not, and shall not permit any Subsidiary of the Company to, create or
otherwise cause or suffer to exist or to become effective any Payment
Restriction or other encumbrance or restriction on the ability of any Subsidiary
of the Company to (a) pay dividends or make any other distributions on its
Capital Stock or any other interest or participation in, or measured by, its
profits owned by, or pay any Indebtedness owed to, the Company or a Subsidiary
of the Company, (b) make loans or advances to the Company or a Subsidiary of the
Company, or (c) transfer any of its Properties or assets to the Company or any
Subsidiary of the Company, except for such Payment Restrictions or encumbrances
existing under or by reason of: (i) applicable law; (ii) any instrument
governing Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Subsidiaries as in effect at the time of such acquisition (except to
the extent such Indebtedness was Incurred in contemplation of or in connection
with such acquisition), provided, that such restriction is not applicable to any
---------
Person, or the Property or assets of any Person, other than the Acquired Person;
(iii) non-assignment provisions in leases entered into in the ordinary course of
business and consistent with past practices; (iv) instruments governing purchase
money Indebtedness for Property acquired in the ordinary course of business that
only impose restrictions on the Property so acquired; (v) any agreement for the
sale or disposition of the Capital Stock or assets of such Subsidiary, provided
--------
that such restriction is only applicable to such Subsidiary or assets, as
applicable; or (vi) Refinancing Indebtedness permitted under this Agreement with
respect to Indebtedness described in clauses (ii), (iii) or (iv), provided that
--------
the restrictions contained in the agreements governing such Refinancing
Indebtedness are no more restrictive in the aggregate than those contained in
the instrument governing the Indebtedness being refinanced immediately prior to
such refinancing.
7.12 Change of Control. Upon the occurrence of a Change of Control (such
-----------------
date being the "Change of Control Trigger Date"), each Holder will have the
right to require the Company to repurchase all or any part of such Holder's
Senior Discount Notes pursuant to the Offer (but, with respect to any partial
tender of Senior Discount Notes, the Company shall only be required to purchase
principal amounts in integral multiples of $1,000) at a purchase price in cash
equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest to the Purchase Date. The Offer shall be effected in accordance with
Section 6.7 and Article VI (to the extent applicable) and the provisions of this
Section 7.12; provided, however, that this Section 7.12 shall not apply if the
Company instead elects to redeem all Senior Discount Notes as provided in
Section 6.7(f).
7.13 Redemption from the Proceeds of Securities Sales and Mezzanine Debt
-------------------------------------------------------------------
Financings.
- ----------
(a) The Company will not, and will not permit any of its Subsidiaries
to, undertake any Securities Sale or any Mezzanine Debt Financing, unless: (i)
the Company or the applicable Subsidiary receives consideration, which, at the
time of such Securities Sale or
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Mezzanine Debt Financing, is at least equal to the fair market value of the
Capital Stock or other equity or debt securities sold or otherwise disposed of
(as determined in good faith by the Board of Directors of the Company evidenced
by a Board Resolution); and (ii) the Net Cash Proceeds received by the Company
or such Subsidiary, as the case may be, from such Securities Sale or Mezzanine
Debt Financing are applied in accordance with this Section 7.13.
(b) As soon as practicable, but in no event later than 10 Business
Days after any date (with respect to both a Securities Sale or a Mezzanine Debt
Financing, a "Repayment Trigger Date") that the aggregate amount of Net Cash
Proceeds from all such Securities Sales or Mezzanine Debt Financings occurring
on or after the date hereof exceed $40,000,000, the Company shall commence an
Offer to purchase the maximum principal amount of Senior Discount Notes that may
be purchased out of such Net Cash Proceeds, at an offer price per $1,000
principal amount equal to the price set forth in Section 6.6(a) opposite the
period in which the Purchase Date occurs, plus accrued and unpaid interest to
the Purchase Date. The Offer shall be effected in accordance with Section 6.7
and Article VI (to the extent applicable) and the provisions of this Section
7.13. To the extent that any such Net Cash Proceeds remain after completion of
an Offer, the Company may use the remaining amount for any purpose permitted by
this Agreement.
7.14 Maintenance of Properties. The Company will cause all properties used
-------------------------
or useful in the conduct of its business or the business of any Subsidiary of
the Company to be maintained and kept in good condition, repair and working
order, subject to normal wear and tear, and supplied with all necessary
equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided,
however, that nothing in this Section 7.14 shall prevent the Company from
discontinuing the operation or maintenance of any of such properties if such
discontinuance is, as determined by the Company in good faith, desirable in the
conduct of its business or the business of any Subsidiary and not
disadvantageous in any material respect to the Holders.
7.15 Maintenance of Insurance. The Company shall, and shall cause its
------------------------
Subsidiaries to, (a) keep at all times all of their properties which are of an
insurable nature insured against loss or damage with financially sound and
reputable insurers to the extent that property of similar character is usually
so insured by corporations similarly situated and owning like properties in
accordance with good business practice, and (b) will maintain with financially
sound and reputable insurers insurance against other hazards and risks and
liability to persons and property to the extent and in a manner customary for
corporations in similar business similarly situated. The Company shall, and
shall cause its Subsidiaries to, use the proceeds from any such insurance policy
to repair, replace or otherwise restore the property to which such proceeds
relate, except to the extent that a different use of such proceeds is, as
determined by the Company, in good faith, desirable in the conduct of its
business or the business of any Subsidiary and not disadvantageous in any
material respect to the Holders.
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7.16 Compliance with Laws. The Company shall comply, and shall cause each
--------------------
of its Subsidiaries to comply, with all applicable statutes, rules, regulations,
orders and restrictions of the United States of America, all states and
municipalities thereof, and of any governmental department, commission, board,
regulatory authority, bureau, agency and instrumentality of the foregoing, in
respect of the conduct of their respective businesses and the ownership of their
respective properties, except such as are being contested in good faith and by
appropriate proceedings and except for such noncompliance as would not in the
aggregate have a Material Adverse Effect.
7.17 Limitation on Issuances and Dispositions of Capital Stock of
------------------------------------------------------------
Subsidiaries. The Company (a) shall not, and shall not permit any Subsidiary
- ------------
to, transfer, convey, sell, or otherwise dispose of any Capital Stock, or
securities convertible into or exercisable or exchangeable for, or options,
warrants, rights or any other interest with respect to, Capital Stock of a
Subsidiary to any Person (other than the Company or a Wholly-Owned Subsidiary)
unless such transfer, conveyance, sale, lease or other disposition is of 100% of
the Capital Stock of such Subsidiary held by the Company and the Net Cash
Proceeds from such transfer, conveyance or sale are applied in accordance with
Section 7.18 hereof and (b) shall not permit any Subsidiary to issue shares of
its Capital Stock (other than directors' qualifying shares), or securities
convertible into or exercisable or exchangeable for, or options, warrants,
rights or any other interest with respect to, its Capital Stock to any Person
other than to the Company or a Wholly-Owned Subsidiary
7.18 Limitation on Sale of Assets.
----------------------------
(a) The Company shall not, and shall not permit any of its
Subsidiaries to undertake an Asset Disposition unless (i) the Board of Directors
of the Company or such Subsidiary, as applicable, determines in good faith that
the Company or such Subsidiary, as applicable, receives consideration at the
time of such Asset Disposition at least equal to the Fair Market Value of the
assets sold or otherwise disposed of, (ii) no Default or Event of Default would
occur as a consequence of (after giving effect, on a pro forma basis, to) such
Asset Disposition, and (iii) at least 75% of the consideration therefor received
by the Company or such Subsidiary is in the form of cash or Cash Equivalents;
provided that for purposes of this provision the amount of (A) any Indebtedness
(other than Senior Discount Notes) that is required to be repaid or assumed (and
is either repaid or assumed by the transferee of the related assets) by virtue
of such Asset Disposition and which is secured by a Lien on the property or
assets sold and (B) any securities or other obligations received by the Company
or any such Subsidiary from such transferee that are immediately converted by
the Company or such Subsidiary from such transferee into cash (or as to which
the Company or such Subsidiary has received at or prior to the consummation of
such Asset Disposition a commitment (which may be subject to customary
conditions) from a nationally recognized investment, merchant or commercial bank
to convert into cash within 90 days of the consummation of such Asset
Disposition and which are thereafter actually converted into cash within such
90-day period) will be deemed to be cash.
(b) Within 270 days after the receipt of any Net Cash Proceeds from an
Asset Disposition, the Company may invest or commit such Net Cash Proceeds,
pursuant to a binding
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commitment subject only to reasonable, customary closing conditions, to be
invested (and providing such Net Cash Proceeds are, in fact, so invested, within
an additional 90 days) in assets and Property (other than notes, bonds,
obligations and securities of an entity not wholly-owned by the Company) which
in the good faith reasonable judgment of the Company will immediately constitute
or be part of a Related Business of the Company or such Subsidiary (if it
continues to be a Subsidiary) immediately following such transaction. Pending
the application of any such Net Cash Proceeds as described above, the Company
may invest such Net Cash Proceeds in any manner that is not prohibited by this
Agreement. Any Net Cash Proceeds from an Asset Disposition that are not applied
or invested as provided in the first sentence of this paragraph (including any
Net Cash Proceeds which were committed to be invested as provided in such
sentence but which are not in fact invested within the time period provided)
will be deemed to constitute "Excess Proceeds."
(c) Notwithstanding the provisions of (a) and (b) above:
(i) the Company and such Subsidiaries may convey, sell, lease,
transfer assign, or otherwise dispose of assets pursuant to and in
accordance with Article VIII hereof; and
(ii) the Company and such Subsidiaries may exchange assets held
by the Company or a Subsidiary for one or more Related Businesses of any
Person owning one or more Related Businesses; provided, that the Board of
Directors of the Company has determined that the terms of any such exchange
are fair and reasonable and the Fair Market Value of the assets received by
the Company are approximately equal to the Fair Market Value of the assets
exchanged by the Company.
(d) For purposes of this Section 7.18, "Excess Proceeds Date" means
each date on which the aggregate amount of Excess Proceeds exceeds $5,000,000.
Within 30 days after each Excess Proceeds Date, the Company will make an Offer
to each Holder to purchase, on a pro rata basis based on the respective
principal amounts of Senior Discount Notes held by such Holders, the maximum
principal amount of Senior Discount Notes then outstanding that may be purchased
out of such Excess Proceeds, at an offer price per $1,000 principal amount equal
to the price set forth in Section 6.6(a) opposite the period in which the
Purchase Date occurs, plus any accrued and unpaid interest thereon to the
Purchase Date. The Offer shall be effected in accordance with Section 6.7 and
Article VI (to the extent applicable) and the provisions of this Section 7.18.
(e) If the amount required to acquire all Senior Discount Notes
tendered pursuant to the Offer is less than the total Excess Proceeds, the
Excess Proceeds may be used by the Company for general corporate purposes
without restriction, unless otherwise restricted by the other provisions of this
Agreement. Upon commencement of any Offer made in accordance with the terms of
this Section 7.18, the amount of Excess Proceeds existing at the time of the
commencement of such Offer will be reduced to zero irrespective of the amount of
Senior Discount Notes tendered pursuant to the Offer.
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<PAGE>
ARTICLE VIII
SUCCESSORS
8.1 Merger or Consolidation.
-----------------------
(a) The Company shall not (i) consolidate with or merge into any other
Person; (ii) permit any other Person to consolidate with or merge into the
Company; (iii) permit any other Person to consolidate with, merge into or be
merged into by, any Subsidiary (in a transaction in which such Subsidiary (or
successor Person) remains (or becomes) a Subsidiary); and (iv) directly or
indirectly, transfer, convey, sell, lease or otherwise dispose of all or
substantially all of its properties and assets as an entirety (except for any
Permitted Disposition, or the merger or consolidation of any Subsidiary of the
Company with or into, or the disposition of all or substantially all of the
assets of any Subsidiary of the Company to, the Company or any Wholly-Owned
Subsidiary of the Company) unless, in any such transaction:
------
(1) in the event the Company shall consolidate with or merge into
another Person or shall directly or indirectly transfer, convey, sell,
lease or otherwise dispose of all or substantially all of its properties
and assets as an entirety, the Person formed by such consolidation or into
which the Company is merged or the Person which acquires by transfer,
conveyance, sale, lease or other disposition all or substantially all of
the properties and assets of the Company as an entirety (for purposes of
this Article VIII, a "Successor Company") shall be a corporation,
partnership or trust, shall be organized and validly existing under the
laws of the United States of America, any State thereof or the District of
Columbia and shall expressly assume pursuant to the terms and conditions of
this Agreement, in form reasonably satisfactory to the Holders, the due and
punctual payment of the principal of (and premium, if any) and interest on
all the Senior Discount Notes and the performance of every covenant of this
Agreement on the part of the Company to be performed or observed;
(2) immediately before and after giving effect to such
transaction and treating any Indebtedness Incurred by the Company or a
Subsidiary of the Company as a result of such transaction as having been
Incurred by the Company or such Subsidiary at the time of such transaction,
no Default or Event of Default shall have occurred and be continuing;
(3) immediately after giving effect to such transaction, and
treating any Indebtedness Incurred by the Company or any Subsidiary as a
result of such transaction as having been Incurred at the time of such
transaction, the Company or the Successor Company has a Consolidated Net
Worth greater than or equal to the Consolidated Net Worth of the Company
immediately prior to the closing of such transaction and the Company could
Incur at least $1.00 of additional Indebtedness pursuant to Section 7.7(b);
and
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(4) the Company has delivered to the Holders an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer, lease or acquisition and, if
the assumption of the obligations of the Company under this Agreement is
required in connection with such transaction, such documents effecting such
assumption, complies with this Article VIII and that all conditions
precedent herein for relating to such transaction have been complied with,
and, with respect to such Officers' Certificate, setting forth the manner
of determination of the Consolidated Net Worth of the Company or, if
applicable, the Successor Company and of the Incurrence of at least $1.00
of additional Indebtedness pursuant to Section 7.7(b).
(b) For purposes of the foregoing, the transfer (by lease, assignment,
sale or otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties and assets of one or more Subsidiaries, the
Capital Stock of which constitutes all or substantially all of the properties
and assets of the Company, shall be deemed to be the transfer of all or
substantially all of the properties and assets of the Company.
8.2 Surviving Person Substituted. Upon any consolidation or merger, or
----------------------------
any transfer of assets in accordance with Section 8.1, the Surviving Person (if
other than the Company) formed by such consolidation or into which the Company
is merged or to which such transfer is made shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under this Agreement
with the same effect as if such Surviving Person had been named as the Company
herein. When a Successor Company assumes all of the obligations of the Company
hereunder and under the Senior Discount Notes and agrees to be bound hereby and
thereby, the predecessor shall be released from such obligations.
ARTICLE IX
DEFAULTS AND REMEDIES
9.1 Events of Default.
-----------------
(a) Each of the following constitutes an "Event of Default": (i) the
Company shall fail to make any payment in respect of (A) the principal of or
premium, if any, on the Senior Discount Notes as the same shall become due,
whether at maturity, upon acceleration, redemption or otherwise, or (B) interest
on or in respect of any Senior Discount Notes as the same shall become due, and
such failure shall continue for a period of 15 Business Days; (ii) failure by
the Company for 30 days after receipt of notice from the Holders of at least 25%
of the principal amount of the outstanding Senior Discount Notes to comply with
any other provisions of this Agreement or any Senior Discount Notes; (iii)
default under any mortgage, agreement or instrument under which there may be
Incurred or by which there may be secured or evidenced any Indebtedness for
money borrowed by the Company or any of its Subsidiaries (or the payment of
which is guaranteed by the Company or any of its Subsidiaries) whether such
Indebtedness now exists, or is created after the date hereof if (A) such default
results in the acceleration of such Indebtedness prior to its express maturity
or shall constitute a default in the payment of such
57
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Indebtedness at final maturity of such Indebtedness, and (B) the principal
amount of any such Indebtedness that has been accelerated or not paid at
maturity, when added to the aggregate principal amount of all other such
Indebtedness that has been accelerated or not paid at maturity, exceeds
$1,000,000; (iv) failure by the Company or any of its Subsidiaries to pay final
judgments, the uninsured portion of which exceeds $1,000,000, which judgments
are not paid, discharged, bonded or stayed for a period of 90 days after the
date of entry thereof; (v) if under any Bankruptcy Law, (A) the Company or any
Subsidiary commences a voluntary case, consents to the entry of an order for
relief against it in an involuntary case, consents to the appointment of a
Custodian of it or for all or substantially all of its Property, or makes a
general assignment for the benefit of its creditors, or (B) a court of competent
jurisdiction enters an order or decree, and such order or decree remains
unstayed and in effect for 60 days, that is for relief against the Company or
any Subsidiary in an involuntary case, appoints a Custodian of the Company or
any Subsidiary or for all or substantially all of the Property of the Company or
any Subsidiary, or orders the liquidation of the Company or any Subsidiary; (vi)
if the Company by September 30, 1998 has not delivered to the Purchaser both the
opinions of counsel contemplated by Section 11.14(c) hereof; and (vii) any of
the Transaction Documents shall cease, for any reason, to be in full force and
effect in any material respect, except as a result of an amendment, waiver or
termination thereof as contemplated or permitted hereby, or the Company shall so
assert in writing.
(b) Any notice of default delivered to the Company by the Holders of
Senior Discount Notes must be in writing and must specify the Event of Default,
demand that it be remedied and state that the notice is a "Notice of Default."
9.2 Acceleration.
------------
(a) If an Event of Default (other than an Event of Default under
Section 9.1(a)(v)) occurs and is continuing, the Holders of at least 25% in
principal amount of the then outstanding Senior Discount Notes may declare all
outstanding Senior Discount Notes to be due and payable immediately and, upon
such declaration, the principal amount of, and premium, if any, and any accrued
and unpaid interest on, all such Senior Discount Notes, to the date of payment
shall be due and payable immediately.
(b) Notwithstanding anything to the contrary in this Agreement, if an
Event of Default arises under Section 9.1(a)(v) the principal amount of, and
premium, if any, and any accrued and unpaid interest on, all outstanding Senior
Discount Notes shall ipso facto become and be immediately due and payable
---- -----
without any declaration or other act on the part of any Holder.
(c) To the extent permitted under Section 10.2(b), the Holders of a
majority in aggregate principal amount of the then outstanding Senior Discount
Notes by notice to the Company may rescind any declaration of acceleration of
such Senior Discount Notes and its consequences if (i) the rescission would not
conflict with any judgment or decree, (ii) if all existing Defaults and Events
of Default (other than the nonpayment of principal of, or premium, if any, or
interest on, the Senior Discount Notes which shall have become due by such
declaration)
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<PAGE>
shall have been cured or waived, and (iii) the Company has delivered to the
Holders an Officers' Certificate to the effect of clauses (i) and (ii) above.
(d) In the event of a declaration of acceleration under this Agreement
because an Event of Default set forth in Section 9.1(a)(iii) has occurred and is
continuing, such declaration of acceleration shall be automatically rescinded
and annulled if either (i) the holders of the Indebtedness which is the subject
of such Event of Default have waived such failure to pay at maturity or have
rescinded the acceleration in respect of such Indebtedness within 10 days of
such maturity or declaration of acceleration, as the case may be, and no other
Event of Default has occurred during such 10-day period which has not been cured
or waived, or (ii) such Indebtedness shall have been discharged or the maturity
thereof shall have been extended such that it is not then due and payable, or
the underlying default has been cured within 10 days of such maturity or
declaration of acceleration as the case may be.
9.3 Other Remedies. If an Event of Default occurs and is continuing, the
--------------
Holders may pursue any available remedy to collect the payment of principal of,
or premium, if any, or interest on the Senior Discount Notes or to enforce the
performance of any provision of the Senior Discount Notes or this Agreement. A
delay or omission by any Holder in exercising any right or remedy accruing upon
an Event of Default shall not impair the right or remedy or constitute a waiver
of or acquiescence in the Event of Default. All remedies are cumulative to the
extent permitted by law.
9.4 Waiver of Past Defaults. Subject to the provisions of Sections 9.6
-----------------------
and 10.2 hereof, the Holders of a majority in aggregate principal amount of the
then outstanding Senior Discount Notes by notice to the Company may on behalf of
all Holders waive any existing Default or Event of Default and its consequences
under this Agreement, except a continuing Default or Event of Default in the
payment of the principal of, or premium, if any, or interest on, any Note (which
may only be waived with the consent of each Holder affected). Upon any such
waiver, such Default shall cease to exist, and any Event of Default arising
therefrom shall be deemed to have been cured for every purpose of this
Agreement; provided that no such waiver shall extend to any subsequent or other
--------
Default or impair any right consequent thereon.
9.5 Control by a Majority. The Holders of a majority in principal amount
---------------------
of the Senior Discount Notes may direct the time, method and place of conducting
any proceeding for any remedy available to the Holders.
9.6 Rights of Holders to Receive Payment. Notwithstanding any other
------------------------------------
provision of this Agreement, the right of any Holder of a Senior Discount Note
to receive payment of principal of, and premium, if any, and interest on such
Senior Discount Note, on or after the respective dates expressed in such Senior
Discount Note, or to bring suit for the enforcement of any such payment on or
after such respective dates, shall not be impaired or affected without the
consent of such Holder.
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9.7 Holders May File Proofs of Claim. The Holders may file such proofs of
--------------------------------
claim and other papers or documents as may be necessary or advisable to have the
claims of the Holders allowed in any Insolvency or Liquidation Proceeding or
other judicial proceeding relative to the Company (or any other obligor upon the
Senior Discount Notes), its creditors or its property.
9.8 Undertaking for Costs. In any suit for the enforcement of any right
---------------------
or remedy under this Agreement, a court in its discretion may require the filing
by any party litigant in the suit of an undertaking to pay the costs of the
suit, and the court in its discretion may assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in the suit, having due
regard to the merits and good faith of the claims or defenses made by the party
litigant.
ARTICLE X
AMENDMENTS
10.1 Amendments and Supplements Permitted Without Consent of Holders.
---------------------------------------------------------------
Notwithstanding Section 10.2, the Company may amend or supplement this Agreement
or the Senior Discount Notes without the consent of any Holder to: (i) cure any
ambiguity, defect or inconsistency; provided that such amendment does not
adversely affect the rights of any Holder; (ii) provide for uncertificated
Senior Discount Notes in addition to or in place of certificated Senior Discount
Notes; (iii) provide for the assumption of the Company's obligations to the
Holders in the event of any Disposition involving the Company that is permitted
under Article VIII in which the Company is not the Surviving Person; or (iv)
make any change that would (A) provide any additional rights or benefits to
Holders or (B) not adversely affect the legal rights under this Agreement of any
Holder.
10.2 Amendments and Supplements Requiring Consent of Holders; Other
--------------------------------------------------------------
Consents.
- --------
(a) Except as otherwise provided in Sections 10.1 and 10.2(c), this
Agreement and the Senior Discount Notes may be amended or supplemented with the
written consent of the Holders of at least a majority of the aggregate principal
amount of the then outstanding Senior Discount Notes (including consents
obtained in connection with a tender offer or exchange offer for the Senior
Discount Notes), and any existing Default or Event of Default or compliance with
any provision of this Agreement or the Senior Discount Notes may be waived with
the consent of Holders of at least a majority of the aggregate principal amount
of the then outstanding Senior Discount Notes (including consents obtained in
connection with a tender offer or exchange offer for the Senior Discount Notes).
(b) Without the consent of each Holder affected, no amendment,
supplement or waiver to this Agreement shall: (i) reduce the principal amount
of Senior Discount Notes whose Holders must consent to an amendment, supplement
or waiver; (ii) reduce the principal of or change the fixed maturity of any
Senior Discount Note, or alter the provisions with respect to the redemption of
the Senior Discount Notes in a manner adverse to the Holders; (iii) reduce the
rate of or change the time for payment of interest on any Senior Discount Note;
(iv) waive a
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Default or Event of Default in the payment of principal of, or premium, if any,
or interest on, the Senior Discount Notes (except that Holders of at least a
majority in aggregate principal amount of the then outstanding Senior Discount
Notes may (A) rescind an acceleration of the Senior Discount Notes that resulted
from a non-payment default, and (B) waive the payment default that resulted from
such acceleration); (v) make any Senior Discount Note payable in money other
than that stated in the Senior Discount Notes; (vi) make any change in the
provisions of this Agreement relating to waivers of past Defaults or the rights
of Holders to receive payments of principal of, or premium, if any, or interest
on, the Senior Discount Notes; (vii) waive a redemption payment with respect to
any Senior Discount Note; or (viii) make any change in Section 9.4, Section 9.6
or this sentence.
(c) It shall not be necessary for the consent of the Holders under
this Section 10.2 to approve the particular form of any proposed amendment or
waiver, but it shall be sufficient if such consent approves the substance
thereof. After an amendment, supplement or waiver under this Section 10.2
becomes effective, the Company shall mail to each Holder affected thereby a
notice briefly describing the amendment, supplement or waiver. Any failure of
the Company to mail such notice, or any defect therein, shall not, however, in
any way impair or affect the validity of any such amended or supplemental
Agreement or waiver.
(d) Except as otherwise specified in this Agreement, if any consent or
approval of the Holders is required pursuant to the terms of this Agreement,
such consent or approval shall be deemed to have been given if given by at least
a majority of the aggregate principal amount of then outstanding Senior Discount
Notes.
10.3 Revocation and Effect of Consents.
---------------------------------
(a) Until an amendment, supplement or waiver becomes effective, a
consent to it by a Holder of a Senior Discount Note is a continuing consent by
the Holder and every subsequent holder of a Senior Discount Note or portion of a
Senior Discount Note that evidences the same Indebtedness as the consenting
Holder's Senior Discount Note, even if notation of the consent is not made on
any such Senior Discount Note. However, any such Holder or subsequent Holder
may revoke the consent as to his or her Senior Discount Note or portion of a
Senior Discount Note if the Company receives the notice of revocation before the
date on which the Company mails to the Holders an Officers' Certificate
certifying that the Holders of the requisite principal amount of Senior Discount
Notes have consented (and not theretofore revoked such consent) to the amendment
or waiver.
(b) The Company may, but shall not be obligated to, fix a record date
for the purpose of determining the holders of Senior Discount Notes entitled to
consent to any amendment or waiver. If a record date is fixed, then
notwithstanding the provisions of the immediately preceding paragraph, those
Persons who were holders of Senior Discount Notes at such record date (or their
duly designated proxies), and only those Persons, shall be entitled to consent
to such amendment or waiver or to revoke any consent previously given, whether
or not such Persons
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continue to be holders of Senior Discount Notes after such record date. No
consent shall be valid or effective for more than 90 days after such record
date.
(c) After an amendment or waiver becomes effective it shall bind every
Holder, unless it is of the type described in Section 10.2(b), in which case the
amendment or waiver shall only bind each Holder that consented to it and every
subsequent holder of a Senior Discount Note that evidences the same debt as the
consenting Holder's Senior Discount Note.
10.4 Notation on or Exchange of Senior Discount Notes. The Company may
------------------------------------------------
place an appropriate notation about an amendment, supplement or waiver on any
Senior Discount Note thereafter issued in exchange for any Senior Discount Note
issued as of the date of such amendment, supplement or waiver. The Company in
exchange for all Senior Discount Notes may issue new Senior Discount Notes that
reflect the amendment, supplement or waiver. Failure to make the appropriate
notation or issue a new Senior Discount Note shall not affect the validity and
effect of such amendment, supplement or waiver.
10.5 Board Approval. The Company may not sign an amendment, supplement or
--------------
waiver with respect to this Agreement until the Board of Directors of the
Company approves it.
ARTICLE XI
THE SENIOR DISCOUNT NOTES
11.1 Form and Dating. The Senior Discount Notes shall be substantially in
---------------
the form of Exhibit A hereto, which exhibit is part of this Agreement. The
---------
Senior Discount Notes may have notations, legends or endorsements required by
law, stock exchange rule or usage. The Company shall approve the form of the
Senior Discount Notes and any notation, legend or endorsement on them. Subject
to adjustment as provided in Section 6.6(c) hereof, the Senior Discount Notes
shall be issued, and may be transferred only, in denominations of $100,000 and
integral multiples thereof. The terms and provisions contained in the Senior
Discount Notes shall constitute, and are hereby expressly made, a part of this
Agreement and to the extent applicable, the Company, by its execution and
delivery of this Agreement, expressly agrees to such terms and provisions and to
be bound thereby.
11.2 Execution and Authentication. Two Officers of the Company (each of
----------------------------
whom shall have been duly authorized by all requisite corporate actions) shall
sign each Senior Discount Note for the Company by manual or facsimile signature.
If an Officer whose signature is on a Senior Discount Note no longer holds that
office at the time the Senior Discount Note is issued, the Senior Discount Note
shall nevertheless be valid. The Company's seal shall be reproduced on each
Senior Discount Note.
With respect to the sale and issuance of the Senior Discount Notes, the
Company shall authorize for issuance, upon the execution and delivery of this
Agreement, Senior Discount Notes in an aggregate principal amount up to
$30,000,000. In no case shall the aggregate principal
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amount of outstanding Senior Discount Notes exceed $30,000,000 at any time,
except as provided in Section 11.5.
11.3 Transfer and Exchange.
---------------------
(a) When Senior Discount Notes are presented to the Company with a
request to register a transfer or to exchange them for an equal principal amount
of Senior Discount Notes of other authorized denominations, the Company shall
register the transfer or make the exchange if its requirements for such
transaction are met; provided, however, that any Senior Discount Note presented
-------- -------
or surrendered for registration of transfer or exchange shall be duly endorsed
or accompanied by a written instruction of transfer in form satisfactory to the
Company or duly executed by the Holder of such Senior Discount Note or by its
attorney duly authorized in writing.
(b) The Company shall not be required to issue, register the transfer
of or exchange any Senior Discount Note (i) selected for redemption, in whole or
in part, except the unredeemed portion of any Senior Discount Note being
redeemed in part may be transferred or exchanged, or (ii) during an Offer if
such Senior Discount Note is tendered pursuant to such Offer and not withdrawn.
(c) No service charge shall be made for any registration of transfer
or exchange (except as otherwise expressly permitted herein), but the Company
may require payment of a sum sufficient to cover any transfer tax or similar
governmental charge payable in connection therewith (other than any such
transfer tax or similar governmental charge payable upon exchanges pursuant to
Sections 10.4 or 11.7 which the Company shall pay).
(d) Prior to due presentment for registration of transfer of any
Senior Discount Note, the Company may deem and treat the Person in whose name
any Senior Discount Note is registered as the absolute owner of such Senior
Discount Note (whether or not such Senior Discount Note shall be overdue and
notwithstanding any notation of ownership or other writing on such Senior
Discount Note made by anyone other than the Company) for the purpose of
receiving payment of principal of, and premium, if any, and interest on, such
Senior Discount Note and for all other purposes, and notice to the contrary
shall not affect the Company.
11.4 Replacement Senior Discount Notes. If any mutilated Senior Discount
---------------------------------
Note is surrendered to the Company, or if the Company receives evidence to its
satisfaction of the destruction, loss or theft of any Senior Discount Note, the
Company shall issue a replacement Senior Discount Note and each such replacement
Senior Discount Note shall be an additional obligation of the Company. If the
Company requires, the Holder must supply an indemnity bond that is sufficient in
the judgment of the Company to protect the Company from any loss that any of
them may suffer if a Senior Discount Note is replaced. The Company may charge
for its reasonable expenses in replacing a Senior Discount Note.
11.5 Outstanding Senior Discount Notes. The Senior Discount Notes
---------------------------------
outstanding at any time are all the Senior Discount Notes the Company has issued
except for those it has canceled,
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those delivered to it for cancellation, and those described in this Section 11.5
as not outstanding. If a Senior Discount Note is replaced pursuant to Section
11.4 (other than a mutilated Note surrendered for replacement), it ceases to be
outstanding unless the Company receives proof satisfactory to it that a bona
fide purchaser holds the replaced Senior Discount Note. A mutilated Senior
Discount Note ceases to be outstanding upon surrender of such Senior Discount
Note and replacement thereof pursuant to Section 11.4 hereof. If the entire
principal of, and premium, if any, and accrued interest on, any Senior Discount
Note is considered paid under Section 6.1, it ceases to be outstanding and
interest on it ceases to accrue. Subject to Section 11.6, a Senior Discount Note
does not cease to be outstanding because the Company or any Affiliate of the
Company holds such Senior Discount Note.
11.6 Treasury Senior Discount Notes. In determining whether the Holders of
------------------------------
the required principal amount of Senior Discount Notes have concurred in any
directions, waiver or consent, Senior Discount Notes owned by the Company or any
Subsidiary or Affiliate of the Company shall be considered as though they are
not outstanding. Notwithstanding the foregoing, Senior Discount Notes that the
Company or any Affiliate of the Company offers to purchase or acquires pursuant
to an exchange offer, tender offer or otherwise shall not be deemed to be owned
by the Company or any Affiliate of the Company until legal title to such Senior
Discount Notes passes to the Company or such Affiliate, as the case may be.
11.7 Temporary Senior Discount Notes. Until definitive Senior Discount
-------------------------------
Notes are ready for delivery, the Company may prepare and issue temporary Senior
Discount Notes. Temporary Senior Discount Notes shall be substantially in the
form of definitive Senior Discount Notes but may have variations that the
Company considers appropriate for temporary Senior Discount Notes. Without
unreasonable delay, the Company shall prepare and issue definitive Senior
Discount Notes in exchange for temporary Senior Discount Notes. Until such
exchange, temporary Senior Discount Notes shall be entitled to the same rights,
benefits and privileges as definitive Senior Discount Notes.
11.8 Cancellation. The Company shall cancel any Senior Discount Notes
------------
surrendered to it for registration of transfer, exchange, replacement, payment
(including all Senior Discount Notes called for redemption and all Senior
Discount Notes accepted for payment pursuant to an Offer) or cancellation. The
Company may not issue new Senior Discount Notes to replace any Senior Discount
Notes that have been canceled. If the Company or any Affiliate of the Company
acquires any Senior Discount Notes (other than by redemption pursuant to Section
6.6 or an Offer pursuant to Section 6.7), such acquisition shall not operate as
a redemption or satisfaction of the Indebtedness represented by such Senior
Discount Notes unless and until such Senior Discount Notes are canceled pursuant
to this Section 11.8.
11.9 Defaulted Interest. If the Company defaults in a payment of interest
------------------
on the Senior Discount Notes, it shall pay the defaulted interest in any lawful
manner plus, to the extent lawful, interest payable on the defaulted interest,
to Holders on a subsequent special record date, in each case at the rate
provided in the Senior Discount Notes and Section 7.1. The Company shall fix or
cause to be fixed each such special record date and payment date. At least 15
days before the
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special record date, the Company shall mail a notice that states the special
record date, the related payment date and the amount of interest (including
interest, if any, on the defaulted interest) to be paid.
11.10 Record Date. The record date for purposes of determining the
-----------
identity of Holders of Senior Discount Notes entitled to vote or consent to any
action by vote or consent authorized or permitted under this Agreement shall be
10 days prior to the first solicitation of such vote or consent.
11.11 CUSIP Number. A "CUSIP" number will be printed on the Senior
------------
Discount Notes, and the Company shall use the CUSIP number in notices of
redemption, purchase or exchange as a convenience to Holders, provided that any
such notice may state that no representation is made as to the correctness or
accuracy of the CUSIP number printed in the notice or on the Senior Discount
Notes and that reliance may be placed only on the other identification numbers
printed on the Senior Discount Notes. The Company will promptly notify the
Holders of any change in the CUSIP number.
11.12 Restrictive Legends. Except as otherwise permitted by this Section
-------------------
11.12, each Unit, and each constituent Senior Discount Note and Common Stock
Purchase Warrant certificate (or Common Stock certificate issued on exercise
thereof), issued pursuant to this Agreement shall be stamped or otherwise
imprinted with a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR
PURSUANT TO THE SECURITIES OR "BLUE SKY" LAWS OF ANY STATE. SUCH
SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE ASSIGNED, EXCEPT PURSUANT TO (i) A
REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS
EFFECTIVE UNDER SUCH ACT, (ii) RULE 144 OR RULE 144A UNDER SUCH ACT,
OR (iii) ANY OTHER EXEMPTION FROM REGISTRATION UNDER SUCH ACT
RELATING TO SUCH ACT, PROVIDED THAT, IF REQUESTED BY THE COMPANY, AN
OPINION OF COUNSEL REASONABLY SATISFACTORY IN FORM AND SUBSTANCE IS
FURNISHED TO THE COMPANY THAT AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF SUCH ACT IS AVAILABLE.
IN ADDITION, ANY SALE, ASSIGNMENT, TRANSFER, PLEDGE OR OTHER
DISPOSITION OF THIS SECURITY IS RESTRICTED BY, AND THE RIGHTS OF THE
HOLDER OF SUCH SECURITY ARE SUBJECT TO THE TERMS AND
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CONDITIONS CONTAINED IN, A SECURITIES PURCHASE AGREEMENT DATED AS OF
SEPTEMBER 30, 1997, A COMPLETE AND CORRECT COPY OF THE FORM OF WHICH
WILL BE FURNISHED BY THE ISSUER TO THE HOLDER HEREOF UPON WRITTEN
REQUEST AND WITHOUT CHARGE.
PURSUANT TO PROVISIONS OF THE INTERNAL REVENUE CODE OF 1986 RELATING
TO ORIGINAL ISSUE DISCOUNT AND TREASURY REGULATIONS PUBLISHED
THEREUNDER, THE FOLLOWING INFORMATION IS PROVIDED: (1) THIS SECURITY
IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT IN THE AMOUNT OF
$269.42 PER $1,000 OF FACE AMOUNT; (2) THE ISSUE PRICE OF THIS
SECURITY IS $730.58 PER $1,000 FACE AMOUNT; (3) THE ISSUE DATE OF
THIS SECURITY IS SEPTEMBER 30, 1997; AND (4) THE YIELD TO MATURITY
OF THIS SECURITY IS 16.64%.
The Company shall maintain a copy of this Agreement and any amendments
thereto on file in its principal office, and will make such copy available
during normal business hours for inspection to any party thereto or will provide
such copy to the Purchaser upon its request.
Whenever the legend requirement imposed by this Section 11.12 shall
terminate, as hereinabove provided, the respective holders of Securities for
which such legend requirements have terminated shall be entitled to receive from
the Company, at the Company's expense, Senior Discount Notes or new Common Stock
Purchase Warrant certificates, as applicable, without such legend.
11.13 Notice of Transfer; Opinions of Counsel. The holder of each Senior
---------------------------------------
Discount Note and Common Stock Purchase Warrant certificate (or Common Stock
certificate issued on exercise thereof) bearing the restrictive legend set forth
in Section 11.12 above (a "Restricted Security") agrees in connection with any
transfer of such Restricted Security to give to the Company, upon request (a)
written description of the manner or circumstances of such transfer and/or an
opinion of counsel, which is knowledgeable in securities law matters (including
in-house counsel or regular counsel to such Purchaser or its investment
advisor), in form and substance reasonably satisfactory to the Company, to the
effect that the transfer of such Restricted Security may be effected without
registration of such Restricted Security under the Securities Act. If for any
reason the Company (after having been furnished with the opinion required to be
furnished pursuant to this Section 11.13) shall fail to notify such holder
within 5 days after such holder shall have delivered such description and/or
opinion to the Company that, in its or its counsel's opinion, the transfer may
not be legally effective (the "Illegal Transfer Notice"), such holders shall
thereupon be entitled to consummate the transfer of the Restricted Security as
proposed; provided, however, that such procedure shall not be required, and any
-----------------
such attempted transfer shall not be effective,
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in respect of a proposed transfer which is expressly prohibited by the terms of
this Agreement because it represents an attempt to transfer Senior Discount
Notes in an aggregate principal amount of less than $1,000,000 (subject to
adjustment) in contravention of Section 11.1 hereof. If the holder of the
Restricted Security delivers to the Company an opinion of counsel (including in-
house counsel or regular counsel to such Purchaser or its investment adviser) in
form and substance reasonably satisfactory to the Company that subsequent
transfers of such Restricted Security will not require registration under the
Securities Act, or if the Company does not provide the holders with an Illegal
Transfer Notice as set forth above, the Company will promptly after such
contemplated transfer deliver new certificates for such Restricted Security
which do not bear the Securities Act legend set forth in Section 11.12 above.
The restrictions imposed by this Article XI upon the transferability of any
particular Restricted Security shall cease and terminate when such Restricted
Security has been sold pursuant to an effective registration statement under the
Securities Act or transferred pursuant to Rule 144 promulgated under the
Securities Act. The holder of any Restricted Security as to which such
restrictions shall have terminated shall be entitled to receive from the Company
a new security of the same type but not bearing the restrictive Securities Act
legend set forth in Section 11.12 and not containing any other reference to the
restrictions imposed by this Article XI. Notwithstanding any of the foregoing,
no opinion of counsel will be required to be rendered pursuant to this Section
11.13 with respect to the transfer of any Securities on which the restrictive
legend has been removed in accordance with this Section 11.13. As used in this
Section 11.13, the term "transfer" encompasses any sale, transfer or other
disposition of any Securities referred to herein.
11.14 Security.
--------
(a) In order to secure the due and punctual payment of the principal
of and interest on the Senior Discount Notes when and as the same shall be due
and payable, whether on an Interest Payment Date, at maturity, by acceleration,
call for redemption or otherwise, and interest on the overdue principal and, to
the extent permitted by applicable law, interest, if any, on the Senior Discount
Notes and the performance of all other obligations of the Company to the Holders
under this Agreement and the Senior Discount Notes according to the terms
hereunder or thereunder, the Company covenants and agrees to enter into, and to
cause its Subsidiaries to enter into, (i) as soon as practicable and in any
event no later than December 31, 1997 (the "Security Date") any security
agreements, mortgages, financing statements, pledge agreements or security
documents (the "Security Documents") as Purchaser shall reasonably require or
request in order to grant a security interest to the Holders in the Collateral
other than the Capital Stock of the Gaming Subsidiaries and (ii) as soon as
practicable and in any event no later than March 31, 1998 (the "Pledge Date")
any Security Documents as Purchaser shall reasonably require or request in order
to grant a security interest to the Holders in the Collateral constituting the
Capital Stock of the Gaming Subsidiaries, in each case for the equal and ratable
benefit and security of the Holders without preference, priority or distinction
of any thereof over any other by reason or difference in time of issuance, sale
or otherwise. At the time the Security Documents are executed, the Company will
have full right, power and lawful authority to grant, convey, hypothecate,
assign, mortgage and pledge the property constituting the Collateral, in the
manner and form done, or intended to be done, in this Agreement and the Security
Documents, free and
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clear of all Liens whatsoever, except the Liens created by this Agreement and
the Security Documents and except to the extent otherwise provided herein and
therein, and the Company covenants an agrees to (i) forever warrant and defend
the title to the same against the claims of all Persons whatsoever, (ii)
execute, acknowledge and deliver to the Purchaser such further assignments,
transfers, assurances or other instruments as the Purchaser may reasonably
require or request, and (iii) do or cause to be done all such acts and things as
may be necessary or proper, or as may be reasonably required by the Purchaser,
to assure and confirm to the Purchaser the security interest in the Collateral
contemplated hereby and by the Security Documents, or any part thereof, as from
time to time constituted, so as to render the same available for the security
and benefit of this Agreement and of the Senior Discount Notes secured hereby,
according to the intent and purposes herein expressed. This Agreement and the
Security Documents will create in favor of the Holders a direct and valid first
priority Lien (the "Securityholder Lien") on the property constituting the
Collateral, as set forth herein and therein; provided, however, that the
Holders' Lien shall be subject to a priority Lien of any lender with respect to
any Liens created in connection with the Incurrence of Senior Indebtedness
permitted under Section 7.7(c)(iv) and Liens on assets acquired pursuant to
Section 7.7(c)(v) which Liens are created in connection with such purchase.
(b) The Company will, at its own expense, enter into, register, record
and file or rerecord or refile and renew the Security Documents, this Agreement
and all amendments or supplements thereto in such manner and in such place or
places, if any, as may be required by law in order fully to effectuate, preserve
and protect the Securityholder Lien and the Security Documents and to effectuate
and preserve the Securityholder Lien and all rights of the Holders in the
Collateral.
(c) The Company shall furnish to the Purchaser as promptly as possible
(i) an opinion of Gray, Cary, Ware & Freidenrich (or other counsel satisfactory
to Purchaser), which opinion shall be in form and substance satisfactory to
Purchaser, either (A) stating that, in the opinion of such counsel, this
Agreement and the assignment of the Collateral other than the Capital Stock of
the Gaming Subsidiaries intended to be made by the Security Documents and all
other instruments of further assurance or amendment have been properly recorded,
registered and filed to the extent necessary to make effective the
Securityholder Lien intended to be created by the Security Documents, or (B)
stating that, in the opinion of such counsel, no such action is necessary to
make any Securityholder Lien and assignment effective; and (ii).an opinion of
Gray, Cary, Ware & Freidenrich (or other counsel satisfactory to Purchaser),
which opinion shall be in form and substance satisfactory to Purchaser, either
(A) stating that, in the opinion of such counsel, this Agreement and the
assignment of the Collateral constituting the Capital Stock of the Gaming
Subsidiaries intended to be made by the Security Documents and all other
instruments of further assurance or amendment have been properly recorded,
registered and filed to the extent necessary to make effective the
Securityholder Lien intended to be created by the Security Documents, or (B)
stating that, in the opinion of such counsel, no such action is necessary to
make any Securityholder Lien and assignment effective
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(d) The Company shall be entitled to obtain a full release of all of
the Collateral from the Liens of the Security Documents upon payment in full of
its obligations the Senior Discount Notes.
(e) The Holders of a majority in aggregate principal amount of the
then outstanding Senior Discount Notes shall have power to institute and to
maintain such suits and proceedings as they may deem advisable to prevent any
impairment of the Collateral by any acts which may be unlawful or in violation
of the Security Documents, or this Agreement, and such suits and proceedings as
the Holders of a majority in aggregate principal amount of the then outstanding
Senior Discount Notes may deem expedient to preserve or protect their interests
in the Collateral (including power to institute and maintain suits or
proceedings to restrain the enforcement of or compliance with any legislative or
other governmental enactment, rule or order that may be unconstitutional or
otherwise invalid if the enforcement of, or compliance with, such enactment,
rule or order would impair the security hereunder or be prejudicial to the
interests of the Holders).
(f) In the event that the opinion of counsel contemplated by Section
11.14(c)(i) hereof is not delivered to the Purchaser on or prior to the Security
Date, interest on the Senior Discount Notes will accrue at 2.0% per annum (the
"Additional Interest") in excess of the interest rate then in effect commencing
on January 1, 1998 (unless Additional Interest is otherwise accruing). In the
event that the opinion of counsel contemplated by Section 11.14(c)(ii) hereof is
not delivered to the Purchaser on or prior to the Pledge Date, Additional
Interest will accrue in excess of the interest rate then in effect commencing on
April 1, 1998 (unless Additional Interest is otherwise accruing). In the event
that the Mississippi Gaming Commission has not approved issuance and transfer of
the Warrants (as set forth in Section 13.15(c) on or prior to December 31, 1997,
Additional Interest will accrue in excess of the interest rate then in effect
commencing on January 1, 1998 (unless Additional Interest is otherwise
accruing). The Company shall pay any accrued and unpaid Additional Interest to
the Holders of record (as determined on the fifteenth day of any month during
which Additional Interest is accruing) no later than the last Business Day of
any month during which Additional Interest is accruing. The Additional Interest
shall cease to accrue on any date on which the Company shall deliver to the
Purchaser the relevant opinion of counsel contemplated by Section 11.14(c)
hereof.
ARTICLE XII
INDEMNIFICATION
12.1 Indemnification; Expenses, Etc.
------------------------------
(a) In addition to any and all obligations of the Company to indemnify
the Purchaser hereunder or under the other Transaction Documents, the Company
agrees, without limitation as to time, to indemnify and hold harmless the
Purchaser, its Affiliates, and the employees, officers, directors, and agents of
the Purchaser and its Affiliates (individually, an "Indemnified Party" and,
collectively the "Indemnified Parties") from and against any and all
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losses, claims, damages, liabilities, costs (including the costs of preparation
and attorneys' fees) and expenses (including expenses of investigation)
(collectively, "Losses") incurred or suffered by an Indemnified Party (i) in
connection with or arising out of any breach of any warranty, or the inaccuracy
of any representation, as the case may be, made by the Company, or the failure
of the Company to fulfill any agreement or covenant contained in this Agreement
or (ii) in connection with any proceeding against the Company or any Indemnified
Party brought by any third party arising out of or in connection with this
Agreement or the other Transaction Documents or the transactions contemplated
hereby or thereby, as the case may be, or any action taken in connection
herewith or therewith (or any other document or instrument executed herewith or
pursuant hereto or thereto), whether or not the transactions contemplated by
this Agreement are consummated or whether or not any Indemnified Party is a
formal party to any proceeding; provided, however, that the Company shall not be
-------- -------
liable for any losses resulting from action on the part of any Indemnified Party
which is finally determined in such proceeding to be wrongful or which is an act
of gross negligence, recklessness, or willful misconduct by such Indemnified
Party. The Company agrees promptly to reimburse any Indemnified Party for all
such Losses as they are incurred or suffered by such Indemnified Party.
Except as otherwise provided herein, the Company agrees (for the benefit of
the Purchaser) to pay, and to hold the Purchaser harmless from and against, all
costs and expenses (including, without limitation, attorneys' fees, expenses and
disbursements), if any, incurred in connection with the enforcement against the
Company of this Agreement or any other agreement to which the Company is a party
or any other agreement or instrument furnished pursuant hereto or thereto, as
the case may be, or in connection herewith or therewith in any action in which
the Purchaser shall prevail or in any action in which the Purchaser shall in
good faith assert any provision of any of the foregoing as a defense.
(b) If any Indemnified Party is entitled to indemnification hereunder,
such Indemnified Party shall give prompt notice to the Company of any claim or
of the commencement of any proceeding against the Company or any Indemnified
Party brought by any third party with respect to which such Indemnified Party
seeks indemnification pursuant hereto; provided, however, that the failure so to
-------- -------
notify the Company shall not relieve the Company from any obligation or
liability except to the extent the Company is prejudiced by such failure. The
Company shall have the right, exercisable by giving written notice to an
Indemnified Party promptly after the receipt of written notice from such
Indemnified Party of such claim or proceeding, to assume, at the expense of the
Company, the defense of any such claim or proceeding with counsel reasonably
satisfactory to such Indemnified Party. The Indemnified Party or Parties will
not be subject to any liability for any settlement made without its or their
consent (but such consent will not be unreasonably withheld). The Company shall
not consent to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof the giving by claimant or plaintiff to
such Indemnified Party or Parties of a release, in form and substance
satisfactory to the Indemnified Party or Parties, from all liability in respect
of such claim, litigation or proceeding.
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<PAGE>
(c) In addition to any other obligations of the Company to indemnify
the Purchaser herein or pursuant to any of the Transaction Documents or any
other agreements or documents executed and delivered in connection herewith or
therewith, the Company will pay, and will save the Purchaser and each other
holder of any of the Securities harmless from liability for the payment of, all
expenses arising in connection with such transactions, including, without
limitation: (a) all document production and duplication charges and the
reasonable fees, charges and expenses of Purchaser's Special Counsel (whether
arising before or after the Closing Date), the transactions contemplated hereby
and any subsequent proposed modification of, or proposed consent under, this
Agreement, whether or not such proposed modification shall be effected or such
proposed consent granted; (b) the costs of obtaining a private placement CUSIP
number from Standard & Poor's Corporation for the Securities; (c) the costs and
expenses, including attorneys' fees, incurred by the Purchaser in enforcing any
rights under this Agreement or in responding to any subpoena or other legal
process issued in connection with this Agreement or the transactions
contemplated hereby or thereby or by reason of the Purchaser's having acquired
any of the Securities, including, without limitation, costs and expenses
incurred by the Purchaser in any bankruptcy case; (d) the cost of delivering to
the Purchaser's principal office, insured to its satisfaction, the Units
delivered to the Purchaser hereunder and any Securities delivered to the
Purchaser upon any substitution of Securities pursuant to this Agreement or any
of the Transaction Documents and of the Purchaser's delivering any Securities,
insured to its satisfaction, upon any such substitution; and (e) the reasonable
out-of-pocket expenses incurred by the Purchaser in connection with such
transactions and any such amendments or waivers.
ARTICLE XIII
MISCELLANEOUS
13.1 Survival of Representations and Warranties; Severability. All
--------------------------------------------------------
representations and warranties contained in this Agreement or the Transaction
Documents or made in writing by or on behalf of the Company in connection with
the transactions contemplated by this Agreement or the Transaction Documents
shall survive, for the duration of any statutes of limitation applicable
thereto, the execution and delivery of this Agreement, any investigation at any
time made by the Purchaser or on the Purchaser's behalf, the purchase of the
Units by the Purchaser under this Agreement and any disposition of or payment on
the Units. All statements contained in any certificate or other instrument
delivered to the Purchaser by or on behalf of the Company pursuant to this
Agreement or the Transaction Documents at the Closing shall be deemed
representations and warranties of the Company under this Agreement. Any
provision of this Agreement that is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof or affecting the validity or enforceability of such provisions
in any other jurisdiction.
13.2 Notices, Etc. Any notice or communication under this Agreement shall
------------
be duly given if in writing and delivered in person, mailed by registered or
certified mail, postage prepaid, return receipt requested or delivered by
telecopier or overnight air courier guaranteeing next day delivery to the
other's address:
71
<PAGE>
If to the Company: Silicon Gaming, Inc.
2800 W. Bayshore Road
Palo Alto, California 94303
Attn: President
Fax: (650) 842-9001
Tel: (650) 842-9000
With a copy to: Gray Cary Ware & Freidenrich,
A Professional Corporation
400 Hamilton Avenue
Palo Alto, California 94301-1825
Attn: James M. Koshland, Esq.
Fax: (650) 327-3699
Tel: (650) 328-6561
If to the Purchaser: DDJ Capital Management, LLC
141 Linden Street, Suite S-4
Wellesley, Massachusetts 02181
Attn: General Counsel
Fax: (617) 283-8555
Tel: (617) 283-8500
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Attn: Laura Hodges Taylor, P.C.
Fax: (617) 570-8150
Tel: (617) 570-1536
The Company or the Purchaser by notice to the other may designate
additional or different addresses for subsequent notices or communications.
All notices and communications (other than those sent to Holders) shall be
deemed to have been duly given: at the time delivered by hand, if personally
delivered; the date receipt is acknowledged, if mailed by registered or
certified mail; when answered back, if telecopied; and the next Business Day
after timely delivery to the courier, if sent by overnight air courier
guaranteeing next day delivery.
Any notice or communication to any other Holder shall be mailed by first-
class mail to his or her address shown on the register maintained by the
Company. Failure to mail a notice or communication to a Holder or any defect in
it shall not affect its sufficiency with respect to other Holders. If a notice
or communication is mailed in the manner provided above within the time
prescribed, it is duly given, whether or not the addressee receives it.
72
<PAGE>
13.3 Successors and Assigns. Whenever in this Agreement any of the parties
----------------------
hereto are referred to, such reference shall be deemed to include the successors
and assigns of such party; and all covenants, promises and agreements by or on
behalf of the respective parties which are contained in this Agreement shall
bind and inure to the benefit of the successors and assigns of all other
parties. The terms and provisions of this Agreement and the other Transaction
Documents shall inure to the benefit of and shall be binding upon any assignee
or transferee of the Purchaser, and in the event of such transfer or assignment,
the rights and privileges herein conferred upon the Purchaser shall
automatically extend to and be vested in, and become an obligation of, such
transferee or assignee, all subject to the terms and conditions hereof. In
connection therewith, such transferee or assignee may disclose all documents and
information which such transferee or assignee now or hereafter may have relating
to the Securities, this Agreement, the other Transaction Documents, the Company,
any other Persons referred to herein or any of the business of any of the
foregoing entities, subject to full compliance with Section 13.9 hereof.
13.4 Descriptive Headings. The headings in this Agreement are for purposes
--------------------
of reference only and shall not limit or otherwise affect the meaning hereof.
13.5 Satisfaction Requirement. If any agreement, certificate or other
------------------------
writing, or any action taken or to be taken, is by the terms of this Agreement
required to be satisfactory to the Purchaser or to the holders of a specified
portion of the principal amount of any class of the Securities, the
determination of such satisfaction shall be made by the Purchaser or such
holders, as the case may be, in the sole and exclusive judgment (exercised in
good faith) of the Person or Persons making such determination.
13.6 Governing Law. THIS AGREEMENT AND THE UNITS SHALL BE CONSTRUED AND
-------------
ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY,
THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF
CONFLICT OF LAW.
13.7 Service of Process. The Company (a) hereby irrevocably submits itself
------------------
to the jurisdiction of the state courts of the State of New York and to the
jurisdiction of the United States District Court for the Southern District of
New York for the purpose of any suit, action or other proceeding arising out of
or based upon this Agreement, the Securities, the other Transaction Documents or
the subject matter hereof or thereof brought by the Purchaser or its successors
or assigns and (b) hereby waives, and agrees not to assert, by way of motion, as
a defense, or otherwise, in any such suit, action or proceeding, any claim that
it is not subject personally to the jurisdiction of the above-named courts, that
its property is exempt or immune from attachment or execution, that the suit,
action or proceeding is brought in an inconvenient forum, that the venue of the
suit, action or proceeding is improper or that this Agreement or the subject
matter hereof may not be enforced in or by such court, and (c) hereby waives any
offsets or counterclaims in any such action, suit or proceeding (other than
compulsory counterclaims). The Company hereby consents to service of process by
registered mail at the address to which notices are to be given. The Company
agrees that its submission to jurisdiction and its consent to service of process
by
73
<PAGE>
mail is made for the express benefit of the Purchaser. Final judgment against
the Company in any such action, suit or proceeding shall be conclusive and may
be enforced in other jurisdictions (a) by suit, action or proceeding on the
judgment, a certified or true copy of which shall be conclusive evidence of the
fact and of the amount of any indebtedness or liability of the Company therein
described or (b) in any other manner provided by or pursuant to the laws of such
other jurisdiction; provided, however, that the Purchaser may at its option
-------- -------
bring suit or institute other judicial proceedings against the Company or any of
the Company's assets in any state or federal court of the United States or in
any country or place where the Company or such assets may be found.
13.8 Counterparts. This Agreement may be executed simultaneously in two or
------------
more counterparts, each of which shall be deemed an original, and it shall not
be necessary in making proof of this Agreement to produce or account for more
than one such counterpart.
13.9 Disclosure to Other Persons. The Purchaser agrees to keep
---------------------------
confidential any financial information delivered by the Company pursuant to this
Agreement (other than information that is publicly available) and such other
non-public proprietary information delivered by the Company that is clearly
designated in writing to be or otherwise known by the Purchaser to be
confidential; provided, however, that nothing herein shall prevent the Purchaser
-------- -------
from disclosing such information: (a) to any prospective purchaser who agrees
in writing to be bound by this Section 13.9, (b) to any Affiliate, director,
officer, employee, agent and professional consultant of any prospective
purchasers, in its capacity as such or any actual purchaser, participant,
assignee, or transferee of such Purchaser's or prospective purchaser's rights
under any Unit or any part thereof that agrees in writing to be bound by this
Section 13.9, (c) upon order of any court or administrative agency having
jurisdiction over such party, (d) upon the request or demand of any regulatory
agency or authority having jurisdiction over such party, (e) which has been
publicly disclosed through no breach of Purchaser, (f) which has been obtained
from any Person that is not a party hereto or an Affiliate of any such party,
(g) in connection with the exercise of any remedy hereunder, (h) to the
certified public accountants for the Purchaser or as required in summary
financial or descriptive business information disclosed by the Purchaser that is
an investment fund as part of its regular reports to its investors or partners,
or (i) as otherwise expressly contemplated by this Agreement. In order to
permit the Company to remove or limit any order, request or demand or to obtain
confidential treatment for any disclosure pursuant to (c) or (d) above, the
Purchaser will use reasonable efforts to inform the Company of any such request
for disclosure prior to disclosure. Nothing in this Section 13.9 shall be
construed to create or give rise to any fiduciary duty on the part of the
Purchaser to the Company.
13.10 No Adverse Interpretation of Other Agreements. This Agreement may
---------------------------------------------
not be used to interpret another agreement, indenture, loan or debt agreement of
the Company or any Subsidiary. Any such agreement, indenture, loan or debt
agreement may not be used to interpret this Agreement.
13.11 Waiver of Jury Trial. THE PARTIES HERETO HEREBY WAIVE TRIAL BY JURY
--------------------
IN ANY LITIGATION, SUIT OR PROCEEDING, IN ANY COURT WITH RESPECT
74
<PAGE>
TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT, THE SECURITIES, ANY
OTHER TRANSACTION DOCUMENTS, OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT TO
THIS AGREEMENT, THE SECURITIES OR ANY OTHER TRANSACTION DOCUMENTS, OR THE
VALIDITY, PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF,
PROVIDED, HOWEVER, THAT WITH RESPECT TO ANY COMPULSORY COUNTERCLAIM (I.E., A
- -------- -------
CLAIM BY ONE PARTY AGAINST ANOTHER PARTY WHICH IF NOT BROUGHT IN SUCH ACTION
WOULD RESULT IN THE PARTY BRINGING SUCH CLAIM BEING FOREVER BARRED FROM BRINGING
SUCH CLAIM), THE PARTY BRING SUCH CLAIM SHALL HAVE THE RIGHT TO RAISE SUCH
COMPULSORY COUNTERCLAIM IN ANY SUCH LITIGATION.
13.12 Merger. This Agreement and the Senior Discount Notes constitute the
------
entire agreement of the Company and the Holders and express the entire
understanding of the Company and the Holders with respect to the Senior Discount
Notes.
13.13 Expenses. The Company agrees to pay, on demand, all reasonable out-
--------
of-pocket expenses incurred by the Holders, including, without limitation, legal
and accounting fees, in connection with the collection of amounts upon the
occurrence of an Event of Default hereunder,
75
<PAGE>
and the revision, protection or enforcement of any of the Holder's rights
against the Company under this Agreement and the Senior Discount Notes.
13.14 Cooperation with Gaming Authorities. The Purchaser and each Holder
-----------------------------------
of the Securities agree to cooperate with the Gaming Authorities in connection
with the administration of their regulatory jurisdiction over the Company 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 Purchaser or any Holder of the Securities, or to the Company or
its Gaming Subsidiaries, or to the Transaction Documents.
13.15 Gaming Laws; Requisite Gaming Approvals.
---------------------------------------
(a) Notwithstanding anything to the contrary therein, the Transaction
Documents 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
Transaction Documents, it is understood and agreed 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 Company 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 Transaction Documents, 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 Requisite Gaming Approvals have been obtained, the Gaming
Subsidiaries Stock Restrictions contained in Section 7.9, 7.17, 7.18 and 8.1
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 Company 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 above or in the
transaction documents, the holders of the Units may not separate the Common
Stock Purchase Warrants from the Senior Discount Notes for the purpose of any
transfer of such Common Stock Purchase Warrants until such time as the
Mississippi Gaming Commission has issued its approval for the issuance and
transfer of the Common Stock Purchase Warrants.
76
<PAGE>
(d) Notwithstanding anything to the contrary contained in this subparagraph
(b) above or in the Transaction Documents, it is understood and agreed that the
provisions of paragraph (b) shall not apply to the Company'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
Pledged Securities Requisite Gaming Approvals contemplated therein.
13.16 Nevada Gaming Collateral. Subject to any release of any Capital
------------------------
Stock of Silicon Gaming-Nevada, Inc., pledged pursuant to the relevant pledge
agreement and as contemplated by any of the Transaction Documents, the
collateral agent shall, to the extent required by the Nevada Gaming Laws, retain
possession of all pledged collateral consisting of the Capital Stock of Silicon
Gaming-Nevada, Inc., within the State of Nevada at a location designated to the
Nevada State Gaming Control Board.
13.17 Assistance with Gaming Approvals. The Company and its Gaming
--------------------------------
Subsidiaries agree to assist the Purchaser and any Holder in obtaining all
approvals of any Gaming Authority or other Governmental Body that are required
by law, including, without limitation, the Gaming Laws, for or in connection
with any action or transaction contemplated by the Transaction Documents and, at
the request of any Holder after and during an Event of Default, to prepare, sign
and file with the appropriate Gaming Authorities the transferor's portion of any
application for consent to the transfer of control thereof necessary or
appropriate under the Gaming Laws for approval of any sale or transfer of any
applicable pledged collateral consisting of the Capital Stock of the Gaming
Subsidiaries pursuant to the exercise of the Holder's remedies hereunder and
under the Transaction Documents.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
77
<PAGE>
SECURITIES PURCHASE AGREEMENT
UNITS OF SENIOR DISCOUNT NOTES AND COMMON STOCK PURCHASE WARRANTS
COMPANY SIGNATURE PAGE
If this Agreement is satisfactory, please so indicate by signing the
applicable attached signature page of this Agreement and delivering such
counterpart to the Company whereupon this Agreement will become binding among
the parties hereto in accordance with its terms.
SILICON GAMING, INC.,
a California corporation
By: _____________________________________________
Name: Thomas E. Carlson
Title: Vice President and Chief Financial Officer
<PAGE>
SECURITIES PURCHASE AGREEMENT FOR UNITS OF SENIOR DISCOUNT NOTES
AND COMMON STOCK PURCHASE WARRANTS
PURCHASER SIGNATURE PAGE
Accepted and agreed as of the Aggregate Number and
date first written above: Purchase Price of Units
to be Purchased:
B III CAPITAL PARTNERS, L.P., Number of Units: 300, $25,000,000,
a Delaware limited partnership
Comprised of:
By: DDJ Capital III, LLC, Aggregate principal
its General Partner amount of Senior Discount Notes
By: DDJ Capital Management, LLC, to be Purchased: $30,000,000
its Manager
Aggregate Number of
Shares of Common Stock
Purchase Warrants to
By: ____________________________ be Purchased: 375,000
Name:
Title: Member Purchase Price: $25,000,000
Address: c/o DDJ Capital Management, LLC
Attn: Wendy Schnipper Clayton
141 Linden Street, Suite 4
Wellesley, MA 02181
Telephone: (617) 283-8500
Telecopy: (617) 283-8555
Nominee (name in which the Units are to be registered,
if different than name of Purchaser):
Goldman Sachs & Company FFC: BIII Capital Partners, L.P.
- --------------------------------------------------------
(Nominee's Name)
Tax I.D. Number: __________________
(if acquired in the name of a nominee, the taxpayer I.D.
number of such nominee)
<PAGE>
Designated Bank:
_______________________________ __________________________________
Name ABA #
_______________________________ __________________________________
Street Address
_______________________________ __________________________________
Account Number Attention
<PAGE>
[FORM OF NOTE] EXHIBIT A
---------
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, NOR PURSUANT TO THE SECURITIES OR "BLUE
SKY" LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED,
PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED, EXCEPT PURSUANT TO (i) A
REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER
SUCH ACT, (ii) RULE 144 OR RULE 144A UNDER SUCH ACT, OR (iii) ANY OTHER
EXEMPTION FROM REGISTRATION UNDER SUCH ACT RELATING TO SUCH ACT, PROVIDED THAT,
IF REQUESTED BY THE COMPANY, AN OPINION OF COUNSEL REASONABLY SATISFACTORY IN
FORM AND SUBSTANCE IS FURNISHED TO THE COMPANY THAT AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT IS AVAILABLE.
IN ADDITION, ANY SALE, ASSIGNMENT, TRANSFER, PLEDGE OR OTHER DISPOSITION OF THIS
SECURITY IS RESTRICTED BY, AND THE RIGHTS OF THE HOLDER OF SUCH SECURITY ARE
SUBJECT TO THE TERMS AND CONDITIONS CONTAINED IN, A SECURITIES PURCHASE
AGREEMENT DATED AS OF SEPTEMBER 30, 1997, A COMPLETE AND CORRECT COPY OF THE
FORM OF WHICH WILL BE FURNISHED BY THE ISSUER TO THE HOLDER HEREOF UPON WRITTEN
REQUEST AND WITHOUT CHARGE. SUCH AGREEMENT, AMONG OTHER THINGS, RESTRICTS THE
DETACHMENT OF THIS SENIOR DISCOUNT NOTE FROM THE COMMON STOCK PURCHASE WARRANTS
ATTACHED HERETO.
PURSUANT TO PROVISIONS OF THE INTERNAL REVENUE CODE OF 1986 RELATING TO ORIGINAL
ISSUE DISCOUNT AND TREASURY REGULATIONS PUBLISHED THEREUNDER, THE FOLLOWING
INFORMATION IS PROVIDED: (1) THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE
DISCOUNT IN THE AMOUNT OF $ 269.42 PER $1,000 OF FACE AMOUNT; (2) THE ISSUE
PRICE OF THIS SECURITY IS $ 730.58 PER $1,000 FACE AMOUNT; (3) THE ISSUE DATE OF
THIS SECURITY IS SEPTEMBER 30, 1997; AND (4) THE YIELD TO MATURITY OF THIS
SECURITY IS 16.64 %.
SILICON GAMING, INC.
SENIOR DISCOUNT NOTE DUE SEPTEMBER 30, 2002
No. 1 $30,000,000
Silicon Gaming, Inc., a California corporation (hereinafter called the
"Company", which term includes any successor entity under the Agreement
hereinafter referred to), for value received, hereby promises to pay to GOLDMAN
SACHS & COMPANY FFC: BIII CAPITAL PARTNERS, L.P., a Delaware limited
partnership, or registered assigns, the principal sum of Thirty Million Dollars
on September 30, 2002.
Interest Payment Dates: July 1 and January 1 commencing July 1, 1999
Record Dates: June 15 and December 15
Reference is hereby made to the further provisions of this Senior Discount
Note set forth on the following five (5) pages, which further provisions shall
for all purposes have the same effect as if set forth at this place.
IN WITNESS WHEREOF, the Company has caused this Senior Discount Note to be
signed manually or by facsimile by its duly authorized officers and a facsimile
of its seal to be affixed hereto or imprinted hereto.
SILICON GAMING, INC.
By: _____________________________________
Name:
Title:
A-1
<PAGE>
Senior Discount Note due September 30, 2002
1. Interest. Silicon Gaming, Inc. (the "Company") promises to pay interest on
--------
the principal amount of this Senior Discount Note at the rate and in the manner
specified below. Interest on this Senior Discount Note will accrue at 12.5% per
annum from January 1, 1999 until maturity and will be payable semiannually in
cash on January 1 and July 1 of each year beginning on July 1, 1999, or if any
such day is not a Business Day on the next succeeding Business Day (each an
"Interest Payment Date"), to the holder of record on the immediately preceding
June 15, or December 15, as the case may be. Interest on this Senior Discount
Note will accrue from the most recent date on which interest has been paid or,
if no interest has been paid, from January 1, 1999, provided that the first
Interest Payment Date shall be July 1, 1999. The Company shall pay interest on
overdue principal and premium, if any, from time to time on demand at the rate
of 1.5% per annum in excess of the interest rate then in effect and shall pay
interest on overdue installments of interest (without regard to any applicable
grace periods) from time to time on demand at the same rate to the extent
lawful. The Company shall also pay interest from time to time after March 31,
1998 at the rate of 2.0% per annum in excess of the interest rate then in effect
if the Company shall fail to provide adequate evidence of the grant of a
security interest to the Holders. Interest will be computed on the basis of a
360-day year of twelve 30-day months.
The Accreted Value of this Senior Discount Note shall accrete, for purposes
of calculating any Redemption Price or Purchase Price and for all other purposes
in determining Accreted Value, in the period during which this Senior Discount
Note remains outstanding, at 16.64% per annum from the date hereof until
September 30, 2002 on a semi-annual basis compounding on each March 31 and
September 30, using a 360-day year comprised of twelve 30-day months, commencing
on the date of issuance of this Senior Discount Note, and shall cease to accrete
upon payment in full on the earliest of September 30, 2002, any Redemption Date
or any Purchase Date.
2. Method of Payment. The Company will pay interest on this Senior
-----------------
Discount Note (except defaulted interest) to the Person who is the registered
Holder of this Senior Discount Note at the close of business on the record date
for the next Interest Payment Date even if such Senior Discount Note is canceled
after such record date and on or before such Interest Payment Date. Holders
must surrender Senior Discount Notes to the Company to collect principal
payments on such Senior Discount Notes. The Company will pay principal,
premium, if any, and interest in money of the United States that at the time of
payment is legal tender for payment of public and private debts. However, the
Company may pay principal, premium, if any, and interest by wire transfer of
Federal funds, or interest by check payable in such money, and any such check
may be mailed to a Holder's registered address.
3. Securities Purchase Agreement. The Company issued the Senior Discount
-----------------------------
Notes pursuant to a Securities Purchase Agreement, dated as of September 30,
1997 (the "Agreement"), by and between the Company, as issuer of the Senior
Discount Notes, and the Purchaser named therein. The terms of the Senior
Discount Notes are those stated in the Agreement and herein. The Senior
Discount Notes are subject to, and qualified by, all such terms, certain of
which are summarized herein, and Holders are referred to the Agreement (all
capitalized terms not defined herein shall have the meanings assigned them in
the Agreement). The Senior Discount Notes are general obligations of the
Company limited to $30,000,000 in aggregate principal amount. Reference is
hereby made to the Agreement for a description of the properties and assets in
which a security interest has been granted, the nature of the security, the
terms and conditions upon which the security interests were granted.
4. Redemption Provisions. The Senior Discount Notes will be subject to
---------------------
redemption, in whole or from time to time in part (in multiples of $1,000 of
principal amount) at the option of the Company at the price per $1,000 principal
amount at maturity with respect to any Redemption Date appearing opposite the
period in which such Redemption Date occurs, plus any accrued and unpaid
interest to the Redemption Date:
Period Price per $1,000 Principal Amount
------ ---------------------------------
A-2
<PAGE>
October 1997 $833.33
November 1997 $837.19
December 1997 $848.49
January 1998 $859.78
February 1998 $871.08
March 1998 $882.38
April 1998 $894.61
May 1998 $906.85
June 1998 $919.09
July 1998 $931.32
August 1998 $943.56
September 1998 $955.79
October 1998 $969.05
November 1998 $982.30
December 1998 $995.56
January 1999 $997.20
February 1999 $998.84
After February 28, 1999 $1,000.00
Notwithstanding the foregoing, if any Gaming Authority requires that any
Purchaser, Holder or beneficial owner of the Senior Discount Notes must be
licensed, qualified or found suitable under any Gaming Laws and such Purchaser,
Holder or beneficial owner of the Senior Discount Notes fails to apply for a
license, qualification or finding of suitability within 30 days after being
requested to do so by any Gaming Authority (or such lesser period that may be
required by such Gaming Authority), or, if any Purchaser, Holder or beneficial
owner of the Senior Discount Notes is not so licensed, qualified or found
suitable, the Purchaser, Holder or beneficial owner of the Senior Discount Notes
shall comply with any order by such Gaming Authorities requiring that such
Person dispose of any Securities held by it; provide, however, that in the event
the Purchaser, Holder or beneficial owner of the Senior Discount Notes does not
comply with such order within the required period, the Company shall have the
option as its sole remedy with respect to the Senior Discount Notes to call for
redemption the Senior Discount Notes held by such Purchaser, Holder or
beneficial owner at a price equal to the Accreted Value thereof on the
Redemption Date, plus accrued and unpaid interest to the Redemption Date.
Notwithstanding the foregoing, $5.0 million in aggregate principal amount
of Senior Discount Notes originally issued under the Agreement shall be redeemed
by the Company on the date which is four years following the date of original
issuance thereof, at a redemption price equal to 100% of the principal amount
thereof, together with accrued and unpaid interest to the date of redemption,
subject to certain conditions set forth in the Agreement.
In addition, if not previously redeemed, the Senior Discount Notes will be
subject to redemption (a "Change of Control Redemption") at the option of the
Holders, in whole or in part, at any time within 30 days after the completion of
an Offer made as a result of a Change of Control, at a redemption price equal to
101% of the principal amount thereof, plus accrued and unpaid interest to the
Purchase Date, subject to certain conditions set forth in the Agreement.
In addition, the Senior Discount Notes will be subject to redemption
("Securities Sale Redemption") at the option of the Holders, in whole or in
part, following a Securities Sale or a Mezzanine Debt Financing, from the Net
Cash Proceeds of such Securities Sale or Mezzanine Debt Financing; provided that
an Offer to make a Securities Sale Redemption shall be made by the Company only
if, and to the extent that, the aggregate amount of Net Cash Proceeds from all
such Securities Sales or Mezzanine Debt Financings occurring on or after the
date hereof exceed $40,000,000. In the event of a Securities Sale Redemption,
the Senior Discount Notes will be redeemable at a price per $1,000 principal
amount equal to the price set forth in Section 4 hereof opposite the period in
which the Purchase Date occurs, plus any accrued and unpaid interest to the
Purchase Date.
A-3
<PAGE>
5. Mandatory Offers. (a) Within 10 days after any Change of Control
----------------
Trigger Date, any Repayment Trigger Date or any Excess Proceeds Date, the
Company shall mail a notice to each Holder stating a number of items as set
forth in Section 6.7 of the Agreement.
(a) Holders may tender all or, subject to Section 8 below, any portion
of their Senior Discount Notes in an Offer by completing the form below entitled
"OPTION OF HOLDER TO ELECT PURCHASE."
(b) Promptly after consummation of an Offer, (i) the Company shall
mail to each Holder of Senior Discount Notes or portions thereof accepted for
payment an amount equal to the purchase price for, plus any accrued and unpaid
interest on, such Senior Discount Notes, (ii) with respect to any tendered
Senior Discount Note not accepted for payment in whole or in part, the Company
shall return such Senior Discount Note to the Holder thereof, and (iii) with
respect to any Senior Discount Note accepted for payment in part, the Company
shall authenticate and mail to each such Holder a new Senior Discount Note equal
in principal amount to the unpurchased portion of the tendered Senior Discount
Note.
(c) The Company will (i) publicly announce the results of the Offer to
Holders on or as soon as practicable after the Purchase Date, and (ii) comply
with Rule 14e-1 under the Securities Exchange Act of 1934, as amended, and any
other securities laws and regulations to the extent applicable to any Offer.
6. Notice of Redemption or Purchase. At least 30 days but not more than
--------------------------------
60 days before any Redemption Date the Company shall mail by first class mail a
notice of redemption to each Holder of Senior Discount Notes or portions thereof
that are to be redeemed.
7. Senior Discount Notes to be Redeemed or Purchased. The Senior
-------------------------------------------------
Discount Notes may be redeemed or purchased in part, but only in whole multiples
of $1,000 unless all Senior Discount Notes held by a Holder are to be redeemed
or purchased. On or after any date on which Senior Discount Notes are redeemed
or purchased, interest ceases to accrue on the Senior Discount Notes or portions
thereof called for redemption or accepted for purchase on such date.
8. Denominations, Transfer, Exchange. The Senior Discount Notes are in
---------------------------------
registered form without coupons in denominations of $100,000 and integral
multiples thereof (subject to adjustment as provided in the Agreement). The
transfer of Senior Discount Notes may be registered and Senior Discount Notes
may be exchanged as provided in the Agreement. Holders seeking to transfer or
exchange their Senior Discount Notes may be required, among other things, to
furnish appropriate endorsements and transfer documents and to pay any taxes and
fees required by law or permitted by the Agreement. The Company need not
exchange or register the transfer of any Senior Discount Note or portion of a
Senior Discount Note selected for redemption or tendered pursuant to an Offer.
9. Persons Deemed Owners. The registered holder of a Senior Discount
---------------------
Note may be treated as its owner for all purposes.
10. Amendments and Waivers.
----------------------
(a) Subject to certain exceptions, the Agreement and the Senior
Discount Notes may be amended or supplemented with the written consent of the
Holders of at least a majority in aggregate principal amount of the then
outstanding Senior Discount Notes, and any existing Default or Event of Default
or compliance with any provision of the Agreement or the Senior Discount Notes
may be waived with the consent of the Holders of at least a majority in
principal amount of the then outstanding Senior Discount Notes.
(b) Notwithstanding Section 10(a) above, the Company may amend or
supplement the Agreement or the Senior Discount Notes without the consent of any
Holder to: cure any ambiguity, defect or inconsistency; provide for
uncertificated Senior Discount Notes in addition to or in place of certificated
Senior Discount Notes; provide for the assumption of the Company's obligations
to the Holders in the event
A-4
<PAGE>
of any Disposition involving the Company that is permitted under Article VIII of
the Agreement and in which the Company is not the Surviving Person; or make any
change that would provide any additional rights or benefits to Holders or not
adversely affect the legal rights under the Agreement of any Holder.
(c) Certain provisions of the Agreement cannot be amended,
supplemented or waived without the consent of each Holder of Senior Discount
Notes affected.
11. Defaults and Remedies. Events of Default include: (i) the Company's
---------------------
failure to make any payment in respect of (A) the principal of or premium, if
any, on the Senior Discount Notes as the same shall become due, whether at
maturity, upon acceleration, redemption, or otherwise, or (B) interest on or in
respect of any Senior Discount Notes as the same shall become due and such
failure shall continue for a period of 15 Business Days; (ii) failure by the
Company for 30 days after receipt of notice from the Holders of at least 25% of
the outstanding Senior Discount Notes to comply with any other provisions of the
Agreement or the Senior Discount Notes; (iii) default under any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the Company or any
of its Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Subsidiaries) whether such Indebtedness now exists, or is created after
the date hereof, if (A) such default results in the acceleration of such
Indebtedness prior to its express maturity or shall constitute a default in the
payment of such Indebtedness at final maturity of such Indebtedness, and (B) the
principal amount of any such Indebtedness that has been accelerated or not paid
at maturity, when added to the aggregate principal amount of all other such
Indebtedness that has been accelerated or not paid at maturity, exceeds
$1,000,000; (iv) failure by the Company or any of its Subsidiaries to pay final
judgments, the uninsured portion of which exceeds $1,000,000, which judgments
are not paid, discharged, bonded or stayed for a period of 60 days after the
date of entry thereof; (v) if under any Bankruptcy Law, (A) the Company or any
Subsidiary commences a voluntary case, consents to the entry of an order for
relief against it in an involuntary case, consents to the appointment of a
Custodian of it or for all or substantially all of its property, or makes a
general assignment for the benefit of its creditors, or (B) a court of competent
jurisdiction enters an order or decree, and such order or decree remains
unstayed and in effect for 90 days, that is for relief against the Company or
any Subsidiary in an involuntary case, appoints a Custodian of the Company or
any Subsidiary or for all or substantially all of the Property of the Company or
any Subsidiary, or orders the liquidation of the Company or any Subsidiary; (vi)
if the Company by September 30, 1998 has not delivered to the Purchaser both of
the opinions of counsel contemplated by Section 11.14(c) of the Agreement; and
(vi) any of the Transactions Documents shall cease for any reason, to be in full
force and effect, in any material respect, except as a result of an amendment,
waiver or termination thereof as contemplated or permitted hereby, or the
Company shall so assert in writing.
12. No Recourse Against Others. No director, officer, employee,
--------------------------
incorporator or shareholder of the Company shall have any liability for any
obligation of the Company under the Agreement or the Senior Discount Notes or
for any claim based on, in respect of, or by reason of, any such obligation or
the creation of any such obligation. Each Holder by accepting a Senior Discount
Note waives and releases such Persons from all such liability, and such waiver
and release is part of the consideration for the Issuance of the Senior Discount
Notes.
13. Successor Substituted. Upon the merger, consolidation or other
---------------------
business combination involving the Company or upon the sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
the Company's properties and assets, the Surviving Person (if other than the
Company) resulting from such Disposition shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under the Agreement
with the same effect as if such Surviving Person had been named as the Company
in the Agreement.
14. Governing Law. This Senior Discount Note shall be governed by and
-------------
construed in accordance with the internal laws of the State of New York, without
regard to the conflict of laws provisions thereof.
15. CUSIP Numbers. The Company will use reasonable efforts to cause CUSIP
-------------
numbers to be printed on the Senior Discount Notes and to use CUSIP numbers in
notices of redemption as a convenience
A-5
<PAGE>
to Holders. No representation is made as to the accuracy of such numbers either
as printed on the Senior Discount Notes or as contained in any notice of
redemption and reliance may be placed only on the other identification numbers
printed on the securities.
16. Copies of Agreement. The Company will furnish to any Holder upon
-------------------
written request and without charge a copy of the Agreement, which has in it the
text of this Senior Discount Note. Requests may be made to: Silicon Gaming,
Inc., 2800 W. Bayshore Road, Palo Alto, California 94303, Attn: President.
17. Certain Information Obligations. To the extent permitted by
-------------------------------
applicable law or regulation, whether or not the Company is subject to the
requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file
with the Commission all quarterly and annual reports and such other information,
documents or other reports (or copies of such portions of any of the foregoing
as the Commission may by rules and regulations prescribe) required to be filed
pursuant to such provisions of the Exchange Act. At any time when the Company
is not permitted by applicable law or regulations to file the aforementioned
reports, the Company shall mail to the Holders, within five days after it would
have been required to file the same with the Commission, all information that
the Company would have had to provide to the Commission if the Company had been
subject to Section 13 or 15(d) of the Exchange Act. Also, at any time when the
Company is not permitted by applicable law or regulations to file the
aforementioned reports, upon the request of a Holder of a Senior Discount Note,
the Company will promptly furnish or cause to be furnished such information as
is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any
successor provision thereto) to such Holder or to a prospective purchaser of
such Senior Discount Note, as the case may be, in order to permit compliance by
such Holder with Rule 144A under the Securities Act.
A-6
<PAGE>
ASSIGNMENT FORM
To assign this Senior Discount Note, fill in the form below:
FOR VALUE RECEIVED the undersigned hereby sell(s), assign(s) and transfer(s)
unto
________________________________________________________________________________
(Please insert social security or other identifying number of assignee)
at _____________________________________________________________________________
(Please print or typewrite name and address including postal zip code of
assignee)
________________________________________________________________________________
the within Senior Discount Note and all rights thereunder, hereby irrevocably
constituting and appointing ________________________________________ to transfer
said Senior Discount Note on the books of the Company. The agent may substitute
another to act for him.
Date:________________________
Your Signature:_______________________
(Sign exactly as your name appears on
the other side of this Senior Discount
Note)
Signature Guarantee: __________________________
A-7
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you elect to have this Senior Discount Note purchased by the Company
pursuant to Section 7.12 of the Agreement, check the box: [_]
If you elect to have this Senior Discount Note purchased by the Company
pursuant to Section 7.13 of the Agreement, check the box: [_]
If you elect to have this Senior Discount Note purchased by the Company
pursuant to Section 7.18 of the Agreement, check the box: [_]
If you elect to have only part of this Senior Discount Note purchased by
the Company pursuant to Section 7.12, 7.13 or 7.18 of the Agreement, state the
amount (multiples of $1,000 only):
$_________________________
Date ______________________ Your Signature: __________________________________
(Sign exactly as your name appears
on the other side of this Senior
Discount Note)
Signature Guarantee: _________________________
<PAGE>
EXHIBIT 4.2
CUSIP 827054 AC 1
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, NOR PURSUANT TO THE SECURITIES OR "BLUE
SKY" LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED,
PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED, EXCEPT PURSUANT TO (i) A
REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER
SUCH ACT, (ii) RULE 144 OR RULE 144A UNDER SUCH ACT, OR (iii) ANY OTHER
EXEMPTION FROM REGISTRATION UNDER SUCH ACT RELATING TO SUCH ACT, PROVIDED THAT,
IF REQUESTED BY THE COMPANY, AN OPINION OF COUNSEL REASONABLY SATISFACTORY IN
FORM AND SUBSTANCE IS FURNISHED TO THE COMPANY THAT AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT IS AVAILABLE.
IN ADDITION, ANY SALE, ASSIGNMENT, TRANSFER, PLEDGE OR OTHER DISPOSITION OF THIS
SECURITY IS RESTRICTED BY, AND THE RIGHTS OF THE HOLDER OF SUCH SECURITY ARE
SUBJECT TO THE TERMS AND CONDITIONS CONTAINED IN, A SECURITIES PURCHASE
AGREEMENT DATED AS OF SEPTEMBER 30, 1997, A COMPLETE AND CORRECT COPY OF THE
FORM OF WHICH WILL BE FURNISHED BY THE ISSUER TO THE HOLDER HEREOF UPON WRITTEN
REQUEST AND WITHOUT CHARGE. SUCH AGREEMENT, AMONG OTHER THINGS, RESTRICTS THE
DETACHMENT OF THIS SENIOR DISCOUNT NOTE FROM THE COMMON STOCK PURCHASE WARRANTS
ATTACHED HERETO.
PURSUANT TO PROVISIONS OF THE INTERNAL REVENUE CODE OF 1986 RELATING TO ORIGINAL
ISSUE DISCOUNT AND TREASURY REGULATIONS PUBLISHED THEREUNDER, THE FOLLOWING
INFORMATION IS PROVIDED: (1) THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE
DISCOUNT IN THE AMOUNT OF $ 269.42 PER $1,000 OF FACE AMOUNT; (2) THE ISSUE
PRICE OF THIS SECURITY IS $ 730.58 PER $1,000 FACE AMOUNT; (3) THE ISSUE DATE OF
THIS SECURITY IS SEPTEMBER 30, 1997; AND (4) THE YIELD TO MATURITY OF THIS
SECURITY IS 16.64 %.
SILICON GAMING, INC.
SENIOR DISCOUNT NOTE DUE SEPTEMBER 30, 2002
No. 1 $30,000,000
Silicon Gaming, Inc., a California corporation (hereinafter called the
"Company", which term includes any successor entity under the Agreement
hereinafter referred to), for value received, hereby promises to pay to GOLDMAN
SACHS & COMPANY FFC: BIII CAPITAL PARTNERS, L.P., a Delaware limited
partnership, or registered assigns, the principal sum of Thirty Million Dollars
on September 30, 2002.
Interest Payment Dates: July 1 and January 1 commencing July 1, 1999
Record Dates: June 15 and December 15
Reference is hereby made to the further provisions of this Senior Discount
Note set forth on the following five (5) pages, which further provisions shall
for all purposes have the same effect as if set forth at this place.
IN WITNESS WHEREOF, the Company has caused this Senior Discount Note to be
signed manually or by facsimile by its duly authorized officers and a facsimile
of its seal to be affixed hereto or imprinted hereto.
SILICON GAMING, INC.
By:
Name:
Title:
<PAGE>
CUSIP 827054 AC 1
Senior Discount Note due September 30, 2002
1. Interest. Silicon Gaming, Inc. (the "Company") promises to pay
--------
interest on the principal amount of this Senior Discount Note at the rate and in
the manner specified below. Interest on this Senior Discount Note will accrue
at 12.5% per annum from January 1, 1999 until maturity and will be payable
semiannually in cash on January 1 and July 1 of each year beginning on July 1,
1999, or if any such day is not a Business Day on the next succeeding Business
Day (each an "Interest Payment Date"), to the holder of record on the
immediately preceding June 15, or December 15, as the case may be. Interest on
this Senior Discount Note will accrue from the most recent date on which
interest has been paid or, if no interest has been paid, from January 1, 1999,
provided that the first Interest Payment Date shall be July 1, 1999. The
Company shall pay interest on overdue principal and premium, if any, from time
to time on demand at the rate of 1.5% per annum in excess of the interest rate
then in effect and shall pay interest on overdue installments of interest
(without regard to any applicable grace periods) from time to time on demand at
the same rate to the extent lawful. The Company shall also pay interest from
time to time after March 31, 1998 at the rate of 2.0% per annum in excess of the
interest rate then in effect if the Company shall fail to provide adequate
evidence of the grant of a security interest to the Holders. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
The Accreted Value of this Senior Discount Note shall accrete, for purposes
of calculating any Redemption Price or Purchase Price and for all other purposes
in determining Accreted Value, in the period during which this Senior Discount
Note remains outstanding, at 16.64% per annum from the date hereof until
September 30, 2002 on a semi-annual basis compounding on each March 31 and
September 30, using a 360-day year comprised of twelve 30-day months, commencing
on the date of issuance of this Senior Discount Note, and shall cease to accrete
upon payment in full on the earliest of September 30, 2002, any Redemption Date
or any Purchase Date.
2. Method of Payment. The Company will pay interest on this Senior
-----------------
Discount Note (except defaulted interest) to the Person who is the registered
Holder of this Senior Discount Note at the close of business on the record date
for the next Interest Payment Date even if such Senior Discount Note is canceled
after such record date and on or before such Interest Payment Date. Holders
must surrender Senior Discount Notes to the Company to collect principal
payments on such Senior Discount Notes. The Company will pay principal,
premium, if any, and interest in money of the United States that at the time of
payment is legal tender for payment of public and private debts. However, the
Company may pay principal, premium, if any, and interest by wire transfer of
Federal funds, or interest by check payable in such money, and any such check
may be mailed to a Holder's registered address.
3. Securities Purchase Agreement. The Company issued the Senior Discount
-----------------------------
Notes pursuant to a Securities Purchase Agreement, dated as of September 30,
1997 (the "Agreement"), by and between the Company, as issuer of the Senior
Discount Notes, and the Purchaser named therein. The terms of the Senior
Discount Notes are those stated in the Agreement and herein. The Senior
Discount Notes are subject to, and qualified by, all such terms, certain of
which are summarized herein, and Holders are referred to the Agreement (all
capitalized terms not defined herein shall have the meanings assigned them in
the Agreement). The Senior Discount Notes are general obligations of the
Company limited to $30,000,000 in aggregate principal amount. Reference is
hereby made to the Agreement for a description of the properties and assets in
which a security interest has been granted, the nature of the security, the
terms and conditions upon which the security interests were granted.
4. Redemption Provisions. The Senior Discount Notes will be subject to
---------------------
redemption, in whole or from time to time in part (in multiples of $1,000 of
principal amount) at the option of the Company at the price per $1,000 principal
amount at maturity with respect to any Redemption Date appearing opposite the
period in which such Redemption Date occurs, plus any accrued and unpaid
interest to the Redemption Date:
<PAGE>
CUSIP 827054 AC 1
<TABLE>
<CAPTION>
Period Price per $1,000 Principal Amount
------ ---------------------------------
<S> <C>
October 1997 $ 833.33
November 1997 $ 837.19
December 1997 $ 848.49
January 1998 $ 859.78
February 1998 $ 871.08
March 1998 $ 882.38
April 1998 $ 894.61
May 1998 $ 906.85
June 1998 $ 919.09
July 1998 $ 931.32
August 1998 $ 943.56
September 1998 $ 955.79
October 1998 $ 969.05
November 1998 $ 982.30
December 1998 $ 995.56
January 1999 $ 997.20
February 1999 $ 998.84
After February 28, 1999 $1,000.00
</TABLE>
Notwithstanding the foregoing, if any Gaming Authority requires that any
Purchaser, Holder or beneficial owner of the Senior Discount Notes must be
licensed, qualified or found suitable under any Gaming Laws and such Purchaser,
Holder or beneficial owner of the Senior Discount Notes fails to apply for a
license, qualification or finding of suitability within 30 days after being
requested to do so by any Gaming Authority (or such lesser period that may be
required by such Gaming Authority), or, if any Purchaser, Holder or beneficial
owner of the Senior Discount Notes is not so licensed, qualified or found
suitable, the Purchaser, Holder or beneficial owner of the Senior Discount Notes
shall comply with any order by such Gaming Authorities requiring that such
Person dispose of any Securities held by it; provide, however, that in the event
the Purchaser, Holder or beneficial owner of the Senior Discount Notes does not
comply with such order within the required period, the Company shall have the
option as its sole remedy with respect to the Senior Discount Notes to call for
redemption the Senior Discount Notes held by such Purchaser, Holder or
beneficial owner at a price equal to the Accreted Value thereof on the
Redemption Date, plus accrued and unpaid interest to the Redemption Date.
Notwithstanding the foregoing, $5.0 million in aggregate principal amount
of Senior Discount Notes originally issued under the Agreement shall be redeemed
by the Company on the date which is four years following the date of original
issuance thereof, at a redemption price equal to 100% of the principal amount
thereof, together with accrued and unpaid interest to the date of redemption,
subject to certain conditions set forth in the Agreement.
In addition, if not previously redeemed, the Senior Discount Notes will be
subject to redemption (a "Change of Control Redemption") at the option of the
Holders, in whole or in part, at any time within 30 days after the completion of
an Offer made as a result of a Change of Control, at a redemption price equal to
101% of the principal amount thereof, plus accrued and unpaid interest to the
Purchase Date, subject to certain conditions set forth in the Agreement.
In addition, the Senior Discount Notes will be subject to redemption
("Securities Sale Redemption") at the option of the Holders, in whole or in
part, following a Securities Sale or a Mezzanine Debt Financing, from the Net
Cash Proceeds of such Securities Sale or Mezzanine Debt Financing; provided that
an Offer to make a Securities Sale Redemption shall be made by the Company only
if, and to the extent that, the aggregate amount of Net Cash Proceeds from all
such Securities Sales or Mezzanine Debt Financings occurring on or after the
date
<PAGE>
CUSIP 827054 AC 1
hereof exceed $40,000,000. In the event of a Securities Sale Redemption,
the Senior Discount Notes will be redeemable at a price per $1,000 principal
amount equal to the price set forth in Section 4 hereof opposite the period in
which the Purchase Date occurs, plus any accrued and unpaid interest to the
Purchase Date.
5. Mandatory Offers. (a) Within 10 days after any Change of Control
----------------
Trigger Date, any Repayment Trigger Date or any Excess Proceeds Date, the
Company shall mail a notice to each Holder stating a number of items as set
forth in Section 6.7 of the Agreement.
(a) Holders may tender all or, subject to Section 8 below, any portion
of their Senior Discount Notes in an Offer by completing the form below entitled
"OPTION OF HOLDER TO ELECT PURCHASE."
(b) Promptly after consummation of an Offer, (i) the Company shall
mail to each Holder of Senior Discount Notes or portions thereof accepted for
payment an amount equal to the purchase price for, plus any accrued and unpaid
interest on, such Senior Discount Notes, (ii) with respect to any tendered
Senior Discount Note not accepted for payment in whole or in part, the Company
shall return such Senior Discount Note to the Holder thereof, and (iii) with
respect to any Senior Discount Note accepted for payment in part, the Company
shall authenticate and mail to each such Holder a new Senior Discount Note equal
in principal amount to the unpurchased portion of the tendered Senior Discount
Note.
(c) The Company will (i) publicly announce the results of the Offer to
Holders on or as soon as practicable after the Purchase Date, and (ii) comply
with Rule 14e-1 under the Securities Exchange Act of 1934, as amended, and any
other securities laws and regulations to the extent applicable to any Offer.
6. Notice of Redemption or Purchase. At least 30 days but not more than
--------------------------------
60 days before any Redemption Date the Company shall mail by first class mail a
notice of redemption to each Holder of Senior Discount Notes or portions thereof
that are to be redeemed.
7. Senior Discount Notes to be Redeemed or Purchased. The Senior
-------------------------------------------------
Discount Notes may be redeemed or purchased in part, but only in whole multiples
of $1,000 unless all Senior Discount Notes held by a Holder are to be redeemed
or purchased. On or after any date on which Senior Discount Notes are redeemed
or purchased, interest ceases to accrue on the Senior Discount Notes or portions
thereof called for redemption or accepted for purchase on such date.
8. Denominations, Transfer, Exchange. The Senior Discount Notes are in
---------------------------------
registered form without coupons in denominations of $100,000 and integral
multiples thereof (subject to adjustment as provided in the Agreement). The
transfer of Senior Discount Notes may be registered and Senior Discount Notes
may be exchanged as provided in the Agreement. Holders seeking to transfer or
exchange their Senior Discount Notes may be required, among other things, to
furnish appropriate endorsements and transfer documents and to pay any taxes and
fees required by law or permitted by the Agreement. The Company need not
exchange or register the transfer of any Senior Discount Note or portion of a
Senior Discount Note selected for redemption or tendered pursuant to an Offer.
9. Persons Deemed Owners. The registered holder of a Senior Discount
---------------------
Note may be treated as its owner for all purposes.
10. Amendments and Waivers.
----------------------
(a) Subject to certain exceptions, the Agreement and the Senior
Discount Notes may be amended or supplemented with the written consent of the
Holders of at least a majority in aggregate principal
<PAGE>
CUSIP 827054 AC 1
amount of the then outstanding Senior Discount Notes, and any existing Default
or Event of Default or compliance with any provision of the Agreement or the
Senior Discount Notes may be waived with the consent of the Holders of at least
a majority in principal amount of the then outstanding Senior Discount Notes.
(b) Notwithstanding Section 10(a) above, the Company may amend or
supplement the Agreement or the Senior Discount Notes without the consent of any
Holder to: cure any ambiguity, defect or inconsistency; provide for
uncertificated Senior Discount Notes in addition to or in place of certificated
Senior Discount Notes; provide for the assumption of the Company's obligations
to the Holders in the event of any Disposition involving the Company that is
permitted under Article VIII of the Agreement and in which the Company is not
the Surviving Person; or make any change that would provide any additional
rights or benefits to Holders or not adversely affect the legal rights under the
Agreement of any Holder.
(c) Certain provisions of the Agreement cannot be amended,
supplemented or waived without the consent of each Holder of Senior Discount
Notes affected.
11. Defaults and Remedies. Events of Default include: (i) the Company's
---------------------
failure to make any payment in respect of (A) the principal of or premium, if
any, on the Senior Discount Notes as the same shall become due, whether at
maturity, upon acceleration, redemption, or otherwise, or (B) interest on or in
respect of any Senior Discount Notes as the same shall become due and such
failure shall continue for a period of 15 Business Days; (ii) failure by the
Company for 30 days after receipt of notice from the Holders of at least 25% of
the outstanding Senior Discount Notes to comply with any other provisions of the
Agreement or the Senior Discount Notes; (iii) default under any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the Company or any
of its Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Subsidiaries) whether such Indebtedness now exists, or is created after
the date hereof, if (A) such default results in the acceleration of such
Indebtedness prior to its express maturity or shall constitute a default in the
payment of such Indebtedness at final maturity of such Indebtedness, and (B) the
principal amount of any such Indebtedness that has been accelerated or not paid
at maturity, when added to the aggregate principal amount of all other such
Indebtedness that has been accelerated or not paid at maturity, exceeds
$1,000,000; (iv) failure by the Company or any of its Subsidiaries to pay final
judgments, the uninsured portion of which exceeds $1,000,000, which judgments
are not paid, discharged, bonded or stayed for a period of 60 days after the
date of entry thereof; (v) if under any Bankruptcy Law, (A) the Company or any
Subsidiary commences a voluntary case, consents to the entry of an order for
relief against it in an involuntary case, consents to the appointment of a
Custodian of it or for all or substantially all of its property, or makes a
general assignment for the benefit of its creditors, or (B) a court of competent
jurisdiction enters an order or decree, and such order or decree remains
unstayed and in effect for 90 days, that is for relief against the Company or
any Subsidiary in an involuntary case, appoints a Custodian of the Company or
any Subsidiary or for all or substantially all of the Property of the Company or
any Subsidiary, or orders the liquidation of the Company or any Subsidiary; (vi)
if the Company by September 30, 1998 has not delivered to the Purchaser both of
the opinions of counsel contemplated by Section 11.14(c) of the Agreement; and
(vi) any of the Transactions Documents shall cease for any reason, to be in full
force and effect, in any material respect, except as a result of an amendment,
waiver or termination thereof as contemplated or permitted hereby, or the
Company shall so assert in writing.
12. No Recourse Against Others. No director, officer, employee,
--------------------------
incorporator or shareholder of the Company shall have any liability for any
obligation of the Company under the Agreement or the Senior Discount Notes or
for any claim based on, in respect of, or by reason of, any such obligation or
the creation of any such obligation. Each Holder by accepting a Senior Discount
Note waives and releases such Persons from all such liability, and such waiver
and release is part of the consideration for the Issuance of the Senior Discount
Notes.
<PAGE>
CUSIP 827054 AC 1
13. Successor Substituted. Upon the merger, consolidation or other
---------------------
business combination involving the Company or upon the sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
the Company's properties and assets, the Surviving Person (if other than the
Company) resulting from such Disposition shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under the Agreement
with the same effect as if such Surviving Person had been named as the Company
in the Agreement.
14. Governing Law. This Senior Discount Note shall be governed by and
-------------
construed in accordance with the internal laws of the State of New York, without
regard to the conflict of laws provisions thereof.
15. CUSIP Numbers. The Company will use reasonable efforts to cause CUSIP
-------------
numbers to be printed on the Senior Discount Notes and to use CUSIP numbers in
notices of redemption as a convenience to Holders. No representation is made as
to the accuracy of such numbers either as printed on the Senior Discount Notes
or as contained in any notice of redemption and reliance may be placed only on
the other identification numbers printed on the securities.
16. Copies of Agreement. The Company will furnish to any Holder upon
-------------------
written request and without charge a copy of the Agreement, which has in it the
text of this Senior Discount Note. Requests may be made to: Silicon Gaming,
Inc., 2800 W. Bayshore Road, Palo Alto, California 94303, Attn: President.
17. Certain Information Obligations. To the extent permitted by
-------------------------------
applicable law or regulation, whether or not the Company is subject to the
requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file
with the Commission all quarterly and annual reports and such other information,
documents or other reports (or copies of such portions of any of the foregoing
as the Commission may by rules and regulations prescribe) required to be filed
pursuant to such provisions of the Exchange Act. At any time when the Company
is not permitted by applicable law or regulations to file the aforementioned
reports, the Company shall mail to the Holders, within five days after it would
have been required to file the same with the Commission, all information that
the Company would have had to provide to the Commission if the Company had been
subject to Section 13 or 15(d) of the Exchange Act. Also, at any time when the
Company is not permitted by applicable law or regulations to file the
aforementioned reports, upon the request of a Holder of a Senior Discount Note,
the Company will promptly furnish or cause to be furnished such information as
is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any
successor provision thereto) to such Holder or to a prospective purchaser of
such Senior Discount Note, as the case may be, in order to permit compliance by
such Holder with Rule 144A under the Securities Act.
<PAGE>
CUSIP 827054 AC 1
ASSIGNMENT FORM
To assign this Senior Discount Note, fill in the form below:
FOR VALUE RECEIVED the undersigned hereby sell(s), assign(s) and transfer(s)
unto
(Please insert social security or other identifying number of assignee)
at
(Please print or typewrite name and address including postal zip code of
assignee)
the within Senior Discount Note and all rights thereunder, hereby irrevocably
constituting and appointing ________________________________________ to transfer
said Senior Discount Note on the books of the Company. The agent may substitute
another to act for him.
Date:________________________
Your Signature:_________________________
(Sign exactly as your name appears on
the other side of this Senior Discount
Note)
Signature Guarantee: _________________________
<PAGE>
CUSIP 827054 AC 1
OPTION OF HOLDER TO ELECT PURCHASE
If you elect to have this Senior Discount Note purchased by the Company
pursuant to Section 7.12 of the Agreement, check the box: [_]
If you elect to have this Senior Discount Note purchased by the Company
pursuant to Section 7.13 of the Agreement, check the box: [_]
If you elect to have this Senior Discount Note purchased by the Company
pursuant to Section 7.18 of the Agreement, check the box: [_]
If you elect to have only part of this Senior Discount Note purchased by
the Company pursuant to Section 7.12, 7.13 or 7.18 of the Agreement, state the
amount (multiples of $1,000 only):
$_________________________
Date:_____________________ Your Signature:_________________________________
(Sign exactly as your name appears
on the other side of this Senior
Discount Note)
Signature Guarantee: _________________________
<PAGE>
EXHIBIT 4.3
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of
September 30, 1997, is entered into by and among Silicon Gaming, Inc., a
California corporation (the "Company"), and each Holder (as hereinafter defined)
executing a signature page hereto.
This Agreement is made pursuant to a certain Securities Purchase
Agreement, dated as of September 30, 1997, by and between the Company and the
Purchaser named therein (the "Purchase Agreement"). In order to induce the
Purchaser to enter into the Purchase Agreement, the Company has agreed to
provide the registration rights set forth in this Agreement. The execution of
this Agreement is a condition to the closing of the transactions contemplated by
the Purchase Agreement.
In consideration of the foregoing, the parties hereby agree as
follows:
SECTION 1. DEFINITIONS.
-----------
As used in this Agreement, the following terms shall have the
following meanings:
"Actual Effective Date" shall have the meaning set forth in Section
---------------------
2(a).
"Advice" shall have the meaning set forth in Section 3.
------
"Affiliate" means, with respect to any specified Person, any other
---------
Person (i) directly or indirectly controlling (including, but not limited to,
all directors and executive officers of such Person), controlled by or under
direct or indirect common control with such specified Person, or (ii) that
directly or indirectly owns more than 10% of the voting securities of such
Person. A Person shall be deemed to control a corporation if such Person
possesses, directly or indirectly, the power to direct or cause the direction of
the management and policies of such corporation, whether through the ownership
of voting securities, by contract or otherwise.
"Business Day" means a day that is not a Legal Holiday.
------------
"Commission" means the United States Securities and Exchange
----------
Commission.
"Common Stock" means the common stock, par value $.001 per share, of
------------
the Company.
"Company" shall have the meaning set forth in the preamble and shall
-------
include the Company's successors by merger, acquisition, reorganization or
otherwise.
<PAGE>
"Controlling Persons" shall have the meaning set forth in Section
-------------------
5(a).
"Damages" shall have the meaning set forth in Section 5(a).
-------
"Exchange Act" means the Securities Exchange Act of 1934, as amended
------------
from time to time, or any successor statute, and the rules and regulations of
the Commission promulgated thereunder.
"Holder" means (i) each Person (other than the Company) executing a
------
signature page hereto and (ii) each Person (other than the Company) to whom a
Holder transfers Warrant Shares if such Person acquires such Warrant Shares as
Registrable Securities.
"Holders' Counsel" means Goodwin, Procter & Hoar LLP, special counsel
----------------
to the Holders, or any successor counsel selected by Holders of a majority in
interest of the Registrable Securities.
"Inspectors" shall have the meaning set forth in Section 3(m).
----------
"Legal Holiday" means a Saturday, Sunday or a day on which banking
-------------
institutions in New York City, New York, or Boston, Massachusetts, or at such
place of payment, are not required to be opened.
"NASD" shall have the meaning set forth in Section 3(q).
----
"Nasdaq" shall have the meaning set forth in Section 3(o).
------
"Objection Notice" shall have the meaning set forth in Section 3(a).
----------------
"Objecting Party" shall have the meaning set forth in Section 3(a).
---------------
"Person" means any individual, corporation, partnership, joint
------
venture, association, joint-stock company, trust, limited liability company,
unincorporated organization, government or other agency, or any political
subdivision thereof, or any other entity of whatever nature.
"Prospectus" means the prospectus included in any Registration
----------
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
Registration Statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by such Registration Statement, and all other amendments and
supplements to the prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such prospectus.
"Purchase Agreement" means the Securities Purchase Agreement, dated as
------------------
of the date of this Agreement, between the Company and the Holder, pursuant to
which the Warrant Agreement
2
<PAGE>
is being executed and the Warrants are being issued, as amended, modified or
supplemented from time to time, together with any exhibits, schedules or other
attachments thereto.
"Records" shall have the meaning set forth in Section 3(m).
-------
"Registrable Securities" means the Warrant Shares; provided, however,
---------------------- -------- -------
that any Warrant Shares shall cease to be Registrable Securities when (i) a
Registration Statement covering such Registrable Securities has been declared
effective and such Registrable Securities have been disposed of pursuant to such
effective Registration Statement, (ii) such Registrable Securities are
transferred to any Person other than a Holder pursuant to Rule 144 (or any
successor rule or similar provision then in effect, but not Rule 144A) under the
Securities Act, including a sale pursuant to the provisions of Rule 144(k),
(iii) such Warrant Shares shall have ceased to be outstanding, or (iv) such
Warrant Shares may be resold pursuant to Rule 144(k) assuming a Net Cashless
Exercise (as defined in Section 2.3 of the Warrant Agreement) thereof in
accordance with Section 2.3 of the Warrant Agreement.
"Registration Expenses" shall have the meaning set forth in Section 4.
---------------------
"Securities Act" means the Securities Act of 1933, as amended from
--------------
time to time, or any successor statute, and the rules and regulations of the
Commission promulgated thereunder.
"Shelf Registration Statement" means a registration statement of the
----------------------------
Company on the appropriate form for an offering to be made on a continuous basis
pursuant to Rule 415 under the Securities Act that covers any of the Registrable
Securities pursuant to the provisions of this Agreement, and all amendments and
supplements to any such registration statement, including post-effective
amendments, in each case including the Prospectus, all exhibits, and all
material incorporated by reference or deemed to be incorporated by reference in
such registration statement.
"Suspension Notice" shall have the meaning set forth in Section 3.
-----------------
"Suspension Period" shall have the meaning set forth in Section 3.
-----------------
"Target Effective Date" means the date which is 30 days after the
---------------------
earlier of (i) the Target Filing Date or (ii) the date on which the Shelf
Registration Statement is filed with the Commission.
"Target Effective Period" shall have the meaning set forth in Section
-----------------------
2(a).
"Target Filing Date" shall mean the date which is 270 days after the
------------------
date hereof, or such other date subsequent thereto as the Holders shall request.
3
<PAGE>
"Warrant Agreement" means the Warrant Agreement, dated as of the date
-----------------
of this Agreement, by and between the Company and the Purchaser identified
therein, as amended or supplemented from time to time in accordance with the
terms thereof.
"Warrants" means the warrants to purchase shares of Common Stock
--------
issued to the Holder pursuant to the Warrant Agreement.
"Warrant Shares" means the shares of Common Stock issuable upon
--------------
exercise of the Warrants and all shares of Common Stock directly or indirectly
issued or issuable in respect of the Warrant Shares by way of stock dividend or
stock split or in connection with a combination of shares, recapitalization,
merger, consolidation, or other reorganization. For purposes of this Agreement,
all references to Holders of Warrants exercisable into a majority or other
specified percentage of Warrant Shares shall be read as incorporating the
assumption that all Warrants have been exercised into Warrant Shares.
SECTION 2. SHELF REGISTRATION.
------------------
(a) Filing; Effectiveness. Not later than the Target Filing Date, the
---------------------
Company shall prepare and file with the Commission a Shelf Registration
Statement covering the resale of all of the Registrable Securities. The Company
shall use its best efforts to cause the Shelf Registration Statement to be
declared effective on or before the Target Effective Date and to keep such Shelf
Registration Statement continuously effective for a period (the "Target
Effective Period") following the date on which such Shelf Registration Statement
is declared effective (the "Actual Effective Date"), which Target Effective
Period shall be equal to, with respect to each Holder, the longer of the period
of time between the Actual Effective Date and (i) the date which is 24 months
following the Actual Effective Date, or (ii) if such holder is an Affiliate of
the Company, the date which is three months after the date on which such Holder
ceases to be an Affiliate of the Company, provided that the Company first
provides such Holder with an opinion of counsel to such effect.
(b) Supplements; Amendments. The Company agrees, if necessary, to
-----------------------
supplement or amend the Shelf Registration Statement, as required by the rules,
regulations or instructions applicable to the registration form used by the
Company for such Shelf Registration Statement or by the Securities Act or as
requested (which request shall result in the filing of a supplement or
amendment) by any Holder of Registrable Securities to which such Shelf
Registration Statement relates, and the Company agrees to furnish to the
Holders, Holders= Counsel and any managing underwriter copies of any such
supplement or amendment prior to its being used and/or filed with the
Commission.
(c) Liquidated Damages. If the Shelf Registration Statement is not
------------------
filed on or before the Target Filing Date, the Company shall pay liquidated
damages to each Holder in an amount equal to $3.25 per 1,000 Warrant Shares per
week beginning on the Target Filing Date. If the Shelf Registration Statement
is filed but has not become effective on or before the Target Effective Date,
the Company shall pay liquidated damages to each Holder in an amount equal to
4
<PAGE>
$3.25 per 1,000 Warrant Shares per week beginning on the Target Effective Date.
The weekly liquidated damages payable by the Company to each Holder as a result
of a late filing or a late declaration of effectiveness shall increase by an
amount equal to $3.25 per 1,000 Warrant Shares 90 days after the Target Filing
Date or the Target Effective Date, as the case may be. If a stop order is
imposed or if for any other reason the effectiveness of the Shelf Registration
Statement is suspended during the Target Effective Period, then the Company
shall pay liquidated damages to each Holder in an amount equal to $3.25 per
1,000 Warrant Shares per week beginning on the date of such stop order or other
suspension of effectiveness. The weekly liquidated damages payable by the
Company to each Holder as a result of the imposition of a stop order or such
other suspension of the effectiveness of the Shelf Registration Statement during
the Target Effective Period shall increase by an amount equal to $3.25 per 1,000
Warrant Shares 90 days after the stop order was imposed or the effectiveness of
the Shelf Registration Statement was otherwise suspended, and shall thereafter
increase by an amount equal to $3.25 per 1,000 Warrant Shares at the end of each
subsequent 90-day period so long as such stop order or other suspension of the
effectiveness of the Shelf Registration Statement remains in effect. For
purposes of the two preceding sentences, a Holder will not be entitled to
receive liquidated damages under this Agreement during a Suspension Period (as
hereinafter defined) except to the extent permitted by Section 3 of this
Agreement. The Warrant Shares with respect to which liquidated damages shall
accrue and be payable in accordance with this Section 2(c) shall be those
Registrable Securities held by the Holders which are included or proposed to be
included in the Shelf Registration Statement.
The liquidated damages payable by the Company to the Holders pursuant
to this Section 2(c) shall be deemed to commence accruing on the day on which
the event triggering such liquidated damages occurs. Such liquidated damages
shall cease to accrue (i) with respect to the liquidated damages payable as a
result of the Company's failure to file the Shelf Registration Statement on or
prior to the Target Filing Date, on the day after the Shelf Registration
Statement is filed, (ii) with respect to the liquidated damages payable as a
result of the Company's failure to have the Shelf Registration Statement
declared effective on or prior to the Target Effective Date, on the day after
the Shelf Registration Statement is declared effective, or (iii) with respect to
the liquidated damages payable as a result of the imposition of a stop order or
the suspension for any other reason of the effectiveness of the Shelf
Registration Statement, on the day after the stop order is withdrawn or the
effectiveness of the Shelf Registration Statement is otherwise reinstated.
Notwithstanding the foregoing, if the sole reason why (i) the Company
has not filed the Shelf Registration Statement on or before the Target Filing
Date and/or (ii) the Shelf Registration Statement has not become effective on or
before the Target Effective Date is because the Holders did not provide the
Company with information which is required to be disclosed in the Shelf
Registration Statement and which the Company requested the Holders to so provide
in writing at least 15 days prior to the Target Filing Date and/or the Target
Effective Date, as the case may be, the Company's obligation to pay liquidated
damages with respect to such late filing or such late declaration of
effectiveness will not begin to accrue until five days after the Holders have
provided such information to the Company.
5
<PAGE>
The Company shall pay the liquidated damages due with respect to any
Registrable Securities at the end of each week during which such liquidated
damages accrue. Liquidated damages shall be paid to the Holders of Registrable
Securities entitled to receive such liquidated damages by wire transfer in
immediately available funds to the accounts designated by such Holders.
The parties hereto agree that the liquidated damages provided for in
this Section 2(c) and in Section 3 constitute a reasonable estimate as of the
date hereof of the damages that will be suffered by Holders of Registrable
Securities by reason of the failure of the Shelf Registration Statement to be
filed, to be declared effective and/or to remain effective, as the case may be,
in accordance with this Agreement.
(d) Effective Registration. A registration will not be deemed to have
----------------------
been effected as a Shelf Registration Statement unless the Shelf Registration
Statement with respect thereto has been declared effective by the Commission and
the Company has complied in all material respects with its obligations under
this Agreement with respect thereto; provided, however, that if after a Shelf
-------- -------
Registration Statement has been declared effective, the offering of Registrable
Securities pursuant to such Shelf Registration Statement is interfered with by
any stop order, injunction or other order or requirement of the Commission or
any other governmental agency or court, such Shelf Registration Statement will
be deemed not to have become effective during the period of such interference
(and liquidated damages shall accrue and be payable under Section 2(c)) until
the offering of Registrable Securities pursuant to such Shelf Registration
Statement may legally resume. If a registration requested pursuant to this
Section 2 is deemed not to have been effected, then the Company shall continue
to be obligated to effect a registration pursuant to this Section 2.
SECTION 3. REGISTRATION PROCEDURES.
-----------------------
In connection with the obligations of the Company to effect or cause
the registration of any Registrable Securities pursuant to the terms and
conditions of this Agreement, the Company shall use its best efforts to effect
the registration and sale of such Registrable Securities in accordance with the
intended method of disposition thereof as quickly as practicable, and in
connection therewith:
(a) The Company shall prepare and file with the Commission a Shelf
Registration Statement on the appropriate form under the Securities Act,
which Shelf Registration Statement shall comply as to form in all material
respects with the requirements of the applicable form and include all
financial statements required by the Commission to be filed therewith, and
use its best efforts to cause such Shelf Registration Statement to become
effective and remain effective in accordance with the provisions of this
Agreement; provided, however, that, at least ten Business Days prior to
-------- -------
filing a Shelf Registration Statement or Prospectus or any amendments or
supplements thereto, including documents incorporated by reference after
the initial filing of the Shelf Registration
6
<PAGE>
Statement, the Company shall furnish to the Holders of the Registrable
Securities covered by such Shelf Registration Statement, Holders' Counsel
and the underwriters, if any, draft copies of all such documents proposed
to be filed, which documents will be subject to the review of Holders'
Counsel and the underwriters, if any, and the Company will not, unless
required by law or this Agreement, file any Shelf Registration Statement or
amendment thereto or any Prospectus or any supplement thereto to which
Holders holding a majority in interest of the Registrable Securities
covered by such Shelf Registration Statement or the underwriters with
respect to such Securities, if any, shall object; provided, however, that
-------- -------
any such objection to the filing of any Shelf Registration Statement or
amendment thereto or any Prospectus or supplement thereto shall be made by
written notice (the "Objection Notice") delivered to the Company no later
-----------------
than five Business Days after the party or parties asserting such objection
or their counsel (the "Objecting Party") receives draft copies of the
---------------
documents that the Company proposes to file. The Objection Notice shall set
forth the objections and the specific areas in the draft documents where
such objections arise. The Company shall have five Business Days after
receipt of the Objection Notice to correct such deficiencies to the
satisfaction of the Objecting Party, and will notify each Holder of any
stop order issued or threatened by the Commission in connection therewith
and shall use its best efforts to prevent the entry of such stop order or,
if entered, to have such stop order withdrawn at the earliest possible
moment.
(b) The Company shall promptly prepare and file with the Commission
such amendments and post-effective amendments to such Shelf Registration
Statement as may be necessary to keep such Shelf Registration Statement
effective for as long as the Company is required to keep such Shelf
Registration Statement effective pursuant to the terms hereof; shall cause
the Prospectus to be supplemented by any required Prospectus supplement,
and, as so supplemented, to be filed pursuant to Rule 424 under the
Securities Act; and shall comply with the provisions of the Securities Act
applicable to it with respect to the disposition of all Registrable
Securities covered by such Shelf Registration Statement during the
applicable period in accordance with the intended methods of disposition by
the Holders set forth in such Shelf Registration Statement or amendment
thereto or such Prospectus or supplement thereto;
(c) The Company shall promptly furnish to any Holder of Registrable
Securities included in a Shelf Registration Statement and the underwriters,
if any, without charge, such number of conformed copies of such Shelf
Registration Statement and any post-effective amendment thereto and such
number of copies of the Prospectus (including each preliminary Prospectus)
and any amendments or supplements thereto, any documents incorporated by
reference therein and such other documents as any such Holder or
underwriter may request in order to facilitate the public sale or other
disposition of the Registrable Securities being sold by such Holder (it
being understood that the Company consents to the use of the Prospectus and
any amendment or supplement thereto by each Holder selling Registrable
Securities and each underwriter, if any, in connection with the offering
and sale of the Registrable Securities covered by the Prospectus or any
amendment or supplement thereto).
7
<PAGE>
(d) The Company shall, on or prior to the date on which a Shelf
Registration Statement is declared effective, (i) use its best efforts to
register or qualify the Registrable Securities covered by such Shelf
Registration Statement under the securities or "blue sky" laws of each of
the 50 states of the United States or obtain appropriate exemptions
therefrom; (ii) do any and all other acts and things which may be necessary
or advisable to enable the Holders of Registrable Securities included in
such Shelf Registration Statement to consummate the disposition of such
Registrable Securities in accordance with their intended method of
disposition thereof; (iii) use its best efforts to keep each such state
securities or "blue sky" registration or qualification (or exemption
therefrom) effective during the period in which the Company is required to
keep such Shelf Registration Statement effective; and (iv) do any and all
other acts or things which may be necessary or advisable to enable the
Holders of Registrable Securities included in such Shelf Registration
Statement to complete the disposition in such jurisdictions of such
Registrable Securities in accordance with their intended method of
disposition thereof; provided, however, that the Company shall not be
-------- -------
required (x) to qualify to do business in any jurisdiction where it would
not otherwise be required to so qualify but for this Section 3(d) or (y) to
file any general consent to service of process.
(e) The Company shall use its best efforts to cause the Registrable
Securities covered by a Shelf Registration Statement to be registered with
or approved by such other governmental agencies or authorities as may be
necessary by virtue of the business and operations of the Company to enable
the Holders to consummate the disposition of such Registrable Securities in
accordance with their intended method of disposition thereof.
(f) The Company shall promptly notify each Holder of Registrable
Securities included in a Shelf Registration Statement, Holders' Counsel and
any underwriter and (if requested by any such Person) confirm such notice
in writing (i) when such Shelf Registration Statement or a Prospectus or
any post-effective amendment or any Prospectus supplement has been filed
and, with respect to such Shelf Registration Statement or any post-
effective amendment, when the same has become effective, (ii) of any
request by the Commission or any state securities authority for amendments
and supplements to such Shelf Registration Statement and Prospectus or for
additional information after such Shelf Registration Statement has become
effective, (iii) of the issuance by the Commission of any stop order
suspending the effectiveness of such Shelf Registration Statement or the
initiation or threatening of any proceedings for that purpose, (iv) of the
issuance by any state securities commission or other regulatory authority
of any order suspending the registration or qualification or exemption from
registration or qualification of any of the Registrable Securities under
state securities or "blue sky" laws or the initiation of any proceedings
for that purpose, (v) if, between the effective date of such Shelf
Registration Statement and the closing of any sale of Registrable
Securities covered thereby, the representations and warranties of the
Company contained in any underwriting agreement, securities sales agreement
or other similar agreement, if any, relating to the offering of such
Registrable Securities cease to be true and correct in all material
respects, and (vi) of the happening of any event which makes any statement
of a material fact made in such
8
<PAGE>
Shelf Registration Statement or related Prospectus untrue or which requires
the making of any changes in such Shelf Registration Statement or
Prospectus so that such Shelf Registration Statement or Prospectus will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; and, as promptly as practicable thereafter, prepare
and file an amendment to such Shelf Registration Statement with the
Commission and furnish to any such Holders and any underwriter a supplement
or amendment to such Prospectus so that, as thereafter deliverable to the
purchasers of such Registrable Securities, such Prospectus will not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(g) The Company shall make generally available to the Holders of
Registrable Securities included in a Shelf Registration Statement an
earnings statement satisfying the provisions of Section 11(a) of the
Securities Act no later than 30 days after the end of the 12-month period
beginning with the first day of the Company's first fiscal quarter
commencing after the effective date of such Shelf Registration Statement,
which earnings statement shall cover said 12-month period, and which
requirement will be deemed to be satisfied if the Company timely files
complete and accurate information on Forms 10-Q, 10-K and 8-K under the
Exchange Act and otherwise complies with Rule 158 under the Securities Act.
(h) The Company shall promptly use its best efforts to prevent the
issuance of any order suspending the effectiveness of a Shelf Registration
Statement, and, if any such order suspending the effectiveness of a Shelf
Registration Statement is issued, shall promptly use its best efforts to
obtain the withdrawal of such order at the earliest possible moment.
(i) The Company shall, if requested by the managing underwriter or
underwriters, if any, Holder's Counsel or any Holder of Registrable
Securities included in a Shelf Registration Statement, promptly incorporate
in a Prospectus supplement or post-effective amendment such information as
such managing underwriter or underwriters, Holder or Holders' Counsel
requests to be included therein, including, without limitation, with
respect to the Registrable Securities being sold by such Holder to such
underwriter or underwriters, the purchase price being paid therefor by such
underwriter or underwriters and any other terms of an underwritten offering
of the Registrable Securities to be sold in such offering, and the Company
shall promptly make all required filings of such Prospectus supplement or
post-effective amendment.
(j) After the filing with the Commission of any document which is
incorporated by reference into a Shelf Registration Statement (in the form
in which it was incorporated), the Company shall, upon request, promptly
deliver a copy of each such document to each
9
<PAGE>
of the Holders of Registrable Securities included in such Shelf
Registration Statement so requesting and to Holders' Counsel.
(k) The Company shall cooperate with the Holders of Registrable
Securities included in a Shelf Registration Statement and the managing
underwriter or underwriters, if any, to facilitate the timely preparation
and delivery of certificates (which shall not bear any restrictive legends
unless required under applicable law) representing Registrable Securities
sold under such Shelf Registration Statement to the purchasers thereof, and
enable such Registrable Securities to be in such denominations and
registered in such names as the managing underwriter or underwriters, if
any, or such Holders may request and keep available and make available to
the Company's transfer agent prior to the effectiveness of such Shelf
Registration Statement a supply of such certificates.
(l) The Company shall enter into such customary agreements (including,
if applicable, an underwriting agreement in customary form) and take such
other actions as the Holders of Registrable Securities included in a Shelf
Registration Statement or the underwriters, if any, may reasonably request
in order to expedite or facilitate the disposition of Registrable
Securities (any such Holders may, at their option, require that any or all
of the representations, warranties and covenants of the Company to or for
the benefit of any underwriters also be made to and for the benefit of such
Holders).
(m) The Company shall promptly make available to each Holder of
Registrable Securities included in a Shelf Registration Statement, any
underwriter and any attorney, accountant or other agent or representative
retained by any such Holder or underwriter (collectively, the
"Inspectors"), all financial and other records, pertinent corporate
----------
documents and properties of the Company (collectively, the "Records"), as
-------
shall be reasonably necessary to enable them to exercise their due
diligence responsibility, and cause the Company's officers, directors and
employees to supply all Records and other information requested by any such
Inspector in connection with such Shelf Registration Statement.
(n) The Company shall furnish to each Holder of Registrable Securities
included in a Shelf Registration Statement and to any underwriter, upon
request, a signed counterpart, addressed to such Holder or underwriter, of
(i) an opinion or opinions of counsel to the Company, and (ii) a comfort
letter or comfort letters from the Company's independent public
accountants, each in customary form and covering matters of the type
customarily covered by opinions or comfort letters, as the case may be.
(o) The Company shall use its best efforts to cause the Registrable
Securities included in a Shelf Registration Statement (if the Company and
the Registrable Securities so qualify) (i) to be listed on each national
securities exchange, if any, on which similar securities issued by the
Company are then listed, or (ii) if similar securities issued by the
Company are not then listed, to be authorized for listing or quotation, as
applicable, on
10
<PAGE>
the New York Stock Exchange or The Nasdaq Stock Market, Inc.'s ("Nasdaq")
National Market.
(p) The Company shall provide a CUSIP number for all Registrable
Securities covered by a Shelf Registration Statement not later than the
effective date of such Shelf Registration Statement.
(q) The Company shall cooperate with each Holder of Registrable
Securities included in a Shelf Registration Statement and each underwriter
and their respective counsel in connection with any filings required to be
made with the National Association of Securities Dealers, Inc. ("NASD").
----
(r) The Company shall, during the period when the Prospectus is
required to be delivered under the Securities Act, promptly file all
documents required to be filed with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act.
(s) The Company shall appoint a transfer agent and registrar for all
Registrable Securities covered by a Shelf Registration Statement not later
than the effective date of such Shelf Registration Statement.
(t) In connection with an underwritten offering, the Company shall
participate, to the extent reasonably requested by the managing underwriter
for the offering or the Holders of Registrable Securities included in such
offering, in customary efforts to sell the securities being offered,
including without limitation, participating in "road shows."
(u) If the Registrable Securities are of a class of securities that is
listed on a national securities exchange or Nasdaq, the Company will file
copies of any Prospectus with such exchange or Nasdaq, as applicable, in
compliance with Rule 153 under the Securities Act so that the Holders shall
benefit from the prospectus delivery procedures described therein.
Each Holder of Registrable Securities included in a Shelf Registration
Statement, upon receipt of any notice (a "Suspension Notice") from the Company
-----------------
of the happening of any event of the kind described in Section 3(f), shall
forthwith discontinue disposition of the Registrable Securities pursuant to such
Shelf Registration Statement covering such Registrable Securities until such
Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 3(f) or until such Holder is advised in writing (the
"Advice") by the Company that the use of the Prospectus may be resumed, and such
------
Holder has received copies of any additional or supplemental filings which are
incorporated by reference in the Prospectus, and, if so directed by the Company,
such Holder will, or will request the managing underwriter or underwriters, if
any, to, deliver to the Company (at the Company's expense) all copies, other
than permanent file copies then in such Holder's possession, of the Prospectus
covering such Registrable Securities current at the time of receipt of such
notice; provided, however, that the Company shall not give a Suspension Notice
-------- -------
until after the Shelf Registration Statement has been declared effective and
11
<PAGE>
shall not give more than three Suspension Notices during any period of twelve
consecutive months and in no event shall the period from the date on which any
such Holder receives a Suspension Notice to the date on which any such Holder
receives either the Advice or copies of the supplemented or amended Prospectus
contemplated by Section 3(f) (the "Suspension Period") exceed 30 days. In the
-----------------
event that the Company shall give any Suspension Notice, (i) the Company shall
use its best efforts and take such actions as are reasonably necessary to render
the Advice and end the Suspension Period as promptly as practicable and (ii) the
time periods for which a Shelf Registration Statement is required to be kept
effective pursuant to Section 2 hereof shall be extended by the number of days
during the Suspension Period.
If the Suspension Period exceeds 30 days, the Company shall pay
liquidated damages to each Holder in the amount of $3.25 per 1,000 Warrant
Shares included in the Shelf Registration Statement for each week during which
the Suspension Period is in effect. The weekly liquidated damages payable by
the Company to each Holder as a result of the continuance of a Suspension Period
shall increase by an amount equal to $3.25 per 1,000 Warrant Shares 60 days
after receipt of the Suspension Notice. The Company shall pay the liquidated
damages due with respect to any Registrable Securities at the end of each week
during which such damages accrue. Liquidated damages shall be paid to the
Holders of Registrable Securities entitled to receive such liquidated damages by
wire transfer in immediately available funds to the accounts designated by such
Holders.
If any Shelf Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (i) the insertion therein of language, in form and
substance reasonably satisfactory to such Holder, to the effect that the holding
by such Holder of such securities is not to be construed as a recommendation by
such Holder of the investment quality of the Company's securities covered
thereby and that such holding does not imply that such Holder will assist in
meeting any future financial requirements of the Company, or (ii) in the event
that such reference to such Holder by name or otherwise is not required by the
Securities Act or any similar Federal or state securities or "blue sky" statute
and the rules and regulations thereunder then in force, the deletion of the
reference to such Holder.
SECTION 4. REGISTRATION EXPENSES. Any and all expenses incident to
---------------------
the Company's performance of or compliance with this Agreement, including
without limitation, all Commission and securities exchange, Nasdaq or NASD
registration and filing fees, all fees and expenses incurred in connection with
compliance with state securities or "blue sky" laws (including reasonable fees
and disbursements of one counsel for the Holders or underwriters in connection
with "blue sky" qualifications of the Registrable Securities), printing
expenses, messenger and delivery expenses, internal expenses (including, without
limitation, all salaries and expenses of the Company's officers and employees
performing legal or accounting duties), all expenses for word processing,
printing and distributing any Shelf Registration Statement, any Prospectus, any
amendments or supplements thereto, any underwriting agreements, securities sales
agreements and other documents relating to the performance of and compliance
with this Agreement, the fees and expenses of the Company incurred in connection
with the listing of the Registrable Securities, the
12
<PAGE>
fees and disbursements of counsel for the Company and of the independent
certified public accountants of the Company (including the expenses of any
comfort letters or costs associated with the delivery by independent certified
public accountants of a comfort letter or comfort letters requested pursuant to
Section 3(n)), Securities Act liability insurance (if the Company elects to
obtain such insurance), the reasonable fees and expenses of any special experts
or other Persons retained by the Company in connection with any registration,
and the reasonable fees and disbursements of Holders' Counsel incurred in
connection with each registration hereunder (up to a maximum of $10,000) and any
reasonable out-of-pocket expenses of the Holders and their agents, including any
reasonable travel costs (but excluding underwriting discounts and commissions
and transfer taxes, if any, relating to the sale or disposition of Registrable
Securities) (all such expenses being herein called "Registration Expenses"),
---------------------
will be borne by the Company whether or not the Shelf Registration Statement to
which such expenses relate becomes effective.
SECTION 5. INDEMNIFICATION AND CONTRIBUTION.
--------------------------------
(a) Indemnification by the Company. The Company agrees to indemnify
------------------------------
and hold harmless, to the full extent permitted by law, each Holder, its
partners, members, officers, directors, trustees, stockholders, employees,
agents and investment advisers, and each Person who controls such Holder within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act, or is under common control with, or is controlled by, such Holder,
together with the partners, members, officers, directors, trustees,
stockholders, employees, agents and investment advisors of such controlling
Person (collectively, the "Controlling Persons"), from and against all losses,
-------------------
claims, damages, liabilities and expenses (including, without limitation, any
legal or other fees and expenses incurred by any Holder or any such Controlling
Person in connection with defending or investigating any action or claim in
respect thereof) (collectively, the "Damages") to which such Holder, its
-------
partners, officers, directors, trustees, stockholders, employees, agents and
investment advisers, and any such Controlling Person, may become subject under
the Securities Act or otherwise, insofar as such Damages (or proceedings in
respect thereof) arise out of or are based upon any untrue or alleged untrue
statement of material fact contained in any Shelf Registration Statement (or any
amendment thereto) pursuant to which Registrable Securities were registered
under the Securities Act, including all documents incorporated therein by
reference, or are caused by any omission or alleged omission to state therein a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in any Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto), or are caused by any
omission or alleged omission to state therein a material fact necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the Company shall not be liable
-------- -------
for Damages to any Holder under this Section 5(a) to the extent that any such
Damages (i) arise out of or are based upon any such untrue statement or omission
which is based upon information relating to such Holder furnished in writing to
the Company by such Holder expressly for use in any such Shelf Registration
Statement (or any amendment thereto) or Prospectus (or amendment or supplement
thereto); or (ii) were caused by the fact that such Holder sold Securities to a
Person as to whom it shall be established that there
13
<PAGE>
was not sent or given, or deemed sent or given pursuant to Rule 153 under the
Securities Act, at the time of or prior to the written confirmation of such
sale, a copy of the Prospectus as then amended or supplemented if, and only if,
(a) the Company has previously furnished copies of such amended or supplemented
Prospectus to such Holder and (b) such Damages were caused by any untrue
statement or omission or alleged untrue statement or omission contained in the
Prospectus so delivered which was corrected in such amended or supplemented
Prospectus. In connection with an underwritten offering, the Company will
indemnify the underwriters thereof, their officers and directors and each Person
who controls such underwriters (within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act) to the same extent as provided
above with respect to the indemnification of the Holders of Registrable
Securities except with respect to information provided by the underwriter
specifically for inclusion therein.
(b) Indemnification by the Holders. In connection with any Shelf
------------------------------
Registration Statement in which a Holder is participating, each such Holder
agrees, severally and not jointly, to indemnify and hold harmless the Company,
its directors and officers and each Person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act from and against all Damages to the same extent as the
foregoing indemnity from the Company to such Holder, but only to the extent such
Damages arise out of or are based upon any untrue statement of a material fact
contained in any Shelf Registration Statement (or any amendment thereto) or
Prospectus (or any amendment or supplement thereto) or are caused by any
omission to state therein a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, which untrue statement or omission is based upon information
relating to such Holder furnished in writing to the Company by such Holder
expressly for use in any such Shelf Registration Statement (or any amendment
thereto) or any such Prospectus (or any amendment or supplement thereto);
provided, however, that such Holder shall not be obligated to provide such
- -------- -------
indemnity to the extent that such Damages result from the failure of the Company
to promptly amend or take action to correct or supplement any such Shelf
Registration Statement or Prospectus on the basis of corrected or supplemental
information furnished in writing to the Company by such Holder expressly for
such purpose. In no event shall the liability of any Holder of Registrable
Securities hereunder be greater in amount than the dollar amount of the net
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.
(c) Indemnification Procedures. In case any proceeding (including any
--------------------------
governmental investigation) shall be instituted involving any Person in respect
of which indemnity may be sought pursuant to either paragraph (a) or (b) above,
such Person (the "indemnified party") shall promptly notify the Person against
whom such indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceedings
and shall pay the fees and disbursements of such counsel relating to such
proceeding. The failure of an indemnified party to notify the indemnifying
party with respect to a particular proceeding shall not relieve the indemnifying
party from any obligation or liability (i) which it may have pursuant to this
Agreement if the indemnifying party is not substantially prejudiced by such
failure to so notify
14
<PAGE>
it or (ii) which it may have otherwise than pursuant to this Agreement. In any
such proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel, or (ii) the
indemnifying party fails promptly to assume the defense of such proceeding or
fails to employ counsel reasonably satisfactory to such indemnified party, or
(iii) (A) the named parties to any such proceeding (including any impleaded
parties) include both such indemnified party or an Affiliate of such indemnified
party and any indemnifying party or an Affiliate of such indemnifying party, (B)
there may be one or more defenses available to such indemnified party or such
Affiliate of such indemnified party that are different from or additional to
those available to any indemnifying party or such Affiliate of any indemnifying
party and (C) such indemnified party shall have been advised by such counsel
that there may exist a conflict of interest between or among such indemnified
party or such Affiliate of such indemnified party and any indemnifying party or
such Affiliate of any indemnifying party, in which case, if such indemnified
party notifies the indemnifying party in writing that it elects to employ
separate counsel of its choice at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the defense thereof and
such counsel shall be at the expense of the indemnifying party, it being
understood, however, that unless there exists a conflict among indemnified
parties, the indemnifying parties shall not, in connection with any one such
proceeding or separate but substantially similar or related proceedings in the
same jurisdiction, arising out of the same general allegations or circumstances,
be liable for the fees and expenses of more than one separate firm of attorneys
(together with appropriate local counsel) at any time for such indemnified
parties. The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent (which consent shall not be
unreasonably withheld) but, if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify each
indemnified party from and against any loss or liability by reason of such
settlement or judgment. No indemnifying party shall, without the prior written
consent of any indemnified party (which consent shall not be unreasonably
withheld), effect any settlement of any pending or threatened proceeding in
respect of which such indemnified party is a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on all claims
that are the subject matter of such proceeding with no payment by such
indemnified party of consideration.
(d) Contribution. If the indemnification from the indemnifying party
------------
provided for in this Section 5 is found, pursuant to a final judicial
determination not subject to appeal, to be unavailable to an indemnified party
hereunder in respect of any losses, claims, damages, liabilities, or expenses
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities, or
expenses in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and the indemnified parties in connection with the
actions that resulted in such losses, claims, damages, liabilities or expenses,
as well as any other relevant equitable considerations. The relative fault of
such indemnifying party and indemnified parties shall be determined by reference
to, among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or the
15
<PAGE>
omission or alleged omission to state a material fact, has been made by, or
relates to information supplied by, such indemnifying party or indemnified
parties, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such action. The amount paid or payable by a
party as a result of the losses, claims, damages, liabilities, and expenses
referred to above shall be deemed to include, subject to the limitations set
forth in Section 5(c), any legal or other expenses reasonably incurred by such
party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just or equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
--- ----
allocation or by any other method of allocation that does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), no underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Registrable Securities underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages which
such underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission, and no selling Holder shall be required to
contribute any amount in excess of the amount by which the total net proceeds
received by such selling Holder with respect to Registrable Securities sold by
such selling Holder exceeds the amount of any damages which such selling Holder
has otherwise been required to pay by reason of such untrue statement or alleged
untrue statement or omission or alleged omission. Each Holder's obligation to
contribute pursuant to this Section 5(d) is several and not joint and shall be
determined by reference to the proportion that the net proceeds of the offering
received by such Holder bears to the total net proceeds of the offering received
by all the Holders. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 5 are not
exclusive and shall not limit any rights or remedies that may otherwise be
available to any indemnified party at law or in equity.
If indemnification is available under this Section 5, the indemnifying
party shall indemnify each indemnified party to the full extent provided in
Sections 5(a) and (b) without regard to the relative fault of said indemnifying
party or indemnified party or any other equitable consideration provided for in
this Section 5(d).
SECTION 6. RULE 144. The Company covenants that it will file any
--------
reports required to be filed by it under the Securities Act and the Exchange
Act, and the rules and regulations adopted by the Commission thereunder (or, if
the Company is not required to file such reports, it will, upon the request of
any Holder, make publicly available other information so long as necessary to
permit sales of the Registrable Securities pursuant to Rule 144 under the
Securities Act), and it will take such further action as any Holder may request,
all to the extent required from time to time to enable such Holder to sell
Registrable Securities without registration under the Securities Act within the
limitation of the exemptions provided by (a) Rule 144 under the Securities Act,
as such Rule may be amended from time to time, or (b) any successor rule or
similar provision
16
<PAGE>
hereafter adopted by the Commission. Upon the request of any Holder, the Company
will deliver to such Holder a written statement as to whether it has complied
with such requirements.
SECTION 7. RULE 144A. The Company covenants that it will file all
---------
reports required to be filed by it under the Securities Act and the Exchange
Act, and the rules and regulations adopted by the Commission thereunder (or if
the Company is not required to file such reports, it will, upon the request of
any Holder, make available other information so long as necessary to permit
sales of the Registrable Securities pursuant to Rule 144A under the Securities
Act), and it will take such further action as any Holder may request, all to the
extent required from time to time to enable such Holder to sell Registrable
Securities without registration under the Securities Act within the limitation
of the exemptions provided by (a) Rule 144A, as such rule may be amended from
time to time, or (b) any successor rule or similar provision hereafter adopted
by the Commission. Upon the request of any Holder, the Company will deliver to
such Holder a written statement as to whether it has complied with such
requirements.
SECTION 8. MISCELLANEOUS.
-------------
(a) No Inconsistent Agreements. The Company has not entered into nor
--------------------------
will the Company on or after the date of this Agreement enter into any agreement
which is inconsistent with the rights granted to the Holders of Registrable
Securities in this Agreement or otherwise conflicts with the provisions hereof.
The rights granted to the Holders hereunder do not in any way conflict with, and
are not inconsistent with, the rights granted to the holders of the Company's
other issued and outstanding securities under any such agreements. The Company
may grant registration rights that would permit any Person the right to piggy-
back or may itself exercise its right to piggy-back, on any Shelf Registration
Statement, provided that if the managing underwriter or underwriters, if any, of
--------
such offering delivers an opinion to the Holders that the total amount of
securities which they and the holders of such new piggy-back rights intend to
include in any Shelf Registration Statement is so large as to materially and
adversely affect the success of such offering (including the price at which such
securities can be sold), then only the amount, number or kind of securities to
be offered for the account of holders of such new piggy-back rights (other than
the Company) will be reduced to the extent necessary to reduce the total amount
of securities to be included in such Shelf Registration Statement to the amount,
number or kind recommended by the managing underwriter prior to any reduction in
the amount of Registrable Securities to be included; and provided further that
-------- -------
if such offering is not underwritten, then such piggy-back rights shall only be
exercised with the consent of the Holders of Warrants exercisable into a
majority of the Warrant Shares being offered under such Shelf Registration
Statement.
(b) Amendments and Waivers. The provisions of this Agreement,
----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the Company has obtained the written consent of Holders
of Warrants exercisable into at least a majority of Warrant Shares which are
affected by such amendment, modification, supplement, waiver or consent.
17
<PAGE>
(c) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be in writing and shall be deemed to have been duly
given if delivered personally or sent by telecopier, registered or certified
mail (return receipt requested), postage prepaid or courier to the parties at
their respective addresses set forth on the signature pages hereof (or at such
other address for any party as shall be specified by like notice, provided that
notices of a change of address shall be effective only upon receipt thereof).
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; by confirmed
receipt of transmission, if telecopied; and on the next Business Day, if timely
delivered to a courier guaranteeing overnight delivery.
(d) Successors and Assigns. This Agreement shall inure to the benefit
----------------------
of and be binding upon the successors, assigns and transferees of each of the
parties, including, without limitation and without the need for an express
assignment, subsequent Holders. If any transferee of any Holder shall acquire
Registrable Securities in any manner, whether by operation of law or otherwise,
such Registrable Securities shall be held subject to all of the terms of this
Agreement, and by taking and holding such Registrable Securities such Person
shall be conclusively deemed to have agreed to be bound by and to perform all of
the terms and provisions of this Agreement and such Person shall be entitled to
receive the benefits hereof.
(e) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(f) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(g) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York without regard to
principles or rules of conflicts of law.
(h) Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby, it being intended that all of the rights and privileges of the Holders
shall be enforceable to the fullest extent permitted by law.
(i) Entire Agreement. This Agreement is intended by the parties as a
----------------
final expression of their agreement and is intended to be the complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth
18
<PAGE>
or referred to herein. This Agreement, the Warrant Agreement and the Securities
Purchase Agreement supersede all prior agreements and understandings between the
parties with respect to such subject matter.
(j) Attorneys' Fees. In any action or proceeding brought to enforce
---------------
any provision of this Agreement or where any provision hereof is validly
asserted as a defense, the successful party shall, to the extent permitted by
applicable law, be entitled to recover reasonable attorneys' fees in addition to
any other available remedy.
(k) Further Assurances. Each party shall cooperate and take such
------------------
action as may be reasonably requested by another party in order to carry out the
provisions and purposes of this Agreement and the transactions contemplated
hereby.
(l) Remedies. In the event of a breach or a threatened breach by any
--------
party to this Agreement of its obligations under this Agreement, any party
injured or to be injured by such breach will be entitled to specific performance
of its rights under this Agreement or to injunctive relief, in addition to being
entitled to exercise all rights provided in this Agreement and granted by law.
The parties agree that the provisions of this Agreement shall be specifically
enforceable, it being agreed by the parties that remedies at law for violations
hereof including monetary damages, are inadequate and that the right to object
in any action for specific performance or injunctive relief hereunder on the
basis that a remedy at law would be adequate is waived.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
19
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
SILICON GAMING, INC.
By:_________________________________
Name: Thomas E. Carlson
Title: Vice President and
Chief Financial Officer
Notice Information:
Mr. Thomas E. Carlson
Silicon Gaming, Inc.
2800 W. Bayshore Road
Palo Alto, California 94303
Phone: (650) 842-9000
Fax: (650) 842-9001
<PAGE>
REGISTRATION RIGHTS AGREEMENT
PURCHASER SIGNATURE PAGE
B III CAPITAL PARTNERS, L.P.,
a Delaware limited partnership
By: DDJ CAPITAL III, LLC,
its General Partner
By: DDJ CAPITAL MANAGEMENT, LLC,
its Manager
By:_________________________________
Name:
Title:
Notice Information:
Mr. Jay Burnham
DDJ Capital Management, LLC
141 Linden Street, Suite S-4
Wellesley, Massachusetts 02181
Phone: (617) 283-8500
Fax: (617) 283-8555
<PAGE>
EXHIBIT 4.4
================================================================================
WARRANT AGREEMENT
BY AND BETWEEN
SILICON GAMING, INC.
AND
THE PURCHASER NAMED HEREIN
DATED AS OF SEPTEMBER 30, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS
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ARTICLE I WARRANT CERTIFICATES.......................................... 1
Section 1.1 Forms of Warrant Certificates............................ 1
Section 1.2 Execution of Warrant Certificates........................ 1
Section 1.3 Registration of Warrant Certificates..................... 2
Section 1.4 Exchange and Transfer of Warrant Certificates............ 2
Section 1.5 Lost, Stolen, Mutilated or Destroyed Warrant Certificates 2
Section 1.6 Cancellation of Warrant Certificates..................... 2
ARTICLE II WARRANT EXERCISE PRICE AND EXERCISE OF WARRANTS.............. 3
Section 2.1 Exercise Price........................................... 3
Section 2.2 Registration of Warrants and Warrant Shares.............. 3
Section 2.3 Procedure for Exercise of Warrants....................... 3
Section 2.4 Issuance of Common Stock................................. 5
Section 2.5 Certificates for Unexercised Warrants.................... 5
Section 2.6 Reservation of Shares.................................... 5
Section 2.7 No Impairment............................................ 5
ARTICLE III ADJUSTMENTS AND NOTICE PROVISIONS........................... 6
Section 3.1 Adjustment of Exercise Price............................. 6
Section 3.2 Sales of Certain Securities.............................. 7
Section 3.3 No Adjustments to Exercise Price......................... 9
Section 3.4 Adjustment of Number of Shares........................... 9
Section 3.5 Reorganizations.......................................... 9
Section 3.6 Verification of Computations............................. 9
Section 3.7 Notice of Certain Actions................................ 10
Section 3.8 Certificate of Adjustments............................... 10
Section 3.9 Warrant Certificate Amendments........................... 10
Section 3.10 Fractional Shares........................................ 11
ARTICLE IV MISCELLANEOUS................................................ 11
Section 4.1 Payment of Taxes and Charges............................. 11
Section 4.2 Changes to Agreement..................................... 11
Section 4.3 Assignment............................................... 11
Section 4.4 Successor to Company..................................... 12
Section 4.5 Notices.................................................. 12
Section 4.6 Defects in Notice........................................ 13
Section 4.7 Governing Law............................................ 13
Section 4.8 Standing................................................. 13
Section 4.9 Headings................................................. 13
Section 4.10 Counterparts............................................. 13
Section 4.11 Availability of the Agreement............................ 13
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Section 4.12 Entire Agreement......................................... 13
WARRANT AGREEMENT COMPANY SIGNATURE PAGE................................. 14
WARRANT AGREEMENT PURCHASER SIGNATURE PAGE............................... 15
EXHIBIT A - FORM OF WARRANT CERTIFICATE.................................. A-1
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WARRANT AGREEMENT
THIS WARRANT AGREEMENT, dated as of September 30, 1997, is entered into by
and between Silicon Gaming, Inc., a California corporation (the "Company"), and
the undersigned purchaser (the "Purchaser").
WITNESSETH:
WHEREAS, the Company proposes to sell pursuant to a Securities Purchase
Agreement, dated as of September 30, 1997 (the "Securities Purchase Agreement"),
by and between the Company and the Purchaser, units consisting of Senior
Discount Notes in the aggregate principal amount of $30 million (as defined in
the Securities Purchase Agreement) and warrants (each, a "Warrant," and
collectively, the "Warrants") to purchase up to an aggregate of 375,000 shares
(subject to adjustment) of the common stock, par value $.001 per share, of the
Company (the "Common Stock") (the Common Stock issuable upon exercise of the
Warrants being referred to herein as the "Warrant Shares");
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the parties hereto agree as follows:
ARTICLE I
WARRANT CERTIFICATES
Section 1.1 Forms of Warrant Certificates. The warrant certificates (the
-----------------------------
"Warrant Certificates") shall be issued in registered form only and, together
with the form of the election to purchase (the "Election to Purchase"), and
assignment (the "Assignment") to be attached thereto, shall be substantially in
the form of Exhibit A attached hereto and, in addition, may have such letters,
---------
numbers or other marks of identification or designation and such legends,
summaries, or endorsements stamped, printed, lithographed or engraved thereon as
the Company may deem appropriate and as are not inconsistent with the provisions
of this Agreement, or as, in any particular case, may be required in the opinion
of counsel for the Company, to comply with any law or with any rule or
regulation of any regulatory authority or agency, or to conform to customary
usage.
Section 1.2 Execution of Warrant Certificates. The Warrant Certificates
---------------------------------
shall be executed on behalf of the Company by its Chairman or President or any
Vice President and attested to by its Secretary or Assistant Secretary, either
manually or by facsimile signature printed thereon. In case any authorized
officer of the Company who shall have signed any of the Warrant Certificates
shall cease to be an officer of the Company either before or after delivery
thereof by the Company to any Purchaser, the signature of such person on such
Warrant Certificates shall be valid nevertheless and such Warrant Certificates
may be issued and delivered to those persons entitled to receive the Warrants
represented thereby with the same force and effect as though the person who
signed such Warrant Certificates had not ceased to be an officer of the Company.
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Section 1.3 Registration of Warrant Certificates. The Company shall
------------------------------------
number and register the Warrant Certificates in a register as they are needed.
The Company may deem and treat the registered holder(s) of the Warrant
Certificates (the "Holders") as the absolute owner(s) thereof for all purposes.
Section 1.4 Exchange and Transfer of Warrant Certificates. The Warrants
---------------------------------------------
(and any Warrant Shares issued upon exercise of the Warrants) shall bear such
restrictive legend or legends as may be required by the Securities Purchase
Agreement and as may be required by law and shall be transferable only in
accordance with the terms of this Agreement and the Securities Purchase
Agreement.
The Company may from time to time register the transfer of any outstanding
Warrant Certificates in a warrant register to be maintained by the Company upon
surrender thereof accompanied by a written instrument or instruments of transfer
in form satisfactory to the Company duly executed by the Holder or Holders
thereof or by the duly appointed legal representative thereof or by a duly
authorized attorney. Upon any such registration of transfer, a new Warrant
Certificate shall be issued to the transferee(s).
Warrant Certificates may be exchanged at the option of the Holder(s)
thereof, when surrendered to the Company at the address set forth in Section 4.5
hereof for another Warrant Certificate or Warrant Certificates of like tenor and
representing in the aggregate a like number of Warrant Shares: provided that the
--------
Company shall not be required to issue any Warrant Certificate representing any
fractional Warrant Shares.
Section 1.5 Lost, Stolen, Mutilated or Destroyed Warrant Certificates. If
---------------------------------------------------------
any Warrant Certificate shall be mutilated, lost, stolen or destroyed, the
Company shall issue, execute and deliver, in exchange and substitution for and
upon cancellation of a mutilated Warrant Certificate, or in lieu of or in
substitution for a lost, stolen or destroyed Warrant Certificate, a new Warrant
Certificate representing an equivalent number of Warrants or Warrant Shares. If
required by the Company, the Holder of the mutilated, lost, stolen or destroyed
Warrant Certificate must provide indemnity sufficient to protect the Company
from any loss which it may suffer if the Warrant Certificate is replaced. Any
such new Warrant Certificate shall constitute an original contractual obligation
of the Company, whether or not the allegedly lost, stolen, mutilated or
destroyed Warrant Certificate shall be at any time enforceable by anyone.
Section 1.6 Cancellation of Warrant Certificates. Any Warrant Certificate
------------------------------------
surrendered upon the exercise of Warrants or for exchange or transfer, or
purchased or otherwise acquired by the Company, shall be canceled and shall not
be reissued by the Company; and, except as provided in Section 2.5 hereof in
case of the exercise of less than all of the Warrants evidenced by a Warrant
Certificate or in Section 1.4 in an exchange or transfer, no Warrant Certificate
shall be issued hereunder in lieu of such canceled Warrant Certificate. Any
Warrant Certificate so canceled shall be destroyed by the Company.
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ARTICLE II
WARRANT EXERCISE PRICE AND EXERCISE OF WARRANTS
Section 2.1 Exercise Price. Each Warrant Certificate shall, when signed
--------------
by the Chairman or President or any Vice President and attested to by the
Secretary or Assistant Secretary of the Company, entitle the Holder thereof to
purchase from the Company, subject to the terms and conditions of this
Agreement, the number of fully paid and nonassessable Warrant Shares evidenced
thereby at a purchase price of $15.4375 per share (the "Initial Exercise Price")
or such adjusted number of Warrant Shares at such adjusted purchase price as may
be established from time to time pursuant to the provisions of Article III
hereof, payable in full in accordance with Section 2.3 hereof, at the time of
exercise of the Warrant. Except as the context otherwise requires, the term
"Exercise Price" as used in this Agreement shall mean the purchase price of one
share of Common Stock, reflecting all appropriate adjustments made in accordance
with the provisions of Article III hereof.
Section 2.2 Registration of Warrants and Warrant Shares. The Company
-------------------------------------------
shall secure the effective registration of the Warrant Shares for resale under
the Securities Act upon the terms and subject to the conditions set forth in the
Registration Rights Agreement dated as of the date hereof (the "Registration
Rights Agreement") between the Company and the Purchaser. Promptly after a
registration statement under the Securities Act covering the Warrant Shares has
become effective, the Company shall cause notice thereof together with a copy of
the prospectus covering the Warrant Shares to be mailed to each registered
Holder.
Section 2.3 Procedure for Exercise of Warrants. The Warrants may be
----------------------------------
exercised prior to the Expiration Date (as hereinafter defined) at the Exercise
Price at any time after (a) 6 months of the date hereof, (b) eleven (11)
business days following the commencement of a tender offer (as provided in Rule
14d-2 of the Exchange Act (as defined below)) with respect to the Common Stock
pursuant to Regulation 14D promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), unless the Company has published, sent or
given to securityholders pursuant to Rule 14e-2(a) under the Exchange Act a
statement that the Company recommends rejection of such tender offer (a
"Rejection Recommendation"), (c) after a Rejection Recommendation, if and upon
the public announcement by the Company, a filing by the Company with the
Securities and Exchange Commission, or the sending by the Company to
securityholders of a statement pursuant to Rule 14e-2(b) under the Exchange Act,
in each case, which changes the Company's position with respect to such tender
offer to a recommendation of acceptance of such tender offer or an expression of
no opinion with respect to such tender offer, (d) immediately prior to
consummation by the Company of any consolidation or merger with any entity
(other than a wholly-owned subsidiary of the Company) other than a consolidation
or merger as a result of which each of the stockholders of the Company owns,
immediately after consummation of such consolidation or merger, directly or
indirectly, at least 70% of the percentage of the fully diluted capital stock of
the Company or the surviving entity of such consolidation or merger which such
stockholder owned immediately prior to the consummation of such consolidation or
merger, calculated without giving effect to the issuance as part of such
consolidation or merger of up to 375,000 shares of Common Stock upon exercise of
the Warrants, or (e) the consummation by the Company of any sale, transfer or
other disposition of all or substantially all of its property, assets
3
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or business, other than to a wholly-owned subsidiary of the Company. The
Warrants shall expire at 5:00 p.m., New York City time, on September 30, 2002
(the "Expiration Date"). The Warrants may be exercised by surrendering the
Warrant Certificates representing such Warrants to the Company at its address
set forth in Section 4.5 hereof, together with the Election to Purchase duly
completed and executed, accompanied by payment in full, as set forth below, to
the Company of the Exercise Price for each Warrant Share in respect of which
such Warrants are being exercised. Such Exercise Price shall be paid in full by
(i) cash or a certified check or a wire transfer in same day funds in an amount
equal to the Exercise Price multiplied by the number of Warrant Shares then
being purchased or (ii) delivery to the Company of that number of shares of
Common Stock having a Fair Market Value (as hereinafter defined) equal to the
Exercise Price multiplied by the number of Warrant Shares then being purchased.
In the alternative, the Holder of a Warrant Certificate may exercise its right
to purchase some or all of the Warrant Shares subject to such Warrant
Certificate, on a net basis, such that, without the exchange of any funds, such
Holder receives that number of Warrant Shares subscribed to pursuant to such
Warrant Certificate less that number of shares of Common Stock having an
aggregate Fair Market Value at the time of exercise equal to the aggregate
Exercise Price that would otherwise have been paid by such Holder for the number
of Warrant Shares subscribed to pursuant to such Warrant Certificate
(hereinafter, a "Net Cashless Exercise").
As used herein: (a) the term "Fair Market Value," on a per share basis,
means the average of the daily Closing Prices (as hereinafter defined) of the
Common Stock for the five (5) consecutive Trading Days (as hereinafter defined)
ending the Trading Day immediately preceding the Date of Exercise; (b) the term
"Date of Exercise" with respect to any Warrant means the date on which such
Warrant is exercised as provided herein; (c) the term "Closing Price" for any
date shall mean the last sale price reported in The Wall Street Journal regular
-----------------------
way or, in case no such reported sale takes place on such date, the average of
the last reported bid and asked prices regular way, in either case on the
principal national securities exchange on which the Common Stock is admitted to
trading or listed if that is the principal market for the Common Stock or, if
not listed or admitted to trading on any national securities exchange or if such
national securities exchange is not the principal market for the Common Stock,
the last sale price as reported on The Nasdaq Stock Market, Inc.'s National
Market ("Nasdaq") or its successor, if any, or if the Common Stock is not so
reported, the average of the reported bid and asked prices in the over-the-
counter market, as furnished by the National Quotation Bureau, Inc., or if such
firm is not then engaged in the business of reporting such prices, as furnished
by any similar firm then engaged in such business and selected by the Company
or, if there is no such firm, as furnished by any member of the National
Association of Securities Dealers, Inc. ("NASD") selected by the Company or, if
the Common Stock is not quoted in the over-the-counter market, the fair value
thereof determined in good faith by the Company's Board of Directors as of a
date which is within 15 days of the date as of which the determination is to be
made; and (d) the term "Trading Days" with respect to the Common Stock means (i)
if the Common Stock is quoted on Nasdaq or any similar system of automated
dissemination of quotations of securities prices, days on which trades may be
made on such system or (ii) if the Common Stock is listed or admitted for
trading on any national securities exchange, days on which such national
securities exchange is open for business.
4
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Section 2.4 Issuance of Common Stock. As soon as practicable after the
------------------------
Date of Exercise of any Warrants, the Company shall issue, or cause its transfer
agent to issue, a certificate or certificates for the number of full Warrant
Shares, registered in accordance with the instructions set forth in the Election
to Purchase, together with cash for fractional shares as provided in Section
3.10. All Warrant Shares issued upon the exercise of any Warrants shall be
validly authorized and issued, fully paid, non-assessable, free of preemptive
rights and (subject to Section 4.1 hereof) free from all taxes, liens, charges
and security interests in respect of the issuance thereof. Each person in whose
name any such certificate for Warrant Shares is issued shall be deemed for all
purposes to have become the holder of record of the Common Stock represented
thereby on the Date of Exercise of the Warrants resulting in the issuance of
such shares, irrespective of the date of issuance or delivery of such
certificate for Warrant Shares.
Section 2.5 Certificates for Unexercised Warrants. In the event that,
-------------------------------------
prior to the Expiration Date, a Warrant Certificate is exercised in respect of
fewer than all of the Warrant Shares issuable on such exercise a new Warrant
Certificate representing the remaining Warrant Shares shall be issued and
delivered pursuant to the provisions hereof; provided that the Company shall not
--------
be required to issue any Warrant Certificate representing any fractional Warrant
Shares.
Section 2.6 Reservation of Shares. The Company shall at all times
---------------------
reserve and keep available, free from preemptive rights, for issuance upon the
exercise of Warrants, the maximum number of its authorized but unissued shares
of Common Stock which may then be issuable upon the exercise in full of all
outstanding Warrants. The Company shall from time to time take all action which
may be necessary or appropriate so that the Warrant Shares, immediately upon
their issuance following an exercise of Warrants, will be listed or quoted, as
the case may be, on the principal securities exchanges or markets within the
United States of America, if any, on which other shares of the Common Stock are
then listed.
Section 2.7 No Impairment. The Company shall not by any action,
-------------
including, without limitation, amending its articles of incorporation or through
any reorganization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of the Warrants, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such actions as may be necessary or appropriate to protect
the rights of the Holders against impairment. Without limiting the generality
of the foregoing, the Company will (a) not increase the par value of any Warrant
Shares receivable upon the exercise of the Warrants above the amount payable
therefor upon such exercise immediately prior to such increase in par value, (b)
take all such action as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and non-assessable Warrant
Shares upon the exercise of any Warrant, and (c) use its best efforts to obtain
all such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under the Warrants. Notwithstanding the foregoing paragraph,
the Company shall not be required to issue Warrant Shares upon the exercise of
any Warrant if such issuance would result in a violation by the Company of any
applicable law.
5
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ARTICLE III
ADJUSTMENTS AND NOTICE PROVISIONS
Section 3.1 Adjustment of Exercise Price. Subject to the provisions of
----------------------------
this Article III, the Exercise Price in effect from time to time shall be
subject to adjustment, as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on the outstanding shares of its Common Stock in shares of its
Common Stock, (ii) subdivide or reclassify the outstanding shares of its Common
Stock into a greater number of shares, or (iii) combine or reclassify the
outstanding shares of its Common Stock into a smaller number of shares, the
Exercise Price in effect immediately after the record date for such dividend or
distribution or the effective date of such subdivision, combination or
reclassification shall be adjusted so that it shall equal the price determined
by multiplying the Exercise Price in effect immediately prior thereto by a
fraction, of which the numerator shall be the number of shares of Common Stock
outstanding immediately before such dividend, distribution, subdivision,
combination or reclassification, and of which the denominator shall be the
number of shares of Common Stock outstanding immediately after such dividend,
distribution, subdivision, combination or reclassification. Any shares of
Common Stock of the Company issuable in payment of a dividend shall be deemed to
have been issued immediately prior to the record date for such dividend for
purposes of calculating the number of outstanding shares of Common Stock of the
Company under Subsections 3.l(b), 3.l(c) and 3.2(a) hereof. Such adjustment
shall be made successively whenever any event specified above shall occur.
(b) In case the Company shall fix a record date for the issuance of
rights, options, warrants or convertible or exchangeable securities to all
holders of its Common Stock entitling them (for a period which, by its express
terms, expires within forty-five (45) days after such record date) to subscribe
for or purchase shares of its Common Stock at a price per share less than the
Current Market Price (as such term is defined in Subsection 3.1(d) hereof) of a
share of Common Stock of the Company on such record date, the Exercise Price
shall be adjusted immediately thereafter so that it shall equal the price
determined by multiplying the Exercise Price in effect immediately prior thereto
by a fraction, of which the numerator shall be the number of shares of Common
Stock outstanding on such record date plus the number of shares of Common Stock
which the aggregate offering price of the total number of shares of Common Stock
so offered would purchase at the Current Market Price per share, and of which
the denominator shall be the number of shares of Common Stock outstanding on
such record date plus the number of additional shares of Common Stock offered
for subscription or purchase. Such adjustment shall be made successively
whenever such a record date is fixed. To the extent that any such rights,
options, warrants or convertible or exchangeable securities are not so issued or
expire unexercised, the Exercise Price then in effect shall be readjusted to the
Exercise Price which would then be in effect if such unissued or unexercised
rights, options, warrants or convertible or exchangeable securities had not been
issuable.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of shares of its Common Stock (i) of shares of any
class other than its Common Stock or (ii) of evidences of its indebtedness or
(iii) of assets (excluding cash dividends or
6
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distributions (other than extraordinary cash dividends or distributions), and
dividends or distributions referred to in Subsection 3.1(a) hereof) or (iv) of
rights, options, warrants or convertible or exchangeable securities (excluding
those rights, options, warrants convertible or exchangeable securities referred
to Subsection 3.1(b) hereof), then in each such case the Exercise Price in
effect immediately thereafter shall be determined by multiplying the Exercise
Price in effect immediately prior thereto by a fraction, of which the numerator
shall be the total number of shares of Common Stock outstanding on such record
date multiplied by the Current Market Price (as such term is defined in
Subsection 3.l(d) hereof) per share on such record date, less the aggregate fair
market value as determined in good faith by the Board of Directors of the
Company of said shares or evidences of indebtedness or assets or rights,
options, warrants or convertible or exchangeable securities so distributed, and
of which the denominator shall be the total number of shares of Common Stock
outstanding on such record date multiplied by such Current Market Price per
share. Such adjustment shall be made successively whenever such a record date is
fixed; provided, however, that in no event shall the exercise price be less than
zero. In the event that such distribution is not so made, or that such
distribution, by its express terms, is intended to be made, and is in fact made,
to all holders of Warrant Shares upon exercise of their respective Warrants, the
Exercise Price then in effect shall be readjusted to the Exercise Price which
would then be in effect if such record date had not been fixed.
(d) For the purpose of any computation under Subsection 3.1(b) or
3.1(c) hereof, the "Current Market Price" per share at any date (the
"Computation Date") shall be deemed to be the average of the daily Closing
Prices of the Common Stock for the five (5) consecutive Trading Days ending the
Trading Day immediately preceding the Computation Date; provided, however, that
-------- -------
if there shall have occurred prior to the Computation Date any event described
in Subsection 3.l(a), 3.l(b) or 3.1(c) which shall have become effective with
respect to market transactions at any time (the "Market-Effect Date") on or
within such 10-day period, the Closing Price for each Trading Day preceding the
Market-Effect Date shall be adjusted, for purposes of calculating such average,
by multiplying such Closing Price by a fraction, of which the numerator shall be
the Exercise Price as in effect immediately prior to the Computation Date and
the denominator of which shall be the Exercise Price as in effect immediately
prior to the Market-Effect Date, it being understood that the purpose of this
proviso is to ensure that the effect of such event on the market price of the
Common Stock shall, as nearly as possible, be eliminated in order that the
distortion in the calculation of the Current Market Price may be minimized.
Section 3.2 Sales of Certain Securities.
---------------------------
(a) In case the Company shall on or after the date hereof issue or
sell any shares of Common Stock or any rights, options, warrants or convertible
or exchangeable securities containing the right to subscribe for or purchase
shares of Common Stock (excluding Excluded Securities, as defined in Subsection
3.2(b) below) at a price per share less than the fair market value of the Common
Stock on the date of such issuance or sale, which value shall be either the
Current Market Price if the Common Stock is quoted on Nasdaq or listed or
admitted for trading on any national securities exchange, or the value
determined by the Board of Directors in good faith, on a reasonable basis, as
the case may be (which amount shall be subject to adjustment in the event of a
stock dividend, stock split or subdivision, combination or reclassification of
the
7
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Common Stock), then the Exercise Price shall be adjusted immediately thereafter
so that it shall equal the price determined by multiplying the Exercise Price in
effect immediately prior to such issuance or sale by a fraction, of which the
numerator shall be the number of shares of Common Stock outstanding immediately
prior to such issuance or sale (and shares issuable upon conversion of the
Company's Series A1 Preferred Stock and Series B1 Preferred Stock) plus the
number of additional shares of Common Stock the Aggregate Consideration
Receivable (as defined in Subsection 3.2(d) below) would purchase at the fair
market value per share on the date of such issuance or sale as determined above
(which amount shall be subject to adjustment in the event of a stock dividend,
stock split or subdivision, combination or reclassification of the Common
Stock), and of which the denominator shall be the number of shares of Common
Stock outstanding immediately prior to such issuance or sale (and shares
issuable upon conversion of the Company's Series A1 Preferred Stock and Series
B1 Preferred Stock) plus the number of additional shares of Common Stock offered
for subscription or purchase. Such adjustment shall be made successively
whenever such issuance or sale shall occur. To the extent that any such shares
of Common Stock are not so issued or sold or any such rights, options, warrants
or convertible or exchangeable securities are not so issued or sold or expire
unexercised, the Exercise Price then in effect shall be readjusted to the
Exercise Price which would then be in effect if such unissued or unsold shares
of Common Stock and such unissued or unsold or unexercised rights, options,
warrants or convertible or exchangeable securities had not been issuable.
(b) "Excluded Securities" means (i) rights, options, warrants, or
convertible or exchangeable securities issued in any of the transactions
described in Subsections 3.l(b) or (c) or Section 3.5 hereof; (ii) shares of
Common Stock issuable upon exercise of the Warrants, and (iii) shares of Common
Stock issuable upon exercise of rights, options or warrants or conversion or
exchange of convertible or exchangeable securities issued or sold under
circumstances causing an adjustment pursuant to this Section 3.2.
(c) The price per share of Common Stock referred to in Subsection
3.2(a) above shall be determined by dividing (i) the Aggregate Consideration
Receivable in respect of such rights, options, warrants or convertible or
exchangeable securities, by (ii) the total number of shares of Common Stock
covered by such rights, options, warrants or convertible or exchangeable
securities.
(d) "Aggregate Consideration Receivable" means the aggregate amount
paid to the Company for such rights, options, warrants or convertible or
exchangeable securities, plus the aggregate consideration or premiums stated in
such rights, options, warrants or convertible or exchangeable securities to be
payable for the shares of Common Stock covered thereby.
(e) In case the Company shall sell and issue rights, options, warrants
or convertible or exchangeable securities containing the right to subscribe for
or purchase shares of Common Stock, for a consideration consisting, in whole or
in part, of property other than cash or its equivalent, then in determining the
"price per share of Common Stock" referred to in Subsections 3.2(a) and (c)
above and the "Aggregate Consideration Receivable" referred to in Subsections
3.2(a), (c) and (d) above, the Board of Directors of the Company shall
determine, in good faith and on a reasonable basis, the fair value of said
property.
8
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Section 3.3 No Adjustments to Exercise Price. No adjustment in the
--------------------------------
Exercise Price in accordance with the provisions of Subsection 3.1(a), (b) or
(c) or Subsection 3.2(a) hereof need be made unless such adjustment would amount
to a change of at least 0.5% in such Exercise Price, provided, however, that the
-------- -------
amount by which any adjustment is not made by reason of the provisions of this
Section 3.3 shall be carried forward and taken into account at the time of any
subsequent adjustment in the Exercise Price.
Section 3.4 Adjustment of Number of Shares. Upon each adjustment of the
------------------------------
Exercise Price pursuant to Subsection 3.l(a), (b) or (c) or Subsection 3.2(a)
hereof, each Warrant shall thereupon evidence the right to purchase that number
of Warrant Shares (calculated to the nearest hundredth of a share) obtained by
multiplying the number of Warrant Shares purchasable immediately prior to such
adjustment upon exercise of the Warrant by the Exercise Price in effect
immediately prior to such adjustment and dividing the product so obtained by the
Exercise Price in effect immediately after such adjustment.
Section 3.5 Reorganizations. In case of any capital reorganization,
---------------
other than in the cases referred to in Section 3.1 hereof, or the consolidation
or merger of the Company with or into another corporation (other than a merger
or consolidation in which the Company is the continuing corporation and which
does not result in any reclassification of the outstanding shares of Common
Stock or the conversion of such outstanding shares of Common Stock into shares
of other stock or other securities or property), or the sale or conveyance of
the property of the Company as an entirety or substantially as an entirety
(collectively such actions being hereinafter referred to as "Reorganizations"),
there shall thereafter be deliverable upon exercise of any Warrant (in lieu of
the number of Warrant Shares theretofore deliverable) the number of shares of
stock or other securities or property to which a holder of the number of Warrant
Shares which would otherwise have been deliverable upon the exercise of such
Warrant would have been entitled upon such Reorganization if such Warrant had
been exercised in full immediately prior to such Reorganization. In case of any
Reorganization, appropriate adjustment, as determined in good faith by the Board
of Directors of the Company, shall be made in the application of the provisions
herein set forth with respect to the rights and interests of Holders so that the
provisions set forth herein shall thereafter be applicable, as nearly as
possible, in relation to any shares or other property thereafter deliverable
upon exercise of Warrants. Any such adjustment shall be made by and set forth
in a supplemental agreement prepared by the Company or any successor thereto,
between the Company and any successor thereto, and shall for all purposes hereof
conclusively be deemed to be an appropriate adjustment. The Company shall not
effect any such Reorganization, unless upon or prior to the consummation thereof
the successor corporation, or if the Company shall be the surviving corporation
in any such Reorganization and is not the issuer of the shares of stock or other
securities or property to be delivered to holders of shares of the Common Stock
outstanding at the effective time thereof, then such issuer, shall assume by
written instrument the obligation to deliver to the Holder of any Warrant
Certificate such shares of stock, securities, cash or other property as such
holder shall be entitled to purchase in accordance with the foregoing
provisions.
Section 3.6 Verification of Computations. The Company shall select a
----------------------------
firm of independent public accountants (which may be its outside auditors),
which selection may be
9
<PAGE>
changed from time to time, to verify each computation and/or adjustment made in
accordance with this Article III. The certificate, report or other written
statement of any such firm shall be conclusive evidence of the correctness of
any computation made under this Article III. Promptly upon its receipt of such
certificate, report or statement from such firm of independent public
accountants, the Company shall deliver a copy thereof to each Holder.
Section 3.7 Notice of Certain Actions. In the event the Company shall
-------------------------
(a) declare any dividend payable in stock to the holders of its Common Stock or
make any other distribution in property other than cash to the holders of its
Common Stock, (b) offer to the holders of its Common Stock rights to subscribe
for or purchase any shares of any class of stock or any other rights or options,
or (c) effect any reclassification of its Common Stock (other than a
reclassification involving merely the subdivision or combination of outstanding
shares of Common Stock) or any capital reorganization or any consolidation or
merger (other than a merger in which no distribution of securities or other
property is made to holders of Common Stock) or any sale, transfer or other
disposition of its property, assets and business substantially as an entirety,
or the liquidation, dissolution or winding up of the Company; then, in each such
case, the Company shall cause notice of such proposed action to be mailed to
each Holder at least thirty (30) days prior to such action; provided, however,
-------- -------
that in the event that the Company provides public notice of such action
specifying the information set forth below at least fifteen (15) days prior to
such action, the Company shall be deemed to have satisfied its obligation to
provide notice pursuant to this Section 3.7. Such notice shall specify the date
on which the books of the Company shall close, or a record be taken, for
determining holders of Common Stock entitled to receive such stock dividend or
other distribution or such rights or options, or the date on which such
reclassification, reorganization, consolidation, merger, sale, transfer, other
disposition, liquidation, dissolution, winding up or exchange shall take place
or commence, as the case may be, and the date as of which it is expected that
holders of record of Common Stock shall be entitled to receive securities or
other property deliverable upon such action, if any such date has been fixed.
Such notice shall be mailed in the case of any action covered by paragraph (a)
or (b) of this Section 3.7, at least ten (10) days prior to the record date for
determining holders of the Common Stock for purposes of receiving such payment
or offer, and in the case of any action covered by this paragraph (c), at least
ten (10) days prior to the earlier of the date upon which such action is to take
place or any record date to determine holders of Common Stock entitled to
receive such securities or other property.
Section 3.8 Certificate of Adjustments. Whenever any adjustment is to
--------------------------
be made pursuant to this Article III, the Company shall prepare a certificate
executed by the Chief Financial Officer of the Company, setting forth such
adjustments to be mailed to each Holder at least fifteen (15) days prior
thereto, such notice to include in reasonable detail (a) the events
precipitating the adjustment, (b) the computation of any adjustments, and (c)
the Exercise Price and the number of shares or the securities or other property
purchasable upon exercise of each Warrant after giving effect to such
adjustment. Such Certificate shall be accompanied by the accountant's
verification required by Section 3.6 hereof.
10
<PAGE>
Section 3.9 Warrant Certificate Amendments. Irrespective of any
------------------------------
adjustments pursuant to this Article III, Warrant Certificates theretofore or
thereafter issued need not be amended or replaced, but certificates thereafter
issued shall bear an appropriate legend or other notice of any adjustments;
provided the Company may, at its option, issue new Warrant Certificates
- --------
evidencing Warrants in such form as may be approved by its Board of Directors to
reflect any adjustment in the Exercise Price and number of Warrant Shares
purchasable under the Warrants.
Section 3.10 Fractional Shares. The Company shall not be required upon
-----------------
the exercise of any Warrant to issue fractional Warrant Shares which may result
from adjustments in accordance with this Article III to the Exercise Price or
number of Warrant Shares purchasable under each Warrant. If more than one
Warrant is exercised at one time by the same Holder, the number of full Warrant
Shares which shall be issuable upon the exercise thereof shall be computed based
on the aggregate number of Warrant Shares purchasable upon exercise of such
Warrants. With respect to any final fraction of a share called for upon the
exercise of any Warrant or Warrants, the Company shall pay an amount in cash to
the Holder of the Warrants in respect of such final fraction in an amount equal
to the Fair Market Value of a share of Common Stock as of the Date of Exercise
of such Warrants, multiplied by such fraction. All calculations under this
Section 3.10 shall be made to the nearest hundredth of a share.
ARTICLE IV
MISCELLANEOUS
Section 4.1 Payment of Taxes and Charges. The Company will pay all taxes
----------------------------
(other than income taxes) and other government charges in connection with the
issuance or delivery of the Warrants and the initial issuance or delivery of
Warrant Shares upon the exercise of any Warrants and payment of the Exercise
Price. The Company shall not, however, be required to pay any additional
transfer taxes in connection with the subsequent transfer of Warrants or any
transfer involved in the issuance and delivery of Warrant Shares in a name other
than the name in which the Warrants to which such issuance relates were
registered, and, if any such tax would otherwise be payable by the Company, no
such issuance or delivery shall be made unless and until the person requesting
such issuance has paid to the Company the amount of any such tax, or it is
established to the reasonable satisfaction of the Company that any such tax has
been paid.
Section 4.2 Changes to Agreement. The Company, when authorized by its
--------------------
Board of Directors, with the written consent of Holders of at least a majority
of the outstanding Warrants may amend or supplement this Agreement. The Company
may, without the consent or concurrence of any Holder, by supplemental agreement
or otherwise, make any changes or corrections in this Agreement that the Company
shall have been advised by counsel (a) are required to cure any ambiguity or to
correct any defective or inconsistent provision or clerical omission or mistake
or manifest error herein contained, (b) add to the covenants and agreements of
the Company in this Agreement such further covenants and agreements thereafter
to be observed, or (c) result in the surrender of any right or power reserved to
or conferred upon the Company in this Agreement, in each case which changes or
corrections do not and will not adversely affect, alter or change the rights,
privileges or immunities of the Holders.
11
<PAGE>
Section 4.3 Assignment. All the covenants and provisions of this
----------
Agreement by or for the benefit of the Company or the Holders shall bind and
inure to the benefit of their respective successors and assigns.
Section 4.4 Successor to Company. In the event that the Company merges
--------------------
or consolidates with or into any other corporation or sell or otherwise
transfers its property, assets and business substantially as an entirety to a
successor corporation, the Company shall use reasonable commercial efforts to
have such successor corporation assume each and every covenant and condition of
this Agreement to be performed and observed by the Company.
Section 4.5 Notices. Any notice or demand required by this Agreement to
-------
be given or made by any Holder to or on the Company shall be sufficiently given
or made if sent by first-class or registered mail, postage prepaid, addressed as
follows:
Silicon Gaming, Inc.
2800 W. Bayshore Road
Palo Alto, California 94303
Attn: Vice President--Chief Financial Officer
With a copy to:
Gray Cary Ware & Freidenrich,
A Professional Corporation
400 Hamilton Avenue
Palo Alto, California 94301-1825
Attn: James M. Koshland, Esq.
Any notice or demand required by this Agreement to be given or made by the
Company to or on any Holder shall be sufficiently given or made if sent by
first-class or registered mail, postage prepaid, addressed to such Holder and
sent to the following address:
DDJ Capital Management, LLC
141 Linden Street, Suite S-4
Wellesley, MA 02181
Attn: Wendy Schnipper Clayton, Esq.
With a copy to:
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109-2881
Attn: Laura Hodges Taylor, P.C.
Any notice or demand required by this Agreement to be given or made by the
Company to or on any Holder shall be sufficiently given or made, whether or not
such holder receives the notice,
12
<PAGE>
five (5) days after mailing, if sent by first-class or registered mail, postage
prepaid, addressed to such Holder at its last address as shown on the books of
the Company. Otherwise, such notice or demand shall be deemed given when
received by the party entitled thereto.
Section 4.6 Defects in Notice. Failure to file any certificate or notice
-----------------
or to mail any notice, or any defect in any certificate or notice pursuant to
this Agreement shall not affect in any way the rights of any Holder or the
legality or validity of any adjustment made pursuant to Section 3.1 or Section
3.2 hereof, or any transaction giving rise to any such adjustment, or the
legality or validity of any action taken or to be taken by the Company.
Section 4.7 Governing Law. This Agreement and each Warrant Certificate
-------------
issued hereunder shall be governed by the laws of the State of New York without
regard to principles of conflicts of laws thereof.
Section 4.8 Standing. Nothing in this Agreement expressed and nothing
--------
that may be implied from any of the provisions hereof is intended, or shall be
construed, to confer upon, or give to, any person or corporation other than the
Company and the Holders of any right, remedy or claim under or by reason of this
Agreement or of any covenant, condition, stipulation, promise or agreement
contained herein; and all covenants, conditions, stipulations, promises and
agreements contained in this Agreement shall be for the sole and exclusive
benefit of the Company and its successors, and the Holders.
Section 4.9 Headings. The descriptive headings of the articles and
--------
sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
Section 4.10 Counterparts. This Agreement may be executed in any number
------------
of counterparts, each of which so executed shall be deemed to be an original,
and all of which together shall constitute one and the same instrument.
Section 4.11 Availability of the Agreement. The Company shall keep
-----------------------------
copies of this Agreement available for inspection by Holders during normal
business hours. Copies of this Agreement may be obtained upon written request
addressed to the Company at the address set forth in Section 4.5 hereof.
Section 4.12 Entire Agreement. This Agreement, including the Exhibits
----------------
referred to herein and the other writings specifically identified herein or
contemplated hereby, is complete, reflects the entire agreement of the parties
with respect to its subject matter, and supersedes all previous written or oral
negotiations, commitments and writings.
13
<PAGE>
WARRANT AGREEMENT
COMPANY SIGNATURE PAGE
IN WITNESS WHEREOF, this Warrant Agreement has been duly executed by the
parties as of the day and year first above written.
SILICON GAMING, INC.,
a California corporation
By:______________________________________________
Name: Thomas E. Carlson
Title: Vice President and Chief Financial Officer
<PAGE>
WARRANT AGREEMENT
PURCHASER SIGNATURE PAGE
Accepted and Agreed as of the date first written above.
B III CAPITAL PARTNERS, L.P.,
a Delaware limited partnership
By: DDJ CAPITAL III, LLC,
its General Partner
By: DDJ CAPITAL MANAGEMENT, LLC,
its Manager
By:_________________________________
Name:
Title:
Notice Information:
Mr. Jay Burnham
DDJ Capital Management, LLC
141 Linden Street, Suite S-4
Wellesley, Massachusetts 02181
Phone: (617) 283-8500
Fax: (617) 283-8555
<PAGE>
EXHIBIT A - FORM OF WARRANT CERTIFICATE
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, NOR PURSUANT TO THE SECURITIES OR "BLUE
SKY" LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED,
PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED, EXCEPT PURSUANT TO (i) A
REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER
SUCH ACT, (ii) RULE 144 OR RULE 144A UNDER SUCH ACT, OR (iii) ANY OTHER
EXEMPTION FROM REGISTRATION UNDER SUCH ACT RELATING TO THE DISPOSITION OF
SECURITIES. ANY TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO THE TERMS AND CONDITIONS CONTAINED IN A SECURITIES PURCHASE AGREEMENT
DATED AS OF SEPTEMBER 30, 1997, AS AMENDED FROM TIME TO TIME, A COMPLETE AND
CORRECT COPY OF THE FORM OF WHICH WILL BE FURNISHED BY THE ISSUER TO THE HOLDER
HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE. SUCH AGREEMENT, AMONG OTHER
THINGS, RESTRICTS THE DETACHMENT OF THE COMMON STOCK PURCHASE WARRANTS FROM THE
SENIOR DISCOUNT NOTE ATTACHED HERETO.
No. DDJ W-1
Certificate for 375,000 Warrants
NOT EXERCISABLE AFTER 5:00 P.M.,
NEW YORK CITY TIME, ON SEPTEMBER 30, 2002
SILICON GAMING, INC.
COMMON STOCK PURCHASE WARRANT CERTIFICATE
THIS CERTIFIES that GOLDMAN, SACHS & COMPANY FFC: BIII CAPITAL PARTNERS,
L.P., a Delaware limited partnership, or its registered assigns is the
registered holder (the "Registered Holder") of Warrants set forth above, each of
which represents the right to purchase one fully paid and non-assessable share
of common stock, par value $.001 per share (the "Common Stock"), of Silicon
Gaming, Inc., a California corporation (the "Company"), at the Exercise Price
(as defined in the Warrant Agreement) at the times specified in the Warrant
Agreement, by surrendering this Warrant Certificate, with the form of Election
to Purchase attached hereto duly executed and by paying in full the Exercise
Price. Payment of the Exercise Price shall be made as set forth in the Warrant
Agreement (as hereinafter defined). No Warrant may be exercised after 5:00
P.M., New York City time, on September 30, 2002 (the "Expiration Date"). All
Warrants evidenced hereby shall thereafter become void, subject to the terms of
the Warrant Agreement hereinafter referred to.
Prior to the Expiration Date, subject to any applicable laws, rules or
regulations restricting transferability and to any restriction on
transferability that may appear on this Warrant Certificate
A-1
<PAGE>
and in accordance with the terms of the Warrant Agreement hereinafter referred
to, the Registered Holder shall be entitled to transfer this Warrant
Certificate, in whole or in part, upon surrender of this Warrant Certificate at
the principal office of the Company with the form of assignment set forth hereon
duly executed. Upon any such transfer, a new Warrant Certificate or Warrant
Certificates representing the same aggregate number of Warrants to purchase the
shares of the Common Stock will be issued in accordance with instructions in the
form of assignment.
Upon the exercise of less than all of the Warrants to purchase the shares
of the Common Stock evidenced by this Warrant Certificate, there shall be issued
to the Registered Holder a new Warrant Certificate in respect of the Warrants
not exercised.
Prior to the Expiration Date, the Registered Holder shall be entitled to
exchange this Warrant Certificate, with or without other Warrant Certificates,
for another Warrant Certificate or Warrant Certificates for the same aggregate
number of Warrants to purchase the shares of the Common Stock, upon surrender of
this Warrant Certificate at the principal office of the Company.
Upon certain events provided for in the Warrant Agreement, the Exercise
Price and the number of shares of Common Stock issuable upon the exercise of
each Warrant are required to be adjusted.
No fractional shares will be issued upon the exercise of Warrants. As to
any final fraction of a share of Common Stock which the Registered Holder of one
or more Warrant Certificates, the rights under which are exercised in the same
transaction, would otherwise be entitled to purchase upon such exercise, the
Company shall pay the cash value thereof determined as provided in the Warrant
Agreement. No Warrant Certificate representing any fractional Warrant Shares
will be issued.
This Warrant Certificate is issued under and in accordance with the Warrant
Agreement dated as of September 30, 1997 (the "Warrant Agreement") by and among
the Company and the Purchaser (as defined in the Warrant Agreement) and is
subject to the term and provisions contained in the Warrant Agreement. All
capitalized terms not defined herein shall have the meanings given such terms as
set forth in the Warrant Agreement.
This Warrant Certificate shall not entitle the Registered Holder to any of the
rights of a stockholder of the Company, including, without limitation, the right
to vote, to receive dividends and other distributions, or to attend or receive
any notice of meetings of stockholders or any other proceedings of the Company.
A-2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its facsimile corporate seal.
SILICON GAMING, INC.
By: ____________________________________
Name:
Title:
[Seal] Attest:
By:____________________________________
Name:
Title: Secretary
A-3
<PAGE>
[Form of Assignment]
FOR VALUE RECEIVED, the undersigned hereby irrevocably sells, assigns and
transfers unto the Assignee named below all of the rights of the undersigned
represented by the within Warrant Certificate, with respect to the number of
Warrants to purchase the shares of the Common Stock set forth below:
<TABLE>
<CAPTION>
NAME OF ASSIGNEE ADDRESS NO. OF WARRANTS
---------------- ------- ---------------
<S> <C> <C>
</TABLE>
and does hereby irrevocably constitute and appoint _____________________ true
and lawful Attorney, to make such transfer on the books of Silicon Gaming, Inc.,
maintained for that purpose, with full power of substitution in the premises.
Dated: __________ ___, _____ ________________________________________
Signature
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
A-4
<PAGE>
[Form of Election To Purchase]
The undersigned hereby irrevocably elects to exercise ____________ of the
Warrants represented by this Warrant Certificate and to purchase the shares of
Common Stock issuable upon the exercise of said Warrants, and requests that
certificates for such shares be issued and delivered as follows:
ISSUE TO:_______________________________________________________________________
(NAME)
________________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)
________________________________________________________________________________
(SOCIAL SECURITY OR OTHER IDENTIFICATION NUMBER)
DELIVER TO:_____________________________________________________________________
(NAME)
at______________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)
In full payment of the purchase price with respect to the exercise of
Warrants to purchase shares of the Common Stock, the undersigned:
[_] hereby tenders payment of $________ by cash, certified check,
cashier's check or money order payable in United States currency to
the order of the Company; or
[_] hereby delivers to the Company that number of shares of Common Stock
having a Fair Market Value (as defined in the Warrant Agreement) equal
to the Exercise Price multiplied by the number of Warrant Shares being
purchased; or
[_] hereby makes a Net Cashless Exercise (as defined in the Warrant
Agreement).
If the number of Warrants to purchase the shares of the Common Stock hereby
exercised is less than all the Warrants represented by this Warrant Certificate,
the undersigned requests that a new Warrant Certificate representing the number
of such full Warrants not exercised be issued and delivered as follows:
A-5
<PAGE>
ISSUE TO:_______________________________________________________________________
(NAME)
________________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)
________________________________________________________________________________
(SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER)
DELIVER TO:_____________________________________________________________________
(NAME)
at______________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)
Date: __________ ___, ______ ________________________________________
Signature
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
PLEASE INSERT SOCIAL SECURITY OR TAX
I.D. NUMBER OF HOLDER
________________________________________
A-6
<PAGE>
CUSIP 827054 11 5
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, NOR PURSUANT TO THE SECURITIES OR "BLUE
SKY" LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED,
PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED, EXCEPT PURSUANT TO (i) A
REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER
SUCH ACT, (ii) RULE 144 OR RULE 144A UNDER SUCH ACT, OR (iii) ANY OTHER
EXEMPTION FROM REGISTRATION UNDER SUCH ACT RELATING TO THE DISPOSITION OF
SECURITIES. ANY TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO THE TERMS AND CONDITIONS CONTAINED IN A SECURITIES PURCHASE AGREEMENT
DATED AS OF SEPTEMBER 30, 1997, AS AMENDED FROM TIME TO TIME, A COMPLETE AND
CORRECT COPY OF THE FORM OF WHICH WILL BE FURNISHED BY THE ISSUER TO THE HOLDER
HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE. SUCH AGREEMENT, AMONG OTHER
THINGS, RESTRICTS THE DETACHMENT OF THE COMMON STOCK PURCHASE WARRANTS FROM THE
SENIOR DISCOUNT NOTE ATTACHED HERETO.
No. DDJ W-1
Certificate for 375,000 Warrants
NOT EXERCISABLE AFTER 5:00 P.M.,
NEW YORK CITY TIME, ON SEPTEMBER 30, 2002
SILICON GAMING, INC.
COMMON STOCK PURCHASE WARRANT CERTIFICATE
THIS CERTIFIES that GOLDMAN, SACHS & COMPANY FFC: BIII CAPITAL PARTNERS,
L.P., a Delaware limited partnership, or its registered assigns is the
registered holder (the "Registered Holder") of Warrants set forth above, each of
which represents the right to purchase one fully paid and non-assessable share
of common stock, par value $.001 per share (the "Common Stock"), of Silicon
Gaming, Inc., a California corporation (the "Company"), at the Exercise Price
(as defined in the Warrant Agreement) at the times specified in the Warrant
Agreement, by surrendering this Warrant Certificate, with the form of Election
to Purchase attached hereto duly executed and by paying in full the Exercise
Price. Payment of the Exercise Price shall be made as set forth in the Warrant
Agreement (as hereinafter defined). No Warrant may be exercised after 5:00
P.M., New York City time, on September 30, 2002 (the "Expiration Date"). All
Warrants evidenced hereby shall thereafter become void, subject to the terms of
the Warrant Agreement hereinafter referred to.
Prior to the Expiration Date, subject to any applicable laws, rules or
regulations restricting transferability and to any restriction on
transferability that may appear on this Warrant Certificate
<PAGE>
CUSIP 827054 11 5
and in accordance with the terms of the Warrant Agreement hereinafter referred
to, the Registered Holder shall be entitled to transfer this Warrant
Certificate, in whole or in part, upon surrender of this Warrant Certificate at
the principal office of the Company with the form of assignment set forth hereon
duly executed. Upon any such transfer, a new Warrant Certificate or Warrant
Certificates representing the same aggregate number of Warrants to purchase the
shares of the Common Stock will be issued in accordance with instructions in the
form of assignment.
Upon the exercise of less than all of the Warrants to purchase the shares
of the Common Stock evidenced by this Warrant Certificate, there shall be issued
to the Registered Holder a new Warrant Certificate in respect of the Warrants
not exercised.
Prior to the Expiration Date, the Registered Holder shall be entitled to
exchange this Warrant Certificate, with or without other Warrant Certificates,
for another Warrant Certificate or Warrant Certificates for the same aggregate
number of Warrants to purchase the shares of the Common Stock, upon surrender of
this Warrant Certificate at the principal office of the Company.
Upon certain events provided for in the Warrant Agreement, the Exercise
Price and the number of shares of Common Stock issuable upon the exercise of
each Warrant are required to be adjusted.
No fractional shares will be issued upon the exercise of Warrants. As to
any final fraction of a share of Common Stock which the Registered Holder of one
or more Warrant Certificates, the rights under which are exercised in the same
transaction, would otherwise be entitled to purchase upon such exercise, the
Company shall pay the cash value thereof determined as provided in the Warrant
Agreement. No Warrant Certificate representing any fractional Warrant Shares
will be issued.
This Warrant Certificate is issued under and in accordance with the Warrant
Agreement dated as of September 30, 1997 (the "Warrant Agreement") by and among
the Company and the Purchaser (as defined in the Warrant Agreement) and is
subject to the term and provisions contained in the Warrant Agreement. All
capitalized terms not defined herein shall have the meanings given such terms as
set forth in the Warrant Agreement.
This Warrant Certificate shall not entitle the Registered Holder to any of the
rights of a stockholder of the Company, including, without limitation, the right
to vote, to receive dividends and other distributions, or to attend or receive
any notice of meetings of stockholders or any other proceedings of the Company.
<PAGE>
CUSIP 827054 11 5
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its facsimile corporate seal.
SILICON GAMING, INC.
By: ____________________________________
Name:
Title:
[Seal] Attest:
By:____________________________________
Name:
Title: Secretary
<PAGE>
CUSIP 827054 11 5
[Form of Assignment]
FOR VALUE RECEIVED, the undersigned hereby irrevocably sells, assigns and
transfers unto the Assignee named below all of the rights of the undersigned
represented by the within Warrant Certificate, with respect to the number of
Warrants to purchase the shares of the Common Stock set forth below:
<TABLE>
<CAPTION>
NAME OF ASSIGNEE ADDRESS NO. OF WARRANTS
---------------- ------- ---------------
<S> <C> <C>
</TABLE>
and does hereby irrevocably constitute and appoint _____________________ true
and lawful Attorney, to make such transfer on the books of Silicon Gaming, Inc.,
maintained for that purpose, with full power of substitution in the premises.
Dated: __________ ___, _____ ________________________________________
Signature
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
<PAGE>
CUSIP 827054 11 5
[Form of Election To Purchase]
The undersigned hereby irrevocably elects to exercise ____________ of the
Warrants represented by this Warrant Certificate and to purchase the shares of
Common Stock issuable upon the exercise of said Warrants, and requests that
certificates for such shares be issued and delivered as follows:
ISSUE TO:_______________________________________________________________________
(NAME)
________________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)
________________________________________________________________________________
(SOCIAL SECURITY OR OTHER IDENTIFICATION NUMBER)
DELIVER TO:_____________________________________________________________________
(NAME)
at______________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)
In full payment of the purchase price with respect to the exercise of
Warrants to purchase shares of the Common Stock, the undersigned:
[_] hereby tenders payment of $________ by cash, certified check,
cashier's check or money order payable in United States currency to
the order of the Company; or
[_] hereby delivers to the Company that number of shares of Common Stock
having a Fair Market Value (as defined in the Warrant Agreement) equal
to the Exercise Price multiplied by the number of Warrant Shares being
purchased; or
[_] hereby makes a Net Cashless Exercise (as defined in the Warrant
Agreement).
If the number of Warrants to purchase the shares of the Common Stock hereby
exercised is less than all the Warrants represented by this Warrant Certificate,
the undersigned requests that a new Warrant Certificate representing the number
of such full Warrants not exercised be issued
<PAGE>
CUSIP 827054 11 5
and delivered as follows:
<PAGE>
CUSIP 827054 11 5
ISSUE TO:_______________________________________________________________________
(NAME)
________________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)
________________________________________________________________________________
(SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER)
DELIVER TO:_____________________________________________________________________
(NAME)
at______________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)
Date: __________ ___, ______ ________________________________________
Signature
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
PLEASE INSERT SOCIAL SECURITY OR TAX
I.D. NUMBER OF HOLDER
________________________________________
<PAGE>
[LETTERHEAD OF GRAY CARY WARE FREIDENRICH LLP APPEARS HERE]
EXHIBIT 5.1
March 20, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Silicon Gaming, Inc.
Registration Statement on Form S-3
Ladies and Gentlemen:
As legal counsel for Silicon Gaming, Inc., a California corporation (the
"Company"), we are rendering this opinion in connection with the preparation
and filing of a registration statement on Form S-3 (the "Registration
Statement") relating to the registration under the Securities Act of 1933, as
amended, of 375,000 shares of Common Stock, par value $0.001 per share (the
"Common Stock"), issuable by the Company to the Selling Shareholder upon
exercise of a warrant issued in connection with that certain Warrant Agreement
by and between Silicon Gaming, Inc. and B III Capital Partners, L.P., a
Delaware limited partnership, dated September 30, 1997.
We have examined such instruments, documents and records as we deemed relevant
and necessary for the basis of our opinion hereinafter expressed. In such
examination, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the conformity
to the originals of all documents submitted to us as copies.
Based on such examination, we are of the opinion that the 375,000 shares of
Common Stock of the Company being registered pursuant to the Registration
Statement and to be sold by the Selling Stockholder are duly authorized shares
of Common Stock and, when sold, will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement referred to above and the use of our name wherever it
appears in said Registration Statement.
This opinion is to be used only in connection with the issuance of the Common
Stock while the Registration Statement is in effect.
Respectfully submitted,
/s/ Gray Cary Ware & Freidenrich LLP
--------------------------------------
GRAY CARY WARE & FREIDENRICH LLP
<PAGE>
EXHIBIT 5.2
[LETTERHEAD OF BROWNSTEIN HYATT FARBER & STRICKLAND, P.C. APPEARS HERE]
March 20, 1998
Silicon Gaming, Inc.
2800 West Bayshore Road
Palo Alto, CA 94303
RE: Form S-3 Registration Statement of 375,000 Shares of Common Stock of
Silicon Gaming, Inc.
Ladies and Gentlemen:
We have acted as special Colorado counsel to Silicon Gaming, Inc., a
California corporation (the "Company"), in connection with the registration of
375,000 shares of the Company's Common Stock (the "Securities"), as filed with
the U.S. Securities and Exchange Commission (the "Commission"), under the
Securities Act of 1933, as amended (the "Act").
This opinion (this "Opinion") is being furnished to you pursuant to the
section of the Registration Statement (as hereinafter defined), entitled "Legal
Matters." Unless the context otherwise requires, capitalized terms used and not
otherwise defined herein shall have the respective meanings set forth in the
Registration Statement.
In rendering the opinion set forth herein, we have examined and relied on
originals or copies of the Registration Statement relating to the Securities,
filed with the Commission, on March 20, 1998 (the "Registration Statement").
We also have examined such other documents as we have deemed necessary or
appropriate as a basis for the opinion set forth herein.
For purposes of the Opinion, we have assumed the conformity to original
documents of all documents submitted to us as photostatic copies and the
authenticity of the originals of such copies.
Members of our firm are admitted to the Bar of the State of Colorado. We
express no opinion as to the laws of any jurisdiction other than the laws of the
State of Colorado.
<PAGE>
Based upon the foregoing and subject to the limitations, qualifications and
assumptions set forth herein, as of the date hereof, we are of the opinion that
the statements concerning Colorado gaming laws included in the Registration
Statement under the captions "Risk Factors--Regulatory Approval" and
"Business--Gaming Regulation and Licensing--Colorado Regulatory Matters,"
insofar as they relate to statements of law or legal conclusions regarding
Colorado gaming laws and regulations, when taken together, fairly summarize the
information called for with respect to such legal matters, subject to the
qualification that such summaries are inherently incomplete descriptions of
complex statutes, regulations and documents.
This Opinion is provided to you at your request for use in connection with
the registration of the Securities contemplated in the Registration Statement.
This Opinion may not be relied upon for any other purpose, nor may it be quoted
from or referred to, or copies delivered to any other person, without our prior
written consent. Further, this Opinion is given as of the date first written
above and we have no obligation to update this Opinion for any changes in the
law.
Very truly yours,
/s/ Brownstein Hyatt Farber & Strickland
---------------------------------------------
Brownstein Hyatt Farber & Strickland, P.C.
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Period from
inception Nine-months Year Year
(July 27, 1993) Year ended ended ended ended
to March 31, March 31, December 31, December 31, December 31,
1994 1995 1995 1996 1997
-------------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes...... $(140) $(1,866) $(3,974) $(13,364) $(22,986)
Fixed charges (1)...................... - 22 - 77 1,240
Total earnings plus fixed charges...... (140) (1,844) (3,974) (13,557) (21,746)
Fixed charges (1)...................... - 22 - 77 1,240
Ratio of earnings to fixed charges (2). - - - - -
</TABLE>
- -----------
(1) Fixed charges consist of interest expense incurred and the portion of
rental expense under operating leases deemed by the Company to be
representative of the interest factor.
(2) Earnings were inadequate to cover fixed charges by $1,844,000, $13,557,000,
and $21,746,000 for the year ended March 31, 1995 and for the years ended
December 31, 1996 and 1997, respectively. The Company had no fixed charges
during the period from inception (July 27, 1993) through March 31, 1994 and
the nine months ended December 31, 1995.
<PAGE>
EXHIBIT 23.1
------------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Silicon Gaming, Inc. on Form S-3 of our report dated January 27, 1998,
incorporated by reference in the Annual Report on Form 10-K of Silicon
Gaming, Inc. for the year ended December 31, 1997 and to the reference to us
under the heading "Experts" in the Prospectus, which is part of this
Registration Statement.
DELOITTE & TOUCHE LLP
San Jose, California
March 20, 1998
<PAGE>
EXHIBIT 23.3
March 19, 1998
We hereby consent to the reference to our firm under the heading "Experts"
in this Prospectus and the Registration Statement on Form S-3 of which it is a
part.
/s/ Lionel Sawyer & Collins
-----------------------------------------
Lionel Sawyer & Collins
<PAGE>
EXHIBIT 23.4
March 19, 1998
We hereby consent to the reference to our firm under the heading "Experts"
in this Prospectus and the Registration Statement on Form S-3 of which it is a
part.
/s/ Phelps Dunbar, L.L.P.
-----------------------------------------
Phelps Dunbar, L.L.P.
-2-
<PAGE>
EXHIBIT 23.5
March 19, 1998
We hereby consent to the reference to our firm under the heading "Experts"
in this Prospectus and the Registration Statement on Form S-3 of which it is
part.
/s/ Green, Schaaf & Margo, P.C.
-----------------------------------------
Green, Schaaf & Margo, P.C.
-3-
<PAGE>
EXHIBIT 23.6
March 19, 1998
We hereby consent to the reference to our firm under the heading, "Experts"
in the Registration Statement on Form S-3 and related Prospectus of Silicon
Gaming, Inc. for the registration of 375,000 shares of common stock of which
this is a part.
/s/ Sterns & Weinroth
-----------------------------------------------
Sterns & Weinroth, A Professional Corporation
-4-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
1997 Annual Report
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 21,057
<SECURITIES> 0
<RECEIVABLES> 4,980
<ALLOWANCES> 50
<INVENTORY> 6,335
<CURRENT-ASSETS> 33,656
<PP&E> 11,642
<DEPRECIATION> 2,798
<TOTAL-ASSETS> 49,038
<CURRENT-LIABILITIES> 8,569
<BONDS> 22,637
0
3,065
<COMMON> 54,131
<OTHER-SE> (42,806)
<TOTAL-LIABILITY-AND-EQUITY> 49,038
<SALES> 9,550
<TOTAL-REVENUES> 9,500
<CGS> 10,421
<TOTAL-COSTS> 32,534
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,240
<INCOME-PRETAX> (22,986)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,986)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,986)
<EPS-PRIMARY> (2.16)
<EPS-DILUTED> (2.16)
</TABLE>
