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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Mark one
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 000-28294
SILICON GAMING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 77-0357939
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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2800 W. BAYSHORE ROAD PALO ALTO, CA 94303
(Address of principal executive offices) (Zip Code)
650-842-9000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the registrant's Common Stock held by non-
affiliates as of February 28, 1998: $96,364,181
Number of shares outstanding of the issuer's Common Stock, $.001 par value, as
of February 28, 1998: 13,649,198
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's 1997 Annual Report for the year ended December
31, 1997, are incorporated by reference into Parts II and IV of this Form 10-
K. Portions of the definitive Proxy Statement for the Registrant's Annual
Meeting of Shareholders to be held on May 26, 1998, are incorporated by
reference into Part III of this Form 10-K.
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PART I
ITEM 1: BUSINESS
Silicon Gaming, Inc. ("SGI" or the "Company") is engaged in the design,
development, production, marketing and sale of what it believes will be the
next generation of interactive slot machines for use in casinos and other
gaming establishments. The Company's first product, Odyssey(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(TM). In addition, Odyssey's modular components and Machine
Management System(TM) software provides easy-to-use diagnostics designed to
minimize player inconvenience and machine down-time.
In January and February of 1997, the Company conducted regulatory field
trials of its product at Bally's Las Vegas. Based on the results of extensive
tests by the Nevada Gaming Lab and on the results of the field trial, Odyssey
was granted final product approval by the Nevada Gaming Commission on March
20, 1997, allowing the Company to commence commercial distribution of the
Odyssey. Having received product approval, the Company has, through December
31, 1997 installed 1,501 Odyssey machines at 72 properties throughout Nevada,
Missouri and Mississippi. Of these machines, 1,298 were converted to revenue
under one of the three pricing options offered by the Company. Sixty machines
remain installed on a trial basis and the casino operators are required to
purchase the machine outright, participate in SGI's revenue sharing plan or
return the machine to the Company within a defined trial period.
INDUSTRY BACKGROUND
According to industry sources, casino gaming revenue in the United States in
1991, 1992, 1993, 1994 and 1995 was approximately $9.0 billion, $9.9 billion,
$12.6 billion, $14.0 billion and $18.0 billion respectively, and continued
growth was forecast for 1997 and 1998. Slot machines, video gaming machines
and similar devices are the dominant source of gaming revenue for casino
operators in most U.S. markets. Slot revenue as a percentage of total gaming
revenue in 1996 was 63% in Nevada and 69% in Atlantic City. Jurisdictions
where gaming has recently been legalized have reported similar statistics. For
example, in 1996, slot machines accounted for 72% of casino revenue in
Illinois and 67% in Missouri. In addition to constituting the largest portion
of gaming revenue, slot revenue is more profitable than table games for casino
operators, since slot machines require much lower labor costs.
The Company believes that slot machines offer their owners an attractive
return on investment. In December 1997, the average "win per machine per day"
(defined as the average amount of money wagered on a machine less the average
jackpot payoffs) on the Las Vegas Strip was $92. A new slot machine from a
major manufacturer, equipped with player tracking and slot accounting
software, costs approximately $8,000. At this price, a new slot machine
earning the Las Vegas Strip average would recoup its purchase price in 87
days. While certain markets have lower average wins per day than the Las Vegas
Strip, many other markets, such as Atlantic City and Connecticut, often have
casinos with win per day figures over $300.
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All casino games offer the same underlying proposition: the opportunity to
win money in varying amounts and with varying frequency, but with the
statistical certainty of losing money to the casino operator over an extended
period of time. With slot machines, the prospect of winning can be varied
across the spectrum from many small jackpots won frequently to one very large
jackpot won very rarely. Players' risk/reward appetites will determine what
type of machine they will want to play, and the nature of the payoffs can be
deduced from the "pay table," a chart that graphically shows how much can be
won based on various outcomes and various amounts of money wagered.
Notwithstanding the differences in jackpot frequency and size, however, all
slot machines retain a net amount of the money wagered through them over time.
This amount is referred to as the "hold" and is generally expressed as a
percentage of the amount of money wagered on a machine, which is called the
"handle." The handle in any given machine is preset by the manufacturer based
on specifications from the casino, subject to legal parameters in some
jurisdictions, and may differ from machine to machine on a casino floor.
The U.S. gaming machine market is currently dominated by reel-based slot
machines, which were broadly introduced in the 1960s, when the free-spinning
reel was made possible by advances in electro-mechanical circuitry. The free-
spinning reel enabled manufacturers to create different versions of the same
product by varying such things as the number of reels, the number of stops on
each reel and the number and variety of payoff combinations. The 1980s saw the
introduction of virtual reel "stepper" technology which allowed for a greater
number of stops, or outcomes, on a reel, enabling casino operators to offer
larger jackpots due to the lower likelihood of their being hit. Another
significant development was the installation of electronic memory in machines,
allowing players to keep an "account" of credits on the machine consisting of
the initial amount inserted plus winnings minus losses. Since the player did
not have to reinsert coins for every pull of the handle, the number of pulls
per hour was increased significantly, and players tended to rewager much of
the amounts won, raising the total win per machine. Except for the addition of
features such as bill acceptors and player tracking systems, the technology
employed by slot machines in the 1970s and 1980s still predominates in
current-generation machines.
In the 1980s, hardware and software advances allowed for application of
video graphics to gaming devices. Using these techniques, International Game
Technology, Inc. ("IGT") was the first company to introduce video poker. Video
poker offers slot players two important advantages. First, the game is
interactive, since the player has to decide which cards to hold or discard
during the hand. This feature allows the outcome to be influenced somewhat by
the player, an attribute unavailable on reel-based machines. Second, the use
of a video screen allows machine manufacturers to develop more interesting and
attractive graphics than are available on reel-based slot machines. Recently,
Bally Gaming expanded the capabilities of video-based devices when it
introduced GameMaker, a popular video-based machine which offers the player a
choice of up to twelve different games on a single machine. The Company
believes that the popularity of video poker and multi-game machines suggests
that customers may be receptive to a more complex and interactive slot
experience.
In the late 1980s, a category of slot machine games called "progressives"
was introduced and became very popular. The progressive configuration
generally consists of traditional reel-based machines linked together by a
computer network that allows them to share a common jackpot which is usually
much larger than the jackpot that a single, unlinked machine could support.
Progressive jackpots are usually several million dollars, and have
occasionally exceeded $10 million. Progressives may be linked locally within a
bank of a few machines, across an entire casino, or across an entire state.
IGT is the dominant competitor in the progressives market.
Growth in demand for slot machines has historically been driven by the
opening of new casinos, including casinos in jurisdictions where gaming has
recently been legalized. However, in recent years, the rate at which new
jurisdictions have legalized gaming has fallen significantly; therefore, the
Company believes that demand based on new openings will be largely limited to
new projects in existing markets. Several new projects are under construction
or have been announced in Las Vegas, Atlantic City, on the Gulf Coast and in
the Midwest.
While the physical useful life of a slot machine can be up to a decade or
more, casino operators have tended to replace machines on a cycle closer to
every five years. Also, the development of certain new features which
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offer the prospect of significantly increased slot earnings, such as the
advent of bill acceptors in the 1990s, can encourage operators to replace
machines even more rapidly.
STRATEGY
Although the gaming industry has enjoyed significant growth over the past
decade, the Company believes that most of the investment over this period has
been made in assets such as large hotels and themed attractions, and that
comparatively little has been invested in further developing the actual casino
games which, in the aggregate, account for a majority of the average casino's
revenue and profits. SGI's strategy is to tap what it believes is an
underexploited segment of the gaming market by developing what it believes
will be the next generation of interactive slot machines and on implementing
its strategy of providing a gaming platform that offers slot machine players a
more entertaining and engaging experience than is available from current
gaming machines. The Company believes that its machines will encourage casino
patrons to play more frequently and for longer periods of time and will also
attract new gaming customers, particularly younger patrons who typically are
not attracted to current generation slot machines. The Company believes that,
as a result, its machines will outperform most existing machines in win per
machine and thus motivate casino operators to supplement or replace existing
slot machines with SGI products.
Because of the importance of slot win to casino operators and the high
returns available from an investment in slot machines, the Company believes
that casino operators are willing to try new slot machine products that offer
the prospect of higher win per machine per day. At the same time, operators
are motivated to remove any machines that are performing significantly below
expectations. SGI believes that its machines will generate win per machine per
day that will exceed that of the average installed machine and, therefore, it
believes that it will be able to penetrate the market, generate orders for its
machines and maintain a share of casino floor space. However, the tastes and
playing styles of slot players are difficult to predict with certainty, and
there can be no assurance that SGI's machines will, in the long run,
outperform competing machines in win per machine per day.
The Company believes that new slot machine sales in the replacement category
will surpass sales for new installations in the near future, due to the
slowing in demand from new casino projects, and because the large number of
machines installed during the high-growth period of the early 1990s will soon
be reaching their normal replacement time.
The market for slot machines outside of North America is relatively small,
with the exception of Australia, and is generally difficult to forecast. In
addition, international markets have often served as an outlet for used
machines. While SGI intends to take advantage of certain opportunities in
international markets, it intends to pursue these markets only after
successfully establishing its market position in North America.
SGI's initial sales of Odyssey include the hardware platform bundled with a
suite of six games, play stoppage entertainment and the Machine Management
System. SGI sells Odyssey at a significant premium to most current slot
machines based on its belief that Odyssey will generate greater win per unit.
The Company offers Odyssey to casino operators and other potential purchasers
using two alternative purchase programs, consisting of either (i) the sale of
the hardware unit bundled with a single game or a suite of games and other
software for a fixed price, or (ii) the sale of the hardware unit alone
combined with a renewable one-year software license, including access to the
entire Odyssey game library for the term of the license.
In order to support the initial rollout of Odyssey and promote more rapid
expansion, the Company also has developed a unique revenue sharing plan as an
alternative to the two purchase pricing options. Under this plan, the casino
operator is not required to make an upfront capital investment and does not
take ownership of the machines; rather, in exchange for placing the machines
on the floor, the casino operator agrees to share with the Company the
aggregate win generated by the machines. Under this plan, 20% of the aggregate
win goes to the Company, subject to a predetermined minimum.
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In order to broaden distribution and accelerate market penetration, SGI
plans to introduce a single game strategy that it believes will enable it to
capture a significant portion of the casino floor. The Odyssey multigame
platform's flexibility enables casino operators to evaluate, analyze and
optimize game offerings for a particular customer base. As the next step in
the penetration of the casino floor, SGI intends to offer a lower-cost single-
game platform that will enable the operators to roll out and promote those
games which are most successful in their particular casinos. SGI believes that
players will ultimately identify with individual games and the single-game
platform will enable slot operators to leverage the brand identity of popular
games such that they are easily recognizable and accessible on the casino
floor. Additionally, SGI believes that the single-game strategy will enable it
to penetrate areas of the casino floor that are dedicated to a particular game
type such as stand-alone Keno.
SGI PARADIGM
SGI believes that it has succeeded in improving on the standard slot machine
game in part due to its understanding of the slot machine market and the
casino patron, in particular. The Company believes it has identified an
underlying structure to the typical slot play session, consisting of four
distinct phases: initial attraction; initial play; extended play; and
completion. During each of these phases, certain factors determine whether the
player advances from one phase to the next. SGI has sought to understand these
four phases so that (1) it can maximize the likelihood that a slot customer
will play its machine, (2) once playing, the player will stay at the machine
for a long period of time, and (3) the player will return frequently to play
the same or similar SGI machines. When developing Odyssey and games played on
Odyssey, the Company has focused on the four phases of play in order to
deliver a full entertainment experience to the casino patron.
Initial Attraction. The Company believes that the factors that determine
whether a customer will initiate play include the machine's visual appeal,
the payout structure, promotional graphics and other external attributes
that convey the impression that the machine would be entertaining to play.
Initial Play. Once play commences, the customer makes an initial decision
about whether to continue. The Company believes that factors affecting this
decision include whether the game meets the customer's entertainment
expectations, conforms to his or her payout expectations, is easy to
understand and play, and is relatively trouble-free.
Extended Play. Extended play occurs when the player has become fully
engaged in the entertainment experience provided by the game. Because
extended play eliminates idle machine time, this phase is strongly desired
by casino operators. Once the player commits to extended play, any
interruption in play, such as a fill, malfunction or reset for change
service, becomes an excuse to end the session.
Completion. Completion is the final phase of the play session and can
occur, for example, when the customer runs out of money, runs out of time,
or achieves a targeted jackpot level. One of the Company's goals in
designing its gaming platform is to increase the likelihood that the player
will leave the completion phase with the desire to play the same machine at
a later time based on a number of factors, including winnings and
entertainment value.
PRODUCT
The Company has developed a product that it believes represents the next
generation of interactive gaming devices for use in casinos and other gaming
establishments in the United States and worldwide. Odyssey utilizes multimedia
technologies to present casino games that it believes will be more engaging
and entertaining than other gaming devices currently available. The Company's
games feature high-resolution video presented across the full surface of a
large touchscreen display. The games feature high-quality animation, video
clips, digital sound and a level of game attractiveness and interaction that
the Company believes is unavailable from and unachievable by current-
generation slot machines. Unlike traditional "hardware-dominant" slot
machines, Odyssey runs games that are software based, allowing SGI and casino
operators to adapt their game offerings to
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evolving technologies and changing consumer tastes without structural change
to, or replacement of, the gaming platform.
PLATFORM, HARDWARE AND OTHER PHYSICAL ATTRIBUTES
SGI's gaming platform is designed to resemble a traditional slot machine in
many respects. The machine occupies the same footprint as a traditional slot
machine and is of roughly the same general size and shape, enabling casino
operators to replace traditional slot machines with SGI's machines without any
reconfiguration of the casino floor. The most distinctive attribute of the
product is its vertically-oriented, 26-inch-diagonal touchscreen video
monitor. A player's sense of interactivity is heightened by the ability to
make all the required decisions on the screen, within the game itself. For
players who are uncomfortable or unfamiliar with touchscreen devices, however,
all of the traditional slot machine controls have been included as well. Thus,
a player can control the game by using the touchscreen, by pushing a series of
buttons similar to those found on current slot or video poker machines, or by
pulling a handle as on traditional slot machines. Coin handling mechanisms,
bill acceptors, card readers and other devices related to cash deposit, credit
and win payout are similar to those used in current gaming machines. The
music, voice and other audible features of the Company's games are played on a
digital sound system.
The principal electronic hardware used in SGI's gaming platform consists of
high-end multimedia and personal computer components. The central processing
unit is a 166-MHz Intel Pentium chip. This processor is accompanied by a
variety of video and auxiliary controllers, some of which have been developed
exclusively for use with the Company's product. To achieve high-level
multimedia performance from the system, the Company's machine uses 64
megabytes of random access memory. Storage for the audio and visual media
elements of the games, as well as the product software itself, is provided by
a 4 gigabyte hard disk drive. These components are connected internally by a
high-speed PCI bus. SGI's reliance on sophisticated full-motion video and
high-quality audio presentations requires the use of state-of-the-art
technology, and SGI expects to upgrade the performance of its platform
periodically as higher-performance components become available. SGI machines
are intended to be easily reconfigurable in the field through the replacement
of hardware components such as computer motherboards and video and auxiliary
controllers, allowing casino operators to upgrade hardware in a cost-effective
manner.
SGI's gaming platform employs modular construction at almost every level,
facilitating upgrades and minimizing machine down-time. Such modularity
permits the rapid exchange of components for upgrades or to replace defective
parts. Using SGI's proprietary Machine Management System, casino personnel can
run a variety of diagnostic programs or review detailed performance data
directly from the gaming platform itself. In the case of a malfunctioning
component, a casino technician can quickly restore play simply by swapping out
the failed component with a new one. The modularity of SGI's platform will
also facilitate upgrades of hardware components such as card readers and bill
validators as new components become available. The Company believes that these
features may allow casino operators to reduce platform down-time and shorten
the time required to fix any malfunction, thereby increasing the time the
platform is available for play and reducing the risk that a player will elect
to terminate a gaming session as a result of play stoppage.
The Company's gaming platform is assembled almost entirely from off-the-
shelf hardware, which the Company anticipates will reduce the chance of a
parts shortage and will enable the Company to continue to manufacture its
devices using state-of-the-art components as PC and multimedia technologies
advance. There can be no assurance, however, that the Company will continue to
enjoy a reliable supply of hardware components. Moreover, certain components
such as the touchscreen display and monitor are manufactured by single sources
and may be particularly susceptible to interruptions in supply. Although SGI
does develop proprietary components in order to meet certain specialized
requirements of its platform, the Company intends to primarily use
commercially available computer hardware components as a regular part of its
product development process.
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SGI's machines have been designed to accept future hardware upgrades that
will take advantage of networking capabilities. When networked, two or more
machines can be linked, facilitating activities such as group play,
tournaments and progressives. For example, a particular group of platforms can
be configured to announce to players that a tournament will begin at a
particular time and allow each player the option to participate. Similarly,
platforms can be configured so that when one machine hits a jackpot, a player
at another machine can win a bonus award; the two affected platforms can then
display a coordinated audio/video simulation of a coin flying out of one tray
and into the other. The Company believes that features of this kind will
promote interaction among players at adjacent platforms and thereby maintain
player interest for longer periods of time.
SGI has incorporated numerous features into its gaming platform that are
designed both to attract the player and to maintain his or her interest over
an extended period of time. For example, SGI's gaming platform can be
programmed to allow for a free spin following a specified number of
unsuccessful attempts in order to ensure a minimum level of reward to the
player. Similarly, SGI's machines are capable of running promotional or
entertainment video programs during play stoppages such as those caused by a
hopper refill, malfunction or request for change. These features have been
designed to reduce the likelihood that a player will leave the machine during
a play stoppage event. These features may also provide an additional revenue
or promotional source to the operator by providing an advertising medium.
To address the desire of slot machine operators to respond efficiently to
service calls that cause stoppages in play, SGI's slot machine incorporates
what SGI believes to be a significant improvement over the traditional
"candle" (the light on the top of a slot machine). SGI's multi-state candle
uses variable color and strobe rate displays to convey more information than a
simple call for help. Different colors signify different service calls, and
changes in strobe rate signify how long the customer has been waiting,
features that the Company believes will assist the casino floor staff in
prioritizing responses to customer needs.
GAMES AND OTHER SOFTWARE
While SGI believes that the design of its machine and its hardware
components are important to its operation and its ability to foster initial
and extended play, it believes that the most important factor affecting the
success of its platform will be the games themselves and the software that
controls those games. The majority of the Company's development efforts to
date have been devoted to hardware, system software and game development, and
the Company expects that, in the future, game development will be its
principal development activity.
Odyssey is a multi-game platform. The Company's initial release of Odyssey
included six separate game themes, play stoppage entertainment and the Machine
Management System. The Company intends to introduce at least ten to twelve new
games per year.
The Company's games have been designed to present traditional casino games
with the benefit of video and audio enhancements that are afforded by the
Company's use of high-end multimedia hardware. While the underlying game may
consist of a traditional casino game such as poker, keno, blackjack or a reel-
based slot machine, the game itself is only one aspect of the entertainment
experience. Such games may be enhanced by an entertaining story and a rich
multimedia environment.
The Company believes that the combination of its attractive machine, high-
level graphics and sound, bonusing features and the pursuit of an interesting
and entertaining story will make SGI's product outperform conventional slot
machines at each of the four phases of slot machine play--initial attraction,
initial play, extended play and completion.
Initial Attraction. The Company believes that the physical appearance of
its machines is more attractive than conventional machines and will entice
customers to play. In addition to the physical attributes of its machines,
the Company has included a suite of video images that run when the machine
is not being
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played. These include short, animated vignettes from the Company's games
and "help" screens, as well as a menu page identifying all of the games
available on that particular machine. Information regarding any game can be
viewed through the push of a "Help" button. These merchandising segments
feature the same quality of graphics, sound, video and animation that
distinguish all of SGI's games.
Initial Play. In the initial play period, SGI believes it is necessary to
quickly engage the customer in the story line and to avoid any confusion,
unfamiliarity or negative experiences which might cause the customer to
discontinue play. For this reason, the Company's initial suite of games
consisted of enhanced versions of traditional casino games, including reel-
based slot games, so that the rules of the game will be well known. SGI
presents these games using enhanced graphics and sound to enrich the play
experience, without changing the fundamental characteristics or objective
of the game. In addition, the machine offers traditional game controls for
those players unfamiliar or uncomfortable with the touchscreen interface.
Extended Play. The Company believes that the enhancements it has made to
traditional casino games by the addition of high level graphics, sound,
animation and storyline will encourage extended play, as well as more
frequent play, and thereby generate greater win per machine than the
unenhanced versions of these games available in conventional machines.
A significant feature which the Company believes will contribute
significantly to extended play is the introduction of advanced play levels
in which a player, by virtue of having played a certain amount of time or
achieved a certain number of jackpots at one level, gains access to a bonus
sequence in which larger jackpots become available. For example, in Fort
Knox, one of the Company's reel-based games, a 10-digit master combination
to the main vault appears in the play field. At random time intervals
during play, another digit on the main vault lock is matched. When the main
vault is opened, a player may select from one of three vault drawers to
receive an additional bonus.
To facilitate extended play, the Company has developed a sophisticated
on-line tutorial, help features and play stoppage entertainment. The
tutorial and help features generally consist of video inserts designed to
provide orientation, instruction and assistance before or during the game.
In Fort Knox, for example, Seymour Bucks, the main security guard at Fort
Knox, can appear if there is a call for change and provide assistance. If
there is a machine play stoppage, a hopper fill requirement, or a jackpot
requiring the player to be hand paid, Professor Jack Potts, the absent-
minded slot genius, will explain the cause of the play stoppage and present
trivia, other game information, video clips advertising the casino's
amenities or upcoming promotions and tournaments, or other commercial
material.
Completion. The Company believes that the principal events that lead to
completion of play include the player's running out of money, running out
of time or achieving a targeted jackpot level. The Company believes that
the unique features and entertainment value of its games will entice
players to remain in the extended play phase for longer periods of time
than are generally fostered by current generation slot machines. Moreover,
the design of the Company's platform and games is intended to provide an
entertainment experience that will encourage repeated play.
In addition to features that are designed to enhance the entertainment value
of SGI's machine and its ability to generate incremental revenue for the
casino, SGI's platform incorporates proprietary features that are designed to
overcome certain hurdles that may be involved in obtaining regulatory
licensing of a slot machine design, as well as to facilitate easy maintenance
and supervision by casino personnel. These features are as follows:
Random Number Generator. At the core of every gaming machine is a random
number generator that determines the outcome of every gaming proposition.
To eliminate what the Company believes are some of the impediments to
randomness that characterize random number generators, SGI engaged Dr.
Evangelos A. Yfantis, a recognized authority in the field of random number
algorithms, to develop a proprietary random number generator algorithm for
the Company. The Company has filed a U.S. patent application with respect
to its algorithm. See "Proprietary Rights and Licensing."
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Software Authentication. A critical element of all gaming machines is an
authentication mechanism to determine that the software being used is
identical to the software that has been approved by regulatory authorities
and is operating correctly. Traditional slot machines must be authenticated
manually, a process usually performed only after a sizable jackpot award.
This infrequency of checks offer greater opportunities to breach the
security of traditional machines. The Company has developed a proprietary
authentication process which leverages the advanced capabilities of the
Company's machine to verify the integrity of a game each time it is
selected for play. This process combines sophisticated authentication
routines developed by RSA Data Security, Inc. with a proprietary
methodology developed by the Company. The Company's authentication process
provides continual checking of the machine's software for both accidental
corruptions and intentional attempts to cheat the machine. Any detected
anomalies will cause the machine to signal the loss of integrity
immediately. The Company has filed for patent protection for certain
aspects of its authentication methodology. See "Proprietary Rights and
Licensing."
Machine Management System. The Company's Machine Management System is
designed to provide easy access to the configuration, accounting, and
diagnostic capabilities of the machine. The Machine Management System's
accounting functions are designed to provide a rapid, easy-to-interpret
report of all key machine metering data, as well as detailed accounting and
statistics, on a game-by-game basis. The Machine Management System uses the
machine's touchscreen to make installation and setup of the machine easier
than traditional slot machines. The diagnostic programs comprise a user-
friendly maintenance and troubleshooting system that allows casino floor
personnel to quickly and effectively assess the cause of a play stoppage or
other malfunctions or to examine transaction history where the validity of
a jackpot or other transaction must be verified. For example, if a player
asserts that the machine has not given full credit for a jackpot or has not
properly recorded a cash input, a floor manager, using the touchscreen and
a key, can access comprehensive data to review transaction and event
history. With this information, the floor manager can rapidly evaluate the
merit of the player's claim and take appropriate action at the machine's
location without having to consult back office records or review
surveillance videotape.
PRODUCT DEVELOPMENT
The Company's product development efforts, particularly its game development
efforts, will be critical to its success in the gaming market. Research and
development expenses have increased significantly since inception and are
expected to continue to increase in the future. During the nine-month period
ended December 31, 1995 and the years ended December 31, 1996 and 1997, the
Company's research and development expenses were $3,137,000, $7,030,000 and
$9,283,000, respectively. At December 31, 1997, 55 of the Company's 190 full-
time employees were engaged in research and development.
Ideas for new games are derived from customer preferences as perceived by
the Company or ascertained through the Company's market research and direct
feedback from slot machine operators. The initial designs for the Company's
games are conceived by a design team, which outlines the appearance and
features of each game. A prototype is developed by a production team that
includes a producer, product manager, artists, computer graphics engineers and
entertainment software engineers. The game is then evaluated by SGI's
marketing and sales staff, after which it is modified into its final form. The
Company estimates that the development of a typical game takes approximately
five to eight months and costs approximately $500,000 to $700,000.
SGI is continually seeking to develop a variety of specific games which
management believes will appeal to casino operators and their customers.
Currently, the Company is engaged in the development of games based on
traditional slot machine games such as animated reel slots, video poker and
keno. The Company is also in the process of creating slot machine versions of
popular casino games such as blackjack and roulette. These initial games are
intended to help customers look beyond the unfamiliar technology to
recognizable game types. In addition, the Company is developing a line of
Magic Windows type games. The proprietary Magic Windows game type introduces
decision making into a traditional reel-slot experience by allowing the player
to select from a number of available symbols.
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Completion of games under development is subject to various risks and
uncertainties. Such games may be subject to further creative decisions that
could alter the game implementation or marketing considerations that could
result in a shift of the Company's development focus to different types of
games altogether. Successful completion of any game will also be subject to
risks typically associated with the creative process, such as the risk that
the Company's creative team will be unable to achieve the desired results in
terms of the game's entertainment quality.
Over time, SGI expects to introduce additional games that offer a wider
range of gaming experiences as players become more familiar with the
capabilities of advanced video gaming platforms. For example, the Company may
introduce games with sports attributes such as baseball, football or golf. The
Company also anticipates developing some of its games for progressive formats
in which the Company's machines would be networked to support a common jackpot
that is significantly larger than that which a stand-alone machine could
offer.
SALES AND MARKETING
The ultimate success of SGI's gaming platform depends on its acceptance by
casino operators and casino patrons. The Company believes that, from the point
of view of casino operators, the attractiveness of any gaming platform depends
on win per machine, ease of upgrade, maintenance and game change and
information management. The Company believes that, from the casino patron's
perspective, the attractiveness of a platform is a function of entertainment
value. SGI's sales and marketing strategy is to generate product sales by
highlighting the advantages presented by its gaming platform to casino
operators, such as potential for increased win per machine; and by developing
processes focused on key operator values. SGI's marketing strategy also
targets casino players and will focus on developing brand recognition for
SGI's games, which the Company believes can be accomplished through the
development of proprietary games that deliver greater entertainment value for
the gaming dollar.
SGI intends to position itself as a partner with casino operators in
establishing the next generation of wagering entertainment. The Company
recognizes the important role that casino operations personnel play in
establishing market acceptance for new machines and thus will target this
group with products, sample game platforms and training.
Because SGI's games are software-based, SGI believes that there will be a
significant opportunity for game customization and the development of games
for the exclusive use of one or more casino customers. It is already
commonplace for casinos to ask that conventional slot machines be customized
with the casino's logo or theme. SGI believes that it can significantly exceed
this level of customization by inserting the casino's logo or theme directly
in the game, by presenting images of the casino's other games and amenities,
or by creating a new game entirely based on the casino's theme. The Company
intends to charge customers a fee for this work.
THREE-PHASE PRODUCT INTRODUCTION
The Company introduced its product and began its marketing and sales efforts
in a controlled and deliberate manner, following a three-phase program that
began in 1996 and is expected to be completed in 1998:
1996: In the initial phase, the Company's primary objective was to
complete development of Odyssey and to have it licensed and available for
sale in one or more jurisdictions. The Company was approved by the Nevada
Gaming Control Board to conduct a 60-day field trial of Odyssey in December
1996. Final approval was granted in March 1997, allowing the Company to
make its first customer shipment into Nevada.
1997: The Company commenced installations of its product in certain Las
Vegas casinos during the first quarter of 1997. The Company's plan was to
limit the number of machines it sold in 1997 so that it could carefully
monitor the reactions of gaming patrons and casino operators to its
platform, game software
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and product support features. Based on the feedback obtained through this
process, the Company periodically introduced modifications and enhancements
to Odyssey's hardware and software components. Also during this period, the
Company built its sales and support infrastructure in order to properly
support customers when full rollout, planned for 1998, takes place.
1998: In 1998, the Company expects to broadly market and sell its
platform and software-based games. Because of the restraints imposed by its
product introduction program, the Company currently believes that 1998 will
be the first year in which a reasonable assessment of the commercial
potential of its product can be made.
The successful introduction of the Company's product is subject to
substantial risks and uncertainties, including the risk of technical or
manufacturing difficulties, the possibility that the SGI platform will not
receive the anticipated market acceptance and possible delays or hurdles
associated with licensing of the Company's product in various jurisdictions.
The Company will be required to be licensed in each jurisdiction in which it
expects to sell product. As of December 31, 1997, the Company had filed
applications to sell its product in Nevada, New Jersey, Mississippi, Missouri,
Colorado, Indiana and Minnesota. To date, the Company has received both
corporate approval and approval to sell its product in Nevada, Missouri and
Mississippi and has also received corporate approval in Colorado. The Company
has also filed an application for approval of its gaming platform in New
Jersey and with Gaming Laboratories International, Inc., an independent
testing facility which grants product approval for many jurisdictions
worldwide. See "Gaming Regulation and Licensing."
Although the Company plans to file applications in other jurisdictions,
there can be no assurance that the Company will be ready to file future
applications or that any licenses will be granted on a timely basis, or at
all.
PRICING
The Company offers its product to casino operators and other potential
purchasers using two alternative purchase programs, consisting either of (i)
the sale of the hardware unit bundled with a single game or a suite of games
and other software for a fixed price, or (ii) the sale of the hardware unit
alone combined with a renewable one-year software license, including access to
the entire Odyssey game library for the term of the license. Based on its
belief that Odyssey will generate substantially greater win per machine than
conventional slot machines and that casino operators attribute more weight to
win per machine than to the machine's purchase price, the Company plans to
offer the foregoing packages at prices that are substantially higher than the
prices of existing slot machines.
In order to support the initial rollout of the Odyssey and promote more
rapid expansion, the Company has also developed a unique revenue sharing plan
as an alternative to the two purchase pricing options. Under this plan, the
casino operator is not required to make an upfront capital investment; rather,
in exchange for placing the machines on the floor, the casino operator agrees
to share with the Company the aggregate win generated by the machines. Under
this plan, 20% of the aggregate win goes to the Company, subject to a
predetermined minimum. The Company offers the casino operator a buyout option
at any point after the 90 day minimum evaluation period, something not
currently offered elsewhere in the industry. Under the buyout option, the
operator receives a credit towards the purchase of the hardware and must then
purchase its choice of software at list price. Because software-based gaming
machines represent a new development for the casino industry, potential
purchasers' preferences for any particular pricing mode have not been
determined. The Company plans to evaluate its pricing and sales methods from
time to time and to incorporate changes as appropriate. The Company believes
that licensing revenue from game software may eventually constitute a
substantial portion of its revenue.
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COMPETITION
The current slot machine market is highly competitive and is dominated by a
small number of manufacturers, some of whom have significantly greater
financial and other resources than the Company. The Company believes that the
principal competitive factors in this market are the appeal of the machine to
players, knowledge of customer requirements and player preferences, service,
support and training, distribution, name and product recognition and price.
IGT may be viewed as a dominant competitor in the slot machine market, with a
1997 market share estimated at 75%. Additional or potential competitors
include Alliance Gaming Corp., Anchor Gaming, WMS Industries Inc., Video
Lottery Consultants, Aristocrat Leisure Industries, Universal Distributing,
Sigma Games, Casino Data Systems, Acres Gaming Inc. and Innovative Gaming
Corporation of America. Companies in historically unrelated industries, such
as Sega, have technological resources that could offer them a competitive
advantage in developing multimedia-based gaming machines. There can be no
assurance that other companies in the video game or multimedia market will not
successfully enter the market for video slot machines. There also can be no
assurance that the manufacturers of traditional slot machines will not develop
products that offer superior performance or that achieve greater market
acceptance than, the Company's product. 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. 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 shares, including price reductions, acceleration of technical
development or acquisition of new, competitive technologies. Any success the
Company might have may benefit existing competitors and induce new competitors
to enter the market. There can be no assurance that the Company will be a
successful competitor in the gaming machine industry.
PROPRIETARY RIGHTS AND LICENSES
The Company's computer programs and technical know-how are both novel and
proprietary, and management believes that they can best be protected by use of
technical devices to protect the computer programs and by enforcement of
contracts and covenants not to compete with certain employees and others with
respect to the use of the Company's proprietary information and trade secrets.
The Company has registered copyrights with respect to various aspects of its
games, and has filed several U.S. patent applications for protection of
certain technology it has created or licensed. These patent applications cover
various aspects of the gaming machine hardware and software. Although the
company has received certain patents and trademarks with respect to its
intellectual property, no assurance can be given that the remaining pending
applications will be granted, nor can there be any assurance that the patents
will not be infringed or that others will not develop technology that does not
violate such patents.
SGI has developed a proprietary method of authentication for disk drive-
based gaming machines, for which it has submitted a patent application. Since
modern gaming technology requires the handling and processing of large amounts
of on-line data, establishing a method for storing and retrieving data that
meets the approval requirements of the regulatory authorities in Nevada and
other jurisdictions while meeting adequate standards of internal performance
requires use of a comprehensive authentication system to assure both the
casino operator and requisite gaming authorities that the software is an exact
copy of what was generated by SGI and approved by such regulatory authorities.
In addition, SGI owns exclusive rights to the algorithm for its random
number generator, the key component of the Company's gaming machine which
determines the outcome of each proposition. SGI's algorithm was developed by
Dr. Evangelos A. Yfantis, a professor of Computer Science at the University of
Nevada, Las Vegas.
In developing its games, the Company relies on certain software that it
licenses from Duck Corporation ("Duck") on a nonexclusive basis. This license
may be terminated by Duck only in the event of a material breach of its terms
by the Company or in the event of a bankruptcy petition with respect to the
Company.
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EMPLOYEES
As of December 31, 1997, the Company had 190 full-time employees, including
55 in research and development. The Company also retains independent
contractors to provide certain services, primarily in connection with its
product development activities. The Company and its full-time employees are
not subject to any collective bargaining agreements and the Company believes
that its relations with its employees are good. From time to time the Company
has retained actors and/or "voice over" talent to perform in certain of the
Company's games and expects to continue this practice in the future. The
Company's future success depends in large part on its ability to attract and
retain management and other key personnel.
MANUFACTURING
The Company's manufacturing process consists primarily of assembly of
components obtained from third-party suppliers and testing of software systems
and applications. In 1996, the Company established its manufacturing process
and commenced commercial production. During 1997 the Company moved its
manufacturing operations into a new facility in Mountain View, California. The
Company intends to continue investing significantly in leasehold improvements
and manufacturing equipment at its Mountain View location. The Company has
installed manufacturing lines with 5,000 unit per year capacity and intends to
incrementally increase its manufacturing capacity in accordance with perceived
demand. The Company believes that, once fully operational, its Mountain View
manufacturing facility will allow the Company to produce 25,000 units per
year. As of December 31, 1997, the Company had 39 full-time employees in
manufacturing.
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.
Nevada Regulatory Matters. The Company must obtain a registration, license,
approval or finding of suitability, and equipment approval in all
jurisdictions before it can offer gaming devices for sale to licensed gaming
operations within those jurisdictions. The licensing process usually involves
the licensing or approval of certain officers, directors, and shareholders of
the corporation, and approval of the specific product that the Company wants
to offer for sale. On June 19, 1996 the Nevada Commission registered SGI as a
publicly traded corporation and licensed Silicon Gaming-Nevada ("SGI-Nevada"),
a wholly-owned subsidiary of SGI, as a manufacturer, distributor and operator
of a slot machine route. The Company's initial public offering was also
approved by the Nevada Commission on June 19, 1996. On March 20, 1997, the
Nevada Commission granted final approval of the Company's product for sale to
licensed casinos in Nevada.
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,
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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 applied for, and in
some cases received, the various registrations, approvals, permits and
licenses in order to engage in manufacturing, distribution and slot route
activities in Nevada.
All gaming devices that are manufactured, sold or distributed for use or
play in Nevada, or for distribution outside of Nevada, must be manufactured by
licensed manufacturers and distributed or sold by licensed distributors. All
gaming devices manufactured for use or play in Nevada must be approved by the
Nevada Commission before distribution or exposure for play. The approval
process for gaming devices includes rigorous testing by the Nevada Board, a
field trial and a determination as to whether the gaming device meets strict
technical standards that are set forth in the regulations of the Nevada
Commission. Associated equipment must be administratively approved by the
Chairman of the Nevada Board before it is distributed for use in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, a Registered
Corporation or its subsidiaries in order to determine whether such individual
is suitable or should be licensed as a business associate of a gaming
licensee. Officers, directors and certain key employees of the Company and
SGI-Nevada are required to file applications with the Nevada Gaming
Authorities and may be required to be licensed or found suitable by the Nevada
Gaming Authorities. The Nevada Gaming Authorities may deny an application for
licensing for any cause which they deem reasonable. A finding of suitability
is comparable to licensing, and both require submission of detailed personal
and financial information followed by a thorough investigation. The applicant
for licensing or a finding of suitability must pay all the costs of the
investigation. Changes in licensed positions must be reported to the Nevada
Gaming Authorities and in addition to their authority to deny an application
for a finding of suitability or licensure, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position. 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 will be required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities and similar financing transactions by the Company
will be required to be reported to or approved by the Nevada Commission.
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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 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
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without the prior approval of the Nevada Commission, it: (i) pays to the
unsuitable person any dividend, interest, or any distribution whatsoever; (ii)
recognizes any voting right by such unsuitable person in connection with such
securities; (iii) pays the unsuitable person remuneration in any form; or (iv)
makes any payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation, or similar transaction.
The Company will be required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder
may be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such disclosure may be grounds for
finding the record holder unsuitable. The Company will also be required to
render maximum assistance in determining the identity of the beneficial owner.
The Nevada Commission has the power to require the stock certificates of the
Company to bear a legend indicating that the securities are subject to the
Nevada Act. However, 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, such as an IPO, without the prior approval of the Nevada
Commission if the securities or proceeds therefrom are intended to be used to
construct, acquire or finance gaming facilities in Nevada, or to retire or
extend obligations incurred for such purposes. Approval of a public offering,
if given, does not constitute a finding, recommendation or approval by the
Nevada Commission or the Nevada Board as to the accuracy or adequacy of the
Offering Memorandum or the investment merits of the securities offered. Any
representation to the contrary is unlawful.
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting
agreements, or any act or conduct by a person whereby he obtains control, may
not occur without the prior approval of the Nevada Commission. Entities
seeking to acquire control of a Registered Corporation must satisfy the Nevada
Board and the Nevada Commission in a variety of stringent standards prior to
assuming control of such Registered Corporation. The Nevada Commission may
also require controlling shareholders, officers, directors and other persons
having a material relationship or involvement with the entity proposing to
acquire control, to be investigated and licensed as part of the approval
process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established a
regulatory scheme to ameliorate the potentially adverse effects of these
business practices upon Nevada's gaming industry and to further Nevada's
policy to: (i) assure the financial stability of corporate gaming licensees
and their affiliates; (ii) preserve the beneficial aspects of conducting
business in the corporate form; and (iii) promote a neutral environment for
the orderly governance of corporate affairs. Approvals are, in certain
circumstances, required from the Nevada Commission before the Registered
Corporation can make exceptional repurchases of voting securities above the
current market price thereof and before a corporate acquisition opposed by
management can be consummated. The Nevada Act also requires prior approval of
a plan of recapitalization proposed by the Registered Corporation's Board of
Directors in response to a tender offer made directly to the Registered
Corporation's shareholders for the purposes of acquiring control of the
Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which gaming operations are to be conducted. Depending
upon the particular fee or tax involved, these fees and taxes are payable
either monthly, quarterly or annually and are based upon either: (i) a
percentage of the gross 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.
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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. 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.
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Missouri suppliers' gaming licenses must be renewed annually for a fee of
$5,000 or such greater amount as may be determined by the Commission. 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. All licenses must be renewed annually. On
January 24, 1997, the Company's wholly-owned subsidiary, Silicon Gaming-
Colorado, Inc., was granted a manufacturer and distributor license by the
Colorado Limited Gaming Commission and the Company was found suitable to be an
associated person of a licensee.
In addition, pursuant to the Colorado Regulations, no manufacturer or
distributor of slot machines may have an interest in any casino operator,
allow any of its officers to have such an interest, employ any person if such
person is employed by a casino operator, or allow any casino operator or
person with a substantial interest therein to have an interest in a
manufacturer's or distributor's business. The Commission has ruled that a
person does not have a "substantial interest" if it directly or indirectly has
less than a five percent (5%) interest in such voting securities of a
licensee. Some Division Staff informally have interpreted the Regulations to
prohibit a casino operator from having any interest in a slot machine
manufacturer or distributor.
Under the Colorado Regulations, any person or entity having any direct or
indirect interest in a gaming licensee or an applicant for a gaming license,
including, but not limited to, the Company and shareholders of the Company,
may be required to supply the Colorado Commission with substantial
information, including, but not limited to, background information, source of
funding information, a sworn statement that such person or entity is not
holding his interest for any other party, and fingerprints. Such information,
investigation and licensing as
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<PAGE>
an "associated person" automatically will be required of all persons (other
than certain institutional investors discussed below) which directly or
indirectly own ten percent (10%) or more of a direct or indirect legal,
beneficial or voting interest in the Colorado subsidiary, through their
ownership in the Company. Such persons must report their interest and file
appropriate applications within 45 days after acquiring such interest. Persons
directly or indirectly having a five percent (5%) or more interest (but less
than 10%) in the Colorado Subsidiary, through their ownership in the Company,
must report their interest to the Colorado Commission within ten (10) days
after acquiring such interest and may be required to provide additional
information and to be found suitable. If certain institutional investors
provide certain information to the Colorado Commission, such investors, at the
Colorado Commission's discretion, may be permitted to own up to 14.99% of the
Colorado Subsidiary, through their ownership in the Company, before being
required to 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, including those acquiring the Notes, 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 and 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
19
<PAGE>
professional gambler; or (v) has refused to cooperate with any state or
federal body investigating organized crime, official corruption or gaming
offenses.
If the Colorado Commission determines that a person or entity is unsuitable
to own interests in the Company, then the Company or the Colorado Subsidiary
may be sanctioned, which may include the loss by the Company or the Colorado
Subsidiary of their respective approvals and licenses.
The Colorado Commission 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.
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 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 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 and 18% on adjusted gross gaming proceeds over $5 million up to and
including $10 million and 20% in excess of $10 million. The Colorado
Commission also has imposed an annual device fee of $100 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.
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<PAGE>
Second, Colorado constitutionally limits the maximum single bet to $5.00.
Colorado statutes define a bet to be an amount placed as a wager in a game of
chance. If the Company's product permits multiple rounds of betting at $5.00
per round, it would be unclear whether Colorado would permit such betting. If
Colorado does not permit multiple round bets in excess of $5.00, then the
Company would need to adjust its machines to limit the total bets to $5.00,
including all rounds.
Third, Commission Regulations define the requirements of slot machines,
including limitations on the ability to alter the slot machine's program and
the internal requirements of the slot machine itself. The Company's proposed
machines do not comply with existing Regulations. Although the Company intends
to seek a change in the Commission's Regulations, there can be no assurance
that such changes will be made. If the Regulations are not changed, then the
Company will need to modify its machines to conform to Colorado requirements.
Even as so modified, the Company's machines must be approved by the Division
as meeting existing Regulations and there is no assurance that the Company
will receive such approval or will receive such approval in a timely basis.
New Jersey Regulatory Matters. Casino gaming in New Jersey, including the
manufacture, distribution and operation of gaming devices, is subject to
strict regulation by the New Jersey Casino Control Commission (the "New Jersey
Commission") pursuant to the New Jersey Casino Control Act and the regulations
of the New Jersey Commission promulgated thereunder (collectively, the "New
Jersey Act"). The New Jersey Commission is authorized to decide all
applications for licensure or other approvals and to promulgate regulations.
The New Jersey Act also established the New Jersey Division of Gaming
Enforcement (the "New Jersey Division"), which is responsible for
investigating all applications for licensure or approval and for prosecuting
violations of the New Jersey Act.
Under the New Jersey Act, a company must be licensed as a gaming related
casino service industry ("CSI") in order to manufacture or distribute gaming
devices to New Jersey casinos. In January of 1997, the applications of the
Company and its wholly-owned subsidiary, Silicon Gaming-New Jersey, Inc.
("SGI-NJ"), for CSI licensure were deemed complete and accepted for filling by
the New Jersey Commission. These applications consisted of extensive
disclosure forms by the Company, SGI-NJ, and certain of their officers,
directors, principal employees and security holders.
The New Jersey Commission has broad discretion regarding the issuance,
renewal, suspension or revocation of CSI licenses. In order to obtain a CSI
license, the Company and SGI-NJ must demonstrate to the New Jersey Commission
by clear and convincing evidence that they, any five percent or greater
security holders, certain officers, directors, and principal employees, and
anyone else whom the New Jersey Commission deems appropriate in its
discretion, possess good character, honesty and integrity, and financial
stability, integrity and responsibility. If a person who is required to be
found qualified is found disqualified by the New Jersey Commission, the
license applications may be denied.
With respect to security holders, the New Jersey Commission may waive the
qualification requirement for "institutional investors," as defined in the New
Jersey Act, of the Company in the absence of a prima facie showing by the
Director of the New Jersey Division that there is any cause to believe that
the institutional investor may be unqualified, if the institutional investor
holds less than ten percent of the outstanding securities, provided the
securities were acquired for investment purposes only and the holder has no
intention of influencing the affairs of the Company, other than voting its
securities. The New Jersey Act defines an "institutional investor" as (i) any
retirement fund administered by a public agency for the exclusive benefit of
federal, state or local public employees, (ii) an investment company
registered under the Investment Company Act of 1940, (iii) a collective
investment trust organized by banks under Part Nine of the Rules of the
Comptroller of the Currency, (iv) a closed end investment trust, (v) a
chartered or licensed life insurance company or property and casualty
insurance company, (vi) banking or other licensed or chartered lending
institutions, (vii) an investment advisor registered under the Investment
Advisors Act of 1940, or (viii) such other persons as the New Jersey
Commission may determine for reasons consistent with the policies of the New
Jersey Act.
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The applications of the Company and SGI-NJ will be investigated by the New
Jersey Division. During the course of the investigation, the Company and SGI-
NJ are required to provide additional information to the New Jersey Division.
At the conclusion of its investigation, the New Jersey Division will file a
report with the New Jersey Commission stating its position on the license
applications. After receipt of the report of the New Jersey Division, the New
Jersey Commission will hold a public hearing on the license applications. No
assurances can be given as to the timing of the completion of the
investigation by the New Jersey Division and the public hearing by the New
Jersey Commission on the license applications or that the licenses will be
obtained.
In its discretion, the New Jersey Commission may permit the Company and SGI-
NJ to transact business with New Jersey casinos prior to their licensure. In
order to do so, the Company and SGI-NJ must continue to have complete
applications for CSI licensure on file with the New Jersey Commission,
petition the New Jersey Commission for permission for each transaction,
demonstrate that good cause exists for granting the petition and the New
Jersey Division must not object to the petition.
The fee for a CSI license is a minimum of $5,000 and a maximum of $15,000,
with the actual cost depending upon the amount of time spent by the New Jersey
Commission and New Jersey Division in investigating an processing the
applications, plus the out of pocket expenses of the New Jersey Commission and
New Jersey Division.
A CSI license is issued for an initial period of two years and, upon proper
application and satisfaction of the same standards applicable to the initial
issuance of a CSI license, is renewable for four year periods. The New Jersey
Commission may impose conditions on the issuance of a license. In addition,
the New Jersey Commission has the authority to impose fines or suspend or
revoke a license for violations of the New Jersey Act, including the failure
to satisfy the licensure requirements.
In addition, gaming devices manufactured or distributed by the Company or
SGI-NJ must be approved by the New Jersey Commission based on, at a minimum,
their quality, design, integrity, fairness, honesty and suitability in order
to be used in New Jersey casinos. The approval process includes the submission
of a model of the gaming device and relevant documentation to the New Jersey
Division for testing, examination and analysis. Only a licensed CSI or an
applicant for CSI licensure can submit a gaming device for approval. All costs
of such testing, examination and analysis are borne by the Company. Prior to
deciding to approve a particular model of gaming device, the New Jersey
Commission may require a test of up to 60 days of the gaming device in a
licensed casino. During the test period, the manufacturer or distributor of
the gaming device shall not be entitled to receive revenue of any kind
whatsoever. Once a gaming device is approved by the New Jersey Commission, all
gaming devices of that model placed in operation in licensed casinos shall
operate in conformity with the model approved by the New Jersey Commission.
Any changes in the design, function or operation of an approved gaming device
are subject to prior approval by the New Jersey Commission, after testing by
the New Jersey Division. In March of 1997, Odyssey was submitted to the New
Jersey Division and New Jersey Commission for testing and approval. No
assurances can be given as to the timing of the testing process or that
Odyssey will be approved.
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
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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 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 application 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 component 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 or 1988
("IGRA"), which is administered by the National Indian Gaming Commission (the
"NIGC") and the Security 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 Registrar. 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
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shareholders of gaming equipment supplies. 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 to gaming equipment suppliers and their officers, directors, and
shareholders.
Application of Future or Additional Regulatory Requirements. In the future,
the Company intends to seek the necessary registrations, licenses, approvals
and findings of suitability for the Company, its 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.
ITEM 2: PROPERTIES
The Company leases a 28,000 square foot facility in Palo Alto, California
for its development, marketing, sales and administrative personnel. The lease
expires in January 2006. The Company also leases a 29,000 square foot
manufacturing facility in Mountain View, California pursuant to a lease that
expires in February 2006. The Company leases a 27,000 square foot facility in
Las Vegas, Nevada that houses its sales and support organization and a 4,000
square foot facility in Reno, Nevada that houses a sales and support
organization.
The Company believes that its existing manufacturing facility is adequate to
meet its production requirements through at least 1999.
ITEM 3: LEGAL PROCEEDINGS
Inapplicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Donald J. Massaro................ 54 President, Chairman of the Board and
Chief Executive Officer
Andrew S. Pascal................. 32 Executive Vice President--Marketing and
Game Development
Thomas E. Carlson................ 44 Vice President--Chief Financial Officer
Karen M. Katz.................... 32 Vice President--Sales and Support
Paul D. Matthews................. 33 Vice President--Corporate Development
and Government Affairs
H. Paul Kurth.................... 61 Vice President--Operations
</TABLE>
Donald J. Massaro has served as President and Chief Executive Officer since
June 1995. In addition, Mr. Massaro has served as a director of the Company
since May 1995 and as Chairman of the Board since October 1996. Mr. Massaro
has over 20 years of general management experience and has been a director
and/or chairman of the board of directors for a number of public and private
Silicon Valley based technology companies. Prior to
24
<PAGE>
joining SGI, Mr. Massaro was Executive Vice President and General Manager of
Worldwide Sales and Marketing for Conner Peripherals Inc. ("Conner"), a disk
drive manufacturer, from July 1994 to May 1995. From January 1991 to June
1994, Mr. Massaro was Chief Executive Officer of Sjoberg Industries
("Sjoberg"), and Inversion Development Corporation ("Inversion"),
manufacturers of environmental products. Prior thereto, he served as President
and Chief Executive Officer of Metaphor Computer Systems ("Metaphor"), a
company he co-founded in 1982 to develop and manufacture client-server based
management information systems. Mr. Massaro's other prior experience includes
positions as Corporate Vice President and President of Xerox Corporation's
Office Products Division and President and Chief Executive Officer of Shugart
Associates, a computer peripherals company he co-founded in 1972.
Andrew S. Pascal has served as Executive Vice President--Marketing and Game
Development since October 1994. He has over 10 years of gaming industry
experience with an emphasis in slot marketing, slot merchandising and slot
operations. He joined SGI in October 1994 from Mirage Resorts, Incorporated,
where he had worked from June 1985 to October 1994, most recently as Director
of Slot Operations and Marketing at The Mirage Hotel and Casino, managing a
division consisting of 350 employees and annual revenue in excess of $110
million. Mr. Pascal also served on The Mirage's eight-member Operating
Committee, which set operating policy and established the strategic direction
for The Mirage and its 7,300 employees, from September 1992 to October 1994.
Prior to the opening of The Mirage Hotel and Casino, Mr. Pascal served as the
Director of Slot Marketing for the Golden Nugget Casino-Hotel.
Thomas E. Carlson joined SGI in May 1995 from Conner, where from November
1994 to February 1995 he held the position of Worldwide Research and
Development and Launch Manufacturing Controller. From January 1991 to October
1994 he was Chief Financial Officer of Sjoberg and continued in that position
with Inversion. From 1984 to 1990 Mr. Carlson held various positions at
Metaphor, including Director of Financial Planning and Corporate Controller.
Karen M. Katz joined SGI in July 1995 from Conner, where from August 1994 to
July 1995 she held the position of Director of Strategic Programs and was
responsible for developing and implementing the programs and systems for
managing its $2.5 billion disk drive and tape drive businesses. Prior to her
promotion to Director of Strategic Programs, from July 1993 to July 1994 Ms.
Katz served as Conner's Director of Corporate Sales and was responsible for
the global sales management of the Sun Microsystems, Inc. and Digital
Equipment Corporation accounts. Prior to joining Conner in October 1991, Ms.
Katz was a member of the technical staff at AT&T Bell Laboratories.
Paul D. Mathews joined SGI in November 1995 from Casino Data Systems, a
designer and manufacturer of casino management information systems and gaming
devices, where from March 1995 to November 1995 he was Director of Regulatory
Compliance responsible for corporate and product licensing in all gaming
jurisdictions. Prior to joining Casino Data Systems, Mr. Mathews spent five
years with the Nevada State Gaming Control Board in the Corporate Securities
and Investigation Divisions.
H. Paul Kurth joined SGI in November 1995 from Edge Diagnostic Systems, a
manufacturer of computerized automotive diagnostic systems, where he was the
founder and Vice President of Operations responsible for product design,
fabrication and manufacturing from January 1988 to June 1994. Prior to
founding Edge Diagnostic Systems, Mr. Kurth founded Vertex Peripherals, a
manufacturer of high-performance, high-capacity disk drives.
25
<PAGE>
PART II
Portions of the information required by Part III of Form 10-K are
incorporated by reference to portions of the Company's 1997 Annual Report.
Except for the information specifically incorporated by reference, the
Company's 1997 Annual Report is not be deemed filed as part of this Report.
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information under "Stock Price History" set forth in the 1997 Annual
Report is incorporated herein by reference.
ITEM 6: SELECTED FINANCIAL DATA
The information under "Selected Consolidated Financial Data" set forth in
the 1997 Annual Report is incorporated herein by reference.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" set forth in the 1997 Annual Report is
incorporated herein by reference.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information contained the 1997 Annual Report under the captions
"Consolidated Balance Sheets," "Consolidated Statements of Operations,"
"Consolidated Statements of Shareholders' Equity (Deficiency)," "Consolidated
Statements of Cash Flows," "Notes to Consolidated Financial Statements" and
"Independent Auditors' Report" is incorporated herein by reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In November 1995, the Company engaged Deloitte & Touche LLP ("Deloitte") as
its independent auditor and dismissed its former auditor, Coopers & Lybrand
L.L.P. ("Coopers"). The decision to change auditors was approved by the
Company's Board of Directors. Since the Company's inception, there has been no
auditors' report on the Company's financial statements containing an adverse
opinion or disclaimer of opinion or that was qualified or modified as to
uncertainty, audit scope or accounting principles. During such period, there
were no disagreements with Coopers on any matter of accounting principle or
practice, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to Coopers' satisfaction, would have caused it
to make reference to the subject matter of the disagreements in connection
with its report. Further, during this period, there were no events of the type
required to be reported pursuant to Item 304(a)(1)(v) of Regulation S-K.
During the period from inception through November 1, 1995, the Company did not
consult Deloitte on items that involved either the Company's accounting
principles or the form of its audit opinion.
26
<PAGE>
PART III
Portions of the information required by Part III of Form 10-K are
incorporated by reference to portions of the Company's definitive Proxy
Statement to be filed with the Commission in connection with the 1997 Annual
Meeting of Shareholders (the "Proxy Statement"), which the Company intends to
file not less than 120 days after the end of the fiscal year covered by this
Report.
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the Proxy Statement under the captions
"Proposal One--Election of Directors-Nominees" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement to be filed
in connection with its 1998 Annual Meeting of Shareholders (the "Proxy
Statement") and the information set forth in Part I of this Report under the
caption "Executive Officers" is incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
The information set forth in the Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the Proxy Statement under the caption "Security
Ownership of Certain Beneficial Owners and Management" is incorporated herein
by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the Proxy Statement under the caption "Certain
Relationships and Related Transactions" is incorporated herein by reference.
27
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS FORM 10-K:
(1) Consolidated Financial Statements. The following consolidated
financial statements and related notes, together with the report thereon of
Deloitte & Touche LLP, independent public accountants, are incorporated
herein by reference from the 1997 Annual Report.
<TABLE>
<CAPTION>
ANNUAL REPORT
PAGE NUMBER
-------------
<S> <C>
Consolidated Balance Sheets at December 31, 1997 and 1996... 12
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996 and the nine-month period ended
December 31, 1995.......................................... 13
Consolidated Statements of Shareholders' Equity (Deficiency)
for the period from April 1, 1995 through December 31,
1997....................................................... 14
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 and the nine-month period ended
December 31, 1995.......................................... 16
Notes to Consolidated Financial Statements.................. 17
Independent Auditors' Report................................ 28
</TABLE>
(2) Financial Statement Schedules.
Schedules have been omitted because they are not required or the information
required to be set forth therein is included in the Consolidated Financial
Statements or Notes to Consolidated Financial Statements.
(3) Exhibits. The exhibits listed in the accompanying Exhibit Index are
filed as part of, or incorporated by reference into, this Report.
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, in the City of Palo Alto, County of Santa
Clara, State of California, on the 19 day of March, 1998.
Silicon Gaming, Inc.
/s/ Donald J. Massaro
By___________________________________
DONALD J. MASSARO
PRESIDENT, CHAIRMAN OF THE BOARD
AND CHIEF
EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Donald J. Massaro President, Chairman of the March 19, 1998
- ----------------------------- Board and Chief Executive
DONALD J. MASSARO Officer (Principal
Executive Officer)
/s/ Thomas E. Carlson Vice President--Chief March 19, 1998
- ----------------------------- Financial Officer
THOMAS E. CARLSON (Principal Financial and
Accounting Officer)
/s/ Robert M. Fell Director March 19, 1998
- -----------------------------
ROBERT M. FELL
/s/ William Hart Director March 19, 1998
- -----------------------------
WILLIAM HART
/s/ Kevin R. Harvey Director March 19, 1998
- -----------------------------
KEVIN R. HARVEY
/s/ David S. Morse Director March 19, 1998
- -----------------------------
DAVID S. MORSE
/s/ Joseph T. Piemont Director March 19, 1998
- -----------------------------
JOSEPH T. PIEMONT
/s/ Thomas J. Volpe Director March 19, 1998
- -----------------------------
THOMAS J. VOLPE
29
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
3.1(1) Amended and Restated Articles of Incorporation of the Registrant.
3.2(3) Bylaws of the Registrant.
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
10.1(3) Amended and Restated 1994 Stock Option Plan, as amended.
10.2(3) Lease Agreement dated September 14, 1995, between the Registrant and
Demmon Family Partnership.
10.6(2) Series C Preferred Stock Purchase Agreement dated as of March 21,
1996, as amended May 29, 1996.
10.7(3) Second Amended and Restated Rights Agreement dated as of March 21,
1996.
10.8(2) Master Equipment Lease Agreement dated October 6, 1995, between the
Registrant and Lighthouse Capital Partners, L.P.
10.10(3) Side Letter Agreement dated March 21, 1996, between the Registrant
and the Interpublic Group of Companies, Inc.
10.11(3) Side Letter Agreement dated March 21, 1996, between the Registrant
and Station Casinos, Inc.
10.15(3) OEM Master License Agreement dated April 17, 1996, between the
Registrant and RSA Data Security, Inc.
10.16(3) Agreement dated March 26, 1996, between the Registrant and MICROID
Research.
10.18(2) Employment Agreement dated May 25, 1995, by and between the
Registrant and Donald J. Massaro.
10.19(3) 1996 Employee Stock Purchase Plan.
10.20(3) 1996 Outside Directors Stock Option Plan.
10.21(2) Software License Agreement dated June 20, 1996 between the Registrant
and Duck Corporation.
10.22(4) Lease Agreement dated August 14, 1996, between the Registrant and
Interactive Technologies, Inc.
10.23(4) Lease Agreement dated January 1997, between the Registrant and The
Prudential Insurance Company of America
10.24(4) Lease Agreement dated January 23, 1997, between the Registrant and
Johnny Ribeiro
10.25(4) Lease Agreement dated January 23, 1997, between the Registrant and
The Ribeiro Corporation
10.26 Lease Agreement dated October 7, 1997 between the Registrant and
Battle Born Development, LLC.
10.27 1997 Nonstatutory Stock Option Plan
10.28 See Exhibit 4.1
10.29 See Exhibit 4.2
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
10.30 See Exhibit 4.3
10.31 See Exhibit 4.4
11.1 Statement of Computation of Net Loss Per Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
13.1 Portions of 1997 Annual Report to Shareholders.
16.1(3) Letter re change in certifying accountant.
21.1 Subsidiaries of the registrant.
23.1 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated by reference to Exhibit 3.3 to Registrant's Registration
Statement on Form S-1 (No. 333-4793) which became effective on July 30,
1996 (the "Form S-1"). (No. 0-28294) filed with the Commission on
April 24, 1996 (the "Form 10").
(2) Incorporated by reference to identically numbered exhibit to the Form S-1.
(3) Incorporated by reference to identically numbered exhibit to Registrant's
Registration Statement on Form 10 (No. 0-28294) filed with the Commission
on April 24, 1996 (the "Form 10").
(4) Incorporated by reference to identically numbered exhibit to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996.
2
<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
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(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
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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.
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"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
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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
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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
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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
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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
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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
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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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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
---- -----
Indebtedness of any Person in relation to other Indebtedness of such Person,
that each such Indebtedness (a) either
14
<PAGE>
(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.
15
<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
16
<PAGE>
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.
17
<PAGE>
"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,
18
<PAGE>
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
19
<PAGE>
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
-------- -------
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.
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<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.
31
<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
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<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
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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.
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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.
50
<PAGE>
(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
51
<PAGE>
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
52
<PAGE>
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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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
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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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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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(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:
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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.
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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
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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
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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
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
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
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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
</TABLE>
(ii)
<PAGE>
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.
<PAGE>
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.
2
<PAGE>
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
<PAGE>
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.
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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.
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<PAGE>
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
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<PAGE>
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
<PAGE>
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
<PAGE>
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
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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>
Exhibit 10.26
COMMERCIAL REAL ESTATE LEASE
BETWEEN
BATTLE BORN DEVELOPMENT, LLC
AS LANDLORD
AND
SILICON GAMING, INC.;
AS TENANT
<PAGE>
TABLE OF CONTENTS
ARTICLE ONE
DEFINITIONS...................................... 1
Section 1.01 DEFINITIONS..................... 1
Section 1.02 BASE RENT....................... 5
Section 1.03 RIDERS.......................... 5
Section 1.04. PARKING......................... 5
ARTICLE TWO
LEASE TERM AND COMMON BUILDING AREAS............. 5
Section 2.01 LEASE OF PROPERTY FOR LEASE
TERM............................ 5
Section 2.02 DELIVERY OF POSSESSION.......... 5
Section 2.03 TENANT IMPROVEMENT ALLOWANCE.... 6
Section 2.04 COMMON AREAS.................... 7
Section 2.05 LANDLORD'S RIGHT IN COMMON AREAS 7
Section 2.06 HOLDING OVER.................... 7
ARTICLE THREE
BASE RENT........................................ 8
Section 3.01. TIME AND MANNER OF PAYMENT...... 8
Section 3.02 ANNUAL INCREASES................ 8
ARTICLE FOUR
OTHER CHARGES PAYABLE BY TENANT.................. 8
Section 4.01 ADDITIONAL RENT................. 8
Section 4.02 OPERATING COSTS................. 8
Section 4.03 REAL PROPERTY TAXES............. 9
Section 4.04 PERSONAL PROPERTY TAXES......... 10
Section 4.05 REPAIRS AND UTILITIES........... 10
Section 4.06 INSURANCE....................... 10
Section 4.07 WAIVER OF SUBROGATION........... 11
Section 4.08 LATE CHARGES.................... 11
Section 4.09 INTEREST ON PAST DUE OBLIGATIONS 11
Section 4.10 RETURN OF CHECK................. 12
Section 4.11 SECURITY DEPOSIT INCREASES...... 12
Section 4.12 TERMINATION; ADVANCE PAYMENTS... 12
<PAGE>
ARTICLE FIVE
USE OF PROPERTY.................................. 13
Section 5.01 PERMITTED USES.................. 13
Section 5.02 MANNER OF USE................... 13
Section 5.03 HAZARDOUS SUBSTANCES............ 13
Section 5.04 SIGNS AND AUCTIONS.............. 15
Section 5.05 INDEMNITY....................... 15
Section 5.06 LANDLORD'S ACCESS............... 16
ARTICLE SIX
CONDITION OF PROPERTY; MAINTENANCE, REPAIRS
AND ALTERATIONS.................................. 16
Section 6.01 EXISTING CONDITIONS............. 16
Section 6.02 EXEMPTION OF LANDLORD FROM
LIABILITY....................... 16
Section 6.03 LANDLORD'S OBLIGATIONS.......... 17
Section 6.04 TENANT'S OBLIGATIONS............ 17
Section 6.05 ALTERATIONS, ADDITIONS, AND
IMPROVEMENTS.................... 18
Section 6.06 CONDITION UPON TERMINATION...... 19
ARTICLE SEVEN
DAMAGE OR DESTRUCTION............................ 19
Section 7.01 PROPERTY DAMAGE................. 19
Section 7.02 ABATEMENT OR REDUCTION OF RENT.. 20
Section 7.03 WAIVER.......................... 21
ARTICLE EIGHT
CONDEMNATION..................................... 21
Section 8.01 CONDEMNATION.................... 21
ARTICLE NINE
ASSIGNMENT AND SUBLETTING........................ 21
Section 9.01 LANDLORD'S CONSENT REQUIRED..... 21
Section 9.02 LANDLORD'S ELECTION............. 21
Section 9.03 NO RELEASE OF TENANT............ 22
Section 9.04 NO MERGER....................... 22
ARTICLE TEN
DEFAULTS; REMEDIES........................ 22
Section 10.01 COVENANTS AND CONDITIONS........ 22
Section 10.02 DEFAULTS........................ 22
Section 10.03 REMEDIES........................ 23
Section 10.04 CUMULATIVE REMEDIES............. 24
ii
<PAGE>
ARTICLE ELEVEN
PROTECTION OF LENDERS............................ 24
Section 11.01 SUBORDINATION................... 24
Section 11.02 ATTORNMENT...................... 25
Section 11.03 SIGNING OF DOCUMENTS............ 25
Section 11.04 ESTOPPEL CERTIFICATES........... 25
Section 11.05 TENANT'S FINANCIAL CONDITION.... 26
ARTICLE TWELVE
LEGAL COSTS...................................... 26
Section 12.01 LEGAL PROCEEDINGS.................. 26
Section 12.02 LANDLORD'S CONSENT................. 27
ARTICLE THIRTEEN
MISCELLANEOUS PROVISIONS......................... 27
Section 13.01 NON-DISCRIMINATION.............. 27
Section 13.02 LANDLORD'S LIABILITY............ 27
Section 13.03 SEVERABILITY.................... 27
Section 13.04 INTERPRETATION.................. 27
Section 13.05 INCORPORATION OF PRIOR AGREEMENT
MODIFICATIONS................... 28
Section 13.06 NOTICES......................... 28
Section 13.07 WAIVERS......................... 28
Section 13.08 NO RECORDATION.................. 28
Section 13.09 BINDING EFFECT; CHOICE OF LAW... 28
Section 13.10 CORPORATE AUTHORITY; PARTNERSHIP
AUTHORITY....................... 28
Section 13.11 JOINT AND SEVERAL LIABILITY..... 29
Section 13.12 FORCE MAJEURE................... 29
Section 13.13 EXECUTION OF LEASE.............. 29
Section 13.14 BROKERS AND LEASING AGENTS...... 29
Section 13.15 RULES AND REGULATIONS........... 29
Section 13.16 LIENS........................... 30
iii
<PAGE>
COMMERCIAL REAL ESTATE LEASE
THIS COMMERCIAL REAL ESTATE LEASE (this "Lease") is made as of the day
of 1997, by and between BATTLE BORN DEVELOPMENT, LLC, a Nevada limited
liability company ("Landlord") and SILICON GAMING, INC., a California
corporation ("Tenant").
ARTICLE ONE
DEFINITIONS
Section 1.01 DEFINITIONS. For purposes of this Lease, the following
terms shall have the following meanings:
(a) [Intentionally Omitted].
(b) Building: The structure and related improvements constructed on
the Premises containing approximately Twenty-six Thousand, Nine Hundred Seventy-
seven (26,977) rentable square feet, including Eleven Thousand One Hundred
Eighty-eight (11,088) square feet of office space, 2,500 square feet of "tech
area" and Thirteen Thousand Three Hundred Eighty-nine (13,389) square feet of
evaporative cooled warehouse space. The Building is stipulated for all purposes
to contain said rentable square feet in the Building.
(c) Commencement Date: The earlier of (i) the date Tenant actually
occupies the Premises (other than for the purposes set forth in Section 2.02(d),
below), (ii) the date the Work (as defined in RIDER NO.1 attached hereto) is
substantially completed in accordance with Section 2.02(c) below, or (iii)
February 15, 1998, except as delayed pursuant to Section 2.02(c) of this Lease.
(d) Common Areas: All areas and facilities outside the Building and
within the exterior boundary line of the Premises that are provided and
designated by the Landlord from time to time for the general non-exclusive use
of Landlord, Tenant and their respective employees, suppliers, shippers,
customers, contractors and invitees, including, without limitation, trash areas,
roadways, sidewalks, walkways, landscaped areas, irrigation systems, lighting
facilities, fences, gates, and the parking facilities for the Building. Landlord
has the right to change the Common Areas and to take other actions respecting
these areas in accordance with Section 2.05 below.
(e) Declaration: That certain Declaration of Restrictions and Grant of
Easements dated November 1, 1985 and filed for record with the County Recorder
of Clark County, Nevada ("County Recorder as Document No.2175093, as
supplemented by the Supplement to Declaration of Restrictions and Grant of
Easements dated June 1, 1988, filed with the County Recorder in Book 880602,
Instrument No.00517, as amended from time to time. The
<PAGE>
Declaration is filed on the Premises and a larger real estate development, of
which the Premises are a part, known as Hughes Airport Center.
(f) Initial Security Deposit: Twenty-four Thousand Four Hundred
Thirty-five and 00/100 Dollars ($24,435.00). The Initial Security Deposit shall
be paid to Landlord contemporaneously with Tenant's execution hereof.
(g) Laws: All applicable statutes, regulations, requirements,
ordinances and orders promulgated by any federal, state, local or regional
governmental authority whether prior to or following the Commencement Date of
this Lease.
(h) Landlord's Address: Baffle Born Development, LLC, 6680 Amelia
Earhart Court, Las Vegas, Nevada, 89119, Attention: W. Mark Stewart, Manager.
(i) Landlord's Broker: The Industrial Property Group, Inc., 4495 South
Pecos Road, Las Vegas, Nevada, 89121, Attention: Dean P. Willmore.
(j) Lease Interest Rate: The lesser of (i) two percentage points (2%)
over that fluctuating rate of interest announced from time to time by the Bank
of America National Trust and Savings Association as its prime or reference
commercial lending rate of interest (or in the event such bank is no longer
announcing such rate, by such other federally regulated banking institution of
comparable stature as Landlord shall determine), or (ii) the maximum interest
rate permitted by law.
(k) Lease Term: Five (5) years beginning on the Commencement Date and
continuing until sixty (60) months after the first day of the first full month
following the Commencement Date, unless extended pursuant to Rider No.2 -
Extension Option attached to this Lease and incorporated herein by this
reference.
(1) Leased Premises Address: 6685 Amelia Earhart Court, Las Vegas,
Nevada 89119.
(m) Mortgagee: The mortgagee under a mortgage or beneficiary under a
deed of trust holding a lien encumbering the Building or any holder of a ground
leasehold interest in the Building or any part thereof.
(n) Operating Costs: All costs of any kind paid or incurred by
Landlord because of or in connection with the ownership, management,
maintenance, repair, replacement, restoration or operation of the Premises
(including all Common Areas), including by way of illustration but not
limitation, all of the following: (i) all amounts charged to the Premises
pursuant to the Declaration or the Special Use Restrictions; (ii) all costs,
charges and surcharges for utilities, water, sewage, janitorial, waste disposal
and refuse removal and all other utilities
2
<PAGE>
and services provided to the Premises which are not separately metered or billed
directly to Tenant; (iii) any insurance costs for which Landlord is responsible
under this Lease or which Landlord or any Mortgagee deems necessary or prudent;
(iv) any costs levied, assessed or imposed pursuant to any applicable Laws; (v)
the cost (amortized over such period as Landlord reasonably determines, together
with interest at the Lease Interest Rate on the unamortized balance) of any
capital improvements to the Common Areas or equipment replacements made by
Landlord after the Commencement Date that are intended to reduce other Operating
Costs or are required by any laws or are necessary in order to operate the
Common Areas at the same quality level as prior to such replacement; (vi)
utilities surcharges or any other costs levied, assessed or imposed by, or at
the direction of, or resulting from statutes or regulations or interpretations
thereof, promulgated by any federal, state, regional, municipal or local
government authority in connection with the use of the Premises (including,
without limitation, energy conservation charges or surcharges); (vii) all costs
incurred in the management and operation of the Common Areas including, without
limitation, gardening and landscaping, maintenance, maintenance of signs, window
washing, resurfacing and repaving, painting, lighting, and general cleaning;
(viii) management fees, wages, salaries and other labor costs incurred in the
operation or maintenance of the Premises; (ix) depreciation on personal property
owned by Landlord which is consumed in the operation or maintenance of the
Common Areas; (x) rental or lease payments paid by Landlord for rented or leased
personal property used in the operation or maintenance of the Common Areas; (xi)
Real Property Taxes attributable to the Premises and insurance premiums for
policies of insurance insuring loss or damage to the Premises; (xii) fees for
required licenses and permits; (xiii) reasonable and appropriate reserves for
repair and replacement; and (xiv) any other expenses which would reasonably or
customarily be included in the cost of managing, operating, maintaining and
repairing the Common Areas. Operating Costs shall not include any amounts paid
by Landlord for the Work.
(o) Permitted Uses: General office, warehousing, assembly, repair and
distribution activities of a gaming equipment company.
(p) Premises: That certain parcel of real estate described in EXHIBIT
"A" attached hereto and incorporated herein by this reference and the building
and other improvements located thereon, all of which is commonly known as 6685
Amelia Earhart Court, Las Vegas, Nevada 89119.
(q) Real Property Taxes: Any form of tax, assessment, license fee,
license tax, business license fee, commercial rental tax, levy, charge, penalty,
tax or similar imposition, imposed by any authority having the direct power to
tax (including any city, county, state or federal government, or any school,
agricultural, lighting, drainage, transportation, air pollution, environmental
or other improvement or special assessment district) as against any legal or
equitable interest of Landlord in the Building and/or the Premises, including,
but not limited to, the following:
(i) any tax on a landlord's "right" to rent or "right" to other
income from the Premises or against Landlord's business of leasing the
Premises;
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(ii) any assessment, tax, fee, levy or charge in substitution,
partially or totally, of any assessment, tax, fee, levy or charge
previously including within the definition of Real Property Taxes (it is
the intention of Tenant and Landlord that all such new and increased
assessments, taxes, fees, levies and charges be included within the
definition of "Real Property Taxes" for the purposes of this Lease);
(iii) any assessment, tax, fee, levy or charge allocable to or
measured by the area of the Premises or the rent payable hereunder,
including, without limitation, any gross income tax or excise tax levied by
the state, county, city or federal government, or any political subdivision
thereof, with respect to the receipt of such rent, or upon or with respect
to the possession, leasing, operating, management and maintenance,
alteration, repair, use or occupancy of, the Building, or any portion
thereof;
(iv) any assessment, tax, fee, levy or charge upon this
transaction creating or transferring an interest or an estate in the
Premises;
(v) any assessment, tax, fee, levy or charge based upon the
number of people employed, working at, or using the Premises or the
Building, or utilizing public or private transportation to commute to the
Premises or the Building; and
(vi) reasonable legal and other professional fees, costs and
disbursements incurred in connection with proceedings to contest, determine
or reduce Real Property Taxes. Real Property Taxes shall not include
federal or state income, franchise, inheritance or estate taxes of Landlord
or any of the parties which comprise Landlord.
(r) Special Use Restrictions: The covenants and restrictions contained
in that certain Declaration of Special Land Use Restrictions, Mortgage Lien,
Option to Purchase and Right of First Refusal executed by Landlord in favor of
Howard Hughes Properties Limited Partnership, a Delaware limited partnership,
dated June 18, 1996 and recorded in the records of the Clark County Recorder at
book 960619, instrument number 01656.
(s) Tenant's Address: Silicon Gaming, Inc., 3070 W. Post Road, Las
Vegas, Nevada 89118, Attention: Paul D. Matthews, Vice President
(t) Tenant's Broker: Stuart Mixer Commercial, 3800 Howard Hughes
Parkway, Suite 1220, Las Vegas, Nevada 89109, Attention: John D. McKeown.
(u) Tenant's Guarantor: None.
(v) Tenant Improvement Allowance: An allowance to Tenant in the amount
of Four Hundred Seventy-five Thousand and 00/100 Dollars ($475,000.00) for the
design, engineering and construction of those improvements to the Premises
identified as the Work in RIDER NO.1.
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(w) Tenant Early Access Date: The date which is four (4) weeks prior
to the Commencement Date.
Section 1.02 BASE RENT. The "Base Rent" shall be Twenty-four Thousand
Four Hundred Thirty-five and 00/100 Dollars ($24,435.00) per month with
adjustments, if any, made pursuant to Rider No.1.
Section 1.03 RIDERS. The following Riders are attached to and made a
part of this Lease: RIDER NO. 1 - Tenant Work Letter and RIDER NO.2 - Extension
Option.
Section 1.04. PARKING. Tenant shall be entitled to use up to fifty-six
(56) unreserved uncovered parking spaces, as farther specified in Section 2.05
below.
ARTICLE TWO
LEASE TERM AND COMMON BUILDING AREAS
Section 2.01 LEASE OP PROPERTY FOR LEASE TERM. Landlord hereby leases
the Premises to Tenant and Tenant leases the Premises from Landlord for the
Lease Term. The Lease Term is for the period stated in Section 1.01 (k) above
and shall begin and end on the dates specified in Section 1.01(k) above. The
"Commencement Date" shall be the date specified in Section 1.01(c) above for the
beginning of the Lease Term. Tenant fully understands and acknowledges that this
Lease is subject to certain approvals required under the Special Use
Restrictions, and that the obtaining of such approvals is a condition precedent
to the obligations of Landlord and Tenant under this Lease.
Section 2.02 DELIVERY OF POSSESSION.
(a) Landlord will be deemed to have delivered possession of the
Premises to Tenant on the Commencement Date, as it may be adjusted pursuant to
Section 2.02(c) below. Landlord shall construct or install the office and
warehouse improvements consisting of the Work as defined in Rider No.1. Tenant
may provide Landlord with a list of Tenant's preferred contractors and
subcontractors to perform the Work, provided that Landlord shall, in Landlord's
discretion, have the final authority in the selection of all contractors,
subcontractors, architects and engineers to perform the Work. Landlord shall be
responsible in all respects for the implementation and management of the Work.
Tenant acknowledges that neither Landlord nor its agents or employees have made
any representations or warranties as to the suitability or fitness of the
Premises for the conduct of Tenant's business or for any other purpose, nor has
Landlord or its agents or employees agreed to undertake any alterations or
construct any Tenant improvements to the Premises except as expressly provided
in this Lease and RIDER NO.1. If for any reason, Landlord cannot deliver
possession of the Premises to Tenant on or before the fixed date component of
the Commencement Date, this Lease will not be void or voidable, and Landlord
will not be liable to Tenant for any resultant loss or damage.
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(b) If, by the fixed date component of the Commencement Date specified
in Section 1.01 (c)(iii), the Premises have not been substantially completed (as
defined below) due to any cause other than Landlord's default or "Force Majeure
Delays" (as defined below), Landlord shall have no liability, and the
obligations of this Lease (including, without limitation, the obligation to pay
rent) shall nonetheless commence as of said fixed date component of the
Commencement Date.
(c) If, however, the Work is not substantially completed by the fixed
date specified in Section 1.0l(c)(iii) due to default on the part of Landlord or
Force Majeure Delays, then as Tenant's sole remedy for the delay in tenant's
occupancy of the Premises, the fixed date component of the definition of the
Commencement Date shall be delayed for the period of delay in substantial
completion of the Work resulting therefrom. The Work shall be deemed
"substantially completed" when (i) Landlord has provided reasonable access to
the Premises to Tenant, (ii) Landlord has completed the Work other than details
of construction which do not materially interfere with Tenant's use of the
Premises, and (iii) Landlord has obtained a permanent or temporary certificate
of occupancy for the Premises (or its equivalent). For purposes of this Section
2.02, "Force Majeure Delays" shall mean and refer to a period of delay or delays
encountered by Landlord affecting the Work because of delays due to excess time
in obtaining governmental permits or approvals beyond the time period normally
required to obtain such permits or approvals for similar space; fire, earthquake
or other acts of God; acts of the public enemy; riot; insurrection; public
unrest; governmental regulations of the sales of materials or supplies or the
transportation thereof; strikes or boycotts; shortage of material or labor or
any cause beyond the reasonable control of Landlord.
(d) Landlord shall permit Tenant to access the Premises on the Tenant
Early Access Date for the purpose of installing Tenant's furnishings, fixtures
and equipment, provided that Tenant shall not obstruct or hinder the performance
of the Work. This Lease shall apply in all respects from and after the Tenant
Early Access Date, except that Tenant shall have no obligation to pay Rent until
the Commencement Date.
Section 2.03 TENANT IMPROVEMENT ALLOWANCE. Landlord agrees to provide to
Tenant a Tenant Improvement Allowance in the amount set forth in Section
1.01(v), for the performance and completion of the Work. In the event the actual
amount required to complete the Work is less than the Tenant Improvement
Allowance, the amount of the Tenant Improvement Allowance which exceeds the
actual cost of the Work shall be credited to Tenant and shall, at Tenant's
option, either be paid to Tenant as a cash payment or be credited to Tenant
toward the payment of Rent by Tenant to Landlord. In the event the actual cost
of the Work shall exceed the Tenant Improvement Allowance, Tenant shall pay to
Landlord, in cash or its equivalent, all amounts by which the actual cost of the
Work exceeds the Tenant Improvement Allowance. Tenant shall be required to pay
any and all such sums prior to, and as a condition precedent to the taking of
possession of the Premises.
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Section 2.04 COMMON AREAS. Tenant shall have the nonexclusive right to
the use the Common Areas, subject to the Rules and Regulations referred to in
Section 13.16 below.
Section 2.05 LANDLORD'S RIGHT IN COMMON AREAS. Landlord hereby reserves
the right from time to time to do the following provided it is done without
unreasonable interference with Tenant's business or Tenant's use of the
Premises:
(a) To install, use, maintain, repair and replace pipes, conduits,
wires and appurtenant meters, pipe ducts, equipment and landscaping located in
the Common Areas;
(b) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
parking spaces, entrances, loading and unloading areas, ingress, egress,
direction of traffic, landscaped areas, and walkways and the parking facilities
for the Building;
(c) To close temporarily any of the Common Areas for maintenance
purposes or to prevent prescriptive easements so long as access to the Building
remains available.
(d) To add additional improvements to the Common Areas, including,
without limitation, the construction of parking structures or surface parking
areas;
(e) To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and as Landlord may, in the exercise of
sound business judgment, deem to be appropriate.
Section 2.06 HOLDING OVER. Tenant shall vacate the Premises upon the
expiration or earlier termination of this Lease. Tenant shall reimburse Landlord
for and indemnify and hold Landlord harmless against all damages, claims,
losses, penalties, charges, and expenses (including reasonable attorney's fees)
incurred by Landlord resulting from any delay by Tenant in vacating the
Premises. If Tenant does not vacate the Premises upon the expiration or earlier
termination of this Lease, Tenant's occupancy of the Premises shall be a tenancy
at sufferance, subject to all of the terms of this Lease applicable to a tenancy
at sufferance, except that the Base Rent then in effect shall be equal to one
hundred fifty percent (150%) of the Base Rent in effect immediately prior to the
expiration or earlier termination of this Lease. Nothing contained in this
Section 2.03 shall be construed as consent by Landlord to any holding over of
the Premises by Tenant, and Landlord expressly reserves the right to require
Tenant to surrender possession of the Premises to Landlord upon the expiration
or earlier termination of this Lease.
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ARTICLE THREE
BASE RENT
Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Section 1.02
above for the first full month of the Lease Term. The Base Rent for the first
month of the Lease term shall be prorated on the basis of the actual number of
days in such month, if such month is a fractional month. If such month is a
fractional month, then the Base Rent for such fractional month shall be due and
payable on the Commencement Date. Thereafter, on the first day of the second
month of the Lease Term (or, if the first full month of the Lease Term is the
second month, then the third month of the Lease Term) and each month thereafter,
Tenant shall pay Landlord the Base Rent, in advance, without offset, deduction
or prior demand. The Base Rent shall be payable at Landlord's Address or at such
other place as Landlord may designate in writing. Base Rent is due on or before
the first (1st) day of each month.
Section 3.02 ANNUAL INCREASES. The Base Rent shall be increased on the
first day of the thirteenth (13th) month of the Lease Term and on each annual
anniversary thereof during the Lease Term (the "Adjustment Month") in an amount
equal to three percent (3%) of the Base Rent immediately preceding such
Adjustment Month.
ARTICLE FOUR
OTHER CHARGES PAYABLE BY TENANT
Section 4.01 ADDITIONAL RENT. All charges payable by Tenant hereunder
other than Base Rent are called "Additional Rent." Unless this Lease provides
otherwise, all Additional Rent shall be paid with the next monthly installment
of Base Rent. The term "Rent" shall mean Base Rent and Additional Rent.
Section 4.02 OPERATING COSTS.
(a) Tenant shall during the Lease Term pay as Additional Rent Tenant's
Share of the Operating Costs. The inclusion of the improvements, facilities and
services described in the definition of Operating Costs set forth in Section
1.01(n) above, shall not be deemed to impose an obligation upon Landlord to
either have said improvements or facilities or to provide any of said services
unless Landlord has agreed elsewhere in this Lease to provide the specific
improvement, facility or service.
(b) Tenant shall pay Tenant's Share of Operating Costs, in advance, in
monthly installments with the Base Rent based on Landlord's good faith estimate
of the Operating Costs. Landlord may adjust such estimates from time to time as
Landlord determines, which adjustment will be effective as of the next rent
payment date after notice to Tenant. After the end of each calendar year,
Landlord shall deliver to Tenant a statement ("Actual Statement"), in reasonable
detail, of the actual Operating Costs incurred by Landlord during the preceding
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calendar year and Tenant's Share of such Operating Costs. Upon receipt of such
statement, there shall be an adjustment between Landlord and Tenant, with
payment to Landlord or credit given to Tenant, as the case may be, to reflect
the actual Operating Costs.
(c) In the event of any dispute as to the amount of Tenant's Share of
Operating Costs as set forth in the Operating Costs statement, Tenant shall have
the right, after reasonable notice and at reasonable times, to inspect and
photocopy Landlord's Operating Costs records at Landlord's offices. If, after
such inspection and photocopy, Tenant continues to dispute the amount of
Tenant's Share of Operating Costs as set forth in the Operating Costs statement,
Tenant shall be entitled to retain a national, independent, certified public
accountant mutually acceptable to Landlord and Tenant to audit Landlord's
Operating Costs records to determine the proper amount of Tenant's Share of
Operating Costs. Landlord shall be entitled to review the results of such audit
promptly after completion of same. If such audit proves that Landlord has
overcharged Tenant, then within fifteen (15) days after the results of the audit
are made available to Landlord, Landlord shall credit Tenant the amount of such
overcharge toward the payments of Base Rent and Additional Rent next coming due
under this Lease. If such audit proves that Landlord has undercharged Tenant,
then within fifteen (15) days after the results of the audit are made available
to Tenant, Tenant shall pay to Landlord the amount of any such undercharge.
Tenant agrees to pay the cost of such audit, provided that Landlord shall
reimburse Tenant the amount of such cost if the audit proves that Landlord's
determination of Tenant's Share of Operating Costs (as set forth in the
Operating Costs statement) was in error by more than six percent (6%). Landlord
shall be required to maintain records of all Operating Costs for three (3) years
following the issuance of the Operating Costs statement for such Operating
Costs. The payment by Tenant of any amounts pursuant to this Section shall not
preclude Tenant from questioning the correctness of any Operating Costs
statement.
Section 4.03 REAL PROPERTY TAXES. Tenant shall pay to Landlord, as part
of the Operating Costs, all Real Property Taxes and any increases thereof on the
Premises during the Lease Term. Tenant may initiate proceedings with the
appropriate taxing authorities to attempt to have the assessed valuation of the
Premises reduced or may initiate proceedings to contest the Real Property Taxes.
If required by law, Landlord shall join in the proceedings brought by Tenant.
However, Tenant shall pay all costs of the proceedings, including any costs or
fees incurred by Landlord. During the pendency of any such proceedings, Tenant
may instruct Landlord to remit the Real Property Taxes under protest if Tenant
reasonably concludes that such action is necessary to preserve Tenant's right to
seek a reassessment or contest the Real Property Taxes. In no event, however,
shall Tenant be relieved from its obligation to pay the Real Property Taxes to
Landlord as part of the Operating Costs, nor shall Tenant be entitled to reduce
the amount of the Real Property Taxes, as assessed, unless and until a final
order binding upon the taxing authority is entered authorizing such a reduction,
and all appeals or opportunities to appeal such order have been exhausted.
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Section 4.04 PERSONAL PROPERTY TAXES. Tenant shall pay all taxes charged
against trade fixtures, utility installations, furnishings, equipment or any
other personal property belonging to Tenant. Tenant shall use its best efforts
to have personal property taxed separately from the Premises. If Tenant fails to
pay when due any taxes on personal property which are assessed against the
Premises, Landlord may, in Landlord's discretion, pay such taxes and Tenant
shall reimburse Landlord for the amount of such taxes as Additional Rent.
Section 4.05 REPAIRS AND UTILITIES. The parties acknowledge that this
Lease is intended to be a fully net lease and that, except as expressly provided
in this Lease, Tenant shall be responsible for all repairs required to the
Premises and for the provision of all utilities at the Premises, including but
not limited to water, sewage, trash removal, waste disposal, janitorial,
electricity, telephone, security, and cleaning of the Premises, together with
any taxes thereon. If any such utilities or services are not able to be
separately metered or separately billed to the Premises, Tenant shall pay to
Landlord a reasonable proportion to be determined by Landlord of all such
charges jointly metered or billed to Landlord, together with a reasonable
administrative fee, immediately upon receipt of Landlord's bill therefor.
Section 4.06 INSURANCE.
(a) Landlord shall maintain, at Tenant's expense, and shall obtain and
keep in force at all times during the Lease Term, a policy of insurance covering
loss or damage to the Premises, including the Building and all of the
improvements, betterments, and installations, located within the Premises
(including all Work constructed in accordance with RIDER NO.1) in the amount of
one hundred percent (100%) of the full replacement value thereof as reasonably
ascertained by Landlord, insuring against risks of direct physical loss or
damage, normally covered in an "all risk" policy (including the perils of flood
and surface waters), as such term is used in the insurance industry; provided,
however, that neither Landlord nor Tenant shall have no obligation to insure
against earthquake. All premiums for such insurance shall be included as part of
the Operating Costs. The proceeds of the insurance shall be payable solely to
Landlord or the Mortgagees, as their respective interests shall appear.
(b) Tenant shall, at Tenant's expense, maintain a policy of Commercial
General Liability insurance insuring Tenant and as additional insureds, Landlord
and any Mortgagees, against liability arising out of the ownership, use,
occupancy or maintenance of the Premises. Such insurance shall be on an
occurrence basis providing single-limit coverage in an amount not less than One
Million Dollars ($1,000,000) per occurrence. The initial amount of such
insurance shall be subject to periodic increase upon reasonable demand by
Landlord based upon inflation, increased liability awards, recommendation of
professional insurance advisers, and other relevant factors. However, the limits
of such insurance shall not limit Tenant's liability nor relieve Tenant of any
obligation hereunder. Such policy shall contain the following provision: "Such
insurance as afforded by this policy for the benefit of Landlord shall be
primary
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as respects any claims, losses or liabilities arising out of the use of the
Premises by the Tenant or by Tenant's operation and any insurance carried by the
Landlord shall be excess and noncontributing." The policy shall insure Tenant's
performance of the indemnity provisions of Section 5.05.
(c) Tenant shall, from time to time, at Tenant's sole expense, obtain
and maintain other types of insurance as Tenant, Landlord or the Mortgagees of
Landlord may reasonably require in form, in amounts and for insurance risks
against which a prudent tenant would protect itself.
(d) Insurance required to be maintained hereunder shall be in
companies holding a "General Policyholders' Rating" of B-plus or better and a
"financial rating" of 10 or better, as set forth in the most current issue of
"Best's Insurance Guide," or such comparable ratings as Landlord shall approve,
in its sole discretion. Tenant shall promptly deliver to Landlord, within thirty
(30) days of the Commencement Date, original certificates evidencing the
existence and amounts of all insurance required to be maintained by Tenant. No
such policy shall be cancelable or subject to reduction of coverage except after
thirty (30) days' prior written notice to Landlord. Tenant shall, within thirty
(30) days prior to the expiration, cancellation or reduction of such policies,
furnish Landlord with renewals of "binders" thereof. Tenant shall not do or
permit to be done anything which shall invalidate the insurance policies
required under this Lease.
Section 4.07 WAIVER OF SUBROGATION. Tenant and/or Landlord shall obtain
the issuers of the insurance policies referred to in this Article Four a mutual
waiver of subrogation provision in said policies and Tenant and Landlord each
hereby release and relieve the other, and waive any and all rights of recovery
against the other, or against the employees, officers, agents and
representatives of the other, for loss or damage arising out of or incident to
the perils required to be insured against under this Section 4 which perils
occur in, on or about the Premises, whether due to the negligence of Landlord or
Tenant or their agents, employees, contractors or invitees.
Section 4.08 LATE CHARGES. Tenant acknowledges that Tenant's failure to
pay Base Rent or Additional Rent promptly may cause Landlord to incur
unanticipated costs. The exact amount of such costs are impractical or extremely
difficult to ascertain. Such costs may include, but are not limited to,
processing and accounting charges and late charges which may be imposed on
Landlord by any ground lease, mortgage or trust deed encumbering the Premises.
Therefore, if Landlord does not receive any Rent payment within five (5) days
after it becomes due, Tenant shall pay Landlord a late charge equal to ten
percent (10%) of the overdue amount. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of such late payment. In the event that a late charge is payable
hereunder, whether or not collected, for three (3) consecutive installments of
Rent, the Rent shall automatically become due and payable quarterly in advance,
rather than monthly, notwithstanding Section 3.01 above.
Section 4.09 INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant to
Landlord which is not paid when due shall bear interest at the rate of (i)
fifteen percent (15%)
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per annum, or (ii) the Lease Interest Rate, whichever is greater, from the due
date of such amount. However, interest shall not be payable on late charges to
be paid by Tenant under this Lease. The payment of interest on such amounts
shall not excuse or cure any default by Tenant under this Lease. If the
interest rate specified in this Section 4.08 is higher than the rate permitted
by law, the interest rate shall be decreased to the maximum legal interest
rate permitted by law.
Section 4.10 RETURN OF CHECK. If Base Rent or Additional Rent is paid by
check and the check is returned to Landlord without payment for any reason
whatsoever, Tenant shall be assessed a late charge and interest on past due
amount pursuant to Sections 4.07 and 4.08 as well as a Fifty Dollar ($50.00)
fee. If payment is returned for insufficient funds, Landlord has the right to
demand that such payment be in the form of a cashiers or certified check. If
Tenant has two (2) or more insufficient funds' payments in a twelve (12) month
period, Landlord may demand that all subsequent payments be in the form of a
cashiers or certified check.
Section 4.11 SECURITY DEPOSIT INCREASES.
(a) Upon the execution of this Lease, Tenant shall deposit with
Landlord a cash security deposit (the "Security Deposit") in the amount of the
Initial Security Deposit set forth in Section 1.01(f) above. On the first day of
the thirty-first (31st) full month of the Lease Term, if Tenant is not then in
default, the Security Deposit required hereunder shall be reduced from the
Initial Security Deposit amount to the sum of Ten Thousand and No/100 Dollars
($10,000.00) (the "Reduced Security Deposit"). Any Security Deposit amount held
by Landlord at that time which is in excess of the Reduced Security Deposit
shall be credited to Tenant toward the payment of rent for the thirty-first
(31st) full month of the Lease Term. If Tenant is in default on the first day of
the thirty-first (31st) full month of the Lease Term, then the Initial Security
Deposit amount shall continue to be required until such time as Tenant's default
shall have been cured, at which time the Reduced Security Deposit shall apply
and Tenant shall be credited toward Tenant's next payment of Rent an amount
equal to the excess of the Security Deposit then held by Landlord over the
Reduced Security Deposit amount.
(b) Landlord may apply all or part of the Security Deposit to any
unpaid Rent or other charges due from Tenant or to cure any other defaults of
Tenant. If Landlord uses any part of the Security Deposit, Tenant shall restore
the Security Deposit to the full amount required under subparagraph (a) of this
Section within ten (10) days after Landlord's written request. Tenant's failure
to do so shall be a material default under this Lease. No interest shall be paid
on the Security Deposit. Landlord shall not be required to keep the Security
Deposit separate from its other accounts and no trust relationship is created
with respect to the Security Deposit.
Section 4.12 TERMINATION: ADVANCE PAYMENTS. Upon expiration of this
Lease or other termination of this Lease not resulting from Tenant's default,
and after Tenant has vacated the Premises in the manner required by this Lease,
an equitable adjustment shall be made concerning advance rent and other advance
payments made by Tenant to Landlord, and Landlord
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shall refund any unused portion of the Security Deposit to Tenant, or, at
Landlord's option, to Tenant's assignee or sublessee.
ARTICLE FIVE
USE OF PROPERTY
Section 5.01 PERMITTED USES. Tenant may use the Premises only for the
Permitted Uses set forth in Section 1.01(0) above.
Section 5.02 MANNER OF USE. Tenant shall not cause or permit the
Premises to be used in any way (i) which constitutes (or would constitute) a
violation of any Laws, occupancy certificate, the requirements of any board of
fire underwriters or similar body, as any of the same now or in the future may
exist, or (ii) which constitutes a nuisance or waste, or (iii) which is
prohibited by the Declaration or the Special Use Restrictions. Tenant, at its
sole cost and expense, shall comply with all Laws now in force or which may
hereafter be in force regulating the use, occupancy or alterations by Tenant of
the Premises. Landlord makes no representation or warranty as to the suitability
of the Premises for Tenant's intended use or whether such use complies with all
such Laws.
Section 5.03 HAZARDOUS SUBSTANCES.
(a) Reportable Uses Require Consent. The term "Hazardous Substance" as
used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment, or the Premises; (ii) regulated or monitored by any governmental
authority; or (iii) a basis for potential liability of Landlord to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products or by-products thereof. Tenant
shall not engage in any activity in or about the Premises which constitutes a
Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Landlord and compliance in a timely manner (at
Tenant's sole cost and expense) with all Applicable Requirements (as defined in
Section 5.03(d)). "Reportable Use" shall mean (i) the installation or use of any
above or below ground storage tank, (ii) the generation, possession, storage,
use, transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with any governmental authority, and (iii) the presence
in, on or about the Premises of a Hazardous Substance with respect to which any
Applicable Requirements require that a notice be given to persons entering or
occupying the Premises or neighboring properties. Notwithstanding the foregoing,
Tenant may, without Landlord's prior consent, but upon notice to Landlord and in
compliance with all Applicable Requirements, use any ordinary and customary
materials reasonably required to be used by Tenant in the normal course of the
Permitted Uses,
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so long as such use is not a Reportable Use and does not expose the Premises or
neighboring properties to any meaningful risk of contamination or damage or
expose Landlord to any liability therefor. In addition, Landlord may (but
without any obligation to do so) condition its consent to any Reportable Use of
any Hazardous Substance by Tenant upon Tenant's giving Landlord such additional
assurances as Landlord, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefor, including but not limited to
the installation (and, at Landlord's option, removal on or before Lease
expiration or earlier termination) of reasonably necessary protective
modifications to the premises (such as concrete encasements) and/or the deposit
of an additional Security Deposit.
(b) Duty to Inform Lessor. If Tenant knows, or has reasonable cause to
about the Premises or the Building, other than as previously consented to by
Landlord, Tenant shall immediately give Landlord written notice thereof,
together with a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding given
to, or received from, any governmental authority or private patty concerning the
presence, spill, release, discharge of, or exposure to, such Hazardous Substance
including but not limited to all such documents as may be involved in any
Reportable Use involving the Premises. Tenant shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including, without limitation, through the plumbing or sanitary sewer
system).
(c) Indemnification. Tenant shall indemnify, protect, defend and hold
Landlord, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Tenant or by anyone under Tenant's control. Tenant's
obligations under this Section 5.03(c) shall include, but not be limited to, the
effects of any contamination or injury to person, property or the environment
created or suffered by Tenant, and the cost of investigation (including
consultants' and attorneys' fees and testing), removal, remediation, restoration
and/or abatement thereof, or of any contamination therein involved, and shall
survive the expiration or earlier termination of this Lease. No termination,
cancellation or release agreement entered into by Landlord and Tenant shall
release Tenant from its obligations under this Lease with respect to Hazardous
Substances, unless specifically so agreed by Landlord in writing at the time of
such agreement.
(d) Tenant's Compliance with Requirements. Tenant shall, at Tenant's
sole cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Landlord's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about
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the Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill, or release of any Hazardous Substance), now in
effect or which may hereafter come into effect. Tenant shall, within five (5)
days after receipt of Landlord's written request, provide Landlord with copies
of all documents and information, including but not limited to permits,
registrations, manifests, applications, reports and certificates, evidencing
Tenant's compliance with any Applicable Requirements specified by Landlord, and
shall immediately upon receipt, notify Landlord in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Tenant or the
Premises to comply with any Applicable Requirements.
(e) Inspection: Compliance with Law. Landlord, Landlord's agents,
employees, contractors and designated representatives, and any Mortgagees, shall
have the right to enter the Premises at any time in the case of an emergency,
and otherwise at reasonable times, for the purpose of inspecting the condition
of the Premises and for verifying compliance by Tenant with this Lease and all
Applicable Requirements, and Landlord shall be entitled to employ experts and/or
consultants in connection therewith to advise Landlord with respect to Tenant's
activities, including but not limited to Tenant's installation, operation, use,
monitoring, maintenance, or removal of any Hazardous Substance on or from the
Premises. The costs and expenses of any such inspections shall be paid by the
party requesting the same, unless a default of this Lease by Tenant or a
violation of Applicable Requirements or a contamination, caused or materially
contributed to by Tenant, is found to exist or to be imminent, or unless the
inspection is requested or ordered by a governmental authority as the result of
any such existing or imminent violation or contamination. In such case, Tenant
shall upon request reimburse Landlord or Landlord's Mortgagee, as the case may
be, for the costs and expenses of such inspections.
Section 5.04 SIGNS AND AUCTIONS. Tenant shall not place any signs on the
Premises without Landlord's prior written consent. All signage shall be in
conformance with the Declaration and the Special Use Restrictions. Tenant shall
not conduct or permit any auctions or sheriff's sales at the Premises.
Section 5.05 INDEMNITY. Tenant shall indemnify and hold harmless Landlord
and all agents, servants and employees of Landlord from and against all claims,
losses, damages, expenses (including reasonable attorneys' fees), penalties and
charges arising from or in connection with (i) Tenant's use of the Premises
during the Lease Term, or (ii) the conduct of Tenant's business, or (iii) any
activity, work or things done, permitted or suffered by Tenant in or about the
Premises during the Lease Term. Tenant shall farther indemnify and hold harmless
Landlord from and against any and all claims, loss, damage, expense (including
reasonable attorneys' fees), penalty or charge arising from any default in the
performance of any obligation on Tenant's part to be performed under the terms
of this Lease, or arising from any negligence of Tenant, or any of Tenant's
agents, contractors, or employees, and from and against all costs, attorneys'
fees, expenses and liability incurred in the defense of any such claim or any
action or proceeding brought thereon. If any action or proceeding be brought
against Landlord by reason
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of any such claim, Tenant, upon notice from Landlord; shall defend the same at
Tenant's expense by legal counsel reasonably satisfactory to Landlord. Tenant,
as a material part of its consideration to Landlord, hereby assumes all risk of
damage to property or injury to persons in or upon the Premises arising from any
cause and Tenant hereby waives all claims in respect thereof against Landlord.
Notwithstanding the foregoing, Tenant shall not be required to defend, save
harmless or indemnify Landlord from any liability for injury, loss, accident or
damage to any person or property resulting from Landlord's negligence or willful
acts or omissions, or those of Landlord's officers, agents, contractors or
employees. Tenant's indemnity is not intended to nor shall it relieve any
insurance carrier of its obligations under policies required to be carried by
Tenant pursuant to the provisions of this Lease to the extent that such policies
cover the results of negligent acts or omissions of Landlord, its officers,
agents, contractors or employees, or the failure of Landlord to perform any of
its obligations under this Lease.
Section 5.06 LANDLORD'S ACCESS. Landlord or its agents may enter the
Premises at all reasonable times to inspect the condition of the Premises and
verity Tenant's compliance with the terms of this Lease. Landlord may also enter
the Premises at reasonable times to show the Premises to potential buyers,
investors or tenants or other parties, or for any other purpose Landlord deems
necessary. Landlord shall give Tenant prior notice of Landlord's entry, except
in the case of an emergency. Landlord may place customary "For Sale" or "For
Lease" signs on the Premises.
ARTICLE SIX
CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01 EXISTING CONDITIONS. Except as is set forth in RIDER NO.1,
Tenant accepts the Premises in its condition "AS IS" as of the date of execution
of this Lease, subject to all recorded mailers and Laws. Tenant acknowledges
that neither Landlord nor any employee or agent of Landlord has made any
representation as to the condition of the Premises or the suitability of the
Premises for Tenant's intended use.
Section 6.02 EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be
liable for and Tenant shall indemnify and hold Landlord harmless from and
against all claims, losses, damages, expenses, penalties and charges arising
from or in connection with any damage or injury to the person, business (or any
loss of income therefrom), goods, wares, merchandise or other property of
Tenant, Tenant's employees, invitees, customers or any other person in or about
the Premises, whether such damage or injury is caused by or results from: (a)
fire, steam, electricity, water, gas or rain; (b) the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air conditioning or lighting fixtures or any other cause; (c) the failure, delay
or diminution in the quality or quantity of any utilities or services supplied
to the Premises or the Building; or (d) any conditions arising in or about the
Premises, or from other sources or places, nor shall any of the same be
construed as an eviction of Tenant, nor, unless otherwise permitted under this
Lease, work an abatement of Rent, nor relieve Tenant from any obligation under
this Lease. Landlord shall not be liable for any such damage or injury even
though the cause of or the means of repairing such damage or injury are not
accessible to Tenant.
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The provisions of this Section 6.02 shall not, however, exempt Landlord from
liability for Landlord's gross negligence or willful misconduct.
Section 6.03 LANDLORD'S OBLIGATIONS. Landlord shall keep the Common
Areas in good order, condition and repair. Landlord shall have no other
obligation, in any manner whatsoever, to repair or maintain the Premises, the
improvement thereon or equipment therein, it being intended that all such
obligations shall be the obligations of Tenant. Landlord shall, however,
cooperate with Tenant to assist Tenant in taking advantage of any manufacturer's
or installer's warranties which may be in effect with regard to the Building or
any of its components, or with regard to any other aspect of the Premises to
which a warranty may apply. Tenant expressly waives the benefit of any statute,
whether now or hereinafter in effect, which affords Tenant the right to make
repairs at the expense of Landlord or to terminate this Lease by reason of any
needed repairs.
Section 6.04 TENANT'S OBLIGATIONS.
(a) Tenant shall, at Tenant's sole cost and expense, keep all portions
of the Premises (other than the Common Areas) in good order, condition and
repair, including, without limitation, the roof and structure, walls and
foundation, doors and windows, and all components of the electrical, mechanical,
plumbing, heating, air conditioning and ventilation systems which serve the
Premises. If any portion of the Premises or any system or equipment in the
Premises which Tenant is obligated to repair cannot be filly repaired, Tenant
shall promptly replace such portion of or system or equipment in the Premises,
regardless of whether the benefit of such replacement extends beyond the Lease
Term.
(b) Either Landlord or Tenant, at Tenant's option and at Tenant's
sole expense, shall enter into a preventative maintenance contract ("Maintenance
Contract") with a licensed heating and air conditioning contractor providing for
the regular inspection and maintenance of the heating, air conditioning and
ventilation system utilized for the Premises. Landlord shall have the right to
approve the contractor and the Maintenance Contract prior to Tenant's execution
thereof. Thirty (30) days prior to the Commencement Date, Tenant shall inform
Landlord whether Tenant will obtain the Maintenance Contract or whether Tenant
wants Landlord to obtain the Maintenance Contract. In the event Tenant elects to
obtain the Maintenance Contract, Tenant shall provide Landlord with a copy of
such Maintenance Contract at least fifteen (15) days prior to the Commencement
Date: the Maintenance Contract cannot be canceled without providing Landlord
with thirty (30) days' prior written notice. If Tenant elects not to obtain a
Maintenance Contract or if Tenant fails to provide landlord with a copy of the
Maintenance Contract fifteen (15) days prior to the Commencement Date, Landlord
shall obtain the Maintenance Contract for Tenant's benefit and Tenant shall be
obligated to pay Landlord, as Additional Rent, monthly, without demand, one
twelfth (1/12th) of the annual cost of the Maintenance Contract. Regardless if
Landlord or Tenant obtains the Maintenance Contract,
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Landlord shall have the right to enter Tenant's Premises to inspect any and all
aspects of the Premises including, without limitation, the air condition,
heating and ventilation system utilized for the Building.
(c) Tenant shall, at Tenant's sole expense, enter into a sewer and
trash removal contract ("Trash Removal Contract") with a contractor providing
for regular sewer and trash removal services for the Premises. Landlord shall
have the right to approve the contractor and the Trash Removal Contract prior to
Tenant's execution thereof. Tenant shall provide Landlord with a copy of such
Trash Removal Contract at least fifteen (15) days prior to the Commencement
Date: the Trash Removal Contract cannot be canceled without providing Landlord
with thirty (30) days' prior written notice. If Tenant fails to provide Landlord
with a copy of the Trash Removal Contract fifteen (15) days prior to the
Commencement Date, Landlord shall have the right to obtain the Trash Removal
Contract for Tenant's benefit and Tenant shall be obligated to pay Landlord, as
Additional Rent, monthly, without demand, one-twelfth (1/12th) of the annual
cost of the Trash Removal Contract.
(d) If Tenant fails to maintain or repair the Premises as required by
this Section 6.04, Landlord may, upon ten (10) days' prior notice to Tenant
(except that no notice shall be required in the case of an emergency), enter the
Premises and perform such maintenance or repair on behalf of Tenant. In such
case, Tenant shall reimburse Landlord for all costs incurred in performing such
maintenance or repair, including twenty percent (20%) of such costs for
Landlord's supervision, immediately upon demand.
Section 6.05 ALTERATIONS. ADDITIONS. AND IMPROVEMENTS.
(a) Tenant shall not make any alterations, additions, or improvements
to the Premises without Landlord's prior written consent. Tenant shall deliver
to Landlord, for Landlord's approval prior to any construction, a complete set
of plans and specifications for the proposed alterations, additions or
improvement, copies of contracts with general contractors, evidence of
contractor's insurance and bonds, and all necessary permits for such
construction. Landlord may require Tenant to provide demolition and/or lien and
completion bonds in form and amount satisfactory to Landlord. Tenant shall
promptly remove any alterations, additions, or improvements constructed in
violation of this Section 6.05(a) upon Landlord's written request. All
alterations, additions, and improvements will be accomplished in a good and
workmanlike manner, in conformity with all applicable Laws, and by a contractor
approved by Landlord. Landlord's approval of the plans, specifications and
working drawings for Tenant's alterations shall create no responsibility or
liability on the part of Landlord for their completeness, design, sufficiency,
or compliance with all laws, rules and regulations of governmental agencies or
authorities. Upon completion of any such work, Tenant shall provide Landlord
with "as built" plans, copies of all construction contracts, and proof of
payment for all labor and materials.
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(b) Tenant shall pay when due all claims for labor and material
furnished to the Premises. Tenant shall give Landlord at least ten (10) days'
prior written notice of the commencement of any work on the Premises. Landlord
may elect to record and post notices of non-responsibility on the Premises.
(c) Notwithstanding the foregoing, Tenant shall be permitted to make
minor improvements to the interior of the Building without obtaining Landlord's
prior written consent, provided that the cost of any such improvements completed
during any consecutive six (6) month period shall not exceed, in the aggregate,
the sum of Ten Thousand and 00/100 Dollars ($10,000.00). Tenant shall be
permitted to make minor improvements to the interior of the Building under this
Section 6.05(c) only to the extent Tenant's improvements (i) do not affect the
Building's structural integrity; (ii) do not affect the appearance of the
exterior of the Building; (iii) are in compliance with the Laws, the Declaration
and the Special Use Restrictions; and (iv) are in compliance with all other
provisions of this Lease, including the requirements of Sections 6.05(a) and
6.05(b) (other than the requirement of obtaining Landlord's prior written
consent).
Section 6.06 CONDITION UPON TERMINATION. Upon the termination of this
Lease, Tenant shall surrender the Premises to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. In
addition, Landlord may require Tenant to remove, at Tenant's expense, any
alterations, additions or improvements by providing written notice to Tenant
within thirty (30) days after the termination of this Lease. Landlord shall not,
however, require Tenant to remove any portions of the Work, as set forth in
Rider 1, nor shall Landlord require Tenant to remove any alterations made with
Landlord's approval under Section 6.05(a) to the extent that, at the time such
approval is granted, Landlord affirms in writing that Tenant will not be
required to remove such addition or improvement. All alterations, additions and
improvements which Landlord has not required Tenant to remove shall become
Landlord's property and shall be surrendered to Landlord upon the termination of
the Lease, except that Tenant may remove any of Tenant's machinery or equipment
which can be removed without material damage to the Premises. Tenant shall
repair, at Tenant's expense, any damage to the Premises caused by the removal of
any such machinery or equipment. In no event, however, shall Tenant remove any
of the following materials or equipment without Landlord's prior written
consent: any power wiring or power panels; lighting or lighting fixtures; wall
coverings; drapes, blinds or other window coverings; carpets or other floor
coverings; heaters, air conditioners or any other heating or air conditioning
equipment; fencing or security gates; or other similar building operating
equipment and decorations.
ARTICLE SEVEN
DAMAGE OR DESTRUCTION
Section 7.01 PROPERTY DAMAGE. If the Premises or any part thereof shall
be damaged by fire or other peril, Tenant shall given prompt written notice
thereof to Landlord. In case the Premises shall be so damaged that fifty percent
(50%) or more of the square footage of the Premises shall be unusable for its
intended purpose or the time required to restore the
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Premises shall exceed one hundred eighty (180) days, or in the event any
Mortgagee shall require that the insurance proceeds payable as a result of a
peril be applied to the payment of the mortgage debt, or in the event of any
material uninsured loss to the Premises, either Landlord or Tenant may, at its
option, terminate this Lease by notifying the other party in writing of such
termination within ninety (90) days after the date of such casualty. If the
casualty to the Premises shall occur during the final year of the Lease Term and
the Premises shall be so damaged that the time required to restore the Premises
shall exceed ninety (90) days, either Landlord or Tenant may, at its option,
terminate this Lease by providing written notice as set forth in the previous
sentence. If neither Landlord nor Tenant elects to terminate this Lease,
Landlord shall, as Landlord's sole obligation, commence and proceed with
reasonable diligence to restore the Premises to substantially the same condition
in which it was immediately prior to the occurrence of the peril, including all
improvements constructed pursuant to RIDER NO.1. Any shortfall between the
amount of insurance proceeds and the actual costs of such reconstruction shall
be deposited by Tenant prior to the commencement of such reconstruction and, if
additional costs occur, immediately upon demand therefor. Landlord shall not be
liable for any inconvenience or annoyance to Tenant or injury to the business of
Tenant resulting in any way from such damage or the repair thereof, except as
set forth in Section 7.02 below.
Section 7.02 ABATEMENT OR REDUCTION OF RENT.
(a) If the Premises are destroyed or damaged as the result of a
casualty or peril which is covered by insurance, and neither Landlord nor Tenant
terminates this Lease pursuant to the provisions of this Article Seven, Tenant
shall not be required to pay Base Rent during the period commencing as of the
date of the casualty and continuing for the period of time required for Landlord
to repair or restore the Premises.
(b) If the Premises are destroyed or damaged as the result of a
casualty or peril which is not covered by insurance, and neither Landlord nor
Tenant terminates this Lease pursuant to the provisions of this Article Seven,
the Base Rent payable during the period commencing as of the date of the
casualty and continuing for the period of time required for Landlord to complete
the repairs described in this Article Seven, due to such damage, repair and/or
restoration shall be reduced according to the degree, if any, to which Tenant's
use of the Premises is impaired as of the date of the casualty as determined by
Landlord. If any casualty is the result of the fault or negligence of Tenant or
any of Tenant's agents, employees or invitees, the Base Rent hereunder shall not
be diminished during the repair of such damage.
(c) Except for such possible reduction in Base Rent, Tenant shall not
be entitled to any abatement, compensation, reduction, or reimbursement from
Landlord as a result of any damage, destruction, repair, or restoration of or to
the Premises. In the event this Lease is terminated pursuant to this Article
Seven, such termination shall be effective as of the date of the casualty.
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Section 7 03 WAIVER Tenant waives the protection of any statute, code
or judicial decision which grants a tenant the right to terminate a lease in the
event of the substantial destruction of the leased property. Tenant agrees that
the provisions of this Article Seven above shall govern the rights and
obligations of Landlord and Tenant in the event of any casualty to the Premises.
ARTICLE EIGHT
CONDEMNATION
Section 8.01 CONDEMNATION. If the whole or substantially the whole of the
Premises shall be taken for any public or quasi-public use, by right of eminent
domain or otherwise or shall be sold in lieu of condemnation, then this Lease
shall terminate as of the date when physical possession of the Premises is taken
by the condemning authority. If less than the whole or substantially the whole
of the Premises is thus taken or sold, Landlord may terminate this Lease by
giving written notice thereof to Tenant; in which event this Lease shall
terminate as of the date when physical possession of such portion of the
Premises is taken by the condemning authority. If the Lease is not so terminated
upon any such taking or sale, the Rent payable hereunder shall be diminished by
an equitable amount, and Landlord shall, to the extent Landlord deems feasible,
restore the Premises to substantially their former condition, but such work
shall not exceed the scope of the work done by Landlord in originally
constructing the building and installing improvements in the Premises, nor shall
Landlord in any event be required to spend for such work an amount in excess of
the amount received by Landlord as compensation for such taking. All amounts
awarded upon a taking of any part or all of the Premises shall belong to
Landlord, and Tenant shall not be entitled to and expressly waives all claims to
any such compensation.
ARTICLE NINE
ASSIGNMENT AND SUBLETTING
Section 9.01 LANDLORD'S CONSENT REQUIRED. No portion of the Premises or
of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by assignment, mortgage, sublease, transfer, operation of law,
or act of Tenant, without Landlord's prior written consent, which consent shall
not be unreasonably withheld. Any attempted transfer without consent shall be
void and shall constitute a non-curable breach of this Lease. Tenant shall have
the right, without Landlord's consent, to assign this Lease to a corporation
with which it may merge or consolidate, to any controlling parent or controlled
subsidiary of Tenant or controlled subsidiary of Tenant's parent, or to a
purchaser of substantially all of Tenant's assets, if the assignee executes an
agreement required by Landlord assuming all Tenant's obligations under this
Lease. Notwithstanding any other provision of this Lease, Tenant expressly
acknowledges and agrees that no assignment, transfer or sublease shall be
permitted it and to the extent, such assignment, transfer or sublease shall be
in violation of the Special Use Restrictions.
Section 9.02 LANDLORD'S ELECTION. Tenant's request for consent to any
transfer described in Section 9.01 above shall be accompanied by a written
statement setting forth the details of the proposed transfer, including the
name, business and financial condition of the
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prospective transferee, financial details of the proposed transfer (e.g., the
term of and rent and security deposit payable under any assignment or sublease),
and any other information Landlord deems relevant. Landlord shall have the right
in Landlord's sole discretion to (a) withhold consent; (b) grant consent; or (c)
if the transfer is a sublease of the Premises or an assignment of this Lease, to
terminate this Lease as of the effective date of such sublease or assignment, in
which case Landlord may elect to enter into a direct lease with the proposed
assignee or subtenant. If Landlord consents to any assignment or sublease and
Tenant receives rent or other consideration, either initially or over the term
of the assignment or sublease, in excess of the Rent called for hereunder, or,
in case of the sublease of a portion of the Premises, in excess of such Rent
fairly allocable to such portion ("Profits"), then Tenant shall pay Landlord, as
Additional Rent hereunder, promptly after its receipt, fifty percent (50%) of
such Profits. For purposes of this section, Tenant's Profits shall be net of
Tenant's reasonable expenses incurred in subleasing the Premises, including
advertising costs, leasing commissions and costs of tenant improvements which
Tenant is required to incur.
Section 9.03 NO RELEASE OF TENANT. No transfer consented to by Landlord,
shall release Tenant or change Tenant's primary liability to pay the Rent and to
perform all other obligations of Tenant under this Lease. Upon the occurrence of
any default under this Lease, Landlord may proceed directly against Tenant
without the necessity of exhausting any remedies against any subtenant or
assignee. Upon termination of this Lease, any permitted subtenant shall, at
Landlord's option, attorn to Landlord and shall pay all Rent directly to
Landlord. Landlord's acceptance of Rent from any other person shall not
constitute a waiver of any provision of this Article Nine. Consent to one
transfer shall not constitute a consent to any subsequent transfer. Landlord may
consent to subsequent assignments or modifications of this Lease by Tenant's
transferee, without notifying Tenant or obtaining its consent. Such action shall
not relieve Tenant of its liability under this Lease.
Section 9.04 NO MERGER. No merger shall result from Tenant's sublease of
the Premises under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant as
sublandlord thereunder.
ARTICLE TEN
DEFAULTS; REMEDIES
Section 10.01 COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Premises is conditioned upon
such performance. Time is of the essence in the performance of all covenants and
conditions.
Section 10.02 DEFAULTS. Tenant shall be in material default under this
Lease:
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(a) If Tenant abandons the Premises or if Tenant vacates the Premises
for thirty (30) consecutive days;
(b) If Tenant fails to pay Rent or any other charge required to be
paid by Tenant within five (5) days from the due date thereof;
(c) If tenant fails to perform any of Tenant's nonmonetary obligations
under this Lease for a period often (10) days after written notice from
Landlord; provided that if more than then (10) days are required to complete
such performance, Tenant shall not be in default if Tenant commences such
performance within such ten (10) day period and thereafter diligently pursues
its completion;
(d) (i) If Tenant makes a general assignment or general arrangement
for the benefit of creditors; (ii) if a petition for adjudication of bankruptcy
or for reorganization or rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed
to take possession of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease and possession is not restored to
Tenant within thirty (30) days; or (iv) if Tenant's interest in this Lease is
subjected to attachment, execution or other judicial seizure which is not
discharged within thirty (30) days. If a court of competent jurisdiction
determines that any of the acts described in this Section (d) is not a default
under this Lease, and a trustee is appointed to take possession (or if Tenant
remains a debtor in possession) and such trustee or Tenant transfers Tenant's
interest hereunder, then Landlord shall receive, as Additional Rent, the
difference between the rent (or any other consideration) paid in connection with
such assignment or sublease and the rent payable by Tenant hereunder;
(e) If any representation or warranty made by Tenant or by a subtenant
or assignee in connection with this Lease shall have been false or misleading as
of the date such representation or warranty was made; or
(f) If Tenant fails to take substantial occupancy of the Premises
within a reasonable time after the Commencement Date.
Section 10.03 REMEDIES. On the occurrence of any default by Tenant,
Landlord may, at any time thereafter, with or without notice or demand and
without limiting Landlord in the exercise of any right of remedy which Landlord
may have:
(a) Terminate Tenant's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Premises to Landlord. In such event,
Landlord shall be entitled to recover from tenant all damages incurred by
Landlord by reason of Tenant's default, including without limitation (i) the
worth at the time of the award of the unpaid Base Rent, Additional Rent and
other charges which had been earned at the time of the termination; (ii) the
worth at the time of the award of the amount by which the unpaid Base Rent,
Additional Rent and other charges
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which would have been earned after termination until the time of the award
exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; (iii) the worth at the time of the award of the amount by
which the unpaid Base Rent, Additional Rent and other charges which would have
been paid for the balance of the Lease Term after the time of award exceeds the
amount of such rental loss that Tenant proves could have been reasonably
avoided; and (iv) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under the Lease or which in the ordinary course of things would be likely to
result therefrom, including, but not limited to, any costs or expenses incurred
by Landlord in maintaining or preserving the Premises after such default, the
cost of recovering possession of the Premises, expenses of reletting, including
necessary renovation or alteration of the Premises, Landlord's reasonable
attorneys' fees incurred in connection therewith, and any real estate commission
paid or payable. As used in subparts (i) and (ii) above, the "worth at the time
of the award" is computed by allowing interest on unpaid amounts at the rate of
fifteen percent (15%), or such lesser amount as may then be the maximum lawful
rate, accruing the date such payments are due until paid. As used m subpart
(iii) above, the "worth at the time of the award" is computed by discounting
such amount at the discount rate of the Federal Reserve Bank of San Francisco at
the time of the award, plus one percent (1%);
(b) Maintain Tenant's right to possession, in which case this Lease
shall continue in effect whether or not Tenant shall have abandoned the
Premises. In such event, Landlord shall be entitled to enforce all of Landlord's
rights and remedies under this Lease, including the right to recover Rent as it
becomes due hereunder. Landlord's election to maintain Tenant's right to
possession shall not prejudice Landlord's right, at any time thereafter to
terminate Tenant's right to possession and proceed in accordance with Section
10.03(a) above; or
(c) Pursue any other remedy now or hereafter available to Landlord
under the laws or judicial decisions of the State of Nevada.
Section 10.04 CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN
PROTECTION OF LENDERS
Section 11.01 SUBORDINATION. Landlord shall have the right to subordinate
this Lease to any ground lease, deed of trust or mortgage encumbering the
Premises, any advances made on the security thereof and any renewals,
modifications, consolidations, replacements or extensions thereof, whenever made
or recorded. However, Tenant's right to quiet possession of the Premises during
the Lease Term shall not be disturbed if Tenant pays the Rent and performs all
of Tenant's obligations under this lease and is not otherwise in default.
Landlord agrees to use best efforts to obtain a nondisturbance agreement from
the holder of any ground lease, deed of trust or mortgage to which this Lease is
subordinate, providing in substance that as long as
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Tenant performs its obligations under? this Lease and is not in default, no
foreclosure, deed in lieu of foreclosure, or sale under the encumbrance shall
affect Tenant's rights under this Lease. If any ground lessor, beneficiary or
mortgagee elects to have this lease prior to the lien of its ground lease, deed
of trust or mortgage and gives written notice thereof to Tenant, this Lease
shall be deemed prior to such ground lease, deed of trust or mortgage where this
Lease is dated prior or subsequent to the date of said ground lease, deed of
trust or mortgage or the date of recording thereof. If in connection with
obtaining construction, interim or permanent financing for the Building, the
lender shall request modifications to this Lease as a condition to such
financing, Tenant will not withhold or delay its consent thereto, provided that
such modifications do not increase the obligations of Tenant hereunder and do
not otherwise materially adversely affect Tenant's rights hereunder. In the
event that Tenant should fail to execute any instrument described in this
Article Eleven promptly as requested, Tenant hereby irrevocably constitutes
Landlord as its attorney-in-fact to execute such instrument in Tenant's name,
place and stead, it being agreed that such power is one coupled with an
interest.
Section 11.02 ATTORNMENT. If Landlord's interest in the Premises is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Premises and recognize such transferee
or successor as Landlord under this lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Premises upon the transfer
of Landlord's interest.
Section 11.03 SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instruments or documents reasonably necessary or appropriate to evidence any
such attornment or subordination or agreement to do so. Such subordination and
attornment documents may contain such provisions as are customarily required by
any ground lessor, beneficiary under a deed of trust or mortgagee. If Tenant
fails to do so within ten (10) days after written request, Tenant hereby makes,
constitutes and irrevocably appoints Landlord, or any transferee or successor of
Landlord, the attorney-in-fact of Tenant to execute and deliver any such
instrument or document.
Section 11.04 ESTOPPEL CERTIFICATES.
(a) Upon Landlord's written request, Tenant shall execute, acknowledge
and deliver to Landlord a written statement certifying: (i) that none of the
terms or provisions of this Lease have been changed (or if they have been
changed, stating how they have been changed); (ii) that this Lease has not been
canceled or terminated; (iii) the last date of payment of the Base Rent and
other charges and the time period covered by such payment; (iv) that Landlord is
not in default under this Lease (or, if Landlord is claimed to be in default,
stating why); and (v) such other matters as may be reasonably required by
Landlord or the holder a mortgage, deed of trust or lien to which the Premises
is or becomes subject. Tenant shall deliver such statement to Landlord within
ten (10) days after Landlord's request. Any such statement by Tenant may be
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given by Landlord to any prospective purchaser or encumbrancer of the Premises.
Such purchaser or encumbrancer may rely conclusively upon such statement as true
and correct.
(b) If Tenant does not deliver such statement to Landlord within
such ten (10) day period, Landlord, and any prospective purchaser or
encumbrancer, may conclusively presume and rely upon the following facts: (i)
that the terms and provisions of this Lease have not been changed except as
otherwise represented by Landlord; (ii) that this Lease has not been canceled or
terminated except as otherwise represented by Landlord; (iii) that not more than
one month's Base Rent or other charges have been paid in advance; and (iv) that
Landlord is not in default under the Lease. In such event, Tenant shall be
esteemed from denying the truth of such facts.
Section 11.05 TENANT'S FINANCIAL CONDITION. Within ten (10) days after
written request from Landlord, Tenant shall deliver to Landlord such financial
statements as are reasonably required by Landlord to verify the net worth of
Tenant, or any assignee, subtenant, or guarantor of Tenant. In addition, Tenant
shall deliver to any lender designated by Landlord any financial statements
required by such lender to facilitate the financing or refinancing of the
Premises. Tenant represents and warrants to Landlord that each such financial
statement is a true and accurate statement as of the date of such statement. All
financial statements shall be confidential and shall be used only for the
purposes set forth herein.
ARTICLE TWELVE
LEGAL COSTS
Section 12.01 LEGAL PROCEEDINGS. Tenants shall reimburse Landlord,
upon demand, for any costs or expenses incurred by Landlord in connection with
any breach or default of Tenant under this Lease, whether or not suit is
commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, if any action for breach of or to enforce the provisions
of this Lease is commenced, the court in such action shall award to the party in
whose favor a judgment is entered, a reasonable sum as attorneys' fees and
costs. Such attorneys' fees and costs shall be paid by the losing party in such
action and Tenant shall also indemnify Landlord against and hold Landlord
harmless from all costs, expenses, demands and liability incurred by Landlord if
Landlord becomes or is made a party to any claim or action (a) instituted by
Tenant, or by any third party against Tenant, or by or against any person
holding any interest under or using the Premises by license of or agreement with
Tenant; (b) for foreclosure of any lien for labor or material furnished to or
for Tenant or such other person; (c) otherwise arising out of or resulting from
any act or transaction of Tenant or such other person; or (d) necessary to
protect Landlord's interest under this Lease in a bankruptcy proceeding, or
other proceeding under Title 11 of the United States Code, as amended. Tenant
shall defend Landlord against any such claim or action at Tenant's expenses with
counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant
shall reimburse Landlord for any legal fees or costs incurred by Landlord in any
such claim or action.
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Section 12.02 LANDLORD'S CONSENT. Tenant shall pay Landlord's
reasonable attorneys' fees incurred in connection with Tenant's request for
Landlord's consent under Article Nine (Assignment and Subletting), or in
connection with any other act which Tenant proposes to do and which requires
Landlord's consent.
ARTICLE THIRTEEN
MISCELLANEOUS PROVISIONS
Section 13.01 NON-DISCRIMINATION. Tenant promises, and it is a condition
to the continuance of this Lease, that there will be no discrimination against,
or segregation of; any person or group of persons on the basis of race, color,
sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Premises or any portion thereof.
Section 13.02 LANDLORD'S LIABILITY. As used in this Lease, the term
"Landlord" means only the current owner or owners of the fee title to the
Premises or the leasehold estate under a ground lease of the Premises at the
time in question. Each Landlord is obligated to perform the obligations of
Landlord under this Lease only during the time such Landlord owns such interest
or title. Any Landlord who transfers its title or interest is relieved of all
liability with respect to the obligations of Landlord under this Lease to be
performed on or after the date of transfer. However, each Landlord shall deliver
to its transferee all finds previously paid by Tenant if such finds have not yet
been applied under the terms of this Lease. The liability of Landlord to Tenant
for any default by Landlord under the terms of this Lease shall be limited to
the lesser of (i) the interest of Landlord in the Premises, or (ii) the interest
Landlord would have in the Premises if the Premises were encumbered by third
party debt in an amount equal to eight percent (80%) of the value of the
Premises (as such value is determined by Landlord) and Tenant agrees to look
solely to such amount for recovery of any judgment from Landlord, it being
intended that Landlord shall not be personally liable for any judgment or
deficiency.
Section 13.03 SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
Section 13.04 INTERPRETATION. The captions of the Articles and Sections
of this Lease are to assist the parties in reading this Lease and are not a part
of the terms or provisions of this Lease. Whenever required by the context of
this Lease, the singular shall include the plural and the plural shall include
the singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include tenant's agents, employees, contractors,
invitees, successors or others using the Premises with Tenant's expressed or
implied permission. The provisions of this Lease shall be construed as a whole
according to their fair meaning and not strictly for or against any party. The
normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation
of this Lease or any of its exhibits or amendments.
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Section 13.05 INCORPORATION OF PRIOR AGREEMENT: MODIFICATIONS. This Lease
is the only agreement between the patties pertaining to the lease of the
Premises and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.06 NOTICES. All notices required or permitted under this Lease
shall be in writing and shall be personally delivered or sent by certified mail,
return receipt requested, postage prepaid. Notices to Tenant shall be delivered
to Tenant's Address specified in Section 1.01(s) above, except that upon
Tenant's taking possession of the Premises, the Premises shall be Tenant's
address for notice purposes. Notices to Landlord shall be delivered to
Landlord's Address specified in Section 1.01(h) above. Notices deposited in the
mail in the manner hereinabove described shall be effective from and after the
expiration of three (3) calendar days after it is so deposited. All other
notices shall be effective upon delivery or attempted delivery in accordance
with this Section 13.06. Either party may change its notice address upon written
notice to the other party.
Section 13.07 WAIVERS. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord, and Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
Section 13.08 NO RECORDATION. Tenant shall not record this Lease without
prior written consent from Landlord. However, either Landlord or Tenant may
require that a "short form" memorandum of this Lease executed by both parties be
recorded; provided that, in such event, Tenant hereby covenants and agrees that,
upon the expiration or earlier termination of the Lease Term, Tenant will
execute and deliver a quitclaim deed to Landlord in form reasonably satisfactory
to Landlord, in favor of Landlord, or Landlord's successor in interest releasing
and conveying any and all right, title, or interest of Tenant in the Premises.
Section 13.09 BINDING EFFECT: CHOICE OF LAW. This lease binds any party
who legally acquires any rights or interest in this lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. This Lease shall be governed by and construed in
accordance with the laws of the State of Nevada.
Section 13.10 CORPORATE AUTHORITY: PARTNERSHIP AUTHORITY. If Tenant is a
corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person signing this Lease for Tenant represents and warrants that he is a
general partner of the partnership, that he
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has fill authority to sign for the partnership and that this Lease binds the
partnership and all general partners 0f the partnership. Tenant shall give
written notice to Landlord of any general partner's withdrawal or addition.
Within thirty (30) days after this Lease is signed, tenant shall deliver to
Landlord a copy of Tenant's recorded statement of partnership or certificate of
limited partnership.
Section 13.11 JOINT AND SEVERAL LIABILITY. All parties signing this
Lease as Tenant shall be jointly and severally liable for all obligations of
Tenant.
Section 13.12 FORCE MAJEURE. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, governmental regulation
or restriction and weather conditions.
Section 13.13 EXECUTION OF LEASE. This Lease may be executed in
counterparts, and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. The delivery of this Lease by
Landlord to Tenant shall not be deemed to be an offer and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14 BROKERS AND LEASING AGENTS. Landlord represents and
warrants to Tenant, and Tenant represents and warrants to Landlord, that no
broker, leasing agent or finder has been engaged by it other than Landlord's
Broker (if any) specified in Section 1.01(i) and Tenant's Broker (if any)
specified in Section 1.01(t), respectively, in connection with any of the
transactions contemplated by this Lease, or to its knowledge is in any way
connected with any of such transactions. Subject to the terms and conditions of
a commission agreement ("Commission Agreement") between Landlord and Landlord's
Broker or Tenant's Broker, Landlord shall be responsible for the payment of a
commission to Landlord's Broker or Tenant's Broker in accordance with the
Commission Agreement. Landlord and Tenant acknowledge that the Commission
Agreement contains no provision for the payment of additional brokers
commissions arising from any extension of this Lease beyond the initial Lease
Term. In the event of any claims for brokers' or finders' fees or commissions in
connection with the negotiation, execution or consummation of this Lease other
than by the Tenant's Broker (if any) or Landlord's Broker (if any), Tenant shall
indemnify, save harmless and defend Landlord from and against such claims if
they shall be based upon any statement or representation or agreement made by
Tenant, and Landlord shall indemnify, save harmless and defend Tenant if such
claims shall be based upon any statement, representation or agreement made by
Landlord.
Section 13.15 RULES AND REGULATIONS. Tenant shall faithfully observe and
comply with the "Rules and Regulations," as set forth in EXHIBIT "B" attached
hereto and incorporated herein by this reference and all reasonable
modifications thereof and additions
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thereto from time to time put into effect by Landlord. Tenant shall be
responsible for the observance of all the foregoing rules by Tenant's employees,
agents, clients, customers, invitees and guests.
Section 13.16 LIENS. Tenant shall not permit any mechanic's,
materialmen's or other liens to be filed against the real property of which the
Premises form a part nor against the Tenant's leasehold interest in the
Premises. Landlord shall have the right at all reasonable times to post and keep
posted on the Premises any notices which it deems necessary for protection from
such liens. If any such liens are filed and are not discharged by Tenant by bond
or otherwise within ten (10) days after the filing thereof, Landlord may,
without waiving its rights and remedies based on such breach of Tenant and
without releasing Tenant from any of its obligations, cause such liens to be
released by any means it shall deem proper, including payment in satisfaction of
the claim giving rise to such lien. Tenant shall pay to Landlord at once, upon
notice by Landlord, any sum paid by Landlord to remove such liens, together with
interest at the maximum rate per annum permitted by law from the date of such
payment by Landlord.
IN WITNESS WHEREOF, Landlord and Tenant have signed this Lease in the State
of Nevada on the day and year first above written and have initialed all Riders
which are attached to or incorporated by reference in this Lease.
LANDLORD: TENANT:
BATTLE BORN DEVELOPMENT, LLC, a SILICON GAMING INC a California
Nevada limited liability company corporation
By By:
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EXHIBIT "A"
(Legal Description of Premises)
That Portion of Lot 3 of "Hughes Airport Center Phase III - Unit No.2" as shown
by map thereof on file in Book 46, Page 23 of Plats in the Clark County
Recorder's Office, Clark County, Nevada, lying within the North Half (N 1/2) of
the Northeast Quarter (NE 1/4) of Section 4, Township 22 South, Range 61 East
M.D.M., Clark County, Nevada and described as follows:
Commencing at the most Easterly corner of said Lot 3, said corner being the
intersection of the Southwesterly right-of-way line of Pilot Road (75.00 feet
wide) with the North 1/16th line of said Section 4; thence Westerly along said
right-of-way line, the following five (5) courses: from a tangent bearing North
69052'04" West, curving to the right along the arc of a 375.00 foot radius
curve, concave Northeasterly, through a central angle of 23 057'38", an arc
length of 156.82 feet; thence North 45054'26" West, 615.00 feet; thence curving
to the left along the arc of a 555.00 foot radius curve, concave Southwesterly,
through a central angle of 39057'51", an arc length of 387.12 feet; thence North
85052'17" West, 228.50 feet; thence curving to the right along the arc of a
350.00 foot radius curve, concave Northeasterly, through a central angle of 070
12'40", an arc length of 44.05 feet to a point on the Westerly right-of-way line
of Amelia Earhart Court (varying width), a radial line to said point bears South
11020'23" West; thence Southerly along said right-of-way line, the following
three (3) courses: along the Southwesterly prolongation of said radial line,
South 11020'23" West, 5.00 feet; thence from a tangent bearing South 78039'37"
East, curving to the right along the arc of a 20.00 foot radius curve, concave
Southwesterly, through a central angle of 77045'11", an arc length of 27.14
feet; thence South 0005412611 East, 336.31 feet to the Point of Beginning;
thence departing said right-of-way line South 89005'34" West, 229.88 feet;
thence South 00054'26" East, 316.05 feet to a Point on the Northerly right-of-
way line of Martin Avenue (30.00 feet wide); thence along said right-of-way
line, North 89005'34" East, 259.88 feet; thence North 00054'26" West, 152.34
feet to a point on the aforementioned Westerly right-of-way line of Amelia
Earhart Court; thence along said right-of-way line, the following three (3)
courses: from a tangent bearing South 89005'34" West, curving to the right along
the arc of a 50.00 foot radius curve, concave Northeasterly, through a central
angle of 132050'00", an arc length of 115.92 feet to a point of reverse
curvature through which a radial line bears North 48004'26" West; thence curving
to the left along the arc of a 25.00 foot radius curve, concave Northwesterly,
through a central angle of 42050'00", an arc length of 18.69 feet; thence North
00054'26" West, 62.72 feet to the Point of Beginning.
Containing 76,186 square feet or 1.7490 acres.
Page 1 of Exhibit A
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EXHIBIT "B"
RULES AND REGULATIONS
1. No sign, placard, picture, advertisement, name or notice shall be
installed or displayed on any part of the Premises without the prior written
consent of Landlord. Tenant shall not do any painting or marking on the exterior
of the Building or the Common Areas, including without limitation, marking of
parking areas. Landlord shall have the right to remove, at Tenant's expense and
without notice, any sign installed or displayed in violation of this rule. All
approved signs or lettering on doors, windows and walls shall be printed,
painted, affixed or inscribed at the expense of Tenant, using materials and in a
style and format approved by Landlord.
2. Window coverings must be approved by Landlord which approval shall not
be unreasonably withheld. No awning shall be permitted on any part of the
Premises. Tenant shall not place anything against or near glass partitions or
doors or windows which may appear unsightly from outside the Premises.
3. Landlord will furnish Tenant, free of charge, with two keys to each
outside door lock in the Building, provided, however, that Landlord shall not be
entitled to possess keys to any safes, files; vaults, or safe deposit boxes.
Unless Landlord otherwise agrees, Tenant shall not alter any lock or install a
new additional lock or bolt on any outside door of the Building. Tenant, upon
the termination of its tenancy, shall deliver to Landlord all keys which have
been furnished to Tenant, and in the event of loss of any keys furnished shall
pay Landlord therefor.
4. Tenant shall comply with all applicable regulations, laws, and
standards, including, but not limited to, OSHA rules and regulations, if the
Premises contains any kerosene, gasoline or inflammable or combustible fluid or
material other than those limited quantities necessary for the operation or
maintenance of office equipment. Tenant shall not use or permit to be used in
the Premises any foul or noxious gas or substance, or permit or allow the
Premises to be occupied or used in a manner offensive or objectionable to
Landlord by reason of noise, odors or vibrations, nor shall Tenant bring into or
keep in or about the Premises any birds or animals.
5 Without the consent of Landlord, Tenant shall not use any method of
heating or air-conditioning other than that supplied by Landlord.
6. Tenant shall not waste electricity, water or air-conditioning and
agrees to cooperate fully with Landlord to assure the most effective operation
of the Building's heating and air-conditioning and to comply with any
governmental energy-saving rules, laws or regulations of which Tenant has actual
notice, and shall refrain from attempting to adjust controls other than room
thermostats installed for Tenant's use.
Page 1 of Exhibit B
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7. The toilet rooms, toilet urinals, wash bowls and other apparatus shall
not be used for any purpose other than that for which they were constructed and
no foreign substance of any kind whatsoever shall be thrown therein.
8. Unless otherwise approved by Landlord, Tenant shall not sell, or
permit the sale of newspapers, magazines, periodicals, theater tickets or any
other goods or merchandise to the general public in or on the Premises. Tenant
shall not use the Premises for any business or activity other than that
specifically provided for in Tenant's Lease.
9. Unless approved by Landlord, Tenant shall not install any radio or
television antenna, microwave dishes, loudspeaker or other device on the roof or
exterior walls of the Building.
10. Tenant shall store all its trash and garbage within its designated
trash area. Tenant shall not place in any trash box or receptacle any material
which cannot be disposed of in the ordinary and customary manner of trash and
garbage disposal. All garbage and refuse disposal shall be made in accordance
with directions issued from time to time by Landlord.
11. The Premises shall not be used for the storage of merchandise held
for sale to the general public except to the extent incidental to Tenant's use
of the Premises, or for lodging, nor shall the Premises be used for any
improper, immoral or objectionable purpose. No cooking shall be done or
permitted by any tenant on the Premises (except as permitted in these Rules and
Regulations as to operating an employee cafeteria). Use by Tenant of equipment
for brewing coffee, tea, hot chocolate and similar beverages shall be permitted,
and the use of a microwave shall be permitted, provided that such equipment and
use is in accordance with all applicable federal, state, county and city laws,
codes, ordinances and regulations.
12. Without the written consent of Landlord, Tenant shall not use the name
of the Building in connection with or in promoting or advertising the business
of Tenant except as Tenant's address.
13. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental agency.
14. Tenant assumes any and all responsibility for protecting its Premises
from theft, robbery and pilferage, which includes keeping doors locked and other
means of entry to the Building closed.
15. Tenant shall comply with the system reasonably established by Landlord
from time to time for Tenant to report cleaning, maintenance and repair, or
other work which is required under this Lease.
Page 2 of Exhibit B
<PAGE>
16. Tenant shall not park any vehicles in the Building parking areas other
than automobiles, motorcycles, motor driven or non-motor driven bicycles or
four-wheeled trucks. Landlord may, in its sole discretion, designate separate
areas for bicycles and motorcycles.
17. Landlord may waive any one or more of these Rules and Regulations
for the benefit of Tenant or any other tenant, but no such waiver by Landlord
shall be construed as a wavier of such Rules and Regulations in favor of Tenant
nor prevent Landlord from thereafter enforcing any such Rules and Regulations.
18. Landlord reserves the right to make such other and reasonable Rules
and Regulations as, in its judgment, may from time to time be needed for safety
and security, for care and cleanliness of the Premises and for the preservation
of good order therein. Tenant agrees to abide by all such Rules and Regulations
hereinabove stated and any additional rules and regulations which are adopted.
19. Tenant shall be responsible for the observance of all of the foregoing
rules by Tenant's employees and agents.
20. Tenant shall maintain exterior loading docks and bay areas in a neat
and clean manner. Permanent outside storage of pallets, packing crates, barrels,
etc. is prohibited. Tenant shall dispose of refuse in a manner which prevents
littering and dispersing of refuse by wind.
21. Landlord reserves the right, exercisable without liability to Tenant,
to change the name and street address of the Premises and/or the Building.
22. Landlord reserves the right to modify and/or adopt such other
reasonable and nondiscriminatory rules and regulations for the parking areas as
it deems necessary for the operation of the parking area. Landlord may refuse to
permit any person who violates the within rules to park in the parking area, and
any violation of the rules shall subject the car to removal.
23. All directional signs and arrows must be observed. The speed limit
shall be 5 miles per hour. Parking is prohibited: (a) in areas not striped for
parking, (b) in aisles, (c) where "no parking" signs are posted, (d) on ramps,
(e) in cross hatched areas, and (f) in such other areas as may be designated by
Landlord as reserved for the exclusive use of others. Washing, waxing, cleaning
or servicing of any vehicle in the Building parking areas by anyone is
prohibited. Tenant shall inform all persons to whom Tenant assigns parking
spaces of these Rules and Regulations.
Page 3 of Exhibit B
<PAGE>
RIDER NO.2- EXTENSION OPTION
THIS RIDER NO. 2 is attached to and made a part of that certain lease dated
1997, between BATTLE BORN DEVELOPMENT, LLC,
a Nevada limited liability company, as Landlord, and SILICON GAMING, INC., a
California corporation, as Tenant (the "Lease"). The terms used in this Rider
shall have the same definitions as set forth in the Lease. The provisions of
this Rider shall prevail over any inconsistent or conflicting provisions of
the Lease.
R-1. Option. Provided that Tenant is not in default of this Lease at the
time of the exercise of an Extension Option (as defined below) or at the
expiration of the initial Lease Term or the First Renewal Term (as defined
below), as the case may be, the Tenant may renew and extend this Lease (referred
to singularly as the "Extension Option" and collectively as the "Extension
Options") for two (2) additional terms of five (5) years each (referred to
singularly as the "Renewal Term" and collectively as the "Renewal Terms"), upon
written notice to the Landlord delivered not more than eighteen (18) months and
not less than twelve (12) months before the expiration of the initial Lease Term
or the First Renewal Term, as the case may be. Upon the delivery of such notice
by Tenant and subject to the conditions set forth in the preceding sentence,
this Lease shall be extended without the necessity of the execution of any
farther instrument or document; provided, however, that each party agrees to
execute and deliver such further instruments or documents as the other party may
reasonably request to memorialize or acknowledge the exercise of the Extension
Options. If Tenant makes a valid exercise of the Extension Option prior to the
expiration of the initial Lease Term, the Renewal Term resulting therefrom
(referred to as the "First Renewal Term") shall commence upon the expiration of
the initial Lease Term and shall expire upon the anniversary of such date five
(5) years thereafter. If Tenant makes a valid exercise of the Extension Option
prior to the expiration of the First Renewal Term, the additional Renewal Term
resulting therefrom shall commence on the expiration of the First Renewal Term
and shall expire upon the anniversary of such date five (5) years thereafter.
The Renewal Terms shall be upon the same terms, covenants and conditions as
provided in this Lease, except that the Base Rent shall be as provided for in
Section R-2. Tenant shall only be able to exercise the Extension Options as to
all of the Premises. If Tenant fails to exercise the Extension Option after the
initial Lease Term, Tenant shall have no farther rights as to any subsequent
Extension Option.
R-2. Rent. The monthly Base Rent during the first twelve (12) months of
the First Renewal Term shall be the greater of (i) the monthly Base Rent in
effect as of the end of the initial Lease Term, increased by three percent (3%);
or (ii) fair market rent for similar properties in similar locations.
Thereafter, during the First Renewal Term and any subsequent Renewal Term, the
Base Rent shall be adjusted annually in accordance with Section R-3, below. For
purposes of this section, fair market rent shall be as agreed upon by Landlord
and Tenant or, upon the failure of Landlord and Tenant to agree, as determined
by the concurrence of three (3) MAI appraisers, one (1) of whom shall be
selected by Landlord, one (1) of whom shall be selected by Tenant, and one of
whom shall be selected by the unanimous vote of the two (2)
Page 1 of Rider No. 2
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appraisers selected by Landlord and Tenant, respectively. In the event the three
(3) appraisers fail to reach a concurrence as to what constitutes fair market
rent, then fair market rent shall be determined by averaging the two (2) closest
appraisals.
R-3. Adjustments to Base Rent. The Base Rent shall be increased on the
first day of the thirteenth (13th) month of the First Renewal Term and on each
annual anniversary thereafter during the Renewal Terms (the "Adjustment Month")
in proportion to the increase in the Index (as defined below) which has occurred
between the month ("Comparison Month") which is three (3) months prior to such
Adjustment Month as compared to the Index for the month which is twelve (12)
months prior to the Comparison Month. In no event shall any increase in Base
Rent exceed an amount equal to six percent (6%) or be less than an amount equal
to three percent (3%) of the Base Rent immediately preceding such Adjustment
Month. Landlord shall notify Tenant of each increase by delivering a written
statement setting forth the Indices, and the new amount of the Base Rent. The
Base Rent shall not be reduced from the last previous adjusted Base Rent by
reason of any decrease in the Index. Tenant shall pay the new Base Rent from its
effective date until the next periodic increase. If the Index for the Comparison
Month is not available at the time the Base Rent for the Adjustment Month is
payable, the most recently available Index shall be used as the basis for an
estimate and when the Index for such month becomes available, the parties shall
adjust for any variation between the estimated and actual Base Rent for such
month. For purposes of this Section R-3, "Index" shall mean the Consumer Price
Index, Urban Wage Earners and Clerical Workers for Los Angeles, Anaheim and
Riverside Area, all items (1982-1984=100), as published by the Bureau of Labor
Statistics of the United States Department of Labor. In the event that the Index
is discontinued or is revised to substantially alter the calculations under this
Section R-3, Landlord shall select such other government index which provides
substantially the same result as would have been obtained if the Index had not
been so discontinued or revised.
Page 2 of Rider No. 2
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RIDER NO. 1 - TENANT IMPROVEMENTS (THE "WORKS")
Page 1 of Rider No. 1
<PAGE>
ADDENDUM
TO
COMMERCIAL REAL ESTATE LEASE
THIS ADDENDUM TO COMMERCIAL REAL ESTATE LEASE (this "Addendum") is
made as of the day of November, 1997, by and between BATTLE BORN DEVELOPMENT.
LLC, a Nevada limited liability company ("Landlord") and SILICON GAMING, INC., a
California corporation ("Tenant") with reference to that certain Commercial Real
Estate Lease (the "Lease") entered into between Landlord and Tenant on October
7, 1997.
WHEREAS, Section 1.01 (v) of the Lease provides for a Tenant
Improvement Allowance to Tenant in the amount of Four Hundred Seventy-five
Thousand and No/100 Dollars ($475,000.00);
WHEREAS, Tenant desires that the Tenant Improvement Allowance from
Four Hundred Seventy-five Thousand and No/100 Dollars ($50,000.00); and
WHEREAS, Landlord is willing to increase the Tenant Improvement
Allowance from Four Hundred Seventy-five Thousand and No/100 Dollars
($475,000.00) to Five Hundred Twenty-five Thousand and No/100 Dollars
($525,000.00) in exchange for an increase in the Base Rent set forth at Section
1.02 of the Lease.
NOW THEREFORE, in consideration of the mutual covenants and promises
contained herein, Landlord and Tenant hereby agree as follows;
A. Increase in Tenant Improvement Allowance. Landlord and Tenant agree to,
and do hereby increase the Tenant Improvement Allowance set forth in Section
1.01 (v) of the Lease from the original sum of Four Hundred Seventy-five
Thousand and No/100 Dollars ($475,000.00) to the increase sum of Five Hundred
Twenty-five Thousand and No/100 Dollars ($525,000.00).
B. Increase in Base Rent. Landlord and Tenant agree to and do hereby
increase the Base Rent set forth in Section 1.02 of the Lease from the
original sum of Twenty-four Thousand Four Hundred Thirty-five and No/100
($24,435.00) per month to the increase sum of Twenty-five Thousand Eight
Hundred Twenty-four and No/100 Dollars ($25,824.00).
C. Costs and Expenses of Addendum. Landlord and Tenant acknowledge and
agree that any and all costs and expenses incurred by Landlord arising from or
in any way connected with the preparation, execution of performance of this
Addendum, including without limitation, attorney's fees, broker's commissions,
finder's fees, recording fees, and any other cost or expense whatsoever, shall
be included as an expense of the Work as defined n Rider No. 1 of the Lease,
and shall be appropriately applied against the Tenant Improvement Allowance.
<PAGE>
D. Miscellaneous.
1. The validity, construction, interpretation and enforceability of
this Addendum shall be determined and governed by the laws of the State of
Nevada.
2. In addition to any rights the parties may have under the Lease and
applicable law, in any action brought to enforce the obligations imposed by this
Addendum or to redress any violation of this Addendum, the prevailing party
shall be entitled to recover as damages from the non-prevailing party its
attorney's fees and costs incurred, whether or not the action is reduced to
judgement. For the purposes of this Addendum, the "prevailing party" shall be
that party who has been successful with regard to the main issue, even if that
party does not prevail on all the issues.
3. Headings in this Addendum are included herein for the convenience
of reference only and shall nor define, limit, or otherwise constitute a part
of this Addendum for any other purpose. Whenever required by the context of
this Addendum, the singular shall include the plural and the plural shall
include the singular. The masculine feminine, or neuter genders shall each
include the others. All references to a period of days, months or years herein
shall refer to calendar days, months or years, respectively, unless otherwise
specifically stated.
4. The terms and conditions of this addendum shall be construed as a
whole according to their fair meaning and not strictly for or against any
party. The parties acknowledge that each of them has reviewed this Addendum
and has had the opportunity of having their attorneys review this Addendum.
The normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the
interpretation of this Addendum or of any of its exhibits or amendments.
5. All parties represent and agree that each has had the full and
fair opportunity to discuss all aspects of this Addendum with an attorney of
their choice and that they carefully have read and understand the terms hereof
and that they are voluntarily executing into this Addendum.
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6. Landlord and Tenant acknowledge and agree that, as amended by this
Addendum, the Lease continues in full force and effect as a binding agreement
between the parties. Landlord and Tenant each acknowledge and affirm their
respective rights and obligations under the Lease.
IN WITNESS WHEREOF, Landlord and Tenant have signed this Addendum on the
day and year first above written.
LANDLORD: TENANT:
BATTLE BORN DEVELOPMENT, LLC, a SILICON GAMING INC a California
Nevada limited liability company corporation
By By:
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Exhibit 10.27
SILICON GAMING, INC.
1997 NONSTATUTORY STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1. ESTABLISHMENT. The Silicon Gaming, Inc. 1997 Nonstatutory Stock
Option Plan is hereby established as of December 10, 1997.
1.2. PURPOSE. The purpose of the Plan is to advance the interests of
the Participating Company Group and its shareholders by providing an incentive
to attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.
1.3. TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed.
2. DEFINITIONS AND CONSTRUCTION.
2.1. DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one or
more Committees have been appointed by the Board to administer the Plan, "Board"
also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended, and
any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or other committee of
the Board duly appointed to administer the Plan and having such powers as shall
be specified by the Board. Unless the powers of the Committee have been
specifically limited, the Committee shall have all of the powers of the Board
granted herein, including, without limitation, the power to amend or terminate
the Plan at any time, subject to the terms of the Plan and any applicable
limitations imposed by law.
(d) "COMPANY" means Silicon Gaming, Inc., a California
corporation, or any successor corporation thereto.
(e) "CONSULTANT" means any person, including an advisor, engaged by a
Participating Company to render services other than as an Employee or a
Director.
(f) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
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(g) "EMPLOYEE" means any person treated as an employee (including an
officer or a Director who is also treated as an employee) in the records of a
Participating Company; provided, however, that neither service as a Director nor
payment of a director's fee shall be sufficient to constitute employment for
purposes of the Plan.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(i) "FAIR MARKET VALUE" means, as of any date, the value of a share of
stock or other property as determined by the Board, in its sole discretion, or
by the Company, in its sole discretion, if such determination is expressly
allocated to the Company herein.
(j) "OPTION" means a right to purchase Stock (subject to adjustment as
provided in Section 4.2) pursuant to the terms and conditions of the Plan.
Options are intended to be nonstatutory stock options and shall not be treated
as incentive stock options within the meaning of Section 422(b) of the Code.
(k) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee setting forth the terms, conditions and restrictions of the
Option granted to the Optionee and any shares acquired upon the exercise
thereof.
(l) "OPTIONEE" means a person who has been granted one or more
Options.
(m) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(n) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(o) "PARTICIPATING COMPANY GROUP" means, at any point in time, all
corporations collectively which are then Participating Companies.
(p) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
(q) "SUBSIDIARY CORPORATION" means any present or future "subsidiary
corporation" of the Company, as defined in Section 424(f) of the Code.
2.2. CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
the term "or" shall include the conjunctive as well as the disjunctive.
2
<PAGE>
3. ADMINISTRATION.
3.1. ADMINISTRATION BY THE BOARD. The Plan shall be administered by
the Board, including any duly appointed Committee of the Board. All questions of
interpretation of the Plan or of any Option shall be determined by the Board,
and such determinations shall be final and binding upon all persons having an
interest in the Plan or such Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation, determination
or election.
3.2. POWERS OF THE BOARD. In addition to any other powers set forth
in the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or times at which,
Options shall be granted and the number of shares of Stock to be subject to each
Option;
(b) to determine the Fair Market Value of shares of Stock or other
property;
(c) to determine the terms, conditions and restrictions applicable to
each Option (which need not be identical) and any shares acquired upon the
exercise thereof including, without limitation, (i) the exercise price of the
Option, (ii) the method of payment for shares purchased upon the exercise of the
Option, (iii) the method for satisfaction of any tax withholding obligation
arising in connection with the Option or such shares, including by the
withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof (v) the time of the expiration of the Option,
(vi) the effect of the Optionee's termination of employment or service with the
Participating Company Group on any of the foregoing, and (vii) all other terms,
conditions and restrictions applicable to the Option or such shares not
inconsistent with the terms of the Plan;
(d) to approve one or more forms of Option Agreement;
(e) to amend, modify, extend, or renew, or grant a new Option in
substitution for, any Option or to waive any restrictions or conditions
applicable to any Option or any shares acquired upon the exercise thereof
(f) to accelerate, continue, extend or defer the exercisability of any
Option or the vesting of any shares acquired upon the exercise thereof including
with respect to the period following an Optionee's termination of employment or
service with the Participating Company Group;
(g) to prescribe, amend or rescind rules, guidelines and policies
relating to the Plan, or to adopt supplements to, or alternative versions of the
Plan, including, without limitation, as the Board deems necessary or desirable
to comply with the laws of or to
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<PAGE>
accommodate the tax policy or custom of foreign jurisdictions whose citizens may
be granted Options; and
(h) to correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law.
4. SHARES SUBJECT TO PLAN.
4.1. MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be Forty Thousand (40,000) and shall consist
of authorized but unissued or reacquired shares of Stock or any combination
thereof. If any outstanding Option for any reason expires or is terminated or
canceled or shares of Stock acquired, subject to repurchase, upon the exercise
of an Option are repurchased by the Company, the shares of Stock allocable to
the unexercised portion of such Option, or such repurchased shares of Stock,
shall again be available for issuance under the Plan.
4.2. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the Plan and to any outstanding Options, and in the exercise price
per share of any outstanding Options. If a majority of the shares which are of
the same class as the shares that are subject to outstanding Options are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event, as defined in Section 8.1) shares of another
corporation (the "New Shares"), the Board may unilaterally amend the outstanding
Options to provide that such Options are exercisable for New Shares. In the
event of any such amendment, the number of shares subject to, and the exercise
price per share of the outstanding Options shall be adjusted in a fair and
equitable manner as determined by the Board, in its sole discretion.
Notwithstanding the foregoing, any fractional share resulting from an adjustment
pursuant to this Section 4.2 shall be rounded up or down to the nearest whole
number, as determined by the Board, and in no event may the exercise price of
any Option be decreased to an amount less than the par value, if any, of the
stock subject to the Option. The adjustments determined by the Board pursuant to
this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY AND OPTION LIMITATIONS. Options may be granted only to
Employees and Consultants; provided, however, that no Option shall be granted
any person whose eligibility to receive an Option under the Plan at the time of
grant would require the approval of the Company's shareholders pursuant to any
applicable law, regulation or rule, including, without limitation, the rules
applicable to the listing of the Company's securities on the Nasdaq National
Market System. For purposes of the foregoing sentence, "Employees" shall include
prospective Employees to whom Options are granted in connection with written
offers of employment with the Participating Company Group, and "Consultants"
shall include prospective Consultants to
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<PAGE>
whom Options are granted in connection with written offers of engagement with
the Participating Company Group. Eligible persons may be granted more than one
(1) Option.
6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option
Agreements specifying the number of shares of Stock covered thereby, in such
form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
6.1. EXERCISE PRICE. The exercise price for each Option shall be
established in the sole discretion of the Board; provided, however, that the
exercise price per share for an Option shall be not less than eighty-five
percent (85%) of the Fair Market Value of a share of Stock on the effective date
of grant of the Option. Notwithstanding the foregoing, an Option may be granted
with an exercise price lower than the minimum exercise price set forth above if
such Option is granted pursuant to an assumption or substitution for another
option in a manner qualifying under the provisions of Section 424(a) of the
Code.
6.2. EXERCISE PERIOD. Options shall be exercisable at such time or
times, or upon such event or events, and subject to such terms, conditions,
performance criteria, and restrictions as shall be determined by the Board and
set forth in the Option Agreement evidencing such Option; provided, however,
that no Option granted to a prospective Employee or prospective Consultant may
become exercisable prior to the date on which such person commences service with
a Participating Company.
6.3. PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of
Stock being purchased pursuant to any Option shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of shares of Stock
owned by the Optionee having a Fair Market Value (as determined by the Company
without regard to any restrictions on transferability applicable to such stock
by reason of federal or state securities laws or agreements with an
underwriter for the Company) not less than the exercise price, (iii) by the
assignment of the proceeds of a sale or loan with respect to some or all of
the shares being acquired upon the exercise of the Option (including, without
limitation, through an exercise complying with the provisions of Regulation T
as promulgated from time to time by the Board of Governors of the Federal
Reserve System) (a "CASHLESS EXERCISE"), (iv) by the Optionee's promissory
note in a form approved by the Company, (v) by such other consideration as may
be approved by the Board from time to time to the extent permitted by
applicable law, or (vi) by any combination thereof The Board may at any time
or from time to time, by adoption of or by amendment to the standard forms of
Option Agreement described in Section 7, or by other means, grant Options
which do not permit all of the foregoing forms of consideration to be used in
payment of the exercise price or which otherwise restrict one or more forms of
consideration.
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<PAGE>
(b) TENDER OF STOCK. Notwithstanding the foregoing, an Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any
law, regulation or agreement restricting the redemption of the Company's
stock. Unless otherwise provided by the Board, an Option may not be exercised
by tender to the Company of shares of Stock unless such shares either have
been owned by the Optionee for more than six (6) months or were not acquired,
directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
Options by means of a Cashless Exercise.
(d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be
permitted if the exercise of an Option using a promissory note would be a
violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Option is granted. The Board shall
have the authority to permit or require the Optionee to secure any promissory
note used to exercise an Option with the shares of Stock acquired upon the
exercise of the Option or with other collateral acceptable to the Company.
Unless otherwise provided by the Board, if the Company at any time is subject
to the regulations promulgated by the Board of Governors of the Federal
Reserve System or any other governmental entity affecting the extension of
credit in connection with the Company's securities, any promissory note shall
comply with such applicable regulations, and the Optionee shall pay the unpaid
principal and accrued interest, if any, to the extent necessary to comply with
such applicable regulations.
6.4. TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of a number of whole shares of
Stock having a Fair Market Value, as determined by the Company, equal to all or
any part of the federal, state, local and foreign taxes, if any, required by law
to be withheld by the Participating Company Group with respect to such Option or
the shares acquired upon the exercise thereof Alternatively or in addition, in
its sole discretion, the Company shall have the right to require the Optionee,
through payroll withholding, cash payment or otherwise, including by means of a
Cashless Exercise, to make adequate provision for any such tax withholding
obligations of the Participating Company Group arising in connection with the
Option or the shares acquired upon the exercise thereof The Company shall have
no obligation to deliver shares of Stock or to release shares of Stock from an
escrow established pursuant to the Option Agreement until the Participating
Company Group's tax withholding obligations have been satisfied by the Optionee.
7. STANDARD FORM OF OPTION AGREEMENT.
7.1. GENERAL. Unless otherwise provided by the Board at the time the
Option is granted, an Option shall comply with and be subject to the terms and
conditions set forth in the form of Immediately Exercisable Nonstatutory Stock
Option Agreement adopted by the Board concurrently with its adoption of the Plan
and as amended from time to time.
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7.2. STANDARD TERM OF OPTIONS. Except as otherwise provided by the
Board in. the grant of an Option, any Option granted hereunder shall have a term
of ten (10) years from the effective date of grant of the Option.
7.3. AUTHORITY TO VARY TERMS. The Board shall have the authority from
time to time to vary the terms of any of the standard forms of Option Agreement
described in this Section 7 either in connection with the grant or amendment of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of any such new,
revised or amended standard form or forms of Option Agreement are not
inconsistent with the terms of the Plan.
8. TRANSFER OF CONTROL.
8.1. DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2. EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's
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rights and obligations under outstanding Options or substitute for outstanding
Options substantially equivalent options for the Acquiring Corporation's stock.
Any Options which are neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of the
date of the Transfer of Control shall terminate and cease to be outstanding
effective as of the date of the Transfer of Control. Notwithstanding the
foregoing, shares acquired upon exercise of an Option prior to the Transfer of
Control and any consideration received pursuant to the Transfer of Control with
respect to such shares shall continue to be subject to all applicable provisions
of the Option Agreement evidencing such Option except as otherwise provided in
such Option Agreement. Furthermore, notwithstanding the foregoing, if the
corporation the stock of which is subject to the outstanding Options immediately
prior to an Ownership Change Event described in Section 8. l(a)(i) constituting
a Transfer of Control is the surviving or continuing corporation and immediately
after such Ownership Change Event less than fifty percent (50%) of the total
combined voting power of its voting stock is held by another corporation or by
other corporations that are members of an affiliated group within the meaning of
Section 1504(a) of the Code without regard to the provisions of Section 1504(b)
of the Code, the outstanding Options shall not terminate unless the Board
otherwise provides in its sole discretion.
9. PROVISION OF INFORMATION. Each Optionee shall be given access to
information concerning the Company equivalent to that information generally made
available to the Company's common shareholders.
10. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an
Option shall be exercisable only by the Optionee or the Optionee's guardian or
legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
11. INDEMNIFICATION. In addition to such other rights of indemnification
as they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the Participating Company Group to whom authority to act for the Board is
delegated shall be indemnified by the Company against all reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such action, suit or
proceeding, such person shall offer to the Company, in writing, the opportunity
at its own expense to handle and defend the same.
12. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the
Plan at any time. However, no termination or amendment of the Plan may adversely
affect any
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<PAGE>
then outstanding Option or any unexercised portion thereof without the consent
of the Optionee, unless such termination or amendment is necessary to comply
with any applicable law or government regulation.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing Silicon Gaming, Inc. 1997 Nonstatutory Stock Option Plan was duly
adopted by the Board on December 10, 1997.
Secretary
9
<PAGE>
PLAN HISTORY
December 10, 1997 Board adopts Plan with an initial share reserve of 40,000
shares.
10
<PAGE>
EXHIBIT 11.1
SILICON GAMING, INC.
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE-MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net loss................................. $ (22,986) $ (13,634) $(3,974)
========= ========= =======
Weighted average common shares
outstanding (1)......................... 11,418 6,433 2,065
Weighted average shares subject to
repurchase.............................. 752 1,069 370
--------- --------- -------
Shares used in computation............... 10,666 5,364 1,695
========= ========= =======
Basic and diluted net loss per share (1). $ 2.16 $ 2.54 $ 2.34
========= ========= =======
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used in
the computation of net loss per share. Amounts have been restated to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
per share."
<PAGE>
EXHIBIT 12.1
SILICON GAMING, INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(in thousands)
<TABLE>
<CAPTION>
Nine-months Year Year
ended ended ended
December 31, December 31, December 31,
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Income (loss) before income taxes........... $(3,974) $(13,634) $(22,986)
Fixed charges (1)........................... -- 77 1,240
------- -------- --------
Total earnings plus fixed charges........... $(3,974) $(13,557) $(21,746)
======= ======== ========
Fixed charges (1)........................... $ -- $ 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 $13,557,000, and
$21,746,000 for the years ended December 31, 1996 and 1997,
respectively. The Company had no fixed charges during the nine-month
period ended December 31, 1995.
<PAGE>
Exhibit 13.1
------------
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
YEAR ENDED YEAR ENDED NINE MONTHS YEAR ENDED (JULY 27 1993)
DECEMBER 31, DECEMBER ENDED MARCH 31, THROUGH
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1997 31, 1996 DECEMBER 31, 1995 MARCH 31,
1995(1) 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 9,550 $ - $ - $ - $ -
Loss from operations 22,984 14,533 4,059 1,851 140
Net loss 22,986 13,634 3,974 1,866 140
Basic and diluted net loss per share(2) 2.16 2.54 2.34 - -
Shares used in computation 10,666 5,364 1,695 - -
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
--------------------------------------------------------- ---------------------------
(IN THOUSANDS) 1997 1996 1995(1) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and equivalents $ 16,352 $ 25,583 $ 2,399 $ 241 $ 36
Short-term investments 4,705 9,683 - - -
Working capital 25,087 34,203 2,027 (1,253) (169)
Total assets 49,038 39,646 3,486 486 67
Long-term debt 695 778 272 - -
Senior Discount Notes 22,277 - - - -
Redeemable Convertible Preferred Stock 3,065 6,455 8,496 967 -
Total shareholders' equity (deficiency) 14,432 30,061 (5,946) (2,003) (138)
</TABLE>
(1) Effective April 1, 1995, the Company changed its fiscal year end from March
31 to December 31.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine number of shares used in the computation of
basic and diluted net loss per share. Amounts have been restated to comply with
Statement of Financial Accounting Standards No. 128, "Earnings per share."
1
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
THIS DISCUSSION INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH REFLECT
THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL
PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES, INCLUDING THOSE REFERRED TO IN THE RISK FACTORS SECTION BELOW AND
ELSEWHERE HEREIN AND CONTAINED IN THE COMPANY'S PREVIOUSLY FILED ANNUAL REPORT
ON FORM 10-K, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR THOSE ANTICIPATED. IN THIS DISCUSSION, THE WORDS
"ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND SIMILAR
EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF
THE DATE HEREOF.
The Company was incorporated on July 27, 1993 to design, develop, manufacture
and distribute interactive gaming devices that implement advanced multimedia
technologies using state-of-the-art, off-the-shelf components. Following its
formation, the Company's principal activities consisted of assembling a
technical, marketing and executive staff, developing its gaming platform and
related gaming and support software, raising capital, and processing
applications for regulatory approvals in Nevada and other jurisdictions to
manufacture and distribute its gaming devices, and establish manufacturing and
sales operations. In May 1997, the Company commenced commercial sale of its
product; however, the Company experienced a net loss and negative operating cash
flow in 1997.
The Company's first commercial product, Odyssey(TM), was approved for
product field testing in Nevada in December 1996. Following the completion of
field testing, the product was approved for sale to licensed casinos in Nevada
by the Nevada Gaming Commission on March 20, 1997. The Company expanded its
licensed jurisdictions to Missouri and Mississippi and Odyssey(TM) was approved
for sale by those states' gaming commissions on October 17, 1997 and December
18, 1997, respectively. The Company transitioned from the development stage and
generated revenue from the commercial distribution and sale of its product in
May 1997.
The Company limited production and distribution of its product in 1997 in
order to carefully monitor reactions to its platform, game software and product
support features. In 1998, the Company expects to broaden the marketing,
distribution and sale of its product; thus, the Company believes that 1998 will
be the first year in which a reasonable assessment can be made of its product's
commercial potential. Future revenue, profit, and cash flows will depend on
market acceptance of the Company's product, the ability of such product to
generate higher revenue for casinos compared to competitive products, and the
technical performance of the Company's product. The Company's success will also
depend on, among other factors, the Company's ability to attract, retain and
motivate qualified personnel and meet all the initial and ongoing licensing
requirements in key jurisdictions.
Effective April 1, 1995, the company changed its fiscal year end from March 31
to December 31. Accordingly, the period ended December 31, 1995 is a nine-month
period.
RESULTS OF OPERATIONS
The Company had a net loss of $22,986,000 for the year ended December 31,
1997. During this period, the Company focused its resources primarily on
manufacturing development, building a sales, support and administrative
infrastructure, hiring additional marketing and administrative staff, and
ramping up its marketing activities. The Company incurred manufacturing
development expenses, including direct cost of sales expense and other costs
associated with manufacturing operations. The Company expanded its manufacturing
and commercial distribution operations to meet the anticipated increase in sales
and shipment volume associated with the product rollout. In future periods, the
Company expects the focus of its resources to shift from hardware and
infrastructure
2
<PAGE>
development to software and game development, expanding the library of the
Company's suite of games offered to casino patrons.
The Company had net losses of $13,634,000 and $3,974,000 for the year ended
December 31, 1996 and the nine months ended December 31, 1995, respectively.
During these periods the Company was in the development stage and focused its
resources primarily on research and product development, including system
hardware and software, game concept development and software coding, as well as
starting up manufacturing operations. During 1996 the Company began
manufacturing units initially for testing and engineering, game development,
license approval and regulatory field trials. In the fourth quarter of 1996,
the Company commenced manufacture of units for commercial distribution. The
Company did not generate any product sales or any revenue from other sources in
1996.
The Company limited the number of units it sold in 1997 to collect feedback
from casino operators and gaming patrons before commencing a full rollout of its
product in 1998. Accordingly, the Company expects increased revenue in 1998;
however, it expects to continue to incur substantial losses and negative
operating cash flows at least through the second quarter of 1998. The Company
believes that operating expenses will increase in the future as it continues to
develop its product and increases commercial operations, including
manufacturing, marketing and sales. Accordingly, the Company expects that
future results will differ materially from, and may not be comparable to, prior
periods.
REVENUE
Revenue for the year ended December 31, 1997 was $9,550,000, comprised of
$7,636,000 in hardware sales, $567,000 in software license revenue and
$1,347,000 in participation revenue. The Company did not have revenue in the
year ended December 31, 1996 or the nine months ended December 31, 1995. In
1997, the Company installed 1,501 units in 72 casinos across 3 states. Revenue
was recognized on 1,298 units, with the remaining units (net of returns) subject
to an initial evaluation period. Due to the early stage of the Company's
product cycle, the Company believes the revenue generated from future sales will
increase significantly after the full rollout of the Company's product planned
for 1998. The Company believes license revenue will increase as a percentage of
total revenue and in absolute dollars as the Company's base of installed units
continues to increase.
The Company began commercial sale of its product in May 1997, generating
revenue from machine sales direct to customers as well as from software license
and participation revenue in the Nevada, Missouri and Mississippi markets. The
Company installs units on casino floors through direct sales, as well as on a
trial basis, consistent with industry practice. The Company's initial sales of
Odyssey include the hardware platform bundled with a suite of six games, play
stoppage entertainment and the Machine Management SystemTM. The Company offers
two alternative purchase programs, consisting of the sale of hardware bundled
with either (1) a single game or a suite of games or (2) a renewable one-year
software license, including access to the Company's entire game library for the
term of the license. In addition, the Company offers a revenue participation
plan that allows the Company to share with casino operators the aggregate win
generated by the machines, with 20% going to the Company. Under this plan, the
casino accumulates credits which may be applied to the purchase of the machines
after a 90 day minimum evaluation period. As of December 31, 1997, the Company
had 607 units with customers under participation arrangements.
During 1997, three customers accounted for 27%, 12% and 12% of revenue. The
Company expects a significant portion of its future sales to remain concentrated
within a limited number of strategic customers. There can be no assurance that
such customers will continue to account for a significant percentage of the
Company's revenue in the future. The loss of any of such customers could have a
material adverse effect on the Company's business and results of operations.
COST OF SALES AND RELATED MANUFACTURING EXPENSES
Cost of sales and related manufacturing expenses include direct costs of
product sales; payroll and related costs for manufacturing personnel; overhead
costs and depreciation of participation units. Cost of sales and related
3
<PAGE>
manufacturing expenses were $10,421,000 and $2,458,000 for the years ended
December 31, 1997 and 1996, respectively, with no cost of sales or manufacturing
expenses in the nine months ended December 31, 1995. In the year ended December
31, 1996 the Company was in the development stage, without revenue, and
manufacturing expenses did not include direct costs of product sales.
Commencing with the Company's sales, manufacturing costs, as well as direct
costs of product sales, relate to the corresponding revenue in the year ended
December 31, 1997. As a result, the prior periods differ from, and may not be
comparable to, current or future periods. Cost of sales and manufacturing
expenses are expected to increase through 1998 as the Company increases sales of
its product and expands its manufacturing capacity and infrastructure to produce
its product in greater commercial quantities. In 1997, the Company began to
realize manufacturing efficiencies from the tooling of certain of its hardware
components and expects to achieve a further reduction in per unit manufacturing
costs in future periods; however, aggregate fixed manufacturing costs are
expected to increase as the Company's manufacturing volume increases.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses include payroll and related costs
of employees engaged in ongoing design and development activities, fees to
outside contractors, prototype development expenses, overhead costs, equipment
depreciation and costs of supplies. To date, the Company has expensed all costs
associated with the research, design and development of its product. R&D
expenses were $9,283,000, $7,030,000 and $3,137,000 for the years ended December
31, 1997 and 1996, and for the nine months ended December 31, 1995,
respectively. Increases over these periods have resulted from the incremental
hiring of personnel, increased use of engineering consultants and license fees
and similar costs associated with the acquisition of outside technologies. The
Company believes that a significant level of R&D expense is required due to the
technical nature of its product and the elaborate requirements of the game
development process. Accordingly, the Company anticipates devoting substantial
resources, including additional personnel, to R&D and that these costs are
expected to increase in absolute dollars in future periods.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses include payroll and
related costs for administrative and executive personnel, sales and marketing
personnel, overhead costs, legal and associated costs, costs associated with
obtaining corporate and product licenses in various jurisdictions and fees for
professional services. SG&A expenses were $12,830,000, $5,045,000, and $922,000
for the years ended December 31, 1997 and 1996, and for the nine months ended
December 31, 1995, respectively. Increases over these periods have resulted
from the incremental hiring of personnel and expenses associated with applying
for corporate and product licensing in various jurisdictions and costs
associated with the establishment of sales and marketing organizations as the
Company commenced commercial distribution of its initial product. SG&A expenses
are expected to increase substantially in absolute dollars as the Company
invests in increased sales- and marketing-related activities and in
administrative personnel to support its growing infrastructure and comply with
regulatory requirements.
INTEREST INCOME AND EXPENSE
Interest income was $1,238,000, $1,016,000 and $85,000 for the years ended
December 31, 1997 and 1996, and for the nine months ended December 31, 1995,
respectively. Increases over these periods were due to higher average cash and
investment balances held compared to prior years. Interest expense was
$1,240,000 and $84,000 for the years ended December 31, 1997 and 1996,
respectively, with no interest expense in the nine months ended December 31,
1995. Increases over these preiods were primarily due to interest and amortized
debt costs recorded in the quarter ended December 31, 1997 for Senior Discount
Notes (the "Notes") issued on September 30, 1997. Interest expense will
increase in absolute dollars in future years due to the full year effect of
interest expense related to the Notes and to potential costs of financing
alternatives that the Company is exploring, which, if pursued, could result in
further increases.
INCOME TAXES
4
<PAGE>
The Company has not been required to pay income taxes due to its net operating
losses in each period since inception. As of December 31, 1997, the Company had
net operating loss carryforwards of approximately $40,800,000 and $24,900,000
for federal and state income tax purposes, respectively. These loss
carryforwards will expire beginning in the year 2000, if not utilized. The
Company also has R&D credit carryforwards of approximately $480,000 and $480,000
for federal and state purposes as of December 31, 1997, which expire beginning
2010. A valuation allowance has been recorded for any deferred tax assets due
to uncertainties regarding the realization of these assets resulting from the
lack of earnings history of the Company. The Tax Reform Act of 1986 and the
California Act of 1987 impose restrictions on the utilization of net operating
loss and tax credit carryforwards in the event of an "ownership change" as
defined by the Internal Revenue Code. The Company's ability to utilize its net
operating loss and tax credit carryforwards is subject to limitation pursuant
to these restrictions. As of March 31, 1997, approximately $4 million of the
Company's net operating loss carryforwards is subject to such limitation and
was dependent on the Company's future profitability and the utilization of its
net operating loss carryforwards over a period of time.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $21,057,000 as of
December 31, 1997, compared to $35,266,000 as of December 31, 1996. This
decrease is primarily due to increases in cash used in operating activities as
the Company ramped up manufacturing, marketing, and selling of its product,
partially offset by decreases in cash used in investing activities and cash
provided by financing activities.
The Company's net cash used in operating activities was $29,909,000,
$12,000,000 and $3,701,000 for the years ended December 31, 1997 and 1996, and
for the nine months ended December 31, 1995, respectively. The increase from
1996 to 1997 was due to increases in the Company's net losses, partially offset
by depreciation and amortization, and working capital. The change in working
capital consists of increases in accounts receivable, inventory on hand,
participation units, prepaid and other current assets, offset by increases in
accounts payable, accrued liabilities, and deferred revenue. These changes are
primarily due to the fact that the Company was ramping up operations and began
selling its product in 1997, recording revenue from hardware and software
license fees, accounts receivable, increased inventory on hand, and deferred
revenue. The increase from 1995 to 1996 was due to increases in the Company's
net losses from operations focused on the research, design and pre-production
manufacturing expense related to the development of the Company's product, as
well as the shortened fiscal year in 1995.
Net cash used in investing activities was $3,077,000, $12,657,000 and
$689,000 for the years ended December 31, 1997 and 1996, and for the nine months
ended December 31, 1995, respectively. The decrease between 1996 and 1997 was
primarily due to increases in the net proceeds from the purchase, sale and
maturity of short-term investments, offset by increases in the acquisition of
fixed assets, primarily computer equipment and software. The increase between
1995 and 1996 was primarily due to increases in the acquisition of fixed assets,
primarily computer equipment and software, as well as increases in net cash used
in the purchase, sale and maturity of short-tem investments.
Net cash provided by financing activities was $23,755,000 for the year
ended December 31, 1997, compared to $47,841,000 and $6,548,000 in 1996 and
1995, respectively. In 1997, the Company financed its operations primarily
through proceeds of $25,000,000 from the issuance of the Notes plus detachable
warrants. In 1996, the Company financed its operations with funds from its
initial public offering, of which the Company received proceeds, net of
underwriting discounts and offering expenses, of $32,855,000. In 1996 and 1995
the Company obtained financing from the private placements of Redeemable
Convertible Preferred Stock and from shareholder loans which were subsequently
converted to Redeemable Convertible Preferred Stock. The amounts raised from
these private placements, net of issuance costs, was $22,943,000.
On September 30, 1997 the Company completed the private placement of $30
million principal obligation Senior Discount Notes due September 30, 2002.
Commencing January 1, 1999 the Notes bear interest at 12.5% per annum, payable
semi-annually. The Company is required to redeem $5 million in principal on the
fourth
5
<PAGE>
anniversary of the original issuance of the Notes. The Company is permitted to
raise additional proceeds from debt or equity securities of up to $40 million
before mandatory redemption of the Notes. The Notes are callable at the option
of the Company at any time, with an initial redemption price of 83.3% of the
aggregate amount, increasing to 100% over 16 months. In connection with the
offering, purchasers of the Notes were also issued warrants to purchase 375,000
shares of the Company's Common Stock at a per share price of $15.4375. Such
warrants, which expire five years from issuance, were ascribed a value of
$3,082,000. The Company is required, after approval is received by the necessary
gaming regulatory authorities, to register the Common Stock underlying the
warrants with the Securities and Exchange Commission within nine months of the
issuance date of the Notes. Gross proceeds to the Company before fees and other
expenses were $25 million including the value ascribed to the warrants. The
resulting debt discount of $8,082,000 is being accreted as an addition to
interest expense over the term of the Notes using the effective interest
method. Offering costs of $1,945,000 are included in other assets and are
being amortized as an addition to interest expense over the term of the Notes.
Working capital was $25,087,000 and $34,203,000 at December 31, 1997 and
December 31, 1996, respectively. At December 31, 1997 the Company's principal
sources of liquidity included cash and equivalents of $16,352,000 and $4,705,000
in short-term investments. The Company believes that its cash on hand will be
sufficient to meet its anticipated cash needs for working capital, capital
expenditures and business expansion until the Company is capable of generating
positive cash flow from operations. However, there can be no assurances that
the Company will generate positive cash flow within the currently anticipated
time frame. In the future, the Company expects to increase the cash used in
operating activities in order to increase commercial production and distribution
of its product, enhance manufacturing capabilities, expand sales and support
operations, increase research and development activities and add administrative
infrastructure.
Cash flow from the Company's initial commercial sales has been negatively
affected by the revenue participation plan that the Company is offering to its
customers. This plan allows the Company to share with its customers the
aggregate win generated by the machines, with 20% going to the Company. The
customer accumulates credits which may be applied to the purchase of the
machines. Although the Company expects that this plan will generate higher
revenue per unit than conventional sales, the cash flow generated by sales under
the plan occurs over an extended period, as the aggregate win per day is earned.
The Company obtained financing in 1997 through the sale of the Notes to support
the rollout of its product and the expansion of its operations. However, the
Company's capital requirements will depend on many factors, including, but not
limited to, the rate at which the Company can introduce its product, the market
acceptance and competitive position of such product, the extent to which the
customers choose the revenue participation plan, the response of competitors to
the Company's product, and the ability of the Company to satisfy the licensing
requirements in various jurisdictions applicable to the Company, its product,
and in some jurisdictions, its officers, directors, employees or principal
shareholders. In addition to the financing obtained in 1997, the Company may be
required to seek additional financing before it achieves positive cash flow. In
that event, no assurance can be given that additional financing will be
available or that, if available, it will be available on terms acceptable to the
Company or its shareholders. If adequate funds are not available to satisfy the
Company's short-term or long-term capital requirements, the Company may be
required to limit its operations significantly.
YEAR 2000 ISSUES
The inability of computers and software programs to recognize and properly
process data fields containing a two digit year is commonly know as the Year
2000 issue. As the year 2000 approaches, such computer systems may be unable to
accurately process certain date-based information. This could result in system
failures or miscalculations causing disruption of operations including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
During 1997 the Company implemented an enterprise-wide management
information system which supports all of the Company's major business
applications including sales and customer service, manufacturing and
distribution, and finance and accounting. Management has determined that the
Year 2000 issue will not pose significant operational problems for its computer
systems. As a result, any costs attributable to the purchase and implementation
of new software will be capitalized and any other costs incurred in connection
with Year 2000 compliance will be expensed as incurred.
6
<PAGE>
The Company is in the process of obtaining assurances from vendors that
timely updates will be made available to ensure that all purchased software will
be 2000 compliant. The Company is also in the process of initiating formal
communications with all of its significant suppliers to determine the extent to
which the Company is vulnerable to Year 2000 issues. However, there can be no
guarantee that if the systems of other companies on which the Company's systems
rely are not timely converted, or if another company fails to convert, this
would not have a material adverse effect on the Company.
The Company expects that any systems or application changes or upgrades
connected with Year 2000 compliance will be completed before December 31, 1998.
The Company plans on using both internal and external resources to replace and
test software for Year 2000 compliance. The total cost to the Company of these
Year 2000 compliance activities has not been and is not anticipated to be
material to its financial position or results of operations in any given year.
The total cost of Year 2000 compliance is not expected to exceed $500,000, the
majority of which will be spent on the purchase and implementation of new
software and upgrades. These costs and the date by which management expects to
complete the Year 2000 compliance are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
availability of certain resources, third party product and modification programs
and other factors. However there can be no assurance that these estimates will
be achieved and actual results could differ materially from those anticipated.
RISK FACTORS
UNCERTAIN MARKET ACCEPTANCE; RISK OF TECHNICAL ERRORS; SINGLE PRODUCT. To
achieve commercial success, the Company's product must be accepted both by
casino operators and gaming patrons. Because acceptance of the product by
casino operators will ultimately depend on win per machine, the Company believes
that its ultimate success will depend on player acceptance. The Company's first
gaming platform, Odyssey, has only been installed in casinos for a limited
period and the Company has only limited market studies and player data to
support its belief that Odyssey 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 a number of casinos have purchased or
installed the Company's product, any additional purchases of the product by
these casinos, or others that may conduct similar evaluations in the future,
will be subject to the superior performance of the product on the casino floor.
Odyssey was licensed in 1997 for manufacture, distribution and sale in
Nevada, Missouri and Mississippi, and the Company commenced installing its
machines on casino floors during the year. Because of the limited opportunity
for the Company to test its gaming platform under long-term play conditions,
there can be no assurance that a substantial technical difficulty with, or an
undetected error in, the Company's software or hardware will not arise, possibly
resulting in unanticipated costs, installation and production delays or delays
in product licensing.
The Company's success 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. As the
Company moves into new jurisdictions, including potential international markets,
the Company may be required to make certain modifications to its product to
comply with local regulatory or market conditions. There can be no assurance
that such modifications will be successful, or that these modifications will be
performed in a timely or cost effective manner. Moreover, should Odyssey fail
to win
7
<PAGE>
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 December 31, 1997, the
Company has 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 and
complications that may affect the Company's ability to achieve profitable
operations and the competitive and regulatory environment in which the Company
must operate. To date, the Company's operations have focused primarily on
product development, and the Company has had limited experience in the areas of
manufacturing, sales, product distribution and customer support. Accordingly,
it is not possible to estimate future operating expenses and revenue based upon
historical operating performance. Operating results will depend, in part, on
matters over which the Company has little or no control, including, without
limitation, the ability of the Company to obtain the licenses necessary to
conduct its business, competition, the actual number of orders for its product,
gaming regulations and taxes.
CAPITAL REQUIREMENTS. The Company obtained financing in September 1997 to
fund its product rollout, expansion of operations and the adoption of its
revenue sharing plan. The cash flow generated by sales under the revenue sharing
plan is recognized over an extended period, as the aggregate win per day is
earned, and therefore has an adverse effect on the Company's working capital
compared to other pricing options. In addition to the financing obtained, the
Company may be required to seek additional financing before it achieves positive
cash flow. There can be no assurance that the Company will be able to obtain
such financing, or that, if it is able to obtain such financing, it will be able
to do so on satisfactory terms or on a timely basis. If additional funds are
raised through the issuance of equity, convertible debt or similar securities,
shareholders may experience substantial dilution, and such securities may have
rights or preferences senior to those of Common Stock. Moreover, if adequate
funds are not available to satisfy the Company's short-term or long-term capital
requirements, the Company may be required to limit or discontinue its revenue
sharing plan, scale back its product rollout, or limit its operations
significantly. The Company's capital requirements will depend on many factors,
including, but not limited to, the rate at which the Company introduces its
product, the market acceptance and competitive position of such product, the
extent to which the customers choose the revenue participation plan, the
response of competitors to the product and the ability of the Company's
management and its product to satisfy the corporate licensing and product
licensing requirements in various jurisdictions.
COMPETITION. The gaming machine industry is characterized by intense
competition that is based on, among other things, a device's ability to generate
win per machine through product appeal to players, and knowledge of customer
requirements such as ease of use, quality of service, support and training,
distribution, name recognition and price. In recent years, the gaming machine
market has been dominated by International Game Technology ("IGT") which,
according to industry sources, captured approximately 75% of the market in 1997.
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.
8
<PAGE>
MANAGEMENT OF GROWTH. Execution of the Company's plan of operation will
require significant growth. The Company's current plans for growth will place a
significant strain on the Company's financial, managerial and other resources.
The Company's ability to manage its growth effectively will require it to
continue to improve its operational, financial and management information
systems and to attract, motivate and train key employees. Should the Company's
executives be unable to manage growth effectively, the Company's business,
operating results and financial condition would be materially and adversely
affected.
DEPENDENCE ON KEY PERSONNEL. The operations of the Company depend to a
great extent on the management efforts of its officers and other key personnel
and on the ability to attract new key personnel and retain existing key
personnel. Competition is intense for highly skilled product development
employees in particular. There can be no assurance that the Company will be
successful in attracting and retaining such personnel or that it can avoid
increased costs in order to do so. In addition, the Company's officers and key
employees are not bound by noncompetition agreements that extend beyond their
employment at the Company, and there can be no assurance that employees will not
leave the Company or compete against the Company. The Company's failure to
attract additional qualified employees or to retain the services of key
personnel could have a material adverse effect on the Company's operating
results and financial condition. The Company currently maintains a "key-man"
life insurance policy in the amount of $3 million on the life of Andrew S.
Pascal, the Company's Executive Vice President--Marketing and Game Development.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS; RISK OF LITIGATION. The
Company regards its product as proprietary and relies primarily on a combination
of patent, trademark, copyright and trade secret laws and employee and third-
party nondisclosure agreements to protect its proprietary rights. Defense of
intellectual property rights can be difficult and costly, and there can be no
assurance that the Company will be able to effectively protect its technology
from misappropriation by competitors. In addition, the protections offered by
trademark, copyright and trade secret laws would not prevent a competitor from
designing games having appearance and functionality that closely resemble the
Company's games. At present, the Company's principal proprietary technology
consists of its game authentication algorithm, which is designed to prevent
tampering with the game software that is resident in its product, and its random
number generator algorithm, which determines the outcome of each gaming
proposition. While the Company believes that these algorithms are unique at
present, there can be no assurance that a competitor of the Company will not
succeed in developing an authentication algorithm or a random number generator
algorithm that performs as well as, or better than, the Company's. Moreover,
although the Company has applied for and received certain patents and trademarks
for its intellectual property, there can be no assurance that such patents and
trademarks will not be successfully challenged in subsequent litigation.
As the number of software products in the industry increases and the
functionality of these products further overlaps, software developers and
publishers may increasingly become subject to infringement claims. The 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
9
<PAGE>
respect could substantially diminish the Company's product sales and thereby
have a material adverse effect on the Company's operating results.
LIMITED MANUFACTURING EXPERIENCE. In order for the Company to be
successful, its product must be manufactured to meet high quality standards in
commercial quantities at competitive prices. The Company has a limited history
of manufacturing Odyssey 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.
SLOWING IN TREND TO LEGALIZE GAMING. Growth in demand for slot machines
historically has been driven by the opening of new casinos, including casinos in
jurisdictions where gaming has recently been legalized. However, in recent
years, the legalization of gaming in new jurisdictions has been significantly
reduced; therefore, demand based on new openings will be largely limited to new
projects in existing markets. Certain jurisdictions which currently permit
gaming are contemplating legislation to limit, reduce, or eliminate gaming. If
successful, such legislation could limit growth opportunities for the Company.
As a result of these factors, there can be no assurance that the slot machine
industry will sustain the rate of growth that was possible in the first half of
this decade.
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, Indiana, Illlinois and with certain native
American Tribes in Mississippi and Louisiana, 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 and Mississippi
on October 17, 1997 and December 18, 1997, respectively. The Company has also
submitted Odyssey for testing in New Jersey and to Gaming Laboratories
International, Inc. for various jurisdictions. 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 beneficial holder of the Company's Common Stock may be subject to
investigation by any gaming authority in any jurisdiction in which the Company
does business if such authorities have reason to believe that such ownership may
be inconsistent with the gaming policies of that jurisdiction. Persons who
acquire beneficial
10
<PAGE>
ownership of more than certain designated percentages of the Common Stock may be
subject to certain reporting and qualification procedures. In addition, changes
in control of the Company and certain other corporate transactions may not be
effected without the prior approval of gaming authorities in other jurisdictions
in which the Company plans to do business. Such provisions could adversely
affect the marketability of the Company's Common Stock or prevent certain
corporate transactions, including mergers or other business combinations.
NO DIVIDENDS. The Company has not paid any cash dividends in the past and
does not expect to do so in the foreseeable future.
11
<PAGE>
SILICON GAMING, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents............................................................. $ 16,352 $ 25,583
Short-term investments........................................................... 4,705 9,683
Accounts receivable (net of allowances of $50 in 1997)........................... 4,930 --
Inventories...................................................................... 6,335 477
Prepaids and other............................................................... 1,334 812
-----------------------------------------
Total current assets.......................................................... 33,656 36,555
PROPERTY AND EQUIPMENT, NET........................................................ 8,844 3,046
PARTICIPATION UNITS, NET........................................................... 4,825 --
OTHER ASSETS, NET.................................................................. 1,713 45
-----------------------------------------
$ 49,038 $ 39,646
=========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 3,151 $ 1,158
Accrued liabilities.............................................................. 3,655 987
Deferred revenue................................................................. 1,478 --
Current portion of capital lease obligations..................................... 285 207
-----------------------------------------
Total current liabilities..................................................... 8,569 2,352
DEFERRED RENT...................................................................... 335 133
CAPITAL LEASE OBLIGATIONS.......................................................... 360 645
SENIOR DISCOUNT NOTES ($30 million principal obligation)........................... 22,277 --
REDEEMABLE CONVERTIBLE PREFERRED STOCK--6,884,473 shares
authorized at December 31, 1997; shares outstanding: December 31, 1997--
2,769,424; December 31, 1996--6,384,473.......................................... 3,065 6,455
SHAREHOLDERS' EQUITY:
Common Stock, $.001 par value; 50,000,000 shares authorized; shares
outstanding: December 31, 1997-- 13,149,737; December 31, 1996--
10,608,105..................................................................... 54,131 49,848
Warrants......................................................................... 3,107 25
Notes receivable from shareholders............................................... (207) (221)
Unrealized gain on investments................................................... 1 23
Accumulated deficit.............................................................. (42,600) (19,614)
-----------------------------------------
Total shareholders' equity.................................................... 14,432 30,061
-----------------------------------------
$ 49,038 $ 39,646
=========================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
SILICON GAMING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR YEAR NINE MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Hardware............................... $ 7,636 $ -- $ --
Software............................... 567 -- --
Participation.......................... 1,347 -- --
--------------------------------------------------
Total revenue 9,550 -- --
OPERATING EXPENSES:
Cost of sales and related
manufacturing expenses............... 10,421 2,458 --
Research and development............... 9,283 7,030 3,137
Selling, general and
administrative....................... 12,830 5,045 922
--------------------------------------------------
Total costs and expenses 32,534 14,533 4,059
--------------------------------------------------
Loss from operations................ 22,984 14,533 4,059
Interest income........................ (1,238) (1,016) (85)
Interest expense................. 1,240 84 --
Other (income) expense........... -- 33 --
--------------------------------------------------
NET LOSS................................. $22,986 $13,634 $3,974
==================================================
BASIC AND DILUTED NET LOSS PER SHARE $2.16 $2.54 $2.34
==================================================
SHARES USED IN COMPUTATION 10,666 5,364 $1,695
==================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
SILICON GAMING, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY )
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
NOTES GAIN ON
COMMON STOCK RECEIVABLE AVAILABLE
---------------------- FROM FOR-SALE ACCUMULATED
SHARES AMOUNT WARRANTS SHAREHOLDERS SECURITIES DEFICIT TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, April 1, 1995 2,000,000 $ 3 $ -- $ -- $ -- $ (2,006) $ (2,003)
Options exercised during the year for cash
and notes receivable. 716,222 77 (75) 2
Common Stock and warrants issued to
employees and vendors for services 21,767 4 4
Warrants issued to vendors 25 25
Net loss. (3,974) (3,974)
---------------------------------------------------------------------------------------
BALANCES, December 31, 1995 2,737,989 $ 84 $ 25 $ (75) $ -- (5,980) (5,946)
Options exercised for cash and notes
Receivable 870,979 155 (152) 3
Collection of notes receivable 1 1
Repurchase of Common Stock and cancellation
of notes receivable (39,780) (5) 5 --
Common Stock issued to vendors for
Services 10,568 11 11
Conversion of Redeemable Preferred Stock in
conjunction with initial public offering 3,528,349 16,748 16,748
Common Stock issued pursuant to initial
public offering in July 1996, net of
costs of $3,895 3,500,000 32,855 32,855
Unrealized gain on investments 23 23
Net loss (13,634) (13,634)
--------------------------------------------------------------------------------------
BALANCES, December 31, 1996 10,608,105 $49,848 $ 25 $ (221) $ 23 $ (19,614) $ 30,061
Options exercised for cash 49,083 200 200
Collection of notes receivable 14 14
Employee stock purchase plan issuances 99,894 696 696
Repurchase of Common Stock (17,377) (3) (3)
Conversion of Series A1 Redeemable
Preferred Stock 1,219,032 1,371 1,371
Conversion of Series B1 Redeemable
Preferred Stock 1,191,000 2,019 2,019
Warrants issued in conjunction with
Senior Notes 3,082 3,082
Unrealized loss on investments (22) (22)
Net loss (22,986) (22,986)
--------------------------------------------------------------------------------------
BALANCES, December 31, 1997 13,149,737 $54,131 $3,107 $ (207) $ 1 $ (42,600) $ 14,432
======================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
SILICON GAMING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss............................................... $(22,986) $(13,634) $(3,974)
Reconciliation to net cash used in operating
activities:
Depreciation and amortization......................... 2,623 668 136
Accretion of debt discount............................ 359 -- --
Deferred rent......................................... 202 133 --
Common and Preferred Stock issued for services........ -- 261 4
Accrued interest exchanged for Preferred
Stock................................................ -- -- 10
Loss on sale of property............................... -- 33 --
Changes in assets and liabilities:
Accounts receivable.................................. (4,930)
Inventory............................................ (5,858) (477)
Prepaids and other................................... (133) (520) (264)
Participation units.................................. (5,325) -- --
Accounts payable..................................... 1,993 788 296
Deferred revenue..................................... 1,478 -- --
Accrued liabilities.................................. 2,668 748 91
-----------------------------------------------------------
Net cash used in operating activities............... (29,909) (12,000) (3,701)
-----------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment.................. (7,817) (3,013) (659)
Proceeds from sale of assets........................... -- 7 --
Purchases of short-term investments.................... (6,725) (14,310) --
Sales and maturities of short-term investments......... 11,681 4,650 --
Other assets, net...................................... (216) 9 (30)
-----------------------------------------------------------
Net cash used in investing activities............... (3,077) (12,657) (689)
-----------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt financing and issuance of warrants,
net of costs....................................... 23,055 -- --
Sale of Common Stock, net of notes
Receivable............................................ 893 32,858 2
Sale of Redeemable Convertible Preferred Stock,
net of issuance costs................................. -- 14,457 5,457
Collection of note receivable.......................... 14 1 12
Proceeds from notes payable to shareholders............ -- -- 750
Proceeds from sale/leaseback of property and
equipment............................................. -- 667 333
Repayment of capital lease obligation.................. (207) (142) (6)
-----------------------------------------------------------
Net cash provided by financing
activities......................................... 23,755 47,841 6,548
-----------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS............................................ (9,231) 23,184 2,158
CASH AND EQUIVALENTS:
Beginning of period.................................... 25,583 2,399 241
End of period.......................................... $ 16,352 $ 25,583 $ 2,399
===========================================================
SUPPLEMENTARY DISCLOSURES OF CASH
FLOW INFORMATION--
Cash paid during the period for interest............... $ 106 $ 70 $ 11
===========================================================
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of Common and Preferred Stock for
notes receivable...................................... $ -- $ 152 $ 75
===========================================================
Cancellation of Preferred Stock and related
Notes receivable...................................... $ -- $ 5 $ 12
===========================================================
Conversion of notes payable to shareholder to
Preferred Stock....................................... $ -- $ -- $ 2,050
===========================================================
Issuance of common warrants............................ $ -- $ -- $ 25
===========================================================
Conversion of Preferred Stock to Common Stock.......... $ 3,390 $ 16,748 $ --
===========================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
SILICON GAMING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business--Silicon Gaming, Inc. (the "Company") was incorporated on July 27,
1993 to develop and market innovative gaming devices through the use of advanced
multimedia and interactive technologies.
Through March 31, 1997, the Company was in the development stage and its
financial statements were presented in accordance with Statement of Financial
Accounting Standards No. 7, Accounting and Reporting by Development Stage
Enterprises. During the quarter ended June 30, 1997, the Company generated
revenue as it commenced commercial sale of its first product, Odyssey(TM), and
emerged from the development stage.
Fiscal Year End--Effective April 1, 1995, the Company changed its fiscal
year end to December 31 from March 31. Accordingly, the period ended December
31, 1995 is a nine-month period.
Consolidation--The consolidated financial statements include the Company and
its wholly-owned subsidiaries after elimination of intercompany accounts and
transactions.
Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents--The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Short-term Investments--Short-term investments represent debt securities
which are stated at fair value. The difference between amortized cost (cost
adjusted for amortization of premiums and accretion of discounts which are
recognized as adjustments to interest income) and fair value representing the
unrealized holding gains and losses are recorded as a separate component of
shareholders' equity until realized. While the Company's intent is to hold debt
securities to maturity, they are classified as available-for-sale securities
because the sale of such securities may be required prior to maturity. Any gains
or losses on the sale of debt securities are determined on a specific
identification basis.
Fair Value of Financial Instruments--The estimated fair value of the
Company's financial instruments, which include cash equivalents, short-term
investments, accounts receivable and Senior Discount Notes, approximate their
carrying value.
Inventories--Inventories consist of raw materials, work-in-process and
finished goods and are stated at the lower of cost or market on a first-in,
first-out basis.
Property and Equipment--Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
estimated useful lives of three to seven years. Leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or
the asset's useful life.
Participation Units--The Company places gaming machines in customer locations
and receives a portion of the net win from each machine. Depreciation of units
under such arrangements is the greater of the ratio that current gross revenue
bears to total anticipated revenue for such unit or straight-line over three
years.
Revenue Recognition--Revenue from hardware units and non-renewable software
licenses is recognized upon acceptance by the customer after completion of a
trial period, or upon shipment of the hardware. Renewable software licenses are
recognized ratably over the license period. Amounts due the Company under
revenue participation plans with its customers are recognized as revenue is
earned.
<PAGE>
Concentration of Credit Risk-- Financial instruments which potentially subject
the Company to concentrations of credit risk consist primarily of cash
equivalents, short-term investments, and trade accounts receivable. The Company
invests only in high credit quality short-term debt. The Company performs
ongoing credit evaluations of its customers' financial condition and limits the
amount of credit extended when deemed necessary but generally requires no
collateral. The Company maintains reserves for estimated potential credit
losses. At December 31, 1997, two customers accounted for 32% and 21% of
accounts receivable. For the year ended December 31, 1997, three customers
accounted for 27%, 12%, and 12% of revenue.
Research and Development Expenses--Research and development expenses are
charged to operations as incurred. In connection with the Company's product
development efforts, it develops software applications which are integral to the
operation of the product. The costs to develop such software have not been
capitalized as the Company believes its current software development process is
essentially completed concurrent with the establishment of technological
feasibility and/or development of the related hardware.
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, which requires an asset and liability approach for financial reporting of
income taxes.
Stock-based Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25
Accounting for Stock Issued to Employees, ("APB 25"). The Company adopted the
disclosure requirements of Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, ("SFAS 123"), which require the
disclosure of pro forma net income and earnings per share as if the Company
adopted the fair value-based method in measuring compensation expense as of the
beginning of fiscal 1995.
Net Loss Per Share-- During the fourth quarter of 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
128"), which replaces the previously reported primary and fully diluted earnings
per share with basic and diluted earnings per share and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
would occur if securities or other contracts to issue Common Stock were
exercised or converted into Common Stock. Common share equivalents including
stock options, warrants and Redeemable Convertible Preferred Stock have been
excluded for all periods presented as their effect would be antidilutive. All
net loss per share amounts for all periods have been presented and, where
necessary, restated to conform to the SFAS 128 requirement.
Recently Issued Accounting Standard-- In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, which requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from nonowner sources; and No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas, and major customers.
Adoption of these statements will not impact the Company's consolidated
financial position, results of operations or cash flows. Both statements are
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted.
Reclassifications-- Certain prior year amounts have been reclassified to
conform to the current year presentation.
<PAGE>
2. SHORT-TERM INVESTMENTS
Short-term investments consist of the following securities:
<TABLE>
<CAPTION>
AMORTIZED MARKET UNREALIZED UNREALIZED
DECEMBER 31, 1997: COST VALUE HOLDING GAINS HOLDING LOSSES
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale debt corporate securities........... $4,704 $4,705 $2 $1
=========================================================
<CAPTION>
AMORTIZED MARKET UNREALIZED UNREALIZED
DECEMBER 31, 1996: COST VALUE HOLDING GAINS HOLDING LOSSES
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
--------------------------------------------------------
Available-for-sale debt corporate securities........... $9,660 $9,683 $28 $5
========================================================
</TABLE>
Realized gains or losses on sales of available-for-sale securities for the year
ended December 31, 1997 were not significant. The cost of securities sold is
based on the specific identification method. Fair values are based on quoted
market prices obtained from independent brokers. Available-for-sale investments
have been classified as current assets as all maturities are within one year.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following :
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
(IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials.................................. $3,028 $ 307
Work in process................................ 468 170
Finished goods................................. 2,839 --
------------------------------
6,335 $ 477
==============================
</TABLE>
Finished goods includes completed finished goods and units on trial.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
(IN THOUSANDS) 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Furniture, fixtures and office equipment .......... $ 1,375 $ 485
Computer equipment ................................ 7,158 2,450
Manufacturing equipment ........................... 1,969 581
Leasehold improvements ............................ 1,140 156
Construction in progress .......................... -- 172
--------------------------------
11,642 3,844
Accumulated depreciation and amortization ......... (2,798) (798)
--------------------------------
$ 8,844 $3,046
================================
</TABLE>
Included in property and equipment at December 31, 1997 and 1996 are assets
leased under capital leases of $1,000,000 net of accumulated depreciation of
$702,000 and $373,000 as of December 31, 1997 and 1996, respectively.
<PAGE>
5. PARTICIPATION UNITS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
(IN THOUSANDS) 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Machines at cost ................................... $5,325 $ --
Accumulated depreciation ........................... (500) --
---------------------------------
$4,825 $ --
=================================
</TABLE>
6. ACCRUED LIABILITIES
Accrued liabilities consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
(In thousands) 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Accrued compensation benefits.................. $1,330 $ 642
Accrued interest expense....................... 672 --
Other accrued liabilities...................... 1,653 345
-----------------------------
$3,655 $ 987
=============================
</TABLE>
7. LEASES
The Company leases its facilities under noncancellable operating lease
agreements. The accompanying statements of operations reflect rent expense on a
straight-line basis over the term of the leases. The difference between
straight-line rent expense and actual cash payments is recorded as deferred
rent.
In October 1995 the Company obtained a lease line of credit to acquire up to
$1,000,000 of equipment under capital leases with a term of 48 months. The
Company granted the leasing company a warrant to purchase 40,936 shares of
Common Stock at a price of $1.71 per share; such warrant expires in the year
2002 and may be net-exercised by the holder. The estimated fair value of the
warrant, $25,000, has been recorded as a deferred financing cost in other
assets, and is being amortized over the term of the related leases. In December
1995 and during 1996, the Company entered into sale/leaseback arrangements under
this lease line for equipment with an original cost of $333,000 and $667,000,
respectively; no gains or losses were recorded on these transactions.
Future minimum operating and capital lease commitments at December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
- --------------------------------------------------------------------------------------
(IN THOUSANDS)
<S>..................................................... <C> <C>
1998 ................................................ $1,120 $336
1999 ................................................ 1,255 327
2000 ................................................ 1,236 56
2001 ................................................ 1,276 --
2002 ................................................ 1,311 --
Thereafter .......................................... 3,121 --
------------------------
Total minimum lease payments ........................ $9,319 719
============
Amount representing interest ........................ (74)
------------
Present value of lease payments ..................... 645
Current portion ..................................... 285
------------
Long-term portion ................................... $360
============
</TABLE>
Rent expense (including prorated common area maintenance charges and utilities)
for the years ended December 31, 1997 and 1996 and for the nine-month period
ended December 31, 1995 was $975,000, $469,000 and $58,000, respectively.
<PAGE>
8. SENIOR DISCOUNT NOTES
On September 30, 1997, the Company completed the private placement of $30
million principal obligation Senior Discount Notes (the "Notes") due September
30, 2002. Commencing January 1, 1999 the Notes bear interest at 12.5% per
annum, payable semi-annually. The Company is required to redeem $5 million in
principal on the fourth anniversary of the original issuance of the Notes. The
Company is permitted to raise additional proceeds from debt or equity securities
of up to $40 million before mandatory redemption of the Notes. The Notes are
callable at the option of the Company at any time, with an initial redemption
price of 83.3% of the aggregate amount, increasing to 100% over 16 months. In
connection with the offering, purchasers of the Notes were also issued warrants
to purchase 375,000 shares of the Company's Common Stock at a per share price of
$15.4375. Such warrants, which expire five years from issuance, were ascribed
a value of $3,082,000. The Company is required, after approval is received by
the necessary gaming regulatory authorities, to register the Common Stock
underlying the warrants with the Securities and Exchange Commission, within nine
months of the issuance date of the Notes. Gross proceeds to the Company before
fees and other expenses were $25 million, including the value ascribed to the
warrants. The resulting discount of $8,082,000 is being accreted as an addition
to interest expense over the term of the Notes using the effective interest
method. Offering costs of $1,945,000 are included in other assets and are being
amortized as an addition to interest expense over the term of the Notes. The
Notes require the Company to comply with certain financial covenants and the
Company was in compliance with all financial covenants at December 31, 1997.
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK
At December 31, 1997, the Company had the following shares of Nonvoting
Redeemable Convertible Preferred Stock outstanding:
<TABLE>
<CAPTION>
AMOUNT, NET
SHARES OF NOTES
OUTSTANDING RECEIVABLE
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C>
Series A:
Issued in 1994 at $.75 per share for cash and notes 1,349,998 $ 967
Cancellation of shares and note in 1995 (16,667) --
Collection of notes receivable -- 12
Conversion of notes payable at $.75 per share in 1995 1,666,666 1,250
Conversion of Series A to Series A1 in 1996 (1,998,332) (1,499)
Conversion to 667,777 shares of Common Stock in 1996 (1,001,665) (730)
------------- -----------
-- --
------------- -----------
Series A1:
Conversion of Series A to Series A1 in 1996 1,998,332 1,499
Conversion to 1,219,032 shares of Common Stock in 1997 (1,828,549) (1,371)
------------- -----------
169,783 128
------------- -----------
Series B:
Issued in 1995 at $1.14 per share for cash and
accrued interest 5,535,000 6,267
Conversion of Series B to Series B1 in 1996 (4,386,141) (4,956)
Conversion to 765,906 shares of Common Stock in 1996 (1,148,859) (1,311)
------------- -----------
-- --
------------- -----------
Series B1:
Conversion of Series B to Series B1 in 1996 4,386,141 4,956
Conversion to 1,191,000 shares of Common Stock in 1997 (1,786,500) (2,019)
------------- -----------
2,569,641 2,937
------------- -----------
Series C:
Issued in 1996 at $5.00 per share for cash 1,600,000 7,500
Issued in 1996 at $5.00 per share for cash and
services 1,542,000 6,960
Conversion to 2,094,666 shares of Common Stock in 1996 (3,142,000) (14,460)
------------- -----------
-- --
------------- -----------
--------------------------------
Total Balance, December 31, 1997 2,769,424 $ 3,065
================================
</TABLE>
<PAGE>
Concurrent with the Company's initial public offering, the authorized number of
Preferred Shares was reduced to 6,884,473, including 500,000 shares not
designated to a specific series. The rights, preferences and privileges of these
500,000 additional shares of Redeemable Convertible Preferred Stock are subject
to the determination of the Board of Directors.
Significant terms of the Series A1 and B1 Redeemable Convertible Preferred Stock
are as follows:
Each share is convertible into .6667 shares of Common Stock (subject to
adjustment for anti-dilution) at the election of the holder upon at least 75
days notice to the Company.
Shares have no voting rights except as required by law.
At any time after August 2000, the holders of a majority of the then outstanding
shares of Redeemable Convertible Preferred Stock may require the Company to
redeem for cash the Preferred Shares outstanding over a three-year period at a
per-share purchase price equal to the original issue price (subject to certain
anti-dilution adjustments) plus all declared but unpaid dividends on such
shares. The Company shall redeem the shares of Redeemable Convertible Preferred
Stock ratably from the Preferred Shareholders of record on that date.
Dividends may be declared at the discretion of the Board of Directors and are
noncumulative. To the extent declared, dividends of $.075 per share for Series
A1 and $.114 per share for Series B1 must be paid prior to any dividends on
Common Stock. No dividends have been declared through December 31, 1997.
In the event of liquidation, dissolution or winding up of the Company, the
Preferred Shareholders shall receive the initial issue price per share plus all
declared but unpaid dividends. If the assets and funds to be distributed are
insufficient to permit full payment, then the funds shall be distributed on a
pro rata basis. Upon completion of this distribution, the holders of the Common
Stock will receive a pro rata distribution of any remaining assets of the
Company.
Holders of the Redeemable Convertible Preferred Stock have certain registration
rights.
10. COMMON STOCK
During 1996, the Board of Directors adopted, and the shareholders approved, an
amendment to the Articles of Incorporation to increase the number of authorized
shares of Common Stock to 50,000,000. At December 31, 1997, Common Stock was
reserved for issuance as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
<S> <C>
Conversion of outstanding Redeemable Convertible Preferred Stock 1,846,282
Issuable under stock purchase warrants 710,379
Stock Option Plans 2,024,605
1996 Employee Stock Purchase Plan 200,106
---------
4,781,372
=========
</TABLE>
COMMON STOCK OFFERING
In August 1996, the Company completed an initial public offering of 3,500,000
shares of Common Stock at a price of $10.50 per share. Concurrent with the
initial public offering, all outstanding shares of Series A, B and C Redeemable
Convertible Preferred Stock were automatically converted into 3,528,349 shares
of Common Stock. The proceeds to the Company from the offering, net of
underwriting discounts and offering expenses, were $32,855,000.
<PAGE>
WARRANTS
During 1997, the Company issued warrants to purchase 375,000 shares of Common
Stock at $15.4375 per share in conjunction with the issuance and sale of the
Company's Senior Discount Notes (see Note 8). The warrants expire on September
30, 2002. During 1996 the Company issued warrants to certain financial advisors
in connection with its Series C Redeemable Convertible Preferred Stock
financing. These warrants are exercisable for 116,666 shares of Common Stock at
an exercise price of $7.50 per share and expire in 2001. In connection with the
initial public offering, the Company issued 5-year warrants to purchase an
aggregate of 177,777 shares of Common Stock to other financial advisors at an
exercise price of $12.60 per share. Warrants to purchase 40,936 shares of Common
Stock at an exercise price of $1.71 were issued to a leasing company in 1995 in
connection with a lease line of credit (See Note 7). The warrants expire in
2001.
STOCK OPTION PLANS
Under the 1994 Stock Option Plan (the "1994 Option Plan"), the Company may grant
incentive or nonstatutory stock options up to 3,366,666 shares of Common Stock
to employees, directors and consultants at prices not less than fair market
value for incentive stock options and not less than 85% of fair market value for
nonstatutory stock options. These options generally expire five to ten years
from the date of grant. Options normally vest at a rate of 25% on the first
anniversary of the grant date and 1/48 per month thereafter and may be exercised
at any time, subject to the Company's right to repurchase unvested shares at the
original exercise price upon termination. During the year ended December 31,
1996, employees exercised options in exchange for notes payable to the Company
of $152,000. No employees exercised options in exchange for notes payable to
the Company during the year ended December 31, 1997.
In 1996, the Board of Directors adopted the 1996 Outside Directors Stock Option
Plan (the "Directors Plan"). Under this plan, non-employee directors of the
Company are automatically granted initial options to purchase 15,000 shares of
Common Stock and additional options to purchase 5,000 shares of Common Stock in
each subsequent year that such person remains a director of the Company. Options
under the Directors Plan have an exercise price equal to fair market value at
the grant date, vest at a rate of 1/36 per month over three years and expire 10
years from the date of grant. The number of shares authorized under this plan is
200,000.
In 1997, the Board of Directors adopted the 1997 Nonstatuatory Stock Option Plan
(the "1997 Option Plan"). Under this plan, the Company may grant nonstatutory
stock options for up to 40,000 shares of Common Stock to employees and
consultants at prices not less than 85% of fair market value on the effective
date of the grant. These options generally expire ten years from the date of
grant and are immediately exercisable.
The Company repriced options to purchase 1,013,202 shares to $9.125, the current
market price on January 9, 1998. The repriced options will be treated as
cancelled and regranted in 1998, however, they retain their original vesting
terms.
Option activity under the 1994 Option Plan, Directors Plan, and 1997 Option Plan
is as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF EXERCISE
SHARES PRICE
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, March 31, 1995 406,667 $ 0.11
Granted (weighted average fair value
of $.04) 1,096,333 0.13
Exercised (716,222) 0.11
Cancelled (61,111) 0.11
--------------------------------------
Outstanding, December 31, 1995 725,667 0.14
Granted (weighted average fair value 5.34
of $2.59) 1,020,063
Exercised (870,979) 0.18
Cancelled (39,348) 2.22
--------------------------------------
Outstanding, December 31, 1996 835,403 6.35
Granted (weighted average fair value
of $7.49) 1,150,385 15.02
Exercised (49,083) 4.13
Cancelled (39,529) 12.01
--------------------------------------
Outstanding, December 31, 1997 1,897,176 11.36
======================================
</TABLE>
<PAGE>
Additional information regarding options outstanding as of December 31, 1997, is
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
RANGE OF EXERCISE PRICES 12/31/97 LIFE (YRS) PRICE 12/31/97 PRICE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.105 - $ 0.105 20,333 7.32 $ 0.11 20,333 $ 0.11
$ 0.165 - $ 1.500 247,259 8.30 1.50 247,259 1.50
$ 4.500 - $ 7.500 243,507 8.46 5.67 243,507 5.67
$ 8.750 - $ 12.250 240,508 8.23 10.54 192,728 10.40
$ 12.375 - $ 13.875 318,735 9.55 13.44 318,375 13.44
$ 14.000 - $ 14.375 168,750 9.73 14.29 168,750 14.29
$ 14.500 - $ 14.500 260,000 9.29 14.50 260,000 14.50
$ 14.625 - $ 17.375 226,250 9.36 15.87 226,250 15.87
$ 17.438 - $ 20.250 171,834 9.19 18.66 149,334 18.64
- ------------------------------------------------------------------------------------------------------------------
$ 0.105 - $ 20.250 1,897,176 8.98 $11.36 1,826,896 $11.27
==================================================================================================================
</TABLE>
At December 31, 1997, 32,829, 90,000, and 4,600 shares were available for future
grants under the 1994 Option Plan, Directors Plan, and 1997 Option Plan
respectively. At December 31, 1997, 538,850 shares exercised were subject to
repurchase.
EMPLOYEE STOCK PURCHASE PLAN
In 1996, the Board of Directors adopted the 1996 Employee Stock Purchase Plan
(the "Purchase Plan"). Under the Purchase Plan, eligible employees are permitted
to purchase shares of Common Stock through salary withholding at a price equal
to 85% of the lower of the market value of the stock at the beginning of the 24-
month offering period or the end of each six-month purchase period, subject to
certain limitations. At December 31, 1997, 99,894 shares had been issued under
the Plan and 200,106 shares were reserved for further issuance. The weighted
average fair value of those purchase rights granted in 1997 and 1996 was $3.52
and $2.66, respectively. The Company's calculations were made using the Black-
Scholes option pricing model with the following weighted average assumptions:
expected life of one year for both years; expected interest rate of 6.2% and
5.4% for 1997 and 1996, respectively; expected volatility of 65% in 1997 and
39.2% subsequent to the initial public filing in July 1996; and no dividends
during the expected term.
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with APB No. 25 and its
related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements.
SFAS 123 requires the disclosure of pro forma net income and earnings per share
had the Company adopted the fair value method as of the beginning of fiscal
1995. Under SFAS 123, the fair value of stock-based awards to employees is
calculated through the use of the minimum value method for all periods prior to
the initial public offering, and subsequently through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's stock option calculations were made using the minimum and Black-
Scholes option pricing models with the following weighted average assumptions:
expected life, 12 months following vesting; stock volatility, 65% in 1997 and
39.2% subsequent to the initial public filing in July 1996; risk-free interest
rates, 6.2% in 1997, 6.7% in 1996 and 6% in 1995; and no dividends during the
expected term. The Company's calculations are based on a multiple option
valuation approach and forfeitures are recognized as they occur. If the computed
fair values of the stock-based awards (including awards under the Purchase Plan)
had been amortized to expense over the vesting period of the awards, pro forma
net loss would have been $26,815,000 ($2.51 per share) in 1997, $14,345,000
($2.68 per share) in
<PAGE>
1996, and $3,982,000 ($2.35 per share) in 1995. However, because options vest
over several years and grants prior to 1995 are excluded from these
calculations, these amounts may not be representative of the impact on future
years' earnings, assuming grants are made in those years.
11. INCOME TAXES
The Company has had losses since inception and therefore has not provided for
income taxes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating loss
and tax credit carryforwards. Significant components of the Company's deferred
income tax assets as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
(IN THOUSANDS)
Net deferred tax assets:
Net operating losses $ 15,696 $ 7,009
Research and development credits 963 489
Capitalized research and development costs 480 87
Accruals deductible in different periods 881 364
Depreciation and amortization (415) (88)
------------------------------
17,605 7,861
Valuation allowance (17,605) (7,861)
------------------------------
Total $ -- $ --
==============================
</TABLE>
Due to the uncertainty surrounding the realization of the benefits of its
favorable tax attributes in future tax returns, the Company has fully reserved
its net deferred tax assets as of December 31, 1997 and 1996, respectively.
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $40,800,000 and $24,900,000 for federal and state income tax
purposes, respectively. These carryforwards begin to expire in 2000.
The Company also has research and development credit carryforwards of
approximately $480,000 and $480,000 available to offset future federal and state
income taxes, respectively, as of December 31, 1997. These carryforwards begin
to expire in 2010.
The Tax Reform Act of 1986 and the California Act of 1987 impose restrictions on
the utilization of net operating loss and tax credit carryforwards in the event
of an "ownership change" as defined by the Internal Revenue Code. The Company's
ability to utilize its net operating loss and tax credit carryforwards is
subject to limitation pursuant to these restrictions. As of March 31, 1997,
approximately $4 million of the Company's net operating loss carryforwards was
subject to such limitation and is dependent on the Company's future
profitability and the utilization of its net operating loss carryforwards over a
period of time.
12. SUBSEQUENT EVENTS
Certain holders of the Company's Series A1 and Series B1 Nonvoting Redeemable
Convertible Preferred Stock ("Nonvoting Preferred") have notified the Company of
their election to convert shares of Nonvoting Preferred to Common Stock. Each
Share of Nonvoting Preferred is convertible into .6667 shares of Common Stock
upon 75 days' prior written notice. Pursuant to these conversion notices,
400,000 shares of Common Stock were issued upon Conversion of shares of
Nonvoting Preferred in January 1998 and 583,189 shares are to be issued in March
1998.
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors and Shareholders of Silicon Gaming, Inc.:
We have audited the accompanying consolidated balance sheets of Silicon Gaming,
Inc. and subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of operations, shareholders' equity (deficiency) and
cash flows for the nine months ended December 31, 1995 and the years ended
December 31, 1996 and 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating theoverall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Silicon Gaming, Inc. and
subsidiaries at December 31, 1996 and 1997, and the results of their operations
and their cash flows for the periods stated above in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
San Jose, California
January 27, 1998
<PAGE>
UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL YEAR
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997:
SALES -- $ 1,665 $ 2,847 $ 5,038 $ 9,550
NET LOSS $(4,662) $(5,937) $(6,344) $(6,043) $(22,986)
BASIC AND DILUTED NET LOSS PER SHARE(1) (0.48) (0.58) (0.58) (0.51) (2.16)
===============================================================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL YEAR
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996:
NET LOSS $(2,336) $(3,647) $(3,705) $(3,946) $(13,634)
BASIC AND DILUTED NET LOSS PER SHARE(1) (1.01) (1.60) (0.52) (0.41) (2.54)
===============================================================
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used in the computation of
basic and diluted net loss per share. The amounts for 1996 have been restated
to comply with Statement of Financial Accounting Standards No. 128 ("SFAS 128").
Net loss per share excludes dilution and is computed by dividing net loss by the
weighted average number of common shares outstanding for the period.
SHAREHOLDERS' INFORMATION
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------------------------------
(FISCAL YEAR) HIGH LOW HIGH LOW
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIRST QUARTER 21 3/8 14 5/8 -- --
SECOND QUARTER 17 3/4 11 3/4 -- --
THIRD QUARTER 16 3/16 11 13/16 11 8 1/4
FOURTH QUARTER 18 7/16 10 7/16 17 1/8 9 7/8
============================================================
</TABLE>
The preceding table sets forth the high and low closing sale prices as reported
on the Nasdaq Stock Market since the Company's initial public offering completed
in August 1996.
<PAGE>
EXHIBIT 21.1
SILICON GAMING, INC.
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION
---------- ------------
<S> <C>
Silicon Gaming-Colorado, Inc. Colorado
Silicon Gaming-Mississippi, Inc. Mississippi
Silicon Gaming-Missouri, Inc. Missouri
Silicon Gaming-Nevada, Inc. Nevada
Silicon Gaming-New Jersey, Inc. New Jersey
Silicon Gaming-Minnesota, Inc. Nevada
Silicon Gaming-Indiana, Inc. Nevada
Silicon Gaming-Illinois, Inc. Nevada
</TABLE>
<PAGE>
EXHIBIT 23.1
SILICON GAMING, INC.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
Numbers 333-20233 and 333-34183 of Silicon Gaming, Inc. on Form S-8 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.
Deloitte & Touche LLP
San Jose, California
March 16, 1998
<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>
