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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-48393
375,000 SHARES
SILICON GAMING, INC.
COMMON STOCK
The 375,000 shares of Common Stock of Silicon Gaming, Inc., a California
corporation ("SGI" or the "Company") offered by this Prospectus (the "Shares")
represent shares issuable upon exercise of warrants issued by SGI (the
"Warrants") in connection with the Company's sale of (i) $30,000,000 principal
amount of Senior Discount Notes due September 30, 2002 (the "Notes") and (ii)
the Warrants to B III Capital Partners, L.P., a Delaware limited partnership
(the "Selling Shareholder") which was consummated on September 30, 1997 (the
"Financing"). The Shares may be sold from time to time by or on behalf of the
Selling Shareholder who is described in this Prospectus under "Selling
Shareholder." As part of the Financing, the Company has agreed to register the
Shares under the Securities Act of 1933, as amended (the "Securities Act"). The
Company has also agreed to use its best efforts to cause the registration
statement covering the Shares to remain effective until the longer of (i)
twenty-four months following the date such registration statement is declared
effective by the Securities and Exchange Commission (the "Commission") or (ii)
if the holder of the Shares is an Affiliate of the Company, the date which is
three months after the date on which such holder ceases to be an Affiliate of
the Company, provided that the Company first provides such holder with an
opinion of counsel to such effect.
The Company has been advised by the Selling Shareholder that it intends to sell
all or a portion of the Shares from time to time in The Nasdaq National Market,
in negotiated transactions or otherwise, and on terms and at prices then
obtainable. The Selling Shareholder and any broker-dealers, agents or
underwriters that participate with the Selling Shareholder in the distribution
of any of the Shares may be deemed to be "underwriters" within the meaning of
the Securities Act, and any commission received by them and any profit on the
resale of the Shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The Company has agreed to
indemnify in certain circumstances the Selling Shareholder against certain
liabilities, including liabilities under the Securities Act. The Selling
Shareholder has agreed to indemnify in certain circumstances the Company against
certain liabilities, including liabilities under the Securities Act. See "Plan
of Distribution."
The Company will bear all out-of-pocket expenses incurred in connection with the
registration of the Shares, including, without limitation, all registration and
filing fees imposed by the Securities and Exchange Commission (the
"Commission"), the National Association of Securities Dealers ("NASD") and blue
sky laws, printing expenses, transfer agents' and registrars' fees, and the
reasonable fees and disbursements of the Company's outside counsel and
independent accountants and a single counsel for the Selling Shareholder, but
excluding underwriting discounts and commissions and transfer taxes and other
costs and expenses incident to the offering and sale of the shares to the public
which shall be borne by the Selling Shareholder.
THE SHARES HAVE NOT BEEN REGISTERED FOR SALE UNDER THE SECURITIES LAWS OF ANY
STATE OR JURISDICTION AS OF THE DATE OF THIS PROSPECTUS. BROKERS OR DEALERS
EFFECTING TRANSACTIONS IN THE SHARES SHOULD CONFIRM THE REGISTRATION OF THE
SHARES UNDER THE SECURITIES LAWS OF THE STATES IN WHICH SUCH TRANSACTIONS OCCUR,
OR THE EXISTENCE OF ANY EXEMPTIONS FROM SUCH REGISTRATION.
The Company's Common Stock is quoted on The Nasdaq National Market. On April
20, 1998, the last sales price of the Company's Common Stock as reported on The
Nasdaq National Market was $9-1/4.
________________________________
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR INFORMATION THAT SHOULD BE CONSIDERED
BY PROSPECTIVE PURCHASERS OF THE SHARES OFFERED HEREBY.
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________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
________________________________
NEITHER THE NEVADA GAMING COMMISSION, THE NEVADA STATE
GAMING CONTROL BOARD, THE MISSISSIPPI GAMING COMMISSION,
THE COLORADO LIMITED GAMING CONTROL COMMISSION, THE MISSOURI
GAMING COMMISSION, THE NEW JERSEY CASINO CONTROL COMMISSION NOR ANY OTHER
GAMING AUTHORITY HAS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFERING
MEMORANDUM OR THE INVESTMENT MERITS OF THE COMMON STOCK
HEREBY. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
________________________________
The date of this Prospectus is April 27, 1998.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company can be inspected and copied at the Commission's public reference room at
450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the Regional
Offices of the Commission located at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60611 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can also be
obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed
by the Commission. SGI's Common Stock is traded on The Nasdaq National Market.
Reports and other information concerning SGI can also be inspected at the
offices of the National Association of Securities Dealers, Inc., Market Listing
Section, 1735 K Street, N.W., Washington, D.C. 20006. Such reports and other
information may also be inspected without charge at a Web site maintained by the
Commission. The address of the site is http:\\www.sec.gov.
The Company has also filed with the Commission a Registration Statement on
Form S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is made to the Registration Statement, copies of
which may be obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed
by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act are incorporated herein by reference:
1. The description of the Company's securities contained in the Company's
Registration Statement on Form 10 filed on April 24, 1996 as amended on June 13,
1996 and October 25, 1996;
2. Annual Report on Form 10-K for the year ended December 31, 1997; and
3. Quarterly Reports on Form 10-Q for the three month periods ended March
31, 1997, June 30, 1997 and September 30, 1997.
All documents and reports subsequently filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
of such documents or reports. Any statement contained in a document
incorporated by reference or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus. The Company will provide without charge to each person to
whom this Prospectus is delivered, upon written or oral request, a copy of any
or all of the foregoing documents incorporated by reference in this Prospectus
(other than any exhibits thereto). Requests for such documents should be
directed to Silicon Gaming, Inc. at 2800 West Bayshore Road, Palo Alto,
California 94303 (telephone number (650) 842-9000), Attn: Investor Relations.
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THE COMPANY
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. Actual results could differ materially from those projected in these
forward-looking statements as a result of a variety of factors, including those
set forth below and elsewhere in this Prospectus.
SGI is engaged in the design, development, production, marketing and sale of
what it believes will be the next generation of interactive slot machines for
use in casinos and other gaming establishments. The Company's first product,
Odyssey/TM/, combines an advanced multimedia gaming platform with software-based
games that the Company believes will be more engaging and entertaining than
other gaming devices currently available and will, as a result, generate
increased gaming revenue per device ("win per machine") for the casino operator.
Odyssey features high resolution video presented across the full surface of
a large touchscreen display. The games feature high quality animation, video
clips, digital sound and a level of visual appeal and interactivity that the
Company believes is unattainable by the current generation of slot machines.
The Company is attempting to maximize the entertainment value offered on the
video screen by providing multiple levels of achievement within certain games,
so that, through successful play over a period of time, a player may advance to
a bonusing sequence and win additional jackpots. SGI believes that, by
utilizing these features, its products will encourage longer and more frequent
periods of play by existing slot machine customers and attract new gaming
customers who are seeking greater entertainment value than that offered by the
current generation of slot machines. The Company has designed its machines with
a number of unique player features, such as play stoppage entertainment. In
addition, Odyssey's modular components and Machine Management System/TM/
software provide easy-to-use diagnostics designed to minimize player
inconvenience and machine down-time.
The majority of today's slot machines are "hardware dominant," consisting of
a fixed and unvarying game played out on spinning reels or a small video screen
mounted within a large metal box. By contrast, Odyssey is "software dominant,"
in that the attraction and entertainment value of its machines is created by
software programs that run SGI's games. Odyssey offers a selection of a suite
of six different games on a single machine. Furthermore, Odyssey's 26-inch-
diagonal touchscreen display serves both as the play field when the machine is
in use and a source of attraction by displaying sample game highlights and
information when the machine is not in use. Another benefit of a "software
dominant" machine is that casino operators can quickly and easily change or
upgrade games. The Company expects that casino operators will be able to
upgrade SGI's machines simply by installing new software, rather than by
replacing an entire slot machine.
Odyssey features a number of sophisticated technology components, including
a 133-MHz Pentium processor, a 4-gigabyte hard drive, state-of-the-art video
processing devices and a high speed PCI bus. The software powering Odyssey is
significantly more complex and flexible than the software driving current
generation slot machines and video gaming devices. The Company believes that
the programs driving current generation gaming devices utilize approximately 0.1
megabytes of information. By contrast, each of the Company's games utilizes
several hundred megabytes of information, requiring storage on a high capacity
hard drive.
SGI was incorporated in California on July 27, 1993. Its principal offices
are located at 2800 W. Bayshore Road, Palo Alto, California 94303. The
Company's telephone number is (650) 842-9000.
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RISK FACTORS
The following risk factors should be considered in conjunction with the
other information included and incorporated by reference in its Prospectus
before purchasing the Common Stock offered hereby issuable upon conversion of
the Warrants.
UNCERTAIN MARKET ACCEPTANCE; RISK OF TECHNICAL ERRORS; SINGLE PRODUCT
To achieve commercial success, the Company's product must be accepted both
by casino operators and gaming patrons. Because acceptance of the product by
casino operators will ultimately depend on win per machine, the Company believes
that its ultimate success will depend on player acceptance. The Company's first
gaming platform, Odyssey, has only been installed in casinos for a limited
period and the Company has only limited market studies and player data to
support its belief that Odyssey will be accepted by slot players. There can be
no assurance that Odyssey will be accepted by casino patrons. Initial player
interest in the product may be affected by its novel design in addition to any
inherent advantages it may have over competing platforms and may therefore not
be indicative of the long-term success of Odyssey in the marketplace. Player
preferences are highly subjective, vary substantially among geographic and
demographic markets and are subject to unpredictable change. Because the
Company's product offers features not found on traditional slot machines, it may
not appeal to players for whom familiarity and predictability are important
considerations.
The Company sells its machines at prices that are substantially higher than
the prices of most competing products. In light of these higher sale prices,
coupled with the Company's status as a new and relatively small entrant in a
market dominated by larger companies, Odyssey's success will require that it
demonstrate superior, as opposed to merely comparable, win per machine when
compared to traditional slot machines and other gaming platforms offered by more
established competitors. Although several casinos have agreed to purchase or to
install and evaluate the Company's product, any additional purchases of the
product by these casinos, or others that may conduct similar evaluations in the
future, will be subject to the superior performance of the product on the casino
floor.
Odyssey has been licensed for manufacture, distribution and sale in Nevada
and Missouri and the Company has only recently commenced installing its machines
on casino floors. Because of the limited opportunity for the Company to test
its gaming platform under long-term play conditions, there can be no assurance
that a substantial technical difficulty with, or an undetected error in, the
Company's software or hardware will not arise, possibly resulting in
unanticipated costs, production delays or delays in product licensing.
The Company's success will depend on the success of a single product.
Because sales of its slot machine and related software will comprise the
Company's only source of revenue in the foreseeable future, any interruption in
these sales due to a technical problem will prevent the Company from earning
revenue unless and until the cause of such interruption can be remedied. In
addition, Odyssey's success will also depend upon the Company's ability to
generate new and successful software-based games which are readily accepted in
the marketplace. Moreover, should Odyssey fail to win broad acceptance in the
market, the Company's business, financial condition and results of operations
would be materially and adversely affected, and investors would be exposed to
the loss of all or a substantial portion of their investment.
EXPECTATION OF LOSSES; NEGATIVE CASH FLOWS
As of September 30, 1997, the Company had net losses since inception, and
the Company expects to continue to incur substantial losses and negative cash
flows at least through mid-1998. There can be no assurance that the Company
will become profitable or cash flow positive at any time in the future. The
likelihood of the success of the Company must be considered in light of the
expenses, difficulties, complications and the competitive and regulatory
environment in which the Company must operate. To date, the Company's
operations have focused primarily on product development, and the Company has
had limited experience in the areas of manufacturing, sales, product
distribution or customer support. Accordingly, it is not possible to estimate
future operating expenses and revenue based upon historical operating
performance. Operating results will depend, in part, on
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matters over which the Company has little or no control, including, without
limitation, the ability of the Company to obtain the licenses necessary to
conduct its business, competition, the actual number of orders for its product,
gaming regulations and taxes.
CAPITAL REQUIREMENTS
The Company believes that its cash and equivalents and short-term
investments, will be sufficient to fund its capital and operating requirements
until the Company is capable of generating positive cash flow from operations.
The Company's Financing is intended primarily to fund its product roll-out,
expand operations, and fund the adoption of its revenue sharing plan. The cash
flow generated by sales under this plan is recognized over an extended period,
as the aggregate win per day is earned, and therefore has an adverse effect on
the Company's working capital compared to other pricing options. In addition to
the Financing, the Company may be required to seek additional financing before
it achieves positive cash flow. There can be no assurance that the Company will
be able to obtain such financing, or that, if it is able to obtain such
financing, it will be able to do so on satisfactory terms or on a timely basis.
If additional funds are raised through the issuance of equity, convertible debt
or similar securities, shareholders may experience substantial dilution, and
such securities may have rights or preferences senior to those of Common Stock.
Moreover, if adequate funds are not available to satisfy the Company's short-
term or long-term capital requirements, the Company may be required to limit or
discontinue its revenue sharing plan, scale back its product roll-out, or limit
its operations significantly. The Company's capital requirements will depend on
many factors, including, but not limited to, the rate at which the Company can
introduce its product, the market acceptance and competitive position of such
product, the extent to which the customers choose the revenue participation
plan, the response of competitors to the product and the ability of the
Company's management and its product to satisfy the corporate licensing and
product licensing requirements in various jurisdictions.
COMPETITION
The gaming machine industry is characterized by intense competition that is
based on, among other things, a device's ability to generate win per machine
through product appeal to players, and knowledge of customer requirements such
as ease of use, quality of service, support and training, distribution, name
recognition and price. In recent years, the gaming machine market has been
dominated by International Game Technology ("IGT") which, according to industry
sources, captured approximately 75% of the market in 1996. Because of its
extensive market presence, distribution capacity, player acceptance and
financial, technological and other resources, IGT represents formidable
competition. Several other companies, including Bally Gaming International,
Inc. ("Bally Gaming"), are established in, or are seeking to enter, the gaming
machine business. Companies in historically unrelated industries, such as Sega
Enterprises Ltd. ("Sega"), have technological resources that could offer them a
competitive advantage in developing multimedia-based gaming machines. In
general, the Company's existing competitors, as well as many potential new
competitors, have significantly greater financial and technical resources than
the Company, as well as more established customer bases and distribution
channels, any of which could afford them a competitive advantage in developing
multimedia-based gaming machines. Any success the Company might have may
benefit existing competitors and induce new competitors to enter the market. If
Odyssey displays a potential to capture a significant share of the gaming
machine market, the Company's competitors can be expected to employ a variety of
tactics to limit erosion of their market share, including price reductions,
acceleration of new product development or acquisition of new, competitive
technologies. In the face of such tactics, there can be no assurance that the
Company will be a successful competitor in the gaming machine industry.
MANAGEMENT OF GROWTH
Execution of the Company's plan of operation will require significant
growth. The Company's current plans for growth will place a significant strain
on the Company's financial, managerial and other resources. The Company's
ability to manage its growth effectively will require it to continue to improve
its operational, financial and management information systems and to attract,
motivate and train key employees. If the Company's executives are unable to
manage growth effectively, the Company's business, operating results and
financial condition would be materially and adversely affected.
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DEPENDENCE ON KEY PERSONNEL
The operations of the Company depend to a great extent on the management
efforts of its officers and other key personnel and on the ability to attract
new key personnel and retain existing key personnel. Competition is intense for
highly skilled product development employees in particular. There can be no
assurance that the Company will be successful in attracting and retaining such
personnel or that it can avoid increased costs in order to do so. In addition,
the Company's officers and key employees are not bound by noncompetition
agreements that extend beyond their employment at the Company, and there can be
no assurance that employees will not leave the Company or compete against the
Company. The Company's failure to attract additional qualified employees or to
retain the services of key personnel could have a material adverse effect on the
Company's operating results and financial condition. The Company currently
maintains a "key-man" life insurance policy in the amount of $3 million on the
life of Andrew S. Pascal, the Company's Executive Vice President--Marketing and
Game Development.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS; RISK OF LITIGATION
The Company regards its product as proprietary and relies primarily on a
combination of patent, trademark, copyright and trade secret laws and employee
and third-party nondisclosure agreements to protect its proprietary rights.
Defense of intellectual property rights can be difficult and costly, and there
can be no assurance that the Company will be able effectively to protect its
technology from misappropriation by competitors. In addition, the protections
offered by trademark, copyright and trade secret laws would not prevent a
competitor from designing games having appearance and functionality that closely
resemble the Company's games. At present, the Company's principal proprietary
technology consists of its game authentication algorithm, which is designed to
prevent tampering with the game software that is resident in its product, and
its random number generator algorithm, which determines the outcome of each
gaming proposition. While the Company believes that these algorithms are unique
at present, there can be no assurance that a competitor of the Company will not
succeed in developing an authentication algorithm or a random number generator
algorithm that performs as well as, or better than, the Company's. Moreover,
although the Company has applied for and received certain patents and trademarks
for its intellectual property, there can be no assurance that such patents and
trademarks will not be successfully challenged in subsequent litigation.
As the number of software products in the industry increases and the
functionality of these products further overlaps, software developers and
publishers may increasingly become subject to infringement claims. The Company
may also become subject to infringement claims, with or without merit, that are
brought by competitors who are motivated by a desire to disrupt the Company's
business. Although the Company is not currently aware of any claim that it is
infringing upon any intellectual property rights, there can be no assurance that
the Company will not face claims, with or without merit, in the future. Any
such claims or litigation could be costly and could result in a diversion of
management's attention, which could have a material adverse effect on the
Company's business and financial condition. Any settlement of such claims or
adverse determinations in such litigation could also have a material adverse
effect on the Company's business, operating results and financial condition.
RAPIDLY CHANGING TECHNOLOGY
The Company's product utilizes hardware components that have been developed
primarily for the personal computer and multimedia industries. These industries
are characterized by rapid technological change and product enhancements. The
Company's ability to remain competitive and retain any technological lead may
depend in part upon its ability to continually develop new slot machine games
that take full advantage of the technological possibilities of state-of-the-art
hardware. Should any current or potential competitor of the Company succeed in
developing a competing software-based gaming platform, such competitor could be
in a position to outperform the Company in its ability to exploit developments
in microprocessor, video or other multimedia technology. The emergence of a
suite of slot machine games that is superior to the Company's in any respect
could substantially diminish the Company's product sales and thereby have a
material adverse effect on the Company's operating results.
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LIMITED MANUFACTURING EXPERIENCE
In order for the Company to be successful, its product must be manufactured
to meet high quality standards in commercial quantities at competitive prices.
The Company has only recently begun to manufacture Odyssey for commercial
distribution and has had no prior experience in large-scale manufacturing of
gaming machines. The transition to large-scale manufacturing of Odyssey will
involve various risks and uncertainties including unforeseen costs or assembly
difficulties and the possibility that anticipated efficiencies or economies of
scale will fail to materialize as the Company begins manufacturing in greater
volumes. A failure by the Company to successfully manage this transition would
have a material adverse affect on the Company's business, operating results or
financial condition.
DEPENDENCE ON SINGLE-SOURCE SUPPLIERS
The Company currently obtains a number of its system's components from
single-source suppliers. In particular, the touchscreen and picture tube that
comprise the video display are supplied by MicroTouch Systems, Inc. and Philips
Display Components Company, respectively. The Company does not have long-term
supply contracts with these suppliers but rather obtains these components on a
purchase order basis. Although the design of these components is not unique or
proprietary and the Company believes that it could identify alternative sources
of supply, if necessary, there can be no assurance that the Company would be
able to procure, substitute or produce such components without a significant
interruption in its assembly process in the event that these single sources were
unable to supply these components. Even where the Company has multiple sources
of supply for a component, industry-wide component shortages, such as those that
have occurred with various computer components, could significantly delay
productivity, increase costs or both. The failure or delay by any supplier to
furnish the Company with required components would have a material adverse
effect on the Company's business, financial condition and results of operations.
LEVERAGE, SUBORDINATION OF SHAREHOLDERS AND RESTRICTIONS ON FUTURE FINANCIAL
ACTIVITIES
In connection with the sale of the Notes in the Financing, the Company
incurred $30 million of indebtedness. The Company's principal and interest
obligations have increased substantially as a result of the Financing. The
degree to which the Company is leveraged could materially and adversely affect
the Company's ability to obtain future financing for working capital,
acquisitions or other purposes and could make it more vulnerable to industry
downturns and competitive pressures. The Company's ability to meet its debt
service obligations is dependent upon the Company's future performance, which
will be subject to financial, business and other factors affecting the
operations of the Company, many of which are beyond its control.
The Notes are secured by all of the Company's assets as well as all of the
assets of the Company's subsidiaries. As a result, in the event of bankruptcy,
liquidation or reorganization of the Company or certain other events, the assets
of the Company will be available to pay obligations on the Notes prior to any
payment to the Company's shareholders, and there may not be sufficient assets
remaining to pay amounts due to such shareholders then outstanding.
The Securities Purchase Agreement by and between the Company and the Selling
Shareholder (the "Securities Purchase Agreement") also contains various
covenants, restrictions and limitations on the Company's ability to undertake
future financial activities. Such restrictions and limitations could materially
and adversely affect the Company's ability to obtain future financing and could
limit or restrict the Company's ability to conduct future business transactions.
See "Description of Notes."
SLOWING IN TREND TO LEGALIZE GAMING
Growth in demand for slot machines historically has been driven by the
opening of new casinos, including casinos in jurisdictions where gaming has
recently been legalized. However, in recent years, the legalization of gaming
in new jurisdictions has been significantly reduced; therefore, demand based on
new openings will be
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largely limited to new projects in existing markets. There can be no assurance
that the slot machine industry will sustain the rate of growth that was possible
in the first half of this decade.
REGULATORY APPROVAL
The Company will be required to obtain and maintain the necessary licenses,
approvals, findings of suitability and product approvals in all jurisdictions in
which it intends to distribute its product. The licensing and approval
processes can involve extensive examination of the Company and its officers,
directors, employees, principal shareholders and product, and can require
significant expenditures of time and resources by the Company. Distribution of
gaming devices in U.S. gaming jurisdictions generally requires both corporate
approval and product approval. The Company and certain of its subsidiaries have
received the requisite corporate approvals in Nevada, Mississippi, Missouri and
Colorado. The Company has also applied for corporate approval in New Jersey,
Minnesota and Indiana and intends to file for approval in other jurisdictions
where its product can be sold legally. Odyssey was approved for sale in Nevada
on March 20, 1997 and in Missouri on October 17, 1997 after review by Gaming
Laboratories International, Inc. ("GLI"), an independent testing facility. On
December 18, 1997, Odyssey was approved by the Mississippi Gaming Commission.
The Company has also submitted Odyssey for testing in New Jersey and to GLI for
approval in New Mexico. There can be no assurance that Odyssey will be approved
in any additional jurisdiction. The regulations relating to company and product
licensing are subject to change, and other jurisdictions, including the federal
government, may elect to regulate or tax gaming activities. The Company cannot
predict the nature of any such changes or their impact on the Company. In
addition to the initial product approval, the Company is required to submit all
software and hardware modifications to the various regulatory laboratories.
These modifications normally take between 30 and 45 days to process.
Any legal or beneficial holder of the Company's Common Stock may be subject
to investigation by any gaming authority in any jurisdiction in which the
Company does business if such authorities have reason to believe that such
ownership may be inconsistent with the gaming policies of that jurisdiction.
Persons who acquire legal or beneficial ownership of more than certain
designated percentages of the Common Stock may be subject to certain reporting
and qualification procedures. In addition, changes in control of the Company
and certain other corporate transactions may not be effected without the prior
approval of gaming authorities in other jurisdictions in which the Company plans
to do business. Such provisions could adversely affect the marketability of the
Company's Common Stock or prevent certain corporate transactions, including
mergers or other business combinations. See "Business--Gaming Regulation and
Licensing."
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with such "Year 2000"
requirements. Although the Company believes that its products and systems are
Year 2000 compliant, the Company utilizes third-party equipment and software
that may not be Year 2000 compliant. Failure of such third-party equipment or
software to operate properly with regard to the Year 2000 and thereafter could
require the Company to incur unanticipated expenses to remedy any problems,
which could have a material adverse effect on the Company's business, operating
results and financial condition. The business, operating results and financial
condition of the Company's customers could be adversely affected to the extent
that they utilize third-party software products which are not Year 2000
compliant. Furthermore, the purchasing patterns of customers or potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct their current systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase products and
services such as those offered by the Company, which could have a material
adverse effect on the Company's business, operating results and financial
condition.
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POSSIBLE VOLATILITY OF COMMON STOCK PRICE
The market price of the Company's common stock has historically experienced
significant fluctuations and may continue to fluctuate significantly. Future
announcements concerning the Company or its competitors, quarterly variations in
operating results, announcements of technological innovations, the introduction
of new products or changes in product pricing policies by the Company or its
competitors, proprietary rights or other litigation, changes in earnings
estimates by analysts or other factors could cause the market price of the
Common Stock to fluctuate substantially, particularly on a quarterly basis. In
addition, stock prices for many technology-related companies fluctuate widely
for reasons which may be unrelated to operating results of such companies.
These fluctuations, as well as general economic, market and political conditions
such as recessions or military conflicts, may materially and adversely affect
the market price of the Company's Common Stock. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such companies. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
LIMITATIONS ON REPURCHASE OF NOTES
Upon a Change of Control, the holder of the Notes will have certain rights
including requiring the Company to redeem all or a portion of such holder's
Notes. If a Change of Control were to occur, there can be no assurance that the
Company would have or be able to obtain sufficient funds to pay the repurchase
price for all Notes tendered by the holder. In addition, any future credit
agreements or other agreements relating to other indebtedness to which the
Company becomes a party may contain restrictions and provisions which prohibit
the Company from repurchasing or redeeming any Notes or provide that a Change of
Control would constitute an event of default thereunder. In the event a Change
of Control occurs at a time when the Company is prohibited from repurchasing or
redeeming Notes, the Company could seek the consent of its lenders to the
repurchase of Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company would remain prohibited from repurchasing or redeeming
Notes. In such case, the Company's failure to repurchase tendered Notes may
constitute an Event of Default under and as defined in the Securities Purchase
Agreement, which may, in turn, constitute a further default under the terms of
other indebtedness that the Company may enter into from time to time. See
"Description of Notes--Redemption at Option of Holders upon a Change of
Control."
NO DIVIDENDS
The Company has not paid any cash dividends in the past and does not expect
to do so in the foreseeable future.
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BUSINESS -- GAMING REGULATION AND LICENSING
GENERAL REGULATION OF SHAREHOLDERS OF PUBLICLY TRADED CORPORATIONS
In most jurisdictions, any beneficial owner of the Company's Common Stock is
subject on a discretionary basis to being required to file applications with
gaming regulatory authorities, be investigated and found suitable or qualified
as such. In addition, shareholders whose holdings of Common Stock exceed
certain designated percentages are subject to certain reporting and
qualification requirements imposed by state and federal gaming regulators and,
any shareholder, if found to be unsuitable, may be required to immediately
dispose of its holdings of Common Stock. See "--Nevada Regulatory Matters," "--
Missouri Regulatory Matters," "--Colorado Regulatory Matters," "--New Jersey
Regulatory Matters," and "--Mississippi Regulatory Matters."
The Company must obtain a registration, license, approval or finding of
suitability, and equipment approval in all jurisdictions before it can offer
gaming devices for sale to licensed gaming operations within those
jurisdictions. The licensing process usually involves the licensing or approval
of certain officers, directors, and shareholders of the corporation, and
approval of the specific product that the Company wants to offer for sale.
NEVADA REGULATORY MATTERS
The manufacture, sale and distribution of gaming devices for use or play in
Nevada or for distribution outside of Nevada, the manufacture and distribution
of associated equipment for use in Nevada, and the ownership and operation of
slot machine routes in Nevada are subject to: (i) the Nevada Gaming Control Act
and the regulations promulgated thereunder (collectively, "Nevada Act"); and
(ii) various local ordinances and regulations. Such activities are subject to
the licensing and regulatory control of the Nevada Commission, the Nevada Board,
and various local, city and county regulatory agencies (collectively referred to
as the "Nevada Gaming Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming, or manufacturing or
distribution of gaming devices at any time or in any capacity; (ii) the strict
regulation of all persons, locations, practices, associations and activities
related to the operation of licensed gaming establishments and the manufacture
or distribution of gaming devices and equipment; (iii) the establishment and
maintenance of responsible accounting practices and procedures; (iv) the
maintenance of effective controls over the financial practices of licensees,
including the establishment of minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenue, providing reliable record keeping
and requiring the filing of periodic reports with the Nevada Gaming Authorities;
(v) the prevention of cheating and fraudulent practices; and (vi) the provision
of a source of state and local revenue through taxation and licensing fees.
Change in such laws, regulations and procedures could have an adverse effect on
the Company's operations.
On June 19, 1996 the Company was registered by the Nevada Commission as a
publicly-traded corporation (a "Registered Corporation"), and SGI-Nevada was
approved as a manufacturer, distributor and operator of a slot machine route.
On March 20, 1997, the Nevada Commission granted final approval of the Company's
product. Such gaming approvals require the periodic payment of fees and taxes
and are not transferable. As a Registered Corporation, the Company is required
periodically to submit detailed financial and operating reports to the Nevada
Commission and furnish any other information which the Nevada Commission may
require. No person may become a shareholder of, or receive any profit from SGI-
Nevada without first obtaining licenses and approvals from the Nevada Gaming
Authorities. The Company and SGI-Nevada have obtained the various
registrations, approvals, permits and licenses in order to engage in
manufacturing, distribution and slot route activities in Nevada.
All gaming devices that are manufactured, sold or distributed for use or
play in Nevada, or for distribution outside of Nevada, must be manufactured by
licensed manufacturers and distributed or sold by licensed distributors. All
gaming devices manufactured for use or play in Nevada must be approved by the
Nevada
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Commission before distribution or exposure for play. The approval process for
gaming devices includes rigorous testing by the Nevada Board, a field trial and
a determination as to whether the gaming device meets strict technical standards
that are set forth in the regulations of the Nevada Commission. Associated
equipment must be administratively approved by the Chairman of the Nevada Board
before it is distributed for use in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, a Registered Corporation
or its subsidiaries in order to determine whether such individual is suitable or
should be licensed as a business associate of a gaming licensee. Officers,
directors and certain key employees of the Company and SGI-Nevada are required
to file applications with the Nevada Gaming Authorities and may be required to
be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any cause which
they deem reasonable. A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Changes in licensed
positions must be reported to the Nevada Gaming Authorities and in addition to
their authority to deny an application for a finding of suitability or
licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position. On June 19, 1996 SGI's Chief Executive Officer,
Chief Financial Officer, the required directors and SGI-Nevada's sole officer
and director were found suitable by the Nevada Commission.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with SGI or SGI-Nevada, the Company would have to sever all
relationships with such person. In addition, the Nevada Commission may require
the Company or SGI-Nevada to terminate the employment of any person who refuses
to file appropriate applications. Determination of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.
The Company and SGI-Nevada are required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities and similar financing transactions by the Company
are required to be reported to or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by the Company or
SGI-Nevada, the registration and gaming licenses it holds could be limited,
conditioned, suspended or revoked, subject to compliance with certain statutory
and regulatory procedures. In addition, the Company, SGI-Nevada and the persons
involved could be subject to substantial fines for each separate violation of
the Nevada Act at the discretion of the Nevada Commission. Limitation,
conditioning or suspension of any gaming license could (and revocation of any
gaming license would) materially adversely affect the Company's gaming
operations.
Any beneficial holder of a Registered Corporation's voting securities,
regardless of the number of shares owned, may be required to file an
application, be investigated, and have his suitability determined as a
beneficial holder of the Registered Corporation's voting securities if the
Nevada Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the State of Nevada. The applicant
must pay all costs of investigation incurred by the Nevada Gaming Authorities in
conducting any such investigation.
The Nevada Act requires any person who acquires beneficial ownership of more
than 5% of a Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of a Registered Corporation's voting securities apply to
the Nevada Commission for a finding of suitability within thirty days after the
Chairman of the Nevada Board mails the written notice requiring such filing.
Under certain circumstances, an "institutional investor," as defined in the
Nevada Act, which acquires more than 10% but not more than 15%, of the
Registered Corporation's voting securities may apply to the Nevada Commission
for a waiver of such finding of suitability if such institutional investor holds
the voting securities for investment purposes only. An institutional investor
shall not be deemed to hold voting securities for investment purposes unless the
voting securities were acquired and are held in the ordinary course of business
as an institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies or operations of the Registered
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Corporation, or any of its gaming affiliates, or any other action which the
Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by shareholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent.
If the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any shareholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the Common Stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company will be subject to disciplinary
action if, after it receives notice that a person is unsuitable to be a
shareholder or to have any other relationship with the Company or SGI-Nevada,
the Company (i) pays that person any dividend or interest upon voting securities
of the Company, (ii) allows that person to exercise, directly or indirectly, any
voting right conferred through securities held by that person, (iii) pays
remuneration in any form to that person for services rendered or otherwise, or
(iv) fails to pursue all lawful efforts to require such unsuitable person to
relinquish his voting securities including, if necessary, the immediate purchase
of said voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
The Company is required to maintain a current stock ledger in Nevada which
may be examined by the Nevada Gaming Authorities at any time. If any securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the stock certificates of the Company to
bear a legend indicating that the securities are subject to the Nevada Act.
However, the Nevada Commission has not imposed such a requirement on the Company
to date, but it is unknown whether the Nevada Commission will impose such a
requirement on the Company in the future.
As a Registered Corporation, the Company may not make a public offering of
its securities, without the prior approval of the Nevada Commission if the
securities or proceeds therefrom are intended to be used to construct, acquire
or finance gaming facilities in Nevada, or to retire or extend obligations
incurred for such purposes. Approval of a public offering, if given, does not
constitute a finding, recommendation or approval by the Nevada Commission or the
Nevada Board as to the accuracy or adequacy of the prospectus or the investment
merits of the securities offered. Any representation to the contrary is
unlawful.
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person whereby he obtains control, may not occur
without the prior approval of the Nevada Commission. Entities seeking to
acquire control of a Registered Corporation must satisfy the Nevada Board and
the Nevada Commission in a variety of stringent standards prior to assuming
control of such Registered Corporation. The Nevada Commission may also require
controlling
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shareholders, officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire control, to be
investigated and licensed as part of the approval process relating to the
transaction.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's shareholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which gaming operations are to be conducted. Depending
upon the particular fee or tax involved, these fees and taxes are payable either
monthly, quarterly or annually and are based upon either: (i) a percentage of
the gross revenue received; or (ii) the number of gaming devices operated.
Annual fees are also payable to the State of Nevada for renewal of licenses as a
manufacturer, distributor and operator of a slot machine route.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities that
are harmful to the state of Nevada or its ability to collect gaming taxes and
fees, or employ a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
In the future, SGI intends to seek the necessary registrations, licenses,
approvals, and findings of suitability for the Company, its product and its
personnel in other jurisdictions throughout the world. However, there can be no
assurances that such registrations, licenses, approvals or findings of
suitability will be obtained. Many other jurisdictions in which the Company
wishes to do business require various licenses, permits, and approvals in
connection with the manufacture and/or distribution of gaming devices, typically
involving restrictions similar in most respects to those of Nevada.
MISSOURI REGULATORY MATTERS
Gaming was originally authorized in the state of Missouri in November 1992.
On April 29, 1993, new legislation (the "Missouri Act") was enacted which
replaced the 1992 legislation. In January 1994 the Missouri Supreme Court
handed down a decision which held that the operation of certain games of chance
such as traditional slot machines was prohibited by the constitution of the
state of Missouri. On November 8, 1994, the people of Missouri voted in favor
of an amendment to the Missouri constitution to allow slot machine gaming in the
state. Six months prior to the constitutional amendment, the state legislature
enacted a statute defining Mississippi and Missouri Rivers to include artificial
spaces located 1,000 feet or less from the closest edge of the
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main channel of the river. The constitutional amendment, however, authorized
games of change "only upon the Mississippi River and the Missouri River." In
August 1996, three Missouri taxpayers filed a lawsuit seeking to prevent the
licensing of a gaming facility in an artificial space not contiguous to the
river, but within 1,000 feet of the main channel. The lower court dismissed the
action summarily. On November 25, 1997 the Supreme Court of Missouri reversed
the lower court decision.
In Akin et. al. v. Missouri Gaming Commission, et. al., 956 S.W. 261 (Mo.
1997), the Supreme Court ordered the lower court to hear evidence and make
findings consistent with the Supreme Court opinion that "the 1994 constitutional
amendment authorizes games of chance to be conducted on excursion gambling boats
and floating facilities solely over and in contact with the surface of the
Mississippi and Missouri Rivers. Such gambling may occur in artificial spaces
that are contiguous to the surface stream (and thus river-based), but not in
other artificial spaces that are not contiguous to the surface stream of the
river (that are land-based)."
Without a state-wide referendum explicitly permitting games of chance to be
conducted adjacent to, as opposed to contiguous with, the Mississippi and
Missouri Rivers, six of Missouri's 11 casinos could lose their licenses to
operate slot machines and other games of chance within the state.
Currently, SGI-Missouri has an exclusive agreement with the Stations Casino
projects in Kansas City and St. Charles, Missouri, with 130 Odyssey's at the
Kansas City casino and 60 Odyssey's at the St. Charles casino. The Kansas City
facility would be impacted by a finding that it is not in compliance with the
requirement that the casino be "in contact" with the river. The St. Charles
facility is not one of the six Missouri casinos affected by the Supreme Court's
decision. The exclusive arrangement between SGI-Missouri and Stations Casinos
ends on October 30, 1998, at which time the other casinos operating in the state
become potential customers.
Irrespective of the challenge to the configuration of the state's gaming
facilities, the Missouri Act provides for the licensing and regulation of
excursion gambling boat operations on the Mississippi and Missouri Rivers in the
state of Missouri and the licensing and regulation of persons who distribute
gaming equipment and supplies to gaming licensees. An excursion gambling boat
is a boat, ferry or other floating facility on which gaming is allowed. The
Missouri Act limits the loss per individual on each excursion to $500, but does
not otherwise limit the amount which may be wagered on any bet or the amount of
space in the vessel which may be utilized for gaming.
The Missouri Act is to be implemented and enforced by a five-member Missouri
Commission. The Missouri Commission is empowered to issue such number of
riverboat gaming licenses as it determines to be appropriate. A gaming license
cannot be granted to any gaming operator unless the voters in such operator's
"home dock" city or county have authorized gaming activities on gaming
riverboats.
On September 1, 1993, the Missouri Commission adopted rules and regulations
(the "Missouri Regulations") governing the licensing, operation and
administration of riverboat gaming in the state of Missouri and the form of
application for such licensure. The Missouri Regulations generally provide for
four types of licenses--a Class A owner's license; a Class B operator's license;
a supplier's license; and an occupational license. In addition, the Missouri
Regulations remain subject to amendment and interpretation, and may further
limit or otherwise adversely affect the Company and its Missouri gaming
operations.
Directors and certain officers and key persons of the Company and Silicon
Gaming-Missouri ("SGI-Missouri"), a wholly-owned subsidiary of SGI, must file
personal disclosure forms with the gaming license application and must be found
suitable by the Missouri Commission. Further, the Missouri Regulations require
that all employees of SGI-Missouri who are involved in gaming operations and who
are employed on the licensed premises must file applications for and receive
Missouri gaming occupational licenses. The Missouri regulations require
disclosure by the Company and SGI-Missouri of any person or entity holding any
direct or indirect ownership interest in SGI- Missouri. SGI-Missouri is also
required to disclose the names of the holders of all of the Company's and SGI-
Missouri's debt including a description of the nature and terms of such debt.
The Missouri Commission may, in its sole discretion, request additional
information with respect to such holders. Missouri suppliers' gaming licenses
must be renewed annually for a fee of $5,000 or such greater amount as may
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be determined by the Commission. On November 8, 1996, SGI-Missouri was granted a
temporary supplier's license by the Missouri Commission.
Under Missouri law, gaming licenses are not transferable, and under the
Missouri Regulations the transfer of (i) any ownership interest in a privately
held business entity or (ii) a 5% or greater interest in a publicly traded
company directly or indirectly holding a Missouri gaming license is prohibited
without the approval of the Missouri Commission. Further, without the prior
approval of the Missouri Commission, the Missouri Regulations prohibit
withdrawals of capital, loans, advances or distribution of any assets in excess
of 5% of accumulated earnings by a license holder to anyone with an ownership
interest in the license holder.
The Missouri Regulations specifically provide that any action of the
Missouri Commission shall not indicate or suggest that the Missouri Commission
has considered or passed in any way on the marketability of the applicant or
licensee's securities, or on any other matter, other than the applicant or
licensee's suitability for licensure under Missouri law. A Missouri gaming
license holder can be disciplined in Missouri for gaming-related acts occurring
in another jurisdiction which result in disciplinary action in the other
jurisdiction.
The Missouri Commission has broad powers to require additional disclosure by
an applicant during the processing of a gaming application, to deny gaming
licensure and to administratively fine or suspend or revoke a gaming license for
failure to comply with or for violation of the Missouri Act or Missouri
Regulations.
COLORADO REGULATORY MATTERS
The State of Colorado created the Division of Gaming (the "Division") within
the Department of Revenue to license, implement, regulate and supervise the
conduct of limited gaming. The Director of the Division, under the supervision
of a five-member Colorado Commission, has been granted broad power to ensure
compliance with the Colorado Regulations. The Director may inspect, without
notice, impound or remove any gaming device. He may examine and copy any
licensee's records, may investigate the background and conduct of licensees and
their employees, and may bring disciplinary actions against licensees and their
employees. He also may conduct detailed background investigations of persons
who loan money to the Company.
The Colorado Commission is empowered to issue five types of gaming and
gaming-related licenses. The failure or inability of the Company or Silicon
Gaming-Colorado, Inc. (the "Colorado subsidiary"),or others associated with the
Company or the Colorado subsidiary, to obtain or maintain necessary gaming
licenses will have a material adverse affect on the operations of the Company.
All persons employed by the Company and the Colorado subsidiary and involved,
directly or indirectly, in gaming operations in Colorado also are required to
obtain a Colorado gaming license. The Colorado subsidiary's license must be
reviewed annually and those of its key and support employees every two years.
On January 24, 1997, Silicon Gaming-Colorado, Inc., was granted a manufacturer
and distributor license by the Colorado Limited Gaming Control Commission and
the Company was found suitable to be an associated person of the Colorado
subsidiary.
In addition, pursuant to the Colorado Regulations, no manufacturer or
distributor of slot machines may have an interest in any casino retailer or
operator, allow any of its officers or persons with a substantial interest in it
to have such an interest, employ any person if such person is employed by a
casino retailer or operator, or allow any casino retailer or operator or person
with a substantial interest therein to have an interest in a manufacturer's or
distributor's business. "Substantial interest" means the lesser of: as large
an interest (direct or indirect) in the licensee as that of any other
shareholder, partner or principal, or any financial or equity interest equal
to or greater than 5%. Notwithstanding the definition of "substantial
interest," there may remain an argument that the ownership of less than 5% of
the voting securities of a publicly traded licensee or publicly traded
affiliate of a licensee is not a substantial interest. On December 15, 1997,
the Division ruled that it is unlawful for any officers, directors or persons
holding a substantial interest in a manufacturer/distributor to hold publicly
or privately traded stock in a corporation operating as a retailer in
Colorado, and vice versa.
Under the Colorado Regulations, any person or entity having any direct or
indirect interest in a gaming licensee or an applicant for a gaming license,
including, but not limited to, the Company and shareholders of the Company, may
be required to supply the Colorado Commission with substantial information,
including, but not limited to, background information, source of funding
information, a sworn statement that such person or entity is not holding his
interest for any other party, and fingerprints. Such information, investigation
and licensing as an "associated person" automatically will be required of all
persons (other than certain institutional investors
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discussed below) which directly or indirectly own ten percent (10%) or more of a
direct or indirect legal, beneficial or voting interest in the Colorado
subsidiary, through their ownership in the Company. Such persons must report
their interest and file appropriate applications within 45 days after acquiring
such interest. Persons directly or indirectly having a five percent (5%) or more
interest (but less than 10%) in the Colorado Subsidiary, through their ownership
in the Company, must report their interest to the Colorado Commission within ten
(10) days after acquiring such interest and may be required to provide
additional information and to be found suitable. If certain institutional
investors provide certain information to the Colorado Commission, such
investors, at the Colorado Commission's discretion, may be permitted to own up
to 14.99% of the Colorado Subsidiary, through their ownership in the Company,
before being required to be found suitable. All licensing and investigation fees
will have to be paid for by the person in question. The associated person
investigation fee currently is $48.00 per hour.
The Colorado Commission also has the right to request information from any
person directly or indirectly interested in, or employed by, a licensee, and to
investigate the moral character, honesty, integrity, prior activities, criminal
record, reputation, habits and associations of (i) all persons licensed pursuant
to the Colorado Limited Gaming Act, (ii) all officers, directors and
shareholders of a licensed privately held corporation, (iii) all officers,
directors and shareholders holding either a five percent (5%) or greater
interest or a controlling interest in a licensed publicly traded corporation,
(iv) all general partners and all limited partners of a licensed partnership,
(v) all persons who have a relationship similar to that of an officer, director
or shareholder of a corporation (such as members and managers of a limited
liability company), (vi) all persons supplying financing or loaning money to any
licensee connected with the establishment or operation of limited gaming, and
(vii) all persons having a contract, lease or ongoing financial or business
arrangement with any licensee, where such contract, lease or arrangement relates
to limited gaming operations, equipment, devices or premises.
In addition, under the Colorado Regulations, every person who is a party to
a "gaming contract" with an applicant for a license, or with a licensee, upon
the request of the Colorado Commission or the Director, promptly must provide to
the Colorado Commission or Director all information which may be requested
concerning financial history, financial holdings, real and personal property
ownership, interests in other companies, criminal history, personal history and
associations, character, reputation in the community, and all other information
which might be relevant to a determination whether a person would be suitable to
be licensed by the Colorado Commission. Failure to provide all information
requested constitutes sufficient grounds for the Director or the Colorado
Commission to require a licensee or applicant to terminate its "gaming contract"
(as defined below) with any person who failed to provide the information
requested. In addition, the Director or the Colorado Commission may require
changes in "gaming contracts" before an application is approved or participation
in the contract is allowed. A "gaming contract" is defined as an agreement in
which a person does business with or on the premises of a licensed entity.
An application for licensure or suitability may be denied for any cause
deemed reasonable by the Colorado Commission or the Director, as appropriate.
Specifically, the Colorado Commission and the Director must deny a license to
any applicant who (i) fails to prove by clear and convincing evidence that the
applicant is qualified, (ii) fails to provide information and documentation
requested; (iii) fails to reveal any fact material to qualification, or supplies
information which is untrue or misleading as to a material fact pertaining to
qualification; (iv) has been, or has any director, officer, general partner,
shareholder, limited partner or other person who has a financial or equity
interest in the applicant who has been, convicted of certain crimes, including
the service of a sentence upon conviction of a felony in a correctional
facility, city or county jail, or community correctional facility or under the
state board of parole or any probation department within ten years prior to the
date of the application, gambling-related offenses, theft by deception or crimes
involving fraud or misrepresentation, is under current prosecution for such
crimes (during the pendency of which license determination may be deferred), is
a career offender or a member or associate of a career offender cartel, or is a
professional gambler; or (v) has refused to cooperate with any state or federal
body investigating organized crime, official corruption or gaming offenses.
If the Colorado Commission determines that a person or entity is unsuitable
to own interests in the Company, then the Company or the Colorado Subsidiary may
be sanctioned, which may include the loss by the Company or the Colorado
Subsidiary of their respective approvals and licenses.
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The Colorado Commission does not need to approve in advance a public
offering of securities, but rather requires a filing of notice and additional
documents with regard to such public offering prior to such public offering.
Under the regulations, the Colorado Commission may, in its discretion, require
additional information and prior approval of such public offering.
In addition, the Colorado Regulations prohibit a licensee or affiliated
company thereof, such as the Company, from paying dividends, interest or other
remuneration to any unsuitable person, or recognizing the exercise of any voting
rights by any unsuitable person. Further, the Company may repurchase the shares
of anyone found unsuitable at the lesser of the cash equivalent to the original
investment in the Company or the current market price. Further, the regulations
require anyone with a material involvement with a licensee, including a director
or officer of a holding company, such as the Company, to file for a finding of
suitability if required by the Colorado Commission.
In addition to its authority to deny an application for a license or
suitability, the Colorado Commission has jurisdiction to disapprove a change in
corporate position of a licensee and may have such authority with respect to any
entity which is required to be found suitable by the Colorado Commission. The
Colorado Commission has the power to require the Company and the Colorado
Subsidiary to suspend or dismiss managers, officers, directors and other key
employees or sever relationships with other persons who refuse to file
appropriate applications or whom the authorities find unsuitable to act in such
capacities, and may have such power with respect to any entity which is required
to be found suitable.
A person or entity may not sell, lease, purchase, convey or acquire a
controlling interest in the Company without the prior approval of the Colorado
Commission. The Company may not sell any interest in the Colorado Subsidiary
without the prior approval of the Colorado Commission.
Limited gaming facilities in Colorado must not exceed certain gaming square
footage limits as a total of each floor and the full building. Casinos in
Colorado may operate only between 8:00 a.m. and 2:00 a.m., and may permit only
individuals 21 years or older to gamble in the casino. The law permits slot
machines, blackjack and poker, with a maximum single bet of $5.00. Casinos may
not provide credit to their gaming patrons.
The Colorado Constitution permits a gaming tax of up to 40% on adjusted
gross gaming proceeds. The Colorado Commission currently has set a gaming tax
rate of 2% on adjusted gross gaming proceeds of up to and including $2 million,
4% over $2 million and including $4 million, 14% over $4 million up to and
including $5 million, 18% over $5 million and up to an including $10 million and
20% on adjusted gross gaming proceeds in excess of $10 million. The Colorado
Commission also has imposed an annual device fee of $75 per gaming device. The
Colorado Commission may revise the gaming tax rate and device fee from time to
time. Central City Black Hawk and Cripple Creek each have imposed annual device
fees of approximately $1,000 per gaming device and may revise the same from time
to time.
Colorado has certain unique regulatory laws which, if adversely interpreted
or not modified, may limit or adversely affect the ability of the Company to
enter in, or compete within, the Colorado market. First, as noted, gaming in
Colorado constitutionally is limited to slot machines, blackjack and poker.
Although no manufacturer or distributor has attempted to distribute the
Company's type of interactive game, it should be included within the definition
of "slot machine." In preliminary discussions, Division personnel have stated
that the device likely is a "slot machine," although neither the Division nor
the Commission have formally ruled on the issue and will not do so until the
product is submitted to the Division for approval.
Second, Colorado constitutionally limits the maximum single bet to $5.00.
Colorado statutes define a bet to be an amount placed as a wager in a game of
chance. If the Company's product permits multiple rounds of betting at $5.00
per round, it would be unclear whether Colorado would permit such betting. If
Colorado does not permit multiple round bets in excess of $5.00, then the
Company would need to adjust its machines to limit the total bets to $5.00,
including all rounds.
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Third, Commission Regulations define the requirements of slot machines,
including limitations on the ability to alter the slot machine's program and the
internal requirements of the slot machine itself. The Company's proposed
machines do not comply with existing Commission Regulations. Although the
Company intends to seek a change in the Commission's Regulations, there can be
no assurance that such changes will be made. If the Regulations are not
changed, then the Company will need to modify its machines to conform to
Colorado requirements. Even as so modified, the Company's machines must be
approved by the Division as meeting existing Regulations and there is no
assurance that the Company will receive such approval or will receive such
approval in a timely basis.
NEW JERSEY REGULATORY MATTERS
Casino gaming in New Jersey is regulated by the New Jersey Casino Control
Act, N.J.S.A. 5:12-1 et seq., and regulations promulgated thereunder (the
"NJCCA"). The NJCCA created the New Jersey Casino Control Commission ("NJCCC"),
which is authorized to decide all license applications and other matters and to
promulgate regulations, and created the New Jersey Division of Gaming
Enforcement (the "NJDGE"), which is authorized to investigate all license
applications, make recommendations to the NJCCC, and prosecute violations of the
NJCCA. Under the NJCCA, any enterprise providing goods or services to a casino
must register with or be licensed by the NJCCC. The Company and its wholly-
owned subsidiary, Silicon Gaming-New Jersey, Inc., filed the necessary documents
in order to be licensed by the NJCCC.
Business enterprises providing goods or services directly related to casino
gaming or simulcast wagering must be licensed as a gaming related Casino Service
Industry ("CSI") prior to conducting business with New Jersey casino licensees
or must have filed a complete application for CSI licensure with the NJCCC and
received the permission of the NJCCC for each business transaction.
A CSI license application consists of a Business Entity Disclosure Form for
the applicant and each of its holding companies and Personal History Disclosure
Forms for each individual required to be found qualified. The application fee
consists of a non-refundable deposit of $5,000 and an obligation to pay an
additional $5,000 if the processing of the application requires more than 1,000
but less than 2,000 hours and a further $5,000 if the processing of the
application exceeds 2,000 hours. The same fee structure applies to any renewal
application.
In connection with a license application, the NJDGE conducts an
investigation of the Company to determine its suitability for licensure. In
order for the requisite CSI license to be issued by the NJCCC to the Company and
maintained, the Company's officers, directors and key employees and all
beneficial owners of more than five percent (5%) of the Company's Common Stock
must be found qualified by the NJCCC. In order to be found qualified, the
Company, its officers, directors, key employees and five percent (5%)
shareholders must demonstrate by clear and convincing evidence their good
character, honesty and integrity and their financial stability, integrity and
responsibility. Any other shareholder or other person associated with the
Company whom the NJCCC deems appropriate, in its discretion, is also required to
be qualified. If a person is required to and fails to submit to qualification
or submits to qualification and is found disqualified by the NJCCC, the NJCCC
may prohibit casinos in New Jersey from doing business with the Company.
However, "institutional investors" (as defined in the NJCCC) may be granted
a waiver of the requirement to be found qualified by the NJCCC. An
institutional investor includes any retirement fund administered by a public
agency for the exclusive benefit of federal, state or local public employees,
investment company registered under the Investment Company Act of 1940,
collective investment trust organized by banks under Part Nine of the Rules of
the Comptroller of the Currency, closed end investment trust, chartered or
licensed life insurance company or property and casualty insurance company,
banking and other chartered or licensed lending institution, and investment
advisor registered under The Investment Advisors Act of 1940. At the discretion
of the NJCCC, a waiver of qualification may be granted to such institutional
investors provided the securities are owned for investment purposes only and the
institutional investor certifies that it has no intention of influencing or
affecting the affairs of the issuer or its holding companies.
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After 30 days following the filing of a CSI license application with the
NJCCC, the Company may seek permission from the NJCCC to conduct specific
business transactions with a New Jersey casino. Such "transactional waivers"
will only be granted in the absence of an objection by the NJDGE. Such
approvals are granted for a maximum term of six (6) months subject to renewal.
A CSI license is issued for an initial period of two years and is thereafter
renewable for four year periods. There is no guarantee that the Company will be
granted an initial license or that, following the issuance of an initial CSI
license or any renewal thereof, the Company will continue to be granted renewals
of the license. Additionally, upon application of the NJDGE, the NJCCC may at
any time review any license issued by it and determine to suspend, revoke or
place conditions on such license.
In addition to the required licensure from the NJCCC, the gaming equipment
manufactured, distributed or sold by the Company to New Jersey casinos is
subject to a technical examination by the NJDGE and approval by the NJCCC for,
at a minimum, quality, design, integrity, fairness, honesty and suitability.
The approval process includes the submission of a model of the machine to the
NJDGE for testing, examination and analysis and for comparison with
documentation of the schematics, block diagram, circuit analysis and written
explanation of the method of operation, odds determination and all other
pertinent information. The model remains in the custody of the NJDGE unless
otherwise directed by the NJCCC. All costs of such testing, examination and
analysis are borne by the Company. As part of this approval process, the NJCCC
may require that the manufacturer of any component of the gaming equipment which
the NJCCC, in its discretion, determines is essential to the gaming operation of
the device submit to licensing. Such components would include the computer
control circuitry which causes or allows the device to operate as a gambling
device. The failure or refusal of such a manufacturer to submit to licensing or
the denial of a license by the NJCCC to such manufacturer would result in the
inability of the Company to distribute and market that gambling device to New
Jersey casinos. Prior to a decision by the NJCCC to approve a particular model
of machine, it may require up to 60 days trial period to test the machine in a
licensed casino. During the trial period, the manufacturer or distributor of
the machine shall not be entitled to receive revenue of any kind whatsoever.
Once a model is approved by the NJCCC, all machines of that model placed in
operation in licensed casinos shall operate in conformity with the model tested
by the NJDGE. Any changes in the design, function or operation of the machine
are subject to prior approval by the NJCCC in consultation with the NJDGE.
MISSISSIPPI REGULATORY MATTERS
The manufacture, sale and distribution of gaming devices for use or play in
Mississippi are subject to the Mississippi Gaming Control Act and the
regulations promulgated thereunder (collectively, the "Mississippi Act"). Such
activities are subject to the licensing and regulatory control of the
Mississippi Gaming Commission (the "Mississippi Commission") and the Mississippi
State Tax Commission (collectively referred to as the "Mississippi Gaming
Authorities"). Although not identical, the Mississippi Act is similar to the
Nevada Gaming Control Act and regulations promulgated thereunder.
On June 20, 1996 the Company was registered by the Mississippi Commission as
a publicly traded corporation (a "Registered Corporation") and the holding
company of Silicon Gaming-Mississippi, Inc. (the "Mississippi Subsidiary").
Also on June 20, 1996 the Mississippi Subsidiary was licensed as a manufacturer
and distributor. SGI and the Mississippi Subsidiary are required to
periodically submit detailed financial and operating reports to the Mississippi
Commission and furnish any other information which the Mississippi Commission
may require. The Company and the Mississippi Subsidiary have received the
various registrations, approvals, permits and licenses in order to engage in
manufacturing, distribution and gaming activities as presently conducted in
Mississippi. Such licenses, registrations and approvals are not transferable,
are initially issued for a two-year period and must be renewed periodically
thereafter.
Similar to Nevada, the Mississippi Commission may investigate and find
suitable any individual who has a material relationship to, or material
involvement with, the Company or the Mississippi Subsidiary, including record or
beneficial holders of any of the voting securities of the Company, holders of
debt obligations, and officers, directors and employees of the Company and the
Mississippi Subsidiary. The Company and the
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Mississippi Subsidiary are required to maintain a current stock ledger in
Mississippi which may be examined by the Mississippi Commission at any time. The
Company believes that all required findings of suitability currently required
have been applied for or obtained. Any applicant for a finding of suitability
must pay all investigative fees and costs of the Mississippi Commission in
connection with such an investigation.
The Mississippi Act requires any person who acquires beneficial ownership of
more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Mississippi Commission and such person may be required to be
found suitable. The Mississippi Act requires that beneficial owners of more
than 10% of a Registered Corporation's voting securities apply to the
Mississippi Commission for a finding of suitability. The Mississippi Commission
has generally exercised its discretion to require a finding of suitability of
any beneficial owner of more than 5% of a Registered Corporation's Common Stock.
Under certain circumstances, an "institutional investor," as defined by
Mississippi Commission policy, which acquires more than 5%, but not more than
10%, of the Registered Corporation's voting securities may apply to the
Mississippi Commission for a waiver of such finding of suitability if such
institutional investor holds the voting securities for investment purposes only.
The Company may not make a public offering of its securities without the
approval of the Mississippi Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Mississippi, or to retire or extend obligations incurred for such purposes.
If it were determined that the Mississippi Act was violated by the
Mississippi Subsidiary, the licenses it holds could be limited, condition,
suspended or revoked, subject to compliance with certain statutory and
regulatory procedures, which action, if taken, could materially adversely affect
the Company's manufacturing and distribution.
FEDERAL REGULATION
The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it
unlawful, in general, for a person to manufacture, deliver, or receive gaming
machines, gaming machine type devices and components across state lines or to
operate gaming machines unless that person has first registered with the
Attorney General of the United States. The Company is required to register and
renew its registration annually. The Company has complied with such
registration requirements. In addition, various record keeping equipment
identification requirements are imposed by the Federal Act. Violation of the
Federal Act may result in seizure and forfeiture of the equipment, as well as
other penalties.
NATIVE AMERICAN GAMING
Gaming on Native American lands, including the terms and conditions under
which gaming equipment can be sold or leased to Native American tribes, is or
may be subject to regulation under the laws of the tribes, the laws of the host
state, the Indian Gaming Regulatory Act of 1988 ("IGRA"), which is administered
by the National Indian Gaming Commission (the "NIGC") and the Secretary of the
U.S. Department of the Interior (the "Secretary"), and also may be subject to
the provisions of certain statutes relating to contracts with Native American
tribes, which are administered by the Secretary. As a precondition to gaming
involving gaming machines, IGRA requires that the tribe and the state have
entered into a written agreement (a "tribal-state compact") that specifically
authorizes such gaming, and that has been approved by the Secretary, with notice
of such approval published in the Federal Register. Tribal-state compacts vary
from state to state. Many require that equipment suppliers meet ongoing
registration and licensing requirements of the state and/or the tribe and some
impose background check requirements on the officers, directors, and
shareholders of gaming equipment suppliers. Under IGRA, tribes are required to
regulate all commercial gaming under ordinances approved by the NIGC. Such
ordinances may impose standards and technical requirements on gaming hardware
and software, and may impose registration, licensing and background check
requirements on gaming equipment suppliers and their officers, directors, and
shareholders.
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APPLICATION OF FUTURE OR ADDITIONAL REGULATORY REQUIREMENTS
In the future, the Company intends to seek the necessary registrations,
licenses, approvals and findings of suitability for the Company, its product and
its personnel in other U.S. and foreign jurisdictions in which the Company
identifies significant sales potential for its product. However, there can be
no assurance that such registrations, licenses, approvals or findings of
suitability will be obtained and will not be revoked, suspended or conditioned
or that the Company will be able to obtain the necessary approvals for its
future products as they are developed in a timely manner, or at all. If a
registration, license, approval or finding of suitability is required by a
regulatory authority and the Company fails to seek or does not receive the
necessary registration, license, approval or finding of suitability, the Company
may be prohibited from selling its product for use in the respective
jurisdiction or may be required to sell its product through other licensed
entities at a reduced profit to the Company.
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RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's consolidated ratio of earnings
to fixed charges for the periods shown.
<TABLE>
<CAPTION>
Period from Nine-months Year Year
inception Year ended ended ended ended
(July 17, 1993) March 31, December 31, December 31, December 31,
to March 31, 1994 1995 1995 1996 1997
---------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges
-- -- -- -- --
</TABLE>
For the purposes of calculating the ratio of earning to fixed charges, (i)
earnings consists of consolidated income (loss) before income taxes plus fixed
charges and (ii) fixed charges consists of interest expense incurred and the
portion of rental expense under operating leases deemed by the Company to be
representative of the interest factor. Earnings were inadequate to cover fixed
charges by $1,844,000, $13,557,000 and $21,746,000 for the year ended March 31,
1995 and the years ended December 31, 1996 and 1997, respectively. The Company
had no fixed charges during the period from inception (July 27, 1993) through
March 31, 1994 and the nine months ended December 31, 1995.
DESCRIPTION OF NOTES AND WARRANTS
The Notes were issued pursuant to the Securities Purchase Agreement. The
Warrants were issued pursuant to the Warrant Agreement (as defined below). A
copy of the form of Note, the Securities Purchase Agreement, the Warrant
Agreement, the form of Warrant and the Registration Rights Agreement (as defined
below) have been filed as exhibits to the Registration Statement of which this
Prospectus forms a part. The following summaries of certain provisions of the
Notes, the Securities Purchase Agreement, the Warrant Agreement, the Warrant and
the Registration Rights Agreement do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, all of the provisions
of the Notes, the Securities Purchase Agreement, the Warrant Agreement, the
Warrant and the Registration Rights Agreement, including the definitions therein
of certain terms which are not otherwise defined in this Prospectus. Wherever
particular provisions or defined terms of the Note, the Securities Purchase
Agreement, the Warrant Agreement, the Warrant or the Registration Rights
Agreement are referred to, such provisions or defined terms are incorporated
herein by reference. References in this section to the "Company" are solely to
Silicon Gaming, Inc., a California corporation, and not its Subsidiaries unless
otherwise noted.
DESCRIPTION OF NOTES
General
The Notes are senior discount obligations of the Company, in the aggregate
principal amount of $30 million secured by all of the assets of the Company and
its Subsidiaries. Of the $30 million, the Company has agreed to redeem $5
million in principal amount on September 30, 2001. The remaining $25 million
matures on September 30, 2002. The Notes bear interest at the rate of 12 1/2%
per annum from January 1, 1999, until maturity. Interest is payable
semiannually in cash on January 1, and July 1 of each year, commencing on July
1, 1999.
The Notes are redeemable (i) at the Company's option in whole or from time to
time in part at the various times and redemption prices set forth in
"Description of Notes--Redemption--Optional Redemption," and (ii) upon the
failure of the purchaser of the Notes (the "Purchaser"), the holders of the
Notes (the "Holders") or the beneficial owners of the Notes to be licensed,
qualified or found suitable under any gaming laws of any jurisdiction ("Gaming
Laws") as determined by any gaming governmental authority ("Gaming Authority").
Notwithstanding the foregoing, the Company has agreed to redeem $5 million in
principal amount of the Notes on September 30, 2001.
If not previously redeemed, the Notes are redeemable at the Holders' option
(i) in whole or in part, upon a Change of Control (as defined below) at any time
within 30 days after the completion of an Offer made as a result of a Change of
Control (as defined below), at a redemption price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest to the Purchase Date (as
defined below), subject to certain
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conditions set forth in the Securities Purchase Agreement or (ii) following a
Securities Sale or a Mezzanine Debt Financing, from the Net Cash Proceeds of
such Securities Sale or Mezzanine Debt Financing; provided that an Offer to make
a Securities Sale or Mezzanine Debt Financing Redemption shall be made by the
Company only if, and to the extent that, the aggregate amount of Net Cash
Proceeds from all such Securities Sales and Mezzanine Debt Financings exceeds
$40,000,000.
The Securities Purchase Agreement contains financial covenants, restrictions
and limitations on the Company, including, but not limited to, limitations on
the making of Restricted Payments, limitations on the incurrence of various
types of indebtedness described in the Securities Purchase Agreement
("Indebtedness"), limitations on Liens, limitations on the entering into of
certain transactions with Affiliates, limitations on the Company's Subsidiaries'
ability to agree to Payment Restrictions and the undertaking of various
issuances, dispositions or repurchases of securities or assets by the Company.
Redemption and Offers to Purchase
Optional Redemption
-------------------
The Notes are redeemable at the Company's option on at least 30 and not more
than 60 days' notice, in whole, or from time to time in part, at the price per
$1,000 principal amount at maturity set forth below (the "Accreted Value"),
together with accrued and unpaid interest to the Redemption Date.
Price Per $1,000
Period Principal Amount
------ ----------------
April 1998 $ 894.61
May 1998 $ 906.85
June 1998 $ 919.09
July 1998 $ 931.32
August 1998 $ 943.56
September 1998 $ 955.79
October 1998 $ 969.05
November 1998 $ 982.30
December 1998 $ 995.56
January 1999 $ 997.20
February 1999 $ 998.84
After February 28, 1999 $1,000.00
Notwithstanding any other redemption provision in the Notes or the Securities
Purchase Agreement, if any Gaming Authority requires that the Purchaser or any
Holder or beneficial owner of the Notes, Warrants or Shares must be licensed,
qualified or found suitable under any Gaming Laws in order to maintain any
material gaming license, registration or approval of the Company, or its Gaming
Subsidiaries under such Gaming Laws, and the Purchaser, Holder or beneficial
owner of the Notes, Warrants or Shares fails to apply for a license,
qualification or finding of suitability within 30 days after being requested to
do so by such Gaming Authority (or such lesser period that may be required by
such Gaming Authority), or if such Purchaser, Holder or beneficial owner is not
so licensed, qualified or found suitable, the Purchaser, Holder or beneficial
owner of such securities shall comply with any order by such Gaming Authority
that such Person dispose of any such securities held by it; provided, however,
that in the event the Purchaser, Holder or beneficial owner of such securities
does not comply with such order within the required period, the Company shall
have the option as its sole remedy with respect to the Notes to call for
redemption of the Notes of such Purchaser, Holder or beneficial owner at a price
in cash equal to the Accreted Value thereof on the Redemption Date, plus accrued
and unpaid interest to the Redemption Date, and except as may be required by any
Gaming Authority, the Company shall comply with the procedures contained in the
Notes for their redemption. The Company shall pay or reimburse any Purchaser,
Holder or beneficial owner
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<PAGE>
of the Securities who is required to apply for a license, qualification or
finding of suitability, for the costs or expenses incurred therewith except with
respect to any Purchaser, Holder or beneficial owner of the Securities whose
affirmative actions have directly caused such Purchaser, Holder or beneficial
owner to so apply.
Mandatory Redemption on September 30, 2001
------------------------------------------
On September 30, 2001, the Company is required to redeem $5 million in
principal amount of the Notes (without prepayment penalty or premium) at 100% of
the principal amount so redeemed, plus any accrued and unpaid interest thereon
to the Redemption Date.
Mandatory Offer by the Company Upon a Change of Control, Securities Sale or
---------------------------------------------------------------------------
Mezzanine Debt Financing
------------------------
If not previously redeemed, the Notes will be subject to redemption (a "Change
of Control Redemption") at the Holders' option, in whole or in part, at any time
within 30 days after the completion of an Offer made as a result of a Change of
Control (but with respect to any partial tender of Notes, the Company shall only
be required to purchase principal amounts in integral multiples of $1,000), at a
redemption price in cash equal to 101% of the principal amount thereof, plus
accrued and unpaid interest to the Purchase Date, subject to certain conditions
set forth in the Securities Purchase Agreement.
In addition, if not previously redeemed, as soon as practicable, but in no
event later than 10 Business Days after any date (with respect to both a
Securities Sale or a Mezzanine Debt Financing, a "Repayment Trigger Date") that
the aggregate amount of Net Cash Proceeds from all Securities Sales and
Mezzanine Debt Financings exceed $40,000,000, the Company shall commence an
Offer to purchase the maximum principal amount of the Notes that may be
purchased out of such Net Cash Proceeds, at an offer price per $1,000 principal
amount equal to the Accreted Value in the period in which the Purchase Date
occurs, plus accrued and unpaid interest to the Purchase Date. To the extent
that any such Net Cash Proceeds remain after completion of an Offer, the Company
may use the remaining amount for any purpose permitted by the Securities
Purchase Agreement.
Within 10 days after any Change of Control, any Securities Sale or any
Mezzanine Debt Financing, the Company is obligated to give to each Holder all
instructions and materials necessary to enable them to tender the Notes pursuant
to any Offer, as provided in the Securities Purchase Agreement.
The term "Change of Control" means any transaction or series of transactions
in which any of the following occurs: (a) any Person or group (within the
meaning of Rule 13d-3 under the Exchange Act and Sections 13(d) and 14(d) of the
Exchange Act) becomes the direct or indirect "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act) of 25% or more of the issued and outstanding
shares of Capital Stock entitled to vote in the election of directors of the
Company or the Surviving Person (if other than the Company); or (b) individuals
who on September 30, 1997, constituted the Company's Board of Directors
(together with any new directors whose election by such Board of Directors or
whose nomination for election by the Company's stockholders was approved by a
vote of at least a majority of the Company directors then still in office who
were either directors on September 30, 1997, or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office.
The term "Offer" means the Company's irrevocable offer to repurchase the Notes
for cash after a Change of Control, Securities Sale or Mezzanine Debt Financing.
Upon a Change of Control, Securities Sale or Mezzanine Financing, each Holder
will have certain rights, at the Holder's option, to require the Company to
repurchase all or a portion of such Holder's Notes. If a Change of Control,
Securities Sale or Mezzanine Financing were to occur, there can be no assurance
that the Company would have or be able to obtain sufficient funds to pay the
purchase price for all Notes tendered by the Holders thereof. Any future credit
agreements or other agreements relating to other indebtedness (including Senior
Indebtedness) to which the Company becomes a party may contain restrictions and
provisions which prohibit the Company from repurchasing or redeeming any Notes
or provide that a Change of Control, Securities Sale or Mezzanine Financing
would constitute an event of default thereunder. If a Change of Control,
Securities Sale or Mezzanine Financing occurs at a time when the Company is
prohibited from repurchasing or redeeming Notes, the Company could seek the
consent of its lenders to the repurchase or redemption of Notes or could attempt
to
25
<PAGE>
refinance the borrowings that contain such prohibition. If the Company does
not obtain such a consent or repay such borrowings, the Company would remain
prohibited from repurchasing or redeeming Notes. In such case, the Company's
failure to repurchase tendered Notes would constitute an Event of Default under
the Securities Purchase Agreement, which could, in turn, constitute a further
default under the other Indebtedness that the Company may enter into from time
to time. In such circumstances, the subordination provisions in the Securities
Purchase Agreement would likely restrict payments to the Holders.
There is no sinking fund provided for the Notes.
Payment
The principal of, premium, if any, and interest (except defaulted interest)
on the Notes will be payable in money of the United States, against surrender
thereof of the Notes to the Company. The Company will pay interest on the Notes
(except defaulted interest) to the Person who is the registered Holder of the
Notes at the close of business on the record date for the next Interest Payment
Date even if such Notes are canceled after such record date and on or before
such Interest Payment Date. Holders must surrender Notes to the Company to
collect principal payments on such Notes. The Company will pay principal,
premium, if any, and interest in money of the United States that at the time of
payment is legal tender for payment of public and private debts. However, the
Company may pay principal, premium, if any, and interest by wire transfer of
Federal funds, or interest by check payable in such money, and any such check
may be mailed to a Holder's registered address. The Company shall pay interest
on overdue principal and premium, if any, from time to time on demand at the
rate of 1.5% per annum in excess of the interest rate then in effect and shall
pay interest on overdue installments of interest (without regard to any
applicable grace periods) from time to time on demand at the same rate to the
extent lawful. The Company shall also pay interest from time to time after
March 31, 1998, at the rate of 2.0% per annum in excess of the interest rate
then in effect if the Company fails to provide adequate evidence of the grant of
a security interest to the Holders. Interest will be computed on the basis of a
360-day year of twelve 30-day months.
Limitation on Restricted Payments
The Company and its Subsidiaries are restricted from directly or indirectly
making any Restricted Payment, except (i) payments, prepayments, repurchases,
redemptions and acquisitions with respect to Indebtedness not incurred in
violation of the Securities Purchase Agreement, and (ii) Restricted Payments by
the Company or its Subsidiaries if (A) at the time of and after giving effect to
the proposed Restricted Payment no Default or Event of Default shall have
occurred and be continuing or would occur as a consequence thereof, (B) at the
time of and immediately after giving effect to the proposed Restricted Payment,
the Company could incur at least $1.00 of additional Indebtedness pursuant to
the Securities Purchase Agreement and (C) at the time of and immediately after
giving effect to the proposed Restricted Payment (the value of any such payment
if other than cash, as determined by the Board of Directors, whose determination
shall be conclusive and evidenced by a Board Resolution, provided that in the
event such value exceeds $1,000,000, such determination shall be supported by a
fairness opinion of an Independent Financial Advisor) the aggregate amount of
all Restricted Payments (excluding all payments, investments, redemptions,
repurchases, retirements and other acquisitions specifically allowed for in the
Securities Purchase Agreement) does not exceed an amount equal to the sum of (A)
50% of the Consolidated Net Income accrued during the period (treated as one
accounting period) from the first day of the first month of the first fiscal
quarter after the date of the Securities Purchase Agreement in which
Consolidated Net Income is positive through the last full fiscal quarter for
which quarterly or annual financial statements are available prior to the date
of such Restricted Payment (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit), plus (B) an amount equal to 100% of the
aggregate Net Cash Proceeds received by the Company from the issuance and sale
(other than to a Subsidiary of the Company) of Qualified Capital Stock to the
extent that such proceeds are not used to redeem, repurchase, return or
otherwise acquire Capital Stock or any Indebtedness of the Company or any
Subsidiary pursuant to the redemption, repurchase, retirement or other
acquisition for value of any capital stock or any Indebtedness of the Company or
any Subsidiary in exchange for, or out of the Net Proceeds of, the substantially
concurrent sale (other than to the Company or a Subsidiary) of qualified Capital
Stock of the Company, plus (C) an amount equal to 100% of the aggregate
principal amount of any Indebtedness incurred after the date hereof converted
into Qualified Capital Stock. Notwithstanding the foregoing, the following
Restricted Payments may be made: (i) the payment of any dividend within 60 days
after the date of declaration thereof, if at said date of declaration such
payment would have complied with the provisions of the Securities Purchase
26
<PAGE>
Agreement; (ii) the payment of any dividend on the Company's Redeemable
Convertible Preferred Stock in accordance with the dividend provisions set forth
in the Company's Articles of Incorporation for such Redeemable Convertible
Preferred Stock as in effect on the date of the Securities Purchase Agreement;
(iii) the redemption, repurchase, retirement or other acquisition for value of
any Capital Stock or any Indebtedness of the Company or any Subsidiary in
exchange for, or out of the Net Cash Proceeds of, the substantially concurrent
sale (other than to the Company or a Subsidiary of the Company) of Qualified
Capital Stock of the Company; (iv) the redemption of the Notes under the
circumstances set forth in the Securities Purchase Agreement; and (v) Restricted
Payments which do not exceed an aggregate of $1,000,000.
Limitation on Transactions with Affiliates
The Company and its Subsidiaries are limited from entering into any
transaction or series of transactions to sell, lease, transfer, exchange or
otherwise dispose of any of their properties or assets to or to purchase any
property or assets from, or for the direct or indirect benefit of, an Affiliate
of the Company or of any Subsidiary of the Company, make any Investment in or
enter into any contract, agreement, understanding, loan, advance or Guarantee
with, or for the direct or indirect benefit of, an Affiliate of the Company or
of any Subsidiary of the Company (each, including any series of transactions
with one or more Affiliates, an "Affiliate Transaction"), unless the Board of
Directors of the Company or the relevant Subsidiary determines, as evidenced by
a Board Resolution, that the terms of such Affiliate Transaction are fair and
reasonable to the Company or the relevant Subsidiary and no less favorable to
the Company or the relevant Subsidiary than those that could have been obtained
at that time in a comparable arms-length transaction by the Company or such
Subsidiary with an unrelated Person. In addition, neither the Company nor any
of its Subsidiaries shall enter into an Affiliate Transaction involving or
having a potential aggregate value of more than $1,000,000 unless, in addition
to the requirements above, (i) such transaction has been approved by a majority
of the Board of Directors of the Company or the relevant Subsidiary who have no
direct or indirect interest in the Affiliate Transaction or in the Affiliate
that is a party to the Affiliate Transaction, or in any other party that is an
Affiliate of any such Affiliate, and (ii) the Company delivers to the Holders an
Officers' Certificate certifying that such conditions have been satisfied. In
addition, neither the Company nor any of its Subsidiaries shall enter into an
Affiliate Transaction involving or having a potential aggregate value of more
than $5,000,000 unless, in addition to all of the requirements above, the Board
of Directors of the Company or the relevant Subsidiary first has received a
written opinion from an Independent Financial Advisor for the benefit of the
Company and the Holders, which firm is not receiving any contingent fee or other
consideration directly or indirectly related to the successful completion of the
Affiliate Transaction, to the effect that the proposed Affiliate Transaction is
fair to the Company from a financial point of view.
The limitations on transactions with Affiliates shall not apply to (i) any
Restricted Payment that is made in compliance with the provisions in the
Securities Purchase Agreement referenced in "Limitations on Restricted
Payments," (ii) the reasonable and customary fees and compensation paid to or
indemnity provided on behalf of, officers, directors, employees or consultants
of the Company or any Subsidiary, as determined by the Board of Directors of the
Company or such Subsidiary or the senior management thereof in good faith, (iii)
transactions exclusively between or among the Company and any Wholly-Owned
Subsidiary or exclusively between or among Wholly-Owned Subsidiaries, provided
such transactions are not otherwise prohibited by the Securities Purchase
Agreement, and (iv) any Affiliate Transaction in existence as of September 30,
1997.
Limitation on Issuances and Dispositions of Capital Stock of Subsidiaries
The Company (a) is restricted from permitting any Subsidiary to transfer,
convey, sell, or otherwise dispose of any Capital Stock, or securities
convertible into or exercisable or exchangeable for, or options, warrants,
rights or any other interest with respect to, Capital Stock of such Subsidiary
to any Person (other than the Company or a Wholly-Owned Subsidiary) unless such
transfer, conveyance, sale, or other disposition is of 100% of the Capital Stock
of such Subsidiary held by the Company and the Net Cash Proceeds from such
transactions are applied in accordance with the limitation on the sale of assets
set forth in the Securities Purchase Agreement and (b) is restricted from
permitting any Subsidiary to issue shares of its Capital Stock (other than
directors' qualifying shares), or securities convertible into or exercisable or
exchangeable for, or options, warrants, rights or any other interest with
respect to, its Capital Stock to any Person other than to the Company or a
Wholly-Owned Subsidiary.
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<PAGE>
Events of Default and Acceleration
The following constitute "Events of Default" under the Securities Purchase
Agreement: (i) failure by the Company to make any payment in respect of (A) the
principal of or premium, if any, on the Notes as the same shall become due,
whether at maturity, upon acceleration, redemption or otherwise, or (B) interest
on or in respect of the Notes as the same shall become due, and such failure
shall continue for a period of 15 Business Days; (ii) failure by the Company for
30 days after receipt of notice from the Holders of at least 25% of the
principal amount of the outstanding Notes to comply with any other provisions of
the Securities Purchase Agreement or the Notes; (iii) default under any
mortgage, agreement or instrument under which there may be Incurred or by which
there may be secured or evidenced any Indebtedness for money borrowed by the
Company or any of its Subsidiaries (or the payment of which is guaranteed by the
Company or any of its Subsidiaries) whether such Indebtedness now exists, or is
created after the date hereof if (A) such default results in the acceleration of
such Indebtedness prior to its express maturity or shall constitute a default in
the payment of such Indebtedness at final maturity of such Indebtedness, and (B)
the principal amount of any such Indebtedness that has been accelerated or not
paid at maturity, when added to the aggregate principal amount of all other such
Indebtedness that has been accelerated or not paid at maturity, exceeds
$1,000,000; (iv) failure by the Company or any of its Subsidiaries to pay final
judgments, the uninsured portion of which exceeds $1,000,000, which judgments
are not paid, discharged, bonded or stayed for a period of 90 days after the
date of entry thereof; (v) if under any Bankruptcy Law, (A) the Company or any
Subsidiary commences a voluntary case, consents to the entry of an order for
relief against it in an involuntary case, consents to the appointment of a
Custodian of it or for all or substantially all of its Property, or makes a
general assignment for the benefit of its creditors, or (B) a court of competent
jurisdiction enters an order or decree, and such order or decree remains
unstayed and in effect for 60 days, that is for relief against the Company or
any Subsidiary in an involuntary case, appoints a Custodian of the Company or
any Subsidiary or for all or substantially all of the Property of the Company or
any Subsidiary, or orders the liquidation of the Company or any Subsidiary; and
(vi) any of the Transaction Documents ceases, for any reason, to be in full
force and effect in any material respect, except as a result of an amendment,
waiver or termination thereof as contemplated or permitted thereby, or the
Company shall so assert in writing. Any notice of default delivered to the
Company by the Holders must be in writing and must specify the Event of Default,
demand that it be remedied and state that the notice is a "Notice of Default."
Acceleration
If an Event of Default (other than one that occurs in connection with a
bankruptcy) occurs and is continuing, the Holders of at least 25% in principal
amount of the then outstanding Notes may declare all outstanding Notes to be due
and payable immediately and, upon such declaration, the principal amount of, and
date of payment shall be due and payable immediately. The principal amount of,
and premium, if any, and any accrued and unpaid interest on, all outstanding
Notes shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of any Holder upon a bankruptcy event.
To the extent permitted under the Securities Purchase Agreement, the Holders
of a majority in aggregate principal amount of the then outstanding Notes by
notice to the Company may rescind any declaration of acceleration of the Notes
and its consequences if (i) the rescission would not conflict with any judgment
or decree, (ii) all existing Defaults and Events of Default (other than the
nonpayment of principal of, or premium, if any, or interest on, the Notes which
have become due by such declaration) shall have been cured or waived, and (iii)
the Company has delivered to the Holders an Officers' Certificate to the effect
of clauses (i) and (ii) above.
In the event of a declaration of acceleration because an Event of Default
related to a default under a mortgage agreement or instrument evidencing any
indebtedness for money borrowed by the Company or its Subsidiaries has occurred
and is continuing, such declaration of acceleration shall be automatically
rescinded and annulled if either (i) the holders of the Indebtedness which is
the subject of such Event of Default have waived such failure to pay at maturity
or have rescinded the acceleration in respect of such Indebtedness within 10
days of such maturity or declaration of acceleration, as the case may be, and no
other Event of Default has occurred during such 10-day period which has not been
cured or waived, or (ii) such Indebtedness shall have been discharged or the
maturity thereof shall have been extended such that it is not then due and
payable, or the underlying default has been cured within 10 days of such
maturity or declaration of acceleration as the case may be.
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<PAGE>
The Company will be required to furnish to the Selling Shareholder a statement
as to the performance by the Company of certain of its obligations under the
Securities Purchase Agreement and as to any default in such performance.
Amendments, Modification and Waiver
The Company may amend or supplement the Securities Purchase Agreement or the
Notes without the consent of any Holder to: (i) cure any ambiguity, defect or
inconsistency; provided that such amendment does not adversely affect the rights
of any Holder; (ii) provide for uncertificated Notes in addition to or in place
of certificated Notes; (iii) provide for the assumption of the Company's
obligations to the Holders in the event of any Disposition involving the Company
that is permitted by the Securities Purchase Agreement in a merger or
consolidation in which the Company is not the Surviving Person; or (iv) make any
change that would (A) provide any additional rights or benefits to Holders or
(B) not adversely affect the legal rights under the Securities Purchase
Agreement of any Holder.
In general, the Securities Purchase Agreement and the Notes may be amended or
supplemented with the written consent of the Holders of at least a majority of
the aggregate principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for the Notes), and
any existing Default or Event of Default or compliance with any provision of the
Securities Purchase Agreement or the Notes may be waived with the consent of
Holders of at least a majority of the aggregate principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for the Notes). Without the consent of each Holder affected,
no amendment, supplement or waiver to the Securities Purchase Agreement is
allowed to: (i) reduce the principal amount of Notes whose Holders must consent
to an amendment, supplement or waiver; (ii) reduce the principal of or change
the fixed maturity of any Note, or alter the provisions with respect to the
redemption of the Notes in a manner adverse to the Holders; (iii) reduce the
rate of or change the time for payment of interest on any Note; (iv) waive a
Default or Event of Default in the payment of principal of, or premium, if any,
or interest on, the Notes (except that Holders of at least a majority in
aggregate principal amount of the then outstanding Notes may (A) rescind an
acceleration of the Notes that resulted from a non-payment default, and (B)
waive the payment default that resulted from such acceleration); (v) make any
Note payable in money other than that stated in the Notes; (vi) make any change
in the provisions of the Securities Purchase Agreement relating to waivers of
past Defaults or the rights of Holders to receive payments of principal of, or
premium, if any, or interest on, the Notes; (vii) waive a redemption payment
with respect to any Note; or (viii) make any change regarding a waiver of past
defaults or the rights of Holders to receive payments.
After an amendment or supplement becomes effective, the Company is required to
mail to each Holder affected thereby a notice briefly describing the amendment,
supplement or waiver. Any failure of the Company to mail such notice, or any
defect therein, shall not, however, in any way impair or affect the validity of
any such amended or supplemental Agreement or waiver.
Except as otherwise specified in the Securities Purchase Agreement, if any
consent or approval of the Holders is required pursuant to the terms of the
Securities Purchase Agreement, such consent or approval shall be deemed to have
been given if given by at least a majority of the aggregate principal amount of
then outstanding Senior Discount Notes.
Until an amendment, supplement or waiver becomes effective, a consent to it by
a Holder of a Note is a continuing consent by the Holder and every subsequent
holder of a Note or portion of a Note that evidences the same Indebtedness as
the consenting Holder's Note, even if notation of the consent is not made on any
such Note. However, any such Holder or subsequent Holder may revoke the consent
as to his or her Note or portion of a Note if the Company receives the notice of
revocation before the date on which the Company mails to the Holders an
Officers' Certificate certifying that the Holders of the requisite principal
amount of Notes have consented (and not theretofore revoked such consent) to the
amendment or waiver.
The Company may, but shall not be obligated to, fix a record date for the
purpose of determining the holders of Notes entitled to consent to any amendment
or waiver. If a record date is fixed, then notwithstanding the provisions of
the preceding paragraph, those Persons who were holders of Notes at such record
date (or their duly designated proxies), and only those Persons, shall be
entitled to consent to such amendment or
29
<PAGE>
waiver or to revoke any consent previously given, whether or not such Persons
continue to be holders of Notes after such record date. No consent shall be
valid or effective for more than 90 days after such record date.
Transfer and Exchange
When Notes are presented to the Company with a request to register a
transfer or to exchange them for an equal principal amount of Notes of other
authorized denominations, the Company shall register the transfer or make the
exchange if its requirements for such transaction are met; provided, however,
that any Note presented or surrendered for registration of transfer or exchange
shall be duly endorsed or accompanied by a written instruction of transfer in
form satisfactory to the Company or duly executed by the Holder of such Note or
by its attorney duly authorized in writing. The Company shall not be required
to issue, register the transfer of or exchange any Note (i) selected for
redemption, in whole or in part, except the unredeemed portion of any Note being
redeemed in part may be transferred or exchanged, or (ii) during an Offer if
such Note is tendered pursuant to such Offer and not withdrawn.
No service charge shall be made for any registration of transfer or exchange
(except as otherwise expressly permitted in the Securities Purchase Agreement),
but the Company may require payment of a sum sufficient to cover any transfer
tax or similar governmental charge payable in connection therewith (other than
any such transfer tax or similar governmental charge payable upon exchanges
pursuant to the Securities Purchase Agreement which the Company shall pay).
Prior to due presentment for registration of transfer of any Note, the Company
may deem and treat the Person in whose name any Note is registered as the
absolute owner of such Note (whether or not such Note shall be overdue and
notwithstanding any notation of ownership or other writing on such Note made by
anyone other than the Company) for the purpose of receiving payment of principal
of, and premium, if any, and interest on, such Note and for all other purposes,
and notice to the contrary shall not affect the Company.
DESCRIPTION OF WARRANTS
General
The Warrants give the holder thereof the right to purchase up to an aggregate
of 375,000 shares (subject to adjustment) of the Company's Common Stock at a
purchase price of $15.4375 per share (the "Initial Exercise Price"). The
Warrants may be exercised at any time prior to September 30, 2002 after (a)
March 30, 1998, (b) eleven (11) business days following the commencement of a
tender offer (as provided in Rule 14d-2 of the Exchange Act (as defined below))
with respect to the Common Stock pursuant to Regulation 14D promulgated under
the Securities Exchange Act of 1934, as amended, unless the Company has
published, sent or given to securityholders pursuant to Rule 14e-2(a) under the
Exchange Act a statement that the Company recommends rejection of such tender
offer (a "Rejection Recommendation"), (c) after a Rejection Recommendation, if
and upon the public announcement by the Company, a filing by the Company with
the Securities and Exchange Commission, or the sending by the Company to
securityholders of a statement pursuant to Rule 14e-2(b) under the Exchange Act,
in each case, which changes the Company's position with respect to such tender
offer to a recommendation of acceptance of such tender offer or an expression of
no opinion with respect to such tender offer, (d) immediately prior to
consummation by the Company of any consolidation or merger with any entity
(other than a wholly-owned subsidiary of the Company) other than a consolidation
or merger as a result of which each of the stockholders of the Company owns,
immediately after consummation of such consolidation or merger, directly or
indirectly, at least 70% of the percentage of the fully diluted capital stock of
the Company or the surviving entity of such consolidation or merger which such
stockholder owned immediately prior to the consummation of such consolidation or
merger, calculated without giving effect to the issuance as part of such
consolidation or merger of up to 375,000 shares of Common Stock upon exercise of
the Warrants, or (e) the consummation by the Company of any sale, transfer or
other disposition of all or substantially all of its property, assets or other
business, other than to a wholly-owned subsidiary of the Company.
Exercise
The Warrants may be exercised by surrendering the certificates representing
such Warrants to the Company at its headquarters, together with the Election to
Purchase form duly completed and executed, accompanied by payment in full, to
the Company of the Exercise Price for each Warrant Share in respect of which
such Warrants are being exercised. Such Exercise Price shall be paid in full by
(i) cash or a certified check or a
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<PAGE>
wire transfer in same day funds in an amount equal to the Exercise Price
multiplied by the number of Warrant Shares then being purchased or (ii) delivery
to the Company of that number of shares of Common Stock having a Fair Market
Value (as defined) equal to the Exercise Price multiplied by the number of
Warrant Shares then being purchased. In the alternative, the Holder of a Warrant
Certificate may exercise its right to purchase some or all of the Shares subject
to such Warrant Certificate, on a net basis, such that, without the exchange of
any funds, such Holder receives that number of Warrant Shares subscribed to
pursuant to such Warrant Certificate less that number of shares of Common Stock
having an aggregate Fair Market Value at the time of exercise equal to the
aggregate Exercise Price that would otherwise have been paid by such Holder for
the number of Warrant Shares subscribed to pursuant to such Warrant Certificate
(a "Net Cashless Exercise").
Adjustment to Exercise Price
The Exercise Price of the Warrants shall be subject to adjustment subject to
the terms set forth in the Warrant Agreement in the event of (i) declarations by
the Company of dividends on its Common Stock or distributions on the outstanding
shares of its Common Stock in shares of its Common Stock, (ii) subdivision or
reclassification of the outstanding shares of its Common Stock into a greater
number of shares or (iii) combinations or reclassifications by the Company of
the outstanding shares of its Common Stock into a smaller number of shares. In
addition, the Exercise Price of the Warrants shall be subject to adjustment in
case (i) the Company fixes a record date for the issuance of rights, options,
warrants or convertible or exchangeable securities to all holders of its Common
Stock entitling them (for a period which, by its express terms, expires within
45 days after such record date) to subscribe for or purchase shares of its
Common Stock at a price per share less than the Current Market Price of a share
of Common Stock of the Company on such record date or (ii) the Company fixes a
record date for the making of a distribution to all holders of shares of its
Common Stock (i) of shares of any class other than its Common Stock or (ii) of
evidences of its indebtedness or (iii) of assets (excluding cash dividends or
distributions. The Exercise Price of the Warrants shall be subject to
adjustment as set forth in the Warrant Agreement in the event the Company issues
or sells any shares of Common Stock or any rights, options, warrants or
convertible or exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock (excluding Excluded Securities) at a price per
share less than the fair market value of the Common Stock on the date of such
issuance or sale. Lastly, the Exercise Price of the Warrants shall be subject
to adjustment as set forth in the Warrant Agreement in the case of any
Reorganizations (as defined) involving the Company.
Payment of Taxes and Charges
The Company will pay all taxes (other than income taxes) and other government
charges in connection with the issuance or delivery of the Warrants and the
initial issuance or delivery of the Shares upon the exercise of any Warrants and
payment of the Exercise Price. The Company shall not, however, be required to
pay any additional transfer taxes in connection with the subsequent transfer of
Warrants or any transfer involved in the issuance and delivery of the Shares in
a name other than the name in which the Warrants to which such issuance relates
were registered, and, if any such tax would otherwise be payable by the Company,
no such issuance or delivery shall be made unless and until the person
requesting such issuance has paid to the Company the amount of any such tax, or
it is established to the reasonable satisfaction of the Company that any such
tax has been paid.
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Registration Rights
The Company has entered into a Registration Rights Agreement with the Selling
Shareholder dated September 30, 1997 (the "Registration Rights Agreement"),
pursuant to which the Company has agreed to, at the Company's expense and for
the benefit of the holders of the Common Stock issuable upon exercise of the
Warrants, (i) file with the Commission within 270 days after the date of
original issuance of the Notes (the "Target Filing Date"), a registration
statement (the "Shelf Registration Statement") covering resales of the Shares,
(ii) use its best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act 30 days after the earlier of (a) the
Target Filing Date or (b) the date on which the Shelf Registration Statement is
filed with the Commission and (iii) use its best efforts to keep continuously
effective the Shelf Registration Statement until the longer of the period of
time between the date the Shelf Registration Statement is declared effective and
(a) the date which is 24 months following the date the Shelf Registration
Statement is declared effective, or (b) if such holder is an Affiliate of the
Company, the date which is three months after the date on which such holder of
the Shares ceases to be an Affiliate of the Company, provided that the Company
first provides such holder of the Shares with an opinion of counsel to such
effect (the "Effectiveness Period"). The Registration Statement of which this
Prospectus forms a part has been filed by the Company pursuant to the
Registration Rights Agreement. The Company will be permitted to suspend the use
of the prospectus which is part of the Shelf Registration Statement in
connection with the sales of the Registrable Securities during certain periods
of time under certain circumstances relating to pending corporate developments,
public filings with the Commission and other events.
In the event that during the Effectiveness Period the Company suspends the use
of the prospectus of which the Shelf Registration Statement is a part more than
three times during any period of twelve consecutive months or for more than 30
days, whether or not consecutive, then the Company shall pay liquidated damages
to each Holder in the amount of $3.25 per 1,000 Shares included in the Shelf
Registration Statement for each week during which the suspension is in effect.
The weekly liquidated damages payable by the Company to each holder as a result
of the continuance of a suspension period shall increase by an amount equal to
$3.25 per 1,000 Shares 60 days after receipt of the suspension notice. The
Company has agreed in the Registration Rights Agreement to use its reasonable
efforts to cause the Shares issuable upon exercise of the Warrants to be quoted
on the Nasdaq National Market, or, if the Common Stock is not then quoted on the
Nasdaq National Market, to be listed on such exchange or market in the United
States as the Common Stock is then listed, upon effectiveness of the Shelf
Registration Statement.
This summary of certain provisions of the Registration Rights Agreement does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Registration Rights Agreement, a copy of
which has been filed as Exhibit 4.3 to the Registration Statement of which this
Prospectus forms a part.
Governing Law
The Securities Purchase Agreement, the Notes, the Warrant Agreement, the
Warrant and the Registration Rights Agreement are governed by and construed in
accordance with the laws of the State of New York, United States of America.
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<PAGE>
SELLING SHAREHOLDER
The Warrants and the Shares issuable upon exercise thereof and offered hereby
were issued by the Company to the Selling Shareholder in the Financing, in a
transaction exempt from the registration requirements of the Securities Act, to
persons reasonably believed to be either (i) "qualified institutional buyers"
(as defined in Rule 144A under the Securities Act) or (ii) other institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act). The Selling Shareholder (which term includes its transferees,
pledgees, donees or its successors) may from time to time offer and sell
pursuant to this Prospectus any or all of the Common Stock issued upon exercise
of the Warrants.
The table below lists the Selling Shareholder, the number of shares of SGI
Common Stock which it beneficially owned as of March 1, 1998, the number of
Shares subject to sale pursuant to this Registration Statement, and the number
of the shares of SGI Common Stock which each would own assuming that such number
of Shares were offered and assuming the sale of all such Shares.
<TABLE>
<CAPTION>
Shares Beneficially Owned as of Shares To Shares Beneficially Owned
Selling Shareholder/(1)/ March 1, 1998 Be Offered Hereby After Offering/(2)/
- ----------------------------------- ------------------------------- ----------------- -------------------------
<S> <C> <C> <C>
B III Capital Partners, L.P./(3)/ 375,000 375,000 0
</TABLE>
- ----------------------
(1) The entity named in the table has sole voting and investment power with
respect to all shares of SGI Common Stock shown as beneficially owned by
them.
(2) Assumes that all Shares are sold by the Selling Shareholder.
(3) B III Capital Partners, L.P. is a Delaware limited partnership of which DDJ
Capital III, LLC is the general partner. The manager of DDJ Capital III,
LLC is DDJ Capital Management, LLC. The address of B III Capital Partners,
L.P. is c/o DDJ Capital Management, LLC, 141 Linden Street, Wellesley, MA
02181.
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<PAGE>
PLAN OF DISTRIBUTION
The sale or distribution of the Shares may be effected directly to purchasers
by the Selling Shareholder as principals or through one or more underwriters,
brokers, dealers or agents from time to time in one or more transactions (which
may involve crosses or block transactions) (i) or on any exchange or in the
over-the-counter market, (ii) in transactions other than in the over-the-
counter market or (iii) through the writing of options (whether such options
are listed on an options exchange or otherwise) on, or settlement of short
sales of, the Shares. Any of the transactions may be effected at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at varying prices determined at the time of sale or at negotiated or
fixed prices, in each case as determined by the Selling Shareholder or by
agreement between the Selling Shareholder and underwriters, brokers, dealers,
or agents, or purchasers. If the Selling Shareholder effects such transactions
by selling Shares to or through underwriters, brokers, dealers or agents, such
underwriters, brokers, dealers, or agents may receive compensation in the form
of discounts, concessions or commissions from the Selling Shareholder or
commissions from purchasers of Shares for whom they may act as agent (which
discounts, concessions or commissions as to particular underwriters, brokers,
dealers or agents may be in excess of those customary in the types of
transactions involved). The Selling Shareholder and any brokers, dealers or
agents that participate in the distribution of the Shares may be deemed to be
underwriters, and any profit on the sale of Shares by them and any discounts,
concessions or commissions received by any such underwriters, brokers, dealers
or agents may be deemed to be underwriting discounts and commissions under the
Securities Act.
Under the securities laws of certain states, the Shares may be sold in such
states only through registered or licensed brokers or dealers.
The Company will pay all of the expenses incident to the registration,
offering and sale of the Shares to the public hereunder other than commissions,
fees and discounts of underwriters, brokers, dealers and agents. The Company
has agreed to indemnify the Selling Shareholder and any underwriters against
certain liabilities, including liabilities under the Securities Act. The
Company will not receive any of the proceeds from the sale of any of the Shares
by the Selling Shareholder.
The Company has agreed to use its best efforts to keep the Registration
Statement, of which this Prospectus constitutes a part, effective until the
longer of (i) twenty-four months following the date such registration statement
is declared effective by the Commission or (ii) if the holder of the Shares is
an Affiliate of the Company, the date which is three months after the date on
which such holder ceases to be an Affiliate of the Company, provided that the
Company first provides such holder with an opinion of counsel to such effect.
34
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares by the
Selling Shareholder.
LEGAL MATTERS
The legality of the Shares is being passed upon by Gray Cary Ware &
Freidenrich LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements incorporated in this prospectus by
reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated herein by reference,
and have been incorporated in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The statements as to matters of law and legal conclusion concerning Nevada
gaming laws included under the caption "Risk Factors--Regulatory Approval" and
the statements as to matters of law and legal conclusion concerning Nevada
gaming laws included under the caption "Business--Gaming Regulation and
Licensing--Nevada Regulatory Matters" have been prepared by Lionel Sawyer &
Collins, Las Vegas, Nevada, Nevada gaming counsel for the Company, and are
included in reliance upon such firm as experts in the gaming laws of the state
of Nevada.
The statements as to matters of law and legal conclusion concerning
Mississippi gaming laws included under the caption "Risk Factors--Regulatory
Approval" and the statements as to matters of law and legal conclusion
concerning Mississippi gaming laws included under the caption "Business--Gaming
Regulation and Licensing--Mississippi Regulatory Matters" have been prepared by
Phelps Dunbar, L.L.P., Jackson, Mississippi, Mississippi gaming counsel for the
Company, and are included in reliance upon such firm as experts in the gaming
laws of the state of Mississippi.
The statements as to matters of law and legal conclusion concerning Missouri
gaming laws included under the caption "Risk Factors--Regulatory Approval" and
the statements as to matters of law and legal conclusion concerning Missouri
gaming laws included under the caption "Business--Gaming Regulation and
Licensing--Missouri Regulatory Matters" have been prepared by Green, Schaaf &
Margo, P.C., St. Louis, Missouri, Missouri gaming counsel for the Company, and
are included in reliance upon such firm as experts in the gaming laws of the
state of Missouri.
The statements as to matters of law and legal conclusion concerning New Jersey
gaming laws included under the caption "Risk Factors--Regulatory Approval" and
the statements as to matters of law and legal conclusion concerning New Jersey
gaming laws included under the caption "Business--Gaming Regulation and
Licensing--New Jersey Regulatory Matters" have been prepared by Sterns &
Weinroth, A Professional Corporation, Atlantic City, New Jersey, New Jersey
gaming counsel for the Company, and are included in reliance upon such firm as
experts in the gaming laws of the state of New Jersey.
35
<PAGE>
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR BY ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES, OR AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT PROSPECTUS
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
----
Available Information................................................. 3
Incorporation Of Certain Documents By Reference ...................... 3
The Company........................................................... 4
Risk Factors.......................................................... 5
Ratio of Earnings to Fixed Charges.................................... 23
Description of Notes and Warrants..................................... 23
Selling Shareholder................................................... 33
Plan Of Distribution.................................................. 34
Use Of Proceeds....................................................... 35
Legal Matters......................................................... 35
Experts............................................................... 35
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PROSPECTUS
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375,000 SHARES OF
COMMON STOCK
SILICON GAMING, INC.
April 27, 1998
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