<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
------
Exchange Act of 1934 for the quarterly period ended June 30, 1999
OR
Transition Report pursuant to Section 13 or 15(d) of the Securities
------
Exchange Act of 1934 for the transition period from to
Commission File Number 0-28294
SILICON GAMING, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 77-0357939
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2800 W. Bayshore Road
Palo Alto, CA 94303
(Address of principal executive offices)
Telephone: (650) 842-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ------
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
14,588,571 shares of Common Stock, $.001 par value,
were outstanding as of July 31, 1999.
<PAGE>
SILICON GAMING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
--------
Part I Financial Information
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets-- June 30, 1999 and December 31, 1998...................... 3
Consolidated Statements of Operations--Three months and six months ended June 30, 1999
and June 30, 1998...................................................................... 4
Consolidated Statements of Cash Flows--Six months ended June 30, 1999 and June 30, 1998 5
Notes to Consolidated Financial Statements............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 10
Part II Other Information
Item 1. Legal Proceedings...................................................................... 22
Item 6. Exhibits and Reports on Form 8-K....................................................... 23
Signature.............................................................................. 24
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILICON GAMING, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents............................................................. $ 3,194 $ 8,399
Accounts receivable (net of allowances of $1,333 and $1,650)..................... 4,329 5,340
Inventories...................................................................... 10,859 12,024
Investments to fund jackpot winners.............................................. 327 288
Prepaids and other............................................................... 1,876 1,410
----------------------------------------
Total current assets.......................................................... 20,585 27,461
PROPERTY AND EQUIPMENT, NET........................................................ 6,762 12,922
OTHER ASSETS, NET.................................................................. 1,309 1,361
----------------------------------------
$ 28,656 $ 41,744
========================================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 1,399 $ 1,480
Accrued liabilities.............................................................. 8,322 8,154
Deferred revenue................................................................. 1,029 1,766
Line of credit................................................................... 1,943 4,000
Current portion of long-term obligations......................................... 1,252 1,289
----------------------------------------
Total current liabilities..................................................... 13,945 16,689
OTHER LONG-TERM LIABILITIES........................................................ 3,084 2,032
LONG-TERM OBLIGATIONS.............................................................. 40,423 39,809
REDEEMABLE CONVERTIBLE PREFERRED STOCK--6,884,473 shares
authorized at June 30, 1999; shares outstanding: June 30, 1999-- 1,111,659;
December 31, 1998--1,474,641..................................................... 1,256 1,666
SHAREHOLDERS' DEFICIENCY
Common Stock, $.001 par value; 50,000,000 shares authorized; shares
outstanding: June 30, 1999-- 14,588,571; December 31, 1998--
14,242,313..................................................................... 58,024 57,398
Warrants......................................................................... 4,548 4,548
Notes receivable from shareholders............................................... (115) (128)
Accumulated deficit.............................................................. (92,509) (80,270)
Accumulated other comprehensive income........................................... -- --
----------------------------------------
Total shareholders' deficiency................................................ (30,052) (18,452)
----------------------------------------
$ 28,656 $ 41,744
========================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SILICON GAMING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------------- -------------- -------------- --------------
REVENUE:
<S> <C> <C> <C> <C>
Hardware............................................ $ 3,609 $ 5,462 $ 7,322 $ 7,886
Software............................................ 1,502 1,941 2,888 2,661
Participation....................................... 616 858 1,178 1,740
------- ------- ------- -------
Total revenue $ 5,727 $ 8,261 $11,388 $12,287
OPERATING EXPENSES:
Cost of sales and related
manufacturing expenses............................ 2,965 5,836 7,184 9,026
Research and development............................ 1,483 2,838 3,831 5,554
Selling, general and
administrative.................................... 2,587 3,922 5,483 7,873
Restructuring charges............................... (35) -- 3,277 --
------- ------- ------- -------
Total costs and expenses 7,000 12,596 19,775 22,453
------- ------- ------- -------
Loss from operations............................ 1,273 4,335 8,387 10,166
Interest (income)/expense, net...................... 1,926 $ 1,093 3,852 $ 2,026
------- ------- ------- -------
NET LOSS $ 3,199 $ 5,428 $12,239 $12,192
======= ======= ======= =======
Basic and diluted net loss per share $0.22 $0.39 $0.86 $0.91
======= ======= ======= =======
Shares used in computation 14,376 13,755 14,275 13,417
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SILICON GAMING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
------------------ -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................................. $(12,239) $(12,192)
Reconciliation to net cash used in operating activities:
Depreciation and amortization........................................ 2,570 2,351
Accrued interest..................................................... 2,251 1,344
Accretion of debt discount........................................... 1,207 736
Deferred rent........................................................ (111) 106
Restructuring charges................................................ 3,277 --
Provision for bad debt............................................... (98) 150
Gain from disposal of property....................................... -- (28)
Changes in assets and liabilities:
Accounts receivable.................................................. 1,109 (2,984)
Inventories.......................................................... 1,165 (7,531)
Prepaid and other.................................................... (655) 142
Participation units.................................................. 1,628 668
Accounts payable..................................................... (80) 2,017
Accrued liabilities.................................................. (1,808) (392)
Other liabilities.................................................... 177 --
Deferred revenue..................................................... (737) (242)
-------- --------
Net cash used in operating activities.............................. (2,344) (15,855)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment................................. (221) (1,816)
Proceeds from disposal of property and equipment...................... -- 75
Sales and maturities of short-term investments........................ -- 4,704
Other assets, net..................................................... (39) 47
-------- --------
Net cash provided by (used in) investing activities................ (260) 3,010
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of Common Stock, net of notes receivable........................ 74 630
Collection of note receivable......................................... 13 18
Proceeds from term loans and line of credit........................... -- 2,897
Repayment of bank line of credit...................................... (2,057) --
Repayment of term loans............................................... (478) (137)
Repayment of capital lease obligations................................ (153) (139)
-------- --------
Net cash provided by (used in) financing activities................ (2,601) 3,269
-------- --------
NET DECREASE IN CASH AND EQUIVALENTS.................................... (5,205) (9,576)
Beginning of period................................................... 8,399 16,352
-------- --------
End of period......................................................... $ 3,194 $ 6,776
======== ========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest.............................. $ 313 $ 87
======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of preferred stock to Common Stock......................... $ 410 $ 1,399
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
SILICON GAMING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated balance sheet as of June 30, 1999, the
consolidated statements of operations for the three and six months ended June
30, 1999 and 1998, and the consolidated statements of cash flows for the six
months ended June 30, 1999 and 1998, are unaudited. In the opinion of
management, these financial statements have been prepared on the same basis as
the audited financial statements and include all adjustments, consisting only of
normal recurring adjustments and accruals, necessary for the fair presentation
of the financial position and operating results as of such dates and for such
periods. The unaudited information should be read in conjunction with the
audited consolidated financial statements of Silicon Gaming, Inc. ("Silicon
Gaming" or the "Company") and the notes thereto for the year ended December 31,
1998 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
operating losses every year since its inception and at June 30, 1999 had an
accumulated deficit of $92,509,000 and a shareholders' deficiency of
$30,052,000. The Company has been required to obtain additional financing every
year to be able to fund its ongoing operations. As of June 30, 1999 the
Company's cash and equivalents had decreased to $3,194,000. Based on historical
levels of cash usage, the above factors raise substantial doubt about the
Company's ability to continue as a going concern.
In the fourth quarter of 1998 the Company took steps to reduce the level of
operating expenses and made a number of management decisions which resulted in a
reduction of the Company's workforce by approximately 20% and cuts in
expenditures across the Company. The Company continued to evaluate further
possible ways to reduce operating expenses through outsourcing of different
parts of its business and further downsizing of its workforce. In March 1999
management reduced the size of the Company's workforce by an additional 35% and
made additional cuts to operating expenses. Management also announced in March
1999 the relocation of its manufacturing operations to its Las Vegas, Nevada
facility and the closure of its Mountain View, California manufacturing
facility. The Company has been able to significantly reduce its level of
operating expenses and cash required for operating activities as a result of the
above actions, and in the second quarter of 1999 reduced the amount of cash used
in operations to $506,000 from the $1,838,000 used in the first quarter of 1999
and the $5,356,000 used in the fourth quarter of 1998. The Company was also able
to renegotiate the terms of its line of credit with its bank during the second
quarter of 1999 so that this credit facility will remain available to the
Company. (See Note 5).
In July 1999 the Company announced that it had entered into a non-binding
letter of intent with the holders of its Senior Discount Notes to convert
approximately $40 million of the Senior Discount Notes into a new class of
convertible preferred stock. The Company had previously announced that it would
not make the scheduled July 1, 1999 interest payment on the Senior Discount
Notes, and the letter of intent contemplates that accrued and unpaid interest on
the Senior Discount Notes would be forgiven through July 15, 1999. The amount of
accrued and unpaid interest at June 30, 1999 was $6,517,000. Under the letter of
intent, the Company would also receive additional funding of up to $5 million in
new convertible senior secured notes. The proposed restructuring is subject to a
number of conditions, including the receipt of necessary gaming and regulatory
approvals and the negotiation and execution of definitive documentation.
Management continues to review financing alternatives available to the Company
such as additional share or debt offerings, joint ventures, alternative
distribution channels, and sale of all or a portion of the Company's assets to
further improve the Company's liquidity position. Management believes that these
steps, satisfactory resolution of its financing and strategic alternatives,
including timely completion of the proposed Senior Discount Note conversion
already announced, plus sales related to new product introductions will provide
sufficient cash and working capital for the Company to meet its ongoing
obligations and to allow it to continue operating as a going concern through at
least the end of 1999. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
6
<PAGE>
2. Net loss per share - Basic earnings per share excludes dilution and is
computed by dividing net income by the weighted average of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution that would occur if securities or other contracts to issue Common Stock
were exercised or converted into Common Stock. Common share equivalents
including stock options, warrants and Redeemable Convertible Preferred Stock
have been excluded from all periods presented, as their effect would be
antidilutive.
The following is a reconciliation of the numerators and denominators of the
basic and diluted net loss per share computations (in thousands except per share
amounts):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30
---------------------------- -----------------------------
1999 1998 1999 1998
------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net Loss (Numerator):
Net Loss, basic and diluted ........................... $(3,199) $(5,428) $(12,239) $(12,192)
======= ======= ======== ========
Shares (Denominator)
Weighted average common shares outstanding ............ 14,437 14,159 14,367 13,866
Weighted average common shares subject to
repurchase......................................... (61) (404) (92) (449)
------- ------- -------- --------
Shares used in computation 14,376 13,755 14,275 13,417
======= ======= ======== ========
Net Loss Per Share, Basic
and Diluted............................................ $ 0.22 $ 0.39 $ 0.51 $ 0.91
======= ======= ======== ========
</TABLE>
Certain prior year amounts have been reclassified to conform to the current
year presentation.
3. Inventories
Inventories are stated at lower of cost (first-in, first-out) or market and
consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Raw materials.... $ 4,864 $ 4,294
Work in process.. 396 93
Finished goods... 5,599 7,637
------- -------
$10,859 $12,024
======= =======
</TABLE>
4. Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations
of credit risk consist primarily of cash equivalents and trade accounts
receivable. The Company invests only in high credit quality short-term debt with
its surplus funds. The Company performs ongoing credit evaluations of its
customers' financial condition and limits the amount of credit extended when
deemed necessary but generally requires no collateral. The Company maintains
reserves for estimated potential credit losses. As of June 30, 1999, one
customer accounted for 28% of accounts receivable. As of December 31, 1998, two
different customers accounted for 16% and 13% of accounts receivable. For the
three months ended June 30, 1999, two customers accounted for 27% and 13% of
revenue and for the six months ended June 30, 1999, one customer accounted for
18% of revenue. For the three months ended June 30, 1998 one customer accounted
for 19% of revenue and for the six months ended June 30, 1998, five different
customers accounted for 26%, 27%, 13%, 10% and 10% of revenue, respectively.
7
<PAGE>
5. Borrowing Arrangements
In June 1999 the Company entered into a $4 million secured revolving line of
credit agreement based on the Company's eligible accounts receivable which
expires December 31, 1999. Borrowings bear interest at the Bank's prime rate
(8.5% at June 30, 1999) plus 3.5%. As of June 30, 1999 the Company had
$1,943,000 outstanding under this facility. This agreement requires the
Company to maintain a minimum level of shareholder's equity (as defined in the
agreement) and the Company was in compliance with the agreement as of June 30,
1999.
Borrowing arrangements consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- ----------------
<S> <C> <C>
Senior Discount Notes ($47.25 million principal obligation).................. $38,923 $37,716
Capital lease obligations.................................................... 207 360
Other long-term obligations.................................................. 2,545 3,022
------- -------
41,675 41,098
Current obligation........................................................... (1,252) (1,289)
------- -------
Long-term obligation......................................................... $40,423 $39,809
======= =======
</TABLE>
In July 1999, the Company announced that it had entered into a non-binding
letter of intent for the conversion of $39.75 million principal obligation of
Senior Discount Notes into convertible preferred stock of the Company and the
forgiveness of accrued and unpaid interest on the Senior Discount Notes through
July 15, 1999. See Note 7.
6. Restructuring Charges
In March 1999 the Company announced the closure of its Mountain View,
California manufacturing facility and the relocation of all of its manufacturing
operations to its Las Vegas, Nevada facility. At the same time the Company
announced a reduction in size of its employee workforce by approximately 35%.
The Company recorded restructuring charges of $3,312,000 in the three-month
period ended March 31, 1999. The restructuring charges include severance costs,
lease related costs of excess facilities and the write down of specific fixed
assets associated with these facilities and assets rendered surplus as a result
of the reduction in force. Details of the restructuring charges are as follows
(in thousands):
<TABLE>
<CAPTION>
Accrued
severance, Facility Write down
benefits & lease Of
other costs obligations fixed assets Total
------------- -------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Restructuring provision............. $ 595 $ 293 $ 2,424 $ 3,312
Adjustment to amounts recorded...... -- (35) -- (35)
Non-cash items...................... -- -- (2,424) (2,424)
Amounts paid........................ (595) (133) -- (728)
----- ----- ------- -------
Balance at June 30, 1999............ $ -- $ 125 $ -- $ 125
===== ===== ======= =======
</TABLE>
Termination benefits were paid to 55 employees and all benefits were paid
prior to May 31, 1999. The Company anticipates completion of all remaining
restructuring activities, including disposal of assets, before the end of the
third quarter, 1999.
8
<PAGE>
7. Subsequent Events
In July 1999, the Company announced that it had entered into a non-binding
letter of intent for a proposed restructuring of certain of its long-term
obligations. Under the terms of the proposed restructuring, $39.75 million
principal obligation of Senior Discount Notes would be exchanged for shares of
convertible preferred stock that would be convertible into a 57% equity interest
in the Company. The terms of the remaining balance of Senior Discount Notes
would be modified to reduce the interest rate from 12.5% to 10% per annum
(effective July 15, 1999), and to provide for interest to be payable in kind, at
the Company's option, subject to certain coverage ratio tests, for up to the
first five years following the effective date of the restructuring, at which
time the notes would mature. Pursuant to the letter of intent, accrued and
unpaid interest on the Senior Discount Notes remaining outstanding following the
restructuring would be forgiven through July 15, 1999.
The letter of intent also contemplates an additional investment by the
holders of the Senior Discount Notes of up to $5 million in the form of
convertible senior secured notes (the "New Notes"). The New Notes would bear
interest at the rate of 10% per annum, payable in cash, with a maturity of 5
years. The $5 million of New Notes would be convertible into a 40% equity
interest in the Company (subject to the issuance of additional employee equity
incentives as described below). The New Notes would be issuable in tranches,
with the first $2.0 million issued on the closing date of the restructuring. To
the extent required by the Company, the remaining $3.0 million of New Notes
would be issued upon the achievement of certain financial and operating hurdles.
As part of the debt restructuring, the Company would allocate 38% of its
equity as of the effective date to be issued as incentive stock-based
compensation to employees. The Company's current equity holders, including all
holders of options, warrants and convertible preferred stock, would own
approximately 5% of the outstanding fully-diluted equity upon the effective date
of the debt restructuring (prior to the issuance of any New Notes). Certain of
the Company's currently outstanding warrants and convertible preferred stock
have anti-dilution rights that may substantially reduce the portion of the 5%
equity interest that would be allocated to holders of the common stock. As
discussed above, $39.75 million of existing Senior Discount Notes would be
convertible into the remaining 57% of the Company's outstanding equity as of the
effective date of the debt restructuring (prior to the issuance of any New
Notes). Upon issuance of any New Notes, the number of shares of common stock
allocated to the employee incentive compensation pool would be increased so that
the incentive pool would remain at 38% of the Company's equity after giving
effect to the dilution of the conversion of the New Notes. In addition, upon
closing of the debt restructuring, the Board of Directors would be reduced to
three members, consisting of Andrew Pascal, the President and Chief Executive
Officer of the Company, and two independent directors.
The proposed debt restructuring is subject to a number of conditions,
including receipt by the Company's board of directors of a `fairness opinion'
from an investment banking firm, the receipt of all necessary gaming and
regulatory approvals and the negotiation and execution of definitive
documentation. There can be no assurance that the debt restructuring will be
successfully implemented or that there will not be modifications to the
restructuring terms. The Company expects to finalize and close the above
transactions on or about September 30, 1999.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS DISCUSSION INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH REFLECT
THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL
PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES, INCLUDING THOSE REFERRED TO IN THE RISK FACTORS SECTION BELOW AND
ELSEWHERE HEREIN AND CONTAINED IN THE COMPANY'S PREVIOUSLY FILED ANNUAL REPORT
ON FORM 10-K, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR THOSE ANTICIPATED. IN THIS DISCUSSION, THE WORDS
"ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND SIMILAR
EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF
THE DATE HEREOF.
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included in Part I--Item 1
of this Report and the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
Overview
Silicon Gaming, Inc. ("SGI" or the "Company") was incorporated on July 27,
1993 to design, develop, manufacture and distribute interactive gaming devices
that implement advanced multimedia technologies using state-of-the-art, off-the-
shelf components. In March 1997 the Company introduced its first product,
Odyssey/TM/, a multi-game, video-based slot machine, into the Nevada market. In
1998 the Company introduced Quest, a single-game platform that utilizes many of
the same components as the Odyssey, to increase its penetration of the casino
floor. The Company has since rolled out Odyssey and Quest into other
jurisdictions including Connecticut, Indiana, Iowa, Louisiana, Michigan,
Minnesota, Mississippi, Missouri, New Jersey, New Mexico, certain Canadian
provinces and Uruguay.
The Company's products feature high-resolution video presented across the full
surface of a large touchscreen display. The games feature high-quality
animation, video clips, digital sound and a level of visual appeal and
interactivity that the Company believes is unattainable by the current
generation of slot machines. The 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, it will encourage
longer and more frequent periods of play by existing slot machine customers and
attract new gaming customers who are seeking greater entertainment value than
that offered by the current generation of slot machines. The Company has
designed its machines with a number of unique player features, such as play
stoppage entertainment/TM/. In addition, the product's modular components and
Machine Management System/TM/ software provide easy-to-use diagnostics designed
to minimize player inconvenience and machine down time. The Company currently
offers several products including Odyssey/TM/, a multi-game machine that can
play up to six different games on the same machine, and Quest, a single-game
machine.
In December 1998, the Company introduced its first wide-area progressive
product, The Big Win. Under a wide-area progressive system, numerous slot
machines are linked by computer networks and share a common top award that is
usually much greater than the award that a single, unlinked machine could
support. The network links machines in different casinos, and can be extended
from its current installed base in Las Vegas to include other locations across
Nevada. The Company receives a predetermined percentage of the amounts wagered
on these machines as revenue and is responsible for payment of the game's
progressive jackpot prizes.
10
<PAGE>
Through June 30, 1999, the Company has installed 3,773 Odyssey and Quest
machines in approximately 193 properties throughout Connecticut, Indiana, Iowa,
Louisiana, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Jersey, New
Mexico, certain Canadian provinces and Uruguay. Of these machines, 3,372 have
been sold outright or placed on a revenue-sharing basis. After returns, 361
machines remain installed on a trial basis and the casino operators are required
to purchase the machine outright, participate in SGI's revenue sharing plan or
return the machine to the Company within a defined trial period. Included in the
Company's revenue and installed base at June 30, 1999 are 16 machines connected
to the wide-area progressive system. The Company began reinstalling machines on
its wide-area progressive system in early July.
At June 30, 1999 the Company had cash and equivalents of $3,194,000. The
Company has incurred operating losses each year since inception and as of June
30, 1999 had an accumulated deficit of $92,509,000 and a deficiency of
shareholders' equity of $30,052,000. The Company has been required to obtain
additional financing each year to be able to fund its ongoing operations. Based
on historical levels of cash usage, the above factors raise substantial doubt
about the Company's ability to continue as a going concern.
In the fourth quarter of 1998 the Company took steps to reduce the level of
operating expenses and made a number of management decisions which resulted in a
reduction of the Company's work force by approximately 20% and cuts in
expenditures across the Company. The Company continued to evaluate further
possible ways to reduce operating expenses through outsourcing of different
parts of its business and further downsizing of its workforce. In March 1999
management reduced the size of the Company's workforce by a further 35% and made
additional cuts to its operating expenses. Management also announced the
relocation of its manufacturing operations to its Las Vegas, Nevada facility and
the closure of its Mountain View, California manufacturing facility. The Company
has been able to significantly reduce its operating expenses and the level of
cash required for operating activities as a result of the above actions and in
the second quarter of 1999 reduced the amount of cash used in operations to
$506,000 from the $1,838,000 recorded in the first quarter of 1999 and the
$5,356,000 used in the fourth quarter of 1998. The Company was also able to
renegotiate the terms of its line of credit with its bank during the second
quarter of 1999 so that this credit facility will remain available to the
Company.
In July 1999 the Company announced that it had entered into a non-binding
letter of intent with the holders of its Senior Discount Notes to convert
approximately $40 million of the Senior Discount Notes into a new class of
convertible preferred stock. The Company had previously announced that it would
not make the scheduled July 1, 1999 interest payment on the Senior Discount
Notes, and the letter of intent contemplates that accrued and unpaid interest on
the Senior Discount Notes would be forgiven through July 15, 1999. Under the
letter of intent, the Company would also receive additional funding of up to $5
million in new convertible senior secured notes. The proposed restructuring is
subject to a number of conditions, including the receipt of necessary gaming and
regulatory approvals and the negotiation and execution of definitive
documentation. Management continues to review financing alternatives available
to the Company such as additional equity or debt offerings, joint ventures,
alternative distribution channels, and sale of all or a portion of the Company's
assets to further improve the Company's liquidity position. Management believes
that these steps, satisfactory resolution of its financing and strategic
alternatives, including timely completion of the proposed Senior Discount Note
conversion already announced, plus sales related to new product introductions
will provide sufficient cash and working capital for the Company to meet its
ongoing obligations and to allow it to continue operating as a going concern
through at least the end of 1999.
Silicon Gaming is headquartered in Palo Alto, California and has sales offices
in Reno and Las Vegas, Nevada, and in Gulfport, Mississippi. The Company's
products are now manufactured at the Company's location in Las Vegas, Nevada. At
June 30, 1999 the Company had 78 employees.
11
<PAGE>
Revenue
The Company generates revenue from the sale of its products and related
parts and accessories. All products are sold with licensed software, and
customers have the choice of either a paid-up or renewable annual license. The
Company places products in casinos under a participation program whereby it
receives 20% of the net win generated by the product as revenue. The Company
also places machines in casinos that are linked to a wide-area progressive
system in exchange for a predetermined share of the gross amount wagered on the
machine. Amounts received from the participation program and the wide area
progressive system are recorded as participation revenues. Total revenue units
includes machines sold outright as well as machines placed under the
participation programs.
The Company generated revenues as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
-------------- ------------- ---------------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in $'000 except for machine numbers)
-------------------------------------------------------------
Hardware sales $3,609 63% $5,462 66% $ 7,322 64% $ 7,886 64%
Software sales 1,502 26% 1,941 24% 2,888 25% 2,661 22%
Participation revenue 616 11% 858 10% 1,178 11% 1,740 14%
------ --- ------ --- ------- --- ------- ----
Total revenue $5,727 100% $8,261 100% $11,388 100% $12,287 100%
====== ====== ======= =======
Total revenue units 468 606 895 847
====== ====== ======= =======
</TABLE>
Revenue for the quarter ended June 30, 1999 was $5,727,000, a decrease of
$2,534,000, or 31%, from $8,261,000 for the quarter ended June 30, 1998. This
also represents an increase of $49,000, or 1%, from the $5,661,000 recorded in
the three-month period ended March 31, 1999. The 1998 results included a one-
time sale of approximately $1.8 million of product to a new distributor and
route operator. The
12
<PAGE>
change in sales mix reflects an increase in direct sales relative to sales on a
participation basis, and the benefit of sales to new jurisdictions. The average
selling price on hardware sales decreased to $7,711 in the quarter ended June
30, 1999 compared to $8,181 in the quarter ended June 30, 1998, reflecting a
much higher level of competition in the industry and a resulting higher level of
discounts given to strategic corporate customers compared to the prior year
period, plus lower selling prices due to the Company selling used equipment to
certain customers during 1999.
The decrease in software revenues for the three months ended June 30, 1999
of $439,000, or 23%, compared to the same period in 1998 is a direct result of
the lower number of units sold outright and the lower selling prices of used
equipment in the current year. Participation revenues decreased by $242,000, or
28%, compared to the comparable period in 1998 due largely to a reduction in the
number of machines on participation programs as customers have either purchased
those machines outright or returned them to the Company.
Revenue for the six months ended June 30, 1999 was $11,388,000, a decrease
of $899,000, or 7%, from $12,287,000 for the six months ended June 30, 1998. For
the six month period ended June 30, 1999 total software sales increased by
$227,000, or 9%, compared to the same period in 1998 reflecting the higher
installed base of machines from which the company derives annual license fees.
Total participation revenues decreased by $592,000, or 34%, due to the
reductions in the number of machines on participation as the Company has
converted these units to sales or were returned to the Company by its customers.
During the three-month period ended June 30, 1999, two customers accounted
for 27% and 13% of revenue. In the three-month period ended June 30, 1998 one
different customer represented 19% of revenue. For the six month period ended
June 30, 1999 one customer represented 18% of revenue and in the six-months
ended June 30, 1998 five customers represented 26%, 17%, 13%, 10% and 10% of
revenue, respectively. The Company expects that a significant portion of its
revenues will remain consolidated within a limited number of strategic customers
within the gaming industry due to the increasing consolidation that is taking
place among casino operators. As an equipment vendor to the gaming industry, the
Company sells infrequently to many customers and the volume of sales to any
particular customer may vary significantly from period to period. As a result,
there can be no assurance that the above strategic customers will continue to
account for a significant percentage of the Company's revenue in the future. The
loss of any strategic customer would adversely affect the Company's business and
results of operations.
Cost of Sales
Cost of sales includes the direct costs of product sales as well as the
unabsorbed costs of the Company's manufacturing operations. Cost of sales also
includes license fees and royalties paid to third parties, depreciation on
machines placed on the participation programs as well as the costs directly
associated with running the wide-area progressive systems, including payment of
jackpot awards. Cost of sales was $2,965,000, or 52% of revenue, as compared to
$5,836,000, or 71% of revenue, for the quarters ended June 30, 1999 and 1998,
respectively. Cost of sales was $7,184,000, or 63% of revenue, as compared to
$9,026,000, or 73% of revenue, for the six months ended June 30, 1999 and 1998,
respectively.
The relative decrease in cost of sales as a percentage of revenue for the
three and six-month periods ended June 30, 1999 compared to the comparable
prior-year periods reflect the lower level of
13
<PAGE>
manufacturing overhead as a result of the closure of the Company's California
manufacturing facility and the relocation of all manufacturing to the Company's
Las Vegas, Nevada facility. The Company also recorded a favorable adjustment to
cost of sales in the three months ended June 30, 1999 of approximately $500,000
as a result of settlement of patent infringement litigation and cancellation of
obligations relating to previously expensed royalties. These benefits are
partially offset by higher fixed costs associated with the participation
machines and the wide-area progressive system, as well as the effects of lower
average selling prices of product compared to the prior year period. The Company
has been able to realize a decrease in per-unit product costs as a result of
reductions in the cost of materials and buying quantities, as well as redesigns
from tooling certain hardware components, although the high levels of inventory
that the Company has maintained for the last year have mitigated the effects of
such lower product costs. The Company does not anticipate that this rate of cost
reduction will continue into future periods, although management is currently
investigating further outsourcing possibilities that may help to contain future
product costs. The Company believes that as it introduces more unique, fully
integrated specialty products, per-unit costs may actually increase in future
periods.
Gross margins are expected to remain volatile due the product's sensitivity
to volume levels. The Company has yet to commence full scale manufacturing of
its product in its Las Vegas facility due to its current inventory position, and
so commencement of such activities may adversely affect the Company's gross
margin if any difficulties are encountered. Anticipated manufacturing expenses
are subject to a number of risks and uncertainties. See "Factors Affecting
Future Results - Management of Changing Business."
Research and Development
Research and development ("R&D") expenses include payroll and related costs
of employees engaged in ongoing design and development activities of the
Company, costs paid to outside contractors and specialists, prototype
development expenses, overhead costs, equipment depreciation and costs of
supplies. To date, the Company has expensed all costs associated with the
research, design and development of its product. R&D expenses were $1,483,000,
or 26% of revenue, as compared to $2,838,000, or 34% of revenue, for the
quarters ended June 30, 1999 and 1998, respectively. R&D expenses were
$3,831,000, or 34% of revenue, as compared to $5,554,000, or 45% of revenue for
the six months ended June 30, 1999 and 1998, respectively.
The decreases in R&D expenses are largely the result of lower personnel
costs as a result of the Company's reductions in its workforce and lower use of
outside engineering consultants, offset partially by higher license fees and
similar costs associated with the acquisition of outside technologies. Since the
comparable periods in 1998, the focus of the Company's R&D activities has
changed to emphasize new game development, the introduction of new product
platforms, and the introduction of new game types, such as the wide-area
progressive system. The Company is focussed on offering additional features in
its product that will fully utilize the underlying technology used. This is
expected to require an increased investment in R&D activities in future periods,
including additional personnel, to continue the development of the existing
product platforms and new platforms to facilitate the elaborate requirements of
the game development process. The absolute level of R&D expenses is therefore
expected to increase in future periods.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses include payroll and
related costs for administrative and executive personnel, sales and customer-
support organization personnel, marketing and licensing personnel, overhead
costs, legal and associated costs, costs associated with obtaining and retaining
corporate and product licenses in various jurisdictions and fees for
professional services. Approximately 50% of SG&A expenses are headcount related.
SG&A expenses were $2,587,000, or 45% of revenue, as compared to $3,922,000, or
47% of revenue for the quarters ended June 30, 1999 and 1998,
14
<PAGE>
respectively. SG&A expenses were $5,483,000, or 48% of revenue, as compared to
$7,873,000, or 64% of revenue for the six months ended June 30, 1999 and 1998,
respectively.
The decrease in SG&A expenses over these periods is largely attributable to
the reduction in personnel and associated costs from the reductions in the
Company's workforce, offset by higher costs associated with applying for
corporate and product licenses as the Company began selling product into new
jurisdictions. The Company also incurred costs compared to the prior year
periods as it created and established a customer-support organization to support
the rollout of its product into new markets, and as it established a marketing
organization upon the commercial distribution of its products. The costs of
these organizations are reflected in the 1999 expense levels. SG&A expenses were
also affected during 1999 by higher legal costs associated with patent
infringement disputes and due to higher product licensing costs as the Company
has increased the number of new game types and platforms for which it is
currently seeking approval. SG&A expenses are expected to increase in absolute
dollars as the Company invests in increased sales and marketing-related
activities and in administrative personnel to support its infrastructure.
Interest Income and Expense
Net interest expense was $1,926,000 for the quarter ended June 30, 1999, as
compared to $1,093,000 for the quarter ended June 30, 1998. Net interest expense
was $3,852,000 for the six months ended June 30, 1999, as compared to $2,026,000
for the six months ended June 30, 1998. Included in these totals was interest
income of $25,000 and $107,000 for the quarter ended June 30, 1999 and 1998,
respectively, and $75,000 and $327,000 for the six months ended June 30, 1999
and 1998, respectively. Changes in interest income over these periods are
directly attributable fluctuations in the level of average cash and investment
balances that the Company holds. The timing of share offerings, issuance of
Senior Discount Notes, and the rate of spending on operations have impacted the
average level of cash and investments.
Interest expense was $1,947,000 and $1,200,000 for the quarters ended June
30, 1999 and 1998, respectively, and $3,927,000 and $2,353,000 for the six
months ended June 30, 1999 and 1998, respectively. The increases in interest
expense over these periods are due to increases in the Company's level of long-
term indebtedness over the periods. The Company raised $25 million in September,
1997 from the issuance of Senior Discount Notes (the "1997 Notes") and raised an
additional $15 million in July 1998 from the issuance of additional Senior
Discount Notes (the "1998 Notes"). The Company also raised approximately $3.6
million from equipment financing borrowing during 1998. The substantial increase
in interest expense in 1999 compared to the prior year periods reflects the
interest costs associated with the 1998 Notes, the related issuance and
repricing of stock warrants and the equipment financing.
Income Taxes
The Company has not been required to pay income taxes due to its net operating
losses in each period since inception. As of December 31, 1998, the Company had
net operating loss carryforwards of approximately $69,100,000 and $35,800,000
for federal and state income tax purposes, respectively. These loss
carryforwards will expire beginning in the year 2000, if not utilized. As of
December 31, 1998, the Company also has R&D credit carryforwards of
approximately $815,000 and $720,000 for federal and state purposes,
respectively, which expire beginning 2010.
A valuation allowance has been recorded for any deferred tax assets due to
uncertainties regarding the realization of these assets resulting from the lack
of earnings history of the Company. The Tax Reform Act of 1986 and the
California Act of 1987 impose restrictions on the utilization of net operating
loss and tax credit carryforwards in the event of an "ownership change" as
defined by the Internal Revenue Code. The Company's ability to utilize its net
operating loss and tax credit carryforwards is subject to limitation pursuant to
these restrictions. As of March 31, 1998, approximately $4 million of the
Company's net operating loss carryforwards was subject to such limitation and
this limitation is dependent on the
15
<PAGE>
Company's future profitability and the utilization of its net operating loss
carryforwards over a period of time.
Liquidity and Capital Resources
Cash and equivalents were $3,149,000 as of June 30, 1999, compared to
$8,399,000 as of December 31, 1998. The decrease in cash in the current period
of $5,205,000 is due to losses from ongoing operations that the Company has
incurred and to the repayment of $2,057,000 against the Company's bank line of
credit during 1999.
The Company has incurred operating losses each year since inception and as
of June 30, 1999 had an accumulated deficit of $92,509,000 and a deficiency of
shareholders' equity of $30,052,000. The Company has been required to obtain
additional financing each year to be able to fund its ongoing operations. Based
on historical levels of cash usage, the above factors raise substantial doubt
about the Company's ability to continue as a going concern.
In the fourth quarter of 1998 the Company took steps to reduce the level of
operating expenses and made a number of management decisions which resulted in a
reduction of the Company's work force by approximately 20% and cuts in
expenditures across the Company. The Company continued to evaluate further
possible ways to reduce operating expenses through outsourcing of different
parts of its business and further downsizing of its workforce. In March 1999
management reduced the size of the Company's workforce by a further 35% and made
additional cuts to its operating expenses. Management also announced the
relocation of its manufacturing to its Las Vegas, Nevada facility and the
closure of its Mountain View, California manufacturing facility. The Company has
been able to significantly reduce its level of operating expenses and cash
required for operating activities as a result of the above actions and in the
second quarter of 1999 reduced the amount of cash used in operations to $506,000
from the $1,838,000 recorded in the first quarter of 1999 and the $5,356,000
used in the fourth quarter of 1998. The Company was also able to renegotiate the
terms of its line of credit with its bank during the second quarter of 1999 so
that this credit facility will remain available to the Company through December
1999.
In July 1999 the Company announced that it had entered into a non-binding
letter of intent with the holders of its Senior Discount Notes to convert
approximately $40 million of the Senior Discount Notes into a new class of
convertible preferred stock. The Company had previously announced that it would
not make the scheduled July 1, 1999 interest payment on the Senior Discount
Notes, and the letter of intent contemplates that accrued and unpaid interest on
the Senior Discount Notes would be forgiven through July 15, 1999. Under the
letter of intent, the Company would also receive additional funding of up to $5
million in new convertible senior secured notes. The proposed restructuring is
subject to a number of conditions, including the receipt of necessary gaming and
regulatory approvals and the negotiation and execution of definitive
documentation. Management continues to review additional financing alternatives
available to the Company such as additional equity or debt offerings, joint
ventures, alternative distribution channels, and sale of all or a portion of the
Company's assets to further improve the Company's liquidity position. Management
believes that these steps, satisfactory resolution of its financing and
strategic alternatives, including timely completion of the proposed Senior
Discount Note conversion already announced, plus sales related to new product
introductions will provide sufficient cash and working capital for the Company
to meet its ongoing obligations and to allow it to continue operating as a going
concern through at least the end of 1999.
The Company's net cash used in operating activities was $2,344,000 and
$15,855,000 for the six months ended June 30, 1999 and 1998, respectively. The
decrease in cash used in operating activities reflects the higher amount of non-
cash items such as depreciation and amortization, accretion of debt discount and
accrued interest, the non-cash restructuring related charges recorded in March
1999, and a significant reduction in cash used for working capital. The Company
was able to reduce its investments in receivables and inventory and increase its
level of payables as it has improved its asset management and focussed on
converting existing assets into cash to improve its liquidity situation. During
the six months
16
<PAGE>
ended June 30, 1999 the Company decreased its investment in receivables and
inventory by $2,274,000, compared to an increase of $10,515,000, in these items
in the prior year period.
Net cash used in investing activities was $260,000 for the six months ended
June 30, 1999 as compared to net cash provided by investing activities of
$3,010,000 for the six months ended June 30, 1998. The change was primarily due
to decreases in the net cash provided by the purchase, sale and maturity of
short-term investments as the Company's available cash balances decreased,
offset by reductions in the acquisition of fixed assets and decreases in other
assets.
Net cash used in financing activities was $2,601,000 for the six months
ended June 30, 1999 as compared to net cash provided by financing activities of
$3,269,000 for the six months ended June 30, 1998. The decrease is related to
the timing of additional borrowings in the 1998 period. In 1998 the Company
received proceeds from term loans and the sale of common stock, but received no
new borrowings in the current period. In 1999, the Company made repayments
against its bank line of credit, capital lease and term loan
obligations.
In July 1999, the Company announced that it had entered into a non-binding
letter of intent for a proposed restructuring of certain of its long-term
obligations. Under the terms of the restructuring, $39.75 million principal
obligation of Senior Discount Notes would be exchanged for shares of convertible
preferred stock that would be convertible into a 57% equity interest in the
Company. The term of the remaining balance of Senior Discount Notes would be
modified to reduce the interest rate from 12.5% to 10% per annum effective July
15, 1999 and to provide for interest to be payable in kind, at the Company's
option and subject to certain coverage ratio tests, for up to the first 5 years
following the effective date of the restructuring, at which times the Notes
would mature. Pursuant to the letter of intent, accrued and unpaid interest on
the Senior Discount Notes remaining outstanding following the restructuring
would be forgiven through July 15, 1999.
The letter of intent also contemplates an additional investment by the
holders of the Senior Discount Notes of up to $5 million in the form of
convertible senior secured notes (the "New Notes"). The New Notes would bear
interest at the rate of 10% per annum, payable in cash, with a maturity of 5
years. The $5 million of New Notes would be convertible into a 40% equity
interest in the Company (subject to the issuance of additional employee equity
incentives as described below). The New Notes would be issuable in tranches,
with the first $2.0 million issued on the closing date of the restructuring. To
the extent required by the Company, the remaining $3.0 million of New Notes
would be issued upon the achievement of certain financial and operating hurdles.
As part of the restructuring, the Company would allocate 38% of its equity as
of the effective date to be issued as incentive compensation to employees. The
Company's current equity holders, including all holders of options, warrants and
convertible preferred stock, would own approximately 5% of the outstanding
fully-diluted equity upon the effective date of the restructuring (prior to the
issuance of any New Notes). Certain of the Company's currently outstanding
warrants and convertible preferred stock have anti-dilution rights that may
substantially reduce the portion of such equity interest that would be allocated
to holders of the common stock. As discussed above, $39.75 million of existing
Senior Discount Notes would be convertible into the remaining 57% of the
Company's outstanding equity as of the effective date of the restructuring
(prior to the issuance of any New Notes). Upon issuance of any New Notes, the
number of shares of common stock allocated to the employee incentive
compensation pool would be increased so that the incentive pool would remain at
38% of the Company's equity after giving effect to the dilution of the
conversion of the New Notes. In addition, upon closing of the restructuring, the
Board of Directors would be reduced to three members, consisting of Andrew
Pascal, the President and Chief Executive Officer of the Company, and two
independent directors.
The proposed restructuring is subject to a number of conditions, including
receipt by the Company's board of directors of a fairness opinion from an
investment banking firm, the receipt of all necessary gaming and regulatory
approvals and the negotiation and execution of definitive documentation. There
can
17
<PAGE>
be no assurance that the restructuring will be successfully implemented or
that there will not be modifications to the restructuring terms. The Company
expects to finalize and close the above transactions on or about September 30,
1999.
Year 2000 Issues.
The following section represents Year 2000 readiness disclosures.
The inability of computers and software programs to recognize and properly
process data fields containing a two-digit year is commonly known as the Year
2000 issue. As the year 2000 approaches, such computer systems may be unable to
accurately process certain date-based information. This could result in system
failures or miscalculations causing disruption of operations including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
During 1997 the Company implemented an enterprise-wide management
information system which supports all of the Company's major business
applications including sales and customer service, manufacturing and
distribution, and finance and accounting. Management has determined that the
Year 2000 issue will not pose significant operational problems for its computer
systems. As a result, any costs attributable to the purchase and implementation
of new software will be capitalized and any other costs incurred in connection
with Year 2000 compliance will be expensed as incurred.
During 1998 the Company established a Year 2000 management committee
comprised of senior management to provide leadership and direction to the Year
2000 effort throughout the Company. The Committee is using a multi-step approach
in managing the Year 2000 project. The major steps include an inventory of all
major systems and devices with potential Year 2000 problems, assigning priority
to identified items, assessing the Year 2000 compliance of all items deemed
material to the Company, repairing or replacing material items that are not
deemed to be Year 2000 compliant, testing material items, and designing and
implementing contingency and business continuation plans. The Company has
completed the inventory of its critical systems, made an assessment of Year 2000
compliance and has identified all systems to be upgraded and replaced. The
Company commenced the upgrading and replacing of certain systems during the
quarter ended March 31, 1999 and continued these activities through the current
quarter. Due to vendor scheduling limitations, the Company does not expect to
have all such upgrades and replacements completed until September, 1999. The
Company continues to communicate with the suppliers and customers with which it
has material contracts to determine the extent to which the Company is
vulnerable to those third parties failure to remediate their own Year 2000
issues. The Company cannot accurately predict the outcome of other companies'
remediation efforts.
The Company utilizes third-party vendors for processing data such as
payroll, 401(k) administration and medical benefits processing. The Company has
not yet determined the status of Year 2000 readiness of these vendors. Should
these vendors not be Year 2000 ready in a timely manner, the Company may be
required to process transactions manually or delay processing until such time
the vendors are Year 2000 compliant. No contingency plan has yet been developed,
however it is expected that contingency plans could be developed, if needed, on
short notice.
A number of the Company's customers have contacted the Company to determine if
the Company's products are Year 2000 compliant. The Company has tested its
products and believes that the products will correctly process data such that
the Year 2000 issue will not affect the operation of its products. However,
because the Company's product must run on third party slot management and
tracking systems, there is still a risk that the Company's products will not
work properly with such third party software. This risk is exacerbated because
the Company's products continue to display date fields as a two-digit rather
than a four-digit field. The Company has developed a solution to this problem
and is upgrading its installed base as needed. As a result, it does not
anticipate any significant problem with its products being Year 2000 compliant.
There can still be no
18
<PAGE>
guarantee that the Company's product will be able to run with third party
software after December 31, 1999 however.
The total cost associated with required product and systems modifications to
become Year 2000 compliant is not expected to be material to the Company's
financial position. The Company spent approximately $450,000 during 1998 in
getting its major business systems upgraded and Year 2000 compliant. The Company
plans on using both internal and external resources during the remainder of 1999
to continue to replace and test hardware and software for Year 2000 compliance.
Currently the Company does not anticipate spending more than $200,000 in
connection with its Year 2000 projects during 1999. The majority of this will be
spent on the purchase of new or replacement hardware and software and upgrades,
and on updating software code for its products, and this will be funded from
operations. The anticipated costs and scope of the Year 2000 project are based
on management's best estimates using information currently available and
numerous assumptions about future events. However, there can be no guarantee
that these estimates will be achieved and actual results could differ materially
from these plans.
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Year 2000 project is expected
to reduce the Company's level of uncertainty about the Year 2000 problem, and in
particular, about the Year 2000 compliance and readiness of its products.
The Company currently obtains a significant amount of its revenue from
relatively few customers. There can be no assurance that the Year 2000 issue
will not pose significant problems for the computer systems of these customers,
which could in turn affect the customers' ability to purchase machines and
generate revenue for the Company. Accordingly, there can be no assurance revenue
generated for the Company will not be affected by the Year 2000 issues that
these customers might have. The Company cannot predict the nature of any such
changes or their impact on the Company.
Factors Affecting Future Results
Management of Changing Business - The Company is currently in the process
of shifting its business strategy from one of high-volume manufacturing and
placement of slot machines with a goal of capturing market share, to a strategy
that emphasizes the quality and feature content of new game titles and takes
advantage of revenue-sharing opportunities. It will offer product extensions and
variations of successful existing games, however the emphasis will shift from
volume-based to one of providing a unique, fully-integrated gaming experience.
The Company has also relocated its manufacturing operations from California to
Nevada. This transition represents a significant challenge for the Company and
its management and employees, and places increased demand on its systems and
controls. The Company's ability to manage this change will require the Company
to continue to change, expand and improve its operational, management and
financial systems and controls to manage any outsourcing or relocation of
existing activities. Some of the keys to effecting this change are the ability
of the Company to sell its existing inventory of Odyssey and Quest products in a
timely manner, and to resolve outstanding collections issues with customers in
order to provide sufficient working capital during this transition process. If
the Company is not able to generate adequate funds from its working capital in a
timely manner or able to successfully manage the relocation of its manufacturing
activities, the Company's business, operating results and financial condition
could be adversely affected.
Liquidity - The Company has funded its operations to date primarily through
private and public offerings of its equity securities, the issuance of Senior
Discount Notes, term and equipment loans and from bank borrowings. At June 30,
1999 the Company had an accumulated deficit of $92,509,000 and a deficiency of
shareholders' equity of $30,052,000. Management was able to renegotiate the
terms of its
19
<PAGE>
line of credit with its bank in June 1999 so that this credit facility
will remain available to the Company through December 1999. In July 1999 the
Company announced that it had entered into a non-binding letter of intent with
the holders of its Senior Discount Notes to convert approximately $40 million of
the Senior Discount Notes into a new class of convertible preferred stock. The
Company had previously announced that it would not make the scheduled July 1,
1999 interest payment on the Senior Discount Notes, and the letter of intent
contemplates that accrued and unpaid interest on the Senior Discount Notes would
be forgiven through July 15, 1999. Under the letter of intent, the Company would
also receive additional funding of up to $5 million in new convertible senior
secured notes. The proposed restructuring is subject to a number of conditions,
including the receipt of necessary gaming and regulatory approvals and the
negotiation and execution of definitive documentation. Management is continuing
to review financing alternatives available to the Company such as additional
equity or debt offerings, joint ventures, alternative distribution channels,
conversion of some or all of its debt to equity and sale of all or a portion of
the Company's assets. If the plans that management have undertaken to improve
the Company's liquidity position are not successfully completed in a timely
manner it is probable that insufficient funds will exist to satisfy the
Company's operating requirements. The Company will be required to make
adjustments to its operating activities to operate within the restrictions of
its liquidity and this could adversely affect the Company's business, operating
results and financial condition. To the extent that the Company sells additional
equity or issues any convertible debt securities, or converts any existing debt
into equity, this could result in additional dilution to existing shareholders.
There can be no assurance that the Company will be able to successfully
renegotiate its existing credit facility or be able to raise additional funds
when and if needed.
Volatility of Stock Price - The market price of the Company's stock has been
subject to large fluctuations. The Company's stock price may be affected by
factors such as actual or unanticipated fluctuations in the Company's results of
operations, new product or technical introductions by the Company or any of its
competitors, developments with respect to patents, copyrights or proprietary
rights, conditions or trends in the gaming industry, changes in or failure by
the Company to meet securities analysts' expectations, general market conditions
and other factors. The Company's stock now trades on the Over The Counter (OTC)
Bulletin Board. This is likely to reduce the level of trading activity in the
Company's stock, result in higher bid/ask spreads, and increase the cost of
raising additional equity for the Company. The Company's stock price is expected
to be adversely affected due to the announced restructuring that, if
consummated, would result in a significant reallocation of the Company's equity
ownership. As a result, the volatility of the Company's stock price may
increase, however there can be no certainty as to how the public markets will
react in both the short and long-term to this proposed transaction.
Retention of 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. The
Company experienced high turnover among its senior management during the second
half of 1998 and in the first half of 1999. The Company also reduced its
workforce by approximately 20% in December 1998 and by an additional 35% in
March 1999. Subsequent to these reductions, the Company has continued to lose
additional employees, particularly in its sales and engineering organizations.
These factors, combined with the Company's poor operating results, its current
liquidity situation and the significant decrease in the price of the Company's
Common Stock, may have an adverse affect on the Company's ability to retain and
motivate its key employees. Competition is intense for highly skilled product
development employees in particular. In addition, the Company's officers and key
employees are not bound by non-competition 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 its existing employees could
have a material adverse affect on the Company's operating results and financial
condition. Should the Company offer additional stock option grants to its
existing employees to encourage them to continue their employment at the
Company, this may result in additional dilution to existing shareholders.
20
<PAGE>
Customer Retention - The Company's ability to sell product has been
hampered due to the current financial position of the Company which presents
risks to customers that the Company may not be able to fulfill its obligations
under license agreements or be available to provide warranty, repair or upgrade
services on products that it has already sold. The Company has experienced
negative reaction from customers who have had these views during the first half
of 1999 and who have indicated that they may not purchase additional product
from the Company or who have deferred purchase decisions until the uncertainties
surrounding the Company's liquidity position has been resolved. Certain of the
Company's competitors who have significantly greater financial and marketing
resources than the Company are also trying to take advantage of the Company's
financial position. To the extent that this results in the loss of any of the
Company's strategic customers or results in a loss of sales opportunities, the
Company's business, operating results and financial condition may be adversely
affected.
Intellectual Property Rights - 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 costly, and there can be no assurance that the Company will be
able to effectively protect its technology from misappropriation by competitors.
As the number of software products in the gaming industry increases and the
functionality of these products further overlaps, software developers and
publishers or competitors 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 with a desire
to disrupt the Company's business. The Company has been involved in two
intellectual property disputes since September, 1998. The Company has been able
to negotiate a settlement to each of these disputes. The September 1998 dispute
resulted in the Company entering into a license and royalty agreement with the
competitor and incurring an expense of $2,200,000. The second dispute, in March
1999, resulted in the Company entering into a cross-licensing arrangement with
the same competitor so that the Company was able to continue selling its product
and resulted in a favorable adjustment to income of approximately $500,000 in
the second quarter of 1999. There can by no assurance that similar claims will
not arise in the future or that the Company will be able to successfully
negotiate a settlement to such claims. Any such claims or litigation that may
arise can be costly and result in a diversion of management's attention, which
could have a material adverse 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 affect on the Company's business, operating results
and financial condition.
Changing Legislative Environment - In May 1999 the Nevada Legislature
passed legislation that negatively impacts the ability of slot machine
manufacturers to derive profit from machines that it has on a participation
basis in customer casinos. The legislation requires slot manufacturers to pay a
proportionate share of state gaming taxes related to their share of revenue from
the participation products. This will reduce the profitability of the
participation machines to the manufacturers. This legislation may require the
Company to review its business strategy of placing its premium products on a
participation basis with casino operators and require it to end its practice of
placing machines in casinos and sharing in the net win with the casino
operators. Adoption of similar legislation in additional jurisdictions that
attempt to restrict or prohibit slot machine manufacturers from receiving a
percentage of profits or revenues from a gaming machine placed on a casino floor
may have a material adverse impact upon the Company's business, operating
results and financial condition.
The opening of new casinos, including casinos in jurisdictions where gaming
has recently been legalized, historically has driven growth for demand in slot
machines. However, in recent years, the legalization of gaming in new
jurisdictions has been significantly reduced; therefore, demand based on new
openings will be largely limited to new projects in existing markets. Certain
markets that currently permit gaming are contemplating legislation to limit,
reduce or eliminate gaming. If successful such legislation could limit growth
opportunities for the Company. As a result of these factors, there can be no
assurance that the slot machine market will sustain the rate of growth that was
possible in the first half of this decade.
21
<PAGE>
Rapidly Changing Technology - The Company's products utilize hardware
components that have been developed primarily for the personal computer and
multimedia industries. These industries are characterized by rapid technological
change and product enhancements. The Company's ability to remain competitive and
retain any technological lead may depend in part upon its ability to continually
develop new slot machine games that take full advantage of the technological
possibilities of state-of-the-art hardware. Should any current or potential
competitor of the Company succeed in developing a competing software-based
gaming platform, such a 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 adversely affect the Company's operating
results.
Dependence on Single-Source Suppliers - The Company currently obtains a number
of its systems components from single-source suppliers. In particular the
touchscreen and picture tube that comprise the video display are supplied by
MircoTouch 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
Company is also considering exclusive outsourcing arrangements whereby a single
third party contract manufacturer will assemble all or a significant portion of
new products that the Company is planning to introduce. The failure or delay by
any supplier to furnish the Company with the required components or products
would adversely affect the Company's business, financial condition and results
of operations.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 1999, the Company announced the settlement of its patent
infringement litigation with International Game Technology, Inc. ("IGT"). Under
the settlement agreement, the Company obtained an exclusive sublicense from IGT
related to the disputed patents, which will allow the Company to continue to
sell its Lucky Draw and Multi Draw poker games without any limitations. The
Company's customers who chose to purchase this product will be required to
exercise a separate license agreement with IGT and to pay daily fees for the use
of the game under the terms of the settlement. The Company also cross licensed
certain of its intellectual property to IGT as part of the settlement and in
consideration IGT will pay a per-unit royalty to the Company for each product
sold that incorporates licensed technology upon the occurrence of certain
events. IGT also granted the Company development rights to create and distribute
games on IGT's future product platforms. As a result of settlement of disputed
royalties payable to IGT, the Company recorded a favorable adjustment to income
approximately $500,000 in the quarter ended June 30, 1999.
22
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Number Exhibit Description
------ -------------------
10.40 Amended and Restated Collateral Assignment, Patent Mortgage
and Security Agreement between the Company and
Silicon Valley Bank dated June 30, 1999
10.41 Loan and Security Agreement dated June 30, 1999, by and
between the Company and Silicon Valley Bank
10.42 Loan Modification Agreement dated June 30, 1999, by and
between the Company and Silicon Valley Bank
10.43 Cross-Corporate Continuing Guaranty Agreement dated
June 30, 1999, by and between the Company and
Silicon Valley Bank
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SILICON GAMING, INC.
By /s/ ANDREW S. PASCAL
---------------------------
Andrew S. Pascal
President, Chief Executive Officer,
Acting Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
Date: August 16, 1999
24
<PAGE>
Exhibit 10.40
-------------
AMENDED AND RESTATED
COLLATERAL ASSIGNMENT, PATENT MORTGAGE
AND SECURITY AGREEMENT
This Amended and Restated Collateral Assignment, Patent Mortgage and
Security Agreement is made as of June 30, 1999, by and between Silicon Gaming,
Inc. ("Assignor"), and Silicon Valley Bank, a California banking corporation
("Assignee").
RECITALS
--------
A. Assignor and Assignee entered into an Intellectual Property Security
Agreement dated as of November 25, 1997 (the "Existing IP Security Agreement"),
in connection with a certain Loan and Security Agreement between Assignor and
Assignee dated November 25, 1997 (the "Existing Loan Agreement"; the Existing
Loan Agreement and all related documents, instruments and agreements are
referred to collectively herein as the "Existing Loan Documents").
B. Assignee and Assignor are, concurrently herewith, entering into
certain loan documents, including but not limited to a new Loan and Security
Agreement (the "New Loan Agreement"; the New Loan Agreement and all related
documents, instruments and agreements are referred to collectively herein as the
"New Loan Documents").
C. Pursuant to an Amendment to Loan Documents dated even date herewith,
the Existing Loan Documents are being amended to read as set forth in the New
Loan Documents.
D. The parties desire to amend and restate the Existing IP Security
Agreement to read as set forth below.
NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
1. Assignment, Patent Mortgage and Grant of Security Interest. As
----------------------------------------------------------
collateral security for the prompt and complete payment and performance of all
of Assignor's present or future indebtedness, obligations and liabilities to
Assignee, Assignor hereby assigns, transfers, conveys and grants a security
interest and mortgage to Assignee, as security, but not as an ownership
interest, in and to Assignor's entire right, title and interest in, to and under
the following (all of which shall collectively be called the "Collateral"):
(a) All of present and future United States registered copyrights and
copyright registrations, including, without limitation, the registered
copyrights listed in Exhibit A to this Agreement (and including all of the
---------
exclusive rights afforded a copyright registrant in the United States under 17
U.S.C. (S)106 and any exclusive rights which may in the future arise by act of
Congress or otherwise) and all present and future applications for copyright
registrations (including applications for copyright registrations of derivative
works and compilations) (collectively, the "Registered Copyrights"), and any and
all royalties, payments, and other amounts payable to Assignor in connection
with the Registered Copyrights, together with all renewals and extensions of the
Registered Copyrights, the right to recover for all past, present, and future
infringements of the Registered Copyrights, and all computer programs, computer
databases, computer program flow diagrams, source codes, object codes and all
tangible property embodying or incorporating the Registered Copyrights, and all
other rights of every kind
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whatsoever accruing thereunder or pertaining thereto.
(b) All present and future copyrights which are not registered in the
United States Copyright Office (the "Unregistered Copyrights"), whether now
owned or hereafter acquired, and any and all royalties, payments, and other
amounts payable to Assignor in connection with the Unregistered Copyrights,
together with all renewals and extensions of the Unregistered Copyrights, the
right to recover for all past, present, and future infringements of the
Unregistered Copyrights, and all computer programs, computer databases, computer
program flow diagrams, source codes, object codes and all tangible property
embodying or incorporating the Unregistered Copyrights, and all other rights of
every kind whatsoever accruing thereunder or pertaining thereto. The Registered
Copyrights and the Unregistered Copyrights collectively are referred to herein
as the "Copyrights."
(c) All right, title and interest in and to any and all present and
future license agreements with respect to the Copyrights (the "Licenses").
(d) All present and future accounts, accounts receivable and other
rights to payment arising from, in connection with or relating to the
Copyrights.
(e) Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or hereafter
existing, created, acquired or held;
(f) Any and all design rights which may be available to Assignor now
or hereafter existing, created, acquired or held;
(g) All patents, patent applications and like protections including,
without limitation, improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same, including without limitation
the patents and patent applications set forth on Exhibit B attached hereto
---------
(collectively, the "Patents");
(h) Any trademark and servicemark rights, whether registered or not,
applications to register and registrations of the same and like protections, and
the entire goodwill of the business of Assignor connected with and symbolized by
such trademarks, including without limitation those set forth on Exhibit C
---------
attached hereto (collectively, the "Trademarks")
(i) Any and all claims for damages by way of past, present and future
infringements of any of the rights included above, with the right, but not the
obligation, to sue for and collect such damages for said use or infringement of
the intellectual property rights identified above;
(j) All licenses or other rights to use any of the Copyrights, Patents
or Trademarks, and all license fees and royalties arising from such use to the
extent permitted by such license or rights;
(k) All amendments, extensions, renewals and extensions of any of the
Copyrights, Trademarks or Patents; and
(l) All proceeds and products of the foregoing, including without
limitation
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<PAGE>
all payments under insurance or any indemnity or warranty payable in respect of
any of the foregoing.
THE INTEREST IN THE COLLATERAL BEING ASSIGNED HEREUNDER SHALL NOT BE CONSTRUED
AS A CURRENT ASSIGNMENT, BUT AS A CONTINGENT ASSIGNMENT TO SECURE ASSIGNOR'S
OBLIGATIONS TO ASSIGNEE UNDER THE LOAN AGREEMENT.
2. Authorization and Request. Assignor authorizes and requests that the
--------------------------
Register of Copyrights and the Commissioner of Patents and Trademarks record
this conditional assignment.
3. Covenants and Warranties. Assignor represents, warrants, covenants
-------------------------
and agrees as follows:
(a) Assignor is now the sole owner of the Collateral, except for non-
exclusive licenses granted by Assignor to its customers in the ordinary course
of business.
(b) Listed on Exhibits A are all registered copyrights owned by
Assignor, in which Assignor has an interest, or which are used in Assignor's
business.
(c) Each employee, agent and/or independent contractor who has
participated in the creation of the property constituting the Collateral has
either executed an assignment of his or her rights of authorship to Assignor or
is an employee of Assignor acting within the scope of his or her employment and
was such an employee at the time of said creation.
(d) All of Assignor's present and future software, computer programs
and other works of authorship subject to United States copyright protection, the
sale, licensing or other disposition of which results in royalties receivable,
license fees receivable, accounts receivable or other sums owing to Assignor
(collectively, "Receivables"), have been and shall be registered with the United
States Copyright Office prior to the date Assignor requests or accepts any loan
from Assignee with respect to such Receivables and prior to the date Assignor
includes any such Receivables in any accounts receivable aging, borrowing base
report or certificate or other similar report provided to Assignee, and Assignor
shall provide to Assignee copies of all such registrations promptly upon the
receipt of the same.
(e) Assignor shall undertake all reasonable measures to cause its
employees, agents and independent contractors to assign to Assignor all rights
of authorship to any copyrighted material in which Assignor has or may
subsequently acquire any right or interest.
(f) Performance of this Assignment does not conflict with or result in
a breach of any agreement to which Assignor is bound, except to the extent that
certain intellectual property agreements prohibit the assignment of the rights
thereunder to a third party without the licensor's or other party's consent and
this Assignment constitutes an assignment.
(g) During the term of this Agreement, Assignor will not transfer or
otherwise encumber any interest in the Collateral, except for non-exclusive
licenses granted by Assignor in the ordinary course of business or as set forth
in this Assignment;
(h) Each of the Patents is valid and enforceable, and no part of the
Collateral
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<PAGE>
has been judged invalid or unenforceable, in whole or in part, and no claim has
been made that any part of the Collateral violates the rights of any third
party;
(i) Assignor shall promptly advise Assignee of any material adverse
change in the composition of the Collateral, including but not limited to any
subsequent ownership right of the Assignor in or to any Trademark, Patent or
Copyright not specified in this Assignment;
(j) Assignor shall (i) protect, defend and maintain the validity and
enforceability of the Trademarks, Patents and Copyrights, (ii) use its best
efforts to detect infringements of the Trademarks, Patents and Copyrights and
promptly advise Assignee in writing of material infringements detected and (iii)
not allow any Trademarks, Patents, or Copyrights to be abandoned, forfeited or
dedicated to the public without the written consent of Assignee, which shall not
be unreasonably withheld unless Assignor determines that reasonable business
practices suggest that abandonment is appropriate.
(k) Assignor shall promptly register the most recent version of any of
Assignor's Copyrights, if not so already registered, and shall, from time to
time, execute and file such other instruments, and take such further actions as
Assignee may reasonably request from time to time to perfect or continue the
perfection of Assignee's interest in the Collateral;
(l) This Assignment creates, and in the case of after acquired
Collateral, this Assignment will create at the time Assignor first has rights in
such after acquired Collateral, in favor of Assignee a valid and perfected first
priority security interest in the Collateral in the United States securing the
payment and performance of the obligations evidenced by the Loan Agreement upon
making the filings referred to in clause (m) below;
(m) To its knowledge, except for, and upon, the filing with the United
States Patent and Trademark office with respect to the Patents and Trademarks
and the Register of Copyrights with respect to the Copyrights necessary to
perfect the security interests and assignment created hereunder and except as
has been already made or obtained, no authorization, approval or other action
by, and no notice to or filing with, any U.S. governmental authority or U.S.
regulatory body is required either (i) for the grant by Assignor of the security
interest granted hereby or for the execution, delivery or performance of this
Assignment by Assignor in the U.S. or (ii) for the perfection in the United
States or the exercise by Assignee of its rights and remedies thereunder;
(n) All information heretofore, herein or hereafter supplied to
Assignee by or on behalf of Assignor with respect to the Collateral is accurate
and complete in all material respects.
(o) Assignor shall not enter into any agreement that would materially
impair or conflict with Assignor's obligations hereunder without Assignee's
prior written consent, which consent shall not be unreasonably withheld.
Assignor shall not permit the inclusion in any material contract to which it
becomes a party of any provisions that could or might in any way prevent the
creation of a security interest in Assignor's rights and interest in any
property included within the definition of the Collateral acquired under such
contracts, except that certain contracts may contain anti-assignment provisions
that could in effect prohibit the creation of a security interest in such
contracts.
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<PAGE>
(p) Upon any executive officer of Assignor obtaining actual knowledge
thereof, Assignor will promptly notify Assignee in writing of any event that
materially adversely affects the value of any material Collateral, the ability
of Assignor to dispose of any material Collateral or the rights and remedies of
Assignee in relation thereto, including the levy of any legal process against
any of the Collateral.
4. Assignee's Rights. Assignee shall have the right, but not the
------------------
obligation, to take, at Assignor's sole expense, any actions that Assignor is
required under this Assignment to take but which Assignor fails to take, after
fifteen (15) days' notice to Assignor. Assignor shall reimburse and indemnify
Assignee for all reasonable costs and reasonable expenses incurred in the
reasonable exercise of its rights under this section 4.
5. Inspection Rights. Assignor hereby grants to Assignee and its
------------------
employees, representatives and agents the right to visit, during reasonable
hours upon prior reasonable written notice to Assignor, and any of Assignor's
plants and facilities that manufacture, install or store products (or that have
done so during the prior six-month period) that are sold utilizing any of the
Collateral, and to inspect the products and quality control records relating
thereto upon reasonable written notice to Assignor and as often as may be
reasonably requested, but not more than one (1) in every six (6) months;
provided, however, nothing herein shall entitle Assignee access to Assignor's
trade secrets and other proprietary information.
6. Further Assurances; Attorney in Fact.
-------------------------------------
(a) Upon an Event of Default, on a continuing basis thereafter,
Assignor will, subject to any prior licenses, encumbrances and restrictions and
prospective licenses, make, execute, acknowledge and deliver, and file and
record in the proper filing and recording places in the United States, all such
instruments, including, appropriate financing and continuation statements and
collateral agreements and filings with the United States Patent and Trademarks
Office and the Register of Copyrights, and take all such action as may
reasonably be deemed necessary or advisable, or as requested by Assignee, to
perfect Assignee's security interest in all Copyrights, Patents and Trademarks
and otherwise to carry out the intent and purposes of this Collateral
Assignment, or for assuring and confirming to Assignee the grant or perfection
of a security interest in all Collateral.
(b) Upon an Event of Default, Assignor hereby irrevocably appoints
Assignee as Assignor's attorney-in-fact, with full authority in the place and
stead of Assignor and in the name of Assignor, Assignee or otherwise, from time
to time in Assignee's discretion, upon Assignor's failure or inability to do so,
to take any action and to execute any instrument which Assignee may deem
necessary or advisable to accomplish the purposes of this Collateral Assignment,
including:
(i) To modify, in its sole discretion, this Collateral Assignment
without first obtaining Assignor's approval of or signature to such modification
by amending Exhibit A, Exhibit B and Exhibit C, thereof, as appropriate, to
include reference to any right, title or interest in any Copyrights, Patents or
Trademarks acquired by Assignor after the execution hereof or to delete any
reference to any right, title or interest in any Copyrights, Patents or
Trademarks in which Assignor no longer has or claims any right, title or
interest; and
-5-
<PAGE>
(ii) To file, in its sole discretion, one or more financing or
continuation statements and amendments thereto, relative to any of the
Collateral without the signature of Assignor where permitted by law.
7. Events of Default. The occurrence of any of the following shall
------------------
constitute an Event of Default under the Assignment:
(a) An Event of Default occurs under the Loan Agreement; or
(b) Assignor breaches any warranty or agreement made by Assignor in
this Assignment.
8. Remedies. Upon the occurrence and continuance of an Event of Default,
---------
Assignee shall have the right to exercise all the remedies of a secured party
under the California Uniform Commercial Code, including without limitation the
right to require Assignor to assemble the Collateral and any tangible property
in which Assignee has a security interest and to make it available to Assignee
at a place designated by Assignee. Assignee shall have a nonexclusive, royalty
free license to use the Copyrights, Patents and Trademarks to the extent
reasonably necessary to permit Assignee to exercise its rights and remedies upon
the occurrence of an Event of Default. Assignor will pay any expenses
(including reasonable attorney's fees) incurred by Assignee in connection with
the exercise of any of Assignee's rights hereunder, including without limitation
any expense incurred in disposing of the Collateral. All of Assignee's rights
and remedies with respect to the Collateral shall be cumulative.
9. Indemnity. Assignor agrees to defend, indemnify and hold harmless
----------
Assignee and its officers, employees, and agents against: (a) all obligations,
demands, claims, and liabilities claimed or asserted by any other party in
connection with the transactions contemplated by this Agreement, and (b) all
losses or expenses in any way suffered, incurred, or paid by Assignee as a
result of or in any way arising out of, following or consequential to
transactions between Assignee and Assignor, whether under this Assignment or
otherwise (including without limitation, reasonable attorneys fees and
reasonable expenses), except for losses arising form or out of Assignee's gross
negligence or willful misconduct.
10. Release. At such time as Assignor shall completely satisfy all of the
--------
obligations secured hereunder, Assignee shall execute and deliver to Assignor
all assignments and other instruments as may be reasonably necessary or proper
to terminate Assignee's security interest in the Collateral, subject to any
disposition of the Collateral which may have been made by Assignee pursuant to
this Agreement. For the purpose of this Agreement, the obligations secured
hereunder shall be deemed to continue if Assignor enters into any bankruptcy or
similar proceeding at a time when any amount paid to Assignee could be ordered
to be repaid as a preference or pursuant to a similar theory, and shall continue
until it is finally determined that no such repayment can be ordered.
11. No Waiver. No course of dealing between Assignor and Assignee, nor
---------
any failure to exercise nor any delay in exercising, on the part of Assignee,
any right, power, or privilege under this Agreement or under the Loan Agreement
or any other agreement, shall operate as a waiver. No single or partial exercise
of any right, power, or privilege under this Agreement or under the Loan
Agreement or any other agreement by Assignee shall preclude any other or further
exercise of such right, power, or privilege or the exercise of any other right,
power, or
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<PAGE>
privilege by Assignee.
12. Rights Are Cumulative. All of Assignee's rights and remedies with
---------------------
respect to the Collateral whether established by this Agreement, the Loan
Agreement, or any other documents or agreements, or by law shall be cumulative
and may be exercised concurrently or in any order.
13. Course of Dealing. No course of dealing, nor any failure to exercise,
------------------
nor any delay in exercising any right, power or privilege hereunder shall
operate as a waiver thereof.
14. Attorneys' Fees. If any action relating to this Assignment is brought
----------------
by either party hereto against the other party, the prevailing party shall be
entitled to recover reasonable attorneys fees, costs and disbursements.
15. Amendments. This Assignment may be amended only by a written
-----------
instrument signed by both parties hereto. To the extent that any provision of
this Agreement conflicts with any provision of the Loan Agreement, the provision
giving Assignee greater rights or remedies shall govern, it being understood
that the purpose of this Agreement is to add to, and not detract from, the
rights granted to Assignee under the Loan Agreement. This Agreement, the Loan
Agreement, and the documents relating thereto comprise the entire agreement of
the parties with respect to the matters addressed in this Agreement.
16. Severability. The provisions of this Agreement are severable. If any
------------
provision of this Agreement is held invalid or unenforceable in whole or in part
in any jurisdiction, then such invalidity or unenforceability shall affect only
such provision, or part thereof, in such jurisdiction, and shall not in any
manner affect such provision or part thereof in any other jurisdiction, or any
other provision of this Agreement in any jurisdiction.
17. Counterparts. This Assignment may be executed in two or more
-------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute the same instrument.
18. California Law and Jurisdiction. This Assignment shall be governed by
--------------------------------
the laws of the State of California, without regard for choice of law
provisions. Assignor and Assignee consent to the nonexclusive jurisdiction of
any state or federal court located in Orange County, California.
19. Confidentiality. In handling any confidential information, Assignee
----------------
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Assignment
except that the disclosure of this information may be made (i) to the affiliates
of the Assignee, (ii) to prospective transferee or purchasers of an interest in
the obligations secured hereby, provided that they have entered into a
comparable confidentiality agreement in favor of Assignor and have delivered a
copy to Assignor, (iii) as required by law, regulation, rule or order, subpoena
judicial order or similar order and (iv) as may be required in connection with
the examination, audit or similar investigation of Assignee.
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<PAGE>
20. WAIVER OF RIGHT TO JURY TRIAL. ASSIGNEE AND ASSIGNOR EACH HEREBY
-----------------------------
WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING
OUT OF, OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT; OR (II) ANY OTHER
PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN ASSIGNEE AND ASSIGNOR; OR
(III) ANY CONDUCT, ACTS OR OMISSIONS OF ASSIGNEE OR ASSIGNOR OR ANY OF THEIR
DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS
AFFILIATED WITH ASSIGNEE OR ASSIGNOR; IN EACH OF THE FOREGOING CASES, WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
This Amended and Restated Collateral Assignment, Patent Mortgage and
Security Agreement amends and restates, in its entirety, the Existing IP
Security Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment on the
day and year first above written.
ASSIGNOR:
Silicon Gaming, Inc.
/s/ Andrew S. Pascal
By:_____________________________
President & CEO
Title___________________________
Name (please print):
Andrew S. Pascal
________________________________
Address of Assignor:
2800 West Bayshore Road
Palo Alto, California 94303
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Silicon Valley Bank
Loan and Security Agreement
Borrower: Silicon Gaming, Inc. and the Subsidiaries signing below
Address: 2800 W. Bayshore Road
Palo Alto, California 94303
Date: June 30, 1999
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK, COMMERCIAL FINANCE DIVISION ("Silicon"), whose address is
3003 Tasman Drive, Santa Clara, California 95054 and the borrowers named above
(including without limitation the subsidiaries signing below) (all, jointly and
severally, the "Borrower"), whose chief executive office is located at the above
address ("Borrower's Address"). The Schedule to this Agreement (the "Schedule")
shall for all purposes be deemed to be a part of this Agreement, and the same is
an integral part of this Agreement. (Definitions of certain terms used in this
Agreement are set forth in Section 8 below.)
1. LOANS.
1.1 Loans. Silicon will make loans to Borrower (the "Loans"), in amounts
determined by Silicon in its sole discretion, up to the amounts (the "Credit
Limit") shown on the Schedule, provided no Default or Event of Default has
occurred and is continuing, and subject to deduction of any Reserves for accrued
interest and such other Reserves as Silicon deems proper from time to time.
1.2 Interest. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Silicon's discretion, be charged to
Borrower's loan account, and the same shall thereafter bear interest at the same
rate as the other Loans. Silicon may, in its discretion, charge interest to
Borrower's Deposit Accounts maintained with Silicon. Regardless of the amount
of Obligations that may be outstanding from time to time, Borrower shall pay
Silicon minimum monthly interest during the term of this Agreement in the amount
set forth on the Schedule (the "Minimum Monthly Interest").
1.3 Overadvances. If at any time or for any reason the total of all
outstanding Loans and all other Obligations exceeds the Credit Limit (an
"Overadvance"), Borrower shall immediately pay the amount of the excess to
Silicon, without notice or demand. Without limiting Borrower's obligation to
repay to Silicon on demand the amount of any Overadvance, Borrower agrees to pay
Silicon interest on the outstanding amount of any Overadvance, on demand, at a
rate equal to the interest rate which would otherwise be applicable to the
Overadvance, plus an additional 2% per annum.
1.4 Fees. Borrower shall pay Silicon the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to Silicon and are not
refundable.
1.5 Letters of Credit. [Not Applicable]
2. SECURITY INTEREST.
2.1 Security Interest. To secure the payment and performance of all of the
Obligations when due, Borrower hereby grants to Silicon a security interest in
all of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located (collectively, the "Collateral"): All Inventory,
Equipment, Receivables, and General Intangibles, including, without limitation,
all of Borrower's Deposit Accounts, and all money, and all property now or at
any time in the future in Silicon's possession (including claims and credit
balances), and all proceeds (including proceeds of any insurance policies,
proceeds of proceeds and claims against third parties), all products and all
books and records related to any of the foregoing (all of the foregoing,
together with all other property in which Silicon may now or in the future be
granted a lien or security interest, is referred to herein, collectively, as the
"Collateral").
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3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Silicon to enter into this Agreement and to make Loans,
Borrower represents and warrants to Silicon as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
3.1 Corporate Existence and Authority. Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation. Borrower is and will
continue to be qualified and licensed to do business in all jurisdictions in
which any failure to do so would have a material adverse effect on Borrower.
The execution, delivery and performance by Borrower of this Agreement, and all
other documents contemplated hereby (i) have been duly and validly authorized,
(ii) are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), and (iii) do not violate Borrower's articles or certificate
of incorporation, or Borrower's by-laws, or any law or any material agreement
or instrument which is binding upon Borrower or its property, and (iv) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or its
property.
3.2 Name; Trade Names and Styles. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Silicon 30 days' prior written notice before changing its
name or doing business under any other name. Borrower has complied, and will in
the future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 Place of Business; Location of Collateral. The address set forth in the
heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Silicon at least 30 days prior
written notice before opening any additional place of business, changing its
chief executive office, or moving any of the Collateral to a location other than
Borrower's Address or one of the locations set forth on the Schedule.
3.4 Title to Collateral; Permitted Liens. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Silicon now has,
and will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Silicon and the Collateral against all claims
of others. None of the Collateral now is or will be affixed to any real
property in such a manner, or with such intent, as to become a fixture.
Borrower is not and will not become a lessee under any real property lease
pursuant to which the lessor may obtain any rights in any of the Collateral and
no such lease now prohibits, restrains, impairs or will prohibit, restrain or
impair Borrower's right to remove any Collateral from the leased premises.
Whenever any Collateral is located upon premises in which any third party has an
interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien
or otherwise), Borrower shall, whenever requested by Silicon, use its best
efforts to cause such third party to execute and deliver to Silicon, in form
acceptable to Silicon, such waivers and subordinations as Silicon shall specify,
so as to ensure that Silicon's rights in the Collateral are, and will continue
to be, superior to the rights of any such third party. Borrower will keep in
full force and effect, and will comply with all the terms of, any lease of real
property where any of the Collateral now or in the future may be located.
3.5 Maintenance of Collateral. Borrower will maintain the Collateral in good
working condition, and Borrower will not use the Collateral for any unlawful
purpose. Borrower will immediately advise Silicon in writing of any material
loss or damage to the Collateral.
3.6 Books and Records. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 Financial Condition, Statements and Reports. All financial statements
now or in the future delivered to Silicon have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in the
future will completely and accurately reflect the financial condition of
Borrower, at the times and for the periods therein stated. Between the last
date covered by any such statement provided to Silicon and the date hereof,
there has been no material adverse change in the financial condition or business
of Borrower. Borrower is now and will continue to be solvent.
3.8 Tax Returns and Payments; Pension Contributions. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely pay,
all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Silicon in
writing of the commencement of, and any material
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development in, the proceedings, and (iii) posts bonds or takes any other steps
required to keep the contested taxes from becoming a lien upon any of the
Collateral. Borrower is unaware of any claims or adjustments proposed for any of
Borrower's prior tax years which could result in additional taxes becoming due
and payable by Borrower. Borrower has paid, and shall continue to pay all
amounts necessary to fund all present and future pension, profit sharing and
deferred compensation plans in accordance with their terms, and Borrower has not
and will not withdraw from participation in, permit partial or complete
termination of, or permit the occurrence of any other event with respect to, any
such plan which could result in any liability of Borrower, including any
liability to the Pension Benefit Guaranty Corporation or its successors or any
other governmental agency. Borrower shall, at all times, utilize the services of
an outside payroll service providing for the automatic deposit of all payroll
taxes payable by Borrower.
3.9 Compliance with Law. Borrower has complied, and will comply, in all
material respects, with all provisions of all foreign, federal, state and local
laws and regulations relating to Borrower, including, but not limited to, those
relating to Borrower's ownership of real or personal property, the conduct and
licensing of Borrower's business, and all environmental matters.
3.10 Litigation. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted. Borrower will promptly inform Silicon in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving any single claim of
$100,000 or more, or involving $100,000 or more in the aggregate.
3.11 Use of Proceeds. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation U of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
4. RECEIVABLES.
4.1 Representations Relating to Receivables. Borrower represents and
warrants to Silicon as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made, (i)
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business, and (ii)
meet the Minimum Eligibility Requirements set forth in Section 8 below.
4.2 Representations Relating to Documents and Legal Compliance. Borrower
represents and warrants to Silicon as follows: All statements made and all
unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's books and
records are and shall be genuine and in all respects what they purport to be,
and all signatories and endorsers have the capacity to contract. All sales and
other transactions underlying or giving rise to each Receivable shall fully
comply with all applicable laws and governmental rules and regulations. All
signatures and endorsements on all documents, instruments, and agreements
relating to all Receivables are and shall be genuine, and all such documents,
instruments and agreements are and shall be legally enforceable in accordance
with their terms.
4.3 Schedules and Documents relating to Receivables. Borrower shall deliver
to Silicon transaction reports and loan requests, schedules and assignments of
all Receivables, and schedules of collections, all on Silicon's standard forms;
provided, however, that Borrower's failure to execute and deliver the same shall
not affect or limit Silicon's security interest and other rights in all of
Borrower's Receivables, nor shall Silicon's failure to advance or lend against a
specific Receivable affect or limit Silicon's security interest and other rights
therein. Loan requests received after 12:00 Noon will not be considered by
Silicon until the next Business Day. Together with each such schedule and
assignment, or later if requested by Silicon, Borrower shall furnish Silicon
with copies (or, at Silicon's request, originals) of all contracts, orders,
invoices, and other similar documents, and all original shipping instructions,
delivery receipts, bills of lading, and other evidence of delivery, for any
goods the sale or disposition of which gave rise to such Receivables, and
Borrower warrants the genuineness of all of the foregoing. Borrower shall also
furnish to Silicon an aged accounts receivable trial balance in such form and at
such intervals as Silicon shall request. In addition, Borrower shall deliver
to Silicon the originals of all instruments, chattel paper, security agreements,
guarantees and other documents and property evidencing or securing any
Receivables, immediately upon receipt thereof and in the same form as received,
with all necessary indorsements, all of which shall be with recourse. Borrower
shall also provide Silicon with copies of all credit memos within two days after
the date issued.
4.4 Collection of Receivables. Borrower shall have the right to collect all
Receivables, unless and until a Default or an Event of Default has occurred.
Borrower shall hold all payments on, and proceeds of, Receivables in trust for
Silicon, and Borrower shall immediately deliver all such
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payments and proceeds to Silicon in their original form, duly endorsed in blank,
to be applied to the Obligations in such order as Silicon shall determine.
Silicon may, in its discretion, require that all proceeds of Collateral be
deposited by Borrower into a lockbox account, or such other "blocked account" as
Silicon may specify, pursuant to a blocked account agreement in such form as
Silicon may specify. Silicon or its designee may, at any time, notify Account
Debtors that the Receivables have been assigned to Silicon.
4.5. Remittance of Proceeds. All proceeds arising from the disposition of
any Collateral shall be delivered, in kind, by Borrower to Silicon in the
original form in which received by Borrower not later than the following
Business Day after receipt by Borrower, to be applied to the Obligations in such
order as Silicon shall determine; provided that, if no Default or Event of
Default has occurred, Borrower shall not be obligated to remit to Silicon the
proceeds of the sale of worn out or obsolete equipment disposed of by Borrower
in good faith in an arm's length transaction for an aggregate purchase price of
$25,000 or less (for all such transactions in any fiscal year). Borrower agrees
that it will not commingle proceeds of Collateral with any of Borrower's other
funds or property, but will hold such proceeds separate and apart from such
other funds and property and in an express trust for Silicon. Nothing in this
Section limits the restrictions on disposition of Collateral set forth elsewhere
in this Agreement.
4.6 Disputes. Borrower shall notify Silicon promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in full,
or agree to do any of the foregoing, except that Borrower may do so, provided
that: (i) Borrower does so in good faith, in a commercially reasonable manner,
in the ordinary course of business, and in arm's length transactions, which are
reported to Silicon on the regular reports provided to Silicon; (ii) no Default
or Event of Default has occurred and is continuing; and (iii) taking into
account all such discounts settlements and forgiveness, the total outstanding
Loans will not exceed the Credit Limit. Silicon may, at any time after the
occurrence of an Event of Default, settle or adjust disputes or claims directly
with Account Debtors for amounts and upon terms which Silicon considers
advisable in its reasonable credit judgment and, in all cases, Silicon shall
credit Borrower's Loan account with only the net amounts received by Silicon in
payment of any Receivables.
4.7 Returns. Provided no Event of Default has occurred and is continuing, if
any Account Debtor returns any Inventory to Borrower in the ordinary course of
its business, Borrower shall promptly determine the reason for such return and
promptly issue a credit memorandum to the Account Debtor in the appropriate
amount (sending a copy to Silicon). In the event any attempted return occurs
after the occurrence of any Event of Default, Borrower shall (i) hold the
returned Inventory in trust for Silicon, (ii) segregate all returned Inventory
from all of Borrower's other property, (iii) conspicuously label the returned
Inventory as Silicon's property, and (iv) immediately notify Silicon of the
return of any Inventory, specifying the reason for such return, the location and
condition of the returned Inventory, and on Silicon's request deliver such
returned Inventory to Silicon.
4.8 Verification. Silicon may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Silicon or such other name as Silicon may choose.
4.9 No Liability. Silicon shall not under any circumstances be responsible
or liable for any shortage or discrepancy in, damage to, or loss or destruction
of, any goods, the sale or other disposition of which gives rise to a
Receivable, or for any error, act, omission, or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Silicon be deemed to be responsible for any of
Borrower's obligations under any contract or agreement giving rise to a
Receivable. Nothing herein shall, however, relieve Silicon from liability for
its own gross negligence or willful misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 Financial and Other Covenants. Borrower shall at all times comply with
the financial and other covenants set forth in the Schedule.
5.2 Insurance. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Silicon, in such form and amounts as Silicon
may reasonably require, and Borrower shall provide evidence of such insurance to
Silicon, so that Silicon is satisfied that such insurance is, at all times, in
full force and effect. All such insurance policies shall name Silicon as an
additional loss payee, and shall contain a lenders loss payee endorsement in
form reasonably acceptable to Silicon. Upon receipt of the proceeds of any such
insurance, Silicon shall apply such proceeds in reduction of the Obligations as
Silicon shall determine in its sole discretion, except that, provided no Default
or Event of Default has occurred and is continuing, Silicon shall release to
Borrower insurance proceeds with respect to Equipment totaling less than
$100,000, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Silicon may
require reasonable assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any insurance, Silicon may, but
is not obligated to, obtain the same at
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Borrower's expense. Borrower shall promptly deliver to Silicon copies of all
reports made to insurance companies.
5.3 Reports. Borrower, at its expense, shall provide Silicon with the
written reports set forth in the Schedule, and such other written reports with
respect to Borrower (including budgets, sales projections, operating plans and
other financial documentation), as Silicon shall from time to time reasonably
specify.
5.4 Access to Collateral, Books and Records. At reasonable times, and on one
Business Day's notice, Silicon, or its agents, shall have the right to inspect
the Collateral, and the right to audit and copy Borrower's books and records.
Silicon shall take reasonable steps to keep confidential all information
obtained in any such inspection or audit, but Silicon shall have the right to
disclose any such information to its auditors, regulatory agencies, and
attorneys, and pursuant to any subpoena or other legal process. The foregoing
inspections and audits shall be at Borrower's expense and the charge therefor
shall be $500 per person per day (or such higher amount as shall represent
Silicon's then current standard charge for the same), plus reasonable out of
pocket expenses. Borrower will not enter into any agreement with any accounting
firm, service bureau or third party to store Borrower's books or records at any
location other than Borrower's Address, without first obtaining Silicon's
written consent, which may be conditioned upon such accounting firm, service
bureau or other third party agreeing to give Silicon the same rights with
respect to access to books and records and related rights as Silicon has under
this Loan Agreement. Borrower waives the benefit of any accountant-client
privilege or other evidentiary privilege precluding or limiting the disclosure,
divulgence or delivery of any of its books and records (except that Borrower
does not waive any attorney-client privilege).
5.5 Negative Covenants. Except as may be permitted in the Schedule, Borrower
shall not, without Silicon's prior written consent, do any of the following:
(i) merge or consolidate with another corporation or entity; (ii) acquire any
assets, except in the ordinary course of business; (iii) enter into any other
transaction outside the ordinary course of business; (iv) sell or transfer any
Collateral, except for the sale of finished Inventory in the ordinary course of
Borrower's business, and except for the sale of obsolete or unneeded Equipment
in the ordinary course of business; (v) store any Inventory or other Collateral
with any warehouseman or other third party; (vi) sell any Inventory on a sale-
or-return, guaranteed sale, consignment, or other contingent basis; (vii) make
any loans of any money or other assets; (viii) incur any debts, outside the
ordinary course of business, which would have a material, adverse effect on
Borrower or on the prospect of repayment of the Obligations; (ix) guarantee or
otherwise become liable with respect to the obligations of another party or
entity; (x) pay or declare any dividends on Borrower's stock (except for
dividends payable solely in stock of Borrower); (xi) redeem, retire, purchase or
otherwise acquire, directly or indirectly, any of Borrower's stock*; (xii) make
any change in Borrower's capital structure which would have a material adverse
effect on Borrower or on the prospect of repayment of the Obligations; or (xiv)
dissolve or elect to dissolve. Transactions permitted by the foregoing
provisions of this Section are only permitted if no Default or Event of Default
would occur as a result of such transaction.
* except for repurchase(s) of stock of employee(s) pursuant to stock purchase
agreement(s), provided that the aggregate amount paid for such repurchase(s) in
any fiscal year shall not exceed $50,000.
5.6 Litigation Cooperation. Should any third-party suit or proceeding be
instituted by or against Silicon with respect to any Collateral or in any manner
relating to Borrower, Borrower shall, without expense to Silicon, make available
Borrower and its officers, employees and agents and Borrower's books and
records, to the extent that Silicon may deem them reasonably necessary in order
to prosecute or defend any such suit or proceeding.
5.7 Further Assurances. Borrower agrees, at its expense, on request by
Silicon, to execute all documents and take all actions, as Silicon, may deem
reasonably necessary or useful in order to perfect and maintain Silicon's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
6. TERM.
6.1 Maturity Date. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"), subject to
Section 6.3 below.
6.2 Early Termination. This Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective three Business Days after
written notice of termination is given to Silicon; or (ii) by Silicon at any
time after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Silicon under
this Section 6.2, Borrower shall pay to Silicon a termination fee in an amount
equal to one percent (1.0%) of the Maximum Credit Limit, provided that no
termination fee shall be charged if the credit facility hereunder is replaced
with a new facility from another division of Silicon Valley Bank. The
termination fee shall be due and payable on the effective date of termination
and thereafter shall bear interest at a rate equal to the highest rate
applicable to any of the Obligations.
6.3 Payment of Obligations. On the Maturity Date or on any earlier effective
date of termination, Borrower
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shall pay and perform in full all Obligations, whether evidenced by installment
notes or otherwise, and whether or not all or any part of such Obligations are
otherwise then due and payable. Without limiting the generality of the
foregoing, if on the Maturity Date, or on any earlier effective date of
termination, there are any outstanding Letters of Credit issued by Silicon or
issued by another institution based upon an application, guarantee, indemnity or
similar agreement on the part of Silicon, then on such date Borrower shall
provide to Silicon cash collateral in an amount equal to the face amount of all
such Letters of Credit plus all interest, fees and cost due or to become due in
connection therewith, to secure all of the Obligations relating to said Letters
of Credit, pursuant to Silicon's then standard form cash pledge agreement.
Notwithstanding any termination of this Agreement, all of Silicon's security
interests in all of the Collateral and all of the terms and provisions of this
Agreement shall continue in full force and effect until all Obligations have
been paid and performed in full; provided that, without limiting the fact that
Loans are subject to the discretion of Silicon, Silicon may, in its sole
discretion, refuse to make any further Loans after termination. No termination
shall in any way affect or impair any right or remedy of Silicon, nor shall any
such termination relieve Borrower of any Obligation to Silicon, until all of the
Obligations have been paid and performed in full. Upon payment and performance
in full of all the Obligations and termination of this Agreement, Silicon shall
promptly deliver to Borrower termination statements, requests for reconveyances
and such other documents as may be required to fully terminate Silicon's
security interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 Events of Default. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall give
Silicon immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or delivered to Silicon by Borrower or any
of Borrower's officers, employees or agents, now or in the future, shall be
untrue or misleading in a material respect; or (b) Borrower shall fail to pay
when due any Loan or any interest thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time shall exceed
the Credit Limit; or (d) Borrower shall fail to comply with any of the financial
covenants set forth in the Schedule or shall fail to perform any other non-
monetary Obligation which by its nature cannot be cured; or (e) Borrower shall
fail to perform any other non-monetary Obligation, which failure is not cured
within 5 Business Days after the date due; or (f) any levy, assessment,
attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made
on all or any part of the Collateral which is not cured within 10 days after the
occurrence of the same; or (g) any default or event of default occurs under any
obligation secured by a Permitted Lien, which is not cured within any applicable
cure period or waived in writing by the holder of the Permitted Lien; or (h)
Borrower breaches any material contract or obligation, which has or may
reasonably be expected to have a material adverse effect on Borrower's business
or financial condition; or (i) Dissolution, termination of existence, insolvency
or business failure of Borrower; or appointment of a receiver, trustee or
custodian, for all or any part of the property of, assignment for the benefit of
creditors by, or the commencement of any proceeding by Borrower under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or (j) the commencement of any proceeding against Borrower or
any guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect, which is not cured
by the dismissal thereof within 30 days after the date commenced; or (k)
revocation or termination of, or limitation or denial of liability upon, any
guaranty of the Obligations or any attempt to do any of the foregoing, or
commencement of proceedings by any guarantor of any of the Obligations under any
bankruptcy or insolvency law; or (l) revocation or termination of, or limitation
or denial of liability upon, any pledge of any certificate of deposit,
securities or other property or asset of any kind pledged by any third party to
secure any or all of the Obligations, or any attempt to do any of the foregoing,
or commencement of proceedings by or against any such third party under any
bankruptcy or insolvency law; or (m) Borrower makes any payment on account of
any indebtedness or obligation which has been subordinated to the Obligations
other than as permitted in the applicable subordination agreement, or if any
Person who has subordinated such indebtedness or obligations terminates or in
any way limits his subordination agreement; or (n) there shall be a change in
the record or beneficial ownership of an aggregate of more than 20% of the
outstanding shares of stock of Borrower, in one or more transactions, compared
to the ownership of outstanding shares of stock of Borrower in effect on the *
date hereof, without the prior written consent of Silicon; or (o) Borrower shall
generally not pay its debts as they become due, or Borrower shall conceal,
remove or transfer any part of its property, with intent to hinder, delay or
defraud its creditors, or make or suffer any transfer of any of its property
which may be fraudulent under any bankruptcy, fraudulent conveyance or similar
law; or (p) there shall be a material adverse change in Borrower's business or
financial condition; or (q) Silicon, acting in good faith and in a commercially
reasonable manner, deems itself insecure because of the occurrence of an event
prior to the effective date hereof of which Silicon had no knowledge on the
effective date or because of the occurrence of an event on or subsequent to the
effective date. Silicon may cease making any Loans hereunder during any of the
above cure periods, and thereafter if an Event of Default has occurred.
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<PAGE>
* later of (i) the date hereof, or (ii) the date (if any) on which the
indebtedness of Borrower to B III Capital Partners, L.P., in the amount of
$40,000,000, plus accrued interest, is converted to equity in the form of equity
securities issued by Borrower
7.2 Remedies. Upon the occurrence of any Event of Default, and at any time
thereafter, Silicon, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrower), may do any one or more
of the following: (a) Cease making Loans or otherwise extending credit to
Borrower under this Agreement or any other document or agreement; (b) Accelerate
and declare all or any part of the Obligations to be immediately due, payable,
and performable, notwithstanding any deferred or installment payments allowed by
any instrument evidencing or relating to any Obligation; (c) Take possession of
any or all of the Collateral wherever it may be found, and for that purpose
Borrower hereby authorizes Silicon without judicial process to enter onto any of
Borrower's premises without interference to search for, take possession of,
keep, store, or remove any of the Collateral, and remain on the premises or
cause a custodian to remain on the premises in exclusive control thereof,
without charge for so long as Silicon deems it reasonably necessary in order to
complete the enforcement of its rights under this Agreement or any other
agreement; provided, however, that should Silicon seek to take possession of any
of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any
bond and any surety or security relating thereto required by any statute, court
rule or otherwise as an incident to such possession; (ii) any demand for
possession prior to the commencement of any suit or action to recover possession
thereof; and (iii) any requirement that Silicon retain possession of, and not
dispose of, any such Collateral until after trial or final judgment; (d) Require
Borrower to assemble any or all of the Collateral and make it available to
Silicon at places designated by Silicon which are reasonably convenient to
Silicon and Borrower, and to remove the Collateral to such locations as Silicon
may deem advisable; (e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Silicon shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time Silicon obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. Silicon shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Silicon deems reasonable, or on Silicon's premises, or elsewhere and
the Collateral need not be located at the place of disposition. Silicon may
directly or through any affiliated company purchase or lease any Collateral at
any such public disposition, and if permissible under applicable law, at any
private disposition. Any sale or other disposition of Collateral shall not
relieve Borrower of any liability Borrower may have if any Collateral is
defective as to title or physical condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Receivables and General Intangibles
comprising Collateral and, in connection therewith, Borrower irrevocably
authorizes Silicon to endorse or sign Borrower's name on all collections,
receipts, instruments and other documents, to take possession of and open mail
addressed to Borrower and remove therefrom payments made with respect to any
item of the Collateral or proceeds thereof, and, in Silicon's sole discretion,
to grant extensions of time to pay, compromise claims and settle Receivables and
the like for less than face value; (h) Offset against any sums in any of
Borrower's general, special or other Deposit Accounts with Silicon; and (i)
Demand and receive possession of any of Borrower's federal and state income tax
returns and the books and records utilized in the preparation thereof or
referring thereto. All reasonable attorneys' fees, expenses, costs, liabilities
and obligations incurred by Silicon with respect to the foregoing shall be added
to and become part of the Obligations, shall be due on demand, and shall bear
interest at a rate equal to the highest interest rate applicable to any of the
Obligations. Without limiting any of Silicon's rights and remedies, from and
after the occurrence of any Event of Default, the interest rate applicable to
the Obligations shall be increased by an additional four percent per annum.
7.3 Standards for Determining Commercial Reasonableness. Borrower and
Silicon agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable: (i) Notice of the sale is given to
Borrower at least seven days prior to the sale, and, in the case of a public
sale, notice of the sale is published at least seven days before the sale in a
newspaper of general circulation in the county where the sale is to be
conducted; (ii) Notice of the sale describes the collateral in general, non-
specific terms; (iii) The sale is conducted at a place designated by Silicon,
with or without the Collateral being present; (iv) The sale commences at any
time between 8:00 a.m. and 6:00 p.m; (v) Payment of the purchase price in cash
or by cashier's check or wire transfer is required; (vi) With respect to any
sale of any of the Collateral, Silicon may (but is not obligated to) direct any
prospective purchaser to ascertain directly from Borrower any and all
information concerning the same. Silicon shall be free to employ other methods
of noticing and selling the Collateral, in its discretion, if they are
commercially reasonable.
7.4 Power of Attorney. Upon the occurrence of any Event of Default, without
limiting Silicon's other rights and remedies, Borrower grants to Silicon an
irrevocable power of attorney coupled with an interest, authorizing
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<PAGE>
and permitting Silicon (acting through any of its employees, attorneys or
agents) at any time, at its option, but without obligation, with or without
notice to Borrower, and at Borrower's expense, to do any or all of the
following, in Borrower's name or otherwise, but Silicon agrees to exercise the
following powers in a commercially reasonable manner: (a) Execute on behalf of
Borrower any documents that Silicon may, in its sole discretion, deem advisable
in order to perfect and maintain Silicon's security interest in the Collateral,
or in order to exercise a right of Borrower or Silicon, or in order to fully
consummate all the transactions contemplated under this Agreement, and all other
present and future agreements; (b) Execute on behalf of Borrower any document
exercising, transferring or assigning any option to purchase, sell or otherwise
dispose of or to lease (as lessor or lessee) any real or personal property which
is part of Silicon's Collateral or in which Silicon has an interest; (c) Execute
on behalf of Borrower, any invoices relating to any Receivable, any draft
against any Account Debtor and any notice to any Account Debtor, any proof of
claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or
other lien, or assignment or satisfaction of mechanic's, materialman's or other
lien; (d) Take control in any manner of any cash or non-cash items of payment or
proceeds of Collateral; endorse the name of Borrower upon any instruments, or
documents, evidence of payment or Collateral that may come into Silicon's
possession; (e) Endorse all checks and other forms of remittances received by
Silicon; (f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same; (g)
Grant extensions of time to pay, compromise claims and settle Receivables and
General Intangibles for less than face value and execute all releases and other
documents in connection therewith; (h) Pay any sums required on account of
Borrower's taxes or to secure the release of any liens therefor, or both; (i)
Settle and adjust, and give releases of, any insurance claim that relates to any
of the Collateral and obtain payment therefor; (j) Instruct any third party
having custody or control of any books or records belonging to, or relating to,
Borrower to give Silicon the same rights of access and other rights with respect
thereto as Silicon has under this Agreement; and (k) Take any action or pay any
sum required of Borrower pursuant to this Agreement and any other present or
future agreements. Any and all reasonable sums paid and any and all reasonable
costs, expenses, liabilities, obligations and attorneys' fees incurred by
Silicon with respect to the foregoing shall be added to and become part of the
Obligations, shall be payable on demand, and shall bear interest at a rate equal
to the highest interest rate applicable to any of the Obligations. In no event
shall Silicon's rights under the foregoing power of attorney or any of Silicon's
other rights under this Agreement be deemed to indicate that Silicon is in
control of the business, management or properties of Borrower.
7.5 Application of Proceeds. All proceeds realized as the result of any sale
of the Collateral shall be applied by Silicon first to the reasonable costs,
expenses, liabilities, obligations and attorneys' fees incurred by Silicon in
the exercise of its rights under this Agreement, second to the interest due upon
any of the Obligations, and third to the principal of the Obligations, in such
order as Silicon shall determine in its sole discretion. Any surplus shall be
paid to Borrower or other persons legally entitled thereto; Borrower shall
remain liable to Silicon for any deficiency. If, Silicon, in its sole
discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale of Collateral, Silicon shall
have the option, exercisable at any time, in its sole discretion, of either
reducing the Obligations by the principal amount of purchase price or deferring
the reduction of the Obligations until the actual receipt by Silicon of the cash
therefor.
7.6 Remedies Cumulative. In addition to the rights and remedies set forth in
this Agreement, Silicon shall have all the other rights and remedies accorded a
secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Silicon and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Silicon of one or more of its rights or remedies shall not be deemed an
election, nor bar Silicon from subsequent exercise or partial exercise of any
other rights or remedies. The failure or delay of Silicon to exercise any
rights or remedies shall not operate as a waiver thereof, but all rights and
remedies shall continue in full force and effect until all of the Obligations
have been fully paid and performed.
8. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Account Debtor" means the obligor on a Receivable.
--------------
"Affiliate" means, with respect to any Person, a relative, partner,
---------
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Business Day" means a day on which Silicon is open for business.
------------
"Code" means the Uniform Commercial Code as adopted and in effect in the State
----
of California from time to time.
"Collateral" has the meaning set forth in Section 2.1 above.
----------
"Default" means any event which with notice or passage of time or both, would
-------
constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
---------------
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<PAGE>
"Eligible Inventory" [NOT APPLICABLE].
------------------
"Eligible Receivables" means Receivables arising in the ordinary course of
--------------------
Borrower's business from the sale of goods or rendition of services, which
Silicon, in its sole judgment, shall deem eligible for borrowing, based on such
considerations as Silicon may from time to time deem appropriate. Without
limiting the fact that the determination of which Receivables are eligible for
borrowing is a matter of Silicon's discretion, the following (the "Minimum
-------
Eligibility Requirements") are the minimum requirements for a Receivable to be
- ------------------------
an Eligible Receivable: (i) the Receivable must not be outstanding for more
than 90 days from its invoice date, (ii) the Receivable must not represent
progress billings, or be due under a fulfillment or requirements contract with
the Account Debtor, (iii) the Receivable must not be subject to any
contingencies (including Receivables arising from sales on consignment,
guaranteed sale or other terms pursuant to which payment by the Account Debtor
may be conditional), (iv) the Receivable must not be owing from an Account
Debtor with whom the Borrower has any dispute (whether or not relating to the
particular Receivable), (v) the Receivable must not be owing from an Affiliate
of Borrower, (vi) the Receivable must not be owing from an Account Debtor which
is subject to any insolvency or bankruptcy proceeding, or whose financial
condition is not acceptable to Silicon, or which, fails or goes out of a
material portion of its business, (vii) the Receivable must not be owing from
the United States or any department, agency or instrumentality thereof (unless
there has been compliance, to Silicon's satisfaction, with the United States
Assignment of Claims Act), (viii) the Receivable must not be owing from an
Account Debtor located outside the United States or Canada (unless pre-approved
by Silicon in its discretion in writing, or backed by a letter of credit
satisfactory to Silicon, or FCIA insured satisfactory to Silicon), (ix) the
Receivable must not be owing from an Account Debtor to whom Borrower is or may
be liable for goods purchased from such Account Debtor or otherwise. Receivables
owing from one Account Debtor will not be deemed Eligible Receivables to the
extent they exceed 25% of the total Receivables outstanding. In addition, if
more than 50% of the Receivables owing from an Account Debtor are outstanding
more than 90 days from their invoice date (without regard to unapplied credits)
or are otherwise not eligible Receivables, then all Receivables owing from that
Account Debtor will be deemed ineligible for borrowing. Silicon may, from time
to time, in its discretion, revise the Minimum Eligibility Requirements, upon
written notice to the Borrower.
"Equipment" means all of Borrower's present and hereafter acquired machinery,
---------
molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade
fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible
personal property (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"Event of Default" means any of the events set forth in Section 7.1 of this
----------------
Agreement.
"General Intangibles" means all general intangibles of Borrower, whether now
-------------------
owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in
all litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against Silicon, rights to purchase or sell
real or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders, and all
insurance policies and claims (including without limitation life insurance, key
man insurance, credit insurance, liability insurance, property insurance and
other insurance), tax refunds and claims, computer programs, discs, tapes and
tape files, claims under guaranties, security interests or other security held
by or granted to Borrower, all rights to indemnification and all other
intangible property of every kind and nature (other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
---------
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit), and
all materials and supplies of every kind, nature and description which are or
might be used or consumed in Borrower's business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of such goods,
merchandise or other personal property, and all warehouse receipts, documents of
title and other documents representing any of the foregoing.
"Obligations" means all present and future Loans, advances, debts,
-----------
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Silicon, whether evidenced by this Agreement or any
note or other instrument or document, whether arising from an extension of
credit, opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Silicon in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, collateral
monitoring
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<PAGE>
fees, closing fees, facility fees, termination fees, minimum interest charges
and any other sums chargeable to Borrower under this Agreement or under any
other present or future instrument or agreement between Borrower and Silicon.
"Permitted Liens" means the following: (i) purchase money security interests
---------------
in specific items of Equipment; (ii) leases of specific items of Equipment;
(iii) liens for taxes not yet payable; (iv) additional security interests and
liens consented to in writing by Silicon, which consent shall not be
unreasonably withheld; (v) security interests being terminated substantially
concurrently with this Agreement; (vi) liens of materialmen, mechanics,
warehousemen, carriers, or other similar liens arising in the ordinary course of
business and securing obligations which are not delinquent; (vii) liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods. Silicon will have
the right to require, as a condition to its consent under subparagraph (iv)
above, that the holder of the additional security interest or lien sign an
intercreditor agreement on Silicon's then standard form, acknowledge that the
security interest is subordinate to the security interest in favor of Silicon,
and agree not to take any action to enforce its subordinate security interest so
long as any Obligations remain outstanding, and that Borrower agree that any
uncured default in any obligation secured by the subordinate security interest
shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, partnership, joint
------
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Receivables" means all of Borrower's now owned and hereafter acquired
-----------
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, securities accounts, investment
property, documents and all other forms of obligations at any time owing to
Borrower, all guaranties and other security therefor, all merchandise returned
to or repossessed by Borrower, and all rights of stoppage in transit and all
other rights or remedies of an unpaid vendor, lienor or secured party.
"Reserves" means, as of any date of determination, such amounts as Silicon may
--------
from time to time establish and revise in good faith reducing the amount of
Loans, Letters of Credit and other financial accommodations which would
otherwise be available to Borrower under the lending formula(s) provided in the
Schedule: (a) to reflect events, conditions, contingencies or risks which, as
determined by Silicon in good faith, do or may affect (i) the Collateral or any
other property which is security for the Obligations or its value (including
without limitation any increase in delinquencies of Receivables), (ii) the
assets, business or prospects of Borrower or any Guarantor, or (iii) the
security interests and other rights of Silicon in the Collateral (including the
enforceability, perfection and priority thereof); or (b) to reflect Silicon's
good faith belief that any collateral report or financial information furnished
by or on behalf of Borrower or any Guarantor to Silicon is or may have been
incomplete, inaccurate or misleading in any material respect; or (c) in respect
of any state of facts which Silicon determines in good faith constitutes an
Event of Default or may, with notice or passage of time or both, constitute an
Event of Default.
Other Terms. All accounting terms used in this Agreement, unless otherwise
-----------
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 Interest Computation. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Silicon (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Silicon on account of the Obligations three Business Days after
receipt by Silicon of immediately available funds, and, for purposes of the
foregoing, any such funds received after 12:00 Noon on any day shall be deemed
received on the next Business Day. Silicon shall not, however, be required to
credit Borrower's account for the amount of any item of payment which is
unsatisfactory to Silicon in its sole discretion, and Silicon may charge
Borrower's loan account for the amount of any item of payment which is returned
to Silicon unpaid.
9.2 Application of Payments. All payments with respect to the Obligations
may be applied, and in Silicon's sole discretion reversed and re-applied, to the
Obligations, in such order and manner as Silicon shall determine in its sole
discretion.
9.3 Charges to Accounts. Silicon may, in its discretion, require that
Borrower pay monetary Obligations in cash to Silicon, or charge them to
Borrower's Loan account, in which event they will bear interest at the same rate
applicable to the Loans. Silicon may also, in its discretion, charge any
monetary Obligations to Borrower's Deposit Accounts maintained with Silicon.
9.4 Monthly Accountings. Silicon shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement.
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<PAGE>
Such account shall be deemed correct, accurate and binding on Borrower and an
account stated (except for reverses and reapplications of payments made and
corrections of errors discovered by Silicon), unless Borrower notifies Silicon
in writing to the contrary within thirty days after each account is rendered,
describing the nature of any alleged errors or admissions.
9.5 Notices. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, or certified mail return receipt
requested, addressed to Silicon or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Silicon shall be directed to the
Commercial Finance Division, to the attention of the Division Manager or the
Division Credit Manager. All notices shall be deemed to have been given upon
delivery in the case of notices personally delivered, or at the expiration of
one Business Day following delivery to the private delivery service, or two
Business Days following the deposit thereof in the United States mail, with
postage prepaid.
9.6 Severability. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
9.7 Integration. This Agreement and such other written agreements, documents
and instruments as may be executed in connection herewith are the final, entire
and complete agreement between Borrower and Silicon and supersede all prior and
contemporaneous negotiations and oral representations and agreements, all of
which are merged and integrated in this Agreement. There are no oral
-----------------
understandings, representations or agreements between the parties which are not
- -------------------------------------------------------------------------------
set forth in this Agreement or in other written agreements signed by the parties
- --------------------------------------------------------------------------------
in connection herewith.
- -----------------------
9.8 Waivers. The failure of Silicon at any time or times to require Borrower
to strictly comply with any of the provisions of this Agreement or any other
present or future agreement between Borrower and Silicon shall not waive or
diminish any right of Silicon later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Silicon shall be deemed to have been
waived by any act or knowledge of Silicon or its agents or employees, but only
by a specific written waiver signed by an authorized officer of Silicon and
delivered to Borrower. Borrower waives demand, protest, notice of protest and
notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper,
instrument, account, General Intangible, document or guaranty at any time held
by Silicon on which Borrower is or may in any way be liable, and notice of any
action taken by Silicon, unless expressly required by this Agreement.
9.9 No Liability for Ordinary Negligence. Neither Silicon, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Silicon shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the ordinary negligence of Silicon, or any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Silicon, but nothing herein shall relieve Silicon from
liability for its own gross negligence or willful misconduct.
9.10 Amendment. The terms and provisions of this Agreement may not be waived
or amended, except in a writing executed by Borrower and a duly authorized
officer of Silicon.
9.11 Time of Essence. Time is of the essence in the performance by Borrower
of each and every obligation under this Agreement.
9.12 Attorneys Fees and Costs. Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to,
or in connection with, or relating to this Agreement (whether or not a lawsuit
is filed), including, but not limited to, any reasonable attorneys' fees and
costs Silicon incurs in order to do the following: prepare and negotiate this
Agreement and the documents relating to this Agreement; obtain legal advice in
connection with this Agreement or Borrower; enforce, or seek to enforce, any of
its rights; prosecute actions against, or defend actions by, Account Debtors;
commence, intervene in, or defend any action or proceeding; initiate any
complaint to be relieved of the automatic stay in bankruptcy; file or prosecute
any probate claim, bankruptcy claim, third-party claim, or other claim; examine,
audit, copy, and inspect any of the Collateral or any of Borrower's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce
Silicon's security interest in, the Collateral; and otherwise represent Silicon
in any litigation relating to Borrower. In satisfying Borrower's obligation
-----------------------------------
hereunder to reimburse Silicon for attorneys fees, Borrower may, for
- --------------------------------------------------------------------
convenience, issue checks directly to Silicon's attorneys, Levy, Small & Lallas,
- --------------------------------------------------------------------------------
but Borrower acknowledges and agrees that Levy, Small & Lallas is representing
- ------------------------------------------------------------------------------
only Silicon and not Borrower in connection with this Agreement. If either
- ----------------------------------------------------------------
Silicon or Borrower files any lawsuit against the other predicated on a breach
of this Agreement, the prevailing party in such action shall be entitled to
recover its reasonable costs and attorneys' fees, including (but not limited to)
reasonable attorneys' fees and costs incurred in the enforcement of, execution
upon or defense of any order, decree, award or
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<PAGE>
judgment. All attorneys' fees and costs to which Silicon may be entitled
pursuant to this Paragraph shall immediately become part of Borrower's
Obligations, shall be due on demand, and shall bear interest at a rate equal to
the highest interest rate applicable to any of the Obligations.
9.13 Benefit of Agreement. The provisions of this Agreement shall be binding
upon and inure to the benefit of the respective successors, assigns, heirs,
beneficiaries and representatives of Borrower and Silicon; provided, however,
that Borrower may not assign or transfer any of its rights under this Agreement
without the prior written consent of Silicon, and any prohibited assignment
shall be void. No consent by Silicon to any assignment shall release Borrower
from its liability for the Obligations.
9.14 Joint and Several Liability. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.15 Limitation of Actions. Any claim or cause of action by Borrower against
Silicon, its directors, officers, employees, agents, accountants or attorneys,
based upon, arising from, or relating to this Loan Agreement, or any other
present or future document or agreement, or any other transaction contemplated
hereby or thereby or relating hereto or thereto, or any other matter, cause or
thing whatsoever, occurred, done, omitted or suffered to be done by Silicon, its
directors, officers, employees, agents, accountants or attorneys, shall be
barred unless asserted by Borrower by the commencement of an action or
proceeding in a court of competent jurisdiction by the filing of a complaint
within one year after the first act, occurrence or omission upon which such
claim or cause of action, or any part thereof, is based, and the service of a
summons and complaint on an officer of Silicon, or on any other person
authorized to accept service on behalf of Silicon, within thirty (30) days
thereafter. Borrower agrees that such one-year period is a reasonable and
sufficient time for Borrower to investigate and act upon any such claim or cause
of action. The one-year period provided herein shall not be waived, tolled, or
extended except by the written consent of Silicon in its sole discretion. This
provision shall survive any termination of this Loan Agreement or any other
present or future agreement.
9.16 Paragraph Headings; Construction. Paragraph headings are only used in
this Agreement for convenience. Borrower and Silicon acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Silicon or Borrower under any rule
of construction or otherwise.
9.17 Governing Law; Jurisdiction; Venue. This Agreement and all acts and
transactions hereunder and all rights and obligations of Silicon and Borrower
shall be governed by the laws of the State of California. As a material part of
the consideration to Silicon to enter into this Agreement, Borrower (i) agrees
that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Silicon's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Santa Clara County;
(ii) consents to the jurisdiction and venue of any such court and consents to
service of process in any such action or proceeding by personal delivery or any
other method permitted by law; and (iii) waives any and all rights Borrower may
have to object to the jurisdiction of any such court, or to transfer or change
the venue of any such action or proceeding.
-12-
<PAGE>
9.18 Mutual Waiver of Jury Trial. BORROWER AND SILICON EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN
ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER:
SILICON GAMING, INC.
BY /s/ ANDREW S. PASCAL
------------------------------
PRESIDENT OR VICE PRESIDENT
BY_______________________________
SECRETARY OR ASS'T SECRETARY
SILICON:
SILICON VALLEY BANK
BY /s/ PATRICK CLEMENS
------------------------------
TITLE VICE PRESIDENT
---------------------------
VERSION -2
-13-
<PAGE>
Signature Page attached to and forming part of Loan and Security Agreement with
Silicon Valley Bank dated June 30, 1999.
Borrowers:
<TABLE>
<S> <C>
SILICON GAMING - COLORADO, INC. SILICON GAMING - ILLINOIS, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
----------------------------------- -------------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
BY_______________________________ BY_______________________________
SECRETARY OR ASS'T SECRETARY SECRETARY OR ASS'T SECRETARY
SILICON GAMING - INDIANA, INC. SILICON GAMING - IOWA, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
----------------------------------- -------------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
BY_______________________________ BY_______________________________
SECRETARY OR ASS'T SECRETARY SECRETARY OR ASS'T SECRETARY
SILICON GAMING - KANSAS, INC. SILICON GAMING - LOUISIANA, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
----------------------------------- -------------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
BY_______________________________ BY_______________________________
SECRETARY OR ASS'T SECRETARY SECRETARY OR ASS'T SECRETARY
SILICON GAMING - NEVADA, INC. SILICON GAMING - MICHIGAN, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
----------------------------------- -------------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
BY_______________________________ BY_______________________________
SECRETARY OR ASS'T SECRETARY SECRETARY OR ASS'T SECRETARY
</TABLE>
-14-
<PAGE>
<TABLE>
<S> <C>
SILICON GAMING - MINNESOTA, INC. SILICON GAMING - MISSISSIPPI, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
----------------------------------- -------------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
BY_______________________________ BY_______________________________
SECRETARY OR ASS'T SECRETARY SECRETARY OR ASS'T SECRETARY
SILICON GAMING - MISSOURI, INC. SILICON GAMING NEW JERSEY, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
----------------------------------- -------------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
BY_______________________________ BY_______________________________
SECRETARY OR ASS'T SECRETARY SECRETARY OR ASS'T SECRETARY
SILICON GAMING NEW MEXICO, INC.
BY /s/ ANDREW S. PASCAL
-----------------------------------
PRESIDENT OR VICE PRESIDENT
BY_______________________________
SECRETARY OR ASS'T SECRETARY
</TABLE>
-15-
<PAGE>
Silicon Valley Bank
Schedule to
Loan and Security Agreement
Borrower: Silicon Gaming, Inc. and the Subsidiaries signing below
Address: 2800 W. Bayshore Road
Palo Alto, California 94303
Date: June 30, 1999
This Schedule forms an integral part of the Loan and Security Agreement between
Silicon Valley Bank and the borrowers referred to above of even date.
1. CREDIT LIMIT
(SECTION 1.1): AN AMOUNT NOT TO EXCEED THE LESSER OF: (I)
$4,000,000 AT ANY ONE TIME OUTSTANDING (THE
"MAXIMUM CREDIT LIMIT"); OR (II) 75% OF THE AMOUNT
OF BORROWER'S ELIGIBLE RECEIVABLES (AS DEFINED IN
SECTION 8 ABOVE). IN THE DISCRETION OF SILICON,
LOANS MAY BE MADE SEPARATELY TO EACH BORROWER
BASED ON THE ELIGIBLE RECEIVABLES OF EACH
BORROWER, SUBJECT TO THE AGGREGATE MAXIMUM CREDIT
LIMIT FOR ALL LOANS TO ALL BORROWERS.
2. INTEREST.
INTEREST RATE (SECTION 1.2):
A RATE EQUAL TO THE "PRIME RATE" IN EFFECT FROM
TIME TO TIME, PLUS 3.5% PER ANNUM. INTEREST SHALL
BE CALCULATED ON THE BASIS OF A 360-DAY YEAR FOR
THE ACTUAL NUMBER OF DAYS ELAPSED. "PRIME RATE"
MEANS THE RATE ANNOUNCED FROM TIME TO TIME BY
SILICON AS ITS "PRIME RATE;" IT IS A BASE RATE
UPON WHICH OTHER RATES CHARGED BY SILICON ARE
BASED, AND IT IS NOT NECESSARILY THE BEST RATE
AVAILABLE AT SILICON. THE INTEREST RATE APPLICABLE
TO THE OBLIGATIONS SHALL CHANGE ON EACH DATE THERE
IS A CHANGE IN THE PRIME RATE.
MINIMUM MONTHLY
INTEREST (SECTION 1.2): $20,000 PER MONTH.
-16-
<PAGE>
3. FEES (SECTION 1.4):
LOAN FEE: $20,000, PAYABLE CONCURRENTLY HEREWITH.
COLLATERAL MONITORING
FEE: $1,000, PER MONTH, PAYABLE IN ARREARS (PRORATED FOR ANY
PARTIAL MONTH AT THE BEGINNING AND AT TERMINATION OF THIS
AGREEMENT).
UNUSED LINE FEE: IN THE EVENT, IN ANY CALENDAR MONTH (OR PORTION THEREOF
AT THE BEGINNING AND END OF THE TERM HEREOF), THE AVERAGE
DAILY PRINCIPAL BALANCE OF THE LOANS OUTSTANDING DURING
THE MONTH IS LESS THAN THE AMOUNT OF THE MAXIMUM CREDIT
LIMIT, BORROWER SHALL PAY SILICON AN UNUSED LINE FEE IN
AN AMOUNT EQUAL TO 0.25% PER ANNUM ON THE DIFFERENCE
BETWEEN THE AMOUNT OF THE MAXIMUM CREDIT LIMIT AND THE
AVERAGE DAILY PRINCIPAL BALANCE OF THE LOANS OUTSTANDING
DURING THE MONTH, WHICH UNUSED LINE FEE SHALL BE COMPUTED
AND PAID MONTHLY, IN ARREARS, ON THE FIRST DAY OF THE
FOLLOWING MONTH.
4. MATURITY DATE
(SECTION 6.1): DECEMBER 31, 1999.
5. FINANCIAL COVENANTS
(SECTION 5.1): BORROWER SHALL COMPLY WITH EACH OF THE FOLLOWING
COVENANT(S). COMPLIANCE SHALL BE DETERMINED AS OF THE END
OF EACH MONTH, EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED
BELOW:
MINIMUM TANGIBLE
NET WORTH: SILICON GAMING, INC. ("PARENT") SHALL MAINTAIN A TANGIBLE
NET WORTH OF NOT LESS THAN $11,100,000, ON A CONSOLIDATED
BASIS WITH ITS SUBSIDIARIES.
DEFINITIONS. FOR PURPOSES OF THE FOREGOING FINANCIAL COVENANTS, THE
FOLLOWING TERMS SHALL HAVE THE FOLLOWING MEANINGS:
"TANGIBLE NET WORTH" SHALL MEAN THE EXCESS OF TOTAL
ASSETS OVER TOTAL LIABILITIES, DETERMINED IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, WITH THE
FOLLOWING ADJUSTMENTS:
(A) THERE SHALL BE EXCLUDED FROM ASSETS: (I) NOTES,
ACCOUNTS RECEIVABLE AND OTHER OBLIGATIONS OWING TO THE
BORROWER FROM ITS OFFICERS OR OTHER AFFILIATES, AND
(II) ALL ASSETS WHICH WOULD BE CLASSIFIED AS INTANGIBLE
ASSETS UNDER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES,
INCLUDING WITHOUT LIMITATION GOODWILL, LICENSES,
PATENTS, TRADEMARKS, TRADE NAMES, COPYRIGHTS,
CAPITALIZED SOFTWARE AND ORGANIZATIONAL COSTS, LICENSES
AND FRANCHISES
-17-
<PAGE>
(B) THERE SHALL BE EXCLUDED FROM LIABILITIES: ALL
INDEBTEDNESS WHICH IS SUBORDINATED TO THE OBLIGATIONS
UNDER A SUBORDINATION AGREEMENT IN FORM SPECIFIED BY
SILICON OR BY LANGUAGE IN THE INSTRUMENT EVIDENCING THE
INDEBTEDNESS WHICH IS ACCEPTABLE TO SILICON IN ITS
DISCRETION.
6. REPORTING.
(SECTION 5.3):
BORROWER SHALL PROVIDE SILICON WITH THE FOLLOWING:
1. MONTHLY RECEIVABLE AGINGS, AGED BY INVOICE DATE, WITHIN
FIFTEEN DAYS AFTER THE END OF EACH MONTH.
2. MONTHLY ACCOUNTS PAYABLE AGINGS, AGED BY INVOICE DATE,
AND OUTSTANDING OR HELD CHECK REGISTERS, IF ANY, WITHIN
FIFTEEN DAYS AFTER THE END OF EACH MONTH.
3. MONTHLY RECONCILIATIONS OF RECEIVABLE AGINGS (AGED BY
INVOICE DATE), TRANSACTION REPORTS, AND GENERAL LEDGER,
WITHIN FIFTEEN DAYS AFTER THE END OF EACH MONTH.
4. MONTHLY UNAUDITED FINANCIAL STATEMENTS, AS SOON AS
AVAILABLE, AND IN ANY EVENT WITHIN THIRTY DAYS AFTER THE
END OF EACH MONTH.
5. MONTHLY COMPLIANCE CERTIFICATES, WITHIN THIRTY DAYS AFTER
THE END OF EACH MONTH, IN SUCH FORM AS SILICON SHALL
REASONABLY SPECIFY, SIGNED BY THE CHIEF FINANCIAL OFFICER
OF BORROWER, CERTIFYING THAT AS OF THE END OF SUCH MONTH
BORROWER WAS IN FULL COMPLIANCE WITH ALL OF THE TERMS AND
CONDITIONS OF THIS AGREEMENT, AND SETTING FORTH
CALCULATIONS SHOWING COMPLIANCE WITH THE FINANCIAL
COVENANTS SET FORTH IN THIS AGREEMENT AND SUCH OTHER
INFORMATION AS SILICON SHALL REASONABLY REQUEST,
INCLUDING, WITHOUT LIMITATION, A STATEMENT THAT AT THE
END OF SUCH MONTH THERE WERE NO HELD CHECKS.
6. QUARTERLY UNAUDITED FINANCIAL STATEMENTS, AS SOON AS
AVAILABLE, AND IN ANY EVENT WITHIN FORTY-FIVE DAYS AFTER
THE END OF EACH FISCAL QUARTER OF BORROWER.
7. ANNUAL OPERATING BUDGETS (INCLUDING INCOME STATEMENTS,
BALANCE SHEETS AND CASH FLOW STATEMENTS, BY MONTH) FOR
THE UPCOMING FISCAL YEAR OF BORROWER WITHIN THIRTY DAYS
PRIOR TO THE END OF EACH FISCAL YEAR OF BORROWER.
8. ANNUAL FINANCIAL STATEMENTS, AS SOON AS AVAILABLE, AND IN
ANY EVENT WITHIN 120 DAYS FOLLOWING THE END OF BORROWER'S
FISCAL YEAR, CERTIFIED BY INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS ACCEPTABLE TO SILICON.
-18-
<PAGE>
7. COMPENSATION
(SECTION 5.5):
8. BORROWER INFORMATION:
PRIOR NAMES OF
BORROWER
(SECTION 3.2): NONE
PRIOR TRADE
NAMES OF BORROWER
(SECTION 3.2):
EXISTING TRADE
NAMES OF BORROWER
(SECTION 3.2):
OTHER LOCATIONS AND
ADDRESSES (SECTION 3.3): SEE EXHIBIT A HERETO
MATERIAL ADVERSE
LITIGATION (SECTION 3.10): NONE
9. OTHER PROVISIONS
(SECTION 5.1):
(1) BANKING RELATIONSHIP. BORROWER SHALL AT ALL TIMES
MAINTAIN ITS PRIMARY BANKING RELATIONSHIP WITH
SILICON.
(2) Subordination of Inside Debt. All present and future
indebtedness of the Borrower to its officers,
directors and shareholders ("Inside Debt") shall, at
all times, be subordinated to the Obligations
pursuant to a subordination agreement on Silicon's
standard form. Borrower represents and warrants that
there is no Inside Debt presently outstanding, except
for the following: ____________. Prior to incurring
any Inside Debt in the future, Borrower shall cause
the person to whom such Inside Debt will be owed to
execute and deliver to Silicon a subordination
agreement on Silicon's standard form.
-19-
<PAGE>
(3) Corporate Structure. Borrower represents and warrants
that Parent holds, and will continue to hold,
throughout the term of this Agreement, 100% of the
issued and outstanding stock of each of the other
Borrowers signing below (the "Subsidiaries").
Borrower: SILICON:
SILICON GAMING, INC. SILICON VALLEY BANK
BY /s/ ANDREW S. PASCA BY /s/ PATRICK CLEMENS
-------------------------------- --------------------------------
PRESIDENT OR VICE PRESIDENT TITLE VICE PRESIDENT
-----------------------------
BY_______________________________
SECRETARY OR ASS'T SECRETARY
-20-
<PAGE>
Signature Page attached to and forming part of Schedule to Loan and Security
Agreement with Silicon Valley Bank dated June 30, 1999.
Borrowers:
<TABLE>
<S> <C>
SILICON GAMING - COLORADO, INC. SILICON GAMING - ILLINOIS, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
---------------------------------- -----------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
BY_______________________________ BY_______________________________
SECRETARY OR ASS'T SECRETARY SECRETARY OR ASS'T SECRETARY
SILICON GAMING - INDIANA, INC. SILICON GAMING - IOWA, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
---------------------------------- -----------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
BY_______________________________ BY_______________________________
SECRETARY OR ASS'T SECRETARY SECRETARY OR ASS'T SECRETARY
SILICON GAMING - KANSAS, INC. SILICON GAMING - LOUISIANA, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
---------------------------------- -----------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
BY_______________________________ BY_______________________________
SECRETARY OR ASS'T SECRETARY SECRETARY OR ASS'T SECRETARY
SILICON GAMING - NEVADA, INC. SILICON GAMING - MICHIGAN, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
---------------------------------- -----------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
BY_______________________________ BY_______________________________
SECRETARY OR ASS'T SECRETARY SECRETARY OR ASS'T SECRETARY
</TABLE>
-21-
<PAGE>
<TABLE>
<S> <C>
SILICON GAMING - MINNESOTA, INC. SILICON GAMING - MISSISSIPPI, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
---------------------------------- -----------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
BY_______________________________ BY_______________________________
SECRETARY OR ASS'T SECRETARY SECRETARY OR ASS'T SECRETARY
SILICON GAMING - MISSOURI, INC. SILICON GAMING NEW JERSEY, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
---------------------------------- -----------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
BY_______________________________ BY_______________________________
SECRETARY OR ASS'T SECRETARY SECRETARY OR ASS'T SECRETARY
SILICON GAMING NEW MEXICO, INC.
BY /s/ ANDREW S. PASCAL
----------------------------------
PRESIDENT OR VICE PRESIDENT
BY_______________________________
SECRETARY OR ASS'T SECRETARY
</TABLE>
-22-
<PAGE>
Silicon Valley Bank
Amendment to Loan Documents
Borrower: Silicon Gaming, Inc. and the Subsidiaries signing below
Date: June 30, 1999
THIS AMENDMENT TO LOAN DOCUMENTS is entered into between SILICON VALLEY
BANK ("Silicon") and the borrowers referred to above (jointly and severally, the
"Borrower"), with reference to the various loan and security agreements and
other documents, instruments and agreements between certain of the Borrowers and
Silicon, including but not limited to that certain Loan and Security Agreement
between Silicon and Silicon Gaming, Inc. dated November 25, 1997 (as amended, if
at all, the "Existing Loan Agreement"), and those certain Unconditional
Guaranties and Security Agreements dated November 25, 1997 executed by certain
of the Borrowers in favor of Silicon (the Existing Loan Agreement, said other
agreements, and all other related documents, instruments and agreements may be
referred to collectively herein as the "Existing Loan Documents").
The Parties agree to amend the Existing Loan Documents, as follows:
1. Present Loan Balance. Borrower acknowledges that the present unpaid
principal balance of the Borrower's indebtedness, liabilities and obligations to
Silicon under the Existing Loan Documents, including interest accrued through
June 30th, 1999is $1,958,426.09 (the "Present Loan Balance"), and that said sum
is due and owing without any defense, offset, or counterclaim of any kind.
2. Amendment to Existing Loan Documents. The Existing Loan Documents are
hereby amended in their entirety to read as set forth in the Loan and Security
Agreement, and related documents, being executed concurrently (collectively, the
"New Loan Documents"). The Borrower acknowledges that the Present Loan Balance
shall be the opening balance of the Loans pursuant to the New Loan Documents as
of the date hereof, and shall, for all purposes, be deemed to be Loans made by
Silicon to the Borrower pursuant to the New Loan Documents. Notwithstanding the
execution of the New Loan Documents, the following Existing Loan Documents shall
continue in full force and effect and shall continue to secure all present and
future indebtedness, liabilities, guarantees and other Obligations (as defined
in the New Loan Documents): All standard documents of Silicon entered into by
the Borrower in connection with Letters of Credit and/or Foreign Exchange
Contracts; all security agreements, pledge agreements (including but not limited
to the Pledge Agreement dated as of December, 1997, by Silicon Gaming, Inc., in
favor of Silicon), collateral assignments and mortgages, including but not
limited to those relating to patents, trademarks, copyrights and other
intellectual property (including but not limited to the Intellectual Property
Security Agreement between Silicon and Silicon Gaming, Inc. dated November 25,
1997, as amended, if at all); all lockbox agreements and/or blocked account
agreements; the Intercreditor Agreement dated as of December __, 1997,
-1-
<PAGE>
between Silicon and BIII Capital Partners, L.P. (acknowledged by Silicon Gaming,
Inc.); and all UCC-1 financing statements and other documents filed with
governmental offices which perfect liens or security interests in favor of
Silicon. In addition, in the event the Borrower has previously issued any stock
options, stock purchase warrants or securities to Silicon, the same and all
documents and agreements relating thereto shall also continue in full force and
effect.
3. General Provisions. THIS AMENDMENT AND THE NEW LOAN DOCUMENTS SET
FORTH IN FULL ALL OF THE REPRESENTATIONS AND AGREEMENTS OF THE PARTIES WITH
RESPECT TO THE SUBJECT MATTER HEREOF AND SUPERSEDE ALL PRIOR DISCUSSIONS,
REPRESENTATIONS, AGREEMENTS AND UNDERSTANDINGS BETWEEN THE PARTIES WITH RESPECT
TO THE SUBJECT HEREOF.
Borrower: Silicon:
SILICON GAMING, INC. SILICON VALLEY BANK
BY /s/ ANDREW S. PASCAL BY /s/ PATRICK CLEMENS
-------------------------------- ----------------------------
PRESIDENT OR VICE PRESIDENT TITLE VICE PRESIDENT
------------------------
-2-
<PAGE>
Signature Page attached to and forming part of Amendment to Loan Documents with
Silicon Valley Bank dated June 30, 1999.
Additional Borrowers:
<TABLE>
<S> <C>
SILICON GAMING - COLORADO, INC. SILICON GAMING - ILLINOIS, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
---------------------------------- -----------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
SILICON GAMING - INDIANA, INC. SILICON GAMING - IOWA, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
---------------------------------- -----------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
SILICON GAMING - KANSAS, INC. SILICON GAMING - LOUISIANA, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
---------------------------------- -----------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
SILICON GAMING - NEVADA, INC. SILICON GAMING - MICHIGAN, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
---------------------------------- -----------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
SILICON GAMING - MINNESOTA, INC. SILICON GAMING - MISSISSIPPI, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
---------------------------------- -----------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
SILICON GAMING - MISSOURI, INC. SILICON GAMING NEW JERSEY, INC.
BY /s/ ANDREW S. PASCAL BY /s/ ANDREW S. PASCAL
---------------------------------- -----------------------------------
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
</TABLE>
-3-
<PAGE>
SILICON GAMING NEW MEXICO, INC.
BY /s/ ANDREW S. PASCAL
----------------------------------
PRESIDENT OR VICE PRESIDENT
-4-
<PAGE>
____________________________________________________
Cross-Corporate Continuing Guaranty
Borrowers: Silicon Gaming, Inc. and the Subsidiaries signing below
Guarantors: Silicon Gaming, Inc. and the Subsidiaries signing below
Date: June 30, 1999
This Cross-Corporate Continuing Guaranty is executed by the guarantors referred
to above (jointly and severally, the "Guarantor"), as of the above date, in
favor of SILICON VALLEY BANK ("Silicon"), whose address is 3003 Tasman Drive,
Santa Clara, California 95054, with respect to the Indebtedness of each and all
of the borrowers referred to above (jointly and severally, the "Borrower").
1. Continuing Guaranty. Guarantor hereby unconditionally guarantees and
promises to pay on demand to Silicon in lawful money of the United States, and
to perform for the benefit of Silicon, all of the Borrower's present and future
Indebtedness (as defined below) to Silicon.
2. "Indebtedness." As used in this Guaranty, the term "Indebtedness" is used
in its most comprehensive sense and shall mean and include without limitation:
(a) any and all debts, duties, obligations, liabilities, representations,
warranties and guaranties of Borrower or any one or more of them, heretofore,
now, or hereafter made, incurred, or created, whether directly to Silicon or
acquired by Silicon by assignment or otherwise, or held by Silicon on behalf of
others, however arising, whether voluntary or involuntary, due or not due,
absolute or contingent, liquidated or unliquidated, certain or uncertain,
determined or undetermined, monetary or nonmonetary, written or oral, and
whether Borrower may be liable individually or jointly with others, and
regardless of whether recovery thereon may be or hereafter become barred by any
statute of limitations, discharged or uncollectible in any bankruptcy,
insolvency or other proceeding, or otherwise unenforceable; and (b) any and all
amendments, modifications, renewals and extensions of any or all of the
foregoing, including without limitation amendments, modifications, renewals and
extensions which are evidenced by any new or additional instrument, document or
agreement; and (c) any and all attorneys' fees, court costs, and collection
charges incurred in endeavoring to collect or enforce any of the foregoing
against Borrower, Guarantor, or any other person liable thereon (whether or not
suit be brought) and any other expenses of, for or incidental to collection
thereof.
3. Waivers. Guarantor hereby waives: (a) presentment for payment, notice of
dishonor, demand, protest, and notice thereof as to any instrument, and all
other notices and demands to which Guarantor might be entitled, including
without limitation notice of all of the following: the acceptance hereof; the
creation, existence, or acquisition of any Indebtedness; the amount of the
Indebtedness from time to time outstanding; any foreclosure sale or other
disposition of any property which secures any or all of the Indebtedness or
which secures the obligations of any other guarantor of any or all of the
Indebtedness; any adverse change in Borrower's financial position; any other
fact which might increase Guarantor's risk; any default, partial payment or non-
payment of all or any part of the Indebtedness; the occurrence of any other
Event of Default (as hereinafter defined); any and all agreements and
arrangements between Silicon and Borrower and any changes, modifications, or
extensions thereof, and any revocation, modification or release of any guaranty
of any or all of the Indebtedness by any person (including without limitation
any other person signing this Guaranty); (b) any right to require Silicon to
institute suit against, or to exhaust its rights and remedies against, Borrower
or any other person, or to proceed against any property of any kind which
secures all or any part of the Indebtedness, or to exercise any right of offset
or other right with respect to any reserves, credits or deposit accounts held by
or maintained with Silicon or any indebtedness of Silicon to Borrower, or to
exercise any other right or power, or pursue any other remedy Silicon may have;
(c) any defense arising by reason of any disability or other defense of Borrower
or any other guarantor or any endorser, co-maker or other person, or by reason
of the cessation from any cause whatsoever of any liability of Borrower or any
other guarantor or any endorser, co-maker or other person, with respect to all
or any part of the Indebtedness, or by reason of any act or omission of Silicon
or others which directly or indirectly results in the discharge or release of
Borrower or any other guarantor or any other person or any Indebtedness or any
security therefor, whether by operation of law or otherwise; (d) any defense
arising by reason of any failure of Silicon to obtain, perfect, maintain or keep
in force any security interest in, or lien or encumbrance upon, any property of
Borrower or any other person; (e) any defense based upon any failure of Silicon
to give Guarantor notice
<PAGE>
Silcon Valley Bank Cross-Corporate Continuing Guaranty
_________________________________________________________________________
of any sale or other disposition of any property securing any or all of the
Indebtedness, or any defects in any such notice that may be given, or any
failure of Silicon to comply with any provision of applicable law in enforcing
any security interest in or lien upon any property securing any or all of the
Indebtedness including, but not limited to, any failure by Silicon to dispose of
any property securing any or all of the Indebtedness in a commercially
reasonable manner; (f) any defense based upon or arising out of any bankruptcy,
insolvency, reorganization, arrangement, readjustment of debt, liquidation or
dissolution proceeding commenced by or against Borrower or any other guarantor
or any endorser, co-maker or other person, including without limitation any
discharge of, or bar against collecting, any of the Indebtedness (including
without limitation any interest thereon), in or as a result of any such
proceeding; and (g) the benefit of any and all statutes of limitation with
respect to any action based upon, arising out of or related to this Guaranty.
Until all of the Indebtedness has been paid, performed, and discharged in full,
nothing shall discharge or satisfy the liability of Guarantor hereunder except
the full performance and payment of all of the Indebtedness. If any claim is
ever made upon Silicon for repayment or recovery of any amount or amounts
received by Silicon in payment of or on account of any of the Indebtedness,
because of any claim that any such payment constituted a preferential transfer
or fraudulent conveyance, or for any other reason whatsoever, and Silicon repays
all or part of said amount by reason of any judgment, decree or order of any
court or administrative body having jurisdiction over Silicon or any of its
property, or by reason of any settlement or compromise of any such claim
effected by Silicon with any such claimant (including without limitation the
Borrower), then and in any such event, Guarantor agrees that any such judgment,
decree, order, settlement and compromise shall be binding upon Guarantor,
notwithstanding any revocation or release of this Guaranty or the cancellation
of any note or other instrument evidencing any of the Indebtedness, or any
release of any of the Indebtedness, and the Guarantor shall be and remain liable
to Silicon under this Guaranty for the amount so repaid or recovered, to the
same extent as if such amount had never originally been received by Silicon, and
the provisions of this sentence shall survive, and continue in effect,
notwithstanding any revocation or release of this Guaranty. Until all of the
Indebtedness has been irrevocably paid and performed in full, Guarantor hereby
expressly and unconditionally waives all rights of subrogation, reimbursement
and indemnity of every kind against Borrower, and all rights of recourse to any
assets or property of Borrower, and all rights to any collateral or security
held for the payment and performance of any Indebtedness, including (but not
limited to) any of the foregoing rights which Guarantor may have under any
present or future document or agreement with any Borrower or other person, and
including (but not limited to) any of the foregoing rights which Guarantor may
have under any equitable doctrine of subrogation, implied contract, or unjust
enrichment, or any other equitable or legal doctrine. Neither Silicon, nor any
of its directors, officers, employees, agents, attorneys or any other person
affiliated with or representing Silicon shall be liable for any claims, demands,
losses or damages, of any kind whatsoever, made, claimed, incurred or suffered
by Guarantor or any other party through the ordinary negligence of Silicon, or
any of its directors, officers, employees, agents, attorneys or any other person
affiliated with or representing Silicon.
4. Consents. Guarantor hereby consents and agrees that, without notice to or
by Guarantor and without affecting or impairing in any way the obligations or
liability of Guarantor hereunder, Silicon may, from time to time before or after
revocation of this Guaranty, do any one or more of the following in Silicon's
sole and absolute discretion: (a) accelerate, accept partial payments of,
compromise or settle, renew, extend the time for the payment, discharge, or
performance of, refuse to enforce, and release all or any parties to, any or all
of the Indebtedness; (b) grant any other indulgence to Borrower or any other
person in respect of any or all of the Indebtedness or any other matter; (c)
accept, release, waive, surrender, enforce, exchange, modify, impair, or extend
the time for the performance, discharge, or payment of, any and all property of
any kind securing any or all of the Indebtedness or any guaranty of any or all
of the Indebtedness, or on which Silicon at any time may have a lien, or refuse
to enforce its rights or make any compromise or settlement or agreement therefor
in respect of any or all of such property; (d) substitute or add, or take any
action or omit to take any action which results in the release of, any one or
more endorsers or guarantors of all or any part of the Indebtedness, including,
without limitation one or more parties to this Guaranty, regardless of any
destruction or impairment of any right of contribution or other right of
Guarantor; (e) amend, alter or change in any respect whatsoever any term or
provision relating to any or all of the Indebtedness, including the rate of
interest thereon; (f) apply any sums received from Borrower, any other
guarantor, endorser, or co-signer, or from the disposition of any collateral or
security, to any indebtedness whatsoever owing from such person or secured by
such collateral or security, in such manner and order as Silicon determines in
its sole discretion, and regardless of whether such indebtedness is part of the
Indebtedness, is secured, or is due and payable; (g) apply any sums received
from Guarantor or from the disposition of any collateral or security securing
the obligations of Guarantor, to any of the Indebtedness in such manner and
order as Silicon determines in its sole discretion, regardless of whether or not
such Indebtedness is secured or is due and payable. Guarantor consents and
agrees that Silicon shall be under no obligation to marshal any assets in favor
of Guarantor, or against or in payment of any or all of the Indebtedness.
Guarantor further consents and agrees that Silicon shall have no duties or
responsibilities whatsoever with respect to any property securing any or
-2-
<PAGE>
Silcon Valley Bank Cross-Corporate Continuing Guaranty
_________________________________________________________________________
all of the Indebtedness. Without limiting the generality of the foregoing,
Silicon shall have no obligation to monitor, verify, audit, examine, or obtain
or maintain any insurance with respect to, any property securing any or all of
the Indebtedness.
5. No Commitment. Guarantor acknowledges and agrees that acceptance by
Silicon of this Guaranty shall not constitute a commitment of any kind by
Silicon to extend such credit or other financial accommodation to Borrower or to
permit Borrower to incur Indebtedness to Silicon.
6. Exercise of Rights and Remedies; Foreclosure of Trust Deeds. Guarantor
hereby waives all rights of subrogation, reimbursement, indemnification, and
contribution and any other rights and defenses that are or may become available
to the Guarantor or other surety by reason of California Civil Code Sections
2787 to 2855, inclusive. The Guarantor waives all rights and defenses that the
Guarantor may have because the Borrower's Indebtedness is secured by real
property. This means, among other things: (1) Silicon may collect from the
Guarantor without first foreclosing on any real or personal property collateral
pledged by the Borrower. (2) If Silicon forecloses on any real property
collateral pledged by the Borrower: (A) The amount of the Indebtedness may be
reduced only by the price for which that collateral is sold at the foreclosure
sale, even if the collateral is worth more than the sale price. (B) Silicon may
collect from the Guarantor even if Silicon, by foreclosing on the real property
collateral, has destroyed any right the Guarantor may have to collect from the
Borrower. This is an unconditional and irrevocable waiver of any rights and
defenses the Guarantor may have because the Borrower's Indebtedness is secured
by real property. These rights and defenses include, but are not limited to,
any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the Code
of Civil Procedure. The Guarantor waives all rights and defenses arising out of
an election of remedies by Silicon, even though that election of remedies, such
as a nonjudicial foreclosure with respect to security for a guaranteed
obligation, has destroyed the Guarantor's rights of subrogation and
reimbursement against the principal by the operation of Section 580d of the Code
of Civil Procedure or otherwise.
7. Acceleration. Notwithstanding the terms of all or any part of the
Indebtedness, the obligations of the Guarantor hereunder to pay and perform all
of the Indebtedness shall, at the option of Silicon, immediately become due and
payable, without notice, and without regard to the expressed maturity of any of
the Indebtedness, in the event: (a) Guarantor shall fail to pay or perform when
due any of its obligations under this Guaranty; or (b) any default or event of
default occurs under any present or future loan agreement or other instrument,
document, or agreement between Silicon and Borrower or between Silicon and
Guarantor. The foregoing are referred to in this Guaranty as "Events of
Default".
8. Indemnity. Guarantor hereby agrees to indemnify Silicon and hold Silicon
harmless from and against any and all claims, debts, liabilities, demands,
obligations, actions, causes of action, penalties, costs and expenses (including
without limitation attorneys' fees), of every nature, character and description,
which Silicon may sustain or incur based upon or arising out of any of the
Indebtedness, any actual or alleged failure to collect and pay over any
withholding or other tax relating to Borrower or its employees, any relationship
or agreement between Silicon and Borrower, any actual or alleged failure of
Silicon to comply with any writ of attachment or other legal process relating to
Borrower or any of its property, or any other matter, cause or thing whatsoever
occurred, done, omitted or suffered to be done by Silicon relating in any way to
Borrower or the Indebtedness (except any such amounts sustained or incurred as
the result of the gross negligence or willful misconduct of Silicon or any of
its directors, officers, employees, agents, attorneys, or any other person
affiliated with or representing Silicon). Notwithstanding any provision in this
Guaranty to the contrary, the indemnity agreement set forth in this Section
shall survive any termination or revocation of this Guaranty and shall for all
purposes continue in full force and effect.
9. Subordination. Any and all rights of Guarantor under any and all debts,
liabilities and obligations owing from Borrower to Guarantor, including any
security for and guaranties of any such obligations, whether now existing or
hereafter arising, are hereby subordinated in right of payment to the prior
payment in full of all of the Indebtedness. No payment in respect of any such
subordinated obligations shall at any time be made to or accepted by Guarantor
if at the time of such payment any Indebtedness is outstanding. If any Event of
Default has occurred, Borrower and any assignee, trustee in bankruptcy,
receiver, or any other person having custody or control over any or all of
Borrower's property are hereby authorized and directed to pay to Silicon the
entire unpaid balance of the Indebtedness before making any payments whatsoever
to Guarantor, whether as a creditor, shareholder, or otherwise; and insofar as
may be necessary for that purpose, Guarantor hereby assigns and transfers to
Silicon all rights to any and all debts, liabilities and obligations owing from
Borrower to Guarantor, including any security for and guaranties of any such
obligations, whether now existing or hereafter arising, including without
limitation any payments, dividends or distributions out of the business or
assets of Borrower. Any amounts received by Guarantor in violation of the
foregoing provisions shall be received and held as trustee for the benefit of
Silicon and shall forthwith be paid over to Silicon to be applied to the
Indebtedness in such order and sequence as Silicon shall in its sole discretion
determine, without limiting or affecting any other right or remedy which Silicon
may have hereunder or otherwise and without otherwise affecting the liability of
Guarantor hereunder. Guarantor
-3-
<PAGE>
Silcon Valley Bank Cross-Corporate Continuing Guaranty
_________________________________________________________________________
hereby expressly waives any right to set-off or assert any counterclaim against
Borrower.
10. Revocation. This is a Continuing Guaranty relating to all of the
Indebtedness, including Indebtedness arising under successive transactions which
from time to time continue the Indebtedness or renew it after it has been
satisfied. The obligations of Guarantor hereunder may be terminated only as to
future transactions and only by giving 90 days' advance written notice thereof
to Silicon at its address above by registered first-class U.S. mail, postage
prepaid, return receipt requested. No such revocation shall be effective until
90 days following the date of actual receipt thereof by Silicon.
Notwithstanding such revocation, this Guaranty and all consents, waivers and
other provisions hereof shall continue in full force and effect as to any and
all Indebtedness which is outstanding on the effective date of revocation and
all extensions, renewals and modifications of said Indebtedness (including
without limitation amendments, extensions, renewals and modifications which are
evidenced by new or additional instruments, documents or agreements executed
after revocation), and all interest thereon, then and thereafter accruing, and
all attorneys' fees, court costs and collection charges theretofore and
thereafter incurred in endeavoring to collect or enforce any of the foregoing
against Borrower, Guarantor or any other person liable thereon (whether or not
suit be brought) and any other expenses of, for or incidental to collection
thereof.
11. Independent Liability. Guarantor hereby agrees that one or more
successive or concurrent actions may be brought hereon against Guarantor, in the
same action in which Borrower may be sued or in separate actions, as often as
deemed advisable by Silicon. The liability of Guarantor hereunder is exclusive
and independent of any other guaranty of any or all of the Indebtedness whether
executed by Guarantor or by any other guarantor (including without limitation
any other persons signing this Guaranty). The liability of Guarantor hereunder
shall not be affected, revoked, impaired, or reduced by any one or more of the
following: (a) the fact that the Indebtedness exceeds the maximum amount of
Guarantor's liability, if any, specified herein or elsewhere (and no agreement
specifying a maximum amount of Guarantor's liability shall be enforceable unless
set forth in a writing signed by Silicon or set forth in this Guaranty); or (b)
any direction as to the application of payment by Borrower or by any other
party; or (c) any other continuing or restrictive guaranty or undertaking or any
limitation on the liability of any other guarantor (whether under this Guaranty
or under any other agreement); or (d) any payment on or reduction of any such
other guaranty or undertaking; or (e) any revocation, amendment, modification or
release of any such other guaranty or undertaking; or (f) any dissolution or
termination of, or increase, decrease, or change in membership of any Guarantor
which is a partnership. Guarantor hereby expressly represents that it was not
induced to give this Guaranty by the fact that there are or may be other
guarantors either under this Guaranty or otherwise, and Guarantor agrees that
any release of any one or more of such other guarantors shall not release
Guarantor from its obligations hereunder either in full or to any lesser extent.
12. Financial Condition of Borrower. Guarantor is fully aware of the
financial condition of Borrower and is executing and delivering this Guaranty at
Borrower's request and based solely upon its own independent investigation of
all matters pertinent hereto, and Guarantor is not relying in any manner upon
any representation or statement of Silicon with respect thereto. Guarantor
represents and warrants that it is in a position to obtain, and Guarantor hereby
assumes full responsibility for obtaining, any additional information concerning
Borrower's financial condition and any other matter pertinent hereto as
Guarantor may desire, and Guarantor is not relying upon or expecting Silicon to
furnish to him any information now or hereafter in Silicon's possession
concerning the same or any other matter.
13. Representations and Warranties. Guarantor hereby represents and warrants
that (i) it is in Guarantor's direct interest to assist Borrower in procuring
credit, because Borrower is an affiliate of Guarantor, furnishes goods or
services to Guarantor, purchases or acquires goods or services from Guarantor,
and/or otherwise has a direct or indirect corporate or business relationship
with Guarantor, (ii) this Guaranty has been duly and validly authorized,
executed and delivered and constitutes the valid and binding obligation of
Guarantor, enforceable in accordance with its terms, and (iii) the execution and
delivery of this Guaranty does not violate or constitute a default under (with
or without the giving of notice, the passage of time, or both) any order,
judgment, decree, instrument or agreement to which Guarantor is a party or by
which it or its assets are affected or bound.
14. Costs; Interest. Whether or not suit be instituted, Guarantor agrees to
reimburse Silicon on demand for all reasonable attorneys' fees and all other
reasonable costs and expenses incurred by Silicon in enforcing this Guaranty, or
arising out of or relating in any way to this Guaranty, or in enforcing any of
the Indebtedness against Borrower, Guarantor, or any other person, or in
connection with any property of any kind securing all or any part of the
Indebtedness. Without limiting the generality of the foregoing, and in addition
thereto, Guarantor shall reimburse Silicon on demand for all reasonable
attorneys' fees and costs Silicon incurs in any way relating to Guarantor,
Borrower or the Indebtedness, in order to: obtain legal advice; enforce or seek
to enforce any of its rights; commence, intervene in, respond to, or defend any
action or proceeding; file, prosecute or defend any claim or cause of action in
any action or proceeding (including without limitation any probate claim,
bankruptcy claim, third-party claim, secured creditor claim, reclamation
complaint, and complaint for relief
-4-
<PAGE>
Silcon Valley Bank Cross-Corporate Continuing Guaranty
_________________________________________________________________________
from any stay under the Bankruptcy Code or otherwise); protect, obtain
possession of, sell, lease, dispose of or otherwise enforce any security
interest in or lien on any property of any kind securing any or all of the
Indebtedness; or represent Silicon in any litigation with respect to Borrower's
or Guarantor's affairs. In the event either Silicon or Guarantor files any
lawsuit against the other predicated on a breach of this Guaranty, the
prevailing party in such action shall be entitled to recover its attorneys' fees
and costs of suit from the non-prevailing party. All sums due under this
Guaranty shall bear interest from the date due until the date paid at the
highest rate charged with respect to any of the Indebtedness.
15. Notices. Any notice which a party shall be required or shall desire to
give to the other hereunder (except for notice of revocation, which shall be
governed by Section 10 of this Guaranty) shall be given by personal delivery or
by telecopier or by depositing the same in the United States mail, first class
postage pre-paid, addressed to Silicon at its address set forth in the heading
of this Guaranty and to Guarantor at its address provided by Guarantor to
Silicon in writing, and such notices shall be deemed duly given on the date of
personal delivery or one day after the date telecopied or 3 business days after
the date of mailing as aforesaid. Silicon and Guarantor may change their
address for purposes of receiving notices hereunder by giving written notice
thereof to the other party in accordance herewith. Guarantor shall give Silicon
immediate written notice of any change in its address.
16. Claims. Guarantor agrees that any claim or cause of action by Guarantor
against Silicon, or any of Silicon's directors, officers, employees, agents,
accountants or attorneys, based upon, arising from, or relating to this
Guaranty, or any other present or future agreement between Silicon and Guarantor
or between Silicon and Borrower, or any other transaction contemplated hereby or
thereby or relating hereto or thereto, or any other matter, cause or thing
whatsoever, whether or not relating hereto or thereto, occurred, done, omitted
or suffered to be done by Silicon, or by Silicon's directors, officers,
employees, agents, accountants or attorneys, whether sounding in contract or in
tort or otherwise, shall be barred unless asserted by Guarantor by the
commencement of an action or proceeding in a court of competent jurisdiction
within Los Angeles County, California, by the filing of a complaint within one
year after the first act, occurrence or omission upon which such claim or cause
of action, or any part thereof, is based and service of a summons and complaint
on an officer of Silicon or any other person authorized to accept service of
process on behalf of Silicon, within 30 days thereafter. Guarantor agrees that
such one year period is a reasonable and sufficient time for Guarantor to
investigate and act upon any such claim or cause of action. The one year period
provided herein shall not be waived, tolled, or extended except by a specific
written agreement of Silicon. This provision shall survive any termination of
this Guaranty or any other agreement.
17. Construction; Severability. The term "Guarantor" as used herein shall be
deemed to refer to all and any one or more such persons and their obligations
hereunder shall be joint and several. As used in this Guaranty, the term
"property" is used in its most comprehensive sense and shall mean all property
of every kind and nature whatsoever, including without limitation real property,
personal property, mixed property, tangible property and intangible property.
If any provision of this Guaranty or the application thereof to any party or
circumstance is held invalid, void, inoperative or unenforceable, the remainder
of this Guaranty and the application of such provision to other parties or
circumstances shall not be affected thereby, the provisions of this Guaranty
being severable in any such instance.
18. General Provisions. Silicon shall have the right to seek recourse
against Guarantor to the full extent provided for herein and in any other
instrument or agreement evidencing obligations of Guarantor to Silicon, and
against Borrower to the full extent of the Indebtedness. No election in one
form of action or proceeding, or against any party, or on any obligation, shall
constitute a waiver of Silicon's right to proceed in any other form of action or
proceeding or against any other party. The failure of Silicon to enforce any of
the provisions of this Guaranty at any time or for any period of time shall not
be construed to be a waiver of any such provision or the right thereafter to
enforce the same. All remedies hereunder shall be cumulative and shall be in
addition to all rights, powers and remedies given to Silicon by law or under any
other instrument or agreement. Time is of the essence in the performance by
Guarantor of each and every obligation under this Guaranty. Silicon shall have
no obligation to inquire into the power or authority of Borrower or any of its
officers, directors, employees, or agents acting or purporting to act on its
behalf, and any Indebtedness made or created in reliance upon the professed
exercise of any such power or authority shall be included in the Indebtedness
guaranteed hereby. This Guaranty is the entire and only agreement between
Guarantor and Silicon with respect to the guaranty of the Indebtedness of
Borrower by Guarantor, and all representations, warranties, agreements, or
undertakings heretofore or contemporaneously made, which are not set forth
herein, are superseded hereby. No course of dealings between the parties, no
usage of the trade, and no parol or extrinsic evidence of any nature shall be
used or be relevant to supplement or explain or modify any term or provision of
this Guaranty. There are no conditions to the full effectiveness of this
Guaranty. The terms and provisions hereof may not be waived, altered, modified,
or amended except in a writing executed by Guarantor and a duly authorized
officer of Silicon. All rights, benefits and privileges hereunder shall inure
to the benefit of and be enforceable by Silicon and
-5-
<PAGE>
its successors and assigns and shall be binding upon Guarantor and its
successors and assigns. Section headings are used herein for convenience only.
Guarantor acknowledges that the same may not describe completely the subject
matter of the applicable Section, and the same shall not be used in any manner
to construe, limit, define or interpret any term or provision hereof.
19. Governing Law; Venue and Jurisdiction. This instrument and all acts and
transactions pursuant or relating hereto and all rights and obligations of the
parties hereto shall be governed, construed, and interpreted in accordance with
the internal laws of the State of California. In order to induce Silicon to
accept this Guaranty, and as a material part of the consideration therefor,
Guarantor (i) agrees that all actions or proceedings relating directly or
indirectly hereto shall, at the option of Silicon, be litigated in courts
located within Los Angeles County, California, (ii) consents to the jurisdiction
of any such court and consents to the service of process in any such action or
proceeding by personal delivery or any other method permitted by law; and (iii)
waives any and all rights Guarantor may have to transfer or change the venue of
any such action or proceeding.
20. Receipt of Copy. Guarantor acknowledges receipt of a copy of this
Guaranty.
21. Mutual Waiver of Right to Jury Trial. SILICON AND GUARANTOR HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION, CLAIM, LAWSUIT OR PROCEEDING BASED
UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (I) THIS GUARANTEE OR ANY
SUPPLEMENT OR AMENDMENT THERETO; OR (II) ANY OTHER PRESENT OR FUTURE INSTRUMENT
OR AGREEMENT BETWEEN SILICON AND GUARANTOR ; OR (III) ANY BREACH, CONDUCT, ACTS
OR OMISSIONS OF SILICON OR GUARANTOR OR ANY OF THEIR RESPECTIVE DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSON AFFILIATED WITH OR
REPRESENTING SILICON OR GUARANTOR; IN EACH OF THE FOREGOING CASES, WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
Guarantor Signature:
Silicon Gaming, Inc.
By /S/ Andrew S. Pascal
____________________________
Title President & CEO
See attached page for additional Guarantor signatures
-6-
<PAGE>
________________________________________________________________
Signature Page attached to and forming part of Cross-Corporate Continuing
Guaranty in favor of Silicon Valley Bank dated June 30, 1999.
Guarantors:
SILICON GAMING - COLORADO, INC. SILICON GAMING - ILLINOIS, INC
/s/ Andrew S. Pascal /s/ Andrew S. Pascal
By _______________________________ By ________________________________
President or Vice President President or Vice President
By _______________________________ By ________________________________
Secretary or Ass't Secretary Secretary or Ass't Secretary
SILICON GAMING - INDIANA, INC. SILICON GAMING - IOWA, INC.
/s/ Andrew S. Pascal /s/ Andrew S. Pascal
By ______________________________ By _______________________________
President or Vice President President or Vice President
By ______________________________ By _______________________________
Secretary or Ass't Secretary Secretary or Ass't Ssecretary
SILICON GAMING - KANSAS, INC. SILICON GAMING - LOUISIANA, INC.
/s/ Andrew S. Pascal By /s/ Andrew S. Pascal
By ______________________________ _______________________________
President or Vice President President or Vice President
By ______________________________ BY _______________________________
Secretary or Ass't Secretary Secretary or Ass't Secretary
SILICON GAMING - NEVADA, INC. SILICON GAMING - MICHIGAN, INC.
By /s/ Andrew S. Pascal BY /s/ Andrew S. Pascal
_______________________________ _______________________________
President or Vice President President or Vice President
By_______________________________ BY _______________________________
Secretary or Ass't Secretary Secretary or Aass't Secretary
-7-
<PAGE>
SILICON GAMING - MINNESOTA, INC. SILICON GAMING - MISSISSIPPI, INC.
/s/ Andrew S. Pascal /s/ Andrew S. Pascal
By ______________________________ By _______________________________
President or vice president President or Vice President
By ______________________________ By _______________________________
Secretary or Ass't Secretary Secretary or Ass't Secretary
SILICON GAMING - MISSOURI, INC. SILICON GAMING NEW JERSEY, INC.
/s/ Andrew S. Pascal BY /s/ ANDREW S. PASCAL
______________________________ _______________________________
By President or Vice President President or Vice President
BY________________________________ By _______________________________
Secretary or Ass't Secretary Secretary or Ass't Secretary
SILICON GAMING NEW MEXICO, INC.
/s/ Andrew S. Pascal
By ______________________________
President or Vice president
BY ______________________________
Secretary or Ass't Secretary
-8-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SILICON
GAMING INC'S QUARTERLY REPORT FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 3,194 0
<SECURITIES> 0 0
<RECEIVABLES> 4,329 0
<ALLOWANCES> (1,333) 0
<INVENTORY> 10,859 0
<CURRENT-ASSETS> 20,585 0
<PP&E> 14,178 0
<DEPRECIATION> (7,216) 0
<TOTAL-ASSETS> 28,656 0
<CURRENT-LIABILITIES> 13,945 0
<BONDS> 43,507 0
0 0
1,256 0
<COMMON> 58,024 0
<OTHER-SE> (88,076) 0
<TOTAL-LIABILITY-AND-EQUITY> 28,656 0
<SALES> 5,727 11,388
<TOTAL-REVENUES> 5,727 11,388
<CGS> 2,965 7,184
<TOTAL-COSTS> 7,000 19,775
<OTHER-EXPENSES> 4,035 12,591
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,926 3,852
<INCOME-PRETAX> (3,199) (12,239)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,199) (12,239)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,199) (12,239)
<EPS-BASIC> (0.22) (0.86)
<EPS-DILUTED> (0.22) (0.86)
</TABLE>
