235,092,858 shares of common stock of
SILICON GAMING, INC.
This prospectus relates to the non-underwritten public offering of
235,092,858 shares of our common stock issuable upon exercise of shares of
Series D Convertible Redeemable Preferred Stock and Series E Convertible
Redeemable Preferred Stock issued to B III Capital Partners, L.P., a Delaware
limited partnership, the selling shareholder.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"SGIC.OB" On June 21, 2000, the last sales price of our common stock as reported
on the OTC Bulletin Board was $0.4062.
These securities have not been approved or disapproved by the Securities
and Exchange Commission or any state securities commission nor has the SEC or
any state securities commission passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
Neither the Nevada gaming commission, the Nevada state gaming control
board, the Mississippi gaming commission, the Colorado limited gaming control
commission, the Missouri gaming commission, the New Jersey Casino Control
Commission nor any other gaming authority has passed upon the accuracy or
adequacy of this prospectus or the investment merits of the common stock hereby.
Any representation to the contrary is unlawful.
YOU ARE URGED TO CAREFULLY READ THE "RISK FACTORS" COMMENCING ON PAGE 10.
The date of this prospectus is September 1, 2000.
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INFORMATION WITH RESPECT TO THE REGISTRANT
This prospectus is accompanied by a copy of our Form 10-K for the fiscal
year ended December 31, 1999, a copy of our Form 10-K/A for the fiscal year
ended December 31, 1999, and our latest Form 10-Q for the quarterly period ended
March 31, 2000. You should carefully consider the information presented in our
Form 10-K, Form 10-K/A, and Form 10-Q, as well as the information presented in
this prospectus, including the Risk Factors commencing on Page 10.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the U.S. Securities and Exchange Commission. You may read and
copy any document we file at the SEC's public reference rooms at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549. Please call the SEC at
1-800-732-0330 for further information on the public reference facilities. Our
SEC filings are also available to the public free of charge at the SEC's Website
at "http://www.sec.gov."
Copies of publicly available documents that we have filed with the SEC can
also be inspected and copied at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with them. This means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be an important part of this prospectus, and you should review
that information in order to understand the nature of any investment by you in
the common stock of the Company. We incorporate by reference the documents
listed below:
1. Annual Report on Form 10-K and 10-K/A for the year ended December 31,
1999;
2. Quarterly Report on Form 10-Q for the quarter ended March 31, 2000;
3. Current Report on Form 8-K filed February 14, 2000;
4. Current Report on Form 8-K filed April 21, 2000; and
5. Current Report on Form 8-K filed May 19, 2000.
We will provide you with copies of any of the documents incorporated by
reference, at no charge to you, without copies of any exhibits to those
documents unless the exhibit itself is specifically incorporated by reference.
You may request a copy of these filings by writing or telephoning us at the
following address:
Silicon Gaming, Inc.
2800 West Bayshore Road
Palo Alto, CA 94303
Attn: Investor Relations (650) 842-9000
You should rely only on the information incorporated by reference or
provided in this prospectus. We have authorized no one to provide you with
different information. This prospectus shall not constitute an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information in this prospectus is accurate as of any date other than
the date on the front of the document.
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THE OFFERING
Securities Offered by the
Selling Shareholders ............ A total of 235,092,858 shares of common
stock are covered by this prospectus.
These shares are being offered as follows:
174,285,127 shares issuable upon
conversion of outstanding Series D
Preferred Stock held by the selling
shareholder; and
60,807,731 shares issuable upon the
exercise of 60,807.731 shares of Series E
Preferred Stock which are issuable upon
exercise of outstanding Series E Warrants.
A description of the terms of the Series D
Preferred Stock, Series E Preferred Stock,
and Series E Warrants is included in this
prospectus under "Description of
Securities".
Common Stock Outstanding as
of June 21, 2000................. 30,978,831
Use of Proceeds ................. We will not receive any of the proceeds
from sales of the shares of common stock
by the selling shareholders. We will
receive up to $608.71 from the exercise,
if any, of the Series E Warrants. We will
not receive any proceeds from the
conversion of the Series E Preferred Stock
or conversion of the Series D Preferred
Stock. We will use any proceeds received
for working capital or for our operations.
Risk Factors .................... The shares of common stock offered hereby
involve a high degree of risk. See "Risk
Factors" on page 10.
OTC Bulletin Board Symbol........ "SGIC.OB"
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FORWARD LOOKING STATEMENTS
THROUGHOUT THIS PROSPECTUS AND THE OTHER DOCUMENTS INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS WE MAKE CERTAIN "FORWARD-LOOKING" STATEMENTS.
THESE ARE STATEMENTS ABOUT FUTURE EVENTS, RESULTS OF OPERATION, BUSINESS PLANS
AND OTHER MATTERS. WE USE WORDS SUCH AS "EXPECT", "ANTICIPATE", "INTEND" OR
OTHER SIMILAR WORDS TO IDENTIFY FORWARD LOOKING STATEMENTS. THESE STATEMENTS ARE
MADE BASED ON OUR CURRENT KNOWLEDGE AND UNDERSTANDING. HOWEVER, THERE CAN BE NO
ASSURANCES AS TO WHETHER OR NOT ACTUAL RESULTS WILL BE CONSISTENT WITH THESE
STATEMENTS. WE HAVE NO OBLIGATION TO UPDATE THE FORWARD-LOOKING STATEMENTS MADE
IN THIS PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN.
THE COMPANY
We engage in the design, development, production, marketing and sale of
interactive, software-based products for the gaming industry. To date we have
deployed our product in video-based slot machines that we have designed and
developed for use in casinos and other gaming establishments. These machines
combine a multimedia gaming platform with the software-based games. We believe
our products are more engaging and entertaining than other gaming products
currently available and will, as a result, generate increased gaming revenue per
device ("win per machine") for the casino operator.
Our games feature high-quality animation, video clips, digital sound and a
level of visual appeal and interactivity that we believe are not met by the
current generation of slot machines. To take advantage of these features, our
initial products were deployed in a product that featured high resolution video
presented across the full surface of a distinctive, large touchscreen display.
We are 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. We believe that by utilizing
these features and by introducing new game types, 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. We have also designed our 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. We currently offer several
platforms for our games including Odyssey(TM), a multi-game machine that can
play up to six different games on the same machine, Quest, a single-game upright
machine, and a traditional slant to machine.
As of March 31, 2000, we had installed 4,747 machines in approximately 204
properties throughout Connecticut, Iowa, Louisiana, Michigan, Mississippi,
Missouri, Nevada, New Mexico, Canada and South America. Of these machines, 4,491
have been sold outright or placed on a revenue-sharing basis. After returns, 256
machines remain installed on a trial basis and the casino operators will be
required to purchase the machine outright, participate in our revenue sharing
plan or return the machine to us within a defined trial period.
At March 31, 2000, we had cash and equivalents of $877,000. We have
incurred operating losses each year since inception and as of March 31, 2000 had
an accumulated deficit of $94,764,000 and a deficiency of shareholders' equity
of $9,798,000. Prior to March 1997 we were in the development stage and our
primary activities were focussed on product development and software coding.
Towards the end of 1996 we began manufacturing slot machines for commercial
distribution. We sold our first product in May 1997 following completion of a
customer evaluation period. Prior to that time we did not generate any revenue
from product sales. We have been required to obtain additional financing each
year to be able to fund our ongoing operations. Based on historical levels of
cash usage, the above factors raise substantial doubt about our ability to
continue as a going concern.
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We spent much of 1999 addressing our poor liquidity position, restructuring
our balance sheet, and retaining key personnel. We spent much of the first
quarter ending March 31, 2000 implementing and executing the different product
and market opportunities we identified in the fourth quarter of 1999, while
continuing to address our poor liquidity position and retaining our key
personnel. The uncertainty surrounding our future, along with the reductions in
the workforce, negatively impacted our ability to retain some senior management
and some key employees, especially in our engineering and sales organizations.
These factors also negatively impacted our sales performance, especially in the
second half of 1999 as we were forced to rebuild our sales organization.
RESTRUCTURING
In November of 1999, we completed a financial restructuring (the
"Restructuring") with the holders of $47.25 million in aggregate principal
amount of outstanding 12.5% Senior Discount Noes (the "Senior Discount Notes").
The Senior Discount Notes were held entirely by B III Capital Partners, LP ("B
III"). The Senior Discount Notes were previously issued in two separate
transactions. On September 30, 1997 we issued $30 million in aggregate principal
amount of the Senior Discount Notes to B III pursuant to a Securities Purchase
Agreement. On July 8, 1998, we issued $17.25 million in aggregate principal
amount of the Senior Discount Notes to B III pursuant to Amendment No. 1 to the
Securities Purchase Agreement.
On July 1, 1999, we announced that we would not make the scheduled July 1,
1999 interest payment on our $47.25 million of outstanding Senior Discount
Notes, and that we were in negotiations with B III regarding a consensual
restructuring, which would possibly include a conversion of the Senior Discount
Notes into equity or other securities. As a result of those negotiations, B III
agreed to exchange $39.75 million in aggregate principal amount of the Senior
Discount Notes and to amend the terms of the remaining $7.5 million in aggregate
principal amount of Senior Discount Notes (the "Amended Notes") in exchange for
a substantial portion of equity. In addition B III agreed to waive all accrued
interest on the $39.75 million in aggregate principal amount of Senior Discount
Notes being exchanged in the Restructuring, and to waive all interest on the
Amended Notes that had accrued through July 15, 1999. The amount of interest
waived was approximately $7.6 million. The Senior Discount Notes represented a
substantial portion of the Company's outstanding long-term debt obligations. The
board of directors believed that the exchange of the $39.75 million of Senior
Discount Notes for equity would greatly enhance the financial viability of the
company by reducing our overall debt service obligations.
In connection with the Restructuring we: (1) issued 39,750 shares of Series
D Preferred Stock as well as the Series E Warrant to purchase 60,807.731 shares
of Series E Preferred Stock to B III in exchange for the cancellation of $39.75
million in aggregate principal amount of the Senior Discount Notes and interest
accrued thereon; (2) amended the terms and provisions of the $7.5 million of
Senior Discount Notes that remained outstanding; (3) adopted the Silicon Gaming,
Inc. 1999 Long-Term Compensation Plan pursuant to which up to 116,190,084 shares
of common stock and options to purchase common stock may be issued to management
and employees; and (4) issued $2 million in aggregate principal amount of 13%
Senior Secured Notes (the "New Notes") to B III in consideration for $2 million
in immediately available funds.
Also as a part of the Restructuring, the number of members of the board of
directors was reduced to three. Mr. William Hart, Mr. Kevin R. Harvey and Mr.
Thomas J. Volpe resigned as members of the board of directors effective November
24, 1999, and Mr. Stanford Springel and Mr. Robert Reis became members of the
board of directors. Mr. Andrew Pascal remained a member of the board of
directors.
As a part of the Restructuring, we are currently conducting an exchange
offer whereby participating shareholders may exchange each share of common stock
held for a unit consisting of one share of common stock and a warrant (an
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"Exchange Warrant") to purchase 3.59662 shares of common stock. We anticipate
issuing up to 15,321,341 Exchange Warrants which would be exercisable in the
aggregate for 55,105,041 shares of common stock. Currently, the exchange offer
is scheduled to terminate on June 30, 2000, unless extended.
EFFECT OF RESTRUCTURING AND EXCHANGE OFFER
ON CAPITAL STRUCTURE OF THE COMPANY
As a result of the Restructuring, the capital structure of the Company
changed dramatically. Prior to the Restructuring, existing shareholders of
common stock held approximately 95% of the outstanding equity of the Company.
The remaining 5% was held by the holders of our Series B1 Preferred Stock. (See
Table 1 below). As a part of the Restructuring, the holders of the Series B1
Preferred Stock converted their stock into shares of common stock. The material
changes in the capital structure as a result of the Restructuring and the
exchange offer include:
* Conversion of the Series B1 Preferred Stock in to 741,105 shares of
common stock;
* Issuance of 39,750 shares of Series D Preferred Stock which is
convertible into 174,285,127 shares of common stock;
* Issuance of the Series E Warrant, which is exercisable for up to
60,807.731 shares of Series E Preferred Stock, which are convertible
into 60,807,731 shares of common stock;
* Adoption of the 1999 Long Term Compensation Plan, under which up to
116,190,084 shares of common stock, or options to purchase shares of
common stock, may be issued to directors, officers and employees of
the Company; and
* Issuance of up to 15,321,341 Exchange Warrants, which are exercisable
for up to 55,105,041 shares of common stock.
If all of the shares of Series D Preferred Stock were converted, and all of
the shares of common stock and options to purchase shares of common stock under
the 1999 Long-Term Compensation Plan were issued, the percentage interest of
total outstanding shares of common stock held by existing shareholders
immediately prior to the Restructuring, on a fully-diluted basis, would be
reduced from 100% to approximately 5%. As of the closing of the Restructuring,
the Series D Preferred Stock constituted approximately 57% of the equity of the
Company, and the 1999 Long-Term Compensation Plan accounted for approximately
38% of the equity of the Company. (See Table 2 below).
While there are 30,978,831 shares of common stock outstanding, two officers
of the Company, who were issued in the aggregate 15,657,490 shares of common
stock under the 1999 Long-Term Compensation Plan, have voluntarily agreed as
part of the Restructuring not to tender those shares in the exchange offer.
Therefore, if every shareholder participates in the exchange offer the Company
could issue up to 15,321,341 Exchange Warrants. Each Exchange Warrant is
exercisable for 3.59662 shares of common stock. If all Exchange Warrants were
issued, and all Exchange Warrants were exercised, the Company would issue up to
55,105,041 shares of common stock to the holders of the Exchange Warrants.
The Series E Warrant was issued to B III as a part of the Restructuring to
allow B III to recapture some of the dilution to the equity interest represented
by the Series D Preferred Stock resulting from the actual exercise of Exchange
Warrants. As stated above, the Series D Preferred Stock represents approximately
57% of the equity of the Company as of the closing of the Restructuring. If all
of the Exchange Warrants were exercised, that percentage would drop to
approximately 48.3%. If the Series E Warrant is exercised the total equity
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interest represented by the Series D Preferred Stock and the Series E Preferred
Stock together would equal approximately 55.7%. The Series E Warrant does not
provide a complete recapture of dilution from the exercise of the Exchange
Warrants.
The Series E Warrants are not automatically exercisable. The Series E
Warrants become exercisable only to the extent that Exchange Warrants are
actually exercised. If all of the Exchange Warrants are actually exercised, the
Series E Warrant becomes exercisable in its entirety. The Series E Warrant may
be exercised for up to 60,807.731 shares of Series E Preferred Stock at an
exercise price of $0.01 per share. The Series E Preferred Stock may be converted
into shares of common stock at a rate of 1,000 shares of common stock per share
of Series E Preferred Stock. If the Series E Warrant is exercised in its
entirely, (i) the percentage equity interest of the Company represented by the
Exchange Warrants is diluted from approximately 15% to approximately 13%, (ii)
the equity interest represented by the Series D Preferred Stock is diluted from
approximately 57% to approximately 48.3%, (iii) the equity interest represented
by the Series E Preferred Stock is approximately 14.4%, and (iv) the equity
interest represented by the 1999 Long Term Compensation Plan is diluted from
approximately 38% to approximately 27.6% (See Table 4 below).
TABLE 1
The following tables illustrate the potential effect of the Restructuring
and the exchange offer on the capital structure of the Company. To better
illustrate the percentage equity interests represented by the various securities
issued in the Restructuring, the 15,657,490 shares of common stock issued to two
of our officers under the 1999 Long Term Compensation Plan are not included
under the number of "Issued and Outstanding Common Stock" set forth in the
tables below, rather, they are included in the aggregate number of shares of
common stock available under the 1999 Long Term Compensation Plan.
Table 1 illustrates the capital structure of the Company prior to the
Restructuring.
DESCRIPTION SHARES PERCENT
----------- ------ -------
Issued and Outstanding Common Stock 14,580,236 95
Series B 1 Preferred Stock, as converted 741,105 5
---------- ---
TOTAL 15,321,341 100
========== ===
TABLE 2
As a part of the Restructuring we issued 39,750 shares of Series D
Preferred Stock and approved and adopted the 1999 Long Term Compensation Plan.
In addition, the holders of the Series B1 Preferred Stock converted their shares
into 741,105 shares of common stock. Table 2 illustrates the capital structure
of the Company after the conversion of the Series B1 Preferred Stock and if all
of the outstanding shares of Series D Preferred Stock were converted into shares
of common stock and all of the shares of common stock available under the 1999
Long Term Compensation Plan were issued:
DESCRIPTION SHARES PERCENT
----------- ------ -------
Issued and Outstanding Common Stock 15,321,341 5
1999 Long Term Compensation Plan 116,189,084 38
Series D Preferred Stock, as converted 174,285,127 57
----------- ---
TOTAL 305,796,552 100
=========== ===
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TABLE 3
As a part of the Restructuring, the Company is conducting the exchange
offer. Under the exchange offer, we anticipate issuing up to 15,321,341 Exchange
Warrants. Each of the Exchange Warrants is exercisable for 3.59662 shares of
common stock. The table below illustrates the effect of the conversion of the
Series D Preferred Stock, the issuance of all shares of stock available under
the 1999 Long Term Compensation Plan, and the exercise of the Exchange Warrants:
DESCRIPTION SHARES PERCENT
----------- ------ -------
Issued and Outstanding Common Stock 15,321,341 4.2
Exercise of Exchange Warrants 55,105,041 15.3
1999 Long Term Compensation Plan 116,190,084 32.2
Series D Preferred Stock, as converted 174,285,127 48.3
----------- -----
TOTAL 360,901,593 100.0
=========== =====
TABLE 4
We issued the Series E Warrant to B III to minimize the impact of the
exchange offer on the percentage interest in equity held by B III in the Series
D Preferred Stock. The Series E Warrant is exercisable only if, as and when the
Exchange Warrants issued in the exchange offer are actually exercised. For
example, if all of the Exchange Warrants were issued, but none were ever
exercised prior to their termination, the Series E Warrant would never become
exercisable. If, on the other hand, all of the Exchange Warrants were issued and
all of the Exchange Warrants were exercised, the Series E Warrant would be
exercisable for 60,807.731 shares of Series E Preferred Stock. Each share of
Series E Preferred Stock is convertible into 1000 shares of common stock. (See
"Description of Securities - Series E Warrant" and "Description of Securities -
Exchange Warrants").
As set forth in Table 2 above, the 39,750 shares of Series D Preferred
Stock are convertible into 174,285,127 shares of common stock. Prior to the
exchange offer, the Series D Preferred Stock constituted approximately 57% of
the equity of the Company. As shown in Table 3 above, if all of the Exchange
Warrants were exercised the percentage interest represented by the Series D
Preferred Stock (174,285,127 shares of common stock) would be approximately
48.3%. Table 4 illustrates the effect of the exercise of the Series E Warrant
and the conversion of the shares of Series E Preferred Stock into shares of
common stock.
DESCRIPTION SHARES PERCENT
----------- ------ -------
Issued and Outstanding Common Stock 15,321,341 3.6
Exercise of Exchange Warrants 55,105,041 13.1
1999 Long Term Compensation Plan 116,190,084 27.6
Series D Preferred Stock, as converted 174,285,127 41.3
Series E Preferred Stock, as converted 60,807,731 14.4
----------- -----
TOTAL 421,709,234 100.0
=========== =====
As a result of the exercise of the Series E Warrant the percentage equity
interest of the Company represented by the Series E Preferred Stock and the
Series D Preferred Stock combined would be approximately 55.7% rather than the
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57% equity interest represented by the Series D Preferred Stock prior to the
exchange offer.
Without the exchange offer, the percentage equity interest of the Company
held by existing shareholders would have remained as reduced from approximately
100% to approximately 5%. If all shareholders participate in the exchange offer,
and all Exchange Warrants are exercised, the percentage equity interest held by
existing shareholders could increase from approximately 5% to approximately
16.6%. While the exercise of Exchange Warrants triggers the exercisability of
the Series E Warrant, and the exercise of the Series E Warrant and eventual
conversion of the Series E Preferred Stock into common stock would dilute the
equity interest held by existing shareholders, the net effect of the exercise of
Exchange Warrants is an overall increase in the percentage equity interest held
by existing shareholders. We are conducting this exchange offer as a means of
allowing shareholders the opportunity to recapture some of the dilution that has
resulted from the Restructuring. (SEE, ALSO, the Consolidated Pro Forma Balance
Sheet, and notes to the Pro Forma Financial Statements, commencing on page 30)
Silicon Gaming, Inc. was incorporated in California on July 27, 1993. Our
principal offices are located at 2800 West Bayshore Road, Palo Alto, California
94303. We also maintain sales and support offices in Las Vegas and Reno, Nevada,
and in Gulfport, Mississippi, and a manufacturing facility in Las Vegas, Nevada.
Our telephone number is (650) 842-9000. You may also visit our website at
www.silicongaming.com.
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RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED IN CONJUNCTION WITH THE
OTHER INFORMATION INCLUDED AND INCORPORATED BY REFERENCE IN THIS PROSPECTUS
BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY.
WE MIGHT BE UNABLE TO CONTINUE OPERATING AS A GOING CONCERN.
Our recurring losses from operations and shareholders' deficiency raise
substantial doubt as to our ability to continue as a going concern. We may incur
losses for the foreseeable future due to the significant costs associated with
the development, manufacturing and marketing of our products and due to the
continued research and development activities that will be necessary to further
refine our technology and products and to develop products with additional
applications.
WE HAVE NEVER MADE A PROFIT AND MIGHT NEVER BECOME PROFITABLE.
Since our inception on July 27, 1993, we have never made a profit. For the
fiscal years ended December 31, 1996, 1997, 1998 and 1999 our net loss was
$13,634,000, $22,986,000, $37,670,000, and $11,765,000 respectively. The
significant decrease in net loss for the year ended December 31, 1999 was due to
a $12.3 million extraordinary gain recorded on the cancellation of debt in
conjunction with the financial Restructuring in November 1999 as well as efforts
to reduce the operating expenses in early 1999. As of March 31, 2000 we had an
accumulated deficit of $94,764,000 and a deficiency of shareholders' equity of
$9,798,000. There can be no assurance that we will ever become profitable.
THE CONVERSION OF SHARES OF SERIES D PREFERRED STOCK, SERIES E PREFERRED STOCK,
THE ISSUANCE OF SHARES OF COMMON STOCK UNDER THE 1999 LONG TERM COMPENSATION
PLAN, AND EXERCISE OF EXCHANGE WARRANTS COULD RESULT IN SUBSTANTIAL DILUTION TO
HOLDERS OF SHARES OF COMMON STOCk.
There are 39,750 shares of Series D Preferred Stock outstanding that are
convertible into 174,285,127 shares of common stock, at no additional
consideration to the company. In addition, we are conducting an exchange offer
that is scheduled to expire on June 30, 2000, unless extended, in which we might
issue up to 15,321,341 warrants to purchase, in the aggregate, up to 55,105,041
shares of common stock at an exercise price of $.1528 per share. If all of these
Exchange Warrants were issued in the exchange offer and were then exercised, the
Series E Warrant we issued to B III Capital Partners, LP as part of the
Restructuring would be exercisable for 60,807.731 shares of Series E Preferred
Stock for an aggregate exercise price of $608.07. The 60,807.731 shares of
Series E Preferred Stock would be convertible into 60,807,731 shares of common
stock at no additional consideration to the company. Under the Long Term
Compensation Plan, we have issued 15,657,490 shares of restricted common stock,
and issued options to purchase 85,090,492 shares of common stock. We may issue
up to 15,442,102 additional shares of common stock or options to purchase shares
of common stock under that plan. The issuance of shares of common stock upon
conversion of the Series D Preferred Stock and the Series E Preferred Stock
could result in substantial dilution to existing shareholders. The issuance of
shares of common stock upon the exercise of Exchange Warrants could result in
substantial dilution to existing shareholders. In addition, the sale of shares
of common stock, or the issuance of shares of common stock upon exercise of
options granted under the 1999 Long Term Compensation Plan, could result in
substantial dilution to existing shareholders.
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THE TRADING MARKET FOR OUR SHARES OF COMMON STOCK IS LIMITED AND IS EXTREMELY
VOLATILE.
Our shares of common stock are traded on the OTC Bulletin Board ("OTCBB").
As of May 24, 2000 the OTCBB reports that there are 12 active market makers of
our common stock. Six of the twelve market makers have accounted for
approximately 87% of the trading in our common stock year to date. In order to
trade shares of our common stock you must use one of these 12 market makers,
unless you trade your shares in a private transaction. The average daily trading
volume, as reported by the OTCBB as of May 24, 2000 was 72,727 shares. However,
in the 120 days prior to May 24, 2000 the actual trading volume ranged from a
low of 1,300 shares of common stock to a high of 418,800 shares of common stock.
This low trading volume means there is limited liquidity in our shares of common
stock. These factors result in a limited trading market for our common stock. In
addition, the price of our common stock as traded on the OTCBB is extremely
volatile. During the 120 days prior to May 24, 2000, the percentage difference
between the daily low and high price of our common stock as traded on the OTCBB
ranged from a low of 0% to a high of 166%, and routinely varied by 25% or more.
The variances in our share price occurring on a daily basis make it extremely
difficult to forecast with any certainty the price at which you might be able to
buy or sell your shares of our common stock
OUR SHARES ARE CONSIDERED "PENNY STOCK" AND PURCHASES OF OUR COMMON STOCK ARE
SUBJECT TO REGULATION UNDER THE SECURITIES ACT OF 1934.
Our securities were delisted from Nasdaq in February of 1999 and are
currently subject to the "penny stock" Rule 15g-9 under the Exchange Act, which
imposes additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and "accredited
investors". The SEC has adopted regulations which generally define a "penny
stock" to be any non-Nasdaq equity security that has a market price (as therein
defined) of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require substantial additional disclosure
obligations.
THE SERIES D AND SERIES E PREFERRED STOCK CONTAIN RESTRICTIVE COVENANTS THAT
LIMIT OUR ABILITY TO TAKE CERTAIN ACTIONS INCLUDING PAYING DIVIDENDS OR
EFFECTING A CHANGE OF CONTROL.
So long as at least 100 shares of Series D Preferred Stock or Series E
Preferred Stock remain outstanding, without the prior written consent of the
then holders of a majority of the outstanding shares of each of the Series D
Preferred Stock and Series E Preferred Stock, we are restricted from, among
other actions:
(1) issuing any dividends on our outstanding securities;
(2) issuing any capital stock or debt with a preference to, or pari passu
with, the Series D Preferred Stock, the Series E Preferred Stock, the
outstanding Senior Discount Notes or the New Notes;
(3) issuing any additional capital stock other than capital stock
contemplated by the Restructuring; or
(4) merging or consolidating with any other entity, or entering into any
transaction that would constitute or have the effect of a change of
control.
These restrictions limit our ability to obtain additional financing and could
delay, defer, or prevent a change in control.
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UNDER THE RESTRUCTURING AGREEMENT WE ENTERED INTO WITH B III CAPITAL PARTNERS
LP, WE MAY BE REQUIRED TO DISCONTINUE CONDUCTING BUSINESS IN JURISDICTIONS IN
WHICH B III IS REQUIRED TO COMPLY WITH GAMING RULES AND REGULATIONS BUT ELECTS
NOT TO SO COMPLY.
The Restructuring Agreement, dated November 24, 1999, by and between us and
B III, contains a provision that grants B III the right to require us to
discontinue conducting business in certain jurisdictions. Under that provision,
if B III is required to apply for a gaming approval, which includes licensure,
qualification, or a finding of suitability, B III may request that we withdraw
from that jurisdiction and not sell our products or otherwise conduct business
in that jurisdiction in any manner that would require B III to be required to
apply for a gaming approval in that jurisdiction. If this were to happen, under
the terms of the restructuring agreement, we have agreed that we will not seek
any remedy against B III for its failure or refusal to apply for a gaming
approval. This same provision could also limit our ability to enter into new
markets in which B III would be required to obtain a gaming approval, but elects
not to. The withdrawal from any jurisdiction in which we currently conduct
business and our inability to enter new markets could have a material adverse
affect on our business and financial condition.
THE SERIES D AND SERIES E PREFERRED STOCK HAVE A LIQUIDATION PREFERENCE TO THE
COMMON STOCK.
In connection with the restructuring, we issued 39,750 shares of Series D
Preferred Stock, and a warrant to purchase 60,807.731 shares of Series E
Preferred Stock. In the event of bankruptcy, liquidation or reorganization of
the company or certain other events, our assets will be available to redeem the
Series D Preferred Stock and Series E Preferred Stock prior to any payment to
holders of common stock, and there might not be sufficient assets remaining to
pay any amounts to such holders of common stock.
THE RESTRUCTURING HAS GENERATED CONCERN AMONG OUR CUSTOMERS AND SUPPLIERS ABOUT
OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Public disclosure of the fact that we were negotiating with B III to
restructure our outstanding obligations because we would not be able to make our
interest obligations on our outstanding Senior Discount Notes as of July 1999,
caused concern among our suppliers and purchasers of our products. We believe
this concern has caused some potential customers to delay or decide against
purchasing our products, and for existing clients to delay or decide against
purchasing additional products, because they believe we may not be in business
in the near term to provide them with assistance and support services for our
products. We believe this has adversely affected our business and financial
condition. There can be no assurance that the Restructuring has minimized or in
any way ameliorated the concerns of our suppliers and purchasers.
WE MIGHT NOT BE ABLE TO FUND OUR CAPITAL REQUIREMENTS BEYOND THE FISCAL YEAR
2000.
We believe that our cash and cash equivalents and short-term investments
will be sufficient to fund our capital and operating requirements through the
end of fiscal year 2000. However, we may be required to seek additional
financing following such time. There can be no assurance that we will be able to
obtain such financing, or that, if we are able to obtain such financing, we will
be able to do so on satisfactory terms or on a timely basis. If we raise
additional funds through the issuance of equity, convertible debt or similar
securities, shareholders may experience substantial dilution, and such
securities may have rights or preferences senior to those of common stock. In
addition, we must first obtain the prior written consent of B III in order to
issue additional securities, which consent they may withhold at their sole
discretion. (See "Description of Securities"). Moreover, if adequate funds are
not available to satisfy our short-term or long-term capital requirements, we
may be required to limit or discontinue our revenue sharing plan, scale back our
product roll-out, or limit our operations significantly. Our capital
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requirements will depend on many factors, including, but not limited to, the
rate at which we can continue to introduce our products, the market acceptance
and competitive position of our products, the extent to which the customers
choose the revenue participation plan, the response of competitors to the
products and our ability to satisfy the corporate licensing and product
licensing requirements in various jurisdictions.
WE MAY NOT DECLARE DIVIDENDS WITHOUT THE PRIOR WRITTEN CONSENT OF B III.
Under the terms and provisions of Amendment No. 2 to the Securities
Purchase Agreement dated September 30, 1997, by and between us and B III Capital
Partners, LP ("B III"), and the terms and provisions of the Securities Purchase
Agreement dated November 24, 1999, by and between us and B III, we may not
declare dividends on the common stock without the prior written consent of B
III.
OUR CURRENT CAPITALIZATION COULD DELAY, DEFER OR PREVENT A CHANGE OF CONTROL.
On February 7, 2000 we filed a Certificate of Amendment to our Articles of
Incorporation increasing the authorized number of shares of common stock from
50,000,000 to 750,000,000. As a result of the amendment, we have approximately
321,699,111 shares of authorized but unissued and unreserved shares of common
stock. In addition, we have approximately 6,783,915.3 authorized but unissued
and unreserved shares of preferred stock. Authorized but unissued common stock
may be issued for such consideration as the board of directors determines to be
adequate. Issuance of common stock could have a dilutive effect on certain
shareholders. Shareholders may or may not be given the opportunity to vote
thereon, depending upon the nature of any such transactions, applicable law, the
rules and policies of the national securities exchange on which the common stock
is then trading, if any, and the judgment of the board of directors.
Shareholders have no preemptive rights to subscribe for newly issued shares of
our capital stock. Having a substantial number of authorized and unreserved
shares of common stock and preferred stock could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding voting
stock. Management could use the additional shares to resist a takeover effort
even if the terms of the takeover offer are favored by a majority of the
independent shareholders. This could delay, defer, or prevent a change in
control.
WE MIGHT NOT BE ABLE TO SUCCESSFULLY CHALLENGE OUR COMPETITORS IN THE GAMING
MACHINE INDUSTRY.
The gaming machine industry is characterized by intense competition that is
based on, among other things, a device's ability to generate win per machine
through product appeal to players, and knowledge of customer requirements such
as ease of use, quality of service, support and training, distribution, name
recognition and price. In recent years, the gaming machine market has been
dominated by International Game Technology ("IGT"). Because of its extensive
market presence, distribution capacity, player acceptance and financial,
technological and other resources, IGT represents formidable competition.
Several other companies, including Bally Gaming International, Inc., are
established in, or are seeking to enter, the gaming machine business. Companies
in historically unrelated industries, such as Sega Enterprises Ltd., have
technological resources that could offer them a competitive advantage in
developing multimedia-based gaming machines. In general, our existing
competitors, as well as many potential new competitors, might have significantly
greater financial and technical resources, as well as more established customer
bases and distribution channels, any of which could afford them a competitive
advantage in developing multimedia-based gaming machines. Any success we might
have may benefit existing competitors and induce new competitors to enter the
market. In the face of such competition, there can be no assurance that we will
be a successful competitor in the gaming machine industry.
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WE COULD LOSE KEY PERSONNEL TO COMPETITORS OR OTHER INDUSTRIES WHICH COULD
DRAMATICALLY IMPACT OUR ABILITY TO CONTINUE OPERATIONS.
Our success depends to a great extent on the management efforts of our
officers and other key personnel and on our ability to attract new key personnel
and retain existing key personnel. In particular, we depend on our officers who
are currently qualified, licensed or found suitable in the gaming jurisdictions
in which we operate, and our software engineers, programmers and designers who
create, maintain and service our products. Competition is intense for highly
skilled product development employees in particular. There can be no assurance
that we will be successful in attracting and retaining such personnel or that we
can avoid increased costs in order to do so. We are also faced with the
possibility of losing key employees because of a perceived lack of job security.
Our officers and key employees are not bound by noncompetition agreements that
extend beyond their employment with us, and there can be no assurance that
employees will not leave or compete against us. Our failure to attract
additional qualified employees or to retain the services of key personnel could
have a material adverse effect on operating results and financial condition. We
currently maintain a "key-man" life insurance policy in the amount of $3 million
on the life of Andrew S. Pascal, the President and Chief Executive Officer of
Silicon Gaming, Inc.
WE FACE LITIGATION AND LIMITED PROTECTION PROBLEMS WITH THE PROPRIETARY
INTELLECTUAL PROPERTY WE RELY ON FOR OUR PRODUCTS.
We regard our products as proprietary and rely primarily on a combination
of patent, trademark, copyright and trade secret laws and employee and
third-party nondisclosure agreements to protect our proprietary rights. Defense
of intellectual property rights can be difficult and costly, and there can be no
assurance that we will be able effectively to protect our technology from
misappropriation by competitors. In addition, the protections offered by
trademark, copyright and trade secret laws would not prevent a competitor from
designing games having appearance and functionality that closely resemble our
games. At present, our principal proprietary technology consists of our game
authentication algorithm, which is designed to prevent tampering with the game
software that is resident in our products, and our random number generator
algorithm, which determines the outcome of each gaming proposition. While we
believe that these algorithms are unique at present, there can be no assurance
that a competitor will not succeed in developing an authentication algorithm or
a random number generator algorithm that performs as well as, or better than,
ours. Moreover, although we applied for and received certain patents and
trademarks, there can be no assurance that such patents and trademarks will not
be successfully challenged in future litigation.
As the number of software products in the industry increases and the
functionality of these products further overlaps, software developers and
publishers may increasingly become subject to infringement claims. We have
already faced claims of infringement and have also instituted proceedings
against others we believed were infringing on our intellectual property rights.
For example, in March 2000 we were served papers in connection with a patent
infringement lawsuit filed against it and one other slot machine manufacturer by
IGT. IGT is alleging infringement of a patent issued to IGT in September 1999
entitled "Game Machine and Method Using Touch Screen". We are presently unable
to determine the financial impact, if any, of this litigation. Any present or
future claims or litigation could be costly and could result in a diversion of
management's attention, which could have a material adverse effect on our
business and financial condition. Any settlement of such claims or adverse
determinations in such litigation could also have a material adverse effect on
our business, operating results and financial condition.
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THE TECHNOLOGY WE USE IN OUR PRODUCTS IS CHANGING RAPIDLY AND WE MAY NOT BE ABLE
TO TAKE ADVANTAGE OF THESE CHANGES.
Our 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. Our
ability to remain competitive and retain any technological lead may depend in
part upon our ability to continually develop new slot machine games that take
full advantage of the technological possibilities of state-of-the-art hardware.
Should any of our current or potential competitors succeed in developing a
competing software-based gaming platform, that competitor could be in a position
to outperform us in our ability to exploit developments in microprocessor, video
or other multimedia technology. The emergence of a suite of slot machine games
that is superior to ours in any respect could substantially diminish product
sales and thereby have a material adverse effect on our operating results and
financial condition.
THE SLOWING TREND IN OPENING NEW CASINOS AND NEW GAMING OPPORTUNITIES COULD
ADVERSELY AFFECT OUR BUSINESS.
Growth in demand for slot machines historically has been driven by the
opening of new casinos, including casinos in jurisdictions where gaming has
recently been legalized. However, in recent years, the legalization of gaming in
new jurisdictions has been significantly reduced; therefore, demand based on new
openings will be largely limited to new projects in existing markets. There can
be no assurance that the slot machine industry will sustain the rate of growth
that occurred in the first half of the 1990s.
WE ARE SUBJECT TO NUMEROUS GAMING AND LICENSING CONTROL REGULATIONS AND UNDER
CERTAIN CIRCUMSTANCES DESCRIBED BELOW, YOU, AS A SHAREHOLDER, MAY BE SUBJECT TO
QUALIFICATION OR LICENSING IF YOU HOLD VOTING STOCK OF SILICON GAMING.
In most jurisdictions, any beneficial owner of our common stock is subject,
at the discretion of the gaming regulatory authorities of those jurisdictions in
which we operate or seek to operate, to being required to file applications with
gaming regulatory authorities, be investigated and found suitable or qualified
as such. In addition, shareholders whose holdings of common stock exceed certain
designated percentages are subject to certain reporting and qualification
requirements imposed by state and federal gaming regulators and, any
shareholder, if found to be unsuitable, may be required to dispose of its
holdings of common stock. (SEE ALSO, "Gaming Regulations and Licensing")
GAMING REGULATIONS
The gaming industry is highly regulated and ownership interests in gaming
companies is strictly monitored.
NEVADA REGULATORY MATTERS. The Company must obtain a registration, license,
approval or finding of suitability, and equipment approval in all jurisdictions
before it can offer gaming devices for sale to licensed gaming operations within
those jurisdictions. The licensing process usually involves the licensing or
approval of certain officers, directors, and shareholders of the corporation,
and approval of the specific product that the Company wants to offer for sale.
On June 19, 1996 the Nevada Commission registered Silicon Gaming as a publicly
traded corporation and licensed Silicon Gaming-Nevada ("Silicon Gaming-Nevada"),
a wholly-owned subsidiary of Silicon Gaming, as a manufacturer, distributor and
operator of a slot machine route. The Company's initial public offering was also
approved by the Nevada Commission on June 19, 1996. On March 20, 1997, the
Nevada Commission granted final approval of the Company's product for sale to
licensed casinos in Nevada.
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The manufacture, sale and distribution of gaming devices for use or play in
Nevada or for distribution outside of Nevada, the manufacture and distribution
of associated equipment for use in Nevada, and the ownership and operation of
slot machine routes in Nevada are subject to: (i) the Nevada Gaming Control Act
and the regulations promulgated thereunder (collectively, "Nevada Act"); and
(ii) various local ordinances and regulations. Such activities are subject to
the licensing and regulatory control of the Nevada Commission, the Nevada Board,
and various local, city and county regulatory agencies (collectively referred to
as the "Nevada Gaming Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming, or manufacturing or
distribution of gaming devices at any time or in any capacity; (ii) the strict
regulation of all persons, locations, practices, associations and activities
related to the operation of licensed gaming establishments and the manufacture
or distribution of gaming devices and equipment; (iii) the establishment and
maintenance of responsible accounting practices and procedures; (iv) the
maintenance of effective controls over the financial practices of licensees,
including the establishment of minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenue, providing reliable record keeping
and requiring the filing of periodic reports with the Nevada Gaming Authorities;
(v) the prevention of cheating and fraudulent practices; and (vi) the provision
of a source of state and local revenue through taxation and licensing fees.
Change in such laws, regulations and procedures could have an adverse effect on
the Company's operations.
Gaming approvals require the periodic payment of fees and taxes which are
not transferable. As a Registered Corporation, the Company is required
periodically to submit detailed financial and operating reports to the Nevada
Commission and furnish any other information which the Nevada Commission may
require. No person may become a shareholder of, or receive any profit from
Silicon Gaming-Nevada without first obtaining licenses and approvals from the
Nevada Gaming Authorities. The Company and Silicon Gaming-Nevada have applied
for, and in some cases received, the various registrations, approvals, permits
and licenses in order to engage in manufacturing, distribution and slot route
activities in Nevada.
All gaming devices that are manufactured, sold or distributed for use or
play in Nevada, or for distribution outside of Nevada, must be manufactured by
licensed manufacturers and distributed or sold by licensed distributors. All
gaming devices manufactured for use or play in Nevada must be approved by the
Nevada Commission before distribution or exposure for play. The approval process
for gaming devices includes rigorous testing by the Nevada Board, a field trial
and a determination as to whether the gaming device meets strict technical
standards that are set forth in the regulations of the Nevada Commission.
Associated equipment must be administratively approved by the Chairman of the
Nevada Board before it is distributed for use in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, a Registered Corporation
or its subsidiaries in order to determine whether such individual is suitable or
should be licensed as a business associate of a gaming licensee. Officers,
directors and certain key employees of the Company and Silicon Gaming-Nevada are
required to file applications with the Nevada Gaming Authorities and may be
required to be licensed or found suitable by the Nevada Gaming Authorities. The
Nevada Gaming Authorities may deny an application for licensing for any cause
which they deem reasonable. A finding of suitability is comparable to licensing,
and both require submission of detailed personal and financial information
followed by a thorough investigation. The applicant for licensing or a finding
of suitability must pay all the costs of the investigation. Changes in licensed
positions must be reported to the Nevada Gaming Authorities and in addition to
their authority to deny an application for a finding of suitability or
licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position.
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If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with Silicon Gaming or Silicon Gaming-Nevada, the Company would
have to sever all relationships with such person. In addition, the Nevada
Commission may require the Company or Silicon Gaming-Nevada to terminate the
employment of any person who refuses to file appropriate applications.
Determination of suitability or of questions pertaining to licensing are not
subject to judicial review in Nevada.
The Company and Silicon Gaming-Nevada will be required to submit detailed
financial and operating reports to the Nevada Commission. Substantially all
material loans, leases, sales of securities and similar financing transactions
by the Company will be required to be reported to or approved by the Nevada
Commission.
If it were determined that the Nevada Act was violated by the Company or
Silicon Gaming-Nevada, the registration and gaming licenses it holds could be
limited, conditioned, suspended or revoked, subject to compliance with certain
statutory and regulatory procedures. In addition, the Company, Silicon
Gaming-Nevada and the persons involved could be subject to substantial fines for
each separate violation of the Nevada Act at the discretion of the Nevada
Commission. Limitation, conditioning or suspension of any gaming license could
(and revocation of any gaming license would) materially adversely affect the
Company's gaming operations.
Any beneficial holder of a Registered Corporation's voting securities,
regardless of the number of shares owned, may be required to file an
application, be investigated, and have his suitability determined as a
beneficial holder of the Registered Corporation's voting securities if the
Nevada Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the State of Nevada. The applicant
must pay all costs of investigation incurred by the Nevada Gaming Authorities in
conducting any such investigation.
The Nevada Act requires any person who acquires beneficial ownership of
more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of a Registered Corporation's voting securities apply to
the Nevada Commission for a finding of suitability within thirty days after the
Chairman of the Nevada Board mails the written notice requiring such filing.
Under certain circumstances, an "institutional investor," as defined in the
Nevada Act, which acquires more than 10% but not more than 15%, of the
Registered Corporation's voting securities may apply to the Nevada Commission
for a waiver of such finding of suitability if such institutional investor holds
the voting securities for investment purposes only. An institutional investor
shall not be deemed to hold voting securities for investment purposes unless the
voting securities were acquired and are held in the ordinary course of business
as an institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies or operations of the Registered
Corporation, or any of its gaming affiliates, or any other action which the
Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by shareholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent. If
the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
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Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any shareholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company will be subject to disciplinary action
if, after it receives notice that a person is unsuitable to be a shareholder or
to have any other relationship with the Company or Silicon Gaming-Nevada, the
Company (i) pays that person any dividend or interest upon voting securities of
the Company, (ii) allows that person to exercise, directly or indirectly, any
voting right conferred through securities held by that person, (iii) pays
remuneration in any form to that person for services rendered or otherwise, or
(iv) fails to pursue all lawful efforts to require such unsuitable person to
relinquish his voting securities including, if necessary, the immediate purchase
of those voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file applications, be investigated
and be found suitable to own the debt security of a Registered Corporation. If
the Nevada Commission determines that a person is unsuitable to own such
security, then pursuant to the Nevada Act, the Registered Corporation can be
sanctioned, including the loss of its approvals, if without the prior approval
of the Nevada Commission, it: (i) pays to the unsuitable person any dividend,
interest, or any distribution whatsoever; (ii) recognizes any voting right by
such unsuitable person in connection with such securities; (iii) pays the
unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
The Company will be required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder may
be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. Failure to make such disclosure may be grounds for finding
the record holder unsuitable. The Company will also be required to render
maximum assistance in determining the identity of the beneficial owner. The
Nevada Commission has the power to require the stock certificates of the Company
to bear a legend indicating that the securities are subject to the Nevada Act.
However, the Nevada Commission has not imposed such a requirement on the Company
to date, but it is unknown whether the Nevada Commission will impose such a
requirement on the Company in the future.
As a Registered Corporation, the Company may not make a public offering of
its securities, such as an initial public offering or follow-on offering,
without the prior approval of the Nevada Commission if the securities or
proceeds therefrom are intended to be used to construct, acquire or finance
gaming facilities in Nevada, or to retire or extend obligations incurred for
such purposes. Approval of a public offering, if given, does not constitute a
finding, recommendation or approval by the Nevada Commission or the Nevada Board
as to the accuracy or adequacy of the disclosure materials used in the offering
or the investment merits of the securities offered. Any representation to the
contrary is unlawful.
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person whereby he obtains control, may not occur
without the prior approval of the Nevada Commission. Entities seeking to acquire
control of a Registered Corporation must satisfy the Nevada Board and the Nevada
Commission in a variety of stringent standards prior to assuming control of such
Registered Corporation. The Nevada Commission may also require controlling
shareholders, officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire control, to be
investigated and licensed as part of the approval process relating to the
transaction.
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The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada corporate gaming licensees, and Registered Corporations
that are affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established a regulatory
scheme to ameliorate the potentially adverse effects of these business practices
upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's shareholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which gaming operations are to be conducted. Depending
upon the particular fee or tax involved, these fees and taxes are payable either
monthly, quarterly or annually and are based upon either: (i) a percentage of
the gross revenue received; or (ii) the number of gaming devices operated.
Annual fees are also payable to the State of Nevada for renewal of licenses as a
manufacturer, distributor and operator of a slot machine route.
Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities that
are harmful to the state of Nevada or its ability to collect gaming taxes and
fees, or employ a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
In the future, Silicon Gaming intends to seek the necessary registrations,
licenses, approvals, and findings of suitability for the Company, its product
and its personnel in other jurisdictions throughout the world. However, there
can be no assurances that such registrations, licenses, approvals or findings of
suitability will be obtained. Many other jurisdictions in which the Company
wishes to do business require various licenses, permits, and approvals in
connection with the manufacture and distribution of gaming devices, typically
involving restrictions similar in most respects to those of Nevada.
NEW JERSEY REGULATORY MATTERS. Casino gaming in New Jersey, including the
manufacture, distribution and operation of gaming devices, is subject to strict
regulation by the New Jersey Casino Control Commission (the "New Jersey
Commission") pursuant to the New Jersey Casino Control Act and the regulations
of the New Jersey Commission promulgated thereunder (collectively, the "New
Jersey Act"). The New Jersey Commission is authorized to decide all applications
for licensure or other approvals and to promulgate regulations. The New Jersey
Act also established the New Jersey Division of Gaming Enforcement (the "New
Jersey Division"), which is responsible for investigating all applications for
licensure or approval and for prosecuting violations of the New Jersey Act.
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Under the New Jersey Act, a company must be licensed as a gaming related
casino service industry ("CSI") in order to manufacture or distribute gaming
devices to New Jersey casinos. In April of 1998, the Company and its
wholly-owned subsidiary, Silicon Gaming-New Jersey, Inc. ("Silicon Gaming-NJ"),
were licensed as casino services industries. The licenses expire April 30, 2000.
The Company and Silicon Gaming-NJ have filed for renewal of their CSI licenses.
The Renewal applications consisted of extensive disclosure forms by the Company,
Silicon Gaming-NJ, and certain of their officers, directors, principal employees
and security holders. Once a CSI license renewal application is accepted for
filing by the New Jersey Commission, the applicant may continue to do business
with New Jersey casinos while the renewal application is pending.
A CSI license is renewed for a four year period upon satisfaction of the
same standards applicable to the initial issuance of a CSI license. The New
Jersey Commission may impose conditions on the issuance of a license. In
addition, the New Jersey Commission has the authority to impose fines or suspend
or revoke a license for violations of the New Jersey Act, including the failure
to satisfy the licensure requirements.
The New Jersey Commission has broad discretion regarding the issuance,
renewal, suspension or revocation of CSI licenses. In order to obtain their
initial CSI license the Company and Silicon Gaming-NJ demonstrated to the New
Jersey Commission by clear and convincing evidence that they, any five percent
or greater security holders, certain officers, directors, and principal
employees, and anyone else whom the New Jersey Commission deems appropriate in
its discretion, possess good character, honesty and integrity. In order to renew
their CSI license, the Company and Silicon Gaming-NJ must meet the same standard
as for an initial CSI license. If a person who is required to be found qualified
is found unqualified by the New Jersey Commission, the license renewal
applications of the Company and Silicon Gaming-NJ may be denied.
With respect to security holders, the New Jersey Commission may waive the
qualification requirement for "institutional investors," as defined in the New
Jersey Act, of the Company in the absence of a prima facie showing by the
Director of the New Jersey Division that there is any cause to believe that the
institutional investor may be unqualified, if the institutional investor holds
less than ten percent of the outstanding securities, provided the securities
were acquired for investment purposes only and the holder has no intention of
influencing the affairs of the Company, other than voting its securities. The
New Jersey Act defines an "institutional investor" as (i) any retirement fund
administered by a public agency for the exclusive benefit of federal, state or
local public employees, (ii) an investment company registered under the
Investment Company Act of 1940, (iii) a collective investment trust organized by
banks under Part Nine of the Rules of the Comptroller of the Currency, (iv) a
closed end investment trust, (v) a chartered or licensed life insurance company
or property and casualty insurance company, (vi) banking or other licensed or
chartered lending institutions, (vii) an investment advisor registered under the
Investment Advisors Act of 1940, or (viii) such other persons as the New Jersey
Commission may determine for reasons consistent with the policies of the New
Jersey Act.
The renewal applications of the Company and Silicon Gaming-NJ will be
investigated by the New Jersey Division. During the course of the investigation,
the Company and Silicon Gaming-NJ are required to provide additional information
to the New Jersey Division. At the conclusion of the renewal investigation, the
New Jersey Division will file a report with the New Jersey Commission stating
its position on the license renewal applications. After receipt of the report of
the New Jersey Division, the New Jersey Commission will make a determination on
the license renewal applications. No assurances can be given as to the timing of
completion of the renewal investigation by the New Jersey Division or
consideration of the renewal applications by the New Jersey Commission.
In addition, gaming devices manufactured or distributed by the Company or
Silicon Gaming-NJ must be approved by the New Jersey Commission based on, at a
minimum, their quality, design, integrity, fairness, honesty and suitability in
20
<PAGE>
order to be used in New Jersey casinos. The approval process includes the
submission of a model of the gaming device and relevant documentation to the New
Jersey Division for testing, examination and analysis. Only a licensed CSI or an
applicant for CSI licensure can submit a gaming device for approval. All costs
of such testing, examination and analysis are borne by the Company. Prior to
deciding to approve a particular model of gaming device, the New Jersey
Commission may require a test of up to 60 days of the gaming device in a
licensed casino. During the test period, the manufacturer or distributor of the
gaming device shall not be entitled to receive revenue of any kind whatsoever.
Once a gaming device is approved by the New Jersey Commission, all gaming
devices of that model placed in operation in licensed casinos shall operate in
conformity with the model approved by the New Jersey Commission. Any changes in
the design, function or operation of an approved gaming device are subject to
prior approval by the New Jersey Commission, after testing by the New Jersey
Division.
MISSISSIPPI REGULATORY MATTERS. The manufacture, sale and distribution of
gaming devices for use or play in Mississippi are subject to the Mississippi
Gaming Control Act, Miss. Code Ann.ss.75-76-1 et. seq., and the regulations
promulgated thereunder (collectively, the "Mississippi Act"). Such activities
are subject to the licensing and regulatory control of the Mississippi Gaming
Commission (the "Mississippi Commission") and the Mississippi State Tax
Commission. Although not identical, the Mississippi Act is similar to the Nevada
Gaming Control Act and regulations promulgated thereunder.
On July 18, 1996 the Company was registered by the Mississippi Commission
as a publicly traded corporation (a "Registered Corporation") and the holding
company of Silicon Gaming-Mississippi, Inc. ("Silicon Gaming - Mississippi").
Also on July 18, 1996, Silicon Gaming - Mississippi was licensed as a
manufacturer and distributor. Silicon Gaming and Silicon Gaming - Mississippi
are required to periodically submit detailed financial and operating reports to
the Mississippi Commission and furnish any other information which the
Mississippi Commission may require. The Company and Silicon Gaming - Mississippi
have received the various registrations, approvals, permits and licenses in
order to engage in manufacturing and distribution as presently conducted in
Mississippi. Such licenses, registrations and approvals are not transferable and
must be renewed periodically.
Similar to Nevada, the Mississippi Commission may investigate and find
suitable any individual who has a material relationship to, or material
involvement with, the Company or Silicon Gaming - Mississippi, including record
or beneficial holders of any of the voting securities of the Company, holders of
debt obligations, and officers, directors and employees of the Company and
Silicon Gaming - Mississippi. Silicon Gaming - Mississippi is required to
maintain a current stock ledger in Mississippi that may be examined by the
Mississippi Commission at any time. The Company believes that all required
findings of suitability currently required have been applied for or obtained.
Any applicant for a finding of suitability must pay all investigative fees and
costs of the Mississippi Commission in connection with such an investigation.
The Mississippi Act requires any person who acquires beneficial ownership
of more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Mississippi Commission, and such person may be required to be
found suitable. The Mississippi Act requires that beneficial owners of more than
10% of a Registered Corporation's voting securities apply to the Mississippi
Commission for a finding of suitability. The Mississippi Commission has
generally exercised its discretion to require a finding of suitability of any
beneficial owner of more than 5% of a Registered Corporation's common stock.
Under certain circumstances, an "institutional investor," as defined by
Mississippi Commission policy, which acquires not more than 15% of the
Registered Corporation's voting securities may apply to the Mississippi
Commission for a waiver of such finding of suitability if such institutional
investor holds the voting securities for investment purposes only.
21
<PAGE>
The Company may not make a public offering of its securities without the
approval of the Mississippi Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Mississippi, or to retire or extend obligations incurred for such purposes.
If it were determined that the Mississippi Act was violated by Silicon
Gaming - Mississippi, the licenses it holds could be limited, conditioned,
suspended or revoked, subject to compliance with certain statutory and
regulatory procedures, which action, if taken, could materially adversely affect
the Company's manufacturing and distribution.
FEDERAL REGULATION. The Federal Gambling Devices Act of 1962 (the "Federal
Gambling Act") makes it unlawful, in general, for a person to manufacture,
deliver, or receive gaming machines, gaming machine type devices and components
across state lines or to operate gaming machines unless that person has first
registered with the Attorney General of the United States. We are required to
register and renew our registration annually. We have complied with such
registration requirements. In addition, various record keeping equipment
identification requirements are imposed by the Federal Gambling Act. Violation
of the Federal Gambling Act may result in seizure and forfeiture of the
equipment, as well as other penalties.
NATIVE AMERICAN GAMING. Gaming on Native American lands, including the
terms and conditions under which gaming equipment can be sold or leased to
Native American tribes, is or may be subject to regulation under the laws of the
tribes, the laws of the host state, the Indian Gaming Regulatory Act of 1988
("IGRA"), which is administered by the National Indian Gaming Commission (the
"NIGC") and the Security of the U.S. Department of the Interior, and also may be
subject to the provisions of certain statutes relating to contracts with Native
American tribes, which are administered by the U.S. Department of the Interior.
As a precondition to gaming involving gaming machines, IGRA requires that the
tribe and the state have entered into a written agreement (a "tribal-state
compact") that specifically authorizes such gaming, and that has been approved
by the U.S. Department of the Interior, with notice of such approval published
in the Federal Registrar. Tribal-state compacts vary from state to state. Many
require that equipment suppliers meet ongoing registration and licensing
requirements of the state and/or the tribe and some impose background check
requirements on the officers, directors, and shareholders of gaming equipment
supplies. Under IGRA, tribes are required to regulate all commercial gaming
under ordinances approved by the NIGC. Such ordinances may impose standards and
technical requirements on gaming hardware and software, and may impose
registration, licensing and background check requirements to gaming equipment
suppliers and their officers, directors, and shareholders.
APPLICATION OF FUTURE OR ADDITIONAL REGULATORY REQUIREMENTS. In the future,
we intend to seek the necessary registrations, licenses, approvals and findings
of suitability for us, our products and our personnel in other U.S. and foreign
jurisdictions in which we identify significant sales potential for our product.
However, there can be no assurance that such registrations, licenses, approvals
or findings of suitability will be obtained and will not be revoked, suspended
or conditioned or that we will be able to obtain the necessary approvals for our
future products as they are developed in a timely manner, or at all. If a
registration, license, approval or finding of suitability is required by a
regulatory authority and we fail to seek or do not receive the necessary
registration, license, approval or finding of suitability, we may be prohibited
from selling our products for use in the respective jurisdiction or may be
required to sell our product through other licensed entities at a reduced
profit.
22
<PAGE>
SELLING SHAREHOLDER
On November 24, 1999, we issued 39,750 shares of Series D Convertible
Redeemable Preferred Stock ("Series D Preferred Stock") and a warrant (the
"Series E Warrant") to purchase 60,807.731 shares of Series E Convertible
Redeemable Preferred Stock ("Series E Preferred Stock") to B III Capital
Partners L.P., pursuant to a Restructuring Agreement as of the same date. Each
share of Series D Preferred Stock is convertible into 4,384.53149701 shares of
common stock. No additional consideration is payable upon exercise of the Series
D Preferred Stock. The Series E Warrant is exercisable for up to 60,807.731
shares of Series E Preferred Stock. The Series E Warrant is exercisable only to
the extent that Exchange Warrants are actually exercised. SEE "DESCRIPTION OF
SECURITIES - SERIES E WARRANT, AND EXCHANGE WARRANTS" Upon exercise of the
Series E Warrant, the holder must pay $.01 for each share of Series E Preferred
Stock. Each share of Series E Preferred Stock is convertible into 1,000 shares
of common stock. No additional consideration is payable upon conversion of the
Series E Preferred Stock. This prospectus covers shares of common stock that may
be acquired by the selling shareholder upon conversion of the Series D and
Series E Preferred Stock.
The following table provides information as of April 19, 2000, with respect
to the common stock beneficially owned by the selling shareholder. For purposes
of the information set forth in this table we assume that all of the shares of
Series D and Series E Preferred Stock are converted. We believe that B III has
sole voting and investment power with respect to the respective shares of common
stock set forth opposite its name. The shares of common stock offered by this
prospectus may be offered from time to time by B III or its nominees.
B III Capital Partners, L.P. is a Delaware limited partnership of which DDJ
Capital III, LLC is the general partner. The manager of DDJ Capital III, LLC is
DDJ Capital Management, LLC. The address of B III Capital Partners, L.P. is c/o
DDJ Capital Management, LLC, 141 Linden Street, Wellesley, MA 02181.
Total Shares Common Stock
Outstanding as of June 21, 2000 30,978,831
<TABLE>
NUMBER OF SHARES NUMBER OF SHARES PERCENT
BENEFICIALLY NUMBER OF BENEFICIALLY PERCENT OF ALL
OWNED PRIOR TO SHARES BEING OWNED AFTER OF COMMON COMMON
THE OFFERING OFFERED THE OFFERING STOCK STOCK
------------ ------- ------------ ----- -----
<S> <C> <C> <C> <C> <C>
B III Capital
Partners L.P. 1,066,460* 235,092,858 1,066,460* ** **
</TABLE>
-----------
* To comply with applicable gaming laws, if B III seeks to convert shares of
Series D Preferred Stock that would, following such conversion, cause B III to
own in excess of 4.9% of the outstanding common stock of the company such
conversion requires 65 days notice to the company. In addition, conversion of
Series D Preferred Stock may require DDJ and B III to seek prior approval or
make certain prior filings with certain state gaming authorities. Further,
ownership of such shares of Common Stock may subject DDJ and B III to regulatory
approval under applicable state gaming control laws. Neither B III nor DDJ has
sought or received such approval or made filings to permit such conversion.
Currently, the Series E Warrant is not exercisable and B III does not hold any
shares of Series E Preferred Stock. This number includes 625,000 shares of
common stock issuable upon exercise of warrants issued to B III in September
1997 and July 1998. On September 30, 1997, in connection with its purchase of
Senior Discount Notes from the Company in a private placement, B III acquired
for cash warrants to purchase 375,000 shares of common stock. Each warrant is
23
<PAGE>
currently exercisable to purchase one share of common stock of the Company at an
exercise price of $.56256 per share, subject to adjustment. The exercise price
was reset pursuant to an amendment to the Securities Purchase Agreement dated
September 30, 1997. These warrants are exercisable for a five-year period
beginning six months following the date of issuance. On July 8, 1998, in
connection with its purchase of Senior Discount Notes from the Company in a
private placement, B III acquired for cash warrants to purchase 250,000 shares
of common stock. Each warrant is exercisable to purchase one share of common
stock of the Company at an exercise price of $.56256 in cash per share, subject
to adjustment. The warrants are exercisable for a five year period beginning six
months following the date of issuance. The warrants were purchased pursuant to
an amendment to the Securities Purchase Agreement dated September 30, 1997. The
original exercise price of the warrants to purchase 375,000 shares of common
stock, issued on September 30, 1997, was $15.4375. The exercise price was
adjusted to $8.00 pursuant to the Amended and Restated Warrant Agreement, dated
July 8, 1998. The original exercise price of the warrants to purchase 250,000
shares of common stock, issued on July 8, 1998, was $8.00. The exercise price
for all of the warrants was automatically adjusted on July 15, 1999, to 120% of
the average of the closing bid and ask price as reported on the OTC Bulletin
Board.
** This represents less than 1% of the outstanding common stock, assuming all
Series D and Series E Preferred Stock are converted into shares of common stock,
and all warrants that might be issued in the exchange offer are exercised.
PLAN OF DISTRIBUTION
The sale or distribution of the shares registered by this prospectus may be
effected directly to purchasers by the selling shareholder as principal or
through one or more underwriters, brokers, dealers or agents from time to time.
Such sale or distribution may occur by one or more of the following transactions
(which may involve crosses or block transactions):
* on any exchange or in the over-the-counter market,
* in transactions other than in the over-the-counter market, or
* through the writing of options (whether such options are listed on an
options exchange or otherwise), or settlement of short sales.
Any of the transactions listed above may be made at market prices
prevailing at the time of sale or otherwise or at negotiated or fixed prices, in
each case as determined by the selling shareholder or by agreement between the
selling shareholder and underwriters, brokers, dealers, or agents, or
purchasers. If the selling shareholder effects such transactions by selling
shares to or through underwriters, brokers, dealers or agents, such
underwriters, brokers, dealers, or agents may receive compensation in the form
of customary or other discounts, concessions or commissions from the selling
shareholder or commissions from purchasers of the shares for whom they may act
as agent The selling shareholder and any brokers, dealers or agents that
participate in the distribution of the shares may be deemed to be underwriters,
and any profit on the sale of shares by them and any discounts, concessions or
commissions received by any such underwriters, brokers, dealers or agents may be
deemed to be underwriting discounts and commissions under the Securities Act.
Under the securities laws of certain states, the shares may be sold in such
states only through registered or licensed brokers or dealers.
We pay all of the expenses incident to the registration, offering and sale
of the shares to the public hereunder other than commissions, fees and discounts
of underwriters, brokers, dealers and agents. We have agreed to indemnify the
selling shareholder and any underwriters against certain liabilities, including
24
<PAGE>
liabilities under the Securities Act. We will not receive any of the proceeds
from the sale of any of the shares by the selling shareholder.
We have agreed to use our best efforts to keep the registration statement,
of which this prospectus constitutes a part, effective until the later of
twenty-four months following the date such registration statement is declared
effective by the SEC or the date on which the shares held by or issuable to B
III or its permitted transferee, may be sold under Rule 144(k) of the Securities
Act, provided that we first provide such holder with an opinion of counsel to
such effect.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares by the selling
shareholder. We will not receive any proceeds from the conversion of any shares
of Series D Preferred Stock into shares of common stock. We will receive up to
$608.71 for the exercise of the Series E Warrant. We will not receive any
proceeds from the conversion of any shares of Series E Preferred Stock into
shares of common stock.
DESCRIPTION OF SECURITIES
COMMON STOCK. We are authorized to issue up to 750,000,000 shares of common
stock, par value $.001 per share. Each share of common stock entitles the holder
to one vote in matters in which shareholders are eligible to vote.
SERIES D PREFERRED STOCK. The rights, preferences, privileges and
limitations of the Series D Preferred Stock are set forth in a Certificate of
Determination filed with the Secretary of State of California as of November 24,
1999. The Series D Preferred Stock have rights to receive dividends when, as and
if declared by the board of directors. Dividends may not be paid on any other
capital stock junior to the Series D Preferred Stock prior to an equal dividend
payment to the holders of the Series D Preferred Stock. Currently, the Series A1
Preferred Stock, Series B1 Preferred Stock, common stock and Series E Preferred
Stock are all considered junior to the Series D Preferred Stock; however, at
this time there are no outstanding shares of Series A1 Preferred Stock, Series
B1 Preferred Stock or Series E Preferred Stock. The Series D Preferred Stock may
be converted into shares of common stock at a conversion rate of 4,384.53149701
shares of common stock, subject to adjustment, for each share of Series D
Preferred Stock. The holders of the Series D Preferred Stock are not required to
pay any additional consideration in order to convert their shares into shares of
common stock.
The Series D Preferred Stock has a liquidation preference to the common
stock and the Series E Preferred Stock. In the event of a liquidation,
dissolution or winding up, each share of Series D Preferred Stock is entitled to
receive out of the assets available for distribution, on a pro-rata basis, 100%
of any proceeds up to the first $20 million in aggregate amount, and a
formula-based percentage of any proceeds in excess of $20 million in aggregate
amount the remainder of which would be available for distribution to the holders
of any capital stock junior to the Series D Preferred Stock.
The Series D Preferred Stock may be redeemed at any time. In the event of a
Change of Control (as that term is defined in the Certificate of Determination
for the Series D Preferred Stock), the holders of a majority of the outstanding
shares of the Series D Preferred Stock may require the company to redeem the
shares. The shares may be redeemed at the greater of the liquidation preference
stated above, or the fair market value of the common stock into which the shares
of Series D Preferred Stock could then be converted. If the holders of the
Series D Preferred Stock exercise their right to require redemption of their
shares of Series D Preferred Stock upon a Change of Control the redemption price
is the greater of the liquidation preference set forth above or the fair market
value of the common stock into which the shares of Series D Preferred Stock
could then be converted. No sinking fund is required for the redemption of the
25
<PAGE>
Series D Preferred Stock. The holders of the Series D Preferred Stock are not
required to convert their shares into common stock in order to receive the
benefit of the liquidation preference or a redemption upon a Change of Control.
There is no restriction on the repurchase or redemption of Series D Preferred
Stock while there is any arrearage in the payment of dividends.
The Series D Preferred Stock are non-voting securities. However, the
holders of the Series D Preferred Stock will have the right to vote the number
of shares of common stock into which all of such holders' shares of Series D
Preferred Stock are convertible, as a class with the other holders of common
stock, but not as a separate class, only if such holder has first received all
prior approvals required under applicable gaming laws for conversion of all of
the shares of Series D Preferred Stock held by such holder and such holder has
complied with any filing requirements prerequisite to such holders' conversion
of all of the shares of Series D Preferred Stock held by such holder. We are
subject to the gaming laws and the gaming authorities of the various
jurisdictions in which we operate. The gaming laws and the gaming authorities of
those jurisdictions generally require a gaming license, a finding of
suitability, or some form of approval for any one party who holds a large
percentage of the outstanding voting stock of a gaming company. B III does not
currently hold a gaming license in any state in which we are subject to gaming
laws, nor has it received a finding of suitability or other approval in any of
those jurisdictions. It is our belief that B III has no current intention to
seek any such license, finding of suitability, or other approval in any
jurisdiction in which we operate. There can be no assurance, however, that B III
or any subsequent holder of the Series D Preferred Stock will not seek such
license, finding of suitability, or other approval in the future.
The Series D Preferred Stock does not have preemptive rights. The Series D
Preferred Stock, as issued to B III, is fully paid and non-assessable. The
Series D Preferred Stock is not registered and is considered a "restricted
security" as that term is defined in Rule 144 of the Securities Act of 1933, as
amended. The Series D Preferred Stock may not be transferred unless it has first
been registered under applicable securities laws or there exists an exemption
from registration for such transfer.
So long as at least 100 shares of Series D Preferred Stock remain
outstanding, without the prior written consent of the then holders of a majority
of the outstanding shares of Series D Preferred Stock, we are restricted from,
among other actions:
(1) issuing any dividends on our outstanding securities;
(2) issuing any capital stock or debt with a preference to or pari passu
with the Series D Preferred Stock, the Series E Preferred Stock, the
Amended Notes or the New Notes;
(3) issuing any additional capital stock other than capital stock
contemplated by the Restructuring; or
(4) merging or consolidating with any other entity, or entering into any
transaction which would constitute or have the effect of a change of
control.
These restrictions could delay, defer, or prevent a change in control.
SERIES E PREFERRED STOCK. The rights, preferences, privileges and
limitations of the Series E Preferred Stock are set forth in a Certificate of
Determination filed with the Secretary of State of California as of November 24,
1999. The Series E Preferred Stock have rights to receive dividends when, as and
if declared by the board of directors. Dividends may not be paid on any other
capital stock junior to the Series E Preferred Stock prior to an equal dividend
payment to the holders of the Series E Preferred Stock. Currently, the Series A1
Preferred Stock, Series B1 Preferred Stock, and the common stock are all
considered junior to the Series E Preferred Stock. The Series D Preferred Stock
26
<PAGE>
is considered senior to the Series E Preferred Stock; however, at this time
there are no outstanding shares of Series A1 Preferred Stock or Series B1
Preferred Stock. The Series E Preferred Stock may be converted into shares of
common stock at a conversion rate of 1,000 shares of common stock, subject to
adjustment, for each share of Series E Preferred Stock. The holders of the
Series E Preferred Stock are not required to pay any additional consideration in
order to convert their shares into shares of common stock.
The Series E Preferred Stock may be redeemed at any time. In the event of a
Change of Control (as such term is defined in the Certificate of Determination
for the Series E Preferred Stock), the holders of a majority of the outstanding
shares of the Series E Preferred Stock may require the company to redeem the
shares. No sinking fund is required for the redemption of the Series E Preferred
Stock. There is no restriction on the repurchase or redemption of Series E
Preferred Stock while there is any arrearage in the payment of dividends. The
Series E Preferred Stock does not have a liquidation preference to the common
stock.
The Series E Preferred Stock are non-voting securities. However, the
holders of the Series E Preferred Stock will have the right to vote the number
of shares of common stock into which all of such holders' shares of Series E
Preferred Stock are convertible, as a class with the other holders of common
stock, but not as a separate class, only if such holder has first received all
prior approvals required under applicable gaming laws for conversion of all of
the shares of Series E Preferred Stock held by such holder and such holder has
complied with any filing requirements prerequisite to such holders' conversion
of all of the shares of Series E Preferred Stock held by such holder. We are
subject to the gaming laws and the gaming authorities of the various
jurisdictions in which we operate. The gaming laws and the gaming authorities of
those jurisdictions generally require a gaming license, a finding of
suitability, or some form of approval for any one party who holds a large
percentage of the outstanding voting stock of a gaming company. B III does not
currently hold a gaming license in any state in which we are subject to gaming
laws, nor has it received a finding of suitability or other approval in any of
those jurisdictions. It is our belief that B III has no current intention to
seek any such license, finding of suitability, or other approval in any
jurisdiction in which we operate. There can be no assurance, however, that B III
or any subsequent holder of the Series E Preferred Stock will not seek such
license, finding of suitability, or other approval in the future.
The Series E Preferred Stock does not have preemptive rights. The Series E
Preferred Stock, if and when issued in accordance with the terms and provisions
of the Series E Warrants, will be fully paid and non-assessable. The Series E
Preferred Stock is not registered and is considered a "restricted security" as
that term is defined in Rule 144 of the Securities Act of 1933, as amended. The
Series E Preferred Stock may not be transferred unless it has first been
registered under applicable securities laws or there exists an exemption from
registration for such transfer.
So long as at least 100 shares of Series E Preferred Stock remain
outstanding, without the prior written consent of the then holders of a majority
of the outstanding shares of Series E Preferred Stock, we are restricted from,
among other actions:
(1) issuing any dividends on our outstanding securities;
(2) issuing any capital stock or debt with a preference to or pari passu
with the Series D Preferred Stock, the Series E Preferred Stock, the
Amended Notes or the New Notes;
(3) issuing any additional capital stock other than capital stock
contemplated by the Restructuring; or
(4) merging or consolidating with any other entity, or entering into any
transaction which would constitute or have the effect of a change of
control.
27
<PAGE>
These restrictions could delay, defer, or prevent a change in control.
SERIES E WARRANTS. The Series E Warrants issued to B III are not
immediately exercisable upon issuance. The number of Series E Warrants that are
exercisable is based on the number of Exchange Warrants actually exercised as a
percentage of the number of Exchange Warrants issued. The actual exercise of
Exchange Warrants triggers the exercisability of the Series E Warrants. To the
extent that Exchange Warrants are actually exercised, a portion of the Series E
Warrant becomes exercisable according to the following formula:
The number of shares of common stock for which Exchange Warrants
are exercised, divided by,
(3.59662 multiplied by the total number of Exchange Warrants issued in the
exchange offer)
The Series E Warrants, or portions thereof that become exercisable, may be
exercised for up to 180 days following the date they become exercisable, after
which time, if not exercised, they terminate. However, if the portion of the
Series E Warrant that becomes exercisable is for fewer than 100 shares of Series
E Preferred Stock, it will remain exercisable for an additional 180 days before
it terminates. No Series E Warrant may be exercised after the earlier of (i) the
close of business on the 180th day after the fourth anniversary of its issue
date, or (ii) the date that the warrant is exercised. The Series E Warrants are,
in the aggregate, exercisable for up to 60,807.731 shares of Series E Preferred
Stock. The only Series E Warrants outstanding are the 60,807.731 Series E
Warrants issued to B III as a part of the Restructuring. The Series E Warrants
are exercisable at an exercise price of $0.01 per share. The warrant exercise
price is not subject to adjustment. There can be no assurance that the Series E
Warrants will be exercised in whole or in part, at any time, or from time to
time.
EXCHANGE WARRANTS. Each of the Exchange Warrants to be issued as part of
the proposed exchange offer will be exercisable for 3.59662 additional shares of
common stock, subject to adjustment. The exercise price of the Exchange Warrants
is $0.1528 per share. In addition, the Exchange Warrants are only exercisable
after the first anniversary of issuance and will terminate four years from their
issuance, if not otherwise terminated prior to that time. If the share price of
the Company's common stock, as reported on the Nasdaq National Market or a
national securities exchange, exceeds $0.2346 per share for twenty consecutive
trading days, the holders of the Exchange Warrants would have 180 days to
exercise the Exchange Warrants or they would automatically expire. This
provision is not effective while the common stock is trading on the OTCBB or
during the first two years following issuance of the Exchange Warrants. The
actual exercise of Exchange Warrants triggers the exercisability of the Series E
Warrants. To the extent that Exchange Warrants are actually exercised, a portion
of the Series E Warrant becomes exercisable according to the following formula:
The number of shares of common stock for which Exchange Warrants
are exercised, divided by,
(3.59662 multiplied by the total number of Exchange Warrants issued in the
exchange offer)
See "Description of Securities - Series E Warrants".
28
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LEGAL MATTERS
Certain legal matters have been being passed upon for us by Squire, Sanders
& Dempsey, LLP, Phoenix, Arizona 85004.
EXPERTS
The consolidated financial statements incorporated in this prospectus by
reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated herein by reference,
and have been incorporated in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. .
29
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SILICON GAMING, INC.
CONSOLIDATED PRO FORMA BALANCE SHEET
As of March 31, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
2000 ADJUSTMENT PRO FORMA
--------- ---------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents ..................................... $ 837 $ 11653 $ 12490
Short-term investments
Accounts receivable (net of allowances of $1,044 in
2000 and $1,169 in 1999) ................................ 1963 1963
Inventories .............................................. 5801 5801
Prepaids and other ....................................... 834 834
Total current assets ............................... 9435 11653 21088
-------- -------- --------
PROPERTY AND EQUIPMENT, NET .................................. 3313 3313
OTHER ASSETS, NET ............................................ 299 299
-------- -------- --------
TOTAL ASSETS ................................................. $ 13047 $ 11653 $ 24700
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable ......................................... $ 1252 $ 1252
Accrued liabilities ...................................... 1545 1545
Deferred revenue ......................................... 1131 1131
Line of credit
Current portion of long-term obligations ................. 1152 1152
Total Current Liabilities .................................... 5080 5080
OTHER LONG-TERM LIABILITIES .................................. 1609 1609
LONG-TERM OBLIGATIONS ........................................ 10379 10379
LONG-TERM ACCRUED INTEREST ................................... 5777 5777
SHAREHOLDER'S DEFICIENCY
Common Stock, $.01 PAR VALUE; 750,000,000 shares
authorized; 421,709,324 outstanding pro forma
Preferred Stock, $.001 par value; ........................... 64123 31418 95541
Preferred Stock, $.001 par value; 6,884,473 shares
authorized, -0- outstanding ................................. 20000 (20000) 0
Warrants ..................................................... 5542 5542
Notes receivable from shareholders ........................... (344) 235 (109)
Deferred stock compensation .................................. (4355) (4355)
Accumulated deficiency ....................................... (94764) (94764)
Total shareholders' deficiency ..................... (9498) 11653 1855
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY ..... $ 13047 $ 11418 $ 24700
======== ======== ========
Book value per common share .................................. $ (0.316) $ (0.004)
</TABLE>
See Notes to Pro Forma Financial Statements
30
<PAGE>
Silicon Gaming, Inc.
Notes to Pro Forma Financial Statements
1. Basis for Presentation
The pro forma balance sheets of Silicon Gaming, Inc. present the pro forma
effects of:
* the issuance of 55,105,041 shares of common stock upon exercise of
15,321,431 Exchange Warrants at an exercise price of $0.1528 per share;
* the issuance of 60,807.731 shares of Series E Preferred Stock upon exercise
of the Series E Warrant at an exercise price of $0.01 per share, and the
subsequent conversion of the 60,807.731 shares of Series E Preferred Stock
into 60,807,731 shares of common stock for no additional consideration;
* the issuance of 174,285,127shares of common stock upon conversion of the
39,750 shares of outstanding Series D Preferred Stock for no additional
consideration; and
* the issuance of 116,190,084 shares of common stock under the 1999 Long Term
Compensation Plan.
All of the above are based on the following assumptions:
* All of the events set forth above occurred or were consummated on the first
day of each period presented in the pro forma balance sheet.
* All Exchange Warrants are issued and exercised for cash at the initial
exercise price of $0.1528 per share of common stock for an aggregate total
of proceeds to the Company of $8,420,050. The Exchange Warrants may be
exercised without paying cash by the holder electing to use a "cashless
exercise". Holders of Exchange Warrants may exercise those warrants by
either paying with shares of common stock held, or, electing to receive
fewer shares of common stock for the exercise of the warrant. For example,
if the common stock is trading at $.3056 per share, a holder of an Exchange
Warrant exercisable for 100 shares could elect to use the value of 50 of
those shares as consideration for the exercise of the warrant and receive a
net of 50 shares, for no cash consideration, and the Exchange Warrant would
be considered exercised in full.
* The Series E Warrant was exercised in full for proceeds to the Company of
$608.07.
* Of the 116,190,084 shares of common stock available under the 1999 Long
Term Compensation Plan:
(1) The promissory notes issued as consideration for the 15,657,490 shares
of restricted stock issued on November 24, 1999, for an aggregate
total of proceeds to the Company of $234,862, are paid in full;
(2) 85,090,042 shares were issued upon exercise of options granted under
the plan at an exercise price of $0.0075; and
(3) 15,442,102 shares were issued upon exercise of options, or purchase of
common stock, at a price of $0.1528 per share (the Company is unable
to estimate with any accuracy the exercise price at which any of the
options to purchase common stock remaining in the 1999 Long Term
Compensation Plan will be issued, and is using the exercise price of
the Exchange Warrants for purposes of this calculation. The actual
31
<PAGE>
exercise prices may be higher or lower resulting in a difference in
possible proceeds to the Company.);
for an aggregate total of proceeds to the Company of $3,232,590. The
options may be exercised without paying cash by the holder electing to
use a "cashless exercise". Holders of options issued under the 1999
Long Term Compensation Plan may exercise those options by either
paying with shares of common stock held, or, electing to receive fewer
shares of common stock for the exercise of the option through a
"cashless exercise". For example, if the common stock is trading at
$0.30 per share, and a holder's options are exercisable at a price of
$0.15 per share, a holder of an option exercisable for 100 shares
could elect to use the value of 50 of those shares as consideration
for the exercise of the option and receive a net of 50 shares, for no
cash consideration, and the option would be considered exercised in
full.
* The numbers provided do not include an offset of accumulated offering costs
against net proceeds.
Because of these assumptions the pro forma financial data presented in the pro
forma balance sheet and statement of operations may not be indicative of future
events. There can be no assurance
* that we will receive any proceeds from the exercise of Exchange Warrants;
* that we will receive any proceeds from the exercise of options issued under
the 1999 Long Term Compensation Plan;
* that the Series E Warrant, or any portion of it, will ever be exercised;
* that the Series E Preferred Stock, if ever issued, will ever be converted
into shares of common stock;
* that any of the shares of Series D Preferred Stock will ever be converted
into shares of common stock; or
* that the promissory notes issued to the Company as consideration for
restricted stock issued under the 1999 Long Term Compensation Plan will
ever be paid in full.
PRO FORMA STATEMENT OF OPERATIONS
The impact of the Restructuring on our Statements of Operations has been a
decrease in our interest payments as a result of the cancellation of $37.25
million in Senior Discount Notes. The effect of that cancellation is reflected
in the financial statements provided in our Form 10-K for the fiscal year ended
December 31, 1999, and in our Form 10-Q for the Three-Month Period ended March
31, 2000. Our Form 10-K for the fiscal year ended December 31, 1999, and our
Form 10-Q for the Three-Month Period ended March 31, 2000, were filed with the
SEC. The issuance of the Exchange Warrants, the issuance of common stock upon
exercise of the Exchange Warrants, the exercise of the Series E Warrant and the
subsequent conversion of the Series E Preferred Stock into shares of common
stock, the conversion of the Series D Preferred Stock, and the issuance of
common stock under the 1999 Long Term Compensation Plan would not have an effect
on our statements of operations other than to significantly decrease the "Net
Loss per Share" amount without any increase in actual revenues, or decrease in
actual loss. The proceeds to the Company, if any, from any exercise of the
Exchange Warrants or the Series E Warrants, or the exercise of any options
issued under the 1999 Long Term Compensation Plan, or the sale of common stock
under the 1999 Long Term Compensation Plan, would not contribute to the revenues
of the Company.
32
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The Company had a Deficiency of Earnings to cover Fixed Charges, as that
term is defined under Item 503(d) of Regulation S-K, as follows:
1. For the fiscal year ended December 31, 1998 $(31,409,000)
2. For the fiscal year ended December 31, 1999 $(16,840,000)
3. For the Three-Month Period ended March 31, 2000 $ (2,633,000)
For the periods stated above, the Company had net losses of $37,670,000,
$11,765,000 and $2,729,000, respectively. The "Fixed Charges", as that term is
defined under Instruction number 1(A) to Item 503(d) of Regulation S-K, for each
of those periods was less than the net losses, and as a result, the Company 's
"Earnings", as that term is defined under Item 503(d)(C) for the fiscal year
ended December 31, 1998, the fiscal year ended December 31, 1999, and the
Three-Month Period ended March 31, 2000, was less than zero.
On a pro forma basis, the Ratio of Earnings to Fixed Charges for the same
periods would remain unchanged. As stated above under Pro Forma Statements of
Operations, the effect of the cancellation of $39.75 million in Senior Discount
Notes as a result of the Restructuring completed in November of 1999 is
reflected in the financial statements for the Company for the fiscal year ended
December 31, 1999, including our balance sheets and statements of operations,
provided in our Form 10-K for the fiscal year ended December 31, 1999 and our
Form 10-Q for the Three-Month Period ended March 31, 2000. The proceeds to the
Company, if any, from any exercise of the Exchange Warrants or the Series E
Warrants, or the exercise of any options issued under the 1999 Long Term
Compensation Plan, or the sale of common stock under the 1999 Long Term
Compensation Plan, would not contribute to the "Earnings" of the Company, or
reduce "Fixed Charges."
33
<PAGE>
====================================== ======================================
WE HAVE NOT AUTHORIZED ANY PERSON TO
MAKE A STATEMENT THAT DIFFERS FROM
WHAT IS IN THIS PROSPECTUS. IF ANY
PERSON DOES MAKE A STATEMENT THAT
DIFFERS FROM WHAT IS IN THIS
PROSPECTUS, YOU SHOULD NOT RELY ON IT.
THIS PROSPECTUS IS NOT AN OFFER TO SILICON GAMING, INC.
SELL, NOR IS IT SEEKING AN OFFER TO
BUY, THESE SECURITIES IN ANY STATE IN
WHICH THE OFFER OR SALE IS NOT
PERMITTED. THE INFORMATION IN THIS
PROSPECTUS IS COMPLETE AND ACCURATE AS
OF ITS DATE, BUT THE INFORMATION MAY
CHANGE AFTER THAT DATE.
Table of Contents
235,092,858 SHARES OF
Where You Can Find More COMMON STOCK
Information.......................2
The Offering........................3
The Company.........................4
Risk Factors.......................10
Gaming Regulations ................15
Selling Shareholder................23 September 1, 2000
Plan Of Distribution...............24
Use Of Proceeds....................25
Description of Securities .........25
Legal Matters......................29
Experts............................29
Consolidated Pro Forma Balance
Sheet..............................30
====================================== ======================================
