SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE TO
(Rule 14d-100)
TENDER OFFER STATEMENT UNDER SECTION 14(d)(1) OR 13(e)(1)
OF THE SECURITIES EXCHANGE ACT OF 1934
SILICON GAMING, INC.
(Name of Subject Company (Issuer))
SILICON GAMING, INC. - ISSUER
(Name of Filing Persons (Identifying Status of Offeror, Issuer or Other Person))
COMMON STOCK
(Title of Class of Securities)
827054 10 7
(CUSIP Number of Class of Securities)
Andrew S. Pascal With Copy to:
President and Chief Executive Officer Joseph M. Crabb, Esq.
Silicon Gaming, Inc. Joel J. Agena, Esq.
2700 West Bayshore Road Squire, Sanders & Dempsey L.L.P.
Palo Alto, California 40 North Central Avenue, Suite 2700
(650) 842-9000 Phoenix, Arizona 85004
(Name, Address and Telephone Numbers of Person Authorized to Receive Notices
and Communications on Behalf of the Filing Person)
CALCULATION OF FILING FEE
Transaction value (1) Amount of Filing Fee (2)
- --------------------- ------------------------
$4,539,057.30 $907.81
(1) Solely for the purpose of calculating the filing fee and based on 15,288,169
shares of common stock (which is the maximum number of eligible shares of common
stock that may be tendered based on the number of shares outstanding as of
November 24, 1999) valued at the average of the bid and ask prices on April 19,
2000 of $.2969.
(2) Fee calculated in accordance with Rule 0-11(a)(4) and Rule 0-11(b)(2) under
the Securities Exchange Act of 1934, as amended. [_] Check box if any part of
the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with
which the offsetting fee was previously paid. Identify the previous filing by
registration statement number, or the Form or Schedule and the date of its
filing.
Amount Previously Paid: _____________ Filing Party: _______________
Form or Registration No.: ___________ Date Filed: _________________
[ ] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
Check the appropriate boxes below to designate any transactions to which
the statement relates:
[ ] third-party tender offer subject to Rule 14d-1.
[X] issuer tender offer subject to Rule 13e-4.
[ ] going-private transaction subject to Rule 13e-3.
[ ] amendment to Schedule 13D under Rule 13d-2.
Check the following box if the filing is a final amendment reporting the results
of the tender offer: [ ]
<PAGE>
ITEM 1. SUMMARY TERM SHEET
Silicon Gaming, Inc. is 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 "EXCHANGE WARRANT") to purchase
3.59662 shares of common stock. Participating shareholders will not be required
to tender their physical share certificates. The shares of common stock tendered
will remain outstanding and the participating shareholders will receive the
Exchange Warrants in addition to the shares of common stock they will continue
to hold. Participating shareholders will only be required to tender the Notice
of Election to Participate (the "ELECTION NOTICE") which accompanies this
Offering Circular. The following are the material terms of the exchange offer.
The Exchange Offer Shareholders who elect to participate must
tender their Election Notices. Each
participating shareholder whose Election
Notice is accepted by Silicon Gaming, Inc.
will receive Exchange Warrants to purchase
3.59662 shares of common stock for each share
of common stock tendered in the exchange
offer. See "The Exchange Offer."
Expiration Date 5:00 P.M. New York City time on May 19, 2000,
unless extended. See "The Exchange Offer -
Expiration Date; Extensions."
Withdrawal Rights Tenders of Election Notices may be withdrawn
at any time prior to the expiration date of
the exchange offer. After the expiration date,
all tenders are irrevocable. See "The Exchange
Offer - Withdrawal Rights."
Conditions to Exchange Offer Our obligation to consummate the exchange
offer is subject to several conditions. See
"The Exchange Offer - Conditions to the
Exchange Offer."
How to Tender Election Notices Shareholders are not required to tender their
physical share certificates. Shareholders
wishing to take part in the exchange offer
must complete and sign the Election Notice, in
accordance with all applicable instructions,
and forward or hand deliver the Election
Notice to the exchange agent at its address
set forth on the front cover page of the
Offering Circular. The Election Notice must be
accompanied by any signature guarantees and
any other documents required by the Election
Notice. Any beneficial owner of shares of
common stock whose securities are registered
in the name of a broker, dealer, commercial
bank, trust company or other nominee is urged
to contact the registered holder(s) of the
shares promptly to instruct the registered
holder(s) whether to tender an Election Notice
on your behalf. See "The Exchange Offer -
Tendering Election Notices".
<PAGE>
The Exchange Warrants Each Exchange Warrant is exercisable for
3.59662 shares of common stock at an exercise
price of $0.1528 per share. The Exchange
Warrants are first exercisable 12 months
following the date of issuance. The Exchange
Warrants terminate four years from the date of
issuance, unless earlier terminated (See
"Description of Securities - Exchange
Warrants").
Delivery of Exchange Warrants The exchange agent will deliver the Exchange
Warrants that are issuable upon conclusion of
the exchange offer as soon as practicable
after the expiration of the exchange offer.
See "The Exchange Offer - Delivery of Exchange
Warrants."
Certain Tax Consequences In general, shareholders will recognize no
gain or loss for federal income tax purposes
as a result of the exchange of shares of
common stock pursuant to the exchange offer.
See "Certain Federal Income Tax Consequences."
Securities Outstanding On November 24, 1999, there were 15,288,169
shares of common stock outstanding. As of
March 20, 2000 there were 30,949,273 shares of
common stock, outstanding. Prior to this
exchange offer, there were 4,325,988 shares of
common stock issuable upon the exercise of
existing warrants and options previously
issued and unrelated to the exchange offer,
and an additional 174,285,127 shares of common
stock issuable upon the conversion of the
Series D Convertible Redeemable Preferred
Stock. See "Capitalization" and "Description
of Securities."
Eligible Shares Only those shares of common stock outstanding
as of November 24, 1999, the closing date of
the Restructuring, are eligible to participate
in the exchange offer. Shares of common stock
issued by Silicon Gaming after November 24,
1999, are not eligible to participate. See
"The Exchange Offer - Eligible Shares."
Market Prices The common stock is currently trading on the
OTC Bulletin Board ("OTCBB") under the symbol
`SGIC.OB'. On April 14, 2000, the last
reported sale price for the common stock was
$.34375. See "Price Range of Common Stock."
Currently, there is no market for the Exchange
Warrants.
Exchange Agent EquiServe Trust Company, N.A.
Information Agent Georgeson Shareholder Communications, Inc.
Shareholders may contact the information agent
at (800) 223-2064, or collect at (212)
440-9800, for information about tendering
Election Notices.
<PAGE>
ITEM 2. SUBJECT COMPANY INFORMATION
(a) The issuer of the securities to which this statement relates is Silicon
Gaming, Inc., a California corporation. The principal executive offices of the
Company are located at 2800 West Bayshore Road, Palo Alto, California 94303, and
its telephone number is (650) 842-9000.
(b) As of the date hereof, there were 30,978,831 shares of common stock
outstanding.
(c) Our common stock is listed on the OTC Bulletin Board under the symbol
`SGIC.OB'. For further information, see "Description of Securities" and "Price
Range of Common Stock" in the Offering Circular, which is incorporated herein by
reference.
ITEM 3. IDENTITY AND BACKGROUND OF FILING PERSON.
The filing person is the issuer, Silicon Gaming, Inc., a California corporation.
Its principal executive offices are located at 2800 West Bayshore Road, Palo
Alto, California 94303.
ITEM 4. TERMS OF THE TRANSACTION.
(a) The information under the captions "The Exchange Offer" in the Offering
Circular is incorporated herein by reference.
(b) Not applicable.
ITEM 5. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS, AND AGREEMENTS.
(e) As part of the restructuring completed in November of 1999, B III Capital
Partners LP ("B III") was issued a warrant (the "SERIES E WARRANT") to purchase
up to 60,807.731 shares of Series E Redeemable Convertible Preferred Stock (the
"SERIES E PREFERRED STOCK"). The Series E Warrants issued to B III are not
immediately exercisable upon issuance. The Series E Warrants become immediately
exercisable solely upon and to the extent of the exercise of Exchange Warrants.
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; provided, however, that if the
portion of the Series E Warrants that become 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 Warrants 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 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. The Series E Preferred
Stock is convertible into shares of common stock at a rate of 1,000 shares of
common stock for each share of Series E Preferred Stock.
<PAGE>
The Company also has outstanding 39,750 shares of Series D Redeemable
Convertible Preferred Stock (the "SERIES D PREFERRED STOCK"). The Series D
Preferred Stock was issued to B III as part of the restructuring completed in
November of 1999. 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 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 39,750 outstanding shares of
Series D Preferred Stock are convertible into 174,285,127 shares of common
stock.
As a part of the restructuring completed in November of 1999, the Board of
Directors of the Company adopted the Silicon Gaming, Inc. 1999 Long-Term
Compensation Plan. Under the 1999 Long-Term Compensation Plan, up to 116,190,084
shares of common stock and options to purchase shares of common stock may be
issued to directors, officers and employees of the Company. Grants of options to
purchase shares vest 20% upon issuance and 1/48th each calendar month following
issuance until fully vested.
ITEM 6. PURPOSE OF TRANSACTION AND PLANS OR PROPOSALS.
(a) The information under the captions "Background of the Exchange Offer," and
"The Exchange Offer" in the Offering Circular is incorporated herein by
reference.
(b) Participating shareholders will not be required to tender their shares of
common stock. They will only be required to tender an Election Notice indicating
their election to participate in the Exchange Offer. There will be no change in
the status of outstanding shares of common stock. Only participating
shareholders who comply with the terms and provisions of the Exchange Offer will
receive Exchange Warrants.
(c) (1) The Exchange Offer is being conducted as part of the restructuring
completed in November of 1999. In November 1999, we completed a restructuring of
certain of our long- term obligations. In connection with the restructuring we:
(1) issued 39,750 shares of Series D Preferred Stock as well as the Series E
Warrants to purchase 60,807.731 shares of Series E Preferred Stock to B III
Capital Partners L.P. in exchange for the cancellation of $39.75 million in
aggregate principal amount of our 12.5% Senior Discount Notes and interest
accrued thereon; (2) amended the terms and provisions of the $7.5 million of the
Senior Discount Notes that remained outstanding; (3) adopted the Silicon Gaming,
Inc. 1999 Long Term Compensation Plan pursuant to which equity-based incentives
will 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.
(2) Not applicable.
(3) As a result of the restructuring completed in November of 1999, $39.75
million in aggregate principal amount of long-term debt obligations was
cancelled, and $2 million in aggregate principal amount of long-term debt
obligations was issued.
<PAGE>
(4) As a part of the restructuring completed in November of 1999, 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 as of November 24, 1999, and Mr. Stanford Springel
and Mr. Rob Reis became members of the Board of Directors.
(5) Not applicable.
(6) Not applicable.
(7) Not applicable.
(8) Not applicable.
(9) Pursuant to the terms and provisions of the Series E Warrants, the
Company may be required to issue up to 60,807.731 shares of Series E Preferred
Stock to B III Capital Partners LP. In addition, under the 1999 Long-Term
Compensation Plan, the Company may issue up to 116,190,084 shares, or options to
purchase shares of common stock, to directors, officers and employees of the
Company.
(10) Two Certificates of Determination were filed with the Secretary of
State of California on November 24, 1999, setting forth the rights, preferences,
and limitations of the Company's Series D Preferred Stock and Series E Preferred
Stock. The terms and provisions of the Series D and Series E Preferred Stock
could impede the acquisition of control of the Company. The information
describing the terms and provisions of the Series D and Series E Preferred Stock
set forth in the Offering Circular under the caption "Description of Securities"
is incorporated herein by reference.
In addition, on February 7, 2000, the Company filed a Certificate of
Amendment to its 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, the Company has approximately 321,699,111 shares of authorized but
unissued and unreserved shares of common stock. In addition, the Company has
approximately 6,783,915.3 authorized but unissued and unreserved shares of
preferred stock. Authorized but unissued common stock of the Company may be
issued for such consideration as the board of directors determines to be
adequate. Issuance of common stock by the Company 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 of the Company 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 the Company's 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 the outstanding voting stock of the Company. Management could use
the additional shares or 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.
<PAGE>
ITEM 7. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) No funds will be used to purchase any tendered securities. Participating
shareholders will be issued Exchange Warrants.
(b) Not applicable.
(d) Not applicable.
ITEM 8. INTEREST IN SECURITIES OF THE ISSUER.
(a) Not applicable.
(b) Neither we nor, to our knowledge, any person referred to in Instruction C of
this Schedule or any associate or subsidiary of any such person, including any
executive officer or director of any such subsidiary, has effected any
transaction in the common stock during the 60 business days prior to the date
hereof. However, in February of 2000, the Company issued options to purchase in
aggregate up to 85,090,492 shares of common stock to various officers and
employees of the Company under the Company's 1999 Long Term Compensation Plan.
All of the options were issued with an exercise price of $0.0075 per share of
common stock.
ITEM 9. Person/Assets, Retained, Employed, Compensated or Used.
(a) No persons have been employed, retained or are to be compensated to make
solicitations or recommendations in connection with the Exchange Offer.
EquiServe Trust Company, N.A. has been retained as "exchange agent" to
administer the Exchange Offer and will be paid a negotiated fee of approximately
$10,000 plus disbursements for its services, regardless of the number of
participating shareholders. Georgeson Shareholder Communications has been
retained as "information agent" and will be paid a negotiated fee of
approximately $7,500 plus disbursements for its services, regardless of the
number of participating shareholders. We will also reimburse brokerage firms and
other custodians, nominees and fiduciaries for reasonable out-of-pocket expenses
incurred by them in forwarding copies of the Offering Circular and related
documents to the beneficial owners of eligible shares of common stocks and in
handling or forwarding tenders on behalf of their customers. We will also pay
all legal, accounting, printing, listing, filing and other similar fees and
expenses relating to the exchange offer.
ITEM 10. FINANCIAL STATEMENTS. The information set forth in the Offering
Circular under the caption "Financial Statements" is incorporated herein by
reference.
ITEM 11. ADDITIONAL INFORMATION.
(a)(1) The information contained under the captions "Background of the Exchange
Offer" in the Offering Circular is incorporated herein by reference.
<PAGE>
(2) Upon acceptance of all properly tendered Election Notices, we will issue the
Exchange Warrants in reliance on the exemption from the registration
requirements of the Securities Act of 1933, as amended, provided in Section
3(a)(9) thereof. We intend to register the shares of common stock underlying the
Exchange Warrants on or before the earlier of (i) one year following issuance of
the Exchange Warrants, or (ii) a Change of Control (as that term is defined in
the Exchange Warrant).
(3) Not applicable.
(4) Not applicable.
(5) Not applicable.
(b) The Offering Circular and the related Election Notice, which are attached
hereto as Exhibits (a)(1) and (a)(2), respectively, set forth additional
material information, and such material information is incorporated herein by
reference.
ITEM 12. EXHIBITS.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(a)(1) Offering Circular, dated April 17, 2000.
(a)(2) Form of Election Notice.
(a)(3) Form of Letter to Our Clients.
(a)(4) Form of Letter to Brokers, Dealers, Commercial Bankers, Trust
Companies and other Nominees.
(a)(5) Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
(b) Not applicable.
(d)(1) The form of Certificate of Determination for Series D Preferred
Stock, Certificate of Determination for Series E Preferred Stock,
Series E Warrant Agreement, Silicon Gaming, Inc., 1999 Long-Term
Compensation Plan, and Stockholders Agreement, are incorporated
herein by reference to Exhibits 4.1, 4.2, 4.3, 10.6 and 10.7,
respectively, in the Registrants Form 8-K filed with the
Securities and Exchange Commission on December 6, 1999.
(d)(2) The form of Warrant Agreement between the Company and EquiServe
Trust Company, N.A., acting as the Warrant Agent.
(g) None.
(h) None.
ITEM 13. INFOMRATION REQUIRED BY SCHEDULE 13E-3.
Not applicable.
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Dated:
April 17, 20000
SILICON GAMING, INC.
By: /s/ Andrew S. Pascal
------------------------------------
Name: Andrew S. Pascal
Title: President and Chief Executive
Officer
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(a)(1) Offering Circular, dated April 17, 2000.
(a)(2) Form of Election Notice.
(a)(3) Form of Letter to Our Clients.
(a)(4) Form of Letter to Brokers, Dealers, Commercial Bankers, Trust
Companies and other Nominees.
(a)(5) Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
(d)(1) The form of Certificate of Determination for Series D Preferred
Stock, Certificate of Determination for Series E Preferred Stock,
Series E Warrant Agreement, Silicon Gaming, Inc., 1999 Long-Term
Compensation Plan, and Stockholders Agreement, are incorporated
herein by reference to Exhibits 4.1, 4.2, 4.3, 10.6 and 10.7,
respectively, in the Registrants Form 8-K filed with the
Securities and Exchange Commission on December 6, 1999.
(d)(2) The form of Warrant Agreement between the Company and EquiServe
Trust Company, N.A., acting as the Warrant Agent, with the form
of Exchange Warrant certificate.
[LOGO]
SILICON
GAMING
April 17, 2000
Dear Shareholder:
We are writing you to inform you that we are conducting an exchange offer.
As a part of this exchange offer, we are offering to exchange one unit
consisting of one share of common stock and one warrant to purchase 3.59662
shares of common stock (the "EXCHANGE WARRANT") for each share of common stock
you own that is eligible to participate in the exchange offer. The exchange
offer is not conditioned upon the exchange of a minimum number of shares of
common stock and will expire at 5:00 P.M. New York City time on May 19, 2000
unless extended.
We have enclosed for your review and careful consideration an Offering
Circular dated April 17, 2000 and the related Notice of Election to Participate
(the "ELECTION NOTICE") relating to the exchange offer. The Offering Circular
provides important information about Silicon Gaming, Inc. and details of the
terms of the exchange offer. Please read and carefully consider the information
contained in the Offering Circular. Any holder of common stock electing to
participate in the exchange offer must complete and sign the Election Notice, in
accordance with its instructions, and forward or hand deliver it to the exchange
agent at its address, which you will find in the Offering Circular. Any
beneficial owner of common stock whose securities are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee should not use
the Election Notice, but is instead urged to contact the registered holder(s) of
such securities promptly to instruct the registered holder(s) whether to tender
your securities.
Because each unit consists of one share of common stock identical to the
share of common stock you currently hold, you are not required to tender the
actual physical stock certificate(s) representing your share(s) of common stock.
You are only required to tender the Election Notice in order to participate.
Upon properly and timely tendering the Election Notice, we will deliver the
Exchange Warrants to the registered holder(s).
Questions and requests for assistance or for additional copies of the
Offering Circular or Election Notice should be directed to our information agent
at:
GEORGESON
SHAREHOLDER
COMMUNICATIONS INC.
17 State Street - 10th Floor
New York, New York 10004
Toll-Free (800) 223-2064
Again, we urge you to carefully read the Offering Circular and Election
Notice and carefully consider the exchange offer described.
SILICON GAMING, INC.
<PAGE>
SILICON GAMING, INC.
OFFERING CIRCULAR
Offer to Exchange
One Unit consisting of One Share of Common Stock and One Warrant to purchase
3.59662 Shares of Common Stock for Each Outstanding Share of Common Stock
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME ON
MAY 19, 2000, UNLESS EXTENDED.
Silicon Gaming, Inc., a California corporation, hereby offers, upon the
terms and conditions set forth in this Offering Circular, and in the
accompanying Notice of Election to Participate (the "ELECTION NOTICE"), to
exchange one unit consisting of one share of common stock and one warrant (the
"EXCHANGE WARRANT") to purchase 3.59662 shares of common stock for each one
outstanding share of common stock. PARTICIPATING SHAREHOLDERS WILL NOT BE
REQUIRED TO TENDER THEIR PHYSICAL CERTIFICATES FOR COMMON STOCK. PARTICIPATING
SHAREHOLDERS WILL ONLY BE REQUIRED TO TENDER THE ELECTION NOTICE.
This exchange offer is open to holders of all shares of common stock that
were outstanding as of November 24, 1999, and is not conditioned upon the
exchange of a minimum number of shares of common stock. Our common stock is
currently traded on the OTC Bulletin Board ("OTCBB") under the symbol 'SGIC.OB'.
On April 14, 2000, the last reported closing price for the common stock was
$0.34375. There is no trading market for the Exchange Warrants and we do not
intend to file a registration statement covering the Exchange Warrants or to
apply for the Exchange Warrants to be traded on any securities exchange or
national quotation system.
Subject to applicable securities laws and the terms set forth in this
Offering Circular, we reserve the right to waive any and all conditions to the
exchange offer, to extend the exchange offer and otherwise to amend the exchange
offer, in any respect.
You are urged to read carefully "Risks Relating to The Exchange Offer" on
page 18 and "Other Risk Factors" commencing on page 19.
The exchange agent for the The information agent for the
exchange offer is: exchange offer is:
GEORGESON
EQUISERVE TRUST COMPANY, N.A. SHAREHOLDER
150 Royall Street COMMUNICATIONS INC.
Canton, MA 02021 17 State Street - 10th Floor
(781) 575-3120 New York, New York 10004
Toll-Free (800) 223-2064
This transaction has not been registered under the securities laws of any
state or jurisdiction as of the date of this Offering Circular.
The date of this Offering Circular is April 17, 2000.
<PAGE>
SUMMARY OF EXCHANGE OFFER
Silicon Gaming, Inc. is 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 "EXCHANGE
WARRANT") to purchase 3.59662 shares of common stock. Participating shareholders
will not be required to tender their physical share certificates. The shares of
common stock tendered will remain outstanding and the participating shareholders
will receive the Exchange Warrants in addition to the shares of common stock
they will continue to hold. Participating shareholders will only be required to
tender the Notice of Election to Participate (the "ELECTION NOTICE") which
accompanies this Offering Circular. The following are the material terms of the
exchange offer.
The Exchange Offer Shareholders who elect to participate must tender their
Election Notices. Each participating shareholder whose
Election Notice is accepted by Silicon Gaming, Inc.
will receive Exchange Warrants to purchase 3.59662
shares of common stock for each share of common stock
tendered in the exchange offer. See "The Exchange
Offer."
Expiration Date 5:00 P.M. New York City time on May 19, 2000, unless
extended. See "The Exchange Offer - Expiration Date;
Extensions."
Withdrawal Rights Tenders of Election Notices may be withdrawn at any
time prior to the expiration date of the exchange
offer. After the expiration date, all tenders are
irrevocable. See "The Exchange Offer - Withdrawal
Rights."
Conditions to Our obligation to consummate t he exchange offer is
Exchange Offer subject to several conditions. See "The Exchange Offer
- Conditions to the Exchange Offer."
How to Tender Shareholders are not required to tender their physical
Election Notices share certificates. Shareholders wishing to take part
in the exchange offer must complete and sign the
Election Notice, in accordance with all applicable
instructions, and forward or hand deliver the Election
Notice to the exchange agent at its address set forth
on the front cover page of this Offering Circular. The
Election Notice must be accompanied by any signature
guarantees and any other documents required by the
Election Notice. Any beneficial owner of shares of
common stock whose securities are registered in the
name of a broker, dealer, commercial bank, trust
company or other nominee is urged to contact the
registered holder(s) of the shares promptly to instruct
the registered holder(s) whether to tender an Election
Notice on your behalf. See "The Exchange Offer -
Tendering Election Notices".
2
<PAGE>
The Exchange Warrants Each Exchange Warrant is exercisable for 3.59662 shares
of common stock at an exercise price of $0.1528 per
share. The Exchange Warrants are first exercisable 12
months following the date of issuance. The Exchange
Warrants terminate four years from the date of
issuance, unless earlier terminated (See "Description
of Securities - Exchange Warrants").
Delivery of Exchange The exchange agent will deliver the Exchange Warrants
Warrants that are issuable upon conclusion of the exchange offer
as soon as practicable after the expiration of the
exchange offer. See "The Exchange Offer - Delivery of
Exchange Warrants."
Certain Tax In general, shareholders will recognize no gain or loss
Consequences for federal income tax purposes as a result of the
exchange of shares of common stock pursuant to the
exchange offer. See "Certain Federal Income Tax
Consequences."
Securities On November 24, 1999, there were 15,288,169 shares of
Outstanding common stock outstanding. As of March 20, 2000 there
were 30,949,273 shares of common stock outstanding.
Prior to this exchange offer, there were 4,325,988
shares of common stock issuable upon the exercise of
existing warrants and options previously issued and
unrelated to the exchange offer, and an additional
174,285,127 shares of common stock issuable upon the
conversion of the Series D Convertible Redeemable
Preferred Stock. See "Capitalization" and "Description
of Securities."
Eligible Shares Only those shares of common stock outstanding as of
November 24, 1999, the closing date of the
Restructuring, are eligible to participate in the
exchange offer. Shares of common stock issued by
Silicon Gaming after November 24, 1999, are not
eligible to participate. See "The Exchange Offer -
Eligible Shares."
Market Prices The common stock is currently trading on the OTC
Bulletin Board ("OTCBB") under the symbol 'SGIC.OB'. On
April 14, 2000, the last reported sale price for the
common stock was $.34375. See "Price Range of Common
Stock." Currently, there is no market for the Exchange
Warrants.
Exchange Agent EquiServe Trust Company, N.A.
Information Agent Georgeson Shareholder Communications, Inc. Shareholders
may contact the information agent at (800) 223-2064, or
collect at (212) 440-9800, for information about
tendering Election Notices.
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THIS TRANSACTION HAS 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
TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN
THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Neither the Nevada gaming commission, the Nevada state gaming control
board, the Mississippi gaming commission, the Colorado limited gaming control
commission, the Missouri gaming commission, the New Jersey Casino Control
Commission nor any other gaming authority has passed upon the accuracy or
adequacy of this Offering Circular or the merits of the exchange offer. Any
representation to the contrary is unlawful.
IMPORTANT
Any beneficial holder of shares of common stock desiring to participate in
the exchange offer for all or any portion of his or her shares of common stock
should either (i) complete and sign the Election Notice (or a facsimile thereof)
in accordance with the instructions in the Election Notice and mail or deliver
it, together with any other required documents, to the exchange agent or (ii)
request his or her broker, dealer, commercial bank, trust company or nominee to
effect the transaction. YOU DO NOT NEED TO DELIVER YOUR COMMON STOCK
CERTIFICATES IN ORDER TO PARTICIPATE IN THE EXCHANGE OFFER, YOU NEED ONLY
DELIVER THE ELECTION NOTICE. DO NOT SEND ANY ELECTION NOTICES OR COMMON STOCK
CERTIFICATES TO SILICON GAMING, INC. ALL ELECTION NOTICES SHOULD BE DELIVERED TO
EQUISERVE, THE EXCHANGE AGENT, AT THE ADDRESS SET FORTH ON THE FRONT COVER PAGE.
Beneficial holders whose shares of common stock are registered in the name
of a broker, dealer, commercial bank, trust company or other nominee must
contact such person if they desire to tender an Election Notice. We have not
authorized any person to make any recommendation on behalf of us as to whether
holders of shares of common stock should tender an Election Notice pursuant to
the exchange offer. Georgeson Shareholder Communications has been authorized as
the information agent to give information regarding the exchange offer to
shareholders. No person has been authorized to make any representations in
connection with the exchange offer other than those contained herein or in the
Election Notice. If given or made, such recommendation or representations must
not be relied upon as having been authorized by us. Neither the delivery of this
Offering Circular nor any distribution of securities hereunder shall under any
circumstances create any implication that the information contained herein is
correct as of any time subsequent to the date hereof or that there has been no
change in the information set forth herein or in the affairs of Silicon Gaming,
Inc. since the date hereof.
This Offering Circular does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the securities covered
by this Offering Circular, nor does it constitute an offer to sell or a
solicitation of an offer to buy any such securities by any person in any
jurisdiction in which such offer or solicitation would be unlawful.
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We are making this exchange offer in reliance on the exemption from the
registration requirements of the Securities Act of 1933, as amended (the
"SECURITIES ACT"), afforded by Section 3(a)(9) thereof. We therefore have made
no arrangements for and have no understanding with any broker, dealer, salesman
or other person for soliciting tenders of Election Notices. We have retained
Equiserve as the exchange agent to help us administer the exchange offer. We
have agreed to pay the exchange agent approximately $10,000 plus disbursements
for these services, regardless of how many shareholders participate. We have
retained Georgeson Shareholder Communications as the information agent to help
us administer the exchange offer and to provide information to the holders of
common stock. We have agreed to pay the information agent approximately $7,500
plus disbursements for these services, regardless of how many shareholders
participate. The information agent has not made and will not make any
recommendation to the holders of common stock with respect to whether they
should tender an Election Notice in the exchange offer. Officers, directors and
regular employees of Silicon Gaming, Inc. may solicit tenders of Election
Notices but they will not receive additional compensation therefore.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., Chicago, Illinois or New York,
New York. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available to the public from
the SEC's Website at "http://www.sec.gov."
We have recently filed our Annual Report on Form 10-K for the year ended
December 31, 1999. We encourage you to read our Annual Report, as well as other
periodic reports we have filed with the SEC, as they contain important
information about us that might be helpful to you in deciding whether or not to
participate in the exchange offer.
You should rely only on the information provided in this Offering Circular,
or any supplements to this Offering Circular. We have authorized no one to
provide you with different information. This Offering Circular shall not
constitute an offer in any state where the offer is not permitted. You should
not assume that the information in this Offering Circular or any supplement to
this Offering Circular is accurate as of any date other than the date on the
front of the document.
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<PAGE>
FORWARD LOOKING STATEMENTS
THROUGHOUT THIS OFFERING CIRCULAR 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 THAT ACTUAL RESULTS WILL BE CONSISTENT WITH THESE
STATEMENTS. WE HAVE NO OBLIGATION TO UPDATE THE FORWARD-LOOKING STATEMENTS MADE
IN THIS OFFERING CIRCULAR.
THE COMPANY
We engaged 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 December 31, 1999, we had 4,050 machines installed in approximately
200 properties throughout Connecticut, Iowa, Louisiana, Michigan, Mississippi,
Missouri, Nevada, New Mexico, Canada and South America. Of these machines, 3,702
have been sold outright or placed on a revenue-sharing basis. After returns, 348
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.
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<PAGE>
At December 31, 1999, we had cash and equivalents of $1,877,000. We have
incurred operating losses each year since inception and as of December 31, 1999
had an accumulated deficit of $92,035,000 and a deficiency of shareholders'
equity of $7,361,000. 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 this 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.
We spent much of 1999 addressing our poor liquidity position, restructuring
our balance sheet, and retaining 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.
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.
CAPITALIZATION
On March 20, 2000 there were 30,949,273 shares of common stock outstanding,
39,750 shares of Series D Preferred Stock outstanding, Series E Warrants to
purchase 60,870.731 shares of Series E Preferred Stock, and other options and
warrants to purchase 4,325,988 shares of common stock. At December 31, 1999,
common stock was reserved for issuance as follows:
Conversion of outstanding shares of Series D Preferred Stock 174,285,127
Conversion upon exercise of Series E Preferred Stock warrants 60,807,731
Common stock warrants issued to shareholders of record as of
November 24, 1999 in connection with the debt restructuring 54,985,667
Issuable under other stock purchase warrants 919,443
Stock Option Plans 105,904,165
Employee Stock Purchase Plans 449,483
-----------
397,351,616
===========
In anticipation of the exchange offer, and as a part of the restructuring
completed in November of 1999, 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 by could
have a dilutive effect on certain shareholders. Shareholders may or may not be
7
<PAGE>
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 capital stock. (See "Description of Securities").
PRICE RANGE OF COMMON STOCK
The following table sets forth the high and low closing sale prices of our
common stock as reported on the OTCBB during each of the quarters in 1998 and
1999. Our common stock currently trades under the symbol "SGIC.OB." In February
1999 our common stock was delisted from the Nasdaq National Market. There is no
trading market for the Exchange Warrants and we do not intend to apply for
registration of the Exchange Warrants on any securities exchange or national
quotation system.
Expressed in FRACTIONS
(FISCAL YEAR) 1998 1999
- --------------------------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
First Quarter 11 3/16 8 1/4 1 11/16 7/16
SECOND QUARTER 10 3/8 7 1/2 13/16 5/16
THIRD QUARTER 9 15/16 3 1/8 19/32 3/16
FOURTH QUARTER 3 7/8 1 3/8 11/32 5/64
===========================================
Expressed in DECIMALS
(FISCAL YEAR) 1998 1999
- --------------------------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
First Quarter 11.1875 8.25 1.6875 .4375
SECOND QUARTER 10.375 7.50 .8125 .3125
THIRD QUARTER 9.9375 3.125 .59375 .1875
FOURTH QUARTER 3.875 1.375 .34375 .0781
===========================================
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We presently intend
to retain all cash for use in the operation and expansion of our business and do
not anticipate paying any cash dividends in the near future. 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. Under the terms and
provisions of the Certificates of Determination for the Series D Convertible
Redeemable Preferred Stock ("SERIES D PREFERRED STOCK") and the Series E
Convertible Redeemable Preferred Stock ("SERIES E PREFERRED STOCK"), we may not
pay dividends on the common stock without the prior written consent of a
majority of the holders of the Series D Preferred Stock and the Series E
Preferred Stock, and may not pay a dividend on the common stock unless a
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<PAGE>
dividend is first paid on the Series D Preferred Stock and the Series E
Preferred Stock in an amount equal to the dividend that would have been paid to
each share of preferred stock if such preferred stock had been converted into
shares of commons stock.
BACKGROUND OF THE EXCHANGE OFFER
The exchange offer is being conducted as part of a restructuring (the
"RESTRUCTURING") we completed on November 24, 1999 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 equity-based incentives
will 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.
The 39,750 shares of Series D Preferred Stock issued to B III are, in the
aggregate, convertible into 174,285,127 shares of common stock, or approximately
57% of the outstanding common stock of the Company on a fully-diluted basis as
of the closing of the Restructuring. The Series E Warrants issued to B III may
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<PAGE>
be exercised for, in the aggregate, up to 60,807.731 shares of Series E
Preferred Stock, which is convertible into up to 60,807,731 shares of common
stock. The Series E Warrants are exercisable only to the extent that Exchange
Warrants issued in the exchange offer are actually exercised. The Series E
Warrants were issued to protect the percentage interest of the equity held by B
III in the form of the Series D Preferred Stock from being diluted by the
exercise of the Exchange Warrants. For a more detailed description of the terms
and provisions of the Series D Preferred Stock, the Series E Preferred Stock,
the Series E Warrants and the Exchange Warrants see "Description of Securities."
As a result of the issuance of the Series D Preferred Stock and the Series
E Warrant, and shares of stock and options to purchase shares of common stock
that might be issued under the 1999 Long-Term Compensation Plan, the percentage
interest of total outstanding shares of common stock held by existing
shareholders immediately prior to the Restructuring on a fully-diluted basis was
dramatically reduced. The Company is conducting this exchange offer as a means
of allowing shareholders the opportunity to recapture some of the dilution that
has resulted from the Restructuring. Participating shareholders tendering
completed Election Notices prior to the Expiration Date will be issued Exchange
Warrants. See "The Exchange Offer" starting on page 11.
The maximum number of Exchange Warrants to be issued is 15,288,169. The
Exchange Warrants, in the aggregate, may be exercised for 54,985,734 shares of
common stock.
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, 19999, and Mr. Stanford Springel and Mr. Robert Reis became members of the
board of directors.
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
We are hereby offering to exchange a unit consisting of one share of common
stock and a warrant (an "EXCHANGE WARRANT") to purchase 3.59662 shares of common
stock for each share of common stock eligible to participate. Participating
shareholders will not be required to tender their physical share certificates.
The shares of common stock participating will remain outstanding and the
participating shareholders will receive the Exchange Warrants. Participating
shareholders will only be required to tender a Notice of Election to Participate
(the "ELECTION Notice").
PURPOSE OF THE EXCHANGE OFFER
The primary purpose of the exchange offer is to allow certain shareholders
the opportunity to recapture some of the dilution that has resulted from the
Restructuring.
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ELIGIBLE SHARES
Throughout this Offering Circular we refer to "eligible shares." Eligible
shares are those shares of common stock outstanding as of November 24, 1999, the
closing date of the Restructuring. Shares of common stock issued by Silicon
Gaming after November 24, 1999, are not eligible to participate. Since November
24, 1999, we have issued approximately 15,661,104 shares of common stock.
15,657,490 shares of common stock were sold to two of our officers on November
24, 1999 and those officers' shares are not eligible to participate in the
exchange offer. The remaining approximately 3,614 shares of common stock issued
since November 24, 1999, are also not eligible to participate. If you did not
acquire your shares directly from us through part of an employee stock purchase
plan or stock option plan, or from the exercise of a warrant or option exercised
after November 24, 1999, your shares are eligible to participate in the exchange
offer.
PARTICIPATING SHARES
Throughout this Offering Circular, we refer to "Participating Shares." We
use this term to mean the shares of common stock held by a participating holder
of common stock that such holder elects to tender in the exchange offer. Holders
are not required to tender all of their shares of common stock in the exchange
offer. For example, a participating holder might hold 10,000 shares of commons
stock, but might elect to tender only 5,000 of those shares. The 5,000 shares of
common stock tendered in the exchange offer are referred to as the
"Participating Shares."
PROCEDURES FOR TENDERING ELECTION NOTICES
The acceptance by a shareholder of the exchange offer pursuant to one of
the procedures set forth below will constitute an agreement between such
shareholder and Silicon Gaming, Inc. in accordance with the terms and subject to
the conditions set forth in this Offering Circular and in the Election Notice.
To validly tender an Election Notice pursuant to the exchange offer, the
shareholder must either (i) deliver, and not withdraw, a properly completed and
duly executed Election Notice and any other documents required by the Election
Notice, to the exchange agent at the address set forth below under "Exchange
Agent" on or prior to the Expiration Date, or (ii) request his or her broker,
dealer, commercial bank, trust company or nominee to effect the transaction.
Nominees or other record holders of shares of common stock that hold shares
of common stock for more than one beneficial owner are entitled to make multiple
elections pursuant to the Election Notice that reflect the election of each of
the beneficial owners for whom they are holding common stock. To make such
multiple elections, nominees or other record holders should properly complete
the applicable table in the Election Notice. NO SHARES OF COMMON STOCK OR
ELECTION NOTICES SHOULD BE SENT TO SILICON GAMING, INC.
All signatures on a Election Notice or a notice of withdrawal must be
guaranteed by an eligible institution unless the Election Notice is tendered (i)
by a record holder who has not completed the box entitled "Special Issuance
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<PAGE>
Instructions" or "Special Delivery Instructions" on the relevant Election Notice
or (ii) for the account of an eligible institution. If Participating Shares are
registered in the name of a person other than the signer of an Election Notice,
then evidence must be submitted that the Participating Shares were endorsed by
the record holder, or be accompanied by a written instrument or instruments of
transfer or exchange in form satisfactory to us duly executed by the record
holder, with the signature guaranteed by an eligible institution. If signatures
on an Election Notice are required to be guaranteed, such guarantees must be by
a member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or a correspondent in the United States, a credit union, a
savings association or otherwise an "eligible guarantor institution" within the
meaning of Rule 17Ad-15 under the Exchange Act (each of which is an "eligible
institution").
The method of delivery of Election Notices and all other required documents
to the exchange agent is at the election and risk of the participant, but, if
sent by mail, registered mail with return receipt requested, properly insured,
is recommended.
Unless the Election Notices being tendered are deposited with the exchange
agent prior to the Expiration Date, we may, at our opinion, reject such tender.
Issuance of Exchange Warrants will be made only against properly tendered
Election Notices. If less than all the shares of commons stock held by a
participant are Participating Shares, the participant should fill in the number
of Participating Shares in the appropriate box on the relevant Election Notice.
All shares of common stock held by any participant tendering an Election Notice
with the exchange agent will be deemed to be Participating Shares unless
otherwise indicated.
Participants who are not record holders of, and who seek to tender,
Participating Shares should (i) obtain a properly completed Election Notice from
the record holder with signatures guaranteed by an eligible institution, or (ii)
obtain and include with the relevant Election Notice evidence of a properly
endorsed transfer by the registered holder or a properly completed stock power
from the record holder, with signatures on the endorsement or power guaranteed
by an eligible institution or (iii) effect a record transfer of such shares of
Participating Shares and comply with the requirements applicable to record
holders for tendering Participating Shares prior to the Expiration Date.
Each tendering participant must complete the Substitute Form W-9 provided
in the Election Notice and either (i) provide his or her correct taxpayer
identification number (social security number, for individuals) and certify that
the taxpayer identification number provided is correct (or that such holder is
awaiting a taxpayer identification number) and that (A) the participant has not
been notified by the Internal Revenue Service that he is subject to backup
withholding as a result of failure to report all interest or dividends or (B)
the Internal Revenue Service has notified the participant that he is no longer
subject to backup withholding or (ii) provide an adequate basis for exemption
from backup withholding. Participants who do not satisfy these conditions may be
subject to a $50 (or greater) penalty imposed by the Internal Revenue Service
and may be subject to backup withholding at the rate of 31% with respect to
dividends paid on, and gross receipts from the sale of, Exchange Warrants or
shares of common stock received upon exercise of the Exchange Warrants. Exempt
participants (including, among others, corporations and certain foreign
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<PAGE>
individuals) are not subject to these requirements if they satisfactorily
establish their status as such. Certain foreign participants may be required to
provide a Form W-8 or Form 1001 in order to avoid or reduce withholding tax.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Election Notices will be determined by
Silicon Gaming, Inc. in our sole discretion. Our determination will be final and
binding. All participating shareholders, by execution of the Election Notice (or
facsimile thereof), waive any right to receive notice of the acceptance of the
Election Notices. We reserve the absolute right to reject any and all Election
Notices not properly tendered or any Election Notices our acceptance of which
would, in the opinion of our counsel, be unlawful. We also reserve the right to
waive any irregularities or conditions of tender as to particular Election
Notices. Our interpretation of the terms and conditions of the exchange offer
(including the instructions in the Election Notice) shall be final and binding
on all parties. Unless waived, any defects or irregularities in connection with
tenders of Election Notices must be cured within such time as we shall
determine. Neither we, the exchange agent or the information agent nor any other
person shall be under any duty to give notification of defects or irregularities
with respect to tenders of Election Notices, nor shall any of us incur any
liability for failure to give such notification. Tenders of Election Notices
will not be deemed to have been made until such defects or irregularities have
been cured to our satisfaction or waived. Any Election Notices received by the
exchange agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the exchange
agent to the tendering participants as soon as practicable following the
Expiration Date. The exchange agent has no fiduciary duties to the participants
in the exchange offer and is acting solely on the basis of our directions.
ACCEPTANCE OF ELECTION NOTICES
The acceptance for participation of Election Notices validly tendered and
not withdrawn and delivery of the Exchange Warrants will be made as promptly as
practicable after the Expiration Date. We expressly reserve the right to delay
acceptance of any of the Election Notices or terminate the exchange offer and
not accept Election Notices not already accepted if any of the conditions set
forth below under "Conditions of the Exchange Offer" shall not have been
satisfied or waived by us. We will be deemed to have accepted validly tendered
Exchange Notices if, as and when we give oral or written notice thereof to the
exchange agent. Subject to the terms and conditions of the exchange offer,
delivery of Exchange Warrants will be made by the exchange agent as soon as
practicable after the Expiration Date. The exchange agent will act as agent for
the participants for the purposes of receiving Exchange Warrants from us and
transmitting the Exchange Warrants to the participants. Election Notices
tendered and not accepted by us, if any, will be returned without expense to the
tendering shareholder as promptly as practicable following the Expiration Date.
DELIVERY OF EXCHANGE WARRANTS
The exchange agent will deliver the Exchange Warrants as soon as
practicable after the Expiration Date.
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WITHDRAWAL RIGHTS
Tenders of Election Notices are irrevocable, except that tendered Election
Notices may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the Expiration Date. Participants who wish to exercise their right of withdrawal
must give notice of withdrawal in writing. This notice must be timely received
by the exchange agent at one of the addresses set forth below under "Exchange
Agent" in accordance with the method of delivery. Any such notice of withdrawal
must specify the name of the person who tendered an Election Notice to be
withdrawn and the number of Participating Shares to be withdrawn. A notice of
withdrawal must be signed by the record holder in the same manner as the
original signature on the Election Notice (including any required signature
guarantees) or be accompanied by evidence satisfactory to us that the person
withdrawing the tender has succeeded to the beneficial ownership of the
Participating Shares.
Any permitted withdrawals of tenders of Election Notices may not be
rescinded, and any Election Notices withdrawn will thereafter be deemed not
validly tendered for purposes of the exchange offer. Withdrawn Election Notices
may be re-tendered by following the procedures for tendering Election Notices
described in this Offering Circular at any time on or before the Expiration
Date.
All questions as to validity, form and eligibility (including time of
receipt) of the notice of withdrawal will be determined by us in our sole
discretion. Our determination will be final and binding. Neither we, the
exchange agent, the information agent, nor any other person will be under any
duty to give notification of defects or irregularities in any notice of
withdrawal, nor shall any of us incur any liability for failure to give any such
notification. Withdrawal of Election Notices will not be deemed to have been
made until such defects or irregularities have been cured to our satisfaction.
EXCHANGE AGENT
EquiServe Trust Company, N.A. will act as exchange agent for the exchange
offer. All correspondence in connection with the exchange offer and the Election
Notice should be addressed to the exchange agent as follows:
BY MAIL BY HAND BY OVERNIGHT CARRIER
EquiServe Securities Transfer & EquiServe
Corporate Actions Reporting Services Attn: Corporate Actions
PO Box 8029 C/O EquiServe 150 Royall Street
Boston, MA 02266-8029 100 William's Street, Galleria Canton, MA 02021
New York, NY 10038
INFORMATION AGENT
Georgeson Shareholder Communications Inc. will act as the information agent
for the exchange offer. The information agent will help us administer the
exchange offer and will answer questions and provide information to participants
with respect to the exchange offer. The information agent is not authorized, and
will not make, any recommendation to participants with respect to whether they
should tender Election Notices. The information agent may be contacted as
follows:
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GEORGESON
SHAREHOLDER
COMMUNICATIONS INC.
17 State Street - 10th Floor
New York, New York 10004
Toll-Free (800) 223-2064
EXPIRATION DATE; EXTENSIONS
The exchange offer will expire at 5:00 p.m., New York City time, on May 19,
2000, unless extended. We reserve the right to extend the exchange offer at our
discretion, in which event the Expiration Date shall mean the time and date on
which the exchange offer as so extended shall expire. We will notify the
exchange agent of any extension prior to the Expiration Date. This notice will
specify the date and time to which the exchange offer has been extended and may
be given to the exchange agent by facsimile or orally, if confirmed in writing
prior to 9:00 a.m. on the next business day. During any extension, all Election
Notices previously tendered and not properly withdrawn will remain subject to
the exchange offer, subject to the right of a tendering participant to withdraw
his Election Notices in accordance with the procedures described above under
"Withdrawal Rights."
Any extension of the Expiration Date will be followed as soon as
practicable, but in no event later than 9:00 a.m., New York City time, on the
second business day after the previously scheduled Expiration Date, by public
announcement, and any amendment of the exchange offer will be followed as soon
as practicable by public announcement. Without limiting the manner by which we
may choose to make such public announcement, we shall not, unless otherwise
required by law, have any obligation to publish, advertise or otherwise
communicate any such public announcement other than by making a release to the
Dow Jones News Service.
If we decide to waive, modify or amend a material provision of the exchange
offer, we may do so at any time, or from time to time, provided that we give
notice thereof in the manner specified above and extend the exchange offer to
the extent required by the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"). With respect to the percentage of the class of securities being
sought or a change in the consideration offered, Rule 13e-4(f)(1) under the
Exchange Act generally requires that a tender offer remain open for at least 20
business days from the date that notice of the change is first published or sent
or given to security holders. The minimum period during which an offer must
remain open following other material changes in the terms of the offer or
information concerning the offer will depend upon the facts and circumstances,
including the relative materiality of the change in the terms or information.
Any amendment to the exchange offer will apply to all eligible shares of common
stock and all Election Notices, regardless of when or in what order the Election
Notices are tendered. The term "business day" means a day other than Saturday,
Sunday or a federal holiday and consists of the time period from 12:01 a.m.
through 12:00 midnight, New York City time.
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CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, we may cancel,
modify or terminate the exchange offer and are not required to accept any
Election Notices pursuant to the exchange offer if before the expiration of the
exchange offer:
(i) there shall be pending, instituted or threatened, any legal action or
administrative proceeding before any court or government agency, by any
government agency or any other person prohibiting, restricting or delaying the
exchange offer;
(ii) any statute, rule or regulation shall have been enacted, or any action
shall have been taken by any governmental authority, which would prohibit or
materially restrict or delay consummation of the exchange offer; or
(iii) there shall have occurred (and the adverse effect of such occurrence
will be continuing) (a) any general suspension of, or limitation on prices for
trading on, the other over-the-counter markets, (b) a declaration of a banking
moratorium by United States or New York authorities, or (c) a commencement of a
war, armed hostilities or other international or national calamity directly or
indirectly involving the United States of America which could reasonably be
expected to affect materially and adversely (or to delay materially) the
consummation of the exchange offer.
In the event that we terminate the exchange offer pursuant to any of the
conditions set forth above, the exchange agent will promptly return any tendered
Election Notices to the participants.
EXPENSES
We will not make any payments to any brokers, dealers or persons for
soliciting Election Notices. We will, however, pay the exchange agent a $10,000
fee for its services and will reimburse the exchange agent for its reasonable
out-of-pocket expenses in connection therewith. We have also agreed to pay the
information agent a fee of approximately $7,500 plus disbursements for its
services and to reimburse the information agent for its reasonable out-of-pocket
expenses. We will also reimburse brokerage firms and other custodians, nominees
and fiduciaries for reasonable out-of-pocket expenses incurred by them in
forwarding copies of this Offering Circular and related documents to the
beneficial owners of eligible shares of common stock and in handling or
forwarding tenders on behalf of their customers. We will also pay all legal,
accounting, printing, listing, filing and other similar fees and expenses
relating to the exchange offer.
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RISKS RELATING TO THE EXCHANGE OFFER
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AS WELL AS THE
OTHER INFORMATION INCLUDED IN THIS OFFERING CIRCULAR BEFORE ELECTING TO
PARTICIPATE IN THE EXCHANGE OFFER.
NON-PARTICIPANTS MIGHT BE ECONOMICALLY DISADVANTAGED.
Shareholders who elect not to participate in the exchange offer may be
economically disadvantaged. Shareholders who elect to participate in the
exchange offer will receive one warrant to purchase 3.59662 shares of common
stock at an exercise price of $0.1528 per share for each Participating Share.
The Exchange Warrants are first exercisable 12 months following the date of
issuance. The Exchange Warrants terminate four years from the date of issuance,
unless earlier terminated (See "Description of Securities - Exchange Warrants").
The exercise of the Exchange Warrants could dilute the percentage ownership of
shareholders who did not elect to participate in the exchange offer, as well as
shareholders who did participate in the exchange offer but elect not to exercise
their Exchange Warrants.
THE MORE PARTICIPANTS WHO RECEIVE EXCHANGE WARRANTS IN THE EXCHANGE OFFER, THE
GREATER THE NUMBER OF SHARES OF SERIES E PREFERRED STOCK THE SERIES E WARRANT
ISSUED TO B III BECOMES EXERCISABLE FOR, WHICH, IF EXERCISED AND SUBSEQUENTLY
CONVERTED INTO SHARES OF COMMON STOCK, WOULD RESULT IN DILUTION OF THE OWNERSHIP
INTERESTS OF THE HOLDERS OF THE COMMON STOCK.
As a part of the Restructuring, we issued the Series E Warrant to B III. To
the extent that the Exchange Warrants are exercised the Series E Warrant becomes
exercisable. The Series E Warrant entitles the holder to purchase up to
60,807.731 shares of Series E Preferred Stock at an exercise price of $.01 per
share. Each share of Series E Preferred Stock may be converted into 1,000 shares
of common stock. The Series E Preferred Stock may be converted into shares of
common stock without the payment of any additional consideration by the holders.
The purpose of the issuance of the Series E Warrants was to protect the
percentage interest of the equity held by B III in the form of the Series D
Preferred Stock from being diluted by the exercise of the Exchange Warrants
issued in the exchange offer. (See "Description of Securities - Series E
Preferred Stock"). The conversion of Series E Preferred Stock would have a
dilutive effect on the holders of common stock.
WE ARE ISSUING THE EXCHANGE WARRANTS IN RELIANCE ON THE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SECTION 3(A)(9) OF THE SECURITIES ACT OF 1933, ARE
NOT REGISTERING THE EXCHANGE WARRANTS, AND MIGHT NOT REGISTER THE SHARES OF
COMMON STOCK UNDERLYING THE EXCHANGE WARRANTS UNTIL 12 MONTHS AFTER THE ISSUANCE
OF THE EXCHANGE WARRANTS.
The exchange offer is being made by us in reliance on the exemption from
the registration requirements of the Securities Act afforded by Section 3(a)(9)
thereof. We are relying on responses given by the Division of Corporation
Finance of the Securities Exchange Commission in matters similar to this
exchange offer. Because the common stock outstanding that is eligible to
participate in the exchange offer has been registered under the Securities Act,
the Exchange Warrants issued as part of the exchange will not be considered
"restricted securities." However, the Exchange Warrants issued in the exchange
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offer and the shares of common stock underlying the Exchange Warrants are not
registered. We do not intend to register the Exchange Warrants. We do intend to
register the shares of common stock underlying the Exchange Warrants but not at
any time during the first twelve months following their issuance. We do intend
to apply for the Exchange Warrants to be listed or traded on any securities
exchange or national quotation system.
OTHER RISK FACTORS
THE FOLLOWING ADDITIONAL RISK FACTORS SHOULD BE CONSIDERED IN CONJUNCTION
WITH THE OTHER INFORMATION INCLUDED IN THIS OFFERING CIRCULAR BEFORE ELECTING TO
PARTICIPATE IN THE EXCHANGE OFFER.
WE MIGHT BE UNABLE TO CONTINUE OPERATING AS A GOING CONCERN
We have received a report from our independent auditors that includes an
explanatory paragraph regarding uncertainty as to our ability to continue as a
going concern. The factors cited by the auditors as raising substantial doubt as
to our ability to continue as a going concern are our recurring losses from
operations and shareholders' deficiency. 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 December 31, 1999 we had
an accumulated deficit of $92,035,000 and a deficiency of shareholders' equity
of $7,361,000. There can be no assurance that we will ever become profitable.
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 April 13, 2000 the OTCBB reports that there are 11 active market makers of
our common stock. Five of the eleven market makers have accounted for
approximately 79% 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 11 market makers,
unless you trade your shares in a private transaction. The average daily trading
volume, as reported by the OTCBB as of April 14, 2000 was 110,772 shares.
However, in the ninety days prior to April 14, 2000 the actual trading volume
ranged from a low of 11,400 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
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common stock. In addition, the price of our common stock as traded on the OTCBB
is extremely volatile. During the ninety days prior to April 14, 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.
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.
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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 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
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.
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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 of. Management could use the additional shares or 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.
OUR OUTSTANDING SHARES OF SERIES D PREFERRED STOCK, IF CONVERTED, COULD DILUTE
THE OWNERSHIP INTERESTS OF THE HOLDERS OF THE COMMON STOCK.
Subject to certain restrictions, the holders of the Series D Preferred
Stock may elect to convert all or any portion of their shares into shares of
common stock. The Series D Preferred Stock is convertible into shares of common
stock at a conversion price of approximately $0.2145 per share. The holders do
not need to pay any additional consideration in order to convert their shares.
The 39,750 shares of Series D Preferred Stock outstanding are convertible into
174,285,127 shares of common stock. (See "Description of Securities - Series D
Preferred Stock"). The conversion of the Series D Preferred Stock could have a
dilutive affect on the holders of common stock.
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
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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.
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.
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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.
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 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 B III. 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.
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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 "Gaming Regulations and Licensing")
GAMING REGULATION AND LICENSING
In most jurisdictions, any beneficial owner of our common stock is subject
on a discretionary basis to being required to file applications with gaming
regulatory authorities, be investigated and found suitable or qualified as such.
In addition, shareholders whose holdings of common stock exceed certain
designated percentages are subject to certain reporting and qualification
requirements imposed by state and federal gaming regulators and, any
shareholder, if found to be unsuitable, may be required to immediately dispose
of its holdings of common stock. We currently operate in several jurisdictions
that have their own independent set of rules and regulations, including, but not
limited to, Nevada, New Jersey, Missouri, Mississippi, Louisiana, Iowa, Indiana,
and others. In most of the jurisdictions in which we operate, we must obtain a
registration, license, approval or finding of suitability, or equipment approval
before we 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 we want to offer for sale. In
addition, we must often apply for prior approval from the various gaming
jurisdiction authorities for any significant corporate activities, such as
mergers, acquisitions, changes of control or sales of our securities and assets.
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
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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.
BUSINESS OF SILICON GAMING, INC.
We are engaged in the design, development, production, marketing and sale
of interactive, software-based products for the gaming industry. To date we have
deployed our products 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.
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Our games feature high-quality animation, video clips, digital sound and a
level of visual appeal and interactivity that we believe is not met by the
current generation of slot machines. To take advantage of these features, our
initial products 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, our products
will encourage longer and more frequent periods of play by existing slot machine
customers and attract new gaming customers who are seeking greater entertainment
value than that offered by the current generation of slot machines. We have also
designed our machines with a number of unique player features, such as play
stoppage entertainmentTM. In addition, our product's modular components and
Machine Management SystemTM software provide easy-to-use diagnostics designed to
minimize player inconvenience and machine down time. We currently offer several
platforms for our games, including ODYSSEYTM, 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 top machine. We were granted product approval
for ODYSSEY from the Nevada Gaming Commission in March 1997, allowing us to
commence commercial distribution of our products. We typically place machines in
casinos for an evaluation period prior to sale, consistent with industry
practice. We sell machines outright to casinos and also place machines in
casinos and receive a predetermined percentage of the net win per machine. We
also sell new game titles periodically to existing customers that allows
customers to update their products.
As of December 31, 1999, we had 4,050 machines installed in approximately
200 properties throughout Connecticut, Iowa, Louisiana, Michigan, Mississippi,
Missouri, Nevada, New Mexico, Canada and South America. Of these machines, 3,702
have been sold outright or placed on a revenue-sharing basis. After returns, 348
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.
INDUSTRY BACKGROUND
According to industry sources, casino gaming revenue in the United States
in 1993, 1994, 1995, 1996, 1997 and 1998 was approximately $12.6 billion, $14.0
billion, $18.0 billion, $22.4 billion, $25.8 billion and $28.1 billion,
respectively, and continued growth was forecast for 1999 and 2000. Slot
machines, video gaming machines and similar devices are the dominant source of
gaming revenue for casino operators in most U.S. markets. Slot revenue as a
percentage of total gaming revenue in 1999 was 64% in Nevada and 71% in Atlantic
City. Jurisdictions where gaming has been legalized more recently have reported
similar statistics. For example, in 1999, slot machines accounted for 76% of
casino revenue in Indiana. In addition to constituting the largest portion of
gaming revenue, slot revenue is more profitable than table games for casino
operators, because slot machines require much lower labor costs.
We believe that slot machines offer their owners an attractive return on
investment. In 1998, the average win per machine per day, defined as the average
amount of money wagered on a machine less the average jackpot payoffs, on the
Las Vegas Strip was $101. A new slot machine from a major manufacturer, equipped
with player tracking and slot accounting software, costs approximately $8,000
and generally has a useful life that can exceed five years. At this price, a new
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slot machine earning the Las Vegas Strip average would recoup its purchase price
in 79 days. While certain markets have lower average wins per day than the Las
Vegas Strip, many other markets have win per day figures that are significantly
higher. For example, in 1998, Harrahs Marina Hotel & Casino in Atlantic City
reported win per machine per day of $255 and Harrah's riverboat casino in
Joliet, Illinois reported win per machine per day of $371. Many of the Native
American gaming establishments often have daily win per machine numbers much
higher than these levels, as evidenced by the two Native American casinos in
Connecticut, reporting win per machine per day during December 1999 of $394.
All casino games offer the same underlying proposition: the opportunity to
win money in varying amounts and with varying frequency, but with the
statistical certainty of losing money to the casino operator over an extended
period of time. With slot machines, the prospect of winning can be varied across
the spectrum from many small jackpots won frequently to one very large jackpot
won very rarely. Players' risk and reward appetites will determine what type of
machine they will want to play, and the nature of the payoffs can be deduced
from the "pay table," a chart that graphically shows how much can be won based
on various outcomes and various amounts of money wagered. Notwithstanding the
differences in jackpot frequency and size, however, all slot machines retain a
net amount of the money wagered through them over time. This amount is referred
to as the "hold" and is generally expressed as a percentage of the amount of
money wagered on a machine, which is called the "handle." The hold percentage in
any given machine is preset by the manufacturer based on specifications from the
casino, subject to legal parameters in some jurisdictions, and may differ from
machine to machine on a casino floor.
The U.S. gaming machine market has traditionally been dominated by
reel-based slot machines. These were broadly introduced in the 1960s, when the
free-spinning reel was made possible by advances in electro-mechanical
circuitry. The free-spinning reel enabled manufacturers to create different
versions of the same product by varying such things as the number of reels, the
number of stops on each reel and the number and variety of payoff combinations.
The 1980s saw the introduction of virtual reel "stepper" technology that allowed
for a greater number of stops, or outcomes, on a reel, enabling casino operators
to offer larger jackpots due to the lower likelihood of their being hit. Another
significant development was the installation of electronic memory in machines,
allowing players to keep an "account" of credits on the machine consisting of
the initial amount inserted plus winnings minus losses. Because the player did
not have to reinsert coins for every pull of the handle, the number of pulls per
hour was increased significantly, and players tended to rewager much of the
amounts won, raising the total win per machine. Except for the addition of
features such as bill acceptors and player tracking systems, the technology
employed by slot machines in the 1970s and 1980s still predominates in
current-generation, reel-based slot machines.
In the 1980s, hardware and software advances allowed for application of
video graphics to gaming devices. Using these techniques, IGT was the first
company to introduce video poker. Video poker offered slot players two important
advantages. First, the game is interactive, since the player has to decide which
cards to hold or discard during the hand. This feature allows the outcome to be
influenced somewhat by the player, an attribute unavailable on reel-based
machines. Second, the use of a video screen allows machine manufacturers to
develop more interesting and attractive graphics than are available on
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reel-based slot machines. Since the mid-1990s, a number of slot machine
manufacturers have introduced video-based products that have expanded the
capabilities of video-based devices, including machines that offer the player a
choice of up to twelve different games on a single machine. Now video-based
products actually constitute a majority of new machines sales in the slot
machine industry. We believe that the increasing popularity of video poker and
multi-game machines suggests that customers may be receptive to a more complex
and interactive slot experience.
In the mid 1980s, a category of slot machine games called "progressives"
was introduced and became very popular. The progressive configuration generally
consists of traditional reel-based machines linked together by a computer
network that allows them to share a common jackpot that is usually much larger
than the jackpot that a single, unlinked machine could support. Progressives now
include video based products as well. Progressive jackpots are typically several
million dollars, and recently have exceeded $35 million. Progressives may be
linked locally within a bank of a few machines, across an entire casino, or
across an entire state. IGT is the dominant competitor in the progressives
market.
Historically, the growth in demand for slot machines has been driven by the
opening of new casinos, including casinos in jurisdictions where gaming has
recently been legalized. However, in recent years, the number of new
jurisdictions that have legalized gaming has significantly declined; therefore,
demand based on new openings will be largely limited to new projects in existing
markets. Several new projects are under construction or have been announced in
Las Vegas, Atlantic City, on the Gulf Coast and in the Midwest.
While the physical useful life of a slot machine can be up to a decade or
more, casino operators have tended to replace machines on a cycle closer to
every five years. Also, the development of certain new features which offer the
prospect of significantly increased slot earnings, such as the advent of bill
acceptors in the early 1990s, or more recent developments such as tokenization
or cashless operating systems, can encourage operators to replace machines even
more rapidly.
STRATEGY
Although the gaming industry as a whole has enjoyed significant growth over
the past decade, we believe that there has been very little growth in the slot
machine manufacturing segment. We believe that most of the growth and new
investment in the gaming industry over this period has come from the investment
made in assets such as large hotels and themed attractions, or from the
consolidation of property ownership, and that comparatively little has been
invested in further developing the actual casino games which, in the aggregate,
account for a majority of the average casino's revenue and profits.
In contrast, we have focused our resources primarily on developing what we
believe will be more rewarding and entertaining casino games. We have also
developed what we believe to be a new generation of interactive slot machines on
which to run our games. Since inception, in addition to game development, we
have developed and refined a gaming platform that takes advantage of personal
computer-based technology to offer a more visually appealing and complex gaming
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experience. We believe that our games and machines will encourage casino patrons
to play more frequently and for longer periods of time and will also attract new
gaming customers, particularly younger patrons who typically are not attracted
to current generation slot machines. We believe that, as a result, our machines
will outperform most existing machines in win per machine and thus motivate
casino operators to supplement or replace existing slot machines with our
products.
The market for slot machines has become increasingly competitive since we
were formed, and the number of new game and product introductions has increased
significantly from historical levels. The proliferation of new product offerings
has benefited casino operators who are able to leverage their position with slot
machine manufacturers and who have demanded higher levels of performance from
new products. The casino operators are willing to try new products or new games
for existing products that offer the prospect of higher win per machine per day.
At the same time, operators are also much quicker to remove or replace a slot
machine whose performance is less than that of other competing products. Casino
operators have also been able to benefit from the level of competition to keep
the average selling price of new slot machines from increasing significantly,
despite the higher cost and complexity of new-generation products. As a result,
the slot machine manufacturing industry can now be characterized by high
competition and low levels of profitability.
Certain slot machine manufacturers have responded to this pressure from the
casino operators by placing machines in casinos and participating in the revenue
stream generated from the product, either by participating in the net win per
machine or in the gross amount wagered on the machine. This has allowed
manufacturers to achieve a higher revenue per machine than an outright sale to
the casino operator. Casino operators are increasingly reluctant to place
machines in their casinos on a participation basis in the belief that this
represents a profit shift from the casino operator to the manufacturer.
Manufacturers have responded by selling their newest and most successful games,
or games that they think will be highly successful, on a participation basis
only. Casino operators have only tolerated this where the game is highly
successful, as the net win to the casino is still attractive. This has also
contributed to the casino operators' willingness to remove non-performing slot
machines from their floors.
We believe that we are uniquely placed among slot machine manufacturers
because of the potential to leverage the technology that is inherent in our
products. We believe our products and platforms are significantly more complex
than competing products but at the same time are more flexible so that new and
innovative game types can be deployed on our game platforms. This will allow us
to develop game types and game themes that can offer play characteristics that
cannot be easily imitated by our competitors and that take full advantage of the
underlying technology of the product. By doing so, we hope to offer a richer,
more entertaining gaming experience for the casino customer and thereby generate
a higher win per day per machine. We believe that this will also assist us in
placing machines with casino operators on a participation basis, which should
prove more profitable for us than a one-time sale of the machine.
The flexibility of our products allow us to customize or develop new game
content much quicker than our competitors. We believe that this will allow us to
partner directly with casino operators to develop games for the exclusive use of
that operator, affording the operator a competitive advantage given the lack of
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product differentiation between most casinos. Working directly with operators to
develop products may also help us overcome the operators concerns about
participation games, as it aligns the operator and the manufacturer to the
benefits of product success. We believe that there is greater profit potential
in this type of collaborative relationship than in the more traditional "build
and sell" model of the typical slot machine manufacturer.
We believe that new slot machine sales in the replacement category will
surpass sales for new installations in the near future, due to the slowing in
demand from new casino projects, and because the large number of machines
installed during the high growth period of the early 1990s will soon be reaching
their normal replacement time.
The market for slot machines outside of North America is relatively small,
with the exception of Australia, and it is generally difficult to forecast. In
addition, international markets have often served as an outlet for used machines
for most slot machine operators. We are currently focused on establishing and
solidifying our market position in North America. Given our relatively small
size compared to certain of our competitors, we do not believe we have adequate
resources to simultaneously develop products for both the North American and
international markets. As a result, we do not currently contemplate entering any
international markets with the exception of certain Canadian provinces, South
America, and possibly Australia. We remain open to taking advantage of
opportunities in international markets, but only if this can be accomplished
without any adverse impact on our domestic business.
We currently sell our products outright to casino operators and other
potential purchasers offering several pricing programs. For the ODYSSEY this
consists of either (i) the sale of the hardware unit bundled with a single game
or a suite of games and other software for a fixed price, or (ii) the sale of
the hardware unit alone combined with a renewable one-year software license,
including access to the entire ODYSSEY game library for the term of the license.
Our single game upright machine, QUEST, and its slant top machine are sold as a
bundled package of the hardware unit and a single game for a fixed price. We
also offer a participation program where we will place our product on a casino
floor in exchange for a share in the aggregate win generated by the machine.
Typically, under this program we receive 20% of the aggregate win, subject to a
predetermined minimum, or a fixed daily rental fee.
We believe that with the ODYSSEY, we have achieved a leadership position
within the multi-game segment of the video slot machine market. Since we
commenced sales in 1997, we have also learned a great deal about what makes a
game successful and which characteristics of a game are most appealing to gaming
customers. We believe that we have been able to improve our game content as a
result of this experience, and now we have one of the most successful blackjack
games with TOP HAT 21, a successful poker game with LUCKY DRAW POKER, and some
of the more successful multi-line, multi-coin games with EUREKA and BANANA RAMA.
At the same time we believe that we currently have not yet fully exploited the
technological potential of our game platform and that many of our game offerings
are in fact similar to competing products. This places us at a competitive
disadvantage because of the higher cost of our product.
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The introduction of QUEST during 1998 was designed to allow us to increase
our penetration of the casino floor by offering a wider array of product and
price points to the casino operator. The introduction of the wide-area
progressive products in December 1998 further increased our product offerings.
In 1999 we also introduced a more traditional, slant-top machine that is
physically similar to competitors' products. We intend to offer additional
platform choices in the future to further diversify our product offering.
We believe that our ultimate success will come not from the breadth of
platform offerings, but from the quality of play characteristics of the
individual games offered on those platforms, and from the total gaming
experience that we can provide to patrons playing our products. Developing
pricing models that will allow us to maximize the revenue from each of our games
will also be critical to our future success.
PRODUCTS
We have developed a family of games and platforms that we believe
represents the next generation of interactive gaming devices for use in casinos
and other gaming establishments in the United States and worldwide. Our products
utilize multimedia technologies to present casino games that we believe will be
more engaging and entertaining than other gaming devices currently available.
Our games feature high-resolution video presented across the full surface of a
large touchscreen display. The touchscreen displays we use are larger and more
distinctive than those on competitive products, which has helped make our
platforms distinctive and easily recognizable within a casino environment. The
games themselves feature high-quality animation, video clips, digital sound and
a level of game attractiveness and interaction that we believe is unavailable
from and unachievable by current-generation slot machines. Unlike traditional
"hardware-dominant" slot machines, our products run games that are software
based, allowing us to offer casino operators the benefits of flexibility to
adapt their game offerings to evolving technologies and changing consumer tastes
without structural change to, or replacement of, the gaming platform.
GAMES AND OTHER SOFTWARE
While we believe that the design of our machines and our hardware
components are important to our operation and our ability to foster initial and
extended play, we believe that the most important factor affecting the success
of our platforms will be the games themselves and the software that controls
those games. The majority of our development efforts to date have been devoted
to hardware, system software and game development, and we expect that, in the
future, game development will be its principal development activity.
Our games have been designed to present traditional casino games with the
benefit of video and audio enhancements that are afforded by the use of high-end
multimedia hardware. While the underlying game may consist of a traditional
casino game such as poker, keno or a reel-based slot machine, the game itself is
only one aspect of the entertainment experience.
The development cycle for our games has been reduced significantly since
our initial introduction of games in 1997. We developed a standard "engine" for
each game type that we introduced such as video-reels, keno, poker, blackjack
and multi-line, multi-coin. In addition, for every game that is introduced we
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develop a number of different percentaging models that each have a different
hold percentage. The percentaging models are developed to meet jurisdictional
regulatory requirements, local market conditions and to offer flexibility to the
casino operators. The number of percentaging models vary by game type. For
example, ARABIAN RICHES, a reel-based game introduced during 1998, has 38
different percentaging variations and PHANTOM BELLE, a poker-based game, has 29
different percentaging variations. The choice of gaming platform can also affect
the development cycle for games; however, to date we have used a common gaming
platform for all of our hardware products. Development of a new game engine is a
lengthy process but one that can be leveraged and used on subsequent game
offerings. The ability to leverage existing game engines and percentaging models
allows us to develop new game themes and to introduce these new game titles much
faster than if we had to develop a brand new game engine with unique
percentaging requirements. This has been reflected in the increase in the number
of new game titles that we introduced in 1999 as compared to 1998.
All of our games embed an engaging and entertaining theme story to help
attract patrons to our machines. Some of the games developed and introduced
during 1999 include the following:
* EUREKA - This multi-line, multi-coin wagering experience takes players deep
inside a derelict coal mine on the way to hidden fortune. Featuring two
separate bonuses embedded in the basic 4 X 4 playing field, players can
follow a coal cart as it speeds its way into a long-sealed mine shaft on
their way to discovering riches. This game was named one of Casino
Journal's Top 20 Most Innovative Games of the Year in 1999.
* HOT REELS - A new game type developed and patented by us during 1999, Hot
Reels introduces the player-decision characteristics of video poker into a
3-reel traditional game set to an engaging auto racing theme. Players can
select or hold game symbols from one reel across all of the reels being
played (up to 5 reels simultaneously), and then re-spin for a second chance
at a match, increasing their opportunities to win.
* STRIKE-IT-RICH - A multi-line, multi-coin game based on the popular pastime
of 10-pin bowling, this game offers players an unusual twist; the
opportunity to actually bowl a bowling ball for cash. Incorporating a track
ball, when bonus time comes around, the player can use the track ball to go
bowling for dollars. Also named one of Casino Journal's Top 20 Most
Innovative Games of the Year in 1999, this game is sold and distributed on
our behalf by Anchor Gaming.
* BANANA-RAMA DELUXE- A multi-line, multi-coin version of our traditional
three-reel game BANANA RAMA, this game utilizes the same infectious jungle
rhythms and the on-screen antics of the game's two animated host monkeys,
Banana and Clyde. The characters interact with each other and with the
player and celebrate jackpots with the player. A bonus feature takes the
player to the Oyster Bar for a pick-till-you-win bonus game where players
can select up to twelve oysters and collect the awards lying inside each of
the oysters. The players continue doing this until the collect symbol
appears at which time they return to the game.
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* CASH CRUISE - This multi-line, multi-coin game set to a cruise ship theme
takes the player across the oceans to either of a tropical or artic
destination to see the sights and win some cash. Cash Cruise is a nickel
game that allows the player to wager up to 50 coins a play. This game
features two instant bonuses that hit with varying frequencies. Players
select one of a selection of different destinations and collect prizes
based upon the amount wagered and then return to the game.
We believe that the combination of our attractive machines, high-level
graphics and sound, bonusing features and the pursuit of an interesting and
entertaining story will make our products outperform conventional slot machines.
During the last few years, a number of our competitors have developed games
based upon well known licensed brands that the manufacturers have licensed from
the holders of the brands. This has helped in the "attract" stage of the
wagering experience in bringing customers to a machine as customers can readily
identify with these brands. Many of these games have been participation games,
and have been highly successful for both the casino operator and the slot
machine manufacturer. The ability to use licensed brands as themes for slot
games has to date been limited to the larger competitors in the slot machine
industry who have the necessary financial resources to acquire those brands.
Competition for well known and established brands has intensified, which has
increased the price that a manufacturer must pay to acquire the licensed brand.
We believe that opportunities exist for us to partner with one or several of the
larger casino operators to acquire licensed brands during 2000 that will allow
us to compete in this new, but growing segment of the gaming industry.
We believe that the physical appearance of our machines is more attractive
than conventional machines and will entice customers to play. In addition to the
physical attributes, our machines include a suite of video images that run when
the machine is not being played. These include short, animated vignettes from
our games and "help" screens, as well as a menu page identifying all of the
games available on that particular machine. Information regarding any game can
be viewed through the push of a "Help" button. These merchandising segments
feature the same quality of graphics, sound, video and animation that
distinguish all of our games.
In the initial play period, we believe it is necessary to quickly engage
the customer in the story line and to avoid any confusion, unfamiliarity or
negative experience that might cause the customer to discontinue play. For this
reason, many of our game offerings to date consist of enhanced versions of
traditional casino games, including reel-based slot games, so that the rules of
the game will be well known. We intend to present these games using enhanced
graphics and sound to enrich the play experience, but will not change the
fundamental characteristics or objective of the game. In addition, the machine
will offer traditional game controls for those players unfamiliar or
uncomfortable with the touchscreen interface.
We believe that the enhancement we have made to traditional casino games by
the addition of high level graphics, sound, animation and storyline will
encourage extended play, as well as more frequent play, and thereby generate
greater win per machine than the unenhanced versions of these games available in
conventional machines. A significant feature which we believe will contribute
significantly to extended play is the introduction of advanced play levels in
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which a player, by virtue of having played a certain amount of time or achieved
a certain number of jackpots at one level, gains access to a bonus sequence in
which larger jackpots become available.
We believe that the principal events that lead to completion of play
include the player's running out of money, running out of time or achieving a
targeted jackpot level. We believe that the unique features and entertainment
value of our games will entice players to remain in the extended play phase for
longer periods of time than are generally fostered by current generation slot
machines. Moreover, the design of our platform and games is intended to provide
an entertainment experience that will encourage repeated play.
In addition to features that are designed to enhance the entertainment
value of our machines and the ability to generate incremental revenue for the
casino, our platform incorporates proprietary features that are designed to
overcome certain hurdles that may be involved in the licensing of a slot machine
design, as well as to facilitate easy maintenance and supervision by casino
personnel. These features are as follows:
* RANDOM NUMBER GENERATOR. At the core of every gaming machine is a random
number generator that determines the outcome of every gaming proposition.
To eliminate what we believe are some of the impediments to randomness that
characterize random number generators, we engaged Dr. Evangelos A. Yfantis,
a recognized authority in the field of random number algorithms, to develop
a proprietary random number generator algorithm. We have filed and received
a U.S. patent with respect to our algorithm.
* SOFTWARE AUTHENTICATION. A critical element of all gaming machines is an
authentication mechanism to determine that the software being used is
identical to the software that has been approved by regulatory authorities
and is operating correctly. This is necessary to ensure that the game being
played corresponds exactly to that designed by the manufacturer and
approved by regulatory authorities. Traditional slot machines need to be
authenticated manually, a process usually performed only after a sizable
jackpot award. The infrequency of checks offer greater opportunities to
breach the security of traditional machines. We have developed a
proprietary authentication process that leverages the advanced capabilities
of our machine to verify the integrity of a game each time it is selected
for play. This process combines sophisticated authentication routines
developed by RSA Data Security, Inc. with a proprietary methodology
developed by us. Our authentication process provides continual checking of
the machine's software for both accidental corruptions and malicious
attempts to cheat the machine. Any detected anomalies will cause the
machine to signal the loss of integrity immediately. We filed for and
received patent protection for certain aspects of our authentication
methodology.
* MACHINE MANAGEMENT SYSTEM. Our Machine Management System is designed to
provide easy access to the configuration, accounting, and diagnostic
capabilities of the machine. The Machine Management System's accounting
functions are designed to provide a rapid, easy-to-interpret report of all
key machine metering data, as well as detailed accounting and statistics,
on a game-by-game basis. The Machine Management System uses the full
benefit of the machine's touchscreen to make installation and setup of the
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machine easier than traditional slot machines. The diagnostic programs
comprise a user-friendly maintenance and troubleshooting system that allows
casino floor personnel to quickly and effectively assess the cause of a
play stoppage or other malfunctions or to examine transaction history where
the validity of a jackpot or other transaction must be verified. For
example, if a player asserts that the machine has not given full credit for
a jackpot or has not properly recorded a cash input, a floor manager, using
the touchscreen and a key, can access comprehensive data to review
transaction and event history. With this information, the floor manager can
rapidly evaluate the merit of the player's claim and take appropriate
action. In this way, disputes can be quickly resolved at the machine's
location without the operator having to consult back office records or
review surveillance videotape.
PLATFORM, HARDWARE AND OTHER PHYSICAL ATTRIBUTES
Our gaming platforms so far have been designed to resemble a traditional
slot machine in many respects. Our machines occupy the same footprint as a
traditional slot machine and are of roughly the same general size and shape,
enabling casino operators to replace traditional slot machines with our machines
without any reconfiguration of the casino floor. The most distinctive attribute
of the upright products we have introduced so far are their vertically-oriented,
26-inch-diagonal touchscreen video monitor. A player's sense of interactivity is
heightened by the ability to make all the required decisions on the screen,
within the game itself. However, for players who are uncomfortable or unfamiliar
with touchscreen devices, all of the traditional slot machine controls have been
included as well. Thus, a player can control the game by using the touchscreen,
by pushing a series of buttons similar to those found on current slot or video
poker machines, or by pulling a handle as on traditional slot machines. Coin
handling mechanisms, bill acceptors, card readers and other devices related to
cash deposit, credit and win payout are similar to those used in current gaming
machines. The music, voice and other audible features of our games are played on
a digital sound system.
The products that we have introduced all share a common gaming platform.
The principal electronic hardware used in our gaming platform consists of
multimedia and personal computer ("PC") components. The central processing unit
is an Intel 200-MHz Pentium chip. This processor is accompanied by a variety of
video and auxiliary controllers, some of which have been developed exclusively
for use with our products. To achieve a high level of multimedia performance
from our system, our machines use 64 megabytes of random access memory. Storage
for the audio and visual media elements of the games, as well as the product
software itself, is provided by a high-density 4 gigabyte hard disk drive for
the multi-game machines and by a smaller 2-gigabyte hard disk drive for single
game machines. All of these components are connected internally by a high-speed
PCI bus. Our reliance on sophisticated full-motion video and high-quality audio
presentations requires the use of state-of-the-art technology, and we expect to
upgrade the performance of our platform periodically as higher-performance
components become available. Our machines are intended to be easily
reconfigurable in the field through the replacement of hardware components such
as computer motherboards and video and auxiliary controllers, allowing casino
operators to upgrade hardware in a cost-effective manner.
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Our gaming platforms employ modular construction at almost every level,
facilitating upgrades and minimizing machine down-time. Such modularity permits
the rapid exchange of components for upgrades or to replace defective parts.
Using our proprietary Machine Management System, casino personnel can run a
variety of diagnostic programs or review detailed performance data directly from
the gaming platform itself. In the case of a malfunctioning component, a casino
technician can quickly restore play simply by swapping out the failed component
with a new one. The modularity of our platform will also facilitate upgrades of
hardware components such as card readers and bill validators as new components
become available. We believe that these features may allow casino operators to
reduce platform down-time and shorten the time required to fix any malfunction,
thereby increasing the time the platform is available for play and reducing the
risk that a player will elect to terminate a gaming session as a result of play
stoppage.
Our gaming platforms are assembled almost entirely from off-the-shelf
hardware, which we anticipate will reduce the chance of a parts shortage and
will enable us to continue to manufacture our devices using state-of-the-art
components as PC and multimedia technologies advance. The different platforms
share many common components, making it easier for our games to be played on
different platforms and for customer technical staff to work on our different
product offerings. There can be no assurance, however, that we will continue to
use common components or enjoy a reliable supply of hardware components.
Moreover, certain components such as the touchscreen display and monitor are
manufactured by single sources and may be particularly susceptible to
interruptions in supply. Although we do develop proprietary components in order
to meet certain specialized requirements of our platform, we intend to primarily
use commercially available computer hardware components as a regular part of our
product development process.
Our machines were designed to accept future hardware upgrades to take
advantage of networking capabilities. When networked, two or more machines can
be linked, facilitating activities such as group play, tournaments and
progressives. For example, a particular group of platforms can be configured to
announce to players that a tournament will begin at a particular time and allow
each player the option to participate. Similarly, platforms can be configured so
that when one machine hits a jackpot, a player at another machine can win a
bonus award; the two affected platforms can then display a coordinated
audio/video simulation of a coin flying out of one tray and into the other. We
believe that features of this kind will promote interaction among players at
adjacent platforms and thereby maintain player interest for longer periods of
time. We introduced our first product into the Nevada market in December 1998,
THE BIG WIN, which incorporated this networking capability in a wide-area
progressive system. We anticipate introducing products into the market during
2000 that will incorporate group play and tournament capabilities.
We have incorporated numerous features into our gaming platform that are
designed both to attract the player and to maintain his or her interest over an
extended period of time. For example, our gaming platform can be programmed to
allow for a free spin following a specified number of unsuccessful attempts in
order to ensure a minimum level of reward to the player. Similarly, our machines
are capable of running promotional or entertainment video programs during play
stoppages such as those caused by a hopper refill, malfunction or request for
change. These features have been designed to reduce the likelihood that a player
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will leave the machine during a play stoppage event. These features may also
provide an additional revenue or promotional source to the operator by providing
a medium for commercial messages.
PRODUCT DEVELOPMENT
Our product development efforts, particularly our game development and
customization efforts, will be critical to our success in the gaming market.
Research and development (R&D) expenses have increased significantly since
inception. However, given the maturity of the game platform, the development
tools and the software code base, we anticipate higher levels of productivity
that will result in increased product output and an overall reduction in the
level of development expenses. Development efforts will also likely be focused
on new or custom game development during 2000. During the years ended December
31, 1999, 1998 and 1997, our research and development expenses were $4,410,000,
$11,853,000 and $9,283,000, respectively. The reductions in our headcount in
late 1998 and early 1999, driven by efforts to reduce costs in light of
continued losses, contributed to the lower levels of R&D expense during 1999. At
December 31, 1999, 23 of our 90 full-time employees were engaged in research and
development.
Ideas for new games are derived from customer preferences as perceived by
us or ascertained through our market research and direct feedback from slot
machine operators. The initial designs for our games are conceived by a design
team, which outlines the appearance and features of each game. A prototype is
developed by a production team that includes a producer, product manager,
artists, computer graphics engineers and entertainment software engineers. The
game is then evaluated by our marketing and sales staff, after which it is
modified into its final form. We estimate that the development of a typical game
takes approximately two to six months and costs approximately $150,000 to
$400,000.
We are seeking to develop a variety of specific games which management
believes will appeal to casino operators and their customers. Currently, we are
engaged in the development of games based on traditional slot machine games such
as animated reel slots and video poker, as well as developing our first brand
based products. We are also creating variations of the multi-coin, multi-line,
Australian type games, which have proved popular and successful in all of the US
gaming markets since 1998.
Some of the games currently under development include the following:
* HITSVILLE - The hits keep coming in this Motown inspired multi-line,
multi-coin game. Stylized characters and soulful sounds come together
in this nod to Barry Gordy's "hit factory." The game features two
unique bonuses and stunning graphics, making it a pleasure to play.
* KING PUTT - Golf and gambling have long gone together and now players
can test their skills in a true "putt for money" contest. This
five-reel, nine-line payout game brings high hit frequency and a
seemingly skill based bonus game incorporating the animated antics of
mini-golf with an entertaining wagering experience.
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* 3-REEL HOLDUP - This comic-book caper set to a 20's gangster theme,
complete with wise -cracking "tough guys," car chases, armored car
heists and a swinging soundtrack, is our second unique "multi-spin"
reel based game. Targeted to be a quarter denomination game, success
sees the lucky participant choosing a bag of loot from the back of an
armored truck.
* STOCK CARDS - This high-speed, single hand poker game has been set to
an auto racing theme and is designed to remind you how popular
traditional draw poker still is. Stock cards offers the added
challenge of accelerated play and experienced players can rev up the
proposition rate to keep pace with their thirst for action.
Completion of the games under development is subject to various risks and
uncertainties. Such games may be subject to further creative decisions that
could alter the game implementation or marketing considerations that could
result in a shift of our development focus to different types of games
altogether. Successful completion of any game will also be subject to risks
typically associated with the creative process, such as the risk that our
creative team will be unable to achieve the desired results in terms of the
game's entertainment quality.
The product development strategy to date has focused on enhancing
traditional gaming experiences by offering variations of existing casino-type
games. Familiarity with these game types attracts customers to these games. We
have also taken this strategy a step further by introducing games based on
familiar brands or activities, such as the EUREKA mining game. The next phase in
our product development strategy, which we commenced in 1999 is to introduce
completely new types of wagering experiences such as the multi-spin games
offered with HOT REELS or the interactive bowling in STRIKE IT RICH. We intend
to introduce new game types that reflect a broader kind of wagering experiences
during 2000.
Over time, we expect to introduce additional games that offer a wider range
of gaming experiences as players become more familiar with the capabilities of
advanced video gaming platforms. For example, we may introduce games that
utilize new digital camera technology to transform the player into the game
during a bonus event, to enable the player to "participate" in the game, rather
than merely being a spectator to a predetermined random outcome. We also
anticipate developing more of our games for progressive formats in which our
machines would be networked to support a common jackpot that is significantly
larger than that which a stand-alone machine could offer, or to support
additional networked features such as tournaments and peer-to-peer play.
As Internet technologies continue to evolve, we will continue to monitor
the changes in the legal environment surrounding on-line gaming. To the extent
that it will not jeopardize our existing gaming licenses, we will look at
leveraging our software content in the Internet domain, either through licensing
our content to third parties, developing or operating our own Internet gaming
site for cash or for prize, developing gaming sites for other third parties, or
any combination of the above. We believe that our software-based games would
translate easily into the Internet world, and we will continue to monitor the
evolution of this online gaming market.
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SALES AND MARKETING
The ultimate success of our games and gaming platforms depends on
acceptance by casino operators and casino patrons. We believe that, from the
point of view of casino operators, the attractiveness of any game or gaming
platform depends on win per machine, ease of upgrade, maintenance and game
change and information management. We believe that, from the casino patron's
perspective, the attractiveness of a platform is a function of entertainment
value and the perceived likelihood of the customer winning. Our sales and
marketing strategy is to generate product sales by highlighting the advantages
presented by our gaming platform to casino operators, such as potential for
increased win per machine; and by developing processes focused on key operator
values. Our marketing strategy also targets casino players and will focus on
developing brand recognition for our games, which we believe can be accomplished
through the development of proprietary games that deliver greater entertainment
value for the gaming dollar.
We intend to position ourselves as a partner with either casino operators
or other slot manufacturers in establishing the next generation of wagering
entertainment. We recognize that we are a small player in the gaming industry at
this point and that we may have to leverage the skills and experience of these
third parties to help in the development or deployment of new products. During
1999 we worked with Anchor Gaming to jointly develop and introduce a new game,
STRIKE-IT-RICH. Anchor is responsible for the sale and support of this product
that we manufacture.
Because our games are software-based, we believe that there will be a
significant opportunity for game customization and the development of games for
the exclusive use of one or more casino customers. It is already commonplace for
casinos to ask that conventional slot machines be customized with the casino's
logo or theme. We believe that we can significantly exceed this level of
customization by inserting the casino's logo or theme right in the game, by
presenting images of the casino's other games and amenities, or by creating a
new game entirely based on the casino's theme. We expect that we would charge
fees for any customization or development work that we perform for any other
parties. We announced in February 2000 that we had entered into a
joint-development agreement with a Nevada-based casino operator to develop a
licensed brand into an exclusive game for that operator. We expect to announce
more of these type of arrangements in the future as a way to help defray the
cost and risks of new game development and to facilitate distribution of our
products.
We currently sell products through a direct sales force that is based in
Nevada, Mississippi and the mid-west. We are planning to distribute product
through third parties including other slot machine manufacturers or casino
operators to help in the penetration of new markets without the need for
additional hiring. As at December 31, 1999, 19 of our 90 full-time employees
were engaged in sales and marketing.
The successful introduction of our product is subject to substantial risks
and uncertainties, including the risk of technical or manufacturing
difficulties, the possibility that our platform will not receive the anticipated
market acceptance and possible delays or hurdles associated with licensing of
our product in various jurisdictions.
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We are required to be licensed in each jurisdiction in which we expect to
sell product. As of December 31, 1999, we had received both corporate approval
and approval to sell our products in Colorado, Illinois, Indiana, Iowa, Nevada,
New Jersey, Missouri, Mississippi, and certain native American jurisdictions in
Connecticut, Louisiana, Michigan, Minnesota and New Mexico. See, also, "Gaming
Regulation and Licensing."
Although we plan to file applications in other jurisdictions, there can be
no assurance that we will be ready to file future applications or that any
licenses will be granted on a timely basis, or at all.
PRICING
We sell our products to casino operators and other potential purchasers
offering several pricing programs. For the ODYSSEY this consists of either (i)
the sale of the hardware unit bundled with a single game or a suite of games and
other software for a fixed price, or (ii) the sale of the hardware unit alone
combined with a renewable one-year software license, including access to the
entire game library for the term of the license. QUEST and the slant-top product
are sold as a bundled package of the hardware unit and a single game for a fixed
price.
Similar to several of our competitors, we also offer a revenue sharing plan
as an alternative to the above purchase pricing options. Under this plan, the
casino operator is not required to make an upfront capital investment; rather,
in exchange for placing the machines on the floor, the casino operator agrees to
share with us the aggregate win generated by the machines. Under this plan, we
receive 20% of the aggregate win, subject to a predetermined minimum. In certain
jurisdictions where this type of arrangement is not permitted, the operator
agrees to pay a fixed daily fee for the use of the machine. Our plan is unique
because we also offer the casino operator a buyout option at any point after the
90 day minimum evaluation period, something not currently offered in the
industry. Under the buyout option, the operator receives a credit towards the
purchase of the hardware and must purchase its choice of software at list price.
We believe that licensing revenue from game software may eventually constitute a
substantial portion of its revenue.
COMPETITION
The current slot machine market is highly competitive and is dominated by a
small number of manufacturers, many of which have significantly greater
financial and other resources than us. We believe that the principal competitive
factors in this market are the appeal of the machine to players, knowledge of
customer requirements and player preferences, price, ease of use, service,
support and training, distribution, and name and product recognition. The
principal competitors in the slot machine market are IGT and Williams
Industries. IGT may be viewed as a dominant competitor, with a 1999 market share
estimated at 70%; William Industries 1999 market share is estimated at 15%.
Additional competitors or potential competitors include Bally/Alliance Gaming,
Inc., Anchor Gaming, Inc., Aristocrat Leisure Industries, Universal
Distributing, Sigma Games, Casino Data Systems, Mikohn Systems, Inc. and Acres
Gaming Inc. There can be no assurance that other companies in the video game or
multimedia market will not successfully enter the market for video slot
machines, nor can there be any assurance that the manufacturers of traditional
slot machines will not develop products that are superior to, or that achieve
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greater market acceptance than, our products. A number of our larger customers
who operate multiple casinos have also indicated that they may become involved
in the design, development and manufacture of slot machines, although to date
few have actually done so. In general, our existing competitors, as well as many
potential new competitors, have significantly greater financial and technical
resources than we do, as well as more established customer bases and
distribution channels, any of which could afford them a competitive advantage.
If any of our products or specific game titles display potential to capture a
significant share of the gaming machine market, our competitors can be expected
to employ a variety of tactics to limit erosion of their market shares,
including price reductions, acceleration of technical development or acquisition
of new, competitive technologies. Any success we might have may benefit existing
competitors and induce new competitors to enter the market. There can be no
assurance that we will be a successful competitor in the gaming machine
industry.
PROPRIETARY RIGHTS AND LICENSES
Our computer programs and technical know-how are both novel and
proprietary, and management believes that they can best be protected by use of
technical devices to protect the computer programs and by enforcement of
contracts and covenants not to compete with certain employees and others with
respect to the use of our proprietary information and trade secrets. We have
registered copyrights with respect to various aspects of our games, and have
filed several U.S. patent applications for protection of certain technology we
have created or licensed. These patent applications cover various aspects of the
gaming machine hardware and software. Although we have received certain patents
and trademarks with respect to our intellectual property, no assurance can be
given that the remaining pending applications will be granted, nor can there be
any assurance that the patents will not be infringed or that others will not
develop technology that does not violate such patents.
We have developed a proprietary method of authentication for disk
drive-based gaming machines, for which we have submitted for a patent
application. Since modern gaming technology requires the handling and processing
of large amounts of on-line data, establishing a method for storing and
retrieving data that meets the approval requirements of the regulatory
authorities while meeting adequate standards of internal performance requires
use of a comprehensive authentication system to assure both the casino operator
and requisite gaming authorities that the software is an exact copy of what was
generated and approved by such gaming authorities.
In addition, we own exclusive rights to the algorithm for our random number
generator, the key component of our gaming machine that determines the outcome
of each proposition. Our algorithm, which may have uses outside the gaming
industry, was developed by Dr. Evangelos A. Yfantis, a professor of Computer
Science at the University of Nevada, Las Vegas.
In developing our games, we rely on certain software that we licenses from
Duck Corporation on a nonexclusive basis. This license may be terminated by Duck
Corporation only in the event of a material breach of its terms by us or in the
event of a bankruptcy petition with respect to us. We believe that alternative
products exist that accomplish the same functionality as that licensed from
Duck.
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EMPLOYEES
As of December 31, 1999, we had 90 full-time employees, including 23 in
research and development. We also retain independent contractors to provide
certain services, primarily in connection with product development activities.
Our full-time employees are not subject to any collective bargaining agreements
and we believe that our relations with our employees are good. From time to time
we have retained actors and/or "voice over" talent to perform in certain of our
games and expect to continue this practice in the future. Our future success
depends in large part on our ability to attract and retain management and other
key personnel.
MANUFACTURING
Our manufacturing process consists primarily of assembly of components
obtained from third-party suppliers and testing of software systems and
applications. This activity now takes place at our Las Vegas, Nevada facility.
As we have introduced new product platforms, we have increased our use of
subcontractors and third party vendors to supply completed sub-assemblies and
components, which has decreased the need for direct manufacturing labor. As of
December 31, 1999, we had 30 full-time employees engaged in manufacturing and
support-related activities.
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.
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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), a majority of the outstanding holders 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 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;
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(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 WARRANTS. The Series E Warrants issued to B III are not
immediately exercisable upon issuance. The number Series E Warrants that are
exercisable is based on the number of Exchange Offer Warrants actually exercised
as a percentage of the number of Exchange Offer Warrants issued. 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.
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
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), a majority of the outstanding holders of the
Series E Preferred Stock may require the company to redeem the shares. No
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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.
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These restrictions could delay, defer, or prevent a change in control.
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, it 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.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In general, shareholders will recognize no gain or loss for federal income
tax purposes as a result of the receipt of the Exchange Warrants, or upon
exercise of the Exchange Warrants. However, upon sale of the shares of common
stock received from the exercise of the Exchange Warrants, shareholders might
recognize a gain or a loss for federal income tax purposes as a result of the
disposition of those shares. You should consult your tax advisor for information
concerning the tax effects of your participation in the Exchange Offer.
46
<PAGE>
FINANCIAL STATEMENTS
The following financial statements of the Company are set forth below:
* Consolidated Balance Sheets --- December 31, 1999 and December 31, 1998
* Consolidated Statements of Operations --- Fiscal years ended December 31,
1999, December 31, 1998 and December 31, 1997.
* Consolidated Statements of Cash Flows --- Fiscal years ended December 31,
1999, December 31, 1998 and December 31, 1997.
* Notes to Consolidated Financial Statements.
47
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Silicon Gaming, Inc.:
We have audited the accompanying consolidated balance sheets of Silicon Gaming,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity (deficiency) and
cash flows for each of the three years in the period ended December 31, 1999.
Our audits also included the consolidated financial statement schedule listed in
Item 14(a)2. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Silicon Gaming, Inc. and
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the years in the period ended December 31, 1999
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations and shareholders' deficiency raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Deloitte & Touche LLP
San Jose, California
February 15, 2000
(March 22, 2000
as to Note 11)
48
<PAGE>
SILICON GAMING, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31
--------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents ....................................................... $ 877 $ 8,399
Short-term investments ..................................................... 1,000 --
Accounts receivable (net of allowances of $1,169 in 1999 and $1,650 in 1998) 1,188 5,340
Inventories ................................................................ 7,331 12,024
Prepaids and other ......................................................... 1,069 1,698
-------- --------
Total current assets .................................................. 11,465 27,461
PROPERTY AND EQUIPMENT, NET .................................................. 3,795 12,922
OTHER ASSETS, NET ............................................................ 321 1,361
-------- --------
$ 15,581 $ 41,744
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable ........................................................... $ 1,389 $ 1,480
Accrued liabilities ........................................................ 1,655 8,154
Deferred revenue ........................................................... 240 1,766
Line of credit ............................................................. 622 4,000
Current portion of long-term obligations ................................... 1,165 1,289
-------- --------
Total current liabilities ............................................. 5,071 16,689
OTHER LONG-TERM LIABILITIES .................................................. 1,611 2,032
LONG-TERM OBLIGATIONS ........................................................ 10,428 39,809
LONG-TERM ACCRUED INTEREST ................................................... 5,832 --
REDEEMABLE CONVERTIBLE PREFERRED STOCK--
shares outstanding: December 31, 1999--0; December 31, 1998--1,474,641 ..... -- 1,666
SHAREHOLDERS' DEFICIENCY:
Preferred Stock, $.001 par value; 6,884,473 shares authorized; 39750
shares outstanding at December 31, 1999; (liquidation preference up
to $39.75 million) ....................................................... 20,000 --
Common Stock, $.001 par value; 750,000,000 shares authorized; shares
outstanding: December 31, 1999--30,949,273; December 31, 1998--
14,242,313 ............................................................... 64,123 57,398
Warrants ................................................................... 5,542 4,548
Notes receivable from shareholders ......................................... (345) (128)
Deferred stock compensation ................................................ (4,646) --
Accumulated deficit ........................................................ (92,035) (80,270)
Accumulated other comprehensive income ..................................... -- --
-------- --------
Total shareholders' equity (deficiency) ............................... (7,361) (18,452)
-------- --------
$ 15,581 $ 41,744
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
49
<PAGE>
SILICON GAMING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
REVENUE:
Hardware ................................. $ 10,370 $ 14,126 $ 7,636
Software ................................. 4,288 4,657 567
Participation ............................ 2,457 3,498 1,347
-------- -------- --------
Total revenue ............................ 17,115 22,281 9,550
OPERATING EXPENSES:
Cost of sales and related
manufacturing expenses ................ 13,213 24,062 10,421
Research and development ................. 4,410 11,853 9,283
Selling, general and
administrative ........................ 12,651 18,375 12,830
Restructuring ............................ 3,277 -- --
-------- -------- --------
Total costs and expenses ................. 33,551 54,290 32,534
-------- -------- --------
Loss from operations ................ 16,436 32,009 22,984
Interest income .......................... (99) (618) (1,238)
Interest expense ...................... 7,241 6,261 1,240
Other expense, net .................... 503 18 --
-------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEMS ............ 24,081 37,670 22,986
Extraordinary gain upon conversion of
debt (Note 7) ......................... (12,316) -- --
======== ======== ========
NET LOSS ................................... $ 11,765 $ 37,670 $ 22,986
======== ======== ========
BASIC AND DILUTED NET LOSS PER SHARE:
Loss before extraordinary items .......... $ 1.42 $ 2.75 $ 2.16
======== ======== ========
Net loss ................................. $ 0.70 $ 2.75 $ 2.16
======== ======== ========
SHARES USED IN COMPUTATION ................. 16,906 13,696 10,666
======== ======== ========
See Notes to Consolidated Financial Statements.
50
<PAGE>
SILICON GAMING, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY )
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Notes
Common Stock Preferred Stock Receivable
------------------- ---------------------- From
Shares Amount Shares Amount Warrants Shareholders
------- -------- ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1997 10,608,105 49,848 25 (221)
Options exercised for cash 49,083 200
Collection of notes receivable 14
Employee stock purchase plan issuances 99,894 696
Repurchase of Common Stock (17,377) (3)
Conversion of Series A1 Redeemable Preferred Stock 1,219,032 1,371
Conversion of Series B1 Redeemable Preferred Stock 1,191,000 2,019
Warrants issued in conjunction with Senior Notes 3,082
Other comprehensive income (loss)
Net loss & comprehensive net loss
------- -------- ---------- -------- -------- -------
BALANCES, December 31, 1997 13,149,737 $ 54,131 $ 3,107 $ (207)
Options exercised for cash 97,400 217
Collection of notes receivable 75
Employee stock purchase plan issuances 151,808 935
Repurchase of Common Stock (54,130) (6) 4
Net exercise of warrants 34,309 25 (25)
Conversion of Series A1 Redeemable Preferred Stock 113,189 128
Conversion of Series B1 Redeemable Preferred Stock 750,000 1,271
Warrants issued in conjunction with Senior Notes 1,466
Stock compensation arrangements 697
Net loss
Other comprehensive income(loss)
Comprehensive loss
------- -------- ---------- -------- -------- -------
BALANCES, December 31, 1998 14,242,313 $ 57,398 $ 4,548 $ (128)
Debt restructuring transactions:
Conversion of Series B1 Preferred Stock 983,093 468
Issuance of preferred stock 39,750 20,000
Issuance of warrants 994
Options exercised for cash and notes receivable 15,722,830 6,202 (235)
Amortization of deferred stock compensation
Collection of notes receivable 11
Employee stock purchase plan issuances 48,815 62
Repurchase of Common Stock (47,778) (7) 7
Net loss and comprehensive loss
------- -------- ---------- -------- -------- -------
BALANCES, December 31, 1999 39,750 $ 20,000 30,949,273 $ 64,123 $ 5,542 $ (345)
======= ======== ========== ======== ======== =======
Accumulated
Deferred Other
Stock Accumulated Comprehensive
Compensation Deficit Income Total
-------- --------- ---- ---------
BALANCES, January 1, 1997 -- (19,614) 23 30,061
Options exercised for cash 200
Collection of notes receivable 14
Employee stock purchase plan issuances 696
Repurchase of Common Stock (3)
Conversion of Series A1 Redeemable Preferred Stock 1,371
Conversion of Series B1 Redeemable Preferred Stock 2,019
Warrants issued in conjunction with Senior Notes 3,082
Other comprehensive income (loss) (22)
Net loss & comprehensive net loss (22,986) (23,008)
-------- --------- ---- ---------
BALANCES, December 31, 1997 $ -- $ (42,600) $ 1 $ 14,432
Options exercised for cash 217
Collection of notes receivable 75
Employee stock purchase plan issuances 935
Repurchase of Common Stock (2)
Net exercise of warrants --
Conversion of Series A1 Redeemable Preferred Stock 128
Conversion of Series B1 Redeemable Preferred Stock 1,271
Warrants issued in conjunction with Senior Notes 1,466
Stock compensation arrangements 697
Net loss (37,670)
Other comprehensive income(loss) (1)
Comprehensive loss (37,671)
-------- --------- ---- ---------
BALANCES, December 31, 1998 $ -- $ (80,270) $ -- $ (18,452)
Debt restructuring transactions:
Conversion of Series B1 Preferred Stock 468
Issuance of preferred stock 20,000
Issuance of warrants 994
Options exercised for cash and notes receivable (5,807) 160
Amortization of deferred stock compensation 1,161 1,161
Collection of notes receivable 11
Employee stock purchase plan issuances 62
Repurchase of Common Stock --
Net loss and comprehensive loss (11,765) (11,765)
-------- --------- ---- ---------
BALANCES, December 31, 1999 $ (4,646) $ (92,035) $ -- $ (7,361)
======== ========= ==== =========
</TABLE>
See Notes to Consolidated Financial Statements.
51
<PAGE>
SILICON GAMING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................... $(11,765) $(37,670) $(22,986)
Reconciliation to net cash used in operating activities:
Gain on debt conversion .............................. (12,316) -- --
Depreciation and amortization ........................ 4,775 4,700 2,623
Accrued interest ..................................... 4,405 3,594 672
Accretion of debt discount ........................... 2,206 1,905 359
Deferred rent ........................................ (98) 213 202
Restructuring expenses ............................... 3,277 -- --
Stock compensation ................................... 1,161 697 --
Loss (gain) on disposal of property .................. 131 (35) --
Changes in assets and liabilities:
Accounts receivable ................................ 4,152 (410) (4,930)
Inventory .......................................... 4,693 (5,689) (5,858)
Prepaids and other ................................. (146) (64) (133)
Participation units ................................ 2,252 (361) (5,325)
Accounts payable ................................... (591) (1,671) 1,993
Deferred revenue ................................... (1,526) 288 1,478
Accrued and other liabilities ...................... (4,446) 2,389 1,996
-------- -------- --------
Net cash used in operating activities ............ (3,836) (32,110) (29,909)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment .................. (397) (3,271) (7,817)
Proceeds from sale of assets ........................... -- 127 --
Purchases of short-term investments .................... (1,000) -- (6,725)
Sales and maturities of short-term investments ....... -- 4,704 11,681
Other assets, net .................................... 288 (315) (216)
-------- -------- --------
Net cash provided by (used in) investing activities .. (1,109) 1,245 (3,077)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt financing and issuance of warrants,
net of costs ......................................... 2,000 14,950 23,055
Sale of Common Stock, net .............................. 80 1,146 893
Collection of note receivable .......................... 11 79 14
Proceeds from notes payable ............................ -- 3,586 --
Repayment of notes payable ............................. (985) (564) --
Proceeds (repayment) from line of credit ............... (3,378) 4,000 --
Repayment of capital lease obligation .................. (305) (285) (207)
-------- -------- --------
Net cash provided by (used in) financing activities .... (2,577) 22,912 23,755
-------- -------- --------
NET DECREASE IN CASH AND EQUIVALENTS ..................... (7,522) (7,953) (9,231)
CASH AND EQUIVALENTS:
Beginning of period .................................... 8,399 16,352 25,583
-------- -------- --------
End of period .......................................... $ 877 $ 8,399 $ 16,352
======== ======== ========
SUPPLEMENTARY DISCLOSURES OF CASH
FLOW INFORMATION--
Cash paid during the period for interest ............... $ 602 $ 360 $ 106
======== ======== ========
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of Common Stock for notes receivable .......... $ 235 $ -- $ --
======== ======== ========
Issuance of Common Stock warrants ...................... $ 994 $ 1,466 $ 3,082
======== ======== ========
Conversion of Preferred Stock to Common Stock .......... $ 468 $ 1,399 $ 3,390
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
52
<PAGE>
SILICON GAMING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--Silicon Gaming, Inc. (the "Company") was incorporated on July 27,
1993 to develop and market innovative gaming devices through the use of advanced
multimedia and interactive technologies.
BASIS OF PRESENTATION - The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern.
The Company has incurred operating losses every year since its inception and at
December 31, 1999 had an accumulated deficit of $92,035,000 and a shareholders'
deficiency of $7,361,000. The Company has been required to obtain additional
financing every year to be able to fund its ongoing operations. Based on
historical levels of cash usage, the above factors raise substantial doubt about
the Company's ability to continue as a going concern. In the fourth quarter of
1999 the Company completed a substantial restructuring of its capitalization
whereby $39.75 million of Senior Discount Notes and approximately $8.3 million
of accrued interest were converted into Preferred Stock, and the remaining terms
of the Senior Discount Notes were modified to reduce the interest rate thereon
and extend the payment terms. Concurrent with the restructuring, the Company
borrowed $2 million under new Senior Discount Notes and established a facility
whereby up to an additional $3 million of new Senior Discount Notes may be
issued upon meeting certain financial and operational milestones. Management
continues to review financing and other strategic alternatives available to the
Company such as additional equity or debt offerings in the Company or certain of
its subsidiaries, joint ventures, alternative distribution channels, direct
investment by third parties into several of the Company's strategic business
opportunities and sale of all or part of the Company's assets to improve the
Company's liquidity position. Management believes that these steps, plus sales
related to proposed new product introductions, will provide sufficient cash and
working capital for the Company to meet its ongoing obligations and to allow it
to continue operating as a going concern through at least the end of 2000. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
CONSOLIDATION--The consolidated financial statements include the Company
and its wholly-owned subsidiaries after elimination of intercompany accounts and
transactions.
ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS--The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
SHORT-TERM INVESTMENTS - Short-term investments represent debt securities
which are stated at fair value. To the extent there is a difference between
amortized cost (cost adjusted for amortization of premiums and accretion of
53
<PAGE>
discounts which are recognized as adjustments to interest income) and fair value
representing the unrealized holding gains or losses, these will be recorded as a
separate component of shareholders' equity until realized. While the Company's
intent is to hold debt securities to maturity, they are classified as
available-for-sale securities because the sale of such securities my be required
prior to maturity. Any gains or losses on the sale of debt securities are
determined on a specific identification basis.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The estimated fair value of the
Company's financial instruments, which include cash equivalents and short-term
investments approximate their carrying value. The fair value of the Company's
Senior Discount Notes may be lower than the recorded value but the Company is
unable to estimate the fair value at this time.
INVENTORIES--Inventories consist of raw materials, work-in-process and
finished goods and are stated at the lower of cost or market on a first-in,
first-out basis.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
estimated useful lives between eighteen months and seven years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the asset's useful life. The Company places gaming machines
and related equipment in customer locations on its participation program and
receives a portion of the net win from each machine. Depreciation of units under
such arrangements is the greater of the ratio that current gross revenue bears
to total anticipated revenue for such unit or straight-line over three years.
Ancillary gaming equipment such as signs and chairs are depreciated over an
eighteen-month period.
REVENUE RECOGNITION--Revenue from hardware units and non-renewable software
licenses is recognized upon acceptance by the customer after completion of a
trial period, if applicable, or otherwise upon shipment of the unit. Renewable
software licenses are recognized ratably over the license period. Amounts due
the Company under revenue participation plans with its customers are recognized
ratably based on the Company's share of gaming machine play.
CONCENTRATION OF CREDIT RISK-- Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of cash
equivalents, short-term investments and trade accounts receivable. The Company
performs ongoing credit evaluations of its customers' financial condition and
limits the amount of credit extended when deemed necessary but generally
requires no collateral. The Company maintains reserves for estimated potential
credit losses. At December 31, 1999, one customer accounted for 19% of accounts
receivable. A significant portion of the Company's revenues are concentrated
with a small number of strategic customers. For the year ended December 31, 1999
one customer accounted for 16% of revenue and the Company's top 10 customers
represented 52% of revenue. For the year ended December 31, 1998, two customers
accounted for 11% and 10% of revenue and the Company's top 10 customers
represented 67% of revenue. In 1997 three different customers accounted for 27%,
12% and 12% of revenue.
RESEARCH AND DEVELOPMENT EXPENSES--Research and development expenses are
charged to operations as incurred. In connection with the Company's product
development efforts, it develops software applications which are integral to the
54
<PAGE>
operation of the product. The costs to develop such software have not been
capitalized as the Company believes its current software development process is
essentially completed concurrent with the establishment of technological
feasibility and/or development of the related hardware.
INCOME TAXES--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, which requires an asset and liability approach for financial reporting of
income taxes.
STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25
Accounting for Stock Issued to Employees ("APB 25"). The Company adopted the
disclosure requirements of Statement of Financial Accounting Standards No.123,
Accounting for Stock-Based Compensation, ("SFAS 123"), which require the
disclosure of pro forma net income and earnings per share as if the Company
adopted the fair value-based method in measuring compensation expense as of the
beginning of fiscal 1995.
NET LOSS PER SHARE--Basic EPS excludes dilution and is computed by dividing
net income by the weighted average of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that would occur if securities or
other contracts to issue Common Stock were exercised or converted into Common
Stock. Common share equivalents including stock options, warrants and Preferred
Stock have been excluded for all periods presented, as their effect would be
antidilutive.
The following is a reconciliation of the numerators and denominators of the
basic and diluted net loss per share computations:
Year Ended December 31,
---------------------------
(In thousands except per share amounts) 1998 1998 1997
------- ------- -------
Net Loss (Numerator):
Net loss, basic and diluted ................. $11,765 $37,670 $22,986
======= ======= =======
Shares (Denominator):
Weighted average common shares outstanding .. 16,965 14,047 11,418
Weighted average common shares outstanding
subject to repurchase ..................... 59 351 752
------- ------- -------
Shares used in computation, basic and diluted 16,906 13,696 10,666
======= ======= =======
Net Loss Per Share, Basic and Diluted ....... $ 0.70 $ 2.75 $ 2.16
======= ======= =======
SEGMENT DISCLOSURES - Effective January 1, 1999 the Company adopted SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information".
The Company organizes and manages its products and services as a single product
family, and accordingly, the required disclosures under SFAS No. 131 regarding
the Company's products and services are made to the face of the financial
statements. The adoption of SFAS No. 131 had no effect on the financial position
of the Company.
55
<PAGE>
RECLASSIFICATIONS-- Certain prior year amounts have been reclassified to
conform to the current year presentation.
2. SHORT-TERM INVESTMENTS
Short-term investments consist of the following debt securities as of December
31, 1999:
<TABLE>
<CAPTION>
Amortized Market Unrealized Unrealized
(In thousands) Cost Value Holding Gains Holding Losses
-------------- ---- ----- ------------- --------------
<S> <C> <C> <C> <C>
Available-for-sale corporate securities $1,000 $1,000 $ -- $ --
====== ====== ===== =====
</TABLE>
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following :
December 31,
------------------------
(In thousands) 1999 1998
-------------- ------- -------
Raw materials ...................... $ 849 $ 4,294
Work in process .................... 111 93
Finished goods ..................... 6,371 7,637
------- -------
$ 7,331 $12,024
======= =======
Finished goods includes units on trial of $ 2,397 and $ 3,462 at December
31, 1999 and 1998, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of:
December 31
--------------------
(In thousands) 1999 1998
-------------- -------- --------
Furniture, fixtures and office equipment ..... $ 453 $ 1,586
Computer equipment ........................... 6,876 9,292
Manufacturing equipment ...................... 69 1,954
Gaming machines & equipment .................. 3,125 6,230
Leasehold improvements ....................... 737 1,445
-------- --------
11,260 20,507
Accumulated depreciation and amortization .... (7,465) (7,585)
-------- --------
$ 3,795 $ 12,922
======== ========
Included in property and equipment at December 31, 1999 and 1998 are assets
leased under capital leases of $1,000,000 net of accumulated depreciation of
$1,000,000 and $792,000 as of December 31, 1999 and 1998, respectively.
56
<PAGE>
5. ACCRUED LIABILITIES AND RESTRUCTURING ACCRUAL
Accrued liabilities consists of:
December 31,
-------------------
(In thousands) 1999 1998
-------------- ------ ------
Accrued compensation benefits .............. $ 363 $ 958
Accrued purchase arrangements .............. 160 1,100
Accrued royalties .......................... 60 1,811
Accrued tax obligations .................... 550 --
Accrued interest expense ................... 20 2,782
Other accrued liabilities .................. 502 1,503
------ ------
$1,655 $8,154
====== ======
In March 1999 the Company announced the closure of its Mountain View,
California manufacturing facility and the relocation of all of its manufacturing
operations to its Las Vegas, Nevada facility. At the same time the Company
announced a reduction in size of its employee workforce by approximately 35%.
The Company recorded restructuring charges of $3,312,000 in the three-month
period ended March 31, 1999. The restructuring charges include severance costs,
lease related costs of excess facilities and the write down of specific fixed
assets associated with these facilities and assets rendered surplus as a result
of the reduction in force. Details of the restructuring charges are as follows
(in thousands):
<TABLE>
<CAPTION>
Accrued
severance, Facility Write down
benefits & lease Of
Other Costs Obligations Fixed Assets Total
------- ------- ------- -------
<S> <C> <C> <C> <C>
Restructuring provision ...... $ 595 $ 293 $ 2,424 $ 3,312
Adjustment to amounts recorded -- (35) -- (35)
Non-cash items ............... -- -- (2,424) (2,424)
Amounts paid ................. (595) (258) -- (853)
------- ------- ------- -------
Balance at September 30, 1999 $ -- $ -- $ -- $ --
======= ======= ======= =======
</TABLE>
Termination benefits were paid to 55 employees and all benefits were paid
prior to May 31, 1999. The Company completed all remaining restructuring
activities, including disposal of assets, before the end of 1999.
6. LEASES
The Company leases its facilities under noncancellable operating lease
agreements. The accompanying statements of operations reflect rent expense on a
straight-line basis over the term of the leases. The difference between
straight-line rent expense and actual cash payments is recorded as deferred
rent.
57
<PAGE>
Future minimum operating commitments at December 31, 1999 are as follows:
OPERATING
LEASES
------
(In thousands)
2000 ................................................ $1,059
2001 ................................................ 961
2002 ................................................ 926
2003 ................................................ 567
2004 ................................................ 549
Thereafter .......................................... 566
------
Total minimum lease payments ........................ $4,628
======
During 1999 the Company entered into a sublease with respect to a portion
of its Palo Alto facility. Pursuant to this agreement, which expires in 2005,
the Company will receive sublease income approximating $3,912,000.
Rent expense (including prorated common area maintenance charges and
utilities) for the years ended December 31, 1999, 1998 and 1997 was $859,000,
$1,310,000 and $975,000, respectively. The 1999 rent expense was net of sublease
income received of $279,000.
7. LONG-TERM BORROWING OBLIGATIONS
The Company had a $4 million secured revolving line of credit agreement
based on the Company's eligible accounts receivable, which expired on December
31, 1999. As of December 31, 1999 the Company had $622,000 outstanding under
this agreement. As of December 31, 1999 the Company was not in compliance with
the minimum net worth covenants of the agreement, however the Company
subsequently repaid all outstanding balances under this agreement in February
2000.
Borrowing arrangements consist of the following (in thousands):
December 31,
--------------------
1999 1998
-------- --------
Senior Discount Notes ($9.5 million and $47.25
million principal obligation, respectively) ..... $ 9,500 $ 37,716
Capital lease obligations ......................... 55 360
Other long-term obligations ....................... 2,038 3,022
-------- --------
11,593 41,098
Current obligation ................................ (1,165) (1,289)
-------- --------
Long-term portion ................................. $ 10,428 $ 39,809
======== ========
58
<PAGE>
Future minimum debt commitments at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Senior Other Long
Discount Capital Term
Notes Leases Obligations Total Debt
-------- -------- -------- --------
(In thousands):
<S> <C> <C> <C> <C>
2000 .......................................... $ 1,037 $ 56 $ 1,315 $ 2,408
2001 .......................................... 1,063 -- 788 1,851
2002 .......................................... 1,072 -- 230 1,302
2003 .......................................... 1,082 -- -- 1,082
2004 .......................................... 10,887 -- -- 10,887
Thereafter .................................... -- -- -- --
-------- -------- -------- --------
Total minimum payments ..................... 15,141 56 2,333 17,530
Amount representing interest or future discount (5,641) (1) (295) (5,937)
-------- -------- -------- --------
Present value of debt payments ................ 9,500 55 2,038 11,593
Current portion ............................... -- 55 1,110 1,165
-------- -------- -------- --------
Long-term portion ............................. $ 9,500 $ -- $ 928 $ 10,428
======== ======== ======== ========
</TABLE>
In November 1999 the Company completed a restructuring of its then
outstanding Senior Discount Notes whereby $39.75 million of principal plus
approximately $8.3 million of accrued interest was exchanged for 39,750 shares
of Series D Preferred Stock (see Note 8) which is convertible into 57% of the
fully diluted equity of the Company and warrants to purchase up to 60,807.7
shares of Series E Preferred Stock at $0.01 per share. The terms of the
remaining $7.5 million of Senior Discount Notes were modified to reduce the
interest rate from 12.5% to 10% per annum (effective July 15, 1999) and to
provide for interest to be payable in-kind through the issuance of additional
notes at the Company's option and subject to certain coverage ratio tests. The
maturity date of the remaining notes was extended to November 2004. Accrued and
unpaid interest on the $7.5 million of notes remaining outstanding following the
restructuring was forgiven through July 15, 1999.
As a part of the debt restructuring, the holders of the Senior Discount
Notes agreed to make an additional investment in the Company of up to $5 million
in the form of senior secured notes (the New Notes). The New Notes are not
convertible and bear cash interest at the rate of 10% per annum and in-kind
interest at the rate of 3% per annum. The New Notes mature in five years and are
issuable in tranches. The first $2 million was issued at the closing of the
restructuring on November 24, 1999. To the extent, required by the Company, the
additional $3 million of New Notes will be issued upon the achievement of
certain financial and operating milestones, as determined by the holders of the
Notes.
Also, as part of the debt restructuring, the Company entered into certain
other equity transactions: Holders of the outstanding Series B1 Redeemable
Preferred Stock were required to convert their shares into Common Stock. Holders
of outstanding shares of Common Stock (subject to the increase in authorized
common stock which was approved by the shareholders in February 2000) are to be
granted warrants to purchase additional shares of Common Stock for $0.1528 per
share, at a rate of 3.59662 additional shares for each share of Common Stock
held as of November 24, 1999 (54.9 million additional shares in total). See
additional information regarding these equity securities in Notes 8 and 9.
59
<PAGE>
In accordance with Statement of Financial Accounting Standard No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructuring", the gain
on cancellation of debt that reflects these related equity transactions was
reduced to reflect all future cash payments due to the holders of the Senior
Discount Notes, as well as, future interest payments on these Notes and
estimated amounts under the New Notes. All such future interest payments have
been recorded as a liability as of the date of the Company's debt restructuring
and are shown as Long-Term Accrued Interest on the accompanying balance sheet.
As a result, in the future the Company will not record interest expense on its
Senior Discount Notes.
The components of the gain on conversion of debt consist of:
(In thousands)
Carrying value of debt and related accrued interest $39,098
Fair value of Series D Preferred Stock and Series E
Preferred Stock warrants issued (20,000)
Future expected interest on modified debt and New Notes (5,832)
Gain on conversion of preferred stock to common stock 1,198
Fair value of warrants issued to common stockholders (994)
Legal and other costs of restructuring (1,154)
-------
Net gain $12,316
=======
In June 1998, the Company entered into a secured equipment loan. Borrowings
bear interest at 14% per annum for a term of 42 months. As of December 31, 1999,
the Company had borrowed $1,562,000 under this agreement. The agreement requires
the Company to comply with certain financial covenants, with which the Company
was in compliance as of December 31, 1999.
In March 1998, the Company entered into a secured equipment term.
Borrowings bear interest at 11% per annum for a term of 36 months. As of
December 31, 1999 the Company had borrowed $1,698,000 under this agreement. The
agreement requires the Company to comply with certain financial covenants, with
which the Company was not in compliance as of December 31, 1999.
8. PREFERRED STOCK
At December 31, 1999, the Company had 39,750 shares of Series D Preferred
Stock and warrants to purchase up to 60,807.731 shares of Series E Preferred
Stock outstanding. In connection with the increase in authorized shares of
Common Stock approved by the shareholders in February 2000, the terms of the
preferred stock was amended. The significant terms of the Series D and E
Preferred Stock, as amended, are as follows:
* Each share of Series D Preferred Stock is convertible into 4,384.53 shares
of Common Stock (subject to adjustment for anti-dilution) and each share of
Series E Preferred Stock is convertible into 1,000 shares of Common Stock
(subject to adjustment for anti-dilution).
* The holders of the Series D and E Preferred Stock will have the right to
vote the number of shares of Common Stock into which all of such holder's
shares are convertible, 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 held by such holder
60
<PAGE>
* Dividends may be paid at the discretion of the Board of Directors, however,
cash dividends must be paid in an amount equal to the as-converted rate
based on any cash dividends paid on common stock.
* In the event of liquidation, the holders of the Series D are first entitled
to receive varying amounts based upon the aggregate transaction proceeds.
If such proceeds are less than $20 million, the Series D holders are
entitled to 100% of the proceeds. If such transaction proceeds exceed $30
million, the Series D holders would be entitled to the amount that would be
paid if such Series D stock were converted into Common Stock immediately
prior to the liquidation event. For aggregate transaction proceeds between
$20 and $30 million, a pro rata formula applies. Notwithstanding this, the
holders of the Series D Preferred Stock shall not receive more than $1,000
per share as a result of a liquidation event. Series E holders will then
receive an amount equal to the as-converted amount to be received for each
share of Common Stock.
* The Company may redeem the outstanding shares of Series D, in whole or in
part, at any time for cash at a redemption price equal to the greater of
$1,000 per share or the amount which is equal to the fair market value of
the Common Stock into which a share of Series D could be converted.
* In the event of a Change in Control (as defined), the holders of a majority
of the Series D Preferred Stock may require the Company to redeem the
outstanding shares of Series D Preferred Stock at a redemption price equal
to the greater of $1,000 per share or the amount which is equal to the fair
market value of the Common Stock into which a share of Series D Preferred
Stock could be converted.
* So long as at least 100 shares of Series D or 200 shares of Series E remain
outstanding, the prior written consent of the holders of the Series D and
Series E will be required prior to certain corporate actions including, but
not limited to, issuing additional capital stock or debt with a preference
to or equal to the Series D or E in the Company or any of its subsidiaries,
payment of dividends, incurring additional indebtedness (excluding
refinancing and the Company's bank borrowings), entering into transactions
with affiliates, issuing or disposing of the capital stock of its
subsidiaries, disposing of assets of the Company or its subsidiaries, and
merging or consolidating with any other entity or entering into any
transaction which would have the effect of a change in control.
The warrants to purchase up to 60,807.731 shares of Series E Preferred
Stock at $0.01 per share are to be issued in connection with the debt
restructuring and are directly related to the common stock warrants issued to
the Common Shareholders of record as of November 24, 1999 (see Note 7). The
Series E warrants become exercisable in proportion to the number of Common Stock
warrants exercised. The warrants expire in May 2004.
61
<PAGE>
9. COMMON STOCK
In February 2000 the Company's shareholders approved an increase in the
authorized capital of the Company to 750,000,000 shares. This will provide
sufficient shares for the conversion of the Preferred Shares into Common Stock,
the issuance of warrants to the existing equity holders, and the granting of
stock options to management and employees of the Company as contemplated in the
November 1999 debt restructuring. At the same time the Board of Directors
increased the number of shares authorized in the 1999 Long-Term Compensation
Plan from 15,657,490 to 116,190,084.
At December 31, 1999, Common Stock (including the effect of the February
2000 increases noted above) was reserved for issuance as follows:
Conversion of outstanding shares of Series D Preferred Stock 174,285,127
Conversion upon exercise of Series E Preferred Stock warrants 60,807,731
Common stock warrants issued to shareholders of record as of
November 24, 1999 in connection with the debt restructuring 54,985,667
Issuable under other stock purchase warrants 919,443
Stock Option Plans 105,904,165
Employee Stock Purchase Plans 449,483
-----------
397,351,616
===========
WARRANTS
Holders of outstanding shares of Common Stock (subject to the increase in
authorized common stock which was approved by the shareholders in February 2000)
are to be granted warrants to purchase additional shares of Common Stock for
$0.1528 per share, at a rate of 3.59662 additional shares for each share of
Common Stock held as of November 24, 1999. These warrants become exercisable
beginning in February 2001 and expire in February 2004. In the event that the
Company's stock price exceeds $0.2346 per share for twenty consecutive days, the
expiration date of the warrant is accelerated to a date 180 days after that
event.
During 1998, the Company issued warrants to purchase 250,000 shares of
Common Stock at $8.00 per share in conjunction with the issuance and sale of the
Company's 1998 Senior Discount Notes. These warrants expire on September 30,
2002. During 1997, the Company issued warrants to purchase 375,000 shares of
Common Stock at $15.4375 per share in conjunction with the issuance and sale of
the Company's 1997 Senior Discount Notes. These warrants were repriced to $8.00
per share in connection with the issuance of the Company's 1998 Senior Discount
Notes. The warrants expire on September 30, 2002. During 1996, the Company
issued warrants to certain financial advisors in connection with its Series C
Redeemable Convertible Preferred Stock financing. These warrants are exercisable
for 116,666 shares of Common Stock at an exercise price of $7.50 per share and
expire in 2001. In connection with the initial public offering in 1996, the
Company issued 5-year warrants to purchase an aggregate of 177,777 shares of
Common Stock to other financial advisors at an exercise price of $12.60 per
share. All warrants remain outstanding after the debt restructuring that
occurred during the fourth quarter of 1999.
62
<PAGE>
STOCK OPTION PLANS
Under the 1994 Stock Option Plan (the "1994 Option Plan"), the Company may
grant incentive or nonstatutory stock options up to 4,563,077 shares of Common
Stock to employees, directors and consultants at prices not less than fair
market value for incentive stock options and not less than 85% of fair market
value for nonstatutory stock options. These options generally expire five to ten
years from the date of grant. Options normally vest at a rate of 25% on the
first anniversary of the grant date and 1/48 per month thereafter and may be
exercised at any time, subject to the Company's right to repurchase unvested
shares at the original exercise price upon termination.
In 1996, the Board of Directors adopted the 1996 Outside Directors Stock
Option Plan (the "Directors Plan"). Under this plan, non-employee directors of
the Company are automatically granted initial options to purchase 15,000 shares
of Common Stock and additional options to purchase 5,000 shares of Common Stock
in each subsequent year that such person remains a director of the Company.
Options under the Directors Plan have an exercise price equal to fair market
value at the grant date, vest ratably over three years and expire ten years from
the date of grant. The number of shares authorized under this plan is 200,000.
In 1997, the Board of Directors adopted the 1997 Nonstatutory Stock Option
Plan (the "1997 Option Plan"). Under this plan, the Company may grant
nonstatutory stock options for up to 2,350,000 shares of Common Stock to
employees and consultants at prices not less than 85% of fair market value on
the effective date of the grant. These options generally expire ten years from
the date of grant and are immediately exercisable.
In 1999, the Board of Directors adopted the 1999 Long-Term Compensation
Plan (the "1999 Plan") as a part of the debt restructuring. A total of
15,657,490 shares were authorized for issuance under this plan and 15,657,490
shares were sold to officers in the year ended December 31, 1999. Under the
terms of the restricted stock purchase agreement, the Company has the right to
repurchase up to 80% of these shares at the original sale price; this right
lapses over a four-year period based on continued employment. Under this plan,
the Company may grant options or restricted shares of Common Stock to employees,
and directors at prices not less than 85% of fair market value on the effective
date of the grant. The terms of the options may vary but generally expire ten
years from the date of grant and are immediately exercisable. In February 2000
the authorized number of shares in the 1999 Plan was increased to 116,190,094
shares following the increase in the Company's authorized capital. Also in
February, 2000 the Company issued an additional 85,090,492 shares to employees
and directors.
63
<PAGE>
Option activity under the Company's option plans is as follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Exercise
Shares Price
----------- ------
<S> <C> <C>
Outstanding, January 1, 1997 835,403 $ 6.35
Granted (weighted average fair value of $7.49) 1,150,385 15.02
Exercised (49,083) 4.13
Cancelled (39,529) 12.01
----------- ------
Outstanding, December 31, 1997 1,897,176 11.36
Granted (weighted average fair value of $4.29) 3,759,563 5.85
Exercised (97,400) 2.23
Cancelled (3,605,166) 9.84
----------- ------
Outstanding, December 31, 1998 1,954,173 4.09
Granted at market value (weighted average fair value of $0.13) 3,437,751 0.58
Granted below market value (weighted average fair value of $0.01) 15,657,490 0.02
Exercised (15,722,830) 0.45
Cancelled (1,920,039) 2.69
----------- ------
Outstanding, December 31, 1999 3,406,545 $ 1.58
=========== ======
</TABLE>
Additional information regarding options outstanding as of December 31,
1999, is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
as of Contractual Exercise as of Exercise
Range of Exercise Prices 12/31/99 Life (yrs) Price 12/31/99 Price
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.105 - $ 0.452 176,512 8.77 $0.43 176,512 $0.43
$ 0.500 - $ 0.500 1,337,375 2.98 0.50 1,337,375 0.50
$ 0.562 - $ 0.719 139,128 4.41 0.62 139,128 0.62
$ 0.750 - $ 0.750 804,500 9.2 0.75 804,500 0.75
$ 1.500 - $ 3.750 268,819 8.31 1.84 268,819 1.90
$ 4.000 - $ 4.000 576,445 7.57 4.00 576,445 4.00
$ 4.250 - $10.500 72,666 7.10 9.55 63,218 9.58
$11.750 - $11.750 1,100 7.38 11.75 1,100 11.75
$12.250 - $12.250 15,000 7.39 12.25 12,915 12.25
$18.750 - $18.750 15,000 7.18 18.75 13,750 18.75
- --------------------------------------------------------------------------------------
$ 0.105 - $18.750 3,406,545 6.13 $1.58 3,393,762 $1.55
======================================================================================
</TABLE>
At December 31, 1999, 1,111,317, 105,000, and 748,699 shares were available
for future grants under the 1994 Option Plan, Directors Plan, and 1997 Option
Plan respectively. At December 31, 1999, 13,212 shares exercised were subject to
repurchase. As of December 31, 1998 and 1997, 1,915,974 and 1,826,896 shares
respectively were exercisable with a weighted average exercise price of $3.94
and $11.27, respectively.
EMPLOYEE STOCK PURCHASE PLAN
Under the 1998 Purchase Plan, eligible employees are permitted to purchase
shares of Common Stock through salary withholding at a price equal to 85% of the
lower of the market value of the stock at the beginning or the end of the
6-month offering period, subject to certain limitations. At December 31, 1999,
300,517 shares had been issued under both of the Purchase Plans and 449,483
64
<PAGE>
shares were reserved for further issuance. The weighted average fair value of
those purchase rights granted in 1999, 1998 and 1997 was $1.28, $3.73 and $3.52,
respectively. The Company's calculations were made using the Black-Scholes
option pricing model with the following weighted average assumptions: expected
life of one year for all years; expected interest rate of 6.0%, 5.7% and 6.2%
for 1999, 1998 and 1997, respectively; expected volatility of 115% in 1999, 75%
in 1998 and 65% in 1997; and no dividends during the expected term.
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with APB No.
25 and its related interpretations. Accordingly, no compensation expense has
been recognized in the financial statements for employee stock arrangements.
SFAS 123 requires the disclosure of pro forma net income and earnings per
share had the Company adopted the fair value method as of the beginning of
fiscal 1995. Under SFAS 123, the fair value of stock-based awards to employees
is calculated through the use of the minimum value method for all periods prior
to the initial public offering, and subsequently through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's stock option calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected life, 12 months following vesting; stock volatility, 115%
in 1999, 75% in 1998 and 65% in 1997; risk-free interest rates, 6.0% in 1999,
5.7% in 1998, and 6.2% in 1997; and no dividends during the expected term. The
Company's calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
stock-based awards (including awards under the Purchase Plan) had been amortized
to expense over the vesting period of the awards, pro forma net loss would have
been $13,763,000 ($0.81 loss per share) in 1999, $44,673,000 ($3.15 loss per
share) in 1998, and $26,815,000 ($2.51 loss per share) in 1997.
10. INCOME TAXES
The Company has had losses since inception and therefore has not provided
for income taxes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating loss
and tax credit carryforwards. Significant components of the Company's deferred
income tax assets as of December 31, 1999 and 1998 are as follows:
65
<PAGE>
December 31,
----------------------
1999 1998
-------- --------
(In thousands)
Net deferred tax assets:
Net operating losses $ -- $ 25,596
Research and development credits -- 1,140
Capitalized research and development costs -- 895
Accruals deductible in different periods 6,160 4,204
Depreciation and amortization 258 (250)
-------- --------
6,418 31,585
Valuation allowance (6,418) (31,585)
-------- --------
Total $ -- $ --
======== ========
Due to the uncertainty surrounding the realization of the benefits of its
favorable tax attributes in future tax returns, the Company has fully reserved
its net deferred tax assets as of December 31, 1999 and 1998, respectively.
The Tax Reform Act of 1986 and the California Act of 1987 impose
restrictions on the utilization of net operating loss and tax credit
carryforwards in the event of an "ownership change" as defined by the Internal
Revenue Code. The Company's ability to utilize its net operating loss and tax
credit carryforwards is subject to limitation pursuant to these restrictions.
The Company underwent an ownership change as of the date of the debt
restructuring in November, 1999. As a result, the Company lost the potential tax
benefits of the net operating loss carryforwards and tax credit carryforwards
that existed at that time.
11. SUBSEQUENT EVENTS
In March 2000 the Company entered into a secured revolving line of credit
with a new bank based upon eligible accounts receivable. Under the terms of this
borrowing arrangement which will expire in March 2001, the Company may borrow up
to $2 million. Borrowings will bear interest at the bank's prime rate plus
1.50%. The Company will issue the bank warrants to acquire 100,000 shares of
Common Stock at a per share price of $0.30 which may be exercised over a
five-year period.
In March 2000 the Company was served papers in connection with a patent
infringement lawsuit filed against it and one other slot machine manufacturer by
International Game Technology, Inc. (IGT). As disclosed in November 1999, IGT is
alleging infringement of a patent issued to IGT in September 1999 entitled "Game
Machine and Method Using Touch Screen". The Company has not yet responded to the
lawsuit and the Company's management denies the assertions of infringement. The
Company is presently unable to determine the financial impact, if any, of this
litigation. The costs of defending this lawsuit may be substantial and may
require significant amounts of senior management time. Any adverse result from
such litigation could materially and adversely affect the Company's liquidity
and capital resources. No adjustments have been made in the accompanying
consolidated financial statements relating to this litigation.
In March 2000, a former distributor of the Company's products filed suit
against the company in the United States District Court for the District of
South Carolina. The distributor seeks repayment of $1 million, plus damages, in
connection with machines previously shipped to the distributor in 1998. The
Company is in the process of arbitration as required by the Distribution
Agreement, seeking to recover outstanding receivables from the distributor. The
Company is in the preliminary stages of investigating the allegations contained
in the suit and has not yet responded to the complaint.
66
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in this Offering Circular of
Silicon Gaming, Inc. of our report dated February 15, 2000 (March 22, 2000 as to
Note 11) (which expresses an unqualified opinion and includes an explanatory
paragraph relating to an uncertainty concerning the Company's ability to
continue as a going concern), included in the Annual Report on Form 10-K of
Silicon Gaming, Inc. for the year ended December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
April 17, 2000
67
<PAGE>
WE HAVE NOT AUTHORIZED ANY PERSON TO
MAKE A STATEMENT THAT DIFFERS FROM WHAT
IS IN THIS OFFERING CIRCULAR. IF ANY
PERSON DOES MAKE A STATEMENT THAT
DIFFERS FROM WHAT IS IN THIS OFFERING
CIRCULAR, YOU SHOULD NOT RELY ON IT.
THIS OFFERING CIRCULAR IS NOT AN OFFER
TO SELL, NOR IS IT SEEKING AN OFFER TO SILICON GAMING, INC.
BUY, SECURITIES IN ANY STATE IN WHICH
THE OFFER OR SALE IS NOT PERMITTED. THE Offer to Exchange
INFORMATION IN THIS OFFERING CIRCULAR One Unit consisting of One Share of
IS COMPLETE AND ACCURATE AS OF ITS Common Stock and One Warrant to
DATE, BUT THE INFORMATION MAY CHANGE purchase 3.59662 Shares of Common
AFTER THAT DATE. Stock for Each Outstanding Share of
Common Stock
Table of Contents
Summary of Exchange Offer.............2 OFFERING CIRCULAR
Where You Can Find More Information...5
The Company...........................6
Capitalization........................7 April 17, 2000
Price Range of Common Stock...........8
Dividend Policy.......................8
Background of the Exchange Offer......9
The Exchange Offer...................10
Exchange Agent.......................14
Information Agent....................14
Risk Factors Relating to the
Exchange Offer.....................17
Other Risk Factors ..................18
Gaming Regulations and Licensing.....24
Business of Silicon Gaming...........25
Description of Securities ...........42
Certain Federal Tax Consequences.....46
Financial Statements.................47
Independent Auditor's Report.........48
Notes to Financial Statements........53
Independent Auditor's Consent........68
NOTICE OF ELECTION TO PARTICIPATE
IN SILICON GAMING, INC.'S
OFFER TO EXCHANGE
ONE UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE
WARRANT TO PURCHASE 3.59662 SHARES OF COMMON STOCK FOR EACH
OUTSTANDING SHARE OF COMMON STOCK
PURSUANT TO THE OFFERING CIRCULAR DATED APRIL 17, 2000
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME ON MAY 19, 2000.
The Exchange Agent For The Exchange Offer Is:
EQUISERVE TRUST COMPANY, N.A.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
BOX A
DESCRIPTION OF CERTIFICATE(S)
- -----------------------------------------------------------------------------------------------------------------
Number of
Certificate Number Participating
Name(s) and Address(es) of Registered Holder(s) Number(s) of Shares Shares*
- ----------------------------------------------- -----------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
(Attach additional schedule if necessary) Total No. of Shares
- -----------------------------------------------------------------------------------------------------------------
*See Instruction 5
</TABLE>
Election Notices should be delivered by registered or certified mail,
by hand or by overnight delivery to:
<TABLE>
<CAPTION>
BY MAIL BY HAND BY OVERNIGHT CARRIER
------- ------- --------------------
<S> <C> <C>
EquiServe Securities Transfer & Reporting Services EquiServe
Corporate Actions C/O EquiServe Attn: Corporate Actions
PO Box 8029 100 William Street, Galleria 150 Royall Street
Boston, MA 02266-8029 New York, NY 10038 Canton, MA 02021
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE
DOES NOT CONSTITUTE A VALID DELIVERY. THE METHOD OF DELIVERY OF ALL DOCUMENTS IS
AT THE RISK OF THE HOLDER. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN
RECEIPT REQUESTED, IS RECOMMENDED. YOU SHOULD READ THE INSTRUCTIONS ACCOMPANYING
THIS ELECTION NOTICE CAREFULLY BEFORE YOU COMPLETE THIS ELECTION NOTICE.
YOU DO NOT NEED TO DELIVER YOUR COMMON STOCK CERTIFICATES IN ORDER TO
PARTICIPATE IN THE EXCHANGE OFFER, YOU NEED ONLY DELIVER THIS ELECTION NOTICE.
THE COMPANY WILL DELIVER EXCHANGE WARRANTS TO HOLDERS WHO ELECT TO PARTICIPATE
IN THE EXCHANGE OFFER.
- --------------------------------------------------------------------------------
Questions and requests for assistance or for GEORGESON
additional copies of the Offering Circular or SHAREHOLDER
Election Notice should be directed to our COMMUNICATIONS INC.
information agent at: 17 State Street - 10th Floor
New York, New York 10004
Toll-Free (800) 223-2064
- --------------------------------------------------------------------------------
<PAGE>
The undersigned acknowledges that he or she has received the Offering
Circular, dated April 17, 2000 (the "OFFERING CIRCULAR"), of Silicon Gaming,
Inc., a California corporation (the "COMPANY"), and this Notice of Election to
Participate and the instructions hereto (the "NOTICE OF ELECTION"), which
together constitute the Company's offer (the "EXCHANGE OFFER") to exchange one
unit (the "UNIT") consisting of one share of common stock, $.01 par value per
share and one warrant to purchase 3.59662 shares of common stock ("EXCHANGE
WARRANT") for each one (1) outstanding share of common stock, upon the terms and
subject to the conditions set forth in the Offering Circular. The term
"Expiration Date" shall mean 5:00 p.m., New York City time, on May 19, 2000,
unless the Company, in its sole discretion, extends the Exchange Offer, in which
case the term shall mean the latest date and time to which the Exchange Offer is
extended by the Company. Capitalized terms used but not defined herein have the
meaning given to them in the Offering Circular.
This Election Notice is to be used by any Holder who elects to participate
in the Exchange Offer. Delivery of this Election Notice and any other required
documents must be made to the Exchange Agent.
The term "Holder" as used herein means any person in whose name common
stock are registered on the books of the Company or any other person who has
obtained a properly completed stock transfer power from the registered holder.
All Holders of common stock who wish to participate in the Exchange Offer
must, prior to the Expiration Date: (1) complete, sign, and deliver this
Election Notice to the Exchange Agent, in person or to the address set forth
above; and (2) not withdraw his or her election to participate in the Exchange
Offer.
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance of the Election Notice validly tendered and not withdrawn and the
issuance of the Exchange Warrants will be made promptly following the Expiration
Date. For the purposes of the Exchange Offer, the Company shall be deemed to
have accepted validly tendered Election Notices when, as and if the Company has
given written notice thereof to the Exchange Agent.
The undersigned has completed, executed and delivered this Election Notice
to indicate the action the undersigned desires to take with respect to the
Exchange Offer.
PLEASE READ THE ENTIRE ELECTION NOTICE AND THE OFFERING CIRCULAR CAREFULLY
BEFORE CHECKING ANY BOX BELOW. THE INSTRUCTIONS INCLUDED IN THIS ELECTION NOTICE
MUST BE FOLLOWED. QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES
OF THE OFFERING CIRCULAR AND THIS ELECTION NOTICE MAY BE DIRECTED TO THE
INFORMATION AGENT. SEE INSTRUCTION 10.
HOLDERS WHO WISH TO PARTICIPATE IN THE EXCHANGE OFFER MUST COMPLETE THIS
ELECTION NOTICE IN ITS ENTIRETY AND COMPLY WITH ALL OF ITS TERMS.
2
<PAGE>
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS.
SPECIAL ISSUANCE AND MAILING INSTRUCTIONS
To be completed ONLY if Exchange Warrants are to be ISSUED in the name of
someone other than the undersigned, OR to be DELIVERED to someone other than the
undersigned.
SPECIAL ISSUANCE AND PAYMENT INSTRUCTIONS
(See Instruction 4, 5 and 6)
TO BE COMPLETED ONLY if Exchange Warrants are to be registered in the name(s) of
someone other than the registered holder(s) set forth above in Box A.
ISSUE TO:
------------------------------------------------------------------
(Please print or type)
Name(s):
------------------------------------------------------------------
Address:
------------------------------------------------------------------
(street and number)
------------------------------------------------------------------
(city, state and zip code)
------------------------------------------------------------------
Tax Identification Number
(Also complete Substitute Form W-9)
SPECIAL MAILING INSTRUCTIONS
(See Instruction 4, 5 and 6)
TO BE COMPLETED ONLY if Exchange Warrants are to be delivered to the registered
holder(s) or someone other than the registered holder(s) at an address other
than that set forth above in Box A.
MAIL TO:
------------------------------------------------------------------
(Please print or type)
Name(s):
------------------------------------------------------------------
Address:
------------------------------------------------------------------
(street and number)
------------------------------------------------------------------
(city, state and zip code)
IMPORTANT TAX INFORMATION
PLEASE PROVIDE YOUR SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER ON
THIS SUBSTITUTE FORM W-9 AND CERTIFY THEREIN THAT YOU ARE NOT SUBJECT TO BACKUP
WITHHOLDING. FAILURE TO DO SO MAY SUBJECT YOU TO 31% FEDERAL INCOME TAX
WITHHOLDING.
BOX D
SUBSTITUTE FORM W-9
PART 1 - Please provide the Taxpayer Identification Number ("TIN") of the person
submitting this Letter of Transmittal in the box at right and certify by signing
and dating below.
Social Security Number PART II - Exempt Payee
---------------------- ----------------------
---------------------- ----------------------
or Employer
Identification Number
CERTIFICATION - Under penalties of perjury, the undersigned hereby certifies the
following:
(1) The TIN shown in part I above is the correct TIN of the person who is
submitting this Letter of Transmittal and who is required by law to provide such
TIN; and
(2) The person who is submitting this Letter of Transmittal and who is required
by law to provide such TIN is not subject to backup withholding because such
person has not been notified by the Internal Revenue Service ("IRS") that such
person is subject to backup withholding as a result of a failure to report all
interest or dividends, or because the IRS has notified such person that he or
she is no longer subject to backup withholding, or because such person is an
exempt payee under the attached guidelines.
NOTE: You must cross out item (2) above if you have been notified by the IRS
that you are no longer subject to backup withholding.
Signature: ________________________ Date: ___________________
3
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ
ACCOMPANYING INSTRUCTIONS CAREFULLY.
NOTE: ALL SHAREHOLDERS MUST SIGN IN THE SPACE PROVIDED BELOW.
- ------------------------------------- ----------------------------------------
(Signature(s) of Shareholder(s)) (Signature(s) of Shareholder(s))
Dated: ________________________, 2000
(Must be signed by the registered Holder(s) EXACTLY as name(s) appear(s) on
stock certificate(s) or by person(s) authorized to become registered Holder(s)
by certificates and documents transmitted herewith. If signature is by
attorneys-in-fact, executors, administrators, trustees, guardians, agents,
officers of corporations or others acting in a fiduciary or representative
capacity, please provide the following information. See Instruction 4 attached
hereto.)
Name(s):
------------------------------------------------------------------
(Please Print)
Capacity:
------------------------------------------------------------------
Address:
------------------------------------------------------------------
Telephone Number:
---------------------------------------------------------
(Taxpayer Identification or Social Security Number):
----------------------
PLEASE NOTE THAT UNDER CERTAIN CIRCUMSTANCES SIGNATURE(S)
MUST BE GUARANTEED
(SEE INSTRUCTION 3)
Signature(s) Guaranteed: _____________________________
By: _____________________________
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
members in an approved signature guaranty medallion program) pursuant to the
Securities and Exchange Commission Rule 17Ad-15.
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. GUARANTEE OF SIGNATURES. Signatures on this Election Notice need not be
guaranteed if (a) this Election Notice is signed by the registered Holder(s) of
the Participating Shares and such Holder(s) have not completed the box set forth
herein entitled "Special Registration Instructions" or the box entitled "Special
Delivery Instructions" or (b) such Participating Shares are for the account of a
member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc. or a commercial bank or trust company
having an office or correspondent in the United States (each, an "ELIGIBLE
INSTITUTION"). See Instruction 6. Otherwise, all signatures on this Election
Notice or a notice of withdrawal, as the case may be, must be guaranteed by an
Eligible Institution.
4
<PAGE>
2. DELIVERY OF THIS ELECTION NOTICE. A properly completed and duly executed copy
of this Election Notice and any other documents required by this Election
Notice, must be received by the Exchange Agent at its address set forth herein
prior to 5:00 p.m., New York City time, on the Expiration Date. The method of
delivery of this Election Notice and all other required documents to the
Exchange Agent is at the election and risk of the Holder and the delivery will
be deemed made only when actually received by the Exchange Agent. In all cases,
sufficient time should be allowed to ensure timely delivery. NO ELECTION NOTICE
OR COMMON STOCK SHOULD BE SENT TO THE COMPANY.
All questions as to the validity, form, eligibility (including time of receipt),
acceptance of tendered Election Notices, and withdrawal of tendered Election
Notices will be determined by the Company in its sole discretion, which
determination will be final and binding. All tendering Holders, by execution of
this Election Notice (or facsimile thereof), shall waive any right to receive
notice of the acceptance of the Election Notice. The Company reserves the
absolute right to reject any and all Election Notices not properly tendered or
any Election Notices the Company's acceptance of which would, in the opinion of
counsel for the Company, be unlawful. The Company also reserves the right to
waive any irregularities or conditions of tender as to particular Election
Notices. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in this Election Notice) shall be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Election Notices must be cured within such time as
the Company shall determine. Neither the Company, the Exchange Agent nor any
other person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Election Notices, nor shall any of
them incur any liability for failure to give such notification. Tenders of
Election Notices will not be deemed to have been made until such defects or
irregularities have been cured to the Company's satisfaction or waived. Any
Election Notices received by the Exchange Agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived will
be returned by the Exchange Agent to the tendering Holders pursuant to the
Company's determination, unless otherwise provided in this Election Notice as
soon as practicable following the Expiration Date. The Exchange Agent has no
fiduciary duties to the Holders with respect to the Exchange Offer and is acting
solely on the basis of directions of the Company.
3. INADEQUATE SPACE. If the space provided is inadequate, the certificate
numbers and the number of Participating Shares should be listed on a separate
signed schedule attached hereto.
4. TENDER BY HOLDER. Only a Holder of common stock may tender an Election Notice
in the Exchange Offer. Any beneficial owner of common stock who is not the
registered Holder and who wishes to participate should arrange with such
registered holder to execute and deliver this Election Notice on such beneficial
owner's behalf or must, prior to completing and executing this Election Notice
and delivering his or her Election Notice, either make appropriate arrangements
to register ownership of the common stock in such beneficial owner's name or
obtain a properly completed stock transfer power from the registered holder or
properly endorsed certificates representing such common stock.
5. PARTIAL TENDERS; WITHDRAWALS. If less than the entire number of shares held
by the Holder is participating, the Holder should fill in the number of
Participating Shares in the fourth column of the applicable box entitled
"Description of Common Stock" above. The entire number of all shares of common
stock held by the Holder will be deemed to have been tendered unless otherwise
indicated. If the entire number of shares of all common stock is not tendered,
then a certificate representing Exchange Warrants with respect only to
Participating Shares will be issued and delivered to the Holder.
Except as otherwise provided herein, tenders of Election Notices may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date. To withdraw a tender of an Election Notice in the Exchange Offer, a
written notice of withdrawal must be received by the Exchange Agent at its
address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (1) specify the name of the
person having delivered the Election Notice to be withdrawn (the "DEPOSITOR"),
(2) identify the Election Notice to be withdrawn, including the certificate
number or numbers and number of Participating Shares, (3) be signed by the
Depositor in the same manner as the original signature on the Election Notice by
which such Election Notice was tendered or be accompanied by documents of
transfer sufficient to have the Registrar with respect to the common stock
register the transfer of such common stock into the name of the person
withdrawing the tender and (4) specify the name in which any such common stock
are to be registered, if different from that of the Depositor. All questions as
5
<PAGE>
to the validity, form and eligibility (including time of receipt) of such
Election Notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any Election Notices so withdrawn will be
deemed not to have been validly tendered for purposes of the Exchange Offer and
no Exchange Warrants will be issued with respect thereto unless the Election
Notices so withdrawn are validly retendered. Any Election Notice which has been
tendered but which is not accepted for exchange by the Company will be returned
to the Holder thereof without cost to such Holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Election Notices may be retendered by following one of the procedures
described in the Offering Circular under "The Exchange Offer--Procedures for
Tendering Election Notices" at any time prior to the Expiration Date.
6. SIGNATURES ON THE ELECTION NOTICE. If this Election Notice is signed by the
registered holder(s) of the Participating Shares, the signature must correspond
with the name(s) as written on the face of the common stock Certificate without
alteration, enlargement or any change whatsoever. If any of the Participating
Shares are owned of record by two or more joint owners, all such owners must
sign this Election Notice. If a number of shares of Participating Shares are
registered in different names, it will be necessary to complete, sign and submit
as many copies of this Election Notice as there are different registrations of
shares of Participating Shares. If this Election Notice is signed by trustees,
executors, administrators, guardians, attorneys-in-fact, or officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority so to act must be
submitted with this Election Notice.
7. BACKUP FEDERAL INCOME TAX WITHHOLDING AND SUBSTITUTE FORM W-9. Under the
federal income tax laws, payments that may be made by the Company with respect
to Exchange Warrants issued pursuant to the Exchange Offer, or common stock
issued upon exercise of the Exchange Warrants, may be subject to backup
withholding at the rate of 31%. In order to avoid such backup withholding, each
tendering Holder should complete and sign the Substitute Form W-9 included in
this Election Notice and either (a) provide the correct taxpayer identification
number ("TIN") and certify, under penalties of perjury, that the TIN provided is
correct and that (1) the Holder has not been notified by the Internal Revenue
Service the ("IRS") that the Holder is subject to backup withholding as a result
of failure to report all interest or dividends or (2) the IRS has notified the
Holder that the Holder is no longer subject to backup withholding; or (b)
provide an adequate basis for exemption. If the tendering Holder has not been
issued a TIN and has applied for one, or intends to apply for one in the near
future, such Holder should write "Applied For" in the space provided for the TIN
in Part 1 of the Substitute Form W-9, sign and date the Substitute Form W-9 and
sign the Certificate of Payee Awaiting Taxpayer Identification Number. If
"Applied For" is written in Part 1, the Company shall retain 31% of payments
made to the tendering Holder during the 60-day period following the date of the
Substitute Form W-9. If the Holder furnishes the Exchange Agent or the Company
with its TIN within 60 days after the date of the Substitute Form W-9, the
Company (or the Paying Agent) shall remit such amounts retained during the
60-day period to the Holder and no further amounts shall be retained or withheld
from payments made to the Holder thereafter. If, however, the Holder has not
provided the Exchange Agent or the Company with its TIN within such 60-day
period, the Company (or the Paying Agent) shall remit such previously retained
amounts to the IRS as backup withholding. In general, if a Holder is an
individual, the TIN is the Social Security number of such individual. If the
Exchange Agent or the Company are not provided with the correct TIN, the Holder
may be subject to a $50 penalty imposed by the Internal Revenue Service.
Certain Holders (including, among others, all corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements. In order for a foreign individual to qualify as an exempt
recipient, such Holder must submit a statement (generally, IRS Form W-8), signed
under penalties of perjury, attesting to that individual's exempt status. Such
statements can be obtained from the Exchange Agent. For further information
concerning backup withholding and instructions for completing the Substitute
Form W-9 (including how to obtain a taxpayer identification number if you do not
have one and how to complete the Substitute Form W-9 if Common Stock are
registered in more than one name), consult the enclosed Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9. Failure
to complete the Substitute Form W-9 will not, by itself, cause Election Notices
to be deemed invalidly tendered, but may require the Company (or the Paying
Agent) to withhold 31% of the amount of any payments made on account of the
Exchange Warrants or the common stock issued upon exercise of the Exchange
Warrants. Backup withholding is not an additional federal income tax. Rather,
the federal income tax liability of a person subject to backup withholding will
be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained from the IRS.
6
<PAGE>
8. TRANSFER TAXES. The Company will pay all transfer taxes, if any, applicable
to the exchange of Units pursuant to the Exchange Offer. If, however,
Participating Shares are registered in the name of a person other than the
person signing this Election Notice, or if a transfer tax is imposed for any
reason other than the exchange of Units pursuant to the Exchange Offer, then the
amount of any such transfer taxes (whether imposed on the registered Holder or
on any other persons) will be payable by the tendering Holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
this Election Notice, the amount of such transfer taxes will be billed directly
to such tendering Holder. See the Offering Circular under "The Exchange
Offer--Expenses."
Except as provided in this Instruction 8, it will not be necessary for transfer
tax stamps to be affixed to the Participating Shares listed in this Election
Notice.
9. WAIVER OF CONDITIONS. The Company reserves the right, in its sole discretion,
to amend, waive or modify specified conditions in the Exchange Offer in the case
of any Election Notice tendered.
10. REQUESTS FOR ASSISTANCE, COPIES. Requests for assistance and requests for
additional copies of the Offering Circular or this Election Notice may be
directed to the Exchange Agent or the Information Agent at their respective
addresses specified in the Offering Circular. Holders may also contact their
broker, dealer, commercial bank, trust company or other nominee for assistance
concerning the Exchange Offer.
IMPORTANT TAX INFORMATION
Under federal income tax laws, a Holder whose tendered Election Notice is
accepted is required to provide such Holder's correct TIN on Substitute Form W-9
above or otherwise establish a basis for exemption from backup withholding. If
such Holder is an individual, the TIN is his social security number. If the
Exchange Agent is not provided with the correct TIN, a $50 penalty may be
imposed by the Internal Revenue Service, and payments with respect to the
Exchange Warrants, or the common stock issued upon exercise of the Exchange
Warrants, may be subject to backup withholding.
Certain Holders (including, among others, all corporations and certain foreign
persons) are not subject to these backup withholding requirements. Exempt
Holders should indicate their exempt status on Substitute Form W-9. A foreign
person may qualify as an exempt recipient by submitting to the Exchange Agent a
properly completed Internal Revenue Service Form W-8, signed under penalties of
perjury, attesting to that Holder's exempt status. A Form W-8 can be obtained
from the Exchange Agent. See the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional
instructions.
If backup withholding applies, 31% of dividend payments made with respect to the
common stock issued upon exercise of the Exchange Warrants will be withheld.
Backup withholding is not an additional federal income tax. Rather, the federal
income tax liability of persons subject to backup withholding will be reduced by
the amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments made with respect to the common stock
issued upon exercise of the Exchange Warrants, the Holder is required to provide
either (a) the Holder's correct TIN by completing the form below, certifying
that the TIN provided on Substitute Form W-9 is correct (or that such Holder is
awaiting a TIN) and that (1) the Holder has been notified by the Internal
Revenue Service that the Holder is subject to backup withholding as a result of
failure to report all interest or dividends or (2) the Internal Revenue Service
has notified the Holder that the Holder is no longer subject to backup
withholding or (b) an adequate basis for exemption.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The Holder is required to give the Exchange Agent the TIN (e.g., social security
number or employer identification number) of the registered Holder of the common
stock. If the common stock are held in more than one name or are held not in the
name of the actual owner, consult the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional guidance
on which number to report.
7
SILICON GAMING, INC.
Offer to Exchange
One Unit Consisting of One Share of Common Stock and One Warrant to Purchase
3.59662 Shares of Common Stock for Each Outstanding Share of Common Stock
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME ON
MAY 19, 2000, UNLESS EXTENDED.
April 17, 2000
To Our Clients:
Enclosed for your consideration is an Offering Circular dated April 12, 2000
(the "Offering Circular") and the related Notice of Election to Participate (the
"Election Notice") which, together with any amendments or supplements thereto,
collectively constitute the "Exchange Offer") relating to an offer by Silicon
Gaming, Inc., a Delaware corporation (the "Company"), to exchange one Unit (the
"Unit") consisting of one share of Common Stock, $.001 par value per share and
one warrant to purchase 3.59662 shares of common stock (the "Exchange Warrant")
for each one (1) outstanding share of common stock, upon the terms and subject
to the conditions set forth in the Offering Circular.
We are the holder of record of shares of common stock held by us for your
account. An election to participate in the Exchange Offer can be made only by us
as the holder of record and pursuant to your instructions. The Election Notice
is furnished to you for your information only and cannot be used by you to elect
to participate in the Exchange Offer and receive Exchange Warrants.
We request instructions as to whether you wish to have us tender the Election
Notice on your behalf for any or all of such common stock held by us for your
account, pursuant to the terms and subject to the conditions set forth in the
Exchange Offer.
Your attention is directed to the following:
1. The Exchange Offer will expire at 5:00 p.m. New York City time on May 19,
2000, unless the Exchange Offer is extended. Your instructions to us should
be forwarded to us in ample time to permit us to submit a tender on your
behalf.
2. The Exchange Offer is made for all shares of common stock that were
outstanding as of November 24, 1999.
3. The Exchange Offer is conditioned upon the satisfaction of certain
conditions set forth in the Offering Circular under the caption "The
Exchange Offer -- Conditions of the Exchange Offer." The Exchange Offer is
not conditioned upon any minimum number of shares of common stock
participating in the exchange.
<PAGE>
4. Participating Holders tendering Election Notices will not be obligated to
pay brokerage fees or commissions or, except as set forth in Instruction 8
of the Election Notice, transfer taxes applicable pursuant to the Exchange
Offer.
5. In all cases, deliveries of Exchange Warrants pursuant to the Exchange
Offer will be made only after timely receipt by the "Exchange Agent" of (i)
the Election Notice, properly completed and duly executed, with any
required signature guarantees, and (ii) any other documents required by the
Election Notice.
The Exchange Offer is being made solely by the Offering Circular and the related
Election Notice and is being made to all Holders of shares of common stock that
were outstanding as of November 24, 1999. The Company is not aware of any state
where the making of the Exchange Offer is prohibited by administrative or
judicial action pursuant to any valid state statute. If the Company becomes
aware of any valid state statute prohibiting the making of the Exchange Offer or
the delivery of the Exchange Warrants, the Company will make a good faith effort
to comply with any such state statute or seek to have such statute declared
inapplicable to the Exchange Offer. If, after such good faith effort, the
Company cannot comply with such state statute the Exchange Offer will not be
made to, nor will deliveries of Exchange Warrants be made to, the holders of
common stock in such state. In any jurisdiction where the securities, blue sky
or other laws require the Exchange Offer to be made by a licensed broker or
dealer, the Exchange Offer shall be deemed to be made on behalf of the Company
by one or more registered brokers or dealers that are licensed under the laws of
such jurisdiction.
If you wish to have us tender an Election Notice for any or all of the shares of
common stock held by us for your account, please instruct us by completing,
executing and returning to us the instruction form contained in this letter. If
you authorize a tender of an Election Notice, the entire aggregate amount of
your shares of common stock will be considered Participating Shares unless
otherwise specified in such instruction form. Your instructions should be
forwarded to us in ample time to permit us to submit a tender on your behalf
prior to the expiration of the Exchange Offer.
<PAGE>
Instructions with respect to the
SILICON GAMING, INC.'s
Offer to Exchange
One Unit Consisting of One Share of Common Stock and One Warrant to Purchase
3.59662 Shares of Common Stock for Each Outstanding Share of Common Stock
The undersigned acknowledge(s) receipt of your letter enclosing the Offering
Circular dated April 17, 2000 (the "Offering Circular") and the related Election
Notice (which, together with any amendments or supplements thereto, collectively
constitute the "Exchange Offer") pursuant to an offer by Silicon Gaming, Inc., a
Delaware corporation (the "Company"), to exchange one Unit (the "Unit")
consisting of one share of common stock, $.001 par value per share and a warrant
to purchase 3.59662 shares of common stock (the "Exchange Warrants"), for each
one (1) outstanding share of common stock, upon the terms and subject to the
conditions set forth in the Offering Circular.
This will instruct you to tender an Election Notice for the number of
Participating Shares indicated below (or, if no number is indicated below, the
entire number of shares of common stock) which are held by you for the account
of the undersigned, upon the terms and subject to the conditions set forth in
the Exchange Offer.
- --------------------------------------------------------------------------------
Aggregate Number of Participating Share of Common Stock:*
Dated:
SIGN HERE
Signature(s):
---------------------------------------------
Please print name(s):
-------------------------------------
Address:
--------------------------------------------------
Area Code and Telephone Number:
---------------------------
Tax Identification or Social Security Number:
- --------------------------------------------------------------------------------
* Unless otherwise indicated, it will be assumed that the entire number of
shares of common stock held by us for your account are to be Participating
Shares.
SILICON GAMING, INC.
Offer to Exchange
One Unit Consisting of One Share of Common Stock and One Warrant to Purchase
3.59662 Shares of Common Stock for Each One (1) Outstanding
Share of CommonStock
-------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
MAY 19, 2000, UNLESS EXTENDED.
-------------------------------------------------------------------------------
April 17, 2000
To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees:
Silicon Gaming, Inc., a Delaware corporation ("Company"), is offering to
exchange one unit (the "Unit") consisting of one share of common stock, $.001
par value per share and one warrant to purchase 3.59662 shares of common stock
(the "Exchange Warrant"), for each one (1) outstanding share of common stock,
upon the terms and subject to the conditions set forth in the Offering Circular,
dated April 17, 2000 (the "Offering Circular"), and in the accompanying Notice
of Election to Participate (the "Election Notice," which together with the
Offering Circular constitute the "Exchange Offer"). Capitalized terms used but
not defined herein have the meanings given to them in the Offering Circular.
THE EXCHANGE OFFER IS CONDITIONED UPON SATISFACTION OF CERTAIN CONDITIONS SET
FORTH IN THE OFFERING CIRCULAR UNDER THE CAPTION "THE EXCHANGE OFFER --
CONDITIONS OF THE EXCHANGE OFFER." THE EXCHANGE OFFER IS NOT CONDITIONED UPON
ANY MINIMUM NUMBER OF PARTICIPATING SHARES. PARTICIPATING HOLDERS ARE NOT
REQUIRED TO DELIVER THEIR CERTIFICATES, ONLY THEIR COMPLETED ELECTION NOTICES.
Enclosed herewith for your information and forwarding to your clients for whose
accounts you hold shares of common stock registered in your name or in the name
of your nominee are copies of the following documents:
1. The Offering Circular dated April 17, 2000.
2. The Election Notice (for your use and for the information of your clients).
A manually signed original Election Notice must be used to give notice of
an election to participate in the Exchange Offer.
3. A printed form of letter which may be sent to your clients for whose
accounts you hold shares of common stock registered in your name or in the
name of your nominee, with space provided for obtaining such clients'
instructions with regard to the Exchange Offer.
<PAGE>
4. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
5. A return envelope addressed to the Exchange Agent.
YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY
AS POSSIBLE. PLEASE NOTE THAT THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL
EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MAY 19, 2000, UNLESS EXTENDED.
In all cases, deliveries of Exchange Warrants pursuant to the Exchange Offer
will be made only after timely receipt by the Exchange Agent of (i) the Election
Notice properly completed and duly executed with any required signature
guarantees, and (ii) any other documents required by the Election Notice.
The Company will not pay any fees or commissions to any broker or dealer or any
other person for soliciting tenders of Election Notices pursuant to the Exchange
Offer. We will reimburse brokerage firms and other custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred in forwarding copies
of the Offering Circular and related documents to the beneficial owners of
eligible shares of common stock and in handling or forwarding tenders on behalf
of their customers. The Company will pay or cause to be paid any transfer taxes
applicable pursuant to the Exchange Offer, except as otherwise provided in
Instruction 8 of the Election Notice.
Any inquiries you may have with respect to the Exchange Offer should be
addressed to the Information Agent, at its address and telephone numbers set
forth in the Offering Circular. Additional copies of the enclosed material may
be obtained from the Information Agent.
Very truly yours,
SILICON GAMING, INC.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR
ANY OTHER PERSON THE AGENT OF THE COMPANY OR THE EXCHANGE AGENT, THE INFORMATION
AGENT, OR ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO
MAKE ANY STATEMENT OR USE ANY DOCUMENT ON BEHALF OF ANY OF THEM IN CONNECTION
WITH THE EXCHANGE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS
THEREIN.
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE
FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER.
Social Security numbers have nine digits separated by two hyphens: i.e.,
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e., 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<CAPTION>
Give the Employer
Give the Social Security Identification Number
for This Type of Account. Number of for This Type of Account of
- --------------------------------- ------------------------- ------------------------- ---------------------
<S> <C> <C> <C>
1. An individual's account The individual trust 7. A valid trust, The legal entity (Do
estate, or pension not furnish the
identifying number
of the personal
representative or
trustee unless the
legal entity itself is
not designated in the
account title) (4)
2. Two or more individual (joint The actual owner of the
account) account or, if combined
funds, any one of the
individuals (1)
3. Husband and wife (joint The actual owner of the 8. Corporate account The corporation
account) account or, if joint
funds, either person (1)
4. Custodian account of a minor The minor (2) 9. Religious, charitable, The organization
(Uniform Gift to Minors Act) or educational
organization account
5. a. The usual revocable The grantor-trustee (1) 10. Partnership account The partnership
savings trust account
(grantor is also trustee)
b. So-called trust account The actual owner (1) 11. Association, club, or The organization
that is not a legal or other tax-exempt
valid trust under State organization
law
6. Sole proprietorship account The owner (3) 12. A broker or registered The broker or nominee
nominee
13. Account with the The public entity
Department of
Agriculture in the
name of a public
entity (each as a
State or local
government, school
district, or prison)
that receives
agricultural program
payments)
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Show the name of the owner.
<PAGE>
(4) List first and circle the name of the legal trust, estate, or pension
trust. NOTE: If no name is circled when there is more than one name, the
number will be considered to be that of the first name listed.
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number, or Form
SS-4, Application for an Employer Identification Number, at the local office of
the Social Security Administration or the Internal Revenue Service and apply for
a number. United States resident aliens who cannot obtain a social security
number must apply for an ITIN (Individual Taxpayer Identification Number) on
Form W-7.
PAYEES EXEMPT FROM BACKUP WITHHOLDING. Payees specifically exempted from backup
withholding on payments of interest, dividends and with respect to broker
transactions include the following:
* A corporation.
* A financial institution.
* An organization exempt from tax under section 501(a), or an individual
retirement plan.
* The United States or any agency or instrumentality thereof.
* A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof.
* A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
* An international organization or any agency or instrumentality thereof.
* A registered dealer in securities or commodities registered in the U.S. or
a possession of the U.S.
* A real estate investment trust.
* A common trust fund operated by a bank under section 584(a).
* An exempt charitable remainder trust, or a non-exempt trust described in
section 4947(a)(1).
* An entity registered at all times under the Investment Company Act of 1940.
* A foreign central bank of issue. Payments of dividends and patronage
dividends not generally subject to backup withholding include the
following:
* Payments to nonresident aliens subject to withholding under section 1441.
* Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
* Payments of patronage dividends where the amount received is not paid in
money. o Payments made by certain foreign organizations.
* Payments made to a middleman known in the investment community as a nominee
as listed in the most recent publication of the American Society of
Corporate Secretaries, Inc., Nominee List.
<PAGE>
Payments of interest not generally subject to backup withholding include the
following:
* Payments of interest on obligations issued by individuals. Note: You may be
subject to backup withholding if this interest is $600 or more and is paid
in the course of the payer's trade or business and you have not provided
your correct taxpayer identification number to the payer.
* Payments of tax-exempt interest (including exempt-interest dividends under
section 852). o Payments described in section 6049(b)(5) to nonresident
aliens.
* Payments on tax-free covenant bonds under section 1451.
* Payments made by certain foreign organizations.
* Payments made to a middleman known in the investment community as a nominee
as listed in the most recent publication of the American Society of
Corporate Secretaries, Inc., Nominee List.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding.
FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER,
WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO THE PAYER. IF THE
PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE
FORM.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. If you fail
to furnish your taxpayer identification number to a payer, you are subject to a
penalty of $50 for each such failure unless your failure is due to reasonable
cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you make
a false statement with no reasonable basis which results in no imposition of
backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE
FORM OF
WARRANT AGREEMENT
DATED AS OF
APRIL ___, 2000
BETWEEN
SILICON GAMING, INC.
AND
EQUISERVE TRUST COMPANY, N.A.
AS WARRANT AGENT
----------
WARRANTS FOR
COMMON STOCK OF
SILICON GAMING, INC.
----------
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS........................................................ 1
1.1 DEFINITIONS......................................................... 1
1.2 RULES OF CONSTRUCTION............................................... 3
ARTICLE II WARRANT CERTIFICATES.............................................. 3
2.1 FORM OF WARRANT CERTIFICATES........................................ 3
2.2 EXECUTION AND DELIVERY OF WARRANT CERTIFICATES...................... 3
2.3 LOSS OR MUTILATION.................................................. 4
ARTICLE III EXERCISE TERMS................................................... 4
3.1 EXERCISE PRICE...................................................... 4
3.2 EXPIRATION; TERMINATION............................................. 5
3.3 MANNER OF EXERCISE.................................................. 5
3.4 ISSUANCE OF WARRANT SHARES.......................................... 5
3.5 FRACTIONAL WARRANT SHARES........................................... 6
3.6 RESERVATION OF WARRANT SHARES....................................... 6
3.7 COMPLIANCE WITH LAW................................................. 6
3.8 AMENDMENT OF OUTSTANDING OPTIONS.................................... 7
ARTICLE IV ANTIDILUTION PROVISIONS........................................... 7
4.1 ADJUSTMENT OF EXERCISE PRICE AND WARRANT NUMBER..................... 7
4.2 NOTICE OF ADJUSTMENT................................................ 10
4.3 NOTICE OF CERTAIN TRANSACTIONS...................................... 10
4.4 ADJUSTMENT TO WARRANT CERTIFICATE................................... 10
ARTICLE V TRANSFERABILITY.................................................... 11
5.1 TRANSFER AND EXCHANGE............................................... 11
5.2 REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE................. 11
5.3 SURRENDER OF WARRANT CERTIFICATES................................... 12
ARTICLE VI WARRANT AGENT..................................................... 12
6.1 APPOINTMENT OF WARRANT AGENT........................................ 12
6.2 RIGHTS AND DUTIES OF WARRANT AGENT.................................. 12
6.3 INDIVIDUAL RIGHTS OF WARRANT AGENT.................................. 13
6.4 WARRANT AGENT'S DISCLAIMER.......................................... 13
6.5 COMPENSATION........................................................ 13
6.6 SUCCESSOR WARRANT AGENT............................................. 13
ARTICLE VII MISCELLANEOUS.................................................... 15
7.1 COMPANY RESALES..................................................... 15
7.2 SEC REPORTS AND OTHER INFORMATION................................... 15
7.3 PERSONS BENEFITING.................................................. 15
7.4 RIGHTS OF HOLDERS................................................... 15
7.5 AMENDMENT........................................................... 15
7.6 NOTICES............................................................. 16
7.7 GOVERNING LAW....................................................... 17
7.8 SUCCESSORS.......................................................... 17
7.9 MULTIPLE ORIGINALS.................................................. 17
7.10 TABLE OF CONTENTS................................................ 17
7.11 SEVERABILITY..................................................... 17
7.12 FURTHER ASSURANCES............................................... 18
i
<PAGE>
WARRANT AGREEMENT
This WARRANT AGREEMENT (this "Agreement") dated as of April ___, 2000, is
entered into by and between SILICON GAMING, INC., a California corporation
(together with its permitted successors and assigns, the "Company"), and
EQUISERVE TRUST COMPANY, N.A., a national banking association having its
principal offices in Canton, Massachusetts, as Warrant Agent (together with its
permitted successors and assigns, the "Warrant Agent").
WHEREAS, the Company has undergone a financial restructuring wherein the
Company will conduct an exchange offer pursuant to which the holders of Common
Stock par value $.001 per share ("Common Stock") of the Company will be provided
an opportunity to exchange their outstanding shares of Common Stock for a unit
("Unit") consisting of one share of Common Stock and one warrant, as hereinafter
described ("Warrant" or, taken collectively, the "Warrants"), to purchase
3.59662 shares of Common Stock.
WHEREAS, the Company desires that the Warrant Agent act on behalf of the
Company in connection with the issuances, division, transfer, exchange,
substitution and exercise of the Warrants, and the Warrant Agent is willing so
to act.
Each party agrees as follows for the benefit of the other party and for the
equal and ratable benefit of the holders of Warrants:
ARTICLE I
Definitions
1.1 DEFINITIONS.
"Board" means the Board of Directors of the Company or any committee
thereof duly authorized to act on behalf of such Board of Directors.
"Business Day" means each day that is not a Saturday, a Sunday or a day on
which banking institutions are not required to be open in New York City or in
the city where the Warrant Agent's principal corporate trust office is located.
"Certificated Warrants" means certificated Warrants in fully registered
definitive form.
"Common Stock" has the meaning ascribed thereto in the preamble to this
Agreement.
"Election Notice" means the Notice of Election to Participate distributed
to shareholders on or about April 17, 2000 with the Offering Circular pursuant
to the exchange offer.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Price" shall have the meaning set forth in Section 3.1.
"Expiration Date" shall have the meaning set forth in Section 3.2.
<PAGE>
"Extraordinary Transaction" shall have the meaning set forth in Section
4.1(d).
"Fair Market Value" means, with respect to any asset or Property, the price
which could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair Market Value will be
determined, except as otherwise provided, (i) if such property or asset has a
Fair Market Value of less than or equal to $1 million, by any Officer of the
Company or (ii) if such property or asset has a Fair Market Value in excess of
$1 million, by a majority of the Board of Directors of the Company and evidenced
by a Board Resolution, dated within 30 days of the relevant transaction.
"Issue Date" means the date on which Warrants are initially issued.
"Offering Circular" means the Offering Circular dated April 12, 2000,
setting for the terms and conditions of the exchange offer, as well as
information regarding the Company, distributed to shareholders of the Company on
April 17, 2000.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
President, the Chief Financial Officer or the Treasurer of the Company.
"Person" means any individual, corporation, company (including any limited
liability company), partnership, joint venture, trust, unincorporated
organization, government or any agency or political subdivision thereof.
"Redeemable Stock" means, with respect to any Person, any capital stock
that by its terms (or by the terms of any security into which it is convertible
or exchangeable) or otherwise (i) matures or is mandatorily redeemable pursuant
to a sinking fund obligation or otherwise, (ii) is or may become redeemable or
repurchaseable at the option of the holder thereof, in whole or in part, or
(iii) is convertible or exchangeable for indebtedness.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Termination Date" shall have the meaning set forth in Section 3.2.
"Trigger Date" shall have the meaning set forth in Section 3.2.
"Units" shall have the meaning set forth in the preamble.
"Voting Stock" means all classes of capital stock of a corporation then
outstanding and normally entitled to vote in the election of directors.
"Warrant Certificate" shall have the meaning set forth in Section 2.1.
2
<PAGE>
"Warrant Number" shall have the meaning set forth in Section 4.1.
"Warrant Shares" means the Common Stock (and other securities) issuable
upon the exercise of the Warrants.
1.2 RULES OF CONSTRUCTION. Unless the text otherwise requires:
(i) a term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the meaning assigned to
it in accordance with generally accepted accounting principles as in
effect from time to time;
(iii) "or" is not exclusive;
(iv) "including" means including, without limitation; and
(v) words in the singular include the plural and words in the plural
include the singular.
ARTICLE II
Warrant Certificates
2.1 FORM OF WARRANT CERTIFICATES. Certificates representing the Warrants
(the "Warrant Certificates") shall be in registered form only and substantially
in the form attached hereto as Exhibit A. The Warrant Certificates shall be
dated the date on which countersigned by the Warrant Agent and shall have such
insertions as are appropriate or required or permitted by this Agreement and may
have such letters, numbers or other marks of identification and such legends and
endorsements typed, stamped, printed, lithographed or engraved thereon as the
Company may deem appropriate and as are not inconsistent with the provisions of
this Agreement, or as may be required to comply with any law or with any rule or
regulation pursuant thereto, or to conform to usage. The Company shall approve
the form of the Warrant Certificates and any notation, legend or endorsement on
them.
The terms and provisions contained in the forms of the Warrant Certificates
annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a
part of this Agreement.
The Warrant Certificates shall be typed, printed, lithographed or engraved
or produced by any combination of these methods, all as determined by the
Officer of the Company executing such Warrant Certificates, as evidenced by such
Officer's execution of such Warrant Certificates.
2.2 EXECUTION AND DELIVERY OF WARRANT CERTIFICATES. The Company is
undertaking an exchange offer pursuant to which eligible shareholders will have
the opportunity to exchange their shares of Common Stock for Units consisting of
one share of Common Stock and one Warrant to purchase 3.59662 shares of Common
Stock for each whole share of Common Stock then held by the holder. The exchange
offer will be conducted pursuant to the Offering Circular and the Election
3
<PAGE>
Notice. Warrant Certificates evidencing Warrants to purchase an aggregate of up
to 58,985,734 Warrant Shares (subject to adjustment) shall be executed on or
prior to the Issue Date by the Company and delivered to the Warrant Agent for
countersignature. The Warrant Agent shall countersign and deliver such Warrant
Certificates upon the order and at the direction of the Company to the holders
of Common Stock who timely tender their Election Notices in compliance with the
provisions of the Offering Circular and the Election Notice. The Warrant Agent
is hereby authorized to countersign and deliver Warrant Certificates as required
hereby.
The Warrant Certificates shall be executed on behalf of the Company by its
Chairman of the Board, President or any Vice President, either manually or by
facsimile signature printed thereon. The Warrant Certificates shall be
countersigned manually by the Warrant Agent and shall not be valid for any
purpose unless so countersigned. In case any Officer of the Company whose
signature shall have been placed upon any of the Warrant Certificates shall
cease to be an Officer of the Company before countersignature by the Warrant
Agent and issuance and delivery thereof, such Warrant Certificates may,
nevertheless, be countersigned by the Warrant Agent and issued and delivered
with the same force and effect as though such person had not ceased to be an
Officer of the Company.
2.3 LOSS OR MUTILATION. Upon receipt by the Company and the Warrant Agent
of evidence satisfactory to them of the ownership and the loss, theft,
destruction or mutilation of any Warrant Certificate and of indemnity
satisfactory to them and (in the case of mutilation) upon surrender and
cancellation thereof, then, in the absence of notice to the Company or the
Warrant Agent that the Warrants represented thereby have been acquired by a bona
fide purchaser, the Company shall execute and the Warrant Agent shall
countersign and deliver to the registered holder of the lost, stolen, destroyed
or mutilated Warrant Certificate, in exchange for or in lieu thereof, a new
Warrant Certificate of the same tenor and for a like aggregate number of
Warrants. Upon the issuance of any new Warrant Certificate under this Section
2.3, the Company may require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in relation thereto and other
expenses (including the reasonable fees and expenses of the Warrant Agent and of
counsel to the Company) in connection therewith. Every new Warrant Certificate
executed and delivered pursuant to this Section 2.3 in lieu of any lost, stolen
or destroyed Warrant Certificate shall constitute a contractual obligation of
the Company, whether or not the allegedly lost, stolen or destroyed Warrant
Certificates shall be at any time enforceable under applicable law, and shall be
entitled to the benefits of this Agreement equally and proportionately with any
and all other Warrant Certificates duly executed and delivered hereunder. The
provisions of this Section 2.3 are exclusive and shall preclude (to the extent
lawful) all other rights or remedies with respect to the replacement of
mutilated, lost, stolen or destroyed Warrant Certificates.
ARTICLE III
Exercise Terms
3.1 EXERCISE PRICE. The number of Warrant Shares into which each Warrant
will be exercisable (subject to adjustment as provided in this Agreement) shall
be 3.59662. The Warrants will be exercisable on or after the first anniversary
4
<PAGE>
date following the Issue Date, initially at a price per Warrant Share of $0.1528
(the "Exercise Price"); provided, however, in the event an Extraordinary
Transaction occurs during the first 12 months following the Issue Date the
Warrants will automatically become exercisable.
3.2 EXPIRATION; TERMINATION. A Warrant shall terminate and become void as
of the earlier of (i) the close of business on the fourth anniversary of the
Issue Date (the "Expiration Date"), or (ii) the date such Warrant is exercised.
In addition, following the second anniversary of the Issue Date the Warrants
will automatically terminate, if not sooner exercised, on the 180th day (the
"Termination Date") following any period of twenty (20) consecutive trading days
ending on the date (the "Trigger Date") in which the average closing price of
the Common Stock on the NASDAQ National Market, New York Stock Exchange, or
other national exchange (adjusted for any stock split, reverse stock splits or
stock dividend) equals or exceeds $0.2346 per share. The Company shall within
five (5) days after the Trigger Date deliver to the Warrant Agent, and the
Warrant Agent shall within five (5) days thereafter mail to the holders, a
notice (in such form as shall be furnished to the Warrant Agent by the Company)
informing the holders of the occurrence of the Trigger Date, specifying the
Termination Date, and stating that the Warrants will automatically terminate on
the Termination Date (unless the Expiration Date or exercise of the Warrants
shall have earlier occurred).
3.3 MANNER OF EXERCISE. Warrants may be exercised, subject to Section 3.7
upon surrender to the Warrant Agent of the Warrant Certificates, together with
the form of election to purchase Common Stock (set forth as Exhibit 1 to the
Warrant Certificate) duly filled in and signed by the registered holder thereof
and the Exercise Price for each Warrant Share purchased (which Exercise Price
may consist of a cashless exercise as indicated on the applicable election
form). The rights represented by the Warrants shall be exercisable at the
election of the holder thereof either in full or from time to time in part and
in the event that a Warrant Certificate is surrendered for exercise in respect
of less than all the Warrant Shares purchasable on such exercise at any time
prior to the Expiration Date a new Warrant Certificate exercisable for the
remaining Warrant Shares will be issued. The Warrant Agent shall countersign and
deliver the required new Warrant Certificates, and the Company, at the Warrant
Agent's request, shall supply the Warrant Agent with Warrant Certificates duly
signed on behalf of the Company for such purpose. Funds received by the Warrant
Agent as consideration for the exercise of the Warrants must be delivered to the
Company within 3 business days following receipt.
3.4 ISSUANCE OF WARRANT SHARES. Upon the surrender of Warrant Certificates
and receipt of the Exercise Price for each Warrant Share purchased, as set forth
in Section 3.3, the Company shall issue and cause the Warrant Agent or, if
appointed, a transfer agent for the Common Stock ("Stock Transfer Agent") to
countersign and deliver to or upon the written order of the holder and in such
name or names as the holder may designate, a certificate or certificates for the
number of full Warrant Shares so purchased upon the exercise of such Warrants or
other securities or property to which it is entitled, registered or otherwise,
to the Person or Persons entitled to receive the same, together with cash as
provided in Section 3.5 in respect of any fractional Warrant Shares otherwise
issuable upon such exercise. Such certificate or certificates shall be deemed to
have been issued and any Person so designated to be named therein shall be
deemed to have become a holder of record of such Warrant Shares as of the date
of the surrender of such Warrant Certificates and payment of the per share
5
<PAGE>
Exercise Price; provided, however, that if, at such date, the transfer books for
the Warrant Shares shall be closed, the certificates for the Warrant Shares in
respect of which such Warrants are then exercised shall be issuable as of the
date on which such books shall next be opened and until such date the Company
shall be under no duty to deliver any certificates for such Warrant Shares;
provided, further, however, that such transfer books, unless otherwise required
by law, shall not be closed at any one time for a period longer than 20 calendar
days.
3.5 FRACTIONAL WARRANT SHARES. The Company shall not be required to issue
fractional Warrant Shares on the exercise of Warrants. If more than one Warrant
shall be exercised in full at the same time by the same holder, the number of
full Warrant Shares which shall be issuable upon such exercise shall be computed
on the basis of the aggregate number of Warrant Shares purchasable pursuant
thereto. If any fraction of a Warrant Share would, except for the provisions of
this Section 3.5, be issuable on the exercise of any Warrant (or specified
portion thereof), the Company shall pay an amount in cash equal to the market
price for one Warrant Share on the trading day immediately preceding the date
the Warrant is exercised, multiplied by such fraction, computed to the nearest
whole cent.
3.6 RESERVATION OF WARRANT SHARES. The Company shall at all times keep
reserved out of its authorized shares of Common Stock a number of shares of
Common Stock sufficient to provide for the exercise of all outstanding Warrants.
The registrar for the Common Stock (the "Registrar") shall at all times until
the Expiration Date reserve such number of authorized shares as shall be
required for such purpose. The Company will deliver a copy of this Agreement to
the Stock Transfer Agent with instructions to maintain it until the Expiration
Date. The Company will supply the Stock Transfer Agent with duly executed stock
certificates for such purpose and will itself provide or otherwise make
available any cash which may be payable as provided in Section 3.5. The Company
will furnish to the Stock Transfer Agent a copy of all notices of adjustments
and certificates related thereto transmitted to each holder.
Before taking any action which would cause an adjustment pursuant to
Article IV to reduce the Exercise Price below the then par value (if any) of the
Common Stock, the Company shall take any and all corporate action which may, in
the opinion of its counsel, be necessary in order that the Company may validly
and legally issue fully paid and nonassessable shares of Common Stock at the
Exercise Price as so adjusted.
The Company covenants that all shares of Common Stock which may be issued
upon exercise of Warrants will, upon issuance in accordance with the terms set
forth herein and in the Warrant Certificate, be fully paid, nonassessable, free
of preemptive rights, free from all taxes and free from all liens, charges and
security interests, created by or through the Company, with respect to the issue
thereof.
3.7 COMPLIANCE WITH LAW. (a) Notwithstanding anything in this Agreement to
the contrary, in no event shall a holder be entitled to exercise a Warrant
unless (i) a registration statement filed under the Securities Act in respect of
the issuance of the Warrant Shares is then effective or (ii) in the opinion of
counsel to the Company addressed to the Warrant Agent an exemption from the
registration requirements is available under the Securities Act or otherwise for
6
<PAGE>
the issuance of the Warrant Shares (and the delivery of any other securities for
which the Warrants may at the time be exercisable) at the time of such exercise.
(b)The Company will, upon the earlier to occur of (i) forty-five days prior
to the first anniversary date of the Issue Date, or (ii) an Extraordinary
Transaction, file with the Securities and Exchange Commission a registration
statement on the appropriate form under the Securities Act covering the issuance
of the Warrant Shares upon exercise of the Warrants and shall use reasonable
efforts to cause the Securities and Exchange Commission to declare such
registration statement effective under the Securities Act not later than the
date the Warrants first become exercisable. The Company will use reasonable
efforts to maintain the effectiveness of such Registration Statement under the
Securities Act at all times that the Warrants are exercisable. At all times that
the Warrants are exercisable, if and to the extent that the Common Stock is
approved for listing on the Nasdaq National Market, the New York Stock Exchange
or other national securities exchange, the Company shall take all action
required to qualify the Warrant Shares for listing on such market or exchange.
If and to the extent the Company fails to comply with any of the covenants set
forth in this Section 3.7(b), the Expiration Date shall be extended by a number
of days equal to the number of days the Company failed to so comply with such
covenants (such extension period to be computed concurrently, and not
consecutively, for one or more simultaneous failures to so comply with such
covenants).
(c) If any shares of Common Stock required to be reserved for purposes of
exercise of Warrants require, under any other Federal or state law or applicable
governing rule or regulation of any national securities exchange, registration
with or approval of any governmental authority, or listing on any such national
securities exchange before such shares may be issued upon exercise, the Company
will in good faith and as expeditiously as possible endeavor also to cause such
shares to be duly registered or approved by such governmental authority or
listed on the relevant national securities exchange, as the case may be.
3.8 AMENDMENT OF OUTSTANDING OPTIONS. The Company will not amend the terms
or provisions of its Amended and Restated 1994 Stock Option Plan, 1996 Outside
Directors Stock Option Plan, 1996 Employee Stock Purchase Plan, 1997
Nonstatutory Stock Option Plan, 1998 Employee Stock Purchase Plan, any option
agreements outstanding thereunder or any other plan or agreement under which
options to employees or directors are outstanding as of the Issue Date
(collectively the "Plans"), if such amendment would result in (i) a decrease in
the per share exercise price, or (ii) an increase in the number of shares for
which the options might be exercised, of any options outstanding as of the Issue
Date under the Plans, other than as provided for by the terms and provisions of
the Plans as in effect on the Issue Date.
ARTICLE IV
Antidilution Provisions
4.1 ADJUSTMENT OF EXERCISE PRICE AND WARRANT NUMBER. The number of Warrant
Shares issuable upon the exercise of each Warrant (the "Warrant Number") is
subject to adjustment from time to time upon the occurrence of the events
enumerated in, or as otherwise provided in, this Section 4.1.
7
<PAGE>
(a) Adjustment for Change in Capital Stock
If the Company:
(1) subdivides or reclassifies its outstanding shares of Common Stock
into a greater number of shares;
(2) combines or reclassifies its outstanding shares of Common Stock
into a smaller number of shares; or
(3) issues by reclassification of its Common Stock any shares of its
capital stock (other than reclassification arising solely as a result of a
change in the par value or no par value of the Common Stock);
then the Warrant Number in effect immediately prior to such action shall be
proportionately adjusted so that the holder of any Warrant thereafter exercised
may receive the aggregate number and kind of shares of capital stock of the
Company which it would have owned immediately following such action if such
Warrant had been exercised immediately prior to such action.
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, combination or reclassification.
Such adjustment shall be made successively whenever any event listed above
shall occur.
The Company shall not issue shares of Common Stock as a dividend or
distribution on any class of capital stock other than Common Stock with the
intention of denying the Warrant holders the benefit of the foregoing provisions
unless the Warrant holders also receive such dividend or distribution on a
ratable basis or the appropriate adjustment to the Warrant Number is made under
this Section 4.1.
(b) ADJUSTMENT TO EXERCISE PRICE Upon each adjustment to the Warrant Number
pursuant to this Section 4.1, the Exercise Price shall be adjusted so that it is
equal to the Exercise Price in effect immediately prior to such adjustment
multiplied by a quotient, the numerator of which is the Warrant Number in effect
immediately prior to such adjustment and the denominator of which is the Warrant
Number in effect immediately after such adjustment.
(c) WHEN NO ADJUSTMENT REQUIRED If an adjustment is made upon the
establishment of a record date for a reclassification subject to subsection (a),
hereof and such reclassification is subsequently cancelled, the Warrant Number
and Exercise Price then in effect shall be readjusted, effective as of the date
when the Board of Directors determines to cancel such reclassification, to that
which would have been in effect if such record date had not been fixed.
(d) REORGANIZATIONS In the event of, prior to the Expiration Date, (i) a
merger, reorganization or consolidation in which a majority of the outstanding
voting power of the surviving or consolidated corporation immediately following
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such event is held by persons or entities who were not stockholders of the
Company immediately prior to such event, (ii) the sale or transfer or all or
substantially all of the properties and assets of the Company and its
subsidiaries, (iii) any purchase by any party (or group of affiliated parties)
other than any investment fund or funds associated with DDJ Capital management
LLC, of all of the shares of capital stock of the Company (each an
"Extraordinary Transaction"), the Warrants shall terminate on the effective date
of such Extraordinary Transaction, unless provision is made in such transaction
in the sole discretion of the parties thereto for the assumption of the Warrants
or the substitution for the Warrants of new warrants of the successor person or
entity or a parent or subsidiary thereof, with such adjustment as the number and
kinds of shares and the per share exercise price as shall be necessary to
provide holders of the Warrants upon exercise thereof with the kind and amount
of securities, cash or other assets that such holder (net of Exercise Price)
would have owned immediately after the Extraordinary Transaction if such holder
had exercised the Warrant immediately before the effective date of the
Extraordinary Transaction. In the event of any transaction which will result in
such termination, the Company shall give to the Warrant Agent written notice
thereof. Until the earlier to occur of such effective date or record date, the
holders of Warrants may exercise the Warrants in accordance with their terms,
but after such effective date or record date, as the case may be, holders of
Warrants may not exercise the Warrants unless they are assumed or substituted by
the successor as provided above.
(e) FORM OF WARRANTS Irrespective of any adjustments in the Exercise Price
or the number or kind of shares purchasable upon the exercise of the Warrants,
Warrants here or hereafter issued may continue to express the same price and
number and kind of shares as are stated in the Warrants initially issuable
pursuant to this Agreement.
(f) OTHER DILUTIVE EVENTS In case any event shall occur as to which the
provisions of this Section 4.1 are not strictly applicable but the failure to
make any adjustment would not, in the good faith judgment of the Board of
Directors, fairly protect the purchase rights represented by the Warrants in
accordance with the essential intent and principles of such section, then, in
each such case, such Board of Directors shall make a good faith adjustment to
the Exercise Price and Warrant Number into which each Warrant is exercisable in
accordance with the intent of this Section 4.1.
(g) MISCELLANEOUS For purpose of this Section 4.1, the term "shares of
Common Stock" shall mean (i) shares of any class of stock designated as Common
Stock of the Company as of the date of this Agreement and (ii) shares of any
other class of stock resulting from successive changes or reclassification of
such shares consisting solely of changes in par value, or from par value to no
par value, or from no par value to par value. In the event that at any time, as
a result of an adjustment made pursuant to this Section 4.1, the holders of
Warrants shall become entitled to purchase any securities of the Company other
than, or in addition to, shares of Common Stock, thereafter the number or amount
of such other securities so purchasable upon exercise of each Warrant shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Warrant Shares
contained in subsections (a) through (e) of this Section 4.1, inclusive, and the
other provisions hereof with respect to the Warrant Shares or the Common Stock
shall apply on like terms to any such other securities.
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4.2 NOTICE OF ADJUSTMENT. Whenever the Exercise Price or the number of
shares of Common Stock and other property, if any, purchasable upon exercise of
Warrants is adjusted, as herein provided, the Company shall deliver to the
Warrant Agent a certificate of an officer of the Company setting forth, in
reasonable detail, the event requiring the adjustment and the method by which
such adjustment was calculated and specifying the Exercise Price and the number
of shares of Common Stock purchasable upon exercise of Warrants after giving
effect to such adjustment. The Company shall promptly cause the Warrant Agent to
mail a copy of such certificate to each holder in accordance with Section 7.6.
The Warrant Agent shall be entitled to rely on such certificate and shall be
under no duty or responsibility with respect to any such certificate, except to
exhibit the same from time to time, to any holder desiring an inspection thereof
during reasonable business hours. The Warrant Agent shall not at any time be
under any duty or responsibility to any holder to determine whether any facts
exist which may require any adjustment of the Exercise Price or the number of
shares of Common Stock or other stock or property, purchasable on exercise of
the Warrants, or with respect to the nature or extent of any such adjustment
when made, or with respect to the method employed in making such adjustment or
the validity or value of any shares of Common Stock.
4.3 NOTICE OF CERTAIN TRANSACTIONS. In the event that the Company shall
propose (a) to effect any Extraordinary Transaction or (b) to effect the
voluntary or involuntary dissolution, liquidation or winding-up of the Company,
the Company shall within 5 days send to the Warrant Agent and the Warrant Agent
shall within 5 days send the holders a notice (in such form as shall be
furnished to the Warrant Agent by the Company) of such proposed action or offer,
such notice to be mailed by the Warrant Agent to the holders at their addresses
as they appear in the Certificate register, which shall specify the date such
issuance or event is to take place and the date of participation therein by the
holders of Common Stock, if any such date is to be fixed, and shall briefly
indicate the effect of such action on the Common Stock and on the number and
kind of any other shares of stock and on other property, if any, and the number
of shares of Common Stock and other property, if any, purchasable upon exercise
of each Warrant and the Exercise Price after giving effect to any adjustment, if
any, which will be required as a result of such action. Such notice shall be
given by the Company at least 20 days prior to the date of the taking of such
proposed action or the date of participation therein by the holders of Common
Stock, whichever shall be the earlier.
4.4 ADJUSTMENT TO WARRANT CERTIFICATE. The form of Warrant Certificate need
not be changed because of any adjustment made pursuant to this Article IV, and
Warrant Certificates issued after such adjustment may state the same Exercise
Price and the same number of shares of Common Stock as are stated in the Warrant
Certificates initially issued pursuant to this Agreement. The Company, however,
may at any time in its sole discretion make any change in the form of Warrant
Certificate to give effect to such adjustments. Such a change in form will not
affect the substance of the Warrant Certificate, and any Warrant Certificate
thereafter issued or countersigned, whether in exchange or substitution for an
outstanding Warrant Certificate or otherwise, may be in the form as so changed.
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ARTICLE V
Transferability
5.1 TRANSFER AND EXCHANGE. The Warrant Certificates shall be issued in
registered form only. The Company shall cause to be kept at the office of the
Warrant Agent a register in which, subject to such reasonable regulations as it
may prescribe, the Company shall provide for the registration of Warrant
Certificates and transfers or exchanges of Warrant Certificates as herein
provided. All Warrant Certificates issued upon any registration of transfer or
exchange of Warrant Certificates shall be the valid obligations of the Company,
evidencing the same obligations, and entitled to the same benefit under this
Agreement, as the Warrant Certificates surrendered for such registration of
transfer or exchange.
The Warrants will not be registered under the Securities Act. The Warrants
may not be sold, transferred or otherwise disposed of except pursuant to a valid
exemption from the registration requirements of the Securities Act and
applicable state securities laws. A holder may transfer its Warrants only
pursuant to a valid exemption from the registration requirements of applicable
securities laws and only by complying with the terms of this Agreement. No such
transfer shall be effected until, and such transferee shall succeed to the
rights of a holder only upon, final acceptance and registration of the transfer
by the Warrant Agent in the register. Prior to the registration of any transfer
of Warrants by a holder as provided herein, the Company, the Warrant Agent, and
any agent of the Company or the Warrant Agent may treat the Person in whose name
the Warrants are registered as the owner thereof for all purposes and as the
Person entitled to exercise the rights represented thereby, any notice to the
contrary notwithstanding. When Warrant Certificates are presented to the Warrant
Agent with a request to register the transfer or to exchange them for an equal
amount of Warrants of other authorized denominations, the Warrant Agent shall
register the transfer or make the exchange in accordance with the provisions
hereof.
5.2 REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE. When Certificated
Warrants are presented to the Warrant Agent with a request from the holder of
such Warrants to register the transfer or to exchange them for an equal number
of Warrants of other authorized denominations, the Warrant Agent shall register
the transfer or make the exchange as requested; provided, however, that every
Warrant presented and surrendered for registration of transfer or exchange shall
be duly endorsed and be accompanied by a written instrument of transfer in form
satisfactory to the Company, duly executed by the holder thereof or the holder's
attorneys duly authorized in writing.
To permit registrations of transfer and exchanges, the Company shall make
available to the Warrant Agent a sufficient number of executed Warrant
Certificates to effect such registrations of transfers and exchanges. No service
charge shall be made to the holder for any registration of transfer or exchange
of Warrants, but the Company may require from the transferring or exchanging
holder payment of a sum sufficient to cover any transfer tax or similar
governmental charge payable upon exchanges pursuant to Section 2.3 and exchanges
in respect of portions of Warrants not exercised and the Company may deduct such
taxes from any payment of money to be made and such transfer or exchange shall
not be consummated (if such taxes are not deducted in full) unless or until the
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holder shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company and the Warrant Agent that such
tax has been paid.
5.3 SURRENDER OF WARRANT CERTIFICATES. Any Warrant Certificate surrendered
for registration of transfer, exchange, exercise or repurchase of the Warrants
represented thereby shall, if surrendered to the Company, be delivered to the
Warrant Agent, and all Warrant Certificates surrendered or so delivered to the
Warrant Agent shall be promptly canceled by the Warrant Agent and shall not be
reissued by the Company and, except as provided in this Article V in case of an
exchange or in Article III hereof in case of the exercise or repurchase of less
than all the Warrants represented thereby or in case of a mutilated Warrant
Certificate, no Warrant Certificate shall be issued hereunder in lieu thereof.
The Warrant Agent shall deliver to the Company from time to time such canceled
Warrant Certificates.
ARTICLE VI
Warrant Agent
6.1 APPOINTMENT OF WARRANT AGENT. The Company hereby appoints the Warrant
Agent to act as agent for the Company in accordance with provisions of this
Agreement and the Warrant Agent hereby accepts such appointment.
6.2 RIGHTS AND DUTIES OF WARRANT AGENT.
(a) AGENT FOR THE COMPANY. In acting under this Warrant Agreement and in
connection with the Warrant Certificates, the Warrant Agent is acting solely as
agent of the Company and does not assume any obligation or relationship or
agency or trust for or with any of the holders of Warrant Certificates or
beneficial owners of Warrants.
(b) COUNSEL. The Warrant Agent may consult with counsel satisfactory to it,
and the advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the advice of such counsel.
(c) DOCUMENTS. The Warrant Agent shall be protected and shall incur no
liability for or in respect of any action taken or thing suffered by it in
reliance upon any Warrant Certificate, notice, direction, consent, certificate,
affidavit, statement or other paper or document reasonably believed by it to be
genuine and to have been presented or signed by the proper parties.
(d) NO IMPLIED OBLIGATIONS. The Warrant Agent shall be obligated to perform
only such duties as are herein and in the Warrant Certificates specifically set
forth and no implied duties or obligations shall be read into this Agreement or
the Warrant Certificates against the Warrant Agent. The Warrant Agent shall not
be under any obligation to take any action hereunder which may tend to involve
it in any expense or liability for which it does not receive indemnity if such
indemnity is reasonably requested. The Warrant Agent shall not be accountable or
under any duty or responsibility for use by the Company of any of the Warrant
Certificates countersigned by the Warrant Agent and delivered by it to the
holders or on behalf of the holders pursuant to this Agreement or for the
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application by the Company of the proceeds of the Warrants. The Warrant Agent
shall have no duty or responsibility in case of any default by the Company in
the performance of its covenants or agreements contained herein or in the
Warrant Certificates or in the case of the receipt of any written demand from a
holder with respect to such default, including any duty or responsibility to
initiate or attempt to initiate any proceedings at law or otherwise.
(e) NOT RESPONSIBLE FOR ADJUSTMENTS OR VALIDITY OF STOCK. The Warrant Agent
shall not at any time be under any duty or responsibility to any holder to
determine whether any facts exist that may require an adjustment of the number
of shares of Common Stock purchasable upon exercise of each Warrant or the
Exercise Price, or with respect to the nature or extent of any adjustment when
made, or with respect to the method employed, or herein or in any supplemental
agreement provided to be employed, in making the same. The Warrant Agent shall
not be accountable with respect to the validity or value of any shares of Common
Stock or of any securities or property which may at any time be issued or
delivered upon the exercise of any Warrant or upon any adjustment pursuant to
Article IV, and it makes no representation with respect thereto. The Warrant
Agent shall not be responsible for any failure of the Company to make any cash
payment or to issue, transfer or deliver any shares of Common Stock or stock
certificates upon the surrender of any Warrant Certificate for the purpose of
exercise or upon any adjustment pursuant to Article IV, or to comply with any of
the covenants of the Company contained in Article IV.
6.3 INDIVIDUAL RIGHTS OF WARRANT AGENT. The Warrant Agent and any
stockholder, director, officer or employee of the Warrant Agent may buy, sell or
deal in any of the Warrants or other securities of the Company or its affiliates
or become pecuniarily interested in transactions in which the Company or its
affiliates may be interested, or contract with or lend money to the Company or
its affiliates or otherwise act as fully and freely as though it were not the
Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant
Agent from acting in any other capacity for the Company or for any other legal
entity.
6.4 WARRANT AGENT'S DISCLAIMER. The Warrant Agent shall not be responsible
for and makes no representation as to the validity or adequacy of this Agreement
or the Warrant Certificates and it shall not be responsible for any statement in
this Agreement or the Warrant Certificates other than its countersignature
thereon.
6.5 COMPENSATION. The Company agrees to pay the Warrant Agent from time to
time such compensation for its services as the Company and the Warrant Agent
shall agree from time to time. The Company's payment obligations pursuant to
this Section 6.5 shall survive the termination of this Agreement.
6.6 SUCCESSOR WARRANT AGENT.
(a) THE COMPANY TO PROVIDE WARRANT AGENT. The Company agrees for the
benefit of the holders that there shall at all times be a Warrant Agent
hereunder until all the Warrants have been exercised or are no longer
exercisable.
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(b) RESIGNATION AND REMOVAL. The Warrant Agent may at any time resign by
giving written notice to the Company of such intention on its part, specifying
the date on which its desired resignation shall become effective; provided,
however, that such date shall not be less than 60 days after the date on which
such notice is given unless the Company otherwise agrees. The Warrant Agent
hereunder may be removed at any time by the filing with it an instrument in
writing signed by or on behalf of the Company and specifying such removal and
the date when it shall become effective, which date shall not be less than 60
days after such notice is given unless the Warrant Agent otherwise agrees. Any
removal under this Section 6.6 shall take effect upon the appointment by the
Company as hereinafter provided of a successor Warrant Agent (which shall be a
bank or trust company authorized under the laws of the jurisdiction of its
organization to exercise corporate trust powers) and the acceptance of such
appointment by such successor Warrant Agent.
(c) THE COMPANY TO APPOINT SUCCESSOR. In case at any time the Warrant Agent
shall resign, or shall be removed, or shall become incapable of acting, or shall
be adjudged bankrupt or insolvent, or shall commence a voluntary case under the
Federal bankruptcy laws, as now or hereafter constituted, or under any other
applicable Federal or state bankruptcy, insolvency or similar law or shall
consent to the appointment of or taking possession by a receiver, custodian,
liquidator, assignee, trustee, sequestrator (or other similar official) of the
Warrant Agent or its property or affairs, or shall make an assignment for the
benefit of creditors, or shall admit in writing its inability to pay its debts
generally as they become due, or shall take corporate action in furtherance of
any such action, or a decree or order for relief by a court having jurisdiction
in the premises shall have been entered in respect of the Warrant Agent in an
involuntary case under the Federal bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal or State bankruptcy, insolvency or
similar law; or a decree order by a court having jurisdiction in the premises
shall have been entered for the appointment of a receiver, custodian,
liquidator, assignee, trustee, sequestrator (or similar official) of the Warrant
Agent or of its property or affairs, or any public officer shall take charge or
control of the Warrant Agent or of its property or affairs for the purpose of
rehabilitation, conservation, winding up of or liquidation, a successor Warrant
Agent, qualified as aforesaid, shall be appointed by the Company by an
instrument in writing, filed with the successor Warrant Agent (or, in the
absence of such appointment within 60 days after the notice of resignation or
removal, either party hereto may petition the appointment of a successor by a
court of competent jurisdiction). Upon the appointment as aforesaid of a
successor Warrant Agent and acceptance by the successor Warrant Agent of such
appointment, the Warrant Agent shall cease to be Warrant Agent hereunder;
provided, however, that in the event of the resignation of the Warrant Agent
under this subsection (c), such resignation shall be effective on the earlier of
(i) the date specified in the Warrant Agent's notice of resignation and (ii) the
appointment and acceptance of a successor Warrant Agent hereunder.
(d) SUCCESSOR TO EXPRESSLY ASSUME DUTIES. Any successor Warrant Agent
appointed hereunder shall execute, acknowledge and deliver to its predecessor
and to the Company an instrument accepting such appointment hereunder, and
thereupon such successor Warrant Agent, without any further act, deed or
conveyance, shall become vested with all the rights and obligations of such
predecessor with like effect as if originally named as Warrant Agent hereunder,
and such predecessor, upon payment of its charges and disbursements then unpaid,
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shall thereupon become obligated to transfer, deliver and pay over, and such
successor Warrant Agent shall be entitled to receive, all monies, securities and
other property on deposit with or held by such predecessor, as Warrant Agent
hereunder.
(e) SUCCESSOR BY MERGER. Any corporation into which the Warrant Agent
hereunder may be merged or consolidated, or any corporation resulting from any
merger or consolidation to which the Warrant Agent shall be a party, or any
corporation to which the Warrant Agent shall sell or otherwise transfer all or
substantially all of its corporate trust business; provided that it shall be
qualified as aforesaid, shall be the successor Warrant Agent under this
Agreement without the execution or filing of any paper or any further act on the
part of any of the parties hereto.
ARTICLE VII
Miscellaneous
7.1 COMPANY RESALES. The Company hereby agrees with each holder, that the
Company shall not resell any Warrants or Warrant Shares it acquires, by purchase
or otherwise, except pursuant to an effective registration statement.
7.2 SEC REPORTS AND OTHER INFORMATION. Notwithstanding that the Company may
not be subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company shall, for all periods ending after the date of this
Warrant Agreement and through the Expiration Date, file with the SEC and
thereupon provide the Warrant Agent and holders with such annual reports and
such information, documents and other reports as are specified in Sections 13
and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to
such Sections, such information, documents and other reports to be so filed and
provided at the times specified for the filing of such information, documents
and reports under such Sections.
7.3 PERSONS BENEFITING. Nothing in this Agreement is intended or shall be
construed to confer upon any Person other than the Company, the Warrant Agent
and the holders any right, remedy or claim under or by reason of this agreement
or any part hereof.
7.4 RIGHTS OF HOLDERS. Except as expressly contemplated herein, holders of
unexercised Warrants are not, solely because they hold Warrants, entitled (i) to
receive dividends or other distributions, (ii) to receive notice of or vote at
any meeting of the stockholders, (iii) to consent to any action of the
stockholders, (iv) to exercise any preemptive right or to receive notice of any
other proceedings of the Company or (v) to exercise any other rights whatsoever
as stockholders of the Company.
7.5 AMENDMENT. This Agreement may be amended by the parties hereto without
the consent of any holder for the purpose of curing any ambiguity, or of curing,
correcting or supplementing any defective provision contained herein or making
any other provisions with respect to matters or questions arising under this
Agreement as the Company and the Warrant Agent may deem necessary or desirable;
provided, however, that the Company determines, and the Warrant Agent may rely
on such determination, that such action shall not affect adversely the rights of
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the holders. Any amendment or supplement to this Agreement that has an adverse
effect on the interests of the holders shall require the written consent of the
holders of a majority of the then outstanding Warrants. The consent of each
holder affected shall be required for any amendment pursuant to which the
Exercise Price would be increased or the number of Warrant Shares purchasable
upon exercise of Warrants would be decreased (other than pursuant to adjustments
provided in Article IV). In determining whether the holders of the required
number of Warrants have concurred in any direction, waiver or consent, Warrants
owned by the Company, or by any officer or employee of the Company or any of its
subsidiaries, or by any person directly or indirectly controlling or controlled
by or under direct or indirect common control with the Company shall be
disregarded and deemed not to be outstanding, except that, for the purpose of
determining whether the Warrant Agent shall be protected in relying on any such
direction, waiver or consent, only Warrants which the Warrant Agent knows are so
owned shall be so disregarded. Also, subject to the foregoing, only Warrants
outstanding at the time shall be considered in any such determination.
7.6 NOTICES. Any notice or communication shall be in writing and delivered
in Person or mailed by first-class mail addressed as follows:
if to the Company:
Silicon Gaming, Inc.
2800 W. Bayshore Road
Palo Alto, CA 94303
Attention: President
with a copy to:
Squire, Sanders & Dempsey L.L.P.
40 N. Central Avenue, Suite 2700
Phoenix, AZ 85004
Attention: Joseph M. Crabb, Esq.
Joel J. Agena, Esq.
and:
Gray, Cary, Ware & Freidenrich
400 Hamilton Avenue
Palo Alto, CA 94301
Attention: James M. Koshland, Esq.
if to the Warrant Agent:
EquiServe Trust Company, N.A.
150 Royall Street
Canton, MA 02021
Att: Corporate Actions Department
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The Company or the Warrant Agent by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a holder shall be mailed to the
holder at the holder's address as it appears on the register in which the
Company shall provide for the registration of Warrants and Warrant Shares and of
transfers and exchanges of Warrants and Warrant Shares and shall be sufficiently
given if so mailed within the time prescribed.
Failure to mail a notice or communication to a holder or any defect in it
shall not affect its sufficiency with respect to other holders. If a notice or
communication is mailed in the manner provided above, it is duly given, whether
or not the addressee receives it.
7.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA AS APPLIED TO
CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN THE STATE OF CALIFORNIA, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW. THE COMPANY HEREBY IRREVOCABLY SUBMITS
TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL AND CALIFORNIA STATE COURTS LOCATED
IN THE CITY OF PALO ALTO OR THE CITY OF SAN JOSE IN CONNECTION WITH ANY SUIT,
ACTION OR PROCEEDING RELATED TO THIS AGREEMENT OR ANY OF THE MATTERS
CONTEMPLATED HEREBY, IRREVOCABLY WAIVES ANY DEFENSE OF LACK OF PERSONAL
JURISDICTION AND IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUIT,
ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. THE COMPANY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER
APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING
OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND
ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM.
7.8 SUCCESSORS. All agreements of the Company in this Agreement and the
Warrant Certificates shall bind its successors. All agreements of the Warrant
Agent in this Agreement shall bind its successors.
7.9 MULTIPLE ORIGINALS. The parties may sign any number of copies of this
Agreement. Each signed copy shall be an original, but all of them together
represent the same agreement. One signed copy is enough to prove this Agreement.
7.10 TABLE OF CONTENTS. The table of contents and headings of the Articles
and Sections of this Agreement have been inserted for convenience of reference
only, are not intended to be considered a part hereof and shall not modify or
restrict any of the terms or provisions hereof.
7.11 SEVERABILITY. The provisions of this Agreement are severable, and if
any clause or provision shall be held invalid, illegal or unenforceable in whole
or in part in any jurisdiction, then such invalidity or unenforceability shall
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affect in that jurisdiction only such clause or provision, or part thereof, and
shall not in any manner affect such clause or provision in any other
jurisdiction or any other clause or provision of this Agreement in any
jurisdiction.
7.12 FURTHER ASSURANCES. From time to time on and after the date hereof,
the Company shall deliver or cause to be delivered to the Warrant Agent such
further documents and instruments and shall do and cause to be done such further
acts as the Warrant Agent shall reasonably request (it being understood that the
Warrant Agent shall have no obligation to make such request) to carry out more
effectively the provisions and purposes of this Agreement, to evidence
compliance herewith or to assure itself that it is protected hereunder.
IN WITNESS WHEREOF, the parties have caused this Warrant Agreement to be
duly executed as of the date first written above.
SILICON GAMING, INC.
By:
-------------------------------------
Name: Andrew S. Pascal
Title: President and Chief Executive
Officer
EQUISERVE TRUST COMPANY, N.A.,
as Warrant Agent,
By:
-------------------------------------
Name:
Title:
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EXHIBIT A
FORM OF WARRANT CERTIFICATE
No. _________ Certificate for _____ Warrants
CUSIP No. 827054 12 3
WARRANTS TO PURCHASE COMMON STOCK OF
SILICON GAMING, INC.
THIS CERTIFIES THAT ___________________, or its registered assigns, is the
registered holder of the number of Warrants set forth above (the "Warrants").
Each Warrant entitles the holder thereof (the "Holder"), at its option and
subject to the provisions contained herein and in the Warrant Agreement referred
to below, to purchase from Silicon Gaming, Inc., a California corporation (the
"Company"), shares of Common Stock, $.001 par value, of the Company (the "Common
Stock") at the per share exercise price of $0.1528 (the "Exercise Price"). The
number of shares of Common Stock into which each Warrant will be exercisable
(subject to adjustment as provided in the Warrant Agreement) shall be 3.59662
per share of current Common Stock. This Warrant shall terminate and become void
as of the earlier of (i) the close of business on the fourth anniversary of the
Issue Date (the "Expiration Date"), or (ii) the date such Warrant is exercised.
In addition, following the second anniversary of the Issue Date the Warrants
will automatically terminate, if not sooner exercised, on the 180th day (the
"Termination Date") following any period of twenty (20) consecutive trading days
ending on the date (the "Trigger Date") on which the average closing price of
the Common Stock as reported by the NASDAQ National Market, New York Stock
Exchange, or other national securities exchange (adjusted for any stock split,
reverse stock splits or stock dividend) equals or exceeds $0.2346 per share. The
"Issue Date" of this Warrant is May ___, 2000. The number of shares purchasable
upon exercise of the Warrants and the Exercise Price per share shall be subject
to adjustment from time to time as set forth in the Warrant Agreement.
This Warrant Certificate is issued under and in accordance with a Warrant
Agreement dated as of April ___, 2000 (the "Warrant Agreement"), between the
Company and EquiServe Trust Company, N.A., a national banking association with
its principal offices in Canton, Massachusetts (the "Warrant Agent," which term
includes any successor Warrant Agent under the Warrant Agreement), and is
subject to the terms and provisions contained in the Warrant Agreement, to all
of which terms and provisions the Holder of this Warrant Certificate consents by
acceptance hereof. The Warrant Agreement is hereby incorporated herein by
reference and made a part hereof. In the event of a conflict between the terms
and provisions of this Warrant and the Warrant Agreement, the terms and
provisions of the Warrant Agreement will control. Reference is hereby made to
the Warrant Agreement for a full statement of the respective rights, limitations
of rights, duties and obligations of the Company, the Warrant Agent and the
Holders of the Warrants. Capitalized terms used but not defined herein shall
have the meanings ascribed thereto in the Warrant Agreement.
<PAGE>
The Company may require payment of a sum sufficient to pay all taxes,
assessments or other governmental charges in connection with the transfer or
exchange of the Warrant Certificates pursuant to Section 5.2 of the Warrant
Agreement but not for any exchange or original issuance (not involving a
transfer) with respect to temporary Warrant Certificates, the exercise of the
Warrants or the Warrant Shares.
Upon any partial exercise of the Warrants, there shall be countersigned and
issued to the Holder hereof a new Warrant Certificate in respect of the shares
of Common Stock as to which the Warrants shall not have been exercised. This
Warrant Certificate may be exchanged at the office of the Warrant Agent by
presenting this Warrant Certificate properly endorsed with a request to exchange
this Warrant Certificate for other Warrant Certificates evidencing an equal
number of Warrants. No fractional Warrant Shares will be issued upon the
exercise of the Warrants, but the Company shall pay an amount in cash equal to
the market price for one Warrant Share on the trading day immediately preceding
the date the Warrant is exercised, multiplied by the fraction of a Warrant Share
that would be issuable on the exercise of any Warrant.
All shares of Common Stock issuable by the Company upon the exercise of the
Warrants shall, upon such issue, be duly and validly issued and fully paid and
nonassessable.
Notwithstanding anything in this Warrant Certificate or the Warrant
Agreement to the contrary, in no event shall a holder be entitled to exercise a
Warrant unless (i) a registration statement filed under the Securities Act in
respect of the issuance of the Warrant Shares is then effective or (ii) in the
opinion of counsel to the Company addressed to the Warrant Agent an exemption
from the registration requirements is available under the Securities Act or
otherwise for the issuance of the Warrant Shares (and the delivery of any other
securities for which the Warrants may at the time be exercisable) at the time of
such exercise.
The Warrants will not be registered under the Securities Act. The Warrants
may not be sold, transferred or otherwise disposed of except pursuant to a valid
exemption from the registration requirements of the Securities Act and
applicable state securities laws. A holder may transfer its Warrants only
pursuant to a valid exemption from the registration requirements of applicable
securities laws and only by complying with the terms of this Agreement. No such
transfer shall be effected until, and such transferee shall succeed to the
rights of a holder only upon, final acceptance and registration of the transfer
by the Warrant Agent in the register.
The Holder in whose name the Warrant Certificate is registered may be
deemed and treated by the Company and the Warrant Agent as the absolute owner of
the Warrant Certificate for all purposes whatsoever and neither the Company nor
the Warrant Agent shall be affected by notice to the contrary.
The Warrants do not entitle any Holder hereof to any of the rights of a
stockholder of the Company.
This Warrant Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Warrant Agent.
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<PAGE>
DATED: April ___, 2000
SILICON GAMING, INC. Countersigned:
By: EQUISERVE TRUST COMPANY, N.A. as
-------------------------------- Warrant Agent,
Name: Andrew S. Pascal
Its: President and Chief Executive
Officer
By:
Attest: -------------------------------
Authorized Signatory
- ------------------------------------
Assistant Secretary
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<PAGE>
EXHIBIT 1
NOTICE OF EXERCISE OF WARRANT
The undersigned hereby irrevocably elects to exercise the right,
represented by the Warrant Certificate dated as of May ___, 2000, to purchase
_______ shares of the Common Stock, par value $.001 pre shares, of Silicon
Gaming, Inc. and
[Check one]
______ tenders herewith payment of $____________ (the Exercise Price multiplied
by the number of shares).
______ elects a cashless exercise for the number of shares of Common Stock equal
in Market Value to the difference between the Market Value of ______ shares of
Common Stock issuable upon exercise of this Warrant and the total case Exercise
Price thereof. Market Value shall be an amount equal to the market price of the
Common Stock on the day of the Company's receipt of this Notice of Exercise form
duly executed, multiplied by the number of shares of Common Stock above.
Please deliver the stock certificate to:
----------------------------------
----------------------------------
----------------------------------
- --------------------------------
[Name of holder]
By:
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