EXHIBIT 10.2
SUBSCRIPTION AGREEMENT
OCTOBER 12, 2004
Electronic Game Card, Inc.
000 Xxxxx Xxxxxx, 00xx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000-0000
Attn: Xxxx Xxxxxxx
Dear Xx. Xxxxxxx:
Reference is made in this Subscription Agreement (this "Agreement") to
that certain Joint Venture Agreement (the "JV Agreement"), dated October 12,
2004, between Scientific Games International, Inc., a Delaware corporation
("SciGames"), and Electronic Game Card Inc., a Nevada corporation (the
"Company"), pursuant to which such parties will operate a joint venture to
distribute electronic game cards (the "Joint Venture").
A. SUBSCRIPTION FOR COMMON SHARES.
Contemporaneously with and as part of the inducement for SciGames to enter
into the JV Agreement, SciGames hereby subscribes for Two Million One Hundred
Seventy-One Thousand Five Hundred Ninety-Five (2,171,595) shares of newly-issued
common stock of the Company (the "Shares") for an aggregate purchase price of
One Million Eighty-Five Thousand Seven Hundred Ninety-Seven and 50/100 Dollars
($1,085,797.50) (the "Investment"), which amount shall be tendered at "Closing"
(as that term is defined in the JV Agreement) to the Company in good funds.
SciGames hereby reserves the right to withdraw and revoke this Agreement in full
or in part at any time prior to the Closing.
B. APPOINTMENT OF OBSERVER.
At all times during which SciGames is the beneficial owner of five percent
(5%) or more of the issued and outstanding common shares of the Company (the
"Ownership Threshold"), SciGames shall have the right from time to time to
designate one (1) observer (the "Observer") who shall be entitled to attend each
meeting of the Board of Directors of the Company (the "Board") in a non-voting,
non-compensatory capacity. The Observer shall have no power or authority
whatsoever to make any decisions regarding or otherwise bind the Company. Any
vacancy created by the death, resignation or removal of the Observer shall be
filled only by SciGames. The Company shall provide to the Observer, concurrently
with the Board and in the same manner, notice of any and all meetings of the
Board and a copy of all materials delivered to members of the Board in advance
of such meeting. The Company shall reimburse the Observer for his or her
reasonable expenses (including travel and lodging) incurred in attending
meetings of the Board promptly after the Company's receipt of appropriate
documentation substantiating such expenses; provided that the Company shall not
be obligated to reimburse the Observer for such aggregate annual expenses in
excess of $10,000. Effective on the date hereof, SciGames hereby designates
Xxxxxx X. Xxxxxxx as its initial Observer. The Company hereby represents and
warrants to SciGames that it has taken all action necessary or appropriate in
respect of its corporate governance documents, including its Articles of
Incorporation, Bylaws and any shareholders agreements to effect the right of
appointment set forth in this Section B. The Company shall indemnify, defend and
hold harmless SciGames and the Observer against any and all expenses, including
attorney's fees, judgments, penalties, fines, and amounts paid in settlement,
actually and reasonably incurred thereby arising out of or related to actions
taken by the Board to the same extent that it indemnifies, defends and holds
harmless directors on the Board, but at no time less than to the fullest extent
of the law. The Company shall promptly notify SciGames in the event that the
number of shares of the Company's common stock that are beneficially held by
SciGames falls below the Ownership Threshold and shall fulfill its obligations
in this Section B to reimburse and indemnify the Observer and SciGames, as
applicable, for all periods prior to the date SciGames receives such notice. The
terms of this Section B. shall survive the acceptance of this Agreement by the
Company.
C. REGISTRATION RIGHTS.
The Shares purchased hereunder shall entitle SciGames to certain
registration rights in respect of the Shares as are set forth in the
Registration Rights Agreement attached hereto as Exhibit A and incorporated
herein by this reference (the "Registration Rights Agreement"). At Closing,
SciGames and the Company shall enter into the Registration Rights Agreement.
D. SUBSCRIBER'S REPRESENTATIONS.
The following representations and covenants are made by SciGames in
respect of the Shares it is receiving pursuant to Section A above:
(a) SciGames is acquiring such Shares for its own account for investment
purposes only and not with a view to, or for sale or resale in connection with,
any public distribution thereof or with any present intention of selling,
distributing or otherwise disposing of such Shares.
(b) SciGames has been afforded access to information about the Company and
about the financial condition, capitalization and management of the Company
sufficient to enable it to evaluate the merits and the risks inherent in
acquiring and holding such Shares. SciGames has conducted its own analysis of
the Company in order to evaluate the merits and the risks inherent in acquiring
and holding such Shares. SciGames has had an opportunity to ask questions and to
obtain such additional information concerning the Company as it has deemed
necessary in connection with the acquisition of such Shares.
(c) SciGames is aware that such Shares have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or under any state
securities laws. SciGames further understands and agrees that its
representations and warranties contained in this Section D are being relied upon
by the Company and by the other shareholders of the Company as the basis for the
exemption of such Shares from the registration requirements of the Securities
Act and all applicable state securities laws. SciGames further acknowledges and
agrees that such Shares may not be resold or otherwise transferred, assigned or
distributed other than in a transaction registered under the Securities Act and
applicable state securities laws, or pursuant to an exemption from registration
thereunder.
(d) SciGames is aware that (i) there is presently no market for the resale
of such Shares, (ii) the resale of such Shares under Rule 144 of the Securities
Act is not available at this time and may never be available and (iii) no market
may exist in the future for resale of such Shares. SciGames understands that it
must bear the economic risk of its acquisition of such Shares for an unlimited
period of time.
(e) SciGames hereby acknowledges and agrees that a legend reflecting the
restrictions imposed upon the transfer of such Shares under this Agreement,
under the Securities Act, and under applicable state securities laws may be
placed on the certificates representing such Shares.
(f) SciGames hereby agrees to indemnify and hold harmless the Company and
its affiliates from any liability, loss, cost, damage and expense (including,
without limitation, the reasonable costs of litigation and attorneys' fees)
arising out of, resulting from, or in any way related to the breach of any
representation or warranty set forth in this Section D.
E. COMPANY'S REPRESENTATIONS.
The following representations and covenants are made by the Company to
induce SciGames to make the Investment:
(a) The Company has made available to SciGames (a) its annual report on
Form 10-KSB for its fiscal year ended December 31, 2003, (b) its quarterly
report on Form 10QSB for its quarters ended March 31, 2004 and June 30, 2004,
(c) its proxy or information statements relating to meetings of, or actions
taken without a meeting by, the stockholders of the Company since December 31,
2003, and (d) all of its other reports, statements, schedules and registration
statements filed with the Securities and Exchange Commission (the "SEC") since
December 31, 2003 (all of the documents in subsections (a) - (d) being referred
to herein collectively as the "SEC Documents"). The Company has filed with the
SEC all necessary forms, documents, exhibits and disclosures regarding the
transactions contemplated by this Agreement in compliance with the Securities
Act of 1933, as amended (the "Securities Act"), or the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), as the case may be, and the rules and
regulations of the SEC thereunder. As of its filing date, each SEC Document
complied in all material respects with the Securities Act, the Exchange Act and
the rules and regulations of the SEC thereunder. None of the SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except to the extent any such misstatement or omission has been
superseded by a subsequent report or other document filed with the SEC prior to
the date hereof.
(b) As of the applicable filing date, the consolidated financial
statements (including, in each case, any related notes) of the Company included
in the SEC Documents complied as to form and substance in all material respects
with applicable accounting requirements of the SEC and the published rules and
regulations of the SEC or other applicable SEC or stock exchange rules and
regulations with respect thereto. Such financial statements were prepared in
accordance with generally accepted accounting principles of the United States
("GAAP") applied on a consistent basis during the periods involved (except (i)
as may be otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent that they may
include footnotes, may be condensed or summary statements) and fairly presented
in all material respects, the financial position of the Company as of the
respective dates thereof and the results of operations and cash flows for the
periods indicated (subject, in the case of unaudited statements, to normal
year-end audit adjustments).
(c) Except for the conduct and results of the Iowa test market for
electronic game cards manufactured by the Company, since January 1, 2004, no
event, change or effect, that individually or when taken together with all other
such events, changes or effects is or could reasonably be expected (as far as
can be foreseen at the time) to be materially adverse to the business, assets,
liabilities, financial condition, or results of operations (hereinafter, a
"Material Adverse Effect") of the Company, has occurred or exists and to the
Company's knowledge, no event or circumstance has occurred that, with notice or
passage of time or both, is reasonably likely to result in a Material Adverse
Effect with respect to the Company.
(d) As of the date hereof, all of the issued and outstanding equity
interests of EGC (the "Issued Shares") and the rights to acquire equity
interests in EGC are as set forth on Annex 1 hereto. All of the Issued Shares
and the Shares have been, and all of the Warrant Shares will be when issued,
duly authorized and validly issued, fully paid and nonassessable and offered,
issued, and sold in accordance with all applicable federal and state securities
laws.
(e) The Company hereby agrees to indemnify and hold harmless SciGames and
its affiliates from any liability, loss, cost, damage and expense (including,
without limitation, the reasonable costs of litigation and attorneys' fees)
arising out of, resulting from, or in any way related to the breach of any
representation or warranty set forth in this Section E.
Very truly yours,
Scientific Games International, Inc.
By: /s/ Xxxxxx X. Xxxxxxx
Xxxxxx X. Xxxxxxx, Senior Vice President
The foregoing is agreed to and accepted this 12th day of October, 2004.
Electronic Game Card, Inc.
By: /s/ Xxxx Xxxxxxx
Xxxx Xxxxxxx, President
EXHIBIT A
REGISTRATION RIGHTS AGREEMENT
ANNEX 1
21,715,953 shares of EGC common stock issued and outstanding
4,005,125 warrants for EGC common stock exercisable at $1.00
1,021,00 employee share options for EGC common stock exercisable at
$0.50 200,000 employee share options for EGC common stock exercisable at $2.00
