UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
_X_ Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended June 30, 1999 or
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 0-27226
SPINTEK GAMING TECHNOLOGIES, INC.
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(Exact name of small business issuer as specified in its Charter)
Nevada 33-0134823
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1857 Helm Drive, Las Vegas, Nevada 89119 (702) 263-3660
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(Address of principal executive offices) (Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class: Name of Exchange on which registered:
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None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.002 per share
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(Title of Class)
Indicate by mark whether the issuer (1) filed all reports to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No ___
Indicate by mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
The issuer's revenues for the fiscal year ended June 30, 1999 were: $7,959,249.
There were 142,663,196 outstanding shares of common stock, par value $0.002 per
share, as of August 31, 1999. The aggregate market value of the voting stock of
the Registrant held by non-affiliates of the Registrant, as of August 31, 1999,
was $ 14,976,622 based on the last sales price on such date.
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DOCUMENTS INCORPORATED BY REFERENCE:
PART III
The information required by Part III of this Form 10-KSB is incorporated by
reference to the Company's definitive proxy statement on Schedule 14A to be
filed on or before October 28, 1999 in accordance with Rule 12b-23 of the Rules
and Regulations under the Securities Exchange Act of 1934.
Transitional Small Business Disclosure Format: Yes ___ No _X_
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CAUTIONARY NOTICE
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Certain information included herein contains statements that may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as
terms expressing future expectations, enthusiasm about future potential and
anticipated growth in sales, revenues and earnings, and like expressions
typically identify such statements. All forward-looking statements, although
made in good faith, are subject to important risks and uncertainties that could
significantly affect anticipated results in the future and, accordingly, results
may differ from those expressed in any forward-looking statements made herein.
Such statements are necessarily speculative, and factors including, but not
limited to, unusual production or supply problems, unusual risks attending
foreign transactions, year 2000 problems, competitive pressures, unanticipated
problems in obtaining approvals and/or licenses from governmental authorities as
to products or the ability to sell products in any jurisdiction, a general
deterioration in domestic or global economic conditions, and changes in federal
or state tax laws or laws permitting legalized gaming in any jurisdiction within
which gaming is currently conducted or the administration of such laws could
cause results to differ materially from those projected.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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General
Spintek Gaming Technologies, Inc., (referred to herein as the "Company")
was originally incorporated in the State of California on September 11, 1984.
Pursuant to a vote of the shareholders approving a merger at the Company's
annual meeting on January 21, 1998, the Company was merged with and into a
newly-formed corporation solely for effecting a change in the legal domicile of
the Company. Upon acceptance of Articles of Merger filed with the States of
California and Nevada, the Company was reincorporated as a Nevada corporation on
August 24, 1998. The Company is based in Las Vegas, Nevada.
The Company is authorized to issue 500,000,000 shares of its $0.002 per
share par value common stock (the "Common Stock") and 100,000 shares of
preferred stock. Its Common Stock trades on the OTC Bulletin Board under the
symbol "SPTK". The Company has a wholly-owned subsidiary, Spintek Gaming, Inc.
("Gaming"), originally incorporated in Georgia on December 3, 1993. Gaming also
has a wholly-owned subsidiary, Spinteknology, Inc. (Spinteknology"), originally
incorporated in Georgia on May 3, 1995. Gaming and Spinteknology (collectively,
the "Subsidiaries") were merged with and into newly-formed corporations solely
for effecting changes in the legal domicile of the two corporations from Georgia
to Nevada on June 30, 1999. The Company and its Subsidiaries market and license
worldwide proprietary gaming and nongaming technology.
The Company has 142,811,922 shares of it Common Stock issued and
outstanding as of August 31, 1999. The Company previously issued 10,059 shares
of its Series A Convertible Preferred Stock (the "Preferred Stock") and
$5,000,000 of its 6% Secured Convertible Notes due February 28, 2008 (the
"Notes"). On April 26, 1999, the Company received notices of conversion of its
Preferred Stock and Notes, each of which was consummated in two separate
transactions. The conversion resulted in the issuance of 123,315,284 shares of
Common Stock, increasing the number of shares of Common Stock outstanding at the
time from 18,798,311 to 142,113,595. To be able to accommodate the conversion, a
majority of the Company's shareholders approved an increase in the number of
authorized shares of Common Stock from 100,000,000 to 500,000,000. Although, the
Company is authorized to issue 100,000 shares of preferred stock, no Preferred
Stock was issued and outstanding on August 31, 1999.
Equipment and Technology
The Company's business plan calls for it to identify, refine and then
market and license proprietary gaming and non-gaming technology on a worldwide
basis. Since April 1996, the Company, through its subsidiaries, has devoted its
efforts to the development of proprietary technology for determining the
contents of a slot machine hopper and an on-line data collection system that
allows a casino to utilize this financial and security information
("AccuSystemTM"). The Company believes this proprietary technology is unique in
the gaming industry. Trademark and patent applications on the Company's
proprietary trademarks have been granted by or are currently pending with the
United States Patent Office and certain foreign patent authorities.
AccuSystem was developed for the casino industry to gather financial and
security information in an easy to read format which uses the latest standards
in open database technology, allowing access for custom reporting through third
party programs such as Crystal Reports or Report Smith. AccuSystem is comprised
of the following products: AccuHopper(TM), AccuBoard(TM) and AccuDrop(TM). Some
of these products can be used independently or they can be combined together to
offer a level of coin control that has been non-existent in the casino industry.
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The heart of the system is the AccuHopper, which utilizes proprietary
technology for weighing hopper contents. AccuHopper can be calibrated for any
denomination of coin or token. Management believes that no other product
currently exists in the market that can give the real-time contents of a slot
hopper with reliability. Any other system that attempts to provide this
information relies on at least four separate components: beginning hopper
balance, coin traveling from the coin receptor into the hopper, fills placed
into the hopper, and coin diverted from the hopper. An error in any one of the
four components results in an error that continues indefinitely (and can
increase due to cumulative meter errors unless corrected manually). The Company
developed AccuHopper to relay the hopper contents electronically to AccuBoard or
to other on-line accounting systems currently on the market.
AccuDrop, being tested in a Nevada casino, is similar to the AccuHopper but
relays the number of coins currently in the drop compartment. By allowing the
casino operator to always know the amount of money in the drop compartment on a
real-time basis, AccuDrop can be used to determine when drop buckets need to be
emptied, thereby eliminating the requirement of dropping all slot machines each
time a drop is conducted. With the proliferation of bill acceptors in slot
machines, coin drop has been reduced significantly. Management believes that
many casinos would realize substantial savings by not having to drop and track
drop buckets that are either empty or contain insignificant contents. AccuDrop
has not been approved for use in any jurisdiction. Prior to installation,
AccuDrop must go through a procedural review and approval by the gaming
authorities in each jurisdiction.
AccuBoard is capable of collecting data from AccuHopper and AccuDrop along
with other types of data from a slot machine (e.g., Door Open, Door Close, meter
information, and In Play status). The AccuBoard is powered by a micro-controller
and up to two hundred and fifty-five events can be recorded and maintained until
a system requests them. AccuBoard also adds the ability to monitor external
switches which have been used for monitoring activity in a casino's auxiliary
fill containers. AccuBoard will create an event when either an auxiliary fill
container door is opened or a fill bag of coins is removed from the compartment.
AccuBoard is configurable such that low hopper levels can be assigned and used
to illuminate an indicator to show that the hopper is currently low, thus
avoiding a hopper empty condition and play interruption.
AccuSystem software includes the following programs: AccuPoller(TM),
AccuView(TM), AccuReports(TM) and AccuAdministrator(TM).
o AccuPoller is a real-time polling system program that retrieves the
data from the AccuBoard and stores it into the SQL database.
o AccuView is a real-time floor display that provides the casino with an
easy to use graphic display of the hopper, drop, and fill bag
inventory.
o AccuAdministrator allows the user to define application level security
for all AccuSystem software. Security setup includes designating user
groups and assigning features and functions applicable to that group.
An unlimited number of different used groups may be setup.
AccuSystem offers the operator control features that are not available from
any other product currently available in the market. Theft can occur any time a
slot machine door is open. While the door is open an employee has access to
funds in the hopper while performing normal duties such as clearing a coin jam,
replacing a burned out light bulb, or making a routine hopper fill. AccuSystem
can accurately report the amount of coins in the hopper before the machine door
is opened and the amount of coins in the hopper after the employee closes the
machine door. With this information, any coin discrepancies can be reported to
the operator for further investigation.
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In addition to the added controls, which reduce the amount of employee
theft, it is management's belief that use of AccuHopper in connection with
existing on-line slot accounting systems will also result in payroll savings to
the operator. Some jurisdictions require that the contents of slot hoppers be
counted on a routine basis, a cumbersome and costly process. AccuHopper provides
this information continuously and accurately to within a tolerance which
management anticipates will be acceptable to gaming regulators in substantially
all jurisdictions, domestic and international, thus eliminating the need to
count the hopper contents manually. AccuHopper can also notify the operator of
the need for a fill before the hopper goes empty and the slot machine shuts
down, thereby preventing interruption of a customer's play. A fill can interrupt
the play of a customer for an average of fifteen minutes but can take more than
thirty minutes during times of heavy play. By using AccuHopper, the operator
will be able to schedule some fills during slower periods of play, thereby
reducing the number of slot machines that shut down due to an empty hopper
condition.
In December 1998, the Company received notification from the State of
Nevada Gaming Control Board ("NGCB") that AccuSystem had been authorized to be
the second verifier of a slot machine fill, thereby eliminating the need for a
second employee to observe each fill and sign the required fill documentation in
Nevada casinos. This authorization will be granted to casinos on a case by case
basis by the NGCB provided a casino's accounting and auditing procedures
adequately substitute for the lack of the second signature verification. In
management's opinion, this was a significant event for the Company in that a
casino utilizing AccuSystem will be able to reduce slot machine down time and
increase its customer satisfaction through better utilization of its slot floor
personnel. The Company is assisting certain casinos in other domestic gaming
jurisdictions in their requests to have AccuSystem authorized to be the second
verifier, and to be able to utilize certain other features of AccuSystem
designed to enhance revenues and a casino's customers satisfaction. No assurance
can be given that a significant number of Nevada casinos will satisfy the NGCB's
internal requirement and thereby qualify for the single signature fill
authorization or these requests will ultimately be approved by the gaming
authorities in the jurisdictions where they are pending.
Although the AccuHopper is capable of operating on a stand-alone real-time
basis, either by means of hard wire or radio frequency transmission of data,
many casinos have indicated that they would prefer to have it interface with
their existing slot accounting systems. The Company has been diligently working
with various developers and vendors of slot machine accounting systems on
interfaces of AccuSystem with their products. At the World Gaming Congress and
Exposition trade show in Las Vegas in September 1999, three of the primary
vendors of these slot machine accounting systems, Bally Systems, Acres and ACSC,
presented AccuSystem interfaces in their show booths. The interface with the
Bally SDS system has undergone field trial as required by the Nevada gaming
authorities. Bally Systems has submitted the interface for approval as required
by the gaming authorities in the various worldwide jurisdictions in which they
operate. AccuHopper is currently being installed in casinos in Michigan and Las
Vegas using the Acres and ACSC slot accounting systems, respectively, with the
interfaces to AccuHopper currently being reviewed by the respective gaming
authorities. Management is also currently in discussions with other slot
accounting software vendors who have expressed an interest in completing an
interface for their online software accounting systems with AccuHopper.
In addition to working with various slot accounting software companies to
incorporate the AccuHopper into their systems, the Company is also engaged in
discussions with several of the slot machine manufacturing companies to
encourage them to incorporate the AccuHopper as an option for factory
installation in their newly manufactured slot machines. Although discussions
with those companies continue, to date only two slot machine manufacturers have
entered into license agreements with the Company for AccuHopper (see marketing
below).
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Marketing
The Company has initiated a comprehensive sales and marketing program for
its product. Management believes there is a worldwide market for the AccuSystem
and/or the components which comprise the system and intends to market its
products either by direct sales or through licensing arrangements with
manufacturers of slot machines or coin hoppers, vendors of gaming products as
well as the major domestic and worldwide manufacturers of automated accounting
systems for slot machines.
Direct Sales. The Company has developed AccuHopper kits for the various
internal configurations of slot machines produced by the major manufacturers.
Hoppers retrofitted with the AccuSystem can either be installed by the Company,
or the Company will train the purchaser's technicians on installation
procedures.
License Agreements. Management is attempting to forge strategic alliances
with companies that are already successful in the gaming industry which are
presently looking to enhance their existing products and/or expand their
presence in foreign markets as opportunities for sales growth. In January 1998,
Spinteknology entered into a joint venture with Kinsale Development Proprietary
Limited ("Kinsale"), an Australian company, to form a company named "Spintek
Gaming Pty Ltd. ("SGPL") which will distribute the Company's products in
Australia, New Zealand, Macao, Singapore, Malaysia, Hong Kong, China, Indonesia,
Philippines, South Korea, Guam, Brunei, Thailand, Noumea, Vanuatu, Taiwan, Laos,
Cambodia, Kampuchea, Vietnam, Samoa, Fiji, Nauru, Kiribati, and Tonga (the
"Territory"). Spinteknology and Kinsale have since determined that it would be
in the best interests of both parties to dissolve the joint venture, and for
Kinsale to be the distributor of the Company's product in the Territory. On
September 17, 1999, the Company and SGPL, in which the Company no longer has a
joint venture interest, executed an agreement whereby SGPL will be the
distributor in the Territory, with the Company receiving a royalty payment for
each unit sold and a collection fee. The AccuSystem product can either be
manufactured by the Company, whereby the Company would be reimbursed its
production cost plus the royalty and collection fees, or manufactured in the
Territory pursuant to a license agreement between the Company and SGPL. During
testing by SGPL in the Territory, it was determined that variances in the
electrical supply systems in foreign countries negatively impacted the
performance of AccuSystem. In a joint effort, the Company and SGPL have
developed a solution that is currently being tested. Although management is of
the opinion that the solution will be successful, no assurance can be given that
this solution will ultimately be successful, nor that AccuSystem will be
approved for use in the Territory or in other international locations.
The Company has signed five technology licensing agreements, in which the
Company has given a nonexclusive license to four separate companies for the
AccuHopper. These five license agreements are with SGPL, SUZO International,
(N.L.) B.V. ("SUZO"), International Gaming Technology, Inc. ("IGT")
Alliance/Bally Gaming, Inc. ("Bally") and Monoco Information Systems ("MIS").
Each of the agreements requires a fee to be paid to the Company for each
AccuHopper sold by the licensee. While management is optimistic about its
international opportunities, to date no sales have taken place by any of these
companies nor can there be any assurance that the Company will recognize
revenues as a result of these agreements.
Competition
Management does not believe there is currently any competition for its
patented hopper-weighing technology. The Company's principal product,
AccuSystem, is capable of operating on a stand-alone basis or, as previously
noted, to be interfaced with various slot accounting systems currently in use.
Technology has recently been developed by a number of companies, including
vendors of slot machine accounting systems, that would pay out slot machine
winnings to customers electronically or in scrip, thereby eliminating the need
for slot machine hoppers. Although management is of the opinion that the
non-monetary payout system will eventually be accepted by the casino customer,
the utilization of this technology in casinos, domestically and internationally,
is felt to be premature. The Company is exploring the development of a
non-monetary payout system, both internally and through the acquisition of
technology from a third party. In addition,
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as previously noted, management has adopted a policy of forming alliances with
accounting system manufactures with a focus on writing interfaces to incorporate
the data generated by AccuSystem into their systems. (See "Equipment and
Technology") Management therefore no longer considers the Company to be in
direct competition with existing data collection and accounting system
manufactures.
Raw Materials and Principal Suppliers
The components of AccuSystem and associated products are made from
currently available materials. Such raw materials include steel, aluminum,
copper, brass, plastics, zinc, and silicon, and are currently widely available
to the Company. The Company sometimes purchases the raw materials directly,
which it subcontracts to assemblers for assembly, and sometimes it purchases
completed sub-parts and subassemblies from suppliers. There can be no assurance
that certain raw materials used in the Company's products will remain available
in the future or that the Company will be able to find alternate materials in
the event that such materials become unavailable.
The Company is dependent on various suppliers for the components of its
AccuSystem and data collection and accounting systems. With the possibility of
product availability problems due to the impact of Year 2000 ("Y2K") on computer
systems, the Company has located alternative sources for all of its basic
components.
Major Customers
The Company has sold its products to various legalized gaming operations in
the states of Nevada, Minnesota, Michigan, New Jersey, Iowa and Mississippi. In
addition, the Company is currently negotiating with casino operations in
Louisiana, Canada and other domestic jurisdictions.
Patents, Trademarks, Licenses and Royalty Agreements
The Company currently has patent applications for its weighing technology
pending with the United States Patent and Trademark Office ("USPTO") as well as
applications pending in other countries. Patents have been awarded to the
Company in the United States, Europe, Asia, Africa and other international
venues. The Company has submitted additional patent applications which are
pending. However, there can be no assurance that these patents will be granted
or, if granted, will be effective in preventing competitors from developing
similar systems. Further submissions, both in the United States and abroad, are
expected to be made in the future.
The Company has applied for trademarks for corporate and product
identification in the United States and worldwide. To date a number of
trademarks have been issued in various countries and the Company anticipates
further trademark publications in the coming fiscal year. The Company has
registered copyrights with the United States Copyright Office.
Federal, State and Local Gaming Regulation
The federal Gambling Devices Act of 1962 (the "Federal Act") makes it
unlawful, in general, for a person to manufacture, deliver, or receive slot
machines (or devices defined as "gaming-type" units, e.g., video poker games).
The Federal Act also makes it illegal to ship certain slot machine game
components across state lines as well as operating gaming machines unless that
person or company has first registered with the Attorney
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General of the United States. In addition, various record keeping and equipment
identification requirements are imposed by the Federal Act. Violation of the
Federal Act can result in seizure and forfeiture of the equipment, as well as
other penalties.
Regulation of Stockholders of Publicly Traded Corporations: At the
discretion of the respective gaming regulatory authorities in most
jurisdictions, a stockholder with a substantial position in a company (i.e.,
owning 5% or more of issued and outstanding shares) can be required to file an
application for a license, finding of suitability or other approval, and in the
process to subject himself or herself to an investigation by those authorities.
Lenders are also subject to similar license or suitability requirements as
determined by the appropriate gaming authorities.
State and Local Regulation: The Company is subject to regulation by
authorities in most jurisdictions in which its products are sold or anticipated
to be sold or used by persons or entities licensed to conduct gaming activities.
The gaming regulatory requirements vary from jurisdiction to jurisdiction, and
licensing, other approval or findings of suitability processes with respect to
the Company, its personnel and its products can be lengthy and expensive.
Generally, gaming regulatory authorities may deny applications for licenses,
other approvals or findings of suitability for any cause they deem reasonable.
The Company's AccuSystem as well as each of the individual components thereof,
are generally classified as "associated gaming equipment" which is equipment
that is not classified as a "gaming device" but which has such an integral
relationship to the conduct of licensed gaming that regulatory authorities have
discretion to require manufacturers and distributors of associated equipment to
meet licensing or suitability requirements prior to or concurrent with the use
of such equipment in the respective jurisdiction. The Company has several issued
licenses or other approvals and pending license applications and product
approval in various gaming jurisdictions. See "Present Gaming Compliance
Status".
Currently, the Company's product line of hopper assessment technology is
considered "non-gaming" in many United States jurisdictions. However, the
Company maintains its registration with the United States Attorney General so
that any shipments of product, regardless of destination, are legal under the
Federal Act.
Present Gaming Compliance Status
Compliance with United States and international gaming jurisdiction
regulations falls within two distinct areas: product suitability (i.e.,
certification that the product meets the standards of the jurisdiction) and
corporate suitability (i.e., suitability of the corporation and its
directors/officers to do business in the jurisdiction).
The Company currently produces a product line that is, in the majority of
gaming jurisdictions, considered "non-gaming". Since AccuSystem does not affect
game outcome in slot machines and does not directly affect revenue reporting, it
is not a gaming device. Generally, such products are defined as "associated
equipment". Since the Company does not make a gaming device it has not been
required by most jurisdictions to obtain a "gaming license" (i.e., corporate
suitability). However, since AccuSystem is installed in gaming devices, most
jurisdictions have required certification of product suitability.
In 1995, the Company submitted a combination of products to the Electronic
Services division of the State of Nevada Gaming Control Board ("NGCB") for
assessment and certification. The AccuSystem at that time comprised the
AccuHopper weighing technology, AccuTrack user interface software, AccuBoard
machine/coin data acquisition PCB (Printed Circuit Board) and the TEK TOUCH PEN
2000, a data acquisition device that extracted stored data from the AccuBoard.
On October 13, 1995, the NGCB found that the AccuSystem was suitable and
issued a product approval
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for use in Nevada. Subsequent approvals by the NGCB have been granted up to and
including 1999 for hardware, firmware and software modifications to the original
AccuSystem product line.
In September 1997, the Company was given the opportunity to install
AccuSystem into slot machines of Bally's Park Place Casino in Atlantic City, New
Jersey. At that time, the Company was not required to obtain a gaming license,
but product suitability certification of AccuSystem by the Division of Gaming
Enforcement ("DGE") was required. The Company submitted AccuSystem to the DGE
and the product was found suitable on October 16, 1997.
Due to development of an interface with an on-line slot accounting system
currently installed in casinos in Atlantic City and use of the AccuSystem to
decrease the number of individuals involved with filling hoppers, the Company
found it necessary to apply for a full gaming license in New Jersey. The
necessary application documents were filed with the authorities in June 1999.
During the investigation process in New Jersey, the Company can conduct business
under the auspices of transactional waivers. While the Company does not
anticipate denial of a gaming license in this jurisdiction, it is unknown when
DGE and Casino Control Commission will complete their investigations.
In January 1998, the Company applied for and received a vendor license from
the Shakopee Mdewakanton Sioux (Dakota) Community of Prior Lake, Minnesota. This
vendor license allowed the Company to sell and install AccuSystem at the Mystic
Lake Casino Hotel, a tribal-owned facility. The vendor license is renewable each
year and the Company received a renewal in January 1999.
In anticipation of sales in two jurisdictions (Ontario, Canada, and
Amerindian reservation casinos in Louisiana), the Company submitted required
gaming license applications. Ontario awarded the Company a non-gaming supplier
license in August 1999. The State Police authority based in Lafayette,
Louisiana, which oversees the compliance operations of Amerindian casinos in
that state, awarded the Company a temporary gaming license in July 1999 which
allows the Company to do business with the tribes. That authority is completing
final investigations and the Company anticipates receiving a full license in the
immediate future. The Company has obtained licenses with the respective tribal
gaming commissions in Louisiana.
The Company entered into negotiations with Mandalay Resort Group/ Atwater
Group to sell AccuSystem to the Motor City Casino in Detroit, Michigan. In
anticipation of the purchase, the Company began discussions with the Michigan
Gaming Commission in regards to corporate licensure and product approval. Over
the course of four months, the Michigan Gaming Commission determined AccuSystem
to be non-gaming product and did not require the Company to obtain a gaming
license.
Due to the amount of sales the Company has in Mississippi, the Company
voluntarily applied for a full gaming license in that jurisdiction. The Company
submitted an application early in 1999. After an extensive investigation by that
jurisdiction's authorities, the Company and its officers and directors were
found suitable and a gaming license was awarded in August 1999.
Throughout 1998 and 1999, the Company has met with jurisdiction authorities
in the United States and discussed licensing requirements. To date, many
jurisdictions have not required licensing and the Company can enter into
negotiations for casino sales pending product compliance. However, any and all
jurisdictions can require finding of suitability for licensing at any time.
Further, the Company may (as in the case of Mississippi) determine it to be in
its best interest to voluntarily submit a license application.
In regards to product compliance, the Company has submitted AccuSystem for
testing and certification
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by various jurisdictional testing laboratories and by Gaming Laboratories
International, Inc. ("GLI"), an independent testing facility1 for gaming devices
and associated equipment based in Toms River, New Jersey. AccuSystem has been
found suitable by all jurisdictional testing laboratories and GLI found
AccuSystem suitable and issued a certification letter on October 10, 1997.
As the product line is enhanced and modified, each iteration is submitted
for assessment to the various laboratories. So far, each version of the
hardware, firmware and software has passed testing and been approved. Approvals
by GLI are transferable, allowing for approval in multiple jurisdictions without
redundant testing of the same versions.
Application of Future or Additional Regulatory Requirements
In the future, the Company intends to seek the necessary licenses,
approvals and findings of suitability for the Company, its products and its
personnel in other jurisdictions throughout the world where significant sales
are expected to be made. However, there is no assurance that such licenses,
approvals or findings or suitability will be obtained and that they will not be
revoked, suspended or unsuitably conditioned. There is no assurance that the
Company will be able to obtain in a timely manner the necessary approvals for
its future products as they are developed nor is there assurance that such
approval can be obtained at all. If a license, approval or finding of
suitability is required by a regulatory authority and the Company fails to seek
or does not receive the necessary license or finding of suitability, the Company
may be prohibited from selling its products for use in that jurisdiction or may
be required to sell its products through other licensed entities at a reduced
profit to the Company.
Impact of Environmental Laws
The Company is not aware of any federal, state or local environmental laws
which would affect its operations materially.
Employees
The Company is not subject to any union labor contracts or collective
bargaining agreements and relations with its employees are satisfactory. As of
August 31,1999, the Company had 54 full time employees at its corporate
facilities in Las Vegas, Nevada.
Research and Development
During the years ended June 30, 1999 and 1998, the Company expended
approximately $353,000 and $1,327,000 respectively, on research and development
activities. From inception on March 31, 1995 through the third quarter of fiscal
1998, the Company and its subsidiaries reported operating activities as a
development stage enterprise. Whereas all engineering and product development
expenses in prior years were classified as research
______________________________
1 Only five (5) United States gaming jurisdictions maintain
testing/certification facilities: Nevada, New Jersey, Michigan, Mississippi and
Montana. Most other United States and Canadian gaming jurisdictions rely on GLI
for testing and product certification.
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and development expenses, only expenses associated with new product development
are classified as research and development in the current year. Expenses related
to the further development of the AccuSystem product, including costs associated
with interfacing with various slot machine systems and design modifications
necessitated by slot machine cabinet and design variations are expensed
elsewhere in the financial statements. The cost of research is not borne
directly by the Company's customers.
The Company will incur research and development expenses in the development
of certain AccuSystem related products currently being researched, and in the
development of new products that utilize the Company's proprietary technology.
Management does not intend to commit significant resources to the development of
products or technologies outside of its current focus until the Company has
achieved positive cash flow from the sales of its existing products.
ITEM 2. DESCRIPTION OF PROPERTIES
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The Company's corporate headquarters are located in Las Vegas, Nevada in
two buildings of 16,903 and 12,000 square feet. The monthly base rent for the
first facility is $13,130 in the first year with annual increases to $18,655 for
the final twelve months of the lease, plus $1,690 in estimated monthly common
area maintenance fees and landlord operating expenses. The second warehouse
facility, which is located beside the first facility, is leased for a period of
sixty-one months commencing September 1, 1999, at an initial monthly rental of
$8,338.42 with annual cost of living increases limited to a maximum of 3%, and
monthly common area maintenance fees of $1,440.50.
ITEM 3. LEGAL PROCEEDINGS
-----------------
On September 25, 1996, Unique Entertainment, a Nevada Corporation
("Unique"), filed a complaint in Clark County (Las Vegas), Nevada District Court
against the Company asserting breach of contract and related claims. The Company
filed an answer denying liability. In February of 1999, the Company paid Unique
$15,000 in full satisfaction of its claims in order to end the litigation. The
suit was dismissed with prejudice on April 1, 1999, and is no longer pending in
any court.
On October 10, 1996, Richard M. Mathis of Reno, Nevada ("Mathis") filed a
complaint in the Washoe County (Reno), Nevada District Court against the
Company, Spintek International, Inc., and Lanier M. Davenport, who, until
October 18, 1996, was chairman and chief executive officer of Gaming and may be
the beneficial owner of more then 5% of the Company's common stock, contending
Davenport defrauded him and breached a fiduciary duty to him. On July 8, 1998,
the court granted Davenport's motion for summary judgement. On January 13, 1999,
following the entry of Stipulation for Dismissal filed by Mathis's attorney, the
District Court dismissed the case against the remaining two defendants - the
Company and Spintek International, Inc. Thus, the litigation is no longer
pending in any court.
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. Except as set
forth above, the Company is not a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse on the Company's results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On April 30, 1999, a proposal to amend Articles III and VI of the Articles
of Incorporation was submitted
12
<PAGE>
by the Board of Directors to the shareholders pursuant to Section 78.390 of the
Nevada Revised Statutes. The shareholders resolved by majority vote that the
number of shares that the Company is authorized to issue, shall be five hundred
million one hundred thousand (500,100,000) shares of capital stock consisting of
five hundred million (500,000,000) shares of common stock, each with a $0.002
par value, and one hundred thousand (100,000) shares of preferred stock without
a par value.
On May 7, 1999, a majority of the shareholders of the Company voted to
amend the Company's 1996 Stock Option Plan after the Board of Directors resolved
to submit this issue by unanimous written consent adopted on April 30, 1999.
Pursuant to this resolution, Section 2.1 of the Plan was amended by increasing
the aggregated number of shares that may be issued upon exercise of options
under the Plan to 60,000,000 shares of the Company's common stock.
The 1998 Annual Meeting of Shareholders was held on June 29, 1999. A
majority of the shareholders approved two proposals, (i) the election of Dr.
Thomas C. Burns as a Class III director to serve until the 2001 Annual Meeting
and until his successor has been duly elected and qualified and, (ii) to ratify
the selection of Joseph Decosimo & Co. as the Company's independent public
accountants for fiscal year 1999. The terms of the Class I and Class II
directors, Gary L. Coulter and Malcolm C. Davenport V, respectively, continued
after the meeting until the 2000 Annual Meeting and 1999 Annual Meeting,
respectively.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The common stock of the Company trades on the OTC Bulletin Board under the
symbol "SPTK". The following table sets forth the high and low quotations from
the National Quotation Bureau, Inc. The quotations shown reflect inter-dealer
prices, without retail mark-up, mark-down, or commission and may not represent
actual transactions.
Common Stock Price
------------------
Bid Prices Ask Prices
---------- ----------
High Low High Low
---- --- ---- ---
Fiscal 1998
1st Quarter $0.56 $0.45 $0.59 $0.45
2nd Quarter 1.14 0.43 1.23 0.45
3rd Quarter 0.73 0.39 0.78 0.39
4th Quarter 0.69 0.42 0.75 0.43
Fiscal 1999
1st Quarter $0.51 $0.36 $0.56 $0.30
2nd Quarter 0.39 0.20 0.43 0.26
3rd Quarter 0.34 0.20 0.51 0.23
4th Quarter 0.31 0.15 0.33 0.18
As of August 31, 1999, the Company had approximately 362 holders of record
of its Common Stock, representing approximately 128,606,076 shares.
Approximately 14,057,120 additional shares were held by Cede & Co. for street
name holders of the Company's Common Stock. The Company estimates there are
approximately 2,500 additional beneficial holders of the Company's Common Stock
in street name.
The Company has not paid any dividends on its Common Stock during the last
two fiscal years. The Company does not intend to pay any dividends on its Common
Stock in the foreseeable future.
14
<PAGE>
ITEM 6. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------------------------------------------------------------------------
OF OPERATIONS
-------------
Background Information
The Company's business plan has been to develop and market proprietary
gaming and non-gaming technology, patent such technology nationally and
internationally, and obtain all necessary governmental approvals and/or licenses
to sell products developed with this exclusive technology internationally. The
Company has focused its efforts on the AccuSystem and AccuHopper, a slot machine
hopper weighing system, and certain ancillary products specifically for the
gaming industry. The Company began to actively market and sell its products in
the second half of the Company's fiscal 1998. As a result of this marketing
activity and approximately $444,000 in sales in the latter stages of fiscal
1998, management determined that the Company would no longer report as a
development stage enterprise commencing with the Form 10-KSB for the year ended
June 30, 1998. During the thirty-nine month development period from inception
through the year ended June 30, 1998, the Company incurred net losses of
approximately $13.3 million and negative cash flows from operating activities of
approximately $11.1 million.
Although the AccuSystem is capable of operating on a stand-alone real-time
basis, either by means of hard wire or radio frequency transmission of data,
many casinos have indicated that they would prefer to have it interface with
their existing slot accounting systems, thereby having only one system for
monitoring their slot machine activities. The Company has been diligently
working with various developers and vendors of slot machine accounting systems
on interfaces of AccuSystem with their products. At the World Gaming Congress
and Exposition trade show in Las Vegas in September 1999, three of the primary
vendors of slot machine accounting systems presented AccuSystem interfaces in
their show booths. These interfaces, which must be reviewed and approved by the
gaming authorities in most jurisdictions, are undergoing field trials in various
casinos or are being tested in laboratories operated by or acceptable to the
respective gaming authorities.
In addition to the added controls, which can reduce the amount of employee
theft, it is management's belief that use of AccuHopper, whether as a
stand-alone system or interfaced with a slot accounting system, can also result
in payroll savings as well as increased revenues to the operator. Payroll
savings can result from two areas: (a) being able to have the AccuSystem
function as the second verifying signature on slot machine fills, with such
procedure being approved by the gaming authorities in Nevada subject to certain
internal control modifications that must be approved on a casino by casino
basis; and (b) casinos no longer having to count the contents of slot machine
hoppers on a routine or other basis. Increased revenue can result by the casino
operator performing preemptory slot machine fills, thereby reducing the number
of slot machines that shut down due to an empty hopper condition.
The accompanying financial statements for prior periods reflect certain
reclassifications, which have no effect on net losses or cash flow in those
periods, to conform with classifications in the current period.
Year 2000 Considerations
The approach of the year 2000 has become a potential problem for businesses
utilizing computers in their operations since many computer programs are date
sensitive and will only recognize the last two digits of the year, thereby
recognizing the year "2000" as the year "1900" or not at all.
The Company's hopper weighing technology is date sensitive and has been
programmed to be Y2K compliant. However, certain of the Company's customers
utilize third party report writing technologies that, when sold as a component
of the Company's system, were not Y2K compliant. The Company has installed
15
<PAGE>
Y2K compliant programs provided by these third parties at each of the affected
customer's casinos.
The Company's primary customers are hotel/casinos who utilize slot machines
and/or slot machine accounting systems into which the Company's product is
either installed or interfaced. Although the Company has not received assurances
from the primary slot machine manufacturers or the gaming system manufacturers
as to Y2K, the Company expects that at least a majority of these manufacturers
will be Y2K compliance.
The Company has contacted its primary suppliers to receive assurances that
they are Y2K compliant. In addition the Company has located secondary suppliers
of the key components of its hopper weighing system to assure continuity in
product deliveries.
The supplier of the software system utilized by the Company for operational
and financial reporting purposes has supplied the Company with written assurance
that such systems are Y2K compliant. Although the Company is confident that the
system will not be negatively impacted by the Y2K issue, the Company is prepared
to initiate alternative procedures.
Management has estimated that total costs to achieve Y2K compliance will
not exceed $100,000. Total costs to date, including all costs and expenses
associated with updating the third party report writing systems sold to
customers, is less than $20,000. Maintenance or modification costs associated
with the Y2K compliance issue will be expensed as incurred, while the costs of
any new software will be capitalized and amortized over the software's useful
life.
Results of Operations
Years Ended June 30, 1999 and 1998
For the year ended June 30, 1999, the Company reported sales of
approximately $7.96 million, which included sales in Mississippi, Minnesota, New
Jersey, Iowa and Nevada. The gross margin was approximately 47% and reflects
discounts from the listed sales prices to introduce product in the various
domestic markets and to establish a customer base. In addition, the gross margin
has been negatively impacted by a greater than anticipated costs associated with
the adaptation of the AccuHopper product to the varied internal configurations
of slot machines into which the AccuHopper is to be installed, and (b)
modifications to the AccuHopper installation to conform to variations in fill
procedures in certain casinos. During the third and fourth quarters of the
fiscal year ended June 30, 1998, the Company recorded its initial sales of
approximately $444,000, with a gross margin of 37%. Through June 30, 1999, the
Company has sold approximately 18,250 AccuHopper units, 16,900 of which were
sold in the year ended June 30, 1999. As of September 21, 1999, the Company had
a sales backlog of approximately $2.0 million.
As detailed in the footnotes to the accompanying financial statements and
notes thereto (the "Financial Statements"), as a result of the conversion of the
Preferred Stock and Notes, an anti-dilution provision of the 1996 Stock Option
Plan was activated whereby 5,934,928 existing options were cancelled and
replaced by 44,206,735 new options at exercise prices which were approximately
$0.20 less than the market value on the date of conversion. This resulted in the
Company reporting a non-monetary operating expense of approximately $7.25
million in the accompanying financial statements. (See Consolidated Financial
Statement Note 1 - Organization; note 6 - Long-term Debt; and Note 7 -
Stockholders' Equity, Options and Warrants)
Selling, general and administrative expenses increased by $1.97 million, or
53%, from $3.52 million in the year ended June 30, 1998 to $5.49 million in the
current year. When comparing the two years, an increase
16
<PAGE>
in selling, general and administrative payroll and payroll related expenses of
$1.56 million to $2.51 million was partially offset by decreases of $180,000 in
bad debt expense, $365,000 in accrued expenses that are based on fiscal period
changes in the market value of the Company's Common Stock, and $98,000 in
royalty expenses pursuant to an agreement that was terminated. The increase in
payroll and payroll related expenses were primarily related to additional
administrative, product development and support personnel costs necessitated by
sales activities, and approximately $322,000 in engineering labor costs that
would have been classified as research and development expense in the prior
year. The reserve for inventory obsolescence was $260,000 for the year ended
June 30, 1999, primarily due to reserving for inventory items that have become
functionally obsolete through product development, compared to $211,000 for the
year ended June 30, 1998, which were classified as a research and development
expense in that year's financial statements. Travel and entertainment expenses
increased 93%, or $339,000, to $701,000 for the year ended June 30, 1999 from
$363,000 in the prior year. This increase was primarily due to domestic and
international sales and marketing activities and an increase in administrative
travel. License expense was approximately $101,000 in the current year compared
to $16,000 in the fiscal year ended June 30, 1998, primarily due to payments
made to gaming investigative agencies in connection with license applications.
When comparing the two years, other selling, general and administrative expenses
in the current year are generally higher than in the prior year due to increased
staffing and sales activities.
Research and development expenses decreased by $973,000, or 73%, to
$353,000 in the year ended June 30, 1999 from $1.33million in the prior year.
Whereas all engineering and product development expenses in the prior year were
classified as research and development expenses when the Company was emerging
from being classified as a development stage enterprise, only expenses
associated with new product development are classified as research and
development expenses in the current year. Expenses related to the further
development of the AccuSystem product, including costs associated with
interfacing with the various slot accounting systems and design modifications
necessitated by slot machine cabinet and design variations, are expensed
elsewhere in the financial statements.
Interest expense increased to $279,000 for the year ended June 30, 1999
from $71,000 in the prior year, primarily as a result of issuing the remaining
$2.65 million of the Notes together with additional stockholder loans.
Depreciation and amortization expense increased to $123,000 in the year ended
June 30, 1999 from $45,000 in the prior year, primarily due to amortization of
certain patent costs and depreciation of office and equipment additions.
As noted in the accompanying Financial Statements, valuation allowances
have been established for deferred tax assets that may be realized in future
income tax savings through the year 2014. These deferred tax benefits have
resulted from losses and expenses reported in the Company's Financial Statements
that have not been realized in the Company's federal and state income tax
returns, including (a) net operating losses that will be available as deductible
carryforwards to offset future taxable income, (b) tax deferred start up costs,
and (c) stock option compensation expense that will become deductible in future
periods to the extent that the holders of the stock options realize taxable gain
upon exercise of such options. Based on the current corporate federal income tax
rate of 34%, the Company's net loss for the year ended June 30, 1999 would have
been reduced by approximately $3.27 million, $2.47 million of which would have
been attributable to the non-monetary expenses associated with the stock options
reported in the financial statements. Recognition of the deferred taxes in the
year ended June 30, 1999 would have resulted in an increase in assets of $3.27
million, with a like increase being reported in stockholders' equity, thereby
increasing stockholders' equity to $4.38 million on June 30, 1999. In addition,
should the Company recognize sales or enter into sales contracts that would
support the Company's ability to realize approximately $7.66 million in future
tax benefits, deferred tax assets will be recognized with a corresponding
increase in stockholder's equity in the quarterly or annual report period in
which any or all of such benefits are realized.
17
<PAGE>
Years Ended June 30, 1998 and 1997
During the third and fourth quarters of the year ended June 30, 1998, the
Company recorded its initial sales of approximately $444,000. The Company
offered sales discounts from the listed sales price to those casinos who have
assisted the Company in obtaining approvals of AccuHopper through field tests.
These sales discounts, coupled with higher initial cost of product due to the
initial relatively small quantities of inventory ordered, negatively impacted
the Company's gross margin which was 37% on these initial sales. On June 30,
1998, the Company reported as a current liability approximately $247,000 in
deposits received from customers for future sales.
Research and development expenses increased approximately $446,000, or 51%,
to $1.33 million for the year ended June 30, 1998 from just over $880,000 in the
prior year. In addition to research and development costs incurred in developing
the AccuHopper to operate on a stand alone basis, in the year ended June 30,
1998 the Company significantly increased its focus on enhancing the
AccuSystems's ability to interface with the predominant slot accounting systems
currently utilized in the casino industry. Additional research and development
expenses were incurred in developing ancillary products that will be marketable
in conjunction with the AccuHopper.
Selling, general and administrative expenditures increased approximately
$1.25 million, or 54%, from $2.27 million in the year ended June 30, 1997 to
$3.52 million in the current year. An increase in payroll and payroll related
expenses of approximately $409,000, $280,000 of which was for sales and
marketing personnel, was the most significant contributor to the increase. Legal
fees for the year ended June 30, 1998 were $898,000 compared to $551,000 in the
prior year, an increase of $347,000 or 63%. Legal expenses incurred in
jurisdictional product licensing activities, debt and equity financing
activities, the joint venture with the Australian company (which was replaced by
a distribution agreement in September 1999) and various litigation matters
accounted for this increase in legal expenses. Other significant increases in
selling, general and administrative expenses were (a) bonus compensation
associated with the Company's SAR Plan implemented on June 1, 1997 increased to
$195,000 in the year ended June 30, 1998 compared to $15,000 in the prior year;
(b) bad debt expense increased to $180,000 from $60,000 when comparing the two
years in connection with a $240,000 receivable from a former officer and
director of the Company that was written off during the year ended June 30,
1998, and (c) an increase of $67,000 in advertising expense.
Interest and other income decreased from $141,000 for the year ended June
30, 1997 to $13,000 for the year ended June 30, 1998, primarily due to a $74,000
deposit that was forfeited to the Company in fiscal 1997.
Interest expense decreased from $534,000 for the year ended June 30, 1997
to $71,000 for the year ended June 30, 1998 as a result of the expensing of debt
discount and issuance costs incurred in connection with the debenture issued in
July 1996 being converted into preferred stock in October 1996.
Depreciation and amortization expense increased $18,000, or 67%, to $45,000
in fiscal 1998 from $27,000 in the prior year. The increase was primarily due to
purchases of depreciable assets used in the Company's business operations.
Liquidity and Capital Resources
When comparing the accompanying June 30, 1999 and 1998 Balance Sheets,
current assets increased from $1.45 million to $3.96 million, total assets
increased from $2.74 million to $5.40 million, and total liabilities decreased
from $4.82 million to $4.37 million. In addition, stockholders' equity went from
a deficit of $2.07
18
<PAGE>
million on June 30, 1998 to an equity position of $1.03 million, a change of
$3.10 million. Excluding the non-monetary stock option expense of $7.25 million,
the Company would have reported a loss from operations for the year ended June
30, 1999 of $2.10 million on sales of $7.96 million. The Company has
approximately $7.66 million in deferred tax benefit carryovers, all of which has
been reserved through the year ended June 30, 1999, to offset income taxes in
future years. Should the Company realize sales activities that result in pretax
income in future periods, the valuation reserve for these deferred tax benefits
will be reduced thereby resulting in the recognition of a net deferred tax asset
and an increase in net income (stockholders' equity).
The Company's current assets at June 30, 1999 totaled $3.96 million,
including $980,000 in cash and cash equivalents, deposits on pending inventory
purchases of $350,000, $2.0 million in inventory, and $598,000 in accounts
receivable. The Company's current liabilities were $3.96 million, including
$490,000 in an account payable to the Company's principal stockholder, $593,000
in current portion of long-term debt ($572,000 of which is due the principal
stockholder), and $580,000 in customer deposits received on pending sales. Net
cash used in operating activities was approximately $2.59 million.
The Company recorded sales of approximately $7.60 million for the year
ended June 30, 1999 compared to $444,000 in the prior year. As previously noted,
initial sales and marketing activities commenced in the last two quarters of the
year ended June 30, 1998. Prior to the Form 10-KSB for the year ended June 30,
1998, the Company reported financial activities as a development stage
enterprise. Through its development stage and it first fiscal year of sales
activities, the Company has primarily funded itself through equity and debt
financing.
During the first quarter of 1998, the Malcolm C. Davenport V Family Trust
(the "Trust"), loaned $500,000 to the Company. This loan, together with accrued
interest of approximately $4,000 was converted into 1,400,880 shares of the
Company's common stock on October 1, 1997. On February 27, 1998, the Company
initiated the issuance of a maximum of $5.0 million of the Notes. When the Note
issue was completed during the first six months of the Company's fiscal year
ended June 30, 1999, the Trust held $4.3 million of the Notes and a former
member of the Board of Directors held an additional $350,000. On April 26, 1999,
the Company received Notices of Conversion from the holders of the Notes, and
converted the $5.0 million in outstanding Notes into 71,477,950 shares of the
Company's common stock, with an additional 104,353 shares remaining to be
issued. Malcolm C. Davenport V is a director of the Company, beneficial interest
holder of more than 10% of the Company's Common Stock, and co-trustee of the
Trust.
In addition, Malcolm C. Davenport V loaned the Company a total of $850,000
during the year ended June 30, 1999, $822,000 of which was outstanding on June
30, 1999 in the form of term notes secured by the Company's intangible assets
and intellectual rights.
The Company issued 10,059 shares of Preferred Stock to RBB Bank
Aktiengesellschaft ("RBB"), an offshore bank representing investors, pursuant to
Regulation S promulgated under the Securities Act of 1933, as follows: (a) 7,202
shares on October 1, 1996 in exchange for a $7.143 million debenture for which
the Company received a net of $4.375 million; (b) 1,429 shares on April 21, 1997
for which the Company received a net of $880,000; and (c) 1,428 shares on
October 22, 1997 for which the Company received a net of $1,000,000. RBB has
converted all of the Preferred Stock as follows: (a) on November 21, 1996, 360
shares were converted into 1,113,883 shares of the Company's Common Stock; (b)
on June 5, 1997, 958 shares were converted into 4,919,658 shares of the
Company's Common Stock; (c) on May 1, 1998, 500 shares were converted into
1,000,690 shares of the Company's Common Stock; and (d) on April 29, 1999 and
May 7, 1999, in two separate equal transactions, a total of 8,241 shares of
preferred stock together with $753,000 in accrued premium on preferred stock
were converted into a total of 51,837,334 shares of the Company's Common Stock.
19
<PAGE>
During the year ended June 30, 1999, the Company recorded sales of $7.96
million. Management believes that increased sales activities will continue into
the future, and, consequently, the Company expects to achieve sales and
operating cash flows that will sustain future operations. In addition, the
Company received from Malcolm C. Davenport V a letter agreement dated August 31,
1999 whereby Mr. Davenport agreed to loan the Company up to $2.0 million during
the next twelve months.
Based on anticipated sales and the $2.0 million loan commitment, management
believes that it will have sufficient capital to fund operations for fiscal
2000.
20
<PAGE>
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements Page No.
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheets as of June 30, 1999 and June 30, 1998 F-2
Consolidated Statements of Operations for the Years Ended June 30, 1999,
1998 and 1997 F-3
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the
Years Ended June 30, 1999, 1998 and 1997 F-4
Consolidated Statement of Cash Flows for the Years Ended June 30, 1999,
1998 and 1997 F-5
Notes to Consolidated Financial Statements F-7
</TABLE>
21
<PAGE>
Joseph Decosimo and Company, LLP Letterhead
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Spintek Gaming Technologies, Inc.
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Spintek Gaming
Technologies, Inc. and subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for each of the three years in the period ended June
30, 1999. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Spintek Gaming
Technologies, Inc. and subsidiaries as of June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1999, in conformity with generally accepted accounting
principles.
Joseph Decosimo and Company, LLP
Chattanooga, Tennessee
September 14, 1999
<PAGE>
SPINTEK GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
June 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 980,883 $ 499,551
Accounts receivables .................................... 598,073 229,245
Inventories, net ........................................ 1,995,868 679,445
Prepaid expenses and other current assets ............... 389,507 45,922
------------ ------------
Total current assets ................................ 3,964,331 1,454,163
Furniture, fixtures and equipment, net .................... 353,025 144,397
Licenses and patents, net ................................. 959,520 1,019,490
Other assets .............................................. 119,855 125,542
------------ ------------
Total assets .............................................. $ 5,396,731 $ 2,743,592
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable ........................................ $ 1,589,767 $ 851,775
Accounts and demand notes payable to stockholders ....... 490,000 190,188
Current portion of capitalized leases and notes payable . 593,273 --
Accrued liabilities ..................................... 707,136 692,763
Customer deposits ....................................... 580,002 247,211
Accrued preferred stock preference ...................... -- 484,882
------------ ------------
Total current liabilities ........................... 3,960,178 2,466,819
------------ ------------
Long-term debt, net of current portion .................... 408,229 2,350,000
------------ ------------
Stockholders' equity (deficit):
Convertible preferred stock, no par value, 100,000 shares
authorized, -0- and 8,241 shares issued and
outstanding (converted into common stock 4/29/99) ..... -- 5,355,182
Common stock, $0.002 par value, 500,000,000 and
100,000,000 shares authorized, 143,560,448 and
19,990,384 shares issued .............................. 287,123 39,982
Additional paid-in capital .............................. 23,757,611 5,855,303
Accumulated deficit ..................................... (22,987,816) (13,295,100)
Treasury stock, 1,317,329 shares, at cost ............... (28,594) (28,594)
------------ ------------
Total stockholders' equity (deficit) .................. 1,028,324 (2,073,227)
------------ ------------
Total liabilities and stockholders' equity ................ $ 5,396,731 $ 2,743,592
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-2
<PAGE>
SPINTEK GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended June 30,
--------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales ....................................... $ 7,959,249 $ 444,011 $ --
Cost of sales ............................... 4,215,933 280,375 --
------------ ------------ ------------
Gross profit .............................. 3,743,316 163,636 --
Selling, general and administrative expenses 5,487,509 3,520,913 2,271,161
Research and development expenses ........... 353,470 1,326,698 880,353
Stock options issued to non-employees ....... 1,219,373 -- --
Stock option compensation expense ........... 6,034,660 -- --
------------ ------------ ------------
Operating loss ............................ (9,351,696) (4,683,975) (3,151,514)
Other income (expense):
Interest and other income ................. 61,679 13,594 141,272
Depreciation and amortization ............. (123,433) (45,272) (26,999)
Interest expense .......................... (279,266) (70,928) (533,658)
------------ ------------ ------------
Net loss .................................... (9,692,716) (4,786,581) (3,570,899)
Preferred stock preference .................. (267,895) (328,614) (215,336)
------------ ------------ ------------
Net loss applicable to common shares ........ $ (9,960,611) $ (5,115,195) $ (3,786,235)
============ ============ ============
Earnings (loss) per common share information:
Weighted average common shares:
Basic ................................... 38,547,340 17,175,885 11,284,874
============ ============ ============
Diluted ................................. 38,547,340 17,175,885 11,284,874
============ ============ ============
Net loss per common share:
Basic ................................... $ (0.26) $ (0.30) $ (0.34)
============ ============ ============
Diluted ................................. $ (0.26) $ (0.30) $ (0.34)
============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-3
<PAGE>
SPINTEK GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Treasury
Common Stock Stock Preferred Stock
Shares Amount Amount Shares Amount
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996 ......................... 10,651,762 $ 21,338 $ (25,994) -- $ --
Issuance of common stock to repay
debt to stockholders .......................... 401,140 802 -- -- --
Issuance of preferred stock for conversion
of Convertible Debenture ...................... -- -- -- 7,202 4,828,687
Issuance of common stock for conversion
of preferred stock ............................ 6,033,541 12,068 -- (1,318) (883,673)
Contribution of common stock to treasury ....... (1,300,000) -- (2,600) -- --
Conversion of debt to additional paid in
capital ....................................... 335,435
Issuance of preferred stock .................... -- -- -- 1,429 880,000
Dividends on preferred stock ................... (215,336)
Net loss ....................................... -- -- -- -- --
Balance, June 30, 1997 ......................... 15,786,443 34,208 (28,594) 7,313 4,825,014
Issuance of common stock to repay
debt .......................................... 1,678,658 3,358 -- -- --
Issuance of common stock for conversion
of preferred stock ............................ 1,000,690 2,001 -- (500) (335,232)
Exercise of stock options ...................... 7,264 15 -- -- --
Stock options issued to nonemployees ........... -- -- -- -- --
Issuance of preferred stock .................... 200,000 400 -- 1,428 865,400
Dividends on preferred stock ................... -- -- -- -- --
Net loss ....................................... -- -- -- -- --
Balance, June 30, 1998 ......................... 18,673,055 39,982 (28,594) 8,241 5,355,182
Issuance of common stock to repay
debt .......................................... 120,938 242 -- -- --
Issuance of common stock in exchange for
convertible preferred stock and preferred stock
preference .................................... 51,837,334 103,675 -- (8,241) (5,355,182)
Issuance of common stock in exchange for
6% secured convertible notes .................. 71,477,950 142,956 -- -- --
Stock options issued to nonemployees ........... 1,219,373
Stock option compensation expense .............. 6,034,660
Exercise of stock options ...................... 133,842 268 -- -- --
Preferred stock preference accrued ............. -- -- -- -- --
Net loss ....................................... -- -- -- -- --
Balance, June 30, 1999 ......................... 142,243,119 $ 287,123 $ (28,594) -- $ --
============ ============ ============ ============ ============
Additional
Paid-In Accumulated
Capital Deficit
------- -------
<S> <C> <C>
Balance, June 30, 1996 ......................... $ 3,591,620 $ (4,937,620)
Issuance of common stock to repay
debt to stockholders .......................... 439,198 --
Issuance of preferred stock for conversion
of Convertible Debenture ...................... --
Issuance of common stock for conversion
of preferred stock ............................ 899,549 --
Contribution of common stock to treasury ....... 2,600 --
Conversion of debt to additional paid in
capital .......................................
Issuance of preferred stock .................... -- --
Dividends on preferred stock ...................
Net loss ....................................... -- (3,570,899)
------------ ------------
Balance, June 30, 1997 ......................... 5,053,066 (8,508,519)
Issuance of common stock to repay
debt .......................................... 596,642 --
Issuance of common stock for conversion
of preferred stock ............................ 364,847 --
Exercise of stock options ...................... 1,488 --
Stock options issued to nonemployees ........... 58,274 --
Issuance of preferred stock .................... 109,600 --
Dividends on preferred stock ................... (328,614) --
Net loss ....................................... -- (4,786,581)
------------ ------------
Balance, June 30, 1998 ......................... 5,855,303 (13,295,100)
Issuance of common stock to repay
debt .......................................... 26,365 --
Issuance of common stock in exchange for
convertible preferred stock and preferred stock
preference .................................... 6,004,285 --
Issuance of common stock in exchange for
6% secured convertible notes .................. 4,857,044 --
Stock options issued to nonemployees ...........
Stock option compensation expense ..............
Exercise of stock options ...................... 28,476 --
Preferred stock preference accrued ............. (267,895) --
Net loss ....................................... -- (9,692,716)
------------ ------------
Balance, June 30, 1999 ......................... $ 23,757,611 $(22,987,816)
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-4
<PAGE>
SPINTEK GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended June 30,
---------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss ..................................... $(9,692,716) $(4,786,581) $(3,570,899)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization .............. 123,433 45,272 26,999
Provision for doubtful receivables ......... -- (60,000) 60,000
Allowance for inventory obsolescence ....... 260,363 205,130 212,000
Non-cash interest expense .................. 171,456 -- 394,687
Non-cash operating expense for common
stock options issued to non-employees ..... 1,219,373 58,274 --
Non-cash compensation expense for common
stock options issued to employees ......... 6,034,660 -- --
Royalty expense used to reduce note
receivable from related company ........... -- 88,278 75,632
(Increase) decrease in assets:
Inventories ................................ (1,576,786) (401,106) (243,734)
Prepaids and other ......................... (338,144)
Receivables ................................ (368,829) 16,871 (356,368)
Increase (decrease) in liabilities:
Accounts payable ........................... 737,995 425,871 13,169
Accrued liabilities ........................ 543,921 510,929 (104,537)
Interest payable ........................... (39,548) 47,668 (70,285)
Customer deposits .......................... 332,791 247,212 --
----------- ----------- -----------
Net cash used in operating activities .......... (2,592,031) (3,602,182) (3,563,336)
----------- ----------- -----------
Net cash used by investing activities:
Purchases of furniture, fixtures and equipment (200,228) (85,377) (81,722)
Note receivable from related company ......... -- -- (4,000)
Other ........................................ -- (617) --
----------- ----------- -----------
Net cash used in investing activities .......... (200,228) (85,994) (85,722)
----------- ----------- -----------
Net cash provided by financing activities:
Proceeds from (repayment of) notes payable to
related parties ............................ 850,000 357,176 (446,121)
Repayment of advances from
stockholders ............................... (246,538) -- (1,004,588)
Proceeds from issuance of convertible debt ... 2,650,000 2,350,000 4,503,151
Payments of capital leases ................... (8,615)
Proceeds from issuance of common and treasury
stock ...................................... 28,744 101,503 --
Proceeds from issuance of preferred stock .... -- 975,000 880,000
----------- ----------- -----------
Net cash provided by financing activities ...... 3,273,591 3,783,679 3,932,442
----------- ----------- -----------
Net increase in cash and cash equivalents ...... 481,332 95,503 283,384
Cash and cash equivalents, beginning of year 499,551 404,048 120,664
----------- ----------- -----------
Cash and cash equivalents, end of year ........ $ 980,883 $ 499,551 $ 404,048
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-5
<PAGE>
SPINTEK GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended June 30,
---------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Supplemental schedule of non-cash investing and
financing activities:
Issuance of common stock in exchange for debt ......... $ 20,000 $ 500,000 $ 440,000
============ =========== ===========
Issuance of common stock in exchange for convertible
secured notes ....................................... $ 5,000,000 $ -- $ --
============ =========== ===========
Issuance of common stock and treasury stock
for services ........................................ $ -- $ 110,000 $ --
============ =========== ===========
Issuance of preferred stock in exchange for convertible
debenture, net of unamortized debt issuance costs ... $ -- $ -- $ 4,828,687
============ =========== ===========
Issuance of common stock in exchange for preferred
stock and accrued preferred stock preference ........ $ 5,840,064 $ 366,848 $ 911,617
============ =========== ===========
Notes and interest payable to stockholders converted
to additional paid-in capital ....................... $ -- $ -- $ 335,435
============ =========== ===========
Dividends payable on preferred stock .................. $ (267,895) $ (328,614) $ (187,884)
============ =========== ===========
Equipment acquired through capital leases ............. $ 71,617 $ -- $ --
============ =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest ................................ $ 145,377 $ 23,259 $ 119,737
============ =========== ===========
Cash paid for taxes ................................... $ 18,243 $ -- $ --
============ =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-6
<PAGE>
SPINTEK GAMING TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Spintek Gaming Technologies, Inc. (the "Company") was originally
incorporated in California in 1984 and was reincorporated in Nevada in August
1998. The Company's corporate offices are located in Las Vegas, Nevada. The
Company's $0.002 par value common stock (the "Common Stock") trades on the Over
The Counter Bulletin Board under the symbol "SPTK".
Spintek Gaming, Inc. ("Gaming") was incorporated under the laws of the
State of Georgia in December 1993 as a wholly-owned subsidiary of Spintek
International, Inc. ("International"), also a Georgia corporation. On April 12,
1995, Gaming was spun off from International through a dividend of Gaming's
shares to stockholders of record of International as of that date. International
is neither a parent nor a subsidiary of the Company. However, Lanier M.
Davenport, the Company's former Chairman and Chief Executive Officer and a
current shareholder of the Company is a significant shareholder of
International. In September 1995, Gaming became a wholly owned subsidiary of the
Company effected by an exchange of common stock of the entities. On June 30,
1999, Gaming was reincorporated in Nevada.
In May 1995, Spinteknology, Inc. ("Spinteknology") was incorporated in the
State of Georgia as the wholly-owned subsidiary of Gaming. Spinteknology holds
the Company's patents and intellectual property rights, and is the entity
through which most corporate business activities are conducted. On June 30,
1999, Spinteknology was reincorporated in Nevada.
On April 26, 1999, the Company received notices of conversion of its
convertible preferred stock (the "Preferred Stock") and 6% Convertible Secured
Notes (the "Notes"), each of which was consummated in two separate transactions,
resulting in the issuance of a total of 123,315,284 shares of Common Stock,
increasing the number if shares of Common Stock outstanding from 18,798,311 to
142,113,595. To be able to accommodate the conversion, on May 6, 1999 a majority
of the Company's shareholders approved an increase in the number of authorized
shares of Common Stock from 100,000,000 to 500,000,000. In addition, the Company
is authorized to issue 100,000 shares of preferred stock, none of which are
outstanding on June 30, 1999.
The Company's 1996 Stock Option Plan (the "Plan"), as amended by the
stockholders on January 21, 1998, contained a provision whereby the equity
position held by option holders could not be diluted or enhanced by the issuance
of or reduction in the number of shares of common stock issued. As a result of
the above noted conversions of the preferred stock and Notes, this provision,
which has subsequently been deleted from the Plan with certain exceptions such
as stock splits, was activated. As a result, 5,934,928 outstanding stock options
were cancelled and replaced with 44,206,735 stock options with an average option
price of approximately $0.03 per share, which was $0.20 under the closing price
of the Company's common stock on the effective date of the issuance of the
anti-dilution options. This resulted in the Company recording $7,254,033 as a
non-monetary operating expense for the year ended June 30, 1999 which was
computed on the 36,337,400 stock options which were vested on the effective date
of the conversion or became vested as of June 30, 1999. In addition, 2,761,237,
2,150,414, 1,730,476 and 1,167,597 options will vest in the years ending June
30, 2000, 2001, 2002 and 2003, respectively, with non-monetary operating
expenses to be recorded based on the difference between the option price and the
closing market price of the Company's common stock on the vesting dates.
F-7
<PAGE>
The Company's business plan calls for it to identify, refine and then
market and license proprietary gaming and non-gaming technology on a worldwide
basis. Since approximately April 1996, the Company has devoted its efforts to
the development of proprietary technology for determining the contents of a slot
machine hopper and an on-line data collection system that allows a casino to
utilize this financial and security information. The Company believes that this
proprietary technology is unique. Prior to the end of the Company's fiscal year
ended June 30, 1995, the Company distributed products in the medical first aid
and personal safety field from its corporate office in Laguna Hills, California.
From inception on March 31, 1995 through the third quarter of 1998, the
Company and its subsidiaries reported operating activities as a development
stage enterprise. With the commencement of active marketing and sales activities
in the fourth quarter of fiscal 1998, management determined that the Company was
no longer considered a development stage enterprise for financial reporting
purposes. During the thirty-nine month development period from inception through
the year ended June 30, 1998, the Company incurred net losses of approximately
$13.3 million and negative cash flows from operating activities of approximately
$11.1 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiary, Spintek Gaming, Inc., and
Spintek Gaming, Inc.'s wholly-owned subsidiary, Spinteknology, Inc. All material
inter-company accounts and transactions have been eliminated in consolidation.
Reclassifications. The financial statements for prior periods reflect certain
reclassifications, which have no effect on losses incurred in those periods, to
conform with classifications adopted in the current year.
Estimates and Uncertainties. 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 revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Certain significant estimates were made in the preparation of the financial
statements. While management's estimates of the allowance for doubtful accounts,
allowance for inventory obsolescence and valuation allowance for deferred taxes
were based on the best information currently available, it is reasonably
possible that these estimates could change by a material amount within one year.
Cash and Cash Equivalents. The Company maintains cash and investment accounts at
financial institutions which may exceed federally insured amounts at times and
which may at times significantly exceed balance sheet amounts due to outstanding
checks. The Company classifies as cash equivalents all highly liquid debt
instruments with a maturity of three months or less when purchased.
Inventories. Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
Furniture, Fixtures and Equipment. Furniture, fixtures and equipment is stated
at cost. Expenditures for repairs and maintenance are charged to expense as
incurred and additions and improvements that significantly extend the lives of
assets are capitalized. Upon sale or other retirement of depreciable property,
the cost and
F-8
<PAGE>
accumulated depreciation are removed from the related accounts and any gain or
loss is reflected in operations.
Depreciation is provided at the time equipment is placed in service using the
straight-line method over the estimated useful lives of the assets which range
from three to ten years.
Licenses and Patent Costs. Spinteknology holds various domestic and
international patents and has other patent applications pending in the United
States and elsewhere regarding its coin hopper technology. Deferred patent costs
are recorded at cost and are being amortized over the life of the patents.
Patent amortization in fiscal 1999 was $59,970. Management requires that
licenses, patents, other intangible assets and long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable.
Financial Instruments. The Company's financial instruments recorded on the
balance sheet include cash, accounts receivable, accounts payable and debt. The
carrying amount of cash, accounts receivable and accounts payable approximates
fair value because of their short term maturity. The carrying amount of the
Company's debt instruments approximates fair value based on borrowing rates for
similar types of debt arrangements.
Income Taxes. Income taxes are computed based on the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred
tax assets and liabilities, if significant, are recognized for the estimated
future tax effects attributed to temporary differences between the book and tax
bases of assets and liabilities and for carryforward items. The measurement of
current and deferred tax assets and liabilities is based on enacted law.
Deferred tax assets are reduced, if necessary, by a valuation allowance for the
amount of tax benefits that may not be realized. (See note 12).
Sales, Customer Deposits and Accounts Receibable. The Company requires a
customer to pay approximately 80% of the total amount of the contract on or
before the commencement date of shipping of product to the customer's facility.
Such amounts are recorded as a liability in Customer Deposits. Sales are
recorded when the product is shipped, with the customer deposit account being
relieved. When the total amount of sales to a particular customer exceed the
amount of the deposits, the excess is recorded as a trade account receivable.
3. ACCOUNTS RECEIVABLE
The Company requires that a customer pay deposits upon execution of a
contract and upon the commencement of shipping that, in a majority of cases,
equal approximately 80% of the total contract amount. Trade accounts receivable
reflect billings for shipping costs, reimbursement of installation costs and for
invoiced product sales that exceed the amount of the customer deposits received.
Accounts receivable at June 30, 1999 and 1998 consist of the following:
1999 1998
---- ----
Trade Accounts $ 569,396 $ 224,188
Other 28,677
5,057
---------------- ----------------
Subtotal
Less allowance for doubtful accounts 598,073 229,245
- -
---------------- ----------------
Accounts receivable, net $ 598,073 $ 229,245
================ ================
F-9
<PAGE>
Changes in the allowance for doubtful accounts for the years ended June 30,
1999, 1998 and 1997 are summarized as follows:
1999 1998 1997
---- ---- ----
Allowance for doubtful accounts, beginning . $ -- $ (60,000) $ --
Provision for bad debts .................... (180,000) (60,000)
---------
Write offs ................................. -- 240,000 --
======= ========= =========
Allowance for doubtful accounts, ending .... $ -- $ -- $ (60,000)
======= ========= =========
4. INVENTORIES
The Company primarily purchases weigh scale mechanisms and other basic
components that are assembled into kits for shipment to a customer's site where
they are installed. Finished goods are those products that have been placed into
kits and are ready for shipment, with all other inventory items being identified
as raw materials. Inventories at June 30, 1999 and 1998 consist of the
following:
1999 1998
---- ----
Raw materials ............................ $ 1,705,542 $ 693,504
Finished goods ........................... 730,326 235,941
Less allowance for obsolescence .......... (440,000) (250,000)
=========== ===========
Inventories, net ......................... $ 1,995,868 $ 679,445
=========== ===========
Changes in the allowance for obsolescence for the years ended June 30,
1999, 1998 and 1997 are summarized below:
1999 1998 1997
---- ---- ----
Allowance for obsolescence, beginning ... $(250,000) $(240,000) $ (28,000)
Provision for obsolete inventory ........ (260,363) (205,130) (212,000)
Write-offs .............................. 70,363 195,130 -
--------- --------- ---------
Allowance for obsolescence, ending ...... $(440,000) $(250,000) $(240,000)
========= ========= =========
5. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment at June 30, 1999 and 1998 consists of the
following:
1999 1998
---- ----
Furniture and fixtures ......................... $ 110,300 $ 29,889
Equipment ...................................... 365,618 174,185
--------- ---------
475,918 204,074
Less accumulated depreciation .................. (122,893) (59,677)
========= =========
Furniture, fixtures and equipment, net ......... $ 353,025 $ 144,397
========= =========
F-10
<PAGE>
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following:
June 30,
--------------------------
1999 1998
---- ----
<S> <C> <C>
6% Secured Notes, interest payable annually, converted
to common stock in April and May, 1999 ............. $ -- $ 2,350,000
10% unsecured debt and Secured Notes, payable in a total
monthly payment of $50,000 ......................... 938,500 --
Capitalized leases, secured by equipment, payable in
monthly installments of $2,393 ..................... 63,002 --
----------- -----------
1,001,502 2,350,000
Less current maturities ................................ (593,273) --
----------- -----------
Long-term debt, net .................................... $ 408,229 $ 2,350,000
=========== ===========
</TABLE>
On July 16, 1996, the Company issued a $7,143,000, 4% Debenture (the
"Debenture") due December 31, 1997. The Debenture was issued to an offshore
investor pursuant to Regulation S promulgated under the Securities Act of 1933
at a discount of 30% and netted the Company $4,375,000 after discount and costs
associated with the offering. The Debenture, plus any accrued interest, was
issued with the intent that it was to be converted into preferred stock after
the Board of Directors received authority to issue such shares from the
stockholders of the Company. On October 1, 1996, the Debenture plus accrued
interest thereon was converted to the Preferred Stock as described in these
notes to the financial statements.
On February 27, 1998, the Company initiated the private placement of
certain 6% Secured Notes (the "Notes") in two separate filings with identical
terms due February 28, 2008 in the aggregate principal amount of a maximum of
$5,000,000 to a limited number of investors with interest payable annually
commencing February 28, 1999. The Notes were secured by a security interest and
collateral assignment of all of the Company's patents, patent applications,
trade secrets and all other intellectual rights of the Company existing or
developed ("intellected assets") prior to the repayment or other settlement of
the Notes. As of June 30, 1998, $2,350,000 of the Notes had been purchased, with
the remaining balance of $2,650,000 being purchased during the six month period
ended December 31, 1998. Upon completion of the private placement of the Notes,
the Malcolm C. Davenport V Family Trust (the "Trust"), Malcolm C. Davenport V, a
co-trustee of the Trust, 10% beneficial owner, and a member of the Board of
Directors of the Company, held $4,300,000 of the Notes, and a former member of
the Board of Directors held an additional $350,000. The principal balances of
the Notes were convertible by the holders at any time through February 28, 2001
into shares of the Company's $0.002 par value common stock in a number equal to
0.8% of the then outstanding shares of the Company's common stock for each
$100,000 in principal amount of the Notes. On April 26, 1999, the Company
received Notices of Exercise of the conversion privilege from the holders of the
Notes (the "Holders") effective April 29, 1999. In two separate transactions,
the Company consummated the conversion of the Notes into the Company's common
stock, issuing a total of 71,477,950 shares of its common stock to the Holders,
with an additional 104,353 shares of common stock remaining to be issued. (See
Note 7 - Stockholders' Equity, Options and Warrants).
Malcolm C. Davenport V loaned Spinteknology $350,000 in January 1999
evidenced by a 10% demand note and secured by a pledge of the Company's
intellectual assets. At the time, the security position was subordinate to the
position of the holders of the Notes. In addition, Mr. Davenport loaned
Spinteknology $500,000 in February 1999. The two loans were rewritten in May
1999 in the form of two notes, one in the amount of $450,000 and one in the
amount of $400,000, each of which bear interest at the rate of 10% per
F-11
<PAGE>
annum and are secured by the Company's intellectual assets. In addition, the
Company and the Trust entered into an agreement whereby $164,850 of accrued
interest due the Trust on the Notes was to be paid in monthly installments
including interest at the rate of 10% per annum. The two notes payable to Mr.
Davenport together with the accrued interest due the Trust are to be repaid in a
monthly installment of $50,000, with the first such monthly payments being
applied against the obligation to the Trust, then to the $450,000 note, and
finally to the $450,000 note.
In addition, the Company financed the purchase of $86,328 of furniture and
equipment during fiscal 1999 through three capitalized leases.
The following is the long-term maturity schedule:
2000 $ 593,273
2001 391,658
2002
16,571
==============
Total $ 1,001,502
==============
7. STOCKHOLDERS' EQUITY, OPTIONS AND WARRANTS
Convertible Preferred Stock- On August 6, 1996 the Board of Directors was
granted authority by a consent of a majority of the stockholders of the Company
to issue up to 100,000 shares of Series A 4% Preferred Stock, without nominal or
par value per share, in one or more series and to fix the number of shares
constituting any such series, the voting powers, designation, preferences and
relative participation, optional or other special rights and qualifications,
limitations or restrictions thereof, including the dividend rights and dividend
rate, terms of redemption (including sinking fund provisions), redemption price
or prices, conversions rights and liquidation preferences of the shares
constituting any series, without any further vote or action by the stockholders.
The Company issued 10,059 shares of preferred stock to RBB Bank
Aktiengesellschaft ("RBB"), an offshore bank representing investors pursuant to
Regulation S promulgated under the Securities Act of 1933, including 7,202
shares on October 1, 1996 in exchange for $7,143,000 principal amount of the
Debenture plus accrued interest; and, pursuant to Regulation S Securities
Subscription Agreements (a) 1,429 shares of preferred stock on April 21, 1997
for which the Company received $880,000 after discount and commissions; and (b)
1,428 shares of preferred stock on October 22, 1997 for which the Company
received approximately $1,000,000 after discount. In conjunction with the
October 1997 transaction, the Company incurred commission expense of $100,000
which was paid through the issuance of 200,000 shares of the Company's $0.002
par value common stock.
RBB has converted all of the preferred stock and the accumulated 4%
preferred stock preference, as follows: (a) on November 21, 1996, 360 shares of
preferred stock were converted into 1,113,883 shares of common stock at an
average price of $0.325 per share; (b) on June 5, 1997, 958 shares of preferred
stock were converted into 4,919,658 shares of common stock at a conversion price
of $0.20 per share; (c) on May 1, 1998, 500 shares of preferred stock were
converted into 1,000,690 shares of common stock at a conversion price of $0.53
per share; and (d) in two separate transactions, the first occurring on April
29, 1999 and the second on May 7, 1999, 8,241 shares of preferred stock together
with $752,777 in 4% preferred stock preference, which had accrued through April
26, 1999, were converted into a total of 51,837,334 shares of common stock at a
conversion price of $0.1735 per share. Each of the conversion prices was based
on the average closing bid price of the common stock for the five trading days
ended immediately prior to the date of the notices of conversion.
F-12
<PAGE>
At June 30, 1998, there were 8,241 issued outstanding shares of convertible
preferred stock, all of which had been retired through conversion into common
stock as of June 30, 1999. The Company does not anticipate issuing additional
shares of convertible preferred stock in the future.
6% Secured Convertible Notes - On February 27, 1998, the Company initiated the
issuance of a maximum of $5,000,000 of 6% Secured Convertible Notes (the
"Notes"). As of June 30, 1998, $2,350,000 of the Notes had been purchased, with
the remaining $2,650,000 having been purchased during the six month period ended
December 31, 1998. Upon completion of the private placement of the Notes, the
Malcolm C. Davenport V Family Trust, Malcolm C. Davenport V, a co-trustee of the
Trust, 10% beneficial owner and member of the Board of Directors of the Company,
held $4,300,000 of the Notes, and a former member of the board of Directors held
an additional $350,000. The principal balance of the Notes was convertible by
the holders at any time through February 28, 2001 into shares of the Company's
$0.002 per value common stock in a number equal to 0.8% of the then outstanding
shares of the Company's common stock, including vested stock options, for each
$100,000 in principal amount of the Notes.
On April 26, 1999, the Company received Notices of Exercise of the
conversion privilege from the holders of the Notes effective April 29, 1999. In
two separate transactions, the Company consummated the conversion of the Notes
into the Company's common stock, issuing a total of 71,477,950 shares of its
common stock to the Holders, with an additional 104,353 shares of common stock
remaining to be issued.
Common Stock - In conjunction with the above noted conversion of the Company's
preferred stock and Notes, on April 30, 1999 a majority of the shareholders of
the Company's common stock voted for the amendment of the Company's Articles of
Incorporation to increase the number of authorized shares of the Company's
$0.002 par value common stock from 100,000,000 to 500,000,000 shares. At June
30, 1999 and June 30, 1998, 143,560,448 and 19,990,384 shares had been issued,
respectively, with 1,317,329 shares held as treasury shares by the Company on
each of those dates. As noted above, a total of 123,315,284 shares of common
stock had been issued to the former holders of convertible securities, with the
former holders of the preferred stock having received a total of 51,837,334
shares and the former holders of the Notes having received a total of 71,477,950
shares. An additional 104,353 shares of common stock remain to be issued to the
former Note Holders.
On January 20, 1998, the Company issued a Warrant for the purchase of
277,778 shares of the Company's common stock for $0.36 per share to NAC
Investments Properties, Inc. N.V. ("NAC") in association with a secured loan
from NAC in the amount of $100,000. On April 24, 1998, NAC exercised the Warrant
and was issued 277,778 shares of common stock in settlement of the loan.
Treasury Stock - On October 18, 1997, Mr. Lanier M. Davenport resigned as
Chairman of the Board of Directors and as Chief Executive Officer of the
Company. Mr. Davenport, in conjunction with his resignation, contributed
1,300,000 of the shares of common stock he owned in the Company back to the
Company in an effort to enhance shareholder value. Such contribution of shares
was recorded as treasury stock at December 31, 1996 with a basis at par value,
or $2,600.
Warrants - On July 16, 1996, the Company issued a Warrant for the purchase of
250,000 shares of its common stock as part of the consideration paid in
conjunction with the funding provided to the Company from the Debenture
described above. In addition, as noted in Common Stock above, the Company issued
a Warrant for the purchase of 277,778 shares of its common stock on January 20,
1998 that was exercised by the holder on April 24, 1998.
Stock Options - During the fiscal year ended June 30, 1999, the Company's 1996
Stock Option Plan, as
F-13
<PAGE>
amended by the stockholders on January 21, 1998 (the "Plan"), was impacted by
the following events: (a) effective December 10, 1998 the Company's Board of
Directors approved a re-pricing of those employee stock options with prices
exceeding the $0.22 per share closing price on the prior day, including those
held by officers of the Company, and established a new expiration date of the
affected options of December 9, 2008 with no change in the vesting dates; and
(b) an increase in the number of shares subject to purchase under the Plan from
4,000,000 to 60,000,000, as further described below.
The Plan contained a provision whereby the equity position held by option
holders could not be diluted or enhanced by the issuance of or reduction in the
number of shares of common stock issued other than through the Plan subject to
certain approvals by the Board of Directors. This provision, which has
subsequently been deleted from the Plan with certain exceptions such as stock
splits, was activated by the above noted conversions of the preferred stock and
Notes. On May 6, 1999, a majority of the Company's common shareholders approved
an increase in the number of shares of common stock available under the Plan
from 4,000,000 to 60,000,000. Effective June 21, 1999, after approval by the
Company's Board of Directors, 5,934,928 existing stock options were cancelled
and replaced with 44,206,735 stock options that retained the vesting and
expiration dates of the options being replaced. In addition, the anti dilution
provision required the total amount to be paid by a holder of a stock option
previously granted not be increased or decreased by a change in the number of
shares outstanding. This resulted in the 44,206,735 new options being issued at
an average option price per share of approximately $0.03, compared to the
closing price of the Company's common stock of $0.23 on June 21, 1999. As a
result of the new options being issued at an option price less than the market
price, the Company is required to report as a non-monetary operating expense the
difference between the option price and the closing market price on the date
options become exercisable. For the year ended June 30, 1999, the Company's
income statement reflects a non-monetary expense of $7,254,033 based on
36,337,400 of the new options having vested. In addition, 2,761,237, 2,150,414,
1,730,486 and 1,167,597 options will vest in the years ending June 30, 2000,
2001, 2002 and 2003, respectively, with non-monetary operating expenses to be
recorded based on the difference between the option price and the market price
of the Company's common stock on the vesting dates.
The following is a summary of stock option activity for the year ended June
30,1999, which has been segmented into periods based on the December 10,1998
re-pricing and the issuance of options based on the anti dilution provision:
F-14
<PAGE>
<TABLE>
<CAPTION>
Period Period Period
July 1, 1998 Dec. 10, 1998 June 21, 1999
Through Through Through
Dec. 9, 1998 June 20, 1999 June 30, 1999
-------------- ----------- ----------------- ------------ ---------------- -------------
Number of Weighted Number of Weighted Number of Weighted
Shares Average Shares Average Shares Average
Under Price Per Under Price Per Under Price Per
Option Share Option Share Option Share
-------------- ----------- ----------------- ------------ ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at ....... 4,509,898 $ 0.41 5,214,897 $ 0.39 6,184,929 $ 0.25
beginning of period
Additional options
granted:
Pre repricing of
Dec.10, 1999 ...... 895,021 0.35 -- -- -- --
Post repricing
of Dec.10, 1999 ...... -- -- 1,160,000 0.26 -- --
Exercised ............ -- -- (133,842) 0.21 -- --
Forfeited ............ (190,022) 0.54 (56,126) 0.21 (74,486) 0.0295
Cancelled in repricing -- -- (2,904,934) 0.45 -- --
Reissued with new
ten year term in Dec
10,1999 repricing .... -- -- 2,904,934 .02 2 -- --
Cancelled in
anti dilution ........ -- -- -- -- (5,934,928) 0.25
transaction
Reissued in
anti dilution ........ -- -- -- -- 44,206,735 0.03
transaction
--------- --------- ----------
Outstanding at end of
period ............... 5,214,897 $ 0.39 6,184,929 $ 0.25 44,382,250 $ 0.03
========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Outstanding at end of year:
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of Exercise Number of Contractual Price Per Number of Price Per
Price Per Share Shares Life (years) Share Shares Share
--------------- ------ ------------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Employees:
$0.0252 - $0.0295 31,269,091 9.19 $ 0.0286 26,357,773 $ 0.0283
$0.0309 - $0.0389 1,623,787 9.89 0.0362 22,346 0.0349
$0.0403 - $0.0443 1,757,860 9.53 0.0407 1,489,714 0.0403
----------------- ----------------
34,650,738 27,869,833
------------------ -----------------
Non-employees:
$0.0269 - $0.0420 5,410,344 8.60 0.0351 5,410,344 0.0351
$0.0577 - $0.0873 4,071,168 8.16 0.0640 4,071,168 0.0640
$0.43 -$1.20 250,000 7.49 0.5900 250,000 0.5900
------------------ -----------------
9,731,512
------------------
44,382,250 37,601,345
================== =================
</TABLE>
F-15
<PAGE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the stock option plan. FASB Statement 123 "Accounting for
Stock-Based Compensation" ("SFAS 123") was issued in 1995 and, if fully adopted,
changes the methods for recognition of cost on plans similar to those of the
Company. Had compensation cost for the Company's stock-based compensation plan
been determined based on the fair market value of options on the dates of grant
in 1999, 1998 and 1997 using the Black-Scholes option-pricing of model (as
required by SFAS 123) with the following assumptions: (a) no dividends, (b)
expected volatility of 22%, 33% and 75% for 1999, 1998 and 1997, respectively,
(c) risk free interest rates of 6%, 6% and 6% for 1999, 1998 and 1997,
respectively, and (d) expected lives of 9.0 years, 9.75 years and 9.5 years,
respectively, the effect on net income and earnings per share would be as
follows:
1999 1998 1997
---- ---- ----
Net loss:
As reported ............ $ (9,692,716) $ (4,786,581) $ (3,570,899)
============= ============ =============
Pro-forma .............. $ (9,836,666) $ (5,072,386) $ (4,313,028)
============= ============ =============
Loss per common share:
As reported ............ $ (0.26) $ (0.30) $ (0.34)
============= ============ =============
Pro-forma .............. $ (0.26) $ (0.30) $ (0.40)
============= ============ =============
8. BONUS PLAN
Effective June 1, 1997, the Company adopted a bonus plan to provide
incentive compensation to certain key employees, directors and advisory
directors. The plan provides for stock appreciation rights to the participants
covered by the plan. Compensation under the plan is based on the award of
performance units, which are defined as a percentage of the total market value
of the Company's common stock ("market value") and which have a value related to
the appreciation in the value of the Company's common stock. The maximum number
of performance units that may be issued under the plan shall not exceed an
aggregate of twelve percent (12%) of the market value of the Company. The Board
of Directors has determined that the shares issued in connection with the
conversions of the preferred stock and the Notes were to be excluded from the
computation of the Company's total market value.
Performance units are vested upon issuance and mature at a rate of 25% per
year over a four year period from the date granted. After the first anniversary
of any grant of performance units, participants may elect to receive payments
which represent the appreciation in value of the performance unit from the date
granted through the date such payment is elected. A participant is entitled to
receive payments following termination if an election to receive such payments
is made prior to the third anniversary of termination; or, at the Company's
discretion following the third anniversary of termination if no such election is
made by the participant.
For the year ended June 30, 1999, after the exclusion of the 123,315,284
shares of common stock issued in the conversion of the preferred stock and Notes
from the outstanding shares on June 30, 1999, accrued compensation expense was a
negative $111,332. For the years ended June 30,1998 and 1997, compensation
expense under the plan was $194,998 and $115,458, respectively.
F-16
<PAGE>
9. COMMITMENTS
The Company leases two facilities located beside one another in Las Vegas,
Nevada. The 16,903 square foot facility is leased for a period of sixty-two
months which commenced November 1, 1998 at an initial monthly rental of $13,130,
with increases each year to a maximum of $18,655 in the fifth year. The 12,000
square foot warehouse facility is leased for a period of sixty-one months
commencing September 1, 1999 at an initial monthly rental of $8,338, with annual
cost of living increases which are limited to a maximum of 3% per year. In
addition, the Company pays monthly common area maintenance fees of $1,690 and
$1,440 for the two facilities, respectively. The follow is a schedule of future
minimum rent payments due under leases for the years ended June 30:
2000 $ 279,245
2001 349,454
2002 359,405
2003 369,655
2004 253,168
2005 21,729
==================
Total $ 1,632,656
==================
Rent expense for the years ended June 30, 1999, 1998 and 1997 was $222,447,
$123,829, and $135,021, respectively.
10. BENEFIT PLANS
Effective January 1, 1999, the Company adopted a savings plan (the "401(k)
Plan") qualified under Section 401(k) of the Internal Revenue Code of 1986, as
amended. The 401(k) Plan is a discretionary plan and covers all full time
employees who have accredited service. Through June 30, 1999, the employer has
not made a discretionary contribution to the 401(k) Plan.
11. RELATED PARTY TRANSACTIONS
The Lanier M. Davenport, Sr. Family Trust and the Malcolm C. Davenport V
Family Trust (the "Trust"), the principal shareholder of the Company, the
trustees of which are Malcolm C. Davenport V, Director of the Company, 10%
beneficial owner and brother of Lanier M. Davenport, former Chairman and Chief
Executive Officer of the Company and current shareholder, and Malcolm C.
Davenport, Jr., a stockholder of the Company and father of Lanier M. Davenport
and Malcolm C. Davenport V, made advances to the Company in the amount of
$1,920,000 during the year ended June 30, 1996. Of that amount, $1,000,000 was
converted into 454,545 shares of common stock of the Company on April 14, 1996
and an additional $440,000 was converted into 401,141 shares of common stock of
the Company on July 16, 1996. All of the shares of common stock issued in
satisfaction of this debt were issued with restrictive legends. The remaining
$480,000 (plus accrued interest of $15,542) was converted into demand notes with
an interest rate of 10% per annum. These notes were repaid in monthly
installments of $20,000, including interest, with the balance being repaid in
full in July 1998.
On August 14, 1997, Spinteknology entered into a $500,000, 12% promissory
note agreement with the Trust. On October 1, 1997, the Trust elected to convert
the note plus accrued interest of approximately $4,000 thereon, into 1,400,800
shares of the Company's common stock. The conversion price of $0.36 per share
F-17
<PAGE>
reflects a 32% discount from the closing price of $0.53 per share on October 1,
1997. The shares were issued as a result of the conversion on or about November
30, 1997. The shares as a result of the conversion have not been registered and
bear a restrictive legend.
On February 27, 1998, the Company initiated the $5,000,000 private
placement of the Notes. (See Note 6 - Long-Term Debt). The Malcolm C. Davenport
V Family Trust purchased $4,300,000 of the Notes, including purchases of
$1,000,000 in March 1998, $900,000 in April 1998, $2,100,000 in July 1998, and
$300,000 in October 1998. A total of $197,556 in accrued interest was due the
Trust on February 28, 1999, the first annual interest payment date on the Notes,
which was not paid on that date pursuant to an agreement between the Trust and
the Company. In March 1999, the Company paid the Trust $75,000 of this interest,
and in May 1999 entered into an agreement to pay the Trust in monthly
installments of $50,000 including interest at the rate of 10% per annum, with
the first of such payments being made in June 1999. An additional $42,283
interest accrued on the Notes through April 29, 1999. On April 26, 1999, the
company received Notice of Exercise of the conversion privilege from the Trust,
and in two separate transactions on April 29, 1999 and May 7, 1999, the Company
issued the Trust a total of 61,471,037 shares of the Company's common stock,
with an additional 89,744 shares remaining to be issued, in conversion of the
$4,300,000 in Notes.
On October 18, 1996, Mr. Lanier M. Davenport resigned as Chairman of the
Board of Directors and as Chief Executive Officer of the Company. Mr. Davenport,
in conjunction with his resignation, contributed 1,300,000 of the shares of
common stock he owned in the Company back to the Company in an effort to enhance
shareholder value. Such contribution of shares was recorded as treasury stock at
December 31, 1996 with a basis at par value, or $2,600. Prior to July 1, 1996,
Mr. Lanier M. Davenport, or companies with which he was affiliated made loans
and advances to the Company in the aggregate amount of $356,000 at an annual
interest rate of 10% in the form of demand notes, of which $145,108, plus
accrued and unpaid interest of $10,951, remained outstanding as of June 10,
1996. During fiscal 1997, the Company accrued additional interest in the amount
of $2,964 and repaid $123,694 and $10,612 for principal and interest,
respectively. The remaining $21,414 of principal and $3,304 of interest were
contributed back to the Company in an effort to enhance shareholder value. Such
contribution was recorded as additional paid in capital by the Company on
December 31, 1996. At June 30, 1998, the Company did not owe any monies to Mr.
Lanier M. Davenport.
Malcolm C. Davenport, Jr., stockholder of the Company and father of both
Lanier M. Davenport and Malcolm C. Davenport V, made loans to the Company during
fiscal 1996 in the aggregate amount of $418,500 at an annual interest rate of
10% in the form of demand notes. At June 30, 1996, the balance payable for
principal and accrued interest on the notes was $323,000 and $21,850,
respectively. During fiscal 1997, the Company accrued additional interest on the
notes in the amount of $15,866 and paid $50,000 to Malcolm C. Davenport, Jr., of
which $30,000 was applied to principal with the remaining $20,000 applied to
interest payable on the notes. On December 31, 1996 the unpaid principal and
interest n the amount of $303,000 and $7,717 were contributed back to the
Company in an effort to enhance shareholder value. Such contribution was
recorded as additional paid in capital by the Company. At June 30, 1998 the
Company did not owe any monies to Mr. Malcolm C. Davenport, Jr.
Davenport Investments, Inc., a corporation controlled by Lanier M.
Davenport was party to an agreement whereby it received lease payments for
office space used by the Company for its corporate offices in Chattanooga,
Tennessee. Such agreement terminated September 30, 1996. During the year ended
June 30, 1997, the Company made lease payments to Davenport Investments, Inc. in
the amount of $3,655.
Malcolm C. Davenport V loaned Spinteknology $350,000 in January 1999
evidenced by a 10% note and secured by a pledge of the Company's intellectual
assets. At the time, the security position was subordinate to the position of
the holders of the Notes. In addition, Mr. Davenport loaned Spinteknology
$500,000 in February 1999. The two loans were rewritten in May 1999 in the form
of two notes, one in the amount of
F-18
<PAGE>
$450,000 and one in the amount of $400,000, each of which bear interest at the
rate of 10% per annum and are secured by the Company's intellectual assets. The
Company made a payment of $50,000 on the $450,000 note in May 1999, including
accrued interest. The two notes, together with the interest due the Trust as
noted in the above paragraph, are to be repaid in a monthly installment of
$50,000 with the first such monthly payments being applied against the
obligation to the Trust, then to the $450,000 loan, and finally to the $400,000
loan.
Periodically Malcolm C. Davenport V has provided operating advances to the
Company by allowing the Company to charge certain travel expenses on his
personal credit card. As of June 30, 1999, this practice has ceased. In
addition, Mr. Davenport has traveled extensively on the Company's behalf. The
amount payable to Mr. Davenport at June 30, 1999 for reimbursement of his
Company related travel expenses together with Company charges for travel on Mr.
Davenport's credit card is $493,000.
Sarah L. Davenport, stockholder of the Company and mother of both Lanier
Davenport and Malcolm C. Davenport V, made loans in the aggregate amount of
$20,000 in the form of demand notes with an annual interest rate of 10% during
fiscal 1996. On October 1, 1998, the note plus accrued interest in the amount of
$6,606 was converted into 120,938 shares of the Company's common stock. The
conversion price of $0.22 per share represented a 32% discount from the closing
price of $0.33. The shares issued as a result of the conversion have not been
registered and bear a restrictive legend.
F-19
<PAGE>
12. INCOME TAXES
The provision for income taxes for the years ended June 30, 1999, 1998 and
1997 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Deferred provision .......... $(1,580,000) $ 76,000 $ (149,900)
Tax benefit of net operating
loss ........................ carryforward (1,288,000) (1,765,000) (1,138,000)
----------- ----------- -----------
(2,868,000) (1,689,000) (1,287,900)
Change in valuation allowance 2,868,000 1,689,000 1,287,900
----------- ----------- -----------
$ - $ - $ -
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
The provision for income taxes for the years ended June 30, 1999, 1998 and
1997 differs from the amounts computed by applying the federal statutory rate to
income before provision for income taxes as follows:
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income tax benefit at federal statutory rate ... $ 3,170,000 $ 1,627,000 $ 1,214,000
State income tax benefit, net of federal benefit -- 191,500 142,800
Valuation allowance ............................ (2,868,000) (1,689,000) (1,287,900)
Other .......................................... (302,000) (129,500) (68,900)
----------- ----------- -----------
$ - $ - $ -
=========== ============== ==========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance has
been recognized to offset the related deferred tax assets due to the uncertainty
of realizing the benefit of the loss carryforward.
As of June 30, 1999, the Company has $10,355,000 net operating loss
carry-forwards available to reduce future taxable income which will expire in
future periods as follows:
Amount
Fiscal Year Ending
2011 $ 1,141,000
2012 235,000
2013 5,191,000
2014 3,788,000
=================
$10,355,000
=================
F-20
<PAGE>
The following is a summary of the significant components of the Company's
deferred tax assets for the years ended, June 30, 1999 and 1998:
1999 1998
---- ----
Net operating loss carryforward .......... $ 3,522,000 $ 2,307,000
Inventory ................................ 150,000 146,000
Deferred start-up costs .................. 1,484,000 --
Accrued expenses ......................... 63,000 2,399,000
Nonstatutory stock options ............... 2,466,000 --
Other .................................... 43,000 8,000
Valuation allowance ...................... (7,728,000) (4,860,000)
----------- -----------
$ - $ -
----------- -----------
13. LEGAL PROCEEDINGS
On September 25, 1996, Unique Entertainment, a Nevada Corporation
("Unique"), filed a complaint in Clark County (Las Vegas), Nevada District Court
against the Company asserting breach of contract and related claims. The Company
filed an answer denying liability. In February of 1999, the Company paid Unique
$15,000 in full satisfaction of its claims in order to end the litigation. The
suit was dismissed with prejudice on April 1, 1999, and is no longer pending in
any court.
On October 10, 1996, Richard M Mathis of Reno, Nevada ("Mathis") filed a
complaint in the Washoe County (Reno), Nevada District Court against the
Company, Spintek International, Inc., and Lanier M. Davenport, who, until
October 18, 1996, was chairman and chief executive officer of Gaming and may be
the beneficial owner of more then 5% of the Company's common stock, contending
Davenport defrauded him and breached a fiduciary duty to him. On July 8, 1998,
the court granted Davenport's motion for summary judgement, finding that he had
committed no wrongdoing. On January 13, 1999, following the entry of Stipulation
for Dismissal filed by Mathis's attorney, the District Court dismissed the case
against the remaining two defendants - the Company and Spintek International,
Inc. Thus, the litigation is no longer pending in any court.
F-21
<PAGE>
25
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
There were no changes in or disagreements with the Company's principal
independent accountant, Joseph Decosimo & Company.
PART III
The information required by Part III of this Form 10-KSB is incorporated by
reference to the Company's definitive proxy statement on Schedule 14A to be
filed on or before October 28, 1999 in accordance with Rule 12b-23 of the Rules
and Regulations under the Securities Exchange Act of 1934.
22
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
The following exhibits are submitted herewith:
No. Description
- ---- -----------------------------------------------------------------------
<S> <C>
2.1 Agreement of Merger and Plan of Reorganization, effective August 24, 1998 (1)
3.1 Certificate of Amendment of Articles of Incorporation
3.2 By laws of the Registrant, adopted August 24, 1998 (1)
4.1 Certificate of Designations, Numbers, Powers, Preferences and Relative,
Participating, Optional, and Other Special Rights and the
Qualifications, Limitations, Restrictions, and Other Distinguishing
Characteristics of Series A Preferred Stock dated July 16, 1997,
restated effective __________, 1998 (1)
4.2 6% Secured Convertible Notes (1)
4.3 Notices of Exercise of 6% Secured Convertible Notes dated April 26, 1999 (8)
4.4 Notices of Conversion of Preferred Stock dated April 26, 1999 (8)
10.1 Premise Lease dated June 9, 1998 (1)
10.2 Premise Lease dated May 19, 1999
10.3 Amendment to Premise Lease dated May 19, 1999
10.4 Employment Agreement with Gary L. Coulter dated December 10, 1998 (2)
10.5 Employment Agreement with Robert E. Huggins dated June 10, 1999
10.6 License Agreement between Spinteknology, Inc. and SUZO International (N.L.) B.V. (3)
10.7 Warrant Agreement, dated as of July 16, 1996, relating to warrants to purchase 250,000
shares of common stock (4)
10.8 Registrant's 1996 Stock Option Plan, as amended (5)
10.9 Agreement dated February 5, 1997 by and between Registrant and Gary L. Coulter and Robert E. Huggins (6)
10.10 1997 Incentive Bonus Plan of Spintek Gaming Technologies, Inc. effective June 1, 1997 (6)
10.11 Promissory Note, dated August 14, 1997, to Malcolm C. Davenport V Family Trust (6)
10.12 Regulation S Securities Subscription Agreement dated October 22, 1997 (7)
10.13 Loan Commitment letter dated August 31, 1999 from Malcolm C. Davenport V
10.14 Promissory Note dated May 1, 1999 to Malcolm C. Davenport V in the amount of $450,000
10.15 Promissory Note dated May 1, 1999 to Malcolm C. Davenport V in the amount of $400,000
10.16 Patent Collateral Assignment dated December 20, 1998
10.17 Collateral Assignment and Security Agreement dated December 20, 1998
10.18 Amendment to Patent Collateral Assignment and Collateral Assignment and Security Agreement dated May 1, 1999
21.1 List of Subsidiaries of the Registrant
27.1 Financial Data Schedule
- ----------------
(1) Incorporated by reference to the Form 10-KSB for the period ended June 30,
1998.
(2) Incorporated by reference to the Form 10-QSB for the period ended December
31, 1998.
(3) Incorporated by reference to the specific exhibit to the Form 10-QSB for the period ended March 31, 1996.
23
<PAGE>
(4) Incorporated by reference to the specific exhibit to the Form 8-K, filed
August 12, 1996.
(5) Incorporated by reference to the Form S-8 filed June 18, 1999.
(6) Incorporated by reference to the Form 10-KSB for the period ended June 30,
1997.
(7) Incorporated by reference to the Form 10-QSB for the period ended September
30, 1997.
(8) Incorporated by reference to the Form 8-K dated April 26, 1999.
(b) Reports on Form 8-K
</TABLE>
On April 26, 1999, a Current Report on Form 8-K was filed with the
Securities and Exchange Commission reporting that all of the outstanding shares
of the Preferred Stock, together with the accrued interest, and the Notes had
been converted into the Company's Common Stock. Each of these events was
transacted through the issuance of one-half of the shares on April 29, 1999 and
the balance of the shares on May 7, 1999. The holders of the Preferred Stock and
the Notes received a total of 51,837,334 and 71,477,950 shares of the Company's
Common Stock, respectively, increasing the Company's issued and outstanding
Common Stock to 142,554,846 shares.
On April 30, 1999, the Board of Directors, with the written consent of the
shareholders holding a majority of the Company's Common Stock, authorized an
increase in the number of shares of Common Stock to 500,000,000. On May 7, 1999,
the Board of Directors, with the written consent of the shareholders holding a
majority of the Company's common stock, authorized an increase in the number of
shares authorized under the 1996 Stock Option Plan to 60,000,000.
24
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SPINTEK GAMING TECHNOLOGIES, INC.
By:/s/ GARY L. COULTER
----------------------
Gary L. Coulter
President, Chairman of the Board and
Chief Executive Officer
Pursuant to requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature
/s/ GARY L. COULTER September 24, 1999
- -------------------
Gary L. Coulter
President, Chairman of the Board, Chief Executive
Officer, and Director (Principal
Executive Officer)
/s/ GEORGE P. MILLER September 24, 1999
- ------------------------------------
George P. Miller
Chief Financial Officers, Treasurer
(Principal Financial and
Accounting Officer)
/s/ MALCOLM C. DAVENPORT V September 24, 1999
- --------------------------
Malcolm C. Davenport V
Director
/s/ DR. THOMAS C. BURNS, Ph.D September 24, 1999
- -----------------------------
Thomas C. Burns
Director
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION
(After issuance of stock)
SPINTEK GAMING TECHNOLOGIES, INC.
A Nevada corporation
We the undersigned vice president and secretary of Spintek Gaming
Technologies, Inc. do hereby certify:
That the Board of Directors of said corporation at a meeting duly
convened, held on the 30th day of April, 1999 adopted a resolution to amend the
original articles as follows:
Article III is hereby amended to read as follows:
The number of shares with par value: 500,000,000
Par values: $.002
Number of shares without par value: 100,000
Article 6.1 is hereby amended to read as follows:
ADDITIONAL INFORMATION ON SHARES. This Corporation is authorized to
issue Five Hundred Million One Hundred Thousand (500,100,000) shares of
capital stock consisting of Five Hundred Million (500,000,000) shares
of common stock, each with a $.002 par value, and One Hundred Thousand
(100,000) shares of preferred stock without a par value. As to the
preferred stock of the Corporation, the power to issue any shares of
preferred stock of any class or any series of any class and
designation, numbers, voting powers, or the denial of voting powers,
preferences, and relative, participating, optional or other rights, if
any, or the qualifications, limitations, or restrictions thereof, shall
be determined by the Board of Directors.
The number of shares of the corporation outstanding and entitled to
vote on an amendment to the Articles of Incorporation is 80,455,953;
that the said changes and amendment have been consented to and approved
by a majority vote of the stockholders holding at least a majority of
each class of stock outstanding and entitled to vote thereon.
/s/ JUDY KARABIN
President or Vice President
/s/ ERIK R. BATZLOFF
Secretary or Assistant Secretary
State of Nevada
County of Clark
On May 3, 1999, personally appeared before me, a Notary Public,
_____________________who acknowledged that he executed the above instrument.
------------------------------
Notary Public
STANDARD LEASE
SPENCER AIRPORT CENTER
ARTICLE 1 BASIC LEASE TERMS
1.01 Premises Leased
1.02 Project
1.03 Term
1.04 Rent
1.05 Operating Expenses
1.06 Security Deposit
1.07 Permitted Use
1.08 Addresses for Payments, Notices and Deliveries
1.09 Broker
1.10 Building Improvements
1.11 Payments Upon Execution
ARTICLE 2 PREMISES
2.01 Leased Premises
2.02 Delivery and Acceptance of Premises
2.03 Building Name and Address
ARTICLE 3 TERM
3.01 General
3.02 Tender of Possession by Lessor
3.03 Delay in Possession
3.04 Early Occupancy
3.05 Option Term(s)
ARTICLE 4 RENT AND OPERATING EXPENSES
4.01 Base Rent
4.02 Operating Expenses
4.03 Cost of Living Increases
4.04 Security Deposit
4.05 Option Rent
ARTICLE 5 USES
5.01 Use
5.02 Hazardous Materials
5.03 Signs and Auctions
5.04 Year 2000 Compliance
ARTICLE 6 COMMON FACILITIES AND VEHICLE PARKING
6.01 Operation and Maintenance of Common Facilities
6.02 Use of Common Facilities
6.03 Parking
6.04 Changes and Additions by Lessor
ARTICLE 7 MAINTENANCE, REPAIRS AND ALTERATIONS
7.01 Lessor's Obligations
7.02 Lessee's Obligations
7.03 Alterations and Additions
7.04 Utility Additions
7.05 Entry and Inspection
ARTICLE 8 TAXES AND ASSESSMENTS ON LESSEE'S PROPERTY
8.01 Taxes on Lessee's Property
ARTICLE 9 UTILITIES
ARTICLE 10 ASSIGNMENT AND SUBLETTING
10.01 Rights of Parties
10.02 Effect of Transfer
ARTICLE 11 INSURANCE AND INDEMNITY
11.01 Liability Insurance - Lessee
11.02 Lessor's Insurance
11.03 Waiver of Subrogation
11.04 Policies
11.05 Lessee's Indemnity
11.06 Lessor's Non-Liability
<PAGE>
ARTICLE 12 DAMAGE OR DESTRUCTION
12.01 Restoration
ARTICLE 13 EMINENT DOMAIN
13.01 Total or Partial Taking
13.02 Temporary Taking
13.03 Taking of Parking Area
ARTICLE 14 SUBORDINATION, ESTOPPEL CERTIFICATE
14.01 Subordination
14.02 Estoppel Certificate
ARTICLE 15 DEFAULTS AND REMEDIES
15.01 Lessee's Defaults
15.02 Lessor's Remedies
15.03 Repayment of "Free" Rent
15.04 Cumulative Remedies
15.05 Late Payments
15.06 Right of Lessor to Perform
15.07 Default by Lessor
15.08 Expenses and Legal Fees
ARTICLE 16 END OF TERM
16.01 Holding Over
16.02 Merger on Termination
16.03 Surrender of Premises; Removal of Property
16.04 Termination; Advance Payments
ARTICLE 17 PAYMENTS AND NOTICES
ARTICLE 18 LIMITATION OF LIABILITY
ARTICLE 19 BROKER'S COMMISSION
ARTICLE 20 TRANSFER OF LESSOR'S INTEREST
ARTICLE 21 INTERPRETATION
21.01 Gender and Number
21.02 Headings
21.03 Joint and Several Liability
21.04 Successors
21.05 Time of Essence
21.06 Severability
21.07 Entire Agreement
21.08 Covenants and Conditions
21.09 Counterparts
21.10 Indemnities
21.11 Attachments
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LEASE
(FREESTANDING BUILDING)
This lease is hereby dated for reference purposes only as of May 19,
1999 by and between SPENCER AIRPORT CENTER, LLC, a Delaware limited liability
company (herein called "Lessor") and SPINTEKNOLOGY, INC., a Georgia corporation
(herein called "Lessee").
ARTICLE 1 BASIC LEASE TERMS
Each reference in this Lease to the "Basic Lease Terms" shall mean and
refer to the following collective terms, the application of which shall be
governed by the provisions in the remaining articles of this Lease.
1.01 Premises Leased:
a. Premises Address: 1854 Pama Lane
b. Rental Area: 12,328 approximate square feet
c. Building Designation: D-2
1.02 Project:
a. Project Name: Spencer Airport Center
b. Total Project Rental Area: 114,446
1.03 Term:
a. Estmated Commencement Date: September 1,1999 contingent upon
final approval of plans and permits.
b. Number of Calendar Months (Initial Term):Sixty-one (61) months
1.04 Rent:
a. Base Rent: (i) Month one (1) free of base rent and CAM for
fixturization which will be September 1999; (ii) two (2) through four (4) will
be half (1/2) of base rent only ($3,.637.00) and full CAM charges which will be
October, November, December 1999; (iii) $7,274.00/month during months five (5)
through sixty-one (61) subject to annual rent adjustment per Article 1.04b
below. Where reference is made in this Lease to rent as provided in Section
1.04a, or where such reference is made to the term "Original Monthly Rent", such
rent shall be deemed to be $7,274.00. In addition, operating expenses are due
and payable throughout the term of the Lease.
b. Rent Adjustments: The base rent shall be increased annually
commencing the thirteenth (13th) month of this Lease in accordance with the
Consumer Price Index, as provided in Section 4.03. Said adjustment will have a
cap of three percent (3%) per annum and will commence in 2000.
1.05 Operating Expenses: Lessor estimates Operating Expenses during the calendar
year when the Lease commences to be $1,479.36 per month. Operating Expenses are
in addition to the Base Rent set forth in Section 1.04.
1.06 Security Deposit: $7,274.00.
1.07 Permitted Use: Office and warehouse for the sales, display, storage,
distribution, and light manufacturing of gaming slot devices and related legal
use.
1.08 Addresses for Payments, Notices and Deliveries:
Lessor: Spencer Airport Center
6754 Spencer Street
Las Vegas, Nevada 89119
Lessee: Spinteknology, Inc.
1857 Helm Drive
Las Vegas, NV 89119
1.09 Brokers: Nevada Brokers, Inc.
1.10 Building Improvements: The tenant improvement allowance shall be
$51,800.00. It is further understood after execution of said lease, we will
immediately finalize bids on the improvements for approval by Lessee. The
approximate square footage of 12,328 square feet to include approximately 1,850
square feet of office area. Should Lessee anytime throughout the lease term,
desire to perform additional modifications at Lessee's cost, bids may be
obtained from Lessor's contractor or another licensed, bonded contractor subject
to Lessor's approval. If an outside contractor is chosen, Lessee shall be
subject to the following requirements: Lessee must meet with Lessor to review
the selected contractor's bid in order to ascertain that all construction
modifications meet code requirements, prior to commencement of construction;
Provide Lessor with contractor's license and bond status; Comply with the
attached Tenant Specification Guidelines; Provide Lessor with the buildout plans
and subsequent permits for same prior to construction; and Provide Lessor with
the Building Department final sign off and Certificate of Occupancy. Lessor will
post Notice of Non-Responsibility during said modification period.
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1.11 Payments Upon Execution: The first installment of Base Rent $7,274.00, the
first month's Operating Expenses $1,479.36, and a Security Deposit of $7,274.00
for a total of $16,027.36, which shall be delivered to Lessor concurrently with
Lessee's execution of this Lease.
ARTICLE 2 PREMISES
2.01 Leased Premises: Lessor leases to Lessee and Lessee rents from Lessor the
Premises (herein the "Premises"), containing the rental area set forth in
Section 1.01b of the Basic Lease Terms. The Premises are located at the building
identified in the Basic Lease Terms (which together with underlying real
property is called herein the "Building"), and is a portion of the project
including other buildings described in Section 1.02a of the Basic Lease Terms
(herein the "Center"). The Premises and the Center are indicated on a site plan
attached hereto as Exhibit "A". If, upon completion of the space plans for the
Premises, Lessor's architect or space planner determines that the rentable
square footage of the Premises differs from that set forth in the Basic Lease
Terms, then Lessor shall so notify Lessee, and the Base Rent (as shown in
Section 1.04 of the Basic Lease Terms) shall be promptly adjusted in proportion
to the change in square footage. Within ten (10) days following Lessor's
request, the parties shall memorialize the adjustments by executing a
certificate to this Lease prepared by Lessor, provided that the failure or
refusal by either party to execute the certificate shall not affect its
validity. The form of such certificate is Exhibit "B".
2.02 Delivery and Acceptance of Premises: Lessor shall deliver the Premises to
Lessee clean and free of debris, on the Commencement Date (unless Lessee is
already in possession), and Lessor further warrants to Lessee that the Common
Facilities referred to in Article 6, plumbing, heating, air conditioning,
ventilating, electrical, lighting facilities and equipment with the Premises,
fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors,
windows, access doors, loading doors, plate glass and skylights shall be in good
operating condition on the Commencement Date. In the event that it is determined
that this warranty has been violated, then it shall be the obligation of the
Lessor, after receipt of written notice from Lessee setting forth with
specificity the nature of the violation, to promptly, at Lessor's sole cost,
rectify such violation. Lessee's failure to give such written notice to Lessor
within six (6) months after the Commencement Date shall cause the conclusive
presumption that Lessor has complied with all of Lessor's obligations hereunder.
The warranty contained in this Section shall be of no force or effect if prior
to the date of this Lease Lessee was the owner or occupant of the Premises.
Except as otherwise provided in this Lease, Lessee hereby accepts the
Premises in their condition existing as of the Commencement Date or the date
that Lessee takes possession of the Premises, whichever is earlier, subject to
all applicable zoning, municipal, county and state laws, ordinances and
regulations governing and regulating the use of the Premises and any covenants
or restrictions of record, and accepts this Lease subject thereto and to all
matters disclosed thereby and by any exhibits attached hereto. Lessee
acknowledges that neither Lessor nor Lessor's agent has made any representation
or warranty as to the present or future suitability of the Premises for the
conduct of Lessee's business.
2.03 Building Name and Address: Lessee shall not utilize any name selected by
Lessor from time to time for the Building as any part of Lessee's corporate or
trade name. Lessor shall have the right to change the name, number or
designation of the Building without notice or liability to Lessee.
ARTICLE 3 TERM
3.01 General: The term shall be for the period shown in Section 1.03b of the
Basic Lease Terms. Subject to the provisions of Section 3.03, the term shall
commence on the commencement date (herein "Commencement Date") on the earliest
of (a) the Estimated Commencement Date as set forth in Section 1.03a of the
Basic Lease Terms, or (b) the date Lessee acquires possession or commences use
of the Premises for any purpose other than construction. Within ten (10) days
after possession of the Premises is tendered to Lessee, the parties shall
execute the Exhibit "B" Certificate form provided by Lessor, which shall state
the Commencement Date and the expiration date ("Expiration Date") of the Lease.
Lessee's failure to execute that form shall not affect the validity of Lessor's
determination of those dates.
3.02 Tender of Possession by Lessor: The Premises shall be deemed ready for
occupancy upon the tendered date, but only if and when Lessor, to the extent
applicable, (a) has provided reasonable access to the Premises for Lessee so
that it may be used without unnecessary interference, (b) has substantially
completed all the work required to be done by Lessor in this Lease, and (c) has
obtained requisite governmental approvals to Lessee's occupancy.
3.03 Delay in Possession: Notwithstanding the provisions of Section 3.01, if
Lessor, for any reason whatsoever, cannot deliver possession of the Premises to
Lessee on/or before the Estimated Commencement Date, this Lease shall not be
void or voidable nor shall Lessor be liable to Lessee for any resulting loss or
damage. However, Lessee shall not be liable for any rent and the Commencement
Date shall not occur until Lessor delivers possession of the Premises and the
Premises are in fact ready for occupancy in accordance with Section 3.02; except
that if Lessor's failure to so deliver possession on the Estimated Commencement
Date is attributable to any action or inaction by Lessee (including any tenant
improvement construction change orders requested by Lessee or Lessee's failure
to supply any information required from Lessee or the furnishing by Lessee of
inaccurate or erroneous estimates, specifications, data or other information),
then the Commencement Date shall not be advanced to the date on which possession
of the Premises is tendered to Lessee, and Lessor shall be entitled to full
performance by Lessee (including the payment of rent) from the Estimated
Commencement Date.
3.04 Early Occupancy: If Lessee occupies the Premises prior to the Estimated
Commencement Date, Lessee's occupancy of the Premises shall be subject to all of
the provisions of this Lease. Early occupancy of the Premises shall
4
<PAGE>
not advance the expiration date of this Lease. Lessee shall pay Base Rent,
Operating Expenses and all other charges, including, without limitation,
insurance specified in this Lease for the early occupancy period, upon Lessor's
demand for same.
3.05 Option Term(s): Lessee is hereby granted the right and option to extend
this Lease for the additional term or terms as provided in Section 1.03c (herein
"Option Term" or "Option Terms") commencing at the expiration of the Initial
Term at a mutually agreeable increase. Such option is granted upon the following
terms and conditions:
a. The Option Term(s) shall be on the same terms, covenants,
conditions, provisions and agreements as in this Lease and any amendments
thereto except for forgiveness of Base Rent, if applicable.
b. Lessee duly and regularly pays the rent and all other amounts
required to be paid pursuant to this Lease and performs each and every covenant,
provision and agreement on the part of the Lessee to be paid, rendered, observed
and performed herein.
c. Lessee gives to Lessor and Lessor receives from Lessee written
notice of the exercise of each option to extend this Lease no earlier than nine
(9) months and no later than six (6) months prior to the expiration of the term
immediately preceding the Option Term(s) to be exercised, time being of the
essence. If said notification is not given and received, the option to be
exercised shall automatically expire. Failure to exercise the first option shall
result in automatic expiration of the second if one so exists.
ARTICLE 4 RENT AND OPERATING EXPENSES
4.01 Base Rent: From and after the Commencement Date, Lessee shall pay without
deduction or offset a Base Rent for the Premises in the total amount shown
(including subsequent adjustments, if any) in Section 1.04a of the Basic Lease
Terms. The rent shall be due and payable in equal monthly installments on the
first day of each month, in advance, except that if the Commencement Date occurs
on a day other than the first day of the month, the first installment of Base
Rent shall include rent for both the fractional month, if any, starting with the
Commencement Date and the following calendar month. No demand, notice or invoice
shall be required.
4.02 Operating Expenses:
a. Lessee shall pay to Lessor during the term hereof, in addition to
the Base Rent, Lessee's share, as hereinafter defined, of all Operating
Expenses, as hereinafter defined, during each year of the term of this Lease.
b. "Lessee's Share" is defined, for purposes of this Lease, as the
percentage determined by dividing the square footage of the Premises by the
total square footage of the rentable space contained in the Center. It is
understood and agreed that the square footage figures set forth in the Basic
Lease Terms are approximations which Lessor and Lessee agree are reasonable and
shall not be subject to revision except in connection with an actual change in
the size of the Premises or a change in the space available for lease in the
Center.
c. The term "Operating Expenses" (excluding property taxes and building
insurance which shall be billed separately by Lessor to Lessee) shall include
(i) all expenses attributable to Lessor's obligations for operation,
replacement, repair and maintenance in neat, clean, good order and condition of
the Center, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping,
bumpers, irrigation systems, common lighting facilities, fences and gates,
tenant directories and any other services to be provided by Lessor under this
Lease; (ii) property taxes (billed separately), general or special assessments,
and costs and expenses in contesting the amount or validity of any property tax
by appropriate proceedings; (iii) parkway water and sewer charges and other
publicly mandated services to the Center; (iv) insurance premiums for liability
and property insurance maintained by Lessor pursuant to Article 11 or reasonable
premium equivalents should Lessor elect to self-insure any risk that Lessor is
authorized to insure hereunder; (v) license, permit and inspection fees; (vi)
air conditioning maintenance; (vii) supplies, materials, equipment, tools,
amortization of capital investments reasonably intended to produce a reduction
in operating charges or energy conservation , labor, any expense incurred
pursuant to Article 6, 7, 11 and 12, and (viii) a reasonable overhead/management
fee which shall include, without limitation, allocated wages and salaries,
fringe benefits and payroll taxes for administrative, accounting and other
personnel applicable to the Center. It is understood that Operating Expenses
shall include competitive charges for direct services provided by any subsidiary
or division of Lessor, including reasonable supervisory or overhead fees. The
term "property taxes" (billed separately) as used herein shall include the
following: (i) all real estate taxes or personal property taxes (on Lessor's
personal property used for the Center), as such property taxes may be reassessed
from time to time; (ii) other taxes, documentary transfer fees, charges and
assessments which are levied with respect to this Lease or to the Premises
and/or the Center, and any improvements, fixtures and equipment and other
property of Lessor located in the Center, except that general net income and
franchise taxes imposed against Lessor which shall be excluded; and (iii) any
tax surcharge or assessment which shall be levied in addition to or in lieu of
real estate or personal property taxes, other than taxes covered by Article 8. A
copy of Lessor's unaudited statement of expenses shall be made available to
Lessee upon request.
d. The inclusion of the improvements, facilities and services set forth
in the definition of Operating Expenses shall not be deemed to impose an
obligation upon Lessor to either have said improvements or facilities or to
provide those services unless the Center already has the same, Lessor already
provides the services or Lessor has agreed elsewhere in this Lease to provide
the same or some of them.
e. Lessee's Share of Operating Expenses shall be payable by Lessee
within ten (10) days after a reasonably detailed statement of actual expenses is
presented to Lessee by Lessor. At Lessor's option, however, an
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amount may be estimated by Lessor from time to time of Lessee's share of annual
Operating Expenses and the same shall be payable monthly or quarterly, as Lessor
shall designate, during each calendar year of the Term, on the same day as the
Base Rent is due hereunder. In the event that Lessee pays Lessor's estimate of
the Lessee's Share of Operating Expenses as aforesaid, Lessor shall deliver to
Lessee within sixty (60) days after expiration of each calendar year a
reasonably detailed statement showing Lessee's share of the actual Operating
Expenses incurred during the preceding year. If Lessee's payments under this
subparagraph during said preceding calendar year exceed Lessee's Share as
indicated on said statement, Lessee shall be entitled to credit in the amount of
such overpayment against Lessee's Share of Operating Expenses next falling due.
If Lessee's payments under this subparagraph during said preceding calendar year
were less than Lessee's Share as indicated on said statement, Lessee shall pay
to Lessor the amount of the deficiency within ten (10) days after delivery by
Lessor to Lessee of said statement. Changes in rental amounts will be made March
1st of each year.
f. If, at any time during any calendar year, any one or more of the
Operating Expenses are increased to a rate(s) or amount(s) in excess of the
rate(s) or amount(s) used in calculating the estimated Operating Expenses for
the year, then Lessee's estimated amount of Operating Expenses shall be
increased for the month in which the increase becomes effective and for all
succeeding months by an amount equal to Lessee's proportionate share of the
increase. Lessor shall give Lessee written notice of the amount or estimated
amount of the increase, the month in which the increase will become effective,
Lessee's monthly share thereof and the months for which the payments are due.
Lessee shall pay the increase to Lessor as a part of the Lessee's monthly
payments of Estimated Operating Expenses as provided in subparagraph "b" above,
commencing with the month in which effective.
g. Even though the Lease has terminated and Lessee has vacated the
Premises, when the final determination is made of Lessee's Share of Operating
Expenses for any prior calendar year in which the Lease terminates, Lessee shall
immediately upon notice pay the entire increase due over the estimated expenses
paid. Conversely, any overpayment made in the event expenses decrease shall be
immediately rebated by Lessor to Lessee.
4.03 Cost of Living Increases: Upon the expiration date of the month referenced
in Section 1.04b of the Basic Lease Terms after the commencement of the Term,
and upon the expiration of each twelve (12) calendar month period thereafter
during the Term hereof, rent shall be adjusted by multiplying the Base Rent as
referenced in Section 1.04a of the Basic Lease Terms by a fraction, which
fraction shall have as its numerator the Consumer Price Index For All Urban
Consumers using the U.S. City Average (or alternative thereto as hereinafter
provided) (Base Period 1982-84=100), as published by the U.S. Department of
Labor, Bureau of Labor Statistics, for the calendar month which is four (4)
months prior to the expiration of the applicable twelve (12) month period, and
which such fraction shall have as its denominator said Consumer Price Index, as
published for the calendar month which is four (4) months prior to the
commencement of the Term. If the present base of said Index should hereafter be
changed, then the new base shall be converted to the base now used. In the event
that the Bureau should cease to publish said Index figure, then any similar
Index published by any other branch or department of the U.S. Government shall
be used. In the event said Bureau shall publish more than one such index, the
index showing the greater proportionate increase shall be used, and if none is
so published, then another index generally recognized as authoritative shall be
substituted by agreement of the parties hereto, or if no such agreement is
reached within a reasonable time, either party may make application to any court
of competent jurisdiction to designate such other index. In any event, the base
used by any new index shall be reconciled to the 1982-84=100 Base Index. In no
event shall the rent to be paid by Lessee pursuant hereto be less than the Base
Rent set forth in Section 1.04a of the Basic Lease Terms or the Base Rent as
adjusted with respect to the next preceding twelve (12) month period, whichever
is the greater. In the event the numerator of said fraction is not available at
the time of adjustment of the rent as provided herein, Lessee shall continue to
pay the rent established for the immediately prior twelve (12) month period;
provided, however, Lessee shall promptly pay to Lessor any deficiency at such
time as said rent is adjusted. Said adjustment will have a three percent (3%)
cap per annum and will commence in the year 2001.
4.04 Security Deposit: Concurrently with the execution of this Lease, Lessee
shall deposit with Lessor the sum stated in Section 1.06 of the Basic Lease
Terms, to secure the faithful performance of Lessee's obligations hereunder. If
Lessee fails to pay Rent or other charges due hereunder, or otherwise defaults
with respect to any provision of this Lease, Lessor may use, apply or retain all
or any portion of said deposit for the payment of any rent or other charges in
default or for the payment of any other sum to which Lessor may become obligated
by reason of Lessee's default, or to compensate Lessor for any loss or damage
which Lessor may suffer thereby. If Lessor so uses or applies all or any portion
of said deposit, Lessee shall, within ten (10) days after written demand
therefor, deposit cash with Lessor in an amount sufficient to restore said
deposit to the full amount hereinabove stated and Lessee's failure to do so
shall be a material breach of this Lease. If the Base monthly rent shall, from
time to time, increase during the Term, Lessee shall thereupon deposit with
Lessor additional security deposit so that the amount of security deposit held
by Lessor shall at all times bear the same proportion to current rent as the
original security deposit bears to the original Base monthly rent set forth in
this Article. Lessor shall not be required to keep said deposit separate from
its general accounts. If Lessee performs all of Lessee's obligations hereunder,
said deposit, or so much thereof as has not theretofore been applied by Lessor,
shall be returned, without payment of interest or other increment for its use,
to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's
interest hereunder) at the expiration of the Term hereof, and after Lessee has
vacated the Premises. No trust relationship is created herein between Lessor and
Lessee with respect to said security deposit. In no event may Lessee
unilaterally apply or credit its deposit against the last month's rent. Should
Lessor sell its interest in the Premises during the Term hereof and if Lessor
deposits with the Purchaser thereof, the then unappropriated funds deposited by
Lessee as aforesaid, thereupon Lessor shall be discharged from any further
liability with respect to such deposit.
4.05 Option Rent: If Lessee duly exercises its option to extend this Lease as
provided in Section 3.05 above, the rent payable during the Option Term(s) shall
be at a mutually agreeable increase.
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ARTICLE 5 USES
5.01 Use: Lessee shall use the Premises only for the purposes stated in Section
1.07 of the Basic Lease Terms. Lessee shall not do, or permit anything to be
done, in or about the Premises which will in any way interfere with the rights
of other occupants of the Building, or use or allow the Premises to be used for
any improper, immoral, unlawful or objectionable purpose, nor shall Lessee
permit any nuisance or commit any waste in the Premises. Lessee shall not do or
permit to be done anything which will invalidate or increase the cost of any
insurance policy(ies) covering the Building and/or their contents, and shall
comply with all applicable insurance underwriters' rules and the requirements of
the Pacific Fire Rating Bureau or any other organization performing a similar
function. Lessee shall comply, at its expense, with all present and future laws,
ordinances and requirements of all governmental authorities that pertain to
Lessee or its use of the Premises, including without limitation, all federal and
state occupational health and safety requirements, whether or not Lessee's
compliance will necessitate expenditures or interfere with its use and enjoyment
of the Premises. Lessee shall promptly upon demand reimburse Lessor for any
additional insurance premium charged by reason of Lessee's failure to comply
with the provisions of this Section, and shall indemnify Lessor from any
liability and/or expense resulting from Lessee's noncompliance.
5.02 Hazardous Materials: Lessee shall not cause, permit or allow any Hazardous
Materials (as defined below) to be brought upon, kept or used in or about the
Premises by Lessee, its agents, employees, contractors or invitees, without the
prior written consent of Lessor (which consent Lessor shall not unreasonably
withhold as long as Lessee demonstrates to Lessor reasonable satisfaction that
such Hazardous Materials are necessary to Lessee's business, and will be used,
kept and stored in a manner that complies with all Hazardous Materials Laws (as
defined below) regulating any such Hazardous Materials so brought upon, used or
kept in or about the Premises). If (i) Lessee, its employees, invitees or agents
breach any obligation stated in the preceding sentence, or (ii) the presence of
Hazardous Materials in the Premises caused or permitted by Lessee results in
contamination of the Premises, the Building, any structure, system or
improvement, any soil or water in, on, under or about the Premises
(collectively, the "Property"), or (iii) contamination of the Property by
Hazardous Materials otherwise occurs for which Lessee is legally liable to
Lessor for damage resulting therefrom, then Lessee shall indemnify, defend and
hold Lessor and lessor's partners, affiliates, employees, contractors,
representatives, lenders, successors and assigns (collectively, the "Indemnified
Parties") harmless from any and all claims, judgments, damages, penalties,
fines, costs, liabilities, losses, actions or causes of action (including,
without limitation, diminution in value of the Building, damages for the loss or
restriction on use of rentable or usable space or of any amenity, damages
arising from any adverse impact on marketing any of the foregoing, and sums paid
in settlement of claims, attorneys' fees and costs incurred, consultant fees and
expert fees) made, brought or sought against or suffered or incurred by the
Indemnified Parties, or any of them, which arise during or after the Term of
this Lease as a result of such contamination. This indemnification of Lessor by
Lessee includes, without limitation, attorneys' fees and expenses and costs
incurred in connection with any investigation of site conditions or any cleanup,
remedial, removal or restoration work required by any federal, state or local
governmental agency or political subdivision or required to return the property
to the condition existing prior to the introduction of any such Hazardous
Materials for which Lessee is responsible. Lessee's obligations hereunder shall
survive the expiration or earlier termination of the Term of this Lease. Prior
to lease commencement, Lessee will provide Lessor with toxic management plans
for glass and sign manufacturing.
Lessee shall at all times and in all respects comply with all federal,
state and local laws, ordinances and regulations ("Hazardous Materials Laws")
relating to industrial hygiene, environmental protection or the use, analysis,
generation, manufacture, storage, disposal or transportation of any oil or
petrochemical products, PCB, flammable materials, explosives, asbestos, urea
formaldehyde, radioactive materials or waste, or other hazardous, toxic,
contaminated or polluting materials, substances or wastes, including, without
limitation, any substances defined as or included in the definition of
"Hazardous Materials", "toxic substances" or "chemicals known to the State to
cause cancer or reproductive toxicity" under any such Hazardous Materials Laws
(collectively, "Hazardous Materials").
Signs and Auctions: Lessee shall not place any signs on the Premises without
Lessor's prior written consent. Lessee shall not conduct, nor permit to be
conducted, either voluntarily or involuntarily, any auctions or sheriff's sales
from the Premises without having first obtained Lessor's prior written consent,
which shall not be unreasonably withheld.
5.04 Year 2000 Compliance: The Lessee shall take reasonable steps to ensure that
all computer controlled facility components that have been purchased or
installed by Lessee, or over which Lessee has control, are Year 2000 compliant
prior to January 1, 2000. Compliance shall be verified by physical testing of
the components and/or written confirmation from the component or systems
manufacturer. "Computer controlled facility components" refers to software
driven technology and embedded microchip technology. This includes, but is not
limited to, programmable thermostats, HVAC controllers, auxiliary elevator
controllers, utility monitoring and control systems, fire detection and
suppression systems, alarms, security systems, and any other facilities control
systems utilizing microcomputer, minicomputer, or programmable logic
controllers. "Year 2000 compliant" means computer controlled facility components
that accurately process date/time data (including, but not limited to,
calculating, comparing, and sequencing) from, into, and between the twentieth
and twenty-first centuries, and the years 1999 and 2000 and leap year
calculations.
ARTICLE 6 COMMON FACILITIES AND VEHICLE PARKING
6.01 Operation and Maintenance of Common Facilities: During the Term, Lessor
shall operate all Common Facilities within the Center. The term "Common
Facilities" shall mean all areas within the exterior boundaries of the Building
and other buildings in the Center which are not held for exclusive use by
persons entitled to occupy space, and all other appurtenant areas and
improvements provided by Lessor for the common use of Lessor and tenants and
their respective employees and invitees, including, without limitation, parking
areas and structures, driveways, sidewalks, landscaped and planted areas and
common entrances not located within the Premises of any tenant.
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6.02 Use of Common Facilities: The occupancy by Lessee of the Premises shall
include the use of the Common Facilities in common with Lessor and with others
for whose convenience and use the Common Facilities may be provided by Lessor,
subject, however, to compliance with all rules and regulations as are prescribed
from time to time by Lessor. Lessor shall operate and maintain the Common
Facilities in the manner Lessor may determine to be appropriate. Lessor shall at
all times during the Term have exclusive control of the Common Facilities, and
may restrain any use or occupancy, except as authorized by Lessor's rules and
regulations. Lessee shall keep the Common Facilities clear of any obstruction or
unauthorized use related to Lessee's operations. Nothing in this Lease shall be
deemed to impose liability upon Lessor for any damage to or loss of the property
of, or for any injury to , Lessee, its invitees or employees. Lessor may
temporarily close any portion of the Common Facilities for repairs or
alterations, to prevent a public dedication or the accrual of prescriptive
rights, or for any other reason deemed sufficient by Lessor. Under no
circumstances shall the right herein granted to use the Common Facilities be
deemed to include the right to store any property, temporarily or permanently,
in the Common Facilities. Any such storage shall be permitted only by the prior
written consent of Lessor or Lessor's designated agent, which consent may be
revoked at any time. In the event that any unauthorized storage shall occur,
then Lessor shall have the right, without notice, in addition to such other
rights and remedies that it may have, to remove the property and charge the cost
to Lessee, which cost shall be immediately payable upon demand by Lessor.
6.03 Parking: Subject to Lessor's right to adopt reasonable, nondiscriminatory
modifications and additions to the regulations by written notice to Lessee,
Lessee shall have the parking rights set forth as follows:
a. Lessor agrees to maintain, or cause to be maintained, an automobile
parking area ("Parking Area") for the benefit and use of the visitors and
patrons and employees of Lessee, and other tenants and occupants of the Center.
The Parking Area shall include the automobile parking stalls, driveways,
entrances, exits, sidewalks and attendant pedestrian passageways and other areas
designated for parking. Lessor shall have the right and privilege of determining
the nature and extent of the Parking Area, and of making such changes to the
Parking Area from time to time which in its opinion are desirable and for the
best interests of all persons using the Parking Area. Lessor shall keep the
Parking Area in a neat, clean and orderly condition, properly lighted and
landscaped, and shall repair any damage to its facilities. Nothing contained in
this Lease shall be deemed to create liability upon Lessor for any damage to
motor vehicles of visitors or employees, unless ultimately determined to be
caused by the sole negligence or willful misconduct of Lessor, its agents,
servants and employees. Unless otherwise instructed by Lessor, every user of the
Parking Area shall park and lock his or her own motor vehicle. Lessor shall also
have the right to establish, and from time to time amend, and to enforce against
all users of the Parking Area all reasonable rules and regulations as Lessor may
deem necessary and advisable for the proper and efficient operation and
maintenance of the Parking Area.
b. Persons using the Parking Area shall observe all directional signs
and arrows and any posted speed limits. All vehicles shall be parked entirely
within painted stalls, and no vehicles shall be parked in areas which are posted
or marked as "no parking" or on, or in ramps, driveways and aisles. Only one (1)
vehicle may be parked in a parking space. In no event shall Lessee interfere
with the use and enjoyment of the Parking Area by other tenants of the Building
or buildings within the Center or their employees or invitees.
c. Parking areas shall be used only for parking vehicles. Washing,
waxing, cleaning or servicing of vehicles, or the storage of vehicles for
twenty-four (24) hour periods, in the Parking Area (other than emergency
services) by any user of the Parking Area or his or her agents or employees is
prohibited unless otherwise authorized by Lessor. Lessee shall have no right to
install any fixtures, equipment or personal property (other than vehicles) in
the Parking Area, nor shall Lessee make any alteration to the Parking Area.
6.04 Changes and Additions by Lessor: Lessor reserves the right to make
alterations or additions to the Building(s) or the Center, or to the attendant
fixtures, equipment and Common Facilities. Lessor may at any time relocate or
remove any of the various buildings, parking areas and other common facilities,
and may add buildings and areas to the Center from time to time. No change shall
entitle Lessee to any abatement of rent or other claim against Lessor, provided
that the change does not deprive Lessee of reasonable access to or use of the
Premises. The Landlord must notify the Lessee 90 days in advance of any building
or project alterations to the "Building" leased to the Lessee and the common
area designated as the Lessee's exclusive parking area, and not to other
buildings or other portions of the project.
ARTICLE 7 MAINTENANCE, REPAIRS AND ALTERATIONS
7.1 Lessor's Obligations:
a. Subject to the provisions of Section 4.02 (Operating Expenses),
Article 5 (Uses), Article 6 (Building Parking), Section 7.02 (Lessee's
Obligations) and Article 12 (Damage or Destruction), and except for damage
caused by any negligent or intentional act or omission of Lessee, Lessee's
employees, suppliers, shippers, customers or invitees, in which event Lessee
shall, at its sole cost and expense, repair the damage further utilizing a
contractor of Lessor's choice. Lessor at Lessor's expense, subject to
reimbursement pursuant to Section 4.02, shall keep in good condition and repair
the foundations, exterior walls, structural condition of interior bearing walls,
and roof of the Premises, and utility installations of the Building and all
parts thereof, as well as providing the services for which there is an Operating
Expense pursuant to Section 4.02. Lessor shall not, however, be obligated to
paint the interior walls, nor shall Lessor be required to maintain, repair or
replace windows, doors or plate glass of the Premises. Lessor shall have no
obligation to make repairs under this Section 7.01 until a reasonable time after
receipt of written notice from Lessee of the need for such repairs. Lessor shall
not be liable for damages or loss of any kind or nature by reason of Lessor's
failure to furnish any such services when such failure is caused by accident,
breakage, repairs, strikes, lockout or any other labor disturbances or disputes
of any character, or by any other cause beyond the reasonable control of Lessor.
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b. Lessor shall warrant Lessee's heating-ventilation-air conditioning
(HVAC), plumbing and electrical throughout the first lease year of the Initial
Term only. In addition, Lessor will successively perform quarterly air filter
changes and annual evaporative cooler winterizing, if applicable; however,
Lessor shall not be responsible for any other item pertaining to the HVAC,
plumbing or electrical following said warranty during the Initial Term,
including without limitation, repair or replacement. Lessor's one year warranty
shall immediately expire if Lessee, its employees, invitees or agents modify or
cause damage to same and Lessee shall then assume all responsibility for same,
including without limitation, repair/replacement, etc. After Lessor's one year
HVAC warranty, Lessor reserves the right to continue changing the HVAC filters
on a quarterly basis and further winterize the warehouse evaporative coolers on
an annual basis.
7.02 Lessee's Obligations:
a. Subject to the provisions of Article 5 (Use), Section 7.01 (Lessor's
Obligations) and Article 12 (Damage or Destruction), Lessee, at Lessee's
expense, shall keep in good order, condition and repair the Premises and every
part thereof (whether or not the damaged portion of the Premises or the means of
repairing same are reasonably or readily accessible to Lessee) including,
without limiting the generality of the foregoing, all plumbing, heating,
ventilating and air conditioning systems, electrical and lighting facilities and
equipment within the Premises, fixtures, interior walls and interior surfaces of
exterior walls, ceilings, windows (including glass and casings), doors
(including casings), plate glass and skylights located within the Premises.
b. If Lessee fails to perform Lessee's obligations under this Section
7.02 or under any other paragraph of this Lease, Lessor may enter upon the
Premises after ten (10) days' prior written notice to Lessee (except in the case
of emergency, in which event, no notice shall be required), perform such
obligations on Lessee's behalf and put the Premises in good order, condition and
repair, and the cost thereof together with interest thereon at fifteen percent
(15%) per annum shall be due and payable as additional rent to Lessor together
with Lessee's next Base Rent installment.
7.03 Alterations and Additions:
a. Lessee shall not, without Lessor's prior written consent which shall
not be unreasonably withheld, make any alterations, improvements, additions or
Utility Installments in, on or about the Premises, except for nonstructural
alterations to the Premises not exceeding $5,000 in cumulative costs during the
Initial Term. In any event, whether or not in excess of $5,000 in cumulative
cost, Lessee shall make no change or alteration to the exterior of the Premises,
without Lessor's prior written consent. As used in this Lease, the term "Utility
Installations" shall mean carpeting, window coverings, air lines, power panels,
electrical distribution systems, lighting fixtures, space heaters, air
conditioning, plumbing and fencing. Lessor may require that Lessee remove any
and all of said alterations, improvements, additions or Utility Installations at
the expiration of the Initial Term, as it may have been extended, and restore
the Premises to its prior condition. Lessor may require Lessee to provide
Lessor, at Lessee's sole cost and expense, a lien and completion bond in an
amount equal to one and one-half times the estimated cost of such improvements,
to insure Lessor against any liability for mechanic's and materialman's liens
and to insure completion of the work. Should Lessee make any alterations,
improvements, additions or Utility Installations without the prior approval of
Lessor, Lessor may, at any time during the term of this Lease, require that
Lessee remove any or all of same.
b. Any alterations, improvements, additions or Utility Installations in
or about the Premises that Lessee shall desire to make and which requires the
consent of Lessor, shall be presented to Lessor in written form with proposed
detailed plans. If Lessor shall give its consent, the consent shall be deemed
conditioned upon Lessee acquiring a permit to perform the work from appropriate
governmental agencies, the furnishing of a copy thereof to Lessor prior to the
commencement of the work and the compliance by Lessee of all conditions of said
permit in a prompt and expeditious manner.
c. Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claims are, or may be secured by, any mechanic's or
materialman's lien against the Premises, or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in the Premises, and Lessor shall have the right to post notices of
non-responsibility in or on the Premises or the Building as provided by law. If
Lessee shall in good faith contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense, defend itself and Lessor against
the same and shall pay and satisfy any such adverse judgment that may be
rendered thereon, before the enforcement thereof, against Lessor or the Premises
upon the condition that if Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor in an amount equal to such contested lien
claim or demand indemnifying Lessor against liability for the same and holding
the Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorneys fees and costs in participating in such
action if Lessor shall decide it is to Lessor's best interest to do so.
d. All alterations, improvements, additions and Utility Installations
(whether or not such Utility Installations constitute trade fixtures of Lessee),
which may be on the Premises, shall be the property of Lessor and shall remain
upon and be surrendered with the Premises at the expiration of the Initial Term
except if Lessee designates items he wants to remove to Lessor, as it may have
been extended, unless Lessor requires their removal pursuant to subparagraph "a"
above. Notwithstanding the provisions of this paragraph, Lessee's machinery and
equipment, other than that which is affixed to the Premises, and other than
Utility Installations, shall remain the property of Lessee and may be removed by
Lessee subject to the provisions of Section 7.02.
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7.04 Utility Additions: Lessor reserves the right to install new or additional
utility facilities throughout the Building for the benefit of Lessor or Lessee,
including, but not limited to, such utilities as plumbing, electrical systems,
security systems, communication systems and fire protection and detection
systems, so long as such installations do not unreasonably interfere with
Lessee's use of the Premises.
7.05 Entry and Inspection: Lessor shall at reasonable times have the right to
enter the Premises to inspect them, to supply services in accordance with this
Lease, to protect the interests of Lessor in the Premises, to submit the
Premises to prospective or actual purchasers or encumbrance holders (or, during
the last one hundred and eighty (180) days of the Term, or when an uncured
tenant default exists, to prospective tenants), to alter, improve or repair the
Premises, or as otherwise permitted in this Lease, all without being deemed to
have caused an eviction of Lessee and without abatement of rent except as
provided elsewhere in this Lease. If Lessee vacates the Premises, Lessor may
enter the Premises and alter them without abatement of rent and without
liability to Lessee. Lessor shall have the right to use any and all means which
Lessor may deem proper to open the doors in an emergency in order to obtain
entry to the Premises, and any entry to the Premises obtained by Lessor shall
not under any circumstances be deemed to be a forcible or unlawful entry into,
or a detainer of the Premises, or any eviction of Lessee from the Premises.
ARTICLE 8 TAXES AND ASSESSMENTS ON LESSEE'S PROPERTY
8.01 Taxes on Lessee's Property: Lessee shall be liable for and shall pay, at
least ten (10) days before delinquency, all taxes and assessments levied against
all personal property of Lessee located in the Premises. When possible, Lessee
shall cause its personal property to be assessed and billed separately from the
real property of which the Premises form a part. If any taxes on Lessee's
personal property are levied against Lessor or Lessor's property is increased by
the inclusion of a value placed upon the personal property of Lessee, and if
Lessor pays the taxes based upon the increased assessment, Lessee shall pay to
Lessor the taxes so levied against Lessor or the proportion of the taxes
resulting from the increase in the assessment. In calculating what portion of
any tax bill which is assessed against Lessor separately, or Lessor and Lessee
jointly, is attributable to Lessee's fixtures and personal property, Lessor's
reasonable determination shall be conclusive.
ARTICLE 9 UTILITIES
Lessee shall fully and promptly pay for all gas and electric (where
applicable), water, telephone and trash removal for the building and other
utilities of every kind furnished to the leased Premises, together with any
personal property taxes thereon, and all other costs and expenses of every kind
whatsoever, of, or in connection with the use, operation and maintenance of the
leased Premises and all activities conducted thereon, and Lessor shall have no
responsibility of any kind for any thereof. Lessee shall put all such utilities
in its own name and not that of Lessor.
ARTICLE 10 ASSIGNMENT AND SUBLETTING
10.01 Rights of Parties:
a. No assignment (whether voluntary, involuntary or by operation of
law), and no subletting shall be valid or effective without Lessor's prior
written consent. Further, no assignment or subletting shall relieve Lessee from
its primary and ultimate obligations, responsibilities or duties under the
Lease.
b. Lessee may assign this Lease or sublet the Premises to an assignee
or subtenant which controls, is controlled by or is under common control with
Lessee or to any corporation resulting from the merger of or consolidation with
Lessee ("Lessee's Affiliate"). In such case, any Lessee's Affiliate shall assume
in writing all of Lessee's obligations under this Lease. Lessee shall in no
event increase Lessee's Affiliate's rent from the rate currently being charged
Lessee under this Lease.
c. If Lessee, or any guarantor of Lessee ("Lessee's Guarantor") is a
corporation, or is an unincorporated association or partnership, the transfer of
any stock or interest in the corporation, association or partnership which
results in a change in the voting control of Lessee or Lessee's Guarantor, if
any, shall be deemed an assignment within the meaning and provisions of this
Article. In addition, any change in the status of the entity, such as, but not
limited to, the withdrawal of a general partner, shall be deemed an assignment
within the meaning of this Article.
d. Lessee shall reimburse Lessor for Lessor's reasonable costs and
attorney's fees incurred in connection with the processing and documentation of
any requested transfer. In addition, Lessee shall pay a transfer fee of $500.00
in the event the transfer is approved. 10.02 Effect of Transfer: No subletting
or assignment, even with the consent of Lessor, shall relieve Lessee of its
obligation to pay rent and to perform all its other obligations under this
Lease. Moreover, Lessee shall indemnify and hold Lessor harmless, as provided in
Section 11.03, for any acts or omission by Lessee's Affiliate. Each transferee,
other than Lessor, shall assume all obligations of Lessee under this Lease and
shall be liable jointly and severally with Lessee for the payment of all rent,
and for the due performance of all of Lessee's obligations under this Lease. No
transfer shall be binding upon Lessor unless any document memorializing the
transfer is delivered to Lessor and, if the transfer is an assignment or
sublease, both the assignee/subtenant and Lessee deliver to Lessor an executed
document which contains (i) a covenant of assumption by the assignee/subtenant,
and (ii) an indemnification agreement by Lessee, both satisfactory in substance
and form to Lessor and consistent with the requirements of this Article;
provided that the failure of the assignee/subtenant or Lessee to execute the
instrument of assumption shall not release either from any obligation under this
Lease. The acceptance by Lessor of any payment due under this Lease from any
other person shall not be deemed to be a waiver by Lessor of any provision of
this Lease or to be a consent to any transfer. Consent by Lessor to one or more
transfers shall not operate as a waiver or estoppel to the future enforcement by
Lessor of its rights under this Lease.
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ARTICLE 11 INSURANCE AND INDEMNITY
11.01 Liability Insurance - Lessee: Lessee shall, at Lessee's expense, obtain
and keep in force during the term of this Lease, a policy of Combined Single
Limit Bodily Injury and Property Damage insurance insuring Lessee and Lessor
against any liability arising out of the use, occupancy or maintenance of the
Premises. Such insurance shall be in an amount not less than $1,000,000.00 per
occurrence. The policy shall insure performance by Lessee of the indemnity
provisions of this Article. The limits of said insurance shall not, however,
limit the liability of Lessee hereunder.
11.02 Lessor's Insurance: (Building insurance to be billed separately by Lessor
to Lessee). Lessor may, at its election, provide any or all of the following
types of insurance, with or without deductible and in amounts and coverages as
may be determined by Lessor in its discretion: "all risk" property insurance,
subject to standard exclusions, covering the Premises, and such other risks as
Lessor or its mortgagees may from time to time deem appropriate, and
comprehensive public liability coverage. Lessor shall not be required to carry
insurance of any kind on Lessee's property, including leasehold improvements,
trade fixtures, furnishings, equipment, plate glass, signs and all other items
of personal property, and shall not be obligated to repair or replace the
property should damage occur. All proceeds of insurance maintained by Lessor
upon the Premises shall be the property of Lessor, whether or not Lessor is
obligated to, or elects, to make any repairs. In the event there is a deductible
clause in any standard form policy insuring the Premises against fire, extended
coverage and other property insurance losses, then the amount deducted from the
coverage pursuant to such deductible clause shall be borne by Lessee. Any
insurance containing a deductible clause of $3,000 (per occurrence) for fire,
extended coverage and other property losses, shall not, by virtue of such
deductible clause, be regarded as unsatisfactory. In the event Lessor assumes
supervision and control of the repair or restoration activity for the
improvements damaged or destroyed by reason of occurrences embraced by the
aforesaid standard form insurance policy, Lessor shall provide Lessee with
written notice of the actual cost of repair and restoration, up to the full
deductible amount, and Lessee shall pay to Lessor such sum within thirty (30)
days thereafter. Failure to pay such sum shall constitute a breach of the Lease
and subject Lessee to any rights or remedies of Lessor as provided in the Lease.
11.03 Waiver of Subrogation: Lessor and Lessee hereby waive any rights each may
have against the other on account of any loss or damage occasioned to Lessor or
Lessee, as the case may be, or to the Premises or its contents, and which may
arise out of or incident to the perils insured against under Section 11.02,
which perils occur in, on or about the Premises, whether due to the negligence
of Lessor or Lessee or their agents, contractors and/or invitees. The parties
shall obtain from their respective insurance companies insuring the property a
waiver of any right of subrogation which said insurance companies may have
against Lessor or Lessee as the case may be.
11.04 Policies: All insurance to be maintained by Lessee under this Lease shall
be procured from an insurance company or companies rated "A" or better in
"Best's Insurance Guide" and authorized to do business in the State of Nevada,
and Lessee shall deliver to Lessor, prior to taking occupancy of the Premises,
copies of insurance binders required to be maintained by Lessee hereunder,
together with evidence of the payment of the premiums thereof. Insurance binders
shall name Lessor and all members thereof as "Additional Insured." The binders
evidencing such insurance shall provide that they shall not be canceled or
modified except after thirty (30) days prior written notice of intention to
modify or cancel has been given to Lessor and any encumbrancer named as
beneficiary thereunder. At lease ninety (90) days prior to the expiration date
of any policy to be maintained by Lessee hereunder, Lessee shall deliver to
Lessor a renewal policy or "binder" therefor.
11.05 Lessee's Indemnity: To the fullest extent permitted by law, Lessee shall
defend, indemnify and hold harmless Lessor, its agents and any and all
affiliates of Lessor, including, without limitation, its members, co-venturers,
corporations or other entities controlling, controlled by or under common
control with Lessor, from and against any and all claims or liabilities arising
either before or after the Commencement Date from Lessee's use or occupancy of
the Premises, the Building, or from the conduct of its business, or from any
activity, work or thing done, permitted or suffered by Lessee or its agents,
employees, invitees or licensees in or about the Premises, the Building, or from
any default in the performance of any obligation on Lessee's part to be
performed under this Lease, or from any act or negligence of Lessee or its
agents, employees, visitors, patrons, guests, invitees or licensees. In case
Lessor, its agent or affiliates are made a party to any litigation commenced by
or against Lessee (relating to Lessee's use and occupancy of the Premises), then
Lessee shall protect and hold Lessor harmless and shall pay all costs, expenses
and attorneys' fees incurred or paid by Lessor in connection with the
litigation. Lessor may, at its option, require Lessee to assume Lessor's defense
in any action covered by this Section through counsel satisfactory to Lessor.
11.06 Lessor's Non-Liability: Lessor shall not be liable to Lessee, its
employees, agents and invitees, and Lessee hereby waives all claims against
Lessor for loss of or damage to any property, or any injury to any person, or
loss or interruption of business or income, resulting from, but not limited to,
fire, explosion, falling plaster, steam, gas, electricity, water or rain which
may leak or flow from or into any part of the Premises or from the breakage,
leakage, obstruction or other defects of the pipes, sprinklers, wires,
appliances, plumbing, air conditioning, electrical works or other fixtures in
the Building, whether the damage or injury results from conditions arising in
the Premises or in other portions of the Building, unless Lessor, its agents,
invitees and/or employees cause such loss, damage or injury through their own
negligence or willful misconduct. Neither Lessor nor its agents shall be liable
for interference with light or other similar intangible interests. Lessee shall
immediately notify Lessor in case of fire or accident in the Premises, the
Building and of defects in any improvements or equipment.
ARTICLE 12 DAMAGE OR DESTRUCTION
12.01 Restoration:
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a. If the Building of which the Premises are a part is damaged, Lessor
shall repair that damage as soon as reasonably possible, at its expense, unless:
(i) Lessor reasonably determines that the cost of repair would exceed ten
percent (10%) of the full replacement cost of the Building ("Replacement Cost")
and the damage is not covered by Lessor's fire and extended coverage insurance
(or by normal extended coverage policy should Lessor fail to carry that
insurance); or (ii) Lessor reasonably determines that the cost of repair would
exceed twenty-five percent (25%) of the Replacement Cost; or (iii) Lessor
reasonably determines that the cost of repair would exceed ten percent (10%) of
the Replacement Cost and the damage occurs during the final twelve (12) months
of the Initial Term, as it may have been extended. Should Lessor elect not to
repair the damage for one of the preceding reasons, Lessor shall so notify
Lessee in writing within sixty (60) days after the damage occurs and this Lease
shall terminate as of the date of that notice.
b. Unless Lessor elects to terminate this Lease in accordance with
subsection "a" above, this Lease shall continue in effect for the remainder of
the Initial Term, as it may have been extended; provided that if the damage is
so extensive as to reasonably prevent Lessee's substantial use and enjoyment of
the Premises for more than six (6) months, then Lessee may elect to terminate
this Lease by written notice to Lessor within the sixty (60) day period stated
in subsection "a".
c. Commencing on the date of any damage to the Building, and ending on
the date the damage is repaired or this Lease is terminated, whichever occurs
first, the rental to be paid under this Lease shall be abated in the same
proportion that the floor area of the Premises that is rendered unusable by the
damage from time to time bears to the total floor area of the Premises. Lessee
further agrees that if there is a fire and the building burns down, provided it
is not the fault of the Lessee, its invitees or agents; and half or more of the
building is not usable Lessor will notify Lessee of the time required for repair
as reasonably determined by Lessor, and if the time exceeds six months the
Lessee will have the right to cancel the lease.
d. Notwithstanding the provisions of subsections "a", "b" and "c" of
this Section, the cost of any repairs shall be borne by Lessee, and Lessee shall
not be entitled to rental abatement or termination rights if the damage is due
to the fault or neglect of Lessee or its employees, subtenants, invitees or
representatives. In addition, the provisions of this Section shall not be deemed
to require Lessor to repair any improvements or fixtures that Lessee is
obligated to repair or insure pursuant to any other provisions of this Lease.
Lessee will have liability for repairs unless Lessor, its agents, invitees
and/or employees cause such damage through their own negligence or willful
misconduct or by such act of God.
ARTICLE 13 EMINENT DOMAIN
13.01 Total or Partial Taking: If all or a material portion of the Premises is
taken by any lawful authority by exercise of the right of eminent domain, or
sold to prevent a taking, either Lessee or Lessor may terminate this Lease
effective as of the date possession is required to be surrendered to the
authority. In the event title to a portion of the Building, other than the
Premises, is taken or sold in lieu of taking, and if Lessor elects to restore
the Building in such a way as to alter the Premises materially, Lessor may
terminate this Lease, by written notice to Lessee giving 90 days notice
effective from vesting of title. effective on the date of vesting of title. In
the event neither party has elected to terminate this Lease as provided above,
then Lessor shall promptly, after receipt of a sufficient condemnation award,
proceed to restore the Premises to substantially their condition prior to the
taking, and a proportionate allowance shall be made to Lessee for the rent
corresponding to the time during which, and to the part of the Premises of
which, Lessee is deprived on account of the taking and restoration. In the event
of a taking, Lessor shall be entitled to the entire amount of the condemnation
award without deduction for any estate or interest of Lessee; provided that
nothing in this Section shall be deemed to give Lessor any interest in, or
prevent Lessee from seeking any award against the taking authority for, the
taking of personal property and fixtures belonging to Lessee or for relocation
recoverable from the taking authority.
13.02 Temporary Taking: No temporary taking of the Premises shall terminate this
Lease or give Lessee any right to abatement of rent, and any award specifically
attributable to a temporary taking of the Premises shall belong entirely to
Lessee. A temporary taking shall be deemed to be a taking of the use or
occupancy of the Premises for a period not to exceed ninety (90) days.
13.03 Taking of Parking Area: In the event there shall be a taking of the
Parking Area such that Lessor can no longer provide sufficient parking to comply
with this lease, Lessor may substitute reasonably equivalent parking in a
location reasonably close to the Building; provided that if Lessor fails to make
that substitution within ninety (90) days following the taking and if the taking
materially impairs Lessee's use and enjoyment of the Premise, Lessee may, at its
option, terminate this Lease by written notice to Lessor, and such termination
shall be effective thirty (30) days after written notice of termination is given
by Lessee. If this Lease is not so terminated by Lessee within thirty (30) days
after this taking, there shall be no abatement of rent and this Lease shall
continue in effect. ARTICLE 14 SUBORDINATION; ESTOPPEL CERTIFICATE
14.01 Subordination:
a. This Lease shall be subordinate to all ground or underlying leases,
mortgages, deeds of trust and conditions, covenants and restrictions, reciprocal
easements and rights of way, if any, which may hereafter affect the Premises,
and to all renewals, modifications, consolidations, replacements and extensions
thereof; provided, that so long as Lessee is not in default under this Lease,
this Lease shall not be terminated or Lessee's quiet enjoyment of the Premises
disturbed in the event of termination of any such ground or underlying lease, or
the foreclosure of any such mortgage or deed of trust, to which Lessee has
subordinated this Lease pursuant to this Section. In the event of a termination
or foreclosure, Lessee shall become a tenant of and attorney to the
successor-in-interest to Lessor upon the same terms and conditions as are
contained in this Lease, and shall execute any instrument reasonably required by
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Lessor's successor for that purpose. Lessee shall also, upon written request of
Lessor, execute and deliver all instruments as may be required from time to time
to subordinate the rights of Lessee under this Lease to any ground or underlying
lease or to the lien of any mortgage or deed of trust, or if requested by
Lessor, to subordinate, in whole or in part, any ground or underlying lease or
the lien of any mortgage or deed of trust to this Lease.
b. Failure of Lessee to execute any statements or instruments necessary
or desirable to effectuate the provisions of this Article within ten (10) days
after written request by Lessor, shall constitute a default under this Lease. In
that event, Lessor, in addition to any other rights or remedies it might have,
shall have the right, by written notice to Lessee, to terminate this Lease as of
a date not less than twenty (20) days after the date of Lessor's notice.
Lessor's election to terminate shall not relieve Lessee of any liability for its
default.
14.02 Estoppel Certificate:
a. Lessee shall, at any time upon not less than twenty (20) days' prior
written notice from Lessor, execute, acknowledge and deliver to Lessor, in any
form that Lessor may reasonably require, a statement, in writing (i) certifying
that this Lease is unmodified and in full force and effect (or, if modified,
stating the nature of the modification and certifying that this Lease is
unmodified and in full force and effect) and the dates to which the rental,
additional rent and other charges have been paid in advance, if any, and (ii)
acknowledging that, to Lessee's knowledge, there are no uncured defaults on the
part of Lessor, or specifying each default if any are claimed, and (iii) setting
forth all further information that Lessor may reasonably require. Lessee's
statement may be relied upon by any prospective purchaser or encumbrancer of all
or any portion of the Building.
b. Lessee's failure to deliver any estoppel statement within the
provided time shall be conclusive upon Lessee that (i) this Lease is in full
force and effect without modification except as may be represented by Lessor,
(ii) there are no uncured defaults in Lessor's performance, and (iii) not more
than one month's rental has been paid in advance.
ARTICLE 15 DEFAULTS AND REMEDIES
15.01 Lessee's Defaults: In addition to any other event of default set forth in
this Lease, the occurrence of any one or more of the following events shall
constitute a default by Lessee:
a. The abandonment of the Premises by Lessee. Abandonment is defined to
include, but not limited to, any absence by Lessee from the Premises for ten
(10) days or longer.
b. The failure by Lessee to make any payment of rent or additional rent
required to be made by Lessee, as and when due, where the failure continues for
a period of ten (10) days after the date such payment was due. For purposes of
these default and remedies provisions, the term "additional rent" shall be
deemed to include all amounts of any type whatsoever, other than Base Rent, to
be paid by Lessee pursuant to the terms of this Lease.
c. Assignment, sublease, encumbrance or other transfer of the Lease by
Lessee, either voluntarily or by operation of law, whether by judgment,
execution transfer by intestacy or testacy, or other means, without the prior
written consent of Lessor.
d. The discovery by Lessor that any financial statement provided by
Lessee, or by any affiliate, successor or guarantor of Lessee was materially
false or misleading.
e. The failure or inability by Lessee to observe or perform any of the
express or implied covenants or provisions of this Lease to be observed or
performed by Lessee, other than as specified in any other subsection of this
Section, where the failure continues for a period of thirty (30) days after
written notice from Lessor to Lessee. However, if the nature of the failure is
such that more than thirty (30) days are reasonably required for its cure, then
Lessee shall not be deemed to be in default if Lessee commences the cure within
thirty (30) days and thereafter diligently pursues the cure to completion in a
time period not to exceed thirty (30) days.
f. (i) The making by Lessee of any general assignment for the benefit
of creditors; (ii) the filing by or against Lessee of a petition to have Lessee
adjudged a Chapter 7 debtor under the Bankruptcy Code or to have debts
discharged or a petition for reorganization or arrangement under any law
relating to bankruptcy (unless, in the case of a petition filed against Lessee,
the same is dismissed within sixty (60) days); (iii) the appointment of a
trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, if possession is
not restored to Lessee within thirty (30) days; (iv) the attachment, execution
or other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease where the seizure is not
discharged within thirty (30) days; or (v) Lessee's convening of a meeting of
its creditors for the purpose of effecting a moratorium upon or composition of
its debts. Lessor shall not be deemed to have knowledge of any event described
in this subsection unless notification in writing is received by Lessor, nor
shall there be any presumption attributable to Lessor of Lessee's insolvency. In
the event that any provision of this subsection is contrary to applicable law,
the provision shall be of no force or effect.
15.02 Lessor's Remedies: On the occurrence of any default by Lessee, Lessor may,
at any time thereafter, with or without notice or demand and without limiting
Lessor in the exercise of any right or remedy which Lessor may have:
a. Terminate Lessee's right to possession of the Premises by any lawful
means, in which case this Lease shall terminate and Lessee shall immediately
surrender possession of the Premises to Lessor. In such event, Lessor shall be
entitled to recover from Lessee all damages incurred by Lessor by reason of
Lessee's default, including (i) the
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worth at the time of the award of the unpaid Base Rent, additional rent and
other charges which had been earned at the time of the termination; (ii) the
worth at the time of the award of the amount by which the unpaid Base Rent,
additional rent and other charges which would have been earned after termination
until the time of the award exceeds the amount of such rental loss that Lessor
proves could not have been reasonably avoided; (iii) the worth at the time of
the award of the amount by which the unpaid Base Rent, additional rent and other
charges which would have been paid for by the balance of the term after the time
of award exceeds the amount of such rental loss that Lessor proves could not
have been reasonably avoided; and (iv) any other amount necessary to compensate
Lessor for all the detriment proximately caused by Lessee's failure to perform
its obligations under the Lease or which in the ordinary course of things would
be likely to result therefrom, including, but not limited to, any costs or
expenses incurred by Lessor in maintaining or preserving the Premises after such
default, the cost of recovering possession of the Premises, expenses of
reletting, including necessary renovation or alteration of the Premises,
Lessor's reasonable attorneys' fees incurred in connection therewith, and any
real estate commission paid or payable. As used in subparts "(i)" and "(ii)"
above, the "worth at the time of the award" is computed by allowing interest on
unpaid amounts at the rate of fifteen percent (15%) per annum, or such lesser
amount as may be then the maximum lawful rate. As used in subpart "(iii)" above,
the "worth at the time of the award" is computing by discounting such amount at
the discount rate of the Federal Reserve Bank of San Francisco at the time of
the award, plus one percent (1%). If Lessee shall have abandoned the Premises,
Lessor shall have the option of (i) retaking possession of the Premises and
recovering from Lessee the amount specified in this Section 15.02a, or (ii)
proceeding under Section 15.02b.
b. Maintain Lessee's right to possession, in which case this Lease
shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event, Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.
c. Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state in which the Property is located.
15.03 Repayment of "Free" Rent: If this Lease provides for a postponement of any
monthly rental payments, a period of "free" rent, or other rent concession, such
postponed rent or "free" rent is called the "Abated Rent". Lessee shall be
credited with having paid all of the Abated Rent on the expiration of the Lease
Term only if Lessee has fully, faithfully and punctually performed all of
Lessee's obligations hereunder, including the payment of all rent (other than
Abated Rent) and all other monetary obligations and the surrender of the
property in the physical condition required by this Lease. Lessee acknowledges
that its right to receive credit for the Abated Rent is absolutely conditioned
upon Lessee's full, faithful and punctual performance of its obligations under
this Lease. If Lessee defaults and does not cure within any applicable grace
period, the Abated Rent shall immediately become due and payable in full and
this Lease shall be enforced as if there were no such rent abatement or other
rent concession. In such case, Abated Rent shall be calculated based on the full
initial rent payable under this Lease.
15.04 Cumulative Remedies: Lessor's exercise of any right or remedy shall not
prevent it from exercising any other right or remedy.
15.05 Late Payments: Any rent due under this Lease that is not paid to Lessor
within ten (10) days of the date when due shall bear interest fifteen percent
(15%) per annum from the date due until fully paid. The payment of interest
shall not cure any default by Lessee under this Lease. In addition, Lessee
acknowledges that the late payment by Lessee to Lessor, of rent, will cause
Lessor to incur costs not contemplated by this Lease, the exact amount of which
will be extremely difficult and impractical to ascertain. Those costs may
include, but are not limited to, administrative, processing and accounting
charges, and late charges which may be imposed on Lessor by the terms of any
ground lease, mortgage or trust deed covering the Premises. Accordingly, if any
rent due from Lessee shall not be received by Lessor or Lessor's designee within
ten (10) days after the date due, then Lessee shall pay to Lessor, in addition
to the interest provided above, a late charge in the amount of ten percent (10%)
of each delinquent payment. Acceptance of a late charge by Lessor shall not
constitute a waiver of Lessee's default with respect to the overdue amount, nor
shall it prevent Lessor from exercising any of its other rights and remedies.
15.06 Right of Lessor to Perform: All covenants and agreements to be performed
by Lessee under this Lease shall be performed at Lessee's sole cost and expense
and without any abatement of rent or right of set off. If Lessee fails to pay
any sum of money, other than rent, or fails to perform any other act on its part
to be performed under this Lease, and the failure continues beyond any
applicable grace period set forth in Section 15.01, then in addition to any
other available remedies, Lessor may, at its election, make the payment or
perform the other act on Lessee's part. Lessor's election to make the payment or
perform the act on Lessee's part shall not give rise to any responsibility of
Lessor to continue making the same or similar payments or performing the same or
similar acts. Lessee shall, promptly upon demand by Lessor, reimburse Lessor for
all sums paid by Lessor and all necessary incidental costs, together with
interest at the maximum rate permitted by law from the date of the payment by
Lessor. Lessor shall have the same rights and remedies if Lessee fails to pay
those amounts as Lessor would have in the event of a default by Lessee in the
payment of rent.
15.07 Default by Lessor: Lessor shall not be deemed to be in default in the
performance of any obligation under this Lease unless, and until, it has failed
to perform the obligation within thirty (30) days after written notice by Lessee
to Lessor specifying in reasonable detail the nature and extent of the failure;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days are required for its performance, then Lessor shall not be
deemed to be in default if it commences performance within the thirty (30) day
period and thereafter diligently pursues the cure to completion.
15.08 Expenses and Legal Fees: Lessee shall reimburse Lessor upon demand, for
any costs or expenses incurred by Lessor in connection with any breach or
default of Lessee under this Lease, whether or not suit is commenced or
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judgment entered. Lessor shall reimburse Lessee as well in connection with any
breach or default of Lessor under this lease. Such costs shall include legal
fees and costs incurred for the negotiation of a settlement, enforcement of
rights or otherwise. Furthermore, if any action for breach of, or to enforce,
the provisions of this Lease is commenced, the court in such action shall award
to the party in whose favor a judgment is entered, a reasonable sum as
attorneys' fees and costs. Such attorneys' fees and costs shall be paid by the
losing party in such action. Lessee shall also indemnify Lessor against and hold
lessor harmless from all costs, expenses, demands and liability incurred by
Lessor if Lessor becomes or is made a party to any claim or action (a)
instituted by Lessee, or by any third party if due to negligence by Lessee, or
by or against any person holding any interest under or using the Premises by
license of or agreement with Lessee; (b) for foreclosure for any lien for labor
or material furnished to or for Lessee or such other person; (c) otherwise
arising out of or resulting from any negligent act by Lessee or such other
person; or (d) necessary to protect Lessor's interest under this Lease in a
bankruptcy proceeding, or other proceeding under Title 11 of the United States
Code, as amended. Lessee shall defend Lessor against any such claim or action at
Lessee's expense with counsel reasonably acceptable to lessor or, at Lessee's
election, Lessee shall reimburse Lessor for any legal fees or costs incurred by
Lessor in any such claim or action.
ARTICLE 16 END OF TERM
16.01 Holding Over: This Lease shall terminate without further notice upon the
expiration of the Term (herein "Expiration Date"), and any holding over by
Lessee after the Expiration Date shall not constitute a renewal or extension of
this Lease, or give Lessee any rights under this Lease, except when in writing,
signed by both parties. If Lessee holds over for any period after the Expiration
(or earlier termination) of the Term, Lessor may, at its option, treat Lessee as
a tenant at sufferance only, commencing on the first (1st) day following the
termination of this Lease and subject to all of the terms of this Lease, except
that the monthly rental shall be one hundred fifty percent (150%) of the greater
of (a) the total monthly rental for the month immediately preceding the date of
termination, or (b) the then currently scheduled rent for comparable space in
the Building. If Lessee fails to surrender the Premises upon the expiration of
this Lease despite demand to do so by Lessor, Lessee shall indemnify and hold
Lessor harmless from all loss or liability, including, without limitation, any
claims made by any succeeding tenant relating to such failure to surrender.
Acceptance by Lessor of rent after the termination shall not constitute a
consent to a holdover or result in a renewal of this Lease. The foregoing
provisions of this Section are in addition to, and do not affect, Lessor's right
of re-entry or any other rights of Lessor under this Lease or at law.
16.02 Merger on Termination: The voluntary or other surrender of this Lease by
Lessee, or mutual termination of this Lease, shall terminate any or all existing
subleases unless Lessor, at its option, elects in writing to treat the surrender
or termination as an assignment to it of any or all subleases affecting the
Premises.
16.03 Surrender of Premises: Removal of Property: Upon the Expiration Date, or
upon any earlier termination of this Lease, Lessee shall quit and surrender
possession of the Premises to Lessor in as good order, condition and repair as
when received or as hereafter may be improved by Lessor or Lessee, reasonable
wear and tear and repairs, which are Lessor's obligation excepted, and shall
without expense to Lessor, remove or cause to be removed from the Premises all
personal property and debris, except for any items that Lessor may by written
authorization allow to remain. Lessee shall repair all damage to the Premises
resulting from the removal, which repair shall include the patching and filling
of holes and repair of structural damage, provided that Lessor may instead elect
to repair any structural damage at Lessee's expense. If Lessee shall fail to
comply with the provisions of this Section, Lessor may effect the removal and/or
make any repairs, and the cost to Lessor shall be additional rent payable by
Lessee upon demand. If requested by Lessor, Lessee shall execute, acknowledge
and deliver to Lessor an instrument in writing releasing and quitclaiming to
Lessor, all right, title and interest of Lessee in the Premises.
16.04 Termination; Advance Payments: Upon termination of this Lease under
Article 12 (Damage or Destruction), Article 13 (Eminent Domain) or any other
termination not resulting from Lessee's default, and after Lessee has vacated
the Premises in the manner required by this Lease, and equitable adjustment
shall be made concerning advance rent, and any other advance payments made by
Lessee or Lessor, and Lessor shall refund the unused portion of the security
deposit to Lessee or Lessee's successor.
ARTICLE 17 PAYMENTS AND NOTICES
All sums payable by Lessee to Lessor shall be paid, without deduction
or offset, in lawful money of the United States to Lessor at its address set
forth in Section 1.08 of the Basic Lease Terms, or at any other place as Lessor
may designate in writing. Unless this Lease expressly provides otherwise, as for
example in the payment of rent pursuant to Section 4.01, all payments shall be
due and payable within five (5) days after demand. All payments requiring
proration shall be prorated on the basis of a thirty (30) day month and a three
hundred sixty (360) day year. Any notice, election, demand, consent, approval or
other communication to be given, or other document to be delivered by either
party to the other, may be delivered in person to an officer or duly authorized
representative of the other party, or may be deposited in the United States
mail, duly registered or certified, postage prepaid, return receipt requested,
and addressed to the other party at the address set forth in Section 1.08 of the
Basic Lease Terms, or if to Lessee, at that address, or from and after the
Commencement Date, at the Premises (whether or not Lessee has departed from,
abandoned or vacated the Premises). Either party may, by written notice to the
other, served in the manner provided in this Article, designate a different
address. If any notice or other document is sent by mail, it shall be deemed
served or delivered upon actual receipt or refusal thereof. If more than one
Lessee is named under this Lease, service of any notice upon any one of them
shall be deemed as service upon all of them.
ARTICLE 18 LIMITATION OF LIABILITY
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In consideration of the benefits accruing hereunder, Lessee agrees that
in the event of any actual or alleged failure, breach or default of this Lease
by Lessor: (i) the sole and exclusive remedy shall be against Lessor and its
assets - Lessor's liability shall be limited to its interest in the Center; (ii)
no member of Lessor shall be sued or named as a party in any suit or action
(except as may be necessary to secure jurisdiction of the Lessor); (iii) no
service of process shall be made against any member of Lessor (except as may be
necessary to secure jurisdiction of the lessor; (iv) no member of Lessor shall
be required to answer or otherwise plead to any service of process; (v) no
judgment may be taken against any member of Lessor; (vi) any judgment taken
against any member of Lessor may be vacated and set aside at any time without
hearing; (vii) no writ of execution will ever be levied against the assets of
any member of Lessor; and (viii) these covenants and agreements are enforceable
both by Lessor and also by any member of Lessor. Lessee agrees that each of the
foregoing provisions shall be applicable to any covenant or agreement either
expressly contained in this Lease or imposed by statute or at common law.
ARTICLE 19 BROKER'S COMMISSION
The parties recognize as the broker(s) who negotiated this Lease, the
firm(s), if any, whose name(s) is (are) stated Section 1.09 of the Basic Lease
Terms, and agree that the party designated in Section 1.09 shall be solely
responsible for the payment of brokerage commissions to those broker(s), and
that the other party shall have no responsibility for the commissions unless
otherwise provided in this Lease. Lessee warrants that it has had no dealings
with any other real estate broker or agent in connection with the negotiation of
this Lease, and Lessee agrees to indemnify and hold Lessor harmless from any
cost, expense or liability (including reasonable attorneys' fees) for any
compensation, commissions or charges claimed by any other real estate broker or
agent employed or claiming to represent or to have been employed by Lessee in
connection with the negotiation of this Lease. The foregoing agreement shall
survive the Expiration or earlier termination of this Lease. If Lessee fails to
take possession of the Premises or if this Lease otherwise terminates prior to
the Expiration Date, Lessor shall be entitled to recover the unamortized portion
of any brokerage commission funded by Lessor in addition to any other damages to
which Lessor may be entitled.
ARTICLE 20 TRANSFER OF LESSOR'S INTEREST
In the event of any transfer of Lessor's interest in the Premises,
including a so-called sale-leaseback, the transferor shall be automatically
relieved of all obligations on the part of Lessor accruing under this Lease from
and after the date of the transfer, provided that any funds held by the
transferor, in which Lessee has an interest, shall be turned over, subject to
that interest, to the transferee, and Lessee is notified of the transfer as
required by law. No holder of a mortgage and/or deed of trust to which this
Lease is, or may be, subordinate, and no landlord under a so-called
sale-leaseback shall be responsible in connection with the security deposit,
unless the mortgagee or holder of the deed of trust or the landlord actually
receives the security deposit. It is intended that the covenants and obligations
contained in this Lease on the part of the Lessor shall, subject to the
foregoing, be binding on Lessor, its successors and assigns, only during, and in
respect to, their respective successive periods of ownership.
ARTICLE 21 INTERPRETATION
21.01 Gender and Number: Whenever the context of this Lease requires, the words
"Lessor" and "Lessee" shall include the plural and well as the singular, and
words used in neuter, masculine or feminine genders shall include the others.
21.02 Headings: The captions and headings of the Articles and Sections of this
Lease are for convenience only, and are not a part of this Lease and shall have
no effect upon its construction or interpretation.
21.03 Joint and Several Liability: If there is more than one Lessee, the
obligations imposed upon Lessee shall be joint and several, and the act of, or
notice from, or notice or refund to, or the signature of, any one or more of
them shall be binding on all of them with respect to the tenancy of this Lease,
including, but not limited to, any renewal, extension, termination, or
modification of this Lease.
21.04 Successors: Subject to Articles 10 and 20, all rights and liabilities
given to or imposed upon Lessor and Lessee shall extend to and bind their
respective heirs, executors, administrators, successors and assigns. Nothing
contained in this Section is intended, or shall be construed, to grant to any
person other than Lessor and Lessee and their successors and assigns any rights
or remedies under this Lease.
21.05 Time of Essence: Time is of the essence with respect to the performance of
every provision of this Lease, in which time of performance is a factor.
21.06 Severability: If any term or provision of this Lease, [the deletion of
which would not adversely affect the receipt of any material benefit by either
party or the deletion of which is consented to by the party adversely affected],
shall be held invalid or unenforceable to any extent, the remainder of this
Lease shall not be affected and each term and provision of this Lease shall be
valid and enforceable to the fullest extent permitted by law.
21.07 Entire Agreement: The parties hereto declare and represent that no
promise, inducement or agreement not herein expressed has been made to them,
that this document embodies and sets forth the entire agreement and
understanding between them relating to the subject matter hereof, and that it
merges and supersedes all prior discussions, agreements, understandings,
representations, conditions, warranties and covenants between them on said
subject matter.
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21.08 Covenants and Conditions: All of the provisions of this Lease shall be
construed to be conditions as well as covenants as though the words specifically
expressing or imparting covenants and conditions were used in each separate
provision.
21.09 Counterparts: This Lease may be executed in one or more counterparts, each
of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
21.10 All indemnities set forth in this Lease shall survive the expiration or
earlier termination of this Lease.
21.11 Attachments: In addition to all of the exhibits referred to above,
attached are the following documents which also constitute a part of this Lease:
Utilities Information Form and Center Signage Guidelines.
LESSOR: SPENCER AIRPORT CENTER LLC
By: Its Members
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
By:____________________________
Michael Noulas, Second Vice President, Real Estate
NEVADA REAL ESTATE GROUP, LLC, a Nevada limited liability company
By:____________________________
Bradford H. Miller, Manager
By:____________________________
Lee W. Phelps, Manager
LESSEE: SPINTEKNOLOGY, INC. a Georgia corporation
By:________________________________________
Gary Coulter, Chairman and Chief Executive Officer
By:____________________________________________________
Eric R. Batzloff, Vice President of Administration and
Secretary of the Board of Spintek Gaming
If Lessee shall be a corporation, then authorized officers must sign on behalf
of the corporation. The Lease must be executed by the President or Vice
President and the Secretary or Secretary/Treasurer, unless the By-Laws or a
Resolution of the Board of Directors shall otherwise provide, in which event,
the By-Laws, or a certified copy of the Resolution, as the case may be, must be
furnished. Also, the appropriate corporate seal must be affixed.
Exhibit 10.4
AGREEMENT
THIS AGREEMENT is made and entered effective the 10th day of June, 1999 by and
between Spintek Gaming Technologies, Inc., a Nevada corporation (the
"Corporation"), and Robert E. Huggins, (the "Executive"):
W I T N E S S E T H:
WHEREAS, the Corporation is desirous of retaining Executive in his
current position of President and Chief Operating Officer, and entering into an
agreement with respect to the Executive providing consulting services to the
Corporation after the Executive completes his services and President and Chief
Operating Officer; and
WHEREAS, the parties are desirous of eliminating certain change in
control provisions contained in Executive's Employment Agreement dated July 1,
1998 (the "Former Agreement"); and
WHEREAS, in order effect the foregoing, the Corporation and Executive
desire to enter into a new Employment Agreement replacing previous employment
agreements, including the Former Agreement, between the parties.
NOW, THEREFORE, on the basis of the foregoing facts and in consideration of the
mutual covenants and agreements contained herein, the parties hereto agree as
follows:
1. Employment.
The Corporation hereby agrees to, and does hereby, employ the Executive
and Executive hereby accepts employment with the Corporation on the terms and
conditions set forth in this Agreement (the "Agreement"). By execution of this
Agreement, the Executive acknowledges the termination of the Former Agreement,
and that all obligations of the Corporation under the Former Agreement have been
satisfied in full.
2. Term.
The term of this Agreement shall continue through December 31, 2005,
unless sooner terminated as hereinafter provided (the "Term"). The Term shall be
divided into two parts, the first to be the time during which the Executive acts
a full-time employee of the Corporation (the "Employment Term"), that period to
be from the date of this Agreement until terminated, and the second to be from
the day following termination of the Employment Term through the Term of this
Agreement (the "Consulting Term"). The Corporation has the right to terminate
the Employment Term and thereby initiate the Consulting Term at any time upon 15
days written notice to Executive. The Executive has the right to terminate the
Employment Term and thereby initiate the Consulting Term at any time upon 15
days written notice to the Corporation; provided that should the Executive
terminate the Employment Term prior to June 30, 2000 then
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the Employment Term will terminate in accordance with the Executive's notice to
the Corporation although the consulting fee payable pursuant to Section 4 shall
not begin until July 1, 2000. Notwithstanding the foregoing, the Employment Term
shall automatically terminate on December 31, 2000 and the Consulting Term shall
begin on January 1, 2001 if not otherwise noticed by the Corporation.
3. Duties and Services.
A. The Corporation and the Executive hereby agree that, subject to the
provisions of this Agreement, during the Employment Term the Corporation will
employ the Executive and the Executive will serve the Corporation as President
and Chief Operating Officer.
B. During the Consulting Term, the Executive agrees to provide services
as an independent consultant and, if requested by the Corporation, as an
advisory director to the Corporation. The Executive will be retained as an
independent contractor and not as an employee during the Consulting Term, and
shall be free to pursue other endeavors provided he complies with the terms of
this Agreement. During the Consulting Term the Executive agrees to make himself
available to the Corporation at the request of the Chief Executive Officer and
the Board of Directors for up to forty (40) hours per month. The Corporation
shall reimburse the Executive for reasonable travel expenses incurred at the
request of the Corporation.
C. Executive agrees during the Term of this Agreement not to usurp a
corporate opportunity for his own financial gain. A corporate opportunity shall
be defined as a business opportunity which the corporation is financially able
to undertake, is, from its nature, in the line of the Corporation's business and
is one in which the Corporation has an interest or a reasonable expectancy.
Executive agrees that he shall offer a corporate opportunity to the Corporation.
The Corporation shall have thirty (30) days to either take the opportunity for
itself or to reject the opportunity in which case Executive shall have the right
to pursue such opportunity for himself. Failure to notify Executive within such
thirty (30) day period shall be deemed a rejection of the opportunity by the
Corporation.
4. Compensation.
A. As salary during the Employment Term, the Corporation shall pay the
Executive, in accordance with its normal payroll, a minimum annual salary of Two
Hundred Thousand Dollars ($200,000) such salary to be paid no less than biweekly
during the Term, such amount to be retroactive to May 1, 1999. During the
Consulting Term, the Executive shall receive a consulting fee of Ten Thousand
Seven Hundred Dollars ($10,000) per month, such amount to be paid to the
Executive on a monthly basis, in advance; provided that if the Executive
terminated the Employment Term prior to June 30, 2000 pursuant to Section 2
hereof, then the Consulting Fee shall not begin until July 1, 2000,
notwithstanding that the Consulting Term had previously been initiated. Unless
expressly agreed in writing by the parties hereto, no such additional
compensation or benefits shall be deemed to modify or other wise affect the
terms or conditions of this Agreement.
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B. Executive shall receive an automobile allowance in the amount of
Seven Hundred Fifty Dollars ($750) per month during the Employment Term.
C. The Corporation shall reimburse Executive for the cost of his
country club initiation fee which Executive has previously paid. Such
reimbursement shall be paid to Executive through payments of $858.60 per month
through July 31, 2001, regardless of whether during the Employment Term or the
Consulting Term. Such country club membership shall be held in the name of the
Executive for the benefit of Executive and shall be the exclusive property of
the Executive.
D. Executive may receive additional compensation, including bonuses
granted by the Corporation at the discretion of the Board of Directors or Chief
Executive Officer of the Corporation (the "CEO"). The amount of any bonus paid
to Executive shall be determined in the discretion of the Board of Directors.
The Corporation agrees to provide a written bonus compensation plan for the
benefit of the Executive Officers, Officers and additional employees of the
Corporation as soon as practicable following execution of this Agreement.
6. Other Benefits.
During the Employment Term the Executive shall receive all rights and
benefits for which he is then eligible under any employee benefit plan or bonus
plan which the Corporation generally provides for its employees. Executive shall
be provided with a life insurance policy on his life for not less than double
his then current base annual salary; and, he shall also be provided with a
disability insurance policy for not less than 60% of his then current annual
salary. Such benefits shall cease, with the exception of rights of the Executive
under the Consolidated Omnibus Budget Resolution Act of 1976, upon the beginning
of the Consulting Term.
7. Grant of Options to Acquire Stock and Restrictions of Sale.
A. In addition to those options previously granted by the Corporation
to Executive, Corporation hereby grants on the date of this Agreement to
Executive and option to purchase 1,117,287 shares of the Corporation's common
stock at the closing price per share for a share of the Corporation's common
stock on the date of grant, which options shall vest and become exercisable (i)
with respect to 744,858 shares on June 30, 2000 if the Employment Term has not
sooner been terminated, and (ii) with respect to 372,429 shares on December 31,
2000 if the Employment Term has not sooner been terminated. All options granted
or to be granted hereunder shall be exercisable for a period of ten years from
the date of grant by the Executive (or, if earlier, within 12 months following
the date of Executives' death by the family trust described herein, or
Executive's personal representative or transferee if received by the laws of
descent and distribution), may not be assigned without the consent of the
Corporation except by the laws of descent and distribution in the event of
Executive's death or to a trust which agrees to be bound by the terms of this
Agreement and in which the Executive is the grantor and whose beneficiaries
include only the Executive and the members of the Executive's immediate family,
and both the number of shares and the exercise price shall be subject to such
appropriate and
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<PAGE>
equitable adjustments as the Board of Directors may reasonably make in the event
of any stock split, stock dividend, reorganization, recapitalization, merger,
consolidation or similar event.
B. Executive agrees that during the Term he will, if requested by the
Corporation or the Corporation's underwriter, execute such agreements as the
Corporation or the underwriter may reasonably request in connection with an
offering of the Corporation's common stock or a merger of other sale of the
Corporation, including, but not limited to, agreements restricting the sale of
any shares of the Corporation's common stock owned by the Executive.
8. Death or Disability.
In the event of the death or disability of the Executive, this
Agreement shall terminate and the Corporation shall pay to the Executive or the
Executive's personal representative in the event of death, the sum of Ten
Thousand Dollars ($10,000) per month through the Term of this Agreement. Such
payments shall begin upon the sooner of (i) thirty (30) days of Executive's
death or (ii) thirty (30) days after Executive is declared by his physician
incapable of performing his duties as specified in this Agreement. The
Corporation shall have the right to fund Executive's death and/or disability
benefit through life insurance.
9. Place of Performance.
In connection with his employment by the Corporation during the
Employment Term, the Executive shall at all times be entitled to an office at
the principal executive offices of the Corporation, located in Las Vegas,
Nevada, or at such other office of the Corporation, in Las Vegas, Nevada, as the
Chief Executive Officer of the Corporation shall, in his reasonable discretion
deem to be in the best interest of the Corporation. In the event that during the
Employment Term the Corporation moves its principal place of business outside of
Las Vegas, Nevada, Executive at his option to terminate the Employment Term by
giving written notice to the Corporation, at which time the Consulting Term
shall begin.
10. Notice.
All Notices and other communications hereunder shall be in writing and
shall be deemed to have been validly served, given or delivered five (5) days
after deposit in the United States mail, by certified mail with return receipt
requested and postage prepaid, when delivered personally, one (1) day after
delivery to any overnight courier, or when transmitted by facsimile transmission
facilities, and addressed to the party to be notified as follows: If to
Corporation at: Spintek Gaming Technologies, Inc., 1857 Helm Drive, Las Vegas,
Nevada, 89119 Attn: Chairman, Facsimile #: (702) 263-3680. If to Executive at:
Robert E. Huggins, 9104 Crystal Lake Court, Las Vegas, Nevada 89134, Facsimile
#: (702) 341-7424.
11. Miscellaneous.
A. This Agreement shall inure to the benefit of and be binding upon the
Corporation, its successors and assigns. This Agreement may not be assigned by
the Corporation without the
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<PAGE>
prior written consent of the Executive. The obligations and duties of the
Executive hereunder shall be personal and not assignable.
B. Whenever possible, each provision of this Agreement shall be
interpreted in such a manner as to be valid and effective under applicable law,
but if any provision of this Agreement is found to be prohibited or invalid
under applicable law, such provision will be ineffective to the extent of such
prohibition or invalidity without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
C. For purposes of this Agreement an "affiliate" of a person shall
include any person, group of persons, firm, corporation, association,
organization, or unincorporated trade or business that, now or hereinafter
directly or indirectly, controls, or is controlled by, or practices is under
common control with such person.
D. Any waiver, alteration or modification of any terms of this
Agreement will be valid only if made in writing and signed by the parties
hereto. Each party hereto from time to time may waive any of his or its rights
hereunder without effecting a waiver with respect to any subsequent occurrences
or transactions hereunder
E. Captions and paragraph headings used herein are for convenience only
and are not a part hereof and shall not be used in construing this Agreement.
F. This Agreement constitutes the entire understanding and agreement of
the parties and, except as otherwise provided hereunder, there are no other
agreements or understandings, written or oral, in effect between the parties
relating to the employment of the Executive by the Corporation during the Term.
All prior negotiations or agreements, if any, between the parties relating
solely to the employment of the Executive by the Corporation during the Term are
hereby superseded.
G. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of Nevada.
H. This Agreement may be executed in counterparts, each of which shall
be deemed an original, but both of which taken together shall constitute one and
the same instrument.
12. Arbitration.
Any controversy between the parties hereto, including the construction
or application of any of the terms, covenants or conditions of this Agreement,
shall on written request of one party served on the other be settled exclusively
by arbitration in accordance with the rules of the American Arbitration
Association then in effect. The arbitrator selected must be a member of the
National Academy of Arbitrators and must have significant experience in
arbitrating labor disputes. Further, the Arbitrator must be an attorney
practicing labor law in the Southern Nevada area. The cost of such arbitration
shall be borne by the losing party or in such proportions as the Arbitrator(s)
shall decide. Judgment may be entered on the arbitrator's award in any court of
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competent jurisdiction. The parties shall have the right to bring an action in a
Nevada court of competent jurisdiction to enforce any equitable remedy such
party may have.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
EXECUTIVE:
-----------------------------------
ROBERT E. HUGGINS
SPINTEK GAMING TECHNOLOGIES, INC.
By:________________________________
GARY L. COULTER, Chairman and CEO
By:________________________________
MALCOLM C. DAVENPORT, Vice Chairman
MALCOLM CLIFTON DAVENPORT V
ATTORNEY AT LAW
1140 NORTH 18TH STREET
LANETT, ALABAMA
(994)642-3456
[email protected]
August 31, 1999
Mr. Gary Coulter, President
Spintek Gaming Technology, Inc.
Las Vegas, NV
RE: $2,000,000.00 Line of Credit
Dear Gary:
This is to confirm my agreement to lend Spintek ("The Company") up to
$2,000,000.00 at any time, and from time to time, (up to a maximum of
$2,000,000.00) during the next twelve months.
The loan will be on commercially reasonable terms, considering all the
circumstances, and will be due no sooner than March 1, 2001.
I think we should go ahead and prepare a draw schedule, to the extent possible.
Very truly yours,
/s/Malcolm C. Davenport, V
- -------------------------------
Malcolm C. Davenport, V
Exhibit 10.13
PROMISSORY NOTE
---------------
U. S. $400,000.00 May 1, 1999
FOR VALUE RECEIVED, the undersigned, SPINTEK GAMING TECHNOLOGIES, INC.
(hereinafter referred to as "Maker"), promises to pay to the order of MALCOLM C.
DAVENPORT, V (hereinafter, together with its heirs and assigns, referred to as
"Holder"), at such place as Holder hereof may from time to time designate in
writing, in lawful money of the United States of America, the principal sum of
Four Hundred Thousand and No/100 Dollars ($400,000.00) together with interest on
the principal balance from time to time outstanding during the term of this Note
at a rate of ten percent (10%) per annum.
This Note shall be payable in monthly installments of principal and
interest in the amount of Fifty Thousand and No/100 Dollars ($50,000.00) each,
commencing on the 30th day of June, 2000, and continuing on the last day of each
successive month with a final payment of all unpaid principal hereof, together
with all accrued and unpaid interest and late charges, if any, being due on
February 28, 2001.
This Note may be prepaid at any time in whole or in part. All payments
made hereon shall be applied first to accrued and unpaid late charges, then to
accrued and unpaid interest and the remainder to principal.
Upon the occurrence of an Event of Default as defined in that certain
Collateral Assignment and Security Agreement between Holder and Maker's
subsidiary Spinteknology, Inc. dated January 6, 1999 and any amendments thereto
(the "Security Agreement"), at the Holder's option, the entire unpaid principal
balance of this Note, together with all accrued and unpaid interest thereon
shall immediately become due and payable, without notice or demand, and Holder
shall have all rights and remedies stated in this Note or the documents which
now or hereafter evidence or secure the loan evidenced by this Note
(collectively, "Loan Documents"). Holder shall have, in addition to the rights
provided herein and therein, the rights and remedies available to it pursuant to
the Uniform Commercial Code and other applicable laws. Such rights or remedies
shall be cumulative, and the exercise of any right or remedy shall not preclude
the exercise of any other right or remedy. From and after maturity, whether by
acceleration or otherwise, the principal balance hereunder shall, at Holder's
option, bear interest at the Default Rate stated below.
In the event that Holder institutes legal proceedings to enforce this
Note or refers the same to an attorney-at-law for enforcement or collection
after default or maturity, Maker agrees to pay to Holder, in addition to any
indebtedness due and unpaid, all reasonable costs and expenses of such
proceedings, including reasonable attorneys' fees.
Holder shall not by an act of omission or commission be deemed to waive
any of its rights or remedies hereunder unless such waiver be in writing and
signed by an authorized officer of Holder and then only to the extent
specifically set forth therein; a waiver on one occasion shall not be construed
as continuing or as a bar to or waiver of such right or remedy on any other
occasion. All remedies conferred upon Holder by this Note or any other
instrument or agreement connected
<PAGE>
herewith or related hereto shall be cumulative and none is exclusive, and such
remedies may be exercised concurrently or consecutively at Holder's option.
This Note is hereby expressly limited so that in no contingency or
event whatsoever, whether by acceleration of maturity of the debt evidenced
hereby or otherwise, shall the amount paid or agreed to be paid to Holder for
the use, forbearance or retention of the money advanced or to be advanced
hereunder exceed the highest lawful rate permissible under applicable laws
("Maximum Rate") in accordance with the written agreement of the parties.
Determination of the rate of interest for the purpose of determining whether
this Note is usurious under applicable law shall be made by amortizing,
prorating, allocating and spreading in equal parts during the period of the full
stated term of this Note, all interest or other sums deemed to be interest at
any time contracted for, charged or received from Maker in connection with this
Note. Maker or any endorsers or other parties now or hereafter becoming liable
for payment of this Note shall never be required to pay interest on this Note at
a rate in excess of the Maximum Rate, and the provisions of this paragraph shall
control over all other provisions of this Note and any other instruments now or
hereafter executed in connection herewith which may be in apparent conflict
herewith. If, from any circumstances whatsoever, fulfillment of any provision
hereof or of any other agreement evidencing or securing the debt, at the time
performance of such provisions shall be due, shall involve the payment of
interest in excess of that authorized by law, the obligation to be fulfilled
shall be reduced to the limit so authorized by law, and if from any
circumstances Holder shall ever receive as interest an amount which would exceed
the Maximum Rate applicable to Maker, such amount which would be excessive
interest shall, at the option of Holder, be applied against the unpaid principal
balance on this Note or, if this Note has been paid in full, be repaid by Holder
to Maker.
This Note is given and accepted as evidence of indebtedness and not in
payment or satisfaction of any indebtedness or obligation.
If the principal balance of this Note is accelerated, or if the
principal balance of this Note is not paid at maturity, then Holder shall have
the option to increase the interest rate, as defined hereunder, to eighteen
percent (18%) per annum (the "Default Rate"). The Default Rate shall apply to
the entire unpaid principal balance of this Note effective as of the earlier of
(i) the due date of the first payment due hereunder not timely paid, or (ii) the
date of acceleration.
If any payment is not received within ten (10) days after its due date,
and Holder elects to waive the delinquency by accepting the payment, Maker
shall, at Holder's option and without notice or further grace period, pay a late
charge equal to four percent (4%) of the late payment, such payment to be due
with the succeeding monthly payment. The late charge is an amount which the
parties agree is appropriate to compensate Holder for the cost of handling
delinquent payments and is in addition to Holder's right to impose a default
interest rate and to exercise any other right or remedy for default under this
Note or any Loan Document.
Maker hereby consents and agrees that Holder may at any time, and from
time to time, without notice to or further consent from Maker, either with or
without consideration, release, surrender or impair any property or other
security of any kind or nature whatsoever held by Holder securing this Note;
grant releases, compromises and indulgences with respect to this Note or the
other Loan Documents as to any persons or entities now or hereafter liable
thereunder or hereunder;
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<PAGE>
release any endorser of this Note or the Loan Documents; or take or fail to take
any action of any type whatsoever. No such action which Holder shall take or
fail to take in connection with this Note or the Loan Documents, or any of them,
nor any course of dealing with or any other person, shall be deemed to release
Maker's obligations hereunder, affect this Note in any way or afford any Maker
any recourse against Holder.
Maker hereby waives and agrees not to assert or take advantage of (a)
any defense that may arise by reason of the lack of authority of any other
person or entity, or the failure of Holder to file or enforce a claim against
the estate (either in bankruptcy, or any other proceeding) of said Maker; (b)
any defense based upon failure of Holder to commence an action against Maker
(other than a defense based on a statute of limitations); (c) any duty on the
part of Holder to disclose to Maker any facts it may now or hereafter know
regarding Maker; (d) demand for payment of any of the indebtedness or
performance of any of the obligations hereby evidenced; (e) protest and notice
of dishonor or of default to Maker or to any other party with respect to the
indebtedness; (i) any and all other notices whatsoever to which Maker might
otherwise be entitled; and (j) any defense based on lack of due diligence by
Holder in collection, protection, perfection or realization upon any collateral
securing the indebtedness evidenced by this Note.
The liability of Maker under this Note shall be direct and immediate
and not conditional or contingent upon the pursuit of any remedies against any
other person, nor against security or liens available to Holder, its successors,
successors-in-title, endorsees or assigns. Maker waives any right to require
that an action be brought against any other person or to require that resort be
had to any security held by Holder.
In the event of any dispute, misunderstanding, suit or claim related to
this Note or any of the Loan Documents, and if Maker and Holder are unable to
resolve said dispute and it becomes necessary to enter into any litigation to
resolve such dispute or claim, Maker hereby waives its right to trial by jury in
any suit or legal action of any kind or nature brought by Holder against Maker
related to this Note or any of the Loan Documents. Maker further agrees that any
such litigation shall be heard by a court of appropriate jurisdiction sitting
without a jury.
Time is of the essence with respect to all of Maker's obligations and
agreements under this Note.
This Note and all provisions, conditions, promises and covenants hereof
shall be binding in accordance with the terms hereof upon Maker, its successors
and assigns, provided nothing herein shall be deemed a consent to any assignment
or conveyance which is restricted or prohibited by the terms of this Note or the
Loan Documents.
All notices to Maker and Holder hereunder shall be deemed to have been
sufficiently given or served for all purposes when sent pursuant to the notice
requirements in the Security Agreement.
This Note shall be governed and construed under the laws of the State
of Georgia.
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<PAGE>
IN WITNESS WHEREOF, Maker has signed, sealed and delivered this Note as
of the date first hereinabove written.
MAKER:
SPINTEK GAMING TECHNOLOGIES, INC.
By:_______________________________
Title: ___________________________
Attest:___________________________
Title: ___________________________
(CORPORATE SEAL)
PATENT COLLATERAL ASSIGNMENT
----------------------------
This Agreement is made as of the 20th day of December, 1998 between
SPINTEKNOLOGY, INC., a corporation having a mailing address at 1857 Helm Drive,
Las Vegas, Nevada 89119 ("Debtor") and MALCOLM C. DAVENPORT, V, having a mailing
address at 409 West 10th Street, West Point, Georgia 31833 ("Secured Party").
BACKGROUND. Debtor's corporate affiliate, Spintek Gaming Technology,
Inc. ("Borrower") has executed and delivered its promissory note (the "Note") to
the Secured Party in the aggregate principal amount of $350,000 of even date
herewith. In order to induce the Secured Party to make the loan to Borrower
evidenced by the Note, Debtor has agreed to assign to Secured Party certain
patent rights. This Agreement is made subject to prior assignments to secure
debts of Debtor and Borrower (or either) (the "Prior Debt").
NOW, THEREFORE, in consideration of the premises, Debtor hereby agrees
with Secured Party as follows:
1. To provide security for the due and punctual performance of all of
the Borrower's obligations under the Note, including, without limitation,
payment in full of the principal and interest on the Note, costs and attorneys'
fees, all indebtedness to be incurred by Borrower or Debtor to Secured Party
with respect to the Note and further to secure any other indebtedness and
obligations now or hereafter owing by Borrower or Debtor to Secured Party
(hereinafter the "Obligations"), Debtor hereby grants, assigns and conveys to
Secured Party the entire right, title and interest in and to and grants Secured
Party a security interest in the patent applications and patents listed in
Schedule A hereto, including without limitation all proceeds thereof (such as,
by way of example, license royalties and proceeds of infringement suits), the
right to sue for past, present and future infringement suits), the right to sue
for past, present and future infringements, all rights corresponding thereto
throughout the world and all re-issues, divisions, continuations, renewals,
extensions and continuations-in-part thereof (collectively called the
"Patents").
2. Debtor covenants and warrants that:
(a) The Patents are subsisting and have not been adjudged
invalid or unenforceable, in whole or in part;
(b) Except for prior assignments to secure the Prior Debt,
Debtor is the sole and exclusive owner of the entire and
unencumbered right, title and interest in and to each of the
Patents, free and clear of any liens, charges and
encumbrances, including without limitation licenses, shop
rights and covenants by Debtor not to sue third persons; and
(c) Debtor has the unqualified right to enter into this
Agreement and perform its terms and has entered and will enter
into written agreements with each of its present and future
employees, agents and consultants which will enable it to
comply with the covenants herein contained.
<PAGE>
Except has specifically set forth above, Debtor does not warrant that
the Patents might not be declared invalid if challenged in court.
3. Debtor agrees that, until all of the Obligations shall have been
satisfied in full, it will not enter into any agreement (for example, a license
agreement) which is inconsistent with Debtor's obligations under this Agreement,
without Secured Party's prior written consent.
4. If, before the Obligations shall have been satisfied in full, Debtor
shall obtain rights to any new patentable inventions, or become entitled to the
benefit of any patent application or patent for any reissue, division,
continuation, renewal, extension, or continuation-in-part of any Patent or any
improvement on any Patent, the provisions of Paragraph 1 shall automatically
apply thereto and Debtor shall give to Secured Party prompt notice thereof in
writing hereof.
5. Debtor authorizes Secured Party to modify this Agreement by amending
Schedule A to include any future patents and patent applications which are
Patents under Paragraph 1 or Paragraph 4 hereof.
6. Unless and until there shall have occurred and be continuing an
Event of Default (as defined below), Secured Party hereby grants to Debtor the
exclusive, non-transferable right and license to make, have made, use and sell
the inventions disclosed and claimed in the Patents for Debtor's own benefit and
account and for none other. Debtor agrees not to sell or assign its interest in,
or grant any sublicense under, the license granted to Debtor in this Paragraph
6, without the prior written consent of Secured Party.
7. (a) The occurrence of one or more of the following events shall, at
the option of Secured Party, constitute an "Event of Default" hereunder:
(i) if Borrower defaults in the payment of the
Note or any installment thereof or interest thereon or any other payment due
Secured Party within five (5) days after its due date;
(ii) if any warranty or representation of Debtor
contained herein shall be materially false or misleading when made;
(iii) if Debtor or Borrower shall cease to do
business as a going concern, or generally fail to meet its obligations as they
mature;
(iv) an event of default occurs under and as defined
in the Note or other document or instrument evidencing or securing the
indebtedness of the Note (each, a "Loan Document");
(v) if any material litigation or claim is
commenced against Debtor or wherein Debtor is a party defendant or defendant in
counterclaims or cross-claims, and the claims against Debtor are not dismissed
within forty-five (45) days thereafter;
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<PAGE>
(vi) the occurrence of any transaction in which
control of the Debtor or Borrower would be transferred regardless of whether
such transaction is entered into with the consent or agreement of the Debtor.
(b) If any Event of Default shall have occurred and be
continuing, Debtor's license under the Patents as set forth in Paragraph 6,
shall terminate forthwith, and the Secured Party shall have, in addition to all
other rights and remedies given it by this Agreement, those allowed by law and
the rights and remedies of a secured party under the Uniform Commercial Code as
enacted in any jurisdiction in which the Patents may be located and, without
limiting the generality of the foregoing, the Secured Party may immediately,
without demand of performance and without other notice (except as set forth next
below) or demand whatsoever to Debtor, all of which are hereby expressly waived,
and without advertisement, sell at public or private sale or otherwise realize
upon, in Las Vegas, Nevada, or elsewhere, the whole or from time to time any
part of the Patents, or any interest which the Debtor may have therein, and
after deducting from the proceeds the sale or other disposition of the Patents
all expenses (including all reasonable expenses for brokers' fees and legal
services), shall apply the residue of such proceeds toward the payment of the
Obligations. Any remainder of the proceeds after payment in full of the
Obligations shall be paid over to the Debtor. Notice of any sale or other
disposition of the Patents shall be given to Debtor at least five (5) days
before the time of any intended public or private sale or other disposition of
the Patents is to be made, which Debtor hereby agrees shall be reasonable notice
of such sale or other disposition. At any such sale or other disposition, any
holder of any Note or Secured Party may, to the extent permissible under
applicable law, purchase the whole or any part of the Patents sold, free from
any right of redemption on the part of Debtor, which right is hereby waived and
released.
8. At such time as Debtor shall completely satisfy all of the
Obligations, Secured Party shall execute and deliver to Debtor all deeds,
assignments and other instruments as may be necessary or proper to re-vest in
Debtor full title to the Patents, subject to any disposition thereof which may
have been made by Secured Party pursuant hereto.
9. Any and all fees, costs and expenses, of whatever kind or nature,
including the reasonable attorneys' fees and legal expenses, incurred by Secured
Party in connection with the preparation of this Agreement and all other
documents relating hereto and the consummation of this transaction, the filing
or recording of any documents (including all taxes in connection therewith) in
public offices, the payment or discharge of any taxes, counsel fees, maintenance
fees, encumbrances or otherwise protecting, maintaining, preserving the Patents,
or in defending or prosecuting any actions or proceedings arising out of or
related to the Patents, shall be borne and paid by Debtor on demand by Secured
Party and until so paid shall be added to the principal amount of the
Obligations and shall bear interest at the Default Rate prescribed in the Note.
10. Debtor shall have the duty, through counsel acceptable to Secured
Party, to prosecute diligently any patent application of the Patents pending as
of the date of this Agreement or thereafter until the Obligations shall have
been paid in full, to make application on unpatented but patentable inventions
and to preserve and maintain all rights in patent applications and patents of
the Patents. Any expenses incurred in connection with such an application shall
be borne by Debtor. The Debtor shall not abandon any right to file a patent
application, or any pending patent
-3-
<PAGE>
application or patent without the consent of the Secured Party, which consent
shall not be unreasonably withheld.
11. Secured Party shall have the right but in no way be obligated to
bring suit in its own name to enforce the Patents and any license thereunder, in
which event Debtor shall at the request of Secured Party do any and all lawful
acts and execute any and all proper documents required by Secured Party in aid
of such enforcement and Debtor shall promptly, upon demand, reimburse and
indemnify Agent for all costs and expenses incurred by Secured Party in the
exercise of its rights under this Paragraph 11.
12. No course of dealing between Debtor and Secured Party, nor any
failure to exercise, nor any delay in exercising, on the part of Secured Party,
any rights, power or privilege hereunder or under any Loan Document shall
operate as a waiver thereof; nor shall any single or partial exercise of any
rights, power or privilege hereunder or thereunder preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.
13. All of Secured Party's rights and remedies with respect to the
Patents, whether established hereby or by the Note, or by any Loan Document or
by law shall be cumulative and may be exercised singularly or concurrently.
14. The provisions of this Agreement are severable, and if any clause
or provision shall be held invalid and unenforceable in whole or in party in any
jurisdiction, then such invalidity or unenforceability shall affect only such
clause or provision, or part thereof, in such jurisdiction, 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.
15. This Agreement is subject to modification only by a writing signed
by the parties, except as provided in Paragraph 5.
16. The benefits and burdens of this Agreement shall inure to the
benefit of and be binding upon the respective successors and permitted assigns
of the parties.
17. The validity and interpretation of this Agreement and the rights
and obligations of the parties hereunder shall be governed by the laws of the
State of Nevada.
WITNESS the execution hereof under seal as of the day and year first
above written.
SPINTEKNOLOGY, INC.
By: _______________________________
Title: ____________________________
-4-
COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of the
20th day of December, 1998, by and between SPINTEKNOLOGY, INC., a Georgia
corporation (hereinafter referred to as "Debtor"), and MALCOLM C.
DAVENPORT, V (hereinafter referred to as "Secured Party").
W I T N E S S E T H:
WHEREAS, Debtor holds certain intellectual property rights for
development of gaming technology (the "Business");
WHEREAS, Debtor's corporate affiliate, Spintek Gaming Technologies,
Inc. ("Borrower"), has borrowed from Secured Party the sum of $350,000.00
evidenced by a Promissory Note (the "Note") in favor of Secured Party, dated of
even date herewith, in the face principal amount of $350,000.00; and
WHEREAS, in order to secure the obligations of Borrower under the Note
and all other obligations now or hereafter owing from Borrower or Debtor to
Secured Party, the Debtor desires to grant a security interest in the collateral
described below.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged and confessed, the parties hereto
agree as follows:
1. Security Interest. To provide security for the due and punctual
performance of all of the Borrower's obligations under the Note, including,
without limitation, payment in full of the principal and interest on the Note,
costs and attorneys' fees, all indebtedness to be incurred by Borrower to
Secured Party with respect to the Note and further to secure any other
indebtedness and obligations now or hereafter owing by Borrower or Debtor to
Secured Party (hereinafter the "Obligations"), the Debtor hereby mortgages,
pledges, assigns, transfers, sets over, conveys and delivers to Secured Party
and grants to Secured Party security interests (the "Security Interests") in all
of the following rights, interests and properties:
All of the Debtor's patents, unpatented inventions, patent
applications, patent interference proceedings, trade secrets, rights
under technology licenses, choices-in-action, information contained in
computer media (such as data bases, source and object codes, and
information therein) and derivatives thereof (including those covered
by the Patent Applications identified on Schedule "A" attached hereto),
including the right to make, use, and vend goods utilizing any of the
foregoing, together with all cash and non-cash proceeds and products
thereof (all of which are collectively hereinafter referred to as the
"Collateral").
<PAGE>
Until payment in full of all Obligations, the Secured Party's Security
Interests in the Collateral granted hereby shall continue in full force and
effect. This Agreement is made subject to all presently perfected or unperfected
security interests that secure the debt of Borrower or Debtor (the "Prior
Debt").
2. Representations and Warranties.
Debtor represents and warrants to Secured Party that:
(a) Debtor has all requisite authority to execute and deliver this
Agreement and this Agreement is enforceable in accordance with its terms;
(b) Debtor's books and records concerning the Collateral are kept at
the principal office of Debtor;
(c) No financing statement covering the Collateral, or any part
thereof, is currently on file with any filing officer except with respect to the
Prior Debt;
(d) Except to secure the Prior Debt, no other security agreement is
currently in effect and no security interest, other than the Security Interests
herein granted, has attached to or has been perfected in the Collateral or in
any part thereof that has not been released;
(e) No dispute, right of setoff, counterclaim, or defenses exist with
respect to Debtor's title to any part of the Collateral;
(f) The principal place of business of Debtor is 1857 Helm Drive, Las
Vegas, Nevada 89119;
(g) Debtor has not acquired any of the Collateral in the past twelve
(12) months from any third party outside of the ordinary course of business or
as part of a bulk sale.
3. Covenants.
(a) Debtor covenants and agrees to:
(i) comply with all covenants and agreements set forth herein;
(ii) deliver to Secured Party, at such intervals as Secured
Party reasonably may require, such documents, lists, descriptions, certificates,
and other information as may be necessary or proper to keep Secured Party fully
informed with respect to the description of the Collateral;
(iii) from time to time promptly execute and deliver to
Secured Party all such other assignments, certificates, supplemental documents,
and financing statements, and do all other acts or things, as Secured Party may
reasonably request in order to more fully evidence and perfect the Security
Interests;
-2-
<PAGE>
(iv) promptly notify Secured Party of any claim, action or
proceeding which could affect Debtor's title to or materially and adversely
affect the value of the Collateral, or any part thereof, or the effectiveness of
the Security Interests, and, at the request of Secured Party, appear in and
defend, at Debtor's expense, any such action or proceeding;
(v) promptly, after being requested by Secured Party, pay to
Secured Party the amount of all expenses, including attorneys' fees and other
legal expenses, reasonably incurred by Secured Party in enforcing the Security
Interests; and
(vi) do all things reasonably necessary or appropriate to
enable Secured Party to fully exercise its rights under this Agreement;
(b) Debtor covenants and agrees that without the prior written consent
of Secured Party, Debtor will not:
(i) sell, assign, lease or transfer any of the Collateral; or
(ii) remove, or permit to be removed, Debtor's records
concerning the Collateral from Debtor's offices; or
(c) without prior written notice to Secured Party and without filing
any amendments to any UCC Financing Statements as may be required to retain
Secured Party's perfected security interest in the Collateral:
(i) change the name of the Debtor; or
(ii) conduct business under any name other than in the name of
the Debtor.
4. Default. The occurrence of one or more of the following events
shall, at the option of Secured Party, constitute an "Event of Default"
hereunder:
(a) if Borrower defaults in the payment of the Note or any
installment thereof or interest thereon or any other payment due Secured Party
within five (5) days after its due date;
(b) if any warranty or representation of Debtor contained
herein shall be materially false or misleading when made;
(c) if Debtor or Borrower shall cease to do business as a
going concern, or generally fail to meet its obligations as they mature;
(d) an event of default occurs under and as defined in the
Note or other Loan Document;
(e) if any material litigation or claim is commenced against
Debtor or wherein Debtor is a party defendant or defendant in counterclaims or
cross-claims, and the claims against Debtor are not dismissed within forty-five
(45) days thereafter;
-3-
<PAGE>
(f) the occurrence of any transaction in which control of the
Debtor or Borrower would be transferred regardless of whether such transaction
is entered into with the consent or agreement of the Debtor.
5. Default Remedies. Upon the occurrence of an Event of Default, in
addition to any and all other rights and remedies which Secured Party may then
have hereunder, herein, or under the Uniform Commercial Code of the State of
Nevada, or any other pertinent jurisdiction (the "Code"), or otherwise, Secured
Party may, at its option:
(a) reduce its claim to judgment or foreclose or otherwise enforce the
Security Interests, in whole or in part, by any available judicial procedure;
(b) require Debtor, upon the receipt of any revenue, income, profits or
other sums in which a security interest is granted by this Agreement or of any
check, draft, note, trade acceptance or other instrument evidencing an
obligation to pay any such sum, to hold the same in trust for Secured Party in
precisely the form received, and to forthwith, endorse, transfer and deliver any
such sums or instruments, or both, to Secured Party for prompt application to
the payment of the Obligations in a manner satisfactory to Secured Party;
(c) require Debtor to assemble and make available to Secured Party, at
the expense of Debtor, the Collateral at any place mutually convenient to Debtor
and Secured Party;
(d) enter upon the premises wherever any evidence of the Collateral may
be, freely and without being deemed to disrupt the peace, and take possession of
any evidence of the Collateral, and demand and receive such possession from any
person or organization which has possession thereof, and to take such measures
as it may deem necessary or proper for the care or protection thereof, including
the right to remove all or any portion of the Collateral, and with or without
taking such possession may sell or cause to be sold, whenever Secured Party
shall decide, in one or more sales or parcels, at such price as Secured Party
may deem adequate, and for cash or, on credit or for future delivery, without
assumption of any credit risk, all or any portion of the Collateral, at any
broker's board or at public or private sale (whether such sale is conducted by
Secured Party or a private auction company hired by Secured Party), without
demand of performance or notice of intention to sell or of time or place of sale
(except ten [10] days prior written notice to Debtor of the time and place of
any public sale or sales or of the time after which any private sale or sales or
other intended disposition is to be made and only such other notice as may be
required by applicable statute and cannot be waived, which notice Debtor hereby
acknowledges shall be considered commercially reasonable for all purposes), and
Secured Party or any other person may be the purchaser of all or any portion of
the Collateral so sold and thereafter hold the same absolutely, free from any
claim or right of whatsoever kind, including any equity of redemption, of
Debtor, and such demand, notice, claim, right or equity being hereby expressly
waived and released. In any action hereunder, Secured Party shall be entitled to
the appointment of a receiver without notice, to take possession of all or any
portion of the Collateral and to exercise such powers as the court shall confer
upon the receiver. Without limiting the scope or definition of commercial
reasonableness, Debtor agrees that any disposition of any Collateral pursuant
hereto shall be commercially
-4-
<PAGE>
reasonable within the meaning of Section 9-504 of the Code as in effect in the
jurisdiction or jurisdictions where such Collateral is located.
(e) at its discretion, retain the Collateral in satisfaction of the
Obligations whenever the circumstances are such that Secured Party is entitled
to do so under the Code;
(f) exercise any and all other rights, remedies, and privileges it may
have under the Note or any document or instrument evidencing or securing the
Note (collectively, "Loan Documents"); and
Debtor hereby irrevocably makes, constitutes and appoints Secured Party
or any of its officers or designees its true and lawful attorney-in-fact, upon
the occurrence of an Event of Default (A) to enforce all rights of Debtor under
and pursuant to any agreements relating to the Collateral, all for the sole
benefit of Secured Party, or (B) to enter into and perform such agreements as
may be necessary in order to carry out the provisions of this Agreement, or to
carry out the terms, covenants and conditions of this Agreement which are
required to be observed or performed by Debtor, or (C) to execute such other and
further grants, mortgages, pledges and assignments of the Collateral as Secured
Party may reasonably require for the protecting or maintaining of the Security
Interests granted to Secured Party by this Agreement. Debtor hereby ratifies and
confirms all that Secured Party, as such attorney-in-fact, or its substitutes,
shall do by virtue of this power of attorney. Debtor hereby waives all rights to
marshalling of assets or sale in inverse order of alienation, including any such
rights with respect to the Collateral.
Secured Party shall not be responsible or liable for any shortage,
discrepancy, damage, loss or destruction of any part of the Collateral, wherever
the same may be located and regardless of the cause thereof, unless the same
shall happen through the gross negligence or willful misconduct of Secured
Party. Secured Party shall not, under any circumstances or in any event
whatsoever, have any liability for any error or omission or delivery of any kind
incurred with respect to any instrument received in payment for the Collateral
or for any damage resulting therefrom. In no event shall Secured Party be liable
in any manner or for anything in connection with this Agreement other than to
account for moneys actually received by it in accordance with the terms hereof.
6. Application of Proceeds. If an Event of Default shall have occurred
and be continuing, all proceeds received from the sale or other disposition of
any of the Collateral shall be applied by Secured Party as follows:
First: to the payment of all costs and expenses incurred in connection
with any such sale of the Collateral, including, without limitation, all court
costs and the reasonable fees and expenses of agents and of counsel for Secured
Party in connection therewith, and to the payment of all costs and expenses
reasonably paid or incurred by Secured Party hereunder, to the extent that such
advances, costs and expenses shall not have been paid to Secured Party upon its
demand therefor;
Second: to the payment or reduction of any late fees on the Note, then
the payment of interest on the Note then due and payable, then the payment of
all principal on the Note whether at the stated maturity thereof or by
acceleration or otherwise in such order as Secured Party elects;
-5-
<PAGE>
Third: to the payment in full of all other Obligations; and
Fourth: the balance, if any, of such proceeds remaining after payment
in full of the foregoing items shall be remitted to Debtor or as a court of
competent jurisdiction may otherwise direct.
7. Taxes; Financing Statements; Certificates of Title. At its option,
Secured Party may discharge past due sales, use or property (but not income),
taxes, liens, or security interests, registration title and license fees,
assessments or other encumbrances at any time levied or placed on any of the
Collateral and may pay for the maintenance and preservation thereof, and Debtor
agrees to reimburse Secured Party on demand for any payment made or any expense
reasonably incurred by Secured Party pursuant to the foregoing authorization;
provided, however, that nothing in this Section or its exercise may be
interpreted as excusing Debtor from performance of any covenants or other
promises with respect to such past due taxes, liens, security interests or other
encumbrances, nor shall it be interpreted as an assumption by Secured Party of
such obligations.
Debtor hereby authorizes Secured Party to file financing statements and
any amendments thereto or continuations thereof.
8. Remedies Cumulative, Etc. The rights, remedies and benefits of
Secured Party herein expressly specified are cumulative and not exclusive of any
other rights, remedies or benefits which Secured Party may have under this
Agreement, the Note, any other Loan Document or at law, in equity, by statute or
otherwise. Without limiting the generality of the foregoing, Secured Party shall
have all rights and remedies of a secured creditor under Article 9 of the
Uniform Commercial Code in the jurisdiction or jurisdictions where any of the
Collateral is located.
9. Expenses, Etc. Debtor will pay to Secured Party all reasonable
expenses (including reasonable attorneys fees and court costs) of, or incidental
to, the enforcement of any of the provisions of this Agreement or any actual or
attempted sale, or any exchange, enforcement, collection, compromise or
settlement of any of the Collateral or receipt of the proceeds thereof, and the
care of the Collateral and defending or asserting the rights and claims of
Secured Party in respect thereof, by litigation or otherwise, including expenses
of insurance; and all such expenses shall be secured by this Agreement.
10. No Delay, Waiver, Etc. No delay on the part of Secured Party in
exercising any power or right hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any power or right hereunder preclude
other or further exercise thereof or the exercise of any other power or right.
Debtor hereby waives presentment, notice of dishonor and protest of all
instruments included in or evidencing the liability of Debtor and any and all
other notices and demands whatsoever (except notices specifically provided for
herein), whether or not relating to such instruments.
11. Modification, Successors and Assigns, Etc. No amendment hereof
shall be effective unless contained in a written instrument signed by the
parties hereto. This Agreement shall be binding upon the successors and assigns
of Debtor and shall inure to the benefit of the successors and assigns of
Secured Party.
-6-
<PAGE>
12. Notices, Etc. Any notices, requests or demands hereunder shall be
deemed to have been sufficiently given when received by the addressee if sent by
prepaid certified mail, return receipt requested, or by Federal Express or other
similar overnight delivery service where a return receipt is available, to
Debtor or Secured Party at their respective addresses as follows:
Debtor:
1857 Helm Drive
Las Vegas, Nevada 89119
Secured Party:
409 West 10th Street
West Point, Georgia 31833
13. Governing Law. This Agreement shall be deemed to be a contract made
under the laws of the State of Nevada, and shall be governed by and construed in
accordance with the laws of the State of Nevada.
14. Severability. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term of this Agreement, such provision shall be fully severable; this
Agreement shall be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part of this Agreement; and the
remaining provisions of this Agreement shall remain in full force and effect and
shall not be affected by the illegal, invalid, or unenforceable provision or by
its severance from this Agreement. Furthermore, in lieu of each such illegal,
invalid, or unenforceable provision there shall be added automatically as a part
of this Agreement a provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid, and enforceable.
15. Counterparts. This Agreement may be executed in a number of
identical counterparts, each of which for all purposes is to be deemed an
original, and all of which constitute collectively, one agreement; but in making
proof of this Agreement, it shall not be necessary to produce or account for
more than one such counterpart.
16. Binding Agreement. This Agreement shall be binding upon and inure
to the benefit of Debtor, its successors and assigns, and shall inure to the
benefit of Secured Party, its successors and assigns.
17. Waiver of Trial by Jury. In the event of any dispute,
misunderstanding, suit or claim related to this Agreement or any of the Loan
Documents, and if Debtor and Secured Party are unable to resolve said dispute
and it becomes necessary to enter into any litigation to resolve such dispute or
claim, Debtor hereby waives its right to trial by jury in any suit or legal
action of any kind or nature brought by Secured Party against the Debtor related
to this Agreement or any of the Loan Documents. Debtor further agrees that any
such litigation shall be heard by a court of appropriate jurisdiction sitting
without a jury.
-7-
<PAGE>
18. Assignment by Secured Party. This Agreement and the Note or Loan
Documents may be assigned by Secured Party without the approval of the Debtor
and the Debtor may not raise a defense to its obligations under this Agreement,
the Note or any of the Loan Documents on the grounds that these documents have
been transferred by Secured Party to a third party.
IN WITNESS WHEREOF, Debtor has caused this Agreement to be duly
executed (by its authorized officers, where applicable), all as of the day and
year first above written.
DEBTOR:
SPINTEKNOLOGY, INC., a Georgia corporation
By: _______________________________
Title: _____________________________
SCHEDULE A
----------
Part of exhibit, considered to be Proprietary and Confidential
-8-
AMENDMENT OF PATENT COLLATERAL ASSIGNMENT AND
---------------------------------------------
COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT
--------------------------------------------
This Amendment is made effective the 1st day of May, 1999, by and among
SPINTEK GAMING TECHNOLOGIES, INC., a Nevada corporation having a mailing address
at 1857 Helm Drive, Las Vegas, Nevada 89119 ("Borrower"), SPINTEKNOLOGY, INC., a
Georgia corporation having a mailing address at 1857 Helm Drive, Las Vegas,
Nevada 89119 ("Debtor"), and MALCOLM C. DAVENPORT, V, having a mailing address
at 409 West 10th Street, West Point, Georgia 31833 ("Secured Party").
W I T N E S S E T H :
WHEREAS, Debtor's corporate affiliate, Spintek Gaming Technologies,
Inc. ("Borrower"), borrowed from Secured Party the sum of $850,000 (the "Loan"),
$350,000 of which was evidenced by a Promissory Note in favor of Secured Party,
dated January 6, 1999 (the "Original Note"); and
WHEREAS, in order to secure the obligations of Borrower now and
thereafter owing by Borrower or Debtor to Secured Party, the Debtor granted
security interest in certain patent rights by entering into a Collateral
Assignment and Security Agreement ("Security Agreement") and a Patent Collateral
Assignment ("Assignment"), both dated January 6, 1999; and
WHEREAS, the parties have been negotiating to restructure (but not
otherwise extinguish, novate, or discharge) the indebtedness outstanding by
providing for two Promissory Notes evidencing the outstanding principal balance
of the Loan; and
WHEREAS, the Borrower has agreed to provide two new Promissory Notes,
one for a principal amount of $450,000 and the other for $400,000 (the "Notes"),
evidencing the current outstanding principal amount owed to the Secured Party
pursuant to the Loan which will replace the Original Note; and
WHEREAS, the Secured Party has agreed to waive any and all rights,
remedies, or defaults existing under the Original Note.
NOW, THEREFORE, in consideration of the promises and mutual covenants
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
1. All references in the Security Agreement and Assignment to the Original Note
shall now refer to the new Notes of even date herewith executed and delivered by
the Borrower to the Secured Party.
2. The Secured Party hereby waives any and all rights, remedies, obligations,
and defaults that arose under the Original Note and such Original Note is hereby
cancelled.
<PAGE>
3. The Secured Party hereby waives any Event of Default which occurred under
Sections 7(a)(i) and 7(a)(iv) of the Assignment and Sections 4(a) and 4(d) under
the Security Agreement solely as those provisions relate to the Original Note.
The sections referred to in this paragraph shall remain in full force and effect
as they relate to the Notes.
4. The Secured Party warrants that he has not transferred, assigned, or granted
any interest in the Original Note to any other party except that, pursuant to
this Agreement, the Original Note has been delivered to the Borrower for
purposes of canceling the Original Note.
5. The parties acknowledge that the existence and principal amount of the Loan,
as now evidenced by the two Notes, shall not be affected or changed by the
issuance of the two Notes and the cancellation of the Original Note does not
represent a cancellation of any of the outstanding balance under the Loan. The
Loan and all loan documents, other than the Original Note, shall remain in full
force and effect and, subject to the agreement set forth herein with respect to
the Original Note and Notes, are hereby ratified, approved, and confirmed by the
Borrower and the Debtor.
DEBTOR: BORROWER:
- ------- ---------
SPINTEKNOLOGY, INC. SPINTEK GAMING TECHNOLOGIES, INC.
By: _______________________ By: ___________________________
Title: ____________________ Title: ________________________
(CORPORATE SEAL) (CORPORATE SEAL)
SECURED PARTY:
--------------
______________________________ (SEAL)
MALCOLM C. DAVENPORT, V
Spintek Gaming Technologies, Inc. Subsidiaries
Name of Subsidiary Date of Incorporation
------------------ ---------------------
Spintek Gaming, Inc. Nevada
Spinteknology, Inc. Nevada
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM SPINTEX GAMING TECHNOLOGIES, INC. FINANCIAL STATEMENTS FOR
THE YEAR ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 981
<SECURITIES> 0
<RECEIVABLES> 598
<ALLOWANCES> 0
<INVENTORY> 1,996
<CURRENT-ASSETS> 3,964
<PP&E> 476
<DEPRECIATION> 123
<TOTAL-ASSETS> 5,397
<CURRENT-LIABILITIES> 3,960
<BONDS> 408
0
0
<COMMON> 287
<OTHER-SE> 741
<TOTAL-LIABILITY-AND-EQUITY> 5,397
<SALES> 7,959
<TOTAL-REVENUES> 7,959
<CGS> 4,216
<TOTAL-COSTS> 4,216
<OTHER-EXPENSES> 13,157
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 279
<INCOME-PRETAX> (9,693)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,693)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,693)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
