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 December 31, 1997
Transition Report Pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-21071
NEVSTAR GAMING & ENTERTAINMENT CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 88-0309578
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
3175 West Post Road, Las Vegas, Nevada 89118 (702) 269-1325
(Address of principal executive offices) (Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
(Title of Class) (Name of Exchange on which registered)
None None
Securities registered under Section 12(g) of the Exchange Act:
(Title of Class)
Common Stock $0.01 par value
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 filing requirements for the past 90 days. Yes X No
Indicate by mark if disclosure of delinquent filers pursuant to Rule 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. X
The issuer's revenues for the fiscal year ended December 31, 1997 were: $0.
There were 3,606,719 outstanding shares of common stock, par value $0.01 per
share, as of April 8, 1998. The aggregate market value of the voting stock of
the registrant held by non-affiliates of the registrant, as of April 8, 1998,
was $8,841,000 based on the last sales price on such date.
DOCUMENTS INCORPORATED BY REFERENCE: ________
Transitional Small Business Disclosure Format: Yes____ NO X <PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
NevStar Gaming & Entertainment Corporation is a development stage company
formed for the purpose of acquiring, developing, constructing, owning and
managing hotel/casino facilities. The Company's strategy is to concentrate its
efforts on "niche" markets such as "local" or "neighborhood" casinos. The
Company's hotel/casinos will be "theme" based, which will attempt to distinguish
the Company's properties from its competitors.
The Company was incorporated under the laws of the State of Nevada on December
2, 1993 under the name Mesquite Gaming Corp. On October 3, 1995, the Company
changed its name to NevStar Gaming Corporation, and on September 18, 1997,
changed its name to NevStar Gaming & Entertainment Corporation. To date, the
Company has had no revenues from operations.
INITIAL PUBLIC OFFERING. On September 24, 1997, the Company executed its
initial public offering (the "IPO") of 1,725,000 units (the "Units") raising net
proceeds of $7,738,648. Each Unit was sold for $5.50 and consisted of one share
of the Company's Common Stock and two Redeemable Common Stock Purchase Warrants
(each a "Warrant" and collectively, the "Warrants"). The registered holder of
each Warrant may purchase, at any time, through September 17, 2002, one share of
Common Stock at a price of $5.50 per share (the "Initial Exercise Price"). The
Warrants are subject to redemption by the Company at $.05 per Warrant on 30 days
prior written notice to the Warrantholders, if the closing bid price of the
Common Stock as reported in the National Association of Security Dealers, Inc.
Automated Quotation System ("NASDAQ") SmallCap Market averages in excess of
$11.00 (the "Initial Notice Price") for a period of 20 consecutive trading days
ending within 15 days prior to the notice of redemption. Both the Initial
Exercise Price and the Initial Notice Price are subject to adjustment under
certain circumstances. The Common Stock and the Warrants are listed on the
NASDAQ SmallCap Market under the symbols NVST and NVSTW, respectively.
In connection with the IPO, the representative underwriter was issued a warrant
to purchase 76,278 units, each consisting of one share of Common Stock and four
Common Stock purchase warrants. The exercise price to purchase these units and
the exercise price for the warrants included in these units are both $8.03.
EXCHANGE OFFER. In June 1997, the Company delivered an exchange offer to the
holders of the Company's shares of Series A Convertible Non-Voting Preferred
Stock (the "Preferred Stock") which gave them the right to convert each share of
Preferred Stock into 0.7 shares of Common Stock effective upon the close of the
IPO. As of March 31, 1998, 1,418,844 shares of Preferred Stock had been
exchanged for 993,190 shares of Common Stock and 64,500 shares of Preferred
Stock remained outstanding.
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THE COMPANY'S PROJECTS. The Company's initial hotel/casino project will be
known as the Mesquite Star (1) (the "Mesquite Star") and will be located in
Mesquite, Nevada. At present, the Company's primary asset is a 25.2 acre
property zoned for a hotel/casino commercial development in Mesquite, Nevada
(the "Mesquite Property"). The Mesquite Star Hotel and Casino is under
construction on the site and scheduled for completion during the Spring of 1998.
See "THE MESQUITE PROPERTY." The Company also holds an option to purchase an
indirect 20% ownership interest in an approximately 25 acre parcel of unimproved
real property located in the City of North Las Vegas, Nevada (the "North Las
Vegas Property"). See "THE NORTH LAS VEGAS PROPERTY."
THE MESQUITE PROPERTY. Mesquite, Nevada is located on Interstate 15 on the
border of Nevada and Arizona, approximately 80 miles from Las Vegas and 37 miles
from St. George, Utah. The Mesquite Property is adjacent to the Interstate 15
and East Sandhill Road Interchange. The Company will attempt to distinguish the
Mesquite Star from other casinos in the Mesquite area by its emphasis on the
"old west" and by a casual, friendly atmosphere catering to middle income, value
oriented customers. The "old west" feel will be evident from a customer's first
sight of the facade of the Mesquite Star, which will resemble a main street in
an old west town. The Company plans to reinforce this western theme throughout
the customer's stay with the use of western memorabilia in its interior decor,
country/western music and the promotion of special events and activities such as
rodeos and bull riding.
The Company has commenced construction of the Mesquite Star, and intends to
complete construction of the Mesquite Star hotel/casino on the Mesquite Property
in May, 1998. The Mesquite Star will consist of 210 hotel rooms, including 13
suites, with a swimming pool and spa, and public area of approximately 34,300
square feet, featuring approximately 12,000 square feet of casino space
initially containing 440 slot machines, 12 table games and Keno, one specialty
restaurant, one cocktail lounge, one coffee shop/buffet, a video arcade and a
gift shop.
Phase I of the Mesquite Star Project will utilize about 11 acres of the 25.2
acre site, including ground level parking for 624 cars. The remaining 14 acres
is available for future development. Phase II development may include an
additional 400 rooms, 55,000 square feet of additional public and gaming area,
and a recreational vehicle park. Any future development is dependent upon the
Company obtaining all necessary permits and financing therefor, as well as the
suitability of the market for such development.
COMPLETION OF THE MESQUITE STAR. AF Construction Company, Inc. ("AF
Construction") is the general contractor for the Mesquite Star. AF Construction
is one of Nevada's leading casino/hotel contractors and has served as general
contractor for over 10 casino/hotel projects, including the Palace Station
Hotel/Casino and the Primadonna Hotel/Casino. The construction contract
entitles AF Construction to a general contractor's profit equal to 10% of the
actual hard construction costs.
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As of March 31, 1998, the Mesquite Star Hotel and Casino property was estimated
to be approximately 80 to 85 percent complete. The scheduled construction
completion date by AF Construction, assuming no rain or other unforseen delays,
is May 7, 1998. Since issuance of the grading and foundation permits, the
Mesquite Property has been cleared, the grading completed to sub base, the curbs
and gutters completed, and the sidewalks approximately 30 percent completed. In
addition, the asphalt paving, the landscaping, the pool design, the water, gas
and sewer utilities, the electrical utilities hook-up, the exterior western
theme facade, the roof, the public areas including the casino, wall texture and
painting, electrical and tile, the ceiling, sprinkler/fire alarm, lighting,
surveillance and sound system, the millwork, the exterior doors, the elevators,
the hotel first, second and third floor electrical, plumbing, fixtures, door
frames, wall texture and painting, the carpet and pad, are either complete or
substantially complete. The fourth floor dry wall is installed, the utilities
are stubbed in and the plumbing and fixtures is about 45 percent complete.
GOVERNMENT APPROVALS. The appropriate zoning district for a hotel/casino in the
City of Mesquite is Special District H. The Mesquite Property is in Zone H.
Among the uses permitted in Zone H are hotels and resort hotels, and, subject to
the issuance of a Conditional Use Permit ("CUP"), "gambling casinos and
establishments." The Mesquite Property is designated as a "Gaming Enterprise
Zone" on the City of Mesquite Long Range Comprehensive Master Plan. In 1995,
the City of Mesquite confirmed that a valid and existing CUP is presently in
full force and effect with respect to the Mesquite Property and that no other
discretionary approvals by the City of Mesquite are required to construct and
complete the hotel/casino in accordance with the plans and specifications
approved by the City of Mesquite.
The Company paid for the building and related permits, costing approximately
$496,000, in a timely manner. Building Permit No. 0-95-186 was issued on May
30, 1995 and recites "Erect New Casino only on this Building Permit" (two
stories, 32,000 square feet) ("Casino Building Permit"). Building Permit No. 0-
95-187 was issued on May 30, 1995 and recites "Erect New Hotel Only on this
Building Permit" (three stories, 100,780 square feet, 210 units) ("Hotel
Building Permit"). Building Permit Nos. 0-95-186 and 0-95-187 are jointly
referred to as "the Building Permits." Construction of the Mesquite Star
commenced under the Building Permits on approximately May 31, 1995. City of
Mesquite regulations require that actual construction work be diligently carried
on until completion of the building or structure involved. Due to the cessation
of work for a period of over 180 days on the hotel during 1996, the Hotel Permit
lapsed. The Company paid approximately $8,600 in December 1996 to renew the
Building Permits. By letter dated June 11, 1997 the City of Mesquite informed
the Company that the City would renew the Building Permits upon submission of
revised building plans to the City of Mesquite. In conformance with the City's
plan review letter dated April 7, 1997, the previously paid sum of $8,600 was
being held as payment in full for the renewal of the Building Permits pending
approval of the revised plans. The revised building plans are required due to a
change in the City of Mesquite building codes. The Company completed the
revised building plans and the building permits were renewed by the City of
Mesquite, Nevada on November 4, 1997.
<PAGE>
The Company has paid for construction of an irrigation canal, road, street
lights and other offsite improvements and utility infrastructure at a cost of
$401,630.
Although the Casino Building Permit describes only 32,000 square feet of casino
and support area, approximately 34,300 square feet of slab has been poured for
the casino and support area. The City of Mesquite previously reviewed and
approved the architectural plans which included 34,300 square feet of building
area for the casino and support area. While the Company reasonably anticipates
that the Casino Building Permits can be amended or reissued to provide for the
increased square footage of 34,300, there is no guaranty that the Casino
Building Permits will be so amended or reissued, or, if so amended or reissued,
at what additional cost to the Company.
The Mesquite Star borders on and will have vehicular access from Sandhill Road,
a State of Nevada highway, pursuant to Permits for Occupancy, dated January 10,
1992 and December 5, 1994 (the "Occupancy Permits") from NDOT. All properties
along Sandhill Road are subject to similar NDOT occupancy permits. Occupancy
permits are subject to terms and conditions issued by NDOT which provide that
they are revocable and are subject to modification or abrogation by NDOT at any
time. While it is unlikely that access from the Mesquite Property to Sandhill
Road would ever be completely denied, it is possible that access might be
curtailed, altered or limited to the detriment of the Mesquite Star in the
future.
MESQUITE MASTER PLAN. In July 1994, the City of Mesquite adopted a master plan
which includes long-range planning for the City for residential, commercial,
gaming and other districts. The plan includes specific densities and designated
zoning for specific projects.
The master plan takes into consideration the separation of residential and other
land uses. It also includes plans for recreational and other public land uses.
This includes the Park Concept Plan, which entails the development of a
municipal golf course, a fairground, an amphitheater, a rodeo arena, a track and
field stadium, a barbecue pit and picnic areas, a small area with shuffleboard
facilities, horseshoe pits, several ball diamonds and tennis courts. A trail
system that will connect commercial and recreational segments of the City is
also planned.
At the same time that the master plan was developed, a Redevelopment District
was designated for the "downtown" area. The area encompasses approximately 62.5
acres (approximately five blocks) and is situated near the east end of the
central business district. The boundaries are Desert Drive on the west,
approximately 2nd North on the north, North Mesquite Boulevard on the east and
East 1st South on the south. The Downtown Redevelopment District's purpose is
to provide a mix of tourist, commercial, government, financial, professional,
cultural and residential uses.
<PAGE>
MESQUITE MARKET. Mesquite is an incorporated city within Clark County, Nevada
and is located on Interstate 15 near the banks of the Virgin River and the
Arizona border, 80 miles north of Las Vegas and 37 miles south of St. George,
Utah. Mesquite encompasses approximately 11 square miles and has traditionally
been an agricultural community with farming, ranching and dairying as the base
of its economy. In recent years, travel, tourism, recreation and retirement
have significantly grown in economic importance to this community.
The major streets within Mesquite are Mesquite Boulevard and Sandhill Road,
which constitutes a 4-lane highway running from the west end of the City until
it turns north at the east end of Mesquite, where the Mesquite Property is
located. At the Mesquite Property, Sandhill Road is presently a two-lane
highway. There are two interchanges with Interstate 15 in Mesquite, one on the
west end of Sandhill Road, and the other on the east end of Mesquite Boulevard
directly adjacent to the Mesquite Property.
Mesquite is rapidly becoming a full-service destination resort area recognized
as an ideal year-round location for visitors and retirees. Championship golf
courses, hunting, fishing and gaming offer Mesquite area residents and tourists
a variety of recreational activities. Other features include a mild climate, a
low tax structure and a favorable cost of living. In addition, Mesquite is a
short driving distance from other major attractions, including boating and
fishing located at Lake Mead National Park and Quail Creek Reservoir, three
presently existing golf courses located in Mesquite, and seven additional golf
courses located in St. George, Utah approximately 37 miles away, ski resorts
located approximately 110 miles away, and various national and state parks
located 40 miles away in the case of Snow Canyon State Park, and approximately
180 miles from Grand Canyon National Park. The climate in Mesquite is excellent
for recreation. The sun shines approximately 85% of the time and the average
daily maximum temperature is 77 degrees, and the average daily minimum
temperature is 55 degrees. Average annual rainfall is approximately 4.34
inches. Winter daytime temperatures are pleasant with an average high of 60
degrees. The temperature on an average summer day often rises past 100 degrees.
In 1997, approximately 9,300 people lived in the City of Mesquite. The average
annual population growth rate was 30% for the 1992-1996 period. Mesquite's
population is projected to reach approximately 14,000 by the year 2000.
Washington County, where St. George, Utah is located, which is one area where
the Company intends to focus its marketing efforts, has grown from a population
of approximately 22,000 in 1980 to approximately 63,400 in 1994 and continues to
enjoy rapid growth. Clark County, where Las Vegas is located, and which the
Company also expects to be a focus of its marketing efforts, has grown from
approximately 460,000 in 1980 to approximately 1,200,000 in 1997 and also
continues to enjoy rapid growth. Also, since the Mesquite Star is strategically
located along Interstate 15, the Company intends to focus marketing efforts
towards the estimated 3,790,000 motor vehicles that will annually pass by the
facility on Interstate 15.
<PAGE>
The border town of Mesquite is not unlike other border towns in Nevada,
including Stateline, which is located on Interstate 15 in southwestern Nevada
and Wendover, which is located on Interstate 80 in northeastern Nevada. Similar
to Mesquite, both Stateline and Wendover started with one casino/motel, rapidly
developed additional properties, and have experienced high occupancy and
increased gaming revenues.
The City of Mesquite is also serviced by Greyhound Bus Lines and a local
airport, two miles north of downtown, which has a 5,100 foot runway. The
airport is a private plane airport, which can bring potential customers through
private air traffic. At present, air service to Mesquite is limited primarily
to private planes and to small charter service. The airport is owned and
operated by the City of Mesquite. There are no plans for major expansions to
this airport in the near future. The City of Mesquite has announced that it
will construct a recreation facility on property contiguous to the Mesquite
Property. The Las Vegas Convention and Visitors Authority Board has voted to
award the City of Mesquite a $2.5 million grant towards the funding of this
recreational facility. The Mesquite recreational facility is currently in the
planning stage with the City of Mesquite.
The City of Mesquite has announced a proposal to build a commercial airport
three miles west of Mesquite on Flattop Mesa. This is a desirable location as a
freight distribution center since it is an equidistant site from Salt Lake City,
Los Angeles and Phoenix and is located on Interstate 15, a major thoroughfare.
The City of Mesquite has discussed this idea with both the McCarren Airport in
Las Vegas and the Federal Aviation Administration ("FAA"). McCarren Airport has
agreed to participate in an FAA study, and the FAA has hired a consulting firm
to conduct a thorough assessment of the area and make a recommendation about the
proposed airport site. If completed, the City of Mesquite has announced that it
feels the airport would bring both jobs and commerce to the region.
BUSINESS AND MARKETING STRATEGY. The Company intends to focus its marketing
efforts in the following markets:
Interstate 15 Travelers
St. George, Utah Area
Las Vegas and Clark County Area
Mesquite Resident Market
The primary focus of the Company's marketing efforts for the Mesquite Star will
be Interstate 15 travelers. At present, Mesquite derives most of its market
from the highway travelers and residents of nearby local communities. The
driving time from Las Vegas to Mesquite is approximately one hour and 15
minutes, and the driving time from St. George, Utah to Mesquite is approximately
one-half hour.
<PAGE>
The Company has reached an agreement with Best Western International, Inc.
("Best Western") for brand and reservations affiliation for the Mesquite Star.
Best Western is the world's largest hotel chain with nearly 3,800 independently
owned and operated hotels comprising 300,000 rooms throughout the world, serving
more than 50 million guests annually. Its worldwide reservation system and
frequent travel program, Gold Crown International, serve 600,000 members in
North America alone. The Best Western nationwide reservations system, along with
the display of the familiar Best Western logo to the motoring public as they
travel along Interstate 15, is expected to increase the competitive edge of the
Mesquite Star in its market niche.
The Company recently signed a five year $950,000 lease contract with Mikohn
Gaming Corporation to build a 10-story high exterior sign at the Mesquite Star.
When completed in Spring 1998, the Company's new exterior 10-story sign will
begin to provide travelers with dynamic color video graphics and messages from
its highly visible location positioned adjacent to Interstate 15 and the
Mesquite East Interchange. This 100-foot pylon installation will feature a
double-sided Mikohn Vision(TM) electronic lampbank spectacular. The Mikohn
Vision video board, which measures 20 by 40 feet will provide full color, real
time computer-generated graphics, animation, and text. Video clips can be
preprogrammed or run live at the discretion of the Mesquite Star. Almost 58,000
light bulbs will be used on this unit, which will be capable of dispensing 16.7
million shades of color with automatic dimming for optimum day or night viewing.
The sign will also carry the Mesquite Star's western theme, lettering and logo.
The sign is expected to attract the attention of travelers in and near Mesquite,
Nevada, thereby increasing the visibility and business potential of the Mesquite
Star.
The Mesquite Star will be one of the first casinos visible to southbound traffic
on Interstate 15 from Utah and Arizona, but will be one of the last to be seen
by northbound traffic. The Nevada Welcome Center is located across Mesquite
Boulevard from the Mesquite Property. This is the first welcome center that
southbound travelers on Interstate 15 encounter in this area. It attracts
travelers off the highway, which could be an advantage for the Mesquite
Property. The extent to which traffic will be able to easily cross Sandhill
Road to the Mesquite Property is yet to be determined. The ready flow of
traffic from the Welcome Center and the other land uses adjacent to it
(including a Budget Inn) would be beneficial to the Mesquite Property.
Otherwise, most of this traffic is likely to turn right onto Sandhill Road and
proceed under the Interstate 15 bridge to the Virgin River Hotel/Casino and
Bingo, and Rancho Mesquite Hotel and Casino to the north.
A new Smith's grocery store is located to the southeast of the Mesquite Property
on Sandhill Road. This store, at this location, is anticipated to increase
residential traffic in the proximate area, which could be an advantage for the
Mesquite Property. It will be important to have access to the Mesquite Property
from several locations to enhance accessibility by traffic in both directions on
Sandhill Road. There is an existing Denny's restaurant, Arby's restaurant and
Texaco gas station within one block of the Mesquite Star, with a Kentucky Fried
Chicken restaurant planned in the same area.
<PAGE>
The Company expects to position itself between Si Redd's Oasis Resort
Hotel/Casino and the Virgin River Hotel/Casino and Bingo, on the one hand, which
are low-rise properties with detached rooms, and Casa Blanca Resort Casino Spa,
on the other hand, which is a high-rise hotel resort. The Company believes it
will attract customers who will enjoy the Company's hotel and casino as an
alternative to the motel environment and the increased cost of the resort
alternative. The Company believes that it is competitive with and similar in
size and scope to the recently opened Rancho Mesquite Hotel and Casino, except
that Rancho's casino is detached from the related lodgings, while the Mesquite
Star's casino will be attached to its hotel. The Company's room rates are
expected to be competitive with the room rates currently charged by all the
other hotel/casino properties in Mesquite.
Washington County, Utah, which contains the City of St. George, is a rapidly
growing retirement and resort community. The St. George, Utah area has been
recognized as a fast growing and desirable retirement area in the southwestern
United States. The Company believes that a significant segment of the current
customers of Si Redd's Oasis Resort Hotel/Casino, Virgin River Hotel/Casino and
Bingo, Casa Blanca Resort Casino Spa, and the Rancho Mesquite Hotel and Casino
(collectively the "Existing Mesquite Casinos") currently come from the Utah
markets. To the Company's knowledge, the State of Utah has no present or
proposed gaming activities.
Another significant segment of the Existing Mesquite Casinos' customers
currently come from the Nevada market, including the Las Vegas area. The
Company believes that Mesquite is a recognized weekend retreat for people in Las
Vegas because of its recreational attractions and quiet resort-like atmosphere.
The weekend rates and occupancy for the Existing Mesquite Casinos are higher
than weekday rates. The Company intends to also focus on this market and to
entice customers from Las Vegas during weekdays with special promotional
packages.
The Company also anticipates attracting local customers comprised of Mesquite
residents and hotel/casino employees.
The top three employers in Mesquite are Casa Blanca Resort Casino Spa, Si Redd's
Oasis Resort Hotel/Casino, and Virgin River Hotel/Casino and Bingo, which
collectively employ approximately 2,860 people.
The Company also intends to promote special events, such as rodeos and bull
riding as well as the existing attractions and amenities located in the Mesquite
area, including the championship golf courses, which are open to the public, as
well as a local horseback riding ranch, gun club and a petting zoo.
<PAGE>
The Company believes that the recent opening of the Rancho Mesquite Hotel and
Casino creates critical mass in the Mesquite area, which will enable Mesquite to
become more recognized and attractive as a destination resort area, and attract
more customers to Mesquite. See "Competition."
Representative elements of the Company's strategy as currently identified,
include, but are not limited to, the following key principles:
Strategic Location. Management of the Company ("Management") believes that its
location, convenient access and ample parking are critical factors in attracting
interstate traffic, local patronage and repeat visitors. The Mesquite Star will
be strategically located as the moderately priced hotel/casino on Interstate 15
and the Mesquite Eastern Interchange, and management believes that the location
will provide the Company with a competitive advantage over other Mesquite
hotel/casinos. Travelers will be targeted through signage along Interstate 15.
The Company will also promote the City of Mesquite and the Mesquite Star as a
getaway retreat for people in Las Vegas because of its recreational attraction
and quiet resort-like atmosphere.
Differentiating its Product from Competition. Management intends to focus the
Company's marketing efforts of the Mesquite Star towards attempting to
differentiate its advantages apart from other hotel/casinos in Mesquite, with a
particular emphasis on a new moderately priced hotel, providing quality
services, the "old west" theme, and its related special events and promotions.
Focus on Repeat Customers. Management believes generating customer satisfaction
and loyalty is a critical component of the Company's business strategy. The
Company intends to attract customers from the areas of St. George, Utah and Las
Vegas, Nevada, as well as Mesquite residents, through promotional programs,
focused marketing efforts and convenient location. Although perceived value
will attract a customer to the Mesquite Star initially, actual value will
generate customer satisfaction and loyalty. Management believes that actual
value will become apparent during the customer's visit through an enjoyable and
high quality entertainment experience.
Affordable Quality. Management is committed to providing a quality
entertainment experience for its customers at a moderate price. Management
believes that the value offered by the Mesquite Star's hotel, restaurants and
buffet will be a major factor in attracting gaming customers. The Company
intends to offer generous portions of high quality food and specialty menu items
at reasonable prices. In addition, the Company plans to provide a high level of
value to its hotel guests by offering moderately priced rooms which are well-
appointed relative to comparably priced hotels in Mesquite. Management believes
that providing affordable quality to customers contributes significantly to
casino patronage.
Emphasis on Slot Play. An integral part of the Company's business strategy is
an emphasis on slot machine play in a friendly and convenient atmosphere. In
addition, the Company intends to install wide area linked progressive games,
which offer players significantly higher jackpots. The Company also expects to
offer casino gaming tournaments to attract and retain frequent gaming customers.
<PAGE>
Specialty Promotions. The Company plans to engage in specialty promotions and
marketing activities consistent with its old west theme, including potentially
sponsoring rodeo and bullriding events in Mesquite, Nevada, centered at the
Mesquite Star.
COMPETITION IN GENERAL. Gaming is an international industry that has continued
to expand in the United States, with the focal point in Las Vegas, Nevada.
Gaming activities include traditional full-service casinos, state or national
Native American Indian sponsored lotteries, bingo games, riverboat gaming,
small-stakes casino gaming, international gaming, gaming on cruise ships in
international waters, and Native American Indian gaming. Other forms of gaming
conducted in certain areas of the United States include parimutuel betting on
horse racing, dog racing and jai-alai; sports bookmaking; and card rooms. The
gaming industry, including the development, operation and management of gaming
sites and casinos, is highly competitive. The Company's proposed gaming-related
activities, including casino site development, operation and management will
compete with other forms of gaming in Mesquite, Nevada, as well as in Las Vegas,
throughout the State of Nevada and California, and throughout the United States.
the gaming industry is currently undergoing significant changes in operations,
amenities and technological advances, and it is impossible to accurately predict
future trends or changes in the industry.
The gaming industry in Mesquite also competes with other forms of gaming,
including low-stakes bingo games operated by non-profit organizations and pull-
tab games; sports betting; riverboat gaming; parimutuel betting on horse racing,
dog racing and jai-alai; state sponsored lotteries; and international gaming on
cruise ships in international waters. One consequence of the growth in the
gaming industry has been the increased pressure on state legislatures to allow
competitive gaming activity in one form or another. Several states have
approved or are considering approval of land-based casinos, riverboat gaming or
dockside casinos. Increased support is also present in a number of states for
approval of video slot machines for bars, restaurants and resorts. In addition,
non-gaming entertainment competes with the gaming industry for the public's
disposable income. These other forms of entertainment and gaming affect the
demand for gaming in Mesquite and the opportunities the Company has to develop
other hotel/casinos. As a result of such competition, the business and
financial condition of the Mesquite Star project and other projects may be
adversely affected.
OTHER COMPETITION IN NEVADA. The Mesquite Star also faces competition from all
other casinos and hotels in the greater Las Vegas area. The Las Vegas
competitors generally have substantially greater name recognition and financial
marketing resources than the Company. The Company will also compete with gaming
establishments in Laughlin, Nevada, as well as other stateline locations in
Stateline and Wendover, Nevada. In addition, a new proposed development for two
to four casinos situated in a 275-acre river front village scene has been
proposed for the town of Glendale, Nevada, which is 54 miles northeast of Las
Vegas on Interstate 15. This development, if completed, along with any future
casino developments in other cities or towns on Interstate 15, will compete with
the Mesquite Star and, consequently, may adversely affect the business of the
Company.
<PAGE>
COMPETITION IN MESQUITE, NEVADA. Currently, there are four other hotel/casinos
in Mesquite, including Si Redd's Oasis Resort Hotel/Casino, Virgin River
Hotel/Casino and Bingo, Casa Blanca Resort Casino Spa, and the Rancho Mesquite
Hotel and Casino. In addition to the four existing major casino hotels, there
is one small casino/motel and four small motels located in the Mesquite area.
Additional competitors may enter this market and compete with the Company for
customers and market share if the City of Mesquite changes its zoning and allows
additional properties to be used for hotel/casino operations.
Si Redd's Oasis Resort Hotel/Casino has grown from 28 rooms in 1981 to 1028
rooms. Si Redd's Oasis Resort Hotel/Casino contains eight hotel buildings, six
swimming pools, three spas, two 18-hole championship golf courses, trap, skeet,
and sporting clays, the Arvada Ranch, rodeo area, tennis courts, health club and
spa, three whirlpool spas, four restaurants, two casino bars, a video arcade,
miniature golf, gift shop, an R.V. Park, 10,276 square feet of meeting
facilities, and a 24-hour, full-service, 40,000 square foot casino featuring
over 700 slot and poker machines, two crap tables, two roulette wheels, 22
blackjack tables, four poker tables, and other betting games.
Virgin River Hotel/Casino and Bingo is located directly across Interstate 15
from the proposed Mesquite Star. Virgin River Hotel/Casino and Bingo was built
in 1991 with 152 rooms and has subsequently expanded to 723 rooms. Virgin River
Hotel/Casino and Bingo features two outdoor pools and three spas, live
entertainment, dancing, a restaurant, two movie theaters, an R.V. Park, 3,300
square feet of convention/meeting facilities, and an approximately 27,900 square
foot casino with approximately 600 slot machines, more than 10 table games, a
500-seat bingo area and a race and sports book, a convenience store, a truck
stop and a gas station.
Casa Blanca Resort Casino Spa, which opened in July 1995 as Player's Island
Resort Casino and Spa, consists of a 40,000 square foot casino, 500 rooms, 18
suites with Jacuzzi tubs, four three-bedroom detached bungalows, an 18 hole
championship golf course under development, four restaurants, a 450-seat show
room, a full-service spa and mineral bath, tennis courts, a swimming pool, gift
and retail stores, arcades, 8,850 square feet of banquet and conference
facilities, a 50 unit full-service R.V. park and a parking lot with a capacity
for 1800 automobiles.
Rancho Mesquite Hotel and Casino consists of 215 hotel rooms, a 35,000 square
foot casino and two restaurants. Rancho Mesquite Hotel and Casino is part of
the Holiday Inn chain and will be direct competition for the Mesquite Star. The
Rancho Mesquite hotel opened in November 1996 and the casino opened in February
1997. Like the Mesquite Star, the Rancho Mesquite Hotel and Casino is located
near Mesquite's eastern interchange to Interstate 15.
The Existing Mesquite Casinos are already established and have larger facilities
and more amenities than are planned for the Mesquite Star. Therefore, they will
provide significant competition for the Mesquite Star. Rancho Mesquite Hotel
and Casino has facilities which are comparable to those of the Mesquite Star,
has the advantage of having commenced operations at an earlier point in time and
will also provide significant competition for the Mesquite Star.
<PAGE>
DEMAND. The Las Vegas Convention & Visitors Authority ("LVCVA") recently
completed an analysis of lodging and meeting demand in Mesquite for the City of
Mesquite. In their report, the LVCVA estimated that occupancy for the local
rooms supply generally was in the 70 percent range during the week (Sunday
through Thursday) and in the 90 percent range on weekends and holiday periods.
These ranges equate to an annual occupancy average in the mid-70 percent range.
NORTH LAS VEGAS PROPERTY. Pursuant to the Option Agreement ("North Las Vegas
Option Agreement") among the Company, Desert Mesa Land Partners, Ltd., a Nevada
limited partnership ("Desert Mesa"), and High Mesa Development, Inc., a Nevada
corporation ("High Mesa"), dated April 23, 1996, Desert Mesa has granted the
Company an option (the "Option") to purchase from Desert Mesa an indirect 20%
ownership interest in the North Las Vegas Property. Desert Mesa, High Mesa and
the Company have amended the Option Agreement to provide extensions of time in
which the Company may exercise the Option until September 15, 1998. The Company
would be entitled to acquire the 20% ownership interest in the North Las Vegas
Property indirectly through ownership of a membership interest in a newly formed
Nevada limited liability company (the "LLC"), which LLC would purchase direct
title to the North Las Vegas Property. Desert Mesa's general partner is a
Nevada corporation in which Dr. Richard Tam, a director of the Company, is an
officer and a 35% stockholder. Dr. Tam is also an officer and 52.7% stockholder
of High Mesa. See "EQUITY AND DEBT FINANCING - Kelley Loan," "DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS," "PRINCIPAL STOCKHOLDERS OF
THE COMPANY" and "CERTAIN TRANSACTIONS."
The North Las Vegas Property is currently zoned for hotel and gaming use. Newly
enacted legislation affecting casino developments in Clark County, Nevada, which
are not in the Las Vegas Strip corridor (including the North Las Vegas
Property), may impose additional zoning requirements on the property and may
require the developers of the property to obtain local approvals for use of the
property for gaming activities no later than December 31, 1998. Desert Mesa
intends that the LLC will develop and construct an approximately 200 room hotel
on the North Las Vegas Property, which will include approximately 30,000 to
40,000 square feet of public area space, containing a casino, restaurants and
other amenities (the "Project"). The North Las Vegas Property is one portion of
an approximately 118-acre parcel of commercially zoned real property owned
directly or indirectly by Desert Mesa (the "Parcel"). A limited partnership
affiliated with Desert Mesa and High Mesa has received conditional approval from
the City of North Las Vegas for an approximately 500,000 square foot shopping
center to be developed on 55 acres of the 118-acre parcel.
The Company has an option to purchase a 20% membership interest in the LLC for a
formula based upon the total square footage ultimately included in the Property,
the result of which is currently estimated to be approximately $2,178,000 (the
"Option Purchase Price"). No appraisal of the North Las Vegas Property was
conducted in order to determine the Option Purchase Price; instead, the Option
Purchase Price was determined based on arms-length negotiation and comparison to
completed real estate purchases in the vicinity.
<PAGE>
As consideration for the grant of the Option, in September 1997, the Company(i)
gave Desert Mesa a promissory note in the amount of $200,000 which shall be
convertible into $200,000 in cash on or before September 15, 1998, for planning,
engineering, promotional expenses and design work with respect to the Project
(the "Development Funds") pursuant to an agreed-upon budget; and (ii) agreed to
pay roughly 21.2% of all property taxes and assessments accruing with respect to
the Parcel after the date of the North Las Vegas Option Agreement through the
earlier of termination of the Option or closing of the Company's purchase of an
interest in the LLC. The Development Funds are non-refundable and will not be
applied to the Option Purchase Price, but are reimbursable from the LLC to the
Company in connection with the development and financing of the Project.
Preliminary development of the Project will require funds substantially in
excess of the Development Funds. The Company can elect, in its sole discretion,
to advance additional development funds pursuant to budgets approved by Desert
Mesa, in which case any additional advances would be reimbursed from the LLC to
the Company in connection with the development and financing of the Project.
In connection with the transfer of the North Las Vegas Property to the LLC,
Desert Mesa has agreed to pay a brokerage fee equal to 10% of the total
consideration paid to Desert Mesa to Sterling Realty and Scripps Resources
International, Inc. ("Scripps"). Scripps is controlled by James Shadlaus, who
is a consultant to the Company.
If the Company consummates the purchase of its interest in the LLC, Desert Mesa
will concurrently sell the North Las Vegas Property to the LLC, which would be
owned as follows: (i) 20% by the Company, (ii) 15% by Desert Mesa, (iii) 25% by
High Mesa, and (iv) 40% by future equity investors ("Equity Investors")
contributing equity to the LLC in the minimum amount of $18,000,000 in cash.
Such Equity Investors have not been located, and there can be no assurance that
such Equity Investors will be located at any time in the future. The Company
has a first right of refusal to acquire up to an additional 30% ownership
interest in the LLC on the same terms as the Equity Investors or any other
future equity investor. If either any investor group contributing equity to the
Company requires an ownership percentage in excess of 40% or the Company
requires additional capital in the future, all the then-existing members of the
LLC would be diluted on a pro-rata basis.
The Company and High Mesa would be co-managing members of the LLC ("Managing
Members"), with the remaining members having non-managing membership interests
in the LLC. As Managing Members, the Company and High Mesa would jointly manage
the overall activities of the LLC including, but not limited to, development and
construction of the Project. After approval by the Managing Members of a pre-
development budget, operating budget, construction budget, development plan
and/or marketing plan, including any modifications thereto, however, the Company
would be authorized to operate and control the LLC's affairs in accordance with
those approved budgets and plans. Any material change to those budgets or plans
would require approval of a majority of the Managing Members, with any budget
line items exceeding the amount previously approved by greater than 10%
considered a material change.
<PAGE>
If the Company exercises the Option, the Company has agreed to exert its best
efforts to arrange for $25,000,000 of capital for construction of the Project
from a reputable financing source ("Construction Financing") within 360 days of
the closing of the Company's purchase of its interest in the LLC. If the
Company exercises the Option, then the Company will be entitled to the following
rights: (i) with respect to the period before the Project is open to the public
("Opening"), the Company would have the right to co-develop and co-manage the
Project with High Mesa; and (ii) with respect to the period after the Opening,
the Company would have the right to be hired by the LLC as manager of the hotel,
restaurant, casino and other aspects of the Project pursuant to the terms of a
non-binding Letter of Intent attached to the Desert Mesa Option Agreement ("LLC
Letter of Intent") and a definitive Management Agreement mutually acceptable to
both Desert Mesa and the Company to be executed in the future. The Company will
receive no compensation for preopening co-development and co-management
services.
In consideration for the Company's management services, the Company would
receive the following compensation: (i) three percent of net sales (comprised of
gross revenues (including revenues from all non-gaming sources and net gaming
wins) less promotional allowances, sales, occupancy and use taxes, gaming taxes
assessed on revenues and license fees paid on gaming equipment); (ii) five
percent of earnings before interest, taxes, depreciation and amortization
("EBITDA") before provision for the EBITDA based management fee but after
deducting the three percent management fee ("Adjusted EBITDA"); and (iii)
incentive compensation, which would be a percentage of the Adjusted EBITDA in
excess of the projected budgeted amount, which the parties would negotiate in
connection with the preparation of a definitive Management Agreement.
Under the LLC Letter of Intent, the initial term of the Management Agreement
would commence on execution of the Management Agreement and continue for five
years thereafter, with automatic renewals for additional one-year terms (each a
"Renewal Term") unless either party gave notice six months prior to any
termination date. If the LLC gives notice of the termination of the Management
Agreement at the expiration of the initial term or any Renewal Term, the LLC
Letter of Intent provides that the Company would continue to receive a
management fee for the next five years payable annually in arrears based on the
total fees paid to the Company for the full fiscal year prior to termination
("Base Year") as follows:
Year 1 100% of fees for the Base Year
Year 2 80% of fees for the Base Year
Year 3 60% of fees for the Base Year
Year 4 40% of fees for the Base Year
Year 5 20% of fees for the Base Year
<PAGE>
The LLC Letter of Intent provides that, notwithstanding the foregoing, no
continuing management fees would be payable if the ratio of Adjusted EBITDA to
all equity invested by the LLC in the Project is less than an average cumulative
simple interest return of 15% during the period from commencement of the first
Renewal Term through the date the LLC gives notice of termination. The LLC
Letter of Intent states that the Management Agreement may be terminated by the
LLC "for cause" (as defined in the LLC Letter of Intent), as a result of which
the Company would not be entitled to any management fees after such termination.
The Company believes the rights granted to the Company under the North Las Vegas
Option Agreement create an additional hotel/casino management opportunity.
Under the North Las Vegas Option Agreement, the Company's management rights with
respect to the Project vest upon the Company's purchase of an interest in the
LLC. The Company's decision whether or not to exercise the Option and manage
the Project is subject to the Company's further due diligence investigation into
all business, financial and legal aspects of the North Las Vegas Property, the
Parcel, and the Project.
REGULATION AND LICENSING. The ownership and operation of casino gaming
facilities in Nevada are subject to: (i) the Nevada Gaming Control Act and the
regulations promulgated thereunder (collectively, the "Nevada Act"); and (ii)
various local regulation. The Company's gaming operations are subject to the
licensing and regulatory control of the Nevada Gaming Commission (the "Nevada
Commission"), the Nevada State Gaming Control Board (the "Nevada Board"), and
the City of Mesquite, Nevada. The Nevada Commission, the Nevada Board and the
City of Mesquite, Nevada are collectively referred to as the "Nevada Gaming
Authorities."
As of the date of this filing, the Company has not obtained the license and
related approvals from the Nevada Commission to conduct gaming at the Mesquite
Star. The Company, its directors, officers and principal stockholders have
applied for the necessary licenses, approvals and findings of suitability to own
and operate the Mesquite Star. However, there can be no assurance that the
Company and such persons will be licensed, found suitable, or granted the other
approvals that are necessary to commence gaming operations.
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) to provide a source of state and local revenues
through taxation and licensing fees. Changes in such laws, regulations and
procedures could have an adverse effect on the Company's gaming operations.
<PAGE>
The Company, as a proposed operator of a casino, is required to be licensed by
the Nevada Gaming Authorities. The gaming license requires the periodic payment
of fees and taxes, and is not transferable. The Company has applied for
registration with the Nevada Commission as a publicly traded corporation (a
"Registered Corporation") and for licensure as a corporate gaming licensee. If
these approvals are obtained, the Company will be required to periodically
submit detailed financial and operating reports to the Nevada Commission and
furnish any other information which the Nevada Commission may require.
Registration with and licensure by the Nevada Commission are privileges under
Nevada law and may be denied for any cause deemed reasonable by the Nevada
Commission. Appeals of licensing decisions by the Nevada Commission are not
permitted under Nevada law.
The Nevada Gaming Authorities may investigate any individual who has a material
relationship to, or material involvement with, the Company in order to determine
whether such individual is suitable or should be licensed as a business
associate of a gaming licensee. Officers, directors and certain key employees
of the Company must file applications with the Nevada Gaming Authorities and may
be required to be licensed or found suitable by the Nevada Gaming Authorities.
The Nevada Gaming Authorities may deny an application for licensing for any
cause which they deem reasonable. A finding of suitability is comparable to
licensing, and both require submission of detailed personal and financial
information followed by a thorough investigation. Changes in licensed positions
must be reported to the Nevada Gaming Authorities and in addition to their
authority to deny an application for a finding of suitability or licensure, the
Nevada Gaming Authorities have jurisdiction to disapprove a change in a
corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, the Company would have to sever all relationships
with such person. In addition, the Nevada Commission may require the Company to
terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
If licensed by the Gaming Authorities, the Company will be required to submit
detailed financial and operating reports to the Nevada Commission.
Substantially all material loans, leases, sales of securities and similar
financing transactions by the Company will be reported to, or approved by, the
Nevada Commission.
<PAGE>
If, after being licensed, it is determined that the Nevada Act was violated by
the Company, its gaming licenses and approvals could be limited, conditioned,
suspended or revoked, subject to compliance with certain statutory and
regulatory procedures. In addition, the Company and the persons involved could
be subject to substantial fines for each separate violation of the Nevada Act at
the discretion of the Nevada Commission. Further, a supervisor could be
appointed by the Nevada Commission to operate the Company's gaming properties
and, under certain circumstances, earnings generated during the supervisor's
appointment (except for the reasonable rental value of the Company's gaming
properties) could be forfeited to the State of Nevada. Limitation, conditioning
or suspension of any gaming license or the appointment of a supervisor could
(and revocation of any gaming license would) materially adversely affect the
Company's gaming operations.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than five percent of the
Company's voting securities to report the acquisition to the Nevada Commission.
The Nevada Act requires that beneficial owners of more than 10% of the Company's
voting securities apply to the Nevada Commission for a finding of suitability
within 30 days after the Chairman of the Nevada Board mails the written notice
requiring such filing. Under certain circumstances, an "institutional
investor," as defined in the Nevada Act, which acquires more than 10%, but not
more than 15%, of the Company's voting securities may apply to the Nevada
Commission for a waiver of such finding of suitability if such institutional
investor holds the voting securities for investment purposes only. An
institutional investor shall not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired and are held in
the ordinary course of business of an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the board of directors of the Company, any change in the Company's
corporate charter, bylaws, management, policies or operations of the Company, or
any of its gaming affiliates, or any other action which the Nevada Commission
finds to be inconsistent with holding the Company's voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies or
operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial
holder of voting securities who must be found suitable is a corporation,
partnership or trust, it must submit detailed business and financial information
including a list of beneficial owners. The applicant is required to pay all
costs of investigation.
<PAGE>
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request, fails to identify
the beneficial owner. Any stockholder found unsuitable and who holds, directly
or indirectly, any beneficial ownership of the Common Stock of the Company
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company is subject to disciplinary action if,
after it receives notice that a person is unsuitable to be a stockholder or to
have any other relationship with the Company, the Company (i) pays that person
any dividend or interest upon voting securities of the Company, (ii) allows that
person to exercise, directly or indirectly, any voting right conferred through
securities held by that person, (iii) pays remuneration in any form to that
person for services rendered or otherwise, or (iv) fails to pursue all lawful
efforts to require such unsuitable person to relinquish his voting securities
for cash at fair market value. The Company's Restated Articles of
Incorporation, as amended, provide that if a stockholder who is found unsuitable
by the Nevada Commission fails to dispose of all stock owned by such stockholder
within 30 days, the Company has the option to redeem the shares held by such
stockholder at a price per share equal to the fair market value of such shares,
as defined in the Restated Articles of Incorporation, as amended.
The Nevada Commission may, in its discretion, require the holder of any debt
security of the Company to file applications, be investigated and be found
suitable to own the debt security. If the Nevada Commission determines that a
person is unsuitable to own such security, then pursuant to the Nevada Act, the
Company can be sanctioned, including the loss of its approvals, if without the
prior approval of the Nevada Commission, it: (i) pays to the unsuitable person
any dividend, interest, or any distribution whatsoever; (ii) recognizes any
voting right by such unsuitable person in connection with such securities; (iii)
pays the unsuitable person remuneration in any form; or (iv) makes any payment
to the unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
The Company will be required to maintain a current stock ledger in Nevada which
may be examined by the Nevada Gaming Authorities at any time. If any securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company will also be required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act.
<PAGE>
After the Company has been registered with and licensed by the Nevada
Commission, the Company may not make a public offering of its securities without
the prior approval of the Nevada Commission, if the securities or proceeds
therefrom are intended to be used to construct, acquire, or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. Any such approval, if granted, does not constitute a finding,
recommendation, or approval by the Nevada Commission or the Nevada Board as to
the accuracy or adequacy of the prospectus or the investment merits of the
securities offered. Any representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock or assets
acquisitions, management or consulting agreements, or any act or conduct by a
person whereby he obtains control, may not occur without the prior approval of
the Nevada Commission. Entities seeking to acquire control must satisfy the
Nevada Board and Nevada Commission in a variety of stringent standards prior to
assuming control. The Nevada Commission may also require controlling
stockholders, officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire control, to be
investigated and licensed as part of the approval process relating to the
transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licensees may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Company's
Board of Directors in response to a tender offer made directly to the Company's
stockholders for the purposes of acquiring control of the Company.
License fees and taxes, computed in various ways depending on the type of gaming
or activity involved, are payable to the State of Nevada and to the counties and
cities in which the Nevada licensee's respective operations are conducted.
Depending upon the particular fee or tax involved, these fees and taxes are
payable either monthly, quarterly or annually and are based upon either: (i) a
percentage of the gross revenues received; (ii) the number of gaming devices
operated; or (iii) the number of table games operated. A casino entertainment
tax is also paid by casino operations where entertainment is furnished in
connection with the selling of food or refreshments. Nevada licensees that hold
a license as an operator of a slot route, or a manufacturer's or distributor's
license, also pay certain fees and taxes to the State of Nevada.
<PAGE>
Any person who is licensed, required to be licensed, registered, required to be
registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation of
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities that
are harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employs a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
CAPITAL NEEDS. The Company's immediate capital requirements include the cost of
completing and opening the Mesquite Star. The development, construction and
operation of the Mesquite Star is capital intensive. The Company is indebted to
PMJ Enterprises, Inc. as of December 31, 1997 in the amount of approximately
$1,100,000 (including accrued interest) (the "PMJ Debt"). The Company is also
indebted to Dr. Richard Kelley in the approximate amount of $6,742,000
(including accrued interest and net of unamortized original issue discount) as
of December 31, 1997 (the "Kelley Loan"). Dr. Richard Tam has a 50% loan
participation interest in substantially all of the Kelley Loan. See "EQUITY AND
DEBT FINANCING - Kelley Loan." By letter dated March 31, 1998, Drs. Kelley and
Tam agreed to lend the Company up to $1,000,000 for current and future working
capital purposes, no sooner than June 1, 1998 and no later than March 26, 1999.
A condition to any advance pursuant to such commitment requires the Company to
possess all gaming licenses required to fully operate the Mesquite Star Hotel
and Casino. In January, 1998, the Company obtained a $5,000,000 construction
loan from First Credit Bank. On March 27, 1998, the Company received a letter
of commitment from First Credit Bank increasing the $5,000,000 secured financing
principal to $5,450,000, or by $450,000 which will be used by the Company for
construction and for about $25,000 in incremental loan costs. As more fully
described in the following table and paragraphs, the Company intends to finance
significant portions, of its furniture, fixtures and equipment - approximately
$6,600,000 ($5,650,000 capital costs, plus the $950,000 Mikohn exterior highway
sign and reader board lease, which includes, capital costs, finance costs,
maintenance costs and the purchase option at end of term). Although certain
contracts have been executed, until such Additional Financing is finalized,
there is no assurance that such Additional Financing will be obtained. Continued
operation of the Company is dependent on its ability to (i) generate positive
operating revenues from the Mesquite Star, (ii) procure additional financing, or
(iii) obtain additional equity capital from exercise of the Warrants or
otherwise. Management has prepared the estimated budget based on comparative
costs incurred by other similarly situated properties, and such estimates may
prove to be inaccurate. To the extent that the funds generated are insufficient
to fund the Company's completion of the Mesquite Star and commencement of
operations, the Company could be required to adopt one or more alternatives,
such as obtaining additional financing, to the extent permitted by the terms of
the First Credit Bank Loan, the Kelley Loan, the Secured Financing and the
Additional Financing, reducing or delaying planned construction or capital
expenditures, restructuring debt or obtaining additional equity capital. There
can be no assurance that any of these alternatives could be obtained on
satisfactory terms, and any resort to alternative sources of funds could impair
the Company's competitive position and reduce its future financial viability.
Any equity financing could result in dilution to the Company's then-existing
stockholders. Sources of debt financing may result in higher interest expense.
Any financing, if available, may be on terms unfavorable to the Company. If
adequate funds are not obtained, the Company may be required to reduce or
curtail certain improvements and/or operations. There is no assurance that any
revenue will be generated or that additional financing, if required, can be
obtained on terms favorable to the Company. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION."
SALE OF PARCELS WITHIN MESQUITE PROPERTY. The Company is currently in escrow to
sell approximately 27,100 sq. ft. of the Mesquite Property to an unrelated third
party for development as a drugstore site. The purchase price for the parcel is
$450,000. The closing is scheduled for May 15, 1998. The buyer has the right
to extend the closing for up to two (2) periods of thirty (30) days each upon
non-refundable but applicable to the purchase price extension payments of
$20,000 each. The feasability period for the buyer to decide whether or not to
purchase the parcel expires on April 17, 1998. The sale is conditioned upon a
number of items, the most significant of which are approval of the project by
the City of Mesquite, the creation of a separate legal parcel for the property
pursuant to a parcel map in compliance with Nevada subdivision laws, the partial
reconveyance of all existing deeds of trust on the parcel and the concurrent
close of escrow for an adjacent parcel of property to the south. As part of the
transaction, NevStar is to receive approximately 5,199 square feet of adjacent
property which is being acquired by the drugstore site developer but which is
not needed for the drugstore project.
MESQUITE STAR BULL. In December 1997, the Company entered into a License
Agreement with the Meehan Family Trust, of which James D. Meehan, a director of
the Company is trustee, and an unrelated third party pursuant to which the
Company acquired a license to commercially exploit the picture, likeness and
name of a bull to promote the Company's businesses, activities and image to the
public. The name of the bull is "Mesquite Star." As consideration for the
grant of the license, the Company issued 6,250 shares of Common Stock to each of
the Meehan Family Trust and the unrelated third party in 1998.
DEBT FINANCING. The following is a summary of the Company's debt financing in
tabular form as of March 31, 1998:
Type of Principal
Financing Amount Interest Rate Principal Terms Security
The First $5,450,000 Prime plus 2.5% Monthly payments First lien on
Credit Bank Loan per annum of interest only the Mesquite
until 18 months Property and
following closing the Company's
of the loan, at assets
which time all
principal and
accrued interest
is due (subject to
three-year
extension)
The Kelley $6,501,000 Greater of prime Monthly payments Second lien on
Loan plus 3% or 11% of interest only the Mesquite
net of unamortized per annum (payable Property and
original in cash the Company's
issue or shares of assets subject
discount Common Stock) to PMJ right
discount until August 15, to participate
1999, at which pari passu
time all with respect
principal and to payments
accrued interest received by
is due the Company or
proceeds from
the Mesquite
Property
pursuant to an
Intercreditor
Agreement
PMJ Debt $1,099,000 Greater of prime Monthly payments Third lien on
plus 3% or 11% of interest only the Mesquite
per annum until September Property
24, 1999, at subject to
which time all PMJ's right to
principal and participate
accrued interest pari passu
is due with the
Kelley Loan
with respect
to payments
received by
the Company or
proceeds from
the Mesquite
Property
pursuant to an
Intercreditor
Agreement
The North Las
Vegas Note $ 200,000 Non-interest
bearing September, 1998 Unsecured
LEASE FINANCING. Lease financing contracts, commitments and proposals, at April
15, 1998 follow:
Mikohn Lighting
and Sign lease,
highway sign $ 950,000 N/A Monthly payments UCC-1
of $12,500 for Equipment
56 months, security
plus $125,000 on interest
January 31, 2000;
purchase option
of $125,000 at
end of term.
IGT Lease, $1,028,000 N/A Monthly payments UCC-1
gaming devices of $29,782 for Equipment
(April 8, 1998) 36 months; purchase security
option of approx- interest
mately 20% at end
of term.
PDS Lease $1,417,000 N/A Monthly payments UCC-1
Proposal* of $41,598 for Furniture
(April 14, 1998) 36 months; purchase and equipment
option for FMV at security
end of term. Interest
Telerent, lease $1,168,000 N/A Monthly payments UCC-1
commitment letter of $33,904 for Furniture
(April 6, 1998) 36 months; then and equipment
$11,568 for 24 security
months; purchase interest
option at FMV at
end of term.
Various other $1,300,000 Various payments UCC-1
equipment financing generally over Equipment
agreements 36 months security
Or less interests
*Indicates non-binding proposals.
FIRST CREDIT BANK. In January, 1998 the Company has obtained a $5,000,000
construction loan to finance the development and construction of the Mesquite
Star (the "Secured Financing"). The Secured Financing consists of a $5,000,000
construction loan from First Credit Bank (the "First Credit Loan") secured by a
first deed of trust and UCC-1 fixture filings on the Mesquite Property. In
connection with the Secured Financing, the PMJ Debt and the Kelley Loan have
subordinated to the new first deed of trust on the Mesquite Property.
Under the terms of the First Credit Bank Construction Loan Agreement between
First Credit Bank and the Company (the "Bank Loan Agreement"), the First Credit
Loan is an 18-month construction loan in the principal amount of $5,000,000
bears interest at a fluctuating rate of interest per annum equal to the sum of
prime plus 2.5%. Pursuant to the First Credit Bank Loan Agreement, upon
maturity of the 18-month construction loan, the Company could request and obtain
a three-year extension of the First Credit Loan (the "Three-Year Loan") if
certain specified conditions are met, including: (i) the timely completion of
construction of the Mesquite Star project, (ii) the Company's full payment and
performance of the Company's loan obligations to First Credit Bank during the
18-month construction phase, and (iii) payment of a loan extension fee of
$50,000 (the "Loan Extension Fee"), plus additional costs and fees associated
with the closing of the Three-Year Loan.
<PAGE>
The Company paid a total of $232,000 in fees (collectively, the "Loan Fee")
consisting of a loan origination fee of $125,000, a fund control and inspection
fee of $25,000, plus $32,000 in costs and fees associated with the closing of
the First Credit Loan, and the Loan Extension Fee of $50,000. The Company has
also agreed to pay $75,000 to a third party at the closing of the First Credit
Loan, consisting of an initial $50,000 fee for arranging the First Credit Loan
and an additional $25,000 fee for assistance in the extension thereof. However,
the Company has advised such third party that it will be necessary for the third
party to obtain all necessary approvals relating to the payment of the fee from
the Nevada Commission before any fee will be paid. Under the First Credit
Conditional Loan Commitment, accrued and unpaid interest is payable monthly
during the 18-month loan period, with the outstanding principal balance of the
loan, plus accrued and unpaid interest and any other unpaid fees, due at the end
of the 18-month period (unless, as specified above, the First Credit Loan is
converted to the Three-Year Loan). If the Company qualifies for and obtains the
Three-Year Loan, then in addition to regular monthly payments of interest, the
Company would be required to make regular monthly payments of principal in the
amount of $30,000 each beginning 30 days after the extension of the First Credit
Loan, with all accrued and unpaid interest and principal plus any other unpaid
fees due upon maturity of the Three-Year Loan.
As of April 8, 1998, the Company had drawn approximately $2,966,000 from First
Credit Bank, pursuant to the loan agreement, to pay $207,000 in loan fees and
$2,759,000 in construction costs. The remaining sum, including the principal
increase from $5,000,000 to $5,450,000 approved by First Credit Bank, by letter
dated March 27, 1998, will be drawn, when needed, to pay Mesquite Star
development costs including incremental loan costs.
KELLEY LOAN
The Company and Dr. Kelley entered into a Convertible Loan Agreement, dated as
of August 14, 1995 (the "Loan Agreement"), pursuant to which Dr. Kelley agreed
to loan (the "First Kelley Loan") to the Company up to a maximum of $1,460,000
plus $43,800 as a commitment fee thereunder (for a total of $1,503,800) to
finance certain working capital requirements of the Company.
On or about September 15, 1995, Dr. Kelley and Dr. Tam, each as to an undivided
50% tenant in common interest purchased notes issued by the Company from
unrelated third parties (the "Notes") for the amount of principal and interest
due thereon in the amount of $2,412,631.
<PAGE>
Pursuant to the Amended and Restated Convertible Loan Agreement dated April 18,
1996 between the Company and Dr. Kelley (the "New Kelley Loan Agreement"), the
Company, Dr. Kelley and, pursuant to the Participation and Intercreditor
Agreement (as discussed below), Dr. Tam agreed (i) to increase the credit
available under the First Kelley Loan Agreement, and (ii) to consolidate the
obligations under the Notes and the First Kelley Loan into one loan (the "New
Kelley Loan") evidenced by a convertible promissory note (the "New Kelley
Note"). Under the New Kelley Loan Agreement, the terms of which superseded in
its entirety the First Kelley Loan Agreement, the New Kelley Note was in the
principal amount of $5,750,800.
Pursuant to the Participation and Intercreditor Agreement dated April 18, 1996
between Dr. Kelley and Dr. Tam ("Participation and Intercreditor Agreement"),
Dr. Tam agreed to participate with Dr. Kelley as a lender under the New Kelley
Loan Agreement. Under the Participation and Intercreditor Agreement, Dr. Kelley
and Dr. Tam agreed to each loan 50% of all loan proceeds, on the terms set forth
in the Kelley Loan Agreement and receive one-half of the repayments and benefits
thereof, including any warrants issued in connection therewith or shares
received upon conversion of the New Kelley Note. Subsequent to April 1996, Dr.
Kelley and Dr. Tam advanced in equal amounts an additional $500,000 to the
Company as additional loans secured by deeds of trust. In August 1997, the New
Kelley Loan and the subsequent advances (collectively, the "Kelley Debt") were
restructured. The Kelley Debt was extended and is now payable over an
approximate two-year period ending August 15, 1999 and the convertibility of the
New Kelley Note was eliminated. The New Kelley Loan is secured by a first deed
of trust and the Company's assets and the later advances by several subordinate
deeds of trust on the Company's property in Mesquite, Nevada. All of the Kelley
deeds of trust have been subordinated to the construction deed of trust in favor
of First Credit Bank. The extended Kelley Debt bears interest at the greater of
the prime rate of interest plus three percent or 11%, and is payable on a
monthly basis, interest only, until August 15, 1999, at which time all principal
ad accrued interest is due and payable. The Company has the option to make
interest payments on the Kelley Debt (in equal amounts to Drs. Kelley and Tam)
in the form of shares of Common Stock (to be valued at the average closing price
of the Common Stock on the NASDAQ SmallCap Market for the five business days
preceding the interest payment date) or cash subject to the following
restrictions: (a) only up to a cumulative $525,000 in interest may be paid
through the issuance of shares of Common Stock; and (b) the Company must pay
interest in cash and not in Common Stock to the extent the Company determines
that it has sufficient positive cash flow from operations in excess of its
working capital needs. Interest from September 24, 1997 through March 15, 1998
in the amount of $405,750.46 was paid in the form of 70,648 shares of Common
Stock issued to each of Drs. Tam and Kelley on March 31, 1998.
<PAGE>
The Kelley Debt which is owed equally to Drs. Kelley and Tam can be summarized
as follows: (i) $5,750,800 in principal amount secured by a deed of trust on the
Company's real property and its other assets; (ii) $300,000 in principal amount
secured by a deed of trust on the Company's real property; (iii) $250,000 in
principal amount secured by a deed of trust on the Company's real property; and
(iv) $25,000 in principal amount secured by a deed of trust on the Company's
real property. All accrued and unpaid interest on the Kelley Debt as of the
closing of the Company's IPO in the amount of $959,812 was added to principal
and bears interest at the stated rate. As of December 31, 1998, the principal
and accrued interest on the Kelley Debt was $6,742,000, net of unamortized
original issue discount.
On March 31, 1998, Drs. Kelley and Tam executed a financing commitment to lend
to the Company up to $1,000,000 on the terms set forth therein. The obligations
of Drs. Kelley and Tam under the commitment were conditioned upon the execution
of legal documentation satisfactory to the parties and their counsel. The loan
is to bear interest at the greater of Bank of Hawaii prime rate of interest plus
3% per annum or 12% per annum with a $10,000 commitment fee. The loan is to be
secured by a deed of trust encumbering the Company's property in Mesquite,
Nevada and governed by the terms of the New Kelley Loan Agreement. Advances can
be obtained for current working capital purposes upon 20 days advance notice no
sooner than June 1, 1998 and no later than March 26, 1999. A condition to any
advance is that the Company shall possess all gaming licenses required to fully
operate the Mesquite Star Hotel and Casino. The loan would be due and payable
one year from the initial draw date. As consideration for the loan commitment,
Drs. Kelley and Tam were issued warrants in the amount of 37,500 shares each to
purchase shares of Common Stock at an exercise price of $2.00 per share. In
addition, for each $100,000 principal amount advanced under the loan, Drs.
Kelley and Tam are to receive an additional 7,500 warrants each to purchase
shares of Common Stock at a purchase price of $2.00 per share. All warrants are
immediately exercisable for a term of five years and include a cashless exercise
features. The warrants are subject to certain registration rights.
PMJ DEBT
On January 14, 1991, PMJ Enterprises, Inc., a company whose common stock is
controlled by Patrick J. Shannon, a former director and shareholder of the
Company, purchased the Mesquite Property from Jim John Slevcove and
Mary Ann Slevcove, Trustees of The Slevcove Family Trust dated April 1, 1984 as
to an undivided 24-1/2% interest, Richard Sidney Bowlin and Marsha Lynn Bowlin,
Trustees of The Bowlin Family Trust dated March 15, 1985 as to an undivided
41.5% interest; William O. Kilmer, Jr. and Jake Scott as partial-successor in
interest to William O. Kilmer, Jr. as to an undivided 34% interest
(collectively, the "Bowlin Creditors"). Michael J. Signorelli, the Company's
Chief Executive Officer, was a minority stockholder of PMJ Enterprises, Inc.
until June 1, 1995.
<PAGE>
In connection with the purchase of the Mesquite Property, PMJ Enterprises, Inc.
executed a Note Secured by Deed of Trust, dated January 14, 1991 (the "Original
Bowlin Note") in favor of the Bowlin Creditors in the original principal amount
of $2,227,000. On April 20, 1992, PMJ Enterprises, Inc. executed a second
promissory note in favor of the Bowlin Creditors in the original principal
amount of $50,000 (the "Second Bowlin Note"), which was intended to supplement
the Original Bowlin Note and change the payment terms of the Original Bowlin
Note. The Original Bowlin Note and the Second Bowlin Note are referred to
collectively as the "Bowlin Secured Debt."
On December 31, 1993, PMJ Enterprises, Inc. assigned the Mesquite Property to
the Company and the Company assumed all of PMJ Enterprises, Inc.'s obligations
under the Bowlin Secured Debt. The Bowlin Creditors received warrants to
purchase an aggregate of 39,307 shares of Common Stock of the Company in
connection with a number of successive forbearance arrangements with the
Company.
Immediately following its incorporation, the Company delivered promissory notes
to PMJ Enterprises, Inc. in the amount of $2,758,000 in partial consideration
for the transfer of the Mesquite Property to the Company. Within 90 days
thereafter, PMJ Enterprises, Inc. was paid $2,200,000 in cash on these notes,
leaving a single note in the principal amount of $558,000 outstanding. On May
26, 1995, PMJ Enterprises, Inc. made a loan in an amount equal to $500,000 to
the Company. This total indebtedness in the principal amount of $1,058,000
constitutes the PMJ Debt.
In 1997, the PMJ Debt was restructured such that it is payable over a two-year
period following September 24, 1997. The PMJ Debt consists of two notes secured
by a single deed of trust which has a subordinate lien on the Mesquite Property
combined with a right to participate pari passu with the Kelley Loan with
respect to payments received by the Company or proceeds from the Mesquite
Property pursuant to an Intercreditor Agreement. Approximately $41,000 of
accrued interest was added to the principal amount of the note. The PMJ Debt
bears interest at the greater of prime rate of interest plus three percent or
11%, and is payable on a monthly basis, interest only, until the second
anniversary of the closing of the Offering, at which time all principal and
accrued interest is due and payable. The PMJ Debt has been restructured in
connection with the sale of 280,398 shares of Common Stock of the Company
previously held by PMJ Enterprises, Inc. to Drs. Richard Kelley and Richard Tam
at a purchase price of $1.68 per share.
OTHER FINANCING
The Company is arranging financing to fund the Mesquite Star furniture, fixtures
and equipment for guest room furnishings, kitchen equipment, computer systems,
gaming devices and associated equipment, and laundry equipment which
collectively have aggregate capital costs estimated at approximately $5,650,000.
In addition, the Company is leasing the Mikohn exterior free-standing highway
sign and electronic reader board for $950,000 in total payments, which includes
sign maintenance, finance charges, and the $125,000 end of term purchase option.
<PAGE>
As of April 14, 1998, Company management has executed a lease contract with a
capital cost of approximately $1,028,000; has executed other leases or
installment contracts with various slot machine, computer and telephone
equipment vendors covering capital costs of approximately $1,300,000; has
executed conditional lease commitments and proposals with a capital cost of
approximately $2,585,000 under which lease documents are currently being drafted
and vendor invoices are being submitted for processing; is negotiating financing
commitments for a capital cost of approximately $737,000, and has executed the
$950,000 Mikohn highway sign lease.
MIKOHN SIGN
In February 1998, the Company entered into a Lease Agreement with Casino
Excitement, Inc. (dba Mikohn Lighting & Sign), concerning the lease, ownership,
location, installation, operation and maintenance of a double-faced, 99 foot
high, pylon sign (the "Sign") at the Mesquite Property(the "Mikohn Agreement").
The Mikohn Agreement term is from July 1, 1998 through February 28, 2003 and
includes a monthly rental rate of $12,500 per month, with the first payment due
on November 1, 1998. In addition, the Company has agreed to pay an additional
$50,000 in April 1998 and an additional $125,000 prior to January 31, 2000. At
the end of the term of the Mikohn Agreement, the Company shall have the option
to purchase the sign for $125,000. In addition, the Company shall have the
option to purchase the sign for the net present value of the remaining lease
payments (including the end of term option amount of $125,000) discounted at
10%, plus an additional sum of $25,000, at any time during the term.
IGT. The Company has entered into a 36-month lease agreement with IGT, dated
April 8, 1998 concerning 159 IGT slot machines with a capital cost of
approximately $1,028,000 which commences ninety days following the commencement
of gaming operations. The lease requires monthly payments of $29,782 and
contains a purchase option of approximately 20% of the capital cost at the end
of the term.
PDS FINANCIAL CORPORATION. Under a lease proposal dated, April 14, 1998,
approximately $1,417,000 of capital costs is to be financed by PDS Financial
Corporation ("PDS") (the "PDS Financing"), for approximately $850,000 of
furniture, fixtures and equipment and approximately $567,000 for 122 gaming
devices from the PDS Slot Source inventory program. The noncancellable 36-month
lease is to start June 1, 1998. One payment of approximately $41,598 is due upon
execution of the lease, with the first monthly lease payment due July 1, 1998.
The lease is to include a purchase option at the fair market value of the assets
under lease to be determined at the end of the lease term.
TELERENT. On April 12, 1998, the Company executed a lease commitment with
Telerent covering a capital cost for furniture, carpets and equipment of
approximately $1,168,000 which will require monthly payments for the initial 36-
months of $33,903, then payments of $11,568 for the remaining 24 months. The
lease requires, among other things, a 1% commitment fee, and a security
interest, and a mortgagee's waiver, covering such furniture, carpet and
equipment.
<PAGE>
OTHER EQUIPMENT FINANCING. Other equipment financing executed as of the date of
this filing with various slot machine, computer and telephone and other
equipment vendors with an aggregate capital cost of approximately $1,300,000
requires various monthly payments over 12 to 48 months.
The Company believes that existing cash, the Secured Financing, the PDS
Financing and the additional financing required for the purchase of the highway
sign, electronic reader board and other miscellaneous equipment and furnishings
may be sufficient to satisfy its anticipated cash requirements in connection
with the construction and opening of the Mesquite Star. Following the opening
of the Mesquite Star, the Company believes that the Mesquite Star facilities
will begin to generate cash flow from operations. The Company's itemized
estimated costs for completion of the development and construction of the
Mesquite Star facilities, totaling $5,500,000 are based on AF Construction
Company, Inc.'s itemized estimate. See "BUSINESS - Completion of the Mesquite
Star." In the event (i) such sources are not sufficient to satisfy cash
requirements, including debt service, or (ii) any of such financing sources are
not obtained, the Company will be required to seek additional financing, and
there can be no assurance that such financing will be available upon terms
acceptable to the Company, or at all. In addition, to repay the PMJ Debt and
the Kelley Loan, the Company will be required to obtain funds from (i) the net
proceeds from exercise of Warrants; (ii) additional financing; (iii) positive
net operating revenues from the Mesquite Star; or (iv) the sale of additional
equity securities. See "EQUITY AND DEBT FINANCING"; and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -
Liquidity and Capital Resources." There can be no assurance that the Company
will achieve the matters discussed herein.
The Company may, when and if the opportunity arises, pursue the acquisition of
other gaming businesses. If such an opportunity arises, the Company may use a
portion of its working capital and/or the issuance of its debt or equity
securities for that purpose. There can be no assurance that such financing will
be available on acceptable terms, or at all. Except for the North Las Vegas
Option Agreement (See "North Las Vegas Option Agreement"), the Company has no
specific arrangements or understanding with respect to any such acquisition at
the present time, and is not presently involved in any firm negotiations or
discussions with respect to any such acquisition. Further, there is no
assurance that any further acquisition will be made, including, but not limited
to, any acquisition under the North Las Vegas Option Agreement. Although the
Company does not currently contemplate any acquisitions from affiliates other
than the North Las Vegas Option Agreement, it may in the future consider such
other acquisitions, which would be made only on terms no less favorable to the
Company than could be obtained from non-affiliates for comparable properties.
EMPLOYEES. As of April 8, 1998, the Company had approximately 25 employees. The
Company expects to employ approximately 350 employees for the Mesquite Star,
including managers, casino personnel, restaurant personnel, facilities
personnel, security and surveillance personnel, housekeeping personnel and
administrative personnel. The Company anticipates that it will occasionally
employ part-time workers as needed. None of the Company's employees are
represented by a labor union. Management considers its labor relations to be
good.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
The Company presently owns one parcel of real property, the Mesquite Property,
which consists of approximately 25.2 acres in Mesquite, Nevada. See
"DESCRIPTION OF BUSINESS - MESQUITE PROPERTY." The Company also holds a lease
from the State of Nevada (the "Nevada Lease") for property consisting of 1.1
acres. The Nevada Lease may be terminated at any time by the State of Nevada
upon 90 days' notice to the Company. The leased property is located east of the
Company's property on Sandhill Road and may be used solely for parking and
landscaping. The Company intends to use the leased property for valet parking
and landscaping. In addition, the Company has a NDOT right-of-way occupancy
permit dated May 23, 1995 which allows ingress and egress into and from the
Mesquite Property.
The Company also holds an option to purchase an indirect 20% ownership interest
in the North Las Vegas Property. See "DESCRIPTION OF BUSINESS - NORTH LAS VEGAS
PROPERTY."
ITEM 3. LEGAL PROCEEDINGS.
No material legal proceedings to which the Company is a party or to which the
property of the Company is subject are pending and no such proceedings are known
by the Company to be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable - None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth the high and low bid quotations for the Common
Stock as report on the NASDAQ Small Capitalization market for each calendar
quarter for the periods indicated.
1997: HIGH LOW
Fourth Quarter $4.84 $1.81
Third Quarter (September 19, 1997-September 30, 1997) $5.00 $4.00
As of April 8, 1998, there were 228 record holders of Common Stock.
The Company has never paid and has no present plans to pay any cash dividends on
its Common Stock. The Company currently intends to retain its earnings to
finance the growth and development of its business. Further, the Kelley Loan
Agreement prohibits the payment of dividends. If such prohibitions are removed
or modified in the future, the payment of any dividends will be at the
discretion of the Company's board of Directors and will depend upon, among other
tings, future earnings, operations, capital requirements, the general financial
condition of the Company and the general business conditions.
The Common Stock of the Company began trading on September 19, 1997 on the
NASDAQ Small Capitalization Market under the symbol "NVST."
Recent Sales of Unregistered Securities:
Between January 1, 1995 and December 31, 1997, the Company sold securities to a
limited number of persons, as described below, except for unexercised Stock
Options or Warrants granted by the Company. Except as indicated, there were no
underwriters involved in the transactions and there were no underwriting
discounts or commissions paid in connection therewith. The purchasers of
securities in each such transaction were all Accredited Investors, as defined in
Rule 501 promulgated under the Securities Act of 1933, as amended, and
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with the distribution thereof, and
appropriate legends were affixed to the certificates for the securities issued
in such transactions. Further, each purchaser represented that he was aware
that the shares were not registered under the Securities Act of 1933 as amended,
and cannot be reoffered or sold until they have been so registered or until the
availability of the exemption therefrom has been established to the satisfaction
of the Company. Accordingly, the Company believes that the transactions listed
in this section are exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended, and the regulations promulgated thereunder,
as private transactions which did not involve a public offering of securities.
All purchasers of securities in each such transaction had adequate access to
information about the Company.
Common Stock Sold.
1. Pursuant to a Settlement Agreement approved by the Company in 1995 and
entered into January 31, 1996, between the Company and American Capital
Investors Corporation ("American Capital"), and as compensation for American
Capital's consulting services to the Company, the Company issued 5,241 shares of
the Common Stock to American Capital.
2. On August 27, 1995, the Company granted to Michael J. Signorelli a right to
immediately purchase 4,193 shares of Common Stock at a purchase price of $2.38
per share. Mr. Signorelli purchased the 4,193 shares on August 27, 1995, for an
aggregate purchase price of $10,000.
<PAGE>
3. In February through April 1997, the Company consummated a bridge loan
financing pursuant to Section 4(2) of the Securities Act and Regulation D
promulgated thereunder which raised gross proceeds of approximately $1,050,000
(the "Bridge Loan"). The Bridge Loan was sold in 42 Units of $25,000 each.
Each Unit was comprised of a $25,000 senior promissory note and 3,318 shares of
Common Stock, for a total of 139,356 shares of Common Stock issued to the Bridge
Loan investors. The senior promissory notes bore interest at the rate of 8% per
annum, payable in full upon maturity. These notes were repaid in full on
September 24, 1997. The senior promissory notes were secured by a fifth and
sixth deed of trust on the Mesquite Property. H.J. Meyers & Co., Inc.
participated as the Company's placement agent in connection with the Bridge
Loan, and received a 10% commission in the approximate amount of $205,000, and a
3% non-accountable expense allowance in the approximate amount of $31,500.
4. In May 1997, the Company consummated a construction loan financing pursuant
to Section 4(2) of the Securities Act and Regulation D promulgated thereunder
which raised gross proceeds in the amount of $350,000 (the "Interim Construction
Loan"). The Interim Construction Loan bore interest at 8% per annum, payable in
full upon maturity. The Interim Construction Loan was repaid in full on
September 24, 1997. The Interim Construction Loan was secured by an assignment
of a mechanic's lien held by the general contractor with respect to the Mesquite
Star, A.F. Construction Company, Inc. The Construction Lender was also issued
46,452 shares of Common Stock. H.J. Meyers & Co., Inc. participated as the
Company's placement agent in connection with the Interim Construction Loan and
received a 10% commission in the amount of $35,000 and a 3% non-accountable
expense allowance in the amount of $10,500.
USE OF PROCEEDS FROM REGISTERED SECURITIES:
The following information is being provided in accordance with Rule 463 of the
Securities Act of 1933 (the "Securities Act") and Item 701(f) of Regulation S-K
regarding the Company's Registration Statement on Form SB-2 (Registration No.
33-518-LA), effective September 18, 1997 (the "Registration Statement").
1,725,000 Units were sold in the Offering at an aggregate offering price of
$9,487,500. None of the Units were sold subject to the Underwriter's Over-
Allotment Option which expired on November 26, 1997. Expenses incurred for the
Company's account in connection with the offering were as follows:
Underwriting discounts and commissions $ 853,875
Finders fee -0-
Underwriter expenses 284,625
Other expenses 610,352
$1,748,852
<PAGE>
The net offering proceeds to the Company, after deducting offering costs was
$7,738,648. From September 18, 1997, the effective date of the Registration
Statement, through March 31, 1998, the Company has used the net offering
proceeds as follows:
Building and facilities $3,064,444
Repayment of indebtedness 1,576,230
Legal and professional expenses 828,066
Other pre-opening expenses 1,351,882
$6,820,624
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
It should be noted that this document contains forward looking statements that
are subject to risks and uncertainties. Forward looking statements include
certain information relating to the Company's general business strategy,
expansion plans, new opportunities, projected operating performance and
liquidity, as well as information contained elsewhere in this Annual Report Form
10-KSB where statements involve the use of the words "believe", "expect",
"anticipate", "estimate" or expressions of similar import. For such statements,
the Company claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
The forward-looking statements in this document are subject to risks and
uncertainties that could cause the assumptions underlying such forward-looking
statements and the actual results to differ materially from those expressed or
implied by the statements. The most important factors that could prevent the
Company from achieving its goals and cause assumptions underlying the forward-
looking statements and the actual results of the Company to differ materially
from those expressed in or implied by those forward-looking statements include,
without limitation and in addition to those discussed in the various documents
filed by the Company with the Securities and Exchange Commission, the following:
(i) the highly competitive nature of the public gaming and entertainment market,
which includes the market for the small to medium size or niche hotel/casinos,
in which the Company plans to operate and the ability of the Company to
successfully compete in this market with other hotel/casino companies for the
most desirable hotel/casino customers and share of the geographical market; (ii)
the ability of the Company to successfully implement its expansion strategy;
(iii) the need to raise future working capital and the uncertainty of additional
funding (whether through financial markets, collaborative or other arrangements
with strategic partners, or from other sources); (iv) the speculative nature of
other gaming projects; (v)dependence on key personnel; and (vi) the Company's
ability to generate sufficient cash flows, operating profits, and other income
in order to fulfill its obligations for repayment of debt.
<PAGE>
OVERVIEW
NevStar Gaming & Entertainment Corporation is a development stage company,
incorporated on December 2, 1993, formed for the purpose of acquiring,
developing, constructing, owning and managing hotel/casino facilities. The
Company's strategy is to concentrate its efforts on "niche" markets such as
"local" or "neighborhood" casinos. The Company's hotel/casinos will be "theme"
based, which will attempt to distinguish the Company's properties from its
competitors.
The Company has substantially completed construction of the Mesquite Star,
located in Mesquite, Nevada, and intends to complete construction of the
hotel/casino in May, 1998. The Mesquite Star will consist of 210 hotel rooms,
including 13 suites, with a swimming pool and spa, and public area of
approximately 34,300 square feet, featuring approximately 12,000 square feet of
casino space initially containing 440 slot machines, 12 table games and Keno,
one specialty restaurant, one cocktail lounge, one coffee shop/buffet, a video
arcade and a gift shop.
The Company's only source of revenues since inception, December 2, 1993, has
been interest income. The Company has accumulated losses from operations of
approximately $8,531,000 from inception through December 31, 1997. For the
Company to commence business and begin generating operating revenues at the
Mesquite Star, receipt of necessary gaming licenses, securing of all additional
vendor and third party financing, and implementation of the Company's marketing
plans are necessary.
CURRENT STATUS OF CONSTRUCTION
As of March 31, 1998, the Mesquite Star Hotel and Casino property is estimated
to be approximately 80 to 85 percent complete. The scheduled construction
completion date by AF Construction, assuming no rain or other unforseen delays,
is May 7, 1998.
REGULATION AND LICENSING
The ownership and operation of casino gaming facilities in Nevada are subject
to: (i) the Nevada Gaming Control Act and the regulations promulgated thereunder
(collectively, the "Nevada Act"); and (ii) various local regulation. The
Company's gaming operations are subject to the licensing and regulatory control
of the Nevada Gaming Commission (the "Nevada Commission"), the Nevada State
Gaming Control Board (the "Nevada Board"), and the City of Mesquite, Nevada.
The Nevada Commission, the Nevada Board and the City of Mesquite, Nevada are
collectively referred to as the "Nevada Gaming Authorities."
As of the date of this filing, the Company has not obtained the license and
related approvals from the Nevada Commission to conduct gaming at the Mesquite
Star. The Company, its directors, officers and principal stockholders have
applied for the necessary licenses, approvals and findings of suitability to own
and operate the Mesquite Star. However, there can be no assurance that the
Company and such persons will be licensed, found suitable, or granted the other
approvals that are necessary to commence gaming operations.<PAGE>
PLAN OF OPERATION
Mesquite Star
January, 1998- December, 1998
The Company's plan of operations through the spring of 1998 will focus on the
Mesquite Star hotel-casino construction completion, installation of furnishings
and equipment, finalization of remaining financing needs related to such
completion, obtaining all necessary licensing, and opening for business to the
public. There can be no assurance that the Company's plan of operation and
opening will be implemented.
The Company has begun hiring senior management, including the Vice-President and
General Manager, the Director of Finance, Human Resources and other department
managers, and related support staff. Company personnel are developing and
drafting operating policies and procedures, employee guidelines and policies,
and finalizing operating, advertising and marketing plans for the initial year
of operation. The Company expects to implement its staffing and training plan in
the near future. When operational, the Mesquite Star is expected to employ
approximately 350 employees, including managers.
The Mesquite Star is expected to commence operations in May 1998. However, there
can be no assurance that the Company's plan of operation and opening of the
Mesquite Star will be implemented.
North Las Vegas Option
In September of 1997, the Company issued a $200,000 note payable, due March 15,
1998, which has been extended to September 15, 1998, which provides the Company
an option to purchase an 20 percent indirect interest in a 25-acre parcel of
unimproved real property in the city of North Las Vegas, Nevada. Upon payment of
this note, these funds are expected to be used for planning, engineering,
promotional expenses and design work with respect to this project and are non-
refundable and not applicable to the option purchase price, but are reimbursable
in connection with the development and financing of the project.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its capital requirements through the
sale of securities to private investors, the proceeds of secured loans and
through its Initial Public Offering. The Company is using the $7,739,000 of net
proceeds received from its Initial Public Offering, $5,000,000 of secured
financing and approximately $6,600,000 of equipment and sign financing to fund
construction, furnishing, signs and pre-opening costs and expenses of the
Mesquite Star Hotel and Casino.
<PAGE>
Subsequent to year end, the Company received a letter of commitment from First
Credit Bank increasing the $5,000,000 secured financing principal by $450,000 to
$5,450,000, which will be used by the Company for construction and about $25,000
in incremental loan costs. Subsequent to year end, on March 31, 1998, two
principal stockholders and creditors of the Company, have provided the Company
with a $1,000,000 letter of credit commitment letter, to be available for
working capital purposes once the Company is approved for licensing and
commences operations.
Subsequent to year end, the Company entered into a contract to sell a real
estate parcel for $450,000 located adjacent to the Mesquite Star. Escrow is
expected to close about May 15, 1998, at which time the Company expects to
receive approximately $425,000 of net proceeds.
Post offering construction expenses, including the approximately $8,000,000 to
AF construction, is estimated at approximately $8,500,000; the acquisition of
furniture, fixtures and equipment is estimated at approximately $5,650,000; the
Mikohn sign lease is $950,000 (which includes capital costs, financing costs,
maintenance costs and the $125,000 purchase option at the end of the lease
term), and preopening costs and expenses is estimated at approximately
$2,600,000 which includes pre-opening inventories and supplies, prepaid taxes
and licenses, pre-opening advertising costs, and a significant increase in
payroll expenses, as the Company expands to approximately 350 employees at the
Mesquite Star opening.
The Company believes that the proceeds received from its Initial Public
Offering, together with secured financing and equipment financing, and the
additional secured financing, and the working capital financing, subsequent to
December 31, 1997, that the Company has either executed letters of commitments
for or is in the process of negotiating such commitments, as of the date of this
filing, may be sufficient to fund the Construction and pre-opening costs of the
Mesquite Star and to provide working capital at the opening scheduled for the
spring of 1998.
Although the Company may have operating revenues from the Mesquite Star
following its opening, the Company will likely need to raise additional funds
from additional debt financing, the sale of additional equity securities, the
net proceeds of the exercise of the Warrants, or otherwise prior to September
1998 to continue to implement its business plan, including the North Las Vegas
Option. There can be no assurance the Company will be able to generate
sufficient funds from these or other sources.
Current Accounting Developments
The FASB has issued Statement No. 131, Disclosure about Segments of an
Enterprise and Related Information. Statement No. 131 modifies the disclosure
requirements for reportable segments and is effective for the Company's fiscal
year ending December 31, 1998. The Company has not determined the effect the
adoption of this statement would have on the Company's financial statements.
<PAGE>
Year 2000 Contingency Disclosed
The Company has conducted a review of its computer systems to identify systems
that could be affected by the year 2000 issue, and is developing a remediation
plan to resolve the issue.
The issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data and cause a system to
fail.
Based on the review of the computer systems, management does not believe the
cost of remediation will be material to the Company's financial position and
results of operations.
Change of Fiscal Year End
On April 1, 1998, the Company's Board of Directors determined to change the
Company's fiscal year end to June 30 of each year,beginning with June 30, 1998.
The Company will file a transition report on Form 10-KSB for the transition
period from January 1 through June 30, 1998.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Financial Statements:
Independent Auditor's Report F-1
Balance Sheets at December 31, 1997 and 1996 F-2
Statements of Operations for the Years ended
December 31, 1997 and December 31, 1996, and
the period from inception (December 2, 1993)
to December 31, 1997 F-3
Statements of Stockholders' Equity for
years ended December 31, 1996 and December 31, 1997,
and the period from inception (December 2, 1993)
to December 31, 1997 F-4
Statements of Cash Flows for the Years ended
December 31, 1997 and December 31, 1996, and the period
from inception (December 2, 1993) to December 31, 1997 F-5
Notes to financial statements F-7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
NevStar Gaming & Entertainment Corporation
Las Vegas, Nevada
We have audited the accompanying balance sheets of NevStar Gaming &
Entertainment Corporation, a development stage company,
as of December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for the years then ended and from the
date of inception to December 31, 1997. 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 financial statements referred to above present fairly,
in all material respects, the financial position of NevStar Gaming &
Entertainment Corporation as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for the years then ended and from the
date of inception to December 31, 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1, the Company is a
development stage enterprise and has not commenced operations. The Company's
success is substantially dependent on securing additional debt and/or equity
financing, obtaining the license and related approvals from the Nevada Gaming
Commission to conduct gaming and the successful completion of development and
construction of the casino hotel facility and the successful operation
thereof. This raises substantial doubt about the Company's ability to
continue as a going concern. Management plans in regards to these matters
are described in Note 12. The financial statements do not include any
adjustments that might result from the outcome from these uncertainties.
/s/McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
Las Vegas, Nevada
March 20, 1998, except for note 12
as to which the date is April 14, 1998
<PAGE>
NevStar Gaming & Entertainment Corporation
(A Development Stage Company)
Balance Sheets
December 31, 1997 and 1996
(Dollars in Thousands)
1997 1996
ASSETS
Cash and cash equivalents $ 4,133 $ 3
Land and construction in process(notes 2,4,7 and 12) 13,049 9,809
Prepaid expenses and other assets(notes 3 and 9) 431 229
$17,613 $10,041
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,883 $ 881
Accrued expenses 60 212
Accrued interest(note 4) 242 586
Notes payable(note 4) 7,800 7,373
Total liabilities 9,985 9,052
Stockholders' Equity(notes 4, 5 and 6):
Series A convertible non-voting preferred
stock, $.01 par value per share. Designated
1,500,000 shares. Issued and outstanding
77,500 and 1,483,344 shares at December 31,
1997 and 1996, respectively 1 15
Common stock, $.01 par value per share.
Designated 50,000,000 shares. Issued and
outstanding 3,428,433 and 533,543 shares
at December 31, 1997 and 1996, respectively 34 5
Additional paid-in capital 16,124 6,002
Deficit accumulated during the development-stage (8,531) (5,033)
Total stockholders' equity 7,628 989
Commitments and contingencies (notes 8 and 11).
$17,613 $10,041
See accompanying notes to financial statements.
NevStar Gaming & Entertainment Corporation
(A Development Stage Company)
Statements of Operations
Years Ended December 31, 1997 and 1996 and
Period From Inception (December 2, 1993)
to December 31, 1997
(Dollars in Thousands, Except Per Share Amounts)
Period from
Inception
(December 2,1993)
to
1997 1996 December 31,1997
Revenues $ - $ - $ -
Costs and expenses:
Compensation and related costs(note 6) 487 261 1,879
Professional fees 227 53 383
Outside consultants(note 6) 422 46 1,006
Extension fees on notes payable(note 4) 475 - 475
Offering costs(note 5) - 975 975
Rents(note 8) 51 89 206
Depreciation and amortization 255 274 704
Interest, net(notes 2,4,6 and 10) 1,332 664 2,142
Other 319 312 890
3,568 2,674 8,660
Interest income 70 4 129
3,498 2,670 8,531
Net loss $(3,498) $(2,670) $(8,531)
Loss per common share(note 5) $ (2.36) $ (5.00)
Weighted average number
of common shares outstanding(note 5) 1,480,794 533,543
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
NevStar Gaming & Entertainment Corporation
(A Development Stage Company)
Statements of Stockholders' Equity
Years Ended December 31, 1996 and 1997 and
Period From Inception (December 2, 1993)
to December 31, 1997
(Dollars in Thousands)
Additional
Preferred Stock Common Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C> <C>
Shares issued at inception:
For cash - $ - 235,849 $ 2 $ 20 $ - $ 22
For property(note 7) - - 288,260 3 24 - 27
Preferential dividend to
majority shareholder - - - - (588) - (588)
Proceeds from private
placement offering, net 1,483,344 15 - - 4,963 - 4,978
Issuance of common stock - - 4,193 - 10 - 10
Issuance of common stock,
stock warrants and
options - - 5,241 - 1,573 - 1,573
Net loss from inception
to December 31, 1995 - - - - - (2,363) (2,363)
Balance, December 31, 1995 1,483,344 15 533,543 5 6,002 (2,363) 3,659
Net loss - - - - - (2,670) (2,670)
Balance, December 31, 1996 1,483,344 15 533,543 5 6,002 (5,033) 989
Issuance of common stock
in connection with
bridge financing(note 10) - - 185,808 2 306 - 308
Proceeds from public
offering, net(note 5) 1,725,000 17 7,722 - 7,739
Conversion of preferred
stock(note 5) (1,405,844) (14) 984,082 10 4 - -
Notes payable and
accrued interest
forgiven by
shareholders(note 4) - - - - 724 - 724
Issuance of common stock
options and warrants
(notes 4 and 6) - - - - 1,366 - 1,366
Net loss - - - - - (3,498) (3,498)
Balance, December 31, 1997 77,500 $ 1 3,428,433 $ 34 $16,124 $(8,531) $ 7,628
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NevStar Gaming & Entertainment Corporation
(A Development Stage Company)
Statements of Cash Flows
Years Ended December 31, 1997 and 1996 and
Period From Inception (December 2, 1993)
to December 31, 1997
(Dollars in Thousands)
Period from
Inception
(December 2,1993)
to
1997 1996 December 31,1997
Cash flows from operating activities:
Net loss $(3,498) $(2,670) $(8,531)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 255 274 704
Accretion of discount on notes payable 420 97 662
Common stock options and
warrants expenses 413 - 1,744
Loss on investment - - 34
Extension fees on notes payable(note 4) 475 - 475
(Increase) decrease in prepaid
expenses and other assets (194) 78 (652)
Increase in accounts payable and
accrued expenses 585 1,085 1,983
Cash used in operating activities (1,544) (1,136) (3,581)
Cash flows from investing activities:
Hotel and casino construction costs (1,770) (1,295) (6,622)
Purchase of investment - - (34)
Cash used in investing activities (1,770) (1,295) (6,656)
See accompanying notes to financial statements.
NevStar Gaming & Entertainment Corporation
(A Development Stage Company)
Statements of Cash Flows (continued)
Years Ended December 31, 1997 and 1996 and
Period From Inception (December 2, 1993)
to December 31, 1997
(Dollars in Thousands)
Period from
Inception
(December 2,1993)
to
1997 1996 December 31,1997
Cash flows from financing activities:
Proceeds allocated to:
Warrants and original issue discount 308 - 551
Convertible notes and bridge financing 1,092 - 2,054
Issuance of notes payable 32 4,906 5,438
Proceeds from preferred stock offering - - 4,978
Principal repayments of notes payable (1,446) (2,427) (6,088)
Proceeds from issuance of
common stock(note 5) 7,739 - 7,771
Change in construction costs payable (281) (53) (334)
Cash provided by
financing activities 7,444 2,426 14,370
Increase (decrease) in cash
and cash equivalents 4,130 (5) 4,133
Cash and cash equivalents, beginning 3 8 -
Cash and cash equivalents, ending $ 4,133 $ 3 $ 4,133
Supplemental schedule of non-cash
investing and financing
activities (notes 4,6 and 7):
Issuance of note payable for an
option agreement $ 200 $ - $ 200
Value allocated to warrants granted 57 - 57
Accrued interest added to note
principal 1,001 - 1,001
Default interest on notes waived
by shareholders 274 - 274
Note payable forgiven by shareholders 450 - 450
Value of warrants recorded as
original issue discount 896 - 896
Extension and commitment fees
on notes payable 475 100 679
Construction costs incurred and payable 1,476 281 1,476
Acquisition of property:
Notes payable assumed - - 2,442
Issuance of notes payable - - 2,758
Issuance of common stock - - 28
Preferential dividend - - (588)
See accompanying notes to financial statements.<PAGE>
NevStar Gaming & Entertainment Corporation
(A Development Stage Company)
Notes to Financial Statements
Years Ended December 31, 1997 and 1996 and
Period From Inception (December 2, 1993)
to December 31, 1997
1. Nature of Business and Summary of Significant Accounting Policies
NevStar Gaming & Entertainment Corporation is a development stage company formed
in December 1993 to develop, construct and operate a hotel casino in Mesquite,
Nevada. The 210 room hotel casino, known as the Mesquite Star, which is
scheduled for completion in the spring of 1998 is expected to feature
approximately 34,000 square feet of public area including two restaurants, a
video arcade, a gift shop, and 12,000 square feet of gaming.
The Company is finalizing terms and documents related to certain financing
commitments, described more fully in note 12, which are necessary to complete
the furnishings and equipment of the Mesquite Star, prior to opening, and also
to provide the availability of additional working capital and/or interest
reserves when the property opens in 1998.
The ownership and operation of casino gaming facilities in Nevada are subject
to: (i) the Nevada Gaming Control Act and the regulations promulgated thereunder
(collectively, the "Nevada Act"); and (ii) various local regulation. The
Company's gaming operations are subject to the licensing and regulatory control
of the Nevada Gaming Commission (the "Nevada Commission"), the Nevada State
Gaming Control Board (the "Nevada Board"), and the City of Mesquite, Nevada.
The Nevada Commission, the Nevada Board and the City of Mesquite, Nevada are
collectively referred to as the "Nevada Gaming Authorities."
As of the date of this filing, the Company has not obtained the license and
related approvals from the Nevada Commission to conduct gaming at the Mesquite
Star. The Company, its directors, officers and principal stockholders have
applied for the necessary licenses, approvals and findings of suitability to own
and operate the Mesquite Star. However, there can be no assurance that the
Company and such persons will be licensed, found suitable, or granted the other
approvals that are necessary to commence gaming operations.
The Company's success is substantially dependent upon the factors mentioned
above, including the securing of debt financing, the successful completion of
development and construction of the casino hotel facility and the successful
operation thereof. In addition, continued operations are dependant on the
Company's management's ability to generate positive operating revenues, procure
additional financing and/or obtain additional equity capital from the exercise
of warrants or other methods.
A summary of the Company's significant accounting policies follow:
<PAGE>
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents represents amounts held in banks and money market
accounts and short-term cash investments such as certificates of deposit with
maturities of less than three months. The fair value of cash and cash
equivalents approximates cost. The Company maintains cash in bank accounts
which, at times, exceeds federally insured limits. The Company has experienced
no losses relating to these excess amounts of cash in banks.
Land and construction in process
Land and construction in process are recorded at cost.
Loan commitment and origination costs
Such costs are amortized over the term of the corresponding debt based on a
method that approximates the effective interest method.
Accounting for impairment of long-lived assets
Long-lived assets to be held and used by the Company and certain identifiable
intangibles are reviewed for impairment on an annual basis.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carry forwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax basis. Deferred tax
assets and liabilities are adjusted for the effect of changes in tax laws and
rates on the date of enactment.
<PAGE>
As of December 31, 1997, the Company has recorded approximately $1,744,000 of
compensation and consulting expenses for financial statement purposes,which are
not currently deductible for federal income tax purposes. Temporary differences
of approximately $3,315,000 resulted from expensing start-up and organization
costs for financial statement purposes which are capitalized for federal income
tax purposes. In addition, the Company has recorded approximately $2,362,000 of
expenses which are not deductible for federal income tax purposes. These
expenses relate primarily to offering costs on the withdrawn IPO, original issue
discount, and an extension fee and default interest on notes payable. At
December 31, 1997, the Company had approximately $1,131,000 of net operating
losses of which $563,000 and $568,000 expire in 2011 and 2012, respectively.
The deferred tax asset of $1,512,000 arising from temporary differences has been
offset by an equal valuation allowance. No tax expense (benefit) is recorded as
a result of increases in the valuation allowance.
Net loss per common share
Net loss per common share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding. The 72,810 incremental
common shares attributed to outstanding options and warrants, for 1997,as
computed under the treasury stock method, have not been included in the loss per
common share calculations. Pursuant to FASB Statement No.128 Earnings per share,
no adjustment is made for diluted earnings per share purposes since the Company
is reporting a net loss and common stock equivalents would result in anti-
dilutive per share amounts.
Fair value of financial instruments
The Financial Accounting Standards Board issued FASB Statement No.107,
Disclosures about Fair Value of Financial Instruments, which became effective
December 31,1995. This Statement requires the disclosure of fair values for all
financial instruments as defined in the Statement for which it is practicable to
estimate fair value.
The carrying amounts of financial instruments including cash and cash
equivalents, accounts payable and accrued expenses, approximate fair value
because of their short maturity.
Management has determined that it is not practicable to estimate the fair value
of the debt as of December 31, 1997 due to the related party nature of these
agreements.
<PAGE>
Accounting for stock-based compensation
Effective January 1, 1996, the Company adopted FASB Statement No.123, Accounting
for Stock-Based Compensation. Statement No. 123 establishes financial
accounting and reporting standards for stock-based compensation plans, such as
stock options and stock purchase plans. The Statement generally suggests but
does not require stock-based compensation arrangements for employees be
accounted for based on the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
Transactions occurring after December 15, 1995 with non-employees shall be
accounted for based on the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
Companies that do not elect to change their accounting for stock-based
compensation for employees are required to disclose the effect on net income and
earnings per share as if the provision of Statement No.123 were applied. The
Company has decided not to adopt the accounting provisions of this Statement for
employees' stock-based compensation arrangements.
Current accounting development
The FASB issued Statement No.131 Disclosures about Segments of an Enterprise and
Related Information. Statement No.131 modifies the disclosure requirements for
reportable segments and is effective for the Company's year ending after
December 31, 1997. The Company has not determined the effect of the adoption of
this Statement would have on the Company's financial statements.
Note 2. Land and Construction in Process
Development costs of The Mesquite Star Hotel and Casino (under construction and
scheduled to open in the spring of 1998 in Mesquite, Nevada) follow:
December 31,
1997 1996
(Dollars in Thousands)
Land $ 4,710 $ 4,710
Costs of construction (estimated additional
obligations under construction contracts
of $5.5 million at December 31, 1997) 8,339 5,099
$13,049 $ 9,809
<PAGE>
The land is a 25.2 acre site in Mesquite NV ("Mesquite land"). Costs of
construction includes architectural and engineering plans, permits and approval
costs, on and off-site infrastructure improvements, and grading and foundation
work at the site. Interest capitalized during the years ended December 31, 1997,
and 1996 and during the period from (inception)December 2, 1993 to December 31,
1997 was approximately $245,000, $266,000 and $1,495,000, respectively.
Construction of the facility was substantially curtailed from July, 1996 to
September 30, 1997. Interest costs charged to expense, instead of to
construction, was approximately $912,000 in 1997 and $567,000 in 1996.
Note 3. Prepaid Expenses and Other Assets
Prepaid expenses and other assets follow:
December 31,
1997 1996
(Dollars in thousands)
Option to develop land(note 9) $ 257 $ -
Loan commitment fees 46 -
Prepaid consulting fees 54 -
Deferred offering costs - 145
Other 74 84
$ 431 $ 229
Note 4. Notes Payable
Notes payable is summarized as follows:
December 31,
1997 1996
(Dollars in thousands)
Notes payable to shareholders of $7,285,000 net
of $784,000 unamortized original issue discount,
secured by deeds of trust on the Mesquite land.
Interest is payable monthly, either at the
greater of the Bank of Hawaii prime interest
rate (8.5 percent at December 31, 1997) plus
3 percent, or 11 percent. Principal
is due August, 1999.(A) $ 6,501 $ 6,301
<PAGE>
Note payable to a former shareholder, secured by
deed of trust on the Mesquite land. Interest
is payable monthly, either at the greater
of the Bank of Hawaii prime interest rate
(8.5 percent at December 31, 1997) plus
3 percent, or 11 percent. Principal is due
on the earlier of September, 1999; the date
of refinancing of any other lien secured by
the property which is junior in priority to
the lender's deed of trust; or the date that
the property is sold.(B) 1,099 1,058
Note payable to shareholder, unsecured and
non-interest bearing, due September, 1998.(C) 200 -
Other - 14
______ ______
$ 7,800 $ 7,373
(A) Following the closing of the IPO in September of 1997, the shareholders
agreed to extend the terms of the notes based on the terms described above.
In addition, accrued interest of approximately $960,000 was added to the
principal amount of the notes and approximately $274,000 of accrued default
interest was waived by the shareholders. The corresponding credit entry
for this transaction was to additional paid-in capital. In consideration
of this extension, the Company issued these shareholders warrants to
acquire a total of 400,000 shares of common stock at an exercise price of
$2.75 per share. Original issue discount in the amount of $896,000 was
recorded for the granting of these warrants and $112,000 of this discount
was expensed during the year ended December 31, 1997.
The loan agreement with the shareholders provides the Company with the option of
making up to $525,000 in interest payments due after the closing of the IPO in
the form of common stock. The Company must pay interest in cash and not in
common stock to the extent there is sufficient positive cash flows from
operations in excess of working capital needs. The shares of common stock
issued pursuant to this loan agreement shall be valued based on the average
closing price of the Company's common stock for five business days preceding the
interest payment due date. The Company intends to issue approximately 71,000
shares of common stock subsequent to year end for the related $241,000 of
accrued interest at December 31, 1997.
In addition the shareholders forgave $450,000 of a $475,000 note payable (which
was issued as a loan extension fee in 1997 by the Company and charged to expense
on the Statement of Operations) following the closing of the IPO. The
corresponding credit entry for this transaction was to additional paid-in
capital.
<PAGE>
(B) Following the closing of the IPO in September of 1997, this note was
extended under the terms described above. In addition, approximately $41,000 of
accrued interest was added to the principal amount of the note.
(C) In September of 1997, the Company issued a $200,000 note payable as
consideration for the option to purchase an indirect interest in a North Las
Vegas property. The corresponding debit entry for this transaction was to other
assets (See Notes 3 and 9).
Total interest expense paid or accrued to the shareholders was approximately
$965,000 and $710,000 for the years ended December 31, 1997 and 1996,
respectively. Total interest expense paid or accrued to the former shareholder
was approximately $122,000 and $97,000 for the years ended December 31, 1997 and
1996, respectively. All of the above debt at December 31, 1997 matures in 1999
except for the $200,000 note payable which matures in 1998.
Note 5. Capital Stock
Initial Public Offering
On September 24, 1997, the Company completed an initial public offering ("IPO")
of 1,725,000 units consisting of one share of Common Stock and two redeemable
Common Stock Purchase Warrants at $5.50 per unit. The registered holder of each
Warrant may purchase, at any time, over a five-year period commencing on
September 18, 1997, one share of the Company's Common Stock at a price of $5.50
per share. Commencing 90 days from September 18, 1997, the Warrants are subject
to redemption by the Company at $0.05 per Warrant on 30 days prior written
notice to the Warrant holders, if the closing price of the Common Stock as
reported in the NASDAQ Automated Quotation System Small Cap Market averages in
excess of $11.00 for a period of 20 consecutive trading days ending within 15
days prior to the notice of redemption. The net proceeds to the Company of
$7,739,000 were after underwriting discounts, commissions, and other costs
associated with the offering.
Offering costs of approximately $975,000 were expensed during the year ended
December 31, 1996 due to the withdrawal of an IPO during that period.
Authorized shares
The Company has authority to issue an aggregate of 100,000,000 shares, of which
50,000,000 shares have been designated as Common Stock with $0.01 par value and
1,500,000 shares have been designated as Series A Convertible Non-Voting
Preferred Stock with a $0.01 par value. The Company is not required to pay any
dividends on the preferred stock.
In June of 1997, the Company's shareholders approved a 1 for 9.54 reverse stock
split which became effective concurrently with the consummation of the IPO. All
share and per share amounts presented in these financial statements have been
adjusted for this reverse stock split.
<PAGE>
Preferred stock
In June of 1997, the Company delivered an exchange offer to the holders of the
preferred shares which gave them the right to convert each of the preferred
shares into common stock at a ratio of .7 shares of common stock for every 1
share of preferred stock. As of December 31, 1997, 1,405,844 preferred shares
have been exchanged for 984,082 shares of common stock and the capital stock
accounts have been adjusted accordingly.
Common stock
In May 1995, certain stockholders of the Company granted the Company an option
to purchase a total of 171,514 shares of the Company's common stock for a
purchase price of $2.38 per share. In December, 1995, the Company exercised
that option, but the transaction was never completed due to the withdrawal of a
planned IPO in 1996. As a result, the Company delivered "termination of option
agreements" to such stockholders and executed agreements had been received from
each of these stockholders at December 31, 1997.
Note 6. Stock Options, Warrants and Other Rights
Stock Options
The Company's shareholders approved the 1997 Stock Incentive Plan ("the Plan")
for a total of 1,266,994 shares in June of 1997. The outstanding options under
a former stock option plan have been incorporated into the 1997 Plan and no
further options will be made under it. The incorporated options will continue
to be governed by their existing terms. Stock options, stock appreciation
rights and other stock-based awards may be granted under this new Plan. Awards
under the Plan may be made to Company employees, directors, officers and
consultants of the Company. The Plan confers upon the Compensation Committee
(as Plan Administrator) the discretion to determine the number of the shares
applicable to each option, the term of each option, and the time or times during
its term when the option becomes exercisable. The Plan requires that the
exercise price for awards made subsequent to the closing of the IPO be at fair
market value at the date of grant. No option may be granted under the plan
after July, 2007.
<PAGE>
A summary of Plan activity under the current and former employees stock option
plans, for the years ended December 31, 1997 and 1996 follows:
1997 1996
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares
Outstanding at beginning of year 151,596 $ 8.59 151,596 $ 8.59
Granted 1,068,000 3.27 - -
Canceled or relinquished (151,596) (8.59) - -
Exercised - - - -
Outstanding at end of year 1,068,000 $ 3.27 151,596 $ 8.59
Awards exercisable at end of year - - 133,580 -
Available to grant, end of year 99,398 - 78,360 -
Weighted-average fair value of
awards granted during the year - $ 2.03 - $ 7.29
The following table presents additional information as it relates to the above
awards:
Weighted-
Average
Remaining
Contractual life
Number of Weighted- For awards out-
Awards Average Weighted- standing at
Granted in Exercise Average December 31,
Awards granted with exercise prices 1997 Price Fair Value 1997
Equal to market price when granted 33,000 $ 2.05 $0.36 9.75 years
Less than market price when
granted 1,025,000 3.28 2.10 9.50 years
Greater than market price when
granted 10,000 5.50 0.52 9.75 years
1,068,000 9.50 years
In July of 1997, options to purchase 151,596 shares of common stock granted
under the prior stock option plan were canceled and replaced by granting
1,025,000 options under the 1997 Plan with the modification of certain terms.
147,058 of these options vest upon opening of the Mesquite Star hotel and
Casino, 887,942 options vest over five years and the remaining 33,000 options
vest over three years. Additional compensation (and a corresponding credit
entry to additional paid-in capital) of approximately $495,000 will be recorded
as services are provided. Approximately $71,000 of expense was recorded during
the year ended December 31, 1997.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees
and related interpretations in accounting for its plan with regards to stock
awards granted to employees. Accordingly, compensation costs have been
recognized in accordance with this opinion and related interpretations. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant dates for awards under this plan consistent with the
method of Statement No. 123, the Company's net loss and net loss per common
share, for the years ended December 31, 1997 and 1996 would have increased as
reflected in the following proforma amounts:
December 31,
1997 1996
(Dollars in thousands
except per share amounts)
Net loss:
As reported $(3,498) $ (2,670)
Proforma (3,618) (2,698)
Net loss per common share:
As Reported $ (2.36) $ (5.00)
Proforma (2.44) (5.06)
The proforma compensation costs recognized for the fair value of the stock
options granted, which was estimated using the minimum-value method, including
risk-free interest rate of 6.5%, and estimated life of the options of 36 to 60
months and no dividends.
A summary of option activity with non-employees for the years ended December 31,
1997 and 1996 follows:
1997 1996
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
Outstanding at beginning of year 27,906 $ 3.60 27,906 $ 3.60
Granted 98,548 3.80 - -
Canceled or relinquished (26,858) (3.00) - -
Exercised - - - -
Outstanding at end of year 99,596 $ 4.00 27,906 $ 3.60
Awards exercisable at end of year 24,596 -
In July of 1997, 7,862 shares of common stock previously granted under the prior
stock option plan to a consultant were canceled and replaced by granting 75,000
options under the 1997 Plan with the modification of certain terms.
<PAGE>
Approximately $5,000 of consulting expense (and a corresponding entry to
additional paid-in capital) will be recorded as the services are provided. No
expense was recorded during the year ended December 31, 1997. These 75,000
common stock options have a weighted average price of $3.32 and a weighted
average remaining contractual life of 9.50 years. The other 23,548 common stock
options granted in 1997 were granted with an exercise price of $5.50 and have a
weighted average remaining contractual life of 4.75 years.
In addition, shareholders agreed to relinquish 17,948 shares of stock options
and all debt conversion rights in connection with the extension of the debt
following the closing of the IPO as discussed in Note 4.
Warrants
In connection with securing notes payable, the Company issued warrants to
purchase 26,205 shares of the Company's common stock at $9.25 per share in1995.
The Company allocated approximately $243,000 of the proceeds to the warrants and
recorded a corresponding original issue discount on the note. The proceeds
allocated to the warrants were determined based on the difference between the
purchase price and the estimated fair value of $18.51 for the common stock when
issued. During the year ended December 31, 1996, the remaining $97,000 of the
discount was recognized as expense. In addition, these warrants expired during
the year ended December 31, 1996.
In connection with the private placement of the Series A preferred stock in
1994, the Company issued warrants to purchase 15,547 shares of the Company's
common stock at $44.07 per share. The remaining contractual life for these
warrants is approximately 1 year as of December 31, 1997.
Warrants to purchase 13,102 and 26,205 shares of the Company's common stock at
$9.54 and $18.51 per share, respectively were issued in 1995 in connection with
a note payable which was later purchased by shareholders. The remaining
contractual life for these warrants is approximately 2.5 years as of December
31, 1997.
In addition to the 400,000 warrants granted in 1997 to shareholders in
consideration of the notes payable extension as discussed in Note 4, the Company
granted a shareholder warrants to purchase 79,839 shares of the Company's common
stock at an exercise price of $0.25 for various consulting services provided to
the Company. Approximately $342,000 of consulting expense (and a corresponding
credit entry to additional paid-in capital) was recorded during the year ended
December 31, 1997 relating to this transaction. Also, a shareholder was granted
warrants to purchase 20,000 shares of the Company's common stock at an exercise
price of $2.00 per share for assisting with the arrangement of the North Las
Vegas Option (See Notes 3 and 9). The Company recorded approximately $57,000 in
other assets (and a corresponding credit entry to additional paid-in capital) in
1997 relating to this transaction. The remaining contractual maturity for these
warrants is approximately 4.5 years as of December 31, 1997.
<PAGE>
In connection with the IPO that closed in 1997, the representative underwriter
was issued a warrant agreement entitling the underwriter to purchase 76,278
units, each comprised of one share of common stock and four common stock
purchase warrants. The exercise price of the units is $8.03 as is the exercise
price for the warrants included in the units. The remaining contractual
maturity for these units is approximately 3.5 years as of December 31, 1997.
A summary of all common shares under issued stock options and warrants, at
December 31, 1997 follows:
Number of common shares
Stock options 1,167,596
Warrants issued in connection
with IPO(note 5) 3,450,000
Warrants underlying underwriter's warrant 305,112
Shares underlying underwriter's warrant 76,278
Other warrants 554,693
Total 5,553,679
Note 7. Related Party Transactions
The Mesquite land was acquired from a company related through common ownership
on December 2, 1993 in exchange for 288,260 shares of common stock, assumption
of $2,442,000 of notes payable and the issuance of an additional note payable
for $2,758,000.
The historical cost of the land acquired from the related company was
approximately $4,639,000 which includes the original purchase price of the land
of approximately $3,083,000 plus improvements and capitalized costs of
approximately $1,556,000. The difference between the historical cost basis and
the cost to the Company to acquire the property of approximately $588,000 has
been treated as a preferential dividend. The land costs have been reduced by
this amount with a corresponding reduction to additional paid-in capital.
This same related party loaned the Company $500,000 in 1995 and the total notes
payable to this related party at December 31, 1997 is approximately $1,099,000
as reflected in Note 4. In July 1997, the makers of the other notes payable,
reflected in note 4, purchased 280,398 shares of common stock from this related
party at a purchase price of $1.68 and became shareholders of the Company.
<PAGE>
Note 8. Commitments and Contingent liabilities
Lease
The Company leases real property near the Mesquite Star Hotel and Casino, which
is under construction and scheduled to open in the spring of 1998, pursuant to a
noncancellable lease which expires in the year 2000. However, the lease may be
terminated by the lessor upon 90 days notice. The lease requires annual minimum
rents of $42,750. Future minimum rents totals approximately $99,000. The Company
has an option to renew the lease for three additional 5-year terms. Rent
expense, including other month-to-month leases was approximately $51,000 and
$89,000 in 1997 and 1996, respectively.
Employment agreements
The Company has employment agreements with two of its officers. The terms of the
agreements are for five years and contain minimum base level salary requirements
and include provisions where both officers upon termination are eligible for
severance pay and certain other benefits as outlined in the agreements.
In addition to the matters described above, the Company is involved in various
other claims and litigation arising in the normal course of business. While any
claim or litigation has an element of uncertainty, management believes that the
final outcome of these other matters will not have a material adverse effect
upon the Company's financial statements.
Note 9. North Las Vegas Option Agreement
The Company entered into a option agreement in April, 1996 that provides the
Company the option to purchase an indirect 20% ownership interest, (which is
estimated to be approximately $2,200,000) in a 25-acre parcel of unimproved real
property located in the city of North Las Vegas, Nevada. As discussed in Note
4, the Company issued a $200,000 note payable as consideration for the option.
The option expires in September of 1999. Upon payment of the note, the funds
are expected to be used for planning, engineering, promotional expenses and
design work with respect to the project and are non-refundable and not
applicable to the option purchase price, but are reimbursable in connection with
the development and financing of the project.
One of the Company's shareholders (Note 4) has an ownership interest in the
above property.
Note 10. 1997 Bridge Financing
On September 24, 1997, the Company repaid all the bridge financing plus the
accrued interest, and the entire discount on such financing was expensed in
1997.
<PAGE>
The Company obtained $1,000,000 of the bridge financing in February, 1997. The
Company also received $400,000 of additional bridge/construction financing in
April and May of 1997. For each $25,000 cash investment (a unit), an investor
received a $25,000 senior promissory note and 3,318 shares of common stock. The
notes required interest at 8% per annum, and were due in full on the earlier of
(1) two years from the date of the notes; (2) within ten business days following
the closing of the proposed IPO; or (3) financing of the Company totaling $4
million or more in gross proceeds. Notes totaling $1,050,000 were secured by
deeds of trust on the Mesquite property and $350,000 was secured by an
assignment of contract for a mechanics lien on the Mesquite property for
$400,000.
The Company allocated approximately $308,000 of the proceeds of the combined 56
units to equity which resulted in an original issue discount in the same amount
amortized over the expected life of the notes. The proceeds allocated to
equity were determined based on the estimated fair value of the common stock
when the units were issued.
Note 11. Year 2000
The Company has conducted a review of its computer systems to identify systems
that could be affected by the year 2000 issue, and is developing a remediation
plan to resolve the issue.
The issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data and cause a system to
fail.
Based on the review of the computer systems, management does not believe the
cost of remediation will be material to the Company's financial position and
results of operations.
Note 12. Subsequent Events and Financing
Sales of Land
The Company entered into an agreement subsequent to year end with an unrelated
party. The Company has agreed to sell a portion of the Mesquite land (27,100
square feet) for $450,000 and the closing is scheduled for May 15, 1998.
In addition to the $450,000 of consideration, the agreement provides for future
consideration of 5,199 square feet of land to be transferred to the Company.
The Company expects to record a gain as a result of this transaction.
Change of Fiscal Year End
On April 1, 1998, the Company's Board of Directors determined to change the
Company's fiscal year end to June 30 of each year, beginning with June 30,1998.
The Company will file a transition report on Form 10-KSB for the transition
period January 1, 1998 through June 30, 1998.
<PAGE>
Debt Financing
In January, 1998 the Company has obtained a $5,000,000 construction loan to
finance the development and construction of the Mesquite Star (the "Secured
Financing"). The Secured Financing consists of a $5,000,000 construction loan
from First Credit Bank (the "First Credit Loan") secured by a first deed of
trust and UCC-1 fixture filings on the Mesquite Property. In connection with
the Secured Financing, the PMJ Debt and the Kelley Loan have subordinated to the
new first deed of trust on the Mesquite Property.
Under the terms of the First Credit Bank Construction Loan Agreement between
First Credit Bank and the Company (the "Bank Loan Agreement"), the First Credit
Loan is an 18-month construction loan in the principal amount of $5,000,000
which bears interest at a fluctuating rate of interest per annum equal to the
sum of prime plus 2.5%. Pursuant to the First Credit Bank Loan Agreement, upon
maturity of the 18-month construction loan, the Company could request and obtain
a three-year extension of the First Credit Loan (the "Three-Year Loan") if
certain specified conditions are met, including: (i) the timely completion of
construction of the Mesquite Star project, (ii) the Company's full payment and
performance of the Company's loan obligations to First Credit Bank during the
18-month construction phase, and (iii) payment of a loan extension fee of
$50,000 (the "Loan Extension Fee"), plus additional costs and fees associated
with the closing of the Three-Year Loan.
The principal was increased from $5,000,000 to $5,450,000 by First Credit
Bank, by letter dated March 27, 1998.
<PAGE>
On March 31, 1998, Drs. Kelley and Tam executed a financing commitment to lend
to the Company up to $1,000,000 on the terms set forth therein. The obligations
of Drs. Kelley and Tam under the commitment were conditioned upon the execution
of legal documentation satisfactory to the parties and their counsel. The loan
is to bear interest at the greater of Bank of Hawaii prime rate of interest plus
3% per annum or 12% per annum with a $10,000 commitment fee. The loan is to be
secured by a deed of trust encumbering the Company's property in Mesquite,
Nevada and governed by the terms of the New Kelley Loan Agreement. Advances can
be obtained for current working capital purposes upon 20 days advance notice no
sooner than June 1, 1998 and no later than March 26, 1999. A condition to any
advance is that the Company shall possess all gaming licenses required to fully
operate the Mesquite Star Hotel and Casino. The loan would be due and payable
one year from the initial draw date. As consideration for the loan commitment,
Drs. Kelley and Tam were issued warrants in the amount of 37,500 shares each to
purchase shares of Common Stock at an exercise price of $2.00 per share. In
addition, for each $100,000 principal amount advanced under the loan, Drs.
Kelley and Tam are to receive an additional 7,500 warrants each to purchase
shares of Common Stock at a purchase price of $2.00 per share. All warrants are
immediately exercisable for a term of five years and include a cashless exercise
features. The warrants are subject to certain registration rights.
Lease and Other Financing
The Company is arranging financing to fund the Mesquite Star furniture, fixtures
and equipment for guest room furnishings, kitchen equipment, computer systems,
gaming devices and associated equipment, and laundry equipment which
collectively have aggregate capital costs estimated at approximately $5,650,000.
In addition, the Company is leasing the Mikohn exterior free-standing highway
sign and electronic reader board for $950,000 in total payments, which includes
sign maintenance, finance charges, and the $125,000 end of term purchase option.
As of April 14, 1998, Company management has executed a lease contract with a
capital cost of approximately $1,028,000; has executed other leases or
installment contracts with various slot machine, computer and telephone
equipment vendors covering capital costs of approximately $1,300,000; has
executed conditional lease commitments and proposals with a capital cost of
approximately $2,585,000 under which lease documents are currently being drafted
and vendor invoices are being submitted for processing; is negotiating financing
commitments for a capital cost of approximately $737,000, and has executed the
$950,000 Mikohn highway sign lease.
<PAGE>
MIKOHN SIGN
In February 1998, the Company entered into a Lease Agreement with Casino
Excitement, Inc. (dba Mikohn Lighting & Sign), concerning the lease, ownership,
location, installation, operation and maintenance of a double-faced, 99 foot
high, pylon sign (the "Sign") at the Mesquite Property(the "Mikohn Agreement").
The Mikohn Agreement term is from July 1, 1998 through February 28, 2003 and
includes a monthly rental rate of $12,500 per month, with the first payment due
on November 1, 1998. In addition, the Company has agreed to pay an additional
$50,000 in April 1998 and an additional $125,000 prior to January 31, 2000. At
the end of the term of the Mikohn Agreement, the Company shall have the option
to purchase the sign for $125,000. In addition, the Company shall have the
option to purchase the sign for the net present value of the remaining lease
payments (including the end of term option amount of $125,000) discounted at
10%, plus an additional sum of $25,000, at any time during the term.
IGT. The Company has entered into a 36-month lease agreement with IGT, dated
April 8, 1998 concerning 159 IGT slot machines with a capital cost of
approximately $1,028,000 which commences ninety days following the commencement
of gaming operations. The lease requires monthly payments of $29,782 and
contains a purchase option of approximately 20% of the capital cost at the end
of the term.
PDS FINANCIAL CORPORATION. Under a lease proposal dated, April 14, 1998,
approximately $1,417,000 of capital costs is to be financed by PDS Financial
Corporation ("PDS") (the "PDS Financing"), for approximately $850,000 of
furniture, fixtures and equipment and approximately $567,000 for 122 gaming
devices from the PDS Slot Source inventory program. The noncancellable 36-month
lease is to start June 1, 1998. One payment of approximately $41,598 is due upon
execution of the lease, with the first monthly lease payment due July 1, 1998.
The lease is to include a purchase option at the fair market value of the assets
under lease to be determined at the end of the lease term.
TELERENT. On April 12, 1998, the Company executed a lease commitment with
Telerent covering a capital cost for furniture, carpets and equipment of
approximately $1,168,000 which will require monthly payments for the initial 36-
months of $33,903, then payments of $11,568 for the remaining 24 months. The
lease requires, among other things, a 1% commitment fee, and a security
interest, and a mortgagee's waiver, covering such furniture, carpet and
equipment.
OTHER EQUIPMENT FINANCING. Other equipment financing executed as of the date of
this filing with various slot machine, computer and telephone and other
equipment vendors with an aggregate capital cost of approximately $1,300,000
requires various monthly payments over 12 to 48 months.
<PAGE>
The Company believes that existing cash, the Secured Financing, the PDS
Financing and the additional financing required for the purchase of the highway
sign, electronic reader board and other miscellaneous equipment and furnishings
may be sufficient to satisfy its anticipated cash requirements in connection
with the construction and opening of the Mesquite Star. Following the opening
of the Mesquite Star, the Company believes that the Mesquite Star facilities
will begin to generate cash flow from operations. The Company's itemized
estimated costs for completion of the development and construction of the
Mesquite Star facilities, totaling $5,500,000 are based on AF Construction
Company, Inc.'s itemized estimate. In the event (i) such sources are not
sufficient to satisfy cash requirements, including debt service, or (ii) any
of such financing sources are not obtained, the Company will be required to
seek additional financing, and there can be no assurance that such financing
will be available upon terms acceptable to the Company, or at all. In
addition, to repay the PMJ Debt and the Kelley Loan, the Company will be
required to obtain funds from (i) the net proceeds from exercise of Warrants;
(ii) additional financing; (iii) positive net operating revenues from the
Mesquite Star; or (iv) the sale of additional equity securities.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
DIRECTORS AND EXECUTIVE OFFICERS. The current directors and executive officers
of the Company and their ages are as follows:
Name Age Position
Michael J. Signorelli 52 Chairman, Chief Executive Officer, Secretary and
Director
Jeffrey L. Gilbert 51 President, Chief Operating Officer, Treasurer and
Director
Dr. Richard Tam 81 Director
James D. Meehan 46 Director
Michael J. Signorelli. Mr. Signorelli is one of the founders of the Company.
He has been a director and chief executive officer of the Company since its
inception, Chairman since April 1997 and Secretary since August 1995. He was
President of the Company from its inception in 1993 until April 1997. Since
December 1993, Mr. Signorelli has devoted substantially all of his business time
and attention to the Company. As Chief Executive Officer, Mr. Signorelli is
responsible for the daily operations associated with the development and
construction of the Mesquite Star. From 1990 through 1993, Mr. Signorelli was
also the Executive Vice President of PMJ Enterprises, Inc. As such Executive
Vice President, Mr. Signorelli was responsible for the daily operations
associated with the development of the Mesquite Property, which included
obtaining the necessary entitlements, permits, approvals and licenses from the
City of Mesquite, assisting in the development of architectural and landscaping
plans for the hotel/casino, and locating long-term and interim financing sources
for the initial development costs associated with the hotel/casino. From 1989
through 1990, he was Vice President of Walter Development Corp. in Las Vegas,
Nevada. In this position, he was responsible for directing all Nevada
operations of Walter Development Corp., which included the development,
construction, financing and administration of the Paradise Bay, a 1,000-room
hotel/casino in Laughlin, Nevada. During the construction of the Paradise Bay,
Mr. Signorelli left Walter Development Corp. to join PMJ Enterprises, Inc. with
Mr. Patrick Shannon. Due to the financial insolvency of Walter Development
Corp., the Paradise Bay was never fully developed and did not open. Prior to
his employment with Walter Development Corp., Mr. Signorelli was Director of
Project Development for Lincoln Management, a company involved in the management
of hotel/casino properties located in Reno and Las Vegas, Nevada, including
Fitzgerald's Hotel & Casino in Las Vegas, Nevada. Mr. Signorelli attended the
University of Rhode Island where he received his B.S. degree in Business
<PAGE>
Administration with an emphasis in accounting and economics in 1968. He
received his M.S. degree in Psychological Research from the University of Nevada
in 1973; and his Ed.D. degree from the University of Nevada in 1978. Mr.
Signorelli's term as a director expires at the Company's 2000 Annual Meeting of
Stockholders.
Jeffrey L. Gilbert. Mr. Gilbert has served as a director of the Company since
October 1, 1997 and as President and Chief Operating Officer of the Company
since April 1997. He served as Executive Vice President and Chief Operating
Officer from January 2, 1996 through April 1997. From March 1990 through April
1995, Mr. Gilbert was Executive Vice President and Chief Operating Officer of
Jackpot Enterprises, Inc. ("Jackpot"), a New York Stock Exchange company, which
operated four casinos and approximately 4,000 gaming machines at approximately
500 locations. While employed with Jackpot, Mr. Gilbert was responsible for
various aspects of administration and management, as well the operations of the
casinos and gaming route. Mr. Gilbert also served as a member of Jackpot's
regulatory compliance committee. Mr. Gilbert ceased his employment with Jackpot
in April 1995; however, he continued to be paid under his employment agreement
through June 1995. From August 1995 to January 1, 1996, Mr. Gilbert served as a
consultant for the Company and other businesses and he pursued his own business
interests. Mr. Gilbert became an employee of the Company on January 2, 1996.
For seven years prior to joining Jackpot, Mr. Gilbert held various positions
with Bally Manufacturing Corporation, including Vice President and General
Manager of Bally Gaming's Las Vegas operations. Mr. Gilbert has been licensed
by the Nevada Commission as an equity owner, officer, director, and key
employee; by Mississippi's Gaming Commission as an officer, director, and
managing board member; and by the South Dakota Commission on Gaming as an owner,
operator, and director.
Mr. Gilbert is currently involved in the following gaming related activities:
(i) serving as an officer, director and shareholder of Lotsa Slots, Inc., a
Nevada corporation, whose primary business is a gaming route operator and gaming
rights holder at restricted and non-restricted gaming locations in Nevada; (ii)
serving as an officer, director and shareholder of Paradise Gaming Company, a
Nevada corporation, which holds the rights to operate the Metropolitan Casino in
Clark County, Nevada (although Mr. Gilbert is negotiating to sell his entire
interest therein); (iii) serving as an officer, director and shareholder of
Preferred Gaming Entertainment, a Nevada corporation, involved in the
development of two small non-restricted casino operations in Nye County, Nevada;
(iv) serving as an officer, director and shareholder of Paradise Distributing
Company, a licensed distributor of gaming devices in Nevada; (v) serving as a
member of the Board of Directors of Universal Distributing of Nevada, Inc., a
licensed manufacturer and distributor of gaming devices in Nevada, and other
U.S. and foreign jurisdictions, and serving as a consultant to Universal's
domestic and foreign operations; (vi) serving as an advisory member of the Board
of Directors of Spin Tech Gaming Technologies, a publicly-traded company which
markets proprietary gaming technology; and (vii) serving as a member of the
Board of Directors of Avi Casino Enterprise, Inc., a wholly owned subsidiary of
the Fort Mohave Indian Tribe of Needles, California, which operates the Avi
Hotel & Casino in Laughlin, Nevada. Mr. Gilbert's term as a director expires at
the Company's 1999 Annual Meeting of Stockholders.
<PAGE>
Each of Messrs. Signorelli and Gilbert devote substantially all of his business
time, attention, and energy to his duties to the Company as set forth in his
Employment Agreement, although Mr. Gilbert is involved in the enterprises set
forth in the preceding paragraph. See "MANAGEMENT - Employment Agreements."
Dr. Richard Tam. Dr. Tam has served as a director since October 1, 1997. Dr.
Tam received his Bachelor of Arts in Civil Engineering from Stanford University
and his Masters in Business Administration from Columbia University. In 1995,
Dr. Tam received an honorary Doctor of Laws degree from the University of
Nevada, Las Vegas. Dr. Tam is currently active as a private investor and real
estate investor and developer. Dr. Tam also operates and manages his own
thoroughbred breeding and racing business. Dr. Tam is also a principal in
Desert Mesa Land Partners, a Nevada limited partnership which has granted the
Company an option to purchase a 20% indirect ownership interest in a casino site
in North Las Vegas, Nevada. See "MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - North Las Vegas Option
Agreement." Dr. Tam's term as a director expires at the Company's 1999 Annual
Meeting of Stockholders.
James D. Meehan. Mr. Meehan has served as a director since October 1, 1997.
Since 1983, Mr. Meehan has served as a partner in CM Properties, Inc., a real
estate investment business, with interests in office, retail, single-family and
multi-family housing located in Santa Ana, California. Mr. Meehan was
previously a partner in both Garrett Development, Inc. and NU West R.E.I., which
were both commercial real estate development entities. From 1978 to 1980, Mr.
Meehan was engaged as an investment banker for Warberg-Parribas-Becker, dealing
in corporate and government notes, bonds and commercial paper. Mr. Meehan
received a BA in the honors program at the undergraduate school of Letters Arts
and Sciences from the University of Southern California in 1975. Mr. Meehan
received his MBA in finance from the graduate school of Business Administration
of the University of Southern California. Mr. Meehan's term as a director
expires at the Company's 1998 Annual Meeting of Stockholders.
The Company's Articles of Incorporation provide for a classified or "staggered"
Board of Directors comprised of three classes of directors elected for terms
expiring at the 1998, 1999 and 2000 Annual Meetings of Stockholders.
Thereafter, each class is elected for a term of three years. By reason of the
classified Board of Directors, one class of the Board comes up for re-election
each year. Any further amendment to the Company's Articles of Incorporation
affecting the classified Board may only be adopted upon the affirmative vote of
not less than two-thirds of the issued and outstanding shares entitled to vote
thereon.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of the
Exchange Act requires the Company's officers and directors, and persons who own
more than 10% of a registered class of the Company's equity securities to file
reports of ownership and changes in ownership with the SEC and NASDAQ. These
persons are required by regulation of the SEC to furnish the Company with copies
of all Section 16(a) forms they file.
<PAGE>
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that during 1997, the Company's
officers, directors and greater than 10% beneficial owners complied with all
applicable Section 16(a) filing requirements.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid by the Company during the
fiscal years ended December 31, 1995, 1996 and 1997 to the Company's executive
officers.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Name and
Principal Other Annual
Position Year Salary ($) Bonus ($) Compensation ($)1
Michael J. Signorelli 1997 $245,875 -0- -0-
(Chairman, Chief Executive 1996 $120,000 -0- $67,600
Officer and Secretary) 1995 $120,000 -0- -0-
Jeffrey L. Gilbert 1997 $222,999 -0- -0-
(President, Chief Operating 1996 $120,000 -0- -0-
Officer and Treasurer)
LONG TERM COMPENSATION
Name and Restricted Securities All
Principal Stock Underlying LTIP Other
Position Year Awards Options/SARs Payouts Compensation
Michael J. Signorelli 1997 -0- 775,000 -0- -0-
(Chairman, Chief Executive 1996 -0- -0- -0- -0-
Officer and Secretary) 1995 $67,600 125,390 -0- -0-
Jeffrey L. Gilbert 1997 -0- 250,000 -0- -0-
(President, Chief Operating 1996 -0- -0- -0- -0-
Officer and Treasurer)
1 See Footnote (3). Management believes that the value of non-cash benefits and
compensation distribution to executive officers of the Company individually or
as a group during each of the years 1995, 1996 and 1997 did not exceed the
lesser of $50,000 or 10% of such officer's individual cash compensation. This
table also does not include repayment of certain advances made to the Company by
both Mr. Signorelli and certain members of his family.
<PAGE>
2 Pursuant to a Restricted Stock Purchase Agreement dated August 27, 1995, Mr.
Signorelli was granted a right to immediately purchase 4,193 shares of
restricted Common Stock (the "Restricted Stock") at a purchase price of $2.39
per share. Mr. Signorelli purchased the 4,193 shares for a $10,000 promissory
note on August 27, 1995. The Company believes that for purposes of recording
compensation in accordance with APB No. 25, the per share fair market value of
the Company's Common Stock on August 27, 1995 was equal to $18.51. Therefore,
the difference between the aggregate fair market value on the date of grant and
the purchase price of the Restricted Stock is includable in both Other Annual
Compensation and Restricted Stock Awards of this table with respect to the
Restricted Stock.
3 Mr. Signorelli was granted certain stock options in 1995, which are included
in this table. In July 1997, these options were canceled and replaced by the
grant of options to purchase (i) 117,647 shares of Common Stock for $2.00 per
share and (ii) 657,353 shares of Common Stock for $3.50 per share. See "Stock
Option Plan" and "Outstanding Stock Options and Restricted Stock."
4 Mr. Gilbert was granted options to purchase 26,205 shares of Common Stock in
1995 prior to his becoming an execute officer of the Company. In July 1997,
these options were canceled and replaced by the grant of options to purchase (i)
29,411 shares of Common Stock for $2.00 per share, and (ii) 220,589 shares of
Common Stock for $3.50 per share. See "Stock Option Plan" and "Outstanding
Stock Options and Restricted Stock."
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1997
(Individual Grants)
Name Number of Percent of total
securities granted to Market
underlying employees Price
options during Exercise Expiration on date
granted 1997 Price Date of grant
Michael J. Signorelli 775,000 73% 117,647
at $2.00;
657,353
at $3.50 June 30,
2000 $4.50
Jeffrey L. Gilbert 250,000 23% 29,411 at
at $2.00;
220,589
at $3.50 June 30,
2000 $4.50
<PAGE>
EMPLOYMENT AGREEMENTS.
Signorelli Employment Agreement.
The Company and Mr. Signorelli entered into an Employment Agreement (the
"Signorelli Employment Agreement"), dated effective January 2, 1996 (the
"Effective Date"), as amended on June 30, 1997, pursuant to which Mr. Signorelli
serves as the Chief Executive Officer of the Company. The term of Mr.
Signorelli's employment under the Signorelli Employment Agreement commenced on
the Effective Date and will continue until September 23, 2002 (the "Termination
Date"), unless earlier terminated in accordance with the terms of the Signorelli
Employment Agreement; subject to automatic one-year extensions unless written
notice of either party's intention not to extend has been given to the other
party at least six months prior to the expiration of the then-effective term
(the "Employment Term").
Pursuant to the Employment Agreement, the Company has agreed to pay Mr.
Signorelli a base salary at the minimum annual rate of $120,000, which minimum
annual rate increased to $200,000 on the closing of the Company's IPO and will
increase to $240,000 on the date when the Mesquite Star opens for business. The
agreement also required that, upon the closing of the Company's IPO, the Company
paid to Mr. Signorelli $75,000 as reimbursement of expenses advanced by Mr.
Signorelli in connection with the conception and development of the Mesquite
Star prior to January 2, 1996. Mr. Signorelli's base salary may be increased
(but not decreased) by the Board of Directors based upon performance review.
Following commencement of operations at the Mesquite Star, Mr. Signorelli is
also entitled to participate in the Company's Executive Employee Bonus Plan
described below. Mr. Signorelli may also receive an additional discretionary
bonus based on criteria established by the Board of Directors. Mr. Signorelli
will be entitled to participate in all employee pension and welfare benefit
plans and programs made available to the Company's senior level executives. Mr.
Signorelli will also be entitled to reimbursement of expenses, car allowance,
vacation, holidays and other perquisites in accordance with the Company's normal
personnel policies for senior level executives of the Company, including,
without limitation, complementary rooms at the Mesquite Star. Mr. Signorelli is
also permitted to continue to participate in PMJ Enterprises, Inc., which owns
approximately 1.1 acres of land contiguous to the Mesquite Property, subject to
any business opportunity with respect thereto being offered to and rejected by
the Company. Upon termination of the Signorelli Employment Agreement for any
reason, the Signorelli Employment Agreement requires the Company to continue to
provide health insurance coverage to Mr. Signorelli, at Mr. Signorelli's
expense, for 24 months following the termination date.
<PAGE>
Payments Upon Termination of Employment.
a. Death or Disability. Upon death or disability, Mr. Signorelli will be
entitled to his accrued but unpaid base salary and bonus, continued applicable
Company benefits for a one-year period and the right to exercise any vested
stock options for a one-year period after termination. In addition, the
Signorelli Employment Agreement requires that the Company acquire and maintain a
policy of life insurance in the face amount equal to 12 months' base salary
(determined as if the Mesquite Star were open for business) covering the life of
Mr. Signorelli.
b. Termination for Cause. If Mr. Signorelli is terminated "for cause," as
defined in the Signorelli Employment Agreement, he is entitled to his unpaid
base salary through the expiration of a 30-day notice period, but would not be
entitled to any further payments.
c. Termination for Nonsuitability. Upon termination of Mr. Signorelli's
employment for failure to meet the licensing requirements or finding of
suitability as set forth in Nevada's gaming law or any other applicable
licensing laws, and, contingent upon Mr. Signorelli's and the Company's signing
a mutual written general release, Mr. Signorelli will be paid his base salary
through the termination date, and an amount equal to 25 months of base salary,
determined at the annual rate of $200,000.
d. No Termination "Without Cause." Until the Mesquite Star is open and
operating, the Company cannot dismiss or terminate Mr. Signorelli for any reason
other than as a result of death or disability, for cause, or as a result of a
failure to satisfy licensing requirements. After the Mesquite Star is open and
operating, Mr. Signorelli's employment with the Company may be terminated
without cause upon 60 days' prior written notice. Upon termination of Mr.
Signorelli's employment without cause, and contingent upon Mr. Signorelli's
signing a release, Mr. Signorelli is entitled to receive as liquidated damages
(i) his base salary through the termination date, (ii) any bonus, and all other
benefits and amounts to which Mr. Signorelli is entitled, or would be entitled
but for the acceleration of the termination date, through the balance of his
employment term, and (iii) the immediate vesting of Mr. Signorelli's stock
options as of the termination date.
e. Termination of Mr. Signorelli for Good Reason. Upon termination of Mr.
Signorelli's employment for "good reason" (as defined in the Signorelli
Employment Agreement) and, contingent upon the Company's and Mr. Signorelli's
signing a release, Mr. Signorelli would be entitled to the following: (i) his
base salary through the termination date, (ii) an additional amount equal to 12
months of base salary, (iii) a pro rata portion of any bonus to which Mr.
Signorelli would otherwise be entitled for the year in which such termination
occurs, (iv) all other benefits and amounts to which Mr. Signorelli is entitled
or would be entitled for six months, and (v) the immediate vesting of all of Mr.
Signorelli's stock options. The definition of "good reason" includes Mr.
Signorelli's failure to be elected to serve on or removal from the Board for any
reason other than death or disability.
<PAGE>
f. Termination Upon Change of Control. Upon termination of Mr. Signorelli's
employment upon a change in control of the Company, and contingent upon Mr.
Signorelli's and the Company's signing a release, Mr. Signorelli is entitled to
receive (i) all benefits which would be due to him under clauses (i) through
(iv) of paragraph e. above, or the amounts specified in clauses (i) and (ii) of
paragraph d. above, whichever is greater, (ii) the immediate vesting of all
stock options, and (iii) any amount of Mr. Signorelli's base salary accrued and
unpaid through the termination date and an additional amount equal to Mr.
Signorelli's base salary in lieu of unused vacation pay.
Gilbert Employment Agreement.
In General. The Company and Mr. Gilbert entered into an Employment Agreement
(the "Gilbert Employment Agreement") effective as of January 2, 1996, as amended
pursuant to which Mr. Gilbert agreed to become the President and Chief Operating
Officer of the Company and initial General Manager of the Mesquite Star. The
term of Mr. Gilbert's employment under the Gilbert Employment Agreement will
continue until September 23, 2002 and will be automatically extended without
further action of either party for additional one-year periods, unless written
notice of termination is given at least six months prior to the expiration of
the then-effective term.
The Gilbert Employment Agreement provides that Mr. Gilbert be a nominee for the
Company's Board. Mr. Gilbert is required to meet the licensing requirements or
finding of suitability as set forth in Nevada's gaming law and all other
applicable licensing laws. The Company has agreed to pay Mr. Gilbert a base
salary as follows: (i) for the first 12 months of the Gilbert Employment
Agreement at the annual rate of $120,000, which annual rate increased to
$150,000 upon the closing of the IPO, (ii) for the second 12 months of the
Gilbert Employment Agreement at the annual rate of $175,000, and (iii) for the
remaining term of the Gilbert Employment Agreement, at the annual rate of
$200,000. In January 1998, Mr. Gilbert has agreed to waive the salary increase
due to him for the second 12 months (January - December 1998) concurrently, the
Company issued him a ten year option to purchase 15,000 shares of Common Stock,
at an exercise price of $2.19. Mr. Gilbert's base salary may be increased (but
not decreased) by the Board of Directors based upon performance review.
Following commencement of operations at the Mesquite Star, Mr. Gilbert is also
entitled to participate in the Executive Employee Bonus Plan as describedbelow.
See "Executive Employee Bonus Plan." Mr. Gilbert's annual compensation under
the Plan is not permitted to be less than one-half percent of the Company's
EBITDA. Mr. Gilbert may also receive an additional discretionary bonus based on
criteria established by the Board of Directors. Mr. Gilbert will be entitled to
participate in all employee pension and welfare benefit plans and programs made
available to the Company's senior level executives. Mr. Gilbert will also be
entitled to reimbursement of expenses, car allowance, vacation, holidays and
other perquisites in accordance with the Company's normal personnel policies for
senior level executives of the Company, including, without limitation,
complementary rooms at the Mesquite Star. Mr. Gilbert is also permitted to
continue to participate in activities as an officer and director of, or a
consultant to, certain gaming and real estate entities, so long as they do not
interfere with the performance of Mr. Gilbert's duties. As of the present
<PAGE>
time, Mr. Gilbert is involved in a number of gaming related activities. See
"MANAGEMENT - Directors and Executive Officers."
Payments Upon Termination of Employment.
a. Death or Disability. Upon death or disability, Mr. Gilbert will be entitled
to accrued but unpaid base salary and bonus, continued applicable Company
benefits for a one-year period and the right to exercise any vested stock
options for a one year period after termination.
b. Termination for Cause. If Mr. Gilbert is terminated "for cause," as defined
in the Gilbert Employment Agreement, he is entitled to his unpaid base salary
through the expiration of a 30-day notice period, but would not be entitled to
any further payments.
c. Termination for Nonsuitability. Upon termination of Mr. Gilbert's
employment for failure to meet the licensing requirements or finding of
suitability as set forth in Nevada's gaming law or any other applicable
licensing laws, and, contingent upon Mr. Gilbert's and the Company's signing a
release, Mr. Gilbert will be paid the following: (i) his base salary through the
termination date, (ii) the pro rata portion of any bonus to which Mr. Gilbert
would otherwise be entitled for the year of termination, and (iii) immediate
vesting of all of Mr. Gilbert's stock options.
d. Termination "Without Cause." Upon the Company's termination of Mr. Gilbert
without cause, and contingent upon Mr. Gilbert's and the Company's signing a
release, Mr. Gilbert is entitled to receive as liquidated damages (i) his base
salary through the termination date, (ii) the pro rata portion of any bonus to
which Mr. Gilbert would otherwise be entitled for the year of termination,
(iii) $100,000, payable in six equal consecutive monthly installments over a
six-month period, (iv) all other accrued benefits and amounts to which Mr.
Gilbert is entitled or would be entitled for six months following termination,
(v) the immediate vesting of Mr. Gilbert's stock options as of the termination
date, and (vi) payments or benefits under any applicable Company benefit
coverages.
e. Termination of Mr. Gilbert for Good Reason. Upon termination of Mr.
Gilbert's employment for "good reason" (as defined in the Gilbert Employment
Agreement) and, contingent upon Mr. Gilbert's and the Company's signing a
release, the Company would be required to pay to Mr. Gilbert the following: (i)
his base salary through the termination date, (ii) $100,000, payable in six
equal consecutive monthly installments, (iii) the pro rata portion of any bonus
to which Mr. Gilbert would otherwise be entitled for the year in which such
termination occurs, (iv) all other benefits and amounts to which Mr. Gilbert is
entitled or would be entitled under the Gilbert Employment Agreement (but for
the acceleration of the termination date) through the sixth month anniversary
date following the termination date, and (v) effective as of the termination
date, the immediate vesting of all of Mr. Gilbert's stock options.
f. Voluntary Termination. Mr. Gilbert may voluntarily terminate his employment
with the Company for any reason upon 180 days' advance written notice to the
Company. However, upon the expiration of such 180-day period, Mr. Gilbert would
not be entitled to any further payments under the Gilbert Employment Agreement.
g. Termination Upon Change of Control. Mr. Gilbert's termination upon a change
in control in the Company, and only upon Mr. Gilbert's and the Company's
execution of a release, Mr. Gilbert is entitled to receive all benefits which
would be due to him under clauses (i) through (iv) of paragraph e. above, and
the immediate vesting of all stock options belonging to Mr. Gilbert. In
addition, in the event of Mr. Gilbert's termination upon a change of control,
Mr. Gilbert will receive base salary accrued and unpaid through such termination
date, and an additional amount equal to Mr. Gilbert's base salary in lieu of
unused vacation pay.
EXECUTIVE EMPLOYEE BONUS PLAN. The Company's Board is considering the adoption
of an Executive Employee Bonus Plan (the "Plan"), which will relate to the
Company's financial performance, and provide incentives to the executives
participating in the Plan. Upon implementation, the Plan will entitle a
specified group of executives to each receive an annual cash bonus ("Bonus")
equal to a percentage of the Company's EBITDA. It is proposed that the Plan
will use a sliding scale approach measured against a targeted budget number (the
"Budget"), with an increased percentage of EBITDA paid to each executive
participating in the Plan as the Budget is met and exceeded. Bonuses are
intended to provide executives with an opportunity to receive additional cash
compensation based upon the financial performance of the Company.
Messrs. Signorelli and Gilbert will be entitled to participate in the Plan under
the terms of the Signorelli Employment Agreement and Gilbert Employment
Agreement, respectively.
STOCK OPTION PLAN.
1997 Stock Incentive Plan. The Company's 1997 Stock Incentive Plan (the "1997
Plan") is intended to serve as the successor equity incentive program to the
Company's 1993 Stock Option and Compensation Plan (the "Predecessor Plan"). The
1997 Plan became effective on July 1, 1997 upon adoption by the Board of
Directors and has been approved by the stockholders. 1,266,994 shares of Common
Stock have initially been authorized for issuance under the 1997 Plan. However,
in no event may any one participant in the 1997 Plan receive option grants or
direct stock issuances for more than 200,000 shares in the aggregate per year in
or after the calendar year 2000.
Outstanding options under the Predecessor Plan were incorporated into the 1997
Plan and no further option grants will be made under the Predecessor Plan. The
incorporated options will continue to be governed by their existing terms,
unless the Plan Administrator elects to extend one or more features of the 1997
Plan to those options.
<PAGE>
The 1997 Plan is divided into two separate components: (i) the Discretionary
Option Grant Program under which eligible individuals in the Company's employ or
service (including officers, non-employee Board members and consultants) may, at
the discretion of the Plan Administrator, be granted options to purchase shares
of Common Stock at an exercise price (at any date after the Offering) not less
than 100% of their fair market value on the grant date, and (ii) the Stock
Issuance Program under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly, through the purchase of
such shares at a price not less than 100% of their fair market value at the time
of issuance or as a bonus tied to the performance of services.
The Discretionary Option Grant Program and the Stock Issuance Program are
administered by the Compensation Committee. The Compensation Committee as Plan
Administrator has complete discretion to determine which eligible individuals
are to receive option grants or stock issuances, the time or times when such
option grants or stock issuances are to be made, the number of shares subject to
each such grant or issuance, the status of any granted option as either an
incentive stock option or a non-statutory stock option under the federal tax
laws, the vesting schedule to be in effect for the option grant or stock
issuance and the maximum time for which any granted option is to remain
outstanding.
Under the Stock Issuance Program, participants may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly, in exchange for cash or
as a bonus for past services, at a price equal to the fair market value of the
shares on the date of issuance. The shares may, in the Plan Administrator's
discretion, be fully and immediately vested upon issuance or may vest in one or
more installments over the participant's period of service or upon specified
performance objectives. Should a participant's service with the Company cease
before the individual's shares have vested, then any unvested shares will be
surrendered to the Company and canceled at that time. However, any unvested
shares will vest fully and immediately upon certain changes in the ownership or
control of the Company.
The exercise price for the shares of Common Stock subject to option grants made
under the Plan may be paid in cash or in shares of Common Stock valued at fair
market value on the exercise date. The option may also be exercised through a
same-day sale program without any cash outlay by the optionee. In addition, the
Plan Administrator may authorize the Company to provide financial assistance to
one or more optionees in the exercise of their outstanding options by allowing
such individual to deliver a full-recourse, interest-bearing promissory note in
payment of the exercise price and any associated withholding taxes incurred in
connection with such exercise.
<PAGE>
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the Stock Issuance Program will immediately vest,
except to the extent the Company's repurchase rights with respect to those
shares are to be assigned to the successor corporation. The Plan Administrator
will have the authority under the Discretionary Option Grant and Stock Issuance
Programs to grant options and to structure repurchase rights so that the shares
subject to those options or repurchase rights will automatically vest in the
event the individual's service is terminated, whether involuntarily or through a
resignation for good reason, within 18 months following (i) a merger or asset
sale in which those options are assumed or those repurchase rights are assigned
or (ii) a hostile change in control of the Company effected by a successful
tender offer for more than 50% of the outstanding voting stock or by proxy
contest for the election of Board members.
Stock appreciation rights are authorized for issuance under the Discretionary
Option Grant Program which provide the holders with the election to surrender
their outstanding options for an appreciation distribution from the Company
equal to the excess of (i) the fair market value of the vested shares of Common
Stock subject to the surrendered option over (ii) the aggregate exercise price
payable for such shares. Such appreciation distribution may be made in cash or
in shares of Common Stock. There are currently no outstanding stock
appreciation rights.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) in return for the grant of new
options for the same or different number of option shares with an exercise price
per share based upon the fair market value of the Common Stock on the new grant
date.
The Board may amend or modify the 1997 Plan at any time. The 1997 Plan will
terminate on July 1, 2007, unless sooner terminated by the Board. As of
December 31, 1997, 1,166,548 options have been granted under the 1997 Plan, all
of which were granted during 1997.
FISCAL YEAR-END OPTION VALUES1
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year-End2 at Fiscal Year-End3
Name Exercisable Unexercisable Exercisable Unexercisable
Michael J. Signorelli (3) -0- 775,000 $0.00 $0.00
Jeffrey L. Gilbert (4) -0- 250,000 0.00 0.00
(1) No option or Stock Appreciation Rights (SARs) were exercised by any Company
employee in 1997, and there are no outstanding SARs held by any employee or
director of the Company.
<PAGE>
(2) The sum of the numbers under the Exercisable and Unexercisable columns of
this heading represents each named executive officer's total outstanding
options.
(3) In July 1997, options granted under a prior plan were canceled and replaced
by the grant of options to purchase (i) 117,647 shares of Common Stock for $2.00
per share and (ii) 657,353 shares of Common Stock for $3.50 per share. See
"Stock Option Plan" and "Outstanding Stock Options and Restricted Stock."
(4) In July 1997, options granted under a prior plan were canceled and replaced
by the grant of options to purchase (i) 29,411 shares of Common Stock for $2.00
per share, and (ii) 220,589 shares of Common Stock for $3.50 per share. See
"Stock Option Plan" and "Outstanding Stock Options and Restricted Stock."
COMPENSATION OF DIRECTORS. Directors receive no additional compensation for
services as a director except that non-employee directors of the Company are
reimbursed for their expenses incurred and grants of Stock options pursuant to
the Company's 1997 Stock Incentive Plan. See "EXECUTIVE COMPENSATION - STOCK
OPTION PLAN."
Outstanding Stock Options and Restricted Stock. The Company has granted to Mr.
Signorelli pursuant to the 1997 Plan, (i) a non-qualified option to purchase
117,647 shares of the Company's Common Stock at an option price of $2.00 per
share which vests upon the opening of the Mesquite Star and (ii) an incentive
Stock option to purchase 657,353 shares of the Company's Common Stock at an
option price of $3.50 per share which vests 20% per year over five years or
earlier if the Company achieves revenues of $30,000,000 or $5,000,000 EBITDA in
any fiscal year. Mr. Signorelli has purchased 4,193 shares of restricted Stock
for a $10,000 promissory note on August 27, 1995. The exercise of Mr.
Signorelli's option shares is contingent upon Mr. Signorelli's continued
employment with the Company. Mr. Signorelli is permitted to exercise all or a
portion of the 775,000 option shares by (i) surrendering some of his 4,193
shares of restricted Stock to the Company at their fair market value as of the
exercise date; and (ii) delivering a promissory note to the Company for the
balance of the exercise price.
The Company has granted to Mr. Gilbert pursuant to the 1997 Plan, (i) a non-
qualified option to purchase 29,411 shares of the Company's Common Stock at an
option price of $2.00 per share, which vests upon the opening of the Mesquite
Star, and (ii) an incentive Stock option to purchase 220,589 shares of the
Company's Common Stock at an option price of $3.50 per share which vests 20% per
year over five years or earlier if the Company has revenues of $30,000,000 or
EBITDA of $5,000,000 in any fiscal year. In addition, the vesting of Mr.
Gilbert's Stock options will accelerate and be exercisable upon the effective
date of one of the following transactions (a "Corporate Transaction") <PAGE>
(a) a
merger or acquisition in which the Company is not the surviving entity,
except for a transaction the principal purpose of which is to change the state
of the Company's incorporation, (b) the sale, transfer or other disposition of
all or substantially all of the assets or Stock of the Company, or (c)any other
corporate reorganization or business combination in which 50% or more of the
Company's outstanding voting Stock is transferred to different holders in a
single transaction or a series of related transactions. As long as Mr. Gilbert
Remains employed with the Company, the option is exercisable until July 1, 2007.
On December 11, 1997, the Company granted each of Dr. Tam and Mr. Meehan an
option exercisable until December 11, 2007 to purchase 12,500 shares of Common
Stock at a per share exercise price of $2.03. This option is exercisable after
December 11, 1998 provided that (i) Dr. Tam and Mr. Meehan has, respectively,
continued to serve as a director of the Company or at least agreed to serve and
(ii) the Company's shareholders have approved an increase in the number of
shares of Common Stock issuable under the Company's 1997 Stock Incentive Plan by
at least the amount of shares subject to this option.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL STOCKHOLDERS OF THE COMPANY. The following table sets forth certain
information as of April 8, 1998, regarding beneficial ownership of the Company's
Common Stock prior to the Offering by (i) each person who is known by the
Company to own beneficially more than five percent of the Company's outstanding
Common Stock, (ii) each of the Company's directors and nominees, and executive
officers, and (iii) the directors and executive officers of the Company as a
group. Unless otherwise provided, the percentages set forth in this Section are
calculated with respect to each person as follows: (i) using a denominator equal
to the amount of outstanding Common Stock plus, for each person, any Common
Stock that person has the right to acquire within 60 days pursuant to options,
warrants, conversion privileges and other rights; and (ii) using a numerator
equal to any Common Stock actually owned by that person plus any Common Stock
that person has the right to acquire within 60 days pursuant to options,
warrants, conversion privileges and other rights.
<PAGE>
Title of Name and Address Number of Ownership
Class of Beneficial Owner Shares Percentage(1)
Beneficially
Owned
Common Richard Tam 775,074 (2) 19.7%
2140 W. Charleston Blvd.
Las Vegas, NV 89012
Common Interworld Group LLC 775,074 (2) 19.7%
2140 W. Charleston Blvd.
Las Vegas, NV 89012
Common Valley Star, LLC 775,074 (2) 19.7%
2140 W. Charleston Blvd.
Las Vegas, NV 89102
Common Richard Roy Kelley 422,208 (3) 10.9%
2375 Kuhio Avenue
Honolulu, HI 96815-2939
Common Jeffrey L. Gilbert 15,000 (4) *
Cypress Center
3175 West Post Road
Las Vegas, NV 89118
Common James D. Meehan 6,250 (5) *
313 N. Birch St., 1st Flr.
Santa Ana, CA 92701
Common Michael J. Signorelli 4,193 (6) *
Cypress Center
3175 West Post Road
Las Vegas, NV 89118
Common Directors and Executive 800,517 (2.4.5.6) 20.4%
Officers as a Group
1 The amount of outstanding securities included in calculating the
percentages is 3,609,719 shares of outstanding Common Stock.
<PAGE>
2 As reported by Dr. Tam, Interworld Group, LLC and Valley Star, LLC in
their Schedule 13D dated April 8, 1998 filed with the SEC, includes (i) 220,338
shares held of record by Interworld Group, LLC, of which Dr. Tam is the
controlling managing member, (ii) 167,341 shares held directly by Dr. Tam, (iii)
50,057 shares held of record by Valley Star, LLC, of which Dr. Tam is the
controlling managing member, (iv) a warrant to purchase 200,000 shares held by
Dr. Tam, currently exercisable at a price of $2.75 per share until August 13,
2002, (v) a warrant to purchase 79,839 shares held by Dr. Tam, currently
exercisable at a price of $0.25 per share until September 23, 2002, (vi) a
warrant to purchase 37,500 shares held by Dr. Tam, currently exercisable at a
price of $2.00 per share until March 31,2003 and (vii) a warrant to purchase
20,000 shares held by Dr. Tam, currently exercisable at a price of $2.00 per
share until September 23, 2002. Does not include an option to purchase 12,500
shares held by Dr. Tam at a price of $2.05 per share that will become
exercisable upon the following (i) approval of an increase in the shares subject
to the Company's 1997 Stock Incentive Plan, and (ii) Dr. Tam serving as a
director through December 10, 1998.
3 As reported by Dr. Kelley in his Schedule 13D dated April 10, 1998, filed
with the SEC, including (i) 148,708 shares held directly by Dr. Kelley, (ii) a
warrant to purchase 200,000 shares held by Dr. Kelley, currently exercisable at
a price of $2.75 per share until August 13, 2002, (iii) a warrant to purchase
37,500 shares held by Dr. Kelly, currently exercisable at a price of $2.00 per
share until March 31, 2003, and (iv) a warrant to purchase 36,000 shares held by
Dr. Kelley, currently exercisable at a price of $5.50 per share until September
18, 2002.
4 Includes an option to purchase 15,000 shares of Common Stock at a price
of $2.19, currently exercisable until January 21, 2008. Does not include
options to purchase 29,411 and 220,589 shares of Common Stock at exercise prices
of $2.00 and $3.50 per share, respectively. See "MANAGEMENT - Outstanding Stock
Options and Restricted Stock."
5 Includes 6,250 shares of Common Stock held by the Meehan Family Trust of
which Mr. Meehan is Trustee. Does not include an option to purchase 12,500
shares held by Mr. Meehan at a price of $2.05 per share that will become
exercisable upon the following (i) approval of an increase in the shares subject
to the Company's 1997 Stock Incentive Plan, and (ii) Mr. Meehan serving as a
director through December 10, 1998.
6 Does not include options to purchase 117,647 and 657,353 shares of
Common Stock at exercise prices of $2.00 and $3.50 per share, respectively. See
"MANAGEMENT - Outstanding Stock Options and Restricted Stock."
* Less than one percent
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The following is a brief description of certain relationships and related
transactions.
<PAGE>
KELLEY/TAM LOANS. In September 1997, the Kelley Loan was extended until August
15, 1999. The principal amount and accrued interest was approximately
$6,742,000, net of unamortized original issue discount, at December 31, 1997.
Dr. Tam has a 50% loan participation interest in a significant portion of the
Kelley Loan. The Kelley Loan is secured by a first deed of trust and several
subordinate deeds of trust on the Mesquite Property and the Company's assets.
The Kelley Loan bears interest at the greater of the prime rate of interest
plus three percent or 11%, and will be payable on a monthly basis, interest
only, until its maturity date.
In consideration of the extension of the Kelley Loan, each of Drs. Kelley and
Tam have been granted a warrant to purchase 200,000 shares of Common Stock of
the Company at the purchase price of $2.75 per share. All other warrants,
options or equity or conversion rights otherwise held by Drs. Kelley and Tam
pursuant to the Kelley Loan (which were issued in connection with the financing
as described above) were relinquished.
In connection with the extension of the Kelley Loan, the Company has paid Drs.
Kelley and Tam a loan fee of $475,000 in the form of a secured note payable to
Drs. Kelley and Tam. Concurrent with the closing of the Company's IPO, $450,000
of this loan fee was waived.
On March 31, 1998, Drs. Kelley and Tam executed a financing commitment to lend
to the Company up to $1,000,000 and were each issued warrants to purchase 37,500
shares of Common Stock. See " BUSINESS - Equity and Debt Financing - Kelley
Loan."
PURCHASE OF PMJ ENTERPRISES, INC.'S SHARES BY DRS. KELLEY AND TAM. In May 1997,
Drs. Kelley and Tam purchased from PMJ Enterprises, Inc., which is controlled by
Patrick J. Shannon, a total of 280,398 shares of Common Stock of the Company,
with Dr. Kelley purchasing 60,060 and Dr. Tam purchasing 220,338. The purchase
price per share was $1.68 for an aggregate purchase price of $472,057.50. PMJ
Enterprises, Inc. agreed to an extension of the PMJ Debt for a two-year period
following the closing of the Offering in connection with the purchase of such
shares. The Company has granted Drs. Kelley and Tam certain "piggy-back"
registration rights giving them the right to register their shares of Common
Stock in connection with certain Company registrations, which are subject to
cut-back at the discretion of the underwriter, if any, with respect to any such
registration.
THE COMPANY'S OPTION TO PURCHASE AN INTEREST IN NORTH LAS VEGAS REAL PROPERTY
FROM DESERT MESA LAND PARTNERS, LTD. Pursuant to the Option Agreement between
the Company, Desert Mesa and High Mesa, Desert Mesa has granted the Company an
option to purchase from Desert Mesa an indirect 20% ownership interest in the
North Las Vegas Property. Desert Mesa's general partner is a Nevada corporation
in which Dr. Tam is an officer and a 35% stockholder. Dr. Tam is also an
officer and 52.7% stockholder of High Mesa. See "BUSINESS - North Las Vegas
Option Agreement."
See "Executive Compensation" for a discussion of certain transactions between
the Company and certain of its executive officers and directors.
<PAGE>
The Company believes that all of the above transactions with present or former
officers, directors and stockholders of the Company and/or their affiliated
companies were made on terms no less favorable to the Company than those
available from unaffiliated parties. The Company plans to engage in
transactions with officers and stockholders, if at all, in the future, on terms
no less favorable to the Company than those which would be available from
unaffiliated parties and subject to the approval of a majority of the
disinterested independent members of the Company's Board of Directors.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit 3 - Articles of Incorporation and By-Laws
3.1. Restated Articles of Incorporation of the Company, filed October 3, 1995
(filed as Exhibit 3.2 to Pre-Effective Amendment No. 2 to Registration Statement
No. 333-518-LA and incorporated herein by reference)
3.2. Certificate of Amendment to Restated Articles of Incorporation of the
Company, filed September 18, 1997 (filed as Exhibit 3.2.1 to Amendment No. 5 to
Registration Statement No. 333-518-LA and incorporated herein by reference)
3.3. Bylaws of the Company, dated December 2, 1993 (filed as Exhibit 3.3 to
Amendment No. 2 to Registration Statement No. 333-518-LA and incorporated herein
by reference)
3.4. Certificate of Amendment to Bylaws of the Company, dated July 23, 1997
(filed as Exhibit 3.4 to Amendment No. 5 to Registration Statement No. 333-518-
LA and incorporated herein by reference)
Exhibit 10 - Material Contracts
10.1. Employment Agreement between Mr. Signorelli and the Company, dated
January 2, 1996 (filed as Exhibit 10.67 to Amendment No. 2 to Registration
Statement No. 333-518-LA and incorporated herein by reference)
10.2. First Amendment of Employment Agreement between Michael J. Signorelli and
the Company, dated June 30, 1997 (filed as Exhibit 10.110 to Amendment No. 5 to
Registration Statement No. 333-518-LA and incorporated herein by reference)
10.3. Employment Agreement between Jeffrey L. Gilbert and the Company, dated
January 2, 1996 (filed as Exhibit 10.68 to Amendment No. 2 to Registration
Statement No. 333-518-LA and incorporated herein by reference)
10.4. First Amendment of Employment Agreement between Jeffrey L. Gilbert and
the Company, dated June 28, 1996 (filed as Exhibit 10.106 to Amendment No. 4 to
Registration Statement No. 333-518-LA and incorporated herein by reference)
10.5. Second Amendment of Employment Agreement between Jeffrey L. Gilbert and
the Company, dated August 13, 1996 (filed as Exhibit 10.107 to Amendment No. 4
to Registration Statement No. 333-518-LA and incorporated herein by reference)<PAGE>
10.6. Third Amendment of Employment Agreement between Jeffrey L. Gilbert and
the Company, dated February 24, 1997 (filed as Exhibit 10.108 to Amendment No. 4
to Registration Statement No. 333-518-LA and incorporated herein by reference)
10.7. Fourth Amendment of Employment Agreement between Jeffrey L. Gilbert and
the Company, dated June 30, 1997 (filed as Exhibit 10.109 to Amendment No. 5 to
Registration Statement No. 333-518-LA and incorporated herein by reference)
10.8. Standard Form Agreement between Owner and Architect (the Company and
Rissman & Rissman Associates), dated August 23, 1994 (filed as Exhibit 10.60 to
Amendment No. 2 to Registration Statement No. 333-518-LA and incorporated herein
by reference)
10.9. Standard Form of Agreement between Owner and Contractor (the Company and
A.F. Construction Company), dated August 30, 1994 (filed as Exhibit 10.61 to
Amendment No. 2 to Registration Statement No. 333-518-LA and incorporated herein
by reference)
10.10. Warrant Agent Agreement, dated September 18,1997, between the Company
and American Stock Transfer & Trust Company (filed as Exhibit 4.8 to Amendment
No. 5 to Registration Statement No. 333-518-LA and incorporated herein by
reference)
10.11. 1997 Stock Incentive Plan (filed as Exhibit 10.103 to Amendment No. 5 to
Registration Statement No. 333-518-LA and incorporated herein by reference)
10.12. Convertible Loan Agreement dated August 14, 1995 between the Company and
Richard Kelley (filed as Exhibit 10.51 to Amendment No. 2 to Registration
Statement No. 333-518-LA and incorporated herein by reference)
10.13. Amended and Restated Convertible Loan Agreement dated April 18, 1996
among the Company, Richard R. Kelley and Richard Tam (filed as Exhibit 10.78 to
Amendment No. 2 to Registration Statement No. 333-518-LA and incorporated herein
by reference)
10.14. Participation and Intercreditor Agreement, dated April 18, 1996, between
Richard Kelley and Richard Tam (filed as Exhibit 10.53 to Amendment No. 2 to
Registration Statement No. 333-518-LA and incorporated herein by reference)
10.15. Stock Purchase Agreement dated as of May 9, 1997 by and between the
Company, PMJ Enterprises, Inc., Patrick J. Shannon, Dr. Richard Roy Kelley and
Richard Tam (filed as Exhibit 10.111 to Registration Statement No. 333-518-LA
and incorporated herein by reference)
10.16. First Amendment to Amended and Restated Convertible Loan Agreement
between the Company and Richard R. Kelley dated July 17, 1997 (filed as Exhibit
10.123 to Amendment No. 6 to Registration Statement No. 333-518-LA and
incorporated herein by reference)
10.17. Intercreditor Agreement by and among Richard Kelley, Richard Tam and PMJ
Enterprises, Inc., dated May 1997
10.18. Option Agreement between the Company and Desert Mesa Land Partners,
Ltd., a Nevada limited partnership dated April 23, 1996 (filed as Exhibit 10.84
to Amendment No. 2 to Registration Statement No. 333-518-LA and incorporated
herein by reference)
10.19. First Amendment dated April 30, 1997 to Option Agreement between the
Company and Desert Mesa Land Partners, Ltd., and High Mesa Development, Inc.,
dated April 23, 1996 (filed as Exhibit 10.117 to Amendment No. 5 to Registration
Statement No. 333-518-LA and incorporated herein by reference)
10.20. Second Amendment dated September 8, 1997 to Option Agreement between the
Company and Desert Land Partners, Ltd. and High Mesa Development, Inc.
10.21. Third Amendment, dated March 15, 1998 to Option Agreement and Amendment
to Note between the Company and Desert Land Partners, Ltd. and High Mesa
Development, Inc.
10.22. Operating Lease Commitment for $2,100,000 dated April 10, 1996 between
the Company and PDS Financial Corporation (filed as Exhibit 10.87 to Amendment
No. 2 to Registration Statement No. 333-518-LA and incorporated herein by
reference)
10.23. Equipment Financing Commitment dated March 12, 1996 between the Company
and PDS Financial Corporation (filed as Exhibit 10.88 to Amendment No. 2 to
Registration Statement No. 333-518-LA and incorporated herein by reference)
10.24. Operating Lease Commitment for $700,000 dated March 29, 1996 between the
Company and PDS Financial Corporation (filed as Exhibit 10.94 to Amendment No. 2
to Registration Statement No. 333-518-LA and incorporated herein by reference)
10.25. Construction Loan Agreement between First Credit Bank and the Company
dated January 27, 1998
10.26. Master Lease Agreement between IGT and the Company, dated April 8,
1998
10.27. Lease Agreement between Casino Excitement, Inc. dba Mikohn Lighting &
Sign and the Company dated as of February 9, 1998
Exhibit 24 - Powers of Attorney
Exhibit 27 - Financial Data Schedule (filed on EDGAR only)
(b) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed during the quarter ended December 31,
1997.
<PAGE>
SIGNATURES
In accordance with 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, on the 15th day of April, 1998.
NEVSTAR GAMING & ENTERTAINMENT CORPORATION
By: /s/ MICHAEL J. SIGNORELLI
Michael J. Signorelli
Chairman of the Board and
Chief Executive Officer
In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons who include a
majority of the Board of Directors on behalf of the Registrant and in the
capacities indicated on April 15, 1998.
Signatures Title Date
Jeffrey L. Gilbert Director
James D. Meehan Director
Michael J. Signorelli Director
Richard Tam Director
By:/s/ Michael J. Signorelli April 15, 1998
Michael J. Signorelli, individually,
Chairman of the Board, Secretary and
Chief Executive Officer (Principal
Executive Officer) and as attorney-in-fact
for the foregoing Persons
By:/s/ Jeffrey L. Gilbert April 15, 1998
Jeffrey L. Gilbert
President, Chief Operating Officer
and Treasurer (Principal Financial
Officer and Principal Accounting Officer)
CONSTRUCTION LOAN AGREEMENT
This Construction Loan Agreement (the "Agreement") is entered into between
First Credit Bank, hereinafter "Lender," and NevStar Gaming & Entertainment
Corporation, herein "Borrower," with reference to the following facts:
A. Borrower has applied to Lender for a construction loan in the amount
of Five Million Dollars ($5,000,000.00) for the purpose of financing the
construction of a hotel and casino building and other improvements incidental
thereto.
B. The Project is to be built on Borrower's Real Property located in
Clark County, Nevada.
C. The Project is to be constructed in accordance with the Plans and
Specifications provided pursuant to the Architecture Contract and built by
Contractor pursuant to the Construction Contract.
D. The terms of repayment of the Construction Loan are as set forth on
the Note and the Note shall be secured by the Related Documents.
E. Lender agrees to make the loan to Borrower provided all terms,
conditions, and covenants hereof are satisfied, and all Related Documents and
Project Documents are executed and delivered as required by Lender.
Based upon the above, Borrower and Lender agree as follows:
I
DEFINITIONS
As used herein, the following terms shall have the following meanings:
A. Agreement. The word "Agreement" means this Construction Loan
Agreement, as this Construction Loan Agreement may be amended or modified from
time to time, together with all exhibits and schedules attached to this
Construction Loan Agreement from time to time.
B. Architecture Contract. The words "Architecture Contract" mean the
contract between Borrower and Rissman & Rissman,a Nevada Professional
Corporation (License #109), who designed the Project.
C. Borrower. the word "Borrower" means each and every person or entity
signing the Note, including without limitation Nevstar Gaming & Entertainment
Corporation (formerly Mesquite Gaming Corp.), a Nevada corporation.
D. Collateral. The word "Collateral" means and includes without
limitation all property and assets granted as collateral security for a loan,
whether real or personal property, whether granted directly or indirectly,
whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel
trust, factor's lien, equipment trust, conditional sale, trust receipt, lien,
charge, lien or title retention contract, lease or consignment intended as a
security device, or any other security or lien interest whatsoever, whether
created by law, contract, or otherwise.
E. Commencement Date. The words "Commencement Date" mean January
___,1998.
F. Completion Date. The words "Completion Date" mean July __, 1999.
G. Construction Budget. The words "Construction Budget" shall mean the
Construction Cost Breakdown attached hereto as Exhibit "B" and incorporated
herein
by reference, as the same may be amended from time to time with the consent and
approval of the Lender.
H. Construction Contract. The words "Construction Contract" mean and
include the contract between Borrower and AF Construction, a Nevada Corporation
(License #AB 22805), the general contractor for the Project,
(General Contractor),
and any subcontracts with subcontractors, materialmen, laborers, or any other
person or entity for performance of work on the Project or the delivery of
materials to the Project.
I. Contractor. The word "Contractor" means AF Construction, a Nevada
corporation (License #AB 22805), the General Contractor for the Project.
J. Event Of Default. The words "Event of Default" mean and include
without limitation any of the Events of Default set forth below in the section
titled "Events of Default."
K. Grantor. The word "Grantor" means and includes without limitation
each and all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including, without limitation, the Borrower
granting such a Security Interest.
L. Improvements. The word "Improvements" means any and all buildings,
structures, open parking areas and other improvements, and any and all
accessions,
additions, replacements, substitutions or alterations thereof or appurtenances
thereto, now or at any time hereafter situated, placed or constructed upon the
Property or any part thereof.
M. Indebtedness. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and liabilities
of Borrower to Lender, or any one or more of them, as well as all claims by
Lender
against Borrower, or any one or more of them; whether now or hereafter existing,
voluntary or involuntary, due or not due, absolute or contingent, liquidated or
unliquidated; whether Borrower may be liable individually or jointly with
others,
whether Borrower may be obligated as a guarantor, surety, or otherwise; whether
recovery upon such Indebtedness may be or hereafter may become barred by any
statute of limitations; and whether such Indebtedness may be or hereafter may
become otherwise unenforceable.
N. Lender. The word "Lender" means First Credit Bank, its successors and
assigns.
O. Loan. The word "Loan" means the loan made to Borrower under this
Agreement and the Related Documents as described below.
P. Loan Fund. The words" Loan Fund" mean the undisbursed proceeds of the
Loan under this Agreement together with any equity funds or other deposits
required from Borrower under this Agreement.
Q. Note. The word "Note" means that certain Promissory Note of this same
date executed by Borrower, payable to the order of Lender, in the principal sum
of Five Million Dollars ($5,000,000.00), bearing interest at a Variable Interest
Rate and being payable as therein provided, together with any and all renewals,
extensions, modifications, substitutions, replacements and expansions thereof
(herein the "Note").
R. Personal Property Collateral. The words "Personal Property
Collateral" shall have the same meaning as the term "Personalty" is defined
in the
Construction Deed of Trust and Security Agreement with Assignment of Rents to be
executed concurrently herewith by Borrower.
S. Plans And Specifications. The words "Plans and Specifications" means
the plans and specifications for the Project which have been submitted to and
initialed by Lender, together with such changes and additions as may be approved
by Lender in writing.
T. Project. The word "Project" means the construction and completion of
all Improvements contemplated by this Agreement, including, without limitation,
the erection of the buildings or structures and the other work set forth in the
Construction Budget generally described as follows:
Construction of a hotel and casino building on an approximately 27-acre
parcel of land located on the southeast corner of Mesquite Boulevard and the
I-15 freeway in the City of Mesquite, Nevada.
U. Project Documents. The words "Project Documents" means the Plans and
Specifications, all studies, data, and drawings relating to the Project, whether
prepared by or for Borrower, the Construction Contract, the Architecture
Contract,
and all other contracts and agreements relating to the Project or the
construction
of the Improvements.
V. Property. The word "Property" means the Real Property together with
all Improvements, fixtures, and Personal Property Collateral, together with all
accessions, parts, and additions to, all replacements of, and all substitutions
for any of such property, and all proceeds (including insurance proceeds and
refunds of premiums) from any sale or other disposition of such property.
W. Real Property. The words "Real Property" mean the real property
located in Clark County, State of Nevada, and legally described as:
See Exhibit "A" attached hereto and incorporated herein by this
reference.
X. Related Documents. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
Y. Security Agreement. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security Interest.
Z. Security Interest. The words "Security Interest" mean and include
without limitation any type of collateral security, whether in the form of a
lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel
trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or
title retention, contract, lease or consignment intended as a security
device, or any other
security or lien interest whatsoever, whether created by law, contract,
or otherwise.
AA. Value. The word "Value" means such amount or worth as defined and
determined by Lender in its sole discretion unless agreed to the contrary by
Lender in writing.
II
THE LOAN
A. Description Of Loan. The Loan shall be in an amount not to exceed the
principal sum of U.S. $5,000,000.00 and shall bear interest on so much of the
principal sum as shall be advanced pursuant to the terms of this Agreement
and the
Related Documents. The Loan shall bear interest on each Advance from the
date of
the Advance in accordance with the terms of the Note. Borrower shall use the
Loan
Funds solely for the payment of (a) the costs of constructing the Improvements
and of partially equipping the Project with the Personal Property Collateral in
accordance with the Construction Contract and the Construction Budget; (b)
other
costs and expenses incurred or to be incurred in connection with the
construction
of the Improvements as Lender in its sole discretion shall approve; and (c) if
permitted by Lender, interest due under the Note, including all expenses and all
loan and commitment fees described in this Agreement. The Loan amount shall be
subject at all times to all maximum limits and conditions set forth in this
Agreement or in any of the Related Documents, including without limitation, any
limits relating to loan to value ratios and acquisition and Project costs.
B. Fees And Expenses. As a condition of Lender's making the Loan,
Borrower agrees to pay the following fees, charges, and expenses, in addition to
all others set forth in this Agreement: Loan Origination Fee, $125,000; Loan
Extension Fee, $50,000.00 (Borrower's right to extend the term of the Loan being
evidenced by a separate letter agreement of this same date); Fund Control and
Inspection Fee, $25,000.00; Processing, Credit Verification, Title, Appraisal
and
Environmental Review, Documentation and Legal Review, $12,000.00;
Escrow and Title
Fees and Costs, $20,000.00. Whether or not the Project shall be consummated,
Borrower shall assume and pay upon demand all out-of-pocket expenses incurred by
Lender in connection with the preparation of loan documents and the making of
the
Loan, including without limitation the following: (a) all closing costs, fees
and disbursements; (b) all expenses of Lender's legal counsel; and (c) all
title
examination fees, title insurance premiums, appraisal fees, survey costs,
required
fees, and filing and recording fees.
C. Security. The Construction Loan shall be secured by the terms of
certain of the Related Documents. Disbursement of the Loan Funds shall be
conditioned upon the execution and delivery of the Related Documents granting
the
Security Interests and containing such terms and conditions as may reasonably be
required by Lender, and in Lender's discretion.
III
DISBURSEMENT OF CONSTRUCTION LOAN
A. Conditions Precedent To Each Advance. Lender's obligation to make the
initial Advance and each subsequent Advance under this Agreement shall be
subject
to the fulfillment to Lender's satisfaction of all of the conditions set
forth in
this Agreement.
1. Special Conditions To Subsequent Advances. BORROWER
ACKNOWLEDGES THAT, BEFORE ANY SUBSEQUENT ADVANCE OF LOAN FUNDS, OTHER THAN THE
INITIAL DISBURSEMENT OF THE LOAN FUNDS, IS MADE BY LENDER, BORROWER SHALL HAVE
DELIVERED TO LENDER RECEIPTS, INVOICES, AND RELEASES EVIDENCING EXPENDITURES ON
THE PROJECT OUT OF SUBORDINATE FINANCING OR BORROWER'S EQUITY FUND OF NOT LESS
THAN $6,000,000, SAID EXPENDITURES TO BE EXCLUSIVE OF COSTS OF ACQUIRING THE
REAL
PROPERTY.
2. Approval Of Contractors, Subcontractors, And Materialmen.
Lender shall have approved a list of all contractors employed in connection with
the construction of the Improvements, showing the name, address, and telephone
number of each contractor, a general description of the nature of the work to be
done, the labor and materials to be supplied, the names of materialmen,
if known,
and the approximate dollar value of the labor, work, or materials with
respect to
each contractor or materialman. Lender shall have the right to communicate with
any person to verify the facts disclosed by the list or by any application
for any
Advance, or for any other purpose.
3. Plans, Specifications, And Permits. Lender shall have received
and accepted a complete set of Plans and Specifications setting forth all
Improvements for the Project, and Borrower shall have furnished to Lender copies
of all permits and requisite approvals of any governmental body necessary for
the
construction and use of the Project.
4. Architecture And Construction Contracts. Borrower shall have
furnished in form and substance satisfactory to Lender an executed copy of the
Architecture Contract and an executed copy of the Construction Contract.
5. Support Documents. Borrower shall provide to Lender in form
satisfactory to Lender the following support documents for the loan: Assignment
of Architecture Contract, Architect's Certificate, and Assignment of
Construction
Contract.
6. Budget And Schedule Of Estimated Advances. Lender shall have
approved any modifications or changes to the Construction Budget and the Advance
otherwise conforms to the Construction Budget.
7. Borrower's Authorization. Borrower shall have provided in form
and substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of the Loan documents, and the
consummation
of the Project, and such other authorizations and other documents as Lender
in its
sole discretion may require.
8. Appraisal. If required by Lender, an appraisal shall be
prepared for the Property, at Borrower's expense, which in form and substance
shall be satisfactory to Lender, in its sole discretion, including applicable
regulatory requirements.
9. Plans And Specifications. If requested by Lender, Borrower
shall have assigned to Lender on Lender's forms the Plans and Specifications for
the Project.
10. Environmental Report. If requested by Lender, Borrower shall
have furnished to Lender, at Borrower's expense, an environmental report and
certificate on the Property in form and substance satisfactory to Lender,
prepared
by an engineer or other expert satisfactory to Lender stating that the Property
complies with all applicable provisions and requirements of the Related
Documents
11. Soil Report. If requested by Lender, Borrower shall have
furnished to Lender, at Borrower's expense, a soil report for the Property in
form
and substance satisfactory to Lender, prepared by a registered engineer
satisfactory to Lender stating that the Property is free from soil or other
geological conditions that would preclude its use or development as contemplated
without extra expense for precautionary, corrective or remedial measures.
12. Survey. If requested by Lender, Borrower shall have furnished
to Lender a survey of recent date, prepared and certified by a qualified
surveyor
and providing that the Improvements, if constructed in accordance with the Plans
and Specifications, shall lie wholly within the boundaries of the Property
without
encroachment or violation of any zoning ordinances, building codes or
regulations,
or setback requirements, together with such other information as lender in its
sole discretion may require.
13. Zoning. Borrower shall have furnished evidence satisfactory to
Lender that the Property is duly and validly zoned for the construction,
maintenance, and operation of the Project.
14. Title Insurance. Borrower shall have provided to Lender an ALTA
Lender's extended coverage policy of title insurance with such endorsements as
Lender may require, issued by a title insurance company acceptable to Lender and
in a form, amount, and content satisfactory to Lender, insuring or agreeing to
insure that Lender's Mortgage or Deed of Trust on the Property is or will be
upon
recordation a valid first lien on the Property free and clear of all defects,
liens, encumbrances, and exceptions except those as specifically accepted by
Lender in writing. If requested by Lender, Borrower shall provide to Lender, at
Borrower's expense, the following endorsements: (i) Form 100 endorsement; (ii)
Form 102.5 endorsement; (iii) Form 103.1 endorsement; (iv) Form 103.7
endorsement; (v) Form 108.8 endorsement; (vi) Form 110.9 endorsement;(vii)
Form
111.8 endorsement; (viii) Form 116 endorsement; (ix) Form 116.1 endorsement
referring to the Survey of the subject real property prepared by _________ of
Nevada, Inc. dated ____, 1997, a copy of which Survey shall be attached to the
endorsement; (x) Form 116.4 endorsement; (xi) Form 116.7 endorsement;
and (xii)
Form 123.2 endorsement.
15. Insurance. Unless waived by Lender in writing, Borrower shall
have delivered to Lender the following insurance policies or evidence thereof:
(a) an all risks course of construction insurance policy (builder's risk), with
extended coverage covering the Improvements issued in an amount and by a company
acceptable to Lender, containing a loss payable or other endorsement
satisfactory
to Lender insuring Lender as mortgagee, together with such other endorsements as
may be required by Lender, including stipulations that coverages will not be
canceled or diminished without at least ten (10) days' prior written notice to
Lender; (b) owners and General Contractor general liability insurance, public
liability and workmen's compensation insurance; (c) flood insurance if
reasonably
required
by Lender or applicable law; and (d) all other insurance required by this
Agreement or by the Related Documents.
16. Workers' Compensation Coverage. Provide to Lender proof of the
General
Contractor's compliance with all applicable workers' compensation laws and
regulations with regard to all work performed on the Project.
17. Payment Of Fees And Expenses. Borrower shall have paid to
Lender all expenses specified in this Agreement as are then due and payable.
18. Satisfactory Construction. All work usually done at the stage
of construction
for which disbursement is requested shall have been furnished and
installed, all in compliance with the Plans and Specifications. Borrower shall
also have furnished to Lender such proofs as Lender may require to establish the
progress
of the work, compliance with applicable laws, freedom of the Property
from liens, and the basis for the requested disbursement.
19. Certification. Borrower shall have furnished to Lender a
certification by an engineer, architect, or other qualified inspector acceptable
to Lender
that the construction of the Improvements has complied and will continue
to comply with all applicable statutes, ordinances, codes, regulations, and
similar requirements.
20. Lien Waivers. Borrower shall have obtained and attached to each
application for an Advance, including the Advance to cover final payment to the
General Contractor, executed acknowledgements of payments of all sums due and
releases of mechanics' and materialmen's liens, satisfactory to Lender, from any
party having lien rights, which acknowledgments of payment and releases of liens
shall cover all work, labor, equipment, materials done, supplied, performed, or
furnished prior to such application for an Advance.
21. Lack Of Default. There shall not exist at the time of any
Advance a condition which would constitute an Event of Default under this
Agreement.
A. Disbursement Of Loan Proceeds. The following provisions relate to the
disbursement of funds from the Loan Fund.
1. Application For Advances. Each application shall be stated on
a standard
AIA payment request form or other form approved by Lender, executed by
Borrower, and supported by such evidence as Lender shall reasonably require,
including, without limitation, a description of the items for which disbursement
is requested,
with references to the line item or items of the Construction Budget
which includes the item for which disbursement is requested and a statement
showing the percentage of work performed or services rendered under each budget
line item through the date of the application for Advance. Borrower shall apply
only for
disbursement with respect to work actually done by the General Contractor
and for materials and equipment actually incorporated into the Project. Each
application
for an Advance shall be deemed a certification of Borrower that as of
the date of such application, all representations and warranties contained in
the Agreement are true and correct, and that Borrower is in compliance with
all of the provisions of this Agreement.
2. Payments. At the sole option of Lender, Advances may be paid
in the joint names of Borrower and the General Contractor, subcontractor(s), or
supplier(s) in payment of sums due under the Construction Contract. At its sole
option, Lender may directly pay the General Contractor and any subcontractors or
other parties the sums due under the Construction Contract. Borrower appoints
Lender as
its attorney-in-fact to make such payments. This power shall be deemed
to be coupled with an interest, shall be irrevocable, and shall survive an Event
of Default under this Agreement.
3. Projected Cost Overruns. If Lender at any time determines in
its reasonable discretion that the amount of the Loan Fund is insufficient, or
will be insufficient, to complete fully and to pay for the Project, then within
ten (10) days after receipt of a written request from Lender, Borrower shall
deposit in the Loan Fund an amount equal to the deficiency as determined by
Lender. Any such amounts deposited by Borrower shall be disbursed prior to any
Loan proceeds.
4. Final Payment To General Contractor. Upon completion of the
Project
and fulfillment of the Construction Contract to the satisfaction of Lender
and
provided sufficient Loan Funds are available, Lender shall make an Advance to
cover the final payment due to the General Contractor upon delivery to Lender of
endorsements to the ALTA title insurance policy following the posting of the
completion notice, as provided under applicable law. Construction shall not be
deemed complete for purposes of final disbursement unless and until Lender shall
have received all of the following:
a. Evidence satisfactory to Lender that all work under the
Construction Contract requiring inspection by any governmental authority with
jurisdiction has been duly inspected and approved by such authority, that a
certificate of occupancy has been issued, and that all parties performing work
have been paid, or will be paid, for such work;
b. A certification by an engineer, architect, or other
qualified
inspector acceptable to Lender that the Improvements have been completed
substantially
in accordance with the Plans an Specifications and the Construction
Contract, that direct connection has been made to all utilities set forth in the
Plans and Specifications, and that the Project is ready for occupancy; and
c. Acceptance of the completed Improvements by Lender and
Borrower.
Notwithstanding
any other provision of this Agreement to the contrary, Lender may
retain
the final $150,000.00 of Loan proceeds to be paid as the final disbursement
of Loan proceeds upon satisfaction of the conditions set forth above.
5. Construction Default. If Borrower fails in any material respect
to comply with the provisions of this Agreement or if construction ceases in
violation of paragraph A.13. of article IV below, Lender, at its option, may
refuse to make further Advances, may accelerate the indebtedness under the terms
of the Note, and without thereby impairing any of its rights, powers, or
privileges, may enter into possession of the construction site and perform or
cause to be performed any and all work and labor necessary to complete the
Improvements, substantially in accordance with the Plans and Specifications.
6. Damage Or Destruction. If any of the Property or Improvements
is damaged or destroyed by casualty of any nature, within sixty (60) days
thereafter Borrower shall restore the Property and Improvements to the condition
in which they were before such damage or destruction with funds other than those
in the Loan Fund.
Lender shall not be obligated to make disbursements under this
Agreement until such restoration has been accomplished.
7. Right To Advance Funds. When any event occurs that Lender
reasonably determines may endanger completion of the Project or the fulfillment
of any condition or covenant in this Agreement, Lender may require Borrower to
furnish, within ten (10) business days after delivery of a written request,
adequate
security to eliminate, reduce, or indemnify Lender against, such danger.
In addition,
upon such occurrence, Lender in its sole discretion may advance funds
or agree to undertake to advance funds to any party to eliminate, reduce, or
indemnify Lender against, such danger or to complete the Project. All sums paid
by Lender pursuant to such agreements or undertakings shall be for Borrower's
account and shall be without prejudice to Borrower's rights, if any, to receive
such funds from the party to whom paid. All sums expended by Lender in the
exercise
of its option to complete the Project or protect Lender's interests shall
be payable to Lender on demand
together with interest form the date of the Advance
at the rate applicable to the Loan. In addition, any Advance of funds under this
Agreement, including without limitation direct disbursements to the General
Contractor or other parties in payment of sums due under the Construction
Contract, shall be deemed to have been expended by or on behalf of Borrower and
to have been secured by Lender's Mortgage or Deed of Trust, if any, on the
Property.
B. Limitation Of Responsibility. The making of any Advance by Lender
shall not constitute or be interpreted as either (a) an approval or acceptance
by Lender of the work done through the date of the Advance, or (b) a
representation or indemnity by Lender to any party against any deficiency or
defect in the work or against any breach of any contract. Inspections and
approvals of the Plans and Specifications, the Improvements, the workmanship and
materials used in the Improvements, and the exercise of any other right of
inspection, approval, or inquiry granted to Lender in this Agreement are
acknowledged to be solely for the protection of Lender's interests, and under no
circumstances shall they be construed to impose any responsibility or liability
of any nature whatsoever on Lender to any party. Neither Borrower nor any
contractor, subcontractor, materialman, or approval by Lender shall constitute a
representation by Lender as to the nature of the Project,its construction,
or its
intended use for Borrower or for any other person, nor shall it constitute an
indemnity by Lender to Borrower or to any other person against any deficiency or
defects in the Project or against any breach of any contract.
IV
COVENANTS AND AGREEMENTS OF BORROWER
A. Affirmative Covenants. Borrower covenants and agrees with Lender
that, while this Agreement is in effect, Borrower will:
1. Litigation. Promptly inform Lender in writing of (a) all
material adverse changes in Borrower's financial condition, and (b)
all existing
and all threatened litigation, claims, investigations, administrative
proceedings
or similar actions affecting Borrower or any Guarantor which could materially
affect the financial condition of Borrower or the financial condition of any
Guarantor.
2. Financial Records. Maintain its books and records in accordance
with generally accepted accounting principles, applied on a consistent basis,
and
permit Lender to examine and audit Borrower's books and records at all
reasonable
times.
3. Additional Information. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports with
respect to Borrower's financial condition and business operations as Lender may
reasonably request from time to time.
4. Compliance With Governmental Requirements. Comply with all
laws, ordinances, and regulations, now or hereafter in effect, of all
governmental
authorities applicable to the use or occupancy of the Property, including
without
limitation, the Americans With Disabilities Act. Borrower may contest in good
faith any such law, ordinance, or regulation and withhold compliance during any
proceeding, including
appropriate appeals, so long as Borrower has notified Lender
in writing prior to doing so and so long as, in Lender's reasonable opinion,
Lender's interests in the Property are not jeopardized. Lender may require
Borrower to post adequate security or a surety bond, reasonably satisfactory to
Lender, to protect Lender's interest.
5. Construction Of The Project. Commence construction of the
Project no later than the Commencement Date, and cause the Improvements to be
constructed
and equipped in a diligent and orderly manner and in strict accordance
with the Plans, Specifications, and Construction Budget approved by Lender, the
Construction Contract, and all applicable laws, ordinances, codes, regulations,
and rights of adjoining or concurrent property owners. Borrower agrees to
complete the Project for purposes of final payment to the General Contractor on
or before the Completion Date, regardless of the reason for any delay.
6. Loan Proceeds. Use the Loan Funds solely for payment of bills
and expenses directly related to the Project.
7. Defects. Upon demand of lender, promptly correct any defect in
the Improvements or any departure from the Plans and Specifications not approved
by Lender before further work shall be done upon the portion of the Improvements
affected.
8. Project Claims And Litigation. Promptly inform Lender of (a)
all
material adverse changes in the financial condition of the General Contractor;
(b) any
litigation and claims, actual or threatened, affecting the Project or the
General Contractor,
which could materially affect the successful completion of the
Project or the ability of the General Contractor to complete the Project as
agreed; and (c) any condition or event which constitutes a material breach or
default under
any of the Related Documents or any contract related to the Project.
9. Payment Of Claims And Removal Of Liens. (a) Cause all claims
for labor done and materials and services furnished in connection with the
Improvements to be fully paid and discharged in a timely manner, (b) diligently
file or procure the filing of a valid notice of completion of the Improvements,
or such comparable document as may be permitted under applicable lien laws, (c)
diligently
file or procure the filing of a notice of cessation, or such comparable
document as may be permitted under applicable lien laws, upon the happening of
cessation of labor on the Improvements for a continuous period of thirty (30)
days
or more, and (d) take all reasonable steps necessary to remove all claims of
liens against the Property, the Improvements, or any part of the Property or
Improvements, or any rights or interests appurtenant to the Property or
Improvements. Upon Lender's request, Borrower shall make such demands or claims
upon or against laborers, materialmen, subcontractors, or other person who have
furnished or claim to have furnished labor, services, or materials in connection
with the Improvements, which demands or claims shall under the laws of the State
of Nevada require diligent assertions of lien claims upon penalty of loss or
waiver thereof. Borrower shall,
within thirty (30) days after filing of any claim
of lien that is disputed or contested by Borrower, provide Lender with a surety
bond issued by a surety acceptable to Lender sufficient to release the claim of
lien or deposit with Lender an amount satisfactory to Lender for the possibility
that the contest will be unsuccessful. If Borrower fails to remove any lien on
the Property or Improvements or provide a bond or deposit pursuant to this
provision,
Lender may pay such lien, or may contest the validity of the lien, and
Borrower shall pay all costs and expenses of such contest, including Lender's
reasonable attorneys' fees.
10. Taxes And Claims. Pay and discharge when due all of Borrower's
indebtedness, obligations, and claims that, if unpaid, might become a lien or
charge upon the Property or Improvements; provided, however, that Borrower shall
not be required to pay and discharge any such indebtedness, obligation, or claim
so long as (a) its legality shall be contested in good faith by appropriate
proceedings, (b) the
indebtedness, obligation or claim does not become a lien or
charge upon the
Property or Improvements, and (c) Borrower shall have established
on its books
adequate reserves with respect to the amount contested in accordance
with generally accepted accounting practices. If the indebtedness, obligation,
or claim
does become a lien or charge upon the Property or Improvements, Borrower
shall remove the lien or charge as provided in the preceding paragraph.
11. Performance. Perform and comply with all terms, conditions, and
provisions
set forth in this Agreement and in all other instruments and agreements
between Borrower and Lender, and in all other loan agreements now or hereafter
existing between Borrower and any other party. Borrower shall notify Lender
immediately in writing of any material default in connection with any agreement.
12. Additional Assurances. Make, execute, and deliver to Lender
such Security
Agreements, instruments, documents, and other agreements reasonably
necessary to document and secure the Loan and to perfect Lender's Security
Interests in the Property and Improvements.
13. Construction Of Improvements. Construction of the Improvements
shall be prosecuted with diligence and continuity, in a good and workmanlike
manner, in accordance with the Plans and Specifications, all applicable laws and
regulations and the requirements hereof. Borrower shall not permit cessation of
work for a period in excess of thirty (30) days without prior written consent of
Lender;
provided, however, that this limitation shall not apply in the case of any
cessation
of work due to unusually prolonged periods of ice, snow, rain, strikes,
or other labor troubles, unavailability of materials, national emergency, any
rule, order or regulation of any governmental body having jurisdiction, or other
similar cause not within Borrower's control; provided, further, that Borrower
shall give prompt written notice of such cause or delay to Lender, and Borrower
shall promptly
recommence work immediately upon termination of such cause of delay
and diligently prosecute the same to completion. Borrower shall complete
construction of
the Improvements on or before the Completion Date, free and clear
of all liens.
14. Storage Of Materials. Borrower shall cause all materials
supplied for,
or intended to be utilized in, the construction of the Improvements,
but not affixed
to or incorporated into the Improvements or the Property, to be
stored on the Property, with adequate safeguards, as required by Lender, to
prevent loss, theft, damage or commingling with other materials or projects.
15. Inspection Of Property. Borrower shall permit Lender and
Lender's agents and representatives, including any architects or engineers
retained by Lender, to enter upon the Property and any other location where
materials intended to be utilized in the construction on the Improvements are
stored for the purpose of inspection of the Property and such materials at all
reasonable times.
16. Application Of Advances. Borrower shall ensure that all
advances of Construction Loan proceeds made by the Lender will be disbursed for
the payment of the costs and expenses specified in the Construction Budget and
Borrower's
application for Advance, and for no other purpose without the expressed
written consent of the Lender.
17. No Liability Of Lender. Lender shall have no liability,
obligation or responsibility whatsoever with respect to the construction of the
Improvements
except to advance the Loan Funds pursuant to this Agreement. Lender
shall not be obligated to inspect the Property or the construction of the
Improvements, nor be liable for the performance or default of Borrower,
contractor, or any other party, or for any failure to construct, complete,
protect, or insure the Improvements, or for the payment of costs of labor,
materials, or services supplied for the construction of the Improvements, or for
the performance of any obligation of Borrower whatsoever.
18. Additional Security. As additional security for the performance
of Borrower's obligations under the Related Documents, Borrower irrevocably
assigns to Lender, and grants to Lender a Security Interest in all governmental
permits obtained for the lawful construction of the Project, the Construction
Contract, the Architecture Contract, the Plans and Specifications, and all
reserves,
deferred payments, deposits, refunds, costs savings, and payments of any
kind
relating to the construction of the Project. Upon any default of Borrower and
not withstanding any of the provisions of this Agreement, Lender may use any of
the foregoing, the Loan Funds and Borrower's deposits for any purpose for which
Borrower should have used them under this Agreement or with respect to the
construction
or financing of the Project. Lender shall have all other rights and
remedies with respect to any of the foregoing that are provided under applicable
law or in equity.
B. Negative Covenants. Borrower covenants and agrees with Lender that
while this Agreement is in effect, Borrower shall not, without the prior written
consent of Lender:
1. Indebtedness And Liens. (a) Except for (i) existing
indebtedness which is subordinated in writing to the Loan, (ii) additional
financing
incurred to pay for the costs of constructing and equipping the Project
and which is subordinate to the Loan and obtained from an FDIC insured financial
institution or other lender acceptable to Lender, and (iii) trade debt incurred
in the normal course of business, create, incur, or assume indebtedness for
borrowed
money in connection with the Project or Property, or (b) sell, transfer,
assign, or lease the Property. Lender and Borrower acknowledge and agree that
Borrower may independently finance various items of furniture, furnishings, and
equipment necessary for the Project so long as any security interest granted or
lease entered into by Borrower for the benefit of a person or entity other than
Lender does
not adversely affect the priority of Lender's security interest in the
Personal Property Collateral or the Real Property.
2. Continuity Of Operations. (a) Engage in any business
activities substantially different than those in which Borrower is presently
engaged, or (b) cease operations, liquidate, merge, transfer, acquire or
consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business.
3. Modification Of Contract. Make or permit to be made any
modification of the Construction Contract.
4. Liens. Create or allow to be created any lien or charge upon
the Property or the Improvements.
V
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Lender, as of the date of this
Agreement, as of the date of each disbursement of Loan Funds, as of the date of
any renewal, extension, or modification of any Loan, and at all times any
Indebtedness exists:
A. Organization. Borrower is a corporation which is duly organized,
validly existing, and in good standing under the laws of the state of Nevada and
is validly
existing and in good standing in all states in which Borrower is doing
business.
Borrower has the full power and authority to own its properties and to
transact
the businesses in which it is presently engaged or presently proposes to
engage. Borrower also is duly qualified as a foreign corporation and is in good
standing in all states in which the failure to so qualify would have a material
adverse effect on its businesses or financial condition.
B. Authorization. The execution, delivery, and performance of this
Agreement by Borrower, to the extent to be executed, delivered, or performed by
Borrower, have been duly authorized by all necessary action by Borrower; do not
require the consent or approval of any other person, regulatory authority or
governmental body; and do not conflict with, result in a violation of, or
constitute
a default under (a) any provision of its articles of incorporation or
organization, or bylaws, or any agreement or other instrument binding upon
borrower or (b) any law, governmental regulation, court decree, or order
applicable to Borrower.
C. Financial Information. Each financial statement of Borrower supplied
to Lender
truly and completely disclosed Borrower's financial condition as of the
date of the
statement, and there has been no material adverse change in Borrower's
financial condition
subsequent to the date of the most recent financial statement
supplied to Lender. Borrower has no material contingent obligations except as
disclosed in such financial statements.
D. Litigation And Claims. No litigation, claim, investigation,
administrative proceeding or similar action (including those for unpaid taxes)
against Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or properties,
other than litigation, claims, or other events, if any, that have been disclosed
to and acknowledged by Lender in writing.
E. Title To Property. Borrower has, or on the date of the first
disbursement of the Loan Funds will have, good and marketable title to the
Property free and claim of all defects, liens, and encumbrances, excepting only
liens
for taxes, assessments, or governmental charges or levies not yet delinquent
or payable
without penalty or interest, and such liens and encumbrances as may be
approved in writing by the Lender.
F. Project Costs. The total cost for the Project shall not exceed the
total amount
set forth in the Construction Budget, as the same may be amended and
modified with the approval of Lender from time to time. The Project costs are
true and accurate estimates of the costs necessary to complete the Improvements
in a good and workmanlike manner according to the Plans and Specifications
presented by Borrower to Lender, and Borrower shall take all steps necessary to
prevent the actual cost of the Improvements from exceeding the Project costs.
G. Utility Services. All utility services appropriate to the use of the
Project after completion of construction are available at the boundaries of the
Property.
H. Access. The Property is contiguous to publicly dedicated streets,
roads, or highways providing access to the Property.
I. Assessment Of Property. The Property is and will continue to be
assessed and taxed as an independent parcel by all governmental authorities.
J. Compliance With Governing Authorities. Borrower has examined and is
familiar with all the easements, covenants, conditions, restrictions,
reservations, building laws, regulations, zoning ordinances, and federal, state,
and local requirements affecting the Project. The Project will at all times and
in all respects conform to and comply with the requirements of such easements,
covenants, conditions, restrictions, reservations, building laws, regulations,
zoning ordinances, and federal, state, and local requirements.
K. Legal Effect. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered will
constitute, legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
L. Binding Effect. This Agreement, the Note, and all Security Agreements
directly
or indirectly securing repayment of Borrower's Loan and Note are binding
upon Borrower
as well as upon Borrower's successors, representatives and assigns,
and are legally enforceable in accordance with their respective terms.
M. Survival Of Representation And Warranties. Borrower understands and
agrees that Lender is relying upon the above representations and warranties in
extending Loan Advances to Borrower. Borrower further agrees that the foregoing
representations and warranties shall be continuing in nature and shall remain in
full force and effect until such time as Borrower's Loan and Note shall be paid
in full,
or until this Agreement shall be terminated in the manner provided above,
whichever is the last to occur.
VI
GENERAL PROJECT PROVISIONS
The following provisions relate to the construction and completion of the
Project:
A. Change Orders. All requests for changes in the Plans and
Specifications, other than minor changes involving no material increase in cost,
must be in writing, signed by Borrower and the architect, include any proposed
changes or modifications to the Construction Budget resulting from the change
order, and delivered to Lender for its approval. Borrower will not permit the
performance of any work pursuant to any change order or modification of the
Construction
Contract or any subcontract without the written approval of Lender.
Borrower will obtain any required permits or authorizations from governmental
authorities
having jurisdiction before approving or requesting a new change order.
B. Purchase Of Materials; Conditional Sales Contracts. No construction
materials, fixtures, or other items of personal property specifically included
within the definition of Personal Property Collateral placed in or incorporated
into the Project shall be purchased or installed under any Security Agreement or
other agreement whereby the seller reserves or purports to reserve title or the
right
of removal or repossession, or the right to consider such items as personal
property after their incorporation into the Project, unless otherwise authorized
by Lender in writing. Notwithstanding the foregoing, Lender and Borrower
acknowledge and agree that Borrower may independently finance various items of
furniture, furnishings, and equipment necessary for the Project so long as any
security interest granted or lease entered into by Borrower for the benefit of a
person or entity other than Lender does not adversely affect the priority of
Lender's security interest in the Personal Property Collateral or the Real
Property.
C. Lender's Right Of Entry And Inspection. Lender and its agents shall
have
at all times the right of entry and free access to the Property and the right
to inspect all work done, labor performed, and materials furnished with respect
to the Project. Lender shall have unrestricted access to and the right to copy
all records, accounting books, contracts, subcontracts, bills, statements,
vouchers,
and supporting documents of Borrower relating in any way to the Project.
D. Lender's Right To Stop Work. If Lender in good faith determines that
any work or materials do not conform to the approved Plans and Specifications or
sound
building practices, or otherwise depart from any of the requirements of this
Agreement, Lender may require the work to be stopped and withhold disbursements
until
the matter is corrected. In such event, Borrower will promptly correct the
work to Lender's satisfaction. No such action by Lender will affect Borrower's
obligation
to complete the Improvements on or before the Completion Date. Lender
is under
no duty to supervise or inspect the construction or examine any books and
records. Any inspection or examination by Lender is for the sole purpose of
protecting
Lender's security and preserving Lender's rights under this Agreement.
No default of Borrower will be waived by any inspection by Lender. In no event
will any inspection by Lender be a representation that there has been or will be
compliance
with the Plans and Specifications or that the construction is free from
defective materials or workmanship.
E. Indemnity. Borrower shall indemnify and hold Lender harmless from any
and all claims asserted against Lender or the Property by any person, entity, or
governmental
body arising out of or in connection with the Property, Improvements,
or Project except for those claims arising out of the gross negligence or
intentional
acts or omissions of Lender or Lender's employees and agents. Lender
shall be entitled to appear in any action or proceeding to defend itself against
such claims, and all costs incurred by Lender in connection with such defense,
including attorneys' fees, shall be paid by Borrower to Lender. Lender shall,
in its sole discretion, be entitled to settle or compromise any asserted claims
against it, and such settlement shall be binding upon Borrower for purposes of
this indemnification. All amounts paid by Lender under this paragraph shall be
secured by Lender's Mortgage or deed of trust, if any, on the Property, shall be
deemed an additional principal Advance under the Loan, payable upon demand, and
shall bear interest at the rate applicable to the Loan.
F. Publicity. Lender may display a sign at the construction site
informing the public that Lender is the construction lender for the Project.
Lender may obtain other publicity in connection with the Project through press
releases and participation in ground-breaking and opening ceremonies and similar
events.
G. Actions. Lender shall have the right to commence, appear in, or
defend any action or proceeding purporting to affect the rights, duties, or
liabilities of the parties to this Agreement, or the disbursement of funds from
the
Loan Fund. In connection with this right, Lender may incur and pay reasonable
costs
and expenses, including, but not limited to, attorneys' fees, for both trial
and
appellate proceedings. Borrower covenants to pay to Lender on demand all
such expenses, together with interest from the date Lender incurs the expense at
the rate specified in the Note, and Lender is authorized to disburse funds from
the Loan Fund for such purposes.
VII
DEFAULT AND REMEDIES
A. Events Of Default. The term "Event of Default" as used herein and in
the Related
Documents shall mean the occurrence or happening, at any time and from
time to time, of any one or more of the following:
1. Payment Of Indebtedness. The failure, refusal or neglect to
pay, in full, (1) all of the Indebtedness on the maturity date thereof; or (2)
any installment or portion of the Indebtedness no later than the date the same
shall become due and payable, whether at the due date thereof stipulated in the
Related Documents or at a date fixed for prepayment or by acceleration or
otherwise.
2. Performance Of Obligations. The failure, refusal or neglect by
Borrower
or any Guarantor to comply with, perform, and discharge fully and timely
each and every other material term, obligation, covenant, or condition contained
in this Agreement or in any of the Related Documents, as and when required.
3. False Representation. Any warranty, representation, or
statement made or furnished by Borrower in, under or pursuant to the Related
Documents or any other documents executed in connection therewith is false or
misleading
in any material respect at the time made or furnished, or becomes false
or misleading at any time thereafter.
4. Judgment. If any final money judgment shall be rendered against
Borrower
or any Guarantor or surety of the Indebtedness and the same shall not be
paid or
execution on the same shall not be stayed by perfection of an appeal or
other appropriate action within the cure period described in paragraph B. below.
5. Voluntary Bankruptcy. If Borrower or any Guarantor or surety
of the Indebtedness shall (1) seek entry of an order for relief as a debtor in
a proceeding under the Bankruptcy Code; (2) seek, consent to or not contest the
appointment of receiver or trustee for itself or himself or for all or any part
of its property; (3) file a petition seeking relief under the bankruptcy,
arrangement, reorganization or other debtor relief laws of the United States or
any state
or any other competent jurisdiction; (4) make a general assignment for
the
benefit of its or his creditors; or (5) admit in writing its or his inability
to pay its or his debts as they mature.
6. Involuntary Bankruptcy. If (1) a petition is filed against
Borrower
or any Guarantor or surety of the Indebtedness seeking relief under the
bankruptcy,
arrangement, reorganization or other debtor relief laws of the United
States or
any state or other competent jurisdiction; or (2) a court of competent
jurisdiction
enters an order, judgment or decree appointing a receiver or trustee
for Borrower, or for all or any part of its property; and (3) such petition,
order,
judgment or decree shall not be discharged or stayed within the cure period
described in paragraph B. below.
7. Foreclosure Of Other Liens. If the holder of any lien or
security interest on the Property (without implying Lender's consent to the
existence, placing, creating or permitting of any lien or security interest)
institutes foreclosure or other proceedings for the enforcement of its remedies
thereunder and any such proceedings shall not be stayed or discharged within the
cure period described in paragraph B. below.
8. Sale, Lease Or Other Transfer. Any sale, lease, exchange,
assignment, conveyance, transfer of possession or other disposition of all or
any portion of
the Property or any interest therein without the consent of the Lender,
or any sale, lease, exchange, assignment, conveyance or other disposition of
substantially all of the personal property collateral, except for sales or other
dispositions of the personal property collateral in the ordinary course of
Borrower's business, without the prior written consent of the Lender.
9. Dissolution Or Failure. The dissolution, business failure,
merger or similar event affecting the Borrower or any surety, endorser or
Guarantor of the Indebtedness, without the prior written consent of Lender.
10. Title And Lien Priority. If title of Borrower to any or all of
the Property or the status of the Deed of Trust as a first and prior lien and
security
interest on the Property shall be endangered by any party whatsoever, and
Borrower shall fail to cure the same upon demand by Lender.
11. Other Defaults. The occurrence of an Event of Default, as
defined or described in any of the other Related Documents, or the occurrence of
a default by Borrower on any other loan or obligation of Borrower, including,
without limitation, loans or obligations secured by all or any portion of the
Property which are subordinate to the Deed of Trust or the other Related
Documents.
12. Levy On Assets. A levy on any of the assets of Borrower or any
Guarantor or surety of the Indebtedness, and such levy is not stayed or abated
within the cure period described in paragraph B. below.
13. Adverse Change In Financial Condition. The occurrence of a
material adverse change in Borrower's financial condition, or if Lender, in
Lender's reasonable judgment, believes the prospect of payment or performance of
the indebtedness by Borrower is impaired.
14. Breach Of Construction Contract. The occurrence of a material
breach of the Construction Contract by either the Borrower or the Contractor.
15. Cessation Of Construction. Prior to the completion of
construction of the Improvements and equipping of the Project, the construction
of the Improvements or the equipping of the Project is abandoned or work thereon
ceases for a period
of more than ten (10) days for any reason, or the Improvements
are not completed for purposes of final payment to the General Contractor prior
to June ___, 1999, regardless of the reason for the delay.
B. Notice And Cure. If any default, other than a default in payment (as
defined below) is curable and if Borrower or Grantor, as the case may be, has
not
been given two (2) or more notices of a similar default within the preceding
twelve (12) months, it may be cured (and no Event of Default will have occurred)
if Borrower or Grantor, as the case may be, after receiving written notice from
Lender
demanding cure of such default: (a) cures the default within thirty (30)
days; or (b) if the cure requires more than thirty (30) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be sufficient
to cure the default and thereafter continues and completes all reasonable and
necessary
steps sufficient to produce compliance as soon as reasonably practical.
For purposes of this Agreement and the other Related Documents, a "default in
payment"
shall mean the failure to pay any installment of interest, principal, or
late charge under the Note, or the failure to pay real estate taxes and
assessments,
and insurance premiums, including any payments to an impound account,
as required under the terms of the Construction Deed of Trust and Security
Agreement with Assignment of Rents which secures payment of the Note.
C. Remedies.
1. Generally. Upon the occurrence of any Event of Default which
is not cured pursuant to paragraph B. above and at any time thereafter, Lender
may, at its option, but without any obligation to do so, and in addition to any
other right Lender may have, do any one or more of the following without notice
to Borrower: (a) Cancel this Agreement; (b) Institute appropriate proceedings
to enforce the performance of this Agreement; (c) Withhold further disbursement
of Loan Funds; (d) Expend funds necessary to remedy the default; (e) Take
possession of the Property and continue construction of the Project; (f)
Accelerate
maturity of the Note and/or Indebtedness and demand payment of all sums
due under the Note and/or Indebtedness; (g) Bring an action on the Note and/or
Indebtedness; (h) Foreclose Lender's Mortgage or Deed of Trust, if any, on the
Property in any manner available under law; and (i) Exercise any other right or
remedy which it has under the Note or Related Documents, or which is otherwise
available at law or in equity or by statute.
2. Right To Complete Construction. If Lender takes possession of
the Property, it may take any and all actions necessary in its judgment to
complete construction of the Improvements, including, but not limited to, making
changes in the Plans and Specifications, work, or materials and entering into,
modifying or terminating any contractual arrangements, subject to Lender's right
at any time to discontinue any work without liability. If Lender elects to
complete
the Improvements, it will not assume any liability to Borrower or to any
other person for completing the Improvements or for the manner or quality of
construction of the Improvements, and Borrower expressly waives any such
liability. Borrower irrevocably appoints Lender as its attorney-in-fact, with
full power of substitution, to complete the Improvements, at Lender's option,
either in
Borrower's name or in its own name. In any event, all sums expended by
Lender in completing the construction of the Improvements will be considered to
have been disbursed to Borrower and will be secured by the collateral for the
Loan. Any such sums that cause the principal amount of the Loan to exceed the
face amount of the Note will be considered to be an additional Loan to Borrower,
bearing
interest at the Note rate and being secured by the collateral. For these
purposes, Borrower assigns to Lender all of its right, title and interest in and
to the Project Documents; however, Lender will not have any obligation under the
Project Documents unless Lender expressly hereafter agrees to assume such
obligations in writing. Lender will have the right to exercise any rights of
Borrower
under the Project Documents upon the occurrence of an Event of Default.
All rights,
powers, and remedies of Lender under this Agreement are cumulative and
alternative, and are in addition to all rights which Lender may have under
applicable law.
D. Advances By Lender. Any funds of Lender used for any purpose referred
to in this article shall constitute advances under the Loan and shall bear
interest at the variable rate specified in the Note.
E. Coordination With Related Documents. The benefits, rights and
remedies of Lender contained herein or provided for in any of the Related
Documents, are cumulative. To the extent of any conflict between any provision
of this Agreement and any provision contained in any and all of the Related
Documents, the provisions of this Agreement shall control, except that any
provision
of any other Related Documents giving the greater security or additional
rights and remedies shall control over this Agreement.
VIII
MISCELLANEOUS
A. Notices. All notices required under the terms of this Agreement or
any security document are sufficient either (i) three (3) days after their
deposit in the United States Mail, postage prepaid, or (ii) two (2) days after
their deposit in a nationally recognized overnight courier service, or (iii) on
the day of their personal delivery, if addressed or delivered to the parties at
the addresses set forth beneath their signature lines or at such other addresses
as specified in writing by any party to the others, provided that no change of
address by any party will be effective unless the party first serves notice of
such change of address on the other parties in writing by certified mail with
return receipt requested, retaining a copy of such return receipt in its files.
Notwithstanding the foregoing, notice regarding any proposed foreclosure sale
shall be given as required by law.
B. Agency. Nothing in this Agreement shall be construed to constitute
the creation of a partnership or joint venture between Lender and Borrower or
any
contractor.
Lender is not an agent or representative of Borrower. This Agreement
does not create a contractual relationship with and shall not be construed to
benefit
or bind Lender in any way with or create any contractual duties by Lender
to any contractor, subcontractor, materialman, laborer, or any other person.
C. Authority To File Notices. Borrower appoints and designates Lender
as
its attorney-in-fact to file for record any notice that Lender deems necessary
to
protect its interest under this Agreement. This power shall be deemed coupled
with
an interest and shall be irrevocable while any sum or performance remains due
and owing under any of the Related Documents.
D. Consent To Loan Participation. Borrower agrees and consents to
Lender's sale or transfer, whether now or later, of one or more participation
interests
in the Loans to one or more purchasers, whether related or unrelated to
Lender. Lender may provide, without any limitation whatsoever, to any one or
more
purchasers,
or potential purchasers, any information or knowledge Lender may have
about Borrower
or about any other matter relating to the Loan, and Borrower hereby
waives any rights to privacy it may have with respect to such matters. Borrower
additionally waives any and all notices of sale of participation interests, as
well as all notices of any repurchase of such participation interests. Borrower
also agrees that the purchasers of any such participation interests will be
considered as the
absolute owners of such interests in the Loans and will have all
the rights granted under the participation agreement or agreements governing the
sale of such participation interests. Borrower further waives all rights of
offset
or counterclaim that it may have now or later against Lender or against any
purchaser
of such a participation interest and unconditionally agrees that either
Lender or such purchaser may enforce Borrower's obligation under the Loans
irrespective of the failure or insolvency of any holder of any interest in the
Loans. Borrower further agrees that the purchaser of any such participation
interests
may enforce its interests irrespective of any person claims or defenses
that Borrower may have against Lender.
E. Costs And Expenses. Borrower agrees to pay upon demand all of
Lender's expenses, including without limitation reasonable attorneys' fees,
incurred
in connection with the preparation, execution, enforcement, modification
and
collection of this Agreement or in connection with the Loans made pursuant to
this Agreement. Lender may pay someone else to help collect the Loans and to
enforce
this Agreement, and Borrower will pay that amount. This includes, subject
to any limits under applicable law, Lender's attorneys' fees and Lender's legal
expenses, whether or not there is a lawsuit, including attorneys' fees for
bankruptcy proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection services.
Borrower
also will pay any court costs, in addition to all other sums provided by
law.
F. Modifications. No provision of this Agreement or the other Related
Documents
may be modified, waived or terminated except by an instrument in writing
executed
by the party against whom a modification, waiver or termination is sought
to be enforced.
G. Severability. In case any of the provisions of this Loan Agreement
shall for any reason be held to be invalid, illegal or unenforceable, such
invalidity, illegality or unenforceability shall not affect any other provision
hereof,
and this Loan Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein.
H. Election Of Remedies. Lender shall have all of the rights and
remedies granted in the Related Documents and available at law or in equity, and
these
same rights and remedies shall be cumulative and may be pursued separately,
successively or concurrently against Borrower, any Guarantor or any collateral
provided
by the Related Documents at the sole discretion of Lender. The exercise
of, or failure to exercise, any of the same shall not constitute a waiver or
release thereof or of any other right or remedy, and the same shall be
nonexclusive.
I. Form And Substance. All documents, certificates, insurance policies
and other items required under this Agreement to be executed and/or delivered to
Lender shall be in form and substance satisfactory to Lender.
J. No Third Party Beneficiary. This Loan Agreement is for the sole
benefit of Lender, its successors and assigns, and Borrower, its permitted
successors and assigns, and is not for the benefit of any third party.
K. Number And Gender. Whenever used herein, the singular number shall
include
the plural and the singular, and the use of any gender shall be applicable
to
all genders. The duties, covenants, obligations and warranties of Borrower in
this Loan Agreement shall be joint and several obligations of Borrower, and of
each Borrower if more than one.
L. Captions. The captions, headings and arrangements used in this Loan
Agreement are for convenience only and do not in any way affect, limit, amplify
or modify the terms and provisions hereof.
M. Applicable Law. This Loan Agreement and the Related Documents shall
be governed by and construed in accordance with the laws of the State of Nevada
and the laws of the United States applicable to transactions within such state.
N. Survival. All warranties, representations, and covenants made by
Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been relied
upon by Lender and will survive the making of the Loan and delivery to Lender of
the Related Documents, regardless of any investigation made by Lender or on
Lender's behalf.
O. Time Is Of The Essence. Time is of the essence in the performance of
this Agreement.
P. Waiver. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall operate as
a waiver of such right or any other right. A waiver by Lender of a provision of
this Agreement shall not prejudice or constitute a waiver of Lender's right
otherwise to demand strict compliance with that provision or any other provision
of this Agreement. No prior waiver by Lender, nor any course of dealing between
Lender
and Borrower, or between Lender and any Grantor, shall constitute a waiver
of any of Lender's rights or of any obligations of Borrower or of any Grantor as
to any
future transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent in subsequent instances where such consent is
required, and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
Dated this _____ day of January, 1998.
LENDER
First Credit Bank
By______________________________________
Authorized Officer
Hawaiian Gardens Branch
11940 East Carson Street
Hawaiian Gardens, CA 90716
BORROWER
NevStar Gaming & Entertainment
Corporation
By_________________________________
Michael J. Signorelli, Secretary
By_________________________________
Jeffrey L. Gilbert, President
3175 West Post Road
Las Vegas, NV 89118
STATE OF CALIFORNIA )
: ss.
COUNTY OF __________)
This instrument was acknowledged before me on January ___, 1998, by
____________________________ as the Authorized Agent of First Credit Bank.
___________________________________
Notary Public
STATE OF NEVADA )
: ss.
COUNTY OF __________)
This instrument was acknowledged before me on January ___, 1998, by Michael
J. Signorelli as Secretary of NevStar Gaming & Entertainment Corporation.
___________________________________
Notary Public
STATE OF NEVADA )
: ss.
COUNTY OF __________)
This instrument was acknowledged before me on January ___, 1998, by Jeffrey
L. Gilbert as President of NevStar Gaming & Entertainment Corporation.
___________________________________
Notary Public
Exhibit _______
When recorded mail to:
Terrence A. Everett, Esq.
Carlsmith Ball Wichman Case & Ichiki
555 S. Flower Street, 25th Floor
Los Angeles, CA 90071
________________________________________________________________________________
INTERCREDITOR AGREEMENT
This Intercreditor Agreement (this "Agreement"), dated as of May ___, 1997,
is entered into by and among Richard Kelley ("Kelley" or the "Lender"), Richard
Tam ("Tam") and PMJ Enterprises, Inc., a Nevada corporation ("PMJ").
RECITALS
A. Nevstar Gaming Corporation, a Nevada Corporation ("Borrower") owns the
real property which is described in Exhibit A, attached hereto (the "Property")
and is in the process of constructing improvements on the Property.
B. Pursuant to that Amended and Restated Convertible Loan Agreement dated
as of April 18, 1996 between Borrower and Kelley (the "Loan Agreement"),
Borrower has issued to Lender a certain promissory note in the principal amount
of $5,750,800 (the "Note") secured by a deed of trust dated April 18, 1996 and
recorded in Book 960423 as Instrument No. 00683 on April 23, 1996 with the
County Recorder of Clark County, Nevada (the "Deed of Trust"); and pursuant to
that certain Participation and Intercreditor Agreement between Kelley and Tam,
Tam agreed to become a participant under the Loan Agreement. The obligations
under the Loan Agreement, Note and Deed of Trust are collectively referred to as
the "Lender Obligations".
C. PMJ has advanced certain funds to Borrower in the amount of $1,058,000,
which is evidenced by two promissory notes in the amount of $558,000 and
$500,000 dated December 31, 1993 and May 26, 1995, respectively (the "PMJ
Notes"), which notes are secured by a Deed of Trust dated May 26, 1995 (the "PMJ
Deed of Trust") which is recorded on May 26, 1995 in Book 950526 as Instrument
No. 00132
in the official records of the Clark County Recorder, State of Nevada.
The obligations under the PMJ Notes, as twice amended, and the PMJ Deed of
Trust, as twice amended, are collectively referred to as the "PMJ Obligations".
D. The Deed of Trust constitutes a first deed of trust on the Property and
the PMJ Deed of Trust constitutes a second deed of trust on the Property.
E. In addition to the funds owed to Lender under the Lender Obligations
described in recital B above, Lender also extended additional credit to
Borrower, which additional advances are in the aggregate principal amount of
$575,000, represented by notes in the principal amounts of $300,000, $250,000
and $25,000, secured by deeds of trust, all of which are subordinate in priority
to the PMJ Deed of Trust (the "Subordinate Deeds of Trust").
F. Concurrently herewith, PMJ is selling all of the capital stock of the
Borrower owned by it to Kelley and Tam and the parties have agreed to enter into
this Intercreditor Agreement to set forth the relative rights of the parties
with respect to collection on the Lender Obligations and PMJ Obligations.
NOW, THEREFORE, the parties hereby agree as follows:
1. Notwithstanding the relative priorities of the perfection of the
security interests in the Property of Borrower by Lender and PMJ, from and after
the date of this Agreement, all funds payable by Borrower pursuant to the Lender
Obligations and the PMJ Obligations (except for the payment of accrued interest
in the amount of $114,086.59 to PMJ and the payment to Lender of previously
incurred attorneys fees in the amount of approximately $50,000 upon the closing
of the Borrower's initial public offering) shall be transmitted into an escrow
account with Weststar Loan Servicing Corporation or such other institution
agreed by the parties as escrow agent ("Escrow Agent"), subject to the terms and
conditions of the escrow agreement (the "Escrow Agreement") entered into among
the parties and the Escrow Agent as of the date of this Agreement, and by its
execution of this Agreement, Borrower agrees to make all payments pursuant to
the terms of the PMJ Obligations and the Lender Obligations (except for the
$114,086.59 interest payment and the $50,000 legal fee reimbursement as
aforesaid) to the Escrow Agent to be disbursed pursuant to the terms of this
Agreement and the Escrow Agreement.
2. The Escrow Agent shall collect and receive all payments from Borrower
or on behalf of Borrower or as proceeds from the Property pursuant to the PMJ
Obligations and Lender Obligations and, after deducting any fees due to the
Escrow Agent for activities to date, shall promptly disburse same to PMJ and to
Lender as follows:
a. Until the closing of the proposed public offering of the Borrower to be
underwritten by H.J. Meyers (at which time it is anticipated an interest payment
in the amount of $114,086 will be made on the PMJ Notes) (the "IPO") the funds
disbursed by the Escrow Agent shall be disbursed in accordance with the
provisions of this paragraph 2(a). For purposes of this Section 2(a): (i) the
Lender's Disbursement Amount shall be $6,505,782.70 (the sum of $5,750,800 plus
accrued interest through April 30, 1997 in the amount of $754,982.70); (ii) the
PMJ Disbursement Amount shall be $1,172,086.59 (the sum of $1,058,000 plus
accrued interest through April 30, 1997 in the amount of $114,086.59); (iii) the
Lender's Disbursement Percentage shall be 84.734% (the Lender's Disbursement
Amount divided by the sum of the Lender's Disbursement Amount and the PMJ
Disbursement Amount); and (iv) the PMJ Disbursement Percentage shall be 15.266%
(the PMJ Disbursement Amount divided by the sum of the PMJ Disbursement Amount
and the Lender's Disbursement Amount). The funds transmitted to the Escrow
Agent shall be promptly disbursed to Lender and PMJ on a pro rata basis
according to their respective Disbursement Percentages. Lender and PMJ
represent and warrant to each other that the amounts set forth in this Section
2a are accurate and correctly reflect the descriptions thereof contained herein.
b. After the closing of the IPO and the payment to PMJ by Borrower of
$114,086 ("Adjustment Date"), the Disbursement Amounts and Disbursement
Percentages shall be adjusted in accordance with the provisions of this Section
2(b). From and after the Adjustment Date: (i) the Lender's Disbursement Amount
shall be adjusted to add accrued interest on Lender's $5,750,800 Note through
the Adjustment Date; (ii) the PMJ Disbursement Amount shall be adjusted to
subtract the $114,086 interest payment (if such payment is in fact made) and to
add accrued interest on the $1,058,000 PMJ Notes through the Adjustment Date;
(iii) the Lender's Disbursement Percentage shall be recalculated using the
adjusted Disbursement Amounts; and (iv) the PMJ Disbursement Percentage shall be
recalculated using the adjusted Disbursement Amounts. After the Adjustment Date
unless otherwise agreed in writing by Lender and PMJ, the Disbursement Amounts
and the Disbursement Percentages shall be fixed until the PMJ Obligations
(including all principal and accrued interest thereunder) have been paid in
full. PMJ agrees that after all PMJ Obligations have been received by PMJ in
full, the obligations of Lender to PMJ pursuant to this Agreement shall have
been satisfied, and PMJ will, if requested by Lender, immediately execute a
termination of this Agreement and the Escrow Agreement. In the event that,
notwithstanding the payment in full of the amount of all PMJ Obligations to PMJ,
any amounts remain due from the Company pursuant to the PMJ Obligations, PMJ
agrees to assign to Lender all of its rights to such remainder. Further, in the
event that the Lender Obligations have been received by Lender in full, but
there remains an outstanding balance due from Borrower on the Lender
Obligations, Lender agrees to assign to PMJ all of its rights to such remainder,
and Tam agrees to consent to such assignment and be bound thereby.
3. The Lender and PMJ agree that each shall act as agent for the other to
the extent of any proceeds received by them from the Borrower or on Borrower's
behalf (except for the $114,086.59 interest payment and the $50,000 legal fee
reimbursement) on account of the Lender Obligations or the PMJ Obligations
(which the recipient shall hold in trust for the benefit of the other until such
is paid over to the Escrow Agent), and shall transmit any such funds to the
Escrow Agent to be disbursed in accordance with the terms of this Agreement and
the Escrow Agreement. To the extent that Lender or PMJ receives any proceeds
from the Property or payments from Borrower which are subsequently recovered,
set aside, deemed a preference or fraudulent conveyance, or otherwise required
to be repaid under any law or principle of equity, then that part of such
party's claim against the Borrower previously satisfied with such proceeds shall
be deemed revived and unsatisfied.
4. Lender hereby expressly waives any and all rights, expressed or
implied, by written agreement or otherwise, to set-off or recoup any amounts
required to be paid to Escrow Agent hereunder against any amounts due to Lender
from PMJ or Borrower, and the parties agree that the obligations hereunder are
completely independent of any other claim or obligation of each party to any
other party hereto, provided, however, that Lender shall retain the right
independently to assert such claims against PMJ and Borrower.
5. Lender and PMJ shall consult with each other, prior to the declaration
of a default under their respective Notes and Deeds of Trust referenced herein
(including the Subordinate Deeds of Trust) and the exercise of rights thereunder
and shall consult with each other thereafter as the parties proceed to realize
upon the collateral encumbered by the respective Deeds of Trust. This
requirement to consult with each other shall not be construed to require the
approval of either party to the other party's intended action as permitted
hereunder. In the event Lender or PMJ intend to declare a default in accordance
with the provisions of the respective documentation governed by this
Intercreditor Agreement, they shall notify the other party in writing of such
intent and shall not declare a default (except where the circumstances require
immediate action) until five business days have passed from the date of notice
to the other party. If the other party so requests, the party which is
declaring the default will, unless an emergency situation exists or the value of
the collateral requires protection, not take steps to foreclose upon or realize
upon the collateral or record a notice of default (except to preserve the value
of such pending a realization on same) for a period of up to 10 business days
from the date of notice to the other party (the "Standstill Period"); provided,
however, that the party so requesting the standstill shall likewise take no such
action during the Standstill Period. After the expiration of the Standstill
Period, either party shall be free to pursue foreclosure or realization upon the
collateral encumbered under the respective Deeds of Trust, subject to the
obligations set forth in this Section to consult with the other party with
respect to same. Provided further, that any and all proceeds received from any
foreclosure, net of the reasonable costs and expenses of such proceeding, shall
be paid to the Escrow Agent to be disbursed in accordance with the terms of the
Escrow Agreement as set forth herein. Notwithstanding the standstill provision
hereinabove, either party may declare a default after the five business day
notice period, but prior to expiration of the Standstill Period upon the
dissolution of, termination of existence of, appointment of a receiver, trustee,
custodian or similar fiduciary of, assignment for the benefit of creditors or
the commencement of any proceedings under any bankruptcy laws by or against
Borrower or if either party has evidence which reasonably leads such party to
conclude that Borrower has transferred the Property or committed fraud in
respect to the PMJ Obligations or the Lender's Obligations or the Subordinate
Deeds of Trust.
6. The Lender and PMJ agree that each shall provide the other and the
Escrow Agent with a copy of all notices of default to Borrower on the same date
as provided to Borrower.
7. Notwithstanding any other provision hereof, in the event that the
Lender has declared a default and has moved to foreclose under the Deed of Trust
or the Subordinate Deeds of Trust, if requested in writing by PMJ, Lender will
permit PMJ to schedule a foreclosure sale of the Property under the PMJ Deed of
Trust prior to the foreclosure sale for the Property under the Deed of Trust or
the Subordinate Deed of Trust, provided that PMJ shall move expeditiously and
record a proper notice of default under the PMJ Deed of Trust within 30 days of
the date that the Lender delivers a copy to PMJ of any notice of default under
the Deed of Trust or the Subordinate Deed of Trust and that PMJ schedule a
foreclosure sale as soon as practical after the legal cure period has expired.
In all such cases, all proceeds from foreclosure or realization upon the
collateral under the PMJ Deed of Trust, the Deed of Trust or the Subordinate
Deeds of Trust shall be paid to the Escrow Agent to be disbursed in accordance
with the terms hereof.
8. In the event the Lender or PMJ or their nominee becomes the owner of
the Property through a credit bid in the foreclosure sale or otherwise as a
result of a notice of default, such party shall hold the Property in trust for
the benefit of Lender and PMJ pursuant to the terms of this Agreement. Lender
or PMJ holding the Property shall not further encumber, sell, alienate,
hypothecate or otherwise dispose of the Property or any interest therein without
the consent of the other party except in accordance with the terms of this
Agreement. Upon receipt of the Property, the parties shall consult with each
other with respect to the best method of achieving a full repayment of all fees,
costs, interest and principal owing to the parties hereunder under the Lenders
Obligations and the PMJ Obligations. If the parties cannot mutually agree as to
dealing with the Property, then either party shall have the right to cause the
Property to be put up for sale with a recognized broker provided that the
minimum sale price shall not be less than an amount equal to that which would
net to the parties sufficient money to pay all fees, costs, charges, principal
and interest due under the PMJ Obligations and Lender Obligations and both
parties shall be obligated to sell the Property free and clear of their
respective Deeds of Trust if a bona fide cash offer is made which will net the
parties such amounts. Provided further, that despite attempts at a sale, in the
event that the Property has not been sold under this Section and the Lenders
Obligations or the PMJ Obligations have not been repaid within two years after
the date in which the Property was obtained by credit bid, then either party
shall have the right upon notice to the other to cause the party holding the
Property in trust for the parties to put the Property up for sale through a
public auction process with reasonable publicity for sale to the highest cash
bidder at which there shall be no minimum price except that which is mutually
agreed between the parties. The proceeds from any such sale shall be deposited
with the Escrow Agent and disbursed pursuant to the provisions of Section 2
hereof.
9. Each of Lender and PMJ will, upon the request of the other, from time
to time, execute and deliver or cause to be executed and delivered such further
instruments and do or cause to be done such further acts as may be necessary or
proper to carry out more effectively the provisions of this Agreement. Lender
and PMJ acknowledge that any additional extensions of credit by either of them
to Borrower will have no effect whatsoever on the Disbursement Percentages set
forth in Section 5 hereof, and neither party shall have the right, without the
written consent of the other, to take any actions which shall in any way alter
or affect the Disbursement Percentages set forth in Section 5 hereof without the
prior written consent of the other.
10. Neither the execution and delivery of this Agreement nor any interest
of the Lender or PMJ or any of them, that they may now or hereinafter have in
all or any part of the Property, shall be construed as creating a partnership,
joint venture or other joint enterprise between the Lender and PMJ.
11. PMJ hereby agrees to subordinate the PMJ Deed of Trust and the PMJ
Notes to the Lender's Subordinate Deeds of Trust so that the Subordinate Deeds
of Trust will be prior to the encumbrance in favor of PMJ subject, in all
circumstances, to PMJ having a right to continue the benefits of this
Intercreditor Agreement with respect to the Lender's Obligations and the
Lender's Subordinate Deeds of Trust; provided, however, that such subordination
shall not be effective unless and until PMJ receives: (i) a fully executed
mortgage modification indorsement no. 110.5 issued by Fidelity National Title
Insurance Company ("Fidelity") indorsing its title insurance policy relating to
its Deed of Trust; (ii) a fully executed subordination indorsement no. 111.2
issued by Fidelity indorsing the title policy referred to in (i) above; and
(iii) a preliminary commitment for title insurance (lender's policy) issued by
Fidelity showing the PMJ Deed of Trust as a valid, enforceable lien against the
Property, subject only to current real estate taxes and Lender's Obligations and
the Subordinate Deeds of Trust. Lender shall have no obligation to pay for any
such title insurance matters. PMJ agrees to execute any and all documents
reasonably requested by Lender or the Title Insurance Company in order to effect
such subordination.
12. Any provision of this Agreement may be waived, modified or amended by
a writing signed by PMJ and the Lender. This Agreement shall be binding upon
and enure to the benefit of the Lender, PMJ and their respective successors and
permitted assigns. Lender and PMJ agree that notwithstanding any provision in
the Lender Obligations, the Subordinate Deeds of Trust or the PMJ Obligations,
neither Lender nor PMJ will sell, transfer, convey, assign, license, create a
security interest in or otherwise dispose of any of the Lender Obligations or
the Subordinate Deeds of Trust, or the PMJ Obligations without the prior written
consent of the other party; provided, however, that Lender may pledge its rights
under the Lender Obligations and Subordinate Deeds of Trust to Bank of Hawaii to
secure repayment of the funds borrowed to make such loans, subject to the
security interest of PMJ under the Note Pledge Agreement between Lender and PMJ
dated the date hereof.
13. This Agreement shall in all respects be governed by the substantive
laws of the State of Nevada as such laws are applied through agreements between
Nevada residents entered into and to be performed entirely within the State of
Nevada.
14. Notwithstanding the priorities established pursuant to the recordation
of PMJ Deed of Trust, the Deed of Trust, and Lender's Subordinate Deeds of
Trust, the relative interests of the Lender and PMJ in the Property shall be
governed solely by this Intercreditor Agreement and the Escrow Agreement. Under
no circumstances shall any term in this Intercreditor Agreement be deemed a
modification of the PMJ Deed of Trust, the Deed of Trust or the Subordinate
Deeds of Trust.
15. In the event either party hereto incurs costs or attorneys' fees in
enforcing the provisions hereof, the non-prevailing party shall promptly
reimburse the prevailing party for all such costs and reasonable attorneys' fees
so incurred.
16. This Agreement may be executed in several counterparts and by the
parties hereof on separate counterparts and each counterpart when so executed
and delivered, shall constitute an original agreement and all such separate
counterparts shall constitute but one and the same agreement. This Agreement
may be executed and executed copies may be sent by facsimile which shall be
deemed the same as original copies hereof.
17. Borrower hereby consents to the terms and provisions of this Agreement
and agrees that the application of payments or proceeds pursuant to this
Agreement shall be binding upon it.
18. Richard Tam hereby consents to the execution and delivery of this
Agreement and the Escrow Agreement and the other transactions entered into
between Lender, PMJ and Borrower concurrently herewith, and acknowledges his
intent to be bound thereby.
19. Nothing in this Agreement is intended to affect or limit, in any way
whatsoever, the security interest which each of the parties hereto has in any
property of Borrower or any other person, insofar as the rights of Borrower or
any other person or third parties are involved. The parties hereto specifically
reserve any and all of their respective rights, security interests and rights to
assert security interests as against any third party.
20. Notices shall be sent to the parties as follows:
Richard Kelley
4800 S. Lafayette Street
Englewood, CO 80110-7011
PMJ:
PMJ Enterprises, Inc.
9901 S. Western, Suite 205
Chicago, Illinois 60643
Attention: Patrick Shannon
and shall be effective upon actual receipt (by fax, or nationally recognized
courier).
21. If Lender or PMJ shall enforce its rights or remedies in violation of
the terms of this Agreement, Borrower, by its execution of the acknowledgment
set forth below, agrees that it shall not use such violation as a defense to any
action, default or foreclosure proceeding pursued by either Lender or PMJ nor
assert such violation as a counterclaim or basis for setoff or recoupment
against either Lender or PMJ.
IN WITNESS WHEREOF, Kelly, Tam and PMJ have caused this Agreement to be
duly executed and delivered as of the date written above.
"Lender"
___________________________________
Richard Roy Kelley
___________________________________
Richard Tam
PMJ Enterprises, Inc.
By:________________________________
Patrick Shannon, President
Nevstar Gaming Corporation hereby consents and agrees to the provisions in
Sections 1, 3, 17 and 21 of this Agreement.
Nevstar Gaming Corporation
By:_________________________________
SECOND AMENDMENT TO OPTION AGREEMENT
This SECOND AMENDMENT TO OPTION AGREEMENT ("Amendment") is entered into
effective as of September 8, 1997, by and among DESERT MESA LAND PARTNERS, LTD.,
a Nevada limited partnership ("Seller"), HIGH MESA DEVELOPMENT, INC., a Nevada
corporation ("High Mesa") and NEVSTAR GAMING CORPORATION, a Nevada corporation
("Buyer") in connection with that certain Option Agreement between the parties
dated
April 23, 1996 as amended by that certain First Amendment to Option Agreement
between the parties dated April ___, 1997 (jointly the "Option").
For good and valuable consideration, the receipt and legal sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Development Funds Payable in Form of Promissory Note. The second
paragraph
of Section 1.4 of the Option entitled "Initial Option Consideration" is
deleted and replaced in its entirety with the following:
"Notwithstanding anything set forth in this Section 1.4 or anything set
forth elsewhere in the Option, Buyer's obligation to deposit
Development Funds shall be satisfied by Buyer giving to Seller on or
before September 30, 1997, Buyer's Promissory Note in the amount of
$200,000 (in the form attached hereto as Exhibit "A") which note shall
provide that it shall be converted to $200,000 in cash on or before
March 15, 1998 which funds shall thereupon be deposited into a
federally insured financial institution in an account designated for
the Project on which both Buyer and High Mesa are joint signatories.
Notwithstanding the foregoing, in no event shall Buyer be required to
deposit the Initial Option Consideration until Seller has obtained its
limited partner approval under Section 8.2 below. The Development
Funds shall be non-refundable and shall not be applicable to the Option
Purchase Price, but shall be reimbursable from the LLC to Buyer in
connection with the development and financing of the Project. If Buyer
fails to deposit the Development Funds as set forth in the first
sentence of this paragraph above, this Option shall automatically
terminate and shall be null and void for all purposes. Upon any such
termination, neither party shall have any further liability to the
other party with respect to the Option. Any portion of the Initial
Option Consideration remaining at Closing shall be deposited in the
name of the LLC. The parties hereto acknowledge and agree that the
preliminary development of the Project will require funds substantially
in excess of the Development Funds and that Buyer may elect, in its
sole discretion to advance additional funds pursuant to budget(s)
approved by Desert Mesa. Any such additional advances shall be
reimbursed from the LLC to Buyer in connection with the development and
financing of the Project.
2. Except as amended hereby, all of the other terms and provisions of the
Option shall remain in full force and effect.
3. This Amendment may be executed in one or more counterparts, each of
which
taken together shall constitute one and the same instrument. This Amendment
may be executed by facsimile with original signatures to follow by mail.
IN WITNESS WHEREOF, the parties have executed into this Amendment as of the
date first written above.
"Buyer" NEVSTAR GAMING CORPORATION,
a Nevada corporation
By:
Michael J. Signorelli, Chief Executive
Officer
"Seller" DESERT MESA LAND PARTNERS, LTD.,
a Nevada limited partnership
BY: TSRS, INC., a Nevada corporation
Its: General Partner
By:
Richard Tam, Chairman
By:
R. Ian Ross, President
"High Mesa" HIGH MESA DEVELOPMENT, INC.,
a Nevada corporation
By:
Richard Tam, Chairman of the Board
[Continued signature page to Second Amendment to Option Agreement]
THIRD AMENDMENT TO OPTION AGREEMENT
AND AMENDMENT TO NOTE
This THIRD AMENDMENT TO OPTION AGREEMENT ("Amendment") is entered into
effective as of March __, 1998, by and among DESERT MESA LAND PARTNERS, LTD., a
Nevada limited partnership ("Seller"), HIGH MESA DEVELOPMENT, INC., a Nevada
corporation ("High Mesa"), and NEVSTAR GAMING & ENTERTAINMENT CORPORATION, a
Nevada corporation, formally known as NEVSTAR GAMING CORPORATION ("Buyer"), in
connection with that certain Option Agreement between the parties dated April
23, 1996 (the "Agreement"), as previously amended by that certain First
Amendment to Option Agreement between the parties dated April 30, 1997 (the
"First Amendment"), and as further amended by that certain Second Amendment to
Option Agreement between the parties dated September 8, 1997 (the "Second
Amendment") (the Agreement, First Amendment and Second Amendment are
collectively referred to as the "Option").
For good and valuable consideration, the receipt and legal sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Change in Date of Conversion of Note to Cash.
a. The second paragraph of Section 1.4 of the Option entitled "Initial
Option Consideration" is deleted and replaced in its entirety with the
following:
"Notwithstanding anything set forth in this Section 1.4
or anything set forth elsewhere in the Option, Buyer's
obligation to deposit Development Funds shall be
satisfied by Buyer giving to Seller on or before
September 30, 1997, Buyer's Promissory Note in the
amount of $200,000 (in the form attached hereto as
Exhibit "A") which note shall provide that it shall be
convertible into $200,000 in cash on or before
September 15, 1998 which funds shall thereupon be
deposited into a federally insured financial institution
in an account designated for the Project on which both
Buyer and High Mesa are joint signatories. Any monies
advanced by Buyer directly to third parties to pay for
Development Funds expenses of the Project which are
approved by High Mesa shall be a dollar for dollar
credit against said $200,000. The Development Funds
shall be non-refundable and shall not be applicable to
the Option Purchase Price, but shall be reimbursable
from the LLC to Buyer in connection with the development
and financing of the Project. If Buyer fails to deposit
the Development funds as set forth in the first sentence
of this paragraph above, this Option shall automatically
terminate and shall be null and void for all purposes.
Upon any such termination, neither party shall have any
further liability to the other party with respect to the
Option. Any portion of the Initial Option Consideration
remaining at Closing shall be deposited in the name of
the LLC. The parties hereto acknowledge and agree that
the preliminary development of the Project will require
funds substantially in excess of the Development Funds
<PAGE>
and that Buyer may elect, in its sole discretion to advance
additional funds pursuant to budget(s) approved by Desert Mesa. Any
such additional advances shall be reimbursed from the LLC to Buyer
in connection with the development and financing of the Project."
b. The due date of the Note dated September 30, 1997 in the principal
amount of $200,000 given by Buyer to Seller is hereby amended to provide it is
due on September 15, 1998 instead of March 15, 1998.
2. Except as amended hereby, all of the other terms and provisions of the
Option shall remain in full force and effect.
3. This Amendment may be executed in one or more counterparts, each of which
taken together shall constitute one and the same instrument. This Amendment may
be executed by facsimile with original signatures to follow by mail.
IN WITNESS WHEREOF, the parties have entered into this Amendment as of the
date first written above.
"Buyer" NEVSTAR GAMING & ENTERTAINMENT CORPORATION,
a Nevada corporation
By:
Michael J. Signorelli, Chief Executive
Officer
"Seller" DESERT MESA LAND PARTNERS, LTD.
a Nevada limited partnership
BY: TSRS, INC., a Nevada corporation
Its: General Partner
By:
Richard Tam, Chairman
By:
R. Ian Ross, President
"High Mesa" HIGH MESA DEVELOPMENT, INC.
a Nevada corporation
By:
Richard Tam, Chairman of the Board
[Signature Page to Third Amendment to Option Agreement and Amendment to Note]
MASTER LEASE AGREEMENT
MASTER LEASE AGREEMENT NO. 1465540
LESSEE: NEVSTAR GAMING AND ENTERTAINMENT CORPORATION D/B/A MESQUITE STAR HOTEL
& CASINO
ADDRESS OF LESSEE: 3175 West Post Road, Las Vegas, NV 89115
THIS MASTER LEASE AGREEMENT ("Lease"), made in the State of Nevada as of this
_____ day of April, 1998, between IGT, 9295 Prototype Drive, Reno, Nevada 89511
("IGT") as Lessor and Lessee as stated above ("Lessee") herein it is agreed as
follows:
1. MASTER LEASE AGREEMENT:
In consideration of the terms and conditions set forth herein, Lessor hereby
leases to Lessee and Lessee hereby rents from Lessor, the equipment
("Equipment") described in any Lease Schedule ("Schedule") executed by the
parties concurrently herewith or in any Schedule later executed by the parties
which make specific reference to this MASTER LEASE AGREEMENT ("Lease"). This
Lease covers all such items together with all replacement parts, accessories,
devices or mechanisms now or hereafter attached or affixed thereto. All
Schedules executed by both parties shall be incorporated herein by reference
and made a part hereof. Wherever reference is made herein to Lease, that
reference shall be deemed to include such subsequent executed Schedules.
Lessor shall have no obligation hereunder until the execution and delivery of a
Schedule by Lessee and Lessor.
2. RENTAL:
As rental for the Equipment, Lessee agrees to pay Lessor, its successors and
assigns, the rental payment specified under "Periodic Rental Payment" on each
Schedule for the number of months specified in the "Lease Term". The Periodic
Rental Payments are due and payable in arrears and shall commence on the
"Commencement Date" which shall be defined on that specific Schedule. Payments
shall continue on the first day of each month thereafter for the total number
of rentals specified in the Lease Term on that specific Schedule. An interim
rental payment ("Interim Rental") equal to the Daily Interim Rent on that
specific Schedule times the number of days in the Interim Term shall be
invoiced by Lessor and shall be immediately due and payable by Lessee upon
receipt of invoice. The Interim Rental on each Schedule shall be defined as
the period from the Commencement Date through the last day of that month
("Interim Term"). Payment shall be made to Lessor at the address stated above
or to such other person and/or place as described by Lessor in writing. Lessee
agrees this a "net" lease, and therefore understands and agrees that in
addition to the rental payments stated above, any applicable Sales/Use Tax
which IGT is required to collect will be invoiced monthly and is due and
payable by Lessee upon receipt of invoice. In addition to the Initial Rental
and the Periodic Rental, Lessee agrees to pay all personal property taxes and
any other taxes and all maintenance, insurance, and other costs and expenses
and obligations of every kind and nature relating to the Equipment which may
arise or come due during the term of this Lease (except any taxes based upon
the Net Income of Lessor), whether or not specifically mentioned herein,
payment thereof, to the person entitled thereto (except as specified herein).
3. WARRANTY, DISCLAIMERS AND LIMITATIONS OF LIABILITY:
IGT WARRANTS THAT FOR A PERIOD OF 90 DAYS FOLLOWING INSTALLATION OF THE
EQUIPMENT, THAT THE NEW IGT EQUIPMENT LEASED HEREUNDER WILL BE FREE FROM
DEFECTS AND IN GOOD WORKING ORDER. LESSEE'S SOLE AND EXCLUSIVE REMEDY IN THE
EVENT OF DEFECT IS EXPRESSLY LIMITED TO THE RESTORATION OF THE EQUIPMENT TO
GOOD WORKING CONDITION BY ADJUSTMENT, REPAIR OR REPLACEMENT OF DEFECTIVE PARTS,
AT IGT'S ELECTION. VIDEO MONITORS (COVERED UNDER SEPARATE MANUFACTURER
WARRANTY), MACHINES, EQUIPMENT, AND OTHER PRODUCTS NOT MANUFACTURED BY IGT, ARE
EXCLUDED FROM THIS WARRANTY. EXCEPT AS SPECIFICALLY PROVIDED IN THIS
AGREEMENT, THERE ARE NO OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT
NOT LIMITED TO WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, NO AFFIRMATION OF FACT, INCLUDING BUT NOT LIMITED TO STATEMENTS
REGARDING SUITABILITY FOR USE, PERFORMANCE OR PERCENTAGE HOLD OR PAR VALUE OF
THE EQUIPMENT SHALL BE OR BE DEEMED TO BE A WARRANTY OF IGT FOR ANY PURPOSE.
IN NO EVENT SHALL IGT BE LIABLE FOR DIRECT, INDIRECT, SPECIAL, OR CONSEQUENTIAL
DAMAGES, INCLUDING LOSS OF PROFITS, ARISING OUT OF ANY BREACH OF THIS
AGREEMENT. THE LIABILITY OF IGT AND THE MANUFACTURER OF THE NOTE ACCEPTOR WITH
WHICH IGT MACHINES MAY BE EQUIPPED, WHETHER IN CONTRACT, IN TORT, UNDER
WARRANTY, IN NEGLIGENCE OR OTHERWISE, SHALL NOT EXCEED AN AMOUNT EQUAL TO THE
FAIR MARKET VALUE OF THE NOTE ACCEPTOR AND UNDER NO CIRCUMSTANCES SHALL IGT OR
THE MANUFACTURER OF THE NOTE ACCEPTOR BE LIABLE FOR SPECIAL, INDIRECT OR
CONSEQUENTIAL DAMAGES. NEITHER IGT NOR THE MANUFACTURER OF THE NOTE ACCEPTOR
SHALL BE LIABLE IN ANY RESPECT FOR THE ACCEPTANCE OF COUNTERFEITS AND/OR
FRAUDULENT MATERIALS. ANY UNAUTHORIZED MODIFICATION, ALTERATION, OR REVISION
OF ALL OR ANY PORTION OF THE IGT EQUIPMENT WHICH IS SUBJECT OF THIS AGREEMENT
SHALL CAUSE THE WARRANTY DESCRIBED IN THIS PARAGRAPH TO BE NULL AND VOID. IGT,
ITS AFFILIATES, SUBSIDIARIES, REPRESENTATIVES, AND AGENTS MAKE NO OTHER
WARRANTY, EXPRESS OR IMPLIED.
4. INSURANCE:
Lessee, at its own expense, shall keep the Equipment insured against all risks
of loss or damage from every cause whatsoever for not less than the full
replacement value thereof as determined by Lessor. The proceeds of such
insurance, at the option of Lessor, shall be applied; a) towards the
replacement, restoration, or repair of the Equipment or b) toward payment of
the obligations of Lessor hereunder. Lessee shall at its own expense carry
public liability and property damage insurance protecting Lessee and Lessor
with respect to liabilities for injuries to persons and damage to property of
others resulting from the use of the Equipment. Such insurance as stated above
shall be in form and with companies acceptable to Lessor and shall name Lessor
as an Additional Insured and Loss Payee and provide for thirty (30) days prior
written notice to Lessor of any alteration or cancellation of such policy.
Unless a higher or lower amount is specified by Lessor, such insurance shall
provide coverage of not less than $1,000,000 for injury or death to one (1)
person and subject to that limit for each person. Evidence of such coverage
shall be provided to the Lessor's Insurance Coordinator, c/o IGT, P.O. Box
10580, Reno, NV 89510-0580.
5. TERM OF LEASE:
The term of the Lease as to each Schedule shall commence upon installation of
one-half (1/2) the units of Equipment on that Schedule, continue through the
Interim Term, and thereafter for the number of months stated in the Lease Term.
6. TITLE TO EQUIPMENT:
Lessor is the lawful owner of the Equipment leased hereunder, and title shall
remain the Lessor's or its assign's at all times. Lessee shall furnish Lessor,
upon request and prior to its affixation, a landlord's waiver and consent to
removal of all Equipment if such Equipment or any part thereof is or may be
affixed to the realty during the Lease Term. Lessor may display notice of its
ownership of the Equipment by plates, tags, identifying stencil or other
identification. Lessee will not alter or deface any such indication of
ownership and shall maintain all such inditica of ownership in good and
readable condition. Lessee shall have no right, title, or interest on any of
the Equipment except the right to peacefully and quietly hold and use the
Equipment during the Lease Term as herein provided unless and until an event of
default shall occur. The Equipment is, and shall at all times be and remain
personal property, notwithstanding that the Equipment or any part thereof may
be, or hereafter become, in any manner affixed or attached to, or imbedded in,
or permanently resting upon real property or any building thereon, or attached
in any manner to what is permanent as by means of cement, plaster, nails,
bolts, screws or otherwise.
7. INSTALLATION:
If Equipment is not already installed, IGT shall install the Equipment on, or
within a reasonable time following, the Projected Ship Date specified in the
IGT Order. IGT may, at its option, install portions of Equipment on separate
dates as warranted by availability and scheduling of installation personnel.
Lessee agrees to installation of the Equipment at the Equipment Location shown
on the Schedule during the term of this Agreement. Any movement of the
Equipment from the Equipment Location within the state of Nevada shall require
thirty (30) days prior written notification to Lessor.
8. MAINTENANCE, REPAIR AND ALTERATION:
Lessee agrees it will, at its own expense (except as provided in paragraph 3.
above):
a). keep and maintain Equipment in good condition and working order and at
its own expense shall supply and install all replacement parts, accessories or
other devices when required to maintain the Equipment in good working
condition, or when required by applicable law, ordinance or regulation, which
parts accessories or devices shall be and become the sole property of Lessee;
b). use, operate, and maintain the Equipment in a careful manner in the
normal course of its business and only for the purposes for which such
Equipment was designated and shall comply with all laws, ordinances and
regulations in any manner relating to the ownership, possession, installation,
use, operation or maintenance thereof, and obtain all permits or licenses
necessary to install, use or operate the Equipment;
c). keep Equipment free and clear of all levies, liens and claims;
d). timely pay all taxes, costs, fees and expenses of every kind and nature,
including applicable sales taxes, now or hereafter occasioned by, imposed or
levied upon, or arising out of the use, possession, ownership, renting, leasing
or maintenance of the Equipment together with any interest or penalties in
connection therewith whether billed to, levied or assessed against Lessor or
Lessee; and
e). make no alterations, additions, subtractions or improvements to the
Equipment, except as allowed herein, without the prior written consent of
Lessor, but if so authorized by Lessor, any such alterations, modifications,
additions, subtractions or improvements shall be deemed to be a part of the
Equipment and shall become property of Lessor. Machine software conversions
performed within the normal course of business and in compliance with all laws,
ordinances and regulations, shall not require Lessor's prior written consent,
but shall become the property of Lessor.
9. INDEMNITY BY LESSEE:
Lessee, during the term of this Lease or while Lessee is in possession of any
Equipment, assumes all risks and liability for the Equipment and for the use,
possession, operations, maintenance, storage or condition thereof and for
injuries or deaths of persons and/or damage to property howsoever arising from
or incident to such use, possession, operation, maintenance, storage or
condition whether such injuries, death or damage be to agents or employees of
Lessee or their property, or to third persons or their property. Lessee shall
completely indemnify and hold Lessor harmless from all claims, actions,
proceedings, losses, damages, penalties, liabilities and expenses including
attorney's fees howsoever arising or incurred because of or incident to the
use, possession, operations, maintenance, storage or condition of the
Equipment, and shall, at Lessor's option, assume the defense of and/or
settlement of any suit or suits, or other legal proceeding in connection
therewith.
10. ASSIGNMENT:
Lessor and any assignee, with thirty (30) days advance notice without consent
of Lessee may assign the Lease and/or mortgage the Equipment under this lease,
in such event, the assignee and/or mortgage shall succeed to all Lessor's
rights in respect thereto and Lessee, upon receiving notice of any such
assignment, shall abide thereby and make payment as may therein be directed.
Such assignment and/or mortgage shall not relieve Lessor of any of its
obligations to Lessee hereunder and Lessee agrees such assignment shall not be
construed to as being an assumption of such obligations by the assignee.
Notwithstanding such assignment, Lessee, subject to its own rights hereunder,
which shall remain unimpaired, shall become the pledgeholder of Equipment for
the assignee, and will act as agent and custodian in possession of the
Equipment and part with possession thereof only to the assignee or pursuant to
the assignee's written order. Lessee shall not, without prior written consent
of Lessor, a) mortgage, assign, sell, transfer, pledge, hypothecate or
otherwise encumber or dispose of this Lease, the Equipment or any part thereof,
or any interest therein, or b) sublet or rent the Equipment or any part thereof
to be used by anyone other than the Lessee or its employees. Consent to any of
the foregoing prohibited acts by Lessor shall not release or discharge the
Lessee from any liability hereunder and shall apply only to the given instance,
and shall not be deemed a consent to any subsequent like act by Lessee or any
other person. Except as provided herein, neither this Lease or any interest
therein is assignable by Lessee or transferable to operation by law.
11. LOSS AND DAMAGE:
Lessee hereby assumes and shall bear the entire risk of loss, theft, damage or
destruction of the Equipment from any cause whatsoever, and no loss, theft,
damage or destruction of Equipment shall relieve Lessee of the obligation to
pay rent or any other obligation hereunder. In the event of damage to any item
of Equipment, Lessee shall immediately place the same in good repair. If
Lessor determines that any item of Equipment is lost, stolen, destroyed or
damaged beyond repair, Lessee at the option of Lessor, shall immediately:
a). Replace the same with like Equipment in good repair, condition or working
order and shall deliver to Lessor a bill of sale covering the replacement
equipment; or
b). Pay Lessor in cash all amounts then owed by Lessee under the Lease, plus
the fair market value of the item of Equipment on the date of loss, theft,
damage or destruction. Upon receipt of such payment in cash, LESSEE SHALL BE
ENTITLED TO WHATEVER INTEREST LESSOR MAY HAVE IN SAID ITEM, IN ITS THEN
CONDITION AND LOCATION, WITHOUT WARRANTIES, EXPRESS OR IMPLIED and this Lease
shall terminate as to such item.
Any insurance proceeds collected by Lessor shall be applied against the
obligations therein contained. Any surplus of such proceeds shall be the
property of Lessor.
12. LESSEE'S DEFAULT:
a). In the event Lessee fails to preserve and maintain the Equipment,
discharge all taxes, liens or charges, pay all costs, fees, assessments, and
expenses or procure, maintain or pay for insurance, as above provided, Lessor
at its option (i) may do so, and all such advances by Lessor together with
reasonable costs incurred by Lessor in such performance, shall be added to the
unpaid balance of the rentals due hereunder and shall be repayable by Lessee to
Lessor on demand, together with interest thereon at the rate of eighteen
percent (18%) per annum if allowed, or if not, the maximum interest rate
permitted by state law, or (ii) may consider such failure an immediate default
hereunder.
b). If Lessee should fail to pay Lessor any rent, or any other sums due
Lessor as herein provided when the same is due and payable, and such default
continues after ten (10) days notice from Lessor, Lessee shall pay interest
thereon from such date at the rate of eighteen percent (18%) per annum, if
allowed, if not, then the maximum interest rate permitted by state law. If
such default continues for more than ten (10) days, or if Lessee should fail to
observe, keep or perform any other provision of this Lease or any schedule
hereto, or any other lease, loan, credit or progressive agreement between the
parties, or if a default is declared under a). above, or if a petition or
proceeding under any chapter of the Bankruptcy Act, as amended, or for the
appointment of a receiver of any part of the property of Lessee, or any other
proceedings for the relief of debts be filed by or against Lessee or its
property, or if Lessee should make a general assignment for the benefit of
creditors, suspend business, become insolvent or, commence any act amounting to
a business failure, or if an attachment or execution be levied or tax or other
lien be filed against any of Lessee's property or against the Equipment, or if
the condition of Lessee's affairs shall so change as to, in the Lessor's
opinion, increase the business risk involved, then Lessor, at its option, and
in addition to and without prejudice to any other remedies, shall have the
right to exercise any one or more of the following remedies:
(i) declare the entire amount of rent hereunder immediately due and payable
as to any or all items of Equipment without notice or demand to Lessee;
(ii) sue for and recover all rents, and other payments, then accrued or
thereafter accruing, with respect to any or all items of Equipment;
(iii) enter upon the premises where the Equipment is located and without
court order or other process of law, repossess and remove the Equipment either
with or without notice to Lessee (damages occasioned by such taking are hereby
expressly waived by Lessee), and thereupon Lessee's right to possession and use
of the Equipment shall terminate, but such repossession shall not constitute
termination of the Lease unless Lessor expressly notifies Lessee in writing;
(iv) sell or lease any or all items of Equipment at public or private sale
for cash or on credit, or, if leased, to such persons and upon such terms as
Lessor shall elect, and recover from Lessee all costs of taking possession,
storing, repairing and selling or leasing the Equipment, including but not
limited to; reasonable attorney's fees, and the unpaid balance of the total
rent for the Lease term attributable to the items of Equipment sold or leased
less the net proceeds of such sale, if sold, or if leased, the rent under such
lease attributable to the period remaining under this Lease.
(v) terminate the Lease as to all items of Equipment;
(vi) pursue any other remedies in law or in equity;
(vii) no right or remedy reserved to Lessor by this Lease shall be exclusive
of any other right or remedy herein or allowed by law. All rights remedies
conferred upon Lessor by this Lease or by law shall be cumulative and in
addition to any other right and remedy available to Lessor and may be exercised
simultaneously.
13. LEASE IRREVOCABLE:
This Lease is irrevocable for the term thereof until the aggregate rentals
provided for in the schedules have been paid by Lessee. Rentals shall not
abate during the term hereon because Lessee's right to possession of the
Equipment has terminated or because the Equipment has been repossessed or
because of limitations of use of the Equipment for any reason whatsoever unless
specifically agreed to in writing by Lessor.
14. LESSOR'S RIGHTS:
Punctuality in the payment of rentals and other charges is of the essence of
this Lease. Lessor's failure at any time to require strict performance by
Lessee of any of the provisions herein shall not waive or diminish Lessor's
right hereafter to demand strict compliance therewith or with any other
provision. Waiver of any default shall not waive any other default. Lessor's
rights hereunder are cumulative and not alternative and may be exercised
simultaneously.
15. LEASE EMBODIES ENTIRE AGREEMENT:
This Lease represents the complete and entire agreement between the parties
hereto and may not be amended except in writings signed by the duly authorized
representatives of the parties, and, in the event of assignment hereof, by the
duly authorized representatives of such assignee except that the Lease
authorizes Lessor to correct patent errors and to fill in descriptive material
in connection with the Equipment, including but not limited to serial numbers.
There are no oral agreements or understandings affecting this Lease, and the
parties intent that the written terms of this lease shall be the only binding
agreement between the parties notwithstanding any prior, present or future
course of dealing or usage of trade. It is specifically understood that no
supplier or salesman or agent is authorized to waive or alter any term or
condition of this Lease, and no attempt to so modify this Lease shall in any
affect Lessee's duty to pay the rent and perform all obligations hereunder.
16. NOTICES:
Service of all notices under this Lease shall be sufficient if given personally
or mailed to the party involved at its respective address hereinbefore set
forth, or at such address as such party may provide in writing from time to
time. Any such notice mailed to such address shall be effective when deposited
in the United States mail, duly addressed with postage prepaid.
17. LESSOR'S EXPENSES:
Lessee agrees that it shall pay Lessor all costs and expenses, including
reasonable attorney's fees, incurred by Lessor in exercising any of its rights
and remedies hereunder or enforcing any of the terms, conditions or provisions
hereof, and that such amount shall be considered additional rental due
hereunder. Lessee further agrees to pay to Lessor all costs and expenses,
including attorneys' fees, incurred by Lessor in successfully defending itself
against any claim brought by Lessee, or any third party concerning this Master
Lease Agreement, subsequently executed schedules or the Equipment covered
hereunder.
18. OTHER DOCUMENTS:
Lessee agrees to execute and deliver to Lessor upon execution of this Lease, or
at any time during the existence of this Lease, if requested to do so, any
additional document or documents deemed necessary or desirable by Lessor to
effect the provisions of this Lease, including but not limited to financing
statements to comply with the provisions of the Uniform Commercial Code as
enacted in the state where the Equipment is located, which Lessor shall be
authorized to file with the appropriate filing officer(s), provided however
that nothing herein, nor the execution of the said financing statements, shall
be interpreted as acknowledging that this transaction is subject to the Uniform
Commercial Code, except as to Section 2A Chapter 104.A of the Nevada Uniform
Commercial Code which relates to leases of this nature. This Lease shall at
all times be considered a lease of Equipment from Lessor to Lessee.
19. GOVERNING LAW:
This Lease shall be governed by and construed in accordance with the laws of
the State of Nevada, including but not limited to Section 2A Chapter 104A of
the Nevada Uniform Commercial Code which relates to leases of this nature. If
the lease is not signed and delivered in Washoe County, Nevada it is subject to
acceptance or rejection upon receipt by Lessor in Washoe County, Nevada, and
shall be construed and enforced in accordance with the laws of Nevada and for
all purposes be considered a Nevada transaction. The parties hereto further
agree that for all court proceedings, venue shall be deemed to be in either
Washoe County or Clark County, Nevada as designated by Lessor.
20. MISCELLANEOUS:
(a). Lessor may require from time to time, and Lessee agrees to furnish
certified financial statements setting forth the financial condition and
operations of Lessee.
(b). Subject to the provisions herein, this Lease shall be binding upon and
inure to the benefit of heirs, administrators, successors and assigns of the
parties hereto.
(c). No obligations of Lessor hereunder shall survive the term of the Lease
or sooner termination thereof, and should Lessor permit the use of any
Equipment beyond the term specified therefore, the obligations of Lessee
hereunder shall continue and such permissive use shall not be construed as an
extension of the term thereof nor as a waiver of any right or continuation of
any obligation of Lessor hereunder, and Lessor may take possession of any such
Equipment at any time upon demand after ten (10) days notice.
(d). This Lease shall not constitute a binding contract until accepted in
writing by an authorized representative of Lessor in Washoe County, Nevada.
(e). The terms and provisions of this Lease shall be severable and if any
term or provision hereof is declared unconscionable or otherwise invalid,
illegal, or void, in whole or in part, the decision so holding shall not be
construed as impairing the other provisions of this Lease and such invalid,
illegal, void or unconscionable term or provision shall not be considered a
part of this Lease and this Lease shall continue in full force and effect as if
such term or provision were not originally included herein.
(f). Lessee acknowledges that the Equipment is being leased for business
purposes, and will not be used during the Lease Term for personal, family, or
household purposes.
LESSEE: LESSOR:
NEVSTAR GAMING AND ENTERTAINMENT CORPORATION IGT
By: By:
Its: Its:
ACCEPTED BY IGT, in Washoe County, Nevada
By: / /
(signature) (title) (date)
<PAGE>
RIDER NO. 1.
RIDER TO LEASE SCHEDULE NO.: 1 DATED: APRIL __, 1998
under
Master Lease Agreement No.: 1465540 Dated: April __, 1998
Fair Market Value Purchase Option
(a). Provided that Lessee is not in default under the Lease or any Lease
Schedule(s), Lessee shall have the option ("Purchase Option"), with respect to
the above referenced Lease Schedule, to purchase all of the Equipment on that
Lease Schedule upon expiration of the Lease Term on the above referenced Lease
Schedule ("Expiration Date"). Lessee must notify Lessor or Assignee(s) of
Lessor, in writing, ninety (90) days prior to the Expiration Date, of their
election to exercise this Purchase Option. On the Expiration Date, there must
be no events of default under any Lease Schedule(s) of the Master Lease
Agreement referenced above in order for Lessee to be entitled to exercise this
Purchase Option.
(b). The exercise price of the Purchase Option shall be One Hundred Sixty-
Seven Thousand Three Hundred Twenty-Four and 03/100 Dollars ($167,324.03) plus
any applicable Sales/Use Tax which IGT is required to collect. This amount
represents the Fair Market Value of the Equipment on Expiration Date, as
reasonably agreed upon by Lessor and Lessee.
Dated this day of April, 1998
LESSEE: LESSOR:
NEVSTAR GAMING AND ENTERTAINMENT IGT
CORPORATION
D/B/A MESQUITE STAR HOTEL & CASINO
By: By:
Its: Its:
<PAGE>
Rider No. 1.
Rider to Lease Schedule No.: 2 Dated: April __, 1998
under
Master Lease Agreement No.: 1465540 Dated: April __, 1998
Fair Market Value Purchase Option
(a). Provided that Lessee is not in default under the Lease or any Lease
Schedule(s), Lessee shall have the option ("Purchase Option"), with respect to
the above referenced Lease Schedule, to purchase all of the Equipment on that
Lease Schedule upon expiration of the Lease Term on the above referenced Lease
Schedule ("Expiration Date"). Lessee must notify Lessor or Assignee(s) of
Lessor, in writing, ninety (90) days prior to the Expiration Date, of their
election to exercise this Purchase Option. On the Expiration Date, there must
be no events of default under any Lease Schedule(s) of the Master Lease
Agreement referenced above in order for Lessee to be entitled to exercise this
Purchase Option.
(b). The exercise price of the Purchase Option shall be Twenty-Four Thousand
One Hundred Thirty-Two and 63/100 Dollars ($24,132.63) plus any applicable
Sales/Use Tax which IGT is required to collect. This amount represents the Fair
Market Value of the Equipment on Expiration Date, as reasonably agreed upon by
Lessor and Lessee.
Dated this day of April, 1998
LESSEE: LESSOR:
NEVSTAR GAMING AND ENTERTAINMENT IGT
CORPORATION
D/B/A MESQUITE STAR HOTEL & CASINO
By: By:
Its: Its:
<PAGE>
LESSEE'S ACKNOWLEDGMENT OF
INSURANCE OBLIGATION
As Lessee under Master Lease Agreement No. 1465540, dated April __, 1998, with
IGT as Lessor, we acknowledge our obligation to promptly furnish a Certificate
or Evidence of Insurance providing coverage on the Equipment in Lease Schedule
2, dated April __, 1998.
"IGT and its Successors and Assigns, as their interests may appear", shall show
as Loss Payee and Additional Insureds. The Equipment will be insured for
replacement value.
Please be advised that this request has been made of:
of , ( )
(Lessee's Insurance Agent) (Address) (Telephone)
and that such Certificate or Evidence of Insurance will be shortly forthcoming
to Lessor's Insurance Coordinator, c/o IGT, P.O. Box 10580, Reno, NV 89510-
0580.
LESSEE:
NEVSTAR GAMING AND ENTERTAINMENT CORPORATION
D/B/A MESQUITE STAR HOTEL & CASINO
By:
Its:
Date:
LESSEE'S ACKNOWLEDGMENT OF
INSURANCE OBLIGATION
As Lessee under Master Lease Agreement No. 1465540, dated April __, 1998, with
IGT as Lessor, we acknowledge our obligation to promptly furnish a Certificate
or Evidence of Insurance providing coverage on the Equipment in Lease Schedule
1, dated April __, 1998.
"IGT and its Successors and Assigns, as their interests may appear", shall show
as Loss Payee and Additional Insureds. The Equipment will be insured for
replacement value.
Please be advised that this request has been made of:
of , ( )
(Lessee's Insurance Agent) (Address) (Telephone)
and that such Certificate or Evidence of Insurance will be shortly forthcoming
to Lessor's Insurance Coordinator, c/o IGT, P.O. Box 10580, Reno, NV 89510-
0580.
LESSEE:
NEVSTAR GAMING AND ENTERTAINMENT CORPORATION
D/B/A MESQUITE STAR HOTEL & CASINO
By:
Its:
Date:
<PAGE>
Lease Schedule
SCHEDULE: 1 DATED: APRIL , 1998
TO
MASTER LEASE AGREEMENT NO.: 1465540 DATED: APRIL , 1998
LESSEE: NEVSTAR GAMING AND
ENTERTAINMENT CORPORATION D/B/A MESQUITE STAR HOTEL & CASINO
LOCATION: 333 Sandhill Boulevard, Mesquite, Nevada
LEASE TERM: thirty-six (36) months
PERIODIC RENTAL PAYMENT: Twenty-Four Thousand Eight Hundred Twenty-Six and
70/100 Dollars ($24,826.70)
COMMENCEMENT DATE: Ninety (90) days following the commencement of gaming
operations at the Mesquite Star Hotel & Casino or one hundred twenty (120) days
following installation of one-half (1/2) the units of Equipment leased
hereunder, whichever occurs first.
INTERIM RENTAL: There shall be no interim rental charges for purposes of
this Lease Schedule
Equipment as described below ("Equipment"):
QUANTITY: DESCRIPTION:
(131) IGT SLOT MACHINES WITH EMBEDDED BILL ACCEPTORS
serial numbers: serial numbers shall be provided upon installation
All of the terms, conditions, representations and warranties of the Master
Lease Agreement are hereby incorporated by reference herein and made a part
hereof as if they were expressly set forth in this Lease Schedule. This lease
Schedule constitutes a separate lease with respect to the Equipment described
herein. By execution and delivery of this Lease Schedule, Lessee certifies
their acceptance of the Equipment described herein, and the parties hereby
reaffirm as of the date hereof all of the terms, conditions, representations
and warranties of the Master Lease Agreement, except as modified herein.
LESSEE:
NEVSTAR GAMING AND ENTERTAINMENT CORPORATION MESQUITE STAR HOTEL & CASINO
By:
Title:
Date:
ACCEPTED BY IGT, as Lessor, in Washoe County, Nevada
By: / /
(Signature) (Title) (Date)
Lease Schedule
SCHEDULE: 2 DATED: APRIL , 1998
TO
MASTER LEASE AGREEMENT NO.: 1465540 DATED: APRIL , 1998
LESSEE:NEVSTAR GAMING AND ENTERTAINMENT
CORPORATION D/B/A MESQUITE STAR HOTEL & CASINO
LOCATION: 333 Sandhill Boulevard, Mesquite, Nevada
LEASE TERM: thirty-six (36) months
PERIODIC RENTAL PAYMENT: Four Thousand Nine Hundred Fifty-Five and 39/100
Dollars
($4,955.39)
COMMENCEMENT DATE: Ninety days following the commencement of gaming
operations at the Mesquite Star Hotel & Casino or one hundred twenty (120)
days following installation of one-half (1/2) the units of Equipment leased
hereunder, whichever occurs first.
INTERIM RENTAL: There shall be no interim rental charges for purposes of
this Lease Schedule
Equipment as described below ("Equipment"):
QUANTITY: DESCRIPTION:
(28) USED IGT SLOT MACHINES WITH EMBEDDED BILL ACCEPTORS
serial numbers: serial numbers shall be provided upon installation
All of the terms, conditions, representations and warranties of the Master
Lease Agreement are hereby incorporated by reference herein and made a part
hereof as if they were expressly set forth in this Lease Schedule. This lease
Schedule constitutes a separate lease with respect to the Equipment described
herein. By execution and delivery of this Lease Schedule, Lessee certifies
their acceptance of the Equipment described herein, and the parties hereby
reaffirm as of the date hereof all of the terms, conditions, representations
and warranties of the Master Lease Agreement, except as modified herein.
LESSEE:
NEVSTAR GAMING AND ENTERTAINMENT CORPORATION MESQUITE STAR HOTEL & CASINO
By:
Title:
Date:
ACCEPTED BY IGT, as Lessor, in Washoe County, Nevada
By: / /
(Signature) (Title) (Date)
LEASE AGREEMENT
1 AGREEMENT, DATE, PARTIES, SUBJECT, INSTALLATION, TERM, LEASE RATE, GAMING
TAXES, ADDITIONAL CONSIDERATION.
1.1 This is a Lease Agreement ("Agreement") dated as of February 9,
1998 ("Effective Date") between CASINO EXCITEMENT, INC. DBA MIKOHN
LIGHTING & SIGN, a Nevada corporation ("Mikohn"), and NEVSTAR
GAMING & ENTERTAINMENT CORPORATION, a Nevada corporation dba
Mesquite Star Hotel & Casino ("Lessee"), concerning the lease,
ownership, location, installation, operation and maintenance of a
do*u*b*l*e* *f*a*c*e*d*,* *9*9*<down-arrow> *h*i*g*h*,*
*p*y*l*o*n* *s*i*g*n* *w*i*t*h* *M*i*k*o*h*n*V*i*s*i*o*n*"!
*(*t*h*e* *"*S*i*g*n*"*)* *m*o*r*e* *p*a*r*t*i*c*u*l*a*r*l*y*
*d*e*s*c*r*i*b*e*d* *i*n* *d*e*t*a*i*l* *o*n* *E*X*H*I*B*I*T* *1*
*a*n*n*e*x*e*d* *h*e*r*e*t*o* *a*n*d* *i*n*c*o*r*p*o*r*a*t*e*d*
*b*y* *r*e*f*e*r*e*n*c*e*.*
1.2 *
* M*i*k*o*h*n* *h*e*r*e*b*y* *l*e*a*s*e*s* *t*o* *t*h*e*
*L*e*s*s*e*e* *t*h*e* *S*i*g*n*.* * *M*i*k*o*h*n* *s*h*a*l*l*
*i*n*s*t*a*l*l* *t*h*e* *S*i*g*n* *o*n* *L*e*s*s*e*e*<down-arrow>
s* *p*r*e*m*ises at 335 Sandhill Blvd., Mesquite, Nevada (the
"Location"). Mikohn shall complete installation of the Sign at the
Location on or before April 15, 1998 (the "Installation Date").
1.3 The term of this Agreement commences on July 1, 1998 and extends 56
consecutive months or until February 28, 2003 (the "Term"). At
the end of the Term, this Agreement may be extended on a month to
month basis unless either party gives the other written notice of
its intent to terminate this Agreement at least 30 days in advance
of the expiration date of the Term or unless Lessee exercises its
option to purchase the Sign as set forth herein.
1.4 The lease rate for the Sign shall be $12,500.00 per month (the
"Lease Rate"), which Lessee agrees to pay to Mikohn. Mikohn shall
pay all personal property taxes on the Sign. The first payment
shall be made by November 1, 1998 and each subsequent monthly
payment shall be due on the 1{st} day of each month for the next 51
consecutive months for a total of 52 payments.
1.5 As additional consideration for Mikohn to lease the Sign to Lessee
under the terms and conditions set forth in this Agreement, the
Lessee shall deliver to Mikohn the total sum of $50,000.00. Said
sum shall be payable as follows: $25,000.00 upon execution of this
Agreement; $12,500.00 within fifteen (15) days from the date of the
execution of this Agreement; $12,500.00 within forty five (45) days
from the date of the execution of this Agreement. Said sum shall
constitute additional rent of $12,500.00 per month from July 1,
1998 through October 31, 1998.
1.6 As further consideration for Mikohn to lease the Sign to Lessee
under the terms and conditions set forth in this Agreement, the
Lessee, prior to January 31, 2000, shall deliver to Mikohn the
additional sum of $125,000.00. Said sum shall be payable in one
lump sum. Said sum shall constitute an additional non-refundable
payment for the Sign.
2 CERTAIN MATERIAL REPRESENTATIONS OF THE PARTIES.
2.1 Mikohn represents that it is, and throughout the Term will
continue to be, the sole owner of the Sign (except for security
interests, if any).
2.2 Mikohn represents that it has obtained from all federal, state and
local government entities and agencies and maintains and will maintain on an
active and current basis, all licenses, approvals and authority required to
enable Mikohn to own and maintain the Sign in the manner contemplated by this
Agreement.
2.3 Mikohn represents that it will obtain all necessary government
authorizations and approvals for the installation and construction of the Sign.
2.4 Lessee represents that it has obtained, maintains, and will maintain,
on an active and current basis, all licenses and other authority required for
the lawful placement and operation of the Sign on its premises, as specified in
this Agreement, from all federal, state and local governments and agencies
having jurisdiction.
Mikohn represents and Lessee acknowledges that Mikohn has no rights in or to
Lessee's premises other than the license granted by Lessee under this
Agreement, which authorizes Mikohn [i] to install, construct and place the Sign
on Lessee's premises and [ii] to enter upon Lessee's premises for the purpose
of inspecting or maintaining the Sign and taking such other action as may be
required or permitted by the terms of this Agreement including those default
remedies of Mikohn set forth in section 6.
2.6 Mikohn and Lessee agree that ownership of the Sign will not be transferred
prior to the expiration of this Agreement, and only upon the Lessee's exercise
of its option to purchase the Sign as set forth herein.
2.7 Mikohn represents that the estimated economic life of the Sign is in excess
of 7 years and that the present value of the monthly payments set forth in
section 1.4 is less than 90% of the cash sales value of the Sign as of the
Effective Date.
3 CERTAIN RIGHTS AND OBLIGATIONS OF THE PARTIES.
3.1 Mikohn will pay the costs of transporting the materials for the Sign to the
Location and of constructing and installing the Sign.
3.2 Mikohn will notify Lessee of any special facilities required for the
installation and/or operation of the Sign in addition to a suitable electric
power supply.
3.3 Lessee shall specify the exact site on its premises where the Sign is
to be installed, and shall provide, at Lessee's expense, suitable electric
power, lighting and other requirements for the proper installation and
operation of the Sign.
3.4 During the Term, Mikohn will provide 24 hour repair and maintenance
service to keep the Sign in continuous operation insofar as possible. Lessee
will [i] notify Mikohn immediately of any situation or condition requiring
maintenance on any part or unit of the Sign, and [ii] provide all service
necessary to keep the exterior of the Sign clean, presentable and generally in
good condition.
3.5 Lessee will ensure the security of the Sign at all times to prevent
damage to the Sign.
3.6 Except for its obligation to repair the Sign as set forth herein,
Mikohn disclaims any liability to Lessee for loss, damage or injury, including
opportunity costs and lost revenues resulting from failure of the Sign or
failure of Mikohn to service or repair the Sign. In no event shall Mikohn be
liable for any special, indirect, incidental or consequential damages or lost
profits even if Mikohn has been advised of the possibility of such damages.
3.7 Lessee will operate the Sign in accordance with the instructions and
procedures specified by Mikohn.
3.8 As consideration for this Agreement, Mikohn agrees to provide during the
Term, at no additional cost to Lessee, one (1) graphic design for use with the
Sign, per month. It is the intent of the parties that only one (1) graphic
designed will be provided per month by Mikohn and that in no event shall the
graphic designs to be provided by Mikohn exceed sixty (60) during the Term.
Mikohn shall provide the monthly graphic design no later than the last calendar
day of each month.
4 CERTAIN RIGHTS OF MIKOHN.
4.1 During the Term, Mikohn has the right to place on the Sign, a
medallion or other marker of reasonable size stating in substance [i] that the
Sign is the property of Mikohn, and [ii] that Mikohn, to protect its ownership
thereof, has filed in appropriate government offices a UCC Financing Statement
covering the Sign. Prior to the Installation Date, and as part of the
consideration for this Agreement, Lessee shall execute and deliver to Mikohn
such UCC Financing Statement.
4.2 Mikohn has the right at any time, by and through its employees and/or
agents, to inspect the Sign and the area surrounding the Sign.
5 PROPERTY RIGHTS, LOSS, DAMAGE OR INJURY.
5.1 The Sign and all property rights therein remain the sole property of
Mikohn during the Term. Mikohn will maintain insurance on the Sign in an
amount of not less than the replacement cost of the Sign. Lessee agrees to
hold Mikohn harmless from, and to the extent not covered by insurance shall
indemnify Mikohn from and against any and all loss or damage to the Sign other
than normal wear; and any and all claims due to possession, use, and operation
of the Sign. All payments made by an insurance company to either party because
of a casualty loss to the Sign shall be the property of Mikohn.
5.2 Lessee indemnifies Mikohn and holds Mikohn harmless in respect of any
and all liabilities arising from Lessee's business, or any negligent act or
omission of Lessee, or any agent or employee of Lessee. For the purposes of
this indemnity, the term "Mikohn" includes the officers, directors and
shareholders of Mikohn and Mikohn's affiliates, and their successors, heirs and
assigns; and the term "liabilities" includes all claims, demands, damages,
actions, suits, debts, attorneys fees, liens, costs and obligations of every
nature, character and description, known or unknown, accrued or not yet
accrued, whether anticipated or unanticipated.
5.3 Mikohn indemnifies Lessee and holds Lessee harmless in respect of any
and all liabilities arising from Mikohn's business, or any negligent act or
omission of Mikohn, or any agent or employee of Mikohn. For the purposes of
this indemnity, the term "Lessee" includes the officers, directors and
shareholders of Lessee and its and their successors, heirs and assigns; and the
term "liabilities" includes all claims, demands, damages, actions, suits,
debts, attorneys fees, liens, costs and obligations of every nature, character
and description, known or unknown, accrued or not yet accrued, whether
anticipated or unanticipated.
6 DEFAULT AND REMEDIES.
6.1 Lessee shall be deemed in default under this Agreement upon the
occurrence of any one of the following: [i] failure of Lessee to make any
payment within ten (10) days of its due date or failure to perform any other
obligation under this Agreement within thirty (30) days after receipt of
written notice of default and failure to cure; [ii] any representation or
statement made or furnished to Mikohn by Lessee in any financial or credit
statement or application for credit made prior to this Agreement, proves to
have been false in any material respect when made or furnished; [iii] loss,
theft, destruction, seizure, attachment or unauthorized sale or encumbrance of
any part of the Sign; [iv] death, dissolution, insolvency, appointment of a
receiver for, or commencement of any proceeding under any bankruptcy or
insolvency laws by or against Lessee; [v] expiration or revocation of any
gaming license of Lessee; [vi] sale, or any other transfer of Lessee's rights
to possession of Lessee's business premises, for any reason, which results in
cessation of operation of the Sign for a period of thirty (30) days; [vii]
failure of Lessee to execute and deliver the UCC Financing Statement required
by section 4.1.
In the event of default, Mikohn may, at its option and without demand or notice
to Lessee, declare all amounts remaining unpaid under this Agreement
immediately due and payable and interest shall accrue on the outstanding
principal and interest balance at a rate of 1.5% per month, which is 18% per
annum, until paid in full and Mikohn shall be entitled to recover any attorney
fees and any other costs of collection. No waiver by Mikohn, its successors or
assigns, of any default, including, but not limited to, acceptance of late
payment after the same is due, shall operate as a waiver of any other default
or of the same default on a future occasion. Time is of the essence.
In the event of default, Mikohn may also require Lessee to dismantle and return
the Sign, at Lessee's expense, to a place designated by Mikohn, or Mikohn may
take possession or control of the Sign without demand or notice, wherever the
same may be located, without any court order or pre-taking hearing. Lessee
agrees that if Mikohn takes possession or control of the Sign as a result of
Lessee's default hereunder, that Mikohn, in its discretion, may remove the
Sign or continue to operate the Sign in whatever manner Mikohn deems
appropriate. In the event of default, Lessee hereby grants to Mikohn and
Mikohn's designated agents, an irrevocable license for ingress and egress to
Lessee's property for the purposes of taking control of the Sign and re-leasing
the Sign to third parties. In the event of default, Lessee consents to the re-
leasing of the Sign by Mikohn to third parties of Mikohn's choosing and
disclaims any right, title and interest in any rentals generated by the re-
leasing of the Sign. In the event of default, Mikohn shall have the right to
display any advertising it deems appropriate, including, but not limited to the
promotion of Mikohn itself. Lessee waives any and all damages occasioned by
such retaking, repossession or exercise of control. Lessee shall also be
liable and shall pay to Mikohn all expenses incurred by Mikohn in connection
with the enforcement of Mikohn's remedies, including all expenses of
repossessing, storing, shipping, and repairing the Sign, and Mikohn's
reasonable attorney fees. All remedies of Mikohn are cumulative, are in
addition to any other remedies provided for by law, and may, to the extent
permitted by law, be exercised concurrently or separately.
7 APPLICABLE LAW; DISPUTE RESOLUTION.
7.1 This Agreement shall be construed and enforced according to the laws of the
State of Nevada, and the parties agree to jurisdiction in Nevada and venue in
Clark County.
7.2 At Mikohn's discretion, any dispute that the parties to this Agreement
are unable to resolve between them and for which relief is not already provided
for in this Agreement, including a claim that a party has breached this
Agreement and that this Agreement should be terminated, may be submitted to
arbitration under this paragraph. Arbitration shall take place in Las Vegas,
Nevada in accordance with the Uniform Arbitration Act, NRS 38.015 to 38.205,
inclusive. The arbitrator is expressly authorized to enter an order, after
hearing, granting any party to the dispute before it temporary or preliminary
injunctive relief or any other relief that the arbitrator deems appropriate
including money damages. The arbitrator or any party to a proceeding before
the arbitrator may invoke the jurisdiction of the District Court of the State
of Nevada in Clark County to enforce any temporary or preliminary injunction so
issued by filing a petition for enforcement naming the enjoined person as
respondent. Upon filing the petition, the court may enter any order it deems
appropriate for enforcement of the injunction ordered by the arbitrator.
8 MODIFICATION, ASSIGNMENT, WAIVERS, INTEGRATION, NOTICE.
8.1 This Agreement may be amended or modified only by written instrument
executed by both parties.
8.2 This Agreement may not be assigned in whole or in part by either party
without the written consent of the other.
8.3 This Agreement shall inure to the benefit of the parties and their
respective heirs and assigns.
8.4 Waiver of non-performance of any provision of this agreement does not
constitute a waiver of any other provision of this agreement or waiver of non-
performance of the same provision or any other provision.
8.5 If any provision of this Agreement shall be declared invalid or
unenforceable by a court of competent jurisdiction, it shall not per se
invalidate or render unenforceable any other provision hereof; however, a party
who is materially and adversely affected by such declaration may terminate this
Agreement upon thirty days notice given to the other party not later than
thirty days after the date of such declaration.
8.6 This Agreement constitutes the entire understanding and Agreement
between the parties and cancels, terminates and supersedes any prior
understandings or agreements relating to the subject matter hereof between the
parties.
Notices under this Agreement shall be directed to each party at its address
appearing under its name on the signature page hereof, or to such other address
as either may hereafter specify to the other in writing. Notices are deemed to
have been received [i] on the fourth business day following posting thereof in
the U. S. Mail, properly addressed and postage prepaid, and [ii] when received
in any medium if confirmed or receipted for in the manner customary in the
medium employed, or if acknowledged in any manner by the party to whom the
communication is directed.
OPTION TO PURCHASE.
9.1 Lessee shall have the option of purchasing the Sign for the net present
value of the remaining lease payments (including the end of the Term option of
$125,000.00 as set forth in section 9.2) discounted at 10%, plus an additional
sum of $25,000.00, at any time during the Term.
9.2 At the end of the Term, Lessee shall have the option of purchasing the Sign
for the sum of $125,000.00, which the parties both agree is the reasonable fair
market value of the Sign. Lessee shall provide Mikohn sixty (60) days written
notice of whether Lessee will exercise its option to purchase the Equipment.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date above
written.
"Lessee" "Mikohn"
NEVSTAR GAMING & ENTERTAINMENT CASINO EXCITEMENT, INC.
CORPORATION
________________________________
(Salesperson)
BY:_____________________________
________________________________
Jeffrey L. Gilbert, (Authorized Officer or Manager)
President and COO
ADDRESS: MIKOHN LIGHTING & SIGN
3665 West Diablo Drive
3175 W. Post Road Las Vegas, Nevada 89119
Las Vegas, Nevada 89119
2/27/98 1:33 P.M.
<PAGE>
EXHIBIT 1
One (1) double faced pylon sign, 99 feet overall height with the following sign
cabinets:
MikohnVision 2" on center, 120 X 240 double face ID cabinet featuring:
"Mesquite Star" letters and logo.
Logo to be backlit free form cabinet.
Letters to be bulb pack on 4"
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that I, the undersigned, do hereby constitute
and appoint Michael J. Signorelli and Jeffrey L. Gilbert, or any one
and/or more of them, my true and lawful attorney or attorneys for me, and in
my name, place and stead, as a director and/or officer of NevStar Gaming &
Entertainment Corporation to sign its Form 10-KSB for the fiscal year ended
December 31, 1997 and any and all amendments thereto granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the above premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all said attorneys-in-fact
or either of them may lawfully do or cause to be done by virtue hereof.
March 27, 1998 /s/ Jeffrey L. Gilbert
Signature
Jeffrey L. Gilbert
Print Name
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that I, the undersigned, do hereby
constitute and appoint Michael J. Signorelli and Jeffrey L. Gilbert, or any one
and/or more of them, my true and lawful attorney or attorneys for me, and in my
name, place and stead, as a director and/or officer of NevStar Gaming &
Entertainment Corporation to sign its Form 10-KSB for the fiscal year ended
December 31, 1997 and any and all amendments thereto granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the above premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all said attorneys-in-fact
or either of them may lawfully do or cause to be done by virtue hereof.
March 23, 1998 /s/ Richard Tam
Signature
Richard Tam
Print Name
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that I, the undersigned, do hereby constitute
and appoint Michael J. Signorelli and Jeffrey L. Gilbert, or any one and/or
more of them, my true and lawful attorney or attorneys for me, and in my
name, place and stead, as a director and/or officer of NevStar Gaming &
Entertainment Corporation to sign its Form 10-KSB for the fiscal year ended
December 31, 1997 and any and all amendments thereto granting unto said
attorneys-in-fact, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the above premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact or either of them may lawfully do or cause to be done by
virtue hereof.
April 14, 1998 /s/James D. Meehan
Signature
James D. Meehan
Print Name
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The accompanying 1997 Financial Data schedule is unaudited. It is suggested that
it be read in conjunction with the Company's audited 1997 financial statements
and notes thereto which are included in the Company's December 31, 1997 Form
10-KSB.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,133
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 13,049
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,613
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
1
<COMMON> 34
<OTHER-SE> 7,593
<TOTAL-LIABILITY-AND-EQUITY> 17,613
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,166
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,332
<INCOME-PRETAX> (3,498)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,498)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,498)
<EPS-PRIMARY> (2.36)
<EPS-DILUTED> (2.36)
</TABLE>
