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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Mark one
[X]Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1996
[_]Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
COMMISSION FILE NUMBER: 000-28294
SILICON GAMING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 77-0357939
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) (Identification No.)
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2800 W. BAYSHORE ROAD, PALO ALTO, CA 94303
(Address of principal executive offices including Zip Code)
(415) 842-9000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the registrant's Common Stock held by non-
affiliates as of February 28, 1997: $130,407,631
Number of shares outstanding of the issuer's Common Stock, $.001 par value, as
of February 28, 1997: 10,672,210
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1996 Annual Report for the year ended December
31, 1996, are incorporated by reference into Parts II and IV of this Form 10-
K. Portions of the definitive Proxy Statement for the Registrant's Annual
Meeting of Shareholders to be held on May 20, 1997, are incorporated by
reference into Part III of this Form 10-K.
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PART I
ITEM 1: BUSINESS
Silicon Gaming, Inc. ("SGI" or the "Company") is engaged in the design and
development of what it believes will be the next generation of interactive
slot machines for use in casinos and other gaming establishments. The
Company's product combines an advanced multimedia gaming platform with
software-based games that the Company believes will be more engaging and
entertaining than other gaming devices currently available and will, as a
result, generate increased gaming revenue per device ("win per machine") for
the casino operator. On March 20, 1997, the Company's product was granted
final approval by the Nevada Gaming Commission, thereby allowing the Company
to ship its first product for commercial trial. As of December 31, 1996, the
Company had received nonbinding commitments to install and evaluate its gaming
platform from Bally's Las Vegas, Bally's Park Place Casino, Boulder Station
Hotel and Casino, Caesars Palace Las Vegas, California Hotel & Casino, Circus
Circus Hotel & Casino, Excalibur Hotel Casino, the Flamingo Hilton, Grand
Casino Biloxi, Grand Casino Gulfport, Grand Casino Tunica, Hard Rock Hotel &
Casino, Harrah's Las Vegas, ITT Sheraton Desert Inn, ITT Sheraton Tunica, Las
Vegas Hilton, Luxor Hotel Casino, MGM Grand Hotel/Casino, New York-New York
Hotel/Casino, Palace Station Hotel & Casino, Stardust Resort & Casino, Station
Casino Kansas City, St. Charles Riverfront Station, Stratosphere Hotel &
Casino, Texas Station and Treasure Island, each of which has agreed to install
and evaluate from 8 to 40 of the Company's machines. Collectively, these
casinos have agreed to install over 500 units. During the first quarter of
1997, the Company commenced installations of its product in certain Las Vegas
casinos.
The Company's gaming platform features high resolution video presented
across the full surface of a large touchscreen display. The games feature high
quality animation, video clips, digital sound and a level of visual appeal and
interactivity that the Company believes is unattainable by the current
generation of slot machines. The Company is attempting to maximize the
entertainment value offered on the two-dimensional surface of the video screen
by providing multiple levels of achievement within select games, so that,
through successful play over a period of time, a player may advance to a
bonusing sequence and win additional jackpots. Utilizing these features, SGI
believes that its product will encourage longer and more frequent periods of
play by existing slot machine customers and attract new gaming customers who
are seeking greater entertainment value than that offered by the current
generation of slot machines. In addition, the Company has designed its
machines with a number of features, such as play stoppage entertainment(TM),
modular components and the Company's Machine Management System(TM) software,
which provides casino operators streamlined access to the advanced diagnostic,
configuration, and accounting capabilities of the machine.
INDUSTRY BACKGROUND
The U.S. gaming machine market is currently dominated by reel-based slot
machines, which were broadly introduced in the 1960s, when the free-spinning
reel was made possible by advances in electro-mechanical circuitry. The free-
spinning reel enabled manufacturers to create different versions of the same
product by varying such things as the number of reels, the number of stops on
each reel and the number and variety of payoff combinations. The 1980s saw the
introduction of virtual reel "stepper" technology which allowed for a greater
number of stops, or outcomes, on a reel, enabling casino operators to offer
larger jackpots due to the lower likelihood of their being hit. Another
significant development was the installation of electronic memory in machines,
allowing players to keep an "account" of credits on the machine consisting of
the initial amount inserted plus winnings minus losses. Since the player did
not have to reinsert coins for every pull of the handle, the number of pulls
per hour was increased significantly, and players tended to rewager much of
the amounts won, raising the total win per machine. Except for the addition of
features such as bill acceptors and player tracking systems, the technology
employed by slot machines in the 1970s and 1980s still predominates in
current-generation machines.
In the 1980s, hardware and software advances allowed for application of
video graphics to gaming devices. Using these techniques, International Game
Technology ("IGT") was the first company to introduce video
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poker. Video poker offers slot players two important advantages. First, the
game is interactive, since the player has to decide which cards to hold or
discard during the hand. This feature allows the outcome to be influenced
somewhat by the player, an attribute unavailable on reel-based machines.
Second, the use of a video screen allows machine manufacturers to develop more
interesting and attractive graphics than are available on reel-based slot
machines. Recently, Bally Gaming International, Inc. ("Bally Gaming") expanded
the capabilities of video-based devices when it introduced GameMaker, a
popular video-based machine which offers the player a choice of up to ten
different games on a single machine. The Company believes that the popularity
of video poker and multi-game machines suggests that customers may be
receptive to a more complex and interactive slot experience.
In the late 1980s, a category of slot machine games called "progressives"
was introduced and became very popular. The progressive configuration
generally consists of traditional reel-based machines linked together by a
computer network that allows them to share a common jackpot which is usually
much larger than the jackpot that a single, unlinked machine could support.
Progressive jackpots are usually several million dollars, and have
occasionally exceeded $10 million. Progressives may be linked locally within a
bank of a few machines, across an entire casino, or across an entire state.
IGT is the dominant competitor in the progressives market.
According to industry sources, casino gaming revenue in the United States in
1991, 1992, 1993, 1994 and 1995 were approximately $9.0 billion, $9.9 billion,
$12.6 billion, $14.0 billion and $18.0 billion, respectively, and continued
growth was forecasted for 1996 and 1997. Slot machines, video gaming machines
and similar devices are the dominant source of gaming revenue for casino
operators in most U.S. markets. Slot revenue as a percentage of total gaming
revenue in 1996 was 63% in Nevada and 69% in Atlantic City. Jurisdictions
where gaming has recently been legalized have reported similar statistics. For
example, in 1996, slot machines accounted for 69% of casino revenue in
Illinois and 62% in Louisiana. In addition to constituting the largest portion
of gaming revenue, slot revenue is more profitable than table games for casino
operators, since slot machines require much lower labor costs.
All casino games offer the same underlying proposition: the opportunity to
win money in varying amounts and with varying frequency, but with the
statistical certainty of losing money to the casino operator over an extended
period of time. With slot machines, the prospect of winning can be varied
across the spectrum from many small jackpots won frequently to one very large
jackpot won very rarely. Players' risk/reward appetites will determine what
type of machine they will want to play, and the nature of the payoffs can be
deduced from the "pay table," a chart that graphically shows how much can be
won based on various outcomes and various amounts of money wagered.
Notwithstanding the differences in jackpot frequency and size, however, all
slot machines retain a net amount of the money wagered through them over time.
This amount is referred to as the "hold" and is generally expressed as a
percentage of the amount of money inserted into the machine, which is called
the "handle." The hold percentage in any given machine is preset by the
manufacturer based on specifications from the casino, subject to legal
parameters in some jurisdictions, and may differ from machine to machine on a
casino floor.
The Company believes that slot machines offer their owners an attractive
return on investment. In January 1996, the average win per machine per day,
defined as the average amount of money inserted into the machine less the
average jackpot payoffs, on the Las Vegas Strip was $101. A new slot machine
from a major manufacturer, equipped with player tracking and slot accounting
software, costs approximately $8,000 and generally has a useful life exceeding
five years. At this price, a new slot machine earning the Las Vegas Strip
average would recoup its purchase price in 80 days. While certain markets have
lower average wins per day than the Las Vegas Strip, many other markets have
win per day figures that are significantly higher. For example, in January
1996, the Trump Taj Mahal casino in Atlantic City reported win per machine per
day of $151, Foxwoods Hotel and Casino in Ledyard, Connecticut reported win
per machine per day of $359, and Harrah's riverboat casino in Joliet, Illinois
reported win per machine per day of $411.
Because of the importance of slot win to casino operators and the high
returns available from an investment in slot machines, the Company believes
that casino operators are willing to try new slot machine products that
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offer the prospect of higher win per machine per day. At the same time,
operators are motivated to remove any machines that are performing
significantly below expectations. SGI believes that its machines will generate
win per machine per day that will exceed that of the average installed
machine, and therefore, it believes that it will be able to penetrate the
market, generate orders for its machines and maintain a share of casino floor
space. However, the tastes and playing styles of slot players are difficult to
predict with certainty, and there can be no assurance that SGI's machines will
outperform competing machines in win per machine per day.
Growth in demand for slot machines has historically been driven by the
opening of new casinos, including casinos in jurisdictions where gaming has
recently been legalized. However, in recent years, the legalization of gaming
in new jurisdictions has been significantly reduced; therefore, demand based
on new openings will be largely limited to new projects in existing markets.
Several new projects are under construction or have been announced in Las
Vegas, Atlantic City, on the Gulf Coast and in the Midwest.
While the physical useful life of a slot machine can be up to a decade or
more, casino operators have tended to replace machines on a cycle closer to
every five years. Also, the development of certain new features which offer
the prospect of significantly increased slot earnings, such as the advent of
bill acceptors in the 1990s, can encourage operators to replace machines even
more rapidly.
Because of the slowing in demand from new casino projects, and because the
large number of machines installed during the high growth period of the early
1990's will soon be reaching their normal replacement time, the Company
believes that the new slot machine sales in the replacement category will
surpass gaming machine sales for new installations in the near future. The
Company believes that it will more easily penetrate the replacement segment of
the slot machine market than the market for new installations, since the
operators of a newly-opened casino may be less likely to risk overall success
on the trial of a relatively unproven product.
The market for slot machines outside of North America is relatively small,
with the exception of Australia, and is generally difficult to forecast. In
addition, international markets have often served as an outlet for used
machines. While SGI intends to take advantage of certain opportunities in
international markets, the Company intends to pursue these markets only after
successfully establishing its market position in North America.
SGI PARADIGM
The Company believes it has identified an underlying structure to the
typical slot play session, consisting of four distinct phases: initial
attraction; initial play; extended play; and completion. During each of these
phases, certain factors determine whether the player advances from one phase
to the next. SGI has sought to understand these four phases so that (1) it can
maximize the likelihood that a slot customer will play its machine, (2) once
playing, the player will stay at the machine for a long period of time, and
(3) the player will return frequently to play the same or similar SGI
machines.
Initial Attraction. The Company believes that the factors that determine
whether a customer will initiate play include the machine's visual appeal,
the payout structure, promotional graphics and other external attributes
that convey the impression that the machine would be entertaining to play.
Initial Play. Once play commences, the customer makes an initial decision
about whether to continue. The Company believes that factors affecting this
decision include whether the game meets the customer's entertainment
expectations, conforms to his or her payout expectations, is easy to
understand and play, and is relatively trouble-free.
Extended Play. Extended play occurs when the player has become fully
engaged in the entertainment experience provided by the game. Because
extended play eliminates idle machine time, this phase is strongly desired
by casino operators. Once the player commits to extended play, any
interruption in play, such as a fill, malfunction or reset for change
service, becomes an excuse to end the session.
Completion. Completion is the final phase of the play session and can
occur, for example, when the customer runs out of money, runs out of time,
or achieves a targeted jackpot level. One of the Company's
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goals in designing its gaming platform is to increase the likelihood that
the player will leave the completion phase with the desire to play the same
machine at a later time based on a number of factors, including winnings
and entertainment value.
PRODUCT
The Company has developed a product it believes represents the next
generation of interactive gaming devices for use in casinos and other gaming
establishments in the United States and worldwide. The Company's product
utilizes multimedia technologies to present casino games that it believes will
be more engaging and entertaining than other gaming devices currently
available. The Company's games feature high-resolution video presented across
the full surface of a large touchscreen display. The games feature high
quality animation, video clips, digital sound and a level of game
attractiveness and interaction that the Company believes is unavailable from
and unachievable by current-generation slot machines. Unlike traditional
"hardware-dominant" slot machines, the principal features of each of SGI's
proprietary games are software based, allowing SGI and its customers to adapt
their game offerings to evolving technologies and changing consumer tastes
without structural change to, or replacement of, the gaming platform.
Platform, Hardware and Other Physical Attributes
SGI's gaming platform is designed to resemble a traditional slot machine in
many respects. The machine occupies the same footprint as a traditional slot
machine and is of roughly the same general size and shape, enabling casino
operators to replace traditional slot machines with SGI's machines without any
reconfiguration of the casino floor. The most distinctive attribute of the
product is its vertically-oriented, 26-inch-diagonal touchscreen video
monitor. A player's sense of interactivity is heightened by the ability to
make all the required decisions on the screen, within the game itself. For
players who are uncomfortable or unfamiliar with touchscreen devices, however,
all of the traditional slot machine controls have been included as well. Thus,
a player can control the game by using the touchscreen, by pushing a series of
buttons similar to those found on current slot or video poker machines, or by
pulling a handle as on traditional slot machines. Coin handling mechanisms,
bill acceptors, card readers and other devices related to cash deposit, credit
and win payout are similar to those used in current gaming machines. The
music, voice and other audible features of the Company's games are played on a
digital sound system.
The principal electronic hardware used in SGI's gaming platform consists of
high-end multimedia and personal computer ("PC") components. The central
processing unit is an Intel 133-MHz Pentium chip. This processor is
accompanied by a variety of video and auxiliary controllers, some of which
have been developed exclusively for use with the Company's product. To achieve
optimal multimedia performance from the system, the Company's machine uses 64
megabytes of random access memory. Storage for the vast array of audio and
visual media elements of the games, as well as the product software itself, is
provided by a high-capacity 4 gigabyte hard disk drive. These components are
connected internally by a high-speed PCI bus. SGI's reliance on sophisticated
full-motion video and high-quality audio presentations requires the use of
state-of-the-art technology, and SGI expects to upgrade the performance of its
platform periodically as higher-performance components become available. SGI
machines are intended to be easily reconfigurable in the field through the
replacement of hardware components such as computer motherboards and video and
auxiliary controllers, allowing casino operators to upgrade hardware in a cost
effective manner.
The Company's gaming platform is assembled almost entirely from off-the-
shelf hardware, which the Company anticipates will reduce the chance of a
parts shortage and will enable the Company to continue to manufacture its
devices using state-of-the-art components as PC and multimedia technologies
advance. There can be no assurance, however, that the Company will continue to
enjoy a reliable supply of hardware components. Moreover, certain components
such as the touchscreen display and monitor are manufactured by single sources
and may be particularly susceptible to interruptions in supply. Although SGI
does develop proprietary components in order to meet certain specialized
requirements of its platform, the Company intends
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to primarily use commercially available computer hardware components as a
regular part of its product development process.
SGI's machines have been designed to accept future hardware upgrades that
will take advantage of networking capabilities. When networked, two or more
machines can be linked, facilitating activities such as group play,
tournaments and progressives. For example, a particular group of platforms can
be configured to announce to players that a tournament will begin at a
particular time and allow each player the option to participate. Similarly,
platforms can be configured so that when one machine hits a jackpot, a player
at another machine can win a bonus award; the two affected platforms then
display a coordinated audio/video simulation of a coin flying out of one tray
and into the other. The Company believes that features of this kind will
promote interaction among players at adjacent platforms and thereby maintain
player interest for longer periods of time.
SGI has incorporated numerous features into its gaming platform that are
designed both to attract the player and to maintain his or her interest over
an extended period of time. For example, SGI's gaming platform can be
programmed to allow for a free spin following a specified number of
unsuccessful attempts in order to ensure a minimum level of reward to the
player. Similarly, SGI's machines are capable of running promotional or
entertainment video programs during play stoppages such as those caused by a
hopper refill, malfunction or request for change. These features have been
designed to reduce the likelihood that a player will leave the machine during
a play stoppage event. These features may also provide an additional revenue
or promotional source to the operator by providing a medium for commercial
messages.
SGI's gaming platform employs modular construction at almost every level,
facilitating upgrades and minimizing machine down-time. Such modularity
permits the rapid exchange of components for upgrades or to replace defective
parts. Using SGI's proprietary Machine Management System, casino personnel can
run a variety of diagnostic programs or review detailed performance data
directly from the gaming platform itself. In the case of a malfunctioning
component, a casino technician can quickly restore play simply by swapping out
the failed component with a new one. The modularity of SGI's platform will
also facilitate upgrades of hardware components such as card readers and bill
validators as new components become available. The Company believes that these
features may allow casino operators to reduce platform down-time and shorten
the time required to fix any malfunction, thereby increasing the time the
platform is available for play and reducing the risk that a player will elect
to terminate a gaming session as a result of play stoppage.
To address the desire of slot machine operators to respond efficiently to
service calls that cause stoppages in play, SGI's slot machine incorporates
what SGI believes to be a significant improvement over the traditional
"candle" (the light on the top of a slot machine). SGI's multi-state candle
uses variable color and strobe rate displays to convey more information than a
simple call for help. Different colors signify different service calls, and
changes in strobe rate signify how long the customer has been waiting,
features that the Company believes will assist the casino floor staff in
prioritizing responses to customer needs.
Games and Other Software
While SGI believes that the design of its machine and its hardware
components are important to its operation and its ability to foster initial
and extended play, it believes that the most important factor affecting the
success of its platform will be the games themselves and the software that
controls those games. The majority of the Company's development efforts to
date have been devoted to hardware, system software and game development, and
the Company expects that, in the future, game development will be its
principal development activity.
The SGI machine, called Odyssey(TM), is a multi-game platform. The Company's
initial release of its product includes nine gaming options consisting of six
separate game themes, play stoppage entertainment and the Machine Management
System. The Company intends to develop at least six new games per year.
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The Company's games have been designed to present traditional casino games
with the benefit of video and audio enhancements that are afforded by the
Company's use of high-end multimedia hardware. While the underlying game may
consist of a traditional casino game such as poker, keno or a reel-based slot
machine, the game itself is only one aspect of the entertainment experience.
Some of SGI's games embed an engaging and entertaining story. As examples,
Fort Knox, SGI's basic three-reel slot game, places the experience in the
context of a player trying to gain access to Fort Knox, with payouts being
depicted as gold coins spilling from a secure vault. In Phantom Belle, a video
poker game, the player is pitted against the disembodied hands of a ghostly
dealer aboard a 19th century riverboat.
Some of the games that the Company plans to offer include the following:
Fort Knox--A variation on the traditional three-reel slot game in which
the player enters the main vault room of Fort Knox and spins the giant
combination reels. If the symbols match those on the pay table, a series of
vault doors swing open, spilling coins into the tray. If the player matches
the numbers to the bonus combination, he will be given access to the main
vault's interior, where he can win an additional jackpot.
Phantom Belle--The Phantom Belle series provides players with a variety
of traditional five-card poker games, enhanced by thematic and rich playing
experience. Played on a 19th century haunted river boat, cards are dealt by
the floating hands of a phantom dealer.
Krazy Keno--A version of keno in which balls shoot into the air through a
transparent tube. If enough of the flying balls land on the spots selected
by the player, he wins a jackpot according to the pay table.
Win-O-Matic--A classic three-reel slot game reminiscent of that played on
mechanical devices in the 1950s featuring traditional reel symbols like
cherries, lemons and oranges. Win-O-Matic combines simplicity of play with
the flexibility of modern game percentaging technology.
Dazzling Diamonds--This variation on the traditional, three-reel game
features a large photo-realistic diamond and a host of sounds. When the
dazzling diamond symbol appears on the pay line, it doubles all jackpot
combinations.
Star Spangled Keno--This rendition of a traditional keno game features a
patriotic theme. The play is faster and the rules simpler than in
traditional keno. If enough numbers are matched, a colorful marching band
appears to celebrate the jackpot.
The Company believes that the combination of its attractive machine, high-
level graphics and sound, bonusing features and the pursuit of an interesting
and entertaining story will make SGI's product outperform conventional slot
machines at each of the four phases of slot machine play--initial attraction,
initial play, extended play and completion.
Initial Attraction. The Company believes that the physical appearance of
its machines will be more attractive than conventional machines and will
entice customers to play. In addition to the physical attributes of its
machines, the Company has included a suite of video images that run when
the machine is not being played. These include short, animated vignettes
from the Company's games and "help" screens, as well as a menu page
identifying all of the games available on that particular machine.
Information regarding any game can be viewed through the push of a "Help"
button. These merchandising segments feature the same quality of graphics,
sound, video and animation that distinguish all of SGI's games.
Initial Play. In the initial play period, SGI believes it is necessary to
quickly engage the customer in the story line and to avoid any confusion,
unfamiliarity or negative experiences which might cause the customer to
discontinue play. For this reason, the Company has produced an initial
suite of games that consist of enhanced versions of traditional casino
games, including reel-based slot games, so that the rules of the game will
be well known. SGI intends to present these games using enhanced graphics
and sound to enrich the play experience, but will not change the
fundamental characteristics or objective of the game. In addition, the
machine will offer traditional game controls for those players unfamiliar
or uncomfortable with the touchscreen interface.
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Extended Play. The Company believes that the enhancements it has made to
traditional casino games by the addition of high level graphics, sound,
animation and storyline will encourage extended play, as well as more
frequent play, and thereby generate greater win per machine than the
unenhanced versions of these games available in conventional machines.
A significant feature which the Company believes will contribute
significantly to extended play, is the introduction of advanced play levels
in which a player, by virtue of having played a certain amount of time or
achieved a certain number of jackpots at one level, gains access to a bonus
sequence in which larger jackpots become available. For example, in Fort
Knox a 10-digit master combination to the main vault appears in the play
field. At random time intervals during play, another digit on the main
vault lock is matched. When the main vault is opened, a player may select
from one of three vault drawers to receive an additional bonus.
To facilitate extended play, the Company has developed a sophisticated
on-line tutorial, help features and play stoppage entertainment. The
tutorial and help features generally consist of video inserts designed to
provide orientation, instruction and assistance before or during the game.
In Fort Knox, for example, Seymour Bucks, the main security guard at Fort
Knox, can appear if there is a call for change and provide assistance. If
there is a machine play stoppage, a hopper fill requirement, or a jackpot
requiring the player to be hand paid, Professor Jack Potts, the absent-
minded slot genius, will appear to explain the cause of the malfunction and
present trivia, other game information, video clips advertising the
casino's amenities or upcoming promotions and tournaments, or other
commercial material.
Completion. The Company believes that the principal events that lead to
completion of play include the player's running out of money, running out
of time or achieving a targeted jackpot level. The Company believes that
the unique features and entertainment value of its games will entice
players to remain in the extended play phase for longer periods of time
than are generally fostered by current generation slot machines. Moreover,
the design of the Company's platform and games is intended to provide an
entertainment experience that will encourage repeated play.
In addition to features that are designed to enhance the entertainment value
of SGI's machine and its ability to generate incremental revenue for the
casino, SGI's platform incorporates proprietary features that are designed to
overcome certain hurdles that may be involved in the licensing of a slot
machine design, as well as to facilitate easy maintenance and supervision by
casino personnel. These features are as follows:
Random Number Generator. At the core of every gaming machine is a random
number generator that determines the outcome of every gaming proposition.
To eliminate what the Company believes are some of the impediments to
randomness that characterize random number generators, SGI engaged Dr.
Evangelos Yfantis, a recognized authority in the field of random number
algorithms, to develop a proprietary random number generator algorithm for
the Company. The Company has filed a U.S. patent application with respect
to its algorithm.
Software Authentication. A critical element of all gaming machines is an
authentication mechanism to determine that the software being used is
identical to the software that has been approved by regulatory authorities
and is operating correctly. This is necessary to ensure that the game being
played corresponds exactly to that designed by the manufacturer and
approved by regulatory authorities. Traditional slot machines need to be
authenticated manually, a process usually performed only after a sizable
jackpot award. The infrequency of checks offer greater opportunities to
breach the security of traditional machines. The Company has developed a
proprietary authentication process which leverages the advanced
capabilities of the Company's machine to verify the integrity of a game
each time it is selected for play. This process combines sophisticated
authentication routines developed by RSA Data Security, Inc. with a
proprietary methodology developed by the Company. The Company's
authentication process provides continual checking of the machine's
software for both accidental corruptions or malicious attempts to cheat the
machine. Any detected anomalies will cause the machine to signal the loss
of integrity immediately. The Company has filed for patent protection for
certain aspects of its authentication methodology.
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Machine Management System. The Company's Machine Management System is
designed to provide easy access to the configuration, accounting, and
diagnostic capabilities of the machine. The Machine Management System's
accounting functions are designed to provide a rapid, easy-to-interpret
report of all key machine metering data, as well as detailed accounting and
statistics, on a game-by-game basis. The Machine Management System uses the
full benefit of the machine's touchscreen to make installation and setup of
the machine easier than traditional slot machines. The diagnostic programs
comprise a user-friendly maintenance and troubleshooting system that allows
casino floor personnel to quickly and effectively assess the cause of a
play stoppage or other malfunctions or to examine transaction history where
the validity of a jackpot or other transaction must be verified. For
example, if a player asserts that the machine has not given full credit for
a jackpot or has not properly recorded a cash input, a floor manager, using
the touchscreen and a key, can access comprehensive data to review
transaction and event history. With this information, the floor manager can
rapidly evaluate the merit of the player's claim and take appropriate
action. In this way, disputes can be quickly resolved at the machine's
location without the operator having to consult back office records or
review surveillance videotape.
PRODUCT DEVELOPMENT
The Company's product development efforts, particularly its game development
efforts, will be critical to its success in the gaming market. Research and
development expenses have increased significantly since inception and are
expected to continue to increase in the future. At December 31, 1996, 40 of
the Company's 98 full-time employees were engaged in research and development.
Ideas for new games are derived from customer needs as perceived by the
Company or ascertained through the Company's market research and direct
feedback from slot machine operators. The initial designs for the Company's
games are conceived by a design team, which outlines the appearance and
features of each game. A prototype is developed by a production team that
includes a producer, product manager, artists, computer graphics engineers and
entertainment software engineers. The game is then evaluated by SGI's
marketing and sales staff, after which it is modified into its final form. The
Company estimates that the development of a typical game takes approximately
three to eight months and costs approximately $100,000 to $300,000.
SGI is seeking to develop a variety of specific games which management
believes will appeal to casino operators and their customers. Currently, the
Company is engaged in the development of games based on traditional slot
machine games such as animated reel slots, video poker and keno. The Company
is also in the process of creating slot machine versions of popular casino
games such as blackjack and roulette. These initial games are intended to help
customers look beyond the unfamiliar technology to recognizable game types. In
addition, the Company is developing a line of Magic Windows(TM) type games.
The proprietary Magic Windows game type introduces decision making into a
traditional reel-slot experience by allowing the player to select from a
number of available symbols.
Some of the games currently under development include the following:
Meteors--A Magic Windows version of a traditional three-reel game in
which the player fires three laser blasts at a meteor field. As the meteors
explode and disintegrate, reel symbols are revealed. Symbol combinations
matching the pay table win jackpot awards. As a bonus feature, at random
intervals, the player is sent into "hyperspace" mode in which all jackpots
are doubled.
Roulette Royale--A slot version of roulette in which the player can place
bets in the same fashion as in a traditional roulette game. The player then
"spins" the wheel on the video screen to determine the outcome based on the
number or color at which the wheel stops.
Buccaneer Gold--A three-reel slot machine game in which the player aims
his cannons at three combination wheels set in the flank of a pirate ship.
When symbols on the wheels are matched according to the pay table, the
player wins, and the screen displays a jackpot celebration such as gold
coins being spilled from a treasure chest or fired from a musket. Upon
certain combinations on the reel, a pirate sticks a dagger into the deck
railing; an accumulation of five daggers leads to a bonusing sequence.
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Mayan Riches--A Magic Windows version of a three-reel game in which the
player finds himself in front of a large pyramid uncovered in an
archaeological dig. Embedded in the pyramid are nine stone reels, over
which stone doors close as the reels begin to spin. The player is required
to pick three of the doors to reveal hidden symbols, the object being to
match one of the jackpot combinations on the pay table. After the outcome
is revealed, the remaining symbols are uncovered and the game is ready to
resume.
Completion of the games under development is subject to various risks and
uncertainties. Such games may be subject to further creative decisions that
could alter the game implementation or marketing considerations that could
result in a shift of the Company's development focus to different types of
games altogether. Successful completion of any game will also be subject to
risks typically associated with the creative process, such as the risk that
the Company's creative team will be unable to achieve the desired results in
terms of the game's entertainment quality.
Over time, SGI expects to introduce additional games that offer a wider
range of gaming experiences as players become more familiar with the
capabilities of advanced video gaming platforms. For example, the Company may
introduce games with sports attributes such as baseball, football or golf. The
Company also anticipates developing some of its games for progressive formats
in which the Company's machines would be networked to support a common jackpot
that is significantly larger than that which a stand-alone machine could
offer.
During the year ended March 31, 1995, the nine month period ended December
31, 1995 and the year ended December 31, 1996, the Company's research and
development expenses were $1,539,000, $3,137,000 and $7,030,000, respectively.
SALES AND MARKETING
The ultimate success of SGI's gaming platform depends on its acceptance by
casino operators and casino patrons. The Company believes that, from the point
of view of casino operators, the attractiveness of any gaming platform depends
on win per machine, ease of upgrade, maintenance and game change and
information management. The Company believes that, from the casino patron's
perspective, the attractiveness of a platform is a function of entertainment
value. SGI's sales and marketing strategy is to generate product sales by
highlighting the advantages presented by its gaming platform to casino
operators, such as potential for increased win per machine, and by developing
processes focused on key operator values. SGI's marketing strategy also
targets casino players and will focus on developing brand recognition for
SGI's games, which the Company believes can be accomplished through the
development of proprietary games that deliver greater entertainment value for
the gaming dollar.
SGI intends to position itself as a partner with casino operators in
establishing the next generation of wagering entertainment. The Company
recognizes the important role that casino operations personnel play in
establishing market acceptance for new machines and thus will target this
group with products, sample game platforms and training.
Because SGI's games are software-based, SGI believes that there will be a
significant opportunity for game customization and the development of games
for the exclusive use of one or more casino customers. It is already
commonplace for casinos to ask that conventional slot machines be customized
with the casino's logo or theme. SGI believes that it can significantly exceed
this level of customization by inserting the casino's logo or theme right in
the game, by presenting images of the casino's other games and amenities, or
by creating a new game entirely based on the casino's theme. The Company
intends to charge customers a fee for this work.
Three-Phase Product Introduction
The Company intends to introduce its product and begin its marketing and
sales efforts in a controlled and deliberate manner, following a three-phase
program through 1998:
1996: In the initial phase, the Company's primary objective was to complete
development of the product and to have it licensed and available for sale
in one or more jurisdictions. The Company was approved by
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the Nevada Gaming Control Board to conduct a 60-day field trial of its
product in December 1996. Final approval was granted on March 20, 1997,
allowing the Company to make its first customer shipment into Nevada. The
Company has received nonbinding commitments to install and evaluate its
gaming platform from several leading Las Vegas casinos.
1997: The Company commenced installations of its product in certain Las
Vegas casinos during the first quarter of 1997. However, the Company's plan
is to limit the number of machines it sells in 1997 so that it can
carefully monitor the reactions of gaming patrons and casino customers to
its platform, game software and product support features. The Company
expects to incorporate any changes it deems advisable based on these
surveys into revised and new versions of its platform and games. At the
same time, the Company will be building its sales and support
infrastructure in order to properly support customers when full roll-out
planned for 1998 takes place.
1998: In 1998, the Company expects to broadly market and sell its platform
and software-based games. Because of the restraints imposed by its product
introduction program, the Company currently believes that 1998 will be the
first year in which a reasonable assessment of the commercial potential of
its product can be made.
The successful introduction of the Company's product will be subject to
substantial risks and uncertainties, including the risk of technical or
manufacturing difficulties, the possibility that the SGI platform will not
receive the anticipated market acceptance and possible delays or hurdles
associated with licensing of the Company's product in various jurisdictions.
The Company will be required to be licensed in each jurisdiction in which it
expects to sell product. As of January 31, 1997, the Company had filed
applications to sell its product in Nevada, New Jersey, Mississippi, Missouri
and Colorado. To date, the Company has received both corporate approval and
approval to sell its product in Nevada and has also received corporate
approval in Mississippi, Missouri and Colorado. The Company has also filed an
application for approval of its gaming platform in Mississippi and New Jersey
and with Gaming Laboratories International, Inc., an independent testing
facility which grants product approval for many jurisdictions worldwide. See
"Gaming Regulation and Licensing."
Although the Company plans to file applications in other jurisdictions,
there can be no assurance that the Company will be ready to file future
applications or that any licenses will be granted on a timely basis, or at
all.
Sales Organization
The Company is building a sales and support organization to handle sales and
after-sales service to the Company's casino customers. As of December 31,
1996, the Company had 15 employees in its sales and support area, and the
Company plans to continue to build its sales and support organization
throughout 1997. The Company intends to sell its product by developing close
working relationships with casino operators, through SGI's direct sales
representatives and support team. Where appropriate, the Company may enter
into distribution arrangements or other strategic relationships to enter
additional markets.
The Company has entered into non-binding commitments for trial shipments
with casinos, principally in Las Vegas. In accordance with industry practice,
these casinos will accept such units, without payment to the Company, for a
45-day installation and evaluation period. During this period, each casino
operator will evaluate the performance of the machine against other machines
on its floor or available for purchase and will make a determination whether
or not to purchase units at the end of the trial period. At the end of the
trial period, such customers may purchase the trial machines. If a casino
declines to purchase a machine, SGI will remove the machine from that casino's
premises. The Company has received nonbinding commitments to install and
evaluate its gaming platform from Bally's Las Vegas, Bally's Park Place
Casino, Boulder Station Hotel and Casino, Caesars Palace Las Vegas, California
Hotel & Casino, Circus Circus Hotel & Casino, Excalibur Hotel Casino,
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the Flamingo Hilton, Grand Casino Biloxi, Grand Casino Gulfport, Grand Casino
Tunica, Hard Rock Hotel & Casino, Harrah's Las Vegas, ITT Sheraton Desert Inn,
ITT Sheraton Tunica, Las Vegas Hilton, Luxor Hotel Casino, MGM Grand
Hotel/Casino, New York-New York Hotel/Casino, Palace Station Hotel & Casino,
Stardust Resort & Casino, Station Casino Kansas City, St. Charles Riverfront
Station, Stratosphere Hotel & Casino, Texas Station and Treasure Island, each
of which has agreed to install and evaluate from 8 to 40 of the Company's
machines. Collectively, these casinos have agreed to install over 500 units.
During the first quarter of 1997, the Company commenced installations of its
product in certain Las Vegas casinos.
Pricing
The Company intends to offer its product to casino operators and other
potential purchasers using two alternative purchase programs, consisting
either of (i) the sale of the hardware unit bundled with a specific package of
games and other software for a fixed price, or (ii) the sale of the hardware
unit alone combined with a renewable one-year software license, including
games. The Company expects that the prices of both of the packages described
above will be higher than the current prices for most conventional slot
machines. The Company may also consider cost-sharing and revenue-sharing
arrangements. Because software-based gaming machines represent a new
development for the casino industry, potential purchasers' preferences in this
area have not been determined. The Company plans to evaluate its pricing and
sales methods and to incorporate changes as appropriate. The Company believes
that license revenue from game software may eventually constitute a
substantial portion of its revenue.
COMPETITION
The current slot machine market is highly competitive and is dominated by a
small number of manufacturers, some of whom have significantly greater
financial and other resources than the Company. The Company believes that the
principal competitive factors in this market are the appeal of the machine to
players, knowledge of customer requirements and player preferences, service,
support and training, distribution, name and product recognition and price.
The principal competitors in the slot machine market are IGT and Bally Gaming.
IGT may be viewed as a dominant competitor, with a 1996 market share estimated
at 75%; Bally Gaming's 1996 market share is estimated at 15%. Additional
competitors or potential competitors include WMS Industries Inc., Video
Lottery Consultants, Aristocrat Leisure Industries, Universal Distributing,
Sigma Games, Casino Data Systems, Acres Gaming Inc. and Innovative Gaming
Corporation of America. Companies in historically unrelated industries, such
as Sega Enterprises LTD ("Sega"), have technological resources that could
offer them a competitive advantage in developing multimedia-based gaming
machines. There can be no assurance that other companies in the video game or
multimedia market will not successfully enter the market for video slot
machines, nor can there be any assurance that the manufacturers of traditional
slot machines will not develop products that are superior to, or that achieve
greater market acceptance than, the Company's product. In general, the
Company's existing competitors, as well as many potential new competitors,
have significantly greater financial and technical resources than the Company,
as well as more established customer bases and distribution channels, which
may afford them competitive advantages. Increased competition is likely to
result in price reductions, reduced operating margins and loss of market
share, any of which could materially and adversely affect the Company's
business, operating results or financial condition.
PROPRIETARY RIGHTS AND LICENSES
The Company's computer programs and technical know-how are both novel and
proprietary, and management believes that they can best be protected by use of
technical devices to protect the computer programs and by enforcement of
contracts and covenants not to compete with certain employees and others with
respect to the use of the Company's proprietary information and trade secrets.
The Company has registered copyrights with respect to various aspects of its
games, and has filed several U.S. patent applications for protection of
certain technology it has created or licensed. These patent applications cover
various aspects of the gaming machine hardware and software. No assurance can
be given that the pending applications will be granted, nor can there be any
assurance that the patents will not be infringed or that others will not
develop technology that does not violate such patents.
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SGI has developed a proprietary method of authentication for disk drive-
based gaming machines, for which it has submitted a patent application. Since
modern gaming technology requires the handling and processing of large amounts
of on-line data, establishing a method for storing and retrieving data that
meets the approval requirements of the regulatory authorities while meeting
adequate standards of internal performance requires use of a comprehensive
authentication system to assure both the casino operator and requisite gaming
authorities that the software is an exact copy of what was generated by SGI
and approved by such gaming authorities.
In addition, SGI owns exclusive rights to the algorithm for its random
number generator, the key component of the Company's gaming machines which
determines the outcome of each proposition. SGI's algorithm, which may have
uses outside the gaming industry, was developed by Dr. Evangelos A. Yfantis, a
professor of Computer Science at the University of Nevada, Las Vegas.
In developing its games, the Company relies on certain software that it
licenses from Duck Corporation ("Duck") on a nonexclusive basis. This license
may be terminated by Duck only in the event of a material breach of its terms
by the Company or in the event of a bankruptcy petition with respect to the
Company.
EMPLOYEES
As of December 31, 1996, the Company had 98 full-time employees, including
40 in research and development. The Company also retains independent
contractors to provide certain services, primarily in connection with its
product development activities. The Company and its full-time employees are
not subject to any collective bargaining agreements and the Company believes
that its relations with its employees are good. From time to time the Company
has retained actors and/or "voice over" talent to perform in certain of the
Company's games, and expects to continue this practice in the future. The
Company's future success depends in large part on its ability to attract and
retain management and other key personnel.
MANUFACTURING
The Company intends to manufacture product in-house or contract product
assembly to a licensed manufacturer. All of the Company's initial
manufacturing will be performed at the Palo Alto and Mountain View facilities.
The Company intends to continue investing significantly in leasehold
improvements and manufacturing equipment at these facilities. In 1996, the
Company established its manufacturing process and commenced commercial
production. As of December 31, 1996, the company had 19 full-time employees in
manufacturing and had manufacturing development expenses of $2,458,000. The
Company expects the manufacturing process to consist primarily of assembly of
components obtained from third-party suppliers and testing software systems
and applications.
GAMING REGULATION AND LICENSING
General Regulation of Shareholders of Publicly Traded Corporations. In most
jurisdictions, any beneficial owner of the Company's Common Stock is subject
on a discretionary basis to being required to file applications with gaming
regulatory authorities, be investigated and found suitable or qualified as
such. In addition, shareholders whose holdings of Common Stock exceed certain
designated percentages are subject to certain reporting and qualification
requirements imposed by state and federal gaming regulators and, any
shareholder, if found to be unsuitable, may be required to immediately dispose
of its holdings of Common Stock. See "--Nevada Regulatory Matters," "--
Missouri Regulatory Matters," "--Colorado Regulatory Matters," "--New Jersey
Regulatory Matters," and "--Mississippi Regulatory Matters."
Nevada Regulatory Matters. The Company must obtain a registration, license,
approval or finding of suitability, and equipment approval in all
jurisdictions before it can offer gaming devices for sale to licensed gaming
operations within those jurisdictions. The licensing process usually involves
the licensing or approval of certain officers, directors, and shareholders of
the corporation, and approval of the specific product that the Company wants
to offer for sale. On June 19, 1996 the Nevada Commission registered SGI and
licensed Silicon Gaming-Nevada ("SGI-Nevada"), a wholly-owned subsidiary of
SGI, as a manufacturer, distributor and operator of a slot machine route. The
Company's initial public offering was also approved by the Nevada Commission
on June 19, 1996. On March 20, 1997, the Nevada Commission granted final
approval of the Company's product for sale to licensed casinos in Nevada.
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The manufacture, sale and distribution of gaming devices for use or play in
Nevada or for distribution outside of Nevada, the manufacture and distribution
of associated equipment for use in Nevada, and the ownership and operation of
slot machine routes in Nevada are subject to: (i) the Nevada Gaming Control
Act and the regulations promulgated thereunder (collectively, "Nevada Act");
and (ii) various local ordinances and regulations. Such activities are subject
to the licensing and regulatory control of the Nevada Commission, the Nevada
Board, and various local, city and county regulatory agencies (collectively
referred to as the "Nevada Gaming Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming, or manufacturing or
distribution of gaming devices at any time or in any capacity; (ii) the strict
regulation of all persons, locations, practices, associations and activities
related to the operation of licensed gaming establishments and the manufacture
or distribution of gaming devices and equipment; (iii) the establishment and
maintenance of responsible accounting practices and procedures; (iv) the
maintenance of effective controls over the financial practices of licensees,
including the establishment of minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenue, providing reliable record keeping
and requiring the filing of periodic reports with the Nevada Gaming
Authorities; (v) the prevention of cheating and fraudulent practices; and (vi)
the provision of a source of state and local revenue through taxation and
licensing fees. Change in such laws, regulations and procedures could have an
adverse effect on the Company's operations.
On June 19, 1996 the Company was registered by the Nevada Commission as a
publicly-traded corporation (a "Registered Corporation"), and SGI-Nevada was
approved as a manufacturer, distributor and operator of a slot machine route.
On March 20, 1997, the Nevada Commission granted final approval of the
Company's product. Such gaming approvals require the periodic payment of fees
and taxes and are not transferable. As a Registered Corporation, the Company
is required periodically to submit detailed financial and operating reports to
the Nevada Commission and furnish any other information which the Nevada
Commission may require. No person may become a shareholder of, or receive any
profit from SGI-Nevada without first obtaining licenses and approvals from the
Nevada Gaming Authorities. The Company and SGI-Nevada have applied for, and in
some cases received, the various registrations, approvals, permits and
licenses in order to engage in manufacturing, distribution and slot route
activities in Nevada.
All gaming devices that are manufactured, sold or distributed for use or
play in Nevada, or for distribution outside of Nevada, must be manufactured by
licensed manufacturers and distributed or sold by licensed distributors. All
gaming devices manufactured for use or play in Nevada must be approved by the
Nevada Commission before distribution or exposure for play. The approval
process for gaming devices includes rigorous testing by the Nevada Board, a
field trial and a determination as to whether the gaming device meets strict
technical standards that are set forth in the regulations of the Nevada
Commission. Associated equipment must be administratively approved by the
Chairman of the Nevada Board before it is distributed for use in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, a Registered
Corporation or its subsidiaries in order to determine whether such individual
is suitable or should be licensed as a business associate of a gaming
licensee. Officers, directors and certain key employees of the Company and
SGI-Nevada are required to file applications with the Nevada Gaming
Authorities and may be required to be licensed or found suitable by the Nevada
Gaming Authorities. The Nevada Gaming Authorities may deny an application for
licensing for any cause which they deem reasonable. A finding of suitability
is comparable to licensing, and both require submission of detailed personal
and financial information followed by a thorough investigation. The applicant
for licensing or a finding of suitability must pay all the costs of the
investigation. Changes in licensed positions must be reported to the Nevada
Gaming Authorities and in addition to their authority to deny an application
for a finding of suitability or licensure, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position. On June 19, 1996
SGI's Chief Executive Officer, Chief Financial Officer, the required directors
and SGI-Nevada's sole officer and director were found suitable by the Nevada
Commission.
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If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with SGI or SGI-Nevada, the Company would have to sever all
relationships with such person. In addition, the Nevada Commission may require
the Company or SGI-Nevada to terminate the employment of any person who
refuses to file appropriate applications. Determination of suitability or of
questions pertaining to licensing are not subject to judicial review in
Nevada.
The Company and SGI-Nevada will be required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities and similar financing transactions by the Company
will be required to be reported to or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by the Company or
SGI-Nevada, the registration and gaming licenses it holds could be limited,
conditioned, suspended or revoked, subject to compliance with certain
statutory and regulatory procedures. In addition, the Company, SGI-Nevada and
the persons involved could be subject to substantial fines for each separate
violation of the Nevada Act at the discretion of the Nevada Commission.
Limitation, conditioning or suspension of any gaming license could (and
revocation of any gaming license would) materially adversely affect the
Company's gaming operations.
Any beneficial holder of a Registered Corporation's voting securities,
regardless of the number of shares owned, may be required to file an
application, be investigated, and have his suitability determined as a
beneficial holder of the Registered Corporation's voting securities if the
Nevada Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the State of Nevada. The applicant
must pay all costs of investigation incurred by the Nevada Gaming Authorities
in conducting any such investigation.
The Nevada Act requires any person who acquires beneficial ownership of more
than 5% of a Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of a Registered Corporation's voting securities apply
to the Nevada Commission for a finding of suitability within thirty days after
the Chairman of the Nevada Board mails the written notice requiring such
filing. Under certain circumstances, an "institutional investor," as defined
in the Nevada Act, which acquires more than 10% but not more than 15%, of the
Registered Corporation's voting securities may apply to the Nevada Commission
for a waiver of such finding of suitability if such institutional investor
holds the voting securities for investment purposes only. An institutional
investor shall not be deemed to hold voting securities for investment purposes
unless the voting securities were acquired and are held in the ordinary course
of business as an institutional investor and not for the purpose of causing,
directly or indirectly, the election of a majority of the members of the board
of directors of the Registered Corporation, any change in the Registered
Corporation's corporate charter, bylaws, management, policies or operations of
the Registered Corporation, or any of its gaming affiliates, or any other
action which the Nevada Commission finds to be inconsistent with holding the
Registered Corporation's voting securities for investment purposes only.
Activities which are not deemed to be inconsistent with holding voting
securities for investment purposes only include: (i) voting on all matters
voted on by shareholders; (ii) making financial and other inquiries of
management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management, policies or operations;
and (iii) such other activities as the Nevada Commission may determine to be
consistent with such investment intent. If the beneficial holder of voting
securities who must be found suitable is a corporation, partnership or trust,
it must submit detailed business and financial information including a list of
beneficial owners. The applicant is required to pay all costs of
investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable. The
same restrictions apply to a record owner if the record owner, after request,
fails to identify the beneficial owner. Any shareholder found unsuitable and
who holds, directly or indirectly, any beneficial ownership of the Common
Stock beyond such period of time as may be prescribed by the Nevada Commission
may be guilty of a criminal offense. The Company will be subject to
disciplinary action if, after it receives notice that a person is unsuitable
to be a shareholder or to have any other relationship with the Company or SGI-
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Nevada, the Company (i) pays that person any dividend or interest upon voting
securities of the Company, (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by that person,
(iii) pays remuneration in any form to that person for services rendered or
otherwise, or (iv) fails to pursue all lawful efforts to require such
unsuitable person to relinquish his voting securities including, if necessary,
the immediate purchase of said voting securities for cash at fair market
value.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the
Nevada Commission, it: (i) pays to the unsuitable person any dividend,
interest, or any distribution whatsoever; (ii) recognizes any voting right by
such unsuitable person in connection with such securities; (iii) pays the
unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
The Company will be required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder
may be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. 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 stock certificates of the
Company to bear a legend indicating that the securities are subject to the
Nevada Act. However, the Nevada Commission has not imposed such a requirement
on the Company to date, but it is unknown whether the Nevada Commission will
impose such a requirement on the Company in the future.
As a Registered Corporation, the Company may not make a public offering of
its securities, such as an IPO, without the prior approval of the Nevada
Commission if the securities or proceeds therefrom are intended to be used to
construct, acquire or finance gaming facilities in Nevada, or to retire or
extend obligations incurred for such purposes. Approval of a public offering,
if given, does not constitute a finding, recommendation or approval by the
Nevada Commission or the Nevada Board as to the accuracy or adequacy of the
prospectus or the investment merits of the securities offered. Any
representation to the contrary is unlawful.
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting
agreements, or any act or conduct by a person whereby he obtains control, may
not occur without the prior approval of the Nevada Commission. Entities
seeking to acquire control of a Registered Corporation must satisfy the Nevada
Board and the Nevada Commission in a variety of stringent standards prior to
assuming control of such Registered Corporation. The Nevada Commission may
also require controlling shareholders, officers, directors and other persons
having a material relationship or involvement with the entity proposing to
acquire control, to be investigated and licensed as part of the approval
process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established a
regulatory scheme to ameliorate the potentially adverse effects of these
business practices upon Nevada's gaming industry and to further Nevada's
policy to: (i) assure the financial stability of corporate gaming licensees
and their affiliates; (ii) preserve the beneficial aspects of conducting
business in the corporate form; and (iii) promote a neutral environment for
the orderly governance of corporate affairs. Approvals are, in certain
circumstances, required from the Nevada Commission before the Registered
Corporation can make exceptional repurchases of voting securities above the
current market price thereof and before a corporate acquisition opposed by
management can be consummated. The Nevada Act also requires prior approval of
a plan of recapitalization proposed by the Registered Corporation's Board of
Directors
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in response to a tender offer made directly to the Registered Corporation's
shareholders for the purposes of acquiring control of the Registered
Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which gaming operations are to be conducted. Depending
upon the particular fee or tax involved, these fees and taxes are payable
either monthly, quarterly or annually and are based upon either: (i) a
percentage of the gross revenue received; or (ii) the number of gaming devices
operated. Annual fees are also payable to the State of Nevada for renewal of
licenses as a manufacturer, distributor and operator of a slot machine route.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside
of Nevada, is required to deposit with the Nevada Board, and thereafter
maintain, a revolving fund in the amount of $10,000 to pay the expenses of
investigation by the Nevada Board of their participation in such foreign
gaming. The revolving fund is subject to increase or decrease in the
discretion of the Nevada Commission. Thereafter, Licensees are required to
comply with certain reporting requirements imposed by the Nevada Act.
Licensees are also subject to disciplinary action by the Nevada Commission if
they knowingly violate any laws of the foreign jurisdiction pertaining to the
foreign gaming operation, fail to conduct the foreign gaming operation in
accordance with the standards of honesty and integrity required of Nevada
gaming operations, engage in activities that are harmful to the state of
Nevada or its ability to collect gaming taxes and fees, or employ a person in
the foreign operation who has been denied a license or finding of suitability
in Nevada on the ground of personal unsuitability.
In the future, SGI intends to seek the necessary registrations, licenses,
approvals, and findings of suitability for the Company, its product and its
personnel in other jurisdictions throughout the world. However, there can be
no assurances that such registrations, licenses, approvals or findings of
suitability will be obtained. Many other jurisdictions in which the Company
wishes to do business require various licenses, permits, and approvals in
connection with the manufacture and/or distribution of gaming devices,
typically involving restrictions similar in most respects to those of Nevada.
Missouri Regulatory Matters. Gaming was originally authorized in the state
of Missouri in November 1992. On April 29, 1993, new legislation (the
"Missouri Act") was enacted which replaced the 1992 legislation. In January
1994 the Missouri Supreme Court handed down a decision which held that the
operation of certain games of chance such as traditional slot machines was
prohibited by the constitution of the state of Missouri. On November 8, 1994,
the people of Missouri voted in favor of an amendment to the Missouri
constitution to allow slot machine gaming in the state. The Missouri Act
provides for the licensing and regulation of excursion gambling boat
operations on the Mississippi and Missouri Rivers in the state of Missouri and
the licensing and regulation of persons who distribute gaming equipment and
supplies to gaming licensees. An excursion gambling boat is a boat, ferry or
other floating facility on which gaming is allowed. The Missouri Act limits
the loss per individual on each excursion to $500, but does not otherwise
limit the amount which may be wagered on any bet or the amount of space in the
vessel which may be utilized for gaming.
The Missouri Act is to be implemented and enforced by a five-member Missouri
Commission. The Missouri Commission is empowered to issue such number of
riverboat gaming licenses as it determines to be appropriate. A gaming license
cannot be granted to any gaming operator unless the voters in such operator's
"home dock" city or county have authorized gaming activities on gaming
riverboats.
On September 1, 1993, the Missouri Commission adopted rules and regulations
(the "Missouri Regulations") governing the licensing, operation and
administration of riverboat gaming in the state of Missouri and the form of
application for such licensure. The Missouri Regulations generally provide for
four types of licenses--a Class A owner's license; a Class B operator's
license; a supplier's license; and an occupational license. In addition, the
Missouri Regulations remain subject to amendment and interpretation, and may
further limit or otherwise adversely affect the Company and its Missouri
gaming operations.
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Directors and certain officers and key persons of the Company and Silicon
Gaming-Missouri ("SGI-Missouri"), a wholly-owned subsidiary of SGI, must file
personal disclosure forms with the gaming license application and must be
found suitable by the Missouri Commission. Further, the Missouri Regulations
require that all employees of SGI-Missouri who are involved in gaming
operations and who are employed on the licensed premises must file
applications for and receive Missouri gaming occupational licenses. The
Missouri regulations require disclosure by the Company and SGI-Missouri of any
person or entity holding any direct or indirect ownership interest in SGI-
Missouri. SGI-Missouri is also required to disclose the names of the holders
of all of the Company's and SGI-Missouri's debt including a description of the
nature and terms of such debt. The Missouri Commission may, in its sole
discretion, request additional information with respect to such holders.
Missouri suppliers' gaming licenses must be renewed annually for a fee of
$5,000 or such greater amount as may be determined by the Commission. On
November 8, 1996, SGI-Missouri was granted a temporary supplier's license by
the Missouri Commission.
Under Missouri law, gaming licenses are not transferable, and under the
Missouri Regulations the transfer of (i) any ownership interest in a privately
held business entity or (ii) a 5% or greater interest in a publicly traded
company directly or indirectly holding a Missouri gaming license is prohibited
without the approval of the Missouri Commission. Further, without the prior
approval of the Missouri Commission, the Missouri Regulations prohibit
withdrawals of capital, loans, advances or distribution of any assets in
excess of 5% of accumulated earnings by a license holder to anyone with an
ownership interest in the license holder.
The Missouri Regulations specifically provide that any action of the
Missouri Commission shall not indicate or suggest that the Missouri Commission
has considered or passed in any way on the marketability of the applicant or
licensee's securities, or on any other matter, other than the applicant or
licensee's suitability for licensure under Missouri law. A Missouri gaming
license holder can be disciplined in Missouri for gaming-related acts
occurring in another jurisdiction which result in disciplinary action in the
other jurisdiction.
The Missouri Commission has broad powers to require additional disclosure by
an applicant during the processing of a gaming application, to deny gaming
licensure and to administratively fine or suspend or revoke a gaming license
for failure to comply with or for violation of the Missouri Act or Missouri
Regulations.
Colorado Regulatory Matters. The State of Colorado created the Division of
Gaming (the "Division") within the Department of Revenue to license,
implement, regulate and supervise the conduct of limited gaming. The Director
of the Division, under the supervision of a five-member Colorado Commission,
has been granted broad power to ensure compliance with the Colorado
Regulations. The Director may inspect, without notice, impound or remove any
gaming device. He may examine and copy any licensee's records, may investigate
the background and conduct of licensees and their employees, and may bring
disciplinary actions against licensees and their employees. He also may
conduct detailed background investigations of persons who loan money to the
Company.
The Colorado Commission is empowered to issue five types of gaming and
gaming-related licenses. The failure or inability of the Company or Silicon
Gaming-Colorado, Inc. (the "Colorado subsidiary"),or others associated with
the Company or the Colorado subsidiary, to obtain or maintain necessary gaming
licenses will have a material adverse affect on the operations of the Company.
All persons employed by the Company and the Colorado subsidiary and involved,
directly or indirectly, in gaming operations in Colorado also are required to
obtain a Colorado gaming license. All licenses must be renewed annually. On
January 24, 1997, the Company and its wholly-owned subsidiary, Silicon Gaming-
Colorado, Inc., were granted a manufacture and distribution license by the
Colorado Limited Gaming Commission.
In addition, pursuant to the Colorado Regulations, no manufacturer or
distributor of slot machines may have an interest in any casino operator,
allow any of its officers to have such an interest, employ any person if such
person is employed by a casino operator, or allow any casino operator or
person with a substantial interest therein to have an interest in a
manufacturer's or distributor's business. The Commission has ruled that a
person does not have a "substantial interest" if it directly or indirectly has
less than a five percent (5%) interest in such
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<PAGE>
voting securities of a licensee. Some Division Staff informally have
interpreted the Regulations to prohibit a casino operator from having any
interest in a slot machine manufacturer or distributor.
Under the Colorado Regulations, any person or entity having any direct or
indirect interest in a gaming licensee or an applicant for a gaming license,
including, but not limited to, the Company and shareholders of the Company,
may be required to supply the Colorado Commission with substantial
information, including, but not limited to, background information, source of
funding information, a sworn statement that such person or entity is not
holding his interest for any other party, and fingerprints. Such information,
investigation and licensing as an "associated person" automatically will be
required of all persons (other than certain institutional investors discussed
below) which directly or indirectly own ten percent (10%) or more of a direct
or indirect legal, beneficial or voting interest in the Colorado subsidiary,
through their ownership in the Company. Such persons must report their
interest and file appropriate applications within 45 days after acquiring such
interest. Persons directly or indirectly having a five percent (5%) or more
interest (but less than 10%) in the Colorado Subsidiary, through their
ownership in the Company, must report their interest to the Colorado
Commission within ten (10) days after acquiring such interest and may be
required to provide additional information and to be found suitable. If
certain institutional investors provide certain information to the Colorado
Commission, such investors, at the Colorado Commission's discretion, may be
permitted to own up to 14.99% of the Colorado Subsidiary, through their
ownership in the Company, before being required to be found suitable. All
licensing and investigation fees will have to be paid for by the person in
question. The associated person investigation fee currently is $48.00 per
hour.
The Colorado Commission also has the right to request information from any
person directly or indirectly interested in, or employed by, a licensee, and
to investigate the moral character, honesty, integrity, prior activities,
criminal record, reputation, habits and associations of (i) all persons
licensed pursuant to the Colorado Limited Gaming Act, (ii) all officers,
directors and shareholders of a licensed privately held corporation, (iii) all
officers, directors and shareholders holding either a five percent (5%) or
greater interest or a controlling interest in a licensed publicly traded
corporation, (iv) all general partners and all limited partners of a licensed
partnership, (v) all persons who have a relationship similar to that of an
officer, director or shareholder of a corporation (such as members and
managers of a limited liability company), (vi) all persons supplying financing
or loaning money to any licensee connected with the establishment or operation
of limited gaming, and (vii) all persons having a contract, lease or ongoing
financial or business arrangement with any licensee, where such contract,
lease or arrangement relates to limited gaming operations, equipment, devices
or premises.
In addition, under the Colorado Regulations, every person who is a party to
a "gaming contract" with an applicant for a license, or with a licensee, upon
the request of the Colorado Commission or the Director, promptly must provide
to the Colorado Commission or Director all information which may be requested
concerning financial history, financial holdings, real and personal property
ownership, interests in other companies, criminal history, personal history
and associations, character, reputation in the community, and all other
information which might be relevant to a determination whether a person would
be suitable to be licensed by the Colorado Commission. Failure to provide all
information requested constitutes sufficient grounds for the Director or the
Colorado Commission to require a licensee or applicant to terminate its
"gaming contract" (as defined below) with any person who failed to provide the
information requested. In addition, the Director or the Colorado Commission
may require changes in "gaming contracts" before an application is approved or
participation in the contract is allowed. A "gaming contract" is defined as an
agreement in which a person does business with or on the premises of a
licensed entity.
An application for licensure or suitability may be denied for any cause
deemed reasonable by the Colorado Commission or the Director, as appropriate.
Specifically, the Colorado Commission and the Director must deny a license to
any applicant who (i) fails to prove by clear and convincing evidence that the
applicant is qualified, (ii) fails to provide information and documentation
requested; (iii) fails to reveal any fact material to qualification, or
supplies information which is untrue or misleading as to a material fact
pertaining to qualification; (iv) has been, or has any director, officer,
general partner, shareholder, limited partner or other person who has a
financial or equity interest in the applicant who has been, convicted of
certain crimes, including
19
<PAGE>
the service of a sentence upon conviction of a felony in a correctional
facility, city or county jail, or community correctional facility or under the
state board of parole or any probation department within ten years prior to
the date of the application, gambling-related offenses, theft by deception or
crimes involving fraud or misrepresentation, is under current prosecution for
such crimes (during the pendency of which license determination may be
deferred), is a career offender or a member or associate of a career offender
cartel, or is a professional gambler; or (v) has refused to cooperate with any
state or federal body investigating organized crime, official corruption or
gaming offenses.
If the Colorado Commission determines that a person or entity is unsuitable
to own interests in the Company, then the Company or the Colorado Subsidiary
may be sanctioned, which may include the loss by the Company or the Colorado
Subsidiary of their respective approvals and licenses.
The Colorado Commission does not need to approve in advance a public
offering of securities, but rather requires a filing of notice and additional
documents with regard to such public offering prior to such public offering.
The Company has filed the required notice with the Colorado Commission. Under
the regulations, the Colorado Commission may, in its discretion, require
additional information and prior approval of such public offering.
In addition, the Colorado Regulations prohibit a licensee or affiliated
company thereof, such as the Company, from paying dividends, interest or other
remuneration to any unsuitable person, or recognizing the exercise of any
voting rights by any unsuitable person. Further, the Company may repurchase
the shares of anyone found unsuitable at the lesser of the cash equivalent to
the original investment in the Company or the current market price. Further,
the regulations require anyone with a material involvement with a licensee,
including a director or officer of a holding company, such as the Company, to
file for a finding of suitability if required by the Colorado Commission.
In addition to its authority to deny an application for a license or
suitability, the Colorado Commission has jurisdiction to disapprove a change
in corporate position of a licensee and may have such authority with respect
to any entity which is required to be found suitable by the Colorado
Commission. The Colorado Commission has the power to require the Company and
the Colorado Subsidiary to suspend or dismiss managers, officers, directors
and other key employees or sever relationships with other persons who refuse
to file appropriate applications or whom the authorities find unsuitable to
act in such capacities, and may have such power with respect to any entity
which is required to be found suitable.
A person or entity may not sell, lease, purchase, convey or acquire a
controlling interest in the Company without the prior approval of the Colorado
Commission. The Company may not sell any interest in the Colorado Subsidiary
without the prior approval of the Colorado Commission.
Limited gaming facilities in Colorado must not exceed certain gaming square
footage limits as a total of each floor and the full building. Casinos in
Colorado may operate only between 8:00 a.m. and 2:00 a.m., and may permit only
individuals 21 years or older to gamble in the casino. The law permits slot
machines, blackjack and poker, with a maximum single bet of $5.00. Casinos may
not provide credit to their gaming patrons.
The Colorado Constitution permits a gaming tax of up to 40% on adjusted
gross gaming proceeds. The Colorado Commission has set a gaming tax rate of 2%
on adjusted gross gaming proceeds of up to and including $2 million, 8% over
$2 million and including $4 million, 15% over $4 million up to and including
$5 million and 18% on adjusted gross gaming proceeds in excess of $5 million.
The Colorado Commission also has imposed an annual device fee of $75 per
gaming device. The Colorado Commission may revise the gaming tax rate and
device fee from time to time. Central City Black Hawk and Cripple Creek each
have imposed annual device fees of approximately $1,000 per gaming device and
may revise the same from time to time.
Colorado has certain unique regulatory laws which, if adversely interpreted
or not modified, may limit or adversely affect the ability of the Company to
enter in, or compete within, the Colorado market. First, as noted,
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<PAGE>
gaming in Colorado constitutionally is limited to slot machines, blackjack and
poker. Although no manufacturer or distributor has attempted to distribute the
Company's type of interactive game, it should be included within the
definition of "slot machine." In preliminary discussions, Division personnel
have stated that the device likely is a "slot machine," although neither the
Division nor the Commission have formally ruled on the issue and will not do
so until the product is submitted to the Division for approval.
Second, Colorado constitutionally limits the maximum single bet to $5.00.
Colorado statutes define a bet to be an amount placed as a wager in a game of
chance. If the Company's product permits multiple rounds of betting at $5.00
per round, it would be unclear whether Colorado would permit such betting. If
Colorado does not permit multiple round bets in excess of $5.00, then the
Company would need to adjust its machines to limit the total bets to $5.00,
including all rounds.
Third, Commission Regulations define the requirements of slot machines,
including limitations on the ability to alter the slot machine's program and
the internal requirements of the slot machine itself. The Company's proposed
machines do not comply with existing Regulations. Although the Company intends
to seek a change in the Commission's Regulations, there can be no assurance
that such changes will be made. If the Regulations are not changed, then the
Company will need to modify its machines to conform to Colorado requirements.
Even as so modified, the Company's machines must be approved by the Division
as meeting existing Regulations and there is no assurance that the Company
will receive such approval or will receive such approval in a timely basis.
New Jersey Regulatory Matters. Casino gaming in New Jersey is regulated by
the New Jersey Casino Control Act, N.J.S.A. 5:12-1 et seq., and regulations
promulgated thereunder (the "NJCCA"). The NJCCA created the New Jersey Casino
Control Commission ("NJCCC"), which is authorized to decide all license
applications and other matters and to promulgate regulations, and created the
New Jersey Division of Gaming Enforcement (the "NJDGE"), which is authorized
to investigate all license applications, make recommendations to the NJCCC,
and prosecute violations of the NJCCA. Under the NJCCA, any enterprise
providing goods or services to a casino must register with or be licensed by
the NJCCC. The Company and its wholly-owned subsidiary, Silicon Gaming-New
Jersey, Inc., filed the necessary documents in order to be licensed by the
NJCCC and the NJDGE.
Business enterprises providing goods or services directly related to casino
gaming or simulcast wagering must be licensed as a gaming related Casino
Service Industry ("CSI") prior to conducting business with New Jersey casino
licensees or must have filed a complete application for CSI licensure with the
NJCCC and received the permission of the NJCCC for each business transaction.
A CSI license application consists of a Business Entity Disclosure Form for
the applicant and each of its holding companies and Personal History
Disclosure Forms for each individual required to be found qualified. The
application fee consists of a non-refundable deposit of $5,000 and an
obligation to pay an additional $5,000 if the processing of the application
requires more than 1,000 but less than 2,000 hours and a further $5,000 if the
processing of the application exceeds 2,000 hours. The same fee structure
applies to any renewal application.
In connection with a license application, the NJDGE conducts an
investigation of the Company to determine its suitability for licensure. In
order for the requisite CSI license to be issued by the NJCCC to the Company
and maintained, the Company's officers, directors and key employees and all
beneficial owners of more than five percent (5%) of the Company's Common Stock
must be found qualified by the NJCCC. In order to be found qualified, the
Company, its officers, directors, key employees and five percent (5%)
shareholders must demonstrate by clear and convincing evidence their good
character, honesty and integrity, their financial stability, integrity and
responsibility and their business ability. Any other shareholder or other
person associated with the Company whom the NJCCC deems appropriate, in its
discretion, is also required to be qualified. If a person is required to and
fails to submit to qualification or submits to qualification and is found
disqualified by the NJCCC, the NJCCC may prohibit casinos in New Jersey from
doing business with the Company.
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However, "institutional investors" (as defined in the NJCCC) may be granted
a waiver of the requirement to be found qualified by the NJCCC. An
institutional investor includes any retirement fund administered by a public
agency for the exclusive benefit of federal, state or local public employees,
investment company registered under the Investment Company Act of 1940,
collective investment trust organized by banks under Part Nine of the Rules of
the Comptroller of the Currency, closed end investment trust, chartered or
licensed life insurance company or property and casualty insurance company,
banking and other chartered or licensed lending institution, and investment
advisor registered under The Investment Advisors Act of 1940. At the
discretion of the NJCCC, a waiver of qualification may be granted to such
institutional investors provided the securities are owned for investment
purposes only and the institutional investor certifies that it has no
intention of influencing or affecting the affairs of the issuer or its holding
companies.
After 30 days following the filing of a CSI license application with the
NJCCC, the Company may seek permission from the NJCCC to conduct certain
business transactions with a New Jersey casino. Such "transactional waivers"
will only be granted in the absence of an objection by the NJDGE. Such
approvals are granted for a maximum term of six (6) months subject to renewal.
A CSI license is issued for an initial period of two years and is thereafter
renewable for four year periods. There is no guarantee that the Company will
be granted an initial license or that, following the issuance of an initial
CSI license or any renewal thereof, the Company will continue to be granted
renewals of the license. Additionally, upon application of the NJDGE, the
NJCCC may at any time review any license issued by it and determine to
suspend, revoke or place conditions on such license.
In addition to the required licensure from the NJCCC, the gaming equipment
manufactured, distributed or sold by the Company to New Jersey casinos is
subject to a technical examination by the NJDGE and approval by the NJCCC for,
at a minimum, quality, design, integrity, fairness, honesty and suitability.
The approval process includes the submission of a model of the machine to the
NJDGE for testing, examination and analysis and for comparison with
documentation of the schematics, block diagram, circuit analysis and written
explanation of the method of operation, odds determination and all other
pertinent information. The model remains in the custody of the NJDGE unless
otherwise directed by the NJCCC. All costs of such testing, examination and
analysis are borne by the Company. As part of this approval process, the NJCCC
may require that the manufacturer of any component of the gaming equipment
which the NJCCC, in its discretion, determines is essential to the gaming
operation of the device submit to licensing. Such components would include the
computer control circuitry which causes or allows the device to operate as a
gambling device. The failure or refusal of such a manufacturer to submit to
licensing or the denial of a license by the NJCCC to such manufacturer would
result in the inability of the Company to distribute and market that gambling
device to New Jersey casinos. Prior to a decision by the NJCCC to approve a
particular model of machine, it may require up to 60 days trial period to test
the machine in a licensed casino. During the trial period, the manufacturer or
distributor of the machine shall not be entitled to receive revenue of any
kind whatsoever. Once a model is approved by the NJCCC, all machines of that
model placed in operation in licensed casinos shall operate in conformity with
the model tested by the NJDGE. Any changes in the design, function or
operation of the machine are subject to prior approval by the NJCCC in
consultation with the NJDGE.
Mississippi Regulatory Matters. The manufacture, sale and distribution of
gaming devices for use or play in Mississippi are subject to the Mississippi
Gaming Control Act and the regulations promulgated thereunder (collectively,
the "Mississippi Act"). Such activities are subject to the licensing and
regulatory control of the Mississippi Gaming Commission (the "Mississippi
Commission") and the Mississippi State Tax Commission (collectively referred
to as the "Mississippi Gaming Authorities"). Although not identical, the
Mississippi Act is similar to the Nevada Gaming Control Act and regulations
promulgated thereunder.
On June 20, 1996 the Company was registered by the Mississippi Commission as
a publicly traded corporation (a "Registered Corporation") and the holding
company of Silicon Gaming-Mississippi, Inc. (the "Mississippi Subsidiary").
Also on June 20, 1996 the Mississippi Subsidiary was licensed as a
manufacturer and distributor. SGI and the Mississippi Subsidiary are required
to periodically submit detailed financial and
22
<PAGE>
operating reports to the Mississippi Commission and furnish any other
information which the Mississippi Commission may require. The Company and the
Mississippi Subsidiary have received the various registrations, approvals,
permits and licenses in order to engage in manufacturing, distribution and
gaming activities as presently conducted in Mississippi. Such licenses,
registrations and approvals are not transferable, are initially issued for a
two-year period and must be renewed periodically thereafter.
Similar to Nevada, the Mississippi Commission may investigate and find
suitable any individual who has a material relationship to, or material
involvement with, the Company or the Mississippi Subsidiary, including record
or beneficial holders of any of the voting securities of the Company, holders
of debt obligations, and officers, directors and employees of the Company and
the Mississippi Subsidiary. The Company and the Mississippi Subsidiary are
required to maintain a current stock ledger in Mississippi which may be
examined by the Mississippi Commission at any time. The Company believes that
all required findings of suitability currently required have been applied for
or obtained. Any applicant for a finding of suitability must pay all
investigative fees and costs of the Mississippi Commission in connection with
such an investigation.
The Mississippi Act requires any person who acquires beneficial ownership of
more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Mississippi Commission and such person may be required to
be found suitable. The Mississippi Act requires that beneficial owners of more
than 10% of a Registered Corporation's voting securities apply to the
Mississippi Commission for a finding of suitability. The Mississippi
Commission has generally exercised its discretion to require a finding of
suitability of any beneficial owner of more than 5% of a Registered
Corporation's Common Stock. Under certain circumstances, an "institutional
investor," as defined by Mississippi Commission policy, which acquires more
than 5%, but not more than 10%, of the Registered Corporation's voting
securities may apply to the Mississippi Commission for a waiver of such
finding of suitability if such institutional investor holds the voting
securities for investment purposes only.
The Company may not make a public offering of its securities without the
approval of the Mississippi Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Mississippi, or to retire or extend obligations incurred for such purposes.
If it were determined that the Mississippi Act was violated by the
Mississippi Subsidiary, the licenses it holds could be limited, condition,
suspended or revoked, subject to compliance with certain statutory and
regulatory procedures, which action, if taken, could materially adversely
affect the Company's manufacturing and distribution.
Federal Regulation. The Federal Gambling Devices Act of 1962 (the "Federal
Act") makes it unlawful, in general, for a person to manufacture, deliver, or
receive gaming machines, gaming machine type devices and components across
state lines or to operate gaming machines unless that person has first
registered with the Attorney General of the United States. The Company is
required to register and renew its registration annually. The Company has
complied with such registration requirements. In addition, various record
keeping equipment identification requirements are imposed by the Federal Act.
Violation of the Federal Act may result in seizure and forfeiture of the
equipment, as well as other penalties.
Native American Gaming. Gaming on Native American lands, including the terms
and conditions under which gaming equipment can be sold or leased to Native
American tribes, is or may be subject to regulation under the laws of the
tribes, the laws of the host state, the Indian Gaming Regulatory Act of 1988
("IGRA"), which is administered by the National Indian Gaming Commission (the
"NIGC") and the Secretary of the U.S. Department of the Interior (the
"Secretary"), and also may be subject to the provisions of certain statutes
relating to contracts with Native American tribes, which are administered by
the Secretary. As a precondition to gaming involving gaming machines, IGRA
requires that the tribe and the state have entered into a written agreement (a
"tribal-state compact") that specifically authorizes such gaming, and that has
been approved by the Secretary, with notice of such approval published in the
Federal Register. Tribal-state compacts vary from state to state. Many require
that equipment suppliers meet ongoing registration and licensing requirements
of the
23
<PAGE>
state and/or the tribe and some impose background check requirements on the
officers, directors, and shareholders of gaming equipment suppliers. Under
IGRA, tribes are required to regulate all commercial gaming under ordinances
approved by the NIGC. Such ordinances may impose standards and technical
requirements on gaming hardware and software, and may impose registration,
licensing and background check requirements on gaming equipment suppliers and
their officers, directors, and shareholders.
Application of Future or Additional Regulatory Requirements. In the future,
the Company intends to seek the necessary registrations, licenses, approvals
and findings of suitability for the Company, its product and its personnel in
other U.S. and foreign jurisdictions in which the Company identifies
significant sales potential for its product. However, there can be no
assurance that such registrations, licenses, approvals or findings of
suitability will be obtained and will not be revoked, suspended or conditioned
or that the Company will be able to obtain the necessary approvals for its
future products as they are developed in a timely manner, or at all. If a
registration, license, approval or finding of suitability is required by a
regulatory authority and the Company fails to seek or does not receive the
necessary registration, license, approval or finding of suitability, the
Company may be prohibited from selling its product for use in the respective
jurisdiction or may be required to sell its product through other licensed
entities at a reduced profit to the Company.
ITEM 2: PROPERTIES
In February 1996, the Company moved from its facilities in Saratoga,
California to a 28,000 square foot leased facility in Palo Alto, California
consisting of 17,000 square feet of office space and 11,000 square feet of
manufacturing space. The lease expires in January 2006. In September 1996, the
Company occupied a 12,000 square foot office building designated primarily for
its sales and support organization in Las Vegas, Nevada. The lease expires in
October 1997. In January 1997, the Company executed a lease for an additional
29,000 square foot manufacturing facility in Mountain View, California
commencing in March 1997 and expiring in February 2006. Also in January 1997,
the Company entered into leases for up to 4,000 square feet of office space
for sales and support in Reno, Nevada.
In connection with the Company's occupancy of the Mountain View
manufacturing site, the 11,000 square feet in Palo Alto previously allocated
to manufacturing will be converted to office space. The Company believes that
its existing manufacturing facility is adequate to meet its production
requirements through 1998.
ITEM 3: LEGAL PROCEEDINGS
Inapplicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Donald J. Massaro................ 53 President, Chairman of the Board and
Chief Executive Officer
Andrew S. Pascal................. 31 Executive Vice President--Marketing and
Game Development
Thomas E. Carlson................ 43 Vice President--Chief Financial Officer
Karen M. Katz.................... 31 Vice President--Sales and Support
Paul D. Mathews.................. 32 Vice President--Government Affairs
Jeffrey D. Friedberg............. 38 Vice President--Engineering
H. Paul Kurth.................... 60 Vice President--Manufacturing
</TABLE>
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Donald J. Massaro has served as a director of the Company since May 1995 and
as Chairman of the Board since October 1996. In addition, Mr. Massaro has
served as President and Chief Executive Officer since June 1995. Mr. Massaro
has over 20 years of general management experience and has been a director
and/or chairman of the board of directors for a number of public and private
Silicon Valley based technology companies. Prior to joining SGI, Mr. Massaro
was Executive Vice President and General Manager of Worldwide Sales and
Marketing for Conner Peripherals Inc. ("Conner"), a disk drive manufacturer,
from July 1994 to May 1995. From January 1991 to June 1994, Mr. Massaro was
Chief Executive Officer of Sjoberg Industries ("Sjoberg"), and Inversion
Development Corporation ("Inversion"), manufacturers of environmental
products. Sjoberg filed for protection under federal bankruptcy statutes in
December 1992 and was acquired by Inversion in March 1993. Prior thereto, he
served as President and Chief Executive Officer of Metaphor Computer Systems
("Metaphor"), a company he co-founded in 1982 to develop and manufacture
client-server based management information systems. Mr. Massaro's other prior
experience includes positions as Corporate Vice President and President of
Xerox Corporation's Office Products Division and President and Chief Executive
Officer of Shugart Associates, a computer peripherals company he co-founded in
1972.
Andrew S. Pascal has served as Executive Vice President--Marketing and Game
Development since October 1994. He has over 10 years of gaming industry
experience with an emphasis in slot marketing, slot merchandising and slot
operations. He joined SGI in October 1994 from Mirage Resorts, Incorporated ,
where he worked from June 1985 to October 1994. Mr. Pascal held the position
of Director of Slot Operations and Marketing at The Mirage Hotel and Casino,
managing a division consisting of 350 employees and annual revenue in excess
of $110 million. Mr. Pascal served on The Mirage's eight-member Operating
Committee, which set operating policy and established the strategic direction
for The Mirage and its 7,300 employees, from September 1992 to October 1994.
Prior to the opening of The Mirage Hotel and Casino, Mr. Pascal served as the
Director of Slot Marketing for the Golden Nugget Casino-Hotel.
Thomas E. Carlson joined SGI in May 1995 from Conner, where from November
1994 to February 1995 he held the position of Worldwide Research and
Development and Launch Manufacturing Controller. From January 1991 to October
1994 he was Chief Financial Officer of Sjoberg and Inversion. Sjoberg filed
for protection under federal bankruptcy laws in December 1992 and was
ultimately acquired by Inversion in March 1993. From 1984 to 1990 Mr. Carlson
held various positions at Metaphor, including Director of Financial Planning
and Corporate Controller.
Karen M. Katz joined SGI in July 1995 from Conner, where from August 1994 to
July 1995 she held the position of Director of Strategic Programs and was
responsible for developing and implementing the programs and systems for
managing its $2.5 billion disk drive and tape drive businesses. Prior to her
promotion to Director of Strategic Programs, from July 1993 to July 1994 Ms.
Katz served as Conner's Director of Corporate Sales and was responsible for
the global sales management of the Sun Microsystems, Inc. and Digital
Equipment Corporation accounts. Prior to joining Conner in October 1991, Ms.
Katz was a member of the technical staff at AT&T Bell Laboratories.
Paul D. Mathews joined SGI in November 1995 from Casino Data Systems, a
designer and manufacturer of casino management information systems and gaming
devices, where from March 1995 to November 1995 he was Director of Regulatory
Compliance responsible for corporate and product licensing in all gaming
jurisdictions. Prior to joining Casino Data Systems, Mr. Mathews spent five
years with the Nevada State Gaming Control Board in the Corporate Securities
and Investigation Divisions.
Jeffrey D. Friedberg joined SGI in March 1995 as Director of Software
Development, a position he held until May 1996, when he was elected Vice
President-Engineering. From December 1994 to March 1995, he worked at Apple
Computers, Inc. as a consultant identifying third party graphics acceleration
strategies. From May 1991 to November 1994, Mr. Friedberg worked at Kubota
Graphics Corporation, a manufacturer of graphics supercomputers and
workstations, where he held various positions including Director of Graphics
Software Development. From October 1986 to May 1991, Mr. Friedberg served as a
Principal Engineer with Digital Equipment Corporation.
25
<PAGE>
H. Paul Kurth joined SGI in November 1995 from Edge Diagnostic Systems, a
manufacturer of computerized automotive diagnostic systems, where he was the
founder and Vice President of Operations responsible for product design,
fabrication and manufacturing from January 1988 to June 1994. Prior to founding
Edge Diagnostic Systems, Mr. Kurth founded Vertex Peripherals, a manufacturer
of high-performance, high-capacity disk drives.
26
<PAGE>
PART II
Portions of the information required by Part III of Form 10-K are
incorporated by reference to portions of the Company's 1996 Annual Report.
Except for the information specifically incorporated by reference, the
Company's 1996 Annual Report is not be deemed filed as part of this Report.
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information under "Stock Price History" set forth in the 1996 Annual
Report is incorporated herein by reference.
ITEM 6: SELECTED FINANCIAL DATA
The information under "Selected Consolidated Financial Data" set forth in
the 1996 Annual Report is incorporated herein by reference.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information under "Management's Discussion and Analysis of Financial
Condition and Results of Operation" set forth in the 1996 Annual Report is
incorporated herein by reference.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information contained in the 1996 Annual Report under the captions
"Consolidated Balance Sheets," "Consolidated Statement of Operations,"
"Consolidated Statements of Shareholders' Equity (Deficiency)," "Consolidated
Statements of Cash Flows," "Notes to Consolidated Financial Statements" and
"Independent Auditors' Report" is incorporated herein by reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In November 1995, the Company engaged Deloitte & Touche LLP ("Deloitte") as
its independent auditor and dismissed its former auditor, Coopers & Lybrand
L.L.P. ("Coopers"). The decision to change auditors was approved by the
Company's Board of Directors. Since the Company's inception, there has been no
auditors' report on the Company's financial statements containing an adverse
opinion or disclaimer of opinion or that was qualified or modified as to
uncertainty, audit scope or accounting principles. During such period, there
were no disagreements with Coopers on any matter of accounting principle or
practice, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to Coopers' satisfaction, would have caused it
to make reference to the subject matter of the disagreements in connection
with its report. Further, during this period, there were no events of the type
required to be reported pursuant to Item 304(a)(1)(v) of Regulation S-K.
During the period from inception through November 1, 1995, the Company did not
consult Deloitte on items that involved either the Company's accounting
principles or the form of its audit opinion.
27
<PAGE>
PART III
Portions of the information required by Part III of Form 10-K are
incorporated by reference to portions of the Company's definitive Proxy
Statement to be filed with the Commission in connection with the 1996 Annual
Meeting of Shareholders (the "Proxy Statement"), which the Company intends to
file not less than 120 days after the end of the fiscal year covered by this
Report.
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the Proxy Statement under the captions
"Proposal One--Election of Directors-Nominees" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement to be filed
in connection with its 1997 annual meeting of shareholders (the "Proxy
Statement") and the information set forth in Item I of this Report under the
caption "Executive Officers" is incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
The information set forth in the Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the Proxy Statement under the caption "Security
Ownership of Certain Beneficial Owners and Management" is incorporated herein
by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the Proxy Statement under the caption "Certain
Relationships and Related Transactions" is incorporated herein by reference.
28
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS FORM 10-K:
(1) Consolidated Financial Statements. The following consolidated financial
statements and related notes, together with the report thereon of Deloitte
& Touche LLP, independent public accountants, are incorporated herein by
reference from the Annual Report.
<TABLE>
<CAPTION>
ANNUAL REPORT
PAGE NUMBER
-------------
<S> <C>
Consolidated Balance Sheets at December 31, 1995 and 1996.... 34
Consolidated Statements of Operations for the year ended
March 31, 1995, the nine-month period ended December 31,
1995, the year ended December 31, 1996 and cumulative....... 35
Consolidated Statements of Shareholders' Equity (Deficiency)
for the period from inception (July 27, 1993) through
December 31, 1996........................................... 36
Consolidated Statements of Cash Flows for the year ended
March 31, 1995, the nine-month period ended December 31,
1995, the year ended December 31, 1996 and cumulative....... 37
Notes to Consolidated Financial Statements................... 38
Independent Auditors' Report................................. 45
</TABLE>
(2) Financial Statement Schedule.
Schedules have been omitted because they are not required or the information
required to be set forth therein is included in the Consolidated Financial
Statements or Notes to Consolidated Financial Statements.
(3) Exhibits. The exhibits listed in the accompanying Exhibit Index are
filed as part of, or incorporated by reference into, this Report:
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, in the City of Palo Alto, County of Santa Clara, State of
California, on the 28th day of March, 1997.
Silicon Gaming, Inc.
/s/ Donald J. Massaro
By___________________________________
DONALD J. MASSARO PRESIDENT,
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, ths
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Donald J. Massaro President, Chairman March 28, 1997
- ------------------------------------- of the Board and
DONALD J. MASSARO Chief Executive
Officer (Principal
Executive Officer)
/s/ Thomas E. Carlson Vice President-- March 28, 1997
- ------------------------------------- Chief Financial
THOMAS E. CARLSON Officer (Principal
Financial and
Accounting Officer)
/s/ Robert M. Fell Director March 28, 1997
- -------------------------------------
ROBERT M. FELL
/s/ William Hart Director March 20, 1997
- -------------------------------------
WILLIAM HART
/s/ Kevin R. Harvey Director March 28, 1997
- -------------------------------------
KEVIN R. HARVEY
/s/ David S. Morse Director March 28, 1997
- -------------------------------------
DAVID S. MORSE
/s/ Joseph S. Piemont Director March 20, 1997
- -------------------------------------
JOSEPH S. PIEMONT
/s/ Thomas J. Volpe Director March 24, 1997
- -------------------------------------
THOMAS J. VOLPE
30
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
3.1(1) Amended and Restated Articles of Incorporation of the Registrant.
3.2(2) Bylaws of the Registrant.
10.1(2) Amended and Restated 1994 Stock Option Plan, as amended.
10.2(2) Lease Agreement dated September 14, 1995, between the Registrant and
Demmon Family Partnership.
10.3(2) Founders Stock Purchase Agreements dated September 14, 1993, between
the Registrant and Robert M. Fell and David S. Morse, respectively.
10.4(2) Series A Preferred Stock Purchase Agreement dated as of May 12, 1994.
10.5(2) Series B Preferred Stock Purchase Agreement dated as of August 10,
1995.
10.6(3) Series C Preferred Stock Purchase Agreement dated as of March 21,
1996, as amended May 29, 1996.
10.7(2) Second Amended and Restated Rights Agreement dated as of March 21,
1996.
10.8(2) Master Equipment Lease Agreement dated October 6, 1995, between the
Registrant and Lighthouse Capital Partners, L.P.
10.9(2) Letter Agreement dated December 8, 1994, between the Registrant and
IDEO Product Development providing for product development.
10.10(2) Side Letter Agreement dated March 21, 1996, between the Registrant
and the Interpublic Group of Companies, Inc.
10.11(2) Side Letter Agreement dated March 21, 1996, between the Registrant
and Station Casinos, Inc.
10.12(2) ASIC Design and Development Agreement dated January 1995 between the
Registrant and RAVIcad, Inc.
10.13(2) License Agreement dated February 6, 1995, between the Registrant and
RAVIcad, Inc.
10.14(2) ASIC Design and Development Agreement dated February 15, 1995,
between the Registrant and RAVIcad, Inc.
10.15(2) OEM Master License Agreement dated April 17, 1996, between the
Registrant and RSA Data Security, Inc.
10.16(2) Agreement dated March 26, 1996, between the Registrant and MICROID
Research.
10.17(2) Management Services Agreement by and between the Registrant and
Interactive Partners.
10.18(3) Employment Agreement dated May 25, 1995, by and between the
Registrant and Donald J. Massaro.
10.19(2) 1996 Employee Stock Purchase Plan.
10.20(2) 1996 Outside Directors Stock Option Plan.
10.21(3) Software License Agreement dated June 20, 1996 between the Registrant
and Duck Corporation.
10.22 Lease Agreement dated August 14, 1996, between the Registrant and
Interactive Flight Technologies, Inc.
10.23 Lease Agreement dated January 1997, between the Registrant and The
Prudential Insurance Company of America.
10.24 Lease Agreement dated January 23, 1997, between the Registrant and
Johnny Ribeiro.
10.25 Lease Agreement dated January 23, 1997, between the Registrant and
The Ribeiro Corporation.
11.1 Statement of Computation of Loss Per Share.
13.1 Portions of 1996 Annual Report to Shareholders.
16.1(1) Letter re change in certifying accountant.
21.1 Subsidiaries of the registrant.
23.1 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated by reference to Exhibit 3.3 to Registrant's Registration
Statement on Form 10 (No. 0-28294) filed with the Commission on April 24,
1996 (the "Form 10").
(2) Incorporated by reference to identically numbered exhibit to the Form 10.
(3) Incorporated by reference to identically numbered exhibit to Registrant's
Registration Statement on Form S-1 (No. 333-4793), which became effective
on July 30, 1996.
<PAGE>
EXHIBIT 10.22
STANDARD FORM SUBLEASE
----------------------
1. DUTIES
------
This sublease is entered by and between Interactive Flight Technologies,
Inc., a Nevada corporation, Sublessor and, Silicon Gaming, Inc., a California
corporation Sublessee, as a Sublease under the Lease dated June 25, 1992,
entered into by Post Palms Associates, a joint venture of Post Road Associates,
a California General Partnership, and Copley Institutional Investors Fund II, a
Delaware Limited Partnership as Lessor, and Sublessor under this Lease as
Lessee, a copy of the Lease is attached and designated Exhibit A.
2. PROVISIONS CONSTITUTING SUBLEASE
--------------------------------
(a) This Sublease is subject to all of the terms and conditions of the
Lease in Exhibit A and Sublessee shall assume and perform the obligations of
Sublessor and Lessee in said Lease, to the extent said terms and conditions are
applicable to the premises subleased pursuant to this Sublease. Sublessee shall
not commit or permit to be committed on the subleased premises any act or
omission which shall violate any term or condition of the Lease. In the event of
the termination of Sublessor's interest as Lessee under the Lease for any
reason, then this Sublease shall terminate coincidentally therewith without any
liability of Sublessor to Sublessee.
(b) All of the terms and conditions contained in the Lease in Exhibit
A are incorporated herein as terms and conditions of this Sublease (with each
reference therein to Lessor and Lessee to be deemed to refer to Sublessor and
Sublessee) and along with all of the following paragraphs set out in this
Sublease, shall be the complete terms and conditions of this Sublease, excluding
Paragraphs 1.07 and 4.04.
3. PREMISES
--------
Sublessor leases to Sublessee and Sublessee hires from said Sublessor the
following described premises together WITH the appurtenances, situated in the
City of Las Vegas, County of Clark, State of Nevada.
3046 - 3070 West Post Road, an 11,711 square foot office/warehouse unit
situated within the Post Palms Business Center.
4. RENT
(a) Base Rent
Sublessee shall pay to Sublessor without deduction, offset, prior
notice or demand, as rental, the sum of $8,783.25 per month for the remainder of
the lease term. In advance on the 15th day of each month in lawful money of the
United States of America, commencing on the 1st day of September 1996 and
continuing throughout the balance of the term. Monthly rental for any partial
month shall be prorated at the rate of 1/30th of monthly rental per day. Rent
shall be paid to Sublessor at 4041 N. Central Avenue, 20th Floor, Phoenix,
Arizona 85012 or at such other place or places as Sublessor may from time to
time direct.
Page 1 of 3
<PAGE>
(b) Operating Expenses (including real estate taxes and insurance)
Sublessee shall pay to Sublessor $1,405.00 per month for each and
---------
every month of the Sublease term.
Receipt of $8,783.25 is hereby acknowledged for base rental and
---------
operating expenses for the month of September 30, 1996 through September 30th
1996 and the additional security deposit amount of $8,783.25 in consideration of
---------
the execution of this Sublease. In the event Sublessee has performed all of the
terms and conditions of this Sublease throughout the term upon Sublessee
vacating the premises, the amount paid in consideration for the execution shall
be returned to Sublessee after first deducting any sums owing to Sublessor.
5. TERM
----
(a) the term of this Sublease shall be for a period of thirteen
(13) months and seven (7) days and commencing on the 1st day of September, 1996,
and ending on the 7th day of October, 1997.
(b) if Sublessee, with Sublessor's consent, takes possession
prior to the commencement of the term, Sublessee shall do so subject to all of
the covenants and conditions hereof and shall pay rent for the period ending
with the commencement of the term at the same rental as that prescribed for the
first month of the term, prorated at the rate of 1/30th thereof per day.
6. USE
---
Sublessee shall use the premises for general and administrative
offices and development, manufacturing, and marketing of Casino Gaming Devices
and for no other purpose without the prior written consent of Sublessor and
master Lessor.
Sublessee's business shall be established and conducted
throughout the term hereof in a first class manner. Sublessee shall not use the
premises for, or carry on, or permit to be carried on, any offensive, noisy or
dangerous trade, business, manufacture or occupation nor permit any auction sale
to be held or conducted on or about the premises. Sublessee shall not do or
suffer anything to be done upon the premises which will cause structural injury
to the premises or the building of which the same form a part. The premises
shall not be overloaded and no machinery apparatus or other appliance shall be
used or operated in or upon the premises which will in any manner injure,
vibrate or shake the premises or the building of which it is a part. Sublessee
shall not lease the premises unoccupied or vacant during the term. No musical
instrument of any sort, or any noise making device will be operated or allowed
upon the premises for the purpose of attracting trade or otherwise. Sublessee
shall not use or permit the use of the premises or any part thereof for any
purpose which will increase the existing rate of insurance upon the building in
which the premises are located, or cause a cancellation of any insurance policy
covering the building or any part thereof. If any act on the part of Sublessee
or use of the premises by Sublessee shall cause, directly or indirectly, any
increase of Sublessor's insurance expense, said additional expense shall be paid
by Sublessee to Sublessor upon demand. No such payment by Sublessee shall limit
Sublessor in the exercise of any other rights or remedies, or constitute a
waiver of Sublessor's right to require Sublessee to discontinue such act or use.
Page 2 of 3
<PAGE>
7. ADDITIONAL PROVISIONS
---------------------
(a) This Lease is contingent upon the Sublessee verifying
availability of funds not less than $1,000,000.00 or before September 1, 1996.
Sublessor shall reserve the right to, in its sole discretion cancel this
Sublease contract at any time prior to Sublessee providing verification of funds
to Sublessor.
SUBLESSOR: Interactive Flight SUBLESSEE: Silicon Gaming, Inc.
Technologies, Inc.
BY: /s/ Robert J. Aten BY:/s/PAUL D. MATHEWS
------------------------------------ -------------------------------
ITS: CFO ITS: Vice President
------------------------------------ ------------------------------
BY: /s/ Lauren Snopkowski BY: /s/THOMAS E. CARLSON
------------------------------------ -------------------------------
ITS: Treasurer ITS: CFO
------------------------------------ ------------------------------
DATED: 8/16/96 DATED: 8/14/96
--------------------------------- ----------------------------
The undersigned, Lessor under the Lease in Exhibit A, hereby
consents to the subletting of the premises described in Exhibit B on the terms
and conditions contained in this Sublease. This consent shall apply only to this
Sublease and shall not be deemed to be a consent to any other sublease.
LESSOR: Post Palms Associates, a joint venture
of Post Road Associates, a California
General Partnership. and Copley
Institutional Investors Fund II, a
Delaware Limited Partnership
BY: /s/David B. Morthland BY:
------------------------------------ -------------------------------
Key Products, Inc. Lee W. Phelps
DATED: 8/26/96 ITS: General Partner
----------------------------------
ITS: Vice President BY:
------------------------------------ ------------------------------
Stanley K. Gentzler
ITS: General Partner
DATED: 8/14/96
----------------------------
If this Lease has been filled in it has been prepared for
submission to your attorney for his approval. No representation or
recommendation is made by the real estate broker or its agents or employees as
to the legal sufficiency, legal effect, or tax consequences of this Lease or the
transaction relating thereto.
Page 3 of 3
<PAGE>
EXHIBIT "A"
TABLE OF CONTENTS
STANDARD LEASE
<TABLE>
<CAPTION>
PAGE
<C> <S> <C>
ARTICLE 1 BASIC LEASE TERMS 1
1.01 Premises Leased 1
1.02 Project 1
1.03 Term 1
1.04 Rent 1
1.05 Operating Expenses 1
1.06 Security Deposit 1
1.07 Permitted Use of Premises 1
1.08 Addresses for Payments Notices and Deliveries 1
1.09 Broker 1
1.10 Building Improvements 1
1.11 Payments Upon Execution 1
ARTICLE 2 PREMISES 2
2.01 Leased Premises 2
2.02 Delivery and Acceptance of Premises 2
2.03 Building Name and Address 2
ARTICLE 3 TERM 2
3.01 General 2
3.02 Tender of Possession by Lessor 2
3.03 Delay In Possession 2
3.04 Early Occupancy 2
3.05 Option Term(s) 2
ARTICLE 4 RENT AND OPERATING EXPENSES 3
4.01 Base Rent 3
4.02 Operating Expenses 3
4.03 Cost of Living Increases 4
4.04 Security Deposit 4
4.05 Option Rent 4
ARTICLE 5 USES 5
5.01 Use 5
5.02 Hazardous Materials 5
5.03 Signs and Auctions 5
ARTICLE 6 COMMON FACILITIES AND VEHICLE PARKING 5
6.01 Operation and Maintenance of Common Facilities 5
6.02 Use of Common Facilities 6
6.03 Parking 6
6.04 Changes and Additions by Lessor 6
ARTICLE 7 MAINTENANCE, REPAIRS AND ALTERATIONS 6
7.01 Lessor's Obligations 6
7.02 Lessee's Obligations 7
7.03 alterations and Additions 7
7.04 Utility Additions 7
7.05 Entry and Inspection 7
ARTICLE 8 TAXES AND ASSESSMENTS ON LESSEE'S PROPERTY 8
8.01 Taxes on Lessee's Property 8
ARTICLE 9 UTILITIES 8
ARTICLE 10 ASSIGNMENT AND SUBLETTING 8
10.01 Rights of Parties 8
10.02 Effect of Transfer 9
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
ARTICLE 11 INSURANCE AND INDEMNITY 9
11.01 Liability Insurance - Lessee 9
11.02 Lessor's Insurance 9
11.03 Waiver of Subrogation 9
11.04 Policies 9
11.05 Lessee's Indemnity 9
11.06 Lessor's NonLiability 10
ARTICLE 12 DAMAGE OR DESTRUCTION 10
12.01 Restoration 10
ARTICLE 13 EMINENT DOMAIN 10
13.01 Total or Partial Taking 10
13.02 Temporary Taking 10
13.03 Taking of Parking Area 10
ARTICLE 14 SUBORDINATION, ESTOPPEL CERTIFICATE 10
14.01 Subordination 10
14.02 Estoppel Certificate 11
ARTICLE 15 DEFAULTS AND REMEDIES 11
15.01 Lessee's Defaults 11
15.02 Lessor's Remedies 11
15.03 Repayment of "Free" Rent 12
15.04 Cumulative Remedies 12
15.05 Late Payments 12
15.06 Right of Lessor to Perform 12
15.07 Default by Lessor 12
15.00 Expenses and Legal Fees 13
ARTICLE 16 END OF TERM 13
16.01 Holding Over 13
16.02 Merger on Termination 13
16.03 Surrender of Premises; Removal of Property 13
16.04 Termination; Advance Payments 13
ARTICLE 17 PAYMENTS AND NOTICES 13
ARTICLE 18 LIMITATION OF LIABILITY 14
ARTICLE 19 BROKER'S COMMISSION 14
ARTICLE 20 TRANSFER OF LESSOR'S INTEREST 14
ARTICLE 21 INTERPRETATION 14
21.01 Gender and Number 14
21.02 Headings 14
21.03 Joint and Several Liability 14
21.04 Successors 14
21.05 Time of Essence 14
21.06 Severability 14
21.07 Entire Agreement 14
21.06 Covenants and Conditions 14
21.09 Counterparts 15
21.10 Attachments 15
</TABLE>
ii
<PAGE>
STANDARD LEASE
(Multi)
THIS LEASE, dated for reference purposes only, June 25, 1992, is made by and
between POST PALMS ASSOCIATES, a joint venture of POST ROAD ASSOCIATES, a
California General Partnership, and COPLEY INSTITUTIONAL INVESTORS FUND II, a
Delaware Limited Partnership (herein called 'lessor') and KEY PRODUCTS CO.,
INC., a Nevada Corporation, (herein called "'Lessee"").
ARTICLE 1 BASIC LEASE TERMS
Each reference in this Lease to the "Basic Lease Terms" shall mean and refer
to the following collective terms, the application of which shall be governed by
the provisions in the remaining articles of this Lease.
1.01 Premises Leased:
a. Premises Address: 3046 - 3070 Post Road, Las Vegas, Nevada
b. Rental Area: 11,711 square feel as illustratively highlighted in
exhibit "A"
c. Building Designation: A5-A9
1.02 Project:
a. Project Name: Post Palms Business Center
b. Project Rental Area: 139,949 Square Feet
1.03 Term:
a. Estimated Commencement Date: September 1,1992
b. Number of Calendar Months: Sixty (60)
c. Option to Renew - One (1) Five (5) year.
1.04 Rent:
a. Base Rent: (i) during month(s) one (1) through eleven (11);
(ii) forgiveness of Base Rent and Operating Expenses during month twelve (12);
(iii) during month(s) thirteen (13) through twenty-three (23); (iv)
forgiveness of Base Rent and Operating Expenses during month twenty-four (24);
(v) during month(s) twenty-five (25) through thirty-six (36); (vi)
during months thirty-seven (37) through forty-eight (48); (vii) during
month(s) forty-nine (49) through sixty (60). Where reference is made in this
Lease to rent as provided in Section 1.04a, or where such reference is made to
the term "Original Monthly Rent", such rent shall be deemed to be
Operating expenses are due and payable throughout the term of the Lease, except
during months twelve (12) and twenty-four (24) of the initial Lease term.
1.05 Operating Expenses: Lessee's Share of Operating Expenses: 8% as defined
in Section 4.02. Lessor estimates Operating Expenses during the calendar year
when the Lease commences to be $1,405.00 per month. This is a fixed operating
expense charge that will not be increased during the initial term of the Lease.
1.06 Security Deposit:
1.07 Permitted Use: Sales and distribution of health products.
1.08 Addresses for Payments, Notices and Deliveries:
Lessor: Post Palms Associates
3137 W. Tompkins
LV, NV 89103
367-3000
Lessee: Key Products Co.
3070 Post Road
Las Vegas, Nevada 89118
1.09 Brokers: the Commercial Group
Cristian Danel
Party Responsible for Payment: Lessor.
1.10 Building Improvements: Attached as Exhibit "C".
1.11 Payments Upon Execution: the first installment of Base Rent the
first month's Operating Expenses of and a security deposit of
which totals shall be delivered to Lessor concurrently with Lessee's
execution of this Lease.
1 Initial____
<PAGE>
ARTICLE 2 PREMISES
2.01 Leased Premises: Lessor leases to Lessee and Lessee rents from Lessor
the premises (herein the "Premises"), containing the rental area set forth in
Section 1.01b of the Basic Lease Terms. The Premises are located at the building
identified in the Basic Lease Terms (which together with underlying real
property is called herein the "Building"), and is a portion of the project
including other buildings described in Section 1.02a of the Basic Lease Terms
(herein the "Center"). The premises and the Center are indicated on a site plan
attached hereto as Exhibit "A". If, upon completion of the space plans for the
Premises, Lessor's architect or space planner determines that the rentable
square footage of the Premises differs from that set forth in the Basic Lease
Terms, then Lessor shall so notify Lessee, and the Base Rent (as shown in
Section 1.04 of the Basic Lease Terms) shall be promptly adjusted in proportion
to the change in square footage. Within ten (10) days following Lessor's
request, the parties shall memorialize the adjustments by executing a
certificate to this Lease prepared by Lessor, provided that the failure or
refusal by Lease prepared by either party to execute the amendment shall not
affect its validity. The form of such certificate is attached as Exhibit "B".
2.02 Delivery and Acceptance of Premises: Lessor shall deliver the Premises
to Lessee clean and free of debris, on the Commencement Date (unless Lessee is
already in possession), and Lessor further warrants to Lessee that the Common
Facilities referred to in Article 6, plumbing, healing, air conditioning,
ventilating, electrical, lighting facilities and equipment with the Premises,
fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors,
windows, access doors, loading doors, plate glass and skylights shall be in good
operating condition on the Commencement Date. In the event that it is determined
that this warranty has been violated, then it shall be the obligation of the
Lessor, after receipt of written notice from Lessee setting forth with
specificity the nature of the violation, to promptly, at Lessor's sole cost,
rectify such violation. Lessee's failure to give such written notice to Lessor
within six (6) months after the Commencement Date shall cause the conclusive
presumption that Lessor has complied with all of Lessor's obligations hereunder.
The warranty contained in this Section shall be of no force or effect if prior
to the date of This Lease Lessee was the owner or occupant of the Premises.
Except as otherwise provided in this Lease, Lessee hereby accepts the
Premises in their condition existing as of the Commencement Date or the date
that Lessee takes possession of the Premises, whichever is earlier, subject to
all applicable zoning, municipal, county and state laws, ordinances and
regulations governing and regulating the use of the Premises and any covenants
or restrictions of record, and accepts this Lease subject thereto and to all
matters disclosed thereby and by any exhibits attached hereto. Lessee
acknowledges that neither Lessor nor Lessor's agent has made any representation
or warranty as to the present or future suitability of the Premises for the
conduct of Lessee's business.
2.03 Building Name and Address: Lessee shall not utilize any name selected by
Lessor from time to time for the Building and/or the Center as any part of
Lessee's corporate or trade name. Lessor shall have the right to change the
name, number or designation of the Building without notice or liability' to
Lessee.
ARTICLE 3 TERM
3.01 General: the term shall be for the period shown in Section 1.03b of the
Basic Lease Terms. Subject to the provisions of Section 3.03, the term shall
commence on the commencement date (herein "Commencement Date") on the earliest
of (a) the Estimated Commencement Date as set forth in Section 1.03a of the
Basic Lease Terms, or (b) the date Lessee acquires possession or commences use
of the Premises for any purpose other than construction. Within ten (10) days
after possession of the Premises is tendered to Lessee, the parties shall
execute the Exhibit "B" Certificate form provided by Lessor, which shall state
the Commencement Date and the expiration date ("Expiration Date") of the Lease.
Lessee's failure to execute that form shall not affect the validity of Lessor's
determination of those dates.
3.02 Tender of Possession by Lessor: the premises shall be deemed ready for
occupancy upon the tendered date, but only if and when Lessor, to the extent
applicable, (a) has provided reasonable access to the Premises for Lessee so
that it may be used without unnecessary interference, (b) has substantially
completed all the work required to be done by Lessor in this Lease, and (c) has
obtained requisite governmental approvals to Lessee's occupancy.
3.03 Delay in Possession: Notwithstanding the provisions of Section 3.01, if
Lessor, for any reason whatsoever, cannot deliver possession of the Premises to
Lessee on/or before the Estimated Commencement Date, this Lease shall not be
void or voidable nor shall Lessor be liable to Lessee for any resulting loss or
damage. However, Lessee shall not be liable for any rent and the Commencement
Date shall not occur until Lessor delivers possession of the Premises and the
Premises are in fact ready for occupancy in accordance with Section 3.02; except
that if Lessor's failure to so deliver possession on the Estimated Commencement
Date is attributable to any action or inaction by Lessee (including any tenant
improvement construction change orders requested by Lessee or Lessee's failure
to supply any information required from Lessee or the furnishing by Lessee of
inaccurate or erroneous estimates, specifications, data or other information),
then the Commencement Date shall not be advanced to the date on which possession
of the Premises is tendered to Lessee, and Lessor shall be entitled to full
performance by Lessee (including the payment of rent) from the Estimated
Commencement Date.
3.04 Early Occupancy: if Lessee occupies the Premises prior to the Estimated
Commencement Date, Lessee's occupancy of the Premises shall be subject to all of
the provisions of this Lease. Early occupancy of the Premises shall not advance
the expiration date of this Lease. Lessee shall pay Base Rent and all other
charges specified in this Lease for the early occupancy period.
3.05 Option Term(s): Lessor is hereby granted the right and option to extend
this Lease for the additional term or terms as provided in Section 1 .03c
(herein "Option Term" or "Option Terms") commencing at the expiration of the
initial Term. Such option is granted upon the following terms and conditions:
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a. The Option Term(s) shall be on the same terms, covenants, conditions,
provisions and agreements as in this Lease and any amendments thereto except
for forgiveness of base rent, if applicable.
b. Lessee duly and regularly pays the rent and all other amounts
required to be paid pursuant to this Lease and performs each and every covenant,
provision and agreement on the part of the Lessee to be paid, rendered, observed
and performed herein.
c. Lessee gives to Lessor and Lessor receives from Lessee written notice
of the exercise to each option to extend this Lease no earlier than nine (9)
months and no later than six (6) months prior to the expiration of the term
immediately preceding the Option Term(s) to be exercised, time being of the
essence. If said notification is not given and received, the option to be
exercised shall automatically expire. Failure to exercise the first option shall
result in automatic expiration of the second if one so exists.
d. The rent payable during the Option Term(s) shall be payable and
computed as provided in Section 4.05 below.
ARTICLE 4 RENT AND OPENING EXPENSES
4.01 Base Rent: From and after the Commencement Date, Lessee shall pay
without deduction or offset a Base Rent for the premises in the total amount
shown (including subsequent adjustments, if any) in Section 1.04a of the Basic
Lease Terms. The rent shall be due and payable in equal monthly installments on
the first day of each month, in advance, except that if the Commencement Date
occurs on a day other than the first day of the month, the first installment of
Base Rent shall include rent for both the fractional month, if any, starling
with the Commencement Date and the following calendar month. No demand, notice
or invoice shall be required.
4.02 Operating Expenses
a. Lessee shall pay to Lessor during the term hereof, in addition to the Base
Rent, Lessee's share, as hereinafter defined, of all Operating Expenses, as
hereinafter defined, during each year of the term of this Lease.
b. "Lessee's Share" is defined, for purposes of this Lease, as the percentage
set forth in Section 1.05 of the Basic Lease Terms, which percentage has been
determined by dividing the square footage of the premises by the total square
footage of the rentable space contained in the Center. It is understood and
agreed that the square footage figures set forth in the Basic Lease Terms are
approximations which Lessor and Lessee agree are reasonable and shall not be
subject to revision except in connection with an actual change in the size of
the Premises or a change in the space available for lease in the Center.
c. The term "Operating Expenses" shall include (i) all expenses attributable
to Lessor's obligations for operation, replacement, repair and maintenance in
neat, clean, good order and condition of the Center, including parking areas,
loading and unloading areas, trash areas, roadways, sidewalks, walkways,
parkways, driveways, landscaped areas, striping, bumpers, irrigation systems,
common lighting facilities, fences and gates. trash disposal service, water and
tenant directories and any other services to be provided by Lessor under this
Lease; (ii) property taxes, general or special assessments, and costs and
expenses in contesting the amount or validity of any property tax by appropriate
proceedings; (iii) water and sewer charges and other publicly mandated services
to the Center; (iv) insurance premiums for liability and property insurance
maintained by Lessor pursuant to Article 11 or reasonable premium equivalents
should Lessor elect to self-insure any risk that Lessor is authorized to insure
hereunder; (v) license, permit and inspection fees; (vi) air conditioning
maintenance (Lessor shall be responsible for replacement of HVAC systems per
warranty provided to Lessee/Lessor), supplies, materials, equipment, tools,
amortization of capital investments reasonably intended to produce a reduction
in operating charges or energy conservation, labor, any expense incurred
pursuant to Article 6, 7, 11 and 12, and a reasonable overhead/management fee
which shall include, without limitation, allocated wages and salaries, fringe
benefits and payroll taxes for administrative, accounting and other personnel
applicable to the Center. It is understood that Operating Expenses shall include
competitive charges for direct services provided by any subsidiary or division
of Lessor, including reasonable supervisory or overhead fees. The term "property
taxes" as used herein shall include the following: (i) all real estate taxes or
personal property taxes (on Lessor's personal property use for the Center), as
such property taxes may be reassessed from time to time: (ii) other taxes,
documentary transfer fees, charges and assessments which are levied with respect
to this Lease or to the Premises and/or the Center, and any improvements,
fixtures and equipment and other property of Lessor located in the Center,
except that general net income and franchise taxes Imposed against Lessor which
shall be excluded; and (iii) any tax surcharge or assessment which shall be
levied in addition to or in lieu of real estate or personal property taxes,
other than taxes covered by Article 8. A copy of Lessor's unaudited statement of
expenses shall be made available to Lessee upon request.
d. The inclusion of the improvements, facilities and services set forth in
Section 4.02 of the definition of Operating Expenses shall not be deemed to
impose an obligation upon Lessor to either have said Improvements or facilities
or to provide those services unless the Center already has the same, Lessor
already provides the services or Lessor has agreed elsewhere in this Lease to
provide the same or some of them.
e. Lessee's share of Operating Expenses shall be payable by Lessee within ten
(10) days after a reasonably detailed statement of actual expenses is presented
to Lessee by Lessor.
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4.04 Security Deposit: Concurrently with the execution of this Lease, Lessee
shall deposit with Lessor the sum stated in Section 1.05 of the Basic Lease
Terms, to secure the faithful performance of Lessee's obligations hereunder. If
Lessee fails to pay rent or other charges due hereunder. or otherwise defaults
with respect to any provision of this Lease, Lessor may use, apply or retain all
or any portion of said deposit for the payment of any rent or other charges in
default or for the payment of any other sum to which Lessor may become obligated
by reason of Lessee's default, or to compensate Lessor for any loss or damage
which Lessor may suffer thereby. If Lessor so uses or applies all or any portion
of said deposit, Lessee shall, within ten (10) days after written demand
therefor, deposit cash with Lessor in an amount sufficient to restore said
deposit to the full amount hereinabove stated and Lessee's failure to do so
shall be a material breach of this Lease. If the Base monthly rent shall, from
time to time, increase during the Term, Lessee shall thereupon deposit with
Lessor additional security deposit so that the amount of security deposit held
by Lessor shall at all times bear the same proportion to current rent as the
original security deposit bears to the original Base monthly rent set forth in
this Article. Lessor shall not be required to keep said deposit separate from
its general accounts. If Lessee performs all of Lessee's obligations hereunder,
said deposit, or so much thereof as has not theretofore been applied by Lessor,
shall be returned, without payment of interest or other increment for its use,
to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's
interest hereunder) at the expiration of the Term hereof, and after Lessee has
vacated the Premises. No trust relationship is created herein between Lessor and
Lessee with respect to said security deposit. in no event may Lessee
unilaterally apply or credit its deposit against the last month's rent. Should
Lessor sell its interest in the Premises during the Term hereof and if Lessor
deposits with the Purchaser thereof, the then unappropriated funds deposited by
Lessee as aforesaid, thereupon Lessor shall be discharged from any further
liability with respect to such deposit.
4.05 Option Rent:
a. In the event Lessee duly exercises its option to extend this Lease
as provided in Section 3.05 above, the rent payable during the Option Term(s)
shall be computed and payable as follows: commencing on the first (1st) day of
the Option Term and upon the expiration of each twelve (12) calendar months
thereafter during such Option Term, that portion of the rent constituting the
Base Rent shall be adjusted by multiplying the rent as referenced in Section
1.04a by. a fraction, which fraction shall have as its numerator the Consumer
Price Index For All Urban Consumers using the U.S. City Average (or alternative
thereto as hereinafter provided) is maintained (Base Period 1982-84 = 100), as
published by the U.S. Department of Labor, Bureau of Labor Statistics for the
calendar month, which is four (4) months prior to the)e applicable adjustment
date, and which such fraction shall have as its denominator said Consumer Price
Index, as published for the calendar month which is four (4) months prior to the
commencement of the Initial Term. If the present base of said Index should
hereafter be changed, then the new base shall be converted to the base now used.
in the event that said Bureau: should cease to publish said index figure, then
any similar Index published by any other branch or department of
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the U.S. Government shall be used. In the event that said Bureau shall publish
more than one such index, then the index showing the greater proportionate
increase shall be sued, and if none is so published, then another index
generally recognized as authoritative shall be substituted by agreement the
parties hereto, or if no such agreement is reached within a reasonable time,
either party may make application to any court of competent jurisdiction to
designate such other index. In any event, the base used by any new index shall
be reconciled to the 1982-84 = 100 base index. In no event shall the Base Rent
to be paid by Lessee pursuant hereto be less than the rent set forth in Section
1.04a or the Base Rent for the twelve (12) month period immediately preceding
the adjustment date, whichever is the greater. In the event the numerator of
said fraction is not available at the time of adjustment of the rent as provided
herein, Lessee shall continue to pay the rent established for the next prior
twelve (12) month period; provided, however, Lessee shall promptly pay to Lessor
any deficiency at such time as said rent is adjusted.
ARTICLE 5 USES
5.01 Use: Lessee shall use the Premises only for the purposes slated in
Section 1.07 of the Basic Lease Terms. Lessee shall not do, or permit anything
to be done, in or about the Premises which will in any way interfere with the
rights of other occupants of the Building, or use or allow the Premises to be
used for any improper, immoral, unlawful or objectionable purpose, nor shall
Lessee permit any nuisance or commit any waste in the Premises or the Center.
Lessee shall not do or permit to be done anything which will invalidate or
increase the cost of any insurance policy(ies) covering the Building, the Center
and/or their contents, and shall comply with all applicable insurance
underwriters' rules and the requirements of the Pacific Fire Rating Bureau or
any other organization performing a similar function. Lessee shall comply, at
its expense, with all present and future laws, ordinances and requirements of
all governmental authorities that pertain to Lessee or its use of the Premises,
including without limitation, all federal and state occupational health and
safety requirements, whether or not Lessee's compliance will necessitate
expenditures or interfere with its use and enjoyment of the Premises. Lessee
shall promptly upon demand reimburse Lessor for any additional insurance premium
charged by reason of Lessee's failure to comply with the provisions of this
Section, and shall indemnity Lessor from any liability and/or expense resulting
from Lessee's noncompliance.
5.02 Hazardous Materials: Lessee shall not cause, permit or allow any
Hazardous Materials (as defined below) to be brought upon, kept or used in or
about the Premises by Lessee, its agents, employees, contractors or invitees,
without the prior written consent of Lessor (which consent Lessor shall not
unreasonably withhold as long as Lessee demonstrates to Lessor reasonable
satisfaction that such Hazardous Materials are necessary to Lessee's business,
and will be used, kept and stored in a manner that complies with all Hazardous
Materials Laws (as defined below) regulating any such 1-hazardous Materials so
brought upon, used or kept in or about the Premises). If (i) Lessee breaches any
obligation stated in the preceding sentence, or (ii) the presence of Hazardous
Materials in the Premises caused or permitted by Lessee results in contamination
of the Premises, the Building, any other Building in the Center, any structure,
system or improvement in the Center, any soil or water in, on, under or about
the Center (collectively, the "Property"), or (iii) contamination of the
Property by Hazardous Materials otherwise occurs for which Lessee is legally
liable to Lessor for damage resulting therefrom, then Lessee shall indemnity,
defend and hold Lessor and lessor's partners, affiliates, employees,
contractors, representatives, lenders, successors and assigns (collectively, the
"Indemnified Parties") harmless from any and all claims, judgements, damages,
penalties, fines, costs, liabilities, losses, actions or causes of action
(including, without limitation, diminution in value of the Premises, the
Building, or any other building in the Center, any structure, system or
improvement in the Center, damages for the loss or restriction on use of
rentable or usable space or of any amenity, damages arising from any adverse
impact on marketing any of the foregoing, and sums paid in settlement of claims,
attorneys' fees and costs incurred, consultant fees and expert fees) made,
brought or sought against or suffered or incurred by the Indemnified Parties, or
any of them, which arise during or after the Term of this Lease as a result of
such contamination. This indemnification of Lessor by Lessee includes, without
limitation, costs incurred in connection with any investigation of site
conditions or any cleanup, remedial, removal or restoration work required by any
federal, state or local governmental agency or political subdivision or required
to return the property to the condition existing prior to the introduction of
any such Hazardous Materials for which Lessee is responsible. Lessee's
obligations hereunder shall survive the expiration or earlier termination of the
Term of this Lease.
Lessee shall at all times and in all respects comply with all federal, slate
and local laws, ordinances and regulations ("Hazardous Materials Laws") relating
to industrial hygiene, environmental protection or the use, analysis,
generation, manufacture, storage, disposal or transportation of any oil or
petrochemical products, PCB, flammable materials, explosives, asbestos, urea
formaldehyde, radioactive materials or waste, or other hazardous, toxic,
contaminated or polluting materials, substances or wastes, including, without
limitation, any substances defined as or included in the definition of
"Hazardous Materials", "toxic substances" or "chemicals known to the State to
cause cancer or reproductive toxicity" under any such Hazardous Materials Laws
(collectively, "Hazardous Materials").
5.03 Signs and Auctions: Lessee shall not place any signs on the Premises
without Lessor's prior written consent. Lessee shall not conduct, nor permit to
be conducted, either voluntarily or involuntarily, any auctions or sheriff's
sales from the Premises without having first obtained Lessor's prior written
consent. Notwithstanding anything to the contrary in this Lease, Lessor shall
not be obligated to exercise any standard of reasonableness in determining
whether to grant such consent.
ARTICLE 6 COMMON FACILITIES AND VEHICLE PARKING
6.01 Operation and Maintenance of Common Facilities: During the Term, Lessor
shall operate all Common Facilities within the Center. The term "Common
Facilities" shall mean all areas within the exterior boundaries of the Building
and other buildings in the Center which are not held for exclusive use by
persons entitled to occupy space, and all other appurtenant areas and
improvements provided by Lessor for the common use of Lessor and tenants and
their respective employees and invitees, including, without limitation, parking
areas and structures, driveways, sidewalks, landscaped and planted areas and
common entrances not located within the premises of any tenant.
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6.02 Use of Common Facilities: the occupancy by Lessee of the Premises shall
include the use of the Common Facilities in common with Lessor and with others
for whose convenience and use the Common Facilities may be provided by Lessor,
subject, however, to compliance with all rules and regulations as are prescribed
from time to time by Lessor. Lessor shall operate and maintain the Common
Facilities in the manner Lessor may determine to be appropriate. Lessor shall at
all times during the Term have exclusive control of the Common Facilities, and
may restrain any use or occupancy, except as authorized by Lessor's rules and
regulations. Lessee shall keep the Common Facilities clear of any obstruction or
unauthorized use related to Lessee's operations. Nothing in this Lease shall be
deemed to impose liability upon Lessor for any damage to or loss of the property
of, or for any injury to, Lessee, its invitees or employees. Lessor may
temporarily chose any portion of the Common Facilities for repairs or
alterations, to prevent a public dedication or the accrual of prescriptive
rights, or for any other reason deemed sufficient by Lessor. Under no
circumstances shall the right herein granted to use the Common Facilities be
deemed to include the right to store any property, temporarily or permanently,
in the Common Facilities. Any such storage shall be permitted only by the prior
written consent of Lessor or Lessor's designated agent, which consent may be
revoked at any time. In the event that any unauthorized storage shall occur,
then Lessor shall have the right, without notice, in addition to such other
rights and remedies that it may have, to remove the property and charge the cost
to Lessee, which cost shall be immediately payable upon demand by Lessor.
6.03 Parking: Subject to Lessor's right to adept reasonable,
nondiscriminatory modifications and additions to the regulations by written
notice to Lessee, Lessee shall have the parking rights set forth as follows:
a. Lessor agrees to maintain, or cause to be maintained, an automobile
parking area ("Parking Area") in reasonable proximity to the Building within the
Center for the benefit and use of the visitors and patrons and employees of
Lessee, and other tenants and occupants of the Center. The Parking Area shall
include the automobile parking stalls, driveways, entrances, exits, sidewalks
and attendant pedestrian passageways and other areas designated for parking.
Lessor shall have the right and privilege of determining the nature and extent
of the Parking Area, and of making such changes to the Parking Area from time to
time which in its opinion are desirable and for the best interests of all
persons using the Parking Area. Lessor shall keep the Parking Area in a neat,
clean and orderly condition, properly lighted and landscaped, and shall repair
any damage to its facilities. Nothing contained in this Lease shall be deemed to
create liability upon Lessor for any damage to motor vehicles of visitors or
employees, unless ultimately determined to be caused by the sole negligence or
willful misconduct of Lessor, its agents, servants and employees. Unless
otherwise instructed by Lessor, every user of the Parking Area shall park and
lock his or her own motor vehicle. Lessor shall also have the right to
establish, and from time to time amend, and to enforce against all users of the
Parking Area all reasonable rules and regulations as Lessor may deem necessary
and advisable for the proper and efficient operation and maintenance of the
Parking Area.
b. Persons using the Parking Area shall observe all directional signs
and arrows and any posted speed limits. All vehicles shall be parked entirely
within painted stalls, and no vehicles shall be parked in areas which are posted
or marked as "no parking" or on, or in ramps, driveways and aisles. Only one (1)
vehicle may be parked in a parking space. In no event shall Lessee interfere
with the use and enjoyment of the Parking Area by other tenants of the Building
or buildings within the Center or their employees or invitees.
c. Parking areas shall be used only for parking vehicles. Washing,
waxing, cleaning or servicing of vehicles, or the storage of vehicles for
twenty. four (24) hour periods, in the Parking Area (other than emergency
services) by any user of the Parking Area or his or her agents or employees is
prohibited unless otherwise authorized by Lessor. Lessee shall have no right to
install any fixtures, equipment or personal property (other than vehicles) in
the Parking Area, nor shall Lessee make any alteration to the Parking Area.
6.04 Changes and Additions by Lessor: Lessor reserves the right to make
alterations or additions to the Building(s) or the Center, or to the attendant
fixtures, equipment and Common Facilities. Lessor may at any time relocate or
remove any of the various buildings, parking areas and ether common facilities,
and may add buildings and areas to the Center from time to time. No change shall
entitle Lessee to any abatement of rent or other claim against Lessor, provided
that the change does not deprive Lessee of reasonable access to or use of the
Premises.
ARTICLE 7 MAINTENANCE, REPAIRS AND ALTERATIONS
7.01 Lessor's Obligations: Subject to the provisions of Section 4.02
(Operating Expenses), Article 5 (Uses), Article 6 (Common Facilities and Vehicle
Parking), Section 7.02 (Lessee's Obligations) and Article 12 (Damage or
Destruction), and except her damage caused by any negligent or intentional act
or omission of Lessee, Lessee's employees, suppliers, shippers, customers or
Invitees, in which event Lessee shall repair the damage, Lessor at Lessor's
expense, subject to reimbursement pursuant to Section 4.02, shall keep in good
condition and repair the foundations, exterior walls, structural condition of
interior bearing walls, and roof of the Premises, and utility installations of
the Common Facilities and all parts thereof, as well as providing the services
for which there is an Operating Expense pursuant to Section 4.02. Lessor shall
not, however, be obligated to paint the interior walls, nor shall Lessor be
required to maintain, repair or replace windows, doors or plate glass of the
Premises. Lessor shall have no obligation to make repairs under this Section
7.01 until a reasonable time after receipt of written notice from Lessee of the
need for such repairs. Lessee expressly waives the benefits of any statute now
or hereafter in effect which would otherwise afford Lessee the right to make
repairs at Lessor's expense or to terminate this Lease because of Lessor's
failure to keep the Premises in good order, condition and repair. Lessor shall
not be liable for damages or loss of any kind or nature by reason of Lessor's
failure to furnish any such services when such failure is caused by accident,
breakage, repairs, strikes, lockout or any other labor disturbances or disputes
of any character, or by any other cause beyond the reasonable control of Lessor.
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7.02 Lessee's Obligations:
a. Subject to the provisions of Article 5 (Use), Section 7.01 (Lessor's
Obligations) and Article 12 (Damage or Destruction), Lessee, at Lessee's
expense. shall keep in good order, condition and repair the Premises and every
part thereof (whether or not the damaged portion of the Premises or the means of
repairing same are reasonably or readily accessible to Lessee) including,
without limiting the generality of the foregoing, all plumbing. heating,
ventilating and air conditioning systems (Lessor shall procure and maintain, at
Lessee's expense, which expense shall be a part of the Operating Expenses as
defined under Section 4.02c, a ventilating and air conditioning system
maintenance contract). electrical and lighting facilities and equipment within
the Premises, fixtures, interior walls and interior surfaces of exterior walls,
ceilings, windows (including glass and casings), doors (including casings),
plate glass and skylights located within the Premises. Lessor reserves the right
to procure and maintain the ventilating and air conditioning system maintenance
contract for the entire Center, including the Premises, and if Lessor so elects,
the cost thereof shall be an Operating Expense.
b. if Lessee fails to perform Lessee's obligations under this Section
7.02 or under any other paragraph of this Lease, Lessor may enter upon the
Premises after ten (10) days' prior written notice to Lessee (except in the case
of emergency, in which event, no notice shall be required), perform such
obligations on Lessee's behalf and put the Premises in good order, condition and
repair, and the cost thereof together with interest thereon at the maximum rate
then allowable by law shall be due and payable as additional rent to Lessor
together with Lessee's next Base Rent installment.
7.03 Alterations and Additions:
a. Lessee shall not, without Lessor's prior written consent, make any
alterations, improvements, additions or Utility installments in, on or about the
Premises, or the Center, except for nonstructural alterations to the Premises
not exceeding $5,000 in cumulative costs during the Term. In any event., whether
or not in excess of $5,000 in cumulative cost, Lessee shall make no change or
alteration to the exterior of the Premises, nor the exterior of the Building,
nor the Center without Lessor's prior written consent. As used in this Lease,
the term "Utility installations" shall mean carpeting, window coverings, air
lines, power panels, electrical distribution systems, lighting fixtures, space
heaters, air conditioning, plumbing and fencing. Lessor may require that Lessee
remove any and all of said alterations, improvements, additions or Utility
installations at the expiration of the term, and restore the Premises and the
Center to their prior condition. Lessor may require Lessee to provide Lessor, at
Lessee's sole cost and expense, a lien and completion bond in an amount equal to
one and one-half times the estimated cost of such improvements. to insure Lessor
against any liability for mechanic's and materialman's liens and to insure
completion of the work. Should Lessee make any alterations, improvements,
additions or Utility installations without the prior approval of Lessor, Lessor
may, at any time during the term of this Lease, require that Lessee remove any
or all of same.
b. Any alterations. Improvements, additions or Utility installations in
or about the Premises or the Center that Lessee shall desire to make and which
requires the consent of Lessor, shall be presented to Lessor in written form
with proposed detailed plans. If Lessor shall give its consent, the consent
shall be deemed conditioned upon Lessee acquiring a permit to do so from
appropriate governmental agencies. The furnishing of a copy thereof to Lessor
prior to the commencement of the work and the compliance by Lessee of all
conditions of said permit in a prompt and expeditious manner.
c. Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claims are, or may be secured by, any mechanic's or
materialman's lien against the Premises, or the Center, or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in the premises, and Lessor shall have the right to
post notices of non-responsibility in or on the Premises or the Building as
provided by law. If Lessee shall in good faith contest the validity of any such
lien, claim or demand, then Lessee shall, at its sole expense, defend itself and
Lessor against the same and shall pay and satisfy any such adverse judgment that
may be rendered thereon, before the enforcement thereof, against Lessor or the
Premises or the Center upon the condition that if Lessor shall require, Lessee
shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal
to such contested lien claim or demand indemnifying Lessor against liability for
the same and holding the Premises and the Center free from the effect of such
lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys
fees and costs in participating in such action if Lessor shall decide if is to
Lessor's best interest to do so.
d. All alterations, improvements, additions and Utility installations
(whether or not such Utility Installations constitute trade fixtures of Lessee),
which may be on the Premises, shall be the property of Lessor and shall remain
upon and be surrendered with the Premises at the expiration of the Term, unless
Lessor requires their removal pursuant to subparagraph "a" above.
Notwithstanding the provisions of this paragraph, Lessee's machinery and
equipment, other than that which is affixed to the Premises, and other than
Utility Installations, shall remain the property of Lessee and may be removed by
Lessee subject to the provisions of Section 7.02.
7.04 Utility Additions: Lessor reserves the right to install new or
additional utility facilities throughout the Building and the Common Facilities
for the benefit of Lessor or Lessee, or any other tenant of the Center,
including, but not limited to, such utilities as plumbing, electrical systems,
security systems, communication systems and fire protection and detection
systems, so long as such installations do not unreasonably interfere with
Lessee's use of the Premises.
7.05 Entry and Inspection: Lessor shall at all times have the right to enter
the Premises to inspect them, to supply services in accordance with this Lease,
to protect the interests of Lessor in the Premises, to submit the Premises to
prospective or actual purchasers or encumbrance holders (or, during the last one
hundred and eighty (180) days of the Term, or when an uncured tenant default
exists, to prospective tenants), to alter, Improve or repair the Premises or any
other portion of the Building, or as otherwise permitted in this Lease, all
without being deemed to have caused an eviction of Lessee and without abatement
of rent except as provided elsewhere in this Lease. If Lessee vacates the
Premises, Lessor may enter the Premises and after them without abatement of rent
and without liability to Lessee. Lessor shall at
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all times have and retain a key which unlocks all of the doors in the Premises,
excluding, Lessee's vaults and safes, and Lessor shall have the right to use any
and all means which Lessor may deem proper to open the doors in an emergency in
order to obtain entry to the Premises, and any entry to the Premises obtained by
Lessor shall not under any circumstances be deemed to be a forcible or unlawful
entry into, or a detainer of the Premises, or any evictions of Lessee from the
Premises.
ARTICLE 8 TAXES AND ASSESSMENT ON LESSEES PROPERTY
8.01 Taxes on Lessee's Property-. Lessee Shall be liable for and shall pay,
at least ten (10) days before delinquency. all taxes and assessments levied
against all personal property of Lessee located in the Premises. When possible.
Lessee shall cause its personal property to be assessed and billed separately
from the real property of which the Premises form a part. If any taxes on
Lessee's personal property are levied against Lessor or Lessor's property is
increased by the inclusion of a value placed upon the personal property of
Lessee, and if Lessor pays the taxes based upon the increased assessment, Lessee
shall pay to Lessor the taxes so levied against Lessor or the proportion of the
taxes resulting From the increase in the assessment. In calculating what portion
of any tax bill which is assessed against Lessor separately, or Lessor and
Lessee jointly, is attributable to Lessee's fixtures and personal property,
Lessor's reasonable determination shall be conclusive.
ARTICLE 9 UTILITIES
Lessee shall fully and promptly pay for all gas (where applicable), power,
water, telephone and trash removal on all freestanding buildings and other
utilities of every kind furnished to the Premises, together with any taxes
thereon, and all other costs and expenses of every kind whatsoever, of, or in
connection with the use, operating and maintenance of the Premises and all
activities conducted thereon, and Lessor shall have no responsibility of any
kind for any thereof. Lessee shall put all such utilities in its own name and
not that of Lessor. Lessor shall pay for water and trash removal in all multi-
tenant/non-free-standing buildings.
ARTICLE 10 ASSIGNMENT AND SUBLETTING
10.01 Rights of Parties:
a. Notwithstanding any provision of this Lease to the contrary, Lessee
will not, either voluntarily or by operation of law, assign, sublet, encumber or
otherwise transfer all or any part of Lessee's interest in this Lease, or permit
the Premises to be occupied by anyone other than Lessee, without Lessor's prior
written consent. No assignment (whether voluntary, involuntary or by operation
of law), and no subletting shall be valid or effective without Lessor's prior
written consent and, at Lessor's election, shall constitute a material default
of this Lease. To the extent not prohibited by provisions of the Bankruptcy
Code, 11 U.S.C. Section 101, et seq. (the "Bankruptcy Code"), including Section
365(l)(1), Lessee on behalf of itself and its creditors, administrators and
assigns. waives the applicability of Section 365(e) of the Bankruptcy Cede
unless the proposed assignee of the trustee for the estate of the bankrupt meets
Lessor's standard for consent as set forth in subparagraph "c" below. If this
Lease is assigned to any person or entity pursuant to the provisions of the
Bankruptcy Code, any and all monies or other considerations to be delivered in
connection with the assignment shall be delivered to Lessor, shall be and remain
the exclusive property of Lessor and shall not constitute property of Lessee or
of the estate of Lessee within the meaning of the Bankruptcy Code. Any person or
entity to which this Lease is assigned pursuant to the provision of the
Bankruptcy Code shall be deemed to have assumed all of the obligations arising
under this Lease on and after the date of the assignment ,and shall upon demand
execute and deliver to Lessor an instrument confirming that assumption.
b. If Lessee, or any guarantor of Lessee ("Lessee's Guarantor") is a
corporation, or is an unincorporated association or partnership, the transfer of
any stock or interest in the corporation, association or partnership which
results in a change in the voting control of Lessee or Lessee's Guarantor, if
any, shall be deemed an assignment within the meaning and provisions of this
Article. In addition, any change in the status of the entity, such as, but not
limited to, the withdrawal of a general partner, shall be deemed an assignment
within the meaning of this Article.
c. If Lessee desires to transfer an interest in this Lease, it shall
first notify Lessor of its desire and shall submit in writing to Lessor: (i) the
name and address of the proposed transferee; (ii) the nature of any proposed
subtenant's or assignee's business to be carried on in the Premises; (iii) the
terms and provisions of any proposed sublease or assignment; and (iv) any other
information requested by Lessor and reasonably related to the transfer. Lessor
shall not unreasonably withhold its consent provided: (1) use of the Premises
will be consistent with Lessor's commitments to other tenants of the Center and
the proposed assignee or subtenant meets all requirements generally imposed by
Lessor with respect to new tenants; (2) at Lessor's election, insurance
requirements shall be brought into conformity with Lessor's then current leasing
practice; (3) any proposed subtenant or assignee demonstrates that if is
financially responsible by submission to Lessor of all reasonable information as
Lessor may request concerning the proposed subtenant or assignee, including, but
not limited to, a balance sheet of the proposed subtenant or assignee as of a
date within ninety (90) days of the request for Lessor's consent and statements
of income or profit and loss of the proposed subtenant or assignee for the two
(2) year period preceding the request for Lessor's consent; (4) any proposed
subtenant or assignee demonstrates to Lessor's reasonable satisfaction, a record
of successful experience in operating the same type of business; (5) any
proposed subtenant or assignee has a reputation for honesty and is of good moral
character; and (6) the proposed transfer will not impose additional burdens or
adverse tax effects on Lessor. If Lessor consents to the proposed transfer,
Lessee may within ninety (90) days after the date of the consent oiled the
transfer upon the terms described in the information furnished to Lessor;
provided that any material change in the terms shall be subject to Lessor's
consent as set forth in this Section. Lessor shall approve or disapprove any
requested transfer within thirty (30) days following receipt of Lessee's written
request and the information set forth above.
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d. Lessee shall reimburse Lessor for Lessor's reasonable costs and
attorneys' fees incurred in connection with the processing and documentation of
any requested transfer. In addition, Lessee shall pay a transfer fee of $500 in
the event the transfer is approved.
10.02 Effect of Transfer: No subletting or assignment, even with the consent
of Lessor. shall relieve Lessee of its obligation to pay rent and to perform all
its other obligations under this Lease. Moreover, Lessee shall indemnity and
hold Lessor harmless, as provided in Section 11.03. for any acts or omission by
an assignee or subtenant. Each transferee, other than Lessor shall assume all
obligations of Lessee under this Lease and shall be liable jointly and severally
with Lessee for the payment of all rent, and for the due performance of all of
Lessee's obligations under this Lease. No transfer shall be binding upon Lessor
unless any document memorializing the transfer is delivered to Lessor and, if
the transfer is an assignment or sublease, both the assignee/subtenant, and
Lessee deliver to Lessor an executed document which contains (i) a covenant of
assumption by the assigned subtenant. and (ii) an indemnification agreement by
Lessee, both satisfactory in substance and form to Lessor and consistent with
the requirements of this Article; provided that the failure of the
assignee/subtenant or Lessee to execute the instrument of assumption shall not
release either from any obligation under this Lease. The acceptance by Lessor of
any payment due under this Lease from any other person shall not be deemed to be
a waiver by Lessor of any provision of this Lease or to be a consent to any
transfer. Consent by Lessor to one or more transfers shall not operate as a
waiver or estoppel to the future enforcement by Lessor of its rights under this
Lease.
ARTICLE 11 INSURANCE AND INDEMNITY
11.01 Liability Insurance - Lessee: Lessee shall, at Lessee's expense, obtain
and keep in force during the term of this Lease, a policy of Combined Single
Limit Bodily Injury and Properly Damage insurance insuring Lessee and Lessor
against any liability arising out of the use, occupancy or maintenance of the
Premises and the Center. Such insurance shall be in an amount not less than
$1,000,000 per occurrence. The policy shall insure performance be Lessee of the
indemnity provisions of this Article. The limits of said insurance shall not,
however, limit the liability of Lessee hereunder.
11.02 Lessor's Insurance: Lessor may, at its election, provide any or all of
the following types of insurance, with or without deductible and in amounts and
coverages as may be determined by Lessor in its discretion: "all risk" property
insurance, subject to standard exclusions, covering the Premises or Center, and
such ether risks as Lessor or its mortgagees may From time to time deem
appropriate, and comprehensive public liability coverage. Lessor shall not be
required to carry insurance of any kind on Lessee's property, including
leasehold improvements, trade fixtures, furnishings, equipment, plate glass,
signs and all other items of personal property, and shall not be obligated to
repair or replace the property should damage occur. All proceeds of insurance
maintained by Lessor upon the Premises and center shall be the property of
Lessor, whether or not Lessor is obligated to, or elects, to make any repairs.
In the event there is a deductible clause in any standard form policy insuring
the Premises against fire, extended coverage and other properly insurance
losses, then the amount deducted from the coverage pursuant to such deductible
clause shall be borne by Lessee. Any insurance containing a deductible clause of
$3,000 (per occurrence) for fire, extended coverage and other property losses,
shall not, by virtue of such deductible clause, be regarded as unsatisfactory.
In the event Lessor assumes supervision and control of the repair or restoration
activity for the improvements damaged or destroyed by reason of occurrences
embraced by the aforesaid standard form insurance policy, Lessor shall provide
Lessee with written notice of the actual cost of repair and restoration, up to
the full deductible amount, and Lessee shall pay to Lessor such sum within
thirty (30) days thereafter. Failure to pay such sum shall constitute a breach
of the Lease and subject Lessee to any rights or remedies of Lessor as provided
in the Lease.
11.03 Waiver of Subrogation: Lessor and Lessee hereby waive any rights each
may have against the other on account of any loss or damage occasioned to Lessor
or Lessee, as the case may be, or to the Premises or its contents, and which may
arise out of or incident to the perils insured against under Section 11.02,
which perils occur in, on or about the Premises, whether due to the negligence
of Lessor or Lessee or their agents, contractors and/or invitees. The parties
shall obtain from their respective insurance companies insuring the property a
waiver of any right of subrogation which said insurance companies may have
against Lessor or Lessee as the case may be.
11.04 Policies: All insurance to be maintained by Lessee under this Lease
shall be procured from an insurance company or companies rated "A" or better in
"Bests Insurance Guide" and authorized to do business in the State of Nevada,
and Lessee shall deliver to Lessor, prior to taking occupancy of the Premises,
copies of policies of all such insurance required to be maintained by Lessee
hereunder, together with evidence of the payment of the premiums thereof. The
policies evidencing such insurance shall provide that they shall not be canceled
or modified except after thirty (30) days prior written notice of intention to
modify or cancel has been given to Lessor and any encumbrancer named as
beneficiary hereunder. At lease ninety (90) days prior to the expiration date of
any policy to be maintained by Lessee hereunder, Lessee shall deliver to Lessor
a renewal policy or "binder" therefor.
11.05 Lessee's Indemnity: To the fullest extent permitted by law, Lessee shall
defend, indemnify and hold harmless Lessor, its agents and any and all
affiliates of Lessor, including, without limitation, any partners, co-venturers,
corporations or other entities controlling, controlled by or under common
control with Lessor, from and against any and all claims or liabilities arising
either before or after the Commencement Date from Lessee's use or occupancy of
the Premises, the Building or the Common Facilities, or from the conduct of its
business, or from any activity, work or thing done, permitted or suffered by
Lessee or its agents, employees, invitees or licensees in or about the Premises,
the Building or the Common Facilities, or from any default in the performance of
any obligation on Lessee's part to be performed under this Lease, or from any
act or negligence of Lessee or its agents, employees, visitors, patrons, guests,
invitees or licensees. In case Lessor, its agent or affiliates are made a part
to any litigation commenced by or against Lessee, then Lessee shall protect and
hold Lessor harmless and shall pay all costs, expenses and reasonable attorneys'
fees incurred or paid by Lessor in connection with the litigation. Lessor may,
at its option, require Lessee to assume Lessor's defense in any action covered
by this Section through counsel satisfactory to Lessor.
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11.06 Lessor's Non-Liability: Lessor shall not be liable to Lessee, its
employees, agents and invitees, and Less hereby waives all claims against Lessor
for loss of or damage to any property, or any injury to any person, or loss or
interruption of business or income, resulting from, but not limited to, fire,
explosions, falling plaster, steam, gas, electricity, water or rain which may
leak or from or into any part of the Premises or from the breakage, leakage,
obstruction or other defects of the pipes, sprinklers, wires, appliances,
plumbing, air conditioning, electrical works or other fixtures in the Building,
whether the damage or injury results from conditions arising in the Premises or
in other portions of the Building. Neither Lessor nor its agents shall be liable
for interference with light or other similar intangible interests. Lessee shall
immediately notify Lessor in case of fire or accident in the premises, the
Building or the Center and of defects in any improvements or equipment.
ARTICLE 12 DAMAGE OR DESTRUCTION
12.01 Restoration:
a. It the Building of which the Premises are a part is damaged, Lessor
shall repair that damage as soon as reasonably possible, at its expense, unless:
(i) Lessor reasonably determines that the cost of repair would exceed ten
percent (10%) of the full replacement cost of the Building ("Replacement Cost")
and the damage is not covered by Lessor's the and extended coverage insurance
(or by normal extended coverage policy should Lessor fail to carry that
insurance); or (ii) Lessor reasonably determines that the cost of repair would
exceed twenty-five percent (25%) of the Replacement Cost; or (iii) Lessor
reasonably determines that the cost of repair would exceed ten percent (10%) of
the Replacement Cost and the damage occurs during the final twelve (12) months
of the Term. Should Lessor elect not to repair the damage for one of the
preceding reasons, Lessor shall so notify Lessee in writing within sixty (60)
days after the damage occurs and this Lease shall terminate as of the date of
that notice.
b. Unless Lessor elects to terminate this Lease in accordance with
subsection "a" above, this Lease shall continue in effect for the remainder of
the Term: provided that if the damage is so extensive as to reasonably prevent
Lessee's substantial use and enjoyment of the Premises for more than six (6)
months, then Lessee may elect to terminate this Lease by written notice to
Lessor within the sixty (60) day period stated in subsection "a".
c. Commencing on the date of any damage to the Building, and ending on
the date the damage is repaired or this Lease is terminated, whichever occurs
first, the rental to be paid under this Lease shall be abated in the same
proportion that the floor area of the Premises that is rendered unusable by the
damage from time to time bears to the total floor area of the Premises.
d. Notwithstanding the provisions of subsections "a", "b" and "c" of
this Section, the cost of any repairs shall be borne by Lessee, and Lessee shall
not be entitled to rental abatement or termination rights if the damage is due
to the fault or neglect of Lessee or its employees, subtenants, invitees or
representatives. In addition, the provisions of this Section shall not be deemed
to require Lessor to repair any improvements or fixtures that Lessee is
obligated to repair or insure pursuant to any other provisions of this Lease.
ARTICLE 13 EMINENT DOMAIN
13.01 Total or Partial Taking: if all or a material portion of the Premises is
taken by any lawful authority by exercise of the right of eminent domain, or
sold to prevent a taking, either Lessee or Lessor may terminate this Lease
effective as of the date possession is required to be surrendered to the
authority. In the event title to a portion of the Building or Center, other than
the Premises, is taken or sold in lieu of taking, and if Lessor elects to
restore the Building in such a way as to alter the Premises materially, Lessor
may terminate this Lease, by written notice to Lessee, effective on the date of
vesting of title. In the event neither party has elected to terminate this Lease
as provided above, then Lessor shall promptly, after receipt of a sufficient
condemnation award, proceed to restore the premises to substantially their
condition prior to the taking, and a proportionate allowance shall be made to
Lessee for the rent corresponding to the time during which, and to the part of
the Premises of which, Lessee is deprived on account of the taking and
restoration. In the event of a taking, Lessor shall be entitled to the entire
amount of the condemnation award without deduction for any estate or interest of
Lessee; provided that nothing in this Section shall be deemed to give Lessor any
interest in, or prevent Lessee from seeking any award against the taking
authority for, the taking of personal property and fixtures belonging to Lessee
or for relocation or business interruption expenses recoverable from the taking
authority.
13.02 Temporary Taking: No temporary taking of the Premises shall terminate
this Lease or give Lessee any right to abatement of rent, and any award
specifically attributable to a temporary taking of the Premises shall belong
entirely to Lessee. A temporary taking shall be deemed to be a taking of the use
or occupancy of the Premises for a period not to exceed ninety (90) days.
13.03 Taking of Parking Area: in the event there shall be a taking of the
Parking Area such that Lessor can no longer provide sufficient parking to comply
with this tease, Lessor may substitute reasonably equivalent parking in a
location reasonably close to the Building; provided that if Lessor fails to make
that substitution within ninety (90) days following the taking and if the taking
materially Impairs Lessee's use and enjoyment of the Premises, Lessee may, at
its option, terminate this Lease by notice to Lessor. If this Lease is not so
terminated by Lessee, there shall be no abatement of rent and this Lease shall
continue in effect.
ARTICLE 14 SUBORDINATION; ESTOPPEL CERTIFICATE
14.01 Subordination:
a. At the option of Lessor, this Lease shall be either superior or
subordinate to all ground or underlying teases, mortgages, deeds of trust and
conditions, covenants and restrictions, reciprocal easements and rights of way,
if any, which may hereafter affect the Premises or Center, and to all renewals,
modifications, consolidations, replacements
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and extensions thereof; provided, that so long as Lessee is not in default under
this Lease, this Lease shall not be terminated or Lessee's quiet enjoyment of
the Premises is disturbed in the event of termination of any such ground or
underlying lease, or the foreclosure of any such mortgage or deed of trust, to
which Lessee has subordinated this Lease pursuant to this Section. In the event
of a termination or foreclosure, Lessee shall become a tenant of and attorney to
the successor-in-interest to Lessor upon the same terms and conditions as are
contained in this Lease, and shall execute any instrument reasonably required by
Lessor's successor for that purpose. Lessee shall also, upon written request of
Lessor, execute and deliver all instruments as may be required from time to time
to subordinate the rights of Lessee under this Lease to any ground or underlying
lease or to the lien of any mortgage or deed of trust, or if requested by
Lessor, to subordinate, in whole or in part, any ground or underlying lease or
the heir of any mortgage or deed of trust to this Lease.
b. Failure of Lessee to execute any statements or instruments necessary or
desirable to effectuate the provisions of this Article within ten (10) days
after written request by Lessor, shall constitute a default under this Lease. In
that event, Lessor, in addition to any other rights or remedies it might have,
shall have the right, by written notice to Lessee, to terminate this Lease as of
a date not less than twenty (20) days after the date of Lessor's notice.
Lessor's election to terminate shall not relieve Lessee of any liability for its
default.
14.02 Estoppel Certificate:
a. Lessee shall, at any time not less than twenty (20) days' prior
written notice from Lessor, execute, acknowledge and deliver to Lessor, in any
form that Lessor may reasonably require, a statement, in writing (i) certifying
that this Lease is unmodified and in full force and effect (or, if modified,
slating the nature of the modification and certifying that this Lease is
unmodified and in full force and effect) and the dates to which the rental,
additional rent and other charges have been paid in advance, if any, and (ii)
acknowledging that, to Lessee's knowledge, there are no uncured defaults on the
part of Lessor, or specifying each default if any are claimed, and (iii) setting
forth all further information that Lessor may reasonably require. Lessee's
statement may be relied upon by any prospective purchaser or encumbrancer of all
or any portion of the Building or Center.
b. Lessee's failure to deliver any estoppel statement Within the
provided time shall be conclusive upon Lessee that (i) this Lease is in full
force and effect without modification except as may be represented by Lessor,
(ii) there are no uncured defaults in Lessor's performance, and (iii) not more
than one month's rental has been paid in advance.
ARTICLE 15 DEFAULTS AND REMEDIES
15.01 Lessee's Defaults: In addition to any other event of default set for in
this Lease, the occurrence of any one or more of the following events shall
constitute a default by Lessee:
a. the abandonment of the Premises by Lessee. Abandonment is defined to
include, but not limited to, any absence by Lessee from the Premises for ten
(10) days or longer.
b. the failure by Lessee to make any payment of rent or additional rent
required to be made by Lessee, as and when due, where the failure continues for
a period of three (3) days after written notice from Lessor to Lessee. For
purposes of these default and remedies provisions, the term "additional rent"
shall be deemed to include all amounts of any type whatsoever, other than Base
Rent, to be paid by Lessee pursuant to the terms of this Lease.
c. Assignment, sublease, encumbrance or other transfer of the Lease by
Lessee, either voluntarily or by operation of law, whether by judgment,
execution transfer by intestacy or testacy, or other means, without the prior
written consent of Lessor.
d. the discovery by Lessor that any financial statement provided by
Lessee, or by any affiliate, successor or guarantor of Lessee was materially
false.
e. the failure or inability by Lessee to observe or perform any of the
express or implied covenants or provisions of this Lease to be observed or
performed by Lessee, other than as specified in any other subsection of this
Section, where the failure continues for a period of thirty (30) days after
written notice from Lessor to Lessee. However, if the nature of the failure is
such that more than thirty (30) days are reasonably required for its cure, then
Lessee shall not be deemed to be in default if Lessee commences the cure within
thirty (30) days and thereafter diligently pursues the cure to completion.
f. (i) the making by Lessee of any general assignment for the benefit
of creditors; (ii) the filing by or against Lessee of a petition to have Lessee
adjudged a Chapter 7 debtor under the Bankruptcy Code or to have debts
discharged or a petition for reorganization or arrangement under any law
relating to bankruptcy (unless, in the case of a petition filed against Lessee,
the same is dismissed within sixty (60) days); (iii) the appointment of a
trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, if possession is
not restored to Lessee within thirty (30) days; (iv) the attachment, execution
or other judicial Seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease where the seizure is not
discharged within thirty (30) days; or (v) Lessee's convening of a meeting of
its creditors for the purpose of effecting a moratorium upon or composition of
its debts. Lessor shall not be deemed to have knowledge of any event described
in this subsection unless notification in writing is received by Lessor, nor
shall there be any presumption attributable to Lessor of Lessee's insolvency. In
the event that any provision of this subsection is contrary to applicable law,
the prevision shall be of no force or effect.
15.02 Lessor's Remedies: On the occurrence of any material default by Lessee,
Lessor may, at any time thereafter, with or without notice or demand and without
limiting Lessor in the exercise of any right or remedy which Lessor may have:
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a. Terminate Lessee's right to possession of the Premises by any lawful
means, in which case this Lease shall terminate and Lessee shall immediately
surrender possession of the premises to Lessor. In such event, Lessor shall be
entitled to recover from Lessee all damages incurred by Lessor by reason of
Lessee's default, including (i) the worth at the time of the award of the unpaid
Base Rent, additional rent and other charges which had been earned at the time
of the termination; (ii) the worth at the time of the award of the amount by
which the unpaid Base Rent, additional rent and other charges which would have
been earned after termination until the time of the award exceeds the amount of
such rental loss that Lessee proves could have been reasonably avoided; (iii)
the worth at the time of the award of the amount by which the unpaid Base Rent,
additional rent and other charges which would have been paid for by the balance
of the term after the time of award exceeds the amount of such rental loss that
Lessee proves could have been reasonably avoided; and (iv) any other amount
necessary to compensate Lessor for all the detriment proximately caused by
Lessee's failure to perform its obligations under the Lease or which in the
ordinary course of things would be likely to result therefrom, including, but
not limited to, any costs or expenses incurred by Lessor in maintaining or
preserving the Premises after such default, the cost of recovering possession of
the Premises, expenses of reletting, including necessary renovation or
alteration of the Premises, Lessor's reasonable attorneys' fees incurred in
connection therewith, and any real estate commission paid or payable. As used in
subparts "(i)" and "(ii)" above, the "worth at the time of the award' is
computed by allowing interest on unpaid amounts at the rate of fifteen percent
(15%) per annum, or such lesser amount as may be then the maximum lawful rate.
As used in subpart "(iii)' above, the "worth at the time of the award' is
computing by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of the award, plus one percent (1%). If Lessee
shall have abandoned the Premises, Lessor shall have the option of (i) retaking
possession of the Premises and recovering from Lessee the amount specified in
this Section 15.02a, or (ii) proceeding under Section 1 5.02b.
b. Maintain Lessee's right to possession, in which case this Lease
shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event, Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.
c. Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state in which the Property is located.
15.03 Repayment of "Free" Rent: if this Lease provides for a postponement of
any monthly rental payments, a period of "free" rent, or other rent concession,
such postponed rent or "free" rent is called the "Abated Rent". Lessee shall be
credited with having paid all of the Abated Rent on the expiration of the Lease
Term only if Lessee has fully, faithfully and punctually performed all of
Lessee's obligations hereunder, including the payment of all rent (other than
Abated Rent) and all other monetary obligations and the surrender of the
property in the physical condition required by this Lease. Lessee acknowledges
that us right to receive credit for the Abated Rent is absolutely conditioned
upon Lessee's full, faithful and punctual performance of is obligations under
this Lease. If Lessee defaults and does not cure within any applicable grace
period, the Abated Rent shall immediately become due and payable in full and
this Lease shall be enforced as if there were no such rent abatement or other
rent concession. In such case, Abated Rent shall be calculated based on the full
initial rent payable under this Lease.
15.04 Cumulative remedies: Lessor's exercise of any right or remedy shall not
prevent it from exercising any other right or remedy.
15.05 Late Payments: Any rent due under this Lease that is not paid to Lessor
within ten (10) days of the date when due shall bear interest at the maximum
rate permitted by law from the date due until fully paid. The payment of
interest shall not cure any default by Lessee under this Lease. In addition,
Lessee acknowledges that the late payment by Lessee to Lessor, of rent, will
cause Lessor to incur costs not contemplated by this Lease, the exact amount of
which will be extremely difficult and impractical to ascertain. Those costs may
include, but are not limited to, administrative, processing and accounting
charges, and late charges which may be imposed on Lessor by the terms of any
ground lease, mortgage or trust deed covering the Premises. Accordingly, if any
rent due from Lessee shall not be received by Lessor or Lessor's designee within
ten (10) days after the date due, then Lessee shall pay to Lessor, in addition
to the interest provided above, a late charge in the amount of ten percent (10%)
of each delinquent payment. Acceptance of a late charge by Lessor shall not
constitute a waiver of Lessee's default with respect to the overdue amount, nor
shall it prevent Lessor from exercising any of its other rights and remedies.
15.06 Right of Lessor to Perform: All covenants and agreements to be
performed by Lessee under this Lease shall be performed at Lessee's sole cost
and expense and without any abatement of rent or Right of set off. If Lessee
fails to pay any sum of money, other than rent, or fails to perform any other
act on its part to be performed under this Lease, and the failure continues
beyond any applicable grace period set forth in Section 15.01, then in addition
to any other available remedies, Lessor may, at its election, make the payment
or perform the other act on Lessee's part. Lessor's election to make the payment
or perform the act on Lessee's part shall not give rise to any responsibility of
Lessor to continue making the same or similar payments or performing the same or
similar acts. Lessee shall, promptly upon demand by Lessor, reimburse Lessor for
all sums paid by Lessor and all necessary incidental costs, together with
interest at the maximum rate permitted by law from the date of the payment by
Lessor. Lessor shall have the same rights and remedies if Lessee fails to pay
those amounts as lessor would have in the event of a default by Lessee in the
payment of rent.
15.07 Default by Lessor: Lessor shall no be deemed to be in default in the
performance of any obligation under this Lease unless, and until, it has failed
to perform the obligation within thirty (30) days after written notice by Lessee
to Lessor specifying in reasonable detail the nature and extent of the failure;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days are required for its performance, then Lessor shall not be
deemed to be in default if it commences performance within the thirty (30) day
period and thereafter diligently pursues the cure to completion.
12 Initial____
<PAGE>
15.08 Expenses and Legal Fees: Lessee shall reimburse Lessor upon demand, for
any costs or expenses, incurred by Lessor in connection with any breach or
default of Lessee under this Lease, whether or not suit is commenced or judgment
entered. Such costs shall include legal fees and costs incurred for the
negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if
any action for breach of, or 10 enforce, the provisions of this Lease is
commenced, the court in such action shall award to the party in whose favor a
judgment is entered. a reasonable sum as attorneys' fees and costs. Such
attorneys' fees and costs shall be paid by the losing party in such action.
Lessee shall also indemnity Lessor against and hold lessor harmless from all
costs, expenses. demands and liability incurred by Lessor if Lessor becomes or
is made a party to any claim or and/or (a) instituted by Lessee, or by any third
party against Lessee. or by or against any person holding any interest under or
using the Premises by license of or agreement with Lessee; (b) for foreclosure
for any lien for labor or material furnished to or for Lessee or such other
person; (c) otherwise arising out of or resulting from any act or transaction of
Lessee or such other person; or (d) necessary to protect Lessor's interest under
this Lease in a bankruptcy proceeding. or other proceeding under Title 11 of the
United Slates Code, as amended. Lessee shall defend Lessor against any such
claim or action at Lessee's expense with counsel reasonably acceptable to lessor
or, at Lessee's election, Lessee shall reimburse Lessor for any legal fees or
costs incurred by Lessor in any such claim or action.
ARTICLE 16 END OF TERM
16.01 Holding Over: This Lease shall terminate without further notice upon the
expiration of the Term (herein "Expiration Date"), and any Holding over by
Lessee after the expiration shall not constitute a renewal or extension of this
Lease, or give Lessee any rights under this Lease, except when in writing,
signed by both parties. If Lessee holds over for any period after the expiration
(or earlier termination) of the Term, Lessor may, at its option. treat Lessee as
a tenant at sufferance only, commencing on the first (1st) day following the
termination of this Lease and subject to all of the terms of this Lease. except
that the monthly rental shall be one hundred twenty percent (120%) of the
greater of (a) the total monthly rental for the month immediately preceding the
date of termination, or (b) the then currently scheduled rent for comparable
space in the Building. If Lessee fails to surrender the Premises upon the
expiration of this Lease despite demand to do so by Lessor, Lessee shall
indemnify and hold Lessor harmless from all loss or liability, including,
without limitation, any claims made by any succeeding tenant relating to such
failure to surrender. Acceptance by Lessor of rent after the termination shall
not constitute a consent to a holdover or result in a renewal of this Lease. The
foregoing provisions of this Section are in addition to, and do not effect,
Lessor's right of re-entry or any other rights of Lessor under this Lease or at
law.
16.02 Merger on Termination: the voluntary or other surrender of this Lease by
Lessee, or mutual termination of this Lease, shall terminate any or all existing
subleases unless Lessor, at its option, elects in writing to treat the surrender
or termination as an assignment to it of any or all subleases affecting the
Premises.
16.03 Surrender of Premises: Removal of Property: Upon the Expiration Date, or
upon any earlier termination of this Lease, Lessee shall quit and surrender
possession of the Premises to Lessor in as good order, condition and repair as
when received or as hereafter may be improved by Lessor or Lessee, reasonable
wear and tear and repairs, which are Lessor's obligation excepted, and shall
without expense to Lessor, remove or caused to be removed from the Premises all
personal property and debris, except for any items that Lessor may by written
authorization allow to remain. Lessee shall repair all damage to the Premises
resulting from the removal, which repair shall include the patching and filling
of holes and repair of structural damage, provided that Lessor may instead elect
to repair any structural damage at Lessee's expense. If Lessee shall fail to
comply with the provisions of this Section, Lessor may effect the removal and/or
make any repairs, and the cost to Lessor shall be additional rent payable by
Lessee upon demand. If requested by Lessor, Lessee shall execute, acknowledge
and deliver to Lessor an instrument in writing releasing and quitclaiming to
Lessor, all right, title and interest of Lessee in the Premises.
16.04 Termination; Advance Payments: Upon termination of this Lease under
Article 12 (Damage or Destruction), Article 13 (Eminent Domain) or any other
termination not resulting from Lessee's default, and after Lessee has vacated
the Premises in the manner required by this Lease, and equitable adjustment
shall be made concerning advance rent, and any other advance payments made by
Lessee or Lessor, and Lessor shall refund the unused portion of the security
deposit to Lessee or Lessee's successor.
ARTICLE 17 PAYMENTS AND NOTICES
All sums payable by Lessee to Lessor shall be paid, without deduction or
offset, in lawful money of the United States to Lessor at its address set forth
in Section 1.08 of the Basic Lease Terms, or at any other place as lessor may
designate in writing. Unless this Lease expressly provides otherwise, as for
example in the payment of rent pursuant to Section 4.01, all payments shall be
due and payable within five (5) days after demand. All payments requiring
proration shall be prorated on the basis of a thirty (30) day month and a three
hundred sixty (360) day year. Any notice, election, demand, consent, approval or
other communication to be given, or other document to be delivered by either
party to the other, may be delivered in person to an officer or duly authorized
representative of the other party, or may deposited in the United States mail,
duly registered or certified, postage prepaid. return receipt requested. and
addressed to the other party at the address set forth in Section 1.08 of the
Basic Lease Terms, or if to Lessee, at that address, or from and after the
Commencement Date, at the Premises (whether or not Lessee has departed from,
abandoned or vacated the premises). Either party may, by written notice to the
other, served in the manner provided in this Article, designate a different
address. If any notice or other document is sent by mail, it shall be deemed
served or delivered twenty-four (24) hours after mailing. If more than one
Lessee is named under this Lease, service of any notice upon any one of them
shall be deemed as service upon all of them.
13 Initial____
<PAGE>
ARTICLE 18 LIMITATION OF LIABILITY
In consideration of the benefits accruing hereunder, Lessee agrees that in the
event of any actual or alleged failure, breach or default of this Lease by
Lessor, if Lessor is a partnership: (i) the sole and exclusive remedy shall be
against the partnership and its partnership assets; (ii) no partner of Lessor
shall be used or named as a party in any suit or action (except as may be
necessary to secure jurisdiction of the partnership); (iii) no service of
process shall be made against any partner of Lessor (except as may be necessary
to secure jurisdiction of the partnership); (iv) no partner of Lessor shall be
required to answer or otherwise plead to any service of process; (v) no judgment
may be taken against any partner of Lessor; (vi) any judgment taken against any
partner of Lessor may be vacated and set aside at any time without hearing;
(vii) no writ of execution will ever be levied against the assets of any partner
of Lessor; and (viii) these covenants and agreements are enforceable both by
Lessor and also by any partner of Lessor. Lessee agrees that each of the
foregoing provisions shall be applicable to any covenant or agreement either
expressly contained in this Lease or imposed by statute or at common law.
ARTICLE 19 BROKERS COMMISSION
The parties recognize as the broker(s) who negotiated this Lease, the firm(s),
if any, whose name(s) is (are) stated Section 1.09 of the Basic Lease Terms, and
agree that the party designated in Section 1.09 shall be solely responsible for
the payment of brokerage commissions to those broker(s), and that the other
party shall have no responsibility for the commissions unless otherwise provided
in this Lease. Lessee warrants that it has had no dealings with any other real
estate broker or agent in connection with the negotiation of this Lease, and
Lessee agrees to indemnify and hold Lessor harmless from any cost, expense or
liability (including reasonable attorneys' fees) for any compensation,
commissions or charges claimed by any other real estate broker or agent employed
or claiming to represent or to have been employed by Lessee in connection with
the negotiation of this Lease. The foregoing agreement shall survive the
termination of this Lease. If Lessee fails to take possession of the Premises or
if this Lease otherwise terminates prior to the expiration date, Lessor shall be
entitled to recover the unamortized portion of any brokerage commission funded
by Lessor in addition to any other damages to which Lessor may be entitled.
ARTICLE 20 TRANSFER OF LESSOR'S INTEREST
In the event of any transfer of Lessor's interest in the Premises, including a
so-called sale-leaseback, the transferor shall be automatically relieved of all
obligations on the part of Lessor accruing under this Lease from and after the
date of the transfer, provided that any funds held by the transferor. In which
Lessee has an interest, shall be turned over, subject to that interest, to the
transferee, and Lessee is notified of the transfer as required by law. No holder
of a mortgage and/or deed of trust to which this Lease is, or may be,
subordinate, and no landlord under a so-called sale-leaseback shall be
responsible in connection with the security deposit, unless the mortgagee or
holder of the deed of trust or the landlord actually receives the security
deposit. It is intended that the covenants and obligations contained in this
tease on the part of the Lessor shall, subject to the foregoing. be binding on
Lessor, its successors and assigns, only during. and in respect to, their
respective successive periods of ownership.
ARTICLE 21 INTERPRETATION
21.01 Gender and Number: Whenever the context of this Lease requires,
the words "Lessor" and "Lessee" shall include the plural and well as the
singular, and words used in neuter, masculine or feminine genders shall include
the others.
21.02 Headings: the captions and headings of the Articles and Sections
of this Lease are for convenience only, and are not a part of this Lease and
shall have no effect upon its construction or interpretation.
21.03 Joint and Several Liability: if there is more than one Lessee,
the obligations imposed upon Lessee shall be joint and several, and the act of,
or notice from, or notice or refund to, or the signature of, any one or more of
them shall be binding on all of them with respect to the tenancy of this Lease,
including, but not limited to, any renewal, extension, termination, or
modification of this Lease.
21.04 Successors: Subject to Articles 10 and 20, all rights and
liabilities given to or imposed upon Lessor and Lessee shall extend to and bind
their respective heirs, executors, administrators, successors and assigns.
Nothing contained in this Section is intended, or shall be construed, to grant
to any person other than Lessor and Lessee and their successors and assigns any
rights or remedies under this Lease.
21.05 Time of Essence: Time is of the essence with respect to the
performance of every prevision of this Lease, in which time of performance is a
factor.
21.06 Severability: if any term or provision of this Lease, the
deletion of which would not adversely affect the receipt of any material benefit
by either party or the deletion of which is consented to by the party adversely
affected, shall be held invalid or unenforceable to any extent, the remainder of
this Lease shall not be affected and each term and provision of this Lease shall
be valid and enforceable to the fullest extent permitted by law.
21.07 Entire Agreement: the parties thereto declare and represent that
no promise, inducement or agreement not therein expressed has been made to them,
that this document embodies and sets forth the entire agreement and
understanding between them relating to the subject matter hereof, and that it
merges and supersedes all prior discussions, agreements, understandings,
representations, conditions, warranties and covenants between them on said
subject matter.
21.08 Covenants and Conditions: All of the provisions of this Lease
shall be construed to be conditions as well as covenants as through the words
specifically expressing or imparting covenants and conditions were used in each
separate provision.
14 Initial____
<PAGE>
21.09 Counterparts: This Lease may be executed in one or more
counterparts, each of which shall be deemed on original, but all of which taken
together shall constitute one and the same instrument.
21.10 Attachments: in addition to all of the exhibits referred to
above, attached are the following documents which also constitute a part of this
Lease: Utilities information Form and Center Signage Guidelines.
LESSOR:
POST PALMS ASSOCIATES
a joint venture of POST ROAD ASSOCIATES
a California general partnership
and COPLEY INSTITUTIONAL INVESTORS FUND II
a Delaware limited partnership
By:
POST ROAD ASSOCIATES
/s/Lee W. Phelps
By: ___________________________________
Lee W. Phelps, General Partner
/s/Stanley K. Gentzler
By: ___________________________________
Stanley K. Gentzler, General Partner
LESSEE:
KEY PRODUCTS CO., INC.,
A NEVADA CORPORATION
/s/Barbara L. Morthland
By: ___________________________________
Barbara L. Morthland, President
/s/David W.B. Morthland
By: ___________________________________
David W.B. Morthland, Vice-President
If Lessee shall be a corporation, then authorized officers must sign on
behalf of the corporation. The Lease must be executed by the president
or Vice President and the Secretary or Assistant Secretary, unless the
---
By-Laws or a Resolution of the Board of Directors shall otherwise
provide, in which event, the By-Laws, or a certified copy of the
Resolution, as the case may be, must be furnished. Also, the appropriate
corporate seal must be affixed.
15 Initial____
<PAGE>
EXHIBIT "A"
[PICTURE OF EXHIBIT A]
<PAGE>
FIRST ADDENDUM TO STANDARD LEASE
THIS FIRST ADDENDUM TO STANDARD LEASE this "Addendum:, is made this 9th
day of July, 1992, by and between POST PALMS ASSOCIATES, a Joint Venture of POST
ROAD ASSOCIATES, a California General Partnership, and COPLEY INSTITUTIONAL
INVESTORS FUND II, a Delaware Limited Partnership ("Lessor"): and KEY PRODUCTS
CO., INC., a Nevada Corporation ("Lessee").
AUDITIONS
_________
In consideration of the mutual agreements of said Lessee herein
contained, the parties hereby agree to the addition of said Lease so illustrated
in this First Addendum to Lease.
1. Lessor grants to Lessee the right to expand its current premisis
at Post Palms Business Center, so long as Lessee utilizes more square footage,
(contingent upon space availability), during the original term or extensions of
said Lease, (Lessor and Lessee will mutually agree to said rate and terms),
without responsibility to said Lease after the Building Department signs off on
tenant improvements on said expansion.
Lessor grants to Lessee the right to relocate from Post Palms
Business Center to Palms Airport Center, so long as Lessee utilizes more square
footage, (contingent upon space availability), during the original term or
extensions of said Lease, (Lessor and Lessee mutually agree to said rate and
terms), without responsibilty to said Lease After the Building Department signs
off on tenant improvements on said relocation.
<PAGE>
IN WITNESS WHEREOF, this Addendum has been executed by the parties as of
the date first written above.
LESSOR:
POST ROAD ASSOCIATES, a California General Partnership
By: /s/Lee W. Phelps
--------------------------------------
Lee W. Phelps
General Partner
By: /s/Stanley K. Gentzler
--------------------------------------
Stanley K. Gentzler
General Partner
LESSEE:
KEY PRODUCTS CO., INC., a Nevada Corporation
By: /s/Barbara L. Morthland
--------------------------------------
Barbara L. Morthland, President
By: /s/David B. Morthland
--------------------------------------
David B. Morthland, Vice-President
<PAGE>
FIRST AMENDMENT TO STANDARD LEASE
THE FIRST AMENDMENT TO STANDARD LEASE (this "Amendment"), is made this
20th day of July, 1992, by and between POST PALMS ASSOCIATES, a Joint Venture of
POST ROAD ASSOCIATES, a California General Partnership, and COPLEY INSTITUTIONAL
INVESTORS FUND II, INC., a Nevada Corporation ("Lessee").
AMENDMENT
---------
In consideration of the mutual agreements of said Lease herein
contained, the parties hereby agree to the amendments of said Lease so
illustrated in this First Amendment to Lease.
ARTICLE 1 BASIC LEASE TERMS
1.04 RENT
a. Base Rent: (i) during month(s) one (1) through eleven (11);
(ii) forgiveness of Base Rent and Operating Expenses during month twelve (12);
(iii) during month(s) thirteen (13) through twenty-three (23); (iv)
forgiveness of Base Rent and Operating Expenses during month twenty-four (24);
(v) during month(s) twenty-five (25) through thirty-six (36); (vi) during
month(s) thirty-seven (37) through fourty-eight (48); (vii) during month(s)
forty-nine (49) through sixty (60). Where reference is made in this Lease so
rent as provided in Section 1.04a, or where reference is made to the "Original
Monthly Rent", such rent shall be deemed to be Operating Expenses are due
and payable throughout the term of the Lease, except during months twelve (12)
and twenty-four (24) of the initial Lease term.
1.06 SECURITY DEPOSIT:
1.11 PAYMENTS UPON EXECUTION: The first installment of Base Rent
the first months Operating Expenses of and a Security Deposit of
which totals shall be delivered to Lessor concurrently with Lessee's
execution of this Lease.
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed by the parties as
of the date first written above.
LESSOR:
POST ROAD ASSOCIATES, a California General Partnership
By: /s/Lee W. Phelps
--------------------------------------
Lee W. Phelps
General Partner
By: /s/Stanley K. Gentzler
--------------------------------------
Stanley K. Gentzler
General Partner
LESSEE:
KEY PRODUCTS CO., INC., a Nevada Corporation
By: /s/Barbara L. Morthland
--------------------------------------
Barbara L. Morthland, President
By: /s/David B. Morthland
--------------------------------------
David B. Morthland, Vice-President
<PAGE>
EXHIBIT 10.23
================================================================================
PROPERTY ADDRESS
CYPRESS BUSINESS PARK
685 Clyde Avenue
Mountain View, CA 94043
INDUSTRIAL
LEASE
BETWEEN
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
LANDLORD
AND
SILICON GAMING, INC.
TENANT
January __, 1997
================================================================================
<PAGE>
INDUSTRIAL LEASE
----------------
THIS LEASE is made as of the __ day of January, 1997, between THE
PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("Landlord"),
and SILICON GAMING, INC., a California corporation ("Tenant"), for space in the
building located at 685 Clyde Avenue Mountain View, CA 94043 (such building,
together with the land upon which it is situated, being herein referred to as
the "Building"). The following schedule (the "Schedule") sets forth certain
basic terms of this Lease:
SCHEDULE
1. Premises 685 Clyde Avenue, Mountain View, CA
2. Rentable Square Feet of Premises: 28,800 (Approx.)
3. Term One Hundred Eight (108) Months,
Commencing on the Commencement Date
4. Base Rent:
Period from/to Monthly
-------------- ----------
Months: 1-12 $27,360.00
13-108 $ (See Section 2.c)
5. Tenant's Share of CAM Charges: 24.42%
6. Security Deposit: $ (see Section 17)
7. Broker(s): The Galbreath Company (Tenant)
CPS (Landlord)
8. Commencement Date MARCH 1, 1997
9. Landlord's Notice Address: The Voit Companies
1111 Broadway, Suite 1510
Oakland, CA 94506
RE: Cypress Business Park
2
<PAGE>
with a copy to: The Prudential Insurance
Company of America
2029 Century Park East, Suite 2050
Los Angeles, CA 90067
ATTN: Real Estate Investments,
Vice President
and The Prudential Insurance
Company of America
4 Embarcadero Center Suite 2700
San Francisco, CA 94111
ATTN: Regional Counsel
10. Tenant's Notice Address: Silicon Gaming Inc.
2800 West Bayshore road
Palo Alto, CA 94303
Attn: Chief Financial Officer
with a copy to:
Silicon Gaming, Inc.
685 Clyde Avenue
Mountain View, CA 94043
ATTN: General Manager
11. Exhibits: A. Floor Plan
B. Tenant Improvements Construction
Agreement
C. Commencement Memorandum
D. Rules and Regulations
3
<PAGE>
1. DEMISING CLAUSE
Landlord leases to Tenant and Tenant leases from Landlord the premises (the
"Premises") described in Item 1 of the Schedule and shown on the plan attached
-------
hereto as Exhibit A. subject to the covenants and conditions set forth in this
---------
Lease, for a term (the "Term") commencing on the date described in Item 8 of the
------
Schedule (the "Commencement Date") and expiring on the last day of the Term
specified in the Schedule, subject, however, to paragraph 7 of the Tenant
Improvement Construction Agreement attached hereto as Exhibit B. (the
---------
"Expiration Date"), unless terminated earlier as otherwise provided in this
Lease.
2. RENT
a. Definitions. For purposes of this Lease, the following terms shall
------------
have the following meanings:
i. "Common Areas" shall mean the parking, landscaping, sidewalks and
other common areas of the Project.
ii. "Project" shall mean the project commonly known as Cypress Business
Park.
iii. "Expenses" shall mean (1) all of Landlord's direct costs and
expenses of operation, repair and maintenance of the Common Areas and supporting
facilities and such other matters as are the responsibility of Landlord
hereunder, including, without limitation, reasonable management fees related to
the Project (provided, however, that such fee shall not exceed the management
fees generally charged by comparable managers of properties such as the Premises
and Project in the market area of the Project), all as determined by Landlord in
accordance with generally accepted accounting principles or other recognized
accounting principles, consistently applied; (2) costs, or a portion thereof,
properly allocable to the Common Areas of any capital improvements made to the
Common Areas by Landlord which comprise labor-saving devices or other equipment
intended to improve the operating efficiency of any system within Common Areas
(such as an energy management computer system), subject to amortization, as
provided below; and (3) costs properly allocable to the Building or Common Areas
of any capital improvements made to the Building or Common Areas by Landlord
that are required under any governmental law or regulation that was not
applicable to the Building and Common Areas at the time they were constructed,
or that are reasonably required for the health and safety of tenants in the
Building. Wherever this Lease authorizes capital expenses to be charged as
Expenses, capital costs shall be amortized over the life of any relevant
improvement, together with interest at the rate of ten percent (10%) on the
unamortized balance. Any repairs to the foundations or structural areas of the
Building required pursuant to Section 8.b hereof shall not be charged as
-----------
Expenses unless such repairs result from a legal requirement applicable to the
Building which is required to be paid by Landlord thereunder and that comes into
effect after the Commencement Date of the Lease. As used herein, the term
"capital improvement" shall mean any replacement, work, improvement, alteration
or repair the cost of which is considered a capital expense under GAAP.
Notwithstanding anything to the contrary in the foregoing paragraph, in no event
shall "Expenses" include any of the following: (i) Repairs or other work
occasioned by fire, windstorm or other casualty or by exercise of the right of
eminent domain; (ii) Leasing commissions, attorney's fees, costs and
disbursements and expenses incurred in connection with negotiations or disputes
with tenants, other occupants of the Project, or prospective tenants or other
occupants; (iii) Expenses of renovating or otherwise improving or decorating,
painting or redecorating the Premises of Tenant or any other occupants of
premises within the Project, or vacant tenant space; (iv) Cost of damage and
repairs necessitated by the negligence or willful misconduct of Landlord or of
Landlord's agents, employees, contractors, invitees, or other tenants in the
Project; (v) Depreciation on the Building, Project, Common Areas or any personal
property associated therewith; (vi) Costs of a capital nature except to the
extent expressly permitted to be charged as "Expenses" hereunder, including, but
not limited to, capital improvements, capital repairs, capital equipment, and
capital tools all determined in accordance with generally accepted accounting
principles, except for the yearly amortized portion of said capital costs, as
permitted in this Lease; (vii) Expenses in connection with services or other
benefits of a type which are not provided Tenant but which are provided to
another tenant or occupant of the Building or Project; (viii) Costs incurred due
to violation by Landlord (or any other tenant), of the terms and conditions of
this Lease or any such tenant's lease; (ix) Overhead and profit increment paid
to subsidiaries or affiliates of Landlord for services rendered in connection
with the Building or Project, to the extent that the cost of such
4
<PAGE>
services exceeds the costs for such services from unrelated third parties
offering such services in the market area of Building or Project; (x) Interest
on debt or amortization payments on any mortgage or mortgages, and rental under
any ground or underlying leases or lease, or rental or lease payments by the
Landlord for the parking portions of the Common Areas; (xi) Landlord's general
corporate overhead and general administrative expenses, excluding however any
components of covered by the management fee charged hereunder; (xii) Any
compensation paid to clerks, attendants or other persons in commercial
concessions operated by Landlord; (xiii), Rentals and other related expenses
incurred in leasing air conditioning systems, elevators or other equipment
ordinarily considered to be of a capital nature; (xiv) All items and services
for which Tenant reimburses Landlord or pays third persons directly; (xv) All
costs and expenses for which Landlord receives full reimbursement from any
tenant in the Project or any third party; (xvi) Advertising and promotional
expenditures, excluding any such expenses covered by the management fee charged
hereunder; and (xvii) other expense which under generally accepted accounting
principles and practice would not be included as normal maintenance or operating
expenses by comparable managers of comparable Projects in the market area of the
Project.
iv. "Rent" shall mean Base Rent, Adjustment Rent, and any other sums or
charges due from Tenant hereunder. This Lease is intended to be a triple net
lease, with all costs, expenses and charges (including the Expenses) allocated
to the Premises to be paid by Tenant except as otherwise specifically provided
in this Lease.
v. "Taxes" shall mean all taxes, assessments and fees levied upon the
Building, the property of Landlord located therein or the rents collected
therefrom, by any governmental entity based upon the ownership, leasing, renting
or operation of the Building, including all costs and expenses of protesting any
such taxes, assessments or fees. Taxes shall not include any net income,
capital stock, succession, transfer, franchise, gift, estate or inheritance
taxes; provided, however, if at any time during the Term, a tax or excise on
income is levied or assessed by any governmental entity, in lieu of or as a
substitute for, in whole or in part, real estate taxes or other ad valorem
----------
taxes, such tax shall constitute and be included in Taxes. For the purpose of
determining Taxes for any given year, the amount to be included for such year
(a) from special assessments payable in installments shall be the amount of the
installments (and any interest) due and payable during such year, and (b) from
all other Taxes shall be the amount due and payable in such year.
vi. "Tenant's Share" shall mean the percentage set forth in Item 5 of the
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Schedule.
b. Components of Rent. Tenant agrees to pay the following amounts to
-------------------
Landlord at the office of the Building or at such other place as Landlord
designates:
i. Base rent ("Base Rent") to be paid in monthly installments in the
amounts set forth in Item 4 of the Schedule, in advance on or before the first
------
day of each month of the Term, without demand, except that Tenant shall pay the
first month's Base Rent upon execution of this Lease.
ii. Adjustment rent ("Adjustment Rent") in an amount equal to Tenant's
Share of Expenses and Taxes for any calendar year (or in the event Tenant shall
occupy the Premises for a portion of a year, any portion of the year during
which Tenant shall occupy the Premises). Prior to each calendar year, or as
soon as reasonably possible, Landlord shall estimate and notify Tenant of the
amount of Adjustment Rent due for such year, and Tenant shall pay Landlord one-
twelfth of such estimate on the first day of each month during such year. Such
estimate may be revised by Landlord whenever it obtains information relevant to
making such estimate more accurate. After the end of each calendar year,
Landlord shall deliver to Tenant a statement setting forth the actual Expenses
and Taxes for such calendar year and a statement of the amount of Adjustment
Rent that Tenant has paid and is payable for such year. Within thirty (30) days
after receipt of such statement, Tenant shall pay to Landlord the amount of
Adjustment Rent due for such calendar year, as shown in said statement, minus
any payments of estimated Adjustment Rent made by Tenant for such year. If
Tenant's estimated payments of Adjustment Rent exceed the amount due Landlord
for such calendar year, Landlord shall apply such excess as a credit against
Tenant's other obligations under this Lease, unless the Term has expired and
Tenant is not in default hereunder, in which case such amount shall be refunded
to Tenant promptly after determination of said overpayment. In no case shall any
overpayment by Tenant earn interest.
c. Increase of Rent. The Base Rent shall be adjusted upward every year
------------------
of the term hereof, based on the increase in the Consumer Price Index ("CPI").
The first increase in Base Rent pursuant to this paragraph shall be effective
beginning with the rent payable on the first (1st) day of the thirteenth (13th)
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month of the Term, and subsequent increases shall be effective every twelve (12)
months thereafter. Rent shall be determined based on the increase in the CPI
from the Commencement Date, or the last Rent Determination Date (as defined
herein), as the case may be, to a date that is thirty (30) days prior to the
effective date of any increase hereunder (the "Rent Determination Date"). "CPI"
shall mean the Consumer Price Index for Urban Wage Earners and Clerical Workers
(Revised Series) (CPI-W), All Items, for the San Francisco-Oakland-San Jose
area (1982-1984 equals 100) of the United States Department of Labor Bureau of
Labor Statistics, over the relevant period. If such index is no longer
published at any time, the Consumer Price Index shall mean a comparable index
reasonably selected by Landlord. Notwithstanding the foregoing, in no event
shall the Base Rent for any twelve month period covered hereby be less than the
Base Rent in effect on any Rent Determination Date, and in no event shall any
increase under this paragraph be less than five percent (5%), nor more than
eight percent (8%) of the rent in effect as of the Rent Determination Date.
Landlord shall notify Tenant as soon as possible following the Rent
Determination Date of the Base Rent applicable for the next twelve month period.
d. Payment of Rent. The following provisions shall govern the payment of
----------------
Rent: i. if this Lease commences or ends on a day other than the first day or
last day of a calendar month, respectively, the Rent for such month shall be
prorated accordingly; ii. all Rent shall be paid to Landlord without offset or
deduction, and the covenant to pay Rent shall be independent of every other
covenant in this Lease; iii. any sum due from Tenant to Landlord which is not
paid within thirty (30) days of the date due shall bear interest from the date
due until the date paid at the annual rate of ten percent (10%) from the date
the payment was due (or the first business day thereafter), which rate shall not
exceed the maximum rate permitted by law (the "Default Rate"); and, in addition,
in recognition of the fact that Landlord will incur certain administration costs
and other damages, the amount of which are not readily quantifiable, but of
which the Late Charge (as defined herein) shall be an approximation, Tenant
shall, in addition to interest at the Default Rate, pay Landlord a late charge
for any Rent payment which is paid more than five (5) days after its due date
equal to five percent (5%) of such payment (the "Late Charge"); iv. Tenant
shall have the right to inspect Landlord's accounting records relative to
Expenses and Taxes during normal business hours at any time within ninety (90)
days following the furnishing to Tenant of the annual statement of Adjustment
Rent; and, unless Tenant shall take written exception to any item in any such
statement within such ninety (90) day period, such statement shall be considered
as final and accepted by Tenant; v. in the event of the termination of this
Lease prior to the determination of any Adjustment Rent , Tenant's agreement to
pay any such sums and Landlord's obligation to refund any such sums (provided
Tenant is not in default hereunder) shall survive the termination of this Lease;
vi. no adjustment to the Rent by virtue of the operation of the rent adjustment
provisions in this Lease shall result in the payment by Tenant in any year of
less than the Base Rent shown on the Schedule; vii. Landlord may at any time
change the fiscal year of the Building; viii. each amount owed to Landlord
under this Lease for which the date of payment is not expressly fixed shall be
due on the same date as the Rent listed on the statement showing such amount is
due; and ix. if Landlord fails to give Tenant an estimate of Adjustment Rent
prior to the beginning of any calendar year, Tenant shall continue to pay
Adjustment Rent at the rate for the previous calendar year until Landlord
delivers such estimate, at which time Tenant shall pay retroactively the
increased amount for all previous months of such calendar year.
e. Allocation of Rent Abatement for Tax Purposes. Landlord and Tenant
----------------------------------------------
agree that no portion of the Base Rent paid by Tenant during the portion of the
term of this Lease occurring after the expiration of any period during which
such rent was abated shall be allocated, for income tax purposes, nor is such
rent intended by the parties to be allocable, for income tax purposes, to any
abatement period.
3. USE
a. Tenant agrees that it shall occupy and use the Premises only for
general office, sales, the testing and review of software products and the
manufacture and assembly of electronic or computer equipment and other legal
uses reasonably related to the above, and for no other purposes. Tenant shall
comply with all present and future federal, state and municipal laws, ordinances
and regulations and all covenants, conditions and restrictions of record
applicable to Tenant's use or occupancy of the Premises. Without limiting the
foregoing, Tenant shall not cause, nor permit, any hazardous or toxic substances
to be brought upon, produced, stored, used, discharged or disposed of in, on or
about the Premises other than commercially reasonable amounts of such substances
for general office purposes, without the prior written consent of Landlord and
then only in compliance with all applicable environmental laws, provided nothing
in this Paragraph 3 or elsewhere in this Lease shall be construed as imposing
-----------
on Tenant any obligation to remediate or clean up any hazardous materials or
toxic substances except to the extent
6
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resulting from the willful act or negligence of Tenant or its employees, agents,
contractors or invitees. Further, Landlord, at its sole cost, shall perform all
seismic upgrades to the Building or Project required by applicable laws, unless
the Premises are in compliance with seismic requirements as of the date Tenant
commences its construction and such upgrade is required as a result of a
specific improvement Tenant proposes to make pursuant to the Tenant Improvement
Construction Agreement. If as a result of Tenant's use of the Premises i. the
amount of insurance premiums payable by Landlord for insurance maintained for or
in respect to the Building is increased, ii. any such insurance coverage is
decreased, or iii. cancellation or refusal to renew any such insurance policy is
threatened, Landlord shall so notify Tenant, whereupon Tenant shall immediately
pay any such increased premium or cease any such use, failing which (or in the
event of a threatened cancellation or refusal to renew any such insurance policy
which may not be cured by the payment of an additional premium), Landlord shall
have the right, in addition to Landlord's other rights and remedies hereunder,
to terminate this Lease upon written notice to Tenant, effective on the date set
forth in such notice.
b. "Hazardous Substance" shall mean the substances including within the
definitions of the term "Hazardous Substance" under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, 42
U.S.C. Section 9601 et seq., and the California Carpenter-Presley-Tanner
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Hazardous Substance Account Act, California Health & Safety Code Section 25300
et seq., and regulations promulgated thereunder, as amended. "Hazardous Waste"
- -------
shall mean (a) any waste listed as or meeting the identified characteristics of
a "Hazardous Waste" under the Resource Conservation and Recovery Act of 1976, 42
U.S.C. Section 6901 et seq., and regulations promulgated pursuant thereto,
-------
collectively "RCRA", or (b) any waste meeting the identified characteristics of
"Hazardous Waste" under California Hazardous Waste Control Law, California
Health and Safety Code Section 25100 et. seq., and regulations promulgated
---------
pursuant thereto, collectively "CHWCL". "Hazardous Waste Facility" shall mean a
hazardous waste facility as defined under CHWCL.
i. Tenant covenants that, at its sole cost and expense, it will comply
with all applicable laws, rules, regulations, orders, permits, licenses and
operating plans of any governmental authority with respect to the use,
handling, generation, transportation, storage, treatment and/or disposal of
hazardous substances or wastes, and Tenant will provide Landlord with
copies of all permits, registrations or other similar documents that
authorize Tenant to conduct any such activities in connection with its
authorized use of the Premises. Additionally, Tenant agrees to comply with
the Rules and Regulations attached hereto as Exhibit D, the requirements of
---------
the Board of Fire Underwriters or Landlord's insurance carrier, and to
comply with covenants, conditions and restrictions ("CC&R's") applicable
to the Building.
ii. Tenant agrees that it shall not operate on the Premises any
facility required to be permitted or licensed as a Hazardous Waste Facility
or for which interim status as such is required. Nor shall Tenant store
any Hazardous Wastes on the Premises for ninety (90) days or more.
iii. Tenant agrees to comply with all applicable laws, rules,
regulations, orders, and permits relating to underground storage, tanks
(including any installation, monitoring, maintenance, closure and/or
removal of such tanks) as such tanks are defined in California Health and
Safety Code, Section 25281(u), including, without limitation, complying
with California Health and Safety Code Sections 25280-25299.6 and the
regulations promulgated thereunder. Tenant shall furnish to Landlord
copies of all registrations and permits for all underground storage tanks.
iv. If applicable, Tenant shall provide to Landlord in writing the
following information and/or documentation at the Commencement Date and
within sixty (60) days of any change in the required information and/or
documentation:
(1) A list of all hazardous substances and/or wastes that Tenant
uses, handles, generates, transports, stores, treats or disposes in
connection with its operations on the Premises.
(2) Copies of all Material Safety Data Sheets ("MSDS's")
required to be completed with respect to operations of Tenant at the
Premises in accordance with Title 8, California Code of Regulations
Section 5194 or 42 U.S.C. Section 11021, or any amendments thereto.
In lieu of this requirement, Tenant may provide a Hazardous Materials
Inventory Sheet that details the MSDS's.
7
<PAGE>
(3) Copies of all hazardous waste manifests, as defined in Title
22, California Code of Regulations Section 66481, that Tenant is
required to complete in all connections with its operations at the
Premises.
(4) A copy of any Hazardous Materials Management Plans required
with respect to Tenant's operations.
(5) Copies of any Contingency Plans and Emergency Procedures
required of Tenant due to its operations in accordance with Title 22,
Chapter 30, Article 20, of the California Code of Regulations, and any
amendments thereto.
(6) Copies of any biennial reports to be furnished to California
Department of Health Services relating to hazardous substances or
wastes.
(7) Copies of all industrial waste water discharge permits.
c. Tenant shall secure Landlord's prior written approval for any
proposed receipt, storage, possession, use, transfer or disposal of
"Radioactive Materials" or "Radiation", as such materials are defined in
Title 17, California Code of Regulations Sections 30100(w) and (z) or
possessing the characteristics of the materials so defined, which approval
Landlord may withhold in its sole and absolute discretion. The Tenant in
connection with any authorized receipt, storage, possession, use, transfer
or disposal of radioactive materials or radiation shall:
i. Comply with all federal, state and local laws, rules,
regulations, orders, licenses and permits;
ii. Furnish Landlord with a list of all radioactive materials or
radiation received, stored, possessed, used, transferred or disposed;
and
iii. Furnish Landlord with all licenses, registration materials,
inspection reports, orders and permits in connection with the receipt,
storage, possession, use, transfer or disposal or radioactive
materials or radiation.
d. Tenant agrees to comply with any and all applicable laws, rules,
regulations, and orders with respect to the release into the environment of
any hazardous wastes or substances or radiation or radioactive materials.
Tenant agrees to notify Landlord in writing of any unauthorized release
into the environment within twenty-four (24) hours of the time at which
Tenant becomes aware of such release.
e. Tenant shall indemnify, defend, and hold Landlord harmless from any
and all claims, losses (including, but not limited to, loss of rental
income and loss due to business interruption), damages, (including
diminution in value or loss of rental value following expiration or earlier
termination of the Term) liabilities, costs, legal fees, and expenses of
any sort arising out of or relating to any unauthorized release by Tenant
or its employees, agents, contractors or invitees into the environment of
hazardous substances or wastes or radiation or radioactive materials by
Tenant or any of Tenant's agents, contractors or invitees, or Tenant's
failure to comply with Subparagraphs (a)-(h) of this section of the Lease.
f. Tenant agrees to cooperate with Landlord in furnishing Landlord
with complete information regarding Tenant's receipt, handling, use,
storage, transportation, generation, treatment and/or disposal of hazardous
substances or wastes or radiation or radioactive materials. Upon request,
Tenant agrees to grant Landlord reasonable access at reasonable times to
the Premises to inspect Tenant's receipt, handling, use, storage,
transportation, generation, treatment and/or disposal of hazardous
substances wastes or radiation or radioactive materials without being
deemed guilty of any disturbance of Tenant's use or possession and without
being liable to Tenant in any manner. Additionally, Landlord shall have
the right at any time during the term if it reasonably suspects that
hazardous substances or hazardous wastes have been disposed at the Premises
in a manner or in such amounts as would violate any applicable law, conduct
an environmental audit of the Premises and Tenant shall reimburse Landlord
for the cost of such audit within thirty (30) days after billing If such
audit reveals that Tenant or any of Tenant's
8
<PAGE>
agents, contractors or invitees has released or caused to be released such
substances into the Building or Project. Furthermore, if at any time during
the term of this Lease, Tenant shall store, use, or dispose of hazardous
substances at the Premises, other than commercially reasonable amounts of
such substances for normal office uses, Landlord may, at Tenant's expense
conduct such an environmental review of the Premises at any time during the
last six (6) months of the Term of this Lease.
g. Notwithstanding Landlord's rights of inspection and review under
this paragraph, Landlord shall have no obligation or duty to so inspect or
review, and no third party shall be entitled to rely on Landlord to conduct
any sort of inspection or review by reason of the provisions of this
paragraph.
h. On or before the Commencement Date, Landlord shall provide Tenant
with copies of any surveys in its possession regarding hazardous materials
that may be located in, on, about or under the Premises or Common Areas.
Landlord hereby warrants to Tenant that as of the date of this Lease, it
has received no written notice that the Premises, Project or Common Areas
are in violation of any applicable Hazardous Materials Laws.
Notwithstanding the foregoing, Tenant shall have the right to conduct any
and all investigations of the Property, subject to Landlord's reasonable
supervision as it shall deem suitable to assure itself of matters related
to the environmental condition of the Property and shall rely on its own
investigations in assessing the environmental condition of the Premises,
Project and Common Areas.
i. This Section 3 of the Lease shall survive termination of the Lease.
---------
4. CONDITION OF PREMISES
Landlord warrants that the mechanical, electrical, plumbing and other building
systems, foundations, exterior walls truck door, windows, skylights, and the
roof, roof membranes, sidewalks, parking areas and other structural components
of the Building and the Common Areas are in good operating condition as of the
date of delivery of the Premises to Tenant for the purposes of Tenant's
commencement of its construction. Landlord further warrants that as of the date
of delivery of the Premises to Tenant for the purposes of Tenant's commencement
of its construction, it has received no written notice that the buildings or
Common Areas are in violation of any applicable building codes or laws,
including, without limitation, the Americans with Disabilities, Act, Title 24 or
any relevant seismic or structural requirements. Subject to the foregoing
representations and warranties of Landlord, Tenant's taking possession of the
Premises shall be conclusive evidence that the Premises were in good order and
satisfactory condition when Tenant took possession, subject to the provisions of
Exhibit B and Landlord's representations set forth in the preceding sentence.
- ---------
No agreement of Landlord to alter, remodel, decorate, clean or improve the
Premises or the Building (or to provide Tenant with any credit or allowance for
the same), and no representation regarding the condition of the Premises or the
Building or the suitability of the Premises, Building or Project for Tenant's
business, have been made by or on behalf of Landlord or relied upon by Tenant,
except as set forth above or as provided in Exhibit B
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5. BUILDING SERVICES
a. Basic Services. Landlord shall and shall repair maintain and operate
---------------
the parking areas, landscaping, sidewalks and other Common Areas associated
with the Project, the cost of which shall be charged as Expenses.
b. Electricity. The Premises shall be separately metered for electrical
------------
use. Electricity shall be distributed to the Premises by the electric utility
company serving the Building. Tenant at its cost shall make all necessary
arrangements with the electric utility company for metering and paying for
electric current furnished to the Premises.
c. Telephones. Tenant shall arrange for telephone service directly with
-----------
one or more of the public telephone companies servicing the Building and shall
be solely responsible for paying for such telephone service. If Landlord
acquires ownership of the telephone cables in the Building at any time, Landlord
shall permit Tenant to connect to such cables on such terms and conditions as
Landlord may prescribe. In no event does Landlord make any representation or
warranty with respect to telephone service in the Building, and Landlord shall
have no liability with respect thereto.
9
<PAGE>
d. Additional Services. Tenant shall contract for its own Water, Gas,
--------------------
Garbage Collection, Janitorial, and maintenance of the equipment serving the
Premises and all other services that are not the responsibility of the Landlord
hereunder. Notwithstanding the foregoing, Landlord shall have the option to
maintain the HVAC on behalf of Tenant pursuant to Paragraph 8 hereof, and charge
-----------
Tenant for the cost attributable thereto, allocated as appropriate based on the
number of units covered by any applicable service contract. Landlord shall not
be obligated to furnish any services other than those stated above.
e. Failure or Delay in Furnishing Services. Tenant agrees that Landlord
----------------------------------------
shall not be liable for damages for failure or delay in furnishing any service
by any of the public utilities that are required to furnish any such service,
nor shall any such failure or delay be considered to be an eviction or
disturbance of Tenant's use of the Premises, or relieve Tenant from its
obligation to pay any Rent when due or from any other obligations of Tenant
under this Lease.
6. RULES AND REGULATIONS
Tenant shall observe and comply, and shall cause its subtenants, assignees,
invitees, employees, contractors and agents to observe and comply, with the
Rules and Regulations listed on Exhibit "D" attached hereto and with such
reasonable modifications and additions thereto as Landlord may make from time to
time, provided in the event of a conflict between the Rules and Regulations, as
so amended and this Lease, the provisions of this Lease shall control. Landlord
shall not be liable for failure of any person to obey the Rules and Regulations.
Landlord shall not be obligated to enforce the Rules and Regulations against any
person, and the failure of Landlord to enforce any such Rules and Regulations
shall not constitute a waiver thereof or relieve Tenant from compliance
therewith, provided, however, that Landlord shall not enforce such Rules and
Regulations in a manner which unreasonably interferes with Tenant's use of the
Premises.
7. CERTAIN RIGHTS RESERVED TO LANDLORD
Landlord reserves the following rights, each of which Landlord may exercise
without notice to Tenant and without liability to Tenant, and the exercise of
any such rights shall not be deemed to constitute an eviction or disturbance of
Tenant's use or possession of the Premises and shall not give rise to any claim
for set-off or abatement of rent or any other claim: a. to change the name or
street address of the Building or the suite number of the Premises; b. to
install, affix and maintain any and all signs on the exterior or interior of the
Building; c. to make repairs, decorations, alterations, additions, or
improvements, whether structural or otherwise, in and about the Building, and
for such purposes to enter upon the Premises, temporarily close doors, corridors
and other areas in the Building and interrupt or temporarily suspend services or
use of common areas, and Tenant agrees to pay Landlord for overtime and similar
expenses incurred if such work is done other than during ordinary business hours
at Tenant's request; d. to retain at all times, and to use in appropriate
instances, keys to all doors within and into the Premises; e. to grant to any
person or to reserve unto itself the exclusive right to conduct any business or
render any service in the Building; f. to show or inspect the Premises at
reasonable times and, if vacated, to prepare the Premises for reoccupancy; g.
to install, use and maintain in and through the Premises pipes, conduits, wires
and ducts serving the Building, provided that such installation, use and
maintenance does not unreasonably interfere with Tenant's use of the Premises;
and h. to take any other action which Landlord deems reasonable in connection
with the operation, maintenance, marketing, or preservation of the Building.
8. MAINTENANCE AND REPAIRS
a. Tenant's Obligation. Except as provided in subsection b, below, and
-------------------
subject to Landlord's representations and warranties as set forth in this Lease,
Tenant, at all times during the Term and at Tenant's sole cost and expense,
shall keep the Premises and every part thereof in good condition and repair,
(excepting ordinary wear and tear, the effect of any latent defects and any
damage Landlord is required to occur or maintain pursuant to any other provision
of this Lease, e.g., Paragraphs 8.b, 11 and 12) excepted, including, without
limitation, the HVAC system serving the Premises, if Landlord shall not elect to
maintain the HVAC system. Tenant shall, when and if needed, make all repairs to
the Premises, including, but not limited to; painting of the interior ceiling
and floors, painting of the interior, windows, doors, plate glass and all
plumbing electrical and sewage located in the Premises. Tenant hereby waives
10
<PAGE>
all right to make repairs at the expense of Landlord or in lieu thereof to
vacate the Premises as provided in California Civil Code Section 1942 or any
other law, statute or ordinance now or hereafter in effect.
b. Landlord's Obligations. Landlord, at Landlord's expense, shall repair
----------------------
and maintain the roof structure, roof membrane, foundations and structural
exterior walls of the Building except to the extent that the maintenance and
repair are caused in whole or in part by the act, neglect, fault or omission of
any duty of Tenant, its agents, servants, employees or invitees, and are not
covered by Landlord's insurance, in which case Tenant shall pay to Landlord the
cost of the maintenance and repairs to the extent caused by Tenant, subject,
however, to the provisions of Paragraph 10.c. Landlord shall, if it elects to
do so, contract for the maintenance of the HVAC and charge the allocable costs
thereof to Tenant. There shall be no abatement of Rent and no liability of
Landlord by reason of any injury to or interference with Tenant's business
arising from the making of any repairs, alterations or improvements in or to the
fixtures, appurtenances and equipment therein, provided the foregoing shall not
be deemed to relieve Landlord of liability for failure to make any repairs,
alterations or improvements required under this Lease. Landlord shall maintain
the Common Areas subject to reimbursement of its expenses pursuant to Section 2.
---------
Notwithstanding the foregoing, Landlord shall not be required to upgrade any
structural component of the Premises if the Premises are in compliance with
seismic requirements as of the date Tenant commences its construction and such
upgrade is required as a result of a specific improvement Tenant proposes to
make pursuant to the Tenant Improvement Construction Agreement.
9. ALTERATIONS
a. Requirements. Tenant shall not make any replacement, alteration,
-------------
improvement or addition to or removal from the Premises (collectively an
"Alteration") that shall either (a) cost in excess of $10,000 or (b) affect a
Building system, or the Building structure or external appearance without the
prior written consent of Landlord, which consent shall not be unreasonably
withheld unless such Alteration affects the structure or systems of the Building
or affects the exterior appearance of the Building. Alterations permitted
hereunder without the consent of Landlord will be referred to as "Permitted
Alterations." In the event Tenant proposes to make any Alteration that is not a
Permitted Alteration, Tenant shall, prior to commencing such Alteration, submit
to Landlord for prior written approval: i. detailed plans and specifications;
ii. the names, addresses and copies of contracts for all contractors (other than
subcontractors who shall supply materials or services costing less than $5000 in
connection with said work); iii. all necessary permits evidencing compliance
with all applicable governmental rules, regulations and requirements; iv.
certificates of insurance in form and amounts required by Landlord, naming
Landlord, its managing agent, and any other parties designated by Landlord as
additional insureds; and v. all other documents and information as Landlord may
reasonably request in connection with such Alteration. Tenant agrees to pay
Landlord's reasonable charges for review of all such items and supervision of
the Alteration. Neither approval of the plans and specifications nor
supervision of the Alteration by Landlord shall constitute a representation or
warranty by Landlord as to the accuracy, adequacy, sufficiency or propriety of
such plans and specifications or the quality of workmanship or the compliance of
such Alteration with applicable law. Tenant shall pay the entire cost of the
Alteration and, if requested by Landlord, shall deposit with Landlord, prior to
the commencement of the Alteration, security for the payment and completion of
the Alteration in form and amount reasonably required by Landlord. Each
Alteration shall be performed in a good and workmanlike manner, in accordance
with the plans and specifications approved by Landlord, and shall meet or exceed
the standards for construction and quality of materials reasonably established
by Landlord for the Building. In addition, each Alteration shall be performed in
compliance with all applicable governmental laws and regulations and insurance
company requirements. Each Alteration that is not a Permitted Alteration shall
be performed under Landlord's supervision, and in harmony with Landlord's
employees, contractors and other tenants. Each Alteration, whether temporary or
permanent in character, made by Landlord or Tenant in or upon the Premises
(excepting only Tenant's furniture, equipment and trade fixtures) shall become
Landlord's property and shall remain upon the Premises at the expiration or
termination of this Lease without compensation to Tenant; provided, however,
that Landlord shall have the right to require Tenant to remove such Alteration
at Tenant's sole cost and expense in accordance with the provisions of Section
14 of this Lease, which required removal shall be specified by Landlord when
Landlord consents to Tenant's requested Alterations.
b. Liens. Upon completion of any alteration, Tenant shall promptly
------
furnish Landlord with sworn owner's and contractors' statements and full and
final waivers of lien covering all labor and materials included in such
alteration. Tenant shall not permit any mechanic's lien to be filed against the
Building, or any part thereof, arising out of any alteration performed, or
alleged to have been performed, by or on behalf of Tenant. If any such lien is
filed, Tenant shall within ten (10) days thereafter have such lien
11
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released of record or diligently contest and deliver to Landlord a bond in form,
amount, and issued by a surety satisfactory to Landlord, indemnifying Landlord
against all costs and liabilities resulting from such lien and the foreclosure
or attempted foreclosure thereof. If Tenant fails to have such lien so released
or to contest and deliver such bond to Landlord, Landlord, without investigating
the validity of such lien, may pay or discharge the same; and Tenant shall
reimburse Landlord upon demand for the amount so paid by Landlord, including
Landlord's expenses and attorneys' fees.
c. Americans With Disabilities Act. Replacements, alterations,
--------------------------------
improvements or additions to or removals from the Premises required to achieve
compliance with the Americans With Disabilities Act ("ADA") shall be completed
at Tenant's expense in accordance with the procedures set forth in paragraphs 9
A. and B. of this Lease. Landlord shall be responsible for the cost of any
improvements required by the ADA to be made to the Building or Common Areas, to
the extent any such requirement does not relate to Tenant's particular use of
the Premises, but would be required for any tenant of the Building.
10. INSURANCE AND INDEMNIFICATION
In consideration of the leasing of the Premises at the Rent stated herein,
Landlord and Tenant agree to provide insurance and allocate the risks of loss as
follows:
a. Tenant's Insurance. Tenant, at its sole cost and expense but for the
-------------------
mutual benefit of itself and Landlord, agrees to purchase and keep in force and
effect during the Term hereof, insurance which is available at commercially
reasonable rates and otherwise commonly carried by tenants in the area, under
policies issued by insurers licensed to do business in the state in which the
Building is located with a Best's rating of A-, class VIII or higher on all
alterations, additions, and improvements owned by Tenant, and on all personal
property located in the Premises, protecting Landlord and Tenant from damage or
other loss caused by perils covered under an All Risk Property Policy, and
Boiler and Machinery Policy, in amounts not less than the full insurable
replacement value of such property. Such insurance shall provide that it is
specific and not contributory and shall name the Landlord and its management
agent as additional insureds and shall contain an agreed amount endorsement.
Such insurance shall also contain a clause pursuant to which the insurance
carriers waive all rights of subrogation against the Landlord with respect to
losses payable under such policies.
Tenant also agrees to maintain commercial general liability insurance covering
Tenant as the insured party, and naming Landlord and its managing agent as an
additional insured, against claims for bodily injury and death and property
damage occurring in or about the Premises, with limits of not less then Two
Million Dollars ($2,000,000.00) per occurrence and Five Million Dollars
($5,000,000.00) general aggregate.
Tenant shall, prior to commencement of the Term, furnish to Landlord
certificates evidencing such coverage, which certificates shall state that such
insurance coverage may not be changed or canceled without at least thirty (30)
days prior written notice to Landlord and Tenant. In the event Tenant shall
fail to procure such insurance, Landlord may at its option, after giving Tenant
no less than fourteen (14) days prior written notice of its election to do so,
procure the same for the account of Tenant and the cost thereof shall be paid to
Landlord as additional Rent upon receipt by Tenant of bills therefor. When used
in this Section 10. A the term "Landlord" shall include Landlord's partners,
beneficiaries, officers, agents, servants and employees and the term "Tenant"
shall include Tenant's partners, beneficiaries, officers, agents, servants and
employees.
b. Landlord's Insurance. Landlord agrees to purchase and keep in force
---------------------
and effect commercial general liability insurance in an amount not less than
Three Million Dollars ($3,000,000.00) per occurrence and Five Million Dollars
($5,000,000.00) general aggregate, and All Risk property insurance with an
agreed amount endorsement, on the Building and Common Areas, insuring 100% of
replacement value (subject to customary deductibles in the market area of the
property on policies maintained by commercial landlords of properties similar to
the Premises and Project), subject to the reimbursement of the full amount
thereof as Expenses. Notwithstanding the foregoing, during the time that
Prudential shall own the Premises and Project, Prudential's insurance program
maintained for its equity or separate account properties shall be deemed to
satisfy the foregoing. Subject to the foregoing sentence, such insurance shall
provide that it is specific and not contributory and shall contain a clause
pursuant to which the
12
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insurance carriers waive all rights of subrogation against the Tenant with
respect to losses payable under such policies.
c. Risk of Loss. By this Section 10, Landlord and Tenant intend that the
-------------
risk of loss or damage as described above be borne by responsible insurance
carriers to the extent above provided, and Landlord and Tenant hereby agree to
look solely to, and to seek recovery only from, their respective insurance
carriers in the event of a loss of a type described above to the extent that
such coverage is agreed to be provided hereunder. For this purpose, any
applicable deductible amount shall be treated as though it were recoverable
under such policies. Landlord and Tenant agree that applicable portions of all
monies collected from such insurance shall be used toward the full compliance
with the obligations of Landlord and Tenant under this Lease in connection with
damage resulting from fire or other casualty. This Paragraph 10.c shall
--------------
supersede any provision of this Lease that shall allocate liability for an
insured event to Landlord or Tenant.
d. Indemnification of Landlord. Tenant shall indemnify and defend
---------------------------
Landlord, its employees and agents and save them harmless from and against any
and all loss and against all claims, actions, damages, liability and expenses,
in connection with loss of life, bodily and personal injury, or property damage
arising from any occurrence in, upon or at the Premises or any part thereof, or
occasioned wholly or in part by any act or omission of Tenant, its agents,
contractors, employees or invitees or by anyone permitted to be on the Premises
by Tenant, except to the extent caused by the negligence or willful misconduct
of Landlord, its employees or agents. In case Landlord, its employees or agents
shall be made a party to any litigation commenced by or against Tenant, then
Tenant shall indemnify, defend and hold them harmless and shall pay all costs,
expenses, and reasonable attorneys' fees incurred or paid by them in connection
with such litigation. The obligations assumed herein shall survive the
expiration or sooner termination of this Lease.
11. FIRE OR OTHER CASUALTY
a. Destruction of the Building. If fifty percent (50%) of the area of
----------------------------
the Building should be substantially destroyed by fire or other casualty, either
party hereto may, at its option, terminate this Lease by giving written notice
thereof to the other party within thirty (30) days of such casualty. In such
event, Rent shall be apportioned to and shall cease as of the date of such
casualty. In the event neither party exercises this option, then the Premises
shall be reconstructed and restored as set forth below.
b. Destruction of the Premises. If the Premises should be rendered
---------------------------
untenantable for the purpose for which they were leased, by fire or other
casualty, but the Building is not substantially destroyed as provided above,
then the parties hereto shall have the following options:
i. If, in Landlord's reasonable judgment, the Premises cannot be
reconstructed or restored within one hundred eighty (180) days of such casualty
to substantially the same condition as they were prior to such casualty,
Landlord shall so notify Tenant within thirty (30) days of the casualty and
either Landlord or Tenant may elect, within fifteen (15) days thereafter, to
terminate this Lease. If Tenant makes no election within such fifteen (15) day
period, Landlord shall then have the right, to be exercised within fifteen (15)
days following the expiration of Tenant's election period, by giving written
notice to Tenant, to reconstruct and restore the Premises to substantially the
same condition as they were prior to the casualty. In such event this Lease
shall continue in full force and effect to the balance of the term, upon the
same terms, conditions and covenants as are contained herein; provided, however,
that the Rent shall be abated in the proportion which the approximate area of
the damaged portion bears to the total area in the Premises from the date of the
casualty until substantial completion (as defined in Exhibit B) of the
---------
reconstruction of the Premises. If Landlord fails to exercise such right, this
Lease shall be terminated as of the date of the casualty, to which date Rent
shall be apportioned and shall thereafter cease.
Notwithstanding the above, if the casualty occurs during the last twelve (12)
months of the Term of this Lease, either party hereto shall have the right to
terminate this Lease as of the date of the casualty, which right shall be
exercised by written notice to be given by either party to the other party
within thirty (30) days therefrom. If this right is exercised, Rent shall be
apportioned to and shall cease as of the date of the casualty. If a casualty
occurs during the last twelve (12) months of the term of the Lease, Tenant may
not exercise any extension options without first obtaining Landlord's written
consent.
ii. If, in Landlord's reasonable judgment, the Premises are able to be
restored within one hundred eighty (180) days to substantially the same
condition as they were prior to such casualty, Landlord shall so notify
13
<PAGE>
Tenant within fifteen (15) days of the casualty, and Landlord shall then proceed
to reconstruct and restore the damaged portion of the Premises, at Landlord's
expense, to substantially the same condition as it was prior to the casualty;
Rent shall be abated in the proportion which the approximate area of the damaged
portion bears to the total area in the Premises from the date of the casualty
until substantial completion (as defined in Exhibit B) of the reconstruction
---------
repairs, and this Lease shall continue in full force and effect for the balance
of the Term.
iii. In the event Landlord undertakes reconstruction or restoration of the
Premises pursuant to subparagraph (i) or (ii) above, Landlord shall use
reasonable diligence in completing such reconstruction repairs, but in the event
Landlord fails to substantially complete the same within two hundred forty (240)
days from the date of the casualty, except as a result of any of the occurrences
set forth in subparagraph 25 (j) below, Tenant may, at its option, terminate
this Lease upon giving Landlord written notice to that effect, whereupon both
parties shall be released from all further obligations and liability hereunder.
12. CONDEMNATION
If the Premises or the Building is rendered untenantable by reason of a
condemnation (or by a deed given in lieu thereof), then either party may
terminate this Lease by giving written notice of termination to the other party
within thirty (30) days after such condemnation, in which event this Lease shall
terminate effective as of the date that possession of such property is required
to be delivered to the condemning authority. If this Lease so terminates, Rent
shall be paid through and apportioned as of the date of such condemnation. If
such condemnation does not render the Premises or the Building untenantable, or
if such condemnation affects the Common Areas but not the Premises, and after
such condemnation Landlord shall have sufficient Common Areas in the Project to
enable it to meet all of its obligations to tenants of the Project, including
Tenant, this Lease shall continue in effect and Landlord shall promptly restore
the portion not condemned to the extent reasonably possible to the condition
existing prior to the condemnation and Tenant shall be entitled to an abatement
of Rent based on the extent of Tenant's impairment of the use of its Premises.
In such event, however, Landlord shall not be required to expend an amount in
excess of the proceeds received by Landlord from the condemning authority.
Landlord reserves all rights to compensation for any condemnation, except for
such amount the condemning authority attributes to the value of Tenant's
leasehold interest in the Premises and relocation expenses, but only to the
extent that any such award to Tenant does not reduce the amount payable to
Landlord on account of such condemnation. Tenant hereby assigns to Landlord
any right Tenant may have to such compensation, and Tenant shall make no claim
against Landlord or the condemning authority for compensation for termination of
Tenant's leasehold interest under this Lease or interference with Tenant's
business.
13. ASSIGNMENT AND SUBLETTING
a. Landlord's Consent. Tenant shall not, without the prior written
-------------------
consent of Landlord, which shall not be unreasonably withheld: i. assign,
convey, mortgage or otherwise transfer this Lease or any interest hereunder, or
sublease the Premises, or any part thereof, whether voluntarily or by operation
of law; or ii. permit the use of the Premises by any person other than Tenant
and its employees. Any such transfer, sublease or use described in the
preceding sentence (a "Transfer") occurring without the prior written consent of
Landlord shall be void and of no effect. Landlord's consent to any Transfer
shall not constitute a waiver of Landlord's right to withhold its consent to any
future Transfer. Landlord's consent to any Transfer or acceptance of rent from
any party other than Tenant shall not release Tenant from any covenant or
obligation under this Lease. Landlord may require as a condition to its consent
to any assignment of this Lease that the assignee execute an instrument in which
such assignee assumes the obligations of Tenant hereunder. For the purposes of
this paragraph, however, the transfer (whether direct or indirect) of all or a
majority of the capital stock in a corporate Tenant (other than the shares of
the capital stock of a corporate Tenant whose stock is publicly traded) or the
merger, consolidation or reorganization of such Tenant and the transfer of all
or any general partnership interest in any partnership Tenant shall not be
considered a Transfer, so long as the transferee of the Lease or any successor
or surviving entity shall have a net worth not less than the net worth of Tenant
as of the date of this Lease and shall otherwise agree in writing to be bound by
this Lease.
b. Standards for Consent. If Tenant desires the consent of Landlord to a
----------------------
Transfer, Tenant shall submit to Landlord, at least twenty (20) days prior to
the proposed effective date of the Transfer, a written notice which includes
such information as Landlord may reasonably require about the proposed Transfer
14
<PAGE>
and the transferee, together with a non-refundable processing fee in the amount
of five hundred dollars ($500.00). Tenant shall also pay all reasonable
attorneys' or other fees and expenses incurred by Landlord in connection with
any proposed Transfer, whether or not Landlord consents to such Transfer.
Landlord's consent or lack thereof shall be provided within twenty (20) days of
receipt of Tenant's notice. If Landlord shall not respond within such twenty
(20) day period, it shall be deemed to have consented to the proposed transfer.
Landlord shall not be deemed to have unreasonably withheld its consent if, in
the judgment of Landlord: i. the transferee is of a character or engaged in a
business which is not in keeping with the standards or criteria used by Landlord
in leasing the Building; ii. the financial condition of the transferee is such
that it may not be able to perform its obligations in connection with this
Lease; iii. the transferee is a tenant of or negotiating for space in the
Building; iv. the transferee is a governmental unit; v. Tenant is in Default
under this Lease; or vi. in the judgment of Landlord, such a Transfer would
violate any term, condition, covenant, or agreement of the Landlord involving
the Building or any other tenant's lease within it. If Landlord wrongfully
withholds its consent to any Transfer, Tenant's sole and exclusive remedy
therefor shall be to seek specific performance of Landlord's obligation to
consent to such Transfer.
c. Recapture. If Landlord consents to any Transfer, Tenant shall pay
----------
to Landlord fifty percent (50%) of all rent and other consideration received by
Tenant in excess of the Rent paid by Tenant hereunder for the portion of the
Premises so transferred. Such rent shall be paid as and when received by Tenant.
Tenant shall have the right to deduct from such excess rent, on a pro-rata
basis, Tenant's reasonable costs and expenses directly related to the Transfer
including, but not limited to, broker's commissions, tenant improvements, and
legal fees.
14. SURRENDER
Upon expiration or sooner termination of the Term or Tenant's right to
possession of the Premises, Tenant shall return the Premises to Landlord in
substantially the same order and condition when received, except for, ordinary
wear and damage by fire or other casualty or any other damage that Tenant has no
obligation to repair. Tenant shall remove any of the initial improvements
required to be removed pursuant to Exhibit B hereof, at its sole costs and
---------
expense, prior to the surrender of the Premises, and restore any areas damaged
by such removal to a reasonably good condition consistent with the required
condition of the balance of the Premises under this paragraph. If Landlord
requires Tenant to remove any alterations pursuant to Section 9, then such
removal shall be done in a good and workmanlike manner; and upon such removal
Tenant shall restore the Premises to its condition prior to the installation of
such alterations. If Tenant does not remove such alterations after request to do
so by Landlord, Landlord may remove the same and restore the Premises; and
Tenant shall pay the cost of such removal and restoration to Landlord upon
demand. Tenant shall also remove its furniture, equipment, trade fixtures and
all other items of personal property from the Premises prior to termination of
the Term or Tenant's right to possession of the Premises. If Tenant does not
remove such items, Tenant shall be conclusively presumed to have conveyed the
same to Landlord without further payment or credit by Landlord to Tenant; or at
Landlord's sole option such items shall be deemed abandoned, in which event
Landlord may cause such items to be removed and disposed of at Tenant's expense,
which shall be 115% of Landlord's actual cost of removal, without notice to
Tenant and without obligation to compensate Tenant.
15. DEFAULTS AND REMEDIES
a. Default. The occurrence of any of the following shall constitute
--------
a default (a "Default") by Tenant under this Lease: (i) Tenant fails to pay any
Rent when due, including, without limitation, Adjustment Rent, and such failure
is not cured within three (3) business days after notice from Landlord (which
notice may be in the form of a statutory notice to pay rent or quit); (ii)
Tenant fails to perform any other provision of this Lease and such failure is
not cured within thirty (30) days (or immediately if the failure involves a
hazardous condition) after notice from Landlord (unless the nature of the
default is such that it cannot reasonably be cured in thirty (30) days, in which
event Tenant shall not be in Default so long as Tenant commences the cure within
thirty (30) days and thereafter diligently prosecute the cure to completion);
(iii) the leasehold interest of Tenant is levied upon or attached under process
of law; (iv) Tenant abandons the Premises; or (v) any voluntary or involuntary
proceedings are filed by or against Tenant or any guarantor of this Lease under
any bankruptcy, insolvency or similar laws and, in the case of any involuntary
proceedings, are not dismissed within thirty (30) days after any filing by
Tenant or sixty (60) days after any involuntary filing.
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b. Remedies Upon Tenant's Default. Upon a Default, Landlord shall
-------------------------------
have the following remedies, in addition to all other rights and remedies
provided by law, equity, statute or otherwise provided in this Lease, to which
Landlord may resort cumulatively or in the alternative:
Landlord may continue this Lease in full force and effect, and this Lease shall
continue in full force and effect as long as Landlord does not terminate
Tenant's right to possession, and Landlord shall have the right to collect Rent
when due. During the period Tenant is in default, Landlord may enter the
Premises and relet it, or any part of it, to third parties for Tenant's account,
provided that any Rent in excess of the Rent due hereunder shall be payable to
Landlord, but shall be applied to Tenant's obligations hereunder. Tenant shall
be liable immediately to Landlord for all costs Landlord incurs in reletting the
Premises, including, without limitation, brokers' commissions, expenses of
cleaning and redecorating the Premises required by the reletting and like costs.
Reletting may be for a period shorter or longer than the remaining Term of this
Lease. Tenant shall pay to Landlord the Rent and other sums due under this
Lease on the dates the Rent is due, less the Rent and other sums Landlord
receives from any reletting. No act by Landlord allowed by this Section 15.b
------------
shall terminate this Lease unless Landlord notifies Tenant in writing that
Landlord elects to terminate this Lease.
"THE LESSOR HAS THE REMEDY DESCRIBED IN CIVIL CODE SECTION 1951.4
(LESSOR MAY CONTINUE THE LEASE IN EFFECT AFTER LESSEE'S BREACH OR
ABANDONMENT AND RECOVER RENT AS IT BECOMES DUE, IF LESSEE HAS THE RIGHT TO
SUBLET OR ASSIGN SUBJECT ONLY TO REASONABLE LIMITATIONS)."
Landlord may terminate Tenant's right to possession of the Premises at any time
by giving written notice to that effect. No act by Landlord other than giving
written notice to Tenant shall terminate this Lease. Acts of maintenance,
efforts to relet the Premises or the appointment of a receiver on Landlord's
initiative to protect Landlord's interest under this Lease shall not constitute
a termination of Tenant's right to possession. On termination, Landlord shall
have the right to remove all personal property of Tenant and store it at
Tenant's cost and to recover from Tenant as damages: (1) the worth at the time
of award of unpaid Rent and other sums due and payable which had been earned at
the time of termination; plus (2) the worth at the time of award of the amount
by which the unpaid Rent and other sums due and payable which would have been
payable after termination until the time of award exceeds the amount of the Rent
loss that Tenant proves could have been reasonably avoided; plus (3) the worth
at the time of award of the amount by which the unpaid Rent and other sums due
and payable for the balance of the Term after the time of award exceeds the
amount of the Rent loss that Tenant proves could be reasonably avoided; plus (4)
any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform Tenant's obligations under
this Lease, or which, in the ordinary course of things, would be likely to
result therefrom, including, without limitation, any costs or expenses incurred
by Landlord: (a) in retaking possession of the Premises, including reasonable
attorneys' fees and costs therefor; (b) maintaining or preserving the Premises
for reletting to a new tenant, including repairs or alterations to the Premises
for the reletting; (c) leasing commissions attributable to the new lease; (d)
any other costs necessary or appropriate to relet the Premises; and (e) at
Landlord's election, such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by the laws of the State of
California.
The "worth at the time of award" of the amounts referred to in Sections 15.b (1)
-----------------
and (2) is computed by allowing interest at the lesser of twelve percent (12%)
- -------
per annum or the maximum rate permitted by law, on the unpaid Rent and other
sums due and payable from the termination date through the date of award. The
"worth at the time of award" of the amount referred to in Section 15.b.3 is
--------------
computed by discounting the amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award, plus one percent (1%). Tenant
waives redemption or relief from forfeiture under California Code of Civil
Procedure Sections 1174 and 1179, or under any other present or future law, if
Tenant is evicted or Landlord takes possession of the Premises by reason of any
default of Tenant hereunder.
c. Other Remedies. Landlord may but shall not be obligated to
---------------
perform any obligation of Tenant under this Lease and if Landlord so elects, all
costs and expenses paid by Landlord in performing such obligation, together with
interest at the Default Rate, shall be reimbursed by Tenant to Landlord on
demand. Any and all remedies set forth in this Lease: (i) shall be in addition
to any and all other remedies Landlord may have at law or in equity, (ii) shall
be cumulative, and (iii) may be pursued successively or concurrently as Landlord
may elect. The exercise of any remedy by Landlord shall not be deemed an
election of remedies or preclude Landlord from exercising any other remedies in
the future.
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<PAGE>
d. Bankruptcy. If Tenant becomes bankrupt, the bankruptcy trustee
-----------
shall not have the right to assume or assign this Lease unless the trustee
complies with all requirements of the United States Bankruptcy Code; and
Landlord expressly reserves all of its rights, claims, and remedies thereunder.
e. Waiver of Trial by Jury. Landlord and Tenant waive trial by jury
------------------------
in the event of any action, proceeding or counterclaim brought by either
Landlord or Tenant against the other in connection with this Lease.
f. Counterclaims. Tenant hereby waives the right to interpose any
--------------
counterclaim in any proceeding instituted by Landlord against Tenant to
terminate the Lease, to obtain possession of the Premises, or to recover Rent.
g. Venue. If either Landlord or Tenant desires to bring an action
------
against the other in connection with this Lease, such action shall be brought in
the federal or state courts located in the state in which the Building in
located. Landlord and Tenant consent to the jurisdiction of such courts and
waive any right to have such action transferred from such courts on the grounds
of improper venue or inconvenient forum.
16. HOLDING OVER
If Tenant retains possession of the Premises after the expiration or termination
of the Term or Tenant's right to possession of the Premises, Tenant shall pay
Rent during such holding over at one hundred fifty percent (150%) the rate in
effect immediately preceding such holding over computed on a monthly basis for
each month or partial month that Tenant remains in possession. Tenant shall also
pay, indemnify and defend Landlord from and against all claims and damages,
consequential as well as direct, sustained by reason of Tenant's holding over.
The provisions of this Section do not waive Landlord's right of re-entry or
right to regain possession by actions at law or in equity or any other rights
hereunder, and any receipt of payment by Landlord shall not be deemed a consent
by Landlord to Tenant's remaining in possession or be construed as creating or
renewing any lease or right of tenancy between Landlord and Tenant.
17. SECURITY DEPOSIT
a. On or before the Commencement Date, Tenant shall deliver to
Landlord cash or a letter of credit having a term of at least one year (the
"Letter of Credit") in an amount equal to the amounts expended by Landlord for
leasing commissions and the amount reimbursed to Tenant for Tenant Improvements
to be made pursuant to Exhibit B hereto, which amount is estimated by Landlord
---------
to be approximately $196,762. Any Letter of Credit shall be reduced by 1/5 on
each anniversary of the Commencement Date, provided when the balance shall be
reduced to $34,848 (the "Minimum Balance") or less, Tenant shall deliver cash in
the amount of the Minimum Balance in lieu of the Letter of Credit and the Letter
of Credit shall be returned to Tenant. If the Letter of Credit is replaced with
cash in excess of the Minimum Balance and the conditions to a reduction of the
security shall have been met, then the amount of cash security shall be reduced
on each anniversary of the Commencement Date to the amount of the Letter of
Credit that would otherwise be required hereunder, and any excess shall be
promptly refunded to Tenant. While any Letter of Credit is outstanding: 1.
Tenant shall replace the letter of credit at least thirty (30) days before the
due date thereof, and if Tenant does not do so, Landlord shall be entitled to
draw on the Letter of Credit for the full amount thereof and shall hold the
proceeds thereof until applied as provided herein, or until Tenant delivers to
Landlord a substitute Letter of Credit ; 2. the issuing bank and the form of the
Letter of Credit shall be satisfactory to Landlord in its sole discretion; 3. if
Landlord shall transfer the property, Tenant shall, provided Landlord shall
agree as a condition to Tenant's obligation hereunder to replace such Letter of
Credit, to return any superseded Letter of Credit to Tenant, cause its bank to
issue a replacement letter of credit or amendment to any existing Letter of
Credit naming the new owner as beneficiary, and if it fails to do so within ten
(10) business days after Landlord's request therefor, Landlord is authorized to
cash the Letter of Credit and deliver the proceeds thereof to any successor
owner, to be applied as provided herein; and 4) the Letter of Credit shall be
security for Tenant's timely performance of its obligations hereunder, and if a
default shall occur under the Lease, Landlord may cash the Letter of Credit and
apply the proceeds thereof as described in the next succeeding subsection of
this Paragraph.
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b. The Letter of Credit and any cash held by Landlord pursuant to
the preceding subsection of this Paragraph (the "Security Deposit") shall be
security for the performance of Tenant's obligations under this Lease. Upon the
occurrence of a Default, Landlord may use all or any part of the Security
Deposit for the payment of any Rent or for the payment of any amount which
Landlord may pay or become obligated to pay by reason of such Default, or to
compensate Landlord for any loss or damage which Landlord may suffer by reason
of such Default. If any portion of the Security Deposit is used, Tenant shall
within five (5) business days after written demand therefor deposit cash with
Landlord in an amount sufficient to restore the Security Deposit to its original
amount. Landlord shall not be required to keep the Security Deposit separate
from its general funds, and Tenant shall not be entitled to interest on the
Security Deposit, except to the extent required by law. In no event shall the
Security Deposit be considered an advanced payment of Rent, and in no event
shall Tenant be entitled to use the Security Deposit for the payment of Rent.
The Security Deposit or any balance thereof after applying said security deposit
to the obligations of Tenant under this Lease, shall be returned to Tenant
within thirty (30) days after the expiration of the Term and vacation of the
Premises by Tenant. Landlord shall have the right to transfer the Security
Deposit to any purchaser of the Building. Upon transfer of the Security Deposit,
Tenant shall look solely to such purchaser for return of the Security Deposit;
and Landlord shall be relieved of any liability with respect to the Security
Deposit.
18. [INTENTIONALLY DELETED]
19. ESTOPPEL CERTIFICATE
a. Tenant shall within ten (10) business days following written request
by Landlord:
1. Execute and deliver to Landlord any documents, including estoppel
certificates, in the form prepared by Landlord:
(i) certifying that this Lease is unmodified and in full force
and effect or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is
in full force and effect, and the date to which the rent and
other charges are paid in advance, if any; and
(ii) acknowledging that there are not, to Tenant's knowledge, any
uncured defaults on the part of Landlord hereunder, or if there
are uncured defaults on the part of the Landlord, stating the
nature of such uncured defaults; and
(iii) evidencing the status of the Lease as may be required
either by a lender making a loan to Landlord to be secured by
deed of trust or mortgage covering the Premises or a purchaser of
the Property from Landlord.
Tenant's failure to deliver an estoppel certificate within ten
(10) business days after delivery of Landlord's written request
therefor shall be conclusive upon Tenant:
(x) that this Lease is in full force and effect, without
modification except as may be represented by Landlord;
(y) that there are then no uncured defaults in Landlord's
performance; and
(z) that no rent has been paid in advance.
b. Landlord shall, within twenty (20) days following written request by
Tenant execute and deliver to Tenant an estoppel certificate in a form
reasonably satisfactory to Landlord certifying (i) that this Lease is unmodified
and in full force and effect or, if modified, stating the nature of such
modification, and (ii) acknowledging that there are not, to Landlord's
knowledge, any uncured defaults on the part of Tenant hereunder, or if there are
uncured defaults on the part of the Landlord, stating the nature of such uncured
defaults.
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20. SUBORDINATION
This Lease is and shall be expressly subject and subordinate at all times to (i)
any ground or underlying lease of the Building, now or hereafter existing, and
all amendments, renewals and modifications to any such lease, and (ii) the lien
of any mortgage or trust deed now or hereafter encumbering fee title to the
Building and/or the leasehold estate thereunder, and all amendments, renewals,
modifications and extensions thereof unless such ground lease or ground lessor,
mortgage or mortgagee, or trust deed or trustee or beneficiary, expressly
provides or elects that the Lease shall be superior to such lease, mortgage, or
trust deed. Without limiting the foregoing, such subordination may be effected
by notice by any ground lessor, mortgagee, trustee or beneficiary to Tenant, or
by a unilateral instrument of subordination executed by such mortgagee, trustee,
or ground lessor and recorded in the records of the county in which the Building
is located, without the necessity of written notice to or further agreement of
Tenant. If any such mortgage or trust deed is foreclosed, or if any such ground
lease is terminated, upon request of the mortgagee, holder or lessor, as the
case may be and regardless of whether such mortgagee or lessee shall have
subordinated its interest to the interest of Tenant under this Lease, Tenant
will attorn to the purchaser at the foreclosure sale or to the lessor under such
lease, as the case may be on the terms and conditions contained in this Lease,
or shall execute a new lease with such purchaser at the foreclosure sale or to
the lessor under such lease, as the case may be, on all of the terms and
conditions contained in this Lease. The foregoing provisions are declared to be
self-operative and no further instruments shall be required to effect such
subordination and/or attornment; provided, however, that Tenant agrees upon
request by any such mortgagee, holder, lessor or purchaser at foreclosure, to
execute and deliver such subordination and/or attornment instruments as may be
required by such person to confirm such subordination and/or attornment, or any
other documents required to evidence superiority of the ground lease or
mortgage, should ground lessor or mortgagee elect such superiority, provided it
shall be a condition of Tenant's obligation to execute any such subordination
agreement that the beneficiary of such agreement agree in the same agreement
that in the event of a foreclosure, such beneficiary shall recognize the Lease
and Tenant's right to posses the Premises shall not be disturbed so long as it
shall not be in Default under this Lease. If Tenant fails to execute and
deliver any instrument or document required under this paragraph, within ten
(10) days after request, Tenant shall be deemed to have irrevocably appointed
Landlord and Landlord's beneficiaries as Tenant's attorneys-in-fact to execute
and deliver such instrument or document in Tenant's name.
21. QUIET ENJOYMENT
Landlord represents that it has the authority to enter into this Lease. As long
as no Default exists, Tenant shall peacefully and quietly have and enjoy the
Premises for the Term, free from interference by Landlord, subject, however, to
the provisions of this Lease. The loss or reduction of Tenant's light, air or
view will not be deemed a disturbance of Tenant's occupancy of the Premises nor
will it affect Tenant's obligations under this Lease or create any liability of
Landlord to Tenant.
22. BROKER
Tenant represents to Landlord that Tenant has dealt only with the broker(s) set
forth in Item 7 of the Schedule (collectively, the "Broker") in connection with
------
this Lease and that, insofar as Tenant knows, no other broker negotiated this
Lease or is entitled to any commission in connection herewith. Tenant agrees to
indemnify, defend and hold Landlord and Landlord's beneficiaries and agents
harmless from and against any claims for a fee or commission made by any broker,
other than the Broker, claiming to have acted on behalf of Tenant in connection
with this Lease. Landlord agrees to pay the Broker a commission in accordance
with a separate agreement between Landlord and the Broker.
23. NOTICES
All notices and demands to be given by one party to the other party under this
Lease shall be given in writing, mailed or delivered to Landlord or Tenant, as
the case may be, at the address set forth in the Schedule or at such other
address as either party may hereafter designate. Notices shall be delivered by
hand or by United States certified or registered mail, postage prepaid, return
receipt requested, or by a nationally recognized overnight air courier service.
Notices shall be considered to have been given upon actual receipt or refusal
of delivery.
19
<PAGE>
24. MISCELLANEOUS
a. Successors and Assigns. Subject to Section 14 of this Lease, each
-----------------------
provision of this Lease shall extend to, bind and inure to the benefit of
Landlord and Tenant and their respective legal representatives, successors and
assigns; and all references herein to Landlord and Tenant shall be deemed to
include all such parties. The term "Landlord" as used in this Lease, so far as
covenants or obligations on the part of Landlord are concerned, shall be limited
to mean only the owner or owners of the Building at the time in question.
b. Entire Agreement. This Lease, and the riders and exhibits, if any,
-----------------
attached hereto which are hereby made a part of this Lease, represent the
complete agreement between Landlord and Tenant; and Landlord has made no
representations or warranties except as expressly set forth in this Lease. No
modification or amendment of or waiver under this Lease shall be binding upon
Landlord or Tenant unless in writing signed by Landlord and Tenant.
c. Time of Essence. Time is of the essence of this Lease and each and
----------------
all of its provisions.
d. Execution and Delivery. Submission of this instrument for examination
-----------------------
or signature by Tenant does not constitute a reservation of space or an option
for lease, and it is not effective until execution and delivery by both Landlord
and Tenant. Execution and delivery of this Lease by Tenant to Landlord shall
constitute an irrevocable offer by Tenant to lease the Premises on the terms and
conditions set forth herein, which offer may not be revoked for fifteen (15)
days after such delivery.
e. Severability. The invalidity or unenforceability of any provision of
-------------
this Lease shall not affect or impair any other provisions.
f. Governing Law. This Lease shall be governed by and construed in
--------------
accordance with the laws of the state in which the Building is located.
g. Attorneys' Fees. In the event of a litigation arising out of this
----------------
Lease, the prevailing party shall be entitled to be paid all costs and expenses,
including reasonable attorneys' fees, incurred by such party in any such action.
h. Delay in Possession. In no event shall Landlord be liable to Tenant
--------------------
if Landlord is unable to deliver possession of the Premises to Tenant on the
Commencement Date for causes outside Landlord's reasonable control. If Landlord
is unable to deliver possession of the Premises to Tenant by the Commencement
Date, the Commencement Date shall be deferred until Landlord can deliver
possession to Tenant. If the Commencement Date is so delayed and as a result
would occur on a day other than the first day of the month; (i) the Commencement
Date shall be further delayed until the first day of the following month, (ii)
Tenant shall be allowed to take occupancy of the Premises prior to the
Commencement Date, subject to all of the terms and conditions of this Lease and
shall pay the pro-rata Rent for such partial month, and (iii) the Expiration
Date shall be extended so that the Term will continue for the full period
contemplated in the Schedule.
i. Joint and Several Liability. If Tenant is comprised of more than one
----------------------------
party, each such party shall be jointly and severally liable for Tenant's
obligations under this Lease.
j. Force Majeure. Landlord shall not be in default hereunder and Tenant
--------------
shall not be excused from performing any of its obligations hereunder if
Landlord is prevented from performing any of its obligations hereunder due to
any accident, breakage, strike, shortage of materials, acts of God or other
causes beyond Landlord's reasonable control ("Force Majeure").
k. Captions. The headings and titles in this Lease are for convenience
---------
only and shall have no effect upon the construction or interpretation of this
Lease.
l. No Waiver. No receipt of money by Landlord from Tenant after
----------
termination of this Lease or after the service of any notice or after the
commencing of any suit or after final judgment for possession of the Premises
shall renew, reinstate, continue or extend the Term or affect any such notice or
suit. No waiver
20
<PAGE>
of any default of Tenant shall be implied from any omission by Landlord to take
any action on account of such default if such default persists or is repeated,
and no express waiver shall affect any default other than the default specified
in the express waiver and then only for the time and to the extent therein
stated.
m. Limitation of Liability. Any liability of Landlord under this Lease
------------------------
shall be limited solely to its interest in the Project (including sale proceeds,
insurance proceeds and current rents), and in no event shall any personal
liability be asserted against Landlord in connection with this Lease nor shall
any recourse be had to any other property or assets of Landlord.
25. PARKING
Tenant shall have the right to park in the Building's parking
facilities in common with other tenants of the Building upon terms and
conditions, including imposition of a reasonable parking charge, as may from
time to time be established by Landlord, provided Tenant shall have at least 109
spaces allocated to it. Tenant acknowledges that parking is currently on a
first-come, first-served basis. Tenant agrees not to use in excess of the
number of spaces allocated to it and agrees to cooperate with Landlord and other
tenants in the use of the parking facilities. Landlord reserves the right, in
its absolute discretion, to determine whether the parking facilities are
becoming crowded and to allocate and assign parking spaces among Tenant and the
other tenants, so long as the number of spaces allocated to Tenant shall not be
reduced unless Landlord is required by law to do so. Landlord shall not be
liable to Tenant, nor shall this Lease be affected, if any parking is impaired
by moratorium, initiative, referendum, law, ordinance, regulation or order
passed, issued or made by any governmental or quasi-governmental body.
26. SIGNAGE
Tenant shall be entitled to a monument sign identifying its Premises
of a size and configuration consistent with the character of the Project and any
other signs in the Project, provided the sign shall be reasonably visible from
Highway 101 and provided further that the final plans relating to any such
monument sign shall be approved by Landlord in its reasonable discretion.
IN WITNESS WHEREOF, the parties hereto have executed this Lease in manner
sufficient to bind them as of the day and year first above written.
LANDLORD:
--------
VOIT MANAGEMENT COMPANY, L.P., Managing
Agent for THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA, a New Jersey Corporation
By: Mary Davis
----------
Title: Vice President
----------------
TENANT:
------
SILICON GAMING, INC. a California corporation
By: Thomas E. Carlson
------------------
Title: Vice President & CFO
----------------------
21
<PAGE>
EXHIBIT A
TO LEASE DATED
January __, 1997
Between Prudential
and Silicon Gaming, Inc.
SITE PLAN
(Site plan shown for the Mountain View, CA facility)
22
<PAGE>
EXHIBIT B
TO LEASE DATED
January __, 1997
Between Prudential
and Silicon Gaming, Inc.
TENANT IMPROVEMENTS CONSTRUCTION AGREEMENT
------------------------------------------
(Tenant Designs and Constructs with Landlord Supervision)
This Tenant Improvements Construction Agreement("Agreement") is part of the
Lease dated January __, 1997 between Prudential Insurance Company of America
and Silicon Gaming, Inc. ("Lease") relating to certain premises ("Premises")
which are more particularly described in Exhibit A of this Lease. Landlord and
---------
Tenant agree as follows with respect to the Tenant Improvements to be installed
in the Premises:
1. PLANS AND SPECIFICATIONS. Plans and specifications and Working Drawings
------------------------
sufficient for the construction of the Tenant Improvements to be installed
in the Premises (the "Drawings") shall be prepared by Tenant's Architect
("Architect") and submitted to Landlord. Within five (5) business days
after Drawings have been delivered to Landlord, Landlord shall reasonably
approve or disapprove the preliminary plans and specifications, provided
Landlord shall specify in writing any objections it shall have to the
Drawings. If Landlord fails to disapprove the Drawings, within five (5)
business days after delivery thereof to Landlord, the Drawings shall be
deemed approved. If Landlord reasonably disapproves the Drawings,
Landlord shall, in its notice of disapproval, provide sufficient
information to Architect so that revised Drawings can be prepared. If
Landlord and Tenant shall disagree on any aspect of the Drawings, Landlord
and Tenant will meet and promptly attempt to resolve any differences.
Architect shall revise the Drawings based on Landlord's suggested changes
or the changes agreed between Landlord and Tenant, and resubmit the revised
Drawings until the parties are able to agree on the final form of Drawings.
The parties will agree on the final form of Drawings within twenty (20)
business days of the date of Architect's initial submittal, provided in any
and all events Landlord shall have at least three (3) business days to
review and respond to the final version of the Drawings. The working
drawings and specifications which have been approved by Landlord and Tenant
are hereinafter referred to as the "Approved Working Drawings." At the
time of final approval of the Working Drawings, Landlord shall specify
which of the improvements shown on the Working Drawings shall be required
to be removed by Tenant at Tenant's sole costs, upon the expiration of the
Term and/or surrender of the Premises.
2. CONSTRUCTION OF TENANT IMPROVEMENTS.
-----------------------------------
A. Tenant Improvement Allowance. Tenant shall be granted an allowance
----------------------------
in the amount of $ 72,000.00 ($2.50/rsf) to be applied for the
purposes provided in this Agreement (the "Tenant Improvement
Allowance").
B. Construction by Tenant. Tenant shall cause construction of the
----------------------
Tenant Improvements to be completed in a good and workmanlike manner,
in compliance with all laws, including, without limitation, the
Americans with Disabilities Act, and at Tenant's sole cost and
expense (except for the items to be completed by Landlord hereunder),
subject to the payment of the Tenant Improvement Allowance. Tenant
shall competitively bid the work to be completed hereunder to at least
two (2) general contractors reasonably satisfactory to Landlord, and
shall select the lowest bid, after adjusting the assumptions of each
bid to provide an "apples to apples" comparison of cost. The final
Construction Contract, including, without limitation, the schedule of
progress payments and the amount of retention provided therein shall
be subject to the reasonable approval of Landlord. The Tenant
Improvements cost ("Tenant Improvements Cost") to be paid by Landlord,
up to the Tenant Improvement Allowance shall include, but not be
limited to:
(i) Costs to demolish the existing Tenant Improvements and
fixtures on each floor;
23
<PAGE>
(ii) Costs of any structural or ADA upgrades required as a result
of Tenant's construction, but excluding any costs repair of any
patent or latent structural defects or of ADA compliance that
are the responsibility of Landlord under the Lease;
(iii) All costs of preliminary and final architectural and
engineering plans, drawings and specifications for the Tenant
Improvements, and engineering costs and calculations;
(iv) All costs of obtaining building permits and other necessary
authorizations from the applicable governmental authority
(e.g., the City in which the Building is located);
----
(v) All costs of interior design and finish schedule plans,
drawings and specifications including as-built drawings;
(vi) All direct and indirect costs of procuring and installing
Tenant Improvements in the Premises, including the contractor's
fee for overhead and profit, the cost of all of contractor's
on-site supervisory and administrative staff, office, equipment
and temporary services provided in connection with construction
of the Tenant Improvements;
(vii) Costs of installing telecommunications and electrical
facilities, equipment and wiring necessary for Tenant's use and
costs of reinforcing floors if required in connection with the
particular proposed improvements to be constructed by Tenant
and not otherwise generally required by code, but not
structural seismic improvements, which shall be made by
Landlord, unless the Premises are in compliance with seismic
requirements as of the date Tenant commences its construction
and such upgrade is required as a result of a specific
improvement Tenant proposes to make pursuant to the Tenant
Improvement Construction Agreement, in which case Tenant shall
bear the cost of such upgrade;
(viii) Sewer connection fees, if any;
(ix) A supervision Fee payable to Landlord in the amount of two
percent (2%) of the total construction cost;
(x) Fire and Builder's All-Risk insurance and public liability
insurance premiums and fees; and
(xi) Tenant's moving costs and the costs to cable the Premises
for telephone and electrical service.
3. PAYMENT OF TENANT IMPROVEMENT COSTS. Tenant shall on or after the date of
-----------------------------------
substantial completion of the work, present Landlord with a request for
payment in an amount not to exceed the Tenant Improvement Allowance.
Together with such request for payment, Tenant shall provide (a) a
certificate of the Architect certifying the completion of the Tenant
Improvements in accordance with the Approved Working Drawings; (b) invoices
covering all items for which payment is requested; (c) unconditional, final
waivers of lien from the Contractor and each subcontractor or materials
supplier to be paid in connection with the work, covering the work
performed by such contractor subcontractor or materials supplier who shall
supply in excess of $5,000 of materials and/or services to the Work; (d)
reasonably detailed working drawings showing the final improvements
constructed by Tenant and (e) a conditional certificate of occupancy
authorizing Tenant to occupy the Premises. If Tenant shall fail to provide
full and final unconditional waivers of lien for the contractor and all
subcontractors and material suppliers performing work or supplying
materials in connection with the work, Landlord may withhold payment of the
Tenant allowance until such time as the period for the filing of any liens
in connection with the work has expired. Otherwise, Landlord shall pay the
amount requested within twenty (20) days after Tenant's submittal of its
request for payment, together with all supporting
24
<PAGE>
information. If Tenant prepares final "as-built" plans and specifications,
it shall cause a copy thereof to be prepared for Landlord and shall deliver
such copy to Landlord promptly after Tenant's receipt thereof. If Tenant
shall not have requested disbursement of the Tenant Improvement Allowance
within one hundred twenty (120) days after the execution of the
Commencement Date Memorandum, Landlord shall have no further obligation to
fund or credit any remaining Tenant Improvement Allowance to Tenant.
4. [INTENTIONALLY DELETED]
5. CHANGE REQUESTS. No material changes to the Approved Working Drawings
---------------
shall be made without Landlord's prior approval, which approval shall not
be unreasonably withheld or delayed beyond five (5) business days;
provided, however, that no change request shall affect the structure of the
Building and provided further if such change request is not disapproved by
Landlord within said five (5) business day period, it will be deemed
approved . Any changes to the Approved Working Drawings shall be in
writing and shall be signed by both Landlord and Tenant prior to the change
being made.
6. COOPERATION. Landlord and Tenant shall cooperate and diligently assist the
-----------
architect, engineer or space planner in completing the Approved Working
Drawings and specifications and the Contractor in completing construction
of the Tenant Improvements. Tenant shall comply with Landlord's reasonable
requirements in connection with the scheduling and conduct of the work in
order to minimize an disruption to the operation of the Building.
7. RENT COMMENCEMENT DATE. The "Commencement Date" of this Lease shall be the
----------------------
earlier of (a) March 1, 1997, (b) the date of substantial completion of the
Premises or (c) the date that Tenant shall commence its business
operations from Premises. As used herein (and throughout the lease), the
term "substantial completion" shall mean the date on which all of the
following have occurred: (i) the work contemplated has been completed
substantially in accordance with the plans and specifications therefor in
a good and workmanlike manner and in compliance with applicable laws and
(ii) a certificate of occupancy or other governmental approval shall have
been issued which shall permit the legal occupancy of the Premises. The
Commencement Date with respect to any portion of the Premises covered under
this paragraph shall be deferred for one (1) day for each day of Landlord
Delay, if any Landlord Delay shall occur. The parties shall execute a
Commencement Date Memorandum in the form of Exhibit C to this Lease to
---------
confirm the Commencement Date of the Lease.
8. LANDLORD DELAY. The term "Landlord Delay" as used in this Lease shall
--------------
mean any delay in the completion of work which is due to any act or
omission of Landlord (wrongful, negligent or otherwise), its employees,
agents or contractors (including acts or omissions while acting as agent or
contractor for Tenant). The term Landlord Delay shall include, but shall
not be limited to, any of the following, to the extent that such act or
omission of Landlord actually delays Tenant in the completion of the Tenant
Improvements: (i) delay in the giving of authorizations or approvals by
Landlord beyond any period specified in the Lease; (ii) delay attributable
to the acts or failure to act, whether willful, negligent or otherwise, of
Landlord, its agents or contractors, where such acts or failures to act
delay the completion of the Tenant Improvements; or (iii) delay
attributable to the interference of Landlord, its agents or contractors
with the completion of the Tenant Improvements or the failure or refusal of
any such part to permit Tenant, its agents or contractors, access to and
use of the Building or any Building facilities or services, including
loading docks, which access and use are required for the orderly and
continuous performance of the work necessary to complete the Tenant
Improvements. Tenant shall give Landlord notice within five (5) days after
the alleged occurrence of a Landlord Delay, which notice shall reasonably
describe the nature and duration of the Landlord Delay, as a condition to
the occurrence of a Landlord Delay, or it shall waive any right to assert a
Landlord Delay.
9. [INTENTIONALLY DELETED]
10. INDEMNITY. Tenant shall at all times after delivery of the Premises to
---------
Tenant, during construction and prior to the Commencement Date, comply with
any and all provisions of the Lease, except the obligation to pay Rent.
Tenant shall indemnify defend and hold harmless Landlord and its agents,
managers, employees, affiliates, subsidiaries, successors and assigns from
and against any and all losses, claims (liquidated or unliquidated),
damages, or expenses
25
<PAGE>
(including without limitation, attorney's fees and costs), arising out of
or in connection with the work contemplated by this Agreement. The
indemnity of Landlord by Tenant contained herein will survive termination
of the Lease.
26
<PAGE>
EXHIBIT C
TO LEASE DATED
January __, 1997
Between Prudential
and Silicon Gaming, Inc.
COMMENCEMENT DATE MEMORANDUM
----------------------------
Landlord: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA,
a New Jersey corporation
TENANT: SILICON GAMING , a California corporation
LEASE DATE: January __ ,1997
PREMISES: 685 Clyde Ave Mountain View, CA
Pursuant to Exhibit B of the above-referenced Lease, the Commencement Date
---------
hereby is established as ________________, 19__, and the Expiration Date is
hereby established as _______________________, 20__.
LANDLORD
VOIT MANAGEMENT COMPANY, L.P.,
Managing Agent for THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA, a New Jersey
Corporation
By: __________________________________
Its: _________________________________
TENANT
SILICON GAMING, INC. , a California corporation
By: __________________________________
______________________ [Print Name]
Its: _________________________________
27
<PAGE>
EXHIBIT D
TO LEASE DATED
January __, 1997
Between Prudential
and Silicon Gaming , Inc.
EXHIBIT D
---------
RULES AND REGULATIONS
---------------------
1. No sign, placard, picture, advertisement, name or notice shall be installed
or displayed on any part of the outside or inside of the Building without
the prior written consent of Landlord. Landlord shall have the right to
remove, at Tenant's expense and with prior notice, any sign installed or
displayed in violation of this rule.
2. Except as consented to in writing by Landlord or in accordance with
Building standard improvements, no draperies, curtains, blinds, shades,
screens or other devices shall be hung at or used in connection with any
window or exterior door or doors of the Premises. No awning shall be
permitted on any part of the Premises. Tenant shall not place anything
against or near glass partitions or doors or windows which may appear
unsightly from outside the Premises.
3. Tenant shall not obstruct any sidewalks, halls, lobbies, passages, exits,
entrances, elevators or stairways of the Building. No tenant and no
employee or invitee of any tenant shall go upon the roof of the Building or
make any roof or terrace penetrations, except for HVAC and maintenance
personnel.
4. If Tenant requires a burglar alarm or similar services, it shall first
obtain, and comply with, Landlord's instructions for their installation.
5. Tenant shall not place a load upon any floor of the Premises which exceeds
the maximum load per square foot which the floor was designed to carry (500
lbs./sq.in.) and which is allowed by law. Tenant's business machines and
mechanical equipment which cause noise or vibration which may be
transmitted to the structure of the Building or to any space therein, and
which is objectionable to Landlord or to any tenants in the Building, shall
be placed and maintained by Tenant, at Tenant's expense, on vibration
eliminators or other devices sufficient to eliminate noise or vibration.
6. Tenant shall not use or keep in the Premises any kerosene, gasoline or
inflammable or combustible fluid or material other than those limited
quantities necessary for the operation or maintenance of office equipment.
Tenant shall not use or permit to be used in the Premises any foul or
noxious gas or substance, or permit or allow the Premises to be occupied or
used in a manner unreasonably offensive or objectionable to Landlord or
other occupants of the Building by reason of noise, odors or vibrations.
No animal, except seeing eye dogs when in the company of their masters, may
be brought into or kept in the Building.
7. Tenant shall close and lock the doors of its Premises, shut off all water
faucets or other water apparatus and turn off all lights and other
equipment which is not required to be continuously run. Tenant shall be
responsible for any damage or injuries sustained by other tenants or
occupants of the Building or Landlord for noncompliance with this Rule.
8. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall
not be used for any purpose other than that for which they were
constructed, and no foreign substance of any kind whatsoever shall be
placed therein. The expense of any breakage, stoppage or damage resulting
from any violation of this rule shall be borne by the tenant who, or whose
employees or invitees, shall have caused it.
28
<PAGE>
9. Tenant shall not, without the prior written consent of Landlord, install
any radio or television antenna, loudspeaker or other device on the roof or
exterior walls of the Building. Tenant shall not interfere with radio or
television broadcasting or reception from or in the Building or elsewhere.
10. Following completion of the initial Tenant Improvements, Tenant shall not
affix any floor covering to the floor of the Premises in any manner except
as approved by Landlord unless Landlord's approval is not required under
the Lease. Tenant shall repair, or be responsible for the cost of repair
of any damage resulting from noncompliance with this Rule.
11. Tenant shall store all its trash and garbage in a separate designated area.
Tenant shall not place in any trash box or receptacle any material which
cannot be disposed of in the ordinary and customary manner of trash and
garbage disposal in a separate designated area.
12. Use by Tenant of Underwriters' Laboratory approved equipment for brewing
coffee, tea, hot chocolate and similar beverages and microwaving food shall
be permitted, provided that the equipment and use is in accordance with all
applicable federal, state, county and city laws, codes, ordinances, rules
and regulations.
13. Tenant shall not use the name of the Building in connection with or in
promoting or advertising the business of Tenant, except as Tenant's
address, without the written consent of Landlord.
14. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental
agency. Tenant shall be responsible for any increased insurance premiums
attributable to Tenant's use of the Premises, Building or Property.
15. Tenant assumes any and all responsibility for protecting its Premises from
theft and robbery, which responsibility includes keeping doors locked and
other means of entry to the Premises closed.
16. Tenant shall not use the Premises, or suffer or permit anything to be done
on, in or about the Premises, which may result in an increase to Landlord
in the cost of insurance maintained by Landlord on the Building and Common
Areas.
17. Tenant shall not park its vehicles in any parking areas designated by
Landlord as areas for parking by visitors to the Building or other reserved
parking spaces. Tenant shall not leave vehicles in the Building parking
areas overnight, except for medical vans, nor park any vehicles in the
Building parking areas other than automobiles, motorcycles, motor driven or
non-motor driven bicycles or four-wheeled trucks. Tenant, its agents,
employees and invitees shall not park any one (1) vehicle in more than one
(1) parking space.
18. Landlord may waive any one or more of these Rules and Regulations for the
benefit of Tenant or any other tenant, but no waiver by Landlord shall be
construed as a waiver of the Rules and Regulations in favor of Tenant or
any other tenant, nor prevent Landlord from thereafter enforcing the Rules
and Regulations against any or all of the tenants of the Building.
19. These Rules and Regulations are in addition to, and shall not be construed
to in any way modify or amend, in whole or in part, the terms, covenants,
agreements and conditions of any lease of premises in the Building.
20. Landlord reserves the right to make other reasonable Rules and Regulations
as, in its judgment, may from time to time be needed for safety and
security, for care and cleanliness of the Building and for the preservation
of good order therein. Tenant agrees to abide by all Rules and Regulations
herein above stated and any additional rules and regulations which are
adopted, provided that in the event of a conflict between the Rules and
Regulations, as amended, and the Lease, the provisions of the Lease shall
control.
21. Tenant shall be responsible for the observance of all of the foregoing
rules by Tenant's employees, agents, clients, customers, invitees and
guests.
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EXHIBIT 10.24
THE RIBEIRO CORPORATION
[LOGO OF This Lease made and entered into this 23RD day of JANUARY,
THE ---- -------
RIBEIRO 1997, by and between, JOHNNY RIBEIRO, hereinafter called
CORPORATION] -- --------------
"LESSOR", and SILICON GAMING, hereinafter called "LESSEE".
--------------
WITNESSETH:
DEMISED Lessor hereby leases, demises and lets unto Lessee, and Lessee
PREMISES hereby leases, hires and takes from Lessor those certain
premises hereinafter called the "Demised Premises," located in
that certain building (the "Building"), described as follows:
THAT CERTAIN 600 SQUARE FEET OF OFFICE SPACE AND 1,028 SQUARE
--------------------------------------------------------------
FEET OF WAREHOUSE SPACE LOCATED AT 5401 LONGLEY LANE, RENO,
--------------------------------------------------------------
NEVADA 89511 KNOWN AS UNITS #44 & 56 AS OUTLINED IN RED ON THE
--------------------------------------------------------------
ATTACHED PLAT MAP MARKED EXHIBIT "A".
--------------------------------------------------------------
This lease is made upon the following terms, covenants, and
conditions to which the parties hereby agree:
TERM 1. The term of this Lease shall commence WITHIN 10 DAYS OF
---------------------
SIGNED LEASE BEING RECEIVED IN RENO, and shall continue for a
-----------------------------------
term UNTIL 8-31-97 from and after said date of commencement. If
-------------
the Demised Premises require improvements to be constructed by
the Lessor prior to occupancy of the said premises by the
Lessee, said improvements shall be set out in "Exhibit A"
attached hereto, consisting of plans, specifications and
descriptions of the work to be performed prior to said date of
occupancy, together with the specification as to the cost of
such improvements and the party to bear such cost of
improvement. If, despite Lessor's best efforts, said premises,
as improved in accordance with the agreement of the parties, is
not delivered by Lessor on or before N/A, 19N/A, this Lease
--- ---
shall have no further force or effect and each party shall be
relieved of all obligations, each to the other, provided that
said date will be extended for a period equal to the time
construction has been delayed due to causes beyond the
reasonable control of Lessor.
RENTAL 2. (a) Lessee agrees to pay a Base Monthly Rental (plus any
excise, privilege or sales taxes or any tax levied on the
rentals or the receipt thereof, except Lessor's income tax) on
the first day of each calendar month throughout the demised term
without offset or deduction of any kind. Rental is to be paid in
lawful money of the United States of America, which shall be
legal tender at the time of payment of rents, as follows: ONE
-----
THOUSAND THREE HUNDRED FIFTY DOLLARS AND NO/100'S ($1,350.00)
---------------------------------------------------------------
PER MONTH
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(b) Lessee understands that the issuance of a check or draft
without. funds or with intent to defraud is a criminal offense
punishable by imprisonment or by a fine or both fine and
imprisonment.
(c) In, the event the term of this Lease commences other than on
the first day of a calendar month, or if the termination date is
not the last day of a month, a pro-rated monthly installment
shall be paid for the fractional month during which this Lease
commences and/or terminates. Payment of rent shall be made by
Lessee to Lessor at such addresses as shall from time to time be
designated by Lessor to Lessee in writing.
(d) If any payment of Base Monthly Rental is not received by
Lessor by the tenth (10th) day of the calendar month in which it
is due, then that Base Monthly Rental payment shall be increased
by five percent (5%). Accordingly, if received after the tenth
(10th) of the month, Base Monthly Rental shall be: ONE THOUSAND
-------------
FOUR HUNDRED SEVENTEEN DOLLARS AND 50/100'S ($1,417.50)
---------------------------------------------------------------
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Nothing in this Lease shall be construed to permit the payment
of rent after the date on which it is due. The parties hereby
agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late
payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's default with
respect to such overdue amount, nor excuse or cure any default
by Lessee under this Lease, nor prevent Lessor from excising any
of the other rights and remedies granted hereunder.
(e) "Rent", "Rental", "rent" or "rental" includes the Base
Monthly Rental and other sums as may be due from Lessee pursuant
to any of the provisions of this Lease, and any other sums, or
becoming payable to Lessor under this Lease.
(f) In the event a check comes back for non-sufficient funds, a
services fee of $25.00 will be assessed to the Lessee.
DEPOSIT 3. For and as additional consideration for the making of this
Lease, Lessee shall pay to Lessor, upon execution of the Lease,
the sum of: ONE THOUSAND THREE HUNDRED FIFTY DOLLARS AND
---------------------------------------------------
NO/100'S ($1,350.00), as a security deposit to insure Lessee's
--------------------
faithful performance of the terms, conditions, covenants, and
agreements of this Lease. The security deposit may not be
applied against rental payments by the Lessee. If the Lessee
fully complies with all the terms, conditions, covenants and
agreements of the Lease, then within thirty (30) days after the
expiration of the Lease term, and cleanup completed in
conjunction with Paragraph 33, the security deposit without
interest shall be refunded to Lessee (or, at Lessor's option at
the last permitted assignee of Lessee's interests hereunder)
less the reasonable value of damages suffered by the Lessor,
including but not limited to rental delinquencies, costs of
repairs, cleaning, lock and key change charges, and other
obligations of Lessee to Lessor.
TAXES, 4. (a) As additional rental, Lessee agrees to pay to Lessor in
INSURANCE & each year of the term of this lease a pro-rated amount equal
ASSESSMENTS to any rate increase of liability and casualty insurance
required by the insurance company upon the building and Demised
Premises in addition to an amount equal to any increases in
taxes, general or special assessments, improvements or
retrofitting expenses assessed by any federal, state or
municipal authority for the real property of which the Building
and Demised Premises are a part of. The pro-ration of the
insurance, taxes and assessments set forth above shall be based
upon the percentage of the total floor space of the Building and
Demised Premises, whether occupied or not, to the amount of
floor space being leased by Lessee. Such additional rental shall
be paid as soon as the amount thereof shall have been determined
and upon written demand therefore by Lessor to Lessee, with the
next succeeding installment of rental. Such additional rental
shall be pro-rated for the first and last years of the demised
term to reflect periods during either or both of said years not
included within the demised term.
(b) Lessee agrees to pay or cause to be paid, before
delinquency, any and all taxes levied or assessed and which
become payable during the term hereof upon all equipment,
furniture, fixtures and other personal property located in the
Demised Premises, except that which may be owned by Lessor.
PURPOSE 5. Lessee agrees to use and occupy the Demised Premises during
the term of this Lease for the purpose of: MANUFACTURING &
--------------------
OFFICE and for no other purpose whatsoever without the written
------
consent of Lessor, Lessee shall not use, or permit the Demised
Premises, or any part thereof, to be used, for any purpose or
purposes other than the purpose for which said premises are
hereby leased; and no use shall be made of the Demised Premises,
or acts done, which will increase the rate of insurance upon the
Building in which said premises may be located over the standard
rate of insurance prevailing in the area in which said premises
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are located, or cause a cancellation of any: part thereof, or
make it impossible for Lessor to obtain an insurance policy
covering the Building or any part thereof. If the rate of any
insurance carried by Lessor is increased as a result of
Lessee's use, Lessee shall pay to Lessor the increase within
ten (10) days after Lessor delivers to Lessee a certified
statement from Lessor's insurance carrier stating that the rate
of increase was caused solely by an activity of Lessee on the
premises as permitted in this Lease. Any other provision hereof
to the contrary notwithstanding, Lessee shall not do or permit
anything to be done in or about the premises which will in any
way obstruct or interfere with the rights of other Lessees or
occupants of the Building or injure or annoy them or use or
allow the premises to be used for any improper, immoral,
unlawful or objectionable purpose, nor shall Lessee cause,
maintain or permit any nuisance in, on or about the premises.
Lessee will not commit or suffer to be committed any waste in
or upon the premises .
ALTERATIONS 6. (a) LESSEE SHALL NOT, WITHOUT LESSOR'S PRIOR WRITTEN
AND ADDITIONS CONSENT, MAKE ANY ALTERATIONS, ADDITIONS OR UTILITY
INSTALLATIONS IN, ON, OR ABOUT THE DEMISED PREMISES. As used in
Paragraph 6(a), the term "utility installations" shall include
ducting, power panels, florescent fixtures, space heaters,
conduit and wiring. As a condition to giving such consent,
Lessor may require that Lessee agree to remove any such
alterations, additions, improvements or utility installations
at the expiration of the demised term and to restore the
Demised Premises to their prior condition. As a further
condition to giving such consent, Lessor may require Lessee to
provide Lessor, at Lessee's sole cost and expense, a lien and
completion bond in an amount equal to one and one half (1 1/2)
times the estimated cost of such improvements, to insure Lessor
against any liability for mechanics' and material men's liens
and to insure completion of the work.
(b) Unless Lessor requires their removal, as set forth in
Paragraph 6(a), all alterations, additions, improvements and
utility installments (whether or not such utility installations
constitute trade fixtures of Lessee), which may be made on the
Demised Premises, shall at the expiration or earlier
termination of the Lease become the property of the Lessor and
remain upon and be surrendered with the Demised Premises.
Notwithstanding the provisions of this Paragraph 6(b), personal
property, business and trade fixtures, cabinetwork, furniture,
movable partitions, machinery and equipment, other than that
which is affixed to the Demised Premises so that it cannot be
removed without material damage to the Demised Premises, shall
remain the property of Lessee and may be removed by Lessee
subject to the provisions of Paragraph 32, at any time during
the term of this Lease when Lessee is not in default hereunder.
(c) If space is equipped with air conditioning and heating
system, Lessor has designed air conditioning and heating
systems for standard office occupancy only. Such systems are
NOT designed for excessive traffic, exposure to outside
temperatures, excessive equipment, excessive personnel, nor
computer room environment. Upgrading of air conditioning and
heating Systems can be done at Lessee's expense.
GLASS AND 7. Lessee shall be responsible for all doors and glass
DOORS damages by wind, vandalism, etc., on the Demised Premises, and
Lessee shall forthwith replace or repair same at Lessee's sole
expense.
ABANDONMENT 8. Lessee agrees not to vacate or abandon the Demised Premises
at any time during the demised term. Should Lessee vacate or
abandon the Demised Premises or be dispossessed by process of
law or otherwise, such abandonment, vacation or dispossession
shall be a default hereunder. Lessee agrees that any property
not claimed within thirty (30) days after the abandonment of the
Demised Premises by the Lessee, or after the expiration or
earlier termination of, this Lease, becomes the property of the
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Lessor and shall be sold by the Lessor and the Lessor is to
retain the proceeds derived therefrom as reimbursement for costs
related to storing said property, and not as a penalty.
LESSOR'S 9. If during the term of this Lease, Lessor shall convey its
CONVEYANCE interest in the Demised Premises, then from and after the
effective date of the conveyance, Lessor shall be released and
discharged from any and all obligations under this Lease except
those already accrued.
REPAIRS 10. LESSEE, AT LESSEE'S SOLE EXPENSE, SHALL REPAIR AND MAINTAIN
THE DEMISED PREMISES and every part thereof, including but not
limited to all glazing, skylights, and signs in good, safe and
sanitary condition, except those portions which Lessor agrees to
maintain in the Paragraph 10. Lessor shall, at Lessor's expense,
repair and maintain only the heating and air conditioning
equipment and the exterior walls, exterior roof and cement
bedded or sub surface non-accessible plumbing serving the
Demised Premises, sidewalks, driveways, landscaping and parking
lots, except that Lessee shall reimburse Lessor for any costs
incurred by Lessor in repair and maintenance of damage caused by
the intentional or negligent act of Lessee, its officers,
agents, partners, employees, tradesmen or customers. Lessor
shall not be liable to Lessee or any other party whatsoever for
any damage or injury caused by Lessor's failure to keep or
maintain said heating and air conditioning equipment, exterior
walls, exterior roof, cement-embedded or sub-surface, non-
accessible plumbing, landscaping, sidewalks, driveways, and
parking lots unless Lessee has given Lessor written notice of
the need to repair said portions of the Demised Premises and
Lessor has failed to make said repairs within a reasonable time
after receiving written notice. By entry hereunder, Lessee
accepts the Demised Premises as being in good and sanitary
order, condition and repair. It is understood and agreed that
Lessor has no obligation to alter, remodel, improve, repair,
decorate, or paint the Demised Premises or any part thereof,
except as specifically herein set forth, and no representation's
respecting the condition of the Demised Premises have been made
by Lessor to Lessee, except as specifically herein set forth.
LAWS AND 11. (a) Lessee at its own cost and expense shall comply with
REGULATIONS all laws, rules, and orders of all Federal, State and Municipal
Governments, or departments, which may be applicable to the
Demised Premises.
(b) Lessee shall faithfully observe and comply with the rules
and regulations adopted by Lessor from time to time and all
modifications of and additions thereto from time to time put
into effect by Lessor. Lessor shall not be responsible to Lessee
for the nonperformance by any other Lessee or occupant of the
Building of any of said rules and regulations.
INDEMNIFI- 12. Lessor shall not be liable to Lessee, its officers,
CATION agents, employees, customers, invitees or third parties for any
loss or damage to property, including goods, wares and
merchandise, or for any injury or death to persons, in, on, or
about the Demised Premises. Lessee agrees to indemnify and hold
Lessor harmless of and from any and all costs, expenses,
claims, demands, obligations, and liabilities, cause or causes
or action by reason of or in connection with the condition of,
state of, repair, or use of the Building, common areas, Demised
Premises or appurtenant thereto including all adjacent
sidewalks, alleys, and parking lots.
SIGNS AND 13. Lessee shall not place or permit to be placed any
AUCTIONS advertising, sign, marquee, awning, decoration, or other
attachment to the common areas, or in or on the Building or the
real property on which the Building is situated or on the roof,
front, windows, doors, or exterior walls of the Demised Premises
without the prior written consent of Lessor. Lessor may without
liability, enter upon the Demised Premises or elsewhere and
remove any such advertising, sign, marquee, awning, decoration
or attachment affixed in violation of the Paragraph 13, all at
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Lessee's expense. Lessee shall not conduct any auction in the
Demised Premises, the Building, or on any portion of the real
property on which the Building and Demised Premises are
situated, without: Lessor's consent. ANY SIGN ON ANY BUILDING
MUST BE APPROVED BY LESSOR IN WRITING.
UTILITIES 14. a) Lessee from the time it first enters the Demised Premises
for the purpose of setting fixtures, or from the commencement of
the term of this lease, whichever date shall first occur, and
throughout the term of this lease shall be responsible for and
shall pay prior to delinquency for all heat, light, power,
telephone service and all other utilities and services supplied
to or consumed in or on the demised premises, whether occupied
or not, except water, sewer and gas charges, unless separately
metered.
b) LESSOR shall not be held responsible for any interruption in
utilities whatsoever.
ENTRY BY 15. Lessee shall permit Lessor and its agents to enter the
LESSOR Demised Premises at all reasonable times for any of the
following purposes: To inspect same; to show said premises to
prospective purchasers; to maintain the Building; to make such
repairs to the Demised Premises as Lessor is obligated or elects
to make; to make repairs, alterations, additions or utility
installations to any other portion of the Building; to post
notices of non responsibility for alterations, additions,
repairs or any utility installations; for the purpose of placing
upon the property in which said premises are located any
ordinary "for sale" sign. Lessee shall permit Lessor within
sixty (60) days prior to the expiration of this Lease to place
upon the Demised Premises ordinary "for lease" signs, and to
show said premises to prospective Lessees during reasonable
business hours.
PARTIAL AND 16. Lessor shall carry insurance on the Demised Premises
TOTAL under a standard form of fire and extended coverage policy and
DESTRUCTION in the event of partial destruction of the Demised Premises
during the term of this Lease from any cause insured under said
policy, Lessor shall forthwith repair the same, provided such
repairs can be made within ninety (90) days from date of such
destruction, under the then applicable laws and regulations of
Federal, State, County and Municipal Authorities and in light of
the extent of such damage and the then condition of the labor
market and availability of materials and supplies, but such
partial destruction shall in no way annul or void this Lease,
except that Lessee shall be entitled to a proportionate
reduction of rent while such repairs are being made, such
proportionate reduction to be based upon the extent to which the
making of such repairs shall interfere with the business carried
on by Lessee in the Demised Premises. In the event that the
Building is destroyed to the extent of not less than fifty
percent (50%) of the replacement cost of the Building, Lessor
may elect to terminate this Lease, whether the Demised Premises
be injured or not. A total destruction of the Building shall
automatically terminate this Lease. Anything in this Paragraph
16 to the contrary, if at the time of any such damage there is
less than two (2) months term remaining on this Lease, than this
Lease may, at the option of Lessor, be canceled by notice in
writing to Lessee within ten (10) days from the date of such
damage.
ASSIGNMENT 17. LESSEE SHALL NOT ASSIGN THIS LEASE OR ANY INTEREST
AND SUBLETTING HEREIN, nor lease or sublet the Demised Premises, or any part
thereof, or any right or privilege appurtenant thereto, nor
permit the occupancy or use of any part thereof by any other
person, WITHOUT THE WRITTEN CONSENT OF LESSOR FIRST HAND AND
OBTAINED, and a consent td one assignment, subletting, occupancy
or use, shall not be construed as a consent to any subsequent
assignment, subletting, occupancy or use. The Lessor may refuse
its consent without giving any reason whatsoever, and such
refusal shall nevertheless be binding on Lessee.
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DEFAULT 18. If default shall be made in the payment of rent or any
GROUNDS installment thereof or in the payment of any other amount
required to be paid by Lessee under this Lease, or any other
agreement between Lessor and Lessee, or if in default shall be
made in the performance of any of the other covenants, terms,
conditions, or agreements which Lessee is required to observe
and perform hereunder, or if the interest of Lessee in its
assets and/or this Lease shall be levied on or seized under
execution or other legal process, or if any petition shall be
filed by or against Lessee to declare Lessee bankrupt or to
delay, reduce or modify Lessee's debts or obligations or if any
petition shall be filed or other action taken to reorganize or
modify Lessee's capital structure, or if Lessee be declared
insolvent according to law, or if any assignment of Lessee's
property shall be made for the benefit of creditors, or if a
receiver or trustee is appointed for Lessee or its property, or
if Lessee shall abandon or vacate the Demised Premises during
the term of this Lease, and thereupon at its option may, without
notice or demand of any kind to Lessee or any other person, have
any one or more of the remedies specified in Paragraph 19, in
addition to all other rights and remedies provided by law or in
equity.
DEFAULT 19. (a) Lessor may re-enter the Demised Premises with or
REMEDIES without the process of law and take possession of the same and
of all equipment and fixtures of Lessee therein and expel or
remove Lessee and all other parties occupying the Demised
Premises, using such force as may be reasonably necessary to do
so, without being liable to any prosecution for such re-entry or
for the use of such force and without terminating this Lease, at
any time and from time to time to re-let the Demised Premises or
any part thereof for the account of Lessee, for such term, upon
such conditions and at such rental as Lessor may deem proper.
In such event Lessor may receive and collect rent from such
re-letting and apply it against any amounts due from Lessee
hereunder (including without limitation such expenses as Lessor
may have incurred in recovering possession of the Demised
Premises, placing same in good order and condition, altering or
repairing the same for re-letting, and all other expenses,
commissions, and charges including attorney's fees which
Lessor may have paid or incurred in connection with such
repossession and re-letting). Lessor may execute any lease made
pursuant hereto in Lessor's name or in the name of Lessee as
Lessor may see fit, and Lessee thereunder shall be under no
obligation to see to the application by Lessor of any rent
collected by Lessor nor shall Lessee have any right to collect
any rent thereunder. Whether or not the Demised Premises are re-
let, Lessee shall pay Lessor all amounts required to be paid by
Lessee up to the date of Lessor's re-entry and thereafter Lessee
shall pay Lessor, until the end of the term hereof, the amount
of all rent and other charges required to be paid by Lessee
hereunder, less the proceed of such re-letting during the term
hereof, if any, after payment of Lessor's expenses as provided
above. Such payments by Lessee shall be due at such times as are
provided elsewhere in this Lease, and Lessor need not wait until
the termination of this Lease to recover them by legal action or
otherwise Lessor shall not, by any re-entry or other act, be
deemed to have terminated this Lease or the liability of Lessee
for the total rent hereunder unless Lessor shall give Lessee
written notice of Lessor's election to terminate this Lease.
(b) Lessor may give written notice to Lessee of Lessor's
election to terminate this Lease, re-enter the Demised Premises
with or without process of law and take possession of the same
and of all equipment and fixtures therein, and expel or remove
Lessee and all other parties occupying the premises, using such
force as may be reasonably necessary to do so, without being
liable to any prosecution for such re-entry of for the use of
such force. In such event Lessor shall thereupon be entitled to
recover from Lessee the worth, at the time of such termination,
of the excess, if any, of the rent and other charges required to
be paid by Lessee hereunder for the balance of the term hereof
(if this lease had not been so terminated) over the then
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reasonable rental value of the Demised Premises for the same
period.
(c) Lessee hereby releases, indemnifies, and holds harmless
Lessor from any liability whatsoever for the removal of persons
and the removal and storage of property pursuant to
subparagraphs (a) and (b) of this Paragraph 19.
(d) To secure the full and timely performance of all the
Lessee's obligations under this Lease, Lessee hereby grants to
Lessor a security interest and lien in all of Lessee's
equipment, goods, fixtures, furnishings, furniture, inventory,
machinery, trade fixtures, other property, and the proceeds
therefrom, now or hereafter to be located within the Demised
Premises. In the event of default or breach by Lessee, then with
respect to that security interest, Lessor may exercise all of
the rights and remedies granted a secure party under the Uniform
Commercial Code as adopted in Nevada in effect at the time.
(e) The remedies given to Lessor in this Paragraph 19 shall be
in addition to and supplemental to all other rights and remedies
which Lessor may have under the laws then in force.
HOLDING OVER 20. If Lessee holds possession of all or a part of the Demised
Premises after the expiration of the term of this Lease, with or
without the express or implied consent of Lessor, Lessee shall
become a tenant from month-to-month only, upon the terms,
covenants, conditions, and agreements herein specified, so far
as applicable. Such holding over shall not constitute an
extension or renewal of this Lease. During such holding over,
the Base Monthly Rental shall be increased fifty (50%) percent
over the Base Monthly Rental provided in Paragraph 2.
WAIVER 21. No covenant, term, condition or agreement or the breach
thereof shall be deemed waived, except by written consent of the
party against whom the waiver is claimed, and any waiver or the
breach of any covenant, term, condition or agreement shall not
be deemed to be a waiver of any preceding or succeeding breach
of the same or any other covenant, term, condition or agreement.
Acceptance by Lessor of any performance by Lessee after the time
the same shall become due shall not constitute a waiver by
Lessor of the breach or default of any covenant, term, condition
or agreement unless other wise expressly agreed to by Lessor in
writing.
NOTICES 22. Except as otherwise provided in this Lease, all notices or
demands of any kind required or desired to be given by Lessor to
Lessee hereunder shall be in writing and shall be deemed
delivered when hand delivered or forty eight (48) hours after
depositing the notice or demand in the United States Mail,
certified or registered, postage prepaid, addressed to the
Lessee at the Demised Premises, whether or not Lessee has
departed from, abandoned or vacated the Demised Premises. All
notices or demands of any kind by Lessee to Lessor shall be in
writing and shall be deemed delivered when hand delivered or
forty eight (48) hours after depositing the notice in the United
States Mail, certified or registered, postage prepaid, addressed
to the Lessor at such address as shall from time to time be
designated by Lessor to Lessee in writing.
CONDEMNATION 23. In the event any condemnation proceedings shall be commenced
affecting the Demised Premises, Lessee shall have no right to
claim any valuation for its leasehold interest or otherwise by
reason of its occupancy of or improvements to said premises, and
any condemnation award (Whether adjudicated or by way of
settlement) shall belong in its entirety to Lessor. In the event
of condemnation of a part of the Demised Premises, the rent
shall be reduced in the proportion that the floor area taken
bears to the total floor area prior to the taking. If
condemnation takes more than twenty five percent (25%) of the
floor area of the Demised Premises or if the amount of Lessee's
parking area following condemnation is not sufficient to meet
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the deed restrictions, if any, concerning parking on the real
property on which the Demised Premises are situated, or the
local parking ordinances, if any, only then, may Lessee, at
Lessee's option, terminate this Lease as of the date the
condemning authority takes possession of said condemned portion
by giving written notice of termination to Lessor within ten
(10) days after the condemning authority takes such
possession.
If Lessee does not terminate this Lease as herein
above immediately provided, then the rent payable shall be
reduced as set forth above.
SUBORDINATION 24. This Lease at Lessor's option shall be subject and
subordinate to the lien of any mortgages or deeds of trust in
any amount or amounts whatsoever now or hereafter placed on or
against the real property or improvements, or either thereof, of
which the Demised Premises are a part, or on or against Lessor's
interest or estate therein, without the necessity of the
execution and delivery of any further instruments on the part of
Lessee to effectuate such subordination. If any mortgage or
trustee shall elect to have this Lease prior to the lien of its
mortgage or deed of trust, and shall give written notice thereof
to Lessee, this Lease shall be deemed prior to such mortgage or
deed or trust, whether this Lease is dated prior or subsequent
to the date of said mortgage or deed of trust or the date of the
recording thereof: Lessee covenants and agrees to execute and
deliver upon demand, without charge therefore, such further
instruments evidencing such subordination of this Lease to the
lien of any such mortgages or deeds of trust as may be required
by Lessor. Lessee hereby appoints Lessor as Lessee's attorney-
in-fact, irrevocably, to execute and deliver any such
agreements, instruments, releases or other documents.
PARKING 25. (a) Lessee and its customers, employees and tradesmen may
park only operative vehicles on the surfaced parking lot
adjacent to the Demised Premises only during Lessee's normal
business hours on terms and conditions as may be established by
Lessor from time to time during the term of this Lease. The
parking areas referred to in this Paragraph 25 shall be used on
a non-exclusive basis with other occupants of the Building. THE
PARKING LOT MAY NOT BE USED TO STORE VEHICLES OR TO WORK ON
VEHICLES. NO VEHICLE SHALL BE PARKED IN A PARKING LOT FOR MORE
THAN TWENTY FOUR (24) CONSECUTIVE HOURS. Any vehicles parked in
the parking lots in breach of these terms may be towed away at
Lessee's expense. Lessee releases, indemnifies, and holds
harmless Lessor and Lessor's officers, employees, and agents
from any claims arising from or relating to such towing of
vehicles including any consequential damages or loss of property
or the use of the vehicle or other. property. The right to tow a
vehicle is in addition to Lessor's rights under the Lease for
default or breach of any of the terms hereof.
(b) Other than parking, egress and ingress, Lessee has no right
to use the common area, and Lessee shall not obstruct the
common areas, including the sidewalks, landscaped areas, paved
areas, parking, lots, or driveways. ANIMALS, INCLUDING
WATCHDOGS, ARE NOT ALLOWED ON THE DEMISED PREMISES OR COMMON
AREAS.
SUCCESSORS 26. All terms, covenants, conditions hereof shall be binding
upon and inure to the benefit of the heirs, executors,
administrators, successors, and assigns of the parties hereto,
provided that nothing in this paragraph shall be deemed to
permit any assignment, sub-letting, occupancy or use contrary to
the provisions of Paragraph 17.
ENTIRE 27. This Lease, along with any exhibits and attachments
AGREEMENT hereto constitutes the entire agreement between Lessor and
Lessee relative to the Demised Premises and this Lease and the
exhibits and attachments may be altered, amended or revoked only
by an instrument in writing signed by both Lessor and Lessee.
Lessor and Lessee hereby agree that all oral agreements between
and among themselves and their agents or representatives
relative to the leasing of the Demised Premises are merged in or
revoked by this Lease.
________
________
INITIALS
8
<PAGE>
DEFAULT BY 28. Lessor shall not be in default under this Lease unless
LESSOR Lessor fails to perform obligations required of Lessor within a
reasonable time, but in no event later than thirty (30) days
after written notice by Lessee to Lessor, specifying wherein
Lessor has failed to perform such obligation; provided, however,
that if the nature of Lessor's obligation is such that more than
thirty (30) days are required for performance, then Lessor shall
not be in default if Lessor commences performance within such
thirty (30) day period and thereafter diligently prosecutes the
same to completion.
LIABILITY 29. Lessee shall, at Lessee's sole cost and expense, obtain and
keep in force during the term of this Lease a policy of
comprehensive public liability insurance insuring Lessor, Lessee
and Lessor's mortgage against any liability arising out of the
ownership, use, occupancy or maintenance of the Premises and all
areas appurtenant thereto. Such insurance shall be in the amount
of not less than $1,000,000.00 for injury or death of one person
-------------
in any one accident or occurrence and in the amount of not less
than $1,000,000.00 for injury or death of more than one person
-------------
in any one accident or occurrence. Such insurance shall further
insure Lessor and Lessee against liability for property damage
of at least $500,000.00. The limit of any such insurance shall
-----------
not, however, limit the liability of the Lessee hereunder.
Lessee may provide this insurance under a blanket policy,
provided that said insurance shall have a Lessor's protective
liability endorsement attached thereto. If Lessee shall fail to
procure and maintain said insurance, Lessor may, but shall not
be required to, procure and maintain same, but at the expense of
Lessee. Insurance required hereunder shall be in companies
approved by Lessor which approval shall not be unreasonably
withheld. Lessee shall deliver to Lessor, upon request, copies
of policies of liability insurance required herein or
certificates evidencing the existence and amounts of such
insurance with loss payable clauses satisfactory to Lessor. No
policy shall be cancelable or subject to reduction of coverage
which Lessor may carry.
ESTOPPEL 30. Lessee shall at any time upon not less than ten (10) days
CERTIFICATE prior written notice from Lessor execute, acknowledge and
deliver to Lessor a statement in writing; (i) certifying that
this Lease is unmodified in full force and effect, (or if
modified, state the nature of such modification and certifying
that this Lease, as so modified, is in full force and effect)
and the date to which the rent and other charges are paid in
advance, if any and (ii) acknowledging that there are not, to
Lessee's knowledge, any uncured defaults on the part of Lessor
hereunder, or specifying such defaults, if any, are claimed. Any
such statement may be conclusively relied upon by a prospective
purchaser or encumbrance of the Demised Premises. Lessee's
failure to deliver such statement within such time shall be
conclusive upon Lessee (i) that this Lease is in full force and
effect, without modification except as may be represented by
Lessor, (ii) that there are no uncured defaults in Lessor's
performance, and (iii) that not more than one (1) month's rent
has been paid in advance. If Lessor desires to finance or
refinance the Demised Premises, or any part thereof, Lessee
hereby agrees to deliver to any lender designated by Lessor such
financial statements of Lessee as may be reasonably required by
such lender. Such statements shall include the past three (3)
years financial statements of Lessee. All such financial
statements shall be received by Lessor in confidence and shall
be used only for the purposes herein set forth.
COSTS OF SUIT 31. (a) If Lessee or Lessor shall bring any action for any
relief against the other, declaratory or otherwise, arising out
of this Lease, including any suit by Lessor for the recovery of
rent or possession of the Demised Premises, the prevailing party
is entitled to an award of reasonable attorney's fees which
shall be deemed to have accrued on the commencement of such
action and shall be paid whether or not such action is
prosecuted to judgment.
________
________
INITIALS
9
<PAGE>
(b) Should Lessor, without fault on Lessor's part, be made a
party to any litigation instituted by Lessee or by a third
party against Lessee, or by or against any person holding over
or using the Demised Premises by license of Lessee, or for the
foreclosure of any lien for labor or material furnished to or
for Lessee or any such other person or otherwise arising out of
or resulting from any act or transaction of Lessee or of any
such other person, Lessee covenants to save and hold Lessor
harmless from any judgment rendered against Lessor or the
Demised Premises or any part thereof, and all costs and
expenses, including reasonable attorney's fees, incurred in or
in connection with such litigation.
CHOICE OF LAW 32. The Lease shall be governed, construed and enforced by the
laws of the State of NEVADA.
------
SURRENDER 33. Upon the expiration or earlier termination of this Lease,
Lessee shall remove all its signs from the Demised Premises,
return the keys and surrender the Demised Premises in a
condition satisfactory to Lessor. Lessee, at its sole cost and
expense, agrees to repair any damage to the Demised premises
caused by or in connection with the removal of any articles of
personal property, business or trade fixtures, machinery,
equipment, cabinetwork, furniture, movable partitions, or
permanent improvements or additions, including without
limitation thereto, repairing the floor and patching and
painting the walls where required by Lessor to Lessor's
reasonable satisfaction. Lessee shall indemnify Lessor against
any loss or liability resulting from delay by Lessee in so
surrendering the Demised Premises, including without limitation,
any claims made by any succeeding tenant founded on such delay.
MISCELLANEOUS 34. The marginal captions of this Lease are for convenience only
and shall not in any way limit or be deemed to construe or
interpret the terms and provisions hereof. The words "Lessor"
and "Lessee" as used herein shall include the plural as well as
the singular. Words used in neuter gender include the masculine
and feminine, words in the masculine or feminine gender include
the neuter. If there be more than one Lessor or Lessee, the
obligations hereunder imposed upon Lessor or Lessee shall be
joint and several.
TIME 35. Time is of the essence of this Lease and each and all of its
provisions.
PARKING 36. (a) Lessor shall have the right to limit the amount of
LIMITATIONS vehicles parked on the demised premises in connection with
Lessee's business during the term of this Lease.
(b) No storage, repairs, or cleaning of vehicles, parts, or
equipment outside the units will be permitted.
PROMOTIONAL 37. Lessee shall not use pictures of Lessor's properties for,
MATERIALS but limited to, brochures, advertising, or promotional
activities without written consent of Lessor.
ALARM SYSTEMS 38. No alarm system shall be attached to the exterior walls of
the Building. When installing a system, the alarm box must be
inside the unit. Lessee shall, at Lessee's sole expense, be
responsible for removal of alarm system and restoring the
Demised Premises to its original condition.
USE OF 39. "IN THE AREAS WHERE DUMPSTERS ARE PROVIDED, LESSEE MAY
DUMPSTERS UTILIZE THE DUMPSTERS FOR WASTE PAPER TRASH ONLY." Packing
skids, boxes and garbage from the complex or home are not to be
placed in or around dumpsters. It is the sole responsibility
of Lessee to dispose of excessive trash and packaging materials
somewhere else or obtain their own dumpster. "IN AREAS WHERE
DUMPSTERS ARE NOT PROVIDED, IT IS LESSEE'S RESPONSIBILITY TO
DISPOSE OF THEIR TRASH OR PROVIDE THEIR OWN DUMPSTER." Trash
stored outside the Building, not in dumpster, is prohibited and
Lessor shall have the right to charge a fine to Lessee for
________
________
INITIALS
10
<PAGE>
committing said storage or waste on the premises. Lessee shall
reimburse Lessor $30.00 per month for garbage reimbursement.
TEC 40. Lessee agrees not to park vehicles in front of other units
____________ whether vacant or occupied.
TEC 41. Lessee agrees not to store vehicles in parking lot more
____________ than twenty four (24) hours, or they will be towed at Owner's
expense.
TEC 42. Lessee agrees not to wash or work on vehicles outside
____________ Demised Premises.
TEC 43. Lessee is with understanding that he is allotted one (1)
____________ parking space per 250 square feet of office space and one (1)
parking space per 1,000 square feet of warehouse space.
N/A 44. Lessee is aware that "Park 2001" Associates have signed an
____________ aviation easement with the Reno Cannon International Airport
Authority.
N/A 45. Lessee understands that because of the proximity of the
____________ leased premised to Reno Cannon International Airport, the noise
levels may be experienced by reason of the operation of the
airport within FAA parameters and the Lessee agrees to hold the
Airport Authority, the City of Reno, Park 2001 Associates, and
The Ribeiro Corporation harmless from any claim or litigation
stemming from normal or reasonable operations of the airport
that fall within FAA parameters of conduct of operations.
IN WITNESS WHEREOF, the parties hereto have executed this Lease,
or as the case may be, have caused their officers thereunto duly
authorized to execute this Lease in duplicate, the day and year
first written above.
JOHNNY RIBEIRO SILICON GAMING
__________________________________ ____________________________________
LESSOR LESSEE
/s/ Edward G. Yuill BY: /s/ Thomas E. Carlson
__________________________________ ____________________________________
Edward G. Yuill Thomas E. Carlson
Vice President of Leasing, Reno CFO
DATE: 2-12-97 AS:
__________________________________ ____________________________________
PERSONALLY GUARANTEED:
BY:_________________________________
DATE:_______________________________
BY:_________________________________
DATE:_______________________________
PERSONALLY GUARANTEED:
BY:_________________________________
DATE:_______________________________
11
<PAGE>
DUTIES OWED BY A NEVADA REAL ESTATE LICENSEE
In Nevada, a real estate licensee can (1) act for only one party to a real
estate transaction, (2) act for more than one party to a real estate transaction
with written consent of each party, (3) act as a broker who assigns different
licensees affiliated with the broker's company to separate parties to a real
estate transaction. A licensee, acting as an agent, must act in one of the above
capacities in every real estate transaction. If this form is used for a lease,
the term Seller shall mean Landlord/Lessor and the term Buyer means
Tenant/Lessee.
LICENSEE: The licensee in the real estate transactions is Edward G. Yuill
---------------
("Licensee"), whose license number is 18931. The Licensee is acting for Edward
----- ------
G. Yuill, ("Broker"), whose company is THE RIBEIRO CORPORATION ("Company").
- -------- -----------------------
A NEVADA REAL ESTATE LICENSEE IN A REAL ESTATE TRANSACTION SHALL:
1. Disclose to each party to the real estate transaction as soon as is
practicable:
(a) Any material and relevant facts, data or information which Licensee, or
which by the subject of the real estate care and diligence licensee
should have known, relating to the property which is the subject of the
real estate transaction.
(b) Each source from which Licensee will receive compensation as a result
of the transaction.
(c) That Licensee is a principal to the transaction or has an interest in a
principal to the transaction.
(d) Any changes in Licensee's relationship to a party to the real estate
transaction.
2. Disclose, if applicable, that Licensee is acting for more than one party to
the transaction. Upon making such a disclosure the licensee is acting for more
than on party to the transaction for whom the Licensee is acting before Licensee
may continue to act in Licensee;s capacity as an agent.
3. Exercise reasonable skill and care with respect to all parties to the real
estate transaction.
4. Provide to each party to the real estate transaction this form.
5. Not to disclose, except to the Broker confidential information relating to a
client.
6. Exercise reasonable skill and care to carry out the terms of the brokerage
agreement and to carry out Licensee's duties pursuant to the terms of the
brokerage agreement.
7. Not to disclose confidential information relating to a client for 1 year
after the revocation or termination of the brokerage agreement, unless Licensee
is required to do so by order of the court. Confidential information includes,
but is not limited to the client's motivation to purchase, sell or trade and
other information of a personal nature.
8. Promote the interest of his client by:
(a) Seeking a sale, lease or property at the price and terms stated in the
brokerage agreement or at a price acceptable to the client.
(b) Presenting all offers made to or by the client as soon as it is
practicable.
(c) Disclosing to the client material facts of which the licensee has
knowledge concerning the transaction.
(d) Advising the client to obtain advice from an expert relating to matters
which are beyond the expertise of the licensee.
(e) Accounting for all money and property Licensee receives in which the
client may have an interest as soon as practicable.
9. Not deal with any party to a real estate transaction in a manner which is
deceitful, fraudulent or dishonest.
10. Abide by all duties, responsibilities and obligations required of Licensee
in chapters 119, 119A, 119B, 645, 645A and 645C of the NRS.
In the event any part of the real estate transaction is also represented by a
licensee who is affiliated with the same Company, the Broker may assign another
Licensee to act for that party. The above Licensee will continue to act for you.
As set forth above, no confidential information will be disclosed.
I/We acknowledge receipt of a copy of this list of licensee duties, and have
read and understand this disclosure.
Lessee /s/ Thomas E. Carlson Date Date Time am/pm
--------------------- ------- --------- ---------- ------
Lessor Date Date Time am/pm
--------------------- ------- --------- ---------- -------
CONFIRMATION REGARDING REAL ESTATE AGENT RELATIONSHIP
Property Address: 5401 Longley Lane #44 & 56, Reno, Nevada 89511
---------------------------------------------------------------
I/We confirm the duties of a real estate licensee of which has been presented
and explained to me/us. My/Our representative's relationship is: _______________
________________________ is the AGENT of ___________________________ is the
AGENT of
___Seller Exclusively* ___Both Buyer & Seller** ___Buyer Exclusively**
___Seller Exclusively* ___Both Buyer & Seller**
**IF AGENT IS ACTING FOR MORE THAN ONE PARTY IN THIS TRANSACTION, you will be
provided a Consent to Act Form for your review, consideration and approval or
rejection. A licensee can legally represent both the Lessor and Lessee in a
transaction ONLY with the knowledge and written consent of BOTH the Lessor and
Lessee.
*A licensee who is acting for the Lessor exclusively, is not representing the
Lessee and has not duty to advocate or negotiate for the Lessee.
**A licensee who is acting for the Lessee exclusively, is not representing the
Lessor and has no duty to advocate or negotiate for the Lessor.
The Ribeiro Corporation Silicon Gaming
- ----------------------------- ------------------------- ----------------
Listing Company Lessee's Company Date
/s/ Edward G. Yuill
- ----------------------------------- -----------------------------------
By: Licensed Real Estate Agent By: Licensed Real Estate Agent
/s/ Thomas E. Carlson 2/10/97
- ----------------------------------- -----------------------------------
Lessor Date Lessee Date
- ----------------------------------- -----------------------------------
Lessor Date Lessee Date
<PAGE>
[LETTERHEAD OF THE RIBEIRO CORPORATION]
TOXIC AND/OR HAZARDOUS MATERIALS ADDENDUM
Lessee guarantees that neither Lessee nor any of Lessee's employees,
agents, or visitors to his premises shall use, store, or dispose of any
hazardous or toxic materials or chemicals within the subject premises or
any other area within the Project of which the premises is a part. Any
such use or storage of any hazardous or toxic materials or chemicals
within the subject premises or other parts of the Project shall constitute
a material breach of this Lease, and Lessor shall be entitled to carry out
all means necessary to recover from this breach (as outlined within the
Lease). In addition, Lessee shall have sole financial and legal
responsibility for the proper and legal cleanup of any spillage or other
contamination caused by any use of toxic or hazardous materials by Lessee.
It is further agreed that, if, upon written notice from Lessor that Lessee
has violated the above provisions of this Agreement, Lessee does not
complete necessary steps (as outlined in said written notice from Lessor)
to achieve satisfactory cleanup within 72 hours, Lessor shall have the
right to complete necessary cleanup and bill the entire cost (including
any legal costs incurred by Lessor) of same to Lessee.
Lessee will also bear the entire cost of any government cleanup order or
any third-party lawsuit, caused by spillage or contamination caused by any
use of toxic or hazardous materials by Lessee.
Hazardous or toxic material means any substance now, or hereafter,
identified by :any government agency requiring special handling, disposal,
or control unlike regular refuse.
Johnny Ribeiro Silicon Gaming
__________________________________ ____________________________________
Lessor Lessee
/s/ Edward G. Yuill /s/ Thomas E. Carlson
__________________________________ ____________________________________
By: Edward G. Yuill By:
Vice President
2-12-97 2/10/97
__________________________________ ____________________________________
Date Date
<PAGE>
[LETTERHEAD OF THE RIBEIRO CORPORATION]
INSURANCE AGREEMENT
-------------------
I, Silicon Gaming, do hereby agree that myself or my company has or will have
--------------
insurance required in my lease, and that rider shall be given to The Ribeiro
Corporation within thirty days of the signing of my lease. This rider shall
include The Ribeiro Corporation as an additional insured for the demised
premises that I lease. At no time do I understand that insurance is not needed
for leasing property with The Ribeiro Corporation.
/s/ Edward G. Yuill 2-12-97
_________________________________ _____________________________________
By: Edward G. Yuill Date
Vice President of Leasing
/s/ Thomas E. Carlson 2/10/97
_________________________________ _____________________________________
By: Silicon Gaming Date
<PAGE>
[LETTERHEAD OF THE RIBEIRO CORPORATION]
Disclaimer
----------
All agreements and concessions between Lessor and Lessee for the property
located at 5401 Longley Lane, Reno, Nevada 89511 Unit(s) #44 & 56 are
-------------------------------------- --------
Contained within this Lease, dated January 23, 1997; Addenda or attached letters
----------------
(no verbal agreements). Any modifications, remodels or maintenance of leased
unit(s) required after Lessor and Lessee have signed this Lease that are not
specifically described in this Lease, Addenda, attached letters and walk-through
will be at no cost to the Lessor. Prior to vacating unit(s), Lessee agrees to
restore unit(s) to the condition in which it was received, except for normal
wear and tear, at Lessee's expense unless changes to the unit are approved, in
writing, by Lessor Discrepancies identified during the initial walk-through
inspection that are not repaired by Lessor will be included in the Lease file,
and Lessee will not be charged for such repairs.
Johnny Ribeiro 2-12-97
___________________________________ _______________________________
Lessor Date
___________________________________
By: Edward G. Yuill
Vice President of Leasing
The Ribeiro Corporation
Silicon Gaming 2/10/97
___________________________________ _______________________________
Lessee Date
/s/ Thomas E. Carlson
___________________________________
By:
<PAGE>
EXHIBIT 10.25
THE RIBEIRO CORPORATION
[LOGO OF This Lease made and entered into this 23RD day of JANUARY, 1997,
THE ---- ------- --
RIBEIRO "by and between, THE RIBEIRO CORPORATION, hereinafter called
CORPORATION] -----------------------
"LESSOR", and SILICON GAMING, hereinafter called "LESSEE".
--------------
WITNESSETH:
DEMISED Lessor hereby leases, demises and lets unto Lessee, and Lessee
PREMISES hereby leases, hires and takes from Lessor those certain
premises hereinafter called the "Demised Premises," located in
that certain building (the "Building"), described as follows:
THAT CERTAIN 2,718 SQUARE FEET OF OFFICE SPACE AND 1,549 SQUARE
---------------------------------------------------------------
FEET OF WAREHOUSE SPACE LOCATED AT 280 GREG STREET, RENO, NEVADA
----------------------------------------------------------------
89502 KNOWN AS UNITS #4, 5, 6 & 30 AS OUTLINED IN RED ON THE
------------------------------------------------------------
ATTACHED PLAT MAP MARKED EXHIBIT "A".
-------------------------------------
This lease is made upon the following terms, covenants, and
conditions to which the parties hereby agree:
TERM 1. The term of this Lease shall commence on SEPTEMBER 1, 1997,
----------- --
and shall continue for a term of SIXTY (60) months from and
----- --
after said date of commencement. If the Demised Premises
require improvements to be constructed by the Lessor prior to
occupancy of the said premises by the Lessee, said improvements
shall be set out in "Exhibit A" attached hereto, consisting of
plans, specifications and descriptions of the work to be
performed prior to said date of occupancy, together with the
specification as to the cost of such improvements and the party
to bear such cost of improvement. If, despite Lessor's best
efforts, said premises, as improved in accordance with THE
agreement of the parties, is not delivered by Lessor on or
before :N/A, 19N/A, this Lease shall have no further force or
effect and each party shall be relieved of all obligations, each
to the other, provided that said date will be extended for a
period equal to the time construction has been delayed due to
causes beyond the reasonable control of Lessor.
RENTAL 2. (a) Lessee agrees to pay a Base Monthly Rental (plus any
excise, privilege or sales taxes or any tax levied on the
rentals or the receipt thereof, except Lessor's income tax) on
the first day of each calendar month throughout the demised term
without offset or deduction of any kind. Rental is to be paid in
lawful money of the United States of America, which shall be
legal tender at the time of payment of rents, as follows:------
09-01-97 TO 08-31-98: FOUR THOUSAND FORTY FIVE DOLLARS AND
-------- ------------------------------------------------------
NO/l00's ($4,045.00) PER MONTH
---------------------------------------------------------------
09-01-98 TO 08-31-99: FOUR THOUSAND ONE HUNDRED SIXTY SIX
---------------------------------------------------------------
DOLLARS AND NO/1OO's ($4,166.00) PER MONTH
---------------------------------------------------------------
09-01-99 TO 08-31-00: FOUR THOUSAND TWO HUNDRED NINETY ONE
---------------------------------------------------------------
DOLLARS AND NO/100's ($4,291.00) PER MONTH
---------------------------------------------------------------
09-01-00 TO 08-31-01: FOUR THOUSAND FOUR HUNDRED TWENTY DOLLARS
---------------------------------------------------------------
AND NO/100's ($4,420.00) PER MONTH
---------------------------------------------------------------
09-01-01 TO 08-31-02: FOUR THOUSAND FOUR HUNDRED FIFTY THREE
------------------------------------------------------------
(b) Lessee understands that the issuance of a check or draft
without funds or with intent to defraud is a criminal offense
punishable by imprisonment or by a fine or both fine and
imprisonment.
(c) In the event the term of this Lease commences other than on
the first day of a calendar month, or if the termination date is
not the last day of a month, a pro-rated monthly installment
shall be paid for the fractional month during which this Lease
commences and/or terminates. Payment of rent shall be made by
Lessee to Lessor at such addresses as shall from time to time be
designated by Lessor to Lessee in writing.
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<PAGE>
(d) If any payment of Base Monthly Rental is not received by
Lessor by the tenth (10th) day of the calendar month in which it
is due, then that Base Monthly Rental payment shall be increased
by five percent (5%). Accordingly, if received after the tenth
(10th) of the month, Base Monthly Rental shall be: 09-01-97 TO
-----------
08-31-98: FOUR THOUSAND TWO HUNDRED FORTY SEVEN DOLLARS AND
--------------------------------------------------------------
29/100's ($4,247.29)
--------------------------------------------------------------
09-01-98 TO 08-31-99: FOUR THOUSAND THREE HUNDRED SEVENTY FOUR
--------------------------------------------------------------
DOLLARS AND 30/100's ($4,374.30)
--------------------------------------------------------------
09-01-99 TO 08-31-00: FOUR THOUSAND FIVE HUNDRED FIVE DOLLARS
--------------------------------------------------------------
AND 55/100's ($4,505.55)
--------------------------------------------------------------
09-01-00 TO 08-31-01: FOUR THOUSAND SIX HUNDRED FORTY ONE
--------------------------------------------------------------
DOLLARS AND 00/100's ($4,641.00)
--------------------------------------------------------------
09-01-01 TO 08-31-02: FOUR THOUSAND SEVEN HUNDRED EIGHTY
--------------------------------------------------------------
DOLLARS AND 65/100's ($4,780.65)
--------------------------------------------------------------
Nothing in this Lease shall be construed to permit the payment
of rent after the date on which it is due. The parties hereby
agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late
payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's default with
respect to such overdue amount, nor excuse or cure any default
by Lessee under this Lease, nor prevent Lessor from excising any
of the other rights and remedies granted hereunder.
(e) "Rent", "Rental", "rent" or "rental" includes the Base
Monthly Rental and other sums as may be due from Lessee pursuant
to any of the provisions of this Lease, and any other sums, or
becoming payable to Lessor under this Lease.
(f) In the event a check comes back for non-sufficient funds, a
services fee of $25.00 Will be assessed to the Lessee.
DEPOSIT 3. For and as additional consideration for the making of this
Lease, Lessee shall pay to Lessor, upon execution of the Lease,
the sum of: TWO THOUSAND SIX HUNDRED NINETY FIVE DOLLARS AND
------------------------------------------------
NO/100's ($2,695.00) PLUS $1,350.00 TRANSFERRED FROM 5401
---------------------------------------------------------
LONGLEY LANE, #44 & 56, RENO, NEVADA 89511, as a security
------------------------------------------
deposit to insure Lessee's faithful performance of the terms,
conditions, covenants, and agreements of this Lease. THE
SECURITY DEPOSIT MAY NOT BE APPLIED AGAINST RENTAL PAYMENTS by
the Lessee. If the Lessee fully complies with all the terms,
conditions, covenants and agreements of the Lease, then within
thirty (30) days after the expiration of the Lease term, and
cleanup completed in conjunction with Paragraph 33, the security
deposit without interest shall be refunded to Lessee (or, at
Lessor's option at the last permitted assignee of Lessee's
interests hereunder) less the reasonable value of damages
suffered by the Lessor, including but not limited to rental
delinquencies, costs of repairs, cleaning, lock and key change
charges, and other obligations of Lessee to Lessor.
TAXES, 4. (a) As additional rental, Lessee agrees to pay to Lessor in
INSURANCE & each year of the term of this lease a pro-rated amount equal
ASSESSMENTS to any rate increase of liability and casualty insurance
required by the insurance company upon the building and Demised
Premises in addition to an amount equal to any increases in
taxes, general or special assessments, improvements or
retrofitting expenses assessed by any federal, state or
municipal authority for the real property of which the Building
and Demised Premises are a part of. The pro-ration of the
insurance, taxes and assessments set forth above shall be based
upon the percentage of the total floor space of the Building and
Demised Premises, whether occupied or not, to the amount of
floor space being leased by Lessee. Such additional rental shall
be paid as soon as the amount thereof shall have been determined
and upon written demand therefore by Lessor to Lessee, with the
next succeeding installment of rental. Such additional rental
shall be pro-rated for the first and last years of the demised
term to reflect periods during either or both of said years not
included within the demised term.
________
________
INITIALS
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<PAGE>
(b) Lessee agrees to pay or cause to be paid, before
delinquency, any and all taxes levied or assessed and which
become payable during the term hereof upon all equipment,
furniture, fixtures and other personal property located in the
Demised Premises, except that which may be owned by Lessor.
PURPOSE 5. Lessee agrees to use and occupy the Demised Premises during
the term of this Lease for the purpose of: SALES AND
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DISTRIBUTION OF GAMING PRODUCTS and for no other purpose
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whatsoever without the written consent of Lessor, Lessee shall
not use, or permit the Demised Premises, or any part thereof, to
be used, for any purpose or purposes other than the purpose for
which said premises are hereby leased; and no use shall be made
of the Demised Premises, or acts done, which will increase the
rate of insurance upon the Building in which said premises may
be located over the standard rate of insurance prevailing in the
area in which said premises are located, or cause a cancellation
of any: part thereof, or make it impossible for Lessor to obtain
an insurance policy covering the Building or any part thereof.
If the rate of any insurance carried by Lessor is increased as a
result of Lessee's use, Lessee shall pay to Lessor the increase
within ten (10) days after Lessor delivers to Lessee a certified
statement from Lessor's insurance carrier stating that the rate
of increase was caused solely by an activity of Lessee on the
premises as permitted in this Lease. Any other provision hereof
to the contrary notwithstanding, Lessee shall not do or permit
anything to be done in or about the premises which will in any
way obstruct or interfere with the rights of other Lessees or
occupants of the Building or injure or annoy them or use or
allow the premises to be used for any improper, immoral,
unlawful or objectionable purpose, nor shall Lessee cause,
maintain or permit any nuisance in, on or about the premises.
Lessee will not commit or suffer to be committed any waste in or
upon the premises.
ALTERATIONS 6. (a) Lessee shall not, without Lessor's prior written
AND ADDITIONS consent, make any alterations, additions or utility
installations in, on, or about the Demised Premises. As used in
Paragraph 6(a), the term "utility installations" shall include
ducting, power panels, florescent fixtures, space heaters,
conduit and wiring. As a condition to giving such consent,
Lessor may require that Lessee agree to remove any such
alterations, additions, improvements or utility installations at
the expiration of the demised term and to restore the Demised
Premises to their prior condition. As a further condition to
giving such consent, Lessor may require Lessee to provide
Lessor, at Lessee's sole cost and expense, a lien and completion
bond in an amount equal to one and one half (1 1/2) times the
estimated cost of such improvements, to insure Lessor against
any liability for mechanics' and material men's liens and to
insure completion of the work.
(b) Unless Lessor requires their removal, as set forth in
Paragraph 6(a), all alterations, additions, improvements and
utility installments (whether or not such utility installations
constitute trade fixtures of Lessee), which may be made on the
Demised Premises, shall at the expiration or earlier termination
of the Lease become the property of the Lessor and remain upon
and be surrendered with the Demised Premises. Notwithstanding
the provisions of this Paragraph 6(b), personal property,
business and trade fixtures, cabinetwork, furniture, movable
partitions, machinery and equipment, other than that which is
affixed to the Demised Premises so that it cannot be removed
without material damage to the Demised Premises, shall remain
the property of Lessee and may be removed by Lessee subject to
the provisions of Paragraph 32, at any time during the term of
this Lease when Lessee is not in default hereunder.
(c) If space is equipped with air conditioning and heating
system, Lessor has designed air conditioning and heating
systems for standard office occupancy only. Such systems are NOT
designed for excessive traffic, exposure to outside
temperatures, excessive equipment, excessive personnel, nor
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computer room environment. Upgrading of air conditioning and
heating Systems can be done at Lessee's expense.
GLASS AND 7. Lessee shall be responsible for all doors and glass
DOORS damages by wind, vandalism, etc., on the Demised Premises, and
Lessee shall forthwith replace or repair same at Lessee's sole
expense.
ABANDONMENT 8. Lessee agrees not to vacate or abandon the Demised Premises
at any time during the demised term. Should Lessee vacate or
abandon the Demised Premises or be dispossessed by process of
law or otherwise, such abandonment, vacation or dispossession
shall be a default hereunder. Lessee agrees that any property
not claimed within thirty (30) days after the abandonment of the
Demised Premises by the Lessee, or after the expiration or
earlier termination of, this Lease, becomes the property of the
Lessor and shall be sold by the Lessor and the Lessor is to
retain the proceeds derived therefrom as reimbursement for costs
related to storing said property, and not as a penalty.
LESSOR'S 9. If during the term of this Lease, Lessor shall convey its
CONVEYANCE interest in the Demised Premises, then from and after the
effective date of the conveyance, Lessor shall be released and
discharged from any and all obligations under this Lease except
those already accrued.
REPAIRS 10. LESSEE, AT LESSEE'S SOLE EXPENSE, SHALL REPAIR AND MAINTAIN
THE DEMISED PREMISES and every part thereof, including but not
limited to all glazing, skylights, and signs in good, safe and
sanitary condition, except those portions which Lessor agrees to
maintain in the Paragraph 10. Lessor shall, at Lessor's expense,
repair and maintain only the heating and air conditioning
equipment and the exterior walls, exterior roof and cement
bedded or sub surface non-accessible plumbing serving the
Demised Premises, sidewalks, driveways, landscaping and parking
lots, except that Lessee shall reimburse Lessor for any costs
incurred by Lessor in repair and maintenance of damage caused by
the intentional or negligent act of Lessee, its officers,
agents, partners, employees, tradesmen or customers. Lessor
shall not be liable to Lessee or any other party whatsoever for
any damage or injury caused by Lessor's failure to keep or
maintain said heating and air conditioning equipment, exterior
walls, exterior roof, cement-embedded or sub-surface, non-
accessible plumbing, landscaping, sidewalks, driveways, and
parking lots unless Lessee has given Lessor written notice of
the need to repair said portions of the Demised Premises and
Lessor has failed to make said repairs within a reasonable time
after receiving written notice. By entry hereunder, Lessee
accepts the Demised Premises as being in good and sanitary
order, condition and repair. It is understood and agreed that
Lessor has no obligation to alter, remodel, improve, repair,
decorate, or paint the Demised Premises or any part thereof,
except as specifically herein set forth, and no representation's
respecting the condition of the Demised Premises have been made
by Lessor to Lessee, except as specifically herein set forth.
LAWS AND 11. (a) Lessee at its own cost and expense shall comply with
REGULATIONS all laws, rules, and orders of all Federal, State and Municipal
Governments, or departments, which may be applicable to the
Demised Premises.
(b) Lessee shall faithfully observe and comply with the rules
and regulations adopted by Lessor from time to time and all
modifications of and additions thereto from time to time put
into effect by Lessor. Lessor shall not be responsible to Lessee
for the nonperformance by any other Lessee or occupant of the
Building of any of said rules and regulations.
INDEMNIFI- 12. Lessor shall not be liable to Lessee, its officers,
CATION agents, employees, customers, invitees or third parties for any
loss or damage to property, including goods, wares and
merchandise, or for any injury or death to persons, in, on, or
about the Demised Premises. Lessee agrees to indemnify and hold
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Lessor harmless of and from any and all costs, expenses,
claims, demands, obligations, and liabilities, cause or causes
or action by reason of or in connection with the condition of,
state of, repair, or use of the Building, common areas, Demised
Premises or appurtenant thereto including all adjacent
sidewalks, alleys, and parking lots.
SIGNS AND 13. Lessee shall not place or permit to be placed any
AUCTIONS advertising, sign, marquee, awning, decoration, or other
attachment to the common areas, or in or on the Building or the
real property on which the Building is situated or on the roof,
front, windows, doors, or exterior walls of the Demised Premises
without the prior written consent of Lessor. Lessor may without
liability, enter upon the Demised Premises or elsewhere and
remove any such advertising, sign, marquee, awning, decoration
or attachment affixed in violation of the Paragraph 13, all at
Lessee's expense. Lessee shall not conduct any auction in the
Demised Premises, the Building, or on any portion of the real
property on which the Building and Demised Premises are
situated, without Lessor's consent. ANY SIGN ON ANY BUILDING
MUST BE APPROVED BY LESSOR IN WRITING.
UTILITIES 14. a) Lessee from the time it first enters the Demised Premises
for the purpose of setting fixtures, or from the commencement of
the term of this lease, whichever date shall first occur, and
throughout the term of this lease shall be responsible for and
shall pay prior to delinquency for all heat, light, power,
telephone service and all other utilities and services supplied
to or consumed in or on the demised premises, whether occupied
or not, except water, sewer and gas charges, unless separately
metered.
b) LESSOR shall not be held responsible for any interruption in
utilities whatsoever.
ENTRY BY 15. Lessee shall permit Lessor and its agents to enter the
LESSOR Demised Premises at all reasonable times for any of the
following purposes: To inspect same; to show said premises to
prospective purchasers; to maintain the Building; to make such
repairs to the Demised Premises as Lessor is obligated or elects
to make; to make repairs, alterations, additions or utility
installations to any other portion of the Building; to post
notices of non responsibility for alterations, additions,
repairs or any utility installations; for the purpose of placing
upon the property in which said premises are located any
ordinary "for sale" sign. Lessee shall permit Lessor within
sixty (60) days prior to the expiration of this Lease to place
upon the Demised Premises ordinary "for lease" signs, and to
show said premises to prospective Lessees during reasonable
business hours.
PARTIAL AND 16. Lessor shall carry insurance on the Demised Premises
TOTAL under a standard form of fire and extended coverage policy and
DESTRUCTION in the event of partial destruction of the Demised Premises
during the term of this Lease from any cause insured under said
policy, Lessor shall forthwith repair the same, provided such
repairs can be made within ninety (90) days from date of such
destruction, under the then applicable laws and regulations of
Federal, State, County and Municipal Authorities and in light of
the extent of such damage and the then condition of the labor
market and availability of materials and supplies, but such
partial destruction shall in no way annul or void this Lease,
except that Lessee shall be entitled to a proportionate
reduction of rent while such repairs are being made, such
proportionate reduction to be based upon the extent to which the
making of such repairs shall interfere with the business carried
on by Lessee in the Demised Premises. In the event that the
Building is destroyed to the extent of not less than fifty
percent (50%) of the replacement cost of the Building, Lessor
may elect to terminate this Lease, whether the Demised Premises
be injured or not. A total destruction of the Building shall
automatically terminate this Lease. Anything in this Paragraph
16 to the contrary, if at the time of any such damage there is
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less than two (2) months term remaining on this Lease, than this
Lease may, at the option of Lessor, be canceled by notice in
writing to Lessee within ten (10) days from the date of such
damage.
ASSIGNMENT 17. LESSEE SHALL NOT ASSIGN THIS LEASE OR ANY INTEREST
AND SUBLETTING HEREIN, nor lease or sublet the Demised Premises, or any part
thereof, or any right or privilege appurtenant thereto, nor
permit the occupancy or use of any part thereof by any other
person, WITHOUT THE WRITTEN CONSENT OF LESSOR FIRST HAND AND
OBTAINED, and a consent to one assignment, subletting, occupancy
or use, shall not be construed as a consent to any subsequent
assignment, subletting, occupancy or use. The Lessor may refuse
its consent without giving any reason whatsoever, and such
refusal shall nevertheless be binding on Lessee.
DEFAULT 18. If default shall be made in the payment of rent or any
GROUNDS installment thereof or in the payment of any other amount
required to be paid by Lessee under this Lease, or any other
agreement between Lessor and Lessee, or if in default shall be
made in the performance of any of the other covenants, terms,
conditions, or agreements which Lessee is required to observe
and perform hereunder, or if the interest of Lessee in its
assets and/or this Lease shall be levied on or seized under
execution or other legal process, or if any petition shall be
filed by or against Lessee to declare Lessee bankrupt or to
delay, reduce or modify Lessee's debts or obligations or if any
petition shall be filed or other action taken to reorganize or
modify Lessee's capital structure, or if Lessee be declared
insolvent according to law, or if any assignment of Lessee's
property shall be made for the benefit of creditors, or if a
receiver or trustee is appointed for Lessee or its property, or
if Lessee shall abandon or vacate the Demised Premises during
the term of this Lease, and thereupon at its option may, without
notice or demand of any kind to Lessee or any other person, have
any one or more of the remedies specified in Paragraph 19, in
addition to all other rights and remedies provided by law or in
equity.
DEFAULT 19. (a) Lessor may re-enter the Demised Premises with or
REMEDIES without the process of law and take possession of the same and
of all equipment and fixtures of Lessee therein and expel or
remove Lessee and all other parties occupying the Demised
Premises, using such force as may be reasonably necessary to do
so, without being liable to any prosecution for such re-entry or
for the use of such force and without terminating this Lease, at
any time and from time to time to re-let the Demised Premises or
any part thereof for the account of Lessee, for such term, upon
such conditions and at such rental as Lessor may deem proper.
In such event Lessor may receive and collect the rent from such
re-letting and apply it against any amounts due from Lessee
hereunder (including without limitation such expenses as Lessor
may have incurred in recovering possession of the Demised
Premises, placing same in good order and condition, altering or
repairing the same for re-letting, and all other expenses,
commissions, and charges including attorney's fees which
Lessor may have paid or incurred in connection with such
repossession and re-letting). Lessor may execute any lease made
pursuant hereto in Lessor's name or in the name of Lessee as
Lessor may see fit, and Lessee thereunder shall be under no
obligation to see to the application by Lessor of any rent
collected by Lessor nor shall Lessee have any right to collect
any rent thereunder.
Whether or not the Demised Premises are re-let, Lessee shall
pay Lessor all amounts required to be paid by Lessee up to the
date of Lessor's re-entry and thereafter Lessee shall pay
Lessor, until the end of the term hereof, the amount of all rent
and other charges required to be paid by Lessee hereunder, less
the proceed of such re-letting during the term hereof, if any,
after payment of Lessor's expenses as provided above. Such
payments by Lessee shall be due at such times as are provided
elsewhere in this Lease, and Lessor need not wait until the
termination of this Lease to recover them by legal action or
otherwise Lessor shall not, by any re-entry or other act, be
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deemed to have terminated this Lease or the liability of Lessee
for the total rent hereunder unless Lessor shall give Lessee
written notice of Lessor's election to terminate this Lease.
(b) Lessor may give written notice to Lessee of Lessor's
election to terminate this Lease, re-enter the Demised Premises
with or without process of law and take possession of the same
and of all equipment and fixtures therein, and expel or remove
Lessee and all other parties occupying the premises, using such
force as may be reasonably necessary to do so, without being
liable to any prosecution for such re-entry of for the use of
such force. In such event Lessor shall thereupon be entitled to
recover from Lessee the worth, at the time of such termination,
of the excess, if any, of the rent and other charges required to
be paid by Lessee hereunder for the balance of the term hereof
(if this lease had not been so terminated) over the then
reasonable rental value of the Demised Premises for the same
period.
(c) Lessee hereby releases, indemnifies, and holds harmless
Lessor from any liability whatsoever for the removal of persons
and the removal and storage of property pursuant to
subparagraphs (a) and (b) of this Paragraph 19.
(d) To secure the full and timely performance of all the Lessee
5 obligations under this Lease, Lessee hereby grants to Lessor a
security interest and lien in all of Lessee's equipment, goods,
fixtures, furnishings, furniture, inventory, machinery, trade
fixtures, other property, and the proceeds therefrom, now or
hereafter to be located within the Demised Premises. In the
event of default or breach by Lessee, then with respect to that
security interest, Lessor may exercise all of the rights and
remedies granted a secure party under the Uniform Commercial
Code as adopted in Nevada in effect at the time.
(e) The remedies given to Lessor in this Paragraph 19 shall be
in addition to and supplemental to all other rights and remedies
which Lessor may have under the laws then in force.
HOLDING OVER 20. If Lessee holds possession of all or a part of the Demised
Premises after the expiration of the term of this Lease, with or
without the express or implied consent of Lessor, Lessee shall
become a tenant from month-to-month only, upon the terms,
covenants, conditions, and agreements herein specified, so far
as applicable. Such holding over shall not constitute an
extension or renewal of this Lease. During such holding over,
the Base Monthly Rental shall be increased fifty (50%) percent
over the Base Monthly Rental provided in Paragraph 2.
WAIVER 21. No covenant, term, condition or agreement or the breach
thereof shall be deemed waived, except by written consent of the
party against whom the waiver is claimed, and any waiver or the
breach of any covenant, term, condition or agreement shall not
be deemed to be a waiver of any preceding or succeeding breach
of the same or any other covenant, term, condition or agreement.
Acceptance by Lessor of any performance by Lessee after the time
the same shall become due shall not constitute a waiver by
Lessor of the breach or default of any covenant, term, condition
or agreement unless other wise expressly agreed to by Lessor in
writing.
NOTICES 22. Except as otherwise provided in this Lease, all notices or
demands of any kind required or desired to be given by Lessor to
Lessee hereunder shall be in writing and shall be deemed
delivered when hand delivered or forty eight (48) hours after
depositing the notice or demand in the United States Mail,
certified or registered, postage prepaid, addressed to the
Lessee at the Demised Premises, whether or not Lessee has
departed from, abandoned or vacated the Demised Premises. All
notices or demands of any kind by Lessee to Lessor shall be in
writing and shall be deemed delivered when hand delivered or
forty eight (48) hours after depositing the notice in the United
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States Mail, certified or registered, postage prepaid, addressed
to the Lessor at such address as shall from time to time be
designated by Lessor to Lessee in writing.
CONDEMNATION 23. In the event any condemnation proceedings shall be commenced
affecting the Demised Premises, Lessee shall have no right to
claim any valuation for its leasehold interest or otherwise by
reason of its occupancy of or improvements to said premises, and
any condemnation award (Whether adjudicated or by way of
settlement) shall belong in its entirety to Lessor. In the event
of condemnation of a part of the Demised Premises, the rent
shall be reduced in the proportion that the floor area taken
bears to the total floor area prior to the taking. If
condemnation takes more than twenty five percent (25%) of the
floor area of the Demised Premises or if the amount of Lessee's
parking area following condemnation is not sufficient to meet
the deed restrictions, if any, concerning parking on the real
property on which the Demised Premises are situated, or the
local parking ordinances, if any, only then, may Lessee, at
Lessee's option, terminate this Lease as of the date the
condemning authority takes possession of said condemned portion
by giving written notice of termination to Lessor within ten
(10) days after the condemning authority takes such
possession.
If Lessee does not terminate this Lease as herein above
immediately provided, then the rent payable shall be reduced as
set forth above.
SUBORDINATION 24. This Lease at Lessor's option shall be subject and
subordinate to the lien of any mortgages or deeds of trust in
any amount or amounts whatsoever now or hereafter placed on or
against the real property or improvements, or either thereof, of
which the Demised Premises are a part, or on or against Lessor's
interest or estate therein, without the necessity of the
execution and delivery of any further instruments on the part of
Lessee to effectuate such subordination. If any mortgage or
trustee shall elect to have this Lease prior to the lien of its
mortgage or deed of trust, and shall give written notice thereof
to Lessee, this Lease shall be deemed prior to such mortgage or
deed or trust, whether this Lease is dated prior or subsequent
to the date of said mortgage or deed of trust or the date of the
recording thereof. Lessee covenants and agrees to execute and
deliver upon demand, without charge therefore, such further
instruments evidencing such subordination of this Lease to the
lien of any such mortgages or deeds of trust as may be required
by Lessor. Lessee hereby appoints Lessor as Lessee's attorney-
in-fact, irrevocably, to execute and deliver any such
agreements, instruments, releases or other documents.
PARKING 25. (a) Lessee and its customers, employees and tradesmen may
park only operative vehicles on the surfaced parking lot
adjacent to the Demised Premises only during Lessee's normal
business hours on terms and conditions as may be established by
Lessor from time to time during the term of this Lease. The
parking areas referred to in this Paragraph 25 shall be used on
a non-exclusive basis with other occupants of the Building. THE
PARKING LOT MAY NOT BE USED TO STORE VEHICLES OR TO WORK ON
VEHICLES. NO VEHICLE SHALL BE PARKED IN A PARKING LOT FOR MORE
THAN TWENTY FOUR (24) CONSECUTIVE HOURS. Any vehicles parked in
the parking lots in breach of these terms may be towed away at
Lessee's expense. Lessee releases, indemnifies, and holds
harmless Lessor and Lessor's officers, employees, and agents
from any claims arising from or relating to such towing of
vehicles including any consequential damages or loss of property
or the use of the vehicle or other. property. The right to tow a
vehicle is in addition to Lessor's rights under the Lease for
default or breach of any of the terms hereof.
(b) Other than parking, egress and ingress, Lessee has no right
to use the common area, and Lessee shall not obstruct the
common areas, including the sidewalks, landscaped areas, paved
areas, parking, lots, or driveways. ANIMALS, INCLUDING
WATCHDOGS, ARE NOT ALLOWED ON THE DEMISED PREMISES OR COMMON
AREAS.
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SUCCESSORS 26. All terms, covenants, conditions hereof shall be binding
upon and inure to the benefit of the heirs, executors,
administrators, successors, and assigns of the parties hereto,
provided that nothing in this paragraph shall be deemed to
permit any assignment, sub-letting, occupancy or use contrary to
the provisions of Paragraph 17.
ENTIRE 27. This Lease, along with any exhibits and attachments
AGREEMENT hereto, constitutes the entire agreement between Lessor and
Lessee relative to the Demised Premises and this Lease and the
exhibits and attachments may be altered, amended or revoked only
by an instrument in writing signed by both Lessor and Lessee.
Lessor and Lessee hereby agree that all oral agreements between
and among themselves and their agents or representatives
relative to the leasing of the Demised Premises are merged in or
revoked by this Lease.
DEFAULT BY 28. Lessor shall not be in default under this Lease unless
LESSOR Lessor fails to perform obligations required of Lessor within a
reasonable time, but in no event later than thirty (30) days
after written notice by Lessee to Lessor, specifying wherein
Lessor has failed to perform such obligation; provided, however,
that if the nature of Lessor's obligation is such that more than
thirty (30) days are required for performance, then Lessor shall
not be in default if Lessor commences performance within such
thirty (30) day period and thereafter diligently prosecutes the
same to completion.
LIABILITY 29. Lessee shall, at Lessee's sole cost and expense, obtain and
keep in force during the term of this Lease a policy of
comprehensive public liability insurance insuring Lessor, Lessee
and Lessor's mortgage against any liability arising out of the
ownership, use, occupancy or maintenance of the Premises and all
areas appurtenant thereto. Such insurance shall be in the amount
of not less than $1,000,000.00 for injury or death of one person
------------
in any one accident or occurrence and in the amount of not less
than $1,000,000.00 for injury or death of more than one person
------------
in any one accident or occurrence. Such insurance shall further
insure Lessor and Lessee against liability for property damage
of at least $500,000.00. The limit of any such insurance shall
----------
not, however, limit the liability of the Lessee hereunder.
Lessee may provide this insurance under a blanket policy,
provided that said insurance shall have a Lessor's protective
liability endorsement attached thereto. If Lessee shall fail to
procure and maintain said insurance, Lessor may, but shall not
be required to, procure and maintain same, but at the expense of
Lessee. Insurance required hereunder shall be in companies
approved by Lessor which approval shall not be unreasonably
withheld. Lessee shall deliver to Lessor, upon request, copies
of policies of liability insurance required herein or
certificates evidencing the existence and amounts of such
insurance with loss payable clauses satisfactory to Lessor. No
policy shall be cancelable or subject to reduction of coverage
which Lessor may carry.
ESTOPPEL 30. Lessee shall at any time upon not less than ten (10) days
CERTIFICATE prior written notice from Lessor execute, acknowledge and
deliver to Lessor a statement in writing; (i) certifying that
this Lease is unmodified in full force and effect, (or if
modified, state the nature of such modification and certifying
that this Lease, as so modified, is in full force and effect)
and the date to which the rent and other charges are paid in
advance, if any and (ii) acknowledging that there are not, to
Lessee's knowledge, any uncured defaults on the part of Lessor
hereunder, or specifying such defaults, if any, are claimed. Any
such statement may be conclusively relied upon by a prospective
purchaser or encumbrance of the Demised Premises. Lessee's
failure to deliver such statement within such time shall be
conclusive upon Lessee (i) that this Lease is in full force and
effect, without modification except as may be represented by
Lessor, (ii) that there are no uncured defaults in Lessor's
performance, and (iii) that not more than one (1) month's rent
has been paid in advance. If Lessor desires to
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finance or refinance the Demised Premises, or any part thereof,
Lessee hereby agrees to deliver to any lender designated by
Lessor such financial statements of Lessee as may be reasonably
required by such lender. Such statements shall include the past
three (3) years financial statements of Lessee. All such
financial statements shall be received by Lessor in confidence
and shall be used only for the purposes herein set forth.
COSTS OF SUIT 31. (a) If Lessee or Lessor shall bring any action for any
relief against the other, declaratory or otherwise, arising out
of this Lease, including any suit by Lessor for the recovery of
rent or possession of the Demised Premises, the prevailing party
is entitled to an award of reasonable attorney's fees which
shall be deemed to have accrued on the commencement of such
action and shall be paid whether or not such action is
prosecuted to judgment.
(b) Should Lessor, without fault on Lessor's part, be made a
party to any litigation instituted by Lessee or by a third
party against Lessee, or by or against any person holding over
or using the Demised Premises by license of Lessee, or for the
foreclosure of any lien for labor or material furnished to or
for Lessee or any such other person or otherwise arising out of
or resulting from any act or transaction of Lessee or of any
such other person, Lessee covenants to save and hold Lessor
harmless from any judgment rendered against Lessor or the
Demised Premises or any part thereof, and all costs and
expenses, including reasonable attorney's fees, incurred in or
in connection with such litigation.
CHOICE OF LAW 32. The Lease shall be governed, construed and enforced by the
laws of the State of NEVADA.
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SURRENDER 33. Upon the expiration or earlier termination of this Lease,
Lessee shall remove all its signs from the Demised Premises,
return the keys and surrender the Demised Premises in a
condition satisfactory to Lessor. Lessee, at its sole cost and
expense, agrees to repair any damage to the Demised premises
caused by or in connection with the removal of any articles of
personal property, business or trade fixtures, machinery,
equipment, cabinetwork, furniture, movable partitions, or
permanent improvements or additions, including without
limitation thereto, repairing the floor and patching and
painting the walls where required by Lessor to Lessor's
reasonable satisfaction. Lessee shall indemnify Lessor against
any loss or liability resulting from delay by Lessee in so
surrendering the Demised Premises, including without limitation,
any claims made by any succeeding tenant founded on such delay.
MISCELLANEOUS 34. The marginal captions of this Lease are for convenience only
and shall not in any way limit or be deemed to construe or
interpret the terms and provisions hereof. The words "Lessor"
and "Lessee" as used herein shall include the plural as well as
the singular. Words used in neuter gender include the masculine
and feminine, words in the masculine or feminine gender include
the neuter. If there be more than one Lessor or Lessee, the
obligations hereunder imposed upon Lessor or Lessee shall be
joint and several.
TIME 35. Time is of the essence of this Lease and each and all of its
provisions.
PARKING 36. (a) Lessor shall have the right to limit the amount of
LIMITATIONS vehicles parked on the demised premises in connection with
Lessee's business during the term of this Lease.
(b) No storage, repairs, or cleaning of vehicles, parts, or
equipment outside the units will be permitted.
PROMOTIONAL 37. Lessee shall not use pictures of Lessor's properties for,
MATERIALS but limited to, brochures, advertising, or promotional
activities without written consent of Lessor.
________
________
INITIALS
10
<PAGE>
ALARM SYSTEMS 38. No alarm system shall be attached to the exterior walls of
the Building. When installing a system, the alarm box must be
inside the unit. Lessee shall, at Lessee's sole expense, be
responsible for removal of alarm system and restoring the
Demised Premises to its original condition.
USE OF 39. "IN THE AREAS WHERE DUMPSTERS ARE PROVIDED, LESSEE MAY
DUMPSTERS UTILIZE THE DUMPSTERS FOR WASTE PAPER TRASH ONLY." Packing
skids, boxes and garbage from the complex or home are not to be
placed in or around dumpsters. It is. the sole responsibility
of Lessee to dispose of excessive trash and packaging materials
somewhere else or obtain their own dumpster. "IN AREAS WHERE
DUMPSTERS ARE NOT PROVIDED, IT IS LESSEE'S RESPONSIBILITY TO
DISPOSE OF THEIR TRASH OR PROVIDE THEIR OWN DUMPSTER." Trash
stored outside the Building, not in dumpster, is prohibited and
Lessor shall have the right to charge a fine to Lessee for
committing said storage or waste on the premises. Lessee shall
reimburse Lessor $30.00 per month for garbage reimbursement.
TEC 40. Lessee agrees not to park vehicles in front of other units
____________ whether vacant or occupied.
TEC 41. Lessee agrees not to store vehicles in parking lot more
____________ than twenty four (24) hours, or they will be towed at Owner's
expense.
TEC 42. Lessee agrees not to wash or work on vehicles outside
____________ Demised Premises.
TEC 43. Lessee is with understanding that he is allotted one (1)
____________ parking space per 250 square feet of office space and one (1)
parking space per 1,000 square feet of warehouse space.
N/A 44. Lessee is aware that "Park 2001" Associates have signed an
____________ aviation easement with the Reno Cannon International Airport
Authority.
N/A 45. Lessee understands that because of the proximity of the
____________ leased premised to Reno Cannon International Airport, the noise
levels may be experienced by reason of the operation of the
airport within FAA parameters and the Lessee agrees to hold the
Airport Authority, the City of Reno, Park 2001 Associates, and
The Ribeiro Corporation harmless from any claim or litigation
stemming from normal or reasonable operations of the airport
that fall within FAA parameters of conduct of operations.
IN WITNESS WHEREOF, the parties hereto have executed this Lease,
or as the case may be; have caused their officers thereunto duly
authorized to execute this Lease in duplicate, the day and year
first written above.
THE RIBEIRO CORPORATION SILICON GAMING
__________________________________ ____________________________________
LESSOR LESSEE
/s/ Edward G. Yuill BY: /s/ Thomas E. Carlson
__________________________________ ____________________________________
Edward G. Yuill Thomas E. Carlson
Vice President of Leasing, Reno CFO
DATE: 2-12-97 AS:
__________________________________ ____________________________________
PERSONALLY GUARANTEED:
BY:_________________________________
DATE:_______________________________
11
<PAGE>
DUTIES OWED BY A NEVADA REAL ESTATE LICENSEE
In Nevada, a real estate licensee can (1) act for only one party to a real
estate transaction, (2) act for more than one party to a real estate transaction
with written consent of each party, (3) act as a broker who assigns different
licensees affiliated with the broker's company to separate parties to a real
estate transaction. A licensee, acting as an agent, must act in one of the above
capacities in every real estate transaction. If this form is used for a lease,
the term Seller shall mean Landlord/Lessor and the term Buyer means
Tenant/Lessee.
LICENSEE: The licensee in the real estate transactions is Edward G. Yuill
---------------
("Licensee"), whose license number is 18931. The Licensee is acting for Edward
----- ------
G. Yuill, ("Broker"), whose company is THE RIBEIRO CORPORATION ("Company").
- -------- -----------------------
A NEVADA REAL ESTATE LICENSEE IN A REAL ESTATE TRANSACTION SHALL:
1. Disclose to each party to the real estate transaction as soon as is
practicable:
(a) Any material and relevant facts, data or information which Licensee, or
which by the subject of the real estate care and diligence licensee
should have known, relating to the property which is the subject of the
real estate transaction.
(b) Each source from which Licensee will receive compensation as a result
of the transaction.
(c) That Licensee is a principal to the transaction or has an interest in a
principal to the transaction.
(d) Any changes in Licensee's relationship to a party to the real estate
transaction.
2. Disclose, if applicable, that Licensee is acting for more than one party to
the transaction. Upon making such a disclosure the licensee is acting for more
than on party to the transaction for whom the Licensee is acting before Licensee
may continue to act in Licensee;s capacity as an agent.
3. Exercise reasonable skill and care with respect to all parties to the real
estate transaction.
4. Provide to each party to the real estate transaction this form.
5. Not to disclose, except to the Broker confidential information relating to a
client.
6. Exercise reasonable skill and care to carry out the terms of the brokerage
agreement and to carry out Licensee's duties pursuant to the terms of the
brokerage agreement.
7. Not to disclose confidential information relating to a client for 1 year
after the revocation or termination of the brokerage agreement, unless Licensee
is required to do so by order of the court. Confidential information includes,
but is not limited to the client's motivation to purchase, sell or trade and
other information of a personal nature.
8. Promote the interest of his client by:
(a) Seeking a sale, lease or property at the price and terms stated in the
brokerage agreement or at a price acceptable to the client.
(b) Presenting all offers made to or by the client as soon as it is
practicable.
(c) Disclosing to the client material facts of which the licensee has
knowledge concerning the transaction.
(d) Advising the client to obtain advice from an expert relating to matters
which are beyond the expertise of the licensee.
(e) Accounting for all money and property Licensee receives in which the
client may have an interest as soon as practicable.
9. Not deal with any party to a real estate transaction in a manner which is
deceitful, fraudulent or dishonest.
10. Abide by all duties, responsibilities and obligations required of Licensee
in chapters 119, 119A, 119B, 645, 645A and 645C of the NRS.
In the event any part of the real estate transaction is also represented by a
licensee who is affiliated with the same Company, the Broker may assign another
Licensee to act for that party. The above Licensee will continue to act for you.
As set forth above, no confidential information will be disclosed.
I/We acknowledge receipt of a copy of this list of licensee duties, and have
read and understand this disclosure.
Lessee /s/ Thomas E. Carlson Date Date Time am/pm
--------------------- ------- --------- ---------- ------
Lessor Date Date Time am/pm
--------------------- ------- --------- ---------- -------
CONFIRMATION REGARDING REAL ESTATE AGENT RELATIONSHIP
Property Address: 280 Greg Street, #4, ,5, 6 & 30, Reno, Nevada 89502
---------------------------------------------------------------
I/We confirm the duties of a real estate licensee of which has been presented
and explained to me/us. My/Our representative's relationship is: _______________
________________________ is the AGENT of ___________________________ is the
AGENT of
___Seller Exclusively* ___Both Buyer & Seller** ___Buyer Exclusively**
___Seller Exclusively* ___Both Buyer & Seller**
**IF AGENT IS ACTING FOR MORE THAN ONE PARTY IN THIS TRANSACTION, you will be
provided a Consent to Act Form for your review, consideration and approval or
rejection. A licensee can legally represent both the Lessor and Lessee in a
transaction ONLY with the knowledge and written consent of BOTH the Lessor and
Lessee.
*A licensee who is acting for the Lessor exclusively, is not representing the
Lessee and has not duty to advocate or negotiate for the Lessee.
**A licensee who is acting for the Lessee exclusively, is not representing the
Lessor and has no duty to advocate or negotiate for the Lessor.
The Ribeiro Corporation Silicon Gaming
- ----------------------------- ------------------------- ----------------
Listing Company Lessee's Company Date
/s/ Edward G. Yuill
- ----------------------------------- -----------------------------------
By: Licensed Real Estate Agent By: Licensed Real Estate Agent
/s/ Thomas E. Carlson 2/10/97
- ----------------------------------- -----------------------------------
Lessor Date Lessee Date
- ----------------------------------- -----------------------------------
Lessor Date Lessee Date
<PAGE>
[LETTERHEAD OF THE RIBEIRO CORPORATION]
TOXIC AND/OR HAZARDOUS MATERIALS ADDENDUM
Lessee guarantees that neither Lessee nor any of Lessee's employees, agents, or
visitors to his premises shall use, store, or dispose of any hazardous or toxic
materials or chemicals within the subject premises or any other area within the
Project of which the premises is a part. Any such use or storage of any
hazardous or toxic materials or chemicals within the subject premises or other
parts of the Project shall constitute a material breach of this Lease, and
Lessor shall be entitled to carry out all means necessary to recover from this
breach (as outlined within the Lease). In addition, Lessee shall have sole
financial and legal responsibility for the proper and legal cleanup of any
spillage or other contamination caused by any use of toxic or hazardous
materials by Lessee.
It is further agreed that, if, upon written notice from Lessor that Lessee has
violated the above provisions of this Agreement, Lessee does not complete
necessary steps (as outlined in said written notice from Lessor) to achieve
satisfactory cleanup within 72 hours, Lessor shall have the right to complete
necessary cleanup and bill the entire cost (including any legal costs incurred
by Lessor) of same to Lessee.
Lessee will also bear the entire cost of any government cleanup order or any
third-party lawsuit, caused by spillage or contamination caused by any use of
toxic or hazardous materials by Lessee.
Hazardous or toxic material means any substance now, or hereafter,
identified by any government agency requiring special handling, disposal,
or control unlike regular refuse.
The Ribeiro Corporation Silicon Gaming
__________________________________ ____________________________________
Lessor Lessee
/s/ Edward G. Yuill /s/ Thomas E. Carlson
__________________________________ ____________________________________
By: Edward G. Yuill By:
Vice President
2-12-97 2/10/97
__________________________________ ____________________________________
Date: Date:
<PAGE>
[LETTERHEAD OF THE RIBEIRO CORPORATION]
INSURANCE AGREEMENT
-------------------
I, Silicon Gaming, do hereby agree that myself or my company has or will have
--------------
insurance required in my lease, and that rider shall be given to The Ribeiro
Corporation within thirty days of the signing of my lease. This rider shall
include The Ribeiro Corporation as an additional insured for the demised
premises that I lease. At no time do I understand that insurance is not needed
for leasing property with The Ribeiro Corporation.
/s/ Edward G. Yuill 2-12-97
__________________________________ _________________________________
By: Edward G. Yuill Date
Vice President of Leasing
/s/ Thomas E. Carlson 2/10/97
___________________________________ __________________________________
By: Silicon Gaming Date
<PAGE>
[LETTERHEAD OF THE RIBEIRO CORPORATION]
Disclaimer
----------
All agreements; and concessions between Lessor and Lessee for the property
located at 280 Greg Street, Reno, Nevada 89502 Unit(s) #4, 5, 6 & 30 are
----------------------------------- -------------
Contained within this Lease, dated January 23, 1997; Addenda or attached letters
----------------
(no verbal agreements). Any modifications, remodels or maintenance of leased
unit(s) required after Lessor and Lessee have signed this Lease that are not
specifically described in this Lease, Addenda, attached letters and walk-through
will be at no cost to the' Lessor. Prior to vacating unit(s), Lessee' agrees to
restore unit(s) to the condition in which it was received, except for normal
wear and tear, at Lessee's expense unless:. changes to the unit are approved, in
writing, by Lessor Discrepancies identified during the initial walk-through
inspection that are not repaired by Lessor will be included in the Lease file,
and Lessee will not be charged for such repairs.
The Ribeiro Corporation 2-12-97
_______________________ _________________________________
Lessor Date
/s/ Edward G. Yuill
__________________________________
By: Edward G. Yuill
Vice President of Leasing
The Ribeiro Corporation
Silicon Gaming 2/10/97
- -------------------------------- ----------------------------------
Lessee Date
/s/ Thomas E. Carlson
________________________________
By:
<PAGE>
EXHIBIT 11.1
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Net loss............................................. $(3,974) $(13,634)
======= ========
Weighted average common shares outstanding........... 2,065 6,433
Weighted average preferred shares outstanding, as if
converted........................................... 679 396
Common shares, redeemable convertible preferred
shares and options and warrants to purchase shares
of common and redeemable convertible preferred
shares granted (using the treasury stock method
assuming an initial public offering price of $10.50)
since July 31, 1995 included pursuant to Securities
and Exchange Commission Rules....................... 5,548 3,192
------- --------
Weighted average common and equivalent shares........ 8,292 10,021
======= ========
Net loss per share................................... $ (0.48) $ (1.36)
======= ========
</TABLE>
<PAGE>
EXHIBIT 13.1
SELECTED CONSOLIDATED FINANCIAL DATA
- ------------------------------------
<TABLE>
<CAPTION>
Period from Cumulative from
inception (July 27, Inception (July 27,
(In thousands, except per 1993) through Year Ended Nine Months Ended Year Ended 1993) through
share amounts) March 31, 1994 March 31, 1995 December 31, 1995/(1)/ December 31, 1996 December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Loss from operations $140 $1,851 $ 4,059 $ 14,533 $20,583
Net loss 140 1,866 3,974 13,634 19,614
Net loss per share/(2)/ (0.48) (1.36)
</TABLE>
<TABLE>
<CAPTION>
March 31 December 31
-----------------------------------------------------------------------------------
(In thousands) 1994 1995 1995/(1)/ 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and equivalents $ 36 $ 241 $ 2,399 $25,583
Short-term investments -- -- -- 9,683
Working capital (169) (1,253) 2,027 34,203
Total assets 67 486 3,486 39,646
Long-term debt -- -- 272 778
Redeemable Convertible Preferred Stock -- 967 8,496 6,455
Total shareholders' equity (deficiency) (138) (2,003) (5,946) 30,061
</TABLE>
/(1)/ Effective April 1, 1995, the Company changed its fiscal year end from
March 31 to December 31.
/(2)/ See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used in
the computation of net loss per share.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
OVERVIEW
THIS DISCUSSION INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH REFLECT
THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL
PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES, INCLUDING THOSE REFERRED TO IN THE RISK FACTORS SECTION BELOW AND
ELSEWHERE HEREIN AND CONTAINED IN THE COMPANY'S PREVIOUSLY FILED FORM 10 AND
FORM S-1 REGISTRATION STATEMENTS, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED. IN THIS DISCUSSION, THE
WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND SIMILAR
EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF
THE DATE HEREOF.
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes thereto included in this Annual
Report.
The Company was incorporated on July 27, 1993 to design, develop, manufacture
and distribute interactive gaming devices that implement advanced multimedia
technologies using state-of-the-art, off-the-shelf components. Since its
formation, the Company has been in the development stage, and its principal
activities have consisted of assembling a technical, marketing and executive
staff, developing its gaming platform, raising capital, and initiating
applications for regulatory approvals in Nevada and other jurisdictions to
manufacture and distribute its gaming devices. To date, the Company has
generated no sales or other revenue and has had negative operating cash flows.
The Company's first commercial product was approved for product field testing in
Nevada in December 1996. Following the completion of field testing, the product
was approved for sale to licensed casinos in Nevada by the Nevada Gaming
Commission on March 20, 1997. Accordingly, the Company is now commencing the
next phase in its transition to making commercial sales of its product.
Consistent with industry practice, the Company's product will first be installed
on a trial basis on casino floors for a period of 45 days before a sales
decision is made by the customer. In the fourth quarter of 1996, the Company
commenced manufacture of commercial units and, in 1997, the Company intends to
transition from the development stage to commercial distribution of its product.
The Company plans to limit the number of machines it sells in 1997, however, in
order to carefully monitor reactions to its platform, game software and product
support features. In 1998, the Company expects to broadly market and sell its
product; thus, the Company believes that 1998 will be the first year in which a
reasonable assessment can be made of its product's commercial potential. Future
revenue, profits, and cash flows will depend on market acceptance of the
Company's product, the ability of such product to generate higher revenue for
casinos as compared to competitive products and the technical performance of the
Company's product. The Company's success will also depend on, among other
factors, the Company's ability to attract, retain and motivate qualified
personnel and meet all the initial and ongoing licensing requirements in key
jurisdictions.
Effective April 1, 1995, the Company changed its fiscal year end from March 31
to December 31. Accordingly, the period ended December 31, 1995 is a nine-month
period.
RESULTS OF OPERATIONS
The Company is in the development stage and has not generated any revenue to
date. As of December 31, 1996, the Company had net losses since inception of
$19,614,000. To date, the Company has focused its resources on product
development, including system hardware and software, game concept development
and software coding, hiring additional marketing and administrative staff,
ramping up its marketing activities and starting up the manufacturing
operations. In addition to increasing expenditures in research and development,
the Company will need to incur significant expenses and other costs associated
with the commencement of manufacturing operations and building sales, support
and
27
<PAGE>
administrative infrastructure. During 1996, units were manufactured primarily
for testing and engineering, game development, licensing approval and regulatory
field trials. In the fourth quarter of 1996, the Company commenced
manufacture of units for commercial distribution, although volume shipments are
not expected to commence until the second quarter of 1997. The Company did not
generate any product sales or any revenue from other sources in 1996. The
Company's plan for 1997 is to limit the number of machines it sells so that it
can collect feedback from casino operators and gaming patrons before commencing
a full roll-out of its product. Accordingly, the Company expects only limited
revenue in 1997 and expects to incur substantial losses and negative operating
cash flows at least through the second quarter of 1998.
Amounts for the year ended March 31, 1995, the nine-month period ended December
31, 1995, and the year ended December 31, 1996 may not be comparable due to the
Company's change in fiscal year-end. The Company believes that operating
expenses will increase in the future as it continues to develop its product and
emerges from the development stage to begin commercial operations, including
manufacturing, marketing and sales. Accordingly, the Company expects that future
results will differ materially from, and may not be comparable to, prior
periods.
Research and Development
- ------------------------
Research and development ("R&D") expenses include payroll and related costs of
employees engaged in ongoing design and development activities, fees to outside
contractors, early prototype development expenses, overhead costs, equipment
depreciation and costs of supplies. To date, the Company has expensed all costs
associated with the research, design and development of its product. R&D
expenses were $1,539,000, $3,137,000 and $7,030,000 for the year ended March 31,
1995, the nine-month period ended December 31, 1995, and the year ended December
31, 1996, respectively. Increases over the periods have resulted from the
incremental hiring of personnel, increased usage of engineering consultants and
license fees and similar costs associated with the acquisition of outside
technologies. The Company believes that a significant level of R&D expense is
required due to the technical nature of the product and the elaborate
requirements of the game development process. Accordingly, the Company
anticipates devoting substantial resources, including additional personnel, to
R&D and that these costs will continue to increase in absolute dollars in future
periods.
Manufacturing Development
- -------------------------
Manufacturing development expenses include payroll and related costs for
manufacturing personnel, overhead costs, reserves against inventory and
depreciation. In the fourth quarter of 1996, the Company completed initial
development of its manufacturing process and commenced commercial production.
Manufacturing development expenses were $2,458,000 for the year ended December
31, 1996. There were no manufacturing development expenses in prior
periods. Manufacturing expenses are expected to increase through 1997 as the
Company expands its manufacturing capacity and infrastructure to produce its
product in commercial quantities. Upon commencement of sales of its product,
manufacturing costs will be matched to the corresponding revenue or included in
inventory prior to product sale. Due to the significant resources required to
manufacture its product and the early stage of its manufacturing processes, the
Company believes the fixed costs associated with its manufacturing activities
will increase significantly in absolute dollars in future periods.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative ("SG&A") expenses include payroll and
related costs for administrative and executive personnel and sales and marketing
personnel, overhead costs, legal and associated costs, costs associated with
obtaining corporate and product licenses in various jurisdictions and fees for
professional services. SG&A expenses were $312,000, $922,000 and $5,045,000 for
the year ended March 31, 1995, the nine-month period ended December 31, 1995,
and the year ended December 31, 1996, respectively. Increases over the periods
result from the incremental hiring of personnel and expenses associated with
applying for corporate and product licensing in various jurisdictions. SG&A
expenses are expected to increase substantially in absolute dollars as the
Company invests in sales and marketing activities to launch its product and in
administrative personnel to support its growing infrastructure and comply with
regulatory requirements.
28
<PAGE>
Income Taxes
- ------------
The Company has not been required to pay income taxes due to its net operating
losses in each period since inception. As of December 31, 1996, the Company had
net operating loss carryforwards of approximately $18,600,000 for federal
purposes and $17,200,000 for state purposes. These loss carryforwards will
expire beginning in 2000, if not utilized. The Company also has R&D credit
carryforwards of approximately $490,000 for federal and state purposes as of
December 31, 1996, which expire beginning in 2010. A valuation allowance has
been recorded for these deferred tax assets as a result of uncertainties
regarding the realization of these assets due to the lack of earnings history of
the Company. Due to changes in ownership, as defined by Section 382 of the
Internal Revenue Code, that may have resulted from the sale of Series B and
Series C Redeemable Convertible Preferred Stock in private placements and the
sale of Common Stock in the Company's initial public offering, the annual
deductibility of a substantial portion of the federal net operating loss and tax
credit carryforwards may be limited. See Note 7 of Notes to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through the issuance
of Common Stock in its initial public offering, private placements of Redeemable
Convertible Preferred Stock and loans from shareholders which were subsequently
converted to Redeemable Convertible Preferred Stock. In August 1996, the Company
completed its initial public offering, in which the Company received proceeds,
net of underwriting discounts and offering expenses, of $32,855,000. Through
December 31, 1996, the amounts raised in the private placements of Redeemable
Convertible Preferred Stock, net of issuance costs, totaled $22,943,000. As of
December 31, 1996, the Company had $35,266,000 of cash and cash equivalents and
short-term investments to fund operations.
The Company's operating activities used cash of $1,696,000, $3,731,000 and
$11,991,000 for the year ended March 31, 1995, the nine-month period ended
December 31, 1995 and the year ended December 31, 1996, respectively. Cash used
in operating activities primarily reflects net losses, partially offset by
depreciation and amortization and changes to working capital.
From inception through December 31, 1996, the Company acquired a total of
$3,930,000 in fixed assets, primarily computer equipment, of which $1.0 million
was financed under a capital lease.
In the future, the Company expects to significantly increase cash used in
operating activities in order to commence commercial production and distribution
of its product, enhance manufacturing capabilities, expand sales and support
operations, increase research and development activities and add administrative
infrastructure. The Company believes that its cash on hand will be sufficient to
meet its anticipated cash needs for working capital, capital expenditures and
business expansion. However, the Company may need to raise additional funds to
finance more rapid expansion, to develop its product, to respond to competitive
pressures or to acquire complementary products, businesses or technologies. No
assurance can be given that additional financing will be available or that, if
available, it will be available on terms acceptable to the Company or its
shareholders. If adequate funds are not available to satisfy either the short-
term or long-term capital requirements, the Company may be required to limit its
operations significantly. The Company's capital requirements will depend on many
factors, including, but not limited to, the rate at which the Company can
introduce its product, the market acceptance and competitive position of such
product, the response of competitors to the Company's product, and the ability
of the Company to satisfy the licensing requirements in various jurisdictions
applicable to the Company, its product, and in some jurisdictions, its officers,
directors, employees or principal shareholders.
29
<PAGE>
RISK FACTORS
SINGLE PRODUCT; RISK OF TECHNICAL ERRORS; UNCERTAIN MARKET ACCEPTANCE. The
Company's success will depend on the success of a single product. There can be
no assurance that a substantial technical difficulty with, or an undetected
error in, the Company's software or hardware will not arise, possibly resulting
in unanticipated costs, production delays, temporary revocation of existing
product licenses or delays in future product licensing.
To achieve commercial success, the Company's gaming platform must be accepted
both by casino operators and by gaming patrons. Because acceptance of the
platform by casino operators will ultimately depend on win per machine, the
Company believes that its ultimate success will depend on player acceptance. The
Company has performed only limited market studies to support its belief that its
platform design will be perceived by slot players as an improvement in slot
machine design, and there can be no assurance that its gaming platform will be
accepted by casino patrons. Player preferences are highly subjective, vary
substantially among geographic and demographic markets and are subject to
unpredictable change. Because the Company's gaming platform contains features
not found on traditional slot machines, it may not appeal to the player for whom
familiarity and predictability are an important consideration. As a new and
relatively small entrant in a market dominated by larger companies, the Company
believes that its success will require that its gaming platform demonstrate
superior, as opposed to merely comparable, win per machine when compared to
traditional slot machines and other gaming platforms offered by more established
competitors. The Company also believes its product must have superior
performance since its price is expected to exceed that of its competitors'
products. Although several casinos have agreed to install and evaluate the
Company's gaming platform, any purchases of gaming platforms by such casinos, or
by others that may conduct similar evaluations in the future, will likely
require that the Company's machine outperform competing machines on the casino
floor. If the Company's gaming platform does not perform well in its initial
evaluations, the Company's business, financial condition and results of
operations will be materially and adversely affected, and investors will be
exposed to the risk of loss of at least a portion of their investment.
REGULATORY APPROVAL. The Company will be required to obtain the necessary
licenses, approvals, findings of suitability and product approvals in all
jurisdictions in which it intends to distribute its product. The licensing and
approval processes can involve extensive investigation into the Company and its
officers, directors, employees, principal shareholders and product, and can
require significant expenditures of time and resources by the Company. The
Company and certain of its subsidiaries have been approved as manufacturers and
distributors of gaming devices in Nevada, Mississippi, Missouri and Colorado.
The Company has also applied for the requisite corporate and individual
approvals in New Jersey and intends to file for the requisite approvals in other
jurisdictions wherein its product can be legally sold. The Company's gaming
platform was approved for sale in Nevada on March 20, 1997. In addition, the
Company has submitted its product for testing in Mississippi and New Jersey and
with Gaming Laboratories International, Inc., an independent testing facility
located in Tom's River, New Jersey. There can be no assurance that the Company's
product will be approved in any additional jurisdiction other than Nevada. The
regulations relating to Company and product licensing are subject to change, and
other jurisdictions, including the federal government, may elect to regulate or
tax gaming activities. The Company cannot predict the nature of any such changes
or their impact on the Company.
Any beneficial holder of the Company's Common Stock may be subject to
investigation by any gaming authority in any jurisdiction in which the Company
does business if such authorities have reason to believe that such ownership may
be inconsistent with the gaming policies of that jurisdiction. Persons who
acquire beneficial ownership of more than certain designated percentages of the
Common Stock may be subject to certain reporting and qualification procedures.
In addition, changes in control of the Company and certain other corporate
transactions may not be effected without the prior approval of gaming
authorities in other jurisdictions in which the Company plans to do business.
Such provisions could adversely affect the marketability of the Company's Common
Stock or prevent certain corporate transactions, including mergers or other
business combinations.
30
<PAGE>
In the future, the Company intends to store its game software and Machine
Management System/TM/ on a writeable internal hard disk drive that will enhance
data storage and facilitate upgrades to game software. Current technical
standards in Nevada and Colorado prohibit the storage of software affecting game
outcome in a medium that can be altered through the circuitry or programming of
the gaming device. Accordingly, implementation of a writeable internal disk
drive will require a modification to the applicable technical standard or any
similar regulations of any other jurisdictions where the Company intends to sell
its machine. Although the Company believes that the Nevada gaming authorities
may modify the technical standard in the near future in a manner that will
permit the implementation of the Company's current design, there can be no
assurance that such modification will occur in the near future or at all, or
that a similar modification will be made to the regulations of any other
jurisdiction. Moreover, any such modification will be subject to administrative
procedures in Nevada that allow for comment by certain parties currently
licensed under Nevada gaming regulations. Thus, certain existing or potential
competitors of the Company will have the opportunity to object to modifications
to the technical standard that may be necessary to permit the Company to
implement a writeable hard disk design. There can be no assurance that such
objection will not affect the outcome of this administrative procedure in a
manner that would prevent the Company's implementation of its current platform
design. The Company has altered its product to comply with existing regulations
in Nevada by disabling the write feature of its hard drive in a manner that
could not be changed without violating the integrity of the machine. Although
this alternative limits the machine's ability to store substantial quantities of
game history data during play and the ease of software upgrades, the Company
does not believe that this alternative affects the actual play characteristics
of the Company's games or the operation of the Machine Management System./TM/
DEVELOPMENT STAGE COMPANY; EXPECTATION OF LOSSES; NEGATIVE CASH FLOWS. The
Company was founded in July 1993 and, as a development stage company, has not
yet generated revenue from product sales or other sources. As of December 31,
1996, the Company had cumulative net losses since inception of $19,614,000, and
the Company expects to continue to incur substantial losses and negative
operating cash flows at least through mid-1998. There can be no assurance that
the Company will become profitable or cash flow positive at any time in the
future. The likelihood of the success of the Company must be considered in light
of the expenses, difficulties, complications and delays frequently encountered
in connection with the formation of a new business and the competitive and
regulatory environment in which the Company must operate. In particular, the
Company's operations to date have focused primarily on product development, and
the Company has little or no experience in the areas of manufacturing, sales,
product distribution or customer support. It is not possible to estimate future
operating expenses and revenue based upon historical operating performance.
Operating results will depend, in part, on matters over which the Company has no
control, including, without limitation, general economic conditions, gaming
regulations and taxes, the ability of the Company to obtain the licenses
necessary to conduct its business, competition, the actual number of orders for
its product and the availability of qualified personnel.
COMPETITION. The gaming machine industry is characterized by intense
competition, which is based on, among other things, a device's ability to
generate win per machine through product appeal to players, knowledge of
customer requirements such as ease of use, ease of service, support and
training, distribution, name recognition and price. In recent years, the gaming
machine market has been dominated by International Game Technology ("IGT")
which, according to industry sources, captured approximately 75% of the market
in 1996. Because of its extensive market presence, distribution capacity, player
acceptance and financial, technological and other resources, IGT represents
formidable competition. Several other companies, including Bally Gaming
International, Inc., are established in, or are seeking to enter, the gaming
machine business. Companies in historically unrelated industries, such as Sega
Enterprises LTD ("Sega"), have technological resources that could offer them a
competitive advantage in developing multimedia-based gaming machines. In
general, the Company's existing competitors, as well as many potential new
competitors, have significantly greater financial and technical resources than
the Company, as well as more established customer bases and distribution
channels, which may allow them to move rapidly into the Company's market and
acquire significant market share. Increased competition could result in price
reductions, reduced operating margins and loss of market share, any of which
31
<PAGE>
could materially and adversely affect the Company's business, operating results
or financial condition. Furthermore, any success the Company might have may
benefit existing competitors and induce new competitors to enter the market.
There can be no assurance that the Company will be a successful competitor in
the gaming machine industry.
MANAGEMENT OF GROWTH. Execution of the Company's plan of operation will require
significant growth. The Company's current plans for growth will place a
significant strain on the Company's financial, managerial and other resources.
The Company's ability to manage its growth effectively will require it to
continue to improve its operational, financial and management information
systems and to attract, motivate and train key employees. If the Company's
executives are unable to manage growth effectively, the Company's business,
operating results and financial condition would be materially and adversely
affected.
DEPENDENCE ON KEY PERSONNEL. The operations of the Company depend a great
extent on the management efforts of its officers and other key personnel and on
the ability to attract new key personnel and retain existing key personnel.
Competition is intense for highly skilled product development employees in
particular. There can be no assurance that the Company will be successful in
attracting and retaining such personnel or that it can avoid increased costs in
order to do so. In addition, the Company's officers and key employees are not
bound by noncompetition agreements that extend beyond their employment at the
Company, and there can be no assurance that employees will not leave the Company
or compete against the Company. The Company's failure to attract additional
qualified employees or to retain the services of key personnel could have a
material adverse effect on the Company's operating results and financial
condition. The Company currently maintains a "key-man" life insurance policy in
the amount of $3 million on the life of Andrew S. Pascal, the Company's
Executive Vice President-Marketing and Game Development.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS; RISK OF LITIGATION. The
Company regards its product as proprietary and relies primarily on a combination
of trademark, copyright and trade secret laws and employee and third-party
nondisclosure agreements to protect its proprietary rights. Defense of
intellectual property rights can be difficult and costly, and there can be no
assurance that the company will be able effectively to protect its technology
from misappropriation by competitors. In addition, the protections offered by
trademark, copyright and trade secret laws would not prevent a competitor from
designing games having appearance and functionality that closely resemble the
company's games. At present, the company's principal proprietary technology
consists of its game authentication algorithm, which is designed to inhibit the
ability of any person to tamper with the game software resident in its product,
and its random number generator algorithm, which determines the outcome of each
gaming proposition. While the company believes that these algorithms are unique
at present, the algorithms are not patented, and there can be no assurance that
a competitor of the company will not succeed in developing an authentication
algorithm or a random number generator algorithm that performs as well as, or
better than, the company's. Although the company has applied for a U.S. patent
with respect to its authentication algorithm, there can be no assurance that
such patent will be issued or, if issued, that such patent will not be
successfully challenged in subsequent litigation.
As the number of software products in the industry increases and the
functionality of these products further overlaps, software developers and
publishers may increasingly become subject to infringement claims. The Company
may also become subject to infringement claims, with or without merit, that are
brought by competitors who are motivated by a desire to disrupt the Company's
business. Although the Company is not currently aware of any claim that it is
infringing upon any of its intellectual property rights, there can be no
assurance that the Company will not face claims, with or without merit, in the
future. Any such claims or litigation could be costly and could result in a
diversion of management's attention, which could have a material adverse effect
on the Company's business and financial condition. Any settlement of such claims
or adverse determinations in such litigation could also have a material adverse
effect on the Company's business, operating results and financial condition.
RAPIDLY CHANGING TECHNOLOGY. The Company's product utilizes hardware components
that have been developed primarily for the personal computer and multimedia
industries. These industries are characterized by rapid technological change
32
<PAGE>
and product enhancements. The Company's ability to remain competitive and retain
any technological lead may depend in part upon its ability to continually
develop new slot machine games that take full advantage of the technological
possibilities of state-of-the-art hardware. Should any current or potential
competitor of the Company succeed in developing a competing software-based
gaming platform, such competitor could be in a position to outperform the
Company in its ability to exploit developments in microprocessor, video or other
multimedia technology. The emergence of a suite of slot machine games that is
superior to the Company's in any respect could substantially diminish the
Company's product sales and thereby have a material adverse effect on the
Company's operating results.
CAPITAL REQUIREMENTS. The Company believes that its cash and equivalents and
short-term investments will be sufficient to fund its capital and operating
requirements. No assurance can be given, however, that the Company will not be
required to seek additional financing to fund its operations. In that event,
there can be no assurance that the Company will be able to obtain such
financing, or that, if it is able to obtain such financing, it will be able to
do so on satisfactory terms or on a timely basis. If additional funds are raised
through the issuance of equity, convertible debt or similar securities, the
percentage of ownership of the Company's shareholders will be reduced,
shareholders may experience additional dilution, and such securities may have
rights or preferences senior to those of the Common Stock. Moreover, if adequate
funds were not available to satisfy the Company's short-term or long-term
capital requirements, the Company would be required to limit its operations
significantly. The Company's capital requirements will depend on many factors,
including, but not limited to, the rate at which the Company can introduce its
product, the market acceptance and competitive position of such product, the
response of competitors to the product and the ability of the Company's
management and its product to satisfy the corporate licensing and product
licensing requirements in various jurisdictions.
LIMITED MANUFACTURING EXPERIENCE. In order for the Company to be successful,
its product must be manufactured to meet high quality standards in commercial
quantities at competitive prices. Although the Company has produced small
quantities of prototype devices for testing, design, licensing and field testing
purposes, it has only recently attempted to manufacture its product for
commercial distribution. The transition to commercial manufacturing of the
Company's product, either by the Company or by a contract manufacturer, will
involve various risks and uncertainties including unforeseen costs or assembly
difficulties and the possibility that anticipated efficiencies or economies of
scale will fail to materialize as the Company begins manufacturing in greater
volumes. A failure by the Company to successfully manage this transition would
have a material adverse affect on the Company's business, operating results or
financial condition.
DEPENDENCE ON SINGLE-SOURCE SUPPLIERS. The Company currently obtains a number
of its system's components from single-source suppliers. In particular, the
touchscreen and picture tube that comprise the video display are supplied by
MicroTouch Systems, Inc. and Philips Display Components Company, respectively.
The Company does not have long-term supply contracts with these suppliers but
rather obtains these components on a purchase order basis. Although the design
of these components is not unique or proprietary and the Company believes that
it could identify alternative sources of supply, if necessary, there can be no
assurance that the Company would be able to procure, substitute or produce such
components without a significant interruption in its assembly process in the
event that these single sources were unable to supply these components. The
failure or delay by any supplier to furnish the Company with any such components
would have a material adverse effect on the Company's business, financial
condition and results of operations.
SLOWING IN TREND TO LEGALIZE GAMING. Growth in demand for slot machines
historically has been driven by the opening of new casinos, including casinos in
jurisdictions where gaming has recently been legalized. However, in recent
years, the legalization of gaming in new jurisdictions has been significantly
reduced; therefore, demand based on new openings will be largely limited to new
projects in existing markets. There can be no assurance that the slot machine
industry will sustain the rate of growth that was possible in the first half of
this decade.
NO DIVIDENDS. The Company has not paid any cash dividends in the past and does
not expect to do so in the foreseeable future.
33
<PAGE>
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(In thousands, except share -----------------------------
and per share amounts) 1995 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and equivalents $ 2,399 $ 25,583
Short-term investments - 9,683
Inventory - 477
Prepaids and other 292 812
----------------------------
Total current assets 2,691 36,555
Property and Equipment, Net 734 3,046
Other Assets, Net 61 45
----------------------------
Total $ 3,486 $ 39,646
============================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY):
Current Liabilities:
Accounts payable $ 370 $ 1,158
Accrued liabilities 239 987
Current portion of capital lease obligations 55 207
----------------------------
Total current liabilities 664 2,352
Deferred Rent - 133
Capital Lease Obligations 272 645
Commitments (Note 4)
Redeemable Convertible Preferred Stock
6,884,473 shares authorized at December 31,
1996; Shares outstanding: December 31, 1995
--8,534,997; December 31, 1996--6,384,473 8,496 6,455
----------------------------
Shareholders' Equity (Deficiency)
Common Stock, $.001 par value; 50,000,000 shares
authorized; Shares outstanding: December 31,
1995--2,737,989; December 31, 1996--10,608,105 109 49,873
Notes receivable from shareholders (75) (221)
Unrealized gain on investments - 23
Deficit accumulated during the development stage (5,980) (19,614)
----------------------------
Total shareholders' equity (deficiency) (5,946) 30,061
----------------------------
Total $ 3,486 $ 39,646
============================
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative from
Inception (July 27,
(In thousands, except per Year Ended Nine Months Ended Year Ended 1993) through
share amounts) March 31, 1995 December 31, 1995 December 31, 1996 December 31, 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Expenses:
Research and development $ 1,539 $ 3,137 $ 7,030 $ 11,785
Manufacturing development - - 2,458 2,458
Selling, general and
administrative 312 922 5,045 6,340
------------------------------------------------------------------------------
Loss from operations 1,851 4,059 14,533 20,583
Interest income (7) (85) (1,016) (1,108)
Interest expense 22 - 84 106
Loss on disposal of fixed asset - - 33 33
------------------------------------------------------------------------------
Net Loss $ 1,866 $ 3,974 $ 13,634 $ 19,614
==============================================================================
Net Loss Per Share ($0.48) ($1.36)
==============================================================================
Shares Used In Computation 8,292 10,021
==============================================================================
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
PERIOD FROM INCEPTION (JULY 27, 1993) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION> Unrealized Deficit
Notes Gain on Accumulated
Common Stock Receivable Available- During the
(In thousands, except share ---------------------------- from for-sale Development
and per share amounts) Shares Amount Shareholders Securities Stage Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
September 1993-Sale of Common
Stock to founders at $.001
per share 2,000,000 $ 3 $ (1) $ 2
Net loss $ (140) (140)
------------------------------------------------------------------------------------
Balances, March 31, 1994 2,000,000 $ 3 (1) - (140) (138)
Collection of notes
receivable 1 1
Net loss (1,866) (1,866)
-----------------------------------------------------------------------------------
Balances, March 31, 1995 2,000,000 3 - - (2,006) (2,003)
Options exercised during the
year for cash and notes
receivable 716,222 77 (75) 2
Common Stock and warrants
issued to employees and vendors
for services at $.18 per share 21,767 4 4
Warrants issued to vendors 25 25
Net loss (3,974) (3,974)
-----------------------------------------------------------------------------------
Balances, December 31, 1995 2,737,989 109 (75) - (5,980) (5,946)
Options exercised for cash
and notes receivable 870,979 155 (152) 3
Collection of notes
receivable 1 1
Repurchase of Common Stock
and cancellation of notes
receivable (39,780) (5) 5 -
Common Stock issued to
vendors for services at $1.04
per share 10,568 11 11
Conversion of Redeemable
Preferred Stock in conjunction
with initial public offering 3,528,349 16,748 16,748
Common Stock issued pursuant
to initial public offering
in July 1996 at $10.50 per
share, net of costs of $3,895 3,500,000 32,855 32,855
Unrealized gain on investments $ 23 23
Net loss (13,634) (13,634)
------------------------------------------------------------------------------------
Balances, December 31, 1996 10,608,105 $ 49,873 $ (221) $ 23 $(19,614) $ 30,061
====================================================================================
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative from
Inception (July 27,
Year Ended Nine Months Ended Year Ended 1993) through
(In thousands) March 31, 1995 December 31, 1995 December 31, 1996 December 31, 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net loss $ (1,866) $ (3,974) $(13,634) $(19,614)
Reconciliation to net cash
used in operating
activities:
Depreciation and
amortization 47 136 668 852
Deferred rent - - 133 133
Common and Preferred Stock
issued for services - 4 261 265
Accrued interest exchanged
for Preferred Stock - 10 - 10
Loss on sale of property - - 33 33
Changes in assets and
liabilities:
Inventory - - (477) (477)
Prepaids and other (28) (264) (520) (812)
Other assets, net (2) (30) 9 (28)
Accounts payable 21 296 788 1,158
Accrued liabilities 132 91 748 987
----------------------------------------------------------------------------
Net cash used in
operating activities (1,696) (3,731) (11,991) (17,493)
----------------------------------------------------------------------------
Cash Flows from Investing
Activities:
Acquisition of property (231) (659) (3,013) (3,930)
and equipment
Proceeds from sale of assets - - 7 7
Purchases of short-term
investments - - (14,310) (14,310)
Sales and maturities of
short-term investments - - 4,650 4,650
----------------------------------------------------------------------------
Net cash used in
investing activities (231) (659) (12,666) (13,583)
----------------------------------------------------------------------------
Cash Flows from Financing
Activities:
Sale of Common Stock,
net of notes receivable - 2 32,858 32,862
Sale of Redeemable
Convertible Preferred
Stock, net of issuance costs 967 5,457 14,457 20,881
Collection of notes receivable 1 12 1 14
Proceeds from notes payable
to shareholders 1,300 750 - 2,186
Payment on notes payable to
shareholders (136) - - (136)
Proceeds from
sale/leaseback of property
and equipment - 333 667 1,000
Repayment of capital lease
obligation - (6) (142) (148)
----------------------------------------------------------------------------
Net cash provided by
financing activities 2,132 6,548 47,841 56,659
----------------------------------------------------------------------------
Net Increase in Cash and
Equivalents 205 2,158 23,184 25,583
Cash and Equivalents:
Beginning of period 36 241 2,399 -
----------------------------------------------------------------------------
End of period $ 241 $ 2,399 $ 25,583 $ 25,583
============================================================================
Supplementary Disclosure of
Cash Flow Information:
Cash paid during the period
for interest $ 1 $ 11 $ 70 $ 82
============================================================================
Noncash Investing and
Financing Activities:
Issuance of Common and
Preferred Stock for notes
receivable $ 25 $ 75 $ 152 $ 252
============================================================================
Cancellation of stock and
related note receivable $ - $ 12 $ 5 $ 17
============================================================================
Conversion of note payable
to shareholder to
Preferred Stock $ - $ 2,050 $ - $ 2,050
============================================================================
Issuance of common warrants $ - $ 25 $ - $ 25
============================================================================
Conversion of Preferred Stock
to Common Stock on initial
public offering $ - $ - $ 16,748 $ 16,748
============================================================================
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--Silicon Gaming, Inc. (the Company) was incorporated on July 27, 1993
to develop and market innovative gaming devices through the use of advanced
multimedia and interactive technologies.
In May 1996, the Board of Directors of the Company approved a two-for-three
reverse split of the outstanding shares of Common Stock which was approved by
shareholders and effected in July 1996. All share and per share amounts in these
financial statements have been adjusted to reflect this split.
As of December 31, 1996, the Company was a development stage company. Successful
completion of the Company's development program and, ultimately, the attainment
of profitable operations is dependent upon future events, including obtaining
regulatory approval of its products and achieving a level of sales adequate to
support the Company's cost structure.
FISCAL YEAR END--Effective April 1, 1995, the Company changed its fiscal year
end to December 31 from March 31. Accordingly, the period ended December 31,
1995 is a nine-month period.
Selected financial information for the nine-month periods ended December 31,
1995 and 1996 are as follows :
<TABLE>
<CAPTION>
Nine Months ended December 31,
--------------------------------
1995 1996
(In thousands, except per share amounts) (unaudited)
- --------------------------------------------------------------------------------
<S> <C> <C>
Research and development expense $ 3,137 $ 5,465
Manufacturing development expense - 2,458
Selling, general and administrative expense 922 4,273
Other expense (income)--net (85) (898)
-------------------------
Net loss $ 3,974 $11,298
=========================
Net loss per share ($0.48) ($1.09)
Shares used in computation 8,292 10,361
</TABLE>
CONSOLIDATION--The consolidated financial statements include the Company and its
wholly-owned subsidiaries (formed in February 1996) after elimination of
intercompany accounts and transactions.
ESTIMATES--The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS--The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
SHORT-TERM INVESTMENTS--Short-term investments represent debt securities which
are stated at fair value. The difference between amortized cost (cost adjusted
for amortization of premiums and accretion of discounts which are recognized
as adjustments to interest income) and fair value representing the unrealized
holding gains and losses are recorded as a separate component of shareholders'
equity until realized. While the Company's intent is to hold debt securities to
maturity, they are classified as available-for-sale securities because the sale
of such securities may be required prior to maturity. Any gains or losses on
the sale of debt securities are determined on a specific identification
basis.Inventories--Inventories consist of raw materials and work-in-process and
are stated at the lower of cost or market on a first-in, first-out basis.
38
<PAGE>
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost. Depreciation
and amortization are computed using the straight-line method over estimated
useful lives of three to ten years.
RESEARCH AND DEVELOPMENT EXPENSES--Research and development expenses are charged
to operations as incurred. In connection with the Company's product development
efforts, it develops software applications which are integral to the operation
of the product. The costs to develop such software have not been capitalized as
the Company believes its current software development process is essentially
completed concurrent with the establishment of technological feasibility and/or
development of the related hardware.
INCOME TAXES--The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach for financial reporting of income
taxes.
STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
Accounting for Stock Issued to Employees.
NET LOSS PER SHARE--Net loss per share is based on the weighted average number
of common shares outstanding subsequent to the Company's initial public offering
in 1996. Common share equivalents including stock options, warrants and
redeemable convertible preferred stock have been excluded, as their effect would
be antidilutive. Pursuant to rules of the Securities and Exchange Commission
Staff, all common and common equivalent shares issued by the Company at a price
less than the initial public offering price during the 12 months preceding the
offering date (using the treasury stock method until shares are issued) have
been included in the calculation of common and common equivalent shares
outstanding for all periods presented prior to the July 1996 initial public
offering.
2. SHORT-TERM INVESTMENTS
Short-term investments consist of the following debt securities as of December
31, 1996:
<TABLE>
<CAPTION>
Unrealized Unrealized
Amortized Market Holding Holding
(In thousands) Cost Value Gains Losses
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale corporate debt securities $ 9,660 $ 9,683 $ 28 $ 5
=========================================
</TABLE>
Realized gains or losses on sales of available-for-sale securities for the year
ended December 31, 1996 were not significant. The cost of securities sold is
based on the specific identification method. Fair values are based on quoted
market prices obtained from independent brokers. Available-for-sale investments
have been classified as current assets as all maturities are within one year.
3. BALANCE SHEET COMPONENTS
Inventory consists of:
December 31,
------------------------
(In thousands) 1995 1996
- --------------------------------------------------------------------------------
Raw materials $ - $ 307
Work in progress $ - 170
------------------------
$ - $ 477
========================
39
<PAGE>
Property and equipment consists of:
December 31,
---------------
(In thousands) 1995 1996
- -----------------------------------------------------------------------
Furniture and fixtures and office equipment $ 136 $ 485
Computer equipment 781 2,450
Manufacturing equipment - 581
Leasehold improvements - 156
Construction in progress - 172
---------------
917 3,844
Accumulated depreciation and amortization (183) (798)
---------------
$ 734 $3,046
===============
Accrued liabilities consists of:
December 31,
---------------
(In thousands) 1995 1996
- -----------------------------------------------------------------------
Accrued compensation benefits $ 97 $ 642
Other accrued liabilities 142 345
---------------
$ 239 $ 987
===============
4. LEASES
In October 1995, the Company obtained a lease line of credit to acquire up to
$1,000,000 of equipment under capital leases with a term of 48 months. The
Company granted the leasing company a warrant to purchase 40,936 shares of
Common Stock at a price of $1.71 per share; such warrant expires in the year
2002 and may be net-exercised by the holder. The estimated fair value of the
warrant, $25,000, has been recorded as a deferred financing cost in other
assets, and is being amortized over the term of the related leases. In December
1995 and during 1996, the Company entered into sale/leaseback arrangements under
this lease line for equipment with an original cost of $333,000 and $667,000,
respectively; no gains or losses were recorded on these transactions.
In September 1995, the Company entered into a facility lease agreement which
expires in 2006 and requires the Company to incur at least $175,000 for net
leasehold improvements in the first three years of occupancy, which the Company
completed in 1996.
Future minimum operating and capital lease commitments at December 31, 1996 are
as follows:
Operating
(In thousands) Leases Capital Leases
- ---------------------------------------------------------------
1997 $ 391 $ 283
1998 299 336
1999 422 327
2000 445 56
2001 465 -
Thereafter 2,110 -
-----------------------
Total minimum lease payments $4,132 1,002
======
Amount representing interest (150)
------
Present value of lease payments 852
Current portion (207)
------
Long-term portion $ 645
======
Total rent expense (including prorated common area maintenance charges and
utilities) for the year ended March 31, 1995, the nine-month period ended
December 31, 1995 and the year ended December 31, 1996 was $49,000, $58,000 and
$469,000, respectively.
40
<PAGE>
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
At December 31, 1996, the Company had 1,998,332 shares of Series A1 and
4,386,141 shares of Series B1 Nonvoting Redeemable Convertible Preferred Stock
outstanding. Information concerning Redeemable Convertible Preferred Stock
transactions follows:
<TABLE>
<CAPTION>
Amount, net
Shares of Notes
(In thousands, except share and per share amounts) Outstanding receivable
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Series A:
Issued May 1994 at $.75 per share for cash 1,299,998 $ 967
Issued October 1994 at $.75 for notes 50,000 -
Cancellation of shares and note in June 1995 (16,667) -
Collection of notes receivable - 12
Conversion of notes payable at $.75 per share in June 1995 1,666,666 1,250
Conversion of Series A to Series A1 in April 1996 (1,998,332) (1,489)
Conversion to 667,777 shares of Common Stock (1,001,665) (740)
Series A1:
Conversion of Series A to Series A1 in April 1996 1,998,332 1,489
Series B:
Issued August 1995 at $1.14 per share for cash and
accrued interest 5,535,000 6,267
Conversion of Series B to Series B1 in April 1996 (4,386,141) (4,966)
Conversion to 765,906 shares of Common Stock (1,148,859) (1,301)
Series B1:
Conversion of Series B to Series B1 in April 1996 4,386,141 4,966
Series C:
Issued March 1996 at $5.00 per share for cash 1,600,000 7,500
Issued April and May 1996 at $5.00 per share for
cash and services 1,542,000 6,960
Conversion to 2,094,666 shares of Common Stock (3,142,000) (14,460)
-------------------------
Total Balance, December 31, 1996 6,384,473 $ 6,455
=========================
</TABLE>
Concurrent with the Company's initial public offering, the authorized number of
Preferred Shares was reduced to 6,884,473, including 500,000 shares not
designated to a specific series. The rights, preferences and privileges of these
500,000 additional shares of Redeemable Convertible Preferred Stock are subject
to the determination of the Board of Directors.
Significant terms of the Series A1 and B1 Redeemable Convertible Preferred Stock
are as follows:
Each share is convertible into .6667 shares of Common Stock (subject to
adjustment for anti-dilution) at the election of the holder upon at least 75
days notice to the Company.
Shares have no voting rights except as required by law.
At any time after August 2000, the holders of a majority of the then outstanding
shares of Redeemable Convertible Preferred Stock may require the Company to
redeem for cash the Preferred Shares outstanding over a three-year period at a
per-share purchase price equal to the original issue price (subject to certain
anti-dilution adjustments) plus all declared but unpaid dividends on such
shares. The Company shall redeem the shares of Redeemable Convertible Preferred
Stock ratably from the Preferred Shareholders of record on that date.
41
<PAGE>
Dividends may be declared at the discretion of the Board of Directors and are
noncumulative. To the extent declared, dividends of $.075 per share for Series
A1 and $.114 per share for Series B1 must be paid prior to any dividends on
Common Stock. No dividends have been declared through December 31, 1996.
In the event of liquidation, dissolution or winding up of the Company, the
Preferred Shareholders shall receive the initial issue price per share plus all
declared but unpaid dividends. If the assets and funds to be distributed are
insufficient to permit full payment, then the funds shall be distributed on a
pro rata basis. Upon completion of this distribution, the holders of the Common
Stock will receive a pro rata distribution of any remaining assets of the
Company.
Holders of the Redeemable Convertible Preferred Stock have certain registration
rights.
6. COMMON STOCK
During 1996, the Board of Directors adopted, and the shareholders approved, an
amendment to the Articles of Incorporation to increase the number of authorized
shares of Common Stock to 50,000,000. At December 31, 1996, Common Stock was
reserved for issuance as follows:
- -------------------------------------------------------------------------------
Conversion of outstanding Redeemable Convertible Preferred Stock 4,256,315
Issuable under stock purchase warrants 335,379
1994 Stock Option Plan 1,279,466
1996 Employee Stock Purchase Plan 300,000
1996 Outside Directors Stock Option Plan 200,000
---------
6,371,160
=========
Common Stock Offering
- ---------------------
In August 1996, the Company completed an initial public offering of 3,500,000
shares of Common Stock at a price of $10.50 per share. Concurrent with the
initial public offering, all outstanding shares of Series A, B and C Redeemable
Convertible Preferred Stock were automatically converted into 3,528,349 shares
of Common Stock. The proceeds to the Company from the offering, net of
underwriting discounts and offering expenses, were $32,855,000.
Warrants
- --------
During 1996 the Company issued warrants to certain financial advisors in
connection with its Series C Redeemable Convertible Preferred Stock financing.
These warrants are exercisable for 116,666 shares of Common Stock at an
exercise price of $7.50 per share. In connection with the initial public
offering, the Company issued 5-year warrants to purchase an aggregate of 177,777
shares of Common Stock to other financial advisors at an exercise price of
$12.60 per share. Warrants to purchase 40,936 shares of Common Stock at an
exercise price of $1.71 were issued to a leasing company in 1995 in connection
with a lease line of credit (See Note 4). All warrants expire in 2001.
Stock Option Plans
- ------------------
Under the 1994 Stock Option Plan (the "Option Plan"), the Company may grant
incentive or nonstatutory stock options up to 2,866,666 shares of Common Stock
to employees, directors and consultants at prices not less than fair
market value for incentive stock options and not less than 85% of fair market
value for nonstatutory stock options. These options generally expire five to ten
years from the date of grant. Options normally vest at a rate of 25% on the
first anniversary of the grant date and 1/48 per month thereafter and may be
exercised at any time, subject to the Company's right to repurchase unvested
shares at the original exercise price upon termination. During the nine months
ended December 31, 1995 and the year ended December 31, 1996, employees
exercised options in exchange for notes payable to the Company of $75,000 and
$152,000, respectively.
In 1996, the Board of Directors adopted the 1996 Outside Directors Stock Option
Plan (the "Directors Plan"). Under this plan, non-employee directors of the
Company are automatically granted initial options to purchase 15,000 shares of
Common Stock and additional options to purchase 5,000 shares of Common Stock in
each subsequent year that such person remains a director of the Company. Options
under the Directors Plan have an exercise price equal to fair market value at
the grant date, vest at a rate of 1/36 per month over three years and expire 10
years from the date of grant. The number of shares authorized under this plan is
200,000.
42
<PAGE>
Option activity under the 1994 Option Plan and the Directors Plan is as follows:
Weighted
Number of Average
Shares Exercise Price
- -------------------------------------------------------------------------------
Granted 406,667 $ 0.11
----------------------------
Outstanding, March 31, 1995 406,667 0.11
Granted (weighted average fair value of $.04) 1,096,333 0.13
Exercised (716,222) 0.11
Cancelled (61,111) 0.11
----------------------------
Outstanding, December 31, 1995 725,667 0.14
Granted (weighted average fair value of $2.59) 1,020,063 5.34
Exercised (870,979) 0.18
Cancelled (39,348) 2.22
----------------------------
Outstanding, December 31, 1996 835,403 $ 6.35
============================
Additional information regarding options outstanding as of December 31, 1996,
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- -------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Outstanding Contractual Average Exercisable as Average
Range of Exercise Prices as of 12/31/96 Life (yrs) Exercise Price of 12/31/96 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.105 - $ 0.165 33,666 8.33 $ 0.11 33,666 $ 0.11
$ 1.500 - $ 1.500 233,994 9.30 1.50 233,994 1.50
$ 4.500 - $ 4.500 148,663 9.41 4.50 148,663 4.50
$ 7.500 - $ 7.500 107,997 9.54 7.50 107,997 7.50
$ 8.750 - $ 11.625 247,833 8.01 10.13 247,833 10.13
$ 13.375 - $ 16.625 63,250 9.92 15.13 63,250 15.13
- -----------------------------------------------------------------------------------------------------------------------
$ 0.105 - $ 16.625 835,403 8.98 $ 6.35 835,403 $ 6.35
=======================================================================================================================
</TABLE>
At December 31, 1996, 540,908 and 140,000 shares were available for future
grants under the Option Plan and Directors Plan, respectively. At December 31,
1996, 966,471 shares exercised were subject to repurchase.
Employee Stock Purchase Plan
- ----------------------------
In 1996, the Board of Directors adopted the 1996 Employee Stock Purchase Plan
(the 'Purchase Plan'). Under the Purchase Plan, eligible employees are permitted
to purchase shares of Common Stock through salary withholding at a price equal
to 85% of the lower of the market value of the stock at the beginning of the 24-
month offering period or the end of each six-month purchase period, subject to
certain limitations. No shares have been issued under the Purchase Plan as of
December 31, 1996; 300,000 shares were reserved for future issuance.
Additional Stock Plan Information
- ---------------------------------
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with APB No. 25,
Accounting for Stock Issued to Employees, and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), requires the disclosure of pro forma net income and
earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of the minimum value method for all
periods prior to the initial public offering, and subsequently through the use
of option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the minimum and Black-Scholes
option pricing models with the following weighted average assumptions: expected
life, 12 months following vesting; stock
43
<PAGE>
volatility, 39.2% subsequent to the initial public filing in 1996; risk-free
interest rates, 6% in 1995 and 6.7% in 1996; and no dividends during the
expected term. The Company's calculations are based on a multiple option
valuation approach and forfeitures are recognized as they occur. If the computed
fair values of the 1995 and 1996 awards had been amortized to expense over the
vesting period of the awards, pro forma net loss would have been $3,982,000
($0.49 per share) in 1995 and $14,345,000 ($1.45 per share) in 1996. However,
because options vest over several years and grants prior to 1995 are excluded
from these calculations, these amounts may not be representative of the impact
on future years' earnings, assuming grants are made in those years.
7. INCOME TAXES
The Company has had losses since inception and therefore has not provided for
income taxes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating loss
and tax credit carryforwards. Significant components of the Company's deferred
income tax assets as of December 31, 1995 and 1996 are as follows:
December 31,
------------------
(In thousands) 1995 1996
- -------------------------------------------------------------------
Net deferred tax assets:
Net operating losses $ 2,031 $ 7,009
Research and development credits 150 489
Capitalized research and development costs 428 87
Accruals deductible in different periods (183) 364
Depreciation and amortization 53 (88)
------------------
2,479 7,861
Valuation allowance (2,479) (7,861)
------------------
Total $ - $ -
==================
Due to the uncertainty surrounding the realization of the benefits of its
favorable tax attributes in future tax returns, the Company has fully reserved
its net deferred tax assets as of December 31, 1995 and 1996, respectively.
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $18,600,000 and $17,200,000 for federal and state income tax
purposes, respectively. These carryforwards begin to expire in 2000.
The Company also has research and development credit carryforwards of
approximately $240,000 and $250,000 available to offset future federal and state
income taxes, respectively, as of December 31, 1996. These carryforwards begin
to expire in 2010.
Section 382 of the Internal Revenue Code and the applicable California law
impose annual limitations on the use of net operating loss and tax credit
carryforwards if there is a change in ownership, as defined, within any three-
year period. As a result of certain stock offerings, the annual deductibility of
a substantial portion of the federal net operating loss and tax carryforwards
may be limited.
8. RELATED PARTIES
For the year ended March 31, 1995, the nine-month period ended December 31, 1995
and the year ended December 31, 1996, the Company paid approximately $166,000,
$23,000 and $8,000, respectively, to a partnership in which a founder of the
Company is a partner in exchange for management services and administrative
support. Additionally, for the year ended March 31, 1995 and the nine-month
period ended December 31, 1995, payroll and other expenses, including rent,
utilities and travel, amounting to $467,000 and $71,000, respectively, were paid
on behalf of the Company by affiliated companies and were subsequently
reimbursed by the Company.
44
<PAGE>
UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
- -----------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------- Nine-Month
(In thousands, except per share amounts) June 30 September 30 December 31 Period
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995:
Net loss $ (735) $ (1,321) $ (1,918) $ (3,974)
Net loss per share (0.09) (0.16) (0.24) (0.48)
=============================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------- Total
(In thousands, except per share amounts) March 31 June 30 September 30 December 31 Year
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996:
Net loss $ (2,336) $ (3,647) $ (3,705) $ (3,946) $ (13,634)
Net loss per share (0.26) (0.32) (0.35) (0.37) (1.36)
============================================================================
</TABLE>
SHAREHOLDERS' INFORMATION
Stock Price History
1996
---------------------
(Fiscal Year) High Low
- --------------------------------------------------------------------------------
Third Quarter 11 8 1/4
Fourth Quarter 17 1/8 9 7/8
=====================
The preceding table sets forth the high and low closing sale prices as reported
on the Nasdaq Stock Market since the Company's initial public offering completed
in August 1996.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Silicon Gaming, Inc.:
We have audited the accompanying consolidated balance sheets of Silicon
Gaming, Inc. (a development stage company) and subsidiaries as of December 31,
1995 and 1996, and the related consolidated statements of operations,
shareholders' equity (deficiency) and cash flows for the year ended March 31,
1995, the nine months ended December 31, 1995, the year ended December 31,
1996 and cumulative from inception (July 27, 1993). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Silicon Gaming, Inc. and
subsidiaries at December 31, 1995 and 1996, and the results of their operations
and their cash flows for the periods stated above in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
January 17, 1997
45
<PAGE>
EXHIBIT 21.1
SILICON GAMING, INC.
LIST OF SUBSIDIARIES
<TABLE>
<S> <C>
SUBSIDIARY JURISDICTION
---------- ------------
Silicon Gaming--Colorado, Inc. Colorado
Silicon Gaming--Mississippi, Inc. Mississippi
Silicon Gaming--Missouri, Inc. Missouri
Silicon Gaming--Nevada Nevada
Silicon Gaming--New Jersey, Inc. New Jersey
</TABLE>
<PAGE>
EXHIBIT 23.1
SILICON GAMING, INC.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 333-20233 of Silicon Gaming, Inc. on Form S-8 of our report dated
January 17, 1997 incorporated by reference in the Annual Report on Form 10-K
of Silicon Gaming, Inc. for the year ended December 31, 1996.
Deloitte & Touche LLP
San Jose, California
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
1996 ANNUAL REPORT
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 25,583
<SECURITIES> 9,683
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 477
<CURRENT-ASSETS> 36,555
<PP&E> 3,844
<DEPRECIATION> 798
<TOTAL-ASSETS> 39,646
<CURRENT-LIABILITIES> 2,352
<BONDS> 0
0
6,455
<COMMON> 49,873
<OTHER-SE> (19,614)
<TOTAL-LIABILITY-AND-EQUITY> 39,646
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,488
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84
<INCOME-PRETAX> (13,634)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,634)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,634)
<EPS-PRIMARY> (1.36)
<EPS-DILUTED> (1.36)
</TABLE>
