<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A
General Form for Registration of Securities of
Small Business Issuers
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
Virtual Gaming Technologies, Inc.
(Name of Small Business Issuer in its charter)
Delaware 33-0716247
- ---------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12625 High Bluff Drive
Suite 205A
San Diego, California 92130-2053
- ---------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code 619-259-5015
------------
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None N/A
- ---------------------------------------- -----------------------------------
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.00001 par value
- --------------------------------------------------------------------------------
(Title of class)
<PAGE>
Part 1
Item 1. Description of Business
Business Development
- --------------------
Virtual Gaming Technologies, Inc. (the "Company") is engaged in the
business of offering over the Internet casino-style gaming operations, including
baccarat, blackjack and video poker, and a pari-mutuel sports betting service.
The Company intends to offer additional casino games in the future. The
Company's gaming operations are offered in certain international jurisdictions,
located in Europe, the Caribbean, Latin America, the Middle East, Australia,
Asia and Africa supported by a server site and hardware located in Antigua. The
Company commenced gaming operations in September 1997.
The Company was formed under the laws of the State of Delaware on October
24, 1995 under the name MBA Licensing Corp. The Company's initial operations
included the development of CD-ROM and video game cartridges that incorporated
certain patented virtual reality technology. In November 1995, the Company
conducted a private placement of its $.00001 par value common stock ("Common
Stock") at $0.25 per share pursuant to Rule 504 under the Securities Act of 1933
("1933 Act"). In that offering, the Company sold 1,160,000 shares of Common
Stock in consideration of cash proceeds of $60,000, net of $5,000 of offering
costs, and the cancellation of $225,000 of licensing and consulting fees due and
payable. In May 1996, the Company chose to suspend all operations relating to
the development of the virtual reality CD-ROMs and video game cartridges in
favor of pursuing the development of casino-style gaming operations over the
Internet. On June 20, 1996, the Company changed its corporate name to Internet
Gaming Technologies, Inc. On January 22, 1997, the Company changed its
corporate name to Virtual Gaming Technologies, Inc.
Pursuant to a Securities Purchase Agreement dated September 5, 1996, as
amended, Unistar Entertainment, Inc., a wholly-owned subsidiary of Executone
Information Systems, Inc., agreed to purchase 233,333 shares of Common Stock at
$3.00 per share. In addition, the Company granted Unistar a common stock
purchase warrant entitling Unistar to purchase 200,000 shares of Common Stock at
an exercise price of $3.45 per share. The warrant is immediately exercisable
and expires on March 6, 2002.
Between April 1997 and August 1997, the Company conducted a private
placement of shares of Common Stock, at a price of $2.00 per share, pursuant to
Rule 506 under the 1933 Act. In that offering, the Company sold 1,018,250
shares of Common Stock for the gross proceeds of $2,036,500. Proceeds from the
sale of the shares were applied towards the development and implementation of
the Company's Internet gaming operations and working capital.
In January 1998, the Company commenced a private placement of 1,400,000
shares of Common Stock, at a price of $3.00 per share, pursuant to Rule 506
under the 1933 Act. As of December 8, 1998, the Company had sold 1,377,238
shares of Common Stock for the gross proceeds of $4,131,714. Proceeds from the
sale of the shares were applied towards the development and implementation of
the Company's Internet gaming operations and working capital.
In October 1998, the Company amended its Certificate of Incorporation to
increase its authorized capital to 30,000,000 shares of common stock, $.00001
par value, and to provide for 10,000,000 shares of preferred stock, $.00001 par
value.
Unless the context otherwise requires, all references to the Company
includes its wholly-owned subsidiaries Internet Gaming Technologies, Inc., a
Nevada corporation, Emerald Riviera Ltd., an Irish corporation, and Virtual
Gaming Technologies (Antigua) Ltd., an Antiguan corporation. The Company's
executive offices are located at 12625 High Bluff Drive, Suite 205A, San Diego,
California 92130; telephone number (619) 259-5015.
-1-
<PAGE>
Business of the Issuer
- ----------------------
General
The Company currently offers over the Internet casino-style gaming
opportunities, including baccarat, blackjack and video poker, and a pari-mutuel
sports betting service. The Company has internally developed proprietary
software applications, based on the Java programming language, that allows for
interactive gaming, including simulated casino motion and sound, on a real-time
basis. The Company offers its gaming operations in certain international
jurisdictions located in Asia, the Caribbean, Latin America, the Middle East,
Australia, Europe and Africa. The Company's gaming operations are conducted by
its wholly-owned subsidiary, Virtual Gaming Technologies (Antigua) Ltd.,
pursuant to a non-exclusive license from the Company and supported by a server
site and hardware located in St. Johns, Antigua, West Indies.
The Company's policy is to accept subscriptions only from persons over the
age of 21 and believed to reside in jurisdictions that are not known to
expressly prohibit Internet gaming. Subscriptions will not be accepted from
persons believed to be citizens or residents of the United States.
To date, the Company's activities have included the market analysis and
development of its virtual casino technology and its on line operations.
Beginning in 1996 and continuing through the second quarter of 1997, the Company
established an Internet website at which it offered an interactive beta test
version of its gaming service and a virtual casino under the name
"virtcasino.com." Beginning in the third quarter of 1997 and continuing through
the date of this registration statement, the Company has conducted limited
operations of its Internet casino. On April 1, 1998, the Company commenced
offering a pari-mutuel sports betting service.
As of the date of this registration statement, the Company has conducted
limited marketing of its Internet gaming operations and, consequently, from the
inception of operations in September 1997 through October 31, 1998 the Company
has generated $198,681 of gross revenue from gaming operations. As of December
7, 1998, the Company had accepted 14,216 subscriptions for its Internet gaming
operations and as of the same date cash deposits by customers, which are used by
customers for wagering, from inception of gaming operations totalled
approximately $431,857.
The Company's Services and Products
Platforms and Subscription. The Company has established a website, located
on the Internet at www.virtcasino.com, at which it offers an interactive gaming
service and a virtual casino under the service name "Constellation." The
Company has established a second website, located at www.virtsports.com, at
which it offers a pari-mutuel sports betting service under the service name
Internet Sports Market. The websites are accessible by the general public,
however, only established customers will be permitted to play the gaming
opportunities for money.
The Company's websites are accessible by a minimum hardware configuration
consisting of a 486 personal computer with Windows 95 or greater, with 16 MB
RAM, 20 MB free hard disk space, a 14,400 modem and a direct PPP Internet
connection. All games are provided in a Windows-based, menu driven format with
"point and click" interactivity. Persons who wish to conduct gaming operations
at Constellation or Internet Sports Market are able to subscribe over the
Internet by completing an application appearing at the website. Part of the
application process requires that the subscriber open an account and make a
minimum deposit with the Company of $20.
The websites are controlled by the Company and are designed to invite the
customer to sign up and apply for casino and sportsbook membership. After their
membership application is reviewed, it is either accepted or rejected based on
criteria including, but not limited to, age and geographic location of the
customer. The Company's policy is to accept subscriptions only from persons
over the age of 21 and believed to reside in jurisdictions that are not known to
expressly prohibit Internet gaming. Subscriptions will not be accepted from
persons believed to be citizens or residents of the United States. The Company
uses, among other techniques, Internet databases that publish the local
addresses of most Internet domain names in order to verify that the subscriber
resides in a jurisdiction that is not known to prohibit Internet gaming. Upon
acceptance, the approved customer is then allowed to download the gaming
software over the Internet for installation on their personal
-2-
<PAGE>
computer. The customer is then given a username and password and is thereby
able to access the Company's gaming servers over the Internet through their
Internet service provider.
The Company's websites allow the customers to review all terms, rules and
conditions applicable to gaming and other uses at the site. All gaming winnings
and losses are debited and credited to the customer's account on a real-time
basis. All games are conducted pursuant to house rules and advantages that are
published at the website and which are as favorable or more favorable than those
used by the major Las Vegas casinos.
Customer's conduct deposits to their gaming accounts by way of credit card
or wire payment. In August 1998, the Company began accepting Visa and MasterCard
transactions over a secure platform through Barclays Bank PLC. The Company's
agreement with Barclays enables the Company to process credit cards for the
customers of its Constellation Casino service.
Constellation Casino. The Company internally developed the Constellation
Casino and tested it at beta test sites for three months prior to the
commencement of limited commercial operations in September 1997. The gaming
opportunities offered at the Constellation website have been designed to evoke
the sights and sounds similar to a Las Vegas style casino. Computer graphics
present the "lobby" of the Constellation, consisting of several menu items which
the customer can choose to enter. Included among those menu items are the
various gaming rooms, including baccarat, blackjack and video poker. In the
future, the Company intends to also offer slots, roulette and other casino
games. The customers use the Windows format of commands to carry out gaming
activities. The website offers audio features, including the sound of shuffling
cards, video poker machine payouts and general casino background sounds. The
Constellation Casino is presently written in English, Spanish, Japanese and
Chinese. The Company intends to adapt the website to as many languages and
ethnic identities as practicable in order to facilitate worldwide expansion of
the customer base.
International Sports Market. On April 1, 1998, the Company commenced
offering a pari-mutuel sports betting service at its International Sports Market
website. The Company offers at this website the opportunity to bet on a variety
of sporting events played in the United States, Central and South America,
Europe and Asia. The sports betting service is conducted by way of proprietary
software internally developed by the Company. Management of the Company
believes that its sports wagering service is currently unique on the Internet
and that it provides the Company certain advantages including limited exposure
to sports wagering risk.
Future Developments. The Company intends to conduct continuing development
and innovation of its products in accordance with changing consumer preferences,
demographics, and the evolution of new technologies. The Company's development
strategy is to leverage its technology and the technology of other software
developers, with the goal of providing applications that are competitive and
innovative in the Internet gaming industry.
Virtual Gaming Technologies (Antigua) Ltd.
Virtual Gaming Technologies (Antigua) Ltd. ("VGTA") was organized under the
laws of Antigua on June 19, 1997 as a wholly-owned subsidiary of the Company.
All of the Company's Internet gaming and related banking operations are carried
out by VGTA pursuant to a perpetual nonexclusive license from the Company. The
hardware and software platforms on which the Company's Internet gaming
operations are conducted, including all computer servers, are located and
operated by VGTA staff in Antigua. The Company maintains a redundant server in
San Diego, California for purposes of software development.
VGTA's operations are sanctioned by the government of Antigua pursuant to a
license from the Antiguan government permitting VGTA to conduct a virtual casino
and a sports betting service on the Internet. The government license also
exempts VGTA from the payment of taxes on the repatriation of profits earned in
Antigua. The Antiguan government license expires on July 15, 1999, subject to
VGTA's right to renew for three consecutive one year extensions subject to
VGTA's payment of an annual license renewal fee of $175,000.
-3-
<PAGE>
Marketing
As of the date of this registration statement, the Company markets its
gaming services through Internet advertising. The Company intends to develop a
network of regional sales people who will target potential customers based on
their historical gambling patterns. At that time, the Company intends to use a
multi-tiered marketing approach through a combination of Internet advertising,
telemarketing and direct marketing from regional offices.
Competition
As of the date of this registration statement, there are approximately 100
Internet gaming service providers and several other parties that have announced
their intention to develop Internet gaming operations. The Company believes
that many of the current competitors offer gaming products and services in
English only and focus their marketing efforts on residents of the United
States. The Company believes that it is one of a small number of Internet
gaming service providers that offer multi-lingual gaming sites and focus their
marketing efforts in jurisdictions outside of the United States.
The Company presently encounters significant competition from existing
providers of Internet gaming operations and expects to encounter increasing
competition as additional Internet gaming service providers come on-line. Many
of the Company's present and future competitors have or may have, as the case
may be, greater capital and other resources than the Company and may choose to
adopt an international marketing plan similar to the Company's. There can be no
assurance that the Company will be able to generate meaningful revenues or
earnings from its Internet gaming operations or otherwise successfully compete
in the future.
Regulation
Gaming activities are stringently regulated in the United States and most
developed countries. The gaming regulations and supervisory procedures in the
United States and most developed countries are based upon policies that are
concerned with, among other things, (i) the prevention of unsavory or unsuitable
persons from having a direct or indirect involvement with gaming; (ii) the
establishment and maintenance of responsible accounting practices and
procedures; (iii) the maintenance of effective controls over the financial
practices of licensees, including the establishment of minimum procedures for
internal fiscal affairs and the safeguarding of assets and revenues, providing
reliable record keeping and requiring the filing of periodic reports with the
governing jurisdictions; (iv) the prevention of cheating and fraudulent
practices; and (v) the provision of a source of government revenue through
taxation and licensing fees.
At the present time the Company believes that several developed countries,
including Australia and several countries in Europe, the Caribbean, Latin
America, the Middle East, Asia, and Africa have not prohibited Internet gaming
activities. However, gaming over the Internet is a new industry and some or all
of these foreign jurisdictions may take action to more severely regulate or even
prohibit Internet gaming operations in their jurisdictions. The Company intends
to adopt a proactive policy of lobbying international jurisdictions, where
appropriate, for purposes of seeking approval of Internet gambling and the
regulation of those activities on a basis that is favorable to the Company.
The Company believes that as of the date of this registration statement,
many federal and state prosecutorial agencies in the United States have taken
the position that the provision of Internet gaming services to residents of the
United States are subject to existing federal and state laws which generally
prohibit the provision of gaming opportunities, except where licensed or subject
to exemption. On the other hand, it is the Company's understanding that many
providers of Internet gaming services to citizens and residents of the United
States have taken the position that existing federal and state laws pertaining
to the provision of gaming opportunities do not apply to Internet gaming
services. In 1997, legislation was introduced to the United States Senate and
House of Representatives which, if enacted, would have effectively amended the
Federal Wire Statute, codified at 18 U.S.C. (S)1084, to prohibit the provision
of Internet gaming operations to residents of the United States. No action was
taken on the bills prior to the end of the legislative session, however there
can be no assurance that similar legislation will not be introduced in future
legislative sessions. (Internet Gambling Prohibition Act of 1997; S. 474 and
H.R. 2380). At the present time, it is the Company's policy not to offer its
Internet gaming services to citizens or residents of the United States and to
otherwise endeavor to comply with federal and state laws in the United States
pertaining to gaming.
-4-
<PAGE>
Employees
As of the date of this registration statement, the Company employs 24
people on a full-time basis.
Legal Proceedings
There are no pending legal proceedings to which the Company is a party or
to which the property interests of the Company are subject.
Item 2. Management's Discussion and Analysis or Plan of Operation
Plan of Operations
- ------------------
The Company is engaged in the business of offering gaming opportunities
over the Internet. In September 1997, the Company commenced offering Casino
style gaming opportunities over the Internet, including baccarat, blackjack and
video poker, and in April 1998 commenced offering a pari-mutuel sports betting
service. As of the date of this registration statement, the Company has
conducted limited marketing of its Internet gaming operations and, consequently,
from the inception of gaming operations in September 1997 through March 31,
1998, the Company generated only $41,264 of gross revenue from gaming
operations. As of December 7, 1998, the Company had accepted 14,216
subscriptions for its Internet gaming operations and as of the same date cash
deposits made by customers, which are used by customers for wagering, from
inception of gaming operations totalled approximately $431,857.
The Company has financed its activities to date through the sale of its
securities. See "Item 4, Part II - "Recent Sales of Unregistered Securities"
for a description of the Company's sale of shares of its securities since
inception. In January 1998, the Company commenced a private placement of
1,400,000 shares of Common Stock, at a price of $3.00 per share. The offering is
being conducted by management of the Company on a straight best efforts basis,
which means that there is no minimum offering amount or escrow of proceeds and
there is no commitments on the part of third parties to subscribe or arrange for
others to subscribe for the purchase of the offered shares. As of December 8,
1998, the Company had sold 1,377,238 shares of Common Stock for the gross
proceeds of $4,131,714.
As of March 31, 1998, the Company had a working capital deficit of $103,307
and stockholders' equity of $198,336, however subsequent to March 31, 1998 the
Company sold 1,208,777 shares of Common Stock in the above-mentioned private
placement for the gross proceeds of $3,626,331. The Company's plan of
operations over the next 12 months includes the full scale roll-out of its
casino style gaming operations and sportsbook over the Internet through the
introduction of a multi-tiered marketing plan intended to target potential
customers based on their historical gambling patterns. See "Item 1. Description
of Business - Business of the Issuer - Marketing." In addition to its working
capital on hand as of the date of this registration statement, the Company
believes that it will require, at least, an additional $1,400,000 of capital
over the next 12 months in order to fund the full scale roll-out of its Internet
gaming operations and to finance the continuing losses from operations as the
Company endeavors to build revenue and reach profitable operations.
The Company is seeking to acquire additional capital through the further
sale of its securities or otherwise. However, as of the date of this
registration statement there are no commitments, agreements or understandings
concerning the Company's receipt of additional capital and there can be no
assurance that the Company will be able to obtain sufficient additional capital,
either through the further sale of its securities or otherwise, in order to fund
the Company's working capital requirements in a timely manner. In the event the
Company is unable to obtain additional financing, the Company will be required
to find areas within the Company in which to cut costs. Any cost cutting by the
Company will have a negative impact on the introduction of the Company's multi-
tiered marketing plan and the marketing of the Company's credit card processing
services, both of which are described above. The report of the Company's
independent accountants for the fiscal year ended December 31, 1997 states that
due to recurring losses from operations, the absence of significant operating
revenues and the Company's limited capital resources, there is substantial doubt
about the Company's ability to continue as a going concern.
-5-
<PAGE>
Year 2000 Compliance
- --------------------
The Company utilizes computer software programs and operating systems,
including applications used in operating the gaming services, the Company's
proprietary software, network access, and various administrative and billing
functions. To the extent the Company's software applications contain source
codes that are unable to appropriately interpret the upcoming calendar year
2000, some level of modification, or even possibly replacement of such
applications, may be necessary. The Company has appointed a Year 2000 Committee
to perform an audit to assess the scope of the Company's risks and bring its
applications into compliance. The Committee is currently in the process of
completing its identification of applications that are not Year 2000 compliant,
if any. In addition, the Company has begun to ask its vendors about their
progress in identifying and addressing problems that their computer systems may
face in correctly processing date information related to the Year 2000.
The Company is in the early stages of conducting its Year 2000 audit and
therefore is unable to make a reasonable estimate of the costs associated with
Year 2000 compliance. Accordingly, no assurance can be given that any or all of
the Company's or third party systems are or will be Year 2000 compliant or that
the costs required to address the Year 2000 issue or that the impact of the
Company's failure to achieve substantial Year 2000 compliance will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
Forward Looking Statements
- --------------------------
This registration statement contains forward-looking statements that are
based on the Company's beliefs as well as assumptions made by and information
currently available to the Company. When used in this registration statement,
the words "believe," "endeavor," "expect," "anticipate," "estimate," "intends,"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks, uncertainties and assumptions,
including, without limitation, the Company's recent commencement of commercial
operations; the absence of commercial acceptance of the Company's services and
products by its potential customers; the absence of meaningful revenues as of
the date of this registration statement; the Company's present financial
condition and the risks and the availability of additional capital as and when
required; the going concern opinion included in the report of the Company's
independent accountants for the Company's fiscal 1997 financial statements; the
risks and uncertainties of regulation of Internet gaming by the international
community; the risks and uncertainties concerning technological changes;
increased competition; and general economic conditions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated,
or projected. The Company cautions potential investors not to place undue
reliance on any such forward-looking statements all of which speak only as of
the date made.
Item 3. Description of Property
The Company's executive offices are located in San Diego, California, and
consist of approximately 4,603 square feet which the Company rents on a month to
month basis for monthly rent of $8,333. The Company's gaming operations are
conducted from its facility in St. John's, Antigua, West Indies. The Antiguan
facility consists of approximately 532 square feet which the Company rents on a
month to month basis for monthly rent of $1,620.
-6-
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the
beneficial ownership of the shares of Common Stock as of November 4, 1998 by (i)
each person who is known by the Company to be the beneficial owner of more than
five percent (5%) of the issued and outstanding shares of Common Stock, (ii)
each of the Company's directors and executive officers and (iii) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage Owned
---------------- ----------------
<S> <C> <C>
Daniel B. Najor (1) 3,362,500 39.9%
Joseph R. Paravia (1)(2) 680,000 7.6%
John Van Rhyn (1)(4) 59,000 (3)
John Varley (1)(5) 60,000 (3)
Bruce Merati (1)(6) -- --
Michael Yacenda (1)(7) -- --
Charles R. McCarthy, Jr. (1)(8) 48,000 (3)
Dick L. Rottman (1)(9) 63,665 (3)
Kim A. Nathanson (1) 16,667 (3)
Scott A. Walker (1)(10) 141,196 1.7%
All officers and directors as a group 4,431,028 49.0%
</TABLE>
____________________
(1) Address is 12625 High Bluff Drive, Suite 205A, San Diego, California
92130.
(2) Includes options granted to Mr. Paravia to purchase 480,000 shares of
Common Stock at an exercise price of $.25 per share.
(3) Less than one percent.
(4) Includes options granted to Mr. Van Rhyn to purchase 45,000 shares of
Common Stock at an exercise price of $2.00 per share.
(5) Includes options granted to Mr. Varley to purchase 60,000 shares of Common
Stock at an exercise price of $2.87 per share. Does not include options to
purchase 20,000 shares of Common Stock at an exercise price of $2.87 per
share that are subject to vesting.
(6) Does not include options granted to Mr. Merati to purchase 40,000 shares of
Common Stock at an exercise price of $6.00 per share that are subject to
vesting.
(7) Does not include securities of the Company held by Unistar Entertainment
Inc., of which Mr. Yacenda is President. See Item 1: "Description of
Business - Business Development."
(8) Includes options granted to Mr. McCarthy to purchase 10,000 shares of
Common Stock at an exercise price of $4.50 per share. Does not include
options to purchase 10,000 shares of Common Stock at an exercise price of
$4.50 per share that are subject to vesting.
(9) Includes options granted to Mr. Rottman to purchase 10,000 shares of Common
Stock at an exercise price of $4.50 per share. Does not include options to
purchase 10,000 shares of Common Stock at an exercise price of $4.50 per
share that are subject to vesting.
(10) Includes 121,196 shares of Common Stock owned by MCOM Management Corp.,
with which Mr. Walker is affiliated.
-7-
<PAGE>
Item 5. Directors, Executive Officers, Promoters and Control Persons.
Set forth below are the directors and officers of the Company.
Name Age Position
---- --- --------
Daniel B. Najor 44 Chairman of the Board and Secretary
Joseph R. Paravia 47 President, Chief Executive Officer and Director
John Van Rhyn 61 Vice President of Gaming Operations
John A. Varley 36 Vice President of Marketing
Bruce Merati 41 Chief Financial Officer
Michael W. Yacenda 46 Director
Charles R. McCarthy, Jr. 59 Director
Dick L. Rottman 60 Director
Kim A. Nathanson 42 Director
Scott A. Walker 39 Director
Mr. Najor founded the business of the Company in 1995 and has served as
Chairman of the Board and Secretary since June 1996. From June 1996 to July
1997, Mr. Najor served as Chief Executive Officer of the Company. Since 1997,
Mr. Najor has also served as President and a director of Contextual Trading
Company, Inc., a San Diego, California based independent retail grocery business
with over 160 employees.
Mr. Paravia has served as President and a director of the Company since
July 1996 and as Chief Executive Officer of the Company since July 1997. Mr.
Paravia has over 20 years of experience in the gaming industry. From October
1995 through May 1996, Mr. Paravia served as the Vice President of the Tropicana
Hotel in Las Vegas, Nevada, where he was responsible for all casino operations.
From 1991 to February 1995, Mr. Paravia served as a member of the Board of
Directors and as Senior Director of Casino Operations for Caesars Palace in Las
Vegas, Nevada, where he was responsible for all casino operations.
Mr. Van Rhyn has served as Vice President of Gaming Operations since June
1997. Mr. Van Rhyn has over 20 years of experience in the gaming industry,
including positions of primary responsibility in the areas of sports book and
racing, finance and accounting, and general casino operations. From 1993 to
1997, Mr. Van Rhyn was a self-employed consultant to the gaming industry. From
1989 to 1992, Mr. Van Rhyn was director of all race, sports book, poker and Keno
operations at the Desert Inn Hotel & Casino in Las Vegas, Nevada. From 1988 to
1989, Mr. Van Rhyn was director of all race, sports book, poker and Keno
operations at the Sands Hotel & Casino in Las Vegas.
Mr. Varley has served as the Vice President of Marketing of the Company
since July 27, 1998. From August 1997 until July 1998, Mr. Varley served as
Chief Financial Officer of the Company. From April 1996 to August 1997, Mr.
Varley served as Chief Financial Officer of CGM Group LLC, a management
consulting firm. From 1990 to April 1996, Mr. Varley served in various
accounting positions, including Director of Accounting, for American Hawaii
Cruises, a wholly-owned subsidiary of American Classic Voyages.
Mr. Merati has served as Chief Financial Officer of the Company since July
27, 1998. From July 1997 to July 1998, Mr. Merati served as the Controller of
The Weekend Exercise Company, Inc., an apparel manufacturer. From 1995 to 1997,
Mr. Merati served as the Controller of Airline Interiors, Inc., an airline seat
manufacturer. From 1993 to 1995, Mr. Merati served as the Controller of First
Affiliated Securities, a securities broker-dealer and investment banker. Mr.
Merati is a Certified Public Accountant and spent seven years as a staff
accountant and audit manager with the London office of PricewaterhouseCoopers.
-8-
<PAGE>
Mr. Yacenda has served as a director of the Company since March 1997. Mr.
Yacenda has served as President of Unistar Entertainment, Inc., a wholly-owned
subsidiary of Executone Information Systems, Inc., since 1996 and as Executive
Vice President of Executone Information Systems, Inc. since 1990.
Mr. McCarthy has served as director of the Company since April 1998. Since
1993, Mr. McCarthy has been a partner in O'Connor & Hannan, where he has
practices as a corporate attorney in the firm's Washington, D.C. office.
Mr. Rottman has served as director of the Company since April 1998. Since
1994, Mr. Rottman has served as Chairman of the Board and Chief Executive
Officer of Western Insurance Company. In addition, Mr. Rottman has served as
Chief Executive Officer of Bell United Insurance Company since 1986. Mr.
Rottman served as the Insurance Commissioner for the State of Nevada from 1971
to 1978.
Ms. Nathanson has served as a director of the Company since October 1998.
Ms. Nathanson currently serves as the Senior Vice President of Product
Management at ENTEX Information Services. From 1996 to 1998, Ms. Nathanson
served as the Vice President of Paragon Initiatives at ENTEX, a provider of PC
networks and support services. From 1990 to 1996, she served as the Chairman and
Chief Operating Officer of FCP Technologies, Inc., a systems integrator and
reseller of computers, software and networking products.
Mr. Walker has served as a director of the Company since October 1998. From
January 1996 to the present, Mr. Walker has served as a partner and as General
Counsel of MCOM Management Corp. From June 1995 to the present, Mr. Walker
served as a principal of Walker Worldwide Ltd., an international trading
company. From 1986 to 1995, Mr. Walker practiced law with the firm of Walker &
Corsa.
Each director holds office until his successor is elected and qualified or
until his earlier resignation in the manner provided in the Bylaws of the
Company. The Board of Directors has established an Audit Committee consisting
of Messrs. Yacenda, Najor and Rottman and a Compensation Committee consisting of
Messrs. McCarthy, Najor and Paravia. The Audit Committee reviews the Company's
independent auditors, the scope and timing of their audit services and other
services they are asked to perform, the auditor's report on the Company's
financial statements following completion of the their audit, and the Company's
policies and procedures with respect to internal accounting and financial
controls. In addition, the Audit Committee makes annual recommendations to the
Board of Directors for the appointment of independent auditors for the ensuing
year. The Compensation Committee reviews and recommends to the Board of
Directors the compensation and benefits of all officers of the Company and
reviews general policy matters relating to compensation benefits of employees of
the Company.
Item 6. Executive Compensation
Cash Compensation of Executive Officers. The following table sets forth
the cash compensation paid by the Company to its Chief Executive Officer and to
all other executive officers for services rendered during the fiscal years ended
December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------------- --------------------------------------
Name and Position Year Salary Bonus Other Annual Restricted Common Shares All
Compensation Stock Underlying Other
Awards ($) Options Granted Compen-
(# Shares) sation
- ------------------------------- ---- ---------- ----- ------------ ---------- --------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel B. Najor, Chairman(1) 1997 $ 47,197 -0- -0- -0- -0- -0-
1996 -0- -0- -0- -0- -0- -0-
1995 -0- -0- -0- -0- -0- -0-
Joseph R. Paravia, President 1997 $111,076 -0- -0- $50,000 -0- -0-
and CEO(2) 1996 $ 39,036 -0- -0- $ 8,000 480,000 -0-
1995 -0- -0- -0- -0- -0- -0-
John Van Rhyn, 1997 $ 39,846 -0- -0- -0- 45,000 -0-
Vice President - Gaming 1996 -0- -0- -0- -0- -0- -0-
Operations(3) 1995 -0- -0- -0- -0- -0- -0-
John A. Varley, 1997 $ 26,250 -0- -0- -0- -0- -0-
Vice President - Marketing(4) 1996 -0- -0- -0- -0- -0- -0-
1995 -0- -0- -0- -0- -0- -0-
Bruce Merati, 1997 $ -0- -0- -0- -0- -0- -0-
Chief Financial Officer(5) 1996 -0- -0- -0- -0- -0- -0-
1995 -0- -0- -0- -0- -0- -0-
</TABLE>
_________________
(1) The Company did not pay to or accrue for Mr. Najor any salary until July
1997, at which time Mr. Najor began to receive a salary at the rate of
$120,000 per annum. Mr. Najor's salary was reduced to $1,000 per month
effective as of November 11, 1997.
(2) Commencing June 1, 1996, the Company began paying Mr. Paravia a salary at
the rate of $100,000 per annum. Mr. Paravia's salary was reduced to $8,000
per month effective as of November 11, 1997.
(3) Commencing June 6, 1997, the Company began paying Mr. Van Rhyn a salary at
the rate of $70,000 per annum. Mr. Van Rhyn's salary was reduced to $3,000
per month effective as of February 9, 1998.
-9-
<PAGE>
(4) Commencing August 4, 1997, the Company began paying Mr. Varley a salary at
the rate of $65,000 per annum.
(5) Commencing July 27, 1998, the Company began paying Mr. Merati a salary at
the rate of $85,000 per annum.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
- --------------------------------------------------------------------------------------------------------------
Name Number of Securities % of Total Options/SARs Exercise or Expiration Date
Underlying Granted to Employees in Base
Options/SARs Granted Fiscal Year Price ($/Sh)
(#)
- ------------------------ -------------------- ------------------------ -------------- ----------------
<S> <C> <C> <C> <C>
John Van Rhyn
Vice President - Gaming 45,000 28.1% $2.00 May 2, 2000
Operations
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Number of
Securities Value of
Shares Acquired Underlying Unexercised
Name on Exercise Value Received Unexercised In-the-Money
Options (SARs Options (SARs
at FY-End (#) at FY-End($)
Exercisable/ Exercisable/
Unexercisable Unexercisable
- ------------------------ --------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Joseph R. Paravia, 360,000/120,000 $1,036,800/$345,600
President & CEO
John Van Rhyn
Vice President - Gaming 20,000/25,000 $ 22,600/$28,250
Operations
</TABLE>
Compensation of Directors. All non-officer directors of the Company
receive an attendance fee of $1,000 per meeting of the Board of Directors. All
directors receive reimbursement for out-of-pocket expenses in attending Board of
Directors meetings. From time to time the Company may engage certain members of
the Board of Directors to perform services on behalf of the Company and will
compensate such persons for the services which they perform.
Item 7. Certain Relationships and Related Transactions.
Between May 1996 and December 1996, Daniel B. Najor and a company
affiliated with Mr. Najor advanced approximately $128,000 to the Company's
operating subsidiary for general working capital. All advances accrued interest
at the rate of eight percent (8%) per annum. On April 11, 1997, Mr. Najor and
the affiliated company converted the principal amount of the indebtedness into
128,000 shares of Common Stock, at the conversion rate of $1.00 per share.
Accrued interest under the advances in the amount of approximately $11,279 was
repaid by the Company in July 1997.
In May 1996, the Company entered into a non-exclusive licensing agreement
("CasinoWorld Agreement") with CasinoWorld Holdings, Ltd., a Delaware
corporation ("CasinoWorld") for the use of certain computer software and
hardware. Under the terms of the CasinoWorld Agreement, the Company agreed to
transfer 385,000 shares of its Common Stock to CasinoWorld as a licensing fee.
As additional consideration, the Company agreed to pay CasinoWorld a royalty in
the amount of 33 1/3% of the net gaming revenue derived through Internet
operations. Effective February 1997, the Company and CasinoWorld entered into a
Settlement Agreement and Mutual Release (the "CasinoWorld Settlement
Agreement"), pursuant to which the parties agreed to terminate the CasinoWorld
Agreement. Under the terms of the CasinoWorld Settlement Agreement, CasinoWorld
returned to the Company 385,000 shares of Common Stock in exchange for a
$150,000 promissory note. The promissory note is unsecured and bears interest at
a fixed rate of 10%. Principal and interest are due in quarterly installments
equal to 10% of the Company's net gaming revenue, as defined in the promissory
note.
In September 1996, the Company entered into a Securities Purchase Agreement
("Securities Purchase Agreement") with Unistar Entertainment, Inc., a Colorado
corporation ("Unistar"), pursuant to which Unistar agreed to purchase up to
600,000 shares of Common Stock at a price of $5.00 per share. The Securities
Purchase Agreement was executed in contemplation of CasinoWorld providing or
developing an Internet gaming system for the Company. Concurrent with the
execution of the Securities Purchase Agreement, the Company issued 140,000
shares of its common stock to Unistar for $700,000.
As a result of the termination of the CasinoWorld Agreement, in March 1997
the Company and Unistar entered into a settlement agreement (the "Unistar
Settlement Agreement"). Under the terms of the Unistar Settlement Agreement, the
Company readjusted the share purchase price under the Securities Purchase
Agreement to $3.00 per share and accordingly issued an additional 93,333 shares
to Unistar for no additional consideration. In addition, the Company issued to
Unistar a common stock purchase warrant entitling Unistar to purchase up to
200,000 shares of Common Stock at an exercise price of $3.45 per share, subject
to certain adjustments as provided for in the warrant. The warrant is
immediately exercisable and expires five years from the date of issuance.
Finally, the Company granted to Unistar, for no additional consideration, a non-
exclusive, nonassignable royalty-free license to the Company's software
applications relating to state or Indian bingo or lottery games for use by
Unistar, provided that Unistar does not use such software technology to compete
with a preexisting gaming operation of the Company.
-10-
<PAGE>
In March 1997, the Company appointed Mr. Michael Yacenda to its Board of
Directors. Mr. Yacenda is the President of Unistar and the Executive Vice
President of Unistar's parent corporation, Executone Information Systems, Inc.
Item 8. Description of Securities.
Common Stock
The Company is authorized to issue 30,000,000 shares of Common Stock,
$.00001 par value, of which, as of December 8, 1998, 8,423,225 shares were
issued and outstanding and held of record by 137 stockholders. As of December 8,
1998, the Company had 833 beneficial owners of its Common Stock. Holders of
shares of Common Stock are entitled to one vote per share on all matters to be
voted upon by the stockholders generally. The approval of proposals submitted to
stockholders at a meeting other than for the election of directors requires the
favorable vote of a majority of the shares voting, except in the case of certain
fundamental matters (such as certain amendments to the Certificate of
Incorporation, and certain mergers and reorganizations), in which cases Delaware
law and the Company's Bylaws require the favorable vote of at least a majority
of all outstanding shares. Stockholders are entitled to receive such dividends
as may be declared from time to time by the Board of Directors out of funds
legally available therefor, and in the event of liquidation, dissolution or
winding up of the Company to share ratably in all assets remaining after payment
of liabilities. The holders of shares of Common Stock have no preemptive,
conversion, subscription or cumulative voting rights.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock,
$.00001 par value ("Preferred Stock"), none of which is issued or outstanding.
The Company's board of directors is authorized to issue from time to time,
without shareholder authorization, in one or more designated series or classes,
any or all of the authorized but unissued shares of Preferred Stock with such
dividend, redemption, conversion and exchange provisions as may be provided in
the particular series. Any series of Preferred Stock may possess voting,
dividend, liquidation and redemption rights superior to that of the Common
Stock. The rights of the holders of Common Stock will be subject to and may be
adversely affected by the rights of the holders of any Preferred Stock that may
be issued in the future. Issuance of a new series of Preferred Stock, while
providing desirable flexibility in connection with possible acquisition and
other corporate purposes, could make it more difficult for a third party to
acquire, or discourage a third party from acquiring, a majority of the
outstanding voting stock of the Company.
-11-
<PAGE>
Part II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
The Company's Common Stock has been listed on the OTC Bulletin Board under
the symbol "VGTI" since April 1997.
From inception of trading through September 30, 1998, the high and low bid
prices for each quarter were as follows:
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ------ -----
<S> <C> <C>
June 30, 1997 $ 4.81 $2.00
September 30, 1997 $ 6.37 $4.37
December 31, 1997 $ 5.12 $2.63
March 31, 1998 $ 5.63 $2.81
June 30, 1998 $11.25 $3.75
September 30, 1998 $11.25 $2.88
</TABLE>
The quotations reflect inter-dealer prices, without retail mark-up, mark-
down or commission and may not represent actual transactions. The Company
considers its Common Stock to be thinly traded and that any reported bid or sale
prices may not be a true market-based valuation of the Common Stock.
As of December 7, 1998, there were 138 record holders and 833 beneficial
owners of the Company's Common Stock.
The Company has not paid any cash dividends since its inception and does
not contemplate paying dividends in the foreseeable future. It is anticipated
that earnings, if any, will be retained for the operation of the Company's
business.
Item 2. Legal Proceedings.
There are no pending legal proceedings to which the Company is a party or
to which the property interests of the Company are subject.
Item 3. Changes in and Disagreements with Accountants
In October 1997, the Company dismissed Carter, Polito & Muscio, Inc. as
independent auditors for the Company and appointed McGladrey & Pullen, LLP as
independent auditors. Carter, Polito & Muscio, Inc. had previously audited the
Company's consolidated financial statements as of and for the fiscal year ended
December 31, 1996. The decision to change independent auditors was approved by
the Board of Directors of the Company. During the fiscal year ended December 31,
1996 and the subsequent interim period through October 1997 there were no
disagreements between the Company and Carter, Polito & Muscio, Inc. on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures which disagreements if not resolved to the
satisfaction of Carter, Polito & Muscio, Inc. would have caused them to make
reference to the subject matter of the disagreement in connection with their
reports.
Except for the explanatory paragraph included in the firm's report on the
financial statements for the 1996 fiscal year, relating to substantial doubt
existing about the Company's ability to continue as a going concern, the audit
report of Carter, Polito & Muscio, Inc. on the Company's financial statements as
of December 31, 1996 did not contain an adverse opinion or a disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.
Item 4. Recent Sales of Unregistered Securities.
During the last three years the Company sold unregistered shares of its
Common Stock in the following transactions:
A. In October 1995, the Company issued 3,940,000 shares of Common Stock to
the founder of the Company. There was no underwriter involved in this issuance.
The issuance was conducted pursuant to Section 4(2) under the 1933 Act.
B. In November 1995, the Company conducted a private placement of
1,160,000 shares of Common Stock to five parties, at a price of $.25 per share,
for cash proceeds of $60,000, net of $5,000 of offering costs, and the
cancellation of $225,000 of licensing and consulting fees due payable. There was
no underwriter involved in the placement. The placement was conducted pursuant
to Rule 504 under the 1933 Act.
C. In December 1995, the Company issued 25,000 shares of Common Stock to
its corporate counsel in consideration of legal services rendered. There was no
underwriter involved in this issuance. The issuance was conducted pursuant to
Rule 504 under the 1933 Act.
-12-
<PAGE>
D. In May and July 1996, the Company issued 558,334 shares of Common Stock
to one officer and three consultants in consideration of services rendered.
There was no underwriter involved in the issuances. The issuances were conducted
pursuant to Section 4(2) of the 1933 Act.
E. In September and October 1996, the Company conducted a private
placement of 46,669 shares of Common Stock to five investors at a price of $3.00
per share, for the gross proceeds of $140,000. There was no underwriter involved
in this placement. The placement was conducted pursuant to Rule 504 under the
1933 Act.
F. Pursuant to a Stock Purchase Agreement dated September 5, 1996, as
amended, the Company issued 233,333 shares of Common Stock to Unistar
Entertainment, Inc., at an offering price of $3.00 per share, for the gross
proceeds of $700,000. In addition, the Company granted Unistar a common stock
purchase warrant entitling Unistar to purchase 200,000 shares of Common Stock at
an exercise price of $3.45 per share. The warrant is immediately exercisable and
expires on March 6, 2002. The Company is presently obligated to issue Unistar an
additional 116,667 shares of Common Stock pursuant to certain anti-dilution
provisions. There was no underwriter involved in this issuance. The issuance was
conducted pursuant to Section 4(2) of the 1933 Act.
G. In December 1996, the Company granted to an officer options to purchase
480,000 shares of Common Stock at an exercise price of $.25 per share. Options
to purchase 240,000 shares of Common Stock vested and first became exercisable
on December 31, 1996, options to purchase an additional 120,000 shares of Common
Stock vested and first became exercisable on December 31, 1997 and the final
120,000 shares of Common Stock will vest and first become exercisable on
December 31, 1998. The options expire on December 31, 1999. There was no
underwriter involved in this issuance. The issuance was conducted pursuant to
Section 4(2) of the 1933 Act.
H. From November 1996 to May 1998, the Company issued 20,858 shares of
Common Stock to two consulting firms in consideration of consulting services
rendered. There was no underwriter involved in the issuances. The issuances were
conducted pursuant to Rule 504 of the 1933 Act.
I. In April 1997, the Company issued 128,000 shares of Common Stock to an
officer of the Company and one of his affiliates, in consideration of the
cancellation of $128,000 of indebtedness. There was no underwriter involved in
this issuance. The issuance was conducted pursuant to Rule 504 under the 1933
Act.
J. In May 1997, the Company granted to an executive officer of the Company
options to purchase 75,000 shares of Common Stock at an exercise price of $1.00
per share. The options are immediately exercisable and expire on May 6, 2000.
There was no underwriter involved in this issuance. The issuance was conducted
pursuant to Section 4(2) of the 1933 Act.
K. In May 1997, the Company issued to a consultant a common stock purchase
warrant to purchase 30,000 shares of Common Stock at an exercise price of $2.25
per share. In January 1998, the Company issued to the same consultant a common
stock purchase warrant to purchase an additional 70,000 shares of Common Stock
at an exercise price of $3.00 per share. All of the warrants are immediately
exercisable and expire five years from the date of issuance. There was no
underwriter involved in this issuance. The issuance was conducted pursuant to
Section 4(2) of the 1933 Act.
L. During April through August 1997, the Company conducted a private
placement of Common Stock. In the private placement, the Company sold 1,018,250
shares of Common Stock to approximately 29 accredited investors, as that term is
defined in Rule 501 under the 1933 Act, at an offering price of $2.00 per share,
for the gross proceeds of $2,036,500. The placement was conducted pursuant to
Rule 506 under the 1933 Act. The Company utilized finders in the private
placement and issued a total of 113,973 shares of Common Stock to the following
persons as finder's fees: Dominic E. Luizzi, George W. Tracy, MCOM Management
Corp., John Temple Moore and MC&G Entertainment, LLC. The finder's fee shares
were issued pursuant to Section 4(2) of the 1933 Act.
M. In August 1997, the Company granted to an officer options to purchase
45,000 shares of Common Stock at an exercise price of $2.00 per share. Options
to purchase 20,000 shares of Common Stock were immediately exercisable upon
grant and options to purchase 25,000 shares of Common Stock vested and first
became exercisable on June 8, 1998. The options expire on August 14, 2000. There
was no underwriter involved in this issuance. The issuance was conducted
pursuant to Section 4(2) of the 1933 Act.
-13-
<PAGE>
N. In August 1997, the Company issued a total of 27,500 shares of Common
Stock to an officer of the Company and a consultant in consideration for
services rendered on behalf of the Company. There was no underwriter involved in
this issuance. The issuance was conducted pursuant to Rule 504 under the 1933
Act.
O. In September 1997, the Company issued 43,174 shares of Common Stock to
three consultants and one employee in consideration of services rendered on
behalf of the Company. There was no underwriter involved in this issuance. The
issuance was conducted pursuant to Section 4(2) of the 1933 Act.
P. In September 1997, the Company issued 1,200 shares of Common Stock to a
consultant in consideration for services rendered on behalf of the Company.
There was no underwriter involved in this issuance. The issuance was conducted
pursuant to Rule 504 under the 1933 Act.
Q. In September 1997, the Company granted to an employee options to
purchase 30,000 shares of Common Stock at an exercise price of $2.25 per share.
Options to purchase 15,000 shares of Common Stock vest and first become
exercisable on September 1, 1998 and options to purchase 15,000 shares of Common
Stock vest and first become exercisable on September 1, 1999. The options expire
on September 1, 2000. There was no underwriter involved in this issuance. The
issuance was conducted pursuant to Section 4(2) of the 1933 Act.
R. In December 1997, the Company issued to two employees options to
purchase an aggregate of 10,000 shares of Common Stock at an exercise price of
$2.50 per share. The options were immediately exercisable upon grant and expire
on December 30, 2002. There was no underwriter involved in this issuance. The
issuance was conducted pursuant to Section 4(2) of the 1933 Act.
S. In January 1998, the Company issued to one of its officers and eleven
of its employees options to purchase an aggregate of 122,000 shares of Common
Stock at an exercise price of $2.87 per share. Options to purchase 80,000 shares
of Common Stock were issued to an officer of the Company, of which options to
purchase 40,000 shares of Common Stock were immediately exercisable upon grant,
options to purchase 20,000 shares of Common Stock vest and first become
exercisable on January 2, 1999 and options to purchase the remaining 20,000
shares of Common Stock vest and first become exercisable on January 2, 2000. All
options issued to the employees were immediately exercisable upon grant, except
for options to purchase 15,000 shares of Common Stock granted to one employee,
of which options to purchase 5,000 shares of Common Stock were immediately
exercisable upon grant and options to purchase 10,000 shares of Common Stock
vest and first become exercisable on January 2, 1999. All of the foregoing
options expire on January 2, 2001. There was no underwriter involved in the
issuances. The issuances were conducted pursuant to Section 4(2) of the 1933
Act.
T. In January 1998, the Company commenced a private placement of shares of
Common Stock, at a price of $3.00 per share. As of December 8, 1998, the Company
had sold 1,377,238 shares of Common Stock for the gross proceeds of $4,131,714.
The placement is being conducted pursuant to Rule 506 under the 1933 Act. The
Company utilized finders in the private placement and issued a total of 64,696
shares of Common Stock to the following persons as finder's fees: George W.
Tracy, Conventional Properties, Inc. and MCOM Management Corp. The finder's fee
shares were issued pursuant to Section 4(2) of the 1933 Act.
U. In April 1998, the Company issued to two newly appointed directors
options to purchase an aggregate of 40,000 shares of Common Stock at an exercise
price of $4.50 per share, of which options to purchase 20,000 shares of Common
Stock were immediately exercisable upon grant and options to purchase 20,000
shares of Common Stock vest and first become exercisable on April 22, 1999. The
options expire on April 22, 2001. There was no underwriter involved in the
issuance. The issuance was conducted pursuant to Section 4(2) of the 1933 Act.
V. In July 1998, the Company issued to one of its officers options to
purchase 40,000 shares of Common Stock at an exercise price of $6.00 per share.
Options to purchase 10,000 shares of Common Stock vest and first become
exercisable on July 27, 1999. Options to purchase 15,000 shares of Common Stock
vest and first become exercisable on July 27, 2000. Options to purchase 15,000
shares of Common Stock vest and first become exercisable on July 27, 2001. The
options expire on July 27, 2003. There was no underwriter involved in this
issuance. The issuance was conducted pursuant to Section 4(2) of the 1933 Act.
W. In October 1998, the company issued 2,000 shares of Common Stock to a
consultant in consideration of services rendered on behalf of the Company.
There was no underwriter involved in this issuance. The issuance was conducted
pursuant to Section 4(2) of the 1933 Act.
Prior to investing, each subscriber was provided with or had access to all
of the information regarding the Company that would be included in a
registration statement on Form SB-2, except that the financial statements
provided to subscribers were prepared in accordance with generally accepted
accounting practices but were not audited. With regards to the sales made in
reliance on Section 4(2) of the 1933 Act or Rule 506 thereunder, the Company had
reasonable grounds to believe, prior to accepting the subscription of each
subscriber, based in part on the subscription agreements or investment letters
executed by the subscribers, that each of the subscribers were sophisticated
enough to evaluate the merits of an investment in the Common Stock and that each
subscriber was purchasing with investment intent and not with a view to
distribution. In addition, each subscriber referred to in paragraphs A, E, G, I,
J, L-N, and T-V were reasonably believed by the Company to be accredited
investors within the meaning of Rule 501(a) of the 1933 Act.
-14-
<PAGE>
Item 5. Indemnification of Directors and Officers.
Delaware Statutes
- -----------------
Section 145 of the Delaware General Corporation Law, as amended, provides
for the indemnification of the Company's officers, directors, employees and
agents under certain circumstances as follows:
"(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) if there are no such directors, or if such directors
so direct, by independent legal counsel in a written opinion, or (3) by the
stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this section. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested
-15-
<PAGE>
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction to
hear and determine all actions for advancement of expenses or indemnification
brought under this section or under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees).
Certificate of Incorporation
- ----------------------------
The Company's Certificate of Incorporation provides that the directors of
the Company shall be protected from personal liability to the fullest extent
permitted by law. The Company's Bylaws also contain a provision for the
indemnification of the Company's directors (see "Indemnification of Directors
and Officers - Bylaws" below).
Bylaws
- ------
The Company's Bylaws provide for the indemnification of the Company's
directors, officers, employees, or agents under certain circumstances as
follows:
"7.1 Authorization For Indemnification. The Corporation may indemnify, in
---------------------------------
the manner and to the full extent permitted by law, any person (or the estate,
heirs, executors, or administrators of any person) who was or is a party to, or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation), by reason of the
fact that such person is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines
-16-
<PAGE>
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and with respect to any criminal action or proceeding, that he had
reasonable cause to believe that his conduct was unlawful.
7.2 Advance of Expenses. Costs and expenses (including attorneys' fees)
-------------------
incurred by or on behalf of a director or officer in defending or investigating
any action, suit, proceeding or investigation may be paid by the Corporation in
advance of the final disposition of such matter, if such director or officer
shall undertake in writing to repay any such advances in the event that it is
ultimately determined that he is not entitled to indemnification. Such expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the Board deems appropriate. Notwithstanding the
foregoing, no advance shall be made by the Corporation if a determination is
reasonably and promptly made by the Board by a majority vote of a quorum of
disinterested directors, or (if such a quorum is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs) by independent legal
counsel in a written opinion, or by the stockholders, that, based upon the facts
known to the Board or counsel at the time such determination is made, (a) the
director, officer, employee or agent acted in bad faith or deliberately breached
his duty to the Corporation or its stockholders, and (b) as a result of such
actions by the director, officer, employee or agent, it is more likely than not
that it will ultimately be determined that such director, officer, employee or
agent is not entitled to indemnification.
7.3 Insurance. The Corporation may purchase and maintain insurance on
---------
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise or as a member of any committee or similar
body against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of this Article or applicable law.
7.4 Non-exclusivity. The right of indemnity and advancement of expenses
---------------
provided herein shall not be deemed exclusive of any other rights to which any
person seeking indemnification or advancement of expenses from the Corporation
may be entitled under any agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office. Any agreement for
indemnification of or advancement of expenses to any director, officer, employee
or other person may provide rights of indemnification or advancement of expenses
which are broader or otherwise different from those set forth herein."
Indemnity Agreements
- --------------------
The Company's Bylaws provide that the Company may indemnify directors,
officers, employees or agents to the fullest extent permitted by law and the
Company has agreed to provide such indemnification to its directors, Joseph R.
Paravia, Daniel B. Najor, Michael W. Yacenda, Charles R. McCarthy, Jr. and Dick
L. Rottman pursuant to written indemnity agreements.
-17-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report.............................................. 19
Consolidated Balance Sheets............................................... 20
Consolidated Statements of Operations..................................... 21
Consolidated Statements of Stockholders' Equity........................... 22
Consolidated Statements of Cash Flows..................................... 25
Notes to Consolidated Financial Statements................................ 27
</TABLE>
-18-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Virtual Gaming Technologies, Inc.
(A Development Stage Company)
San Diego, California
We have audited the accompanying consolidated balance sheets of Virtual Gaming
Technologies, Inc. (A Development Stage Company) and Subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Virtual Gaming
Technologies, Inc. (A Development Stage Company) and Subsidiaries as of December
31, 1997 and 1996, and the results of their operations and their cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company has suffered recurring losses from operations
since inception, has generated no significant operating revenue, and has limited
capital resources. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 8. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ McGLADREY & PULLEN, LLP
San Diego, California
February 24, 1998, except for Note 8,
as to which the date is July 16, 1998
-19-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------ March 31, 1998
ASSETS 1996 1997 (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 468,301 $ 290,991 $ 184,444
Securities available for sale (Note 2) - 55,190 -
Prepaid expenses and other assets 17,513 34,112 24,790
Gaming license, net - 54,167 29,167
----------------------------------------------------
Total current assets 485,814 434,460 238,401
----------------------------------------------------
Equipment, net (Notes 3 and 4) 58,961 313,113 302,865
----------------------------------------------------
Deposits 5,773 13,745 14,643
----------------------------------------------------
$ 550,548 $ 761,318 $ 555,909
====================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable and accrued expenses $ 45,483 $ 85,658 $ 167,629
Funds held on deposit - 5,588 14,241
Current portion of capital lease obligation
(Note 4) - 9,334 9,838
Note payable (Note 5) - 150,000 150,000
Notes payable to stockholder and affiliate
(Note 5) 128,680 - -
----------------------------------------------------
Total current liabilities 174,163 250,580 341,708
----------------------------------------------------
Long-Term Portion of Capital Lease Obligation
(Note 4) - 19,447 15,865
-----------------------------------------------------
Commitments and Contingencies (Notes 4, 5 and 8)
Stockholders' Equity (Notes 5 and 6)
Common stock, $.00001 par value; authorized 15,000,000
shares; number issuable and number issued and
outstanding: 1996: 0 and 5,853,334 shares;
1997: 116,667 and 6,931,291 shares; March 31, 1998
(unaudited): 172,478 and 7,043,941 shares, respectively 59 70 72
Additional paid-in capital 1,469,456 6,651,558 7,336,906
Unrealized gain on securities available for sale (Note 2) - 120 -
Deficit accumulated during the development stage (1,093,130) (6,160,457) (7,138,642)
-----------------------------------------------------
376,385 491,291 198,336
-----------------------------------------------------
$ 550,548 $ 761,318 $ 555,909
=====================================================
</TABLE>
See Notes to Consolidated Financial Statements.
-20-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Three Months Ended March 31, October 24, 1995
Years Ended December 31, ---------------------------- (Inception) through
-------------------------- 1997 1998 March 31, 1998
1996 1997 (Unaudited) (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Casino Revenue $ - $ 3,681 $ - $ 37,583 $ 41,264
Less promotional discounts - 3,293 - 20,002 23,295
---------------------------------------------------------------------------
Net Gaming Revenue - 388 - 17,581 17,969
---------------------------------------------------------------------------
Operating Expenses:
Operating expenses (Note 6) 737,024 4,160,138 2,820,272 991,246 6,167,091
Settlement expense (Note 5) 75,000 906,203 - - 981,203
---------------------------------------------------------------------------
812,024 5,066,341 2,820,272 991,246 7,148,294
---------------------------------------------------------------------------
(Loss) from Operations (812,024) (5,065,953) (2,820,272) (973,665) (7,130,325)
Financial income (expense):
Interest income 6,383 17,631 2,818 1,497 25,511
Interest expense (Note 5) (7,206) (18,205) (3,420) (4,714) (30,125)
Loss on sale of securities - - - (1,103) (1,103)
---------------------------------------------------------------------------
(823) (574) (602) (4,320) (5,717)
---------------------------------------------------------------------------
(Loss) before
income taxes (812,847) (5,066,527) (2,820,874) (977,985) (7,136,042)
State income tax expense (Note 7) 800 800 200 200 2,600
---------------------------------------------------------------------------
Net (loss) $ (813,647) $ (5,067,327) $(2,821,074) $ (978,185) $(7,138,642)
===========================================================================
Basic and diluted loss per
share $ (0.15) $ (0.80) $ (0.49) $ (0.14) $ (1.22)
===========================================================================
Weighted average common
shares outstanding 5,430,997 6,325,317 5,703,409 7,107,782 5,873,893
===========================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
-21-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Deficit
Gain on Accumulated
Common Stock Additional Securities During the
------------------- Paid-In Available Development
Shares Amount Capital for Sale Stage Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock upon incorporation 3,940,000 $ 39 $ - $ - $ - $ 39
Issuances of common stock for cash:
November 1995 260,000 3 59,997 - - 60,000
Issuances of common stock for services:
Licensing and consulting fees,
November 1995 925,000 9 224,991 - - 225,000
Net (loss) for the period from inception
to December 31, 1995 - - - - (279,483) (279,483)
--------------------------------------------------------------------------------
Balance, December 31, 1995 5,125,000 51 284,988 - (279,483) 5,556
--------------------------------------------------------------------------------
Issuances of common stock for cash:
September 1996 163,000 2 814,998 - - 815,000
October 1996 5,000 - 25,000 - - 25,000
Issuances of common stock:
Officer compensation, May 1996 200,000 2 8,463 - - 8,465
Services, July 1996 358,334 4 304,361 - - 304,365
Consulting services, November 1996 2,000 - 10,000 - - 10,000
Additional paid-in capital contributed:
Forgiven loan from stockholder, June 1996 - - 5,361 - - 5,361
Common stock transferred from
majority stockholder pursuant to
licensing agreement (Note 5) - - 16,285 - - 16,285
Net (loss) for the year ended
December 31, 1996 - - - - (813,647) (813,647)
------------------------------------------------------------------------------
Balance, December 31, 1996, as restated (Note 5) 5,853,334 $ 59 $ 1,469,456 $ - $(1,093,130) $ 376,385
------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-22-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Unrealized Deficit
Gain on Accumulated
Common Stock Additional Securities During the
----------------- Paid-In Available Development
Shares Amount Capital for Sale Stage Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance forwarded, December 31, 1996, as restated 5,853,334 $59 $1,469,456 $-- $(1,093,130) $ 376,385
Issuances of common stock for cash, net of
issuance costs: April 1997 through August 1997 1,132,223 11 2,002,989 -- -- 2,003,000
Issuances of common stock per
antidilution agreements 112,002 1 (1) -- -- --
Issuable common stock per antidilution
agreement (Note 5) 116,667 1 (1) -- -- --
Issuances of common stock:
Consulting services:
January 1997 3,858 -- 15,003 -- -- 15,003
May 1997 4,500 -- 13,725 -- -- 13,725
August 1997 34,500 -- 202,420 -- -- 202,420
September 1997 5,374 -- 26,834 -- -- 26,834
October 1997 4,500 -- 20,565 -- -- 20,565
November 1997 1,500 -- 5,925 -- -- 5,925
December 1997 1,500 -- 5,130 -- -- 5,130
Officer compensation, August 1997 35,000 1 205,799 -- -- 205,800
Conversion of note payable (Note 5) 128,000 1 240,639 -- -- 240,640
Issuance of stock purchase warrants (Note 5) -- -- 818,126 -- -- 818,126
Issuance of employee stock options (Note 6) -- -- 1,641,234 -- -- 1,641,234
Shares retired (Note 5) (385,000) (4) (16,285) -- -- (16,289)
Unrealized gain on securities available for sale -- -- -- 120 -- 120
Net (loss) for the year ended December 31, 1997 -- -- -- -- (5,067,327) (5,067,327)
---------------------------------------------------------------------------
Balance, December 31, 1997 7,047,958 $70 $6,651,558 $120 $(6,160,457) $ 491,291
===========================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
-23-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Continued)
<TABLE>
<CAPTION>
Unrealized Deficit
Gain on Accumulated
Common Stock Additional Securities During the
--------------------- Paid-In Available Development
Shares Amount Capital for Sale Stage Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance forwarded, December 31, 1997 7,047,958 $ 70 $6,651,558 $ 120 $(6,160,457) $ 491,291
Unaudited Information:
- ---------------------
Issuances of common stock for cash, net of
issuance costs: January 1998 through March 1998 168,461 2 437,051 - - 437,053
Issuance of employee stock options (Note 6) - - 94,715 - - 94,715
Issuance of stock purchase warrants (Note 5) - - 153,582 - - 153,582
Elimination of unrealized gain due to
sale of securities - - - (120) - (120)
Net (loss) for the three month period ended
March 31, 1998 - - - - (978,185) (978,185)
----------------------------------------------------------------------------
Balance, March 31, 1998 (Unaudited) 7,216,419 $ 72 $7,336,906 $ - $(7,138,642) $ 198,336
============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
-24-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
Three Months Ended March 31, October 24, 1995
Years Ended December 31, --------------------------- (Inception) through
----------------------- 1997 1998 March 31, 1998
1996 1997 (Unaudited) (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net (loss) $(813,647) $(5,067,327) $(2,821,074) $(978,185) $(7,138,642)
Adjustment to reconcile net (loss) to operating
activities:
Settlement expense - 906,203 906,203 - 906,203
Depreciation and amortization 2,585 39,313 3,510 24,664 66,562
Loss on sale of securities available for sale - 1,103 1,103
Compensation related to the conversion of
stockholder note payable - 112,640 - - 112,640
Issuance of common stock options and warrants
for licensing and consulting fees and compensation 339,115 2,182,270 827,369 248,297 2,994,682
Changes in assets and working capital components:
(Increase) decrease in:
Prepaid expenses (17,513) (16,599) 10,000 9,322 (24,790)
Gaming license - (54,167) - 25,000 (29,167)
Increase (decrease) in:
Accounts payable and accrued expenses 39,233 39,495 (30,698) 81,971 166,949
Funds held on deposit - 5,588 - 8,653 14,241
-------------------------------------------------------------------------
Net cash (used in)
operating activities (450,227) (1,852,584) (1,104,690) (579,175) (2,930,219)
-------------------------------------------------------------------------
Cash Flows from Investing Activities
Increase in deposits (5,773) (7,972) - (898) (14,643)
Purchase of equipment (61,546) (260,125) (22,003) (14,416) (336,087)
Purchase of investments available for sale - (55,070) - - (55,070)
Proceeds from the sale of investments - - - 53,967 53,967
-------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (67,319) (323,167) (22,003) 38,653 (351,833)
-------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-25-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Period From
Three Months Ended March 31, October 24, 1995
Years Ended December 31, --------------------------- (Inception) through
----------------------- 1997 1998 March 31, 1998
1996 1997 (Unaudited) (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Financing Activities
Net proceeds from sale of common stock 840,000 2,003,000 858,254 437,053 3,340,092
Proceeds from notes to stockholder 128,680 - - - 134,041
Principal payments under capital lease - (4,559) - (3,078) (7,637)
--------------------------------------------------------------------------
Net cash provided by
financing activities 968,680 1,998,441 858,254 433,975 3,466,496
--------------------------------------------------------------------------
Net increase (decrease)
in cash and cash equivalents 451,134 (177,310) (268,439) (106,547) 184,444
Cash and cash equivalents at beginning of year 17,167 468,301 468,301 290,991 -
--------------------------------------------------------------------------
Cash and cash equivalents at end of year $468,301 $ 290,991 $ 199,862 $ 184,444 $ 184,444
==========================================================================
Supplemental Disclosures of Cash
Flow Information
Cash payments for:
Interest $ 7,206 $ 6,122 $ - $ 964 $ 14,292
Income taxes $ 800 $ 800 $ - $ - $ 2,400
Supplemental Schedule of Noncash
Investing and Financing Activities
Loan from stockholder converted to paid-in capital $ 5,361 $ 128,000 $ - $ - $ 133,361
Capital lease obligation incurred for equipment $ - $ 33,340 $ - $ - $ 33,340
Settlement and conversion of shares to note payable $ - $ 16,289 $ - $ - $ 16,289
Unrealized gain on securities available for sale $ - $ 120 $ - $ (120) $ -
</TABLE>
See Notes to Consolidated Financial Statements.
-26-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business
Virtual Gaming Technologies, Inc. (the "Company") was incorporated in the State
of Delaware on October 24, 1995 under the name MBA Licensing Corp. The Company's
initial operations were to include the manufacturing and marketing of CD-ROM and
video game cartridges. On June 20, 1996 the Board of Directors approved the
change of the Company's name to Internet Gaming Technologies, Inc. On January
22, 1997, the Company's name was changed to Virtual Gaming Technologies, Inc.
The Company is establishing casino-style operations over the Internet focused on
the international marketplace outside the United States. During its development
stage, the Company has been acquiring computer hardware, developing its gaming
software and operating systems, and raising capital. The Company has incurred
substantial losses to date, as no significant operating revenue has been
generated. Proceeds from the Company's private placements of shares of its
common stock have funded its operations to date.
A summary of the Company's significant accounting policies follows:
Interim financial statements
The accompanying balance sheet as of March 31, 1998 and the statements of
operations and cash flows for the three month periods ended March 31, 1997 and
1998, respectively, have not been audited. However, these financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In management's opinion, the accompanying interim
financial statements reflect all material adjustments (consisting only of normal
recurring accruals) necessary for a fair statement of the results for the
interim periods presented. The results for the interim periods are not
necessarily indicative of the results which will be reported for the entire
year.
Use of 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
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
-27-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Financial instruments
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts payable and short-term debt approximate fair value
due to the immediate short-term maturity of these financial instruments.
The fair value of the Company's capital lease obligation approximates the
carrying amount based on the current rates offered to the Company for debt of
the same remaining maturities with similar collateral requirements.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Emerald Riviera Limited, an Irish Corporation,
Internet Gaming Technologies, Inc., a Nevada Corporation and Virtual Gaming
Technologies (Antigua) Ltd., an Antigua Corporation. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Foreign operations and concentrations
The U.S. dollar is considered the functional currency for Emerald Riviera
Limited and Virtual Gaming Technologies (Antigua) Ltd. Accordingly, the monetary
assets and liabilities of these entities have been remeasured using the current
rate of exchange and nonmonetary assets have been remeasured using the
appropriate historical rates of exchange. Adjustments resulting from the
translation of the financial statements of the entities are not significant.
The Company is licensed and authorized to establish and operate its gaming
operations in Antigua. The Company has a five year gaming license which requires
an annual fee of $100,000. Upon the Company offering its pari-mutuel sports
betting service, the annual fee will be increased to $175,000. All of the
Company's gaming activities are conducted in Antigua, and its server site and
certain gaming related hardware are located in Antigua. As such, all of the
Company's earned gaming revenues and loss of approximately $160,000 were
incurred in Antigua. As of December 31, 1997, the Company maintained
approximately $130,000 in total assets in Antigua which primarily consisted of
approximately $45,000 in net fixed assets and $54,000 in unamortized license
fee.
Cash and cash equivalents
For purposes of reporting cash flows, the Company considers all cash accounts,
which are not subject to withdrawal restrictions or penalties, and certificates
of deposit and money market funds purchased with a maturity of three months or
less to be cash equivalents. The Company maintains its primary checking and
savings accounts at two financial institutions located in California. Accounts
at these banks are insured by the Federal Deposit Insurance Corporation (FDIC)
up to $100,000. At December 31, 1997 and March 31, 1998, the Company's uninsured
cash balances totaled $151,921 and $40,786, respectively. The Company has not
experienced any losses in such accounts.
-28-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Investment securities
Investment securities at December 31, 1997 are principally municipal bonds. The
Company classifies its debt securities in one of three categories: trading,
available-for-sale, or held-to-maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term. Held-to-maturity
securities are those securities that the Company has the ability and intent to
hold until maturity. All other securities not included in trading or held-to-
maturity are classified as available-for-sale. The Company does not have any
securities classified as trading or held-to-maturity.
Securities available-for-sale are recorded at fair value. Unrealized holding
gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate component
of stockholders' equity until realized.
Dividend and interest income are recognized when earned. Realized gains and
losses for securities classified as available-for-sale are included in earnings
and are derived using the specific identification method for determining the
cost of securities sold.
A decline in the market value of any marketable security below cost that is
deemed other than temporary is charged to earnings, resulting in the
establishment of a new cost basis for the security.
Equipment
Equipment is recorded at cost and is depreciated on the straight-line method
over its estimated useful life of five years.
Depreciation of assets under capital lease is included in depreciation expense
of owned assets in the consolidated statements of operations.
Revenue recognition
Gaming revenue is the net win from gaming activities, which is the difference
between gaming wins and losses. As of December 31, 1997, the Company is offering
video blackjack and poker to its customers.
In September 1997, the Company commenced limited operations with live gaming
activity, initially offering video poker and blackjack to its customers. In the
first quarter of 1998, the Company introduced video baccarat, and in the second
quarter of 1998 introduced limited testing of an Internet based pari-mutuel
sports-betting service.
Funds held on deposit
The Company requires customers to advance cash or credit card deposits prior to
participating in gaming activities.
-29-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Advertising costs
The Company follows the policy of charging the costs of advertising to expense
as incurred.
Loss per common share
Basic loss per common share has been computed on the basis of the weighted-
average number of common shares outstanding and issuable under antidilution
provisions during each period presented. Diluted per-share amounts assume the
conversion of potential common stock, such as options and warrants. The common
shares issuable upon exercise of employee stock options and stock warrants have
not been included in the computation of diluted loss per common share because
their inclusion would have had an antidilutive effect.
Income taxes
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Software development costs and recently issued accounting pronouncement
Software development costs for internal use software are expensed as incurred.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-1, "Accounting for Costs of Computer Software Developed or
Obtained for Internal Use" in March 1998. SOP 98-1 is not expected to have a
material impact on the Company's financial statements.
Regulation risk
The Company intends to provide its services in jurisdictions that do not
prohibit gaming over the Internet. There can be no assurance that the Company
will be able to comply with future government regulations that will affect
gaming operations in a significant number of international jurisdictions. The
United States has laws prohibiting gaming operations except by licensed persons.
Currently, the effect of these laws on Internet gaming is uncertain. As a
result, the Company does not intend to accept subscribers from the United
States.
-30-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
- -------------------------------------------------------------------------------
Note 2. Investment Securities
Investments at December 31, 1997 consist of municipal bonds that mature in April
2001 and are stated at fair value.
The amortized cost, gross unrealized holding gains and fair value of the
available-for-sale securities at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Gross
Amortized Unrealized
Cost Gains Fair Value
--------- ----------- ----------
<S> <C> <C> <C>
Municipal obligations $ 55,070 $ 120 $ 55,190
</TABLE>
Subsequent to December 31, 1997, the Company sold these securities for a
realized loss of $1,103.
Note 3. Equipment
Equipment consists of the following:
<TABLE>
<CAPTION>
March 31,
December 31, December 31, 1998
1996 1997 (Unaudited)
------------ ------------ -----------
<S> <C> <C> <C>
Computers $ 22,032 $ 268,091 $ 276,938
Office furniture and equipment 39,514 53,580 59,149
Capital lease - automobile -- 33,340 33,340
--------------------------------------------------------------------
61,546 355,011 369,427
Less accumulated depreciation 2,585 41,898 66,562
--------------------------------------------------------------------
$ 58,961 $ 313,113 $ 302,865
====================================================================
</TABLE>
Note 4. Lease Commitments
Operating leases
The Company leases its office facility under three noncancelable operating lease
agreements expiring at various times through July 1999. The leases call for
aggregate monthly payments of approximately $13,000.
In addition, the Company leases certain office equipment under noncancelable
operating lease agreements expiring at various times through December 2002. The
leases call for aggregate monthly payments of approximately $500.
-31-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
- -------------------------------------------------------------------------------
Note 4. Lease Commitments (Continued)
Capital lease
The Company leases an automobile under a capital lease agreement, with an
imputed interest rate of 21.22%, due in monthly installments of $1,214 through
July 2000. The automobile that collateralizes the lease has a net book value of
$28,710.
At December 31, 1997, the future annual minimum lease payments under operating
and capital leases are as follows:
<TABLE>
<CAPTION>
Operating Capital
Years Ending December 31, Leases Lease
- ------------------------- --------- -------
<S> <C> <C>
1998 $ 147,614 $ 14,568
1999 50,127 14,568
2000 1,445 8,499
2001 840 --
2002 630 --
---------- ---------
Total minimum lease payments $ 200,656 $ 37,635
===========
Less amount representing interest 8,854
---------
Present value of net minimum lease payments 28,781
Less current maturities 9,334
---------
Long-term lease obligations $ 19,447
=========
</TABLE>
Rental expense for the years ended December 31, 1997 and 1996 totaled $105,415
and $19,298, respectively. Rental expense for the three months ended March 31,
1998 and 1997 totaled $35,651 and $22,154, respectively, and totaled $160,364
for the period October 24, 1995 (inception) through March 31, 1998.
-32-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
- -------------------------------------------------------------------------------
Note 5. Related Party Transactions
Note payable to stockholder and affiliate
The Company received advances in the form of notes payable from its Chairman of
the Board of Directors and his affiliated company. The notes payable were
unsecured, due on demand and provided for interest at a fixed rate of 8%. Total
interest expense incurred by the Company on these related party notes payable
for the years ended December 31, 1997 and 1996 was approximately $3,400 and
$7,200, respectively.
During the year ended December 31, 1997, the Company's Board of Directors
approved the issuance of 128,000 shares of the Company's common stock to the
Chairman and his affiliated company in payment of the notes. The per share
quoted market price at the time of issuance was $1.88 per share. The excess of
the fair value of shares issued over the carrying amount of the notes payable of
$112,640 was recognized as compensation expense in the accompanying consolidated
statement of operations.
Note payable - licensing agreement
In May 1996, the Company entered into a non-exclusive licensing agreement with
CasinoWorld Holdings, Ltd. (CasinoWorld) for the use of certain computer
software and hardware (the CasinoWorld Agreement). Under the terms of the
CasinoWorld Agreement, the Company agreed to transfer 385,000 shares of its
common stock to CasinoWorld as a licensing fee. As additional consideration, the
Company agreed to pay a royalty in the amount of 33 1/3% of net gaming revenue
derived through Internet operations. The 385,000 shares of common stock had been
presented as additional shares of common stock issued in the consolidated
financial statements for the year ended December 31, 1996. The shares were
actually transferred to CasinoWorld through the Company's majority stockholder.
Stockholders' equity has been restated without any effect on the Company's
financial position, results of operations or cash flow for the year ended
December 31, 1996 to reflect this transaction. Net (loss) per common share and
the weighted average common shares outstanding were increased and decreased
$0.01 and 241,414 shares, respectively.
Effective February 1997, the Company and CasinoWorld agreed to terminate the
CasinoWorld Agreement. Under the termination agreement, CasinoWorld returned to
the Company 385,000 shares of the Company's common stock in exchange for a
$150,000 promissory note and all 385,000 shares were retired. The promissory
note is unsecured and bears interest at a fixed rate of 10%. Principal and
interest are due in quarterly installments equal to 10% of the Company's net
gaming revenue, as defined in the promissory note. At December 31, 1997, no
payments have been made on this promissory note. The Company recorded a charge
to operations of $133,711 to reflect the effect of the settlement during 1997.
-33-
<PAGE>
Virtual Gaming Technologies, Inc. (A Development Stage Company)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
________________________________________________________________________________
Note 5. Related Party Transactions (Continued)
Stock agreements
In September 1996, the Company entered into an agreement with Unistar
Entertainment, Inc. (Unistar) whereby Unistar agreed to purchase up to 600,000
shares of the Company's stock at a price of $5.00 per share (the Securities
Purchase Agreement), subject to certain antidilution provisions. The Securities
Purchase Agreement was executed in contemplation of CasinoWorld providing or
developing an Internet gaming system. Concurrent with the execution of the
Securities Purchase Agreement, the Company issued 140,000 shares of its common
stock to Unistar for $700,000.
As a result of the termination of the Company's license agreement with
CasinoWorld, in March 1997 the Company and Unistar entered into a settlement
agreement (the Settlement Agreement). Under the terms of the Settlement
Agreement, the Company agreed to issue an additional 93,333 shares to Unistar
without consideration as required under the antidilution provisions.
Additionally, as a result of the private placement conducted by the Company in
1997 discussed below, the Company is obligated to issue an additional 116,667
shares to Unistar under the antidilution provisions. The Company also issued to
Unistar a common stock warrant valued at $772,492 entitling Unistar to purchase
up to 200,000 shares of common stock, pursuant to the settlement agreement. The
warrants are immediately exercisable at $3.45 per share, subject to certain
adjustments as provided for in the warrant, and expire five years from the date
of issuance.
The Company has also granted to Unistar, for no additional consideration, a non-
exclusive, nonassignable royalty-free license to the Company's software
applications relating to state or Indian bingo or lottery games for use by
Unistar, provided that Unistar shall not use such software technology to compete
with a preexisting gaming operation of the Company.
Stock and options issued for services
During the year ended December 31, 1997, the Company issued a total of 55,732
shares of its common stock to various unrelated third parties as consideration
for services provided. The Company has accounted for all stock and stock
equivalent transactions at the fair market value of the stock as of the grant
date or as services have been performed.
Pursuant to a consulting agreement, the Company also issued a stock warrant to
purchase 30,000 shares of its common stock as consideration for services
provided. The warrants carry an exercise price of $2.25 per share. The warrant
has been valued at $45,634. As part of an extension of the consulting agreement
effective January 1, 1998, the holder of the warrant is entitled to a warrant to
purchase an additional 35,000 shares of common stock at an exercise price of
$3.00 per share when the stock price reaches $6.00 per share and another 35,000
shares when the stock price reaches $7.50 per share. All of the warrants are
immediately exercisable and expire five years from the date of issuance.
-34-
<PAGE>
Virtual Gaming Technologies, Inc. (A Development Stage Company)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
________________________________________________________________________________
Note 5. Related Party Transactions (Continued)
Stock and options issued for services (continued)
During the three months ended March 31, 1998, the Company granted warrants for
consulting services which entitled the holder to an additional 70,000 shares of
common stock pursuant to the above agreement. The Company recorded a charge
totaling $153,582 for the value of the warrants in the March 31, 1998
consolidated statement of operations.
Stock bonuses
In August 1997, the Company's Board of Directors approved the issuance of stock
bonuses to two key employees. The President/CEO and one of the technical
engineers were issued 25,000 and 10,000 shares of common stock, respectively.
The stock bonuses have been charged to operations based upon the fair market
value of $5.88 per share as of the Board approval date, totaling $205,800.
In May 1996, the Company's Board of Directors approved the issuance of 200,000
shares of the Company's common stock to the President/CEO. The stock bonus was
charged to operations based upon the fair market value of the stock as of the
Board approval date.
Stock issuance for cash
During the year ended December 31, 1997, the Company completed a private
placement of 1,132,223 shares of common stock including 113,973 shares issued as
related commissions under Rule 506 of Regulation D promulgated under the
Securities Act of 1933. Total net proceeds from the offering were $2,003,000.
The Company also issued 18,669 shares of its common stock without consideration
pursuant to a Board resolution on March 20, 1997 to modify the 1996 Rule 504
offering terms from $5.00 per share to $3.00 per share.
During the three months ended March 31, 1998, the Company issued 168,461 shares
of common stock relative to a 700,000 share private placement offering under
Rule 506 of Regulation D promulgated under the Securities Act of 1933. Total net
proceeds from the offering were $437,053. See Note 8 regarding a subsequent
modification of the offering.
-35-
<PAGE>
Virtual Gaming Technologies, Inc. (A Development Stage Company)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
________________________________________________________________________________
Note 6. Stock Option Plans
In 1997, the Company adopted a stock option plan under which options to purchase
up to 500,000 shares of common stock may be granted to officers, employees or
directors of the Company, as well as consultants, independent contractors or
other service providers of the Company. Both "incentive" and "nonqualified"
options may be granted under the Plan. Incentive options may be granted at an
exercise price equal to the fair market value of the shares at the date of grant
while nonqualified options may be granted at an exercise price determined by the
Board of Directors. Individual option agreements will contain such additional
terms as may be determined by the Board of Directors at the time of grant. The
Plan provides for grants of options with a term of up to ten years. Incentive
options must be granted with exercise prices equal to the fair market value on
the date of grant, except that incentive options granted to persons owning stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company may not be granted at less than 110% of the fair market
value on the date of grant.
Stock options
On December 31, 1996, the Company granted an option whereby the President/CEO
can exercise an option to purchase 480,000 shares of common stock. On the
measurement date, February 15, 1997, 240,000 of the shares became immediately
exercisable with the remainder 240,000 shares exercisable in equal increments on
December 31, 1997 and 1998, respectively. All of the options have an exercise
price of $0.25 per share and expire three years from the grant date, in December
1999.
In addition, the Company granted options to several key employees of the Company
for the aggregate purchase of 160,000 shares of common stock. The exercise price
on these shares range from $1.00 to $2.50 per share. The options vest and expire
on various dates through December 2002.
The Company has elected to account for nonqualified grants and grants under its
Plan following APB No. 25 and related interpretations. Accordingly, compensation
cost of approximately $1,641,000 has been recognized for the nonqualified
options granted during the year ended December 31, 1997.
-36-
<PAGE>
Virtual Gaming Technologies, Inc. (A Development Stage Company)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
________________________________________________________________________________
Note 6. Stock Option Plans (Continued)
The fair value of each option granted during the year ended December 31, 1997
was estimated on the measurement date utilizing the then current fair value of
the underlying shares less the exercise price discounted over the average
expected life of the options (3 to 5 years), with an average risk free interest
rate of 5.56% to 6.27%, price volatility of 1.0 and no dividends. Had
compensation cost for all awards been determined based on the fair value method
as prescribed by FASB Statement No. 123, Accounting for Stock-Compensation,
reported net (loss) and (loss) per common share would have been as follows:
<TABLE>
<CAPTION>
December 31, March 31, 1998
1997 (Unaudited)
------------ --------------
<S> <C> <C>
Net (loss):
As reported $(5,067,327) $ (978,185)
Proforma $(5,156,328) $(1,262,527)
Basic and diluted net (loss) per share:
As reported $ (0.80) $ (0.14)
Proforma $ (0.82) $ (0.18)
</TABLE>
A summary of the activity of the stock options for the three months ended March
31, 1998 and the year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended March 31, 1998
December 31, 1997 (Unaudited)
------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of period -- $ -- 640,000 $0.59
Granted 640,000 0.59 122,000 2.87
Forfeited -- -- -- --
Expired -- -- -- --
------- ----- ------- -----
Outstanding at end of period 640,000 $0.59 762,000 $0.95
======= ===== ======= =====
Exercisable at end of period 465,000 $0.50 502,000 $0.87
------- ----- ------- -----
Weighted-average fair value
of options granted during
the period $3.27 $2.21
</TABLE>
-37-
<PAGE>
Virtual Gaming Technologies, Inc. (A Development Stage Company)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
________________________________________________________________________________
Note 6. Stock Option Plans (Continued)
A further summary of options outstanding at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
480,000 2 years $0.25 360,000 $0.25
75,000 3 years 1.00 75,000 1.00
45,000 2.63 years 2.00 20,000 2.00
30,000 2.67 years 2.25
10,000 5 years 2.50 10,000 2.50
------- -------
640,000 465,000
======= =======
</TABLE>
In January 1998, the Company's Board of Directors approved the issuance of stock
options to employees under the Plan. The options provide for an exercise price
equal to the fair market value of the shares on the date of the grant and expire
five years thereafter. No compensation cost has been recognized for grants under
the Plan for the three months ended March 31, 1998. During the three months
ended March 31, 1998, $94,715 of compensation cost was attributed to
nonqualified options granted during the year ended December 31, 1997. The fair
value of each option granted during the three months ended March 31, 1998 was
estimated on the measurement date utilizing the then current fair value of the
underlying shares less the exercise price discounted over the average expected
five year life of the options with an average risk free interest rate of 5.25%
price volatility of 1.0 and no dividends.
The options granted to employees during the three months ended March 31, 1998
are summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Average
Granted and Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
122,000 4.75 years $2.87 72,000 $2.87
======= ======
</TABLE>
Subsequent to March 31, 1998, the Company granted options to purchase shares of
the Company's common stock at the then fair market value to two directors and an
officer. The options are for a total of 80,000 shares and expire three to five
years from the grant date.
-38-
<PAGE>
Virtual Gaming Technologies, Inc. (A Development Stage Company)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
________________________________________________________________________________
Note 7. Income Taxes
Deferred income taxes reflect the net tax effects of the temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. The tax effect of temporary
differences consisted of the following as of March 31, and December 31:
<TABLE>
<CAPTION>
December 31, March 31,
----------------------- 1998
1996 1997 (Unaudited)
---------- ---------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 81,800 $ 346,000 $ 687,000
Compensation element of stock options issued -- 670,000 760,000
Startup costs capitalized for income tax purposes 330,500 975,000 923,000
-------- ---------- ----------
Gross deferred tax assets 412,300 1,991,000 2,370,000
Less valuation allowance 412,300 1,975,000 2,354,000
-------- ---------- ----------
-- 16,000 16,000
Deferred tax liabilities, equipment -- (16,000) (16,000)
-------- ---------- ----------
$ -- $ -- $ --
======== ========== ==========
</TABLE>
Realization of deferred tax assets is dependent upon sufficient future taxable
income during the period that deductible temporary differences and carryforwards
are expected to be available to reduce taxable income. As the achievement of
required future taxable income is uncertain, the Company recorded a valuation
allowance.
As of December 31, 1997, the Company has net operating loss carryforwards for
both federal and state income tax purposes. Federal net operating loss
carryforwards totaling approximately $869,000 expire as follows: $194,000 in
2011, and $675,000 in 2012. State net operating carryforwards totaling
approximately $869,000 expire as follows: $194,000 in 2001, and $675,000 in
2002. Due to Internal Revenue Service regulations, the availability of the
operating loss carryforwards may be limited upon a substantial change in
ownership.
A reconciliation of the effective tax rates with the federal statutory rate is
as follows:
<TABLE>
<CAPTION>
Years Ended December 31, Three months ended
------------------------ March 31, 1998
1996 1997 (Unaudited)
---------- ----------- ------------------
<S> <C> <C> <C>
Income tax benefit at 35% statutory rate $(284,000) $(1,772,000) $(342,000)
Change in valuation allowance 412,300 1,578,700 379,000
Nondeductible expenses -- 443,000 8,000
Loss of net operating loss carryforwards (51,000) -- --
State income taxes, net (76,500) (232,000) (55,000)
Other -- (16,900) 10,200
--------- ----------- ---------
$ 800 $ 800 $ 200
========= =========== =========
</TABLE>
-39-
<PAGE>
Virtual Gaming Technologies, Inc. (A Development Stage Company)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
________________________________________________________________________________
Note 8. Management's Plans for Future Operations and Financing
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. However, as discussed in Note
1, the Company has been in the development stage since its inception October 24,
1995, and has experienced cumulative losses since its inception of $7,138,642,
inclusive of noncash charges for capital stock, options, and warrant issuance-
related activity of approximately $3,789,000. The cumulative losses have reduced
net stockholders' equity to $198,336 and the Company has a working capital
deficit of $103,307 as of March 31, 1998. At present, the Company's working
capital plus limited revenue from gaming will not be sufficient to meet the
Company's objectives as structured. Although these conditions indicate that the
Company may be unable to continue as a going concern, management did anticipate
considerable losses would be incurred before the Company became self-sustaining.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
In September 1997, the Company commenced limited operations with live gaming
activity, initially offering video poker and blackjack to its customers. During
the first quarter of 1998, the Company introduced video baccarat, and in the
second quarter of 1998, introduced limited testing of an Internet based pari-
mutuel sports-betting service.
The Company estimates it needs substantial new capital to achieve meaningful
revenue producing operations. In January 1998, the Company initiated a private
placement of 700,000 shares of the Company's common stock at $3.00 per share. In
July 1998, the Board of Directors approved the modification of the private
placement memorandum to offer 1,400,000 shares at the $3.00 share price and to
extend the termination date of the offering to September 30, 1998. Management's
plans include consideration of joint venture arrangements with other companies
in strategic locations in order to target customers within these specified
foreign countries and licensing of the Company's software to other companies.
The Company is also considering an arrangement to offer credit card processing
services to other Internet based businesses, and in June 1998, deposited
$300,000 with a major bank relative to a contemplated arrangement.
-40-
<PAGE>
PART III
Item 1. Index To Exhibits Page
----
3.1(1) Certificate of Incorporation of the Company
3.2(1) Bylaws of the Company
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company
4.1(1) Specimen of Common Stock Certificate
10.1(1) Securities Purchase Agreement dated September 5, 1996 between
the Company and Unistar Entertainment, Inc.
10.2(1) Settlement Agreement and Mutual General Release Holdings, Ltd,
dated February 2, 1997 between the Company and CasinoWorld
10.3(1) Settlement Agreement and Mutual General Release between the
Company and Unistar Entertainment, Inc. dated March 6, 1997
10.4(1) Employment Agreement dated September 1, 1997 between the Company
and Joseph R. Paravia
10.5(1) Virtual Gaming Technologies, Inc. 1997 Stock Option Plan
10.6 Lease Agreement dated September 4, 1998 between the Company and
Pflueger Partners.
10.7 Sublease Agreement dated May 29, 1997 between the Company and
Gamma Productions, Inc.
16.1 Letter from Carter, Polito & Muscio, Inc. dated October 29, 1998.
21.1(1) List of Subsidiaries
27.1(1) Financial Data Schedule
____________
(1) Previously filed as part of registration statement on Form 10-SB (SEC File
No. 1-14363) filed with the Securities Exchange Commission on August 3,
1998.
-41-
<PAGE>
Signatures
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
VIRTUAL GAMING TECHNOLOGIES, INC.,
a Delaware corporation
Date: December 18, 1998 By: /s/ JOSEPH R. PARAVIA
------------------------------------------
Joseph R. Paravia, Chief Executive Officer
-42-
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
VIRTUAL GAMING TECHNOLOGIES, INC.
Virtual Gaming Technologies, Inc., a corporation duly organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that:
I. The amendment to the Corporation's Certificate of Incorporation set
forth below was duly adopted in accordance with the provisions of Section 242 of
the General Corporation Law of the State of Delaware by resolution of the Board
of Directors adopted at a special meeting and consented to in writing by the
majority stockholders of the Corporation, in accordance with Section 228 of the
General Corporation Law of the State of Delaware.
II. Article 4. of the Corporation's Certificate of Incorporation is
amended to read in its entirety as follows:
"4. This corporation is authorized to issue two classes of shares
designated respectively "Common Stock" and "Preferred Stock" and referred to
herein as Common Stock or Common Shares and Preferred Stock or Preferred Shares,
respectively. The total number of shares of Common Stock this corporation is
authorized to issue is 30,000,000 and each such share shall have a par value of
$.00001, and the total number of shares of Preferred Stock this corporation is
authorized to issue is 10,000,000 and each such share shall have a par value of
$.00001. The Preferred Shares may be issued from time to time in one or more
series. The Board of Directors is authorized to fix the number of shares of any
series of Preferred Shares and to determine the designation of any such series.
The Board of Directors is also authorized to determine or alter the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued series of Preferred Shares and, within the limits and restrictions
stated in any resolution or resolutions of the Board of Directors originally
fixing the number of shares constituting any series, to increase or decrease
(but not below the number of shares of any such series then outstanding) the
number of shares of any series subsequent to the issue of shares of that
series."
IN WITNESS WHEREOF, the undersigned hereby duly executes this Certificate
of Amendment hereby declaring and certifying under penalty of perjury that this
is the act and deed of the Corporation and the facts herein stated are true,
this 26th day of October, 1998.
VIRTUAL GAMING TECHNOLOGIES, INC.
By: /s/ Joseph R. Paravia
----------------------------
Joseph R. Paravia, President
<PAGE>
EXHIBIT 10.6
STANDARD OFFICE LEASE - GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO OF AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION]
1. BASIC LEASE PROVISIONS ("Basic Lease Provisions")
1.1 PARTIES: This Lease, dated, for reference purposes only, September 4,
1998 is made by and between Pflueger Partners, An Hawaiian Partnership (herein
called "Lessor") and Virtual Gaming Technologies, Inc. doing business under the
name of ___________________________________ (herein called "Lessee").
1.2 PROVISIONS: Suite Number(s) 205 A floors, consisting of approximately
2,780 rentable feet, more or less, as defined in paragraph 2 and as shown on
Exhibit "A" hereto (the "Premises").
1.3 BUILDING: Commonly described as being located at 12625 High Bluff Drive
in the City of San Diego, County of San Diego, State of California, as more
particularly described in Exhibit ______ hereto, and as defined in paragraph 2.
1.4 USE: General office purposes consistent with area zoning, building uses
and local CC&Rs., subject to paragraph 6.
1.5 TERM: 24 months commencing October 16, 1998 ("Commencement Date") and
ending October 15, 2000, as defined in paragraph 3.
1.6 BASE RENT: $5,421.00 per month, payable on the first day of each month,
per paragraph 4.1 _____________________________________________________________
_______________________________________________________________________________
1.7 BASE RENT INCREASE: On the anniversary dates of this lease the monthly
Base Rent payable under paragraph 1.6 above shall be adjusted as provided in
paragraph 4.3 below.
1.8 RENT PAID UPON EXECUTION: $5,421.00 for ______________________________.
1.9 SECURITY DEPOSIT: $5,421.00.
1.10 LESSEE'S SHARE OF OPERATING EXPENSE INCREASE: 4.16% as defined in
paragraph 4.2.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 PREMISES: The Premises are a portion of a building, herein sometimes
referred to as the "Building" Identified in paragraph 1.3 of the Basic Lease
Provisions. "Building" shall include adjacent parking structures used in
connection therewith. The Premises, the Building, the Common Areas, the land
upon which the same are located, along with all other buildings and improvements
thereon or thereunder, are herein collectively referred to as the "Office
Building Project." Lessor hereby issues to Lessee and Lessee leases from Lessor
for the term, at the rental, and upon all of the conditions set forth herein,
the real property referred to in the Basic Lease Provisions, paragraph 1.2, as
the "Premises," including rights to the Common Areas as hereinafter specified.
2.2 VEHICLE PARKING: So long as Lessee is not in default, and subject to
the rules and regulations attached hereto, and as established by Lessor from
time to time, Lessee shall be entitled to rent and use 11 parking spaces in the
Office Building Project at the monthly rate applicable from time to time for
monthly parking as set by Lessor and/or its licensee.
2.2.1 If Lessee commits, permits or allows any of the prohibited
activities described in the Lease or the rules then in effect, then Lessor shall
have the right, without notice, in addition to such other rights and remedies
that it may have, to remove or tow away the vehicle involved and charge the cost
to Lessee, which cost shall be immediately payable upon demand by Lessor.
2.2.2 The monthly parking rate per parking space will be $0.00 per
month at the commencement of the term of this Lease, and is subject to change
upon five (5) days prior written notice to Lessee. Monthly parking fees shall be
payable one month in advance prior to the first day of each calendar month.
2.3 COMMON AREAS-DEFINITION. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Office Building Project that are provided and designated by the Lessor
from time to time for the general non-exclusive use of Lessor, Lessee and of
other lessees of the Office Building Project and their respective employees,
suppliers, shippers, customers and invitees, including but not limited to common
entrances, lobbies, corridors, stairways and stairwells, public restrooms,
elevators, escalators, parking areas to the extent not otherwise prohibited by
this Lease, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, ramps, driveways, landscaped areas and decorative walls.
2.4 COMMON AREAS-RULES AND REGULATIONS. Lessee agrees to abide by and
conform to the rules and regulations attached hereto as Exhibit B with respect
to the Office Building Project and Common Areas, and to cause its employees,
suppliers, shippers, customers, and invitees to so abide and conform, Lessor or
such other person(s) as Lessor may appoint shall have the exclusive control and
management of the Common Areas and shall have the right, from time to time, to
modify, amend and enforce said rules and regulations, Lessor shall not be
responsible to Lessee for the noncompliance with said rules and regulations by
other lessees, their agents, employees and invitees of the Office Building
Project.
2.5 COMMON AREAS-CHANGES. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Building interior and exterior and Common
Areas, including, without limitation, changes in the location, size, shape,
number, and appearance thereof, including but not limited to the lobbies,
windows, stairways, air shafts, elevators, escalators, restrooms, driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, decorative walls, landscaped areas and walkways:
provided, however, Lessor shall at all times provide the parking facilities
required by applicable law:
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land and improvements outside the boundaries of
the Office Building Project to be a part of the Common Areas, provided that such
other land and improvements have a reasonable and functional relationship to the
Office Building Project;
(d) To add additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Office Building Project, or any
portion thereof;
(f) To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and Office Building Project as Lessor
may, in the exercise of sound business judgment deem to be appropriate.
3. TERM.
3.1 TERM. The term and Commencement Date of this Lease shall be as
specified in paragraph 1.5 of the Basic Lease Provisions.
3.2 DELAY IN POSSESSION. Notwithstanding said Commencement Date, if for any
reason Lessor cannot deliver possession of the Premises to Lessee on said date
and subject to paragraph 3.2.2, Lessor shall not be subject to any liability
therefor, nor shall such failure affect the validity of this Lease or the
obligations of Lessee hereunder or extend the term hereof; but, in such case,
Lessee shall not be obligated to pay rent or perform any other obligation of
Lessee under the terms of this Lease, except as may be otherwise provided in
this Lease, until possession of the Premises is tendered to Lessee, as
hereinafter defined; provided, however, that if Lessor shall not have delivered
possession of the Premises within sixty (60) days following said Commencement
Date, as the same may be extended under the terms of a Work Letter executed by
Lessor and Lessee, Lessee may, at Lessee's
Initials: JP
------
DB
------
(C) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS
PAGE 1 of 10 PAGES
<PAGE>
option, by notice in writing to Lessor within ten (10) days thereafter, cancel
this Lease, in which event the parties shall be discharged from all obligations
hereunder: provided, however, that, as to Lessee's obligations, Lessee first
reimburses Lessor for all costs incurred for Non-Standard Improvements and, as
to Lessor's obligations, Lessor shall return any money previously deposited by
Lessee (less any offsets due Lessor for Non-Standard Improvements): and provided
further, that if such written notice by Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect.
3.2.1 POSSESSION TENDERED-DEFINED. Possession of the Premises shall
be deemed tendered to Lessee ("Tender of Possession") when (1) the improvements
to be provided by Lessor under this Lease are substantially completed, (2) the
Building utilities are ready for use in the Premises, (3) Lessee has reasonable
access to the Premises, and (4) ten (10) days shall have expired following
advance written notice to Lessee of the occurrence of the matters described in
(1), (2) and (3), above of this paragraph 3.2.1.
3.2.2 DELAYS CAUSED BY LESSEE. There shall be no abatement of rent,
and the sixty (60) day period following the Commencement Date before which
Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed
extended to the extent of any delays caused by acts or omissions of Lessee,
Lessee's agents, employees and contractors.
3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said
Commencement Date, such occupancy shall be subject to all provisions of this
Lease, such occupancy shall not change the termination date, and Lessee shall
pay rent for such occupancy.
3.4 UNCERTAIN COMMENCEMENT. In the event commencement of the Lease
term is defined as the completion of the Improvements, Lessee and Lessor shall
execute an amendment to this Lease establishing the date of Tender of Possession
(as defined in paragraph 3.2.1) or the actual taking of possession by Lessee,
whichever first occurs, as the Commencement Date.
4. RENT
4.1 BASE RENT. Subject to adjustment as hereinafter provided in paragraph
4.3, and except as may be otherwise expressly provided in this Lease, Lessee
shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6 of
the Basic Lease Provisions, without offset or deduction. Lessee shall pay Lessor
upon execution hereof the advance Base Rent described in paragraph 1.6 of the
Basic Lease Provisions. Rent for any period during the term hereof which is for
less than one month shall be prorated based upon the actual number of days of
the calendar month involved. Rent shall be payable in lawful money of the United
States to Lessor at the address stated herein or to such other persons or at
such other places as Lessor may designate in writing.
4.2 OPERATING EXPENSE INCREASE. Lessee shall pay to Lessor during the term
hereof, in addition to the Base Rent, Lessee's Share, as hereinafter defined, of
the amount by which all Operating Expenses, as hereinafter defined, for each
Comparison Year exceeds the amount of all Operating Expenses for the Base Year,
such excess being hereinafter referred to as the "Operating Expense Increase,"
in accordance with the following provisions:
(a) "Lessee's Share" is defined, for purposes of this Lease, as the
percentage set forth in paragraph 1.10 of the Basic Lease Provisions, which
percentage has been determined by dividing the approximate square footage of
the Premises by the total approximate square footage of the rentable space
contained in the Office Building Project. It is understood and agreed that the
square footage figures set forth in the Basic Lease Provisions 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 Office Building
Project.
(b) "Base Year" is defined as the calendar year in which the Lease
term commences.
(c) "Comparison Year" is defined as each calendar year during the term
of this Lease subsequent to the Base Year: provided, however, Lessee shall have
no obligation to pay a share of the Operating Expense increase applicable to the
first twelve (12) months of the Lease Term (other than such as are mandated by a
governmental authority, as to which government mandated expenses Lessee shall
pay Lessee's Share, notwithstanding they occur during the first twelve (12)
months). Lessee's Share of the Operating Expense Increase for the first and last
Comparison Years of the Lease Term shall be prorated according to that portion
of such Comparison Year as to which Lessee is responsible for a share of such
increase.
(d) "Operating Expenses" is defined, for purposes of this Lease, to
include all costs, if any, incurred by Lessor in the exercise of its reasonable
discretion, for:
(i) The operation, repair, maintenance, and replacement, in neat,
clean, safe, good order and condition, of the Office Building Project, including
but not limited to, the following:
(aa) The Common Areas, including their surfaces, coverings,
decorative items, carpets, drapes and window coverings, and including parking
areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways,
stairways, parkways, driveways, landscaped areas, striping, bumpers, irrigation
systems, Common Area lighting facilities, building exteriors and roofs, fences
and gates;
(bb) All heating, air conditioning, plumbing, electrical
systems, life safety equipment, telecommunication and other equipment used in
common by, or for the benefit of, lessees or occupants of the Office Building
Project, including elevators and escalators, tenant directories, fire detection
systems including sprinkler system maintenance and repair.
(ii) Trash disposal, janitorial and security services;
(iii) Any other service to be provided by Lessor that is elsewhere
in this Lease stated to be an "Operating Expense";
(iv) The cost of the premiums for the liability and property
insurance policies to be maintained by Lessor under paragraph 6 hereof;
(v) The amount of the real property taxes to be paid by Lessor
under paragraph 10.1 hereof;
(vi) The cost of water, sewer, gas, electricity, and other
publicly mandated services to the Office Building Project;
(vii) Labor, salaries and applicable fringe benefits and costs,
materials, supplies and tools, used in maintaining and/or cleaning the Office
Building Project and accounting and a management fee attributable to the
operation of the Office Building Project;
(viii) Replacing and/or adding Improvements mandated by any
governmental agency and any repairs or removals necessitated thereby amortized
over its useful life according to Federal Income tax regulations or guidelines
for depreciation thereof (including interest on the unamortized balance as is
then reasonable in the judgment of Lessor's accountants);
(ix) Replacements of equipment of improvements that have a useful
life for depreciation purposes according to Federal Income tax guidelines of
five (5) years or less, as amortized over such life.
(e) Operating Expenses shall not include the costs of replacements of
equipment or Improvements that have a useful life for Federal Income tax
purposes in excess of five (5) years unless it is of the type described in
paragraph 4.2(d)(viii), in which case their cost shall be included as above
provided.
(f) Operating Expenses shall not include any expenses paid by any
lessee directly to third parties, or as to which Lessor is otherwise reimbursed
by any third party, other tenant, or by Insurance proceeds.
(g) Lessee's Share of Operating Expense Increase shall be payable by
Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time in advance of Lessee's Share
of the Operating Expense Increase (or any Comparison Year, and the same shall be
payable monthly or quarterly, as Lessor shall designate, during each Comparison
Year of the Lease term, on the same day as the Base Rent is due hereunder. In
the event that Lessee pays Lessor's estimate of Lessee's Share of Operating
Expense Increase as aforesaid, Lessor shall deliver to Lessee within sixty (60)
days after the expiration of each Comparison Year a reasonably detailed
statement showing Lessee's Share of the actual Operating Expense Increase
incurred during such year. If Lessee's payments under this paragraph 4.2(g)
during said Comparison Year exceed Lessee's Share as indicated on said
statement, Lessee shall be entitled to credit the amount of such overpayment
against Lessee's Share of Operating Expense Increase next falling due. If
Lessee's payments under this paragraph during said Comparison Year were less
than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor
the amount of the deficiency within ten (10) days after delivery by Lessor to
Lessee of said statement. Lessor and Lessee shall forthwith adjust between them
by cash payment any balance determined to exist with respect to that portion of
the last Comparison Year for which Lessee is responsible as to Operating
Expense Increases, notwithstanding that the Lease term may have terminated
before the end of such Comparison Year.
4.3 RENT INCREASE.
4.3.1 At the times set forth in paragraph 1.7 of the Basic Lease
Provisions, the monthly Base Rent payable under paragraph 4.1 of this Lease
shall be adjusted by the increase, if any, in the Consumer Price Index of the
Bureau of Labor Statistics of the Department of Labor for All Urban Consumers,
(1967=100), "all Items," for the city nearest the location of the Building,
herein referred to as "C.P.I.," since the date of this Lease.
4.3.2 The monthly Base Rent payable pursuant to paragraph 4.3.1
shall be calculated as follows: the Base Rent payable for the first month of the
term of this Lease, as set forth in paragraph 4.1 of this Lease, shall be
multiplied by a fraction the numerator of which shall be the C.P.I. of the
calendar month during which the adjustment is to take effect, and the
denominator of which shall be the C.P.I. for the calendar month in which the
original Lease term commences. The sum so calculated shall constitute the new
monthly Base Rent hereunder, but, in no event, shall such new monthly Base Rent
be less than the Base Rent payable for the month immediately preceding the date
for the rent adjustment.
4.3.3 In the event the compilation and/or publication of the C.P.I.
shall be transferred to any other governmental department or bureau or
Initials: JB
------
DB
------
(C) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS
PAGE 2 OF 10 PAGES
<PAGE>
agency or shall be discontinued, then the index most nearly the same as the
C.P.I. shall be used to make such calculations. In the event that Lessor and
Lessee cannot agree on such alternative index, then the matter shall be
submitted for decision to the American Arbitration Association in the County in
which the Premises are located, in accordance with the then rules of said
association and the decision of the arbitrators shall be binding upon the
parties, notwithstanding one party failing to appear after due notice of the
proceeding. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.
4.3.4 Lessee shall continue to pay the rent at the rate previously in
effect until the increase, if any, is determined. Within five (5) days
following the date on which the increase is determined, Lessee shall make such
payment to Lessor as will bring the increased rental current, commencing with
the effective date of such increase through the date of any rental installments
then due. Thereafter the rental shall be paid at the increased rate.
4.3.5 At such time as the amount of any change in rental required by this
Lease is known or determined, Lessor and Lessee shall execute an amendment to
this Lease setting forth such change.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the
security deposit set forth in paragraph 1.9 of the Basic Lease Provisions as
security for Lessee's 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 charge in
default 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 then required of Lessee. If the monthly Base Rent shall, from time
to time, increase during the term of this Lease, Lessee shall, at the time of
such increase, deposit with Lessor additional money as a security deposit so
that the total amount of the security deposit held by Lessor shall at all times
bear the same proportion to the then current Base Rent as the initial security
deposit bears to the Initial Base Rent set forth in paragraph 1.6 of the Basic
Lease Provisions. Lessor shall not be required to keep said security deposit
separate from its general accounts. If Lessee performs all of Lessee's
obligations hereunder, said deposit, or so much thereof as has not heretofore
been applied by Lessor, shall be returned, without payment of Interest or other
increment for its use, to Lessee (or, at Lessor's options, 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.
6. USE.
6.1 USE. The Premises shall be used and occupied only for the purpose set
forth in paragraph 1.4 of the Basic Lease Provisions or any other use which is
reasonably comparable to that use and for no other purpose.
6.2 COMPLIANCE WITH LAW.
(a) Lessor warrants to Lessee that the Premises, in the state existing
on the date that the Lease term commences, but without regard to alterations or
improvements made by Lessee or the use for which Lessee will occupy the
Premises, does not violate any covenants or restrictions of record, or any
applicable building code, regulation or ordinance in effect on such Lease term
Commencement Date. In the event it is determined that this warranty has been
violated, then it shall be the obligation of the Lessor, after written notice
from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such
violation.
(b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's
expense, promptly comply with all applicable statuters, ordinances, rules
regulations, orders, convenants and restrictions of record, and requirements of
any fire insurance underwriters or rating bureaus, now in effect or which may
hereafter come into effect, whether or not they reflect a change in policy
from that now existing, during the term or any part of the term hereof, relating
in any manner to the Premises and the occupation and use by Lessee of the
Premises. Lessee shall conduct its business in a lawful manner and shall not use
or permit the use of the Premises or the Common Areas in any manner that will
tend to create waste or a nuisance or shall tend to disturb other occupants of
the Office Building Project.
6.3 CONDITION OF PREMISES.
(a) Lessor shall deliver the Premises to Lessee in a clean condition on
the Lease Commencement Date (unless Lessee is already in possession) and Lessor
warrants to Lessee that the plumbing, lighting, air conditioning, and heating
system in the Premises shall be in good operating condition. In the event that
it is determined that this warranty has been violated, then it shall be the
obligation of 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.
(b) Except as otherwise provided in this Lease, Lessee hereby accepts
the Premises and the Office Building Project in their condition existing as of
the Lease 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 easements, 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 it has satisfied itself
by its own independent investigation that the Premises are suitable for its
intended use, and that neither Lessor nor Lessor's agent or agents has made any
representation or warranty as to the present or future suitability of the
Premises, Common Areas, or Office Building Project for the conduct of Lessee's
business.
7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES.
7.1 LESSOR's OBLIGATIONS. Lessor shall keep the Office Building Project,
including the Premises, interior and exterior walls, roof, and common areas, and
the equipment whether used exclusively for the Premises or in common with other
premises, in good condition and repair; provided, however, Lessor shall not be
obligated to paint, repair or replace wall coverings, or to repair or replace
any improvements that are not ordinarily a part of the Building or are above
then Building standards. Except as provided in paragraph 9.5, there shall be no
abatement of rent or liability of Lessee on account of any injury or
interference with Lessee's business with respect to any improvements,
alterations or repairs made by Lessor to the Office Building Project or any part
thereof. 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.
7.2 LESSEE'S OBLIGATIONS.
(a) Notwithstanding Lessor's obligation to keep the Premises in good
condition and repair, Lessee shall be responsible for payment of the cost
thereof to Lessor as additional rent for that portion of the cost of any
maintenance and repair of the Premises, or any equipment (wherever located) that
serves only Lessee or the Premises, to the extent such cost is attributable to
causes beyond normal wear and tear. Lessee shall be responsible for the cost of
painting, repairing or replacing wall coverings, and to repair or replace any
Premises improvements that are not ordinarily a part of the Building or that are
above then Building standards. Lessor may, at its option, upon reasonable
notice, elect to have Lessee perform any particular such maintenance or repairs
the cost of which is otherwise Lessee's responsibility hereunder.
(b) On the last day of the term hereof, or on any sooner termination,
Lessee shall surrender the Premises to Lessor in the same condition as received,
ordinary wear and tear excepted, clean and free of debris. Any damage or
deterioration of the Premises shall not be deemed ordinary wear and tear if the
same could have been prevented by good maintenance practices by Lessee. Lessee
shall repair any damage to the Premises occasioned by the installation or
removal of Lessee's trade fixtures, alterations, furnishings and equipment.
Except as otherwise stated in this Lease. Lessee shall leave the air lines,
power panels, electrical distribution systems, lighting fixtures, air
conditioning, window coverings, wall coverings, carpets, wall panelling,
ceilings and plumbing on the Premises and in good operating condition.
7.3 ALTERATIONS AND ADDITIONS.
(a) Lessee shall not, without Lessor's prior written consent make any
alterations, improvements, additions, Utility installations or repairs in, on or
about the Premises, or the Office Building Project. As used in this paragraph
7.3 the term "Utility Installation" shall mean carpeting, window and wall
coverings, power panels, electrical distribution systems, lighting fixtures,
air conditioning, plumbing, and telephone and telecommunication wiring and
equipment. At the expiration of the term, Lessor may require the removal of any
or all of said alterations, improvements, additions or Utility installations,
and the restoration of the Premises and the Office Building Project to their
prior condition, at Lessee's expense. Should Lessor permit Lessee to make its
own alterations, improvements, additions or Utility Installations, Lessee shall
use only such contractor as has been expressly approved by Lessor, and 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 materialmen'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, or use a contractor not expressly approved by Lessor,
Lessor may, at any time during the term of this Lease, require that Lessee
remove any part or all of the same.
(b) Any alterations, improvements, additions or Utility installations
in or about the Premises or the Office Building Project that Lessee shall desire
to make shall be presented to Lessor in written form, with proposed detailed
plans. If Lessor shall give its consent to Lessee's making such alteration,
improvement, addition or Utility Installation, the consent shall be deemed
conditioned upon Lessee acquiring a permit to do so from the applicable
governmental agencies, furnishing a copy thereof to Lessor prior to the
commencement of the work, and compliance by Lessee with 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
materialmen's lien against the Premises, the Building or the Office Building
Project, or any interest therein.
(d) Lessee shall give lessor not less than ten (10) days' notice prior
to the commencement of any work in the Premises by Lessee, 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
Initial: JP
DB
(C) 1984 American Industrial Real Estate Association
FULL SERVICE-GROSS
PAGE 3 OF 10 PAGES
<PAGE>
any such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor or the Premises, the Building or the Office Building
Project, upon the condition that if Lessor shall require, Lessee shall furnish
to Lessor 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, the Building and the Office Building Project free
from the effect of such lien or claim. In addition, Lessor may require Lessee to
pay Lessor's reasonable attorneys' fees and costs in participating in such
action if Lessor shall decide it is to Lessor's best interest so to do.
(e) All alterations, improvements, additions and Utility Installations
(whether or not such Utility Installations constitute trade fixtures of Lessee),
which may be made to the Premises by Lessee, including but not limited to floor
coverings, panelings, doors, drapes, built-ins, moldings, sound attenuation, and
lighting and telephone or communication systems, conduit, wiring and outlets,
shall be made and done in a good and workmanlike manner and of good and
sufficient quality and materials and shall be the property of Lessor and remain
upon and be surrendered with the Premises at the expiration of the Lease term,
unless Lessor requires their removal pursuant to paragraph 7.3(a). Provided
Lessee is not in default, notwithstanding the provisions of this paragraph
7.3(e), Lessee's personal property and equipment, other than that which is
affixed to the Premises so that it cannot be removed without material damage to
the Premises or the Building, and other than Utility Installations, shall remain
the property of Lessee and may be removed by Lessee subject to the provisions of
paragraph 7.2.
(f) Lessee shall provide Lessor with as-built plans and specifications
for any alterations, improvements, additions or Utility installations.
7.4 UTILITY ADDITIONS. Lessor reserves the right to install new or
additional utility facilities throughout the Office Building Project for the
benefit of Lessor or Lessee, or any other lessee of the Office Building Project,
including, but not by way of limitation, such utilities as plumbing, electrical
systems, communication systems, and fire protection and detection systems, so
long as such installations do not reasonably interfere with Lessee's use of the
Premises.
8. INSURANCE; INDEMNITY.
8.1 LIABILITY INSURANCE-LESSEE. Lessee shall, at Lessee's expense, obtain
and keep in force during the term of this Lease a policy of Comprehensive
General Liability insurance utilizing an Insurance Services Office standard form
with Broad Form General Liability Endorsement (13L0404), or equivalent, in an
amount of not less than $1,000,000 per occurrence of bodily injury and property
damage combined or in a greater amount as reasonably determined by Lessor and
shall insure Lessee with Lessor as an additional insured against liability
arising out of the use, occupancy or maintenance of the Premises. Compliance
with the above requirement shall not, however, limit the liability of Lessee
hereunder.
8.2 LIABILITY INSURANCE-LESSOR. Lessor shall obtain and keep in force
during the term of this Lease a policy of Combined Single Limit Bodily Injury
and Broad Form Property Damage Insurance, plus coverage against such other risks
Lessor deems advisable from time to time, insuring Lessor, but not Lessee,
against liability arising out of the ownership, use, occupancy or maintenance of
the Office Building Project in an amount not less than $5,000,000.00 per
occurrence.
8.3 PROPERTY INSURANCE-LESSEE. Lessee shall, at Lessee's expense, obtain
and keep in force during the term of this Lease for the benefit of Lessee,
replacement cost fire and extended coverage insurance, with vandalism and
malicious mischief, sprinkler leakage and earthquake sprinkler leakage
endorsements, in an amount sufficient to cover not less than 100% of the full
replacement cost, as the same may exist from time to time, of all of Lessee's
personal property, fixtures, equipment and tenant improvements.
8.4 PROPERTY INSURANCE-LESSOR. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies of insurance covering loss or
damage to the Office Building Project Improvements, but not Lessee's personal
property, fixtures, equipment or tenant improvements, in the amount of the full
replacement cost thereof, as the same may exist from time to time, utilizing
Insurance Services Office standard form, or equivalent, providing protection
against all perils included within the classification of fire, extended
coverage, vandalism, malicious mischief, plate glass, and such other perils as
Lessor deems advisable or may be required by a lender having a lien on the
Office Building Project. In addition, Lessor shall obtain and keep in force,
during the term of this Lease, a policy of rental value insurance covering a
period of one year, with loss payable to Lessor, which insurance shall also
cover all Operating Expenses for said period. Lessee will not be named in any
such policies carried by Lessor and shall have no right to any proceeds
therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain
such deductibles as Lessor or the aforesaid lender may determine. In the event
that the Premises shall suffer an insured loss as defined in paragraph 9.1(f)
hereof, the deductible amounts under the applicable insurance policies shall be
deemed an Operating Expense. Lessee shall not do or permit to be done anything
which shall invalidate the insurance policies carried by Lessor. Lessee shall
pay the entirety of any increase in the property insurance premium for the
Office Building Project over what it was immediately prior to the commencement
of the term of this Lease if the increase is specified by Lessor's insurance
carrier as being caused by the nature of Lessee's occupancy or any act or
omission of Lessee.
8.5 INSURANCE POLICIES. Lessee shall deliver to Lessor copies of liability
insurance policies required under paragraph 8.1 or certificate evidencing the
existence and amounts of such insurance within seven (7) days after the
Commencement Date of this Lease. No such policy shall be cancelable or subject
to reduction of coverage or other modification except after thirty (30) days
prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to
the expiration of such policies, furnish Lessor with renewals thereof.
8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and
relieve the other and waive their entire right of recovery against the other for
direct or consequential loss or damage arising out of or incident to the perils
covered by property insurance carried by such party, whether due to the
negligence of Lessor or Lessee or their agents, employees, contractors and/or
invitees. If necessary all property insurance policies required under this Lease
shall be endorsed to so provide.
8.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor and its
agents, Lessor's master or ground lessor, partners and lenders, from and against
any and all claims for damage to the person or property of anyone or any entity
arising from Lessee's use of the Office Building Project or from the conduct of
Lessee's business or from any activity, work or things done, permitted or
suffered by Lessee in or about the Premises or elsewhere and shall further
indemnify and hold harmless Lessor from and against any and all claims, costs
and expenses arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease, or
arising from any act or omission of Lessee, or any of Lessee's agents,
contractors, employees or invitees, and from and against all costs, attorney's
fees, expenses and liabilities incurred by Lessor as the result of any such use,
conduct, activity, work, things done, permitted or suffered, breach, default or
negligence, and in dealing reasonably therewith, including but not limited to
the defense or pursuit of any claim or any action or proceeding involved
therein; and in case any action or proceeding be brought against Lessor by
reason of any such matter, Lessee upon notice from Lessor shall defend the same
at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified. Lessee, as a material part of the
consideration to Lessor, hereby assumes all risk of damage to property of Lessee
or injury to persons, in, upon or about the Office Building Project arising from
any cause and Lessee hereby waives all claims in respect thereof against Lessor.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor
shall not be liable for injury to Lessee's business or any loss of income
therefrom or for loss of or damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other person
in or about the Premises or the Office Building Project, nor shall Lessor be
liable for injury to the person of Lessee, Lessee's employees, agents or
contractors, whether such damage or injury is caused by or results from theft,
fire, steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air conditioning or lighting fixtures, or from any other cause, whether said
damage or injury results from conditions arising upon the Premises or upon other
portions of the Office Building Project, or from other sources or places, or
from new construction or the repair, alteration or improvement of any part of
the Office Building Project, or of the equipment, fixtures or appurtenances
applicable thereto, and regardless of whether the cause of such damage or injury
or the means of repairing the same is inaccessible, Lessor shall not be liable
for any damages arising from any act or neglect of any other lessee, occupant
or user of the Office Building Project, nor from the failure of Lessor to
enforce the provisions of any other lease of any other lessee of the Office
Building Project.
8.9 NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation
that the limits or forms of coverage of insurance specified in this paragraph 8
are adequate to cover Lessee's property or obligations under this Lease.
9. DEFINITIONS.
9.1 DEFINITIONS.
(a) "Premises Damage" shall mean if the Premises are damaged or
destroyed to any extent.
(b) "Premises Building Partial Damage" shall mean if the Building of
which the Premises are a part is damaged or destroyed to the extent that the
cost to repair is less than fifty percent (50%) of the then Replacement Cost of
the building.
(c) "Premises Building Total Destruction" shall mean if the Building
of which the Premises are a part is damaged or destroyed to the extent that the
cost to repair is fifty percent (50%) or more of the then Replacement Cost of
the Building.
(d) "Office Building Project Buildings" shall mean all of the buildings
on the Office Building Project site.
(e) "Office Building Project Buildings Total Destruction" shall mean
if the Office Building Project Buildings are damaged or destroyed to the extent
that the cost of repair is fifty percent (50%) or more of the then Replacement
Cost of the Office Building Project Buildings.
(f) "Insured Loss" shall mean damage or destruction which was caused
by an event required to be covered by the insurance described in paragraph 8.
The fact that an Insured Loss has a deductible amount shall not make the loss an
uninsured loss.
(g) "Replacement Cost" shall mean the amount of money necessary to be
spent in order to repair or rebuild the damaged area to the condition that
existed immediately prior to the damage occurring, excluding all improvements
made by lessees, other than those installed by Lessor at Lessee's expense.
Initials JP
------
DB
------
(C) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS
PAGE 4 OF 10 PAGES
<PAGE>
9.2 PREMISES DAMAGE; PREMISES BUILDING PARTIAL DAMAGE.
(a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if
at any time during the term of this Lease there is damage which is an Insured
Loss and which falls into the classification of either Premises Damage or
Premises Building Partial Damage, then Lessor shall, as soon as reasonably
possible and to the extent the required materials and labor are readily
available through usual commercial channels, at Lessor's expense, repair such
damage (but not Lessee's fixtures, equipment or tenant improvements originally
paid for by Lessee) to its condition existing at the time of the damage, and
this Lease shall continue in full force and effect.
(b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and 9.5,
if at any time during the term of this Lease there is damage which is not an
Insured Loss and which falls within the classification of Premises Damage or
Premises Building Partial Damage, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense), which
damage prevents Lessee from making any substantial use of the Premises, Lessor
may at Lessor's option either (i) repair such damage as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) give written notice to Lessee within
thirty (30) days after the date of the occurrence of such damage of Lessor's
intention to cancel and terminate this Lease as of the date of the occurrence of
such damage, in which event this Lease shall terminate as of the date of the
occurrence of such damage.
9.3 PREMISES BUILDING TOTAL DESTRUCTION; OFFICE BUILDING PROJECT TOTAL
DESTRUCTION. Subject to the provisions of paragraphs 9.4 and 9.5, if at any time
during the term of this Lease there is damage, whether or not it is an Insured
Loss, which falls into the classifications of either (i) Premises Building Total
Destruction, or (ii) Office Building Project Total Destruction, then Lessor may
at Lessor's option either (i) repair such damage or destruction as soon as
reasonably possible at Lessor's expense (to the extent the required materials
are readily available through usual commercial channels) to its condition
existing at the time of the damage, but not Lessee's fixtures, equipment or
tenant improvements, and this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after the date of
occurrence of such damage of Lessor's intention to cancel and terminate this
Lease, in which case this Lease shall terminate as of the date of the occurrence
of such damage.
9.4 DAMAGE NEAR END OF TERM.
(a) Subject to paragraph 9.4(b), if at any time during the last twelve
(12) months of the term of this Lease there is substantial damage to the
Premises, Lessor may at Lessor's option cancel and terminate this Lease as of
the date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within 30 days after the date of occurrence of such
damage.
(b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an
option to extend or renew this Lease, and the time within which said option may
be exercised has not yet expired, Lessee shall exercise such option, if it is to
be exercised at all, no later than twenty (20) days after the occurrence of an
Insured Loss falling within the classification of Premises Damage during the
last twelve (12) months of the term of this Lease. If Lessee duly exercises
such option during said twenty (20) day period, Lessor shall, at Lessor's
expense, repair such damage, but not Lessee's fixtures, equipment or tenant
improvements, as soon as reasonably possible and this Lease shall continue in
full force and effect. If Lessee fails to exercise such option during said
twenty (20) day period, then Lessor may at Lessor's option terminate and cancel
this lease as of the expiration of said twenty (20) day period by giving written
notice to Lessee of Lessor's election to do so within ten (10) days after the
expiration of said twenty (20) day period, notwithstanding any term or provision
in the grant of option to the contrary.
9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event Lessor repairs or restores the Building or Premises
pursuant to the provisions of this paragraph 8, and any part of the Premises are
not usable (including loss of use due to loss of access or essential services),
the rent payable hereunder (including Lessee's Share of Operating Expense
Increase) for the period during which such damage, repair or restoration
continues shall be abated, provided (1) the damage was not the result of the
negligence of Lessee, and (2) such abatement shall only be to the extent the
operation and profitability of Lessee's business as operated from the Premises
is adversely affected. Except for said abatement of rent, if any, Lessee shall
have no claim against Lessor for any damage suffered by reason of any such
damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises or the
Building under the provisions of this Paragraph 9 and shall not commence such
repair or restoration within ninety (90) days after such occurrence, or if
Lessor shall not complete the restoration and repair within six (6) months after
such occurrence, Lessee may at Lessee's option cancel and terminate this Lease
by giving Lessor written notice of Lessee's election to do so at any time prior
to the commencement or completion, respectively, of such repair or restoration.
In such event this Lease shall terminate as of the date of such notice.
(c) Lessee agrees to cooperate with Lessor in connection with any such
restoration and repair, including but not limited to the approval and/or
execution of plans and specifications required.
9.6 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant
to this paragraph 9, an equitable adjustment shall be made concerning advance
rent and any advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.7 WAIVER. Lessor and Lessee waive the provisions of any statute which
relate to termination of leases when leases property is destroyed and agree that
such event shall be governed by the terms of this Lease.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as defined in
paragraph 10.3, applicable to the Office Building Project subject to
reimbursement by Lessee of Lessee's Share of such taxes in accordance with the
provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2.
10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for paying any
increase in real property tax specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Office
Building Project by other lessees or by Lessor for the exclusive enjoyment of
any other lessee. Lessee shall, however, pay to Lessor at the time that
Operating Expenses are payable under paragraph 4.2(c) the entirety of any
increase in real property tax if assessed solely by reason of additional
improvements placed upon the Premises by lessee or at Lessee's request.
10.3 DEFINITION OF "REAL PROPERTY TAX." As used herein, the term "real
property tax" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Office Building Project or any portion thereof
by any authority having the direct or indirect power to tax, including any city,
county, state or federal government, or any school, agricultural, sanitary,
fire, street, drainage or other improvement district thereof, as against any
legal or equitable interest of Lessor in the Office Building Project or in any
portion thereof, as against Lessor's right to rent or other income therefrom,
and as against Lessor's business of leasing the Office Building Project. The
term "real property tax" shall also include any tax, fee, levy, assessment or
charge (i) in substitution of, partially or totally, any tax, fee, levy,
assessment or charge hereinabove included within the definition of "real
property tax," or (ii) the nature of which was hereinbefore included within the
definition of "real property tax," or (iii) which is imposed for a service or
right not charged prior to June 1, 1976, or, if previously charged, has been
increased since June 1, 1978, or (iv) which is imposed as a result of a change
in ownership, as defined by applicable local statutes for property tax purposes,
of the Office Building Project or which is added to a tax or charge hereinbefore
included within the definition of real property tax by reason of such change of
ownership, or (v) which is imposed by reason of this transaction, any
modifications or changes hereto, or any transfers hereof.
10.4 JOINT ASSESSMENT. If the improvements or property, the taxes for which
are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not
separately assessed, Lessee's portion of that tax shall be equitably determined
by Lessor from the respective valuations assigned in the assessor's work sheets
or such other information (which may include the cost of construction) as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.5 PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed against and
levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay to Lessor the taxes attributable to
Lessee within ten (10) days after receipt of a written statement setting forth
the taxes applicable to Lessee's property.
11. UTILITIES.
11.1 SERVICES PROVIDED BY LESSOR. Lessor shall provide heating, ventilation,
air conditioning, and janitorial service as reasonably required, reasonable
amounts of electricity for normal lighting and office machines, water for
reasonable and normal drinking and lavatory use, and replacement light bulbs
and/or fluorescent tubes and ballasts for standard overhead fixtures.
11.2 SERVICES EXCLUSIVE TO LESSEE. Lessee shall pay for all water, gas,
heat, light, power, telephone and other utilities and services specially or
exclusively supplied and/or metered exclusively to the Premises or to Lessee,
together with any taxes thereon. If any such services are not separately metered
to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a
reasonable proportion to be determined by Lessor of all charges jointly metered
with other premises in the Building.
11.3 HOURS OF SERVICE. Said services and utilities shall be provided during
generally accepted business days and hours or such other days or hours as may
hereafter be set forth. Utilities and services required at other times shall be
subject to advance request and reimbursement by Lessee to Lessor of the cost
thereof.
Initials: JP
--
DB
--
(C) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS
PAGE 5 OF 10 PAGES
<PAGE>
11.4 EXCESS USAGE BY LESSEE. Lessee shall not make connection to the
utilities except by or through existing outlets and shall not install or use
machinery or equipment in or about the Premises that uses excess water, lighting
or power, or suffer or permit any act that causes extra burden upon the
utilities or services, including but not limited to security services, over
standard office usage for the Office Building Project. Lessor shall require
Lessee to reimburse Lessor for any excess expenses or costs that may arise out
of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion,
install at Lessee's expense supplemental equipment and/or separate metering
applicable to Lessee's excess usage or loading.
11.5 INTERRUPTIONS. There shall be no abatement of rent and Lessor shall
not be liable in any respect whatsoever for the inadequacy, stoppage,
interruption or discontinuance of any utility or service due to riot, strike,
labor dispute, breakdown, accident, repair or other cause beyond Lessor's
reasonable control or in cooperation with governmental request or directions.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in the Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a material
default and breach of this Lease without the need for notice to Lessee under
paragraph 13.1. "Transfer" within the meaning of this paragraph 12 shall include
the transfer or transfers aggregating: (a) if Lessee is a corporation, more than
twenty-five percent (25%) of the voting stock of such corporation, or (b) if
Lessee is a partnership, more than twenty-five percent (25%) of the profit and
loss participation in such partnership.
12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, all of which are referred to as "Lessee Affiliate";
provided that before such assignment shall be effective, (a) said assignee shall
assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall
be given written notice of such assignment and assumption. Any such assignment
shall not, in any way, affect or limit the liability of Lessee under the terms
of this Lease even if after such assignment or subletting the terms of this
Lease are materially changed or altered without the consent of Lessee, the
consent of whom shall not be necessary.
12.3 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, no assignment or subletting shall
release Lessee of Lessee's obligations hereunder or alter the primary liability
of Lessee to pay the rent and other sums due Lessor hereunder including
Lessee's Share of Operating Expense Increase, and to perform all other
obligations to be performed by Lessee hereunder.
(b) Lessor may accept rent from any person other than Lessee pending
approval or disapproval of such assignment.
(c) Neither a delay in the approval or disapproval of such assignment
or subletting, nor the acceptance of rent, shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for the breach of any of the terms or
conditions of this paragraph 12 or this Lease.
(d) If Lessee's obligations under this Lease have been guaranteed by
third parties, then an assignment or sublease, and Lessor's consent thereto
shall not be effective unless said guarantors give their written consent to such
sublease and the terms thereof.
(e) The consent by Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent subletting and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent and such
action shall not relieve such persons from liability under this Lease or said
sublease; however, such persons shall not be responsible to the extent any such
amendment or modification enlarges or increases the obligations of the Lessee or
sublessee under this Lease or such sublease.
(f) In the event of any default under this Lease, Lessor may proceed
directly against Lessee, any guarantors or any one else responsible for the
performance of this Lease, including the sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor or Lessee.
(g) Lessor's written consent to any assignment or subletting of the
Premises by Lessee shall not constitute an acknowledgment that no default then
exists under this Lease of the obligations to be performed by Lessee nor shall
such consent be deemed a waiver of any then existing default, except as may
be otherwise stated by Lessor at the time.
(h) The discovery of the fact that any financial statement relied
upon by Lessor in giving its consent to an assignment or subletting was
materially false shall, at Lessor's election, render Lessor's said consent null
and void.
12.4 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. Regardless
of Lessor's consent, the following terms and conditions shall apply to any
subletting by Lessee of all or any part of the Premises and shall be deemed
included in all subleases under this Lease whether or not expressly incorporated
therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease heretofore or
hereafter made by Lessee, and Lessor may collect such rent and income and apply
same toward Lessee's obligations under this Lease; provided, however, that until
a default shall occur in the performance of Lessee's obligations under this
Lease, Lessee may receive, collect and enjoy the rents accruing under such
sublease. Lessor shall not, by reason of this or any other assignment of such
sublease to Lessor nor by reason of the collection of the rents from a
sublessee, be deemed liable to the sublessee for any failure of Lessee to
perform and comply with any of Lessee's obligations to such sublessee under such
sublease. Lessee hereby irrevocably authorizes and directs any such sublessee,
upon receipt of a written notice from Lessor stating that a default exists in
the performance of Lessee's obligations under this Lease, to pay to Lessor the
rents due and to become due under the sublease. Lessee agrees that such
sublessee shall have the right to rely upon any such statement and request from
Lessor, and that such sublessee shall pay such rents to Lessor without any
obligation or right to inquire as to whether such default exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against said sublessee or Lessor for any such rents
so paid by said sublessee to Lessor.
(b) No sublease entered into by Lessee shall be effective unless and
until it has been approved in writing by Lessor, in entering into any sublease,
Lessee shall use only such form of sublessee as is satisfactory to Lessor, and
once approved by Lessor, such sublease shall not be changed or modified without
Lessor's prior written consent. Any sublease shall, by reason of entering into a
sublease under this Lease, be deemed, for the benefit of Lessor, to have assumed
and agreed to conform and comply with each and every obligations herein to be
performed by Lessee other than such obligations as are contrary to or
inconsistent with provisions contained in a sublease to which Lessor has
expressly consented in writing.
(c) In the event Lessee shall default in the performance of its
obligations under this Lease, Lessor at its option and without any obligation to
do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of Lessee under such sublease from time of the
exercise of said option to the termination of such sublease; provided, however,
Lessor shall not be liable for any prepaid rents or security deposit paid by
such sublessee to Lessee or for any other prior defaults of Lessee under such
sublease.
(d) No sublessee shall further assign or sublet all or any part of the
Premises without Lessor's prior written consent.
(e) With respect to any subletting to which Lessor has consented,
Lessor agrees to deliver a copy of any notice of default by Lessee to the
sublessee. Such sublessee shall have the right to cure a default of Lessee
within three (3) days after service of said notice of default upon such
sublessee, and the sublessee shall have a right of reimbursement and offset from
and against Lessee for any such defaults cured by the sublessee.
12.5 LESSOR'S EXPENSES. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
than Lessee shall pay Lessor's reasonable costs and expenses incurred in
connection therewith, including attorneys', architects', engineers' or other
consultants' fees.
12.6 CONDITIONS TO CONSENT. Lessor reserves the right to condition any
approval to assign or sublet upon Lessor's determination that (a) the proposed
assignee or sublessee shall conduct a business on the Premises of a quality
substantially equal to that of Lessee and consistent with the general character
of the other occupants of the Office Building Project and not in violation of
any exclusives or rights then held by other tenants, and (b) the proposed
assignee or sublessee be at least as financially responsible as Lessee was
expected to be at the time of the of this Lease or of such assignment
or subletting, whichever is greater.
13. DEFAULT; REMEDIES.
13.1 DEFAULT. The occurrence of any one or more of the following events
shall constitute a material default of this Lease by Lessee:
(a) The vacation or abandonment of the Premises by Lessee. Vacation
of the Premises shall include the failure to occupy the Premises for a
continuous period of sixty (60) days or more, whether or not the rent is paid.
(b) The breach by Lessee of any of the covenants, conditions or
provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or
subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency), 13.1(f)
(false statement), 16(a) (estoppel certificate), 30(b) (subordination), 33
(auctions), or 41.1 (easements), all of which are hereby deemed to be material,
non-curable defaults without the necessity of any notice by Lessor to Lessee
thereof.
(c) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three (3) days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statues such
Notice to Pay Rent or Quit shall also constitute the notice required by this
subparagraph.
Initials JP
------
DB
------
(C) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS
PAGE 6 OF 10 PAGES
<PAGE>
(d) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by Lessee
other than those referenced in subparagraphs (b) and (c), above, where such
failure shall continue for a period of thirty (30) days after written notice
thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's
noncompliance 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
commenced such cure within said thirty (30) day period and thereafter diligently
pursues such cure to completion. To the extent permitted by law, such thirty
(30) day notice shall constitute the sole and exclusive notice required to be
given to Lessee under applicable Unlawful Detainer statutes.
(e) (i) The making by Lessee of any general arrangement or general
assignment for the benefit of creditors; (ii) Lessee becoming a "debtor" as
defined in 11 U.S.C. (S)101 or any successor statute thereto (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, where possession is not restored to Lessee within thirty
(30) days; or (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 such seizure is not discharged within thirty (30)
days. In the event that any provision of this paragraph 13.1(e) is contrary to
any applicable law, such provision shall be of no force or effect.
(f) The discovery by Lessor that any financial statement given to Lessor
by Lessee, or its successor in interest or by any guarantor of Lessee's
obligation hereunder, was materially false.
13.2 REMEDIES. In the event of any material default or breach of this Lease
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 by reason of such default:
(a) Terminate Lessee's right to possession of the Premises by any lawful
means, in which case this Lease and the term hereof 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, but not limited to, the cost of
recovering possession of the Premises; expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys' fees,
and any real estate commission actually paid; the worth at the time of award by
the court having jurisdiction thereof of the amount by which the unpaid rent for
the balance of the term after the time of such award exceeds the amount of such
rental loss for the same period that Lessee proves could be reasonably avoided;
that portion of the leasing commission paid by Lessor pursuant to paragraph 15
applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this Lease shall
continue in effect whether or not Lessee shall have vacated or 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 wherein the Premises are located.
Unpaid installments of rent and other unpaid monetary obligations of Lessee
under the terms of this Lease shall bear interest from the date due at the
maximum rate then allowable by law.
13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless 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 and
to the holder of any first mortgage or deed of trust covering the Premises whose
name and address shall have theretofore been furnished to Lessee in writing,
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 30-day period and thereafter diligently
pursues the same to completion.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to
Lessor of Base Rent, Lessee's Share of Operating Expense Increase or other sums
due hereunder will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed on Lessor by the terms of any mortgage or trust
deed covering the Office Building Project. Accordingly, if any installment of
Base Rent, Operating Expense Increase, or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to 6% of such overdue amount. 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 prevent Lessor from
exercising any of the other rights and remedies granted hereunder.
14. CONDEMNATION. If the Premises or any portion thereof or the Office Building
Project are taken under the power of eminent domain, or sold under the threat of
the exercise of said power (all of which are herein called "condemnation"), this
Lease shall terminate as to the part so taken as of the date the condemning
authority takes title or possession, whichever first occurs; provided that if so
much of the Premises or the Office Building Project are take by such
condemnation as would substantially and adversely affect the operation and
profitability of Lessee's business conducted from the Premises, Lessee shall
have the option, to be exercised only in writing within thirty (30) days after
Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within thirty (30) days after the condemning authority
shall have taken possession), to terminate this Lease as of the date the
condemning authority takes such possession. If Lessee does not terminate this
Lease in accordance with the foregoing, this Lease shall remain in full force
and effect as to the portion of the Premises remaining, except that the rent and
Lessee's Share of Operating Expense Increase shall be reduced in the proportion
that the floor area of the Premises taken bears to the total floor area of
the Premises. Common Areas taken shall be excluded from the Common Areas usable
by Lessee and no reduction of rent shall occur with respect thereto or by reason
thereof. Lessor shall have the option in its sole discretion to terminate this
Lease as of the taking of possession by the condemning authority, by giving
written notice to Lessee of such election within thirty (30) days after receipt
of notice of a taking by condemnation of any part of the Premises or the Office
Building Project. Any award for the taking of all or any part of the Premises or
the Office Building Project under the power of eminent domain or any payment
made under threat of the exercise of such power shall be the property of Lessor,
whether such award shall be made as compensation for diminution in value of the
leasehold or for the taking of the fee, or as severance damages; provided,
however, that Lessee shall be entitled to any separate award for loss of or
damage to Lessee's trade fixtures, removable personal property and unamortized
tenant improvements that have been paid for by Lessee. For that purpose the cost
of such improvements shall be amortized over the original term of this Lease
excluding any options. In the event that this Lease is not terminated by reason
of such condemnation, Lessor shall to the extent of severance damages received
by Lessor in connection with such condemnation, repair any damage to the
Premises caused by such condemnation except to the extant that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall pay any amount in
excess of such severance damages required to complete such repair.
15. BROKER'S FEE
(a) The brokers involved in this transaction are Silverado Group, Inc. as
"listing broker" and N/A as "cooperating broker," licensed real estate
broker(s). A "cooperating broker" is defined as any broker other than the
listing broker entitled to a share of any commission arising under this Lease.
Upon execution of this Lease by both parties, Lessor shall pay to said brokers
jointly, or in such separate shares as they may mutually designate in writing, a
fee as set forth in a separate agreement between Lessor and said broker(s), or
in the event there is no separate agreement between Lessor and said broker(s),
the sum of $ N/A for brokerage services rendered by said broker(s) to Lessor in
this transaction.
(b) Lessor further agrees that (i) if Lessee exercises any Option, as
defined in paragraph 38.1 of this Lease, which is granted to Lessee under this
Lease, or any subsequently granted option which is substantially similar to an
Option granted to Lessee under this Lease, or (ii) if Lessee acquires any rights
to the Premises or other Premises described in this Lease which are
substantially similar to what Lessee would have acquired had an Option herein
granted to Lessee been exercised, or (iii) if Lessee remains in possession of
the Premises after the expiration of the term of this Lease after having failed
to exercise an Option, or (iv) if said broker(s) are the procuring cause of any
other lease or sale entered into between the parties pertaining to the Premises
and/or any adjacent property in which Lessor has an interest, or (v) if the Base
Rent is increased, whether by agreement or operation of an escalation clause
contained herein, then as to any of said transactions or rent increases, Lessor
shall pay said broker(s) a fee in accordance with the schedule of said broker(s)
in effect at the time of execution of this Lease. Said fee shall be paid at the
time such increased rental is determined.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but also on
behalf of any person, corporation, association, or other entity having an
ownership interest in said real property or any part thereof, when such fee is
due hereunder. Any transfers of Lessor's interest in this Lease, whether such
transfer is by agreement or by operation of law, shall be deemed to have assumed
Lessor's obligation under this paragraph 15. Each listing and cooperating broker
shall be a third party beneficiary of the provisions of this paragraph 15 to the
extent of their interest in any commission arising under this lease and may
enforce that right directly against Lessor; provided, however, that all brokers
having a right to any part of such total commission shall be a necessary party
to any suit with respect thereto.
(d) Lessee and Lessor each represent and warrant to the other that neither
has had any dealings with any person, firm, broker or finder (other than the
person(s), if any, whose names are set forth in paragraph 15(a), above) in
connection with the negotiation of this Lease and/or the consummation of the
transaction contemplated hereby, and no other broker or other person, firm or
entity is entitled to any commission or finder's fee in connection with said
transaction and Lessee and Lessor do each hereby indemnify and hold the other
harmless from and against any costs, expenses, attorneys' fees or liability for
compensation or charges which may be claimed by any such unnamed broker, finder
or other similar party by reason of any dealings or actions of the indemnifying
party.
16. ESTOPPEL CERTIFICATES.
(a) Each party (as "responding party") shall at any time upon not less than
ten (10) days' prior written notice from the other party ("requesting party")
execute, acknowledge and deliver to the requesting party a statement in writing
(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
Initials: JP
------
DB
------
(C) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS
PAGE 7 OF 10 PAGES
<PAGE>
to which the rent and other charges are paid in advance, if any, and (H)
acknowledging that there are not, to the responding party's knowledge, any
uncured defaults on the part of the requesting party, or specifying such
defaults if any are claimed. Any such statement may be conclusively relied upon
by any prospective purchaser or encumbrancer of the Office Building Project or
of the business of Lessee.
(b) At the requesting party's option, the failure to deliver such statement
within such time shall be a material default of this Lease by the party who is
to respond, without any further notice to such party, or it shall be conclusive
upon such party that (i) this Lease is in full force and effect, without
modification except as may be represented by the requesting party, (ii) there
are no uncured defaults in the requesting party's performance, and (iii) if
Lessor is the requesting party, not more than one month's rent has been paid in
advance.
(c) If Lessor desires to finance, refinance, or sell the Office
Building Project, or any part thereof, Lessee hereby agrees to deliver to
any lender or purchaser designated by Lessor such financial statements of Lessee
as may be reasonably required by such lender or purchaser. Such statements shall
include the past three (3) years' financial statements of Lessee. All such
financial statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the
owner or owners, at the time in question, of the fee title or a lessee's
interest in a ground lease of the Office Building Project, and except as
expressly provided in paragraph 15, in the event of any transfer of such title
of interest, Lessor herein named (and in case of any subsequent transfers then
the grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be performed, provided
that any funds in the hands of Lessor or the then grantor at the time of such
transfer, in which Lessee has an interest, shall be delivered to the grantee.
The obligations contained in this Lease to be performed by Lessor shall, subject
as aforesaid, be binding on Lessor's successors and assigns, only during their
respective periods of ownership.
18. SEVERABILITY. The invalidity of any provision of this Lease as determined
by a court of competent jurisdiction shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the maximum rate
then allowable by law or judgments from the date due. Payment of such interest
shall not excuse or cure any default by Lessee under this Lease; provided,
however, that interest shall not be payable on late charges incurred by Lessee
nor on any amounts upon which late charges are paid by Lessee.
20. TIME OF ESSENCE. Time is of the essence with respect to the obligations to
be performed under this Lease.
21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the
terms of this Lease, including but not limited to Lessee's Share of Operating
Expense Increase and any other expenses payable by Lessee hereunder shall be
deemed to be rent.
22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
or contemporaneous agreement or understanding pertaining to any such matter
shall be effective. This Lease may be modified in writing only, signed by the
parties in interest at the time of the modification. Except as otherwise stated
in this Lease, Lessee hereby acknowledges that neither the real estate broker
listed in paragraph 15 hereof nor any cooperating broker on this transaction nor
the Lessor or any employee or agents of any of said persons has made any oral or
written warranties or representations to Lessee relative to the condition or use
by Lessee of the Premises or the Office Building Project and Lessee acknowledges
that Lessee assumes all responsibility regarding the Occupational Safety Health
Act. the legal use and adaptability of the Premises and the compliance thereof
with all applicable laws and regulations in effect during the term of this
Lease.
23. NOTICES. Any notice required or permitted to be given hereunder shall be in
writing and may be given by personal delivery or by certified or registered
mail, and shall be deemed sufficiently given if delivered or addressed to Lessee
or to Lessor at the address noted below or adjacent to the signature of the
respective parties, as the case may be. Mailed notices shall be deemed given
upon actual receipt at the address required, or forty-eight hours following
deposit in the mail, postage prepaid, whichever first occurs. Either party may
by notice to the other specify a different address for notice purposes except
that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice purposes. A copy of all notices required
or permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by notice to Lessee.
24. WAIVERS. No waiver by Lessor of any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.
26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of
the Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, except that the rent payable
shall be two hundred percent (200%) of the rent payable immediately preceding
the termination date of this Lease, and all Options, if any, granted under the
terms of this Lease shall be deemed terminated and be of no further effect
during said month to month tenancy.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting
assignment or subletting by Lessee and subject to the provisions of paragraph
17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
where the Office Building Project is located and any litigation concerning this
Lease between the parties hereto shall be initiated in the county in which the
Office Building Project is located.
30. SUBORDINATION.
(a) This Lease, and any Option or right of first refusal granted hereby, at
Lessor's option, shall be subordinate to any ground lease, mortgage, deed of
trust, or any other hypothecation or security now or hereafter placed upon the
Office Building Project and to any and all advances made on the security thereof
and to all renewals, modifications, consolidations, replacements and extensions
thereof. Notwithstanding such subordination, Lessee's right to quiet possession
of the Premises shall not be disturbed if Lessee is not in default and so long
as Lessee shall pay the rent and observe and perform all of the provisions of
this Lease, unless this Lease is otherwise terminated pursuant to its terms. If
any mortgagee, trustee or ground lessor shall elect to have this Lease and any
Options granted hereby prior to the lien of its mortgage, deed of trust or
ground lease, and shall give written notice thereof to Lessee, this Lease and
such Options shall be deemed prior to such mortgage, deed of trust or ground
lease, whether this Lease or such Options are dated prior or subsequent to the
date of said mortgage, deed of trust or ground lease or the date of recording
thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination, or to make this Lease or any Option granted herein
prior to the lien of any mortgage, deed of trust or ground lease, as the case
may be. Lessee's failure to execute such documents within ten (10) days after
written demand shall constitute a material default by Lessee hereunder without
further notice to Lessee or, at Lessor's option, Lessor shall execute such
documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby
make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and
in Lessee's name, place and stead, to execute such documents in accordance with
this paragraph 30(b).
31. ATTORNEY'S FEES.
31.1 If either party or the broker(s) named herein bring an action to
enforce the terms hereof or declare rights hereunder, the prevailing party in
any such action, trial or appeal thereon, shall be entitled to his reasonable
attorneys' fees to be paid by the losing party as fixed by the court in the same
or a separate suite, and whether or not such action is pursued to decision or
judgment. The provisions of this paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereunder.
31.2 The attorneys' fee award shall not be computed in accordance with any
court fee schedule, but shall be such as to fully reimburse all attorneys' fees
reasonably incurred in good faith.
31.3 Lessor shall be entitled to reasonable attorneys' fees and all other
costs and expenses incurred in the preparation and service of notice of default
and consultations in connection therewith, whether or not a legal transaction is
subsequently commenced in connection with such default.
32. LESSOR'S ACCESS.
32.1 Lessor and Lessor's agents shall have the right to enter the Premises
at reasonable times for the purpose of Inspecting the same, performing any
services required of Lessor, showing the same to prospective purchasers,
lenders, or lessees, taking such safety measures, erecting such scaffolding or
other necessary structures, making such alterations, repairs, improvements or
additions to the Premises or to the Office Building Project as Lessor may
reasonably deem necessary or desirable and the erecting, using and maintaining
of utilities, services, pipes and conduits through the Premises and/or other
premises as long as there is no material adverse effect to Lessee's use of the
Premises, Lessor may at any time place on or about the Premises or the Building
any ordinary "For Sale" signs and Lessor may at any time during the last 120
days of the term hereof place on or about the Premises any ordinary "For Lease"
signs.
32.2 All activities of Lessor pursuant to this paragraph shall be without
abatement of rent, nor shall Lessor have any liability to Lessee for the same.
Initials JP
----
DB
----
(C) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS
PAGE 8 OF 10 PAGES
<PAGE>
32.3 Lessor shall have the right to retain keys to the Premises and to
unlock all doors in or upon the Premises other than to files, vaults and sales,
and in the case of emergency to enter the Premises by any reasonably appropriate
means, and any such entry shall not be deemed a forceable or unlawful entry or
detainer of the Premises or an eviction. Lessee waives any charges for damages
or injuries or interference with Lessee's property or business in connection
therewith.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises or the Common Areas
without first having 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. The holding of any auction on the Premises or Common Areas in violation
of this paragraph shall constitute a material default of this Lease.
34. SIGNS. Lessee shall not place any sign upon the Premises or the Office
Building Project without Lessor's prior written consent. Under no circumstances
shall Lessee place a sign on any roof of the Office Building Project.
35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
36. CONSENTS. Except for paragraphs 33 (auctions) and 34 (signs) hereof,
wherever in this Lease the consent of one party is required to an act of the
other party such consent shall not be unreasonably withheld or delayed.
37. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and observing
and performing all of the covenants, conditions and provisions on Lessee's part
to be observed and performed hereunder. Lessee shall have quiet possession of
the Premises for the entire term hereof subject to all of the provisions of this
Lease. The individuals executing this Lease on behalf of Lessor represent and
warrant to Lessee that they are fully authorized and legally capable of
executing this Lease on behalf of Lessor and that such execution is binding upon
all parties holding an ownership interest in the Office Building Project.
39. OPTIONS.
39.1 DEFINITION. As used in this paragraph the word "Option" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option or right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of first
refusal to lease other space within the Office Building Project or other
property of Lessor or the right of first offer to lease other space within the
Office Building Project or other property of Lessor; (3) the right or option to
purchase the Premises or the Office Building Project, or the right of first
refusal to purchase the Premises or the Office Building Project or the right of
first offer to purchase the Premises or the Office Building Project, or the
right or option to purchase other property of Lessor, or the right of first
refusal to purchase other property of Lessor or the right of first offer to
purchase other property of Lessor.
39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease is
personal to the original Lessee and may be exercised only by the original Lessee
while occupying the Premises who does so without the intent of thereafter
assigning this Lease or subletting the Premises or any portion thereof, and may
not be exercised or be assigned, voluntarily or involuntarily, by or to any
person or entity other than Lessee; provided, however, that an Option may be
exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of
this Lease. The Options, if any, herein granted to Lessee are not assignable
separate and apart from this Lease, nor may any Option be separated from this
Lease in any manner, either by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple options
to extend or renew this Lease a later option cannot be exercised unless the
prior option to extend or renew this Lease has been so exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary, (i) during the time
commencing from the date Lessor gives to Lessee a notice of default pursuant to
paragraph 13.1(c) or 13.1(d) and continuing until the noncompliance alleged in
said notice of default is cured, or (ii) during the period of time commencing
on the day after monetary obligation to Lessor is due from Lessee and unpaid
(without any necessity for notice thereof to Lessee) and continuing until the
obligation is paid, or (iii) in the event that Lessor has given to Lessee three
or more notices of default under paragraph 13.1(c), or paragraph 13.1(d),
whether or not the defaults are cured, during the 12 month period of time
immediately prior to the time that Lessee attempts to exercise the subject
Option, (iv) if Lessee has committed any non-curable breach, including without
limitation those described in paragraph 13.1(b), or is otherwise in default of
any of the terms, covenants or conditions of this Lease.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to
commence to cure a default specified in paragraph 13.1(d) within thirty (30)
days after the date that Lessor gives notice to Lessee of such default and/or
Lessee fails thereafter to diligently prosecute said cure to completion, or
(iii) Lessor gives to Lessee three or more notices of default under paragraph
13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, or (iv) if
Lessee has committed any non-curable breach, including without limitation those
described in paragraph 13.1(b), or is otherwise in default of any of the terms,
covenants and conditions of this Lease.
40. SECURITY MEASURES--LESSOR'S RESERVATIONS.
40.1 Lessee hereby acknowledges that Lessor shall have no obligation
whatsoever to provide guard service or other security measures for the benefit
of the Premises or the Office Building Project. Lessee assumes all
responsibility for the protection of Lessee, its agents, and invitees and the
property of Lessee and of Lessee's agents and invitees from acts of third
parties. Nothing herein contained shall prevent Lessor, at Lessor's sole
option, from providing security protection for the Office Building Project or
any part thereof, in which event the cost thereof shall be included within the
definition of Operating Expenses, as set forth in paragraph 4.2(b).
40.2 Lessor shall have the following rights:
(a) To change the name, address or title of the Office Building
Project or building in which the Premises are located upon not less than 90 days
prior written notice;
(b) To, at Lessee's expense, provide and install Building standard
graphics on the door of the Premises and such portions of the Common Areas as
Lessor shall reasonably deem appropriate;
(c) To permit any lessee the exclusive right to conduct any business
as long as such exclusive does not conflict with any rights expressly given
herein;
(d) To place such signs, notices or displays as Lessor reasonably
deems necessary or advisable upon the roof, exterior of the buildings or the
Office Building Project or on pole signs in the Common Areas;
40.3 Lessee shall not:
(a) Use a representation (photographic or otherwise) of the Building
or the Office Building Project or their name(s) in connection with Lessee's
business;
(b) Suffer or permit anyone, except in emergency, to go upon the roof
of the Building.
41. EASEMENTS.
41.1 Lessor reserves to itself the right, from time to time, to grant such
easements, rights and dedications that Lessor deems necessary or desirable, and
to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications, Maps and restrictions do not unreasonably
interfere with the use of the Premises by Lessee. Lessee shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall
constitute a material default of this Lease by Lessee without the need for
further notice to Lessee.
41.2 The obstruction of Lessee's view, air, or light by any structure
erected in the vicinity of the Building, whether by Lessor to third parties,
shall in no way affect this Lease or impose any liability upon Lessor.
42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one party to the other under the provisions
hereof, the party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment, and there shall survive the right on the part
of said party to institute suit for recovery of such sum. If it shall be
adjudged that there was no legal obligation on the part of said party to pay
such sum or any part thereof, said party shall be entitled to recover such sum
or so much thereof as it was not legally required to pay under the provisions of
this Lease.
Initials JP
---
DB
---
(C) 1984 American Industrial Real Estate Association
FULL SERVICE--GROSS
PAGE 9 OF 10 PAGES
<PAGE>
43. AUTHORITY. If Lessee is a corporation, trust, or general or limited
partnership, Lessee, and each individual executing this Lease on behalf of such
entity represent and warrant that such individual is duly authorized to execute
and deliver this Lease on behalf of said entity. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty (30) days after execution of
this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
44. CONFLICT. Any conflict between the printed provisions, Exhibits or
Addends of this Lease and the typewritten or handwritten provisions, if any,
shall be controlled by the typewritten or handwritten provisions.
45. NO OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to Lessee to lease.
This Lease shall become binding upon Lessor and Lessee only when fully executed
by both parties.
46. LENDER MODIFICATION. Lessee agrees to make such reasonable modifications to
this Lease as may be reasonably required by an institutional lender in
connection with the obtaining of normal financing or refinancing of the Office
Building Project.
47. MULTIPLE PARTIES. If more than one person or entity is named as either
Lessor or Lessee herein, the obligations of the Lessor or Lessee herein shall be
the joint and several responsibility of all persons or entities named herein
as such Lessor or Lessee, respectively.
48. WORK LETTER. This Lease is supplemented by that certain Work Letter of even
date executed by Lessor and Lessee, attached hereto as Exhibit C, and
incorporated herein by this reference.
49. ATTACHMENTS. Attached hereto are the following documents which constitute
a part of this Lease: Exhibits A, B, C & D.
50. Rental increases shall be at the fixed rate of 2 1/2% per year.
/s/ JRB
-------
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
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 AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR 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; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR
OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
LESSOR LESSEE
Pflueger Partners Virtual Gaming Technologies, Inc.
- ------------------------------------- -------------------------------------
By The Pennbrook Company By /s/ JOSEPH PARAVIA
---------------------------------- ----------------------------------
Joseph Paravia
Its Managing Agent Its President
----------------------------- ------------------------------
-------------------------------------
By /s/ DONALD N. BAUHOFER By
---------------------------------- ----------------------------------
Donald N. Bauhofer
Its President Its
----------------------------- ------------------------------
Executed at Executed at
------------------------- -------------------------
on on
---------------------------------- ----------------------------------
Address Address
------------------------------ ------------------------------
1984 American Industrial Real Estate Association FULL SERVICE-GROSS
PAGE 10 OF 10 PAGES
For these forms write or call the American Industrial Real Estate
Association, 350 South Figueroa Street, Suite 275, Los Angeles, CA 90071, (213)
687-8777. (C) 1984-By American Industrial Real Estate Association. All rights
reserved. No part of these words may be reproduced in any form without
permission in writing.
<PAGE>
Exhibit A FLOOR LOCATION PLAN
Dated: September 4, 1998
By and Between: Pflueger Partners and Virtual Gaming Technologies.
[DIAGRAM OF SECOND FLOOR STREET LEVEL/MAIN ENTRANCE]
Initials JP
--
DB
--
<PAGE>
RULES AND REGULATIONS FOR
STANDARD OFFICE LEASE
[LOGO OF AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION]
Dated: September 4, 1998
By and Between Pflueger Partners and Virtual Gaming Technologies, Inc.
GENERAL RULES
1. Lessee shall not suffer or permit the obstruction of any Common Areas,
including driveways, walkways and stairways.
2. Lessor reserves the right to refuse access to any persons Lessor in good
faith judges to be a threat to the safety, reputation, or property of the Office
Building Project and its occupants.
3. Lessee shall not make or permit any noise or odors that annoy or
interfere with other lessees or persons having business within the Office
Building Project.
4. Lessee shall not keep animals or birds within the Office Building
Project, and shall not bring bicycles, motorcycles or other vehicles into areas
not designated as authorized for same.
5. Lessee shall not make, suffer or permit litter except in appropriate
receptacles for that purpose.
6. Lessee shall not alter any lock or install new or additional locks or
bolts.
7. Lessee shall be responsible for the inappropriate use of any toilet
rooms, plumbing or other utilities. No foreign substances of any kind are to be
inserted therein.
8. Lessee shall not deface the walls, partitions or other surfaces of the
premises or Office Building Project.
9. Lessee shall not suffer or permit any thing in or around the Premises or
Building that causes excessive vibration or floor loading in any part of the
Office Building Project.
10. Furniture, significant freight and equipment shall be moved into or out
of the building only with the Lessor's knowledge and consent, and subject to
such reasonable limitations, techniques and timing, as may be designated by
Lessor. Lessee shall be responsible for any damage to the Office Building
Project arising from any such activity.
11. Lessee shall not employ any service or contractor for services or work
to be performed in the Building, except as approved by Lessor.
12. Lessor reserves the right to close and lock the Building on Saturdays,
Sundays and legal holidays, and on other days between the hours of 6:00 P.M. and
7:00 A.M. of the following day. If Lessee uses the Premises during such
periods, Lessee shall be responsible for securely locking any doors it may have
opened for entry.
13. Lessee shall return all keys at the termination of its tenancy and shall
be responsible for the cost of replacing any keys that are lost.
14. No window coverings, shades or awnings shall be installed or used by
Lessee.
15. No Lessee, employee or invitee shall go upon the roof of the Building.
16. Lessee shall not suffer or permit smoking or carrying of lighted cigars
or cigarettes in areas reasonably designated by Lessor or by applicable
governmental agencies as non-smoking areas.
17. Lessee shall not use any method of heating or air conditioning other
than as provided by Lessor.
18. Lessee shall not install, maintain or operate any vending machines upon
the Premises without Lessor's written consent.
19. The Premises shall not be used for lodging or manufacturing, cooking or
food preparation.
20. Lessee shall comply with all safety, fire protection and evacuation
regulations established by Lessor or any applicable governmental agency.
21. Lessor reserves the right to waive any one of these rules or
regulations, and/or as to any particular Lessee, and any such waiver shall not
constitute a waiver of any other rule or regulation or any subsequent
application thereof to such Lessee.
22. Lessee assumes all risks from theft or vandalism and agrees to keep its
Premises locked as may be required.
23. Lessor reserves the right to make such other reasonable rules and
regulations as it may from time to time deem necessary for the appropriate
operation and safety of the Office Building Project and its occupants. Lessee
agrees to abide by these and such rules and regulations.
PARKING RULES
1. Parking areas shall be used only for parking by vehicles no longer than
full size, passenger automobiles herein called "Permitted Size Vehicles."
Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized
Vehicles."
2. Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or
invitees to be loaded, unloaded, or parked in areas other than those designated
by Lessor for such activities.
3. Parking stickers or identification devices shall be the property of
Lessor and be returned to Lessor by the holder thereof upon termination of the
holder's parking privileges. Lessee will pay such replacement charge as is
reasonably established by Lessor for the loss of such devices.
4. Lessor reserves the right to refuse the sale of monthly identification
devices to any person or entity that willfully refuses to comply with the
applicable rules, regulations, laws and/or agreements.
5. Lessor reserves the right to relocate all or a part of parking spaces
from floor to floor, within one floor, and/or to reasonably adjacent offsite
location(s), and to reasonably allocate them between compact and standard size
spaces, as long as the same complies with applicable laws, ordinances and
regulations.
6. Users of the parking area will obey all posted signs and park only in
the areas designated for vehicle parking.
7. Unless otherwise instructed, every person using the parking areas is
required to park and lock his own vehicle. Lessor will not be responsible for
any damage to vehicles, injury to persons or loss of property, all of which
risks are assumed by the party using the parking area.
8. Validation, if established, will be permissible only by such method or
methods as Lessor and/or its licensee may establish at rates generally
applicable to visitor parking.
9. The maintenance, washing, waxing or cleaning of vehicles in the parking
structure or Common Areas is prohibited.
10. Lessee shall be responsible for seeing that all of its employees,
agents and invitees comply with the applicable parking rules, regulations, laws
and agreements.
11. Lessor reserves the right to modify these rules and/or adopt such other
reasonable and non-discriminatory rules and regulations as it may deem necessary
for the proper operation of the parking area.
12. Such parking use as is herein provided is intended merely as a license
only and no bailment is intended or shall be created hereby.
Initials: JP
---
DB
---
(C) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS
EXHIBIT B
PAGE 1 OF 1 PAGES
<PAGE>
Exhibit C SUITE PLAN
Dated: September 4, 1998
By and Between: Pflueger Partners and Virtual Gaming Technologies, Inc.
[DIAGRAM OF SUITE PLAN]
All dimensions are approximate. Drawing is not to scale.
Initials: JP
--
DB
--
<PAGE>
EXHIBIT D
REVISED RENT PAYMENT SCHEDULE
Dated: October 27, 1998
By and Between: Plueger Partners and Virtual Gaming Technologies, Inc.
Mo. Date Payment
--- ---- -------
1 10/16/98 $2,710.50
2 11/1/98 $5,421.00
3 12/1/98 $5,421.00
4 1/1/99 $5,421.00
5 2/1/99 $5,421.00
6 3/1/99 $5,421.00
7 4/1/99 $5,421.00
8 5/1/99 $5,421.00
9 6/1/99 $5,421.00
10 7/1/99 $5,421.00
11 8/1/99 $5,421.00
12 9/1/99 $5,421.00
13 10/1/99 $5,556.53
14 11/1/99 $5,556.53
15 12/1/99 $5,556.53
16 1/1/00 $5,556.53
17 2/1/00 $5,556.53
18 3/1/00 $5,556.53
19 4/1/00 $5,556.53
20 5/1/00 $5,556.53
21 6/1/00 $5,556.53
22 7/1/00 $5,556.53
23 8/1/00 $5,556.53
24 9/1/00 $5,556.53
25 10/1/00 $2,778.27
Initials: PM
--
ML
--
<PAGE>
Exhibit 10.7
STANDARD SUBLEASE
American Industrial Real Estate Association
[LOGO OF AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION]
1. PARTIES. This Sublease, dated, for reference purposes only, May 29, 1997, is
made by and between Gamma Productions, Inc.(herein called "Sublessor") and
Virtual Gaming Technologies, Inc. (herein called "Sublessee").
2. PREMISES. Sublessor hereby subleases to Sublessees and Sublessee hereby
subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, that certain real property situated in the County
of San Diego, State of California, commonly known as 12625 High Bluff Drive
Suite 218 and described as Hacienda Corporate Center, Suite 218. Said real
property, including the land and all improvements thereon, is hereinafter called
the "Premises".
3. TERM.
3.1 TERM. The term of this Sublease shall be for Twenty Three Months
commencing on July 15, 1997 and ending on June 14, 1999 unless sooner terminated
pursuant to any provision hereof.
3.2 DELAY IN COMMENCEMENT. Notwithstanding said commencement date, if for
any reason Sublessor cannot deliver possession of the Premises to Sublessee on
said date, Sublessor shall not be subject to any liability therefore, nor shall
such failure affect the validity of this Lease or the obligations of Sublessee
hereunder or extend the term hereof, but in such case Sublessee shall not be
obligated to pay rent until possession of the Premises is tendered to Sublessee;
provided, however, that if Sublessor shall not have delivered possession of the
Premises within sixty (60) days from said commencement date, Sublessee may, at
Sublessee's option, by notice in writing to Sublessor within ten (10) days
thereafter, cancel this Sublease, in which event the parties shall be discharged
from all obligations thereunder. If Sublessee occupies the Premises prior to
said commencement date, such occupancy shall be subject to all provisions
hereof, such occupancy shall not advance the termination date and Sublessee
shall pay rent for such period at the initial monthly rates set forth below.
4. RENT. Sublessee shall pay to Sublessor as rent for the Premises equal
monthly payments of $3,190.25, in advance, on the 1st day of each month of the
term hereof. Sublessee shall pay Sublessor upon the execution hereof $3,190.25
as rent for July 1997. Rent for any period during the term hereof which is for
less than one month shall be a prorate portion of the monthly installment. Rent
shall be payable in lawful money of the United States to Sublessor at the
address stated herein or to such other persons or at such other places as
Sublessor may designate in writing.
5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon execution
hereof $3,190.25 as security for Sublessee's faithful performance of Sublessee's
obligations hereunder. If Sublessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Sublease,
Sublessor may use, apply or retain all or any portion of said deposit for the
payment of any rent or other charge in default or for the payment of any other
sum to which Sublessor may become obligated by reason of Sublessee's default, or
to compensate Sublessor for any loss or damage which Sublessor may suffer
thereby if Sublessor so sues or applies all or any portion of said deposit.
Sublessee shall within ten (10) days after written demand therefore deposit cash
with Sublessor in an amount sufficient to restore said deposit to the full
amount hereinabove stated and Sublessee's failure to do so shall be a material
breach of this Sublease. Sublessor shall not be required to keep said deposit
separate from its general accounts. If Sublessee performs all of Sublessee's
obligations hereunder, said deposit, or so much thereof as has not theretofore
been applied by Sublessor, shall be returned, without payment of interest or
other increment for its use to Sublessee (or at Sublessor's option, to the last
assignee, if any, of Sublessee's interest hereunder) at the expiration of the
term hereof, and after Sublessee has vacated the Premises. No trust
relationship is created herein between Sublessor and Sublessee with respect to
said Security Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only for General office
purposes consistent with area zoning and local CC&R's and for no other purpose.
6.2 COMPLIANCE WITH LAW.
(a) Sublessor warrants to Sublessee that the Premises, in its existing
state, but without regard to the use for which Sublessee will use the Premises,
does not violate any applicable building code regulation or ordinance at the
time that this Sublease is executed. In the event that it is determined that
this warranty has been violated, then it shall be the obligation of the
Sublessor, after written notice from Sublessee, to promptly, at Sublessor's sole
cost and expense, rectify any such violation. In the event that Sublessee does
not give to Sublessor written notice of the violation of this warranty within 1
year from the commencement of the term of this Sublease, it shall be
conclusively deemed that such violation did not exist and the correction of the
same shall be the obligation of the Sublessee.
(b) Except as provided in paragraph 6.2(a), Sublessee shall, at
Sublessee's expense, comply promptly with all applicable statutes, ordinances,
rules, regulations, orders, restrictions of record, and requirements in effect
during the term or any part of the term hereof regulating the use by Sublessee
of the Premises. Sublessee shall not use or permit the use of the Premises in
any manner that will tend to create waste or a nuisance or, if there shall be
more than one tenant of the building containing the Premises, which shall tend
to disturb such other tenants.
6.3 CONDITION OF PREMISES. Except as provided in paragraph 6.2(a) Sublessee
hereby accepts the Premises in their condition existing as of the date of the
execution hereof, subject to all applicable zoning, municipal, county and state
laws, ordinances, and regulations governing and regulating the use of the
Premises, and accepts this Sublease subject thereto and to all matters disclosed
thereby and by any exhibits attached hereto. Sublessee acknowledges that
neither Sublessor nor Sublessor's agents have made any representation or
warranty as to the suitability of the Premises for the conduct of Sublessee's
business.
7. MASTER LEASE.
7.1 Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter referred to as the "Master Lease", a copy of which is attached
hereto marked Exhibit 1, dated May 17, 1994 wherein Pflueger Partners is the
lessor, hereinafter referred to as the "Master Lessor".
7.2 This Sublease is and shall be at all times subject and subordinate to
the Master Lease.
7.3 The terms, conditions and respective obligations of Sublessor and
Sublessee to each other under this Sublease shall be the terms and conditions
of the Master Lease except for those provisions of the Master Lease which are
directly contradicted by this Sublease in which event the terms of this Sublease
document shall control over the Master Lease. Therefore, for the purposes of
this Sublease, wherever in the Master Lease the word "Lessor" is used it shall
be deemed to mean the Sublessor herein and wherever in the Master Lease the
word "Lessee" is used it shall be deemed to mean the Sublessee herein.
7.4 During the term of this Sublease and for all periods subsequent for
obligations which have arisen prior to the termination of this Sublease.
Sublessee does hereby expressly assume and agree to perform and comply with, for
the benefit of Sublessor and Master Lessor, each and every obligation of
Sublessor under the Master Lease except for the following paragraphs which are
excluded therefrom ____________________________________________________________
_______________________________________________________________________________
<PAGE>
7.5 The obligations that Sublessee has assumed under paragraph 7.4 hereof
are hereinafter referred to as the "Sublessee's Assumed Obligations". The
obligations that Sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations".
7.6 Sublessee shall hold Sublessor free and harmless of and from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the entire term of
this Sublease, subject, however, to any earlier termination of the Master Lease
without the fault of the Sublessor, and to comply with or perform Sublessor's
Remaining Obligations and to hold Sublessee free and harmless of and from all
liability, judgments, costs, damages, claims or demands arising out of
Sublessor's failure to comply with or perform Sublessor's Remaining
Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is in full
force and effect and that no default exists on the part of any party to the
Master Lease.
8. ASSIGNMENT OF SUBLEASE AND DEFAULT.
8.1 Sublessor hereby assigns and transfers to Master Lessor the Sublessor's
interest in this Sublease and all rentals and income arising therefrom, subject
however to terms of Paragraph 8.2 hereof.
8.2 Master Lessor, by executing this document, agrees that until a default
shall occur in the performance of Sublessor's Obligations under the Master
Lease, that Sublessor may receive, collect and enjoy the rents accruing under
this Sublease. However, if Sublessor shall default in the performance of its
obligations to Master Lessor then Master Lessor may, at its option, receive and
collect, directly from Sublessee, all rent owing and to be owed under this
Sublease Master Lessor shall not, by reason of this assignment of the Sublease
nor by reason of the collection of the rents to be owed under this Sublease
Master Lessor shall not, by reason of this assignment of the Sublease nor by
reason of the collection of the rents to be owed under this Sublease, Master
Lessor shall not, by reason of this assignment of the Sublease nor by reason of
the collection of the rents from the Sublessee, be deemed liable to Sublessee
for any failure of the Sublessor to perform and comply with Sublessor's
Remaining Obligations.
8.3 Sublessor hereby irrevocably authorizes and directs Sublessee, upon
receipt of any written notice from the Master Lessor stating that a default
exists in the performance of Sublessor's obligations under the Master Lease, to
pay to Master Lessor the rents due and to become due under the Sublease.
Sublessor agrees that Sublessee shall have the right to rely upon any such
statement and request from Master Lessor, and that Sublessee shall pay such
rents to Master Lessor without any obligation or right to inquire as to whether
such default exists and notwithstanding any notice from or claim from Sublessor
to the contrary and Sublessor shall have no right or claim against Sublessee
for any such rents so paid by Sublessee.
8.4 No changes or modifications shall be made to this Sublease without the
consent of Master Lessor.
9. CONSENT OF MASTER LESSOR.
9.1 In the event that the Master Lease requires that Sublessor obtain the
consent of Master Lessor to any subletting by Sublessor then, this Sublease
shall not be effective unless, within 10 days of the date hereof, Master Lessor
signs this Sublease thereby giving its consent to this Subletting.
9.2 In the event that the obligations of the Sublessor under the Master
Lease have been guaranteed by third parties then this Sublease, nor the Master
Lessor's consent, shall not be effective unless, within 10 days of the date
hereof, said guarantors sign this Sublease thereby giving guarantors consent
to this Sublease and the terms thereof.
9.3 In the event that Master Lessor does give such consent then:
(a) Such consent will not release Sublessor of its obligations or alter
the primary liability of Sublessor to pay the rent and perform and comply
with all of the obligations of Sublessor to be performed under the Master Lease.
(b) The acceptance of rent by Master Lessor from Sublessee or any one else
liable under the Master Lease shall not be deemed a waiver by Master Lessor of
any provisions of the Master Lease.
(c) The consent to this Sublease shall not constitute a consent to any
subsequent subletting or assignment.
(d) In the event of any default of Sublessor under the Master Lease,
Master Lessor may proceed directly against Sublessor, any guarantors or any one
else liable under the Master Lease or this Sublease without first exhausting
Master Lessor's remedies against any other person or entity liable thereon to
Master Lessor.
(e) Master Lessor may consent to subsequent sublettings and assignments of
the Master Lease or this Sublease or any amendments or modifications thereto
without notifying Sublessor nor any one else liable under the Master Lease and
without obtaining their consent and such action shall not relieve such persons
from liability.
(f) In the event that Sublessor shall default in its obligations under the
Master Lease, then Master Lessor, at its option and without being obligated
to do so, may require Sublessee to attorn to Master Lessor in which event Master
Lessor shall undertake the obligations of Sublessor under this Sublease from the
time of the exercise of said option to termination of this Sublease but Master
Lessor shall not be liable for any prepaid rents nor any security deposit paid
by Sublessee, nor shall Master Lessor be liable for any other defaults of the
Sublessor under the Sublease.
9.4 The signatures of the Master Lessor and any Guarantors of Sublessor at
the end of this document shall constitute their consent to the terms of this
Sublease.
9.5 Master Lessor acknowledges that, to the best of Master Lessor's
knowledge, no default presently exists under the Master Lease of obligations to
be performed by Sublessor and that the Master Lease is in full force and effect.
9.6 In the event that Sublessor defaults under its obligations to be
performed under the Master Lease by Sublessor, Master Lessor agrees to deliver
to Sublessee a copy of any such notice of default. Sublessee shall have the
right to cure any default to Sublessor described in any notice of default within
ten days after service of such notice of default on Sublessee. If such default
is cured by Sublessee then Sublessee shall have the right of reimbursement and
offset from and against Sublessor.
10. BROKERS FEE.
10.1 Upon execution hereof by all parties, Sublessor shall pay to Silverado
Group, Inc. a licensed real estate broker, (herein called "Broker"), a fee as
set forth in a separate agreement between Sublessor and Broker, or in the event
there is no separate agreement between Sublessor and Broker, the sum of $ n/a
for brokerage services rendered by Broker to Sublessor in this transaction.
10.2 Sublessor agrees that if Sublessee exercises any option or right of
first refusal granted by Sublessor herein, or any option or right substantially
similar thereto, either to extend the term of this Sublease, to renew this
Sublease, to purchase the Premises, or to lease or purchase adjacent property
which Sublessor may own or in which Sublessor has an interest, or if Broker is
the procuring cause of any lease, sublease, or sale pertaining to the Premises
or any adjacent property which Sublessor may own or in which Sublessor has an
interest, then as to any of said transactions, Sublessor shall pay to Broker a
fee, in cash, in accordance with the schedule of Broker in effect at the time of
the execution of this Sublease. Notwithstanding the foregoing, Sublessor's
obligation under this Paragraph 10.2 is limited to a transaction in which
Sublessor is acting as a sublessor, lessor or seller.
10.3 Master Lessor agrees, by its consent to this Sublease, that if
Sublessee shall exercise any option or right of first refusal granted to
Sublessee by Master Lessor in connection with this Sublease, or any option or
right substantially similar thereto, either to extend the Master Lease, to
renew the Master Lease, to purchase the Premises or any part thereof, or to
lease or purchase adjacent property which Master Lessor may own or in which
Master Lessor has an interest, or if Broker is the procuring cause of any other
lease or sale entered into between Sublessee and Master Lessor pertaining to
the Premises, any part thereof, or any adjacent property which Master Lessor
owns or in which it has an interest, then as to any of said transactions Master
Lessor shall pay to Broker a fee, in cash, in accordance with the schedule of
Broker in effect at the time of its consent to this Sublease.
10.4 Any fee due from Sublessor or Master Lessor hereunder shall be due and
payable upon the exercise of any option to extend or renew, as to any extension
or renewal, upon the execution of any new lease, as to a new lease transaction
or the exercise of a right of first refusal to lease; or at the close of
escrow, as to the exercise of any option to purchase or other sale transaction.
10.5 Any transferee of Sublessor's interest in this Sublease, or of Master
Lessor's interest in the Master Lease, by accepting an assignment thereof, shall
be deemed to have assumed the respective obligations of Sublessor or Master
Lessor under this Paragraph 10. Broker shall be deemed to be a third-party
beneficiary of this paragraph 10.
11. ATTORNEY'S FEES. If any party or the Broker named herein brings an action
to enforce the terms hereof or to declare rights hereunder, the prevailing party
in any such action, on trail and appeal, shall be entitled to his reasonable
attorney's fees to be paid by the losing party as fixed by the Court. The
provision of this paragraph shall inure to the benefit of the Broker named
herein who seeks to enforce a right hereunder.
<PAGE>
12. ADDITIONAL PROVISIONS. (If there are no additional provisions draw a line
from this point to the next printed word after the space left here. If there are
additional provisions place the same here.)
If this Sublease has been filled in it has been prepared for submission to
your attorney for his approval. Its representation or recommendation is
made by the real estate broker or its agents or employees as is the legal
sufficiency, legal effect, or tax consequences of this Sublease or the
transaction relating thereto.
Executed at /s/ LINDA BRANDT
---------------------------- ------------------------------------
on By Gamma Productions, Inc.
------------------------------------- --------------------------------
address By Linda Brandt, President
-------------------------------- --------------------------------
"Sublessor" (Corporate Seal)
- ----------------------------------------
Executed at /s/ DANIEL NAJOR
---------------------------- ------------------------------------
on By Virtual Gaming Technologies, Inc.
------------------------------------- --------------------------------
address By Daniel Najor, C.E.O.
-------------------------------- --------------------------------
"Sublessee" (Corporate Seal)
- ----------------------------------------
Executed at
---------------------------- ------------------------------------
on By
------------------------------------- --------------------------------
address By
-------------------------------- --------------------------------
"Master Lessor" (Corporate Seal)
Executed at
---------------------------- ------------------------------------
on
------------------------------------- ------------------------------------
address
-------------------------------- ------------------------------------
"Guarantors"
- ----------------------------------------
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing
the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345
So. Figuerine St., M-1, Los Angeles, CA 80071. (213) 997-9777.
<PAGE>
EXHIBIT 16.1
[LETTERHEAD OF CARTER, POLITO & MUSCIO, INC.]
October 29, 1998
U.S. Securities and Exchange Commission
Washington, D.C. 20549
RE: Virtual Gaming Technologies, Inc.
Form 10-SB
Part II, Item 3
Dear Sir or Madam:
We are the former accountants for Virtual Gaming Technologies, Inc.
This response is in accordance with Item 304(a)(3) of Regulation S-B, and
concerns the statements made in Part II, Item 3. of Form 10-SB titled "Changes
in and Disagreements with Accountants."
We agree with the statements made in the above-referenced section.
Please contact the undersigned if you have any questions.
Very truly yours,
/s/ RICHARD J. MUSCIO
Richard J. Muscio
Certified Public Accountant
