Exhibit 10.30
LOAN AGREEMENT
THIS LOAN AGREEMENT (the "Agreement"), is entered into and is effective
this 22nd day of June 2000 by and between J. Dean Tinney with principal address
at the address shown on the last page of this Agreement ("Lender") and
BoysToys.com, Inc., a Delaware corporation with principal offices at
412 Broadway, San Francisco, California 94133 ("Borrower").
WHEREAS:
A. Borrower seeks to borrow funds from Lender in connection with the
operation of Borrower's upscale gentlemen's club in San Francisco,
California.
B. Lender acknowledges receipt of Borrower's Form 10-SB and Exhibits A
and B which are attached and incorporated by reference herein.
C. Lender warrants and represents that: (i) Lender is an "Accredited
Investor" as that term is defined under Rule 501 of Regulation D of the
Securities Act of 1933; and (ii) Lender is sophisticated and experienced
in investing in small development-stage companies that do not possess any
proven history of generating sales revenues or otherwise achieving or
maintaining any profitability.
D. Lender warrants and represents that he has had extensive discussions
with Borrower regarding Borrower's business located at 408-412 Broadway,
San Francisco, California (the "Real Property") and, in that connection,
has a pre-existing business relationship with the Borrower that has
enabled the Lender to assess and evaluate the business acumen and
financial resources of the Borrower.
E. Subject to the terms and conditions of this Agreement, Lender agrees
to loan funds to Borrower pursuant to the terms of the Convertible
Unsecured Promissory Note (the "Note") attached to this Agreement and
incorporated herein.
NOW THEREFORE THE PARTIES AGREE AS FOLLOWS:
1.00 OBLIGATIONS OF LENDER. Lender agrees that in accordance with the terms
of the Note, Lender agrees to loan the funds (the "Funds") recited in the Note
to Borrower. The Lender shall loan such funds to the Borrower upon receiving a
request from Borrower and upon Lender's review and satisfactory approval of
Borrower's use of the funds to be provided Borrower by this Agreement.
1.01 BORROWER'S USE OF FUNDS. Borrower warrants and represents to Lender
that the Funds received from Lender shall be used as follows: all Funds
shall be added to the Borrower's working capital and may be used for
advertising, promotion, salaries, expenses, and other similar uses. Both
Lender and Borrower acknowledge and agree that the Funds will not be used
to enhance the value of the Real Property or otherwise acquire any asset
which would otherwise serve to secure the Funds provided by Lender.
1.02 LENDER'S RECEIPT OF DISCLOSURES. Lender acknowledges and agrees
that prior to this Agreement, Borrower has delivered to Lender the
following documents: (i) a copy of Borrower's audited financial
statements for the year ending December 31, 1998 and December 31, 1999;
(ii) a copy of Borrower's draft copy of Form 10-SB prepared in connection
with Borrower's filing of the same with the U.S. Securities and Exchange
Commission; and (iii) Exhibit A and Exhibit B attached hereto and
incorporated by reference herein.
1.03 LENDER'S ACCESS TO INFORMATION. Lender acknowledges and agrees that
Lender has been given full and unrestricted access to the Borrower and its
financial books and records and that Borrower's officers and directors
have made themselves available to Lender to respond to Lender's questions
without restriction or limitation.
1.04 LENDER'S UNDERSTANDING RE: THE NOTE AND THE SHARES. Lender
acknowledges and agrees that the Note and any shares of the Borrower's
Common Stock (par value $0.001) (the "Shares") acquired upon conversion of
the Note or in payment of any accrued and unpaid interest thereon are
"restricted securities" that have not been registered with the
U.S. Securities and Exchange Commission or any state securities
commission. Lender agrees that he is acquiring the Note and the Shares
for investment purposes only and not with a view toward their resale or
transfer. Lender agrees that Borrower shall have the right to impose a
restricted securities legend upon any stock certificate issued to Lender
in connection with the issuance of the Shares.
1.05 EXPOSURE TO RISKS. Lender acknowledges and understands that the
purchase of the Note (and any Shares upon conversion of the Note) involves
significant and substantial risks, including, but not limited to, those
risks identified in the Form 10-SB under the title, "Factors That May
Affect Future Results." In addition and as attached to this Agreement,
Lender acknowledges receipt of Exhibit A and B attached hereto and
acknowledges that he has a pre-existing business or personal relationship
with the Company and/or any officers or directors of the Company.
2.00 OBLIGATIONS OF BORROWER. In addition to Borrower's obligations to Lender
as set forth in the Note and during the period that the Note is outstanding,
Borrower shall make available to Lender the following information and
documents: (i) Borrower's annual financial statements; and (ii) such
information and documents as Lender may reasonably request regarding Borrower's
business, financial and operating affairs. All said information and documents
shall be reasonably delivered to Lender upon Borrower's receipt of a notice
from Lender.
3.00 OBLIGATION OF BORROWER TO MAINTAIN FINANCIAL & BANK RECORDS. Borrower
agrees that: (i) it shall maintain complete and accurate financial, bank, and
accounting records (including all supporting documentation such as cancelled
checks, receipts, and the like) (the "Records") showing its use of the funds it
receives from Lender. (ii) it shall maintain and hold all said Records for a
period of at least five (5) years from the last date at which it receives funds
from Lender; (iii) it shall, upon thirty (30) days written notice from Lender,
provide Lender with full and unrestricted access to all Records, during regular
business hours; and (iv.) permit Lender to conduct an audit of the Records, at
Lender's sole expense.
3.01 EFFECT OF DEFICIENCY; LACK OF RECORDS TO SHOW SUFFICIENCY. In the
event that Borrower fails to pay any amounts due under this Agreement or
fails to maintain or retain the Records required by Section 3.00 of this
Agreement, then the same shall be considered a material breach of this
Agreement and without waiving any rights that Lender may otherwise have
under the Note or this Agreement, Lender shall have the right to declare
the Note in default with all rights granted Lender as provided by the Note
and by applicable law thereunder.
4.00 OBLIGATION OF BORROWER TO DELIVER FINANCIAL REPORTS.
4.01 ANNUAL FINANCIAL REPORT. Borrower agrees that during the period
that the Note is outstanding, it shall, after Borrower's first issuance of
the Note to Lender, provide Lender with an annual financial report (the
"Annual Financial Report") which shall be delivered to Lender on or before
the 130th day following the close of Borrower's fiscal year. The Annual
Financial Report shall include a complete description of all revenues,
expenses, and income accrued, received, or recorded by the Borrower for
the year immediately prior to the year in which the Annual Financial
Report is delivered.
5.00 MISCELLANEOUS.
5.01 Further Assurances. Each of the parties shall hereafter execute all
documents and do all acts reasonably necessary to effect the provisions of
this Agreement.
5.02 SUCCESSORS. The provisions of this Agreement shall be deemed to
obligate, extend to and inure to the benefit of the successors, assigns,
transferees, grantees, and indemnitees of each of the parties to this
Agreement.
5.03 OPPORTUNITY FOR SEPARATE COUNSEL. Each of the parties to this
Agreement acknowledges and agrees that it has had an opportunity to be
represented by independent counsel of its own choice throughout all
negotiations which preceded the execution of this Agreement and the
transactions referred to in this Agreement, and each has executed this
Agreement with the consent and upon the advice of said independent
counsel, if any. Each party represents that he or it fully understands
the provisions of this Agreement, has had an opportunity to consult with
counsel concerning its terms and executes this Agreement of his or its own
free choice without reference to any representations, promises or
expectations not set forth herein.
5.04 INTEGRATION. This Agreement, after full execution, acknowledgment
and delivery, memorializes and constitutes the entire agreement and
understanding between the parties and supersedes and replaces all prior
negotiations and agreements of the parties, whether written or unwritten.
Each of the parties to this Agreement acknowledges that no other party,
nor any agent or attorney of any other party has made any promises,
representations, or warranty whatsoever, express or implied, which is not
expressly contained in this Agreement; and each party further acknowledges
that he or it has not executed this Agreement in reliance upon any belief
as to any fact not expressly recited hereinabove.
5.05 ATTORNEYS FEES. In the event of a dispute between the parties
concerning the enforcement or interpretation of this Agreement, the
prevailing party in such dispute, whether by legal proceedings or
otherwise, shall be reimbursed immediately for the reasonably incurred
attorneys' fees and other costs and expenses by the other parties to the
dispute.
5.06 INTERPRETATION. Wherever the context so requires: the singular
number shall include the plural; the plural shall include the singular;
and the masculine gender shall include the feminine and neuter genders.
5.07 CAPTIONS. The captions by which the sections and subsections of
this Agreement are identified are for convenience only, and shall have no
effect whatsoever upon its interpretation.
5.08 SEVERANCE. If any provision of this Agreement is held to be
illegal or invalid by a court of competent jurisdiction, such provision
shall be deemed to be severed and deleted; and neither such provision, nor
its severance and deletion, shall affect the validity of the remaining
provisions.
5.09 INCORPORATION BY REFERENCE. The parties agree that the Convertible
Unsecured Promissory Note as executed by the Borrower is an integral part
of this Agreement and is incorporated by reference herein.
5.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts.
5.11 EXPENSES ASSOCIATED WITH THIS AGREEMENT. Each of the parties hereto
agrees to bear its own costs, attorneys fees and related expenses
associated with this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth above.
FOR THE LENDER: FOR THE BORROWER:
By: /s/ Jay Dean Tinney By: /s/ Ralph M. Amato
------------------------- -------------------------
Jay Dean Tinney Ralph M. Amato,
President & CEO
Name & Address of Lender:
Jay Dean Tinney
5148 Cole Road
Mariposa, California 95338
Tax Identification No. of Lender: ###-##-####
===============================================================================
<PAGE>
Attachment to Loan Agreement
CONVERTIBLE UNSECURED PROMISSORY NOTE
San Francisco, California
June 22, 2000
Page 1 of 4
FOR VALUE RECEIVED, the undersigned, BoysToys.com, Inc., a Delaware
corporation (hereinafter called "Maker"), promises to pay to the order of
J. Dean Tinney with principal address at 5148 Cole Road, Mariposa, California
95338 (together with all subsequent holders of this Note, hereinafter called
"Payee"), or at such other place as Payee may from time to time designate in
writing, the principal sum of the amount that may be loaned to Payee hereby
which amount shall be Twenty-Five Thousand Dollars ($25,000), together with
interest thereon calculated on a daily basis (based, at Payee's option, on
360-day or 365/366-day years) from the date hereof on the principal balance
from time to time outstanding (the "Principal Amount") as hereinafter provided,
principal, interest and all other sums payable hereunder to be paid in lawful
money of the United States of America as follows:
A. Interest shall accrue at all times hereunder at the rate of
twelve percent (12%) per annum (non-compounded) commencing upon the
execution of this Note, and shall be payable on June 22, 2001 (the
"Maturity Date").
B. If not earlier due and payable, the unpaid principal balance,
all accrued and unpaid interest and all other amounts payable hereunder
shall be due and payable in full on the Maturity Date.
C. Payee shall have the right, upon thirty (30) days written notice
to Maker, to convert all or any portion of the then outstanding principal
of this Note and any accrued and unpaid interest thereon into shares of
the Payee's common stock (the "Shares") at a conversion price of forty
cents ($0.40) per Share.
Maker agrees to an effective rate of interest that is the rate stated
above plus any additional rate of interest resulting from any other charges in
the nature of interest paid or to be paid by or on behalf of Maker, or any
benefit received or to be received by Payee, in connection with this Note.
If any payment required under this Note is not paid within fifteen (15)
days after the date such payment is due, then, at the option of Payee, Maker
shall pay a "late charge" equal to two percent (2%) of the amount of that
payment to compensate Payee for administrative expenses and other costs of
delinquent payments. This late charge may be assessed without notice, shall be
immediately due and payable and shall be in addition to all other rights and
remedies available to Payee.
All payments on this Note shall be applied in such manner as Payee elects,
and may be applied first to the payment of any costs, penalties, late charges,
fees or other charges incurred in connection with the indebtedness evidenced
hereby, next to the payment of accrued interest and then to the reduction of
the principal balance.
This Note and all other documents or instruments relating to the
indebtedness evidenced by this Note or executed or delivered in connection with
the indebtedness evidenced by this Note are hereinafter called the "Loan
Documents."
Time is of the essence of this Note. At the option of Payee, the entire
unpaid principal balance, all accrued and unpaid interest and all other amounts
payable hereunder shall become immediately due and payable without notice upon
the failure to pay any sum due and owing hereunder as provided herein or upon
the occurrence of any Event of Default in any of the Loan Documents.
The occurrence of any of the following events or conditions shall
constitute and is hereby defined to be an "Event of Default":
(a) Any failure to pay any principal or interest or any other amount
due in connection with this Note when the same shall become due and
payable.
(b) Any failure or neglect to perform or observe any of the terms,
provisions, or covenants of any of the Loan Documents or any other
document or instrument executed or delivered in connection with the Note,
and such failure or neglect either cannot be remedied or, if it can be
remedied, it continues unremedied for a period of fifteen (15) days after
notice thereof to Maker.
(c) Any warranty, representation or statement contained in any of
the Loan Documents or any other document or instrument executed or
delivered in connection with this Note, or made or furnished by or on
behalf of Maker, that shall be or shall prove to have been false when made
or furnished.
(d) The filing by Maker, any endorser of the Note or any guarantor
of this Note (or against Maker or such endorser or guarantor in which
Maker or such endorser or guarantor acquiesces or which is not dismissed
within forty-five (45) days after the filing thereof) of any proceeding
under the federal bankruptcy laws now or hereafter existing or any other
similar stature now or hereafter in effect; the entry of an order for
relief under such laws with respect to Maker or such endorser or
guarantor; or the appointment of a receiver, trustee, custodian or
conservator of all or any part of the assets of Maker or such endorser or
guarantor.
(e) The insolvency of Maker, any endorser of the Note or any
guarantor of this Note; or the execution by Maker or such endorser or
guarantor of an assignment for the benefit of creditors; or the convening
by Maker or such endorser or guarantor of a meeting of its creditors, or
any class thereof, for purposes of effecting a moratorium upon or
extension or composition of its debts; or the failure of Maker or such
endorser or guarantor to pay its debts as they mature; or if Maker or such
endorser or guarantor is generally not paying its debts as they mature.
(f) The admission in writing by Maker, any endorser of the Note or
any guarantor of this Note that it is unable to pay its debts as they
mature or that it is generally not paying its debts as they mature.
(g) The death or incapacity of Maker, any endorser of the Note or
any guarantor of this Note, if an individual, or the liquidation,
termination or dissolution of Maker or any such endorser or guarantor, if
a corporation, partnership or joint venture.
(h) The occurrence of any Event of Default under any of the Loan
Documents or any other document or instrument executed or delivered in
connection with this Note; and not otherwise specifically described in
other provisions of this Note.
IN WITNESS WHEREOF, these presents are executed as of the date first
written above.
MAKER:
BOYSTOYS.COM, INC.
(a Delaware corporation)
By: /s/ Ralph M. Amato
-------------------
Ralph M. Amato, President & CEO
Payee's
Acknowledgement: /s/ Jay Dean Tinney
-------------------
Jay Dean Tinney
Name of Payee: Jay Dean Tinney
Address of Payee:
Jay Dean Tinney
5148 Cole Road
Mariposa, California 95338
Tax Identification: ###-##-####
===============================================================================
<PAGE>
Attachment to Loan Agreement & Convertible Unsecured Promissory Note
EXHIBIT B
BoysToys.com, Inc., a Delaware corporation (the "Company") is a
development stage company and is subject to substantial risks. The Company's
business organization and existing debt and obligations on its balance sheet
all involve elements of substantial risk. Any purchase of the Company's
Secured Promissory Note and/or its Common Stock by the Payee (named in the
Note) is subject to substantial and continuing risks in that the rights of the
holders of these securities will be subject to the claims of the Company's
existing and future creditors. In many instances, these risks arise from
factors over which the Company will have little or no control. Some adverse
events may be more likely than others and the consequence of some adverse
events may be greater than others. No attempt has been made to rank risks in
the order of their likelihood or potential harm. In addition to those general
risks enumerated elsewhere, any purchaser of the Company's Common Stock should
also consider the following factors.
1. CONTINUED OPERATING LOSSES & LACK OF OPERATING HISTORY. The Company
incurred $4,533,243 losses during the twelve months ending December 31, 1999
and the Company anticipates that it may well incur significant additional
losses in the future as well. The Company lacks a substantial operating
history on which to base its anticipated expense and revenues. There is no
assurance that the Company's operations will be successful or that it will be
profitable in the future.
2. UNCERTAINTIES & LACK OF REVENUES. While the Company has expended
substantial resources for the development of its proposed upscale gentlemens'
club in San Francisco, California and the Company anticipates that the Planned
San Francisco Club will open on or before the second week of January 2000, the
operation of the Club is subject to changing state and municipal codes and
ordinances. There can be no assurance that the Company will be successful in
opening the Club or, if it is opened, that the Company will generate revenues
sufficient to sustain profitable operations.
3. AUDITOR'S OPINION: GOING CONCERN. Except for the explanatory paragraph
included in the firm's report on the financial statements for the years ended
December 31, 1998 and 1999, relating to the substantial doubt existing about
the Company's ability to continue as a going concern, the audit report did not
contain an adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope, or accounting principles.
4. SUBORDINATE TO EXISTING AND FUTURE DEBT & AUTHORIZED BUT UNISSUED PREFERRED
STOCK. All of the Common Stock to be issued upon conversion of the Note are
subordinate to the claims of the Company's existing and future creditors and
any future holders of the Company's preferred stock. The Company is authorized
to issue up to 8,000,000 shares of the Company's preferred stock.
5. MARKETING STRATEGY. The Company believes its operation of the San
Francisco Club and related operations will be successful. However, there is no
guarantee that these business operations will be commercially accepted with
sales revenues sufficient to permit the Company to achieve or maintain
profitable operations.
6. CURRENT FINANCIAL STRUCTURE, LIMITED EQUITY, LIMITED WORKING CAPITAL & NEED
FOR ADDITIONAL FINANCING. While the Company's management believes that its
financial policies have been prudent, it will need to raise $500,000 in
additional capital to meet its operating, marketing, and working capital needs.
The Company has, as of December 31, 1999, an aggregate of $2,519,069 in current
liabilities that are due for payment prior to December 31, 2001 and of which
$2,283,614 in convertible debt. However, the Company has not determined how it
will do so or the likelihood that it will be successful in any such efforts to
obtain any additional capital. The Company has had only limited discussions
with potential investors and it does not anticipate receiving any assurances
that the Company will obtain any such additional capital. The Company has not
received any assurances from any investor that it will invest any funds into
the Company and the Company has not sought to receive and has not received any
commitments or assurances from any underwriter, investment banker, venture
capital fund, or other individual or institutional investor for the $500,000 in
funds the Company needs for working capital and marketing. In the event that
the Company does not receive all or nearly all of the $500,000 needed for
additional working capital, the Company may not be able to continue the
operations of the Club or otherwise operate the Club at a level that will be
profitable. There can be no assurance that the Company will be successful in
continuing to meet its cash requirements or in raising a sufficient amount of
additional capital, or if it is successful, that the Company will be able to
achieve these objectives on reasonable terms in light of the Company's current
circumstances.
7. CONCENTRATION & LACK OF DIVERSIFICATION. The Company's assets are invested
almost entirely in the upscale Club in San Francisco at 412 Broadway,
San Francisco, California. While the Company believes that will be successful,
in the event that the Club is not successfully received by the market, the
Company will likely incur substantial and protracted losses since the Company
lacks diversification.
8. CONTROL BY OFFICERS AND DIRECTORS. The Company's present directors and
officers hold the power to vote an aggregate of 36.88% of the Company's Common
Shares as of November 4, 1999 (after including any shares purchasable upon
exercise of all existing common stock purchase options held by the Company's
officers and directors). The Company has granted a common stock purchase
option (the "First Amato Option") to Ralph M. Amato, the Company's Chairman,
President, Secretary, and Founder. The First Amato Option grants Mr. Amato the
right to purchase 1,200,000 shares of the Company's Common Stock at an exercise
price of $0.25 per Common Share. The First Amato Option has no expiration
date. In addition, Mr. Amato holds a second common stock purchase option for
the purchase of 500,000 shares of the Company's Common Stock with an exercise
price of $0.25 per share (the "Second Amato Option"). The Second Amato Option
expires February 13, 2004. Finally, Michael L. Potter, the Company's Secretary
and Director, holds an option to purchase 250,000 shares of the Company's
Common Stock at a purchase price of $0.25 per share (the "Potter Option"). The
Potter Option expires on February 13, 2004.
9. LIMITED PUBLIC MARKET. There is a limited trading market for the Company's
Common Shares, and there is no guarantee that a continuous liquid trading
market will subsequently develop. All of the Common Shares of the Company's
Common Stock are traded only on the NASDAQ (OTC) pink sheets and there can be
no assurance that the Common Shares will ever gain any liquid trading volumes
in any other market or gain listing on any stock exchange. The U.S. Securities
and Exchange Commission requires that any company whose securities are traded
on the NASDAQ Over-The Counter on the Electronic Bulletin Board file a Form 10
and become a "reporting company" and thereby become subject to the reporting
requirements of Section 13 of the Securities Exchange Act of 1934. There can
be no assurance that the Company will "clear" all SEC comments regarding its
Form 10-SB and thereby regain any rights for trading on the OTC Electronic
Bulletin Board.
10. COMPETITION. The Company's Club in San Francisco, California will face
severe competition from several established companies who have well-established
operations, experienced management, and possess significantly greater financial
resources. In addition, the gentlemen's club business is very competitive and
many of competitors have substantially greater managerial resources. Further,
because the gentlemens club business is dependent upon the uncertain commercial
viability of the Company's business, it is especially sensitive to ever-
changing and unpredictable competitive trends which can not be easily predicted
and which are beyond the control of the Company. For these and other reasons,
the Company's business may be said to be riskier than investments in other
types of businesses.
11. DEPENDENCE UPON KEY PERSONNEL AND NEW EMPLOYEES. The Company believes its
success will depend, to a significant extent, on the efforts and abilities of
Ralph M. Amato, the Company's President and CEO. The loss of the services of
Mr. Amato could have a material and continuing adverse effect on the Company.
The Company's success also depends upon its ability to attract and retain
qualified employees. Hiring to meet anticipated Company operations will
require the Company to assimilate significant numbers of new employees during a
relatively short period of time.
12. KEY MAN INSURANCE & LIMITED FULL-TIME MANAGEMENT. While the Company
currently plans to obtain key man life insurance on the life of Ralph M. Amato,
the Company has no key man life insurance on his life. In the event that he is
unable to perform his duties, the Company's business may be adversely impacted.
If the Company grows, it will need to hire additional management and the
ability of the Company to employ suitable management at a cost acceptable to
the Company, in light of the Company's limited financial resources, can not be
assured.
13. LACK OF INDEPENDENT EVALUATION OF BUSINESS PLAN & PROPOSED STRATEGY. The
Company has not obtained any independent evaluation of the Company's Business
Plan and the Company's proposed business strategy. There can be no assurance
that the Company's Club or proposed strategy will generate any revenues, or if
revenues can be generated, that they can be generated at a level to maintain
profitability.
14. LACK OF EXPERIENCED MANAGEMENT. The Company's officers, Ralph M. Amato and
Michael L. Potter, Esq. have no substantial recent experience in acquiring,
establishing, developing, or operating clubs that feature female exotic dance
entertainment. While the Company has, under an employment agreement, employed
Gary Marlin as the general manager of the Club and the Company believes that he
possesses the necessary skills and experience, the Company will need to secure
the services of others who possess the management skill, experience, and
industry knowledge. There can be no assurance that the Company can secure and
retain the necessary management and staff on terms acceptable to the Company.
15. NO ASSURANCE OF AVAILABILITY OF THE ADDITIONAL CAPITAL & PAYMENT OF DEBTS.
The Company's continued operation of its Club will be dependent upon the
Company's ability to raise approximately $500,000 in additional capital on
favorable terms (to provide working capital for the Club) and otherwise
continue to meet its obligations to an aggregate of $2,519,069 in amounts due
as Total Current Liabilities. There can be no assurance that the Company will
be successful in paying these debts. The Company has received no commitment
from any underwriter or other source of capital that any additional capital
will be provided to the Company. There can be no assurance that the Company
will be successful in completing any needed transaction or in obtaining any
additional financing. And if any such transaction or financing is completed,
there can be no guarantee that it can be completed on terms that are reasonable
in light of the Company's current circumstances.
16. NO PLANNED DIVIDENDS. The Company does not anticipate that it will pay any
dividends on the Company's Common Stock at any time in the foreseeable future.
17. GOVERNMENT REGULATION & EXOTIC ENTERTAINMENT INDUSTRY. The Company seeks
to operate establishments that offer "female exotic entertainment." This
business routinely suffers severe and unfavorable regulatory burdens, adverse
zoning ordinances, and other oppressive government regulations which may result
in the Company incurring substantial losses and significant delays in
connection with the development of any establishment.
17. LACK OF DIVERSIFICATION. The Company's proposed business involving the
proposed operation of establishments offering "female exotic entertainment"
will not provide any diversification. If the Company is successful, all of the
Company's business and assets will be concentrated in the same industry.
18. POTENTIAL DILUTION. Funding of the Company's proposed business plan is
likely to result in substantial and on-going dilution of the Company's existing
stockholders. While there can be no guarantee that the Company will be
successful in raising additional capital, if the Company is successful in
obtaining any additional capital, existing stockholders may incur substantial
dilution.
19. RULE 144 STOCK SALES. As of November 8, 1999, the Company had 1,541,374
shares of the Company's outstanding Common Stock as "restricted securities"
which may be sold only in compliance with Rule 144 adopted under the Securities
Act of 1933 or other applicable exemptions from registration. Rule 144
provides that a person holding restricted securities for a period of one year
may thereafter sell in brokerage transactions, an amount not exceeding in any
three month period the greater of either (i) 1% of the Company's outstanding
Common Stock, or (ii) the average weekly trading volume during a period of four
calendar weeks immediately preceding any sale. Persons who are not affiliated
with the Company and who have held their restricted securities for at least two
years are not subject to the volume limitation. Possible or actual sales of the
Company's Common Stock by present shareholders under Rule 144 may have a
depressive effect on the price of the Company's Common Stock if any liquid
trading market develops.
20. RISKS OF LOW PRICED STOCKS. Trading in the Company's Common Stock is
limited. Consequently, a shareholder may find it more difficult to dispose of,
or to obtain accurate quotations as to the price of, the Company's securities.
In the absence of a security being quoted on NASDAQ, or the Company having
$2,000,000 in net tangible assets, trading in the Common Stock is covered by
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934 for non-
NASDAQ and non-exchange listed securities. Under such rules, broker/dealers who
recommend such securities to persons other than established customers and
accredited investors (generally institutions with assets in excess of
$5,000,000 or individuals with net worth in excess of $1,000,000 or an annual
income exceeding $200,000 or $300,000 jointly with their spouse) must make a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities are
also exempt from this rule if the market price is at least $5.00 per share, or
for warrants, if the warrants have an exercise price of at least $5.00 per
share. The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure related to the market for penny stocks and for trades in
any stock defined as a penny stock.
The Commission has adopted regulations under such Act which define a penny
stock to be any NASDAQ or non-NASDAQ equity security that has a market price or
exercise price of less than $5.00 per share and allow for the enforcement
against violators of the proposed rules. In addition, unless exempt, the rules
require the delivery, prior to any transaction involving a penny stock, of a
disclosure schedule prepared by the Commission explaining important concepts
involving a penny stock market, the nature of such market, terms used in such
market, the broker/dealer's duties to the customer, a toll-free telephone
number for inquiries about the broker/dealer's disciplinary history, and the
customer's rights and remedies in case of fraud or abuse in the sale.
Disclosure also must be made about commissions payable to both the
broker/dealer and the registered representative, current quotations for the
securities, and, if the broker/dealer is the sole market maker, the
broker/dealer must disclose this fact and its control over the market. Monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
While many NASDAQ stocks are covered by the proposed definition of penny
stock, transactions in NASDAQ stock are exempt from all but the sole market-
maker provision for (i) issuers who have $2,000,000 in tangible assets has been
in operation for at least three years ($5,000,000 if the issuer has not been in
continuous operation for three years), (ii) transactions in which the customer
is an institutional accredited investor, and (iii) transactions that are not
recommended by the broker/dealer.
In addition, transactions in a NASDAQ security directly with the NASDAQ
market maker for such securities, are subject only to the sole market-maker
disclosure, and the disclosure with regard to commissions to be paid to the
broker/dealer and the registered representatives. The Company's securities are
subject to the above rules on penny stocks and the market liquidity for the
Company's securities could be severely affected by limiting the ability of
broker/dealers to sell the Company's securities.
