Exhibit 10.27
LOAN AGREEMENT
THIS LOAN AGREEMENT (the "Agreement"), is entered into and is effective
this 17th day of March 2000 by and between Xx. Xxxx Xxxxxxx, M.D. with
principal address at the address shown on the last page of this Agreement
("Lender") and XxxxXxxx.xxx, Inc., a Delaware corporation with principal
offices at 0000 Xxx Xxxxxx, Xxxxx 000, Xx Xxxxx, Xxxxxxxxxx 00000 ("Borrower").
WHEREAS:
A. Borrower seeks to borrow Fifty Thousand Dollars ($50,000) 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 Exhibit A
both of 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 000-000 Xxxxxxxx,
Xxx Xxxxxxxxx, Xxxxxxxxxx (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 Fifty Hundred Thousand Dollars ($50,000) to Borrower pursuant to
the terms of the Convertible Unsecured Promissory 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 Two Hundred Thousand Dollars ($200,000) (the
"Funds") 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: (i) the sum of Two
Hundred Thousand Dollars ($200,000) 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, 1997 and December 31, 1999 together with Borrower's
unaudited financial statements for the nine months ending September 30, 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 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 attached hereto.
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/ Xxxx X. Xxxxxxx By: /s/ Xxxxx X. Xxxxx
------------------------- -------------------------
Xxxx X. Xxxxxxx Xxxxx X. Xxxxx
President & CEO
Name & Address of Lender:
Xxxx X. Xxxxxxx, M.D.
000x Xxxxxx Xxxxx
Xxx Xxxxx, Xxxxxxxxxx 00000
Tax Identification No. of Lender:
###-##-####
===============================================================================
CONVERTIBLE UNSECURED PROMISSORY NOTE
San Diego, California
March 17, 2000
Page 1 of 4
FOR VALUE RECEIVED, the undersigned, XxxxXxxx.xxx, Inc., a Delaware
corporation (hereinafter called "Maker"), promises to pay to the order of Xx.
Xxxx X. Xxxxxxx (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 fifty thousand dollars ($50,000)
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 commencing upon the execution of this Note, and
shall be payable on March 17, 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 ten (10) days 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.
(i) The occurrence of any adverse change in the financial condition of
Maker that Payee, in its reasonable discretion, deems material or if Payee
in good faith shall believe that the prospect of payment or performance of
the Note is impaired.
After maturity, including maturity upon acceleration, the unpaid principal
balance, all accrued and unpaid interest and all other amounts payable
hereunder shall bear interest from the date of maturity until paid at the rate
that is five percent (5%) above the rate that would otherwise be payable under
the terms hereof. Maker shall pay all costs and expenses, including reasonable
attorneys' fees and court costs, incurred in the collection or enforcement of
all or any part of this Note. All such costs and expenses shall be secured by
the Loan Documents. In the event of any court proceedings, court costs and
attorneys' fees shall be set by the court and not by jury and shall be included
in any judgement obtained by Payee.
Upon the occurrence of an Event of Default under this Note or in any of
the other Loan Documents, Payee may proceed against any collateral securing
this Note or proceed against the undersigned in such order and manner as Payee,
in its sole discretion, shall determine, provided that under no circumstance
shall Payee be obligated to proceed against any collateral or against the
undersigned for collection of any sums due hereunder.
Failure of Payee to exercise any option hereunder shall not constitute a
waiver of the right to exercise the same in the event of any subsequent default
or in the event of the continuance of any existing default after demand for
strict performance hereof.
Maker, sureties, guarantors and endorsers hereof: (a) agree to be jointly
and severally bound, (b) severally waive demand, diligence, presentment for
payment, protest and demand, and notice of extension, dishonor, protest, demand
and nonpayment of this Note, (c) consent that Payee may extend the time of
payment or otherwise modify the terms of payment of any part or the whole of
the debt evidenced by this Note, at the request of any other person primarily
liable hereon, and such consent shall not alter nor diminish the liability of
any person, and (d) agree that Payee may set off at any time any sums or
property owed to any of them by Payee.
No provision of this Note is intended to or shall require or permit Payee,
directly or indirectly, to take, collect or receive in money, goods or in any
other form, any interest (including amount deemed by law to be interest) in
excess of the maximum rate of interest permitted by applicable law.
If any amount due from or paid by Maker shall be determined by a court of
competent jurisdiction to be interest in excess of such maximum rate, Maker
shall not be obligated to pay such excess and, if paid, such excess shall be
applied against the unpaid principal balance of this Note, or if and to the
extent that this Note has been paid in full, such excess shall be remitted to
Maker.
This Note shall be binding upon Maker and its successors and assigns and
shall inure to the benefit of Payee and its successors and assigns. Payee
warrants and represents that Payee is an Accredited Investor, as that term is
defined under the Securities Act of 1933 and that Payee has received all of the
disclosures described and referenced in the Loan Agreement to which this Note
is attached.
All notices required or permitted in connection with this Note shall be
given at the place and address as separately provided by each party to this
Note. This Note shall be governed by and construed according to the laws of
the State of Delaware.
IN WITNESS WHEREOF, these presents are executed as of the date first
written above.
MAKER:
XXXXXXXX.XXX, INC.
(a Delaware corporation)
By: /s/ Xxxxx X. Xxxxx
------------------------
Xxxxx X. Xxxxx, President & CEO
Acknowledgment of Payee: /s/ Xxxx X. Xxxxxxx
-------------------------
Xxxx X. Xxxxxxx
===============================================================================
Attachment to Loan Agreement & Convertible Unsecured Promissory Note
EXHIBIT A
XxxxXxxx.xxx, 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
Convertible Unsecured Promissory Note and/or its Common Stock 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 $4,148,117 in losses during the nine months ending September 30, 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, 1997 and 1998, 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 offered hereby 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 proposed operation of
the Planned 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, the Company anticipates that once the
Planned San Francisco Club opens, it will need to raise $500,000 in additional
capital to meet its operating, marketing, and working capital needs. The
Company has, as of September 30, 1999, an aggregate of $1,992,182 in current
liabilities that are due for payment prior to September 30, 2000 and of which
$890,000 in convertible debt and $370,980 in notes payable are convertible into
shares of the Company's Common Stock. 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 Planned San Francisco Club. While the Company
believes that will be successful, in the event that the Planned San Francisco
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 Xxxxx Option") to Xxxxx X. Xxxxx, the Company's
Chairman, President, Secretary, and Founder. The First Xxxxx Option grants
Xx. Xxxxx 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 Xxxxx Option has no
expiration date. In addition, Xx. Xxxxx 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 Xxxxx Option"). The Second
Xxxxx Option expires February 13, 2004. Finally, Xxxxxxx X. Xxxxxx, 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) Electronic Bulletin
Board 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. In the event that any such company does not
file a Form 10 with the U.S. Securities and Exchange Commission and thereby
become a "reporting company" within the time allowed by these regulations, the
Company's Common Stock will no longer be permitted to trade on the Electronic
Bulletin Board. The Company is currently not a "reporting company" and is not
subject to the continuous disclosure obligations of Section 13 of the
Securities Exchange Act of 1934. While the Company has filed this Form 10, the
Company anticipates that it will not become effective on a timely basis to
allow the Company to continue the trading of its Common Stock on the NASDAQ
(OTC) Electronic Bulletin Board. In that event, the Company's Common Stock may
be traded only on the Pink Sheets with the result that any investor holding the
Company's Common Stock may lose an ability to otherwise sell any shares held by
them until the Company is able to successfully regain trading of its Common
Stock on the NASDAQ (OTC) Electronic Bulletin Board. There can be no assurance
that the Company will be successful in these efforts.
10. COMPETITION. The Company's Planned San Francisco Club 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 Xxxxx X. Xxxxx, the Company's President and CEO. The loss of the
services of Xx. Xxxxx 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 Xxxxx X. Xxxxx,
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 Planned San Francisco 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,
Xxxxx X. Xxxxx and Xxxxxxx X. Xxxxxx, 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 Xxxx Xxxxxx as the general manager of the
Planned San Francisco 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 Planned San Francisco 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
continued operation of the Planned San Francisco Club once it opens) and
otherwise continue to meet its obligations to an aggregate of $1,992,182 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. If the Company is not successful in
raising the additional capital, the Company will likely be unable to implement
the opening of the Planned San Francisco Club and, as a result, incur
additional losses thereby. 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 Xxxxx Stock Reform Act of 1990 requires
additional disclosure related to the market for xxxxx stocks and for trades in
any stock defined as a xxxxx stock.
The Commission has adopted regulations under such Act which define a xxxxx
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 xxxxx stock, of a
disclosure schedule prepared by the Commission explaining important concepts
involving a xxxxx 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 xxxxx stock
held in the account and information on the limited market in xxxxx stocks.
While many NASDAQ stocks are covered by the proposed definition of xxxxx
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 xxxxx 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.
21. MATTER OF "Y2K" AND THE COMPANY'S COMPUTER AND INFORMATION SYSTEMS.
The Company has acquired point-of-sale computer hardware and software together
with certain management information systems for use in its Planned
San Francisco Club. While the Company has had its computer hardware and
software evaluated to ensure that it will operate effectively after December
31, 1999 and otherwise not result in "Y2K" operating problems (problems arising
out of the inability of any computer systems to accurately calendar all dates
following December 31, 1999 as occurring in the year 2000 and thereafter rather
than inaccurately calendar all such dates as 1900, etc.) there can be no
assurance that the Company's point-of-sale computer hardware and software
together with certain management information systems will function effectively
on or after December 31, 1999.
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