-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mls+NI0YuR0Gd2ERnHL5soEbPfLq/RPrRBbl3wcRRc3OfBlQV252tFdqO9MbipKH lo6ZDG4tiqb7Fl8xMY71Xg== 0000891618-99-004646.txt : 19991022 0000891618-99-004646.hdr.sgml : 19991022 ACCESSION NUMBER: 0000891618-99-004646 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19991021 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SILICON ENTERTAINMENT INC /CA/ CENTRAL INDEX KEY: 0001053689 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-87019 FILM NUMBER: 99731468 BUSINESS ADDRESS: STREET 1: 210 HACIENDA AVE CITY: CAMPBELL STATE: CA ZIP: 95008 BUSINESS PHONE: 4087778082 MAIL ADDRESS: STREET 1: 210 HACIENDA AVE CITY: CAMPBELL STATE: CA ZIP: 95008 FORMER COMPANY: FORMER CONFORMED NAME: SILICON ENTERTAINMENT INC /CA/ DATE OF NAME CHANGE: 19990806 S-1/A 1 AMENDMENT NO. 2 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1999 REGISTRATION NO. 333-87019 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ SILICON ENTERTAINMENT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7999 77-0389433 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
210 HACIENDA AVENUE CAMPBELL, CALIFORNIA 95008 (ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) DAVID S. MORSE CHAIRMAN, CEO & PRESIDENT 210 HACIENDA AVENUE CAMPBELL, CALIFORNIA 95008 (408) 364-6710 (NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: JAMES M. KOSHLAND, ESQ. NORA L. GIBSON, ESQ. NICOLE D. ALSTON, ESQ. RICHARD R. PLUMRIDGE, ESQ. LYNN E. FULLERTON, ESQ. JOHN E. HAYES, ESQ. GRAY CARY WARE & FREIDENRICH LLP BROBECK, PHLEGER & HARRISON LLP 400 HAMILTON AVENUE SPEAR STREET TOWER, ONE MARKET PALO ALTO, CALIFORNIA, 94301-1825 SAN FRANCISCO, CALIFORNIA 94105 (650) 833-2000 (415) 442-0900
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act") check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF OF SECURITIES TO TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3) - ------------------------------------------------------------------------------------------------------------------------------ Common stock, $0.001 par value 5,175,000 $10.00 $51,750,000 $14,387 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------
(1) Includes 675,000 shares which the underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933. (3) Includes a fee in the aggregate amount of $12,788 which has previously been paid. Pursuant to Rule 457(b) of the Securities Act of 1933, such fee is credited against the registration fee. Accordingly, an additional $1,599 is being paid in connection with the filing of the Registration Statement. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED OCTOBER 21, 1999 PROSPECTUS 4,500,000 SHARES [SILICON LOGO] COMMON STOCK This is an initial public offering of 4,500,000 shares of common stock of Silicon Entertainment, Inc. We expect that the public offering price will be between $8.00 and $10.00 per share. An application has been submitted for trading and quotation of our common stock on the Nasdaq National Market under the symbol "SENT." OUR BUSINESS INVOLVES SIGNIFICANT RISKS. THESE RISKS ARE DESCRIBED UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 8. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. -------------------------
PER SHARE TOTAL --------- ----- Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds, before expenses, to Silicon Entertainment......... $ $
The underwriters may also purchase up to an additional 675,000 shares of common stock at the public offering price, less the underwriting discounts and commissions, to cover over-allotments. The underwriters expect to deliver the shares against payment in New York, New York on , 1999. ------------------------- SG COWEN CIBC WORLD MARKETS J.C. BRADFORD & CO. E*OFFERING , 1999 3 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 4 Risk Factors.......................... 8 Forward-Looking Statements............ 19 Use of Proceeds....................... 19 Dividend Policy....................... 19 Capitalization........................ 20 Dilution.............................. 21 Selected Financial Data............... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 24
PAGE ---- Business.............................. 34 Management............................ 48 Transactions with Related Parties..... 57 Principal Stockholders................ 59 Description of Capital Stock.......... 61 Shares Eligible for Future Sale....... 65 Underwriting.......................... 67 Legal Matters......................... 68 Experts............................... 68 Where to Find Additional Information......................... 69 Index to Financial Statements......... F-1
------------------------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. WE ARE OFFERING TO SELL AND SEEKING OFFERS TO BUY SHARES OF OUR COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. ------------------------- UNTIL , 1999 (25 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 3 4 PROSPECTUS SUMMARY The following is only a summary. You should carefully read the more detailed information contained in this prospectus, including our financial statements and related notes. Our business involves significant risks. You should carefully consider the information under the heading "Risk Factors." SILICON ENTERTAINMENT, INC. We own and operate NASCAR Silicon Motor Speedway racing centers. Through strategic relationships and our proprietary technology, we provide a realistic racing experience that simulates the motion, sights and sounds of an actual NASCAR race. Located in high profile, high traffic retail locations, our racing centers currently have eight, ten, twelve or fourteen race car simulators per location and sell a variety of premium motorsports merchandise. Under a licensing agreement with NASCAR, we have the exclusive right to use the NASCAR name in our simulated racing experience. In addition to our licensing agreement with NASCAR, we have licensing agreements with several NASCAR drivers including Dale Earnhardt, Jeff Gordon, Dale Jarrett, Rusty Wallace and others. To extend our racing experience into the home or office, our Web site, SMSonline.com, currently provides a range of information and services including reservations, race results, standings and other racing center information. As of August 1, 1999, our customers had completed over one million races at our racing centers. In addition we generated revenues of approximately $5.4 million for the fiscal year ended January 31, 1999 and revenues of approximately $4.2 million for the twenty-six week period ended August 1, 1999. We also had a net loss of approximately $11.5 million for the fiscal year ended January 31, 1999 and a net loss of approximately $6.5 million for the twenty-six week period ended August 1, 1999. We design our racing centers to provide a fun, interactive entertainment experience in an environment that is both social and competitive. Each race car simulator is 80% of the size of an actual NASCAR race car with the same colors, sponsor logos and numbers. Our race car simulators have motion platforms that move in a variety of directions, as well as several video screens and speakers surrounding each driver, all of which simulate the experience of driving an actual race car. Our racing centers encourage competition by allowing our customers to race against each other in individual races, leagues and competitions. Our racing centers also include pit areas and grandstands that offer drivers and spectators an opportunity to socialize with each other. We believe the authentic "look and feel" of our race car simulators combined with the competitive and social aspects of our racing experience create one of the most realistic and entertaining simulated racing experiences. Our racing centers typically require 4,000 to 8,000 square feet of space and are located in high profile retail locations. These locations currently include Mall of America in Bloomington (Minneapolis), Minnesota; Dallas Galleria in Dallas, Texas; Woodfield in Schaumburg (Chicago), Illinois; Irvine Spectrum in Irvine, California; Palisades Center in West Nyack, New York; Concord Mills in Charlotte, North Carolina; and Arbor Place and Mall of Georgia, both near Atlanta, Georgia. We expect to open 20 to 30 additional racing centers over the next 24 months, and have already signed leases for seven of these locations including Universal CityWalk near Los Angeles, California and Opry Mills in Nashville, Tennessee. Motorsports is currently one of the largest and fastest growing spectator sports in the United States, with more than 80 million people interested in auto racing according to ESPN. One of the most popular motorsports formats in the United States is NASCAR, whose televised events reached over 126 million estimated households in 1998 and are covered by major broadcast and cable television networks. In addition, more than 80 Fortune 500 companies are NASCAR sponsors and total motorsports sponsorship is expected to reach $1.2 billion in 1999, or 24% of all sports sponsorship. The popularity of motorsports and NASCAR has also resulted in a large market for motorsports-related merchandise. Retail sales of NASCAR-licensed merchandise are expected to increase from $950 million in 1998 to more than $1.1 billion in 1999. Based on the growing popularity of motorsports and NASCAR, we believe a significant opportunity exists to provide simulated NASCAR racing and NASCAR-licensed merchandise throughout retail locations in the United States. 4 5 Our objective is to be the leading provider of simulated NASCAR racing. We intend to achieve this by: - Expanding the Number of Our Racing Centers -- We plan to accelerate the roll-out of our racing centers, opening 20 to 30 additional racing centers over the next 24 months. We expect to open primarily 8-, 10- and 12-simulator racing centers based on customer traffic and the retail space available at each location. We intend to locate most of our future racing centers in metropolitan markets that have shown a substantial interest in NASCAR racing. - Continuing to Develop SMSonline.com -- We intend to enhance SMSonline.com and build upon the community of our racing customers by providing online opportunities to discuss our competitions and racing experiences, and by offering NASCAR driver testimonials and customer endorsements of our racing experience. We also intend to offer our customers who purchase our proprietary software and subscribe to our online services, the ability, from a personal computer, to: download replays of races, customize their car set-up, view live racing at our racing centers and race against customers at the racing centers. - Continuing to Enhance Our Racing Experience -- We intend to continue to develop our racing experience by offering additional race tracks, customized car set-up, real-time racing among our customers who are located in different racing centers, video recording and sale of individual races and improved communication during a race between drivers and racing center spectators. - Leveraging Strategic and Working Relationships -- We intend to leverage key relationships with NASCAR, mall developers and others to enhance our racing experience, enter into sponsorship agreements with selected NASCAR sponsors, gain entrance into new geographic markets and high profile retail locations and further promote our racing centers. We were incorporated in California in November 1994 as LBE Technologies, Inc. In June 1998, we changed our name to Silicon Entertainment, Inc. We intend to reincorporate in Delaware prior to the consummation of this offering. Our principal offices are located at 210 Hacienda Avenue, Campbell, California 95008. Our telephone number is (408) 364-6710. Our Web site address is www.SMSonline.com. Information contained on our Web site does not constitute part of this prospectus. 5 6 THE OFFERING Common stock we are offering.............. 4,500,000 shares Common stock to be outstanding after this offering.................................. 15,203,355 shares (see "Capitalization") Underwriters' over-allotment option....... 675,000 shares Use of proceeds........................... For the expansion of the number of our racing centers, the enhancement of our hardware and software technology and basic infrastructure, the promotion of our racing centers, the addition of online content and services to our Web site, the repayment of loans to certain investors and working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol.... SENT The number of shares of our common stock to be outstanding immediately after the offering is based on the number of shares outstanding on August 1, 1999 and includes 7,887,799 shares of common stock assuming the conversion of convertible preferred stock outstanding on that date. This number excludes: - 1,105,598 shares of our common stock issuable upon the exercise of options outstanding at a weighted average exercise price of approximately $1.92 per share; - warrants to purchase 813,659 shares of our common stock at a weighted average exercise price of $4.28 per share; - 369,444 shares of our common stock assuming the conversion of $5.7 million of subordinated convertible promissory notes issued in June 1999; and - 550,000 shares of our common stock assuming the conversion of $5.5 million of subordinated convertible promissory notes issued in September 1999 and warrants issued concurrently to purchase 68,750 shares of our common stock at an exercise price of $10.80 per share. ------------------------ WE HAVE FILED U.S. TRADEMARK AND SERVICE MARK APPLICATIONS FOR "RACING SO REAL YOU CAN FEEL IT," SILICON ENTERTAINMENT, INC., SILICON MOTOR SPEEDWAY AND OUR SILICON MOTOR SPEEDWAY LOGO IN THE UNITED STATES. WE USE THE NASCAR SILICON MOTOR SPEEDWAY LOGO UNDER A LICENSE AGREEMENT WITH THE NATIONAL ASSOCIATION FOR STOCK CAR AUTO RACING, INC. (NASCAR). WE HAVE ALSO FILED TRADEMARK AND SERVICE MARK APPLICATIONS IN CANADA AND THE EUROPEAN UNION FOR SILICON ENTERTAINMENT, INC. ALL OTHER TRADEMARKS, SERVICE MARKS OR TRADE NAMES REFERRED TO IN THIS PROSPECTUS ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS. ------------------------ Unless otherwise indicated, all information contained in this prospectus: - gives effect to the conversion of all outstanding shares of our mandatorily redeemable convertible preferred stock into common stock upon the closing of this offering; - reflects a 1-for-2 reverse stock split to be effected prior to the completion of this offering; - assumes our reincorporation in Delaware prior to the consummation of this offering; and - assumes the underwriters' over-allotment option is not exercised. 6 7 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The tables below summarize our financial data set forth in more detail in the Financial Statements included in this prospectus. The financial data below is based on the following assumptions: - The Pro Forma As Adjusted balance sheet data as of August 1, 1999 has been adjusted to reflect: - the conversion of mandatorily redeemable convertible preferred stock into common stock at the closing of this offering; - the issuance of $5.5 million of subordinated convertible promissory notes in September 1999; and - the sale of 4,500,000 shares of our common stock at an assumed initial public offering price of $9.00 per share and the application of the net proceeds from such sale. See "Use of Proceeds." - See Note 2 of Notes to Financial Statements for an explanation of the determination of the number of shares used in computing basic and diluted net loss per common share.
TWENTY-SIX WEEK FISCAL YEAR ENDED PERIOD ENDED ---------------------------- ----------------- FEB. 2, FEB. 1, JAN. 31, AUG. 2, AUG. 1, 1997 1998 1999 1998 1999 ------- ------- -------- ------- ------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Total revenues.................................. $ 47 $ 1,052 $ 5,382 $ 1,541 $ 4,169 Total operating expenses........................ 2,664 6,021 16,711 6,888 9,509 Operating loss.................................. (2,617) (4,969) (11,329) (5,347) (5,340) Net loss........................................ (2,642) (5,192) (11,488) (5,370) (6,512) Net loss attributable to common stockholders.... $(2,642) $(5,200) $(11,543) $(5,391) $(6,553) Basic and diluted net loss per share attributable to common stockholders........... $ (1.65) $ (3.67) $ (5.85) $ (2.95) $ (2.63) Shares used in computing basic and diluted net loss per share attributable to common stockholders.................................. 1,605 1,417 1,973 1,830 2,489
AS OF AUGUST 1, 1999 ------------------------ PRO FORMA ACTUAL AS ADJUSTED -------- ------------ BALANCE SHEET DATA: Cash and cash equivalents................................... $ 2,778 $41,943 Total assets................................................ 16,210 55,375 Long-term portion of capital leases and long-term debt...... 7,023 12,523 Total liabilities........................................... 14,363 16,863 Mandatorily redeemable convertible preferred stock.......... 24,370 -- Total stockholders' equity (deficit)........................ $(22,523) $38,512
7 8 RISK FACTORS You should carefully consider the risks described below before making an investment decision. You should also refer to the other information in this prospectus, including our financial statements and the related notes. If any of the following risks actually occur, our business, results of operations and financial condition could suffer. In that event, the trading price of our common stock could decline and you may lose all or part of your investment in our common stock. The risks discussed below also include those associated with forward-looking statements, as our actual results may differ substantially from those discussed in these forward-looking statements. RISKS RELATED TO THE BUSINESS OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING HISTORY We opened our first racing center in August 1997. We have recognized limited revenues since our inception. In addition, our senior management team and other employees have worked together at our company for only a short period of time. Consequently, we have a limited operating history upon which you can evaluate our business. WE HAVE NOT GENERATED SIGNIFICANT REVENUES, WE HAVE A HISTORY OF LOSSES AND WE MAY NOT BE ABLE TO ACHIEVE PROFITABILITY Our ability to generate significant revenues is uncertain. We have incurred substantial costs to develop our technology, open and operate our racing centers, build brand awareness and expand our marketing efforts through the Internet. We had a net loss of approximately $11.5 million for the fiscal year ended January 31, 1999 and a net loss of approximately $6.5 million for the twenty-six week period ended August 1, 1999. We expect to continue to incur losses from operations and generate negative cash flows due to significant expenses that we plan to incur. These plans include: - increasing the number of our racing centers; - enhancing our hardware and software technology and basic infrastructure; - expanding our marketing efforts; - expanding our online offerings; and - hiring additional management and other personnel. If our revenues do not increase to a level sufficient to meet our substantial costs, we will not be able to achieve profitability. Even if we do achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis in the future. WE RELY ON SIMULATED AUTO RACING FOR SUBSTANTIALLY ALL OF OUR REVENUE, AND IF DEMAND FOR SIMULATED AUTO RACING DECREASES, OUR BUSINESS WILL SUFFER Substantially all of our revenues are derived from the sale of tickets for our race car simulators. The market for retail entertainment like our race car simulators is characterized by rapidly changing customer preferences and accordingly, may have a limited life. Among the factors that may influence the demand for our racing centers are: - the popularity of motorsports, NASCAR, NASCAR drivers, team owners and other licensors; - technological advancements in arcade games and in at-home racing experiences; - cultural and demographic trends; and 8 9 - general economic conditions, which may have a disproportionate effect on consumer entertainment spending. These factors are neither quantifiable nor predictable. Consequently, although we believe we offer a realistic and entertaining racing experience, we cannot predict whether demand will continue. Moreover, even if we experience great demand when we open a new racing center, we may not be able to sustain the long-term interest of our customers. WE RECENTLY REDUCED THE NUMBER OF RACE CAR SIMULATORS IN TWO OF OUR EIGHT RACING CENTERS DUE TO WEAKER THAN ANTICIPATED DEMAND AND IF WE ARE NOT SUCCESSFUL IN SELECTING SITES FOR OUR RACING CENTERS, WE MAY NEED TO EFFECT SIMILAR REDUCTIONS IN OTHER RACING CENTERS In identifying sites for our racing centers, we analyze many factors such as mall and area population demographics and retail traffic patterns. Nevertheless, it is impossible for us to identify and quantify all of the factors that may determine the suitability of a site; therefore, it is impossible for us to determine whether a site ultimately will be successful. For example, we recently reduced the number of race car simulators from fourteen to eight at our Dallas Galleria racing center and from twelve to eight at our Irvine Spectrum racing center. Moreover, because we have only eight racing centers currently in operation, we have limited experience in selecting sites for our racing centers and there is a limited basis to evaluate our prospects for future success. If the sites we choose do not generate significant revenue and cash flow, our business will not be able to grow. If we choose to close or relocate a racing center, we would incur substantial costs, including costs relating to the long-term, non-cancelable lease obligations that generally cover our sites. In addition, closing or downsizing racing centers could damage our brand image and our relationship with NASCAR, which could affect our future profitability and our ability to negotiate favorable terms for future leases. IF WE FAIL TO MAINTAIN OUR LICENSING AGREEMENT WITH NASCAR, WHICH IS EXCLUSIVE ONLY FOR OUR SIMULATED RACING EXPERIENCE AND WHICH MAY BE TERMINATED IF WE DEFAULT, OUR ABILITY TO PROVIDE AND ENHANCE OUR RACING EXPERIENCE WILL BE IMPAIRED We believe that our licensing agreement with NASCAR is vital to the success of our business and is crucial to the development and enhancement of the racing experience offered by our racing centers. Our license agreement with NASCAR for the use of its image and trademarks extends to December 31, 2005 and is exclusive for a designated category until December 31, 2002, when NASCAR can choose to renew the exclusive portion of the agreement. The exclusive category of the NASCAR license is "operator assisted, location based interactive stockcar or stock-truck entertainment experiences that consist of no less than five linked simulator units, with each on a motion-based platform and each allowing a maximum of two people to participate in each individual simulator unit." Additionally, under the license each location must be permanent in nature and in a retail environment. There can be no assurance that NASCAR will not grant non-exclusive or exclusive licenses for other categories of simulated racing outside of the category to which our exclusivity applies. The term of the agreement runs through December 31, 2005 and may be terminated at the option of NASCAR upon the occurrence of certain events, such as: - the closing of five or more of our racing centers; - the departure of three or more of our current directors; - the failure by us to operate a total of nine racing centers by January 31, 2000 and a total of thirteen racing centers by August 31, 2000; - the temporary cessation of operations at any of our racing centers for reasons other than renovation or repairs; and - the breach by us of any term in our agreement with NASCAR. 9 10 In addition, under our agreement with NASCAR, we must obtain NASCAR's prior approval for all advertising and promotional activities as well as Web site activities utilizing NASCAR's name and for each racing center location. Our agreement also restricts the types of merchandise and food we may sell, as well as the layout of our racing centers, and requires that we locate our race car simulators only in our racing centers. These restrictions may keep us from adapting to market conditions and taking advantage of other opportunities that may arise. Also, we may inadvertently breach one or more of the terms of our agreement with NASCAR and face the possibility that NASCAR would terminate our agreement. THE EXCLUSIVE PORTION OF OUR NASCAR LICENSING AGREEMENT TERMINATES ON DECEMBER 31, 2002 AND IF WE ARE UNABLE TO RENEW OR EXTEND IT, WE COULD BE SUBJECT TO INCREASED COMPETITION AND THE POWER OF OUR USE OF THE NASCAR NAME IN OUR BRANDING CAMPAIGN COULD BE LESSENED Our licensing agreement with NASCAR is exclusive for our designated category until December 31, 2002, at which time NASCAR has the sole option to renew the exclusive portion of the license. There is no assurance that NASCAR will elect to renew the exclusive portion of our license. If NASCAR elects not to renew our exclusivity, we could face additional competition if others were also granted the right to use the NASCAR name in a simulated racing experience comparable to ours. OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO EXTEND OUR LICENSING AGREEMENTS WITH NASCAR DRIVERS, TEAM OWNERS AND RACE TRACK OWNERS, AND THE MAJORITY OF OUR LICENSES WITH TEAM OWNERS WILL EXPIRE BY MAY 2000 We depend on our licensing arrangements with NASCAR drivers, team owners and race track owners which vary in scope and duration, but generally authorize us to incorporate their images and designs into our race car simulators and to use their names and logos in our marketing. The success of these licensing arrangements depends on many factors, including the popularity, performance and public image of the NASCAR drivers and the team owners. Some of these licensing agreements contain provisions that allow the licensor to terminate the agreement upon the occurrence of certain events. The majority of our licenses with team owners will expire before May 31, 2000, unless extended by mutual agreement. For these reasons, we cannot predict whether we will be able to realize the benefits of these licensing agreements in the future. Our business could be materially and adversely affected if our rights under the licensing agreements were diminished or lost. OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY WHICH MAY RESULT IN VOLATILITY OR A DECLINE IN THE PRICE OF OUR STOCK Our quarterly revenues, expenses and operating results have varied in the past and may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control. These factors include, among others: - the pace of the roll-out of our racing centers; - the demand for racing simulation and merchandise at our racing centers; - seasonal fluctuations, particularly those associated with retail shopping patterns and with the NASCAR racing season; - our ability to enter into new and maintain existing strategic and working relationships; - capital expenditures and costs related to our expansion; - changes in our operating expenses including, in particular, expenses related to increased personnel at our headquarters in the areas of human resources, marketing, finance and information systems, seasonal hiring at our racing centers and manufacturing support related to the expansion of our racing center operations; - the introduction of competitive retail entertainment products; 10 11 - unfavorable changes in the prices of components and merchandise we purchase; and - equipment and software-related failures at our sites. Additionally, because we currently have only eight racing centers in operation, our operating results are particularly susceptible to fluctuations in the results from any store. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. It is possible that in some future periods our results of operations may be below the expectations of public market analysts and investors. IF WE FAIL TO EXPAND THE NUMBER OF OUR RACING CENTERS OR TO PROPERLY MANAGE EXPANSION, OUR REVENUES WILL NOT GROW AND OUR PROFITS MAY SUFFER Our future growth depends primarily on our ability to increase the number of our racing centers. We plan to open 20 to 30 racing centers over the next 24 months. To execute our growth plan we must: - identify appropriate locations; - negotiate leases on acceptable terms; - design each racing center; - build race car simulators according to our expansion schedule, while maintaining quality; - depend upon contractors to construct our new racing centers in a timely manner while controlling costs; - obtain and install the necessary equipment on a timely basis; - obtain the timely approval of local regulatory authorities; and - hire, train, motivate and retain qualified employees to assist in our expansion, as well as to staff our racing centers. We have limited experience in building racing centers, particularly in building multiple racing centers concurrently. Our planned expansion will place a significant strain on our limited financial and management resources. Our resources may not be sufficient to adequately manage the opening of the planned number of racing centers cost effectively and under a compressed time schedule. Consequently, it may be difficult for us to meet this growth plan on our short time schedule while controlling costs. In addition, the delay of rolling out our racing centers from one quarter to the next could slow the anticipated growth of our revenues. WE MAY NEED TO OBTAIN ADDITIONAL FUNDS TO EXECUTE OUR BUSINESS PLAN AND IF WE ARE UNABLE TO OBTAIN THESE FUNDS, WE WILL NOT BE ABLE TO EXPAND OUR BUSINESS AS PLANNED The capital resources required to develop each new racing center are significant. The average initial cost of opening our existing 12-simulator racing centers, including our Irvine Spectrum racing center which was initially built as a 12-simulator racing center, was approximately $2.0 million, including development costs, pre-opening costs and start-up merchandise inventory. We plan to open 20 to 30 new racing centers over the next 24 months with an estimated aggregate cost to us of approximately $30.0 to $45.0 million. To date, our cash flow from operations has been insufficient to cover our expenses and capital needs. Although we believe our existing capital resources, together with the proceeds from this offering, will be sufficient to meet our needs for the foreseeable future, including our planned expansion, the rate at which we use our available funds will depend on factors which are difficult to predict, such as our ability to control costs in designing and building our racing centers. In the future, we may require additional capital and there is no assurance that additional financing will be available at that time on terms favorable to us, or at all. If adequate funds are not available on acceptable terms, we may be forced to curtail or cease our operations. Moreover, even if we are able to continue our operations, our failure to obtain additional financing could have a negative impact on our business and financial results and may delay our expansion. 11 12 For a more detailed discussion of cash used by us in our business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." WE ARE SUBJECT TO LONG-TERM LEASES FOR OUR FACILITIES, MANY OF WHICH ARE NON-CANCELABLE AND OTHERS OF WHICH WE MAY CANCEL ONLY UNDER LIMITED CIRCUMSTANCES, WHICH MAY CAUSE OUR BUSINESS TO SUFFER IF WE ARE UNABLE TO TERMINATE OR RENEGOTIATE A LEASE FOR A RACING CENTER THAT DOES NOT GENERATE ADEQUATE REVENUES The leases we enter into for our racing centers typically have terms ranging from five to ten years. Approximately half of our existing leases have limited termination options which generally may only be exercised after a number of years if our gross receipts do not meet stated thresholds, if no default exists under the lease, and a cancellation fee is paid. The leases have minimum annual rents ranging from approximately $180,000 to $395,000, which include charges for operating expenses, common area maintenance, taxes and utilities, plus an additional charge if we achieve sales in excess of certain levels. Our future facilities are likely to be subject to similar non-cancelable long-term leases or may be subject to limited termination options. In many of our leases, the landlord agrees to provide an allowance for construction of improvements, but typically we also make large investments of our own funds to finance tenant improvements. If an existing or future facility does not perform at a profitable level, and the decision is made to close that facility without exercising an option to terminate the lease, we may still be committed to perform our obligations under the applicable lease. These obligations would include, among other things, payment of the rent and additional charges as they would have become due for the balance of the respective lease term. The leases related to five of our sites are cancelable by the landlord after various dates if we have not achieved specified sales. If such a termination were to occur at these locations, we could lose the facility before we are able to receive a return on our investment. IF WE FAIL TO RESPOND TO RAPID MARKET CHANGES, WE MAY GENERATE LOWER THAN ANTICIPATED REVENUES AND EXPERIENCE FLUCTUATIONS IN OUR OPERATING RESULTS The market for retail entertainment is subject to rapidly changing customer tastes, a high level of competition, market seasonality and an ongoing need to identify trends and offer new or enhanced products. Because these factors can change rapidly, the success of our business may depend on our ability to react to these factors, to enhance our simulated racing experience or offer new products at our racing centers. Product development can be time consuming and expensive and we may not be successful. Our business, operating results and financial condition could be negatively impacted if we are unable to respond quickly to market changes. OUR RESULTS OF OPERATIONS DEPEND ON DISCRETIONARY CONSUMER SPENDING, AND A DOWNTURN IN CONSUMER SPENDING COULD RESULT IN DECREASED DEMAND FOR OUR SIMULATED AUTO RACING AND MERCHANDISE The success of our operations depends to a significant extent upon factors relating to discretionary consumer spending, including economic conditions affecting disposable consumer income. These factors include employment, business conditions, interest rates and taxation. These factors, which may have a particularly significant impact on the entertainment industry, can impact attendance at our racing centers. There can be no assurance that consumer spending will not be adversely affected by economic conditions, thereby impacting our growth, revenues and profitability. WE DEPEND ON THIRD-PARTY MANUFACTURERS FOR SIGNIFICANT COMPONENTS OF OUR RACE CAR SIMULATORS AND THE INABILITY TO PROCURE THESE COMPONENTS WOULD RESULT IN DELAYS IN THE OPENING OF OUR RACING CENTERS AND INCREASED COSTS We do not manufacture many of the significant components of our race car simulators or the merchandise that we sell at our racing centers. Any difficulties encountered by the third-party manufacturers that result in product defects, production delays, cost overruns or the inability to fulfill orders on a timely basis could materially and adversely affect us. 12 13 Our suppliers generally do not have long-term contracts with their third-party manufacturers. We may not meet the demands and expectations of our customers and our operations may be adversely affected by: - the loss of these relationships; - significant damage to the facilities of one or more of our suppliers or their third-party manufacturers; - the disruption or termination of the operations of one or more of our suppliers or their third-party manufacturers; or - the disruption or termination of transportation of products from one or more of our suppliers or their manufacturers. Neither we, nor any of our suppliers, maintain an inventory of sufficient size to protect us against any material interruption of supply of merchandise or of components for our race car simulators. We also may be subject to variations in the prices that we or our suppliers pay to third-party manufacturers for merchandise and race car simulator components if raw materials, labor and other costs increase. We may not be able to pass along price increases to our customers. EQUIPMENT AND SERVICE FAILURES OR INTERRUPTIONS COULD REDUCE THE APPEAL OF OUR SIMULATED RACING EXPERIENCE AND RESULT IN LOWER THAN ANTICIPATED REVENUES Any sustained or repeated failure or interruption in our equipment, our simulators or our computer systems could reduce the appeal of our racing centers to our customers. Unanticipated problems affecting our equipment and systems would cause us to lose revenues at our racing centers. Interruptions or failures could result if we fail to maintain our equipment or our computer systems in effective working order. Our race car simulators are subject to extensive wear and tear. We expect to allocate a significant amount of resources to maintaining the equipment and computer systems at our racing centers. To the extent we are unable to adequately maintain our equipment and computer systems and interruptions or failures result, customers may stop visiting our racing centers. Additionally, if maintenance is more costly than we predict, our profitability will suffer. IF WE CANNOT ESTABLISH AND MAINTAIN A HIGH-QUALITY INTERACTIVE WEB SITE, THE SUCCESS OF OUR MARKETING CAMPAIGN AND OUR BRAND IMAGE COULD BE NEGATIVELY IMPACTED We believe that the marketing of our product and our brand image will be substantially enhanced if we are able to provide an interactive Web community for our customers. We intend to enhance SMSonline.com and build upon the community of our racing customers by providing online opportunities to discuss our competitions and racing experiences and by offering NASCAR driver testimonials and customer endorsements of our racing experience. We also intend to offer our customers who purchase our proprietary software and subscribe to our online services, the ability, from a personal computer, to: - download replays of races; - customize their car set-up; - view live racing at the racing centers; and - race against customers at the racing centers. Our failure to develop, introduce and maintain these online products could diminish the effectiveness of our Web site and possibly reflect negatively on our racing centers. Additionally, we may use new technologies ineffectively and may incur substantial costs if we need to modify our services or infrastructure. Also, growth in the number of users accessing our Web site may strain or exceed the capacity of our computer systems and lead to impaired performance or system failures. If this occurs, customer service and satisfaction may suffer, which could lead to dissatisfied users, reduced traffic and a decline in any business we generate over the Internet. 13 14 IF WE LOSE MANAGEMENT OR OTHER KEY PERSONNEL, OUR BUSINESS MAY NOT BE SUCCESSFUL The development of our operations depends upon the efforts and abilities of our senior management, particularly David Morse, Rick Moncrief and Christopher Morse. The loss of services of one or more of our key employees could have a material adverse effect on our business. To date, we have not entered into employment agreements with any of these key personnel and we have not purchased insurance to protect us against the loss of the life of any of these or other key personnel. Our success also depends on our ability to continue to attract, retain and motivate skilled employees. We may be unable to retain our key employees or attract, motivate or retain other qualified employees in the future. Any failure to attract and retain key employees could make it difficult for us to manage our business and meet key objectives, such as timely openings of racing centers. WE HAVE LIMITED PROTECTION FOR OUR INTELLECTUAL PROPERTY AND ANY INFRINGEMENT OR MISAPPROPRIATION OF OUR RIGHTS COULD ADVERSELY IMPACT OUR BUSINESS Although we believe that our success is more dependent upon our technical expertise than our proprietary rights, our future success and ability to compete is dependent in part upon our proprietary technology. We rely on a combination of contractual rights and copyright, patent, trademarks and trade secret laws to establish and protect our proprietary technology. Currently, we have two U.S. patent applications pending. We generally enter into confidentiality agreements with our employees and consultants. We also strictly limit access to and distribution of the language in which our computer programs are written and further limit the disclosure and use of other proprietary information. We cannot assure you that the steps taken by us in this regard will be adequate to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain or use our products or technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. We are also subject to the risk of adverse claims and litigation alleging infringement of the intellectual property rights of others. Third parties may assert infringement claims in the future with respect to our current or future products. Any assertion, regardless of its merit, could require us to pay damages or settlement amounts and could require us to develop non-infringing technology or pay for a license to the technology that is the subject of asserted infringement. For example, we have been served with a civil summons and complaint for the alleged infringement of a third party's patents in connection with our reservation method. The complaint sought an injunction, damages and treble damages. This litigation or any other potential litigation could result in product delays, increased costs or both. In addition, the cost of any litigation and the resulting distraction of our management resources could adversely affect our results of operations. We also cannot assure you that any licenses of technology necessary for our business will be available or that, if available, such licenses can be obtained on commercially reasonably terms. Our failure to obtain such licenses, or to protect our proprietary technology, could harm our business and cause our results of operations to fluctuate. For more information regarding our legal proceedings, see "Business -- Legal Proceedings." We have filed U.S. trademark and service mark applications for "RACING SO REAL YOU CAN FEEL IT," SILICON ENTERTAINMENT, INC., SILICON MOTOR SPEEDWAY and our SILICON MOTOR SPEEDWAY logo in the United States. We have also filed trademark and service mark applications in Canada and the European Union for SILICON ENTERTAINMENT, INC. However, we cannot assure you we will be successful in obtaining registrations for the above marks. Our inability to obtain trademark protection for our marks could allow others to use our trade or service marks and dilute our brand identity. We also have licensed from third parties portions of our hardware and software technology related to our mathematical formula used to simulate our race car handling characteristics and the electromechanical 14 15 device that creates variable amounts of steering wheel resistance and force to simulate actual race car steering wheel performance in our race car simulators. We believe that there are alternative sources for each of the material components of technology we license from these third parties. However, the termination of any of these licenses could have a material adverse effect on our business. None of our license agreements currently provides exclusive rights to these technologies. Therefore we cannot prohibit competitors or potential competitors from obtaining licenses to these technologies and incorporating them into products that may be used to compete with us. IF WE, OR THIRD PARTIES ON WHICH WE RELY, FAIL TO ACHIEVE YEAR 2000 COMPLIANCE, OUR BUSINESS COULD BE HARMED We depend upon complex computer software and systems for certain aspects of our operations. The failure of any of our software or systems to be Year 2000 compliant could disrupt the operation of our racing centers, our financial and management controls and reporting systems. In addition to the systems and software that we use directly, our operations also depend on the performance of software and systems of our third-party vendors and service providers. These include providers of the components for our race car simulators, financial, telecommunications and parcel delivery services. We cannot assure you that our service providers have, or will have, operating software and systems that are Year 2000 compliant. We have begun conducting an analysis of our material operating software and systems to assess and assure Year 2000 compliance. We also have been communicating with our third-party vendors and service providers and others with whom we do business to coordinate Year 2000 readiness. The responses we have received to date have indicated that steps are currently being undertaken by our third-party vendors and service providers to address this concern. However, any failure of our computer software and systems or the software and systems of third parties to achieve timely Year 2000 compliance could harm our business, operating results and financial position. For more detail regarding our Year 2000 compliance, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Compliance." RISKS RELATED TO OUR INDUSTRY A SUBSTANTIAL DECLINE IN THE POPULARITY OF MOTORSPORTS IN GENERAL, AND IN NASCAR RACING IN PARTICULAR, COULD HARM OUR BUSINESS Substantially all of our revenues are derived from the sale of tickets for our race car simulators. Although motorsports and NASCAR racing have enjoyed substantial growth in popularity during the 1990s, we cannot predict whether this growth will continue, particularly in light of the substantial competition for consumer spending in the sports, entertainment and recreation industries. A downturn in the popularity of motorsports or NASCAR racing could reduce interest in simulated racing at our racing centers, as well as diminish sales of motorsports merchandise, and hamper our ability to enter into strategic relationships, all of which could materially harm our business and financial results. SEASONAL FLUCTUATIONS IN SALES MAY AFFECT OUR EARNINGS, MAKING IT DIFFICULT TO PREDICT OUR QUARTERLY RESULTS, WHICH COULD CAUSE OUR EARNINGS TO BE UNPREDICTABLE AND THE TRADING PRICE OF OUR COMMON STOCK TO VARY SIGNIFICANTLY We are subject to seasonal fluctuations in our revenues associated with the retail shopping season, which affects the level of mall traffic near our racing centers. We may also be subject to seasonal fluctuations in our revenues due to the effect of the auto racing season on the demand for tickets for our race car simulators or merchandise sold at our racing centers. Seasonal and cyclical patterns that emerge in the number of visitors to our racing centers or consumer purchasing could result in unfavorable quarterly earnings comparisons. As a result, it is difficult to predict our future revenues. Any shortfall in revenues may materially and adversely affect our business and stock price. You should not rely on quarter- 15 16 to-quarter comparisons of our operating results as an indication of future performance. It is possible that our operating results in some future periods may fall below the expectations of analysts and investors. In that event, the price of our common stock may decline. WE FACE DIRECT AND INDIRECT COMPETITION WHICH COULD REDUCE OUR ABILITY TO RETAIN EXISTING CUSTOMERS, OBTAIN NEW ONES AND EXPAND OUR BUSINESS Competition among providers of other types of simulated racing and providers of retail entertainment is significant. Illusion, Inc. and Penske Racing Centers each operates or provides equipment to one racing facility using simulated "open wheel" (Formula One or Indy type race cars) racing. While neither of these competitors has expanded beyond a single facility, if they do expand in the future we could face direct competition from them. Additionally, we may experience competition from others who enter the simulated racing market. We also face indirect competition from other providers of retail entertainment, such as movie theaters, video arcades, interactive games and theme restaurants. Although we believe that our entertainment experience competes favorably with respect to the quality of the simulated racing experience, strong appeal, price and facility location, many of these competitors have greater resources and greater name recognition than we do and they may appeal to a broader demographic. For more detail regarding our competition, see "Business -- Competition." INCREASING GOVERNMENT REGULATION OF CORPORATE SPONSORSHIP COULD NEGATIVELY IMPACT THE MOTORSPORTS INDUSTRY, REDUCE EXPOSURE TO THE NASCAR BRAND NAME AND LIMIT THE DEMAND FOR OUR RACING EXPERIENCE Tobacco and alcohol companies provide a significant amount of advertising and promotional support to racing events, race car drivers and race car owners. In 1996, the U.S. Food and Drug Administration published regulations that would substantially restrict tobacco industry sponsorship of sporting events, including motorsports. The FDA regulations, if ever approved, and any other legislation, regulations or other initiatives that limit or prohibit advertisements of tobacco or alcohol products at racing events could adversely affect the popularity of motorsports, which could reduce exposure to the NASCAR brand name, decrease demand for our racing experience and negatively affect our operating results. The terms of a November 1998 settlement between certain major manufacturers of cigarettes and smokeless tobacco products and the attorneys general of 46 states, among other things, limit sponsorship of racing events by the participating manufacturers and substantially eliminate outdoor advertising of tobacco products and any marketing or distribution of tobacco brand name merchandise. Domestic and international tobacco advertisers heavily subsidize certain NASCAR and other racing series and teams and those series and teams may not find similar sponsorships. The limitations on tobacco company sponsorship imposed by the settlement and any further limitations imposed on tobacco or alcohol sponsorship of racing events also could ultimately affect the popularity of motorsports and the prominence of the NASCAR brand name, which could decrease demand for our racing experience and negatively affect our operating results. RISKS RELATED TO THE OFFERING VOLATILITY IN THE MARKET PRICE OF OUR COMMON STOCK MAY LEAD TO LOSSES BY INVESTORS AND SECURITIES LITIGATION There has been no public market for our shares prior to this offering, and after the offering, an active public market for our shares may not develop. The trading price of our common stock could be subject to wide fluctuations in response to a number of factors, including the following: - quarterly variations in our operating results; - actual or anticipated announcements of new openings of locations, products or services by us or other business partners or competitors; - announcements of technological and other innovations by us or our competitors; 16 17 - investor perception of our business prospects or the motorsports and retail entertainment industries in general; - changes in analysts' estimates of our financial performance; - general conditions in the retail entertainment and other markets in which we compete; and - worldwide economic and financial conditions. The stock market also has experienced extreme price and volume fluctuations that have affected the market prices for many rapidly expanding companies. These fluctuations often have been unrelated to the operating performance of those companies. Broad market fluctuations and other factors may adversely affect the market price of our common stock. If the market price of our common stock experiences significant market volatility, some stockholders may file a class action lawsuit. We could incur substantial legal costs and our management's attention could be diverted to defend this type of litigation, even if we are ultimately successful in our defense. Declines in the market price of our common stock also could adversely affect employee morale, our ability to attract and retain qualified employees and our access to additional capital. All of these factors could negatively impact our business, operating results and financial condition. ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO INVESTORS Some investors favor companies that pay dividends, particularly in market downturns. For the foreseeable future, we intend to retain future earnings, if any, to finance our business operations and do not anticipate paying any cash dividends with respect to our common stock. Because we may not pay dividends, a return on this investment likely depends on your ability to sell our stock at a profit. INVESTORS WILL SUFFER IMMEDIATE DILUTION The initial public offering price per share will exceed our net tangible book value per share. Accordingly, investors purchasing shares in this offering will incur immediate and substantial dilution of approximately $6.47 in the book value per share of the common stock from the assumed offering price of $9.00 per share. Any exercises of outstanding options to purchase common stock will further dilute existing stockholders. OUR MANAGEMENT HAS BROAD DISCRETION AS TO THE NET PROCEEDS WE RECEIVE FROM THIS OFFERING AND, IF WE DO NOT USE THESE PROCEEDS WISELY, INVESTORS IN OUR STOCK COULD EXPERIENCE A DECREASED RETURN We intend to use the net proceeds as indicated in "Use of Proceeds." However, we have not yet determined the actual expenditures and may not be able to accurately estimate the amounts we will use for each specified purpose. The actual amounts and timing of these expenditures may vary significantly depending on a number of factors, including the amount of cash generated by sales of tickets and merchandise at our racing centers. Depending on future developments and circumstances, we may use some of the proceeds for uses other than as described in "Use of Proceeds." Our management will therefore have significant flexibility in applying the net proceeds of this offering and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. If we do not use the proceeds in a manner beneficial to us, our business could suffer and our stock price could decline. SUBSTANTIAL SALES OF OUR COMMON STOCK IN THE OPEN MARKET BY OUR EXISTING STOCKHOLDERS COULD DEPRESS THE MARKET PRICE OF OUR COMMON STOCK A substantial number of shares of our common stock are eligible for resale in the public market after this offering immediately upon the expiration of 180-day lock-up agreements, subject in many cases to the volume limitations and other restrictions of Rule 144 under the Securities Act. Sales of our common stock in the public market following this offering could adversely affect the market price of our common stock. 17 18 For more detail regarding the number of shares eligible for future sale and the restrictions on those sales, see "Shares Eligible for Future Sale." DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE OR PREVENT A POTENTIAL TAKEOVER, EVEN IF SUCH A TRANSACTION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS Provisions of Delaware law and our certificate of incorporation and bylaws could make more difficult the acquisition of us by means of a tender offer, a proxy contest, or otherwise. These provisions might discourage our potential acquisition at a premium over the market price of our common stock and adversely affect the trading price of our common stock. These provisions also make the removal of incumbent directors and officers more difficult. For a more detailed discussion of these anti-takeover provisions, see "Description of Capital Stock." 18 19 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "anticipates," "believes," "continue," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "should" or "will" or the negative of such terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under "Risk Factors," that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In addition, this prospectus contains forward-looking statements attributed to third party industry sources relating to their estimates regarding the growth of motorsports, NASCAR racing and Internet use. You should not place undue reliance on these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform such statements to actual results, unless required by law. USE OF PROCEEDS The net proceeds to us from the sale of the 4,500,000 shares of common stock we are offering will be approximately $36,665,000, at an assumed initial public offering price of $9.00 per share after deducting estimated underwriting discounts and commissions and estimated offering expenses. The net proceeds to us would increase to $42,314,750 if the underwriters were to exercise their over-allotment option in full. We intend to use the net proceeds of this offering for: - expansion of the number of our racing centers; - enhancement of our hardware and software technology and basic infrastructure; - promotion of our racing centers; - additional online content and services to our Web site; - repayment of $3.0 million of loans to certain investors at a weighted average interest rate of 10.3% per annum with maturity dates in December 1999 and January 2000; and - working capital and other general corporate purposes. Pending this usage, we will invest the net proceeds in short-term, interest-bearing, investment grade securities. DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock and do not anticipate paying such cash dividends in the foreseeable future. We currently anticipate that we will retain all of our future earnings for use in the development and expansion of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operation, financial condition and other factors as the board of directors, in its discretion, deems relevant. 19 20 CAPITALIZATION The following table sets forth our capitalization as of August 1, 1999. The Pro Forma column gives effect to the conversion of each outstanding share of mandatorily redeemable convertible preferred stock into a share of common stock upon the closing of this offering. The Pro Forma As Adjusted column gives effect to the receipt of the net proceeds from the sale of 4,500,000 shares of common stock at an initial public offering price of $9.00 per share, the application of $3.0 million of such net proceeds to repay loans to certain investors and our issuance of $5.5 million of subordinated convertible promissory notes in September 1999. This table should be read in conjunction with our Financial Statements and the related notes included elsewhere in this prospectus. Also see "Use of Proceeds" and "Transactions with Related Parties" for additional information.
(UNAUDITED) AS OF AUGUST 1, 1999 -------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Long-term portion of capital leases...................... $ 1,969 $ 1,969 $ 1,969 Long-term debt........................................... 5,054 5,054 10,554 Mandatorily redeemable convertible preferred stock, $0.001 par value: 20,000,000 shares authorized; 7,887,799 shares issued and outstanding, actual; no shares issued and outstanding, pro forma and as adjusted............................................... 24,370 -- -- -------- -------- ------- Stockholders' equity (deficit): Preferred stock, $.001 par value: 500,000 shares authorized and no shares issued and outstanding, pro forma and pro forma as adjusted..................... -- -- -- Common stock, $.001 par value: 40,000,000 shares authorized and 2,815,556 shares issued and outstanding actual; 10,703,355 shares issued and outstanding pro forma; 100,000,000 shares authorized and 15,203,355 shares issued and outstanding as adjusted............................................ 3 11 15 Additional paid-in capital............................. 3,698 28,060 64,721 Notes receivable from stockholders..................... (247) (247) (247) Warrants............................................... 2,493 2,493 2,493 Deferred stock compensation............................ (1,121) (1,121) (1,121) Accumulated deficit.................................... (27,349) (27,349) (27,349) -------- -------- ------- Total stockholders' equity (deficit)........... (22,523) 1,847 38,512 -------- -------- ------- Total capitalization........................... $ 8,870 $ 8,870 $51,035 ======== ======== =======
This table excludes: - 1,105,598 shares of our common stock issuable upon the exercise of options outstanding at a weighted average exercise price of approximately $1.92 per share; - warrants to purchase 813,659 shares of our common stock at a weighted average exercise price of $4.28 per share; - 369,444 shares of our common stock assuming the conversion of $5.7 million of subordinated convertible promissory notes issued in June 1999; and - 550,000 shares of our common stock assuming the conversion of $5.5 million of subordinated convertible promissory notes issued in September 1999 and warrants issued concurrently to purchase 68,750 shares of our common stock at an exercise price of $10.80 per share. 20 21 DILUTION Our pro forma net tangible book value as of August 1, 1999 was approximately $1.8 million or $0.17 per share of common stock. "Net tangible book value" per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by the total number of shares of common stock outstanding, assuming conversion of our outstanding mandatorily redeemable convertible preferred stock into common stock. After giving effect to the sale of the 4,500,000 shares of common stock offered by us at an initial public offering price of $9.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses, and the adjustments set forth above, our pro forma net tangible book value as of August 1, 1999 would have been $38.5 million or $2.53 per share of common stock. This represents an immediate increase in net tangible book value of $2.36 per share to existing stockholders and an immediate dilution of $6.47 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $ 9.00 Pro forma net tangible book value per share before this offering............................................... $0.17 Increase attributable to new investors.................... $2.36 ----- Pro forma net tangible book value after this offering....... 2.53 ------ Dilution per share to new investors......................... $ 6.47 ======
The following table summarizes on a pro forma basis, as of August 1, 1999, the differences between the existing stockholders and new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid.
SHARES PURCHASED TOTAL CONSIDERATION -------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders............ 10,703,355 70.4% $26,522,200 39.7% $ 2.48 New investors.................... 4,500,000 29.6% 40,500,000 60.3% $ 9.00 ---------- ----- ----------- ------ Totals........................... 15,203,355 100.0% 67,022,200 100.0% ========== ===== =========== ======
The information presented with respect to existing stockholders excludes: - 1,105,598 shares of our common stock issuable upon the exercise of options outstanding at a weighted average exercise price of approximately $1.92 per share; - warrants to purchase 813,659 shares of our common stock at a weighted average exercise price of $4.28 per share; - 369,444 shares of our common stock assuming the conversion of $5.7 million of subordinated convertible promissory notes issued in June 1999; and - 550,000 shares of our common stock assuming the conversion of $5.5 million of subordinated convertible promissory notes issued in September 1999 and warrants issued concurrently to purchase 68,750 shares of our common stock at an exercise price of $10.80 per share. To the extent that any of these options, warrants or subordinated convertible debt are exercised, there will be further dilution to investors. 21 22 SELECTED FINANCIAL DATA Our selected financial data set forth below contains only a portion of our financial statements and should be read in conjunction with the Financial Statements and related Notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. In particular, see Notes to Financial Statements for an explanation of the calculations of earnings per share and per share amounts. Our statement of operations data for the years ended February 2, 1997, February 1, 1998 and January 31, 1999, and our balance sheet data as of February 1, 1998 and January 31, 1999, are derived from and are qualified in their entirety by our Financial Statements that have been audited by PricewaterhouseCoopers LLP, independent accountants, which are included elsewhere in this prospectus. Our statement of operations data for the date of inception to February 4, 1996, the twenty-six week periods ended August 2, 1998 and August 1, 1999 and our balance sheet data as of August 1, 1999 are derived from our unaudited financial statements. In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of the financial position and results of operations for the period. The historical results presented below are not necessarily indicative of the results to be expected for any future fiscal year. We were incorporated in 1994, but did not begin meaningful operations until the opening of our first racing center in August 1997. Therefore, we have combined our selected financial data presented for the period ended January 29, 1995 and our fiscal year ended February 4, 1996.
TWENTY-SIX WEEKS NOV. 1, 1994 FISCAL YEARS ENDED ENDED (DATE OF ---------------------------- ----------------- INCEPTION) TO FEB. 2, FEB. 1, JAN. 31, AUG. 2, AUG. 1, FEB. 4, 1996 1997 1998 1999 1998 1999 ------------- ------- ------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Simulator races.............................. -- $ 47 $ 892 $ 4,357 $ 1,218 $ 3,532 Merchandise.................................. -- -- 104 620 148 462 Other........................................ -- -- 56 405 175 175 ------- ------- ------- -------- ------- ------- Total revenues....................... -- 47 1,052 5,382 1,541 4,169 Operating expenses: Cost of revenue.............................. -- -- 359 1,907 496 1,599 Direct expense............................... -- -- 264 1,875 478 1,580 Marketing and licensing...................... -- -- 484 999 456 827 Research and development..................... -- 1,142 1,767 3,043 1,726 703 General and administration................... 1,502 1,476 2,322 5,770 2,478 2,811 Depreciation and amortization................ -- 46 232 957 215 850 Pre-opening expense.......................... -- -- 571 1,571 915 66 Stock-based compensation expense............. -- -- 22 589 124 1,073 ------- ------- ------- -------- ------- ------- Total operating expense.............. 1,502 2,664 6,021 16,711 6,888 9,509 ------- ------- ------- -------- ------- ------- Operating loss................................. (1,502) (2,617) (4,969) (11,329) (5,347) (5,340) Interest expense, net.......................... 13 25 223 159 23 1,172 ------- ------- ------- -------- ------- ------- Net loss............................. (1,515) (2,642) (5,192) (11,488) (5,370) (6,512) Accretion of mandatorily redeemable convertible preferred stock.............................. -- -- (8) (55) (21) (41) ------- ------- ------- -------- ------- ------- Net loss attributable to common stockholders....................... $(1,515) $(2,642) $(5,200) $(11,543) $(5,391) $(6,553) ======= ======= ======= ======== ======= ======= Basic and diluted net loss per share attributable to common stockholders.......... $ (8.51) $ (1.65) $ (3.67) $ (5.85) $ (2.95) $ (2.63) Shares used in computing basic and diluted net loss per share attributable to common stockholders................................. 178 1,605 1,417 1,973 1,830 2,489 Pro forma basic and diluted net loss per share attributable to common stockholders (unaudited).................................. $ (1.36) $ (0.65) Shares used in computing pro forma basic and diluted net loss per share attributable to common stockholders (unaudited).............. 8,459 10,071
22 23
AS OF ---------------------------------------------------- FEB. 4, FEB. 2, FEB. 1, JAN. 31, AUG. 1, 1996 1997 1998 1999 1999 ------- ------- ------- -------- ----------- (UNAUDITED) (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 135 $ 879 $ 129 $ 606 $ 2,778 Total assets........................................... 212 1,325 2,765 13,087 16,210 Long-term portion of capital leases and long-term debt................................................. -- 212 434 2,088 7,023 Total liabilities...................................... 1,724 542 1,691 9,893 14,363 Mandatorily redeemable convertible preferred stock..... -- 4,937 9,200 21,952 24,370 Total stockholders' deficit............................ (1,512) (4,154) (8,126) (18,758) (22,523)
23 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements and related notes which appear elsewhere in this prospectus. The following discussion contains forward-looking statements. OVERVIEW We own and operate NASCAR Silicon Motor Speedway racing centers. Through strategic relationships and our proprietary technology, we provide a realistic racing experience that simulates the motion, sights and sounds of an actual NASCAR race. Located in high profile, high traffic retail locations, our racing centers currently have eight, ten, twelve or fourteen race car simulators per location and sell a variety of premium motorsports merchandise. Under a licensing agreement with NASCAR, we have the exclusive right to use the NASCAR name in our simulated racing experience. In addition to our licensing agreement with NASCAR, we have licensing agreements with several NASCAR drivers including Dale Earnhardt, Jeff Gordon, Dale Jarrett, Rusty Wallace and others. To extend our racing experience into the home or office, our Web site, SMSonline.com, currently provides a range of information and services including reservations, race results, standings and other racing center information. As of August 1, 1999, our customers had completed over one million races at our racing centers. Prior to 1997, we had minimal revenues, and our operations consisted primarily of research and development activities. In August 1997, we opened our first racing center at Mall of America, near Minneapolis, Minnesota. We now have eight racing centers in operation, which are summarized in the following table:
NUMBER OF EXISTING SQUARE RACE CAR LOCATIONS CITY FOOTAGE SIMULATORS OPENING DATE --------- ---- ------- ---------- -------------- Mall of America........ Bloomington (Minneapolis), MN 5,899 12 August 1997 Woodfield.............. Schaumburg (Chicago), IL 6,111 12 June 1998 Dallas Galleria........ Dallas, TX 6,651 8 August 1998 Irvine Spectrum........ Irvine, CA 5,218 8 August 1998 Palisades Center....... West Nyack, NY 5,700 12 November 1998 Concord Mills.......... Charlotte, NC 7,865 14 September 1999 Arbor Place............ Douglasville (Atlanta), GA 5,055 10 October 1999 Mall of Georgia........ Buford (Atlanta), GA 5,895 12 October 1999
We recently reduced the number of race car simulators from fourteen to eight at our Dallas Galleria racing center and from twelve to eight at our Irvine Spectrum racing center. These reductions are intended to better match the number of simulators at each location with the level of mall traffic. In the future, we plan to open approximately equal numbers of 8-, 10- and 12-simulator racing centers. As market opportunities arise, we plan to open 14-simulator racing centers in selected locations, as we did in Concord Mills, North Carolina. See also, "Business -- Unit Economics" for more information regarding the unit economics of our racing centers. Our fiscal year is based on a 52 or 53 week year ending on the Sunday closest to February 1. When we use the term "fiscal year," it refers to the year that encompasses the majority of months within the twelve month period. For example, the fiscal year ended January 31, 1999 is referred to as fiscal year 1998. Revenues are generated primarily from the sale of tickets for our race car simulators. The price of a ticket for one of our race car simulators ranges from $7.00 to $8.00 for members of our drivers club and from $7.50 to $8.50 for non-members. For an additional $2.50 per race, a person may ride in the passenger seat. We also sell racing-related merchandise at our racing centers. Other revenue historically has consisted of group sales, such as parties and corporate events, and accounts for the balance of total revenues. In the future, we expect other revenue to also reflect revenues related to our Web site. 24 25 Revenues from the sale of tickets for our race car simulators and group sales are recognized when the customer completes a race. Revenues from the sale of merchandise are recognized at the point of sale. Cost of revenue includes the cost of merchandise sold and direct racing center labor and benefits. Cost of revenue also includes a nominal amount of Internet-related expenses, including development, design and technical support. Direct expense includes all other expenses incurred directly by a racing center, such as supplies, racing center marketing, maintenance and repair and occupancy. Racing center marketing expense includes the costs of implementing programs such as local media advertising and printing expense. Marketing and licensing expense reflects corporate marketing expenses and corporate licensing costs. Corporate marketing expenses include the cost of developing programs that build our brand as well as customer acquisition and retention programs. The major components of corporate marketing expenses are compensation, market research, database support and supplies. Corporate licensing costs include the amortization of licensing fees for NASCAR, NASCAR drivers, team owners and race track owners. Research and development is expensed as incurred. Research and development expenses consist of racing systems software and hardware development, compensation and consulting. General and administration expenses include compensation, travel, supplies, consulting and occupancy expenses related to our corporate office. Depreciation and amortization expenses primarily reflect the depreciation of our race car simulators and our network systems and the amortization of leasehold improvements in our racing centers. Other components of depreciation and amortization expenses are corporate headquarters' information systems, leasehold improvements and equipment. Pre-opening expense includes the start-up expenses and other expenses typically incurred during the two-month period prior to the opening of one of our racing centers. Pre-opening expenses include compensation, training, recruiting, relocation, travel, occupancy, supplies and marketing. Historically, we have periodically granted stock options to employees, consultants, non-employee directors and others and expect to continue to do so in the future. We use the intrinsic value method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for our employee stock options and present disclosure of pro forma information required under Financial Accounting Standards Board Statement No. 123 or SFAS 123, "Accounting for Stock-Based Compensation." As of August 1, 1999, we have recorded stock-based compensation expense related to these options in the total amount of $2.5 million. This amount represents the difference between the deemed fair market value of our common stock, as determined for accounting purposes, and the exercise price of the option at the date of grant. Of this amount, $22,000 had been amortized in fiscal 1997, $589,000 in fiscal 1998 and $1,073,000 through the first six months of fiscal 1999. Future stock-based compensation expense arising out of options granted through August 1, 1999 is estimated to be $300,000 for the remaining six months of fiscal 1999, $400,000 for fiscal 2000, $200,000 for fiscal 2001, and $100,000 for fiscal 2002. We amortize the deferred compensation charge monthly over the vesting period of the underlying option. Interest expense includes interest on equipment lease lines, as well as interest from our convertible debt. We have equipment leases, or commitments to provide equipment leases, of approximately $1.0 million for each existing racing center, as well as a smaller lease line for corporate furniture and equipment. We recorded net losses of $2.6 million, $5.2 million, $11.5 million and $6.5 million in fiscal year 1996, fiscal year 1997, fiscal year 1998 and the twenty-six week period ended August 1, 1999, respectively. Accordingly, no provision for income taxes was recorded in any of these periods. The resulting deferred tax asset, representing such net operating loss carry-forwards, has been reduced in full by a valuation allowance in accordance with SFAS 109, "Accounting for Income Taxes." 25 26 Accretion of mandatorily redeemable preferred stock represents the amortization of the financing costs associated with the placement of our Series C preferred stock. The following table sets forth selected financial data for the periods indicated as a percentage of total revenues.
TWENTY-SIX WEEKS FISCAL YEARS ENDED ENDED ------------------- ------------------- FEB. 1, JAN. 31, AUG. 2, AUG. 1, 1998 1999 1998 1999 -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Revenues Simulator races................................... 84.8% 81.0% 79.0% 84.7% Merchandise....................................... 9.9 11.5 9.6 11.1 Other............................................. 5.3 7.5 11.4 4.2 -------- -------- -------- -------- Total revenues................................. 100.0 100.0 100.0 100.0 Operating expenses Cost of revenue................................... 34.1 35.4 32.2 38.3 Direct expense.................................... 25.1 34.8 31.0 37.9 Marketing and licensing........................... 46.0 18.6 29.6 19.8 Research and development.......................... 168.0 56.5 112.0 16.9 General and administration........................ 220.7 107.2 160.8 67.4 Depreciation and amortization..................... 22.0 17.8 14.0 20.4 Pre-operating expense............................. 54.3 29.2 59.4 1.6 Stock-based compensation expense.................. 2.1 11.0 8.0 25.7 -------- -------- -------- -------- Total operating expenses....................... 572.3 310.5 447.0 228.1 -------- -------- -------- -------- Operating loss...................................... (472.3) (210.5) (347.0) (128.1) Interest expense, net............................... 21.2 3.0 1.5 28.1 -------- -------- -------- -------- Net loss....................................... (493.5) (213.5) (348.5) (156.2) Net loss attributable to common stockholders... (494.3)% (214.5)% (349.8)% (157.2)% ======== ======== ======== ========
COMPARISON OF THE TWENTY-SIX WEEK PERIOD ENDED AUGUST 2, 1998 WITH THE TWENTY-SIX WEEK PERIOD ENDED AUGUST 1, 1999 Revenues. Our revenues increased from $1.5 million in the twenty-six week period ended August 1, 1998 to $4.2 million in the twenty-six week period ended August 1, 1999. Simulator races revenues increased from $1.2 million to $3.5 million and merchandise revenues increased from $148,000 to $462,000 due to the opening of four racing centers in fiscal year 1998. Other revenue, which consisted entirely of group sales, was approximately equal in the twenty-six week period ended August 2, 1998 to the twenty-six week period ended August 1, 1999. We recently hired additional personnel to focus on increasing group sales at each racing center. Cost of Revenue. Cost of revenue increased from $496,000 in the twenty-six week period ended August 2, 1998 to $1.6 million in the twenty-six week period ended August 1, 1999. The increase in cost of revenue was primarily due to the impact of opening four racing centers in fiscal year 1998. The increase in such expenses as a percentage of total revenues from 32.2% to 38.3% was primarily due to a higher ratio of labor costs to total revenues at our Dallas Galleria and Irvine Spectrum racing centers. Direct Expense. Direct expense increased from $478,000 in the twenty-six week period ended August 2, 1998 to $1.6 million in the twenty-six week period ended August 1, 1999. The increase in direct 26 27 expense was primarily due to the impact of opening four racing centers in fiscal year 1998. The increase in such expenses as a percentage of total revenues from 31.0% to 37.9% was primarily due to a higher ratio of occupancy costs to total revenues at our Dallas Galleria and Irvine Spectrum racing centers. Marketing and Licensing. Marketing and licensing expense increased from $456,000 in the twenty-six week period ended August 2, 1998 to $827,000 in the twenty-six week period ended August 1, 1999. The increase was primarily due to an increase in licensing fees paid to NASCAR. Research and Development. Research and development expense decreased from $1.7 million in the twenty-six week period ended August 2, 1998 to $703,000 in the twenty-six week period ended August 1, 1999. The decrease was due to a reassignment of certain research and development personnel to systems support and maintenance. General and Administration. General and administration expense increased from $2.5 million in the twenty-six week period ended August 2, 1998 to $2.8 million in the twenty-six week period ended August 1, 1999. The increase was due to higher facilities costs resulting from our relocation to a new corporate headquarters and the continued addition of personnel and systems to support our infrastructure. Depreciation and Amortization. Depreciation and amortization expense increased from $215,000 in the twenty-six week period ended August 2, 1998 to $850,000 in the twenty-six week period ended August 1, 1999. The increase was primarily due to the opening of four racing centers in fiscal year 1998 and to the addition of corporate leasehold improvements and system costs incurred during the last half of fiscal year 1998 and the first half of fiscal year 1999. Pre-Opening Expense. Pre-opening expense decreased from $915,000 in the twenty-six week period ended August 2, 1998 to $66,000 in the twenty-six week period ended August 1, 1999. The decrease was primarily due to the development of three racing centers in the twenty-six week period ended August 2, 1998, compared to none in the twenty-six week period ended August 1, 1999. Interest Expense. Interest expense increased from $23,000 in the twenty-six week period ended August 2, 1998 to $1.2 million in the twenty-six week period ended August 1, 1999. This increase resulted primarily from interest expense related to the issuance of common stock warrants in connection with short-term promissory notes. COMPARISON OF FISCAL YEAR ENDED FEBRUARY 1, 1998 WITH FISCAL YEAR ENDED JANUARY 31, 1999 Revenues. Our revenues increased from $1.1 million in the fiscal year 1997 to $5.4 million in the fiscal year 1998. Simulator races revenues increased from $892,000 to $4.4 million, merchandise revenues increased from $104,000 to $620,000 and other revenue increased from $56,000 to $405,000. The increases were due to opening four racing centers in fiscal year 1998. Cost of Revenue. Cost of revenue increased from $359,000 in fiscal year 1997 to $1.9 million in fiscal year 1998. The increase was due to opening four racing centers in fiscal year 1998. The increase in cost of revenue as a percentage of total revenues from 34.1% to 35.4% was primarily due to a higher ratio of labor costs to total revenues at our Dallas Galleria and Irvine Spectrum racing centers. Direct Expense. Direct expense increased from $264,000 in fiscal year 1997 to $1.9 million in fiscal year 1998. The increase was due to opening four racing centers in fiscal year 1998. The increase in such expenses as a percentage of total revenue from 25.1% to 34.8% was primarily due to a higher ratio of occupancy costs to total revenues at our Dallas Galleria and Irvine Spectrum racing centers. Marketing and Licensing. Marketing and licensing expense increased from $484,000 in fiscal year 1997 to $1.0 million in fiscal year 1998. The increase was due to additional marketing personnel and an increase in the number of licensing agreements with NASCAR drivers, team owners and race track owners. 27 28 Research and Development. Research and development expense increased from $1.8 million in fiscal year 1997 to $3.0 million in fiscal year 1998. The increase was due to additional personnel engaged in research and development activities. General and Administration. General and administration expense increased from $2.3 million in fiscal year 1997 to $5.8 million in fiscal year 1998. The increase was due to higher facilities costs resulting from our relocation to a new corporate headquarters and the continued addition of personnel and systems to support our infrastructure. Depreciation and Amortization. Depreciation and amortization expense increased from $232,000 in fiscal year 1997 to $1.0 million in fiscal year 1998. The increase was primarily due to opening four racing centers in fiscal year 1998 and additional leasehold improvements and system costs incurred during fiscal year 1998. Pre-Opening Expense. Pre-opening expense increased from $571,000 in fiscal year 1997 to $1.6 million in fiscal year 1998. The increase resulted primarily from more racing centers being opened in fiscal year 1998 than in the preceding fiscal year. Interest Expense. Interest expense decreased from $223,000 in fiscal year 1997 to $159,000 in fiscal year 1998. This decrease resulted primarily from a lesser amount of short-term promissory notes outstanding in fiscal year 1998 when compared to fiscal year 1997. COMPARISON OF FISCAL YEAR ENDED FEBRUARY 2, 1997 WITH FISCAL YEAR ENDED FEBRUARY 1, 1998 We have not included a comparison of fiscal year ended February 2, 1997 with the fiscal year ended February 1, 1998 because the results of the fiscal year ended February 2, 1997 represent a relatively limited amount of operating activity. SEASONALITY We are subject to seasonal fluctuations in our revenues associated with the retail shopping season, which affects the level of mall traffic near our racing centers. We may also be subject to seasonal fluctuations in our revenues due to the effect of the auto racing season on the demand for tickets for our race car simulators or merchandise sold at our racing centers. 28 29 QUARTERLY RESULTS OF OPERATIONS The following tables set forth selected statement of operations data for the quarters indicated below in dollars and as a percentage of revenues. This data has been derived from our unaudited financial statements and is not necessarily indicative of the results that may be expected for future periods. In our opinion, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position and results of operations for such period have been included.
QUARTERS ENDED --------------------------------------------------------------------- MAY 3, AUGUST 2, NOVEMBER 1, JANUARY 31, MAY 2, AUGUST 1, 1998 1998 1998 1999 1999 1999 ------- --------- ----------- ----------- ------- --------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues Simulator races................ $ 578 $ 640 $ 1,362 $ 1,777 $ 1,893 $ 1,639 Merchandise.................... 49 99 166 306 226 236 Other.......................... 78 97 110 120 95 80 ------- ------- ------- ------- ------- ------- Total revenues......... 705 836 1,638 2,203 2,214 1,955 Operating expenses Cost of revenue................ 181 315 662 749 783 816 Direct expense................. 161 317 612 785 809 771 Marketing and licensing........ 202 254 300 243 375 452 Research and development....... 643 1,083 669 648 379 324 General and administration..... 873 1,605 1,574 1,718 1,511 1,300 Depreciation and amortization................ 96 119 308 434 423 427 Pre-opening expense............ 196 719 490 166 -- 66 Stock-based compensation expense..................... 27 97 267 198 388 685 ------- ------- ------- ------- ------- ------- Total operating expenses............. 2,379 4,509 4,882 4,941 4,668 4,841 ------- ------- ------- ------- ------- ------- Operating loss................... (1,674) (3,673) (3,244) (2,738) (2,454) (2,886) Interest expense, net............ 12 11 40 96 188 984 ------- ------- ------- ------- ------- ------- Net loss....................... (1,686) (3,684) (3,284) (2,834) (2,642) (3,870) Net loss attributable to common stockholders................ $(1,693) $(3,698) $(3,300) $(2,852) $(2,662) $(3,891) ======= ======= ======= ======= ======= ======= AS A PERCENTAGE OF TOTAL REVENUES: Revenues Simulator races................ 82.0% 76.6% 83.2% 80.7% 85.5% 83.8% Merchandise.................... 7.0 11.8 10.1 13.9 10.2 12.1 Other.......................... 11.1 11.6 6.7 5.4 4.3 4.1 ------- ------- ------- ------- ------- ------- Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 Operating expenses Cost of revenue................ 25.7 37.7 40.4 34.0 35.4 41.7 Direct expense................. 22.8 37.9 37.4 35.6 36.5 39.4 Marketing and licensing........ 28.7 30.4 18.3 11.0 16.9 23.1 Research and development 91.2 129.5 40.8 29.4 17.1 16.6 General and administration..... 123.8 192.0 96.1 78.0 68.2 66.5 Depreciation and amortization................ 13.6 14.2 18.9 19.7 19.1 21.8 Pre-operating expense.......... 27.8 86.0 29.9 7.5 0.0 3.4 Stock-based compensation expense..................... 3.8 11.6 16.3 9.0 17.5 35.0 ------- ------- ------- ------- ------- ------- Total operating expense.............. 337.4 539.4 298.0 224.3 210.9 247.6 ======= ======= ======= ======= ======= ======= Operating loss................... (237.4) (439.4) (198.0) (124.3) (110.09) (147.6) Interest expense, net............ 1.7 1.3 2.4 4.4 8.5 50.3 ------- ------- ------- ------- ------- ------- Net loss....................... (239.1) (440.7) (200.5) (128.6) (119.4) (197.9) Net loss attributable to common stockholders................ (240.1)% (442.3)% (201.5)% (129.5)% (120.2)% (199.0)% ======= ======= ======= ======= ======= =======
29 30 Simulator race revenues increased during the quarters ended August 2, 1998, November 1, 1998 and January 31, 1999 primarily due to the opening of our Woodfield racing center in June 1998, our Dallas Galleria and Irvine Spectrum racing centers in August 1998, and our Palisades racing center in November 1998. Simulator races revenues increased in the quarter ended May 2, 1999 primarily due to our Palisades racing center being in operation for the full three months of the quarter versus only two months in the preceding quarter. Simulator races revenues declined in the quarter ended August 1, 1999 due to a seasonal decrease in mall traffic. Merchandise revenues increased in each of the quarters through the quarter ended January 31, 1999 primarily due to the opening of our racing centers at Woodfield in June 1998, Dallas Galleria and Irvine Spectrum in August 1998 and Palisades in late November 1998. Merchandise revenues also increased in the quarter ended January 31, 1999 due to a seasonal increase in mall traffic during the holiday period. Merchandise revenues declined in the quarters ended May 2, 1999 and August 1, 1999 primarily due to seasonal decreases in mall traffic during the first half of our fiscal year. Other revenues increased in each of the quarters through the quarter ended January 31, 1999 primarily due to increases in group sales as we opened additional racing centers during these periods. Other revenues declined in the quarters ended May 2, 1999 and August 1, 1999 due to seasonal decreases in mall traffic during the first half of our fiscal year. The following is a quarterly comparison of Mall of America's revenues for the last full fiscal quarters, our only racing center that has been open for a substantial period of time. Our revenues for the Mall of America racing center decreased by 1.2% for the quarter ended January 1999 compared to the quarter ended January 1998. Our revenues decreased by 15.0% for the quarter ended April 1999 compared to the quarter ended April 1998. However, included in our revenues for the quarter ended April 1998 was the impact on Mall of America's foot traffic from a state championship sporting event in March 1998. Our revenues decreased by 1.1% for the quarter ended July 1999 to the quarter ended July 1998. We have not included the change in our revenues for the quarter ended October 1998 in comparison to the quarter ended October 1997 since Mall of America was not open for the full quarter ended October 1997. This information for Mall of America is based on a limited history of operations. Accordingly, these results may not be indicative of future results. Moreover, because each retail mall may experience different traffic patterns and seasonal fluctuations, these results may not be indicative of the results we experience at any other racing center. Cost of revenue as a percentage of total revenues increased in the quarter ended August 2, 1998 primarily due to increased labor costs related to the opening of our Woodfield racing center. Cost of revenue decreased as a percentage of total revenues in the quarter ended January 31, 1999 primarily due to a lower ratio of labor costs to total revenues and the sale of higher margin merchandise. Cost of revenue increased in absolute dollars and as a percentage of revenues in the quarter ended August 1, 1999 due to expenses related to the development of our Web site. Direct expense as a percentage of total revenues increased in the quarter ended August 2, 1998 primarily due to increased occupancy costs related to the opening of our Woodfield racing center. Marketing and licensing expense has varied from quarter to quarter due to the timing of various media and other incentive programs. The increase in the first quarter of 1999 is due to the increase in license payments under our agreement with NASCAR. Research and development expense increased in the quarter ended August 2, 1998 due to a one-time technology license expenditure. The decrease in the quarter ended May 2, 1999 is due to a reassignment of certain research and development personnel to systems support and maintenance. General and administration expense increased in the quarter ended August 2, 1998 primarily due to the expenses for management information systems and the production of customer training videos. The decrease in the quarters ended May 2, 1999 and August 1, 1999 resulted primarily from better management of our labor costs. 30 31 LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations primarily from the private placement of debt and equity securities. In the period from November 1, 1994, our date of inception, through fiscal year 1996, we received net proceeds of $1.6 million from the issuance of mandatorily redeemable convertible preferred stock. During fiscal year 1997, we received net proceeds of $107,000 from the issuance of additional series of mandatorily redeemable convertible preferred stock. These proceeds were partially offset by the repayment of capital leases, from working capital uses and from the capital needed to open our first racing center. During fiscal year 1998, we received net proceeds of $12.9 million from the issuance of mandatorily redeemable convertible preferred stock, $1.2 million from the issuance of notes payable and $82,000 from the issuance of common stock. These proceeds were partially offset by repayments of notes payable and capital leases, working capital uses and from the capital needed to open four additional racing centers. During the first half of fiscal year 1999, we have received $9.9 million from the issuance of notes payable, $2.4 million from the issuance of mandatorily redeemable convertible preferred stock and $77,000 from the issuance of common stock. These proceeds have been used for the repayment of notes payable and capital leases, working capital uses and the investment necessary for the development of racing centers we currently have in process. As of August 1, 1999, we had $2.8 million of cash and cash equivalents. Our operating activities used cash of $4.3 million, $6.7 million and $6.6 million in fiscal year 1997, fiscal year 1998 and the twenty-six weeks ended August 1, 1999, respectively. Cash used in operations during fiscal year 1997, fiscal year 1998 and the twenty-six week period ended August 1, 1999 was primarily a result of our net loss, partially offset by depreciation and amortization, stock-based compensation charges, changes in working capital and warrant amortization. Cash used in investing activities in fiscal year 1997, fiscal year 1998 and the twenty-six weeks ended August 1, 1999 was $1.6 million, $6.4 million and $1.0 million, respectively. The investing activities consisted primarily of cash paid for purchases of equipment and leasehold improvements. These investments were partially offset by the proceeds from the sale and leaseback of equipment at our racing centers, such as racing simulators and systems, furniture and fixtures. See also, "Business -- Unit Economics." As of August 1, 1999, we had $2.8 million in cash and cash equivalents. Current maturities of our capital leases as of August 1, 1999 were approximately $1.1 million. We currently anticipate that the net proceeds from this offering will be sufficient to meet our presently anticipated working capital, capital expenditure and business expansion requirements through the first half of 2001. At that time, we believe our business will generate adequate cash from operations to fund working capital and our business expansion needs. However our future capital needs will depend upon numerous factors, including the success of our racing centers and competing technological and market developments. We may be required to raise additional funds through public or private financing, strategic relationships or other arrangements. We cannot guarantee that additional funding, if needed, will be available on terms acceptable to us, or at all. On June 30, 1999, we entered into a secured subordinated convertible note purchase agreement, issuing three convertible subordinated notes in the amounts of $2.3 million, $2.3 million and $1.1 million. The notes accrue interest at 8.5%, payable semiannually beginning July 1, 2000. The notes are due on June 30, 2002. At the option of the holders, the notes convert into shares of our common stock at a conversion price of $15.00 per share. The notes convert automatically if either the price per share in this offering is greater than $15.00 per share or if the price of our common stock exceeds $20.00 per share for any four week period following this offering. If we are involved in an acquisition transaction resulting in all of our stockholders before the transaction owning less than 50% of the voting securities of the surviving entity after the transaction, the holders of these notes may request that we repurchase their notes for 101% of the face amount of the note, plus any unpaid interest accrued on the notes to the date of repurchase. On September 9, 1999, we entered into a second subordinated convertible note and warrant purchase agreement, issuing convertible subordinated notes in the amounts of $2.0 million, $500,000, $500,000, $1.0 million and $1.5 million. We paid each holder a placement fee of one percent of the face value of 31 32 their note. The notes accrue interest at 12.0% per annum, payable on maturity. The notes are due on March 9, 2001. At the option of the note holders, the notes convert into shares of our common stock at a conversion price of $10.00 per share. If we are involved in an acquisition transaction resulting in all of our stockholders before the transaction owning less than 50% of the voting securities of the surviving entity after the transaction, the holders of these notes may request that we repurchase their notes for 101% of the face amount of the note, plus any unpaid interest accrued on the notes to the date of repurchase. Concurrent with the issuance of these notes, we issued warrants to the holders to purchase an aggregate of 68,750 shares of common stock at an exercise price of $10.80 per share. The warrants terminate five years after the date we issued the notes. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We considered the provision of Financial Reporting Release No. 48 "Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments." We had no holdings of derivative financial or commodity instruments at August 1, 1999. However, we are exposed to financial market risks, including changes in interest rates. Our revenue and capital spending is transacted in U.S. dollars. We have had limited funds available for investment other than in our operations. We believe that the fair value of our investment portfolio, if any, or related income would not be significantly impacted by increases or decreases in interest rates due mainly to the short-term nature of our investment portfolio and amount of funds available for investment through August 1, 1999. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Investments and Hedging Activities." The statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. To date, we have not entered into any derivative financial instruments or hedging activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. In June 1997, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for Internally Developed Software." SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use. The impact of adopting SOP 98-1, which is effective for us in fiscal 1999, is not expected to have a significant effect on its financial condition and results of operations. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." This standard requires companies to expense the costs of start-up activities and organization costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning after December 15, 1998. We have expensed the cost of start up activities in the accompanying financial statements as incurred. YEAR 2000 COMPLIANCE We are heavily dependent upon complex computer software and systems for our operations. Many existing computer programs and systems use only two digits to identify a year in the date field. These programs and systems were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at January 1, 2000. State of Readiness We developed almost all of our racing center systems internally and we believe them to be Year 2000 compliant. We have tested the Year 2000 compliance on all of our major racing center systems and 32 33 observed they all continued to function properly. Although we have not tested our credit card processor readiness we believe this risk is nominal due to the fact that most of our business is conducted on a cash basis. In addition, all of our material operating software and our information technology and other systems, including financial and point-of-sale systems and network routers and servers, were developed or are supported by third-party vendors. Most of our third-party vendors have provided written warranties and assurances that the software will not be affected by the change in century. We are currently in the process of obtaining assurances from our remaining third-party vendors. We have been communicating with these third parties to coordinate Year 2000 readiness. The responses we have received to date have indicated that steps are currently being taken to prepare for the year 2000. In addition to the operating systems and software we use directly, our operations are also dependent upon the performance of operating software and systems used by our significant service providers. We have contacted most of our other significant service providers and have obtained written assurances from some of them that the relevant operating software and systems are Year 2000 compliant or will be by the end of the fourth calendar quarter of 1999. We are monitoring the status of all our significant service providers' Year 2000 compliance efforts to minimize the risk of any material adverse effect on our operations resulting from compliance failures. However, we cannot assure you that our service providers have, or will have operating software and systems that are Year 2000 compliant. We have developed contingency plans to be implemented if our efforts to identify and correct Year 2000 problems affecting our operating systems and software are not effective. Depending on the systems and software affected, these plans include: - accelerated replacement of affected equipment or software; - short to medium-term use of backup equipment and software; - increased work hours for our personnel; and - use of contract personnel to correct on an accelerated schedule any Year 2000 problems that arise or to provide manual workarounds for information systems. Our implementation of any of these contingency plans could cause a delay in the delivery of key components required to build and open new racing centers, which could cause our operating results to fluctuate. Costs We have funded our Year 2000 plan from operating cash flows and have not separately accounted for these costs in the past. To date, we have not incurred any material costs related to Year 2000 compliance activities. We do not believe that future costs of remediation will have a material effect on our financial condition or results of operations. Risks The failure of our software or systems to be Year 2000 compliant could prevent us from being able to service and make sales to our customers, could cause users of our Web site to consider alternative Web content and community providers, or could disrupt our financial and management controls and reporting systems. Any such scenario, if not quickly remedied, would materially and adversely affect us. We are also dependent on the Internet and certain T-1 or external ISDN communication systems, which may have risks that cannot be determined yet. To date, we have not identified any significant exposure to Year 2000 problems outside of the information technology issues identified above. 33 34 BUSINESS The following description of our business should be read in conjunction with the information included elsewhere in this prospectus. The description contains forward-looking statements. OVERVIEW We own and operate NASCAR Silicon Motor Speedway racing centers. Through strategic relationships and our proprietary technology, we provide a realistic racing experience that simulates the motion, sights and sounds of an actual NASCAR race. Located in high profile, high traffic retail locations, our racing centers currently have eight, ten, twelve or fourteen race car simulators per location and sell a variety of premium motorsports merchandise. Under a licensing agreement with NASCAR, we have the exclusive right to use the NASCAR name in our simulated racing experience. In addition to our licensing agreement with NASCAR, we have licensing agreements with several NASCAR drivers including Dale Earnhardt, Jeff Gordon, Dale Jarrett, Rusty Wallace and others. To extend our racing experience into the home or office, our Web site, SMSonline.com, currently provides a range of information and services including reservations, race results, standings and other racing center information. As of August 1, 1999, our customers had completed over one million races at our racing centers. INDUSTRY BACKGROUND Growth and Popularity of the Motorsports Industry Motorsports is currently one of the largest and fastest growing spectator sports in the United States. An ESPN poll indicates that more than 80 million people in the United States have an interest in auto racing, while Goodyear reports that more than 17.1 million fans attended an auto racing event in North America during 1998. This compares with 1998 attendance for the National Football League of 15.4 million fans and the National Basketball Association of 21.8 million fans. NASCAR racing is the fastest growing motorsports segment in terms of attendance and media exposure. Attendance at NASCAR Winston Cup events increased 56.7% from 1993 to 1998, and NASCAR now accounts for more than 50% of all auto racing attendance. In recent years, television coverage has increased for NASCAR-related events. According to Nielsen Media Research, NASCAR's events reached over 126 million estimated households in 1998 and are covered by major broadcast and cable television networks. Nielsen Media Research estimated that household viewership of NASCAR's televised Winston Cup events on network television and cable has increased by 20.8% and 40.0%, respectively, from 1993 to 1997. Motorsports coverage is currently provided by broadcast and cable television networks, including ABC, CBS, NBC, ESPN, TBS, TNN and Speedvision, a motorsports cable network, in addition to regional sports networks. NASCAR has announced that it will consolidate all television broadcast rights, currently held individually by each track, for all NASCAR-sanctioned races. We believe this will further increase media exposure for NASCAR events. Large corporate advertisers have recognized the growing popularity of motorsports and the brand-loyalty of motorsports fans. According to Performance Research, NASCAR fans are more sponsor-loyal purchasers than fans of other sports. Accordingly, more than 80 Fortune 500 companies are NASCAR sponsors. The IEG Sponsorship Report indicates that in 1999 corporate sponsors are expected to spend an estimated $1.2 billion, or 24% of all sports sponsorship dollars, on motorsports marketing programs in the United States. We believe that interest in NASCAR sponsorship will continue to grow. The growth and popularity of motorsports is expected to continue, in part due to the recent openings of new speedways in the Los Angeles, Dallas/Ft. Worth and Las Vegas metropolitan areas. Plans for the development of additional speedways have been announced for the Chicago, Denver, Kansas City and New York metropolitan areas. These new speedways are bringing NASCAR and other major motorsports events to new geographic markets that have larger population bases than many of the traditional NASCAR 34 35 venues. We believe that the increased accessibility of major motorsports events in these previously untapped markets will stimulate continued growth in the motorsports industry by creating new racing fans. The Growth of Retail Entertainment Opportunities Retail entertainment includes destinations such as theaters, restaurants, large scale entertainment complexes and other venues that serve customers' demand for unique entertainment experiences. Traditionally, many of these destinations have involved passive activities in which little or no interactivity is required of the participants. However, we believe many consumers are willing to pay a premium for entertainment that provides a level of sophistication and interactivity greater than that which can be achieved at home or through passive entertainment experiences. We believe the most successful retail entertainment formats will: - have a strong brand name identity; - provide an attractive social environment; - offer unique experiences with strong appeal; - draw from foot traffic; and - build repeat business. We believe that retail entertainment has become an integral part of enhancing the overall mall experience. Leading mall owners and developers are continuing to add a significant retail entertainment component to each mall in order to attract destination traffic, appeal to a broader demographic and increase the frequency and extend the duration of visits. As a result, we believe that high quality retail entertainment formats will generally be able to obtain high profile locations within malls under favorable lease terms. The Growth of the Internet and Online Communities The Internet has emerged as a global mass medium, enabling users to access and share information, socialize and conduct business online. International Data Corporation estimates that there were 142 million Internet users worldwide at the end of 1998 and anticipates that the number will increase to approximately 502 million users by the end of 2003. According to Jupiter Communications, the number of U.S. households connected to the Internet is expected to increase from 37% in 1998 to 63% by the end of 2003. Online communities are becoming a popular way for people with similar interests to locate and interact with each other. Communities such as GeoCities, theglobe.com and Xoom.com attract millions of people with similar interests. We believe people tend to visit these sites more frequently and stay longer than at most other types of Web sites because of the content and interactive experience they provide. We also believe companies will increasingly use community-based Web sites to attract and retain customers. We did not record any revenues related to our Web site in our most recent fiscal year. However, we believe that the current growth in the number of Internet users and our efforts to expand our marketing campaign through the enhancement of our Web site may lead to a growth in the use of our Web site by our customers and potentially lead to the generation of Internet revenues. NASCAR SILICON MOTOR SPEEDWAY We believe our NASCAR Silicon Motor Speedway provides a unique entertainment experience. The key factors of our simulated racing experience are: Racing So Real You Can Feel It Our NASCAR Silicon Motor Speedway racing centers offer realistic and interactive simulated NASCAR racing. We provide this authentic racing experience for the customer by simulating the key aspects of a NASCAR event: the race tracks, race cars, sights, sounds and competition. Each of our race 35 36 car simulators has graphics corresponding to a real NASCAR team, allowing our customers to choose from race cars driven by Dale Earnhardt, Jeff Gordon, Dale Jarrett, Rusty Wallace and others. Our race car simulators have motion platforms that move in a variety of different directions, simulating the actual motion of a NASCAR race car. The cockpit of each is nearly identical to that of a NASCAR race car, with the same gauges, gear shift, pedals and steering wheel. Seated in our race car simulator, the driver is surrounded by 135 degrees of video screens and has a video rearview mirror, while the passenger has a dashboard video display which can be easily switched between different views. Our racing centers also include pit areas, grandstands, a track announcer and video displays for spectators. Strong Appeal We design our racing centers to provide a fun, interactive entertainment experience in an environment that is both social and competitive. Our racing centers include pit areas and grandstands designed to offer racers and spectators locations in which to socialize with friends and other competitors. We believe that the social aspects of our racing centers greatly enhance the entertainment value for our customers. In addition to the many individuals and groups that visit our racing centers purely for a fun entertainment experience, many customers view our racing simulation as a competitive sport. Many of our customers cite challenge and competition as primary reasons for returning to our centers. Each racing center has leagues and competitions that appeal to these customers and allow them to compete against other drivers. We believe that by offering a racing experience that is both social and competitive, we will be able to continue to attract new customers and retain a significant base of repeat customers. In fact, since September 1997, we have sold 74% of our races to repeat customers. High Profile Locations To capitalize on our strong appeal, we place our racing centers in high profile, heavy traffic retail locations. We believe our racing centers appeal to destination customers as well as mall traffic that is drawn to our visually and audibly exciting environment. Our racing centers are currently located in the Mall of America in Bloomington (Minneapolis), Minnesota; Dallas Galleria in Dallas, Texas; Woodfield in Schaumburg (Chicago), Illinois; Irvine Spectrum in Irvine, California; Palisades Center in West Nyack, New York; Concord Mills in Charlotte, North Carolina; and Arbor Place and Mall of Georgia, both near Atlanta, Georgia. We believe that it is important to locate in retail locations with characteristics such as strong sales per square foot, state-of-the-art movie theaters, casual dining, high traffic food courts and strong retail tenants. We believe there are many retail entertainment locations such as shopping malls and entertainment centers with high traffic and favorable demographics where we can locate our racing centers. Premium Motorsports Merchandise Each of our racing centers offers high quality, racing-related merchandise. Examples include branded hats, t-shirts and die-cast collectible cars featuring Dale Earnhardt, Jeff Gordon, Dale Jarrett, Rusty Wallace and others. We also offer a variety of NASCAR merchandise and NASCAR Silicon Motor Speedway branded merchandise. SMSonline.com Our Web site is designed to build upon the community of our racing customers and extend our racing experience into the home or office. We provide our customers with an intuitive, easy to use environment through which they can access a range of information and services online including: - Reservations -- Customers are able to book reservations, thereby eliminating possible wait times at our racing centers. - Race results -- Customers are able to get a more detailed version of the race results they receive at the racing centers to further analyze their performance. 36 37 - Standings -- We recognize winners of local and national competitions and provide the standings of ongoing leagues and competitions. - Racing Center Information -- We provide the hours of operations and locations of each racing center, a schedule of events and other information. Key Strategic Relationships We have established strategic relationships with companies and individuals that help us provide a realistic racing simulation, obtain high profile real estate locations and offer NASCAR-themed merchandise. For a more detailed description of the following licenses, see "-- Licensing Agreements." - NASCAR. We have entered into a licensing agreement with NASCAR, under which we have the exclusive right to use the NASCAR name for our simulated racing experience. We use the NASCAR name on our racing center signage, selected merchandise and our Web site. Use of the NASCAR name provides us with immediate name recognition and credibility and increases the authenticity of our racing experience. - NASCAR DRIVERS. We have entered into licensing agreements with several leading NASCAR drivers that provide for scheduled appearances by the drivers at our racing centers. We utilize the driver appearances to create additional excitement at our grand openings and other racing center events. These drivers include Dale Earnhardt, Dale Earnhardt, Jr., Jeff Gordon, Kenny Irwin, Dale Jarrett, Bobby Labonte, Jeremy Mayfield, Rusty Wallace and Michael Waltrip. - TEAM OWNERS AND RACE TRACK OWNERS. We have also established relationships with team owners and two race track owners. These relationships allow us to authentically replicate the look of the team owners' cars and selected tracks in our racing centers and in our racing simulations. In addition to relationships with race track owners Speedway Motorsports and Richmond International Raceway, we have relationships with the following team owners: Dale Earnhardt, Inc., Penske Racing South, Richard Childress Racing, Eastman Kodak Company, Hendrick Motorsports, Roush Racing, Joe Gibbs Racing through Redline Sports Marketing, Wood Brother Racing, JG Motorsports and Robert Yates Racing. - SIMON PROPERTY GROUP, INC. We have a strategic relationship with Simon Investors LLC, whose principals are affiliated with Simon Property Group, Inc. In particular, Simon Property Group has assisted us in site selection for our racing centers and has notified us of available sites from its portfolio of properties. - ACTION PERFORMANCE COMPANIES, INC. We have a strategic relationship with Action Performance Companies, Inc. that provides us with selected merchandise and licensed apparel. This relationship allows us to access all of Action Performance's top product lines including NASCAR-themed merchandise such as t-shirts, hats and die-cast cars. SILICON ENTERTAINMENT STRATEGY Our objective is to be the leading provider of simulated NASCAR racing. We intend to achieve this by: Expanding the Number of Our Racing Centers We plan to accelerate the roll-out of our racing centers, focusing on metropolitan areas throughout the United States with moderate to upper income levels and high population densities that have shown a substantial interest in NASCAR racing. We currently operate eight racing centers and expect to open 20 to 30 additional racing centers over the next 24 months. Of these, we have signed leases for seven sites and are currently negotiating leases for another three. Of these ten sites, five are currently under construction, three are being designed and two are in pre-design. We currently have one 14-simulator racing center, four 12-simulator racing centers, one 10-simulator racing center and two 8-simulator racing centers. In the future, we plan to open an approximately equal 37 38 number of 8-, 10- and 12-simulator racing centers. As market opportunities arise, we plan to open 14-simulator racing centers in selected locations, as we did in Concord Mills, North Carolina. Continuing to Develop SMSonline.com We intend to enhance SMSonline.com and build upon the community of our racing customers by providing online opportunities to discuss our competitions and racing experiences and by offering NASCAR driver testimonials and customer endorsements of our racing experience. We also intend to offer our customers who purchase our proprietary software and subscribe to our online services, the ability, from a personal computer, to: - download replays of races; - customize their car set-up; - view live racing at the racing centers; and - race against customers at the racing centers. Continuing to Enhance Our Racing Experience We have spent approximately $6.7 million since the beginning of fiscal year 1996 developing and refining our technology and we expect to spend approximately $1.5 to $2.0 million per year continuing to develop our technology. In particular, we are working on projects that add features to our racing experience and extend it to the Internet. Some of these projects currently under development are: - customized car set-up in our racing centers and on SMSonline.com; - real-time racing between multiple racing centers; - incorporation of additional race tracks when licensed; - sale of replays of races on videotapes or through a video download on SMSonline.com; - instant replays of races; and - communication during a race between drivers and racing center spectators. Leveraging Strategic and Working Relationships We intend to continue to leverage our key relationships with NASCAR, NASCAR drivers, team owners, race track owners, Simon Property Group and Action Performance Companies to help us provide a realistic racing simulation, secure high profile real estate locations and offer NASCAR-themed merchandise. We intend to continue to leverage our relationship with NASCAR. In particular, we expect NASCAR to continue to incorporate the NASCAR Silicon Motor Speedway name into selected marketing promotions. We also intend to leverage our relationship with NASCAR to gain exposure on various motorsports-related television programming, and to enter into sponsorship agreements with selected NASCAR sponsors. We intend to continue to leverage our relationships with NASCAR drivers, team owners and race track owners to incorporate additional drivers, cars and tracks into our racing experience and instructional and promotional materials. We also plan to continue the use of driver appearances to generate additional business and media coverage at our racing centers. We intend to use our team of NASCAR drivers to advise us on enhancing our technology to ensure authentic simulator handling and a realistic racing experience. We believe that relationships with key mall property owners such as Simon Property Group, The Mills Corporation, General Growth Properties and Pyramid Management Group will offer us opportunities 38 39 to continue to secure attractive racing center sites. We intend to become involved at an early stage in the development of new malls so that the design of our sites will be incorporated into these malls. We also believe that our continued relationships with merchandise suppliers such as Action Performance will help us to improve merchandise selection and sales. OUR RACING EXPERIENCE After buying a ticket for between $7.00 and $8.50 and reserving a race time, a customer goes to our training room and is shown, via video presentation, the basics of racing in our race car simulators by our team of leading NASCAR drivers. After training, each customer races for approximately six minutes on a simulated race track, such as Atlanta Motor Speedway, Lowes Motor Speedway (Charlotte) and Richmond International Raceway. The race is a real-time interactive experience where our customers compete in a field of 32 cars against each other and computer-generated cars, known as drones. Actions taken by any driver impact the racing environment of the other drivers. We offer each driver the opportunity to have a crew member in the passenger seat who can use a video screen in the dashboard to assist the driver by spotting other race cars and following the standings. After the race, our customers meet in the winner's circle to receive their race results sheet that includes personalized information on individual lap time, speeds in the corners, finishing order and other important data. Our racers often talk about the race and compare their statistics with other drivers, which leads to significant interaction among the racers and spectators. This interaction and competition among the drivers, crew and spectators as well as the challenge of improving upon their race results are key factors causing many customers to visit our centers repeatedly. Our racing centers also are designed to draw potential customers into our centers and to turn them into participating racers. Our racing centers offer a spectator area including grandstands from which spectators can view races on large video screens placed throughout the racing center that display various statistics and views of the race. We believe that the visual and audio stimulation is important in drawing mall traffic into our centers and in turning potential customers in the spectator areas into participating racers. LOCATIONS The following table summarizes our existing and planned locations:
NUMBER OF SQUARE RACE CAR EXISTING LOCATIONS CITY FOOTAGE SIMULATORS OPENING DATE TYPE OF SITE ------------------ ---- ------- ---------- -------------- ------------------------ Mall of America.......... Bloomington (Minneapolis), MN 5,899 12 August 1997 Super Regional Mall Woodfield................ Schaumburg (Chicago), IL 6,111 12 June 1998 Regional Mall Dallas Galleria.......... Dallas, TX 6,651 8 August 1998 Regional Mall Irvine Spectrum.......... Irvine, CA 5,218 8 August 1998 Entertainment Center Palisades Center......... West Nyack, NY 5,700 12 November 1998 Super Regional Mall Concord Mills............ Charlotte, NC 7,865 14 September 1999 Value Entertainment Mall Arbor Place.............. Douglasville (Atlanta), GA 5,055 10 October 1999 Super Regional Mall Mall of Georgia.......... Buford (Atlanta), GA 5,895 12 October 1999 Super Regional Mall
39 40
NUMBER OF SQUARE RACE CAR PLANNED LOCATIONS CITY FOOTAGE SIMULATORS STATUS(1) TYPE OF SITE ----------------- ---- ------- ---------- -------------- ------------------------ Katy Mills............... Katy (Houston), TX 6,172 12 Construction Value Entertainment Mall Rivertown Crossings...... Grand Rapids, MI 6,100 10 Construction Super Regional Mall Carousel Mall............ Syracuse, NY 4,597 8 Construction Super Regional Mall Walden Galleria.......... Buffalo, NY 4,124 8 Construction Super Regional Mall Universal CityWalk....... Universal City (Los Angeles), CA 5,000 12 Construction Theme Park/ Entertainment Center Crossgates Mall.......... Albany, NY 4,167 8 Design Super Regional Mall Riverchase Galleria...... Birmingham, AL 6,188 10 Design Regional Mall Opry Mills............... Nashville, TN 6,007 12 Design Value Entertainment Mall Peabody Place............ Memphis, TN 6,000 12 Pre-Design Entertainment Center Arundel Mills............ Baltimore, MD 5,500 12 Pre-Design Value Entertainment Mall
- ------------------------- (1) In some instances, construction or design may begin on a site prior to our signing a definitive lease agreement. For our planned location at Peabody Place, we have signed a definitive lease, but we have not yet begun design. UNIT ECONOMICS As of August 1, 1999, we had five racing centers open, each with a limited history of operations, and we opened three additional racing centers after August 1, 1999. We opened our first racing center in August 1997 and our most recent racing center in October 1999. Accordingly, we have a limited amount of historical financial data to analyze and evaluate their performances. Of our eight existing racing centers, only Mall of America and Woodfield are 12-simulator racing centers that have been open for longer than a year. We recently reduced the number of race car simulators from fourteen to eight at our Dallas Galleria racing center and from twelve to eight at our Irvine Spectrum racing center. These reductions were intended to better match the number of simulators at each location with the levels of mall traffic. Total revenues for our Dallas Galleria and Irvine Spectrum racing centers averaged $1.3 million in the twelve month period ended August 29, 1999. Our Palisades Center racing center is a 12-simulator racing center that has been opened for less than a year. In the twenty-six week period ended August 1, 1999, total revenues at this racing center were $931,000. In the twelve month period ended August 1, 1999, combined average operating performance for the Mall of America and Woodfield racing centers is shown in the following table:
AVERAGE PER CENTER FOR MALL OF AMERICA AND WOODFIELD ---------------------- (DOLLARS IN THOUSANDS) Total revenues.............................................. $2,073 Profit contribution(1)...................................... $ 400 Profit contribution margin.................................. 19.3% Earnings before interest, taxes, depreciation and amortization(2)........................................... $ 638 Earnings before interest, taxes, depreciation and amortization margin....................................... 30.8% Initial investment (including build-out costs, pre-opening expense and initial merchandise inventory)................ $2,129 Payback (in years)(3)....................................... 3.3
- --------------- (1) Profit contribution is defined as total revenues less direct expense of the racing center and merchandise cost of goods sold. Profit contribution also excludes pre-opening expenses. (2) Earnings before interest, taxes, depreciation and amortization excludes pre-opening expenses and is a measure that does not conform to generally accepted accounting principles. Not all companies calculate this number in the same manner and the manner as presented above may not be comparable to similarly defined measures presented by other companies. 40 41 (3) Payback is defined as the total initial cash investment of opening a racing center divided by the earnings before interest, taxes, depreciation and amortization in the twelve months ended August 1, 1999. The information presented above is historical and not necessarily indicative of future results. In addition to the factors discussed elsewhere in this prospectus, including "Risk Factors," in evaluating this information you should consider that of our first five racing centers, only Mall of America had total revenues in excess of the average total revenues shown above. In addition, our Mall of America and Woodfield racing centers have 12 simulators each, while our planned racing centers will have approximately equal numbers of 8-, 10- and 12-simulator racing centers. As market opportunities arise, we plan to open 14-simulator racing centers in selected locations. No assurance can be given that the profit contribution amounts, margins and other measures of profitability for the Mall of America and Woodfield racing centers are representative of results to be obtained by any other racing centers or for us on an overall basis. Since the opening of our initial racing centers, we believe our site selection methodology has been improved and is considerably more research-based than in the past. We determine the market potential and size of each racing center based on location and traffic analysis and through the use of a site selection model developed by Thompson & Associates. Based on this site selection methodology, we believe we are now better able to match the revenue potential of a new market with the number of simulators placed in a new racing center. In addition, we believe we have made progress in reducing the initial cost of opening our racing centers primarily by improving their design and planning, as well as our sourcing of equipment, fixtures and inventory. The average initial cost of opening our first four 12-simulator racing centers, including our Irvine Spectrum racing center which was initially built as a 12-simulator racing center, was approximately $2.0 million, including development costs, pre-opening costs and start-up merchandise inventory. The average cost of opening our next three 12-simulator racing centers is expected to be approximately $1.6 million. The cost of opening our 14-simulator Dallas Galleria racing center was approximately $2.3 million. The cost of opening our latest 14-simulator racing center at Concord Mills, North Carolina in September 1999 was approximately $1.8 million. We also expect to incur lower operating expenses at our planned locations than at our existing locations. In particular, we expect lower labor costs from better personnel scheduling, including increased use of part-time employees, and lower rent expense from the realization of more favorable lease terms. We believe that expected improvements in site selection, lower opening costs and lower operating expenses will result in improved financial performance at our planned racing centers. Nevertheless, controlling these costs depends on a number of factors, many of which are beyond our control. Therefore, there can be no assurance that we will be able to achieve these cost reductions. EXPANSION AND SITE SELECTION We continually seek to identify and evaluate new markets and locations for expansion. We expect to open approximately 20 to 30 additional racing centers over the next 24 months. Of these, we have signed leases for seven sites and are in negotiations for another three. Of these ten sites, five are currently under construction, three are being designed and two are in pre-design. We believe that the location of our racing centers is critical to our success and devote significant time and resources to analyzing each prospective site. We primarily perform three types of analysis for each potential site: Location Analysis In general, we target high profile retail locations with strong sales per square foot within metropolitan areas with high interest in NASCAR racing. We place emphasis on locations that balance traditional retail stores with entertainment experiences such as megaplex movie theaters, large scale entertainment complexes and restaurants, which make ideal co-tenants for our racing centers. 41 42 Traffic Analysis Once we have identified a potential location in an existing mall, we perform extensive traffic analysis. We count the mall traffic of our target customer in front of potential sites and compare it to our existing locations. Our data continues to show that at the existing locations, revenue performance correlates positively with the mall traffic of our target customer. Site Selection Model We also use a site selection model developed by Thompson & Associates, a nationally-recognized market research firm. We use this model to predict the number of potential races at a location based on surrounding demographics and additional market data. The model is also used to identify potential target markets. MARKETING AND PROMOTION Our marketing and promotional programs are targeted towards our typical customer who is between the ages of 18 and 45 and who is an auto racing fan and/or plays video games. We intend to build NASCAR Silicon Motor Speedway into a nationally known and respected brand name through a variety of marketing and promotional programs. These programs focus on two areas: New Customers We primarily rely on mall traffic in front of our racing centers and word-of-mouth referrals to attract new customers. Historically, approximately 50% of our new customers visit our racing centers as a result of walking by the storefront, while approximately 37% of our new customers visit as a result of word-of-mouth. We also target potential customers through: - broadcast advertising during NASCAR Winston Cup races; - advertising at local race tracks; and - appearances at our racing centers by a member of our team of NASCAR drivers. We expect to attract strong media interest when we open a racing center in a new geographic market because of our unique concept and the power of the NASCAR brand. Openings that feature a member of our team of NASCAR drivers usually attract substantial television, radio and print media coverage. Customer Retention We have developed targeted programs that focus on customer loyalty. Since September 1997, we have sold 74% of our races to repeat customers. We have the following programs designed to retain customers: - local and national competitions; - promotion of new features and technology; - appearances by NASCAR drivers; - customer competitions against NASCAR drivers; - special discounts and promotions (e.g., buy 2 tickets, get 1 free); - gift certificate promotions; and - comprehensive drivers clubs that allow our customers to compete in simulated racing leagues, receive discounts off our ticket and merchandise prices and make online and phone reservations. 42 43 We intend to collect data from our racing centers and our Web site to analyze the behavior and purchasing cycles of our existing and potential customers in order to more effectively target promotions. Anticipated promotions will include: - new technology introduction campaigns; - special offers tailored to customer behavior or purchasing decisions; - frequent driver rewards; and - special campaigns to existing customers. OPERATIONS AND MANAGEMENT Our ability to manage our racing centers is critical to our success. We strive to maintain a superior level of service and consistency in each of our racing centers through the hiring, training and supervision of personnel. Accordingly, we have established and adhere to high standards relating to personnel performance and maintenance of our racing centers. Our corporate operations management team consists of a Vice President of Operations, regional directors (typically one director for every six to eight centers), directors of group sales, directors of training and directors of merchandise. In addition, staffing levels at each racing center vary according to the size of the location, but typically have the following personnel: a general manager, one or two assistant general managers and a supervisor, 20 to 25 full and part-time employees, a technical manager and an assistant technical manager. We provide extensive training programs for both employees and managers. New employees are given a thorough orientation on our policies and procedures and three to five days of training. New managers must complete a four-week training program that covers all aspects of each racing center. LICENSING AGREEMENTS We have entered into numerous licensing agreements with the goal of creating an authentic NASCAR racing experience. Creating an authentic environment is a key to our ability to attract new customers and retain existing customers. We believe that our licensing agreements create a significant barrier to entry for competition. We have relationships with the following: - NASCAR. We have entered into a licensing agreement with NASCAR under which NASCAR receives guaranteed minimum royalties and royalties based on the sale of tickets for our race car simulators and merchandise. Under this agreement, we have the right to use the NASCAR marks and trade dress solely for display in, and promotion of, our racing centers, all subject to certain limitations on the use of the marks and NASCAR's prior approval of such uses. Our license agreement with NASCAR for the use of its image and trademarks extends to December 31, 2005 and is exclusive for a designated category until December 31, 2002, at which time NASCAR has the sole option to renew the exclusive portion of the agreement. The exclusive category of the NASCAR license is "operator assisted, location-based interactive stockcar or stock-truck entertainment experiences that consist of no less than five linked simulator units, with each on a motion-based platform and each allowing a maximum of two people to participate in each individual simulator unit." Additionally, under the license each location must be permanent in nature and in a retail environment. In addition, NASCAR has the right to terminate the agreement upon the occurrence of certain events. For a more detailed description of our NASCAR licensing agreement, see "Risk Factors -- If we fail to maintain our licensing agreement with NASCAR, which is exclusive only for our simulated racing experience and which may be terminated if we default, our ability to provide and enhance our racing experience will be impaired." - NASCAR Drivers. Our licensing agreements with our team of NASCAR drivers generally provide for the NASCAR drivers to give feedback on our race car simulators and allow us to use their names, voices and likenesses for the promotion of our business. All of the agreements also provide 43 44 that the NASCAR drivers will make personal appearances and act as spokespeople for our racing experience. We use these NASCAR driver appearances to promote our racing centers as well as to enhance the racing experience for the customer. The agreements generally provide that the NASCAR drivers are compensated by guaranteed fees and the granting of stock options as consideration for their personal appearances and use of their likenesses. The agreements typically expire four years after execution and may be terminated by either party if the other party commits an illegal or immoral act. In addition, we generally have the right to terminate an agreement if the driver stops racing. Our team of NASCAR drivers includes the following: - - Dale Earnhardt - Kenny Irwin - Jeremy Mayfield - - Dale Earnhardt, Jr. - Dale Jarrett - Rusty Wallace - - Jeff Gordon - Bobby Labonte - Michael Waltrip
- Team Owners. Our licensing agreements with the team owners allow us to use the designs and accompanying trademarks of team cars either as actual simulators, as images on the video screen or simply as computer-generated cars on the video screen. The agreements generally set forth a schedule of fee payments and expire three years after execution. They also typically allow us to terminate an agreement if a particular race car is no longer racing. Some of these agreements are expected to terminate May 31, 2000, unless extended by mutual agreement. The following is a list of teams with which we have licensing agreements: Race Car Simulators
CAR NO. TEAM OWNERS ------- ----------- 1 Dale Earnhardt, Inc. 2 Penske Racing South 3 Richard Childress Racing 4 Eastman Kodak Company 5 Hendrick Motorsports 6 Roush Racing
CAR NO. TEAM OWNERS ------- ----------- 18 Joe Gibbs Racing through Redline Sports Marketing 21 Wood Brother Racing 24 JG Motorsports 28 Robert Yates Racing 88 Robert Yates Racing 99 Roush Racing
Computer-Generated Race Cars
CAR NO. RACE CAR OWNERS - ------- --------------- 22 The Source International 30 Bahari Racing, Inc. 43 Petty Enterprises 55 The Motorsports Decision Group 75 Butch Mock Motorsports 97 Roush Racing through Moore & Cotter
- Race Track Owners. We also have licensing agreements with the following race track owners that allow us to authentically replicate the following tracks through use of the simulators: - Speedway Motorsports, Inc. (all of the Speedway Motorsports, Inc. racing tracks) - Richmond International Raceway These agreements typically expire five years after execution and allow us to terminate the agreement if the track is no longer used for certain types of races. We also plan to obtain licenses for additional tracks in the future. NASCAR and the NASCAR drivers, team owners and race track owners all have approval rights for the use of their marks. 44 45 TECHNOLOGY We have designed and installed state-of-the-art technology at our racing centers. This technology is based on Intel PC systems, graphics engines from 3Dfx Interactive, Inc. and licensed and proprietary software. Our system is inexpensive, modular and easy to upgrade. The technology consists of several integrated components. Central Control System All of the activity at each racing center is monitored or directed by its central control system. This system consists of a Pentium-based control computer and three high-speed communications networks. All racing functions, as well as the entertainment and business functions, are controlled or interconnected here. All systems are orchestrated and synchronized by the central control system to the race schedule. During our normal race schedule, a new race starts every eight minutes. Racing activities such as collision management, drone generation, safety monitoring, generation of the race event stream for use with the entertainment systems and race recording for future Web download are additional functions of the central control system. Racing Activities Network The core simulation technology is contained within the Racing Activities Network. The race car simulators are connected together on a high-speed, low latency network. The three displays in front of each race car simulator are driven by five dedicated 600 MHz Pentium III processor systems that display approximately 1.1 million polygons and over 85 million pixels each second. All of the images are updated sixty times per second. All of the display systems are connected to each race car simulator's individual high-speed Ethernet. The interactivity of our race car simulators is based on the network infrastructure carrying time sensitive data throughout the simulation system, and managed by the central control system. The motion of our race car simulators is created by our acceleration sled, which has a patent pending on its technology, that can simulate acceleration, flat or banked turns and collisions. Similar to the display system, the sled has a very low signal-to-motion response time that significantly reduces the occurrence of simulation motion sickness. The sled is powered by a two horsepower high flow/low pressure hydraulic system. The manner in which each race car simulator handles depends on a proprietary vehicle dynamics model. Our vehicle dynamics model, in combination with quick response times, a nearly full-size race car, 135 degrees of surrounding graphics, working gauges, pedals, gear shifter, roll cage, directional sound and interactivity, provides a realistic driving experience. Our team of NASCAR drivers works with us to confirm the reality of our racing experience. Racing Center Entertainment Systems Network Spectators at a racing center are entertained through our Racing Center Entertainment Systems Network, an audio and video system operating a high-speed Ethernet and displayed on monitors located throughout our racing center. The lighting in the racing center is also controlled by this system. Races are shown on this system with alternating camera angles and audio commentary, much like a NASCAR race telecast. Between races, a variety of content, including music, announcements, prerecorded information on NASCAR related subjects and commentary from our team of drivers is broadcast over this system. This patent-pending system also controls storefront video attractions, crew table displays and post-race replay in our Winner's Circle. In the Winner's Circle, our system displays the last few laps completed by the winner and also provides a ceremony for the top driver while others receive their race results sheets. Registration and Customer Tracking Network Our Registration and Customer Tracking Network gathers personal data about a customer and stores it in our databases. A unique identifier is given to each customer and then used for all subsequent 45 46 interactions, including Internet reservations. This system also manages the customer training videos shown in our training room before each race. The data collected during each race is archived for later use at one of our racing centers or over the Internet. COMPETITION We face competition from providers of other types of simulated racing and from other providers of retail entertainment. Illusion, Inc. has provided racing equipment to a racing center in Las Vegas, Nevada which uses multiple, interactive, motion-based racing cars. In addition, a racing center in Anaheim, California operates under the name "Penske Racing Center," which uses equipment similar to that used by Illusion, Inc. Each of these companies uses simulated "open wheel" (Formula One or Indy type) race cars. Although neither of these competitors has undertaken a broad geographic expansion, they may do so in the future. We may face direct competition in the future from these or other operators of simulated racing entertainment products. Our racing centers also face indirect competition from other retail entertainment providers, including interactive games, movie theaters, video arcades and theme restaurants. We also compete with retail entertainment providers and other retail stores for high profile locations within retail centers for our racing centers. We believe the primary competitive factors in attracting customers to our racing centers are the quality of the experience, strong appeal, facility location, pricing and customer convenience. While we believe our racing centers provide an entertainment experience that competes favorably with respect to these factors, most of our competitors, particularly our indirect competitors such as theme restaurants, are operated by well-established companies with greater financial, management, technical and marketing resources than we have. Additionally, some of these providers have greater name recognition than we do and may provide an entertainment alternative that appeals to a broader demographic, which may encompass children and families. By comparison, our core audience is males between the ages of 18 and 45. PROPRIETARY RIGHTS Although our success and ability to compete depend more upon our technical expertise than our proprietary rights, our proprietary technology plays a role in our future success and ability to maintain a competitive stance. We rely on our contractual rights as well as copyright, patent, trademark and trade secret laws to protect our intellectual property. Despite our efforts to protect our intellectual property, a third party could copy or otherwise obtain our proprietary information without authorization, or could develop technology competitive to ours. Our means of protecting rights may not be adequate and our competitors may independently develop similar technology, duplicate our products or design around patents that may be subsequently issued to us or other intellectual property. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States. We may have to resort to litigation to enforce our intellectual property rights, to protect our trade secrets or know-how or to determine their scope, validity or enforceability. Enforcing or defending our proprietary technology could be expensive, could divert our resources and may be unsuccessful. Our protective measures may be inadequate to protect our proprietary rights, and any failure to enforce or protect our rights could diminish the value of our proprietary rights. EMPLOYEES As of August 1, 1999, we had a total of 181 employees. Of those, 6 are in senior management, 4 are in sales and marketing, 47 are in technology, 109 are in operations and 15 are in accounting and administrative positions. We also retain independent contractors to support activities such as product development. Our success depends on our ability to attract and retain qualified, experienced employees and management. None of our employees is represented by a labor union or subject to a collective unit and we have never experienced a work stoppage. We consider our relations with our employees to be good. 46 47 FACILITIES Our headquarters are located in a leased facility in Campbell, California, consisting of approximately 40,000 square feet of office space under a lease expiring in June 2003. We lease an additional 5,000 square feet of warehouse space in San Jose, California. We believe our current facilities will be adequate to meet our needs for the foreseeable future. LEGAL PROCEEDINGS On October 5, 1998, we were served with a summons and complaint for a civil case by Dark Horse Trading Co., Inc. in the United States District Court for the Northern District of Illinois for the alleged infringement of Dark Horse's patents. The complaint sought to enjoin us from the alleged infringement and sought damages as well as treble damages. The complaint focused on our reservation method and not on our core simulation technology. We filed an answer with the same court denying any infringement. We believe that we have meritorious defenses against the alleged claims and intend to defend ourselves vigorously. However, due to the nature of litigation and the fact that discovery is still in its early stages, we cannot determine the possible loss, if any, that may ultimately be incurred either in the context of a trial or as a result of a negotiated settlement. We may also incur substantial legal fees in this matter. After consideration of the nature of the claims and facts relating to the litigation, we believe that the resolution of this matter will not harm our business. However, the results of these proceedings, including any potential settlement, are uncertain and there can be no assurance that they will not harm our business. An unfavorable resolution of this matter could require us to change our reservation method, or alternatively cause us to pay a nominal settlement or license fee, either of which would negatively impact our business. 47 48 MANAGEMENT DIRECTORS AND OFFICERS The following table sets forth certain information regarding our directors and executive officers as of August 1, 1999:
NAME AGE POSITION ---- --- -------- David S. Morse................. 56 Chairman of the Board of Directors, Chief Executive Officer and President Ross C. Mulholland............. 56 Vice President, Finance and Chief Financial Officer Rick L. Moncrief............... 50 Vice President and Chief Technical Officer Lee E. Knowlton................ 37 Vice President, Operations Christopher O. Morse........... 29 Vice President, Marketing and Business Development Russell J. Friend.............. 38 Vice President, Real Estate William Hart(1)................ 59 Director Robert H. Manschot(1).......... 56 Director Christopher S. Besing(2)....... 39 Director Robert V. Cheadle(2)........... 57 Director
- ------------------------- (1) Member of the compensation committee (2) Member of the audit committee David S. Morse is a founder of Silicon Entertainment and has been the Chairman of the Board of Directors since January 1995. Mr. Morse has also served as our President and Chief Executive Officer from January 1997 to June 1997 and from August 1998 to the present. In 1992, Mr. Morse founded Crystal Dynamics, Inc., a developer of games for the 32-bit game market. He served as its Chairman of the board of directors from September 1992 to April 1996 and as its Chief Executive Officer from October 1994 to May 1995. From January 1994 to December 1995, Mr. Morse also served as a partner of Interactive Partners, a venture capital firm. Mr. Morse also founded Silicon Gaming, Inc. in 1993 and served as its Chief Executive Officer from August 1998 to January 1999, Chairman of the board of directors from September 1993 to September 1996 and as a director from September 1993 to May 1999. Mr. Morse received a B.S. from Tufts University and an M.B.A. from the Amos Tuck School at Dartmouth. Mr. Morse's son, Christopher O. Morse, serves as our Vice President, Marketing and Business Development. Ross C. Mulholland has served as our Vice President, Finance and Chief Financial Officer since February 1998 and as our Assistant Secretary since April 1998. From February 1993 to February 1995 and from January 1997 to February 1998, Mr. Mulholland was self-employed as a retail consultant. From February 1995 to January 1997, Mr. Mulholland served as Senior Vice President and Chief Financial Officer of The Nature Company/Discovery Channel Store. Mr. Mulholland received a B.A. and an M.B.A. from Wayne State University. Rick L. Moncrief has served as our Vice President and Chief Technical Officer since February 1995. From March 1977 to February 1995, Mr. Moncrief held various senior positions in technology and technology management, the most recent of which was Director of Applied Research for Time Warner Interactive, Inc. (a.k.a. Atari Games, Inc.). Mr. Moncrief received a B.S.E.E. from the University of Utah. Lee E. Knowlton has served as our Vice President, Operations since April 1997. From April 1994 to March 1997, Mr. Knowlton held various positions at Planet Hollywood, Inc., most recently as Regional Director of Operations. From August 1990 to March 1994, Mr. Knowlton held various positions at TGI Fridays, including the Director of Operations, Northwest/Southwest territories from August 1992 to March 1994. Mr. Knowlton attended West Valley College and majored in Restaurant Management. 48 49 Christopher O. Morse is a founder of Silicon Entertainment and has served as our Vice President, Marketing and Business Development since September 1997. Mr. Morse previously served as our Director of Business Development from July 1996 to August 1997 and as Project Manager from January 1995 to June 1996. From May 1993 to January 1995, Mr. Morse served as an account executive for Crystal Dynamics, Inc. Mr. Morse received a B.A. from the University of California at Berkeley. Mr. Morse's father, David S. Morse, serves as the Chairman of the Board of Directors, Chief Executive Officer and President. Russell J. Friend has served as our Vice President, Real Estate since July 1999. From January 1999 to July 1999, Mr. Friend worked for Blatteis Realty Company, where he served as Vice President and as a consultant to Silicon Entertainment. From August 1998 to December 1998, Mr. Friend served as Managing Partner of Retail Reps, a real estate consulting firm. Prior to that time, from August 1996 to August 1998, Mr. Friend served as Vice President, Real Estate for Sega GameWorks, L.L.C., an entertainment retail venture. From September 1993 to August 1996, Mr. Friend was the Director of Lease Negotiations for the Wolfgang Puck Food Company. Mr. Friend is a member of the International Council of Shopping Centers and the Urban Land Institute. Mr. Friend attended the University of Arizona and majored in Business. William Hart has served as a member of our board of directors since our inception in November 1994. Mr. Hart has served as general partner and managing member of Technology Partners V L.P., a venture capital management firm, since August 1979. Mr. Hart serves on the boards of directors of Trimble Navigation Ltd. and Silicon Gaming, Inc., as well as on the boards of directors of several private companies. Mr. Hart received a B.E. Mgmt. from Rensselaer Polytechnic Institute and an M.B.A. from the Amos Tuck School at Dartmouth. Robert H. Manschot has served as a member of our board of directors since April 1996. Mr. Manschot currently serves as Managing Director and Chairman of the Manschot Investment Group L.L.C. and as Chairman of Seceurop Security Services Group, a privately held emergency services corporation in the United Kingdom. Mr. Manschot also serves as Chief Executive Officer and Chairman of RHEM International Enterprises, Inc. Mr. Manschot served as President and Chief Executive Officer of Rural/Metro Corporation, a publicly held provider of ambulance and fire protection services, from October 1988 until March 1995, after serving as Executive Vice President, Chief Operating Officer and a director since October 1987. Mr. Manschot currently serves as a director of Samoth Capital Corporation, Action Performance Companies, Inc. and DenAmerica Corp., as well as on the boards of directors of several privately held companies. Mr. Manschot received a B.A. from the School for Hospitality Management, The Hague, Netherlands and an M.B.A. from Boston University. Christopher S. Besing has served as a member of our board of directors since June 1999. Mr. Besing has served as the Chief Executive Officer of goracing.com, Inc. since May 1999 and has served as Vice President and Chief Financial Officer of Action Performance Companies, Inc. since January 1994. Prior to joining Action Performance, Mr. Besing held several financial and accounting positions with Orbital Sciences Corporation from September 1986 to December 1993, most recently as Director of Accounting and Controller of OSC's Launch Systems Group in Chandler, Arizona. Mr. Besing serves as a director of goracing.com, Inc. and Action Performance, which is a publicly traded company. Mr. Besing received a B.S. from the American University. Mr. Besing is a Certified Public Accountant. Robert V. Cheadle has served as a member of our board of directors since June 1999. Mr. Cheadle has been self-employed as a financial consultant since June 1998. From October 1983 to June 1998, Mr. Cheadle was a Senior Managing Director at NationsBanc Montgomery Securities and initiated coverage on the motorsports industry. Mr. Cheadle also serves on the board of directors of CornerHardware.com, Inc. Mr. Cheadle received a B.S. from San Jose State University and an M.B.A. from the University of Southern California. 49 50 BOARD COMMITTEES The board of directors has established an audit committee and a compensation committee. The audit committee, which consists of Messrs. Besing and Cheadle, reviews the results and scope of the annual audit and meets with our independent auditors to review our internal accounting policies and procedures. The compensation committee, which consists of Messrs. Hart and Manschot, makes recommendations to the board of directors with respect to our general and specific compensation policies and practices and administers our stock option plans. DIRECTOR COMPENSATION Our outside directors currently do not receive any cash compensation from Silicon Entertainment for their services as members of our board of directors, although we are authorized to pay members for attendance at meetings or a salary in addition to reimbursement for expenses in connection with attendance at meetings. Our non-employee directors receive stock options to purchase 10,000 shares of common stock upon joining the board and stock options to purchase 2,500 shares of common stock each year thereafter. For more detail regarding director compensation and stock ownership, see "-- Stock Option Plans," "Principal Stockholders" and "Transactions with Related Parties." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the compensation committee is currently or has been, at any time since our formation, an officer or employee of Silicon Entertainment. No member of the compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. INDEMNIFICATION We have adopted provisions in our certificate of incorporation, permitted by Delaware General Corporation Law ("Delaware Law"), which provide that our directors shall not be personally liable for monetary damages to us or our stockholders for a violation of the directors' duty to act with care and in the best interests of the stockholders, except for liability: - for acts or omissions that are not in good faith, are deliberately improper or are known to be illegal; - under section 174 of the Delaware Law relating to improper dividends or distributions; or - for any transaction from which the director obtained an improper personal benefit. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. Our bylaws authorize us to indemnify our officers, directors, employees and agents to the extent permitted by the Delaware Law. Section 145 of the Delaware Law empowers us to enter into indemnification agreements with our officers, directors, employees and agents. We have entered into separate indemnification agreements with our directors and executive officers which may in some cases be broader than the specific indemnification provisions contained in the Delaware Law. The indemnification agreements may require us, among other things, to indemnify such executive officers and directors against liabilities that may arise by reason of status or service as directors or executive officers and to advance expenses they spend as a result of any proceeding against them as to which they could be indemnified. At present, there is no material litigation or proceeding pending involving any of our directors, officers, employees or agents of Silicon Entertainment where indemnification will be required or permitted and we are not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. 50 51 EXECUTIVE COMPENSATION The following table summarizes the compensation paid to or earned during the fiscal year ended January 31, 1999 by our current and former Chief Executive Officer and our four other most highly compensated executive officers, each of whose total salary and bonus exceeded $100,000 for services rendered to us in all capacities during such fiscal year. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL ---------------------------- COMPENSATION SECURITIES ------------------ UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION(1) --------------------------- -------- ------- ---------- --------------- David S. Morse.................................. $202,500 $ -- 175,000 $ -- Chairman, Chief Executive Officer and President(2) Lee E. Knowlton................................. 130,833 10,000 35,000 -- Vice President, Operations Rick L. Moncrief................................ 163,125 20,000 35,000 -- Vice President and Chief Technical Officer Christopher O. Morse............................ 97,917 10,000 35,000 -- Vice President, Marketing and Business Development Ross C. Mulholland.............................. 165,000 -- 97,500 16,013 Vice President, Finance and Chief Financial Officer FORMER EXECUTIVE OFFICER: Damon Danielson(2).............................. 108,333 25,000 -- 4,000
- ------------------------- (1) Represents moving and living cost adjustments. (2) Mr. Danielson served as our President and Chief Executive Officer from June 1997 to July 1998. Mr. Morse became our Chief Executive Officer and President effective August 1998. OPTION GRANTS IN LAST FISCAL YEAR The following table contains information about the stock option grants during the fiscal year 1998 to the executive officers described in the first sentence of "Executive Compensation." The table is based on an aggregate of 929,000 options we granted to our employees and consultants during the fiscal year 1998. The exercise price per share of each option was equal to the fair market value of the common stock on the date of grant as determined by the board of directors. These options were granted under our 1996 Stock 51 52 Option Plan and 1998 Executive Stock Option Plan. Such options expire 10 years from the date of grant, or earlier upon termination of employment. See "Stock Option Plans."
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED --------------------------- ANNUAL RATES NUMBER OF % OF OF STOCK SECURITIES TOTAL OPTIONS PRICE APPRECIATION UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -------------------- NAME GRANTED FISCAL YEAR ($/SH) DATE 5% 10% ---- ---------- ------------- ----------- ---------- -------- -------- David S. Morse............... 175,000 18.8% $1.00 08/11/08 $110,057 $278,905 Lee E. Knowlton.............. 35,000 3.8 0.70 06/09/08 15,408 39,047 Rick L. Moncrief............. 35,000 3.8 0.70 06/09/08 15,408 39,047 Christopher O. Morse......... 35,000 3.8 0.70 06/09/08 15,408 39,047 Ross C. Mulholland........... 62,500 6.7 0.15 02/26/08 5,896 14,941 Ross C. Mulholland........... 35,000 3.8 0.70 06/09/08 15,408 39,047 FORMER EXECUTIVE OFFICER: Damon Danielson(1)........... -- -- -- -- -- --
- ------------------------- (1) Mr. Danielson served as our President and Chief Executive Officer from June 1997 to July 1998. Mr. Morse became our Chief Executive Officer and President effective August 1998. Amounts reported in the Potential Realizable Value column above represent hypothetical values that may be realized upon exercise of the options immediately prior to the expiration of their term, assuming that the stock price on the date of grant appreciates at the specified annual rates of appreciation, compounded annually over the term of the options. These numbers are calculated based on rules promulgated by the Securities and Exchange Commission. Actual gains, if any, on stock option exercises and common stock holdings are dependent on the time of such exercise and the future performance of our common stock. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The table below provides information about the number and value of options held by the executive officers described above at January 31, 1999.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL YEAR END(1) OPTIONS AT FISCAL YEAR END(3) --------------------------------- --------------------------------- NAME EXERCISABLE(2) UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE ---- -------------- ------------- -------------- ------------- David S. Morse........... 175,000 -- $ -- $ -- Lee E. Knowlton.......... 95,000 -- 61,500 -- Rick L. Moncrief......... 70,000 -- 40,250 -- Christopher O. Morse..... 55,000 -- 27,500 -- Ross C. Mulholland....... 97,500 -- 53,125 -- FORMER EXECUTIVE OFFICER: Damon Danielson(4)....... -- -- -- --
- ------------------------- (1) All options were granted under our 1996 Stock Option Plan and 1998 Executive Stock Option Plan. These options vest over four years and otherwise generally conform to the terms of the option plans. (2) All stock options granted under our stock option plans are immediately exercisable. We have rights to repurchase unvested shares in the event of early termination of employment. These rights lapse over time as options become vested. (3) Calculated on the basis of the fair market value of our common stock of $1.00 per share on January 31, 1999, as determined by our board of directors, minus the applicable exercise price. 52 53 (4) Mr. Danielson served as our President and Chief Executive Officer from June 1997 to July 1998. Mr. Morse became our Chief Executive Officer and President effective August 1998. STOCK OPTION PLANS 1996 Stock Option Plan Our 1996 Stock Option Plan (the "1996 Plan") was approved by the board of directors in October 1996, subsequently approved by our stockholders and amended in 1997 to increase the share reserve. The 1996 Plan provides for the grant of incentive stock options within the meaning of section 422 of the Internal Revenue Code of 1986, as amended (the "Code") to employees and for grants of nonstatutory stock options to employees, non-employee directors and consultants. A total of 1,850,000 shares of common stock have been reserved for issuance under the 1996 Plan which amount will automatically be increased on the first day of each of our fiscal years on and after January 1, 2000 by a number of shares equal to 4% of the number of shares of our common stock issued and outstanding on the last day of the preceding fiscal year. Because non-employee directors are eligible to receive grants under the 1996 Plan, we have not adopted a separate plan which provides for the formula grant of stock options to non-employee directors. The 1996 Plan is administered by the board of directors or a committee thereof. Subject to the provisions of the 1996 Plan, the board or committee has the authority to select the persons to whom options are granted and determine the terms of each option, including: - the number of shares of common stock covered by the option; - when the option becomes exercisable; - the per share option exercise price, which in the case of incentive stock options must be at least equal to the fair market value of a share of common stock on the grant date (or 110% of such fair market value for incentive stock options granted to 10% stockholders) and, in the case of nonstatutory stock options, must be at least 85% of the fair market value of a share of common stock on the grant date; and - the duration of the option (which may not exceed ten years, or, with respect to incentive stock options granted to 10% stockholders, five years). Generally, options granted under the 1996 Plan are immediately exercisable, subject to our right to repurchase any unvested shares upon the optionee's termination of service. Options granted under the 1996 Plan generally vest over four years, although the board or committee may specify a different vesting schedule for a particular grant. Options granted under the 1996 Plan are nontransferable other than by will or the laws of descent and distribution. In the event of our change in control, the acquiring or successor corporation may assume or substitute for the outstanding options granted under the 1996 Plan. The outstanding options will terminate to the extent that such options are neither exercised nor assumed or substituted for by the acquiring or successor corporation. As of August 1, 1999, 705,808 shares have been issued upon the exercise of options granted under the 1996 Plan, options to purchase of a total of 585,219 shares at a weighted average exercise price of $2.78 per share were outstanding under the 1996 Plan and, after taking into account 1,979 shares we repurchased, 560,953 shares were available for future grant under the 1996 Plan. 1997 Nonstatutory Stock Option Plan Our 1997 Nonstatutory Stock Option Plan (the "1997 Plan") was approved by the board of directors in July 1997, and was subsequently approved by our stockholders and amended to increase the share reserve. The 1997 Plan provides for the grant of nonstatutory stock options to consultants. A total of 625,000 shares of common stock have been reserved for issuance under the 1997 Plan. 53 54 The 1997 Plan is administered by the board of directors or a committee thereof. Subject to the provisions of the 1997 Plan, the board or committee has the authority to select the persons to whom options are granted and determine the terms of each option, including: - the number of shares of common stock covered by the option; - when the option becomes exercisable; - the per share option exercise price, which must be at least equal to 85% of the fair market value of a share of common stock on the grant date; and - the duration of the option (which may not exceed ten years). Generally, options granted under the 1997 Plan are immediately exercisable, subject to our right to repurchase any unvested shares upon the optionee's termination of service. Options granted under the 1997 Plan generally vest over four years, although the board or committee may specify a different vesting schedule for a particular grant. Options granted under the 1997 Plan are nontransferable other than by will or the laws of descent and distribution. In the event of our change in control, the acquiring or successor corporation may assume or substitute for the outstanding options granted under the 1997 Plan. The outstanding options will terminate to the extent that such options are neither exercised nor assumed or substituted for by the acquiring or successor corporation. As of August 1, 1999, 70,000 shares have been issued upon the exercise of options granted under the 1997 Plan, options to purchase of a total of 270,667 shares at a weighted average exercise price of $0.32 per share were outstanding under the 1997 Plan and 284,331 shares were available for future grant under the 1997 Plan. 1998 Executive Stock Option Plan Our 1998 Executive Stock Option Plan (the "1998 Plan") was approved by the board of directors in June 1998 and was subsequently approved by our stockholders. The 1998 Plan provides for the grant of incentive stock options within the meaning of section 422 of the Code to employees and for grants of nonstatutory stock options to employees, non-employee directors and consultants. A total of 350,000 shares of common stock have been reserved for issuance under the 1998 Plan. The 1998 Plan is administered by the board of directors or a committee thereof. Subject to the provisions of the 1998 Plan, the board or committee has the authority to select the persons to whom options are granted and determine the terms of each option, including: - the number of shares of common stock covered by the option; - when the option becomes exercisable; - the per share option exercise price, which in the case of incentive stock options must be at least equal to the fair market value of a share of common stock on the grant date (or 110% of such fair market value for incentive stock options granted to 10% stockholders) and, in the case of nonstatutory stock options, must be at least 85% of the fair market value of a share of common stock on the grant date; and - the duration of the option (which may not exceed ten years, or, with respect to incentive stock options granted to 10% stockholders, five years). Generally, options granted under the 1998 Plan are immediately exercisable, subject to our right to repurchase any unvested shares upon the optionee's termination of service. Options granted under the 1998 Plan generally vest over four years, although the board or committee may specify a different vesting schedule for a particular grant. Options granted under the 1998 Plan are nontransferable other than by will or the laws of descent and distribution. 54 55 In the event of our change in control, the acquiring or successor corporation may assume or substitute for the outstanding options granted under the 1998 Plan. The outstanding options will terminate to the extent that such options are neither exercised nor assumed or substituted for by the acquiring or successor corporation. As of August 1, 1999, 253,500 shares have been issued upon the exercise of options granted under the 1998 Plan, options to purchase of a total of 86,500 shares at a weighted average exercise price of $1.36 per share were outstanding under the 1998 Plan and 10,000 shares were available for future grant under the 1998 Plan although we do not intend to continue to grant options under this plan. Stock Bonus Plan Our Stock Bonus Plan (the "Bonus Plan") was approved by the board of directors in August 1998 and was subsequently approved by our stockholders. A total of 15,000 shares of common stock has been reserved for issuance under our Bonus Plan. The Bonus Plan provides for the grant of stock bonus awards to employees and does not require any monetary payment by an employee who receives an award. Stock bonus awards are generally granted on a quarterly basis to hourly employees at our racing centers and are fully vested at the time of grant. As of August 1, 1999, 2,413 shares have been granted pursuant to the Bonus Plan, 1,525 shares have been issued pursuant to the Bonus Plan and 12,763 shares were available for future grant under the Bonus Plan. 1999 Employee Stock Purchase Plan A total of 250,000 shares of common stock has been reserved for issuance under our 1999 Employee Stock Purchase Plan (the "Purchase Plan") which amount will automatically be increased on the first day of each of our fiscal years on and after January 1, 2000 by a number of shares equal to the lesser of (i) 50,000 shares or (ii) 2% of the number of shares of our common stock issued and outstanding on the last day of the preceding fiscal year. No shares have been issued under the Purchase Plan as of the effective date of our initial public offering. The Purchase Plan, which is intended to qualify under section 423 of the Code, is administered by the board or by a committee thereof. Our employees (including our officers and employee directors) or employees of any subsidiary designated by our board for participation in the Purchase Plan are eligible to participate in the Purchase Plan if they are customarily employed for more than 20 hours per week and more than five months per year. The Purchase Plan will be implemented by sequential offerings of approximately six months duration, the first of which will commence on the effective date of our initial public offering and will terminate on August 31, 2000. Subsequent offering periods under the Purchase Plan will generally begin on March 1 and September 1 of each year. Shares will be purchased on the last day of each offering period under the Purchase Plan. The board may change the dates or duration of one or more offerings under the Purchase Plan, but no offering may exceed 27 months. The Purchase Plan permits eligible employees to purchase common stock through payroll deductions and the purchase price per share will be equal to 85% of the lower of the fair market value of the common stock on (a) the first day of the offering under the Purchase Plan, or (b) the purchase date. Participants generally may not purchase more than 500 shares on a purchase date or stock having a value (measured at the beginning of the offering under the Purchase Plan) greater than $25,000 in any calendar year. If we were to experience a change in control, our board could accelerate the purchase date of the then current offering period under the Purchase Plan to a date prior to the change in control unless the acquiring or successor corporation assumed or replaced the purchase rights outstanding under the Purchase Plan. 401(K) PLAN We have established a tax-qualified employee savings and retirement plan, or a 401(k) plan, which covers all of our full-time employees who have completed 60 days of service. Under our 401(k) plan, eligible employees may defer up to 20% of their pre-tax earnings, subject to the Internal Revenue Service's 55 56 annual contribution limit. The 401(k) plan permits additional discretionary matching contributions by us on behalf of all participants in the 401(k) plan in such a percentage amount as may be determined annually by the board of directors. To date, we have made no matching contributions. Our 401(k) plan is intended to qualify under section 401 of the Code so that contributions by employees or by us to the 401(k) plan and income earned on plan contributions are not taxable to employees until withdrawn from the 401(k) plan and so that our contributions, if any, will be deductible by us when made. The trustee under the 401(k) plan, at the direction of each participant, invests the assets of the 401(k) plan in any of a number of investment options. EMPLOYMENT AGREEMENTS We routinely deliver written offer letters containing provisions on salary, bonuses, benefits and stock option grants to prospective employees. In addition, we entered into a written employment agreement with Russell Friend, Vice President, Real Estate, in August 1999. The agreement sets forth Mr. Friend's base salary, benefits, bonuses and stock option grant. The agreement provides that if Mr. Friend is terminated without due cause, we will pay Mr. Friend severance pay equal to six months' salary, unless the net fair market value of his vested stock equals or exceeds six months' salary. If the net fair market value of Mr. Friend's vested stock exceeds six months' salary, we have agreed to provide Mr. Friend with sixty days' notice of termination and continue to pay his salary until the termination date. 56 57 TRANSACTIONS WITH RELATED PARTIES Since January 1, 1996, there has not been, nor is there currently, any transaction or series of similar transactions to which we were or are a party in which the amount involved exceeds $60,000 and in which any of our directors, executive officers or holders of more than five percent of our capital stock had or will have a direct or indirect material interest other than (a) agreements which are described where required under the caption "Management" and (b) the transactions described below. SALES OF STOCK TO DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS The following directors, executive officers, holders of more than 5% of a class of voting securities and members of each such person's immediate families purchased shares of our Series A Preferred Stock, Series B Preferred Stock, or Series C Preferred Stock:
SERIES A SERIES B SERIES C PURCHASER PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK --------- --------------- --------------- --------------- NAMED EXECUTIVE OFFICERS AND DIRECTORS David S. Morse............................... -- 99,628 -- Rick L. Moncrief............................. -- 38,802 -- Christopher S. Besing........................ -- 2,500 8,334 Robert V. Cheadle............................ -- -- 41,667 Robert H. Manschot........................... -- 6,667 333,333 5% STOCKHOLDERS Technology Partners Fund V L.P............... 1,633,334 605,521 293,837
In February 1996, we sold 1,633,334 shares of our Series A Preferred Stock to Technology Partners Fund V L.P. for $0.60 per share, for an aggregate purchase price of approximately $980,000. From May 1996 through May 1997, we sold an aggregate of 2,769,016 shares of our Series B Preferred Stock to various investors for $1.50 per share, for an aggregate purchase price of $4,153,524. Of such $4,153,524 aggregate purchase price, $2,452,037 was applied towards the payment of principal and interest under notes and other indebtedness payable to the investors. During the period beginning March 1997 through November 1997, we issued an aggregate of $5,258,000 in convertible subordinated promissory notes to various existing investors, all of which converted into Series C Preferred Stock at or around the first closing of the sale of our Series C Preferred Stock. Concurrent with the issuance of these notes, we also issued warrants to purchase approximately 232,584 shares of our Series C Preferred Stock to such note holders at a price per share equal to the price of the Series C Preferred Stock. All of these warrants are expected to be exercised in connection with the closing of this offering. From December 1997 through July 1999, we sold an aggregate of 3,485,449 shares of Series C Preferred Stock at a price of $6.00 per share, for an aggregate purchase price of $20,912,676. Of such $20,912,676 aggregate purchase price, $5,264,000 was applied towards the payment of principal and interest under notes and other indebtedness payable to the investors. On February 7, 1996, we entered into a promissory note and warrant agreement with RPM International Investments, GbR, of which Mr. Manschot is the President and Chief Executive Officer, in the amount of $150,000, which gives RPM a warrant to purchase 50,000 shares of our common stock at a price of $1.50 per share. This note accrued interest at the rate of 8% per annum. We paid this promissory note in May 1996. On April 12, 1996, we issued a convertible demand note to Technology Partners Fund V L.P., a 5% stockholder, in the amount of $200,000. This note accrued interest at the rate of 8% and was subsequently converted into 136,722 shares of Series B Preferred Stock in May 1996. 57 58 From March 2, 1997 to November 19, 1997, in connection with our Series C Preferred Stock financing, we issued warrants to purchase 108,750 shares of our Series C Preferred Stock to Technology Partners Fund V L.P. at an exercise price of $6.00 per share. See the notes to the table of beneficial ownership in "Principal Stockholders" for information relating to the beneficial ownership of such shares. LOAN TO EXECUTIVE OFFICER On April 30, 1999, we loaned $175,000 to David S. Morse, the Chairman of the Board of Directors, Chief Executive Officer and President, secured by a promissory note and pledge agreement, in connection with his exercise of options to purchase 175,000 shares of our common stock at an exercise price of $1.00 per share, a portion of which is subject to a right of repurchase in our favor. This note accrues interest at the rate of 6% per annum and is due on April 1, 2004. LOAN FROM EXECUTIVE OFFICER On November 23, 1998, David S. Morse loaned us $150,000. This note accrued interest at the rate of 8% per annum and was due on demand. We repaid $50,000 of this loan on January 29, 1999 and the remainder on February 8, 1999. MANAGEMENT SERVICES WITH RELATED PARTY We paid fees of $91,000; $125,000; $203,000; $90,000 and $137,000 during fiscal years 1997, 1998, 1999 and the twenty-six week periods ended August 2, 1998 and August 1, 1999, respectively, to a company owned by David S. Morse, our Chairman of the Board of Directors, Chief Executive Officer and President. INDEMNIFICATION We have entered into indemnification agreements with each of our officers and directors containing provisions which may require us, among other things, to indemnify our officers and directors against liabilities that may arise by reasons of their status or service as officers or directors and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. We also intend to execute such agreements with our future directors and executive officers. See "Management -- Indemnification" for a more detailed description of our indemnification agreements. CONFLICT OF INTEREST POLICY We believe that all transactions with affiliates described above were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. Our policy is to require that a majority of the independent and disinterested outside directors on our board of directors approve all future transactions between us and our officers, directors, principal stockholders and their affiliates. We intend that these kinds of transactions will continue to be on terms no less favorable to us than we could obtain from unaffiliated third parties. For a description of other transactions between our affiliates and us, see "Management -- Compensation Committee Interlocks and Insider Participation." 58 59 PRINCIPAL STOCKHOLDERS The following table sets forth certain information concerning the beneficial ownership of the shares of our common stock as of August 1, 1999 and as adjusted to give effect to the sale of 4,500,000 shares of common stock in this offering, assuming (a) conversion of all of our outstanding shares of convertible preferred stock into common stock and (b) no exercise of the underwriters' over-allotment option, by: - each person who is known by us to beneficially own 5% or more of the outstanding shares of our common stock; - each executive officer listed in the Summary Compensation Table; - each of our directors; and - all of our executive officers and directors as a group. Percentage of ownership prior to the offering is based on 10,703,355 shares outstanding on August 1, 1999, excluding an aggregate of 813,659 shares subject to outstanding warrants to purchase common stock or convertible preferred stock, 1,105,598 shares subject to outstanding options and shares underlying approximately $5.7 million in outstanding promissory notes. Percentage of ownership after the offering is based on 15,203,355 shares outstanding assuming no exercise of the underwriters' over-allotment option. The number and percentage of shares beneficially owned are determined in accordance with rules and regulations of the Securities and Exchange Commission. All shares of common stock underlying options are immediately exercisable with all unvested shares of common stock being subject to a right of repurchase in our favor which lapses over time in the event of early termination. Shares of common stock underlying options currently exercisable or exercisable within 60 days after August 1, 1999 are deemed outstanding for the purpose of computing the number of shares beneficially owned and the percentage ownership of the person holding these options but are not deemed outstanding for computing the percentage ownership of any other person. Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each stockholder identified in the table possesses sole voting and investment power with respect to all shares of common stock shown as beneficially owned by that stockholder. Unless otherwise indicated, the address of each listed stockholder is c/o Silicon Entertainment, 210 Hacienda Avenue, Campbell, CA 95008.
PERCENTAGE OF SHARES BENEFICIALLY OWNED NUMBER OF SHARES -------------------- NAME AND ADDRESS BENEFICIALLY BEFORE AFTER OF BENEFICIAL OWNER OWNED OFFERING OFFERING ------------------- ---------------- -------- -------- NAMED EXECUTIVE OFFICERS AND DIRECTORS David S. Morse(1)................................. 791,145 7.3% 5.2% Lee E. Knowlton(2)................................ 95,000 * * Rick L. Moncrief(3)............................... 345,302 3.2 2.3 Christopher O. Morse(4)........................... 145,000 1.4 1.0 Ross C. Mulholland(5)............................. 97,500 * * Damon Danielson................................... 109,375 1.0 * William Hart(6)................................... 2,808,942 25.9 18.3 Robert H. Manschot(7)............................. 754,956 7.0 4.9 Christopher S. Besing(8).......................... 207,501 1.9 1.4 Robert V. Cheadle(9).............................. 51,667 * * 5% STOCKHOLDERS Technology Partners Fund V L.P.(10)............... 2,808,942 25.9 18.3 Attn: William Hart 1550 Tiburon Blvd., Suite A Belvedere, CA 94920 ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP (10 persons)(11)................................ 5,339,512 47.5 33.9
- ------------------------- * Less than 1%. 59 60 (1) Includes (i) 697,128 shares registered in the name of the Morse Family Trust, of which Mr. Morse is a trustee, of which 127,604 shares are subject to a right of repurchase in our favor which lapses over time, (ii) 75,000 shares subject to a fully-vested option held by Mr. Morse and (iii) 19,017 shares subject to warrants held by Morse & Co., of which Mr. Morse is the owner, exercisable within 60 days of August 1, 1999. The warrants are expected to be exercised upon the closing of this offering. (2) Includes (i) 26,729 shares subject to a right of repurchase in our favor which lapses over time and (ii) 22,750 shares subject to immediately exercisable options subject to our right of repurchase. (3) Includes (i) 38,021 shares subject to a right of repurchase in our favor which lapses over time, (ii) 26,250 shares subject to immediately exercisable options held by Mr. Moncrief subject to our right of repurchase and (iii) 1,500 shares subject to an immediately exercisable option held by Carrie Moncrief, Mr. Moncrief's wife, subject to our right of repurchase. (4) Includes 33,021 shares subject to a right of repurchase in our favor which lapses over time. (5) Includes (i) 37,761 shares subject to a right of repurchase in our favor which lapses over time, and (ii) 35,000 shares subject to an immediately exercisable option, of which 24,063 shares are subject to our right of repurchase. (6) Includes (i) 108,750 shares subject to warrants registered in the name of Technology Partners Fund V, L.P. ("Technology Partners"), of which Mr. Hart is the general and managing partner, exercisable within 60 days at August 1, 1999 and (ii) 5,000 shares subject to a fully vested option held by Technology Partners. Also includes 12,500 shares subject to fully-vested options held by TPW Management V, L.P., the general partner of Technology Partners and a venture capital fund of which Mr. Hart is a general partner. The warrants are expected to be exercised upon the closing of this offering. (7) Includes (i) 333,333 shares registered in the name of the Manschot Opportunity Fund ("Manschot Fund"), of which Mr. Manschot is the managing director and (ii) 22,500 shares subject to warrants held by Manschot Fund exercisable within 60 days of August 1, 1999. Also includes (i) 166,373 shares registered in the name of RPM International Investments, GbR, of which Mr. Manschot is the President and Chief Executive Officer and (ii) 60,417 shares subject to warrants held by RPM International GbR exercisable within 60 days of August 1, 1999. Also includes (i) 57,500 shares subject to warrants held by Mr. Manschot exercisable within 60 days of August 1, 1999 and (ii) 7,500 shares subject to a fully-vested option held by Mr. Manschot. The warrants are expected to be exercised upon closing of this offering. (8) Includes (i) 166,667 shares registered in the name to Action Performance Companies, of which Mr. Besing is a director and (ii) 20,000 shares subject to warrants held by Action Performance Companies exercisable within 60 days of August 1, 1999. Also includes 10,000 shares subject to a fully-vested option held by Mr. Besing. The warrants are expected to be exercised upon the closing of this offering. (9) Includes 10,000 shares subject to a fully-vested option. Also includes 41,667 shares registered in the name of The Robert Cheadle Trust, of which Mr. Cheadle is the trustee. (10) All shares listed are registered in the name of Technology Partners and include (i) 108,750 shares subject to warrants exercisable within 60 days of August 1, 1999 and (ii) 5,000 shares subject to a fully-vested option. Also includes 12,500 shares subject to fully-vested options held by TPW Management V, L.P., the general partner of Technology Partners. The warrants are expected to be exercised upon the closing of this offering. (11) Includes (i) 375,199 shares subject to a right of repurchase in our favor which lapses over time, (ii) 288,184 shares subject to warrants exercisable within 60 days of August 1, 1999 and (iii) 243,000 shares subject to options, each of which is exercisable within 60 days of August 1, 1999. The warrants are expected to be exercised upon the closing of this offering. 60 61 DESCRIPTION OF CAPITAL STOCK GENERAL Our authorized capital stock consists of 100,000,000 shares of common stock, par value $0.001 per share and 500,000 shares of preferred stock, par value $0.001 per share. Each outstanding share of convertible preferred stock will be automatically converted into one share of common stock upon the closing of this offering. Upon the conversion, the convertible preferred stock will be canceled and retired. The following summary of our common stock and preferred stock is not complete and a full understanding requires a review of our certificate of incorporation and bylaws that are included as exhibits to this registration statement of which this prospectus is a part and applicable laws. COMMON STOCK As of August 1, 1999, we had 10,703,355 shares of common stock outstanding, assuming the conversion of all of our preferred stock into common stock. These shares are held by 290 stockholders of record after giving effect to the conversion of our mandatorily redeemable convertible preferred stock into common. Options to purchase an aggregate of 1,105,598 shares of our common stock were also outstanding. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Subject to preferences that may be applicable to any then outstanding preferred stock, holders of common stock are entitled to receive proportionate dividends, if any, as may be declared by our board of directors out of any available funds. See "Dividend Policy." In the event that we liquidate, dissolve or wind up, holders of our common stock and preferred stock are entitled to share ratably on an as-converted basis in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding preferred stock. Our common stock has no preemptive or conversion rights or other subscription rights and also has no applicable redemptive or sinking fund provisions. We have received full payment for all outstanding shares of our common stock and cannot require our stockholders to make further payments on the stock. In addition, the common stock that will be outstanding upon completion of this offering will have the same status. PREFERRED STOCK The board of directors has the authority, without further action by the stockholders, to issue from time to time the preferred stock in one or more series and to fix the number of shares, designations, preferences, powers and relative, participating, optional or other special rights and the qualifications or restrictions thereof. The preferences, powers, rights and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and purchase funds and other matters. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to holders of common stock or affect adversely the rights and powers, including voting rights, of the holders of common stock and may have the effect of delaying, deferring or preventing our change in control. See Notes to Consolidated Financial Statements for a description of the currently outstanding preferred stock. WARRANTS As of August 1, 1999, we had issued warrants to purchase a total of 378,017 shares of common stock at exercise prices ranging between $1.50 per share and $6.00 per share, 64,001 shares of Series B Preferred Stock at $1.50 per share and 371,641 shares of Series C Preferred Stock at $6.00 per share, on an as- converted basis. These warrants generally terminate upon the sooner to occur of three to five years after the date the warrants were issued or the completion of our initial public offering. Those warrants that do not terminate upon the completion of the offering terminate ten years after the date those warrants were issued. We expect that all of these warrants will be exercised prior to the completion of this offering. Some of these warrants have rights to registration, all of which we expect will be waived in connection with this offering. For a description of these registration rights, see "-- Registration Rights." 61 62 In connection with a subordinated convertible note purchase agreement we entered into in September 1999, we issued warrants to purchase an aggregate of 68,750 shares of common stock at an exercise price of $10.80 per share. The warrants terminate five years after the date they were issued. CONVERTIBLE PROMISSORY NOTES On June 30, 1999, we entered into a secured subordinated convertible note purchase agreement, issuing three convertible subordinated notes in the amounts of $2.3 million, $2.3 million and $1.1 million. The notes accrue interest at 8.5%, payable semiannually beginning 12 months after the date we issued the notes. The notes are due on June 30, 2002. At the option of the holders, the notes convert into shares of our common stock at a conversion price of $15.00 per share. The notes convert automatically if either the price per share in this offering is greater than $15.00 per share or if the price of our common stock exceeds $20.00 per share for any four week period following this offering. If we are involved in an acquisition transaction resulting in all of our stockholders before the transaction owning less than 50% of the voting securities of the surviving entity after the transaction, the holders of these notes may request that we repurchase their notes for 101% of the face amount of the note, plus any unpaid interest accrued on the notes to the date of repurchase. On September 9, 1999, we entered into a second subordinated convertible note purchase agreement, issuing convertible subordinated notes in the amounts of $2.0 million, $500,000, $500,000, $1.0 million and $1.5 million. We paid each holder a placement fee of one percent of the face value of their note. The notes accrue interest at 12.0% per annum, payable on maturity. The notes are due on March 9, 2001. At the option of the note holders, the notes convert into shares of our common stock at a conversion price of $10.00 per share. If we are involved in an acquisition transaction resulting in all of our stockholders before the transaction owning less than 50% of the voting securities of the surviving entity after the transaction, the holders of these notes may request that we repurchase their notes for 101% of the face amount of the note, plus any unpaid interest accrued on the notes to the date of repurchase. Concurrent with the issuance of these notes, we issued warrants to the holders to purchase an aggregate of 68,750 shares of common stock at an exercise price of $10.80 per share. The warrants terminate five years after the date we issued the notes. ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW Certificate of Incorporation and Bylaws Effective upon the closing of this offering, our certificate of incorporation will provide that any action permitted to be taken by our stockholders must be effected at a duly-called annual or special meeting of stockholders and will not be able to be effected by a consent in writing. Our certificate of incorporation will also require the approval of at least two-thirds of the total number of authorized directors in order to adopt, amend or repeal our bylaws. In addition, our certificate of incorporation will similarly permit the stockholders to adopt, amend or repeal our bylaws only upon the affirmative vote of the holders of at least two-thirds of the voting power of all then outstanding shares of stock entitled to vote. Also, a director will be removable by stockholders only for cause. Vacancies on the board of directors resulting from death, resignation, removal or other reason may be filled by a majority of the directors or a majority of the shares entitled to vote. In general, other vacancies are to be filled by a majority of the directors. Lastly, the provisions in our certificate of incorporation described above and other provisions pertaining to the limitation of liability and indemnification of directors will be able to be amended or repealed only with the affirmative vote of the holders of at least two-thirds of the voting power of all then outstanding shares of stock entitled to vote. These provisions may have the effect of deterring hostile takeovers or delaying changes in our control or management, which could have an adverse effect on the market price of our common stock. Upon the closing of this offering, our bylaws will also contain many of the above provisions found in our certificate of incorporation. Our bylaws will not permit stockholders to call a special meeting. In addition, our bylaws will establish an advance notice procedure with regard to matters to be brought before an annual or special meeting of our stockholders, including the election of directors. Business permitted to 62 63 be conducted in any annual meeting or special meeting of stockholders will be limited to business properly brought before the meeting. DELAWARE TAKEOVER STATUTE We are subject to section 203 of the Delaware Law, which, subject to limited exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder, unless: - prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; - upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (1) by persons who are directors and also officers and (2) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or - on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. Section 203 of the Delaware Law defines business combination to include: - any merger or consolidation involving the corporation and the interested stockholder; - any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; - subject to specified exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; - any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or - the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. REGISTRATION RIGHTS After this offering and under a Third Amended and Restated Rights Agreement, as amended on June 30, 1999, the holders of approximately 9,091,601 shares of common stock will have registration rights with respect to their shares. Of these shares, 763,134 are held by certain holders of our common stock, 7,887,799 shares are issuable upon conversion of our convertible preferred stock, 64,001 shares are issuable upon exercise and conversion of warrants to purchase convertible preferred stock, and 376,667 shares are issuable upon conversion of outstanding subordinated convertible promissory notes, or persons to whom some of these holders transferred the common stock. If we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders, holders of shares entitled to registration rights are entitled to notice of and are entitled to include their shares in this registration, at our expense. However, the underwriters of any such offering have the right to limit the number of shares included in such registration. In addition, beginning 180 days after the effective date of 63 64 this offering, holders of at least 40% of the shares entitled to registration rights outstanding may require us to prepare and file a registration statement under the Securities Act, at our expense, covering their shares and we are generally required to use our best efforts to effect such registration. We are not obligated to effect more than two of these stockholder-initiated registrations. Further, holders of shares entitled to registration rights generally may require us to file additional registration statements on Form S-3. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is Boston Equiserve, which can be reached at (201) 222-4099. 64 65 SHARES ELIGIBLE FOR FUTURE SALE Before this offering there has been no public market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect market prices prevailing from time to time. As described below, only a limited number of shares will be available for sale immediately after this offering due to contractual and legal restrictions on resale described below. Nevertheless, sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price at such time and our ability to raise equity capital in the future. - Upon the closing of this offering, we will have outstanding an aggregate of approximately 15,203,355 shares of common stock based on the number of shares of convertible preferred stock and common stock outstanding as of August 1, 1999 and assuming no exercise of the underwriters' over-allotment option. - Of these shares, the 4,500,000 shares of common stock to be sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless these shares are purchased by our "affiliates" as that term is defined in Rule 144 of the Securities Act. - All remaining shares held by our existing stockholders were issued and sold by us in private transactions and are eligible for public sale if registered under the Securities Act or sold in accordance with Rule 144 or Rule 701, which are summarized below. Our directors, executive officers and 5% stockholders will collectively hold an aggregate of approximately 4,470,289 shares of common stock after the offering and after giving effect to conversion of the convertible preferred stock. These stockholders have signed lock-up agreements which prevent them from selling any common stock owned by them for a period of 180 days from the date of this prospectus without the prior written consent of SG Cowen Securities Corporation. When determining whether or not to release shares from the lock-up agreements, SG Cowen Securities Corporation will consider, among other factors, the stockholder's reasons for requesting the release, the number of shares for which the release is being requested and market conditions at the time. As a result of lock-up agreements with SG Cowen Securities Corporation and the provisions of Rule 144 and 701, a total of approximately 9,322,891 outstanding shares of common stock will be eligible for sale in the public market upon expiration of the lock-up period. Resales of approximately 5,775,043 of these shares, including the 4,470,289 held by our directors, executive officers and 5% stockholders, will continue to be subject to the volume and other restrictions of Rule 144 described below, while the remainder will be eligible for resale under Rule 144(k) or Rule 701. In addition, a total of approximately 378,630 shares of common stock not subject to lock-up agreements or other restrictions will be eligible for sale in the public market immediately following completion of this offering. In general, under Rule 144 as currently in effect, a person or persons whose shares are aggregated, including an "affiliate", who has beneficially owned shares for at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of either 1% of the then outstanding shares of common stock or the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. One percent of the outstanding shares of common stock would be 152,033 shares immediately after the offering. Sales under Rule 144 are also subject to prescribed requirements regarding the manner of sale, notice and availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been one of our "affiliates" at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, would be entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice requirements described above. Therefore, unless restricted through lock-up agreements or other restrictions, "144(k) shares" may be sold immediately following completion of this offering without limitations as to volume. In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchased shares from us in connection with a compensatory stock or option 65 66 plan or written employment agreement is eligible to resell such shares 90 days after the effective date of the offering in reliance on Rule 144, by complying with the applicable requirements of Rule 144 other than the holding period conditions. On the date 90 days after the effective date of this offering, options to purchase approximately 26,718 shares of common stock not subject to lock-up agreements with SG Cowen Securities Corporation will be vested and may be sold pursuant to Rule 701. We intend to file one or more registration statements on Form S-8 under the Securities Act to register all of our shares of common stock issued or reserved for future issuance under our stock option and employee stock purchase plans. Based upon the number of shares subject to outstanding options as of August 1, 1999 and currently reserved for issuance under our stock option plans, these registration statements would cover approximately 3,050,000 shares. These registration statements are expected to be filed soon after the date of this prospectus and will automatically become effective upon filing. Accordingly, shares registered under these registration statements will be available for sale in the open market, unless those shares are subject to vesting restrictions imposed by us or the lock-up restrictions described above. Beginning 180 days after this offering, the holders of approximately 9,091,601 shares of common stock will be entitled to certain rights to cause us to register the sale of such shares under the Securities Act. Registration of such shares under the Securities Act would generally result in such shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of such registration. However, shares purchased by our affiliates would not be freely tradable. For a more detailed discussion, see "Management -- Stock Option Plans," "Management -- Stock Option Plans -- 1999 Employee Stock Purchase Plan," and "Description of Capital Stock -- Registration Rights." 66 67 UNDERWRITING Silicon Entertainment and the underwriters named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus. SG Cowen Securities Corporation, CIBC World Markets Corp., J.C. Bradford & Co. and E*OFFERING Corp. are the representatives of the underwriters.
NUMBER NAME OF SHARES ---- ---------- SG Cowen Securities Corporation............................. CIBC World Markets Corp..................................... J.C. Bradford & Co.......................................... E*OFFERING Corp............................................. ---------- Total............................................. 4,500,000 ==========
The underwriting agreement provides that the obligations of the underwriters are conditional and may be terminated at their discretion based on their assessment of the state of the financial markets. The obligations of the underwriters may also be terminated upon the occurrence of the other events specified in the underwriting agreement. The underwriters are severally committed to purchase all of the common stock being offered by us if any shares are purchased, other than those covered by the over-allotment option described below. The underwriters, at our request, have reserved for sale to our employees, friends and family members of employees and to certain other persons, at the initial public offering price, up to five percent of the shares of common stock to be sold in this offering. The number of shares available for sale to the general public will be reduced to the extent that any reserved shares are purchased. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered hereby. The underwriters propose to offer the common stock directly to the public at the public offering price set forth on the cover page of this prospectus. The underwriters may offer the common stock to securities dealers at that price less a concession not in excess of $ per share. Securities dealers may reallow a concession not in excess of $ per share to other dealers. After the shares of the common stock are released for sale to the public, the underwriters may vary the offering price and other selling terms from time to time. We have granted to the underwriters an option to purchase up to 675,000 additional shares of common stock at the public offering price set forth on the cover of this prospectus to cover over-allotments, if any. The option is exercisable for a period of 30 days. If the underwriters exercise their over- allotment option, the underwriters have severally agreed to purchase shares in approximately the same proportion as shown in the table above. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act and to contribute to payments that the underwriters may be required to make in respect of those liabilities. Silicon Entertainment, our directors and executive officers, all principal stockholders and other existing stockholders who hold an aggregate of 10,156,377 shares, together with the holders of options to purchase 991,698 shares of common stock, holders of warrants to purchase 758,684 shares of common stock and holders of 919,444 shares of common stock assuming conversion of subordinated convertible promissory notes, have agreed with the underwriters that for a period of 180 days following the date of this prospectus, without the prior written consent of SG Cowen Securities Corporation, they will not dispose of or hedge any shares of common stock or any securities convertible into or exchangeable for common stock. 67 68 Certain employees of SG Cowen Securities Corporation own 8,000 shares of our common stock and 37,432 shares of our preferred stock and warrants to purchase up to 17,917 shares of our preferred stock. Also, certain employees of CIBC World Markets Corp. and its affiliates own an aggregate of 23,168 shares of our preferred stock. In addition, J.C. Bradford Venture Fund IV, an affiliate of J.C. Bradford & Co., owns 16,667 shares of our common stock. All of these shares were acquired from us on the same terms as other purchases of our capital stock during the periods in which these shares were acquired. The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions, penalty bids and passive market making in accordance with Regulation M under the Securities Exchange Act of 1934. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by such syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions. In passive market making, market makers in the common stock who are underwriters or prospective underwriters may, subject to certain limitations, make bids for or purchases of the common stock until the time, if any, at which a stabilizing bid is made. These stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the common stock to be higher than it would otherwise be in the absence of these transactions. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. The underwriters have advised us that they do not intend to confirm sales in excess of 5% of the common stock offered hereby to any account over which they exercise discretionary authority. Prior to this offering, there has been no public market for the common stock. Consequently, the initial public offering price was determined by negotiations between us and the underwriters. Among the factors considered in these negotiations were prevailing market conditions, the market capitalizations and the stages of development of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, our results of operation in recent periods, the present state of our development and other factors deemed relevant. SG Cowen Securities Corporation acted as the placement agent of a private placement of our Series C Preferred Stock and, in connection with that placement, received a customary fee for its services. We estimate that our out of pocket expenses for this offering will be approximately $1,000,000. LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for Silicon Entertainment by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, San Francisco, California. EXPERTS The financial statements as of February 1, 1998 and January 31, 1999 and for each of the three years in the period ended January 31, 1999 included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers L.L.P., independent accountants, given on the authority of said firm as experts in auditing and accounting. 68 69 WHERE TO FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission (SEC) a registration statement on Form S-1 under the Securities Act with respect to the common stock offered in this prospectus. When used in this prospectus, the term "registration statement" includes amendments to the registration statement. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement. The term "registration statement" means the initial registration statement, including the exhibits, schedules, financial statements and notes filed as part of the registration statement, including any and all amendments. This prospectus omits certain information contained in the registration statement as permitted by the rules and regulations of the SEC. Investors should read the registration statement for further information about us and the common stock we are offering in this prospectus. Statements herein concerning the contents of any contract or other document are not necessarily complete and in each instance, reference is made to the copy of such contract or other document filed with the SEC as an exhibit to the registration statement, each such statement being qualified by and subject to such reference in all respects. With respect to each such document filed with the SEC as an exhibit to the registration statement, reference is made to the exhibit for a more complete description of the matter involved. As a result of this offering, we will become subject to the informational requirements of the Securities Exchange Act of 1934, as amended and in accordance therewith, will file reports and other information with the SEC. Reports, registration statements, proxy statements and other information filed by us with the SEC can be inspected and copied at the public reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the SEC's Regional Offices: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The SEC maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is http://www.sec.gov. We intend to furnish holders of our common stock with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited condensed financial information for the first three quarters of each fiscal year. We intend to furnish such other reports as it may determine or as may be required by law. 69 70 SILICON ENTERTAINMENT, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... F-2 Balance Sheets.............................................. F-3 Statements of Operations.................................... F-4 Statements of Stockholders' Deficit......................... F-5 Statements of Cash Flows.................................... F-6 Notes to Financial Statements............................... F-7
F-1 71 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Silicon Entertainment, Inc. In our opinion, the accompanying balance sheets, and the related statements of operations, of stockholders' deficit and of cash flows present fairly, in all material respects, the financial position of Silicon Entertainment, Inc. at February 1, 1998 and January 31, 1999 and the results of its operations and its cash flows for each of the three years in the period ended January 31, 1999, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP San Jose, California June 7, 1999 (except for Note 11, as to which date is September 9, 1999) - -------------------------------------------------------------------------------- To the Board of Directors and Stockholders of Silicon Entertainment, Inc. The financial statements and notes thereto included herein have been adjusted to give effect to the reincorporation of the Company in the state of Delaware and the recapitalization as described more fully in Note 11 to the financial statements. The above report is in the form that will be signed by PricewaterhouseCoopers LLP upon the effectiveness of such reincorporation and recapitalization assuming that, from June 7, 1999 to the effective date of such reincorporation and recapitalization, no other events shall have occurred that would affect the accompanying financial statements or notes thereto. /s/ PricewaterhouseCoopers LLP San Jose, California June 7, 1999 (except for Note 11, as to which date is September 9, 1999) F-2 72 SILICON ENTERTAINMENT, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA STOCKHOLDERS' EQUITY AT FEBRUARY 1, JANUARY 31, AUGUST 1, AUGUST 1, 1998 1999 1999 1999 ----------- ----------- --------- ------------- (UNAUDITED) ASSETS Currents assets: Cash and cash equivalents............................ $ 129 $ 606 $ 2,778 Inventory............................................ 54 188 295 Prepaid expenses and other........................... 224 1,611 1,310 ------- -------- -------- Total current assets......................... 407 2,405 4,383 Property and equipment, net............................ 2,287 10,322 10,888 Other assets........................................... 71 360 939 ------- -------- -------- Total assets................................. $ 2,765 $ 13,087 $ 16,210 ======= ======== ======== LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Notes payable to related parties.................. $ -- $ 1,111 $ 3,832 Accounts payable.................................. 604 3,962 684 Accrued expenses.................................. 349 1,740 1,723 Current portion of capital leases................. 304 992 1,101 ------- -------- -------- Total current liabilities.................... 1,257 7,805 7,340 Long-term portion of capital leases.................... 434 2,088 1,969 Long-term debt......................................... -- -- 5,054 ------- -------- -------- Total liabilities............................ 1,691 9,893 14,363 ------- -------- -------- Commitments (Notes 4 and 5) Mandatorily redeemable convertible preferred stock, $0.001 par value: Authorized: 20,000, 20,000 and 20,000 shares at February 1, 1998, January 31, 1999 and August 1, 1999 and 500 shares pro-forma; Issued and outstanding: 5,279, 7,481, 7,888 shares at February 1, 1998, January 31, 1999 and August 1, 1999 and no pro-forma shares (Liquidation value: $10,393, $23,602 and $26,047 at February 1, 1998, January 31, 1999 and August 1, 1999).............. 9,200 21,952 24,370 $ -- ------- -------- -------- ------- Stockholders' equity (deficit): Common stock, $.001 par value: Authorized: 40,000, 40,000 and 40,000 shares at February 1, 1998, January 31, 1999 and August 1, 1999 and 100,000 shares pro-forma Issued and outstanding: 1,798, 2,301 and 2,815 shares at February 1, 1998, January 31, 1999 and August 1, 1999 and 15,203 shares pro-forma...... 2 2 3 11 Additional paid-in capital........................... 158 1,733 3,698 28,060 Notes receivable from stockholders................... -- -- (247) (247) Warrants............................................. 1,139 1,379 2,493 2,493 Deferred stock compensation.......................... (76) (1,035) (1,121) (1,121) Accumulated deficit.................................. (9,349) (20,837) (27,349) (27,349) ------- -------- -------- ------- Total stockholders' equity (deficit)......... (8,126) (18,758) (22,523) 1,847 ------- -------- -------- ------- Total liabilities, mandatorily redeemable convertible preferred stock and stockholders' equity (deficit)............. $ 2,765 $ 13,087 $ 16,210 ======= ======== ========
The accompanying notes are an integral part of these financial statements. F-3 73 SILICON ENTERTAINMENT, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
TWENTY-SIX WEEKS YEAR ENDED ENDED ----------------------------------------- ---------------------- FEBRUARY 2, FEBRUARY 1, JANUARY 31, AUGUST 2, AUGUST 1, 1997 1998 1999 1998 1999 ----------- ----------- ----------- --------- --------- (UNAUDITED) REVENUES Simulator races.................... $ 47 $ 892 $ 4,357 $ 1,218 $ 3,532 Merchandise........................ -- 104 620 148 462 Other.............................. -- 56 405 175 175 ------- ------- -------- ------- ------- Total revenues................ 47 1,052 5,382 1,541 4,169 OPERATING EXPENSES Cost of revenue.................... -- 359 1,907 496 1,599 Direct expense..................... -- 264 1,875 478 1,580 Marketing and licensing............ -- 484 999 456 827 Research and development........... 1,142 1,767 3,043 1,726 703 General and administration......... 1,476 2,322 5,770 2,478 2,811 Depreciation and amortization...... 46 232 957 215 850 Pre-opening expense................ -- 571 1,571 915 66 Stock-based compensation expense... -- 22 589 124 1,073 ------- ------- -------- ------- ------- Total operating expenses...... 2,664 6,021 16,711 6,888 9,509 ------- ------- -------- ------- ------- Operating loss....................... (2,617) (4,969) (11,329) (5,347) (5,340) Interest expense..................... 25 223 159 23 1,172 ------- ------- -------- ------- ------- Net loss........................ (2,642) (5,192) (11,488) (5,370) (6,512) Accretion of mandatorily redeemable convertible preferred stock........ -- (8) (55) (21) (41) ------- ------- -------- ------- ------- Net loss attributable to common stockholders........ $(2,642) $(5,200) $(11,543) $(5,391) $(6,553) ======= ======= ======== ======= ======= Basic and diluted net loss per share attributable to common stockholders....................... $ (1.65) $ (3.67) $ (5.85) $ (2.95) $ (2.63) ======= ======= ======== ======= ======= Shares used in computing basic and diluted net loss per share attributable to common stockholders....................... 1,605 1,417 1,973 1,830 2,489 ======= ======= ======== ======= ======= Pro forma basic and diluted net loss per share attributable to common stockholders (unaudited)........... $ (1.36) $ (0.65) ======== ======= Shares used in computing pro forma basic and diluted net loss per share attributable to common stockholders (unaudited)........... 8,459 10,071 ======== =======
The accompanying notes are an integral part of these financial statements. F-4 74 SILICON ENTERTAINMENT, INC. STATEMENTS OF STOCKHOLDERS' DEFICIT (IN THOUSANDS)
NOTE COMMON STOCK ADDITIONAL RECEIVABLE TOTAL --------------- PAID-IN FROM UNEARNED ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL STOCKHOLDERS WARRANTS COMPENSATION DEFICIT DEFICIT ------ ------ ---------- ------------ -------- ------------ ----------- ------------- Balances, February 5, 1996...................... 1,605 $ 2 $ 1 $ -- $ -- $ -- $ (1,515) $ (1,512) Net loss.................... -- -- -- -- -- -- (2,642) (2,642) ----- ------ ------ ----- ------ ------- -------- -------- Balances, February 2, 1997...................... 1,605 2 1 -- -- -- (4,157) (4,154) Accretion of mandatorily redeemable preferred stock..................... -- -- (8) -- -- -- -- (8) Issuance of common stock for cash...................... 5 -- 1 -- -- -- -- 1 Buyback of common stock from founder pursuant to termination in March 1997...................... (252) -- -- -- -- -- -- -- Issuance of common stock for note receivable........... 325 -- 49 -- -- -- -- 49 Issuance of common stock pursuant to exercise of stock options............. 115 -- 17 -- -- -- -- 17 Deferred compensation related to grants of stock options................... -- -- 98 -- -- (98) -- -- Amortization of deferred stock compensation........ -- -- -- -- -- 22 -- 22 Issuance of warrants........ -- -- -- -- 1,139 -- -- 1,139 Net loss.................... -- -- -- -- -- -- (5,192) (5,192) ----- ------ ------ ----- ------ ------- -------- -------- Balances, February 1, 1998...................... 1,798 2 158 -- 1,139 (76) (9,349) (8,126) Accretion of mandatorily redeemable preferred stock..................... -- -- (55) -- -- -- -- (55) Issuance of common stock for cash...................... 39 -- 19 -- -- -- -- 19 Issuance of common stock pursuant to exercise of stock options............. 466 -- 63 -- -- -- -- 63 Buyback of common stock pursuant to termination... (2) -- -- -- -- -- -- -- Deferred compensation related to grants of stock options................... -- -- 1,548 -- -- (1,548) -- -- Amortization of deferred stock compensation........ -- -- -- -- -- 589 -- 589 Issuance of warrants........ -- -- -- -- 240 -- -- 240 Net loss.................... -- -- -- -- -- -- (11,488) (11,488) ----- ------ ------ ----- ------ ------- -------- -------- Balances, January 31, 1999...................... 2,301 2 1,733 -- 1,379 (1,035) (20,837) (18,758) Unaudited: Accretion of mandatorily redeemable preferred stock..................... -- -- (41) -- -- -- -- (41) Issuance of common stock pursuant to exercise of stock options............. 496 1 312 (247) -- -- -- 66 Issuance of stock under Stock Bonus Plan.......... 1 -- -- -- -- -- -- -- Issuance of stock for services.................. 17 -- 11 -- -- -- -- 11 Deferred compensation related to grants of stock options................... -- -- 1,683 -- -- (1,159) -- 524 Amortization of deferred stock compensation........ -- -- -- -- -- 1,073 -- 1,073 Issuance of warrants........ -- -- -- -- 1,114 -- -- 1,114 Net loss.................... -- -- -- -- -- -- (6,512) (6,512) ----- ------ ------ ----- ------ ------- -------- -------- Balances, August 1, 1999 (unaudited)............... 2,815 $ 3 $3,698 $(247) $2,493 $(1,121) $(27,349) $(22,523) ===== ====== ====== ===== ====== ======= ======== ========
The accompanying notes are an integral part of these financial statements. F-5 75 SILICON ENTERTAINMENT, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
TWENTY-SIX WEEKS ENDED ---------------------- FEBRUARY 2, FEBRUARY 1, JANUARY 31, AUGUST 2, AUGUST 1, 1997 1998 1999 1998 1999 ----------- ----------- ----------- --------- --------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss...................................... $(2,642) $(5,192) $(11,488) $(5,370) $(6,512) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............... 46 232 957 215 850 Deferred compensation charge................ -- 22 589 124 1,267 Amortization of warrants.................... -- -- -- -- 818 Changes in assets and liabilities: Prepaid expenses and other assets......... (29) (195) (1,387) (189) 301 Inventories............................... -- (54) (134) (48) (107) Accounts payable.......................... 88 481 3,358 550 (3,278) Accrued expenses.......................... 8 415 1,402 283 103 ------- ------- -------- ------- ------- Net cash used in operating activities........................... (2,529) (4,291) (6,703) (4,435) (6,558) ------- ------- -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets...................... (340) (2,159) (8,992) (3,385) (1,411) Sale of fixed assets.......................... 309 621 2,832 -- 483 Increase in other assets...................... (31) (30) (274) (926) (27) ------- ------- -------- ------- ------- Net cash used in investing activities........................... (62) (1,568) (6,434) (4,311) (955) ------- ------- -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable....... 1,720 5,115 1,150 400 9,890 Repayment of notes payable obligation......... (14) -- (50) (400) (2,229) Repayment of capital lease obligations........ (13) (179) (490) (146) (493) Proceeds from issuance of mandatorily redeemable convertible preferred stock, net of cancellations............................ 1,642 107 12,922 10,828 2,440 Proceeds from issuance of common stock........ -- 66 82 27 77 ------- ------- -------- ------- ------- Net cash provided by financing activities........................... 3,335 5,109 13,614 10,709 9,685 ------- ------- -------- ------- ------- Net increase (decrease) in cash and cash equivalents................................... 744 (750) 477 1,963 2,172 Cash and cash equivalents, beginning of period........................................ 135 879 129 129 606 ------- ------- -------- ------- ------- Cash and cash equivalents, end of period........ $ 879 $ 129 $ 606 $ 2,092 $ 2,778 ======= ======= ======== ======= ======= SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Fixed assets acquired under sales/leaseback arrangements................................ $ 309 $ 621 $ 2,832 $ -- $ 483 ======= ======= ======== ======= ======= Conversion of notes payable to Series A Preferred Stock............................. $ 980 $ -- $ -- $ -- $ -- ======= ======= ======== ======= ======= Conversion of notes payable and interest thereon to Series B preferred stock......... $ 2,344 $ -- $ -- $ -- $ -- ======= ======= ======== ======= ======= Conversion of notes payable and interest thereon to Series C Preferred Stock......... $ -- $ 5,258 $ -- $ -- $ 6 ======= ======= ======== ======= ======= Valuation of warrants issued.................. $ -- $ 1,139 $ 225 $ 225 $ 69 ======= ======= ======== ======= ======= Accretion of Series C Preferred Stock......... $ -- $ -- $ 55 $ 21 $ 41 ======= ======= ======== ======= ======= Cash paid for interest:....................... $ 2 $ 43 $ 173 $ 33 $ -- ======= ======= ======== ======= =======
The accompanying notes are an integral part of these financial statements. F-6 76 SILICON ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 -- NATURE OF BUSINESS: Silicon Entertainment, Inc. (the "Company"), a California corporation, was incorporated in November 1994. The Company owns and operates NASCAR Silicon Motor Speedway racing centers, that provide a racing experience that simulates the motions, sights and sounds of an actual NASCAR race. The Company's fiscal year is a 52/53 week year that ends on the Sunday closest to February 1. Fiscal year references relate to the year that encompasses the majority of months within the twelve month period. Consequently, the Company's fiscal 1996, 1997 and 1998 years encompass the years ended February 2, 1997, February 1, 1998 and January 31, 1999, respectively. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES: 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 amount of assets and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. UNAUDITED INTERIM FINANCIAL STATEMENTS The accompanying balance sheet as of August 1, 1999 and the statements of operations and cash flows for the twenty-six week period ended August 2, 1998 and August 1, 1999 and the statement of stockholders' deficit for the twenty-six week period ended August 1, 1999 are unaudited. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods. The results of operations for the twenty-six week period ended August 1, 1999 are not necessarily indicative of operating results to be expected for the full fiscal year. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. CERTAIN RISKS AND CONCENTRATIONS The Company's services are concentrated in the retail entertainment industry which is highly competitive and rapidly changing. The Company opened its first racing center in August 1997 and has a limited operating history. The Company expects to incur significant losses from operations and its future profitability remains uncertain. The Company also relies on a single product and the demand for the Company's racing centers is uncertain. The Company's success also depends in large part upon the success in identifying sites for its racing centers. Additional financing is required to accomplish the opening of new racing centers and management is in the process of investigating alternative methods of financing. The Company licenses technology that is incorporated into its products from certain third parties. Any significant interruption in the supply or support of any licensed software could adversely affect the Company's sales, unless and until the Company can replace the functionality provided by this licensed software. Because the Company's race car simulators incorporate software developed and maintained by third parties, the Company depends on such third parties to deliver and support reliable products, enhance their current products, develop new products on a timely and cost-effective basis and respond to emerging industry standards and other technological changes. The failure of these third parties to meet these criteria could adversely impact the Company's business. F-7 77 SILICON ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Company licenses certain trademarks and endorsements as part of its strategy. These trademarks and endorsements authorize the Company to incorporate their images and designs into the Company's retail racing centers. Certain agreements contain provisions that allow the licensor to terminate the agreement upon the occurrence of certain events. The Company's business would be materially and adversely affected if the Company's rights under the licensing agreements were diminished or lost. Cash and cash equivalents are invested in deposits with one major bank in the United States. Deposits in this bank may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents. REVENUES AND OPERATING EXPENSES Revenues are generated primarily from the sale of tickets for the Company's race car simulators. The Company also sells racing-related merchandise at its racing centers. Other revenue historically has consisted of group sales, such as parties and corporate events, and accounts for the balance of total revenues. Revenues from the sale of tickets for the Company's race car simulators and group sales are recognized when the customer completes a race. Revenues from the sale of merchandise are recognized at the point of sale. Cost of revenue includes the cost of merchandise sold and direct racing center labor and benefits. Direct expense includes all other expenses incurred directly by a racing center, such as supplies, racing center marketing, maintenance and repair and occupancy. Racing center marketing expense includes the costs of implementing programs such as local media advertising and printing expense. Marketing and licensing expense reflects corporate marketing expenses and corporate licensing costs. Corporate marketing expenses include the cost of developing programs that build the Company's brand as well as customer acquisition and retention programs. Pre-opening expense includes the start-up expenses and other expenses typically incurred during the two-month period prior to the opening of one of the Company's racing centers. Pre-opening expenses include compensation, training, recruiting, relocation, travel, occupancy, supplies and marketing. INVENTORY Inventory, which consists of racing-related merchandise, is stated at the lower of cost (computed using the average cost method which approximates the first-in, first-out method) or market. Provision, when necessary, has been made to reduce excess or obsolete inventory to its net realizable value. FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts of certain of the Company's financial instruments, including cash and cash equivalents, accounts payable and other accrued liabilities approximate fair value due to their short maturities. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of the notes payable approximates fair value. F-8 78 SILICON ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DEPRECIATION AND AMORTIZATION Property and equipment are stated at cost less accumulated depreciation and leasehold amortization. Depreciation and leasehold amortization are calculated using the straight-line method over the estimated useful lives of the assets, as follows: Computer and other equipment................................ 3 years Simulation equipment........................................ 7 years Software.................................................... 3 to 5 years Furniture and fixtures...................................... 5 years Leasehold improvement....................................... Life of lease
LONG LIVED ASSETS The Company evaluates the recoverability of its long lived assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of." SFAS No. 121 requires recognition of impairment of long lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. INCOME TAXES Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. STOCK-BASED COMPENSATION The Company uses the intrinsic value method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for its employee stock options and presents disclosure of pro forma information required under SFAS 123, "Accounting for Stock Based Compensation." RESEARCH AND DEVELOPMENT COSTS Costs incurred in the research and development of new software products are expensed as incurred, including minimum payments made and due to third parties for technology incorporated into the Company's product, until technological feasibility is established. Development costs are capitalized beginning when a product's technological feasibility has been established and ending when the product is available for general release to customers. To date, products and enhancements have generally reached technological feasibility and have been released for incorporation into the Company's product at substantially the same time. NET LOSS PER SHARE AND UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY Basic and diluted net loss per share are computed using the weighted average number of common shares outstanding. Options, warrants, shares subject to repurchase and preferred stock were not included in the computation of diluted net loss per share because the effect would be antidilutive. Unaudited pro forma net loss per share has been computed as described above and also gives effect, even if antidilutive, to common equivalent shares from the mandatorily redeemable convertible preferred stock that will automatically convert upon the closing of the Company's initial public offering (using the F-9 79 SILICON ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) as-if-converted method). If the offering contemplated by this Prospectus is consummated, all of the mandatorily redeemable convertible preferred stock outstanding as of the closing date will automatically be converted into an aggregate of approximately 7,888 shares of common stock based on the shares of convertible preferred stock outstanding at August 1, 1999 (unaudited). The pro forma effect of this conversion of preferred stock is presented on the pro forma balance sheet. A reconciliation of shares used in the calculation of net loss per share and unaudited pro forma net loss per share follows:
TWENTY-SIX WEEK YEAR ENDED PERIOD ENDED ----------------------------------------- ---------------------- FEBRUARY 2, FEBRUARY 1, JANUARY 31, AUGUST 2, AUGUST 1, 1997 1998 1999 1998 1999 ----------- ----------- ----------- --------- --------- (UNAUDITED) Net loss per share, basic and diluted: Net loss attributable to common stockholders.................... $(2,642) $(5,200) $(11,543) $(5,391) $(6,553) ======= ======= ======== ======= ======= Weighted average shares of common stock outstanding............... 1,605 1,421 2,077 1,919 2,558 Less weighted average shares subject to repurchase........... -- (4) (104) (89) (69) ------- ------- -------- ------- ------- Shares used in computing net loss per share, basic and diluted.... 1,605 1,417 1,973 1,830 2,489 ======= ======= ======== ======= ======= Net loss per share, basic and diluted......................... $ (1.65) $ (3.67) $ (5.85) $ (2.95) $ (2.63) ======= ======= ======== ======= ======= Antidilutive options, warrant, shares subject to repurchase and preferred stock not included in loss per share calculations..... 428 1,642 1,896 2,256 1,919 ======= ======= ======== ======= ======= Pro forma net loss per share, basic and diluted: Net loss........................ $(11,543) $(6,553) ======== Shares used in computing net loss per share, basic and diluted....................... 1,973 2,489 Adjustments to reflect the effect of the assumed conversion of weighted average shares of convertible preferred stock outstanding... 6,486 7,582 -------- ------- Shares used in computing pro forma net loss per share, basic and diluted............. $ 8,459 10,071 ======== ------- Pro forma net loss per share, basic and diluted............. $ (1.36) $ (0.65) ======== -------
COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The Company implemented SFAS No. 130 during fiscal 1998 and has restated all prior periods to comply with SFAS No. 130. There was no difference between the Company's net loss applicable to common stockholders and its total comprehensive income for the years ended February 2, 1997, February 1, 1998 and January 31, 1999 and for the twenty-six week periods ended August 2, 1998 and August 1, 1999. F-10 80 SILICON ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) RECENT PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Investments and Hedging Activities." The statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. To date, the Company has not entered into any derivative financial instruments or hedging activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. In June 1997, the American Institute of Certified Public Accountants ("AICPA") issued statement of Position 98-1 ("SOP 98-1"), "Accounting for Internally Developed Software." SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use. The impact of adopting SOP 98-1, which is effective for the Company in fiscal 1999, is not expected to have a significant effect on its financial condition and results of operations. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." This standard requires companies to expense the costs of start-up activities and organization costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The Company has expensed the cost of start up activities in the accompanying financial statements as incurred. NOTE 3 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):
FEBRUARY 1, JANUARY 31, AUGUST 1, 1998 1999 1999 ----------- ----------- ----------- (UNAUDITED) PREPAID AND OTHER ASSETS: Rebate receivable............................... $ 200 $ 974 $ 280 Prepaid rental fees............................. -- 329 1,003 Other........................................... 24 308 27 ------ ------- ------- $ 224 $ 1,611 $ 1,310 ====== ======= ======= FIXED ASSETS: Computer and other equipment.................... $ 209 $ 831 $ 2,202 Simulation equipment............................ 1,786 5,341 5,361 Software........................................ 18 115 247 Furniture and fixtures.......................... 41 530 566 Leasehold improvements.......................... 510 4,782 4,634 ------ ------- ------- 2,564 11,599 13,010 Less accumulated depreciation and amortization................................. (277) (1,277) (2,122) ------ ------- ------- $2,287 $10,322 $10,888 ====== ======= ======= ACCRUED LIABILITIES Sales taxes..................................... $ 31 $ 234 $ 171 Payroll and related expenses.................... 97 236 240 Deferred revenue................................ 144 335 238 License fees.................................... 25 151 256 Professional services........................... 18 445 777 Other........................................... 34 339 41 ------ ------- ------- $ 349 $ 1,740 $ 1,723 ====== ======= =======
F-11 81 SILICON ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- NOTES PAYABLE, LONG TERM DEBT AND RELATED PARTY TRANSACTIONS: Notes payable and long-term debt activity is summarized as follows (in thousands):
FEBRUARY 1, JANUARY 31, AUGUST 1, 1998 1999 1999 ----------- ----------- ----------- (UNAUDITED) NOTES PAYABLE: Beginning balance..................................... $ -- $ -- $ 1,111 Notes............................................... 5,115 1,100 4,890 Accrued interest.................................... 143 11 66 Payments made....................................... -- -- (2,229) Notes and accrued interest converted to Series C mandatorily redeemable convertible preferred stock............................................ (5,258) -- (6) ------- ------ ------- $ -- $1,111 $ 3,832 ======= ====== =======
At January 31, 1999, the Company's balance of $1,111 is due on demand to a founder and certain investors. The founder note of $100 bears interest at 8%. The investor notes of $1,000 bear interest at 12% per annum. At August 1, 1999, the Company's balance of $3,832 is due on demand to certain related party investors. The notes bear interest at rates of between 6% to 13%, payable semi-annually. During fiscal 1997, notes totaling $5,115 together with $143 of accrued interest were converted into Series C mandatorily redeemable convertible preferred stock at the rate of one share for each $6.00 of debt. Accordingly, 876 shares of Series C mandatorily redeemable convertible preferred stock were issued.
FEBRUARY 1, JANUARY 31, AUGUST 1, 1998 1999 1999 ----------- ----------- ----------- (UNAUDITED) LONG-TERM DEBT: Notes............................................... $ -- $ -- $ 5,000 Accrued interest.................................... -- -- 54 ------- ------ ------- $ -- $ -- $ 5,054 ======= ====== =======
In June 1999, the Company issued convertible notes to certain investors in the principal amount of $5,650. The notes bear interest at 8 1/2% per annum and become due on June 30, 2002. The Company received $5,000 proceeds from these issuances and will amortize the discount, $650, as additional interest using the effective interest method over the term of the notes. The notes are convertible, at the option of the holder, into shares of common stock at the rate of one share of common stock for each $15 of principal amount subject to certain adjustments as provided for in the agreements, should the notes be converted prior to June 30, 2000. RELATED PARTY TRANSACTIONS: The Company utilizes management services provided by a related company, which is owned by a founder of Silicon Entertainment. The Company paid fees to this company of $91, $125, $203, $90 and $137 during fiscal 1997, 1998, 1999 and the twenty six week period ended August 2, 1998 (unaudited) and the twenty six week period ended August 1, 1999 (unaudited), respectively. F-12 82 SILICON ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- COMMITMENTS : OPERATING LEASES The Company leases its facilities and retail locations under noncancelable operating leases expiring from 2002 to 2010. Total rent expense for the years ended February 2, 1997, February 1, 1998, January 31, 1999 was $124, $394 and $1,732, respectively. Future minimum lease payments under noncancelable operating leases, including lease commitments entered into subsequent to January 31, 1999 are as follows (in thousands): FISCAL YEAR END 1999........................................................ $ 2,024 2000........................................................ 2,779 2001........................................................ 2,975 2002........................................................ 2,954 2003........................................................ 1,975 Thereafter.................................................. 3,511 ------- $16,218 =======
CAPITAL LEASES The Company has certain furniture, equipment and software under capital leases which were acquired under sale-leaseback arrangements expiring in December 1999 through August 2002. An analysis of leased assets under capital leases is as follows (in thousands):
FEBRUARY 1, JANUARY 31, AUGUST 1, 1998 1999 1999 ----------- ----------- ----------- (UNAUDITED) Computers................................. $ 35 $ 65 $ 65 Simulation equipment...................... 859 3,577 3,577 Software.................................. 1 1 1 Furniture and fixtures.................... 35 35 518 Leasehold improvements.................... -- 84 84 ---- ------ ------ 930 3,762 4,245 Less accumulated depreciation and amortization............................ (79) (397) (748) ---- ------ ------ $851 $3,365 $3,497 ==== ====== ======
Future minimum lease payments as of January 31, 1999 are as follows (in thousands): FISCAL YEAR END 1999........................................................ $1,287 2000........................................................ 1,088 2001........................................................ 960 2002........................................................ 324 ------ 3,659 Less amount representing interest........................... (579) ------ 3,080 Less current portion........................................ (992) ------ $2,088 ======
F-13 83 SILICON ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) On June 30, 1999 (unaudited) the Company entered into a new capital lease agreement for equipment purchases. The lease term is 36 months and future minimum lease payments under this agreement are $110, $188, $188 and $151, in fiscal 1999, 2000, 2001 and 2002 respectively. LICENSING AGREEMENTS The Company has various licensing agreements with NASCAR, NASCAR drivers, team owners and race track owners. The Company has entered into a licensing agreement with NASCAR under which NASCAR receives guaranteed minimum royalties and royalties based on a percentage of each racing center's simulator revenues and merchandise, beverage and food revenues. Under this agreement, the Company has the right to use the NASCAR marks and trade dress solely for display in, and promotion of, its racing centers, all subject to certain limitations on the use of the marks and NASCAR's prior approval of such uses. The Company's license agreement with NASCAR for the use of its image and trademarks extends to December 31, 2005 and is exclusive for a designated category until December 31, 2002, at which time NASCAR has the sole option to renew the exclusive portion of the agreement. The exclusive category of the NASCAR license is "operator assisted location-based interactive stockcar or stock-truck entertainment experiences that consist of no less than five linked simulator units, with each on a motion-based platform and each allowing a maximum of two people to participate in each individual simulator unit." Additionally, under the license each location must be permanent in nature and in a retail environment. In addition, NASCAR has the right to terminate the agreement upon the occurrence of certain events. The Company's licensing relationships with NASCAR drivers generally provide for the NASCAR drivers to give feedback on the Company's race car simulators and allow the Company to use the names, voices and likenesses of the NASCAR drivers for the promotion of its business. All of the agreements also provide that the NASCAR drivers will make personal appearances and act as spokespeople for the NASCAR Silicon Motor Speedway experience. The Company uses these NASCAR driver appearances to promote its racing centers as well as to enhance the racing experience for the customer. The agreements generally provide that the NASCAR drivers are compensated by guaranteed fees and the granting of stock options as consideration for their personal appearances and use of their likenesses. The agreements typically expire four years after execution and may be terminated by either party if the other party commits an illegal or immoral act. In addition, the Company generally has the right to terminate an agreement if the driver stops racing. The Company's licensing relationships with the team owners allow the Company to use the designs and accompanying trademarks of team cars either as actual simulators, as images on the video screen or simply as computer-generated cars on the video screen. The agreements generally set forth a schedule of fee payments and expire three years after execution. They also typically allow the Company to terminate an agreement if a particular race car is no longer racing. Some of these agreements are expected to terminate May 31, 2000, unless extended by mutual agreement. The Company also has agreements with race track owners that allow the Company to replicate race tracks. These agreements typically expire three years after execution and allow the Company to terminate the agreement if the track is no longer used for certain types of races. F-14 84 SILICON ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Future minimum commitments under these agreements as of January 31, 1999 are as follows:
FISCAL YEAR END -------------------- 1999 2000 2001 ---- ---- ---- NASCAR...................................................... $500 $800 $650 Physical cars............................................... 94 4 -- On-screen cars.............................................. 14 -- -- Tracks...................................................... 27 27 27 Consultants................................................. 46 -- -- ---- ---- ---- Total............................................. $681 $831 $677 ==== ==== ====
NOTE 6 -- MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK: Series A, Series B and Series C mandatorily redeemable convertible preferred stock were issued following the conversion of notes payable as part of private placement offerings at $0.60 per share, $1.50 per share and $6.00 per share, respectively. The rights, preferences and privileges of the preferred stockholders are as follows (numbers in thousands):
AUTHORIZED ISSUED AND OUTSTANDING PROCEEDS, NET --------------------------------------- ---------------------------------------- ----------- FEBRUARY 1, JANUARY 31, AUGUST 1, FEBRUARY 1, JANUARY 31, AUGUST 1, FEBRUARY 1, 1998 1999 1999 1998 1999 1999 1998 ----------- ----------- ----------- ----------- ----------- ------------ ----------- STOCK (UNAUDITED) (UNAUDITED) Series A............. 1,634 1,634 1,634 1,634 1,634 1,634 $ 973 Series B............. 3,111 3,111 3,111 2,769 2,769 2,769 4,112 Series C............. 2,500 4,250 4,250 876 3,078 3,485 5,246 Undesignated......... 2,755 1,005 1,005 -- -- -- -- ------ ------ ------ ------ ------ ------ ------- Total preferred...... 10,000 10,000 10,000 5,279 7,481 7,888 $10,331 ====== ====== ====== ====== ====== ====== ======= PROCEEDS, NET -------------------------- JANUARY 31, AUGUST 1, 1999 1999 ----------- ------------ STOCK (UNAUDITED) Series A............. $ 973 $ 973 Series B............. 4,112 4,112 Series C............. 18,168 20,608 Undesignated......... -- -- ------- ------- Total preferred...... $23,253 $25,693 ======= =======
REDEMPTIONS At any time on or after January 31, 2001, upon request of the holders of the majority of the then outstanding shares of Series A, Series B, or Series C Preferred Stock, the holders may require the Company to redeem for cash up to one-third of the number of such shares outstanding of record on that date (the Redemption Request). Redemptions of each share shall be made at the original price plus an amount equal to the amount of all declared or accrued but unpaid dividends as of that date. A further one-third and one-third of the number of such shares outstanding shall be redeemed for cash on the first and second anniversaries of the Redemption Request upon the request of the holders of the majority of the then outstanding shares of Series A, Series B, or Series C Preferred Stock. DIVIDENDS The holders of Series A, Series B and Series C mandatorily redeemable convertible preferred stock, in preference to the holders of any common stock of the Company, shall be entitled to receive, when and as declared by the Board of Directors, non-cumulative dividends in cash on a pari passu basis at the rate per annum of $0.06 per share of Series A Preferred Stock and $0.15 per share of Series B preferred stock, and $0.60 per share of Series C Preferred Stock, respectively, as adjusted for any consolidations, combinations, stock distributions, stock splits or similar events. Dividends may be declared and paid for common stock in any fiscal year of the Company only if dividends on the preferred stock have been paid or set aside. F-15 85 SILICON ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) VOTING Each share of preferred stock is entitled to vote on an "as converted" basis along with common stockholders. CONVERSION RIGHTS Shares of Series A, Series B and Series C mandatorily redeemable convertible preferred stock are convertible into fully paid and non-assessable shares of common stock at the option of the holder or automatically upon a public offering of the Company's securities with aggregate proceeds to the Company of at least $10,000,000 and an offering price per share equal to or greater than $6.00. The conversion rate is one share of common stock for one share of preferred stock (subject to certain anti-dilution adjustments). LIQUIDATION RIGHTS Upon liquidation, dissolution, or winding up of the Company, before any distribution or payment is made to the holders of common stock, the holders of Series A, Series B and Series C mandatorily redeemable convertible preferred stock are entitled to a liquidation preference to common stockholders of $0.60, $1.5 and $6.00, per share, respectively, plus all declared and unpaid dividends thereon to the date fixed for such distribution. After setting apart or paying in full the preferential amount due the holders of preferred stock, the remaining assets of the Company shall be distributed ratably to the holders of common stock. NOTE 7 -- STOCKHOLDERS' EQUITY: COMMON STOCK At August 1, 1999, the Company has issued and outstanding 2,815 shares of its common stock to the founders and key employees of the Company and to investors under stock purchase agreements. Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders of all classes of stock at the time outstanding who have prior rights as to dividends. WARRANTS During fiscal 1995, 1996, and 1998, in conjunction with notes payable, the Company issued warrants to purchase 40, 206, and 10 shares of common stock at an exercise price of $1.50 per share and 10 shares of common stock at an exercise price of $6.00 per share. During the twenty-six week period ended August 1, 1999, in conjunction with notes payable, the Company issued warrants to purchase 121 shares of common stock at an exercise price of $6.00 per share. The fair value of the warrants of $1,060 was estimated using the Black-Scholes model and the following assumptions: divided yield of 0%, volatility of 60%, risk-free interest rate of 6% and a five year life. The estimated value of the warrants has been recorded as interest expense. During 1997, in conjunction with notes payable, the Company issued warrants to purchase 232 shares of Series C Preferred Stock at an exercise price of $6.00 per share. The fair value of the warrants of $1,433 was estimated using the Black-Scholes model and the following assumptions: dividend yield of 0%, volatility of 60%, risk-free interest rate of 6% and a five year life. The estimated value of the warrants has been recorded as additional consideration for the notes payable and recorded as a discount on the debt. During fiscal 1996, 1998 and the twenty-six week period ended August 1, 1999, the Company entered into various equipment line of credit agreements. In conjunction with these line of credit agreements, the F-16 86 SILICON ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Company issued warrants to the institution to purchase 64 shares of Series B preferred stock at an exercise price of $1.50 per share and 36 shares of Series C Preferred Stock at an exercise price of $6.00 per share. The estimated fair value of these warrants is being accreted as interest expense to be amortized over the term of the lease agreements. During 1997 and 1998, warrants to purchase 140 shares as Series C Preferred Stock at an exercise price of $6.00 per share were issued to certain strategic investors. The estimated fair value of these warrants is being accreted as marketing and licensing expense over the period of the relationship. All warrants remain outstanding at August 1, 1999. All warrants generally have an exercise period of three to five years from the date of issuance. All warrants terminate upon the completion of an initial public offering with the exception of warrants to purchase 64,000 shares of Series B Preferred Stock and warrants to purchase 33,334 shares of Series C Preferred Stock. STOCK OPTION PLAN In October 1996, the Company adopted the 1996 Stock Option Plan (the "1996 Plan") for the issuance of stock options to employees, directors, or consultants under terms and provisions established by the Board of Directors. The 1996 Plan expires in 2006. Under the 1996 Plan, the Company is authorized to issue up to 1.85 million shares of Common Stock. In July 1997, the Company adopted the 1997 Nonstatutory Stock Option Plan (the "1997 Plan"). The 1997 Plan provides for the issuance of non qualified stock options to Company employees and consultants. The Company has reserved approximately 625,000 shares of common stock for issuance under the Plan. In June 1998, the Company adopted the 1998 Executive Stock Option Plan (the "1998 Plan") and reserved 350,000 shares of common stock for issuance under the Plan. The 1998 Plan provides for the issuance of shares to executives of the Company. In July 1998, the Company adopted the Stock Bonus Plan and reserved 15,000 shares of common stock for issuance under the plan. Options to purchase the Company's common stock may be granted at a price not less than 85% of fair market value in the case of nonstatutory stock options, and at fair market value in the case of incentive stock options. Fair market value is determined by the Board of Directors. Options become exercisable as determined by the Board of Directors but generally at a rate of 25% after the first year and 1/48 per month thereafter. Options expire as determined by the Board of Directors but not more than ten years after the date of grant. F-17 87 SILICON ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Activity under the Company's stock option plan is set forth below:
OPTIONS OUTSTANDING -------------------------------------------- WEIGHTED AVAILABLE AVERAGE FOR PRICE PER EXERCISE GRANT SHARES SHARE AMOUNT PRICE --------- ------ ---------- ------ -------- Shares reserved......................... 487 -- $ -- -- $0.15 Options granted......................... (154) 154 0.15 23 0.15 ------ ----- ---------- ------ ----- Balance, February 2, 1997............... 333 154 0.15 23 0.15 Additional shares reserved.............. 1,235 -- -- -- 0.15 Options granted......................... (1,055) 1,055 0.15 158 0.15 Options canceled........................ 9 (9) 0.15 (1) 0.15 Options exercised....................... (115) 0.15 (17) 0.15 ------ ----- ---------- ------ ----- Balance, February 1, 1998............... 522 1,085 0.15 163 0.15 Additional shares reserved.............. 375 -- -- -- 0.15 Options granted......................... (929) 929 0.15-1.00 678 0.73 Options canceled........................ 342 (342) 0.15-1.00 (97) 0.28 Options exercised....................... -- (466) 0.15-0.70 (75) 0.16 ------ ----- ---------- ------ ----- Balance, January 31, 1999............... 310 1,206 0.15-1.00 669 0.55 Additional shares reserved.............. 952 -- -- -- -- Options granted (unaudited)............. (449) 449 1.00-6.00 1,752 3.90 Options canceled (unaudited)............ 53 (53) 0.15-1.00 (39) 0.73 Options exercised (unaudited)........... -- (497) 0.15-1.00 (314) 0.63 ------ ----- ---------- ------ ----- Balance, August 1, 1999................. 866 1,105 $0.15-6.00 $2,068 $1.87 ====== ===== ========== ====== =====
The following table summaries information with respect to stock options outstanding at January 31, 1999:
OPTIONS OUTSTANDING AND EXERCISABLE - ----------------------------------------------------- WEIGHTED AVERAGE WEIGHTED REMAINING AVERAGE EXERCISE NUMBER OF CONTRACTUAL EXERCISE PRICE OUTSTANDING LIFE IN YEARS PRICE - ------------ ----------- ------------- -------- $ 0.15 457 8.50 $0.15 0.50 54 9.25 0.50 0.70 408 9.33 0.70 1.00 287 9.54 1.00 ----- $0.15 - 1.00 1,206 $0.55 =====
F-18 88 SILICON ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information with respect to stock options outstanding at August 1, 1999:
OPTIONS OUTSTANDING AND EXERCISABLE - ----------------------------------------------------- WEIGHTED AVERAGE WEIGHTED REMAINING AVERAGE EXERCISE NUMBER OF CONTRACTUAL EXERCISE PRICE OUTSTANDING LIFE IN YEARS PRICE - ------------ ----------- ------------- -------- $ 0.15 284 7.92 $0.15 0.50 29 8.75 0.50 0.70 282 8.83 0.70 1.00 250 9.42 1.00 6.00 260 9.87 6.00 ----- $0.15 - 6.00 1,105 $1.87 =====
DEFERRED STOCK COMPENSATION During fiscal year end 1997, 1998 and the twenty-six week period ended August 1, 1999, the Company issued options to certain employees under the Plan with exercise prices below the deemed fair market value for financial reporting purposes of the Company's common stock at the date of grant. In accordance with the requirements of APB 25, the Company has recorded deferred compensation for the difference between the exercise price of the stock options and such deemed fair market value at the date of grant. This deferred compensation is amortized to expense over the period during which the Company's right to repurchase the stock lapses or the options become exercisable, generally four years. In connection with the grant of options for the purchase of 2,587 shares of Common Stock to employees during the period from October 1996 through August 1, 1999, the Company recorded aggregate deferred compensation expense of approximately $98 in fiscal 1997, $1,548 in fiscal 1998 and $1,159 in the twenty-six week period ended August 1, 1999. Such deferred compensation will be amortized over the forty-eight month vesting period relating to these options, of which approximately $22, $589 and $1,073 has been amortized during the fiscal years ending 1997 and 1998 and the twenty-six week period ended August 1, 1999, respectively, and is included in the statement of operations within the caption "operating expenses." The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Had compensation cost been determined based on the fair value at the grant date for awards in fiscal year end 1996, 1997 and 1998 consistent with the provisions of SFAS No. 123, the Company's net loss for fiscal year end 1996, 1997 and 1998 would have been as follows:
YEAR ENDED ----------------------------------------- FEBRUARY 2, FEBRUARY 1, JANUARY 31, 1997 1998 1999 ----------- ----------- ----------- Net loss attributable to common stockholders -- as reported............... $(2,642) (5,200) (11,543) Net loss attributable to common stockholders -- pro forma................. $(2,643) (5,225) (11,634) Net loss per share as reported.............. $ (1.65) (3.67) (5.85) Net loss per share -- pro forma............. $ (1.65) (3.69) (5.90)
F-19 89 SILICON ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Such pro forma disclosure may not be representative of future compensation cost because options vest over several years and additional grants are made each year. The fair value of each option grant has been estimated on the date of grant using the minimum value method with the following weighted-average assumptions used for grants in fiscal 1996, 1997 and 1998:
1996 1997 1998 ------- ------- ------- Expected average life of option................... 5 years 5 years 5 years Risk-free interest rate........................... 6.25% 6.27% 5.38% Expected dividends................................ -- -- -- Expected volatility............................... 60% 60% 60%
The weighted average per share value of common stock options granted during fiscal 1996, 1997 and 1998 were $0.00, $0.02 and $0.45, respectively. NOTE 8 -- INCOME TAXES: The tax effect of temporary differences that give rise to significant components of the net deferred tax asset are as follows (in thousands):
FEBRUARY 2, FEBRUARY 1, JANUARY 31, 1997 1998 1999 ----------- ----------- ----------- Research and development.................... $ 579 $ 998 $ 1,571 Net operating loss carryforward............. 875 2,392 5,800 Research and development credit carryforward.............................. 100 268 457 Other....................................... -- (7) (32) ------- ------- -------- Total............................. 1,554 3,651 7,796 Less: Valuation allowance................... (1,554) (3,651) (7,796) ------- ------- -------- Net deferred tax asset...................... $ -- $ -- $ -- ======= ======= ========
As of January 31, 1999, the Company had approximately $15,550 and $10,243 for federal and state net operating loss carryforwards, respectively, available to offset future regular and alternative minimum taxable income. As of January 31, 1999, the Company had approximately $273 and $184 of federal and state research and development tax credits available to offset future U.S. federal and state income taxes. The Company's federal and state net operating loss and research and development carryforwards expire between January 1, 2003 and January 31, 2019, if not used before such time to offset future taxable income or tax liabilities. For federal and state income tax purposes, a portion of the Company's net operating loss and research and development credit carryforwards is subject to certain limitations on annual utilization as a result of a change in ownership, as defined by federal and state tax laws. Management believes that, based on a number of factors, it is more likely than not that the deferred tax assets will not be utilized, such that a full valuation allowance has been recorded. The valuation allowance increased by $1,004, $2,097 and $4,145 in fiscal 1996, 1997 and 1998, respectively. F-20 90 SILICON ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Company's effective tax rate differs from the statutory federal income tax rate as shown in the following schedule:
YEAR ENDED ----------------------------------------- FEBRUARY 2, FEBRUARY 1, JANUARY 31, 1997 1998 1999 ----------- ----------- ----------- Statutory federal income tax rate........... (34)% (34)% (34)% Net operating loss not benefited............ 34% 34% 34% ---- ---- ---- Net deferred tax asset...................... $ --% $ --% --% ==== ==== ====
NOTE 9 -- SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION: The Company has adopted the Financial Accounting Standards Board's Statements of Financial Accounting Standards No. 131, or SFAS 131, "Disclosure about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 31, 1997. The Company has one reportable segment. Management uses one measurement of profitability for its business. The Company markets its products and related services to customers in the United States. No customer individually accounted for more than 10% of revenue in fiscal 1996, 1997 or 1998 or the twenty-six week periods ended August 2, 1998 and August 1, 1999. NOTE 10 -- PROFIT SHARING PLAN: The Company sponsors a 401(k) Profit Sharing Plan covering all of its full-time employees who have completed 60 days of services. Under this plan, participating employees may defer up to 20% of their cash pre-tax earnings, subject to certain limitations. The Company may elect to make contributions to the plan at the discretion of the Board of Directors. No contributions have been made by the Company as of August 1, 1999. NOTE 11 -- SUBSEQUENT EVENTS: INITIAL PUBLIC OFFERING REGISTRATION On August 24, 1999, the board of directors authorized management of the Company to file a registration statement with the Securities and Exchange Commission covering the proposed sale of its common stock to the public. REINCORPORATION On August 24, 1999, the board of directors authorized the reincorporation of the Company in the state of Delaware subject to shareholder approval. Under the new certificate of incorporation in Delaware, the Company is authorized to issue 100,000,000 shares of common stock at $0.001 par value and 500,000 shares of preferred stock at $0.001 par value. RECAPITALIZATION On August 24, 1999, the board of directors authorized a one-for-two reverse split of the outstanding shares of mandatorily redeemable convertible preferred stock and common stock. All share data is restated to reflect the stock split. CONVERTIBLE DEBT In September 1999, the Company issued convertible notes to certain investors in the principal amount of $5.5 million. The notes bear interest at 12% per annum and are due in March 2001. The notes are convertible, at the option of the holder, into shares of common stock at the rate of one share of common stock for each $10 of principal amount. The notes may be repaid at the Company's option after 90 days. Concurrent with the issuance of these notes, the Company issued warrants to the holders to purchase an F-21 91 SILICON ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) aggregate of 68,750 shares of common stock at an exercise price of $10.80 per share. The warrants terminate five years after the date the Company issued the notes. STOCK OPTION ACTIVITY On August 24, 1999, the Company granted options to purchase 33,250 shares at an exercise price of $10.80 per share. A total of 31,098 options have been exercised in the period form August 2, 1999 to September 16, 1999 at a weighted average exercise price of $2.00. F-22 92 INSIDE FRONT COVER OF PROSPECTUS: Graphic depicts the NASCAR Silicon Motor Speedway logo in the shape of a rotated oval with the tagline "Racing so real you can feel it" situated along the base of the oval. INSIDE GATEFOLD: Graphic is a rectangle depicting the inside of one of Silicon Entertainment's racing centers. The top left hand corner of the graphic depicts the "NASCAR Silicon Motor Speedway" logo in the shape of a rotated oval, with the slogan "Racing so real you can feel it" situated along the base of the oval. Centered at the top of the graphic is the following caption: "NASCAR Silicon Motor Speedway" with the caption "We're putting fans in the driver's seat" just beneath it. Two smaller graphics are overlayed on top of the larger rectangular graphic. The first is located just beneath the NASCAR Silicon Motor Speedway logo and is a square-shaped graphic with a caption entitled "www.SMSonline.com." This graphic depicts an online view of a frame of Silicon Entertainment's Web site. The second small graphic is a rectangle situated along the bottom of the larger graphic which contains two smaller pictures of the outside of one of Silicon Entertainment's racing centers and an outside view of a customer racing a race car simulator. This graphic has a caption entitled "Palisades Center West Nyack, NY." INSIDE BACK COVER OF PROSPECTUS: The graphic depicts a view of two customers racing from inside a race car simulator. The top of the graphic bears a long horizontal oval inside which is the caption "NASCAR Silicon Motor Speedway Team of Drivers." Just under this caption is a rectangular picture of nine uniformed NASCAR drivers. One smaller graphic is located in the bottom left and is overlayed on top of the larger graphic. This graphic has a caption entitled "Racing Gear" and depicts two customers perusing the merchandise at a racing center. 93 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 4,500,000 SHARES LOGO COMMON STOCK ------------------------- PROSPECTUS ------------------------- SG COWEN CIBC WORLD MARKETS J.C. BRADFORD & CO. E*OFFERING , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 94 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses, other than the underwriting discounts and commissions, payable by the Registrant in connection with the sale of the common stock being registered. All amounts shown are estimates except for the registration fee, the NASD filing fee and the Nasdaq National Market fee. Registration fee............................................ $ 14,387 NASD filing fee............................................. 5,675 Nasdaq National Market fee.................................. Blue sky qualification fees and expenses.................... Printing and engraving expenses............................. 200,000 Legal fees and expenses..................................... 300,000 Accounting fees and expenses................................ 200,000 Transfer agent and registrar fees........................... Miscellaneous............................................... ---------- Total............................................. $1,000,000 ==========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Section 145 of the Delaware Law permits indemnification of officers, directors and other corporate agents under certain circumstances and subject to certain limitations. The Registrant's Certificate of Incorporation and By-laws provide that the Registrant shall indemnify its directors, officers, employees and agents to the full extent permitted by the Delaware Law, including circumstances in which indemnification is otherwise discretionary under Delaware law. In addition, the Registrant has entered into separate indemnification agreements with its directors and executive officers which require the Registrant, among other things, to indemnify them against certain liabilities which may arise by reason of their status or service (other than liabilities arising from acts or omissions not in good faith or willful misconduct). These indemnification provisions and the indemnification agreements entered into between the Registrant and its executive officers and directors may be sufficiently broad to permit indemnification of the Registrant's executive officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. The Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the Underwriters of the Registrant and its officers and directors for certain liabilities arising under the Securities Act, or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since January 1, 1996, we sold and issued the following unregistered securities: 1. From inception through August 1, 1999, we granted stock options to purchase an aggregate of 2,588,141 shares of our common stock at an average weighted exercise price of approximately $1.90 per share to employees, consultants, directors and other service providers pursuant to our 1996 Stock Option Plan, 1997 Nonstatutory Stock Option Plan, and 1998 Executive Stock Option Plan. 2. From inception through August 1, 1999, we issued and sold an aggregate of 1,078,368 shares of our common stock to employees, consultants, directors and other service providers for aggregate consideration of approximately $2,050,085 pursuant to exercise of options granted under our 1996 Stock Option Plan, 1997 Nonstatutory Stock Option Plan, and 1998 Executive Stock Option Plan. Of the $2,050,085 consideration, $382,000 was received in the form of promissory notes and $1,558 was received in the form of prior services rendered. II-1 95 3. From January 5, 1996 through May 16, 1996, in connection with the issuance of promissory notes, we issued warrants to certain of our existing private investors to purchase an aggregate of 106,667 shares of our common stock at an exercise price of $1.50 per share. 4. On February 7, 1996, we sold 1,633,334 shares of Series A Preferred Stock for $0.60 per share to a private investor for an aggregate purchase price of $980,000.10. 5. On October 15, 1996, in connection with an equipment lease line, we issued a warrant to Phoenix Leasing Incorporated to purchase 26,667 shares of our Series B Preferred Stock at an exercise price of $1.50 per share. 6. From May 16, 1996 through May 12, 1997, we issued and sold an aggregate of 2,769,016 shares of Series B Preferred Stock for $1.50 per share to a group of private investors for an approximate aggregate purchase price of $4,153,524. 7. From March 27, 1997 through November 19, 1997, we issued warrants to certain of our existing private investors to purchase an aggregate of 232,584 shares of our Series C Preferred Stock at an exercise price of $6.00 per share. 8. On August 14, 1997, in connection with a strategic partnership and license transaction, we issued a warrant to one of our strategic partners to purchase 50,000 shares of our Series C Preferred Stock at an exercise price of $6.00 per share. 9. On August 18, 1997, in connection with a strategic partnership and licensing agreement, we issued an option to one of our strategic partners to purchase 20,000 shares of our common stock at $0.15 per share. 10. From December 1997 through July 1999, we issued and sold an aggregate of 3,485,449 shares of Series C Preferred Stock for $6.00 per share to a group of private investors for an aggregate purchase price of $20,912,676. SG Cowen Securities Corporation acted as a broker in this transaction. 11. On April 23, 1998, in connection with a strategic partnership transaction, we issued a warrant to John Force to purchase 7,500 shares of our Series C Preferred Stock at an exercise price of $6.00 per share. 12. On May 17, 1998, in connection with a strategic partnership transaction, we issued a warrant to Simon Investors to purchase 25,000 shares of our Series C Preferred Stock at an exercise price of $6.00 per share. 13. On July 1, 1998, in connection with a strategic partnership transaction, we issued a warrant to Action Performance Companies to purchase 20,000 shares of our Series C Preferred Stock at an exercise price of $6.00 per share. 14. On July 1, 1998, in connection with an equipment lease line, we issued a warrant to Phoenix Growth Capital Corporation to purchase 13,334 shares of our Series C Preferred Stock at an exercise price of $6.00 per share. 15. From February 2, 1999 through June 18, 1999, we granted 2,413 shares of our common stock to our employees pursuant to our 1999 Employee Stock Bonus Plan. Of these shares, 1,525 shares have been exercised. 16. From January 22, 1999 through July 1, 1999, we issued warrants to certain of our existing private investors to purchase an aggregate of 131,000 shares of our common stock at an exercise price of $6.00 per share. 17. On June 17, 1999, we issued a warrant to LINC to purchase 3,224 shares of our Series C Preferred Stock in connection with a capital equipment lease agreement. II-2 96 18. On July 1, 1999, we issued a warrant to Pentech Financial Services, Inc. to purchase 20,000 shares of our Series C Preferred Stock at $6.00 per share in connection with a capital equipment lease agreement. 19. On June 30, 1999, we issued a secured subordinated convertible note to each of Galladio Holding B.V., Wagenaarkwartier's-Gravenhage B.V. and Van der Lee Partnership in the principal amount of $2,260,000, $2,260,000 and $1,130,000, respectively. All of these notes are convertible into shares of our common stock. 20. From June 16, 1999 to September 9, 1999, we issued promissory notes in an aggregate amount of $8,803,166 to various investors, $5,780,000 of which is convertible into shares of our common stock. 21. On February 2, 1999, we issued an option to purchase 100,000 shares of our common stock at $1.00 per share to one of our strategic partners in connection with a strategic partnership and license agreement. 22. On April 23, 1998, August 11, 1998 and June 17, 1999, we issued 1,817, 3,421 and 4,420 shares, respectively, of our common stock at $0.50, $1.00 and $6.00 per share, respectively, to Michael DiLorenzo in connection with consultant stock purchase agreements. 23. On June 17, 1999, we issued 4,000 and 1,000 shares of our common stock at $6.00 per share to Nagle & Ferri, L.L.C. and Michael Nichols, respectively, in connection with a consultant stock purchase agreement. 24. On February 2, 1999 and April 7, 1999, we issued an aggregate of 3,393 shares of our common stock at $1.00 per share to Madeline Canepa in connection with a consultant common stock purchase agreement. There were no underwriters employed in connection with any of the transactions set forth in Item 15. The issuances described in Items 15.3 through 15.14 and 15.16 through 15.23 were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. In addition, the issuances described in Item 15.1, 15.2 and 15.15 were deemed exempt from registration under the Securities Act in reliance on Rule 701 promulgated thereunder as transactions pursuant to compensatory benefit plans and contracts relating to compensation. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. All recipients either received adequate information about the Registrant or had access, through employment or other relationships, to such information. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) EXHIBITS.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- * 1.1 Form of Underwriting Agreement. * 3.1 Restated Certificate of Incorporation of the Registrant. * 3.2 Amended and Restated Bylaws of the Registrant. ** 4.1 Third Amended and Restated Rights Agreement, dated as of December 31, 1998, as amended to date. * 4.2 Specimen Common Stock Certificate. * 5.1 Opinion of Gray Cary Ware & Freidenrich LLP. *10.1 Form of Indemnification Agreement for directors and executive officers. **10.2 1996 Stock Option Plan and forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement thereunder.
II-3 97
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- **10.3 1997 Nonstatutory Stock Option Plan and form of Nonstatutory Stock Option Agreement thereunder. **10.4 1998 Executive Stock Option Plan and forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement thereunder. **10.5 Stock Bonus Plan and form of Stock Bonus Agreement thereunder. *10.6 1999 Employee Stock Purchase Plan and form of subscription agreement thereunder. **10.7+ License Agreement by and between National Association for Stock Car Auto Racing, Inc. and the Registrant, dated August 18, 1997, as amended. **10.8+ The Registrant and Action Performance Companies, Inc. Terms -- Strategic Partnership, dated April 20, 1998. **10.9+ Letter Agreement with Simon Investors, LLC, dated May 17, 1998. **10.10+ Industrial Complex Lease (California) between MP Hacienda, Inc. and the Registrant, dated as of April 30, 1998. **10.11+ Dallas Galleria Lease between Dallas Galleria Limited as "Landlord" and the Registrant, as "Tenant" d/b/a/ Nascar Silicon Motor Speedway, dated as of May 22, 1998, as amended. **10.12+ Lease by and between Mall of America Company, a Minnesota General Partnership, and the Registrant, dated as of August 12, 1997. **10.13+ Irvine Retail Properties Company Retail Space Lease, dated as of April 22, 1998. **10.14+ The Palisades Center Shopping Center Lease, dated as of July 27, 1998. **10.15+ Lease, the Registrant, Tenant, "NASCAR Silicon Motor Speedway," Trade Name, Woodfield Mall, dated as of December 18, 1997. **10.16+ Lease, the Registrant, Tenant, NASCAR Silicon Motor Speedway and/or Silicon Motor Speedway, Trade Name, Concord Mills, dated as of June 30, 1999. **10.17+ Lease, the Registrant, Tenant, NASCAR Silicon Motor Speedway and/or Silicon Motor Speedway, Trade Name, Katy Mills, dated as of March 17, 1999. **10.18+ Universal Studios CityWalk Hollywood Lease between Universal Studios CityWalk Hollywood, a division of Universal Studios, Inc. as Landlord and the Registrant, executed as of July 20, 1999. **10.19+ Standard Shopping Center Lease, dated as of August 12, 1999 (Walden Galleria, Buffalo, New York). **10.20+ Standard Shopping Center Lease, dated as of August 12, 1999 (Crossgates Mall, Albany, New York). **10.21+ Retail Lease Agreement between Peabody Place Centre, L.P., a Tennessee limited partnership and the Registrant dated as of May 24, 1999. **10.22+ Standard Shopping Center letter, dated as of August 18, 1999 (Carousel Center, Syracuse, New York). **10.23+ Lease, the Registrant, Tenant, NASCAR Silicon Motor Speedway and/or Silicon Motor Speedway, Trade Name, Opry Mills, dated as of August 23, 1999. 10.24+ Agreement of Lease between Mall of Georgia, L.L.C. and the Registrant, dated as of September 23, 1999. 10.25 Service Agreement by and among the Registrant, Dale Earnhardt, Inc. and Richard Childress Racing, dated as of April 30, 1997. 10.26 Jeff Gordon Personal Services and Endorsement Agreement by and among the Registrant, Jeff Gordon, Inc. and Jeff Gordon, dated as of January 1, 1998. 10.27 Licensing Agreement by and between the Registrant and Dale Jarrett, dated as of March 24, 1997. 10.28 Licensing Agreement by and between the Registrant and Rusty Wallace Inc., dated as of March 1, 1997. 10.29 License Agreement (Auto Design) by and between the Registrant and Robert Yates Racing, Inc., dated as of February 28, 1997.
II-4 98
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- *10.30 Note Purchase Agreement by and among the Registrant, Galladio Holding, Wagenaarkwartier and E.M.H. van der Lee, dated as of June 30, 1999. *10.31 Note Purchase Agreement by and among the Registrant and Galladio Holding, van der Lee Partnership, E.M.H. van der Lee E.W. van der Lee and Manschot Opportunity Fund, dated as of September 9, 1999. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Public Accountants. *23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1). **24.1 Power of Attorney.
- ------------------------- * To be filed by amendment. ** Previously filed. + Confidential treatment has been requested for portions of this exhibit. (b) FINANCIAL STATEMENT SCHEDULES. No schedules have been filed because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, employee or agent of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, employee or agent in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 99 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Campbell, County of Santa Clara, State of California, on the 21st day of October, 1999. SILICON ENTERTAINMENT, INC. By: /s/ ROSS C. MULHOLLAND ------------------------------------ Ross C. Mulholland Vice President Finance, Chief Financial Officer and Principal Accounting Officer Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ DAVID S. MORSE* Chairman of the Board, Chief October 21, 1999 - --------------------------------------------- Executive Officer and President David S. Morse /s/ ROSS C. MULHOLLAND Vice President Finance, Chief October 21, 1999 - --------------------------------------------- Financial Officer and Principal Ross C. Mulholland Accounting Officer /s/ WILLIAM HART* Director October 21, 1999 - --------------------------------------------- William Hart /s/ ROBERT H. MANSCHOT* Director October 21, 1999 - --------------------------------------------- Robert H. Manschot /s/ CHRISTOPHER S. BESING* Director October 21, 1999 - --------------------------------------------- Christopher S. Besing /s/ ROBERT V. CHEADLE* Director October 21, 1999 - --------------------------------------------- Robert V. Cheadle *By: /s/ ROSS C. MULHOLLAND - --------------------------------------------- Ross C. Mulholland Attorney-in-Fact
II-6 100 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- * 1.1 Form of Underwriting Agreement. * 3.1 Restated Certificate of Incorporation of the Registrant. * 3.2 Amended and Restated Bylaws of the Registrant. ** 4.1 Third Amended and Restated Rights Agreement, dated as of December 31, 1998, as amended to date. * 4.2 Specimen Common Stock Certificate. * 5.1 Opinion of Gray Cary Ware & Freidenrich LLP. *10.1 Form of Indemnification Agreement for directors and executive officers. **10.2 1996 Stock Option Plan and forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement thereunder. **10.3 1997 Nonstatutory Stock Option Plan and form of Nonstatutory Stock Option Agreement thereunder. **10.4 1998 Executive Stock Option Plan and forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement thereunder. **10.5 Stock Bonus Plan and form of Stock Bonus Agreement thereunder. **10.6 1999 Employee Stock Purchase Plan and form of subscription agreement thereunder. **10.7+ License Agreement by and between National Association for Stock Car Auto Racing, Inc. and the Registrant, dated August 18, 1997, as amended. **10.8+ The Registrant and Action Performance Companies, Inc. Terms -- Strategic Partnership, dated April 20, 1998. **10.9+ Letter Agreement with Simon Investors, LLC, dated May 17, 1998. **10.10+ Industrial Complex Lease (California) between MP Hacienda, Inc. and the Registrant, dated as of April 30, 1998. **10.11+ Dallas Galleria Lease between Dallas Galleria Limited as "Landlord" and the Registrant, as "Tenant" d/b/a/ Nascar Silicon Motor Speedway, dated as of May 22, 1998, as amended. **10.12+ Lease by and between Mall of America Company, a Minnesota General Partnership, and the Registrant, dated as of August 12, 1997. **10.13+ Irvine Retail Properties Company Retail Space Lease, dated as of April 22, 1998. **10.14+ The Palisades Center Shopping Center Lease, dated as of July 27, 1998. **10.15+ Lease, the Registrant, Tenant, "NASCAR Silicon Motor Speedway," Trade Name, Woodfield Mall, dated as of December 18, 1997. **10.16+ Lease, the Registrant, Tenant, NASCAR Silicon Motor Speedway and/or Silicon Motor Speedway, Trade Name, Concord Mills, dated as of June 30, 1999. **10.17+ Lease, the Registrant, Tenant, NASCAR Silicon Motor Speedway and/or Silicon Motor Speedway, Trade Name, Katy Mills, dated as of March 17, 1999. **10.18+ Universal Studios CityWalk Hollywood Lease between Universal Studios CityWalk Hollywood, a division of Universal Studios, Inc. as Landlord and the Registrant, executed as of July 20, 1999. **10.19+ Standard Shopping Center Lease, dated as of August 12, 1999 (Walden Galleria, Buffalo, New York). **10.20+ Standard Shopping Center Lease, dated as of August 12, 1999 (Crossgates Mall, Albany, New York). **10.21+ Retail Lease Agreement between Peabody Place Centre, L.P., a Tennessee limited partnership and the Registrant dated as of May 24, 1999. **10.22+ Standard Shopping Center letter, dated as of August 18, 1999 (Carousel Center, Syracuse, New York). **10.23+ Lease, the Registrant, Tenant, NASCAR Silicon Motor Speedway and/or Silicon Motor Speedway, Trade Name, Opry Mills, dated as of August 23, 1999.
101
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.24+ Agreement of Lease between Mall of Georgia, L.L.C. and the Registrant, dated as of September 23, 1999. 10.25 Service Agreement by and among the Registrant, Dale Earnhardt, Inc. and Richard Childress Racing, dated as of April 30, 1997. 10.26 Jeff Gordon Personal Services and Endorsement Agreement by and among the Registrant, Jeff Gordon, Inc. and Jeff Gordon, dated as of January 1, 1998. 10.27 Licensing Agreement by and between the Registrant and Dale Jarrett, dated as of March 24, 1997. 10.28 Licensing Agreement by and between the Registrant and Rusty Wallace Inc., dated as of March 1, 1997. 10.29 License Agreement (Auto Design) by and between the Registrant and Robert Yates Racing, Inc., dated as of February 28, 1997. *10.30 Note Purchase Agreement by and among the Registrant, Galladio Holding, Wagenaarkwartier and E.M.H. van der Lee, dated as of June 30, 1999. *10.31 Note Purchase Agreement by and among the Registrant and Galladio Holding, van der Lee Partnership, E.M.H. van der Lee, E.W. van der Lee and Manschot Opportunity Fund, dated as of September 9, 1999. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Public Accountants. *23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1). **24.1 Power of Attorney.
- ------------------------- * To be filed by amendment. ** Previously filed. + Confidential treatment has been requested for portions of this exhibit. EX-10.24 2 AGREEMENT OF LEASE BETWEEN MALL OF GEORGIA, L.L.C. 1 Exhibit 10.24 PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED BASED ON A REQUEST FOR CONFIDENTIAL TREATMENT AGREEMENT OF LEASE BETWEEN MALL OF GEORGIA, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY AND SILICON ENTERTAINMENT, INC. D/B/A "NASCAR SILICON MOTOR SPEEDWAY" OR "SILICON MOTOR SPEEDWAY" 2 TABLE OF CONTENTS
Page ---- ARTICLE 1 Definitions....................................................................................... 1-1 ARTICLE 2 Construction ..................................................................................... 2-1 Section 2.1 Tenant's Work...................................................................... 2-1 Section 2.2 Performance of Tenant's Work....................................................... 2-1 Section 2.3 Remedies for Tenant's Failure or Delay to Submit Plans or Perform Work............................................................... 2-2 Section 2.4 Ownership of Improvements.......................................................... 2-2 Section 2.5 Failure to Open or to do Business.................................................. 2-2 Section 2.6 Remodeling of Premises............................................................. 2-2 ARTICLE 3 Rent ............................................................................................. 3-1 Section 3.1 Payment............................................................................ 3-1 Section 3.2 Fixed Rent......................................................................... 3-1 Section 3.3 Percentage Rent.................................................................... 3-1 Section 3.4 Tax Rent........................................................................... 3-3 Section 3.5 Common Area Rent................................................................... 3-5 Section 3.6 Additional Rent.................................................................... 3-8 Section 3.7 Rent for a Partial Month........................................................... 3-8 Section 3.8 Late Charges and Interest.......................................................... 3-8 Section 3.9 Taxes.............................................................................. 3-8 ARTICLE 4 Common Areas ..................................................................................... 4-1 Section 4.1 Common Areas....................................................................... 4-1 ARTICLE 5 Landlord's Additional Covenants................................................................... 5-1 Section 5.1 Repairs by Landlord................................................................ 5-1 Section 5.2 Quiet Enjoyment.................................................................... 5-1 ARTICLE 6 Tenant's Additional Covenants..................................................................... 6-1 Section 6.1 Affirmative Covenants.............................................................. 6-1 Section 6.2 Negative Covenants................................................................. 6-8 ARTICLE 7 Destruction: Condemnation........................................................................ 7-1 Section 7.1 Fire or Other Casualty............................................................. 7-1 Section 7.2 Eminent Domain..................................................................... 7-2 ARTICLE 8 Defaults and Remedies............................................................................. 8-1 Section 8.1 Bankruptcy, Insolvency............................................................. 8-1 Section 8.2 Default............................................................................ 8-1 Section 8.3 Remedies of Landlord............................................................... 8-2 Section 8.4 Waiver of Trial by Jury: Tenant Not to Counter-Claim............................... 8-3 Section 8.5 Holdover by Tenant................................................................. 8-3
i 3 Section 8.6 Landlord's Right to Cure Defaults.................................................. 8-4 Section 8.7 Effect of Waivers of Default....................................................... 8-4 Section 8.8 Security Deposit................................................................... 8-4 ARTICLE 9 Additional Provisions............................................................................. 9-1 Section 9.1 Notices from One Party to the Other................................................ 9-1 Section 9.2 Brokerage.......................................................................... 9-1 Section 9.3 Estoppel Certificates.............................................................. 9-1 Section 9.4 Applicable Law and Construction.................................................... 9-1 Section 9.5 Relationship of the Parties........................................................ 9-1 Section 9.6 Limitations on Liability........................................................... 9-2 Section 9.7 Landlord's Entry Rights............................................................ 9-2 Section 9.8 Subordination...................................................................... 9-3 Section 9.9 Construction on Adjacent Premises or Buildings..................................... 9-4 Section 9.10 Mall Expansion..................................................................... 9-4 Section 9.11 Short Form Lease................................................................... 9-6 Section 9.12 Binding Effect of Lease............................................................ 9-6 Section 9.13 Effect of Unavoidable Delays....................................................... 9-7 Section 9.14 No Oral Changes.................................................................... 9-7 Section 9.15 Executed Counterparts of Lease..................................................... 9-7 Section 9.16 Landlord's Liability............................................................... 9-7
ii 4 AGREEMENT OF LEASE made as of Sept. 23rd, 1999 between MALL OF GEORGIA, L.L.C., a Delaware limited liability company, having its principal place of business at 115 West Washington, Indianapolis, Indiana 46204 (the Landlord) and SILICON ENTERTAINMENT, INC., d/b/a "NASCAR Silicon Motor Speedway" or "Silicon Motor Speedway", a California corporation, having its principal place of business at 210 Hacienda Avenue, Campbell, California 95008, (the Tenant). RECITAL Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord, the Premises, for the Term, commencing on the Commencement Date, subject to the terms, covenants, conditions and provisions of this Lease. If the Commencement Date is not the first (1st) day of a month, Rent for the month in which the Commencement Date occurs shall be prorated to the end of the month, the first (1st) full monthly installment of Rent shall be due on the first (1st) day of the next month and after the expiration of the number of years in the Term, the Term shall expire on the last day of the same month in which the Commencement Date of the Term occurred, it being the intention of the parties that the Term expire on the last day of a month. If there shall be any change in the Floor Space of the Premises, Landlord and Tenant shall execute and deliver a written statement reflecting such change or changes, in no event, however, shall the Size of the Premises or the amount of Lease line frontage on the enclosed mall be materially reduced without consent of Tenant. Said statement upon execution and delivery shall be deemed to be a part of this Lease. 5 ARTICLE 1 DEFINITIONS Whenever used in this Lease, the following terms shall have the meanings indicated below. Premises Store No. 2068, Second Level, as shown on Exhibit B. Term [***] Years Commencement Date The earlier of (i) the date Tenant opens for business at the Premises, and (ii) the later of (a) the Grand Opening of the Shopping Center, or (b) the expiration of Tenant's Work Period. Size of Premises 5,895 square feet Fixed Rent [***] per year for each of the first (1st) through [***] years, and [***] per year for each of the [***] through [***] years. Environmental Charge The initial amount of [***] per year, subject to adjustment as provided in Exhibit C. Percentage Rent Rate [***] Percent Promotion Fund Charge [***] per year initially or such other greater amount as shall be determined pursuant to Section 6.1 L. Security Deposit None Tenant's Work Period The period of [***] days after the date possession of the Premises is made available to Tenant in the condition required hereby. Tenant's Trade Name "NASCAR Silicon Motor Speedway" or "Silicon Motor Speedway" Guarantor None Broker Russell Friend Blatteis Realty Company 233 South Beverly Drive
- ---------- *** confidential treatment requested 1-1 6 Beverly Hills, CA 90212 Construction Barrier Fee Tenant shall only be required to erect a construction barrier in the event Tenant is not open for the Grand Opening. In the event that a construction barrier is required, Tenant shall be permitted to construct its own barrier, at its sole cost and expense and such barrier must conform to the requirements of the Shopping Center Criteria and all Governmental Authorities. Construction Deposit None Plan Review Fees None Number of Department Stores Four (4) Percentage of Advertising None Required Permitted Use Tenant shall use the Premises for the use set forth below and for no other purpose: The premises shall be occupied and used by Tenant for the purpose of conducting therein the business of an auto racing entertainment center and other related retail uses. The entertainment facility may include a combination of driving simulators, but shall not include coin operated machines as typically found in conventional video arcade game room type operations. Incidental thereto, Tenant shall be permitted to use the Premises for the display and retail sale of auto racing and other auto racing themed or related entertainment merchandise. Tenant shall be permitted to sell some concessions from the Premises as mutually agreed to from time to time by Landlord and Tenant. Tenant shall not use or permit or suffer to use of the Premises for any other business or purpose. Tenant shall have the right, in an area not to exceed [***] percent of the Floor Space of the Premises to sell snack food items including, but not limited to popcorn and hot and cold non-alcoholic beverages. Landlord hereby represents and warrants to Tenant that Tenant's use of the Premises as contemplated in this paragraph does not violate any exclusivity clause or other agreement between Landlord and any other party, including any other tenant of the Shopping Center and Landlord shall indemnify, defend, protect and hold harmless Tenant from any loss, liability, cost,
- ---------- *** confidential treatment requested 1-2 7 expense, judgment, action or claim of any such party arising from the inaccuracy of such representation and warranty. Tenant shall have the right to temporarily prohibit or restrict access to the Premises by members of the public from time to time for conducting group sales or promotional activities. In connection with such group sales activities, Tenant may contract with private caterers to provide food and beverage service (including alcoholic beverage service) for the group sales customers. Provided they are not within [***] feet of the lease line, Tenant shall have the right to install up to [***] soft drink vending machines at the Premises. Additional Rent The Percentage Rent, Storage Rent, if any, Common Area Rent, Tax Rent and Taxes, Environmental Charge, Promotion Fund Charge and all other amounts, except Fixed Rent, payable by Tenant under this Lease. Affiliate Any Person which controls or is controlled by the Person in question or is controlled by the same Persons which shall then control the Person in question and any Person which is a member with the Person in question in a relationship of joint venture, partnership or other form of business association; the term "control" means, with respect to a corporation, the ownership of stock possessing, or the right to exercise, at least fifty (50%) percent of the total combined voting power of all classes of the controlled corporation, issued, outstanding and entitled to vote for the election of directors, whether such ownership be direct ownership or indirect ownership through another Person. Common Areas As defined in Section 4.1. Common Area Operating Costs As defined in Subsections 3.5 A (2) and 3.5 B (2). Common Area Rent As defined in Subsections 3.5 A (1) and 3.5 B (1). Department Store A retail store occupying not less than an aggregate of 50,000 square feet of Floor Space on one or more levels, for the sale in combination or solely, of a variety of goods and services such as wearing apparel, accessories, general merchandise, home furnishings, fittings, appliances, housewares, furniture, floor coverings and the like. Except for the purposes described in Section 3.2 and Subsection 6.1B, the term
- ---------- *** confidential treatment requested 1-3 8 "Department Store" shall be deemed to include any movie theatre complex or non-retail operation occupying the third (3rd) level of the Enclosed Shopping Center and any other building, improvement or structure, not devoted primarily to retail use, such as an office building or hotel/motel, unless same is deemed by Landlord not to be part of the Shopping Center. Enclosed Shopping Center That portion of the Shopping Center containing an enclosed mall and stores which front on said enclosed mall, as shown in orange on Exhibit A hereto. Floor Space The space available for occupancy by each tenant within the exterior faces of the walls between the tenant's premises and any Common Area or, if the tenant's premises are enclosed by one or more walls abutting leaseable space, the space within such exterior faces and the center of such walls; if the tenant's premises are not surrounded by walls, then the space within and up to the lease line of the premises shall be included in the computation. For the purposes of the definition, store fronts shall not be deemed to be walls. No deduction or exclusion shall be made from Floor Space otherwise computed by reason of stairs, elevators, escalators, interior partitions or other interior construction or equipment. Governmental Authority The United States, the state, county, city, town, village and any water, sewer or school or other district covering the area in which the Shopping Center is located, and any political subdivision thereof or any local public or quasi-public authority, agency, department, commission, board, bureau or instrumentality of any of them including, with respect to matters pertaining to insurance, boards of fire underwriters, rating bureaus and the like, to the extent they have power to impose conditions on the issuance of policies or the coverage thereof. Governmental Requirement Any law, ordinance, code, order, rule or regulation of any Governmental Authority. Gross Leaseable Area The aggregate of all Floor Space in the Shopping Center excluding Storage Space, if any, and excluding for the purposes of the computation of Tax Rent pursuant to Section 3.4., Floor Space which is part of either a parcel or improvement which is separately assessed for the purpose of assessment of Taxes, to the extent the Taxes thereon are paid by the tenant or occupant thereof.
1-4 9 Gross Sales As defined in Subsection 3.3B. Landlord The party named as Landlord herein until a sale, transfer or lease, and thereafter the Person or Persons, collectively, who shall, for the time being, be liable for the obligations of Landlord under the provisions of Subsection 9.16A of this Lease. Lease Year For the purposes of Percentage Rent only, the period of twelve (12) consecutive months from January 1 to December 31 of each year during the Term. If the date Tenant opens for business or the expiration of the Term does not coincide with the beginning or end of a Lease Year, the periods preceding or following the commencement or end of each full Lease Year, as the case may be, shall be deemed independent, partial Lease Years. Necessary Approvals Any permit, license, certificate or approval or other evidence of compliance with any Governmental Requirement necessary to the lawful occupancy of the Premises for the Permitted Use and the issuance of the insurance required to be carried by Tenant. Percentage Rent As defined in Subsections 3.3A and 3.3B. Person A natural person, firm, partnership, association, business trust or corporation, as the case may be. Rent The Fixed Rent and the Additional Rent. Retail Restriction Limit As defined in Subsection 6.2A. Shopping Center Mall of Georgia at Mill Creek, as outlined in green on Exhibit A hereto, located in Gwinnett County, Georgia, plus (i) any other parcels of land at any time designated by Landlord to be added thereto (but only so long as any such designation remains unrevoked) which are used for Shopping Center or related purposes, including, but not limited to, recharge or catch basins, drainage and detention ponds, sumps, access and circulatory roadways to and from public streets, parking, the furnishing to the Shopping Center of any utility, amenity or other service, shuttle transit to and from the Shopping Center, recreation areas for customers of the Shopping Center, or for any other improvement appropriate or related to the operation or functioning of the Shopping Center; together with (ii) all
1-5 10 present and future buildings on and improvements to any such parcels. Specialty Store A retail store occupying not less than an aggregate of 25,000 square feet of Floor Space on one or more levels. Storage Space Space not contained within any tenant's premises which is used solely for the storage of merchandise and other items. Tax Rent and Taxes As defined in Section 3.4. Tenant's Work As set forth in Sections 2.1 and 2.2. Village Area That portion of the Shopping Center containing stores which do not front on the enclosed mall, as shown in yellow on Exhibit A hereto. Exhibit A Shopping Center. Exhibit B Premises. Exhibit C Utilities. Exhibit D (optional) Food Court Area.
1-6 11 ARTICLE 2 CONSTRUCTION Section 2.1. Tenant's Work. Not later than the twentieth (20th) day after the execution and delivery of this Lease by Landlord, Tenant shall furnish to Landlord for Landlord's approval, in accordance with the Shopping Center Information Manual and Design Criteria, plans and specifications which shall provide for the complete remodeling (or finishing in the event the Premises have not been previously occupied) of the Premises. Within [***] days following the Commencement Date, Tenant shall pay to Landlord, a Plan Review Fee calculated in accordance with the fee schedule set forth in Article 1. Tenant agrees, at its sole cost and expense, to construct and make such improvements in the Premises in accordance with the approved plans and specifications. Tenant has inspected the Premises, is familiar with their condition and accepts same "as is" and in their present condition and Landlord shall not be obligated to do any further construction or to make any additional improvements in the Premises, except as may otherwise be expressly provided herein. Tenant understands that Landlord's approval of its plans and specifications is primarily for conceptual purposes and such approval shall not constitute a representation or warranty of any kind with respect thereto, including, without limitation, the cost of Tenant's Work, compliance with Governmental Requirements or suitability of design. Tenant acknowledges receipt of the Shopping Center Tenant Information Manual and Design Criteria, the provisions of which are incorporated herein by reference. Section 2.2 Performance of Tenant's Work. As soon as practicable after Landlord shall have approved Tenant's plans and specifications and possession of the Premises shall be made available to Tenant and Tenant shall have obtained all Necessary Approvals with respect to commencement of Tenant's Work, Tenant shall enter the Premises and shall proceed with due diligence and dispatch to make improvements and install fixtures and other equipment and a full stock of inventory therein, in accordance with the approved plans and specifications and all Governmental Requirements. Such work and installation shall not interfere with any work to be done by Landlord in other portions of the Shopping Center, shall be done with labor which is not incompatible with other labor employed at the Shopping Center without creating any conflict or work stoppage with, under or as a result of any labor agreement to which Landlord or its contractors may be a party, and in compliance with such rules and regulations as Landlord may reasonably make. Except for Landlord's negligence and willful acts (subject, however, to the waiver of subrogation elsewhere set forth in this Lease), Landlord shall have no responsibility or liability whatsoever for any loss of or damage to any fixtures or other equipment or inventory installed or left in the Premises, and Tenant's entry on and occupancy of the Premises shall be governed by and subject to all the provisions, covenants and conditions of this Lease other than those requiring payment of Rent. Prior to commencing any construction work in the Premises, Tenant shall (i) obtain a building permit and furnish a copy of same to Landlord and (ii) deposit with Landlord (or cause its general contractor to deposit) the Construction Deposit set forth in Article 1, said deposit (less any amount retained by Landlord as reimbursement for sums expended in performing Tenant's construction obligations) shall be returned upon completion of - ---------- *** confidential treatment requested 2-1 12 Tenant's Work including punchlist items and clean-up. Tenant shall also obtain and furnish to Landlord, to be delivered not later than the end of Tenant's Work Period, lien waivers from all contractors, subcontractors and materialmen, and all licenses, certificates and approvals with respect to work done and installations made by Tenant that may be required from the Governmental Authorities with respect to Tenant's Work, use and occupancy. During Tenant's Work Period and throughout the Term of this Lease, Tenant shall not do or suffer anything to be done whereby the Premises or the Shopping Center may be encumbered by a mechanic's lien, and Tenant shall, whenever any mechanic's lien is filed against the Premises or the Shopping Center purporting to be for labor, materials or services furnished or to be furnished to Tenant, discharge or remove the same of record within thirty (30) days after the date of filing. Notice is hereby given that Landlord shall not be liable for any labor, materials or services furnished or to be furnished to Tenant. Tenant shall complete Tenant's Work and open for business to the public not later than the expiration of Tenant's Work Period. Landlord and Tenant agree that the timely performance of Tenant's obligations under this Article 2 is a material inducement to the execution and delivery of this Lease by Landlord. Section 2.3. Remedies for Tenant's Failure or Delay to Submit Plans or Perform Work. If Tenant fails or omits to make timely submission to Landlord of any plans or specifications or delays in performing or completing Tenant's Work, such failure or delay shall constitute a default hereunder and shall be governed by Article 8 hereof. Section 2.4. Ownership of Improvements. All installations, alterations, additions or improvements upon the Premises, made by either party, including all heating, ventilating and air conditioning equipment, electrical and plumbing equipment and fixtures, carpeting or other floor covering and wall coverings, pipes, ducts, conduits, wiring, paneling, partitions, railings, mezzanine floors, galleries and the like, shall, unless Landlord otherwise elects by giving Tenant notice not less than thirty (30) days prior to the expiration or other termination of this Lease, become the property of Landlord and shall remain upon and be surrendered with the Premises as a part thereof at the expiration or sooner termination of the Term. None of the foregoing shall be deemed to include Tenant's trade fixtures, furniture and other personal property. Tenant shall not be required to remove at the end of the Term any installations made with Landlord's consent unless Landlord shall so specify at the time its consent is given. Section 2.5 Failure to Open or to do Business. The parties covenant and agree that because of the difficulty or impossibility of determining Landlord's damages, should Tenant (i) subject to Unavoidable Delays, fail to open for business within the number of days allowed for Tenant's Work Period, or (ii) at any time during the Term, vacate, abandon or desert the Premises, or (iii) subject to Unavoidable Delays, at any time during the Term, cease operating its business therein, then, in any such event if Landlord does not terminate this Lease, Tenant shall pay to Landlord, in addition to Fixed and Additional Rent, [***] the Premises and Tenant's business therein are not continuously and uninterruptedly operated by Tenant. - ---------- *** confidential treatment requested 2-2 13 Section 2.6. Remodeling of Premises. Between the [***] and [***] months of the Term, Tenant shall furnish to Landlord for Landlord's approval, plans and specifications which shall provide for the remodeling of the Premises in order to [***]. Within [***] days following receipt of Landlord's approval of said plans and specifications, Tenant shall commence remodeling the Premises in accordance with the approved plans and specifications and shall complete such remodel within [***] days thereafter. In no event shall Tenant, in connection with its remodeling of the Premises, close for business at the Premises for more than [***] days, in the aggregate, and in no event shall Tenant be entitled to receive an abatement of or credit against the Rent due hereunder as a result of any such closure. - ---------- *** confidential treatment requested 2-3 14 ARTICLE 3 RENT Section 3.1. Payment. Tenant covenants and agrees, at all times during the Term, to perform promptly all of the obligations of Tenant set forth in this Lease and to pay when due all Rent, charges, costs and other sums (all of which shall be deemed to be Additional Rent) which by the terms of this Lease are to be paid by Tenant. All Rent shall be paid in lawful money of the United States which shall be legal tender for payment of all debts and dues, public and private, at the time of payment, at the address of Landlord set forth in this Lease or at such other place as Landlord in writing may designate, without (except as may be otherwise herein expressly provided) any set-off or deduction whatsoever and without any prior demand or notice therefor. Section 3.2. Fixed Rent. Tenant shall pay the annual Fixed Rent in equal monthly installments in advance on the first (1st) day of each calendar month included in the Term. If the Shopping Center shall, at any time during the Term of this Lease, contain in excess of the number of Department Stores set forth in Article 1, the Fixed Rent herein provided for shall automatically be increased by [***] percent upon the date each additional Department Store is opened for business. Section 3.3. Percentage Rent. A. Tenant shall also pay, as "Percentage Rent" for each Lease Year included in the Term, payable as hereinafter provided, the amount, if any, by which Tenant's Gross Sales transacted during such Lease Year, [***], shall exceed the [***] payable for the same period; provided, however, that there shall be excluded from such computation any [***]. B. The term "Gross Sales" as used herein is defined to mean the total amount in dollars of the actual prices charged, whether for cash or on credit or trade-in or partly for cash, credit or trade-in, for all sales or leases of merchandise, food, beverages and services (including finance or service charges thereon), redeemed gift or merchandise certificates, irrespective of where sold, and all other receipts of business conducted at, in, on, about or from the Premises, including, but not limited to, all mail or telephone orders received or filled at, in, on, about or from the Premises, and including all deposits not refunded, all orders taken at, in, on, about or from the Premises, whether or not said orders are filled elsewhere, total receipts of sales through any vending machine or other coin or token operated device, other than not more than [***] vending machines used exclusively by Tenant's employees, and total sales by any sublessee, concessionaire or licensee or any other occupant otherwise at, in, on, about or from the Premises, and sales and receipts occurring or arising as a result of solicitation off the Premises conducted by personnel operating from, or reporting to, or under the supervision of any employee of Tenant located at the Premises. Provided that Tenant keeps proper evidence thereof, Gross Sales shall not, however, include (i) any sums collected and paid out for any retail sales tax or retail excise - ---------- *** confidential treatment requested 3-1 15 tax imposed by any Governmental Authority and paid directly by Tenant to that Governmental Authority and separately stated, (ii) any exchange of goods or merchandise between the stores or warehouses of Tenant where such exchange of goods or merchandise is made solely for the convenient operation of the business of Tenant and not for the purpose of consummating a sale which had theretofore been made at, in, on, about or from the Premises, nor for the purpose of depriving Landlord of the benefits of a sale which otherwise would be made at, in, on, about or from the Premises, (iii) the amount of returns to shippers or manufacturers, (iv) the amount of any cash or credit refund, limited to the sales prices, made upon any sale where the merchandise sold, or some part thereof, is thereafter returned by the purchaser and accepted by Tenant, (v) sales of fixtures (after use thereof) which are not a part of Tenant's stock-in-trade, (vi) the amount of any discount on sales to employees of the Premises, (vii) to the extent that the amount thereof was previously included in Gross Sales, bad debts, not exceeding [***] percent of Gross Sales per Lease Year, (viii) to the extent such charges do not materially exceed Tenant's costs, separately stated charges for alterations, repairs, giftwrapping and delivery services rendered to Tenant's customers, and (ix) sales of gift certificates. Each layaway sale shall be treated as a sale (to the extent of the amount received) when Tenant shall receive any payment from its customer. Each sale upon installment or credit shall be treated as a sale for the full amount when Tenant shall receive any payment from its customer, and subject to the limitation set forth above, no deduction shall be allowed for uncollectible credit accounts. Each lease of merchandise shall be treated as a sale in the month in which made for a price equal to the total rent payable during the term of the lease. Notwithstanding anything contained in this Subsection with respect to inclusion in Gross Sales of all receipts of sales made through any vending machine or other coin or token operated device, the operation of any such device shall be subject to the prior written consent of Landlord, as provided in Subsection 6.2E hereof. C. Tenant shall utilize, and cause to be utilized, cash registers equipped with sealed continuous totals or such other devices for recording sales as Landlord shall reasonably approve to record all sales, and Tenant shall keep at its principal office in the continental United States for at least [***] months after expiration of each Lease Year full, true and accurate books of account and records conforming to generally accepted accounting principles showing all of the Gross Sales transacted at, in, on, about or from the Premises for such Lease Year, including all sales or similar tax reports and returns, dated cash register tapes, sales checks, sales books, bank deposit records, computer tapes, disc, chips, print-outs or other storage media and any other records normally maintained by Tenant and other supporting data. Landlord shall have the right, from time to time, to inspect Tenant's recordkeeping system and, in connection therewith, to make test audits of Gross Sales. Within [***] days after the end of each calendar month, or portion thereof, Tenant shall furnish to Landlord a statement signed and verified by Tenant (or by an authorized officer if Tenant be a corporation) of the Gross Sales transacted during such month or portion thereof; and within [***] days after the end of each Lease Year and within [***] days after the end of the Term, Tenant shall furnish to Landlord a statement, hereinafter called the annual statement, certified to Landlord by an executive officer of Tenant, of Gross Sales transacted during the preceding Lease Year included in the Term. The certification by said officer shall expressly state that the Gross Sales shown on said statement conform with and are - ---------- *** confidential treatment requested 3-2 16 computed in compliance with the definition thereof contained in Subsection 3.3B hereof. In the event Gross Sales for each of [***] Lease Years are misstated by more than [***] percent, thereafter the annual statement of Gross Sales must be certified by an independent certified public accountant. Landlord shall have the right, from time to time, by its accountants or representatives, to audit Tenant's Gross Sales and, in connection with such audits, to examine all of Tenant's records (including sales or similar tax returns, an actual inventory of Tenant's stock-in-trade and all supporting data and any other records from which Gross Sales may be tested or determined) of Gross Sales disclosed in any statement given to Landlord by Tenant and Tenant shall make all such records readily available at Tenant's main office, for such examination. If any such audit discloses that the Gross Sales transacted by Tenant exceed those reported, Tenant shall forthwith pay to Landlord such additional Percentage Rent as may be so shown to be payable and, if the actual Gross Sales exceed the Gross Sales reported by Tenant by more than [***] percent, or if Tenant's records or systems do not comply with the requirements of this Subsection, Tenant shall also then pay the reasonable cost of such audit and examination, including travel, food and lodging and related expenses of Landlord's auditors. In the event Tenant has understated Gross Sales by [***] percent or more, Landlord may, in addition to any other remedies, terminate this Lease but Tenant shall remain liable hereunder as set forth in Article 8; provided, however, that Landlord shall not exercise its right to terminate this Lease if Tenant shall demonstrate to Landlord's reasonable satisfaction that such understatement was made inadvertently. Any information obtained by Landlord pursuant to the provisions of this Subsection shall be treated as confidential, except in any litigation or arbitration proceedings between the parties and, except further, that Landlord may disclose such information to prospective buyers, to prospective or existing lenders, in any registration statement filed with the Securities and Exchange Commission or other similar body or in compliance with subpoenas and judicial orders. In no event shall this Subsection be deemed to limit Landlord's rights of pre-trial discovery and disclosure in any action or proceeding. D. If Tenant fails to submit a monthly statement of Gross Sales within [***] days following Landlord's request therefor, then until such statement is received by Landlord, Gross Sales for such month shall be deemed equal to Tenant's highest previously reported monthly Gross Sales (or, if Tenant has never previously reported, to the Gross Sales reasonably estimated by Landlord), and if such failure shall occur [***] in any Lease Year, Landlord may, at Tenant's expense, conduct an audit of Tenant's Gross Sales as set forth in Subsection 3.3C above. E. Percentage Rent shall be payable by Tenant not later than the [***] day of each calendar month for and in respect to the preceding calendar month. Such payment shall be a sum equal to the amount by which Tenant's Gross Sales for the then current Lease Year, through the last day of the preceding month, multiplied by the Percentage Rent Rate, shall exceed the Fixed Rent payable for said period, less payments previously made with respect to such Lease Year. Upon receipt by Landlord of the certified annual statement of Gross Sales to be furnished as hereinabove provided, there shall be an adjustment between Landlord and Tenant with payment to or credit by Landlord, as the case may be, to the end that Landlord shall receive the entire amount of Percentage Rent payable under this Lease for the preceding Lease Year and no more. - ---------- *** confidential treatment requested 3-3 17 Section 3.4. Tax Rent. A. Tenant shall pay to Landlord, as Additional Rent, Tax Rent in an amount equal to the product obtained by multiplying Taxes by a fraction, the numerator of which shall be the Floor Space of the Premises excluding Storage Space, if any, and the denominator of which shall be the portion of the aggregate leased and occupied Floor Space in the Shopping Center which is included in the assessment which constitutes the basis for the Taxes, but excluding Storage Space, if any, buildings or areas occupied by Department Stores and Specialty Stores, stores not fronting on the enclosed mall, and temporary kiosks; provided, however, that Tenant's Tax Rent for any year shall not exceed the amount which would otherwise be payable by Tenant hereunder if the denominator of said fraction were [***] percent of the Gross Leaseable Area of that portion of the Shopping Center included in the assessment, exclusive of Department Stores, Specialty Stores, stores not fronting on the enclosed mall, and temporary kiosks. Tax Rent shall be payable at least [***] days prior to the due date of any Taxes or installment thereof; however, Landlord may, if it so elects, collect Tax Rent from Tenant on a monthly basis, in which event Tenant shall pay, with each monthly installment of Fixed Rent, one-twelfth (1/12) of the annual amount estimated by Landlord to be due hereunder. In the event Taxes for the then current tax year are not known, monthly installments shall be based on the preceding tax year with immediate adjustment as soon as current taxes become known. If at the time any Taxes or installments are required to be paid, the amount of Tenant's previously made monthly payments is insufficient to pay Tenant's share, Tenant shall pay such deficiency within [***] days after demand therefor. In the event of any excess, it shall be credited and applied to future Tax Rent payments, except that any excess in the last year of the Term shall be refunded at the end of the Term. B. Should the taxing authority include in Taxes as a separately stated item the value of any improvements made by or for the benefit of Tenant, or include machinery, equipment, fixtures, inventory or other personal property or assets used by Tenant in the Premises, then Tenant shall pay the entire tax attributable to such items. C. Nothing herein contained shall be construed to include as a tax which shall be the basis of Tax Rent, any inheritance, estate, succession, transfer, gift, franchise, corporation, income or profit tax or capital levy that is or may be imposed upon Landlord, provided, however, that if, at any time during the Term, the method of taxation prevailing at the Commencement Date of this Lease shall be altered so that in lieu of or as a substitute for the whole or any part of the taxes now levied, assessed or imposed on real estate as such, there shall be levied, assessed or imposed (i) a tax on the rents received from real estate, or (ii) a tax or license fee imposed on Landlord which is otherwise measured by or based, in whole or in part, upon the Shopping Center or any portion thereof, then the same shall be included in the computation of Tax Rent hereunder, computed as if the amount of such tax or fee so payable were that due if the Shopping Center were the only property of Landlord subject thereto. - ---------- *** confidential treatment requested 3-4 18 D. For the purpose of this Section 3.4, the term "Taxes" shall include all real estate taxes, assessments, license fees or charges, excise on rent, water and sewer rents, any sums including interest or any payments in lieu or in substitution thereof on any bonds or debt (except industrial revenue bonds or similar indebtedness incurred for construction of non-public facilities) incurred by any Governmental Authority and payable by Landlord in connection with the Shopping Center and other governmental impositions, payments and charges of every kind and nature whatsoever, extraordinary as well as ordinary, foreseeable and unforeseeable, and each and every installment thereof which shall or may during the Term of this Lease be levied, assessed, imposed, become due and payable, or liens upon or arising in connection with the use, occupancy or possession of or grow due or payable out of, or for, the Shopping Center, or any part thereof or any land, building or other improvements therein, including any and all fees or expenses incurred in connection with the institution, prosecution, conduct and maintenance of any negotiations, settlements, actions or proceedings with respect to the amount of any Taxes, less the contributions or payments, if any, paid to Landlord with respect to Taxes by Department Stores, Specialty Stores, stores not fronting on the enclosed mall, and temporary kiosks, such deduction to be credited to the year in which actually received. Taxes shall not include any of the foregoing relating to any parcel or improvement included in the Shopping Center which, except for insignificant portions thereof, comprises a separate tax lot or is separately assessed or valued for the purpose of real estate taxes to the extent the taxes thereon are paid by a single tenant or occupant thereof, and further excluding any charge such as a water meter charge, sewer rent, if any, based thereon, which is measured by the consumption by the actual user of the item or service for which the charge is made. Whether or not Landlord shall take the benefit of the provisions of any statute or ordinance permitting an assessment for public betterment or improvements to be paid over a period of time, Landlord shall, nevertheless, be deemed to have taken such benefit so that the term Taxes shall include only the current annual installment of any such assessment and the interest on unpaid installments. A tax bill or copy thereof submitted by Landlord to Tenant shall be conclusive evidence of the amount of taxes or installments thereof. E. In the event Landlord shall obtain a tax refund as a result of tax reduction proceedings or other proceedings of similar nature, then Tenant shall, provided Tenant is not then in default beyond any opportunity to cure elsewhere set forth in this Lease, and after the final conclusion of all appeals or other remedies, be entitled to its pro rata share of the net refund obtained based upon Tax Rent paid by Tenant which is the subject of the refund. As used herein, the term "net refund" means the refund plus interest, if any, thereon, less appraisal, engineering, expert testimony, attorneys', printing and filing fees and all other costs and expenses of the proceeding, to the extent such fees, costs and expenses have not been previously included in Taxes under Subsection 3.4D, and less an administrative fee to Landlord in the amount of not more than [***] percent of the original refund. Tenant shall not have the right to institute or participate in any such proceedings, it being understood that the commencement, maintenance, settlement or conduct thereof shall be in the sole discretion of Landlord. Section 3.5. Common Area Rent. - ---------- *** confidential treatment requested 3-5 19 A. (1) Tenant shall pay to Landlord as Additional Rent, an amount equal to the product obtained by multiplying Interior Common Area Operating Costs for each fiscal year adopted by Landlord by a fraction, the numerator of which shall be the Floor Space of the Premises excluding Storage Space, if any, and the denominator of which shall be the aggregate of all leased and occupied Floor Space in the Enclosed Shopping Center, excluding the Floor Space of Storage Space, if any, and any buildings or areas occupied by Department Stores, Specialty Stores, stores not fronting on the enclosed mall, and temporary kiosks; provided, however, that the denominator of said fraction shall never be less than [***] percent of the Gross Leaseable Area of the Enclosed Shopping Center, exclusive of Department Stores, Specialty Stores, stores not fronting on the enclosed mall, and temporary kiosks. Tenant shall pay, with each monthly installment of Fixed Rent, one-twelfth (1/12) of the annual amount estimated by Landlord to be due hereunder, subject to adjustment. (2) As used in this Lease, the term Interior Common Area Operating Costs shall mean all costs and expenses incurred by Landlord in maintaining, managing, operating, repairing, replacing and protecting the Common Areas of the Enclosed Shopping Center, all in a manner consistent with the highest shopping center standards, including the cost of all work necessary to preserve and maintain the value, utility and appearance of said Common Areas. Interior Common Area Operating Costs shall specifically include, without limitation, all costs and expenses incurred in connection with the following: lighting, heating, ventilating, and air conditioning the Common Areas of the Enclosed Shopping Center; painting and decorating non-leaseable areas; gardening, including planting and replacing flowers and plants; compliance with environmental, health and safety regulations and standards promulgated by applicable Governmental Authorities; sanitary control, including extermination; removal of rubbish, garbage and other refuse; contracted security personnel, security systems and all other security measures; acquisition (including rental fees), maintenance, repair and replacement of fixtures, machinery, equipment, and supplies used in the operation and maintenance of the Common Areas of the Enclosed Shopping Center, and all personal property taxes and/or fees payable with respect to such items; maintenance, repair and replacement of Enclosed Shopping Center signs, ceilings, elevators, escalators and utility systems; maintenance, repair and replacement of all roofs over non-leaseable areas in the Enclosed Shopping Center; acquisition, maintenance, repair and replacement of cost saving devices commonly used in properties comparable to the Shopping Center; music program services and loud speaker systems; cleaning of non-leaseable areas; maintenance, repair and replacement of decorations in non-leasable areas; water for interior fountains and restrooms; acquisition, maintenance, repair and replacement of seasonal decorations; resolution of disputes or litigation with persons attempting to use the Common Areas of the Enclosed Shopping Center for commercial purposes; professional and technical fees and all other disbursements incurred in connection with the performance of any of the foregoing; other similar direct costs of the type incurred in the operation of comparable properties; and [***] percent of all of the foregoing costs to cover Landlord's administrative and overhead expenses. From the aggregate of the aforementioned costs and expenses, there shall be deducted the payments, if any, made with respect to Interior Common Area Costs by Department Stores, Specialty Stores, stores not fronting on the enclosed mall, and temporary kiosks, such deduction - ---------- *** confidential treatment requested 3-6 20 to be credited to the year for which such payments are applicable irrespective of the fiscal year in which such payments are actually received. B. (1) Tenant shall pay to Landlord as Additional Rent, an amount equal to the product obtained by multiplying Exterior Common Area Operating Costs for each fiscal year adopted by Landlord by a fraction, the numerator of which shall be the Floor Space of the Premises excluding Storage Space, if any, and the denominator of which shall be the aggregate of all leased and occupied Floor Space in the Shopping Center, excluding Storage Space, if any, any buildings or areas occupied by Department Stores and Specialty Stores, stores not fronting on the enclosed mall, and temporary kiosks; provided, however, that Tenant's share of Exterior Common Area Operating Costs for any fiscal year shall not exceed the amount which would otherwise be payable by Tenant hereunder if the denominator of said fraction were [***] percent of the Gross Leaseable Area of the Shopping Center, exclusive of Department Stores and Specialty Stores, stores not fronting on the enclosed mall, and temporary kiosks. Tenant shall pay, with each monthly installment of Fixed Rent, one-twelfth (1/12) of the annual amount estimated by Landlord to be due hereunder, subject to adjustment. (2) As used in this Lease, the term Exterior Common Area Operating Costs shall mean all costs and expenses incurred by Landlord in maintaining, managing, operating, repairing, replacing and protecting the Exterior Common Areas of the Shopping Center, excluding the Common Areas of the Village Area, all in a manner consistent with the highest shopping center standards, including the cost of all work necessary to preserve and maintain the value, utility and appearance of the Exterior Common Areas. Exterior Common Area Operating Costs shall specifically include, without limitation, all costs and expenses incurred in connection with the following: lighting the Exterior Common Areas; providing snow and ice removal; maintenance, repair and replacement of all parking lot surfaces, including striping, repaving and sealcoating; gardening and landscaping, including planting and replacing flowers, shrubbery and trees; policing and regulating vehicle and pedestrian traffic, including the cost of any contracted security personnel; providing off-site employee parking facilities, including transportation to and from such facilities; maintenance, repair and replacement of sewer and storm drainage systems, waste disposal facilities, lift stations, retention ponds or basins and sump facilities; removal of rubbish and other refuse from the Exterior Common Areas; acquisition (including rental fees), maintenance, repair and replacement of machinery, equipment, vehicles and supplies used in the operation and maintenance of the exterior Common Areas, and all personal property taxes and/or fees payable with respect to such items; maintenance, repair and replacement of exterior Shopping Center signs, curbs and walkways; painting and decorating exterior structures and improvements; water for exterior fountains, if any; salaries and other costs (including training costs, employee benefits and workers' compensation insurance) of Shopping Center personnel, such as security and maintenance staff, the regional property manager (a reasonable allocation), the Shopping Center manager, assistant manager, property accountant, secretaries and office staff; resolution of disputes or litigation with Persons attempting to use the Exterior Common Areas for non-commercial purposes; professional and technical fees and all other disbursements incurred in connection with the performance of any of the foregoing; the cost of acquiring, - ---------- *** confidential treatment requested 3-7 21 maintaining and administering such "all risk" insurance (including rental income, flood and earthquake), boiler and machinery insurance, comprehensive general and umbrella liability insurance and such other insurance for the Shopping Center as Landlord may, from time to time, deem necessary, or in lieu thereof or in combination therewith, the costs attributable to that portion of the coverage which Landlord shall elect to self-insure, including the cost of administering Landlord's self-insurance program; dues and assessments allocable to the Shopping Center pursuant to the Declaration of Covenants, Conditions and Restrictions for the Mill Creek development, including any property owners association; other similar direct costs of the type incurred in the operation of the exterior areas of comparable properties; and [***] percent of all of the foregoing costs to cover Landlord's administrative and overhead expenses. Costs and expenses incurred by Landlord solely in connection with or for the benefit of the Common Areas of the Village Area of the Shopping Center, shall not be included as Exterior Common Area Operating Costs. From the aggregate of the aforementioned costs and expenses, there shall be deducted the payments, if any, made with respect to Exterior Operating Costs by Department Stores, Specialty Stores, stores not fronting on the enclosed mall and temporary kiosks, such deduction to be credited to the year for which such payments are applicable irrespective of the fiscal year in which such payments are actually received. C. With respect to costs which Landlord may elect to depreciate (or amortize) in lieu of including such costs in Common Area Operating Costs for a single fiscal year, only that portion of the depreciation (or amortization) allocable to the year for which Common Area Operating Costs are being determined shall be included in then current Common Area Operating Costs, it being understood, however, that interest (at a rate equal to the prime rate being charged from time to time by Citibank, N.A. during the year for which Common Area Operating Costs are being determined) on the then undepreciated (or unamortized) portion of such costs shall be included in Common Area Costs. In no event shall Common Area Operating Costs include the costs and expenses incurred by Landlord in constructing new buildings in the Shopping Center or expanding or improving leasable area or the costs and expenses incurred by Landlord for repairs and replacements with respect to which Landlord receives insurance proceeds or condemnation awards. D. After the end of each fiscal year adopted by Landlord, Landlord shall furnish to Tenant a statement showing in reasonable detail the information relevant or necessary to the calculation and determination of Landlord's actual Interior and Exterior Common Area Operating Costs, as hereinabove defined, for the fiscal year in question. If the monthly charges paid by Tenant during such fiscal year, as hereinabove provided, shall be less than (i) Landlord's actual Interior Common Area Operating Costs for such fiscal year, as shown by such statement, multiplied by the fraction referred to in Subsection 3.5A, plus (ii) Landlord's actual Exterior Common Area Operating Costs for such fiscal year, as shown by such statement, multiplied by the fraction referred to in Subsection 3.5B, Tenant shall pay to Landlord the excess within [***] days after service of such statement. If, however, the said monthly charges shall exceed Landlord's actual costs multiplied by said fractions, Landlord shall, with the submission of said statement, credit or refund to Tenant the excess. - ---------- *** confidential treatment requested 3-8 22 Section 3.6. Additional Rent. Unless another time shall be herein expressly provided, Additional Rent shall be due and payable within [***] days following demand or together with the next-succeeding installment of Fixed Rent, whichever shall first occur, and Landlord shall have the same remedies for failure to pay the Additional Rent as for a non-payment of Fixed Rent. Tenant's failure to object to any final statement, invoice or billing rendered by Landlord within a period of [***] days after receipt thereof shall constitute Tenant's acquiescence with respect thereto and shall render such statement, invoice or billing an account stated between Landlord and Tenant. Section 3.7. Rent for a Partial Month. For any portion of a calendar month included at the beginning or end of the Term, Tenant shall pay one-thirtieth (1/30) of each monthly installment of Rent for each day of such portion, payable in advance at the beginning of such portion, except that Percentage Rent for such portion shall be computed and paid as provided in Section 3.3 hereof. Section 3.8. Late Charges and Interest. Tenant shall pay, as Additional Rent, a service charge in the amount of [***] for bookkeeping and administrative expenses, if any Rent due hereunder is not received within [***] days following its due date. In addition, as of the [***] day following service of notice by Landlord that a payment of Rent is overdue, interest shall accrue on the overdue amount, retroactive to the original due date, at the lesser of the highest rate permitted to be paid by Tenant in the state in which the Shopping Center is located or an annual rate of [***] percent more than the prime interest rate of Citibank N.A., located in New York, New York. Section 3.9. Taxes. Tenant shall pay, as Additional Rent, for any documentary stamps or other transfer fees or any other sales or use taxes or other taxes, impositions or levies of or required by any Governmental Authority, including interest or penalties thereon, arising out of or by reason of this Lease or the amount of Rent payable hereunder. - ---------- *** confidential treatment requested 3-9 23 ARTICLE 4 COMMON AREAS Section 4.1. Common Areas. Landlord hereby grants to Tenant a non-exclusive license to use (i) the parking areas provided by Landlord in the Shopping Center for the accommodation and parking of vehicles of Tenant and its officers, agents and employees and customers while such customers are shopping in the Premises or in any other portion of the Shopping Center, (ii) the public conveniences of the Shopping Center, including any connecting passageways and lobbies used in conjunction with hotels and/or office buildings, and (iii) all other areas in the Shopping Center, including the enclosed mall, to be used in common by tenants of the Shopping Center, such parking areas, public conveniences and other common areas being hereafter collectively referred to as "Common Areas". Notwithstanding any of the provisions herein contained, Landlord retains and reserves the non-exclusive right to the use of the Common Areas. A. Exhibit A sets forth the general layout of the Shopping Center, but shall not be deemed to be a warranty, representation or agreement on the part of Landlord that the Shopping Center will be or will continue to be exactly as indicated on said diagram, and Landlord reserves the right to (i) increase, eliminate, reduce or change the number, type, size, location, elevation, nature and use of any of the Common Areas or the buildings comprising the Shopping Center, (ii) make changes, additions, subtractions, alterations or improvements in or to such Common Areas, including, but not limited to, the construction of decked or subsurface parking, (iii) withdraw portions of the Shopping Center from Common Area or add Common Area to the Shopping Center, including non-contiguous parcels for parking and other related Shopping Center purposes and (iv) construct buildings, additional Department Stores, kiosks and other improvements in the Common Areas. Tenant shall have no rights with respect to the land or improvements below floor slab level or above the interior surface of the ceiling of the Premises or air rights above the Premises. B. Landlord shall not, pursuant to Subsection 4.1A, create any permanent, substantial, adverse interference with access to or visibility of the Premises from the covered mall upon which the front of the Premises abuts. However, this provision shall not preclude Landlord from installing carts or erecting kiosks or similar improvements anywhere in the covered mall, so long as any kiosks or similar improvements which are located in front of the Premises are approximately centered in the mall. Tenant's sole remedy in the event of Landlord's failure to comply with this Subsection 4.1B shall be to terminate this Lease. In the event Tenant, as the result of Landlord's failure to so comply, shall exercise its right to terminate this Lease, Landlord shall pay, within [***] days following the date Tenant vacates and surrenders the Premises, the then unamortized cost of the permanent leasehold improvements (excluding, inter alia, trade fixtures and equipment, furnishings, decorations, inventory and other items of personal property) initially made by Tenant pursuant to Article 2 of this Lease, assuming a useful life equal to the length of the original Term of this Lease and amortization on a straight line - ---------- *** confidential treatment requested 4-1 24 basis. Tenant shall, not later than [***] days following the Commencement Date, deliver an affidavit of an officer of Tenant and a certificate of Tenant's architect accompanied by such bills, contracts, receipts, invoices, cancelled checks and the like as Landlord may reasonably require, specifying the cost of the Tenant's leasehold improvements, which amount shall, unless disputed by Landlord, thereupon be the basis for the amount to be paid by Landlord pursuant to this Subsection. Failure to timely deliver such affidavit, certificate and supporting data shall constitute a waiver of Tenant's right to such payment. C. Tenant, its officers, agents and employees shall park their vehicles only in areas from time to time designated by Landlord as the area for such parking, provided that such areas shall be located in or not more than [***] mile from the perimeter boundary of the Shopping Center. Tenant shall, within [***] days following written notice from Landlord, furnish Landlord, or its authorized agent, the state automobile license numbers assigned to its automobiles and the automobiles of all its employees employed in the Premises. Tenant shall not at any time park any trucks or any delivery vehicles in the parking area. Landlord shall have the right, after service of [***] or more notices to Tenant regarding improper parking, to levy an assessment payable by Tenant in a sum not to exceed [***] per day for each and every car belonging to Tenant, its agents, servants, contractors, licensees or employees which shall thereafter park in an area other than that designated by Landlord as a parking area for such vehicles. Such assessment shall be payable by Tenant on the next due date for Fixed Rent and shall be considered Additional Rent. D. Common Areas shall be subject to such reasonable rules and regulations, including the right to impose parking charges or fees and to allocate parking areas on a uniform or non-discriminatory basis and to prohibit the use of the Shopping Center by such Persons as Landlord determines, as the same may be amended or modified, as Landlord may, from time to time, adopt as provided in this Lease. E. Landlord reserves the right to close, if necessary, all or any portion of the Common Areas for the minimum length of time as may, in the reasonable opinion of Landlord's counsel, be legally sufficient to prevent a dedication thereof or the accrual of the right of the public therein, to close temporarily, if necessary, all or any part of the parking areas to discourage non-customer parking and to do and perform such other acts in and to the Common Areas as in the use of good business judgment of Landlord will improve the use thereof. - ---------- *** confidential treatment requested 4-2 25 ARTICLE 5 LANDLORD'S ADDITIONAL COVENANTS Section 5.1. Repairs by Landlord. Landlord shall keep the exterior walls, foundations, downspouts, gutters and roofs of the buildings, and the plumbing, electrical and other utility system serving but which are located outside of the Premises, in good order, condition and repair and shall make necessary structural repairs to the exterior walls of the buildings (excluding, however, repairs to windows, doors, saddles, plate glass, store fronts and air conditioning and heating installations and wiring, pipes and other utility installations located outside of the Premises which are used exclusively by Tenant), the dividing walls between the Premises and space occupied or to be occupied by others and the load-bearing walls and load-bearing columns, if any, within the Premises, provided that Landlord shall not be obligated hereby to do any work required to be done because of any damage caused by any act, omission or negligence of Tenant and its invitees, licensees, their respective officers, agents and employees or their customers. Except where Landlord has actual notice of the necessity for such repair, Landlord shall not be required to commence any such repair until after notice from Tenant that the same is necessary, which notice, except in case of any emergency, shall be in writing and shall allow Landlord [***] days in which to commence such repair. The fact that the costs incurred by Landlord in connection with any of the foregoing are includable in Common Area Operating Costs pursuant to Subsections 3.5A and 3.5B shall not affect Landlord's performance obligations under this Section 5.1. When necessary by reason of accident or other cause occurring in the Premises, or elsewhere in the Shopping Center, or in order to make any repairs or alterations or improvements in or relating to the Premises or to other portions of the Shopping Center, Landlord reserves the right to interrupt the supply to the Premises of steam, condenser water or cooled air for air conditioning, electricity, water and gas and also to suspend the operation of the heating and air conditioning system, if any, until said repairs, alterations or improvements shall have been completed. If, as a result of Landlord's performance of its obligations or exercise of its rights under this Section 5.1, there is created a substantial and material interference with Tenant's ability to conduct its business in the Premises and Tenant therefor closes for more than [***] consecutive business days, Tenant shall be entitled to an abatement of Fixed Rent for each day after the [***] business day during which the condition continues. Other than the aforesaid, there shall be no abatement of Rent because of any such interruption or suspension; however, Landlord shall pursue such work with reasonable continuity, diligence and dispatch and in such a manner as (consistent with good practice) to cause a minimum of interference with Tenant's use of the Premises. Section 5.2 Quiet Enjoyment. Landlord covenants that Tenant, on paying the Rent and performing Tenant's obligations in this Lease, shall peacefully and quietly have, hold and enjoy the Premises and the appurtenances throughout the Term without hindrance, ejection or molestation by any Person lawfully claiming under Landlord subject to the other terms and provisions of this Lease and to any agreements to which this Lease may be or become subject and subordinate. - ---------- *** confidential treatment requested 5-1 26 ARTICLE 6 TENANT'S ADDITIONAL COVENANTS Section 6.1. Affirmative Covenants. Tenant covenants, at its expense, at all times during the Term: A. To use the Premises only for the Permitted Use: to operate its business in the Premises under Tenant's Trade Name (or such other trade name as is adopted by a majority of stores operating under the Trade Name); and to conduct its business at all times in a dignified manner and in conformity with the highest standards of practice obtaining among superior type stores, shops or concerns dealing in the same or similar merchandise and in such manner as to produce the maximum volume of Gross Sales and to help establish and maintain a high reputation for the Shopping Center. B. To continuously and uninterruptedly use, occupy and operate for retail sales purposes, all of the Premises other than such minor portions thereof as are reasonably required for storage and office purposes; to use such storage and office space only in connection with the business conducted by Tenant in the Premises; to furnish and install all trade fixtures and permitted signs; to carry a complete stock of seasonal merchandise; to maintain an adequate number of trained personnel for efficient service to customers; to open for business and remain open during the entire Term from at least 10:00 A.M. to 9:30 P.M. Mondays through Saturdays and 12:30 P.M. to 6:00 P.M. on Sundays, and to light its display windows and signs during those hours and on those days when the covered mall is kept illuminated by Landlord (but Tenant shall not be obligated to keep the same illuminated beyond 11:00 P.M. on any day). Tenant shall, if not in conflict with any Governmental Requirements, and providing that (i) at least one Department Store is open on such days or for such hours and (ii) Landlord shall agree to cause the Shopping Center to remain open for such days or for such hours, also open for business on such days or for such additional hours. C. To store in the Premises only such merchandise as is to be offered for sale at retail within a reasonable time after receipt; to store all trash and refuse in appropriate containers within the Premises so as not to be visible to the shopping public and to attend to the daily disposal thereof in the manner approved by Landlord; to keep all drains inside the Premises open; and to receive, deliver, load and unload goods, merchandise, supplies, fixtures, equipment, furniture and rubbish through proper service doors and at times established by Landlord, provided, however, that if Landlord shall furnish or designate trash removal service, Tenant shall accept and use such service and pay Landlord or the Person designated by Landlord, monthly for such service at a rate which shall be no greater than the prevailing competitive rate for equivalent service in the locale. If Landlord shall implement a refuse recycling program for the Shopping Center, Tenant shall participate in such a program and shall comply with all rules and regulations promulgated by Landlord in connection therewith, including, but not limited to, the sorting of refuse by type for deposit in designated containers. D. Except for repairs hereunder to be made by Landlord, to take good care of the Premises and the fixtures and appurtenances therein and make all other necessary repairs and replacements thereto, of every kind whatsoever (including, without limitation, repairs and 6-1 27 replacements to windows, doors, saddles, plate glass, store fronts, air conditioning and heating installations and plumbing inside the Premises or located outside but exclusively serving the Premises and any exterior installation peculiar to the conduct of Tenant's business such as, but not limited to, signs, displays or exterior devices of any nature) which repairs and replacements shall be in quality and class at least equal to the original work. If Tenant fails to make any such repairs or replacements, Landlord may after reasonable notice (other than in the case of an emergency) to Tenant make same for the account of Tenant, at Tenant's expense, which amount shall be considered Additional Rent and shall be due and payable by Tenant when billed by Landlord. Tenant shall not be required to make structural repairs unless the necessity therefor arises by reason of Tenant's Work, installations or alterations made by Tenant, the manner of Tenant's use or occupancy or any other cause created by Tenant. E. To make all repairs, alterations, additions or replacements to the Premises, including appurtenances, equipment, facilities and fixtures therein, arising out of the manner of Tenant's use or occupancy of the Premises or necessary to satisfy any Governmental Requirement; to keep the Premises equipped with all safety appliances so required because of such use or occupancy; and otherwise to comply with the orders and regulations of any Governmental Authority. Tenant shall not be required to make structural alterations unless the necessity therefor arises by reason of Tenant's Work, installations or alterations made by Tenant, the manner of Tenant's use or occupancy or any other cause created by Tenant. F. To pay promptly when due the entire cost of any work to the Premises, including equipment, facilities and fixtures therein, so that the Premises and all of Tenant's fixtures and equipment shall, at all times, be free of encumbrances or liens, including liens for labor and materials; to procure all Necessary Approvals before undertaking such work; to permit Landlord to post and keep posted on the Premises, sufficient, conspicuous notices stating that any improvements are not being made at Landlord's instance; to do all such work in a good and workmanlike manner acceptable to Landlord, employing materials of good quality; to perform such work in such a manner as to insure proper maintenance of good and harmonious labor relationships; to comply with any Governmental Requirement relating thereto. Tenant understands that as part of the rules and regulations promulgated by Landlord in connection with Tenant's Work, Landlord requires a construction barrier which fulfills Landlord's construction criteria to be erected around the mall exposure of the Premises. In the event that such a barrier is already in place at the time Tenant takes possession of the Premises to prosecute Tenant's Work, Tenant shall pay to Landlord, as consideration for Landlord having provided the barrier and thereby having relieved Tenant of responsibility for erecting same, an amount equal to the product of the [***]. Said amount shall be payable to Landlord not later than [***] days following the date on which Tenant commences Tenant's Work and shall constitute Additional Rent under the Lease. Tenant shall within [***] days after completion of any work performed by Tenant, file for record in the appropriate public records, a "notice of completion." G. To defend and save Landlord and Landlord's Managing Agent harmless and indemnified from all injury, loss, claims or damage (including reasonable attorneys' fees and - ---------- *** confidential treatment requested 6-2 28 disbursements incurred by Landlord or its Managing Agent in conducting an investigation and preparing for and conducting a defense) to any Person (including Tenant's employees) or property, arising from, related to, or in any way connected with the use or occupancy of the Premises or the conduct or operation of Tenant's business, unless such injury, loss, claim or damage be attributable to the negligence or willful acts of Landlord or its Managing Agent, or its servants or employees. H. To maintain with responsible companies approved by Landlord (said approval not to be unreasonably withheld), (i) commercial general liability insurance (or comparable coverage, including products liability and blanket contractual liability insurance) against all claims, demands or actions for personal injury, bodily injury or property damage arising from, related to, or in any way connected with Tenant's Work, Tenant's occupation of the Premises, or the conduct and operation of Tenant's business, or caused by actions or omissions to act, where there is a duty to act, of Tenant, its agents, servants and contractors, to the limits of not less than [***] per claim and in the aggregate, which limits may be provided by any combination of primary and umbrella or excess insurance, and which insurance shall be on an occurrence basis and shall be endorsed to name Landlord, its agents and employees as additional insureds; (ii) "All-Risk" property insurance, including such flood and earthquake coverage as Landlord may, from time to time, require covering [***] of Tenant's real and personal property values, such as fixtures and equipment, stock-in-trade, furniture, furnishings, finishes, improvements and betterments installed or made by or on behalf of Tenant in, on or about the Premises, to [***] of their replacement cost without deduction for depreciation, as well as loss of business income (so-called business interruption) coverage, to include the Fixed Rent and Additional Rent payable under this Lease; (iii) if there is air conditioning or refrigeration equipment valued in excess of [***], boiler and machinery coverage at replacement cost, or if there is a boiler or pressure vessel or other similar equipment in the Premises, boiler and machinery coverage in the minimum amount of [***]; and (iv) workers' compensation, disability and such other similar insurance covering all persons employed by Tenant in connection with Tenant's Work and the operation of Tenant's business and with respect to whom death or bodily injury claims could be asserted against Tenant, Landlord or the Shopping Center. All of said insurance shall be in form and with deductibles reasonably satisfactory to Landlord and shall provide that it shall not be subject to cancellation, termination or change except after at least [***] days' prior written notice to Landlord. In the case of boiler and machinery insurance, the policy or policies shall cover Landlord or any designee of Landlord as a loss payee and shall provide that losses sustained by Landlord shall be adjusted by and payable to Landlord. Certificates of insurance evidencing the coverage required pursuant to this Subsection H, together with certificates evidencing coverage on the part of Tenant's contractors, shall be deposited with Landlord not less than [***] days prior to the day Tenant begins Tenant's Work and upon renewals of said policies not less than [***] days prior to the expiration of the term of such coverage. All such policies shall be delivered with satisfactory evidence of the payment of the premium therefor. Landlord and Tenant mutually agree that with respect to any loss which is covered by "All-Risk" property insurance then being carried by them respectively, or required to be carried, the party carrying or required to carry such insurance and suffering said loss, releases the other of and from any and - ---------- *** confidential treatment requested 6-3 29 all claims with respect to such loss, including amounts within the deductibles, and they further mutually agree that their respective insurance companies shall have no right of subrogation against the other on account thereof. I. In the event of any action or proceeding arising out of or pursuant to this Lease, the successful party shall be entitled to recover its reasonable attorneys' fees and all other costs and expenses incurred in connection with the action or proceeding. J. Within [***] days following receipt of actual notice thereof, to cause to be discharged of record by bonding, payment or otherwise, any mechanic's or similar lien, judgment, encumbrance, security interest, chattel mortgage or notice thereof at any time filed in any public office against the Shopping Center or the Premises (including any fixtures or equipment located therein) or the owner of any interest therein for any work, labor, services, materials, fixtures, equipment or property claimed to have been performed at or furnished to the Shopping Center or Premises for or on behalf of Tenant or any agent or contractor of Tenant, or anyone holding the Premises through or under Tenant. Nothing contained in this Lease shall be construed as a consent on the part of Landlord to subject Landlord's estate in the Premises to any lien or liability under applicable law. K. Upon the expiration or other termination of the Term to quit and surrender the Premises to Landlord, broom clean, in good order and condition, ordinary wear and tear and casualty damages excepted, and to remove all property of Tenant and each alteration addition and improvement made by Tenant as to which Landlord shall have made the election provided for in Section 2.4 hereof, to repair all damage to the Premises caused by such removal and restore the Premises to the condition in which they were prior to the installation of the articles so removed. Any property not so removed and as to which Landlord shall not have made said election, shall be deemed to have been abandoned by Tenant and may be retained or disposed of by Landlord, as Landlord shall desire. However, Tenant shall be responsible for the cost of removal and disposal. If the last day of the Term falls on a day the Shopping Center is closed, the Term shall expire on the business day immediately preceding and Tenant's obligation to observe or perform this covenant shall survive the expiration or termination of the Term. Immediately upon the failure of Tenant to perform any covenant of this Subsection K, Landlord may, without notice, do so, and shall be entitled to receive from Tenant the then cost of performance of such covenant, such damages to be paid in addition to and separate and independently from damages accruing by reason of breach of any other covenant of this Lease. L. (1) Tenant shall pay to Landlord for deposit by Landlord in a promotion fund (the "Promotion Fund"), an amount (the "Promotion Fund Charge") equal to the sum set forth in Article 1, subject to adjustment as hereinafter provided. On the January 1 next following the [***] anniversary of the Commencement Date of this Lease, the amount set forth in Article 1 shall be increased by [***] percent, and on each January 1 thereafter, the Promotion Fund Charge payable for the immediately preceding year shall be increased by [***] percent. The annual charge payable by Tenant under this paragraph shall be paid in equal monthly - ---------- *** confidential treatment requested 6-4 30 installments on the [***] day of each calendar month in advance and shall be prorated for any partial calendar month. The Promotion Fund shall be used by Landlord, at such times and in such manner as shall be determined by Landlord, to pay all costs and expenses (including the costs of administration) associated with the formulation and carrying out of an ongoing program for the promotion of the Shopping Center, which program may include, without limitation, special events, shows, displays, institutional advertising for the Shopping Center, promotional literature to be distributed within the general trade area of the Shopping Center, and other activities designed to attract customers to the Shopping Center. (2) At any time, Landlord may elect to cause a Merchants' Association (an "Association") to be organized, the object of which shall be the general furtherance of the business interests of tenants in the Shopping Center by sales promotion and Shopping Centerwide advertising. Upon the organization of an Association, Tenant shall become (and remain) a member thereof, and the amount which would have otherwise been payable by Tenant to the Promotion Fund pursuant to the provisions of paragraph (1) above shall be discontinued and a sum equal to such amount (subject to adjustment as herein set forth or such greater adjustment as may be assessed from time to time by the Association) shall be paid by Tenant to the Association as dues. The rules and regulations and by-laws of the Association shall be consistent with the obligations of Tenant set forth in this Subsection L, but shall in all other respects be in the form designated by Landlord; it being agreed, however, that nothing therein set forth shall be in conflict with the provisions of this Lease. Landlord, having once exercised its option as set forth in this Subsection, may at any time elect to discontinue operation of the Association, in which case the provisions of paragraph (1) applicable to the Promotion Fund Charge shall again become operative. (3) The failure of any other tenant or occupant of the Shopping Center to contribute to the Promotion Fund or become a member of the Association shall in no way release Tenant from its obligations to do so. (4) If the Shopping Center shall be expanded by adding a Department Store and/or [***] percent or more to the Gross Leaseable Area of the Shopping Center (an "Expansion"), Tenant shall pay to Landlord's Promotion Fund a one-time charge for each such Expansion. Such Expansion charge shall be an amount equal to the annual Promotion Fund Charge payable by Tenant for the Lease Year immediately preceding the year in which work on the Expansion commences and shall be payable upon [***] days' prior written notice from Landlord given at any time subsequent to the commencement of construction. A like amount shall also be payable by Tenant to the Promotion Fund in the event that the Shopping Center shall be substantially renovated. For purposes of this subparagraph, the term "substantial renovation" or any variation thereof shall be deemed to mean a redecoration of the covered mall portion of the Common Areas of the Shopping Center to the extent of at least [***] percent thereof, including new flooring and the painting and/or recovering of the walls. The amount payable to the Promotion Fund in connection with a substantial renovation of the Shopping Center shall be due upon [***] days' prior written notice from Landlord to Tenant, but in no - ---------- *** confidential treatment requested 6-5 31 event prior to commencement of the renovation. In the event of a contemporaneous Expansion and renovation of the Shopping Center, Tenant shall be assessed only the one-time Expansion charge. M. Tenant shall furnish to Landlord an annual statement at the end of each Lease Year showing the amounts spent by Tenant on white space advertising or other advertising media. Each such annual statement shall be made a part of the annual report required to be furnished by Tenant under Section 3.3. If Tenant's annual statement shows that Tenant has expended for such advertising, during the preceding Lease Year, less than the Percentage of Advertising Required, Tenant shall, within [***] days after the required delivery date of its annual statement, pay to the Promotion Fund (or substitute Association) the difference between the amount actually expended for such advertising and the Percentage of Advertising Required. The Promotion Fund Charge (or dues or other payments made by Tenant to the substitute Association) shall not be deemed an amount expended for advertising within the meaning of this Subsection M. All expenditures made by Tenant for advertising in connection with Tenant's other stores, if any, within the trade area of the Shopping Center, may be included by Tenant to comply with this Subsection provided such advertising in all instances includes the Premises and is distributed to the geographical trade area in which the Shopping Center is located. N. To refer to the Shopping Center by its name above stated in designating the location of the Premises in all newspaper or other advertising in the general trade area in which the Shopping Center is located. With respect to any advertisement in which the location of another similar business activity conducted by Tenant in the trade area shall be mentioned, Tenant shall also mention or cause to be mentioned the Trade Name and location of the business conducted at the Premises. O. (1) To the extent that Tenant currently has or in the future shall establish an online site (including but not limited to a World Wide Web site or a section of a proprietary online service) (each a "Site"; collectively, "Sites"), Tenant shall: (a) In promoting its business via such Site, feature Tenant's store at the Shopping Center with substantially the same prominence as that of any other comparable store of Tenant. (b) To the extent that Tenant shall provide such a link in connection with any other comparable store, provide a link off an appropriate page of Tenant's Site to the Mall Site (as hereinafter defined), if Tenant has a Digital Storefront (as hereinafter defined) for such Mall Site. The placement of the link shall be subject to Tenant's reasonable technical and design requirements. (c) Offer Landlord the opportunity to include content from Tenant's Site on one or more of Landlord's Sites, on terms to be mutually agreed upon. - ---------- *** confidential treatment requested 6-6 32 (d) Subject to Section 3.3, to the extent Tenant shall make any sales of goods or services via Tenant's Site and such goods or services are shipped from or delivered to the customer from the Premises, the amount of the actual prices charged, excluding shipping and handling charges, shall be included in Gross Sales and shall be subject to all audit rights otherwise granted to Landlord under Section 3.3. (2) To the extent that Landlord has established or shall establish a Site for the Shopping Center (the "Mall Site"), Tenant shall cooperate with Landlord to establish a "store" for Tenant in such Mall Site, on terms to be mutually agreed upon, in accordance with Landlord's then current format and features. The "store" shall be known as a "Digital Storefront". (a) In connection with the Digital Storefront and the Mall Site, Tenant shall permit Landlord to use Tenant's Trade Name and any graphics approved by Tenant for use in the Shopping Center directory. If so requested by Landlord, Tenant shall also keep Landlord apprised of all sales events and special promotions taking place in the Premises and shall permit Landlord to publicize same via the Digital Storefront and the Mall Site. (b) Subject to Section 3.3, Tenant hereby agrees that, to the extent that Tenant shall make any sales of goods or services via the Digital Storefront or the Mall Site, the amount of the actual prices charged, excluding shipping and handling charges, shall be included in Gross Sales and shall be subject to all audit rights otherwise granted to Landlord under Section 3.3. (3) Notwithstanding anything to the contrary contained in this Subsection 6.10, Tenant shall not be required to: (a) include any information regarding the Premises, the Shopping Center, the Digital Storefront, and/or the Mall Site in Tenant's Site unless Tenant displays at least one other of Tenant's comparable store locations or other specific shopping centers; or (b) include sales of goods or services in Gross Sales which are made via an online service unless such sales are paid for at the Premises or delivered to the purchaser from the Premises or traceable solely to either the Mall Site or the Digital Storefront; or P. To obtain all Necessary Approvals. Q. To provide in accordance with Landlord's sign criteria, a suitable identification sign or signs, bearing Tenant's Trade Name, of such size, design and character as Landlord shall approve and install said sign or signs at a place or places designated by Landlord. Tenant shall maintain any such signs or other installations in good condition and repair. R. To conform to all reasonable rules and regulations which Landlord may make for management and use of the Shopping Center, requiring such conformance by Tenant and Tenant's employees. Such rules and regulations shall be uniform and shall not discriminate against Tenant. - ---------- *** confidential treatment requested 6-7 33 S. To deliver to Landlord, within [***] days after a request for same, all or any of the following items, in such form and containing such evidence of authenticity and regularity as Landlord may reasonably require. (1) Balance sheet, annual report and related financial statements of Tenant, Guarantor, if any, Tenant's parent and all subsidiaries of Tenant for the previous annual period, same to have been prepared in accordance with generally accepted accounting principles. (2) A list of all Affiliates, officers, directors and stockholders of Tenant, including name, title, number and type of shares owned. (3) If Tenant or any Person from whom information as aforesaid is required to be submitted is a corporation whose shares are traded on the "over the counter", American or New York Stock Exchanges then the provisions of paragraphs (1) and (2) above may be satisfied by submission of Tenant's most recent annual report and form 10K together with all other current filings with the Securities Exchange Commission or otherwise made pursuant to Federal securities laws. (4) Certificates executed by the appropriate chief financial officers (or executives) of any entity from whom information is required pursuant to this Subsection to the effect that there has been no material adverse change in its financial status since the date of the most recent information provided to Landlord. (5) A list of all stores operated by any of the Persons from whom information is required as aforesaid (including shareholders of such Persons) or their licensees, franchisees, concessionaires or the like within a radius of five (5) miles of the Shopping Center. Tenant represents that Tenant has the right, power and authority to execute and deliver this Lease, that such execution, delivery and performance of Tenant's obligations shall not cause, create or constitute a default or breach of or under any agreement to which Tenant is a party or by which it is bound. Tenant further represents that the information concerning its financial status, stockholders, parent, subsidiaries and Affiliates, if any, prior to the execution and delivery of this Lease is unchanged, true and correct, accurately represents the financial status of the Person for whom submitted and that there has been no material or adverse change in the financial status of Tenant or said Persons. Section 6.2.Negative Covenants. Tenant covenants at all times during the Term and such further time as Tenant occupies the Premises or any part thereof: A. Except for existing stores, Tenant shall not, nor shall any officer, director, shareholder, Affiliate, franchisee or licensee or the like of Tenant, directly or indirectly operate, manage or have any interest in any other store or facility for the sale at retail of merchandise or services similar to that which is permitted under "Permitted Use", within ten (10) miles of the Shopping Center (the Retail Restriction Limit). For purposes of this Subsection A, the Retail - ---------- *** confidential treatment requested 6-8 34 Restriction Limit shall be measured along a straight line, the beginning of which is the point on the outer perimeter of the Shopping Center which is closest to such other store and the end of which is a point on the main entry doors of such other store. Without limiting Landlord's remedies in the event Tenant should violate this covenant, Landlord may include the Gross Sales of such other store in the Gross Sales transacted in the Premises, for the purpose of computing Percentage Rent due hereunder. In the event Landlord so elects, all of the provisions of Section 3.3 hereof shall be applicable to all records pertaining to such other store. B. Unless specifically set forth in the Permitted Use, not to sell, display or distribute (i) any alcoholic liquors or beverages for consumption on or off the Premises or (ii) any pornographic or obscene or sexually erotic goods, wares, printed material or services or (iii) any drugs or other substances whose use or sale is prohibited or controlled by Governmental Authority, including any merchandise which, although not per se violative of Governmental Requirements, is designed or may reasonably be inferred to have been designed for use in connection with such prohibited or controlled items. C. Not to injure, overload, deface or otherwise harm the Premises or any part thereof or any equipment or installation therein; nor commit any nuisance; nor permit the emission of any objectionable noise or odor; nor, unless specifically permitted by the Permitted Use, bum anything within the Shopping Center; nor permit the collection of trash or refuse contrary to rules and regulations established by Landlord or by any Person not approved or designated by Landlord; nor install or cause to be installed any automatic garbage disposal equipment; nor conduct business at, in, on, about or from all or any part of the Premises on any days or hours that Landlord does not open the Shopping Center for business to the public; nor make any use of the Premises or of any part thereof or equipment therein which is improper, offensive or contrary to any Governmental Requirement or to the rules and regulations of Landlord as such may be promulgated from time to time; nor use any advertising medium that may constitute a nuisance, such as loudspeakers, sound amplifiers or phonographs in a manner to be heard outside the Premises; nor conduct any auction, fire, "going out of business" or bankruptcy sales except under conditions approved by Landlord in writing; nor use or occupy the Premises, or suffer or permit them to be used or occupied in whole or in part, as a surplus store, salvage or "odd lot" store, or for any similar business or activity; nor do any act tending to injure the reputation of the Shopping Center; nor sell or display merchandise on, or otherwise obstruct, the Common Areas or anywhere else in the Shopping Center or distribute handbills or other advertising matter in the Shopping Center outside of the confines of the Premises; nor carry on or permit any business conduct or practice which, in Landlord's judgment, may harm the business reputation of Landlord or reflect unfavorably on the Shopping Center, Landlord or other tenants or which might confuse or mislead the public. Tenant shall, upon notice from Landlord, immediately discontinue any violation of the foregoing provisions. D. Except for those which are interior, non-structural and do not affect the heating, ventilation, air conditioning, mechanical or utility systems of the Premises or Shopping Center and the aggregate cost of which does not exceed [***], not to make any repairs, installations, - ---------- *** confidential treatment requested 6-9 35 alterations or additions or improvements or work to the Premises without, on each occasion, obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld (it being understood that Landlord's withholding of consent shall not be deemed unreasonable where Tenant is unable to demonstrate, to Landlord's reasonable satisfaction, the ability to pay for the proposed work); nor attach interior signs, placards or other advertising media or other objects to the windows, doors, valances or ceiling or locate the same either outside of or within the Premises in such manner as to obstruct the view of Tenant's store from the mall area or from the outside other than insubstantially. If Landlord's consent is required, Tenant shall not commence any work as aforesaid until Tenant shall have filed with Landlord plans and specifications for such work and Landlord shall have approved same, said approval not to be unreasonably withheld. Tenant shall perform such work in accordance with such approved plans and specifications using labor not incompatible with other labor at the Shopping Center and such as will not create any labor disputes or work stoppages. Any work performed by Tenant shall at all times be subject to Landlord's inspection and approval after completion to determine whether same complies with the requirements of the applicable provisions of this Lease. Tenant shall, preceding and during the course of any alteration, addition, enlargement, improvement or construction, post or permit Landlord to post and keep posted in conspicuous places on the Premises, and in addition, serve all Persons who are expected to perform work or supply materials, such notices as are now or hereafter permitted or required to be posted to protect Landlord from having its interest in the Premises made subject to a mechanics' or materialmen's lien arising from such alteration, enlargement, improvement or construction. Prior to commencing construction, Tenant shall give Landlord a list of names and addresses for all such Persons. E. Except those for the sole use of Tenant's employees, not to operate any coin or token operated vending machine or similar device for the sale of any goods, wares, merchandise, food, beverage or services, including, but not limited to, pay telephones, pay lockers, pay toilets, scales, amusement devices and machines for the sale of beverages, foods, candy, cigarettes or toilet commodities, without the prior written consent of Landlord. F. Unless Tenant shall first have received Landlord's written consent with respect thereto, not to assign, sell, mortgage, hypothecate, encumber, pledge, or in any manner transfer this Lease or any interest therein, or sublet the Premises or any part or parts thereof, or grant any concession or license or otherwise permit occupancy of all or any part thereof by anyone with, through or under it; nor shall Tenant grant or create any security interest or mortgage, hypothecate, encumber or pledge any equipment, or improvements located in or about the Premises. A transfer of any of Tenant's or Guarantor's stock or a transfer or change of "control" (as such term is defined under the heading "Affiliate" in Article 1 of this Lease) of Tenant or Guarantor, if Tenant or Guarantor is a corporation or a change in the composition of Persons owning any interest in any non-corporate Tenant shall be deemed an assignment for the purpose of this Subsection F. In the event of the occurrence of any of the foregoing events without Landlord's prior consent, this Lease shall, at Landlord's option, be deemed to have been cancelled, terminated and expired as of the date of the occurrence of said event. Neither the consent by Landlord to any of the foregoing, nor any references in this Lease to concessionaires or licensees shall be construed to relieve Tenant from obtaining the express consent of Landlord to any further act which is prohibited herein, nor shall the collection of Rent by Landlord from any assignee, subtenant or other occupant, after default by Tenant, be deemed a waiver of this 6-10 36 covenant or the acceptance of the assignee, subtenant or occupant as Tenant or a release of Tenant from the further performance by Tenant of the covenants in this Lease on Tenant's part to be performed. (1) The provisions of this Subsection 6.2F shall not be deemed to prohibit (i) transfers of stock among existing stockholders or among spouses, children or grandchildren of existing stockholders or inter vivos or testamentary transfers to trusts established for the benefit of such persons, (ii) a public offering of the stock of Tenant or Guarantor or (iii) the transfer of outstanding voting stock registered under applicable securities laws of Tenant or Guarantor which are traded on a recognized national securities exchange. For the purposes of the preceding clause (iii), the term "voting stock" shall mean shares of stock regularly entitled to vote for the election of all directors of the corporation. (2) Landlord shall not unreasonably withhold its consent to an assignment of this Lease or sublease of the entire Premises to a parent, Affiliate or wholly-owned subsidiary of Tenant or to any entity with which or into which Tenant may consolidate or merge and who shall assume for Landlord's benefit the performance of all of the terms, conditions and covenants of this Lease; provided, however, that the merged or consolidated entity shall have a net worth at least equal to the net worth of Tenant at the time of such consolidation or merger or at the time of the Commencement Date of this Lease, whichever shall be greater, and further provided that the assignee or sublessee shall use the Premises under the Trade Name and only for the Permitted Use. (3) Except for the transactions described in paragraphs (1) and (2) of this Subsection, Tenant may not assign or sublet the Premises until Tenant completes Tenant's Work and opens for business. When Tenant requests Landlord's consent to a transaction other than the types of transactions described in paragraphs (1) and (2) of this Subsection, such requests shall include the name of the proposed transferee of stock, assignee or subtenant and its officers, directors and stockholders and such information as to the financial responsibility, business and reputation of the proposed assignee, transferee of stock or subtenant and its officers, directors and stockholders as Landlord may reasonably require. Upon the receipt of such request and information from Tenant, Landlord shall have the right, to be exercised in writing within [***] days after such receipt, to cancel and terminate this Lease, as of the date set forth in Landlord's notice of exercise of such option, which effective date of termination in Landlord's said notice shall not be less than [***] nor more than [***] days following the service of such notice. Tenant shall have the right to negate Landlord's cancellation by withdrawing its request within [***] days after service of Landlord's notice, whereupon, this Lease and the occupancy hereunder shall continue unchanged and in full force and effect. (a) In the event Landlord shall exercise such cancellation right, Tenant shall surrender possession of the Premises on the date set forth in Landlord's notice and in accordance with the provisions of this Lease relating to surrender of the Premises at the - ---------- *** confidential treatment requested 6-11 37 expiration of the Term. In no event shall the Premises be subdivided or partially sublet nor any request made for permission to do so. (b) In the event Landlord shall not exercise its right to cancel this Lease as provided above, then Landlord's consent to such request shall not be unreasonably withheld in accordance with subparagraph (c) of this paragraph (3), provided such consent to sublease or assignment is effected by a legal document in form and substance satisfactory to Landlord. In no event shall any assignment or subletting to which Landlord may have consented release or relieve Tenant from its obligations fully to perform all of the terms, covenants and conditions of the Lease on its part to be performed. Any assignee or subtenant shall be bound by, subject to and deemed to have assumed performance of all of the terms, conditions and covenants of this Lease, including, but not limited to, the Permitted Use set forth in Article 1 and the Retail Restriction Limit and any and all defaults shall be cured prior to the assignment or subletting. (c) In determining reasonableness, Landlord may take into consideration all relevant factors surrounding the proposed sublease and assignment, including, without limitation, the following: (i) The business reputation of the proposed assignee or subtenant and its officers, directors and stockholders; (ii) The nature of the business of the proposed assignee or subtenant in relation to the tenant mix or balance of the Shopping Center; (iii) The source of the Rent due under this Lease, the financial condition and operating performance of the proposed assignee or subtenant and its guarantors, if any; (iv) Restrictions, if any, contained in lease or other agreements affecting the Shopping Center; (v) The extent to which the proposed assignee or subtenant and Tenant provide Landlord with assurance of future performance hereunder, including, without limitation, the payment of Percentage Rent; and (vi) The number of other stores operated by the proposed assignee or subtenant in the vicinity in which the Shopping Center is located. (4) This paragraph (4) shall not apply to any transactions described in paragraphs (1) and (2) above but shall apply to all other transactions. In the event Tenant shall assign its interest in this Lease or sublet the Premises, then the Fixed Rent specified in Article 1 shall [***], effective as of the date of such assignment or subletting, [***], required to be paid by Tenant pursuant to this Lease for the Lease Year immediately preceding such assignment or - ---------- *** confidential treatment requested 6-12 38 subletting. In no event shall the Fixed Rent, after such assignment or subletting, be [***]. In addition to the foregoing, Tenant agrees that in the event of an assignment or subletting, Tenant shall pay to Landlord any and all consideration, money or thing of value received by Tenant or payable to Tenant in connection with the transaction, except Tenant shall not be required to pay to Landlord consideration received in connection with the sale of Tenant's trade fixtures, equipment, inventory or leasehold improvements. (5) Except for transactions of the types described in paragraphs (1) and (2), in the event of any assignment or subletting, Landlord shall have the right to require that there be deposited with and held by Landlord, in addition to any other security then held by Landlord, an amount equal to [***] months' rent ensuing. (6) Use of the terms "assignment" or "subletting" shall be deemed to include stock or share transfers as to corporations, and transfers of ownership interests in the case of non-corporate entities. (7) Tenant shall pay to Landlord the sum of [***] for the processing of any assignment, sublease or other transaction covered or affected by this Subsection 6.2F. Tenant shall pay to Landlord the sum of [***] for the processing of all other transactions initiated by Tenant which are covered or affected by the other provisions of this Lease. G. Not to permit commercial or piped in music to be played other than in the Premises or in a manner which can be heard outside the Premises or, except for work performed by its own employees during reasonable hours designated by Landlord, not to permit rubbish or garbage removal, window cleaning, janitorial or maintenance services in or about the Premises, except in each such case, by a Person, if any, designated by Landlord. Landlord agrees that the prices to be charged by the Person, if any, so designated to supply or perform any or all of the services referred to in this Subsection G shall be competitive. Landlord reserves the right to provide rubbish and garbage removal service, and if Landlord provides such service, Tenant shall pay for the cost thereof in such amount and at such intervals as Landlord may fairly and reasonably determine, said payments to constitute Additional Rent hereunder. H. Not to place or install or suffer to be placed or installed or maintain any graphics or sign in, upon or outside the Premises or in the Shopping Center unless it complies with Landlord's sign criteria and is approved by Landlord pursuant to Subsection Q of Section 6.1, nor any awning, canopy, banner, flag, pennant, aerial, antenna or the like in or on the Premises. Tenant shall not place in the windows or at or near the entrance to the Premises any sign, graphics, decoration, lettering, advertising matter, shade or blind or other thing of any kind, other than neatly lettered signs of reasonable size placed on the floor thereof identifying articles offered for sale and the prices thereof, without first obtaining Landlord's written approval and consent in each instance, which consent shall not be unreasonably withheld. Tenant further agrees that Landlord shall have the right to disapprove and require the removal of any sign, graphics, lettering, lights, advertising or other forms of inscription located in the front [***] feet - ---------- *** confidential treatment requested 6-13 39 of the Premises. Any signs, lights, lettering or other forms of inscription displayed without prior written approval of Landlord may be removed forthwith by Landlord. The cost of such removal shall be paid by Tenant and Tenant shall thereafter restore the Premises and the building to the condition existing immediately prior to the installation of the removed signs, lettering or inscription. I. Not to place a load upon any floor of the Premises which exceeds the floor load per square foot area which such floor was designated to carry. If Tenant shall desire a floor load in excess of that for which the floor or any portion of the Premises is designed, upon submission to Landlord of plans showing the location of and the desired floor live load for the area in question, Landlord may, at its option, strengthen and reinforce the same, at Tenant's sole expense, so as to carry the live load desired. Business machines and mechanical equipment used by Tenant which cause vibration or noise that may be transmitted to the building or to any occupiable space to such a degree as to be reasonably objectionable to Landlord or to any tenants in the building shall be placed and maintained by Tenant at its expense, in settings of cork, rubber or spring-type vibration eliminators sufficient to eliminate such vibration or noise. 6-14 40 ARTICLE 7 DESTRUCTION: CONDEMNATION Section 7.1. Fire or Other Casualty. A. Tenant shall give prompt notice to Landlord in case of fire or other damage to the Premises. B. If (i) the Enclosed Shopping Center (whether or not the Premises were damaged) shall be damaged to the extent of more than twenty-five (25%) percent of the cost of replacement thereof, or (ii) the proceeds of Landlord's insurance recovered or recoverable as a result of the damage described in subsection (i) preceding shall be substantially insufficient to pay fully for the cost of replacement of the damaged portion of the Enclosed Shopping Center, or (iii) the Premises or the Enclosed Shopping Center shall be damaged as a result of a risk which is not covered by Landlord's insurance or generally commercially available "All-Risk" property insurance, Landlord may terminate this Lease by notice given within ninety (90) days after such event and upon the date specified in such notice, which shall be not less than thirty (30) nor more than sixty (60) days after the giving of said notice, this Lease shall terminate. If the Premises shall be damaged in whole or in part during the last two (2) years of the Term, then either Landlord or Tenant may terminate this Lease by notice given to the other within ninety (90) days after the occurrence of such damage, and upon the date specified in such notice, which shall not be less than thirty (30) nor more than sixty (60) days after the giving of said notice, this Lease shall terminate. If the casualty, or Landlord's repair and restoration work shall render the Premises untenantable, in whole or in part, then, a proportionate credit against Rent (except Percentage Rent, Tax Rent and that portion of Common Area Rent attributable to the cost of insurance) shall be allowed from the date when the damage occurred until the earlier of (i) the day after Landlord has substantially completed the work required to repair and restore the Premises, as set forth in Subsection C of this Section, or (ii) the date Tenant shall have opened for business, or (iii) the date of termination by Landlord, in the event Landlord elects to terminate this Lease. Said proportion shall be computed on the basis of the ratio which the amount of Floor Space rendered untenantable bears to the total Floor Space. If there is a credit against Fixed Rent, in computing the "break even" for Percentage Rent purposes, the amount of Fixed Rent less such credit shall be applied, or if the "break even" is expressed herein as a fixed dollar amount, such amount shall be ratably reduced. C. If this Lease shall not be terminated as provided in Subsection B hereof, Landlord shall, at its expense, repair or restore the Premises with reasonable diligence and dispatch, to the condition obtaining immediately prior to the casualty except that Landlord shall not be required to repair or restore any of Tenant's leasehold improvements or betterments, furniture, furnishings, finishes, decorations or any other installations made by Tenant. Upon the completion by Landlord of repair or restoration, Tenant shall prepare the Premises for occupancy by Tenant in the manner obtaining immediately prior to the damage or destruction in accordance with plans and specifications approved by Landlord. All work of restoration or repair by Tenant shall be subject to the provisions of Article 2. 7-1 41 D. The provisions of this Section 7.1 shall supersede and are in lieu of the provisions of any present or future statute or law to the contrary of the state in which the Shopping Center is located. E. The "cost of replacement", as such term is used in Subsection B hereof, shall be determined by the company or companies insuring Landlord against the casualty in question, or if there shall be no insurance, then, by an independent engineer selected and paid for by Landlord. Section 7.2. Eminent Domain. A. If twenty-five (25%) percent or more of the Floor Space of the Premises shall be taken or condemned by any competent authority for any public or quasi-public use or purpose, either party may elect, by giving notice to the other not more than sixty (60) days after the date on which title shall vest in such authority, to terminate this Lease, and, in either such event, the Term of this Lease shall cease and terminate as of the said date of title vesting. In case of any taking or condemnation, whether or not the Term of this Lease shall cease and terminate, the entire award shall be the property of Landlord and Tenant hereby assigns to Landlord all its right, title and interest in and to any such award. Tenant shall, however, be entitled to claim, prove and receive in the condemnation proceeding such awards as may be allowed for loss of lease, moving expense, fixtures and other equipment installed by it but only if such awards shall be made by the condemnation court in addition to the award made by it for the land and the building or part thereof so taken. B. The current Rent (except Percentage Rent) in the case of any taking or condemnation, shall be apportioned as of the date of vesting of title and, if the Term of the Lease shall not have ceased and have been terminated as of said date, Tenant shall be entitled to a pro rata reduction in the Rent (except Percentage Rent) payable hereunder based on the proportion which the Floor Space of the space taken bears to the entire Floor Space of the Premises immediately prior to such taking. C. If more than fifty (50%) percent of the Floor Space of the Enclosed Shopping Center, or if more than twenty-five (25%) percent of the total Floor Space in the Shopping Center shall be so taken or conveyed, or if so much of the parking facilities shall be so taken or conveyed that a reasonable number of parking spaces necessary, in Landlord's judgment, for the continued operation of the Shopping Center shall not be available for use by patrons of the Shopping Center, then, in any such event, Landlord may, by notice in writing to Tenant delivered on or before the day of surrendering possession to the Governmental Authority, terminate this Lease, and Rent shall be paid or refunded as of the date of termination. D. If this Lease is not terminated pursuant to the provisions of this Section 7.2, Landlord shall, at its expense, but only to the extent of an equitable proportion of the net award or other compensation (after deducting legal and all other fees in connection with obtaining said award) for the portion taken or conveyed, of the building of which the Premises are a part (excluding award for land) make such repairs or alterations as are in Landlord's reasonable judgment necessary to constitute the building a complete architectural and tenantable unit. 7-2 42 ARTICLE 8 DEFAULTS AND REMEDIES Section 8.1. Bankruptcy, Insolvency. A. If (i) Tenant or Guarantor shall become insolvent or make an assignment for the benefit of creditors; or (ii) if there shall be filed against or by Tenant or Guarantor in any court, pursuant to any statute either of the United States or of any state, a petition in bankruptcy or insolvency or for arrangement or reorganization or for the appointment of a receiver or trustee of all or portion of Tenant's or Guarantor's property and it is not discharged within thirty (30) days after filing; or (iii) in the case of a filing under Title 11 of the United States Code (the Federal Bankruptcy Act), if this Lease is not assumed within sixty (60) days after filing; then upon the occurrence of any of such foregoing events, this Lease shall, automatically and as a matter of law, be deemed to have been cancelled, terminated, expired and rejected in which event neither Tenant nor any Person claiming through or under Tenant by virtue of any statute or of an order of any court shall be entitled to acquire or remain in possession of the Premises, and Landlord shall have no further liability hereunder and Tenant or any such Person, if in possession, shall forthwith quit and surrender the Premises. If this Lease shall be so cancelled or terminated, Landlord, in addition to the other rights and remedies of Landlord by virtue of any other provision herein or elsewhere in this Lease contained or by virtue of any statute or rule of law, may retain and apply to damages incurred by Landlord, any Rent, Security Deposit or monies received by Landlord from Tenant or on behalf of Tenant. B. In the event of the termination or rejection of this Lease pursuant to Subsection A hereof, Landlord shall be entitled to recover from Tenant an amount equal to the maximum allowed by any statute, law or rule of law in effect at the time when, and governing the proceeding in which, such damages are to be proved. If this Lease shall have been terminated pursuant to Section 8.2 or otherwise, prior to the occurrence of any of the events described in Subsection 8.1A above, then Landlord's rights under this Lease shall not be affected or prejudiced by this Section 8.1. Section 8.2. Default. A. If Tenant defaults in fulfilling any of the covenants or provisions of this Lease, including, without limiting the generality of the foregoing, the covenants for the payment of Rent when due or any part thereof or for the making of any other payment herein provided or for the performance of any other covenant on Tenant's part to be performed hereunder, and such default shall continue for [***] days in the case of a default in the payment of Rent or other monies, after service by Landlord of written notice upon Tenant specifying the nature of said default, or, [***] days as to any other default except that if a non-monetary default or omission shall be of such a nature that the same cannot be reasonably cured or remedied within said [***], if Tenant shall not in good faith have commenced the curing or remedying of such default within such twenty- - ---------- *** confidential treatment requested 8-1 43 day period, and shall not thereafter diligently proceed therewith to completion, or if any levy, execution or attachment shall be issued against Tenant or any of Tenant's property at the Premises, or if the Premises become abandoned, vacant or deserted, or if Tenant shall default with respect to any other lease between Landlord (or any Affiliate of Landlord) and Tenant (or any Affiliate of Tenant), Landlord may serve upon Tenant a written notice that this Lease and the Term will terminate on a date to be specified therein, which shall be not less than [***] days after the giving of such notice, and upon the date so specified, this Lease and the Term shall terminate and come to an end as fully and completely as if such date were the date herein definitely fixed for the end and expiration of this Lease and the Term, and Tenant shall then quit and surrender the Premises to Landlord, but Tenant shall remain liable as hereinafter set forth; provided, however, that if Tenant shall default (i) in the timely payment of any item of Rent or the timely reporting of Gross Sales as required by Section 3.3 hereof and any such default shall continue or be repeated for [***] consecutive months or for a total of [***] months in any period of [***] months or (ii) in performance of any other particular convenant of this Lease more than [***] times in any period of [***] months, then, notwithstanding that such defaults shall have each been cured within the period after notice as above provided, any further similar default shall be deemed to be deliberate and Landlord thereafter may serve the said written [***] days' notice of termination without affording to Tenant an opportunity to cure such further default. B. If this Lease shall have been terminated pursuant to Section 8.1 or 8.2, or if Tenant has defaulted (beyond any opportunity to cure hereinabove set forth) in the payment of Rent or in observing any other term, condition or covenant, then, in any of such events, Landlord may institute summary proceedings, re-enter the Premises, dispossess Tenant and the legal representative of Tenant or other occupants of the Premises, and remove their effects and hold the Premises as if this Lease had not been made. Section 8.3. Remedies of Landlord. A. In case of any such default, re-entry, expiration and/or dispossess by summary proceedings or otherwise, (i) the Rent shall become due thereupon and be paid up to the time of such re-entry, dispossess and/or expiration; (ii) Landlord may relet the Premises or any part or parts thereof, either in the name of Landlord or otherwise, for a term which may at Landlord's option be less than or exceed the period which would otherwise have constituted the balance of the Term, and may grant commercially reasonable concessions including free rent; and (iii) Tenant or the legal representative of Tenant shall also pay Landlord, for the failure of Tenant to observe and perform Tenant's covenants herein contained, the maximum amount of damages recoverable or at Landlord's option, for each month of the period which would otherwise have constituted the balance of the Term, any deficiency between (x) the sum of (a) [***], (b) [***], (c) [***] that would have been payable for the year in question but for such re-entry or termination, (d) the current [***] and (e) [***] under this Lease, and (y) the net amount, if any, of the [***]. [***]. In computing damages there shall be included such commercially reasonable expenses as Landlord may incur in connection with reletting, such as court costs, attorneys' fees and disbursements, brokerage fees, other costs and expenses incurred by Landlord - ---------- *** confidential treatment requested 8-2 44 and for putting and keeping the Premises in good order or for preparing the same for reletting as hereinafter provided. Any such damages shall, at Landlord's option, be paid in monthly installments by Tenant on the rent day specified in this Lease and any suit brought to collect the amount of the deficiency for any month shall not prejudice in any way the rights of Landlord to collect the deficiency for any subsequent month by a similar proceeding or, at Landlord's option, in advance, discounted to the then present value. Landlord, at Landlord's option, may make such alterations, repairs, replacements and/or decorations in the Premises as Landlord in Landlord's reasonable judgment considers advisable and necessary for the purpose of reletting the Premises; and the making of such alterations and/or decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. Provided that Landlord makes the same effort to relet the Premises as other space in the Enclosed Shopping Center, Landlord shall in no event be liable in any way whatsoever for failure to relet the Premises, or in the event that the Premises are relet, for failure to collect the rent under such reletting. Landlord shall not, in reletting the Premises, be required to prefer the letting of the Premises over any other space in the Enclosed Shopping Center. Landlord shall have in addition to any statutory or other liens or rights, if any, and not in lieu thereof, a lien on all fixtures, equipment and leasehold improvements located at the Premises. B. In the event of a breach or threatened breach by Tenant of any of the covenants or provisions hereof, Landlord shall have the right of injunction and the right to invoke any remedy allowed at law or in equity as if re-entry, summary proceedings and other remedies were not herein provided for. Mention in this Lease of any particular remedy shall not preclude Landlord from any other remedy. Section 8.4. Waiver of Trial by Jury: Tenant Not to Counter-Claim. It is mutually agreed by and between Landlord and Tenant that the respective parties hereto shall and they hereby do waive, to the extent permitted by the State in which the Shopping Center is located, trial by jury in any action, proceeding or counter-claim or other claim brought by either of the parties hereto against the other on any matters not relating to negligently caused personal injury or property damage, but otherwise arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, and any emergency statutory or any other statutory remedy. Tenant further agrees that unless the failure to do so would constitute a waiver of its right to institute a separate action or proceeding against Landlord, it shall not interpose any counter-claim or cross-claim in a summary dispossess proceeding, unlawful detainer proceeding or in any action or proceeding based on non-payment of Rent or any other payment required of Tenant hereunder, however, Tenant shall not be precluded from disputing the amounts due Landlord. Section 8.5 Holdover by Tenant. In the event Tenant remains in possession of the Premises after the expiration of the Term created hereunder, and without the express written consent of Landlord or the execution and delivery of a new lease, Tenant, at the option of Landlord, shall be deemed to be occupying the Premises as a tenant from month-to-month, terminable at will on thirty (30) days' notice (notwithstanding any contrary provision 8-3 45 of applicable law) by either party, at a monthly rental equal to the sum of (i) [***] the monthly installment of Fixed Rent payable during the last month of the Term, (ii) one-twelfth (1/12) of the average annual Percentage Rent payable hereunder based upon the last [***] Lease Years, (iii) the current monthly Tax Rent payable for the last year of the Term, (iv) the monthly Common Area Rent, (v) the monthly Environmental Charge and (vi) one-twelfth (1/12) of any other Additional Rent or other charges payable, subject to all the other conditions, provisions and obligations of this Lease insofar as the same are applicable to a month-to-month tenancy. Tenant shall not interpose any counter-claim or cross-claim in a summary dispossess proceeding, unlawful detainer proceeding or other action or proceeding based on holdover, however, Tenant shall be permitted to assert appropriate defense to Landlord's claim. Section 8.6. Landlord's Right to Cure Defaults. Landlord may cure, after notice served pursuant to this Article and failure of Tenant to do so, any default by Tenant under this Lease; and whenever Landlord so elects, all costs and expenses incurred by Landlord in curing a default, including, without limitation, reasonable attorneys' fees, together with interest on the amount of costs and expenses so incurred at the rate provided in Section 3.8 hereof, shall be paid by Tenant to Landlord on demand, and shall be recoverable as Additional Rent. Section 8.7. Effect of Waivers of Default. No consent or waiver, expressed or implied, by Landlord to or of any breach of any covenant, condition or duty of Tenant shall be construed as a consent or waiver to or of any other breach of the same or any other covenant, condition or duty of Tenant, unless in writing signed by Landlord. Section 8.8 Security Deposit. Tenant has agreed to deposit with Landlord the Security Deposit as security for the punctual performance by Tenant of each and every obligation of it under this Lease. In the event of any default by Tenant, Landlord may apply or retain all or any part of the Security Deposit to cure the default or to reimburse Landlord for any sum which Landlord may spend by reason of the default. In the case of every such application or retention, Tenant shall, on demand, pay to Landlord the sum so applied or retained which shall be added to the Security Deposit so that the same shall be restored to its original amount. If at the end of the Term, Tenant shall not be in default under this Lease and shall have delivered to Landlord evidence of final utility service readings and payment thereof, the Security Deposit or any balance thereof, shall be returned to Tenant within [***] days. If Landlord shall sell the Shopping Center, or shall lease the Shopping Center, in either case subject to this Lease, or shall otherwise assign or dispose of this Lease, Landlord may assign and turn over the Security Deposit or any balance thereof to Landlord's grantee, lessee or assignee, and Tenant hereby releases and relieves Landlord from any and all liability for the return of said deposit and shall look solely to said grantee, lessee or assignee; it being expressly agreed that this provision shall apply to each and every sale, conveyance or lease of the Shopping Center or assignment or disposition of this Lease. Landlord shall not be required to place the Security Deposit in an interest-bearing account and said fund shall be returned to Tenant without interest. - ---------- *** confidential treatment requested 8-4 46 ARTICLE 9 ADDITIONAL PROVISIONS Section 9.1. Notices from One Party to the Other. Any notice or demand from Landlord to Tenant or from Tenant to Landlord shall be in writing and shall be deemed duly served if mailed by registered or certified mail, return receipt requested, addressed, if to Tenant, at the address of Tenant set forth herein, or to such other address as Tenant shall have last designated by notice in writing to Landlord, and if to Landlord, at the address of Landlord set forth herein or such other address as Landlord shall have designated by notice in writing to Tenant. Notice shall be deemed served when mailed. Section 9.2. Brokerage. Tenant warrants that it has had no dealings with any broker or agent in connection with this Lease other than the Broker, if any, named elsewhere in this Lease and covenants to pay, hold harmless and indemnify Landlord from and against any and all costs, expense or liability for any compensation, commissions and charges claimed by the Broker or by any other broker or agent with respect to this Lease or the negotiation thereof with whom Tenant had dealings. Section 9.3. Estoppel Certificates. Each of the parties agrees that it will, at any time and from time to time, within twenty (20) business days following written notice by the other party herein specifying that it is given pursuant to this Section, execute, acknowledge and deliver to the party who gave such notice a statement in writing certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), and the dates to which the Rent and any other payments due hereunder from Tenant have been paid in advance, if any, and stating whether or not to the best knowledge of the signer of such certificate the other party is in default in performance of any covenant, agreement or condition contained in this Lease, and if so, specifying each such default of which the signer may have knowledge. Section 9.4 Applicable Law and Construction. The laws of the state in which the Shopping Center is located shall govern the validity, performance and enforcement of this Lease. The invalidity or unenforceability of any provision of this Lease shall not affect or impair any other provision. All negotiations, considerations, representations and understandings between the parties are incorporated in this Lease. Landlord or Landlord's agents have made no representations or promises with respect to the Shopping Center or the Premises, except as herein expressly set forth. Tenant further understands that this Lease and every other lease agreement with every other tenant or occupant of the Shopping Center is negotiated on its own merits and Landlord does not make any representation as to the similarity of the terms of this Lease with any other such lease or agreement. The headings of the several articles and sections contained herein are for convenience only and do not define, limit or construe the contents of such articles or sections, it being understood that the so-called "Recital" constitutes part of the agreement between Landlord and Tenant. Whenever herein the singular number is used, the same shall include the plural, and the neuter gender shall include the masculine and feminine genders. Section 9.5. Relationship of the Parties. Nothing contained herein shall be deemed or construed by the parties hereto, or any third party, as creating the relationship of principal and 9-1 47 agent or partnership or joint venture between the parties hereto, it being understood and agreed that neither the method of computation of Rent nor any other provision contained herein, nor any acts of the parties hereto, shall be deemed to create any relationship between the parties hereto other than the relationship of landlord and tenant. Section 9.6. Limitations on Liability. Landlord and Landlord's agents and employees shall not be liable for, and Tenant waives all claims for, loss or damage to Tenant's business or damage to any Person or property sustained by Tenant resulting from any accident or occurrence (unless, subject, however, to the waiver of subrogation provision hereof, caused by or resulting from the negligence or willful acts of Landlord) in or upon the Premises or any other part of the Shopping Center, including, but not limited to, claims for damage resulting from: (i) any equipment or appurtenances becoming out of repair; (ii) injury done or occasioned by wind; (iii) any defect in or failure of plumbing, heating or air conditioning equipment, electric wiring or installation thereof, gas, water and steam pipes, stairs, porches, railings or walks; (iv) broken glass; (v) the backing up of any sewer pipe or downspout; (vi) the bursting, leaking or running of any tank, tub, washstand, water closet, waste pipe, drain or any other pipe or tank in, upon or about the building or the Premises; (vii) the escape of steam or hot water; (viii) water, snow, or ice being upon or coming through the roof, skylight, trapdoor, stairs, doorways, show windows, walks or any other place upon or near the building or the Premises or otherwise; (ix) the falling of any fixture, plaster, tile or stucco; and (x) any act, omission or negligence of other tenants, licensees or of any other Persons or occupants of the Shopping Center. Section 9.7 Landlord's Entry Rights. Landlord or Landlord's agents shall have the right to enter upon the Premises at all reasonable times to examine same and to make such repairs, alterations, improvements or additions to the Premises or to the building as may be necessary, and Landlord shall be allowed to take all materials into and upon the Premises that may be required therefor without the same constituting an eviction of Tenant, in whole or in part, and the Rent shall in nowise abate while such repairs, alterations, improvements or additions are being made by reason of loss or interruption of the business of Tenant because of the prosecution of any such work. However, if as the result of the exercise by Landlord of its rights under this Section 9.7, there is created a substantial and material interference with Tenant's ability to conduct business in the Premises, and Tenant therefore closes for more than [***] consecutive business days, Tenant shall be entitled to an abatement of Fixed Rent for each day after the [***] business day during which the condition continues. Except in emergencies such entry shall be during business hours and on reasonable oral notice to the Person then in charge of the Premises for Tenant. Landlord shall use all reasonable efforts not to unreasonably interfere with or interrupt the conduct and operation of Tenant's business but in no event shall Landlord be required to incur any additional expenses for work to be done during hours or days other than regular business hours or days. Landlord or Landlord's agents shall also have the right to enter upon the Premises after notice as set forth above, at reasonable times to show them to prospective lessees or purchasers of the Shopping Center. During the [***] days prior to the expiration of the Term, Landlord may show the Premises to prospective tenants. If, [***] the end of the Term, Tenant shall have removed all or substantially all of Tenant's property - ---------- *** confidential treatment requested 9-2 48 therefrom, Landlord may [***] enter, renovate and redecorate the Premises without elimination or abatement of Rent or the payment of other compensation to Tenant and such action shall have no effect upon this lease. Section 9.8. Subordination. A. This Lease is and all of Tenant's rights hereunder are subject and subordinate to (i) any ground or underlying (including operation) leases that now exist or may hereafter be placed on the Shopping Center or any part thereof, and (ii) any mortgages or deeds of trust or deeds to secure debt that now exist or may hereafter be placed upon the Shopping Center or the interest under any ground or underlying leases and to any and all advances made thereunder and the interest thereon and to all renewals, replacements, amendments, modifications, consolidations and extensions of any of the foregoing. Tenant covenants and agrees that if any mortgagee of Landlord's interest in any underlying lease or any fee mortgagee succeeds to Landlord's interest under this Lease by foreclosure or otherwise, Tenant will, if requested, attorn to such mortgagee and will recognize such mortgagee as Tenant's landlord under this Lease. At the option of the landlord or any successor landlord thereunder, Tenant agrees that neither the cancellation nor termination of any ground or underlying lease to which this Lease is now or may hereafter become subject or subordinate, nor any foreclosure of a mortgage either affecting the fee title of the Premises or the ground or underlying lease, nor the institution of any suit, action, summary or other proceeding by the landlord or any successor landlord thereof, or any foreclosure proceeding brought by the holders of any such mortgage to recover possession of the leased property, shall by operation of law or otherwise result in the cancellation or termination of this Lease or the obligations of Tenant hereunder, and Tenant covenants and agrees to attorn to the landlord or to any successor to Landlord's interest in the Premises. Tenant shall execute and deliver in recordable form, whatever instruments maybe required to acknowledge or further effectuate the provisions of this Subsection, and in the event Tenant fails to do so within [***] days after demand in writing, such failure shall be deemed a material default hereunder. Any mortgagee or trustee under any such mortgage or deed of trust or deed to secure debt, or the lessor under any such ground or underlying lease may elect that this Lease shall have priority over its mortgage, deed of trust, deed to secure debt, or lease and upon notification of such election by such mortgagee, trustee or lessor to Tenant, this Lease shall be deemed to have priority over said mortgage, deed of trust, deed to secure debt, or ground or underlying lease whether this Lease is dated prior to or subsequent to the date of said mortgage, deed of trust, deed to secure debt, or lease. If the holder of any mortgage, deed of trust, deed to secure debt, or security agreement shall forward to Tenant written notice of the existence of such lien or lease, then Tenant shall, so long as such lien or lease continues, give to such lienholder or lessor the same notice and opportunity to correct any default as is required to be given to Landlord under this Lease but such notice of default may be given to Landlord and such lienholder or lessor concurrently. B. If so requested by Tenant, Landlord shall use reasonable efforts to obtain non-disturbance and attornment agreements from any ground or underlying lessors or present or - ---------- *** confidential treatment requested 9-3 49 future mortgagees of Landlord's interest in the Premises, which efforts shall consist only of Landlord's making a written request for such agreements on behalf of Tenant. Tenant shall cooperate in all respects with Landlord's efforts, shall provide any information reasonably required by such mortgagees or lessors and shall pay such fees or expenses as may be requested by such parties in connection with such agreements. Landlord shall not be required to institute any legal action or proceeding in order to obtain said agreements. The foregoing shall not be deemed a condition to the effectiveness or continuing effectiveness of this Lease. Section 9.9 Construction on Adjacent Premises or Buildings. If any construction, excavation or other building operation shall be about to be made or shall be made on any premises adjoining or above or below the Premises or on any other portion of the Enclosed Shopping Center, Tenant shall permit Landlord, or the adjoining owner, and their respective agents, employees, licensees and contractors, to enter the Premises and to strengthen, add to or shore the foundations, walls, columns or supporting members thereof, and to erect scaffolding and/or protective barricades around and about the Premises (but not so as to preclude entry thereto) and to do any act or thing necessary for the safety or preservation of the Premises. Except as may be expressly set forth to the contrary in this Section 9.9, Tenant's obligations under this Lease shall not be affected by any of the foregoing or any such construction or excavation work, shoring-up, scaffolding or barricading. Landlord shall not be liable in any such case for any inconvenience, disturbance, loss of business or any other annoyance arising from any such construction, excavation, shoring-up, scaffolding or barricades, but Landlord shall use its best efforts so that such work will cause as little inconvenience, annoyance and disturbance to Tenant as possible, consistent with accepted construction practice in the vicinity, and so that such work shall be expeditiously completed. It is understood by Tenant that shopping centers are at times expanded or reconfigured by the addition of new or reconfigured buildings, improvements or structures (including multilevel, decked or subsurface parking structures) and if the foregoing occurs, Landlord shall have the right of access to enter upon the Premises to perform construction work and shall use its reasonable efforts to complete all construction in the Premises as promptly as possible (considering the nature and extent of the construction and subject to prudent construction practices). Landlord shall have the right to require Tenant to temporarily curtail its business or to temporarily close the Premises if necessary in connection with the construction work. Accordingly, (i) if Landlord requires Tenant to temporarily suspend business or to temporarily close the Premises because of any such changes or (ii) if Tenant's use and occupancy of the Premises or Tenant's access to the covered mall in front of the Premises is materially, adversely interfered with and Tenant temporarily closes for business, Tenant shall receive an abatement of Rent (except Percentage Rent) on a per diem basis for the number of days for which Tenant is required to close. Notwithstanding the foregoing, [***] because of the proposed expansion, [***] said expansion. Section 9.10 Mall Expansion. A. In the event Landlord shall add additional buildings to the Enclosed Shopping Center or otherwise expand or reconfigure the Enclosed Shopping Center, Landlord shall have - ---------- *** confidential treatment requested 9-4 50 the right to relocate Tenant's operation to other premises (the "New Premises") in another part of the Enclosed Shopping Center in accordance with the following provisions: The New Premises shall be substantially the same in size and configuration as the Premises described in this Lease and, to the extent reasonably possible, shall be located in an area having, in Landlord's reasonable judgment, comparable pedestrian traffic. If the New Premises have been previously occupied, Landlord shall deliver the New Premises to Tenant in "as is" condition. If the New Premises consist of newly created leasable area, Landlord shall deliver the New Premises to Tenant in a "shell" condition (i.e., Landlord shall provide a concrete slab, demising studs, an empty electrical conduit to the New Premises, sprinkler, water and sewer service to the New Premises, and a common exhaust vent). Landlord shall give Tenant at least [***] days' notice of Landlord's intention to relocate Tenant's operation to the New Premises. To the extent determined by Landlord to be practicable, Tenant's Work in the New Premises shall be prosecuted while Tenant is open for business in the Premises herein demised and the physical move shall take place during non-business hours, if reasonably possible, or during such other period as shall be mutually agreed upon by Landlord and Tenant. Rent (except Percentage Rent) and all other charges shall abate for any period during which Tenant's operation shall be closed to the public as a result of the relocation and there shall be excluded from the computation set forth in Section 3.3A of this Lease the amount of Fixed Rent which would otherwise be payable for such period. Landlord shall not have the right to relocate Tenant's operation more than once during the Term. If the New Premises are smaller or larger than the Premises described in this Lease, Fixed Rent for the balance of the original Term of this Lease shall be adjusted to a sum computed by multiplying the Fixed Rent specified in Article 1, by a fraction, the numerator of which shall be the total number of square feet of Floor Space in the New Premises and the denominator of which shall be the total number of square feet of Floor Space in the Premises described in this Lease. All other charges based upon Floor Space shall likewise be adjusted proportionately. In addition, the original Term hereof shall be extended for such period of time (the "Extension Period") as shall be necessary to permit Tenant to occupy the New Premises for the same number of days and months as constituted the original Term hereunder [e.g., if Tenant's original Term was seven (7) years and Tenant opens for business in the New Premises on the fifteenth day of the fifty second (52nd) month, the Extension Period will be fifty one (51) months and fifteen (15) days]. During the Extension Period, Fixed Rent shall be payable at such rates as constitute the then fair market rental ("FMR"), as determined in accordance with paragraph (D) hereof, and all Additional Rent, including the Promotion Fund Charge, shall be at the rates and payable on the terms then in effect for new retail leases at the Enclosed Shopping Center. B. In the event the New Premises described in Landlord's relocation notice are unacceptable to Tenant, Tenant shall have the right, as its sole and only remedy, exercisable by written notice to Landlord given within [***] days following receipt of Landlord's relocation notice, to terminate this Lease, such termination to be effective as of the proposed relocation date set forth in Landlord's notice. Failure by Tenant to timely exercise such right shall be deemed a waiver with respect thereto and confirmation that the New Premises are acceptable to Tenant. Such termination shall be Tenant's sole and only remedy in the event of Tenant's refusal to accept relocation to the New Premises, it being understood that should Tenant refuse for any - ---------- *** confidential treatment requested 9-5 51 reason to relocate, but fail to terminate this Lease in accordance with the foregoing, this Lease shall nevertheless expire on the date set forth in Landlord's relocation notice. C. If Tenant shall accept the New Premises, Landlord shall pay, within ninety (90) days following the date Tenant opens for business in the New Premises, the then unamortized cost of the permanent leasehold improvements (excluding, inter alia trade fixtures and equipment, furnishings, decorations, inventory and other items of personal property) initially made by Tenant in the original Premises pursuant to Article 2 of this Lease, assuming a useful life equal to the length of the original Term of this Lease and amortization on a straight line basis. Tenant shall, not later than, [***] days following the Commencement Date, deliver an affidavit of an officer of Tenant and a certificate of Tenant's architect accompanied by such bills, contracts, receipts, invoices, cancelled checks and the like as Landlord may reasonably require, specifying the cost of Tenant's leasehold improvements, which amount shall, unless disputed by Landlord, thereupon be the basis for the amount to be paid by Landlord pursuant to this provision. D. FMR during the Extension Period, if any, shall be determined as follows: (1) Within [***] days following the date of Landlord's relocation notice to Tenant, Landlord shall deliver to Tenant a written proposal setting forth Landlord's determination of FMR (on a per square foot basis) for the New Premises during the Extension Period. (2) Within [***] days thereafter, Tenant shall deliver to Landlord (a) written acceptance of Landlord's proposed FMR or (b) a counterproposal setting forth Tenant's determination of such annual FMR. Failure by Tenant to respond to Landlord's proposal within the aforesaid 30-day period shall be deemed confirmation that Landlord's determination of FMR is acceptable to Tenant. (3) If Tenant shall deliver a counterproposal as aforesaid, then for the ensuing 30-day period, Landlord and Tenant shall conduct good faith negotiations in an effort to agree upon FMR. (4) If Landlord and Tenant are unable to reach agreement within said 30-day period, then, within ten (10) days thereafter, each shall appoint an independent real estate appraiser who is then, and has been for a minimum of ten (10) years, a member of the American Institute of Real Estate Appraisers. If Tenant shall fail to make timely appointment of an appraiser, then Landlord's appraiser shall make the determination of FMR, and such determination shall be binding upon both parties. (5) The appraisers shall, within [***] days following their appointment, render their joint determination of FMR for the New Premises for each year of the Extension Period, and such determination shall be binding and conclusive upon Landlord and Tenant. Should the appraisers be unable to reach agreement as to FMR within said [***]-day period, then - ---------- *** confidential treatment requested 9-6 52 together they shall designate a third appraiser, who shall select either the FMR proposed by Landlord's appraiser or the FMR proposed by Tenant's appraiser as the Fixed Rent (per square foot) to be paid by Tenant for the New Premises during the Extension Period, and such determination by the third appraiser shall be binding and conclusive on both Landlord and Tenant. The cost of the appraisal shall be shared equally by Landlord and Tenant. Section 9.11 Short Form Lease. Tenant agrees not to record this Lease. Either party shall, at the request of the other, execute, acknowledge and deliver, at any time after the date of this Lease, a memorandum or notice of lease prepared by the requesting party, but the provisions of this Lease shall control the rights and obligations of the parties. Section 9.12 Binding Effect of Lease. The covenants, agreements and obligations herein contained, except as herein otherwise specifically provided, shall extend to, bind and inure to the benefit of the parties hereto and their respective personal representatives, heirs, successors and permitted assigns. In particular the provisions of Subsection F of Section 6.2 shall bind the executors, administrators or other personal representatives of Tenant, if an individual, or its successors, if Tenant is a corporation or partnership. Each covenant, agreement, obligation or other provisions herein contained shall be deemed and construed as a separate and independent covenant of the party bound by, undertaking or making the same, not dependent on any other provision of this Lease unless otherwise expressly provided. Section 9.13 Effect of Unavoidable Delays. The provisions of this Section shall be applicable if there shall occur, during the Term, or prior to the commencement thereof, any (i) strike(s), lockout(s) or labor dispute(s); (ii) inability to obtain labor or materials, or reasonable substitutes therefor; or (iii) acts of God, governmental restrictions, regulations or controls, enemy or hostile governmental action, civil commotion, fire or other casualty, or other conditions similar or dissimilar to those enumerated in this item (iii) beyond the reasonable control of the party obligated to perform. If Landlord or Tenant shall, as the result of any of the above-described events, fail punctually to perform any obligation on its part to be performed under this Lease, then such failure shall be excused and not be a breach of this Lease by the party in question, but only to the extent occasioned by such event. If any right or option of either party to take any action under or with respect to this Lease is conditioned upon the same being exercised within any prescribed period of time and such named date, then such prescribed period of time and such named date shall be deemed to be extended or delayed, as the case may be, for a period equal to the period of the delay occasioned by any above-described event. Notwithstanding anything herein contained, the provisions of this Section shall not be applicable to or in determining the date of commencement of or the continuance of Tenant's obligation to pay Rent or its obligations to pay any other sums, moneys, costs, charges or expenses required to be paid by Tenant hereunder. Section 9.14 No Oral Changes. Neither this Lease nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. Section 9.15 Executed Counterparts of Lease. This Lease may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original; and all such counterparts shall together constitute but one and the same Lease. 9-7 53 Section 9.16 Landlord's Liability. A. In the event of sale or transfer of all or any portion of the Shopping Center or any undivided interest therein, or in the event of the making of a lease of all or substantially all of the Shopping Center, or in the event of a sale or transfer of the leasehold estate under any such lease, the grantor, transferor or lessor, as the case may be, shall thereafter be entirely relieved of all terms, covenants and obligations thereafter to be performed by Landlord under this Lease to the extent of the interest or portion so sold, transferred or leased, provided that (i) any amount then due and payable to Tenant or for which Landlord or the then grantor, transferor or lessor would otherwise then be liable to pay to Tenant (it being understood that the owner of an undivided interest in the fee or any such lease shall be liable only for his or its proportionate share of such amount) shall be paid to Tenant; (ii) the interest of the grantor, transferor or lessor, as Landlord, in any funds then in the hands of Landlord or the then grantor, transferor or lessor in which Tenant has an interest, shall be turned over, subject to such interest, to the then grantee, transferee or lessee; (iii) notice of such sale, transfer or lease shall be delivered to Tenant and (iv) the grantee, transferee or lessee shall assume in writing all of Landlord's obligations under this Lease accruing from the date of the transaction. B. Tenant agrees that it shall look solely to the estate and property of Landlord in the land and buildings comprising the Shopping Center and the income therefrom (subject to prior rights of the holder of any mortgage or deed of trust on any part of the Shopping Center) for the collection of any judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or breach by Landlord with respect to any of the terms, covenants and conditions of this Lease to be observed or performed by Landlord; and no other assets of Landlord, its members or shareholders shall be subject to levy, execution or other procedures for the satisfaction of Tenant's remedies. 9-8 54 IN WITNESS WHEREOF, Landlord and Tenant have hereunto executed this Lease as of the day and year first above written. (TENANT) SILICON ENTERTAINMENT, INC. By: /s/ Chris Morse ----------------------------------- (LANDLORD) MALL OF GEORGIA, LLC, a Delaware limited liability company ATTEST: By: CPI-GEORGIA CORPORATION, a Delaware corporation, Managing Member By: /s/ David Simon - ------------------------------------ ----------------------------------- Secretary 9-9 55 (TENANT, if a Corporation) STATE OF CALIFORNIA ) ) ss.: COUNTY OF SANTA CLARA ) On this 2nd day of September, 1999, before me personally came Chris Morse, to me known, who being by me duly sworn, did depose and say that s(he) resides at 210 Hacienda Avenue, Campbell, CA 95008, that (s)he is the Vice President of Silicon Entertainment, the corporation described herein and which executed the foregoing instrument; and that (s)he signed his name thereto by authority of the Board of Directors of the said corporation. /s/ Laurie Shermer ------------------------------- Notary Public 56 RIDERS TO LEASE AGREEMENT dated September 23rd, 1999 between MALL OF GEORGIA, L.L.C., a Delaware limited liability company, as Landlord, and SILICON ENTERTAINMENT, INC., d/b/a "NASCAR Silicon Motor Speedway" or "Silicon Motor Speedway", as Tenant, for Store No. 2068 at Mall of Georgia, Gwinnett County, Georgia. - -------------------------------------------------------------------------------- IN THE EVENT OF ANY INCONSISTENCIES BETWEEN THESE RIDERS AND THE PRINTED FORM OF THIS LEASE, THE RIDERS SHALL BE DEEMED TO CONTROL. RIDER #1 - Construction of Shopping Center Landlord has commenced construction of the Shopping Center of which the Premises will be a part. Tenant will occupy Store No. 2068, consisting of approximately 5,895 square feet. Tenant's Premises in the Enclosed Shopping Center is shown on Exhibit B for illustrative purposes and Landlord reserves the right to increase, eliminate, reduce or change the number, type, size, location, elevation, nature and use of any part of the Enclosed Shopping Center and make changes, additions, subtractions, alterations or improvements in or to the Enclosed Shopping Center. RIDER #2 - amending Article 1 - Size of Premises Landlord and Tenant acknowledge that the Fixed Rent set forth on page 1-1 has been calculated assuming that the Premises shall consist of 5,895 square feet of Floor Space. As soon as practicable after Tenant's Work is completed, Landlord shall cause the Premises to be measured and the Floor Space of the Premises to be determined in accordance with the definition thereof set forth in Article 1. In the event the Floor Space of the Premises varies from 5,895 square feet, the Fixed Rent shall be adjusted on the basis of [***] per square foot for each of the first (1st) through [***] years of the Term and $30.00 per square foot for each of the [***] through [***] years of the Term. The Promotion Fund Charge and Environmental Charge set forth on page 1-1 shall also be adjusted to reflect such variance. In no event, as a result of remeasurement shall the Size of the Premises be deemed to vary by more than [***] square feet. Landlord and Tenant shall execute, acknowledge and deliver a supplemental agreement specifying the adjusted annual Fixed Rent, Promotion Fund Charge and Environmental Charge. The form of the Supplemental Agreement is annexed hereto as Exhibit F. RIDER #3 - Landlord's Work Landlord has performed the work (Landlord's Work) described in Exhibit E annexed hereto and made a part hereof. The cost of those items of Landlord's Work which are to be performed at Tenant's expense are designated on page 5 of Exhibit E. In no event shall the aggregate costs to Tenant of items A, B, C, D, E, G, H and I exceed [***] percent of the cost listed on Exhibit E. Such costs shall be deemed Additional Rent under the Lease, shall be billed - ---------- *** confidential treatment requested 1 57 to Tenant upon commencement of Tenant's Work, and shall be due and payable within [***] days thereafter. After delivering possession of the Premises to Tenant, Landlord shall not then alter the size and/or shape of the Premises without Tenant's consent, which consent may be withheld in Tenant's sole discretion. RIDER #4 - Disputes In the event of any dispute between Landlord and Tenant concerning the date of substantial completion of Landlord's Work or the Size of Premises or any part thereof, or whether or not access to the Premises is available as contemplated in these riders, such dispute shall be determined by an architect selected by Landlord's and Tenant's architect, whose decision shall be binding on the parties and whose fees for such determination shall be borne equally by the parties. Until such determination shall have been made, Tenant shall pay all Rent as, when and in the amounts billed by Landlord, subject to reimbursement, if any, as indicated by decision of the architect. RIDER #5 - Grand Opening Contribution On the first day of the month next following the month in which the Commencement Date occurs, Tenant shall pay to Landlord, as a contribution toward the promotion of the Grand Opening of the Enclosed Shopping Center (the "Grand Opening Contribution") the sum of [***] per square foot]. In addition, Tenant shall reasonably cooperate with Landlord in all Grand Opening activities at no additional cost to Tenant. RIDER #6 - amending Article 1 - Tenant's Trade Name Tenant may change its Trade Name to any other name then being used by substantially all of Tenant's chain of stores currently doing business as "Nascar Silicon Motor Speedway" or "Silicon Motor Speedway"; provided, however, said name does not conflict with a name then being used by another tenant in the Shopping Center. RIDER #7 - amending Article 1 - Construction Barrier Fee Tenant shall install a construction barrier at the Premises and decorate such barrier with a NASCAR motif display announcing Tenant's scheduled opening. RIDER #8 - Tenant's Work and amending Section 2.1 Tenant shall commence Tenant's Work when possession of the Premises is made available to Tenant. Landlord's Work is substantially complete in the Premises, and possession of the Premises shall be deemed to have been delivered to Tenant on the later of (i) the date of the Lease and (ii) the date that Tenant has received its conditional use permit (if necessary) and - ---------- *** confidential treatment requested 2 58 all other approvals required for Tenant to commence Tenant's Work in the Premises. In the event Tenant, despite its good faith efforts to do so, Tenant is unable to secure all Necessary Approvals required for Tenant to conduct its business at the Premises for the Permitted Use within [***] months after the date of the Lease, Tenant shall have the right to terminate this Lease. Landlord's Work is substantially completed in accordance with Landlord's plans and specifications on Exhibit E and access to the Premises through the Common Area is available and the Premises are in a condition to accept the installation of Tenant's Work, as reasonably determined by Landlord's architect, notwithstanding that other stores in the Enclosed Shopping Center may not be ready for occupancy by other tenants. Tenant's Work Period shall be as provided in Article 1 of this Lease. Tenant's Work shall be performed in accordance with the terms of the Tenant Design Criteria Manual to be furnished to Tenant by Landlord. RIDER #9 - Temporary Utility Charges during Tenant's Work Period Throughout Tenant's Work Period, Tenant shall pay, promptly upon receipt of bills therefor, for all utilities used at the Premises and for refuse removal, in the amounts referenced in Exhibit E. RIDER #10 - Coordination of Work The timing and progress of Tenant's Work and the work of other tenants, Landlord's Work, and work in the Interior Common Area shall be coordinated with Landlord or its designee. In the event of any dispute with respect to deliveries, parking, storage of equipment or materials or vehicles, traffic flow, or any other matter or thing relating to Landlord's Work, Tenant's Work or the work of other tenants, such dispute shall be determined by Landlord or Landlord's designee, in their sole discretion. Tenant and its agents or contractors, when requested, shall attend at the Shopping Center, during business hours, all construction meetings convened by Landlord or its representative, and they shall comply with all reasonable and nondiscriminatory rules and regulations adopted from time to time by Landlord or its designee. Neither Tenant nor its agents shall park or store any vehicles, equipment, materials or supplies other than within Tenant's Premises, without the specific written consent of Landlord. RIDER #11 - amending Article 1 - Term In the event Tenant's Gross Sales shall be less than [***] in the [***] full (twelve (12) month) Lease Year, Tenant may terminate this Lease by written notice served not later than thirty (30) days after delivery to Landlord of Tenant's annual statement of Gross Sales for the [***] full Lease Year. Tenant's termination notice shall specify a date for the termination of this Lease which shall be not less than [***] days nor more than [***] days from the date thereof. Tenant's right to terminate as aforesaid and the effectiveness of Tenant's notice is conditioned upon (i) payment by Tenant to Landlord of an amount equal to the unamortized portion of Landlord's Contribution assuming a useful life equal to the original Term and unamortization on - ---------- *** confidential treatment requested 3 59 a straight-line basis, and (ii) payment by Tenant to Landlord of all Rent and other charges due to the date of termination. RIDER #12 - amending Article 1 - Storage Space Page 1-5, line 2, delete "soley" and substitute "solely". RIDER #13 - amending Article 1 - Permitted Use (A) Provided the same have been approved by Landlord on Tenant's Plans, Tenant shall be allowed to place a full size race car within the Premises in the area immediately fronting on Tenant's entrance to the Premises. Landlord acknowledges that the race car may be fitted with operating lights, including flashing lights, a "fogging" device to simulate exhaust emissions and race car sound effects. However, Tenant's operation of such race car shall remain subject to the terms and conditions of the Lease (including, but not limited to Section 6.2 thereof) and shall not cause an adverse effect on the Shopping Center activities conducted in or from the Common Areas or interfere with any other tenant's quiet enjoyment of its premises. (B) Tenant shall be allowed to employ a "greeter" at the Premises who would greet Tenant's customers in the Common Area immediately adjacent to the Premises. (C) Landlord hereby consents to tenant's use of hydraulic oil in connection with the operation of the stimulators and cleaning and office products customarily used in retail or office premises so long as such materials are used, handled, stored and disposed of in accordance with applicable laws. RIDER #14 - amending Article 1 -Necessary Approvals Necessary Approvals shall not include those approvals Landlord is required to secure under this Lease. RIDER #15 - amending Section 2.1 (A) Landlord shall approve or reject to Tenant's plans and specifications within twenty (20) days of submission by Tenant. If Landlord rejects Tenant's plans, Landlord shall provide a detailed explanation why the plans were so rejected. If Landlord responds to Tenant's plans and specifications later than [***] days after any submission by Tenant, the Tenant's Work Period shall be extended on a day for day basis. (B) Landlord agrees that it shall contribute the sum of [***] per square foot of Floor Space at the Premises (Landlord's Contribution) towards the cost of Tenant's Work on the terms set forth below: - ---------- *** confidential treatment requested 4 60 (1) Landlord shall not be required to make Landlord's Contribution unless this Lease is in full force and effect and Tenant is not in default beyond any applicable cure period hereunder and the leasehold improvements (excluding fixtures, furnishings and equipment) at the Premises are free of all liens. (2) Landlord's Contribution shall be used only for alterations, improvements, fixtures and equipment which become part of or attached or affixed to the realty, including heating, ventilating and air conditioning systems, walls, floors and ceiling, but excluding trade fixtures, furniture and furnishing or other personal property. (3) Landlord's Contribution shall be made in installments as follows: [***] upon completion of [***] of Tenant's Work; [***] upon completion of [***] of Tenant's Work. The final installment shall be paid upon the last to occur of (i) the opening for business by Tenant in the Premises and (ii) the completion of Tenant's Work as certified pursuant to Section (4)(b) below. (4) Prior to and as a condition precedent to Landlord's obligation to pay any installment, Tenant shall deliver to Landlord's Managing Agent at the Shopping Center: (a) an affidavit of the principal officer of Tenant to the effect that all leasehold improvements (excluding fixtures, furnishings and equipment) at the Premises are free and clear of all mechanics liens, encumbrances and charges; (b) an affidavit sworn to by Tenant's general contractor to the effect that it has been paid all sums due to it through the date of the affidavit or the requisition date, and all subcontractors, materialmen and suppliers and all costs of labor, including payroll taxes and charges, have been paid through the date of the affidavit or the requisition date; said affidavit to contain the names of all subcontractors, materialmen and suppliers, specific amounts, if any, due to each and to be accompanied by copies of all requisitions; (c) conditional lien waivers with respect to work performed and materials supplied to the date of each respective lien waiver or the requisition date, executed by Tenant's general contractor and all subcontractors, materialmen and suppliers supplying in excess of [***] worth of labor and/or materials; (d) an affidavit from the architect having supervision over Tenant's Work to the effect that Tenant's Work has been completed to the extent necessary to qualify for an advance and in accordance with the plans and specifications approved by Landlord, to such architects actual knowledge, and in compliance with all Governmental Requirements. - ---------- *** confidential treatment requested 5 61 (5) Prior to and as a condition precedent to Landlord's obligation to pay the final installment, Tenant shall also deliver to Landlord's Managing Agent at the Shopping Center: (a) a current search of the public records issued by a title insurance or title abstract company reasonably satisfactory to Landlord showing that the Premises, including all installations therein (excluding fixtures, furnishings, and equipment), are free and clear of all mechanics liens, charges, and encumbrances and that there are no judgments, levies, attachments, liens or tax liens issued, pending or in effect with respect to Tenant; (b) an affidavit sworn to by such subcontractors and suppliers supplying in excess of [***] worth of labor and/or materials to the effect that they have been paid all sums due them. (c) a conditional certificate of occupancy and fire underwriters certificate for the Premises and such other approvals of Tenant's Work which may be necessary for the conduct of Tenant's business or as may be required by any Governmental Authority (subject to any and all approvals to be secured by Landlord under this Lease). (6) Tenant shall not mortgage, pledge, assign or hypothecate Tenant's right to receive Landlord's Contribution. (C) Tenant's acceptance of the Premises is subject to and excluding latent defects and items of repair which are Landlord's responsibility as elsewhere set forth in this Lease. (D) In the event a multiple-user antenna and/or satellite system is installed or caused to be installed in the Shopping Center by Landlord, Tenant shall be permitted to utilize said system pursuant to separate agreement with Landlord and/or the vendor of such system and subject to all provisions regarding the use of such system as contained in such separate agreement, which shall be mutually agreed upon by Tenant and Landlord and/or the vendor of such system. In the event Tenant and Landlord and/or such vendor are unable to mutually agree on terms of a satellite agreement, or such system is not made available for Tenant's use, Tenant shall be permitted to install a satellite dish (hereinafter "Dish") at the Center, subject to the following terms, conditions and limitations: (a) Tenant shall provide [***] days prior written notice of its intent to install the Dish, and shall provide plans and specifications for the location and installation of the Dish for Landlord's review and approval concurrently with such notice. Such plans shall be in accordance with Landlord's current design criteria and must conform to the reasonable requirements of Landlord's roofing consultant, in part, in order to protect Landlord's roof warranties; (b) The location of the Dish shall be on the roof of the Shopping Center or such other location as Landlord, in its sole and absolute discretion, shall approve; - ---------- *** confidential treatment requested 6 62 provided that such location provides for the clear transmission of signals from the Dish, and in no event shall such installation affect the structural integrity of the roof or any other area where the Dish has been installed; (c) The installation and maintenance of the Dish, including any necessary structural support to the roof and/or screening shall be at Tenant's sole cost and expense; (d) The Dish shall be installed within the existing wall screen, if any; however, Landlord may require Tenant to further screen or otherwise shield the Dish from view by providing fencing, screening materials or landscaping satisfactory to Landlord; (e) Tenant shall procure and maintain any approval(s) and/or permits required by any governmental authority having jurisdiction thereof and shall deliver evidence of same to Landlord prior to commencing installation. In the event the use or installation of the Dish is in violation of applicable law or any agreement of Landlord or the Shopping Center regarding the Shopping Center, Tenant shall not be permitted to use, install or maintain the Dish and shall be required to remove the Dish from the Shopping Center; (f) Tenant's installation or operation of the Dish shall in no way interfere with the operation of any other transmission or receiving device at the Center; (g) Tenant shall give Landlord two (2) days prior notice of the necessity to access the Dish for service, except in the case of an emergency, or such shorter period of time as Landlord may allow; (h) The Dish and related equipment shall remain the property of Tenant. Tenant shall remove the Dish at the expiration or earlier termination of the Lease Term and repair any damage occurring as a result thereof, at Tenant's sole cost and expense; and (i) Only one Dish will be permitted at the Center for the joint use of Tenant and Tenant's affiliates. Further, Tenant shall not re-sell satellite dish services to any other tenant or occupant in the Shopping Center (E) Tenant shall submit its Design Drawings to Landlord in compliance with the Design Criteria. In the event that Landlord approves Tenant's Design Drawings (as Tenant may agree to modify such plans and specifications in response to Landlord's comments thereto in accordance with the following sentence), then Landlord will be deemed to have approved the measures taken by Tenant to minimize noise and vibration and, thereafter, Tenant shall not be in default under the Lease as a result of noise or vibration associated with the permitted use of the Premises. In the event that Landlord does not approve Tenant's Design Drawings (for reasons relating to the measures taken therein to minimize noise and vibration) within the timeframe required for Landlord's disapproval in accordance with the Design Criteria, and notwithstanding anything to the contrary contained in the Design Criteria, Landlord shall deliver written notice to Tenant thereof (such notice a "Design Drawing Rejection Notice") and specific reasons therefor 7 63 with reasonable alternative recommendations with respect thereto. Tenant shall, for a period of [***] business days after Tenant's receipt of the Design Drawing Rejection Notice, have the right to either (i) agree to incorporate Landlord's recommendations or otherwise address the reasons for Landlord's rejection (as set forth in the Design Drawing Rejection Notice) in a manner mutually agreeable to Tenant and Landlord or (ii) terminate the Lease and neither party shall incur any liability as a result of such termination; provided, however, if Landlord's recommendations are commercially reasonable and if the cost that would be incurred by Tenant therefor is equal to [***] or less, then Tenant shall incorporate Landlord's recommendations into its design and proceed with construction; provided, further, upon Tenant's incorporation of Landlord's recommendations into its design, Landlord shall be deemed to have approved the measures taken by Tenant to minimize noise and vibration. Landlord shall have the right to nullify Tenant's right to terminate, as provided above, if, within the aforementioned [***] day notice period, Landlord notifies Tenant, in writing, that Landlord shall increase Landlord's Contribution by the amount by which the cost to implement Landlord's recommendations exceeds [***]. Notwithstanding the foregoing, if unreasonable noise or vibration occurs (i.e., so as to materially adversely affect the Shopping Center or the business of adjacent tenants) after the Premises are open for business, then Tenant will agree to take such steps as are reasonably necessary to reduce such noise or vibration, as applicable, the cost of which would be split evenly by Landlord and Tenant; provided however, if Tenant's expenditure of Tenant's portion of such costs would, in Tenant's good faith discretion, (1) materially reduce Tenant's expected returns from the operation of the Premises, or (2) affect the performance of one or more of its equipment so as to materially and adversely affect the sensory experience created thereby (e.g., reducing the vertical movement or the volume of the racing simulators), or (3) otherwise make Tenant's operation of its business in the Premises infeasible, then Tenant shall, for a period of [***] days after receiving Landlord's request to make such expenditures, have the right to elect not to make such expenditures as are requested by Landlord and instead terminate this Lease, and neither party shall incur any liability as a result of such termination. RIDER #16 - amending Section 2.2 (A) Page 2-1, line 21, after "specifications" insert "which shall take place as set forth in Section 2.1". (B) Page 2-1, line 27, prior to "interfere" insert "unreasonably". (C) Page 2-1, line 31, after "make" insert "and notify Tenant in writing". (D) Page 2-2, line 3, prior to "the end" insert "[***] days following". (E) Page 2-2, line I 1, after "discharge" insert ", bond". (F) Page 2-2, line 12, delete "[***]" and substitute "[***]". (G) Page 2-2, line 14, after "shall" insert "use best efforts to". - ---------- *** confidential treatment requested 8 64 RIDER #17 - amending Section 2.4 Page 2-2, lines 29-30, delete "not less than ... this Lease" and substitute "at the time Tenant first requests consent thereto". RIDER #18 - amending Section 2.5 Page 2-2, line 39, after "within" insert "[***] days after". RIDER #19 - amending Section 2.5 and 6.1 B Tenant shall not be obligated to continuously operate from the Premises (i) for a period of up to [***] days and after notice to Landlord while Tenant is carrying on remodeling activities, (ii) for up to [***] days per year for the taking of inventory, (iii) while Tenant is unable or reasonably unwilling to operate as a result of casualty or natural disaster, condemnation, interruption of utilities or services, extremely inclement weather, civil unrest, operation of the business would expose Tenants' employees, agents or invitees to an unreasonable risk of physical injury or property damage, or other force majeure events, (iv) while Tenant's use and occupancy of the Premises is prohibited by any law, ordinance, order or other act of any judicial, governmental or quasi-governmental authority. RIDER #20 - amending Section 2.6 Provided Tenant maintains the Premises in a state consistent with the standards required by the Lease and in accordance with Tenant's remodel and maintenance practices for its chain of stores, the provisions of Section 2.6 shall be deemed waived. RIDER #21 - amending Section 3.2 So long as the Tenant operating in the Premises is the Tenant named herein or any assignee of Silicon Entertainment, Inc. pursuant to Section 6.2(F)(2), the second sentence of Section 3.2 shall be deemed deleted. In addition, the foregoing Fixed Rent increase shall only apply to Department Stores which open after the effective date of any such assignment. RIDER #22 - amending Section 3.3B The following shall not be included in (or may be deducted from) Gross Sales: (A) Receipts from bulk sales to jobbers and the like made for the purpose of clearing stock of old and/or obsolete merchandise; (B) Receipts from the bulk sale of the entire stock of merchandise in the Premises, or a substantial portion thereof, to a successor to the business of Tenant; - ---------- *** confidential treatment requested 9 65 (C) Fees charged by credit card companies for the transactions originating in, or from the Premises not to exceed [***] percent of Gross Sales per Lease Year; (D) Sale of fixtures, trade fixtures or personal property after use in the Premises; (E) Free use of games and discounted sales to Tenant's employees not to exceed [***] percent of Gross Sales per Lease Year; (F) Revenue received from mailing, delivery or other service performed on a non-profit basis for the benefit of Tenant's customers; (G) Rents, subrents, or other consideration received in connection with an assignment, sublease, license, concession (however, Gross Sales, if any, for such transferee shall be included) including license fees otherwise payable by Tenant in connection with a third party license agreement; (H) Amounts required to be paid by Tenant under any agreement related to Tenant's use of the NASCAR name, not to exceed [***] percent of Gross Sales per Lease Year; and (1) Discounts given for promotional coupons that are redeemed from time to time not to exceed [***] percent per Gross Sales per Lease Year. RIDER #23 - amending Section 3.3C (A) Page 3-2, line 39, after "to time" insert "but no more than twice per calendar year". (B) Page 3-2, line 41, delete "[***]" and substitute "[***]". (C) Page 3-3, line 1, delete "[***]" and substitute "[***]" in both instances. (D) Page 3-3, lines 8 and 18, delete "[***]" and substitute "[***]". (E) Page 3-3, line 10, after "to time" insert "but no more frequently than twice per calendar year". (F) Page 3-3, line 22, delete "[***]" and substitute "[***]". (G) Page 3-3, line 22, after "more" insert "and such understatement results in underpayment of Percentage Rent". (H) Page 3-3, line 23, delete "but Tenant shall remain liable hereunder" and substitute "and Landlord shall have the remedies". RIDER #24 - amending Section 3.3D - ---------- *** confidential treatment requested 10 66 (A) Page 3-3, line 35, delete "[***]" and substitute "[***]". (B) Page 3-3, line 36, delete "Landlord's request therefor" and substitute "the end of the calendar month". RIDER #25 - amending Section 3.3E Page 3-4, line 1, delete "[***]" and substitute "[***]". RIDER #26 - amending Section 3.4 (A) Page 3-4, line 22, delete "[***]" and substitute "[***]". (B) Page 3-4, line 26, after "elects" insert "upon written notice to Tenant,". (C) Page 3-5, line 42, prior to "tax" insert "rebate, abatements of taxes or". RIDER #27 - amending Section 3.4 (A) With respect to any special assessments made by governmental authorities for street improvement, traffic mitigation or similar physical improvements, Landlord may, at its option, pay any such special assessments in one lump sum when due or, if permitted by law, Landlord may elect to pay such special assessments in installments. In the event Landlord shall pay any special assessment in full when due, Tenant shall nevertheless reimburse Landlord for its share thereof based upon the installment payments including principal and interest which Landlord would have been obligated to pay had Landlord elected to pay the special installment in the maximum number of installments permitted. Tenant's installment payments for such special assessment shall be due and payable on the same dates that they would have been payable to the taxing authority had Landlord elected to pay the special assessment in installments. (B) Tenant shall be required to pay only Tenant's proportionate share of such assessments to the extent Tenant's proportionate and amortized share thereof corresponds to the Lease Term. RIDER #28 - amending Section 3.4C Page 3-4, line 43, prior to "gift" insert "change in ownership". RIDER #29 - amending Section 3.5 (A) Page 3-6, line 23, delete "[***]" and substitute "[***]". (B) Page 3-7, line 29, delete "[***]" and substitute "[***]". - ---------- *** confidential treatment requested 11 67 (C) In no event shall Common Area Operating Costs for the first twelve (12) months of the Term exceed [***] per square foot of Floor Space at the Premises. (D) Commencing the second full year of the Term, the annual increases for Common Area Operating Costs shall not exceed [***] percent. (E) With respect to items costing more than [***], Landlord shall not include such costs in Common Area Operating Costs for the year in which they are incurred, but in lieu thereof shall depreciate (or amortize) such items over a period of not less than [***] nor more than [***] years, as reasonably determined by Landlord in accordance with generally accepted accounting principles for the shopping center industry, consistently applied. In such cases, only that portion of the depreciation (or amortization) allocable to the year for which Common Area Operating Costs are being determined and interest on the undepreciated (or unamortized) portion shall be included in then current costs. (F) Tenant shall not be responsible for payment of any of the following as a Common Area Operating Costs, whether or not otherwise included in the definition of "Common Area Operating Costs": (i) Interest, loan fees, ground lease rental, and other carrying costs related to any mortgage or indebtedness secured by the Shopping Center; (ii) Premiums or deductibles to the extent any other tenant in the Shopping Center causes Landlord's insurance premiums relating to the Premises to increase or obligates Landlord to purchase additional insurance, or any damage resulting from the negligent or willful acts or omissions or breach of any other tenant of the Shopping Center; (iii) New buildings constructed on or within the Shopping Center; (iv) Expenses that under generally accepted accounting principles are treated as capital expenditures to the extent they improve the Common Areas to beyond their original condition or utility (other than those capital expenditures reasonably required for maintenance, repair and replacement of exiting capital items which costs Landlord shall amortize over a period of years as reasonably determined by Landlord and which amortized amount may be included in Common Area Operating Costs; (v) Leasing fees, commissions or other brokerage commissions of any kind, or advertising or promotional expenditures (including costs incurred in leasing to or procuring new tenants with allowances, concessions, or inducements provided by Landlord, such as the cost of leasehold improvements), attorney's fee, or other comparable expenses incurred in connection with attracting any prospective tenant to the Shopping Center or with respect to disputes or litigation with such tenants; - ---------- *** confidential treatment requested 12 68 (vi) Costs incurred due to a violation by Landlord or any tenant (other than Tenant) of the Shopping Center of the terms of this Lease or any other lease or condition, covenant or restriction affecting the Shopping Center, or any laws, rules, regulations or ordinances applicable to the Shopping Center; (vii) Costs of repairs, replacements or other work occasioned by fire, windstorm, earthquake, or other casualty, or the exercise by governmental authorities of the right of eminent domain; (viii) Costs and expenses reimbursed by Tenant or any other third party; except for reimbursements of Common Area Operating Costs; (ix) The cost of repair necessitated by the negligence, willful misconduct or breach of any written agreement by Landlord or Landlord's agents or any other tenant of the Shopping Center; (x) Cost of repairs, replacements, alterations or improvements necessary to make the Shopping Center comply with applicable past, present of future laws, except to the extent compliance with such laws is required as the result of Tenant's particular use of the Premises or alterations or additions made or requested to be made by Tenant; (xi) The cost incurred in performing work or furnishing services for individual tenants in the Shopping Center to the extent such work or services are in excess of the work and services required to be provided to Tenant under the Lease, and costs incurred for the benefit of particular tenants and not generally beneficial to the tenants of the Shopping Center; (xii) Expenses for repair or replacement paid by proceeds of insurance, condemnation awards, warranties or guarantees, or reimbursed by tenants of the Shopping Center; (xiii) Costs of salaries, wages and other employment benefits, except to the extent such costs are fairly allocable to the Shopping Center and not to other shopping centers or projects; (xiv) Amounts that are payable or reimbursable by Landlord to Tenant with respect to Landlord's Contribution provided by Landlord to Tenant in connection with Tenant's construction of leasehold improvements at the Premises; and (xv) Duplication of charges under the Lease. RIDER #30 - amending Section 3.5 D Tenant may audit Landlord's Common Area Operating Costs for such year in order to verify the accuracy thereof, provided that: (a) Tenant specifically designates the year Tenant 13 69 intends to audit, which shall be a year during the Lease Term that is also within [***] years of the date of the audit; (b) such audit is conducted only during regular business hours at the office where Landlord maintains expense records of Landlord's Common Area Operating Costs; (c) Tenant gives Landlord [***] days prior written notice of Tenant's request to audit and Tenant shall deliver to Landlord a copy of the results of such audit within [***] days of its receipt by Tenant; (d) such audit must be conducted by Tenant's employees or an independent nationally recognized accounting firm that is not being compensated on a contingency fee basis; (e) no audit shall be conducted if Tenant has previously conducted an audit for the same time period; (f) such audit shall be at Tenant's sole cost and expense; and (g) any financial or other information provided by Landlord or obtained by Tenant as a result of such audit shall only be pursuant to duly executed confidentiality agreements between Landlord, Tenant and Tenant's agents and employees to whom disclosure is made. Tenant acknowledges that the Landlord considers its financial and other operating information to be confidential and will not disclose such information to any third party without Landlord's prior written consent except to prospective buyers or lenders, Tenant's accountants and attorneys, or in the case of compliance with a subpoena or other legal process provided Tenant gives Landlord at least ten (10) days prior written notice of Tenant's receipt of such subpoena or legal process and Tenant's intent to disclose pursuant thereto. If the audit discloses that Tenant has underpaid, Tenant shall promptly reimburse Landlord of any amount owed. If the audit accurately discloses that Tenant has overpaid, Landlord shall promptly refund such excess. RIDER #31 - amending Section 3.6 (A) Page 3-9, line 22, prior to "demand" insert "written". (B) Page 3-9, line 27, after "thereto" insert "excluding manifest error, which Tenant shall have the continuing right to have corrected". RIDER #32 - amending Section 3.8 (A) Page 3-9, line 38, delete "its due date" and substitute "written notice of such failure". (B) Page 3-9, line 42, delete "[***]" and substitute "[***]". RIDER #33 - amending Section 4.1B (A) Page 4-1, line 27, after "create" insert "material, adverse interference with the access to and/or visibility of the Premises or Tenant's business operation on the Premises, or create". (B) Page 4-1, line 28, prior to "access" insert "pedestrian". - ---------- *** confidential treatment requested 14 70 (C) Page 4- 1, line 32, after "mall" insert "and not immediately fronting the lease line of the Premises". (D) Landlord agrees that except for existing kiosks or replacements thereof, Landlord shall not install or operate or permit any other person to install or operate any kiosks or carts closer than [***] feet parallel to the front of Tenant's mall entrance. (E) Landlord shall (i) provide clear access to Tenant's storefront from the Common Area, and (ii) use reasonable efforts to restrict the theatre queue such that it will not materially and adversely impair access to and visibility of the Premises from the Common Area. (F) Landlord shall maintain such parking as shall be required to be maintained pursuant to its agreements with the Department Stores, as the same may from time to time be modified or amended; it being understood that Tenant shall, without the necessity of any further consents, be bound by such changes in parking requirements as shall be consented or agreed to by the Department Stores or their successors. Tenant's sole and only remedy in the event of a breach of this covenant will be to cancel and terminate this Lease. RIDER #34 - amending Section 4.1C In no event shall the employees of the Premises be required to pay for parking at the Shopping Center while they are working. RIDER #35 - amending Section 5.1 (A) Page 5-1, line 2, after "roofs" insert "(including membrane)". (B) Page 5-1, line 25, after "completed" insert "following notice to Tenant (except in cases of emergency)". (C) Page 5-1, line 25, after "performance of" insert ", or failure to perform,". (D) Page 5-1, line 27, after "Premises" insert "as reasonably determined by Tenant". (E) Landlord shall perform all repairs to the heating, ventilation and air conditioning equipment and systems (including ducts) in the Shopping Center, except those that exclusively serve any tenant's premises. (F) Landlord shall, at Landlord's sole cost and expense, repair any damage or defect in the Premises of the Shopping Center caused by the acts or omissions of Landlord and its agents and contractors. - ---------- *** confidential treatment requested 15 71 RIDER #36 - amending Section 6.1A Page 6-1, line 9, after "manner" insert "using Tenant's commercially reasonable efforts". RIDER #37 - amending Section 6.1B (A) Page 6-1, line 12, delete "To" and substitute "Except as otherwise provided, to". (B) Tenant shall have the right to remain open until 1:00 AM or later if at least one (1) other Tenant is open; provided that entry and exit by customers after the mall is closed is through the food court entrance which shall remain open while Tenant is open for business, and Tenant pays for any additional security staff or devices reasonably required by mall management as a result of Tenant's remaining open later than standard mall hours. In the event other tenants are open after mall hours and the additional security for Tenant's late hours is shared by Tenant and such other tenants, the cost of such additional security shall be evenly divided among such tenants during the additional hours Tenant and such other tenant(s) are simultaneously open. Tenant shall not be responsible to pay any additional costs so long as Tenant is not open for operation after the theatre closes. (C) In no event shall Tenant be required to open prior to 10:00 AM on any day. (D) The parties agree that until such time as Nordstrom opens for business at the Shopping Center, Tenant shall pay, as Opening Rent, on a monthly basis, in lieu of Fixed Rent and Percentage Rent only, [***] percent of Gross Sales made at the Premises, to be paid in accordance with the provisions of Article 3 relating to payment of Percentage Rent. In addition, Tenant shall be obligated to pay all Additional Rent and charges due under the Lease. At such time as Nordstrom opens for business at the Shopping Center, the current Fixed Rent and Percentage Rent, set forth in Article 1 of the Lease shall be reinstated and paid in accordance with Article 3 of this Lease. Notwithstanding the foregoing, Gross Sales transacted at the Premises during the period which Tenant is paying Opening Rent shall not be included in the calculation at Percentage Rent for the applicable Lease Year. RIDER #38 - amending Section 6.1D Tenant shall not be required to maintain plumbing, electrical or other systems that are not located within the Premises or that otherwise do not exclusively serve the Premises, and Tenant shall have no obligation to maintain, repair or replace exterior or structural parts of the Premises, or plumbing, HVAC, elevators, or electrical or mechanical systems (except those exclusively serving the Premises). RIDER #39 - amending Section 6.1E (A) Page 6-2, lines 18-19, delete "the manner of". - ---------- *** confidential treatment requested 16 72 (B) Page 6-2, line 19, after "Tenant's" insert "particular". (C) Page 6-2, line 19, delete "or occupancy". (D) Page 6-2, line 20, after "Requirement" insert "to the extent triggered by Tenant's particular use of the Premises". (E) Page 6-2, line 24, prior to "use" insert "particular". RIDER #40 - amending Section 6.1F (A) Page 6-2, line 26, after "Premises" insert "performed by or on behalf of Tenant and not by Landlord". (B) Page 6-2, line 32, prior to "acceptable" insert "reasonably". RIDER #41 - amending Section 6.1G (A) Page 6-3, line 5, delete "Managing Agent" and substitute "managing agent, if any,". (B) Landlord hereby agrees to defend and save Tenant harmless and indemnified from all injuries, losses, claims and damages (including reasonable attorneys' fees and disbursements) to any Person or property, arising from, related to, or in any way connected with Landlord's use or occupancy of the Common Areas, unless such injury, loss, claim or damage be attributable to the negligence of Tenant or its agents, servants or employees. RIDER #42 - amending Section 6.1H Page 6-3, line 20, delete "[***]" and substitute [***]". RIDER #43 - deleting Section 6.1I Section 6.1I is hereby deemed deleted in its entirety. RIDER #44 - amending Section 6.1J Page 6-4, line 15, delete "[***]" and substitute "[***]". RIDER #45 - amending Section 6.1L (A) Page 6-5, line 4, delete "[***] percent" and substitute "the lesser of (i) [***] percent and (ii) by the [***]. For purposes of this Rider, the "Consumer Price Index" shall mean the Consumer Price Index for U.S. City Average for All Items For All Urban Consumers, 1982- - ---------- *** confidential treatment requested 17 73 84 equals 100 (CPI-U), as published by the United States Department of Labor (or if not published, the most clearly comparable index)." (B) Page 6-5, line 6, delete "[***] percent" and substitute "in the manner set forth above". RIDER #46 - deleting Section 6.1L(4) Section 6.1L(4) is hereby deemed deleted in its entirety. RIDER-#47 - deleting Section 6.1M Section 6.1M is hereby deemed deleted in its entirety. RIDER-#48 - deleting Section 6.1O Section 6.1O is hereby deemed deleted in its entirety. RIDER #49 - deleting Section 6.1P Page 6-7, line 43, after "Approvals" insert "(except those that Landlord's required to obtain)". RIDER #50 - amending Section 6.1R Page 6-8, line 6, delete "To" and insert "Following receipt by Tenant of written notice, to". RIDER #51 - amending Section 6.1S (A) Page 6-8, line 11, delete "To" and substitute "Subject to Section 9.18 below,". (B) Page 6-8, line 11, delete "[***]" and substitute "[***]". (C) Page 6-8, line 11, after "same" insert "not more than [***] times during the Term". (D) Subparagraph (4) is hereby deemed deleted in its entirety. (E) Page 6-8, line 36, delete "[***]" and substitute "[***]". RIDER #52 - amending Section 6.2A (A) Page 6-8, line 7, prior to "officer" insert "then-current". - ---------- *** confidential treatment requested 18 74 (B) Page 6-8, line 10, delete "ten (10)" and substitute "eight (8)". (C) The Retail Restriction Limit shall not apply to any existing or future stores of Tenant, or any Affiliate of Tenant, operating under a different trade name and having a different merchandise mix. (D) The Retail Restriction Limit shall not apply to Tenant's remote site promotional activities. RIDER #53 - amending Section 6.2B Page 6-9, line 22, prior to "beverages" insert "alcoholic". RIDER #54 - amending Section 6.2C Landlord acknowledges that race car simulator noise and track announcer heard outside the Premises shall not be deemed objectionable. RIDER #55 - amending Section 6.2D Page 6-10, line 12, delete "[***]" and substitute "[***]". RIDER #56 - amending Section 6.2E Page 6-10, line 38, after "employees" insert "and except for those allowed by the Permitted Use". RIDER #57 - amending Section 6.2F (A) Notwithstanding anything in Section 6.2F to the contrary, provided such does not involve a change of control, any issuance or transfers of private stock that are exempt under Securities and Exchange Commission regulations. (B) Nothing contained in this Lease shall be deemed to prohibit Tenant from encumbering its trade fixtures and the equipment with security agreements, but no security interest shall be permitted as to any alterations, installations or improvements which by the terms of this Lease become part of the Premises. (C) Tenant shall have the right to issue or transfer Tenant's Stock without Landlord's Consent. (D) In the event of assignment or other transfer by Tenant of its interest in this Lease (whether by merger, consolidation, agency, franchise, or otherwise) and the assignee or transferee (i) has a net worth equal to or greater than the net worth of Tenant on the Commencement Date of this Lease or at the time of such assignment (whichever is greater) and - ---------- *** confidential treatment requested 19 75 (ii) assumes all obligations imposed by this Lease, then as of the effective date of the assignment, Tenant, Tenant shall be released from all obligations imposed by this Lease. The form and substance of legal documents shall be reasonably satisfactory to Landlord. RIDER #58 - amending Section 6.2F(2) Section 6.2F(2) is hereby deleted and the following is substituted in lieu thereof: "After completion of Tenant's Work and the opening of the Premises for business, Tenant, without Landlord's consent, may assign this Lease or sublease the entire Premises to a parent, Affiliate or wholly owned subsidiary of Tenant (or the Guarantor, if any) or to any entity with which or into which Tenant (or the Guarantor, if any) may consolidate or merge or to whom all of the assets and business of the chain of Tenant is sold as a going concern, and who shall assume for Landlord's benefit the performance of all of the terms, conditions and covenants of this Lease; provided, however, that the merged or consolidated entity or transferee of assets shall have a net worth at least equal to the net worth of Tenant at the time of such consolidation, merger or transfer or at the time of the Commencement Date of this Lease, whichever shall be greater; and further provided that the assignee or sublessee shall use the Premises under the Trade Name and only for the purpose stated in the "Permitted Use" clause." RIDER #59 - amending Section 6.2F(3) (A) Page 6-11, line 44, delete "and stockholders". (B) Page 6-11, line 49 through line 1 on page 6-12, delete "responsibility" and substitute "status". (C) Page 6-12, line 9, delete "[***]" and substitute "[***]". (D) Page 6-12, line 19, after "withheld" insert "or delayed". (E) In the event Landlord exercises its right to terminate this Lease pursuant to Section 6.2 F (3), Landlord shall pay to Tenant the unamortized value, less the amount of Landlord's Contribution, and any liens or encumbrances, of Tenant's leasehold improvements (excluding removable personal property and fixtures). Tenant shall, not later than ninety (90) days following its opening for business in the Premises, deliver an affidavit of an officer of Tenant and a certificate of Tenant's architect, accompanied by bills, receipts, invoices, canceled checks and the like, specifying the cost of Tenant's Work which shall thereupon be the basis for the amount to be paid by Landlord pursuant to this provision. Failure to timely deliver such affidavit and certificate shall constitute a waiver of Tenant's right to such payment. As of the termination date, Tenant shall have no further liability for items arising or accruing after such date. (F) Page 6-12, lines 34-35, delete "and its officers, directors and stockholders". - ---------- *** confidential treatment requested 20 76 (G) Page 6-12, line 37, after "nature" insert ", if different from Tenant's business at the Premises,". (H) Subparagraph 6.2F(3)(c)(v) is hereby deemed deleted. RIDER #60 - amending Section 6.2F(4) (A) Page 6-13, line 19, after "transaction" insert "less out-of-pocket leasing commissions, tenant improvement costs, advertising costs and other related expenses paid to third parties". (B) If an assignment or sublease occurs in connection with the sale of Tenant's business and a portion of the sales price is allocated to the goodwill of the business, the payment of said excess rent or other consideration to Landlord as Additional Rent hereunder shall exclude the valuation of goodwill. (C) Page 6-13, line 13, after "Percentage Rent" insert "as averaged for the prior [***] Lease Years". RIDER #61 - amending Section 6.2F(5) Page 6-13, line 25, delete "[***]" and substitute "[***]". RIDER #62 - amending Section 6.2F(7) (A) Page 6-13, line 32, delete "[***]" and substitute "[***]". (B) Page 6-13, line 34, delete "[***]" and substitute "[***]". RIDER #63 - amending Section 6.2G (A) Page 6-13, line 37, delete "Not" and substitute "Except as otherwise provided herein, not". (B) Page 6-13, line 43, after "competitive" insert "with fair market value prevailing". (C) Page 6-14, line 3, after "determine" insert "not to exceed prevailing fair market rates". RIDER #64 - amending Section 6.2H Tenant shall be permitted to use professionally prepared signs consistent with signs displayed in Tenant's other locations operating under the Trade Name. - ---------- *** confidential treatment requested 21 77 RIDER #65 - amending Section 6.2I Page 6-14, lines 23-27, delete "If Tenant ... load desired." RIDER #66 - amending Section 7.1B If the Premises are damaged and the reasonably estimated time to repair the damage will exceed [***] days, then Tenant shall have the right to terminate this Lease by delivering written notice to Landlord within [***] days after the estimated time for rebuilding is determined. RIDER #67 - amending Section 8.1 (A) Page 8-1, line 3, delete "become insolvent or". (B) Page 8-1, line 6, delete "or insolvency". RIDER #68 - amending Section 8.2 (A) Page 8-1, lines 38 and 40, delete "[***]" and substitute "[***]". (B) Page 8-2, line 1, delete "[***]" and substitute "[***]". (C) Page 8-2, line 3, after "Premises" insert "for a period in excess of [***] days". (D) Page 8-2, lines 4-6, delete "or if Tenant ... of Tenant)". (E) Page 8-2, line 17, delete "[***]" and substitute "[***]". RIDER #69 - amending Section 8.3 (A) Page 8-2, line 33, delete "dispossess" and substitute "dispossession". (B) Landlord shall use reasonable efforts to relet the Premises, it being understood that such efforts shall consist of the same efforts as Landlord makes with respect to other vacant space in the Shopping Center and that Landlord shall not be required to prefer the reletting of the Premises over any other vacant or empty space in the Shopping Center or to accept a tenant for any use or purpose other than a use or purpose acceptable to Landlord. (C) Page 8-3, line 11, delete "[***]" and substitute "[***] percent of". (D) The last sentence of this Section 8.3A is hereby deemed deleted. (E) Anything in Section 8.3 A to the contrary notwithstanding, it is agreed that where reference is made in said Section to sums becoming due and payable to Landlord for Fixed Rent and Additional Rent for the entire unexpired balance of the Term, or anything therein referring to - ---------- *** confidential treatment requested 22 78 payment of Fixed Rent and Additional Rent by Tenant to Landlord in a lump sum shall mean that such payments will be made monthly, with no acceleration, over the balance of the Term or, alternatively, that Landlord shall have the right to sue at the end of the Term for amounts accruing to Landlord to the date thereof. RIDER #70 - deleting Section 8.8 Section 8.8 is hereby deemed deleted in its entirety. RIDER #71 - amending Section 9.1 (A) Page 9-1, line 7, delete "mailed" and substitute "received or refused". (B) Landlord agrees to use reasonable efforts to give copies of default notices to Tenant's attorneys; however, the failure to give such a notice shall not affect the validity of any notice otherwise properly given. Tenant's attorneys are: PAUL, HASTINGS, JANOFSKY & WALKER LLP 555 SOUTH FLOWER STREET 23RD FLOOR LOS ANGELES, CALIFORNIA 90071-2371 ATTENTION: RICK S. KIRKBRIDE, ESQ. RIDER #72 - amending Section 9.7 (A) Page 9-3, line 5, delete "[***]" and substitute "[***]". (B) Page 9-3, line 30, after "time" insert "upon reasonable notice to Tenant". RIDER #73 - amending Section 9.8A Page 9-3, line 34, prior to "instruments" insert "reasonable". RIDER #74 - amending Section 9.8B (A) Page 9-4, line 8, delete "If so requested by Tenant,". (B) Page 9-3, line 20, after the word "foregoing" add the following: "(any one or more of the foregoing individually or collectively called an "Encumbrance") provided however that with respect to Encumbrances recorded after the date hereof, this Lease shall not be subordinate to such Encumbrance unless and until Landlord obtains, at Tenant's cost and expense, from the holder of the Encumbrance placed against the Premises, a non-disturbance agreement in recordable form which is reasonably acceptable to Tenant and provides that in the - ---------- *** confidential treatment requested 23 79 event of any foreclosure, sale under a power of sale, ground or master lease termination or transfer in lieu of any of the foregoing or the exercise of any other remedy pursuant to any such Encumbrance (a) Tenant's use, possession and enjoyment of the Premises shall not be disturbed and this Lease shall continue in full force and effect so long as Tenant is not in default hereunder beyond any applicable cure period, and (b) this Lease shall automatically become a direct lease between any successor to Landlord's interest, as Landlord, and Tenant as if such successor were the Landlord originally named hereunder." (B) Page 9-3, line 23, delete ", if requested,". (C) Page 9-3, lines 24-25, delete "At the option ... thereunder,". (D) Page 9-3, line 37, after the word "hereunder" add the following: "Notwithstanding the foregoing, Tenant's obligation to execute the documents as provided in this Subsection shall be subject to the express limitation that (i) such documents shall be strictly limited to the matters which are subject of this Subsection, and (ii) no such document may materially increase any of Tenant's obligations hereunder or materially decrease any of Tenant's rights under this Lease." RIDER #75 - deleting Section 9.10 Section 9.10 is hereby deleted in its entirety. RIDER #76 - amending Section 9.16B Page 9-9, line 4, after "Center)" insert "and proceeds thereof". RIDER #77 - deleting Section 9.16C Section 9.16C is hereby deemed deleted in its entirety. RIDER #78 - deleting Section 9.17 Section 9.17 is hereby deemed deleted in its entirety. RIDER #79 - adding Section 9.18 - Confidentiality In handling any confidential information Landlord shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Lease, except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Landlord in connection with their present or prospective business relations with Landlord, (ii) to prospective transferees or purchasers of any interest in the Lease, provided that they have entered into a comparable confidentiality agreement in favor of Tenant and have delivered a copy to Tenant (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) as may be required in connection with the examination, audit or similar investigation of Landlord and (v) as Landlord may deem appropriate in connection with the exercise of any remedies hereunder. Confidential information hereunder shall not include information that either (a) as in the public domain, or becomes part of the public domain, after 24 80 disclosure to Landlord through no fault of Landlord; or (b) is disclosed to Landlord by a third party, provided Landlord does not have knowledge that such third party is prohibited from disclosing such information. RIDER #80 - Special Stipulations (A) Landlord's Covenants, Representations and Warranties. Landlord represents and warrants to Tenant, and covenants and agrees with Tenant, the following: (i) Landlord is a Delaware limited partnership, duly organized under the laws of Delaware, validly existing and in good standing under the laws of Georgia; (ii) Landlord has good and marketable fee simple title in and to a portion of the Center and a leasehold interest in a portion of the Center; (iii) Landlord, and the undersigned signatories executing this Lease on behalf of Landlord, are duly authorized and empowered to enter into this Lease with Tenant; and (iv) There are no restrictive covenants, zoning or other ordinances or any Laws prohibiting any of the permitted uses of the Premises set forth in this Lease by Tenant. (B) (i) Unless and until Tenant vacates the Premises in violation of this Lease, or Tenant no longer occupies the Premises for the Permitted Use, then Landlord will not lease space within the Shopping Center to (a) any tenant whose permitted use allows the operation of motion-based automobile driving simulators, or any tenant whose trade name contains the word "NASCAR" (hereinafter referred to as "Competing Business"). If (x) Landlord violates or suffers the violation of this paragraph, and (y) Tenant's Gross Sales for any [***] month period during the first [***] years such violation exists are at least [***] percent less than Tenant's Gross Sales for the prior [***] month period, then effective retroactive to the day such Competing Business opens for business, Tenant shall pay the lesser of (i) [***] and (ii) [***] percent of its [***], for so long as such Competing Business remains open in the Shopping Center. If a Competing Business is open for a period in excess of [***] consecutive months, Tenant shall have the right to terminate this Lease upon [***] days' written notice to Landlord. Notwithstanding the foregoing, the restriction hereinabove set forth in this paragraph shall be inapplicable to the following: any tenant or occupant open for business in the Shopping Center on the date of this Lease who by the terms of its Lease or operating agreement is not prohibited or restricted from operating a Competing Business from its premises; provided, however, to the extent the lease under which any of the foregoing tenants or occupants is not prohibited or restricted from operating a Competing Business would nevertheless require such tenant or occupant to obtain Landlord's consent for (or otherwise permit Landlord the opportunity to object to) a change in use, an assignment or sublet or other change in the manner that such tenant or occupant (or its successor assign) does business that would result in such tenant or occupant - ---------- *** confidential treatment requested 25 81 engaging in such Competing Business, Landlord agrees that it shall not grant such consent to (or object to, as appropriate) such change in use or assignment or sublet or other change (i.e., Landlord shall take such affirmative action that is favorable to Tenant under the circumstances); Game Works; any tenant occupying an outlot parcel in the Center, and any Department Store or Specialty Store in the Shopping Center. Additionally, Jillian's may have up to [***] motion based automobile driving simulators without being considered a Competing Business. Notwithstanding anything in this Lease to the contrary, Gross Sales transacted during the period which Tenant is paying Alternative Rent shall not be included in the calculation of Percentage Rent for the applicable Lease Year. (ii) In the event Tenant shall exercise its right to terminate this Lease, as provided above, Landlord shall pay, within [***] days following the date Tenant vacates and surrenders the Premises herein demised, the then unamortized cost of the permanent leasehold improvements (excluding, inter alia, trade fixtures and equipment, furnishings, decorations, inventory and other items of personal property) initially made by Tenant pursuant to Article 2 of this Lease, less the amount of Landlord's contribution, assuming a useful life equal to the length of the original Term of this Lease and amortization on a straight line basis. (C) In the event of any action or proceeding arising out of or pursuant to this Lease, the successful party shall be entitled to recover its reasonable attorney's fees and all other costs and expenses incurred in connection with the action or proceeding. - ---------- *** confidential treatment requested 26 82 MALL OF GEORGIA EXHIBIT "A" GRAPHIC 83 EXHIBIT B GRAPHIC 84 EXHIBIT C Utilities 1. The initial Environmental Charge shall be as follows: The initial amount of [***] per year, of which [***] per year is for the Electric Component [***] per year is for the Non-Electric Portion of the Chilled Air Component, [***] is for the Electric Portion of the Chilled Air Component, [***] per year is for the Facilities Fee, and [***] per year is for sanitary sewer and domestic water, all subject to adjustment as provided herein. 2. Utilities. As of the Commencement Date, all mains, conduits and other facilities necessary for supplying electric energy, domestic water, chilled air and sanitary sewer facilities to the Premises will have been installed by Landlord. Tenant shall pay to Landlord for the furnishing of such services, computed in the manner hereinafter provided, the Environmental Charge. The Environmental Charge shall be paid in equal monthly installments in advance, simultaneously with the payment of Fixed Rent. Tenant shall be solely responsible and shall pay separately for all charges for telephone and for any other utilities used or consumed in the Premises, except those utilities furnished by Landlord, the charge for which is included in the Environmental Charge. 3. Electric Energy and Water. Landlord will (subject to Paragraph 12 of this Exhibit) furnish electric energy for Tenant's lighting and power needs in the Premises and domestic water and sanitary sewer services, subject to the restrictions and limitations on Tenant set forth in this Lease. Tenant shall accept and use the electric energy and domestic water and sanitary sewer facilities furnished by Landlord to the Premises. Tenant, at its own expense, shall furnish and maintain all electric, lighting and power apparatus and plumbing apparatus needed in the Premises. Except as otherwise provided in paragraph 9 of this Exhibit C, Tenant shall not be charged for domestic water and sanitary sewer facilities by way of measuring the use or consumption thereof in the Premises on any meter or other mechanical device based upon amount of use, the cost of furnishing domestic water and sanitary facilities being covered by Tenant's payment as set forth in paragraph 1 above. 4. Facilities Fee. Tenant shall pay to Landlord a Facilities Fee in the amount set forth in Paragraph 1 of this Exhibit C. The Facilities Fee represents an amount agreed upon by Landlord and Tenant as an appropriate sum for the use by Tenant of the utility systems provided by Landlord in the Shopping Center. 5. Chilled Air. Landlord will (subject to paragraph 12 hereof) furnish chilled air to the Premises, subject to the restrictions and limitations on Tenant set forth in this Exhibit C. Tenant shall accept and use such chilled air to air condition and heat the Premises. Tenant, at its own expense, shall furnish a thermostat and mixing (VAV) box to be specified by Landlord to heat the chilled air provided by Landlord and shall provide the distribution system for chilled/heated air within the Premises. In the event Tenant's approved plans set forth a cooling requirement (as - ---------- *** confidential treatment requested C-1 85 reasonably determined by Landlord, in its sole discretion) which would exceed 1.15 CFM per square foot of Floor Space in the Premises, the initial Electric Portion of the Chilled Air Component set forth above shall be adjusted upward by Landlord, in its reasonable determination, to reflect such increased requirement. The expenses of furnishing chilled air to the Premises shall be paid by Tenant to Landlord as part of Tenant's payment of the Environmental Charge and shall be subject to increase as provided for in Paragraph 8. 6. Practices and Rules. The following practices and rules shall apply in connection with Landlord's obligation to furnish electric energy, chilled air, and domestic water and in connection with Tenant's use thereof: A. The Chilled Air Component is predicated upon normal consumption and use of chilled air by Tenant in air conditioning and heating the Premises during the hours specified in Section 6.1 of the Lease. B. Electric energy, chilled air and domestic water shall be made available to Tenant by Landlord on the days when the Shopping Center is open during the hours when the Premises are required to be open as specified in Section 6.1 of the Lease. C. Tenant shall not materially increase its cooling load beyond that installed in the Premises at the Commencement Date of the Lease or as shown on the plans and specifications thereof approved by Landlord. D. Tenant shall not use chilled air for any purpose other than for air conditioning and heating in the Premises, and Tenant shall not use electric energy for any purpose other than for lighting and power demands set forth in Tenant's plans approved by Landlord. E. Landlord shall have the right to inspect the Premises in order to test Tenant's use of chilled air and domestic water and in order to install and operate suitable devices for the purposes of determining Tenant's demands for temperatures. The time and frequency of such inspections shall be at Landlord's sole option, but said test shall be conducted in a manner so as to minimize interference with or disturbance of Tenant's operations at the Premises. In the event that inspection indicates that Tenant's chilled air usage deviates from or materially exceeds the conditions herein set forth, Landlord shall have the right (in addition to any other rights) to require Tenant to pay the cost of such excess usage and the costs of said inspection and to require Tenant to provide, at Tenant's expense, all remedial action or equipment required to conform Tenant's installations and operations to the conditions set forth in this Exhibit C. Any such charges payable by Tenant shall be deemed Additional Rent and shall be payable to Landlord within [***] days after demand. 7. Electric Component. The Environmental Charge as set forth in Paragraph 1 of this Exhibit includes and sets forth Landlord's initial estimate of the Electric Component thereof, which estimate shall be subject to adjustment as set forth below. - ---------- *** confidential treatment requested C-2 86 A. Simultaneously with the submission of Tenant's plans and specifications for Tenant's Work at the Premises, Tenant shall submit to Landlord detailed electrical plans and specifications, including, without limitation, a list of all electrical fixtures, equipment and furnishings, the names, model numbers, electrical ratings and maximum inrush current of each electric consuming item to be located at the Premises. Provided that Tenant's electrical plans and specifications do not indicate that Tenant will consume substantially more electric energy than Landlord's estimated tenant average, the Electric Component of the Environmental Charge will be billed at the rate of [***] per square foot of Floor Space per annum from the Commencement Date through the December 31 next following the Commencement Date. Commencing on the January 1 next following the Commencement Date, the Electric Component will be adjusted and billed as set forth in paragraph B below. B. As part of Tenant's Work, Tenant shall purchase and install an electric check meter, as set forth in the Shopping Center Tenant Information Manual and Design Criteria. Such check meter shall measure both the kilowatts used in the Premises and the kilowatt hours used in the Premises, both of which measurements shall be used in computing electric service consumption and the annual Electric Component of Tenant's Environmental Charge (Electric power consumed by Tenant's heating system is included in the Electric Component). Promptly following the end of each calendar month throughout the Term, Landlord shall cause all electric check meters serving the Premises to be read. Promptly following the end of the calendar year in which the Commencement Date occurs, Landlord shall cause the actual Electric Component payable by Tenant from the Commencement Date to the following December 31 to be calculated. If the aggregate amount billed to Tenant as the Electric Component for said period shall be less than Tenant's actual Electric Component, Tenant shall pay the differential to Landlord within [***] days after receipt of Landlord's invoice therefor. If the aggregate amount billed to Tenant as the Electric Component for said period shall be more than Tenant's actual Electric Component, Landlord shall credit such amount to future Environmental Charge payments. In each successive calendar year thereafter, the monthly Electric Component billed to Tenant shall be one-twelfth (1/12) of the prior year's actual (annualized) Electric Component, and promptly following the end of each such year, Landlord shall cause the actual annual Electric Component payable by Tenant to be calculated. If Tenant's actual Electric Component shall be more than the aggregate of Tenant's monthly payments for the subject year, Tenant shall pay the differential to Landlord as aforesaid. So long as Landlord provides electricity to the Premises on a submetered basis, Tenant shall purchase electricity from Landlord or Landlord's designated agent at the same rates Tenant would be required to pay if Tenant were to purchase electric energy directly from the utility company furnishing electric energy to the Shopping Center, it being understood that the term "rate" shall include all fees, adjustments, tariffs and surcharges that Tenant would be required to pay to said utility company. Where more than one such check meter measures the service to Tenant, the service rendered through each submeter may be computed and billed separately in accordance with the above. In the event that such bills are not paid within [***] days after the same are rendered, Landlord may, in addition to any other remedy available to Landlord, without further notice, discontinue the service of electric current to the Premises without releasing Tenant from any liability under the Lease and without - ---------- *** confidential treatment requested C-3 87 Landlord or Landlord's agent incurring any liability for any damage or loss sustained by Tenant by such discontinuance of services. C. If there are imposed any taxes or if there is an increase in the amount of present taxes upon the sale or furnishing of electric energy to the Shopping Center or to the Premises, then the Electric Component (and the Electric Portion of the Chilled Air Component) shall be increased in the same proportion as the increase or assessment to Landlord. Such taxes shall be paid by Tenant to Landlord in the same manner as if such taxes were to be paid directly by Tenant. As used in this Article, the term "taxes" shall mean any and all taxes, ordinary or extraordinary, foreseen or unforeseen, levied, imposed or assessed in connection with the furnishing of electric energy to the Premises or to the Shopping Center. D. Tenant shall not make any material alteration or addition to the electric system of the Premises without the prior written approval of Landlord, which approval shall not be unreasonably withheld. 8. Chilled Air. The Environmental Charge as set forth in Paragraph 1 includes a component for the furnishing by Landlord to the Premises of chilled air for use by Tenant for air conditioning and heating purposes (the Chilled Air Component of the Environmental Charge). The Chilled Air Component is composed of a sum applicable to the purchase by Landlord of electric energy for the production of chilled air (the Electric Portion) and all other charges related to the production of chilled air (the Non-Electric Portion). The Electric Portion shall be increased for the same causes and in the same manner as the Electric Component of the Environmental Charge is increased as set forth in Paragraph 7. The Non-Electric Portion shall be increased as provided in Paragraph 17 hereof. 9. Water and Sewer. A. The Environmental Charge as set forth in Paragraph 1 included a component for the furnishing by Landlord to the Premises of domestic water and the right to use the sanitary sewer system of the Shopping Center (the Water and Sewer Component). If the rate charged by the public utility, Governmental Authority or other entity supplying water to the Shopping Center shall be increased, then the Water and Sewer Component shall be increased in the same proportion as the increase to Landlord. It is understood that as used in this paragraph, the term "rate" shall include any surcharges which Landlord is required to pay in connection with obtaining domestic water and/or sanitary sewer services for the Shopping Center. B. If Landlord shall so request, Tenant shall install a water meter to measure the amount of water consumed at the Premises. Landlord shall read the meter on a regular basis, and Tenant shall pay to Landlord, in lieu of the amount set forth in paragraph 1 hereof the amount, based on consumption, which Tenant would otherwise pay to the utility company providing water to the Shopping Center. 10. Disputes. Any dispute between Landlord and Tenant arising out of or relating to the amount of increase of the Environmental Charge which Tenant is required to pay pursuant to this Exhibit C shall be determined promptly by a reputable independent electrical engineer to be C-4 88 selected by Landlord and paid by Tenant. The determination of said engineer shall be binding and conclusive on Landlord and Tenant. 11. Effective Dates. All increases of the Environmental Charge as a result of any of the events described in this Exhibit shall be effective as of the date the event occurs which constitutes the basis for such increase and the provisions of this Exhibit shall be cumulative and each of said paragraphs shall operate independently of each other, so that each or all events, if they occur, shall be a separate, cumulative basis for any increase of the Environmental Charge. Landlord reserves the right to bill any increase pursuant to this Exhibit at such times as Landlord shall in its sole discretion determine and the failure to bill any increase pursuant to this Exhibit on the date the event which constitutes the basis for the increase occurs shall not be deemed a waiver of Landlord's right to so bill at a subsequent time, effective, in any event, as of the date the event which constitutes the basis for the increase occurs. Each time an increase in the Environmental Charge occurs pursuant to this Exhibit, Landlord shall notify Tenant of the amount of such increase and the new dollar amount. However, said increase shall be effective from the date the increase became operative. Any decrease in consumption by reason of removal of electric consuming equipment from the Premises shall, provided the equipment is removed, be measured from the date written notice of removal is served upon Landlord. 12. Discontinuance of Utilities. Landlord hereby reserves the right to discontinue furnishing electric energy, chilled air or domestic water to Tenant in the Premises at any time upon not less than [***] days' written notice to Tenant. If Landlord exercises such right of termination, the Lease shall continue in full force and effect and shall be unaffected thereby, except that from and after the effective date of such termination, Landlord shall not be obliged to furnish the discontinued utility to Tenant and the Environmental Charge payable under the Lease shall be reduced by the amount of the discontinued component included therein at the time of discontinuance. If Landlord so discontinues furnishing electric energy or water to Tenant, Tenant shall arrange to obtain same directly from the utility company furnishing the same to the Shopping Center. Electric energy may be furnished to Tenant by means of the then existing building system feeders, risers and wiring to the extent that the same are available, suitable and safe for such purposes. All meters and additional panel boards, feeders, risers, wiring and other conductors and equipment which may be required to obtain electric energy directly from such utility company shall be installed and maintained by Tenant at its expense. 13. Reduction in Power Factor. If Tenant's use of electricity causes reduction in the "power factor" of its electric service below ninety (90%) percent lagging, Tenant will, at Tenant's expense, make the necessary corrections through the proper approved uses of capacitors or other approved devices. 14. Furnishing of Utilities. Any utility which Landlord is required or elects to provide or causes to be provided to the Premises may be furnished by an agent employed or by an independent contractor engaged by Landlord, and Tenant shall accept the same therefrom to the exclusion of all other suppliers. Landlord shall not be liable to any extent to Tenant in damages - ---------- *** confidential treatment requested C-5 89 or otherwise if any one or more of said utilities is interrupted, impaired or terminated because of failures, repairs, installations or improvements, nor shall any such interruption, impairment or termination in any way release Tenant from the performance of any of its obligations under the Lease. 15. Rates if Central Utility Plant is Declared to be a Public Utility. If Landlord's operation of the central utility plant furnishing any utility to the Premises and the other premises served thereby shall be determined to be a public utility service, and rates therefor should be fixed or approved by the public authority having jurisdiction, then such rates for such service shall supersede the provisions of this Exhibit with respect to the determination of the rates to be paid by Tenant for such services, and Tenant shall pay therefor at such rates. 16. Sales and Use Tax. Tenant shall pay all sales, use and other taxes imposed by any Governmental Authority upon the manufacture, sale, use, transmission, distribution or other process necessary or incidental to the furnishing of electric energy and chilled air, and domestic water to the Premises. If Landlord has paid said taxes, Tenant shall reimburse Landlord for the full amount thereof on demand. 17. Increases of Certain Charges. The Non-Electric Portion of the Chilled Air Component of the Environmental Charge shall be adjusted on the January 1 next following the first anniversary of the Commencement Date and on each January 1 thereafter, as provided in the next following sentences. The term "Consumer Price Index" means the Consumer Price Index for U.S. City Average for All Items For All Urban Consumers, 1982-84 equals 100 (CPI-U), as published by the Bureau of Labor Statistics of the United States Department of Labor or if not published then the index of prices most closely comparable. The term "Base Number" means the Consumer Price Index number applicable to the January 1 next following the Commencement Date. The term "Current Number applicable to a calendar year" means the latest Consumer Price Index number published for the month of January (or if no Consumer Price Index is published for January then for the next succeeding month) of each, respective calendar year occurring subsequent to the first anniversary of the Commencement Date. If the latest Current Number applicable to a calendar year exceeds the Base Number, then the new amount of the Non-Electric Portion effective January 1 of each calendar year shall be obtained by multiplying the original amount thereof at the time of execution and delivery of the Lease by a fraction, the numerator of which is the Current Number applicable to any calendar year and the denominator of which is the Base Number; provided, however, that in no event shall the Environmental Charge ever be less than the amount specified in Article 1 of the Lease. 18. Obligations Prior to Commencement Date. Tenant shall pay Environmental Charges for temporary water, chilled air and electricity from the date upon which the Premises are made available to Tenant for Tenant's Work until the Commencement Date, such payment to be at the amounts and rates set forth in Paragraph 1. 19. Communication Services. Landlord may install in the Premises and the Shopping Center such communications lines and systems as Landlord shall elect and, in connection therewith, Landlord may provide communication services (other than voice-grade telephone service) for Tenant's use in the Premises. To the extent that Tenant requires the type of communication services made available by Landlord, Tenant shall use the services offered by Landlord to the C-6 90 exclusion of any other provider. Tenant shall pay Landlord, as an additional component of the Environmental Charge, for the furnishing of such services, in an amount not to exceed what Tenant would pay were Tenant to obtain such services from another provider in the locale in which the Shopping Center is located. 20. All capitalized terms used herein unless otherwise defined shall have the same meaning as in the Lease. C-7 91 Exhibit D Intentionally Deleted 92 EXHIBIT E LANDLORD'S WORK I. Landlord's Work at Tenant's Premises: Landlord shall perform the following work in or at the Premises ("Landlord's Work"). The respective costs of those items of Landlord's Work which are to be reimbursed by Tenant are delineated in the rate schedule which constitutes Part II of this Exhibit E. Said costs shall be deemed Additional Rent under the Lease, shall be billed to Tenant upon completion of Landlord's Work, and shall be due and payable within thirty (30) days thereafter. ITEMS A. Electrical Service An empty conduit sized to service capacity for a 277/480 V, 3 phase, 4 wire, 60 cycle AC service capacity sized to accommodate a maximum load of 20 watts per square foot of Floor Space in the Premises shall be provided from the Landlord's electrical room to a point within the Premises. The location of such conduit shall be indicated on the Lease Outline Drawing. Landlord shall provide a service connection point in the electrical room. B. Telephone Room An 1" empty conduit shall be provided for Tenants not adjacent to a service corridor. A 6" wide cable tray will be provided in the service corridor and the cable tray will terminate in the Landlord's telephone room. C. Sewer Service One (1) 4 inch sanitary sewer connection shall be installed at one point below the Premises. The approximate location of such connection shall be indicated on the Lease Outline Drawing. D. Sanitary Vent Furnish and install one (1) 2" common sanitary vent connection at one point within the Premises. Approximate location and size will be indicated on the Lease Outline Drawing. E. Water Service A 3/4 inch domestic cold water service with ball valve shall be brought to one point within the Premises. The approximate location of such service shall be indicated on the Lease Outline Drawing. F. Sprinklers A sprinkler system flange connection shall be installed within the Premises for extension by Tenant, in accordance with all applicable codes, references design standards and IRI. All branch sprinkler piping within the E-1 93 Premises shall be at Tenant's expense. G. Toilet Exhaust A gravity toilet exhaust duct main shall be provided to each Premise. Approximate location of duct main will be indicated on Lease Outline Drawing. H. Floor Floor Slab. Furnish and install a concrete floor slab designed to support a maximum live load of 75 pounds per square foot and a partition load of 20 pounds per square foot. Smooth troweled finish, no depression, recesses or cutting of slab will be permitted without the prior written approval of Landlord. I. Walls Demising Studs. Furnish and install 6 inch demising metal studs from floor to the underside of the roof deck and/or structural members. J. Roof Roof Penetration. All roof penetrations and flashing will be a Tenant expense and performed solely by Landlord's contractor. Landlord reserves the right to disallow any installation which may exceed the structural capabilities of the roof system or if, in Landlord's opinion, the appearance of such equipment will be detrimental to the appearance of the building. K. Tenant Plan Review Landlord will review Tenant's plans to ascertain that the Tenant and his Architect are in compliance with the Tenant and Information Design Manuals and have designed improvements that uniquely identify the retail store and are a credit to the Tenant and the Mall. L. Construction Deposit Deposit required before Tenant construction can commence to ensure the successful completion of build-out including punch list items, construction clean-up, and administration close-out. M. Intentionally Omitted N. Trash Removal During construction, fixturing and merchandising of the Premises, Landlord will remove Tenant's trash and debris from the building site (not Tenant's Premises) at a cost based upon size of the Premises. Tenant shall deliver trash and debris to designated locations and deposit same in receptacles provided. If Tenant does not maintain the Premises in a clean and orderly condition or properly dispose of its trash and debris in the designated locations, Landlord may perform such work and charge Tenant Landlord's actual cost plus fifteen (15%) percent thereof E-2 94 for administration. O. Temporary Electric Landlord shall provide limited temporary During Construction Service electric service for Tenant's contractors. This is the only temporary electric service available to such contractors. Tenant shall have five (5) days from beginning work to connect to permanent power. P. Temporary Storefront Landlord will furnish and install a painted Closure gypsum board and metal stud wall enclosure at those tenant storefronts' for those tenant spaces' that are not under construction or open at mall grand opening which tenant's contractor can move and use for future construction barricade. II. Landlord's Work - Reimbursed by Tenant A. Electrical Conduit Empty - 2".................. $ 1,100.00 EA B. Telephone Hook/Conduit......................... $ 100.00 EA C. Sanitary Sewer................................. $ 500.00 EA D. Sanitary Vent.................................. $ 600.00 EA E. Water.......................................... $ 500.00 EA F. Sprinkler Shut-Down Fee........................ $ 200.00 EA G. Toilet Exhaust................................. $ 600.00 EA H. Floor 1. Pavers (material only) Floor.................................... $ 15.00/SF Base..................................... $ 15.00/LF 2. Carpet (material only)................... $ 6.50/SF 3. Concrete Slab............................ $ 2.50/SF I. Walls 1. Demising Studs (one-half wall) (No Drywall) 6' metal stud, 16" O.C................... $ 12.00/LF J. Roof Cuts/Penetrations/Flashing................ $ Actual Cost plus 15% Admin K. Tenant Plan Reviews 1. Initial Review........................... $
E-3 95 2. Additional Review........................ $ L. Construction Deposit (Required from Contractor) $ M. Intentionally Omitted N. Trash Removal 1. Up to 1,000 SF........................... $ 500.00 EA 2. 1,001 SF to 3,000 SF..................... $ 1,200.00 EA 3. 3,001 SF or more......................... $ 1,700.00 EA O. Temporary Electric............................. $ 0.38/SF/MTH P. Temporary Storefront Closure................... $ 40.00/LF
E-4 96 EXHIBIT F MODIFICATION OF LEASE LANDLORD NAME AND ADDRESS: MALL OF GEORGIA, L.L.C., a Delaware limited liability company 115 West Washington Street Indianapolis, Indiana 46204 TENANT NAME AND ADDRESS: DATE OF LEASE: PREMISES: Store No. SHOPPING CENTER: Mall of Georgia Gwinnett County, Georgia DATE OF AGREEMENT: R E C I T A L Landlord and Tenant have agreed to amend the Lease in accordance with the terms of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants herein contained it is hereby agreed as follows: 1. The Commencement Date of the Lease shall be _________________ and the Expiration Date of the Term shall be _________________. 2. Landlord and Tenant have agreed that the Size of the Premises is _____________ square feet. 3. The adjusted Fixed Rent shall be as follows: $_______ per year from ______________ through ______________; $_______ per year from ______________ through ______________; and $_______ per year from ______________ through ______________. 4. The adjusted Promotion Fund Charge shall be $_____________ per year initially or such other greater amount as shall be determined pursuant to Section 6.1 L. 5. The adjusted Grand Opening Contribution is $_______________________. F-1 97 6. All additional Rent charges calculated based on the Size of the Premises shall be adjusted according to the adjusted size of the Premises as of the Commencement Date. 7. After execution and delivery of this Modification of Lease, Landlord shall bill Tenant for any monies owed retroactive to the Commencement Date of the Lease. Tenant shall pay such amount within ten (10) days after demand. 8. Except as provided herein all of the terms, conditions and covenants of the lease shall remain the same and in full force and effect. 9. Any capitalized terms used herein shall have the meaning ascribed to it in the Lease. IN WITNESS WHEREOF, Landlord and Tenant have executed this Agreement as of the day and year first above written. Tenant: By: --------------------------------- Title: Landlord: MALL OF GEORGIA, L.L.C., a Delaware limited liability Company By: CPI-Georgia Corporation, a Delaware corporation, Managing Member By: --------------------------------- David Simon, Chief Executive Officer F-2 EX-10.25 3 SERVICE AGREEMENT: DALE EARNHARDT 1 EXHIBIT 10.25 SERVICE AGREEMENT Effective April 30, 1997 ("Effective Date") Dale Earnhardt, Inc., 1675 Coddle Creek Highway, Mooresville, North Carolina 28115 ("DEI") and Richard Childress Racing, 8188 Hampton Road, Clemmons, North Carolina 27021 ("RCR") (referred to hereinafter individually as "Licensor" and collectively as "Licensors") and LBE Technologies, Inc., 10401 Bubb Road, Cupertino, California 95014 ("Company") agree as follows: 1. Services, Payment and Options. Each Licensor agrees to undertake and complete the services specified in Exhibit A ("Services"). As the only consideration due Licensors regarding the subject matter of this Agreement, Company shall pay the fees and grant the stock options set forth in Exhibit A. 2. Inventions; Proprietary Information. a. Company shall own all right, title and interest (including patent rights, copyrights, trade secret rights, trademark rights and other rights throughout the world) relating to any and all inventions (whether or not patentable), works of authorship, designations, designs, know-how, ideas and information made or conceived or reduced in practice, in whole or in part, by each Licensor during the term of this Agreement that relate to the subject matter of, or arise out of, the Services or any Proprietary Information (as defined below) (collectively, "Inventions") and each Licensor will promptly disclose and provide all Inventions to Company. Each Licensor hereby makes all assignments necessary to accomplish the foregoing ownership. Each Licensor shall further assist Company, at Company's expense, to further evidence such record and perfect such assignments, and to perfect, obtain, maintain, enforce, and defend any rights assigned. b. Licensors each agree that all Inventions and all other business, technical and financial information (including, without limitation, the identity of and information relating to Company's customers or employees) each Licensor develops, learns or obtains during the period over which it is (or is supposed to be) providing Services that relate to Company or the business or demonstrably anticipated business of Company or that are received by or for Company in confidence, constitute "Proprietary Information." Licensors will hold in confidence and not disclose or, except in performing the Services, use any Proprietary Information. However, a Licensor shall not be obligated under this paragraph with respect to information such Licensor can document is or becomes readily publicly available without restriction through no fault of either Licensor. Upon termination and as otherwise requested by Company, each Licensor will promptly return to Company all items and copies containing or embodying Proprietary Information, except that each Licensor may keep its personal copies of its compensation records and this Agreement. c. As additional protection for Proprietary Information, each Licensor agrees that during the period over which it is (or is supposed to be) providing Services, and for one year thereafter, (i) such Licensor will not encourage or solicit any employee or consultant of Company to leave Company for any reason; (ii) such Licensor will not engage in any activity that is in any way competitive with the business or demonstrably anticipated business of 1 2 Company; and (iii) such Licensor will not assist any other person or organization in competing or in preparing to compete with any business or demonstrably anticipated business of Company. 3. Grant of Rights. a. Publicity. DEI grants Company a worldwide non-exclusive license to use, reproduce, disseminate, display, perform, record, photograph, alter and otherwise exploit R. Dale Earnhardt's ("Earnhardt") names, likeness, biographical data, memorabilia (along with any trademarks or service marks incorporated therein, including without limitation those of any sponsor of Earnhardt during the effective term of this Agreement with DEI) and/or voice, in whole or in part, in connection with the promotion of Company's current and future business, products and services, including but not limited to display and other use at Company's Centers (as defined below). RCR grants Company a worldwide non-exclusive license to use, reproduce, disseminate, display, perform, record, photograph, alter and otherwise exploit Richard Reed Childress's ("Childress") names, likeness, biographical data, memorabilia (alone, with any trademarks or service marks incorporated therein, including without limitation those of any sponsor of Childress during the effective term of this Agreement with RCR) and/or voice, in whole or in part, in connection with the promotion of Company's current and future business, products and services, including but not limited to display and other use at Company's Centers (as defined below). To the extent any of the foregoing grants are ineffective under applicable law, each Licensor hereby agrees to provide, or, if necessary, to obtain from third parties, at no expense to Company, any and all waivers, approvals, licenses and consents required to accomplish the purpose of the foregoing grants. From time to time, as reasonably requested by Company, each Licensor will confirm in writing that any such waivers, approvals, licenses and consents have been obtained or granted. Each Licensor has no knowledge that any of the foregoing grants are ineffective as of the Effective Date. b. Auto Design. RCR grants Company a nonexclusive worldwide license to incorporate the Auto Design (as defined below) into Productions (as defined below). This license grant includes the right to reproduce, use, display, digitize, broadcast, perform, modify, and distribute the Auto Design, in whole or in part, as incorporated in any Production and any advertising and promotion related to any Production. The rights granted herein shall not confer in RCR or DEI any rights of ownership in any Production, including, without limitation, the copyright thereto, all of which shall be and remain the exclusive property of Company, except that RCR shall retain copyright in the Auto Design. This license grant includes, without limitation, use of the Auto Design on Simulators (as defined below) and as computer graphics projected on a monitor and/or screen at Centers (as defined below). i. Definition of "Auto Design". "Auto Design" shall mean the trade dress, name and design of (a) the race car known as "the #3 car" and (b) any race car RCR or Richard Reed Childress uses in professional auto racing during the effective term of this Agreement with RCR ("Future Auto Design"). "Auto Design" includes, without limitation, the colors and combination thereof, overall design, placement, shape and size of design elements, decals, logos, lettering and trademarks, and any changes made thereto during the effective term of this Agreement with RCR. 2 3 ii. Definition of "Production"; "Center"; and "Simulators." "Production" shall mean any of the following: (i) Company's current or future auto racing simulation centers ("Centers"); (ii) Company's boardable auto-shaped racing simulation control modules ("Simulators"); and (iii) other multimedia uses of any kind, including but not limited to computer software, graphical displays, and audio soundtracks. iii. Quality Approval. After the Auto Design has been incorporated into a Simulator but before the Simulator is commercially distributed or displayed, Company shall submit photographs of the Simulator to RCR for a quality control review. RCR shall have the opportunity to review the Simulator photographs for ten (10) business days and submit any suggested changes or improvements in the reproduction of the Auto Design to Company by the end of this period. Where reasonably possible, and considering production schedules and technical limitations, Company shall incorporate these changes and improvements in the final Simulator. RCR's failure, within the ten (10) day period, to either (i) approve the reproduction of the Auto Design in the Simulator or (ii) submit suggestions shall be deemed to be approval of the reproduction of the Auto Design. Subject to the foregoing, RCR retains final approval of the reproduction of the Auto Design on a Simulator, which shall not be unreasonably withheld. 4. Representations and Warranties. Each Licensor represents and warrants that: (i) the Services will be performed in a professional and workmanlike manner and that none of such Services or any part of this Agreement is or will be inconsistent with any obligation such Licensor may have to others; (ii) all work under this Agreement shall be such Licensor's original work and none of the Services or Inventions or any development, use, production, distribution or exploitation thereof will infringe, misappropriate or violate any intellectual property or other right of any person or entity; and (iii) such Licensor has the full right and power to make the assignments and grant the rights to Company as provided for in this Agreement. RCR represents and warrants that RCR owns all right, title and interest in the Auto Design, including all copyrights, trademarks and other intellectual property rights therein. Each Licensor shall indemnify, defend and hold harmless Company and its officers, employees, and agents from any claims, demands, liabilities, losses, damages, judgments or settlements (including, reasonable attorneys' fees) arising from any breach by such Licensor of any warranty or representation made by such Licensor hereunder, including without limitation a claim of infringement or violation of any intellectual property right or right of publicity or privacy. Execution by Earnhardt and Childress, respectively, and delivery to Company of Releases (i.e., documents granting DEI and RCR, respectively, such permission and rights necessary for Licensors to enter into this Agreement) in a form satisfactory to Company is a condition precedent to the effectiveness of this Agreement. 5. Termination; Extension. a. Termination. The term of this Agreement shall be four (4) years from the Effective Date, except that this Agreement may be terminated earlier as follows. Company may terminate this Agreement: (i) upon thirty (30) days' written notice, only with respect to a breaching Licensor, if such Licensor breaches a material provision of this Agreement, including without limitation failure to perform the Services set forth on Exhibit A, unless the breach is cured within the notice period; (ii) immediately, only with respect to the affiliated Licensor, if Earnhardt or Childress commits (or is accused by a credible third party of committing) an illegal 3 4 or immoral act; (iii) at any time upon sixty (60) days' written notice, only with respect to DEI, if Earnhardt is no longer actively engaged in his NASCAR race driving, and/or NASCAR team owner career; and (iv) at any time upon sixty (60) days' written notice, only with respect to RCR, if an Auto Design is no longer utilized on a racing car actively participating in professional auto racing. If Company breaches a material provision of this Agreement with respect to a Licensor, such Licensor may terminate this Agreement, only with respect to such Licensor, upon thirty (30) days' written notice, unless the breach is cured within the notice period. Sections 2 (subject to the limitations on Section 2(c) stated therein) through 6 of this Agreement and any remedies for breach of this Agreement shall survive any termination or expiration, except that the licenses granted pursuant to Section 3(a) and Section 3(b) shall be limited such that Company may continue to use, to the full extent of the rights granted thereunder, only those Productions or promotional materials already in production or manufactured prior to the effective date of termination or expiration of this Agreement. b. Automatic Extension. On the fourth anniversary of the Effective Date of this Agreement, if the value of the stock underlying all the stock options granted pursuant to this Agreement (whether or not such options have been exercised) equals or exceeds One Million U.S. Dollars ($1,000,000) as determined by (i) if Company's stock has been listed on a national stock exchange or consolidated reporting system for at least thirty (30) days, the average closing sales price for the thirty (30) days preceding the fourth anniversary date or (ii) if Company's stock is not so listed, the fair market value as determined by the Company's Board of Directors (the "Board") in good faith; then the term of this Agreement shall be automatically extended to eight (8) years from the Effective Date. 6. Miscellaneous. Each party shall be and act as an independent contractor and not as partner, joint venture, or agent of any other party and shall not bind nor attempt to bind any other to any contract, as such. Each Licensor is an independent contractor and is solely responsible for all taxes, withholdings, and other statutory or contractual obligations of any sort. Neither Licensor shall have the right or ability to assign, transfer, or subcontract any obligations under this Agreement without the written consent of Company; any attempt to do so shall be void. All notices under this Agreement shall be in writing, and shall be deemed given when personally delivered, or three days after being sent by prepaid certified or registered U.S. mail to the address of the party to be notified as set forth herein or such other address as such party last provided to the others by written notice. The failure of any party to enforce its rights under this Agreement at any time for any period shall not be construed as a waiver of such rights. No changes or modifications or waivers to this Agreement will be effective unless in writing and signed by Company, and the Licensor or Licensors who are directly affected thereby. In the event that any provision of this Agreement shall be determined to be illegal or unenforceable, that provision will be limited or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect and enforceable. This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to the conflicts of laws provisions thereof. In any action or proceeding to enforce rights under this Agreement, the prevailing party will be entitled to recover costs and attorneys' fees. Headings herein are for convenience of reference only and shall in no way affect interpretation of the Agreement. 4 5 Dale Earnhardt, Inc. LBE Technologies, Inc. (Licensor) (Company) By: Donald Hawk By: Chris Morse -------------------------------- --------------------------------- [Print Name] Signature: /s/ Donald Hawk Signature: /s/ Chris Morse ------------------------- -------------------------- Title: President Title: Director of Marketing Richard Childress Racing (Licensor) By: Richard Childress -------------------------------- [Print Name] Signature: /s/ Richard Childress ------------------------- Title: President Don Hawk, the undersigned, represents and warrants he has full authority to execute the foregoing Agreement on behalf of Dale Earnhardt, Inc. and Richard Childress Racing. /s/ Don Hawk ------------------------------------ Don Hawk 5 6 Exhibit A SERVICES: Product development. As requested by Company, DEI will cause R. Date Earnhardt ("Earnhardt") to test drive the prototype Simulator(s) and provide feedback as well as arrange visits by Company representatives to the Winston Cup #3 race shop to obtain various technical information (e.g., engine, audio and wind tunnel data but not necessarily the latest results). Public appearances (1 one-day public appearance trip per year). Licensors will cause Earnhardt and Richard Reed Childress ("Childress") to visit such locations as requested by Company to meet with the media, sponsors and some of the general public (at Company's request, these appearances may include display of each Licensor's memorabilia). Earnhardt and Childress will be important spokespersons for Company, but Company will use reasonable efforts to limit this work to high-impact exposures for them. Each public appearance trip may involve more than one appearance and/or activity, but all such appearances and/or activities will take place at one city and neighboring area per trip. Autograph sessions will not exceed two hours. Delivery of Design Specifications. RCR shall within 10 days of the Effective Date (or, in the case of any Future Auto Design, within 10 days of determination of the official new Auto Design) deliver to Company materials and specifications sufficient to authentically reproduce the Auto Design, including, but not limited to, paint color codes, measurements of decals, and color photographs clearly depicting the Auto Design including views of each side, front, back and top of the #3 car. Merchandising. Each Licensor shall ensure that Company is able to obtain such Licensor's licensed merchandise at most favored reseller prices and terms for licensed merchandise sales. Video Shoot. Company will be allowed one, two-hour video shoot per year. The shoot will be scheduled at a mutually acceptable time/place. FEES: Company shall pay to each of Earnhardt and Childress, respectively, the following fees: $10,000, payable upon execution of this Agreement; $7,500, payable upon the earlier of (i) the opening to the public of Company's 1st public commercial Center or (ii) September 1, 1997; and $7,500, payable upon the earlier of (i) the opening to the public of Company's 2nd such Center or (ii) November 15, 1997. Company shall reimburse Licensors collectively up to $3,000 for the cost of jet fuel if Earnhardt and Childress use the same private jet on the annual public appearance trip, such payment to be made in accordance with instructions received from Licensors. If Earnhardt and Childress travel via separate private jets on a public appearance trip, Company shall reimburse each Licensor for up to $3,000 for jet fuel used on the trip. 1 7 STOCK OPTIONS: Company will grant to each of Earnhardt and Childress, respectively, effective as of the Effective Date of this Agreement, stock options to purchase 30,000 shares of Company's Common Stock pursuant to Company's stock option plan, which shares shall vest over 4 years. Twenty-five percent (25%) of the total shares will vest at the end of one year, and 1/48 of the total shares will vest each subsequent month for the remaining 3 years of the vesting period, provided, however, that vesting, shall cease on termination or expiration of this Agreement. The per-share exercise price will be $0.075 as specified by the Company's Board. The options must be exercised by the earlier of (i) seven (7) years from the date of this Agreement or (ii) the date of Company's initial public offering of its stock. In addition, Company will grant to each of Earnhardt and Childress, respectively, stock options to purchase 20,000 shares of Company's Common Stock pursuant to Company's stock option plan, which shares shall be fully vested upon the execution of this Agreement. The per-share exercise price will be $0.075 as specified by the Company's Board. The options must be exercised by the earlier of (i) seven (7) years from the date of this Agreement or (ii) the date of Company's initial public offering of its stock. 2 EX-10.26 4 SERVICE AGREEMENT: JEFF GORDON 1 EXHIBIT 10.26 JEFF GORDON PERSONAL SERVICES AND ENDORSEMENT AGREEMENT THIS AGREEMENT is entered into this 1st day of January, 1998 by and between LBE TECHNOLOGIES, INC., a California corporation with offices at 10401 Bubb Road, Cupertino, California 95014 ("LBE") , JEFF GORDON, INC., an Indiana corporation with offices at 5257 Pit Road South, Harrisburg, North Carolina 28075 ("JGI") and JEFF GORDON, an individual resident of North Carolina ("Gordon"). W I T N E S S E T H: WHEREAS, Gordon is recognized and widely known throughout the world as a professional race car driver in the NASCAR Winston Cup Series ("Winston Cup"); and WHEREAS, Gordon's name, by virtue of his ability and experience, has acquired a meaning in the mind of the purchasing public important to the advertising, promotion, and sale of products and merchandise; and WHEREAS, Gordon is currently the driver of the #24 Hendrick Motorsports Limited Partnership ("Hendrick")/DuPont Automotive Finishes ("DuPont") race car ("#24 Race Car"); and WHEREAS, LBE is engaged in, among other things, the operation of NASCAR Silicon Motor Speedway themed auto-racing entertainment centers featuring driving simulators; and WHEREAS, LBE is desirous of obtaining certain personal appearances from Gordon and acquiring the right to utilize Gordon's name and likeness in connection with the advertisement and promotion of NASCAR Silicon Motor Speedway entertainment centers ("Silicon Motor Speedway") and the use of simulators ("Simulators") produced by LBE in the United States of America and its territories and possessions, Puerto Rico and United States military bases throughout western Europe (the "Territory") , and JGI and Gordon are willing to grant such rights on the terms and conditions contained herein; NOW, THEREFORE, in consideration of the mutual covenants set forth herein and for other good and valuable consideration, the parties hereto agree as follows: 1. GRANT OF ENDORSEMENT RIGHTS. Subject to the terms and conditions set forth herein, JGI and Gordon hereby grant to LBE the right during the Term (as defined below) and within the Territory to use Gordon's name, photograph, likeness and/or endorsement (collectively, the "Endorsements") in connection with the advertisement and promotion of Silicon Motor Speedway entertainment centers and the Simulators operated therein in the Territory. Subject to the terms and conditions herein, JGI and Gordon specifically grant LBE the right to use the Endorsements in the following during such period: (i) national and regional television commercials, including edits and tags; 2 (ii) radio commercials, including edits and tags to serve as promotional carriers during the Term; (iii) print and outdoor advertising materials; (iv) point-of-sale and product promotional materials, counter-top, shelf, and freestanding displays, banners, posters and cutouts; and (v) press releases and other press materials. 2. TERM. This Agreement shall be binding as of the date of execution by both parties and shall extend through August 1, 2000, unless terminated earlier pursuant to the terms hereof (the "Term"). Provided that no default by LBE has occurred hereunder and provided that the value of the stock options granted herein exceed $850,000 (such valuation to be following LBE's initial public offering and calculated based on the public market if publicly traded and if not publicly traded in a manner and on a basis mutually acceptable to JGI and LBE), this Agreement will be renewed for a three-year period from August 1, 2000 through August 1, 2003, with personal appearance terms and conditions to be mutually agreed (including dates and fees) by LBE and JGI. 3. COMPENSATION. In consideration for the rights granted hereunder, LBE agrees to pay to JGI, on behalf of Gordon, during the Term of this Agreement a promotional fee as provided for below (the "Promotional Fee"). - A signing fee of $15, 000 is due and payable and earned on the date hereof. In addition, LBE hereby agrees to pay to JGI the following appearance fees:
Year Fee ---- --- 1998 $25,000 (1 appearance) 1999 $10,000 (1 appearance) 2000 $15,000 (1 appearance)
The appearance fees are due and earned on the earliest of the date of the appearance or December 31 of the relevant calendar year (August 1 in the case of the year 2000) ; provided, however, no appearance fee shall be due in any calendar year where Jeff Gordon has wrongfully refused to provide the required appearance or is unable to make any appearance for LBE; provided further, that LBE has complied with the terms of Section 4 hereof and has given JBI sufficient advance notice and alternate dates for an appearance that do not conflict with Jeff Gordon's driving schedule and other commitments. - LBE hereby agrees to grant to JGI, or if designated Jeff Gordon, individually, options to purchase 85,000 shares of LBE common stock for an exercise price of $.075 per share. Options for (i) 35,000 shares will vest upon execution of this agreement, (ii) 16,667 shares will 2 3 vest on the first anniversary hereof and (iii) the remaining shares shall vest at a rate of 1,388.875 shares per month thereafter on the first day of each such month. The options must be exercised, at the option of Gordon if Gordon chooses to exercise the options, by the earlier of (a) seven (7) years after the date of grant or (b) the date of completion of LBE's qualified initial public offering. If this Agreement is terminated due to a breach by JGI or Gordon, no further vesting shall occur after the date of termination. 4. PERSONAL APPEARANCES. (a) If requested to do so by LBE, Gordon agrees to make himself available for one (1) day during each calendar year of the Term for photo shoots and production of television and radio commercials, point of sale and print materials and other promotional materials for use in LBE's advertising. Such session shall be at Hendrick Motorsports race shop or at a mutually agreed to location. The date and location of such session shall be coordinated with JGI and shall be subject to Gordon's driving schedule and other personal appearances and professional commitments. Such session shall be for or no more than one (1) hour. In connection with the foregoing, Gordon agrees to participate as a principal non-union performer in the production of television commercials (the "Commercials") for regional and/or national imagebased advertising for Simulators to be broadcast in the Territory. The Commercials may be broadcast over network and cable television. LBE shall be responsible for any amounts due the Screen Actors Guild or related pension, welfare or similar plans. In connection with the Commercials: (i) The filming and recording date and time of the production of the Commercials will be subject to Gordon's prior commitments and will be mutually agreed upon by JGI and LBE; (ii) The result of Gordon's services hereunder shall be deemed "a work for hire" under the provisions of the U.S. Copyright Act, and the resulting Commercials shall be owned by LBE for all purposes. LBE shall have full usage rights for the Commercials produced hereunder until August 1, 2000 for so long as this Agreement is in full force and effect; (iii) All rights, if any, to the #24 Race car, as well as Gordon's uniform, helmet, etc. will be coordinated through JGI or, its affiliate JG Motorsports, Inc.; however, rights to any racing footage or with respect to tracks or other drivers are to be granted to LBE by the appropriate owners; and (iv) All production costs shall be the responsibility of LBE. (b) If requested to do so by LBE, Gordon shall make one (1) appearance in each year of the Term on behalf of LBE (total of three (3) during the term). The time, date and location of such personal appearance shall be mutually agreed upon by LBE and JGI and shall be subject to Gordon's driving schedule and other personal appearances and professional commitments. LBE shall use reasonable efforts to give JGI at least sixty (60) days' prior notice for such requested appearance; however, LBE acknowledges that any such request is subject to Gordon's availability on the requested date. Such appearance shall be attendance at a Silicon Motor Speedway entertainment center. The appearance shall be for no more than two (2) hours, not including travel time. If reasonably deemed necessary by JGI, LBE will provide appropriate 3 4 security and crowd control to ensure Gordon's safety and orderly conduct of such personal appearance. (c) With respect to each photo session or appearance set forth above, LBE agrees to pay first-class or private corporate jet travel expenses at JGI's customary reasonable rates from time to time agreed upon between JGI and LBE, at the option of Gordon, for Gordon, and one other, and reasonable out-of-pocket expenses (including, without limitation, ground transportation, hotel accommodations and meals and beverages) incurred by Gordon in connection with such session or appearance. Additionally, LBE shall provide an employee to coordinate all logistics in connection with such sessions or appearances. (d) At LBE's request, Gordon agrees to wear, whenever rendering services for LBE, either his racing uniform or other clothing provided by LBE bearing LBE's trademarks after consulting with Gordon and with appropriate consideration for Gordon's personal taste. LBE will supply Gordon, Robert B. Brannan, III and the appropriate officers and advisors of JGI with a reasonable quantity of such clothing and other promotional items, which may include banners and race caps bearing LBE's trademarks. If appropriate, LBE will consider the purchase of apparel and products through Sports Image, Inc. or M.T. Sales and Marketing, Inc. and utilize the "Chase Authentics(TM)" or "Competitors View(TM)" labels. 5. NOTICE AND PAYMENTS. Any notice required to be given pursuant to this Agreement shall be in writing and mailed to Gordon at the address set forth below by certified or registered mail, return receipt requested or delivered by a national overnight express service: If to JGI or Gordon: Jeff Gordon, Inc. 5257 Pit Road-South Harrisburg, NC 28075 Attn: Robert B. Brannan, III Fax: (704) 455-7429 If to LBE: LBE Technologies, Inc. 10401 Bubb Road Cupertino, CA 95014 Attn: Christopher Morse Fax: (408) 777-8082 6. ENDORSED PRODUCTS FOR GORDON'S USE. During the Term of this Agreement, LBE shall supply Gordon, and his agents, at no charge, a reasonable number of passes for use at Silicon Motor Speedway entertainment centers. 7. PROMOTIONAL MATERIALS. All advertising and promotional material prepared by LBE in connection with the Simulators depicting Gordon or the #24 Race Car shall be subject to the prior written approval of JGI and Gordon which approval or disapproval shall be given 4 5 within ten (10) business days following receipt of the advertising or promotional material, such approval not to be unreasonably withheld. If the materials are not approved by JGI and Gordon within such ten (10) day period, the materials will be deemed disapproved. Such approvals shall be based on the submission of initial renderings, layouts, comps, pencils and other works in progress. If the text of the advertising and/or promotional material has been previously approved in writing by JGI and Gordon, LBE may reuse such material without again obtaining the written approval of JGI and Gordon unless such approval has been previously withdrawn in writing by JGI or Gordon or unless this Agreement has been terminated. 8. RESERVATION OF RIGHTS; NO LICENSE. (a) "Jeff Gordon(R)" is a federally registered trademark. JGI and Gordon shall retain all rights in and to Gordon's name, likeness, signature and endorsement and, whether during the Term or any extension thereof, Gordon shall not be prevented from using or permitting or licensing others to use his name or endorsement in connection with the advertisement, promotion, and sale of any product or service. (b) It is understood and agreed that Gordon, and JGI as applicable, shall retain all right, title and interest in this likeness, name and/or trademarks, where applicable. (c) This agreement does not grant any license in favor of LBE to produce any products or souvenirs bearing the name, likeness, signature or other mark of JGI or Gordon or the #24 Race Car for sale. (d) The use of the Endorsements in conjunction with any other celebrity or any other marks must be preapproved by Gordon; provided, however, that LEE may utilize the Endorsements in connection with other NASCAR Winston Cup drivers involved with the Simulators, subject to approval of the materials in accordance with the terms hereof. 9. REPRESENTATIONS, WARRANTIES AND INDEMNITY. (a) Gordon, JGI and JG Motorsports, Inc. represent to LBE that they have the full title, right, power, and authority to grant the rights and Endorsements herein and to perform hereunder. Gordon, JGI and JG Motorsports, Inc. agree to defend, indemnify and hold LBE harmless against all costs, expenses, and losses (including reasonable attorneys' fees and costs) incurred through claims of third parties against LBE arising out of their breach of this representation. (b) LBE agrees to defend, indemnify and hold JGI, JG Motorsports, Inc. and Gordon harmless against all costs, expenses and losses (including reasonable attorneys' fees and costs) incurred through claims of third parties against JGI, JG Motorsports, Inc. and/or Gordon based on the manufacture or operation of the Silicon Motor Speedway entertainment centers or of the Simulators, including, but not limited to, actions founded on product liability, or on any violation of the terms hereof by LBE. 5 6 10. TERMINATION. (a) JGI and Gordon shall have the right to terminate this Agreement upon fifteen (15) days' prior written notice to LBE in the event of any of the following contingencies: (i) If LBE is adjudicated insolvent, declares bankruptcy, or fails to continue its business of operating the Simulators; or (ii) In the event LBE fails to make payments to JGI of any sums due pursuant to this Agreement within fifteen (15) days after such payment is due or upon other breach hereunder by LBE unless the breach is cured during the notice period; or (iii) In the event that Hendrick obtains a competitive sponsor for the #24 Race Car or, as to the #24 Race Car, in the event of any sponsor changes or if Gordon ceases to be a driver for the #24 team; (b) JGI and Gordon shall have the right to terminate this Agreement upon default by LBE under the Limited License Agreement of even date. (c) Either party may terminate this Agreement on thirty (30) days' written notice to the other party in the event of a material breach of any material provision of this Agreement by the other party, provided that, during the thirty (30) day period, the breaching party fails to cure such breach. (d) LBE shall have the right to terminate this Agreement (i) upon fifteen (15) days, prior written notice to JGI and Gordon in the event of any breach hereof by JGI or Gordon and failure to cure during such notice period, (ii) if Gordon is convicted of a felony or a crime of moral turpitude or (iii) at any time after sixty (60) days' written notice to JGI and Gordon if Gordon has permanently ceased being a NASCAR Winston Cup series driver. 11. POST TERMINATION RIGHTS. (a) Upon the expiration or termination of this Agreement, all rights granted to LBE under this Agreement shall forthwith terminate and immediately revert to JGI and Gordon, and LBE shall discontinue all use of and reference to the Endorsement. (b) In the event of termination of this Agreement other than due to a breach of any representation or warranty by Gordon, all moneys paid to JGI and Gordon shall be deemed non-refundable. 12. RELATIONSHIP OF THE PARTIES. Gordon's performance of services for LBE hereunder is in his capacity as an independent contractor. Accordingly, nothing contained in this Agreement shall be construed as establishing an employer/employee, a partnership, or a joint venture relationship between JGI and Gordon and LBE. 13. JURISDICTION & DISPUTES. This Agreement shall be governed by the laws of North Carolina and all disputes hereunder shall he resolved in the applicable state or federal 6 7 courts of North Carolina. The parties consent to the jurisdiction of such courts, agree to accept service of process by mail, and waive any jurisdictional or venue defenses otherwise available. 14. AGREEMENT BINDING ON SUCCESSORS; COSTS. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their heirs, administrators, successors and assigns. Each party hereto shall bear its own costs in connection with the preparation, negotiation and execution of this Agreement. 15. ASSIGNABILITY. The license granted hereunder is personal to Gordon and may not be assigned by any act of Gordon, with the exception that Gordon shall have the right to assign his financial benefits hereunder. LBE may not assign its rights or obligation hereunder without the prior written consent of JGI and Gordon. 16. WAIVER. No waiver by either party of any default shall be deemed as a waiver of any prior or subsequent default of the same or other provisions of this Agreement. 17. SEVERABILITY. If any provision hereof is held invalid or unenforceable by a court of competent jurisdiction, such invalidity shall not affect the validity or operation of any other provision and such invalid provision shall be deemed to be severed from the Agreement. 18. INTEGRATION. This Agreement constitutes the entire understanding of the parties and revokes and supersedes all prior agreements between the parties and is intended as a final expression of this Agreement. It shall not be modified or amended except in writing signed by the parties hereto and specifically referring to this Agreement. This Agreement shall take precedence over any other documents which may be in conflict therewith. 19. CONFIDENTIALITY. The terms and conditions of this Agreement, as well as LBE's advertising and marketing plans and programs, are confidential and will not be disclosed by either party, other than to their agencies and representatives, without the other party's prior consent. 7 8 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have each caused to be affixed hereto its or his/her hand and seal the day indicated. LBE TECHNOLOGIES, INC. By: /s/ Chris Morse ----------------------------- Title: JEFF GORDON, INC. By: /s/ Robert B. Brannan, III ----------------------------- Robert B. Brannan, III Vice President /s/ Jeff Gordon --------------------------------- JEFF GORDON 8 EX-10.27 5 LICENSING AGREEMENT: DALE JARRETT 1 EXHIBIT 10.27 LICENSING AGREEMENT Effective March 24, 1997, Dale Jarrett ("Licensor") and LBE Technologies, Inc., 10401 Bubb Rd., Cupertino, CA 95125 ("Company") agree as follows: 1. Services, Payment and Options. Licensor agrees to undertake and complete the Services (as defined in Exhibit A) specified in Exhibit A. As the only consideration due Licensor regarding the subject matter of this Agreement, Company will pay Licensor in accordance with Exhibit A. As a consultant, Licensor will also be entitled to stock options referred to in Exhibit A. 2. Ownership; Rights' Proprietary Information; Publicity. a. Company shall own all right, title and interest (including patent rights, copyrights, trade secret rights, trademark rights and other rights throughout the world) relating to any and all inventions (whether or not patentable), works of authorship, designations, designs, know-how, ideas and information made or conceived or reduced in practice, in whole or in part, by the Licensor during the term of this Agreement that relate to the subject matter of, or arise out of, the Services or any Proprietary Information (as defined below) (collectively, "Inventions") and Licensor will promptly disclose and provide all Inventions to Company. Licensor hereby makes all assignments necessary to accomplish the foregoing ownership. Licensor shall further assist Company, at Company's expense, to further evidence, record and perfect such assignments, and to perfect, obtain, maintain, enforce, and defend any rights assigned the foregoing with the same legal force and effect as if executed by Licensor. b. Licensor agrees that all Inventions and all other business, technical and financial information (including, without limitation, the identity of and information relating to the Company's customers or employees) Licensor develops, learns or obtains during the period over which it is (or is supposed to be) providing Services that relate to Company or the business or demonstrably anticipated business of Company or that are received by or for Company in confidence, constitute "Proprietary Information." Licensor will hold in confidence and not disclose or, except in performing the Services, use any Proprietary Information. However, Licensor shall not be obligated under this paragraph with respect to information Licensor can document is or becomes readily publicly available without restriction and through no fault of Licensor. Upon termination and as otherwise requested by Company, Licensor will promptly return to Company all items and copies containing or embodying Proprietary Information, except that Licensor may keep its personal copies of its compensation records and this agreement. c. As additional protection for Proprietary Information, Licensor agrees that during the period over which it is (or is supposed to be) providing Services, and for one year thereafter, (i) Licensor will not encourage or solicit any employee or consultant of Company to leave Company for any reason and (ii) Licensor will not engage in any activity that is in any way competitive with the business or demonstrably anticipated business of Company. d. Licensor grants Company the worldwide non-exclusive license to use, reproduce, disseminate, display, record, photograph, alter and otherwise exploit Licensor's 1 2 names, likeness, memorabilia (along with any trademarks or service marks incorporated therein) and/or voice in connection with promotion of company's current and future business, products and services, including but not limited to display and other use at Company's auto racing simulation centers. To the extent any of the foregoing grant is ineffective under applicable law, Licensor hereby agrees to provide, or, if necessary, to obtain from third parties, any and all waivers approvals, licenses and consents required to accomplish the purpose of foregoing grant. From time to time, as reasonably requested by Company, Licensor will confirm in writing that any such waivers, approvals, licenses and consents have been obtained or granted. This License Agreement does not grant a license to use Robert Yates Racing owned properties, including the #88 car. 3. Warranty. Licensor warrants that: (i) Trademark (Reg. #1,996,695) "Dale Jarrett" is owned by, used, and is being licensed herewith (ii) the Services will be performed in a professional and workmanlike manner and that none of such Services or any part of this Agreement is or will be inconsistent with any obligation Licensor may have to others; (iii) all work under this Agreement shall be Licensor's original work and none of the Services or Inventions or any development, use, production, distribution or exploitation thereof will infringe, misappropriate or violate any intellectual property or other right of any person or entity; and, (iv) Licensor has the full right and power to make the assignment and grant the rights to the company as provided for herein. Licensor shall indemnify, defend and hold harmless Company and its officers, employees, and agents from any claims, demands liabilities, losses, damages, judgments or settlements (including reasonable attorney's fees) arising from any breach by Licensor of any warranty or representation made by Licensor hereunder, including without limitation a claimed infringement or violation of any intellectual property right or right of publicity or privacy, up to a maximum of $25,000.00. 4. Termination. This Agreement will terminate four years from the date hereof, except that it may be terminated earlier as follows. If either party materially breaches a material provision of this Agreement or commits (or is accused by a credible third party of) a illegal or immoral act, the other party may terminate this Agreement upon 30 days notice, unless, in the case of a breach, the breach is cured within the notice period. Company also may terminate this Agreement at any time upon 60 days notice if Licensor is no longer actively engaged in his NASCAR race driving career. Sections 2 (subject to the limitations on Section 2.c stated therein) through 8 of this Agreement and any remedies for breach of this Agreement shall survive any termination or expiration, except that the license granted pursuant to Section 2(d) shall be limited such that the Company may continue to use, to the full extent of the rights granted thereunder, only those promotional materials already produced or manufactures pursuant to this Agreement prior to termination. 5. Miscellaneous. Each party shall be and act as an independent contractor and not as partner, joint venture, or agent of the other and shall not bind nor attempt to bind the other to any contract, as such Licensor is an independent contractor and is solely responsible for all taxes, withholdings, and other statutory or contractual obligations of any sort. Licensor shall not have the right or ability to assign, transfer, or subcontract any obligations under this Agreement without the written consent of Company; any attempt to do so shall be void. All notices under 2 3 this Agreement shall be deemed be in writing, and shall be deemed given when personally delivered, or three days after being sent by prepaid certified or registered U.S. mail to the address of the party to be notified as set forth herein or such other address as such party last provided to the other by written notice. The failure of either party to enforce its rights under this Agreement at any time for any period shall not be construed as a waiver of such rights. No changes or modifications or waivers to this Agreement will be effective unless in writing and signed by both parties. In the event that any provision of this Agreement shall be determined to be illegal or unenforceable, that provision will be limited or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect and enforceable. This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to the conflicts of laws provisions thereof. In any action or proceeding to enforce rights under this Agreement, the prevailing party will be entitled to recover costs and attorneys' fees. Headings herein are for convenience of reference only and shall in no way affect interpretation of the Agreement. Dale Jarrett LBE Technologies, Inc. - ---------------------------------- ----------------------------------------- (Licensor) (Company) /s/ Dale Jarrett By /s/ Chris Morse - ---------------------------------- -------------------------------------- Title: ---------------------------------- 3 4 Exhibit A SERVICES Product development. As requested by the Company, test drive the simulator and provide feedback as well as arrange visits by company representatives to the Busch car shop to obtain various technical information (e.g., engine, audio and wind tunnel data but not necessarily the latest 1996 results). Public appearances (expect 3 or 4 public performance trips per year). Visit operating locations as requested by the Company to meet with the media, sponsors and some of the general public (at the Company's request, these appearances may include Licensor memorabilia and/or the Busch cars). Licensor would be an important spokesperson for the Company, but the Company would use reasonable efforts to limit this work to high impact-and fun-exposures for Licensor. Merchandising. Ensure that the Company is able to obtain Licensor licensed merchandise at most favored reseller prices and terms for licensed merchandise sales at our operating sites. FEES $3,000 per public performance trip (each of which may involve more than one appearance and/or activity, but all of which will take place at one site/city per trip; autograph sessions will not exceed two hours). Expense reimbursement is limited to required, reasonable telephone expenses and first-class (or equivalent) travel (transportation, lodging and meals) authorized in writing by Company in advance; payable ___ days after itemized invoice and delivery of receipts). STOCK OPTIONS Licensor will be granted stock options to purchase 65,000 shares of the company's common stock under the Company's stock option plan and its terms with vesting over 4 years. (The first vesting period occurs at the end of one year with 25% of the total shares, and 1/48 of the total amount each month for the remaining 3 years of the deal term). The per share exercise price will be $0.075 as specified by the Company's board. The options must be exercised at earlier of (i) seven (7) years from the date of this Agreement or (ii) the date of the Company's IPO (initial public offering) of its stock. Company warrants that option granted to licensor will not be less than 0.3% of the Company's outstanding stock prior to an Initial Public Offering. 4 5 EQUALITY WITH OTHER DRIVERS Licensee agrees that fees for public performances, stock options, and option exercise price agreed to herein will not be less than that provided to any other NASCAR driver during 1997. 5 EX-10.28 6 LICENSING AGREEMENT: RUSTY WALLACE INC. 1 EXHIBIT 10.28 LICENSING AGREEMENT Effective March 1, 1997, Rusty Wallace Inc. ("Licensor") and LBE Technologies, Inc. 10401 Bubb Rd. Cupertino CA 95125 ("Company") agree as follows: 1. Services, Payment and Options. Licensor agrees to undertake and complete the Services (as defined in Exhibit A) specified in Exhibit A. As the only consideration due Licensor regarding the subject matter of this Agreement, Company will pay Licensor in accordance with Exhibit A. As a consultant, Licensor will also be entitled to stock options referred to in Exhibit A. 2. Ownership; Rights' Proprietary Information: Publicity. a. Company shall own all right, title and interest (including patent rights, copyrights, trade secret rights, trademark rights and other rights throughout the world) relating to any and all inventions (whether or not patentable), works of authorship, designations, designs, know-how, ideas and information made or conceived or reduced in practice, in whole or in part, by the Licensor during the term of this Agreement that relate to the subject matter of, or arise out of, the Services or any Proprietary Information (as defined below) (collectively, "Inventions") and Licensor will promptly disclose and provide all Inventions to Company. Licensor hereby makes all assignments necessary to accomplish the foregoing ownership. Licensor shall further assist Company, at Company's expense, to further evidence, record and perfect such assignments, and to perfect, obtain, maintain, enforce, and defend any rights assigned the foregoing with the same legal force and effect as if executed by Licensor. b. Licensor agrees that all Inventions and all other business, technical and financial information (including, without limitation, the identity of and information relating to the Company's customers or employees) Licensor develops, learns or obtains during the period over which it is (or is supposed to be) providing Services that relate to Company or the business or demonstrably anticipated business of Company or that are received by or for Company in confidence, constitute "Proprietary Information." Licensor will hold in confidence and not disclose or, except in performing the Services, use any Proprietary Information. However, Licensor shall not be obligated under this paragraph with respect to information Licensor can document is or becomes readily publicly available without restriction and through no fault of Licensor. Upon termination and as otherwise requested by Company, Licensor will promptly return to Company all items and copies containing or embodying Proprietary Information, except that Licensor may keep its personal copies of its compensation records and this agreement. c. As additional protection for Proprietary Information, Licensor agrees that during the period over which it is (or is supposed to be) providing Services, and for one year thereafter, (i) Licensor will not encourage or solicit any employee or consultant of Company to leave Company for any reason and (ii) Licensor will not engage in any activity that is in any way competitive with the business or demonstrably anticipated business of the Company, and Licensor will not assist any other person or 1 2 organization in competing or in preparing to compete with any business or demonstrably anticipated business of Company. d. Licensor grants Company the worldwide non-exclusive license to use, reproduce, disseminate, display, record, photograph, alter and otherwise exploit Licensor's names, likeness, memorabilia (along with any trademarks or service marks incorporated therein) and/or voice in connection with promotion of company's current and future business, products and services, including but not limited to display and other use at Company's auto racing simulation centers. To the extent any of the foregoing grant is ineffective under applicable law, Licensor hereby agrees to provide, or, if necessary, to obtain from third parties, any and all waivers approvals, licenses and consents required to accomplish the purpose of foregoing grant. From time to time, as reasonably requested by Company, Licensor will confirm in writing hat any such waivers, approvals, licenses and consents have been obtained or granted. 3. Warranty. Licensor warrants that: (i) the Services will be performed in a professional and workmanlike manner and that none of such Services or any part of this Agreement is or will be inconsistent with any obligation Licensor may have to others; (ii) all work under this Agreement shall be Licensor's original work and none of the Services or Inventions or any development, use, production, distribution or exploitation thereof will infringe, misappropriate or violate any intellectual property or other right of any person or entity; and, (iii) Licensor has the full right and power to make the assignment and grant the rights to the company as provided for herein. Licensor shall indemnify, defend and hold harmless Company and its officers, employees, and agents from any claims, demands liabilities, losses, damages, judgments or settlements (including reasonable attorney's fees) arising from any breach by Licensor of any warranty or representation made by Licensor hereunder, including without limitation a claimed infringement or violation of any intellectual property right or right of publicity or privacy. 4. Termination. This Agreement will terminate four years from the date hereof, except that it may be terminated earlier as follows. If either party materially breaches a material provision of this Agreement or commits (or is accused by a credible third party of) a illegal or immoral act, the other party may terminate this Agreement upon 30 days notice, unless, in the case of a breach, the breach is cured within the notice period. Company also may terminate this Agreement at any time upon 60 days notice if Licensor is no longer actively engaged in his NASCAR race driving career. Sections 2 (subject to the limitations on Section 2.c stated therein) through 5 of this Agreement and any remedies for breach of this Agreement shall survive any termination or expiration, except that the license granted pursuant to Section 2(d) shall be limited such that the Company may continue to use, to the full extent of the rights granted thereunder, only those promotional materials already produced or manufactures pursuant to this Agreement prior to termination. 5. Miscellaneous. Each party shall be and act as an independent contractor and not as partner, joint venture, or agent of the other and shall not bind nor attempt to 2 3 bind the other to any contract, as such Licensor is an independent contractor and is solely responsible for all taxes, withholdings, and other statutory or contractual obligations of any sort. Licensor shall not have the right or ability to assign, transfer, or subcontract any obligations under this Agreement without the written consent of Company; any attempt to do so shall be void. All notices under this Agreement shall be in writing, and shall be deemed given when personally delivered, or three days after being sent by prepaid certified or registered U.S. mail to the address of the party to be notified as set forth herein or such other address as such party last provided to the other by written notice. The failure of either party to enforce its rights under this Agreement at any time for any period shall not be construed as a waiver of such rights. No changes or modifications or waivers to this Agreement will be effective unless in writing and signed by both parties. In the event that any provision of this Agreement shall be determined to be illegal or unenforceable, that provision will be limited or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect and enforceable. This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to the conflicts of laws provisions thereof. In any action or proceeding to enforce rights under this Agreement, the prevailing party will be entitled to recover costs and attorneys fees. Headings herein are for convenience of reference only and shall in no way affect interpretation of the Agreement. Rusty Wallace Inc. LBE Technologies, Inc. (Licensor) (Company) By: /s/ By: /s/ Chris Morse ------------------------------ ------------------------------------- Title: Vice President Title: --------------------------- ---------------------------------- 3 4 Exhibit A SERVICES Product development. As requested by the Company, test drive the simulator and provide feedback as well as arrange visits by company representatives to the Winston Cup #2 race shop to obtain various technical information (e.g., engine, audio and wind tunnel data but not necessarily the latest results). Public appearances (expect 3 or 4 public performance trips per year). Visit operating locations as requested by the Company to meet with the media, sponsors and some of the general public (at the Company's request, these appearances may include Licensor memorabilia). Licensor would be an important spokesperson for the Company, but the Company would use reasonable efforts to limit this work to high impact-and fun-exposures for Licensor. Merchandising. Ensure that the Company is able to obtain Licensor licensed merchandise at most favored reseller prices and terms for licensed merchandise sales at our operating sites. FEES $3,000 per public performance trip (each of which may involve more than one appearance and/or activity, but all of which will take place at one site/city per trip; autograph sessions will not exceed two hours). Expense reimbursement is limited to required, reasonable telephone expenses and first-class (or equivalent) travel (transportation, lodging and meals) authorized in writing by Company in advance; payable 30 days after itemized invoice and delivery of receipts). STOCK OPTIONS Licensor will be granted stock options to purchase 65,000 shares of the company's common stock under the Company's stock option plan and its terms with vesting over 4 years. (the first vesting period occurs at the end of one year with 25% of the total shares, and 1/48 of the total amount each month for the remaining 3 years of the deal term). The per share exercise price will be $0.075 as specified by the Company's board. The options must be exercised at earlier of (i) seven (7) years from the date of this Agreement or (ii) the date of the Company's IPO (initial public offering) of its stock. 4 EX-10.29 7 LICENSE AGREEMENT (AUTO DESIGN): ROBERT YATES 1 EXHIBIT 10.29 LICENSE AGREEMENT (Auto Design) This agreement is made and entered into this 28th day of February, 1997 ("Effective Date") by and between Robert Yates Racing Inc. ("Licensor") and LBE Technologies, Inc. ("Company"). Grant of Rights. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Licensor hereby grants to Company a nonexclusive license for use in the United States of America to incorporate the Auto Design, as hereinafter defined, into Productions, as hereinafter defined. The license granted hereunder includes the right to reproduce, use, display, digitize, broadcast, perform, modify, and distribute the Auto Design, in whole or in part, as incorporated in any Production and any advertising and promotion related to any Production. This license shall not include the right to use the Auto Design independently of the Productions or advertising and promotion related thereto. The rights granted herein shall not confer in Licensor any rights of ownership in any Production, including, without limitation, the copyright thereto, all of which shall be and remain the exclusive property of Company, except that Licensor shall retain copyright in the Auto Design. This license grant includes, without limitation, use of the Auto Design on Simulators (defined below) and as a computer graphic projected on a monitor and/or screen at Centers (defined below). Description of Auto Design. "Auto Design" shall mean the trade dress, name and design of the race car known as the #88 car. "Auto Design" includes, without limitation, the colors and combination thereof, overall design, placement, shape and size of design elements, decals, logos, lettering and trademarks. Description of Production. "Production" shall mean any of the following: (i) Company's current or future auto racing simulation centers ("Centers"); (ii) Company's boardable auto-shaped racing simulation control modules ("Simulators"); and (iii) other multimedia uses, including but not limited to computer software, graphical displays, and audio soundtracks. Monetary Consideration. In further consideration of the rights granted to Company herein, Company shall pay to Licensor the following license fees: (i) $2,000 on signing of this Agreement; (ii) $3,000 payable within 90 days of the first commercial installation and opening to the public of a Simulator incorporating the Auto Design; (iii) $7,500 payable half on June 30, 1998 and half on December 31, 1998; and (iv) $10,000 payable half on June 30, 1999 and half on December 31, 1999. Merchandise. Company agrees to offer Licensor's merchandise to be purchased from Robert Yates Racing, Inc., as selected by Licensor, for sale at the retail sales outlets in Company's Centers until this Agreement is terminated or expires. Delivery of Design Specifications. Licensor shall, within 10 days of the Effective Date, deliver to Company materials and specifications sufficient to authentically reproduce the Auto Design, including, but not limited, to paint color codes, measurements of decals, and color 1 2 photographs clearly depicting the Auto Design including, views of each side, front, back and top of the #88 car. Quality Approval. After the Auto Design has been incorporated into a Simulator but before the Simulator is commercially distributed or displayed, Company will submit photographs of the Simulator to Licensor for a quality control review. Licensor shall have the opportunity to review the Simulator photographs for ten (10) business days and submit any suggested changes or improvements in the reproduction of the Auto Design to Company by the end of this period. Where reasonably possible, and considering production schedules and technical limitations, Company shall incorporate these changes and improvements in the final Simulator. Licensor's failure, within the ten (10) day period, to either (i) approve the reproduction of the Auto Design in the Simulator or (ii) submit suggestions shall be deemed to be approval of the reproduction of the Auto Design. With the exception of the foregoing, Licensor retains final approval of the reproduction of the Auto Design on a Simulator, which shall not be unreasonably withheld. Representations and Warranties. Licensor represents and warrants to Company that Licensor owns all right, title and interest in the Auto Design, including all copyrights, trademarks and other intellectual property rights therein, and has the authority to grant to Company the rights provided for herein. Licensor shall indemnify, defend and hold harmless Company and its officers, employees, and agents from any claims, demands, liabilities, losses, damages, judgments or settlements (including reasonable attorneys' fees) arising from any breach by Licensor of any warranty or representation made by Licensor hereunder, including without limitation a claimed infringement or violation of any intellectual property right. Termination. The term of this Agreement shall be three (3) years from the Effective Date, except that this Agreement may be terminated earlier as follows. If either party breaches a material provision of this Agreement, the other party may terminate this Agreement upon thirty (30) days' written notice (specifying the nature of the breach), unless the breach is cured within the thirty (30) day notice period. Company may also terminate this Agreement at any time upon sixty (60) days' notice if the Auto Design is no longer utilized on a racing car actively participating in professional auto racing. Sections 1 (as limited below), 2, 3, 8, 9 and 10 and any remedies for breach of this Agreement shall survive any termination or expiration. Notwithstanding the foregoing, the license granted pursuant to Section 1 shall be limited such that the Company may continue to exercise its rights thereunder only with respect to those Productions into which the Auto Design has already been incorporated prior to the effective date of termination or expiration of this Agreement. General. Each party shall be and act as an independent contractor and not as partner, joint venture or agent of the other. The provisions herein constitute the entire understanding between the parties hereto with respect to the subject matter hereof. Any additions to or changes in the Agreement shall be valid only if set forth in writing and signed by the parties. A waiver of any of the terms or conditions of this Agreement in any instance shall not be deemed or 2 3 construed to be a waiver of such term or condition for the future. This Agreement shall be construed in accordance with the substantive laws of the State of California, without regard to its conflict of laws principles. Accepted for Licensor: Accepted for Company: By: William R. Yates By: Christopher Morse -------------------------------- -------------------------------- (print name) (print name) Signature: /s/ WILLIAM R. YATES Signature: /s/ CHRISTOPHER MORSE ------------------------- ------------------------- Title: Business Manager Title: Director Marketing ----------------------------- ----------------------------- Robert Yates Racing Inc. LBE Technologies, Inc. 115 Dwelle St. 10401 Bubb Rd. Charlotte, NC 28208 Cupertino, CA 95014 3 EX-23.1 8 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLP INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated June 7, 1999, except for Note 11, which is as of September 9, 1999 relating to the financial statements of Silicon Entertainment, Inc., which appear in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Registration Statement. /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP San Jose, California October 20, 1999 -----END PRIVACY-ENHANCED MESSAGE-----