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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER
31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD
FROM _______ TO________
Commission File No. 0-22482
INNOVATIVE GAMING CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1713864
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4750 TURBO CIRCLE
RENO, NEVADA 89502
(Address of principal executive offices) (Zip Code)
(702) 823-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to he filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 17, 1997, 6,476,515 shares of the Registrant's Common Stock were
outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the Registrant on such date, based upon the last sale price of
the Common Stock as reported on the Nasdaq National Market on March 17, 1997,
was $30,040,365. For purposes of this computation, affiliates of the Registrant
are deemed only to be the Registrant's executive officers and directors and
Grand Casinos, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
PART III - Portions of the Registrant's definitive proxy statement in connection
with the annual meeting of the shareholders to be held on May 30, 1997, are
incorporated by reference into Items 10 through 13, inclusive.
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ITEM 1 . BUSINESS
Innovative Gaming Corporation of America ("IGCA") and its wholly owned operating
subsidiary, Innovative Gaming, Inc. ("IGI"), together (the "Company"), develop,
manufacture, market and distribute innovative group participation and other
specialty gaming machines to the gaming industry. The Company manufactures and
distributes multi-station blackjack, craps, and roulette gaming machines under
the names of BJ Blitz TM, Hot Shot Dice TM, Lightning Strike Roulette TM, Live
Video Blackjack TM, Live Video Craps TM, Live Video Roulette TM and Supersuits
Progressive Blackjack TM to certain gaming markets worldwide. Additionally, the
Company developed and anticipates marketing in 1997, Bonus Streak TM , a video
bonus game which operates in conjunction with a slant top spinning reel slot
machine. The Company is also developing and/or enhancing single player and group
participation gaming machines for future introductions.
Historically, the Company's primary target markets have been gaming
jurisdictions in North America, including casinos on Indian land and in the
states of Arizona, Louisiana, Mississippi, Minnesota and South Carolina, and in
Europe, through distributors. Subsequent to obtaining regulatory game approvals
in early 1997, the Company has commenced marketing its products in Colorado and
Nevada. The Company's Australian distributor is in the process of obtaining
technical approvals of the Company's products in New South Wales, Australia,
where, upon approval, the Company's products will be marketed through such
distributor.
The Company expects that its gaming machines will appeal to:
- - Casinos/Clubs seeking to enhance the entertainment experience by providing
new and unique forms of gaming.
- - Casinos/Clubs located in jurisdictions that do not allow live versions of
certain games.
- - Casinos/Clubs seeking to educate potential casino game players in a less
intimidating setting with lower minimum bet requirements than their live
game counterparts.
- - Casinos/Clubs seeking to reduce labor and training costs.
- - Casino operators/clubs who are attracted by the security and operating
controls provided by fully-automated machines.
BUSINESS STRATEGY
The Company's goal is to develop, manufacture and market unique and innovative
group participation and other specialty gaming machines that are not offered by
traditional slot machine suppliers and manufacturers. The Company believes that
it will be able to implement its strategy because of the following factors:
- - Innovative Products. The Company has developed and currently markets
innovative group video gaming machines that are not presently offered by
other manufacturers in the regulated primary gaming markets such as Nevada.
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- - Marketing/Regulatory Advantages. Certain jurisdictions permit video
versions of games that are not allowed in the live format.
- - Operational Advantages. The Company anticipates that its gaming machines
will help casinos improve security and operational controls and reduce
labor costs.
- - Financing Assistance. The Company may lease its machines directly to the
casino operators or assist casino operators to locate sources of financing
to purchase the Company's products. The Company also may enter into lease
participation agreements, where allowable, under which the Company receives
a portion of the income generated by each machine.
PRODUCTS
The Company currently manufactures and markets three primary platforms of group
participation video gaming machines: blackjack, craps and roulette. The Company
has also developed and manufactured additional game software such as Supersuits
Progressive Blackjack to run on an existing platform. Additionally, the Company
has developed a video bonus game built in conjunction with existing slant top
spinning reel slot machines.
BJ Blitz and Live Video Blackjack are electronic audio/video group participation
blackjack games. Each blackjack machine consists of a central "dealer" and five
"player" stations that face the dealer in a semicircle, in the same
configuration as a live action blackjack table. The dealer and each player
station have video display screens. The dealer screen displays the cards as they
are shuffled and dealt, and the dealer's hand. The electronic dealer directs the
action with spoken instructions, and indicators flash on the video display
screen of the player whose turn it is to bet. Each player station has lighted
controls that the players can push to hit, stand, bet, double down, split or buy
insurance. Between games, players can also push buttons to display the rules and
the odds. The machines incorporate electronically generated voices, sound
effects, lights and music into the game.
Management believes that its craps machine is the first entirely electronic
group participation video craps game in the world. Hot Shot Dice and Live Video
Craps consist of a rectangular table that is approximately half the size of a
live action craps table, with a lighted canopy. Each table accommodates six
players, two on each side, and one at each end. Except for a border that
contains the player controls, the table consists of two large video display
screens that reproduce a craps table top. Each player has a hand-sized trackball
that the player rotates with his palm to roll the dice. The trackball also
controls a video "hand" that the player moves around the playing field to place
stacks of video "chips" in the appropriate spot to place his bets. The odds are
displayed as the hand passes over each betting spot on the field. Each player
has his own distinctly-colored video hand and chips. The video rolling dice are
superimposed on the playing field and the roll of the dice responds to the force
and direction with which the player spins the track ball. The game incorporates
sound effects such as rolling dice, and visual effects such as a croupier rake
that wipes away chips, in addition to electronically-generated voices, music and
flashing lights.
Management believes its roulette machine is the first entirely electronic group
participation video roulette game in the world. Lightning Strike Roulette and
Live Video Roulette consist of a rectangular table that is
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approximately half the size of a live action roulette table. The table
accommodates five players, two on each side and an additional player at one end.
The other end of the table has a stand-up cabinet that incorporates a 29-inch
video monitor that employs the most advanced computer graphics available in the
industry today. On the top of the cabinet, a simulated roulette wheel is
displayed that incorporates rotating lights coordinated with the play of the
game. Except for a border that contains the player controls, the table consists
of two large video display screens that reproduce a roulette table betting
field. Each player has a hand-sized trackball that the player rotates with his
palm to control a video hand that the player moves around the playing field to
place stacks of video "chips" in the appropriate spot to place his bets. The
odds are displayed as the hand passes over each betting spot on the field. Each
player has his own distinctly colored video hand and chips. The cabinet video
monitor displays sharp, 3 dimensional graphics of rotating dealers, roulette
wheel action, betting, instructional game play features, and game summary data.
BONUS STREAK. Bonus Streak is used in conjunction with a slant top spinning reel
slot machine. The video bonus game utilizes the industry's first active, high
resolution LCD display. When players catch the Bonus Streak symbol on the reel
slot, they qualify for bonus play. Bonus play starts with 7 cards dealt face up
on the LCD display. If there are any matching cards (two 4's, two jacks, etc.),
bonus play ends and the player receives a first level award. If there are no
matching cards, the player advances to the next award level. Play continues to
subsequent award levels until there is a match or 13 unique cards are displayed,
at which time the top bonus jackpot is awarded. Bonus Streak has not yet been
approved in any gaming jurisdiction. Upon approval in Nevada, the Company
anticipates it will place Bonus Streak in gaming locations on a participation
basis wherein the Company will receive a percentage of the games' net win at
percentages similar to those received by other specialty game suppliers. This
participation amount will be shared with the manufacturer of the slant top
spinning reel slot machine. Under an agreement with IGT, as the supplier of the
slant top slot machines, the Company will share equally in the net revenues
received from the locations until IGT receives its sales price, after which the
Company receives 90% and IGT receives 10% of the net revenues.
MANUFACTURING AND SUPPLY ARRANGEMENTS
The Company's primary products are assembled at its production facility in Reno,
Nevada, utilizing various parts and components from a large base of vendors. The
Company has historically utilized one of its suppliers to facilitate the flow of
a significant portion of its parts and components from a Japanese vendor. The
Company is not obligated to purchase parts and components from any specific
vendor and is not subject to any minimum purchase requirements. On February 2,
1996, the Company negotiated fixed pricing for a minimum of two years for
specific electronic components with its Japanese suppliers in its efforts to
reduce product cost. With certain electronic parts solidified by contract, the
Company is utilizing a more domestic base of vendors for the balance of
components to reduce the reliance on exchange rate sensitivities and to
negotiate more competitive prices on required components. Except for certain
electronic components purchased from a Japanese vendor, the Company has
identified alternate sources of supply for significant parts and components
should any of its current vendors fail to meet order requirements by the
Company.
INTELLECTUAL PROPERTY
On February 2, 1996, the Company acquired the balance of all remaining
intellectual property including patents, trademarks, picture rights and
copyrights for its games from its Japanese suppliers in exchange
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for an aggregate 225,000 shares of IGCA common stock. The Company has exclusive
ownership and licenses pertaining to its blackjack, craps, roulette and
Supersuits Progressive Blackjack in gaming markets worldwide.
IGCA TM, BJ Blitz TM, Hot Shot Dice TM, Lightning Strike Roulette TM, Live Video
Blackjack TM, Live Video Craps TM, Live Video Roulette TM, Bonus Streak TM and
Supersuits TM are all trademarks of Innovative Gaming Corporation of America.
The Company has either Federally registered or applied for Federal registration
of these trademarks.
The Company believes that the technical know-how, trade secrets and creative
skills of its employees and contract personnel are substantial rights of the
Company. The Company requires customers, employees, contract personnel and other
significant contacts of the Company who have access to proprietary information
concerning the Company's products to sign non-disclosure agreements. The Company
relies on such agreements, other security measures, and trade secret law to
protect such proprietary information. No assurance can be given that pending
applications for intellectual property will be granted. There also can be no
assurance that patents or other intellectual property rights will not be
infringed, or that others will not develop technology that will not violate
these rights.
DISTRIBUTORSHIP ARRANGEMENTS
The Company distributes and/or anticipates to distribute its products both
directly to gaming markets and through licensed distributors. In certain
jurisdictions the Company may use an existing licensed distributor to sell its
products pursuant to any necessary Tribal or regulatory transaction approvals.
The Company has a nonexclusive distributorship agreement with Sodak Gaming, Inc.
("Sodak") to market and distribute the Company's products (i) in those limited
geographic areas in the United States (except for the States of Minnesota and
Nevada) and Canada wherever North American Indian, "aboriginal," or "Native
People" (indigenous to Canada) gaming is or becomes permitted during the term of
the distributorship agreement, and (ii) in the states of North Dakota, South
Dakota and Wyoming. At Sodak's option, Sodak may also distribute the Company's
games in any and all non-Indian gaming jurisdictions in which Sodak obtains
exclusive distribution rights from International Game Technology, the world's
largest slot machine manufacturer. The agreement expires August 1998, but may be
renewed for successive one-year terms upon the agreement of Sodak and the
Company on the terms and conditions set forth in the distributorship agreement
or such other terms and conditions as Sodak and the Company may agree, and may
be terminated by either party under certain circumstances. Pursuant to the
agreement, the Company has agreed to sell its products to Sodak at the Company's
then current retail price less a distributor's discount.
The Company also has an exclusive distributorship agreement with Drew
Distributing ("Drew") to market and distribute the Company's products on all
non-Indian land in South Carolina. Under this agreement, Drew was granted a
three-year exclusive license, expiring in October 1997. The agreement may be
renewed for successive one-year terms upon the agreement of Drew and the Company
on the terms and conditions set forth in the distributorship agreement, or such
other terms and conditions as Drew and the Company may agree, and may be
terminated by either party under certain circumstances.
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In February 1996, the Company entered into an exclusive distribution agreement
with Aristocrat Leisure Industries of New South Wales, Australia for the
marketing and distribution of games in Australia, New Zealand, Papua New Guinea,
Taiwan, New Caledonia, Malaysia, the Philippines and Singapore (hereinafter
"Australasia"). The Company has granted Aristocrat an initial five year
exclusive license expiring February 2001 to distribute its blackjack, craps and
roulette games to all legalized Australasia video gaming jurisdictions. Pursuant
to the agreement, the Company has agreed to sell its games at discounted
distributor's pricing in exchange for a minimum purchase quantity of 100 units
per year, with a rolling six month sales materials forecast. Aristocrat has
submitted the Company's blackjack, and roulette games for technical approval
with New South Wales, Australia gaming authorities. Aristocrat may not
distribute games prior to receipt of any and all necessary regulatory approvals.
In March 1996, the Company entered into exclusive agreements with Ludi S.F.M.
and with S.A.M. Eurusa for the exclusive distribution of the Company's games in
France, Monaco, Morocco, Tunisia and Italy. Ludi and Eurusa are affiliated
entities. Under the agreement, Ludi and Eurusa have been granted three-year
exclusive licenses, expiring March 1999, to distribute the Company's blackjack,
craps and roulette games, subsequent to any and all regulatory approvals. The
agreements may be renewed for successive one-year terms upon the agreement of
the parties and on the terms and conditions set forth in the distribution
agreements or such other terms and conditions as the parties may agree and may
be terminated by either party under certain circumstances. Pursuant to the
agreement, the Company has agreed to sell its games to Ludi and Eurusa at the
Company's then current retail price less a distributor's discount.
In December 1996, the Company entered into an exclusive agreement with Bally
Gaming International ("Bally") for the exclusive distribution of the Company's
games in certain European countries. Under the agreement, Bally has been granted
three-year exclusive license, expiring December 1999, to distribute the
Company's blackjack, craps and roulette games in specified European countries.
Bally may not distribute games prior to receipt of any and all necessary
regulatory approvals. The agreement provides an automatic renewal annually after
the original term and may be terminated by either party under certain
circumstances.
In January 1997, the Company entered into a three-year exclusive agreement with
Vista Gaming Corporation ("Vista") for the distribution and service of the
Company's products in Colorado. However, if Vista does not distribute on lease
at least 20 machines after six months and/or 35 machines after one year, this
agreement will revert to a non-exclusive distributorship. The lease rates will
be comparable to lease rates charged by other specialty game suppliers. The
agreement provides for automatic renewal annually after the original term and
may be terminated by either party under certain circumstances.
SIGNIFICANT CUSTOMERS
During fiscal 1996, a substantial portion of the Company's sales were to three
customers. Sodak accounted for 23.7% of sales, Bally Gaming International
accounted for 32.2% of sales and Otimex accounted for 37.0% of sales. The
Company has an agreement with Grand Casinos, Inc. ("GCI") whereby casinos owned
or managed by GCI may purchase up to 125 of the Company's video gaming machines
for a price substantially lower than what the Company charges in related
markets. The Company made minimal parts sales and no video gaming machine sales
to GCI during 1996.
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COMPETITION
Many gaming equipment companies, several of which are large and
well-established, supply the casino and video lottery industries with video
gaming machines and other gaming equipment. Management believes that Aristocrat,
Bally Gaming International, Inc., International Game Technology and Universal
Distributing of Nevada, Inc. are among the largest and most-established gaming
machine suppliers. Management believes that none of these companies currently
offer group video gaming machines that are similar to the Company's
multi-station products. However, Sega Enterprises, Inc. and Sigma Games
distribute multiplayer gaming and amusement machines. There can be no assurance
that these competitors, or another competitor, will not develop gaming machines
that are similar to the Company's gaming machines in the future.
REGULATION
GENERAL - The manufacture, sale and distribution of gaming machines are subject
to various federal, state, county, tribal and/or municipal laws, regulations and
ordinances, which are administered by the relevant regulatory agency or agencies
in each jurisdiction (the "Regulatory Authorities"). These laws, regulations and
ordinances vary from jurisdiction to jurisdiction, but primarily concern the
responsibility, financial stability and character of gaming equipment
manufacturers and distributors, as well as persons financially interested or
involved with gaming equipment manufacturers and distributors. Furthermore,
regulations also require various technical standards and specifications approval
and adherence, which are conducted by state and/or private laboratories. There
are substantial similarities in the basic provisions which are described below.
In the future, Regulatory Authorities may also significantly curtail or
eliminate gaming in jurisdictions that currently or hereafter allow gaming.
In addition to the jurisdictions which currently allow casino gaming, the
Company anticipates doing business in other jurisdictions which may authorize
casino gaming in the future, and in jurisdictions which have legalized casino
gaming but have not adopted regulations. The Company cannot predict the nature
of the regulatory scheme in any such jurisdiction.
INDIAN GAMING - The operation of gaming on Indian land, including the terms and
conditions of contracts to sell or lease gaming equipment to Indian tribes, is
subject to the Indian Gaming Regulatory Act of 1988 ("IGRA"), which has
delegated oversight responsibility to the Bureau of Indian Affairs (the "BIA")
and the National Indian Gaming Commission ("NIGC"), and also is subject to the
provisions of statutes relating to contracts with Indian tribes, which are
administered by the BIA. The regulations and guidelines under which the BIA and
the National Indian Gaming Commission will administer IGRA are incomplete and
evolving. IGRA is subject to interpretation by the Secretary of the Interior and
the NIGC and may be subject to judicial and legislative clarification or
amendment.
The NIGC is empowered to inspect and audit all Indian gaming facilities, to
conduct background checks on all persons associated with Indian gaming, to hold
hearings, issue subpoenas, take depositions, adopt regulations and to assess
fees. Civil penalties for violations of IGRA, and/or other applicable law, may
be imposed. In addition, IGRA provides for criminal penalties for illegal gaming
on Indian land and for theft from Indian gaming facilities.
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IGRA classifies games that may be played on Indian land into three categories.
Class I gaming includes traditional Indian games and private social games
engaged in as a part of; or in connection with, tribal ceremonies or
celebrations. These games, under IGRA, are regulated exclusively by the
respective tribes.
Class II gaming includes bingo and, additionally, pulltabs, lotto, punch boards,
tip jars, instant bingo, and other games similar to bingo, if those games are
played at a location where bingo is played. Class II gaming explicitly excludes
electronic or electromechanical facsimiles of any games of chance or slot
machines of any kind. This classification is also reserved for tribal
regulation, but under federal oversight. Class II gaming is permitted on Indian
land if: (i) the state in which the Indian gaming is located permits such gaming
for any purpose by any person, (ii) the gaming is not otherwise specifically
prohibited on Indian land by federal law, (iii) the gaming is conducted in
accordance with a tribal ordinance which has been approved by the Chairman of
the NIGC (provided that gaming may be conducted under unapproved ordinances or
resolutions adopted prior to the enactment of IGRA unless and until such
ordinances or resolutions are disapproved by the Chairman), (iv) an Indian tribe
has sole proprietary interest and responsibility for the conduct of gaming
(subject to certain exceptions), (v) the primary management officials, key
employees and the facility are tribally licensed; and (vi) several other
specified requirements are met, including the existence of any adequate system
which ensures background investigations are conducted on primary management
officials, all contracts for supplies, services or concessions in excess of
$25,000 annually are subject to independent audit and the construction and
maintenance of the gaming facility is conducted in a manner which adequately
protects the environment and the public health and safety.
Class III gaming includes all other forms of gaming, such as video casino games
(e.g., video slots, video blackjack), slot machines, table games (e.g.,
blackjack, craps, roulette), and other gaming (e.g., sports betting and
parimutuel wagering). The machines manufactured and distributed by the Company
are classified as Class III gaming devices. Class III gaming is permitted on
Indian land only if such activity is: (i) authorized by a tribal ordinance
meeting the requirements of IGRA and approved by the Chairman of the NIGC
(provided that gaming may be conducted under unapproved ordinances or
resolutions adopted prior to the enactment of IGRA unless and until such
ordinances or resolutions are disapproved by the Chairman), (ii) located in a
state that permits gaming defined as Class III by any person for any purpose,
(iii) governed by requirements similar to those described for Class II gaming,
and (iv) conducted in compliance with the terms of a written tribal-state
compact entered into between the Indian tribe and the state in which the subject
gaming is located and which has been approved by the Secretary.
TRIBAL ORDINANCES - Under IGRA, except to the extent otherwise provided in a
tribal-state compact, Indian tribal governments have primary regulatory
authority over gaming on land within the tribe's jurisdiction Therefore, persons
engaged in gaming activities, including the Company, are subject to the
provisions of tribal ordinances and regulations regarding gaming. Such
ordinances and regulations must be consistent with IGRA and with any applicable
tribal-state gaming compact, and cannot impose criminal penalties upon
non-Indians. However, the civil remedies imposed by such tribal government
regulations, if otherwise valid, will likely apply to the Company and its
employees and customers. Tribal ordinances also require participants involved in
Indian gaming enterprises to obtain tribal licenses. The Company as a
manufacturer/distributor of gaming equipment is usually required to obtain a
tribal license before making any equipment sales. Management companies and their
officers, directors and significant shareholders are also subject to licensing
requirements. Tribes have great discretion to deny such licenses, fail to renew
current licenses or revoke such licenses. An Indian tribe has the right to
revoke any tribal gaming ordinance and, pursuant to such revocation, render
Class III gaming illegal on the lands of the tribe.
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The Company must also comply with regulations promulgated pursuant to the tribal
state compacts entered into between the State and the particular Indian tribe.
These compacts vary significantly from state to state.
Indian tribes are sovereign nations with their own courts and governmental
Systems. The Company intends to seek waivers of Sovereign immunity, where
appropriate, from tribes with whom the Company does business although there can
be no assurance that such waivers will be obtained.
UNITED STATES CODE SECTION 81 - Title 25, Section 81 of the United States Code
states that no agreement shall be made by any person with any tribe of Indians,
or individual Indians not citizens of the United States, for the payment or
delivery of any money or other thing of value . . . in consideration of services
for said Indians relative to their lands . . . unless such contract or agreement
be executed and approved" by the Secretary or his or her designee. An agreement
or contract for services relative to Indian lands which fails to conform with
the requirements of Section 81 will be void and unenforceable. All money or
other thing of value paid to any person by any Indian or tribe for or on his or
their behalf, on account of such services, in excess of any amount approved by
the Secretary or his or her authorized representative will be subject to
forfeiture.
The Company has sold and intends to sell gaming machines directly to Indian
tribes. The Company has not submitted its past gaming machine sales contracts
with Indian tribes to the Secretary for approval for a number of reasons. In the
Company's opinion, its sales contracts are not for services. The Company
believes it is engaged in the sale of goods, namely gaming machines, and
therefore Section 81 does not apply to its activities. The Company also believes
that its sales of gaming machines are not "relative to Indian lands." Although
the gaming machines ultimately may be used on Indian lands, the Company believes
the machines themselves are not related to Indian land. The Company intends to
continue its practice of not submitting its sales contracts to the Secretary for
approval. The position of regulatory authorities relative to approval of
contracts of this kind has not been clear.
NEVADA
The manufacture and distribution of gaming devices in Nevada are subject to: (i)
the Nevada Gaming Control Act and the regulations promulgated thereunder
(collectively, the "Nevada Act"); and (ii) various local regulations. Generally,
gaming activities may not be conducted in Nevada unless licenses are obtained
from the Nevada Gaming Commission (the "Nevada Commission"), the Nevada State
Gaming Control Board (the "Nevada Board"), and appropriate county and municipal
licensing agencies. The Nevada Commission, the Nevada Board, and the various
county and municipal licensing agencies are collectively referred to as the
"Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy that are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) to provide a source of state and local revenues
through taxation and licensing fees. Change in such laws, regulations and
procedures could have an adverse effect on the Company.
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Manufacturer and distributor licenses require the periodic payment of fees and
taxes and are not transferable. No person may become a stockholder of, or
receive any percentage of profits from, the Company without first obtaining
licenses and approvals from the Nevada Gaming Authorities. IGCA is registered by
the Nevada Commission as a publicly traded corporation ("Registered
Corporation") and IGI, the operating subsidiary of the IGCA, was granted all
requisite licenses in May 1996 to manufacture gaming devices used in Nevada and
to distribute such devices, subsequent to technical product approvals. As such,
the Company is required periodically to submit detailed financial and operating
reports to the Nevada Commission and furnish any other information that the
Nevada Commission may require.
The Nevada Gaming Authorities may investigate any individual who has a material
relationship to, or material involvement with, the Company in order to determine
whether such individual is suitable or should be licensed as a business
associate of a gaming licensee. Officers, directors and certain key employees of
IGI must file applications with the Nevada Gaming Authorities and are required
to be licensed by the Nevada Gaming Authorities. Officers, directors and key
employees of IGCA who are actively and directly involved in the gaming
activities of IGI may be required to be licensed or found suitable by the Nevada
Gaming Authorities. The Nevada Gaming Authorities may deny an application for
licensing or a finding of suitability for any cause they deem reasonable. A
finding of suitability is comparable to licensing, and both require submission
of detailed personal and financial information followed by a thorough
investigation. The applicant for licensing or a finding of suitability must pay
all the costs of the investigation. Changes in licensed positions must be
reported to the Nevada Gaming Authorities and in addition to their authority to
deny an application for a finding of suitability or licensure, the Nevada Gaming
Authorities have jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or to continue having a relationship with the
Company, the companies involved would have to sever all relationships with such
person. In addition, the Nevada Commission may require the Company to terminate
the employment of any person who refuses to file appropriate applications.
Determinations of suitability or of questions pertaining to licensing are not
subject to judicial review in Nevada.
The Company is required to submit detailed financial and operating reports to
Nevada Gaming Authorities. Substantially all material loans, leases, sales of
securities and similar financing transactions by the Company, must be reported
to or approved by the Nevada Commission.
If it was determined that the Nevada Act was violated by IGI, the gaming
licenses it holds could be limited, conditioned, suspended or revoked, subject
to compliance with certain statutory and regulatory procedures. In addition,
IGI, IGCA and the persons involved could be subject to substantial fines for
each separate violation of the Nevada Act at the discretion of the Nevada
Commission. Limitation, conditioning or suspension of any gaming license could
(and revocation of any gaming license would) materially adversely affect the
Company.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
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The Nevada Act requires any person who acquires more than 5% of the Company's
voting securities to report the acquisition to the Nevada Commission. The Nevada
Act requires that beneficial owners of more than 10% of the Company's voting
securities apply to the Nevada Commission for a finding of suitability within
thirty days after the Chairman of the Nevada Board mails a written notice
requiring such filing. Under certain circumstances, an "institutional investor,"
as defined in the Nevada Act, which acquires more than 10% but not more than 15%
of the Company's voting securities, may apply to the Nevada Commission for a
waiver of such finding of suitability if such institutional investor holds the
voting securities for investment purposes only. An institutional investor shall
not be deemed to hold voting securities for investment purposes unless the
voting securities were acquired and are held in the ordinary course of business
as an institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Company, any change in the Company's corporate charter, bylaws,
management, policies or operations of the Company or any of its gaming
affiliates, or any other action which the Nevada Commission finds to be
inconsistent with holding the Company's voting securities for investment
purposes only. Activities that are not deemed to be inconsistent with holding
voting securities for investment purposes only include: (i) voting on all
matters voted on by stockholders; (ii) making financial and other inquiries of
management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management, policies or operations;
and (iii) such other activities as the Nevada Commission may determine to be
consistent with such investment intent. If the beneficial holder of voting
securities who must be found suitable is a corporation, partnership or trust, it
must submit detailed business and financial information including a list of
beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company, the Company
(i) pays that person any dividend or interest upon voting securities of the
Company, (ii) allows that person to exercise, directly or indirectly, any voting
right conferred through securities held by that person, (iii) pays remuneration
in any form to that person for services rendered or otherwise, or (iv) fails to
pursue all lawful efforts to require such unsuitable person to relinquish his
voting securities for cash at fair market value. Additionally, the Clark County
Liquor and Gaming Licensing Board has taken the position that they have the
authority to approve all persons owning or controlling the stock of any
corporation controlling a gaming license.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file an application, be investigated and
found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
- 11 -
<PAGE> 12
The Company is required to maintain a current stock ledger in Nevada that may be
examined by the Nevada Gaming Authorities at any time. If any Securities are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make such disclosure may be grounds for finding the record holder
unsuitable. The Company is also required to render maximum assistance in
determining the identity of the beneficial owner. The Nevada Commission has the
power to require the Company's stock certificates to bear a legend indicating
that such securities are subject to the Nevada Act. However, to date, the Nevada
Commission has not imposed such a requirement on the Company.
The Company may not make a public offering of any securities without the prior
approval of the Nevada Commission if the securities or the proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Nevada, or to retire or extend obligations incurred for such purposes. Such
approval, if given, does not constitute a finding, recommendation or approval by
the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the
prospectus or the investment merits of the securities. Any representation to the
contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock or asset
acquisitions, management or consulting agreements, or any act or conduct by a
person whereby he obtains control, may not occur without the prior approval of
the Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and the Nevada Commission concerning a
variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process of the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licensees and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environmental for the orderly governance of
corporate affairs. Approvals are, in certain circumstances, required from the
Nevada Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Company's
board of directors in response to a tender offer made directly to the Registered
Corporation's stockholders for the purpose of acquiring control of the
Registered Corporation.
Any person who is licensed, required to be licensed, registered, required to be
registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are also required to comply with certain
reporting requirements imposed by the Nevada Act.
Licensees are also subject to disciplinary action by
- 12 -
<PAGE> 13
the Nevada Commission if they knowingly violate any laws of the foreign
jurisdiction pertaining to the foreign gaming operation, fail to conduct the
foreign gaming operation in accordance with the standards of honesty and
integrity required of Nevada gaming operations, engage in activities that are
harmful to the State of Nevada or its ability to collect gaming taxes and fees,
or employ a person in the foreign operation who has been denied a license or a
finding of suitability in Nevada on the ground of personal unsuitability.
OTHER JURISDICTIONS.
Each of the other jurisdictions in which the Company does business requires
various licenses, permits and approvals in connection with the manufacture
and/or distribution of gaming devices typically involving restrictions similar
in most respects to those of Nevada.
UNITED STATES - FEDERAL - The Federal Gambling Devices Act of 1962 (the "Federal
Act") makes it unlawful for a person to manufacture, deliver or receive gaming
machines and components thereof across interstate lines unless that person has
first registered with the Attorney General of the United States. The Company is
so registered and must renew its registration annually. In addition, various
recordkeeping and equipment identification requirements are imposed by the
Federal Act. Violation of the Federal Act may result in seizure or forfeiture of
equipment, as well as other penalties.
- 13 -
<PAGE> 14
ITEM 2. PROPERTIES
The Company leases approximately 53,100 square feet of warehouse and office
space in Reno, Nevada for its main facility, which includes administrative,
sales, manufacturing and warehousing operations. The rent under the lease, which
expires in October 2001, is approximately $229,000 in 1997, with provisions for
annual rent increases. The Company also leases approximately 2,400 square feet
of office and warehouse space in Las Vegas, Nevada for sales and service
operations. The rent under the lease, which expires in July 1999, is
approximately $26,000 annually.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is not aware of any
threatened litigation that would have a material adverse effect on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year ended December 31, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
EDWARD G. STEVENSON, AGE 50, has been the President, Chief Executive Officer,
and a director of the Company since February 1996. Prior to joining the Company,
Mr. Stevenson served as the President and Chief Operating Officer of Little Six,
Inc. d/b/a Mystic Lake Casino in Minneapolis, from January 1995 to March 1996.
From 1988-1991 and from October 1992 to January 1995, Mr. Stevenson was the
President of CMS International/Summit Casinos of Reno, Nevada. From June 1991 to
October 1992, Mr. Stevenson served as president of gaming operations for
International Game Technology and from 1982 through 1987 served in various posts
as chief operating officer and general counsel of Harvey's Resort Hotel/Casino
in Stateline, Nevada.
SCOTT H. SHACKELTON, AGE 47, has been Vice President, Chief Financial Officer
and Secretary since June 1996. Prior to joining the Company, Mr. Shackelton
served as Vice President, Controller and Treasurer of International Game
Technology from December 1981 to May 1996. Mr. Shackleton held various positions
at Harrah's Hotels/Casinos from 1974 to 1981, with his last position being
assistant controller.
- 14 -
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Since May 28, 1993, the date of the Company's initial public offering, through
September 20, 1994, the Company's Common Stock was traded on NASDAQ Small-Cap
Market under the ticker symbol "IGCA". On September 21, 1994 the Company's
Common Stock began trading on the NASDAQ National Market.
The following table summarizes the high and low prices per share of the Common
Stock for the periods indicated as reported on the NASDAQ SmallCap Market or the
NASDAQ National Market:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FYE 12/31/95
First Quarter $6.75 $4.00
Second Quarter 8.91 4.88
Third Quarter 9.50 7.13
Fourth Quarter 9.50 7.00
FYE 12/31/96
First Quarter $11.75 $7.25
Second Quarter 11.13 8.00
Third Quarter 8.75 5.38
Fourth Quarter 8.88 4.75
</TABLE>
The Company has never declared or paid any dividends on its Common Stock, and
the Board of Directors presently intends to retain all earnings, if any, for use
in the Company's business for the foreseeable future. Any future determination
as to declaration and payment of dividends will be made at the discretion of the
Board of Directors. The terms of the Company's previously outstanding Series B
Convertible Preferred Stock prohibited the Company from paying cash dividends to
common stockholders.
On March 17, 1997, the last reported sale price for the Common Stock was $5.56
per share. As of March 17, 1997, the Company had approximately 135 record
holders of Common Stock.
- 15 -
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain consolidated statement of operations, cash
flow and balance sheet information for the Company as of and for the years ended
July 31, 1993 and 1994, the five months ended December 31, 1994, and the years
ended December 31, 1995 and 1996. The following financial information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Consolidated Financial Statements
of Innovative Gaming Corporation of America and Subsidiary (in thousands except
per share data).
<TABLE>
<CAPTION>
For the Year For the Year For the Five For the Year For the Year
Ended Ended Months Ended Ended Ended
December 31, December 31, 1995 December 31, July 31, July 31,
1996 1994 1994 1993
-------------- ------------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales $2,664 $6,352 $470 $8,910 $396
Gross profit 529 1,589 199 3,825 71
Operating income (loss) (6,592) (2,765) (2,179) 751 (860)
Net income (loss) (6,179) (2,114) (1,129) 1,028 (838)
Net income (loss) per
common share (0.97) (0.38) (0.20) .19 (0.26)
Balance sheet data (end of period):
Working capital $11,996 $16,039 $17,616 $20,049 $7,882
Total assets 15,976 18,929 21,417 23,682 9,457
Long-term debt (net of
current maturities) - - 5 21 44
Redeemable preferred stock - - 983 975 955
Total stockholders' equity 15,450 18,531 19,693 21,851 7,443
</TABLE>
- 16 -
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and this Form 10-K contain forward-looking statements
that involve risks and uncertainties relating to future events. Actual events or
the Company's results may differ materially from those discussed in such
forward-looking statements. Factors that might cause actual results to differ
from those indicated by such forward-looking statements include, but are not
limited to, failure or delay in obtaining gaming regulatory approvals, delays in
developing or manufacturing new products, decline in demand for gaming products
or reduction in the growth rate of new markets, changing economic conditions,
approval of pending patent applications or infringement upon existing patents,
the effects of regulatory and governmental actions, customer acceptance of the
Company's products, need for additional financing and increased competition.
OVERVIEW - The Company was formed in 1991 to develop, manufacture, market and
distribute group participation and other specialty video gaming machines. The
Company manufactures, distributes and markets BJ Blitz TM, Hot Shot Dice TM,
Lightning Strike Roulette TM and Supersuits Progressive Blackjack TM to certain
gaming markets worldwide. Since inception, the Company has focused most of its
resources on the development of games, the regulatory approval process and the
sale and installation of its games.
RELATIONSHIP WITH GRAND CASINOS, INC. - The Company and Grand Casinos, Inc.
("GCI") have entered into an agreement which allows casinos owned or managed by
GCI or its affiliates to purchase up to 125 of the Company's video gaming
machines at prices substantially lower than the price the Company charges
unrelated parties. Pursuant to this agreement, the Company has sold 42 blackjack
machines, 11 craps machines and 8 roulette machines to casinos either owned or
managed by GCI. No machine sales were made to GCI 1996.
REGULATION - The Company distributes its products both directly to the gaming
marketplace and through licensed distributors. The Company is currently licensed
and/or has the necessary regulatory approvals as a gaming product manufacturer
and distributor in Nevada, Colorado, Mississippi, Louisiana, Minnesota, Arizona,
Quebec and the Atlantic Lottery (four Canadian Maritime provinces). In certain
jurisdictions, the Company has received technical game approval and may use an
existing licensed distributor to sell its products pursuant to any necessary
tribal or regulatory transaction approvals. As of March 1997, technical game
approvals are being sought by the Company and/or its distributor in New South
Wales, Australia, Quebec and the Atlantic Lottery. The Company intends to apply
for necessary licenses or approvals in other jurisdictions both domestically and
internationally where Class III gaming is permitted.
DISTRIBUTORS - The Company has granted Sodak Gaming, Inc. a multi-year
non-exclusive license to distribute the Company's products to North American
Indian casinos (excluding the states of Minnesota and Nevada) and to non-Indian
casinos in the states of North Dakota, South Dakota and Wyoming. The Company has
also granted Drew Distributing a multi-year exclusive license to distribute
Company's multi-station products in South Carolina.
On February 7, 1996, the Company entered into a five-year distribution agreement
with Aristocrat Leisure Industries of New South Wales, Australia to exclusively
market and distribute the Company's multi-
- 17 -
<PAGE> 18
station products in Australia, New Zealand and surrounding gaming markets. On
March 5, 1996, the Company entered into a three-year exclusive distribution
agreement with Ludi S.F.M. of France and its related entity Eurusa, to market
and distribute the Company's multi-station products to select western European
gaming markets. On December 4, 1996, the Company entered into a three-year
exclusive distribution agreement with Bally Gaming International to market and
distribute the Company's multi-station products in specified European countries.
On January 21, 1997, the Company granted a three-year exclusive distribution
license to Vista Gaming Corporation to distribute and service the Company's
multi-station products in Colorado.
OTHER - On February 2, 1996, the Company completed the acquisition of all
remaining patents, trademarks, copyrights and other intellectual property
related to its games from its principal supplier. The Company also signed an
agreement to receive favorable pricing on key game components for a two-year
period, which is expected to lower its per game manufacturing costs.
FISCAL YEAR - On December 14, 1994, the Company changed its fiscal year end from
July 31 to December 31. This change created a transitional period which began on
August 1, 1994 and ended on December 31, 1994. The Company has not recast
comparative prior period information to conform with the current period since it
does not believe such recasting is meaningful or cost-effective. The period
which is most nearly comparable to the year ended December 31, 1995 is the year
ended July 31, 1994. The Company does not believe that there are any material
trends, seasonal or otherwise, or other factors which would effect the
comparison of the two periods. All references herein to years are to fiscal
years unless otherwise indicated.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,1996 COMPARED TO THE YEAR
ENDED DECEMBER 31,1995.
For the year ended December 31, 1996, the Company reported a net loss of
$6,179,000, or $.97 per share, compared to a net loss of $2,198,000, or $.38 per
share, for the year ended December 31, 1995. For the prior year period, results
from operations have been adjusted for preferred stock accretion and preferred
stock dividends paid. The increased loss in 1996 was primarily due to: i) a one
time restructuring charge of $1,716,000, ii) lower sales volume and iii) higher
selling, general and administrative expenses.
SALES, COST OF SALES AND GROSS PROFIT
Sales declined to $2,664,000 in 1996 compared to $6,352,000 in 1995, due to a
decrease in unit sales from 94 in 1995 to 33 in 1996. In 1995 the Company
entered into the markets of Arizona, Wisconsin, North Carolina and South
Carolina, where 72 units were sold. Delays in acquiring required gaming licenses
in key gaming jurisdictions limited the markets available to sell the Company's
products in 1996. The Company has subsequently been granted technical game
approval of its blackjack machine in Colorado and its three multi-player video
machines Nevada, and the Company is pursuing placement of its products in those
jurisdictions, which management believes will result in increased revenues. The
Company, through its distributor, is also pursuing game approval in the key
jurisdiction of Australia.
The gross margin in 1996 was 19.8% compared to 25.0% in 1995. In 1996, all of
the games sold by the Company were to distributors, which yield lower gross
margins than direct sales.
- 18 -
<PAGE> 19
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended December 31,
1996 increased $1,051,000 to $5,405,000 compared to $4,354,000 for the year
ended December 31, 1995. This expense increase was primarily due to higher
product engineering and development expense related to preparing the Company's
products for introduction into new jurisdictions, and increased payroll
expenses.
INTEREST INCOME
In the year ended December 31, 1996, interest income decreased $83,000 to
$568,000 compared to $651,000 in the year ended December 31, 1995. The decrease
in interest income was due to a decrease in notes receivable and investments in
interest bearing accounts.
RESTRUCTURING COSTS
The Company recognized $1,716,000 in restructuring costs, which included
expenses relating to inventory write downs, the Company's relocation to Reno and
management transition. As part of the restructuring, management focused on the
product lines it felt were necessary to provide the salability, manufacturing
capability, and ultimately the profit margins necessary to achieve and sustain
future growth. As part of this process the Company wrote down certain of its
inventory. All anticipated expenses related to the relocation and restructuring
were accrued in the quarter ended June 30, 1996. During the relocation process,
the Company maintained operations in both Reno, Nevada and Plymouth, Minnesota
for over two months, which resulted in duplication of various expenses.
Additionally, the Company incurred a loss upon the sale and disposal of unusable
office equipment, computer equipment and leasehold improvements when moving out
of the Plymouth office.
PROVISION FOR INCOME TAXES
The Company recorded a $155,000 provision for income taxes during the second
quarter of 1996 to provide a full valuation allowance on its deferred tax asset
relating to its net operating loss carry forwards.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR
ENDED JULY 31, 1994.
As discussed above, on December 14, 1994, the Company changed its fiscal year.
The Company believes comparison of results of operations to the five-month
transition period ended December 31, 1994 is not appropriate. Accordingly, the
Company has chosen the fiscal year ended July 31, 1994 as the most appropriate
period for comparison. During the five month transition period ended December
31, 1994, the Company reported at net loss of $1,170,000 or $.20 per share.
For the year ended December 31, 1995, the Company reported a net loss of
$2,198,000 or $.38 per share compared to net income of $928,000 or $.19 per
share for the fiscal year ended July 31, 1994. For each period, results from
operations have been adjusted for preferred stock accretion and preferred stock
- 19 -
<PAGE> 20
dividends paid. Earnings decreased due to lower sales volumes, a lower gross
margin, a $649,000 charge for an inventory valuation allowance and higher
selling, general and administrative expenses in anticipation of expanding
markets.
SALES, COST OF SALES AND GROSS PROFIT
Sales declined $2,558,000 during the year ended December 31, 1995 compared to
the year ended July 31, 1994. The following table summarizes product sales:
<TABLE>
<CAPTION>
Year ended December Year ended
31, 1995 July 31, 1994
------------------- -------------
<S> <C> <C>
Sales revenue $6,352,000 $8,910,000
========== ==========
Unit sales:
Blackjack 76 78
Craps 2 53
Roulette 16 --
---------- ----------
Total units 94 131
========== ==========
Total units sold to GCI 8 44
========== ==========
</TABLE>
Gross profit for 1995 was $1,589,000 or 25.0% of sales compared to $3,825,000 or
42.9% of sales for the 1994 fiscal year. Gross profit decreased in part due to
higher cost of game components resulting from unfavorable changes in Yen
exchange rates. Also, per game sales prices were lower in 1995 due to a higher
percentage of sales through distributors which resulted in reduced selling
prices. Gross profits are expected to remain lower than historical levels until
the effects of the new supplier agreements are fully realized and regulatory
approvals in new gaming jurisdictions are obtained.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense for the year ended December 31, 1995
increased $1,280,000 to $4,354,000 compared to $3,074,000 during fiscal year
1994. The increase is attributable primarily to increases in corporate office
expenses in anticipation of expanded markets and product development expenses.
INTEREST INCOME
Interest income for the year December 31, 1995 was $651,000 compared to $377,000
for fiscal year 1994. Interest income increased due to larger amounts invested
in interest bearing accounts, including interest bearing notes receivable from
the sale of product.
- 20 -
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $1,000,000 standby letter of credit/revolving credit
arrangement to facilitate acquisition of components and supplies from foreign
vendors. As of December 31, 1996, the full amount available was utilized.
The facility is collateralized by a $1,000,000 in short-term investments.
On October 20, 1994, the Company's Board of Directors authorized the Company to
repurchase up to 500,000 shares of its currently outstanding common stock from
time to time on the open market or in privately negotiated transactions,
depending on market conditions. As of December 31, 1996, the Company had
repurchased 248,500 shares at prices ranging from $3.56 to $6.08 per share. No
shares were repurchased in 1996.
The Company had $5,959,000, $8,749,000 and $5,796,000 in cash, cash equivalents
and available-for-sale securities as of December 31, 1996, December 31, 1995,
and December 31, 1994, respectively. The Company believes that its cash and cash
equivalents, available-for-sale securities, restricted investments and
additional financing capacity will be sufficient to meet the Company's current
liquidity and capital requirements. These resources and cash generated from
operations are expected to meet the Company's long-term capital requirements. To
adequately finance its expansion, the Company may issue additional equity or
debt securities. The Company had no long-term debt as of December 31, 1996.
Gains and losses on foreign currency transactions are recognized currently in
earnings. The Company's revenues from foreign markets are expected to increase
in the future, further subjecting the Company to the effects of fluctuations in
exchange rates. The Company does not consider this to be a significant risk at
this time.
SUBSEQUENT EVENTS - TECHNICAL GAME APPROVALS
The Company announced on February 4, 1997, that it had received technical game
approval for it multi-station blackjack machine from Colorado regulatory
authorities.
On February 20, 1997, the Nevada Gaming Commission granted the Company unanimous
approval of its Hot Shot DiceTM machine for use in Nevada casinos. On March 20,
1997, the Nevada Gaming Commission also granted the Company approval of its
Blackjack BlitzTM and Lightning Strike RouletteTM machines for use in Nevada
casinos. In Nevada, the Company anticipates placing these machines on a
"participation" basis wherein the Company will receive a percentage of the
games' net win at percentages similar to those received by other specialty game
suppliers in casino locations.
- 21 -
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Innovative Gaming Corporation of America:
We have audited the accompanying consolidated balance sheets of Innovative
Gaming Corporation of America and Subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1996 and 1995, the five months ended
December 31, 1994 and the year ended July 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Innovative Gaming
Corporation of America and Subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years ended December
31, 1996 and 1995, the five months ended December 31, 1994 and the year ended
July 31, 1994 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying schedule is presented for purposes
of complying with the Securities and Exchange Commission rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
February 14, 1997
- 22 -
<PAGE> 23
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
Consolidated Balance Sheets
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
As of December 31,
----------------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,993 $ 897
Available-for-sale securities 2,966 7,852
Restricted investments 1,000 542
Accounts receivable, net of allowances of $75 and $70 483 116
Current portion of notes receivable, net of allowances of $73 and $ - 177 873
Inventories 4,729 5,806
Prepaid expenses and other 174 351
-------- --------
Total current assets 12,522 16,437
NOTES RECEIVABLE, less current portion -- 951
PROPERTY AND EQUIPMENT, net 653 359
DEFERRED INCOME TAXES, net 720 854
INTANGIBLES, net 2,081 328
-------- --------
$ 15,976 $ 18,929
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 246 $ 335
Accrued liabilities 254 58
Notes payable 26 5
-------- --------
Total current liabilities 526 398
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized,
6,476,515 and 4,968,915 shares issued and outstanding 65 50
Class B non-voting common stock, $.01 par value,
1,025,000 shares authorized, 0 and 1,025,000 issued and outstanding -- 10
Additional paid-in capital 24,951 21,858
Accumulated deficit (9,559) (3,380)
Unearned compensation -- (10)
Net unrealized gain (loss) on available-for-sale securities (7) 3
-------- --------
Total stockholders' equity 15,450 18,531
-------- --------
$ 15,976 $ 18,929
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
- 23 -
<PAGE> 24
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the Year For the Year For the Five For the Year
Ended Ended Months Ended Ended
December 31, December 31, December 31, July 31,
1996 1995 1994 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET SALES $ 2,664 $ 6,352 $ 470 $ 8,910
COST OF SALES 2,135 4,763 271 5,085
------- ------- ------- -------
Gross profit 529 1,589 199 3,825
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,405 4,354 2,378 3,074
RESTRUCTURING COSTS 1,716 -- -- --
------- ------- ------- -------
Operating income (loss) (6,592) (2,765) (2,179) 751
INTEREST INCOME, net 568 651 298 377
------- ------- ------- -------
Income (loss) before income taxes (6,024) (2,114) (1,881) 1,128
PROVISION (BENEFIT) FOR INCOME TAXES 155 -- (752) 100
------- ------- ------- -------
Net income (loss) (6,179) (2,114) (1,129) 1,028
PREFERRED STOCK DIVIDENDS -- 67 33 80
PREFERRED STOCK ACCRETION -- 17 8 20
------- ------- ------- -------
Net income (loss) attributable to common shareholders ($6,179) ($2,198) ($1,170) $ 928
======= ======= ======= =======
INCOME (LOSS) PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS
Primary and fully diluted ($ 0.97) ($ 0.38) ($ 0.20) $ 0.19
======= ======= ======= =======
Weighted average common and
common equivalent shares outstanding 6,356 5,856 5,964 5,600
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 24 -
<PAGE> 25
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(In Thousands)
<TABLE>
<CAPTION>
Unrealized
Class B Non-Voting Gain/(Loss) on
Common Stock Common Stock Additional Available-
------------------- ------------------- Paid-in Accumulated Unearned for-sale
Shares Amount Shares Amount Capital Deficit Compensation Securities Total
-------- -------- -------- -------- -------- -------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 31, 1993 4,355 $ 44 -- $ -- $ 8,426 $ (940) $ (86) $ -- $ 7,444
Common stock issued upon
exercise of warrants, net of
executory costs of $164 1,522 15 -- -- 12,759 -- -- -- 12,774
Stock options and warrants
exercised 130 1 -- -- 661 -- -- -- 662
Stock option compensation
earned -- -- -- -- -- -- 44 -- 44
Preferred stock dividends
paid -- -- -- -- -- (80) -- -- (80)
Preferred stock accretion
adjustment -- -- -- -- -- (20) -- -- (20)
Net income -- -- -- -- -- 1,028 -- -- 1,028
-------- -------- -------- -------- -------- -------- -------- -------- --------
BALANCE, July 31, 1994 6,007 60 -- -- 21,846 (12) (42) -- 21,852
Common stock repurchase
and retirement (199) (2) -- -- (995) -- -- -- (997)
Common stock exchanged for
Class B common stock (1,025) (10) 1,025 10 -- -- -- -- --
Stock option compensation
earned -- -- -- -- -- -- 8 -- 8
Preferred stock dividends
paid -- -- -- -- -- (33) -- -- (33)
Preferred stock accretion
adjustment -- -- -- -- -- (8) -- -- (8)
Net loss -- -- -- -- -- (1,129) -- -- (1,129)
-------- -------- -------- -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1994 4,783 48 1,025 10 20,851 (1,182) (34) -- 19,693
Common stock repurchase
and retirement (50) (1) -- -- (202) -- -- -- (203)
Preferred stock conversion 59 1 -- -- 249 -- -- -- 250
Stock options and warrants
exercised 177 2 -- -- 966 -- -- -- 968
Unearned compensation
adjustments -- -- -- -- (6) -- 24 -- 18
Unrealized gain on
available-for-sale securities -- -- -- -- -- -- -- 3 3
Preferred stock dividends
paid -- -- -- -- -- (67) -- -- (67)
Preferred stock accretion
adjustment -- -- -- -- -- (17) -- -- (17)
Net loss -- -- -- -- -- (2,114) -- -- (2,114)
-------- -------- -------- -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1995 4,969 50 1,025 10 21,858 (3,380) (10) 3 18,531
Class B common stock exchange
for common stock 1,025 10 (1,025) (10) -- -- -- -- --
Stock options and warrants
exercised 258 3 -- -- 1,014 -- -- -- 1,017
Common stock issued for
purchase of intangible assets 225 2 -- -- 2,079 -- -- -- 2,081
Unearned compensation
adjustments -- -- -- -- -- -- 10 -- 10
Unrealized loss on
available-for-sale securities -- -- -- -- -- -- -- (10) (10)
Net loss -- -- -- -- -- (6,179) -- -- (6,179)
-------- -------- -------- -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1996 6,477 $ 65 -- $ -- $ 24,951 $ (9,559) $ -- $ (7) $ 15,450
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 25 -
<PAGE> 26
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
Consolidated Statements Of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
For the Year For the Year For the Five For the Year
Ended Ended Months Ended Ended
December 31, December 31, December 31, July 31,
1996 1995 1994 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss ($ 6,179) ($ 2,114) ($ 1,129) $ 1,028
Adjustments to reconcile net loss to
cash flows from operating activities -
Depreciation and amortization 566 338 142 136
Stock option compensation earned 10 17 8 44
Loss on sale of assets 103 - - -
Deferred income taxes 134 - (752) (31)
Provision for inventory obsolescence 1,308 649 - -
Provision for bad debts 78 70 - -
Changes in operating assets and liabilities:
Accounts and notes receivable 1,202 1,388 2,379 (5,777)
Inventories (232) 802 (1,936) (4,407)
Prepaid expenses and other 177 (251) 162 247
Accounts payable and accrued expenses 107 (308) (100) 58
-------- -------- -------- --------
Net cash provided by (used for) operating activities (2,726) 591 (1,226) (8,702)
-------- -------- -------- --------
INVESTING ACTIVITIES:
Purchases of available-for-sale securities (5,936) (15,092) (1,004) (3,125)
Proceeds from sale of available-for-sale securities 10,350 10,800 - 5,805
Payment on covenant not to compete (92) - - -
Proceeds from sale of property and equipment 45 - - -
Purchases of property and equipment (583) (107) (29) (366)
-------- -------- -------- --------
Net cash provided by (used for) investing activities 3,784 (4,399) (1,033) 2,314
-------- -------- -------- --------
FINANCING ACTIVITIES:
Net payments on line of credit - - - (371)
Proceeds from financing agreements 26 - - -
Payments on long-term obligations (5) (34) (15) (22)
Redemption of Series A Preferred Stock - (750) - -
Preferred stock dividends paid - (67) (33) (80)
Net proceeds from sale of common stock 1,017 967 - 13,287
Payments on repurchase of common stock - (203) (996) -
-------- -------- -------- --------
Net cash provided by (used for) financing activities 1,038 (87) (1,044) 12,814
-------- -------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,096 (3,895) (3,303) 6,426
CASH AND CASH EQUIVALENTS, beginning of period 897 4,792 8,095 1,669
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 2,993 $ 897 $ 4,792 $ 8,095
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest $ 3 $ 5 $ 2 $ 14
======== ======== ======== ========
Cash paid for income taxes $ 4 $ 55 $ 59 $-
======== ======== ======== ========
Noncash transactions:
Series B Preferred Stock converted to common stock $- $ 250 $- $-
======== ======== ======== ========
Exchange of common stock for intangible assets $ 2,081 $- $- $-
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 26 -
<PAGE> 27
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
Innovative Gaming Corporation of America ("the Company") was incorporated in the
State of Minnesota on September 19, 1991. The Company is in the business of
developing, manufacturing and distributing gaming equipment.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period.
Ultimate results could differ from those estimates.
REGULATION
The manufacture, distribution and sale of the Company's products are regulated
by various jurisdictions and entities, including requirements to obtain licenses
and product approval. The Company is presently seeking licenses and product
approval in several jurisdictions. Failure to successfully obtain licenses,
approvals, or meet other regulatory requirements could materially impact the
expansion and future operation of the Company.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Innovative Gaming
Corporation of America and its wholly owned subsidiary, Innovative Gaming, Inc.
All significant intercompany transactions have been eliminated.
FISCAL YEAR-END TRANSITION PERIOD PRESENTATION
On December 14, 1994, the Company changed its fiscal year-end from July 31 to
December 31. This change created a transitional period which began on August 1,
1994, and ended on December 31, 1994.
CASH AND CASH EQUIVALENTS
The Company considers all financial instruments which are highly liquid and have
original maturities of three months or less to be cash and cash equivalents
which are readily convertible to cash. Cash equivalents consist primarily of
demand deposits.
- 27 -
<PAGE> 28
RESTRICTED INVESTMENTS
At December 31, 1996, $1.0 million of investments were pledged as collateral
against certain bank credit arrangements.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost with depreciation provided for using
the straight-line method over the useful lives of the assets or the lease term,
whichever is shorter. Maintenance, repairs and minor renewals are expensed when
incurred.
<TABLE>
<CAPTION>
Useful Life 1996 1995
----------- ---- ----
<S> <C> <C> <C>
Office equipment 5 years $250 $359
Display Games 5 years 142 -
Manufacturing equipment 5 years 240 162
Leasehold improvements Life of lease 224 24
---- ----
Total property and equipment 856 545
Less: Accumulated Depreciation (203) (186)
---- ----
Total property and equipment, net $653 $359
==== ====
</TABLE>
INVENTORIES
Inventories are recorded at the lower of cost or market value. Cost is
determined according to the first-in, first-out accounting method. Inventories
consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Game components and parts $ 6,269 $ 6,455
Work in process 128 --
Finished goods 225 --
Inventory reserves (1,893) (649)
------- -------
Total inventories, net $ 4,729 $ 5,806
======= =======
</TABLE>
INTANGIBLES
The Company amortizes intangibles on a straight line basis over their estimated
economic lives.
REVENUE RECOGNITION
Revenue from the sale of product is recognized upon transfer of title and risk
of loss to the customer. Deposits received from customers in advance of delivery
are deferred until the revenue is recognized.
During 1996, a majority of the Company's sales were to three distributors. These
three distributors accounted for 37%, 32% and 24% of sales, respectively. During
1995, a majority of the Company's sales were to three customers. One customer
accounted for 14% of sales and two of the Company's distributors accounted for
41% and 16% of sales, respectively. During the year ended July 31, 1994, a
majority of the
- 28 -
<PAGE> 29
Company's sales were to three customers. Grand Casinos, Inc. accounted for 26%
of sales and two of the Company's distributors accounted for 23% and 34% of
sales, respectively. For the years ended December 31, 1996 and 1995, and July
31, 1994, no other distributors or customers accounted for greater than 10% of
sales.
RESEARCH AND DEVELOPMENT COSTS
The Company engages in the development of new and existing products. Research
and development costs are expensed as incurred. The Company expensed
approximately $1,132, $476, $263 and $136 for the years ended December 31, 1996
and 1995, the five months ended December 31, 1994 and the year ended July 31,
1994, respectively.
RESTRUCTURING COSTS
In 1996, the Company recognized $1,716 of restructuring costs, which included
expenses related to the Company's relocation to Reno, Nevada, management
transition and product focus.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, (Accounting for Income Taxes) ["Statement 109"],
whereby deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be removed or settled. Under Statement No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
To the extent the amount deductible for income tax purposes from stock option
plans exceeds the amount charged to operations for financial statement purposes,
the related tax benefits are credited to capital stock when realized.
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is determined by dividing income available to
common stockholders by the weighted average number of common share and common
share equivalents outstanding during each period. Common share equivalents
include the dilutive effects of options, warrants and convertible redeemable
preferred stock which are assumed to be exercised or converted into common
shares at the beginning of the periods if they are dilutive.
FOREIGN CURRENCY TRANSACTIONS
Transactions which occur in currencies other than U.S. dollars are translated to
U.S. dollars for financial reporting purposes. Gains and losses from this
process are recorded in the results of operations.
- 29 -
<PAGE> 30
LONG-LIVED ASSETS
During 1995, the Company adopted Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of' ("Statement No.121"). Statement No.121 establishes
accounting standards for the recognition and measurement of impairment of
long-lived assets, certain identifiable intangibles and goodwill either to be
held or disposed. In management's opinion, the adoption of Statement No. 121 did
not have a material impact on the Company's financial position or results of
operations.
Long-lived assets, including intangibles, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. For assets which produce future cash flows, an
estimate of undiscounted future cash flows is compared to the carrying amount to
determine if an impairment exists. For assets which do not produce quantifiable
future cash flows, such as intangibles, impairment is measured at the enterprise
level. If an asset is determined to be impaired, the loss is measured based on
quoted market prices in an active market, if available. If quoted market prices
are not available, the estimate of fair market value is based on the best
information available, including considering prices for similar assets and the
results of valuation techniques to the extent available.
RECLASSIFICATIONS
Certain accounts in the prior year financial statements have been reclassified
for comparative purposes to conform with the presentation in the current year
financial statements. These reclassifications had no effect on previously
reported net income or stockholders' equity.
2. RELATIONSHIP WITH GRAND CASINOS, INC.:
Grand Casinos, Inc. ("GCI") is in the business of managing and developing
casinos. Two officer /directors of GCI are also directors of the Company. The
Company has agreed to sell up to 125 machines to GCI under the terms of a
discount machine agreement at significantly reduced prices for the purpose of
testing, evaluating and marketing the Company's products. Through December 31,
1996, the Company has sold 61 machines to GCI, pursuant to the agreement.
3. AVAILABLE-FOR-SALE SECURITIES:
The Company classifies all investments which are not cash equivalents as
available-for-sale securities with all gross unrealized gains or losses included
as a separate component of equity. There were no material gross unrealized gains
or losses at either December 31, 1996 or 1995.
Available-for-sale securities at December 31, 1996 and 1995, consisted of United
States government and corporate securities and certificates of deposit.
Available-for-sale securities at December 31, 1996, were reported at fair value,
and consisted of government and corporate debt securities and certificates of
deposit with an amortized cost of $2,966 and no significant gross unrealized
holding gains or losses. All available-for-sale securities are due within one
year of December 31, 1996, except for $750 and $100 government debt securities,
which are due in July 1998 and December 1998, respectively. The market value of
the portfolio was $7,852 at December 31, 1995, with no significant gross
unrealized holding
- 30 -
<PAGE> 31
gains or losses. Proceeds from the sale of available-for-sale securities were
$10,350 for the year ended December 31, 1996, $10,800 for the year ended
December 31, 1995, $0 for the five months ended December 31, 1994 and $5,805 for
the year ended July 31, 1994.
4. NOTES RECEIVABLE:
The Company has granted certain customers extended payment terms under sales
contracts. These contracts are generally for terms of one to five years and are
collateralized by the equipment sold. The notes carry interest at rates ranging
from 10% to 13%. The balance due on notes receivable as of December 31, 1996 was
$177, net of reserve for doubtful accounts of $73. All notes mature within
twelve months.
The financial instruments that subject the Company to concentrations of credit
risk consist principally of accounts and notes receivable. Accounts and notes
receivable are concentrated in specific legalized gaming jurisdictions. At
December 31, 1996, the following concentrations of credit risk existed:
<TABLE>
<S> <C>
Germany 50%
Holland 29%
North Carolina and Other 21%
---
Total 100%
===
</TABLE>
5. INTANGIBLE ASSETS:
Intangible assets consisted of the following at December 31:
<TABLE>
<CAPTION>
Useful Life 1996 1995
----------- --------- -----
<S> <C> <C> <C>
Covenant not to compete 18 months $ - $ 273
Product patent rights 5 to 10 years 2,332 250
Nevada distribution rights 10 years 250 250
--------- -----
Total intangible assets 2,582 773
Less: accumulated amortization (501) (445)
--------- -----
Total intangible assets, net $ 2,081 $ 328
========= =====
</TABLE>
On February 2, 1996, the Company acquired the balance of all remaining
intellectual property including patents, trademarks, picture rights and
copyrights for its games from its Japanese suppliers in exchange for an
aggregate 225,000 shares of IGCA common stock.
6. FINANCING ARRANGEMENTS:
The Company has a standby letter of credit/revolving credit facility primarily
to facilitate the acquisition of component parts and supplies. At December 31,
1996, the Company had a $1,000 standby letter of credit/revolving credit
facility with a bank that was secured by a $1,000 certificate of deposit, which
is included in the accompanying balance sheets as restricted investments. At
December 31, 1996, the full amount available was utilized. There were no amounts
outstanding on such facility at December 31, 1995.
- 31 -
<PAGE> 32
7. STOCKHOLDERS' EQUITY:
INITIAL PUBLIC OFFERING/REDEMPTION OF CLASS A WARRANTS
In June 1993, the Company completed an initial public offering of 1,523,750
Units consisting of 1,523,750 shares of common stock and 1,523,750 Redeemable
Class A Warrants at an offering price of $5.75 per Unit and received net
proceeds of $7,426. In April 1994, the Company received net proceeds of $12,774
from the exercise of 1,522,110 Redeemable Class A Warrants at $8.50 per share.
Remaining Redeemable Class A Warrants were redeemed.
In connection with the initial public offering, the Company sold a Unit Purchase
Option to its principal underwriter to purchase up to 125,000 Units for $6.90
per Unit expiring in 1998. No Units have been acquired under this option through
December 31, 1996.
PREFERRED STOCK
In April 1993, the Company sold 7,500 shares of Redeemable Non-Voting Series A
Preferred Stock, 2,500 shares of Convertible Redeemable Non-Voting Series B
Preferred Stock, 150,000 Redeemable Warrants to purchase common stock at a price
of $4.00 per share, and the right to designate 100,000 shares of outstanding
common stock for registration for resale at the Company's expense. Both Series A
and Series B Preferred Stocks required the Company to pay a cumulative mandatory
dividend at the annual rate of $8.00 per share. On October 2, 1995, the Series A
Preferred Stock was redeemed for its stated value of $750 and the 2,500 shares
of Series B Convertible Redeemable Preferred Stock were converted into 58,822
shares of common stock.
STOCK REPURCHASE PLAN
On October 20, 1994, the Company's Board of Directors authorized the Company to
repurchase up to 500,000 shares of its outstanding common stock from time to
time on the open market or in privately negotiated transactions. As of December
31, 1996, the Company had repurchased 248,500 shares at prices ranging from
$3.56 to $6.08 per share, for total consideration of $1,199. No shares were
repurchased in 1996.
ISSUANCE AND EXCHANGE OF CLASS B STOCK
On October 20, 1994, the Company issued 1,025,000 shares of its Class B
Non-Voting Common Stock in exchange for 1,025,000 shares of common stock held by
Grand Casinos, Inc. ("GCI"). On December 1, 1995, the Company and GCI amended
their earlier agreement to provide that if the Company did not receive certain
approvals from the Nevada Gaming Commission ("the Nevada Approvals") on or
before December 31, 1995, GCI would, subject to approval of the Minnesota
Commissioner of Commerce, exchange its 1,025,000 shares of Class B non-voting
common stock for 1,025,000 shares of the Company's common stock. The Company did
not receive the Nevada Approvals on or before December 31, 1995. On March 21,
1996, GCI converted 1,025,000 shares of Class B non-voting common stock into
1,025,000 shares of the Company's common stock.
- 32 -
<PAGE> 33
At the time of the original exchange, the Company granted GCI certain
registration rights and the option to purchase 102,500 shares of common stock at
$7.00 per share, increased the number of games GCI may purchase under the
existing discount machine purchase agreement by 50 games (up to an aggregate 125
games) and entered into a transition plan with respect to Board of Directors'
positions based upon the timing of the Company's receipt of regulatory
approvals.
STOCK OPTIONS AND WARRANTS
The Company has a Stock Option and Compensation Plan (the "Plan"), pursuant to
which options and other awards to acquire an aggregate of 1,100,000 shares of
the Company's common stock may be granted. Stock options, stock appreciation
rights, restricted stock, other stock and cash awards may be granted under the
Plan. The Plan is administered by a stock option committee which has the
discretion to determine the number and purchase price of shares subject to stock
options (which may be below the fair value of the common stock on the date
thereof), the term of each option and the time or times during its term when the
option becomes exercisable. Options are generally exercisable in equal amounts
over a five-year period from the date of grant. During 1995 and 1994, the
exercise prices of certain options ranging from $6.00 to $15.75 were reduced to
$4.00 (fair market value on the date of repricing). On October 8, 1996, the
exercise prices of certain options ranging from $7.00 to $11.50 were reduced to
$4.75 (fair market value on the date of repricing).
The Company accounts for the Plan under APB Opinion No. 25 "Accounting for Stock
Options Issued to Employees", under which no compensation cost has been
recognized. FASB Statement No. 123 "Accounting for Stock-Based Compensation" was
issued by the FASB in 1995 and, if fully adopted, changes the methods for
recognition of cost on plans similar to that of the Company. Adoption of FASB
Statement No. 123 is optional, however, pro forma disclosures as if the Company
had adopted the cost recognition method are required. Had compensation cost for
the Plan been determined consistent with FASB Statement No. 123, the Company's
results of operations and earnings per share would have been changed to the
following pro forma amounts:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Net loss: As reported $(6,179) $(2,114)
Pro forma $(6,520) $(2,132)
Primary and fully-diluted EPS: As reported $(0.97) $(0.38)
Pro forma $(1.03) $(0.38)
</TABLE>
Because the Statement No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma comparison
cost may not be representative of that to be expected in future years.
- 33 -
<PAGE> 34
A summary of the status of the Plan at December 31, 1996, 1995 and 1994, and
changes during the periods then ended is presented in the table and narrative
below:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
-------------------------- -------------------------- ------------------------
Wtd Avg Wtd Avg Wtd Avg
Number Ex Price Number Ex Price Number Ex Price
------------- ------------ ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period 352,600 $3.99 510,200 $4.56 500,200 $4.57
Granted 540,500 4.75 45,000 4.61 10,000 4.00
Exercised (207,600) 3.94 (176,600) 5.48 - -
Forfeited (79,000) 4.16 (26,000) 5.38 - -
------------- ------------- -----------
Outstanding at end of
period 606,600 $4.67 352,600 $3.99 510,200 $4.56
------------- ------------- -----------
Exercisable at end of
period 131,000 $4.52 133,100 $3.89 205,000 $5.09
Weighted average fair
value of options granted
$2.95 $2.69 $2.69
</TABLE>
As of December 31, 1996, 540,500 of the 606,500 options outstanding have
exercise prices of $4.75, with a weighted average remaining contractual life of
9.77 years. An additional 52,000 options have an exercise price of $4.00 and a
weighted average remaining contractual life of 7.32 years. The remaining 14,000
options have an exercise price of $4.25 and a weighted average remaining
contractual life of 8.05 years. Of the exercisable options, 91,000 have an
exercise price of $4.75 and 40,000 have an exercise price of $4.00. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for the
1996 grants: risk-free interest rate of 10.0 percent; expected dividend yield of
0.0 percent; expected lives of 5 years; expected volatility of 61.8 percent.
The Company has issued stock purchase warrants with a variety of terms and
conditions. During 1996, the exercise prices of certain warrants were reduced
from $11.00 and $15.00 to $10.00 and $13.00, respectively.
The following summarizes stock purchase warrant transactions during the period:
<TABLE>
<CAPTION>
Number Exercise Prices
--------- ----------------
<S> <C> <C>
Outstanding July 31, 1994 400,000 $4.00 - $8.50
Granted 352,500 7.00 - 15.00
Exercised (100,000) 4.00
--------- ----------------
Outstanding December 31, 1994 652,500 4.00 - 15.00
Granted - -
Exercised - -
Canceled/Expired - -
--------- ----------------
Outstanding December 31, 1995 652,500 4.00 - 15.00
Granted - -
Exercised (50,000) 4.00
Canceled/Expired - -
--------- ----------------
Outstanding December 31, 1996 602,500 $6.90 - $13.00
========= ================
</TABLE>
- 34 -
<PAGE> 35
At December 31, 1996, 602,500 warrants were exercisable. The warrants expire at
various dates through September, 2001.
8. INCOME TAXES:
Provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
For the Year For the Year For the Five For the Year
Ended Ended Months Ended Ended
Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994 July 31, 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Current:
Federal $ 21 $-- $ -- $ 106
State -- -- -- 25
----- --- ----- -----
Total current expense 21 -- -- 131
Deferred 134 -- (752) (31)
----- --- ----- -----
Total provision (benefit) $ 155 $-- ($752) $ 100
===== === ===== =====
</TABLE>
The tax effects of temporary differences giving rise to the deferred items are
as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,354 $ 970
Inventory reserves 1,261 657
Other 691 63
------- -------
Total deferred tax assets 5,306 1,690
Valuation allowance (4,586) (836)
------- -------
Deferred tax assets, net of allowance $ 720 $ 854
======= =======
</TABLE>
In accordance with Statement No. 109, the gross deferred tax asset at December
31, 1996, of $5,306, has been reduced by a valuation allowance of $4,586,
resulting in a net deferred tax asset of $720. The valuation allowance reduces
the deferred tax asset to an amount which management believes is more likely
than not to be realized.
At December 31, 1996, the Company has approximately $8,385 of net operating loss
carryforwards for federal income tax purposes. These losses expire beginning
2009. The use of approximately $1,250 of these losses is limited to
approximately $250 per year for the next five years because the loss was
generated in a short tax year.
- 35 -
<PAGE> 36
9. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company has entered into certain noncancelable operating lease agreements
related to office and warehouse space and equipment. Total lease expense under
operating leases was $222, $124, $60 and $68 for the years ended December 31,
1996 and 1995, the five months ended December 31, 1994, and the year ended July
31, 1994, respectively. The minimum annual rental commitments under operating
leases are as follows for the years ending December 31:
<TABLE>
<S> <C>
1997 $272
1998 279
1999 299
2000 297
2001 254
------
Total $1,401
======
</TABLE>
LITIGATION
The Company is involved in legal actions in the ordinary course of its business.
While no reasonable estimates of potential liability can be determined,
management believes that such legal actions will be resolved without a material
effect on the Company's financial position or results of operations.
EMPLOYMENT CONTRACTS
The Company has employment contracts with various officers with remaining terms
ranging from one to three years at amounts approximating their current levels of
compensation. The Company's remaining aggregate commitment at December 31, 1996,
under such contracts is approximately $1,238. These agreements may also include
additional compensation to officers related to sales commission bonuses that
could be equal to two percent of the Company's sales.
10. DISTRIBUTORSHIP AGREEMENTS:
In February 1996, the Company entered into an exclusive distribution agreement
with Aristocrat Leisure Industries of New South Wales, Australia for the
marketing and distribution of games in Australia, New Zealand, Papua New Guinea,
Taiwan, New Caledonia, Malaysia, the Philippines and Singapore (hereinafter
"Australasia"). The Company has granted Aristocrat an initial five year
exclusive license expiring February 2001 to distribute its blackjack, craps and
roulette games to all legalized Australasia video gaming jurisdictions. Pursuant
to the agreement, the Company has agreed to sell its games at discounted
distributor's pricing in exchange for a minimum purchase quantity of 100 units
per year, with a rolling six month sales materials forecast. Aristocrat has
submitted the Company's blackjack, and roulette games for technical approval
with New South Wales, Australia gaming authorities. Aristocrat may not
distribute games prior to receipt of any and all necessary regulatory approvals.
- 36 -
<PAGE> 37
In March 1996, the Company entered into exclusive agreements with Ludi S.F.M.
and with S.A.M. Eurusa for the exclusive distribution of the Company's games in
France, Monaco, Morocco, Tunisia and Italy. Ludi and Eurusa are affiliated
entities. Under the agreement, Ludi and Eurusa have been granted three-year
exclusive licenses, expiring March 1999, to distribute the Company's blackjack,
craps and roulette games, subsequent to any and all regulatory approvals. The
agreements may be renewed for successive one-year terms upon the agreement of
the parties and on the terms and conditions set forth in the distribution
agreements or such other terms and conditions as the parties may agree and may
be terminated by either party under certain circumstances. Pursuant to the
agreement, the Company has agreed to sell its games to Ludi and Eurusa at the
Company's then current retail price less a distributor's discount.
The Company also has exclusive or nonexclusive distributorship agreements with
Bally Gaming International, Drew Distributing, Sodak Gaming, Inc. and Vista
Gaming Corporation.
- 37 -
<PAGE> 38
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
Schedule II - Valuation and Qualifying Accounts
(In Thousands)
<TABLE>
<CAPTION>
Description Balance Charged to Amount Balance
- ----------- Beginning of Cost and Written End of
Period Expenses Off Period
------------ ---------- -------- --------
<S> <C> <C> <C> <C>
Reserve for inventory obsolescence:
For the five months ended 12/31/94 $ - $ - $ - $ -
For the year ended 12/31/95 - 649 - 649
For the year ended 12/31/96 649 1,308 64 1,893
</TABLE>
<TABLE>
<CAPTION>
Description Balance Charged to Amount Balance
- ----------- Beginning of Cost and Written End of
Period Expenses Off Period
------------ ---------- -------- --------
<S> <C> <C> <C> <C>
Allowance for doubtful notes and accounts receivable:
For the five months ended 12/31/94 $ - $ - $ - $ -
For the year ended 12/31/95 - 70 - 70
For the year ended 12/31/96 70 78 - 148
</TABLE>
- 38 -
<PAGE> 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No change of accountants or disagreements on any matters of accounting
principals or practices or Financial Statement disclosures have occurred.
- 39 -
<PAGE> 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information beginning immediately following the caption "Election of
Directors" to, but not including, the caption "Executive Compensation" in the
Company's Proxy Statement, to be filed with the Securities and Exchange
Commission within 120 days after the close of the Company's year ended December
31, 1996 and forwarded to stockholders prior to the Company's 1997 Annual
Meeting of Shareholders (the "1997 Proxy Statement"), is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information in the 1997 Proxy Statement beginning immediately following the
caption "Executive Compensation" to, but not including, the caption
"Compensation Committee Interlocks and Insider Participation," is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the 1997 Proxy Statement beginning immediately following the
caption "Voting Securities and Principal Holders Thereof " to, but not
including, the caption "Election of Directors," is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the 1997 Proxy Statement under the caption "Certain
Transactions" is incorporated herein by reference.
- 40 -
<PAGE> 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Consolidated Balance Sheets as of December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . 23
Consolidated Statements of Operations for the years ended December 31, 1996 and 1995, the five
months ended December 31, 1994 and the year ended July 31, 1994 . . . 24
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996 and
1995, the five months ended December 31, 1994 and the year ended July 31, 1994 . . . . . . . 25
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995, the
five months ended December 31, 1994 and the year ended July 31, 1994 . . . . . . . . . . . . 26
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
- 41 -
<PAGE> 42
(a)(3) Exhibits
<TABLE>
<S> <C>
3.1 Articles of Incorporation, as amended*
3.2 Bylaws*
10.1 1992 Stock Option and Compensation Plan, as amended** +
10.2 Non-exclusive Distributorship Agreement between Innovative Gaming, Inc. and Sodak Gaming, Inc.
dated August 23, 1993**
10.3 Agreement by and between the Company and Grand Casinos, Inc., dated as of July 28,
1994 **
10.4 Agreement between the Company and NANAO dated as of January 21, 1994*
10.5 Agreement between the Company and IREM, dated as of January 22, 1994*
10.6 Exclusive Distributorship Agreement by and among the Company, Drew
Distributing and Hugh Andrews, dated as of January 24, 1994*
10.7 Employment Agreement between the Company and Edward G. Stevenson dated February 15, 1996***
10.8 Option Agreement between the Company and Edward G. Stevenson dated February 15, 1996***
10.9 Exclusive Distributorship Agreement between the Company and Aristocrat Leisure Industries
PTY LTD dated February 7, 1996***
10.10 Assignment between the Company, NANAO and IREM dated February 2, 1996***
10.11 Parts Supply Agreement between the Company and IREM dated February 2,1996***
10.12 Agreement between the Company and H Square Corporation dated April 26, 1996***
10.13 Preferred Stock Redemption Agreement between the Company and D. Bradly Olah
Dated October 2, 1995***
10.14 Second Amendment to Share Exchange Agreement between the Company and Grand Casinos, Inc.
dated December 1, 1995***
10.15 Exclusive Distributorship Agreement between the Company and Ludi S.F.M. dated March 5, 1996***
10.16 Exclusive Distributorship Agreement between the Company and S.A.M. EURSA dated March 5, 1996***
10.17 Fourth Amendment to Letter of Credit Agreement between the Company and First Bank National Association,
dated December 1, 1996
10.18 Product Development and Revenue Sharing Agreement between the Company and IGT, dated November 18, 1996
10.19 Sublease agreement between the Company and Thomas & Betts Corporation, dated May 14, 1996
10.20 Lease agreement between the Company and Dermody Properties, dated July 9, 1996
21 List of Subsidiaries*
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Arthur Andersen LLP
27 Financial Data Schedule - which is only submitted electronically to the Securities and Exchange Commission
for EDGAR information purposes.
</TABLE>
* Incorporated herein by reference to the Registrant's Registration
Statement on Form SB-2 (Fi1e No. 33-61492C.)
** Incorporated herein by reference to the Registrant's Registration
Statement on Form SB-2 (Fi1e No.33-70450).
*** Incorporated herein by reference to the Registrant's Report on Form 10-K
for the year ended December 31, 1995
+ Agreement relates to Executive Compensation
- 42 -
<PAGE> 43
(b) Reports on Form 8-K.
No current Reports on Form 8-K were filed by the Company during the
fourth quarter ended December 31, 1996.
- 43 -
<PAGE> 44
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INNOVATIVE GAMING CORPORATION OF AMERICA
Registrant
Date: March 24, 1997 By: /s/ Edward G. Stevenson
-----------------------------------------------
Name: Edward G. Stevenson
Title: President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on
March 24, 1997.
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
/s/ Edward G. Stevenson President, Chief Executive Officer and Director
- ------------------------------------------ (principal executive officer)
Edward G. Stevenson
/s/ Scott Shackelton Vice President-Finance, Chief Financial Officer
- ------------------------------------------ (principal accounting officer)
Scott Shackelton
/s/ Lyle Berman Director
- ------------------------------------------
Lyle Berman
/s/ Stanley M. Taube Director
- ------------------------------------------
Stanley M. Taube
</TABLE>
- 44 -
<PAGE> 1
EXHIBIT 10.17
FOURTH AMENDMENT TO LETTER OF CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO LETTER OF CREDIT AGREEMENT (this "Amendment")
is made and entered into as of December 1, 1996 by and between INNOVATIVE
GAMING, INC., a Nevada corporation and successor by merger to Innovative Gaming,
Inc., a Minnesota corporation (collectively, the "Borrower") and FIRST BANK
NATIONAL ASSOCIATION, a national banking association (the "Bank").
RECITALS
1. The Bank and the Borrower have entered. into a Letter of Credit
Agreement dated as of October 26, 1993, as amended by that Amendment to Letter
of Credit Agreement dated as of October 28, 1993, by that Second Amendment to
Letter of Credit Agreement dated as of October 31, 1994 and by that Third
Amendment to Letter of Credit Agreement and Amendment to Pledge Agreement dated
as of November 22, 1995 (as amended, the "Credit Agreement");
2. The obligations and indebtedness of the Borrower to the Bank are
secured, inter alia, by that Pledge Agreement dated as of October 26, 1993 by
the Borrower in favor of the Bank, as amended by that Third Amendment to Letter
of Credit Agreement and Amendment to Pledge Agreement dated as of November 22,
1995 (as amended, the "Pledge Agreement"); and
3. The Borrower has requested the Bank to amend certain provisions of
the Credit Agreement and the Bank has agreed to do so, subject to the terms and
conditions set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto hereby covenant
and agree to be bound as follows:
Section 1. Capitalized Terms. Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to them in the Credit
Agreement, unless the context shall otherwise require.
Section 2. Amendment to Credit Agreement. The Credit Agreement is
hereby amended as follows:
2.1 Definitions. Section 1.1 of the Credit Agreement is
amended by amending the definitions of "Commitment Amount." "Commitment Ending
Date" and "Maturity Date" in their entireties as follows:
"Commitment Amount": $900,000.00, or such greater amount but
only to the extent
<PAGE> 2
arising from changes in foreign exchange rates for Japanese
yen causing the value of the Letters of Credit (if denominated in Japanese yen)
in equivalent United States dollars to exceed $900,000.00.
"Commitment Ending Date": The earlier of May 13, 1997 and the
Termination Date.
"Maturity Date": May 13, 1997.
2.2 Letters of Credit Commitment. Section 2.1 of the Credit Agreement
is amended in its entirety as follows:
Section 2.1 Letters of Credit. Upon the terms and
subject to the conditions of this Agreement, the Bank agrees
to issue Letters of Credit for the account of the Company from
time to time between the Closing Date and the Commitment
Ending Date in such amounts as the Company shall request up to
an aggregate amount at any time outstanding not exceeding
$900,000.00; provided that no Letter of Credit will be issued
in any amount which, after giving effect to such issuance,
would cause Total Outstandings to exceed the Commitment
Amount.
2.3. Commitment Fee. Section 2.9 of the Credit Agreement is amended in
its entirety as follows:
Section 2.9. Commitment Fee. The Company shall pay to
the Bank a commitment fee (the "Commitment Fee") (a) for the
period from the Closing Date through November 15, 1995 in the
amount of $30,000 per annum, payable in quarterly installments
of $7,500 each on each of the Closing Date, January 1, 1994,
April 1, 1994, July 1, 1994, October 27, 1994, January 1,
1995, April 1, 1995, July 1, 1995; (b) an upfront Commitment
Fee for the period of November 22, 1995 through November 30,
1996 in the amount of $5,420; and (c) an upfront Commitment
Fee for the period of December 1, 1996 through the Commitment
Ending Date in the amount of $9,000. In the event that the
Bank agrees to extend the expiration of any Letter of Credit
pursuant to Section 2.3, the Company shall pay to the Bank an
upfront pro rated fee for the period of such extension, based
upon an annual fee equal to one percent (1%) of the Commitment
Amount.
2.4 Section 2.11 of the Credit Agreement is amended in its entirety as
follows:
Section 2.11 Additional Collateral; Substituted
Collateral.
(a) The Company acknowledges the Letters of Credit may be denominated
in Japanese yen rather than United States dollars. If at any time, due to
changes in foreign currency exchange rates, the value of the Letters of Credit
exceeds, as determined by the Bank in its sole discretion, $900,000, the
Company agrees to pledge and deliver additional collateral to the Bank so that
the value of collateral pledged pursuant to the Pledge Agreement and in which
the Bank has otherwise been granted a security interest in equal to or greater
than the value of the Letters of Credit in equivalent United States dollars, as
determined by the Bank in its sole discretion.
<PAGE> 3
(b) Subject expressly to the provisions of Section 2.11(a) regarding
the pledge and delivery of additional collateral on the terms set forth
therein, in the event that the Borrower determines to exercise an early
withdrawal of the Pledged Certificate of Deposit (as that term is defined in
the Pledge Agreement) prior to the earlier of the Commitment Ending Date and
the Final Maturity for the Pledged Certificate of Deposit (as set forth in
Schedule I to the Pledge Agreement), the Bank shall allow the Borrower to
substitute for the Pledged Certificate of Deposit cash or other cash
equivalents satisfactory to the Bank in its sole discretion, in an amount equal
to the greater of $900,000 or such amount as may be required by the Bank to be
pledged and delivered to the Bank pursuant to Section 2.11(a), as Collateral
for the Obligations (as those terms are defined in the Pledge Agreement).
Section 3. Effectiveness of Amendments. The amendments contained in
this Amendment shall become effective upon delivery to the Bank of, and
compliance by the Borrower with, the following:
3.1 This Amendment, duly executed by the Borrower;
3.2 The Consent of the Guarantor in the form of Exhibit A
hereto, duly executed by the Guarantor;
3.3 A certificate by the Secretary or Assistant Secretary of
the Borrower (i) certifying as to a copy of its Board of Directors'
resolution on which the Borrower's authority to execute, deliver and
perform this Amendment is based, (ii) certifying the bylaws of the
Borrower and attaching thereto true and correct copies of the Articles
of Incorporation and Articles of Merger and Plan of Merger of the
Borrower, certified as true and correct by the Nevada Secretary of
State, and of the Code of Bylaws of the Borrower, and (iii) identifying
each officer of the Borrower authorized to execute this Amendment and
certifying as to the specimens of such officer's signature and such
officer's incumbency in such offices as such officer holds;
3.4 A Certificate of Existences with Status in Good Standing,
issued by the Nevada Secretary of State; and
3.5 The Borrower shall have satisfied such other conditions as
reasonably specified by the Bank or counsel to the Bank.
Section 4. Representations: No Default. The Borrower hereby represents
and warrants that on and as of the date hereof and after giving effect to this
Amendment (a) all of the representations and warranties contained in the Credit
Agreement are true, correct and complete in all respects as of the date hereof
as though made on and as of such date, except to the extent such representations
and warranties specifically relate to an earlier date, in which case they are
true and correct as of such earlier date, and (b) there will exist on such date
no Default or Event of Default which has not been waived by the Bank. The
Borrower represents and warrants that the Borrower has the power and legal right
and authority to enter into this Amendment, and has duly authorized as
appropriate the execution and delivery of this Amendment by proper corporate
action, and neither this Amendment nor the agreements contained herein
contravene or constitute a default under any agreement, instrument or indenture
to which the Borrower is a party or a signatory or a provision of the Borrower's
articles of incorporation, bylaws or any other agreement or requirement of law
or result in the imposition of any Lien on any of its property
<PAGE> 4
under any agreement binding on or applicable to the Borrower or any of its
property except, if any, in favor of the Bank. The Borrower represents and
warrants that no consent, approval or authorization of or registration or
declaration with any person, including but not limited to any governmental
authority, is required in connection with the execution and delivery by the
Borrower of this Amendment or the performance of obligations of the Borrower
herein described. The Borrower represents and warrants that this Amendment is
the legal, valid and binding obligations of the Borrower, enforceable in
accordance with its terms. The Borrower warrants that no events have taken place
and no circumstances exist at the date hereof which would give the Borrower any
basis to assert a defense, offset or counterclaim to any claim of the Bank as to
the obligations under the Credit Agreement.
Section 5. Affirmation, Further References. The Bank and the Borrower
each acknowledge and affirm that the Credit Agreement and Pledge Agreement, as
hereby amended, are hereby ratified and confirmed in all respects, that all
terms, conditions and provisions of the Credit Agreement and Pledge Agreement,
except as amended by this Amendment, shall remain unmodified and in full force
and effect, and that the Credit Agreement, as hereby amended, continues to be
secured by the Pledge Agreement, as hereby amended. All references in any
document or instrument to the Credit Agreement and the Pledge Agreement are
hereby amended and shall refer to the Credit Agreement and the Pledge Agreement,
respectively, as amended by this Amendment. All references in the Credit
Agreement to the "Borrower" and all references in the Pledge Agreement to the
"Pledgor" shall, from and after April 10, 1996 be to Innovative Gaming, Inc., a
Nevada corporation and successor by merger to Innovative Gaming, Inc., a
Minnesota corporation, pursuant to those Articles of Merger and Plan of
Merger dated and effective as of April 10, 1996.
Section 6. Merger and Integration. Superseding Effect. This Amendment,
from and after the date hereof, embodies the entire agreement and understanding
between the parties hereto with respect to the subject matter hereof, and
supersedes and has merged into it all prior oral and written agreements on the
same subjects by and between the parties hereto with the effect that this
Amendment shall control with respect to the specific subjects hereof.
Section 7. Legal Expenses. As provided in Section 8.2 of the Credit
Agreement, the Borrower agrees to reimburse the Bank upon demand for all
reasonable out-of-pocket expenses (including reasonable attorneys fees and legal
expenses of Dorsey & Whitney, counsel for the Bank) incurred in connection with
the negotiation or preparation of this Amendment and all other documents
negotiated and prepared in connection with this Amendment and the Borrower
agrees to reimburse the Bank upon demand for all other reasonable expenses,
including attorneys' fees incurred as a result of or in connection with the
enforcement of the Credit Agreement as amended hereby, and including without
limitation, all expenses of collection of any loans made or to be made under the
Credit Agreement as amended hereby.
Section 8. Severabilitv. Each provision of this Amendment and any other
statement, instrument or transactions contemplated hereby or relating hereto
shall be interpreted in such manner as to be effective, valid and enforceable
under the applicable law of any jurisdiction, but, if any provision of this
Amendment or relating hereto or thereto shall be held to be prohibited, invalid
or unenforceable under the applicable law, such provision shall be ineffective
in such jurisdiction only to the extent of such prohibition, invalidity or
unenforceability, without invalidating or rendering unenforceable the remainder
<PAGE> 5
of such provision or the remaining provisions of this Amendment or any other
statement, instrument or transaction contemplated hereby or thereby or relating
hereto or thereto in such jurisdiction, or affecting the effectiveness, validity
or enforceability of such provision in any such jurisdiction.
Section 9. Successors. This Amendment shall be binding upon the
Borrower and the Bank and their respective successors and assigns, and shall
inure to the benefit of the Borrower and the Bank and the successors and assigns
of the Borrower and the Bank.
Section 10. Headings. The headings of various sections of this
Amendment have been inserted for reference only and shall not be deemed to be a
part of this Amendment.
Section 11. Counterparts. This Amendment may be executed in several
counterparts, all or any of which shall be regarded as one and the same document
and either party to this Amendment may execute this Amendment by executing a
counterpart of this Amendment.
SECTION 12. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY THE
INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF
LAW PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL
BANKS.
IN WITNESS WHEREOF, THE PARTIES HERETO HAVE CAUSED THIS AMENDMENT TO BE EXECUTED
AS OF THE DATE AND year first above written.
INNOVATIVE GAMING, INC.
By: S. Shackelton
Its: CFO
FIRST BANK NATIONAL ASSOCIATION
By: Kristin Klein
Its: Business Banking Officer
<PAGE> 6
EXHIBIT A TO FOURTH AMENDMENT TO
LETTER OF CREDIT AGREEMENT
CONSENT AND AGREEMENT BY GUARANTOR
This Consent and Agreement by Guarantor ("Consent") is made by
INNOVATIVE GAMING CORPORATION OF AMERICA, a Minnesota corporation
(hereinafter "Guarantor"), in favor of FIRST BANK NATIONAL
ASSOCIATION, a national banking association ("Bank") and is dated as
of December 1, 1996.
WHEREAS, Guarantor executed a Guaranty ("Guaranty") in favor of the
Bank and dated as of October 26, 1993 by which Guarantor guaranteed the
obligations of INNOVATIVE GAMING, INC., a Minnesota corporation (the "Borrower")
under that certain Letter of Credit Agreement dated as of October 26, 1993 by
and between the Borrower and the Bank, as amended by an Amendment to Letter of
Credit Agreement dated as of October 28, 1993, a Second Amendment to Letter of
Credit Agreement dated as of October 31, 1994 and a Third Amendment to Letter of
Credit Agreement and Amendment to Pledge Agreement dated as of November 22, 1995
(as amended, the "Credit Agreement");
WHEREAS, the Borrower desires to amend the Credit Agreement to extend
the Borrower's right to obtain letters of credit under the Credit Agreement;
WHEREAS, Guarantor desires to consent to such amendments; and
WHEREAS, the Bank has refused to execute a Fourth Amendment to Letter
of Credit Agreement of even date herewith unless Guarantor executes this
Consent,
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and to induce the Bank at its
option to amend certain provisions of the Credit Agreement, and in consideration
of its doing so, the undersigned, INNOVATING GAMING CORPORATION OF AMERICA, as
primary obligor, hereby acknowledges and consents to the amendments to the
Credit Agreement as provided under the Fourth Amendment to Letter of Credit
Agreement, and agrees that all obligations of the Borrower under the Credit
Agreement as amended by the Fourth Amendment to Letter of Credit Agreement are
subject to the Guaranty without any further amendment thereto.
Guarantor acknowledges that it has received a copy of the Fourth
Amendment to Letter of Credit Agreement executed by the Borrower.
Guarantor further acknowledges and agrees that this Consent shall not
in any way extinguish any of the obligations of the Guarantor under the
Guaranty, which obligations shall continue and shall not in any circumstances be
terminated, extinguished or discharged hereby, but the terms of such Guaranty
continue in full force and effect except as otherwise provided for by this
Consent.
<PAGE> 7
IN WITNESS WHEREOF, this Consent has been duly executed by the undersigned the
day and year first above written.
INNOVATIVE GAMING
CORPORATION OF AMERICA
By
Its __________________________________
<PAGE> 1
EXHIBIT 10.18
PRODUCT DEVELOPMENT
AND REVENUE SHARING AGREEMENT
This Agreement is made as of the 18th day of November, 1996, between
IGT, a Nevada corporation with offices located at 9295 Prototype Drive, Reno,
Nevada ("IGT"), and Innovative Gaming, Inc., a Nevada corporation with offices
located at 4750 Turbo Circle, Reno, Nevada ("IGI"), under the following terms
and conditions.
INTRODUCTION
IGT is a gaming machine manufacturer, whose products include a slot
machine referred to as an S+ Slant Top slot machines ("Slant Top"). IGI is a
gaming machine manufacturer, whose products include a bonus top component
("Bonus") which secures to the top of slot machines for bonus play. IGI seeks to
combine IGT's Slant Top with its Bonus (hereinafier the "Machine") for casino
placement.
IGT shall make the necessary custom software engineering changes to the
Slant Top to enable communications between the Slant Top and the Bonus. Upon the
completion of the two major components being combined into a Machine, IGT shall
submit the Machine to the Nevada Gaming Control Board and Gaming Laboratories
International, Inc. for approval as a modification.
NOW, THEREFORE, for good and valuable consideration, as is provided
more fully herein, the parties agree as follows:
1. ENGINEERING
IGT shall develop custom engineering modifications for IGI. IGI will
own these custom engineering modifications and will pay IGT within 30 days of
invoicing. IGT will have the right to utilize this custom engineering in
applications that aren't substantially similar to this application.
2. MACHINE PLACEMENT
IGT shall supply IGT Slant Top machine(s) with the above custom
engineering modifications to IGI which shall be placed by IGI in strategic
casinos for the purpose of product test for consumer acceptance upon such terms
as IGI may agree with the casino locations. In the event that the parties
mutually agree that the market test was successful, IGT shall supply IGI new or
used IGT Slant Top machines in an amount to be mutually agreed upon between the
parties for installation at various casino locations pursuant to participation
agreements between IGI and each casino location and on a revenue participation
basis between IGI and IGT. IGT will provide custom engineering modifications to
the Slant Top, which modifications will allow IGI to install its proprietary
Bonus video component onto the Machines.
3. PARTICIPATION
The parties will participate jointly in the Net Revenue generated by
the Machines as follows:
a. Commencing upon installation of each Machine and continuing
thereafier until IGT has recovered its list price less 40% of the
Slant Top, IGT will receive fifty percent (50%) of the
<PAGE> 2
Net Revenue as received by IGI on account of such Machine, and
IGI shall receive fifty percent (50%) of the Net Revenue on
account of such Machine.
b. Upon receipt of the IGT list price less 40% for each Slant Top by IGT,
ownership of that Slant Top shall pass to IGI and, thereafier for the term of
this Agreement, IGT will receive ten percent (10%) of the Net Revenue and IGI
shall receive ninety percent (90%) of the Net Revenue.
c. IGI may place the bonus component on existing IGT manufactured games
within a casino if (1) IGT is unable to timely supply new or used IGT Slant Top
machines to IGI (timely is defined as within a six week period of IGI placing
the order) or (2) the market demands the bonus component only and both IGT and
IGI agree that IGI will retrofit existing IGT manufactured games already
existing in a casino. In the event the bonus component is added to an existing
IGT manufactured casino game, IGT will receive a royalty of 5% of the net
revenue for as long as IGI collects net revenue.
"Net Revenue" shall be defined as the actual revenue received
by IGI from the casino locations on account of each Machine, less any gaming
taxes and license fees, or other personal taxes, fees and other charges,
applicable to the Machine or its operation, if any, which are paid by IGI rather
than by the casino location pursuant to the participation agreement. Payments
under this provision shall be due and payable on a monthly basis following IGI's
receipt of Net Revenue from each casino location. IGI shall provide all
accounting services and will include with the monthly payment an accounting
summary of the machines' performance.
4. SERVICING OF THE MACHINE
IGT and IGI shall be responsible for service and costs of
repair of the components of the machines supplied by the respective parties. IGT
will not be responsible for servicing the Slant Top on which the bonus
components are placed under paragraph 3(c) above.
5. LICENSING
a. Licensing and the machine approval - Each party shall obtain any and
all licensing necessary to effectuate the terms of this Agreement, and shall
bear their own costs associated with licensing proceedings, governmental
investigation and approval as required under all applicable laws, regulations,
ordinances, and statutes.
b. Machine approval - IGT will submit the machine for approval to the Nevada
Control Board and Gaming Laboratories International by December 31, 1996.
6. RETURNS
IGI agrees to make best efforts to either replace returned
machines in a new casino location or alternatively to modify or refurbish
machines for placement in new casino locations.
7. WARRANTY
IGT warrants that for a period of ninety (90) days following
installation at the casino location, equipment purchased hereunder will be free
from defects and in good working order. IGI's sole and exclusive remedy in the
event of defect is expressly limited to the restoration of the equipment to
<PAGE> 3
good working condition by adjustment, repair, or replacement of defective parts,
at IGT's election. Video monitors (covered under separate manufacturer
warranty), machines, equipment, and other products not manufactured by IGT, are
excluded from this warranty. Except as specifically provided in this Agreement,
there are no other warranties, express and implied, including but not limited
to, warranties of merchantability of fitness for a particular purpose. No
affirmation of fact, including but not limited to statements regarding
suitability for use, performance, percentage hold, or par value of the equipment
shall be deemed to be as warranty or guaranty of IGT for any purpose. In no
event shall IGT or any of its affiliates, subsidiaries, representatives, or
agents be liable for direct, indirect, special or consequential damages,
including loss of profits, arising out of any breach of this Agreement. The
liability of IGT and the manufacturer of the note acceptor with which IGT
machines are equipped, whether in contract, in tort, under warranty, in
negligence or otherwise, shall not exceed an amount of the fair market value of
the note acceptor and under no circumstances shall IGT or the manufacturer of
the note acceptor be liable for special, indirect, or consequential damages.
Neither IGT nor the manufacturer of the note acceptor shall be liable in any
respect for the acceptance of counterfeits and/or fraudulent materials. Any
unauthorized modification, alteration, or revision of all or any portion of the
IGT equipment which is the subject of this Agreement shall cause the warranty
described in this paragraph to be null and void. IGT, its affiliates,
subsidiaries, representatives, and agents make no other warranty, express or
implied.
8. OWNERSHIP
Until payment in full of the IGT list price less 40% for such
Slant Top has been made to IGT, each Slant Top shall remain the sole property of
IGT and shall not become by agreement, act of law or otherwise, security for any
obligation or property of IGI. In the event that IGI ceases doing business for
any reason, fails to maintain all required gaming licenses, or in the event of
filing of voluntary or involuntary petition of bankruptcy or any other default
by IGI, IGT may, in addition to any other remedy at law of equity, enter the
premises where any of the Machines are located and retake possession of the
Slant Top if ownership of such Machines has not been transferred to IGI.
9. TERM AND TERMINATION
a. Term - This Agreement shall be effective for a period of five years and shall
automatically renew for additional one year periods unless terminated upon 30
days written notice by either party prior to the anniversary date.
b. Termination - Either party may terminate this Agreement upon a
material breach of this Agreement which the breaching party does not cure (i)
within fifteen (15) days after delivery of written notice of such breach if the
breach involves the payment of money or (ii) within thirty (30) days after
notice of such breach involves any act or failure other than the payment of
money, or longer if action has commenced to cure a non-monetary breach within
the 30-day period and such party continues to diligently and continuously
prosecute the cure to a favorable conclusion.
c. Unusable Inventory - In the event machines are returned and cannot
be replaced in accordance with paragraph 5 above and IGT has not recovered its
list price less 40%, IGI may either (a) return the slant top machine to IGT or
(b) purchase the machine from IGT for the balance of IGT's list price less 40%
not recovered. If IGI purchases the machine from IGT, IGI will not subsequently
use this machine in conjunction with the IGI bonus component without
compensating IGT as specified herein on a participatory basis.
<PAGE> 4
10. INSURANCE
Casino operators, pursuant to and required by IGI participation
agreements, shall maintain adequate "all risk" insurance on the Machines.
11. AGREEMENTS
All agreements for the placement of machines at casino locations shall
be approved as to form by IGT and IGI.
12. MISCELLANEOUS
a. Governmental Regulatory Approval - The parties agree that the performance by
each party of the terms and provisions of this Agreement is contingent upon
obtaining all necessary approvals from any and all governmental regulatory
agencies in any jurisdiction where they are licensed. Each agrees to fully
cooperate with the other in providing any and all information and documents that
may be required by any appropriate regulatory agency during the approval
process. This will be a continuing obligation of each party during the term of
the agreement after it has been initially approved by the regulatory agencies.
In the event that any regulatory agency determines this the agreement cannot be
approved initially for any reason, then the parties agree that it shall be
considered null and void ab initio. If as a result of later circumstances a
regulatory agency determines that the agreement cannot continue then the parties
agree that it shall terminate as of the date of that determination. Neither
party shall be liable to the other for costs, expenses, or damages of any kind
that result from the failure to perform this agreement if such failure results
from a denied approval from regulatory agency or from a later determination by
such an agency that the agreement must be terminated.
b. Restriction on Assignment or Transfer - Neither party may assign or otherwise
transfer ownership or control of its interest in the operation that is the
subject of this agreement without the express written consent of the other
party. This consent shall also be made conditioned on obtaining the necessary
approvals from any and all governmental regulatory agencies in any jurisdiction
where either party may be licensed.
c. Material Change in Ownership - Both parties agree to provide the other party
with written notice of any material change to its corporate structure, including
but not limited to the substitution or appointment of any individual having
significant ownership interest or controlling interest in the corporation within
thirty (30) days.
d. Successors and Assigns - All of the terms and provisions of this Agreement
shall be binding upon, shall inure the benefit of, and shall be enforceable by
the respective permitted successors and assigns of the parties.
e. No Waivers; Amendments - No failure or delay by any party in exercising any
right, power or privileges hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights or remedies herein provided shall be cumulative and not exclusive for any
rights or remedies provided by law. This Agreement may not be amended, modified
or supplemented other than by a written instrument signed by each of the parties
hereto. Any provision of this Agreement may be waived if, but only if, such
waiver is in writing and is signed by the party against whom the enforcement of
such waiver
<PAGE> 5
is sought.
f. Notices - All notices, demands, requests, consents or approvals required or
permitted to be given hereunder or which are given with respect to this
agreement shall be in writing and shall be mailed, registered, return receipt
requested, postage prepaid (or by a substantially similar method), or delivered
by a reputable international overnight courier service with charges prepaid,
with a copy (which shall not constitute notice) transmitted by hand delivery,
telegram, telex or facsimile, addressed as set forth below, or such other
address as such party shall have specified most recently by written notice.
Notice shall be deemed given or delivered on the third business day following
the date mailed or on the next business day following delivery of such notice to
a reputable international overnight courier service.
TO IGT:
Robert A. Bittman, Executive Vice President
IGT
5270 Neil Road
Reno, Nevada 89502
With copy to:
Brian McKay, Vice President and General Counsel
IGT
5270 Neil Road
Reno, Nevada 89502
TO IGI:
Scott Shackelton, Chief Financial Officer
Innovative Gaming, Inc.
4750 Turbo Circle
Reno, Nevada 89502
With copy to:
Craig Bullis, Vice President/Director of Compliance
Innovative Gaming, Inc.
4750 Turbo Circle
Reno, Nevada 89502
g. Entire Agreement - This Agreement constitutes the entire agreement and
understanding among the parties with respect to the subject matter hereof and
thereof and supersedes any and all prior agreements and understandings, whether
written or oral, relating to the subject matter hereof and thereof.
h. Governing Law and Jurisdiction - The Agreement and the rights of the parties
shall be construed in accordance with the laws of the State of Nevada. The
parties, as well as any of their employees or representative, irrevocably agree
to the exclusive jurisdiction of the Courts of the State of Nevada (or such
judicial district of a court of the United States as shall include same).
<PAGE> 6
i. Severability - Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdictions, it being intended that all rights and
obligations of the parties hereunder shall be enforceable to the fullest extent
permitted by law.
j. Counterparts - This Agreement may be signed in counterparts, each of which
shall constitute an original and which together shall constitute one and the
same agreement.
k. Required Approvals - If approval of this Agreement or any of the transactions
contemplated hereby shall be required by any governmental or supra-governmental
agency or instrumentality (including any applicable gaming authority) or is
considered to be necessary or advisable to all the parties hereto, all parties
shall use their respective reasonable best efforts to obtain such approval. If
any required approval is not obtained or it becomes clear that such approval
will not be granted, any party shall immediately give the other party notice.
l. Section Headings - The section headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or interpretation of
this Agreement.
m. Interpretation - All defined terms herein include the plural as well as the
singular. All references in this Agreement to designated "Sections" or
"Paragraphs" and other subdivisions are to the designated Sections and
Paragraphs and other subdivisions of this Agreement. All references of this
Agreement to any party shall include all permitted transferees of such party.
This Agreement shall not be construed for or against either party by reason of
the authorship or alleged authorship of any provisions hereof or by reason of
the status of the respective parties. This Agreement shall be construed
reasonably to carry out its intent without presumption against or in favor of
either party.
n. Public Disclosure - Unless otherwise required by law, any public disclosure
of the subject matter of this Agreement shall be approved by the parties hereto
prior to release, provided that such approval shall not be unreasonably withheld
or delayed.
o. Confidentiality - IGT and IGI agree that any proprietary information of the
other party will be safeguarded and maintained in confidence and shall not be
reproduced or otherwise used by the non-disclosing party, or its employees or
agents for any purpose other than the purpose of this Agreement, nor to the
detriment of, or in any manner in competition with, the other party or its
products, nor provided or disclosed to any third person or business entity of
any kind without the prior written consent of the disclosing party. Each party
agrees to limit the disclosure of any proprietary information to those in its
organization only on a need-to-know basis for the purpose of this Agreement.
Each party shall at anytime, at the request of the other party, certify the
names of the individuals who were permitted access to any of such other party's
proprietary information.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, as of the day and year first above written.
IGT INNOVATIVE GAMING, INC.
<PAGE> 7
By: _____________________________ By:____________________________
Maureen Imus Scott Shackelton
VP Finance Chief Financial Officer
Date: 11/18/96 Date: 11/18/96
<PAGE> 1
EXHIBIT 10.19
SUBLEASE
Sublease made this 14th day of May, 1996 by and between
Thomas & Betts Corporation
1555 Lynnfield Road
Memphis, Tennessee 38119
("Sublessor")
and
Innovative Gaming Corporation of America
clo Mr. Barry Quick
3486 San Mateo Avenue
Reno, Nevada 89509
("Sublessee")
WHEREAS, Sublessor, as lessee, and Dermody Properties, Inc., as lessor
("Lessor"), are parties to a lease ("Master Lease") dated as of May 9, 1988 (a
copy of which Master Lease is attached as Exhibit A hereto) of premises
consisting of a building with approximately 53,109 square feet of floor space on
real estate located at 4750 Turbo Circle, Reno, Nevada ("Subleased Premises");
and
WHEREAS, subject to obtaining Lessor's written consent to this
Sublease, Sublessor shall sublease to Sublessee, and Sublessee shall sublease
from Sublessor, the Subleased Premises pursuant to the terms and conditions set
forth hereinbelow.
NOW, THEREFORE, the parties hereto agree as follows:
1. Term. The term of this Sublease shall commence as of the date first
written above and end on October 31, 1998 subject to termination prior
to October 31, 1998 in accordance with the terms of this Sublease.
2. Rent. The monthly base rent payable by Sublessee to Sublessor for each
month of the term of the Sublease shall be $19,119.24 per month,
prorated for any portion of a calendar month. All such monthly
installments shall be due and payable on the first day of each month in
advance, except that base rent for the period from the date of this
Lease through May 31, 1996 shall be due and payable upon execution of
this Lease. Also, during the term of this Sublease, Sublessee shall pay
and be responsible for all additional rent and other payments payable
by Sublessor under the Master Lease including, without limitation, as
set forth in Paragraph 4 of the Master Lease payment of real estate
taxes with respect to the Subleased Premises (including land and
building), payment of the cost of facilities and all services necessary
to comply with all applicable statutes, regulations, and ordinances
relating to the maintenance, use, and operation of the Subleased
Premises, and payment of insurance premiums (except as otherwise
expressly provided in this Sublease). Sublessee for itself and for the
benefit of Sublessor and Lessor (as additional insureds) shall procure
and maintain insurance (issued by reputable insurers reasonably
acceptable to Sublessor) of the types and in the amounts required to be
maintained
<PAGE> 2
pursuant to Paragraph 4(c)(l) of the Master Lease as well as insurance
providing contractual indemnity coverage with respect to the
indemnification obligations of Sublessee hereunder, and Sublessee shall
with respect to each such insurance policy (and any other insurance
policy required to be maintained by Sublessee hereunder) have Sublessor
and Lessor named as additional insureds and furnish certificates of
insurance issued by such insurers to Sublessor and Lessor evidencing
such insurance and evidencing the fact that such insurance may not be
terminated or materially modified without each insurer providing at
least twenty (20) days' notice to each certificate holder. Sublessor
shall procure and pay the premiums for the policy or policies of
insurance of the types referred to in Paragraph 4(c) (2) of the Master
Lease, and any such insurance policy shall provide for a waiver of
subrogation by the insurer against Sublessee and its directors,
shareholders, officers, and employees, and Sublessee shall reimburse
Sublessor as additional rent for the reasonable costs incurred by
Sublessor to obtain and maintain such insurance during the term of this
Sublease. Sublessee shall at its sole expense insure its tangible
personal property at the Subleased Premises against loss or damage by
fire or other casualty (including extended coverage), and any such
insurance policy or policies maintained by Sublessee for such purpose
shall provide for a waiver of subrogation by the insurer against the
Sublessor and the Lessor and their respective directors, shareholders,
officers, and employees.
3. Letter of Credit. As security for the performance by Sublessee of its
obligations under the Sublease, Sublessee, at its sole expense, shall
upon execution of this Sublease deliver to Sublessor, and maintain in
effect at all times during the term of the Sublease, an irrevocable
standby letter of credit ("Letter of Credit") in the amount of One
Hundred Thousand Dollars ($100,000.00) issued by a reputable banking
institution ("Issuer") satisfactory to Sublessor in favor of Sublessor,
as beneficiary. The Letter of Credit shall contain terms and conditions
satisfactory to Sublessor, and, without limiting the generality of the
foregoing, shall provide that Sublessor shall have the right to draw on
the Letter of Credit any number of times and in any amounts (but the
total of the amounts so drawn shall not be more than One Hundred
Thousand Dollars ($100,000.00) in the aggregate). Any and all such
drawings may be made after the date of execution of this Sublease and
prior to the expiration date of the Letter of Credit (a) at any time
within thirty (30) days prior to the expiration date of the Letter of
Credit if Sublessor has not prior to the thirtieth (30th) day before
the expiration date of the Letter of Credit received notice in writing
from the Issuer of the Issuer's renewal of the Letter of Credit for a
period of at least one year or (b) at any time if:
(i) Sublessee has at any time failed to perform any of its
obligations undar the Sublease; and
(ii) Sublessor has given Sublessee notice of Sublessee's such
failure to perform specifying the nature of such default and
Sublessee has failed to remedy such default within twenty (20)
days after such notice by Sublessor to Sublessee.
Nothing contained in this Paragraph 3 shall limit or restrict
Sublessor's rights to recover additional damages from Sublessee in
excess of the amount of the Letter of Credit or shall limit or restrict
Sublessor's rights or remedies otherwise available under this Sublease
or under applicable law in the event of Sublessee's default. The
provisions of this Paragraph 3 are cumulative and additional to any
other rights or remedies which Sublessor may have under this Sublease
or by law for damages or otherwise.
4. Utilities.
<PAGE> 3
a. Sublessee shall pay for all utility service at the Subleased
Premises including, without limitation, any utility service
for electricity, gas, water, sewer, or telephone.
b. To the maximum extent permitted under applicable law,
Sublessee shall not have any right to recover damages from
Sublessor or the Lessor, and Sublessee shall not be entitled
to any abatement or reduction of rent or other relief, on
account of any interruption or discontinuance or inadequacy of
any utility service to or at the Subleased Premises for any
reason whatsoever. In the event that Sublessee requires
additional utility service at the Subleased Premises during
the term of the Lease, the installation and maintenance
thereof shall be Sublessee's sole obligation and at
Sublessee's sole cost and expense; provided that no such
utility service may be installed at the Subleased Premises
unless Sublessee shall in each instance have first obtained
the prior written consent of the Sublessor and of the Lessor.
Sublessor agrees that it shall not unreasonably withhold its
consent to the installation by Sublessee at the Subleased
Premises and at Sublessee's expense of additional utility
service; provided that Sublessor shall not be responsible for
any failure (whether or not reasonable) of the Lessor to
consent to any such installation of utility service proposed
by Sublessee. Without limiting the right of Sublessor to
withhold consent when it is reasonable to do so, Sublessor and
Sublessee agree that it shall not be deemed to be unreasonable
for Sublessor to withhold its consent to any such installation
of utility service at the Subleased Premises proposed by
Sublessee in the event that the Lessor does not consent to
same.
5. Condition of Premises at Commencement of Sublease. Sublessee agrees to
accept the Subleased Premises "AS IS", with no warranties of any kind,
expressed or implied, as of the date of execution of the Sublease.
6. Use of Subleased Premises. Subject to Sublessee complying with the
obligations imposed by Paragraph 8 of the Master Lease on the Sublessor
as lessee under the Master Lease and subject to compliance by Sublessee
with the requirements of all applicable laws and regulations including,
without limitation, laws and regulations relating to zoning, health and
safety, and environmental protection, Sublessee shall have the right to
use the Subleased Premises only for the purpose of light assembly of
gaming machines and storage of same and for offices related to the
foregoing use ("Intended Use") . The parties acknowledge and agree that
Sublessor makes no warranty that the area in which the Subleased
Premises are located is zoned so as to permit said Intended Use or as
to the suitability of the Subleased Premises for said use.
7. Hazardous Substances. "Hazardous Substances" as used in this Lease
shall mean pollutants, contaminants, toxic or hazardous substances or
wastes, or any other substances, the removal of which is required by,
or the use of which is regulated, restricted, or prohibited by, any
"Environmental Law", which as used in this Lease shall mean any
federal, state, or local law, regulation, or ordinance relating to
pollutants, contaminants, or toxic or hazardous substances or wastes or
protection of the environment. Sublessee hereby agrees as follows:
a. No activity will be conducted at the Subleased Premises that
will use, generate, or produce any Hazardous Substances,
except for such activities that are part of the ordinary
course of Sublessee's business, that are conducted in
accordance with all Environmental Laws, and that have been
approved in advance in writing by Sublessor
<PAGE> 4
("Permitted Activities");
b. The Subleased Premises will not be used in any manner for the
storage or treatment of any Hazardous Substances except for
the temporary storage of such materials that are used in the
ordinary course of Sublessee's business, that are properly and
legally stored in a manner and location meeting all
Environmental Laws, and that are approved in advance in
writing by Sublessor ("Permitted Materials");
c. In the event that there is a spill or leakage of any of the
Permitted Materials or other Hazardous Substances at or
affecting the Subleased Premises or the property of which the
Subleased Premises are a part or in the event that there is
any contamination or environmental damage to the Subleased
Premises or other property caused directly or indirectly by
any actions or omissions of the Sublessee or the Sublessee's
agents, employees, subtenants, business invitees, or other
persons for whose conduct Sublessee is legally responsible,
Sublessee shall immediately notify Sublessor of the foregoing
and shall immediately begin and diligently complete at
Sublessee's sole cost and expense cleanup procedures to remove
all such contamination and shall remedy such damage pursuant
to all Environmental Laws;
d. No portion of the Subleased Premises shall be used as a
landfill or a dump or otherwise for the disposal of Hazardous
Substances;
e. Sublessee shall not at the Subleased Premises install any
underground or aboveground tanks of any type; and
f. Sublessee agrees to comply in all respects with all applicable
Environmental Laws. Sublessee agrees to indemnify and hold
Sublessor and Lessor harmless from and against all claims,
demands, actions, liabilities (including, without limitation,
any liability under the Comprehensive Environmental Response
Compensation and Liability Act, 42 U.S.C. 9601 at seq. or the
Resource Conservation and Recovery Act, 42 U.S.C. 6901 at
sea.), reasonable fees, costs, and expenses (including,
without limitation, reasonable legal expenses and reasonable
fees payable to environmental consultants), damages (including
losses attributable to diminution of the value of real
estate), and obligations of any nature directly or indirectly
incurred or sustained by either or both of them arising as a
result of any breach by Sublessee of any of the foregoing
covenants, it being understood that the foregoing obligations
of Sublessee shall survive the termination or expiration of
this Sublease.
8. No Option to Extend. etc. Notwithstanding any other provisions herein
or any provisions in the Master Lease, Sublessee shall not have any
right to extend the term of the Sublease beyond October 31, 1998, or to
purchase the Subleased Premises, or to expand the Subleased Premises,
and Sublessee shall not have any right of first refusal to lease,
sublease, or purchase the Subleased Premises or any other adjacent
premises. Sublessor agrees that during the term of the Sublease
Sublessor will not exercise any rights which Sublessor may have as
lessee under the Master Lease to extend the term of the Master Lease
beyond October 31, 1998, to purchase the Subleased Premises, to expand
the Subleased Premises, or to assert any right of first refusal to
lease, sublease, or purchase the Subleased Premises or other adjacent
premises .
9. No Assignment and No Further Subletting Without Consent. Sublessee
shall not have the right to
<PAGE> 5
assign this Sublease or further sublet the Subleased Premises without
in each instance first obtaining the prior written consent of the
Sublessor and of the Lessor under the Master Lease. The consent of the
Lessor under the Master Lease to any proposed assignment of this
Sublease or further subletting of the Subleased Premises may be granted
or withheld in the sole discretion of the Lessor under the Master
Lease. The consent of Sublessor to any proposed assignment of this
Sublease or further subletting of the Subleased Premises shall not be
unreasonably withheld. Without limiting the right of Sublessor to
withhold its consent to a proposed assignment or further subletting
when it is reasonable to do so, Sublessor and Sublessee agree that it
shall not be deemed unreasonable for Sublessor to withhold its consent
to any such assignment or further subletting in the event that the
Lessor does not consent to same.
10. Modifications or Improvements of the Subleased Premises. Sublessee
shall not make any modifications or improvements of the Subleased
Premises at any time without first obtaining the prior written consent
of Sublessor and of the Lessor under the Master Lease. Sublessor agrees
that it shall not unreasonably withhold its consent to any
modifications or improvements proposed by Sublessee; provided that
Sublessor shall not be required to consent to any modifications or
improvements which affect the structural integrity of the Subleased
Premises; and further provided that Sublessor shall not be responsible
for any failure (whether or not reasonable) of the Lessor to consent to
any modifications or improvements proposed by Sublessee. Without
limiting the right of Sublessor to withhold consent when it is
reasonable to do so, Sublessor and Sublessee agree that it shall not be
deemed to be unreasonable for Sublessor to withhold its consent to any
modifications or improvements of the Subleased Premises proposed by
Sublessee in the event that the Lessor does not consent to same. The
parties hereto further agree that if and only if Sublessee obtains the
written consent of the Lessor under the Master Lease to the making of
all of the modifications or improvements of the Subleased Premises set
forth on Exhibit B hereto and the Lessor's agreement is writing that
such modifications or improvements need not be removed from the
Subleased Premises at the end of the term of this Sublease, Sublessor
shall consent to the making at the Subleased Premises by Sublessee, at
Sublessee's sole expense, of such modifications or improvements set
forth on Exhibit B hereto, it being understood that, in such case,
Sublessee shall have the right (but not the obligation) to make such
modifications or improvements set forth on Exhibit B hereto. The
written consent of the Lessor under the Master Lease to the making of
such modifications and improvements set forth on Exhibit B hereto shall
be requested by Sublessee contemporaneously with Sublessor's request
for the Lessor's written consent to this Sublease itself, and, unless
otherwise specified in writing by the Lessor, the Lessor's written
consent to the Sublease shall be deemed to constitute the Lesssor's
consent that Sublessee shall have the right (but not the obligation) to
make the said modifications and improvements set forth on Exhibit B
hereto and agreement that the same need not be removed from the
Subleased Premises at the end of the term of the Sublease. Without
limiting the generality of the foregoing, the Sublessee may not affix
any sign or lettering on or visible from the exterior of the Subleased
Premises without first obtaining the written consent of the Lessor and
Sublessor. Sublessor agrees that it shall not unreasonably withhold its
consent to Sublessee at its expense affixing signs or lettering on or
visible from the exterior of the Subleased Premises; provided that
Sublessor shall not be responsible for any failure (whether or not
reasonable) of the Lessor to consent to the Sublessee's affixing of any
signs or lettering on or visible from the exterior of the Subleased
Premises. Without limiting the right of Sublessor to withhold its
consent when it is reasonable to do so, Sublessor and Sublessee agree
that it shall not be deemed to be unreasonable for Sublessor to
withhold its consent to any affixing by Sublessee of any signs or
lettering on or visible from the exterior of the Subleased Premises in
the event that Lessor does not consent to same. Furthermore, without
limiting the
<PAGE> 6
right of Sublessor to withhold its consent when it is reasonable to do
so to any modifications, improvements, signs, or lettering proposed by
Sublessee, Sublessee agrees that no modifications, improvements, signs,
or lettering may be constructed or erected or affixed at or to the
Subleased Premises unless the same comply in all respects with all
applicable laws, regulations, and codes and are constructed in a good
and workmanlike manner with first class craftsmanship and materials.
Sublesee shall indemnify, defend, and hold harmless Sublessor and the
Lessor from all claims and expenses arising on account of any liens on
the Subleased Premises resulting from any modifications or improvements
or any other activities of Sublessee at the Subleased Premises.
11. Surrender of Subleased Premises. At the end of the term of the
Sublease, Sublessee shall remove all of its tangible personal property
from the Subleased Premises and shall return the Subleased Premises to
Sublessor in the same condition as they were in as of the date of
execution of this Sublease, ordinary wear and tear only excepted;
provided, however, if the Sublessee at any time obtains the consent in
writing of the Lessor and Sublessor to any modifications or
improvements of the Subleased Premises proposed by Sublessee, Sublessor
and Sublessee may agree that such modifications or improvements may
remain as part of the Subleased Premises at the end of the term of the
Sublease if and only if the Lessor's consent when granted had expressly
authorized in writing such modifications or improvements to remain as
part of the Subleased Premises at the end of the term of this Sublease.
Sublessee shall have no right to holdover at the Subleased Premises at
the end of the term of the Sublease, and, if any such holdover shall
occur, Sublessee shall be responsible for any and all damages incurred
or sustained by Sublessor and/or the Lessor as a result of such holding
over. Any damage caused to the Subleased Premises by the removal of any
property of Sublessee therefrom at the end of the term of Sublease or
any other time shall be promptly repaired by the Sublessee. The
Sublessee shall have the right to continue to occupy the Subleased
Premises at the end of the term of the Sublease if, any only if, the
Sublessee has obtained such right to occupy the Subleased Premises
pursuant to the terms of a written lease by and between Sublessee, as
tenant, and Lessor, as landlord, and if Sublessee has complied with all
of Sublessee's obligations under this Sublease as of the date of
termination of this Sublease.
12. Waiver of Claims and Hold Harmless. To the maximum extent permitted
under applicable law, Sublessee (a) agrees to waive and release any and
all claims against Sublessor and/or Lessor for any loss, damage, or
expense incurred by Sublessee directly or indirectly on account of any
personal injuries to Sublessee's employees or any losses of Sublessee's
property or other losses sustained by Sublessee or Sublessee's business
at the Subleased Premises; and (b) shall indemnify and save the Lessor
and Sublessor harmless from all losses, damages, and fees, costs, and
expenses (including, without limitation, reasonable legal fees)
incurred or sustained by either or both of them resulting from any
third party claims against the Lessor and/or Sublessor on account of
any injuries, property damage, or other loss sustained by (i) any third
party (including, without limitation, employees of the Sublessee) in,
at, upon, or near the Subleased Premises, the sidewalks or streets
bordering the Subleased Premises, or the property of which the
Subleased Premises are a part; and (ii) any third party at any location
on account of any acts or omissions of Sublessee or Sublessee's agents,
employees, subtenants, business invitees, or other persons for whose
conduct Sublessee is legally responsible. Notwithstanding anything
contained hereinabove or otherwise in this Sublease, Sublessor and
Sublessee each hereby waives any and all rights of recovery which
either may have against the other party or against such other party's
directors, shareholders, officers, or employees with respect to loss or
damage caused by fire or other causes to the extent that such loss or
damage is insured against under any fire or extended coverage insurance
maintained by such party with respect to the Subleased Premises or any
<PAGE> 7
improvements thereto or any personal property therein and is caused by
the negligence of such other party or such other party's directors,
shareholders, officers, or employees.
13. Brokers. The parties acknowledge and agree that Lessor (which has acted
as a real estate broker for Sublessee in connection with this Sublease)
and Dickson Realty Co., 1030 Caughlin Crossing, Reno, Nevada 89509
("Dickson") will be entitled to a commission in an amount and upon
terms agreed upon by Sublessor and Lessor in connection with this
Sublease if and only if this Sublease is executed by both parties and
consented to in writing by the Lessor, it being further understood that
Sublessor shall have no direct liability to Dickson for any such
commission. Sublessee warrants to Sublessor that Sublessee has not
dealt with any broker except Lessor or Dickson in this transaction, and
Sublessee agrees to hold Sublessor harmless from any and all claims by
any broker or other person except for Lessor or Dickson which claims to
be entitled to a commission or fee based upon alleged dealings with the
Sublessee in connection with this transaction.
14. Effect of Termination of Master Lease. The termination of the Master
Lease at any time prior to the end of the term of this Sublease shall
automatically result in the termination of this Sublease and all
obligations of Sublessor set forth herein, and, unless the termination
of the Master Lease is based on Sublessor's failure to pay rent due to
the Lessor or other default of Sublessor, as lessee, under the Master
Lease, the Sublessee shall have no right or claim against Sublessor on
account of any such termination of this Sublease at any time prior to
the end of the term hereof.
15. Consent of Lessor to this Sublease. This Sublease shall not become
effective unless and until the Lessor under the Master Lease has
consented in writing to this Sublease (and to Sublessee having the
right (but not the obligation) to make, at Sublessee's expense, the
modifications or improvements of the Subleased Premises set forth on
Exhibit B hereto and to the fact that such modifications or
improvements need not be removed from the Subleased Premises at the end
of the term of this Sublease) by having its duly authorized agent
execute and deliver to Sublessor anoriginal counterpart of this
Sublease acknowledging such consent .
16. Notices. Any notices by either party to the other permitted or required
under this Sublease shall be in writing to be effective. Notices to
Sublessee shall be deemed duly given and effective upon delivery in
hand to the Subleased Premises addressed to Sublessee, or delivery by
reputable overnight courier service to the Subleased Premises addressed
to Sublessee, or upon receipt of electronic facsimile transmission at
the Subleased Premises addressed to Sublessee, or upon mailing by
certified mail, return receipt requested, postage prepaid, addressed to
Sublessee at the Subleased Premises. Also, Sublessee may at any time
during the term of this Sublease after notice by Sublessee to Sublessor
in the manner provided for hereinbelow require Sublessee to furnish to
Sublessee's attorney (in the manner hereinabove specified) a copy of
any notice given by Sublessor to Sublessee provided that Sublessee has
previously given Sublessor notice specifying such attorney's name,
address, and fax number and requesting that copies of such notices be
given to such attorney. Notices to Sublessor shall be deemed duly given
and effective upon mailing to Sublessor by certified mail, return
receipt requested, postage prepaid, or upon delivery to Sublessor by
reputable overnight courier service, or upon receipt by Sublessor of
electronic facsimile transmission, in any case addressed to Sublessor
as follows:
Thomas & Betts Corporation
1555 Lynnfield Road
<PAGE> 8
Memphis, Tennessee 38119
ATTN: Vice President - Purchasing
Fax No.: (901) 680-5112 with a copy to:
Thomas & Betts Corporation
1555 Lynnfield Road
Memphis, Tennessee 38119
ATTN: General Counsel
Fax No.: (901) 680-5435
Sublessor may change the address to which notices to it shall be sent
by giving notice to Sublessee in the aforesaid manner.
17. Incorporation of Master Lease Provisions. Except to the extent
inconsistent with the provisions of this Sublease, the below-listed
provisions of the Master Lease are hereby incorporated into this
Sublease by reference and shall bebinding upon the parties hereto;
provided that all references in said provisions of the Master Lease to
"Lessor" shall be deemed to be references to "Sublessor" and all
references in said provisions of the Master Lease to "Lessee" shall be
deemed to be references to "Sublessee", and, with respect to
below-listed Master Lease provisions, Sublessor shall have the rights
and obligations of the "Lessor" and Sublessee shall have the rights and
obligations of the "Lessee", as stated in the Master Lease; and further
provided that references in the Master Lease to the "Lease Term" shall
be deemed to refer to the term of the Sublease and references in the
Master Lease to the "Commencement Date" shall be deemed to refer to the
initial day of the term of this Sublease: 4, Additional Payments and
Covenants (provided that Sublessor does not certify or warrant that the
Subleased Premises comply with any existing statutes, regulations, or
ordinances and provided that the provisions of Paragraph 4(c) (2) of
the Master Lease shall be inapplicable to this Sublease); 8,
Improvements and Use of Leased Premises; 9, Maintenance and Repairs;
11, Default and Remedy (except that the words "thirty (30) days"
therein shall be replaced by the words "twenty (20) days"); 12,
Alterations (except as modified by Paragraphs 5 and 10 hereinabove of
this Sublease); 13, Inspection; 14, Lessor's Right to Mortgage (except
that the last sentence of said Paragraph 14 of the Master Lease shall
be deemed deleted); 15, Fire and Other Casualty (except that Sublessor
shall not be required to repair any damage to, or restore, the
Subleased Premises); 16, Eminent Domain (except that Sublessor shall
not be required to restore, alter, or repair the Subleased Premises or
to place the same in good and usable condition for Lessee's use and
purposes); 17, Lessor's and Lessee's Non-Liability (except that
Sublessor shall not be responsible for any damage resulting from an
error, omission, faulty workmanship, or negligence in the construction
of the Subleased Premises and the exemption from liability contained in
said provision shall be applicable to the Lessor as well as to
Sublessor); 18, Utilities; 19, Surrender (except as modified by
Paragraph 11 hereinabove of this Sublease); 20, Waiver; 21, Covenant of
Quiet Enjoyment; 27, Benefit of Lessor and Lessee (except that the
second sentence thereof shall be deemed deleted); and 28, Governing
Law.
<PAGE> 9
18. Rights of Lessor. Notwithstanding anything contained or implied in this
Sublease, the Lessor shall have the right at any reasonable time to
enter the Subleased Premises (a) to inspect the general condition and
state of repair thereof; and (b) to make repairs required or permitted
to be made by the Lessor under the Master Lease. In addition to the
foregoing, the Lessor may at any time affix to the exterior of the
Subleased Premises a notice for leasing or selling the Subleased
Premises or any part thereof during the lastsix (6) months of the term
of this Sublease or at any other time permitted pursuant to the Master
Lease.
19. Entire Agreement. This Sublease constitutes the sole and exclusive
agreement of the parties hereto with respect to the subject matter
hereof and supersedes and cancels any and all prior or contemporaneous
understandings or agreements, written or oral, between Sublessor and
Sublessee with respect to the subject matter hereof.
20. Attorneys' Fees. Costs, and Interest. In the event that any legal
proceeding is brought by Sublessor or Sublessee against the other party
hereto with respect to any breach by such other party of its
obligations under this Sublease, the prevailing party in such legal
proceeding shall be entitled to recover reasonable costs and attorneys'
fees incurred by it with respect to such proceeding in addition to
damages and other relief available at law and/or in equity. If
Sublessee shall fail to perform any of the obligations to be performed
by Sublessee under the Sublease, Sublessor, without being under any
obligation to do so and without thereby waiving such default, may
remedy such default for the account and at the expense of Sublessee,
and, if Sublessor makes any expenditures or incurs any obligations for
the payment of money in connection therewith, such sums paid or
obligations incurred, with interest at the rate of twelve percent (12%)
per annum, shall be paid to Sublessor by Sublessee as additional rent.
Sublessor agrees with Sublessee that Sublessor shall during the term of
the Sublease pay all rent and additional rent due by Sublessor to the
Lessor under the Master Lease, and, if Sublessor shall fail to make any
such payments to the Lessor, Sublessee, without being under any
obligation to do so and without thereby waiving such default, may
remedy such default for the account of Sublessor, unless such default
by Sublessor is cured by Sublessor within twenty (20) days after notice
thereof by Sublessee to Sublessor, by paying such amounts of rent or
additional rent as are due by Sublessor to the Lessor under the Master
Lease, and, if Sublessee makes any such payments which it is authorized
to make as aforesaid, Sublessee shall then have the right to deduct a
corresponding amount from base monthly rent thereafter due by Sublessee
to Sublessor pursuant to this Sublease .
21. Miscellaneous. In any instance or circumstance in which the consent of
Sublessor is required as a condition precedent to or to authorize any
action by Sublessee, Sublessor agrees that it shall within a reasonable
time after receipt by it from Sublessee of written request for such
consent notify the Sublessee as to whether such consent will be given
or denied. Unless otherwise agreed in writing by Lessor, Sublessor, and
Sublessee, any machinery, equipment, and other tangible personal
property installed by Sublessee at the Subleased Premises shall remain
the sole property or Sublessee and shall be removed from the Subleased
Premises at the end of the term of the Sublease pursuant to the
provisions contained hereinabove in Section 11 of this Sublease .
IN WITNESS WHEREOF, this Sublease has been executed and delivered by
duly authorized agents respectively of the Sublessor and Sublessee, in each case
under seal in multiple original counterparts as of the date first written above.
<PAGE> 10
THOMAS & BETTS CORPORATION
By:
Craig A. Havener,
Vice President - Purchasing
INNOVATIVE GAMING CORPORATION OF AMERICA
By:_____________________________________
Edward G. Stevenson, President
The above Sublease is consented to by Dermody Properties, Inc. and Dermody
Properties, Inc. hereby consents that Sublessee shall have the right (but not
the obligation) to make the modifications and/or improvements listed on Exhibit
B hereto (and agrees that such modifications and/or improvements may remain at
the Subleased Premises at the end of the term of the Sublease except only as
otherwise provided in that certain letter agreement or even date herewith by and
among Lessor, Sublessor, and Sublessee), as of the date first written above.
DERMODY PROPERTIES, INC.
BY:________________________
Dated:______________________
<PAGE> 11
Exhibit A
LEASE AGREEMENT
THIS LEASE executed this 9th day of May 1988, by and between Dermody
Properties Inc., a Nevada corporation having its principal office at 1200
Financial Boulevard, Reno, Nevada, 89502 ("Lessor"), and Thomas & Betts
Corporation, a New Jersey corporation, having its principal office at 1001
Frontier Road, Bridgewater, New Jersey 08807 ("Lessee") .
WITNESSETH:
1. The Leased Premises. The Lessor hereby 1eases and demises
to the Lessee and the Lessee agrees to lease from the Lessor certain real estate
located in Reno, Nevada, more particularly described in Exhibit "A" attached
hereto (the "Real Estate"), together with the improvements to be constructed by
Lessor on the Real Estate, more particularly described in paragraph 6. For ease
of reference the Real Estate and improvements are hereinafter collectively
referred to as the "Leased Premises."
2. Term & Option to Renew. The term of the Lease shall be
for a period of ten (10) years beginning on the first day of the month fol1owing
the Commencement Date as hereinafter defined in paragraph 6.
If the Lessee is not in default hereunder the Lessee shall have the
option to renew and extend the term of this Lease for two (2) additional terms
of five (5) years each. Each such
<PAGE> 12
extension shall be upon the same terms and conditions contained in the Lease for
the original term subject to an adjustment of the minimum rental as provided in
paragraph 5 hereof. Each such option shal1 be exercised by Lessee giving written
notice to Lessor of its intention to extend the term of the Lease not later than
twelve (12) months prior to the expiration of the original Lease Term of, if
applicable, the extended term. Lessee's failure to exercise any option to renew
shall extinguish its right and option for any subsequent extension.
For ease of reference, the original and any extended term of
this Lease is herein referred to as the "Lease Term."
3. Rent. Lessee agrees to pay as base rent for the Leased
Premises the sum of $199,200.00 per year, payable in equa1 monthly installments
of $16,600.00, such monthly insta1lment to be paid on the first day of each
month in advance, to begin on the month following the Commencement Date and the
first day of each month thereafter during the Lease Term.
If the Commencement Date is not the first day of the month,
Lessee shall pay prorated month1y rent from the Commencement Date to the first
day of the next month.
4. Additional Payments and Covenants. During the Lease Term
Lessee agrees to pay the fol1owing amounts as additional rent:
(a) An amount equa1 to real estate taxes levied against the
Leased Premises are charged to the owner thereof and
prorated as of the Commencement Date. Such taxes are
not to include any income or franchise taxes.
(b) The costs of facilities and all services
<PAGE> 13
necessary to comply with all app1icable statutes,
regulations and ordinances relating to maintenance, use
and operation of the Leased Premises, including, but
not 1imited to, the construction or use of
anti-pollution or safety devices, provided, however,
that nothing in this subparagraph 4(b) shall limit
Lessor's duty to deliver the premises in accordance
with the plans and specifications approved by Lessee.
Lessor certifies and warrants as of the Commencement
Date that the Leased Premises comply with such existing
statutes, regu1ations and ordinances.
(c) Lessee shall procure and pay the premiums for a policy
or policies of insurance in companies reasonably
satisfactory to Lessor and its mortgagee, and shall
keep the same in force during the Lease Term and, upon
request, furnish a certificate thereof to its mortgagee
covering the following risks:
(1) Public liability and property damage insurance
in standard form, with limits of bodily injury and
death liability not less than Two Million Dollars
($2,0OO,O0O)for an accident affecting any one
person, and five Million Dollars ($5,000,000) for an
accident affecting more than one person and
providing property damage coverage of at least Five
Million Dollars ($5,000,000) aggregate.
(2) Fire insurance with extended coverage, vandalism
and malicious mischief, riot and civil commotion,
and sprinkler leakage endorsement covering all
improvements located on the demised premises in an
amount equal to the full replacement cost thereof.
Such policies shall provide for any loss payable to
Lessor and at the request of Lessor to any first
mortgagee, as their respective interests may appear.
<PAGE> 14
With respect to the payment of any taxes or the cost of compliance with
any statute, regulation or ordinance, Lessee shall have the right at its own
expense to contest the amount of such taxes or the necessity or manner of
comp1iance with such regulation, statute, or ordinance in any administrative or
court proceeding, saving Lessor harmless from any tax, interest penalties or
costs connected therewith by appropriate surety bond or other assurance
reasonably satisfactory to Lessor and its Mortgagee. Lessor agrees to cooperate
with Lessee in such contest by executing petitions or other documents necessary
to proceed with such contest if requested by Lessee and to furnish such relevant
information to Lessee pertinent to such contest if available to Lessor.
5. Adjustment for Cost of Living. The minimum monthly rate shall be
subject to adjustment at the commencement of the sixth (6th) year of the term
and at the commencement of each sixth (6th) year, thereafter so long as this
lease is in effect ("the adjustment date") as follows: The base for computing
the adjustment is the San Francisco/Oakland-All Urban Consumers Index, published
by the United States Department of Labor, Bureau of Labor Statistics ("Index"),
which is published for the month nearest the data of the commencement of the
term ("Beginning Index"). If the Index published nearest the adjustment date
("Extension Index") has increased over the Beginning Index, the minimum month1y
rent shall be set (until the next rent adjustment) by multiplying the minimum
monthly rent by a fraction, the numerator of which is the Extension Index and
the denominator of which is the Beginning Index. Such increase shall not exceed
four percent (4) per year (2O% per adjustment) and in
<PAGE> 15
no case sha1l the minimum monthly rent be less than the minimum monthly rent set
forth in paragraph 3.
If the index is discontinued or revised during the term, such other
government index or computation with which it is replaced shall be used in order
to obtain substantially the same result as would be obtained if the Index had
not been discontinued or revised.
6. Construction of Improvements. Lessor agrees to construct a building,
parking lot and other improvements on the Leased Premises in accordance with
plans and specifications described in Exhibit "B" attached hereto and
incorporated into this Lease Agreement by reference. Such plans and
specifications sha1l be in general accordance with preliminary plans and
specifications described in Exhibit "B-1" attached hereto and incorporated
herein by reference.
Lessor and Lessee agree that time is of the essence in the construction
of the improvements.
Lessor agrees to commence construction of the improvements as soon as
practicable, to proceed diligently and expeditiously and to complete the
construction thereof on or before November 1, 1988. In the event the
construction has not been substantially comp1eted in accordance with the
foregoing plans and specifications and in full compliance with all applicable
local, state and federal laws, statutes, regu1ations codes and ordinances, and
the Leased Premises ready for occupancy as evidenced by a temporary certificates
of occupancy issued by competent authority, on or before November 1, 1988, than
the Lessee may at its option upon thirty (30) days prior written notice to
Lessor, terminate this Lease without further obligation
<PAGE> 16
and shall be reimbursed by Lessor for all out of pocket expenses incurred by
Lessee up to the date of such prior written notice and the parties shall be
discharged from all obligations hereunder.
Lessee's option to terminate sha1l be in addition to any other legal or
equitable remedy otherwise available to Lessee, provided, however, that in the
event construction of the improvements is delayed due to acts of God, fire or
other casua1ty, 1abor disputes or other causes beyond the control of Lessor,
than the date for fina1 comp1etion shall be adjusted for a period equal to such
de1ay or delays, but in no event shall the date for final comp1etion be
postponed beyond December 1, l988.
When the construction of the improvements has been substantially
completed, Lessor agrees to furnish to Lessee a certificate of Lessor's
architect or engineer stating that the improvements have been constructed
substantia11y in accordance with the plans and specifications. Upon receipt of
such certificate Lessee sha1l have the right of inspection, and upon
verification by Lessee that such plan and specification have been comp1ied with
agrees to provide Lessor within a reasonable time with a written acknow1edgement
of the acceptance of the improvements.
The Commencement Date of this Lease sha11 be the date of Lessee's receipt
and verification of such architect's or engineer's certificate, unless Lessor
and Lessee agree otherwise in writing.
If any disagreement occurs between Lessor and Lessee as to whether the
improvements have been substantia1ly
<PAGE> 17
completed in accordance with the plans and specifications, the parties sha1l
select an independent architect to inspect the construction and certify as to
such completion thereof. The independent architect's certificate shall be
binding on the parties, and in the event any alteration or correction is
required Lessor sha11 promptly cause such to be made. In the event of such
disagreement, the Commencement Date sha1l become the first day of the ca1endar
month fo1lowing the decision of the independent architect, or the comp1etion of
the required a1terations or corrections, whichever comes later.
Lessor, in connection with the construction of the improvements
guarantees and warrants:
(a) That the materials, equipment and fixtures sha1l be as specified
in the plans and specifications, and will comply with all
applicable codes, standards, rules, ordinances, regulations, laws,
and statutes pertaining thereto. Lessor shall also transfer to
Lessee all warranties and guarantees included with all such
materials, equipment and fixtures, together with all builder
warranties furnished in connection with the Leased Premises.
(b) That the work will be done in a workmanlike manner, and
(c) That the Lessor will correct any defect or breach of all such
Warranties provided Lessee gives Lessor written notice within the
warranty period, or in the event no warranty period is specified,
then within two (2) years after the Commencement Date.
(d) Notwithstanding (a), (b) or (c) above, the Lessor agrees to be
responsible, for the term of this Lease for a1l structural
defects.
<PAGE> 18
7. Partial Occupancy. Lessee sha11 have the right for no renta1, during
the course of construction of the improvements on the Leased Premises and prior
to comp1etion thereof, to install its fixtures necessary or desirab1e for its
use of the Leased Premises, provided that the exercise of such right does not
unreasonably interfere with or impair Lessor's construction of the improvements.
In the event Lessee has occupied and is using the Leased Premises for its
benefit other than for preparatory work for the doing of business during any
period of disagreement as to substantia1 completion specifical1y referred to in
paragraph 6, if such has occurred, Lessee sha1l be liable for the rent from the
commencement date of such use.
8. Improvements and Use of Leased Premises. The leased Premises are to be
used by the Lessee for any legal purpose. Lessee shall not use Leased Premises
or fail to maintain them in any manner constituting a violation of any
ordinance, statute, regulation or order of any governmental authority,
including, but not limited to, those governing zoning, health, safety and
occupational hazards, and pollution and environmenta1 control, nor will the
Lessee knowingly maintain or permit any nuisance to occur on the Leased
Premises. Lessee may use the premises for warehouse, related office and other
selected uses and Lessor warrants that such uses will not constitute a violation
of any existing ordinance, statute, regulation, code, or order of any
governmental authority.
<PAGE> 19
9. Maintenance and Repairs. During the term of this Lease the Lessee
sha11, except as provided in Section 6 above, maintain in good condition and
repair the entire Leased Premises including the roof, wa11s and floors, normal
wear and tear excluded.
10. Assignments and Sublease. The Lessee sha11 not assign this Lease in
who1e or in part or sublet the Leased Premises in whole or in part without the
prior written consent of the Lessor. Lessor express1y covenants not to
unreasonably withhold such consent. Lessee shall, however, have the right to
freely assign the Lease to another affiliate of Lessee without the prior written
consent of Lessor. No consent shall be required in the event of a transfer
incident to an acquisition of substantial1y a1l the assets of Lessee or its
merger or consolidation, where the acquirer or resulting entity assumes Lessee's
obligations under this Lease.
11. Default and Remedy. Each of the fo1lowing shall be deemed a defau1t
by the Lessee:
(a) Failure to pay the rent as herein provided when due.
(b) Fai1ure to make additional payments provided in this Lease when
due.
(c) Failure to perform or to commence performance of any act to be
performed by the Lessee hereunder and to di1igently pursue such
performance or failure to comply with any condition or covenant
contained herein.
(d) The abandonment of the Leased Premises by the
<PAGE> 20
Lessee or its adjudication as a bankrupt, the making by the Lessee
of a general assignment for the benefit of creditors; the Lessee's
taking the benefit of any insolvency action or law; the
appointment of a permanent receiver or trustee in bankruptcy for
the Lessee or its assets, the appointment of a temporary receiver
for the Lessee or its assets if such temporary receivership has
not been vacated or set aside within a reasonable period not to
exceed ninety (90) days from the date of such appointment, the
initiation of an arrangement or similar proceedings for the
benefit of creditors by or against Lessee, dissolution or other
termination of Lessee's corporate charter.
In the event of any default provided above and the continuance of such a
defau1t after thirty (30) days prior written notice is given by Lessor to Lessee
in the case of paragraphs (a), (b) and (d) above and sixty (60) days prior
written notice is given by Lessor to Lessee in the case of paragraph (c) above,
this Lease sha1l terminate at the option of the Lessor. In the event of
termination of this Lease, after such default and such notice, the Lessor may
re-enter the Leased Premises, take possession of all or any part thereof, and
remove a1l property and persons therefrom and shall not be liable for any damage
therefor or for trespass unless such damage is due to the willful or neg1igent
act or omissions of Lessor, its agents, representatives or employees. No such
re-entry shall be deemed an acceptance of the surrender of this Lease or a
satisfaction of the Lessee's obligation to pay the rent as provided herein or
any other obligations of Lessee hereunder.
The fai1ure of the Lessor to exercise any option
<PAGE> 21
herein provided on account of any default sha11 not constitute a waiver of the
same or any subsequent default and no waiver of any condition or covenant of
this Lease by either party sha11 be deemed to constitute a waiver by either
party of any default for the same or any other condition or covenant.
12. A1terations. Lessee shall not permit alterations or upon any part of
the Leased Premises without first obtaining the written consent of the Lessor.
Lessor expressly covenants not to withhold his consent unreasonably. Lessor and
Lessee shall agree in writing prior to Lessor's consent to any such addition or
alteration as to whether such addition and alteration may be removed at the
expiration of the Leased Term or may remain as a part of the Leased Premises
provided, however, that the Lessee sha1l indemnify and save harmless the Lessor
from all cost, loss or expense in connection with any construction or
installation done or requested by Lessee for its use or benefit, and provided
such cost, 1oss or expense is not due to any willful or negligent act or
omission of Lessor, its agents, representatives or employees. No person sha11 be
entitled to any lien directly or indirectly derived through or under the Lessee
or through or by virtue of any act or omission of the Lessee upon the Leased
Premises for any improvements or fixtures made thereon or installed therein or
for or on account of any labor or material furnished to the Leaned Premises or
for or an account of any matter or thing whatsoever; and nothing in this Lease
contained shal1 be construed to constitute a consent by the Lessor to the
creation of any lien.
Lessee shall have the right, prior to the expiration of the Lease Term,
to remove all of Lessee's trade fixtures,
<PAGE> 22
equipment and such additions and improvements as required pursuant to the first
paragraph of this paragraph 12; provided that at such time all rents stipulated
herein are paid in full and any resulting damage to the Leased Premises prompt1y
repaired, reasonable wear and tear excepted.
13. Inspection. Lessor or Lessor's agent shall be permitted to inspect or
examine the Leased Premises at any reasonable time after prior written notice to
Lessee. Lessor sha1l have the right to make any repairs to the Leased Premises
which are reasonably necessary for its preservation. In the event that any such
repairs are the obligation of the Lessee, Lessor agrees to give thirty (30)
days' prior written notice to Lessee that such repairs are required (except in
the case of an emergency where immediate repairs are necessary to prevent
immediate damage to the Leased Premises), and in the event Lessee fails to make
such repair within a reasonable time, but in no event shorter than such thirty
(30) day period, Lessor may, but sha11 not be obligated to, make such repairs at
Lessee's expense.
14. Lessor's Right to Mortgage. Lessee agrees at any time, and from time
to time, upon prior written request by Lessor, or the holder of any mortgage or
other instrument of security given by Lessor, to execute, acknow1edge and
de1iver to Lessor or to the holder of such instrument, a statement in writing
certifying that this Lease has not been modified and is in full force and effect
(or if there have been modifications, that the same are in full force and effect
and state such modifications), that there are no defaults hereunder by Lessor,
if such is the fact, and the dates to which the fixed rents and other charges
have been paid, it being intended that
<PAGE> 23
any such statement delivered pursuant to this paragraph may be re1ied upon by
the holder or any such mortgage or other instrument of security or any
authorized assignee of Lessor.
Lessee's right shall be subject to any bona fide mortgage now existing
upon or hereafter placed upon the Leased Premises by Lessor, provided the
Mortgagee has notice of Lessee's rights and privileges under this lease. If,
however, the mortgagee or its successor in interest sha11 take title of the
Leased Premises through forec1osure or other legal proceedings, or deed in lieu
of foreclosure or such proceedings:
(1)Lessee sha1l be allowed to continue in possession of the Leased
Premises and shall be entitled to all rights and privileges as provided
for in this Lease so long as Lessee shall not be in default, and (2) the
mortgagee of such successor, after transfer of title, execute an
attornment agreement whereby the Lessee becomes the lessee of the
mortgagee or such successor in accordance with and subject to the terms
and conditions of this Lease, excepting paragraph 6 thereof. Nothing
provided in the immediately foregoing provision shall, however, diminish
the right of Lessee to terminate this Lease and its obligations hereunder
in accordance with paragraph 6 upon a failure of Lessor to complete
construction of the improvements nor relieve any liability or obligation
of Lessor or Lessee.
15. Fire and Other Casualty. If the Leased Premises are partially damaged
by fire or other casualty to the extent that the Leased Premises can be repaired
within ninety (90) days from the date of such damage, Lessor sha1l notify
<PAGE> 24
Lessee of such fact by written notice within ten (10) days of such damage and
Lessor agrees to promptly repair and restore the Leased Premises, and the rent
shall proportionately abate during the period of such restoration.
If the Leased Premises are substantially damaged by fire or other
casualty to the extent that the Leased Premises cannot be repaired within ninety
(90) days from the date of such damage, Lessor shall notify Lessee of such fact
by written notice within ten (10) days of such damage, and then
(a) Lessee shall have the right to terminate this Lease as of the date
of the fire or casualty by notice to Lessor within thirty (30)
days after such notice, or
(b) If the Lease is not terminated by Lessee then the Lessor shall
repair, restore, or rehabilitate the building or the premises at
the Lessor's expense within one hundred twenty (120) days after
such casua1ty. The Lease shall not terminate but rent shall be
abated on a per diem basis while the Premises are untenantable. If
the Lessor so proceeds to repair, restore or rehabilitate the
building or the Leased Premises and does not substantially
complete the work within the one hundred twenty (120) day period,
either party can terminate this Lease of the data of the fire or
casua1ty by notice to the other party not later than one hundred
twenty (120) days after such casua1ty. In the event Lessee does
not terminate the Lease after the said one hundred twenty (l20)
day period, Lessor sha1l pay to Lessee the difference between the
Lease rent and the rental amount Lessee must pay for substitute
quarters beyond the one hundred twenty (l20) day reconstruction
period.
In the event of termination of the Lease, rent
<PAGE> 25
shall be apportioned on a par diem basis and be paid to the date of the fire or
casua1ty.
16. Eminent Domain. If all or any part of the Leased Premises shall be
acquired by the exercise of eminent domain by any public or quasi public body in
such a manner that the Leased Premises shall become unusable by the Lessee for
the purpose it is than using the Leased Premises, even if they would be
restored, repaired or altered as provided in the last sentence of this paragraph
l6, then in such event this lease may be terminated by the Lessee on the date
that 1egal possession thereof is taken by the applicable governmental authority.
The Lessor shall be entitled to all of the damages awarded by the condemning
authority for the value of the Leased Premises, provided that the Lessee shall
be entitled to any award for the cost of or the removal of its stock equipment
and fixtures and cost of remova1 of any alterations and improvements which
Lessee is permitted to remove as provided in paragraph 12, and relocation
expenses and, any other part of the award attributab1e to damage suffered by
Lessee to the extent that any of these items are allowed as reimbursement or
compensation for such acquisition in addition to the fair market va1ue of the
property acquired and to the cost of repairing the remainder of any improvements
not acquired, as such fair market va1ue and cost is reasonab1y estab1ished by
the condemning authority.
In the event of condemnation that does not result in termination of this
Lease, the Lessor agrees, at its expense to restore, a1ter and repair the
remaining portion of the Leased Premises and place the same in good and usable
condition for Lessee's use and purposes as promptly as reasonab1y
<PAGE> 26
possible, and with the rent to be equitab1y abated as of the date Lessee's use
of the Leased Premises is diminished.
17. Lessor's and Lessee's Non-Liability. The Lessor shall not be liable
for damage either to any person or property due to the condition of the Leased
Premises or to the occurrence of any accident in or about the Leased Premises or
due to any act or neglect of the Lessee or any other occupant of the Leased
Premises or of any person, unless such damage is a result of any error,
omission, faulty workmanship or negligence in the original construction of the
Leased Premises or any act or neglect of Lessor, its agents, representatives, or
employees.
18.Utilities. Lessee shall pay for the use of all utilities serving the
Leased Premises and which are for the benefit of the Lessee.
19. Surrender. Upon the expiration or other termination of this Lease,
Lessee shall quit and surrender to the Lessor the Leased Premises, together with
all other property affixed to the Leased Premises (with the exception of trade
fixtures, alterations, additions and improvements which Lessee has the right to
remove), in good order and condition, ordinary wear and tear, fire and other
casualties excepted. Any damage caused to the Leased Premises by removal of any
property shall be promptly repaired by the Lessee.
If the Lessee shall remain in possession of all or any part of the Leased
Premises after the expiration of the Lease Term, then the Lessee shall be deemed
Lessee of the Leased Premises from month to month at the same rental and subject
to all the terms and conditions hereof.
<PAGE> 27
20. Waiver. No waiver of any covenant or condition or the breach of any
covenant or condition of this Lease shall be taken to constitute a waiver of any
subsequent breach of such Covenant or condition nor justify or authorize a
nonobservance on any other occasion of such covenant or condition or any other
covenant or condition.
21. Covenant of Quiet Enjoyment. Lessor agrees that if the Lessee shall
perform all of the covenants and agreements herein provided to be performed on
the Lessee's part, the Lessee shall, at all times during the Lease Term, have
the peaceable and quiet enjoyment Of possession of the Leased Premises without
any manner of hindrance from the Lessor or any persons lawfully claiming under
the Lessor, and Lessor shall defend Lessee's interest in the Leased Premises
against all persons claiming, lawfu11y or otherwise, under the Lessor.
22. Notice. Any notice required or permitted to be given or served by
either party to this Lease sha11 be deemed to have been given or served when
made in writing, by certified or registered mail, addressed as follows:
Lessor: Dermody Properties, Inc
1200 Financial Boulevard
Reno, Nevada 89502
Att: Michael C. Dermody, President
Lessee: Thomas & Betts Corporation
1001 Frontier Road
Bridgewater, New Jersey 08807
Copy to: Legal Department
All rental payments shall be made to the Lessor at the above
<PAGE> 28
address. The addresses may be changed from time to time by either party by
serving notice as above provided.
23. Option to Purchase. Lessee shall have the option to purchase the
Leased Premises as follows:
(a) At any time during the ninety (90) day period beginning with the
date of execution of this agreement Lessee sha11 have the option
("First Option") to purchase the Leased Premises for the amount of
$2,500,000. which First Option may be exercised by lessee giving
written notice to Lessor at any time during such ninety (90) day
period;
(b) At any time during the ninety (90) day period beginning at the
expiration of the initia1 ten (10) year lease term, Lessee shall
have the option ("Second Option") to purchase the Leased Premises
for Four Million Dollars ($4,000,000). Such Second Option may be
exercised by Lessee giving written notice to Lessor at any time
during such ninety (90) day period.
(c) With respect to any additions or expansions to the original Leased
Premises, Lessee shall have the option to purchase that addition
or expansion together with the original Leased Premises at any
time during the ninety (90) day period commencing ten (10) years
after commencement of the Lease payments covering the costs of
such addition or expansion at the then appraised Fair Market
Value.
24. Option to Cancel. In the event Lessee exercises its option to renew
this Lease after the original term, Lessee shall have the right to cancel this
Lease at any time during such extended lease term by giving Lessor at least
twelve
<PAGE> 29
(12) month's prior written notice. Lessor agrees that, in consideration of the
right of Lessee to such early termination, it will accept the equivalent of six
(6) month's base rent as liquidation damages therefor, in addition to the twelve
(12) month's rent due Lessor after such notice.
25. Expansion & Right of First Refusal. Landlord agrees that upon written
notice by Tenant (such request to be in accordance with the provisions of
paragraph 22 hereof pertaining to notices) de1ivered to Landlord, and subject to
Tenant's exercise of its Right of First Refusal, as set forth below, Landlord
sha11, at its so1e cost and expense, cause to be erected on land adjacent to the
demised premises ("Expansion Land") an expansion ("Expansion") of the original
building which is part of the premises 1eased to Tenant hereunder, (such
Expansion Land and Expansion being out lined in green and designated Future
Expansion on Exhibit "A-1" attached hereto). Landlord agrees to complete the
Expansion within eight (8) months from the date of approval of p1ans and
specifications and cost of such Expansion as hereinafter provided .
Landlord shal1 within thirty (30) days after such written notice prepare
and furnish to Tenant for Tenants approval, plans and specifications for such
Expansion together with Landlord's estimate of the cost (including profit and
overhead) of such Expansion. The Tenant shall approve the p1ans and
specifications and Landlord's estimate for costs for such expansion within
thirty (30) days of the receipt of such p1ans and specifications and estimate of
costs. Failure of the Tenant to disapprove the same within such time shall
constitute approval. Upon approval of such p1ans and
<PAGE> 30
specifications by Tenant, Landlord shal1 promptly cause such Expansion to be
made with due diligence and in a good workmanlike manner.
Shou1d Tenant disapprove of the Landlord' s estimate of the cost of such
Expansion and if the Landlord and Tenant cannot agree upon a fixed cost to be
used as a base for computing the additional renta1 due hereunder for such
Expansion, then Tenant shal1 have the right and privi1ege of securing bids for
the construction of such Expansion from other competent and qua1ified
contractors ready, willing and able to construct such Expansion according to the
p1ans and specifications approved by Tenant. No bid from such other contractors
will be considered for the purposes of this paragraph unless such contractor is
qualified to furnish a payment and performance bond from a corporate surety
licensed to do business in the State of Nevada. If any of the bids received from
such other contractors are 1ess than Landlord's estimate of the cost of the
construction of such Expansion , Landlord may, if Land1ord so elects, proceed
with the construction of such Expansion without employing the other contractor
submitting the lowest bid, or if Landlord elects not to so proceed with the
construction of such Expansion, Landlord shall be required and obligated at
Landlord's so1e cost and expense to employ the other contractor submitting the
lowest bid, provided such contractor is qualified under the terms of this
paragraph. Tenant agrees that the rental under said Lease shall be increased by
reason of such Expansion and shal1 be determined on the basis of the cost of
such Expansion as above provided.
Once the Expansion is substantia1ly complete and
<PAGE> 31
ready for occupancy by Tenant, the expanded space sha11 be deemed a part of the
original demised premises as defined in this Lease and all of the terms and
provisions of this Lease shal1 be applicable to same, except that rental shal1
be adjusted as herein specified.
In the event Land1ord should receive a bona fide offer to purchase or
develop the Expansion Land at any time during the original term of this Lease or
any extension thereof, Land1ord shall notify Tenant, in writing, of such offer
and of Landlord's intention to accept same. Tenant shall then have the right,
within sixty (60) days of receipt of Land1ord' s notice, to lease the unimproved
Expansion Land from Landlord at an annual rental rate calculated by multiplying
the appraised va1ue of the Expansion Land, as hereafter determined ( "Appraised
Value" ) by a figure which will result in a return to Landlord of l2% per year.
For example , if the Expansion Land comprises 1.00 acre, and the annua1 return
is 12%, and the Expansion Land is appraised at $2.00 per square foot the annual
renta1 would be 2.00 x 43,560 x 0.12 = $10,454.00. The Appraised Value shall be
the value determined by two appraisers, each chosen by one of the parties. If
the appraisers cannot agree on a sing1e value, good the two appraisers shall
choose a third appraiser, all of whose fees shall be split equally between
Landlord and Tenant. The Appraised Value would then be the average of the two
va1ues which are closest to each other, but if one value (the "Appraisal") is
equidistant from the other two appraisals both of which are farther from each
other than from the Appraisal, then Appraised Value shall be such Appraisal.
<PAGE> 32
26. Toxic and Hazardous Materials. Lessor warrants and represents that,
to the best of its knowledge, at the Commencement Data the Leased Premises
comply with all app1icab1e federa1 and state 1aws, requirements, rules and
orders re1ating to health, safety, environmental protection, storage, discharge,
waste disposa1, and water and air quality, and that there has been no unlawful
discharge, leakage, spillage commission or pollution of any hazardous or toxic
materials or substances on the Leased Premises.
Lessee agrees to use its best efforts to avoid any unlawful discharge,
treatment process, work leakage, spillage commission or pollution of any
hazardous toxic or noxious materials or substances on the Leased Premises during
the Lease Term or any extensions thereof. Lessee agrees to indemnify and hold
harmless Lessor from and against and to reimburse Lessor with respect to any and
all claims demands, fees, fines, penalties, settlement, judgments, obligations,
suits, losses, liabilities, damages, injuries, costs or expenses arising from or
on account of Lessee's unlawful discharge, treatment process, work, leakage,
spillage, commission or pollution of any hazardous, toxic or noxious materials
or substances on the Leased Premises.
The representations and warranties set forth in this paragraph 26 shal1
be deemed to be relied upon as being true and correct as of the date or the
execution and delivery of this Lease, regardless of any investigation.
The representations and warranties set forth in this paragraph 26 shall
be deemed to be relied upon as being true and correct as of the date of any
extension of this Lease.
<PAGE> 33
* Exhibit D is a list of changes to be made at no cost to Lessee and is
attached hereto and made a part hereof.
Lessor agrees to indemnify and hold Lessee and the premises free and
harmless from and against and to reimburse Lessee with respect to any and all
claims, demands, fees, fines, penalties, settlement, judgments, obligations,
suits, losses, liabilities, damages, injuries, costs or expenses (including
costs of investigation, settlement and defenses of such claims, plus interest,
penalties and attorneys' fees) arising from or on account of the inaccuracy or
breach of any of Lessor's representatives or warranties contained in this Lease.
27. Benefit of Lessor and Lessee. This Lease and all of the terms and
provisions hereof shal1 inure to the benefit of and be binding upon the Lessor
and Lessee, and their respective heirs , successors , assignees and 1egal
representatives. Notwithstanding such assignment, transfer or conveyance, Lessor
shall remain primarily liable to Lessee for all obligations under paragraph 6 of
this Lease.
28. Governing Law. This Lease shall be governed in accordance with the
laws of the State of Nevada .
29. Short Form of Lease. The parties agree at any time, upon the request
of the other party, to execute a short form of this Lease permitting its
recording to provide recorded notice of Lessee's leasehold estate and setting
forth the Commencement Date of the Lease.
IN WITNESS WHEREOF the parties hereto have executed this Lease Agreement
the day and year first above written.
<PAGE> 34
ATTEST:
__________________________________ By:____________________________________
"Lessor"
ATTEST: Thomas & Betts Corporation
___________________________________ By:____________________________________
"Lessee
Exhibit B
Certain Modifications and Improvements Which May
Be Constructed by Sublessee at the Subleased
premises After Obtaining Consent of
Dermody properties. Inc.
1. Modifications to the existing office build-out to:
a. Divide conference room at SE end into two separate office
(drywall construction); and
b. Divide employee break room/cafeteria into two separate
offices, thereby creating hallways to the
production/warehouse and patio (drywall construction and
split heat/air system line to accommodate both offices) .
2. Additional build-out into warehouse/production area, contiguous with the
North wall of the current office area utilizing approximately 2,000 sq.
feet of warehouse area. Build-out to consist of two stories to obtain a
total of 4,000 sq. feet for:
a. Additional offices;
b. Product showroom;
c. Employee break room/cafeteria; and
d. Employee lavatories and locker rooms.
3. Additional improvements to the production/warehouse area for:
a. Evaporative cooling of entire area;
b. Power line drops to assembly lines; and
c. Compressor (Caged, covered outside enclosure to code) with
air line drops to assembly line for air tools.
4. Demising wall from floor to ceiling (from East to West) to create 24,400
sq. feet of separate area for a possible sub-sublease to an approved
sub-subtenant (which sub-subtenant and sub-sublease shall be subject to
prior approval by Sublessor and Lessor as provided in the Sublease) and
the build-out of the existing drywall millwright enclosure at the North
East corner, to create approximately 800 sq. feet of office space
(drywall construction, heating/air conditioning and plumbing) .
<PAGE> 35
5. Security truck enclosure inside drive-in ramp, with adjoining man trap,
count room, and vault. Man trap, count room, and vault would be
modifications to the existing two-story build-out extending into the
warehouse, adjacent to the drive in ramp door.
6. Installation of a central station monitored alarm system and card key
access (or laser retina eye scanner) for selected high security offices
and work areas in the existing and additional build-out.
All of the above modifications or improvements, if constructed by Sublessee,
shall be constructed, at Sublessee's sole expense, in accordance with applicable
government regulations, codes, and construction requirements. Construction will
be performed by qualified contractors in a good and workmanlike mamner with
first-class materials and workmanship.
<PAGE> 1
EXHIBIT 10.20
DERMODY
PROPERTIES
STANDARD INDUSTRIAL LEASE For Landlord Use Only:
[NET-NET-NET] Building #: 524
L/A: BPE
Lease Preparation Date: July 9,1996
Landlord: Dermody lndustnal Group, a Nevada Joint Venture. located at 1200
Financial Boulevard. P.O. Box 7098. Reno. Nevada 89510
Tenant: Innovative Gaming Inc.. a Nevada Corporation
Trade Name (dba) : Innovative Gaming Inc.
1. LEASE TERMS
1. 01 Premises: The Premises referred to in this Lease contain
approximately 53,109 square feet as shown on Exhibit "A" attached. The address
of the Leased Premises is: 4750 Turbo Circle, Reno, Nevada 89502.
1.02 Project: The Project in which the Premises are located consist of
approximately 53,109 square feet as shown in Exhibit A.
1.03 Tenant's Notice Address: Tenant's Notice Address is the address of
the Leased Premises as defined in Section 1.01 unless otherwise specified here:
4750 Turbo Circle, Reno, Nevada 89502
1.04 Landlord's Notice Address: P.O. Box 7098. Reno, Nevada 89510
1.05 Tenant's Permitted Use: Design, development, manufacture, sales and
distribution of slot machines and gaming equipment.
1.06 Lease Term: The Lease Term is for three (3) years and commences on
November 1, 1998, and expires October 31. 2001. Notwithstanding anything
contained in the Lease, the Lease shall not become effective and binding on the
Landlord in the event any of the following events or conditions have occurred or
are in existence as of the Commencement date:
(i) Tenant is not a subtenant in lawful possession of the Premises under
the sublease dated May 14. 1996. by and between Thomas and Betts Corporation
(sublessor) and Innovating Gaming Corporation of America (sublessee) and/or
Master lease dated May 9, 1988 by and between Dermody Industrial Group (Lessor)
and Thomas and Betts Corporation (Lessee) (hereinafter "Master lease"); (ii)
Tenant's right to possession of the Premises has been terminated under the
provisions of the Sublease and/or Master lease or by any applicable law: (iii)
Tenant is or has been previously in Default as defined under the terms of the
Sublease and/or Master lease: (iv) prior to the Commencement date, Tenant has
failed to provide to Landlord a copy of
<PAGE> 2
Tenant's most current financial statement or any other information requested by
Landlord respecting Tenant's ability to comply with the terms of the Lease: or
(v) in Landlord's opinion, Tenant has demonstrated the inability to comply with
the terms of the Lease. Compliance with the foregoing requirements shall be and
are considered conditions precedent to the execution of the Lease.
1.07 Base Monthly Rent shall be paid in lawful money of the United States
of America on the following schedule;
Year 1, November 1, 1998 -
October 31, 1999: NINETEEN THOUSAND TWO HUNDRED
FIFTY-SIX AND NO/100 DOLLARS
($19,256.00) per month;
Year 2, November 1, 1999 -
October 31, 2000; TWENTY THOUSAND SEVEN HUNDRED
AND NO/100 DOLLARS ($20,700.00) per
month; and
Year 3, November 1, 2000 -
October 31, 2001: TWENTY-TWO THOUSAND ONE HUNDRED FORTY-FOUR
AND NO/100 DOLLARS ($22,144.00) per
month.
1.08 Security Deposit; TWENTY-TWO THOUSAND ONE HUNDRED FORTY-FOUR AND
NO/100 DOLLARS ($22,144.00) in lawful money of the United States of America,
1.09 Proportionate Share: Tenant's Proportionate Share is 100% based upon
the total square footage of the Project and the square footage of the Premises.
1.10 Index: The Index for calculating cost of living adjustments in the
Consumer Price Index shall be the All Urban Consumers, U. S, City Average
(1982/84=100).
1.11 Tenant is entitled to common vehicle parking spaces subject to the
provisions of Section 8 of the Lease,
1.12 Tenant Improvements. Tenant Improvements to be performed in the
Premises, if any, will be performed in accordance with the terms and provisions
entitled "Landlord's Work" contained in Exhibit "B" attached if applicable,
Thereafter during the Lease Term, Landlord will be under no obligation to alter,
change, decorate or improve the Premises, Tenant agrees to accept Premises in an
"as is" condition.
2. DEMISE AND POSSESSION
2.01 Landlord leases to Tenant and Tenant leases from Landlord the
Premises described in 1.01. By entering the Premises, Tenant acknowledges that
it has examined the Premises and accepts the Premises in their present condition
subject to any additional work Landlord has agreed to do as stated on Exhibit B
if applicable. Landlord expressly reserves its right to lease any other space
available in the Project to whom ever it wishes, further Tenant hereby
acknowledges that it did not rely on any other tenant remaining a tenant in the
Project as a consideration for entering into this Lease,
2.02 If for any reason Landlord cannot deliver possession of the Premises
on the date the Lease commences, Landlord shall not be subject to any liability
nor shall the validity of this Lease be affected, If Tenant has not caused such
delay there shallbe a proportionate reduction of the Base Monthly Rent covering
the period between the commencement of the Lease Term and the date when Landlord
can deliver possession. However, Tenant, unless it is the cause of the delay,
has the right to cancel this Lease by written notification if possession of the
Premises is not delivered within one hundred eighty (180) days of the date the
Lease Term commences. Landlord may terminate this Lease by giving written notice
to Tenant if possession of the Premises is not delivered within one hundred
eighty (180) days of the date the lease is to commence.
3. BASE MONTHLY RENT
3.01 Base Monthly Rent; On the first day of every calendar month of the
Lease Term commencing November 1, 1998, Tenant will pay, without deduction or
offset, prior notice or demand, Base Monthly Rent at the place designated by
Landlord. The first month's rent is will be due and payable November 1, 1998. In
the event, that the Term of this Lease commences or ends on a day other then the
first day of a calendar month, a prorated amount of Base Monthly Rent shall be
due upon execution and it will be calculated using a thirty (30) day month, In
the event this Lease is to commence upon a date not ascertained on execution,
both parties agree to complete and execute a Commencement Date Certificate in
the form of Exhibit "E" within ten (10) days of the Commencement Date, if
applicable.
<PAGE> 3
3.02 N/A
3.03 Any installment of rent or any other charge payable which is not
paid within ten (10) days after it becomes due will be considered past due and
Tenant will pay to Landlord as Additional Rent a late charge equal to the
product of the variable Prime Rate "Prime", plus six percent (6%) per annum as
charged by Bank of America, Nevada; times the amount of such installment amount
due, or eighteen percent (18%) per annum of such installment or the sum of
twenty-five dollars ($25.00), whichever is greater, for each month or fractional
month transpiring from the date due until paid, A twenty-five dollar ($25.00)
handling charge will be paid by Tenant to Landlord for each returned check and,
thereafter, Tenant will pay all future payments of rent or other charges due by
money order or cashier's check, In the event a late charge is assessed for three
(3) consecutive rental periods, whether or not it is collected, the rent shall
without further notice become due and payable quarterly in advance
notwithstanding any provision of this Lease to the contrary. If Tenant shall be
served with a demand for the payment of past due rent, any payments tendered
thereafter to cure any default by Tenant shall be made only by cashier's check.
3.04 N/A
4. COMMON AREAS
4 .01 Definitions: "Common Areas"; "Common Area" is defined as all areas
and facilities outside the Premises and within the exterior boundary line of the
Project that are provided and designated by Landlord for the non-exclusive use
of Landlord, Tenant and other lessees of the Project and their respective
employees, agents, customers and invitees. Common Areas includes, but are not
limited to; all parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways, corridors, landscaped areas
and any restrooms used in common by lessees.
4.02 Tenant, its employees, agents, customers and invitees have the
non-exclusive right (in common with other Tenants, Landlord, and any other
person granted use by Landlord) to use of the Common Areas. Tenant agrees to
abide by and conform to, and to cause its employees, agents, customers and
invitees to abide by and conform to all rules and regulations established by
Landlord subject to provisions of paragraph 24.
4.03 Landlord has the right, in its sole discretion, from time to time,
to; 1) make changes to the Common Areas, including without limitation, changes
in the location, size, shape end number of driveways, entrances, parking spaces,
parking areas, ingress, egress, direction of driveways, entrances, corridors
parking areas and walkways; 2) close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises remains
avaIlable; 3) add additional buildings and improvements to the Common Areas; 4)
use the Common Areas while engaged in making additional improvements, repairs or
alterations to the Project or any portion thereof; do and perform any other acts
or make any other changes in, to or with respect to the Common Areas and Project
as Landlord may, in the exercise of sound business judgment, deem to be
appropriate.
5. ADDITIONAL RENT
5.01 All charges payable by Tenant other than Base Monthly Rant are
called "Additional Rent". Unless this lease provides otherwise, Additional Rent
is to be paid with the next monthly installment of Base Monthly Rent and is
subject to the provisions of 3.03. The term "rent" whenever used in this Lease
means Base Monthly Rent and Additional Rent.
5.02 Operating Costs
A. "Operating Costs" are all costs and expenses of ownership, operation,
maintenance, management, repair and insurance incurred by Landlord for the
Project including, but not limited to the following; all supplies, materials,
labor and equipment, used in or related to the operation and maintenance of the
Common Areas; all utilities, including but not limited to:
water, electricity, gas, heating, lighting, sewer, waste disposal related
to the maintenance or operation of the Common Areas; all air-conditioning and
ventilating costs related to the maintenance or operation of the Project; all
Landlord's costs in managing, maintaining, repairing, operating and insuring the
Project, including, for example, clerical, supervisory, and janitorial staff;
all maintenance, management and service agreements, including but not limited
to, janitorial, security, trash removal related to the maintenance or operation
of the Project; all legal and accounting costs and fees for licenses and permits
related to the ownership and operation of the Project; all insurance premiums
and costs of fire, casualty, and liability coverage, rent abatement and
earthquake insurance and any other type of insurance related to the Entire
Project, including any deductible for a loss attributable to the Premises; all
operation, maintenance and repair costs to the Common Areas, including but not
limited to, sidewalks, walkways, parkways, parking areas, loading and unloading
areas, trash areas, roadways, driveways, corridors, and landscaped area,
including for example, costs of resurfacing and restriping parking areas; all
maintenance and repair costs of building exteriors (including painting, asphalt
repair and replacement and roof maintenance, repair and replacement), restrooms
used in common by Tenants and signs and directories of the Project; amortization
(along with reasonable financing charges) of capital improvements made to the
Common Areas which may be required by any government authority or which will
improve the operating efficiency of the Project; a reasonable reserve for
repairs and replacement; a five percent (5%) fee for Landlord's supervision of
the Common Areas (five percent (5%) of the total above mentioned costs and
expanses incurred in a calendar year). Operating Costs will not include
depreciation of the Project.
<PAGE> 4
B. Tenant shall pay to Landlord Tenant's Proportionate Share of the
Operating Costs as indicated in 1.09. If there is a change in the square footage
of either the Project or the Premises during the term of this Lease the
Proportionate Share of the Tenant shall be adjusted according]y. Such payment
shall be paid by Tenant with and in addition to the monthly payment of Base
Monthly Rent. Tenant shall, if Landlord so elects, pay to Landlord on a monthly
basis, in advance, the amount which Landlord reasonably estimates to be Tenant's
Proportionate Share of the Operating Costs. In the event of such election by
Landlord, Landlord shall periodically determine Tenant's share of the actual
Operating Costs, and in the event that the amount which Tenant has paid to
Landlord on account of the estimated Operating Costs is less than his share of
such actual Operating Costs, Tenant shall pay such difference to Landlord on the
next rent payment date, In the event that Tenant has paid to Landlord more than
his share of such actual Operating Costs, the amount of such difference shall be
credited against Tenant's payments of Operating Costs next due or if such period
is at the end of the Lease term the amount of any overpayment shall be promptly
refunded to Tenant.
C. Failure by Landlord to provide Tenant with a statement by April 1st of
each year shall not constitute a waiver by Landlord of its right to collect
Tenant's share of Operating Costs or estimates for a particular calendar year,
Landlord's right to charge Tenant for such expenses in subsequent years is not
waived.
5.03 Taxes
A. "Real Project Taxes" are: (i) any fee, license fee, license tax,
business license fee, commercial rental tax, levy, charge, assessment, penalty
or tax imposed by any taxing authority against the Project; (ii) any tax or fee
on Landlord's right to receive, or the receipt of, rent or income from the
Project or against Landlord's business of leasing the Project, (iii) any tax or
charge for fire protection, streets, sidewalks, road maintenance, refuse or
other services provided to the Project by any governmental agency; (iv) any tax
imposed upon this transaction, or based upon a re-assessment of the Project due
to a change in ownership or transfer of all of part or Landlord's interest in
the Project; (v) any charge or fee replacing, substituting for, or in addition
to any tax previously included within the definition of real property tax; and
(vi) the Landlord's cost of any tax protest relating to any of the above. Real
Project Taxes do not, however, include Landlord's federal or state income,
franchise, inheritance or estate taxes.
B. Tenant shall pay to Landlord Tenant's Proportionate Share of the Real
Project Taxes as indicated in 1.09. Such payment shall be paid by Tenant
annually upon being invoiced for such taxes in addition to the monthly payment
of Base Monthly Rent. Tenant shall, if Landlord so elects, pay to Landlord on a
monthly basis, in advance, the amount which Landlord reasonably estimates to be
Tenant's Proportionate Share of the Real Project Taxes. In the event of such
election by Landlord, Landlord shall periodically determine Tenant's share of
the actual Real Project Taxes, and in the event that the amount which Tenant has
paid to Landlord on account of the Real Project Taxes is less than his share of
such actual Real Project Taxes, Tenant shall pay such difference to Landlord on
the next rent payment date. In the event that Tenant has paid to Landlord more
than his share of such actual Real Project Taxes, the amount of such difference
shall be credited against Tenant's payment of Real Project Taxes next due. If
the Lease term is expired then Landlord shall promptly refund any overpayment to
Tenant.
C. Personal Property Taxes: Tenant will pay all taxes charged against
trade fixtures, furnishing, equipment or any other personal property belonging
to Tenant. Tenant will have personal property taxes billed separately from the
Project. If any of Tenant's personal property is taxed with the Project, Tenant
will pay Landlord the taxes for the personal property upon demand by Landlord.
5.04 Based on Tenant's Proportionate Share defined in 1.09, Tenant agrees
to pay as Additional Rent to Landlord its share of any parking charges, utility
surchargas, occupancy taxes, or any other costs resulting from the statutes or
regulations, or interpretations thereof, enacted by any governmental authority
in connection with the use or occupancy of the Project or the parking facilities
serving the Project, or any part thereof.
5.05 Landlord by completing this paragraph may elect to have Tenant pay a
monthly estimate of the Additional Rent due from Tenant of five cents per square
foot per month, i.e.. TWO THOUSAND SIX HUNDRED FIFTY-FIVE AND 45/100 DOLLARS
($2.655.45) per month. Landlord shall make adjustments to this estimate based
upon actual costs and projected future costs. Landlord shall periodically
determine the balance between actual Additional Rent and Additional Rent paid by
Tenant and make adjustments in accordance with 5.02 and 5.03 above.
6. SECURITY DEPOSIT
6.01 If Tenant defaults with respect to any provision of this Lease,
Landlord may retain, use or apply all or any part of the Security Deposit to
compensate Landlord for any loss or damage suffered by Tenant's default
including but not limited to, the payment of Base Monthly Rent, Additional Rent
or other rental sums due, and for payment of amounts Landlord is obligated to
spend by reason of Tenant's default. If any portion is so retained, used or
applied, Tenant, upon demand, will deposit with Landlord an amount sufficient to
restore the deposit to its original amount, as adjusted per 3.02, except as
otherwise provided by law. Landlord will not be required to keep the Security
Deposit separate from its general funds, and Tenant will not be entitled to
interest on it. If Tenant fully and faithfully performs every provision of this
Lease, the Security Deposit or a balance thereof will be returned to Tenant
within 30 days after the expiration of this Lease or any renewals of this Lease.
In no event will Tenant have the right to apply any part of the Security Deposit
to any rents payable under this Lease.
<PAGE> 5
7. USE OF PREMISES; QUIET CONDUCT
7.01 The Premises may be used and occupied only for Tenant's Permitted
Use as shown in 1.05 and for no other purpose, without obtaining Landlord's
prior written consent. Tenant will comply with all laws, ordinances, orders and
regulationsaffecting the Premises. Tenant will not perform any act or carry on
any practices that may injure the Project or the Premises or be a nuisance or
menace, or disturb the quiet enjoyment of other lessees in the Project including
but not limited to equipment which causes vibration, use or storage of
chemicals, or heat or noise which is not properly insulated. Tenant will not
cause, maintain or permit any outside storage on or about the Premises. In
addition, Tenant will not allow any condition or thing to remain on or about the
Premises which diminishes the appearance or aesthetic qualities of the Premises
and/or the Project or the surrounding property. The keeping of a dog or other
animal on or about the Premises is expressly prohibited.
7.02 As used in this section, the term "Hazardous Waste" means:
A. Those substances defined as "hazardous substances", "hazardous
materials", "toxic substances", "regulated substances", or "solid waste" in the
Toxic Substance Control Act, 15 U.S.C. # 2601 et. seq., as now existing or
hereafter amended ("TSCA"), the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, 42 U.S.C. # 9601 et. seq., as now
existing or hereafter amended ["CERCLA"), the Resource, Conservation and
Recovery Act of 1976, 42 U.S.C. Section 6901 et. seq., as now existing or
hereafter amended ("RCRA"], the Federal Hazardous Substances Act, 15 U.S.C. #
1261 et. seq., as now existing or hereafter amended ("FHSA"), the Occupational
Safety and Health Act of 1970, 29 U.S.C. # 651 et. seq., as now existing or
hereafter amended ("OSHA"), the Hazardous Materials Transportation Act, 49
U.S.C. # 1801 et. seq., as now existing or hereafter amended ("HMTA"), and the
rules and regulations now in effect or promulgated hereafter pursuant to each
law referenced above;
B. Those substances defined as "hazardous waste", "hazardous material",
or "regulated substances" in Nev. Rev. Stat. ch 459, 1989 Nev. Stat. ch. 598 and
1989 Nev. Stat. ch 363, or in the regulations now existing or hereafter
promulgated pursuant thereto or in the Uniform Fire Code, 1988 edition;
C. Those substances listed in the United States Department of
Transportation table (49 CFR # 172.101 and amendments thereto) or by the
Environmental Protection Agency (or any successor agency) as hazardous
substances (40 CFR Part 302 and amendments thereto); and
D. Such other substances, mixtures, materials and waste which are
regulated under applicable local, state or federal law, or which are classified
as hazardous or toxic under federal, state or local laws or regulations (all
laws, rules and regulations referenced in paragraphs (a), (b), (c) and (d) are
collectively referred to as "Environmental Laws").
7.03 Tenant's Covenants. Tenant does not intend to and Tenant will not,
nor will Tenant allow any other person (including partnerships, corporations and
joint ventures), during the term of this Lease to manufacture, process, store,
distribute, use, discharge or dispose of any Hazardous Waste in, under or on the
Project, the Common Areas, or any property adjacent thereto.
A. Tenant shall notify Landlord promptly in the event of any spill or
release of Hazardous Waste into, on, or onto the Project regardless of the
source of spill or release, whenever Tenant knows or suspects that such a
release occurred.
B. Tenant will not be involved in operations at or near the Project which
could lead to the imposition on the Tenant or the Landlord of liability or the
creation of a lien on the Project, under the Environmental Laws.
C. Tenant shall, upon twenty-four (24) hour prior notice by Landlord,
permit Landlord or Landlord's agent access to the Project to conduct an
environmental site assessment with respect to the Project.
7.04. Indemnity. Tenant for itself and its successors and assigns
undertakes to protect, indemnify, save and defend Landlord, its agents,
employees, directors, officers, shareholders, affiliates, consultants,
independent contractors, successors and assigns (collectively the "Indemnitees")
harmless from any and all liability, loss, damage and expense, including
reasonable attorneys' fees, claims, suits and judgments that Landlord or any
other Indemnitee, whether as Landlord or otherwise, may suffer as a result of,
or with respect to:
A. Any Environmental Law, including the assertion of any lien thereunder
and any suit brought or judgment rendered regardless of whether the action was
commenced by a citizen (as authorized under the Environmental Laws) or by a
government agency;
B. Any spill or release of or the presence of any Hazardous Waste
affecting the Project whether or not the same originates or emanates from the
Project or any contiguous real estate, including any loss of value of the
Project as a result of a spill or release of or the presence of any Hazardous
Waste;
C. Any other matter affecting the Project within the jurisdiction of the
United States Environmental Protection Agency, the Nevada State Environmental
Commission, the Nevada Department of Conservation and Natural Resources, or the
Nevada
<PAGE> 6
Department of Commerce, including costs of investigations, remedial action, or
other response costs whether such costs are incurred by the United States
Government, the State of Nevada, or any Indemnitee;
D. Liability for clean-up costs, fines, damages or penalties incurred
pursuant to the provisions of any applicable Environmental Law; and
E. Liability for personal injury or property damage arising under any
statutory or common-law tort theory, including, without limitation, damages
assessed for the maintenance of a public or private nuisance, or for the
carrying of an abnormally dangerous activity, and response costs.
7.05 Remedial Acts. In the event of any spill or release of or the
presence of any Hazardous Waste affecting the Project, whether or not the same
originates or emanates from the Project or any contiguous real estate, and/or if
Tenant shall fail to comply with any of the requirements of any Environmental
Law, Landlord may, without notice to Tenant, at its election, but without
obligation so to do, gives such notices and/or cause such work to be performed
at the Project and/or take any and all other actions as Landlord shall deem
necessary or advisable in order to remedy said spill or release of Hazardous
Waste or cure said failure of compliance and any amounts paid as a result
thereof, together with interest at the rate equal to the product of the variable
Prime Rate "Prime", plus six percent (6%) per annum as charged by Bank of
America, Nevada; times the amount of such installment amount due, or eighteen
percent (18%) per annum of such installment or the sum of twenty-five dollars
($25.00), whichever is greater, for each month or fractional month transpiring
from the date due until paid.
7.06 Settlement. Landlord upon giving Tenant ten (10) days prior notice,
shall have the right in good faith to pay, settle or compromise, or litigate any
claim, demand, loss, liability, cost, charge, suit, order, judgment or
adjudication under the belief that it is liable therefor, whether liable or not,
without the consent or approval of Tenant unless Tenant within said ten (10) day
period shall protest in writing and simultaneously with such protest deposit
with Landlord collateral satisfactory to Landlord sufficient to pay and satisfy
any penalty and/or interest which may accrue as a result of such protest and any
judgment or judgments as may result, together with attorney's fees and expenses,
including, but not limited to, environmental consultants.
8. PARKING
8.01 Tenant and Tenant's customers, suppliers, employees, and invitees
have the non-exclusive right to park in common with other lessees in the parking
facilities as designated by Landlord. Tenant agrees not to overburden the
parking facilities and agrees to cooperate with Landlord and other lessees in
the use of the parking facilities. Landlord reserves the right to, on an
equitable basis, assign specific spaces with or without charge to Tenant as
Additional Rent, make changes in the parking layout from time to time, and to
establish reasonable time limits on parking.
9. UTILITIES
9.01 Tenant will be responsible for and shall pay for all water, gas,
heat, light, power, sewer, electricity, or other services metered, chargeable to
or provided to the Premises separate from and in addition to the costs outlined
in Section 5.02 dealing with the utility costs for Common Area Maintenance.
Landlord reserves the right to install separate meters for any such utility.
9.02 Landlord will not be liable or deemed in default to Tenant nor will
there be any abatement of rent for any interruption or reduction of utilities or
services not caused by any act of Landlord or any act reasonably beyond
Landlord's control. Tenant agrees to comply with energy conservation programs
implemented by Landlord by reason of enacted laws or ordinances.
9.03 Tenant will contract and pay for all telephone and such other
services for the Premises subject to the provisions of 10.03.
10. ALTERATIONS, MECHANIC'S LIENS
10.01 Tenant will not make any alterations to the Premises without
Landlord's prior written consent. Landlord's consent shall be contingent upon
Tenant providing Landlord with the following items or information, all subject
to Landlord's approval: (i) Tenant's contractor, (ii) certificates of insurance
by Tenant's contractor for commercial general liability insurance with limits
not less than $2,000,000 General Aggregate,$1,000,000 Products/Complete
Operations Aggregate,$1,000,000 Personal & Advertising Injury, $1,000,000 Each
Occurrence, $50,000 Fire Damage, $5,000 Medical Expense, $1,000,000 Auto
Liability (Combined Single Unit, including Hired/Nonowned Auto Liability),
Workers Compensation, including Employer's Liability, as required by state
statute endorsed to show Landlord as an additional insured and for worker's
compensation as required and (iii) detailed plans and specifications for such
work. Tenant agrees that it will have its contractor execute a waiver of
mechanic's lien and that Tenant will remove any mechanic's lien placed against
the Project within ten (10) days of receipt of notice of lien. In addition,
before alterations may begin, valid building permits or other permits or
licenses required must be furnished to Landlord, and, once the alterations
begin, Tenant will diligently and continuously pursue their completion. At
Landlord's option, any alterations may become part of the realty and belong to
Landlord. If requested hy Landlord, Tenant will pay, prior to the commencement
of the
<PAGE> 7
construction, an amount determined by Landlord necessary to cover the costs of
demolishing such alterations and/or the cost of returning the Premises to its
condition prior to such alterations. As a further condition to giving such
consent, Landlord may require Tenant to provide Landlord, at Tenant's sole cost
and expense, a payment and performance bond in form acceptable to Landlord, in a
principal amount not less than one and one-half times the estimated costs of
such alterations, to ensure Landlord against any liability for mechanic's and
materialmen's liens and to ensure completion of work. Tenant, at Landlord's
option, shall at Tenant's expense remove all alterations and repair all damage
to the Premises.
10.02 Notwithstanding anything in 10.01, Tenant may, with written consent
of Landlord, install trade fixtures, equipment, and machinery in conformance
with the ordinances of the applicable city and county, and they may be removed
upon termination of its Lease provided the Premises are not damaged by their
removal.
10.03 Any private telephone Systems and/or other related
telecommunications equipment and lines must be installed within Tenant's
Premises and, upon termination of this Lease removed and the Premises restored
to the same condition as before such Installation.
10.04 Tenant will pay all costs for alterations and will keep the
Premises, the Project and the underlying property free from any liens arising
out of work performed for, materials furnished to or obligation incurred by
Tenant.
10.05 Landlord will have the right to construct or permit construction of
tenant improvements in or about the Project for existing and new Tenants end to
alter any public areas in and around the Project. Notwithstanding anything which
may be contained in this Lease, Tenant understands this right of Landlord and
agrees that such construction will not be deemed to constitute a breach of this
Lease by Landlord and Tenant waives any such claim which it might have arising
from such construction.
11. FIRE INSURANCE: HAZARDS AND LIABILITY INSURANCE
11.01 Except as expressly provided as Tenant's Permitted Use, or as
otherwise consented to by Landlord in writing. Tenant shall not do or permit
anything to be done within or about the Premises which will increase the
existing rate of insurance on the Project and shall, at its sole cost and
expense, comply with any requirements, pertaining to the Premises, of any
insurance organization insuring the Project and Project-related apparatus.
Tenant agrees to pay to Landlord, as Additional Rent, any increases in premiums
on policies resulting from Tenant's Permitted Use or other use consented to by
Landlord which Increases Landlord's premiums or requires extended coverage by
Landlord to insure the Premises.
11.02 Tenant, at all times during the term of this Lease and at Tenant's
sole expense, will maintain a policy of standard fire and extended coverage
insurance with "all risk" coverage on all Tenant's improvements and alterations
in or about the Premises and on all personal property and equipment to the
extent of at least ninety percent (90%) of their full replacement value. The
proceeds from this policy will be used by Tenant for the replacement of personal
property and equipment and the restoration of Tenant's improvements and/or
alterations. This policy will contain an express waiver, in favor of Landlord,
of any right of subrogation by the insurer.
11.03 Tenant, at all times during the term on this Lease and at Tenant's
sole expense, will maintain a policy of commercial general liability coverage
with limits of not less than $2,000,000 combined single limit for bodily injury
and property damage insuring against all liability of Tenant and its authorized
representatives arising out of or in connection with Tenant's use or occupancy
of the Premises.
11.04 All insurance will name Landlord and/or Landlord's designated
partners and affiliates as an additional Insured and will include an express
waiver of subrogation by the insurer in favor of Landlord and Tenant and will
release Landlord from any claims for damage to any person, to the Premises, and
to the Project, and to Tenant's personal property, equipment, improvements and
alterations in or on the Premises of the Project, caused by or resulting from
risks which are to be insured against by Tenant under this Lease. All insurance
required to be provided by Tenant under this Lease will (a) be issued an
insurance company authorized to do business in the state in which the Premises
are located and which has and maintains a rating of A/X in the Best's Insurance
Reports or the equivalent, (b) be primary and noncontributing with any insurance
carried by Landlord, and (c) contain an endorsement requiring at least thirty
(30) days prior written notice of cancellation to Landlord before cancellation
or change in coverage, scope or limit of any policy. Tenant will deliver a
certificate of insurance or a copy of the policy to Landlord within thirty (30)
days of execution of this Lease and will provide evidence of renewed insurance
coverage at each anniversary, and prior to the expiration of any current
policies; however, in no event will Tenant be allowed to occupy the Premises
before providing adequate and acceptable proof of insurance as stated above.
Tenant's failure to provide evidence of this coverage to Landlord may, in
Landlord's sole discretion, constitute a default under this Lease.
12. INDEMNIFICATION AND WAIVER OF CLAIMS
12.01 Tenant waives all claims against Landlord for damage to any
property in or about the Premises and for injury to any persons, including death
resulting therefrom, regardless of cause or time of occurrence. Tenant will
defend, indemnify and hold Landlord harmless from and against any and all
claims, actions, proceedings, expenses, damages and liabilities, including
attorney's fees, arising out of, connected with, or resulting from any use of
the Premises by Tenant, its employees, agents, visitors
<PAGE> 8
or licensees, including, without limitation, any failure of Tenant to comply
fully with all of the terms and conditions of this Lease except for any damage
or injury which is the direct result of intentional acts by Landlord, its
employees, agents, visitors or licensees.
13. REPAIRS
13.01 Tenant shall, at its sole expense, keep and maintain the Premises
and every part thereof (excepting common use equipment, which Landlord agrees to
repair or replace pursuant to Section 5.02 unless damages are due to the neglect
or intentional acts of Tenant or its agents, employees, visitors, or licensees),
including interior windows, skylights, doors, plate glass, any store fronts and
the interior of the Premises, in good and sanitary order, condition and repair.
Tenant will, also, at its sole cost keep and maintain all utilities, fixtures,
plumbing and mechanical equipment used by Tenant in good order and repair and
furnish all expendables (light bulbs, paper goods, soaps, etc.) used in the
Premises. The standard for comparison and need of repair will be the condition
of the Premises at the time of commencement of this Lease and all repairs will
be made by a licensed and bonded contractor approved by Landlord.
13.02 Tenant will not make repairs to the Premises at the cost of
Landlord whether by deductions of rent or otherwise, or vacate the Premises or
terminate the Lease if repairs are not made. If during the Term, any alteration,
addition or change to the Premises is required by legal authorities, Tenant, at
its sole expense, shall promptly make the same. Landlord reserves the right to
make any such repairs not made or maintained in good condition by Tenant and
Tenant shall reimburse Landlord for all such costs upon demand.
13.03 If repairs deemed necessary by Landlord or any government authority
are not made by Tenant within the prescribed time frame as requested in writing,
Tenant shall be in default of this Lease.
13.04 Tenant shall, at its own expense, within thirty days of lease
commencement, contract with a vendor acceptable to Landlord for the maintenance
service of the HVAC which will be furnished to the Landlord upon request. If
Tenant fails to obtain and maintain such a maintenance service contract Landlord
shall have the right to obtain such a maintenance service contract at the
expense of Tenant.
14. AUCTIONS, SIGNS, AND LANDSCAPING
14.01 Tenant will not conduct or permit to be conducted any sale by
auction on the Premises. Landlord will have the right to control landscaping and
approve the placement, size, and quality of signs . Tenant will not make
alterations or additions to the landscaping and will not place any signs nor
allow the placement of any signs, which are visible from the outside, on or
about any building of the Project, nor in any landscape area, without the prior
written consent of Landlord. Landlord will have the right in its sole discretion
to withhold its consent. Any signs not in conformity with this Lease may be
removed by Landlord at Tenant's expense.
15. ENTRY BY LANDLORD
15.01 Tenant will permit Landlord and Landlord's agents to enter the
Premises at all reasonable times for the purpose of inspecting the same, or for
the purpose of maintaining the Project, or for the purpose of making repairs,
alterations or additions to any portion of the Project, including the erection
and maintenance of such scaffolding, canopies, fences and props as may be
required, or for the purpose of posting notices of nonresponsibility for
alterations, additions or repairs, or for the purpose of showing the Premises
to prospective tenants during the last six months of the Lease Term, or placing
upon the Project any usual or ordinary "for sale" signs, without any rebate of
rents and without any liability to Tenant for any loss of occupation or quiet
enjoyment of the Premises thereby occasioned. Tenant will permit Landlord at any
time within sixty (60) days prior to the expiration of this Lease, to place upon
the Premises any usual or ordinary "to let" or "to lease" signs. Tenant will not
install a new or additional lock or any bolt or any door of the Premises without
the prior written consent of Landlord, which will not be unreasonably withheld.
If Landlord gives its consent, such work shall be undertaken by a locksmith
approved by Landlord, at Tenant's sole cost. Landlord retains the right to
charge Tenant for restoring any altered doors to their condition prior to the
installation of the new or additional locks.
16. ABANDONMENT
16.01 Tenant will not vacate or abandon the Premises, which shall be
deemed to occur any time during the Lease Term if Tenant does not conduct
business for a period of fifteen (15) consecutive days and/or leaves the
Premises unoccupied for any period of time. If Tenant abandons, vacates or
surrenders the Premises, or is dispossessed by process of law, or otherwise, any
personal property belonging to Tenant left in or about the Premises will, at the
option of Landlord be deemed abandoned and may be disposed of by Landlord in the
manner provided for by the laws of the state in which the Premises are located.
17. DESTRUCTION
17.01 In the case of total destruction of the Premises, or any portion
thereof substantially interfering with Tenant's use of the Premises, whether by
fire or other casualty, not caused by the fault or negligence of Tenant, its
agents, employees, servants, contractors, subtenants, licensees, customers or
business invitees, this Lease shall terminate except as herein provided. If
Landlord notifies Tenant in writing within forty-five (45) days of such
destruction of Landlord's election to repair said damage, and if Landlord
proceeds to and does repair such damage with reasonable dispatch, this Lease
shall not terminate, but shall continue in full force and affect, except that
Tenant shall be entitled to a reduction in the minimum rent in an amount equal
to that proportion of
<PAGE> 9
the minimum rent which the number of square feet of floor space in the unusable
portion bears to the total number of square feet of floor space in the Premises.
Said reduction shall be prorated so that the rent shall only be reduced for
those days any given area is actually unusable. In determining what constitutes
reasonable dispatch, consideration shall be given to delays caused by labor
disputes, civil commotion, war, warlike operations, invasion, rebellion,
hostilities, military or usurped power, sabotage, governmental regulations or
control, fire or other casualty, inability to obtain any materials or services,
acts of God and other causes beyond Landlord's control. If this Lease is
terminated pursuant to this Section l7 and if Tenant is not in default
hereunder, rent shall be prorated as of the date of termination, any security
deposited with Landlord shall be returned to Tenant, less any reasonable offsets
and all rights end obligations hereunder shall cease and terminate.
17.02. Notwithstanding the foregoing provisions, in the event the
Premises, or any portion thereof, shall be damaged by fire or other casualty due
to the fault or negligence of Tenant, its agents, employees, servants,
contractors, subtenants, licensees, customers or business invitees, then,
without prejudice to any other rights and remedies of Landlord, this Lease shall
not terminate, the damage shall be repaired at Tenant's cost, and there shall be
no apportionment or abatement of any rent.
17.03. In the event of any damage not limited to, or not including, the
Premises, such that the building of which the Premises is a part is damaged to
the extent of twenty-five (25%) percent or more of the cost of replacement, or
the buildings (taken in the aggregate) of the Project owned by Landlord shall be
damaged to the extent of more than twenty-five (25%) of the aggregate cost of
replacement, Landlord may elect to terminate this Lease upon giving notice of
such election in writing to Tenant within ninety [90) days after the occurrence
of the event causing the damage.
17.04. The provisions of this Section l7 with respect to Landlord shall
be limited to such repair as is necessary to place the Premises in the condition
specified for Landlord's work by Exhibit B (if applicable) and when placed in
such condition the Leased Property shall be deemed restored and rendered
tenantable promptly following which time Tenant, at Tenant's expense shall
perform Tenant's work required by Exhibit B (if applicable) and Tenant shall
also repair or replace its stock in trade, fixtures, furniture, furnishings,
floor coverings and equipment, and if Tenant has closed, Tenant shall promptly
reopen for business.
17.05. All insurance proceeds payable under any fire, and/or rental
insurance shall be payable solely to Landlord and Tenant shall have no interest
therein. Tenant shall in no case be entitled to compensation for damages on
account of any annoyance or inconvenience in making repairs under any provision
of this Lease. Except to the extent provided for in this Section 17, neither the
rent payable by Tenant nor any of Tenant's other obligations under any provision
of this Lease shall be affected by any damage to or destruction of the Premises
or any portion thereof by any cause whatsoever.
18. ASSIGNMENT, SUBLETTING AND TRANSFERS OF OWNERSHIP
18.01 Tenant will not, without Landlord's prior written consent, assign,
sell, mortgage, encumber, convey or otherwise transfer all or any part of
Tenant's leasehold estate, or permit the Premises to be occupied by anyone other
than Tenant and Tenant's employees or sublet the premises or any portion thereof
(collectively called "Transfer"). Tenant must supply Landlord with any and all
documents deemed necessary by Landlord to evaluate any proposed Transfer at
least sixty (60) days in advance of Tenant's proposed Transfer date.
18.02 Landlord need not consent to any Transfer for reasons including,
but not limited to, whether or not: (a) in the reasonable judgment of Landlord
the transferee is of a character or is engaged in a business which is not in
keeping with the standard of Landlord for the Project; (b) in the reasonable
judgment of Landlord any purpose for which the transferee intends to use the
Premises is not in keeping with the standards of Landlord for the Project;
provided in no event may any purpose for which transferee intends to use the
Premises be in violation of this Lease; (c) the portion of the Premises subject
to the transfer is not regular in shape with appropriate means of entering and
exiting, including adherence to any local, county or other governmental codes,
or is not otherwise suitable for the normal purposes associated with such a
Transfer; or (d)Tenant is in default under this Lease or any other Lease with
Landlord.
18.03 In the event Landlord consents to a Transfer, Tenant will pay
Landlord the excess, if any, of the rent and other charges reserved in the
Transfer over the allocable portion of the rent and other charges hereunder for
that portion of the Premises subject to the Transfer. For the purpose of this
section, the rent reserved in the Transfer will be deemed to include any lump
sum payment or other consideration given to Tenant in consideration for the
Transfer. Tenant will pay or cause the transferee to pay to Landlord this
additional rent together with the monthly installments of rent due.
18.04 Any consent to any Transfer which may be given by Landlord, or the
acceptance of any rent, charges or other consideration by Landlord from Tenant
or any third party, will not constitute a waiver by Landlord of the provisions
of this Lease or a release of Tenant from the full performance by it of the
covenants stated herein; and any consent given by Landlord to any Transfer will
not relieve Tenant (or any transferee of Tenant) from the above requirements for
obtaining the written consent of Landlord to any subsequent Transfer.
18.05 If a default under this Lease should occur while the Premises or
any part of the Premises are assigned, sublet or otherwise transferred,
Landlord, in addition to any other remedies provided for within this Lease or by
law, may at its option collect directly from the transferee all rent or other
consideration becoming due to Tenant under the Transfer and apply these monies
against any sums due to Landlord by Tenant; and Tenant authorizes and directs
any transferee to make payments of rent or other
1
<PAGE> 10
consideration direct to Landlord upon receipt of notice from Landlord. No direct
collection by Landlord from any transferee should be construed to constitute a
novation or a release of Tenant or any guarantor of Tenant from the further
performance of its obligations in connection with this Lease.
18.06 N/A
18.07 In the event Tenant requests Landlord's consent to an Assignment,
Sub-Let or Transfer of Tenant's interest in the leased Premises, Tenant agrees
to pay Landlord all attorney's fees incurred by Landlord for any legal services
for document review of any and all documents deemed necessary by Landlord and
Tenant to Assign, Sub-let or Transfer Tenant's interest in the leased Premises.
19. BREACH BY TENANT
19.01 Tenant will be in breach of this Lease if at any time during the
term of this Lease (and regardless of the pendency of any bankruptcy,
reorganization, receivership, insolvency or other proceedings in law, in equity
or before any administrative tribunal which have or might have the effect of
preventing Tenant from complying with the terms of this Lease):
A. Tenant fails to make payment of any installment of Base Monthly Rent,
Additional Rent, or of any other sum herein specified to be paid by Tenant, when
due; or
B. Tenant fails to observe or perform any of its other covenants,
agreements or obligations hereunder, and such failure is not cured within ten
(10) days after Landlord's written notice to Tenant of such failure; provided,
however, that if the nature of Tenant's obligation is such that more than ten
(10) days are required for performance, then Tenant will not be in breach if
Tenant commences performance within such 10 day period and thereafter diligently
prosecutes the same to completion; or
C. Tenant, Tenant's assignee, subtenant, guarantor, or occupant of the
Premises becomes insolvent, makes a transfer in fraud of its creditors, makes a
transfer for the benefit of its creditors, is the subject of a bankruptcy
petition, is adjudged bankrupt or insolvent in proceedings filed against Tenant,
a receiver, trustee, or custodian is appointed for all or substantially all of
Tenant's assets, fails to pay its debts as they become due, convenes a meeting
of all or a portion of its creditors, or performs any acts of bankruptcy or
insolvency, including the selling of its assets to pay creditors; or
D. Tenant has abandoned the Premises as defined in paragraph 16 above.
E. Tenant falls to take possession of the Premises within thirty (30)
days of receiving notice by Landlord that the Premises are available.
20. REMEDIES OF LANDLORD
20.01 Nothing contained herein shall constitute a waiver of Landlord's
right to recover damages by reason of Landlord's efforts to mitigate the damage
to it by Tenant's default; nor shall anything in this Section adversely affect
Landlord's right, as in this Lease elsewhere provided, to indemnification
against liability for injury or damages to persons or property occurring prior
to a termination of this Lease.
20.02 All cure periods provided herein shall run concurrently with any
periods provided by law.
20.03 In the event of default, as designated herein above, in addition to
any other rights or remedies provided for herein or at law or in equity,
Landlord, at its sole option, shall have the following rights:
A. The right to declare the term of this Lease ended and reenter the
Premises and take possession thereof, and to terminate all of the rights of
Tenant in and to the Premises.
B. The right, without declaring the term of this Lease ended, to reenter
the Premises and to occupy the same, or any portion there of, for and on account
of the Tenant as hereinafter provided, and Tenant shall be liable for and pay to
Landlord on demand all such expenses as Landlord may have paid, assumed or
incurred in recovering possession of the Premises, including costs, expenses,
attorney's fees and expenditures placing the same in good order, or preparing or
altering the same for reletting, and all other expenses, commissions and charges
paid by the Landlord in connection with reletting the Premises. Any such
reletting may be for the remainder of the term of this Lease or for a longer or
shorter period. Such reletting shall be for such rent and on such other terms
and conditions as Landlord, in its sole discretion, deems appropriate. Landlord
may execute any lease made pursuant to the terms hereof either in the Landlord's
own name or in the name of Tenant or assume Tenant's interest in any existing
subleases to any tenant of the Premises, as Landlord may see fit, and Tenant
shall have no right or authority whatsoever to collect any rent from such
tenants, subtenents, of the Premises. In any case, and whether or not the
Premises or any part thereof is relet, Tenant, until the end of the Lease term
shall be liable to Landlord for an amount equal to the amount due
<PAGE> 11
as Rent hereunder, less net proceeds, if any of any reletting effected for the
account of Tenant. Landlord reserves the right to bring such actions for the
recovery of any deficits remaining unpaid by the Tenant to the Landlord
hereunder as Landlord may deem advisable from time to time without being
obligated to await the end of the term of the Lease. Commencement of maintenance
of one or more actions by the Landlord in this connection shall not bar the
Landlord from bringing any subsequent actions for further accruals. In no event
shall Tenant be entitled to any excess rent received by Landlord over and above
that which Tenant is obligated to pay hereunder; or
C. The right, even though it may have relet all or any portion of the
Premises in accordance with the provisions of subsection B. above, to thereafter
at any time elect to terminate this Lease for such previous default on the part
of the Tenant, and to terminate all the rights of Tenant in and to the Premises.
20.04 Pursuant to the rights of re-entry provided above, Landlord may
remove all persons from the Premises and may, but shall not be obligated to,
remove all property therefrom, and may, but shall not be obligated to, enforce
any rights Landlord may have against said property or store the same in any
public or private warehouse or elsewhere at the cost and for the account of
Tenant or the owner or owners thereof. Tenant agrees to hold Landlord free and
harmless from any liability whatsoever for the removal and/or storage of any
such property, whether of Tenant or any third party whomsoever. Such action by
the Landlord shall not be deemed to have terminated this Lease.
20.05 If Tenant breaches this Lease and abandons the Premises before the
end of the term, or if its right of possession is terminated by Landlord because
of Tenant's breach of this Lease, then this Lease may be terminated by Landlord
at its option. On such Termination Landlord may recover from Tenant, in addition
to the remedies permitted at law:
A. The worth, at the time of the award, of the unpaid Base Monthly Rents
and Additional Rents which had been earned at the time this Lease is terminated.
B. The worth, at the time of the award, of the amount by which the unpaid
Base Monthly Rents and Additional Rents which would have been earned after the
date of termination of this Lease until the time of award exceeds the amount of
the loss of rents that Tenant proves could be reasonably avoided;
C. The worth, at the time of the award, of the amount by which the unpaid
Base Monthly Rent and Additional Rents for the balance of the Lease Term after
the time of award exceeds the amount of such rental loss for such period as the
Tenant proves could have been reasonably avoided; and
D. Any other amount, and court costs, necessary to compensate Landlord
for all detriment proximately caused by Tenant's breach of its obligations under
this Lease, or which in the ordinary course of events would be likely to result
therefrom. The detriment proximately caused by Tenant's breach will include,
without limitation, (i) expenses for cleaning, repairing or restoring the
Premises, (ii) expenses for altering, remodeling or otherwise improving the
Premises for the purpose of reletting the Premises, (iii) brokers' fees and
commissions, advertising costs and other expenses of relatting the Premises,
(iv) costs of carrving the Premises such as taxes, insurance premiums, utilities
and security precautions, (v) expenses of retaking possession of the Premises,
(vi) reasonable attorney's fees and court costs, (vii) any unearned brokerage
commissions paid in connection with this Lease, (viii) reimbursement of any
previously waived Base Rent, Additional Rent, free rent or reduced rental rate,
and (ix) any concession made or paid by Landlord to the benefit of Tenant in
consideration of this Lease including, but not limited to, any moving
allowances, contributions or payments by Landlord for tenant improvements or
build-out allowances or assumptions by Landlord of any of the Tenant's previous
lease obligations.
20.06 In any action brought by the Landlord to enforce any of its rights
under or arising from this Lease, Landlord shall be entitled to receive its
costs end legal expenses including reasonable attorneys' fees, whether or not
such action is prosecuted to judgment.
20.07 The waiver by Landlord of any breach or default of Tenant hereunder
shall not be a waiver of any preceding or subsequent breach of the same or any
other term. Acceptance of any Rent payment shall not be construed to be a waiver
of the Landlord of any preceding breach of the Tenant.
20.08 All past due amounts owed by Tenant under the terms of this Lease
shall bear interest at twelve percent per annum unless otherwise stated.
21. SURRENDER OF LEASE NOT MERGER
21.01 The voluntary or other surrender of this Lease by Tenant, or mutual
cancellation thereof, will not work a merger and will, at the option of
Landlord, terminate all or any existing transfers, or may, at the option of
Landlord, operate as an assignment to it of any or all of such transfers.
22. ATTORNEYS FEES/COLLECTION CHARGES
22.01 In the event of any legal action or proceeding between the parties
hereto, reasonable attorneys' fees and expenses of the prevailing party in any
such action or proceeding will be added to the judgment therein. Should Landlord
be named
<PAGE> 12
as defendant in any suit brought against Tenant in connection with or arising
out of Tenant's occupancy hereunder, Tenant will pay to Landlord its costs and
expenses incurred in such suit, including reasonable attorney's fees.
22.02 If Landlord utilizes the services of any attorney at law for the
purpose of collecting any rent due and unpaid by Tenant after five (5) days
written notice to Tenant of such nonpayment of rent or in connection with any
other breach of this Lease by Tenant, Tenant agrees to pay Landlord reasonable
attorneys' fees as determined by Landlord for such services, regardless of the
fact that no legal action may be commenced or filed bv Landlord
23. CONDEMNATION
23.01 If twenty-five percent [25%) or more of the square footage of
the Premises is taken for any public or quasi-public purpose by any lawful
government power or authority, by exercise of the right of appropriation,
reverse condemnation, condemnation or eminent domain, or sold to prevent such
taking, and if the remaining portion of the Premises will not be reasonably
adequate for the operation of Tenant's business after Landlord completes such
repairs or alterations as Landlord elects to make, either Tenant or the Landlord
may at its option terminate this Lease by notifying the other party hereto of
such election in writing within twenty (20) days after such taking. Tenant will
not because of such taking assert any claim against the Landlord or the taking
authority for any compensation because of such taking, and Landlord will be
entitled to receive the entire amount of any award without deduction for any
estate of interest of Tenent. If less than twenty-five percent (25%) of the
Premises is taken, Landlord at its option may terminate this Lease. If Landlord
does not so elect, Landlord will promptly proceed to restore the Premises to
substantially its same condition prior to such partial taking, allowing for any
reasonable effects of such taking, and a proportionate allowance based on the
loss of square footage will be made to Tenant for the rent corresponding to the
time during which, and to the part of the Premises, which, Tenant is deprived on
account of such taking and restoration.
24. RULES AND REGULATIONS
24.01 Tenant will faithfully observe and comply with any Rules and
Regulations promulgated by Landlord for the Project and Landlord reserves the
right to modify and amend them as it deems necessary. Landlord will not be
responsible to Tenant for the nonperformance by any other Tenant or occupant of
the Project of any of said Rules and Regulations.
24.02 In the event that Tenant fails to cure any violations of such
Rules and Regulations following ten (10) days written notice by Landlord, such
failure to cure shall be deemed a material breach of this Lease by Tenant.
25. ESTOPPEL CERTIFICATE
25.01 Tenant will execute and deliver to Landlord, within ten (10)
business days of Landlords written demand, a statement in writing certifying
that this Lease is in full force and effect, end that the Base Monthly Rent and
Additional Rent payable hereunder is unmodified end in full force end effect
(or, if modified, stating the nature of such modification) and the date to which
rent and other charges are paid, if any, end acknowledging that there are not,
to Tenant's knowledge, any uncured defaults on the pert of Landlord hereunder or
specifying such defaults if they are claimed and such other matters as Landlord
may reasonably request. Any such statement may be conclusively relied upon by
any prospective purchaser or encumbrencer of the Premises. Tenant's failure to
deliver such statement within such time shall be conclusive Upon Tenant that (1)
this Lease is in full force and effect, without modification except as may be
represented by Landlord; (2) there are no uncured defaults in Landlord's
performance and (3) not more than one (1) month's rents has been paid in
advance.
26. SALE BY LANDLORD
26.01 In the event of a sale or conveyance by Landlord of the Project
the same shall operate to release Landlord from any liability upon any of the
covenants or conditions, expressed or implied, herein contained in favor of
Tenant, and in such event Tenant agrees to look solely to the responsibility of
the successor in interest of Landlord in and to this Lease. This Lease will not
be affected by any such sale, and Tenant agrees to attorn to the purchaser or
assignee.
27. NOTICES
27.01 All notices, statements, demands, requests, consents, approvals,
authorizations, offers, agreements, appointments, or designations under this
Lease by either party to the other will be in writing and will be considered
sufficiently given and served upon the other party if sent by certified or
registered mail, return receipt requested, postage prepaid, delivered
personally, or by a national overnight delivery service and addressed as
indicated in 1.03 and 1.04.
28. WAIVER
28.01 The failure of Landlord to insist in any one or more cases upon
the strict performance of any term, covenant or condition of the Lease will not
be construed as a waiver of a subsequent breach of the same or any other
covenant, term or condition; nor shall any delay or omission by Landlord to seek
a remedy for any breach of this Lease he deemed a waiver by Landlord of Its
remedies or rights with respect to such a breach.
<PAGE> 13
29. HOLDOVER
29.01 If Tenant remains in the Premises after the Lease Expiration
date with the consent of the Landlord, and has not given prior written notice to
Landlord, such continuance of possession by Tenant will be deemed to be a
month-to-month tenancy at the sufferance of Landlord terminable on thirty (30)
day notice at any time by either party. All provisions of this Lease, except
those pertaining to term and rent, will apply to the month-to-month tenancy.
Tenant will pay a new Base Monthly Rent in an amount equal to 150% of the base
monthly rent payable for the last full calendar month during the regular term of
this Lease.
30. DEFAULT OF LANDLORD/LIMITATION OF LIABILITY
30.01 In the event of any default by Landlord hereunder, Tenant agrees
to give notice of such default, by registered mail, to Landlord at Landlord's
Notice Address as stated in 1.04 and to offer Landlord a reasonable opportunity
to cure the default. In the event of any actual or alleged failure, breach or
default hereunder by Landlord, Tenant's sole and exclusive remedy will be
against Landlord's interest in the Project, and Landlord, its directors,
officers, employees and any partner of Landlord will not be sued, be subject to
service or process, or have a judgment obtained against him in connection with
any alleged breach or default, and no writ of execution will be levied against
the assets of any partner, shareholder or officer of Landlord. The covenants end
agreements are enforceable by Landlord and also by any partner, shareholder or
officer of Landlord.
31. SUBORDINATION
31.01 Without the necessity of any additional document being executed
by Tenant for the purpose of affecting a subordination, and at the election of
Landlord or any mortgagee with a lien on the Project or any ground lessor with
respect to the Project, this Lease will be subject and subordinate at all times
to (a) all ground leases or underlying leases which may now exist or hereafter
be executed affecting the Project, and (b) the lien of any mortgage or deed of
trust which may now exist or hereafter be executed in any amount for which the
Project, ground leases or underlying leases, or Landlord's interest or estate in
any of said items is specified as security. In the event that any ground lease
or underlying lease terminates for any reason or any mortgage or deed of trust
is foreclosed or a conveyance in lieu of foreclosure is made for any reason,
Tenant will, notwithstanding any subordination, attorn to and become the Tenant
of the successor in interest to Landlord, at the option of such successor in
interest. Tenant covenants and agrees to execute and deliver to Landlord any
document or instrument reasonably requested by Landlord or its ground lessor,
mortgagee or beneficiary under a deed of trust evidencing such subordination of
this Lease with respect to any such ground lease or underlying leases or the
lien of any such mortgage or deed of trust. Tenant hereby irrevocably appoints
Landlord as attorney-in-fact of Tenant to execute, deliver and record any such
document in the name and on behalf of Tenant.
32. DEPOSIT AGREEMENT
32.01 Landlord and Tenant hereby agree that Landlord will be entitled
to immediately endorse and cash Tenant's good faith rent and the Security
Deposit check(s) accompanying this Lease. It is further agreed and understood
that such action will not guarantee acceptance of this Lease by Landlord, but,
in the event Landlord does not accept this Lease, such deposits will be promptly
refunded in full to Tenant. This Lease will be effective only after Tenant has
received a copy fully executed by both Landlord end Tenant.
33. GOVERNING LAW
33.01 This Lease is governed by and construed in accordance with the
laws of the State of Nevada, and venue of any suit will be in the county where
the Premises are located unless the Premises are not located in Nevada in which
case the venue will be Washoe County in the State of Nevada.
34. NEGOTIATED TERMS
34.01 This Lease is the result of the negotiations of the parties and
has bean agreed to by both Landlord and Tenant after prolonged discussion.
35. SEVERABILTY
35.01 If any provision of this Lease is found to be unenforceable, all
other provisions shall remain in full force and effect
36 BROKERS
36.01 Tenant warrants that it has had no dealings with any broker or
agent in connection with this Lease, except John Britt. Dickson Realty and
covenants to pay, hold harmless and indemnify Landlord from and against any and
all cost, expense or liability for any compensation, commissions and charges
claimed by any broker or agent, other than any identified above, with respect to
this Lease or its negotiation.
37. QUIET POSSESSION
37.01 Tenant, upon payng the rentals and other payments herein
required from Tenant, and upon Tenant's performance of all of the terms,
covenants and conditions of this Lease on its part to be kept and performed, may
quietly have, hold and enjoy the Premises during the Term of this Lease without
disturbance from Landlord or from any other person claiming through Landlord.
<PAGE> 14
38. MISCELLANEOUS PROVISIONS
38.01 Whenever the singular number is used in this Lease and when
required by the context, the same will include the plural, and the masculine
gender will include the feminine and neuter genders, and the word "person" will
include corporation, firm, partnership, or association. If there is more than
one Tenant, the obligations imposed upon Tenant under this Lease will be joint
and several.
38.02 The headings or titles to paragraphs of this Lease are not a
part of this Lease and will have no effect upon the construction or
interpretation of any part of this Lease.
38.03 This instrument contains all of the agreements end conditions
made between the parties to this Lease. Tenant acknowledges that neither
Landlord nor Landlord's agents have made any representation or warranty as to
the suitability of the Premises to the conduct of Tenant's business. Any
agreements, warranties or representations not expressly contained herein will in
no way bind either Landlord or Tenant, and Landlord and Tenant expressly waive
all claims for damages hy reason of any statement, representation, warranty,
promise or agreement, if any, not contained in this Lease.
38.04 Time is of the essence of each term and provision of this Lease.
38.05 Except as otherwise expressly stated, each payment required to
be made by Tenant Is in addition to and not in substitution for other payments
to be made by Tenant.
38.06 Subject to Article 18, the terms and provisions of this Lease
are binding upon and inure to the benefit of the heirs, executors,
administrators, successors and assigns of Landlord and Tenant.
38.07 All covenants and agreements to be performed by Tenant under any
of the terms of this Lease will be performed by Tenant at Tenant's sole cost and
expense and without any abatement of rent.
38.08 In consideration of Landlord's covenants and agreements
hereunder, Tenant hereby covenants and agrees not to disclose any terms,
covenants or conditions of this Lease to any other party without the prior
written consent of Landlord.
38.09 Tenant agrees it will provide to Landlord such financial
information as Landlord may reasonably request for the purpose of obtaining
construction and/or permanent financing for the Premises.
38.10 If Tenant shall request Landlord's consent and Landlord shall
fail or refuse to give such consent, Tenant shall not be entitled to any damages
for any withholding by Landlord of Its consent; Tenant's sole remedy shall be an
action for specific performance or injunction, and such remedy shall be
available only in those cases where Landlord has expressly agreed in writing not
to unreasonably withhold its consent or where as a matter of law Landlord may
not unreasonably withhold Its consent.
38.11 Whenever a day is appointed herein on which, or a period of time
is appointed in which, either party is required to do or complete any act,
matter or thing, the time for the doing or completion thereof shall be extended
by a period of time equal to the number of days on or during which such party is
prevented from, or is reasonably interfered with, the doing or completion of
such act, matter or thing because of labor disputes, civil commotion, war,
warlike operation, sabotage, governmental regulations or control, fire or other
casualty, inability to obtain materials, or to obtain fuel or energy, weather or
other acts of God, or other causes beyond such party's reasonable control
(financial inability excepted); provided, however, that nothing contained herein
shall excuse Tenant from the prompt payment of any Rent or charge required of
Tenant hereunder.
38.12 Landlord acknowledges that the Tenant, pursuant to Article 1.05,
is in the business of manufacturing slot machines and gaming devices and hereby
gives consent to allow slot machines and gaming devices on the Premises as the
use of them directly relates to the sales and manufacturing business of the
Tenant. The Premises shall not be used for any "adult bookstore" or "adult
motion picture theater" as said terms are defined in NRS 278.0221, or any
similar use, notwithstanding any local zoning codes or ordinances or any other
provisions of law to the contrary permitting such use.
39. CHANGE ORDERS. In the event Tenant requests and/or approves changes in the
scope the work being provided by or through Landlord Tenant agrees to pay all
the direct and Indirect costs of additional work at the time it gives such
approval. In the event that the aggregate cost of additional work provided under
this Lease is ten thousand dollars ($10,000.00) or more, or in excess of two
months rant, whichever is less, than Landlord may accept payment of one half of
the cost of additional work at the time of approval of said change order by the
Tenant, and payment of the balance to be paid at the time the additional work is
substantially completed.
40. SPECIAL PROVISIONS
40.01 Special provision of this Lease numbers 41; Exhibits "A" , "C" ,
and "D" are attached hereto and made a part hereof If none so state in the
following space:
<PAGE> 15
41 CONTINGENCIES
This lease is contingent upon the current Tenant, Thomas and Betts
Corporation, terminating their lease dated May 9, 1988, at the end of their
current lease term, i.e., October 31, 1998. It is further contingent upon Thomas
and Betts relinquishing their rights and options to Purchase, Expand, and/or
Extend.
42. OPTION TO MOVE TO A LARGER FACILITY
At any time during the lease term, provided Tenant is not in default
of this lease, Tenant shall have the Option to Move to a larger facility owned
by Landlord provided Tenant gives Landlord a minimum of one hundred twenty (120)
days prior written notice of its desire to do so; that the larger space is a
minimum of 75% larger than the space covered in this Lease, i.e., a minimum of
92,941 square feet; and that Landlord has such larger space available for lease.
The present lease would automatically terminate upon commencement of the new
lease for the larger facility.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the day and year indicated by Landlord's execution date as written below.
Individuals signing on behalf of a Tenant warrant that they have the
authority to bind their principals. In the event that Tenant is a corporation,
Tenant shall deliver to Landlord, concurrently with the execution and delivery
of this Lease, a certified copy of corporate resolutions adopted by Tenant
authorizing said corporation to enter into and perform the Lease and authorizing
the execution and delivery of the Lease on behalf of the corporation by the
parties executing and delivering this Lease. THIS LEASE, WHETHER OR NOT EXECUTED
BY TENANT, IS SUBJECT TO ACCEPTANCE AND EXECUTION BY LANDLORD, ACTING ITSELF OR
BY ITS AGENT ACTING THROUGH ITS PRESIDENT, VICE PRESIDENT, OR ITS DIRECTOR OF
LEASING AND MARKETING.
<TABLE>
<S> <C>
Landlord: Dermody Industrial Group, a Nevada Joint Venture Tenant: Innovative Gaming, Inc.,
By: Dermody Properties, a Nevada Corporation a Nevada Corporation
Managing Venturer
By:_____________________________ __________________________________
Micheal C. Dermony Scott Shackelton
Its: President Its: CFO
Date: 9/26/96 Date: 7/11/96
</TABLE>
<PAGE> 16
Exhibit C
[Tenant Questionnaire)
TENANT QUESTIONNAIRE REGARDING USE OF
PREMISES AT 4750 Turbo Circle. Reno, Nevada
<TABLE>
<CAPTION>
Yes No
<S> <C> <C>
l. Will any manufacturing process be done on the subject premises? [X] [ ]
2. Do you or your company intend to use any internal combustion
engines greater than 50 hp at the subject premises? [ ] [X]
3. Do you or your company intend to use processes that involve
mixing, blending, or processing any solvents, adhesives, paints
or coatings? [ ] [X]
4. Will your operation at the premises create any dusts or smoke? [ ] [X]
5. At the subject premises, will you or your company refine any
liquids or solids? Reclaim any metals? [ ] [X]
6. Will you or your company plate or coat anything at the subject
premises? [ ] [X]
7. Will any process be used on the Premises which requires equipment
for the heating of materials (i.e., boilers, furnaces, broilers,
baking ovens, etc.)? [ ] [X]
8. Will you handle or store solvents or motor fuels on the premises? [ ] [X]
9. Will you use or store any acids at the premises? [ ] [X]
10. Will you or your company use any chemical processes at the premises? [ ] [X]
11. Will you or your company use any solvents for clean up? [X] [ ]
12. Is your business a dry cleaner, restaurant, body shop, gasoline
station, printer or part coater? [ ] [X]
13. Will you or your company use any process which requires lead or
melting or soldering with lead or lead alloys? [X] [ ]
14. Do you or your company have a Hazardous Materials Management plan? [ ] [X]
</TABLE>
If you have marked "Yes" to any of the questions as to processes, chemicals,
including types and quantities, to be used on the Premises, please give a more
detailed explanation below and on a second page if necessary.
1. Manufacture (Assembly) of gaming machines.
11. Glass cleaner, acetone in quantities less than one gallon.
Commercial retail cleaners.
13. Circuit board reparis.
Name of person completing form: David W. Jasper
Company name and address: Innovative Gaming Corp. of America
4750 Turbo Circle , Reno Nevada 89502
Exhibit "C" to lease dated June 21, 1996, by and between Dermody Industrial
Group and Innovative Gaming Corporation of America.
Dermody Industrial Group
Innovative Gaming Corporation of America
<PAGE> 17
EXHIBIT "D"
RULES AND REGULATIONS
It is further agreed that the following rules and regulations shall be and are
hereby made a part of this Lease, and the Tenant agrees that its employees and
agents, or any others permitted by the Tenant to occupy or enter said Premises,
will at all times abide by said rules and regulations and that a default in the
performance and observance thereof shall operate the same as any other defaults
herein:
1. The sidewalks, entries, and driveways shall not be obstructed by the
Tenant, or its agents, or used by them for any purpose other than
ingress and egress to and from their Premises. Landlord may remove any
such obstruction or thing (unauthorized by Landlord) without notice or
obligation to Tenant.
2. Tenant shall not place any movable objects, including antennas, outdoor
furniture, etc., in the parking areas, landscaped area or other areas
outside of said Premises, or on the roof of said Premises.
3. No person shall disturb the occupants of this or adjoining Buildings or
Premises by the use of any radio or musical instrument or by the making
of loud or improper noises.
4. Parking any type of recreational vehicles is specifically prohibited. No
vehicle of any type shall be stored in the parking areas at any time. In
the event that a vehicle is disabled, it shall be removed within 48
hours. There shall be no "For Sale" or other advertising signs on or
about any parked vehicle. All vehicles shall be parked in the designated
parking areas in conformation with all signs and other markings.
5. Lessee shall not use, keep or permit to be used or to be kept any foul
or noxious gas or substance in the Premises, or permit or suffer the
Premises to be occupied or used in a manner offensive or objectionable
to Lessor or other occupants of the Building by reason of noise, odors
and/or vibrations, or interfere in any way with other Lessees or those
having business therein. Lessee shall maintain the leased Premises free
from mice, bugs, and ants attracted by food, water or storage materials.
6. Lessor reserves the right to exclude or expel from the complex any
person who in the judgment of the Lessor, is intoxicated or under the
influence of liquor or drugs or who shall in any manner do any act in
violation of the Rules and Regulations of the said project.
7. Lessee shall give Lessor prompt notice of any defects in the water, lawn
sprinkler, sewage, gas pipes, electrical lights and fixtures, heating
apparatus, or any other service equipment or any dangerous or hazardous
condition existing on the property.
8. No outside storage of pallets, boxes, cartons, drums or any other
containers or materials used in shipping or transport of goods is
allowed. Tenant shall place all refuse in proper receptacles provided by
Tenant at Tenant's expense on the Premises or inside
<PAGE> 18
enclosures (if any) provided by Landlord for the Building, and shall
keep sidewalks and driveways outside the Building and lobbies, corridor
stairwells, ducts or shafts of the Building free of all refuse.
9. All moveable trash receptacles provided by the trash disposal firm must
be kept in the trash enclosure areas where provided for that purpose.
10. The Landlord reserves the right to make such other and further
reasonable rules and regulations as in its judgment may from time to
time be needful and desirable for the safety, care and Cleanliness of
the Premises and for the preservation of good order therein.
11. Lessee shall not use any method of heating or air conditioning other
than that supplied by Lessor without the Consent of Lessor.
12. No person shall go on the roof without Lessor's permission.
13. All goods, including material used to store goods, delivered to the
Premises of Lessee shall be immediately moved into the Premises and
shall not be left in parking or receiving areas overnight.
14. Tenants shall not do or permit anything to be done in their Premises or
bring or keep anything therein which will in any way obstruct or
interfere with the rights of other Tenants. or do, or permit anything to
be done in their Premises which shall, in the judgment of the Landlord
or its manager, in any way injure or annoy them, or conflict with the
laws relating to fire, or with the regulations of the fire department or
with any insurance policy upon the Building or any part thereof or any
contents therein or conflict with any of the of the Rules and Ordinances
of the public Building or health authorities.
15. All electrical equipment used by Tenants shall be U.L. approved. Nothing
shall be done or permitted in Tenant's Premises, and nothing shall be
brought into or kept in the Premises which would impair or interfere
with any of the Building services or the proper and economic heating,
cooling, cleaning or other servicing of the Building or the Premises.
Tenant's computers and other equipment are hereby expressly allowed.
16. Tenants shall not install or operate any steam or gas engine or boiler,
or carry on any mechanical business in the Building. The use of oil, gas
or inflammable liquids for heating, lighting or any other purpose is
expressly prohibited. Explosives or other articles deemed extra
hazardous shall not be brought into the Building. Tenants shall not use
any other method of heating than that supplied by Landlord.
17. Tenants shall not remove any Carpet, or wall coverings, window blinds,
or window draperies in their Premises without the prior written approval
from Landlord.
18. No animals, birds or pets (other than seeing-eye dogs) of any kind shall
be allowed in Tenant's Premises or Building.
l9. The water closets, urinals, waste lines, vents or flues of the Building
shall not be used for any purpose other than those for which they were
Constructed, and no rubbish, acids,
<PAGE> 19
vapors, newspapers or other such substances of any kind shall be thrown
into them. The expense caused by any breakage, stoppage or damage
resulting from a violation of this rule by any Tenant, its employees,
visitors, guests or licensees, shall be paid by Tenant.
20. All decorating, carpentry work, or any labor required for the
installation of Tenant's (a) equipment, such as an alarm system,
computer, telephone/telegraph equipment, lines, cables or other
electrical devices; or (b) furnishings or other property shall be
performed at Tenants expense, and will not require Landlord's prior
verbal or written approval. Should any such work require alterations
that affect the heating, ventilation, air conditioning, plumbing,
electrical or mechanical Systems of the Building, the roof, or the
structure of the Building, Landlord's prior written approval will be
required. Structural changes are defined as changes that affect a vital
and substantial portion of the Premises, changing its characteristic
appearance, fundamental purpose of its erection or uses, or a change of
such a nature as to affect the very realty itself, extraordinary in
scope and effect, or unusual in expenditure.
21. The Premises shall not be used or permitted to be used for residential,
lodging or sleeping purposes.
22. Except as permitted by landlord, Tenant shall not mark upon, paint signs
upon, cut, drill into, drive nails or screws into, or in any way deface
the walls, ceilings, partitions or floors of their Premises or of the
Building, and the repair cost of any defacement, damage, or injury
caused by Tenant, its agents or employees shall be paid for by the
Tenant.
23. The cost of repairing any damage to the public partitions of the
Building or the public facilities, or to any facilities used in common
with other tenants, caused by any Tenant or the employees, licensees,
agents or invitees of the Tenant, shall be paid by such Tenant.
24. Landlord reserves the right to restrict or prohibit canvassing,
soliciting or peddling in the Building.
Exhibit "D" to lease dated July 9, 1996,
by and between Dermody Industrial Group
and Innovative Gaming Corporation of America.
Dermody Industrial Group
Innovative Gaming Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-5523.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
March 25, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 0-22482.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,993
<SECURITIES> 3,966
<RECEIVABLES> 660
<ALLOWANCES> 0
<INVENTORY> 4,729
<CURRENT-ASSETS> 12,552
<PP&E> 653
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,976
<CURRENT-LIABILITIES> 526
<BONDS> 0
0
0
<COMMON> 65
<OTHER-SE> 15,385
<TOTAL-LIABILITY-AND-EQUITY> 15,976
<SALES> 2,664
<TOTAL-REVENUES> 2,664
<CGS> 2,135
<TOTAL-COSTS> 2,135
<OTHER-EXPENSES> 7,121
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (568)
<INCOME-PRETAX> (6,024)
<INCOME-TAX> 155
<INCOME-CONTINUING> (6,179)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,179)
<EPS-PRIMARY> (.97)
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