-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kh+qsc2oKRsXaC+D+0zSl+eAD7lxMH3E+V+ae8HteHSyM9g6k501FHf1XjUVcXbo ikonaAOYYmmHWRIvLxoayQ== 0000891618-97-001425.txt : 19970328 0000891618-97-001425.hdr.sgml : 19970328 ACCESSION NUMBER: 0000891618-97-001425 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVATIVE GAMING CORP OF AMERICA CENTRAL INDEX KEY: 0000897795 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS MANUFACTURING INDUSTRIES [3990] IRS NUMBER: 411713864 STATE OF INCORPORATION: MN FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-22482 FILM NUMBER: 97565611 BUSINESS ADDRESS: STREET 1: 4750 TURBO CICLE STREET 2: SUITE 60 CITY: RENO STATE: NV ZIP: 89502 BUSINESS PHONE: 7028233000 MAIL ADDRESS: STREET 1: 4750 TURBO CIRCLE STREET 2: SUITE 60 CITY: RENO STATE: NV ZIP: 89502 10-K405 1 FORM 10-K405 FOR FISCAL YEAR ENDING 12/31/97 1 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. 2 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. - 2 - 3 - - 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 - 3 - 4 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 - 4 - 5 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. - 5 - 6 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. - 6 - 7 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. - 7 - 8 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. - 8 - 9 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. - 9 - 10 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. - 10 - 11 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 - 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 - 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 - 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 - 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:
HIGH LOW ---- --- 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
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 - 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).
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 -------------- ------------------ ------------ ------------ ------------- 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
- 16 - 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 - 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 - 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 - 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:
Year ended December Year ended 31, 1995 July 31, 1994 ------------------- ------------- 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 ========== ==========
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 - 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 - 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 - 23 INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY Consolidated Balance Sheets (In Thousands, Except Share Data)
As of December 31, ---------------------------- 1996 1995 -------- -------- 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 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. - 23 - 24 INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY Consolidated Statements of Operations (In Thousands, Except Per Share Data)
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 ------- ------- ------- ------- 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 ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. - 24 - 25 INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY Consolidated Statements of Stockholders' Equity (In Thousands)
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 -------- -------- -------- -------- -------- -------- ------------ ---------- ------- 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 ======== ======== ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. - 25 - 26 INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY Consolidated Statements Of Cash Flows (In Thousands)
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 -------- -------- -------- -------- 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 $- $- $- ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. - 26 - 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 - 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.
Useful Life 1996 1995 ----------- ---- ---- 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 ==== ====
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:
1996 1995 ------- ------- 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 ======= =======
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 - 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 - 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 - 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: Germany 50% Holland 29% North Carolina and Other 21% --- Total 100% ===
5. INTANGIBLE ASSETS: Intangible assets consisted of the following at December 31:
Useful Life 1996 1995 ----------- --------- ----- 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 ========= =====
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 - 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 - 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:
1996 1995 ---- ---- 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)
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 - 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:
December 31, 1996 December 31, 1995 December 31, 1994 -------------------------- -------------------------- ------------------------ Wtd Avg Wtd Avg Wtd Avg Number Ex Price Number Ex Price Number Ex Price ------------- ------------ ------------- ------------ ----------- ------------ 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
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:
Number Exercise Prices --------- ---------------- 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 ========= ================
- 34 - 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:
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 ------------- ------------- ------------- ------------- Current: Federal $ 21 $-- $ -- $ 106 State -- -- -- 25 ----- --- ----- ----- Total current expense 21 -- -- 131 Deferred 134 -- (752) (31) ----- --- ----- ----- Total provision (benefit) $ 155 $-- ($752) $ 100 ===== === ===== =====
The tax effects of temporary differences giving rise to the deferred items are as follows for the years ended December 31:
1996 1995 ------- ------- 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 ======= =======
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 - 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: 1997 $272 1998 279 1999 299 2000 297 2001 254 ------ Total $1,401 ======
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 - 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 - 38 INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY Schedule II - Valuation and Qualifying Accounts (In Thousands)
Description Balance Charged to Amount Balance - ----------- Beginning of Cost and Written End of Period Expenses Off Period ------------ ---------- -------- -------- 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
Description Balance Charged to Amount Balance - ----------- Beginning of Cost and Written End of Period Expenses Off Period ------------ ---------- -------- -------- 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
- 38 - 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 - 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 - 41 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements:
Page ---- 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
- 41 - 42 (a)(3) Exhibits 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.
* 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 - 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 - 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.
Name Title ---- ----- /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
- 44 - EX-10.17 2 FOURTH AMENDMENT TO LETTER OF CREDIT AGREEMENT 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 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. 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 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 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 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. 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 __________________________________ EX-10.18 3 PRODUCT DEVELOPMENT AND REVENUE SHARING AGREEMENT 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 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 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. 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 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). 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. 7 By: _____________________________ By:____________________________ Maureen Imus Scott Shackelton VP Finance Chief Financial Officer Date: 11/18/96 Date: 11/18/96 EX-10.19 4 SUBLEASE AGREEMENT BETWEEN THE COMPANY & THOMAS 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 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. 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 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 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 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 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 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. 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. 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:______________________ 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 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 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. 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 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 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 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. 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. 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 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 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, 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 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 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 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 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. 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 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 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 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 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. 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. 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. 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) . 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. EX-10.20 5 LEASE AGREEMENT BETWEEN THE COMPANY AND DERMODY 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 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. 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. 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. 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 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 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 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 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 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 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 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. 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. 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: 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. 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
16 Exhibit C [Tenant Questionnaire) TENANT QUESTIONNAIRE REGARDING USE OF PREMISES AT 4750 Turbo Circle. Reno, Nevada
Yes No 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]
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 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 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, 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. EX-23.1 6 CONSENT OF ARTHUR ANDERSEN LLP 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 EX-23.2 7 CONSENT OF ARTHUR ANDERSEN LLP 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 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 2,993 3,966 660 0 4,729 12,552 653 0 15,976 526 0 0 0 65 15,385 15,976 2,664 2,664 2,135 2,135 7,121 0 (568) (6,024) 155 (6,179) 0 0 0 (6,179) (.97) (.97)
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