-----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, PxtFV9f6evOTszlpobg4/WClNMNrqEFEDNP0AQ3pi0FnRgXgTBtpmBWqwsDda9Nw R12YrDpiQZzmaQqr4u3JBw== 0000891020-98-001417.txt : 19980929 0000891020-98-001417.hdr.sgml : 19980929 ACCESSION NUMBER: 0000891020-98-001417 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACRES GAMING INC CENTRAL INDEX KEY: 0000912601 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 880206560 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22498 FILM NUMBER: 98715575 BUSINESS ADDRESS: STREET 1: 815 NW NINTH ST CITY: CORVALLIS STATE: OR ZIP: 97330 BUSINESS PHONE: 5037537648 MAIL ADDRESS: STREET 1: 815 NW NINTH STREET CITY: CORVALLIS STATE: OR ZIP: 97330 10-K405 1 FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1998 1 - -------------------------------------------------------------------------------- UNITED STATES 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 JUNE 30, 1998 (Commission File No.) 0-22498 -------------------------------------------------- ACRES GAMING INCORPORATED (Exact name of Registrant as specified in its charter) NEVADA 88-0206560 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) -------------------------------------------------- 815 NW NINTH STREET, CORVALLIS, OREGON 97330 (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (541) 753-7648 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01 par value (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be 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 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] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of August 31, 1998 was $24,756,000. The number of shares outstanding of the Registrant's Common Stock, par value $.01 per share, as of August 31, 1998 was 8,819,981 shares. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates by reference the Company's Proxy Statement to be filed in connection with the Company's 1998 Annual Meeting of Stockholders to be held November 18, 1998. 2 TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. BUSINESS ................................................................. 1 General ................................................................ 1 The Market ............................................................. 1 Bonusing Products ...................................................... 1 Strategic Alliance with IGT ............................................ 5 Communication Protocol ................................................. 6 Research and Development ............................................... 6 Customers .............................................................. 6 Marketing .............................................................. 7 Production and Manufacturing ........................................... 7 Patents ................................................................ 8 Competition ............................................................ 8 Government Regulation .................................................. 9 Employees .............................................................. 13 Forward-Looking Statements ............................................. 13 ITEM 2. PROPERTIES ............................................................... 13 ITEM 3. LEGAL PROCEEDINGS ........................................................ 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................... 14 EXECUTIVE OFFICERS OF REGISTRANT ......................................... 15 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ................. 16 ITEM 6. SELECTED FINANCIAL DATA .................................................. 17 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................................................... 17 FACTORS THAT MAY AFFECT FUTURE RESULTS ................................... 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .............................. 24 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ............................................................... 37 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ...................... 37 ITEM 11. EXECUTIVE COMPENSATION .................................................. 37 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .......... 37 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......................... 37 PART IV ITEM 14.EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K ................... 38 SIGNATURES ............................................................... 39
3 PART I ITEM 1. BUSINESS GENERAL The Company develops, manufactures and markets electronic game promotions, equipment and games for the casino gaming industry. The Company's principal products are based on its proprietary Acres Bonusing Technology(TM) and are designed to enhance casino profitability by providing entertainment and incentives to players of gaming machines. The bonusing technology improves the efficiency of bonus and incentive programs currently offered by many casinos, and makes possible bonus and incentive programs that have not previously been offered. THE MARKET In the past few years, legalized gaming has significantly expanded in the United States. As part of this expansion, casino-style gaming has become an increasingly important component of the "leisure time" industry. The expansion resulted from the introduction of riverboat-style gaming in the Midwestern United States, the growth of Native American casino gaming and growth in the established Nevada market. Casino gaming has also grown rapidly worldwide, including in Australia, Canada, Europe and Africa, as well as in parts of the former Soviet Union and South America. The Company estimates that approximately 750,000 casino-style gaming machines are currently in use throughout the world, including approximately 400,000 in the United States. The Company believes that increased competition among casinos will lead to increased demand for game promotions and entertainment enhancements of the type offered by the Company. New or expanding casinos represent a significant part of the potential market for the Company's products. Existing casinos also represent a significant potential market as casino managers seek to maintain or improve casino profitability by employing bonusing and other promotional programs for gaming machines. BONUSING PRODUCTS Casinos provide an opportunity to wager money on a variety of propositions. This act of wagering, or gambling, provides entertainment for a wide range of customers. For example, some of the casinos' customers are entertained by the notion that one pull of a slot handle may change their life. For others, entertainment is achieved by receiving an unexpected reward, profiting from an act of skill or luck, receiving a reward for loyalty or by simply winning some amount, regardless of the amount wagered. The Company's bonusing products are designed to allow the casino to provide and facilitate multiple entertainment aspects to meet their wide range of customers' needs. 1 4 The bonusing technology was conceived to provide the gaming industry with a system to enable the design and delivery of bonuses and other promotions directly to players at the point of play and at the time of play. The Company currently offers bonusing products directly to casinos in the form of standard and customized bonusing promotions that can be applied casino-wide or to a limited number of gaming machines. The Company's bonusing products form a modular system and may be purchased and installed individually or as components of an integrated system. The Company offers bonusing products primarily in two major categories: 1. Casino-wide bonusing systems - Casino-wide, fully integrated applications offered as the Acres Bonusing System(TM) ("ABS") - ABS compatible component parts for International Game Technology's ("IGT") Smart System(R) and new IGT Gaming System(TM) ("IGS") slot accounting and player tracking systems (See "Strategic Alliance with IGT"). 2. Bonus games - A linked group of traditional slot machines that activate a secondary "bonus" game when certain milestones are reached on the traditional games. ACRES BONUSING SYSTEM An ABS installation in a casino includes electronic hardware installed in the gaming machines, microprocessor-based controllers for groups of gaming machines and computers and software to operate bonuses and communicate with the casino's back office system which analyzes data and generates reports to casino management. ABS employs personal computer technology and is designed to take advantage of future improvements in such technology. The Company's largest ABS installation is currently running approximately 2,500 gaming machines and has the capability to include over two times the approximately 4,000 gaming machines at the world's largest casino. The Company and IGT have developed a system which integrates the Company's ABS components and bonusing software with IGT's back office system to create a comprehensive slot accounting, player tracking and bonusing capable business solution. (See "Slot Accounting and Player Tracking Products"). In fiscal 1998, the Company delivered ABS product to IGT for installation in The Orleans Hotel and Casino in Las Vegas, Nevada and in the Star City casino in Sydney, Australia. These installations represent the first installations of integrated ABS/IGS systems in the United States and Australia, respectively. Mirage Resorts has ordered ABS for their newest casino in Las Vegas, the Bellagio, for delivery in fiscal 1999. In fiscal 1997, the Company sold ABS to Aristocrat Leisure Industries of Australia ("Aristocrat") for installation at the Crown South Bank casino opened by Crown Ltd. (the "Crown Casino") in Melbourne, Australia. Aristocrat is the leading manufacturer of gaming machines in Australia and the second largest in the world. The Company is in negotiations to provide casino-wide ABS bonusing applications, audio-visual products and an integrated slot accounting system for a large, new Nevada casino (the "Pending Sales Agreement"). Although the negotiations are not yet complete and a written contract has not been executed, the Company expects the final contract will result in approximately $10 million in revenue and installation will occur in the second half of fiscal 1999. The Company expects that the contract will include new bonusing applications and its own proprietary slot accounting system that have not yet been approved by the Nevada Gaming Authorities. (See "Factors That May Affect Future Results"). ABS and the software in many popular gaming machines that support ABS have been approved by the Nevada Gaming Control Board and regulatory authorities for several other states and for two states in Australia. (See "Government Regulation" and "Communication Protocol"). ABS is designed to facilitate many types of bonuses, several of which increase player loyalty by requiring the use of a player tracking card to qualify for bonuses. (See "Slot Accounting and Player Tracking Products"). Utilizing bonusing technology in conjunction with the casino's player tracking capabilities creates a 2 5 powerful marketing tool. The following bonuses are available in the ABS and can be individually configured to customize the bonus to fit a casino's needs and optimize the promotions' effectiveness: XtraCredit(TM). This patent pending feature is used to award special incentive bonuses to slot club members. With just a few keystrokes, casino personnel can establish XtraCredit bonuses to provide incentives for slot club members to attend the casino's special events or to celebrate the player's special events such as birthdays or anniversaries at the casino. XtraCredit bonus awards dramatically reduce the casino's existing cash voucher mailing and redemption costs and provide a wide variety of marketing opportunities for the casino to retain customers. XtraCredit may also be used by other bonus applications as an award mechanism to allow the players, with a push of a "Bonus Button," to redeem their points earned or bonus awards won for free games on the gaming machines. Nevada gaming regulators have ruled that amounts won by the player through the use of XtraCredit wagering are deductible expenses for gaming tax purposes rather than non-deductible promotion expenses. This ruling results in a savings from using XtraCredit of nearly seven percent of the cost of slot club awards. In addition to the tax savings, players' time at the gaming machine can be increased as players no longer have to visit the slot club booth to collect their rewards. Finally, by offering the XtraCredit redemption, the casino reduces the amount of slot club points that are exchanged for cash awards that can be spent outside of their casino. PointPlay(TM). This feature allows casino players to earn points for slot play in a manner consistent with a standard player tracking system where the casino can configure the rates at which points are earned and values at which they are redeemed. PointPlay uses XtraCredit to allow players to redeem their points for free games simply by pushing the Bonus Button on the gaming machine. ReturnPlay(TM). To encourage players to return to the casino at a later date, the ReturnPlay feature awards a bonus to players that earn a predetermined number of slot club points. The ReturnPlay bonus is automatically redeemed, using the XtraCredit award mechanism, when the player returns to the casino at a future date and inserts their slot club card into the game. Personal Progressive(R). Because the vast majority of gaming machine players never experience the excitement of winning a progressive jackpot, the Personal Progressive bonus creates an individual progressive jackpot for each slot club member. The Personal Progressive jackpot grows as the customer plays, which adds excitement and provides an incentive to continue to visit the casino. Personal Progressive jackpots can be paid directly to the gaming machine's credit meter or can be redeemed as tax-deductible XtraCredit rewards. Appreciation Time(TM). Casino personnel may reward players with multiple jackpots anywhere from two to nine times the normal payout for winning combinations. This promotion can be used to reward casino's best customers or can be used to improve play in certain areas or at slow times of the day. Appreciation Time can be applied to the whole casino or only to a specific bank of gaming machines. This bonus provides greater control over appreciation gifts by insuring the gifts go to customers who are actually playing the games. Random Riches(TM) and Lucky Coin(TM). These progressive jackpot bonuses are granted to the player inserting the "nth coin" where the frequency of "n" and the funding parameters of the bonus are established by the casino. Awards can be created that vary between small jackpots every few minutes and life-changing jackpots every few weeks. These bonuses can be applied to any number of gaming machines (from one machine to every machine in the casino) and any one gaming machine may be tied to multiple bonuses. These promotions also have the ability to alert players with custom audio sequences just before the bonus is awarded. The casino may elect to award smaller Celebration Prizes(TM) or Near Winner(TM) prizes to some or all of the players in the casino at the time the Lucky Coin bonus is awarded. Celebration Prizes may be awarded to slot club members only or in varying amounts to slot club VIPs, regular slot club members and non-members. These awards can be paid directly to the gaming machine's credit meter or can be redeemed as tax-deductible XtraCredit rewards. The Company continues to develop additional bonusing applications for the ABS utilizing the Company's bonusing technology. 3 6 BONUS GAMES The Company develops proprietary bonus games that it expects to operate on a revenue-sharing basis. Two of the gaming industry's most successful recently introduced games, Anchor Gaming's ("Anchor") Wheel of Gold(TM) and IGT's Wheel of Fortune(TM), were introduced primarily under such revenue-sharing arrangements. Although the Company is not a party to these revenue-sharing arrangements, both of these games include components developed and manufactured by the Company. In August 1998, the Company received approval in Nevada for a bonus game called Random Riches(TM) and installed another bonus game called Super Reels(TM) in a field trial location in accordance with Nevada gaming regulations (See "Government Regulation"). Both of these bonus games incorporate full-color, high-resolution, plasma screens over a bank of traditional slot machines. Dynamic animated sequences are displayed on the plasma screens to attract, instruct, entertain and communicate bonus awards to the players. State-of-the-art sound packages complement the animation. In the Random Riches bonus game, players of the underlying base games are periodically and randomly selected to play the secondary "bonus" game. The bonus game entails spinning a bonus wheel, viewed on a single plasma display, which has the capability of paying bonus awards to one, several or all of the players on the base games. The Super Reels bonus game is similar to Random Riches, but includes three vertical plasma displays representing giant spinning reels of a slot machine. Every play on the secondary bonus game results in a bonus being awarded to the slot player. These bonus games have not been in operation long enough to indicate if there will be a strong demand for either game. (See "Custom Bonusing Applications"). SLOT ACCOUNTING AND PLAYER TRACKING PRODUCTS Slot accounting products collect play data about each gaming device. This information is transmitted to a central computer system where it is immediately available to the casino manager, and where it is stored for future analysis and reporting. The equipment is configured to monitor all slot machine functions including coins deposited in the machine, coins paid out of the machine, coins available to "drop", number of games played, jackpot occurrences and other machine functions. Player tracking systems collect performance data about individual players or groups of players. The player tracking product builds upon the casino accounting system to gather and record information about individual players, much like an airline's "frequent flyer" program. Each customer who elects to enroll in the casino's "slot club" is given a plastic card that uniquely identifies the player. The player inserts the card into an electronic card reader on the gaming machine, and the system automatically records the player's level of play. Casino management can use this information to provide special incentives and rewards to individual players or groups of players. In fiscal 1997, the Company discontinued development of the Company's DOS-based slot accounting and player tracking system (the "Legacy" system) and instead, developed and sold component parts to IGT for inclusion in the IGT Smart System and IGS slot accounting and player tracking systems. (See "Strategic Alliance with IGT"). Certain casinos have indicated an interest in purchasing the Company's casino-wide ABS bonusing product without also purchasing IGS. (See "Acres Bonusing System"). The Company is developing a new Windows NT(TM)-based, ABS integrated, slot accounting product that is expected to be available for sale in fiscal 1999. The Company continues to support IGS and Legacy slot accounting and player tracking systems. CUSTOM BONUSING APPLICATIONS The Company has sold and may continue to sell bonusing products that automate basic promotional activities such as offering double or multiples of the gaming machines' jackpots at certain times of the day. The Company's Multiple Jackpot Time(TM) bonusing product accomplishes this goal and can also include lighting, sound, signage and other special effects to call players' attention to the bonusing event as it begins and progresses. The 4 7 Company uses such special effects to simulate clouds, lightning, thunder and wind, which are combined with an up to nine-time jackpot bonus payout to create a promotion called Hurricane Zone(TM). The same technology has been integrated with other signage and special effects to produce other custom promotions such as "The Big Picture" at MGM Grand Hotel & Casino, "Armada Slots" at Sunset Station Hotel & Casino, and "Desert Wins" at the Sahara Hotel & Casino. The Company attempted to place Multiple Jackpot Time promotions into casinos under revenue-sharing arrangements. These placements were not successful and were ultimately removed. The Company is now focusing its product development efforts on its ABS and bonus game products and is not actively developing or marketing these custom bonusing applications. SLOT PRODUCTS Many of the products developed for specific applications also have other uses within the gaming industry. For example, displays developed as player tracking components also may be used as in-machine progressive jackpot displays for gaming machines. The Company markets these products to both developers and manufacturers of gaming machines and to casinos. The Company also offers bonusing products to other developers of specialty gaming machines. These developers can use the bonusing technology to coordinate lights, sound and other special effects and to instruct a slot machine to pay special bonuses. By adding bonusing capabilities to regular gaming machines, entirely new games can be created which offer unique and entertaining experiences for slot players. For example, the Company provides electronic and other components to Anchor for its Wheel of Gold game. This game includes features in which the slot player is periodically awarded the ability to spin a multi-segmented wheel mounted above the slot machine. Each segment of the wheel indicates a bonus jackpot. The bonusing system communicates the results of the wheel spin to the slot machine, which pays the bonus to the player. The Company has also developed products to improve the sound capabilities of gaming machines. These products have been included in IGT's Wheel of Fortune specialty games and have been installed in gaming machines in the Circus Circus casinos in Nevada. The Company is now focusing its product development efforts on its ABS and bonus game products and is not actively developing or marketing these slot products, although some revenues continue to be generated by previously developed products. STRATEGIC ALLIANCE WITH IGT In January 1997, the Company entered into a strategic alliance with IGT (the "Strategic Alliance") which included a Master Agreement for Product Development, Purchase and Sales and a $5 million investment by IGT in the Company's preferred stock. Sales to IGT under the Strategic Alliance have not met the Company's expectations. Certain casinos have expressed an interest in purchasing ABS without also purchasing IGS. Although the Strategic Alliance does not prohibit the Company from selling ABS directly to customers, IGT has expressed objections about the Pending Sales Agreement (see "Acres Bonusing System") and may be unwilling to continue the Strategic Alliance if the Company continues to sell ABS independently of IGT. In late September 1998, Albert Crosson, Vice Chairman of IGT, resigned from the Company's Board of Directors. IGT has not nominated Mr. Crosson's successor, although it continues to have the right to do so. Representatives of the Company and IGT have met several times to work to redefine the relationship. (See "Factors That May Affect Future Results"). COMMUNICATION PROTOCOL The Company and IGT have jointly developed the communication protocol known as SAS4. The protocol is used to communicate instructions and messages between ABS and gaming machines. The communication of these instructions and messages is essential to the operation of bonuses. Although the Company and IGT have agreed that the Company can use SAS4 in connection with the Pending Sales Agreement, IGT has stated that the Company does not have an 5 8 unrestricted right to use SAS4 with non-IGT games. The Company believes that it has joint ownership of the protocol and the ability to use and license the protocol. If necessary, the Company believes there are alternatives to SAS4 but such alternatives could cause delays in product availability. RESEARCH AND DEVELOPMENT The Company devotes significant resources to the development of new products and the enhancement of existing products. The Company had 55 employees involved in research and development as of August 31, 1998. Research and development expenses were $4.7 million, $4.5 million and $2.3 million in the years ended June 30, 1998, 1997 and 1996, respectively. CUSTOMERS Large casinos with more than 1,000 gaming machines represent the principal market for the Company's ABS. Casinos of this size are generally large enough to support a professional management staff capable of using the analytical and promotional tools provided by the Company's products. This market includes most casinos in Las Vegas, Reno and Laughlin, Nevada, and Atlantic City, New Jersey, as well as a number of Native American and riverboat casinos in various other states and a number of casinos in Australia, South Africa and Europe. Sales to IGT accounted for 75 percent, 28 percent and 2 percent of the Company's net revenues in 1998, 1997 and 1996, respectively. (See "Strategic Alliance with IGT"). Sales to Anchor, primarily related to their Wheel of Gold game, accounted for 18 percent, 28 percent and 43 percent of the Company's net revenues in 1998, 1997 and 1996, respectively. Sales of the system components and bonusing applications to Aristocrat for the Crown Casino in Melbourne, Australia, accounted for 12 percent of the Company's net revenues in 1997 and 20 percent in 1996. Legacy player tracking and slot accounting system sales to the Sundowner Hotel & Casino accounted for 12 percent of the Company's net revenues in 1996. The Company's backlog of orders for its products were approximately $2.1 million, $6.1 million and $6.5 million as of June 30, 1998, 1997 and 1996, respectively. The Company does not believe that backlog is a meaningful indication of sales. Sales to the Company's customers are made pursuant to purchase orders or sales agreements for specific system installations and products are often delivered within a few months of receipt of the order. The Company does not have any ongoing long-term sales contracts. At its current stage of operations, the Company's revenues and results of operations may be materially affected, in the near term, by the receipt or loss of any one order. 6 9 REPRESENTATIVE CUSTOMERS The following table presents representative customers for each of the Company's main product categories.
PRODUCT NAME OF CUSTOMER AND LOCATION - ------- ----------------------------- ABS (including slot Aristocrat Leisure Industries - Installed in the Crown accounting & player Casino in Melbourne, Australia tracking components) IGT-Installed in the Star City casino in Sydney, Australia and The Orleans Hotel and Casino in Las Vegas, Nevada Bonus games Stardust Resort & Casino - Las Vegas, Nevada (field trial) Excalibur Hotel-Casino - Las Vegas, Nevada (field trial) Custom bonusing Circus Circus - Las Vegas, Nevada applications Edgewater Hotel & Casino - Laughlin, Nevada MGM Grand Hotel & Casino - Las Vegas, Nevada Sahara Hotel & Casino - Las Vegas, Nevada Sunset Station Hotel & Casino - Las Vegas, Nevada Stand-alone Caesar's Tahoe - Lake Tahoe, Nevada progressive jackpots Golden Nugget Casino - Las Vegas, Nevada Treasure Island Resort - Las Vegas, Nevada Legacy slot Colorado Grande Casino - Cripple Creek, Colorado accounting & player Rio Suite Hotel & Casino - Las Vegas, Nevada tracking systems Sands Regency Hotel & Casino - Reno, Nevada Spirit Lake Casino - Spirit Lake, South Dakota Sundowner Hotel & Casino - Reno, Nevada Meters & displays Anchor Gaming - Las Vegas, Nevada Crown Casino - Melbourne, Australia IGT - Reno, Nevada Sound Systems Circus Circus Enterprises - Las Vegas, Nevada IGT - Reno, Nevada Component parts for Anchor Gaming - Las Vegas, Nevada other game manufacturers
MARKETING The Company currently markets its products and provides service to customers from its office in Las Vegas, Nevada and its headquarters in Corvallis, Oregon. PRODUCTION AND MANUFACTURING The Company's manufacturing operation consists primarily of the assembly of electronic circuit boards and cables from components purchased from third parties. The circuit boards are manufactured and assembled to the Company's specifications by contract manufacturers. A key component of each product is computer software 7 10 that is copied onto electronic chips by contract manufacturers. The Company believes that its component parts and services can be obtained from multiple sources and therefore is not overly reliant on any single vendor. The development, testing and maintenance of the software is conducted by Company engineers. PATENTS The Company has applied for United States and foreign patents on certain features of its product line, and may in the future apply for other United States patents and corresponding foreign patents. The following patents have been issued to the Company:
ISSUE DATE PATENT NO. DESCRIPTION OF PROTECTION PROVIDED BY THE PATENT ---------- ---------- ------------------------------------------------ August 1997 5,655,961 This patent protects the implementation of a bonus pay table in a gaming machine and the implementation of a "Bonus Pool." A Bonus Pool is configurable by casino management to control the total amount of special bonuses paid, thus making it possible for such promotions to be kept within a casino's budget. January 1998 5,702,304 This patent protects the Company's illuminated card reader, a slot accounting and player tracking system component, which indicates where players may insert their card and communicates bonus eligibility to the players and game and player status to the casino through the use of various colors. April 1998 5,741,183 This patent protects a method of identifying and categorizing individual gaming devices that are connected to a casino's computer network. It includes a memory device which allows for the identification and coding of each piece of gaming equipment with its individual configurations even when they are disconnected or moved to another location within a casino's network system. May 1998 5,752,882 This patent protects a method of operating gaming machines in which the casino is able to pre-select which games participate in a variety of bonusing promotions such as linked progressive jackpots or linked random bonuses.
No assurance can be given that any patents that are applied for will be issued or, if issued, will provide any significant competitive advantage to the Company. In addition, the Company has a variety of other intellectual property which it treats as trade secrets. The Company takes reasonable steps to protect its intellectual property but it is possible that others may make unauthorized use of such intellectual property and the Company may or may not be able to prevent such use. (See "Legal Proceedings"). COMPETITION The Company believes that its products compete principally on the basis of functionality, price and service. The Company believes that its proprietary bonusing technology provides a competitive advantage. In addition to the recently issued patents discussed above, the Company has several other patents pending which cover many aspects of its bonusing technology. Mikohn Gaming Corporation ("Mikohn") is the only known competitor offering a bonusing product similar to the Company's. John F. Acres founded Mikohn in 1985. Mr. Acres disposed of his interest in 1988. The Company believes that Mikohn's initial bonusing product, which Mikohn has installed in several casinos, infringes the Company's recently issued patents and will infringe certain of the Company's pending patents, if issued. The Company has notified Mikohn and its customers of the patent infringement and initiated patent infringement litigation. (See "Legal Proceedings"). 8 11 The Company is developing a new slot accounting product which will compete with IGT's IGS slot accounting product. (See "Strategic Alliance with IGT"). Both of these products are bonusing-ready. The Company's slot accounting product will integrate with other vendors' player tracking products while IGS includes both slot accounting and player tracking functionality. (See "Slot Accounting and Player Tracking Products"). IGT, the largest manufacturer of gaming machines in the world, has a competitive advantage in selling its slot accounting and player tracking systems to purchasers of IGT gaming machines. IGT has two principal competitors in the market for slot accounting and player tracking systems: Bally and Casino Data Systems, Inc. ("CDS"). Unlike the IGS system, none of the competitors' products are currently offered as "bonusing-ready" systems. Each of these companies have financial and other resources which are greater than those of the Company. While the Company attempts to differentiate its bonusing products from progressive jackpot systems, the Company's bonusing products compete for casino floor space with other companies' progressive jackpot systems. The market for progressive jackpot systems is served primarily by Mikohn, which has the largest share of the market, and CDS. GOVERNMENT REGULATION The Company is subject to the licensing and regulatory control of the gaming authorities in each jurisdiction in which its products are sold or used by persons licensed to conduct gaming activities. Although licensing of the Company may not be required in a jurisdiction, its products generally must be approved by the regulatory authority for use in each licensed location within the jurisdiction. REGULATION OF PRODUCTS The Company has complied with the approval process and has either been issued a license, temporary license, certificate, approval or other permit allowing it to sell its products in Arizona, Colorado, Connecticut, Indiana, Louisiana, Mississippi, Missouri, Nevada, New Jersey, Wisconsin and Victoria, Australia. Not all of the Company's products have been approved for sale in all jurisdictions. In most jurisdictions, a model of the gaming equipment that the Company seeks to place in operation must be submitted for testing by an approved testing laboratory prior to use in any gaming operation. To obtain such approval, the Company must submit, at its expense, each model of its equipment to the specified laboratory for testing, examination and analysis. Upon completion of the testing, the laboratory submits a report of its findings and conclusions to the applicable gaming authority, together with any recommendations for modifications to the equipment or the addition of equipment or devices to such gaming equipment. The Company has filed applications for licenses in Minnesota and Ontario, Canada, and intends to seek approval of its bonusing technology for use in any other jurisdiction in which a sale arises. Failure of the Company to obtain approval for the use of bonusing technology by a gaming licensee in a jurisdiction would prevent the use of such technology at the licensee's location and also will prevent any other gaming licensee within that jurisdiction from using the products until the appropriate approvals have been obtained or requirements complied with. CORPORATE REGULATION Nevada The manufacture, sale and distribution of gaming devices are subject to: (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, the "Nevada Act"); and (ii) various local regulation. 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. On December 21, 1995, the Nevada Commission registered the Company as a publicly traded corporation ("Registered Corporation") and granted manufacturer's and distributor's licenses to the Company's wholly-owned subsidiary, AGI Distribution, Inc. ("AGID"), a Nevada corporation. The Commission also granted AGID a nonrestricted license as the operator of a slot machine route ("Slot Route License"). As a Registered Corporation, the Company is required to periodically submit detailed financial and operating reports to the Nevada Commission and furnish any other information which the Nevada Commission may require. AGID's manufacturer's, distributor's and Slot Route 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, AGID without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company and AGID have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or AGID in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming 9 12 licensee. Officers, directors and certain key employees of AGID 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 the Company who are actively and directly involved in the gaming activities of AGID 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 or AGID, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company or AGID 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 and AGID are required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by AGID, must be reported to or approved by the Nevada Commission. If it was determined that the Nevada Act was violated by the Company or AGID, the gaming registrations, licenses and approvals they hold could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, AGID, the Company 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 AGID. 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. 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 13 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 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 or AGID, 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 it has 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 14 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. 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 15 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 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. 16 Other Jurisdictions Other jurisdictions in which the Company's products are sold or used require various licenses, permits, and approvals in connection with such sale or use, typically involving restrictions similar in most respects to those of Nevada. The Company has complied with the approval process for use of the products it has sold in these other jurisdictions, including the receipt of manufacturer and distributor licenses, permits, or certificates in each such state. Not all of the Company's products have been approved for sale in all jurisdictions. No assurances can be given that such required licenses, permits, certificates or approvals will be given or renewed in the future. EMPLOYEES At August 31, 1998, the Company had 116 full-time employees of whom 55 were involved in research and development, 24 in manufacturing and material control, 12 in sales, marketing and customer support and 25 in administration and management. None of the Company's employees are represented by a labor union or covered by a collective bargaining agreement. The Company has not experienced any work stoppages and believes that its employee relations are good. FORWARD-LOOKING STATEMENTS This Form 10-K contains forward-looking statements regarding the Company's plans and expectations as to: future performance, growth opportunities, expansion, new products and services, competition, capital expenditures and its Strategic Alliance with IGT. Such plans and expectations involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. For a discussion of these risk factors, see "Factors that May Affect Future Results." In addition, from time to time, the Company may issue other forward-looking statements. Any forward-looking statements, including other written or oral forward-looking statements made by the Company or persons acting on its behalf, should be considered in light of these risk factors and other risk factors referred to from time to time in the Company's press releases, periodic reports or communications with stockholders. ITEM 2. PROPERTIES The Company's administrative headquarters, manufacturing and certain engineering functions are located in a leased facility encompassing approximately 39,000 square feet at 815 N.W. Ninth Street, Corvallis, Oregon. The leases commenced on various dates beginning in April 1994 and will expire on various dates ending in July 1999. The base rent for the total facility is approximately $28,000 per month, which includes property taxes, building insurance and common area maintenance. In June 1998, the Company's sales, marketing, customer service and new product development office in Las Vegas was moved to a larger leased facility at 7115 Amigo Street, Suite 150, Las Vegas, Nevada. The new facility encompasses approximately 31,500 square feet. The lease commenced on June 15, 1998 and will expire on June 15, 2003. The base rent is approximately $36,000 per month, plus $5,000 per month for property taxes, building insurance and common area maintenance. The Company owns manufacturing and engineering equipment which it uses in its assembly operations and research and development efforts. Such equipment is available from a variety of sources and the Company believes that it currently owns or can readily acquire equipment required for its current and anticipated levels of operations. ITEM 3. LEGAL PROCEEDINGS Two related lawsuits have been filed in the U.S. District Court for the District of Nevada involving the Company which allege violation of the federal securities laws by the Company and its executive officers: 12 17 Townsend, et al. v. Acres Gaming Incorporated, et al. CV-S-97-01848-PMP (RJJ) and Jason, et al. v. Acres Gaming Incorporated, CV-S-98-00262-PMP (RJJ). Those suits have been consolidated into one combined action styled: In re Acres Gaming Securities Litigation, CV-S-97-01848-PMP (RJJ). The combined action seeks class certification for a proposed class consisting of the purchasers of the Company's stock during the period from March 26, 1997 to December 11, 1997. The court has not yet ruled on class certification. The Company has moved to dismiss this suit and discovery has been stayed pending resolution of this motion. Three related lawsuits have been filed in the U.S. District Court for the District of Nevada involving the Company and its patents: Mikohn Gaming Corp. v. Acres Gaming Incorporated, No. CV-S-98-1383 HDM (LRL) ("Suit I"); Mikohn Gaming Corp. v. Acres Gaming Incorporated, No. CV-S-98-738 HDM (LRL) ("Suit II"); and Acres Gaming Incorporated v. Mikohn Gaming Corp., Casino Data Systems, New York New York Hotel and Casino and Sunset Station Hotel and Casino; No. CV-S-98 794 PMP (LRL) ("Suit III"). Those suits have now been consolidated. In Suit I, Mikohn asserted a claim for declaratory judgment of noninfringement and invalidity of U.S. Patent No. 5,655,961 ("the `961 patent") owned by the Company. Mikohn also asserted claims for "intentional interference with a business relationship," "intentional interference with prospective business relationship," "unfair competition: trade libel" and "unfair competition: disparagement." Mikohn's complaint sought unspecified damages, punitive damages, attorney's fees, interest on the alleged damages, an injunction against the conduct alleged in the complaint, and a declaration that the `961 patent is invalid and not infringed by Mikohn or its customers. The Company has filed a counterclaim for infringement of the `961 patent, and has denied Mikohn's other allegations. In Suit II, Mikohn asserted a claim for declaratory judgment of noninfringement and invalidity of U.S. Patent No. 5,741,183 ("the `183 patent") owned by the Company. Mikohn's complaint sought no damages, but requested an award of attorney's fees and a declaration that the `183 patent is invalid and not infringed by Mikohn. The Company is not aware of any infringement by Mikohn, and therefore sought to dismiss the complaint for lack of a case or controversy. The court denied the Company's motion. In Suit III, the Company sued Mikohn, Casino Data Systems, New York New York Hotel and Casino and Sunset Station Hotel and Casino for infringement of the Company's U.S. Patent No. 5,752,882 ("the `882 patent"). Mikohn counterclaimed in Suit III, seeking a declaratory judgment of invalidity and noninfringement of the `882 patent and asserted claims for "false and misleading representations" under 11 U.S.C. Section 1125, "interference with prospective economic relations," "unfair competition: trade libel" and "unfair competition: disparagement." Mikohn's counterclaims seek unspecified damages, as well as a trebling of the damages, punitive damages, attorney's fees and an injunction against the Company's "continuing to commit the unlawful acts" alleged in the counterclaims. The Company moved for a preliminary injunction in Suit III against Mikohn's infringement of the `882 patent. The court has not ruled on the Company' motion. In a separate but related action, the Company has filed suit against its general liability insurance carrier for breach of insurance contract: Acres Gaming Incorporated v. Atlantic Mutual Insurance Company, filed June 26, 1998 and now pending in U.S. District Court for the District of Oregon. The Company's suit is based on the insurer's refusal to pay more than nominal amounts of the costs of defense in Suit I. The Company anticipates that this matter will be resolved by cross motions for summary judgment. In addition, the Company has tendered the defense of Mikohn's counterclaims in Suit III to the same insurer. To date the insurer has not responded to the tender of Suit III's defense. The Company from time to time is involved in other various legal proceedings arising in the normal course of business. 13 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended June 30, 1998. EXECUTIVE OFFICERS OF REGISTRANT As of August 31, 1998, the executive officers of the Company were as set forth below:
EXECUTIVE OFFICER NAME AGE POSITIONS AND OFFICES SINCE ---- --- --------------------- ----- John F. Acres 44 Chairman 1985 Floyd W. Glisson 51 Chief Executive Officer, 1998 President and Director Robert W. Brown 43 Executive Vice President, Chief 1993 Financial Officer, Secretary and Treasurer Roy D. Lytle 49 Vice President and Chief 1997 Operating Officer
There are no family relationships among executive officers of the Company. John F. Acres, the founder of the Company, has served as the Chairman of the Company since its inception in 1985. Mr. Acres served as the Chief Executive Officer from January 1985 until July 1998. He also served as President of the Company from January 1985 to January 1996 and from February 1998 to July 1998 and as Secretary from January 1985 to January 1997. Mr. Acres has been involved in the gaming industry since 1972 and has designed slot data collection systems, player tracking systems and equipment for progressive jackpot systems that are widely used in the industry. In 1981, he founded Electronic Data Technology ("EDT") to manufacture and sell progressive jackpot system designs. While with EDT, he designed one of the first slot data collection systems and invented the electronic player tracking system. He sold a majority interest in EDT to IGT in 1983 and remained as president of EDT until 1985. The player tracking system designed by Mr. Acres while with EDT is installed on approximately 100,000 gaming machines throughout the world and was actively marketed by IGT until 1997. In 1985, Mr. Acres co-founded Mikohn. He served as vice president and a director of Mikohn until 1988. Floyd W. Glisson became President and Chief Executive Officer of the Company in July 1998. Mr. Glisson was senior vice president, finance and administration and chief financial officer for ConAgra Grocery Products Company, a unit of ConAgra, Inc., from June 1993 to July 1998. Prior to June 1993, Mr. Glisson was senior vice president, finance and administration and chief financial officer of Hunt Wesson, Inc., a food processing company that is a subsidiary of ConAgra, Inc. In addition to normal staff functions, Mr. Glisson was also responsible for Food Service and International Operations. Robert W. Brown joined the Company in July 1993 as Chief Financial Officer and Treasurer. He was elected Executive Vice President and Secretary in January 1997. Mr. Brown is a Certified Public Accountant. Roy D. Lytle joined the Company in August 1996 as the Director of Manufacturing. In January 1997, Mr. Lytle was promoted to Vice President-Manufacturing and in December 1997, Mr. Lytle was promoted to Chief Operating Officer. From July 1984 to August 1996, Mr. Lytle held manufacturing management positions for Photon Kinetics, a manufacturer of fiber optics test and measurement equipment in Beaverton, Oregon. 14 19 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on the NASDAQ SmallCap Market under the symbol "AGAM". The following table sets forth, for the periods indicated, the range of high, low and end of period market prices for the Company's common stock as reported by the NASDAQ SmallCap Market.
MARKET PRICE PER SHARE ---------------------- LOW HIGH END OF PERIOD --- ---- ------------- FISCAL YEAR ENDED JUNE 30, 1998: First quarter.......................... $ 7.63 $12.00 $11.31 Second quarter......................... 3.75 12.75 4.38 Third quarter.......................... 4.31 6.56 4.88 Fourth quarter......................... 4.31 5.25 5.00 FISCAL YEAR ENDED JUNE 30, 1997: First quarter.......................... $ 9.00 $14.13 $13.63 Second quarter......................... 10.50 20.63 11.00 Third quarter.......................... 4.13 14.38 4.75 Fourth quarter......................... 4.88 9.38 8.75
The Company estimates that there are approximately 4,250 beneficial owners of the Company's common stock. The Company has never paid or declared any cash dividends on its common stock and does not intend to pay cash dividends on its common stock in the foreseeable future. The Company expects to retain its earnings to finance the development and expansion of its business. The payment by the Company of dividends, if any, on its common stock in the future is subject to the discretion of the Board of Directors and will depend on the Company's earnings, financial condition, capital requirements and other relevant factors. 15 20 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial information concerning the Company and should be read in conjunction with the audited financial statements and notes included in "Financial Statements and Supplementary Data".
YEARS ENDED JUNE 30, --------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (in thousands except per share data) STATEMENTS OF OPERATIONS DATA: Net revenues ............................. $ 17,573 $ 20,455 $ 6,942 $ 4,006 $ 2,852 Gross profits ............................ 6,623 10,902 3,355 1,436 851 Income (loss) from operations ............ (4,660)(1) 1,425 (1,665) (2,489) (2,542)(2) Net income (loss) ........................ (4,177)(1) 1,798 (1,641) (2,505) (2,598)(2) Net income (loss) per common share-basic . $ (.47)(1) $ .21 $ (0.22) $ (0.35) $ (0.39)(2) Net income (loss) per common share-diluted $ (.47)(1) $ .20 $ (0.22) $ (0.35) $ (0.39)(2)
(1) During 1998, the Company recorded a non-recurring charge of $745,000 ($.08 per share) for the costs of the Company's change in business focus to the ABS and bonus game product lines. (2) During 1994, the Company recorded a non-recurring charge of $898,000 ($.14 per share) for the expenses and settlement of patent infringement litigation.
AS OF JUNE 30, ------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (in thousands) BALANCE SHEET DATA: Working capital ...................... $12,091 $16,474 $ 2,552 $ 3,458 $ 3,574 Total assets ......................... 17,194 21,323 7,631 6,264 6,301 Current liabilities .................. 2,435 2,545 3,644 1,302 1,227 Long-term debt ....................... -- -- -- -- -- Redeemable convertible preferred stock 4,948 4,948 -- -- -- Stockholders' equity ................. 9,811 13,830 3,987 4,962 5,074
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company develops, manufactures and markets electronic game promotions, equipment and games for the casino gaming industry. The Company's products are based on its proprietary Acres Bonusing Technology and are designed to enhance casino profitability by providing entertainment and incentives to players of gaming machines. The bonusing technology improves the efficiency of bonus and incentive programs currently offered by many casinos, and makes possible some bonus and incentive programs that have not previously been offered. At its current stage of operations, the Company's financial position and operating results may be materially affected by a number of factors, including the timing of receipt, installation and regulatory approval of any one order, availability of additional capital, competition and technological change. Historically, three or fewer customers have accounted for more than 65 percent of annual revenues. (See "Strategic Alliance with IGT" and "Factors That May Affect Future Results"). 16 21 RESULTS OF OPERATIONS COMPARISON OF THE YEARS ENDED JUNE 30, 1998 AND 1997 The Company's net revenues during the year ended June 30, 1998 were $17.6 million, a decrease of 14 percent from the $20.5 million of net revenues in 1997. The Company's revenues can fluctuate significantly based on the timing of the delivery of any large order. Although sales under the Strategic Alliance with IGT during the year ended June 30, 1998 increased over the prior year by approximately $7.5 million, sales of products for the Crown Casino in Melbourne, Australia decreased by $3.8 million, sales of the Company's Legacy slot accounting and player tracking system decreased by $2.7 million and sales of components to a gaming machine developer decreased by $2.6 million from the prior year. Additionally, sales of custom bonusing applications decreased by $1.3 million in fiscal 1998 as compared to the prior year. The Company is now focusing its product development efforts on its ABS and bonus game products and is not currently developing or marketing these custom bonus applications. Component materials purchased primarily from computer and electronics vendors comprised 66 percent of the cost of revenues in 1998 and 72 percent in 1997. Manufacturing, procurement and installation labor and expenses accounted for the remaining cost of revenues. Changes in the components of the cost of revenues result from changes in the mix of products sold. Gross profit as a percentage of net revenue was 38 percent for 1998, compared to 53 percent for 1997. Gross profit is generally higher on products that feature Acres Bonusing Technology, including the Company's Legacy slot accounting and player tracking system, the system used for the Crown Casino and products sold to the gaming machine developer. During the year ended June 30, 1998, these sales were substantially replaced with sales of lower margin hardware components to IGT that resulted in a decrease in gross margin of approximately 7 percentage points. Gross margin was also reduced by 5 percentage points due to the costs of installing and removing certain custom bonus applications that were unsuccessfully placed under revenue-sharing arrangements in 1998 and an additional 3 percentage points as a result of absorbing certain fixed manufacturing costs over a smaller sales volume. The Company's research and development expenses increased slightly to $4.7 million in 1998, from $4.5 million in the prior year. The Company expects to continue to spend a significant portion of its revenue on research and development in order to enhance and expand the capabilities of its products, including the development of additional ABS and bonus game products. Selling, general and administrative costs increased to $5.9 million in 1998 from $4.9 million in the prior year. This increase was primarily the result of approximately $450,000 of incremental legal fees incurred to secure and defend the Company's intellectual property rights for new and existing bonusing products and approximately $250,000 of incremental rent expense resulting from the expansion of the Company's production facility in Corvallis, Oregon in May 1997. During the second quarter of fiscal 1998, the Company changed its business focus to the ABS and bonus game product lines and recorded a non-recurring charge of $745,000 to recognize severance and inventory costs of discontinuing its Legacy slot accounting and player tracking system. The Company originally expected to be able to liquidate the majority of the excess Legacy inventory to existing slot accounting and player tracking customers and smaller casinos. These sales have not been realized and the significant improvements available in currently offered products make future sales unlikely. Other income increased by $110,000 as a result of interest income received on investments of cash and cash equivalents. The Company has cumulative net operating losses of approximately $9.5 million available to offset future taxable income through 2012. As the realizability of these net operating loss carryforwards is uncertain, the Company has provided a valuation allowance for the entire amount and did not record an income tax benefit for the year ended June 30, 1998. An income tax provision was not recorded in fiscal 1997 due to the utilization of net operating loss carryforwards that were available at that time. The net loss for the year ended June 17 22 30, 1998 was $4.2 million ($0.47 per share - diluted) compared to a net income of $1.8 million ($0.20 per share - diluted) in the prior year. COMPARISON OF THE YEARS ENDED JUNE 30, 1997 AND 1996 The Company's net revenues during the year ended June 30, 1997 were $20.5 million, an increase of 197 percent over the $6.9 million of net revenues in 1996. This increase in revenues was primarily the result of an $8.4 million increase in shipments of bonusing, slot accounting and player tracking components to IGT and other game manufacturers. Final deliveries of a slot bonusing system and progressive jackpot displays for the Crown Casino in Melbourne, Australia accounted for an additional $2.5 million of the increase. Installation of the Company's Legacy slot accounting and player tracking systems generated an incremental $1.4 million of revenues. Increased sales of custom bonusing applications accounted for the final $1.3 million of the increase over 1996. Component materials purchased primarily from computer and electronics vendors comprised 72 percent of the cost of revenues in 1997 and 57 percent in 1996. Manufacturing, procurement and installation labor and expenses accounted for the remaining cost of revenues. Changes in the components of the cost of revenues are a result of changes in the mix of products sold. Gross profit as a percentage of net revenue was 53 percent for 1997, compared to 48 percent for 1996. Gross margin increased 9 percentage points as a result of the economies of absorbing certain fixed manufacturing costs over a larger sales volume. This increase was partially offset by a 4 percentage point decrease in gross margin incurred as a result of changes in the mix of products sold. The Company's research and development expenses increased to $4.5 million in 1997, from $2.3 million in the prior year, primarily as a result of hiring and supporting additional personnel. The Company expects to continue to spend a significant portion of its revenue on research and development in order to enhance and expand the capabilities of its products, including the development of additional promotions that utilize the Company's bonusing technology. In order to support growth in revenue and continue to market and sell its products, the Company hired additional personnel and increased the amount of leased office space in 1997, resulting in a $2.3 million increase over 1996 selling, general and administrative operating expenses. Other income increased by $349,000 as a result of interest income received on investments of cash and cash equivalents. An income tax provision was not recorded for the year ended June 30, 1997 due to the utilization of net operating loss carryforwards. In fiscal 1996, the Company had cumulative net operating loss carryforwards for which the realizability was uncertain. The Company provided a valuation allowance for the entire amount and did not record an income tax benefit in fiscal 1996. The net income for the year ended June 30, 1997 was $1.8 million ($0.20 per share - diluted) compared to a net loss of $1.6 million ($0.22 per share - diluted) in the prior year. LIQUIDITY AND CAPITAL RESOURCES The Company expects to incur a net loss in the first half of fiscal 1999. Revenues are expected to decrease from the same period in the prior year. Operating expenses are expected to increase from the same period in the prior year as the Company continues to develop, enhance and market its ABS and bonus games and defend its intellectual property rights. The Company's cash and cash equivalents balances are expected to be sufficient to fund the Company's operations during this period. The Company expects to generate net income in the second half of fiscal 1999 primarily as a result of the Pending Sales Agreement. (See "Acres Bonusing System" and "Factors That May Affect Future Results"). The Company's operations have historically used cash. During the year ended June 30, 1998, $2.3 million of net cash was generated by operating activities as the collection of accounts receivable and reductions in inventories more than offset the effects of the Company's operating loss. During the year ended June 30, 1997, net cash used by operating activities was $4.4 million, 18 23 primarily resulting from volume-related increases in working capital, including changes in accounts receivable, inventory and customer deposits. In the year ended June 30, 1996, $1.2 million of cash was provided by operating activities as the funding requirements of the Company's negative operating results were offset by favorable timing of vendor payments and the receipt of significant customer deposits on projects to be completed in 1997. The Company made capital expenditures of $1.9 million, $1.8 million, and $585,000 in 1998, 1997 and 1996, respectively, primarily on computers and equipment to support research and development efforts. As the Company expands into operating or leasing bonus games, investments in gaming machines and equipment may be significant. The Company's principal sources of liquidity have been net proceeds of $7.2 million from its initial public offering in November 1993 and $6.2 million from the exercise of the Redeemable Warrants (as discussed in Note 5 to the Consolidated Financial Statements) in October 1996. In addition, as part of the Strategic Alliance with IGT entered into in January 1997, the Company issued 519,481 shares of Series A Convertible Preferred Stock for net proceeds of $4.9 million. As of June 30, 1998, the Company had cash and cash equivalents of $9.9 million, compared to $9.3 million as of June 30, 1997. The Company invests its cash in highly liquid marketable securities with maturities of three months or less at date of purchase. The Company does not invest in derivative securities. The Company does not have any debt or any borrowing arrangements. FACTORS THAT MAY AFFECT FUTURE RESULTS Certain statements in this Form 10-K contain "forward-looking" information (as defined in Section 27A of the Securities Act of 1933, as amended) that involve risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Such factors include, but are not limited to, the following: PENDING SALES AGREEMENT The Company is in negotiations to provide casino-wide ABS bonusing applications, audio-visual products and an integrated slot accounting system for a large, new Nevada casino. Although the negotiations are not yet complete and a written contract has not been executed, the Company expects the final contract will result in approximately $10 million in revenue and installation will occur in the second half of fiscal 1999. The Company expects that the sale will include new bonusing applications and its own proprietary slot accounting system that have not yet been approved by the Nevada Gaming Authorities. The Company expects that the definitive contract will include penalty provisions if the Company fails to meet certain milestones. The contract negotiations may not be concluded or may not be concluded to a result that is satisfactory to the Company. The Company expects that the definitive contract will not include an advance payment normally required by the Company before the commencement of a major project. The Company will be materially adversely affected if it is not able to collect payment for its products. RELATIONSHIP WITH IGT Customer Concentration; Strategic Alliance with IGT. The Company's Strategic Alliance with IGT has increased the Company's dependence on IGT as a customer and as a distributor of the Company's products. Sales to IGT under the Strategic Alliance have not met the Company's expectations. Certain casinos have expressed an interest in purchasing ABS without also purchasing IGS. Although the Strategic Alliance does not prohibit the Company from selling ABS directly to customers, IGT has expressed objections about the Pending Sales Agreement (see "Acres Bonusing System") and may be unwilling to continue the Strategic Alliance if the Company continues to sell ABS independently of IGT. In late September 1998, Albert Crosson, Vice Chairman of IGT, resigned from the Company's Board of Directors. IGT has not nominated Mr. Crosson's successor, although it continues to have the right to do so. Representatives of the Company and IGT have met several times to work to redefine the relationship. The Strategic Alliance may be re-defined, mutually terminated or terminated at the election of either party. The termination of the Strategic Alliance would likely have a significant negative impact on the Company's sales to IGT. However, such termination would also provide the Company with additional control of the sale, service and support of the Company's bonusing products and may offer sales opportunities that would otherwise not be available. (See "Acres Bonusing System"). COMMUNICATION PROTOCOL The Company and IGT have jointly developed a communication protocol known as SAS4. The protocol is used to communicate instructions and messages between ABS and gaming machines. The communication of these instructions and messages 19 24 is essential to the operation of bonuses. Although the Company and IGT have agreed that the Company can use SAS4 in connection with the Pending Sales Agreement, IGT has stated that the Company does not have an unrestricted right to use SAS4 with non-IGT games. The Company believes that it has joint ownership of the protocol and the ability to use and license the protocol. If necessary, the Company believes there are alternatives to SAS4 but such alternatives could cause delays in product availability. YEAR 2000 The Year 2000 issue results from computer programs operating incorrectly when the calendar year changes to January 1, 2000. Computer programs that have date-sensitive software may recognize a two-digit date using "00" as calendar year 1900 rather than the year 2000. This could result in system failure or miscalculations and could cause disruptions of operations, including, among other things, a temporary inability to engage in normal business activities. The Company has evaluated its technology and data, including imbedded non-information technology, used in the creation and delivery of its products and services and in its internal operations and has identified no significant Year 2000 issues. The core business systems are compliant, or a migration path to a compliant version will be in place by the year 2000. Compliant upgrades for the Company's existing slot accounting and player tracking products have been developed, submitted to regulatory authorities, made available to all customers and, in some cases, installed at the customers' sites. The Company has not incurred material costs and believes that future costs associated with addressing the Year 2000 issue will have an immaterial effect on the Company's financial results. Although the Company has inquired of certain of its significant vendors as to the status of their Year 2000 compliance initiatives, no binding assurances have been received. The Company believes that its component parts and services can be obtained from multiple sources and therefore is not overly reliant on any single vendor. Failure of telephone service providers or other monopolistic utilities could have a significant detrimental effect on the Company's operations. The Company does not know the status of its customers' Year 2000 compliance initiatives. Failure of the Company's customers to adequately address such issues could negatively affect their ability to purchase bonusing products. There can be no assurances that such third parties will successfully address their own Year 2000 issues over which the Company has no control. A formal contingency plan to address most reasonably likely "worst-case" scenarios has not yet been created, but the Company expects to develop such a plan during the next 12 months. OTHER RISKS Bonus Games. The creation of bonus games and the deployment of those games into casinos on a revenue-sharing basis is a key part of the Company's business plan. The Company may not be able to develop successful bonus games or convince casinos to implement such games on a revenue-sharing basis. Government Regulation; Potential Restrictions on Sales. The Company is subject to gaming regulations in each jurisdiction in which its products are sold or are used by persons licensed to conduct gaming activities. The Company's products generally are regulated as "associated equipment", pursuant to which gaming regulators have 20 25 discretion to subject the Company, its officers, directors, key employees, other affiliates, and certain shareholders to licensing, approval and suitability requirements. In the event that gaming authorities determine that any person is unsuitable to act in such capacity, the Company would be required to terminate its relationship with such person, and under certain circumstances, the Company has the right to redeem its securities from persons who are found unsuitable. Products offered and expected to be offered by the Company include features that are not available on products currently in use. These new features may, in some cases, result in additional regulatory review and licensing requirements for the products or the Company. Compliance with such regulatory requirements may be time consuming and expensive, and may delay or prevent a sale in one or more jurisdictions. In addition, associated equipment generally must be approved by the regulatory authorities for use by each licensed location within the jurisdiction, regardless of whether the Company is subject to licensing, approval, or suitability requirements. Failure by the Company to obtain, or the loss or suspension of, any necessary licenses, approvals or suitability findings, may prevent the Company from selling or distributing its product in such jurisdiction. Such results may have a material adverse effect on the Company. The Company often enters into contracts that are contingent upon the Company and/or the customer obtaining the necessary regulatory approvals to sell or use the Company's products or to operate a casino. Failure to timely obtain such approvals may result in the termination of the contract and the return of amounts paid pursuant to such contract. Changes in Business and Economic Conditions Generally and in the Gaming Industry. The strength and profitability of the Company's business depends on the overall demand for bonusing products and growth in the gaming industry. Gaming industry revenues are sensitive to general economic conditions and generally rise or fall more rapidly in relation to the condition of the overall economy. In a period of reduced demand, the Company may not be able to lower its costs rapidly enough to counter a decrease in revenues. Product Concentration; Competition; Risks of Technological Change. The Company expects to derive most of its revenues from the sale of bonusing products and the Company's future success will depend in part upon its ability to continue to generate sales of these products. A decline in demand or prices for the Company's bonusing products, whether as a result of new product introduction or price competition from competitors, technological change, or failure of the Company's bonusing products to address customer requirements or otherwise, could have a material adverse effect on the Company's revenues and operating results. The markets in which the Company competes are highly competitive and subject to frequent technological change and one or more of the Company's competitors may develop alternative technologies for bonusing or game promotions. The Company's future results of operations will depend in part upon its ability to improve and market its existing products and to successfully develop, manufacture and market new products. While the Company expends a significant portion of its revenues on research and development and on product enhancement, the Company may not be able to continue to improve and market its existing products or develop and market new products, or technological developments may cause the Company's products to become obsolete or noncompetitive. Many of the Company's competitors have substantially greater financial, marketing and technological resources than the Company and the Company may not be able to compete successfully with them. Patents and Trademarks. The Company relies on a combination of patent, trade secret, copyright and trademark law, nondisclosure agreements and technical security measures to protect its products. The Company has received U.S. patents on certain features of its bonusing product line, has applied for additional U.S. patents and may in the future apply for other U.S. patents and corresponding foreign patents. The Company may also file for patents on certain features of products that the Company may develop in the future. Notwithstanding these safeguards, it is possible for competitors of the Company to obtain its trade secrets and to imitate its products. Furthermore, others may independently develop products similar or superior to those developed or planned by the Company. While the Company may obtain patents with respect to certain of its products, the Company may not have sufficient resources to defend such patents, such patents may not afford all necessary protection and competitors may develop equivalent or superior products which may not infringe such patents. Fluctuations in Quarterly Operating Results. The Company's quarterly operating results have fluctuated in the past, and may fluctuate significantly in the future, due to a number of factors, including, among others, the size and timing of customer orders, the timing and market acceptance of new products introduced by the Company, changes in the level of operating expenses, technological advances and new product introductions by the 21 26 Company's competitors, competitive conditions in the industry, regulatory approval and general economic conditions. Product development and marketing costs are often incurred in periods before any revenues are recognized from the sales of products, and gross margins are lower and operating expenses are higher during periods in which such product development expenses are incurred and marketing efforts are commenced. At its current stage of operations, the Company's quarterly revenues and results of operations may be materially affected by the receipt or loss of any one order and by the timing of the delivery, installation and regulatory approval of any one order. The Company may not be able to achieve or maintain profitable operations on a consistent basis. The Company believes that period to period comparisons of its financial results may not be meaningful and should not be relied upon as indications of future performance. Fluctuations in operating results may result in volatility in the price of the Company's Common Stock. Management of Growth; Liquidity. To compete effectively and to manage future growth, the Company must continue to improve its financial and management controls, reporting systems and procedures on a timely basis and expand, train and manage its employees. Any failure by the Company to implement and improve any of the foregoing could have a material adverse effect on the Company's business, operating results and financial condition. In addition, sufficient funds to maintain new product development efforts and expected levels of operations may not be available and additional capital, if and when needed by the Company, may not be available on terms acceptable to the Company. 22 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page ---- Report of Independent Public Accountants........................... 25 Consolidated Balance Sheets........................................ 26 Consolidated Statements of Operations.............................. 27 Consolidated Statements of Stockholders' Equity.................... 28 Consolidated Statements of Cash Flows.............................. 29 Notes to Consolidated Financial Statements......................... 30
23 28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Acres Gaming Incorporated: We have audited the accompanying consolidated balance sheets of Acres Gaming Incorporated (a Nevada Corporation) and subsidiary as of June 30, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 financial statements referred to above present fairly, in all material respects, the financial position of Acres Gaming Incorporated and subsidiary as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Portland, Oregon, July 27, 1998 24 29 ACRES GAMING INCORPORATED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1998 AND 1997 ASSETS
1998 1997 -------- -------- (in thousands) CURRENT ASSETS: Cash and cash equivalents $ 9,887 $ 9,318 Receivables, net of allowance of $50,000 and $322,000 1,929 3,880 Inventories 2,607 5,366 Prepaid expenses 103 455 -------- -------- Total current assets 14,526 19,019 -------- -------- PROPERTY AND EQUIPMENT: Furniture and fixtures 540 541 Equipment 4,003 2,804 Leasehold improvements 627 526 Accumulated depreciation (2,919) (2,075) -------- -------- Property and equipment, net 2,251 1,796 -------- -------- OTHER ASSETS, NET 417 508 -------- -------- $ 17,194 $ 21,323 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 982 $ 1,339 Accrued expenses 438 723 Customer deposits 1,015 483 -------- -------- Total current liabilities 2,435 2,545 -------- -------- REDEEMABLE CONVERTIBLE PREFERRED STOCK 4,948 4,948 STOCKHOLDERS' EQUITY: Common Stock, $.01 par value, 50 million shares authorized, 8.8 million shares issued and outstanding 88 88 Additional paid-in capital 19,554 19,321 Accumulated deficit (9,831) (5,579) -------- -------- Total stockholders' equity 9,811 13,830 -------- -------- $ 17,194 $ 21,323 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. 25 30 ACRES GAMING INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996 -------- -------- -------- (in thousands except per share data) NET REVENUES $ 17,573 $ 20,455 $ 6,942 COST OF REVENUES 10,950 9,553 3,587 -------- -------- -------- GROSS PROFIT 6,623 10,902 3,355 -------- -------- -------- OPERATING EXPENSES: Research and development 4,651 4,531 2,341 Selling, general and administrative 5,887 4,946 2,679 Non-recurring charge 745 -- -- -------- -------- -------- Total operating expenses 11,283 9,477 5,020 -------- -------- -------- INCOME (LOSS) FROM OPERATIONS (4,660) 1,425 (1,665) OTHER INCOME 483 373 24 -------- -------- -------- NET INCOME (LOSS) $ (4,177) $ 1,798 $ (1,641) ======== ======== ======== NET INCOME (LOSS) PER SHARE - BASIC $ (.47) $ .21 $ (0.22) ======== ======== ======== NET INCOME (LOSS) PER SHARE - DILUTED $ (.47) $ .20 $ (0.22) ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 26 31 ACRES GAMING INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
COMMON STOCK ADDITIONAL DEFERRED ------------------- PAID-IN ACCUMULATED CHARGE - SHARES AMOUNT CAPITAL DEFICIT WARRANTS TOTAL ------ ------ ------- ------- -------- ----- (in thousands) Balance as of June 30, 1995 7,495 $ 75 $ 10,615 $ (5,672) $ (56) $ 4,962 Issuance of common stock 106 1 609 -- -- 610 Net loss -- -- -- (1,641) -- (1,641) Amortization of warrants -- -- -- -- 56 56 ----- -------- -------- -------- -------- -------- Balance as of June 30, 1996 7,601 76 11,224 (7,313) -- 3,987 Issuance of common stock 1,163 12 8,097 -- -- 8,109 Net income -- -- -- 1,798 -- 1,798 Preferred stock dividends -- -- -- (64) -- (64) ----- -------- -------- -------- -------- -------- Balance as of June 30, 1997 8,764 88 19,321 (5,579) -- 13,830 Issuance of common stock 56 -- 233 -- -- 233 Net loss -- -- -- (4,177) -- (4,177) Preferred stock dividends -- -- -- (75) -- (75) ----- -------- -------- -------- -------- -------- Balance as of June 30, 1998 8,820 $ 88 $ 19,554 $ (9,831) $ -- $ 9,811 ===== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 27 32 ACRES GAMING INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996 -------- -------- -------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (4,177) $ 1,798 $ (1,641) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 1,493 931 710 Non-recurring charge 745 -- -- Changes in assets and liabilities: Receivables 1,951 (2,970) 57 Inventories 2,098 (2,674) (297) Prepaid expenses 352 (361) (21) Accounts payable and accrued expenses (726) 166 987 Customer deposits 532 (1,265) 1,355 -------- -------- -------- Net cash from operating activities 2,268 (4,375) 1,150 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (1,922) (1,502) (349) Capitalized software costs -- -- (82) Other, net 65 (298) (154) -------- -------- -------- Net cash from investing activities (1,857) (1,800) (585) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 233 8,109 610 Net proceeds from issuance of preferred stock -- 4,948 -- Preferred stock dividends (75) (64) -- -------- -------- -------- Net cash from financing activities 158 12,993 610 -------- -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 569 6,818 1,175 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9,318 2,500 1,325 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,887 $ 9,318 $ 2,500 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 28 33 ACRES GAMING INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND COMPANY OPERATIONS: COMPANY OPERATIONS AND BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of Acres Gaming Incorporated and its wholly owned subsidiary, AGI Distribution, Inc. (the "Company"). All intercompany accounts and transactions have been eliminated. The Company develops, manufactures and markets electronic game promotions, equipment and games for the casino gaming industry. The Company's principal products are based on its proprietary Acres Bonusing Technology and are designed to enhance casino profitability by providing entertainment and incentives to players of gaming machines. The bonusing technology improves the efficiency of bonus and incentive programs currently offered by many casinos, and makes possible bonus and incentive programs that have not previously been offered. The Company currently sells its products in the United States and in Australia. Sales in Australia totaled $1.2 million, $4.8 million and $1.4 million, for the years ended June 30, 1998, 1997 and 1996, respectively. At its current stage of operations, the Company's financial position and operating results may be materially affected by a number of factors, including the timing of receipt, installation and regulatory approval of any one order, availability of additional capital, competition and technological change. REVENUE RECOGNITION The Company sells certain of its products under contracts that generally provide for a deposit to be paid before commencement of the project and for a final payment to be made after completion of the project. Revenue is recognized as individual units are installed or, in those instances where the contract does not provide for the Company to install the equipment, upon shipment. Customer deposits received under sales agreements are reflected as liabilities until the related revenue is recognized. MAJOR CUSTOMERS One customer accounted for 75 percent, 28 percent and 2 percent of the Company's net revenues in 1998, 1997 and 1996, respectively. Another customer accounted for 18 percent, 28 percent and 43 percent of the Company's net revenues in 1998, 1997 and 1996, respectively. A third customer provided 12 percent of the Company's net revenues in 1997 and 20 percent in 1996. Sales to one other customer amounted to 12 percent of the Company's net revenues in 1996. INCOME TAXES The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates in effect in the years in which the differences are expected to reverse. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, amounts held in and due from banks and highly liquid marketable securities with maturities of three months or less at date of purchase. 29 34 FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of receivables. At June 30, 1998 and 1997, the fair value of the Company's receivables approximated their carrying value. INVENTORIES Inventories consist of electronic components and other hardware, which are recorded at the lower of cost (first-in, first-out) or market. Inventories consist of the following:
INVENTORIES AT JUNE 30, ----------------------- 1998 1997 ------ ------ (in thousands) Raw materials $ 957 $2,787 Work-in-progress 124 621 Finished goods 1,526 1,958 ------ ------ Total inventories $2,607 $5,366 ====== ======
PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is computed on the straight-line basis over the assets' estimated useful lives of two to five years. Leasehold improvements are amortized over the lease term. Expenditures for maintenance and repairs are charged to operations when incurred. INTANGIBLE ASSETS Intangible assets consist of costs associated with the establishment of patents, gaming licenses and gaming product approvals in various jurisdictions. Amortization of patents is calculated using the straight-line method over the estimated life of the patent. Gaming licenses and product approvals are amortized over periods of 5 years and 2 years, respectively. Intangible assets, net of accumulated amortization, were $345,000 and $397,000 at June 30, 1998 and 1997, respectively, and are included in other assets. RESEARCH AND DEVELOPMENT COSTS All research and development costs are expensed as incurred. NON-RECURRING CHARGE During the second quarter of fiscal 1998, the Company changed its business focus to the ABS and bonus game product lines and recorded a non-recurring charge of $745,000 to recognize severance and inventory costs of discontinuing its Legacy slot accounting and player tracking system. The Company originally expected to be able to liquidate the majority of the excess Legacy inventory to existing slot accounting and player tracking customers and smaller casinos. These sales have not been realized and the significant improvements available in currently offered products make future sales unlikely. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 30 35 2. INCOME TAXES: At June 30, 1998, the Company had cumulative net operating losses totaling approximately $9.5 million that are available to offset future taxable income through 2012. A portion of the net operating loss carryforwards was used to offset income for the year ended June 30, 1997. The Company has provided a valuation allowance for the remaining amount of the benefit related to these net operating loss carryforwards as realizability is uncertain. Deferred income taxes are provided for the temporary differences between the carrying amounts of the Company's assets and liabilities for financial statement purposes and their tax bases. Deferred tax liabilities were insignificant as of June 30, 1998 and 1997. The sources of the differences that give rise to the deferred income tax assets as of June 30, 1998 and 1997, along with the income tax effects of each, are as follows:
DEFERRED INCOME TAX ASSETS AT JUNE 30, -------------------------- 1998 1997 ------- ------- (in thousands) Operating loss carryforwards $ 3,621 $ 1,907 Research and development tax credit 632 -- Property and equipment 367 144 Accruals and reserves 355 261 Intangible assets 23 20 ------- ------- 4,998 2,332 Less valuation allowance (4,998) (2,332) ------- ------- Net deferred tax assets $ 0 $ 0 ======= =======
During 1998, the valuation allowance related to deferred tax assets increased by $2.7 million. In 1997, the valuation allowance related to deferred tax assets decreased by $496,000. 3. COMMITMENTS AND CONTINGENCIES: Litigation Two related lawsuits have been filed in the U.S. District Court that allege violation of the federal securities laws by the Company and its executive officers. Those suits have been consolidated into one combined action that seeks class certification for a proposed class consisting of the purchasers of the Company's stock during the period from March 26, 1997 to December 11, 1997. The court has not yet ruled on class certification. The Company has moved to dismiss this suit and discovery has been stayed pending resolution of this motion. The Company denies the allegations and intends to vigorously defend itself. Three related lawsuits have been filed in the U.S. District Court involving the Company and its patents. Those suits have now been consolidated. The Company denies all asserted allegations and intends to vigorously defend itself and its intellectual property rights. In Suit I, Mikohn asserted a claim for declaratory judgment of noninfringement and invalidity of U.S. Patent No. 5,655,961 ("the `961 patent") owned by the Company. Mikohn also asserted claims for "intentional interference with a business relationship," "intentional interference with prospective business relationship," "unfair competition: trade libel" and "unfair competition: disparagement." Mikohn's complaint sought unspecified damages, punitive damages, attorney's fees, interest on the alleged damages, an injunction against the conduct alleged in the complaint, and a declaration that the `961 patent is invalid and not infringed by Mikohn or its customers. The Company has filed a counterclaim for infringement of the `961 patent, and has denied Mikohn's other allegations. 31 36 In Suit II, Mikohn asserted a claim for declaratory judgment of noninfringement and invalidity of U.S. Patent No. 5,741,183 ("the `183 patent") owned by the Company. Mikohn's complaint sought no damages, but requested an award of attorney's fees and a declaration that the `183 patent is invalid and not infringed by Mikohn. The Company is not aware of any infringement by Mikohn, and therefore sought to dismiss the complaint for lack of a case or controversy. The court denied the Company's motion. In Suit III, the Company sued Mikohn, Casino Data Systems, New York New York Hotel and Casino and Sunset Station Hotel and Casino for infringement of the Company's U.S. Patent No. 5,752,882 ("the `882 patent"). Mikohn counterclaimed in Suit III, seeking a declaratory judgment of invalidity and noninfringement of the `882 patent and asserted claims for "false and misleading representations" under 11 U.S.C. Section 1125, "interference with prospective economic relations," "unfair competition: trade libel" and "unfair competition: disparagement." Mikohn's counterclaims seek unspecified damages, as well as a trebling of the damages, punitive damages, attorney's fees and an injunction against the Company's "continuing to commit the unlawful acts" alleged in the counterclaims. The Company moved for a preliminary injunction in Suit III against Mikohn's infringement of the `882 patent. The court has not ruled on the Company' motion. In a separate but related action, the Company has filed suit in U.S. District Court against its general liability insurance carrier for breach of insurance contract. The Company's suit is based on the insurer's refusal to pay more than nominal amounts of the costs of defense in Suit I. The Company anticipates that this matter will be resolved by cross motions for summary judgment. In addition, the Company has tendered the defense of Mikohn's counterclaims in Suit III to the same insurer. To date the insurer has not responded to the tender of Suit III's defense. The Company from time to time is involved in other various legal proceedings arising in the normal course of business. Operating Leases The Company leases its office facilities under operating leases that extend through June 15, 2003. Future minimum lease payments under these non-cancelable operating leases as of June 30, 1998 are $785,000, $497,000, $493,000, $493,000 and $472,000 in 1999, 2000, 2001, 2002 and 2003, respectively. Total lease expense was $567,000, $255,000 and $228,000 for the years ended June 30, 1998, 1997 and 1996, respectively. 4. REDEEMABLE PREFERRED STOCK: In January 1997, the Company created an initial series of preferred stock, consisting of 1,038,961 shares, which it designated Series A Convertible Preferred Stock (the "Series A Stock") and issued 519,481 shares for net proceeds of approximately $4.9 million. The Series A Stock is entitled to receive non-cumulative dividends at a rate per share equal to 3 percent of $9.625, the initial per share purchase price. Holders of the Series A Stock have the option, upon notice to the Company, to convert shares of Series A Stock into shares of Common Stock based upon the applicable conversion price in effect at the time of conversion. The initial conversion price for each share of Series A Stock is the lesser of the price at which the Series A Stock was initially issued and the average closing price of the Company's Common Stock for the period of thirty trading days prior to the date of conversion of shares of Series A Stock. The conversion price is subject to adjustments for certain events relating to the Common Stock including stock splits and combinations, dividends and distributions, reclassification, exchange, substitution, reorganization, merger, or sale of assets. The Series A Stock is subject to redemption, subject to certain conditions, at a price equal to the purchase price plus any declared but unpaid dividends. As of June 30, 1998, all declared dividends have been paid. In July 1998, $75,000 of dividends related to the six month period ended June 30, 1998 were declared and subsequently paid. So long as at least 130,000 of the shares of Series A Stock originally issued by the Company remain outstanding, holders of the Series A Stock are entitled as a class to elect one director and must approve any amendments to the Company's articles of incorporation including, among other things, amendments to facilitate the sale or merger of the Company. In the event of any voluntary or involuntary liquidation, dissolution or winding up 32 37 of the Company, the holders of the Series A Stock will be entitled to receive a liquidation preference of $9.625 per share, plus any declared but unpaid dividends, prior to the distribution of any of the Company's assets to holders of the Common Stock. Any assets remaining after the distribution to holders of the Series A Stock will be distributed to holders of the Common Stock. 5. STOCKHOLDERS' EQUITY: In November 1993, the Company completed its initial public offering and issued 1,667,500 units (the "Units") consisting of 1,667,500 shares of Common Stock and 833,750 Redeemable Warrants. In connection with the offering, the Company granted the underwriter warrants to purchase 145,000 Units at $6.00 per share. The net proceeds of the offering were $7.2 million. In October 1996, substantially all of the Redeemable Warrants were exercised, resulting in net proceeds to the Company of approximately $6.2 million. The underwriter warrants were exercised in October 1996 resulting in net proceeds to the Company of approximately $1.4 million. In June 1995, the Company issued 400,000 shares of Common Stock to a group of private investors for net proceeds of approximately $2.3 million. In connection with this offering, the Company granted warrants which expire in June 2000 to purchase 40,000 shares of Common Stock at $7.20 per share, which approximated market value at that date. In 1995, the Company issued warrants to purchase 195,000 shares of Common Stock to two companies and two individuals in exchange for services. Of these, warrants to purchase 50,000 shares were valued at $96,000, recorded as paid-in capital and amortized over the term of the related service agreement that ended in 1996. At June 30, 1998, warrants to purchase 125,000 shares at $9.00 remain outstanding and expire in September 2000. The Company has a Stock Option Plan (the "Plan") which permits the granting of awards to directors, employees and consultants of the Company in the form of stock options. Stock options granted under the Plan may be incentive stock options or nonqualified options. Options generally vest over five years and expire in ten years. The Company accounts for the Plan under APB Opinion No. 25 "Accounting for Stock Issued to Employees", under which no compensation cost is recognized. Had compensation cost for the Plan been determined consistent with FASB Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's net income (loss) and earnings (loss) per share would have approximated the following pro forma amounts:
FOR THE YEARS ENDED JUNE 30, -------------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands except per share data) NET INCOME (LOSS): As reported $ (4,177) $ 1,798 $ (1,641) Pro forma (4,863) 535 (1,921) EARNINGS (LOSS) PER SHARE - BASIC: As reported $ (.47) $ .21 $ (.22) Pro forma (.55) .06 (.25) EARNINGS (LOSS) PER SHARE - DILUTED: As reported $ (.47) $ .20 $ (.22) Pro forma (.55) .06 (.25)
In accordance with SFAS 123, the stock-based compensation methodology has not been applied to option grants awarded before July 1, 1995. Accordingly, the above pro forma compensation costs may not be representative of the costs expected in future years. 33 38 A total of 1,750,000 shares of the Company's Common Stock have been reserved for issuance pursuant to awards granted under the Plan. The Company has granted 1,294,325 options, net of cancellations, through June 30, 1998. Activity under the Plan is summarized below:
FOR THE YEARS ENDED JUNE 30, -------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------- ------------------------ ----------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- -------- --------- --------- ------- -------- Outstanding at beginning of year 1,132,950 $ 6.25 756,375 $ 4.23 391,625 $ 4.83 Granted at exercise prices equal to market prices 329,750 5.18 352,450 9.53 532,400 4.48 Granted at exercise prices exceeding market prices -- -- 230,500 10.47 30,000 6.50 Exercised (55,525) 4.19 (77,625) 4.67 (91,500) 5.75 Canceled (366,000) 8.18 (128,750) 11.92 (106,150) 7.00 --------- ------- ------- Outstanding at end of year 1,041,175 5.34 1,132,950 6.25 756,375 4.23 ========= ========= ======= Exercisable at end of year 523,748 4.76 468,007 4.71 278,000 3.95 ========= ======= ======= Weighted average fair value of options granted $ 3.79 $ 5.35 $ 3.39 ======== ======== ========
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:
1998 1997 1996 ---- ---- ---- Risk free interest rate 5.8% 6.2% 6.2% Expected life of option 5 years 5 years 5 years Expected volatility 91% 97% 97% Dividends none none none
The following table summarizes the options to purchase Common Stock outstanding at June 30, 1998:
WEIGHTED OPTIONS FOR OPTIONS FOR AVERAGE EXERCISE EXERCISE SHARES WEIGHTED AVERAGE WEIGHTED AVERAGE SHARES PRICE OF SHARES PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISABLE -------------- ----------- ---------------- ---------------- ----------- ---------------- $3.00 - $5.00 704,600 $ 4.09 8.1 years 347,414 $3.63 $5.06 - $9.00 255,425 6.88 8.4 years 156,134 6.62 $9.12 - $16.88 81,150 11.36 8.7 years 20,200 9.92 -------------- --------- -------- $3.00 - $16.88 1,041,175 5.34 8.2 years 523,748 4.76 ============== ========= ========
6. EMPLOYEE BENEFIT PLAN: The Company has a profit sharing plan that operates under the provisions of section 401(k) of the Internal Revenue Code and covers substantially all full-time employees. Employer contributions may be made at the discretion of the Board of Directors. To date, there have been no employer contributions. 34 39 7. PER SHARE COMPUTATION: The Company adopted Statement of Financial Accounting Standards No. 128 "Earnings per Share" in the quarter ended December 31, 1997. Under the new requirements, the Company reports basic and diluted earnings per share. Only the weighted average number of common shares issued and outstanding are used to compute basic earnings per share. The computation of diluted earnings per share includes the effect of stock options, warrants and redeemable convertible preferred stock, if such effect is dilutive. For purposes of these earnings per share computations, earnings have not been reduced by preferred stock dividends in accordance with the "if-converted method" of accounting for convertible securities. The following table summarizes the calculations of earnings per share amounts. Where necessary, prior year amounts have been restated.
FOR THE YEAR ENDED JUNE 30, ------------------------------------- 1998 1997 1996 -------- ------- ------- (in thousands except per share data) Net income (loss) $ (4,177) $ 1,798 $(1,641) ======== ======= ======= Weighted average number of shares of common stock and common stock equivalents outstanding: Weighted average number of common shares outstanding 8,804 8,399 7,552 Dilutive effect of warrants and employee stock options after -- 400 -- application of the treasury stock method Dilutive effect of redeemable convertible preferred stock -- 272 -- after application of the if-converted method -------- ------- ------- Weighted average number of common shares outstanding for computing diluted earnings per share 8,804 9,071 7,552 ======== ======= ======= Earnings (loss) per share - basic $ (.47) $ .21 $ (.22) ======== ======= ======= Earnings (loss) per share - diluted $ (.47) $ .20 $ (.22) ======== ======= =======
The following common stock equivalents were excluded from the earnings per share computations because their effect would have been anti-dilutive:
BALANCE OUTSTANDING AS OF JUNE 30, ---------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Warrants and employee stock options 1,206 101 1,887 Redeemable convertible preferred stock 519 -- --
If the Company had been profitable in fiscal 1998 and 1996, application of the treasury stock method, in which the assumed net proceeds from the exercise of the weighted average number of warrants and employee stock options outstanding during the period are assumed to be used to repurchase common stock at its average market price during the period, would have reduced the number of warrants and employee stock options outstanding for purposes of computing earnings per share to 241,000 and 291,000, in 1998 and 1996, respectively. 35 40 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No changes in, or disagreements with, accountants which required reporting on Form 8-K have occurred within the three-year period ended June 30, 1998. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to Directors of the Company is incorporated herein by reference to the Company's Proxy Statement that will be filed pursuant to Regulation 14A within 120 days of June 30, 1998. ITEM 11. EXECUTIVE COMPENSATION Information with respect to Executive Compensation is incorporated herein by reference to the Company's Proxy Statement that will be filed pursuant to Regulation 14A within 120 days of June 30, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to Security Ownership of Certain Beneficial Owners and Management is incorporated herein by reference to the Company's Proxy Statement that will be filed pursuant to Regulation 14A within 120 days of June 30, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to Certain Relationships and Related Transactions is incorporated herein by reference to the Company's Proxy Statement that will be filed pursuant to Regulation 14A within 120 days of June 30, 1998. 36 41 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS See "Item 8. Financial Statements and Supplementary Data" (2) FINANCIAL STATEMENT SCHEDULES REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To Acres Gaming Incorporated: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Acres Gaming Incorporated's 1998 Annual Report on Form 10-K, and have issued our report thereon dated July 27, 1998. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The Valuation and Qualifying Accounts schedule is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. The schedule has been subjected to the auditing procedures applied in our audits of the basic consolidated 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 consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Portland, Oregon July 27, 1998 ACRES GAMING INCORPORATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
AMOUNTS BALANCES AT ADDITIONS CHARGED BEGINNING OF CHARGED TO OFF, NET OF BALANCES AT YEAR INCOME COLLECTIONS END OF YEAR ---- ------ ----------- ----------- (in thousands) ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS 1998 $322 $25 $(297) $50 1997 0 317 5 322 1996 48 20 (68) 0 ALLOWANCE FOR NON-RECURRING CHARGE 1998 $0 $745 $(270) $475
(3) EXHIBITS See "Index to Exhibits". (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the last quarter of the period covered by this report. 37 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ACRES GAMING INCORPORATED Date: September 24, 1998 By: /s/ Floyd W. Glisson --------------------------------- Floyd W. Glisson Chief Executive Officer, President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated. Date: September 24, 1998 /s/ John F. Acres ------------------------------------ John F. Acres Chairman of the Board Date: September 24, 1998 /s/ Floyd W. Glisson ------------------------------------ Floyd W. Glisson Chief Executive Officer, President and Director (Principal Executive Officer) Date: September 24, 1998 /s/ Robert W. Brown ------------------------------------ Robert W. Brown Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) Date: September 24, 1998 /s/ Jo Ann Acres ------------------------------------ Jo Ann Acres Director Date: September 24, 1998 /s/ Richard A. Carone ------------------------------------ Richard A. Carone Director 38 43 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION --- ----------- 3.1 Articles of Incorporation of Acres Gaming Incorporated, as amended(4) 3.2 Bylaws of Acres Gaming Incorporated, as amended(3) +10.1 Acres Gaming Incorporated 1993 Stock Option and Incentive Plan, as amended(4) 10.2 Lease dated January 4, 1994, between the Company and Avery Investments(1) 10.3 Lease dated June 27, 1995, between the Company and McCarran Center, LLC(2) +10.4 Employment Agreement dated January 2, 1996 between the Company and Joseph A. Huseonica(3) +10.5 Employment Agreement dated July 1, 1996 between the Company and John F. Acres(4) 10.6 Stock Purchase Agreement between the Company and IGT dated January 28, 1997(4) 10.7 Registration Rights Agreement between the Company and IGT dated January 28, 1997(4) 10.8 Master Agreement for Product Development, Purchase and Sale between the Company and International Game Technology, Inc. dated January 27, 1997(4) 10.9 Form of sublease between the Company and Hewlett Packard dated May 22, 1998(5) + 10.10 Employment Agreement Amendment dated January 15, 1997 between the Company and Joseph A. Huseonica(5) 10.11 Lease dated March 3, 1998 between the Company and #26 McCarran Center, LC 21.1 Subsidiaries of the Registrant 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants 27.1 Financial Data Schedule for year ended June 30, 1998 27.2 Financial Data Schedule for 3 months ended September 30, 1996 (restated) 27.3 Financial Data Schedule for 6 months ended December 31, 1996 (restated) 27.4 Financial Data Schedule for 9 months ended March 31, 1997 (restated) 27.5 Financial Data Schedule for year ended June 30, 1997 (restated)
- ---------- + Management contract or compensatory plan or arrangement. (1) Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-KSB for the year ended June 30, 1994, previously filed with the Commission. (2) Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-KSB for the year ended June 30, 1995, previously filed with the Commission. (3) Incorporated by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996, previously filed with the Commission. (4) Incorporated by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1996, previously filed with the Commission. (5) Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1997, previously filed with the Commission EX-10.11 2 LEASE DATED MARCH 3, 1998 1 EXHIBIT 10.11 LEASE AGREEMENT #26 MCCARRAN CENTER, LC (Landlord) and ACRES GAMING (Tenant) September 17, 1998 SS-NNN-MT-26 2 1. BASIC LEASE TERMS 1 1.1 PREMISES ADDRESS 1 1.2 RENTAL AREA 1 1.3 BUILDING DESIGNATION 1 1.4 PROJECT 1 1.5 SITE PLAN 1 1.6 PREMISES FLOOR PLAN 1 1.7 TERM: 1 1.8 COMMENCEMENT DATE 1 1.9 PARKING ALLOCATION 1 1.10 OPTION TO RENEW 1 1.11 BASE RENT 1 1.12 RENT ADJUSTMENTS 2 1.13 IMPROVEMENTS 2 1.14 RULES AND REGULATIONS 2 1.15 OPERATING EXPENSES 2 1.16 SECURITY DEPOSIT 2 1.17 PERMITTED USE 2 1.18 ADDRESSES FOR PAYMENTS, NOTICES AND DELIVERIES: 2 1.19 BROKERS: 2 2. PREMISES 3 2.1 LEASED PREMISES: 3 2.2 DELIVERY AND ACCEPTANCE OF PREMISES: 3 2.3 BUILDING NAME AND ADDRESS: 3 3. TERM 4 3.1 GENERAL: 4
3 3.2 DELAY IN POSSESSION: 4 3.3 EARLY OCCUPANCY: 4 3.4 OPTION TERM(S): 4 4. RENT AND OPERATING EXPENSES 5 4.1 BASE RENT: 5 4.2 OPERATING EXPENSES 5 4.2.1 Payment of Operating Expenses 5 4.2.2 Tenant's Prorata Share Defined 5 4.2.3 Operating Expenses 5 4.2.4 Exclusion from Operating Expenses 6 4.2.5 Annual Statement of Operating Expenses 7 4.2.6 Cost Savings or Mandated Capital Improvements 8 4.2.7 Real Property Taxes 8 4.2.8 Final Determination 8 4.3 COST OF LIVING INCREASES: 9 4.4 SECURITY DEPOSIT: 9 4.5 OPTION RENT: 9 5. USE 9 5.1 USE: 9 5.2 HAZARDOUS MATERIALS: 10 5.3 SIGNS: 11 6. COMMON FACILITIES AND VEHICLE PARKING 11 6.1 OPERATION AND MAINTENANCE OF COMMON FACILITIES: 11 6.2 USE OF COMMON FACILITIES: 11 6.3 PARKING: 12 6.3.1 Parking Maintenance 12 6.4 CHANGES AND ADDITIONS BY LANDLORD: 12 7. MAINTENANCE, REPAIRS AND ALTERATIONS 12 7.1 LANDLORD'S OBLIGATIONS: 12 7.2 TENANT'S OBLIGATIONS: 13 7.2.1 Premises Repair and Maintenance 13
4 7.2.2 Remedy for Failure to Perform 13 7.3 ALTERATIONS AND ADDITIONS: 14 7.3.1 Consent 14 7.3.2 Written Notice 14 7.3.3 Payment of Labor 14 7.3.4 Alterations Property of Landlord 15 7.4 UTILITY ADDITIONS: 15 7.5 ENTRY AND INSPECTION: 15 7.6 TENANT'S NON-STANDARD BUILDING IMPROVEMENTS: 15 7.7 LANDLORD'S IMPROVEMENTS: 16 8. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY 16 8.1 TAXES ON TENANT'S PROPERTY: 16 9. UTILITIES 16 9.1 MULTI-TENANT BUILDING 16 9.2 LIABILITY OF LANDLORD 16 10. ASSIGNMENT AND SUBLETTING 17 10.1 RIGHTS OF PARTIES: 17 10.1.1 Non-Assignable 17 10.1.2 Notice 17 10.1.3 Reimbursement of Costs 18 10.2 EFFECT OF TRANSFER: 18 11. INSURANCE AND INDEMNITY 18 11.1 TENANT'S INSURANCE: 18 11.2 LANDLORD'S INSURANCE: 19 11.3 WAIVER OF SUBROGATION: 19 11.4 POLICIES: 19 11.5 TENANT'S INDEMNITY: 19 11.6 LANDLORD'S INDEMNITY: 20 12. DAMAGE OR DESTRUCTION 20
5 12.1 RESTORATION: 20 12.1.1 Damage Repair 20 12.1.2 Termination of Lease 20 12.1.3 Rent Abatement 21 12.1.4 Cost of Repair 21 13. EMINENT DOMAIN 21 13.1 TOTAL OR PARTIAL TAKING: 21 13.2 TEMPORARY TAKING: 21 13.3 TAKING OF PARKING AREA: 21 14. SUBORDINATION; ESTOPPEL CERTIFICATE 22 14.1 SUBORDINATION: 22 14.1.1 Subordinate to all underlying encumbrances 22 14.1.2 Attornment 22 14.1.3 Failure to Perform 22 14.2 ESTOPPEL CERTIFICATE: 22 14.2.1 Time Limit 22 14.2.2 Failure to Perform 22 15. DEFAULTS AND REMEDIES 23 15.1 TENANT'S DEFAULT 23 15.1.1 Abandonment 23 15.1.2 Failure to Pay Rent 23 15.1.3 Assignment 23 15.1.4 Materially False Financial Statements 23 15.1.5 Failure to Observe Covenants 23 15.1.6 Assignment to Creditors/Bankruptcy 23 15.2 LANDLORD'S REMEDIES: 24 15.3 EXPENSES AND LEGAL FEES: 26 16. END OF TERM 26 16.1 HOLDING OVER: 26 16.2 MERGER ON TERMINATION: 27 16.3 SURRENDER OF PREMISES: REMOVAL OF PROPERTY: 27 16.4 TERMINATION; ADVANCE PAYMENTS: 27 17. PAYMENTS AND NOTICES 27
6 18. LIMITATION OF LIABILITY 27 19. TRANSFER OF LANDLORD'S INTEREST 28 20. MISCELLANEOUS 28 20.1 GENDER AND NUMBER 28 20.2 HEADINGS: 28 20.3 JOINT AND SEVERAL LIABILITY: 28 20.4 SUCCESSORS: 28 20.5 TIME OF ESSENCE: 28 20.6 SEVERABILITY: 28 20.7 ENTIRE AGREEMENT 29 20.8 WAIVER OF TRIAL BY JURY. 29 20.9 PARTIAL INVALIDITY 29 20.10 RECORDING 29 20.11 WAIVER 29 20.12 LATE CHARGES 29 20.13 INABILITY TO PERFORM 29 20.14 CHOICE OF LAW 30 20.15 INDEPENDENTLY PROVIDED SERVICES 30 20.16 PRIOR AGREEMENTS 31
7 LEASE AGREEMENT THIS LEASE AGREEMENT ("Lease"), dated September 17, 1998 is made by and between #26 McCarran Center, LC, a Nevada Limited Company, (herein called "Landlord") and Acres Gaming, (herein called "Tenant"). 1. BASIC LEASE TERMS Each reference in this Lease to the "Basic Lease Terms" shall mean and refer to the following collective terms, the application of which shall be governed by the provisions in the remaining articles of this Lease. 1.1 PREMISES ADDRESS 7115 Amigo, Suite 150 1.2 RENTAL AREA 31,438 Rentable Sq. Ft. 1.3 BUILDING DESIGNATION Building 26 Building Rentable Sq. Ft.: 54,624 Building Area Acreage: 5.33 acres 1.4 PROJECT Phase II - Exhibit A-1 1.5 SITE PLAN EXHIBIT A-2 1.6 PREMISES FLOOR PLAN EXHIBIT B-1 1.7 TERM: The term of this Lease will be for a period of 60 months. 1.8 COMMENCEMENT DATE June 15, 1998 for business operations. 1.9 PARKING ALLOCATION 132 parking spaces. 1.10 OPTION TO RENEW EXHIBIT "I": One (1) Term(s) of sixty (60) months. 1.11 BASE RENT $ 36,016.00 per month during the term of the Lease. Where reference is made in this Lease to rent as provided in Section 1.11, or where such reference is made to the term "Original Monthly Rent", such rent shall be deemed to be the Base Rent. TENANT SHALL RECEIVE A RENT CREDIT APPLICABLE TO THE FIRST MONTHS RENT OF $36,016. 1 8 1.12 RENT ADJUSTMENTS See Section 4 below. CPI adjustments shall be capped at a two percent (2%) minimum and five percent (5%) maximum for any twelve (12) month period. 1.13 IMPROVEMENTS Landlord's Contribution: $817,388. Please see EXHIBIT B-2. 1.14 RULES AND REGULATIONS EXHIBIT "D" 1.15 OPERATING EXPENSES See EXHIBIT "E" Group I Percentage: 7.27% Group II Percentage: 57.55% 1.16 SECURITY DEPOSIT $0 1.17 PERMITTED USE General Office 1.18 ADDRESSES FOR PAYMENTS, NOTICES AND DELIVERIES: Landlord: #26 McCarran Center, LC a Nevada Limited Liability Company 2300 W. Sahara, Suite 530 Las Vegas, NV 89102 Tenant: Acres Gaming 815 NW 9th Street Corvallis, OR 97330 2 9 2. PREMISES 2.1 LEASED PREMISES: Landlord leases to Tenant and Tenant rents from Landlord the Premises (herein the "Premises") containing the rental area set forth in Section 1.2 of the Basic Lease Terms. The Premises is located in the building (which together with underlying real property is called herein the "Building"), and is a portion of the project including other buildings described in Section 1.4 of the Basic Lease Terms (herein the "Project"). The Premises and the Project are indicated on Exhibits "A-2". If, upon completion of the space plans for the Premises, Landlord's architect or space planner determines that the rentable area of the Premises differs from that set forth in the Basic Lease Terms then Landlord shall so notify Tenant and the Base Rent (as shown in Section 1.11 of the Basic Lease Terms) shall be promptly adjusted in proportion to the change in square footage. The rentable area of the Premises is determined by measuring: (i) to the "drip-line" of the Building's exterior walls, which includes the area contained within exterior entry alcoves, and (ii) to the centerline of all walls separating the Premises from other tenant's premises. 2.2 DELIVERY AND ACCEPTANCE OF PREMISES: Landlord shall deliver the Premises to Tenant, on the Commencement Date (unless Tenant is already in possession), and Landlord further warrants to Tenant that the Common Facilities referred to in Article 6, (i.e. plumbing, heating, air conditioning, ventilating, electrical, lighting facilities and equipment within the Building, fixtures, walls, foundations, ceilings, roofs, floors, windows, access doors, loading doors, plate glass and skylights) shall be in good operating condition on the Commencement Date. In the event that it is determined that this warranty has been violated, then it shall be the obligation of the Landlord, after receipt of written notice from Tenant setting forth with specificity the nature of the violation, to promptly, at Landlord's sole cost, rectify such violation. Tenant's failure to give such written notice to Landlord within six (6) months after the Commencement Date shall cause the conclusive presumption that Landlord has complied with all of Landlord's obligations hereunder unless said defect cannot be ascertained within six (6) months of the Commencement Date, in which case Tenant shall notify Landlord of such defect within thirty (30) days of detection of the defect or notice of a violation of the aforementioned warranties. Except as otherwise provided in this Lease, Tenant hereby accepts the Premises in their existing condition as of the Commencement Date or the date that Tenant takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises and any covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Tenant acknowledges that neither Landlord nor Landlord's agent has made any representation or warranty as to the present or future suitability of the Premises for the conduct of Tenant's business. 2.3 BUILDING NAME AND ADDRESS: Tenant shall not utilize any name selected by Landlord from time to time for the Building and/or the Project as any part of Tenant's corporate or trade name. Landlord shall have the right to change the name, number or designation of the Building and/or the Project without notice or liability. Landlord agrees not to utilize the name or trademark of Tenant, its subsidiaries or affiliates without Tenant's written approval, which Tenant may withhold without cause or reason. 3 10 3. TERM 3.1 GENERAL: The term shall be for the period shown in Section 1.7 of the Basic Lease Terms ("Initial Term"). Subject to the provisions of Section 3.3, the term shall commence on the earlier of: a. the date Tenant acquires unrestricted possession of the Premises, or b. the Commencement Date as set forth in Section 1.8. Within twenty (20) days after possession of the Premises is tendered to Tenant, the parties shall execute the Exhibit "K" Certificate form provided by Landlord, which shall state the Commencement Date and the expiration date ("Expiration Date") of the Lease. Tenant's failure to execute that form shall not affect the validity of Landlord's determination of those dates. The Premises shall be deemed ready for occupancy upon the tendered date, but only if and when Landlord, to the extent applicable: a. has provided Tenant with unrestricted access to the Premises, and b. has obtained the occupancy permits required for Tenant's unrestricted possession of the Premises. 3.2 DELAY IN POSSESSION: If Landlord cannot deliver possession of the Premises to Tenant on/or before the Commencement Date due to events or factors beyond Landlord's reasonable control, this Lease shall not be void or voidable nor shall Landlord be liable to Tenant for any resulting loss or damage. However, Tenant shall not be liable for any rent and the Commencement Date shall not occur until Landlord delivers possession of the Premises and the Premises are in fact ready for occupancy in accordance with Section 3.1; except that if Landlord's failure to so deliver possession on the Commencement Date is attributable to: (i) Tenant's delays in the reasonable approval or preparation of plans and specifications for improvements, (ii) unreasonable delays caused by the Tenant's contractors or agents in performing services for which Tenant is responsible, or (iii) Tenant's negligence or willful misconduct, then Landlord shall be entitled to full performance by Tenant (including the payment of rent) from the Commencement Date. If Landlord does not deliver possession of the Property to Tenant within sixty (60) days after the Commencement Date, Tenant may elect to cancel this Lease by giving written notice to Landlord within ten (10) days after the sixty (60) day period ends. If Tenant gives such notice, the Lease shall be canceled and neither Landlord nor Tenant shall have any further obligations to the other. 3.3 EARLY OCCUPANCY: If Tenant occupies the Premises prior to the Commencement Date for business operations, then Tenant's occupancy of the Premises shall be subject to all of the provisions of this Lease. Early occupancy of the Premises shall not advance the expiration date of this Lease. 3.4 OPTION TERM(S): Tenant is hereby granted the right and option to extend this Lease for the additional term or terms as provided in Exhibit I (hereinafter "Option Term(s)"), attached hereto and incorporated herein, commencing at the expiration of the Initial Term. Such option is granted upon the following terms and conditions: 4 11 1. Terms and Conditions Except as set forth in Section 3.4.4 below, the Option Term(s) shall be on the same terms, covenants, conditions, provisions and agreements as in this Lease and any amendments thereto. 2. Uncured Defaults No uncured default exists at the time of the exercise of the Option Term. 3. Written Notice Tenant gives to Landlord and Landlord receives from Tenant written notice of the exercise to each option to extend this Lease no earlier than nine (9) months and no later than six (6) months prior to the expiration of the term immediately preceding the Option Term(s) to be exercised. If said notification is not given and received, the option to be exercised shall automatically expire. Failure to exercise an option shall result in automatic expiration of all successive options. 4. Payable Rent The rent payable during the Option Term(s) shall be payable and computed as provided in Exhibit "I" attached hereto. 4. RENT AND OPERATING EXPENSES 4.1 BASE RENT: From and after the Commencement Date, Tenant shall pay without deduction or offset the Base Rent (including subsequent adjustments, if any) as stated in Section 1.11. The Base Rent shall be due and payable in equal monthly installments on the first day of each month. If the Commencement Date occurs on a day other than the first day of the month, the first installment of Base Rent shall include rent for both the fractional month, if any, starting with the Commencement Date and the following calendar month. No demand, notice or invoice shall be required. 4.2 OPERATING EXPENSES 4.2.1 PAYMENT OF OPERATING EXPENSES Tenant shall pay to Landlord during the term hereof, in addition to and concurrently with the Base Rent, Tenant's prorata share of Operating Expenses (as hereinafter defined). 4.2.2 TENANT'S PRORATA SHARE DEFINED Tenant's Premises are located within a multi-tenant office Building which is a part of a multi-office Project. The services provided by Landlord for the maintenance, operation and repair of the Building and Project are set forth in Section 4.2.3 and Exhibit "E". The measurements (rentable square feet, usable square feet and acreage) set forth in this Lease and Exhibits are calculations provided by the Landlord's engineers and architects which Landlord and Tenant agree are reasonable and shall only be subject to revision by common agreement of the Landlord and Tenant. 4.2.3 OPERATING EXPENSES Operating Expenses shall mean all costs paid or incurred by Landlord in operating, cleaning, equipping, protecting, lighting, repairing, replacing, heating, air-conditioning, and maintaining the Building as a first class office project, and a proration of Operating Expenses for all common areas within the Project as provided in Exhibit E or as otherwise reasonably determined by Landlord, including by way of illustration but not limitation, all of the following: (i) the cost of providing, managing, maintaining and repairing all structural and mechanical portions and 5 12 components of the Building including, without limitation, heating and air conditioning systems, plumbing and all other utilities and the cost of supplies, equipment and maintenance and service contracts in connection therewith; (ii) a pro rata portion of the cost of: repairs and general maintenance of all landscaping, parking areas, structures and signs, and trash removal; (iii) the cost of fire, extended coverage, sprinkler, public liability, property damage, and other insurance; (iv) wages, salaries and other labor costs including taxes, insurance, retirement, medical and other reasonable employee benefits for individuals providing direct repair, maintenance and upkeep services to the Building and Project; (v) fees, charges and other costs actually paid by Landlord, including management fees and accounting fees, of all independent contractors engaged by Landlord or reasonably charged by Landlord if Landlord performs management services for the Project, Building or Premises, as the case may be; (vi) the cost of supplying, replacing and cleaning employee uniforms; (vii) a pro rata portion of the actual cost of the Project manager's offices in the Project provided said offices are devoted solely to the management, operation, maintenance or repair of the Project and the costs of the office are shared by all areas within the Project being serviced thereby; (viii) the cost of business licenses and similar taxes; (ix) any costs or fees imposed, assessed or levied pursuant to any applicable laws; (x) a prorata portion of any charges which are payable by Landlord pursuant to a service agreement with the County of Clark for services which are provided directly to the Project; (xi) the reasonable costs of contesting the validity or applicability of any governmental enactment which would increase Operating Expenses; (xii) personal property taxes and the cost of depreciation or the rental expense of personal property used in the maintenance, operation and repair of the Building and Project; (xiii) wages, salaries, normal employee benefits and taxes (or an allocation of the foregoing) for personnel working full or part time in connection with only the operation, maintenance and management of the Building and Common Facilities, (xiv) the Real Property Taxes attributed to the Building on a fully assessed basis as further defined in Section 4.2.7. For purposes of computing rent adjustments pursuant to this Article, Operating Expenses for the entire Project shall be allocated and charged to Tenant in accordance with generally accepted accounting principals (GAAP) and expressed as an amount per square foot of Rentable Area. 4.2.4 EXCLUSION FROM OPERATING EXPENSES The following items shall not be included in Operating Expenses: (i) any expenses which under generally accepted accounting principles would not be considered a maintenance, repair and/or operating expense for a multi-tenant commercial office facility, (ii) costs associated with the operation of the business of the entity which constitutes the "Landlord", as distinguished from the costs of the Building operations, maintenance and repair; including, but not limited to, the legal and accounting costs associated with the marketing, selling, syndicating, financing, mortgaging, or hypothecating of any of Landlord's interest in the Building or Project, the costs of disputes between Landlord and its employees, tenants or contractors, expenses incurred by Landlord to prepare, renovate, repaint, redecorate or perform any other work within any space leased to an existing or prospective tenant of the Building, (iii) expenses for any item or service which Tenant pays directly to a third party or separately reimburses Landlord and expenses incurred by Landlord to the extent the same are reimbursable or reimbursed from any other tenants or third parties, (iv) expenses in connection with services provided solely to the premises of other tenants or prospective tenants which are of no benefit to Tenant, (v) depreciation and/or amortization of the Building, (vi) the cost of repairs or other work incurred by reason of fire, windstorm or other casualty, except for reasonable deductibles paid under insurance contracts, (vii) Landlord's gross receipts taxes, personal and corporate taxes, inheritance and estate taxes, franchise, gift or transfer taxes, (viii) the cost of alterations or capital improvements which under generally accepted accounting principles are properly classified as capital expenditures, (ix) expenses for the replacement of any item covered under warranty, (x) the cost of repair necessitated by Landlord's negligence or willful misconduct, or to correct any latent defects or original design defects in the Building construction, materials or equipment, (xi) salaries of employees above the 6 13 grade of Manager or Superintendent for the Building or Project and/or salaries of employees whose time or cost billed as an Operating Expense was not exclusively devoted to the Building or Project, (xii) fees paid to Landlord or its affiliates to the extent that such fees exceed the customary amount charged for the service provided in Clark County, Nevada, (xiii) HVAC modifications or replacements necessary to comply with federal, state and local laws which were in existence at the time of the Lease Commencement, including the Environmental Protection Agency requirements and ASHRE standards for the maintenance of fresh air and HCVFC/CFC within the Premises. Landlord shall have the right, from time to time, to allocate some or all of the Operating Expenses for the Project among different portions, such as office or retail portions, of the Project ("Cost Pools"), in accordance with generally accepted accounting principles. The Operating Expenses within each such Cost Pool shall be allocated and charged to the tenants within such Cost Pool as an amount per square foot of Rentable Area, based on the total Rentable Area within such Cost Pool. The inclusion of the improvements, facilities and services set forth in Section 4.2, or in Exhibit "E", shall not be deemed to impose an obligation upon Landlord to either have said improvements or facilities or to provide those services unless; (i) the Project already has the same, or (ii) Landlord already provides the services, or (iii) Landlord has agreed elsewhere in this Lease to provide the same or some of them. 4.2.5 ANNUAL STATEMENT OF OPERATING EXPENSES By March 1 of each Lease Year, or as soon thereafter as practicable, but no later than April 1, Landlord shall furnish to Tenant a statement showing the actual Operating Expenses for the previous Lease Year, and any charge or credit to Tenant necessary to adjust the Additional Rent previously paid by Tenant to reflect the actual Operating Expenses. If such statement reveals an underpayment, Tenant shall promptly pay, within thirty (30) days of written notice, to Landlord an amount equal to such underpayment (whether or not this Lease has expired or been terminated), and if such statement shows an overpayment, Landlord shall credit the next monthly rental payment of Tenant, or, if the Term has expired, refund the overpayment to Tenant within thirty (30) days of this determination. In the event of any good faith dispute as to the amount or nature of any Operating Expense, Tenant or its agents shall have the right, not more frequently than once per calendar year, after notice to Landlord and at reasonable times, to inspect and photocopy Landlord's Operating Expense records at Landlord's office. Should Tenant dispute such Operating Expenses, Tenant shall be entitled, not later than one year following the operating year in question, to retain an independent certified public accountant or other competent real estate professional applying GAAP, who is not contracted or compensated on a contingency fee basis, to audit Landlord's Operating Expense records for the calendar year in question, which audit shall be completed within sixty (60) days of commencement. Tenant shall be entitled to escrow any payments for increases in operating expenses while completing its audit, which escrow shall not exceed sixty (60) days. Should the audit determine that Tenant was over-charged, then, within fifteen (15) days of Landlord's inspection of the audit, Landlord shall credit Tenant the amount of such over-charge toward the payments of Base Rent and Additional Rent next coming due under the Lease. Should the audit determine that Tenant has been under-charged, Tenant shall reimburse Landlord for such amount as Additional Rent next coming due under the Lease. Tenant agrees to pay the cost of the audit, unless the audit determines that Landlord's calculation of Operating Expenses was in error by more than five percent (5%), in which case Landlord shall pay for the audit. 7 14 4.2.6 COST SAVINGS OR MANDATED CAPITAL IMPROVEMENTS (a) For any Lease Year during the Term which is included in the useful life of a "Capital Improvement," Tenant shall pay as Additional Rent an amount equal to the product of (i) the "Capital Improvement Amortization" per square foot of Rentable Area in the Building, multiplied by (ii) the number of square feet of Rentable Area in the Premises. (b) "Capital Improvements" shall only pass through as an expenditure in as much as they pertain to any equipment, device or other improvement acquired or installed subsequent to the commencement of the construction of the building or other relevant portion of the Project which benefits all tenants in the Building and is intended or necessary: (i) to achieve economies in the operation, maintenance and repair of the Building or such relevant portion of the Project; (ii) to comply with any statute, ordinance, code, controls or guidelines which shall be enacted after the execution of this lease document, or (iii) to comply with any other future governmental requirement with respect to the building or any such relevant portion of the Project, including without limitation, fire, health, safety or construction requirements, as it pertains to the common areas of the Project. (c) "Capital Improvement Amortization" shall mean the amount determined by multiplying the actual cost, including financing costs, of each Capital Improvement acquired by Landlord by the constant annual percentage required to fully amortize such cost over the useful life of the Capital Improvement (as reasonably determined by GAAP). The Capital Improvement Amortization shall be allocated and charged to Tenant in accordance with generally accepted accounting and management practices and as an amount per square foot of Rentable Area. 4.2.7 REAL PROPERTY TAXES "Real Property Taxes" shall mean all taxes, assessments (special or otherwise) and charges levied upon or with respect to the Building Area as explained in Exhibit E. Real Property Taxes shall include, without limitation, any tax, fee or excise on the act of entering into this Lease, on the occupancy of Tenant, the rent hereunder or in connection with the business of owning and/or renting space in the Project which are now or hereafter levied or assessed against Landlord by the United States of America, the State of Nevada or any political subdivision, public corporation, district or other political or public entity, and shall also include any other tax, assessment, fee or excise, however described (whether general or special, ordinary or extraordinary, foreseen or unforeseen), which may be levied or assessed in lieu of, as a substitute for, or as an addition to, any other Real Property Taxes. Landlord may pay any such special assessments in installments when allowed by law, in which case Real Property Taxes shall include any interest charged thereon. Real Property Taxes shall also include reasonable legal fees, costs and disbursements incurred in connection with proceedings to contest, determine or reduce Real Property Taxes. Real Property Taxes shall not include income, franchise, transfer, inheritance or capital stock taxes, unless such taxes are levied or assessed against Landlord in lieu of, or as a substitute for, any other tax which would otherwise constitute a Real Property Tax. 4.2.8 FINAL DETERMINATION Even though the Lease has terminated and Tenant has vacated the Premises, when the final determination is made of Tenant's share of Operating Expenses for any prior calendar year in which the Lease terminates, Tenant shall, within thirty (30) days of receipt of written notice pay the entire increase due over the estimated expenses paid. Conversely, any overpayment made in the event expenses decrease shall be, within thirty (30) days, rebated by Landlord to Tenant. 8 15 4.3 COST OF LIVING INCREASES: After the Commencement Date and upon the expiration of each twelve (12) calendar month period thereafter during the Term hereof, rent shall be adjusted by multiplying the Base Rent by a fraction, which fraction shall have as its numerator the Consumer Price Index For All Urban Consumers (hereafter the "CPI") using the U.S. City Average (Base Period 1982-84=100), as published by the U.S. Department of Labor, Bureau of Labor Statistics, for the calendar month which is four (4) months prior to the expiration of the applicable twelve (12) month period, and which shall have as its denominator the CPI, as published for the calendar month which is four (4) months prior to the commencement of the Term. If the present base of the CPI should hereafter be changed, then the new base shall be converted to the base now used. In the event that the Bureau should cease to publish the CPI, then any similar index published by any other branch or department of the U.S. Government shall be used. In the event said Bureau shall publish more than one such index, the index showing the greater proportionate increase shall be used, and if none is so published, then another index generally recognized as authoritative shall be substituted by agreement of the parties hereto, or if no such agreement is reached within a reasonable time, either party may make application to any court of competent jurisdiction to designate such other index. In any event, the base used by any new index shall be reconciled to the 1982-84=100 Base Index. In no event shall the rent to be paid by Tenant pursuant hereto be less than the Base Rent or the Base Rent as adjusted with respect to the next preceding twelve (12) month period, whichever is the greater. In the event the numerator is not available at the time of adjustment of the rent as provided herein, Tenant shall continue to pay the rent established for the next prior twelve (12) month period; provided, however, Tenant shall promptly pay to Landlord any deficiency at such time as said rent is adjusted. 4.4 SECURITY DEPOSIT: None. 4.5 OPTION RENT: As set forth in Exhibit "I" attached hereto and incorporated herein. 5. USE 5.1 USE: Tenant shall use the Premises only for the purposes stated in Section 1.17 of the Basic Lease Terms. Tenant shall not do or permit anything to be done in or about the Premises nor bring or keep anything therein which will in any way increase the existing rate of, or affect any, fire or other insurance upon the Premises, Project or the Building, or cause a cancellation of any insurance policy covering said Premises, Project or Building or any part thereof or any of its contents. Tenant shall not do or permit or suffer anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or Project and Tenant shall take all necessary action to prevent odors, emissions, fumes, liquids or other substances or excessive noise from escaping or extending beyond the Premises. Tenant shall not use or allow the Premises to be used for any improper, unlawful or extra hazardous purpose. Tenant shall refrain from using or permitting the use of the Premises or any portion thereof as living quarters, sleeping quarters or for lodging purposes. Tenant shall, at its sole cost and expense, promptly comply with all federal, state, county, borough or municipal laws, ordinances, rules, regulations, directives, orders and/or requirements now in force or which may hereafter be in force with respect to the Premises (other than those that apply to structural elements of the Building), Tenant's use and occupancy of the Premises and Tenant's business conducted thereon and with the requirements of any board of fire underwriters or other similar bodies now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any law, 9 16 statute, ordinance or requirement, shall be conclusive of that fact as between Landlord and Tenant. Tenant shall be solely responsible for and pay, and shall indemnify and hold Landlord harmless from and against, all costs, expenses (including attorneys' fees), fines, damages, penalties and surcharges incurred or arising by reason of Tenant's failure to promptly and completely perform Tenant's obligations under this Section. 5.2 HAZARDOUS MATERIALS: Landlord shall not cause or permit any Hazardous Materials (as defined below) to be brought upon, kept or used in or about the Building, Project or Tenant's Premises, by Landlord, its agents, employees, or contractors unless such Hazardous Materials are (i) necessary to Landlord's business or for the maintenance, repair or cleaning of the Project and Buildings situated therein, and (ii) will be used, kept and stored in a manner that complies with all Hazardous Material Laws (as defined below). Should Landlord fail to fulfill its obligations as stated herein with regard to Hazardous Materials brought on the Project previously to or during the term of this Lease, Landlord shall indemnify Tenant as set forth in this Section 5.2 except that the references to Landlord and Tenant shall be reversed accordingly. Except for ordinary cleaning and office supply materials, Tenant shall not cause, permit or allow any Hazardous Materials (as defined below) to be brought upon, kept or used in or about the Premises, Building and/or Project, by Tenant, its agents, employees, contractors or invitees, without the prior written consent of Landlord (which consent Landlord shall not unreasonably withhold as long as Tenant demonstrates to Landlord reasonable satisfaction that such Hazardous Materials are necessary to Tenant's business, and will be used, kept and stored in a manner that complies with all Hazardous Materials Laws (as defined below) regulating any such Hazardous Materials so brought upon, used or kept in or about the Premises.) If (i) Tenant breaches any obligation stated in the preceding sentence, or (ii) the presence of Hazardous Materials in the Premises caused or permitted by Tenant results in contamination of the Premises, the Building, any other Building in the Project, any structure, system or improvement in the Project, any soil or water in, on, under or about the Project (collectively, the "Property"), or (iii) contamination of the Property by Hazardous Materials otherwise occurs for which Tenant is legally liable to Landlord for damage resulting therefrom, then Tenant shall indemnify, defend and hold Landlord and landlord's partners, affiliates, employees, contractors, representatives, lenders, successors and assigns (collectively, the "Indemnified Parties") harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities, losses, actions or causes of action (including, without limitation, diminution in value of the Premises, the Building, or any other building in the Project, any structure, system or improvement in the Project, damages for the loss or restriction on use of rentable or usable space or of any amenity, damages arising from any adverse impact on marketing any of the foregoing, and sums paid in settlement of claims, attorneys' fees and costs incurred, consultant fees and expert fees) made, brought or sought against or suffered or incurred by the Indemnified Parties, or any of them, which arise during or after the Term of this Lease as a result of such contamination. This indemnification of Landlord by Tenant includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision or required to return the property to the condition existing prior to the introduction of any such Hazardous Materials for which Tenant is responsible. Tenant's obligations hereunder shall survive the expiration or earlier termination of the Term of this Lease. Tenant and Landlord shall at all times and in all respects comply with all federal, state and local laws, ordinances and regulations ("Hazardous Materials Laws") relating to industrial hygiene, environmental protection or the use, analysis, generation, manufacture, storage, disposal or transportation of any oil or petrochemical products, PCB, flammable materials, explosives, asbestos, urea formaldehyde, radioactive materials or waste, or other hazardous, toxic, contaminated or polluting materials, substances or wastes, including, without limitation, any substances defined as or included in the definition of "Hazardous Materials", "toxic substances" or "chemicals known to the State to cause 10 17 cancer or reproductive toxicity" under any such Hazardous Materials Laws (collectively, "Hazardous Materials"). 5.3 SIGNS: Tenant shall not place any signs on the Premises without Landlord's prior written consent. Tenant's signs shall conform to the "Master Sign Plan" as set forth in Exhibit "L" as approved or amended by the governing Municipal or County body. Tenant shall not place or suffer to be placed on the exterior walls of the Premises or Building or upon the roof or any exterior door or wall or on the exterior or interior of any window thereof any sign, awning, canopy, marquee, advertising matter, decoration, letter or other thing of any kind (exclusive of the signs, if any, which may be provided for in the original construction or improvement plans and specifications approved by Landlord or Tenant hereunder, and which conform to Landlord's sign criteria and the Master Sign Plan) without the prior written consent of Landlord. In the event Tenant shall install any sign which does not meet Landlord's sign criteria and the Master Sign Plan, Landlord shall notify Tenant of the non-conformance and Tenant shall have thirty (30) days in which to cure or diligently pursue the correction of the non-conformance, after which Landlord shall have the right and authority without liability to Tenant to enter upon the Premises, remove the subject sign and repair all damage caused by the removal of the sign. All costs and expenses incurred by Landlord shall be immediately paid by Tenant as additional rent. Landlord reserves the right to remove Tenant's sign during any period when Landlord repairs, restores, constructs or renovates the Premises or the Building of which the Premises is a part. Tenant shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auctions or sheriff's sales from the Premises without having first obtained Landlord's prior written consent. Notwithstanding anything to the contrary in this Lease, Landlord shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 6. COMMON FACILITIES AND VEHICLE PARKING 6.1 OPERATION AND MAINTENANCE OF COMMON FACILITIES: During the Term, Landlord shall operate all Common Facilities within the Project. The term "Common Facilities" shall mean all areas outside of the exterior walls, glass or partitions of the Building and other buildings in the Project and all other appurtenant areas and improvements provided by Landlord for the common use of Landlord and tenants and their respective employees and invitees, including, without limitation, parking areas and structures, driveways, or private streets, sidewalks, landscaped and planted areas not located within the premises of any tenant. 6.2 USE OF COMMON FACILITIES: The occupancy by Tenant of the Premises shall include the use of the Common Facilities in common with Landlord and with others for whose convenience and use the Common Facilities may be provided by Landlord, subject, however, to compliance with all rules and regulations as are prescribed from time to time by Landlord. Landlord shall at all times during the Term have exclusive control of the Common Facilities, and may restrain any use or occupancy, except as authorized by Landlord's rules and regulations. Tenant shall keep the Common Facilities clear of any obstruction or unauthorized use related to Tenant's operations. Except in the event of Landlord's negligence or willful misconduct, nothing in this Lease shall be deemed to impose liability upon Landlord for any damage to or loss of the property, or for any injury to, Tenant, its invitees or employees. Landlord may, temporarily close any portion of the Common Facilities for repairs or alterations, to prevent a public dedication or the accrual of prescriptive rights. Under no circumstances shall the right herein granted to use the Common Facilities be deemed to include the right to store any property, temporarily or permanently, on the Common Facilities. Any such storage shall be permitted only by the prior written consent of Landlord or Landlord's designated agent, which consent may be revoked at any time. In the event that any 11 18 unauthorized storage shall occur, then Landlord shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Tenant, which cost shall be immediately payable upon demand by Landlord. 6.3 PARKING: Subject to Landlord's right to adopt reasonable, nondiscriminatory modifications and additions to the regulations by written notice to Tenant, Tenant shall have the parking rights set forth in Exhibit "F". 6.3.1 PARKING MAINTENANCE Landlord shall cause to be maintained, an automobile parking area ("Parking Area") within the Project for the benefit and use of the visitors and patrons and employees of Tenant, and other tenants and occupants of the Project, subject to any and all conditions as set forth in Exhibit "F" attached hereto and incorporated herein. The Parking Area shall include the automobile parking stalls, driveways, entrances, exits, sidewalks and attendant pedestrian passageways and other areas designated for parking. Landlord shall determine the nature and extent of the Parking Area and make such changes which, in its opinion, are in the best interests of all persons using the Parking Area. Nothing contained in this Lease shall be deemed to create liability upon Landlord for any damage to motor vehicles of visitors or employees, unless ultimately determined to be caused by the negligence or willful misconduct of Landlord, its agents, servants and employees. Landlord shall also have the right to establish, amend, and enforce against all users of the Parking Area reasonable rules and regulations as Landlord may deem necessary and advisable for the proper and efficient operation and maintenance of the Parking Area. a. The Landlord shall contract for Security Personnel to monitor the Common Facilities of the Project. The extent and scope of the use of Security Personnel to monitor the Common Facilities, including the Parking Area, shall be under Landlord's sole control. The use of Security Personnel to monitor the Common Facilities shall be for the protection of the capital improvements of the Project and shall not create nor impose upon Landlord or its agents an obligation or duty to protect or defend the property or personal well being of Tenant, its employees, guests or agents. 6.4 CHANGES AND ADDITIONS BY LANDLORD: Landlord reserves the right to make alterations or additions to the Building(s) or the Project, or to the attendant fixtures, equipment and Common Facilities. Landlord may relocate or remove the buildings, Parking Areas and other Common Facilities, and may add buildings and other structures to the Project from time to time. Except for those portions of the Premises physically affected by a change or alteration, no change shall entitle Tenant to any abatement of rent or other claim against Landlord, provided that the change does not deprive Tenant of reasonable access to or use of the Premises. 7. MAINTENANCE, REPAIRS AND ALTERATIONS 7.1 LANDLORD'S OBLIGATIONS: 1. Building Maintenance and Repair Except for damage caused by any negligent or willful misconduct of Tenant, Tenant's employees, suppliers, shippers, customers or invitees, (in which event Tenant shall repair the damage), Landlord at Landlord's expense, shall keep in good condition and repair the foundations, exterior walls, structural 12 19 condition of interior bearing walls, roof structure of the Building, utility installations of the Common Facilities and all parts thereof, as well as providing the services for which there is an Operating Expense pursuant to Section 4.2. Landlord shall not be obligated to paint the Building's interior walls, nor shall Landlord be required to maintain, repair or replace windows, Tenant's signs, the doors or plate glass of the Building. Landlord shall have no obligation to begin repairs under this Section 7.1 until ten (10) days after receipt of written notice from Tenant of the need for such repairs. If Landlord has not performed or undertaken to perform maintenance or repair services required under this Lease within ten (10) days of receipt of written notice from Tenant, Tenant may take such reasonable action as is necessary to make repairs or perform such services and deduct the cost of such performance from any sums due Landlord hereunder. In case of emergencies, the aforesaid ten (10) day period shall be reduced to such period as is reasonable under the circumstances and Tenant shall only be required to provide oral notice to Landlord. Landlord shall not be liable for damages or loss of any kind or nature by reason of Landlord's failure to furnish any such services when such failure is caused by strikes, lockout or any other labor disturbances or disputes of any character beyond the reasonable control of Landlord. 2. ADA and Health Laws Landlord represents and warrants that upon the Commencement Date, the Premises shall be in compliance with the requirements of the Americans with Disabilities Act of 1990 ("ADA"), and other Federal, State or local laws relating to environmental, health and safety matters ("Health Laws"). Landlord further represents and warrants that all future construction, repairs or alterations to the Building, Plaza or Project shall be in compliance with the requirements of the ADA and Health Laws, as then recognized and applied. If alterations to the Premises, Building, Plaza or Project are required due to Landlord's failure to comply with the ADA or Health Laws, as they were applied at the time of construction or alteration, then Landlord shall be fully responsible for compliance at Landlord's sole cost and expense, which shall not be passed through to Tenant. However, should Federal, State or Local Authorities enact changes to the ADA or Health Laws such that alterations to the Building, Plaza or Project are required to accommodate Tenant, its employees and/or visitors, those necessary and required alterations shall be made by Landlord and amortized as an Operating Expense under generally acceptable accounting principals. Any modifications to the Premises which are required under the ADA or Health Laws due to Tenant's floor plan or specific use thereof shall be made by Tenant, at Tenants sole cost and expense, in a good and workmanlike manner. 7.2 TENANT'S OBLIGATIONS: 7.2.1 PREMISES REPAIR AND MAINTENANCE At Tenant's expense, Tenant shall keep in good order, condition and repair the Premises and every part thereof, including, without limiting the generality of the foregoing, all plumbing, heating, ventilating and air conditioning systems electrical and lighting facilities and equipment within the Premises, fixtures, interior walls and interior surfaces of exterior walls, ceilings, windows (including glass and casings), doors (including casings), plate glass and skylights located within the Premises. Landlord reserves the right to procure, oversee and maintain a ventilating and air conditioning system maintenance contract for the Premises, which expense shall be a part of the Operating Expenses passed thru to Tenant. 7.2.2 REMEDY FOR FAILURE TO PERFORM If Tenant fails to perform Tenant's obligations under this Section 7.2, Landlord may enter upon the Premises after ten (10) days' prior written notice to Tenant (except in the case of emergency, in which event, no notice shall be required), perform such obligations on Tenant's behalf and put the Premises in good order, condition and repair, and the cost thereof shall be due and payable as additional rent to Landlord together with Tenant's next Base Rent installment. 13 20 7.3 ALTERATIONS AND ADDITIONS: 7.3.1 CONSENT Tenant shall not, without Landlord's prior written consent, make any alterations, improvements, additions or Utility Installations, on or about the Premises, or the Project, except for nonstructural alterations to the interior of Premises not exceeding Ten Thousand Dollars ($10,000) annually during the Term. In any event, whether or not in excess of Ten Thousand Dollars ($10,000) in annual costs, Tenant shall make no change or alteration to the exterior of the Premises, nor the exterior of the Building, nor the Project without Landlord's prior written consent. As used in this Lease, the term "Utility Installations" shall mean window coverings, air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing and fencing. Landlord may require that Tenant remove any and all of said alterations, improvements, additions or Utility Installations at the expiration of the term, and restore the Premises and the Project to their prior condition provided that Landlord shall have so notified Tenant at the time it grants consent therefore. Landlord may require Tenant to provide Landlord, at Tenant's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Landlord against any liability for mechanic's and materialman's liens and to insure completion of the work. Tenant, Tenant's contractor and materialmen further agree to abide by the terms and conditions set forth in Exhibit C "Tenants Work Letter". Should Tenant make any alterations, improvements, additions or Utility Installations without the prior approval of Landlord, Landlord may, at any time during the term of this Lease, require that Tenant remove any or all of same. In the event that either Landlord or Tenant, during the Term, shall be required by the order or decree of any court, or any other governmental authority, or by law, code or ordinance, (including but not limited to the Americans With Disabilities Act as amended) to repair, alter, remove, reconstruct, or improve any part of the Premises due to Tenant's specific use, interior space plan or alteration of the Premises, then Tenant shall make or Tenant shall be required to permit Landlord to perform such repairs, alterations, removals, reconstruction's, or improvements without effect whatsoever to the obligations or covenants of Tenant herein contained, at Tenant's sole cost and expense, and Tenant hereby waives all claims for damages or abatement of rent because of such repairing, alteration, removal, reconstruction, or improvement. 7.3.2 WRITTEN NOTICE Any alterations, improvements, additions or Utility Installations in or about the Premises or the Project that Tenant shall desire to make and which requires the consent of Landlord, shall be presented to Landlord in written form with proposed detailed plans. Landlord's consent shall be deemed conditioned upon Tenant acquiring a permit to do so from appropriate governmental agencies, the furnishing of a copy thereof to Landlord prior to the commencement of the work and the compliance by Tenant of all conditions of said permit in a prompt and expeditious manner. 7.3.3 PAYMENT OF LABOR Tenant shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Tenant at or for use in the Premises, which claims are, or may be secured by, any mechanic's or materialman's lien against the Premises, or the Project, or any interest therein. Tenant shall give Landlord not less than ten (10) days' notice prior to the commencement of any work in the Premises, and Landlord shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Tenant shall in good faith contest the validity of any such lien, claim or demand, then Tenant shall, at its sole expense, defend itself and Landlord against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon, before the enforcement thereof, against Landlord or the Premises or the Project upon the condition that if Landlord shall require, 14 21 Tenant shall furnish to Landlord a surety bond satisfactory to Landlord in an amount equal to such contested lien claim or demand indemnifying Landlord against liability for the same and holding the Premises and the Project free from the effect of such lien or claim. 7.3.4 ALTERATIONS PROPERTY OF LANDLORD All alterations, improvements, additions and Utility Installations, which may be on the Premises, shall be the property of Landlord and shall remain upon and be surrendered with the Premises at the expiration of the Term, unless Landlord requires their removal. Notwithstanding the provisions of this paragraph, Tenant's machinery, equipment and trade fixtures, other than that which is affixed to the Premises, and other than Utility Installations, shall remain the property of Tenant and may be removed by Tenant subject to the provisions of Section 7.2 7.4 UTILITY ADDITIONS: Landlord reserves the right to install new or additional utility facilities throughout the Building and the Common Facilities for the benefit of Landlord or Tenant, or any other tenant of the Project, including, but not limited to, such utilities as plumbing, electrical systems, security systems, communication systems and fire protection and detection systems, so long as such installations do not unreasonably interfere with Tenant's use of the Premises. 7.5 ENTRY AND INSPECTION: Landlord shall at all times have the reasonable right, provided reasonable notice is given to Tenant except where Landlord determines an emergency exists, to enter the Premises to inspect them, to supply services in accordance with this Lease, to protect the interests of Landlord in the Premises, to alter, improve or repair the Premises or any other portion of the Building, or as otherwise permitted in this Lease, all without being deemed to have caused an eviction of Tenant and without abatement of rent except as provided elsewhere in this Lease. During the last one hundred and eighty (180) days of the Term, or when an uncured tenant default exists, Landlord may enter the Premises, provided reasonable notice is given, to show the Premises to prospective tenants. If Tenant permanently vacates the Premises and fails to pay rent, Landlord may enter the Premises and alter them without abatement of rent and without liability to Tenant. Landlord shall at all times have and retain a key or code which unlocks all of the doors in the Premises, excluding Tenant's vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem proper to open the doors in an emergency in order to obtain entry to the Premises. Any entry to the Premises obtained by Landlord pursuant to this Section 7.5 shall not under any circumstances be deemed to be a forcible or unlawful entry into, or a detainer of the Premises, or an eviction of Tenant from the Premises. 7.6 TENANT'S NON-STANDARD BUILDING IMPROVEMENTS: Tenant shall commence the installation of fixtures, equipment and any other Tenant's Work as set forth in Exhibits "B" or "C" promptly upon substantial completion of Landlord's Work and Tenant shall diligently pursue such installation and work to completion. All of Tenant's Work shall be at Tenant's sole cost and expense and shall be pursuant to plans and specifications which meet Landlord's reasonable approval. If required by Landlord, Tenant shall provide its own trash container(s) as needed for containment and removal of construction debris from Tenant's Work and Tenant shall remove said trash containers prior to opening for business. The location of the trash containers shall be designated by Landlord. During the Tenant improvement period, Tenant and its contractor, if any, shall keep the Common Facilities free of all construction and related debris. Prior to opening for business, Tenant shall remove all construction and related debris from the Premises and Common Facilities, and all such areas shall be in broom clean condition and the Common Facilities shall be returned to the condition it was in prior to commencement of Tenant's Work. Tenant's contractor shall name Landlord, its employees and agents as additional named insureds on contractor's insurance policies. All Tenant's Work shall be undertaken and completed in a good, 15 22 workmanlike manner, and Tenant shall obtain all necessary governmental permits, licenses and approvals with respect thereto and shall fully comply with all governmental statutes, ordinances, rules and regulations pertaining thereto. Tenant covenants that no work by Tenant or Tenant's employees, agents or contractors shall disrupt or cause a slowdown or stoppage of any work conducted by Landlord on the Premises or Project of which it is a part except in cases of "Force Majure" as set forth on Section 20.13. 7.7 LANDLORD'S IMPROVEMENTS: If the Premises is not presently complete, Landlord shall deliver to Tenant, and Tenant agrees to accept from Landlord, possession of the Premises upon substantial completion of Landlord's Work as described in Landlord's Guidelines for Standard Tenant Improvements (Exhibit "C" attached hereto and made a part hereof.) Landlord shall, as soon as is reasonably possible after the execution of this Lease, commence and pursue to completion the improvements to be erected by Landlord. The term substantial completion of Landlord's Work' is defined as the date on which Landlord, or its project architect, notifies Tenant in writing that the Premises is substantially complete to the extent of Landlord's work, with the exception of such work as Landlord cannot complete until Tenant performs necessary portions of its work. 8. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY 8.1 TAXES ON TENANT'S PROPERTY: Tenant shall be liable for and shall pay all taxes and assessments levied against all personal property of Tenant located in the Premises. If any taxes on Tenant's personal property are levied against Landlord or Landlord's property is increased by the inclusion of a value placed upon the personal property of Tenant, and if Landlord pays the taxes based upon the increased assessment, Tenant shall pay to Landlord the taxes so levied against Landlord or the proportion of the taxes resulting from the increase in the assessment. 9. UTILITIES 9.1 MULTI-TENANT BUILDING Landlord shall cause public utilities to furnish at all times during the term of this Lease, as appropriate, electricity, gas, water and sewage utilized in operating any and all facilities serving the Premises. Tenant shall pay, prior to any delinquency, for all water, gas, heat, light, power, telephone and other utilities and services supplied to the Premises. If any such services are not separately metered to the Premises, Tenant shall pay, prior to any delinquency, Tenant proportion of those charges jointly metered with other premises in the Project. 9.2 LIABILITY OF LANDLORD Except in the event of Landlord's negligence or willful misconduct, Landlord shall not be liable for failure to furnish, or for suspension or delays in furnishing, any such utility services caused by breakdown, maintenance or repair work, strike, civil commotion, governmental regulations or any other cause or reason whatever beyond the control of Landlord. Suspension or interruption of services shall not result in abatement of rent, be deemed an eviction or release Tenant of performance of Tenant's obligations under this Lease. Notwithstanding any other provisions of this Lease, in the event there is an interruption of essential services by reason of Landlord's negligence, or due to Landlord's performance of repairs, additions, alterations, or 16 23 replacements, which interruption of essential services prevents Tenant from using all of the Premises for the conduct of its business for a period in excess of two (2) business days, and provided Tenant does not occupy the Premises during such period, except for such limited times and purposes as do not invoke any exclusion in Landlord's applicable insurance policy, then Tenant shall be entitled to abate the payment of all Rent and additional rent routinely due pursuant to the terms and provisions of this Lease for the period commencing on the third (3rd) business day of the interruption of such essential services and ending on the earlier of (i) the date Tenant reoccupies the Premises for the conduct of its business therein or (ii) the date Landlord shall have restored the essential services so interrupted. 10. ASSIGNMENT AND SUBLETTING 10.1 RIGHTS OF PARTIES: 10.1.1 NON-ASSIGNABLE Neither Tenant, nor Tenant's legal representatives, successors or assigns, shall assign, mortgage or encumber this Lease, or sublet or permit the Premises or any part thereof to be used or occupied by others, without the prior written consent of Landlord in each instance, which consent shall not be unreasonably withheld or delayed. Any such assignment, mortgage, encumbrance, sublease or permission without such consent shall be voidable at the option of Landlord. If this Lease is assigned, or if the Premises or any part thereof is sublet or occupied by any party other than Tenant, Landlord may, after default by Tenant, collect rent from the assignee, subtenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, subletting, occupancy or collection shall be deemed a waiver by Landlord of Tenant's default, or the acceptance of the assignee, subtenant or occupant as a tenant, or a release of Tenant from the further performance by Tenant of the obligations on the part of Tenant set forth herein. The consent by Landlord to an assignment or subletting shall not be construed to relieve Tenant, the assignee or the subtenant from obtaining the express consent in writing of Landlord to any further assignment or subletting or to release Tenant from any liability, whether past, present or future, under this Lease or from any liability under this Lease because of Landlord's failure to give notice of default by Tenant (or by the assignee or subleases pursuant to the assumption agreement described below) under any of the terms, covenants, conditions, provisions or agreements of this Lease. Notwithstanding the foregoing, no consent shall be required for an assignment or subletting by Tenant to any subsidiary of Tenant, its affiliate or related company. 10.1.2 NOTICE If Tenant desires to transfer an interest in this Lease, it shall first notify Landlord of its desire and shall first offer such space to the Landlord for recapture by sending notification to Landlord of the amount of space and the date the space will become available (the Recapture Notice). If Landlord fails to accept recapture of the space by notice to Tenant within ten (10) business days from the Recapture Notice, Tenant shall be entitled to effect such a transfer subject to existing use exclusions exercised by other existing tenants and Landlord's reasonable approval, which shall not be unreasonably withheld, conditioned or delayed; and if such transfer be in the form of a sublease, Landlord's approval shall not be required provided that Tenant shall continue to be liable under this Lease. Prior to the effectiveness of any transfer hereunder, and as a precondition of any approval required hereunder, Tenant shall submit in writing to Landlord: (i) the name and address of the proposed transferee; (ii) the nature of any proposed subtenant's or assignee's business to be carried on in the Premises; (iii) the terms and provisions of any proposed sublease or 17 24 assignment; and (iv) any other information requested by Landlord and reasonably related to the transfer. If Landlord consents to the proposed transfer, Tenant may within ninety (90) days after the date of the consent effect the transfer upon the terms described in the information furnished to Landlord; provided that any material change in the terms shall be subject to Landlord's consent as set forth in this Section. Landlord shall approve or disapprove any requested transfer within fifteen (15) days following receipt of Tenant's written request and the information set forth above. 10.1.3 REIMBURSEMENT OF COSTS Tenant shall reimburse Landlord for Landlord's reasonable costs and attorneys' fees incurred in connection with the processing and documentation of any requested transfer, not to exceed Five Hundred Dollars ($500). 10.2 EFFECT OF TRANSFER: No subletting or assignment, even with the consent of Landlord, shall relieve Tenant of its obligation to pay rent and to perform all its other obligations under this Lease. Moreover, Tenant shall indemnify and hold Landlord harmless, as provided in Section 11.5, for any acts or omission by an assignee or subtenant. Each transferee, other than Landlord, shall assume all obligations of Tenant under this Lease and shall be liable jointly and severally with Tenant for the payment of all rent, and for the due performance of all of Tenant's obligations under this Lease. No transfer shall be binding upon Landlord unless any document memorializing the transfer is delivered to Landlord and, if the transfer is an assignment of sublease, both the assignee/subtenant and Tenant deliver to Landlord an executed document which contains: (i) a covenant of assumption by the assignee/subtenant, and (ii) an indemnification agreement by Tenant, both satisfactory in substance and form to Landlord and consistent with the requirements of this Article; provided that the failure of the assignee/subtenant or Tenant to execute the instrument of assumption shall not release either from any obligation under this Lease. The acceptance by Landlord of any payment due under this Lease from any other person shall not be deemed to be a waiver by Landlord of any provision of this Lease to be a consent to any transfer. Consent by Landlord to one or more transfers shall not operate as a waiver or estoppel to the future enforcement by Landlord of its rights under this Lease. 11. INSURANCE AND INDEMNITY 11.1 TENANT'S INSURANCE: Beginning on the date Tenant is given access to the Premises for any purpose and continuing until expiration of the Term, Tenant shall procure, pay for and maintain in effect policies of casualty insurance covering trade fixtures, merchandise and other personal property from time to time in on or about the Premises, in amounts reasonable in relation to the value of the property insured and Tenant's financial condition, from time to time, providing protection against any peril included with the classification "Fire and Extended Coverage," together with insurance against sprinkler damage, vandalism and malicious mischief. Beginning on the date Tenant is given access to the Premises for any purpose and continuing until expiration of the Term (and any other Option Term(s)), Tenant shall provide, pay for and maintain in effect worker's compensation insurance as required by law and commercial general insurance on the Premises and the operations of Tenant in, on or about the Project, providing personal injury and broad form property damage coverage for not less than One Million Dollars ($1,000,000.00) combined single 18 25 limit for bodily injury, death and property damage liability. Such liability insurance shall name Landlord as an additional insured on such insurance policy. Tenant shall also procure adequate insurance to cover all of Tenant's obligations under this Lease, including, but not limited to Tenant's obligations to indemnify Landlord as set forth in Section 11.5 below. 11.2 LANDLORD'S INSURANCE: Landlord shall provide the following types of insurance, with or without deductible, reasonable in relation to the value of the property insured and Landlord's financial condition from time to time, and the common practice of landlords of comparable properties in the Las Vegas area: "all risk" property insurance, subject to standard exclusions, covering the Building, Premises and Tenant Improvements, and such other risks as Landlord or its mortgages may from time to time deem appropriate. Tenant shall be named as an additional insured to the extent of Tenant's contributions to the Tenant Improvements in the Premises. Landlord shall not be required to carry insurance of any kind on Tenant's property, including leasehold improvements, trade fixtures, furnishings, equipment, plate glass, signs and all other items of personal property, and shall not be obligated to repair or replace the property should damage occur except to the extent caused by the negligent acts or omissions of Landlord. All proceeds of insurance maintained by Landlord upon the Premises and Project shall be the property of Landlord. 11.3 WAIVER OF SUBROGATION: Landlord and Tenant hereby waive any rights each may have against the other on account of any loss or damage occasioned to Landlord or Tenant, as the case may be, or to the Premises or its contents, and which may arise out of or incident to the perils insured against under Section 11.2, which perils occur in, on or about the Premises, whether due to the negligence of Landlord or Tenant or their agents, contractors and/or invitees to the extent of such insurance (including any deductibles). The parties shall obtain from their respective insurance companies insuring the property a waiver of any right of subrogation which said insurance companies may have against Landlord or Tenant as the case may be. 11.4 POLICIES: All insurance to be maintained by Tenant or Landlord under this Lease shall be procured from an insurance company or companies rated "A-11" or better in "Best's Insurance Guide" and admitted in the State of Nevada, and Tenant shall deliver to Landlord, prior to taking occupancy of the Premises, Certificates of Insurance required to be maintained by Tenant hereunder, together with evidence of the payment of the premiums thereof. The policies evidencing such insurance shall provide that they shall not be canceled except after thirty (30) days prior written notice of intention to modify or cancel has been given to Landlord and any lienholder named as beneficiary thereunder. At least ninety (90) days prior to the expiration date of any policy to be maintained by Tenant hereunder, Tenant shall deliver to Landlord a renewal policy or "binder" therefor. 11.5 TENANT'S INDEMNITY: Tenant shall defend, indemnify and hold harmless Landlord, its agents and any and all affiliates of Landlord, including, without limitation, any partners, co-venturers, corporations or other entities controlling, controlled by or under common control with Landlord, from and against any and all claims or liabilities arising either before or after the Commencement Date from Tenant's use or occupancy of the Premises, the Building, the Project or the Common Facilities, or from the conduct of its business, or from any activity, work or thing done, permitted or suffered by Tenant or its agents, employees, invitees or licensees in or about the Premises, the Building, the Project or the Common Facilities, or from any default in the performance of any obligation on Tenant's part to be performed under this Lease, or from any act of negligence or willful misconduct of Tenant or its agents, employees, visitors, patrons, guests, invitees, or licensees. In case Landlord, its agent or affiliates are made a party to any litigation commenced by or against Tenant, then Tenant shall protect and hold Landlord harmless and shall pay 19 26 all reasonable costs, expenses and attorneys' fees incurred or paid by Landlord in connection with the litigation. 11.6 LANDLORD'S INDEMNITY: Landlord shall defend, indemnify and hold harmless Tenant, its agents and any and all affiliates of Tenant, including, without limitation, any partners, co-venturers, corporations or other entities controlling, controlled by or under common control with Tenant, from and against any and all claims or liabilities arising from the negligent acts or willful misconduct of Landlord, its agents or affiliates. Landlord shall not be liable to Tenant, its employees, agents and invitees, and Tenant hereby waives all claims against Landlord for loss of or damage to any property, or any injury to any person, or loss or interruption of business or income, resulting from (i) Tenant's failure to properly maintain the Premises in a commercially safe and reasonable manner, or (ii) from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak or flow from or into any part of the Premises or from the breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning, electrical works or other fixtures in the Building, whether the damage or injury results from conditions arising in the Premises or in other portions of the Building. Neither Landlord nor its agents shall be liable for interference with light or other similar intangible interests. Tenant shall immediately notify Landlord in case of fire or accident in the Premises, the Building or the Project and of defects in any improvements or equipment. 12. DAMAGE OR DESTRUCTION 12.1 RESTORATION: 12.1.1 DAMAGE REPAIR If the Building of which the Premises are a part is damaged, Landlord shall repair that damage as soon as reasonably possible, at its expense, unless: (i) Landlord reasonably determines that the cost of repair would exceed ten percent (10%) of the full replacement cost of the Building ("Replacement Cost") and the damage is not covered by Landlord's fire and extended coverage insurance (or by normal extended coverage policy should Landlord fail to carry that insurance); or (ii) Landlord reasonably determines that the cost of repair would exceed twenty-five percent (25%) of the Replacement Cost; or (iii) Landlord reasonably determines that the cost of repair would exceed ten percent (10%) of the Replacement Cost and the damage occurs during the final twelve (12) months of the Term. Should Landlord elect not to repair the damage for one of the preceding reasons, Landlord shall so notify Tenant in writing within sixty (60) days after the damage occurs and this Lease shall terminate as of the date of that notice and the obligations of the parties shall terminate as if the Lease term had naturally expired. 12.1.2 TERMINATION OF LEASE Unless Landlord elects to terminate this Lease in accordance with subsection 12.1.1 above, this Lease shall continue in effect for the remainder of the Term. However, provided that if the damage is so extensive as to reasonably prevent Tenant's substantial use and enjoyment of the Premises for more than fifteen (15) days, then Tenant may elect to terminate this Lease by written notice to Landlord within fifteen (15) days of receiving Landlord's notice of intent not to repair. 20 27 12.1.3 RENT ABATEMENT Commencing on the date of any damage to the Premises, and ending on the date the damage is repaired or this Lease is terminated, whichever occurs first, the rental to be paid under this Lease shall be abated in the same proportion that the floor area of the Premises that is rendered unusable by the damage from time to time bears to the total floor area of the Premises. 12.1.4 COST OF REPAIR Notwithstanding the provisions of the above subsections of this Section, if the damage is due to the negligence or willful misconduct of Tenant or its employees, subtenants, invitees or representatives, the cost of any repairs not covered by Landlord's insurance on the Building shall be borne by Tenant, and Tenant shall not be entitled to rental abatement or termination rights. In addition, the provisions of this Section shall not be deemed to require Landlord to repair any improvements or fixtures that Tenant is obligated to repair or insure pursuant to any other provision of this Lease. 13. EMINENT DOMAIN 13.1 TOTAL OR PARTIAL TAKING: If all or a material portion of the Premises is taken by any lawful authority by exercise of the right of eminent domain, or sold to prevent a taking, either Tenant or Landlord may terminate this Lease effective as of the date possession is required to be surrendered to the authority. In the event title to a portion of the Building or Project, other than the Premises, is taken or sold in lieu of taking, and if Landlord elects to restore the Building in such a way as to alter the Premises materially, Landlord or Tenant may terminate this Lease, by written notice to the other, effective on the date of vesting of title. In the event neither party has elected to terminate this Lease as provided above, then Landlord shall promptly, after receipt of a sufficient condemnation award, proceed to restore the Premises to substantially their condition prior to the taking, and a proportionate allowance shall be made to Tenant for the rent corresponding to the time during which, and to the part of the Premises of which, Tenant is deprived on account of the taking and restoration. In the event of a taking, Landlord shall be entitled to the entire amount of the condemnation award without deduction for any estate or interest of Tenant; provided that nothing in this Section shall be deemed to give Landlord any interest in, or prevent Tenant from seeking any award against the taking authority for the taking of personal property and fixtures belonging to Tenant or for relocation or business interruption expenses recoverable from the taking authority. 13.2 TEMPORARY TAKING: No temporary taking of the Premises by governmental authority shall terminate this Lease or give Tenant any right to abatement of rent, however, any award specifically attributable to a temporary taking of the Premises shall belong entirely to Tenant. A temporary taking shall be deemed to be a taking of the use or occupancy of the Premises for a period not to exceed fifteen (15) days. 13.3 TAKING OF PARKING AREA: In the event there shall be a taking of the Tenant's Parking Area such that Landlord can no longer provide sufficient parking to comply with this Lease, Landlord may substitute reasonably equivalent parking in a location within five minutes walking distance of the Building; provided that if Landlord fails to make that substitution within fifteen (15) days following the taking and if the taking materially impairs Tenant's use and enjoyment of the Premises, Tenant may, at its option, terminate this Lease by notice to Landlord. If this Lease is not so terminated by Tenant, there shall be no abatement of rent and this Lease shall continue in effect. 21 28 14. SUBORDINATION; ESTOPPEL CERTIFICATE 14.1 SUBORDINATION: 14.1.1 SUBORDINATE TO ALL UNDERLYING ENCUMBRANCES At the option of Landlord, this Lease shall be either superior or subordinate to all ground or underlying Leases, mortgages, deeds of trust and conditions, covenants and restrictions, reciprocal easements and rights of way, if any, which may hereafter affect the Premises or Project, and to all renewals, modifications, consolidations, replacements and extensions thereof; provided, that so long as Tenant is not in default under this Lease, this Lease shall not be terminated nor shall Tenant's quiet enjoyment of the Premises be disturbed. Tenant shall also, upon the reasonable written request of Landlord, execute and deliver those instruments, including the Estoppel Certificate attached as Exhibit N, as may be required from time to time to subordinate the rights of Tenant under this Lease to any ground or underlying Lease or to the lien of any mortgage or deed of trust, or if requested by Landlord to subordinate in whole or in part, any ground or underling Lease or the lien of any mortgage or deed to trust to this Lease. Tenant does hereby appoint Landlord as it's special attorney-in-fact to execute said instruments should Tenant wrongfully fail to provide such. 14.1.2 ATTORNMENT Tenant convenants and agrees to attorn to any successor to Landlord's interest in any ground or underlying lease, and in the event, this Lease shall continue as a direct lease between Tenant herein and such landlord or its successor. 14.1.3 FAILURE TO PERFORM Failure of Tenant to execute any statements or instruments prepared by Landlord and materially true in form and fact as to the provisions of this Lease and necessary or desirable to effectuate the provisions of this Article within fifteen (15) days after written request by Landlord, shall constitute a default under this Lease. In that event Landlord shall have the right, by written notice to Tenant, to terminate this Lease as of a date not less than fifteen (15) days after the date of Landlord's notice. Landlord's election to terminate shall not release Tenant of any liability for its default. 14.2 ESTOPPEL CERTIFICATE: 14.2.1 TIME LIMIT Tenant shall, at any time not more than twenty (20) days after receipt from Landlord, execute, acknowledge and deliver to Landlord the Estoppel Certificate attached hereto as Exhibit N. The Estoppel Certificate may be relied upon by any prospective purchaser or encumbrance of all or any portion of the Building or Project. 14.2.2 FAILURE TO PERFORM Tenant's failure to deliver the Estoppel Certificate within the provided time shall be conclusive upon Tenant that: (i) this Lease is in full force and effect without modification except as may be represented by Landlord, (ii) there are no uncured defaults in Landlord's performance, and (iii) not more than one month's rental has been paid in advance. 22 29 15. DEFAULTS AND REMEDIES 15.1 TENANT'S DEFAULT In addition to any other event of default set forth in this Lease, the occurrence of any one or more of the following events shall constitute a default by Tenant: 15.1.1 ABANDONMENT The abandonment of the Premises by Tenant. Abandonment shall be defined as any absence by Tenant from the Premises for fifteen (15) consecutive days (or longer) or sixty (60) days (whether consecutive or not) in any calendar year accompanied by Tenant's failure to pay rent covering the abandonment period. 15.1.2 FAILURE TO PAY RENT Except as permitted by this Lease, the failure by Tenant to make any payment of rent or additional rent required to be made by Tenant, where the failure continues for a period of five (5) days after notice thereof from Landlord. For purposes of this default and remedy provision, the term "additional rent" shall be deemed to include all amounts of any type whatsoever, other than Base Rent, to be paid by Tenant pursuant to the terms of this Lease. 15.1.3 ASSIGNMENT Assignment, sublease, encumbrance or other transfer of the Lease by Tenant, either voluntarily or by operation of law, whether by judgment, execution transfer by intestacy or testacy, or other means, without the prior written consent of Landlord, if necessary. 15.1.4 MATERIALLY FALSE FINANCIAL STATEMENTS The discovery by Landlord that any financial statement provided by Tenant, or by any affiliate, successor or guarantor of Tenant was materially false. 15.1.5 FAILURE TO OBSERVE COVENANTS The failure or inability by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in any other subsection of this Section, where the failure continues for a period of thirty (30) days after written notice from Landlord to Tenant. However, if the nature of the failure is such that more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences the cure within thirty (30) days and thereafter diligently pursues the cure to completion. 15.1.6 ASSIGNMENT TO CREDITORS/BANKRUPTCY The making by Tenant of any general assignment for the benefit of creditors; the filing by or against Tenant of a petition to have Tenant adjudged a debtor under the Bankruptcy Code or to have debts discharged or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets or of Tenant's interest in this Lease, if possession is not restored to Tenant within thirty (30) days; the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interests in this Lease where the seizure is not discharged within thirty (30) days; or Tenant's convening of a meeting of its creditors for the purpose of effecting a moratorium upon or composition of its debts. 23 30 Landlord shall not be deemed to have knowledge of any event described in this subsection unless notification in writing is received by Landlord, nor shall there be any presumption attributable to Landlord of Tenant's insolvency. In the event that any provision of this subsection is contrary to applicable law, the provision shall be of no force or effect. 15.2 LANDLORD'S REMEDIES: In the event that Landlord elects to declare a breach of this Lease, then Landlord shall have the right to give Tenant notice of intention to end the term of this Lease and thereupon the term of this Lease shall expire as fully and completely as if that day were the day herein definitely fixed for the expiration of the Term and Tenant shall then quit and surrender the Premises to Landlord, but Tenant shall remain liable as hereinafter provided. If Tenant fails to so quit and surrender the Premises as aforesaid, Landlord shall have the right as provided by law to evict Tenant and the legal representatives of Tenant and all other occupants of the Premises by unlawful detainer or other summary proceedings, or otherwise, and remove their effects and regain possession of the Premises (but Landlord shall not be obligated to effect such removal). In the event of any breach of this Lease by Tenant (and regardless of whether or not Tenant has abandoned the Premises) this Lease shall not terminate unless Landlord, at Landlord's option, elects at any time when Tenant is in breach of this Lease to terminate Tenant's right to possession or, at Landlord's further option, by the giving of any notice (including but not limited to any notice preliminary or prerequisite to the bringing of legal proceedings in unlawful detainer) terminating Tenant's right to possession. For so long as this Lease continues in effect, Landlord may enforce all of Landlord's rights and remedies under this Lease, including the right to recover all rent as it becomes due hereunder. For the purposes of this paragraph, the following shall not constitute termination of Tenant's right to possession: acts of maintenance or preservation or efforts to relet the Premises, or the appointment of a receiver upon initiative of Landlord to protect Landlord's interest under this Lease. In the event of termination of this Lease, or termination of Tenant's right to possession as the result of Tenant's breach of this Lease, Landlord shall have the right: a. To relet the Premises for such rent and upon such terms as are reasonable under the circumstances. If the full rent reserved under this Lease (and any of the costs, expenses or damages indicated below) shall not be realized by Landlord, Tenant shall be liable for all damages sustained by Landlord, including, without limitation, deficiency in rent, reasonable attorneys' fees, other collection costs, brokerage fees, and expenses of placing the Premises in first-class rentable condition. Landlord's putting the Premises in good order or preparing the same for rerental shall not operate or be construed to release Tenant from liability hereunder. Landlord shall not be liable for failure to relet the Premises. In no event shall Tenant be entitled to receive any excess of such net rent collected over the sums payable by Tenant to Landlord hereunder. Any damage or loss of rent sustained by Landlord may be recovered by Landlord, at Landlord's option, at the time of the reletting, or in separate actions, from time to time, as said damages shall have been ascertained by successive reletting, or, at Landlord's option, may be deferred until the expiration of the term of this Lease (in which event Tenant hereby agrees that the cause of action shall not be deemed to have accrued until the date of expiration of said term). All rights and remedies of Landlord under this Lease shall be cumulative and shall not be exclusive if any other rights and remedies provided to Landlord under applicable law. b. To remove any and all persons and property from the Premises, with or without legal process, and pursuant to such rights and remedies as the laws of the State of Nevada shall then provide or permit, but Landlord shall not be obligated to effect such removal. Said property may, at Landlord's option, be stored or otherwise dealt with as such laws may then provide or permit, including but not limited to the right of Landlord to store the same, or any part thereof, in a warehouse or elsewhere at the expense and risk of and for the account of Tenant. 24 31 c. To enforce, to the extent permitted by the laws of the State of Nevada then in force and effect, any other rights or remedies set forth in this Lease or otherwise applicable hereto by operation of law or contract. In the event of a breach or threatened breach by Tenant of any of the terms, covenants, conditions, provisions or agreements of this Lease, Landlord shall have the right of injunction. Mention in this Lease of any particular remedy shall not preclude Landlord from any other remedy, at law or in equity. If Tenant vacates or abandons the Premises, any property that Tenant leaves in the Premises shall be deemed to have been abandoned and may either be retained by Landlord as the property of Landlord or may be disposed of at public or private sale in accordance with applicable law as Landlord sees fit. The proceeds of any public or private sale of Tenant's property, or the then current fair market value of any property retained by Landlord shall be applied by Landlord against (i) the expenses of Landlord for removal, storage or sale of the property; (ii) the arrears of rent or future rent payable under this Lease; and (iii) any other damages to which Landlord may be entitled hereunder. Further, Landlord may, upon presentation of evidence of a claim valid upon its face of ownership or for security interest in any of Tenant's property abandoned in the Premises, turn over such property to the claimant with no liability to Tenant. The following shall be Events of Bankruptcy under this Lease: (1) Tenant's becoming insolvent, as that term is defined in Title 11 of the United States Code, entitled Bankruptcy, 11 U.S.C. Sec 101 et seq. (the "Bankruptcy Code"), or under the insolvency laws of any State, District, Commonwealth or territory of the United States ("insolvency Laws"); (2) The appointment of a receiver or custodian for any or all of Tenant's property or assets, or the institution of a foreclosure action upon any of Tenant's real or personal property; (3) The filing of a voluntary petition under the provisions of the Bankruptcy Code or Insolvency Laws; (4) The filing of an involuntary petition against Tenant as the subject debtor under the Bankruptcy Code or Insolvency Laws, which is either not dismissed within sixty (60) days of filing, or results in the issuance of an order for relief against the debtor, whichever is later; or (5) Tenant's making or consenting to an assignment for the benefit of creditors or a common law composition of creditors. Upon occurrence of an Event of Bankruptcy, Landlord shall have the right to terminate this Lease by giving written notice to Tenant, provided, however, that this section shall have no effect while a case in which Tenant is the subject debtor under the Bankruptcy Code is pending, unless Tenant or its Trustee is unable to comply with the provisions below. At all other times this Lease shall automatically cease and terminate, and Tenant shall be immediately obligated to quit the Premises upon the giving of notice pursuant to this section. Any other notice to quit, or notice of Landlord's intention to re-enter is hereby expressly waived. If Landlord elects to terminate this Lease, everything contained in this Lease on the part of Landlord to be done and performed shall cease without prejudice, subject, however, to the rights of Landlord to recover from Tenant all rent and any other sums accrued up to the time of termination or recovery of possession by Landlord, whichever is later, and any other monetary damages or loss of reserved rent sustained by Landlord. Without regard to any action by Landlord as authorized above, Landlord may at its discretion exercise all the additional provisions set forth below. In the event Tenant becomes the subject debtor in a case pending under the Bankruptcy Code, Landlord's right to terminate this Lease pursuant to this section shall be subject to the rights of the Trustee in Bankruptcy to assume or assign this Lease. The Trustee shall not have the right to assume or assign this Lease unless the Trustee (i) promptly cures all defaults under this Lease, (ii) 25 32 properly compensates Landlord for monetary damages, incurred as a result of such default, and (iii) provide adequate assurance of future performance on the part of Tenant as debtor in possession or on the part of the assignee of Tenant. Landlord and Tenant hereby agree in advance that adequate assurance of future performance, as used herein, shall mean that all of the following minimum criteria must be met; (i) Tenant must pay its estimated pro rata share of Adjustments (whether provided directly or through agents or contractors and whether or not previously included as part of the minimum rent), in advance of the performance or provisions of such services, (ii) The Trustee must agree that Tenant's business shall be conducted in a first class manner, and that no liquidating sales, auction, or other non-first class business operations shall be conducted in the Premises; (iii) The Trustee must agree that the use of the Premises as stated in this Lease will remain unchanged and that no prohibited use shall be permitted; and (iv) The Trustee must agree that the assumption of this Lease will not violate or affect the right of other tenants in the Project. In the event Tenant is unable to (i) cure its defaults, (ii) reimburse the Landlord for its monetary damages, (iii) pay the rent due under this Lease, and all other payments required by Tenant under this Lease on time (or within five (5) days), or (iv) meet the criteria and obligations imposed above, Tenant agrees in advance that it has not met its burden to provide adequate assurance of future performance, and this Lease may be terminated by Landlord. 15.3 EXPENSES AND LEGAL FEES: Tenant shall reimburse Landlord upon demand, for any costs or expenses incurred by Landlord in connection with any breach or default of Tenant under this Lease, whether or not suit is commenced or judgment entered. Such costs shall include reasonable legal fees and costs incurred for the negotiation of a settlement, enforcement of rights or otherwise. Tenant shall also indemnify Landlord against and hold Landlord harmless from all costs, expenses, demands and liability incurred by Landlord if Landlord becomes or is made a party to any claim or action: a. by or against any person holding any interest under or using the Premises by license of or agreement with Tenant; b. for foreclosure for any lien for labor or material furnished to or for Tenant or such other person; c. otherwise arising out of or resulting from any act or transaction of Tenant or such other person; or d. necessary to protect Landlord's interest under this Lease in a bankruptcy proceeding, or other proceeding under Title 11 of the United States Code, as amended. 16. END OF TERM 16.1 HOLDING OVER: This Lease shall terminate without further notice upon the expiration of the Term (herein "Expiration Date"), and any holding over by Tenant after the expiration shall not constitute a renewal or extension of this Lease, or give Tenant any rights under this Lease, except when in writing, signed by both parties. If Tenant holds over for any period after the expiration (or earlier termination) of the Term, Landlord may, at its option, treat Tenant as a tenant at sufferance only, commencing on the first (1st) day following the termination of this Lease and subject to all of the 26 33 terms of this Lease, except that the monthly rental shall be one hundred twenty-five percent (125%) of the amount of the last monthly rental installment: If Tenant fails to surrender the Premises upon the expiration of this Lease despite demand to do so by Landlord, Tenant shall indemnify and hold Landlord harmless from all loss or liability, including, without limitation, any claims made by any succeeding tenant relating to such failure to surrender. Acceptance by Landlord of rent after the termination shall not constitute a consent to a holdover or result in a renewal of this Lease. The foregoing provisions of this Section are in addition to, and do not effect, Landlord's right to re-entry or any other rights of Landlord under this Lease or at law. 16.2 MERGER ON TERMINATION: The voluntary or other surrender of this Lease by Tenant, or mutual termination of this Lease, shall terminate any or all existing subleases unless Landlord, at its option, elects in writing to treat the surrender or termination as an assignment to it of any or all subleases affecting the Premises. 16.3 SURRENDER OF PREMISES: REMOVAL OF PROPERTY: Upon the Expiration Date, or upon any earlier termination of this Lease, Tenant shall quit and surrender possession of the Premises to landlord in as good order, condition and repair as when received or as hereafter may be improved by Landlord or Tenant, reasonable wear and tear excepted, and shall, without expense to Landlord, remove or caused to be removed from the Premises all personal property and debris. Tenant shall repair all damage to the premises resulting from the removal, which repair shall include the patching and filling of holes and repair of structural damage. If Tenant shall fail to comply with the provisions of this Section, Landlord may effect the removal and/or make any repairs, and the cost to Landlord shall be additional rent payable by Tenant upon demand. 16.4 TERMINATION; ADVANCE PAYMENTS: Upon termination of this Lease under Article 12 (Damage or Destruction), Article 13 (Eminent Domain) or any other termination not resulting from Tenant's default, and after Tenant has vacated the Premises in the manner required by this Lease, and equitable adjustment shall be made concerning advance rent, and any other advance payments made by Tenant or Landlord, and Landlord shall refund the unused portion of the security deposit to Tenant or Tenant's successor. 17. PAYMENTS AND NOTICES All sums payable by Tenant to Landlord shall be paid in lawful money of the United States to Landlord at its address set forth in Section 1.18 of the Basic Lease Terms, or at any other place as Landlord may reasonably designate in writing. Unless this Lease expressly provides otherwise, as for example in the payment of rent, all payments shall be due and payable within ten (10) days after demand. All payments requiring proration shall be prorated on the basis of a thirty (30) day month and a three hundred sixty (360) day year. Any notice, election, demand, consent, approval or other communication to be given, or other document to be delivered by either party to the other, may be delivered in person to an officer or duly authorized representative of the other party, or may be deposited in the United States mail or with a nationally recognized overnight carrier to the address set forth in Section 1.18. Either party may, by written notice to the other, designate a different address. If any notice or other document is sent by mail, it shall be deemed served or delivered when received. If more than one Tenant is named under this Lease, service of any notice upon any one of them shall be deemed as service upon all of them. 18. LIMITATION OF LIABILITY 27 34 In the event of any actual or alleged failure, breach or default of this Lease by Landlord, Tenant's sole and exclusive remedy shall be against the Project and its assets, it being intended that Landlord shall not otherwise be personally liable for any monetary judgment or deficiency therein. Tenant agrees that the foregoing provision shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by statute or at common law. 19. TRANSFER OF LANDLORD'S INTEREST In the event of any transfer of Landlord's interest in the Premises, including a so-called "sale-Leaseback", the transferor shall be automatically relieved of all obligations on the part of Landlord accruing under this Lease from and after the date of the transfer, provided that any funds held by the transferor, in which Tenant has an interest, shall be turned over, subject to that interest, to the transferee, and Tenant is notified of the transfer as required by law. No holder of a mortgage and/or deed of trust to which this Lease is, or may be, subordinate, and no landlord under a so-called sale-Leaseback shall be responsible in connection with the security deposit, unless the mortgagee or holder of the deed of trust or the landlord actually receives the security deposit. It is intended that the covenants and obligations contained in this Lease on the part of the Landlord shall, subject to the foregoing, be binding on the Landlord, its successors and assigns, only in respect to their respective successive periods of ownership. 20. MISCELLANEOUS 20.1 GENDER AND NUMBER Whenever the context of this Lease requires, the words "Landlord" and "Tenant" shall include the plural as well as the singular, and words used in neuter, masculine or feminine genders shall include the others. 20.2 HEADINGS: The captions and headings of the Articles and Sections of this Lease are for convenience only, and are not a part of this Lease and shall have no effect upon its construction or interpretation. 20.3 JOINT AND SEVERAL LIABILITY: If there is more than one Tenant, the obligations imposed upon Tenant shall be joint and several, and the act of, or notice from, or notice or refund to, or the signature of, any one or more of them shall be binding on all of them with respect to the tenancy of this Lease, including, but not limited to, any renewal, extension, termination, or modification of this Lease. 20.4 SUCCESSORS: Subject to Articles 10 and 19, all rights and liabilities given to or imposed upon Landlord and Tenant shall extend to and bind their respective heirs, executors, administrators, successors and assigns. Nothing contained in this Section is intended, or shall be construed, to grant to any person other than Landlord and Tenant and their successors and assigns any rights or remedies under this Lease. 20.5 TIME OF ESSENCE: Time is of the essence with respect to the performance of every provision of this Lease, in which time of performance is a factor. 20.6 SEVERABILITY: If any term or provision of this Lease, the deletion of which would not adversely affect the receipt of any material benefit by either party or the deletion of which is consented to by the party adversely 28 35 affected, shall be held invalid or unenforceable to any extent, the remainder of this Lease shall not be affected and each term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. 20.7 ENTIRE AGREEMENT The parties hereto declare and represent that no promise, inducement or agreement not herein expressed has been made to them, that this document embodies and sets forth the entire agreement and understanding between them relating to the subject matter hereof, and that it merges and supersedes all prior discussions, agreements, understandings, representations, conditions, warranties and covenants between them on said subject matter. 20.8 WAIVER OF TRIAL BY JURY. The respective parties hereby waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, or any claim of injury or damage, or the enforcement of any remedy under any statute, emergency or otherwise. 20.9 PARTIAL INVALIDITY If any term, covenant, or condition of this Lease is, to any extent, invalid or unenforceable, the remainder of this Lease shall not be affected thereby and this Lease shall be valid and enforced to the fullest extent permitted by law. 20.10 RECORDING Tenant shall not record or file this Lease or any form of Memorandum of Lease, or any assignment or security document pertaining to this Lease or all or any part of Tenant's interest therein without the prior written consent of Landlord, which consent shall not be unreasonably withheld. If such consent is granted Tenant will pay all recording fees, costs, taxes and other expenses for the recording. However, upon the request of Landlord, both parties shall execute a memorandum or "short form" of this Lease for the purposes of recordation in a form customarily used for such purposes. Said memorandum or short form of this Lease shall describe the parties, the Premises and the Lease Term and shall incorporate this Lease by reference. 20.11 WAIVER The waiver by either party of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition for any subsequent breach of the same or any other term, covenant or condition herein contained. 20.12 LATE CHARGES If any installment of rent or any sum due from Tenant shall not be received by Landlord or Landlord's designee on or before the date such sum is due then Tenant shall pay to Landlord a late charge equal to five percent (5%) of the amount past due, but in no event more than the legal maximum on such past due amount, plus any attorneys' fees incurred by Landlord by reason of Tenant's failure to pay rent and/or other charges when due hereunder. Any late charges shall be added to the next installment of Base Rent due under the Lease. The parties hereby agree that such late charges represent a fair and reasonable estimate of the cost that Landlord will incur by reason of the late payment by Tenant. 20.13 INABILITY TO PERFORM This Lease and the obligations of the Parties hereunder shall not be affected or impaired because either Party is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability 29 36 or delay is caused by reason of strike, labor troubles, acts of God, governmental laws, ordinances, rules or regulations, or other cause beyond the reasonable control of the Party. 20.14 CHOICE OF LAW This Lease shall be governed by the laws of the State of Nevada. 20.15 INDEPENDENTLY PROVIDED SERVICES This Lease is entirely separate and distinct from and independent of any and all agreements that Tenant may at any time enter into with any third party for the provision of services, which include, but are not limited to, telecommunications, office automation, repair, maintenance services, computer and photocopying ("Independent Services"). Tenant acknowledges that Landlord has no obligation of any type concerning the provision of Independent Services, and agrees that any cessation or interruption of Independent Services or any other act or neglect by the third party providing the Independent Services shall not constitute a default or constructive eviction by Landlord. 30 37 20.16 PRIOR AGREEMENTS THIS LEASE CONTAINS THE ENTIRE AGREEMENT OF THE PARTIES HERETO AND ANY AND ALL ORAL AND WRITTEN AGREEMENTS, UNDERSTANDINGS, REPRESENTATIONS, WARRANTIES, PROMISES AND STATEMENTS OF THE PARTIES HERETO AND THEIR RESPECTIVE OFFICERS, DIRECTORS, PARTNERS, AGENTS AND BROKERS WITH RESPECT TO THE SUBJECT MATTER OF THIS LEASE AND ANY MATTER COVERED OR MENTIONED IN THIS LEASE SHALL BE MERGED IN THIS LEASE AND NO SUCH PRIOR ORAL OR WRITTEN AGREEMENT, UNDERSTANDING, REPRESENTATION, WARRANTY, PROMISE OR STATEMENT SHALL BE EFFECTIVE OR BINDING FOR ANY REASON OR PURPOSE UNLESS SPECIFICALLY SET FORTH IN THIS LEASE. NO PROVISION OF THIS LEASE MAY BE AMENDED OR ADDED TO EXCEPT BY AN AGREEMENT IN WRITING SIGNED BY THE PARTIES HERETO OR THEIR RESPECTIVE SUCCESSORS IN INTEREST. THIS LEASE SHALL NOT BE EFFECTIVE OR BINDING ON ANY PARTY UNTIL FULLY EXECUTED BY BOTH PARTIES HERETO. LANDLORD: TENANT: #26 McCarran Center, LC L.C. Acres Gaming a Nevada Limited Liability Company By:_________________________________ By: ________________________________ Robert Brown Its:________________________________ Its: Executive Vice President On this _____ day of ______________ 199_, before me, the undersigned, a Notary Public in and for the County of_______, State of ________, duly commissioned and sworn, personally appeared Robert Brown in his capacity as Executive Vice President of Acres Gaming, known to me to be the person that executed within instrument and known to me to be the person who affixed his name hereto and who acknowledged to me that he executed the same freely and voluntarily and for the uses and purposes therein mentioned. ------------------------------ NOTARY PUBLIC in and for said County and State On this _____ day of __________, 199_, before me, the undersigned, a Notary Public in and for the County of Clark, State of Nevada, duly commissioned and sworn, personally appeared _________________ in his capacity as ___________________ of #26 McCarran Center, LC LC, known to me to be the person that executed within instrument and known to me to be the person who affixed his name hereto and who acknowledged to me that he executed the same freely and voluntarily and for the uses and purposes therein mentioned. ------------------------------ NOTARY PUBLIC in and for said County and State 31 38 LEASE EXHIBITS A PROJECT & PREMISES A-1 PROJECT SITE PLAN: PHASE II A-2 BUILDING SITE PLAN B-1 FLOOR PLAN B-2 IMPROVEMENTS: LANDLORD RESPONSIBILITY B-3 STANDARD TENANT IMPROVEMENT SPECIFICATIONS C TENANT'S WORK LETTER D RULES AND REGULATIONS E OPERATING EXPENSES - MULTI TENANT F PARKING G CREDIT ENHANCEMENT H GUARANTEE I RENEWAL OPTIONS J BROKERAGE COMMISSION K COMMENCEMENT DATE L MASTER SIGN PLAN M SUBORDINATION AND NON-DISTURBANCE AGREEMENT N TENANT ESTOPPEL CERTIFICATE
39 EXHIBIT A PROJECT & PREMISES PROJECT: PHASE II MCCARRAN CENTER, Phase II consisting of 42.2 Net Acres BUILDING Identified as Building 26 containing 54,624 sq. ft. of leaseable area. PREMISES Consists of 31,438 sq. ft. of leaseable area. 40 EXHIBIT B-2 TENANT IMPROVEMENTS LANDLORD RESPONSIBILITY Landlord agrees to construct certain tenant improvements in the Premises of the Building for Tenant's exclusive use during the term of the Lease. Landlord's contribution to such improvements shall be $26.00 per square foot of office space for a total Tenant Improvement Allowance of $817,388. Tenant shall be responsible for the cost of tenant improvements exceeding the Tenant Improvement Allowance. The Tenant Improvement Allowance shall be applied to the cost of Design & Engineering, Plan Check and Permit Fees, special fees (such as Sewer Fixture Fees for Tenant's requirements), Insurance and the Total Construction Cost. Landlord agrees to use its best efforts, including "value engineering", hard bidding and finish selection in cooperation with Tenant to reduce the actual tenant improvement costs. Landlord shall construct only those Tenant Improvements which are set forth and documented in a final space plan and construction budget, as approved by both Tenant and Landlord and permitted by the applicable governmental authorities. The parties agree to mutually use best efforts to complete the following conditions prior to the construction of the Tenant Improvements. 1. The design and approval of all architectural drawings, including mechanical, electrical and plumbing (Drawings) for the Premises. 2. The Drawings shall be approved by Tenant and by the Clark County Building Department. Any changes or modifications to the approved and County permitted Drawings shall require the mutual approval of both Landlord and Tenant. Landlord shall not charge a supervision or management fee in association with the construction of tenant improvements. Tenant shall pay to Landlord the cost of the improvements in excess of the Tenant Improvement Allowance within ten (10) days of receipt of invoice, including the contractor's invoice and any other supporting documents. All construction, whether by Landlord or Tenant, shall be in a good, workmanlike manner and all necessary governmental permits, licenses and approvals shall be obtained by the party responsible for the construction. Upon the termination of this Lease, Tenant shall be permitted to remove all non-permanent fixtures from the Premises including, but not limited to, case work, book cases, work surfaces, plan racks and holders, and specialty lighting. Tenant agrees to repair any damage to the walls, ceilings or other areas of the Premises occasioned by such removal, normal wear and tear excepted. 41 EXHIBIT B-3 STANDARD TENANT IMPROVEMENT SPECIFICATIONS FOR MULTI TENANT INDUSTRIAL OFFICE BUILDINGS 1. GENERAL IMPROVEMENTS: The following information is provided to establish standard specifications and guidelines for Tenant Improvements in Multi Tenant Industrial Office Buildings. The standards set forth in this Exhibit ( or equivalent material at Tenant's election) are subject to Tenant's Improvement Allowance. Landlord does not warrant that the Tenant Improvement Allowance shall be sufficient to construct the following standards. Landlord's reasonable approval is necessary should Tenant desire to materially alter the following standards or use the Tenant Improvement Allowance for non-standard improvements. A. PARTITIONS: 1. One lineal foot of building standard for each fifteen (15) square feet. Demising partitions shall be one layer of 5/8" gypsum wallboard screw applied to each side of 2-1/2" metal studs spaced at 24" on center. Installation to include 1-1/2" sound attenuation blankets will extend from floor to deck above. 2. Interior partitions shall be one layer of 5/8" gypsum wall board screw applied to each side of 2-1/2" metal studs spaced at 24" on center. Wall board is to extend to 6" above finish ceiling grid to a height of approximately 9'6". 3. All partitions and column enclosures will be taped and sanded to receive paint. B. DOORS FRAMES AND HARDWARE: 1. One (1) door per twenty-five (25) lineal feet of interior partition allowance. 2. Interior doors shall be 3'0" wide by 7'0" high and 1-3/4" thick, solid core door with frame, prefinished, with a standard Mendecino Oak finish, both sides. 3. Interior door hardware will include lever-handled latch sets, 1-1/2" pair of 4-1/2" butts, floor stop and three (3) silencers. 4. Hardware finish to be Schlage Brushed Aluminum or equal. C. CEILING 1. Ceiling throughout the office area will be a 2' x 4' mechanically suspended, acoustical system using flush-finished, lay-in tile with a mineral fiber. Nominal ceiling height is 9'0". 2. The Building Standard for a Multi-tenant office is Armstrong 769 (2767 White or equal.) 3. The Building Standard Allowance for this item is $1.25 per s.f. 42 D. FLOOR COVERING AND BASE: 1. Carpeting: The Building Standard Allowance for Multi-tenant industrial office space is $1.22 per s.f. This is for 22 oz. Glue down carpet, Queen Commercial Carpet, "Commitment 26" solution dyed nylon or equal. 2. V.C.T. The Building Standard Allowance for Multi-tenant industrial office space is $1.25 per s.f. This is for an 12" x 12" Azrock Vinyl Composition Tile 1/8" thick or equal. 3. Rubber Base: The Building Standard Allowance for Multi-tenant industrial office space is $1.25 l.f. This is for Burke standard 4" top set rubber base or equal. E. WINDOW TREATMENT: 1. The Building Standard Allowance for Multi-Tenant industrial office space is $.50 s.f. This is for Riviera Levelor blinds, alabaster number 112 horizontal 1" slats or equal. F. PAINT: 1. The Building Standard for Multi-Tenant industrial office space is Frazee eggshell 5900w, Arctic, or equal. G. TOILET PARTITIONS: 1. The Building Standard for this item is Boberick, American Standard, or Bradley, metal, gray in color. II. STRUCTURAL IMPROVEMENTS: A. STANDARD DESIGN: 1. The structural floor system of the Building is designed to accommodate up to one hundred (100) pounds per square foot, including eight of partitions and up to seven (7) pounds of ceiling and suspended mechanical equipment load. III. HEATING VENTILATION, AIR CONDITIONING AND FIRE PROTECTION SERVICES. A. H.V.A.C. SYSTEM: 1. The following operation standards are based upon population not to exceed one (1) person per 150 square feet of usable floor area. 2. This system shall be at the sole cost of the tenant . 3. The system will include a series of individual roof pack units. 4. The system shall be designed to deliver one ton of air for each 300 s.f. of useable floor space. The system design should also assume a maximum lighting and appliance distribution of 5 watts per rentable s.f. of Multi Tenant Industrial Office Space. 43 5. Tenant H.V.A.C. work shall conform to the master system design and include, but not necessarily be limited to providing thermostatically controlled zones, all required ducting, all required diffusers and grilles, and other items as necessary to complete the system. 6. The tenant shall provide return ductwork on floors without ceiling plenum provisions. (Contact landlord for exact location of lease spaces requiring such.) B. FIRE PROTECTION: 1. The base system, the "up system", is included in the shell and core and is to be composed of risers, mains, and heads that are turned "up" in order to comply with Building Codes for unoccupied Multi-Tenant Industrial Office Space. Modification of the sprinklers is required as a basic part of Tenant Improvements. This work is to include, but not be limited to; additional headers as required, and the down system to allow for protection of the tenant improvement space. 2. The "down" system is to include semi-recessed type heads with chrome finish as required by code. 3. The standard allowance for this item is $.90 s.f. Any cost above this amount is considered above standard. IV. ELECTRICAL AND TELEPHONE SERVICES: A. LIGHTING: 1. One 2' x 4' fluorescent light fixture per ninety useable square feet shall be the standard. One single pole, wall mounted light switch at 48"+/- per each twelve light fixtures shall be provided. 2. The light fixture shall be a recessed prismatic fluorescent 3 tube light fixture, 2' x 4' by Lithonia or equal, with energy saving ballast's. 3. Lamps which complete the building standard fixtures shall be initially furnished and installed as a part of the tenant improvement allowance standard. Subsequent relamping shall be performed at the tenant's expense. 4. Lights, as required by code, shall be connected to an emergency circuit and comply with said code. 5. One (1) 20 amp, 120 volt, single phase, wall type duplex electrical outlet per each one hundred fifty square feet of useable floor space in the Multi Tenant Industrial Office Building. 6. All cover plates to be ivory with no back to back outlets. B. TELEPHONE: 1. Single gang telephone outlet box in stud wall with conduit from outlet to telephone board. 2. All cover plates to be ivory with no back to back outlets. 3. The standard distribution for Multi Tenant Industrial Office Building space is one box for one hundred fifty square feet of useable office space. 4. Installation of telephones and wiring shall be at Tenant's sole arrangement and expense. 44 V. PLUMBING: A. GENERAL 1. Plumbing wet stacks, containing sanitary waste and vent piping will be available on each floor. Tenant's connection shall be at Tenant's expense. 2. Domestic water is available at building core. Tenant's connection shall be at Tenant's expense. 3. Sanitation: For every 10,000 s.f. of office space: Men: 2 Water Closets Women: 3 Water Closets 1 Urinal 1 Lavatory 1 Lavatory For every 60,000 s.f. of Warehouse Men: 1 Water Closet Women: 1 Water Closet 1 Lavatory 1 Lavatory
VI. ABOVE STANDARD TENANT IMPROVEMENTS: 1. Any Above Standard Tenant Improvement; i.e., improvements which exceed the standards described above, in design, quantity, quality, structurally, mechanically, electrically, or in cost (which includes the design fees) shall be deemed above standard. Also, Tenant designs which require fire alarm systems or special emergency lighting above and beyond that provided by the Landlord shall be at Tenant's cost and expense. 45 EXHIBIT C TENANT'S WORK LETTER (CONSTRUCTION RULES) a. The Tenant's Contractors and subcontractors are required to check in with the Landlord's Property Manager for instructions and coordination prior to going on the site. b. All Tenant Contractors are to follow all instructions set forth by Landlord. c. Tenant's Contractors will not be permitted to start work until they: A. Have all necessary building permits and have posted such permits on the wall in the Tenant's space. B. Furnish proper evidence of required insurance coverage. C. Sign for and take possession of keys to service doors of premises (if any) and acknowledge proper installation and operation of said service door. D. Furnish names and phone numbers (office and home) of contractor's supervisory personnel. E. Have a set of Landlord approved drawings in the space at all times. F. Acknowledge receipt of a copy of these Construction Rules. G. Furnish proper evidence that all fees and/or deposits required to commence work have been fully paid. d. Insurance: A. All contractors are required to furnish the Landlord's Property Manager with certificates showing evidence of the following insurance coverage prior to commencing any work. B. The insurance shall: (i) be issued by insurance companies authorized to do business in the State of Nevada with a current financial rating of at least an A+ Class XV or better as rated in the most recent edition of Best's Key Rating Guide; (ii) be issued as a primary policy; (iii) contain an endorsement requiring thirty (30) days written notice from the insurance company to Landlord before cancellation or material change and, (iv) shall be written with minimum coverages and limits as required by law and the following: (1) "All risk" builders' risk insurance in an amount equal to 100% of the replacement cost of the Improvements on a non-reporting, completed value basis, coverage against the perils or damage resulting from water damage; (2) Owner's Protective Liability Insurance in an amount of not less than $1,000,000 naming Landlord as a Named Insured; (3) Unless otherwise waived, in writing, by Landlord, a performance bond from Tenant's general contractor in an amount equal to the contract sum or contract amount set forth in the construction contract between Tenant and its general contractor providing for the construction; (4) Independent Contractors coverage; and 46 (5) Comprehensive General Liability in an amount of, not less than $1,000,000 evidenced by a Certificate of Insurance (said policies hereinafter referred to as the "Construction Period Insurance Policies"). From and after the date of issuance of said certificate of occupancy, the term "Insurance Policies" shall mean: (i) All Risk Property coverage naming Landlord as an Additional Named Insured with Replacement Cost and Agreed Amount endorsements, and including Increased Cost of Construction coverage, Demolition, Clean Up and Clearance coverage, Extra Expense coverage and providing that collection of a total loss recovery will not require reconstruction; (ii) Broad Form Comprehensive General Liability, naming Landlord as an Additional Named Insured, in an amount of, not less than $____________, combined single limit, containing Broad Form Contractual Liability coverage. C. Liability insurance may be arranged by Comprehensive General Liability and Comprehensive Automobile Liability policies for the full limits required or by a combination of underlying comprehensive liability policies for lesser limits with the remaining limits provided by an Excess or Umbrellas Liability policy. D. All policies shall include the following organizations as additional Named Insureds: Landlord: #26 MCCARRAN CENTER, LC Landlord's Lender:___________________________________ All policies shall provide for thirty (30) days prior written notice of expiration or cancellation to the additional insureds. e. Parking: All contractors will be assigned a parking area for their workmen by the Landlord's Property Manager. No parking will be permitted in other than the designated area. Vehicles improperly parked are subject to removal by Landlord at Tenant's sole risk and cost. f. Tools and Equipment: All contractors are expected to arrive at the site with all necessary tools and equipment. No tools or machinery are to be requested of the Landlord's General Contractor. g. Deliveries: A. All deliveries of supplies and materials delivered to a contractor must include the store name and space number to facilitate delivery. B. Deliveries will be made only through entrances and routs designated by the Landlord's Property Manager. Contractors should verify routes daily, since routes may have to be changed from time to time. Roadways, loading docks and curb front delivery is at the discretion of the Landlord. C. The Landlord's General Contractor will not accept or unload supplies or materials for any Tenant work. h. Curb Service: To the greatest extent possible, curbs adjacent to the Buildings will be kept open for deliveries. Parking therein is strictly PROHIBITED. Vehicles delivering materials or merchandise must be completely unloaded at curb side, and immediately removed.Unattended parked vehicles in Loading Courts will be tagged or towed at the expense of the Tenant being served by the vehicles. i. Fire Protection: Each Tenant Contractor shall provide and maintain fire extinguishers within the premises as required by Public Safety Officials. 47 j. Material Storage/Work Area: All materials used for Tenant's work must be stored at all times within the Tenant's demised premises. Under no circumstances will any other portion of the Building or Project area be used as a work area, construction office or to store Tenant materials or Tenant Contractor's equipment. k. Trash Removal: Each Tenant Contractor is responsible for his own trash removal during construction. Contractors are expected to remove debris from the premises on a daily basis. l. Roof Openings: Allcoordination required with Landlord's General Contractor, i.e., any openings in the Building roof, are to be scheduled well in advance of anticipated need. Landlord's General Contractor shall not be responsible for delays to Tenant work caused by failure of Tenant Contractor to give adequate notice of work needed. The penetration and flashing of all roof openings shall be by Landlord's Contractor at Tenant's expense. m. Signage: No signs are to be placed on a Tenant's storefront without approval of the Landlord. n. Compliance with Regulations: Contractors are to comply with all federal and local safety regulations in the execution of their work as well as any safety requirements of the Center Contractor. Hard hats are required for all workmen and visitors to the site. o. Approved Working Plans: The Tenant Contractor must maintain one set of Approved Working Plans displaying signatures of Landlord and Plans Examiner on the job at all times during construction. p. Permits: The Tenant Contractor is required to obtain all necessary permits prior to the start of construction on the Tenant space. q. Protection of Work and Property: Tenant and Tenant's Contractor shall protect their work from damage and shall protect the work of other Tenants and Landlord from damage by Tenant, Tenant's Contractor and their employees and sub-contractors. r. Strictly Prohibited Work and Practices: A. Combustible materials above finished ceilings or in any other concealed, non-sprinklered space are prohibited. B. Imposing any structural load, temporary or permanent, on any part of the Landlord's work or structure without the approval of Landlord's Engineer and Property Manger is prohibited. C. Cutting any holes in Landlord-installed floor slabs, walls, or roof is prohibited unless written approval is provided by the Property Manager. s. Required Documents at Occupancy: Contractor must furnish to Tenant a Certificate of Occupancy (if applicable) and a Contractor's Waiver of Lien upon completion of construction. 48 t. Liens: If any mechanic's lien shall at any time be filed against any part of the Premises by reason of work, labor, services or materials performed for or furnished to Tenant, Tenant shall forthwith cause the lien to be discharged or bonded off to the satisfaction of Landlord. If Tenant shall fail to cause such lien to be discharged or bonded off within fifteen (15) days after being notified of the filing thereof, then, in addition to any other right or remedy of Landlord, Landlord may discharge the lien by paying the amount claimed to be due. The amount paid by Landlord, and all costs and expenses, including reasonable attorney's fees incurred by Landlord in procuring the discharge of the lien, shall be due and payable by Tenant to Landlord as additional rent on the first day of the next following month, or if the Lease term has expired, upon demand. u. Plans: Ten (10) days prior to the commencement of any construction Tenant shall submit to Landlord for Landlord's approval preliminary plans and specifications for the construction ("preliminary Plans"). As promptly as possible after submission of the Preliminary Plans, but in any event within twenty (20) days after receipt thereof, the Landlord will notify the Tenant of any objections thereto (specifying in reasonable detail such objections) and Tenant shall cause such objections to be rectified and to promptly resubmit the revised Preliminary Plans to the Landlord. Landlord's right to object to the Preliminary Plans shall be limited to objections that the submitted Preliminary Plans do not provide for a quality first class structure, workmanship and materials, or functional or architectural harmony with existing improvements, or otherwise do not meet the requirements of this Lease or any applicable Governmental Requirements. Tenant will, immediately after receipt of written notice of objections from Landlord, undertake to amend or modify the Preliminary Plans to conform to the requirements of this Lease and to cure any objections from the Landlord. In the event of Landlord's failure to give written notice of any objections within any of the requisite time periods, the Preliminary Plans as submitted to Landlord shall be deemed approved by the Landlord. Tenant shall submit one (1) copy of the "Final Plans" to Landlord prior to submission to the Building Department for a Building Permit (the "Final Plans"). Within ten (10) days after the Final Plans have been received by Landlord for final approval, Landlord shall give written notice of its approval or disapproval thereof, specifying in the latter event, its reasons therefor. Such approval shall not be unreasonably withheld and the right to disapprove the Final Plans shall be limited to objections that they are not consistent developments of the Preliminary Plans, or do not meet the requirements of this Lease or applicable Governmental Requirements. In the event the Landlord fails to give notice of its approval or disapproval of the Final Plans, as submitted to Landlord, within said ten (10) day period, the Final Plans shall be deemed approved by the Landlord. Notwithstanding anything contained in this Lease which is or may be construed to be to be contrary, Landlord shall have no liability or obligation whatsoever in connection with any of the Plans and no responsibility for the adequacy thereof or for the construction of all or any portion of the Premises contemplated by the Plans. Landlord has no duty to inspect the Premises, and if Landlord should inspect the Premises, Landlord shall have no liability or obligation to Tenant or any other Person arising out of such inspection. No such inspection, or any failure by Landlord to make objections after any such inspection, shall constitute an agreement or a representation by Landlord that the Premises is in accordance with the Plans or constitute a waiver of Landlord's right thereafter to insist that the Premises be constructed in accordance with the Plans. 49 EXHIBIT D RULES AND REGULATIONS 1.00 PROJECT & PREMISES 1.01 INDUSTRIAL AND COMMERCIAL USE: The Premises shall be used for industrial and commercial purposes permitted under the Clark County, Nevada "MD" Zoning Ordinance and Guidelines or as further permitted in Lease, and for no other use. 1.02 OIL DRILLING: No oil drilling, oil development operations, oil refining, holding tanks, quarrying or mining operations of any kind, shall be permitted upon or in the Project. No derrick or other structure designed for use in boring for water, oil or natural gas shall be erected, maintained or permitted upon the Project. 1.03 OFFENSIVE CONDUCT - NUISANCE: Tenant, Renters, Occupiers and Guests within the Project shall conform to all applicable Codes of the County of Clark, and no noxious or offensive activities shall be carried on, upon or within the Project. Any obstruction of Common Access areas is hereby deemed to be a nuisance and is prohibited except for reasonable periods in connection with repairs to the driveway, parking, walkway and Common Facilities. Objects which create or emit loud noise, vibrations or obnoxious odors shall not be located, used or placed on any portion of the Project other than temporarily for landscape, driveway, parking, walkway or building maintenance. No Tenant shall permit or cause anything to be done or kept on its Premises which may increase the rate or cause the cancellation of insurance because of the dangerous or volatile nature of such activity or substance, nor shall any Tenant violate or permit the violation of any law on its Premises. Each Tenant shall comply and require the Occupants and Permittees of its Premises to comply with all the requirements of the local or state health authorities and with all other governmental authorities with respect to the occupancy and use of a building or any portion thereof. The Landlord shall be entitled, but shall not be obligated, to take any action to abate an unlawful nuisance, including without limitation the right to enter into a Premises or Building to exercise the abatement of the unlawful nuisance. 1.04 VEHICULAR MAINTENANCE: No person shall conduct repairs, restorations, or painting of any motor vehicle, boat, trailer, aircraft or other vehicle upon any portion of the Project except wholly within an enclosed building. 1.05 ANTENNA, EXTERNAL FIXTURES, ETC.: No television or radio poles, antennae, flag poles, clotheslines or other external fixtures other than those originally installed by Landlord or approved by the Landlord and any replacements thereof, shall be constructed, erected or maintained on or within the Premises or Building. 1.06 FENCES, ETC.: No fences, awnings, ornamental screens, screen doors, sunshades or walls of any nature shall be erected or maintained on or around any portion of any structure or elsewhere within the Premises except those installed in accordance with the original construction of the Premises, and any replacement thereof, or as are authorized and approved by the Landlord. 1.07 ANIMALS: No animals, reptiles, rodents, livestock or poultry shall be kept in any Premises or elsewhere within the Project, without the express written consent of the Landlord. 1.08 NO STORAGE OR LIVING USE OF RECREATIONAL VEHICLES: No boat, truck, trailer, camper, recreational vehicle or tent shall be stored on the Project or used as a living area. 1.09 TRASH DISPOSAL: Trash, garbage, or other waste shall be kept only in sanitary containers in the enclosures provided. No Tenant shall permit or cause any trash or refuse to be kept on any portion of the Project other than in the receptacles customarily used therefor, and placed or maintained as required by Landlord. 1.10 EXTERIOR ALTERATIONS: No Tenant shall, at his expense or otherwise, make any alterations or modifications to the exterior of the buildings, fences, railings or walls situated within the Project without the prior written consent of the Landlord and approval by the County. 1.11 PARKING RESTRICTIONS: No parking shall be permitted which may obstruct free traffic flow within the Common Facilities, constitute a nuisance, or otherwise create a safety hazard. Notwithstanding the forgoing, this document shall not be interpreted in such a manner so as to permit an activity which would be contrary to any ordinance. Provided the requirements are not violated, construction activity shall be exempt from this section where applicable. The Landlord is hereby empowered to established "no parking" areas within Common Access areas of the Project as well as to enforce parking limitations through its officers and agents by all means lawful for such enforcement on private drives, including the removal of any violating vehicle. Adequate off-street parking is provided to accommodate all parking needs for employees, visitors and company vehicles on the site. 50 1.12 BUILDING MAINTENANCE: Each Tenant shall be responsible for maintaining its building, including the equipment and fixtures therein and the interior and exterior walls, ceiling and roof, private restrooms contained within the Building, (if any), windows and doors thereof, in a first class, clean, sanitary, workable and attractive condition. Tenant shall have complete discretion as to the choice of furniture, furnishings, and interior decorating; provided, that: a) Windows may only be covered by drapes, shades or shutters and may not be painted or covered by foil, cardboard, or other similar materials. Each Tenant shall be responsible for repair, replacement and cleaning of the interior windows and glass of his building. b) Decoration of the exterior of the doors to the Building shall be of uniform design to be adopted and approved by the Landlord. 1.13 SIGNS: The Landlord shall adopt as part of the Project rules, rules for signage established by Landlord for a signage program pertaining to the use of signs by the Tenant. The Landlord shall have the right to approve all signs posted within the Project, including signs on the building doors. No Tenant shall permit or cause any advertising, identifications, or other sign to be constructed, installed or maintained on the Premises or on any property adjacent to the Premises and visible from the Premises until the plans and specifications therefor, including the height, size, coloring, design and location of installation, have been submitted to and approved in writing by the Landlord and the County of Clark. All signs installed on the Premises or on any property adjacent to the Premises and visible from the Premises shall be consistent with the character and architectural style of the buildings located on the Premises upon which they are placed. In addition, no sign, poster, display, or other advertising device shall be placed in the public view upon any portion of the Premises and/or Building or on any property adjacent to the Premises and visible from the Premises unless it complies with all applicable County ordinances. No Tenant shall permit or cause any sign advertising a person, firm, company, or corporation which does not operate, conduct a business, or sell products on such Premises to be constructed, installed, or maintained on such Premises. Landlord , consultants, or contractors may use signs of a size, design and location as determined by the Landlord for the purposes of developing, constructing, marketing and improving the Project. 1.14 MAINTENANCE OF DRAINAGE FACILITIES: The Premises upon which drainage ditches and/or related facilities are located, or which may be hereafter be located, shall keep and maintain any improvements constructed thereon, in a reasonable condition according to their design, purpose and/or function, including, but not limited to, the removal of all obstructions which may or reasonably might cause redirection or impedance of the flow of the drainage thereon regardless of the source or cause of such obstruction or impedance. 1.15 RETENTION OF LOT GRADE: Unless specifically approved in writing by both the County and the Landlord, the grade of any Premises shall not be modified, altered or otherwise changed. 1.16 STORAGE AND LOADING AREAS: No materials, trash, supplies or equipment, including company-owned or operated trucks, shall be stored on the Premises except inside a closed building, or behind a visual barrier screening such areas form the view of adjoining properties and/or private streets subject to the approval of the County of Clark and the Landlord; provided, however, that this provision shall not apply during the course of construction of a building. 1.17 Canvassing, soliciting and peddling in the Project are prohibited. 2.00 RECIPROCAL EASEMENTS 2.01 PREMISES INCLUDED: Certain Premises, located within the Project, because of unique characteristics regarding the relationship of each of these Premises to the other, are encumbered by this document with a special set of easements. These special easements provide for reciprocal surface access and reciprocal subsurface utility access on and under the affected Premises. 2.02 SPECIAL RECIPROCAL SURFACE ACCESS EASEMENTS: Each Tenant of the affected Premises, does covenant for itself and its successors, a nonexclusive special reciprocal surface access easement over portions of his property for the purpose of providing landscape planting and on-going maintenance and utility maintenance and repair. Such surface access shall be reciprocal from one to another, and shall provide continuous access to each Premises, Landlord/Tenant, his tenant(s), guest(s), vendors, suppliers and to landscape maintenance personnel employed by the Landlord or by authorized personnel of Public Utilities servicing a given utility located within the Reciprocal Easement Area. 2.03 RECIPROCAL SUBSURFACE UTILITY EASEMENTS: Each Tenant of the affected Premise does covenant for itself and its successors, a nonexclusive reciprocal subsurface easement beneath the surface of its Leasehold Premise for the purpose of providing a satisfactory location for subsurface utility lines servicing all or some of the 51 Project. Such utilities would be for, but not limited to: water lines, sanitary sewer lines, storm drainage lines, electrical lines, gas lines, fiber optic lines, telephone lines or cable TV lines. Such subsurface access shall be reciprocal from one Leasehold Premise to another and shall provide the necessary reciprocal easement for the utility line in question and provide continuous access to authorized personnel of the utility companies providing the services. 2.04 SUBSURFACE EASEMENTS: The utility company or public agency utilizing the subsurface portion of the Reciprocal Easement Area shall be responsible for the continuous upkeep and maintenance of the utility facilities. 3.00 BUILDING 3.01 Without limitation upon any of the provisions of the Lease, Tenant shall not mark, paint, drill into, cut, string wires within, or in any way deface any part of the Building or Premises, without the prior written consent of Landlord, and as Landlord may direct. Upon removal of any wall decorations or installments or floor coverings by Tenant, any damage to the walls or floors shall be repaired by Tenant at Tenant's sole cost and expense. Tenant shall not lay linoleum or similar floor coverings so that the same shall come into direct contact with the floor of the Premises and , if linoleum or other similar floor covering is to be used, an interlining of builder's deadening felt shall be first affixed to the floor, by a paste or other materials soluble in water. The use of cement or other similar adhesive material is expressly prohibited. Floor distribution boxes for electric and telephone wires must remain accessible at all times. 3.02 Tenant shall not install or permit the installation of any awnings, shades, mylar films or sunfilters on windows. Tenant shall not obstruct, alter or in any way impair the efficient operation of Landlord's heating, ventilating, air conditioning, electrical, fire, safety or lighting systems. 3.03 Tenant shall, upon the termination of its tenancy, provide Landlord with the combinations to all combination locks on safes, safe cabinets and vaults and deliver to Landlord all keys to the Building and all interior doors, cabinets, and other key-controlled mechanisms therein, whether or not such keys were furnished to Tenant by Landlord. 3.04 These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the agreements, covenants, conditions and provisions of any lease of Premises in the Project. 52 EXHIBIT E OPERATING EXPENSES For the purposes of this Lease, "Operating Expenses" shall include those items and services set forth in Section 4.2 and further defined in Section 9 of the Lease. Operating Expenses associated with the Project Common Facilities and the Building occupied by the Tenant are calculated and prorated as set forth hereafter: GROUP I - PROJECT COMMON AREA - Consists of the maintenance and up-keep of perimeter Landscaping Areas generally located parallel to the public streets within the Project to a average depth of 15 to 20 feet from the public right-of-way. - Categories covered include: Landscape Maintenance and Utilities (Electrical and Water), and Property Management. Perimeter Landscaping Areas in the Project shall be constructed and maintained along public streets and private streets within the Project. The method for calculation of the Building's prorata share of Project Operating Expenses shall be based on the number of acres of land assigned to the Building divided by the total number of acres in that phase of the Project. The calculation for the Premises prorata share of the Buildings Operating Expenses shall be based on the square feet of the Premises divided by the total square feet in the Building (See Section 2.1 of the Lease for measurement guidelines). The calculation for the Building and Premises Group I Operating Expense is set forth below. Building Acreage: 5.33 Phase II Project Acreage: 42.2 Building/Project: 12.63 percent Premises sq. ft.: 31,438 sq. ft. Building sq. ft.: 54,624 sq. ft. Premises/Building: 57.55 percent Group I Premises Allocation 7.27 percent (Prem/Bldg x Bldg/Proj) 53 GROUP II - PROVIDED BY LANDLORD TO THE BUILDING AND PREMISES. Operating Expense obligations of the Building include, but are not limited to: - Real Property Taxes including special assessments as indicated on a separate tax bill for the Building but exclusive of any increased taxes due to the sale of the Building. - All Risk Property Insurance. - Property Management for the Building (including, but not limited to: parking facilities and landscaping) as provided by Landlord (see Lease, Section 4.2). - Tenant shall be responsible for its prorata share of the Building Area's Group II expenses. The Building's share of Group II Operating Expenses shall be based upon the Acreage of the Building Area divided by the Acreage of the Project: Building Area Acreage: 5.33 acres Building Area Responsibility: 12.63 percent Operating Expense Obligations of the Premises: - On-Site - Water and Sewer (unless separately metered to the Premises) - Building Maintenance & Repair - HVAC Maintenance and Repair under a Guaranteed Service Contract - Fire Sprinkler Maintenance and Monitoring - Building Area Trash Removal - Prorata share of exterior Building area Expenses Group II Expenses are allocated to the Premises on a prorata basis. The Building is grossed up to reflect at least 95% occupancy. Premises sq. ft.: 31,438 Building sq. ft.: 54,624 sq. ft. Premises Percentage Allocation: 57.55 Percent. (same as Premises/Bldg.) GROUP III - PROVIDED BY TENANT Operational Expenses which are the sole responsibility of the Tenant are: - Utility - Electrical: (HVAC, Lighting & Wall Outlets on separate meter) - Utility - Telephone (In-Suite) - Janitorial and Premises Trash Removal (In-Suite) - All other utilities separately metered to the Premises 54 EXHIBIT F PARKING Tenant shall be provided a minimum of One Hundred Thirty-two (132) unrestricted regular size parking stalls, free of charge, for the use by Tenant's employees and visitors. The rules and regulations governing the use of these spaces are contained in Exhibit "D" of this Lease. Tenant shall not use more parking spaces than set forth herein, or any spaces (a) which have been specifically assigned by Landlord to other tenants or for such other uses as visitor parking or (b) which have been designated by governmental entities of competent jurisdiction as being restricted to certain uses. Landlord reserves the right to erect such security and access and egress control devices as it may reasonably deem to be appropriate (including, without limitation card controlled gates) and Tenant agrees to cooperate fully with Landlord in such matters. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Landlord for such activities. If Tenant permits or allows any of such prohibited activities, then Landlord shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Tenant, which cost shall be immediately payable upon demand by Landlord. Tenant shall pay, throughout the entire Term, an amount equal to the number of reserved-covered parking spaces Tenant leases for its use times the applicable fees (the "Parking Fees") which Landlord is charging for use of the reserved-covered parking facilities from time to time. Tenant agrees and acknowledges that Tenant shall be obligated to pay such rates regardless of whether or not Tenant actually uses the parking spaces. Such Parking Fees shall be payable monthly commencing with the first installment of Base Rent due under the Lease. If the Commencement Date is other than the first day of a calendar month, the first installment of the Parking Fee shall be prorated on the basis of a thirty (30) day calendar month. Landlord may, but shall not be obligated, to construct covered parking structures on the Project which shall be available for the use of the Tenant. Should the Tenant elect to rent spaces in a parking structure, Tenant shall pay, throughout the entire Term, an amount equal to the number of parking spaces Tenant rents in the parking structure times the applicable fees (the "Parking Fees") which Landlord is charging for use of the parking structure. Landlord may, from time to time, increase the Parking Fees being charged in the parking structure upon thirty (30) days prior written notice. Such Parking Fees shall be payable monthly as additional rent by the Tenant. If Landlord mandates the use of the Parking Garage by the Tenant, either temporarily or permanently, such use shall be at no charge to Tenant, its employees, invitees or customers. 55 EXHIBIT G CREDIT ENHANCEMENT For and in consideration of the leasing of the Premises to Tenant, Tenant agrees to maintain as a "Credit Enhancement" an amount determined by taking one half (1/2) of the sum of the Tenant Improvement Allowance and Tenant's contribution to over standard tenant improvements ("Tenant's Contribution") and subtracting therefrom Tenant's Contribution. (Example: Tenant Improvement Allowance=$25/sq. ft. Tenant's Contribution=$9/sq. ft. 1/2($25+$9)=$17. $17-$9=$8/sq. ft. $8x31,438 sq. ft.=$251,504 Credit Enhancement) The Credit Enhancement shall be held in an account or under an alternative agreement approved by Landlord and subject to the following conditions: 1. The Credit Enhancement may be held in an escrow account at a Federally Insured financial institution with a minimum total asset base of One Billion dollars as of January 1, 1998. The account may be in the form of a Certificate of Deposit, Money Market Account, or other federally insured investment. 2. As an alternative to the aforementioned escrow account, the Credit Enhancement may be a Letter of Credit written against a Federally Insured financial institution with assets as set forth above. 3. The Credit Enhancement shall be maintained until Acres Gaming achieves Four (4) consecutive quarters of positive Net Operating Income (Net Earnings) after which Tenant shall be released from the provisions set forth in this Exhibit G. 4. On each annual anniversary of the Commencement Date the amount required to be maintained under this Credit Enhancement shall be reduced by one fifth (1/5) of the original amount. (Example: Credit Enhancement=$150,000. Annual reduction=$30,000) 56 EXHIBIT I RENEWAL OPTIONS If immediately prior to the expiration of the Initial Term, this Lease shall be in full force and effect, and if written notice is given to Landlord no later than one hundred and eighty (180) days prior to the expiration of the Term of Tenant's intent to renew, the giving of such notice by Tenant shall be effective to renew this Lease and extend the term hereof as to the Premises without the necessity for execution of any further instrument by either party, for an additional period of sixty (60) months (Option Term) from and after the expiration of said initial term. The Option Term shall be on the same covenants, agreements, terms, provisions and conditions as are contained herein for the initial term. Base Rent for each year during the entirety of such Option Term on the Premises shall, however, be at the "Extension Rate" (as hereinafter defined). The "Extension Rate" for purposes of calculating the Base Rent payable during each twelve (12) month period of the Option Term shall be the amount equal to the Base Rent (as set forth in the Lease) multiplied by a fraction, which fraction shall have as its numerator the Consumer Price Index For All Urban Consumers using the U.S. City Average (1982-84 = 100), or alternative thereto as hereinafter provided, as published by the U.S. Department of Labor, Bureau of Labor Statistics, for the calendar month which is four (4) months prior to the expiration of the applicable twelve (12) month period, and which shall have as its denominator the Consumer Price Index, as published for the calendar month which is four (4) months prior to the Commencement Date of the Initial Term. If the present base of said Index should hereafter be changed, then the new base shall be converted to the base now used. In the event that the Bureau should cease to publish the Consumer Price Index, then a similar Index published by any other branch or department of the U.S. Government shall be used. In the event the Bureau shall publish more than one such index, then the index showing the greater proportionate increase shall be used, and if none is so published, then another index generally recognized as authoritative shall be substituted by agreement of the parties hereto, or if no such agreement is reached within a reasonable time, either party may make application to any court of competent jurisdiction to designate such other index. In any event, the base used by any new index shall be reconciled to the 1982-84=100 Base Index. In no event shall the Extension Rate to be paid by Tenant pursuant hereto be less than the Base Rent as adjusted with respect to the prior twelve (12) month period of the Initial Term. In the event the numerator of said fraction is not available at the time of adjustment of the rent as provided herein, Tenant shall continue to pay the rent established for the next prior twelve (12) month period; provided, however, Tenant shall promptly pay to Landlord any deficiency at such time as said rent is adjusted. The Extension Rate shall be subject to all rent adjustments and increases as set forth in the Lease, including, but not limited to, Sections 1.12 and 4. 57 EXHIBIT J BROKERS COMMISSION The parties recognize as the broker(s) who negotiated this Lease, the firm(s), if any, whose name(s) is (are) _________________, and agree that Landlord shall be solely responsible for the payment of brokerage commissions to those broker(s), and that the other party shall have no responsibility for the commissions unless otherwise provided in this Lease. Tenant warrants that it has had no dealings with any other real estate broker or agent in connection with the negotiation of this Lease, and the Tenant agrees to indemnify and hold Landlord harmless from any cost, expense or liability (including reasonable attorneys' fees) for any compensation, commissions or charges claimed by any other real estate broker or agent employed or claiming to represent or to have been employed by Tenant in connection with the negotiation of this Lease. The foregoing agreement shall survive the termination of this Lease. If Tenant fails to take possession of the Premises or if this Lease otherwise terminates prior to the expiration date, Landlord shall be entitled to recover the unamortized portion of any brokerage commission funded by Landlord in addition to any other damages to which Landlord may be entitled. It is the Landlord's express policy not to pay commissions for the extensions, renewals, options or expansions of an existing Tenant. 58 EXHIBIT K COMMENCEMENT DATE The Commencement date of that Lease by and between #26 McCarran Center, LC, as Landlord, and Acres Gaming, as Tenant, is hereby acknowledged and agreed to be . Accordingly, the Expiration Date is acknowledged and agreed to be __________199__. LANDLORD: TENANT: #26 McCarran Center, LC Acres Gaming a Nevada Limited Liability Company By:______________________________ By: _____________________________________ Robert Brown Its:_____________________________ Its: Executive Vice President 59 EXHIBIT L MASTER SIGN PLAN MULTI-TENANT SIGNAGE STANDARDS A. GENERAL REQUIREMENTS - ALL BUILDINGS: 1. All sign plans shall be reviewed and approved in writing by the Landlord for conformity with this criteria and overall design quality prior to installation. Approval or disapproval of sign submittals shall remain the sole right of the Landlord. 2. All permits for signs and installation thereof shall be approved by the Landlord or its representative. The expense of obtaining permits, the fabrication and the installation of all signs shall be the responsibility of the Tenant. B. GENERAL SPECIFICATIONS - ALL BUILDINGS: 1. No projections beyond the sign area will be permitted. Signage area is to be within limits as indicated by the Landlord in this criteria. 2. Except as provided herein, no advertising placards, banners, pennants, name insignia, trademarks or other described material shall be affixed or maintained upon the glass panels and supports of the windows and doors or upon the exterior walls of the building or office front. 3. All signs and their installation shall comply with all local building codes. 4. Signs shall be composed of individual lettering. Logos will be considered on a case by case basis. C. GENERAL CONSTRUCTION REQUIREMENTS - ALL BUILDINGS: 1. Tenant shall be responsible for the manufacture, complete installation and maintenance of the building letters and vinyl lettering. 2. All signs are to be installed under the direction of the Project Contractor's superintendent or representative. 3. Tenant shall be fully responsible for the Tenant's sign contractor. 4. Tenant's sign contractor shall execute Landlord's Right of Entry Agreement prior to installation of signage. 5. Tenant's sign contractor shall repair any damage to any portion of the structure and finish caused by its work. 6. All penetrations of the building structure required for sign installation shall be sealed in a water tight condition and shall be patched to match Building finish adjacent to the installation. 7. No signmaker's label or other identification will be permitted on an exposed surface of the sign, except for those required by ordinance, which shall be placed in an inconspicuous location. 8. No signs or lettering will be permitted on the building roof. 60 D. SIGN CONTRACTOR GENERAL REQUIREMENTS - ALL BUILDINGS: 1. Tenant shall use YESCO (Young Electric Sign Company) to produce and install signage for aesthetic consistency or Landlord approved equal. 2. All companies bidding to manufacture signs are to be advised by Tenant that no substitutes will be accepted unless indicated in the specifications and approved by the Landlord. 3. All manufacturers are to be advised by Tenant that prior to acceptance and final payment, each unit will be inspected for conformity with approved plans. Any signs found not in conformity will be rejected and removed at the Tenant's expense. 4. Entire display shall be guaranteed for 90 days against defects in material and workmanship. Defective parts shall be replaced without charge. 5. Sign company shall carry workman's compensation and public liability insurance against all damage suffered or done to any and all persons and/or property while engaged in the construction or erection of signs in the amount of $1,000,000. E. SINGLE-STORY MULTI-TENANT BUILDINGS - SIGNAGE: 1. Building signage to be flush mounted, non-illuminated, individual letters, with both upper and lower case permitted. 2. The width of the Tenant sign facia shall not exceed the width of the Sign Band (as delineated on the exterior elevations). Lettering shall center on demised premises unless otherwise approved by Landlord. 3. Size of the Building signage letters shall be 18" maximum and logos 24" maximum in height by 3/4" in depth. Any exceptions will require prior written consent of the Landlord. 4. Building signage letters will be Helvetica medium or as approved by the Landlord and painted to match Ameritone 1-VR-34A-Navarro. 5. Tenant will be permitted to place at the main entrance of its demised premises not more than 144 inches of vinyl lettering, not to exceed two and three fourths inches (2-3/4") in height, maximum of four (4) lines, indicating suite number and name. Any exceptions will require prior written consent of the Landlord. 6. Tenant's non-customer door for private, employee or merchandise entry may have uniformly applied in two and three-fourths inches (2-3/4") high vinyl block letters, the Tenant's name and suite number. 7. Building address (excluding suite number) shall be provided by Landlord. Address shall be individual 3/4" deep 12" high numbers (Helvetica medium) flush mounted where indicated on exterior elevations. F. MULTI-STORY BUILDINGS - PARAPET SIGN: 1. Parapet Wall Sign Shall mean a logo symbol and/or sign text consisting of individual symbols or letters installed directly to the parapet of the Building. The use of "Raceways" for letter attachment to the Building is not permitted. 2. Signable Area Shall mean the display surface of a sign encompassed within a single continuous perimeter, which encloses the extreme limits of the display face of that graphic. 3. Location 61 Shall be above the upper-most window line, and as indicated on the Sign Location Plan (if provided), or as otherwise designated by Landlord. 4. Number Landlord shall determine the number of individual tenants and signs permitted on a Building. 5. Display Parapet signs shall use a single line of text. 6. Alignment Parapet signs shall be located a distance equal to the height of the wall sign (but not less that 3'0") from the vertical edge of the building, a minimum of 18" above the highest ceiling line and a minimum of 18" below the top of the parapet. The sign shall insure the geometric relationship to the vertical and horizontal features of the building. 7. Height Wall sign height shall not exceed the height as listed in the table below.
Number of Stories Maximum Height ----------------- -------------- 1 2'-0" 2 2'-6" 3 or more 3'-0"
8. Area Wall sign area shall be as listed in the table below.
Number of Stories Maximum Square Footage ----------------- ---------------------- 1 64 2 100 3 or more 144
9. Materials and Construction Parapet signs shall utilize dark anodized bronze aluminum or other materials as approved by Landlord. Returns and trim shall match color of sign face unless otherwise approved. All signs shall consist of individual letters and/or symbols. No continuous sign cabinets or raceways shall be permitted. 10. Colors Colors of parapet sign materials shall be consistent with the Building and be subject to the approval of the Landlord prior to issuance of the required building permit. Registered trademark/logo colors are allowed. 11. Illumination and Lighting Control Parapet signs shall be either non-illuminated or interior or halo illuminated with no exposed conduit, raceway or similar cabinets and shall be wired in such a manner that if any one portion and/or letter of the sign were to burn out, the illumination of the entire sign will automatically turn off. 12. Submittal All parapet signs must be submitted to the Landlord for approval. Upon receiving approval from the Landlord, the Tenant's sign contractor shall obtain all required permits. 62 EXHIBIT M WHEN RECORDED, RETURN TO: - ---------------------------- - ---------------------------- - ---------------------------- - ---------------------------- SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT (MODIFY AS NECESSARY FOR GROUND LEASE, IF ANY) THIS SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT (this "Agreement") is made and entered into as of ____________, 19___, by and between _______________________________, a(n) _____________________________________ ("Lender") and _______________________________, a(n) ________________________ ("Tenant"). RECITALS This Agreement is made with respect to the following facts: A. Pursuant to Loan Agreement dated as of ____________, 19__ (the "Loan Agreement") entered into among ______________, a _________________, and ____________________, a ___________________, the Lenders made a loan to Landlord (the "Loan"). B. The loan is secured by a Deed of Trust, Security Agreement, Assignment of Leases, Rents and Profits, Financing Statement and Fixture Filing (the "Deed of Trust") which was recorded in the Official Records of Clark County, Nevada, as Instrument No. __________, encumbers certain real property owned by Landlord located in Clark County, Nevada, and more particularly described in the Deed of Trust (the "Property"). C. Lender is [the holder of 100% of the rights/has purchased the Loan and succeeded to 100% of the rights] of the Landlord under the Loan Agreement, the Deed of Trust and the other documents evidenced the Loan [pursuant to, inter alia, (i) an Assignment of Loan Documents dated _________________, and (ii) and Assignment of Beneficial Interest under Deed of Trust and under Assignment of Leases and Rents recorded in the Official Records of Clark County, Nevada, on _________________ as Instrument No. _________________]. D. Pursuant to a Lease Agreement dated ______________________ between #26 McCarran Center, LC, a Nevada limited liability company, as landlord ("Landlord"), and Tenant (the "Lease"), Landlord leased to Tenant [a portion of] the Property consisting of approximately ___________________ rentable square feet of office space commonly know as _________________________________________, as more particularly described in the Lease as the "Premises". E. Lender and Tenant now desire to clarify their respective rights with respect to the Premises, to confirm the right of Tenant to quiet and peaceable possession of the Premises under the Lease, and to further define the terms, covenants and conditions precedent to such right of quiet and peaceable possession. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. The recitals set forth above are incorporated herein by reference. 63 2. Tenant covenants and agrees that the Lease now is and at all times shall continue to be subject and subordinate in each and every respect to the lien of the Deed of Trust, to the full extent of the principal, interest and other sums secured thereby. Tenant, upon request, shall execute and deliver any a certificate or other instrument whether or not in recordable form which Lender reasonably may request to confirm such subordination. 3. As long as Tenant is in compliance with the terms of this Agreement and is not in default in the performance of its obligations under the Lease, which default remains uncured beyond the expiration of any applicable grace or cure periods, (i) Lender shall not name Tenant as a party defendant in any action for foreclosure or other enforcement of the Deed of Trust (unless required by law), nor shall the Lease be terminated by Lender in connection with, or by reason of, foreclosure or other proceedings for the enforcement of the Deed of Trust, or by reason of a transfer of the Landlord's interest under the Lease pursuant to the taking of a deed or assignment in lieu of foreclosure (or similar device), and in such event the Lease shall remain in full force and effect as a direct lease between Tenant and any person, including without limitation Lender, acquiring or succeeded to the interests of Landlord as a result of any such action or proceeding (hereinafter referred to as a "Successor") and (ii) Tenant's use or possession of the Premises shall not be interfered with by Lender or anyone acting by or through Lender. 4. If any portion of the Property affected by the Lease is damaged by an insured casualty or if any portion of the Property affected by the Lease is taken under the power of eminent domain, or sold under the threat of the exercise of said power, then Lender agrees that insurance or condemnation proceeds otherwise payable to Lender as a result thereof shall be made available to Landlord to repair and/or restore the Property. 5. If the interest of Landlord under the lease shall be transferred by reason of foreclosure or other proceedings for enforcement of the Deed of Trust or the obligations which it secures or pursuant to a taking of a deed or assignment in lieu of foreclosure (or similar device), Tenant shall be bound to the Successor and the Successor shall be bound to Tenant under all terms, covenants and conditions of the Lease for the unexpired balance of the term thereof remaining (and any extensions, if exercised), with the same force and effect as if the Successor were the landlord, and Tenant does hereby (i) agree to attorn to the Successor, including lender if it be the Successor, as its landlord, (ii) affirm its obligation under the Lease and (iii) agree to make payments of all sums due under the Lease to the Successor, said attornment, affirmation and agreement to be effective and self-operative without the execution of any further instruments, upon the Successor succeeding to the interest of Landlord under the Lease. 6. Tenant agrees that this Agreement satisfies any condition or requirement in the Lease relating to the granting of a non-disturbance agreement with respect to the Deed of Trust. Tenant further agrees that in the event there is any inconsistency between the terms and provisions hereof and the terms and provisions of the Lease dealing with non-disturbance, the terms and provisions hereof shall be controlling. 7. This Agreement may not be modified except by an agreement in writing signed by the parties or their respective successors-in-interest. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. 8. Nothing contained in this Agreement shall in any way impair or affect the lien created by the Deed of Trust, except as specifically set forth herein. 9. If either party hereto shall bring suit to enforce the terms and provisions hereof or to recover damages for breach, the prevailing party shall be entitled to recover from the other party all reasonable costs, expenses and attorneys' fees incurred in connection with the exercise by the prevailing party of its rights and remedies hereunder. The amount of the attorneys' fees is to be affixed by the court without a jury. For the purpose of this paragraph, the term "prevailing party" shall mean, in the case of the claimant, one who is successful in obtaining substantially all of the relief sought, and in the case of the defendant or respondent, one who is successful in denying substantially all of the relief sought by the claimant. 64 10. This Agreement may be executed in one or more counterparts, each of which when taken together shall constitute one and the same instrument. This Agreement has been executed in the State of Nevada, and the laws of the State of Nevada shall govern its construction, performance and terms. This Agreement shall be construed according to its plain meaning and shall not be strictly construed either for or against any party hereto. Either party hereto may record this document in the official records of the county in which the Property is located. 65 LENDER: ________________________________, a(n)_____________________________ By:______________________________ Name:____________________________ Title:_____________________________ TENANT: ---------------------------------, a(n)______________________________ By:_______________________________ Name:____________________________ Title:______________________________ STATE OF NEVADA ) )ss. County of Clark ) The foregoing instrument was acknowledged before me this _____ day of __________, 19__, by _______________________________ the _________________ of _________________________________, on behalf of such________________________. --------------------------------- Notary Public My Commission Expires: - ---------------------- STATE OF NEVADA ) )ss. County of Clark ) The foregoing instrument was acknowledged before me this _____ day of __________, 19__, by _______________________________ the _________________ of _________________________________, on behalf of such _________________________. --------------------------------- Notary Public My Commission Expires: - ---------------------- 66 EXHIBIT N TENANT ESTOPPEL CERTIFICATE TO:______________________________ PREMISES:______________________________ LOCATION:______________________________ LEASE DATE:____________________________ DATE OF AMENDMENTS, IF ANY:___________ TENANT:________________________________ LANDLORD: #26 MCCARRAN CENTER, LC Tenant is a tenant of the Premises pursuant to the lease described above and any amendments thereto (the "Lease") and hereby certifies the following information which you, exclusively, may rely upon in connection with your loan to Landlord: 1. The Lease, a copy of which is attached hereto as Exhibit "A", is presently in full force and effect and has not been modified, supplemented or amended except as follows: _______________________________________________________________________________. 2. (a) The commencement date of the Lease was or will be ___________________, and the date of expiration of the Lease will be ______________________, subject to extensions of the Commencement Date pursuant to Paragraph ________of the Lease and subject to the Tenant's right, if any, to extend the term of the Lease as follows: _______________________________________________________________________________. _______________________________________________________________________________. (b) The Premises consists of _____________square feet for _______________________________________________________________________________ _______________________________________________________________________ use(s). 3. (a) The base rent payable under the terms of the Lease is $_________. (b) The base rent payable under the terms of the Lease has been paid through ______________. (c) The Lease provides for __________ months free rent, and Landlord has not agreed to any other free rent periods except as follows: _____________________________________. 5. Tenant has not assigned its rights under the Lease or sublet any portion of the Premises except as follows: _____________________________________. 6. There are no current actions, whether voluntary or otherwise, pending against Tenant under any insolvency, bankruptcy or other debtor relief laws of the United States. 67 7. Landlord is not currently in default in the performance of any covenants, conditions, agreements, terms or provisions contained in the Lease. Landlord has no current obligations to Tenant or agreements with Tenant, except as set forth in writing in the Lease. 8. Tenant has not been granted any rent abatements or concessions for the term of the Lease, except as set forth in the Lease or in Paragraph 4 (c) of this estoppel certificate, and Tenant is not owed any money by Landlord which can be offset or otherwise deducted from the rental due under the Lease, except as follows: ____________________________________. 9. Tenant has deposited ___________ as a security deposit with Landlord. 10. Except as set forth in the Lease, landlord has no current obligations to or agreements with Tenant with respect to the Premises, including, without limitation, any obligations or agreements regarding any tenant improvement work to be performed by Landlord. THE STATEMENTS MADE HEREIN SHALL BE BINDING UPON US, OUR SUCCESSORS AND ASSIGNS, AND SHALL INURE TO YOUR BENEFIT AND THE BENEFIT OF YOUR SUCCESSORS AND ASSIGNS. THE OFFICER, PARTNER OR PERSON, AS APPLICABLE, EXECUTING THIS CERTIFICATE HAS BEEN DULY EMPOWERED TO DO SO ON BEHALF OF THE UNDERSIGNED. Tenant: By:___________________________ Its:___________________________ EX-21.1 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
Name State of Incorporation ---- ---------------------- AGI Distribution, Inc. Nevada
EX-23.1 4 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 reports included in this Form 10-K into the Company's previously filed Registration Statements (Form S-8, No. 33-75570 and Forms S-3, No. 333-2258 and No. 333-21913). ARTHUR ANDERSEN LLP Portland, Oregon September 24, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE FOR YEAR ENDED 6/30/98
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-1998 JUN-30-1998 9,887,000 0 1,979,000 (50,000) 2,607,000 14,526,000 5,170,000 2,919,000 17,194,000 2,435,000 0 0 4,948,000 19,642,000 (9,831,000) 17,194,000 17,573,000 17,573,000 10,950,000 11,283,000 0 0 (483,000) (4,177,000) 0 (4,177,000) 0 0 0 (4,177,000) (.47) (.47)
EX-27.2 6 FINANCIAL DATA SCHEDULE FOR 3 MONTHS ENDED 9/30/96
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS JUN-30-1997 SEP-30-1996 3,589,000 0 2,862,000 (132,000) 3,017,000 9,425,000 2,587,000 1,473,000 10,915,000 4,600,000 0 0 0 12,139,000 (5,824,000) 10,915,000 6,568,000 6,568,000 3,108,000 2,006,000 0 0 (35,000) 1,489,000 0 1,489,000 0 0 0 1,489,000 .20 .18
EX-27.3 7 FINANCIAL DATA SCHEDULE - 6 MONTHS ENDED 12/31/96
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS JUN-30-1997 DEC-31-1996 6,250,000 0 4,552,000 (132,000) 4,309,000 15,205,000 3,019,000 1,627,000 16,987,000 2,079,000 0 0 0 19,366,000 (4,458,000) 16,987,000 12,243,000 12,243,000 5,414,000 4,093,000 0 0 (119,000) 2,855,000 0 2,855,000 0 0 0 2,855,000 .35 .32
EX-27.4 8 FINANCIAL DATA SCHEDULE - 9 MONTHS ENDED 3/31/97
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS JUN-30-1997 MAR-31-1997 10,128,000 0 3,801,000 (167,000) 5,273,000 19,186,000 3,195,000 1,849,000 21,052,000 2,584,000 0 0 4,948,000 19,327,000 (5,807,000) 21,052,000 14,953,000 14,953,000 6,875,000 6,810,000 0 0 (238,000) 1,506,000 0 1,506,000 0 0 0 1,506,000 .18 .17
EX-27.5 9 FINANCIAL DATA SCHEDULE FOR YEAR ENDED 6/30/97
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-1997 JUN-30-1997 9,318,000 0 3,880,000 (322,000) 5,366,000 19,019,000 3,871,000 2,075,000 21,323,000 2,545,000 0 0 4,948,000 19,409,000 (5,579,000) 21,323,000 20,455,000 20,455,000 9,553,000 9,477,000 0 0 (373,000) 1,798,000 0 1,798,000 0 0 0 1,798,000 .21 .20
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