-----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, F8+sc/T16EMPmPlophb3anrgtznpuEceLfYoOPG7ZnY4syqi6LhfMqY3fZh79R/i d4U5L2lSYhsN1xN4MqStuw== 0000912057-97-000749.txt : 19970114 0000912057-97-000749.hdr.sgml : 19970114 ACCESSION NUMBER: 0000912057-97-000749 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19970113 SROS: NASD SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOARDWALK CASINO INC CENTRAL INDEX KEY: 0000915281 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 880304201 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-12780 FILM NUMBER: 97504707 BUSINESS ADDRESS: STREET 1: 3750 LAS VEGAS BLVD SOUTH CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 7027352400 MAIL ADDRESS: STREET 1: 3750 LAS VEGAS BLVD SOUTH CITY: LAS VEGAS STATE: NV ZIP: 89109 10KSB 1 FORM 10-KSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 Commission File Number 1-12780 BOARDWALK CASINO, INC. (Name of small business issuer in its charter) NEVADA 88-0304201 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3750 LAS VEGAS BLVD. SOUTH LAS VEGAS, NEVADA 89109 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (702) 735-2400 Securities registered under Section 12(b) of the Exchange Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, $.001 Par Value Pacific Stock Exchange Common Stock Purchase Warrants Pacific Stock Exchange Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, $.001 PAR VALUE (Title of Class) COMMON STOCK PURCHASE WARRANTS (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 --- --- Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year: $27,911,557. State the aggregate market value of the voting stock held by non-affiliates of the Registrant: As of January 7, 1997: $15,862,000*. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: $.001 Par Value Common Stock-- 7,179,429 shares as of January 7, 1997. Transitional Small Business Disclosure Format: Yes ; No X --- --- * The aggregate market value was determined by multiplying the number of outstanding shares (excluding those shares held of record by officers, directors and greater than five percent shareholders) by $4.8125, the last sales price of the Registrant's common stock as of January 7, 1997, such date being within 60 days prior to the date of filing. PART I The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Form 10-KSB and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contains statements that are forward-looking, such as statements relating to plans for future expansion and other business development activities as well as other capital spending, financing sources and the effects of regulation (including gaming and tax regulation) and competition. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to development and construction activities, dependence on existing management, debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, changes in federal or state tax laws or the administration of such laws and changes in gaming laws or regulations (including the legalization of gaming in certain jurisdictions). ITEM 1. DESCRIPTION OF BUSINESS. GENERAL Boardwalk Casino, Inc. (the "Company") is a Nevada corporation that owns and operates the Holiday Inn-Registered Trademark- Casino Boardwalk in Las Vegas, Nevada and leases the 1.07 acre shopping center next to the hotel-casino. The Holiday Inn-Registered Trademark- Casino Boardwalk is situated on a 7.8-acre site on the Las Vegas Strip between Flamingo Road and Tropicana Avenue. It includes 653 hotel rooms, approximately 33,000 square feet of casino space, a coffee shop, a full-service restaurant, a snack bar, an entertainment lounge, two bars, two outdoor swimming pools and 1,125 garage and surface parking spaces (including those spaces acquired with the shopping center lease). It also contains a small gift shop under lease to Holiday Gifts, Inc., a Nevada corporation owned by Norbert W. Jansen and Avis P. Jansen, the executive officers, directors and principal shareholders of the Company. The Company has recently completed a substantial hotel and casino renovation and expansion program. Boardwalk Casino, Inc. was incorporated under the laws of the State of Nevada on July 27, 1993; Holiday Gifts, Inc. was incorporated under the laws of the State of Nevada on December 23, 1971. The Company's principal executive office is located at 3750 Las Vegas Boulevard South, Las Vegas, Nevada 89109 and its telephone number is (702) 735-2400. LOCATION The Holiday Inn-Registered Trademark- Casino Boardwalk is strategically located to take advantage of the development and construction of adjacent mega- hotel/casino projects. Las Vegas Boulevard, more commonly known as "The Strip," is currently the center of gambling activity in Las Vegas. There are other concentrations of casinos located in downtown Las Vegas and suburban locations. The Las Vegas Strip has the highest concentration of casino space and hotel rooms in Southern Nevada and it is the location of substantially all of the premier Las Vegas hotels. The Company believes that its highly visible and accessible location is an important factor in attracting visitors as gaming customers. 2 BACKGROUND Holiday Gifts, Inc. ("HGI") began gaming operations in 1977 under the trade name "The Slot Joyn't" when it was granted a restricted Nevada gaming license for 15 slot machines. In 1980, HGI was granted a nonrestricted Nevada gaming license and expanded its operations at The Slot Joyn't to 35 slot machines. In 1985, VC, Ltd., Limited Partnership, an affiliated limited partnership of which HGI was the general partner, acquired the adjacent Holiday Inn property and began operating it under the trade name "Viscount Hotel." Thereafter, HGI constructed a physical connection between the hotel and casino and, in 1989, changed the trade name of the combined businesses to the Boardwalk Hotel & Casino. In September 1995, the Company substantially completed a renovation of the casino by expanding the casino floor space by 18,000 square feet and remodeling the front facade of the property. In May 1996, the Company substantially completed the development and construction of a new 16-story 451-room hotel tower on its property in addition to the existing four- and six-story towers. As a result of these expansions and other incremental additions, the Holiday Inn-Registered Trademark- Casino Boardwalk currently consists of a 653-room hotel and a casino of approximately 33,000 square feet with 647 slot machines, 20 table games and a full-service race and sports book. BUSINESS STRATEGY Management believes that the following key principles have been and will continue to be integral to its success as a gaming operator. TARGETED CUSTOMER BASE The Company's business strategy emphasizes attracting and retaining customers from two primary market segments, tourism and local patronage. As the Company's property has developed by the increase of its room base from 202 rooms to 653 rooms and the completion of its boardwalk exterior facade, the Company has focused its emphasis on marketing a larger room base and capturing the added traffic generated by the development of the mega resorts surrounding the Boardwalk Casino. The Boardwalk Casino is disproportionately large in relation to its room count, thus allowing for the increase in pedestrian traffic generated by the room base of surrounding mega resorts and new mega resorts under construction. The Company believes that its visitor patrons are discerning customers who enjoy the Company's hotel and casino as an alternate to the larger surrounding attractions on the Las Vegas Strip. FOCUS ON REPEAT CUSTOMERS Generating customer satisfaction and loyalty is a critical component of the Company's business strategy. The Company attracts customers from both the tourist and local markets by offering significant value in its dining experiences and its promotional programs. The Company markets its rooms through the Holiday Inn reservation system and its internal group tour, meeting and travel department. The Company believes the local market is primarily influenced by the actual value of its food operations coupled with specific promotions. Although perceived value attracts customers to the Holiday Inn-Registered Trademark- Casino Boardwalk initially, actual value generates customer loyalty and satisfaction. Management believes that actual value becomes apparent during the customer's visit through an enjoyable and high quality entertainment experience. AFFORDABLE QUALITY Because the Company targets the frequent repeat customer, management is committed to providing a quality entertainment experience for its customers at an affordable price. Dining is a primary motivation 3 for a majority of all casino visits by both tourists and local residents, and management believes that the value offered by the Company's restaurants, deli, ice cream parlor and snack bar is a major factor in attracting its customers. The Company offers generous portions of high quality food at reasonable prices. In addition, the Company provides a high level of value to its hotel guests by offering moderately priced rooms which are well-appointed relative to comparably priced Las Vegas hotels. Management believes that providing affordable quality to customers contributes significantly to casino patronage. STRATEGIC LOCATION Management believes that the location of the Holiday Inn-Registered Trademark- Casino Boardwalk provides the Company with a significant competitive edge. With 436 feet of frontage on The Strip, the Company is able to offer inviting opportunities for the pedestrian traffic generated by the surrounding mega resorts. The July 1996 opening of the 3,000-room Monte Carlo Hotel and Casino immediately south of the Company and the Country Star restaurant to its north have significantly increased the pedestrian traffic on the boardwalk. The 2,200-room New York-New York Hotel and Casino (expected to open in January 1997) and the 2,000-room addition to the Luxor Hotel and Casino are also expected to improve pedestrian traffic. EMPHASIS ON SLOT PLAY An integral part of the Company's business strategy is an emphasis on slot machine play. The Company's target market consists of frequent gaming patrons who seek not only a friendly atmosphere and convenience, but also higher-than- average payout rates. Accordingly, the Company's slot machine play provides players with payout rates that are higher than the Las Vegas Strip average payout rates. EXPANSION MASTER PLAN Currently, the Holiday Inn-Registered Trademark- Casino Boardwalk consists of a 33,000 square feet casino and a hotel containing a total of 653 rooms within a four-story, a six-story and a 16-story building located on the property site. The Company's master expansion plan for the Holiday Inn-Registered Trademark- Casino Boardwalk consisted of three phases: (i) the renovation and refurbishment of the original hotel rooms, which was completed in May 1994, (ii) the expansion of the casino, which was substantially completed in September 1995, and (iii) the development and construction of a 16-story, 451-room hotel tower, a parking garage and surface parking (accommodating 1,125 cars) and the completion of the 27,000 square foot second floor of the casino. The development and construction of the 16-story, 451-room hotel tower was substantially completed in May 1996. The Company anticipates that the development and construction of the 27,000 square foot second floor of the casino should be completed by April 1997. The Company has expanded the casino floor space from 15,000 square feet to 33,000 square feet and increased the number of slot machines from 212 to 647 and the number of table games from six to 20. In addition, the casino also features a full-service race and sports book. As part of the casino expansion project, the Company relocated and increased the seating capacities of its restaurant and its new coffee shop. Management believes that this expansion was necessary to respond to its expanding customer base and target markets. As part of its expansion master plan, the Company remodeled the front facade of the Holiday Inn-Registered Trademark- Casino Boardwalk to present a "Coney Island Amusement Park" theme conforming to the historical character and general architecture of Coney Island, New York's famous amusement park. The casino has been combined with the new construction, creating a new exterior with 436 feet of horizontal frontage and an estimated height of 53 feet. The "boardwalk" consists of amusement games and specialty food and/or 4 gift shops. New state-of-the-art outdoor signage has completed the design renovation and casino expansion. The boardwalk consists of a total of 6,000 square feet of retail space, including shops, amusement games and food services. Each of the shops along the boardwalk offers access into the casino. The facade features a full-size model roller coaster rising 90 feet above the boardwalk. A rotating ferris wheel, complete with mannequins, is in place on the facade above the boardwalk, as is a parachute drop with mannequins. The facade features the Company's logo, Jocko the Clown, whose face stands approximately 45 feet high and whose likeness is reproduced on certain of the retail merchandise which is sold by the Company's retail shops. In May 1996, the Company substantially completed the development and construction of a new 16-story 451-room hotel tower on its property in addition to the existing four- and six-story towers. The new 27,000 square foot second level of the existing casino is currently under construction and will provide a large buffet area and additional meeting rooms. This new second floor will also provide a walkway to the parking garage. On December 16, 1993, the Company entered into a license agreement with Holiday Inns Franchising, Inc. to operate a "Holiday Inn-Registered Trademark-" hotel at its location. The agreement, as amended, required the Company to perform certain construction and renovation work and to open 200 rooms as a Holiday Inn by May 1, 1994 and a minimum of 300 additional rooms as a Holiday Inn by April 1, 1996. Thereafter, the Company may open a maximum of 1,000 rooms as a Holiday Inn by October 1, 1998. The agreement provides that the Company will pay (i) a monthly royalty of 5% of the gross rooms revenues; (ii) a "marketing contribution" of 1.5% of the gross rooms revenues; (iii) a "reservation contribution" of 1.0% of the gross rooms revenues; and (iv) a monthly Holidex fee of $6.43 for each guest room on the Holidex reservation system. The license granted under the agreement expires ten years from the date of the opening of the hotel under the "Holiday Inn" system (June 16, 1994), subject to earlier termination as set forth therein. $40 MILLION FIRST MORTGAGE NOTE OFFERING On April 12, 1995, the Company completed the private sale of a $40 Million 16.5% First Mortgage Note due 2005 (the "Note"). The Note was issued under the Indenture between Boardwalk Casino, Inc., Issuer and Shawmut Bank, N.A., Trustee for $40,000,000 16.5% First Mortgage Notes Due March 31, 2005, Dated as of April 7, 1995 (the "Indenture"). The Note is a senior secured obligation of the Company, limited in aggregate principal amount to $40,000,000, secured by all of the current property and assets of the Company. The Note bears interest at the rate of 16.5% per annum, payable in cash semi-annually on March 31 and September 30 of each year, commencing on September 30, 1995. Interest will be paid to the holder of the Note at the close of business on the March 15 or the September 15, as the case may be, immediately preceding the respective interest payment date, or if no interest has yet been paid, on the date of original issue. Pursuant to a Disbursement and Escrow Agreement entered into by and among the Trustee, the Company, Bank of America Nevada and Nevada Construction Services, Inc., the Company deposited $25,845,054 of the net proceeds derived from the issuance and sale of the Notes into the Collateral Account. The funds were disbursed on the terms provided in the Disbursement and Escrow Agreement to pay for construction of the 16-story 451-room hotel tower and related improvements. All funds in the Collateral Account were pledged as security for the repayment of the Note. 5 The Company may not redeem or prepay the Note without penalty prior to the date of its Stated Maturity. Commencing on September 30, 2001, the Company may redeem the Note in whole but not in part at a redemption price equal to (i) the remaining principal amount thereof, plus (ii) accrued interest to the date of redemption, plus (iii) a premium equal to the Yield Maintenance Premium. The Indenture contains certain covenants of the Company, including limitations on use of proceeds, limitations on restricted payments, limitations on incurrence of additional indebtedness, limitations on restrictions on distributions from Restricted Subsidiaries, limitations on capital stock of Restricted Subsidiaries, limitations on transactions with Affiliates, limitations on Liens, limitations on activities, limitations on sales of assets, limitation on merger, sale or consolidation and maintenance of consolidated net worth. The foregoing summary of the Note and the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by, reference to all of the provisions of the Note and the Indenture, including the definitions contained therein of certain terms and those terms made part of the Indenture by reference to the Trust Indenture Act of 1939 as in effect on the date of the Indenture. Capitalized terms used herein and not otherwise defined have the meanings ascribed to them in the Indenture. As part of the private sale of the Note, the Company issued to the Note purchaser 1,281,869 common stock purchase warrants exercisable to purchase 1,281,869 shares of Common Stock at $6.00 per share anytime before April 11, 2005. Further, in connection with the private placement and sale of the Note, the Company issued to the Placement Agent and Financial Advisor (and its affiliates) an aggregate of 626,823 common stock purchase warrants exercisable to purchase 626,823 shares of Common Stock at $6.00 per share anytime before April 11, 2000. The proceeds of the Note were applied to (i) finance approximately $29.6 million of construction costs for the 16-story 451-room hotel tower, parking facility, 27,000 square foot second level addition to the existing casino and related improvements; (ii) finance the retirement of approximately $5.9 million of existing indebtedness; (iii) pay approximately $1.5 million of fees and expenses incurred in connection with the offering and sale of the Note; and (iv) provide approximately $3.0 million for working capital and other corporate purposes. PRIVATE FINANCING WITH DIVERSIFIED OPPORTUNITIES GROUP LTD. On September 25, 1996, the Company completed a private transaction (the "Transaction") entered into by and among Diversified Opportunities Group Ltd., an Ohio limited liability company ("Diversified"), the Company, and Norbert W. Jansen, individually and as trustee under an agreement dated July 14, 1993 ("Jansen"). Pursuant to the terms of a Purchase Agreement dated as of September 24, 1996 (the "Purchase Agreement") among Diversified, the Company and Jansen, the first phase of the Transaction was consummated on September 25, 1996. In the first phase of the Transaction, the Company sold to Diversified 571,429 shares of common stock (the "Shares") at a price of $7.00 per share for a total purchase price of $4,000,000 and issued to Diversified a convertible subordinated note (the "Note") in the principal amount of $5,000,000. In the first phase, Jansen also sold to Diversified 182,411 Shares pursuant to the terms of an Option and Proxy Agreement (the "Option Agreement"). In addition, as of September 24, 1996, the Company and Diversified also executed a Registration Agreement (the "Registration Agreement"). The following is a summary of certain terms of the Purchase Agreement, the Note, the Option Agreement and the Registration Agreement (collectively, "the Transaction Documents"). This summary of the Transaction Documents is qualified in its entirety by reference to the Transaction Documents, copies of which have been filed as exhibits to this Report on Form 10-KSB. 6 The principal business of Diversified is developing and acquiring investments in the gaming industry and managing, supervising, selling or otherwise disposing of such investments and engaging in activities incidental or ancillary thereto. There are two members of Diversified, (i) Gary L. Bryenton and Jeffrey P. Jacobs, as trustees under the Opportunities Trust Agreement dated February 1, 1996 (the "Trust") and (ii) Jacobs Entertainment Ltd., an Ohio limited liability company ("Entertainment"). Entertainment is the Manager of Diversified. Jeffrey P. Jacobs ("Jacobs") and Jacobs Entertainment Inc. (a corporation in which Jacobs owns 100% of the outstanding capital stock) are the members of Entertainment and Jacobs is the manager of Entertainment. Both the Trust and Entertainment were formed primarily to hold their interest in Diversified. The first phase of the Transaction closed on September 25, 1996. At such time, Boardwalk sold to Diversified 571,429 Shares. Pursuant to the Option Agreement, Jansen sold to Diversified 182,411 Shares. In addition, Boardwalk issued the Note to Diversified. Diversified has the right, at its option, to convert the Note into Shares at any time following its receipt of all necessary licensing approvals from the Nevada State Gaming Control Board (the "Gaming Board"), the Nevada Gaming Commission (the "Commission") and local licensing authorities. The Note is convertible into a number of Shares determined by dividing the then unpaid principal balance of the Note by $7.50. The Note provides for a variable interest rate of LIBOR plus 2% and interest thereon is payable on a quarterly basis. The principal of the Note is due and payable in September 1998. On November 25, 1996, Diversified was advised by the Gaming Board that the second phase of the Transaction will not result in a change in control of the Company pursuant to the regulations of the Gaming Board and the Commission. On December 2, 1996, phase two of the Transaction was consummated. In phase two, Diversified purchased an additional 317,589 Shares from Jansen pursuant to the Option Agreement, and the Company's Board of Directors (the "Board") was expanded to six directors, with Jacobs being appointed as the sixth director. The final phase of the Transaction provides Diversified the option to acquire an additional 1,000,000 Shares from Jansen pursuant to the Option Agreement. The exercise of this option is subject to Diversified obtaining all necessary licensing approvals from the Gaming Board, the Commission and the Nevada local licensing authorities. At such time as Diversified acquires a total of 1,000,000 Shares from Jansen pursuant to the Option Agreement, the Company's Board will be expanded to seven directors with the additional director being designated by Diversified. The Option Agreement further provides for first refusal and first offer rights for Diversified on Shares to be sold by Jansen, his estate and family. The Option Agreement requires that Jansen vote all of his Shares and any other securities of the Company over which he has control and that he take all necessary or desirable actions within his control so that: (i) the Board is established at six directors; (ii) Jacobs is elected to the Board as one of the six directors; and (iii) once Diversified acquires 1,000,000 or more Shares from Jansen pursuant to the Option Agreement, the Board is expanded to seven directors with the additional director to be designated by Diversified. Diversified is also granted an irrevocable proxy to vote Jansen's Shares if Jansen fails to comply with the terms of the Option Agreement relating to the Board, or any restrictive covenants imposed on the Company pursuant to the Note. The Registration Agreement gives Diversified certain rights with respect to registering for sale under the Securities Act of 1933, as amended (the "Act"), and applicable state laws the Shares that it may acquire pursuant to the Transaction. The Registration Agreement gives Diversified the right, through September 24, 2001, to demand that the Company effect up to three registrations (two of which are to be paid by the Company and one of which will be paid by Diversified) of such Shares subject to the conditions set forth in the Registration Agreement. In addition, Diversified has the right to have such 7 Shares included in certain registrations under the Act that the Company may effect other than pursuant to such demand, subject to the conditions set forth in the Registration Agreement. MARKETING The Holiday Inn-Registered Trademark- Casino Boardwalk has historically relied upon limited casino and other promotions designed to appeal to local residents. With the completion of the expansion of the casino and the hotel, the Company has implemented an aggressive marketing plan to promote the hotel and the casino. The Company believes that the "Coney Island" theme exterior facade will enhance its ability to attract pedestrian traffic currently generated by the existing mega resorts as well as those mega resorts under construction and in the planning phase which surround the Holiday Inn-Registered Trademark- Casino Boardwalk. With its oversized casino in relation to its room inventory, the "Coney Island" facade, and the Company's inexpensive dining value offerings, the Company believes that it is positioned to attract the mega resort customer as an addition to its established local and hotel customer bases. CURRENT OPERATIONS GAMING. Historically, the casino has accounted for approximately 40% of the net revenues of the Holiday Inn-Registered Trademark- Casino Boardwalk. These revenues were primarily derived from the 212 slot machines and four table games. With the newly expanded casino, it is anticipated that the gaming revenue provided by slot machines will continue to be the primary component of the Company's gaming revenues and income from operations. Currently, the Holiday Inn-Registered Trademark- Casino Boardwalk has 647 slot machines and 20 table games on its casino floor and operates a full-service race and sports book. On average, the preponderance of the weekly gaming net revenues are generated on weekends. The gaming revenues are provided by a broad base of customers and are not dependent on high-stakes players. In connection with its gaming activities, the Company follows a policy of stringent controls in compliance with the standards set by the Nevada Gaming Authorities. As a matter of policy, the Company does not extend credit to its gaming customers. NON-GAMING. The Holiday Inn-Registered Trademark- Casino Boardwalk has 653 rooms, two outdoor pools and a retail gift shop leased to HGI. The Company offers its hotel rooms at modest prices (as of September 30, 1996, the average room rate was approximately $60.00). For fiscal year 1995, the Holiday Inn-Registered Trademark- Casino Boardwalk's average occupancy was approximately 59.42%. For the fiscal year ended September 30, 1996, the average occupancy was approximately 76.44%. See "Item 6. Management's Discussion and Analysis or Plan of Operation" for more information regarding the Company's gaming and non-gaming operations and revenues. The Company offers a full service restaurant, a coffee shop, a snack bar, an entertainment lounge and two bars for its casino and restaurant patrons. As with its hotel accommodations, the Company's food and beverage services are moderately priced. COMPETITION There is intense competition among companies in the gaming industry, many of which have significantly greater financial resources than the Company. The Holiday Inn-Registered Trademark- Casino Boardwalk faces competition from all other casinos and hotels in the Las Vegas areas. The Holiday Inn-Registered Trademark- Casino Boardwalk competes directly with a number of other operations targeted to local residents. Indirectly and to a lesser extent, its operations compete generally with gaming operations in other parts of the State of Nevada, such as Reno, Laughlin and Lake Tahoe, with facilities in Atlantic City, New Jersey and other 8 parts of the world and with state-sponsored lotteries, on- and off-track wagering, card parlors, riverboat and Native American gaming ventures and other forms of legalized gambling. Certain states have recently legalized, and several other states are currently considering legalizing, casino gaming in designated areas. Legalized casino gaming in other states and on Native American reservations represents additional competition to the Company and could adversely affect the Company's operations, particularly if such gaming were to occur in areas close to the Company's operations. EMPLOYEES As of September 30, 1996, the Company employed 600 full-time employees, including its three executive officers, 40 managers and supervisors, 160 casino personnel, 220 food and beverage personnel, 157 hotel personnel and 20 administrative personnel. The Company occasionally employs part-time workers as needed. None of the Company's employees is covered by a collective bargaining agreement. The Company believes that its relationship with its employees is excellent. REGULATION AND LICENSING The ownership and operation of casino gaming facilities in Nevada are subject to (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (the "Nevada Act") and (ii) various local regulations. The Company's gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission (the "Nevada Commission"), the Nevada State Gaming Control Board (the "Nevada Board") and the Clark County Liquor and Gaming Licensing Board (the "CCB"). The Nevada Commission, the Nevada Board and the CCB 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) providing 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's gaming operations. The Company is required to be licensed by the Nevada Gaming Authorities. The gaming licenses require the periodic payment of fees and taxes and are not transferable. The Company is also required to be registered by the Nevada Commission as a publicly traded corporation ("Registered Corporation") and as such, it is required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information that the Nevada Commission may require. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of the Company must file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which 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. An applicant for licensing or an applicant for a finding 9 of suitability must pay all 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 licensing, the Nevada Gaming Authorities have the 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 unsuitable to continue having a relationship with the Company, the Company would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company to terminate the employment of any person who refused to file appropriate applications. Determinations of suitability or questions pertaining to licensing are not subject to judicial review in Nevada. The Company is required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar financing transactions of the Company must be reported to, or approved by, the Nevada Commission. If it were determined that the Nevada Act was violated by the Company, the gaming licenses it holds could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, 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. Further, a supervisor could be appointed by the Nevada Commission to operate the Company's gaming property and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of the gaming property) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license of the Company or the appointment of a supervisor could (and revocation of any gaming license would) have a material adverse effect on the Company's gaming operations. Any beneficial holder of Common Stock or any other voting security of the Company ("Company Voting Securities") regardless of the number of shares owned, may be required to file an application, be investigated, and have such person's suitability as a beneficial holder of Company 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 the investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires beneficial ownership of more than 5% of Company Voting Securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of Company Voting Securities apply to the Nevada Commission for a finding of suitability within thirty days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires beneficial ownership of more than 10%, but not more than 15%, of Company Voting Securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds Company Voting Securities for investment purposes only. An institutional investor shall not be deemed to hold Company Voting Securities for investment purposes unless Company Voting Securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the Board of Directors of the Company, any change in the Company's corporate charter, bylaws, management, policies or operations of the Company, or any other action which the Nevada Commission finds to be inconsistent with holding Company Voting Securities for investment purposes only. Activities which 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 10 of the type normally made by securities analysts for informational purposes and not to cause a change in 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, limited partnership, limited liability company 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. Norbert W. Jansen, the Company's largest stockholder, has been found suitable as a controlling stockholder of the Company. Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or by 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 Company Voting Securities beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company, the Company (i) pays that person any dividend or interest upon any Company Voting Securities; (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 the voting securities for cash at fair market value. Additionally, the CCB has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming licensee. The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own such debt security of a Registered Corporation. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it (i) pays to the unsuitable person any dividend, interest or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction. The Company is required to maintain a current stock ledger in Nevada which 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 of any Company Voting Securities. The Nevada Commission has the power to require the Company's stock certificates to bear a legend indicating that the 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 its 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. Any approval, if granted, does not constitute a finding, recommendation or approval of the Nevada Gaming Authorities as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered thereby. Any representation to the contrary is unlawful. 11 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 such person 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 Nevada Commission in 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 relating to 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 licenses, 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 environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Company can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Company's Board of Directors in response to a tender offer made directly to its stockholders for the purpose of acquiring control of the Company. License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the Company's operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either: (i) a percentage of the gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of table games operated. A casino entertainment tax is also paid by casino operators where entertainment is furnished in connection with the selling of food or refreshments. Nevada Corporate Licensees that hold a license as an operator of a slot route, or a manufacturer's or distributor's license also pay certain fees and taxes to the State of Nevada. 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 the Licensee's participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. A Licensee is also subject to disciplinary action by the Nevada Commission if it knowingly violates any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fails to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engages in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employs a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. The sale of alcoholic beverages by the Company is subject to licensing, control and regulation by applicable local regulatory agencies. All licenses are revocable and are not transferable. The agencies 12 involved have full power to limit, condition, suspend or revoke any such license, and any such disciplinary action could (and revocation would) have a material adverse effect upon the operations of the Company. ITEM 2. DESCRIPTION OF PROPERTY. See "Item 1. Description of Business" for a complete description of the Company's property. Effective October 1, 1996, in connection with the private transaction with Diversified Opportunities Group Ltd., the Company entered into a lease agreement (the "Lease Agreement") as the tenant with The Jansen Trust (as hereinafter defined) as the landlord. The Lease Agreement covers certain land to the north of the hotel and casino (the "Property") which enables the Company to control the use of the Property and provides the Company with an option to purchase the Property for possible expansion of the hotel and casino. The Property consists of approximately 1.07 acres of land and has 150 feet of frontage on the Strip. It currently contains a two-story office building which is leased to several retail and office tenants, including the executive and administrative offices of the Company. The Lease Agreement commenced October 1, 1996 and has a term of 24 months, with an option to extend the lease term for an additional five years and a second, successive, option to extend it an additional 23 years. The base rent of $70,000 per month ($840,000 per year) is subject to adjustment after five years. In addition, the Lease Agreement grants the Company an option to purchase the Property under certain terms and conditions. The Company believes that the terms of the Lease Agreement are fair and reasonable and on as beneficial terms as could be obtained from an unaffiliated third party consistent with other rentals assessed in the market area for similar facilities. The Company does not invest in, and has not adopted any policy with respect to investments in, real estate or interests in real estate, real estate mortgages or securities of or interests in persons primarily engaged in real estate activities. It is not the Company's policy to acquire assets primarily for possible capital gain or primarily for income. ITEM 3. LEGAL PROCEEDINGS. There are no material pending legal proceedings, other than routine litigation incidental to the Company's business, to which the Company is a party or of which any of its property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. 13 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) The Common Stock is traded in the over-the-counter market and is quoted on the Nasdaq SmallCap Market under the symbol "BWLK" and on the Pacific Stock Exchange under the symbol "BWK". For the past two fiscal years, the high and low bid prices of the Common Stock as reported to the Company by the National Association of Securities Dealers, Inc. were as follows: FYE 1996 QUARTER ENDED: HIGH LOW ---------------------- ---- --- December 31, 1995 6 5/8 5 1/4 March 31, 1996 8 1/2 5 3/4 June 30, 1996 8 9/16 7 1/2 September 30, 1996 6 5/8 5 3/4 FYE 1995 QUARTER ENDED: HIGH LOW ---------------------- ---- --- December 31, 1994 6 5 1/4 March 31, 1995 5 5/8 5 1/4 June 30, 1995 8 5/8 7 1/2 September 30, 1995 8 5/8 7 3/8 The over-the-counter quotations set forth herein reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The Warrants are traded in the over-the-counter market and are quoted on the Nasdaq SmallCap Market under the symbol "BWLKW" and on the Pacific Stock Exchange under the symbol "BWKW." (b) On January 7, 1997, the last sale price of the Common Stock as reported by Nasdaq was $4.8125 per share. As of January 7, 1997, there were at least 1,900 record and beneficial holders of the Common Stock. (c) The Company has not paid any dividends on its Common Stock and does not presently anticipate paying dividends in the foreseeable future. The Company currently intends to retain all of its earnings from operations for use in expanding and developing its business. Any future decision as to the payment of dividends will be at the discretion of the Company's Board of Directors and will depend upon the Company's earnings, financial position, capital requirements and such other factors as the Board of Directors deems relevant. Further, the Indenture between the Company as Issuer and Shawmut Bank, N.A. as Trustee for $40,000,000 16.5% First Mortgage Notes Due March 31, 2005, Dated as of April 7, 1995 and the Note issued to Diversified Opportunities Group Ltd. contain significant limitations on the Company's ability to pay dividends on its capital stock. (d) In June 1996, the Company completed a private offering of 15 Units, each Unit consisting of 10,000 shares of Common Stock valued at $6.25 per share and 5,000 warrants valued at $0.25 per warrant, for total gross proceeds of $956,250. Each warrant entitles the holder to purchase one unregistered share of Common Stock at a price of $7.50 at any time until June 17, 2000. The issuance of the foregoing securities was made without registration under the Securities Act in reliance upon the 14 exemption provided by Section 4(2) of the Securities Act and in compliance with Rule 506 of Regulation D under the Securities Act. No underwriter was involved in the distribution of these securities, and no commissions were paid in connection therewith. The purchasers of the Units were Tina Hunt Coots (2 Units), James D. Hunt, Jr. (2 Units), James D. Hunt (4 Units), Glenna K. Hunt (2 Units), Carl Arfa and Judith Arfa (1 Unit) and Grove, Inc. (4 Units). On September 25, 1996, the Company sold to Diversified Opportunities Group Ltd. ("Diversified"), an Ohio limited liability company, 571,429 shares of Common Stock at a price of $7.00 per share for a total purchase price of $4,000,000 and issued to Diversified a convertible subordinated note (the "Note") in the principal amount of $5,000,000. Subject to regulatory approvals, the Note is convertible into a number of shares determined by dividing the then unpaid principal balance of the Note by $7.50. The principal of the Note is due and payable in September 1998. The issuance of the foregoing securities was made without registration under the Securities Act in reliance upon the exemption provided by Section 4(2) of the Securities Act. No underwriter was involved in the distribution of these securities, and no commissions were paid in connection therewith. 15 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. GENERAL Boardwalk Casino, Inc. ("BCI" or the "Company") was formed in July 1993 for the purpose of operating a casino and a hotel in Las Vegas, Nevada. See "Notes to Financial Statements". YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, 1996 1995 ------------- ------------- REVENUES: Casino........................................ $16,897,527 $ 2,128,345 Rooms......................................... 7,224,324 2,824,534 Food and beverage ............................ 4,031,278 1,513,466 Other......................................... 837,895 138,607 ----------- ----------- Gross revenues ............................. 28,991,024 6,604,952 Promotional allowances ....................... (1,079,467) (280,502) ----------- ----------- 27,911,557 6,324,450 COSTS AND EXPENSES: Casino........................................ 10,787,868 2,415,562 Rooms......................................... 3,460,334 1,675,696 Food and beverage............................. 4,168,259 1,745,572 Other......................................... 173,138 64,032 Selling, general and administrative........... 5,174,502 2,209,374 Depreciation and amortization................. 2,525,044 840,168 ----------- ----------- 26,289,145 8,950,404 ----------- ----------- Income (loss) from operations.................. 1,622,412 (2,625,954) ----------- ----------- OTHER (INCOME) EXPENSE: Interest income............................... (395,416) (653,740) Interest expense.............................. 7,874,115 3,463,556 Interest capitalized.......................... (1,442,493) (1,243,558) Loss on disposal of fixed assets.............. - 1,100,585 ----------- ----------- 6,036,206 2,666,843 ----------- ----------- Income (loss) before income taxes & extraordinary item ........................... $(4,413,794) $(5,292,797) ----------- ----------- 16 RESULTS OF OPERATIONS The Company is engaged in a three-phase project to expand and renovate the former existing hotel and casino facilities (the "Expansion"). Phase one of the Expansion was completed in May 1994 which was the renovation of the original 202 existing hotel rooms. Phase two of the Expansion was completed in September 1995 with the completion of a new casino facility that increased floor space from 15,000 square feet to 33,000 square feet. The third phase of the Expansion consisted of development and construction of a new 16-story (451 room) hotel tower, the completion of the 27,000 square foot buffet and meeting rooms on the second floor of the casino, the completion of 4,500 square feet of meeting room space on the first floor of the tower, entertainment lounge and the construction of two parking garages as more fully described below. The hotel tower was opened in stages under a temporary certificate of occupancy permit with an additional 128 rooms on February 23, 1996 added to the existing 202 rooms. Additional rooms were added every few weeks through May 3, 1996 totaling 642 rooms. The remaining 16th floor, comprised of 11 suites, was available for occupancy by late July 1996. On December 22, 1995, the first of two parking garages, consisting of 550 spaces, was available for complete use. The second garage, consisting of 440 spaces, was available for complete use on May 3, 1996. On November 28, 1995, the 105 seat Lighthouse Lounge opened starring "The Unknown Comic" and additional entertainment throughout the year. Phase three of the Expansion was substantially completed, excluding the buffet and meeting rooms on the first and second floors, which are currently under construction. Of the total estimated cost to complete the buffet and meeting rooms, the Company has expended approximately $4,171,000 as of September 30, 1996, leaving an unexpended balance of approximately $3,600,000. The balance of the construction will be financed using existing cash, operating cash flow and cash available from other sources as more fully described in "Liquidity and Capital Resources." YEAR ENDED SEPTEMBER 30, 1996 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1995 The results of operations for the year ended September 30, 1996 reflect the revenues and costs associated with the new casino facility open for the entire year and the additional 451 rooms for approximately one half of the year. The Company incurred a net loss in the year ended September 30, 1996 of $4,413,794 compared to a net loss of $5,336,826 in the prior year, a decrease in the net loss of $923,032 (17.3%). The decrease in loss was attributable to a $4,248,366 (161.8%) increase in income from operations, to an operating profit of $1,622,412 in 1996 from an operating loss of $2,625,954 in 1995 which was offset by an increase in net other expenses and income of $3,369,363. Net revenues at BCI increased $21,587,107 (341.3%), to $27,911,557 in 1996 from $6,324,450 in 1995. The increase in revenues for fiscal 1996 was attributable to the following: (i) an increase of $14,769,182 in casino revenues due to the opening of the new casino which included the opening of a new race and sports book, (ii) $4,399,790 in additional room revenue due to the completion during the year of the new hotel tower, (iii) an increase in food and beverage revenues of $2,517,812 due to increased facilities and a greater number of patrons, (iv) an increase in other revenues by $699,288 and (v) offset by the increase in promotional allowances of $798,965. Operating expenses, including depreciation and amortization, increased $17,338,741 (193.7%) to $26,289,145 in 1996 from $8,950,404 in the prior year. The increase in operating expenses was due primarily to the addition of a new casino facility and start-up and increased operating costs of the new hotel tower. 17 CASINO OPERATIONS For fiscal 1996, casino revenues increased $14,769,182 or 693.9% to $16,897,527. The increase is attributable to (i) a $7,164,793 increase in revenue from the race and sports books to $7,150,487 in fiscal 1996 from a loss of $14,306 for the same period in 1995, (ii) a $5,662,847 increase in slot machine revenues to $7,401,869 in fiscal 1996 from $1,739,022 for the same period in 1995 and (iii) a $1,941,542 increase in revenue from table games to $2,345,171 in fiscal 1996 from $403,629 for the same period in 1995. Casino expenses increased $8,372,306 (346.6%) to $10,787,868 for fiscal year 1996 from $2,415,562 for the same period of 1995. The increase in casino expenses was due to: (i) a new race and sports department which was open for the entire year with $4,675,063 in additional expense, (ii) the increased number of table games resulted in increased wages, benefits and taxes of $1,085,504, (iii) the additional slot machines and table games increased gaming taxes and participation expenses by $1,157,659 (iv) the cost of providing complimentary services increased $663,935, (v) the number of casino and cage personnel was increased to service the additional slot machine patrons at an additional cost of $469,181 and (vi) a new promotions department was added at a cost of $228,423. ROOM OPERATIONS Room revenues increased $4,399,790, or 155.8%, to $7,224,324 for fiscal 1996 from $2,824,534 for the comparable 1995 period. The increase in room revenues reflects an increase in room nights sold by 77,431, or 176.2%, to 121,386 for fiscal 1996 from 43,955 for the comparable 1995 period. This increase was partially offset by a decrease in the average daily room rate by $4.74 to $59.52 for fiscal 1996 from $64.26 for the same period of 1995. Fiscal year 1996 had an additional 85,438 room nights available for rental compared to fiscal year 1995. These additional rooms available during 1996 over 1995 was due to the hotel tower opening in stages with the first 128 additional rooms on February 23, 1996 which added to the existing 202 rooms. Additional rooms were added every few weeks through May 3, 1996 bringing the total to 642 rooms. The 16th floor, which is comprised of 11 suites, was available for occupancy by late July 1996. During the year the Company had retained a professional sales department which had opened several corporate accounts, including a national airline for its flight crews. Despite the 85,438 additional room nights available, the hotel occupancy percentage increased 27.3% to 76.4% for the fiscal year 1996 compared to 60% for fiscal 1995. Rooms expense increased $1,784,638, or 106.5%, for fiscal 1996 to $3,460,334 from $1,675,696 for the same period in 1995. This increase is primarily attributable to (i) an increase in personnel to service the new hotel tower at a cost of $1,141,238, (ii) additional franchise fees and travel agent commissions on the additional revenues totaled $433,574, (iii) additional linen, laundry and room supplies totaled $221,688 and (iv) and additional credit card fees, uniforms, 800 phone lines and maintenance and repair costs. FOOD AND BEVERAGE OPERATIONS Food and beverage revenues increased by $2,517,812 (166.4%), to $4,031,278 for fiscal 1996 from $1,513,466 for the comparable 1995 period. The increase is primarily a result of the new casino facility which had a full year of operations during fiscal 1996, as well as the opening of the new hotel tower which had approximately six months of operations during fiscal 1996. Food and beverage expenses increased $2,422,687 (138.8%), to $4,168,259 for fiscal 1996 from $1,745,572 for 1995 reflecting increases in food and beverage costs associated with the increased sales. 18 Food and beverage expenses as a percentage of gross food and beverage revenues decreased to 103.4% for fiscal 1996 from 115.3% for fiscal year 1995. This decrease is a result of increased casino promotional activity with an increase in food and beverage served on a complimentary basis, which food and beverage costs are included in casino expense. OTHER OPERATING REVENUES AND EXPENSES Other revenues increased by $699,288 (504.5%) to $837,895 for fiscal 1996 compared to $138,607 for 1995. The increase was attributable to (i) an increase of $238,285 in rental income due to the new retail facilities, (ii) an increase of $226,894 in telephone and movie revenues and (iii) the balance of the increased revenues from arcade and vending facilities. The other costs increased $109,106 (170.4%) to $173,138 in fiscal 1996 compared to $64,032 in fiscal 1995. The increase is due primarily to the additional costs of long-distance service and increased cost of movies purchased. DEPRECIATION AND AMORTIZATION Depreciation and amortization totaled $2,525,044 in 1996, reflecting a $1,684,876 (200.5%) increase over the 1995 amount of $840,168. The increase was due to the following: (i) a new casino facility was opened in September 1995 at a cost of $10,897,881, (ii) a new hotel tower was placed in service May 1996 at a cost of $19,893,988, (iii) two new parking facilities were completed during the fiscal year at a cost of $6,268,874, (iv) a central plant was completed September 1995 at a cost of $1,825,842 and (iv) additional gaming devices and casino equipment at a cost of $3,321,176 were placed in service starting in September 1995 through fiscal year 1996. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased $2,965,128 (134.2%) to $5,174,502 in 1996 from $2,209,374 in 1995. The increase in administrative expenses were due to (i) increase in administrative staffing costs of $1,551,137, (ii) utilities increased $535,604, (iii) facility maintenance and operating costs increased $335,991, (iv) advertising expenses increased $195,007 and (v) business insurance increased $152,506 due to the increased facilities. OTHER (INCOME) EXPENSE AND EXTRAORDINARY ITEM In 1996, the Company received $395,416 in interest income as compared to $653,740 in 1995. The $258,324 (39.5%) decrease is attributable to the lower invested balance of marketable securities in the 1996 period. Interest expense increased to $7,874,115 in 1996 from $3,463,556 in 1995 (an increase of $4,410,559 or 127.3%). The increase was the result of additional borrowing and a full year of interest expense on the BCI Notes in 1996 compared to approximately six months of interest cost on the BCI Notes in 1995. Approximately $1,442,493 of interest was capitalized in 1996 in connection with the Expansion compared to $1,243,558 of interest that was capitalized in 1995. During 1995 as part of the Expansion, the Company disposed of certain property and equipment resulting in a loss on disposal of fixed assets of approximately $1,101,000. The Company extinguished certain indebtedness during 1995, resulting in a net extraordinary loss on early extinguishment of $44,029, comprised of (i) a loss on the extinguishment of the Company's 19 12% promissory notes due August 1995, of $64,153; (ii) a loss on indebtedness repaid with the proceeds of the BCI Notes of $60,827; and (iii) a gain on the early settlement of a capital lease obligation in the amount of $80,951. LIQUIDITY AND CAPITAL RESOURCES In June of 1996, the Company completed a private placement equity offering in which it sold 15 units (each unit consisting of 10,000 shares of common stock and 5,000 warrants). The private placement generated net proceeds of $956,250. In September 1996, the Company executed a $5,000,000 subordinated, convertible promissory note. Interest is payable quarterly at the applicable Eurodollar rate plus 2% with principal due September 23, 1998 if not converted by the noteholder. Prior to payment in full by the Company and subject to regulatory approval, the noteholder may convert the unpaid principal balance of the note into common shares of the Company. The number of shares into which the note may be converted shall be determined by dividing the unpaid principal balance by $7.50. In September 1996, the Company completed a private placement offering of 571,429 shares of its common stock at a selling price of $7.00 per share. The Company received net proceeds of $3,735,195 for the stock, after deducting offering expenses. The net loss for fiscal 1996 of $4,414,000 and the reduction of construction related accounts payable resulted in a negative cash flow of approximately $2,728,000 from operating activities. Although the net loss for the year ended September 30, 1995 was $5,337,000, the Company had generated a positive cash flow of approximately $500,000, which was due to the accruing of interest payable on September 30, 1995 of $2,599,668 on the $40,000,000 private placement, which was subsequently paid during fiscal year 1996. Investing activities for fiscal 1996 used approximately $3,425,000, which was comprised of approximately $21,210,000 expended for the construction and furnishing of a 16-story 451 room hotel tower and the second parking garage and restricted cash of approximately $18,000,000 was used to meet the expansion obligations. Financing activities provided approximately $14,641,000 from additional borrowings as well as the issuance of common stock and the exercise of warrants during the year. Such proceeds were offset by $7,366,000 of principal payments on long-term debt notes payable and capital leases during fiscal 1996. The Company had unrestricted cash assets of $4,772,549 (7.6% of total assets) at September 30, 1996 compared to $3,650,236 (6.3% of total assets) at September 30, 1995. The ratio of current assets to current liabilities was .82 to 1 at September 30, 1996 and .52 to 1 September 30, 1995. With the completion of the new hotel tower and expanded casino, restaurant, buffet and meeting rooms opened and the presence of its neighbors (Monte Carlo - June 21, 1996 and New York, New York, - January 3, 1997), management expects to generate cash flows from operations to improve on its working capital position in fiscal 1997. The Company has also arranged for up to $4,000,000 of available working capital borrowings which 20 has been made available by a director and a group of other private investors who have provided other short-term financing to the Company in the past. Such uncollateralized borrowings are available to the Company on an as-needed basis through December 31, 1997 on terms substantially similar to those which had been available to the Company during 1996. Management believes that the combination of expected cash flows from operations in 1997, and the proceeds from the private placement transactions, are sufficient to meet the Company's obligations as they become due during fiscal 1997. The outstanding warrants to purchase common stock at September 30, 1996 also represent a potential significant source of capital to the Company, although management cannot control or accurately predict the timing of proceeds from the exercise of warrants. 21 ITEM 7. FINANCIAL STATEMENTS. INDEX TO FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 1996 AND 1995 -------------- Report Of Independent Accountants Financial Statements: Balance Sheets As Of September 30, 1996 And 1995 Statements Of Income (Loss) For The Years Ended September 30, 1996 And 1995 Statements Of Cash Flows For The Years Ended September 30, 1996 And 1995 Statements Of Shareholders' Equity For The Years Ended September 30, 1996 And 1995 Notes To Financial Statements 22 REPORT OF INDEPENDENT ACCOUNTANTS -------------- Board of Directors Boardwalk Casino, Inc. Las Vegas, Nevada We have audited the accompanying balance sheets of Boardwalk Casino, Inc. as of September 30, 1996 and 1995, and the related statements of income (loss), shareholders' equity and cash flows for the years ended September 30, 1996 and 1995. 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 Boardwalk Casino, Inc. as of September 30, 1996 and 1995, and the results of its operations and its cash flows for the years ended September 30, 1996 and 1995 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Las Vegas, Nevada November 27, 1996, except for Notes 6 and 7 as to which the date is January 6, 1997 23 BOARDWALK CASINO, INC. BALANCE SHEETS SEPTEMBER 30, 1996 AND 1995 ------------ 1996 1995 ------------ ----------- A S S E T S: Current assets: Cash and cash equivalents $ 4,772,549 $ 3,650,236 Restricted cash equivalents, in escrow accounts - 1,464,008 Receivables, net of allowance for doubtful accounts of $17,105 (1996) and $5,400 (1995) 439,857 31,087 Inventory 73,719 65,551 Prepaid expenses 573,964 433,962 ------------ ----------- Total current assets 5,860,089 5,644,844 ------------ ----------- Property and equipment, net of accumulated depreciation of $5,705,685 (1996) and $3,340,364 (1995) 55,486,285 34,132,377 ------------ ----------- Other assets: Restricted cash equivalents, in escrow accounts - 16,459,115 Deferred costs, net of accumulated amortization of $239,436 (1996) and $79,714 (1995) 1,645,090 1,379,993 Other 179,485 77,682 ------------ ----------- Total other assets 1,824,575 17,916,790 ------------ ----------- Total assets $ 63,170,949 $57,694,011 ------------ ----------- ------------ ----------- LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 1,281,657 $ 1,150,830 Construction accounts payable 171,283 2,904,205 Accrued expenses 2,547,615 765,434 Accrued interest expense - 2,600,297 Notes payable - 2,589,628 Current portion of obligations under capital leases 3,115,522 861,616 ------------ ----------- Total current liabilities 7,116,077 10,872,010 ------------ ----------- Long-term debt 40,909,523 35,731,451 Obligations under capital leases, less current portion 3,400,234 1,474,041 ------------ ----------- Total liabilities 51,425,834 48,077,502 ------------ ----------- Commitments and contingencies Shareholders' equity: Preferred stock, $.001 par value; 15,000,000 shares authorized; none issued - - Common stock, $.001 par value; 15,000,000 shares authorized; 7,179,429 (1996) and 6,077,800 (1995) shares issued and outstanding 7,179 6,078 Additional paid-in capital 22,435,083 15,893,784 Accumulated deficit (10,697,147) (6,283,353) ------------ ----------- Total shareholders' equity 11,745,115 9,616,509 ------------ ----------- Total liabilities and shareholders' equity $ 63,170,949 $57,694,011 ------------ ----------- ------------ -----------
The accompanying notes are an integral part of these financial statements. 24 BOARDWALK CASINO, INC. STATEMENTS OF INCOME (LOSS) FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995 ------------ 1996 1995 ----------- ----------- Revenues: Casino $16,897,527 $ 2,128,345 Rooms 7,224,324 2,824,534 Food and beverage 4,031,278 1,513,466 Other 837,895 138,607 ----------- ----------- Gross revenue 28,991,024 6,604,952 Less promotional allowances (1,079,467) (280,502) ----------- ----------- 27,911,557 6,324,450 ----------- ----------- Costs and expenses: Casino 10,787,868 2,415,562 Rooms 3,460,334 1,675,696 Food and beverage 4,168,259 1,745,572 Other 173,138 64,032 Selling, general and administrative 5,174,502 2,209,374 Depreciation and amortization 2,525,044 840,168 ----------- ----------- 26,289,145 8,950,404 ----------- ----------- Income (loss) from operations 1,622,412 (2,625,954) ----------- ----------- Other (income) expense: Interest income (395,416) (653,740) Interest expense 7,874,115 3,463,556 Interest capitalized (1,442,493) (1,243,558) Loss on disposal of property and equipment - 1,100,585 ----------- ----------- 6,036,206 2,666,843 ----------- ----------- Income (loss) before extraordinary item (4,413,794) (5,292,797) Extraordinary item - loss on early retirement of debt (no current tax benefit available) - (44,029) ----------- ----------- Net income (loss) ($4,413,794) ($5,336,826) ----------- ----------- ----------- ----------- Income (loss) per share of common stock: Income (loss) before extraordinary item $ (.70) $ (.90) Extraordinary item - loss on early retirement of debt - (.01) ----------- ----------- Net income (loss) per share of common stock $ (.70) $ (.91) ----------- ----------- ----------- ----------- Weighted average common shares outstanding 6,292,287 5,902,033 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. 25 BOARDWALK CASINO, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995 ---------------- 1996 1995 ------------ ------------ Cash flows from operating activities: Net income (loss) ($4,413,794) ($5,336,826) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,525,044 840,168 Provision for doubtful accounts 11,705 - Loss on disposition of property and equipment - 1,100,585 Amortization of original issue discount 462,472 77,223 Extraordinary loss on early retirement of debt - 44,029 Changes in operating assets and liabilities: (Increase) decrease in receivables (420,475) 18,737 (Increase) in inventory (8,168) (29,149) (Increase) in prepaid expenses (197,331) (8,685) Increase in accounts payable, net of amounts for capital expenditures 130,827 913,353 Increase in accrued expenses 1,782,181 288,199 (Decrease) increase in accrued interest payable (2,600,297) 2,589,864 ------------ ------------ Net cash (used in) provided by operating activities (2,727,836) 497,498 ------------ ------------ Cash flows from investing activities: Capital expenditures, net of amounts in accounts payable (21,209,818) (20,546,214) Net (additions) deductions to restricted cash equivalents in escrow accounts 17,923,123 (17,923,123) (Increase) in deferred costs (93,812) - (Increase) decrease in other assets (44,474) 18,551 ------------ ------------ Net cash used by investing activities (3,424,981) (38,450,786) ------------ ------------ Cash flows from financing activities: Proceeds from notes payable borrowings 3,429,611 2,515,600 Principal payments of notes payable (6,303,639) (1,196,593) Proceeds from long-term debt borrowings, net of issuance costs 4,668,993 35,272,021 Principal payments of long-term debt - (4,644,818) Principal payments of capital lease obligations (1,062,235) (568,699) Proceeds from issuance of common stock and warrants, net of issuance costs 6,542,400 5,365,046 ------------ ------------ Net cash provided by financing activities 7,275,130 36,742,557 ------------ ------------ Net increase (decrease) in cash and cash equivalents 1,122,313 (1,210,731) Cash and equivalents, beginning of period 3,650,236 4,860,967 ------------ ------------ Cash and equivalents, end of period $ 4,772,549 $ 3,650,236 ------------ ------------ ------------ ------------ Supplemental cash flow information: Cash paid for interest $10,474,412 $ 796,471 ----------- ------------- ----------- ------------- Schedule of non-cash investing and financing activities: Property and equipment acquisitions included in accounts payable $ 171,283 $ 2,904,205 ----------- ------------- ----------- ------------- Capitalized lease obligations incurred $ 5,242,336 $ 2,262,050 ----------- ------------- ----------- ------------- Prepaid insurance financed by note payable $ - $ 94,474 ----------- ------------- ----------- -------------
The accompanying notes are an integral part of these financial statements. 26 BOARDWALK CASINO, INC. STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995 ---------------- Common Stock -------------------- Additional Shares Paid-In Accumulated Outstanding Amount Capital Deficit Total ----------- ------ ----------- ------------ ----------- Balances, September 30, 1994 5,915,000 $5,915 $10,528,901 ($946,527) $ 9,588,289 Issuance of warrants to purchase common stock in conjunction with bridge loans - - 374,400 - 374,400 Issuance of warrants to purchase common stock in conjunction with BCI Notes, net of issuance costs - - 4,177,366 - 4,177,366 Exercises of warrants, net of issuance costs 162,800 163 813,117 - 813,280 Net loss - - - (5,336,826) (5,336,826) --------- ------ ----------- ------------ ----------- Balances, September 30, 1995 6,077,800 6,078 15,893,784 (6,283,353) 9,616,509 --------- ------ ----------- ------------ ----------- Issuance of warrants to purchase common stock - - 51,617 - 51,617 Issuance of common stock, net of issuance costs 721,429 721 4,639,107 - 4,639,828 Exercises of warrants, net of issuance costs 380,200 380 1,850,575 - 1,850,955 Net loss - - - (4,413,794) (4,413,794) --------- ------ ----------- ------------ ----------- Balances, September 30, 1996 7,179,429 $7,179 $22,435,083 ($10,697,147) $11,745,115 --------- ------ ----------- ------------ ----------- --------- ------ ----------- ------------ -----------
The accompanying notes are an integral part of these financial statements. 27 BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS ------------ 1. Summary Of Significant Accounting Policies: NATURE OF OPERATIONS Boardwalk Casino, Inc. ("BCI" or the "Company") is a Nevada corporation and was formed in July 1993 for the purpose of operating a casino and a hotel (collectively, the "Boardwalk Hotel and Casino") in Las Vegas, Nevada. CASINO REVENUE In accordance with industry practice, BCI recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. PROMOTIONAL ALLOWANCES The retail value of hotel accommodations and food and beverage provided to customers without charge is included in gross revenues and then deducted as promotional allowances to arrive at net revenues. The estimated costs of providing such promotional allowances have been classified as gaming expenses through interdepartmental allocations, as follows: Year Ended September 30, ------------------------ 1996 1995 ---- ---- Rooms $ 79,615 $ -- Food and beverage 923,362 359,042 ---------- -------- $1,002,977 $359,042 ---------- -------- ---------- -------- CASH EQUIVALENTS AND CONCENTRATION OF CREDIT RISK The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company's restricted cash was invested in shares of the Pacific Horizon Treasury Fund which is collateralized by securities issued by the United States Government. In addition, approximately $2,534,000 of the Company's unrestricted cash is also invested in shares of the Pacific Horizon Treasury Fund. At September 30, 1996, the Company has approximately $3,556,000 on deposit with a single financial institution in excess of federally insured limits. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Continued 28 BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------------ 1. Summary Of Significant Accounting Policies, Continued: PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using the straight-line method. Estimated useful lives for property and equipment are 10 to 40 years for buildings and improvements and 5 to 7 years for furniture and equipment. Accelerated depreciation methods are generally used for income tax purposes. Repairs and maintenance are charged to expense when incurred. A gain or loss is recognized upon disposal of property and equipment, and the asset and related accumulated depreciation and amortization amounts are removed from the accounts. PREOPENING COSTS Preopening costs associated with the expansion of the hotel-casino are expensed as incurred. DEFERRED COSTS Costs associated with the issuance of debt are deferred and amortized over the life of the related indebtedness using the effective interest method. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. EARNINGS PER SHARE Earnings per share is based on the weighted average number of shares of common stock outstanding during each period. Warrants and options to purchase common stock which were issued in 1996, 1995 and 1994 were excluded from the calculation of earnings (loss) per share, as their inclusion would have been anti-dilutive (by reducing the loss per share). STOCK-BASED COMPENSATION In October 1995, Statement of Financial Accounting Standards No. 123 ("SFAS 123") was issued. SFAS 123 established fair value-based financial accounting and reporting standards for all transactions in which a company acquires goods or services by issuing its equity instruments or by incurring a liability to its supplier in amounts based on the price of its common stock or other equity instruments. Continued 29 BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------------ 1. Summary Of Significant Accounting Policies, Continued: STOCK-BASED COMPENSATION, Continued SFAS 123 provides that companies may continue to account for employee stock compensation plans using the accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Companies that elect not to adopt the fair-value based accounting approach under SFAS 123 for employee stock compensation plans must nevertheless comply with certain disclosure requirements and disclose pro forma net income and earnings per share as if such approach under SFAS 123 had been adopted. The disclosure requirements of SFAS 123 are effective for financial statements for fiscal years beginning after December 15, 1995 and the pro forma disclosure requirements are effective for stock awards granted in the first fiscal year beginning after December 15, 1994. The Company plans to utilize the disclosure option allowed by SFAS 123 and continue to account for stock-based compensation under APB 25. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates, particularly with respect to those matters discussed in Notes 2 and 3. RECLASSIFICATIONS Certain amounts in the 1995 financial statements have been reclassified to conform with the 1996 presentation. 2. Casino Expansion And Related Construction Obligations: The Company is currently engaged in a three-phase project to expand and renovate its existing hotel and casino facilities (the "Expansion"). Phase one of the Expansion was the renovation and refurbishment of 202 previously existing hotel rooms, which was completed in May 1994 at an approximate cost of $2,100,000. Phase two of the Expansion was the renovation of the casino by expanding the casino floor space from 15,000 square feet to 33,000 square feet, and increasing the number of slot machines and table games. In addition, the renovated casino also features a full-service race and sports book. Phase two of the Expansion was substantially completed in September 1995 at an approximate cost of $13,924,000. Continued 30 BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------------ 2. Casino Expansion And Related Construction Obligations, Continued: Phase three of the Expansion is the development and construction of a new 16-story 451-room hotel tower, the completion of 27,000 square feet of space on the second floor of the casino which is to provide a buffet area, meeting rooms and entertainment facilities and the construction of two parking garages. A general contractor has been engaged for the construction activities relating to phase three of the Expansion. Completion of the hotel tower portion of phase three of the Expansion was substantially completed in May 1996 at an approximate cost of $19,334,000. Of the total estimated construction cost of the second floor of the casino, the Company has expended approximately $4,171,000 as of September 30, 1996, leaving an unexpended balance of approximately $3,600,000. The balance of the construction will be financed using existing cash, operating cash flow and cash available from other sources, as more fully described in Note 3. 3. Operating Results, Financial Condition And Management's Plans: The results of operations for 1996 and 1995 reflect the impact of construction-related activity which restricted customer access to the Company's facilities, and thus negatively impacted operating revenues and operating results during those years. In addition, in April 1995, the Company completed a $40 million debt financing of the BCI Notes (as more fully described in Note 6), which resulted in an annual debt service requirement, excluding principal, of approximately $6,600,000. The Company had no significant source of cash flow during 1996 and 1995 prior to the opening of the new hotel tower, to service the increased interest obligation related to the BCI Notes. The Company raised funds to meet its interest and other cash obligations in 1996 and 1995 through private placement equity offerings and through short-term notes payable and bridge loans. As a result of these developments, Boardwalk Casino, Inc. incurred significant interest expense and net losses of approximately $4,414,000 and $5,337,000 in 1996 and 1995, respectively, and has a working capital deficiency of approximately $1,256,000 at September 30, 1996. Management plans to generate cash from operations based upon the recent completion and opening in 1996 of the hotel and casino facilities under its expansion program. The Company has arranged for up to $4,000,000 of available working capital borrowings which has been made available by a director and a group of private investors who have provided other short-term financing to the Company during 1996 and 1995. Such uncollateralized borrowings are available to the Company on an as-needed basis through December 31, 1997 on terms substantially similar to those which had been made available to the Company during 1996. Management believes that the combination of existing cash, cash flows from operations and the available borrowing capacity are sufficient to meet the Company's obligations as they become due during fiscal 1997. Continued 31 BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------------ 4. Property And Equipment: Property and equipment consists of the following: September 30, --------------- 1996 1995 ---- ---- Land and improvements $ 3,042,769 $ 2,478,414 Buildings and improvements 38,736,144 17,582,058 Gaming equipment 6,163,617 4,808,135 Furniture and other equipment 8,077,178 3,830,737 Construction-in-progress 5,172,262 8,773,397 ----------- ---------- 61,191,970 37,472,741 Less: accumulated depreciation (5,705,685) (3,340,364) ----------- ----------- $55,486,285 $34,132,377 ----------- ----------- ----------- ----------- Construction-in-progress at September 30, 1996 is comprised of construction of phase three of the Company's expansion plan, as more fully described in Note 2. During 1995, as part of the refurbishment of the existing facilities, the Company disposed of certain property and equipment resulting in a loss of approximately $1,101,000. 5. Leases: The Company has entered into capital lease agreements whereby the Company leases various equipment under two-, three-, five-, seven- and twenty-year leases which expire at various dates through 2015. Capital lease obligations consists of the following: September 30, --------------- 1996 1995 ---- ---- Capital lease obligation, interest rate of prime plus 3%, monthly principal and interest payments of $107,267 through August 1997, collateralized by slot equipment $1,519,684 $1,602,000 Capital lease obligation, with effective interest rate of 12.50% due in monthly installments of $41,817, including interest, through November 1998, collateralized by casino and hotel equipment 948,248 -- Capital lease obligation, interest rate of 10%, semi-annual principal and interest payments of $20,721 through August 2015, uncollateralized 337,988 355,556 Capital lease obligation, with effective interest rate of 12.50% due in monthly installments of $23,418 through May 1999, collateralized by slot equipment 600,732 -- Continued 32 BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------------- 5. Leases, Continued: September 30, ------------------------ 1996 1995 ----------- ---------- Capital lease obligation, with effective interest rate of 12.50% due in monthly installments of $61,794 through September 1999, collateralized by hotel furniture, fixtures and equipment $ 1,822,938 - Capital lease obligations with effective interest rates ranging from 9.36% to 12.90%, due in aggregate monthly installments of $7,619, and ending at various times in 2001, collateralized by phone equipment 346,070 $ 130,198 Capital lease obligation, with effective interest rate of 12.50% due in monthly installments of $9,083 through October 2000, collateralized by signage equipment 347,222 - Other 592,874 247,903 ----------- ---------- 6,515,756 2,335,657 Less amounts classified as current (3,115,522) (861,616) ----------- ---------- $ 3,400,234 $1,474,041 ----------- ---------- ----------- ----------
Property and equipment include the following property leased under capital leases as of September 30, 1996 and 1995: 1996 1995 ----------- ---------- Cost of equipment under capital leases $ 7,001,501 $1,961,088 Less, accumulated depreciation (1,018,864) (30,986) ----------- ---------- $ 5,982,637 $1,930,102 ----------- ---------- ----------- ----------
Continued 33 BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------------- 5. Leases, Continued: Future minimum lease payments, by year and in the aggregate, under capital leases with initial or remaining terms of one year or more consist of the following at September 30, 1996. 1997 $ 3,676,551 1998 1,909,832 1999 1,289,360 2000 368,727 2001 134,706 Thereafter 580,188 ----------- Total minimum lease payments 7,959,364 Less amount representing interest (1,443,608) ----------- Present value of minimum lease payments 6,515,756 Less current portion (3,115,522) ----------- Long-term obligations under capital leases $ 3,400,234 ----------- ----------- The Company leases as lessor certain retail space in its casino facilities under operating lease agreements. The leases are short-term and renewable based upon mutual agreement between the Company and the lessee. Rental income under these agreements totaled $230,566 and $12,000 for the years ended September 30, 1996 and 1995, respectively. 6. Long-Term Debt: Long-term debt consists of the following: September 30, ------------------------- 1996 1995 ----------- ----------- 16.50% First Mortgage Notes due March 31, 2005 (the "BCI Notes") with interest payable semi-annually, net of unamortized original issue discount of $4,090,477 (1996) and $4,268,549 (1995) (see below) $35,909,523 $35,731,451 Eurodollar rate plus 2% convertible subordinated note payable due September 23, 1998 with interest payable quarterly (see below) 5,000,000 - ----------- ----------- $40,909,523 $35,731,451 ----------- ----------- ----------- -----------
Continued 34 BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, Continued 6. Long-Term Debt, Continued: On April 11, 1995, the Company completed a private placement of the BCI Notes. The offering generated net proceeds of approximately $30,652,000 (after deducting debt issue costs and approximately $4,620,000 used to repay principal and accrued interest on existing indebtedness). The BCI Notes are collateralized by a first mortgage on substantially all of the assets of the Company, including the expansion project. The Company recorded an original issue discount of $4,345,772 in connection with the BCI Notes, related to the issuance of 1,908,692 warrants to purchase common stock (exercisable at $6.00 per share), based on the estimated market value of the warrants at the date of issuance. Terms of the warrants are more fully described in Note 7. The indenture governing the BCI Notes (the "Indenture") limited the use of the net proceeds from the offering to fund the cost of the hotel and casino expansion. The proceeds were placed in escrow with a trustee pending draw-downs for qualifying project expenditures and were classified as restricted cash equivalents, in escrow accounts, in the accompanying financial statements. All of the proceeds from the BCI Notes have been used as of September 30, 1996. The BCI Notes are not subject to mandatory redemption, except upon a change of control, decline in net worth, or certain asset sales, all as defined in the Indenture. The Company has the option to redeem the BCI Notes, beginning after September 2001 at a premium, as defined in the Indenture. The Indenture contains covenants that, among other things, limit the ability of the Company to pay dividends or incur additional indebtedness. Additional indebtedness is limited to $5,000,000 of additional uncollateralized debt issuances and $7,000,000 of equipment leases of which the recourse portion cannot exceed $2,000,000. As of September 30, 1996, the Company had equipment leases with recourse totaling approximately $6,178,000. In December 1996, the terms of the Indenture were modified to allow for an increase in the $2,000,000 recourse portion of the Indenture for the additional obligations entered into during 1996. The Indenture also requires the Company to maintain a minimum net worth. The net worth can be no less than the sum of $6,000,000 plus the proceeds from the sale of common stock and 50% of the net income of the Company for all periods beginning after April 1, 1995 (any net loss during that period may not be deducted for purposes of the calculation). In September 1996, the Company executed a $5,000,000 subordinated, convertible promissory note collateralized by a second deed of trust on the assets of the Company. Interest is payable quarterly at the applicable Eurodollar rate plus 2% with principal due September 23, 1998 if not converted by the noteholder. Prior to payment in full by the Company and subject to regulatory approval, the noteholder may convert the unpaid principal balance of the note into common shares of the Company. The number of shares into which the note may be converted shall be determined by dividing the unpaid principal balance by $7.50. 35 BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, Continued ------------- 6. Long-Term Debt, Continued: Maturities of BCI's long-term debt are as follows: Year Ending September 30, ------------- 1997 $ - 1998 5,000,000 1999 - 2000 - 2001 - Thereafter 40,000,000 ----------- $45,000,000 ----------- ----------- 7. Shareholders' Equity: A summary of the Company's equity transactions and issuances of warrants to purchase common stock are summarized in the following paragraphs. At September 30, 1996 and 1995, the Company had the following warrants to purchase shares of common stock outstanding: Warrants Issued Warrants Issued Warrants Issued In Connection In Connection 1994 Bridge In Connection With Issuance With Private Financing With Notes Of BGI Placement And IPO (a) Payable (b) Notes (c) Offering (d) Total ----------- --------------- --------------- --------------- ----- Exercise price $5.00 $5.625,$6.00 $6.00 $7.50 and $8.00 Expiration date Feb. 1998 Mar. 1996 to April 2000 to June 2000 Sept. 2000 Apr. 1, 2005 Balances, September 30, 1994 4,130,000 - - - 4,130,000 Issued - 208,000 1,908,692 - 2,116,692 Exercised (162,800) - - - (162,800) --------- ------- --------- ------ --------- Balances, September 30, 1995 3,967,200 208,000 1,908,692 - 6,083,892 Issued - - - 75,000 75,000 Exercised (380,200) - - - (380,200) --------- ------- --------- ------ --------- Balances, September 30, 1996 3,587,000 208,000 1,908,692 75,000 5,778,692 --------- ------- --------- ------ --------- --------- ------- --------- ------ ---------
Continued 36 BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, Continued -------------- 7. Shareholders' Equity, Continued: (a) 1994 bridge financing, common stock offering and warrant exercises: In 1994 the Company issued 450,000 warrants to purchase its common stock in connection with a bridge financing (the "Bridge Warrants"). Each Bridge Warrant entitles the holder thereof to purchase one share of common stock at an exercise price of $5.00 per share and expires in February 1998. The Bridge Warrants contain provisions that protect the bridge warrantholders against dilution by adjustment of the exercise price in certain events including, but not limited to, stock dividends, stock splits, reclassifications or mergers. Upon completion of the initial public offering of the Company's common stock in February 1994, the Bridge Warrants were automatically converted into warrants identical to the Offering Warrants (described below). A bridge warrantholder does not possess any rights as a shareholder of the Company. The Company may redeem the Bridge Warrants at a price of $0.001 per Bridge Warrant upon 60 days' prior written notice if the closing bid quotation of the common stock has been at least $10.00 on all 20 of the trading days ending on the third day prior to the day on which notice of redemption is given. On February 11, 1994, the Company completed an initial public offering of its common stock. The Company issued 1,840,000 shares of common stock at a selling price of $5.00 per share and issued 3,680,000 warrants (the "Offering Warrants") at a selling price of $0.10 per warrant. The Company received net proceeds of $7,706,109 for the stock and warrants, after deducting underwriters' commissions and offering expenses. Each Offering Warrant entitles the holder thereof to purchase one share of common stock at a price of $5.00 per share until February 11, 1998, at which time the Offering Warrant expires. The Offering Warrants contain provisions that protect the warrantholders against dilution by adjustment of the exercise price in certain events including, but not limited to, stock dividends, stock splits, reclassifications or mergers. A warrantholder does not possess any rights as a shareholder of the Company. The Company may redeem the Offering Warrants at a price of $0.001 per Warrant upon 60 days' prior written notice if the closing bid quotation of the common stock has been at least $10.00 on all 20 of the trading days ending on the third day prior to the day on which notice of redemption is given. In connection with the offering, the Company also sold the underwriter, for $100, an option (the "Option") to purchase 160,000 shares of common stock and 320,000 Warrants. The Option has an exercise price of $7.00 per share of common stock and $0.14 per Warrant (140% of the respective original offering prices). The Option is exercisable for a 36-month period, commencing on February 11, 1995 and expiring on February 11, 1998. During 1996 and 1995, respectively, 380,200 and 162,800 warrants to purchase the Company's common stock were exercised for an equal number of shares of the Company's common stock. All of the warrants had an exercise price of $5.00, resulting in net proceeds to the Company of $1,850,955 and $813,280 after issuance costs in 1996 and 1995, respectively. Continued 37 BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, Continued -------------- 7. Shareholders' Equity, Continued: (b) 1995 bridge financing transactions: The Company issued 50,000 warrants to purchase its common stock in connection with $1,000,000 of bridge loans, which loans have been repaid. Each warrant entitles the holder thereof to purchase one share of common stock at an exercise price of $6.00 per share. The warrants expire in February 2000. The warrants contain provisions that protect the warrantholders against dilution by adjustment of the exercise price in certain events including, but not limited to, stock dividends, stock splits, reclassifications or mergers. A warrantholder does not possess any rights as a shareholder of the Company. The Company issued 150,000 warrants to purchase its common stock in connection with a 10% note payable issued in 1995, which note has been repaid. Each warrant entitles the holder thereof to purchase one share of common stock at an exercise price of $5.625 per share. The warrants are exercisable between March 1996 and September 2000. The warrants contain provisions that protect the warrantholders against dilution by adjustments of the exercise price in certain events including, but not limited to, stock dividends, stock splits, reclassifications or mergers. A warrantholder does not possess any rights as a shareholder of the Company. The Company issued 8,000 warrants to purchase its common stock in connection with a $400,000, 12% note payable issued in 1995, which note has been repaid. Each warrant entitles the holder thereof to purchase one share of common stock at an exercise price of $8.00 per share. The warrants expire in September 2005. A warrantholder does not possess any rights as a shareholder of the Company. (c) BCI Notes offering: As discussed in Note 6, the Company issued 1,908,692 warrants to purchase its common stock in connection with the BCI Notes. Each warrant entitles the holder thereof to purchase one share of common stock at an exercise price of $6.00 per share and 626,823 and 1,281,869 of the warrants expire in April 2000 and April 2005, respectively. The warrants contain provisions that protect the warrantholders against dilution by adjustment of the exercise price in certain events including, but not limited to, stock dividends, stock splits, reclassifications or mergers. A warrantholder does not possess any rights as a shareholder of the Company. (d) 1996 private placement equity offering: During 1996, the Company completed a private placement offering in which it issued 150,000 shares of its common stock for $6.25 per share. In connection with the issuance of the common stock, the Company also sold 75,000 warrants to purchase common stock for $.25 per warrant. Each warrant entitles the holder thereof to purchase one share of common stock at a price of $7.50 per share until June 2000, at which time the warrant expires. The Company received net proceeds of $956,250 for the issuance of the stock and warrants. Continued 38 BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, Continued -------------- 7. Shareholders' Equity, Continued: SEPTEMBER 1996 PRIVATE PLACEMENT EQUITY OFFERING In September 1996, the Company completed a private placement offering of 571,429 shares of its common stock at a selling price of $7.00 per share. The Company received net proceeds of $3,735,195 for the stock, after deducting offering expenses. INCREASE IN AUTHORIZED SHARES OF COMMON STOCK In December 1996, the Company's shareholders voted to amend the Company's articles of incorporation to increase the number of authorized shares of common stock from 15,000,000 to 50,000,000. STOCK OPTION PLANS On April 26, 1994, the Board of Directors adopted (and on March 15, 1995 the shareholders approved) the 1994 Stock Compensation Plan (the "1994 Plan"). The 1994 Plan provides that incentive stock options and nonqualified stock options may be granted to certain officers, directors (other than Outside Directors), employees and advisors of the Company or its subsidiaries, if any, selected by the Compensation Committee. The Company has granted a total of 745,000 options exercisable at prices ranging from $6.25 to $9.00 expiring between April 26, 1999 and September 26, 2005. The options were granted at exercise prices equal to the fair market value (or in the case of options granted to the president and majority shareholder at 110% of market value) as of the date of grant. The options vest in 25% increments annually, subject to acceleration upon a change in control of the Company, as defined in the 1994 Plan agreement. The grants of 450,000 of the options described above were subject to shareholder approval of an increase in the authorized number of shares reserved for issuance under the 1994 Plan to 2,000,000 shares. Such approval was received during 1996. OUTSIDE DIRECTORS STOCK OPTION PLAN On April 26, 1994, the Board of Directors adopted (and on March 15, 1995 the shareholders approved) the Outside Directors Stock Option Plan (the "Plan"). The Company has granted nonqualified options to three of its directors to purchase 100,000 shares of the Company's common stock. The options are exercisable at prices of $6.75 and $6.25 expiring between April 26, 2004 and April 26, 2005. The foregoing options were granted at an exercise price equal to the fair market value of the common stock as of the date of grant. The options vest in 25% increments annually, subject to acceleration upon a change in control of the Company, as defined in the Plan agreement. Continued 39 BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, Continued -------------- 8. Income Taxes: The following is a reconciliation of income taxes at the Federal statutory rate with income taxes recorded by the Company: 1996 1995 ----------- ------------ Tax benefit computed at federal statutory income tax rate (35%) ($1,545,000) ($1,868,000) Unrecognized tax benefit from operating losses 1,494,000 1,852,000 Other, net 51,000 6,000 ----------- ----------- Total income tax provision (benefit) $ - $ - ----------- ----------- ----------- ----------- Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities consist of the following at September 30, 1996 and 1995: 1996 1995 ----------- ----------- DEFERRED TAX ASSETS: Federal net operating loss carryforward $ 3,524,000 $ 2,051,000 Write-off of existing casino facilities during expansion - 307,000 Gaming tax assessment 175,000 - Other 30,000 48,000 ----------- ----------- Total deferred tax assets 3,729,000 2,406,000 ----------- ----------- DEFERRED TAX LIABILITIES: Depreciation (674,000) (490,000) ----------- ----------- Total deferred tax liabilities (674,000) (490,000) Valuation allowance (3,055,000) (1,916,000) ----------- ----------- Net deferred taxes $ - $ - ----------- ----------- ----------- ----------- No income tax provision (benefit) has been recorded in the 1996 and 1995 financial statements, and the Company operates wholly in Nevada and, therefore, has no state income tax liability. As of September 30, 1996, the Company had a federal net operating loss carryforward of approximately $10,568,000 which expires between 2009 and 2011. 9. Commitments And Contingencies: The Company has pending certain legal actions and claims incurred in the normal course of business and is actively pursuing the defense thereof. In the opinion of management, these actions and claims are either without merit or are covered by insurance and will not have a material adverse effect on the Company's financial position, results of operations or cash flows. Continued 40 BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, Continued -------------- 9. Commitments And Contingencies, Continued: HOLIDAY INN-REGISTERED TRADEMARK- FRANCHISE AGREEMENT The Company was granted a Holiday Inn-Registered Trademark- ten-year franchise license on June 16, 1994 after completing renovation of its existing hotel, consisting of 126 rooms in a high-rise tower and 75 annex rooms. The agreement required an application fee of $77,500, (which is reflected in other assets and is being amortized over the life of the agreement). The agreement provides that the Company will pay to Holiday Inn-Registered Trademark- (i) a monthly royalty of 5% of the gross rooms revenues; (ii) a "marketing contribution" of 1.5% of the gross rooms revenues; (iii) a "reservation contribution" of 1.0% of the gross rooms revenues; and (iv) a monthly Holidex fee of $6.43 for each guest room. The license granted under the agreement expires ten years from the date of the opening of the hotel under the "Holiday Inn" system, subject to earlier termination as set forth therein. GAMING TAX ASSESSMENT During the last two quarters of 1996, based on the advice of legal counsel, the Company accrued a total loss contingency of $500,000 related to an anticipated gaming tax assessment from the Nevada Gaming Control Board ("NGCB"). The NGCB has audited the Company's gaming tax returns in 1996 and the Company believes it is probable that the NGCB will determine that the Company has improperly deducted certain promotional wagers by patrons in calculating gross revenue for gaming tax purposes. The Company plans to appeal an assessment; however, the likelihood of a successful outcome cannot be determined. 10. Related-Party Transactions: OFFICE SPACE LEASE During 1996 and 1995, the Company leased office space and storage facilities for its corporate offices from the majority shareholders for approximately $8,375 per month. For the years ended September 30, 1996 and 1995, rent expense under this lease was $101,375 and $43,874, respectively. Effective October 1, 1996, the Company amended the lease and the monthly rental increased to approximately $70,000 per month. The lease term is for two years and allows the Company to use the facilities for any purpose. The Company has options to extend the lease up to an additional 28 years. The lease agreement provides the Company with the first right of refusal to purchase the land and building at their fair value should the shareholders decide to sell them. The lease agreement also entitles the Company to the rental income from the existing lessees during the lease term. The existing lessees are on short-term renewable leases with current rents totaling approximately $39,000 per month. RECEIVABLE FROM HOLIDAY GIFTS, INC. During the period from October 1, 1993 through February 11, 1994, the Company paid certain overhead and general and administrative expenses on behalf of Holiday Gifts, Inc. ("HGI"), a company affiliated through common ownership. As of September 30, 1996 and 1995, the receivable balance was $3,499 and $12,682, respectively. Continued 41 BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, Continued -------------- 10. Related-Party Transactions, Continued: RECEIVABLE FROM HOLIDAY GIFTS, INC., Continued The Company leases retail space to HGI. During the years ended September 30, 1996 and 1995, rental income from HGI was $11,000 and $12,000, respectively. Effective October 1, 1996, rental income from HGI increased to $5,000 per month. 11. Bridge Loans And Related Extraordinary Losses: 1995 BRIDGE LOANS In February 1995, the Company, in a private placement offering, completed the issuance of 12% promissory notes aggregating $1,000,000. In connection with the financing, the Company issued lenders 50,000 warrants to purchase common stock (exercisable at $6.00 per share). These notes were repaid in April 1995 from the proceeds of the BCI Notes. Original issue discount of these notes was attributable to the 50,000 warrants and totaled $90,000 of which $25,847 was amortized through April 1995. The balance of the original issue discount ($64,153) was written- off upon early extinguishment of the debt, and was treated as an extraordinary loss. EARLY EXTINGUISHMENT OF INDEBTEDNESS The Company repaid certain other indebtedness with proceeds from the BCI Notes in 1995. Unamortized debt issuance costs ($60,827) which had been capitalized were written-off upon early extinguishment. Additionally, a settlement was reached with a vendor for an outstanding capital lease obligation. The settlement of the obligation was for less than the amount outstanding which resulted in a gain on early extinguishment of debt of $80,951. Because the Company is in a tax loss carryforward position, no tax benefit has been recognized for the net extraordinary losses in 1996. 1996 BRIDGE LOANS In November 1995, the Company executed a $600,000, 10% uncollateralized promissory note with principal and interest due in May 1996. The note was paid off with no gain or loss in September 1996 with proceeds from the $5,000,000 subordinated, convertible note payable executed in September 1996 as more fully described in Note 6. In December 1995, the Company executed a $500,000, 12% uncollateralized promissory note to the Company's majority shareholder and CEO with principal and interest due in September 1996. The note was paid off with no gain or loss in September 1996 with proceeds from the $5,000,000 subordinated, convertible note payable executed in September 1996 as more fully described in Note 6. In March 1996, the Company executed a $500,000, 10% uncollateralized promissory note to a director of the Company with principal and interest due in September 1996. The note was paid off with no gain or loss in September 1996 with proceeds from the $5,000,000 subordinated, convertible note payable executed in September 1996 as more fully described in Note 6. Continued 42 BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, Continued -------------- 11. Bridge Loans And Related Extraordinary Losses, Continued: 1996 BRIDGE LOANS, Continued In March 1996, the Company executed a $750,000, 12% uncollateralized promissory note to the Company's majority shareholder and CEO with principal and interest due in September 1996. The note was paid off with no gain or loss in September 1996 with proceeds from the $5,000,000 subordinated, convertible note payable executed in September 1996, as more fully described in Note 6. 12. Fair Value Of Financial Instruments: The estimated fair value of the Company's financial instruments has been determined by the Company using available market information and appropriate valuation methodologies. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, capital lease obligations and notes payable approximate their respective fair values due to the short-term maturities and approximate market interest rates of these instruments. Management is unable to determine a fair value for the outstanding BCI Notes. 43 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the names and ages of the Company's directors and executive officers and the positions they hold with the Company. All directors are elected at the annual meeting of stockholders to serve one year or until their successors are elected and qualified. NAME AGE POSITION - ---- --- -------- Norbert W. Jansen* 78 Chief Executive Officer and Chairman of the Board of Directors Forrest J. Woodward, II 54 President and Chief Operating Officer Avis P. Jansen 69 Vice President and Director Louis J. Sposato 46 Chief Financial Officer, Secretary, Treasurer and Director James Scibelli 46 Director Keven J. Picardo 40 Director Jeffrey P. Jacobs 43 Director - -------- * Mr. Jansen died on January 6, 1997. The Company has not yet acted to appoint a new Chief Executive Officer or Chairman of the Board of Directors. NORBERT W. JANSEN served as the Chairman of the Board of Directors and the Chief Executive Officer of the Company until his death on January 6, 1997. He had been employed in the gaming industry in various capacities and at various times since 1947, working first as a race book writer and "21" and craps dealer, before becoming slot manager at the Silver Slipper in Las Vegas in 1956. From 1964 to 1967, Mr. Jansen was an owner and officer of the Pioneer Club in downtown Las Vegas. In the 1960s and early 1970s, Mr. Jansen was a developer of the Holiday Inn-Center Strip, now Harrah's Las Vegas. Mr. Jansen had been investigated and licensed by state and local gaming authorities on numerous occasions. In 1977, Mr. Jansen was licensed as landlord of The Slot Joyn't, the small casino that subsequently became part of the Holiday Inn-Registered Trademark- Casino Boardwalk. In 1988 and 1990, Mr. Jansen was granted limited nonrestricted licenses as an owner, officer and director of HGI. In 1992, the Nevada Gaming Authorities granted Mr. Jansen an unlimited nonrestricted license. FORREST J. WOODWARD, II serves as the President and Chief Operating Officer of the Company. Mr. Woodward began his gaming career in 1966, serving as controller of the Pioneer Club and Pioneer 44 Hotel in Las Vegas until 1969. From 1969 to 1972, he served as controller and, thereafter, executive vice president of the Flamingo Hotel. From 1972 to 1977, Mr. Woodward served as executive vice president and assistant general manager of the Thunderbird Hotel. From 1978 to 1985, he served as executive vice president and assistant general manager of the Desert Inn Country Club and Spa, with responsibility for all aspects of gaming and hotel marketing. From 1986 to 1988, Mr. Woodward served as executive vice president of the Dunes Hotel and Country Club, with responsibility for the management of the hotel and gaming areas. During 1990, he served as general manager of the Landmark Hotel and Casino, having been appointed by the Federal Bankruptcy Court to operate the property. In addition, from 1987 to 1993, Mr. Woodward served as chairman, president and majority shareholder of Las Vegas Resorts Corporation, a public company engaged in land acquisitions related to casino hotels. From 1992 to 1993, Mr. Woodward served as senior vice president - administration for the Stars' Desert Inn Hotel and Country Club. Thereafter, from 1993 until joining the Company in August 1995, he served as senior vice president - administration for Sheraton Desert Inn. His responsibilities at the Desert Inn included all domestic casino marketing, marketing and operations of gaming activities and operations of the country club, security and surveillance. Mr. Woodward received his Bachelor of Science degree from the University of Nevada at Las Vegas in 1968. AVIS P. JANSEN serves as the Vice President and a director of the Company. Since 1971, she has served as the president, secretary and treasurer of Holiday Gifts, Inc., the former operator of the Company's casino. Ms. Jansen is the wife of Norbert W. Jansen. LOUIS J. SPOSATO serves as the Chief Financial Officer, Secretary, Treasurer and a director of the Company. He received his Bachelor of Science degree in accounting from Fordham University in 1972. From 1983 to 1988, Mr. Sposato served as comptroller of Union Plaza Hotel & Casino, Las Vegas, Nevada, where he directed the hotel and casino's administrative functions and compliance requirements, including Nevada Gaming Commission Regulation 6 (internal control procedures for all licensees) and Regulation 6A (casino currency transaction recordkeeping and reporting requirements). From 1988 to 1989, Mr. Sposato served as assistant controller for Electronic Data Technologies, Las Vegas, Nevada, with responsibility for implementing their slot machine route accounting system. From 1989 to 1990, he served as assistant controller of Alexis Park Resort Hotel, Las Vegas, Nevada, with responsibility for all accounting functions. Since 1990, Mr. Sposato has also served as controller of Holiday Gifts, Inc. JAMES SCIBELLI serves as a director of the Company. Since March 1986, Mr. Scibelli has served as president of Roberts & Green, Inc., a New York investment banking firm offering a variety of investment services. Since August 1991, he has also been an officer and director of SG Capital Corp., a financial consulting company. Mr. Scibelli serves as a director and a member of the compensation committee of Acclaim Entertainment, Inc. and a director of B.U.M. International, Inc. Mr. Scibelli devotes such time as is necessary to the affairs of the Company. KEVEN J. PICARDO serves as a director of the Company. From 1984 to 1990, Mr. Picardo served as an investment advisor and mutual fund director for Paine Webber Incorporated. From 1990 to 1994, he served as an associate vice president of Kemper Securities, Inc. During 1994, Mr. Picardo served as senior vice president of USA Capital Management Group, Inc., Las Vegas, Nevada. Since October 1995, he serves as senior financial consultant with Signal USA Securities, Inc., Las Vegas, Nevada. Mr. Picardo devotes such time as is necessary to the affairs of the Company. JEFFREY P. JACOBS serves as a director of the Company. Beginning in 1984, Mr. Jacobs developed the riverfront entertainment district, known as the "Flats", in Cleveland, Ohio. He also has developed, owns and manages several apartment complexes in Cleveland and throughout Ohio. In 1996, Mr. Jacobs became the Chief Executive Officer and Co-Chairman of the Board of Directors of BlackHawk Gaming 45 & Development Co. ("BlackHawk"), a publicly traded gaming company headquartered in Boulder, Colorado that is co-owner and manager of the Gilpin Hotel & Casino in BlackHawk, Colorado. Additionally, BlackHawk has begun construction of a new casino/hotel project in BlackHawk, Colorado that is scheduled to open in early 1998. In 1996, Mr. Jacobs became the Chief Executive Officer and Chairman of the Board of Directors of Colonial Downs, which presently owns and operates two off-track betting parlors in the State of Virginia, has plans to open four more parlors and is constructing the first horse racing track in the state, which is scheduled to open in 1997. Mr. Jacobs received his Bachelor of Business Administration degree from the University of Kentucky in 1975, his Masters of Business Administration from Ohio State University in 1977 and his Masters of Urban Planning from Cleveland State University in 1979. He served as a member of the Ohio House of Representatives from 1984 through 1986. Mr. Jacobs devotes such time as is necessary to the affairs of the Company. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company pursuant to Rule 16a-3(e) during its most recent fiscal year and Forms 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year, and any written representation from the reporting person (as hereinafter defined) that no Form 5 is required, the Company is not aware of any person who, at any time during the fiscal year, was a director, officer, beneficial owner of more than ten percent of any class of equity securities of the Company registered pursuant to Section 12 of the Exchange Act ("reporting person"), that failed to file on a timely basis, as disclosed in the above Forms, reports required by Section 16(a) of the Exchange Act during the most recent fiscal year. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has not established any separate nominating committee. The Board has established a Compensation Committee, which consists of Avis P. Jansen and James Scibelli. Its functions are to review and approve annual salaries and bonuses for all executive officers, review, approve and recommend to the Board of Directors the terms and conditions of all employee benefits or changes thereto, and manage and administer the Company's 1994 Stock Compensation Plan. The Board of Directors has established an Audit Committee, which consists of Messrs. Scibelli, Picardo and Sposato. The functions of the Audit Committee are to recommend annually to the Board of Directors the appointment of the independent public accountants of the Company, discuss and review the scope and the fees of the prospective annual audit and review the results thereof with the independent public accountants, review and approve non-audit services of the independent public accountants, review compliance with existing accounting and financial policies of the Company, review the adequacy of the financial organization of the Company and review management's procedures and policies relative to the adequacy of the Company's internal accounting controls and compliance with federal and state laws relating to financial reporting. The Board of Directors has also established a Stock Option Committee, which consisted of Messrs. Jansen and Sposato as of September 30, 1996. The function of the Stock Option Committee is to manage and administer the Company's Outside Directors Stock Option Plan. 46 ITEM 10. EXECUTIVE COMPENSATION. The following table, and the accompanying explanatory footnotes, includes annual and long-term compensation information on (i) the Company's Chief Executive Officer for services rendered in all capacities during the fiscal years ended September 30, 1996, 1995 and 1994 and (ii) each executive officer who received total annual salary and bonus for the fiscal year ended September 30, 1996 in excess of $100,000. SUMMARY COMPENSATION TABLE LONG TERM ANNUAL COMPENSATION COMPENSATION ---------------------------------------------- ------------ NAME AND PRINCIPAL FISCAL OTHER ANNUAL OPTIONS POSITION YEAR SALARY BONUS COMPENSATION GRANTED -------- ------ -------- ------ ------------ ------------ Norbert W. Jansen, Chief Executive Officer 1996 $238,000 0 0 0 1995 225,000 0 0 170,000 1994 200,000 20,000 0 170,000 Forrest J. Woodward, Chief 1996 180,000 0 0 0 Operating Officer 1995 21,000 0 0 130,000
EMPLOYMENT AGREEMENTS Effective as of February 11, 1994, the Company entered into a five-year employment agreement with Norbert W. Jansen as Chief Executive Officer of the Company which provided for an annual base salary of $275,000 as of September 30, 1996. Effective as of January 1, 1995, the Company entered into a three-year employment agreement with Louis J. Sposato as Chief Financial Officer, Secretary and Treasurer of the Company which currently provides for an annual base salary of $95,000. Effective as of August 15, 1995, the Company entered into a five-year employment agreement with Forrest J. Woodward, II as President and Chief Operating Officer of the Company which currently provides for an annual base salary of $180,000. On each annual anniversary of the commencement date of each agreement, the period of employment is automatically extended for one year unless notified in writing by either party thereto. DIRECTORS' COMPENSATION Each non-employee director of the Company receives $1,000 for each meeting of the Board of Directors attended. In addition, pursuant to the Outside Directors Stock Option Plan, Avis P. Jansen, James Scibelli and Keven J. Picardo have each been granted options to purchase shares of Common Stock (subject to certain vesting requirements). See "- The Outside Directors Stock Option Plan." THE 1994 STOCK COMPENSATION PLAN The Company and its shareholders have adopted and approved the 1994 Stock Compensation Plan, as amended (the "1994 Plan"). Options granted pursuant to the 1994 Plan constitute either incentive stock 47 options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options which constitute nonqualified options at the time of issuance of such options. The 1994 Plan provides that incentive stock options and/or nonqualified stock options may be granted to certain officers, directors (other than Outside Directors), employees and advisors of the Company or its subsidiaries, if any, selected by the Compensation Committee. A total of 2,000,000 shares of Common Stock are authorized and reserved for issuance under the 1994 Plan, subject to adjustment to reflect changes in the Company's capitalization in the case of a stock split, stock dividend or similar event. The 1994 Plan is administered by the Compensation Committee which has the sole authority to interpret the 1994 Plan and make all determinations necessary or advisable for administering the 1994 Plan. The exercise price for any incentive option must be at least equal to the fair market value of the shares covered thereby as of the date of grant of such option. Upon the exercise of the option, the exercise price thereof must be paid in full either in cash, shares of Common Stock of the Company or a combination thereof. If and to the extent that any option to purchase reserved shares shall not be exercised by an optionee for any reason or if such option to purchase shall terminate as provided by the 1994 Plan, such shares which have not been so purchased thereunder shall again become available for the purposes of the 1994 Plan unless the 1994 Plan shall have been terminated. During the fiscal year ended September 30, 1994, the Company had granted an aggregate of 295,000 options, including the following options to its executive officers and Keven J. Picardo (subsequently appointed to the Board of Directors): Norbert W. Jansen - incentive options to purchase 59,256 shares at $7.43 per share until April 26, 1999 and nonqualified options to purchase 110,744 shares at $6.75 per share until April 26, 2004; Louis J. Sposato - incentive options to purchase 90,000 shares at $6.75 per share until April 26, 2004; and Keven J. Picardo - nonqualified options to purchase 10,000 shares at $6.75 per share until April 26, 2004. Each of the foregoing options was granted at an exercise price equal to the fair market value of the Common Stock as of the date of grant (110% with respect to the 59,256 incentive options granted to Norbert W. Jansen). Further, the options vest and may be exercised in 25% cumulative increments annually from the date of grant on April 26, 1994, subject to earlier termination or extension. During the fiscal year ended September 30, 1995, the Company granted an aggregate of 455,000 additional options, including the following options to its executive officers: Norbert W. Jansen - incentive options to purchase 64,000 shares at $6.88 per share until April 26, 2000 and nonqualified options to purchase 106,000 shares at $6.25 per share until April 26, 2005; Forrest J. Woodward, II - incentive options to purchase 130,000 shares at $6.00 per share until May 15, 2005; and Louis J. Sposato - incentive options to purchase 90,000 shares at $6.25 per share until April 26, 2005. Each of the foregoing options was granted at an exercise price equal to the fair market value of the Common Stock as of the date of grant (110% with respect to the 64,000 incentive options granted to Norbert W. Jansen). Further, the options vest and may be exercised in 25% cumulative increments annually from the date of grant subject to earlier termination or extension. During the fiscal year ended September 30, 1996, the Company did not grant any options under the 1994 Plan. THE OUTSIDE DIRECTORS STOCK OPTION PLAN The Company and its shareholders have adopted and approved the Outside Directors Stock Option Plan, as amended (the "Plan"). The Plan was adopted in order to enhance the Company's ability to secure and retain highly qualified and experienced individuals who are not regularly salaried employees of the Company to serve as directors of the Company. The Plan provides generally that: (i) the purchase price of the Common Stock under each option granted shall not be less than the fair market value of the 48 Common Stock on the date of grant; (ii) no director may be granted during any calendar year options to purchase more than 20,000 shares of Common Stock; (iii) no option may be granted for a period of greater than ten years from the date of grant; and (iv) a maximum of 400,000 shares of Common Stock have been authorized and reserved for issuance under the Plan. During the fiscal year ended September 30, 1994, the Company had granted to each of Avis P. Jansen and James Scibelli nonqualified options to purchase 20,000 shares at $6.75 per share until April 26, 2004. During the fiscal year ended September 30, 1995, the Company had granted to each of Avis P. Jansen, James Scibelli and Keven J. Picardo nonqualified options to purchase 20,000 shares at $6.25 per share until April 26, 2005. Each of the foregoing options was granted at an exercise price equal to the fair market value of the Common Stock as of the date of grant. Further, the options vest in 25% increments annually from the date of grant, subject to earlier termination or extension. During the fiscal year ended September 30, 1996, the Company did not grant any options under the Plan. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding beneficial ownership of the Common Stock as of December 20, 1996, by (i) all persons known by the Company to be the owner, of record or beneficially, of more than five percent of the outstanding Common Stock, (ii) each executive officer and director of the Company and (iii) all directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options currently exercisable or exercisable within 60 days of December 20, 1996 are deemed outstanding for computing the percentage of the person holding such securities but are not outstanding for computing the percentage of any other person. As far as is known to management of the Company, no person owned beneficially more than five percent of the outstanding shares of Common Stock as of December 20, 1996 except as set forth below. SHARES BENEFICIALLY NAME OWNED PERCENT OF SHARES ---- ------------------- ----------------- Norbert W. Jansen and Avis Jansen, 2,750,000 38.3 Trustees u/a/d 07/14/93 (1) Norbert W. Jansen (1) 2,892,500 (3) 39.5 Avis P. Jansen (1)(2) 2,892,500 (3) 39.5 Forrest J. Woodward (9) 42,500 (4) * Louis J. Sposato (9) 67,500 (5) * James Scibelli (9) 420,000 (6) 5.6 Keven J. Picardo (9) 12,000 (7) * Jeffrey P. Jacobs (10) 1,071,429 14.9 49 Franklin Custodian Funds, Inc. - 1,281,869 (8) 15.1 Income Series (9) Diversified Opportunities Group Ltd. (10) 1,071,429 14.9 All Executive Officers and Directors as a group (7 persons) 4,505,929 57.8 - ------------------- * Represents beneficial ownership of less than 1% of the outstanding shares of Common Stock. (1) The business address of Norbert W. Jansen and Avis Jansen, Trustees u/a/d 07/14/93 (the "Jansen Trust"), Norbert W. Jansen and Avis P. Jansen is 3750 Las Vegas Boulevard South, Las Vegas Nevada 89109. Such shares are held of record and beneficially by The Jansen Trust but may be deemed to also be beneficially owned by Mr. Jansen (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) since, as trustee of The Jansen Trust, Mr. Jansen has the power to direct the voting and disposition of such shares. (2) Avis P. Jansen is the spouse of Norbert W. Jansen and is also deemed to beneficially own the 2,750,000 shares beneficially owned by Norbert W. Jansen and the Jansen Trust. (3) Includes options currently exercisable to acquire 127,500 shares of Common Stock owned by Norbert W. Jansen and options currently exercisable to acquire 15,000 shares of Common Stock owned by Avis P. Jansen. (4) Includes options currently exercisable to acquire 32,500 shares of Common Stock. (5) Includes options currently exercisable to acquire 67,500 shares of Common Stock. (6) Includes options currently exercisable to acquire 15,000 shares of Common Stock and 355,000 redeemable common stock purchase warrants sold by the Company in its initial public offering dated February 11, 1994 (the "Warrants"). Each Warrant entitles the holder thereof to purchase one share of Common Stock at $5.00 per share at any time until February 11, 1998, subject to earlier redemption under certain circumstances. (7) Includes options currently exercisable to acquire 10,000 shares of Common Stock. (8) Represents warrants currently exercisable to acquire 1,281,869 shares of Common Stock. (9) The business address of Messrs. Woodward, Sposato, Scibelli and Picardo is 3750 Las Vegas Boulevard South, Las Vegas, Nevada 89109. The business address of Franklin Custodian Funds, Inc. - Income Series is 777 Mariners Island Blvd., San Mateo, California 94404. (10) The business address of Jeffrey P. Jacobs and Diversified Opportunities Group Ltd. ("Diversified") is c/o Jacobs Entertainment Ltd., 425 Lakeside Avenue, Cleveland, Ohio 44114. Such shares are held of record and beneficially by Diversified but may be deemed to also be beneficially owned by Mr. Jacobs (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) since Mr. Jacobs has the power to direct the voting and disposition of such shares. 50 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Effective October 1, 1993, the Company entered into a subscription agreement (the "VC Subscription Agreement") with all of the partners of VC, Ltd., Limited Partnership, an affiliated Nevada limited partnership ("VC"). The sole general partner of VC was Holiday Gifts, Inc., a Nevada corporation ("HGI") whose sole shareholders are Norbert W. Jansen and Avis P. Jansen, founders, directors, executive officers and the principal shareholders of the Company. VC owned certain real property upon which VC owned and operated the Boardwalk Hotel. Pursuant and subject to the terms and conditions of the VC Subscription Agreement, the Company acquired all of the VC partners' interests in and to VC, including the real property and the Boardwalk Hotel (the "Hotel Assets"), by the issuance to the VC partners of an aggregate of 1,485,714 unregistered shares of Common Stock. Of these 1,485,714 shares, HGI received 757,714 shares as general partner of VC and 16,000 shares as a limited partner. As a result of the foregoing transaction, the Company acquired all of the liabilities of VC, including the obligations of VC to Bank of America Nevada f/k/a Valley Bank of Nevada pursuant to certain promissory notes of VC dated April 25, 1985 in the original principal amount of $4,000,000 and dated December 1, 1987 in the original principal amount of $1,000,000 (collectively, the "Bank Loans"). Effective October 1, 1993, the Company entered into a purchase and sale agreement (the "Jansen Acquisition Agreement") with Norbert W. Jansen ("Jansen"), the then president, principal shareholder and a director of the Company. Jansen owned certain real property upon which HGI operated the Boardwalk Casino. Pursuant and subject to the terms and conditions of the Jansen Acquisition Agreement, the Company acquired all of Jansen's interests in and to the real property and the Boardwalk Casino (the "Casino Assets") by the issuance to Jansen of 1,605,250 unregistered shares of Common Stock. As a result of this transaction and as part of the consideration paid by the Company, the Casino Assets continued to secure the obligations of VC to Bank of America Nevada f/k/a Valley Bank of Nevada in connection with the Bank Loans. Effective October 1, 1993, the Company entered into a purchase and sale agreement (the "HGI Acquisition Agreement") with HGI. Pursuant to prior leases formerly with VC, Jansen and the Company, HGI operated, among other things, the casino and related facilities at the Holiday Inn-Registered Trademark- Casino Boardwalk and was the owner of certain gaming equipment and related assets used in connection therewith. Pursuant and subject to the terms and conditions of the HGI Acquisition Agreement, the Company acquired all of HGI's interests in and to the casino leases and its gaming equipment and devices (the "Gaming Assets") by the issuance to HGI of 759,036 unregistered shares of Common Stock. The Company did not obtain any independent market appraisal nor engage an investment banker to render any opinion with respect to the fairness to the Company from a financial point of view of the consideration paid by the Company in each of the foregoing transactions. However, the Company believes that the terms of each of the foregoing agreements are at least as favorable as could have been obtained from non-affiliated third parties. A personal loan to the Jansens, the proceeds of which were advanced to the Company in 1987, was collateralized by a second trust deed on certain real and personal property of the Company. Monthly payments of $3,330, including 14% interest, were made to the Jansens through September 30, 1993. On October 1, 1993, the Jansens converted their outstanding loans and advances to equity, including this loan with a balance of $195,483; the loan was paid in full in August 1994. 51 In 1993, a parcel of land was quitclaimed to Norbert W. Jansen and, accordingly, Mr. Jansen's loans and advances were reduced by the fair market value of the land, which exceeded its historical cost by $115,000. From October 1, 1993 through February 11, 1994, HGI operated the casino business of the Company subject to a lease (the "Interim Lease"). The Interim Lease provided for monthly rentals of $32,500. During this period, the Company paid certain overhead and general and administrative expenses on behalf of HGI aggregating $56,780. This amount was recorded by the Company as a receivable from HGI. Upon the completion of the initial public offering, the Interim Lease terminated and the Company acquired possession of the casino and title to the gaming assets for a nominal amount. In October 1994, the Company agreed to assume the $95,000 liability of Mr. Jansen in connection with the settlement of certain litigation covering a claim for architectural fees allegedly incurred in designing a building to be built upon property owned by the Company. The settlement resulted in a significant discount of the fees sought and the acquisition of the intellectual property rights in the building and plans. The Company agreed to assume Mr. Jansen's liability since his efforts to build the building were undertaken on behalf of the Company, and not in his individual capacity. On January 10, 1996, the Company borrowed $500,000 from Mr. Norbert Jansen and issued to Mr. Jansen a 12% uncollateralized promissory note payable upon the earlier of the completion of a proposed private placement equity offering or September 30, 1996. The Company utilized the proceeds of this loan to repay, in part, a note payable to an unaffiliated third party. On September 25, 1996, the Company repaid the loan to Mr. Jansen in full. On March 29, 1996, the Company borrowed $500,000 from Mr. Norbert Jansen and issued to Mr. Jansen a 12% uncollateralized promissory note payable upon the earlier of the completion of a proposed private placement equity offering or September 30, 1996. In addition, on March 29, 1996, the Company borrowed $500,000 from Mr. James Scibelli and issued to Mr. Scibelli a 10% uncollateralized promissory note payable upon the earlier of the completion of a proposed private placement equity offering or November 1, 1996. The Company utilized the proceeds of these loans to satisfy certain indebtedness due April 1, 1996. On September 25, 1996, the Company repaid the loans to Messrs. Jansen and Scibelli in full. In April 1996, the Company borrowed $250,000 from Mr. Norbert Jansen and issued to Mr. Jansen a 10% uncollateralized promissory note payable on demand after 90 days. The Company utilized the proceeds of this loan as working capital. On September 25, 1996, the Company repaid the loan to Mr. Jansen in full. During the fiscal years ended September 30, 1995 and 1996, the Company leased office space for certain executive and administrative employees from Norbert W. Jansen for approximately $8,375 per month, totaling $43,874 and $101,375, respectively. The Company believes that the rent charged was fair and reasonable and on as beneficial terms as could have been obtained from an unaffiliated third party consistent with other rentals assessed in the market area for similar facilities. Effective October 1, 1996, in connection with the private transaction with Diversified Opportunities Group Ltd., the Company entered into a lease agreement (the "Lease Agreement") as the tenant with The Jansen Trust as the landlord. The Lease Agreement covers certain land to the north of the hotel and casino (the "Property") which enables the Company to control the use of the Property and provides the Company with an option to purchase the Property for possible expansion of the hotel and casino. 52 The Property consists of approximately 1.07 acres of land and has 150 feet of frontage on the Strip. It currently contains a two-story office building which is leased to several retail and office tenants, including the executive and administrative offices of the Company. The Lease Agreement commenced October 1, 1996 and has a term of 24 months, with an option to extend the lease term for an additional five years and a second, successive, option to extend it an additional 23 years. The base rent of $70,000 per month ($840,000 per year) is subject to adjustment after five years. In addition, the Lease Agreement grants the Company an option to purchase the Property under certain terms and conditions. The Company believes that the terms of the Lease Agreement are fair and reasonable and on as beneficial terms as could be obtained from an unaffiliated third party consistent with other rentals assessed in the market area for similar facilities. In September 1996, the Company entered into a long term lease with HGI with respect to the gift shop within the hotel-casino covering approximately 1,000 square feet for an initial term of ten years, with a 5-year option, at a base monthly lease payment of the greater of $5.00 per square foot or 10% of the tenant's gross sales. Prior to September 1996, the Company leased to HGI a different and smaller store on its property as a gift shop at a monthly rental of $1,000. All future transactions with affiliates will be on terms no less favorable than could be obtained from unaffiliated parties. Any loans to officers, affiliates and/or shareholders of the Company are subject to the approval by a majority of the disinterested directors of the Company. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. 3.1 Restated Articles of Incorporation of the Registrant.* 3.2 Certificate of Amendment of Articles of Incorporation of the Registrant.** 3.3 Bylaws of the Registrant.* 4.1 Form of Warrant Agreement.* 4.2 Indenture between Boardwalk Casino, Inc., Issuer and Shawmut Bank, N.A., Trustee for $40,000,000 16.5% First Mortgage Notes Due March 31, 2005, Dated as of April 7, 1995.* 10.1 Outside Directors Stock Option Plan of Boardwalk Casino, Inc.** 10.2 1994 Stock Compensation Plan of Boardwalk Casino, Inc.** 10.3 Employment Agreement between Boardwalk Casino, Inc. and Norbert W. Jansen.** 10.4 Employment Agreement between Boardwalk Casino, Inc. and Louis J. Sposato.** 10.5 Employment Agreement between Boardwalk Casino, Inc. and Forrest J. Woodward, II.*** 53 10.6 Subscription Agreement between the Company and the Partners of VC, Ltd., Limited Partnership (the "VC Subscription Agreement").* 10.7 Acquisition Agreement between the Company and Norbert W. Jansen (the "Jansen Acquisition Agreement").* 10.8 Acquisition Agreement between the Company and Holiday Gifts, Inc. (the "HGI Acquisition Agreement").* 10.9 Holiday Inns Franchising, Inc. License Agreement with the Company.* 10.10 Purchase Agreement dated as of September 24, 1996, by and among Diversified, Jansen and the Company. 10.11 Convertible Subordinated Note dated September 24, 1996, executed by the Company in favor of Diversified. 10.12 Option and Proxy Agreement dated as of September 24, 1996, by and among Diversified, Jansen and the Company. 10.13 Registration Agreement dated as of September 24, 1996, by and between Diversified and the Company. 10.14 Lease Agreement effective as of October 1, 1996, by and between Jansen and the Company. 23.1 Consent of Coopers & Lybrand L.L.P., independent public accountants, to the incorporation by reference in the Registration Statements on Form S-8 (file numbers 333-05019 and 333-05021) of their report dated November 27, 1996, included in the Registrant's Report on Form 10-KSB for the fiscal year ended September 30, 1996. 27.1 Financial Data Schedule. __________ * - incorporated by reference to the Exhibits to the Registration Statement on Form SB-2 and Post Effective Amendments thereto, file number 33-71816-LA, declared effective February 11, 1994, June 29, 1995 and February 6, 1996. ** - incorporated by reference to the Report on Form 10-KSB for the fiscal year ended September 30, 1994, file number 1-12780. *** - incorporated by reference to the Report on Form 10-KSB for the fiscal year ended September 30, 1995, file number 1-12780. (b) REPORTS ON FORM 8-K. The Company did not file any reports on Form 8-K during the last quarter of the period covered by this report. 54 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BOARDWALK CASINO, INC. Registrant Date: 1/13/97 By: /s/ FORREST J. WOODWARD ----------------------------------- Forrest J. Woodward, President and Chief Operating Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. NAME TITLE DATE ---- ----- ---- DECEASED Chief Executive Officer and - ----------------------------- Chairman of the Board of Directors Norbert W. Jansen /s/ AVIS P. JANSEN Vice President and Director 1/13/97 - ----------------------------- Avis P. Jansen /s/ LOUIS J. SPOSATO Chief Financial Officer, 1/13/97 - ----------------------------- Secretary, Treasurer and Director Louis J. Sposato /s/ JAMES SCIBELLI Director 1/13/97 - ----------------------------- James Scibelli /s/ KEVEN J. PICARDO Director 1/13/97 - ----------------------------- Keven J. Picardo /s/ JEFFREY P. JACOBS Director 1/13/97 - ----------------------------- Jeffrey P. Jacobs 55 EX-10.10 2 EXHIBIT 10.10 - PURCHASE AGMT. PURCHASE AGREEMENT THIS PURCHASE AGREEMENT is made and entered into as of the ______ day of September, 1996, by and among BOARDWALK CASINO, INC., a Nevada corporation ("Seller"), NORBERT W. JANSEN, individually and as trustee under an agreement dated July 14, 1993 ("Jansen"), and DIVERSIFIED OPPORTUNITIES GROUP LTD., an Ohio limited liability company, or its nominee as described in Section 27 ("Purchaser"). RECITALS Seller desires to sell to Purchaser certain Shares (as hereinafter defined) and issue to Purchaser a convertible subordinated note in the principal amount of $5,000,000 (the "Note"), and Purchaser desires to acquire the Shares and the Note from Seller. AGREEMENTS NOW, THEREFORE, in consideration of the foregoing Recitals and of the warranties, representations, agreements and undertakings hereinafter set forth, the parties hereto do hereby represent, warrant, covenant and agree as follows: 1. CERTAIN DEFINITIONS For the purposes of this Agreement, the terms defined in this Section 1 shall have the meanings set out below. All capitalized terms not defined in this Section 1 shall have the meanings ascribed to them in other parts of this Agreement. (a) "Closing Date" shall mean ______________________, 1996, as of the close of business, or such other date as to which the parties may agree in writing. (b) "Closing" shall mean the closing on the Closing Date of the purchase and sale transaction contemplated by this Agreement. (c) "Annual Statement" shall mean Seller's Balance Sheet at September 30, 1995 and the accompanying Statements of Income (Loss), Statements of Cash Flows and Statements of Shareholders' Equity for Seller's two fiscal years then ended, together with the schedules and notes related thereto, accompanied by the applicable report of Coopers & Lybrand L.L.P., Certified Public Accountants, as filed with the Securities and Exchange Commission ("SEC"). (d) "Interim Statement" shall mean Seller's unaudited Balance Sheet at June 30, 1996 and the accompanying Statements of Operations and Statements of Cash Flow for the 9-month period then ended, together with the notes relating thereto, as filed with the SEC. (e) "Financial Statements" shall mean the Annual Statement and Interim Statement. (f) "Material Adverse Effect" shall mean any event which would, in the aggregate, have a material adverse effect upon the business, assets, financial condition or results of operations of Seller on a consolidated basis. (g) "Purchaser Material Adverse Effect" shall mean any event which would, in the aggregate, have a material adverse effect upon the business, assets, financial condition or results of operations of Purchaser. (h) "Shares" shall mean shares of Seller's Common Stock, $.001 par value. 2. PURCHASE AND SALE; PRICE Seller agrees to issue and sell to Purchaser, as the case may be, and Purchaser agrees to purchase from Seller, the Note and certain of the Shares for the purchase price and upon and subject to the terms, provisions and conditions hereinafter set forth. (a) ISSUANCE OF NOTE. Seller shall issue and Purchaser shall purchase the Note. The Note shall be in substantially the form and substance of Exhibit A attached hereto and -2- incorporated herein by reference. The Note shall contain, among other things, interest at a variable rate per annum equal to Purchaser's costs of funds (estimated at LIBOR + 2.25%) (the "Charged Rate"). Each change in the Charged Rate shall result immediately, without notice or demand of any kind, in a corresponding change in the interest rate under the Note, effective with respect to the periods on or after the date of such change. Interest due on the Note shall be payable on a quarterly basis. The principal of the Note shall be due and payable on the second anniversary of the Closing Date and shall, commencing on the receipt from the Nevada Gaming Commission (the "Commission") and the Nevada State Gaming Control Board (the "Gaming Board") and the authorities of Clark County, Nevada (the Commission, the Gaming Board and the Clark County Authorities are collectively referred to as the "Nevada Gaming Authorities") of all requisite licensing, findings of suitability or other approval required in accordance with Nevada law ("Licensing Approval"), be convertible into Shares at a conversion price of $7.50 per share. The Note shall be secured by a second priority lien on the Collateral, as such term is defined in that certain Indenture dated as of April 7, 1995 between Seller and Shawmut Bank, N.A., Trustee for $40,000,000 16.5% First Mortgage Notes Due March 31, 2005 (the "Indenture"). This second priority lien shall be evidenced by a Deed of Trust and Security Agreement in substantially the form and substance of Exhibit B attached hereto and incorporated herein by reference. (b) PURCHASE OF SHARES. Seller shall sell and Purchaser shall purchase 571,429 Shares at a price of $7.00 per Share for a total purchase price of $4,000,000. (c) ACQUISITION OF AND OPTION FOR JANSEN SHARES. Pursuant to an Option and Proxy Agreement to be entered into between Purchaser and Jansen (the "Option Agreement"), Purchaser shall have the obligation to acquire certain Shares owned by Jansen and the right to -3- acquire certain Shares owned by Jansen. The Option Agreement shall be in substantially the form and substance of Exhibit C attached hereto and incorporated herein by reference. (d) PAYMENT OF PURCHASE PRICE. The purchase price of $5,000,000 for the Note and $4,000,000 for the Shares pursuant to Sections 2(a) and 2(b) above, shall be paid by Purchaser to Seller by wire transfer or by certified or bank check at the Closing. 3. AGREEMENTS REGARDING REGISTRATION OF SHARES AND BOARD REPRESENTATION. (a) At or prior to the Closing, Purchaser and Seller shall execute and deliver a Registration Agreement (the "Registration Agreement") in substantially the form and substance of Exhibit D attached hereto and incorporated herein by reference. The Registration Agreement shall provide for the registration of all Shares acquired by Purchaser as contemplated hereunder, including those acquired by conversion of the Note or pursuant to the Option Agreement. (b) Within seven (7) days following the earlier to occur of (i) receipt of a favorable ruling letter from the Gaming Board, satisfactory to Purchaser and Seller, each in the exercise of its reasonable business judgment, with respect to the transactions contemplated by this Agreement, or (ii) Purchaser having obtained Licensing Approval, Seller's Board of Directors (the "Board") shall be expanded to six persons, one of whom shall be Jeffrey P. Jacobs ("Jacobs"). Subject to Purchaser having obtained Licensing Approval, at such time as Purchaser shall have acquired a total of 1,000,000 or more Shares from Jansen pursuant to the Option Agreement, the Board shall be expanded to seven members and Purchaser shall be entitled to nominate the additional Board member. 4. REPRESENTATIONS AND WARRANTIES BY SELLER AND JANSEN. As a material inducement to Purchaser to enter into this Agreement, Seller and Jansen, jointly and severally, represent, warrant to and, where applicable, covenant with Purchaser -4- that as of the date hereof and as of the Closing Date (it being acknowledged, however, that the representations and warranties being made by Jansen are being made to the best of his actual knowledge): (a) DUE ORGANIZATION. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada, has full corporate power and authority to own its properties and to carry on its business as it is now being conducted, is duly qualified to do business and is in good standing in all jurisdictions in which it is required to be so qualified, except where the failure to so qualify or be in good standing would not, in the aggregate, result in a Material Adverse Effect. Seller has received all necessary authorizations, consents, licenses and approvals of the Nevada Gaming Authorities, and other governmental authorities material to the ownership of its properties and assets and to the conduct of its business. (b) POWER AND AUTHORITY; NO CONFLICTS. Seller has full power and authority (corporate or otherwise) to enter into and carry out the terms of this Agreement. The execution and delivery by Seller of this Agreement and the other documents and instruments to be executed and delivered by Seller pursuant hereto and thereto and the consummation of the transactions contemplated hereby and thereby by Seller have been duly authorized by the requisite vote of the Board of Seller. This Agreement has been duly and validly executed by Seller and constitutes, and when executed and delivered, each other document and instrument to be executed and delivered by Seller pursuant hereto, will constitute, a valid and binding agreement of Seller enforceable against it in accordance with their respective terms subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and except to the extent that the enforceability of rights and remedies may be limited by general principles of equity. The execution and delivery of this -5- Agreement does not, and, subject to any requisite governmental or other consents or approvals, the consummation of the transactions contemplated hereby will not, (i) violate any provision of the Articles of Incorporation, as amended, of Seller, or the Bylaws of Seller, (ii) violate or conflict with any law, ordinance, rule, regulation, order, judgment or decree to which Seller is subject or by which Seller is bound, or (iii) violate or conflict with or constitute a material default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or will result in the termination of, or accelerate the performance required by, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets under, any term or provision of any material contract, commitment, understanding, arrangement, agreement or restriction of any kind or character to which Seller is a party or by which any of its assets or properties may be bound or affected. Except for required approvals of the Nevada Gaming Authorities, no consent, approval, authorization or action by any other federal, state, local or foreign governmental agency, instrumentality, commission, authority, board or body (collectively, "Governmental Agency") or any other third party is required in connection with the execution and delivery by Seller of this Agreement and the other documents and instruments to be executed and delivered by Seller pursuant hereto or the consummation by Seller of the transactions contemplated herein or therein. (c) CAPITAL STRUCTURE. The authorized capital stock of Seller as of September 11, 1996 consists solely of Fifteen Million (15,000,000) Shares, of which 6,608,000 are issued and outstanding, and Fifteen Million (15,000,000) shares ("Preferred Shares") of a preferred class, $.001 par value, none of which Preferred Shares are issued and outstanding. No Shares or Preferred Shares are held as treasury shares. All of the outstanding shares of capital stock of Seller have been duly authorized and validly issued and are fully paid and nonassessable and free from preemptive rights. Schedule 4(c) sets forth a list of each stock option, warrant or other right -6- to acquire securities of Seller (an "Option") outstanding on the date of this Agreement. There are no outstanding options, warrants, convertible securities, subscriptions or other rights or agreements providing for the issuance or delivery of any additional shares of capital stock of Seller, except the Options. (d) VALID ISSUANCE OF SHARES. The Shares that are being purchased hereunder, when issued, sold and delivered in accordance with the terms of this Agreement and the Option Agreement, for the consideration expressed herein and therein, will be duly and validly issued, fully paid and nonassesszable. The Shares issuable upon conversion of the Note have been duly and validly reserved for issuance, and when issued upon conversion, will be duly and validly issued, fully paid and nonassessable. (e) SUBSIDIARIES. Seller has no subsidiaries, either wholly or partially owned. (f) SEC DOCUMENTS. Seller has made available to Purchaser a true and complete copy of each report, schedule, registration statement and definitive proxy statement filed by Seller with the SEC since March 31, 1994 (as such documents have since the time of their filing been amended, the "Seller SEC Documents") which are all of the documents (other than preliminary material) that Seller was required to file with the SEC since such date. As of their respective dates, the Seller SEC Documents complied in all material respects with the requirements of the Securities Act of 1933, as amended (the "1933 Act"), or the Securities Exchange Act of 1934, as amended, as the case may be, and the rules and regulations of the SEC thereunder applicable to such Seller SEC Documents, and none of the Seller SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of Seller included in the Seller SEC Documents comply as to form in all material respects with applicable accounting -7- requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Form 10-QSB of the SEC) and fairly present (subject, in the case of the unaudited statements, to normal, recurring audit adjustments) the consolidated financial position of Seller as at the dates thereof and the consolidated results of its operations and cash flows for the periods then ended. To the best of its knowledge Seller is not now, nor has it ever been, the subject of any inquiry or other investigation by the SEC ("SEC Investigation"), nor, to the best knowledge of Seller, is any such SEC Investigation pending or threatened. (g) TITLE TO ASSETS. Seller has good, marketable and valid title in and to all of its assets, including all real, personal and intangible property, and, except for the lien created by the Indenture and as set forth on Schedule 4(g), holds its assets free and clear of any mortgage, conditional sale agreement, title retention agreement, security interest, lease, pledge, hypothecation, lien or other encumbrance. (h) CONDITION OF ASSETS. All of the assets (whether owned or leased) that are necessary for the conduct of the business of Seller are in normal operating condition, free from defects other than such minor defects as do not materially interfere with the continued use thereof in normal operations. (i) INSURANCE. Seller (a) maintains insurance policies with licensed insurance carriers on such assets, properties and businesses and against such risks as is customary for companies engaged in its business, or (b) has reserved on the Financial Statements sufficient funds to cover all losses known to it arising from such risks. Schedule 4(i) sets forth a list and brief description (specifying the insurer and describing each pending claim thereunder) of all -8- policies, binders or reserves of fire, liability, workers' compensation, vehicular and other insurance or self-insurance held by or on behalf of Seller. All such policies are in full force and effect and insure against risks and liabilities to an extent and in a manner customary in the industry in which Seller operates. Except for claims identified on Schedule 4(i), there are no outstanding unpaid claims under any such policy, binder or reserve. Except as set forth on Schedule 4(i), there will be no liability of Seller, as of the Closing Date, under any such insurance policy or ancillary agreement with respect thereto in the nature of a retroactive rate adjustment, loss sharing arrangement or other actual or contingent liability arising wholly or partially out of events occurring prior to the Closing Date. Seller has received no notice of cancellation or nonrenewal of any such policy or binder. There is no inaccuracy in any application for such policies or binders, or any failure to pay premiums due. (j) DIVIDENDS AND DISTRIBUTIONS. From December 31, 1995 to the date hereof, Seller has not declared or paid any dividends on any Shares or Preferred Shares, nor has it made any other payments or distributions thereon to its shareholders. (k) SELLER DATA. Seller has made available to Purchaser its corporate minutes, articles and bylaws, books and records, all material contracts, summaries of all loans and all leases, evidence of all bank accounts, an accurate and complete list of each insurance policy currently providing coverage for the real and personal property owned, operated or leased together with copies of such policies, information regarding employee compensation and benefit plans, a list of all outstanding workers compensation and unemployment claims, all licenses and permits that Seller has with respect to its operations, and all outstanding citations or complaints relating to environmental, health or safety laws or regulations (collectively, the "Seller Data"). Seller acknowledges that Purchaser has relied on the Seller Data in deciding to execute this Agreement and consummate the transactions contemplated hereby. -9- (l) UNDISCLOSED LIABILITIES. Seller has no liabilities or obligations of any nature, secured or unsecured (absolute, accrued, contingent or otherwise and whether due or to become due), which would result in a Material Adverse Effect, except (i) liabilities and obligations that are fully reflected, reserved against or disclosed in the Financial Statements, and (ii) liabilities and obligations incurred in the ordinary course of business consistent with past practice. (m) INVESTIGATION OR LITIGATION. Except as set forth on Schedule 4(m), there is no investigation or review pending or to the best knowledge of Seller threatened by the Nevada Gaming Authorities or any other Governmental Agency or other party or person with respect to Seller; nor have the Nevada Gaming Authorities or any other Governmental Agency or other party or person indicated in writing to Seller an intention to conduct any such investigation or review; nor, to the knowledge of Seller, is there any valid basis for any such investigation or review. Except as set forth on Schedule 4(m), there is no claim, action, suit or proceeding pending before or, to the best knowledge of Seller, threatened against or affecting Seller at law or in equity by, the Nevada Gaming Authorities or any other Governmental Agency or other party or person, nor is there, to the best knowledge of Seller, any valid basis for any such claim, action, suit or proceeding. (n) CERTAIN AGREEMENTS. Except as disclosed in the Seller SEC Documents filed prior to the date of this Agreement or in Schedule 4(n) as of the date of this Agreement, Seller is not a party to any oral or written (i) consulting agreement not terminable on 60 days' or less notice, (ii) agreement with any executive officer or other key employee of Seller, or (iii) agreement or plan, including any stock option plan, stock appreciation rights plan, any of the Plans (as defined in Section 4(o)), restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the -10- occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. (o) EMPLOYEE BENEFITS. (i) Schedule 4(o) contains a true and complete list of each bonus, deferred compensation, incentive compensation, stock purchase, stock option, severance or termination pay, hospitalization or other medical, life or other insurance, supplemental unemployment benefits, profit-sharing, pension, retirement or other employee benefit plan, program, practice, agreement or arrangement, including, without limitation, each "employee benefit plan" as defined in section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), sponsored, maintained, contributed to or required to be contributed to by Seller or any trade or business, whether or not incorporated (an "ERISA Affiliate"), whose employees would, for the purposes of applying certain provisions of the Internal Revenue Code of 1986, as amended (the "Code"), be aggregated with the employees of Seller under Section 414(b), (c), (m), (n) and/or (o) of the Code or which would be deemed to be a member of a "controlled group" within the meaning of section 4001(a)(14) of ERISA of which Seller is also a member, for the benefit of current or former employees or directors of Seller and/or such ERISA Affiliate (the "Plans"). Seller has delivered or made available to Purchaser true and complete copies of all documents, as they may have been amended to the date hereof, embodying or relating to the Plans. (ii) Each of the Plans has been operated and administered in all material respects in accordance with applicable laws, including but not limited to ERISA and the Code. No violation of Section 404 of ERISA has occurred with respect to any Plan. (iii) There are no pending, or to the best knowledge of Seller, threatened -11- or anticipated claims (other than routine claims for benefits) by, on behalf of or against any of the Plans or any trusts related thereto. (p) LABOR MATTERS. Seller has not entered into any collective bargaining agreements or any other agreements with any labor organization or any other person or group claiming to represent or bargain collectively for any of Seller's employees. There are no unfair labor practice charges, lawsuits, grievances or administrative charges pending or to the best knowledge of Seller threatened, concerning or affecting Seller. Seller has received no written notice nor has there been any proceeding or adjudication questioning whether or alleging or determining that Seller is not in compliance, in all material respects, with all federal, state and local laws and regulations with respect to employment, employment practices and terms and conditions of employment. (q) TAXES. Seller has (i) timely filed all tax returns, schedules, declarations, and tax-related documents including, without limitation, all Forms 5500 pertaining to the Plans (collectively, "Returns") required to be filed in any jurisdictions to which it is or has been subject, (ii) timely paid in full all taxes, interest and penalties with respect thereto subject to audit by the taxing authorities by such jurisdictions and timely made all deposits of tax required by all applicable taxing jurisdictions, (iii) fully accrued on its books an amount sufficient to pay all taxes not yet due but related to operations through the date hereof and will have accrued all taxes not yet due but which will become due through the Closing Date, (iv) made timely payments of all taxes required to be deducted and withheld from the wages paid to employees, and (v) otherwise satisfied, in all material respects, all legal requirements applicable to it with respect to all aforementioned obligations to taxing jurisdictions. All Returns filed by Seller accurately reflect in all material respects their income, expenses, deductions, credits and loss carryovers and the taxes due and are otherwise accurate and complete in all material respects and have not been -12- amended. Seller has delivered to Purchaser true and complete copies of all federal and state income and franchise tax returns for each of the taxable years ended September 30, 1993 through September 30, 1995, inclusive. Seller has no knowledge that an audit of any of the federal income tax returns of Seller is in progress and has no reason to believe that any such audit is contemplated. For purposes of this Section, "tax" and "taxes" (when not modified by other words such as "income" or "franchise") shall include all income, gross receipts, franchise, excise, real and personal property, and other taxes imposed by any federal, state, municipal, local, or other governmental agency, including assessments in the nature of taxes. (r) ABSENCE OF CERTAIN CHANGES. Since December 31, 1995, Seller has not suffered any Material Adverse Effect. (s) CONDUCT OF BUSINESS. Except as shown on Schedule 4(s), since the close of business on June 30, 1996, Seller has not, and prior to the Closing Date will not have, without the prior written consent of Purchaser: (i) Issued, sold, redeemed, reclassified or purchased any Shares or Preferred Shares or other corporate securities, warrants or debt instruments or granted any Options or other rights in connection therewith, except in connection with the exercise of warrants outstanding as of June 30, 1996. (ii) Incurred, paid or settled any obligations, commitments or liabilities, absolute, accrued, contingent or otherwise, which would result in a Material Adverse Effect, except obligations, commitments or liabilities to perform sales contracts, purchase orders or similar commitments, in each case incurred, paid or settled in normal amounts and in the regular and ordinary course of Seller's business. (iii) Incurred any continuing contract or commitment or other liability for the future purchase of materials, supplies or equipment which is not in the regular and ordinary course of the business, or any contracts or commitments for capital expenditures in excess of Twenty-Five Thousand Dollars ($25,000) individually or One Hundred Thousand Dollars ($100,000) in the aggregate. -13- (iv) Conducted its business other than in the regular and ordinary course thereof. (v) Sold, assigned, transferred, encumbered or granted a security interest in respect of any of its assets. (vi) Entered into any pension, retirement, deferred compensation, profit sharing, bonus, retainer, consulting, welfare or incentive compensation plan or arrangement, or any contract, or any fringe or other benefits or arrangements, of, with or for any officer, director, employee or any other person; or granted any increase in the compensation payable, or to become payable, by Seller to any of its officers, directors, employees or other persons (other than customary merit increases of nonofficers), or in any bonus, insurance, pension or other benefit plan made for or with any of them. (vii) Terminated any material contract, agreement, license or other instrument to which it is a party other than in the regular and ordinary course of business. (viii) Changed its Articles of Incorporation, Bylaws or any aspect of its corporate structure. (ix) Agreed to do any of the things or made any commitment to take any of the types of action specified in (i) through (viii) above. (t) LEGAL COMPLIANCE. Seller has complied in all material respects with all applicable laws, rules, regulations, and ordinances of any Governmental Agency (including, without limitation, all laws and regulations of the Nevada Gaming Authorities) having jurisdiction, any trademark, tradename or copyright rules and regulations, and any zoning, occupational safety or environmental protection laws or any laws relating to the employment of labor. Seller is not in violation of, or in default under, any terms or provisions of any mortgage, indenture, security agreement, lease, license, contract, agreement, instrument, order, arbitration award, judgment, injunction or decree (other than violations or defaults which individually or in the aggregate would not result in a Material Adverse Effect). Seller has not received any written notice nor has there been any proceeding or adjudication questioning whether or alleging or -14- determining that the business of Seller is or has been conducted in violation of any law, ordinance, regulation, order, decree, judgment or injunction. Except as disclosed on Schedule 4(t), Seller has not received any written notice nor has there been any proceeding or adjudication questioning whether or alleging or determining that it has not obtained all permits, licenses and other authorizations which relate to the assets or the business of Seller. Seller has not received any written notice nor has there been any proceeding or adjudication questioning whether or alleging or determining that it is not in compliance in all material respects with all material terms and conditions of such permits, licenses and authorizations. (u) ENVIRONMENTAL PROTECTION. (i) Seller is in compliance with all Environmental Laws (as hereinafter defined) applicable to the business of Seller. Seller has disclosed to Purchaser all outside consultants' reports, internal memoranda, legal documents and any other information, written or otherwise (including without limitation, phase 1 and phase 2 reports) in Seller's possession relating to its and their compliance with all Environmental Laws. (ii) "Environmental Laws" means all U.S. federal, state, local and foreign laws and regulations relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata). (v) COPYRIGHTS, TRADEMARKS, TRADE NAMES, ETC. Schedule 4(v) contains an accurate and complete list of all material copyrights, trademark registrations, trademark applications, service marks, trade names and assumed names used in Seller's business. Seller has not received written notice nor has there been any proceeding or adjudication questioning whether or alleging or determining that the use thereof by Seller infringes on or conflicts with any -15- existing patents, trademarks or copyrights or any other rights of any person. Seller has not received any written notice of any material claim of a third party to the use of any such names. (w) CONTRACTS. Except for employment arrangements disclosed on Schedule 4(n), each contract and commitment (whether written or oral) that individually involves potential future payments by or to Seller of $50,000 or more is disclosed on Schedule 4(w) (except as otherwise indicated therein) and copies of such written contracts or commitments have been provided to Purchaser. Seller is not, nor has it been during the past three years, a partner in any partnership or a party to any joint venture. (x) FULL DISCLOSURE. There is no fact known to Seller which has not been disclosed to Purchaser in writing, that has caused, or would reasonably be anticipated to result in, a Material Adverse Effect. 5. REPRESENTATIONS AND WARRANTIES OF PURCHASER. As a material inducement to Seller to enter into this Agreement, Purchaser represents, warrants to and, where applicable, covenants with Seller that as of the date hereof and as of the Closing Date: (a) DUE ORGANIZATION. Purchaser is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Ohio, has the requisite power and authority to own its properties and to carry on its business as it is now being conducted. (b) POWER AND AUTHORITY; NO CONFLICTS. Purchaser has the requisite power and authority to enter into and carry out the terms of this Agreement. The execution and delivery of this Agreement and the other documents and instruments to be executed and delivered by Purchaser pursuant hereto and the consummation of the transactions contemplated hereby and thereby by Purchaser have been duly authorized by all necessary action of Purchaser. This Agreement has been duly and validly executed and delivered by Purchaser and constitutes, and when executed and delivered, the other documents and instruments to be executed and delivered -16- by Purchaser will constitute, valid and binding agreements of Purchaser, enforceable against Purchaser in accordance with their respective terms subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and except to the extent that the enforceability of rights and remedies may be limited by general principles of equity. The execution and delivery of this Agreement does not, and, subject to any requisite governmental or other consents or approvals (including, without limitation, Licensing Approval of the Nevada Gaming Authorities), the consummation of the transactions contemplated hereby and thereby will not, (i) violate any provision of the Articles of Organization or the Operating Agreement of Purchaser, or (ii) violate or conflict with any law, ordinance, rule, regulation, order, judgment or decree to which Purchaser is subject or by which Purchaser is bound (other than violations or conflicts which individually or in the aggregate would not have a Purchaser Material Adverse Effect or which would not prevent or delay the consummation of the transactions contemplated hereby). Except for any required Licensing Approval of the Nevada Gaming Authorities, no consent, approval, authorization or action by any Governmental Agency or any other third party is required in connection with the execution and delivery by Purchaser of this Agreement and the other documents and instruments to be executed and delivered by Purchaser pursuant hereto or the consummation by Purchaser of the transactions contemplated herein or therein. (c) INVESTMENT PURPOSE. The Shares and the Note being acquired by Purchaser pursuant to this Agreement and the Option Agreement are being acquired for Purchaser's own account and not with the view to or for resale in connection with, any distribution or public offering thereof within the meaning of the 1933 Act. Purchaser understands that the Shares have not been registered under the 1933 Act by reason of their contemplated issuance in a transaction believed to be exempt from the registration and prospectus delivery requirements of the 1933 Act -17- pursuant to Section 4(2) thereof, and in transactions believed to be exempt from the registration and/or qualification provisions of the appropriate state securities laws. Purchaser has such knowledge and experience in financial and business matters that it is capable of independently evaluating the risks and merits of purchasing or acquiring the Shares. Purchaser is an accredited investor as defined in Regulation D promulgated under the 1933 Act. Purchaser has not been formed solely for the purpose of consummating the transactions contemplated hereby. 5. CLOSING The Closing hereunder shall take place at 10:00 a.m. on the Closing Date at the offices of Hahn Loeser & Parks, 3300 BP America Building, 200 Public Square, Cleveland, Ohio 44114. 6. UNDERTAKINGS. (a) Prior to the date hereof, Purchaser and its agents and representatives commenced and, from and after the date hereof, shall be permitted to continue Purchaser's due diligence review of Seller, in anticipation of the Closing, and shall have full access to all relevant information regarding Seller, its assets, the business and the Shares to determine that all financial and other information that has been and will be provided to Purchaser is reasonably accurate. Purchaser acknowledges that such information shall be and remain confidential until the Closing. In the event the transactions contemplated by this Agreement do not close, Purchaser shall return to the Seller all documents previously furnished to Purchaser by the Seller. Purchaser and its agents and representatives hereby agree that they will not divulge or use any confidential or other proprietary information regarding Seller, except to the extent (i) required by law, (ii) otherwise available from third parties, or (iii) previously known to Purchaser from sources other than the Seller. -18- (b) Seller and Jansen shall not divulge or use any confidential or proprietary information regarding the Purchaser, except to the extent (i) required by law, (ii) otherwise available from third parties, or (iii) previously known to Seller or Jansen from sources other than the Purchaser. 8. INTENTIONALLY OMITTED. 9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER The obligations of Purchaser hereunder are subject to the following conditions, any of which may be waived in writing by Purchaser: (a) REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. The representations and warranties of Seller and Jansen contained in this Agreement shall be true and correct on the Closing Date with the same effect as if made on and as of such date. All Schedules and all other information furnished to Purchaser pursuant to this Agreement shall be updated by Seller as of the Closing Date. (b) PERFORMANCE OF AGREEMENTS AND CONDITIONS. Seller and Jansen shall have performed and complied with all agreements and conditions required by this Agreement to be performed and complied with by Seller and Jansen, as the case may be, prior to or at the Closing Date. (c) SECRETARY'S CERTIFICATE. Seller shall have delivered to Purchaser a certificate from its Secretary, dated the Closing Date, certifying in such detail as Purchaser may reasonably request to Seller's and Jansen's fulfillment of the conditions specified in subsections (a) and (b) above and such other evidence as to Seller's and Jansen's compliance with the provisions of this Agreement as Purchaser reasonably may request. (d) Intentionally Omitted. -19- (e) INJUNCTION. On the Closing Date there shall not be in effect any injunction, writ, temporary restraining order or any other order of any nature issued by a court or other governmental body or agency of competent jurisdiction directing that the transactions provided for herein not be consummated as herein provided, nor shall there be any litigation or proceeding pending or threatened in respect of the transactions contemplated hereby. (f) OPTION AGREEMENT. Jansen and Purchaser shall have entered into the Option Agreement. (g) REGISTRATION AGREEMENT. Seller and Purchaser shall have entered into the Registration Agreement. (h) LEASE. Seller and Jansen shall have entered into a lease for adjacent real property (the "Lease") in substantially the form and substance of Exhibit E attached hereto and incorporated herein by reference. (i) INSTRUMENTS OF TRANSFER AND OTHER DOCUMENTS. Seller shall have delivered to Purchaser instruments of transfer which vest in Purchaser good and marketable title to the Shares as required herein, and shall have delivered all other instruments, certificates and other documents required to be delivered hereunder. (j) CONDITION OF BUSINESS AND PROPERTIES. Between the date of this Agreement and the Closing Date, Seller shall have continued to operate its business in its regular and ordinary course, and shall not have suffered a Material Adverse Effect. (k) GOVERNMENTAL APPROVAL. Nothing in this Agreement shall be construed to permit Purchaser to acquire control of Seller (as such term is defined in Nevada Gaming Regulation 16.010(1)) without first obtaining Licensing Approval. (l) Intentionally Omitted. -20- (m) OPINION OF COUNSEL. Purchaser shall have received a legal opinion from Jones, Jones, Close & Brown, Chartered, counsel for Seller and Jansen, dated as of the Closing Date, in form and substance reasonably satisfactory to Purchaser's counsel. (n) DELIVERY OF DOCUMENTS. Seller and Jansen shall have delivered to Purchaser the documents contemplated by Section 13(a) not otherwise hereinabove specified. Seller and Jansen represent and warrant that they have not caused, and they covenant and agree that they shall not cause, any event that would prevent the satisfaction of all of the conditions set forth in this Section 9. Seller and Jansen covenant and agree to take all action reasonably required to satisfy such conditions. 10. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER AND JANSEN The obligations of Seller and Jansen hereunder are subject to the following conditions, any of which may be waived in writing by Seller and Jansen: (a) REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. The representations and warranties of Purchaser contained in this Agreement shall be true and correct on the Closing Date with the same effect as if made on and as of such date. (b) PERFORMANCE OF AGREEMENTS AND CONDITIONS. Purchaser shall have performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by Purchaser prior to or at the Closing Date. (c) PRESIDENT'S CERTIFICATE. Purchaser shall have delivered to Seller and Jansen the certificate of Purchaser's Manager or President, dated the Closing Date, certifying in such detail as Seller and Jansen reasonably may request to Purchaser's fulfillment of the conditions specified in subsections (a) and (b) above and such other evidence as to Purchaser's compliance with the provisions of this Agreement as Seller and Jansen reasonably may request. -21- (d) OPINION OF COUNSEL. Purchaser shall have delivered to Seller and Jansen an opinion of Hahn Loeser & Parks, counsel for Purchaser, dated as of the Closing Date, in form and substance reasonably satisfactory to Seller's and Jansen's counsel. (e) INJUNCTION. On the Closing Date there shall not be in effect any injunction, writ, temporary restraining order or any order of any nature issued by a court or other governmental body or agency directing that the transactions provided for herein not be consummated as herein provided, nor shall there be any litigation or proceeding pending or threatened in respect of the transactions contemplated hereby. (f) DELIVERY OF DOCUMENTS. Purchaser shall have delivered to Seller the documents contemplated by Section 13(b) not otherwise hereinabove specified. Purchaser represents and warrants that it has not caused, and it covenants and agrees that it shall not cause, any event that would prevent the satisfaction of all of the conditions set forth in this Section 10. Purchaser covenants and agrees to take all action reasonably required to satisfy such conditions. 11. INDEMNIFICATION BY SELLER AND JANSEN Seller shall and hereby does indemnify and hold Purchaser harmless from and against and in respect of any and all loss, damage and expense incurred by Purchaser, resulting from, arising out of, attributable to, or in any manner connected with: (i) Any matter in respect of which Seller shall have made any misrepresentation, breached any warranty made pursuant to this Agreement or failed to fulfill any covenant or agreement on the part of Seller contained in this Agreement or in any Exhibit, Schedule or certificate or other document delivered, or to be delivered, by Seller to Purchaser in connection with this Agreement; (ii) Any liability of Seller actual or contingent, current or deferred, not disclosed in the Financial Statements, or any Exhibit or Schedule furnished pursuant hereto; and -22- (iii) Any and all actions, suits, proceedings, demands, assessments or judgments, costs and expenses (including reasonable legal and accounting fees and investigation costs) incident to the foregoing and the enforcement thereof. Jansen shall and hereby does indemnify and hold Purchaser harmless from and against and in respect of any and all loss, damage and expense incurred by Purchaser, resulting from, arising out of, attributable to, or in any manner connected with any matter in respect of which Jansen shall have made any misrepresentation, breached any warranty made pursuant to this Agreement or failed to fulfill any covenant or agreement on the part of Jansen contained in this Agreement or in any certificate or other document delivered, or to be delivered, by Jansen to Purchaser in connection with this Agreement and for any and all actions, suits, proceedings, demands, assessments, or judgments, costs and expenses (including reasonable legal and accounting fees and investigation costs) incident to the foregoing and the enforcement thereof. The indemnification obligations of Seller and Jansen pursuant to this Section 11 are several and not joint and several. If any event shall occur or any circumstance arise which might give rise to a claim in respect of any matter against which Seller and/or Jansen have indemnified Purchaser hereunder, Purchaser promptly shall give notice thereof to Seller and/or Jansen. If the matter as to which indemnification may be sought is a claim by a third party, such notice shall be given within thirty (30) days after said claim shall have been presented to Purchaser; otherwise such notice shall be given promptly after Purchaser shall determine that the matter is one as to which indemnification is sought. Unless the parties otherwise agree in writing, Seller and/or Jansen shall defend against all such third-party claims or otherwise satisfy said claims, at their sole cost and expense, through counsel and accountants designated by them and approved by Purchaser, which approval shall not be withheld unreasonably. Purchaser shall have the right to participate with Seller and/or Jansen -23- in the defense of any such matter and shall fully cooperate with and make available to Seller and/or Jansen the business records of Purchaser for said purpose. If Seller and/or Jansen, after receipt of notification from Purchaser of a third-party claim, fail to protest, defend or settle any such third-party claim, demand, suit or proceeding promptly, diligently and in good faith, Purchaser shall have the right at its discretion to settle, defend or pay the same, in which event, Seller's and/or Jansen's indemnity shall extend to and include the amount of said settlement or payment and/or the costs and legal expenses of such defense. 12. INDEMNIFICATION BY PURCHASER Purchaser shall and hereby does indemnify and hold Seller harmless from and against and in respect of any and all loss, damage and expense incurred by Seller, resulting from, arising out of, attributable to, or in any manner connected with: (a) Any matter in respect of which Purchaser shall have made any misrepresentation, breached any warranty made pursuant to this Agreement or failed to fulfill any covenant or agreement on the part of Purchaser contained in this Agreement or in any Exhibit, Schedule or certificate or other document delivered, or to be delivered, by Purchaser to Seller in connection with this Agreement; and (b) Any and all actions, suits, proceedings, demands, assessments or judgments, costs or expenses (including reasonable legal and accounting fees and investigation costs) incident to the foregoing and the enforcement thereof. If any event shall occur or any circumstance arises which might give rise to a claim in respect of any matter against which Purchaser has indemnified Seller hereunder, Seller shall give notice thereof to Purchaser within thirty (30) days after said claim shall have been presented to it and, unless the parties otherwise agree in writing, Purchaser shall defend against said claim or otherwise satisfy said claim, at its sole cost and expense, through counsel and accountants designated by Purchaser and approved by Seller, which approval shall not be unreasonably withheld. Seller shall have the right to participate with Purchaser in the defense of any such -24- matter and shall fully cooperate with and make available to Purchaser the business records of Seller for said purpose. If Purchaser, after receipt of notification from Seller of a thirty-party claim, fails to protest, defend or settle any such third-party claim, demand, suit or proceeding promptly, diligently and in good faith, Seller shall have the right in its discretion to settle, defend or pay the same, in which event, Purchaser's indemnity shall extend to and include the amount of said settlement or payment and/or the costs and legal expenses of such defense. 13. DOCUMENTS TO BE DELIVERED AT CLOSING At the Closing on the Closing Date: (a) Seller and/or Jansen shall deliver to Purchaser the following: (i) The Note referred to in Section 2(a); (ii) Certificates representing the Shares being purchased under Section 2(b) and the Option Agreement, if any; (iii) The Deed of Trust and Security Agreement referred to in Section 2(a); (iv) The Option Agreement referred to in Section 2(c); (v) The Registration Agreement referred to in Section 3(a); (vi) The Lease referred to in Section 9(h); (vii) The certificate referred to in Section 9(c); (viii) A copy of the Seller's Articles of Incorporation and Bylaws certified as of the Closing Date by the Secretary thereof; (ix) The opinion of counsel referred to in Section 9(m); (x) Certified resolutions of Seller's Board authorizing and approving this transaction; and (xi) All other instruments not herein specifically provided for but which are reasonably necessary or desirable to effectuate the purpose of this Agreement. -25- (b) DELIVERIES BY PURCHASER. Purchaser shall deliver to Seller and/or Jansen, as appropriate, the following: (i) The purchase price due at Closing pursuant to Section 2; (ii) The Option Agreement referred to in Section 2(c); (iii) The Registration Agreement referred to in Section 3(a); (iv) Certified resolutions of the Manager of Purchaser authorizing this transaction; (v) The certificate referred to in Section 10(c); (vi) The opinion of counsel referred to in Section 10(d); and (vii) All other instruments not herein specifically provided for but which are reasonably necessary or desirable to effectuate the purpose of this Agreement. 14. BROKERAGE Each party represents and warrants to the other that except for Brenner Securities, Inc., ("Broker") whose compensation shall be the sole responsibility of Seller, no person or persons assisted in or brought about the negotiation of this Agreement in the capacity of broker, agent, finder or originator on behalf of it. Each party ("First Party") agrees to indemnify and hold harmless the other from any claim asserted against such other party for a brokerage or agent's or finder's or originator's commission or compensation in respect of the transaction contemplated by this Agreement by any person (other than Broker as hereinabove provided) purporting to act on behalf of First Party. 15. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS All representations, warranties and agreements made by Seller, Jansen or Purchaser pursuant hereto shall survive for a period of three (3) years from and after the Closing of this -26- transaction. None of the representations, warranties and agreements shall be affected by any investigation at any time made by or on behalf of any of Seller, Jansen or Purchaser. 16. REGULATORY CONCERNS (a) Purchaser acknowledges and understands that notwithstanding anything to the contrary contained herein if the Commission at any time determines that Purchaser is unsuitable to hold Shares or other securities of Seller, then until such Shares or other securities are owned by persons other than Purchaser, (i) Seller shall not be required or permitted to pay any dividend or interest with regard to such Shares or other securities, (ii) the holder of such Shares or other securities shall not be entitled to vote on any matter as a holder of such Shares or other securities, and such Shares or other securities shall not for any purposes be included in the Shares or other securities of the Company entitled to vote, and (iii) Seller shall not pay any remuneration in any form to the holder of such Shares or other securities. (b) The parties acknowledge that Purchaser and its affiliates will be seeking appropriate Licensing Approval from the Nevada Gaming Authorities, and that no assurance can be given that such Licensing Approval will be issued or when such Licensing Approval may be issued. The Purchaser agrees to file for such Licensing Approval as soon as practicable and to pursue their issuance with reasonable diligence. If Purchaser or its affiliates are (i) found unsuitable, (ii) denied such Licensing Approval or (iii) do not obtain such Licensing Approval on or before the third anniversary of the Closing Date, then, subject to the requirements of the Nevada Gaming Authorities, Seller, upon Purchaser's request, shall on such third anniversary or such earlier time that there is a finding of unsuitability or a denial of such Licensing Approval (i) pay off the indebtedness owing to Purchaser under the Note and/or (ii) redeem the Shares previously purchased by Purchaser from Seller at a price equal to the consideration paid for such Shares by Purchaser. The principal balance of the Note, together with interest owing thereon -27- through the date of the event triggering the payment, shall be paid off within six (6) months following the date of the event triggering payment or such shorter period as may be required by the Nevada Gaming Authorities. The purchase price for the redemption of Shares pursuant to this Section 16(b) shall be paid without interest and shall be paid in twenty-four (24) equal, consecutive monthly installments or such shorter period as may be required by the Nevada Gaming Authorities. The installments shall commence on the first day of the calendar month following the month in which the event triggering payment occurred. Further, in the event that the Gaming Board, pursuant to the ruling letter request described in Section 3(b), requires the transactions contemplated by this Agreement to be unwound, then, subject to the requirements of the Gaming Board, the Note shall be paid off and the Shares shall be redeemed by Seller in accordance with the procedure described above, except that in such event the purchase price for the Shares shall be paid within a six (6) month period or such shorter period as may be required by the Nevada Gaming Authorities. 17. REIMBURSEMENT OF EXPENSES OF PURCHASER Upon the Closing, Seller shall reimburse Purchaser for and/or pay directly on behalf of and in the name of Purchaser, all the fees and expenses of Purchaser's attorneys and accountants' fees incurred in the negotiation and consummation of the transactions contemplated hereby; provided, however, that (i) such fees and expenses shall not include any fees and expenses incurred by Purchaser and its affiliates in connection with obtaining appropriate gaming licenses in Nevada and (ii) such fees and expenses shall not exceed $100,000. 18. BINDING AGREEMENT All of the terms and provisions of this Agreement shall inure to the benefit of, be enforceable by and be binding upon and enforceable against the parties hereto and their respective heirs and personal representatives, successors and assigns; provided, however, that except as -28- specified in Section 27 hereof, none of the parties hereto may assign its rights or duties hereunder. Nothing contained in this Agreement shall confer any rights or remedies upon any other person, firm or corporation. 19. NOTICES Any notice or other communication required or permitted hereunder shall be expressed in writing and delivered in person or sent by certified or registered mail, return receipt requested, or sent by overnight courier service such as Federal Express and confirmed by certified or registered mail, return receipt requested, or sent by facsimile (receipt confirmed) to the respective parties at the following addresses, or at such other addresses as the parties shall designate by written notice to the other: PURCHASER: Diversified Opportunities Group Ltd. c/o Jacobs Entertainment Ltd. 1231 Main Avenue Cleveland, Ohio 44113 Attn: Jeffrey P. Jacobs Fax No.: (216) 861-6315 Copy To: Hahn Loeser & Parks 3300 BP America Building 200 Public Square Cleveland, Ohio 44114 Attn: Stephen P. Owendoff, Esq. Fax No.: (216) 241-2824 SELLER AND JANSEN: Boardwalk Casino, Inc. 3750 Las Vegas Boulevard South Las Vegas, Nevada 89109 Attn: Louis J. Sposato Fax No.: (702) 739-7918 Copy To: Jones, Jones, Close & Brown, Chartered 3773 Howard Hughes Parkway Third Floor South Las Vegas, Nevada 89109 Attn: Gary R. Goodheart, Esq. Fax No.: (702) 737-7705 -29- All notices shall be deemed received on the third business day after mailing or the first business day after delivery to the overnight courier service or the same business day if personally delivered or sent by facsimile. 20. SECTION HEADINGS The section and subsection headings and any table of contents listing the same contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 21. SCHEDULES AND EXHIBITS All Schedules and Exhibits referred to in this Agreement are attached hereto and are hereby incorporated herein and made a part hereof. 22. COUNTERPARTS This Agreement may be executed in any one or more counterparts, all of which taken together shall constitute one instrument. 23. COOPERATION Each party shall cooperate and use its best efforts to consummate the transaction contemplated herein. In addition, each party shall cooperate and take such action and execute such other and further documents as reasonably may be requested from time to time after the Closing Date by any other party to carry out the terms and provisions and intent of this Agreement. 24. GENDER Wherever the context of this Agreement so requires or permits, the masculine herein shall include the feminine or the neuter, the singular shall include the plural, and the term "person" shall also include "corporation" or other business entity. -30- 25. ENTIRE AGREEMENT This Agreement contains the entire agreement between the parties hereto, and it is understood and agreed that there are no other covenants, representations or warranties other than those contained herein. This Agreement may not be changed or modified except by a writing duly executed by the parties hereto. 26. WAIVER OF PROVISIONS The terms, covenants, representations, warranties and conditions of this Agreement may be waived only by a written instrument executed by the party waiving compliance. The failure of any party at any time or times to require performance of any provision of this Agreement shall in no manner affect the right at a later date to enforce the same. No waiver by any party of any condition or the breach of any provision, term, covenant, representation or warranty contained in this Agreement, whether by conduct or otherwise, in any one or more instances shall be deemed to be or construed as a further or continuing waiver of any such condition or of the breach of any other provision, term, covenant, representation or warranty of this Agreement. 27. ASSIGNMENT BY PURCHASER. Subject to any required approval of the Nevada Gaming Authorities, Purchaser may assign its rights and obligations hereunder, in whole or in part, to one or more corporations, limited liability companies, partnerships, trusts, or other entities which are under common control with, or controlled through equity ownership and/or voting control by, Purchaser or Jacobs; it being acknowledged that any entity in which Jacobs beneficially owns 15% or more of the voting equity securities and is Chairman of the Board and/or Chief Executive Officer constitutes common control. -31- 28. ARBITRATION. If any dispute shall arise among the parties with respect to this Agreement or any of the transactions contemplated hereby, such dispute shall be settled by arbitration pursuant to this Section 28. In such event, either party hereto may serve upon the other party a written notice demanding that the dispute be resolved pursuant to this Section 28. The dispute or claim shall be heard in Chicago, Illinois by one (1) neutral arbitrator, if the parties can agree on the selection of said arbitrator, or if unable to agree, each party shall select (1) arbitrator and the two arbitrators chosen shall select the third arbitrator. If the dispute shall be heard by three (3) arbitrators, one (1) arbitrator will be selected by the party initiating the arbitration at the time of the submission to arbitration. Within seven (7) days after submission, the other party will select an arbitrator. Within seven (7) days after the first two (2) arbitrators are chosen, the third arbitrator will be selected. The third arbitrator selected shall not have any relationship to either of the parties. The arbitrators shall apply the internal law of the State of Nevada. Said arbitrator(s) shall be sworn faithfully and fairly to determine the question at issue. The arbitrator(s) shall afford to the parties a hearing and the right to submit evidence, with the privilege of cross examination and the right to compel testimony by applying for subpoena powers to appropriate judicial authority, on the question at issue, and shall, with all possible speed, make his/their determination in writing and shall give notice to the parties hereto of such determination. The concurring determination of the arbitrator, if heard by one, or of any two of said three arbitrator(s) shall be binding upon the parties hereto, or, in case no two of the arbitrators shall render a concurring determination, then the determination of the third arbitrator appointed shall be binding upon the parties hereto. The decision of the arbitrators shall be final and binding upon the parties hereto and shall be enforceable in any court having jurisdiction. Any arbitration shall be conducted in accordance with the then prevailing Commercial Rules of -32- the American Arbitration Association, or the successor party thereto from time to time in existence. The fees and expenses of the arbitrator(s) shall be divided equally between the parties so involved. The fees and expenses of the prevailing party's attorneys in any arbitration proceedings shall be borne by the non-prevailing party. 29. GOVERNING LAW This Agreement shall be governed by and construed under the laws of the State of Nevada. -33- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above set forth. SELLER: BOARDWALK CASINO, INC. By: ------------------------------------- Title: ---------------------------------------- Norbert W. Jansen, individually and as trustee under an agreement dated July 14, 1993 PURCHASER: DIVERSIFIED OPPORTUNITIES GROUP LTD. By: Jacobs Entertainment Ltd., its Manager By: -------------------------- Jeffrey P. Jacobs, President -34- LIST OF EXHIBITS AND SCHEDULES CONTRACT EXHIBIT REFERENCE DESCRIPTION ------- --------- ----------- A 2(a) Note B 2(a) Deed of Trust and Security Agreement C 2(c) Option Agreement D 3(a) Registration Agreement E 9(h) Lease CONTRACT SCHEDULE REFERENCE DESCRIPTION -------- --------- ----------- 4(c) 4(c) Options 4(g) 4(g) Liens 4(i) 4(i) Insurance and Claims 4(m) 4(m) Investigations and Litigation 4(n) 4(n) Certain Agreements 4(s) 4(s) Conduct of Business 4(t) 4(t) Legal Compliance 4(o) 4(o) Benefit Plans 4(v) 4(v) Intellectual Property 4(w) 4(w) Contracts EX-10.11 3 EXHIBIT 10.11 - CONVERTIBLE SUB NOTE CONVERTIBLE SUBORDINATED NOTE $5,000,000.00 Las Vegas, Nevada September 24, 1996 FOR VALUE RECEIVED, the adequacy of which is hereby acknowledged, Boardwalk Casino, Inc., a Nevada corporation with its principal office located at 3750 Las Vegas Blvd. South, Las Vegas, Nevada 89109 (the "Maker"), hereby promises to pay to the order of Diversified Opportunities Group Ltd. (the "Holder") with its principal office located at 1231 Main Avenue, Cleveland, Ohio 44113, the principal sum of Five Million Dollars ($5,000,000.00), together with interest thereon from the date hereof until payment in full at the Charged Rate (as defined below). This Convertible Subordinated Note (the "Note") is issued pursuant to that certain Purchase Agreement dated September 24, 1996 (the "Purchase Agreement") among the Maker, the Holder and Norbert W. Jansen, individually and as trustee under an agreement dated July 14, 1993 ("Jansen"). 1. PAYMENT OF PRINCIPAL All principal outstanding hereunder shall be due in one payment, in full, on September 23, 1998. Principal of and interest on this Note are payable in lawful money of the United States of America at the Holder's address stated above, or at such other place as the Holder shall designate to the Maker in writing. 2. INTEREST a. For purposes of this Note, the following terms shall have the meanings given them in this subsection a.: i. "ADJUSTED EURODOLLAR RATE": For each calendar month until this Note is paid in full, the rate (rounded upward, if necessary, to the next one hundredth of one percent) determined by dividing the Eurodollar Rate for such Interest Period by 1.00 minus the Eurodollar Reserve Percentage; ii. "EURODOLLAR BUSINESS DAY": A day (other than a Saturday, Sunday or legal holiday) on which banks are open for business in New York City and on which there is trading by and between banks in United States dollar deposits in the interbank Eurodollar market. iii. "EURODOLLAR RATE": For each calendar month, the interest rate per annum (rounded upward, if necessary, to the next one-sixteenth of one percent) at which United States dollar deposits are offered to First Bank National Association (the "Bank") in the interbank Eurodollar market two Eurodollar Business Days prior to the first day of such calendar month for delivery in immediately available funds on the first day of such month and in an amount approximately equal to the outstanding principal amount of the Note and for a thirty (30) day maturity; provided, that in lieu of determining the rate in the foregoing manner, the Holder may substitute the per annum Eurodollar rate (LIBOR) for United States dollars displayed on the Telerate Systems, Inc. screen, page 3750 (or other applicable page), on the first day, of such calendar month. iv. "EURODOLLAR RESERVE PERCENTAGE": As of any day, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Federal Reserve Board for determining the maximum reserve -2- requirement (including any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System, with deposits comparable in amount to those held by the Bank, in respect of "Eurocurrency Liabilities" as such term is defined in Regulation D of the Federal Reserve Board. The rate of interest applicable to the outstanding principal balance of the Note shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage. b. This Note shall bear interest on the unpaid principal amount at a variable rate per annum equal to the sum of (1) the Adjusted Eurodollar Rate, plus (2) two percent (2.00%) (the "Charged Rate"). The Charged Rate shall be adjusted monthly on the first day of each calendar month and each change in the Charged Rate shall result immediately, without notice or demand of any kind, in a corresponding change in the interest rate under the Note. Interest shall be payable on the last day of each calendar quarter, and, in the event of a permitted prepayment on the date of such prepayment. The Holder shall provide the Maker with notice of the Charged Rate periodically in order to permit the Maker to make timely payments hereunder. c. Any amount not paid when due under this Note, whether at the date scheduled for payment or earlier upon acceleration, shall bear interest until paid in full at a rate per annum equal to the Charged Rate plus four percent (4.00%) (the "Default Rate"). -3- 3. FACILITY FEE Maker shall pay to Holder an annual facility fee (the "Facility Fee") in the amount of Twelve Thousand Five Hundred Dollars ($12,500). The Facility Fee shall be due and payable to Holder on the date hereof and on the same day of each subsequent year until this Note is paid in full. 4. USE OF PROCEEDS The principal sum of Five Million Dollars ($5,000,000) shall be used by the Maker solely for working capital purposes. 5. SECURITY This Note is be secured by a Deed of Trust and Security Agreement of even date herewith on certain real and personal property owned by the Maker located in Clark County, Las Vegas, Nevada (the "Deed of Trust"). 6. PREPAYMENT Except as may be required by Section 16(b) of the Purchase Agreement or as otherwise may be required by the Nevada Gaming Authorities (as defined in the Purchase Agreement), the Maker may not prepay this Note without the prior written consent of the Holder. 7. COVENANTS. So long as any indebtedness under this Note remains outstanding, Maker shall not without the prior written consent of the Holder: a. directly or indirectly declare or pay any dividends or make any distributions upon any of its common stock or other equity securities; PROVIDED that the Maker may pay dividends or make distributions on its common stock or its other equity securities during any fiscal year so long as the same are permitted pursuant to that certain Indenture dated as of -4- April 7, 1995 between the Maker and Shawmut Bank, N.A., Trustee for $40,000,000 16.5% First Mortgage Notes Due March 31, 2005 (the "Indenture"); b. directly or indirectly redeem purchase or otherwise acquire any of the Maker's common stock or other equity securities (including, without limitation, options and other rights to acquire such common stock or other equity securities), or directly or indirectly redeem, purchase or make any payments with respect to any stock appreciation rights, phantom stock plans or similar rights or plans; PROVIDED that the Maker may redeem, purchase or otherwise acquire outstanding common stock or other equity securities so long as the same are permitted pursuant to the Indenture; c. merge or consolidate with any person or permit any subsidiary to merge or consolidate with any person (other than a wholly-owned subsidiary); PROVIDED that a subsidiary may merge with another person so long as after such merger the Maker owns at least 80% of the (i) capital stock of the surviving corporation possessing the right to vote for the election of directors and (ii) number of shares of the common stock of the surviving corporation then outstanding; d. sell, lease or otherwise dispose or, or permit any subsidiary to sell, lease or otherwise dispose of, more than 50% of the consolidated assets of the Maker and its subsidiaries (computed on the basis of book value, determined in accordance with generally accepted accounting principles consistently applied, or fair market value); e. issue or sell any shares of the capital stock, or rights to acquire shares of the capital stock, of any subsidiary to any person (other than the Holder or a permitted assignee of the Holder) if immediately after such issuance or sale the Maker owns less than 80% of -5- the (i) capital stock possessing the right to vote for the election of directors and (ii) the number of shares of the common stock of any subsidiary then outstanding; f. liquidate, dissolve or effect a recapitalization or reorganization in any form of transaction (including, without limitation, any reorganization into a limited liability company or into partnership or other non-corporate form); or g. create, incur, assume or suffer to exist, or permit any subsidiary to create, incur, assume or suffer to exist, additional indebtedness, unless the same is permitted pursuant to the Indenture. Further, in the event the Maker proposes to authorize, issue or enter into any agreement providing for the issuance (contingent or otherwise) of equity securities, including without limitation, common stock, preferred stock, warrants or otherwise, or any notes or debt securities containing equity features, including, without limitation, any notes or debt securities convertible into or exchangeable for common stock, preferred stock, or other equity securities, the Maker shall provide thirty (30) days prior written notice to the Holder that it plans to effect such a transaction. In such event, the Holder shall have the right to require the Maker to pay off the remaining indebtedness owed to the Holder under this Note as a condition to completing such a transaction; such pay off to occur contemporaneously with the closing of such a transaction. The Holder shall exercise such right by delivering written notice to the Maker within twenty (20) days after the Holder's receipt of the notice described above. -6- 8. CONVERSION a. Prior to payment in full of the principal balance of this Note, the Holder of this Note has the right, at the Holder's option, at any time and from time to time following the receipt from the Nevada Gaming Authorities (as defined in the Purchase Agreement) of Licensing Approval (as defined in the Purchase Agreement), to convert all or any portion of the then unpaid principal balance of this Note in accordance with the provisions of subparagraph c. of this Section 8, into shares of Common Stock of Maker, $.001 par value per share (the "Common Stock"). The number of shares of Common Stock into which this Note may be converted ("Conversion Shares") shall be determined by dividing the then unpaid principal balance of this Note by $7.50 (the "Conversion Price"). b. Any Conversion Shares shall have the registration rights set forth in the Registration Agreement between the Maker and the Holder dated of even date herewith. c. Before the Holder shall be entitled to convert this Note into Conversion Shares, it shall give written notice by mail, postage prepaid, to the Maker at its principal corporate office, of the election to convert the same. Such notice shall state therein the date on which such conversion will occur. The Maker at its own expense shall, as soon as practicable thereafter, issue and deliver at such office to the Holder of this Note a certificate or certificates for the number of Conversion Shares to which the Holder of this Note shall be entitled. At the time such certificates are issued, accrued interest on the amount of principal so converted shall be paid by the Maker to the Holder. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of conversion specified in such written notice, and the Holder of this Note shall be treated for all purposes as the record holder of such Conversion Shares. To the extent -7- that the entire unpaid principal balance of this Note is not being converted into Common Stock, the Holder of this Note shall credit the Note on its books to the extent of the principal being converted by the Holder into Common Stock. d. No fractional share of Common Stock shall be issued upon conversion of this Note. In lieu of the Maker issuing any fractional share to the Holder upon the conversion of this Note, the Maker shall pay, in cash, to the Holder the amount of outstanding principal that is applicable to such fractional share. 9. CONVERSION PRICE ADJUSTMENTS. a. In the event the Maker should at any time or from time to time after the date of issuance hereof fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of this Note shall be appropriately decreased so that the number of Conversion Shares issuable upon conversion of this Note shall be increased in proportion to such increase of outstanding shares. b. If the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a combination of the outstanding shares of Common Stock, -8- then, following the record date of such combination, the Conversion Price for this Note shall be appropriately increased so that the number of Conversion Shares issuable on conversion hereof shall be decreased in proportion to such decrease in outstanding shares. c. In the event of (i) any taking by the Maker of a record of the holders of any class of securities of the Maker for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right or (ii) any capital reorganization of the Maker, any reclassification or recapitalization of the capital stock of the Maker or any transfer of all or substantially all of the assets of the Maker to any other person or any consolidation or merger involving the Maker, or (iii) any voluntary or involuntary dissolution, liquidation or winding up of the Maker, the Maker will mail to the Holder of this Note a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend, distribution or right and the amount and character of such dividend, distribution or right, (B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective and the record date for determining stockholders entitled to vote thereon and (C) the new Conversion Price after giving effect to the adjustment event which new Conversion Price shall represent an appropriate increase or decrease in the Conversion Price to preserve the proportionate amount of Conversion Shares. Such notice shall be mailed at least twenty (20) days prior to the date described in clause (A) or (B) above. -9- d. The Maker shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the Note into such number of Conversion Shares as shall from time to time be sufficient to effect the conversion of the Note; and; if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of the entire outstanding principal amount of this Note, in addition to such other remedies as shall be available to the Holder of this Note, the Maker will use its best efforts to take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. 10. EVENTS OF DEFAULT "Event of Default," whenever used herein, means any one or more of the following defaults shall have occurred and be continuing (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law pursuant to any judgment decree or order of any court or any order, rule or regulation of any administrative or governmental body): i. Default in the payment of any installment of interest the Facility Fee, the principal of this Note or any other amount payable hereunder when such payment becomes due and payable, whether at maturity, by acceleration or otherwise, and such default shall continue unremedied for a period of fifteen (15) days; ii. Default in the performance or breach of any other agreement, covenant or warranty of the Maker contained in this Note, and such default or breach shall continue unremedied for a period of thirty (30) days after the date on which written -10- notice of such default or breach, requiring the Maker to remedy the same, shall have been given to the Maker by the Holder, or such longer period provided that the default is of a nature that cannot be remedied within 30 days and the Maker has within the thirty (30) day period instituted curative action and diligently and continuously pursues such action to completion; iii. The entry of a decree or order by a court having jurisdiction adjudging the Maker a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Maker under federal bankruptcy law or any similar federal or state law for the relief of debtors ("Bankruptcy Law"), or appointing a receiver, liquidator, assignee, trustee, conservator, sequestrator or assignee in bankruptcy or insolvency of the Maker or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and such decree or order shall have continued undischarged and unstayed for a period of thirty (30) days; iv. The Maker shall commence a voluntary case or shall consent to the entry of an order for relief in any involuntary case under Bankruptcy Law, or shall consent to the appointment of or taking possession by a receiver, liquidator, custodian, sequestrator, trustee or assignee of any substantial part of its property, or shall make an assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; v. There shall have occurred any circumstance or event which, upon the lapse of time, the giving of notice, or both, would constitute an event of default -11- under any other indebtedness of the Maker with a principal balance in excess of $1,000,000, except if the same is cured or waived within any applicable grace period; vi. The Maker shall have failed to give written notice within five (5) days after the occurrence of the event or circumstances described in clause (v), above; and vii. Breach or default by the Maker of any representation, warranty, agreement or covenant pursuant to the Purchase Agreement or any other agreement between the Holder and Maker or Jansen, including, without limitation, the Deed of Trust and such breach or default gives rise to an indemnification obligation of the Maker or Jansen pursuant to the Purchase Agreement and such parties fail to comply with such indemnification obligations. 11. REMEDIES If an Event of Default occurs and is continuing (unless waived in writing by the Holder), then, and in each and every case, unless the entire principal of this Note already shall have become due and payable, the Holder may, by a notice in writing to the Maker, declare the principal of and the accrued interest on this Note to be immediately due and payable. The principal of and accrued interest on this Note shall become and shall be immediately due and payable upon such declaration. 12. MISCELLANEOUS a. The Maker hereby waives presentment, notice of dishonor, protest and diligence in bringing suit against the Maker. Acceptance by the Holder of any payment which is less than the full amount then due and owing hereunder shall not constitute a waiver of the Holder is right to receive payment in full at such time or at any prior or subsequent time. The Maker consents that the time of payment may be extended an -12- unlimited number of times before or after maturity without notice to the Maker, and that the Maker shall not be discharged by reason of any such extension or extensions of time. No delay or omission on the part of the Holder in exercising any right hereunder shall operate as a waiver of such right or any other right under this Note. A waiver on any one occasion shall not be construed as a bar to or waiver of any such right or remedy on any future occasion. b. Notwithstanding the foregoing, if at any time implementation of any provision hereof shall cause the interest contracted for or charged herein and collectible hereunder to exceed the applicable lawful maximum rate, then the interest shall be limited to such lawful maximum. c. The Maker shall be liable for any and all costs and expenses of collection, including, without limitation, reasonable attorneys' fees, arising by virtue of an Event of Default. d. This Note shall be subject to and construed in accordance with the laws of the State of Nevada. If any provision herein shall be unenforceable, such unenforceable provision shall not render the remaining provisions hereof unenforceable or invalid. e. This Note shall be binding upon the Maker and the Maker may not assign its obligations hereunder without the prior written consent of the Holder. The Holder may assign its rights hereunder, in whole or in part, to one or more corporations, limited liability companies, partnerships, trusts or other entities which are under common control with or controlled through equity ownership and/or voting control by, the Holder or Jeffrey P. Jacobs; it being acknowledged that any entity in which Jeffrey P. Jacobs beneficially owns -13- 15% or more of the voting equity securities and is Chairman of the Board and/or Chief Executive Officer constitutes common control. BOARDWALK CASINO, INC. By: ------------------------------- Title: Secretary/Treasurer ---------------------------- -14- EX-10.12 4 EXHIBIT 10.12 - OPTION AND PROXY AGMT. OPTION AND PROXY AGREEMENT THIS AGREEMENT is made as of September ____, 1996, by and among Boardwalk Casino, Inc., a Nevada corporation (the "Company"), Norbert W. Jansen, individually and as trustee under an agreement dated July 14, 1993 ("Jansen"), and Diversified Opportunities Group Ltd., an Ohio limited liability company, or its nominee as described in Section 14 ("Investor"). RECITALS A. Pursuant to a certain Purchase Agreement dated as of even date herewith (the "Purchase Agreement"), by and among Investor, Jansen and the Company, Investor is acquiring certain Shares and a Note (as defined in the Purchase Agreement) of the Company. B. It is a condition to closing the transactions contemplated by the Purchase Agreement that Jansen and the Investor enter into this Agreement for the purposes, among others, of (i) providing the Investor an option to acquire and a right of first refusal with respect to certain of the Shares of the Company owned by Jansen, (ii) establishing the composition of the Company's Board of Directors (the "Board"), (iii) assuring continuity in the management and ownership of the Company, and (iv) providing certain covenants for the benefit of Investor. C. Capitalized terms used but not otherwise defined herein are defined in Paragraph 9 hereof. NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as follows: 1. ACQUISITION OF AND OPTION FOR JANSEN SHARES. Subject to the conditions to Closing (as described in the Purchase Agreement), Investor shall acquire the Shares contemplated by subparagraph (a), below, and shall be granted an option (the "Option") to acquire from Jansen additional Shares, as described below: (a) At Closing Investor shall acquire from Jansen 182,411 Shares at a purchase price of $7.00 per Share (the "Strike Price"). The parties acknowledge that Investor is filing with the Gaming Board (as defined in the Purchase Agreement) a request for a ruling letter with respect to the transactions contemplated by the Purchase Agreement. Within 7 days following the receipt of a favorable ruling letter from the Gaming Board satisfactory to Purchaser and Seller, each in the exercise of its reasonable business judgment, Investor shall acquire from Jansen 317,589 Shares (the "Differential Shares") at the Strike Price. If, however, the Gaming Board determines that Investor may not acquire the Differential Shares without first having obtained Licensing Approval (as defined in the Purchase Agreement), Investor shall thereafter have the right but not the obligation to acquire the Differential Shares on the terms described in subparagraph (b) below. (b) If applicable, Investor shall have the right but not the obligation to acquire from Jansen and Jansen shall have the obligation to sell to Investor the Differential Shares. The exercise price for the Differential Shares shall be determined by taking the difference of (i) $7.75 less (ii) the Strike Price. Such difference shall be multiplied by a fraction, the numerator of which shall be the number of full months (excluding partial months) elapsed from the Closing until such time as the Investor obtains Licensing Approval and the denominator of which shall be 18. The product obtained therefrom shall be added to the Strike Price in order to determine the Exercise Price. For purposes of illustration if the Closing occurs on September 17, 1996, the Strike Price was $7 and Investor obtains Licensing Approval on September 20, 1997, the exercise price for the Differential Shares would be $7.50 (e.g. $7.75 - $7.00 = $.75 x 12/18 = $.50 + $7 = $7.50). Investor shall have the right to exercise the Option for the Differential Shares as described in this subparagraph (b) by giving written notice to Jansen during the 30 day period following Investor's receipt of Licensing Approval; provided, however if Investor does not obtain Licensing Approval on or before the 18 month anniversary of the Closing, such Option for the Differential Shares as described in this subparagraph (b) shall be null and void. Thereafter, Investor shall have the right but not the obligation to acquire the Differential Shares on the terms described in subparagraph (d) below. (c) Investor shall have the right but not the obligation to acquire from Jansen and Jansen shall have the obligation to sell to Investor up to 1,000,000 Shares at an exercise price of $7.75 per Share. This right may be exercised by Investor commencing on receipt of Licensing Approval and continuing until the 18 month anniversary of the Closing by giving written notice to Jansen. (d) Investor shall have the right but not the obligation to acquire from Jansen and Jansen shall have the obligation to sell to Investor up to an amount equal to the sum of the Differential Shares plus 1,000,000 Shares (less any Shares acquired by Investor pursuant to subparagraph (c) above) at an exercise price of $8.25 per Share. This right may be exercised by Investor at any time following the expiration of the Option period described in subparagraph (c) and continuing until the third anniversary date of the Closing by giving written notice to Jansen. The exercise of any such Option shall be conditioned upon appropriate Licensing Approval or other regulatory approval being obtained from the Nevada Gaming Authorities. The Option shall continue to apply to any Shares owned by Jansen's estate or family which are acquired from Jansen. The closing of any purchase and sale of any such Shares pursuant to Paragraphs 1(b), (c) or (d) shall be consummated as soon as practical after the delivery of the Investor's written election notice to Jansen, but in any event within 15 business days after the delivery of such -2- notice. At the closing of the purchase and sale of the Differential Shares pursuant to Paragraph 1(a), Jansen shall deliver a certificate affirming the representations and warranties made by Jansen pursuant to the Purchase Agreement. The purchase price of any Shares acquired pursuant to this Paragraph 1 shall be payable by Investor in cash by wire transfer or certified or bank check at the time of transfer and Jansen shall deliver to Investor certificates representing such Shares in proper form for transfer. 2. FIRST REFUSAL RIGHTS. (a) TRANSFER OF SHARES. None of Jansen, Jansen's family or his estate (collectively, the "Selling Party") shall sell, transfer, assign, pledge or otherwise dispose of (whether with or without consideration and whether voluntarily or involuntarily or by operation of law) any interest in any Shares or any securities containing options or rights to acquire any Shares (a "Transfer"), except pursuant to the provisions of this Paragraph 2. A Selling Party shall not consummate any Transfer until 14 calendar days after the later of the delivery to the Investor of such Selling Party's Offer Notice (as defined below) (the "Election Period"); provided, however, the Election Period shall be reduced to 7 calendar days if the proposed Transfer involves an interest in less than 50,000 Shares. The restrictions set forth in this Paragraph 2 shall not apply with respect to (i) any Shares owned by Jansen's family members on the date hereof or (ii) any Transfer of Shares from Jansen's estate to his family members pursuant to the terms of his will or trust agreement; provided that the restrictions contained in this Paragraph 2 shall continue to be applicable to the Shares after any such Transfer and provided further that the transferees of such Shares shall have agreed in writing to be bound by the provisions of this Agreement affecting the Shares so transferred. (b) FIRST OFFER RIGHT. At least 7 or 14 calendar days prior to making any Transfer, of any Shares or securities, as applicable, the Selling Party shall deliver a written notice (an "Offer Notice") to the Company and the Investor. The Offer Notice shall disclose in reasonable detail the proposed number of Shares or securities to be transferred, the proposed terms and conditions of the Transfer and the identity of the prospective transferee(s) (if known). The Investor may elect to purchase a portion of such Shares or securities, at the price to be paid to the Selling Party and on the terms proposed in the Offer Notice, equal to the greater of (i) 35% of the number of Shares offered for sale by the Selling Party or (ii) an amount determined by multiplying (x) the number of Shares or securities offered for sale by the Selling Party by (y) the Investor's then percentage ownership of Shares of the Company, by delivering written notice of such election to the Selling Party as soon as practical but in any event during the Election Period. In determining the Investor's percentage ownership, it shall be assumed that the Investor has purchased 500,000 Shares under Paragraphs 1(a), (b) and/or (d), has exercised the Option for 1,000,000 Shares under Paragraphs 1(c) and/or (d) and has converted the Note for 666,667 Shares. If the Investor has elected to purchase Shares and securities from the Selling Party, the transfer of such Shares shall be consummated as soon as practical after the delivery of the election notice(s) to the Selling Party, but in any event within 15 days after the expiration of the Election Period. At the time of transfer, the Selling Party shall deliver to the Investor certificates representing such Shares in proper form for the transfer and the Investor shall deliver the purchase price in accordance with the terms set forth in the Offer Notice, including any notes for a Selling Party financed purchase. -3- (c) SHARES NOT ACQUIRED BY THE INVESTOR. To the extent of the Shares not purchased by the Investor, the Selling Party shall, within 90 days after the expiration of the Election Period, complete the transfer of such Shares either in the public market or to the proposed transferee set forth in the Offer Notice at a price no less than the price per Share specified in the Offer Notice and on other terms no more favorable to the transferees thereof than offered to the Investor, and furnish proof of such transfer to the Investor. Any Shares not transferred within such 90-day period shall be reoffered to the Investor under this Paragraph 2 prior to any subsequent Transfer. The Shares so transferred by the Selling Party pursuant to the Offer Notice shall no longer be subject to the restrictions contained herein and the legend referred to in Paragraph 7 may be removed at the time of such transfer. 3. BOARD OF DIRECTORS. (a) From and after the time that the Board is to be expanded to six persons pursuant to Section 3(b) of the Purchase Agreement, Jansen shall vote all of his Shares and any other voting securities of the Company over which Jansen has voting control and shall take all other necessary or desirable actions within his control (whether in his capacity as a stockholder, director, member of a Board committee or officer of the Company or otherwise, and including, without limitation, attendance at meetings in person or by proxy for purposes of obtaining a quorum and execution of written consents in lieu of meetings), so that: (i) the authorized number of directors on the Board shall be established at six directors; (ii) Jeffrey P. Jacobs shall be elected to the Board; (iii) at such time as the Investor has acquired 1,000,000 or more Shares from Jansen pursuant to this Agreement, the Board shall be expanded to seven directors and the additional director shall be designated by the Investor (such additional director together with Jeffrey P. Jacobs are sometimes referred to collectively as the "Investor Directors"); and (iv) in the event that either of the Investor Directors are removed (with or without cause) or cease to, or cannot, serve as a member of the Board for his elected term of office, the resulting vacancy on the Board shall be filled by a representative designated by the Investor. (b) The Company shall pay the reasonable out-of-pocket expenses incurred by each Investor Director in connection with attending the meetings of the Board and any committee thereof. (c) If the Investor fails to designate a representative to fill a directorship pursuant to the terms of this Paragraph 3 within 30 days after written notice, the election of an individual to such directorship shall be accomplished in accordance with the Company's Bylaws and applicable law. -4- 4. CERTAIN COVENANTS OF JANSEN. From and after the Closing, Jansen shall, subject to his fiduciary duties as a director of the Company, vote all of his Shares and any other voting securities of the Company over which Jansen has voting control and shall take all other necessary or desirable actions within his control (whether in his capacity as a stockholder, director, member of a Board committee or officer of the Company or otherwise, and including, without limitation, attendance at such meetings in person or by proxy for purposes of obtaining a quorum and execution of written consents in lieu of meetings), so that the Company shall not, without the prior written consent of the Investor, take any of the actions described in Section 7 of the Note. 5. IRREVOCABLE PROXY. In order to secure Jansen's obligation to vote his Shares and other voting securities of the Company in accordance with the provisions of Paragraphs 3 and 4 hereof, Jansen hereby appoints the Investor as his true and lawful proxy and attorney-in-fact, with full power of substitution, to vote all of his Shares and other voting securities of the Company for the election and/or removal of directors and all such other matters as expressly provided for in Paragraphs 3 and 4. The Investor may exercise the irrevocable proxy granted to it hereunder at any time Jansen fails to comply with the provisions of this Agreement, subject to the receipt of the required Licensing Approval. The proxies and powers granted by Jansen pursuant to this Paragraph 5 are coupled with an interest and are given to secure the performance of Jansen's obligations to the Investor under this Agreement. Such proxies and powers shall be irrevocable and shall survive the death, incompetency, disability, bankruptcy or dissolution of Jansen and the subsequent holders of his Shares. If for any reason whatsoever the proxy described above is deemed to expire after seven years from the date hereof, this Agreement shall be deemed an agreement entered into in accordance with Section 78.365(3) of the Nevada General Corporate Law, effective for a term of 15 years following the date hereof. 6. REPRESENTATIONS, WARRANTIES AND COVENANTS. (a) Jansen represents and warrants that (i) Jansen is the record owner of the number of Shares set forth on Schedule A attached hereto, and (ii) Jansen has not granted and is not a party to any proxy, voting trust or other agreement which is inconsistent with, conflicts with or violates any provision of this Agreement. Jansen shall not grant any proxy or become party to any voting trust or other agreement which is inconsistent with, conflicts with or violates any provision of this Agreement. Jansen shall at all times during the term of this Agreement own unencumbered and have available for immediate transfer to the Investor the number of Shares pursuant to which Investor has been granted an Option or right to purchase hereunder. (b) The Investor hereby affirms the representations and warranties being made by it pursuant to Section 5(c) of the Purchase Agreement. 7. LEGEND. Each certificate evidencing Shares of Jansen, individually and as trustee, and each certificate issued in exchange for or upon the transfer of any such Shares shall also be stamped or otherwise imprinted with a legend in substantially the following form: -5- "The securities represented by this certificate are subject to the conditions, restrictions and obligations specified in the Option and Proxy Agreement, dated as of September ____, 1996 and as amended and modified from time to time, among the issuer (the "Company"), Norbert W. Jansen, individually and as trustee under an agreement dated July 14, 1993 and Diversified Opportunities Group Ltd., or its permitted assignee(s), and the Company reserves the right to refuse the transfer of such securities until such conditions, restrictions and obligations have been fulfilled with respect to such transfer." Jansen shall deliver all certificates representing Shares held by him, individually and as trustee, as of the date hereof and the Company shall or shall cause its transfer agent to imprint such legend on all such certificates. 8. TRANSFER. Prior to transferring any Shares, except for a Transfer to the Investor and a permitted third party transferee pursuant to Paragraph 2, Jansen shall cause the prospective transferee (including his family members) to be bound by all of the obligations of Jansen under this Agreement with respect to the Shares so transferred and to execute and deliver to the Company and the Investor a counterpart of this Agreement. 9. DEFINITIONS. "Affiliate" of a Person means any other Person controlling, controlled by or under common control with such first Person. "Board" has the meaning set forth in the recitals. "Closing" has the meaning set forth in the Purchase Agreement. "Company" has the meaning set forth in the introductory paragraph. "Gaming Board" has the meaning set forth in the Purchase Agreement. "Investor" has the meaning set forth in the introductory paragraph. "Investor Directors" has the meaning set forth in Paragraph 3. "Licensing Approval" has the meaning set forth in the Purchase Agreement. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and/or a governmental entity or any department, agency or political subdivision thereof. "Purchase Agreement" has the meaning set forth in the recitals. -6- "Shares" means the Company's shares of common stock, $.001 par value. 10. TRANSFERS IN VIOLATION OF AGREEMENT. Any Transfer or attempted Transfer of any Shares of Jansen in violation of any provision of this Agreement shall be void, and the Company shall not record such Transfer on its books or treat any purported transferee of such Shares as the owner of such Shares for any purpose. 11. AMENDMENT AND WAIVER. Except as otherwise provided herein, no modification, amendment or waiver of any provision of this Agreement shall be effective against the parties hereto unless such modification, amendment or waiver is approved in writing by the parties hereto. The failure of any party to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall not affect the right of such party thereafter to enforce each and every provision of this Agreement in accordance with its terms. 12. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provision of this Agreement in such jurisdiction or affect the validity, legality or enforceability of any provision in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 13. ENTIRE AGREEMENT. Except as otherwise expressly set forth herein, this Agreement embodies the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. 14. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this Agreement shall bind and inure to the benefit of and be enforceable by the parties hereto and may not be assigned; provided, however, the Investor may assign its rights and obligations hereunder, in whole or in part, to one or more corporations, limited liability companies, partnerships, trusts or other entities which are under common control with, or controlled, through equity ownership and/or voting control by, the Investor or Jeffrey P. Jacobs; it being acknowledged that any entity in which Jeffrey P. Jacobs beneficially owns 15% or more of the voting equity securities and is the Chairman of the Board and/or Chief Executive Officer constitutes common control. 15. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be an original and all of which taken together shall constitute one and the same agreement. 16. REMEDIES. The Investor shall be entitled to enforce its rights under this Agreement specifically, to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that money damages would not be an adequate remedy for any breach of the -7- provisions of this Agreement and the Investor may in its discretion apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive relief (without posting a bond or other security) in order to enforce or prevent any violation of the provisions of this Agreement. 16. NOTICES. Any notice, demand or other communication provided for in or required by this Agreement shall be given in accordance with Section 19 of the Purchase Agreement. 17. GOVERNING LAW. All issues and questions concerning the construction, validity, interpretation and enforceability of this Agreement and the exhibits and schedules hereto shall be governed by the laws of the State of Nevada. 18. BUSINESS DAYS. If any time period for giving notice or taking action hereunder expires on a day which is a Saturday, Sunday or legal holiday in the State of Nevada, the time period shall automatically be extended to the business day immediately following such Saturday, Sunday or legal holiday. 19. DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. BOARDWALK CASINO, INC. By: ------------------------------------------ Title: --------------------------------------- --------------------------------------------- Norbert W. Jansen, individually and as trustee under an agreement dated July 14, 1993 DIVERSIFIED OPPORTUNITIES GROUP LTD. By: Jacobs Entertainment Ltd., its manager By: ------------------------------------------ Jeffrey P. Jacobs, President -8- SCHEDULE A SHARE OWNERSHIP OF JANSEN -9- EX-10.13 5 EXHIBIT 10.13 - REGISTRATION AGMT. BOARDWALK CASINO, INC. REGISTRATION AGREEMENT THIS AGREEMENT is made as of September __, 1996, between BOARDWALK CASINO, INC., a Nevada Corporation (the "Company"), and DIVERSIFIED OPPORTUNITIES GROUP LTD., an Ohio limited liability company, or its nominee as described in Paragraph 8(e) ("Purchaser"). The parties to this Agreement are parties to a Purchase Agreement dated as of ______________________, 1996 (the "Purchase Agreement"), pursuant to which the Company shall issue to Purchaser unregistered Shares and a convertible subordinated note (the "Note"), which Note is convertible into Shares. It is contemplated pursuant to the Purchase Agreement that Purchaser and Norbert W. Jansen, individually and as trustee under an agreement dated July 14, 1993 ("Jansen"), shall have entered into an option and proxy agreement (the "Option Agreement"), pursuant to which Purchaser shall have the obligation to acquire 500,000 Shares and the right to acquire up to an additional 1,000,000 Shares of the Company owned by Jansen. In order to induce Purchaser to enter into the Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the Closing under the Purchase Agreement. Unless otherwise provided in this Agreement, capitalized terms used herein shall have the meanings set forth in Paragraph 7 hereof. The parties hereto agree as follows: DEMAND REGISTRATIONS. (a) REQUESTS FOR REGISTRATION. For a period of five (5) years following the Closing, Purchaser may request registration under the Securities Act of 1933, as amended (the "Securities Act"), of all or any portion of its Shares on Form S-1 or any similar long-form registration or on Form S-2 or S-3 or any similar short-form registration ("Short-Form Registrations") if available. All registrations requested pursuant to this Paragraph 1(a) are referred to herein as "Demand Registrations". Each request for a Demand Registration shall specify the approximate number of Shares requested to be registered and the anticipated per share price range for such offering. (b) NUMBER OF DEMAND REGISTRATIONS. Purchaser shall be entitled to request (i) two Demand Registrations in which the Company shall pay all Registration Expenses (as defined in Paragraph 5) (the "Company-paid Registrations") and (ii) one Demand Registration in which Purchaser shall pay its share of the Registration Expenses as set forth in paragraph 5 hereof. A registration shall not count as one of the permitted Demand Registrations until it has become effective, and Purchaser is able to register at least 90% of the Shares requested to be included in such registration by Purchaser; provided that in any event the Company shall pay all Registration Expenses in connection with any registration initiated as a Company-paid Registration whether or not it has become effective. Demand Registrations shall be Short-Form Registrations whenever the Company is permitted to use any applicable short form; provided, however, Purchaser shall have the right to determine whether an underwriter or underwriters will be retained and shall select any such underwriter for the sale of Shares included in the Demand Registration, but the selection shall be subject to the reasonable approval of the Company. The Company shall use its reasonable best efforts to make Short-Form Registrations on Form S-3 available for the sale of Shares. (c) PRIORITY ON DEMAND REGISTRATIONS. Any Person other than Purchaser who participates in Demand Registrations which are not at the Company's expense must pay their share of the Registration Expenses as provided in Paragraph 5 hereof. (d) RESTRICTIONS ON DEMAND REGISTRATIONS. The Company shall not be obligated to effect any Demand Registration within 180 days after the effective date of a previous registration. 2. PIGGYBACK REGISTRATIONS. (a) RIGHT TO PIGGYBACK. Whenever the Company proposes to register any of its securities under the Securities Act (other than pursuant to a Demand Registration or on Form S-8 or S-4) and the registration form to be used may be used for the registration of Shares (a "Piggyback Registration"), the Company shall give prompt written notice to Purchaser of its intention to effect such a registration and shall include in such registration all Shares with respect to which Purchaser requests for inclusion therein within 20 days after the receipt of the Company's notice. (b) PIGGYBACK EXPENSES. The Registration Expenses of Purchaser shall be paid by the Company in all Piggyback Registrations. (c) PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, the Company shall include in such registration (i) first, the securities the Company proposes to sell, (ii) second, the Shares requested to be included in such registration by Purchaser, and other securities requested to be included in such registration relating to registration rights existing on the date hereof, on a pro rata basis, and (iii) third, the other securities requested to be included in such registration relating to registration rights granted by the Company after the date hereof. (d) PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Company's securities, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, the Company shall include in such registration (i) first, the Shares and other securities requested to be included therein by Purchaser and other securities requested to be included in such registration relating to registration rights existing as the date hereof, on a pro rata basis, and (ii) second, the other -2- securities requested to be included in such registration relating to registration rights granted by the Company after the date hereof. 3. HOLDBACK AGREEMENTS. (a) Purchaser shall not effect any public sale or distribution (including sales pursuant to Rule 144) of equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and the 180-day period beginning on the effective date of any underwritten Demand Registration (except as part of such underwritten registration), unless the underwriters managing the registered public offering otherwise agree. (b) The Company (i) shall not effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and during the 60-day period beginning on the effective date of any underwritten Demand Registration or any underwritten Piggyback Registration (except as part of such underwritten registration or pursuant to registrations on Form S-8 or any successor form), unless the underwriters managing the registered public offering otherwise agree, and (ii) shall cause each holder of at least 5% (on a fully-diluted basis) of its Shares, or any securities convertible into or exchangeable or exercisable for Shares, purchased from the Company at any time after the date of this Agreement (other than in a registered public offering) to agree not to effect any public sale or distribution (including sales pursuant to Rule 144) of any such securities during such period (except as part of such underwritten registration, if otherwise permitted), unless the underwriters managing the registered public offering otherwise agree. 4. REGISTRATION PROCEDURES. Whenever Purchaser has requested that any Shares be registered pursuant to this Agreement, the Company shall use its best efforts to effect the registration and sale of such Shares in accordance with the intended method of disposition thereof, and pursuant thereto the Company shall as expeditiously as possible: (a) prepare and file with the Securities and Exchange Commission ("SEC") a registration statement with respect to such Shares and use its best efforts to cause such registration statement to become effective; PROVIDED that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall furnish to the counsel selected by Purchaser copies of all such documents proposed to be filed, which documents shall be subject to the review and comment of such counsel; (b) notify Purchaser of the effectiveness of each registration statement filed hereunder and prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than 180 days and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement; (c) furnish to Purchaser such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement -3- (including each preliminary prospectus) and such other documents as Purchaser may reasonably request in order to facilitate the disposition of the Shares owned by Purchaser; (d) use its best efforts to register or qualify such Shares under such other securities or blue sky laws of such jurisdictions as Purchaser reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable Purchaser to consummate the disposition in such jurisdictions of the Shares; PROVIDED that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph, (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction; (e) notify Purchaser, at any time when a prospectus is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of Purchaser, the Company shall prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Shares, such prospectus shall not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; (f) cause all such Shares to be listed on each securities exchange on which similar securities issued by the Company are then listed and, if not so listed, to be listed on the NASD automated quotation system; (g) provide a transfer agent and registrar for all such Shares not later than the effective date of such registration statement; (h) enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as Purchaser may reasonably request in order to expedite or facilitate the disposition of such Shares; (i) make available for inspection by Purchaser, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by Purchaser or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by Purchaser, underwriter, attorney, accountant or agent in connection with such registration statement; (j) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months beginning with the first day of the Company's first full calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; -4- (k) permit Purchaser in its sole and exclusive judgment, to participate in the preparation of such registration or comparable statement; (l) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any Shares included in such registration statement for sale in any jurisdiction, the Company shall use its best efforts promptly to obtain the withdrawal of such order; (m) use its best efforts to cause such Shares covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable Purchaser to consummate the disposition of such Shares; and (n) obtain a cold comfort letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters as Purchaser may reasonably request. 5. REGISTRATION EXPENSES. (a) All expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, fees and disbursements of custodians, independent certified public accountants, underwriters (excluding discounts and commissions) and other Persons retained by the Company and fees and disbursements of counsel for the Company (all such expenses being herein called "Registration Expenses"), shall be borne as provided in this Agreement, except that the Company shall, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance and the expenses and fees for listing the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed or on the NASD automated quotation system. (b) To the extent Registration Expenses are not required to be paid by the Company, each holder of securities included in any registration hereunder shall pay those Registration Expenses allocable to the registration of such holder's securities so included, and any Registration Expenses not so allocable shall be borne by all sellers of securities included in such registration in proportion to the aggregate selling price of the securities to be so registered. 6. INDEMNIFICATION. (a) The Company agrees to indemnify, to the extent permitted by law, Purchaser its, members, managers, officers, directors, shareholders, agents and each Person who controls such holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except -5- insofar as the same are caused by or contained in any information furnished in writing to the Company by Purchaser expressly for use therein. In connection with an underwritten offering, the Company shall indemnify such underwriters, their officers and directors and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of Purchaser. (b) In connection with any registration statement in which Purchaser is participating, Purchaser shall furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any such registration statement or prospectus and, to the extent permitted by law, shall indemnify the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information or affidavit so furnished in writing by Purchaser; provided that Purchaser's obligation to indemnify shall be limited to the gross amount of proceeds received by Purchaser pursuant to such registration statement. (c) Any Person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification (provided that the failure to give prompt notice shall not impair any Person's right to indemnification hereunder to the extent such failure has not prejudiced the indemnifying party) and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (d) The indemnification provided for under this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person of such indemnified party and shall survive the transfer of securities. The Company also agrees to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event the Company's indemnification is unavailable for any reason. 7. DEFINITIONS. (a) "AFFILIATES" of a Person means any other Person controlling, controlled by or under common control with such first Person. -6- (b) "CLOSING" has the meaning set forth in the Purchase Agreement. (c) "PERSON" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and/or a governmental entity or any department, agency, or political subdivision thereof. (d) "SHARES" means, collectively, any shares of the Company's common stock $.001 par value acquired by Purchaser pursuant to the Purchase Agreement, issued or issuable upon conversion of the Note or acquired pursuant to the Option Agreement and any Shares issuable with respect to such shares by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. 8. MISCELLANEOUS. (a) NO INCONSISTENT AGREEMENTS. The Company shall not hereafter enter into any agreement with respect to its securities which is inconsistent with or violates the rights granted to Purchaser in this Agreement. (b) ADJUSTMENTS AFFECTING SHARES. The Company shall not take any action, or permit any change to occur, with respect to its securities which would adversely affect the ability of the Purchaser to include such Shares in a registration undertaken pursuant to this Agreement. (c) REMEDIES. Purchaser shall be entitled to enforce such rights specifically to recover damages caused by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction (without posting any bond or other security) for specific performance and for other injunctive relief in order to enforce or prevent violation of the provisions of this Agreement. (d) AMENDMENTS AND WAIVERS. Except as otherwise provided herein, the provisions of this Agreement may be amended or waived only upon the prior written consent of the Company and Purchaser. (e) SUCCESSORS AND ASSIGNS. All covenants and agreements in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the parties hereunder and may not be assigned; provided, however, Purchaser may assign its rights and obligations hereunder, in whole or in part, to one or more corporations, limited liability companies, partnerships, trusts or other entities which are under common control with, or controlled, through equity ownership and/or voting control by, Purchaser or Jeffrey P. Jacobs; it being acknowledged that any entity in which Jeffrey P. Jacobs beneficially owns 15% or more of the equity securities and is Chairman of the Board and/or Chief Executive Officer constitutes common control. (f) SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision -7- of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. (g) COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. (h) DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. (i) GOVERNING LAW. All issues and questions concerning the construction, validity, interpretation and enforcement of this Agreement and the exhibits and schedules hereto will be governed by the laws of the State of Nevada, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Nevada or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Nevada. (j) NOTICES. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be given in accordance with Section 19 of the Purchase Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. BOARDWALK CASINO, INC. By ---------------------------------- Its --------------------------------- DIVERSIFIED OPPORTUNITIES GROUP LTD. By: Jacobs Entertainment Ltd. its manager By ------------------------------ Jeffrey P. Jacobs, President -8- EX-10.14 6 EXHIBIT 10.14 - LEASE AGMT. LEASE AGREEMENT NORBERT W. JANSEN AND AVIS JANSEN, TRUSTEES OF THE NORBERT W. JANSEN AND AVIS JANSEN FAMILY TRUST, u/a/d JULY 14, 1993, AS AMENDED, LANDLORD AND BOARDWALK CASINO, INC., A NEVADA CORPORATION TENANT TABLE OF CONTENTS 1. PREMISES AND TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . -1- 1.1. PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1- 1.2. TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1- 1.3. OPTION TERM. . . . . . . . . . . . . . . . . . . . . . . . . . . -1- 1.4. DEFINITION OF "LEASE TERM" FOLLOWING EXERCISE OF OPTION. . . . . -2- 1.5. NO REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . . . -2- 2. MATERIAL MODIFICATIONS. . . . . . . . . . . . . . . . . . . . . . . . . -2- 2.1. APPROVAL OF PLANS AND SPECIFICATIONS . . . . . . . . . . . . . . -2- 2.2. LANDLORD'S IMPROVEMENT WORK. . . . . . . . . . . . . . . . . . . -2- 2.3. SUPERVISING ARCHITECT AND GENERAL CONTRACTOR . . . . . . . . . . -3- 2.4. COMPLETION BOND. . . . . . . . . . . . . . . . . . . . . . . . . -3- 2.5. COMMENCEMENT OF TENANT'S CONSTRUCTION. . . . . . . . . . . . . . -3- 2.6. LIABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . -3- 2.7. INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . -3- 2.8. NO SUBORDINATION OF LANDLORD'S FEE TITLE . . . . . . . . . . . . -4- 2.9. NOTICE OF NON-RESPONSIBILITY . . . . . . . . . . . . . . . . . . -4- 2.10. LIENS AND FEES . . . . . . . . . . . . . . . . . . . . . . . . . -4- 2.11. OWNERSHIP OF IMPROVEMENTS AND TENANT'S PERSONAL PROPERTY . . . . -4- 2.12. LAND USE MATTERS . . . . . . . . . . . . . . . . . . . . . . . . -4- 3. RENT AND SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . -5- 3.1. BASE RENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . -5- 3.2. INCREASES IN BASE RENT . . . . . . . . . . . . . . . . . . . . . -5- 3.3. PLACE OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . -5- 3.4. SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . . -6- 3.5. INTEREST ON TENANT'S OBLIGATIONS; LATE CHARGES . . . . . . . . . -6- 4. HOLDING OVER BY TENANT. . . . . . . . . . . . . . . . . . . . . . . . . -6- 5. LEASEHOLD TITLE INSURANCE . . . . . . . . . . . . . . . . . . . . . . . -6- 6. USES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7- 6.1. PERMITTED USE. . . . . . . . . . . . . . . . . . . . . . . . . . -7- 6.2. PROHIBITED USES. . . . . . . . . . . . . . . . . . . . . . . . . -7- 7. REPRESENTATIONS AND COVENANTS OF LANDLORD . . . . . . . . . . . . . . . -7- 7.1. TITLE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7- 7.2. CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . . . . . -7- 7.3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . -7- 7.4. SPECIAL ASSESSMENTS. . . . . . . . . . . . . . . . . . . . . . . -8- -i- 7.4.1. TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8- 7.5. BINDING OBLIGATION . . . . . . . . . . . . . . . . . . . . . . . -8- 7.6. NO VIOLATION OF LAW. . . . . . . . . . . . . . . . . . . . . . . -8- 7.7. ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . . . . . . -8- 7.8. EXISTING LEASES. . . . . . . . . . . . . . . . . . . . . . . . . -8- 7.9. GAMING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8- 8. UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8- 9. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -9- 9.1. PAYMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -9- 9.2. CONTEST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -9- 9.3. SUBSTITUTE TAXES . . . . . . . . . . . . . . . . . . . . . . . . -10- 9.4. INSTALLMENT PAYMENTS . . . . . . . . . . . . . . . . . . . . . . -10- 10. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10- 10.1. FIRE INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . -10- 10.2. LIABILITY INSURANCE. . . . . . . . . . . . . . . . . . . . . . . -11- 10.3. WORKER'S COMPENSATION. . . . . . . . . . . . . . . . . . . . . . -11- 10.4. POLICY REQUIREMENTS. . . . . . . . . . . . . . . . . . . . . . . -11- 11. REPAIRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11- 12. ALTERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12- 12.1. LANDLORD CONSENT . . . . . . . . . . . . . . . . . . . . . . . . -12- 12.2. PERMITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12- 12.3. TENANT'S ARCHITECT . . . . . . . . . . . . . . . . . . . . . . . -12- 12.4. CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . -12- 12.5. INSPECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . -12- 12.6. LIENS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12- 12.7. INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . -13- 13. EQUIPMENT, FIXTURES AND SIGNS . . . . . . . . . . . . . . . . . . . . . -13- 13.1. EQUIPMENT AND FIXTURES . . . . . . . . . . . . . . . . . . . . . -13- 13.2. PERMITTED SIGNAGE. . . . . . . . . . . . . . . . . . . . . . . . -13- 14. DAMAGE BY FIRE OR OTHER CASUALTY. . . . . . . . . . . . . . . . . . . . -13- 14.1. RESTORATION. . . . . . . . . . . . . . . . . . . . . . . . . . . -13- 14.2. USE OF INSURANCE PROCEEDS. . . . . . . . . . . . . . . . . . . . -14- 14.3. ADDITIONAL COST OF RESTORATION . . . . . . . . . . . . . . . . . -14- 14.4. NO RENT ABATEMENT. . . . . . . . . . . . . . . . . . . . . . . . -14- 15. CONDEMNATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14- 15.1. TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . -14- -ii- 15.2. PARTIAL CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . -15- 15.3. PAYMENT OF AWARD . . . . . . . . . . . . . . . . . . . . . . . . -15- 16. LIABILITY AND INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . -15- 16.1. TENANT INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . -15- 16.2. LANDLORD INDEMNITY.. . . . . . . . . . . . . . . . . . . . . . . -15- 16.3. NOTICE OF INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . -15- 16.4. SURVIVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16- 17. RIGHT OF INSPECTION . . . . . . . . . . . . . . . . . . . . . . . . . . -16- 18. WARRANTY OF TITLE AND QUIET ENJOYMENT . . . . . . . . . . . . . . . . . -16- 18.1. QUIET ENJOYMENT. . . . . . . . . . . . . . . . . . . . . . . . . -16- 18.2. ENCUMBRANCES . . . . . . . . . . . . . . . . . . . . . . . . . . -16- 18.3. TRANSFER BY LANDLORD . . . . . . . . . . . . . . . . . . . . . . -17- 19. WAIVER OF SUBROGATION . . . . . . . . . . . . . . . . . . . . . . . . . -17- 20. FORCE MAJEURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17- 21. NO BROKERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17- 22. LANDLORD-TENANT RELATIONSHIP. . . . . . . . . . . . . . . . . . . . . . -17- 23. ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . . . . -18- 23.1. ASSIGNMENT AND SUBLETTING. . . . . . . . . . . . . . . . . . . . -18- 23.2. NO RELEASE OR NOVATION . . . . . . . . . . . . . . . . . . . . . -18- 23.3. ENCUMBRANCE OR ASSIGNMENT AS SECURITY. . . . . . . . . . . . . . -18- 24. NOTICES AND PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . -24- 25. DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26- 25.1. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . -26- 25.2. LANDLORD'S REMEDIES. . . . . . . . . . . . . . . . . . . . . . . -26- 26. HAZARDOUS MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . . . -28- 26.1. COVENANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28- 26.2. RIGHT OF ENTRY . . . . . . . . . . . . . . . . . . . . . . . . . -28- 26.3. INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . -28- 26.4. HAZARDOUS SUBSTANCES DEFINED . . . . . . . . . . . . . . . . . . -29- 27. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29- 27.1. TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . -29- 27.2. CAPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29- -iii- 27.3. MEANINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30- 27.4. SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . . -30- 27.5. ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . -30- 27.6. TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30- 27.7. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . -30- 27.8. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . -30- 27.9. ATTORNEYS' FEES. . . . . . . . . . . . . . . . . . . . . . . . . -30- 27.10. MEMORANDUM OF LEASE. . . . . . . . . . . . . . . . . . . . . . . -30- 27.11. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . -30- 28. GAMING PROVISION. . . . . . . . . . . . . . . . . . . . . . . . . . . . -31- 28.1. COOPERATION AND COMPLIANCE BY LANDLORD . . . . . . . . . . . . . -31- 28.2. DENIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31- 28.3. PURCHASE RIGHT . . . . . . . . . . . . . . . . . . . . . . . . . -31- 29. ARBITRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32- 30. ADJUSTMENT UPON DEMOLITION. . . . . . . . . . . . . . . . . . . . . . . -34- 31. LANDLORD'S SECURITY INTEREST. . . . . . . . . . . . . . . . . . . . . . -34- 31.1. GRANT OF SECURITY INTEREST IN PROJECT PARCELS. . . . . . . . . . -34- 31.2. GRANT OF SECURITY INTERESTS IN FURNITURE, FIXTURES AND EQUIPMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . -34- 31.3. PERFECTION AND PRIORITY. . . . . . . . . . . . . . . . . . . . . -35- 31.4. FAIR MARKET VALUE. . . . . . . . . . . . . . . . . . . . . . . . -36- 31.5. FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . . . . . . -36- 32. TENANT'S OPTION AND RIGHT OF FIRST REFUSAL TO PURCHASE THE LEASED PREMISES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36- 33. BINDING OBLIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . -38- -iv- TABLE OF EXHIBITS Exhibit A The Land Exhibit B Schedule of Leases Exhibit C Permitted Exceptions -v- LEASE AGREEMENT This Lease Agreement (the "LEASE") is made and entered into by and between NORBERT W. JANSEN and AVIS JANSEN, trustees of the Norbert W. Jansen and Avis Jansen Family Trust, u/a/d July 14, 1993, as amended (collectively, "LANDLORD"), and BOARDWALK CASINO, INC., a Nevada corporation ("TENANT") as of the ____ day of September, 1996, to take effect on October 1, 1996 (hereinafter, the "EFFECTIVE DATE"). W I T N E S S E T H : 1. PREMISES AND TERM. 1.1. PREMISES. In consideration of the obligation of Tenant to pay rent as hereinafter provided and in consideration of the other terms, provisions and covenants hereof, Landlord hereby demises and leases to Tenant, and Tenant hereby takes from Landlord, those certain tracts or parcels of land located in the County of Clark, State of Nevada, and more particularly described on Exhibit A attached hereto and made a part hereof (the "LAND"), together with any buildings and other improvements erected or to be erected thereon (the "IMPROVEMENTS"), and together with all rights, privileges, easements and appurtenances belonging or in any way pertaining to the Land (all of the foregoing hereinafter collectively referred to as the "LEASED PREMISES"). The Leased Premises is now subject to one (1) existing lease and certain month to month tenancies (collectively the "Existing Leases") as are more fully described in the Schedule of Leases attached hereto as Exhibit B. Subject to the following terms of this paragraph, Landlord hereby assigns its rights and obligation, including any and all security deposits, under the EXISTING LEASES to Tenant. Tenant will assume the Existing Leases and indemnify and hold Landlord harmless from any claims arising out of any breach of the Existing Leases by Tenant which occur from and after the Effective Date. All rents accruing and received under the Existing Leases from and after the Effective Date and during the term of this Lease shall be paid to Tenant; provided, however, that rents received by Tenant pursuant to the Existing Leases shall first be applied against any rents which became due and payable during the thirty (30) day period preceding the Effective Date, and the same shall be paid to Landlord. Concurrently herewith, Landlord shall provide Tenant with a certificate showing any delinquent or past due rents under the Existing Leases. 1.2. TERM. The term of this Lease shall commence upon the Effective Date and shall continue, unless sooner terminated pursuant to the provisions of this Lease, for twenty-four (24) months (the "LEASE TERM"). 1.3. OPTION TERM. Provided Tenant is not then in default beyond any applicable cure period in the payment of Rent (defined below) or any other obligation of Tenant to be performed under this Lease, Tenant shall have the option to extend the Lease Term for an additional five -1- (5) years and a second, successive, option to extend the Lease Term an additional twenty-three (23) years (the "OPTION TERMS"). Such options shall be exercised, if at all, by written notice to Landlord not later than three months prior to the expiration of the Lease Term, or preceding Option Term. If Tenant fails to exercise any option in a timely manner as provided herein, the provisions of this Section 1.3 shall have no further force or effect. 1.4. DEFINITION OF "LEASE TERM" FOLLOWING EXERCISE OF OPTION. In the event Tenant exercises one, or more Options in a timely manner as provided herein, thereafter, the definition of the term "Lease Term" in this Lease shall be deemed to include such Option the Extension Term, or terms, as appropriate. 1.5. NO REPRESENTATIONS. Landlord makes no representations or warranties concerning the Leased Premises or any matters with respect thereto, except as expressly stated herein. Except for such representations, Tenant is entering into this Lease based on its own investigation and analysis of the Leased Premises and accepts the Leased Premises "as is". 2. MATERIAL MODIFICATIONS. 2.1. APPROVAL OF PLANS AND SPECIFICATIONS. In the event Tenant desires to make any material modification to the Improvements during the Lease Term, Tenant shall deliver to Landlord for approval plans, specifications, and renderings depicting Tenant's proposed modifications. For purposes of this requirement, a modification shall be deemed material if its cost to implement exceeds Fifty Thousand Dollars ($50,000) (a "MATERIAL MODIFICATION"). Within a period of thirty (30) days from the date of delivery of such plans, specifications, and renderings, Landlord shall either approve the same or specify its objections thereto and reasons therefor in detail and shall specify whether such modifications must be removed upon the expiration, or earlier termination of this Lease by written notice delivered to Tenant on or before the end of the thirty (30) day period. In the event Landlord shall specify objections to any Material Modification proposed by Tenant then Tenant shall either abandon its plan to modify the Leased Premises or shall promptly revise the plans, specifications, and renderings to fully accommodate and conform to Landlord's written objections, subject to the terms of any written agreements between Landlord and Tenant as to the manner in which any of such objections may be accommodated to the mutual satisfaction of Landlord and Tenant. Any revision which is approved by Landlord shall be signed by Landlord and Tenant and shall thereafter be deemed a part hereof. Within one hundred eighty (180) days after completion of any Material Modification, Tenant shall deliver a complete set of as-built plans for the approved improvements to Landlord. 2.2. LANDLORD'S IMPROVEMENT WORK. Landlord shall have no obligation whatsoever to improve or alter the Land nor to demolish any improvements which may now be located upon the Land. 2.3. SUPERVISING ARCHITECT AND GENERAL CONTRACTOR. Selection of a supervising architect and general contractor shall be made by Tenant. The supervising architect shall be a -2- member in good standing of the American Institute of Architects or any generally recognized similar organization, duly licensed in the state of Nevada, or affiliated with an architect licensed in Nevada, if required for governmental approvals with respect to any proposed renovation, or construction on the Premises and, if applicable, the general contractor's financial condition and responsibility shall be such as to enable Tenant to obtain the completion bond required by the following Section 2.4. 2.4. COMPLETION BOND. Prior to undertaking any Material Modification, Tenant shall provide Landlord with a completion bond, acceptable to Landlord, in the amount of the projected cost of constructing the proposed improvements, and the amount of such bond shall be increased from time to time to reflect any increases in the projected cost of such construction. Tenant shall, upon request from Landlord, name Landlord's assignee and/or lender, if any, as co-obligee on any such bond. 2.5. COMMENCEMENT OF TENANT'S CONSTRUCTION. Within thirty (30) days after any material portion of the Improvements has been demolished (other than as a result of fire or other casualty), Tenant shall commence the construction of the Material Modification and thereafter proceed with construction with all reasonable diligence and in a good and workmanlike manner. 2.6. LIABILITY. Tenant covenants and agrees that any modification of the Improvements shall be constructed, operated, repaired and maintained without cost or expense to Landlord and in accordance with the requirements of all laws, ordinances, codes, orders, rules and regulations of all governmental authorities having jurisdiction over the Leased Premises and in a good and workmanlike manner. Tenant agrees to defend, indemnify and hold Landlord, its trustees, beneficiaries, heirs, successors, assigns, agents, employees and attorneys harmless from and against any and all cost, liability, expense, damage or injury resulting from or arising in connection with the construction, operation, repair and maintenance of the Material Modifications. 2.7. INSURANCE. Prior to commencing any demolition or construction on the Leased Premises, Tenant, its subcontractors and agents, without cost to Landlord, shall obtain Builder's Risk Insurance covering such project and approved improvements to the full extent of the insurable value thereof, and Tenant shall cause its contractor to obtain or cause to be obtained workers' compensation insurance covering all persons employed in connection with such demolition or construction and with respect to whom death or bodily injury claims could be asserted against Landlord, Tenant or the Leased Premises. Tenant shall also obtain General Liability Insurance naming both Landlord and Tenant as co-insureds for the mutual benefit of Landlord, Tenant and the Leased Premises. All of the aforementioned policies shall be in the form and shall contain the liability limits specified in Article 10 hereof. Tenant and its contractors and subcontractors shall have the right, however, to self-insure with respect to its workers' compensation insurance obligations to the extent permitted by applicable law. 2.8. NO SUBORDINATION OF LANDLORD'S FEE TITLE. Landlord shall not be required to subordinate Landlord's fee interest in the Leased Premises or its reversionary interest in the -3- buildings and improvements now existing or to be constructed thereon to any lien securing Tenant's construction loan or other financing. 2.9. NOTICE OF NON-RESPONSIBILITY. Landlord may, at Landlord's sole discretion, record a Notice of Non-Responsibility to assure that Landlord's interest in the Leased Premises cannot be encumbered by mechanics' liens or materialmen's liens arising from Tenant's construction activity upon the Leased Premises. With respect to any work to be commenced by or on behalf of Tenant, at least ten (10) days before any such work is commenced (or such additional time as may be reasonably required by Landlord in the future to reflect changes in the law with respect to posting and/or recording notices of non-responsibility), Tenant shall notify Landlord of Tenant's intention to commence any such work. 2.10. LIENS AND FEES. Tenant shall at all times indemnify, save and hold harmless Landlord and Landlord's trustees, beneficiaries, heirs, successors, assigns, agents, employees and representatives and the Leased Premises from and against all liens or claims which may ripen into liens, and against all reasonable attorneys' fees incurred by Landlord and other costs and expenses, growing out of or incurred by reason of or with respect to any demolition or construction done by or for Tenant on the Leased Premises. Should Tenant fail to fully discharge any such lien or claim, or in the alternative fail to post a bond sufficient to discharge such lien or claim within thirty (30) days after written request therefor by Landlord, then Landlord may, at its option, (i) treat such failure as an Event of Default pursuant to Paragraph 25.1. Nothing herein shall preclude Tenant from contesting, at its sole cost and expense, any such claims, or liens. 2.11. OWNERSHIP OF IMPROVEMENTS AND TENANT'S PERSONAL PROPERTY. During the term of this Lease all trade fixtures and equipment (collectively, "TENANT'S PERSONAL PROPERTY") shall remain and continue to be the property of Tenant and may be replaced at any time and from time to time during the term of this Lease. Tenant's Personal Property may be removed at the expiration or earlier termination of this Lease if Tenant repairs any damage to the Improvements caused by such removal and the removal does not affect or in any way weaken the structural integrity of the Improvements. All Improvements shall remain on the Leased Premises and automatically become the property of Landlord upon the expiration or earlier termination of this Lease unless Landlord gives written notice to Tenant at the time such improvements are first approved by Landlord, that any or all such Improvements are to be removed, in which case Tenant shall remove the same and regrade the Land to a finish grade in accordance with Landlord's reasonable requirements, at Tenant's sole cost and expense, within sixty (60) days of the expiration or earlier termination of this Lease or notice from Landlord, whichever is later, as to that portion of the Leased Premises upon which such Improvement to be removed is situated. 2.12. LAND USE MATTERS. Provided Landlord's written consent has first been obtained (which consent will not be withheld if Tenant demonstrates to Landlord's reasonable satisfaction that the matters described in or contemplated by this paragraph would not at any time materially adversely affect Landlord's use or development of the Leased Premises upon the expiration or -4- earlier termination of this Lease, and provided, further, that no Event of Default then exists), Tenant, at its sole expense and without cost or expense to Landlord, may apply for and obtain subdivisions, parcel maps, use permits or zoning changes or variances with respect to the Leased Premises. Subject to such requirement of prior written consent, and subject to Landlord's right, at Landlord's cost, to have Landlord's planning and zoning counsel participate with Tenant in all such matters, Landlord shall, upon notice of request by Tenant, join with Tenant as necessary in any applications to obtain such subdivisions, parcel maps, use permits or use or zoning changes or variances, all at Tenant's expense and without cost or expense to Landlord. 3. RENT AND SECURITY DEPOSIT. 3.1. BASE RENT. For the period beginning upon the Effective Date and continuing during the Lease Term, Tenant shall pay, in monthly installments, a base rent of EIGHT HUNDRED FORTY THOUSAND AND NO/100 DOLLARS ($840,000.00) per annum ($70,000.00 per month) (the "BASE RENT"). Base Rent shall be paid to Landlord in lawful money of the United States on the first day of each calendar month during the Lease Term, without any reduction, deduction or setoff; provided that the first installment of Base Rent shall be due and payable upon the Effective Date. Base Rent for any partial calendar month during which the Lease Term commences or terminates shall be prorated based on the actual number of days in such month. 3.2. INCREASES IN BASE RENT. Beginning on the first day of the calendar month which is the sixty-first (61st) month following the Effective Date, and upon the same day of each year thereafter during the Lease Term, or any Option Term (hereinafter, an "ADJUSTMENT DATE"), the Base Rent shall be increased to an amount equal to the product of the Base Rent payable during the immediately preceding calendar month multiplied by the Cost of Living Factor. The "COST OF LIVING FACTOR" for any Adjustment Date during the Lease Term shall be a fraction whose numerator is the index figure stated as the Consumer Price Index for All Urban Consumers (CPI-U; U.S. City Average; All Items 1982-84=100) published by the Bureau of Statistics of the United States Department of Labor (the "INDEX") for the month in which the Adjustment Date occurs (or the most recent available Index if the Index for the month in which the Adjustment Date occurs is not available) and whose denominator is the Index in effect on the Effective Date, in the case of the first adjustment hereunder, or the Index used for the immediately preceding Adjustment Date, in the case of all adjustments after the first adjustment hereunder. If the Index is discontinued, the Cost of Living Factor shall be based on comparable statistics on changes in the purchasing power of the consumer dollar for the applicable periods, as published by a responsible financial periodical report of a recognized governmental or private authority then generally recognized for such purposes, all as selected by Landlord. 3.3. PLACE OF PAYMENT. All payments of Base Rent and other sums due from Tenant to Landlord pursuant to this Lease (sometimes collectively referred to herein as "RENT") shall be made to Landlord as the same shall become due in lawful money of the United States of America at the address specified in Section 24 of this Lease, or to such other party or at such -5- other address as hereinafter may be designated by Landlord by written notice delivered to Tenant at least ten (10) days prior to the next ensuing monthly rental payment date. 3.4. SECURITY DEPOSIT. No security deposit shall be required of Tenant. 3.5. INTEREST ON TENANT'S OBLIGATIONS; LATE CHARGES. 3.5.1. INTEREST. Any amount due from Tenant to Landlord which is not paid on the due date shall bear interest at fifteen percent (15%) per annum from the date such payment is due until paid, but the payment of such interest shall not excuse or cure any default by Tenant under this Lease. 3.5.2. LATE CHARGE. In the event Tenant is more than ten (10) days late in paying any installment of rent or other sum due under this Lease, Tenant shall pay Landlord a late charge equal to five percent (5%) of the delinquent amount. The parties agree that the amount of such late charge represents a reasonable estimate of the cost and expense that would be incurred by Landlord in processing each delinquent payment by Tenant, but the payment of such late charge shall not excuse or cure any default by Tenant under this Lease. The parties further agree that the payment of late charges and the payment of interest provided for in this Section 3.5 are distinct and separate from one another in that the payment of interest is to compensate Landlord for the use of Landlord's money by Tenant, while the payment of a late charge is to compensate Landlord for the additional administrative expense incurred by Landlord in handling and processing delinquent payments. 4. HOLDING OVER BY TENANT. Should Tenant or any assignee, sublessee or licensee of Tenant fail to vacate the Leased Premises or any part thereof after the expiration or earlier termination of the Lease Term, unless otherwise agreed in writing, such failure to vacate shall constitute and be construed as a tenancy from month-to-month upon the same terms and conditions as set forth in this Lease; provided, however, that Tenant shall pay as Base Rent during any holding over period, an amount equal to one and 50/100 (1.50) times the Base Rent payable immediately preceding the expiration of the Lease Term. Nothing contained in this Article 4 shall be construed as a consent by Landlord to any holding over by Tenant, and Landlord expressly reserves the right to require Tenant to surrender possession of the Leased Premises upon the expiration of the Lease Term or upon the earlier termination hereof and to assert any remedy in law or equity to evict Tenant and/or collect damages in connection with such holding over. 5. LEASEHOLD TITLE INSURANCE. Tenant shall, at Tenant's expense, obtain a leasehold title insurance policy through National Title Company, a Nevada corporation ("ESCROW AGENT") insuring Tenant's interest in the Leased Premises subject only to standard title policy exceptions and to those title exceptions set forth on Exhibit "C" attached hereto and made a part hereof (hereinafter, "PERMITTED EXCEPTIONS"). -6- 6. USES. 6.1. PERMITTED USE. Tenant shall have the right to develop the Leased Premises for any lawful use. Tenant shall have the right to use and develop the Leased Premises in conjunction with adjoining property, subject to Article 31 below. If any governmental license or permit is required for the lawful conduct of any business or other activity carried on by Tenant in the Leased Premises, and if the failure to obtain such license or permit would affect Landlord, Tenant shall procure and maintain such license or permit so long as the same is so required, make such license or permit available for inspection, if practicable, by Landlord and comply at all times with all terms and conditions thereof. 6.2. PROHIBITED USES. Tenant covenants and agrees that it will not use or suffer or permit any person or persons to use the Leased Premises or any part thereof for any use or purpose in violation of the laws of the United States of America or the laws, ordinances, regulations and requirements of the State of Nevada, Clark County or other lawful authorities having jurisdiction. Nothing contained herein shall be deemed to prevent Tenant from contesting the application or interpretation of such laws or the determinations of any such lawful authority so long as (i) Landlord is given written notice thereof prior to the commencement of any such contest; (ii) such contest is prosecuted by Tenant with all reasonable diligence; and (iii) Tenant provides Landlord with such assurances or security as Landlord may reasonably require so that neither the Leased Premises nor Landlord's rights under this Lease may be adversely affected by such contest. Tenant shall promptly upon demand by Landlord reimburse Landlord for any additional premium charged for any insurance policy by reason of Tenant's failure to comply with the provisions of this Article 6. 7. REPRESENTATIONS AND COVENANTS OF LANDLORD. As of the Effective Date of this Lease, Landlord represents, warrants and covenants to Tenant as follows: 7.1. TITLE. That Landlord has good and marketable fee simple title to the Leased Premises, subject to those exceptions which are set forth in Exhibit "B" and such other matters as would be disclosed by an ALTA survey of the Leased Premises, possesses full power and authority to deal therewith in all respects and no other party has any right or option thereto or in connection therewith; 7.2. CONDEMNATION. That there are no pending or, to the knowledge of Landlord, threatened condemnation proceedings or actions affecting the Leased Premises; 7.3. LEGAL PROCEEDINGS. That there are no pending or, to the knowledge of Landlord, threatened actions or legal proceedings which could adversely affect the Leased Premises or Tenant's rights under this Lease. -7- 7.4. SPECIAL ASSESSMENTS. There are no unpaid special assessments for sewer, sidewalk, water, paving, electrical or power improvements or other capital expenditures or improvements, matured or unmatured, except the special assessment of record for the Clark County Beautification District improvement project pertaining to certain improvements to Las Vegas Boulevard, South. 7.4.1. TAXES. Real property taxes for the fiscal year 1996 - 1997 are current through the first quarter, 1996. 7.5. BINDING OBLIGATION. That this Lease and the consummation of the transactions contemplated hereby is valid and binding upon Landlord (and the individuals executing this Lease on behalf of Landlord represent and warrant that they are authorized to so act) and does not constitute a default (or an event which with notice or passage of time or both will constitute default) under any contract to which Landlord is a party or by which Landlord is bound; 7.6. NO VIOLATION OF LAW. That Landlord has not received notice nor has Landlord any knowledge of any violation of any law, regulation, ordinance, order or other requirement of any governmental authority having jurisdiction over or affecting any part of the Leased Premises; 7.7. ENVIRONMENTAL MATTERS. Landlord has no actual knowledge of any noncompliance or violation of local, state or federal environmental laws related to the Leased Premises; 7.8. EXISTING LEASES. The Schedule of Leases attached hereto as Exhibit B is a true, correct and complete statement of all leases, and/or accurate description of all tenancies to which the Premises is subject and Landlord is not in default and is not aware of any default by the tenants under the Existing Leases. The lease agreement by and between Landlord and Gary M. Lee, as amended, and the assignment and assumption agreement by and between Gary M. Lee and IGT, Inc., and the sublease agreement by and between IGT, Inc. and Schiff Enterprises, LP, heretofore provided to Tenant, are true, correct and complete copies of said lease agreement, assignment and assumption agreement and sublease agreement; and 7.9. GAMING. Neither Landlord nor, to the best of Landlord's knowledge (without investigation), any person or entity associated with Landlord has ever engaged in any conduct or practices which any of the foregoing persons should reasonably believe would cause Landlord to be denied any gaming or other governmental approval which may be required for Tenant to operate its business upon the Leased Premises. 8. UTILITIES. Tenant shall pay all charges incurred for the use of utility services at the Leased Premises including, without limitation, gas, electricity, water, sanitary sewer, storm sewer, cable television, and telephone. If any of such charges are not separately assessed against the Leased Premises, Tenant shall pay its pro rata share of such charges, as reasonably determined by Landlord, within ten (10) days after receipt of written demand therefor from -8- Landlord. Tenant shall pay all utility connection charges, including, without limitation, any sewer "hook-up" fees and similar charges. 9. TAXES, ASSESSMENTS AND OTHER GOVERNMENTAL IMPOSITIONS. 9.1. PAYMENT. Subject to the following sentence, Tenant shall pay, within thirty (30) days after written demand from Landlord, all real estate taxes, assessments (both general and special) and other governmental impositions which are levied against the Leased Premises, specifically including, without limitation, all payments due with respect to the Las Vegas Strip Beautification Project; provided that Tenant shall have no obligation to pay any of such taxes, assessments and impositions more than ten (10) days prior to the date the same are due to the taxing authority, and provided, further, that to the extent the tenants under the Existing Leases are required to pay the same, compliance with such leases shall constitute compliance hereunder. Tenant's obligations under this Section 9.1 shall extend only to taxes, assessments and impositions which are properly allocable to the Lease Term. Any such tax, assessment, imposition or other similar expense which is properly allocable to any period prior to the Effective Date shall be the obligation of the Landlord or tenants under the Existing Leases. 9.2. CONTEST. Tenant may, if it shall so desire, contest the validity or amount of any tax or assessment against the Leased Premises, in which event Tenant may defer the payment thereof during the pendency of such contest if applicable law so permits; provided, however, that Tenant shall not allow any tax lien to be foreclosed on the Leased Premises, and, unless such tax is paid under protest, not later than ten (10) days prior to the date the same shall become delinquent, Tenant shall have (i) deposited with a bank or trust company acceptable to Landlord, an amount sufficient to pay such contested item(s) together with the interest and penalties thereon (as reasonably estimated by Landlord) with written instructions to said bank or trust company to apply such amount to the payment of such item(s) when the amount thereof shall be finally fixed and determined (with the remainder to be paid to Tenant), or (ii) provided Landlord with other reasonably acceptable security. Landlord will, at the request of Tenant, cooperate with Tenant in contesting any such taxes or assessments; provided, however, there shall be no expense to Landlord in such cooperation. In the event Landlord is required by law to join in any action or proceeding taken by Tenant to contest any such taxes or assessments, Tenant shall indemnify, defend and hold Landlord and Landlord's trustees, beneficiaries, heirs, successors, assigns, agents, employees and representatives harmless from any and all costs, fees (including, but not limited to attorneys' fees), expenses, claims, judgments, orders, liabilities, losses or damage arising out of such action or proceeding. If, at any time, in the judgment of Landlord reasonably exercised, it shall become necessary so to do, Landlord, after written notice to Tenant, may, under protest if so requested by Tenant, pay such monies as may be required to prevent the transfer of the Leased Premises to the Clark County Treasurer or the sale of the Leased Premises or any part thereof, or foreclosure of the lien created thereon by such item, and such amount shall become immediately due and payable by Tenant to Landlord, together with interest thereon at the rate of fifteen percent (15%) per annum, and shall constitute additional rent hereunder, or at Tenant's option -9- and at Tenant's sole cost and expense, in lieu thereof, Tenant shall obtain lien release bonds in amounts equal to the claims of any such liens or as otherwise required by applicable law to obtain the full release of such liens. 9.3. SUBSTITUTE TAXES. Notwithstanding anything herein to the contrary, if at any time during the Lease Term there shall be levied or assessed in substitution of real estate taxes, in whole or in part, a tax, assessment or governmental imposition (other than a general gross receipts or income tax) on the rents received from the Leased Premises or the rents reserved herein, and said tax, assessment or governmental imposition shall be imposed upon Landlord and is properly allocable to the Lease Term, Tenant shall pay same as hereinabove provided, but only to the extent that such new tax, assessment or governmental imposition is a substitute for real estate taxes previously imposed. 9.4. INSTALLMENT PAYMENTS. Notwithstanding anything herein to the contrary, if at any time during the Lease Term any assessment (either general or special) is levied upon or assessed against the Leased Premises or any part thereof, and such assessment may be paid in installments, and if Tenant elects to pay such assessment in installments, Tenant's obligation under this paragraph to pay such assessment shall be limited to the amount of such installments (plus applicable interest thereon charged by the taxing authority, if any) which is properly allocable to the Lease Term. 10. INSURANCE. 10.1. FIRE INSURANCE. Tenant shall maintain and pay for at its sole cost and expense so called "all risk" fire and extended coverage insurance (including vandalism and malicious mischief insurance, earthquake insurance and flood insurance) on the Leased Premises, with a limit of or in an amount not less than one hundred percent (100%) of the replacement value thereof, less the cost of excavations, foundation, footings and underground tanks, conduits, pipes, pilings and other underground items. Payments for losses shall be made to a third party escrow or construction control account which is reasonably acceptable to Landlord and Tenant (and, if applicable, any Leasehold Mortgagee named as loss payee hereunder), and shall be disbursed from such account to Tenant and Tenant's contractors to pay for the restoration of the Improvements in accordance with the provisions of this Lease. Tenant may include the holder of any Leasehold Mortgage as a loss payee provided that the proceeds of such insurance required hereunder shall be used for the repair and reconstruction of the Improvements, subject only to conditions permitted pursuant to Section 23.4. Any such Leasehold Mortgagee which is named as loss payee shall be deemed an acceptable construction control escrow for purposes of this Section 10.1. The full replacement value of the items to be insured under this Section 10.1 shall be determined by the company issuing the insurance policy at the time the policy is initially obtained. Not more frequently than once every year, Landlord shall have the right to notify Tenant that it elects to have the replacement value redetermined by the insurance company. The redetermination shall be made promptly and in accordance with the rules and practices of the -10- Board of Fire Underwriters or a like board recognized and generally accepted by the insurance company, and each party shall be promptly notified of the results by the company. The insurance policy shall be adjusted according to the redetermination. 10.2. LIABILITY INSURANCE. Tenant shall also insure at its sole cost and expense against property damage and public liability arising by reason of occurrences on or about the Leased Premises by maintaining a policy or policies of commercial general liability insurance including contractual liability coverage insuring against the tort liabilities assumed under this Lease, on an "occurrence" basis, with a primary liability limit of not less than FIVE MILLION AND NO/100 DOLLARS ($5,000,000.00), and an excess coverage limit of not less than TWENTY MILLION DOLLARS ($20,000,000). Not more frequently than once each year, if, in the opinion of Landlord's lender or of the insurance broker retained by Landlord, the amount of public liability and property damage insurance coverage at that time is not adequate, Tenant shall increase the insurance coverage as required by Landlord's lender or as may be reasonably required by Landlord's insurance broker. 10.3. WORKER'S COMPENSATION. Tenant shall maintain (at its sole cost and expense) workers' compensation and employers' liability insurance covering all of its employees as required of the laws of the State of Nevada. Tenant shall have the right to self-insure with respect to such required coverage to the extent permitted by applicable law. 10.4. POLICY REQUIREMENTS. Except for workers' compensation insurance, all insurance policies required to be maintained by Tenant hereunder shall be with responsible insurance companies, authorized to do business in the State of Nevada if required by law, and, except for workers' compensation policies, shall name Landlord as an additional insured or, with respect to property insurance to be maintained pursuant to Section 10.1 above, loss payee, as its interests may appear, and shall provide for cancellation only upon thirty (30) days prior written notice to Landlord. Except for workers' compensation insurance, Tenant shall evidence all insurance coverage by delivering to Landlord, prior to taking possession of the Land, and thereafter from time to time upon request by Landlord, certificates issued by the insurance companies, if any, underwriting such risks. Except for workers' compensation insurance, Tenant shall, at least ten (10) days prior to the expiration of any such policy, furnish Landlord with renewals or "binders" thereof or certificates evidencing the same, or Landlord may order such insurance and charge the cost thereof to Tenant, which amount shall be payable by Tenant upon demand as additional rent, together with interest thereon at the rate of fifteen percent (15%) per annum. With respect to workers' compensation insurance, Tenant shall furnish Landlord with reasonable evidence that Tenant has complied with its obligations under this Lease. 11. REPAIRS. Tenant shall maintain and take good care of the Leased Premises (including any Improvements constructed by Tenant) at its sole cost and expense during the Lease Term and any Option Terms and shall maintain the same in a first class condition and state of repair, including repairs to the interior, exterior and structure, it being understood that Landlord shall not be required to make any repairs to the Leased Premises during the Lease -11- Term. At the end or other termination of this Lease, and subject to Section 2.11 and Section 14.1 of this Lease, Tenant shall deliver up the Land with the Improvements thereon in good repair and condition, ordinary wear and tear, depreciation and obsolescence being excepted. 12. ALTERATIONS. Tenant shall have the right to make, at its sole cost and expense, additions, alterations and changes involving a cost of less than FIFTY THOUSAND DOLLARS ($50,000.00) (hereinafter referred to as "ALTERATIONS") in or to the Improvements, provided Tenant shall not then be in default in the performance of any of Tenant's covenants or agreements in this Lease, and subject to the following conditions: 12.1. LANDLORD CONSENT. Tenant shall have given written notice to Landlord at least ten (10) days prior to the commencement of such Alterations and no Alterations of any kind which would cause the Improvements to materially deviate from plans, specifications, and renderings approved by Landlord shall be made without the prior written consent of Landlord. 12.2. PERMITS. No Alterations shall be undertaken until Tenant shall have procured and paid for, so far as the same may be required, from time to time, all required permits and authorizations of Clark County and other governmental authorities having jurisdiction. 12.3. TENANT'S ARCHITECT. Any structural Alteration shall be conducted under the supervision of an architect (otherwise qualified under Section 2.3 above) or engineer selected by Tenant and no such Alteration shall be made except in accordance with detailed plans and specifications prepared and approved in writing by such architect or engineer. Any and all such Alterations shall conform, in all material respects, to the plans, specifications, and renderings approved by Landlord. 12.4. CONSTRUCTION. All Alterations shall be pursued promptly to completion and shall be done in a good and workmanlike manner and in compliance with all applicable permits and authorizations and building and zoning laws and with all other laws, ordinances, orders, rules, regulations and requirements of all federal, state and local governments, departments, commissions, boards and officers. 12.5. INSPECTION. During the course of any Alterations, and subject to applicable laws and to Tenant's security policies, Landlord shall have the right to go upon and inspect the Improvements at all reasonable times and upon reasonable notice and shall have the right to post and keep posted thereon notices of non-responsibility or such other notices which Landlord may deem to be proper for the protection of Landlord's interest in the Leased Premises in such a manner as not to interfere with Tenant's construction. 12.6. LIENS. Tenant shall indemnify, defend, satisfy and hold harmless Landlord and Landlord's trustees, beneficiaries, heirs, successors, assigns, agents, employees and representatives from and against all claims, attorneys' fees and other costs and expenses growing out of or incurred by reason of or with respect to liens for labor or materials supplied or claimed to be supplied in connection with Alterations done by or for Tenant. Should Tenant fail to fully -12- discharge any such lien or claim, or in the alternative fail to post a bond sufficient to discharge such lien or claim within thirty (30) days after written request therefor by Landlord, then Landlord, at its option, may treat such failure as an Event of Default pursuant to paragraph 25.1. Nothing herein shall prevent Tenant from contesting, at its sole cost and expense, any such claims, or liens. 12.7. INSURANCE. Prior to making any material Alterations to any building or work of improvement, Tenant and Tenant's subcontractors and agents shall obtain Workers' Compensation and Builder's Risk and Liability Insurance in such amounts and form as required by Section 2.7 hereof. 13. EQUIPMENT, FIXTURES AND SIGNS. 13.1. EQUIPMENT AND FIXTURES. Tenant shall have the right to erect, install, maintain and operate on the Leased Premises such equipment, trade and business fixtures, and other personal property as Tenant may deem necessary or appropriate, and such shall not be deemed to be part of the Leased Premises, but shall remain the property of Tenant, as provided in Section 2.11 above. Any such installations shall not materially injure or deface the Improvements. At any time during the Lease Term and within thirty (30) days after termination hereof, Tenant shall have the right to remove its equipment, fixtures, signs and other personal property from the Leased Premises provided that Tenant is not then in default. Tenant's Personal Property may be removed at the expiration or earlier termination of this Lease if Tenant repairs any damage to the Improvements caused by such removal and the removal does not affect or in any way weaken the structural integrity of the Improvements; provided that such repair shall not be required and the structural integrity of the Improvements may be affected or weakened, if Landlord requires that the Improvements be removed from the Land, and if Tenant removes the Improvements pursuant to Section 2.11 above. The foregoing provisions of this Section 13.1 are subject to Landlord's security interest in Tenant's "FF&E," as provided in Article 31 below; provided that nothing herein shall be deemed to limit Tenant's right to dispose of items of Tenant's Personal Property in the ordinary course of Tenant's business, so long as Tenant maintains Personal Property which is at all times sufficient for the operation of the Improvements. 13.2. PERMITTED SIGNAGE. Tenant shall be entitled to such signage as may be permitted under applicable law. Tenant's rights under this Section 13.2 are subject to Tenant's receipt of any and all necessary governmental approvals, permits and consents. 14. DAMAGE BY FIRE OR OTHER CASUALTY. 14.1. RESTORATION. Except as otherwise provided in this Section 14.1, Tenant shall repair, at Tenant's cost, any damage to Improvements (except any damage for which no insurance coverage was obtainable). In the event all or any substantial portion of the Improvements shall be damaged or destroyed in whole or in part by fire or any other casualty such that the cost to repair and restore the Improvement exceeds ten percent (10%) of the -13- replacement cost of the Improvements, Tenant shall, at Tenant's option either (i) proceed diligently to repair or rebuild the Improvements as nearly as possible to the value, condition, quality and character immediately prior to such damage or destruction, subject to Tenant's right to alter the same in accordance with Article 12; or (ii) demolish the Improvements and regrade the Land to finish grade in accordance with Landlord's reasonable requirements. 14.2. USE OF INSURANCE PROCEEDS. All insurance proceeds with respect to the Improvements which are paid to Tenant shall, if Tenant elects to rebuild the Improvements pursuant to Section 14.1, be deposited by Tenant into a third party escrow or construction control account which is reasonably acceptable to Landlord and Tenant (and, if applicable, any Leasehold Mortgagee named as loss payee with respect to such insurance pursuant to Section 10.1), and shall be disbursed from such account to Tenant and Tenant's contractor for the payment of the costs of the repair and restoration of the Improvements. Any such Leasehold Mortgagee which is named as loss payee shall be an acceptable construction control account for purposes of this Section 14.2. Notwithstanding the foregoing, if Tenant elects to demolish the Improvements pursuant to option (ii) of Section 14.1, all such insurance proceeds which are not required to be paid to a Leasehold Mortgagee shall be allocated between and distributed to Landlord and Tenant based upon the remaining unexpired Lease Term as of the date of the distribution as follows: (i) Tenant shall receive that portion of such proceeds which is derived by multiplying the amount of available insurance proceeds by a fraction, the numerator of which is the length of the remaining unexpired Lease Term (expressed in years) and the denominator of which is twenty-five (25); and (ii) Landlord shall receive the remaining portion of such proceeds. 14.3. ADDITIONAL COST OF RESTORATION. If Tenant elects to rebuild the Improvements pursuant to Section 14.1, and if the insurance proceeds received by or for the account of Tenant shall be insufficient to pay the entire cost of such repairs and restoration, Tenant shall supply the amount of any such deficiency and shall apply the same to the payment of the cost of such repair and restoration. Under no circumstances shall Landlord be obligated to make any payment or contribution towards the cost of any repairs and restoration. 14.4. NO RENT ABATEMENT. There shall be no abatement of rent as a result of any casualty, including without limitation, during the period of repair and rebuilding of the Leased Premises. 15. CONDEMNATION. 15.1. TERMINATION. If all of the Leased Premises (or if less than all, but the remaining portion will not permit Tenant to operate its business on the Leased Premises, with sufficient parking therefor), shall be acquired by the right of condemnation or eminent domain for any public or quasi-public use or purpose, or sold to a condemning authority under threat of condemnation or in lieu thereof, then the Lease Term shall cease and terminate as of the date of title vesting in such proceeding (or sale) and all rent shall be paid up to that date. -14- 15.2. PARTIAL CONDEMNATION. In the event of a partial taking or condemnation which takes less than a substantial portion of the Leased Premises and if the remaining portion will permit Tenant to operate its business on the Leased Premises, with sufficient parking therefor, then Tenant, at Tenant's sole cost and expense, shall proceed with reasonable diligence to restore the Leased Premises to a condition, to the extent practicable, comparable to its condition at the time of such condemnation less the portion lost in the taking, and this Lease shall continue in full force and effect but with a pro rata reduction of rent. 15.3. PAYMENT OF AWARD. In the event of any condemnation, taking or sale as aforesaid, whether whole or partial, Landlord and Tenant shall be entitled to the portion of the award applicable to their respective interests in the Leased Premises. Nothing contained in this Section 15.3 shall be deemed to prevent Tenant from seeking a separate award from the taking authority for the taking of Tenant's personal property and fixtures or for relocation and business interruption expenses incurred by Tenant as a result of the taking. 16. LIABILITY AND INDEMNIFICATION. 16.1. TENANT INDEMNITY. Landlord shall not be liable to Tenant or Tenant's trustees, beneficiaries, heirs, successors, assigns, employees, agents, patrons or invitees, or any person whomsoever, for any injury to person or damage to property occurring during the Lease Term, or any Option Term, or which is caused by or arising as a result of the negligence, or misconduct of Tenant, its employees or agents, or of any other person (other than Landlord or Landlord's employees or agents) entering upon the Leased Premises under express or implied invitation of Tenant, as well as any such damage or injury which is caused by or which arises as a result of Tenant's breach of this Lease, and Tenant agrees to indemnify, defend and hold Landlord and Landlord's trustees, beneficiaries, heirs, successors, assigns, members, agents, employees and representatives harmless from any liability, loss, claim, damage, cost or expense suffered or incurred by Landlord by reason of any such damage or injury. 16.2. LANDLORD INDEMNITY. Tenant shall not be liable to Landlord, or Landlord's trustees, beneficiaries, heirs, successors, assigns, employees, agents, patrons, or invitees, or any person whomsoever for any injury to person, or damage to property occurring prior to the Effective Date, or subsequent to the surrender of the Premises, or arising out of the gross negligence, or willful misconduct of Landlord and Landlord agrees to indemnify, defend and hold Tenant and Tenant's trustees, beneficiaries, heirs, successors, assigns, agents, employees and representatives harmless from any liability, loss, claim, damage, cost, or expense suffered, or incurred by Tenant by reason of any such damage, or injury. 16.3. NOTICE OF INDEMNITY. Upon notice of any such claims of liability for which indemnification is sought pursuant to Sections 16.1, or 16.2, the indemnifying party, at its election, shall have the right of defense in such proceedings, by counsel of its own choosing, at its sole cost and expense. The party claiming indemnity shall cooperate fully in all respects in any such defense, including, without limitation, by making available all pertinent information under its control. If the indemnifying party does not notify indemnified party within ten (10) -15- days of notice of a potential claim that the indemnifying party will defend the same, or should the indemnifying party fail to file any answer or other pleading at least five (5) days before the same is due, the indemnified party may defend or settle such claim or action in such manner as it deems appropriate, in its sole discretion but, to the extent such claim is properly subject to indemnity pursuant to Sections 16., or 16.2, above, at the sole cost and expense of the indemnifying party. If the indemnifying party so notifies the indemnified party concurrently with its notice of election to defend, it may defend, but not settle, a claim without waiving its right to assert that such claim is not subject to the indemnity agreement in this Article 16. The indemnified party may, at its expense, participate in such matter with counsel of its own choosing. 16.4. SURVIVAL. The provisions of this Article 16 shall survive the termination of this Lease. 17. RIGHT OF INSPECTION. Subject to applicable laws and Tenant's reasonable security policies, Landlord and its agents and representatives shall be entitled to enter upon and inspect the Leased Premises at any time during normal business hours upon prior reasonable notice (or, in the case of an emergency, at any time and with or without notice), provided only that such inspection shall not unreasonably interfere with Tenant's business. 18. WARRANTY OF TITLE AND QUIET ENJOYMENT. 18.1. QUIET ENJOYMENT. Landlord represents and warrants that it is the owner in fee simple of the Land, and that it alone will have full right to lease the Leased Premises for the Lease Term set out herein. Landlord further represents and warrants that Tenant, on paying the rent and performing its obligations hereunder, shall peaceably and quietly hold and enjoy the Leased Premises for the Lease Term without any hindrance, molestation or ejection by Landlord, its successors or assigns, or those claiming by, through, or under them or anyone claiming under paramount title to Landlord. 18.2. ENCUMBRANCES. Landlord represents and warrants that, with the exception of the Permitted Exceptions shown on Exhibit "C," it has not granted nor created and covenants that it will not grant, create or suffer any claim, lien, encumbrance, easement, restriction or other charge or exception to title to the Leased Premises which would have any material adverse effect upon Tenant's rights or obligations under this Lease; provided, however, that it is expressly agreed that Landlord, its successors and assigns may subject its interest in the Leased Premises to mortgage loans if such lender shall agree for itself, its successors and assigns: (i) to be bound by the terms of this Lease; (ii) not to disturb Tenant's use or possession of the Leased Premises in the event of a foreclosure of such lien or encumbrance so long as Tenant is not in default hereunder; (iii) except as may be required under applicable law, not to join Tenant as a party defendant in any foreclosure proceeding relating to the Project or any part thereof. If Landlord's interest in the Land or in this Lease is sold or conveyed upon the exercise of any remedy provided for in any such mortgage loan, or otherwise by operation of law, this Lease will not be affected in any way, and Tenant will attorn to and recognize the new owner as Tenant's -16- Landlord under this Lease. Tenant will confirm such attornment in writing within ten (10) days after Tenant's receipt of a written request for attornment. 18.3. TRANSFER BY LANDLORD. Landlord has the absolute right to transfer all or a part of its interest in this Lease to any successor. In the event of any sale or other transfer of all of Landlord's interest in the Leased Premises, other than a transfer for security purposes only, Landlord shall automatically be relieved of any and all obligations and liabilities on the part of Landlord accruing from and after the date of such transfer, provided that the transferee acknowledges in writing that such transferee assumes the terms and conditions of this Lease. 19. WAIVER OF SUBROGATION. Landlord and Tenant severally waive any and every claim which arises or may arise in its favor and against the other during the Lease Term for any and all loss of, or damage to, any of its property located within or upon, or constituting a part of, the Leased Premises, which loss or damage is covered by valid and collectible fire and extended coverage, general liability, liquor liability or worker's compensation insurance policies, to the extent that such loss or damage is recoverable thereunder. Inasmuch as the above mutual waivers will preclude the assignment of any aforesaid claim by way of subrogation (or otherwise) to an insurance company (or any other person), Landlord and Tenant severally agree immediately to give to each insurance company which has issued to it policies of insurance, written notice of the terms of said mutual waivers, and to have said insurance policies properly endorsed, if necessary, to prevent the invalidation of said insurance coverages by reason of said waivers. 20. FORCE MAJEURE. The time for performance by Landlord or Tenant of any term, provision or covenant of this Lease, other than the payment of amounts due under this Lease, shall be deemed extended by time lost due to delays resulting from acts of God, strikes, unavailability of building materials, civil riots, floods, material or labor restrictions by governmental authority, and any other cause not within the control of Landlord or Tenant, as the case may be. 21. NO BROKERS. Tenant warrants that is has not had any contact or dealings with any person or real estate broker which would give rise to the payment of any finders' fee or brokerage commission by Landlord in connection with this Lease, and Tenant shall indemnify, hold harmless and defend Landlord from and against any liability with respect to any finder's fee or brokerage commission arising out of any act or omission of Tenant. Landlord warrants that it has not had any contact with any person or real estate broker which would give rise to the payment of any finders' fee or brokerage commission by Tenant in connection with this Lease, and Landlord shall indemnify, hold harmless and defend Tenant from and against any liability with respect to any finders' fee or brokerage commission arising out of any act or omission of Landlord. 22. LANDLORD-TENANT RELATIONSHIP. It is further understood and agreed that the Landlord shall in no event be construed or held to be a partner, joint venturer or associate of Tenant in the conduct of Tenant's business, nor shall Landlord be liable for any debts incurred -17- by Tenant in Tenant's business; but it is understood and agreed that the relationship is and at all times shall remain that of landlord and tenant. 23. ASSIGNMENT AND SUBLETTING. 23.1. ASSIGNMENT AND SUBLETTING. Tenant shall not assign this Lease or sublet the whole or any part of the Leased Premises without the prior written consent of Landlord, which shall not unreasonably be withheld. 23.2. NO RELEASE OR NOVATION. No assignment or subletting or collection of rent from the assignee or subtenant (including, without limitation, any assignment pursuant to the preceding Section 23.2) shall be deemed to constitute a novation or in any way release Tenant from further performance of its obligations under this Lease, and Tenant shall continue to be liable under this Lease for the balance of the Lease Term with the same force and effect as if no such assignment had been made. 23.3. ENCUMBRANCE OR ASSIGNMENT AS SECURITY. 23.3.1. DEFINITIONS. The term "LEASEHOLD MORTGAGE" as used in this Lease shall mean a first mortgage, a first deed of trust, a sale - leaseback (wherein the leaseback is prior to all other security interests in Tenant's leasehold estate) or other first priority security instrument or device by which Tenant's leasehold estate is mortgaged, conveyed, assigned, or otherwise transferred, to secure a debt or other obligation. 23.3.1.1. The term "LEASEHOLD MORTGAGEE" as used in this Lease shall refer to an institutional lender (i.e., a savings bank, savings and loan association, commercial bank, trust company, credit union, insurance company, college, university, real estate investment trust or pension fund or any other institution which is recognized nationally or regionally as being in the business of lending money or serving as the trustee for persons investing in such debt) which is not affiliated with Tenant and which is the holder of a Leasehold Mortgage (which in the case of a deed of trust is the beneficiary thereof and in the case of a sale-leaseback is the lessor) in respect to which the notice provided for by Section 23.4.3 has been given and received and as to which the provisions of this Section 23.4 are applicable. 23.3.2. TENANT'S RIGHT TO MORTGAGE ITS LEASEHOLD INTEREST. Notwithstanding any other provision contained in this Lease, for the purpose of financing construction or reconstruction permitted by this Lease or refinancing any such financing, Tenant shall have the right to encumber or assign its interest in this Lease or assign its interest in any sublease hereunder by mortgage or deed of trust (hereinafter, collectively, "MORTGAGE") (or by foreclosure or assignment in lieu of foreclosure under such Mortgage) to any institutional lender or other lender reasonably acceptable to Landlord as mortgagee and if such Mortgage is a deed of trust, foreclosure may be had thereunder by the exercise of a power of sale in accordance -18- with the provisions of Chapter 107 of the Nevada Revised Statutes. There may be no more than one Mortgage on Tenant's interest in the Improvements and this Lease at any given time. 23.3.3. NOTICE TO LANDLORD. Upon execution of a Mortgage otherwise entitled to the benefits of a Leasehold Mortgage (or any amendment, supplement or modification thereto) and in order to be entitled to such benefits a photostatic copy of such instrument and the obligation secured thereby shall be promptly delivered to Landlord together with a certification by Tenant and the Leasehold Mortgagee confirming that the photostatic copy is a true copy of the Leasehold Mortgage and giving written notice of the name and mailing address of the Leasehold Mortgagee (which shall be deemed such Leasehold Mortgagee's address hereunder until changed by notice to Landlord and Tenant as provided in Article 24), that the Leasehold Mortgage was recorded in the Official Records of Clark County, Nevada, the date of recording or filing of record thereof and recorder's instrument number and book reference or other recorder's index reference, and that such Mortgage is a first lien on Tenant's interest in the Improvements and this Lease. Until such true copies and certificate are delivered to Landlord, any such instrument shall have no force or effect whatsoever on the enforcement by Landlord of any provisions of this Lease or any rights or remedies hereunder. 23.3.4. CANCELLATION, SURRENDER AND MODIFICATION. No cancellation, surrender or modification of this Lease shall be effective as to any Leasehold Mortgagee unless consented to in writing by such Leasehold Mortgagee. 23.3.5. NOTICE OF DEFAULT AND RIGHT TO CURE. Landlord, upon providing Tenant any notice of: (i) default under this Lease, (ii) a termination of this Lease, or (iii) a matter on which Landlord may predicate or claim a default, shall at the same time provide a copy of such notice to any Leasehold Mortgagee. From and after such notice has been given to a Leasehold Mortgagee, such Leasehold Mortgagee shall have the same period, after the giving of such notice, for remedying any default or acts or omissions which are the subject matter of such notice or causing the same to be remedied, as is given Tenant after the giving of such notice to Tenant, plus in each instance, the additional periods of time specified in Sections 23.4.6 and 23.4.7, to remedy, commence remedying or cause to be remedied the defaults or acts or omissions which are the subject matter of such notice specified in any such notice. Landlord shall accept such performance by or at the instigation of such Leasehold Mortgagee as if the same had been done by Tenant. Tenant authorizes each Leasehold Mortgagee to take any such action at such Leasehold Mortgagee's option and does hereby authorize entry upon the Leased Premises by the Leasehold Mortgagee for such purpose. 23.3.6. TERMINATION FOR TENANT DEFAULT. Anything contained in this Lease to the contrary notwithstanding, if any default shall occur which entitles Landlord to terminate this Lease, Landlord shall have no right to terminate this Lease unless, following the expiration of the period of time given Tenant to cure such default or the act or omission which gave rise to such default, Landlord shall notify any Leasehold Mortgagee of Landlord's intent to so terminate at least thirty (30) days in advance of the proposed effective date of such termination, if such default is capable of being cured by the payment of money, and at least forty-five (45) -19- days in advance of the proposed effective date of such termination if such default is not capable of being cured by the payment of money. The provisions of Section 23.4.7 below shall apply if, during such thirty (30) or forty-five (45) day cure period, any Leasehold Mortgagee shall: (a) notify Landlord of such Leasehold Mortgagee's desire to avoid any termination of this Lease by Landlord; and (b) pay or cause to be paid all rent and other payments then due and in arrears as specified in the notice to such Leasehold Mortgagee and which may become due during such thirty (30) or forty-five (45) day cure period; and (c) comply, or in good faith and with reasonable diligence commence to comply, with all nonmonetary requirements of this Lease then in default and reasonably susceptible of being complied with by such Leasehold Mortgagee (provided, however, that such Leasehold Mortgagee shall not be required during such period to cure or commence to cure any default consisting of Tenant's failure to satisfy and discharge any lien, charge or encumbrance against Tenant's interest in this Lease or the Leased Premises junior in priority to the lien of the Leasehold Mortgage held by such Leasehold Mortgagee, so long as such lien, charge or encumbrance does not also encumber or threaten Landlord's interest in the Land or the Leased Premises); 23.3.7. PROCEDURE OF DEFAULT. 23.3.7.1. If Landlord shall elect to terminate this Lease by reason of any default of Tenant, and if a Leasehold Mortgagee shall have proceeded in the manner provided for by Section 23.4.6, the specified date for the termination of this Lease as fixed by Landlord in its termination notice shall be extended for a period of six (6) months provided that such Leasehold Mortgagee shall, during such six (6) month period: (a) Pay or cause to be paid the rent, additional rent and other monetary obligations of Tenant under this Lease as the same become due, and continue its good faith efforts to perform all of Tenant's other obligations under this Lease, excepting (A) obligations of Tenant to satisfy or otherwise discharge any lien, charge or encumbrance against Tenant's interest in this Lease or the Leased Premises junior in priority to the lien of the Leasehold Mortgage held by such Leasehold Mortgagee, so long as such lien, charge or encumbrance does not also encumber or threaten Landlord's interest in the Land or the Leased Premises and (B) past nonmonetary obligations then in default and not reasonably susceptible of being cured by such Leasehold Mortgagee; and (b) If not enjoined or stayed, take steps to acquire or sell Tenant's interest in this Lease by foreclosure of the Leasehold Mortgage or other appropriate means and prosecute the same to completion with due diligence. -20- 23.3.7.2. If at the end of such six (6) month period such Leasehold Mortgagee is complying with Section 23.4.7.1, this Lease shall not then terminate, and the time for completion by such Leasehold Mortgagee of its proceedings shall continue so long as such Leasehold Mortgagee is enjoined or stayed and thereafter for so long as such Leasehold Mortgagee proceeds to complete steps to acquire or sell Tenant's interest in this Lease by foreclosure of the Leasehold Mortgage or by other appropriate means with reasonable diligence and continuity. Nothing in this Section 23.4.7, however, shall be construed to extend this Lease beyond the Lease Term, nor to require a Leasehold Mortgagee to continue such foreclosure proceedings after the subject Tenant default has been cured. If the default shall be cured and the Leasehold Mortgagee shall discontinue such foreclosure proceedings, this Lease shall continue in full force and effect as if Tenant had not defaulted under this Lease. 23.3.7.3. If a Leasehold Mortgagee is complying with Section 23.4.7.1, upon the acquisition of Tenant's leasehold estate herein by such Leasehold Mortgagee or its designee or any other purchaser at a foreclosure sale or otherwise, and upon the discharge of any lien, charge or encumbrance against the Tenant's interest in this Lease or the Leased Premises which is junior in priority to the lien of the Leasehold Mortgage held by such Leasehold Mortgagee and which the Tenant is obligated to satisfy and discharge by reason of the terms of this Lease, this Lease shall continue in full force and effect as if Tenant had not defaulted under this Lease. 23.3.7.4. The making of a Leasehold Mortgage shall not be deemed to constitute an assignment or transfer of this Lease or of the leasehold estate hereby created, nor shall any Leasehold Mortgagee, as such, be deemed to be an assignee or transferee of this Lease or of the leasehold estate hereby created so as to require such Leasehold Mortgagee, as such, to assume the performance of any of the terms, covenants or conditions on the part of Tenant to be performed hereunder, but the purchaser at any sale of this Lease and of the leasehold estate hereby created in any proceedings for the foreclosure of any Leasehold Mortgage, or the assignee or transferee of this Lease and of the leasehold estate hereby created under any instrument of assignment or transfer in lieu of the foreclosure of any Leasehold Mortgage, shall be deemed to be an assignee or transferee within the meaning of this Lease, and shall be deemed to have agreed to perform all of the terms, covenants and conditions on the part of Tenant to be performed hereunder from and after the date of such purchase and assignment. 23.3.7.5. Any Leasehold Mortgagee or other acquirer of the leasehold estate of Tenant pursuant to foreclosure, assignment in lieu of foreclosure or other proceedings may, upon acquiring Tenant's leasehold estate, without further consent of Landlord, sell and assign the leasehold estate on such terms and to such persons and entities as are acceptable to such Mortgagee or acquirer and thereafter be relieved of all obligations under this Lease, provided that such assignee is solvent and financially and legally able to perform the obligations of Tenant for the unexpired Lease Term, in Landlord's reasonable judgment. No other or further assignment shall be made except in accordance with the provisions of Article 23 of this Lease. Upon execution of any assignment permitted to be made to or by the Leasehold Mortgagee a fully executed copy thereof, together with a written statement of the place of -21- recording or filing of record, if any, and a copy of the assumption agreement, if applicable, shall be delivered promptly to Landlord; and until such delivery to Landlord such assignment shall have no force or effect whatsoever on the enforcement by Landlord of any provisions of this Lease or any rights or remedies hereunder. 23.3.7.6. Notwithstanding any other provisions of this Lease, any sale of this Lease and of the leasehold estate hereby created in any proceedings for the foreclosure of any Leasehold Mortgage, or the assignment or transfer or this Lease and of the leasehold estate hereby created in lieu of the foreclosure of any Leasehold Mortgage shall be deemed to be a permitted sale, transfer or assignment of this Lease and of the leasehold estate hereby created. 23.3.7.7. Nothing in this Section 23.4 shall limit Landlord's ability to enforce this Lease by any means (including, but not limited to, an action for specific performance and/or injunction) other than termination, reentry or taking possession after expiration of the cure periods, if any, provided in Section 25.1. 23.3.8. NEW LEASE. In the event of the termination of this Lease as a result of Tenant's default, Landlord shall, in addition to providing the notices of default and termination as required above, provide any Leasehold Mortgagee with written notice that this Lease has been terminated, together with a statement of all sums which would at that time be due under this Lease but for such termination, and of all other defaults, if any, then known to Landlord. Landlord agrees to enter into a new lease ("NEW LEASE") of the Leased Premises with such Leasehold Mortgagee or its designee for the remainder of the Lease Term, effective as of the date of termination, at the rent, and upon the terms, covenants and conditions (but excluding requirements which are not applicable or which have already been fulfilled) of this Lease, provided: (a) Such Leasehold Mortgagee shall make written request upon Landlord for such New Lease within sixty (60) days after the date such Leasehold Mortgagee receives Landlord's notice of termination or actual termination, if later, of this Lease given pursuant to this Section 23.4.8. (b) Such Leasehold Mortgagee or its designee shall pay or cause to be paid to Landlord at the time of the execution and delivery of such New Lease, any and all sums which would at the time of execution and delivery thereof be due pursuant to this Lease but for such termination and, in addition thereto, all reasonable expenses, including reasonable attorney's fees, which Landlord shall have incurred by reason of such termination and the execution and delivery of the New Lease, and which have not otherwise been received by Landlord from Tenant or other party in interest under Tenant. Upon the execution of such New Lease, Landlord shall allow to the tenant named therein as an offset against the sums otherwise due under this Section 23.4.8(b) or under the New Lease, an amount equal to the net income, if any, derived by Landlord from the Leased -22- Premises during the period from the date of termination of this Lease to the date of the beginning of the lease term of such New Lease. In the event of a controversy as to the amount to be paid to Landlord pursuant to this Paragraph (b), the payment obligation shall be satisfied if Landlord shall be paid the amount not in controversy, and the Leasehold Mortgage or its designee shall agree to pay any additional sum ultimately determined to be due plus interest at the rate of fifteen percent (15%) and such obligation shall be adequately secured. For purposes of this Section 23.4.8(b), NET INCOME shall mean gross revenue derived by Landlord from the Leased Premises during the period from the date of termination of this Lease to the date of the beginning of the lease term of such New Lease, less all operating expenses, real and personal property taxes and debt service payments (with respect to debt incurred to own, operate, alter or manage the Improvements) incurred or paid by Landlord during such period. (c) Such Leasehold Mortgagee or its designee shall agree to cure any of Tenant's defaults of which said Leasehold Mortgagee was notified by Landlord's notice of termination and which are reasonably susceptible of being so cured by Leasehold Mortgagee or its designee. (d) The tenant under any New Lease shall, upon an assignment of such leasehold estate, be relieved and discharged from the obligations imposed on the tenant by such New Lease, provided that the assignee of such leasehold estate is solvent and financially and legally able to perform the obligations of the tenant for the unexpired term of the New Lease, in Landlord's reasonable judgment. 23.3.9. CASUALTY AND CONDEMNATION LOSS. Any Mortgage must be consistent with and not interfere with Landlord's rights hereunder with respect to insurance, casualty and condemnation, except that a Leasehold Mortgage may provide that casualty insurance proceeds with respect to the Leased Premises and condemnation awards payable with respect to the buildings and other improvements on the Leased Premises shall only be disbursed for repair, reconstruction or restoration upon satisfaction of specified conditions. Such conditions shall be subject to Landlord's approval, which shall not be unreasonably withheld. The Leasehold Mortgage shall provide that Landlord shall have a reasonable period of time after Tenant's failure to satisfy such conditions in which to satisfy the same and that thereupon such proceeds or condemnation awards shall be made available for repair, reconstruction and restoration as herein provided. The failure of any Leasehold Mortgagee to make such proceeds or condemnation awards available shall not relieve Tenant of any obligation hereunder and any failure of Tenant to repair, reconstruct or restore as provided in this Lease shall constitute a default. Any Mortgage must provide that Landlord will be notified of any default thereunder and provided a reasonable opportunity to cure the same. 23.3.10. ARBITRATION. Landlord shall give any Leasehold Mortgagee prompt notice of any arbitration or legal proceedings between Landlord and Tenant involving obligations under this Lease. Any Leasehold Mortgagee shall have the right to intervene in any such -23- proceedings and be made a party to such proceedings at its or Tenant's cost, and the parties hereto do hereby consent to such intervention. In the event that any Leasehold Mortgagee shall not elect to intervene or become a party to any such proceedings, Landlord shall give the Leasehold Mortgagee notice of, and a copy of, any award or decision made in any such proceedings. In the event Tenant shall fail to appoint an arbitrator after notice from Landlord, as provided in Article 29 hereof, a Leasehold Mortgagee shall have an additional period of thirty (30) days, after notice by Landlord that Tenant has failed to appoint such arbitrator, to make such appointment, and the arbitrator so appointed shall thereupon be recognized in all respects as if he had been appointed by Tenant. 23.3.11. NO MERGER. So long as any Leasehold Mortgage is in existence, unless any Leasehold Mortgagee shall otherwise expressly consent in writing, the fee title to the Leased Premises and the leasehold estate of Tenant therein created by this Lease shall not merge but shall remain separate and distinct, notwithstanding the acquisition of said fee title and said leasehold estate by Landlord or by Tenant or by a third party, by purchase or otherwise. 23.3.12. ESTOPPEL. Landlord shall, without charge, at any time and from time to time hereafter, but not more frequently than once in any one-year period, within ten (10) days after written request from Tenant to do so, certify by written instrument duly executed and acknowledged to any Leasehold Mortgagee or purchaser, or proposed Leasehold Mortgagee or proposed purchaser, or any other person or entity specified in such request: (a) as to whether this Lease has been supplemented or amended, and if so, the substance and manner of such supplement or amendment; (b) as to the validity and force and effect of this Lease, in accordance with its tenor; (c) as to the existence of any default hereunder; (d) as to the existence of any offsets, counterclaims or defenses hereto on the part of Tenant; (e) as to the commencement and expiration dates of the Lease Term; and (f) as to any other matters as may be reasonably so requested. Any such certificate may be relied upon by Tenant and any other person or entity to whom the same may be exhibited or delivered, and the contents of such certificate shall be binding on the Landlord. 23.3.13. NOTICES. Notices from Landlord to the Leasehold Mortgagee shall be mailed to the address furnished Landlord pursuant to Section 23.4.3, and those from the Leasehold Mortgagee to Landlord shall be mailed to the address designated pursuant to the provisions of Article 24 hereof. Such notices, demands and requests shall be given in the manner described in Article 24 and shall in all respects be governed by and shall be deemed to be effective in accordance with the provisions of that Article. 23.3.14. NO SUBORDINATION OF LANDLORD'S FEE TITLE. Landlord shall not be required to subordinate Landlord's fee interest in the Leased Premises or its reversionary interest in the buildings and improvements existing or to be constructed thereon to any lien securing Tenant's construction loan or other financing. 24. NOTICES AND PAYMENTS. Any notice or document required or permitted to be delivered hereunder or by law shall be deemed to be delivered, whether actually received or not, -24- (a) when delivered in person, (b) upon confirmed receipt (or the first business day thereafter if receipt does not occur during business hours on a business day) if such item is sent by facsimile transmission to the appropriate party at its fax number set forth below or at such other number as it shall have thereafter specified by written notice delivered in accordance with this Article 24 (provided that a copy of such notice is also sent by another method permitted hereunder within one (1) business day after the same is transmitted by facsimile), (c) three (3) business days after such item is deposited in the United States mail, postage prepaid, certified or registered, return receipt requested, (d) one (1) business day after such item is deposited with Federal Express or other nationally-recognized overnight courier, shipping charges prepaid, addressed to the appropriate party hereto at its address set out below, or at such other address as it shall have theretofore specified by written notice delivered in accordance herewith: LANDLORD: NORBERT W. JANSEN AND AVIS JANSEN, TRUSTEES 978 Bel Air Circle Las Vegas, NV 89129 with a copy to: Howard M. Miller, Esq. CARELLI & MILLER 302 East Carson Avenue, Suite 830 Las Vegas, Nevada 89101 Telefax: (702) 384-9546 TENANT: BOARDWALK CASINO, INC. 3750 Las Vegas Boulevard South Las Vegas, Nevada 89109 with a copy to: Gary R. Goodheart, Esq. JONES, JONES, CLOSE & BROWN, CHARTERED 3773 Howard Hughes Parkway Third Floor South Las Vegas, Nevada 89109 Telefax: (702) 734-2722 Payments of Base Rent and other sums due Landlord from Tenant (collectively referred to in this Lease as "RENT") shall be deemed to be remitted only upon actual receipt thereof by Landlord. If and when included within the term "Landlord" or "Tenant" there is more than one person or legal entity, all shall jointly arrange among themselves for one among their numbers to receive at one specified address all such notices and payments; all parties included within the term "Landlord" or "Tenant," as appropriate, shall be bound by notices delivered by the other party in accordance with the provisions of this Article 24 as if each had received such notice. -25- 25. DEFAULT. 25.1. EVENTS OF DEFAULT. Each of the following events shall be an "Event of Default" under this Lease: 25.1.1. Tenant shall fail to pay any installment of rent hereby reserved prior to the last day of the month in which the same shall become due; 25.1.2. Tenant shall fail to comply with any term, provision or covenant of this Lease, other than the payment of rent, and shall not cure such failure within thirty (30) days after written notice thereof is given by Landlord to Tenant. If such default cannot reasonably be cured within thirty (30) days, then Tenant shall have an additional reasonable period of time within which to cure such default so long as Tenant commences to cure such default within the initial thirty (30) day period and thereafter diligently prosecutes such cure to completion; 25.1.3. Tenant shall be adjudged insolvent, make a transfer in fraud of creditors or make an assignment for the benefit of creditors; 25.1.4. Tenant shall abandon the Leased Premises or shall cease operations in the Premises (except for short time periods not exceeding thirty (30) days in any twelve (12) month period or ninety (90) days in any sixty (60) month period and except for interruptions in Tenant's operations which are caused by events which are beyond Tenant's control, including, without limitation, casualty damage (but not including Tenant's financial inability to operate); provided that Tenant may cease operations in the Leased Premises for one (1) period of up to two (2) years in order to diligently construct major renovations to, or replacement of, the Improvements; 25.1.5. Tenant shall file a petition under any section or chapter of the Bankruptcy Reform Act of 1978, as amended, or under any similar law or statute of the United States or any state thereof, or Tenant shall be adjudged bankrupt or insolvent in proceedings filed against Tenant thereunder; or 25.1.6. A receiver or trustee shall be appointed for all or substantially all of the assets of Tenant and Tenant shall not have had such appointment discharged within thirty (30) days after Tenant receives written notice of such appointment. 25.2. LANDLORD'S REMEDIES: Upon the occurrence of any Tenant Event of Default, Landlord shall have the option to pursue any one or more of the following remedies: 25.2.1. Terminate this Lease, in which event Tenant shall immediately surrender the Leased Premises to Landlord, and if Tenant fails so to do, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Leased Premises and expel or remove Tenant and any other person -26- who may be occupying the Leased Premises, or any part thereof, by force if necessary, without being liable to prosecution or for any claim for damages; and Landlord may recover from Tenant: 25.2.1.1. The worth at the time of award of any unpaid rent which has been earned at the time of such termination; plus 25.2.1.2. The worth at the time of award of any amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss Tenant proves could have been reasonably avoided; plus 25.2.1.3. The worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of the award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus 25.2.1.4. All interest, late charges, attorney's fees, costs and all other charges and sums to be paid by Tenant under this Lease. 25.2.1.5. At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. All such amounts shall be computed on the basis of the monthly amount thereof payable on the date of Tenant's default. As used in Sections 25.2.1.1 and 25.2.1.2 above, the "worth at the time of award" is computed by allowing interest in the per annum amount equal to two percent (2%) in excess of the Reference Rate of interest announced from time to time by Bank of America National Trust and Savings Association (or an equivalent rate announced by a comparable national bank selected by Landlord in the event Bank of America no longer announces a Reference Rate), but in no event in excess of the maximum interest rate permitted by law. 25.2.2. Enter upon and take possession of the Leased Premises and expel or remove Tenant and other persons who may be occupying the Leased Premises, or any part thereof, by force if necessary, without being liable to prosecution or for any claim for damages, and relet the Leased Premises, as Tenant's agent, and receive the rent therefor; and Tenant agrees to pay Landlord on demand any deficiency that may arise by reason of such reletting; or 25.2.3. Enter upon the Leased Premises, without being liable to prosecution or for any claim for damages, and do whatever Tenant is obligated to do under the terms of this Lease; and Tenant agrees to reimburse Landlord on demand for any reasonable and necessary expenses which Landlord may incur in thus effecting compliance with Tenant's obligations hereunder. Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by law, nor shall pursuit of any -27- remedy herein provided constitute a forfeiture or waiver of any rent due to Landlord hereunder or of any damage accruing to Landlord by reason of the violation of any of the terms, provisions and covenants herein contained. Forbearance by Landlord to enforce one or more of the remedies herein provided upon the occurrence of an Event of Default shall not be deemed or construed to constitute a waiver of such default. 26. HAZARDOUS MATERIALS. 26.1. COVENANT. Tenant covenants to Landlord that it will not use, or allow to be used on the Leased Premises, or bring onto, or allow to be brought onto, the Leased Premises any Hazardous Substance, as defined below, except as may be reasonably required in connection with its permitted business on the Leased Premises, and then only in full compliance with all federal, state or local laws. Tenant shall require every sublease to contain provisions similar to the provisions set forth in this Article 26. 26.2. RIGHT OF ENTRY. Subject to applicable laws and Tenant's reasonable security policies, Landlord reserves the right to enter the Leased Premises and all Improvements thereon at any reasonable time and upon reasonable notice, and at any time in exigent circumstances, for the purpose of inspecting and examining the Leased Premises for the presence of any Hazardous Substance. If the results of such inspection or examination reveal the presence of Hazardous Substances in, on or about the Leased Premises, and if Landlord has reasonable cause to believe that they are present in, on or about the Leased Premises due to Tenant's failure to be in compliance with Article 26, then Tenant shall reimburse Landlord for its costs incurred in undertaking such inspection and examination. 26.3. INDEMNITY. Tenant shall indemnify, defend and hold Landlord and its trustees, beneficiaries, heirs, successors, assigns, agents, employees and representatives harmless from any and all Indemnified Costs caused by the presence of Hazardous Substances in, on or about the Leased Premises which are placed, or allowed to be placed, in, on or about the Leased Premises by Tenant, or incurred by Landlord in connection with the release, removal or storage of any Hazardous Substance placed, or allowed to be placed, in, on or about the Leased Premises by Tenant. Landlord shall indemnify, defend and hold Tenant and its trustees, beneficiaries, heirs, successors, assigns, agents, employees and representatives harmless from any and all Indemnified Costs caused by the presence of Hazardous Substances in, on, or about the Leased Premises, which are placed, or allowed to be placed in, on, or about the Leased Premises prior to the Effective Date, or subsequent to surrender of the Leased Premises by Tenant. The provisions of this indemnity shall remain in full force and effect and shall not be affected or impaired by the expiration or any earlier termination of this Lease and shall survive any such expiration or termination. "INDEMNIFIED COSTS" means all actual or threatened liabilities, claims, actions, causes of action, judgments, orders, damages (including foreseeable and unforeseeable consequential damages), costs, expenses, fines, penalties and losses (including sums paid in settlement of claims and all consultant, expert and legal fees), including those incurred in connection with any investigation of site conditions or any clean-up, remedial, removal or restoration work (whether of the Leased Premises, or any other property), or any -28- resulting damages, harm or injuries to the person or property of any third parties or to any natural resources. Without limiting the foregoing, "Indemnified Costs" incurred as a result of any work of cure, mitigation, cleanup, remediation, removal or restoration shall bear interest at the rate of fifteen percent (15%) per annum until paid in full. Indemnified Costs shall include all expenses incurred or suffered pursuant to any order of any federal, state or local governmental agency relating to the clean-up, remediation or other responsive action required by any applicable law. 26.4. HAZARDOUS SUBSTANCES DEFINED. As used herein, the term "HAZARDOUS SUBSTANCES" shall include: (i) petroleum or any of its fractions, flammable substances, explosives, radioactive materials, hazardous wastes or substances, toxic wastes or substances or any other similar materials or pollutants which pose a hazard to the Leased Premises, or to persons on or about same, cause the Leased Premises to be in violation of any law or local approval, or are defined as or included in the definition of "HAZARDOUS SUBSTANCES", "HAZARDOUS WASTES", "HAZARDOUS MATERIALS", or "TOXIC", or words of similar import under any applicable law, including, but not limited to: (A) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq.; (B) the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Section 1801, et seq.; (C) the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901, et seq.; and (D) regulations adopted and publications promulgated pursuant to the aforesaid laws; (ii) asbestos in any form which is or could become friable, urea formaldehyde foam insulation, transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million; and (iii) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or may or could pose a hazard to the health and safety of the occupants of the Leased Premises or the owners and/or occupants of property adjacent to or surrounding the Leased Premises. 27. MISCELLANEOUS. 27.1. TERMINATION. In the event this Lease is terminated pursuant to a right to do so herein contained, except as specifically provided herein (such as, for example, but without limitation, in Section 2.11 (Tenant's obligation to remove the Improvements and regrade the Land), in Article 4 (the payment of hold-over rent by Tenant), in Section 13.1 (Tenant's right to remove its personal property after the expiration of the Lease Term), in Article 16 (indemnity), and in Article 26 above (hazardous materials)) neither Landlord nor Tenant hereto shall thereafter have any further obligation or liability one to the other except such obligations as are owed under this Lease through the date of termination, and this Lease shall be of no further force or effect. 27.2. CAPTIONS. The captions used in this Lease are for convenience only and shall not be deemed to amplify, modify or limit the provisions hereof. -29- 27.3. MEANINGS. Words of any gender used in this Lease shall be construed to include any other gender, and words in the singular shall include the plural and vice versa, unless the context otherwise requires. 27.4. SUCCESSORS AND ASSIGNS. Subject to the restrictions set forth herein on assignment and subletting by Tenant, this Lease shall be binding upon and shall inure to the benefit of Landlord and Tenant and their respective heirs, legal representatives, successors and assigns. 27.5. ENTIRE AGREEMENT. The Exhibits annexed to this Lease are hereby incorporated by reference in their entirety with the same force and effect as if they were set forth in this Lease in their entirety. This Lease contains the entire agreement of Landlord and Tenant with respect to the subject matter hereof and can be altered, amended or modified only by written instrument executed by both of such parties. 27.6. TIME. It is expressly agreed by Landlord and Tenant that time is of the essence with respect to this Lease. In the event the date for performance of an obligation or delivery of any notice hereunder falls on a day other than a business day, then the date for such performance or delivery of such notice shall be postponed until the next ensuing business day. Any references to "business days" contained herein are references to normal working business days (i.e., Monday through Friday of each calendar week, exclusive of Federal and Nevada state holidays). 27.7. SEVERABILITY. If any term or provision, or any portion thereof, of this Lease, or application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. 27.8. COUNTERPARTS. This Lease may be signed in counterparts with the same force and effect as if all required signatures were contained in a single, original instrument. 27.9. ATTORNEYS' FEES. In the event of litigation between the parties to enforce this Lease, the prevailing party in any such action shall be entitled to recover reasonable costs and expenses of suit, including, without limitation, court costs, attorneys' fees, and discovery and related costs. 27.10. MEMORANDUM OF LEASE. Landlord and Tenant shall execute a memorandum of this Lease and record such memorandum against the Land. 27.11. GOVERNING LAW. This Lease shall be construed, interpreted, and enforced pursuant to the laws of the State of Nevada. -30- 28. GAMING PROVISION 28.1. COOPERATION AND COMPLIANCE BY LANDLORD. Landlord, at Tenant's sole cost and expense, shall promptly apply for and use its best efforts to obtain all necessary licenses and other approvals and permits, if any, required of Landlord from any foreign, federal, state or local gaming and liquor licensing authorities (collectively "GOVERNMENTAL AUTHORITIES") for the operation by Tenant of its business at the Leased Premises, and shall otherwise fully cooperate, at Tenant's sole cost and expense, with such Governmental Authorities in connection with any approval or permit applications of Landlord or Tenant, or otherwise, which shall include, without limitation, provision of such information, books and records as may be requested by such authorities and compliance with all orders and requirements of such Governmental Authorities. 28.2. DENIAL. If at any time (a) Landlord, or any affiliate of Landlord or either of them, is denied a license or is denied or otherwise unable to obtain any other approval or permit required by any Governmental Authority with respect to the operation by Tenant or any affiliate of Tenant or either of them of its business at the Leased Premises (collectively "APPROVALS"), is required by any Governmental Authority to apply for an Approval and does not apply within any required time limit, or withdraws any application for Approval other than upon a determination by the applicable Governmental Authority that such Approval is not required, and such denial or failure or withdrawal prevents Tenant or any affiliate of Tenant or either of them from operating its business; or (b) any Governmental Authority commences or threatens to commence any suit or proceeding against Tenant or any affiliate of Tenant or either of them to terminate or deny any Approval of Tenant or any affiliate of Tenant or either of them as a result of Landlord or any person associated with Landlord (all of the foregoing events described in (a) and (b) above are collectively referred to as a "DENIAL"), if such action may be cured by the replacement of one or more individuals as shareholders, officers, employees or directors of Landlord or by a sale of the Leased Premises or disassociation from the applicable person, then Landlord shall have up to one hundred twenty (120) days from such Denial (but not more than the period, if any, as may be allowed by the Governmental Authorities to effect such cure, to replace the disapproved individual with someone, or sell the Leased Premises to someone, acceptable to the Governmental Authorities and reasonably acceptable to Tenant. If a cure of the type described in the preceding sentence is not feasible or permitted, or if the same is feasible and permitted but not effected within the time limit set forth in the previous sentence, Tenant shall have the right, in addition to all its other rights and remedies, to elect to (a) terminate this Lease, or (b) purchase the Leased Premises as provided in Paragraph 28.3. 28.3. PURCHASE RIGHT. Landlord hereby grants to tenant an option (the "PURCHASE RIGHT") to purchase the Leased Premises as provided in this Paragraph 28.3. 28.3.1. Tenant may exercise the Purchase Right at any time following a Denial and the cure period specified in Paragraph 28.2 by delivering written notice to Landlord specifying a commercially reasonable place at which the close (the "CLOSING") of escrow -31- ("ESCROW") shall occur. The Closing shall be ten (10) days after the determination of the Purchase Price pursuant to Section 28.3.2 below. 28.3.2. The total purchase price for the Leased Premises (the "PURCHASE PRICE") shall be equal to the sum of (i) present value of all payments of Base Rent due for the remainder of the Lease Term, computed using an interest rate equal to the "Prime Rate" of interest, as defined below, for the business day preceding Tenant's notice pursuant to Section 28.3.1, and (ii) the fair market value of Landlord's residuary interest in the Leased Premises and the Improvements. If the parties are unable to agree upon the fair market value of such residuary interest within ten (10) days after Tenant's exercise of its Purchase Right pursuant to the preceding Section 28.3.1, such value shall be determined by arbitration in accordance with the provisions of Article 29; provided that if Tenant disapproves the value so determined by arbitration, Tenant shall have the right, to be exercised by written notice to Landlord within fifteen (15) days after such determination is made, to terminate this Lease (in which event Tenant shall pay all costs incurred by Landlord under this Section 28.3). The Purchase Price shall be paid by Tenant at the close of Escrow in cash. 28.3.3. Upon exercise of the Purchase Right, Landlord shall convey title to the Leased Premises to Tenant at the close of Escrow by grant, bargain and sale deed subject only to matters shown in Tenant's leasehold title policy delivered pursuant to Article 5 of this Lease and matters caused or consented to in writing by Tenant. At close of Escrow, Landlord shall provide Tenant with a CLTA owner's policy of title insurance, in the face amount of the Purchase Price, and otherwise in a form and from an insurer or insurers reasonably satisfactory to Tenant, with such endorsements and reinsurance as Tenant may reasonably request, insuring Tenant's title to the Leased Premises, at Tenant's expense. 28.3.4. Closing costs other than title insurance shall be allocated in accordance with the then prevailing practice in Las Vegas, Nevada. Rent shall be prorated as of the date of the close of Escrow. At the close of Escrow, Landlord shall provide Tenant with a suitable affidavit satisfying the requirements of the Internal Revenue Code relating to withholding of a portion of the Purchase Price in the event of a purchase from a foreign person. 28.3.5. Landlord and Tenant shall promptly upon request prepare, execute and deliver such further documents, and shall promptly obtain beneficiary statements and similar certificates and perform such other acts as shall from time to time be reasonably required in effecting the close of Escrow and the better perfecting, assuring, conveying, assigning, transferring and confirming unto Tenant the Leased Property and the rights to be conveyed or assigned. 29. ARBITRATION. If any controversy or claim between the parties hereto arises out of this Lease, other than a claim by Landlord arising from any failure by Tenant to pay rent as and when such rent becomes due, and if the parties are unable to agree by direct negotiations, the parties shall promptly mediate any such disagreement or dispute under the Commercial Mediation Rules of the American Arbitration Association. If the parties are unable to resolve -32- such disagreement or dispute through mediation within ten (10) days after the first written notice of an election to mediate, or if the disagreement concerns the buyout price under Section 28.3, then such disagreement or dispute (excluding an action by Landlord in unlawful detainer, as provided above) shall be submitted to binding arbitration under the Commercial Arbitration Rules of the American Arbitration Association. Notwithstanding the foregoing, if the resolution of any controversy or claim requires the participation of a third party who is not required and who declines to participate in an arbitration proceeding, the parties shall not be required to proceed with an arbitration of such controversy or claim. The arbitrators shall be appointed under the Commercial Arbitration Rules of the American Arbitration Association. As soon as the panel has been convened, a hearing date shall be set within twenty-one (21) days thereafter. Written submittals shall be presented and exchanged by both parties ten (10) days before the hearing date, including reports prepared by experts upon whom either party intends to rely. At such time the parties will also exchange copies of all documentary evidence upon which they will rely at the arbitration hearing and a list of the witnesses whom they intend to call to testify at the hearing. Each party shall also make its respective experts available for deposition by the other party prior to the hearing date. The hearings shall be concluded no later than five (5) days after the initial hearing date. The arbitrators shall make their award within ten (10) business days after the conclusion of the hearing. In the event of a three-member panel, the decision in which two (2) of the members of the arbitration panel concur shall be the award of the arbitrators. Except as otherwise specified herein, there shall be no discovery or dispositive motion practice (such as motions for summary judgment or to dismiss or the like) except as may be permitted by the arbitrators, who shall authorize only such discovery as is shown to be absolutely necessary to insure a fair hearing and no such discovery or motions permitted by the arbitrators shall in any way conflict with the time limits contained herein. Nothing herein shall be deemed to permit discovery in such arbitration proceeding except as provided above. The arbitrators shall not be bound by the rules of evidence or civil procedure, but rather may consider such writings and oral presentations as reasonable businessmen would use in the conduct of their day-to-day affairs, and may require the parties to submit some or all of their presentation as the arbitrators may deem appropriate. It is the intention of the parties to limit live testimony and cross-examination to the extent absolutely necessary to insure a fair hearing to the parties on the significant matters submitted to arbitration. The parties have included the foregoing provisions limiting the scope and extent of the arbitration with the intention of providing for prompt, economic and fair resolution of any dispute submitted to arbitration. The arbitrators shall have the discretion to award the costs of arbitration, arbitrators' fees and the respective attorneys' fees of each party between the parties as they see fit. Judgment upon the award entered by the arbitrator(s) may be entered in any court having jurisdiction thereof. -33- Notwithstanding the parties' agreement to mediate or arbitrate their disputes as provided herein, any party may seek emergency relief in a court of law without waiving the right to arbitrate. The arbitrators shall make their award in accordance with applicable law and this Lease and based on the evidence presented by the parties, and at the request of either party at the start of the arbitration, shall include in their award findings of fact and conclusions of law supporting the award. 30. ADJUSTMENT UPON DEMOLITION. If Tenant, in connection with a Material Modification, desires to demolish the Improvements, provided Landlord's written consent to the Material Modification has been obtained, Tenant may commence to demolish the Improvements only after satisfying the principal balance then due and owing under that certain note secured by a deed of trust in favor of American Life and Casualty described as item 14 on Exhibit "B" to this Lease, or any replacement note not to exceed $1,800,000.00 (the "NOTE"). Thereafter, upon satisfaction of the Note and the full release and reconveyance of any deed of trust securing the Note, commencing on the first day of the first month following the recordation of a full reconveyance, the Base Rent shall be reduced by the sum of $20,000.00 per month for so long as shall be required to reimburse Tenant an amount equal to the principal balance of the Note paid by Tenant, together with interest thereon at the rate of ten percent (10%) per annum. 31. LANDLORD'S SECURITY INTEREST. 31.1. GRANT OF SECURITY INTEREST IN PROJECT PARCELS. Prior to commencing construction of any Material Modification which will integrate any improvements on the land with improvements on any other parcel of land ("TENANT'S PROJECT") (the date of such commencement is referred to herein as the "START DATE"), and as additional security for the payment and performance of Tenant's obligations under this Lease, Tenant shall convey, grant and assign (or cause to be conveyed, granted and assigned) to Landlord a lien on, security interest in and assignment of (collectively, "LANDLORD'S LIEN") all of the right, title and interest which is now owned or hereafter acquired by Tenant or either of them or any affiliate of either of them in each other parcel of land (together with all improvements thereon and appurtenances thereto, collectively, the "PROJECT PARCELS") upon which Tenant's Project, or any part thereof, is to be located. Without limiting the foregoing, Landlord's Lien shall automatically extend to and cover any after acquired right, title, or interest in any Project Parcel (including, without limitation, a fee interest therein). Tenant shall, at Landlord's request, execute and deliver (or cause to be executed and delivered) (in recordable form, if appropriate) any instrument reasonably necessary or appropriate to subject to Landlord's Lien any such after acquired property, when, and if, Tenant or any affiliate acquires such property. In addition, if, upon the Start Date, neither Tenant nor any affiliate has yet acquired any right, title or interest in a Project Parcel, Tenant shall convey, grant and assign (or cause to be conveyed, granted and assigned) the Landlord's Lien in such Project Parcel immediately after Tenant or any affiliate has acquired any right, title or interest therein. -34- 31.2. GRANT OF SECURITY INTERESTS IN FURNITURE, FIXTURES AND EQUIPMENT. Prior to the Start Date, Tenant shall, and as additional security for the payment and performance of Tenant's obligations under this Lease, grant (or cause to be granted) to Landlord a security interest (the "LANDLORD'S SECURITY INTEREST") in all items of personal property, whether tangible or intangible, and whether now owned or hereafter acquired, owned, used or held in connection with the ownership, operation or maintenance of Tenant's Project, including, without limitation, all furniture, fixtures and equipment (collectively, the "FF&E"), whether such items are to be located or used upon the Leased Premises or upon one more the Project Parcels. Nothing contained herein shall prevent Tenant from disposing of items of FF&E in the ordinary course of Tenant's business so long as the FF&E maintained by Tenant is at all times sufficient for the operation of Tenant's Project. 31.3. PERFECTION AND PRIORITY. 31.3.1. FORMS OF CONVEYANCE. The Landlord's Lien in a Project Parcel shall be evidenced by a recorded deed of trust, fixture filing, security agreement and assignment of leases and rents in a commercially reasonable form, reasonably acceptable to Landlord and Tenant. The Landlord's Security Interest shall be evidenced by a written security agreement and shall be perfected by the filing and recordation of appropriate financing statements, all in commercially reasonable forms, reasonably acceptable to Landlord and Tenant. 31.3.2. PRIORITY. Subject to the following provisions of this Section 31.3.2, each of Landlord's Lien and Landlord's Security Interest shall be prior to all other liens and encumbrances on the interests of Tenant or either of them or any affiliate of either of them, and, concurrently with the grant of each Landlord's Lien in a Project Parcel (and concurrently with the acquisition of any after acquired title therein), Tenant shall provide Landlord with an ALTA lender's policy of title insurance (or an endorsement thereto, in the case of any after acquired title), in the amount of the current market value of the subject Project Parcel, as reasonably demonstrated by Tenant's delivery of an escrow closing statement for its purchase of such parcel or other evidence of value which is reasonably acceptable to Landlord, insuring the priority of Landlord's Lien in such collateral. Landlord's Lien and Landlord's Security Interest shall be subordinated to other financing ("PRIOR DEBT") which satisfies the following conditions: 31.3.2.1. The amount of the Prior Debt encumbering the Project Parcels and the FF&E shall not exceed seventy-five percent (75%) of the Fair Market Value, determined in the manner described in Section 31.4 below, of the aggregate of the Project Parcels (including improvements) and FF&E in which Landlord has a security interest. 31.3.2.2. The amount of the Prior Debt encumbering the Project Parcels shall not exceed seventy percent (70%) of the Fair Market Value, determined in the manner described in Section 31.4 below, of the aggregate of the Project Parcels (including improvements) in which Landlord has a security interest. -35- 31.3.2.3. The Prior Debt shall specifically provide that Landlord shall receive notice of any default thereunder and shall have the right to cure any such default to the extent that Tenant is afforded any such cure rights. 31.3.2.4. Tenant shall provide Landlord with a title insurance policy, or an appropriate endorsement to Tenant's existing title insurance policy with respect to the subject collateral, insuring Tenant's subordinated security interest in an amount equal to the Fair Market Value of that collateral. 31.3.2.5. Landlord shall have the right to review the loan documents for the Prior Debt to verify that the conditions to the subordination of Landlord's security interest, as set forth herein, have been satisfied. 31.4. FAIR MARKET VALUE. Tenant shall provide Landlord with an appraisal of the "Fair Market Value" of the Project Parcels and of the FF&E prior to any subordination of Landlord's security interest hereunder. Tenant's appraisal shall be prepared by a licensed MAI or other qualified appraiser. Unless Landlord disapproves such appraisal within ten (10) days of its receipt of the same, the value shown therein shall be deemed to be the Fair Market Value of the subject collateral; provided that: if Landlord, acting reasonably and in good faith, disapproves such appraisal, then Landlord shall appoint its own qualified MAI appraiser within ten (10) days after receipt of Tenant's appraisal, and Landlord's appraiser shall give its opinion as to the Fair Market Value of the subject collateral within thirty (30) days after being so appointed. If the values determined by Landlord's appraiser and Tenant's appraiser do not differ by more than five percent (5%) of the lower appraisal, then the "Fair Market Value," as used herein, shall mean the arithmetic average of such two (2) appraisals. If the two appraisals differ by more than five percent (5%) of the lower appraisal, then the two appointed appraisers shall agree upon a third qualified appraiser within ten (10) days after the expiration of such thirty (30) day period who shall be given copies of the two (2) preceding appraisals and who shall determine the Fair Market Value within fifteen (15) days after such third appraiser is engaged, provided that such final Fair Market Value shall not be greater than the higher of the two previous appraisals nor less than the lower of the two previous appraisals. Landlord and Tenant shall each bear the cost of their own appraiser and shall share equally the cost of the third appraiser. For purposes of determining the ratios under Section 31.3 in the case of Prior Debt which is construction or FF&E financing, the Fair Market Value shall be determined on a "completed project" basis. 31.5. FURTHER ASSURANCES. Landlord shall execute, acknowledge and deliver to Tenant or to Tenant's lender and/or title insurer, as designated by Tenant, such evidence of the subordination of Landlord's Lien and Landlord's Security Interest required hereunder as Tenant may reasonably request. 32. TENANT'S OPTION AND RIGHT OF FIRST REFUSAL TO PURCHASE THE LEASED PREMISES. 32.1. OPTION TO PURCHASE. Provided that the Lease has not expired, or been terminated and remains in full force and effect, and provided further that Tenant is not in default in -36- payment of Rent, Tenant shall have the option to purchase the Leased Premises on the earlier of (i) one hundred twenty (120) months from the first day of the first calendar month following the Effective Date (the "First Option Date"), or (ii) the date of the death of the survivor of Norbert W. Jansen or Avis Jansen (the "ALTERNATE OPTION DATE"), for a purchase price determined as set forth below (the "OPTION PURCHASE PRICE"). Such option shall be exercised, if at all, by written notice to Landlord not later than three (3) months prior to the First Option Date or not later than three (3) months following the Alternate Option Date. The closing date (hereinafter, the "PURCHASE OPTION CLOSING DATE") shall be within six months of the Option Date. The Option Purchase Price shall be paid in cash or by cash equivalent upon the Purchase Option Closing Date. If Tenant fails to exercise its option in a timely manner as provided herein, the provisions of this Article 32 shall have no further force or effect. To determine the Option Purchase Price, Landlord and Tenant shall each select a licensed MAI or other qualified appraiser to determine the Fair Market Value of the Leased Premises. The appraisers selected by Landlord and Tenant shall jointly select a third licensed MAI or other qualified appraiser. Each appraiser so selected shall prepare, within thirty (30) days, a written appraisal report setting forth its opinion of the Fair Market Value of the Leased Premises. The opinions of Fair Market Value shall be ranked according to value, from highest to lowest, and the middle opinion of Fair Market Value shall be the Option Purchase Price. Landlord and Tenant shall each bear the cost of their own appraiser and shall share equally the cost of the third appraiser. Upon exercise of Tenant's option to purchase the Leased Premises hereunder, Landlord shall convey title to the Leased Premises to Tenant at the close of escrow by grant, bargain and sale deed subject only to matters shown in Tenant's leasehold title policy delivered pursuant to Article 5 of this Lease and matters caused or consented to in writing by Tenant. At close of escrow, Landlord shall provide Tenant with a CLTA owner's policy of title insurance, in the face amount of the Option Purchase Price, and otherwise in a form and from an insurer or insurers reasonably satisfactory to Tenant, with such endorsements and reinsurance as Tenant may reasonably request, insuring Tenant's title to the Leased Premises, at Tenant's expense. Closing costs other than title insurance shall be allocated in accordance with the then prevailing practice in Las Vegas, Nevada. Rent shall be prorated as of the date of the close of escrow. At the close of escrow, Landlord shall provide Tenant with a suitable affidavit satisfying the requirements of the Internal Revenue Code relating to withholding of a portion of the Option Purchase Price in the event of a purchase from a foreign person. Landlord and Tenant shall promptly upon request prepare, execute and deliver such further documents, and shall promptly obtain beneficiary statements and similar certificates and perform such other acts as shall from time to time be reasonably required in effecting the close of escrow and the better perfecting, assuring, conveying, assigning, transferring and confirming unto Tenant the Leased Property and the rights to be conveyed or assigned. If Tenant elects to purchase the Leased Premises, Landlord may elect to participate in a tax-free exchange under Section 1031 of the Internal Revenue Code. Tenant agrees to cooperate with such an exchange by Landlord, so long as such cooperation is without cost to Tenant and does not materially affect Tenant's purchase. -37- 32.2. TENANT'S RIGHT OF FIRST REFUSAL. During such time as the Lease is in full force and effect and has not expired or been terminated, and provided Tenant is not then in default in the payment of Rent, Tenant shall have a right of first refusal to purchase the Leased Premises in the event that Landlord shall desire to sell and shall have a bona fide offer to purchase the Lease Premises, whether directly, or indirectly (such as by sale of stock in a corporate Landlord or by transfer of a beneficial interest in a trust), which Landlord wishes to accept. In the event of any such offer, Landlord shall notify Tenant and provide Tenant with a copy of the offer (the "Notification Date"). Tenant shall have thirty (30) days from the Notification Date within which to exercise its right of first refusal. In the event Tenant exercises its right of first refusal, Tenant shall purchase the Leased Premises on the same terms and conditions and at the same price specified in such offer, provided that the closing date shall be the later of the time for closing set forth in the offer, or sixty (60) days from the Notification Date. If Tenant does not exercise its right of first refusal with respect to a transaction and that transaction is not finalized on the terms presented to Tenant within one (1) year after the expiration of Tenant's right of first refusal, the right of first refusal shall be reinstated as to that proposed purchase. If Tenant does not exercise its right of first refusal with respect to a transaction and that transaction is finalized within such one (1) year period, the transferee shall take free of Tenant's right of first refusal. Tenant's failure to exercise its right of first refusal hereunder shall not affect Tenant's right to exercise any OPTION TO EXTEND THE LEASE TERM, ANY SUBSEQUENT RIGHT OF FIRST REFUSAL, OR TENANT'S PURCHASE OPTION. 33. BINDING OBLIGATION. Tenant hereby represents and warrants to Landlord that this Lease and the consummation of the transactions contemplated hereby is valid and binding upon Tenant (and the individuals executing this Lease on behalf of Tenant represent and warrant that they are authorized to so act) and does not constitute a default (or an event which with notice or passage of time or both will constitute default) under any contract to which Tenant is a party or by which Tenant is bound. Prior to the Effective Date, Tenant shall provide Landlord with a certified resolution of the board of directors of Tenant authorizing the transactions contemplated hereby and the execution and delivery of this Lease by the persons executing the same on behalf of Tenant. IN WITNESS WHEREOF, the parties hereto have executed this Lease to be effective as of the Effective Date. -38- LANDLORD: NORBERT W. JANSEN and AVIS JANSEN, Trustees of the NORBERT W. JANSEN and AVIS JANSEN FAMILY TRUST, u/a/d July 14, 1993 By: --------------------------------- Norbert W. Jansen, Trustee Date: ------------------------------- By: --------------------------------- Avis Jansen, Trustee Date: ------------------------------- TENANT: BOARDWALK CASINO, INC., a Nevada corporation By: --------------------------------- Its: -------------------------------- Date: ------------------------------- -39- EXHIBIT "A" THE LAND PARCEL I: A portion of the Northeast Quarter (NE1/4) of the Southeast Quarter (SE1/4) of Section 20, Township 21 South, Range 61 East, M.D.B. & M., more particularly described as follows: BEGINNING at the East Quarter (E1/4) corner of Section 20, Township 21 South, Range 61 East, M.D.B. & M.; thence North 88 DEG. 44' 24" West, 110.02 feet to a point on the west right of way line of U.S. Highway No. 91 South; thence South 0 DEG. 02' 15" West along said right of way line 215.00 feet to the TRUE POINT OF BEGINNING; thence continuing South 0 DEG. 02' 15" West, 150.00 feet to a point; thence North 89 DEG. 57' 47" West, 167.00 feet to a point; thence North 00 DEG. 02'00" West a distance of 2.92 feet to a point; thence continuing North 0 DEG. 02' 15" East, 150.00 feet to a point; thence South 89 DEG. 57' 47" East, 167.00 feet to the TRUE POINT OF BEGINNING. Together with an easement for ingress and egress purposes over the South 28.00 feet of the North 30.00 feet of the East 239.03 feet of that portion of Section 20, Township 21 South, Range 61 East, M.D.B. & M., in the County of Clark, State of Nevada, as follows: COMMENCING at the East Quarter (E1/4) corner of said Section 20; thence along the East line of said Section, North 0 DEG. 50' 24" West, 30.01 feet to the Southeast corner of the land described in the Deed to Howard J. Werner, recorded March 4, 1959 as Document No. 153963 of Official Records of said County; thence along the South line of said land, North 88 DEG. 57' 30" West, 109.76 feet to a point in the West line of U.S. Highway 91; thence along said West line South 0 DEG. 02' 15" West, 215.00 feet to the true point of beginning; thence continuing along the said West line, South 0 DEG. 02' 15" West, 180.00 feet; thence North 88 DEG. 57' 47" West, 600.00 feet; thence North 0 DEG. 02' 15" East, 180.00 feet; thence South 88 DEG. 57' 47" East, 600.00 feet to the true point of beginning. PARCEL II: The South 150.00 feet of the West 72.00 feet of the East 239.03 feet, said distances being measured along or parallel with the North and East lines of that portion of Section 20, Township 21 South, Range 61 East, M.D.B. & M., in the County of Clark, State of Nevada, described as follows: COMMENCING at the East Quarter (E1/4) corner of said Section 20; thence along the East line of said Section, North 0 DEG. 50' 24" West, 30.01 feet to the Southeast corner of the land described in the Deed to Howard J. Werner recorded March 4, 1959, as Document No. 153963 of Official Records of said County; thence along the South line of said land, North 88 DEG. 57' 30" West, 109.76 feet to a point in the West line of U.S. Highway No. 91; thence along said West line, South 0 DEG. 02' 15" West, 215.00 feet to the true point of beginning; thence continuing along the said West line, South 0 DEG. 02' 15" West, 180.00 feet; thence North 88 DEG. 57' 47" West, 600.00 feet; thence A-1 North 0 DEG. 02' 15" West, 180.00 feet; thence South 88 DEG. 57' 47" East, 600.00 feet to the true point of beginning. Together with an easement for ingress and egress purposes over the South 28.00 feet of the North 30.00 feet of the East 239.03 feet of that portion of Section 20, Township 21 South, Range 61 East, M.D.B. & M., in the County of Clark, State of Nevada, as follows: COMMENCING at the East Quarter (E1/4) corner of said Section 20; thence along the East line of said Section, North 0 DEG. 50' 24" West, 30.01 feet to the Southeast corner of the land described in the Deed to Howard J. Werner, recorded March 4, 1959 as Document No. 153963 of Official Records of said County; thence along the South line of said land, North 88 DEG. 57' 30" West, 109.76 feet to a point in the West line of U.S. Highway 91; thence along said West line South 0 DEG. 02' 15" West, 215.00 feet to the true point of beginning; thence continuing along the said West line, South 0 DEG. 02' 15" West, 180.00 feet; thence North 88 DEG. 57' 47" West, 600.00 feet; thence North 0 DEG. 02' 15" East, 180.00 feet; thence South 88 DEG. 57' 47" East, 600.00 feet to the true point of beginning. A-2 EXHIBIT "B" SCHEDULE OF LEASES 1. Lease Agreement dated May 17, 1988 by and between Norbert W. Jansen and Avis P. Jansen as Landlord and Gary M. Lee dba Gary M. Lee Enterprises as Tenant. a. Assignment and Assumption Agreement dated July 25, 1988 by and between Gary M. Lee dba Gary M. Lee Enterprises as Assignor and IGT, Inc., a Nevada corporation, as Assignee. b. Sublease Agreement dated March 15, 1990 by and between IGT, Inc., a Nevada corporation, as Lessor and Schiff Enterprises, a Nevada Limited Partnership, as Lessee. 2. Certain other month to month tenancies, terminable upon ninety (90) days notice, as follows: a. Preferred Equities Corp. b. Smokeys c. Boardwalk Offices B-1 EXHIBIT "C" PERMITTED EXCEPTIONS 1. Taxes for the fiscal year 1996-1997, the first installment will become delinquent August 19, 1996. 2. The lien of supplement taxes, that may be due, but not assessed, for new construction by the Clark County Assessor per N.R.S. 361.260. 3. The hereinabove described real property is located within the boundaries of the Clark County Sanitation District and is subject to any fees that may be charged against property in said District. 4. Special Assessment in Clark County Improvement District 97A amount of $122,044.49, 2nd installment paid, 3rd installment due February 1, 1997. 5. Special Assessment in Clark County Improvement District 97B, amount of $3,854.10 as disclosed by Book 941010 as Document No. 01177, recorded October 10, 1994 (method of payment unknown at this time). 6. Reservations as contained in the Patent from the United States of America Recorded : August 10, 1933 Document No. : 49724 Book No. : 20 of Deeds Pages : 536 and 537 Official Records, Clark County, Nevada. "Subject to any vested and accrued water rights for mining, agricultural, manufacturing, or other purposes, and rights for ditches and reservoirs used in connection with such water rights as may be recognized and acknowledged by the local customs, laws and decisions of courts; and there is reserved from the lands hereby granted, a right of way thereon for ditches or canals constructed by the authority of the United States." 7. Any easements for water well and water lines over an undisclosed area as disclosed by Deed recorded December 30, 1960 as Document No. 222926, Official Records. 8. A Right of Way and Easement over, under, upon and across a portion of said land Granted to : Southern Nevada Power Co. For : power and communication purposes Recorded : April 17, 1961 Document No. : 237071 Book No. : 293 Official Records, Clark County, Nevada. Affects: The South 10 feet of said land. 9. A Right of Way and Easement over, under, upon and across a portion of said land Granted to : Southern Nevada Power Co. C-1 For : power and communication purposes Recorded : April 18, 1961 Document No. : 237215 Book No. : 293 Official Records, Clark County, Nevada' as follows: COMMENCING at the East Quarter corner of said Section 20; thence North 88 DEG. 44' 24" West, 110.02 feet to the West line of U.S. Highway No. 91; thence South 0 DEG. 02' 15" West along said West line, 215.00 feet to the POINT OF BEGINNING; thence continue South 0 DEG. 02' 15" West, 150.00 feet; thence North 89 DEG. 57' 47" West, 167.00 feet; thence North 0 DEG. 02' 15" East, 150.00 feet; thence South 89 DEG. 57' 47" East, 167.00 feet to the POINT OF BEGINNING. 10. A Right of Way and Easement over, under, upon and across a portion of said land Granted to : Southern Nevada Power Co. For : power and communication purposes Recorded : May 2, 1961 Document No. : 239170 Book No. : 295 Official Records, Clark County, Nevada. Affects the South 6 feet of said land. 11. Terms and conditions contained in Indemnification Agreement by and between Norbert W. Jansen and Avis P. Jansen, Husband and Wife, and Nevada Power Company, a Nevada Corporation Recorded : February 1, 1988 Document No. : 00651 Book No. : 880201 Official Records, Clark County, Nevada. 12. Terms and conditions contained in Access To Equipment Agreement by and between Nevada Power Company, a Nevada Corporation and Norbert W. Jansen Recorded : June 8, 1988 Document No. : 00611 Book No. : 880608 Official Records, Clark County, Nevada. 13. A Perpetual Aviation Easement granted to Clark County Recorded : September 1, 1988 Document No. : 00572 Book No. : 880901 Official Records, Clark County, Nevada. 14. Deed of Trust to secure an indebtedness of the amount stated herein Dated : May 24, 1991 Trustor : Norbert W. Jansen and Avis P. Jansen Trustee : National Title Co., a Nevada corporation Beneficiary : American Life and Casualty, an Iowa corporation Amount : $2,000,000.00 Recorded : May 24, 1991 Document No. : 01505 Book No. : 910524 C-2 Official Records, Clark County, Nevada. 15. The existing leases and/or month to month tenancies set forth and described in the Schedule of Leases, attached hereto as Exhibit "B" to the Lease. C-3 EX-23.1 7 EXHIBIT 23.1 - CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the previously filed registration statements of Boardwalk Casino, Inc. on Forms S-8 (File No.'s 333-05019 and 333-05021) of our report dated November 27, 1996, except for notes 6 and 7 as to which the date is January 6, 1997, on our audits of the financial statements of Boardwalk Casino, Inc. as of and for the years ended September 30, 1996 and 1995, included in the Company's Annual Report on Form 10-KSB for the fiscal year ended September 30, 1996. COOPERS & LYBRAND L.L.P. Las Vegas, Nevada January 6, 1997 EX-27.1 8 EXHIBIT 27.1 - FINANCIAL DATA SCHEDULE
5 12-MOS SEP-30-1996 OCT-01-1996 SEP-30-1996 4,772,549 0 456,962 17,105 73,719 5,860,089 61,191,970 5,705,685 63,170,949 7,116,077 44,309,757 0 0 7,179 11,737,936 63,170,949 4,031,279 28,991,024 2,268,404 27,368,612 0 0 6,431,622 (4,413,794) 0 (4,413,794) 0 0 0 (4,413,794) (.70) (.70) Note 1 on tag 32 Net of interest capitalized of $1,442,493
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