UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1998
-----------------
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission file number 0-27226
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SPINTEK GAMING TECHNOLOGIES, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 33-0134823
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1857 Helm Drive, Las Vegas, Nevada 89119
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(Address of principal executive offices) (Zip Code)
(702)263-3660
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(Registrant's telephone number, including area code)
901-B Grier Drive, Las Vegas, Nevada 89119
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the issuer (1) filed all reports to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 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 ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
18,793,993 shares of Common Stock, $0.002 par value as of January 31, 1999
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1
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SPINTEK GAMING TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
FORM 10-QSB
TABLE OF CONTENTS
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1998 and June 30, 1998 3
Consolidated Statements of Operations for the Three Months and Six
Months Ended December 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE PAGE 15
EXHIBIT INDEX 16
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2
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SPINTEK GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
December 31, June 30,
1998 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash ........................................................ $ 176 $ 500
Accounts receivable, net .................................... 447 229
Prepaid and other current assets ............................ 74 46
Inventories, net ............................................ 1,813 679
-------- --------
Total current assets ...................................... 2,510 1,454
Furniture, fixtures and equipment, net ........................ 210 144
Licenses and patents .......................................... 1,004 1,019
Other assets .................................................. 116 126
-------- --------
Total assets .................................................. $ 3,840 $ 2,743
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ............................................ $ 888 $ 852
Demand notes payable to affiliates .......................... -- 190
Accrued liabilities ......................................... 758 640
Accrued interest ............................................ 173 53
Customer deposits ........................................... 33 247
Dividends payable ........................................... 651 485
-------- --------
Total current liabilities ................................. 2,503 2,467
-------- --------
Long-term debt ................................................ 5,000 2,350
-------- --------
Stockholders' deficit:
Convertible preferred stock, no par value, 100,000 shares
authorized, 8,241 shares issued and outstanding ........... 5,355 5,355
Common stock, $.002 par value, 100,000,000 shares authorized,
20,111,322 and 19,990,384 shares issued and outstanding ... 40 40
Additional paid-in capital .................................. 5,716 5,855
Accumulated deficit ......................................... (14,745) (13,295)
Treasury stock, 1,317,329 shares, at cost ................... (29) (29)
-------- --------
Total stockholders' deficit ............................... (3,663) (2,074)
-------- --------
Total liabilities and stockholders' deficit ................... $ 3,840 $ 2,743
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
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SPINTEK GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Sales ...................................... $ 1,007 $ -- $ 2,009 $ --
Cost of sales .............................. 578 -- 1,121 --
-------- -------- -------- --------
Gross profit ............................. 429 -- 888 --
Selling, general and administrative expenses 1,055 921 2,035 1,605
Research and development expense ........... 79 303 164 468
-------- -------- -------- --------
Operating loss ........................... (705) (1,224) (1,311) (2,073)
Other income (expense):
Interest income .......................... 23 2 34 5
Depreciation and amortization ............ (27) (11) (38) (20)
Interest expense ......................... (72) (9) (135) (21)
-------- -------- -------- --------
Net loss ................................... (781) (1,242) (1,450) (2,109)
Dividends on convertible preferred stock ... (83) (86) (166) (159)
-------- -------- -------- --------
Net loss applicable to common shares ....... $ (864) $ (1,328) $ (1,616) $ (2,268)
======== ======== ======== ========
Loss per common share information:
Weighted average common shares:
Basic .................................. 18,793 17,172 18,733 16,487
======== ======== ======== ========
Diluted ................................ 18,793 17,172 18,733 16,487
======== ======== ======== ========
Net loss per common share:
Basic .................................. $ (0.05) $ (0.08) $ (0.09) $ (0.14)
======== ======== ======== ========
Diluted ................................ $ (0.05) $ (0.08) $ (0.09) $ (0.14)
======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
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SPINTEK GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
December 31,
--------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................. $(1,450) $(2,109)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ...................... 38 20
Non-cash interest expense .......................... 126 --
Allowance for inventory obsolescence ............... (30) 14
Provision for bad debts ............................ -- 60
Non-cash operating expenses for common stock ....... -- 27
Royalty expense used to reduce note receivable
from related company .............................. -- 51
(Increase) decrease in assets:
Accounts receivable ................................ (223) --
Inventory .......................................... (1,103) (154)
Prepaid expenses and other ......................... (15) 75
Increase (decrease) in liabilities:
Accounts payable ................................... 36 124
Accrued liabilities ................................ 119 150
Accrued interest ................................... -- 4
Customer deposits .................................. (215) 76
------- -------
Net cash used in operating activities .................. (2,717) (1,662)
======= =======
Net cash used in investing activities:
Purchase of furniture, fixtures and equipment ........ (87) (53)
------- -------
Cash flows from financing activities:
Proceeds from issuance of convertible debentures ..... 2,650 --
Proceeds from (repayment of) demand notes
payable to affiliates and stockholders ............. (170) 470
Proceeds from issuance of preferred stock ............ -- 975
-------
Net cash provided by financing activities .............. 2,480 1,445
------- -------
Net decrease in cash and cash equivalents .............. (324) (270)
Cash and cash equivalents, beginning of period ......... 500 404
------- -------
Cash and cash equivalents, end of period ............... $ 176 $ 134
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
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SPINTEK GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
December 31,
---------------
1998 1997
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<S> <C> <C>
Supplemental schedule of non-cash investing and
financing activities:
Dividends payable on preferred stock ................... $ (166) $(159)
====== =====
Issuance of common stock for debt ...................... $ 26 $ 500
====== =====
Issuance of common stock in lieu of cash for fees
related to preferred stock transaction ............... $ -- $ 110
====== =====
Supplemental disclosure of cash flow information:
Cash paid for interest ................................. $ 8 $ 11
====== =====
</TABLE>
See accompanying Notes to Consolidated Financial Statements
6
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SPINTEK GAMING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Spintek Gaming
Technologies, Inc. and its wholly owned subsidiary Spintek Gaming, Inc.
("Gaming"), and Gaming's wholly owned subsidiary, Spinteknology, Inc.
(collectively the "Company"). All significant intercompany transactions have
been eliminated.
The consolidated balance sheet as of December 31, 1998 and the related
consolidated statements of operations for the three months and six months ended
December 31, 1998 and 1997 and consolidated statements of cash flows for the six
months ended December 31, 1998 and 1997 are unaudited but, in the opinion of
management, reflect all adjustments necessary for a fair presentation of results
for those periods. The results of operations for an interim period are not
necessarily indicative of the results for the full year. The consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's annual report
on Form 10-KSB for the year ended June 30, 1998.
From inception in March 1995 through the third quarter of the Company's fiscal
year ended June 30, 1998, the Company and its subsidiaries reported operating
activities as a development stage enterprise. Since early 1996, the Company has
devoted its efforts to the development of proprietary technology for determining
the contents of a slot machine hopper and an on-line data collection system that
allows a casino to utilize the financial and security information. During the
third and fourth quarters of fiscal 1998, the Company began to actively market
and sell products to the casino industry utilizing this proprietary technology.
Therefore, commencing with the Form 10-KSB for the year ended June 30, 1998,
management determined that the Company should no longer be a development stage
enterprise for financial reporting purposes. Hence, cumulative from inception
financial information has been eliminated from the Consolidated Statements of
Operations and Consolidated Statements of Cash Flows.
NOTE 2 - LICENSES AND PATENTS
In October 1998, the Company was awarded a patent by the U.S. Patent and
Trademark Office ("USPTO"). This patent encompasses hopper weighing technology
used by the Company to thwart technician fraud as well as providing for drop box
counting and weighing of coins. It also enumerates other possible uses of the
weighing technology and allows for the expansion of claims in further filings
with USPTO. Similar patents have previously been awarded to the Company by the
Department of Trade and Industry, Republic of South Africa in July 1997, and the
European Patent Organization ("E.P.O.") in 1998. Patents issued by the E.P.O.
are applicable for eighteen contracting European states and four designated
extension European states. The E.P.O. patent is applicable for the five European
states in which Azkoyen, a Spanish company, has pending patent applications that
may be deemed similar to the Company's E.P.O. patents. Though the granting of a
patent to the Company in the E.P.O. states is considered a mandate of
intellectual property rights, and management believes the Company's claims are
valid and intends to vigorously assert its rights, it is unable to estimate the
possible outcome or the ultimate financial effect of any potential proceedings
regarding this matter.
7
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NOTE 3 - LONG-TERM DEBT
During the first six months of fiscal 1999, the Company completed the
offering of its $5,000,000 6% Secured Convertible Notes (the "Notes"). The
Malcolm C. Davenport V Family Trust (the "Trust") purchased an additional
$2,400,000 of the Notes, increasing the Trust's holdings of the Notes to
$4,300,000; and a member of the Board of Directors at the time purchased an
additional $250,000 of the Notes, increasing his holdings in the Notes to
$350,000.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain information included herein contains statements that may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as
terms expressing future expectations, enthusiasm about future potential, and
anticipated growth in sales, revenues and earnings. All forward-looking
statements, although made in good faith, are subject to important risks and
uncertainties that could significantly affect anticipated results in the future
and, accordingly, results may differ from those expressed in any forward-looking
statements made herein. Such statements are necessarily speculative and factors
including, but not limited to, unusual production or supply problems, unusual
risks attending foreign transactions, year 2000 problems, competitive pressures,
unanticipated problems in obtaining approvals and/or licenses from governmental
authorities as to products or the ability to sell products in any jurisdiction,
a general deterioration in domestic or global economic conditions, and changes
in federal or state tax laws or laws permitting legalized gaming in any
jurisdiction within which gaming is currently conducted or the administration of
such laws, could cause results to differ materially from those projected.
Year 2000 Considerations
The Company's hopper weighing technology is date sensitive and both the hardware
and software are Year 2000 compliant. The Company's primary customers are
casinos with slot machines into which the Company's product is installed. In
addition, many casinos utilize slot machine accounting systems to which the
Company's product must interface. Although the Company has not received
assurances from the primary slot machine manufacturers or the slot machine
accounting system manufacturers as to the Year 2000 issue, the Company expects
that at least a majority of these manufacturers will be Year 2000 compliant.
The Company has initiated a program of contacting its primary suppliers of key
components of its hopper weighing system to receive assurance that the Year 2000
issue will not directly impact their ability to supply the Company with product.
In addition, the Company has located alternative sources for all such key
components.
The Company has recently installed a manufacturing, inventory control and
accounting software system that has been represented by the developer to be Year
2000 compliant.
Maintenance or modification costs associated with the Year 2000 issue will be
expensed as incurred, while the costs of any new software will be capitalized
and amortized over the software's useful life. The Company does not expect to
incur costs in connection with the Year 2000 issue that would have a material
impact on operations.
Material Changes in Results of Operations
Background Information
From inception in March 1995 through the third quarter of the Company's fiscal
year ended June 30, 1998, the Company realized minimal revenues from the sale of
its products, with its first sale in the amount of $180,000 having occurred in
March 1998. As a result, the Company filed its quarterly and annual financial
reports as a development stage enterprise through the quarter ended March 31,
1998. With the commencement of active sales and marketing activity in the latter
stages of fiscal 1998, management determined that the Company should no longer
report as a development stage enterprise.
9
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Commencing with the annual report on Form 10-KSB for the year ended June 30,
1998, the cumulative from inception financial information was deleted from the
Consolidated Statements of Operations, Cash Flows and Changes in Stockholders'
Equity (Deficit).
Since early 1996, the Company has devoted its efforts to the development of
proprietary technology for determining the contents of a slot machine hopper and
an on-line data collection system that allows a casino to utilize the financial
and security information ("AccuSystem" or "AccuHopper"(TM)). During fiscal 1998,
the Company, after various field trials, received approval of its stand alone
AccuSystem from Gaming Laboratories International, from the states of Nevada,
Mississippi and New Jersey, and from Native American tribal authorities in the
states of Connecticut and Minnesota. In addition, the Company is currently
engaged in beta site testing of the interface of AccuSystem with three slot
machine accounting systems, including two of the principal systems utilized
throughout the gaming industry, Bally Systems and Casino Data Systems. The third
beta site is a system that is exclusively utilized by a multiple hotel/casino
operator based in Southern Nevada. The Company is also working with other
manufacturers of slot machine accounting systems, including IGT's new IGS system
and Advanced Casino Systems Corporation, on the interface of AccuSystem with
their products. Although management is confident that AccuSystem will be
successfully interfaced with these slot accounting systems, no assurance can be
given that such interfaces will ultimately be successful or, if successful, will
receive the necessary approvals from the gaming authorities in the jurisdictions
in which such slot accounting systems are utilized.
In December 1998, the Company received notification from the State of Nevada
Gaming Control Board ("NGCB") that AccuSystem had been authorized to be the
second verifier of a slot machine fill, thereby eliminating the need for a
second employee to observe each fill and sign the required fill documentation in
Nevada casinos. This authorization will be granted to casinos on a case by case
basis by the NGCB provided a casino's accounting and auditing procedures
adequately substitute for the lack of the second signature verification. In
management's opinion, this was a significant event for the Company in that a
casino utilizing AccuSystem will be able to reduce slot machine down time,
reduce labor costs associated with the fill process, and increase customer
satisfaction through the elimination of the second person in the fill process.
The Company is assisting certain casinos in other domestic gaming jurisdictions
in their requests to have AccuSystem authorized to be the second verifier, and
to be able to utilize certain other features of the AccuSystem designed to
enhance revenues and reduce operating costs. No assurance can be given that
these requests will ultimately be approved by the gaming authorities in the
jurisdictions wherein they are pending, or that a significant number of Nevada
casinos will satisfy the NGCB's internal control requirement and thereby qualify
for the single signature fill authorization.
The accompanying financial statements for the prior periods reflect certain
reclassifications, which have no effect on net losses or cash flows in those
periods, to conform to classifications in the current period.
Six Months Ended December 31, 1998 and 1997
During the first six months of fiscal 1999, the Company reported sales of
approximately $2,009,000, which included sales in Mississippi, Minnesota, New
Jersey, Iowa and Nevada. The gross margin was approximately 44% and reflects
discounts from the listed sales prices to introduce product in the various
domestic markets and to establish a customer base. In addition, the gross margin
was negatively impacted by costs associated with the adaptation of the
AccuSystem product to the assortment of slot machines into which the AccuSystem
is to be installed. As of February 9, 1999, the Company's sales backlog was
approximately $1,700,000.
Selling, general and administrative expenses increased $430,000, or
approximately 27%, to $2,035,000 for the six months ended December 31, 1998 from
$1,605,000 for the six months ended December 31,
10
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1997. When comparing the two six month periods, an increase in payroll and
payroll related expenses of $615,000 to $1,037,000 was partially offset by
decreases of $60,000 in bad debt expense and $155,000 in accrued expenses that
are based on fiscal period changes in the market capitalization of the Company's
common stock. The increase in payroll and payroll related expenses were
primarily related to additional administrative, product development and support
personnel necessitated by sales activities, and approximately $150,000 in
engineering labor costs that would have been classified as research and
development expense in the prior year period.
Research and development expenses decreased by $304,000, or 64%, to $164,000 in
the current period from $468,000 in the six month period ended December 31,
1997. Whereas all engineering and product development expenses in the prior year
period were classified as research and development expenses, only expenses
associated with new product development are classified as research and
development expenses in the current year period. Expenses related to the further
development of the AccuSystem product, including costs associated with
interfacing with the various slot accounting systems and design modifications
necessitated by slot machine cabinet and design variations are expensed
elsewhere in the financial statements.
Interest expense increased to $135,000 for the six months ended December 31,
1998 from $21,000 in the prior year period as a result of the issuance of the 6%
Secured Convertible Notes from the $5.0 million offering (the "Notes").
Depreciation and amortization increased to $38,000 in the first six months of
fiscal 1999 from $20,000 in the same period in the prior year, primarily due to
amortization of the AccuSystem patent costs.
Three Months Ended December 31, 1998 and 1997
During the second quarter of fiscal 1999, the Company reported sales of
approximately $1,007,000. The gross margin was approximately 43%, reflecting
discounts from the listed sales prices to introduce product in the various
domestic markets and to establish a customer base. In addition, the gross margin
was negatively impacted by costs associated with the customization of the
AccuSystem product to the assortment of slot machines into which the AccuSystem
is to be installed.
Selling, general and administrative expenses increased $133,000, or
approximately 14%, to $1,055,000 for the quarter ended December 31, 1998 from
$922,000 in the same period in the prior year. In the current year's quarter,
payroll and payroll related expenses were approximately $568,000, reflecting an
increase of approximately $316,000 over prior year's payroll and payroll related
expenses. This increase in payroll and payroll related expenses was primarily
due to additional administrative, product development and support personnel
necessitated by sales activities, and approximately $87,000 in engineering labor
costs that would have been classified as research and development expense in the
prior year period. When comparing the two quarters, the increase in payroll and
payroll related expenses were offset by a decrease of $60,000 in bad debt
expense, $25,000 in royalty amortization, $27,000 in non-cash compensation
expense, and $55,000 in accrued expenses that are based on fiscal period changes
in the market capitalization of the Company's common stock.
Research and development expenses decreased by $223,000, or 74%, to $79,000 in
the current year's second quarter. Whereas all engineering and product
development expenses were classified as research and development expenses in the
quarter ended December 31, 1997, only expenses associated with new product
development are classified as research and development expense in the quarter
ended December 31, 1998. Expenses related to the further development of the
AccuSystem product, including costs associated with interfacing with the various
slot accounting systems and design modifications necessitated by slot machine
cabinet and design variations are expensed elsewhere in the financial
statements.
11
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Interest expense increased to $71,000 for the quarter ended December 31, 1998
from $9,000 in the same quarter in the prior year as a result of the issuance of
the Notes. Depreciation and amortization increased to $27,000 in the current
year's quarter from $11,000 for the three month period ended December 31, 1997,
primarily due to amortization of the AccuSystem patent costs.
Liquidity and Capital Resources
The Company's current assets at December 31, 1998 totaled $2,510,000, including
$176,000 in cash and cash equivalents and $1,813,000 in inventory. The Company's
current liabilities were $2,503,000, including $651,000 in dividends payable to
preferred stockholders and $173,000 in interest on the Notes. Net cash used in
operating activities was approximately $2,717,000. As of February 9, 1999, the
Company had a sales backlog of approximately $1,700,000.
As previously noted, the Company's initial sales and marketing activities
commenced in the latter stages of the fiscal year ended June 30,1998. Absent
significant revenues from operations, the Company has funded itself primarily
through equity and debt financing.
On February 27, 1998, the Company initiated the private placement of the Notes
in two separate offerings with identical terms due February 28, 2008 in the
aggregate principal amount of $5,000,000 to a limited number of investors with
interest payable annually commencing February 28, 1999. The Notes are secured by
a security interest and collateral assignment of all of the Company's patents,
patent applications, trade secrets and all other intellectual rights of the
Company existing or developed prior to the repayment or other settlement of the
Notes (the "Intellectual Rights"). The Notes are convertible by holders of the
Notes at any time through February 28, 2001 into shares of the Company's $0.002
common stock in a number equal to 0.8% of the then outstanding shares of the
Company's common stock for each $100,000 in principal amount of the Notes. In
addition, the Company may require conversion at certain times through February
28, 2001 under certain circumstances.
During the six month period ended December 31, 1998, the Company closed the
$5,000,000 Note offering, with the Malcolm C. Davenport V Family Trust (the
"Trust") purchasing an additional $2,400,000 of the Notes from the Company
during the six month period. Consequently the Trust, for which Malcolm C.
Davenport V (a member of the Board of Directors) serves as Trustee, holds a
total of $4,300,000 of the Notes. In addition, a member of the Board of
Directors at the time purchased an additional $250,000 of the Notes, bringing
his holdings in the Notes to $350,000. In January 1999, Malcolm C. Davenport V
loaned the Company an additional $350,000 pursuant to the terms of a 10% note
due March 20, 1999 which is secured by the Company's Intellectual Rights in a
position subordinate to that of the holders of the Notes.
In addition to the Notes, there were 8,241 issued and outstanding shares of 4%
Convertible Preferred Stock at December 31, 1998. These preferred shares were
held by RBB Bank Aktiengesellschaft (the "Holder"), an offshore bank
representing investors pursuant to Regulation S promulgated under the Securities
Act of 1933. All such preferred stock, plus any accrued and unpaid dividends
thereon, can be converted into common stock of the Company at any time at the
discretion of the Holder, and any preferred stock not converted prior to
December 31, 1999 will automatically be converted on that date based on an
average of the closing bid prices of the common stock for the five trading days
ended immediately prior to that date, but not to exceed $3 per share.
If both the Notes and the Preferred Stock had been converted into additional
shares of the Company's common stock on December 31, 1998, the holders of the
Notes would have received approximately 30.9 million common shares, including
26.6 million to the Trust, and RBB would have received approximately 27.5
million shares.
12
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As previously noted, the Company is currently undergoing beta site testing
and/or assisting with certain casino's applications for the amendment of certain
internal control procedures related to slot machines in various domestic
jurisdictions. Management feels that if these beta site tests and/or
applications for the amendment of certain internal control procedures are
successful, an increase in sales will result. No assurance can be given that the
field trials or the applications for amendment of certain internal control
procedures will be successful in any jurisdictions, or if obtained, will result
in increased sales to the Company.
Should the Company fail to generate sufficient revenues to support operations,
the Company would have to secure additional debt or equity financing. If this
additional debt or equity financing should not be available, and no assurance
can be given that such additional debt or equity financing can be located, and
if the Company can not generate sufficient revenues to support operations, the
Company will be unable to continue as a going concern.
13
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On January 22, 1999, the Washoe County (Reno), Nevada District Court
granted the Company's motion for summary judgment and dismissed without
prejudice the lawsuit filed against the Company by Richard M. Mathis ("Mathis").
Mathis had filed suit in October 1996 against the Company, Spintek
International, Inc. and Lanier M. Davenport ("Davenport") who, until October 18,
1996, was chairman and chief executive officer of the Company. In his lawsuit,
Mathis had alleged that Davenport, with the Company's assistance, had defrauded
him, breached a fiduciary duty to him, and was seeking actual damages of in
excess of $500,000 and punitive damages of in excess of $500,000.
ITEM 2. Changes in Securities
None
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employment Agreement with Gary Coulter dated December 10, 1998
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
14
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SPINTEK GAMING TECHNOLOGIES, INC.
Date: February 10, 1999 By: /s/ GARY L. COULTER
------------------------------
Gary L. Coulter
Chairman of the Board,
Chief Executive Officer
Date: February 10, 1999 By: /s/ GEORGE P. MILLER
-----------------------------
George P. Miller
Chief Financial Officer
(Principal Financial
and Accounting Officer)
15
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EXHIBIT INDEX
Exhibit Index Description Page Number
- ------------- ----------- -----------
10.1 Employment Agreement with Gary Coulter dated December 10, 1998 E-1
27.1 Financial Data Schedule E-10
16
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") made and entered into this
____ day of December, 1998 by and between Spintek Gaming Technologies, Inc., a
Nevada corporation (the "Corporation"), and Gary L. Coulter, a resident of
Nevada ("Executive"), with reference to the following:
WHEREAS, the Corporation hired Executive in the position of Chairman
and Chief Executive Officer of the Corporation effective as of October 18, 1996
and entered into an employment agreement which expired on October 17, 1998.
WHEREAS, the Corporation now desires to continue in its employ
Executive as its Chairman of the Board of Directors and Chief Executive Officer;
WHEREAS, in order to continue the services of the Executive in such
capacity and to maximize the period of his continued availability, the
Corporation desires to enter into this Agreement with Executive all as is more
fully set forth herein.
NOW, THEREFORE, on the basis of the foregoing facts and in
consideration of the mutual covenants, agreements and payments contained herein,
the parties hereto agree as follows:
1. Employment
----------
The Corporation hereby agrees to, and does hereby, employ the Executive
and Executive hereby accepts employment with the Corporation as Chairman of the
Board of Directors and Chief Executive Officer on the terms and conditions set
forth in this Agreement.
2. Term
----
The Employment of the Executive hereunder shall commence on October 18,
1998 and shall continue until February 28, 2002 (the "Term"). After the original
Term this Agreement shall continue in effect and shall be deemed automatically
renewed for a second Term unless either party hereto shall notify the other in
writing at least thirty (30) days prior to the end of the Term of their
intention of not renewing the same. The Corporation agrees not to terminate the
Executive during the Term except for Cause. However, Executive shall be
considered terminated, at Executive's election, if
(1) there is a Change of Control of the Corporation or
(2) there is a Change of Duties.
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3. Title, Duties and Services
--------------------------
A. The Corporation and the Executive hereby agree that, subject to the
provisions of this Agreement, the Corporation will employ the Executive and the
Executive will serve the Corporation as Chairman of the Board and Chief
Executive Officer during the Term(s) or any extension thereof. These duties will
be consistent with and not less than the duties specified in the Corporation's
By-Laws, as currently adopted, for the position of "Chairman" and "President",
respectively.
B. Executive agrees during the term of this Agreement not to usurp a corporate
opportunity for his own financial gain. A corporate opportunity shall be defined
as a business opportunity which the Corporation is financially able to
undertake, and is, from its nature, in the line of the Corporation's business
and is one in which the Corporation has an interest or a reasonable expectation
of an interest. Executive agrees that he shall offer a corporate opportunity to
the Corporation. Following disclosure by Executive to Corporation the
Corporation shall have ten (10) days to either take the opportunity for itself
or to reject the opportunity in which case Executive shall have the right to
pursue such opportunity for himself. Failure to notify Executive within such ten
(10) day period shall be deemed a rejection of the opportunity by the
Corporation.
4. Definition
----------
The following terms shall have the following meanings when used
herein:
A. Change of Control. A Change of Control shall be deemed to have
occurred at such time as:
(1) any Person or an affiliate of any Person other than the Corporation
or any Subsidiary of the Corporation, is or becomes the beneficial
owner, directly or indirectly, through a purchase, merger or other
acquisition or transaction or series of transactions, of shares of
capital stock, whether presently issued or which may be issued in the
future, of the Corporation entitling such Person to exercise more than
forty percent (40%) of the total voting power of all shares of capital
stock of the Corporation entitled to vote generally in the election of
directors; or
(2) any consolidation of the Corporation with, or merger of the
Corporation into, any other Person, or any merger of another Person
into the Corporation other than an merger (x) which does not result in
any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock or (y) which is effected solely to
change the jurisdiction of incorporation of the Common Stock and
results in a reclassification, conversion or exchange of outstanding
shares of Common Stock into solely shares of Common Stock; or
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(3) a change in the composition of the Board of Directors of the
Corporation in which the individuals who constituted the Board of
Directors of the Corporation as of December 1, 1998 cease for any
reason to constitute a majority of the directors then in office.
Change of Duties. A Change of Duties shall be deemed to have occurred
at such time as there is a reduction of Executive's duties, title or position
with the Corporation at any time during the Term or any extension thereof.
Subsequent amendments to the By-Laws which result in a reduction of Executive's
duties, title or position with the Corporation at any time during the Term or
any extension thereof shall constitute a Change of Duties.
B. Cause. Cause shall exist when and only when Executive
(1) after thirty (30) days written notification by the Board of
Directors to Executive that he has willfully failed and continues to
fail to substantially perform his duties continues to fail to
substantially perform his duties (other than failure resulting from
incapacity due to physical or mental illness);
(2) is convicted of a crime constituting a felony, or
(3) has been proven to be dishonest, has embezzled or has committed
common law fraud.
C. Person. Person shall mean any individual, trust, estate, partnership,
corporation, association, company, limited liability company or unincorporated
organization, and/or any combination thereof, other than the corporation or an
affiliate thereof.
For purposes of this Agreement an "affiliate" of a person shall include
any person, firm, corporation, association, organization, or unincorporated
trade or business or any group of the foregoing that, now or hereinafter,
directly or indirectly, controls, or is controlled by, or practices is under
common control with such person.
5. Compensation.
-------------
A. As salary during the Term, the Corporation shall pay the Executive, in
accordance with its normal payroll practices, a minimum salary as follows:
(1) Four Hundred Thousand Dollars ($400,000) per year from October 18,
1998 through December 31, 1999;
(2) Four Hundred Twenty Thousand Dollars ($420,000) per year from
January 1, 2000 through December 31, 2000; and
(3) Four Hundred Forty Thousand Dollars ($440,000) from January 1,
2001 through February 28, 2002.
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Provided, however, such salary is to be paid no less than bi-monthly during
the Term. The Executive shall receive such additional salary as the Board of
Directors of the Corporation may from time to time determine during the Term.
Unless expressly agreed in writing by the parties hereto, no such additional
compensation or benefits shall be deemed to modify or otherwise affect the terms
or conditions of this Agreement. Notwithstanding the foregoing, if Executive is
terminated other than
(1) for Cause, as defined herein, or
(2) as a result of a Change of Control, as defined herein, Executive
shall be entitled to two (2) years salary (based upon his annual salary
at the time of termination) and the Life Insurance Policy as severance.
Such payment shall serve as Executive's sole and exclusive rights
pursuant to this Agreement; provided, however, such payment shall not
affect Executive's rights as to options to purchase shares in
accordance with Paragraph 7 hereof or rights accrued under the
Corporation's 1996 Stock Option Plan or any other rights accrued under
any employee benefit plan adopted by Corporation, including the 1996
Bonus Plan (based on stock appreciation). In the event of a Change of
Control or Change of Duties, Executive shall be entitled to two (2)
years salary and the Life Insurance Policy, as severance, provided
Executive exercises his right pursuant to this Agreement to treat such
change as a termination of this Agreement. In the event Executive
resigns for any reason, except as a result of a Change of Control,
Executive shall be entitled to six (6) months salary (based upon his
annual salary at the time of resignation) and the Life Insurance Policy
as severance. In the event Executive is terminated other than for Cause
or there is a Change of Control or Change of Duties in which Executive
exercises his right to treat such change as a termination of this
Agreement, then all obligations to pay Executive shall be due and owed
in a lump sum payment exactly thirty days from the earlier of:
(1) the date of termination,
(2) the date of the Change of Control; and/or
(3) the date Executive elects termination pursuant to the
provisions of Paragraph 5 hereof. The Life Insurance Policy
shall be paid up as of the termination date and the Life
Insurance Policy transferred to Executive.
B. Executive shall receive an automobile allowance of $1,000.00 per month
during the term of this Agreement.
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C. The Corporation shall pay Executive additional compensation, based upon the
aggregate sales of the AccuHopper, AccuDrop and/or AccuFill Systems ("Systems"),
the following sums:
(1) Upon sale of the first 10,000 Systems: $10,000;
(2) Upon sale of an additional 20,000 Systems (for a total of 30,000
systems) the sum of: $30,000; and
(3) Upon the sale of a total of 100,000 Systems the sum of: $100,000.
All such additional compensation shall be earned when the sale is made
as evidenced by purchase orders and shall be paid within thirty days
of Corporation's receipt of payment for sales aggregating the various
numbers of Systems set forth above. Such sales shall be calculated on
the basis of all sales including those made prior to execution of this
Agreement.
D. Executive shall be entitled to two (2) round trip tourist class tickets per
month for non-business travel from Las Vegas/Atlanta for Executive or his
nominee or any equivalent ticket in value to any destination.
E. Executive shall also be provided with a life insurance policy on his life
payable to the beneficiary designated by Executive of not less than the greater
of
(1) $1,000,000,
(2) two times his then current annual salary, or
(3) his total salary package for the immediately preceding calendar
year taking into consideration all bonuses and benefits paid to,
accrued or provided for Executive (the "Life Insurance Policy").
6. Other Benefits.
---------------
During the Term the Executive shall receive all rights and benefits for
which he is then eligible under any employee benefit plan or bonus plan which
the Corporation generally provides for its employees or any group of employees.
Such benefits shall include, but not be limited to, a bonus plan, which shall be
explicitly set forth by the Corporation's Board of Directors within ninety (90)
days of the execution of this Agreement, and full medical and health insurance
for Executive. In no event shall the bonus be less than the largest bonus (based
on percentage of salary received by any member of the executive management team
and employees directly employed in the Sales and Marketing Division of
Corporation.
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<PAGE>
7. Grant of Options to Acquire Stock.
----------------------------------
Corporation acknowledges that it currently has a qualified stock option
plan ("Plan") and that Executive is covered under such Plan. Further,
Corporation guarantees Executive will receive, whether such Plan is continued in
effect or whether such Plan has shares available or not, a minimum of 200,000
non-dilutable options to acquire common shares of the Corporation for each
calendar year commencing January 1, 1999 or fraction thereof for which Executive
is employed by Corporation, that such options will vest immediately upon
granting, that the exercise price will not be in excess of the closing price of
the publicly traded shares on the last day of any such twelve month period and
reduced by not less than thirty (30%) percent in the event such shares upon
exercise of the option would not be free trading shares. The parties further
agree that Stock Option Agreement, the form of such attached as Exhibit "A"
hereto, shall be the form used in granting all such options.
As a result of and in consideration for Executive renewing his
employment with Corporation pursuant to this Agreement, Corporation hereby
grants to Executive 200,000 non-dilutable options to acquire Common Shares
pursuant to the attached Exhibit "A" Option Agreement.
8. Death or Disability.
--------------------
In the event of the death of the Executive or the disability of the
Executive this Agreement shall immediately terminate and the Corporation shall
pay to Executive or his estate one (1) year's salary in a single lump sum
payment which payment shall be due and payable upon the sooner of
(1) thirty (30) days of Executive's death or
(2) thirty (30) days after Executive is declared by his
physician incapable of performing his duties as specified in
this Agreement. The Corporation shall have the right to fund
Executive's death and/or disability benefit through insurance
other than the insurance required by Paragraph 5.E. hereof.
9. Place of Performance.
---------------------
In connection with his employment by the Corporation during the Term,
the Executive shall at all times be entitled to an office at the principal
executive offices of the Corporation, located in Las Vegas, Nevada and/or at
such other office(s) of the Corporation wherever located and at any additional
location, as Executive shall, in his reasonable discretion, deem to be in the
best interest of the Corporation or the Executive in assisting him in the
performance of his duties. In the event the Corporation moves its principal
place of business outside of Las Vegas, Nevada, other than at the direction of
Executive, Executive at his option shall have the right to terminate this
Agreement and receive such salary due to him for the remaining Term of this
Agreement but in no event less then two (2) years salary.
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<PAGE>
10. Notice.
-------
All Notices and other communications hereunder shall be in writing and
shall be deemed to have been validly served, given or delivered five (5) days
after deposit in the United States mail, by certified mail with return receipt
requested and postage prepaid, when delivered personally, one (1) day after
delivery to any overnight courier, or when transmitted by facsimile transmission
facilities, and addressed to the party to be notified as follows:
If to Corporation at: Spintek Gaming Technologies, Inc.
1857 Helm
Las Vegas, Nevada 89119
Attn: Chairman
Facsimile # 702-263-3680
If to Executive at: Gary L. Coulter
1857 Helm Drive
Las Vegas, Nevada 89119
Facsimile # 702-263-8953
The parties may from time to time and at any time supplement or change the
addresses herein by giving Notice hereunder to the other party hereto.
11. Miscellaneous.
--------------
A. This Agreement shall inure to the benefit of and be binding upon the
Corporation, its successors and assigns. This Agreement may not be assigned by
the Corporation without the prior written consent of the Executive. The
obligations and duties of the Executive hereunder shall be personal and not
assignable.
B. Whenever possible, each provision of this Agreement shall be interpreted in
such a manner as to be valid and effective under applicable law, but if any
provision of this Agreement is found to be prohibited or invalid under
applicable law, such provision will be ineffective to the extent of such
prohibition or invalidity without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
C. Any waiver, alteration or modification of any of the terms of this Agreement
will be valid only if made in writing and signed by the parties hereto. Each
party hereto from time to time may waive any of his or its rights hereunder
without effecting a waiver with respect to any subsequent occurrences or
transactions hereunder.
D. Captions and paragraph headings used herein are for convenience only are not
a part hereof and shall not be used in construing this Agreement.
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<PAGE>
E. This Agreement constitutes the entire understanding and agreement of the
parties and, except as otherwise provided hereunder, there are no other
agreements or understandings, written or oral, in effect between the parties
relating to the employment of the Executive by the Corporation during the Term.
All prior negotiations or agreements, if any, between the parties relating
solely to the employment of the Executive by the Corporation during the Term are
hereby superseded.
F. This Agreement shall be governed by and interpreted in accordance with the
laws of the State of Nevada.
G. This Agreement may be executed in counterparts, each of which shall be deemed
an original, but both of which taken together shall constitute one and the same
instrument.
12. Arbitration.
------------
Any controversy between the parties hereto, including the construction
or application of any of the terms, covenants or conditions of this Agreement,
shall on written request of one party served on the other be settled exclusively
by arbitration in accordance with the rules of the American Arbitration
Association then in effect. The arbitrator selected must be a member of the
National Academy of Arbitrators and must have significant experience in
arbitrating labor disputes. Further the arbitrator must be an attorney
practicing labor law in the Southern California area. The cost of such
arbitration shall be borne by the losing party or in such proportions as the
arbitrator(s) shall decide. Judgment may be entered on the arbitrator's award in
any court of competent jurisdiction.
13. The Executive's Employment.
---------------------------
Nothing contained in this Agreement
(1) obligates the Corporation or any subsidiary of the Corporation to
employ the Executive in any capacity whatsoever, or
(2) prohibits or restricts the Corporation (or any such subsidiary)
from terminating the employment, if any, of the Executive at any time
or for any reason whatsoever, with or without cause, subject to the
terms and conditions of this Agreement.
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<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this Agreement as
of the day and year first above written.
EXECUTIVE:
______________________________
GARY L. COULTER
SPINTEK GAMING TECHNOLOGIES, INC.
BY:___________________________
MALCOLM C. DAVENPORT, V
VICE CHAIRMAN
ATTEST:_______________________
ROBERT E. HUGGINS
ASSISTANT SECRETARY
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SPINTEX
GAMING TECHNOLOGIES, INC. FINANCIAL STATEMENTS FOR THE QUARTER ENDED DECEMBER
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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