<PAGE>2
Commission File Number 333-31373
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2/A
REGISTRATION STATEMENT
Under The Securities Act of 1933
CASINOVATIONS INCORPORATED
Washington 91-1696010
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdictions Classification Code Number) Identification
Number)
of incorporation
or organization)
3909 South Maryland Parkway
Suite 311
Las Vegas, Nevada 89119
Telephone: 702-733-7195
Facsimile: 702-733-7197
(Address and telephone number of registrant's principal executive
offices and principal place of business.)
Jay L. King
3909 South Maryland Parkway
Suite 311
Las Vegas, Nevada 89119
Telephone: 702-733-7195
Facsimile: 702-733-7197
(Name, address and telephone number of agent for service.)
with copies to:
Jody M. Walker
Attorney At Law
7841 South Garfield Way
Littleton, Colorado 80122
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box: | x |
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
Title of each Proposed Proposed Amount of
class of Amount to be offering aggregate registration
securities registered price offering price fee
<S> <C> <C> <C> <C>
Common Stock
$.001 par value 200,000 $3.50 $700,000 $218.75
Common Stock<F1> 2,219,041 $3.50 $7,766,644 $2,427.08
Common Stock<F2> 200,000 $3.75 $750,000 $234.38
Common Stock<F3> 200,000 $4.00 $800,000 $250.00
Common Stock<F4> 250,000 $6.00 $1,500,000 $468.75
Total 3,069,041 $11,516,644 $3,593.96
</TABLE>
[FN]
<F1>Represents Common Stock to be registered on behalf of Selling
Shareholders.
<F2>Represents Common Stock underlying the A Warrants to be registered on
behalf of Selling Shareholders.
<F3>Represents Common Stock underlying the B Warrants to be registered on
behalf of Selling Shareholders.
<F4>Represents Common Stock underlying the C Warrants to be registered
on behalf of Selling Shareholders.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>3
PRELIMINARY PROSPECTUS DATED February 16, 1998
SUBJECT TO COMPLETION
Up to a Maximum of 200,000 Common Shares
2,219,041 Common Shares on behalf of Selling Shareholders
200,000 Common Shares underlying the A Warrants
200,000 Common Shares underlying the B Warrants
250,000 Common Shares underlying the C Warrants
CASINOVATIONS INCORPORATED
Common Stock
($.001 Par Value)
The Company is offering up to a maximum of 200,000 Common Shares at the
purchase price of $3.50 per Common Share. There is no minimum investment
amount. The Company is registering 2,219,041 common shares on behalf of its
selling security holders. The Company is registering the stock underlying
its A, B and C Warrants on behalf of its selling security holders. The A
Warrants are exercisable into one common share at the purchase price of
$3.75. The A Warrants shall be exercisable for a period of four years from
July, 1996 and shall be redeemable by the Company at $.001 per A Warrant upon
thirty days notice. The B Warrants are exercisable into one common share at
the purchase price of $4.00. The B Warrants shall be exercisable for a
period of four years from July, 1996 and shall be redeemable by the Company
at $.001 per B Warrant upon thirty days notice. The C Warrants are
exercisable into one common share at the purchase price of $6.00. The C
Warrants shall be exercisable for a period of four years from July, 1996 and
shall be redeemable by the Company at $.001 per C Warrant upon thirty days
notice. The D Warrants are exercisable into one common share at the purchase
price of $1.50.
The 2,219,041 common shares being registered on behalf of selling security
holders consist of 513,511 Common Shares on behalf of the Company's officers,
directors and affiliates, 1,211,516 Common Shares on behalf of shareholders
who purchased in a previous private placement and 294,014 Common Shares to
other unaffiliated shareholders. See "Selling Security Holders". Prior to
the date hereof, there has been no trading market for the Common Stock of the
company. There can be no assurance that the Common Stock will ever be
quoted, that an active trading and/or a liquid market will ever develop or,
if developed, that it will be maintained.
THE COMPANY IS CONSIDERED TO BE IN UNSOUND FINANCIAL CONDITION. PERSONS
SHOULD NOT INVEST UNLESS THEY CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT.
THERE ARE MATERIAL RISKS IN CONNECTION WITH THE PURCHASE OF THE SECURITIES.
SEE RISK FACTORS, PAGE 8.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.DUE TO THE CONTEMPORANEOUS PRIMARY OFFERING BY
THE COMPANY AND SECONDARY OFFERING BY SELLING SHAREHOLDERS, CONFLICTS OF
INTERESTS BETWEEN THE COMPANY AND SELLING SHAREHOLDERS MAY ARISE. SEE TERMS
OF THE OFFERING AND RISK FACTORS.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sales
of these securities in any State in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the securities
laws of any state.
The Company is engaged in the manufacture and marketing of certain gaming
products and concepts.
<TABLE>
<CAPTION>
Price to Proceeds to
Public Commissions Company
<S> <C> <C> <C>
Per Common Share 3.50 $.35 $3.15
Maximum Offering<F1><F2> $700,000 $70,000 $630,000
</TABLE>
(Footnotes on following page)
The date of the Prospectus is February 16, 1998
<PAGE>4
[FN]
<F1>The Common Shares are being offered on a "direct participation" basis by
the Company (employees, officers and directors) and possibly selected broker-
dealers. No sales commission will be paid for Common Shares sold by the
Company. Selected broker-dealers shall receive a sales commission of up to
10% for any Common Shares sold by them. The Company reserves the right to
withdraw, cancel or reject an offer in whole or in part. See "TERMS OF THE
OFFERING - Plan of Distribution and Offering Period."
This Offering will terminate on or before September 30, 1998. In the
Company's sole discretion, the offering of Common Shares may be extended for
up to three Thirty day periods, but in no event later than December 31, 1998.
There is no minimum offering amount and no escrow account. Proceeds of this
Offering are to be deposited directly into the operating account of the
Company. See "TERMS OF THE OFFERING - Plan of Distribution."
<F2>The amount as shown in the preceding table does not reflect the
deductions of (1) general expenses payable by the Company; and (2) fees
payable in connection with legal and accounting expenses incurred in this
Offering. These expenses are estimated to be $41,919.53 if the total
offering amount is obtained. The selling shareholders will not pay any of
the expenses associated with this offering.
REPORTS TO SECURITY HOLDERS
Although the Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith
will file reports and other information with the Securities and Exchange
Commission, the Company has not yet filed any reports with the Securities
and Exchange Commission. The reports and other information filed by the
Company can be inspected and copied at the public reference facilities
maintained by the Commission in Washington, D.C. and at the Chicago
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and the New York Regional Office, 7 World
Trade Center, New York, New York 10048. Copies of such material can
be obtained from the Public Reference Section of the Commission,
Washington, D.C. 20549 at prescribed rates.
The Company will furnish to shareholders: (i) an annual report containing
financial information examined and reported upon by its certified public
accountants; (ii) unaudited financial statements for each of the first three
quarters of the fiscal year; and (iii) additional information concerning the
business and operations of the Company deemed appropriate by the Board
of Directors.
EXHIBITS INCORPORATED BY REFERENCE
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (together with all amendments and
exhibits thereto, the "Registration Statement") under the Act with respect to
the securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the Rules and Regulations of the Commission.
For further information with respect to the Company and the securities
offered hereby, reference is made to the Registration Statement. Copies of
such materials may be examined without charge at, or obtained upon payment of
prescribed fees from, the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, at the
Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511 and the New York Regional Office, 7 World
Trade Center, New York, New York 10048.
The Company will voluntarily file periodic reports in the event its
obligation to file such reports is suspended under Section 15(d) of the
Exchange Act.
The Company will provide without charge to each person who receives a
prospectus, upon written or oral request of such person, a copy of any of the
information that was incorporated by reference in the prospectus.
Requests for copies of said documents should be directed to Jay L. King, 3909
South Maryland Parkway, Suite 311, Las Vegas, Nevada 89119.
The Commission maintains a Web site -- //www.sec.gov -- that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission.
UNTIL _____ , 1997 (90 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL PERSONS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THE OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF SUCH PERSONS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>5
NO DEALER, SALESMAN, AGENT OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, OR THE
UNDERWRITER, IF AN UNDERWRITER ASSISTS IN THE SALE OF THE SECURITIES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION BY ANYONE TO
ANY PERSON IN ANY STATE, TERRITORY OR POSSESSION OF THE UNITED STATES IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED BY THE LAWS THEREOF, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY
CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF.
<PAGE>6
<TABLE>
TABLE OF CONTENTS
<S> <C>
PROSPECTUS SUMMARY 7
RISK FACTORS 8
SELLING SECURITY HOLDERS 12
SOURCE AND USE OF PROCEEDS 15
DILUTION 16
THE COMPANY 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION 21
MANAGEMENT 23
CERTAIN TRANSACTIONS 27
PRINCIPAL SHAREHOLDERS 30
SHARES ELIGIBLE FOR FUTURE SALE 33
MARKET FOR REGISTRANT'S COMMON EQUITY 33
TERMS OF THE OFFERING 34
DESCRIPTION OF SECURITIES 36
LEGAL MATTERS 37
LEGAL PROCEEDINGS 37
EXPERTS 37
INTERESTS OF NAMED EXPERTS AND COUNSEL 37
</TABLE>
<PAGE>7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, financial statements and notes to the financial statements
including the notes thereto appearing elsewhere in this Prospectus.
The Company. The Company was incorporated in the state of Washington on
September 20, 1995. The Company's operations are the development and
marketing of certain gaming products and concepts invented and developed by
the Sines-Forte General Partnership ("Sines-Forte") of which Steve Forte, a
Director of the Company and Randy Sines, former Vice President of the Company
are general partners. The Company is authorized to issue a total of
20,000,000 shares of its capital stock (Common Shares), par value per share
of $.001.
The Company has four products that are completed or are near completion.
First, the Random Ejection Shuffler, which can shuffle automatically up to
six decks of playing cards in random order. There have been five proto
types built and tested. The first production run is complete and parts have
been ordered for the second, much larger run. Second, the Company has five
pre-production units of the Fantasy 21 Table Game which were assembled on
October 13, 1997 and are being used for sales demonstrations and field
testing. Parts for the production run of Fantasy 21 Table Game have been
ordered. Third, the Safety Peek Card, a new type of casino playing
card, is already in use and is under distribution agreements with selected
playing cards distributor. Fourth is the SecureDrop Coin Box system.
This product was not developed internally by the Company, but has been
exclusively licensed from an outside developer in an agreement dated October
10, 1997. The SecureDrop is in advanced development stages, with one
working prototype available. Based on information from the developer, the
Company expects to receive initial production units of the SecureDrop around
January 1, 1998.
The Company intends to sell or lease its products to the world-wide gaming
industry directly, through distributors or subcontracts with non-affiliated
manufacturers. The Company is in the process of negotiating distribution
and marketing arrangements for its products, but has no significant history
of operations and no profits.
The Company's principal offices are located at 3909 South Maryland Parkway,
Suite 311, Las Vegas, Nevada 89119. Its telephone number at such address is
(702) 733-7195.
<TABLE>
<S> <C>
The Offering. The Company hereby offers
up to 200,000 Common Shares
at $3.50 per Common Share.
Common Shares outstanding
prior to Public Offering 6,179,944
Common Shares to be outstanding
after Offering 6,379,944
Percent of Common Shares owned by
current shareholders after Maximum
Offering 96.63%
Gross Proceeds After Maximum Offering $700,000
Use of Proceeds. The Company intends to utilize
the sale of its Common Shares
for working capital. See "Source
and Use of Proceeds."
This Prospectus also relates to
securities being registered on
behalf of selling security
holders and the Company will not
receive any cash or other
proceeds from the sale. Any
proceeds received from the
subsequent exercise of the A, B
or C Warrants shall be used as
working capital, and to expand
operations. See "Source and Use
of Proceeds."
<PAGE>8
MARKET FOR COMMON STOCK
AND WARRANTS. Prior to the date hereof, there
has been no trading market for
the Common Stock or Warrants of
the Company. The Company has
agreed to use its best efforts
to apply for the quotation of
its Common Stock on the
Electronic Bulletin Board.
There can be no assurance that
the Common Stock will be quoted,
that an active trading and/or a
liquid market will develop or,
if developed, that it will be
maintained. See "Risk Factors"
and "Market Listing."
RESALES BY SELLING
SHAREHOLDERS. This Prospectus relates to
common Shares being registered
on behalf of selling security
holders. The Company will not
receive any cash or other
proceeds in connection with the
subsequent sale. Current
officers and directors do not
plan on selling their Common
Shares until the Company's offer
is fully subscribed. The
Company is not selling any
Common Shares on behalf of
Selling Shareholders and has no
control or affect on these
Selling Shareholders. See
"Selling shareholders."
RISK FACTORS There are material risks, such
as uncertainty of future
financial results, liquidity
dependent on additional capital
and debt financing and risks
related to the gaming industry,
in connection with the purchase
of the securities. See "Risk
Factors."
Absence of Dividends; Dividend Policy The Company does not currently
intend to pay regular cash
dividends on its Common Stock;
such policy will be reviewed by
the Company's Board of Directors
from time to time in light of,
among other things, the
Company's earnings and financial
position. The Company does not
anticipate paying dividends on
its Common Stock in the
foreseeable future. See "Risk
Factors."
Transfer Agent The Company acts as its own
transfer agent for the Company's
securities.
</TABLE>
RISK FACTORS
In analyzing this offering, prospective investors should read this entire
Prospectus and carefully consider, among other things, the following Risk
Factors:
Possible Adverse effects due to contemporaneous primary offering by the
Company and secondary offering by Selling Shareholders. The Company, through
its officers and directors, will undertake a direct participation self-
underwritten offering at the same time as the selling shareholders will be
selling their registered shares. Officers and directors of the Company are
participating as selling shareholders. Current officers and directors have
entered into written agreements not to sell their Common Shares until the
Company's offer is fully subscribed. The Company is not selling any Common
Shares on behalf of Selling Shareholders and has no control or affect on the
1,605,530 Common Shares of these Selling Shareholders which are not subject
to any lock-up agreement. The offering of securities by these Selling
Shareholders will occur regardless of the outcome of the primary offering by
the Company.
Other than the written agreements with the current officers and directors,
the Company has not taken any measures to delay the offering by Selling
Shareholders until after the completion of the primary offering by the
Company. The demand for the Company's Common Stock may be decreased due to
the large number of Common Shares being sold in the secondary offering by the
<PAGE>9
Selling Shareholders. Due to the fact that the secondary offering will be
conducted contemporaneously with a primary offering by the Company, the
market price of the Company's common stock (upon commencement of trading) may
be less than the offering price of $3.50. Conflicts of interests may arise
due to the fact that the primary offering of the Company and the secondary
offering of the Selling Shareholders will be conducted contemporaneously.
No Established Business/No Independent Market Research of Potential Demand
for Current Operations. The Company is in the development stage and has
only recently commenced formal efforts to manufacture and market its gaming
devices. No independent organization has conducted market research providing
management with independent assurance from which to estimate potential demand
for the Company's business operations. Even in the event a market demand is
independently identified, there is no assurance the Company will be
successful. See "BUSINESS ACTIVITIES."
Regulation. The gaming industry is a highly regulated industry and is
subject to numerous statutes, rules and regulations administered by the
gaming commissions or similar regulatory authorities of each jurisdiction.
Generally, the Company and other entities which seek to introduce gaming
products or concepts into such jurisdictions may be required to submit
applications relating to their activities or products (including detailed
background information concerning controlling persons within their
organization) which are then reviewed for approval. The Company may incur
significant expenses in seeking to obtain licenses for its gaming products
and concepts, and no assurance can be given that its products will be
approved in any particular jurisdiction. A failure to obtain such approval
in any jurisdiction in which the Company may seek to introduce its products
or concepts, could have a material adverse effect on the Company's business.
Newly Formed Corporation; Lack of Operating Results. The Company was formed
in September of 1995, and its activities have been limited to product
development, analyzing the gaming industry, consulting with persons in the
industry, negotiating agreements with Sines-Forte and Sharps International
Limited Partnership ("Sharps"), negotiating interim financing arrangements
and developing and consummating the plan of reorganization with Sharps.
Sines-Forte and Sharps are or were owned or controlled by persons who are
also directors, executive officers and principal shareholders of the Company.
Sharps has been dissolved. The Company is still in the development stage.
Higher than normal operating expenses will in all likelihood be incurred
during initial operations.
Additional Financing May be Required. Even if all of the 200,000 Common
Shares offered hereby are sold, the funds available to the Company may not be
adequate for its business activities. Accordingly, the ultimate success of
the Company may depend upon its ability to raise additional capital or to
have other parties bear a portion of the required costs to further develop or
exploit its business activities. Currently, the Company is seeking additional
debt or equity financing, however, there can be no assurance that any
additional financing can be obtained. See "USE OF PROCEEDS" AND "BUSINESS
ACTIVITIES."
Risks Attributable to a Direct Participation, Self-Underwritten Offering.
This offering is being offered on a direct participation, self-underwritten
basis. As a result, due to the absence of an underwriter, there may be less
due diligence performed in conjunction with this offering than would be
performed in an underwritten offering.
Potential Adverse Impact of Sale of Shares by Selling Shareholders. Sales
by selling shareholders may have an adverse impact on the Company's primary
offering of securities at $3.50 per share. The current officers and
directors have entered into a written agreement with the Company regarding
their intent to not sell their registered Common Shares until the Company's
offer is fully subscribed. However, the Company is not selling any
Common Shares on behalf of the other Selling Shareholders and has not control
over or affect on these Selling Shareholders.
Influence on Election of Directors and All Other Matters by Current Officers
and Directors. After the offering, the officers and directors of the
Company will own 31.56% of the outstanding common shares. As a result, the
officers and directors of the Company, through their aggregate ownership in
the securities of the Company may be able to influence the election of
directors and all other matters submitted to a vote of the Company's
shareholders.
Uncertainty of Market for Company's Products. The Company's products are
still in the development status and, as such, the market for these products
is uncertain.
Future Sales of and Market for the Common Shares. Upon completion of the
offering there shall be 5,940,640 Common Shares outstanding. This does not
include any Common Shares which shall be issued upon conversion of the A, B
or C Warrants, 75,000 Common Shares reserved for issuance pursuant to loan
conversion options, 593,000 shares reserved pursuant to outstanding options
for issuance to key employees and others. If the maximum number of Common
Shares are sold, 3,721,599 of the Common Shares to be outstanding will be
considered "restricted securities" as that term is defined in Rule 144
adopted under the United States Securities Act of 1933, as amended and in the
<PAGE>10
future may be sold only in compliance with the resale provisions set forth
therein. Rule 144 provides, in essence, that persons holding restricted
securities for a period of one years may sell in brokerage transactions an
amount equal to one percent of the Company's securities or outstanding Common
Shares every three months. Additionally, if persons hold restricted
securities for two years, there are virtually no resale limitations. Hence,
the possibility of sale under Rule 144 may in the future have a depressive
effect on the price of the Company's Common Shares in any market which may
develop.
Conflicts of Interest. Officers and directors of the Company are
participating as selling shareholders in this offering while the Company
undertakes its primary offering by its officers and directors. Additionally,
some of the directors of the Company are currently principals of other
businesses. As a result, conflicts of interest may arise. The directors
shall immediately notify the other directors of any possible conflict which
may arise due to their involvement with other businesses. The interested
directors in any conflict shall refrain from voting on any matter in which a
conflict of interest has arisen. The Company has adopted a policy that any
transactions with directors, officers or entities of which they are also
officers or directors or in which they have a financial interest, will only
be on terms which are fair and reasonable to the Company and approved by a
majority of the disinterested directors of the Company's Board of Directors.
For further discussion see "Management - Conflicts of Interest Policy." There
can be no assurance that such other activities will not interfere with the
officers' and directors' ability to discharge their obligation herein.
Possible Affect on Company's Ability to Obtain Approval for the Licensing of
the Company Due to Actions of Director of the Company. Steven L. Forte, a
consultant to and director of the Company, was convicted of a gambling-
related third degree felony in New Jersey in 1990, and in 1982 pled guilty to
a misdemeanor trespass charge arising from a gambling related charge
emanating from Harrah's Casino in Reno, Nevada. Mr. Forte was sentenced to
120 days and served 61 days. Mr. Forte also paid restitution of $11,200.
All restitution and probation were cleared in 1991. Such convictions could
affect the Company's ability to obtain approval for the licensing of the
Company, if required, in any number of prospective jurisdictions.
Benefit to Management. The Company may, in the future, compensate the
Company's management with substantial salaries and other benefits. The
payment of future larger salaries, commissions and the costs of these
benefits may be a burden on the Company and may be a factor in limiting or
preventing the Company from achieving profitable operations in the future.
However, the Company would not continue to compensate management with such
substantial salaries and other benefits under circumstances where to do so
would have a material negative effect on the Company's financial condition.
See "MANAGEMENT - Remuneration."
No Diversification. The Company intends to manufacture and market certain
gaming products and concepts. Therefore, the Company's financial viability
will depend almost exclusively on its ability to generate revenues from its
operations and the Company will not have the benefit of reducing its
financial risks by relying on revenues derived from other operations.
Dilution. Purchase of the Common Shares offered hereby will incur
immediate dilution of $3.44 or 98.29% in the net tangible book value of their
investment. This does not include any of the Common Shares to be issued
upon exercise of the A, B, C Warrants. The Company has 75,000 Common
Shares reserved for issuance pursuant to loan conversion options or 593,000
shares reserved for issuance pursuant to outstanding options and commitments
to key employees and others. The Company may issue additional shares in
private business transactions and may pursue a public offering in the future
to complete its business plan. Any sales under Rule 144 after the
applicable holding period may have a depressive effect upon the market price
of the Company's Common Shares and investors in this offering upon
conversion. As a result, the investors in this Offering may experience
substantial dilution. See "DILUTION" and "CAPITALIZATION."
Investors May Bear Risk of Loss. The capital required by the Company to
acquire assets needed for its proposed operations is being sought from the
proceeds of this Offering. Therefore, investors of this Offering may bear
most of the risk of the Company's expansion of operations. Conversely,
management stands to realize benefits from the payment of salaries, expenses
and receipt of stock options regardless of the profitability of the Company.
Financial Condition. Although the officers of the Company anticipate that
the Company will have adequate funds to pay all of its operating expenses
assuming the expansion and promotion of the Company's operations, there can
be no assurance that this will in fact occur or that the Company can be
operated in a profitable manner. Profitability depends upon many factors,
including the success of this Offering and the success of the Company's
operations.
Competition. There is significant competition in the gaming industry. The
Company competes with established companies and other entities (many of which
possess substantially greater resources than the Company). Almost all of
the companies with which the Company competes are substantially larger, have
more substantial histories, backgrounds, experience and records of successful
operations, greater financial, technical, marketing and other resources, more
employees and more extensive facilities than the Company now has, or will
<PAGE>11
have in the foreseeable future. It is also likely that other competitors
will emerge in the near future. There is no assurance that the Company will
continue to compete successfully with other established gaming product
Manufacturers. The Company shall compete on the basis of quality and price.
Inability to compete successfully might result in increased costs, reduced
yields and additional risks to the investors herein. See "The Company -
Competition."
Forward-Looking Statements and Associated Risk. This Prospectus, including
the information incorporated herein by reference, contains forward-looking
statements including statements regarding, among other items, the Company's
growth strategies, and anticipated trends in the Company's business and
demographics. These forward-looking statements are based largely on the
Company's expectations and are subject to a number of risks and
uncertainties, certain of which are beyond the Company's control. Actual
results could differ materially from these forward-looking statements as a
result of the factors described in this section "Risk Factors," including
among others, regulatory or economic influences. In light of these risks
and uncertainties, there can be no assurance that the forward-looking
information contained in this Prospectus will be accurate.
Arbitrary Offering Price. The initial offering price of $3.50 per Common
Share has been arbitrarily determined by the Company based upon such factors
as the objectives of the Company, the proceeds to be raised by the Offering
and the percentage of ownership to be held by the purchasers thereof. Having
established that the total gross proceeds of the maximum offering would be
$350,000, the actual price of $3.50 per Common Share was thereupon determined
by the Company and accordingly bears no relationship whatsoever to assets,
earnings, book value or any other objective standard of worth. See
"DILUTION."
Lack of Dividends. There can be no assurance that the operations of the
Company will become profitable. At the present time, the Company intends to
use any earnings which may be generated to finance the growth of the
Company's business. See "DESCRIPTION OF SECURITIES".
Dependence on Key Individuals. The future success of the Company is highly
dependent upon the management skills of its key employees and the Company's
ability to attract and retain qualified key employees. The inability to
obtain and employ these individuals would have a serious effect upon the
business of the Company. The Company has entered into definitive employment
agreements with Jay King and Randy Sines. Mr. Steven Forte has entered into
a personal services agreement with the Company. Mr. Sines has
recently resigned from the Company and will continue on a consultant basis.
There can be no assurance that the Company will be successful in retaining
its two remaining key employees or that it can attract or retain additional
skill personnel required. The Company has not obtained any key man life
Vulnerability to Fluctuations in the Economy. Demand for the Company's
products is dependent on, among other things, general economic conditions
which are cyclical in nature. Prolonged recessionary periods may be damaging
to the Company.
"Penny" Stock Regulation of Broker-Dealer Sales of Company Securities. The
Company intends to list its Common Shares, at least initially, on the OTC
Bulletin Board and on NASDAQ Small Cap Market upon meeting the requirements
for a NASDAQ listing, if ever. Upon completion of this offering, the Company
will not meet the requirements for a NASDAQ Small Cap Market listing. The
OTC Bulletin Board has no quantitative written standards and is not connected
with the NASD. Until the Company obtains a listing on the NASDAQ Small Cap
Market, if ever, the Company's securities may be covered by a Rule 15g-9
under the Securities Exchange Act of 1934 that imposes additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and institutional accredited investors
(generally institutions with assets in excess of $5,000,000 or individuals
with net worth in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouse). For transactions covered by the rule,
the broker-dealer must furnish to all investors in penny stocks, a risk
disclosure document required by Rule 15g-9 of the Securities Exchange Act of
1934, make a special suitability determination of the purchaser and have
received the purchaser's written agreement to the transaction prior to the
sale. In order to approve a person's account for transactions in penny
stock, the broker or dealer must (i) obtain information concerning the
person's financial situation, investment experience and investment
objectives; (ii) reasonably determine, based on the information required by
paragraph (i) that transactions in penny stock are suitable for the person
and that the person has sufficient knowledge and experience in financial
matters that the person reasonably may be expected to be capable of
evaluating the rights of transactions in penny stock; and (iii) deliver to
the person a written statement setting forth the basis on which the broker or
dealer made the determination required by paragraph (ii) in this section,
stating in a highlighted format that it is unlawful for the broker or dealer
to effect a transaction in a designated security subject to the provisions of
paragraph (ii) of this section unless the broker or dealer has received,
prior to the transaction, a written agreement to the transaction from the
person; and stating in a highlighted format immediately preceding the
customer signature line that the broker or dealer is required to provide the
person with the written statement and the person should not sign and return
the written statement to the broker or dealer if it does not accurately
reflect the person's financial situation, investment experience and
<PAGE>12
investment objectives and obtain from the person a manually signed and dated
copy of the written statement. A penny stock means any equity security
other than a security (i) registered, or approved for registration upon
notice of issuance on a national securities exchange that makes transaction
reports available pursuant to 17 CFR 11Aa3-1 (ii) authorized or approved for
authorization upon notice of issuance, for quotation in the NASDAQ system;
(iii) that has a price of five dollars or more or . . . . (iv) whose issuer
has net tangible assets in excess of $2,000,000 demonstrated by financial
statements dated less than fifteen months previously that the broker or
dealer has reviewed and has a reasonable basis to believe are true and
complete in relation to the date of the transaction with the person.
Consequently, the rule may affect the ability of broker-dealers to sell the
Company's securities and also may affect the ability of purchasers in this
Offering to sell their shares in the secondary market. See "Market for
Registrant's Common Equity and Related Stockholder Matters - Broker-Dealer
Sales of Company's Securities."
SELLING SECURITY HOLDERS
The Company shall register pursuant to this prospectus 2,219,041 Common
Shares currently outstanding for the account of the following individuals or
entities. The percentage owned prior to and after the offering reflects all
of the then outstanding common shares. The amount and percentage owned
after the offering assumes the sale of all of the Common Shares being
registered on behalf of the selling shareholders.
<TABLE>
<CAPTION>
Name and Amount Total Number % Owned Number of % Owned
Being Registered Owned Prior to Shares Owned After
Currently Offering After Offering Offering
<S> <C> <C> <C> <C>
Stacy Haskins - 15,478 15,478 .25% 0 0%
Martin Petri - 15,478 15,478 .25% 0 0%
Michael Szeremeta -15,477 15,477 .25% 0 0%
The Argus Group<F1> - 700 7,000 .11% 6,300 .10%
Sines-Forte Partnership<F2>
126,190 1,261,900 20.42% 1,135,710 17.80%
Cheryl Forte - 25,461<F3> 254,610 4.52% 229,149 3.99%
Cheryl & Steve Forte
- 4,512<F4> 45,122 .83% 40,610 .64%
Richard S. Huson
- 312,229 2,661,589 43.78% 2,349,360 36.82%
Leonard A. Hale - 15,478 15,478 .25% 0 0%
David A. Krise - 91,910 91,910 1.44% 0 0%
Norman G. Kelln<F5>
- 11,362 113,628 1.78% 102,266 1.60%
John F. Curran - 10,193 10,193 .16% 0 0%
Randy D. Sines<F6>
- 25,461 254,610 3.99% 229,149 3.59%
David E. Sampson<F7>-4,096 40,955 .64% 36,859 .58%
Jay Willoughby - 50,000 50,000 .81% 0 0%
David Goldsmith - 50,000 50,000 .81% 0 0%
C. Culver Smith - 30,000 30,000 .49% 0 0%
Don Ludwick - 20,000 20,000 .32% 0 0%
William Martin - 10,000 10,000 .15% 0 0%
Adam Chase - 10,000 10,000 .15% 0 0%
Adam W. Jaslow - 30,000 30,000 .49% 0 0%
Jennifer L. Jaslow-50,000 50,000 .81% 0 0%
Jennifer L. Jaslow Trust
- 50,000 50,000 .81% 0 0%
John Horstmann - 6,000 6,000 .11% 0 0%
Richard S. Jaslow, IRA
- 100,000 100,000 1.62% 0 0%
Lori K. Jaslow Trust
- 20,000 20,000 .32% 0 0%
Adam Jaslow Trust - 70,000 70,000 1.24% 0 0%
John Plati - 20,000 20,000 .32% 0 0%
Doris Ljubicich - 3,400 3,400 .06% 0 0%
Joseph Hroncich - 3,000 3,000 .05% 0 0%
John S. Cole - 3,000 3,000 .05% 0 0%
Vito Bavaro - 3,000 3,000 .05% 0 0%
Lori K. Jaslow, Trust
- 80,000 80,000 1.29% 0 0%
Kevo Plumbing & Heating
- 10,000 10,000 .15% 0 0%
Tami L. Dirienzo - 6,000 6,000 .11% 0 0%
Peter Jankowski - 10,000 10,000 .15% 0 0%
Renaldo C. Forcellati - 3,000 3,000 .05% 0 0%
Frank Stein - 3,000 3,000 .05% 0 0%
Joan Carranza - 3,000 3,000 .05% 0 0%
Joseph Criscione Sr. - 3,000 3,000 .05% 0 0%
Paul M. Reichenberg - 6,000 6,000 .11% 0 0%
Kathleen M. Mahaffey - 3,000 3,000 .05% 0 0%
Balieri Associates <F8> 3,000 3,000 .05% 0 0%
William S. Dean - 6,000 6,000 .11% 0 0%
Pratt, Wylce & Lords, Ltd. <F9>
- 29,100 29,100 .47% 0 0%
Clinton Clark - 60,900 60,900 .99% 0 0%
<PAGE>13
Victor & Lana Woinski
- 3,000 3,000 .05% 0 0%
James J. & Sheila Criscione
- 3,000 3,000 .05% 0 0%
Catherine O'Connell - 3,400 3,400 .06% 0 0%
Joseph & Ida Dellaroba
- 3,000 3,000 .05% 0 0%
Mark R. Alleman - 3,000 3,000 .05% 0 0%
William Megnin - 3,400 3,400 .05% 0 0%
James P. Rose - 3,000 3,000 .05% 0 0%
Mark Megnin - 3,000 3,000 .05% 0 0%
Daniel Morgan & Sara
Andelina - 3,010 3,010 .05% 0 0%
Richard P. Keshishian - 3,000 3,000 .05% 0 0%
Robert Jouas - 4,000 4,000 .06% 0 0%
David E. & Margaret Winkelman
- 3,000 3,000 .05% 0 0%
Carl & Birte Mainardi - 3,400 3,400 .06% 0 0%
Mark Megnin & Helen Connor
- 3,400 3,400 .06% 0 0%
Paul S. & Renee Spiegler
- 6,500 6,500 .11% 0 0%
Diana Forcellati - 3,000 3,000 .05% 0 0%
Richard Napolitano - 3,000 3,000 .05% 0 0%
Gaming Venture Corp.U.S.A. <F10>
- 200,000 200,000 3.24% 0 0%
Jeremy B. & W. Stern
- 10,000 10,000 .15% 0 0%
Aldo R. Beretta 1993
Family Trust - 10,000 10,000 .15% 0 0%
Dr. David Adelberg - 10,000 10,000 .15% 0 0%
Michael Schaeffer - 10,000 10,000 .15% 0 0%
Joseph & Julie Vaccaro
- 7,000 7,000 .11% 0 0%
George & Selma Spiegler
- 3,000 3,000 .05% 0 0%
Susan Jaslow - 50,000 50,000 .81% 0 0%
Maria Cunha IRA - 8,500 8,500 .15% 0 0%
Henry and John Horstmann
- 8,000 8,000 .14% 0 0%
Antonio Tommolillo - 3,000 3,000 .05% 0%
Salvatore LaCognata - 3,000 3,000 .05% 0 0%
Harry & Adele Conti - 3,000 3,000 .05% 0 0%
Nicola Attanasio - 5,000 5,000 .09% 0 0%
Lawrence Mendosa - 5,000 5,000 .09% 0 0%
Janet Ausiello - 5,000 5,000 .09% 0 0%
Michael Ausiello - 5,000 5,000 .09% 0 0%
Mark Malzberg - 6,000 6,000 .11% 0 0%
Laura Giostra - 6,700 6,700 .11% 0 0%
David Lupo - 3,000 3,000 .05% 0 0%
Peter O'Hare, Jr. - 4,000 4,000 .07% 0 0%
Giovanni Granata - 3,000 3,000 .05% 0 0%
Mario Tommolillo - 4,000 4,000 .07% 0 0%
Jeffrey Kerne - 6,000 6,000 .11% 0 0%
Gino Ramundo - 6,000 6,000 .11% 0 0$
Evelyn Alleman - 3,000 3,000 .05% 0 0%
Thelma Zube - 3,400 3,400 .06% 0 0%
Vincent & F. Ponte - 6,667 6,667 .11% 0 0%
Laura Giostra - 6,700 6,700 .11% 0 0%
Philip & Concetta Vincenti
- 6,800 6,800 .11% 0 0%
Andrew Lesnak - 3,400 3,400 .06% 0 0%
Susan Miller - 6,700 6,700 .11% 0 0%
Uphill c/o Paul Scott
- 9,400 9,400 .17% 0 0%
Martin Feldman - 3,400 3,400 .06% 0 0%
Mark DeLorenzo - 3,000 3,000 .05% 0 0%
Steven Blad<F11> - 1,000 10,000 .15% 9,000 .14%
Micro Cap World, L.L.C.<F12>
- 10,000 10,000 .15% 0 0%
Jay L. King<F13> - 2,500 25,000 .40% 22,500 .35%
Jayport Holdings, Inc. (BUI)<F14>
- 20,339 20,339 .33% 0 0%
Glenn Fine - 30,000 30,000 .49% 0 0%
Casino Journal of Nevada, Inc.<F15>
- 20000 20,000 .32% 0 0%
Robert Smith - 6,000 6,000 .11% 0 0%
John Wasden - 5,000 5,000 .09% 0 0%
Althea Duggins - 1,000 1,000 .02% 0 0%
James Beard - 1,000 1,000 .02% 0 0%
Michele Gilbert - 10,000 10,000 .15% 0 0%
Thomas DiSalvatore - 90,000 90,000 1.46% 0 0%
</TABLE>
[FN]
<F1> The Argus Group is controlled by Glen (Tom) Pickell). Mr. Pickell is
currently an officer and director of the Company.
<PAGE>14
<F2> Randy Sines, a former officer and director of the Company and Steven
Forte, a current officer and director of the Company are general partners of
Sines-Forte Partnership.
<F3> Cheryl Forte is married to Steven Fortes, a director of the
Company.
<F4> Steve Forte is a director of the Company.
<F5> Norman G. Kelln is a director of the Company.
<F6> Randy Sines was an officer and director of the Company.
<F7> David Sampson is a director of the Company.
<F8> Balieri Associates is not affiliated with the Company or its officers
and directors and the Company does not know the principals of Balieri
Associates
<F9> Timothy Miles and Alan Schafler are the principals of Pratt, Wycle &
Lords, Ltd.
<F10> Alan Woinski and Kim Santangelo-Woinski are the principals of Gaming
Venture Corp., U.S.A.
<F11> Steven Blad is an officer of the Company.
<F12> Clinton Clark is the principal of Micro Cap World, L.L.C.
<F13> Jay L. King is an officer and director of the Company.
<F14> Jayport Holdings, Inc. is not affiliated with the Company or its
officers and directors and the Company does not know the principals of
Jayport Holdings, Inc.
<F15> Glenn Fine is the principal of Casino Journal of Nevada, Inc.
The Company shall register pursuant to this prospectus the 200,000 Common
Shares underlying the Class A Warrants currently outstanding for the account
of the following individuals or entities. The percentage owned prior to and
after the offering reflects all of the then outstanding Class A Warrants.
The amount and percentage owned after the offering assumes the exercise of
all of the Class A Warrants and sale of underlying Common Shares being
registered on behalf of the selling shareholders.
<TABLE>
<CAPTION>
Name and Amount Total Number % Owned Number of % Owned
Being Registered Owned Prior to Warrants Owned After
Currently Offering After Offering Offering
<S> <C> <C> <C> <C>
Norman G. Kelln 5,717 2.86% 0 0%
Sines/Forte Partnership<F1> 63,492 31.75% 0 0%
Cheryl Forte<F2> 30,421 15.21% 0 0%
David Sampson 1,557 .78% 0 0%
Randy Sines 30,421 15.21% 0 0%
Richard Huson 51,586 25.79% 0 0%
Stacey Haskins 779 .39% 0 0%
Martin Petri 779 .39% 0 0%
Michael Szeremeta 779 .39% 0 0%
Leonard Hale 779 .39% 0 0%
David Krise 4,624 2.31% 0 0%
John F. Curran 513 .26% 0 0%
Jay Willoughby 2,516 1.26% 0 0%
David M. Goldsmith EVP Director
Buchingham Research Group 2,516 1.26% 0 0%
C. Culver Smith 1,509 .75% 0 0%
Don Ludwick 1,006 .50% 0 0%
William Martin 503 .25% 0 0%
Adam Chase 503
</TABLE>
[FN]
<F1>Randy Sines and Steve Forte are General Partners of Sines-Forte
partnership and would be deemed to be beneficial owners of the 63,492 Class A
Warrants shown above.
<F2>Steve Forte is married to Cheryl Forte and would be deemed to be a
beneficial owners of the 30,421 Class A Warrants shown above.
The Company shall register pursuant to this prospectus the 200,000 Common
Shares underlying the Class B Warrants currently outstanding for the account
of the following individuals or entities. The percentage owned prior to and
after the offering reflects all of the then outstanding Class B Warrants.
The amount and percentage owned after the offering assumes the exercise of
all of the Class B Warrants and sale of underlying Common Shares being
registered on behalf of the selling shareholders.
<TABLE>
<CAPTION>
Name and Amount Total Number % Owned Number of % Owned
Being Registered Owned Prior to Warrants Owned After
Currently Offering After Offering Offering
<S> <C> <C> <C> <C>
Norman G. Kelln 5,717 2.86% 0 0%
Sines/Forte Partnership<F1> 63,492 31.75% 0 0%
Cheryl Forte<F2> 30,421 15.21% 0 0%
David Sampson 1,557 .78% 0 0%
Randy Sines 30,421 15.21% 0 0%
Richard Huson 51,586 25.79% 0 0%
Stacey Haskins 779 .39% 0 0%
<PAGE>15
Martin Petri 779 .39% 0 0%
Michael Szeremeta 779 .39% 0 0%
Leonard Hale 779 .39% 0 0%
David Krise 4,624 2.31% 0 0%
John F. Curran 513 .26% 0 0%
Jay Willoughby 2,516 1.26% 0 0%
David M. Goldsmith EVP Director
Buchingham Research Group 2,516 1.26% 0 0%
C. Culver Smith 1,509 .75% 0 0%
Don Ludwick 1,006 .50% 0 0%
William Martin 503 .25% 0 0%
Adam Chase 503 .25% 0 0%
</TABLE>
[FN]
<F1>Randy Sines and Steve Forte are General Partners of Sines-Forte
Partnership
and would be deemed to be beneficial owners of the 63,492 Class B Warrants
shown above.
<F2>Steve Forte is married to Cheryl Forte and would be deemed to be a
beneficial owners of the 30,421 Class B Warrants shown above.
The Company shall register pursuant to this prospectus the 250,000 Common
Shares underlying the Class C Warrants currently outstanding for the account
of the following individuals or entities. The percentage owned prior to and
after the offering reflects all of the then outstanding Class C Warrants.
The amount and percentage owned after the offering assumes the exercise of
all of the Class C Warrants and sale of underlying Common Shares being
registered on behalf of the selling shareholders.
<TABLE>
<CAPTION>
Name and Amount Total Number % Owned Number of % Owned
Being Registered Owned Prior to Warrants Owned After
Currently Offering After Offering Offering
<S> <C> <C> <C> <C>
Norman G. Kelln 7,146 2.86% 0 0%
Sines/Forte Partnership<F1> 79,385 31.75% 0 0%
Cheryl Forte<F2> 38,026 15.21% 0 0%
David Sampson 1,947 .78% 0 0%
Randy Sines 38,026 15.21% 0 0%
Richard Huson 64,483 25.79% 0 0%
Stacey Haskins 973 .39% 0 0%
Martin Petri 973 .39% 0 0%
Michael Szeremeta 973 .39% 0 0%
Leonard Hale 973 .39% 0 0%
David Krise 5,781 2.31% 0 0%
John F. Curran 641 .26% 0 0%
Jay Willoughby 3,145 1.26% 0 0%
David M. Goldsmith EVP Director
Buckingham Research Group 3,145 1.26% 0 0%
C. Culver Smith 1,667 .75% 0 0%
Don Ludwick 1,258 .50% 0 0%
William Martin 629 .25% 0 0%
Adam Chase 629 .25% 0 0%
</TABLE>
[FN]
<F1>Randy Sines and Steve Forte are General Partners of Sines-Forte
Partnership and would be deemed to be beneficial owners of the 79,365 Class C
Warrants shown above.
<F2>Steve Forte is married to Cheryl Forte and would be deemed to be a
beneficial owners of the 38,026 Class C Warrants shown above.
- --------------------------------------------------------------
SOURCE AND USE OF PROCEEDS
- --------------------------------------------------------------
If the maximum amount of securities is sold in the offering, the Company
shall have net proceeds of $588,080 after the payment of commissions of
$35,000 and offering expenses of $41,920. The Company shall utilize the
net proceeds from the sale of its Common Shares for working capital,
including (approximately)
Building of product inventory $100,000
Research and development
to expand the current product line 50,000
Development of new products 50,000
Employee compensation 300,000
Other 88,080
-----------
$588,080
If substantially less than the maximum proceeds is raised, the priority for
the use of proceeds is i) to expand sales of current products; ii) to
increase inventory levels of current products; and iii) to develop new
products. The proceeds are anticipated to be utilized over a six month
period.
<PAGE>16
Securities are being registered on behalf of the selling security holders and
the Company will not receive any cash or other proceeds in connection with
the subsequent sale.
Any proceeds received from the subsequent exercise of the A, B or C Warrants
shall be used as working capital and to expand operations. Due to the
uncertainty of the timing and amount of actual funds which may be received
upon exercise of the Warrants, no specific breakdown of uses have been
established by the Company. The aggregate amount of proceeds if all of the
Warrants are exercised is $4,000,000. If all of the A, B or C Warrants are
exercised, the proceeds shall be utilized over a two year period.
- -------------------------------------------------------
DILUTION
- -------------------------------------------------------
Dilution. Assuming completion of maximum offering amount, there will
be a total of 6,379,944 Common Shares outstanding. The following table
illustrates the per Share dilution as of the date of this Prospectus, which
may be experienced by investors upon reaching the maximum offering.
Offering price $3.50
Net tangible book value per
Share before offering (.0930)
Increase per Share .
attributable to investors ------
Pro forma net tangible
book value per Common
Share after offering .002
-----
Dilution to investors 3.498
Dilution as a percent of
offering price 99.94%
Comparative Per Common Share Data.
<TABLE>
Maximum Offering Amount
Total Price
Number of Paid Per Consider-
Shares % Share ation Paid %
<C> <S> <S> <S> <S> <S>
Existing Shareholders 6,179,944 96.87% $ .64 3,953,315 84.96%
New Investors
of Common Shares 200,000 3.13% $3.50 700,000 15.04%
</TABLE>
Further Dilution. The Company may issue additional restricted Common Shares
pursuant to private business transactions. Any sales under Rule 144 after
the applicable holding period may have a depressive effect upon the market
price of the Company's Common Shares and investors in this offering upon
conversion. See "SALES OF STOCK PURSUANT TO RULE 144."
- -------------------------------------------------------
THE COMPANY
- -------------------------------------------------------
The Company. The Company was incorporated in the State of Washington on
September 20, 1995. The Company's principal offices are located at 3909 South
Maryland Parkway, Suite 311, Las Vegas, Nevada 89119. Its telephone number
at such address is (702) 733-7195. These offices consist of 2,100 square
feet on a month to month lease with a lease payment of $2,800 per month.
The Company's operations are the development and marketing of certain gaming
products and concepts invented and developed by Sines-Forte, and others,
which are indirectly affiliated with the Company.
The Company intends to sell or lease its products to the world-wide gaming
industry directly, or through subcontracts with non-affiliated manufacturers.
The Company is in the process of negotiating distribution and marketing
arrangements for its products, but has no significant history of operations
and no profits.
Products. The Company currently has four different types of products and is
considering variations of said products:
(i) Random Ejection Shuffler - an automatic, multi-deck card
shuffler. The machine can shuffle up to six decks of playing cards. The
shuffler shall lease for approximately $10-15 per day. Additionally, the
Company intends to offer a maintenance contract for approximately $50 per
month which would include annual refurbishing of the Random Ejection
Shuffler. The sales price of the shuffler is in the process of being
determined. There have been five proto types built and tested. The first
production run is complete and parts have been ordered for the second, much
larger run.
<PAGE>17
(ii) Fantasy 21 Table Game - a jackpot table game variation of
Casino 21. This game incorporates a jackpot and bonus payment schedule
based on consecutive player high hands (counts of 20 or 21) or dealer busts,
allowing players to win very large jackpots while playing the traditional
game and wagering minimum side bets or antes. The game utilizes a modern
version of the traditional table layout and features an electronic tracking
and display system that documents each player's progress toward the jackpots.
As few as three successive high hands are required to win the smallest
jackpot and eleven successive high hands for the super jackpot. As a
result of the ante structure, simplicity of operation and probable patterns
of play, the casino's profit potential can be significantly higher than that
of the traditional game. The Fantasy 21 Table Game may be leased at the
basis of approximately $400 per month. The Company has five pre-production
units of the Fantasy 21 Table Game which were assembled on October 13, 1997
and are being used for sales demonstrations and field testing. Parts for
the production run of Fantasy 21 Table Game have been ordered.
(iii) Safety Peek Card - a new type of Casino 21 playing card. This
product features a new playing card design which eliminates the holecard
problem in the game of Casino 21 when used with a modified form of the
classic peeking action. In the game of Casino 21, if the dealer is showing
an ace of face card, they will generally peek at the hole or down card.
With this peeking action, there is the chance of players seeing the hole card
and adjusting their bets accordingly. With the patented card design of the
Safety Peek Card, the dealer, by peeking at the opposite corner (which is
considered a modified form of peeking action) can determine if the hole card
is an ace without showing any card value. The Safety Peek Card, a new type of
casino playing card, is already in use and is under distribution agreements
with selected playing cards distributor.
(iv) SecureDrop coin box system - An electronic method to accurately
track the number of coins in a slot machine when the funds are transferred
from the machine, counted and later deposited with a banking institution.
This product was not developed internally by the Company, but has been
exclusively licensed from an outside developer in an agreement dated October
10, 1997. The SecureDrop is in advanced development stages, with one
working prototype available. Based on information from the developer, the
Company expects to receive initial production units of the SecureDrop around
January 1, 1998.
Proprietary Technology. The Company's products are protected under various
pending patents, patents, copyrights and trademarks.
All patent applications filed before June 8, 1995 will have a term which is
either 17 years from the date of issue or 20 years from the filing date (or
priority date). U.S. patent applications filed on or after June 8, 1995
have a term of 20 years from the filing date of the application or filing
date of any parent patent application upon which priority is claimed.
Design patents have a term of 14 years from the issue date. utility patents
require maintenance fees be paid to have the full term. The term of patents
may vary depending upon other consideration in special cases.
The Safety Peek Playing cards patent claims are directed at both the novel
playing cards and methods for playing blackjack using the novel playing
cards.
Title: Cards and Methods for Playing Casino 21 or Blackjack
Status: Issued U.S. Patent
Serial No: 08/165,302
Filing Date: December 9, 1993
Patent No: 5,403,015
Issue Date: April 4, 1995
Title: Cards and Methods for Playing Blackjack
Status: issued U.S. Patent
Serial No: 08/353,526
Filing Date: December 8, 1994
Patent No.: 5,518,249
Issue Date: May 21, 1996
Title: Blackjack Card Deck
Status: Issued U.S. Design Patent
Serial No: 29/028,882
Filing Date: September 23, 1994
Patent No. Des. 366,503
Issue Date: January 23, 1996
Patents for the Playing Card Shuffling Machine have been applied for and
their status is as follows:
Title: Playing Card Shuffler
Status: Pending U.S. Patent Application - case has been allowed and
issue fee has been paid. Patent is expected at any time.
Serial No: 08/228,609
Filing Date: April 18, 1994
Patent No: Not Issued
Issued Date: Not Issued
<PAGE>18
Title: Playing Card Shuffling Machines and Methods
Status: Issued U.S. Patent
Serial No: 08/423/408
Filing Date: April 18, 1995
Patent No: 5,584,483
Issue Date: December 17, 1996
Title: Playing Card Shuffling Machines and Methods
Status: Pending Canadian Patent Application
Serial No. 2,188,137
Filing Date April 18, 1995 (International Filing Date)
Patent No. Not issued
Issue Date: Not issued
Title: Playing Card Shuffling Machines and Methods
Status: Pending European Patent Application
Serial No: 95916434.4
Filing Date: April 18, 1995 (International Filing Date)
Patent No: Pending European Patent Application
Issue Date: Not issued
Title: Playing Card Shuffling Machines and Methods
Status: Pending Australian Patent Application
Serial No: 22936/95
Filing Date: April 18, 1995 (International Filing Date)
Patent No: Not issued
Issue Date: Not issued
The Blackjack Game System and Methods patent claims are as follows:
Title: Blackjack Game System and Methods
Status: Pending application
Serial No: 08/242,229
Filing Date: May 13, 1994
Patent No: Not issued
Issue Date: Not issued
Title: Blackjack Game System and Methods
Status: Issued Patent
Serial No: 08/439,687
Filing Date: May 12, 1995
Patent No: 5,586,766
Issue Date: December 24, 1996
Title: Blackjack Game System and Methods
Status: Pending Canadian patent application
Serial No: 2190266
Registration #1483441 and #1483442
Filing Date: November 13, 1996
Patent No: Not issued
Issue Date: Not issued
Title: Blackjack Game System and Methods
Status: Pending European patent application
Serial No: 95920444.7
Filing Date: May 12, 1995
Patent No: Not issued
Issue Date: Not issued
Title: Blackjack Game System and Methods
Status: Pending Australian patent application
Serial No: 25892/95
Filing Date: November 12, 1996
Patent No: Not issued
Issue Date: Not issued
Title: Blackjack Game System and Methods
Status: Pending Patent Cooperation Treaty patent application
Designates about 80 foreign countries for possible patents
Serial No: PCT/US95/12908
Filing Date: October 13, 1995
Patent No: not issued
Issue Date: Not issued
The Company has applied for the following additional patents:
Title: Slot Machine and Methods of Operation
Status: Pending U.S. Patent Application
Serial No: 08/60317
Filing Date: 2/2/96
Patent No: Not issued
Issue Date: Not issued
Title: Drop Slot Game Machine
Status: Pending U.S. Patent Application
Serial No: 08/649821
Filing Date: 5/17/96
Patent No: Not issued
Issue Date: Not issued
<PAGE>19
Title: Blackjack Game System and Methods
Status: unknown
Serial No: 08/798642
Filing Date: 2/11/97
Patent No: Not issued
Issue Date: Not issued
Title: Slot Machine and Methods of Operation
Status: Pending Patent Cooperation Treaty patent application
Designates about 80 foreign countries for possible patents
Serial No: PCT/US96/02157
Filing Date: 2/20/96
U.S. trademark registrations issued or renewed prior to November 16, 1989
remain in force for 20 years from their date of issue or renewal. Those
U.S. trademark registrations issued or renewed on or after November 16, 1989
have a term of 10 years unless canceled or surrendered. The Company has
made and received the following trademarks.
Mark: SAFETY PEEK
Status: Registered U.S. trademark
Serial No: 74/640,372
Filing Date: February 21, 1995
Reg. No: 1,944,346
Reg. Date: December 26, 1995
Mark: FANTASY 21
Status: Pending U.S. Trademark Application
Serial No: 74/456,337
Filing Date: November 3, 1993
Reg. No: Not yet registered
Reg. Date: Not yet registered
Mark: CASINOVATIONS
Status: Pending U.S. Trademark Application
Serial No: 74/640,371
Filing Date: February 21, 1995
Reg. No: Not yet registered
Reg. Date: Not yet registered
Proprietary information is available to investors upon signature of a Non-
Disclosure Agreement.
Research and Development. Prior to the incorporation of the Company and to
date, most of the time and effort of the Company has been spent on research
and product development. The Company or its predecessors incurred research
and development costs aggregating $244,117 and $436,871 for the years ended
December 31, 1996 and 1995, respectively. These funds were expended on
engineering, tooling, parts and other related expenditures. The Company
intends to have a continued emphasis on research and development as funding
and cash flow allow.
Manufacturing. The Company shall manufacture the Random Ejection
Shuffler and Fantasy 21 through Western Electronics Corporation, an
independent third party supplier. The Safety Peek Card is currently being
manufactured by the George C. Mattheson Company ("GEMACO"), and distributed
to the U.S. Playing Card Company.
Production. It is anticipated that the actual production for the Random
Ejection Shuffler and Fantasy 21 will be subcontracted to Western Electronics
Corporation in Boise, Idaho, a contract manufacturing company.
Packaging and Transportation. The Company shall utilize custom boxes on
which its name, logo and a silk screen of the product itself will be printed.
It is expected that transportation will be by UPS ground or a similar carrier
in the continental United States, and by other arrangements as appropriate.
Initial installations will be made by the Company's sales and/or service
personnel, or, if distributors are used, by their sales and service
personnel.
Service and Maintenance Policy. The Company intends to establish
appropriate service capabilities for each product in each market it services,
either through its distributors or with in-house personnel.
Marketing. The Company shall market and distribute its products in one of
three ways, depending upon the regulatory market and the specific product.
(i) Directly by the Company's sales force;
(ii) Through OEM's who incorporate a Company's product into a
product they manufacture; or
(iii) Through distributors with a significant market presence in
one or more regulatory markets.
OEM's, original equipment manufacturers, are manufacturers who build product
to the product owner's specifications and place the owner's name on the
product.
<PAGE>20
Exclusive Distributorship Agreements. The Company currently has an
exclusive distributorship agreement with Sodak Gaming, Inc. The term of the
agreement is Five (5) years. The Company agrees to offer to Sodak a minimum
discount of twenty-five percent (25%) less than the promoted retail price in
Nevada. The territory includes all Indian lands of the United States and
First Nation/Aboriginal Lands in Canada, Deadwood, South Dakota and Miss
Marquette Riverboat and Casino, Marquette, Iowa. The Company also has an
exclusive distributorship agreement with RGB SDN BHD. , a Malaysia
corporation. The term of the agreement is Five (5) years. The Company
agrees to offer to RGB SDN BHD a minimum discount of twenty-five percent
(25%) less than the promoted retail price in Nevada. The territory including
the entire Asian RIM area including but not limited to Malaysia, Singapore,
China, Hong Kong, Korea, Vietnam, Indonesia, Thailand, The Philippines,
Nepal, Cambodia, India, Sri Lanka, Macau, Myanmar, Laos, Cruise Ships based
in Malaysia, Singapore & Hong Kong and the Islands in the Asian areas. The
territory specifically excludes Japan, Australia and New Zealand which will
be treated as common distributor areas. Additionally, the Company has an
exclusive distributorship agreement with B. Joel Rahn (company name to be
designated). The term of the agreement is Five (5) years. The Company
agrees to offer to B. Joel Rahn a minimum discount of twenty-five percent
(25%) less than the promoted retail price in Nevada. The territory consists
of South America, Central America, the Caribbean Islands, the State of
Florida and Cruise Ships worldwide, excluding Cruise Ships based in Malaysia,
Singapore and Hong Kong. The territory consisting of the Bahamas shall be
non-exclusive.
Exclusive Licensing Agreements. The Company has granted joint exclusive
licenses to the George C. Matheson Company ("Gemaco" ) and to The US Playing
Card Company specifically for the Safety Peek Playing Card. The terms of
the Gemaco agreement provides for a royalty of $.04 per deck of playing cards
being paid to the Company on a quarterly basis. Additionally, Gemaco agreed
that during the term of the agreement, it will use .02 on each deck for
promotion and advertising of the product. The US Playing Card Company pays a
royalty of $.075 per deck.
Technology Development Center, LLC, has grant an exclusive license to the
Company relating to its technology known as a "Coin Operating Machine Having
An Electronically Identified Coin Collection Box"....The geographical scope
of the license is the United States of America and all foreign countries.
As consideration for the exclusive license, the Company executed a promissory
note secured by assets of the Company payable to Technology Development
Center, LLC, for $50,000 payable in five monthly installments beginning on
November 14, 1997 and a promissory note secured by the assets of the Company,
payable to Technology Development Center, LLC for $50,000 payable in twelve
monthly installments beginning on April 15, 1998. The Company shall pay a
royalty of $7.50 per each licensed product sold, rented, leased, or otherwise
used for profit, provided that the Company receives a net compensation in
excess of $7.50 for each Product Development and Ownership History. Sines-
Forte, a general partnership formed in September, 1993 owned the rights to
currently existing patents and trademarks to a variety of gaming devices,
including the Safety Peek Playing Cards, Fantasy 21 and the Random Ejection
Card Shuffler.
Pursuant to the terms of a financing agreement dated January 15, 1996 between
the Company, Sines-Forte and Sharps International Limited Partnership
("Sharps") which initially held exclusive rights to manufacture and market
these gaming products and concepts under the terms of a licensing agreement
with Sines-Forte, and certain of their affiliates, substantially all of the
gaming products and concepts owned by Sines-Forte and licensed to Sharps were
transferred and assigned to Sharps. Subsequently, the ownership of these
products/concepts was transferred to the Company as part of the
reorganization transaction.
Sines-Forte and Sharps are or were owned or controlled by persons who are
also directors, executive officers and principal shareholders of the Company.
Effective January 1, 1996, the Company and Sharps concluded a plan of
reorganization whereby all of the outstanding general and limited partnership
interests in Sharps were exchanged for shares of the Company in a tax-free
transaction, at the rate of 5,160 shares of Capital Stock for each unit of
general or limited partnership interest in Sharps. An aggregate of 2,513,000
shares of Capital Stock of the Company were issued to the Sharps' partners in
this transaction. In addition, 1,261,900 shares of Capital Stock were
issued to Sines-Forte in exchange for substantially all of Sines-Forte's
assets and an additional 130,000 shares of Capital Stock were issued to
certain investors at the price of $1.00 per share.
As a consequence of the reorganization transaction, Sharps was liquidated,
and all of its assets and liabilities were assumed by the Company.
Such assets included substantially all of the gaming products and concepts
formerly owned by Sharps, together with certain contractual arrangements
relating to the manufacture and sale of the Safety Peek Playing Cards.
Royalty Agreement with Sines-Forte. Pursuant to the aforementioned
financing agreement, the Company assumed an obligation of Sharps to pay
royalties to Sines-Forte generated from revenues received by the Company on
certain intellectual properties. Sines-Forte is to receive a quarterly
royalty fee of 3% of the net revenues earned by the Company with respect to
certain products and an option to purchase from the Company 40,000 shares of
the Company's common stock at the price of $1.00 per share. Royalties owed
<PAGE>21
in a given period shall not be a credit toward any royalties owed for a past
or future royalty period. The term "Net Revenues" means gross cash revenues
received by the Company for the relevant quarter attributable to the
products, minus the Company's cost of such goods sold for such quarter.
If the Company leases product instead of selling or having others sell in
their behalf, or if leasing of product otherwise occurs under the Agreement,
the Company shall be obligated to pay royalties on the same terms as if the
lease payments are considered to be Net Revenues. Such treatment of leasing
for determination of royalties shall not apply where a third party pays the
Company and acts as a financial leasing agent or where the Company actually
receives payments on a basis other than the actual lease payments. In such
cases, royalties are determined based on the amount and timing of payments
received by the Company and not those received by any financing and leasing
organization.
Employees. As of the date of this Prospectus, the Company has four full time
and two part time employees. See "RISK FACTORS."
The Company will, as operations demand, sub-contract the balance of its
personnel through independent contractors or hire additional employees.
Competition. There is significant competition in the gaming industry. The
Company competes with established companies and other entities (many of which
possess substantially greater resources than the Company). Almost all of
the companies with which the Company competes are substantially larger, have
more substantial histories, backgrounds, experience and records of successful
operations, greater financial, technical, marketing and other resources, more
employees and more extensive facilities than the Company now has, or will
have in the foreseeable future. It is also likely that other competitors
will emerge in the near future. There is no assurance that the Company will
continue to compete successfully with other established gaming product
manufacturers. The Company shall compete on the basis of quality and price.
Inability to compete successfully might result in increased costs, reduced
yields and additional risks to the investors herein.
Regulation. The gaming industry is a highly regulated industry and is
subject to numerous statutes, rules and regulations administered by the
gaming commissions or similar regulatory authorities of each jurisdiction.
Generally, the Company and other entities which seek to introduce gaming
products or concepts into such jurisdictions may be required to submit
applications relating to their activities or products (including detailed
background information concerning controlling persons within their
organization) which are then reviewed for approval. The Company may incur
significant expenses in seeking to obtain licenses for its gaming products
and concepts, and no assurance can be given that its products will be
approved in any particular jurisdiction. A failure to obtain such approval
in any jurisdiction in which the Company may seek to introduce its products
or concepts, could have a material adverse effect on the Company's business.
- -----------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- ----------------------------------------------------------------
Trends and Uncertainties. Demand for the Company's products will be
dependent on, among other things, general economic conditions which are
cyclical in nature. Inasmuch as a major portion of the Company's activities
is the manufacture and sale of gaming products and concepts, new technologies
may reduce and/or restrict the Company's activities.
In addition, the outcome of this offering is uncertain. The lack of sales of
this offering would negatively impact the Company's ability to successfully
continue operations.
Capital and Source of Liquidity. The Company currently has no material
commitments for capital expenditures. The Company has planned expenditures
of $900,000 for the cost of sales and $140,000 for additional tooling costs
of manufacturing the Random Ejection Shuffler. These costs will be less if
the sales projections are not met. The Company intends to use a majority of
the proceeds of this offering to make a portion of the proposed expenditures.
If this offering is not successful, the Company's cash flow will be
negatively effected if the expenditures are
The Company has commitments under its consulting agreements and employment
agreements. The payments to Mr. Blad of $12,500 per month plus commissions
of 3.73% on the gross margin received by the Company on its product sold
though sales arranged and completed primarily by the efforts of Mr. Blad,
$10,000 per month to Mr. Forte, and $7,500 per month for Mr. King will
negatively impact the liquidity of the Company.
The Company shall attempt to develop business plans, operations and sales
that will permit the Company to be self-supportive 30 to 60 days after
production begins. The funding requirement to complete this time period is
estimated to be between $100,000 and $300,000 and may come in the form of
this offering proceeds, deposits on future sales or debt financing. Based
on the completion of a successful offering subscription and final product
development and refinement, the Company anticipates that the monthly cash
<PAGE>22
flow will be at a break-even point within four months. No additional
capital needs are anticipated. This planning, if effective, would permit
funds raised in this offering, if any, to be used to develop new products in
the next six months.
If the Company has to add a significant amount of capital equipment to
develop an in-house production capacity, this will impact cash flow in a
potentially significant way. The Company expects that the net proceeds from
this offering and the cash flow from operations will be sufficient to allow
the Company to meet the expected growth in demand for its products for at
least the next twelve months. However, there can be no assurance that
sufficient capital will be raised or that future product sales will meet the
Company's growth expectations. Should either of these fail to occur, the
Company may elect to (i) reduce the planned introduction of new products to a
level consistent with its resources or (ii) pursue other financing
alternatives such as loans. The Company is pursuing debt financing and has
received $400,000 to date. Implementation of either of the foregoing options
could delay or diminish the Company's planned growth and adversely affect its
profitability.
For the nine months ended September 30, 1997, the Company acquired plant and
equipment valued at $208,383. The Company had an increase in patents and
trademarks of $18,614. As a result, the Company had net cash used in
investing activities of $226,997 for the nine months ended September 30,
1997.
For the nine months ended September 30, 1996, the Company acquired plant and
equipment valued at $2,600. The Company had an increase in patents and
trademarks of $74,629. As a result, the Company had net cash used in
investing activities of $77,229 for the nine months ended September 30, 1996.
For the year ended December 31, 1996, the Company acquired plant and
equipment valued at $12,969. The Company had an increase in patents and
trademarks of $65,781. As a result, the Company had net cash used in
investing activities of $78,750 for the year ended December 31, 1996.
For the nine months ended September 30, 1997, the Company sold common stock
for cash in the amount of $865,510. The Company received proceeds from
long-term debt of $147,500 and proceeds of shareholder loans of $45,000. The
Company repaid shareholder loans of $20k000 and long-term debt of $39,829. As
a result, the Company had net cash provided by financing activities of
$998,181 for the nine months ended
September 30, 1997.
For the nine months ended September 30, 1996, the Company sold common stock
for cash in the amount of $60,000. The Company received proceeds from
shareholder loans of 647,258. The Company had an increase in amounts due
officers and shareholders of $647,258. As a result, the Company had net
cash provided by financing activities of $1,354,516 for the nine months ended
September 30, 1996.
For the year ended December 31, 1996, the Company sold common stock for cash
in the amount of $887,265. The Company had an increase in stockholder
loans of $630,168. As a result, the Company had net cash provided by
financing activities of $1,517,433 for the year ended December 31, 1996.
Management is of the opinion that its current working capital and anticipated
funds from operations are sufficient to meet its cash requirements for
moderate growth in the year ahead. However, in order to achieve the
Company's plans for growth, additional capital is required.
On a long term basis, liquidity is dependent on increased revenues from
operations, additional infusions of capital and debt financing. The Company
believes that additional capital and debt financing in the short term will
allow the Company to commence its marketing and sales efforts and thereafter
result in revenue and greater liquidity in the long term. However, there can
be no assurance that the Company will be able to obtain additional equity or
debt financing in the future, if at all.
Results of Operations. For the nine months ended September 30, 1997, the
Company has a net loss of $1,964,601. The Company had revenues from card
royalties of $1,928, interest income of $8,204 and the sale of patent rights
of $3,000 for the nine months ended September 30, 1997. The Company had
depreciation and amortization of $18,020 and amortized deferred interest of
$139,500 for the nine months ended September 30, 1997. The Company had an
decrease in accounts receivable of $1,677, a decrease in prepaid expenses of
$724, and a decrease in accounts payable and accrued expenses of $103,894.
The Company issued stock for interest valued at $22,561 and services of
$346,374. For the nine months ended September 30, 1997, the Company had net
cash used in operating activities of $1,284,672.
The Company had general and administrative expenses of $1,154,016. These
expenses consisted of salaries of $239,060, payroll taxes & benefits of
$37,699, travel and entertainment of $190,680, fees to consultants of
$342,283, legal expenses of $44,749, gaming shows of $102,320, rent of
15,167, printing, Video and other of $21,064, and miscellaneous expenses of
$160,994.
<Page 23>
For the nine months ended September 30, 1996, the Company has a net loss of
$649,798. The Company had depreciation and amortization of $9,043 for the
nine months ended September 30, 1996. Due to the commencement of
operations, the Company had an increase in accounts receivable of $1,100 and
an increase in accounts payable of $16,165. The Company issued stock for
services valued at $45,000. For the nine months ended September 30, 1996,
the Company had net cash used in operative activities of $613,771.
For the year ended December 31, 1996, the Company has a net loss of
$1,638,227. The Company had revenues in card royalties of $2,450 and
interest income of $1,803 for the year ended December 31, 1996. The Company
issued stock for services valued at $700,500. Interest added to loan
balances was $23,245. The Company exchanged equipment valued at $2,903 for
services. The Company had depreciation and amortization of $2,553 for the
year ended December 31, 1996. Due to the commencement of operations, the
Company had an increase in accounts receivable of $2,833, an increase in
prepaid expenses of $300, an increase in other assets of $6,119, and increase
in accounts payable of $73,330 and an increase in accrued expenses of
$104,351 for the year ended December 31, 1996. For the year ended December
31, 1996, the Company had net cash used in operative activities of $887,257.
For the year ended December 31, 1996, the Company had general and
administrative expenses of $1,318,327. These expenses consisted of
consulting services valued at $826,824, salaries and wages of $254,200, legal
and accounting of $108,510, development costs of 68,520, reimbursement of
services of $33,497, patent and trademark costs of $27,312, telephone of
$12,880, travel of $24,943, and other miscellaneous expenses of $38,359.
The Company also paid general and administrative expenses of $52,313 to a
related party. Research and development costs to a related party for the
year ended December 31, 1996 was $244,117.
The Company shall seek to maintain low operating and administrative expenses
while expanding operations and increasing the number of distributors and
operating revenues. However, increased marketing expenses will probably
occur in future periods as the Company attempts to further increase its
marketing and sales efforts.
- ---------------------------------------------------------
MANAGEMENT
- ---------------------------------------------------------
Officers and Directors. Pursuant to the Articles of Incorporation, each
Director shall serve until the annual meeting of the stockholders, or until
his successor is elected and qualified. The Company's basic philosophy
mandates the inclusion of directors who will be representative of management,
employees and the minority shareholders of the Company. Directors may only
be removed for "cause". The term of office of each officer of the Company is
at the pleasure of the Company's Board.
The principal executive officers and directors of the Company will be as
follows:
<TABLE>
<CAPTION>
Name Position Term(s) of Office
<S> <C> <C>
Jay L. King, age 50 Vice President From March 12, 1996
of Finance & Controller to present
and Director
Steven Blad, age 45 President and Chief From April 30, 1997
Operations Officer to present
Norman G. Kelln, age 62 Director From March 12, 1996
to present
Glen (Tom) Pickell,
age 52 Director From March 12, 1996
to present
Chief Executive
Officer From Sept. 24, 1996
and President to April 30, 1997
Chairman of the Board
and Chief Executive officer From April 30, 1997
to present
Steven Forte, age 40 Director From March 12, 1996
to present
David Sampson, age 55 Director From March 12, 1996
to present
Mr. Randy Sines resigned as an officer and director of the Company on August
27, 1997.
<PAGE>24
Resumes:
Jay L. King. Mr. King has extensive experience in all phases of financial
management for a variety of companies and circumstances. He was Controller
for Sigma Game, Inc., a manufacturer and developer of electronic based and
software driven gaming machines from December 1994 to October 1995. Mr.
King was consultant to the corporation from November 1995 through February
1996 and elected Vice President of Finance and Controller and Director in
March 1996. He still serves in these positions. From July 1993 to
November 1994, Mr. King was an independent financial consultant and Chief
Financial Officer for I.C. Refreshment Corporation, a startup
beverage company. From 1986 to 1993, Mr. King was director of financial
management for PG&E, a public utility company. Mr. King managed full
financial responsibilities for engineering, construction and manufacturing
business unit.
Mr. King holds a BS in Accounting (1971) and an MBA (1973) from the
University of Utah and is a Certified Public Accountant.
Steven Blad. Mr. Blad was President and Chief Executive Officer of
Flagship Games International from 1987 to July 1991. From July 1991 to
September 1994, Mr. Blad was a consultant for Marketing and Gaming in
Atlanta, Georgia. From October 1994 to September 1996, Mr. Blad was a
consultant for Spintek Gaming Technologies. Mr. Blad joined the Company in
October 1996 as Vice President of Sales and Marketing until April 30, 1997
when he was named President of the Company.
Mr. Blad received a Bachelor of Arts degree in 1973 from Carson Newman. He
obtained a Masters of Arts degree in 1975 from Southern Baptist Graduate
School. From 1975 to 1976, Mr. Blad attended additional graduate studies at
the University of Alabama.
Norman G. Kelln. Mr. Kelln has been President and sole owner of Designed
Devices Co., a Spokane, Washington consulting engineering firm since 1980.
During his career, Mr. Kelln has worked in various engineering capacities for
several well-known companies including RCA, Tally Corporation, Boeing,
Keytronic Corporation and ISC Systems, Inc.
Glen (Tom) Pickell. Mr. Pickell has been President of The Arcus Group, a
financial and management consulting firm he formed since 1989. From 1981 to
1988, Mr. Pickell was Chief Financial Officer and Vice President of Finance
and Administration for Chronicle Broadcasting. Mr. Pickell graduated magna
cum laude with a Bachelor of Science degree in accounting from Golden Gate
University in San Francisco in 1975 and held a CPA certificate in California.
Mr. Pickell also serves as an advisor to Mr. Richard Huson who is a major
shareholder of the Company.
Steven Forte. Mr. Forte is currently the President of his own consulting
company, International Gaming Specialists. In this capacity Mr. Forte
provides consulting assistance in the areas of security, employee
productivity and profitability to casinos throughout the world. Mr. Forte's
recent clients include some of the largest and most successful casino
operations in the world, including Harrahs, Caesar's Palace, The Mirage,
Resorts International and the world's largest casinos in Malaysia and
Austria. Numerous law enforcement agencies have employed his services,
including the FBI and The Royal Canadian Mounted Police.
Mr. Forte is currently a general partner of the Sines-Forte General
Partnership which was formed to hold certain ownership rights and to receive
certain product royalties developed by the two partners. Before entering
the consulting business, Mr. Forte was employed by several different casinos
and is experienced in all aspects of gaming management from
dealer to casino manager. Mr. Forte also gambled professionally for seven
years. He has published several books, articles and video tapes on various
gaming topics.
Steven L. Forte, a consultant to, and an employee and director of the
Company, was convicted of a gambling-related third degree felony in New
Jersey in 1990, and in 1982 pled guilty to a misdemeanor trespass charge
arising from a gambling related charge emanating from Harrah's Casino in
Reno, Nevada. Such convictions could affect the Company's ability to obtain
approval for the licensing of the Company, if required, in any number of
prospective jurisdictions. Were this to occur, Mr. Forte has agreed that he
and the Company would restructure Mr. Forte's relationship with the Company,
and in particular, the terms of Mr. Forte's Personal Services Agreement with
the Company, in order to conform to the gaming requirements of such
jurisdictions.
David Sampson. From August, 1985 to 1991, Mr. Sampson was the owner and
manager of University Bistro in Seattle, Washington. From March 1994 to
April 1996, Mr. Sampson has served as President and Chairman of MITT USA
Corporation, a sporting goods manufacturer. Mr. Sampson joined Rendova
Boats as General Manager and Director of Rendova Boats, L.L.C., a boat
manufacturer located in Olympia, Washington, in October 1996 and still holds
that position. Mr. Sampson received a Bachelor of Science at Oregon State
University in Social Science in 1965. He received a Masters degree in
Political Science from the State University of New York at Buffalo in 1968
and a post-graduate degree from the Pacific Coast Banking School at the
University of Washington.
<PAGE>25
Remuneration. The following table sets forth certain summary information
concerning the total remuneration paid or accrued by the Company, to or on
behalf of the Company's Chief Executive Officer and the Company's four most
highly compensated executive officers determined as of the end of each of the
last three years.
SUMMARY COMPENSATION TABLE
</TABLE>
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
<S> <C> <C> <C> <C> <C> <C> <C>
<C>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other ALL
Name Annual Restricted LTIP Other
and Compen- Stock Options/ Pay-
compen-
Principal Salary Bonus sation Awards SARs Outs
sation
Position(1) Year ($) ($) ($) ($) ($) ($) ($)
Randy Sines 1994 - - - - - - -
President 1995 - - - - - - -
1996 40,000 (2) (2) (2) - - -
David E. Sampson 1994 - - - - - - -
Vice President 1995 - - - - - - -
1996 15,000 - - - - - -
Jay King 1994 - - - - - - -
Vice President 1995 - - - - - - -
1996 73,750 12,500 10,200 - - - -
Steven Blad 1994 - - - - - - -
President 1995 - - - - - - -
1996 - - - - - -27,750<F1>
Glen (Tom) Pickell 1994 - - - - - - -
President 1995 - - - - - - -
1996 - - - - - -20,479<F1>
</TABLE>
(1) Affiliated entities of current officers and directors received
compensation in fiscal year ended December 31, 1996. The Arcus Group
controlled by Glen (Tom) Pickell provides management consulting services to
the Company and received $20,479, Gametek controlled by Steven J. Blad
provides sales, marketing and management consulting services to the Company
received $27,750 and Designed Devices, Co. controlled by Norman Kelln
provides engineering and management consulting services to the Company
received $302,551.
(2) Effective January 15, 1996, the Company, Sines-Forte, Randy D. Sines,
Steven L. Forte, Cheryl L. Forte and Richard S. Huson entered into a series
of transactions to provide additional financing to Sharps. Mr. Huson is a
major shareholder of the Company; Mr. Sines is a director and was president
of the Company and a partner of Sines-Forte; Mr. Forte is a consultant to,
employee and a director of the Company, and a partner of Sines-Forte; and
Cheryl L. Forte is the spouse of Steven L. Forte.
Employment and Personal Services Agreements. Mr. Forte entered into a
Personal Service Agreement with the Company providing for monthly
compensation to each of $10,000 per month on a pro rata basis for time worked
and restricting either from competing, directly or indirectly with the
Company during the terms of the agreements and for a period of two years
thereafter, or from using trade secrets or other proprietary information of
the Company except in furtherance of the Company's business. The personal
service agreements will be terminable by the Company for cause (which is
defined to include breach of the agreement; deception; fraudulent, dishonest
or illegal acts; the failure or refusal to carry out the reasonable
directions of the board of directors; or a willful failure or refusal to
comply in any material respect with the reasonable policies or procedures of
the Company), or without cause (in which event the terminated individual will
be entitled to six months' compensation).
The Company entered into an employment agreement with Jay L. King, effective
January 1, 1997 for a term of two years. At the expiration date of this
agreement, it shall be considered renewed for regular successive periods of
one year terms unless either party submits a notice of termination thirty
days prior to the end of the preceding period. Mr. King receives a monthly
base salary of $7,500 and shall be entitled to a quarterly bonus in an amount
not to exceed $2,500 per month upon the Company achieving its goals as set by
the Board of Directors, upon the fulfillment of the Employees duties and the
Company achieving its goals. Additionally, Mr. King shall receive stock
options to purchase up to 150,000 Common Shares of the Company at $1.50 per
Common Share I) 50,000 Common Shares upon successful completion of the SB-2,
ii) 50,000 Common Shares upon Mr. King fulfilling his obligations and the
Company reaching its goals for 1997 and iii) 50,000 Common Share upon Mr.
King fulfilling his obligations and the Company reaching its goals for 1998.
<PAGE>26
Board of Directors Compensation. Members of the Board of Directors will
receive $500 per meeting if said Directors are not separately compensated by
the Company and will be required to attend a minimum of four meetings per
fiscal year. All expenses for meeting attendance or out of pocket expenses
connected directly with their Board representation will be reimbursed by the
Company. No differentiation is made in the compensation of "outside
Directors" and those officers of the Company serving in that capacity.
The Company has obtained Directors and Officers Insurance. Pursuant to the
policy with National Union Fire Insurance Company, the coverage includes
Company reimbursement and sections action claims entity coverage. The
coverage has a $1,000,000 aggregate limit of liability in each policy year
(inclusive of defense costs) and there is a retention of $25,000 for each
claim.
Conflicts of Interest Policy. The Company has adopted a policy that any
transactions with directors, officers or entities of which they are also
officers or directors or in which they have a financial interest, will only
be on terms consistent with industry standards and approved by a majority of
the disinterested directors of the Company's Board of Directors. The Bylaws
of the Company provide that no such transactions by the Company shall be
either void or voidable solely because of such relationship or interest of
directors or officers or solely because such directors are present at the
meeting of the Board of Directors of the Company or a committee thereof which
approves such transactions, or solely because their votes are counted for
such purpose if: (i) the fact of such common directorship or financial
interest is disclosed or known by the Board of Directors or committee and
noted in the minutes, and the Board or committee authorizes, approves or
ratifies the contract or transaction in good faith by a vote for that purpose
without counting the vote or votes of such interested directors; or (ii) the
fact of such common directorship or financial interest is disclosed to or
known by the shareholders entitled to vote and they approve or ratify the
contract or transaction in good faith by a majority vote or written consent
of shareholders holding a majority of the Common Shares entitled to vote (the
votes of the common or interested directors or officers shall be counted in
any such vote of shareholders), or (iii) the contract or transaction is fair
and reasonable to the Company at the time it is authorized or approved. In
addition, interested directors may be counted in determining the presence of
a quorum at a meeting of the Board of Directors of the Company or a committee
thereof which approves such transactions. If there are no disinterested
directors, the Company shall obtain a majority vote of the shareholders
approving the transaction.
Indemnification. The Company shall indemnify to the fullest extent permitted
by, and in the manner permissible under the laws of the State of Washington,
any person made, or threatened to be made, a party to an action or
proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that he is or was a director or officer of the Company, or
served any other enterprise as director, officer or employee at the request
of the Company. The Board of Directors, in its discretion, shall have the
power on behalf of the Company to indemnify any person, other than a director
or officer, made a party to any action, suit or proceeding by reason of the
fact that he/she is or was an employee of the Company.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceedings) is asserted by such director, officer, or controlling person in
connection with any securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issues.
INDEMNIFICATION OF OFFICERS OR PERSONS CONTROLLING THE COMPANY
FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF 1933, IS HELD TO BE
AGAINST PUBLIC POLICY BY THE SECURITIES AND EXCHANGE COMMISSION AND IS
THEREFORE UNENFORCEABLE.
- ------------------------------------------------------
CERTAIN TRANSACTIONS
- ------------------------------------------------------
Distribution of Securities. In July, 1996, the Board of Directors
authorized the distribution of 200,000 A Warrants each exercisable into one
Common Share of the Company at the exercise price of $3.75 per Common Share,
200,000 B Warrants each exercisable into one Common Share of the Company at
the exercise price of $4.00 per Common Share and 250,000 C Warrants each
exercisable into one Common Share of the Company at the exercise price of
$6.00 per Common Share. The A, B and C Warrants are exercisable for a
period of 48 months from the date of issue and are callable with 30 days
notice at a price of $.001 per warrant. These distributions were made to
the owners of record of Common Shares on the books of the Company as of July
22, 1996.
<PAGE>27
Consulting Agreement. On July 15, 1996, the Company entered into a
consulting agreement with Pratt, Wylce & Lords, Ltd. ("Pratt") to assist the
Company in its capitalization and the obtainment of additional financing. The
agreement was amended January 28, 1997 and subsequently canceled. The net
payment to Pratt after amendment and termination of the consulting agreement
was $35,000 cash and 25,000 Common Shares. Due to the date of the
consulting agreement, the Company distributed A, B and C Warrants to Pratt,
however, Pratt disclaimed the A, B and C Warrants and these Warrants were
then redistributed on a pro rata basis to the remaining shareholders.
Additionally, the Company entered into a consulting agreement with Gaming
Venture Corp., U.S.A. (GVC) to assist the Company with the promotion of its
product and its Common Shares. The original agreement with GVC was dated
July 8, 1996 and was amended on December 1, 1996 and again on February 1,
1997. The contract began on July 8, 1996, and by amendment, will run
through July 7, 1998. GVC received 200,000 shares of the Company,
$45,000 in cash and Options to acquire an additional 100,000 Common Shares.
By action of the Company's Board of Directors, on April 30, 1997, the options
were exchanged for D Warrants which were subsequently exercised.
Loan Collateralized by Related Party. On July 11, 1997, GVC placed $200,000
in a 200 day Certificate of Deposit with Bank West located at 3500 West
Sahara Avenue in Las Vegas, Nevada. Bank West lent the Company up to the
full amount of GVC's CD and charge the Company an interest rate which is the
rate of the CD plus 2%.
The Company agreed to pay GVC a payment equal to 8.5% of the total amount
when the Company pays off the principal of the loan to Bank West.
The payment will be 8.5% of the principal of $200,000 or a total of $17,000.
If the Company is unable to pay off the loan balance after the 200 day
period, half of the $17,000 payment must be paid to GVC. GVC will then have
the option of renewing the CD and allowing the Company to continue with the
loan or convert the principal balance of the loan into the Company's common
stock with registration rights. If GVC elects to renew the CD, the same
terms from the first 200 day period will be in effect including a full 8.5%
of the principal being due when the loan is repaid. The $8,500 which is due
after the first 200 day period will not be deducted from the 8.5% due when
the loan is repaid if the CD is rolled over for another 200 day period.
Consulting Agreement with Related Party. On February 1, 1997, the Company
entered into a consulting agreement with Gametek, and Steven Blad, an officer
of the Company. Mr. Blad is a consultant to Gametek. Pursuant to the
agreement, Mr. Blad shall, for two years commencing January 1, 1997, act as
an officer of the Company and shall receive a base salary of $12,500 per
month. Additionally, Mr. Blad shall receives a commission of 3.73% on the
Gross Margin received by the Company on its product sold through sales
arranged and completed primarily by the efforts of Mr. Blad. Mr. Blad is
also entitled to a one time licensing bonus of 10,000 Common Shares of the
Company each time Mr. Blad successfully obtains a license from the Nevada
Gaming Commission approving current products of the Company for use in the
gaming industry. Mr. Blad is entitled to receive a bonus, payable on a
quarterly basis and in an amount not to exceed $2,000 per month upon the
Company achieving its goals as set by the Board of Directors, The bonus
payable shall be reduced by the commissions received during the same period.
In addition to the base salary, commissions, licensing bonus and quarterly
bonus stated above, the Mr. Blad shall receive "Stock Options" to purchase
up to three hundred thousand (300,000) shares of the Company's common stock
("Shares") under the following terms and conditions:
(i) Upon execution of the consulting agreement, the Consultant
received the right to acquire up to one hundred thousand (100,000) Shares at
One Dollar and Fifty Cents ($1.50) per Share.
(ii) Upon the Consultant fulfilling his obligations and the Company
reaching its goals for 1997, the Consultant shall have the right to acquire
up to an additional one hundred thousand (100,000) Shares at One Dollar and
Fifty Cents ($1,50) per Share. The determination of whether Mr. Blad
has met his obligations and the Company has reached its goals shall be made
at the discretion of the President and Chief Executive Officer and approved
by the Company's Board of Directors. Mr. Blad shall be entitled to a
meeting with the President and Chief Executive Officer during January 1998
to discuss the bonus to be paid hereunder, if any. The Stock Options to be
issued shall be vested in the Consultant no later than January 31, 1998.
(iii) Upon Mr. Blad fulfilling his obligations and the Company
reaching its goals for 1998, Mr. Blad shall have the right to acquire
up to an additional one hundred thousand (100,000) Shares at One Dollar and
Fifty Cents ($1,50) per Share. The determination of whether Mr. Blad
has met his obligations and the Company has reached its goals shall be made
at the discretion of the President and Chief Executive Officer and approved
by the Company's Board of Directors. Mr. Blad shall be entitled to a
meeting with the President and Chief Executive Officer during January 1999
to discuss the bonus to be paid hereunder, if any. The Stock Options to be
issued shall be vested in Mr. Blad no later than January 31, 1999.
(iv) The Stock Options must be exercised within Five (5) years from
the date Mr. Blad's rights are vested. The Shares will be issued
within Thirty (30) days from when Mr. Blad notifies his intent to
exercise the options and tenders the purchase price to the Company. The
<PAGE>28
Company offers no warranty as to the tradability of the Shares or as to
whether such shares will be registered with the Securities and Exchange
Commission.
(v) If the Company is to be sold, a portion of the Stock Options
not yet issued hereinabove shall vest in the Consultant thirty (30) days
prior to such sale. The number of Stock Options to vest under this
subparagraph shall be determined pro rata based upon the number of Stock
Options that Mr. Blad may be entitled to for the year and the number of
months Mr. Blad was retained under the Agreement during this same year.
For example, if the Company was to be sold on April 1, 1998, Mr. Blad
would have an additional twenty-five thousand Stock Options vest on March 1,
1998. [(100,000 stock options for 1998) x (3 months of consulting/12
months)].
The Company shall notify Mr. Blad in writing of (1) the impending sale,
(2) the right of Mr. Blad to exercise the Stock Options and (3) the
terms and conditions of the proposed sale of the Company. For purposes
herein, the Company shall be deemed sold if substantially all of its assets
are sold, including patents and goodwill, or the Company's stock is sold or
transferred causing a change in the person or persons who currently have
majority control of the Company. This Paragraph does not apply to transfers
of stock of the Company, (1) by an assignment to a revocable living trust in
which the holder is and remains a trustee and a beneficiary, or (2) by reason
of death of the holder. It is Mr. Blad's discretion to exercise the
Stock Options prior to the proposed sale. Any Stock Options vested in this
subparagraph shall remain vested in Mr. Blad, whether or not they are
exercised before the sale, under the terms of subparagraph (vi).
Related Party Transaction. Steven Forte, who was a partner of Sines-Forte
partnership retains a 3% royalty interest in the gross margin earned from the
sale of products covered by intellectual property rights which were exchanged
by the partnership for Common Shares of the Company. Royalty amounts due
pursuant to the royalty interest amounted to $136 at December 31, 1996.
During the year ended December 31, 1996, Steven Forte, an officer and
director, Randy Sines, a former director and Richard Huson, a principal
shareholder of the Company made advances to the Company for working capital
purposes. The balances payable by the Company aggregated $650,034 at
December 31, 1996. No cash repayments have been made against the advances,
which are due on demand. Mr. Huson made an addition advance in the amount of
$300,000 on January 15, 1996. The advance was due on July 15, 1996. The
advance was collateralized by partnership shares of Sharps equivalent to
700,000 Common Shares of the Company controlled by Steven and Cheryl Forte
and Randy Sines. On October 1, 1996, Mr. Huson exercised his rights against
the collateral and as a result, the collection rights to the advance plus
accrued interest, which aggregated $320,168 at October 1, 1996, transferred
to the other officer/shareholders. The advances accrue interest at between
9.5% and 14.5% per annum. One of the advances in the amount of $250,000 from
Mr. Huson provides for repayment of the loan by December 31, 1997 or, upon
default, at the option of the shareholder, by the issuance of the Company's
common shares at a conversion rate of $.82 per share. On December 31, 1997,
Mr. Huson elected to convert the principle and interest due ($279,229.29) to
339,304 Common Shares (at $.82 per Common Shares).
During September 1996, the Company entered into personal services agreements
with two of its officers which provide for aggregate monthly compensation of
up to $20,000 per month on a pro rata basis for time spent on Company related
business. The agreements had a term of two years.
Amendment to Employment Agreement (Personal Service Agreement) and Covenant
Not to Compete and Funding Agreements with Randy Sines. The Company and
Randy Sines had previously entered into an Employment Agreement (Personal
Service Agreement) and Covenant Not to Compete dated March 31, 1996. In
connection with the Employment Agreement, the parties entered
into a Funding Agreement dated January 15, 1996 and Third Round Funding
Agreement dated September 30, 1996. The Third Round Funding Agreement
subordinated the $300,000 promissory note assigned to Cheryl Forte/Steve
Forte and the Employee to the $500,000 promissory note, dated September 30,
1996, payable to Richard S. Huson. This subordination requires payments of
$10,000 each to Employee and Cheryl Forte. The $300,000 promissory note was
further subordinated by the agreement, dated July 8, 1997, to the $45,000
promissory note, dated July 8, 1997, payable to Richard S. Huson. (These
agreements and their amendments are referred to as the "Funding Agreements").
Mr. Sines resigned as an officer, director and employee of the Company
effective August 27, 1997. As a result of Mr. Sine's resignation, the
parties confirmed and modified each other's obligations under the Employment
Agreement and Funding Agreements.
1. Assignment of Drop Slot and Anticipation Slot Concepts. Pursuant to
a letter dated June 26, 1997, the Company attempted to transfer to Mr.
Sines all of the Company's right, title and interest in the Drop Slot and
Anticipation Slot inventions/concepts for the sum of $15,000. Pursuant to
the above referenced letter, the payment was reflected in a reduction of the
debt owed to the Mr. Sines from the Company. The parties have raised
questions surrounding the purported transfer and have agreed to restate and
settle on the terms and conditions of the assignment as follows:
<PAGE>29
a. The Company assigned all of its right, title and interest to
the Drop Slot and Anticipation Slot concepts to Mr. Sines.
b. The obligations owed by the Company to Mr. Sines contained in
the Funding Agreements will be decreased by the sum of $5,000, not the
$15,000 as previously agreed, in return for the assignment of the Royalty to
the Company provided herein below.
c. Mr. Sines agreed to reduce the monetary obligations owed by the
Company to him under the Funding Agreements to an interest rate at nine
and one-half percent (9 1/2%) per annum, effective October 1, 1997 and to
extend the due date of such obligations for a twelve (12) month period from
this same date. If the obligations are not paid on or before September 30,
1998, the interest rate shall increase at such date to fourteen and one-half
percent (14 1/2%) per annum. All other terms of the Funding Agreements,
including the subordination provisions, remain unchanged.
d. Mr. Sines agreed to pay to the Company a five percent (5%)
Royalty on the Net Revenue received by Mr. Sines, his heirs or assigns from
the sale, development, or manufacture of the Drop Sot and Anticipation Slot
concepts, including any derivatives or accessories pertaining thereto. The
term "Net Revenue" is defined as gross cash (or equivalents) revenues
received by Mr. Sines, his heirs or assigns from the sale, development, or
manufacture of the Drop Slot and Anticipation Slot concepts minus the cost of
goods sold for such products. In determining the cost of goods sold,
Generally Accepted Accounting Principles shall be used. Mr. Sines shall remit
the Royalty payments to the Company on a calendar quarter basis. The
Royalty payments due for each calendar quarter shall be paid within thirty
(30) days after the expiration of each quarter. Interest shall accrue at the
rate of nine and one-half percent (9 1/2%) per annum on any Royalty payments
that are not paid when due.
Mr. Sines will use prudent efforts to protect the intellectual and
proprietary rights associated with the Drop Slot and Anticipation Slot
concepts, including but not limited to, the procurement and the filing of
patents, trade names or copyrights as may be applicable. Upon thirty (30)
days written notice, Mr. Sines agreed to provide access to the Company or
its auditors to review and audit Mr. Sine's books and records containing
information pertinent to calculating the Royalty due the Company under
this agreement.
The Company allowed Mr. Sine's termination to be effective August 27,
1997. Mr. Sines remains obligated under the terms and conditions of the
Employment Agreement, as amended for those clauses which by their terms
survive termination and consist only of the Non-Competition, Confidential
Information, and Personal Property clauses. It is agreed and understood that
the execution of the agreement is additional consideration from the parties
for the amendment to the Non-Competition clause of the Employment Agreement
as contained herein.
3. Amendment. The parties agreed to amend Paragraph 14, Non-
Competition, ("Non-Competition Clause") of the Employment Agreement to
increase the term to three (3) years and to limit its scope as follows:
a. The Non-Competition Clause was amended to exclude from its
restrictions the Drop Slot and Anticipation Slot inventions/concepts and any
accessories or derivatives pertaining thereto. Mr. Sines is permitted
to market, develop and sell the Drop Slot and Anticipation Slot concepts so
long as such business actions are limited solely to such products and do not
involve any other gaming product not otherwise excluded herein below.
b. It is understood and agreed by the parties that Mr. Sines will not
be in violation of the Non-Competition Clause as amended herein for those
activities that are limited to the invention and development of gaming
products (not manufacturing or marketing), provided that such invention and
development does not pertain to the Company's Current Products and Future
Products defined herein below in sub-paragraph (d).
c. Mr. Sines shall only be required to abide by the terms of the Non-
Competition Clause as it is currently written and as amended herein by
Paragraph 3(a) and (3)(b) for a period of six (6) months, beginning as of
August 27, 1997, with the exception of Paragraphs 3(d) and 3(e).
d. After the expiration of the six (6) month period stated
above, Mr. Sines agreed to remain obligated under the terms of the Non-
Competition Clause for an additional eighteen (18) months, but this
restriction shall be limited solely to products that are substantially
similar to the Company's current products (the "Current Products") and to
the Company's future products referred to or described in the letter
dated August 28, 1997, executed by Steve Forte.
e. After the expiration of the two (2) year period stated above in sub-
paragraph (b) and (c), Mr. Sines agreed not to compete with the Company as
defined in the Employment Agreement for an additional one (1) year period
only as to such products that are substantially similar to the Future
Products defined previously herein.
A state court may determine not enforce (or only partially enforce) non-
compete clauses in the employment.
<PAGE>30
- ----------------------------------------------------------------
PRINCIPAL SHAREHOLDERS
- ----------------------------------------------------------------
There are currently 6,179,944 Common Shares outstanding. Assuming exercise of
the 200,000 A Warrants, 200,000 B Warrants, 250,000 C Warrants and 593,000
options currently outstanding, there would be 7,622,944 Common Shares
outstanding on a fully diluted basis. The following tabulates holdings of
shares of the Company by each person who, subject to the above, as of August
30, 1997, holds of record or is known by Management to own beneficially more
than 5.0% of the Common Shares and, in addition, by all directors and
officers of the Company individually and as a group.
Shareholdings at Date of
This Prospectus<F1>
<TABLE>
<CAPTION>
Percentage of
Outstanding
Shares as
Adjusted
to Reflect
Percentage Number of Conclusion
Number Prior to shares outstanding of the
Name and Address of Shares<F1><F4> Offering after offering Offering
<C> <C> <C> <C>
Richard S. Huson<F2> 2,661,589 43.07 2,349,360 36.82%
121 S.W. Morrison
Suite 1400
Portland, Oregon 97204
Steve and Cheryl Forte<F3><F4> 1,906,849 30.86% 1,836,024 28.78%
315 San Francisco Street
Henderson, Nevada 89014
Randy D. Sines<F4><F5> 1,861,727 30.13% 1,607,117 25.19%
4056 South Madelia
Spokane, Washington 99203
Sines-Forte Partnership 1,508,249 24.41% 1,382,059 21.66%
315 Francisco Street
Henderson, Nevada 89014
Steven Blad <F6> 110,000 1.78% 109,000 1.71%
286 Doe Run Circle
Henderson, Nevada 89012
Norman G. Kelln<F7> 257,208 4.16% 245,846 3.85%
2031 S. Eastern Lane
Spokane, Washington 99212
Jay L. King<F8>
4600 North Donna Street
North Las Vegas, Nevada 89031 100,000 1.62% 97,500 1.53%
David E. Sampson<F9> 141,016 2.28% 136,925 2.15%
4009 - 205th Avenue N.E.
Woodinville, Washington 98072
Glen (Tom) Pickell<F10> 7,000 .11% 6,300 .10%
115 NW Oregon Avenue, Suite 20
Bend, Oregon 97701
All Officers and Directors 2,522,073 40.81% 2,320,796 36.38%
as a Group (7 persons)
</TABLE>
[FN]
<F1> Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, beneficial ownership of a security consists of sole or shared voting
power (including the power to vote or direct the voting) and/or sole or
shared investment power (including the power to dispose or direct the
disposition) with respect to a security whether through a contract,
arrangement, understanding, relationship or otherwise. Unless otherwise
indicated, each person indicated above has sole power to vote, or dispose or
direct the disposition of all shares beneficially owned, subject to
applicable community property laws.
<F2> Includes 167,655 Common Shares which may be issued upon exercise of A,
B and C Warrants.
<F3>Includes 206,349 Common Shares which may be issued to Sine/Forte
Partnership upon exercise of the A, B and C Warrants 98,868 Common Shares
which may be issued to Cheryl Forte upon exercise of the A, B and C Warrants,
and 40,000 Common Shares which may be issued to Sines/Forte Partnership.
Additionally, Steven Forte is a General Partners of Sines-Forte Partnership
and would be deemed to be beneficial owners of the 1,2508,249 Common Shares
shown above.
<F4>Former partners of Sharps International Limited Partnership.
<PAGE>31
<F5>Includes 206,349 Common Shares which may be issued to Sine/Forte
Partnership upon exercise of the A, B and C Warrants and 40,000 Common Shares
which may be issued to Sines/Forte partnership. Additionally, Randy Sines is
a General Partner of Sines-Forte Partnership and would be deemed to be
beneficial owners of the 1,261,900 Common Shares shown above.
<F6>Includes 100,000 Common Shares which may be issued upon exercise of
100,000 options.
<F7>Includes 18,580 Common shares which may be issued upon exercise of the
Warrants and 125,000 Common Shares which may be issued upon exercise of
125,000 options.
<F8>Includes 75,000 Common Shares which may be issued upon exercise of 75,000
options.
<F9>Includes 5,061 Common Shares which may be issued upon exercise of the
warrants and 95,000 Common Shares which may be issued upon exercise of 95,000
options.
<F10>Common Shares are owned of record by The Argus Group, a company
controlled by Mr. Pickell.
This does not include 75,000 Common Shares reserved for issuance pursuant to
loan conversion options. Additionally On September 24, 1996, Mr. Huson
agreed to loan up to $500,000 to the Company for a period not to exceed
December 31, 1997. The note shall be secured by agreement of Randy Sines
and Cheryl Forte to provide Mr. Huson a minimum of 51% of the voting rights
by pledging sufficient voting rights of their Common Shares in the Company
until the note is paid in full and a total of $2.4 million is raised through
all sources. See "Certain Transactions" for further discussion.
There are currently 200,000 A Warrants outstanding. The following
tabulates holdings of A Warrants of the Company by each person who, subject
to the above, at the date of this Prospectus, holds of record or is known by
Management to own beneficially more than 5.0% of the A Warrants and, in
addition, by all directors and officers of the Company individually and as a
group.
<TABLE>
<CAPTION>
Name Total Number Of % Amount %
A Warrants Owned Owned Owned
Owned Prior to After After
Offering Offering
Offering
<S> <C> <C> <C> <C>
Tom Pickell 0 0% 0 0%
Jay L. King 0 0% 0 0%
Steven Blad 0 0% 0 0%
Norman G. Kelln 5,717 2.86% 5,717 2.86%
Sines/Forte Partnership<F1> 63,492 31.75% 63,492 31.75%
Cheryl Forte<F2> 30,421 15.21% 30,421 15.21%
David Sampson 1,557 .78% 1,557 .78%
Randy Sines 30,421 15.21% 30,421 15.21%
Richard Huson 51,586 25.79% 51,586 25.79%
All Officers and
Directors
As a Group (6) 131,608 65.80% 131,608 65.80%
</TABLE>
[FN]
<F1>Randy Sines and Steve Forte are General Partners of Sines-Forte
partnership and would be deemed to be beneficial owners of the 63,492 Class A
Warrants shown above.
<F2>Steve Forte is married to Cheryl Forte and would be deemed to be a
beneficial owners of the 30,421 Class A Warrants shown above.
There are currently 200,000 B Warrants outstanding. The following
tabulates holdings of B Warrants of the Company by each person who, subject
to the above, at the date of this Prospectus, holds of record or is known by
Management to own beneficially more than 5.0% of the B Warrants and, in
addition, by all directors and officers of the Company individually and as a
group.
<PAGE>32
<TABLE>
<CAPTION>
Name Total Number Of % Amount %
B Warrants Owned Owned Owned
Owned Prior to After After
Offering Offering
Offering
<S> <C> <C> <C> <C>
Tom Pickell 0 0% 0 0%
Jay L. King 0 0% 0 0%
Steven Blad 0 0% 0 0%
Norman G. Kelln 5,717 2.86% 5,717 2.86%
Sines/Forte Partnership<F1> 63,492 31.75% 63,492 31.75%
Cheryl Forte<F2> 30,421 15.21% 30,421 15.21%
David Sampson 1,557 .78% 1,557 .78%
Randy Sines 30,421 15.21% 30,421 15.21%
Richard Huson 51,586 25.79% 51,536 25.79%
All Officers and
Directors
As a Group (7) 131,608 65.80% 131,608 65.80%
</TABLE>
[FN]
<F1>Randy Sines and Steve Forte are General Partners of Sines-Forte
Partnership and would be deemed to be beneficial owners of the 63,492 Class B
Warrants
shown above.
<F2>Steve Forte is married to Cheryl Forte and would be deemed to be a
beneficial owners of the 30,421 Class B Warrants shown above.
There are currently 250,000 C Warrants outstanding. The following
tabulates holdings of C Warrants of the Company by each person who,
subject to the above, at the date of this Prospectus, holds of record or is
known by Management to own beneficially more than 5.0% of the C Warrants and,
in addition, by all directors and officers of the Company
individually and as a group.
<TABLE>
<CAPTION>
Name Total Number Of % Amount %
C Warrants Owned Owned Owned
Owned Prior to After After
Offering Offering
Offering
<S> <C> <C> <C> <C>
Tom Pickell 0 0% 0 0%
Jay L. King 0 0% 0 0%
Steven Blad 0 0% 0 0%
Norman G. Kelln 7,146 2.86% 7,146 2.86%
Sines/Forte Partnership<F1> 79,365 31.75% 79,365 31.75%
Cheryl Forte<F2> 38,026 15,21% 38,026 15.21%
David Sampson 1,947 .78% 1,947 .78%
Randy Sines 38,026 15.21% 38,026 15.21%
Richard Huson 64,483 25.79% 64,483 25.79%
All Officers and
Directors
As a Group (6) 164,510 65.80% 164,510 65.80%
</TABLE>
[FN]
<F1>Randy Sines and Steve Forte are General Partners of Sines-Forte
Partnership and would be deemed to be beneficial owners of the 79,365 Class C
Warrants shown above.
<F2>Steve Forte is married to Cheryl Forte and would be deemed to be a
beneficial owners of the 38,026 Class C Warrants shown above.
There are currently outstanding options to purchase 593,000 Common Shares of
the Company. The following tabulates holdings of options of the Company by
each person who, subject to the above, at the date of this Prospectus, holds
of record or is known by Management to own beneficially more than 5.0% of the
options and, in addition, by all directors and officers of the Company
individually and as a group.
<PAGE>33
<TABLE>
<CAPTION>
Name Total Number Of % Amount %
Options Owned Owned Owned
Owned Prior to After After
Offering Offering Offering
<S> <C> <C> <C> <C>
Tom Pickell 0 0% 0 0%
Jay L. King 75,000 12.65% 75,000 12.65%
Steven Blad 100,000 16.86% 100,000 16.86%
Sine/Forte Partnership<F1> 40,000 6.75% 40,000 6.75%
Steven Forte 0 0% 0 0%
Randy Sines 0 0% 0 0%
Norman Kelln 125,000 21.08% 125,000 21.08%
David Sampson 95,000 16.02% 95,000 16.02%
Donald Peterson 100,000 16.86% 100,000 16.86%
John Wasden 45,000 7.59% 45,000 7.59%
All Officers and
Directors
As a Group (7) 435,000 73.32% 435,000 73.32%
</TABLE>
(1)Randy Sines and Steve Forte are General Partners of Sines-Forte
Partnership
and would be deemed to be beneficial owners of the 40,000 options shown
above.
- ----------------------------------------------------------
SHARES ELIGIBLE FOR FUTURE SALE
- ----------------------------------------------------------
The Company currently has 6,179,944 shares of Common Stock outstanding.
Other securities may be issued, in the future, in private transactions
pursuant to an exemption from the Securities Act are "restricted securities"
and may be sold in compliance with Rule 144 adopted under the Securities Act
of 1933, as amended. Rule 144 provides, in essence, that a person who has
held restricted securities for a period of one years may sell every three
months in a brokerage transaction or with a market maker an amount equal to
the greater of 1% of the Company's outstanding shares or the average weekly
trading volume, if any, of the shares during the four calendar weeks
preceding the sale. The amount of "restricted securities" which a person who
is not an affiliate of the Company may sell is not so limited.
Nonaffiliates may each sell without limitation shares held for three years.
The Company will make application for the listing of its Shares in the over-
the-counter market. Sales under Rule 144 may, in the future, depress the
price of the Company's Shares in the over-the-counter market, should a market
develop. Prior to this offering, there has been no public market for the
Common Stock of the Company. The effect, if any, of a public trading market
or the availability of shares for sale at prevailing market prices cannot be
predicted. Nevertheless, sales of substantial amounts of shares in the
public market could adversely effect prevailing market prices.
- ----------------------------------------------------------
MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
- ----------------------------------------------------------
Prior to this Offering, there has been no market for the Company's common
stock. Upon successful completion of this offering, the Company intends
to apply to have its common stock traded in the over-the-counter market and
listed on the OTC Bulletin Board.
Holders. The approximate number of holders of record of the Company's
.0010 par value common stock, as of May 31, 1997 was One Hundred (100).
Dividends. Holders of the Company's common stock are entitled to
receive such dividends as may be declared by its Board of Directors.
Broker-Dealer Sales of Company Securities. " The Company intends to list its
Common Shares, at least initially, on the OTC Bulletin Board and on NASDAQ
Small Cap Market upon meeting the requirements for a NASDAQ listing, if ever.
Upon completion of this offering, the Company will not meet the requirements
for a NASDAQ Small Cap Market listing. As of February 23, 1998, the
requirements for a NASDAQ listing are net tangible assets of $4,00,000 or
market capitalization of $50,000,000 or net income (in latest fiscal year or
2 of last 3 fiscal years) of $750,000, a public float of 1,000,000 Common
<PAGE>34
Shares, a market value of the public float of $55,000,000, a minimum bid
price of $4.00 per share, three market makers, 300 round lot shareholders, an
operating history of one year or a market capitalization of $50,000,000 and
compliance with corporate governance. The OTC Bulletin Board has no
quantitative written standards and is not connected with the NASD. Until
the Company obtains a listing on the NASDAQ Small Cap Market, if ever, the
Company's securities may be covered by a Rule 15g-9 under the Securities
Exchange Act of 1934 that imposes additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and institutional accredited investors (generally institutions with
assets in excess of $5,000,000 or individuals with net worth in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their
spouse). For transactions covered by the rule, the broker-dealer must
furnish to all investors in penny stocks, a risk disclosure document required
by Rule 15g-9 of the Securities Exchange Act of 1934, make a special
suitability determination of the purchaser and have received the purchaser's
written agreement to the transaction prior to the sale. In order to approve
a person's account for transactions in penny stock, the broker or dealer must
(i) obtain information concerning the person's financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on the information required by paragraph (i) that transactions in penny
stock are suitable for the person and that the person has sufficient
knowledge and experience in financial matters that the person reasonably may
be expected to be capable of evaluating the rights of transactions in penny
stock; and (iii) deliver to the person a written statement setting forth the
basis on which the broker or dealer made the determination required by
paragraph (ii) in this section, stating in a highlighted format that it is
unlawful for the broker or dealer to effect a transaction in a designated
security subject to the provisions of paragraph (ii) of this section unless
the broker or dealer has received, prior to the transaction, a written
agreement to the transaction from the person; and stating in a highlighted
format immediately preceding the customer signature line that the broker or
dealer is required to provide the person with the written statement and the
person should not sign and return the written statement to the broker or
dealer if it does not accurately reflect the person's financial situation,
investment experience and investment objectives and obtain from the person a
manually signed and dated copy of the written statement. A penny stock
means any equity security other than a security (i) registered, or approved
for registration upon notice of issuance on a national securities exchange
that makes transaction reports available pursuant to 17 CFR 11Aa3-1 (ii)
authorized or approved for authorization upon notice of issuance, for
quotation in the NASDAQ system; (iii) that has a price of five dollars or
more or . . . . (iv) whose issuer has net tangible assets in excess of
$2,000,000 demonstrated by financial statements dated less than fifteen
months previously that the broker or dealer has reviewed and has a reasonable
basis to believe are true and complete in relation to the date of the
transaction with the person. Consequently, the rule may affect the ability
of broker-dealers to sell the Company's securities and also may affect the
ability of purchasers in this Offering to sell their shares in the secondary
market. See "Market for Registrant's Common Equity and Related Stockholder
Matters - Broker-Dealer Sales of Company's Securities."
- ----------------------------------------------------------
TERMS OF OFFERING
- ----------------------------------------------------------
Plan of Distribution. The Company hereby offers up to 200,000 Common Shares
at the purchase price of $3.50 per Common Share. The Common Shares are
being offered on a "direct participation" basis by the Company (employees,
officers and directors) and possibly selected broker-dealers. The employees,
officers and directors who shall sell the offering on behalf of the Company
are Jay L. King, Steven Blad, Glen (Tom) Pickell, David Sampson and Norman
Kelln. These individuals will be relying on the safe harbor in Rule 3a4-1 of
the Securities Exchange Act of 1934 to sell the Company's securities.
No sales commission will be paid for Common Shares sold by the Company.
Selected broker-dealers shall receive a sales commission of up to 10% for any
Common Shares sold by them. The Company reserves the right to withdraw,
cancel or reject an offer in whole or in part. The Common Shares offered
hereby will not be sold to insiders, control persons, or affiliates of the
Company. There are no plans, proposals, arrangements or understandings with
any potential sales agent with respect to participating in the distribution
of the Company's securities. When, in the future, assuming such
participation develops, the registration statement will be amended to
identify such persons.
The Company, through its officers and directors, will undertake a direct
participation self-underwritten offering at the same time as the selling
shareholders will be selling their registered shares. Officers and
directors of the Company are participating as selling shareholders. Current
officers and directors have entered into written agreements not to sell their
Common Shares until the Company's offer is fully subscribed. The Company is
not selling any Common Shares on behalf of Selling Shareholders and has no
control or affect on the 1,605,530 Common Shares of these Selling
Shareholders which are not subject to any lock-up agreement. The offering
of securities by these Selling Shareholders will occur regardless of the
outcome of the primary offering by the Company.
<PAGE>35
Other than the written agreements with the current officers and directors,
the Company has not taken any measures to delay the offering by Selling
Shareholders until after the completion of the primary offering by the
Company. The demand for the Company's Common Stock may be decreased due to
the large number of Common Shares being sold in the secondary offering by the
Selling Shareholders. Due to the fact that the secondary offering will be
conducted contemporaneously with a primary offering by the Company, the
market price of the Company's common stock (upon commencement of trading) may
be less than the offering price of $3.50. Conflicts of interests may arise
due to the fact that the primary offering of the Company and the secondary
offering of the Selling Shareholders will be conducted contemporaneously.
The Company shall concentrate its sales efforts in the period immediately
after the effective date of the offering until the Company's Common Stock is
listed on the OTC Bulletin Board. Additionally, the Company may pursue
alternate financing to avoid said conflict of interests once trading of its
Common Stock commences.
The Selling Shareholders may sell the Common Shares offered hereby in one or
more transactions (which may include "block" transactions in the over-the-
counter market, in negotiated transactions or in a combination of such
methods of sales, at fixed prices which may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The Selling Shareholders may effect such
transactions by selling the Shares directly to purchasers, or may sell to or
through agents, dealers or underwriters designated from time to time, and
such agents, dealers or underwriters may receive compensation in the form of
discounts, concessions or commissions from the Selling Shareholders and/or
the purchaser(s) of the Common Shares for whom they my act as agent or to
whom they may sell as principals, or both. The Selling Shareholders and
any agents, dealers or underwriters that act in connection with the sale of
the Common Shares might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any discount or commission received
by them and any profit on the resale of the Common Shares as principal might
be deemed to be underwriting discounts or commissions under the Securities
Act.
The Company is not aware of any current or future plans, proposals,
arrangements or understandings by any Selling Shareholders to distribute
their registered shares of Common Stock of the Company to their respective
outstanding shareholders or partners.
The Company is not aware of any plans, arrangements or understandings by any
Selling Shareholders to sell their registered shares of Common Stock to any
particular individual(s) or to use such registered shares to satisfy
contractual obligations.
The Company will receive no portion of the proceeds from the sale of the
Common Shares by the selling shareholder and will bear all of the costs
relating to the registration of this Offering (other than any fees and
expenses of counsel for the Selling Shareholders). Any commissions,
discounts or other fees payable to a broker, dealer, underwriter, agent or
market maker in connection with the sale of any of the Common Shares will be
borne by the Selling Shareholders.
Determination of Offering Price. The offering price and other terms
of the Common Shares were arbitrarily determined by the Company after
considering the total offering amount needed and the possible dilution to
existing and new shareholders.
Offering Procedure. This Offering will terminate on or before
January 31, 1998. In the Company's sole discretion, the offering of
Common Shares may be extended for up to three Thirty day periods, but in
no event later than April 30, 1998.
Subscription Procedure. The full amount of each subscription will be
required to be paid with a check payable to the Company in the amount of
the subscription. Such payments are to be remitted directly to the Company
by the purchaser or by the soliciting broker/dealer before 12:00 noon, on the
following business day, together with a list showing the names and
addresses of the person subscribing for the offered Common Shares or
copies of subscribers confirmations.
No Escrow Account. There is no minimum offering amount and no escrow
account. As a result, any and all offering proceeds will be deposited
directly into the operating account of the Company.
- --------------------------------------------------------------
DESCRIPTION OF SECURITIES
- --------------------------------------------------------------
Qualification. The following statements constitute brief summaries of the
Company's Certificate of Incorporation and Bylaws, as amended. Such
summaries do not purport to be complete and are qualified in their entirety
by reference to the full text of the Certificate of Incorporation and Bylaws.
<PAGE>36
The Company's articles of incorporation authorize it to issue up to
20,000,000 Common Shares. Shares of common stock purchased in this offering
will be fully paid and non-assessable. There are no provisions in the
Company's articles of incorporation or By-Laws that would delay, defer or
prevents a change-in-control of the Company.
Pursuant to Section 23B.19.040 of the Revised Code of Washington, a target
corporation shall not engage in any significant business transaction for a
period of five years following the acquiring person's share acquisition time
unless the significant business transaction or the purchase of shares made by
the acquiring person is approved prior to the acquiring person's share
acquisition time by a majority of the members of the board of directors of
the target corporation. Additionally, Section 23B.11.030 of the Revised
Code of Washington requires that shareholder approval be obtained to approve
any plan of merger or share exchange. These provisions could delay, defer
or prevent a change-in-control of the Company.
Common Stock. There are presently outstanding 5,640,640 Common Shares. As a
result, up to 6,179,944 Common Shares will be outstanding upon completion of
this Offering. This does not include 75,000 Common Shares reserved for
issuance pursuant to loan conversion options, 593,000 shares reserved for
issuance to key employees and others pursuant to outstanding options and
commitments.
Holders of Common Shares of the Company are entitled to cast one vote for
each share held at all shareholders meetings for all purposes. There are no
cumulative voting rights. Upon liquidation or dissolution, each outstanding
Common Share will be entitled to share equally in the assets of the Company
legally available for distribution to shareholders after the payment of all
debts and other liabilities. Common Shares are not redeemable, have no
conversion rights and carry no preemptive or other rights to subscribe to or
purchase additional Common Shares in the event of a subsequent offering. All
outstanding Common Shares are, and the shares offered hereby will be when
issued, fully paid and non-assessable.
There are no limitations or restrictions upon the rights of the Board of
Directors to declare dividends out of any funds legally available therefor.
The Company has not paid dividends to date and it is not anticipated that any
dividends will be paid in the foreseeable future. The Board of Directors
initially may follow a policy of retaining earnings, if any, to finance the
future growth of the Company. Accordingly, future dividends, if any, will
depend upon, among other considerations, the Company's need for working
capital and its financial conditions at the time.
Warrants. In July, 1996, the Board of Directors authorized the
distribution of 200,000 A Warrants each exercisable into one Common Share of
the Company at the exercise price of $3.75 per Common Share, 200,000 B
Warrants each exercisable into one Common Share of the Company at the
exercise price of $4.00 per Common Share and 250,000 C Warrants each
exercisable into one Common Share of the Company at the exercise price of
$6.00 per Common Share. The A, B and C Warrants are exercisable for a
period of four years from July, 1996 and are callable with 30 days
notice at a price of $.001 per warrant. The Warrants have the same
expiration period, which the Board of Directors arbitrarily determined was
sufficient in length to allow for the growth of the Company such that the
Warrants could be deemed attractive to current Warrantholders for exercise.
These distributions were be made to the owners of record of Common Shares on
the books of the Company as of July 22, 1996.
In June 1997, the Company authorized the issuance of 200,000 Class D
Warrants. The D Warrants are exercisable into one common share at the
purchase price of $1.50. The D Warrants shall be exercisable for a period
of two years from January 31, 1997 and shall be redeemable by the Company at
$.001 per D Warrant upon thirty days notice. To date, all of the Class D
Warrants have been exercised.
The Company is registering the stock underlying its A, B and C Warrants on
behalf of its selling security holders.
Transfer Agent. The Company acts as its own transfer agent. Subsequent to
the offering, the Company shall retain a separate transfer agent.
- -----------------------------------------------------------
LEGAL MATTERS
- -----------------------------------------------------------
The due issuance of the Common Shares offered hereby will be opined upon for
the Company by J. M. Walker, Attorney-At-Law, in which opinion Counsel will
rely on the validity of the Certificate and Articles of Incorporation issued
by the State of Washington, as amended and the representations by the
management of the Company that appropriate action under Washington law has
been taken by the Company.
- --------------------------------------------------------
LEGAL PROCEEDINGS
- --------------------------------------------------------
The Company is not involved in any legal proceedings as of the date of this
Prospectus.
<PAGE>37
Steven L. Forte, a consultant to, and an employee and director of the
Company, was convicted of a gambling-related third degree felony in New
Jersey in 1990, and in 1982 pled guilty to a misdemeanor trespass charge
arising from a gambling related charge emanating from Harrah's Casino in
Reno, Nevada. Such convictions could affect the Company's ability to obtain
approval for the licensing of the Company, if required, in any number of
prospective jurisdictions. Were this to occur, Mr. Forte has agreed that he
and the Company would restructure Mr. Forte's relationship with the Company,
and in particular, the terms of Mr. Forte's Personal Services Agreement with
the Company, in order to conform to the gaming requirements of such
jurisdictions.
- --------------------------------------------------------
EXPERTS
- --------------------------------------------------------
The audited financial statements included in this Prospectus have been so
included in reliance on the report of Winter, Scheifley & Associates, Inc.,
P.C., Certified Public Accountants, on the authority of such firm as experts
in auditing and accounting.
- --------------------------------------------------------
INTERESTS OF NAMED
EXPERTS AND COUNSEL
- --------------------------------------------------------
None of the experts or counsel named in the Prospectus are affiliated with
the Company.
<PAGE>38
Casinovations Incorporated
(A Development Stage Company)
Balance Sheet
September 30, 1997
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash $ 39,390
Accounts receivable, trade 1,156
Inventories 12,037
-----------
Total current assets 52,583
Property and equipment, at cost, net of
accumulated depreciation of $4,326 215,150
Intangible assets 151,817
Deferred interest expense 46,500
Deposits 11,320
-----------
$ 477,370
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable - bank $ 197,450
Notes payable - others 83,436
Accounts payable 78,325
Accrued wages 28,984
Shareholder loans 663,825
-----------
Total current liabilities 1,052,020
Stockholders' equity:
Common stock, $.001 par value,
20,000,000 shares authorized,
5,740,638 shares issue and outstanding 5,741
Additional paid-in capital 3,747,574
Unpaid subscriptions to common stock (126,125)
Accumulated deficit (4,201,840)
-----------
(574,650)
-----------
$ 477,370
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>39
Casinovations Incorporated
(A Development Stage Company)
Statements of Operations
Nine Months Ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Period from
Inception
(April 29, 1994)
to
September 30, September 30, September 30,
1997 1996 1997
<S> <C> <C> <C>
Sales $ 1,928 $ 758 $ 4,663
Interest income 8,204 10 9,997
Other income 3,000 - 3,010
------------ ---------- ----------
13,132 768 17,670
Other costs and expenses:
General and administrative 1,154,016 359,525 2,335,331
General and administrative - related p 357,092 32,359 433,860
Research and development 229,897 224,841 936,853
1,741,005 616,725 3,706,044
------------ ---------- ----------
(Loss) from operations (1,727,873) (615,957) (3,688,374)
Interest expense - related parties 236,728 33,841 665,852
------------ ---------- ----------
236,728 33,841 665,852
------------ ---------- ----------
(Loss) before income taxes (1,964,601) (649,798) (4,354,226)
Provision for income taxes - - -
------------ ---------- ----------
Net (loss) $ (1,964,601) $ (649,798) (4,354,226)
============ ========== ===========
(Loss) per share:
Net (loss) $ (0.36) $ (0.16) $ (1.08)
============ ========== ===========
Weighted average shares outstanding 5,486,905 3,943,889 4,038,973
============ ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>40
Casinovations Incorporated
Statements of Cash Flows
(A Development Stage Company)
Nine Months Ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Inception
(April 29, 1994)
to
September 30, 1997 September 30, 1996 September 30, 1997
<S> <C> <C> <C>
Net (loss) $ (1,964,601) $ (649,798) $ (4,354,226)
Adjustments to reconcile net (loss) to net
cash provided by operating activities:
Depreciation and amortization 18,020 9,043 22,247
Interest added to loan balances 33,913 - 71,558
Stock issued for services 346,374 45,000 1,121,874
Compensation value of stock issued 154,000 - 154,000
Stock issued for interest 22,561 - 22,561
Equipment exchanged for services - - 2,903
Amortization of deferred interest 139,500 186,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 1,677 (1,100) (1,156)
(Increase) decrease in inventory (11,181) - (12,037)
(Increase) decrease in prepaid expenses 724 (751) -
(Increase) decrease in other assets (5,201) - (11,320)
Increase (decrease) in accounts payable an
accrued expenses (103,894) (16,165) 107,309
----------- ---------- ----------
Total adjustments 596,493 36,027 1,663,939
----------- ---------- ----------
Net cash (used in)
operating activities (1,368,108) (613,771) (2,690,287)
----------- ---------- ----------
Cash flows from investing activities:
Acquisition of plant and equipment (208,383) (2,600) (227,630)
Increase in patents and trademarks (18,614) (74,629) (164,487)
----------- ---------- ----------
Net cash (used in) investing activities (226,997) (77,229) (392,117)
----------- ---------- ----------
Cash flows from financing activities:
Common stock sold for cash 865,510 60,000 1,800,569
Capital contributions by partners - - 402,950
Proceeds from notes payable 197,450 - 269,450
Proceeds of shareholder loans 45,000 647,258 45,000
Repayment of shareholder loans (20,000) - (40,000)
Repayment of long-term debt (6.343) - (6,343)
Increase in amounts due officers and shareh - - 650,168
----------- ---------- ----------
Net cash provided by
financing activities 1,081,617 707,258 3,121,794
----------- ---------- ----------
Increase (decrease) in cash (513,488) 16,258 39,390
Cash and cash equivalents,
beginning of period 552,878 1,452 -
----------- ---------- ----------
Cash and cash equivalents,
end of period $ 39,390 $ 17,710 $ 39,390
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>41
Casinovations Incorporated
(A Development Stage Company)
Notes to Financial Statements
Basis of presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions incorporated in Regulation
10-SB of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments and
accruals) considered necessary for a fair presentation have been included.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. The accompanying
financial statements should be read in conjunction with the Company's
financial statements for the year ended December 31, 1996, included elsewhere
herein.
Loss per share was computed using the weighted average number of common
shares outstanding.
Advances in the amount of $250,000 during October 1996 from the Company's
major stockholder provides for repayment of the loan by December 31, 1997 or,
upon default, at the option of the stockholder, by the issuance of the
Company's common stock at a conversion rate of $.82 per share. The
difference between this amount and the fair value of the stock ($1.50 per
share) has been recorded as deferred interest on the Company's balance sheet
with a corresponding credit to paid-in capital. The deferred interest is
being amortized as interest expense through December 31, 1997. Unamortized
interest amounted to $46,500 at September 30, 1997 and $139,500 was charged
to interest expense for the nine months ended September 30, 1997. On
December 31, 1997, the stockholder elected to convert the full amount the
advance including accrued interest to common stock of the Company. The
Company issued 339,304 shares of common stock for the cancellation of an
aggregate of $278,229 of loans and accrued interest.
During the period ended September 30, 1997 the Company issued 577,000 shares
of its common stock for cash aggregating $865,510 ($1,50 per share). Seventy
seven thousand of the shares were issued in June 1997 and were valued at
$3.50 per share as the timing of their issuance was considered to be
contemporaneous with the Company's decision to offer its common stock to the
public at that price. The Company recorded compensation expense of $2.00 per
share for these shares. Additionally, the Company issued 135,000 shares of
common stock to consultants and others for services valued at $202,500 ($1.50
per share) and issued 45,122 shares for the conversion of debt of $45,122 to
related parties pursuant to conversion provisions included in the debt
instruments. The difference between the conversion price for the debt ($1.00
per share) and the fair value of the shares issued at the conversion date in
April 1997 ($1.50 per share) has been charged to interest expense. During
June 1997, the Company issued 20,000 shares of its common stock for services
provided by a consultant. The shares were valued at $3.50 per share as the
timing of their issuance was considered to be contemporaneous with the
Company's decision to offer its common stock to the public at that price.
Additionally in June 1997, 100,000 Class D Warrants were issued to the
Company's major shareholder at a conversion price of $1.50 per share.
The difference between conversion price of the warrants and the assumed fair
value of the stock amounted to $200,000 and has been charged to general and
administrative expenses - related parties. The warrants were exercised
during September 1997 and the Company received cash proceeds of $150,000. An
additional 100,000 Class D Warrants were issued to a consultant during this
period, however, the warrants replaced options to purchase 100,000 shares of
common stock at $1.50 per share that were granted to the consultant at a time
when the fair value of the stock was equal to the option price. The Company
has not recorded compensation expense with respect to the replacement
warrants as the terms and conditions of the warrants, including the
expiration date, are identical to those of the original options.
Certain of the shares issued to a consultant and an advertiser were for
future services to be provided to the Company. The amounts attributable to
unearned services have been accounted for as unpaid subscriptions to common
stock in the accompanying balance sheet.
During August 1997, the Company secured a $197,450 short term loan from a
bank. The loan bears interest at 7.2% per annum and has an initial term of
six months. The loan is secured by a certificate of deposit in the amount of
$200,000 pledged as collateral by a company to which the Company has issued
its common stock in exchange for consulting services. The collateral
agreement provides for additional interest costs associated with the loan
calculated at 8.5% per annum based on the certificate amount. The agreement
also contains conversion provisions whereby the consultant may elect to
receive shares of the Company's common stock in lieu of cash repayment of the
loan and accrued interest. The number of conversion shares to be issued in
the event of conversion is to be determined at the conversion date based on a
quoted market price of the common stock.
<PAGE>42
During December 1997 and January 1998, the Company received proceeds from
convertible debentures aggregating $400,000. The debentures bear interest at
6% per annum and are due on or before January 31, 1999. The principal amount
of the debentures is convertible at the holder's option into shares of the
Company's common stock at a conversion price of $2.98 per share. The
difference between this amount and the proposed offering price of the common
stock of $3.50 per share will be recorded as additional interest expense
during the term of the debentures.
<PAGE>43
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Casinovations Incorporated
(A Development Stage Company)
We have audited the balance sheet of Casinovations Incorporated as of
December 31, 1996, and the related statements of income, changes in
stockholders' equity, and cash flows for each of the two years in the
period then ended and for the period from inception (April 29, 1994)
to December 31, 1996. 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
Casinovations Incorporated as of December 31, 1996, and the results
of its operations and cash flows for each of the two years in the
period then ended and for the period from inception (April 29, 1994)
to December 31, 1996, in conformity with generally accepted
accounting principles.
Winter, Scheifley & Associates, P.C.
Certified Public Accountants
Englewood, Colorado
March 27, 1997
(Except for Note 7. For which
the date is July 15, 1997)
<PAGE>44
Casinovations Incorporated
(A Development Stage Company)
Balance Sheet
December 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
1996
Current assets:
Cash $ 552,878
Accounts receivable 2,833
Inventory 856
Prepaid expenses 724
-----------
Total current assets 557,291
Property and equipment, at cost, net of
accumulated depreciation of $1,686 12,117
Other assets:
Patents and trademarks 145,873
Deferred interest expense 186,000
Other 6,119
-----------
337,992
-----------
$ 907,400
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 45,186
Accounts payable - related parties 61,666
Accrued wages 91,950
Accrued expenses 12,401
Amounts due affiliates 650,034
-----------
Total current liabilities 861,237
Long term debt 89,779
Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock, $.001 par value,
20,000,000 shares authorized,
4,963,510 issued and outstanding 4,964
Additional paid-in capital 2,188,659
(Deficit) accumulated during
development stage (2,237,239)
-----------
(43,616)
-----------
$ 907,400
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>45
Casinovations Incorporated
(A Development Stage Company)
Statements of Operations
For the Years Ended December 31, 1996 and 1995
And For the Period From Inception (April 29, 1994) to December 31, 1996
<TABLE>
<CAPTION>
Period from
Inception
(April 29, 1994)
to December 31,
1996 1995 1996
------ ------ ------
<S> <C> <C> <C>
Revenues $ 2,450 $ 285 $ 2,735
Other income 1,803 1,803
----------- ----------- -----------
4,253 28 4,538
Costs and expenses:
General and administrative expenses 977,827 133,315 1,521,815
General and administrative expenses - related party 52,313 24,455 76,768
Research and development - related party 244,117 436,871 706,956
----------- ----------- -----------
1,274,257 594,641 2,305,539
Interest expense - related parties 414,723 14,401 42,124
----------- ----------- -----------
414,723 14,401 42,124
Net (loss) $ (1,684,727) $ (608,757) $ (2,343,125)
=========== =========== ===========
Earnings (loss) per share:
Net income (loss) $ (0.41) $ (0.21) $ (0.71)
=========== =========== ===========
Weighted average shares outstanding 4,133,909 2,867,165 3,306,649
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>46
Casinovations Incorporated
(A Development Stage Company)
Statement of Changes in Stockholders' Equity
For the Period From Inception (April 29, 1994) to December 31, 1996
<TABLE>
<CAPTION>
Deficit
Additional Accumulated
Common Stock Paid -in During Develop-
ACTIVITY Shares Amount Capital ment Stage Total
<S> <C> <C> <C> <C> <C>
Capital contributed by partners $ $ 101,845 $ $ 101,845
Net (loss) for the period (96,141) (96,141)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1994 101,845 (96,141) 5,704
Issue shares to founders (September 1995) 3,775,000 3,775 297,330 301,105
Issuance of stock in private sales:
October 1995 at $1.00 130,000 13 129,870 130,000
(less cost of offering) (7,206) (7,206)
Net (loss) for the year (608,757) (608,757)
Reclassification of partnership losses (152,386) 152,386
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1995 3,905,000 3,905 369,453 (552,512) (179,154)
Issuance of stock in private sales:
March 1996 at $1.50 20,000 20 29,980 30,000
April 1996 at $1.50 10,000 10 14,990 15,000
July 1996 at $1.50 10,000 10 14,990 15,000
October 1996 at $1.50 36,000 36 53,964 54,000
November 1996 at $1.50 302,400 302 453,298 453,600
December 1996 at $1.50 63,110 63 94,602 94,665
Issuance of stock for services:
June 1996 at $1.50 30,000 30 44,970 45,000
October 1996 at $1.50 85,000 85 127,415 127,500
December 1996 at $1.50 175,000 175 262,325 262,500
Issuance of stock to related party
for debt conversion - October 1996 327,000 327 490,173 490,500
Option granted to related party for 235,500 232,500
debt conversion
Net (loss) for the year (1,684,727) (1,684,727)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 4,963,510 $ 4,964 $ 2,188,659 $(2,237,239) $ (43,616)
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>47
Casinovations Incorporated
(A Development Stage Company)
Statements of Cash Flows
For the Years Ended December 31, 1996 and 1995
And For the Period From Inception (April 29, 1994) to December 31, 1996
<TABLE>
<CAPTION>
Period from
Inception
(April 29, 1994)
to December 31,
1996 1995 1996
------ ------ ------
<S> <C> <C> <C>
Net income (loss) $ (1,684,727) $ (608,757) $ (2,343,125)
Adjustments to reconcile net income to net
cash provided by operating activities:
Stock issued for services 775,500 700,500
Interest added to loan balances 23,245 23,245
Amortization of deferred interest 46,500
Equipment exchanged for services 2,903 2,903
Depreciation and amortization 2,553 73 4,227
Changes in assets and liabilities:
(Increase) in accounts receivable (2,833) (2,833)
(Increase) in inventory (856) (856)
(Increase) in prepaid expenses (300) (424) (724)
(Increase) in other assets (6,119) (6,119)
Increase (decrease) in accounts payable (73,330) 180,182 106,852
Increase in accrued expenses 104,351 104,351
----------- ----------- -----------
Total adjustments 872,470 179,634 931,546
----------- ----------- -----------
Net cash provided by (used in)
operating activities (812,257) (429,123) (1,411,579)
Cash flows from investing activities:
Acquisition of plant and equipment (12,969) (19,247)
Increase patents and trademarks (65,781) (67,909) (145,873)
----------- ----------- -----------
Net cash provided by (used in)
investing activities (78,750) (67,909) (165,120)
Cash flows from financing activities:
Capital contributions by partners 301,105 402,950
Common stock sold for cash 812,265 122,794 1,010,059
Increase in stockholder loans 630,168 66,400 716,568
----------- ----------- -----------
Net cash provided by (used in)
financing activities 1,442,433 490,299 2,129,577
----------- ----------- -----------
Increase (decrease) in cash 551,426 (6,733) 552,878
Cash and cash equivalents,
beginning of period 1,452 8,185 -
----------- ----------- -----------
Cash and cash equivalents,
end of period $ 552,878 $ 1,452 $ 552,878
=========== =========== ===========
Supplemental cash flow information:
Cash paid for interest $ - $ - $ -
Cash paid for income taxes $ - $ - $ -
</TABLE>
See accompanying notes to financial statements.
<PAGE>48
Casinovations Incorporated
Notes to Financial Statements
December 31, 1996 and 1995
Note 1. ORGANIZATION
The Company. was incorporated on September 20, 1995, in the
State of Washington. The Company is in the business of
developing and distributing products related to the gaming
industry. The Company has not recorded significant revenues to
date and is considered to be in its development stage. The
Company's principal products are an electronic card shuffling
device, a table game similar to the card game "blackjack" and
playing cards designed to assist the dealer in the game of
"blackjack". The Company is a continuation of a partnership
known as Sharps International, (Sharps) which was formed in
April 1994 and whose principal business activity was the
development of an electronic card shuffler. Pursuant to a
funding agreement dated January 15, 1996, the partners of Sharps
received shares of the Company's common stock on a pro rata
basis in exchange for their partnership interests. Additional
shares were issued to partners of the Sines-Forte general
partnership (Sines) in exchange for the assets of Sines. Such
assets consisted of certain intellectual property rights for
products which the Company plans to exploit. Certain officers
of the Company who were partners of Sines retain a 3% royalty
interest in the gross margin earned from the sale of products
covered by the intellectual property and also hold options to
purchase up to 40,000 shares of the Company's common stock at
$1.00 per share. The transaction was accounted for as a
reorganization of partnerships into corporate form since the controlling
interests of the partnerships are also controlling shareholders of the
corporation. The foregoing financial statements present the operations of
the Company and the partnerships from their inception. Values
assigned to the acquired intellectual property rights are
limited to professional fees paid for patents and trademarks.
SIGNIFICANT ACCOUNTING POLICIES
Estimates:
The preparation of the Company's financial statements requires
management to make estimates and assumptions that effect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from these estimates.
Fixed assets:
The Company depreciates its office equipment utilizing the straight
line method over a period of five years. Depreciation expense
amounted to $2,553 and $732 for the years ended December 31, 1996
and 1995, respectively.
Intangible assets
The Company has applied for patents for certain of its products.
Patent and trademark costs aggregating $145,873 will be amortized
using the straight line method over a period of ten years beginning
in 1997.
Organization costs aggregating $6,395 are amortized using the
straight line method over a period of five years and are stated net
of accumulated amortization of $1,279 at December 31, 1996.
Net loss per share:
The net loss per share is computed by dividing the net loss for the
period by the weighted average number of common shares outstanding
for the period. Common stock equivalents are excluded from the
computation as their effect would be anti-dilutive.
Revenue recognition:
The Company recognizes revenue from the sale of its products upon
shipment to the customer.
Cash and cash equivalents
Cash and cash equivalents consist of cash and other highly liquid
debt instruments with a maturity of less than three months.
Fair value of financial instruments
The Company's short-term financial instruments consist of cash and
cash equivalents, accounts and loans receivable, and payables and
accruals. The carrying amounts of these financial instruments
approximates fair value because of their short-term maturities.
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of cash and accounts
receivable, trade. During the year the Company maintained cash
deposits at financial institutions in excess of the $100,000 limit
covered by the Federal Deposit Insurance Corporation.
<PAGE>49
Stock-based Compensation
The Company adopted Statement of Financial Accounting Standard No. 123
(FAS 123), Accounting for Stock-Based Compensation beginning with the
Company's first quarter of 1996. Upon adoption of FAS 123, the
Company continued to measure compensation expense for its stock-based
employee compensation plans using the intrinsic value method
prescribed by APB No. 25, Accounting for Stock Issued to Employees,
and has provided in Note 2 pro forma disclosures of the effect on net
income and earnings per share as if the fair value-based method prescribed by
FAS 123 had been applied in measuring compensation
expense.
Note 2. Stockholders' EQUITY
During the periods covered by these financial statements the Company
issued securities in reliance upon an exemption from registration
with the Securities and Exchange Commission. Although the Company
believes that the sales did not involve a public offering and that
it did comply with the exemptions from registration, it could be
liable for rescission of said sales if such exemption was found not
to apply.
The Company has not received a request for rescission of shares nor
does it believe that it is probable that its shareholders would
pursue rescission nor prevail if such action were undertaken
At inception, (September 20, 1995) the Company issued 2,513,000
shares of its $.001 par value common stock to the partners of Sharps
on a pro rata basis in exchange for their respective partnership
interests and 1,262,000 shares to the partners of Sines for
intellectual property rights as described in Note 1.
During October 1995 the Company sold 130,000 shares of its common
stock to a limited group of investors for cash at $1.00 per share.
During July 1996 the Company entered into a one year consulting
agreement with an entity whereby the entity would provide to the
Company financial consulting services. Pursuant to the agreement the
entity agreed to assist the Company in preparing a private placement
memorandum to obtain equity financing of a minimum amount of
$450,000 and to assist the Company in completing the offering.
In exchange for these services the Company agreed to pay $45,000 in
cash and to issue 100,000 shares of its $.001 par value common stock
valued at $150,000. The Company also granted the consultant an
option to purchase 50,000 shares of common stock at $1.50 for a two
year period. During February 1997, the Company issued an additional
100,000 shares and granted options to purchase an additional 50,000
shares of common stock at $1.50 to the consultant for a one year
extension of the contract. The shares were valued at $150,000.
Additionally, in 1996, the Company issued 75,000 shares of its $.001
par value common stock valued at $112,500 to other unrelated
individuals for consulting services provided to the Company. These
amounts have been included in general and administrative expenses in
1996 in the accompanying Statement of Operations.
During July 1996, the Company authorized the issuance of 200,000
each of A, B, and 250,000 of C stock purchase warrants exercisable
as follows:
$ 4.00 plus one A warrant for each share of common stock
$ 6.00 plus one B warrant for each share of common stock
$ 8.00 plus one C warrant for each share of common stock
The warrants are exercisable for a period of 48 months from the date
of issue, and are callable with 30 days notice at a price of $.001
per warrant.
During March 1996 the Company began offering shares of its common
stock at $1.50 per share pursuant to a private placement. Through
December 31, 1996, the Company issued 441,510 shares of common stock
to private investors for net cash proceeds aggregating $662,265.
Additionally during 1996 the Company issued an aggregate of 290,000
shares (including the consulting shares described above) to
consultants and others. The shares were valued at fair value of
$1.50 per share.
During June, 1996 the Company agreed to issue 327,000 shares of its
common stock to its principal shareholder in exchange for conversion
of $150,000 of cash advanced to the Company during 1996. The excess
of the fair value of the stock at $1.50 per share over the loan
amount was charged to interest expense - related parties.
The weighted average fair value at the date of grant for options
granted during 1996 as described above was $.17 per option. The
fair value of the options at the date of grant was estimated using
the Black-Scholes model with assumptions as follows:
<PAGE>50
Market value $1.50
Expected life 2
Interest rate 5.15%
Volatility 10%
Dividend yield 0.00%
Stock based compensation costs would have reduced pretax income by
$8,600 in 1996 ($.00 per share) if the fair value of the options
granted during 1996 had been recognized as compensation expense.
Note 3. INCOME TAXES
Deferred income taxes may arise from temporary differences resulting
from income and expense items reported for financial accounting and
tax purposes in different periods. Deferred taxes are classified as
current or non-current, depending on the classification of assets
and liabilities to which they relate. Deferred taxes arising from
temporary differences that are not related to an asset or liability
are classified as current or non-current depending on the periods in
which the temporary differences are expected to reverse. The
deferred tax asset resulting from the operating loss carryforward
described below has been fully reserved.
The Company currently has net operating loss carryforwards
aggregating approximately $ 1,400 000 which expire beginning in
2010. The principal difference between the Company's book operating
losses and income tax operating losses results from the issuance of
common stock during 1996 for services and options to purchase common
stock at less than fair market value in exchange for debt conversion
rights.
Note 4. RELATED PARTY TRANSACTIONS
Certain officers of the Company who were partners of Sines retain a
3% royalty interest in the gross margin earned from the sale of
products covered by the intellectual property described in Note 1.
Royalty amounts due pursuant to the royalty interest amounted to
$136 at December 31, 1996.
During the year ended December 31, 1996, certain officers and
shareholders made advances to the Company for working capital
purposes. The balances payable by the Company aggregated $650,034
at December 31, 1996, including accrued interest. No cash
repayments have been made against the advances, which are due on
demand (except as described below). An advance in the amount of
$300,000 was made by a principal shareholder of the Company on
January 15, 1996. The advance was due on July 15, 1996. The advance
was collateralized by partnership shares of Sharps equivalent to
700,000 shares of the Company's common stock controlled by two other
officer/shareholders. On October 1, 1996, the principal shareholder
exercised his rights against the collateral and as a result, the
collection rights to the advance plus accrued interest, which
aggregated $320,168 at October 1, 1996, transferred to the other
officer/shareholders. The advances accrue interest at between 9.5%
and 14.5% per annum. One of the advances in the amount of $250,000
from the Company's major stockholder provides for repayment of the
loan by December 31, 1997 or, upon default, at the option of the
stockholder, by the issuance of the Company's common stock at a
conversion rate of $.82 per share.
The difference between this amount and the fair value of the stock
($1.50) has been recorded as deferred interest on the Company's
balance sheet with a corresponding credit to paid-in capital. The
deferred interest is being amortized as interest expense through
December 31, 1997. Additionally, the Company paid an aggregate of
$24,455 in 1995 and $52,313 in 1996 to a company controlled by one
of its officers for administrative services provided to the Company.
At December 31, 1996, the Company had a balance due to this company
of $1,882. The Company incurred research and development costs
aggregating $244,117 and $436,871 during the years ended December
31, 1996 and 1995, respectively from a company controlled by a
member of its board of directors, and had a balance due to this
company of $59,784 at December 31, 1996.
During September, 1996 the Company entered into personal service
agreements with two of its officers which provide for aggregate
monthly compensation of up to $20,000 per month on a pro rata basis
for time spent on Company related business. The agreements have a
term of two years.
During February 1997, the Company entered into a consulting
agreement with an officer which provides for monthly base salary of
$12,500 and a commission of 3.73% of the gross margin on sales
attributable to the officer. The agreement has a term of two years
and provides for options to purchase up to 300,000 shares of the
Company's common stock at $1.50 per share depending upon the
achievement of certain corporate goals as approved by the board of
directors.
<PAGE>51
Note 5. LONG-TERM DEBT
During 1995, the Company borrowed $72,000 from two individuals with
interest payable at 15% per annum due January 2, 1998. Interest
accrued through December 31, 1996 has been added to the loan
amounts.
Note 6. COMMITMENTS AND CONTINGENCIES
During October, 1996 (amended March 26, 1997), the Company entered
into a lease for office space for a thirty month period ending March
31, 1999 at a monthly rental of $2,694, including maintenance costs.
Rent expense was $8,939 for the year ended December 31, 1996. The
Company shared office space with the affiliated company discussed in
Note 4 prior to October 1996.
Future minimum rentals under the lease are as follows:
1997: $32,328 1998: $32,328 1999: $8,082
The Company has granted joint exclusive licenses to two entities for
marketing rights to one of its products which provide for royalty
payments to the Company of $.04 and $.075 per unit sold. Amounts
paid pursuant to the licenses have not been material.
The Company's primary business activity since its inception has been
the completion of research and development for its electronic
shuffling machine. Substantially all of the costs associated with
this research and development have been paid to an unaffiliated
engineering and design company. A prototype shuffling machine was
delivered to the Company during 1996. The Company believes that it
has fulfilled its contractual obligations to the design company and
has retained the services of another company for refinements to the
prototype and commencement of manufacture of the device. The
Company's ability to complete its development stage and begin
product sales is dependent upon the successful manufacture of its
products.
Note 7. SUBSEQUENT EVENTS
Subsequent to December 31, 1996 (January 1, 1997 to July 15, 1997)
the Company sold an additional 477,000 shares of its common stock
pursuant to the private placement described in Note 2 for an
aggregate of $715,010 and issued 127,500 shares to consultants for
services valued at $191,250. Additionally, the Company issued Class
D Warrants to purchase 100,000 shares of the Company's common stock
for $1.50 per share to the Company's principal shareholder and
converted options to purchase 100,000 shares of common stock at
$1.50 per share previously granted to the consultant described in
Note 2 to Class D Warrants. The Class D Warrants have an exercise
price of $1.50 per share and are exercisable after January 31, 1997
for a two year period.
During July 1997, the Company secured a $200,000 principal amount
loan with a bank for a period of 200 days with interest accruing at
7.5% per year. The loan is collateralized by a certificate of
deposit placed at the bank by the consultant described in Note 2.
The Company has a collateral agreement with the consultant which
provides for additional interest at 8.5 % per year on the full
amount of the certificate of deposit. Should the Company be unable
to repay the bank loan according to its terms, the consultant has
the option of extending the collateral agreement under the same
terms for an additional 200 day period or of accepting shares of the
Company's common stock in payment of its obligations to the
consultant for release of the collateral to the bank plus any
accrued interest.
The number of shares of the Company's common stock to be paid to the
consultant upon conversion will be determined based upon the average
closing price of the stock for a five day period prior to the due
date of the loan.
<PAGE>52
PART II
INFORMATION NOT REQUIRED BY PROSPECTUS
Item 24. Indemnification of Officers and Directors.
The By-Laws of the Company provides that a director of the registrant
shall have no personal liability to the Registrant or its stockholders for
monetary damages for breach of a fiduciary duty as a director, except for
liability (a) for any breach of the director's duty of loyalty to the
Registrant or its stockholders, (b) for acts and omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, and
(c) pursuant to Canadian law for any transaction form which the director
derived an improper personal benefit. Registrant's By-Laws exculpates and
indemnifies the directors, officers, employees, and agents of the registrant
from and against certain liabilities. Further the By-Laws also provides that
the Registrant shall indemnify to the full extent permitted under Canadian
law any director, officer employee or agent of Registrant who has served as
a director, officer, employee or agent or the Registrant or, at the
Registrant's request, has served as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
INDEMNIFICATION OF OFFICERS OR PERSONS CONTROLLING THE COMPANY
FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF 1933, IS HELD TO BE
AGAINST PUBLIC POLICY BY THE SECURITIES AND EXCHANGE COMMISSION AND IS
THEREFORE UNENFORCEABLE.
Item 25. Other Expenses of Issuance and Distribution.
Other expenses in connection with this offering which will be paid
by Casinovations Incorporated (hereinafter in this Part II referred to as
the "Company") are estimated to be substantially as follows:
<TABLE>
Amount
Payable
Item By Company
<S> <C>
S.E.C. Registration Fees 3,919.53
State Securities Laws (Blue Sky) Fees and Expenses 3,500.00
Printing and Engraving Fees 7,500.00
Legal Fees 15,000.00
Accounting Fees and Expenses 8,000.00
Transfer Agent's Fees 1,500.00
Miscellaneous 2,500.00
---------
Total 41,919.53
</TABLE>
Item 26. Recent Sales of Unregistered Securities.
In September, 1995, the Company issued common shares to the partners of
Sharps on a pro rata basis in exchange for their respective partnership
interests. These issuances were made in reliance on Section 4(2) by
Registrant's management to sophisticated investors who had access to
information on the Company necessary to make an informed investment decision.
<TABLE>
<CAPTION>
Name Total Number
of Shares Date Issued
<S> <C> <C>
Stacy Haskins 15,478 9/1/95
Martin Petri 15,478 9/1/95
Michael Szeremeta 15,477 9/1/95
Sines-Forte Partnership 1,261,900 9/1/95
Cheryl Forte 254,610 9/1/95
Richard S. Huson 1,025,285 9/1/95
Leonard A. Hale 15,478 9/1/95
David A. Krise 61,910 9/1/95
Norman G. Kelln 113,628 9/1/95
John F. Curran 10,193 9/1/95
Randy D. Sines 254,610 9/1/95
David E. Sampson 40,955 9/1/95
</TABLE>
During October, 1995, the Company issued 130,000 for cash consideration of
$130,000. These issuances were made in reliance on Section 4(2) by
Registrant's management to sophisticated investors who had access to
information on the Company necessary to make an informed investment decision.
<PAGE>52
<TABLE>
<CAPTION>
Name Total Number Cash
of Shares Date Issued Consideration
<S> <C> <C> <C>
Jay Willoughby 50,000 10/6/95 $50,000
David Goldsmith 50,000 10/6/95 $50,000
C. Culver Smith 30,000 10/27/95 $30,000
</TABLE>
From March 15, 1995 to January 28, 1997, the Company pursued a private
placement at $1.50 per common shares and issued a total of 828,177 to the
following individuals for aggregate cash consideration of $1,232,265.50.
These issuances were made in compliance with Rule 505, Regulation D of the
Securities Act of 1933 by Registrant's management, consultants and selected
broker/dealers. No commissions or other remuneration was paid to anyone.
No general solicitation was utilized. All of the investors were accredited
investors. The determination of whether an investor was accredited or
nonaccredited was based on the responses in the subscription agreement filled
out by each investor.
<TABLE>
Name Total Number Cash
of Shares Date Issued Consideration
<S> <C> <C> <C>
Don Ludwick 20,000 3/26/96 $30,000
William Martin 10,000 4/12/96 $15,000
Adam Chase 10,000 7/11/96 $15,000
Adam W. Jaslow 30,000 10/25/96 $45,000
Jennifer L. Jaslow 100,000 10/25/96 $150,000
John Horstmann 6,000 10/25/96 $9,000
Richard S. Jaslow, IRA 100,000 11/1/97 $150,000
Lori K. Jaslow Trust 20,000 11/1/96 $30,000
Adam Jaslow Trust 70,000 11/1/96 $105,000
John Plati 20,000 11/12/96 $30,000
Doris Ljubicich 3,400 11/12/96 $5,100
Joseph Hroncich 3,000 11/12/96 $4,500
John S. Cole 3,000 11/12/96 $4,500
Vito Bavaro 3,000 11/12/96 $4,500
Lori K. Jaslow, Trust 80,000 11/14/96 $120,000
Kevo Plumbing & Heating 10,000 11/16/96 $20,000
Tami L. Dirienzo 6,000 11/16/96 $9,000
Peter Jankowski 10,000 11/16/96 $15,000
Renaldo C. Forcellati 3,000 11/16/96 $4,500
Frank Stein 3,000 11/16/96 $4,500
Joan Carranza 3,000 11/16/96 $4,500
Joseph Criscione Sr. 3,000 11/16/96 $4,500
Paul M. Reichenberg 6,000 11/16/96 $9,000
Kathleen M. Mahaffey 3,000 11/16/96 $4,500
Balieri Associates 3,000 11/16/96 $4,500
William S. Dean 6,000 12/1/96 $9,000
Victor & Lana Woinski 3,000 12/11/96 $4,500
James J. & Sheila Criscione 3,000 12/11/96 $4,500
Catherine O'Connell 3,400 12/11/96 $5,100
Joseph & Ida Dellaroba 3,000 12/11/96 $4,500
Mark R. Alleman 3,000 12/11/96 $4,500
William Megnin 3,400 12/11/96 $5,100
James P. Rose 3,000 12/11/96 $4,500
Mark Megnin 3,000 12/11/96 $4,500
Danial Morgan & Sara
Andelina 3,010 12/11/96 $4,515
Richard P. Keshishian 3,000 12/11/96 $4,500
Robert Jouas 4,000 12/11/96 $6,000
David E. & Margaret Winkelman 3,000 12/11/96 $3,000
Carl & Birte Mainardi 3,400 12/11/96 $5,100
Mark Megnin & Helen Connor 3,400 12/11/96 $5,100
Paul S. & Renee Spiegler 6,500 12/11/96 $9,750
Diana Forcellati 3,000 12/16/96 $4,500
Richard Napolitano 3,000 12/11/96 $4,500
Jeremy B. & W. Stern 10,000 1/6/97 $15,000
Aldo R. Beretta 1993
Family Trust 10,000 1/6/97 $15,000
Dr. David Ade 10,000 1/6/97 $15,000
Michael Schaeffer 10,000 1/6/97 $15,000
Joseph & Julie Vaccaro 7,000 1/6/97 $10,500
George & Selma Spiegler 3,000 1/6/97 $4,500
Susan Jaslow 50,000 1/27/97 $75,000
Maria Cunha IRA 8,500 1/28/97 $12,750
Henry and John Horstmann 8,000 1/28/97 $12,000
Antonio Tommolillo 3,000 1/28/97 $4,500
Salvatore LaCognata 3,000 1/28/97 $4,500
Harry & Adele Conti 3,000 1/28/97 $4,500
Nicola Attanasio 5,000 1/28/97 $7,500
Lawrence Mendosa 5,000 1/28/97 $7,500
Janet Ausiello 5,000 1/28/97 $7,500
Michael Ausiello 5,000 1/28/97 $7,500
Mark Malzberg 6,000 1/28/97 $9,000
Laura Giostra 6,700 1/28/97 $10,050
David Lupo 3,000 1/28/97 $4,500
Peter O'Hare, Jr. 4,000 1/28/97 $6,000
<PAGE>54
Giovanni Granata 3,000 1/28/97 $4,500
Mario Tommolillo 4,000 1/28/97 $6,000
Jeffrey Kerne 6,000 1/28/97 $9,000
Gino Ramundo 6,000 1/28/97 $9,000
Evelyn Alleman 3,000 1/28/97 $3,000
Thelma Zube 3,400 1/28/97 $5,100
Vincent & F. Ponte 6,667 1/28/97 $10,000
Laura Giostra 6,700 1/28/97 $10,050
Philip & Concetta Vincenti 6,800 1/28/97 $10,200
Andrew Lesnak 3,400 1/28/97 $5,100
Susan Miller 6,700 1/28/97 $10,050
Uphill c/o Paul Scott 9,400 1/28/97 $14,100
Martin Feldman 3,400 1/28/97 $5,100
Mark DeLorenoz 3,000 1/28/97 $4,500
</TABLE>
On June 29, 1996, the Company issued 30,000 Common Shares to David Krise in
exchange for patents valued at $45,000. This issuance was made in reliance on
Section 4(2) by Registrant's management to a sophisticated investor who had
access to information on the Company necessary to make an informed investment
decision.
In July, 1996, the Board of Directors authorized the distribution of 200,000
A Warrants each exercisable into one Common Share of the Company at the
exercise price of $3.75 per Common Share, 200,000 B Warrants each exercisable
into one Common Share of the Company at the exercise price of $4.00 per
Common Share and 250,000 C Warrants each exercisable into one Common Share of
the Company at the exercise price of $6.00 per Common Share. The A, B and C
Warrants are exercisable for a period of 48 months from the date of issue and
are callable with 30 days notice at a price of $.001 per warrant. These
distributions were be made to the owners of record of Common Shares on the
books of the Company as of July 22, 1996. These issuances were made in
reliance on Section 4(2) by Registrant's management to sophisticated
investors who had access to information on the Company necessary to make an
informed investment decision.
During October, 1996, the Company issued 327,000 Common Shares to Richard
Huson for the conversion of a loan and accrued interest amounting to
$340,500. This issuance was made in reliance on Section 4(2) by
Registrant's management to an accredited investor.
In the fourth quarter of 1996 and the first quarter of 1997, the Corporation
issued an aggregate of 345,000 common shares to consultants who had access to
information on the Company necessary to make an informed investment decision
for services valued at $545,000 in the aggregate and officers and directors
of the Corporation (Steven Blad, David Sampson and Jay L. King) pursuant to
an exemption from registration under Section 4(2) of the Securities Act of
1933.
<TABLE>
<CAPTION>
Name Total Number Services
of Shares Date Issued Valued At
<S> <C> <C> <C>
Gaming Venture Corp. 100,000 12/28/96 $150,000
50,000 2/20/97 $75,000
50,000 2/28/97 $75,000
Pratt, Wylce & Lords 25,000 12/2/96 $37,500
4,100 2/20/97 $6,150
Clinton Clark 50,000 12/2/96 $75,000
10,900 2/20/97 $16,350
Steven Blad 10,000 2/20/97 $15,000
Micro Cap World, L.L.C. 10,000 2/20/97 $15,000
Jay L. King 25,000 10/02/96 $37,500
David Sampson 10,000 10/02/96 $15,000
</TABLE>
Gaming Venture Corp. provides management and capital acquisition consulting.
Pratt, Wylce & Lords provided management and capital acquisition consulting
services.
Clinton Clark provided management and capital acquisition consulting
services.
Micro Cap World, L.L.C. provided management consulting services
On March 31, 1997, the Corporation issued 45,122 Common Shares to Cheryl and
Steve Forte for the conversion of a loan whose principal and interest amount
was $45,122. This issuance was made in reliance on Section 4(2) by
Registrant's management to sophisticated investors who had access to
information on the Company necessary to make an informed investment
decision.
During May and June, 1997, the Corporation issued the following Common Shares
to sophisticated investors who had access to information on the Company
necessary to make an informed investment decision for cash consideration or
services pursuant to an exemption from registration under Section 4(2) of the
Securities Act of 1933.
<PAGE>55
<TABLE>
<CAPTION>
Name Total Number Cash
of Shares Date Issued Consideration
(1)
or Services
Valued At
(2)
<S> <C> <C> <C>
Jayport Holdings, Inc. (BUI) 20,339 5/2/97 $30,509
<F1>
Glenn Fine 30,000 6/5/97 $45,000
<F1>
Casino Journal of Nevada, Inc. 20,000 6/5/97 $30,<F2>
Robert Smith 6,000 6/12/97
$9,000<F1>
John Wasden 5,000 6/12/97 $7,500
<F1>
Althea Duggins 1,000 6/12/97
$1,500<F1>
James Beard 1,000 6/12/97 $1,500
<F1>
</TABLE>
[FN]
<F1>These individuals or entities paid cash consideration. Jayport
Holdings, Inc. is a nonaffiliate.
<F2>Casino Journal of Nevada, Inc. provided advertising services. The
principal of Casino Journal of Nevada, Inc. is Glenn Fine.
In June 1997, the Company issued 100,000 Class D Warrants to Richard Huson, a
majority shareholder of the Company and 100,000 D Warrants to Gaming Venture
Corp., U.S.A., a consultant of the Company for services valued at $2,000.
Mr. Huson subsequently exercised all of his Class D Warrants in October,
1997. In the fourth quarter of 1997, the 100,000 D Warrants remaining were
exercised and 90,000 Common Shares were issued to Thomas DiSalvatore and
10,000 Common Shares were issued to Michele Gilbert. Mr. DiSalvatore and
Ms. Gilbert are sophisticated purchasers.
These issuances were made in reliance on Section 4(2) by Registrant's
management to Mr. Huson, an accredited investor and Gaming Venture Corp.,
U.S.A. a sophisticated investor who had access to information on the Company
necessary to make an informed investment decision.
Item 27. Exhibit Index.
<TABLE>
<S> <C>
(1) Not Applicable
(2) Not Applicable
(3) Certificate of Incorporation incorporated by reference to
Form SB-2 filed on July 16, 1997, S.E.C. File Number 333-
31373
(3.1) Amendment to Articles of Incorporation dated October 14,
1996 incorporated by reference to Form BS-2 filed on July
16, 1997, S.E.C. File Number 333-31373
(3.2) Amendment to Articles of Incorporation dated February 18,
1997 incorporated by reference to Form BS-2 filed on July
16, 1997, S.E.C. File Number 333-31373
(3.3) Bylaws incorporated by reference to Form BS-2 filed on July
16, 1997, S.E.C. File Number 333-31373
(4) Specimen certificate for Common Stock incorporated by
reference to Form BS-2 filed on July 16, 1997, S.E.C. File
Number 333-31373
(4.1) Specimen Warrant certificate incorporated by reference to
Form BS-2 filed on July 16, 1997, S.E.C. File Number 333-
31373
(5) Consent and Opinion of Jody M. Walker regarding
legality of securities registered under this
Registration Statement and to the
references to such attorney in the Prospectus filed
as part of this Registration Statement
(6) Not Applicable
(7) Not Applicable
(8) Not Applicable
(9) Not Applicable
(10.1) Consulting Agreement of GameTek and Steven J. Blad dated
February 1, 1997 incorporated by reference to Form BS-2
filed on July 16, 1997, S.E.C. File Number 333-31373
(10.2) Consulting Agreement with Gaming Venture Corp., U.S.A.
dated July 8, 1996 incorporated by reference to Form SB-2
filed on July 16, 1997, S.E.C. File Number 333-31373
(10.3) Exclusive Distributorship Agreement with Sodak Gaming, Inc.
dated April 23, 1997 incorporated by reference to Form SB-2
filed on July 16, 1997, S.E.C. File Number 333-31373
(10.4) Exclusive Distributorship Agreement with RGB SDN BHD dated
February 19, 1997 incorporated by reference to Form SB-2
filed on July 16, 1997, S.E.C. File Number 333-31373
(10.5) Exclusive Distributorship Agreement with B. Joel Rahn dated
June 1, 1997 incorporated by reference to Form SB-2 filed
on July 16, 1997, S.E.C. File Number 333-31373
<PAGE>56
(10.6) Exclusive License Agreement with George C. Matteson Co.,
Inc. incorporated by reference to Form SB-2 filed on July
16, 1997, S.E.C. File Number 333-31373
(10.7) License Agreement with United States Playing Card Company
(10.8) Royalty Agreement with Sines/Forte Partnership dated June
15, 1996 incorporated by reference to Form SB-2 filed on
July 16, 1997, S.E.C. File Number 333-31373
(10.9) Promissory Note with Richard Huson dated July 8, 1997
incorporated by reference to Form SB-2 filed on July 16,
1997, S.E.C. File Number 333-31373
(10.10) Collateral Loan Agreement with Gaming Venture Corp., U.S.A.
(10.11) Exclusive License Agreement with Technology Development
Center, LLC.
(10.12) Funding Agreement dated January 15, 1996
(10.13) Partnership Pledge and Security Agreement dated January 15,
1996
(10.14) Promissory Note dated January 15, 1996
(10.15) Consent of Spouse date January 15, 1996
(11) Not Applicable
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Not Applicable
(17) Not Applicable
(18) Not Applicable
(19) Not Applicable
(20) Not Applicable
(21) Not Applicable
(22) Not Applicable
(23) Not Applicable
(24) Consent of Winter, Scheifley & Associates, P.C.
(25) Not Applicable
(26) Not Applicable
(27) Financial Data Schedule
(28) Not Applicable
(99) Employment Agreement of Jay L. King dated January 1, 1997
incorporated by reference to Form BS-2 filed on July 16,
1997, S.E.C. File Number 333-31373
(99.1) Employment Agreement with Randy D. Sines dated March 31,
1996 incorporated by reference to Form BS-2 filed on July
16, 1997, S.E.C. File Number 333-31373
(99.2) Employment Agreement with Steven L. Forte dated March 31,
1996 incorporated by reference to Form BS-2 filed on July
16, 1997, S.E.C. File Number 333-31373
(99.3) Amendment to Employment Agreement (Personal Service
Agreement) and Covenant Not to Compete and Funding
Agreements dated September 8, 1997 incorporated by
reference to Amendment 2 to Form BS-2, S.E.C. File Number
333-31373
(99.4) Agreement with Officers and Directors
</TABLE>
Item 28. Undertaking.
The undersigned registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(I) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the formation set forth in the Registration
Statement.
(iii) To include any additional or changed material information on the
plan of distribution.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Delivery of Certificates.
The undersigned registrant hereby undertakes to provide to the
Transfer Agent at the closing, certificates in such denominations and
registered in such names as are required by the Transfer Agent to permit
prompt delivery to each purchaser.
<PAGE>57
(c) Indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions set forth in
the Company's Articles of Incorporation or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>58
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
City of Las Vegas, State of Nevada on the 16th the day of February, 1998.
Casinovations, Inc.
/s/Steven Blad
--------------------------------
By:, Steven Blad President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
and on the dates stated.
<TABLE>
Signature Capacity Date
<S> <C> <C>
/s/Glen (Tom) Pickell Chief Executive Officer
- ------------------- Director February 16, 1998
/s/Jay L. King controller/Director
- ------------------- Principal Financial Officer February 16, 1998
/s/Steven Forte Director February 16, 1998
- -------------------
/s/David Sampson Director February 16, 1998
- -------------------
/s/Norman Kelln Director February 16, 1998
- -------------------
</TABLE>
<PAGE>59
Jody M. Walker
7841 South Garfield Way
Littleton, Colorado 80122
Telephone (303) 850-7637
Facsimile (303) 220-9902
February 16, 1998
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Dear Sirs:
Re: OPINION RE: LEGALITY AND CONSENT OF COUNSEL TO USE OF NAME IN
AMENDMENT 4 TO THE REGISTRATION STATEMENT ON FORM SB-2 OF
CASINOVATIONS, INC.
I am securities counsel for the above mentioned corporation and I have
prepared Amendment 4 to the registration statement on Form SB-2. I hereby
consent to the inclusion and reference to my name in Amendment 4 to the
Registration Statement on Form SB-2 for Casinovations, Inc.
It is my opinion that the securities of Casinovations, Inc. and those which
are registered with the Securities and Exchange Commission pursuant to Form
SB-2 Registration Statement of Casinovations, Inc. have been legally issued
and will be, when sold, legally issued, fully paid and non-assessable.
Yours very truly,
/s/ Jody M. Walker
--------------------
FUNDING AGREEMENT
THIS FUNDING AGREEMENT is entered into as of the 15th day of
January, 1996, by and among RICHARD S. HUSON, an individual ("Huson"), SHARPS
INTERNATIONAL LIMITED PARTNERSHIP, a Nevada limited partnership ("Sharps"),
RANDY D. SINES, an individual ("Sines"), CHERYL L. FORTE, an individual
("Forte"), SINES FORTE PARTNERSHIP, a Nevada general partnership consisting
of Sines and Forte (the "Partnership") and, solely for purposes of Sections 4
and 5 below, STEVEN L. FORTE.
R E C I T A L S:
Huson, Sines, and Forte each own a significant percentage of the
outstanding partnership interests ("Units") in Sharps;
The Partnership licenses certain inventions, ideas, patents,
trademarks and other intellectual property to Sharps;
Huson wishes to purchase from Sines and Forte some of their limited
partnership Units and acquire from them an option to purchase additional
limited partnership Units, and Sines and Forte wish to sell such Units and
provide such an option to Huson;
Sharps has requested a loan from Huson, and Huson is willing to make
such a loan on certain terms and conditions, including certain modifications
of the Partnership's licensing arrangements with Sharps, and the Partnership
is willing to commit to such modifications.
The parties wish to clarify prior agreements and understandings and
make certain additional agreements concerning the reorganization of Sharps'
business.
In consideration of the mutual promises and covenants contained
herein, the parties hereto agree as follows:
A G R E E M E N T:
SECTION 1. PURCHASE OF PARTNERSHIP UNITS AND RELATED MATTERS
a. Purchase of Partnership Units. Subject to the terms and conditions
set forth herein, Sines and Forte (collectively the "Sellers") hereby sell to
Huson and Huson hereby purchases from the Sellers a total of 42 limited
partnership Units, 21 from Sines and 21 from Forte (the "Transferred Units").
The transfer of the Transferred Units shall be duly reflected on Sharps'
books and records as provided in the Sharps International Limited Partnership
Agreement ("Sharps Partnership Agreement").
b. Purchase Price. Subject to the adjustments listed in Section 1.4,
Huson will pay to the Sellers an aggregate amount equal to Two Hundred Sixty
Five Thousand and No/100 Dollars ($265,000.00) (the "Purchase Price") for the
Units.
c. Payment of Purchase Price. The Purchase Price will be paid to the
Sellers as follows:
i. Upon execution of this Agreement, Huson shall deliver a check to
Sellers in the amount of ONE HUNDRED THOUSAND AND NO/100 DOLLARS
($100,000.00)
payable to Sellers; and
ii. Upon execution of this Agreement, Huson and his wife shall execute
and deliver to Sellers a promissory note in the form attached hereto as
Exhibit A (the "Purchase Price Promissory Note").
d. Adjustments to Purchase Price. Upon complete repayment of the Loan
to Sharps (as defined and described in Section 2), and if one of the two
contingencies listed below is met by July 15, 1996, the Purchase Price shall
be increased to THREE HUNDRED NINETY SEVEN THOUSAND FIVE HUNDRED DOLLARS
($397,500.00).
The contingencies are:
e. (a) (i) The "Random Ejection Card Shuffler" product shall be
licensed by Sharps to Shufflemaster, Inc. substantially pursuant to the terms
of the draft agreement attached hereto as Exhibit B, or (ii) Sharps' products
shall be licensed or sold to a third party pursuant to an agreement which
provides for a payment to Sharps concurrently with the execution of such
agreement of at least $1,000,000 in cash or cash equivalents, which payment
shall not be subject to any contractual right of offset, cancellation,
rescission, return or other condition, and (b) a minimum of ONE MILLION FIVE
HUNDRED THOUSAND AND NO/100 DOLLARS ($1,500,000.00) in cash or cash
equivalents shall be received by Sharps from investors who have purchased
Units in Sharps after the date of this Agreement at a minimum amount of
$9,456 per Unit. If, pursuant to Section 5, the Reorganization described
therein has then been completed, clause (b) of the preceding sentence shall
be deemed to require that any shares of Casinovations stock be purchased for
a minimum per-share price of $1.50; OR
ii. A total of TWO MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS
($2,500,000.00) in cash or cash equivalents shall be received by Sharps from
investors who have purchased Units in Sharps after the date of this Agreement
at a minimum amount of $9,456 per Unit (or $1.50 per-share of Casinovations
stock).
f. Payment of Adjusted Purchase Price. In the event the Purchase Price
is adjusted as set forth in Section 1.4 of this Agreement, the additional ONE
HUNDRED THIRTY TWO THOUSAND FIVE HUNDRED DOLLARS AND NO/100 ($132,500.00)
shall be paid by Huson in cash upon repayment of the Loan.
SECTION 2. LOAN
a. Loan by Huson to Sharps. Upon execution of this Agreement, Huson
shall loan to Sharps Three Hundred Thousand and No/100 Dollars ($300,000)
(the "Loan"), and Sharps shall execute and deliver to Huson a promissory note
in the form attached hereto as Exhibit C (the "Loan Promissory Note"). The
Loan shall be secured by a pledge of certain limited partnership Units
("Pledged Units") of Sharps owned by Sines and Forte in accordance with the
terms of a Partnership Pledge and Security Agreement attached hereto as
Exhibit D (the "Partnership Pledge Agreement"). Upon execution of this
Agreement, Sines and Forte shall execute and deliver to Huson the Partnership
Pledge Agreement and shall cause their spouses to execute and deliver spousal
consents in the forms attached hereto as Exhibits E-1 and E-2. If Huson
acquires ownership of any or all of the Pledged Units, Sines and Forte shall
have an option to re-purchase 50% of the acquired Units pursuant to the terms
of the Partnership Pledge Agreement.
b. Assignment of Loan Promissory Note. Notwithstanding any other
provision of this Agreement, if Huson should at any time acquire all or a
portion of the Pledged Units, then Huson shall immediately assign and endorse
the Loan and Note to Sines and Forte who shall have unconditional right,
title and interest in the Note and Loan in the principal amount of $300,000,
without recourse to Huson. The foregoing shall be in addition to any rights
of subrogation which Sines and Forte may have under applicable law.
SECTION 3. OPTION TO PURCHASE ADDITIONAL UNITS
a. Option to Purchase Additional Units. Subject to the terms and
conditions contained in Sections 3.2. and 3.3. below, Huson shall have an
option (the "Option") to purchase from Sellers up to an additional 43 Units
("Option Units"), 21.5 limited partnership Units from Sines and 21.5 limited
partnership Units from Forte, at the price of $405,000 for all such Option
Units or $9,456 per Unit (the "Option Price"). The Option shall be
exercised, if at all, within 90 days from the date the Loan is repaid in
full.
b. Default on Loan. In the event the Loan is not repaid in full on or
before the maturity date specified in the Loan Promissory Note, the Option
described in Section 3.1 shall be extinguished and Huson shall have no rights
with respect to it.
c. Adjustment to Option Price. In the event that the Loan is repaid in
full on or before the maturity date specified in the Loan Promissory Note but
neither of the contingencies listed in Section 1.4.1. or 1.4.2 is satisfied
as of the date the Loan is repaid, the Option Price shall be reduced from
$9,456 per Option Unit to $6,304 per Option Unit.
d. Exercise of Option. To exercise the Option, Huson shall give
written notice to Sellers of his election to exercise the Option. The notice
shall specify the number of Option Units which Huson elects to purchase. The
sale and purchase of the Option Units which Huson has elected to purchase
shall be closed at a mutually agreed time and place within 30 days after
Huson's notice of exercise. At the closing of such purchase, Huson shall pay
50% of the Option Price and the purchase of the Option Units shall be duly
reflected on Sharps' books and records in accordance with the Sharps
Partnership Agreement. At the closing Huson shall also execute and deliver
to Sellers a promissory note in substantially the form attached as Exhibit F
for the balance of the Option Price, except that the principal amount and
related terms of the Note shall be appropriately adjusted in the actual note
to reflect any change in the Option Price pursuant to Section 3.3 or to
reflect a purchase of less than all of the Option Units.
e. Conversion to Casinovations Shares. If the Reorganization has then
been effected, the Option shall apply to 270,000 shares of Casinovations
stock at $1.50 per share, subject to reduction to $1.00 per share on the
terms described above.
SECTION 4. INTELLECTUAL PROPERTY RIGHTS
a. Intellectual Property Rights. Sharps and the Partnership have
previously entered into an Exclusive License Agreement dated June 6, 1994
(the "Licensing Agreement") pursuant to which the Partnership granted to
Sharps a license with respect to certain inventions. The Partnership, Sines,
Forte, and Steven L. Forte hereby transfer, convey and assign to Sharps all
of the right, title and interest in and to the Licensed Inventions, Licensed
Technology, Licensed Patent Rights, Copyrights, Licensed Copyright Works,
Licensed Technology Rights, Licensed Products, Licensed Trademarks, and
Licensed Trademark Rights as those terms are defined and used in the
Licensing Agreement (the "Total Inventions"), excluding from such transfer
the "Safety Peek Dealing Shoe" and the Slow "Roll-Reel Vision" slot machine
concept (the "Retained Inventions"). The Total Inventions, excluding the
Retained Inventions and the Literary Rights, defined below, are referred to
herein as the "Transferred Inventions". The transfers herein shall not be
deemed to restrict the ability of Sines, Forte or Steven L. Forte to write or
develop articles, books, movie scripts, motion pictures, sound recordings or
other literary works about the Total Inventions or the story behind the
development thereof, including any copyrights therein (collectively, the
"Literary Rights"); provided, however, exercise of such rights shall not
involve disclosure of confidential information of Sharps which may have
commercial value to the business of Sharps or its successors.
b. Forte, Steven L. Forte, Sines and the Partnership will take any and
all steps necessary to enable Sharps to record the assignment of the
Transferred Inventions. Forte, Steven L. Forte, Sines and the Partnership
will sign all documents necessary to confirm that the Transferred Inventions
is owned by Sharps, and will take all steps necessary to otherwise effect
transfer of Forte, Steven L. Forte's, Sines' and the Partnership's rights in
the Transferred Inventions to Sharps.
c. Forte, Steven L. Forte, Sines and the Partnership will, at the
request of Sharps, assist in preparing United States and foreign trademark
and or patent applications covering the Transferred Inventions. Forte,
Steven L. Forte, Sines and the Partnership will sign and deliver to Sharps
all such applications. Sharps will bear all expenses to be incurred in
connection with all trademark and patent applications.
d. Royalties for Initial Products. The Licensing Agreement is hereby
terminated as to the Transferred Inventions but shall remain in full force
and effect in all other respects. In lieu of the royalties, license fees and
other consideration provided for in the License Agreement, the Partnership
shall receive from Sharps (a) a quarterly royalty fee of 3% of the "Net
Revenues" (as defined below) earned by Sharps with respect to the Initial
Products, and (b) an option to purchase from Sharps 6 of its limited
partnership Units at a price of $6,304.00 per Unit or 40,000 shares of
Casinovations at a price of $1.00 per share upon completion of the
Reorganization described in Section 5 below (the "Inventions Option"). The
term "Initial Products" means the following products: the "Random Ejection
Shuffler" (including future improvements thereto and variations thereof), the
"Safety Peek Cards" and the table-game version of "Fantasy 21" (but not any
computer, home version or other variation thereof). The term "Net Revenues"
means gross cash revenues received by Sharps for the relevant quarter
attributable to sales of the Initial Products, minus Sharps' cost of such
goods sold for such quarter. Unless otherwise agreed, the determination of
the cost of goods sold shall be made in accordance with generally accepted
accounting principles, consistently applied. The royalty fee provided for
herein shall be paid in accordance with and subject to the terms of a Royalty
Agreement which Sharps and the Partnership shall enter into by April 1, 1996.
The other terms and conditions of the Royalty Agreement shall be as provided
in the Licensing Agreement (including the duration of the royalty obligations
and provisions for termination), but if not provided for therein, shall be
mutually acceptable to Sharps, the Partnership and Huson.
e. To exercise the Inventions Option, the Partnership shall give
written notice to Sharps of its election to exercise the Inventions Option.
The notice shall specify the number of Inventions Option Units which the
Partnership elects to purchase. The sale and purchase of the Inventions
Option Units which the Partnership has elected to purchase shall be closed at
a mutually agreed time and place within 30 days after the Partnership's
notice of exercise. At the closing of such purchase, the Partnership shall
pay Sharps the applicable purchase price for the Units, and the purchase of
the Inventions Option Units shall be duly reflected on Sharps' books and
records in accordance with the Sharps Partnership Agreement.
f. The Inventions Option may be exercised by the Partnership only
during the one year period beginning on the second anniversary of the date of
this Agreement.
g. Consideration. The parties agree that the transfer of the
Transferred Inventions, of the License Agreement, the agreement to enter into
a Royalty Agreement with respect to the Initial Products and the Inventions
Options reflect a negotiated resolution by the parties.
h. Personal Services Agreements.
i. On or before the closing of the Reorganization (defined below), but
in any event by April 1, 1996, Sines and Steven L. Forte, individually, (as
applicable, the Individual"), shall each enter into employment or consulting
agreements with Sharps or Casinovations, as applicable, as the "Company" (the
"Personal Services Agreements").
ii. (a) Each of the Personal Services Agreements shall obligate the
Company to pay compensation to the Individual at a rate of $10,000 per month,
subject to pro rata reductions for any amount of work time spent by the
Individual on business not related to the Company. Each Personal Services
Agreement shall be for a term of two years subject to automatic renewals for
consecutive two-year terms thereafter unless and until either the Company or
the Individual gives written notice of non-renewal at least sixty (60) days
prior to expiration of the then current term, and subject to earlier
termination as provided in the remainder of this Section 4.4.2.
(b) The Company may terminate a Personal Services Agreement for
Adequate Cause (defined in Section 4.4.3 below) immediately upon the Company
giving written notice to the Individual. If terminated for Adequate Cause,
the Company's compensation obligations shall terminate upon the last day of
the employment or consulting relationship as specified in the termination
notice.
(c) The Company may also terminate a Personal Services Agreement
without Adequate Cause, but in such event (other than a Mandatory
Disassociation, defined below), the Company shall be obligated to pay the
terminated Individual compensation for a period equal to the longer of six
(6) months or the balance of the then current term, at a monthly rate equal
to the average monthly compensation paid by the Company to the terminated
Individual during the six (6) month period immediately preceding the month in
which termination occurs. Notwithstanding the preceding sentence, in the
case of a Mandatory Disassociation (defined below), the terminated Individual
shall be entitled to compensation at the rate determined in accordance with
the preceding sentence for a period of six (6) months following the
termination. As used herein, the term "Mandatory Disassociation" means a
termination of the Individual by the Company as a result of any circumstance
in which, in the reasonable opinion of counsel to the Company and after
giving effect to Section 4.4.7 below, the continuation of the Personal
Services Agreement would render the Company unable to obtain any material
gaming or other license, franchise, permit or approval required for the
Company to sell, lease, license and distribute its products and otherwise
engage in its business activities.
(d) In addition to the Company's rights of termination, the Individual may
terminate his Personal Services Agreement voluntarily upon giving at least
sixty (60 days prior written notice.
i. As used herein, the term "Adequate Cause" means and includes any of
the following:
(a) the Individual's failure or refusal to carry out the reasonable
directions of the Board of Directors of Casinovations following the
Reorganization described in Section 5, provided that the directions are
reasonably consistent with the normal duties performed by the Individual,
which failure or refusal continues for thirty (30) days after the
Individual's receipt of written notice thereof;
(b) The Individual's willful failure or refusal to comply in any material
respect with the reasonable policies and procedures of the Company as in
effect from time to time, which failure or refusal continues for thirty (30)
days after the Individual's receipt of written notice thereof;
(c) The Individual's breach of the Personal Services Agreement, including
but not limited to, his failure, inability or refusal in any material respect
to perform his or her duties in accordance with the Personal Services
Agreement, which breach remains uncured for thirty (30) days after the
Individual's receipt of written notice of the breach; or
(d) Any deceptive, fraudulent, dishonest or illegal act (or failure to act)
or breach of fiduciary duty by the Individual with respect to Sharps or
Casinovations.
j. Each Personal Services Agreement shall include provisions
transferring to the Company, without additional compensation, royalty or
other consideration, full ownership of any inventions, ideas or other
intellectual property (other than the Literary Rights) heretofore developed
by the Individual or hereafter developed by the Individual while employed or
retained by the Company that (a) relate to the present or future business of
the Company or (b) are developed on the Company's premises or using the
facilities, property or the assets of the Company Each of the Personal
Services Agreements shall contain confidentiality provisions, provisions
preventing the Individual from competing, directly or indirectly, with the
business of the Company during the employment or consulting term and for a
period of two (2) years thereafter and provisions preventing the use of the
Company's trade secrets and other proprietary information at any time except
in furtherance of the interests of the Company.
The Personal Services Agreement for Steven L. Forte shall permit him
to continue to engage in his gaming industry consulting business as presently
conducted (which does not include product development or improvement), and
shall allow Steven L. Forte to maintain ownership of intellectual property
developed in such consulting business except for any ideas or inventions for
products, other patentable matter and information developed under clause (b)
in Section 4.4.4, all of which shall be the property of the Company pursuant
to Section 4.4.4.
k. The other terms and provisions of the Personal Services Agreements
shall be reasonably acceptable to the Company and Sines or Steven L. Forte,
as applicable.
l. Notwithstanding Sections 4.4.1 through 4.4.6, the parties agree to
structure (or subsequently restructure as appropriate) the terms of the
Personal Services Agreement in such a manner as to enable the Company to
obtain all gaming and other licenses, franchises, permits and approvals
required for the Company to sell, lease, license and distribute its products
and otherwise engage in its business activities.
m. Transfer of Retained Inventions. Each of Sines, Forte, Steven L.
Forte, Huson, the Partnership and Sharps agree and consent that, as part of
the Reorganization, (a) the Partnership shall acquire from Sines, Forte and
Steven L. Forte any residual interest or rights any of such individuals may
have in the Retained Inventions, (b) the Partnership will transfer all right,
title and interest in the Retained Inventions to Casinovations in an Internal
Revenue Code Section 351 transaction, and (c) Casinovations will issue the
Partnership 1,261,000 Casinovations Shares (defined below).
SECTION 5. AGREEMENT TO REORGANIZE
a. Capitalization of Casinovations. As soon as reasonably practicable
following the date of this Agreement, but in no event later than March 15,
1996, all parties hereto agree to vote their Units and/or take all other
actions necessary or appropriate consistent with their respective obligations
set forth below to attempt in good faith to cause a reorganization of Sharps
involving substantially the following elements (the "Reorganization"):
b. Sellers have formed Casinovations, Inc., a Washington corporation
("Casinovations").
c. Sellers represent that at the time of the Reorganization
Casinovations' articles of incorporation and bylaws will (a) authorize
Casinovations to issue only up to 10,000,000 shares of common stock, $1.00
par value (the "Shares") and no other class of securities, (b) provide for
pre-emptive rights to the extent permitted under Washington law, including
RCW 23B.02.010 and 23B.06.300.
d. The Reorganization shall involve the issuance by Casinovations of a
maximum of 5,390,000 Shares, allocated as follows and issued or reserved for
issuance as described below:
(i) 2,513,000 Shares shall be issued to all of the existing holders of
Units in Sharps in exchange for all such Units, on a pro rata basis so that
the relative ownership interests among such holders following such
transaction is the same as immediately prior to such transaction.
(ii) 1,261,900 Shares shall be issued to the Partnership in return for its
contribution of the Retained Inventions pursuant to Section 4.5.
(iii) Up to 1,020,000 Shares shall be offered by Casinovations for sale in a
private placement of securities at a price per Share of not less than $1.50.
(iv) 555,000 Shares shall be issued or reserved for issuance to the persons
listed on exhibit H to this Agreement.
(v) 40,000 Shares shall be reserved for issuance to the Partnership in
connection with the option under Section 4.2.
Casinovations shall, directly or indirectly, succeed to and assume
all of the assets and liabilities of Sharps.
The transactions described in Sections 5.1.1, 5.1.2, 5.1.3 and
5.1.4 shall have no material adverse tax consequences to Sharps,
Casinovations and the existing holders of Units in Sharps.
Casinovations will enter into the Personal Services Agreements
described in Section 4.3 if Sharps has not already done so.
All the parties hereto agree that if all outstanding Units of Sharps
are not transferred in exchange for Shares in Casinovations as provided in
Section 5.1.3 by March 15, 1996, they shall vote their respective Units in
favor of the transfer of, and otherwise attempt to cause Sharps to transfer,
all of Sharps' assets and liabilities to Casinovations by April 10, 1996 in
exchange for 2,513,100 Shares issued to Sharps.
All parties hereto agree to vote to eliminate (a) Article X, Section
10.1(c)(2) of the Sharps Partnership Agreement, (b) and the requirement in
Article X, Section 10.2(a) of the Sharps Partnership Agreement that the
general partner receive an opinion of counsel for Sharps stating that the
transfer or encumbrance of Units by the general partner will not cause the
termination of Sharps for federal income tax purposes, and (c) any other
related sections of the Sharps Partnership Agreement and to bring such
changes to a vote of all Sharps' partners as soon as possible following the
execution of this Agreement.
Effect of Reorganization on Contemplated Transactions. The parties
agree, upon closing of the Reorganization, that:
Casinovations shall assume all liabilities of Sharps under this
Agreement and the documents executed in connection herewith.
Huson shall permit the Pledged Units to be converted to Shares
(at 6304 Shares per Unit) upon his receipt of the certificates evidencing the
shares and an executed Stock Pledge Agreement from Sellers on terms and
conditions substantially identical to the Partnership Pledge Agreement
The rights and obligations of Sellers and Huson with respect to
the Transferred Units, the Pledged Units, the Option Units and the Eligible
Re-Purchase Units (as defined and described in the Partnership Pledge
Agreement) shall attach to the Shares which are attributable thereto, and all
numerical adjustments shall be made as necessary to reflect the
Reorganization.
SECTION 6.REPRESENTATIONS AND WARRANTIES OF SHARPS, THE SELLERS AND
THE PARTNERSHIP
As a material inducement to Buyer to enter into this Agreement and purchase
the Units and make the Loan, Sharps, the Sellers and the Partnership
(collectively, the "Warranting Parties"), jointly and severally, represent
and warrant that:
Organization and Corporate Power. To the best of each Warranting
Party's knowledge, Sharps is a limited partnership validly existing, and in
good standing under the laws of the State of Nevada. To the best of each
Warranting Party's knowledge, Sharps has all requisite power and authority
and all licenses, permits, and authorizations necessary to own and operate
its properties, and to carry on its business as now conducted.
Notwithstanding the foregoing, the parties acknowledge that Sharps presently
has no gaming licenses.
Capital Securities and Related Matters. Sharps' Units are distributed as set
forth on Exhibit G, attached hereto, and copies of all outstanding options
are attached hereto as Exhibit H and no other partnership Units of Sharps are
issued and outstanding. Other than as set forth in this Agreement, Sharps
does not have outstanding and has not agreed, orally or in writing, to issue
any Units convertible or exchangeable for any of its Units, nor does it have
outstanding nor has it agreed, orally or in writing, to issue any options or
rights to purchase or otherwise acquire any Units of Sharps. Sharps is not
subject to any obligation (contingent or otherwise) to repurchase or
otherwise acquire or retire any of its Units. All of the outstanding Units
of Sharps are validly issued, fully paid, and nonassessable. The Sellers
have, and upon purchase thereof by Buyer pursuant to the terms of this
Agreement Buyer will have, good and marketable title to the Transferred
Units, the Pledged Units and the Option Units, free and clear of all security
interests, liens, encumbrances, or other restrictions or claims, subject only
to restrictions as to marketability imposed by securities laws and the Sharps
Partnership Agreement.
Authorization; No Breach. The execution, delivery, and performance
of this Agreement and all other agreements contemplated hereby to which
Sharps, the Sellers or the Partnership are parties have been duly authorized
by Sharps, or the Sellers, or the Partnership, as the case may be. To best
of each Warranting Party's knowledge, this Agreement and each other agreement
contemplated hereby, when executed and delivered by the parties thereto, will
constitute the legal, valid, and binding obligation of Sharps, the Sellers,
or the Partnership, or all of them as the case may be, enforceable against
such parties in accordance with its terms except as the enforceability
thereof may be limited by the Partnership Agreement, the application of
bankruptcy, insolvency, moratorium, or similar laws affecting the rights of
creditors generally or judicial limits on the right of specific performance.
Except as provided in this Agreement, the execution and delivery by Sharps,
the Sellers and the Partnership of this Agreement and all other agreements
contemplated hereby to which Sharps or the Sellers or the Partnership is a
party, the offering and sale of the Units hereunder and the fulfillment of
and compliance with the respective terms hereof and thereof by Sharps, the
Sellers and the Partnership do not and will not (1) conflict with or result
in a breach of the terms, conditions or provisions of, (2) constitute a
default under, (3) result in the creation of any lien, security interest,
charge, or encumbrance upon the capital securities or assets of the Sellers
or Sharps pursuant to, (4) give any third party the right to accelerate any
obligation under, (5) to the best of each Warranting Party's knowledge,
result in a violation of, or (6) to the best of each Warranting Party's
knowledge, require any authorization, consent, approval, exemption, or other
action by or notice to any court or administrative or governmental body
pursuant to the charter or bylaws of Sharps or any law, statute, rule, or
regulation to which the Sellers, Sharps or the Partnership is subject, or any
agreement, instrument, order, judgment, or decree to which the Sellers,
Sharps or the Partnership is subject, including but not limited to the Sharps
Partnership Agreement. Huson acknowledges that he has been informed that his
acquisition of the Option Units and/or Pledged Units may result in a
"termination" of Sharps for federal income tax purposes, which may cause him
to suffer adverse tax consequences and may be contrary to the Sharps
Partnership Agreement.
Litigation. There are no actions, suits, proceedings, orders,
investigations, or claims pending or threatened against Sharps, the Sellers
or the Partnership, or any of their respective properties, at law or in
equity, or before or by any governmental department, commission, board,
bureau, agency, or instrumentality; Sharps, the Sellers and the Partnership
are not currently participating in any arbitration proceedings under
collective bargaining agreements or otherwise, or any governmental
investigations or inquiries; and there is no basis for any of the foregoing.
Tax Matters. To the best of each Warranting Party's knowledge, (a)
Sharps has filed all federal, state, local, and foreign tax returns and
reports heretofore required to be filed by it and has paid all taxes shown as
due thereon (including interest and penalties), (b) no taxing authority has
asserted any deficiency in the payment of any tax or informed Sharps that it
intends to assert any such deficiency or to make any audit or other
investigation of Sharps for the purpose of determining whether such a
deficiency should be asserted against Sharps and (c) Sharps has paid any and
all withholding, payroll or employment taxes required to be paid by, or
assessed against, Sharps.
Compliance with Laws. To the best of each Warranting Party's
knowledge, Sharps is, in the conduct of its business, in compliance with all
laws, statutes, ordinances, regulations, orders, judgments, or decrees
applicable to it, the enforcement of which, if Sharps were not in compliance
therewith, would have a materially adverse effect on the business of Sharps
taken as a whole. Neither the Sellers nor Sharps has received any notice of
any asserted present or past failure by Sharps to comply with such laws,
statutes, ordinances, regulations, orders, judgments, or decrees.
SECTION 7. MISCELLANEOUS PROVISIONS
Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified, or supplemented only by a written
agreement signed by Buyer, the Sellers and the Partnership.
Waiver of Compliance; Consents
Any failure of any party to comply with any obligation, covenant,
agreement, or condition herein may be waived by the party entitled to the
performance of such obligation, covenant, or agreement or who has the benefit
of such condition, but such waiver or failure to insist upon strict
compliance with such obligation, covenant, agreement, or condition will not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
Whenever this Agreement requires or permits consent by or on behalf
of any party hereto, such consent will be given in a manner consistent with
the requirements for a waiver of compliance as set forth above.
Notices. All notices, requests, demands, and other communications
required or permitted hereunder will be in writing and will be deemed to have
been duly given when delivered by hand or two days after being mailed by
certified or registered mail, return receipt requested, with postage prepaid:
If to Huson:
Richard S. Huson
The Crabbe Huson Company
121 S.W. Morrison Street
Suite 1400
Portland, Oregon 97204
With a copy to:
Ater Wynne Hewitt Dodson & Skerritt
222 S.W. Columbia, Suite 1800
Portland, Oregon 97201
Attn: Steven D. Stadum
or to such other person or address as Buyer furnishes to the Sellers pursuant
to the above.
If to Sharps,
Randy D. Sines, or the
Partnership: c/o Randy Sines
4056 South Madelia
Spokane, Washington 99203
with a copy to:
Thomas F. Pitaro
Attorney At Law
815 South 3rd Street
Las Vegas, Nevada 89101
If to Steven L. Forte
or Cheryl L. Forte:
Steven and Cheryl Forte
315 Francisco Street
Henderson, Nevada 89014
or to such other address as any of such parties furnishes to Buyer pursuant
to the above.
Assignment. This Agreement can be assigned by a party hereto upon
such party's giving prior written notice to the other parties hereto. No
assignment will release the assignor from its obligations hereunder. Subject
to the foregoing, this Agreement and all of the provisions hereof will be
binding upon and inure to the benefit of the parties hereto and their
respective successors, assigns, heirs, executors, and personal
representatives. Nothing in this Agreement, express or implied, is intended
to confer on any person other than the parties hereto, or their respective
successors, any rights, remedies, obligations, or liabilities under or by
reason of this Agreement.
Governing Law. All matters with respect to this Agreement,
including but not limited to matters of validity, construction, effect, and
performance, will be governed by the laws of the State of Oregon applicable
to contracts made and to be performed therein between residents thereof,
regardless of the laws that might be applicable under principles of conflicts
of law.
Counterparts. This Agreement may be executed in two or more fully
or partially executed counterparts, each of which will be deemed an original
binding the signer thereof against the other signing parties, but all
counterparts together will constitute one and the same instrument.
Entire Agreement. This Agreement and the agreements to be entered
into pursuant to the provisions hereof (the terms of which are incorporated
herein by this reference) embody the entire agreement and understanding of
the parties hereto as to the subject matter contained herein. There are no
restrictions, promises, representations, warranties, covenants, or
undertakings other than those expressly set forth or referred to in such
documents. This Agreement and such documents supersede all prior agreements
and understandings among the parties with respect to the subject matter
hereof.
Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any jurisdiction will, as to such jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement, or affecting the validity or enforceability of any of the terms or
provisions of this Agreement.
Attorney Fees. If any action is brought by any party to this
Agreement to enforce or interpret its terms or provisions, the prevailing
party will be entitled to reasonable attorney fees and costs incurred in
connection with such action prior to and at trial and on any appeal
therefrom.
Payment of Fees and Expenses. Each party to this Agreement will be
responsible for, and will pay, all of its own fees and expenses, including
those of its counsel and accountants, incurred in the negotiation,
preparation, and consummation of the Agreement and the Purchase.
Further Assurances. Upon the reasonable request of a party, the
other parties will take all action and will execute all documents and
instruments necessary or desirable to consummate and give effect to this
Agreement.
Legal Representation. Each party to this Agreement has been advised
to obtain independent legal counsel prior to executing this Agreement and has
had a full and fair opportunity to do so and either obtained such
representation or voluntarily declined to do so. Each party acknowledges
that Douglas J. Brajcich, P.C. is the attorney only for Randy D. Sines
individually and that Ater Wynne Hewitt Dodson & Skerritt are the attorneys
only for Richard S. Huson.
Effective Date. Regardless of when it is signed by any or all of
the parties, this Agreement and the agreements to be executed concurrently
herewith shall be effective as of January 15, 1996.
Securities Laws. The Units which are the subject to the
transactions contemplated by this Agreement have been issued pursuant to the
Sharps Partnership Agreement and have not been registered with the Securities
and Exchange Commission under the Securities Act of 1933, as amended, or
under the securities acts of Washington, Oregon, Nevada, or under any other
state securities laws. The sale or other disposition of the Units is
restricted, as stated in the Sharps Partnership Agreement. By acquiring any
Unit represented by the Sharps Partnership Agreement, the acquiring party
represents that such party has acquired the Units for investment and that
such party will not sell or otherwise dispose of the Units without
registration or other compliance with the aforesaid acts and the rules and
regulations thereunder. Each of the parties acknowledges that such party has
read the Sharps Partnership Agreement and agrees to remain bound by its terms
and conditions.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
SHARPS INTERNATIONAL LIMITED PARTNERSHIP, a Nevada limited partnership
By:
Title:
RANDY D. SINES
CHERYL L. FORTE
SINES FORTE PARTNERSHIP, a Nevada general partnership
Randy D. Sines, Partner
By:
Steven L. Forte, Partner
RICHARD S. HUSON
STEVEN L. FORTE, solely for purposes of Sections 4 and 5
PARTNERSHIP PLEDGE AND SECURITY AGREEMENT
THIS PARTNERSHIP PLEDGE AND SECURITY AGREEMENT ("Partnership
Pledge Agreement") is made and entered into as of January 15,
1996, by RANDY D. SINES and CHERYL L. FORTE ("Grantors"), in
favor of RICHARD S. HUSON ("Huson").
RECITALS
Huson has agreed to provide a loan to SHARPS INTERNATIONAL
LIMITED PARTNERSHIP, a Nevada limited partnership ("Borrower")
in the principal amount of $300,000.00 (the "Loan") as set forth
in the Funding Agreement dated as of January 15, 1996 (the
"Funding Agreement") among Grantors, Borrower and Huson.
Grantors own partnership units in Borrower and have agreed to
pledge some of their limited partnership units to secure the
repayment of the Loan. Funding of the Loan is conditioned,
among other things, upon Huson's receipt of this Partnership
Pledge Agreement.
Each Grantor owns the partnership units and percentage interest
(exclusive of options) designated next to such Grantor's name as
follows:
<TABLE>
<CAPTION>
Name General Partnership Units Limited Partnership Units % Ownership Interest
<S> <C> <C> <C>
Randy D. Sines 4 139 29.36
Cheryl L. Forte 4 139 29.36
</TABLE>
("Partnership Units"). Grantors deem it in Grantors' best interest
to enter into this Partnership Pledge Agreement.
NOW, THEREFORE, the parties agree as
follows:
Grant of Security Interest. To secure the
prompt and complete payment and performance of all of the
Secured Obligations (as defined in Section 2 below), Grantors
hereby pledge, assign and grant to Huson a continuing first
priority lien upon and security interest in:
(a) all of their right, title and interest in
55.5 limited Partnership Units each, or a combined pledge of 111
limited Partnership Units (the "Pledged Partnership Units), but
none of the obligations with respect thereto; and
(b) all Proceeds of the foregoing.
Subparagraphs (a) and (b) above are hereinafter collectively called
the "Pledged Collateral."
The Pledged Collateral includes, to the extent of the
Pledged Partnership Units, (1) any and all interest of each
Grantor based upon or arising out of the partnership agreements
associated with the specified partnership; (2) any and all right of
each Grantor to receive a share of the profits or other
compensation of such partnership and the right to a return of each
Grantor's contribution to the partnership; and (3) any and all
interest each Grantor has in the property of such partnership.
As used herein, the term "Proceeds" means all cash and
non-cash proceeds of the Pledged Partnership Units, including all
revenues, issues and profits arising from the sale or other
disposition of the Pledged Partnership Units, and all cash or non-
cash proceeds of any proceeds.
Secured Obligations. As used in this
Partnership Pledge Agreement, the term "Secured Obligations"
includes (a) each agreement and liability of Grantors herein and in
the Funding Agreement and; (b) Borrower's indebtedness to
Huson evidenced by a Promissory Note dated January 15, 1996
in the amount of the Loan (the "Note"). Grantors agree that this
is a continuing security interest and shall remain in full force and
effect unless terminated by a written agreement executed by
Huson, or so long as there may be Secured Obligations from time
to time outstanding pursuant to the Note or the Funding
Agreement.
Representations, Warranties and
Covenants. Grantors jointly and severally represent, warrant and
covenant to Huson that:
Attached hereto as Exhibit A is a
true, correct and complete copy of the partnership agreement
establishing Borrower, including all modifications and
supplements thereto and restatements thereof, current as of the
date of this Partnership Pledge Agreement (the "Partnership
Agreement");
To the best of Grantors'
knowledge the Partnership Agreement is valid, binding and in full
force and effect. Except as otherwise permitted or contemplated
in the Funding Agreement, Grantors agree, so long as any
portion of the Loan shall remain outstanding not to terminate,
rescind, cancel or modify in any material respect the Partnership
Agreement without Huson's permission except as necessary as
Managing General Partners to effectuate the transactions
contemplated by this Pledge Agreement and the Funding
Agreement;
This Partnership Pledge Agreement
has been duly authorized, executed and delivered by Grantors
and, to the best of Grantors' knowledge, constitutes a legal, valid
and binding obligation of Grantors enforceable in accordance
with its terms, except as enforceability may be limited by
bankruptcy, insolvency or other similar laws affecting the rights
of creditors generally or by the application of general principles of
equity;
Except as contained in the
Partnership Agreement, no consent, approval, authorization or
other order of any person and, to the best of Grantors'
knowledge, no consent, authorization, approval or other action
by, and no notice to or filing with, any governmental authority or
regulatory body is required to be made or obtained by Grantors
either (i) for the pledge of the Pledged Collateral pursuant to this
Partnership Pledge Agreement or for the execution, delivery or
performance of this Partnership Pledge Agreement by Grantors,
or (ii) for the exercise by Huson of the voting or other rights
provided for in this Partnership Pledge Agreement or the
remedies in respect of the Pledged Collateral pursuant to this
Partnership Pledge Agreement, except as may be required in
connection with any disposition of the Pledged Collateral by laws
relating to the offering and sale of securities generally;
Except for the security interest
granted to Huson pursuant to this Partnership Pledge Agreement,
Grantors are, on the date hereof, the sole record and beneficial
owners of the Pledged Collateral, having good title thereto, free
and clear of any lien, pledge, mortgage, claim, charge, security
interest or other encumbrance ("Liens");
Grantors have the right and
requisite authority to pledge, assign, transfer and deliver the
Pledged Collateral to Huson as provided herein except that the
acquisition of the title to the Pledged Partnership Units by Huson
could be contrary to certain provisions of the Partnership
Agreement, such as provisions restricting the transfer of more
than 50% of all Units within the Partnership during any 12-month
period; and
This Partnership Pledge Agreement
will create a valid, perfected and enforceable first priority lien on
and security interest in the Pledged Collateral and the Proceeds
thereof securing the Secured Obligations.
The representations and warranties set forth in this
Section 3 shall survive the execution and delivery of this
Partnership Pledge Agreement.
Covenants. Grantors covenant and agree
with Huson that from and after the date of this Partnership Pledge
Agreement and until the Termination Date (as defined in
Section 10):
Further Assurances and
Documentation. Grantors will reasonably cooperate with Huson
and, at any time and from time to time, upon the written request
of Huson, and will promptly and duly execute and deliver any
and all such further instruments and documents and take such
further action as Huson may reasonably deem desirable to obtain
the full benefits of this Partnership Pledge Agreement, of the
rights and powers herein granted and of the liens granted to
Huson hereunder.
Limitation on Disposition of
Pledged Collateral. Grantors may not sell, transfer, lease, license
or otherwise dispose of any of the Pledged Collateral unless
(i) such sale or other disposition is to an independent third party
for cash and for fair value, and (ii) the net cash proceeds to
Grantors are simultaneously delivered to Huson for application to
the repayment of the Secured Obligations.
Notices. Grantors will advise
Huson promptly, in reasonable detail, (i) of any Lien asserted or
claim made against any of the Pledged Collateral or the assets or
properties of Borrower, (ii) of any material change in the
composition of the assets and properties of Borrower, and (iii) of
the occurrence of any other event that would have a material
adverse effect on the aggregate value, enforceability, priority or
collectibility of the assets and properties of Borrower or on the
security interests created hereunder.
Right of Inspection. Huson shall
at all times have full and free access during normal business
hours to all the books, correspondence and records of Borrower,
and Huson or its representatives may examine the same, take
extracts therefrom and make photocopies thereof, and Grantors
agree to render to Huson, such clerical and other assistance as
may be reasonably requested with regard thereto. Huson agrees
to maintain the confidentiality of any information of a proprietary
nature made available to it.
Huson's Appointment as Attorney-in-Fact.
Effective in the event a Default
shall have occurred and be continuing, Grantors hereby
irrevocably constitute and appoint Huson and any officer or agent
thereof, with full power of substitution, as their true and lawful
attorney-in-fact with full, irrevocable power and authority in the
place and stead of Grantors and in the name of Grantors or in
their own names, from time to time in Huson's reasonable
discretion after Default shall have occurred and be continuing, for
the purpose of carrying out the terms of this Partnership Pledge
Agreement. Without limiting the generality of foregoing, if any
Default shall have occurred and be continuing, Huson shall have
the right and power to receive, endorse and collect all checks
made payable to the order of Grantors representing any
distribution in respect of the Pledged Collateral or any part thereof
and to give full discharge for the same.
Grantors hereby ratify all that said
attorney-in-fact shall lawfully do or cause to be done by virtue
hereof. This power of attorney is a power coupled with an
interest and shall be irrevocable until the Secured Obligations
have been fully and indefeasibly paid.
The powers conferred on Huson in
this Partnership Pledge Agreement are solely to protect its interest
in the Pledged Collateral and shall not impose any duty upon
Huson to exercise any such powers. Huson shall be accountable
only for amounts that he actually receives as a result of the
exercise of such powers and neither Huson nor any of his
employees or agents shall be responsible to Grantors for any act
or failure to act, except for Huson's own negligence or willful
misconduct and except for the negligence or willful misconduct of
Huson's employees and agents.
In the event a Default shall have
occurred and be continuing, Grantors also authorize Huson, at
any time and from time to time, to execute, in connection with the
sale of the Pledged Collateral provided for in Section 7 hereof,
any endorsements, assignments or other instruments of
conveyance or transfer with respect to the Pledged Collateral.
Certain Rights of Grantors and Huson.
So long as a Default shall not have
occurred and be continuing, Grantors shall be entitled, to the
extent not inconsistent with this Partnership Pledge Agreement,
(i) to exercise the voting power with respect to the Pledged
Collateral, and for that purpose Huson shall execute or cause to
be executed from time to time, at the expense of Grantors, such
proxies or other instruments in favor of Grantors, or their
nominees, in such form and for such purposes shall be
reasonably required by Grantors and as shall be specified in a
written request therefor, to enable Grantors to exercise such
voting power with respect to the Pledged Collateral, and (ii) to
receive and retain for its own account any and all cash dividends
at any time from time to time declared or paid upon any of the
Pledged Collateral.
If a Default shall have occurred and
be continuing, (i) Huson shall have the right to receive any and all
cash dividends or cash dividends or other Proceeds paid in
respect of the Pledged Collateral and, upon notice to Grantors, to
apply such Proceeds to the payment of the Secured Obligations,
and (ii) Huson or its nominee may exercise all voting, corporate
and other rights pertaining to the Pledged Collateral at any
meeting of the shareholders of Borrower or otherwise.
Default and Remedies.
Default. Grantors agree that time
is of the essence and the occurrence of any of the following shall
constitute a default ("Default"):
If Borrower fails to pay (a) any
installment of interest on the Note when due, or (b) any payment
of Note principal precisely when due.
If any representation or warranty
contained in this Partnership Pledge Agreement or in the Funding
Agreement, or made in writing in connection with the transactions
contemplated by this Partnership Pledge Agreement or in the
Purchase Agreement shall be knowingly false in any material
respect on the date made; or
If Grantors fail to perform any
covenant or observe any condition contained in this Partnership
Pledge Agreement or the Purchase Agreement; or
If Borrower admits in writing its
inability to pay its debts generally as they come due, or at any
time is generally not paying its debts as such debts become due,
or has filed any petition or action for relief under any bankruptcy,
reorganization, insolvency or moratorium law, or any other law
or laws for the relief of, or relating to, debtors; or
If an involuntary petition has been
filed under any bankruptcy or insolvency statute against Grantors
or Borrower, or a custodian, receiver or trustee has been
appointed to take possession of other assets of Grantors or
Borrower, unless such petition or appointment is or has been set
aside or withdrawn or ceases or has ceased to be in effect within
60 days from the date of said filing or appointment; or
If there is filed in good faith by or
against Borrower a petition seeking the liquidation or dissolution
of Borrower or the commencement of any other procedure to
liquidate or dissolve Borrower, or there occurs any event,
condition or circumstance which causes the liquidation or
dissolution of Borrower; or
If Grantors or Borrower conceal,
remove, or permit to be concealed or removed, any part of their
property, with intent to hinder, delay or defraud their creditors or
any of them, or make or suffer a transfer of any of their property
which may be fraudulent under any bankruptcy, fraudulent
conveyance or similar law; or makes any transfer of their property
to or for the benefit of a creditor at a time when other creditors
similarly situated have not been paid; or suffer or permit while
insolvent, any creditor to obtain a lien upon any of their property
through legal proceedings which is not vacated within 60 days
from the date thereof; or
If Grantors or Borrower make a
general assignment of the assets of Grantors or Borrower for the
benefit of Grantors' or Borrower's creditors; or
If there is any sequestration or
attachment of, or any levy or execution upon any Pledged
Collateral provided by Grantors under this Partnership Pledge
Agreement or the Purchase Agreement; any Loan proceeds; or a
substantial portion of the other assets of Grantors, which is not
released, expunged or dismissed prior to the earlier of ten (10)
days after such sequestration, attachment or execution, or the sale
of such assets; or
If any governmental authority has
taken or instituted legal action against Borrower which is
reasonably likely to materially adversely affect Borrower's
financial condition, operations or ability to repay the Loan, and
Borrower has not remedied or provided for such situation to
Huson's reasonable satisfaction within 30 days of Huson's
written notice to Borrower of Huson's opinion; or
Acceleration. Upon the occurrence
of a Default and subject to subsection (c) and any other right
expressly granted by Huson in writing to cure any Default to the
extent applicable, (i) the entire principal balance of the Loan,
together with all accrued, unpaid interest and other amounts
owing in connection with the Loan shall, at the option of Huson,
become immediately due and payable, and (ii) Huson shall be
immediately entitled to enforce the collection of all outstanding
secured obligations under the Note and Purchase Agreement and
to pursue any other remedy or remedies herein or in the Note or
Purchase Agreement.
Notice and Cure Periods. Except
as otherwise stated below in subsection (d), upon the occurrence
of a Default, Huson shall not accelerate the Loan or pursue its
other rights and remedies unless it first gives Grantors written
notice of such Default in the manner prescribed for notices in this
Partnership Pledge Agreement and such Default is not fully cured
within the following periods:
three (3) days after such notice is
given in the event of any failure to make a monetary payment;
fifteen (15) days after such notice
is given in the event of nonmonetary Defaults not subject to other
provisions of this Section, provided (a) within five (5) days after
such notice is given, Grantors commence their cure and submit to
Huson in writing their plan to cure; and (b) the cure is
continuously pursued by Grantors with due diligence. If such
Default is not reasonably capable of being cured within fifteen
(15) days, Grantors shall have such additional time as is
reasonably necessary to complete the cure, but in no event more
than thirty (30) days after the notice of Default is given; or
sixty (60) days after the filing of
any involuntary petition in bankruptcy against or for the
appointment of a receiver for Grantors (except for petitions filed
by Huson), with the dismissal of such petitions by the court
within such period being deemed to cure such Default.
Exception to Notice and Cure
Periods. Notwithstanding the above provisions, the notice and
cure periods provided for in this Section shall not apply in the
following circumstances:
any Default of the type described in
subsection (a)(ii), if but only if, as a result of such Default, the
value of all or a substantial portion of the Pledged Collateral, or
Huson's security interest in that Pledged Collateral, is materially
impaired; or
if Grantors transfer or encumber all
or any portion of their interest in the Pledged Collateral without
obtaining any required consent of Huson or as expressly
permitted by this Partnership Pledge Agreement; or
in any circumstance when a delay
in effecting a cure is, in the reasonable judgment of Huson, likely
to result in any Pledged Collateral being damaged, becoming
uninsured or rendered unavailable to Huson or the value thereof
being materially and adversely affected, or Huson's ability to
recover its outstanding balance from Borrower being materially
affected; or
any Default of the same type or
nature which occurs more than twice; or
any filing of a voluntary petition in
bankruptcy by Grantors, or for the appointment of a receiver or
trustee of all or a portion of Grantors' property; or
any assignment for the benefit of
creditors, fraudulent conveyance, or other plan or action instituted
by Grantors in an attempt to avoid the satisfaction of any lawful
indebtedness.
Nothing in this Section is to be construed as extending the term of
the Loan or the date upon which a Default occurs, and no
decision to forego any remedy for any given Default shall be
deemed a waiver on the part of Huson of any right relating to any
other Default. No failure to give any notice of any Default shall
constitute a waiver of such Default or any remedy which may be
available in connection therewith. The cure periods set forth in
this Section shall be narrowly construed, and shall not impair the
exercise of any remedy not referred to above immediately upon
Default, including, without limitation, the seeking of any
mandatory or prohibitive injunction or restraining order.
Retention of Collateral. If any
Default has occurred and is continuing then Huson, after any
applicable cure period provided for in subsection (c) above has
lapsed, but otherwise immediately, shall retain the Pledged
Collateral in accordance with ORS 79.5050(2) (the "Retention
Remedy") to the extent Grantors or any third parties do not object
to his exercise of the Retention Remedy. Grantors hereby waive,
to the fullest extent permitted by applicable law, their rights to
object to Huson's exercise of the Retention Remedy.
General Remedies Provision. If,
notwithstanding Section 7(e), Huson is required to foreclose or
exercise remedies other than the Retention Remedy, then Huson
may proceed to enforce his rights under Sections 7(g)-(l), 8 and 9
of this Partnership Pledge Agreement and the Note and Funding
Agreement by exercising such other remedies as are available
under applicable law, either by nonjudicial self-help, or by suit in
equity or action at law, including specific performance of any
covenant contained in this Partnership Pledge Agreement.
Among other such remedies, or prior to or in conjunction with his
exercise of the Retention Remedy, if Grantors fail to pay any sum
that they are required to pay to third party, fail to perform the
other covenants and agreements contained in this Partnership
Pledge Agreement or the Note and Purchase Agreement, or if any
action or proceeding is commenced which affects the Pledged
Collateral or title thereto or the interest of Huson therein,
including, but not limited to, eminent domain, insolvency, or
arrangements or proceedings involving a bankrupt or decedent,
then Huson, at Huson's option may pay such sums, perform
such acts, make such appearances, and take such action as is
reasonably necessary to protect Huson's interest, including, but
not limited to, disbursement of attorneys' fees.
Sale of Collateral; Exercise of
Voting Rights, etc. If a Default shall have occurred and be
continuing, in addition to the rights and remedies provided in
Section 7(f), if applicable, Huson may, at its option, immediately
do any or all of the following, except as otherwise provided in the
Partnership Agreement, and subject to the provisions of
Section 20 below:
(i) Cause the Pledged Partnership
Units to be registered in its name or in the name of its nominee;
(ii) Exercise all voting powers
pertaining to such securities and otherwise act with respect thereto
as though Huson were the outright owner thereof (Grantors
hereby irrevocably constituting and appointing Huson their proxy
and attorney-in-fact with full power of substitution so to do);
(iii) Receive all distributions of any
kind whatsoever on all or any of such securities;
(iv) Exercise any and all rights of
collection, conversion or exchange, and any and all other rights,
privileges, options or powers of Grantors pertaining or relating to
such securities (Grantors hereby irrevocably constituting and
appointing Huson their proxy and attorney-in-fact with full power
of substitution so to do);
(v) Sell, assign and deliver the whole,
or from time to time, any part of such securities at any broker's
board or at any private sale or at public auction provided such sale
is conducted in a commercially reasonable manner; and
(vi) Exercise any other remedy
specifically granted under this Partnership Pledge Agreement or
now or hereafter existing in equity, at law, by virtue of statute or
otherwise.
For the purposes of Section 7(g),
an agreement to sell all or any part of the Pledged Collateral shall
be treated as a sale thereof and Huson shall be free to carry out
such sale pursuant to such agreement, and except as otherwise
provided herein including in Section 20 below, Grantors shall
not be entitled to the return of any of the same subject thereto,
notwithstanding that after Huson shall have entered into such an
agreement, all Defaults may have been remedied or all obligations
under the Note may have been paid and performed in full.
At any sale made pursuant to this
Section 7(g), Huson may bid for and purchase (free from any
right or equity of redemption on the part of Grantors, and except
as otherwise provided in Section 20 below), any part of or all
securities included in the Pledged Collateral that are offered for
sale and may make payment on account thereof by using any
claim then due and payable to Huson or Grantors as a credit
against the purchase price, and Huson may, upon compliance
with the terms of sale, hold, return and dispose of such securities
without further accountability therefor except as otherwise
provided in the Partnership Agreement and this Agreement.
Huson shall not have any duty to exercise any of the rights,
privileges, options or powers or to sell or otherwise realize upon
any of such securities, as herein authorized, and Huson shall not
be responsible for any failure to do so or delay in so doing.
Except as otherwise provided
herein, including in Section 20 below, any sale of, or the grant
of options to purchase, or any other realization upon, all or any
portion of such securities, under Section 7(f) shall operate to
divest all right, title, interest, claim and demand, either at law or
in equity, of Grantor in and to such securities so sold, optioned
or realized upon, or any part thereof, from, through and under
Grantors.
Grantors recognize that Huson
may be unable to effect a public sale of all or a part of the Pledged
Collateral by reason of certain prohibitions contained in the
Securities Act of 1933 as amended (the "Act"), or that Huson
may be able to do so only after delay which might adversely
affect the value that might be realized upon the sale of the Pledged
Collateral. Accordingly, except as otherwise provided in the
Partnership Agreement, Grantors agree that Huson may, without
the necessity of attempting to cause any registration of the
Pledged Collateral to be effected under the Act, sell the Pledged
Collateral or any part thereof in one or more private sales to a
restricted group of purchasers who may be required to agree,
among other things, that they are acquiring the Pledged Collateral
for their own account for investment and not with a view to the
distribution or resale thereof. Grantors agree that any such
private sale may be at prices or on terms less favorable to the
owner of the Pledged Collateral than would be the case if they
were sold at public sale, but that any such private sale shall
otherwise be conducted in a commercially reasonable manner.
If Section 7(f)-(k) are applicable,
then each and every right, remedy and power granted to Huson
thereunder shall be cumulative and in addition to any other right,
remedy or power specifically granted herein or in any other
related document, or now or hereafter existing in equity, at law,
by virtue of statute or otherwise and may be exercised by Huson,
from time to time, concurrently or independently and as often and
in such order as Huson may deem expedient.
Non-Interference with Remedies; Specific
Performance.
Grantors agree that they will not
unreasonably interfere with any right, power and remedy of
Huson provided for in this Partnership Pledge Agreement or now
or hereafter existing at law or in equity or by statute or otherwise,
or the exercise by Huson of any one or more of such rights,
powers or remedies. The preceding sentence shall not constitute
a waiver of Grantors' rights herein, including under Section 20
below.
Grantors agree that a breach of any
of the agreements or covenants contained in this Partnership
Pledge Agreement may cause irreparable injury to Huson, that
Huson has no adequate remedy at law in respect of such breach
and, as a consequence, agree that each and every agreement and
covenant contained in this Partnership Pledge Agreement shall be
specifically enforceable against Grantors.
Application of Proceeds. If the Retention
Remedy cannot be exercised and Sections 7(g)-(l) are applicable,
Grantors agree that all cash proceeds received by Huson in
respect of any sale of, liquidation of, or other realization upon all
or any part of the Pledged Collateral shall be applied by Huson as
follows:
First, to the payment of all
reasonable costs and expenses (including the reasonable fees,
disbursements and other charges of attorneys) paid or incurred by
Huson in enforcing Huson's security interest in the Pledged
Collateral, whether by sale or otherwise, or otherwise enforcing
Huson's rights hereunder;
Next, to the payment in full of the
Secured Obligations then due and owing; and
Finally, after payment in full of all
Secured Obligations then due and owing, to the payment to
Grantors, or their successors or assigns, or to whomsoever may
be lawfully entitled to receive the same, or as a court of competent
jurisdiction may direct, of any surplus then remaining.
Termination of Agreement. Upon
payment and performance in full of all Secured Obligations (the
"Termination Date"), this Partnership Pledge Agreement shall
terminate and Huson shall promptly release all of his right, title
and interest in and to the Pledged Collateral.
Unconditional Obligations. The
obligations of Grantors under this Partnership Pledge Agreement
shall be absolute and unconditional, and shall remain in full force
and effect without regard to, and shall not be released or
discharged or in any way affected by:
Any exercise or non-exercise of
any right, remedy or privilege under or in respect of this
Partnership Pledge Agreement or the Note or Funding
Agreement, or the granting of any postponements or extensions
for time of payment or other indulgences to Grantors, Borrower,
or any other person, or the settlement or adjustment of any claim
or the release or discharge or substitution of Grantors or any
person which may be or become primarily or secondarily liable
with respect to the Note; and
Any assumption by any person of
the obligations of Borrower under the Note or Funding
Agreement, or any assignment by Huson referred to in
Section 12(b).
Successors, Assignments. This
Partnership Pledge Agreement shall be binding upon and inure to
the benefit of the parties and their respective heirs, executors,
administrators, legal representatives, successors and assigns.
Amendments. Except as otherwise
provided herein, no amendment, modification, termination or
waiver of any provision of this Partnership Pledge Agreement,
nor consent to any departure therefrom, shall in any event be
effective unless the same shall be in writing and signed by the
parties. Any such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which it is
given.
Perfection of Security Interest. Upon
execution of this Partnership Pledge Agreement Grantors agree to
execute and deliver to Huson UCC financing statements
describing the Pledged Partnership Units and all certificates, if
any, evidencing the Pledged Partnership Units. Grantors further
agree that in the future they will, at any time upon the reasonable
request of Huson, execute and deliver such further documents
within ten (10) days and do such further acts and things as Huson
may reasonably request in order to fully effect the purpose of this
Partnership Pledge Agreement.
Notices. All notices, requests, demands,
directions and other communications required under this Note
shall be in writing (including telegraphic communication) and
mailed by United States mail or facsimiled or delivered by
overnight courier or by hand to the applicable party at the
addresses indicated below:
if to Grantors:
RANDY D. SINES
4056 South Madelia
Spokane, Washington 99203
CHERYL L. FORTE
315 Francisco Street
Henderson, Nevada 89014
if to Huson:
RICHARD S. HUSON
121 SW Morrison, Suite 1400
Portland, OR 97204
or, as to any party, at such other address as shall be designated
by such party in a written notice to each other party complying as
to delivery with the terms of this Section 16. All such notices,
requests, demands, directions and other communications so
mailed or telecopied or delivered shall be effective when received
if sent by mail, when delivered if delivered by courier or by hand,
or when transmitted if sent by facsimile.
Severability of Provisions. Any provision
of this Partnership Pledge Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability
without invalidating the remaining provisions hereof or thereof or
affecting the validity or enforceability of such provision in any
other jurisdiction.
Attorneys' Fees; Costs. In the event
litigation is initiated to enforce any remedy contained in this
Partnership Pledge Agreement, then the prevailing party in that
litigation shall be entitled to recover its reasonable costs, charges,
expenses and attorneys' fees incurred in that litigation from the
nonprevailing party.
Litigation shall include any action at law or in
equity, the appeal of any trial court decision, any arbitration
proceeding, any action contesting or seeking to restrain, enjoin,
stay or postpone the exercise of any remedy and any bankruptcy,
probate or other proceeding involving Grantor including but not
limited to the following actions and proceedings in bankruptcy:
(a) filing an involuntary bankruptcy petition; (b) seeking
dismissal, abstention or conversion of a bankruptcy proceeding;
(c) challenging venue of a bankruptcy proceeding; (d) filing and
defending a proof of claim; (e) opposing or conditioning the
debtor's right to operate its business; (f) serving on a creditors'
committee; (g) seeking appointment of a trustee, examiner or
disbursing agent; (h) proposing, challenging or seeking
modification of a plan of reorganization; (i) seeking relief from
stay and/or adequate protection; (j) opposing the debtor's use of
cash collateral or obtaining credit; and (k) opposing discharge.
For the purpose of this Partnership Pledge
Agreement, the terms "attorney fees" and "costs" shall include the
reasonable fees and expenses of counsel, which may include
reporting (for depositions), printing, copying, duplicating and
other expenses, air freight and facsimile transmission charges,
and fees billed for law clerks, paralegals, production assistants,
expert witnesses and others not admitted to the bar but
performing services under the supervision of any attorney. Such
costs, expenses and fees shall be due and payable upon demand
and shall bear interest from the date of such demand to and
including the date of collection at the highest rate of interest stated
in the Loan Agreement (including any Default Rate).
Governing Law. This Partnership Pledge
Agreement shall be governed by, and construed in accordance
with, the laws of the State of Oregon (excluding the laws
applicable to conflicts or choice of law).
Legal Representation. Each party to this
Agreement has been advised to obtain independent legal counsel
prior to executing this Agreement and has had a full and fair
opportunity to do so and either obtained such representation or
voluntarily declined to do so. Each party acknowledges that
Douglas J. Brajcich, P.C. is the attorney only for Randy D. Sines
individually and that Ater Wynne Hewitt Dodson & Skerritt are
the attorneys only for Richard S. Huson.
Option to Repurchase Partnership Units.
Notwithstanding any other provision of this Partnership Pledge
Agreement to the contrary, if any person or entity should at any
time acquire ownership of any of the Pledged Partnership Units,
then Grantors shall have an option to purchase up to 50% of the
Pledged Partnership Units acquired by Huson ("Eligible Re-
Purchase Units") on the following terms and conditions (the "Re-
Purchase Option"):
The Re-Purchase Option cannot be
exercised until the second anniversary of the date on which
Huson becomes the owner of any or all of the Pledged
Partnership Units and can only be exercised until the fifth
anniversary of such date.
The purchase price payable by
Grantors shall be $5,357 per Eligible Re-Purchase Unit, for a
maximum purchase price of approximately $300,000 if Huson
acquires ownership of all of the Pledged Partnership Units and
Grantors elect to re-purchase 50% of such Units.
To exercise the Re-Purchase
Option, Grantors shall give written notice to Huson of their
election to exercise the Re-Purchase Option. The notice shall
specify the number of Eligible Re-Purchase Units which Grantors
elect to purchase. The sale and purchase of the Eligible Re-
Purchase Units which Grantors elect to purchase shall be closed
within 30 days after Grantors' notice of exercise. On the closing
date for such purchase, Grantors shall deliver the entire purchase
price for the Eligible Re-Purchase Units to Huson in cash.
Assignment of Loan and Note.
Notwithstanding any other provisions of this Agreement,
pursuant to Section 2 of the Funding Agreement, if Huson should
at any time acquire any of the Pledged Partnership Units then
Huson shall immediately assign and endorse the Loan and Note
to Grantors, who shall have unconditional right, title and interest
in the Loan and Note in the principal amount of $300,000,
without recourse to Huson. The foregoing shall be in addition to
any rights of subrogation which Grantors may have under
applicable law.
Substitution of Shares. Pursuant to
Section 5 of the Funding Agreement, the parties intend that, as
part of the Reorganization, shares of Casinovations, Inc.
common stock shall be substituted for the Pledged Partnership
Units, at which time this Partnership Pledge Agreement shall be
appropriately amended and restated as a Stock Pledge Agreement.
Securities Laws. The Partnership Units
pledged herein have been issued pursuant to the Partnership
Agreement and have not been registered with the Securities and
Exchange Commission under the Securities Act of 1933, as
amended, or under the securities acts of Washington, Oregon,
Nevada, or under any other state securities laws. The sale or
other disposition of the Units is restricted, as stated in the
Partnership Agreement. By acquiring any Unit represented by
the Partnership Agreement, the acquiring party represents that
such party has acquired the Units for investment and that such
party will not sell or otherwise dispose of the Units without
registration or other compliance with the aforesaid acts and the
rules and regulations thereunder. Huson acknowledges he has
read the Partnership Agreement and agrees to remain bound by its
terms and conditions.
Counterparts. This Agreement may be
executed in two or more fully or partially executed counterparts,
each of which will be deemed an original binding the signer
thereof against the other signing parties, but all counterparts
together will constitute one and the same instrument.
IN WITNESS WHEREOF, Grantors have caused this
Partnership Pledge Agreement to be executed as of the date first
above written.
GRANTORS:
RANDY D. SINES
CHERYL L. FORTE
ACKNOWLEDGED BY HUSON:
RICHARD S. HUSON
PROMISSORY NOTE
$165,000.00 Portland, Oregon
January 15, 1996
Promise to Pay. FOR VALUE
RECEIVED, the undersigned, RICHARD S. HUSON ("Maker"), does
hereby promise to pay to the order of RANDY D. SINES and
CHERYL L. FORTE ("Holders"), at 4056 South Madelia, Spokane,
Washington 99203, or at such other place as Holders may from
time to time designate in writing, the principal sum of ONE
HUNDRED SIXTY-FIVE THOUSAND AND NO/100 DOLLARS
($165,000.00), together with all interest thereon and other sums
herein referred to.
.
Interest and Payment Terms. The
unpaid principal hereof shall bear interest from the date of this
Note until default at the rate of nine and one-half percent (9.5%)
per annum.
This Note shall be paid in eight (8) equal monthly installments of principal,
together with all accrued interest on the date of each such payment. The
first monthly payment shall be due May 15, 1996, and subsequent monthly
payments shall be due on the 15th day of each month thereafter until December
15, 1996, when the remaining principal balance and all accrued, unpaid
interest shall be due and payable.
Calculation of Interest and Application of Payments. Interest shall be
calculated on a 365 or 366-day year, as applicable, based on actual days
elapsed. Each installment hereunder shall be first applied to the payment of
costs and expenses for which Maker is liable hereunder, next to the
payment of accrued interest, and lastly to the reduction of princi-
pal. This Note shall continue to bear interest at the Note rate (or
at the Default Rate, as hereinafter defined, if and so long as any
default exists hereunder) until and including the date of collection,
and all payments hereunder shall be calculated by and shall be
payable in the lawful money of the United States which shall be
legal tender for public and private debts at the time of payment.
Prepayment. Maker shall have the right at any time to prepay the whole or
any part of this Note without prepayment premium or fee.
Default Rate. If and so long as any default exists under this Note, the
interest rate on this Note, and on any judgment obtained for the collection
of this Note, shall be increased from the date the default is declared to a
rate (the "Default Rate") equal to five percent (5%) per annum in excess of
the Note rate. Maker acknowledges that the imposition of the Default Rate
will result in the then effective interest rate in this Note being increased
from 9.5% per annum to 14.5% per annum.
Costs of Collection. Maker promises to pay all costs, expenses and
attorneys' fees incurred by Holders in the exercise of any remedy (with or
without litigation), in any proceeding for the collection of the debt, or the
realization upon any security securing this Note, in protecting or
sustaining the lien or priority of said security, or in any litigation
or controversy arising from or connected with this Note, including any
bankruptcy, receivership, injunction or other proceeding, or any appeal from
or petition for review of any of the foregoing, in which Holders prevail. If
a judgment is obtained thereon which includes an award of attorneys' fees,
such attorneys' fees, costs and expenses shall be in such amount
as the court shall deem reasonable. All collection costs, expenses
and attorneys' fees are payable on demand, shall bear interest at
the Default Rate from the date of demand to and including the date
of payment to Holders.
Defaults; Acceleration. Time is of the essence of this Note. The occurrence
of any of the following shall, without notice, demand or opportunity to cure,
constitute an event of default under this Note:
Failure of Maker to make any payment required to be paid by Maker under this
Note in strict accordance with the terms thereof;
Failure of Maker to perform any other covenant, agreement or other obligation
contained in this Note;
Any warranty, representation, or statement made or furnished to Holders by or
on behalf of Maker proving to be or having been false in any material respect
when made or furnished;
If any assignment by Maker for the benefit of creditors shall be made; or
If Maker shall voluntarily file a petition under the Federal Bankruptcy Act,
as such Act may from time to time be amended, or under any similar or
successor Federal statute relating to bankruptcy, insolvency arrangements or
reorganizations, or under any state bankruptcy or insolvency act, or file an
answer in an involuntary proceeding admitting insolvency or inability to pay
debts, or if Maker shall fail to obtain a vacation or stay of involuntary
proceedings brought for the reorganization, dissolution or liquidation of
Maker or if Maker shall be adjudged a bankrupt, or upon dissolution, business
failure or discontinuance of Maker as a going business (except for labor
disputes), or if a trustee or receiver shall be appointed for Maker, or
Maker's property, or if the partnership interests of Maker shall become
subject to the jurisdiction of a Federal bankruptcy court, or similar state
court, or if Maker shall make an assignment for the benefit of creditors, or
if there is an attachment, execution or other judicial seizure of any portion
of Maker's assets and such seizure is not discharged within ten (10)
days;
then, upon the occurrence of any such event of default, after expiration of
any applicable notice and cure period, the entire principal sum, with accrued
interest thereon due under this Note, shall, at the option of Holders, become
due and payable forthwith, without further notice. No failure to exercise
such option shall be deemed a waiver on the part of Holders of any right
accruing thereafter.
Maker's Right to Cure. Upon an event of default, except as otherwise
provided below, Holders shall not accelerate this debt, make any payments for
which Maker is primarily liable, or foreclose upon or attach any assets of
Maker unless it first gives Maker written notice of such default at Maker's
address and in the manner described for notices described in Section 15 below
and unless such default is not fully cured within the following periods:
three (3) days after such notice is given in the event of any failure to make
a monetary payment to any person;
fifteen (15) days after such notice is given in the event of nonmonetary
defaults not subject to other provisions of this Section, provided (i) within
five (5) days after such notice is given, Maker commences its cure and
submits to Holders in writing its plan to cure; and (ii) the cure is
continuously pursued by Maker with due diligence. If in Holders' sole
judgment such default is not reasonably capable of being cured within fifteen
(15) days, Maker shall have such additional time as is reasonably necessary
to complete the cure, but in no event more than thirty (30) days after the
notice of default is given; or
sixty (60) days after the filing of any involuntary petition in bankruptcy
against or for the appointment of a receiver for Maker (except for petitions
filed by Holders), with the dismissal of such petitions by the court within
such period being deemed to cure such default.
Notwithstanding the above provisions, the notice and cure period provided for
in this Section shall not apply:
if a petition shall be filed by Maker under the Federal Bankruptcy Act, or
Acts amendatory thereof or supplemental thereto, or under any statute either
of the United States or any state in connection with insolvency or
reorganization, or for the appointment of a receiver or trustee of all or a
portion of Maker's property; or
if any assignment by Maker for the benefit of creditors shall be made.
The provisions of this Section shall apply to defaults under all documents
executed as security for this Note, and unless expressly stated to the
contrary in such documents any notice or cure period referred to therein
shall be deemed to incorporate said provisions. If any of said documents are
inconsistent with this Section, this section shall be controlling, unless
said other document expressly provides otherwise. Where additional notice or
cure periods are provided in this or any other such documents or are required
by any other contract or by law, said periods and those contained in this
section shall run concurrently. Nothing in this section shall be construed
as extending the term of this Note or the date upon which a default occurs,
and no decision to forego any remedy for any given default shall be deemed a
waiver on the part of Holders of any right relating to any other default. No
failure to give any notice of any default shall constitute a waiver of such
default or any remedy which may be available in connection therewith. This
section shall be strictly construed, and shall not impair the exercise of any
remedy not referred to above immediately upon default, including, without
limitation, the seeking of any mandatory or prohibitive injunction or
restraining order or appointment of receiver.
Usury. Maker hereby represents that this loan is for commercial use and not
for personal, family or household purposes. It is the specific intent of the
Maker and Holders that this Note bear a lawful rate of interest, and if any
court of competent jurisdiction should determine that the rate herein
provided for exceeds that which is statutorily permitted for the type of
transaction evidenced hereby, the interest rate shall be reduced to the
highest rate permitted by applicable law, with any excess interest
theretofore collected being applied against principal or, if such principal
has been fully repaid, returned to Maker on demand.
Renewals. Maker, and all others who may become liable for all or any part of
this obligation, consent to any number of renewals or extensions of the time
of payment hereof and to the release of all or any part of the security for
the payment hereof. Any such renewals, extensions or releases may be made
without notice to any of said parties and without affecting their liability.
Waivers. Maker hereby waives presentment, demand of payment, notice of
dishonor, protest, and notice of nonpayment, and any and all other notices
and demands whatsoever. No covenant, condition, right or remedy in this Note
may be waived or modified orally, by course of conduct or previous acceptance
or otherwise unless such waiver or modification is specifically agreed to in
writing executed by the Holders.
Construction. This Note shall be governed by and construed in accordance
with the laws of the State of Oregon, and all sums referred to herein shall
be calculated by reference to and payable in the lawful currency of the
United States. This Note has been reviewed and negotiated by Maker and
Holders at arms' length with the benefit of or opportunity to seek the
assistance of legal counsel and shall not be construed against either party.
The titles and captions in this Note are inserted for convenience only and in
no way define, limit, extend, or modify the scope or intent of this Note. In
any case where Holders is permitted to act in its "sole discretion," "sole
option" or the like, Holders shall be entitled to exercise unfettered
discretion and may act without application of principles of law, if any,
requiring good faith or fair dealing or reasonableness in exercising
Holders's options.
Partial Invalidity. If any section or provision of this Note is declared
invalid or unenforceable by any court of competent jurisdiction, said
determination shall not affect the validity or enforceability of the
remaining terms hereof. No such determination in one jurisdiction shall
affect any provision of this Note to the extent it is otherwise enforceable
under the laws of any other applicable jurisdiction.
Addresses for Notices; Etc. All notices, requests, demands, directions and
other communications required under this Note shall be in writing (including
telegraphic communication) and mailed by United States mail or facsimilied or
delivered by overnight courier or by hand to the applicable party at the
addresses indicated below:
if to Maker:
RICHARD S. HUSON
121 S.W. Morrison, Suite 1400
Portland, Oregon 97204
if to Holders:
RANDY D. SINES
4056 South Madelia
Spokane, Washington 99203
CHERYL L. FORTE
315 Francisco Street
Henderson, Nevada 89014
or, as to any party, at such other address as shall be designated
by such party in a written notice to each other party complying as
to delivery with the terms of this Section 15. All such notices,
requests, demands, directions and other communications so
mailed or telecopied or delivered shall be effective when received
if sent by mail, when delivered if delivered by courier or by hand,
or when transmitted if sent by facsimile.
Maker:
RICHARD S. HUSON
CONSENT OF SPOUSE
I, IRENE C. SINES, spouse of RANDY D. SINES, acknowledge that I have read
the Partnership Pledge and Security Agreement and the Funding Agreement, each
dated as of January 15, 1996, (the "Pledge Agreement" and the "Funding
Agreement") and that I know their contents. I am aware that by the
provisions of the Pledge Agreement, my spouse has pledged a portion of his
partnership interests in SHARPS INTERNATIONAL LIMITED PARTNERSHIP, a Nevada
limited partnership (the "Partnership"), to Richard S. Huson to guarantee
repayment of a loan by Richard S. Huson to the Partnership. Under the terms
of the Funding Agreement, Richard S. Huson is purchasing certain Partnership
Units owned by my spouse and has the option to purchase certain additional
Partnership Units owned by my spouse.
I hereby consent to all of the transactions described in the Funding
Agreement and the Pledge Agreement and agree that my interest, if any, in the
Partnership Units subject to the Pledge Agreement and Funding Agreement,
shall be irrevocably bound by such Agreements and further understand and
agree that any community property interest I may have in the Partnership
Units shall be similarly bound by such Agreements. I further consent to the
reorganization of the Partnership as described in the Funding Agreement and
agree that any interest I may hereafter acquire in shares of stock of a
company to be known as Casinovations, Inc. shall be subject to the terms of
the Funding Agreement and the Pledge Agreement.
I am aware that the legal, financial and related matters contained in such
Agreements are complex and that I am free to seek independent professional
guidance or counsel with respect to this Consent. I have either sought such
guidance or counsel or determined after reviewing such Agreements carefully
that I will waive such right.
DATED the ____ day of January, 1996.
IRENE C. SINES
SPOUSE OF RANDY D. SINES
CONSENT OF SPOUSE
I, STEVEN L. FORTE, spouse of CHERYL L. FORTE, acknowledge that I have
read the Partnership Pledge and Security Agreement and the Funding Agreement,
each dated as of January 15, 1996, (the "Pledge Agreement" and the "Funding
Agreement") and that I know their contents. I am aware that by the
provisions of the Pledge Agreement, my spouse has pledged a portion of her
partnership interests in SHARPS INTERNATIONAL LIMITED PARTNERSHIP, a Nevada
limited partnership (the "Partnership"), to Richard S. Huson to guarantee
repayment of a loan by Richard S. Huson to the Partnership. Under the terms
of the Funding Agreement, Richard S. Huson is purchasing certain Partnership
Units owned by my spouse and has the option to purchase certain additional
Partnership Units owned by my spouse.
I hereby consent to all of the transactions described in the Funding
Agreement and the Pledge Agreement and agree that my interest, if any, in the
Partnership Units subject to the Pledge Agreement and Funding Agreement,
shall be irrevocably bound by such Agreements and further understand and
agree that any community property interest I may have in the Partnership
Units shall be similarly bound by such Agreements. I further consent to the
reorganization of the Partnership as described in the Funding Agreement and
agree that any interest I may hereafter acquire in shares of stock of a
company to be known as Casinovations, Inc. shall be subject to the terms of
the Funding Agreement and the Pledge Agreement.
I am aware that the legal, financial and related matters contained
in such Agreements are complex and that I am free to seek independent
professional guidance or counsel with respect to this Consent. I have either
sought such guidance or counsel or determined after reviewing such Agreements
carefully that I will waive such right.
DATED the ____ day of January, 1996.
STEVEN L. FORTE
SPOUSE OF CHERYL L. FORTE
AGREEMENT
(Third Round Funding)
THIS AGREEMENT, made and entered into this 30th day of September, 1996, by
and between RICHARD S HUSON, hereinafter referred to as "Lender", and
CASINOVATIONS INCORPORATED, a Washington corporation, (hereinafter referred
to as "Borrower") and RANDY D. SINES, a married person, and CHERYL L. FORTE,
a married person (Randy D. Sines and Cheryl L Forte hereinafter collectively
referred to as "Grantors"). Lender, Borrower, and Grantors, hereinafter
collectively referred to as "Parties".
WHEREAS, Parties desire to enter into a Third Round Funding contract to lend
money and grant proxies on the terms and conditions provided herein; and
NOW THEREFORE, for valuable consideration the receipt and sufficiency of
which is hereby acknowledged, IT IS AGREED AS FOLLOWS:
1. Lender hereby agrees to lend to Borrower upon request of Borrower and
Borrower hereby borrows from Lender up to the sum of Five Hundred Thousand
and no/100 Dollars ($500,000.00) on terms and conditions contained herein and
on the attached Exhibit "A" Promissory Note Parties acknowledge Lender's
prior Loan to Borrowers of $150,000.00 is paid in full and the Stock Pledge
and Security Agreements between the Parties are fully completed and performed
contracts and Lenders' prior Loan (Exhibit "B") for $300,000.00 has been
fully assigned to Grantors by Lender with full rights and remedies as
provided for in the January 15, 1996 Funding Agreement and Note, except as
otherwise provided for herein.
2. In the event the Exhibit "A" Note has not been fully repaid by Borrower by
December 31, 1997 Borrower grants to Lender, subject to the terms and
conditions of this Agreement and the pre-emptive rights of all Shareholders,
the option to convert Exhibit "A" Loan to Borrower's common voting shares at
$ 82 per share. Said option must be exercised by Lender declaring paid in
full the Exhibit "A' Note and by Lender notifying Borrower in writing of
Lender's intent to exercise the option on or before January 31,1998.
3. Provided that Grantors or their spouses each receive at least $10,000 per
month from borrower (such amounts to be paid first from salaries, second from
accrued salaries and third from interest and/or principal payments on the
Exhibit "B" $300,000 00 Loan due Grantors by Borrower), the Parties agree the
Exhibit "A" Note will be repaid before or concurrent with the $300,000 00
Loan payable by Borrower to Grantor per Exhibit "B" except that the Exhibit
"B", $300,000.00 Loan may be paid as provided above. This provision to pay
Exhibit "B" Note concurrent with or after Exhibit "A" Note shall terminate
January 1, 1998. The Exhibit "A" Note shall be due and payable, without
demand, on December 3 1, 1997 except Note principal and interest due may be
converted to stock in Borrower as provided herein Furthermore, Borrower
agrees to pay 35% of cash proceeds received from equity financing of Borrower
as payment on Note within five (5) days of receipt of cash proceeds by
Borrower.
4. If any legal action or other proceeding is brought for the enforcement of
this Agreement, or because of an alleged dispute, breach, default, or
misrepresentation in connection with any of the provisions of this Agreement,
the successful or prevailing party or parties shall be entitled to recover
from the losing party reasonable attorney's fees and other costs incurred in
connection with that action or proceeding, in addition to any other relief to
which it or they may he entitled.
5 The terms and conditions of this Agreement shall inure to the benefit of,
and shall he binding upon, the Parties hereto, their respective heirs,
personal representatives, successors and assigns.
6. Parties agree to execute any and all documents required by this Agreement
or to effect the intent of this Agreement. Each party has consulted or has
been advised to consult independent legal counsel and has had sufficient time
to do so. Douglas J Brajcich, P.C. represents only Borrower.
7. This Agreement may be executed in any number of counterparts and/or by
facsimile (fax) each of which will be deemed to be an original and all of
which together will constitute a single agreement
8. Every provision of this Agreement is subject to and conditioned upon the
pre-emptive rights of all Borrower's shareholders.
9. No Shares have been registered with the Securities and Exchange Commission
under the Securities Act of 1933 as amended, or under the Securities acts of
Washington, Oregon, Nevada, or under any other stale Securities laws. By
acquiring any Shares, the acquiring party represents that such party has
acquired the Shares for investment and that such party will not sell or
otherwise dispose of the Shares without registration or other compliance with
the aforesaid acts and the rules and regulations thereunder.
10 Until $2.4 million in cash or cash equivalents is raised by Borrower,
Grantors agree to grant Lender irrevocable proxies to vote Grantors' common
voting shares in Borrower to the lessor of 1) all Grantors' shares (to
include additional shares received by Grantors), or 2) shares necessary to
give Lender 51 % voting rights in Borrower
11. This agreement is conditioned on Written assignment and delivery of
Exhibit "B" Note by Lender to Borrower and as otherwise provided herein.
12 This agreement is not a waiver of any of Grantor's rights such as provided
in Employment Agreements between Borrower and Randy D. Sines and Steven L.
Forte.
IN WITNESS WHEREOF, this Agreement is dated as of the day and year first
above mentioned.
RICHARD S HUSON
CASINOVATIONS INCORPORATED
a Washington corporation
By.
RANDY D. SINES
Its President
GRANTORS:
RANDY D. SINES
FORTE
CHERYL L. FORTE
EXHIBIT "A"
PROMISSORY NOTE
Up to $50O,000.00 Spokane, Washington
September 30, 1996 30, 1996
1. Promise to Pay. FOR VALUE RECEIVED, the undersigned, CASINOVATIONS
INCORPORATED, a Washington Corporation ("Borrower"), does hereby promise to
pay to the order of RICHARD S. HUSON ("Lender"), at 121 S.W. Morrison, Suite
1400, Portland, Oregon 97204, or at such other place as Lender may from time
to time designate in writing, the principal sum of up to Five Hundred
Thousand and No/l00 Dollars ($500,000.00), together with all interest thereon
and other sums herein referred to. The final principal balance of this Note
shall be determined by adding thereto additional amounts borrowed by Lender,
which amount when added to the initial principal balance shall accrue as
stated below from date borrowed and reduced by principal and interest
payments made thereon.
2. Interest and Payment Terms. The unpaid principal hereof shall bear
interest from the date of this Note until default and after default at the
rate of nine and one-half percent (9.5%) per annum.
This Note shall be due and payable, without demand, on December 31, 1997
except Note principal and interest due may be converted to stock in Borrower
per Agreement of even date. Furthermore, Borrower agrees to pay 35% of cash
proceeds received from equity financing of Borrower as payment on Note within
five (5) days of receipt of cash proceeds by Borrower.
3. Calculation of Interest and Application of Payments. Interest shall be
calculated on a 365 or 366-day year, as applicable, based on actual days
elapsed. Each installment hereunder shall be first applied to the payment of
costs and expenses for which Borrower is liable hereunder, next to the
payment of accrued interest, and lastly to the reduction of principal. This
Note shall continue to bear interest at the Note rate (or at the Default
Rate, as hereinafter defined, if and so long as any default exists hereunder)
until and including the date of collection, and all payments hereunder shall
be calculated by and shall be payable in the lawful money of the United
States which shall be legal tender for public and private debts at the time
of payment.
4. Prepayment. Borrower shall have the right at any time to prepay the whole
or any part of this Note without prepayment premium or fee.
5. Default Rate. If and so long as any default exists under this Note the
interest rate on this Note, and on any judgment obtained for the collection
of this Note, shall be nine and one-half percent 9.5% per annum (the "Default
Rate").
6. Borrower's Right to Cure. Upon an event of default, except as otherwise
provided below, Lender shall not accelerate this debt, make any payments for
which Borrower is primarily liable, or foreclose upon or attach any assets of
Borrower unless it first gives Borrower written notice of such default at
Borrower's address and in the mariner described for notices described herein
below and unless such default is not fully cured within the following
periods:
(a)ten (10) days after such notice is given in the event of any failure to
make a monetary payment;
(b)fifteen (15) days after such notice is given in the event of non monetary
defaults not subject to other provisions of this Section, provided (I) within
five (5) days after such notice is given; Borrower commences its cure and
submits to Lender in writing its plan to cure; and (ii) the cure is
continuously pursued by Borrower with due diligence. If in Lender's sole
judgment such default is not reasonably capable of being cured within fifteen
(15) days, Borrower shall have such additional time as is reasonably
necessary 'to complete the cure, but in no event more than thirty (30) days
after the notice of default is given.
7. Usury. Borrower hereby represents that this loan is for commercial use and
not for personal, family or household purposes. It is the specific intent of
the Borrower and Lender that this Note bear a lawful rate of interest, and if
any court of competent jurisdiction should determine that the rate herein
provided for exceeds that which is statutorily permitted for the type of
transaction evidenced hereby, the interest rate shall be reduced to the
highest rate permitted by applicable law, with any excess interest
theretofore collected being applied against principal or, if such principal
has been fully repaid, returned to Borrower on demand.
8. Construction. This Note shall be governed by and construed in accordance
with the laws of the State of Washington, and all sums referred to herein
shall be calculated by reference to and payable in the lawful currency of the
United States.
9. Addresses for Notices: Etc. All notices, requests, demands, directions and
other communications required under this Note shall be in 'writing (including
telegraphic communication) and mailed by United States mail or facsimile or
delivered by overnight courier or by hand to the applicable party at the
addresses indicated below:
if to Borrower:
Casinovations Incorporated
Suite 107
2718 East 57th
Spokane, Washington 99223
if to Lender:
RICHARD S. HUSON
121 S.W. Morrison, Suite 1400
Portland, Oregon 97204
or, as to any party, at such other address as shall be designated by such
parry in a written notice to each other party complying as to delivery with
the terms of this Section 9. All such notices, requests, demands, directions
and other communications so mailed or telecopied or delivered shall be
effective when received if sent by mail, when delivered if delivered by
courier or by hand, or when transmitted if sent by facsimile.
10. Counterparts. This Note may be executed in one or more counterparts, all
of which shall together constitute one instrument.
11. Counter Provisions Agreement. This Note is in conjunction with that
certain Agreement of even date by and between Richard S. Huson ("Lender") and
Casinovations Incorporated ("Borrower") and Randy D. Sines and Cheryl L.
Forte ("Grantors").
BORROWER:
CASINOVATIONS INCORPORATED
By
RANDY D SINES President
EXHIBIT "B"
NOTE
$300,000.00 Spokane, Washington
____________ 1996
1. Promise to Pay. FOR VALUE RECEIVED, the undersigned, Casinovations
INCORPORATED, a Washington corporation ("Borrower"), does hereby promise to
pay to the order of RICHARD S. Huson ("Lender"), at 121 S.W. . , Suite 1400,
Portland, Oregon 97204, or at such other place as Lender may from time to
time designate in writing, the principal sum of Three Hundred Thousand and
No/100 Dollars (5300,000.00), together with all interest thereon and other
sums herein referred to.
2. Interest and Pavement Terms. The unpaid principal hereof shall bear
interest from January 15, 1996, until default at the rate of nine and one-
half percent (9.5%) per annum.
This Note shall be due and payable, without demand, on July 15, 1996.
3. Calculation of Interest and Application of Pavements. Interest shall be
calculated on a 365 or 366-day year, as applicable, based on actual days
elapsed. Each installment hereunder shall be first applied to die payment of
costs and expenses for which Borrower is liable hereunder, next to the
payment of accrued interest, and lastly to the reduction of principal. This
Note shall continue to bear interest at the Note rate (or at the Default
Rate, as hereinafter defined, if and so long as any default exists hereunder)
until and including the date of collection, and all payments hereunder shall
be calculated by and shall be payable in the lawful money of the United
States which shall be legal tender for public and private debts at the time
of payment.
4. Prepayment. Borrower shall have die right at any time to prepay the whole
or any part of this Note without prepayment premium or fee.
5. Default Rate. If and so long as any default exists under this Note or any
of the security granted to secure this Note, the interest rate on this Note,
and on any judgment obtained for the collection of this Note, shall be
increased from the date the default is declared to a rate (the "Default
Rate") equal to five percent (5%) per annum in excess of the Note rate.
Borrower acknowledges that die imposition of the Default Rate will result in
the then effective interest rate in this Note being increased from 9.5% per
annum to 14.5% per annum.
6. Costs of Collection. Borrower promises to pay all costs, expenses and
attorneys' fees incurred by Lender in the exercise of any remedy (with or
without litigation), in any proceeding for the collection of the debt, in any
foreclosure of the Partnership Pledge and Security Agreement or the
realization upon any other security securing this Note, in protecting or
sustaining the lien or priority of said Partnership Pledge and Security
Agreement or said other security, or in any litigation or controversy arising
from or connected with this Note or the Partnership Pledge and Security
Agreement, including any bankruptcy, receivership, injunction or other
proceeding, or any appeal from or petition for review of any of the
foregoing, in which Lender prevails. If a judgment is obtained thereon which
includes an award of attorneys' fees, such attorneys' fees, costs and
expenses shall be in such amount as the court shall deem reasonable. All
collection costs, expenses and attorneys' fees are payable on demand, shall
bear interest at the Default Rate from the date of demand to and including
the date of payment to Lender, and shall be fully secured by the Partnership
Pledge and Security Agreement and other security granted in connection with
this Note.
7. Collateral. This Note is secured by a Partnership Pledge and Security
Agreement relating to certain partnership units owned by Randy D. Sines and
Cheryl L. Forte ("Grantors") in Borrower. The Partnership Pledge and Security
Agreement, the Funding Agreement among Grantors, Borrower, Lender and Sines
Forte Partnership pursuant to which this Note is executed, and all other
documents executed in connection with this Note are collectively referred to
hereinafter as the Related Documents. -
8. Defaults: Acceleration. Time is of the essence of this Note. The
occurrence of any of the following shall, without notice, demand or
opportunity to cure, constitute an event of default under this Note and each
of the Related Documents:
(i) Failure of Borrower to make any payment required to be paid by Borrower
under this Note or the Related Documents in strict accordance with the terms
thereof;
(ii) Failure of Borrower to perform any other covenant, agreement or other
obligation contained in this Note or the Related Documents;
(iii) Any warranty, representation, or statement made or furnished to Lender
by or on behalf of Borrower proving to be or having been false in any
material respect when made or furnished;
(iv) The occurrence of any event of default under the Related Documents;
(v) If any assignment by Borrower or any partner of Borrower, or any of them,
for the benefit of creditors shall be made; or
(vi) If Borrower or any partners of Borrower shall voluntarily file a
petition under the Federal Bankruptcy Act, as such Act may from time to time
be amended, or under any similar or successor Federal statute relating to
bankruptcy, insolvency arrangements or reorganizations, or under any state
bankruptcy or insolvency act, or file an answer in an involuntary proceeding
admitting insolvency or inability to pay debts, or if Borrower or any
partners of Borrower shall fail to obtain a vacation or stay of involuntary
proceedings brought for the reorganization, dissolution or liquidation of
Borrower or any partners of Borrower, or if Borrower or any partners of
Borrower shall be adjudged a bankrupt, or upon dissolution, business failure
or discontinuance of Borrower or any partners of Borrower as a going business
(except for labor disputes), or if a trustee or receiver shall be appointed
for Borrower or any partners of Borrower, or Borrower's or any partners of
Borrower's property, or if the partnership interests of Borrower shall become
subject to the jurisdiction of a Federal bankruptcy court, or similar state
court:, or if Borrower or any partners of Borrower shall make an assignment
for the benefit of creditors, or if there is an attachment, execution or
other judicial seizure of any portion of Borrower 5 or any partners of
Borrower's assets and such seizure is not discharged within ten (10) days;
then, upon the occurrence of any such event of default, after expiration of
any applicable notice and cure period, the entire principal sum, with accrued
interest thereon due under this Note, shall, at the option of Lender, become
due and payable forthwith, without further notice. No failure to exercise
such option shall be deemed a waiver on the part of Lender of any right
accruing thereafter.
9. Borrower's Right to Cure. Upon an event of default, except as otherwise
provided below, Lender shall not accelerate this debt, make any payments for
which Borrower is primarily liable, or foreclose upon or attach any assets of
Borrower unless it first gives Borrower written notice of such default at
Borrower's address and in the manner described for notices described in
Section 16 below and unless such default is not fully cured within the
following periods;
(i) three (3) days after such notice is given in the event of any failure to
make a monetary payment;
(ii) fifteen (15) days after such notice is given in the event of nonmonetary
defaults not subject to other provisions of this Section. provided (i) within
five (5) days after such notice is given, Borrower commences its cure and
submits to Lender in writing its plan to cure; and (ii) the cure is
continuously pursued by Borrower with due diligence. If in Lender's sole
judgment such default is not reasonably capable of being cured within fifteen
(15) days, Borrower shall have such additional time as is reasonably
necessary to complete the cure, but in no event more than thirty (30) days
after the notice of default is given, or
(iii) sixty (60) days after the filing of any involuntary petition in
bankruptcy against or for the appointment of a receiver for Borrower (except
for petitions filed by Lender), with the dismissal of such petitions by the
court within such period being deemed to cure such default
Notwithstanding the above provisions, the notice and cure periods provided
for in this Section shall not apply in the following circumstances:
(a) any default of the type described in subsection 8(c), if but only if, as
a result of such default, Lender reasonably determines that the value of all
or a
substantial portion of ~e Pledged Collateral (as described in die Partnership
Pledge and Security Agreement), or Lender's security interest in that Pledged
Collateral, is materially impaired; or
~) if Grantors transfer or encumber all or any portion of their interest in
the Pledged Collateral (as defined in the Partnership Pledge and Security
Agreement) without obtaining any required consent of Lender or as expressly
permitted by this Note or the Partnership Pledge and Security Agreement; or
(c) in any circumstance when a delay in effecting a cure is, in the
reasonable judgment of Lender, likely to result in any Pledged Collateral
being damaged, becoming uninsured or rendered unavailable to Lender or the
value thereof being materially and adversely affected, or lender's ability to
recover its outstanding balance from Borrower being materially affected; or
(d) any default of the same type or nature which occurs more than twice; or
(e) any filing of a voluntary petition in bankruptcy by Borrower or any
partner in Borrower, or for the appointment of a receiver or trustee of all
or a portion of Borrower's property; or
(f) any assignment for the benefit of creditors, fraudulent conveyance, or
other plan or action instituted by Borrower or any partner in Borrower in an
attempt to avoid the satisfaction of any lawful indebtedness
The provisions of this Section shall apply to defaults under all documents
executed as security for this Note, and unless expressly stated to the
contrary in such documents any notice or cure period referred to therein
shall be deemed to incorporate said provisions. If any of said documents are
inconsistent with this Section. this section shall be controlling, unless
said other document expressly provides otherwise. Where additional notice or
cure periods are provided in this or any other such documents or are required
by any other contract or by law, said periods and those contained in this
section shall run concurrently. Nothing in this section shall be construed as
extending the term of this Note or the date upon which a default occurs. and
no decision to forego any remedy for any given default shall be deemed a
waiver on the part of Lender of any right relating to any other default. No
failure to give any notice of any default shall constitute a waiver of such
default or any remedy which may be available in connection therewith. This
section shall be strictly construed, and shall not impair the exercise of any
remedy not referred to above immediately upon default, including, without
limitation, the seeking of any mandatory or prohibitive injunction or
restraining order or appointment of receiver.
10. Usury. Borrower hereby represents that this loan is for commercial use
and not for personal. family or household purposes. It is the specific intent
of the Borrower and Lender that this Note bear a lawful rate of interest, and
if any court of competent jurisdiction should determine that the rate herein
provided for exceeds that which is statutorily permitted for the type of
transaction evidenced hereby, the interest rate shall be reduced to the
highest rare permitted by applicable law, with any excess interest
theretofore collected being applied against principal or, if such principal
has been fully repaid, returned to Borrower on demand.
11. Renewals. Borrower, and all others who may become liable for all or any
part of this obligation, consent to any number of renewals or extensions of
the time of payment hereof and to the release of all or any part of the
security for the payment hereof. Any such renewals, extensions or releases
may be made without notice to any of said parties and without affecting their
liability.
12. Multiple Parties. If Borrower is composed of more than one person or
entity. each of such persons shall be jointly and severally liable for the
indebtedness evidenced hereby. A default on the part of any one person or
entity comprising Borrower or any guarantor of this Note shall be deemed a
default on the part of Borrower hereunder. Any married person comprising
Borrower pledges his or her marital community properties in satisfaction
hereof.
13. Waivers. Borrower hereby waives presentment, demand of payment, notice of
dishonor, protest, and notice of nonpayment, and any and all other notices
and demands whatsoever. No covenant, condition, right or remedy in this Note
may be waived
or modified orally, by course of conduct or previous acceptance or otherwise
unless such waiver or modification is specifically agreed to in writing
executed by the Lender.
14. Construction. This Note shall be governed by and construed in accordance
with the laws of the State of Oregon. and all sums referred to herein shall
be calculated by reference to and payable in the lawful currency of the
United States This Note and all Related Documents executed in connection with
this Note have been reviewed and negotiated by Borrower, Lender and any
guarantors at arms' length with the benefit of or opportunity to seek the
assistance of legal counsel and shall not be construed against either parry.
The titles and captions in this Note are inserted for convenience only and in
no way define, limit, extend, or modify the scope or intent of this Note. In
any case where Lender is permitted to act in its "sole discretion, "sole
option" or the like, Lender shall be entitled to exercise unfettered
discretion and may act without application of principles of law, if any,
requiring good faith or fair dealing or reasonableness in exercising Lender's
options.
15. Partial Invalidity. If any section or provision of this Note is declared
invalid or unenforceable by any court of competent jurisdiction, said
determination shall not affect the validity or enforceability of the
remaining terms hereof. No such determination in one jurisdiction shall
affect any provision of this Note to the extent it is otherwise enforceable
under the laws of any other applicable jurisdiction.
16. Addresses for Notices: Etc. All notices, requests. demands, directions
and other communications required under this Note shall be in writing
(including telegraphic communication) and mailed by United States mail or
facsimile or delivered by overnight courier or by hand to the applicable
party at the addresses indicated below:
if to Borrower:
CASINOVATIONS INCORPORATED
2718 E.57th Avenue, #107
Spokane, WA 99223
if to Lender:
RICHARD S. HUSON
121 S.W. Morrison, Suite 1400
Portland, Oregon 97204
or, as to any parry, at such other address as shall be designated by such
parry in a written notice to each other party complying as to delivery with
the terms of this Section 16. All such notices, requests, demands, directions
and other communications so mailed or telecopied or delivered shall be
effective when received if sent by mail, when delivered if delivered by
courier or by hand, or when transmitted if sent by facsimile.
17. Replacement of Prior Note. This Note is being executed and delivered by
Borrower to evidence Borrower's assumption of the obligations of Sharps
International Limited Partnership under that certain Promissory Note dated as
of January 15, 1996 (the "Sharps Note"). By accepting this Note, Lender
agrees to destroy the Sharps Note.
18. Counterparts. This Note may be executed in one or more counterparts, all
of which shall together constitute one instrument.
BORROWER:
CASINOVATIONS INCORPORATED,
a Washington Corporation
By:
Title
<PAGE>59
INDEPENDENT AUDITOR'S CONSENT
We do hereby consent to the use of our report dated March 27, 1997 (except
for Note 7 for which the date is July 15, 1997 on the financial statements of
Casinovations, Inc. as of December 31, 1996 included in and made part of the
registration statement of Casinovations, Inc. dated January 16, 1998.
February 16, 1998
/s/ Winter, Scheifley & Associates, P.C.
Certified Public Accountant
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 39,930
<SECURITIES> 0
<RECEIVABLES> 1,156
<ALLOWANCES> 0
<INVENTORY> 12,037
<CURRENT-ASSETS> 52,583
<PP&E> 215,150
<DEPRECIATION> 4,326
<TOTAL-ASSETS> 477,370
<CURRENT-LIABILITIES> 1,052,020
<BONDS> 0
<COMMON> 5,741
0
0
<OTHER-SE> 3,747,574
<TOTAL-LIABILITY-AND-EQUITY> 477,370
<SALES> 1,928
<TOTAL-REVENUES> 13,132
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,741,005
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 236,728
<INCOME-PRETAX> (1,964,601)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,964,601)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,964,601)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)
</TABLE>