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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
-----------------------------
OR
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
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Commission file number:
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CASINOVATIONS INCORPORATED
- -----------------------------------------------------------------
(Exact name of small business issuer as
specified in its charter)
Washington 91-1696010
- --------------------------------- -----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5240 S. Eastern Avenue, First Floor, Las Vegas, Nevada 89119
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(Address of principal executive offices)
(702) 733-7195
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(Issuer's telephone number)
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(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES NO X
------ ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed
by court.
YES NO
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date:
6,500,538 shares of Common Stock, $.001 par value, as of
September 30, 1998
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Transitional Small Business Disclosure Format (check one);
YES NO X
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FORM 10-QSB
TABLE OF CONTENTS
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Balance Sheet 3
Statement of Operations 4
Statement of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of
Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
EXHIBIT INDEX 14
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
CASINOVATIONS INCORPORATED
(A Development Stage Company)
Balance Sheet
September 30, 1998
September 30, 1998
(Unaudited)
------------------
ASSETS
<S> <C>
Current assets:
Cash $ 38,559
Accounts receivable, trade 1,605
Accounts receivable - employees 18,117
Inventories 421,562
Prepaid expenses 76,152
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Total current assets 555,995
Property and equipment, at cost, net of
accumulated depreciation of $90,955 317,604
Intangible assets, at cost, net of
accumulated amortization of $32,390 154,231
Deposits 93,579
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$ 1,121,410
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable - bank $ 197,500
Notes payable - other 763,003
Current portion of leases payable 149,616
Accounts payable 387,811
Accrued wages 31,563
Accrued interest 81,006
Customer deposits 13,374
Shareholder loans 1,028,073
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Total current liabilities 2,651,947
Leases payable - non-current 595,588
Stockholders' equity:
Common stock, $.001 par value,
20,000,000 shares authorized,
6,500,538 shares issue and outstanding 6,501
Additional paid-in capital 4,871,999
Unpaid subscriptions to common stock -
Deficit accumulated during development stage (7,004,626)
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(2,126,126)
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$ 1,121,410
=============
</TABLE>
See accompanying notes to unaudited financial statements.
3
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<TABLE>
<CAPTION>
CASINOVATIONS INCORPORATED
(A Development Stage Company)
Statement of Operations
Three Months and Nine Months Ended September 30, 1998 and 1997
And Period From Inception (April 29, 1994) to September 30, 1998
Period from
Inception
(April 29, 1994)
Three Months Ended Nine Months Ended to
September 30 September 30 September 30 September 30 September 30
1998 1997 1998 1997 1998
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Sales $ 11,045 $ 1,296 $ 11,390 $ 1,928 $ 16,351
Interest income - 1,130 - 8,204 10,083
Other income - - - 13,000 3,010
----------- ----------- ----------- ----------- -------------
11,045 2,426 11,390 23,132 29,444
Other costs and expenses:
General and administrative 1,392,832 446,281 1,748,616 1,164,016 4,790,696
General and administrative - related parties - 154,000 - 357,092 76,768
Research and development 172,969 58,083 275,302 229,897 1,446,562
----------- ----------- ----------- ----------- -------------
1,565,801 658,364 2,023,918 1,751,005 6,314,026
----------- ----------- ----------- ----------- -------------
(Loss) from operations (1,554,756) (655,938) (2,012,528) (1,727,873) (6,284,582)
Interest expense - - 37,528 - 86,823
Interest expense - related parties 86,381 69,585 111,261 236,728 785,608
----------- ----------- ----------- ----------- -------------
86,381 69,585 148,789 236,728 872,431
(Loss) before income taxes (1,641,137) (725,523) (2,161,317) (1,964,601) (7,157,013)
Provision for income taxes - - - - -
----------- ----------- ----------- ----------- -------------
Net (loss) $(1,641,137) $ (725,523) $(2,161,317) $(1,964,601) $ (7,157,013)
=========== =========== =========== =========== =============
Basic (loss) per share $ (0.25) $ (0.13) $ (0.34) $ (0.36) $ (1.53)
=========== =========== =========== =========== =============
Weighted average shares outstanding 6,468,271 5,673,971 6,310,516 5,486,905 4,670,172
=========== =========== =========== =========== =============
</TABLE>
See accompanying notes to unaudited financial statements.
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<TABLE>
<CAPTION>
Casinovations Incorporated
Statements of Cash Flows
(A Development Stage Company)
Nine Months Ended September 30, 1998 and 1997
And Period From Inception (April 29, 1994) to September 30, 1998
Inception
(April 29, 1994)
to
September 30, 1998 September 30, 1997 September 30, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
$ (2,161,317) $ (1,964,601) $ (7,157,013)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 80,119 18,020 124,608
Stock and options issued for services 216,500 346,374 1,128,000
Compensation value of cash stock sales - 154,000 177,000
Stock and options issued for additional interest - 22,561 117,332
Equipment exchanged for services - - 2,903
Stock issued in lieu of royalty payment 51,250 - 51,250
Writeoff of goodwill 54,238 - 54,238
Amortization of deferred interest - 139,500 232,500
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (1,561) 1,677 (19,721)
(Increase) decrease in inventory (89,269) (11,181) (271,562)
(Increase) decrease in prepaid expenses (36,152) 724 (76,152)
(Increase) decrease in other assets (45,860) (5,201) (93,579)
Increase (decrease) in accounts payable (54,501) (28,527) 387,810
Increase (decrease) in accrued expenses 44,758 (75,367) 128,945
------------------ ------------------ ------------------
Total adjustments 219,521 562,580 1,943,571
------------------ ------------------ ------------------
Net cash (used in)
operating activities (1,941,796) (1,402,021) (5,213,442)
------------------ ------------------ ------------------
Cash flows from investing activities:
Acquisition of plant and equipment (59,470) (208,383) (374,873)
Increase in patents and trademarks (10,360) (18,614) (185,343)
------------------ ------------------ ------------------
Net cash (used in) investing activities (69,829) (226,997) (560,215)
------------------ ------------------ ------------------
Cash flows from financing activities:
Common stock sold for cash 626,000 865,510 2,576,569
Capital contributions by partners - - 402,950
Proceeds from long-term debt 580,000 - 1,199,100
Proceeds from leases payable 423,750 - 423,750
Proceeds of shareholder loans 615,716 45,000 1,385,884
Repayment of shareholder loans (28,660) (20,000) (87,526)
Repayment of notes payable (160,366) (6,343) (160,366)
Repayment of leases payable (125,646) - (125,646)
Proceeds from notes payable - 197,450 197,500
------------------ ------------------ ------------------
Net cash provided by
financing activities 1,930,795 1,081,617 5,812,216
------------------ ------------------ ------------------
Increase (decrease) in cash (80,830) (547,401) 38,559
Cash and cash equivalents,
beginning of period 119,389 552,878 -
------------------ ------------------ ------------------
Cash and cash equivalents,
end of period $ 38,559 $ 5,477 $ 38,559
================== ================== ==================
</TABLE>
See accompanying notes to unaudited financial statements.
5
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CASINOVATIONS INCORPORATED
(A Development Stage Company)
Notes to Financial Statements
(Unaudited)
NOTE 1 - 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 audited financial statements for
the year ended December 31, 1997 as included in the Company's
Registration Statement on Form SB-2/A as last filed with the
Securities and Exchange Commission on October 16, 1998
(Commission File No. 333-31373).
Basic loss per share was computed using the weighted average
number of common shares outstanding.
Certain of the shares issued to a consultant during 1997 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. The Company has amortized $66,500 of the unearned
services to general and administrative expenses during the nine
months ended September 30, 1998.
During January 1998, the Company received proceeds from
convertible debentures aggregating $400,000. When added to the
proceeds received in December 1997, the Company has received
total proceeds of $500,000 from its convertible debentures. 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 $2.13 per share. Of the
gross proceeds received from the convertible debentures, $150,000
was received from the Company's principal stockholder and has
been included in shareholder loans in the accompanying balance
sheet. Additionally, the principal stockholder made working
capital advances to the Company during the quarters ended March
31, 1998, June 30, 1998 and September 30, 1998, aggregating
$140,000, $350,000, and $325,000 respectively. The advances bear
interest at 9.5% per annum.
During the quarter ended June 30, 1998, the Company sold an
aggregate of 176,000 shares of its $.001 par value common stock
for cash proceeds of $430,000 and $176,500 in services.
Additionally, 20,000 shares of the common stock were sold for
services amounting to $50,000 in connection with the completion
of an outstanding contract.
During the quarter ended September 30, 1998, the Company sold an
aggregate of 111,900 shares of its $.001 par value common stock
for cash proceeds of $228,500 and $51,250 in services.
Additionally, 30,000 shares of the common stock were issued for
services amounting to $75,000 in connection with the purchase of
Gaming 2000.
On July 31, 1998, the Company and Technology Development Center,
LLC amended the terms of the exclusive license granted to the
Company such that the Company will make monthly payments of
$5,000 from August 1998 to October 1998, make a payment of $2,500
in November 1998, and convert the remaining balance of $51,250 in
principal and future into 20,500 Common Shares at a conversion
rate of $2.50 per Common Share. Through this amendment, the
Company reduces its cash payment requirements
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and related expenses. The Company is current on its obligations
with Technology Development Center, LLC.
On August 13, 1998, the Company entered into an agreement with
Gaming 2000, L.L.C. ("Gaming 2000") for the purchase of all of
the assets of Gaming 2000 in exchange for $75,000, payable by
delivery of 30,000 shares of the Company's common stock. In
addition, the Company has hired the following members of Gaming
2000's management team: William O'Hara - Senior Vice President,
Dean Barnett - Vice President of Sales, and Tom Gaytan -
Account Executive. These individuals were all former
employees of Shuffle Master, Inc. with Mr. O'Hara as a founding
member of Shuffle Master, Inc., and Mr. Barnett as national sales
director for Shuffle Master, Inc.
NOTE 2 - STATEMENT REGARDING COMPUTATION OF LOSS PER SHARE.
Fully diluted loss per share excludes any dilutive effects of
options, warrants and convertible securities. Fully diluted loss
per share is not presented because the effect would be anti-
dilutive.
NOTE 3 - EMPLOYMENT AGREEMENT.
Effective June 1, 1998, the Company's president entered into an
employment agreement with the Company for a term expiring
December 31, 1999. The officer will receive base pay of $12,500
per month through December 31, 1998 and $18,500 per month for the
remainder of the term. The officer also was granted options to
purchase 100,000 shares at $1.50 per share effective immediately
and is eligible to receive an additional stock option for 100,000
shares at $1.50 per share upon attaining the Company's goals for
1998 as determined by the Board of Directors. An affiliated
entity of the officer also agreed to the termination of a
consulting agreement in exchange for $42,000, payable over 7
months, and 10,000 shares of the Company's Common Stock. The
Company recognized $100,000 of compensation expense related to
the stock option for 100,000 shares which is exercisable at a
price that is $1.00 per share less than the current fair value of
the stock and $25,000 of compensation expense related to the
stock issuance of 10,000 shares during the quarter ended June 30,
1998.
NOTE 4 - SUBSEQUENT EVENTS.
On May 28, 1998, the Company entered into a letter agreement (the
"Letter Agreement") with Steven L. Forte and Cheryl Forte with
respect to, among other things, the proposed severance of the
business relationship between the Company and Mr. Forte and the
purchase by the Company of all of the share of Company common
stock held by either Steven L. Forte or Cheryl Forte (the "Forte
Shares"). The Forte Transaction also involves the termination of
the employment agreement with Steven Forte and the gifting of
82,000 Common Shares by Steven and Cheryl Forte to certain
individuals. The Company has negotiated the Forte Transaction
due to the concerns of the Nevada State Gaming Control Board with
the prior gaming-related conviction of Steven Forte. The Company
elected to repurchase the Forte Shares instead of including the
Forte Shares as part of the Offering because the Nevada State
Gaming Control Board required such divestiture as a condition to
final approval of the Shuffler for distribution in Nevada. In
addition, the Company did not want to subject this divestiture of
the Forte Shares to the public market risks that affect the
Offering. On July 2, 1998, the Nevada State Gaming Control Board
approved of the terms of the Forte Transaction and permitted the
Company to conduct field trials of the Shuffler at certain hotel-
casinos in Nevada. Mr. Forte is no longer a consultant, director
or employee of the Company.
Pursuant to the definitive agreement between the Company and
Steven L. Forte and Cheryl Forte, the Company has agreed in
principle to, among other things, (a) terminate the employment
and non-compete agreement between the Company and Mr. Forte; and
(b) purchase (i) certain royalties granted to Mr. Forte from the
sale of the Random Ejection Shuffler, Fantasy 21 and the Safety-
Peek Playing Card for $200,000; (ii) options to purchase 20,000
shares of Company common stock for $30,000, and (iii) 848,682
shares of Company common stock for $2,121,705. As consideration,
the Company will issue a promissory note in
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favor of Steven L. Forte and Cheryl Forte in the amount of
$2,351,705. The promissory note will be dated on the date the
Nevada State Gaming Control Board grants its final approval of
the Random Ejection Shuffler. The promissory note shall bear an
interest rate of 6.5% during the first year and 8% thereafter,
and be amortized over a ten-year schedule with payments of
interest only during the first year, payable on the six-month and
twelve-month anniversary of the promissory note, and payments of
principal and interest thereafter on a monthly basis. On the
fifth anniversary of the promissory note, the unpaid principal
and interest will become due and payable. The promissory note is
secured by a security interest in the patents for the Random
Ejection Shuffler and Fantasy 21 table game. Therefore, there
will be no interest payments in 1998.
Although the Forte Note will be secured by the 848,682 Common
Shares and by a first security interest in the patents for the
Random Ejection Shuffler and Fantasy 21, Steven and Cheryl Forte
have agreed to release their security interest in said patents
for a principal reduction of 50% of the outstanding principal of
the Forte Note and for a due-on-sale amendment to the Forte Note
whereby the outstanding principal of the Forte Note will be due
and owing upon a change of control of the Company. In addition,
the Company has agreed to reduce the outstanding principal of the
Forte Note by $750,000.00 if the Company completes the Offering
of 1,500,000 Common Shares. In the event the Company fails to
sell all 1,500,000 Common Shares yet sells at least 500,000
Common Shares for cash, the Company has agreed to reduce the
outstanding principal of the Forte Note by an amount calculated
by multiplying $750,000.00 by the ratio of the number of Common
Shares sold for cash by 1,500,000 Common Shares. Further, in the
event the Company issues and sells Common Shares in a subsequent
registered public offering, the Company and Steven and Cheryl
Forte have agreed to a schedule whereby the Company will reduce
specified amounts of outstanding principal of the Forte Note
according to specified proceeds received by the Company through
such a public offering.
On July 28, 1998, the Company and a third-party supplier entered
into an agreement to settle all claims between the two parties.
Pursuant to the terms of the settlement, the parties agreed to
dismiss the aforementioned matters with prejudice and agreed to
mutually release and indemnify each other with respect to the
issues that were the subject matter of this litigation. Further,
in exchange for certain component parts and equipment used for
the assembly of the Company's products, the Company executed a
demand note in the amount of $325,000 in favor of the third-party
supplier which note the Company (i) has already paid $50,000, and
(ii) will be able to satisfy in full at a discount if the Company
pays an additional $150,000 to the third-party supplier by
October 1, 1998. On October 1, 1998, the Company timely met its
obligation of $150,000. Accordingly, the demand note was
satisfied in full and will be cancelled.
The Company has received working capital advances from its
principal shareholder aggregating $615,000 in the first nine
months of 1998 for a total sum of $735,000 as of September 30,
1998. These amounts are in addition to a $150,000 convertible
debenture also held by its principal shareholder. The conversion
rate for the convertible debentures was adjusted downward by the
Company's board of directors from $2.98 to $2.13 to reflect the
reduction of the offering price of the Company's offering from
$3.50 per share to $2.50 per share.
With respect to the accounting presentation, the Company has
included the $500,000 convertible debentures issued to certain
shareholders, including the Company's principal shareholder,
under "Notes payable - other" entry of the balance sheet. These
convertible debentures have a conversion rate of $2.13 per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
STATEMENT ON FORWARD-LOOKING INFORMATION. Certain
information included herein contains statements that may be
considered forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, such as statements relating to
plans for future operations, capital spending and financing
sources. Such forward-looking information involves important
risks and uncertainties that could significantly affect
anticipated results in the future and, accordingly, such results
may differ from those expressed in any forward-looking statements
made herein. These risks and uncertainties include, but are not
limited to, those relating to adequate sources of cash,
manufacturing and supply issues, marketing of and acceptance of
the Company's products, dependence on existing management, gaming
regulations (including actions affecting licensing), leverage and
debt service (including sensitivity to fluctuations in interest
rates), issues related to the Year 2000, domestic or global
economic conditions and changes in federal or state tax laws or
the administration of such laws.
PLAN OF OPERATION. The Company has substantially completed
its research and development stage of the Random Ejection
Shuffler(TM) (the "Shuffler"), the Fantasy 21(TM) table game
("Fantasy 21") and the SecureDrop Coin Bucket System(TM)
("SecureDrop"). In July 1998, the Company established a
manufacturing facility in Boise, Idaho for the purposes of
producing the Shuffler and Fantasy 21 and has hired a
production manager to oversee the production process.
The Company has 50 completed Fantasy 21 units in the quality
assurance process which, upon assurance, will be shipped to the
Company's offices in Las Vegas, Nevada. The Company will employ
a combination of employees and contract laborers in the
manufacturing process. Through its manufacturing facility, the
Company is producing approximately 300 units of the Shuffler with
delivery of the units to the Company's offices in Las Vegas,
Nevada from late November 1998 to January 1999. The demand for
the Company's products will be dependent on general economic
conditions, economic conditions in the gaming industry and
acceptance of new products in the marketplace.
The Company is developing business plans that are
anticipated to allow the Company to be self-supportive within the
first five to six months from the beginning of sales. Should the
Company be able to complete the successful offering of 1,500,000
shares of Common Stock presently pending pursuant to that certain
Registration Statement on Form SB-2/A (Commission File No. 333-
31373) (the "Offering"), the Company expects that the Shuffler
and the Fantasy 21 will be brought to market and that
SecureDrop development will be completed and brought to
market as well. The Company expects that the net proceeds
from the Offering and cash flow from operations will be
sufficient to meet the Company's liquidity requirements
throughout the remainder of the year. In the event that either
the Offering is not completed or that sales are inadequate to
generate sufficient cash flow from operations, the Company will
have to locate alternative sources of funds.
At September 30,1998, the Company's working capital deficit
was $2,095,952 compared to $1,031,024 at December 31, 1997. The
current ratio (the ratio of current assets to current
liabilities) as of September 30, 1998 was 0.21:1, compared to
0.26:1 at December 31, 1997. The Company is presently dependent
on the success of the Offering to fund its current liquidity
needs or it will need to locate alternative sources of funding
for which there may not be sources available. The Company has
also relied on working capital advances from its principal
shareholder aggregating $615,000 in the first nine months of 1998
for a total sum of $735,000 as of September 30, 1998 (in addition
to a $150,000 convertible debenture purchase) for liquidity
requirements, without which the Company would not have been able
to operate. Since September 30, 1998, the Company has received
proceeds of $105,000 from the sale of shares pursuant to the
Offering and has received an additional $400,000 loan from its
principal shareholder. Although the Company is currently
negotiating with certain lenders for additional sources
of funds and anticipates receiving such additional
sources of funds, the Company may not be able to locate
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alternative liquidity sources in the event that the principal
shareholder ceases to make advances to the Company and the
Offering is not successful.
The ability of the Company to obtain any necessary gaming
licenses, authorizations and approvals in certain key
jurisdictions, such as Nevada and New Jersey, may materially
impact the Company's ability to market its products. Additional
new products are in conceptual design stages and, with adequate
funding, are expected to be brought to market within the next 12
months. With respect to the Nevada gaming authorities, the
Company has received approval for the distribution of Fantasy 21
and has successfully completed field trials for the Shuffler.
Final approval of the Shuffler is dependent upon, INTER ALIA, the
completion of the that certain transaction between the Company
and Steven and Cheryl Forte described in Part I, "Financial
Statements - Notes to Financial Statements - Note 4 - Subsequent
Events" and in Part II, "Item 5. Other Information."
For the three months ended March 31, 1998, the six months
ended June 30, 1998, and the nine months ended September 30, 1998
the Company did not make any significant acquisitions of plant
and equipment. Inventory for parts to assemble product increased
$113,151 at the end of the third quarter. There are no
expectations for the purchase of significant equipment or plant.
Management of the manufacturing process for the Shuffler has been
re-located to the Company's manufacturing facilities in Boise,
Idaho.
For the three months ended March 31, 1998, the six months
ended June 30, 1998, and the nine months ended September 30,
1998, the Company had a net loss of $520,180, $739,880 and
$2,161,317, respectively. For the three months ended March 31,
1998, the six months ended June 30, 1998, and the nine months
ended September 30, 1998, the Company had depreciation and
amortization of $6,965, $44,175, and $80,119, respectively.
For the three months ended March 31, 1998, the six months
ended June 30, 1998, and the nine months ended September 30,
1998, the Company had general and administrative expenses of
$355,787, $1,045,867, and $1,748,616. For these time periods,
these expenses consisted of salaries and related costs of
$96,110, $203,383, and $452,037, respectively; consulting
services of $78,501, $187,242, and $203,045, respectively; cost
of gaming industry shows of $9,363, $17,117, and $119,277,
respectively; travel and entertainment costs of $61,663,
$109,118, and $151,783, respectively; printing and office
expense, including rent of $34,110, $70,642, and $111,842,
respectively; and legal expenses of $14,580, $106,930, and
$158,148, respectively.
YEAR 2000. During 1998, the Company undertook an assessment
of the information systems and software used in its operations to
determine whether or not those systems were Year 2000 compliant,
and assessed plans to upgrade systems and/or software that was
determined to not be Year 2000 compliant. The Company has begun
and is continuing to assess potential issues related to the
approach of the Year 2000 other than those relating to the
Company's internal information systems, such as critical supplier
readiness and potential problems associated with embedded
technologies, and will develop and implement plans to correct any
deficiencies found.
Based upon the Company's efforts to date, the Company
believes that the costs of addressing the Company's Year 2000
issues have not been and are not currently expected to be
material to the Company's results of operations or financial
position; however, should the Company and/or its critical
suppliers fail to identify and/or correct material Year 2000
issues, such failure could impact the Company's ability to
operate as it did before the Year 2000, and subsequently have a
material impact on the Company's results of operations or
financial position. In such an event, the Company will address
issues as they arise and strive to minimize any impact on the
Company's operations. The impact on the Company's operating
10
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results of such failures and of any contingency plans to be
designed to address such events cannot be determined at this
time.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS. The Company
operates in the highly competitive gaming industry that involves
a number of risks, some of which are beyond the Company's
control. For a complete discussion of these risks, see the
section entitled, "Risk Factors," included in the Company's
Registration Statement on Form SB-2/A, as last filed with the
Commission on October 16, 1998 (Commission File No. 333-31373).
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On April 24, 1998, a complaint was filed in District Court,
Clark County, Nevada on behalf of the Company against Western
Electronics, Inc. ("Western") and its Chief Executive Officer,
John Wasden. The Complaint alleges causes of action for breach
of contract, declaratory relief, unjust enrichment, interference
with contractual relations, conversion and fraud--intentional
misrepresentation, all stemming from purchase orders between the
Company and Western for the Shuffler. The Complaint was served
upon Western on April 27, 1998, and service upon Mr. Wasden is
pending. Through this litigation, the Company seeks to recover
component parts purchased for the assembly of the Shuffler or in
the alternative to recover the monies expended for their purchase
as well as other money damages. Subsequent to the filing of its
answer, Western filed an amended answer and counterclaim in which
Western alleged breach of contract and payment of amount.
On July 28, 1998, the Company and Western entered into an
agreement to settle all claims between the two parties. Pursuant
to the terms of the settlement, the parties agreed to dismiss the
aforementioned matters with prejudice and agreed to mutually
release and indemnify each other with respect to the issues that
were the subject matter of this litigation. Further, in exchange
for certain component parts and equipment used for the assembly
of the Company's products, the Company executed a demand note in
the amount of $325,000 in favor of Western which note the Company
(i) has already paid $50,000, and (ii) will be able to satisfy in
full at a discount if the Company pays an additional $150,000 to
Western by October 1, 1998. The Company paid the $150,000 by
October 1, 1998.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Pursuant to a notice dated September 11, 1998, the
Company's board of directors determined that it was in the best
interests of the Company and the Company's stockholders to call
the Company's Class B and Class C Warrants. The holders of the
Class B and Class C Warrants were entitled to exercise such
warrants at $4.00 and $6.00, respectively, until October 11,
1998, at which time the holders of Class B and Class C Warrants
would be entitled to receive $.001 per underlying share of common
stock. As no Class B and Class C Warrants were exercised by
October 11, 1998, the Company will send payment of $.001 per
underlying share of common stock to each holder of Class B and
Class C Warrants.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
11
<PAGE>
ITEM 5. OTHER INFORMATION.
On May 28, 1998, the Company entered into a letter agreement
(the "Letter Agreement") with Steven L. Forte and Cheryl Forte
with respect to, among other things, the proposed severance of
the business relationship between the Company and Mr. Forte and
the purchase by the Company of all of the share of Company common
stock held by either Steven L. Forte and Cheryl Forte (the "Forte
Shares"). The effectiveness of the Letter Agreement was subject
to the approval of the Nevada State Gaming Control Board. On
July 2, 1998, the Nevada State Gaming Control Board approved the
terms of the Letter Agreement and authorized field trials for the
Shuffler.
Pursuant to definitive agreement between the Company and
Steven and Cheryl Forte, the Company has agreed in principle to,
among other things, (a) terminate the employment and non-compete
agreement between the Company and Mr. Forte; and (b) purchase (i)
certain royalties granted to Mr. Forte from the sale of the
Shuffler; (ii) options to purchase 20,000 shares of Company
common stock, and (iii) 848,682 shares of Company
common stock. As part of the transaction, the Company will issue
a promissory note in favor of Steven L. Forte and Cheryl Forte in
the amount of $2,351,705. The promissory note will be dated on
the date the Nevada State Gaming Control Board grants its final
approval for the Shuffler. In addition, the promissory note
shall bear an interest rate of 6.5% during the first year and
8% thereafter, be amortized over a ten-year schedule with
payments of interest only during the first year, payable on the
six-month and twelve-month anniversary of the promissory note,
and payments of principal and interest thereafter on a monthly
basis. On the fifth anniversary of the promissory note, the
unpaid principal and interest will become due and payable. The
promissory note will be secured by a security interest in the
patents for the Shuffler and Fantasy 21.
On October 29, 1998, pursuant to the Company's bylaws, the
Company's board of directors unanimously appointed Ronald O. Keil
of Vancouver, Washington as a member of the Company's board of
directors. The Company's board of directors currently consists
of six members.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
27.01 Financial Data Schedule
(b) REPORT ON FORM 8-K.
None.
12
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act,
the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CASINOVATIONS INCORPORATED
---------------------------------
Date: November 13, 1998 By: /s/ Jay L. King
---------------------------------
Its: Chief Financial Officer and
Secretary
13
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
- -------------- ----------- -----------
27.01 Financial Data Schedule 15
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 38,559
<SECURITIES> 0
<RECEIVABLES> 19,722
<ALLOWANCES> 0
<INVENTORY> 421,562
<CURRENT-ASSETS> 555,995
<PP&E> 408,559
<DEPRECIATION> 90,955
<TOTAL-ASSETS> 1,121,410
<CURRENT-LIABILITIES> 2,651,954
<BONDS> 0
6,501
0
<COMMON> 0
<OTHER-SE> 4,871,999
<TOTAL-LIABILITY-AND-EQUITY> 1,121,410
<SALES> 5,210
<TOTAL-REVENUES> 11,390
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,969,680
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 148,789
<INCOME-PRETAX> (2,161,317)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,161,317)
<DISCONTINUED> 0
<EXTRAORDINARY> (54,238)
<CHANGES> 0
<NET-INCOME> (2,161,317)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
