As filed with the Securities and Exchange
Commission on September 29, 1998. Registration No. 333-31373
==========================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
POST-EFFECTIVE AMENDMENT NO. 3
TO
FORM SB-2/A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------------
CASINOVATIONS INCORPORATED
Washington 91-1696010
- -------------------- ---------------------- ---------------------
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial
incorporation or Classification Code Identification No.)
organization) Number)
5240 S. Eastern Avenue, First Floor, Las Vegas, Nevada 89119
Telephone: (702) 733-7195, Facsimile: (702) 733-7197
- -------------------------------------------------------------------
(Address and telephone number of principal executive offices and
principal place of business)
Jay L. King
5240 S. Eastern Avenue, First Floor
Las Vegas, Nevada 89119
Telephone: (702) 733-7195, Facsimile: (702) 733-7197
- -------------------------------------------------------------------
(Name, address and telephone number of agent for service)
WITH COPIES TO:
Michael J. Bonner, Esq.
Sherwood N. Cook, Esq.
Robert C. Kim, Esq.
Kummer Kaempfer Bonner & Renshaw
3800 Howard Hughes Parkway, 7th Floor
Las Vegas, Nevada 89109
Telephone: (702) 792-7000, Facsimile: (702) 796-7181
- -------------------------------------------------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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]
If this Form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made
pursuant to Rule 434, please check the following box. [ ]
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>
PROSPECTUS [LOGO]
Dated ____________, 1998
SUBJECT TO COMPLETION
Up to a Maximum of 1,500,000 Common Shares
2,107,973 Common Shares on behalf of Selling Security Holders
200,000 Common Shares underlying the A Warrants
CASINOVATIONS INCORPORATED
Common Stock, $.001 Par Value
Casinovations Incorporated, a Washington corporation (the
"Company"), is offering up to a maximum of 1,500,000 shares of
the Company's common stock ("Common Shares") at the purchase
price of $2.50 per share. There is no minimum investment amount.
The Company is also registering 2,107,973 Common Shares on behalf
of its selling security holders and 200,000 Common Shares
underlying its A Warrants.
The 2,107,973 Common Shares being registered on behalf of selling
security holders consist of 319,825 Common Shares on behalf of
the Company's officers, directors and affiliates, 828,177 Common
Shares on behalf of shareholders who purchased in a previous
private placement and 959,971 Common Shares to other unaffiliated
shareholders. See "SELLING SECURITY HOLDERS." Although
2,107,973 Common Shares are being registered, the Company has
secured lockup agreements with the Company's officers and
directors and with certain shareholders.
Prior to the date hereof, there has been no trading market for
the Common Shares. There can be no assurance that the Common
Shares 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 intends to register its Common Shares
under Section 12(g) of the Exchange Act of 1934.
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 THESE SECURITIES. SEE RISK FACTORS, PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
DUE TO THE CONTEMPORANEOUS SECONDARY OFFERING BY SELLING SECURITY
HOLDERS, CONFLICTS OF INTEREST BETWEEN THE COMPANY AND CERTAIN
SELLING SECURITY HOLDERS MAY ARISE. SEE "TERMS OF THE OFFERING"
AND "RISK FACTORS."
THE NEVADA STATE GAMING CONTROL BOARD, THE NEVADA GAMING
COMMISSION, OR ANY OTHER GAMING AUTHORITY HAVE NOT PASSED UPON
THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS OR THE INVESTMENT
MERITS OF THE COMMON STOCK OFFERED HEREBY. ANY REPRESENTATION TO
THE CONTRARY IS UNLAWFUL.
=================================================================
Price to Commissions Proceeds to
Public Company
- -----------------------------------------------------------------
Per Common Share $2.50 $.25 $2.25
Maximum Offering (1) $3,750,000 $375,000 $3,375,000
=================================================================
(1) First Global Securities, Inc. and Grant Bettingen, Inc.
(collectively, the "Placement Agents") have been retained to act,
on a best efforts basis, as exclusive agents for the Company in
connection with the arrangement of this Offering. The amount as
shown in the preceding table does not reflect the deductions of
(i) general expenses payable by the Company; and (ii) 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 security
holders will not pay any of the expenses associated with this
Offering.
This Offering will terminate on or before December 31, 1998.
In the Company's sole discretion, the Offering may be extended
for up to three thirty day periods, but in no event later than
March 31, 1998. The Company reserves the right to withdraw,
cancel or reject an offer in whole or in part. The proceeds of
this Offering are to be deposited directly into an escrow account
with Bank West of Nevada to which the Company will have immediate
access. See "TERMS OF THE OFFERING - Plan of Distribution."
FIRST GLOBAL SECURITIES, INC. GRANT BETTINGEN, INC.
[THIS TEXT APPEARS PRINTED ALONG LEFT MARGIN OF PAGE. 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 sale of
these securities in any State in which such offer, solicitation
or sale would be unlawful prior to the registration or
qualification under the securities laws of any such State.]
<PAGE>
REPORTS TO SECURITY HOLDERS
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 Securities Act of 1933, as amended, with respect to the
securities offered hereby. The Company previously filed a Post-
Effective No.1 to the Registration Statement on June 5, 1998
which was declared effective by the Securities and Exchange
Commission on June 15, 1998. Upon the effectiveness of the
Registration Statement, the Company became subject to the
requirement under the Securities Exchange Act of 1934, as
amended, to file Quarterly Reports on Form 10-QSB and Annual
Reports on Form 10-KSB. Accordingly, the Company has filed
Quarterly Reports on Form 10-QSB for the three month period ended
March 31, 1998 and June 30, 1998. 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. 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. Copies of such materials can
be obtained from the Public Reference Section of the Commission,
Washington, D.C. 20549 at prescribed rates.
The Company has filed with the Commission a Post-Effective
Amendment No.3 to its Registration Statement 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, Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington D.C. 20549, 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 Commission maintains a website -- //www.sec.gov -- that
contains reports, proxy and information statements and other
information regarding issuers that file electronically with the
Commission.
UNTIL _____________, 1998 (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.
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.
2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY..............................................4
RISK FACTORS....................................................7
SELLING SECURITY HOLDERS.......................................12
SOURCE AND USE OF PROCEEDS.....................................16
DILUTION.......................................................17
THE COMPANY....................................................18
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...............................................26
MANAGEMENT.....................................................31
CERTAIN TRANSACTIONS...........................................36
PRINCIPAL SHAREHOLDERS.........................................39
SHARES ELIGIBLE FOR FUTURE SALE................................42
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.........................................42
TERMS OF OFFERING..............................................44
DESCRIPTION OF SECURITIES......................................47
LEGAL MATTERS..................................................49
LEGAL PROCEEDINGS..............................................49
EXPERTS........................................................49
INTERESTS OF NAMED EXPERTS AND COUNSEL.........................49
FINANCIALS.....................................................50
3
<PAGE>
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. Casinovations Incorporated (the "Company") was
incorporated in the state of Washington on September 20, 1995.
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. In addition to the gaming products and concepts obtained
from the Sines-Forte General Partnership ("Sines-Forte"), the
Company recently acquired certain gaming products and concepts
from Gaming 2000, L.L.C. ("Gaming 2000").
THE PRODUCTS. The Company has numerous gaming products and
concepts in its portfolio. The Company's non-table game products
include the Random Ejection Shuffler (the "Shuffler"), the Safety
Peek Playing Card and the SecureDrop Coin Box system
("SecureDrop"). The Shuffler shuffles automatically up to six
decks of playing cards using computer software to produce what
the Company believes to be an unpredictable multi-deck array of
shuffled playing cards. The Company believes that the Safety
Peek Playing Card is a new type of playing card designed to
reduce the "hole card" problem in Blackjack. SecureDrop provides
enhanced security and accountability in "drop box" handling by
streamlining the coin-drop process. The Company's table game
products include the Fantasy 21 Table Game ("Fantasy 21"), Bonus
Blackjack, Greed, Vegas Aces, Jack Attack, Wild Jackpot Poker,
Twin Baccarat, Danny's Jackpot Dice, Countdown and Wild Hold'em
Fold'em. These table game products are generally variations of
existing popular table games, such as Blackjack and Poker. For
example, Fantasy 21 is a multimedia enhancement of Blackjack that
employs a side wager, multimedia electronic tracking and
jackpots.
MANUFACTURING. The Company is currently manufacturing the
Shuffler and Fantasy 21 in its production facilities in Boise,
Idaho. As for SecureDrop, the Company is using a combination of
employees, contract laborers and third-party manufacturers in Las
Vegas.
DISTRIBUTION NETWORK. The Company intends to sell or lease its
products to the worldwide gaming industry directly, through
distributors or subcontracts with non-affiliated manufacturers.
The Company believes that it has created a worldwide distribution
and marketing network through various agreements with companies
in North America, the Pacific Rim, and Europe. The Company has
allied itself with these distribution and marketing companies in
order to take advantage of their respective knowledge of and
their established relationships with the local gaming industry.
Although the Company has created its worldwide distribution and
marketing network, the Company has no significant history of
operations and no profits.
HOW TO CONTACT THE COMPANY. The Company's principal offices are
located at 5240 S. Eastern Avenue, First Floor, Las Vegas, Nevada
89119. Its telephone number and facsimile number at such address
are (702) 733-7195 and (702) 733-7197, respectively. The Company
also maintains a website - http://www.casinovations.com - that
contains information regarding the Company, the Company's
products and the Company's filings with the Commission.
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
THE OFFERING The Company hereby offers up
to 1,500,000 shares of the
Company's common stock (the
"Common Shares") at $2.50 per
Common Share. <F1>
COMMON SHARES OUTSTANDING
PRIOR TO THE OFFERING 6,179,944
COMMON SHARES TO BE OUTSTANDING
AFTER MAXIMUM OFFERING 7,679,944 <F2>,<F3>
PERCENT OF COMMON SHARES OWNED BY
CURRENT SHAREHOLDERS AFTER MAXIMUM
OFFERING 80.47%
GROSS PROCEEDS AFTER
MAXIMUM OFFERING $3,750,000
USE OF PROCEEDS The Company intends to utilize
the proceeds of the sale of
its Common Shares for to
reduce debt, to increase
inventory levels of current
products, to expand current
product line and 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
Warrants shall be used as
working operations. See
"SOURCE AND USE OF PROCEEDS."
MARKET FOR COMMON STOCK
AND WARRANTS Prior to the date hereof,
there has been no trading
market for the Common Shares
or the A Warrants. The
Company has agreed to use its
best efforts to apply for the
quotation of its Common Shares
on the Electronic Bulletin
Board.
There can be no assurance that
the Common Shares 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 FOR
REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS."
- ---------------------
<FN>
<F1>Prior to the date of the prospectus, the Company has sold
317,900 Common Shares of the 1,500,000 Common Shares to be
sold hereunder.
<F2>Upon completion of the "Forte Transaction" as described under
"CERTAIN TRANSACTIONS - Related Party Transactions," and
payment in full of the promissory note to be delivered by the
Company to Steven Forte, a former employee and director of
the Company, and Cheryl Forte, there will be 6,831,262
Common Shares outstanding after the Offering. Mr. Forte is
no longer a consultant, director or an employee of the
Company.
<F3>This number excludes the exercise of the Company's
outstanding options and A Warrants.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
RESALES BY SELLING SECURITY HOLDERS 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
security holders and has no
control or affect on these
selling security holders.
The Company has entered into
written lockup agreements
with its officers and
directors and with certain
shareholders. See "SELLING
SECURITY HOLDERS."
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 Shares; 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
Shares in the foreseeable
future. See "RISK FACTORS."
TRANSFER AGENT The Company has retained
Continental Stock Transfer
and Trust Company as
transfer agent for the
Company's securities.
</TABLE>
6
<PAGE>
- -----------------------------------------------------------------
RISK FACTORS
- -----------------------------------------------------------------
In analyzing the Company's offering (the "Offering") of 1,500,000
Common Shares, prospective investors should read this entire
Prospectus and carefully consider, among other things, the
following risk factors:
POSSIBLE ADVERSE EFFECTS DUE TO SECONDARY OFFERING BY SELLING
SECURITY HOLDERS. The Company is registering 2,107,973 Common
Shares on behalf of selling security holders. As used herein,
selling security holders shall include all Common Shares of
donees and pledgees received from a named selling security holder
after the date of this Prospectus. The Company will undertake a
best efforts offering at the same time as selling security
holders will be able to sell their registered Common Shares.
Although officers and directors of the Company are participating
as selling security holders, all current officers and directors
and certain former officers and directors have entered into
written agreements not to sell their Common Shares until the
Company's Offering is fully subscribed. The Company is not
selling any Common Shares on behalf of selling security holders.
Selling security holders may conduct this secondary offering
regardless of the outcome of the Offering by the Company.
Conflicts of interest may arise due to the contemporaneous nature
of the Offering and the secondary offering by selling security
holders. In the event that the stock price falls below $2.50,
the Offering will be terminated. There is a strong risk that the
Offering may never be fully concluded.
The Company has proposed to enter into written lockup agreements
with its officers and directors and with certain shareholders.
Through these lockup agreements, the relevant shareholders would
agree to lockup their Common Shares for a period of one year.
However, if for any reason the last sale price of the Common
Shares, (a) on any stock exchange designated by the Company on
which the Common Shares may be listed, (b) if the Common Shares
is not traded on any stock exchange, by any reputable quotation
reporting service, or (c) if such quotations are not reported by
any such reporting service, by any dealer in securities dealing
in the Common Shares, exceeds $2.875 for ninety (90) consecutive
trading days, the lockup agreements shall be terminated. The
Company has secured lockup agreements for 502,443 Common Shares
held by officers and directors. The Company has contacted
shareholders holding 1,203,821 Common Shares with respect to the
lockup agreements. There is no guarantee that all of the
contacted shareholders will subject their respective Common
Shares to the terms of the lockup agreement. If all of the
Common Shares become subject to lockup agreements, there will
only be 401,709 Common Shares available for sale by selling
security holders. These lockup agreements will limit the number
of Common Shares available for establishing a market for the
Common Shares. See "TERMS OF THE OFFERING."
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. The 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.
7
<PAGE>
NEWLY FORMED CORPORATION; LACK OF OPERATING RESULTS. Although
the Company was formed on September 20, 1995, the Company is
still in the development stage where higher than normal operating
expenses will in all likelihood be incurred during initial
operations. The Company's activities have been limited to
analyzing the gaming industry, consulting with persons in the
gaming industry, negotiating interim financing arrangements,
developing products, establishing a distribution network for its
products, marketing its products to the gaming industry, and
manufacturing its products.
ADDITIONAL FINANCING MAY BE REQUIRED. Even if all of the
1,500,000 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 BEST EFFORTS OFFERING. The 1,500,000
Common Shares are being offered for sale by the Company on a best
efforts basis. First Global Securities, Inc. and Grant
Bettingen, Inc. (the "Placement Agents") have been retained to
act as the exclusive agents for the Company in connection with
the arrangement of such offers and sales on a best efforts basis.
Since the Placement Agents are not obligated to and do not intend
to itself take (or purchase) any of the Common Shares, there is
no guarantee that the Company will be able to sell all of the
1,500,000 Common Shares offered hereby.
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 approximately 36.05% of the
outstanding common shares (approximately 41.89% of the
outstanding common shares after the Forte Transaction). As a
result, the officers and directors of the Company, through their
aggregate ownership of the Common Shares, 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 has
various gaming products, such as a playing card shuffler, slot
machine coin-tracking system, and variations of traditional games
of Blackjack and Poker, that are ready for distribution. In
addition, the Company has added the numerous gaming products from
Gaming 2000 to its product line. Despite the additions to the
Company's product line, the Company has only recently completed
the development process for some of its gaming products.
Accordingly, the market for the Company's products is uncertain.
REPURCHASE OF COMMON SHARES BY THE COMPANY. The Company has
entered into a letter agreement dated May 28, 1998 with Steven L.
Forte, former director and employee of the Company, and Cheryl
Forte through which the Company has agreed to purchase, subject
to the approval of the Nevada State Gaming Control Board and the
dissolution of Sines-Forte, from Steven and Cheryl Forte:
(a) certain royalties from the sales of the Shuffler and Fantasy
21; (b) 20,000 options exercisable at $1.50 per underlying share;
and (c) 848,682 Common Shares (the "Forte Shares") at $2.50 per
share (the "Forte Transaction"). Although the Company has
deferred payments to be made under the Forte Transaction and
believes that it will be able to make the necessary payments
under the Forte Transaction, there can be no assurance that this
will in fact occur. See "MANAGEMENT'S DISCUSSION OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and "CERTAIN TRANSACTIONS -
Related Party Transactions".
FUTURE SALES OF AND MARKET FOR THE COMMON SHARES. Upon
completion of the Offering there shall be 7,679,644 Common Shares
outstanding (6,831,262 Common Shares upon completion of the Forte
Transaction and payment in full of the promissory note to be
delivered by the Company to Steven and Cheryl Forte). This does
not include the 200,000 Common Shares which shall be issued upon
conversion
8
<PAGE>
of the A Warrants, 75,000 Common Shares reserved for issuance
pursuant to loan conversion options, 645,000 Common Shares
reserved pursuant to outstanding options for issuance to key
employees and other individuals. See "MANAGEMENT - Employment
and Personal Service Agreements." If the maximum number of
Common Shares are sold, 3,721,599 of the Common Shares to be
outstanding (3,223,289 Common Shares upon completion of the Forte
Transaction and payment in full of the promissory note to be
delivered by the Company to Steven and Cheryl Forte) will be
considered "restricted securities" as that term is defined in
Rule 144 adopted under the Securities Act of 1933, as amended,
and in the 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 year
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 one year, 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 Common
Shares in any market which may develop.
CONFLICTS OF INTEREST. Officers and directors of the Company are
participating as selling security holders in this Offering while
the Company undertakes the Offering. 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.
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 $2.27 or 90.95% 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 Warrants. The
Company has 75,000 Common Shares reserved for issuance pursuant
to loan conversion options or 645,000 Common 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 Common Shares. 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
9
<PAGE>
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 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 $2.50
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 $3,750,000, the actual price of $2.50 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 or will enter into
definitive employment agreements with Steven J. Blad, Jay L.
King, William O'Hara and Dean Barnett. There can be no assurance
that the Company will be successful in retaining its key
employees or that it can attract or retain the additional skilled
personnel required.
VULNERABILITY TO FLUCTUATIONS IN THE ECONOMY. Demand for the
Company's products is dependent on, among other things, general
economic conditions and international currency fluctuations which
are cyclical in nature. Prolonged recessionary periods may be
damaging to the Company.
10
<PAGE>
"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 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."
11
<PAGE>
- -----------------------------------------------------------------
SELLING SECURITY HOLDERS
- -----------------------------------------------------------------
The Company shall register pursuant to this prospectus 2,107,973
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. The
information in this section reflects the Forte Transaction. See
"CERTAIN TRANSACTIONS - Related Party Transactions."
<TABLE>
<CAPTION>
TOTAL ASSUMING THE SALE OF ALL
AMOUNT NUMBER SHARES REGISTERED,
BEING OWNED NUMBER OF SHARES
NAME REGISTERED CURRENTLY OWNED AFTER THE OFFERING<F1>
---- ---------- --------- ----------------------------
<S> <C> <C> <C>
Stacy Haskins <F2>.................... 55,478 55,478 0
Martin Petri <F2>..................... 27,978 27,978 0
Michael Szeremeta <F2>................ 27,977 27,977 0
The Arcus Group <F3>,<F4>............. 700 7,000 7,000
Richard S. Huson <F4>,<F5>............ 312,229 2,561,589 2,561,589 (33.35%)
Leonard A. Hale <F6>.................. 15,478 15,478 15,478
David A. Krise........................ 91,910 91,910 0
Norman G. Kelln <F4>,<F7>............. 11,362 113,628 113,628 (1.48%)
John F. Curran........................ 10,193 10,193 0
Randy D. Sines <F8>................... 88,556 885,560 797,004 (10.38%)
David E. Sampson <F4>,<F9>............ 4,096 40,955 40,955
Jay Willoughby........................ 50,000 50,000 0
David Goldsmith <F6>.................. 50,000 50,000 50,000
C. Culver Smith....................... 30,000 30,000 0
Don Ludwick........................... 20,000 20,000 0
William Martin........................ 10,000 10,000 0
Adam Chase............................ 10,000 10,000 0
Adam W. Jaslow <F6>................... 30,000 30,000 30,000
Jennifer L. Jaslow <F6>............... 50,000 50,000 50,000
Jennifer L. Jaslow Trust <F6>......... 50,000 50,000 50,000
John Horstmann........................ 6,000 6,000 0
Richard S. Jaslow, IRA <F6>........... 100,000 100,000 100,000 (1.30%)
Lori K. Jaslow Trust <F6>............. 20,000 20,000 20,000
Adam Jaslow Trust <F6>................ 70,000 70,000 70,000
John Plati............................ 20,000 20,000 0
Doris Ljubicich....................... 3,400 3,400 0
Joseph Hroncich....................... 3,000 3,000 0
John S. Cole.......................... 3,000 3,000 0
Vito Bavaro........................... 3,000 3,000 0
Lori K. Jaslow, Trust <F6>............ 80,000 80,000 80,000 (1.04%)
Kevo Plumbing & Heating............... 10,000 10,000 0
Tami L. Dirienzo...................... 6,000 6,000 0
Peter Jankowski....................... 10,000 10,000 0
Renaldo C. Forcellati................. 3,000 3,000 0
Frank Stein........................... 3,000 3,000 0
Joan Carranza......................... 3,000 3,000 0
Joseph Criscione Sr. ................. 3,000 3,000 0
Paul M. Reichenberg................... 6,000 6,000 0
Kathleen M. Mahaffey.................. 3,000 3,000 0
12
<PAGE>
Baglieri Associates <F10>............. 3,000 3,000 0
William S. Dean....................... 6,000 6,000 0
Pratt, Wylce & Lords, Ltd. <F11>...... 29,100 29,100 0
Clinton Clark......................... 60,900 60,900 0
Victor & Lana Woinski................. 3,000 3,000 0
James J. & Sheila Criscione........... 3,000 3,000 0
Catherine O'Connell................... 3,400 3,400 0
Joseph & Ida Dellaroba................ 3,000 3,000 0
Mark R. Alleman....................... 3,000 3,000 0
William Megnin........................ 3,400 3,400 0
James P. Rose......................... 3,000 3,000 0
Mark Megnin........................... 3,000 3,000 0
Daniel Morgan & Sara Andolina......... 3,010 3,010 0
Richard P. Keshishian................. 3,000 3,000 0
Robert Jouas.......................... 4,000 4,000 0
David E. & Margaret Winkelman......... 3,000 3,000 0
Carl & Birte Mainardi................. 3,400 3,400 0
Mark Megnin & Helen Connor............ 3,400 3,400 0
Paul S. & Renee Spiegler.............. 6,500 6,500 0
Diana Forcellati...................... 3,000 3,000 0
Richard Napolitano.................... 3,000 3,000 0
Gaming Venture Corp. <F6>,<F12>....... 200,000 200,000 180,000 (2.34%)
Jeremy B. & W. Stern.................. 10,000 10,000 0
Aldo R. Beretta 1993 Family Trust..... 10,000 10,000 0
Dr. David Adelberg.................... 10,000 10,000 0
Michael Schaeffer..................... 10,000 10,000 0
Joseph & Julie Vaccaro................ 7,000 7,000 0
George & Selma Spiegler............... 3,000 3,000 0
Susan Jaslow <F6>..................... 50,000 50,000 50,000
Maria Cunha IRA....................... 8,500 8,500 0
Henry and John Horstmann.............. 8,000 8,000 0
Antonio Tommolillo.................... 3,000 3,000 0
Salvatore LaCognata................... 3,000 3,000 0
Harry & Adele Conti................... 3,000 3,000 0
Nicola Attanasio...................... 5,000 5,000 0
Lawrence Mendosa...................... 5,000 5,000 0
Janet Ausiello........................ 5,000 5,000 0
Michael Ausiello...................... 5,000 5,000 0
Mark Malzberg......................... 6,000 6,000 0
Laura Giostra......................... 6,700 6,700 0
David Lupo............................ 3,000 3,000 0
Peter O'Hare, Jr. .................... 4,000 4,000 0
Giovanni Granata...................... 3,000 3,000 0
Mario Tommolillo...................... 4,000 4,000 0
Jeffrey Kerne......................... 6,000 6,000 0
Gino Ramundo.......................... 6,000 6,000 0
Evelyn Alleman........................ 3,000 3,000 0
Thelma Zube........................... 3,400 3,400 0
Vincent & F. Ponte.................... 6,667 6,667 0
Laura Giostra......................... 6,700 6,700 0
Philip & Concetta Vincenti............ 6,800 6,800 0
Andrew Lesnak......................... 3,400 3,400 0
Susan Miller.......................... 6,700 6,700 0
13
<PAGE>
Uphill c/o Paul Scott................. 9,400 9,400 0
Martin Feldman........................ 3,400 3,400 0
Mark DeLorenzo........................ 3,000 3,000 0
Art Laffer............................ 1,000 10,000 9,000
Micro Cap World, LLC <F13>............ 10,000 10,000 0
Jay L. King <F4>,<F14>................ 2,500 25,000 25,000
Jayport Holdings, Inc. <F15>.......... 20,339 20,339 0
Glenn Fine............................ 30,000 30,000 0
Casino Journal of Nevada, Inc. <F16>.. 20,000 20,000 0
Robert Smith.......................... 6,000 6,000 0
John Wasden........................... 5,000 5,000 0
Althea Duggins........................ 1,000 1,000 0
James Beard........................... 1,000 1,000 0
Michele Gilbert....................... 10,000 10,000 0
Thomas DiSalvatore <F7>............... 90,000 90,000 70,000
Shawn Albers <F2>..................... 2,500 2,500 0
Rosemarie Gagliardo <F2>.............. 2,500 2,500 0
Ray Koon <F2>......................... 2,000 2,000 0
Daniel Camillo <F2>................... 10,000 10,000 0
<FN>
<F1> The calculation of the corresponding percentages to
the number of Common Shares owned after the Offering reflects
the inclusion of the 1,500,000 Common Shares offered pursuant to
the Offering. If all 1,500,000 Common Shares are sold, the total
number of Common Shares outstanding will be 7,679,944 Common
Shares.
<F2> As part of the Forte Transaction and upon the
dissolution of Sines-Forte, Steven L. Forte, a former consultant,
employee and director of the Company, and Cheryl Forte will
transfer 82,000 Common Shares to the following individuals, Stacy
Haskins (40,000 shares), Martin Petri (12,500 shares), Michael
Szeremeta (12,500 shares), Daniel Camillo (10,000 shares), Ray
Koon (2,000 shares), Rosemarie Gagliardo (2,500 shares) and Shawn
Albers (2,500 shares). As result of the Forte Transaction,
Steven and Cheryl Forte will no longer be shareholders of the
Company. See "CERTAIN TRANSACTION - RELATED PARTY TRANSACTIONS."
<F3> The Arcus Group is controlled by Glen (Tom) Pickell, a
former officer and director of the Company.
<F4> The Company and certain current and former officers
and directors have entered into an agreement to lock-up their
respective Common Shares registered pursuant to the Registration
Statement until completion of the Offering. Accordingly, the
number of Common Shares currently owned by these shareholders
will be the same as the number of Common Shares to be owned after
the Offering. See "TERMS OF THE OFFERING."
<F5> Richard Huson is Chairman of the Board of Directors of
the Company.
<F6> The Company and certain shareholders have entered into
an agreement to lock-up their respective Common Shares registered
pursuant to the Registration Statement for a period of one year
unless the Common Shares reach certain specified trading levels.
Accordingly, the number of Common Shares currently owned by these
shareholders will be the same as the number of Common Shares to
be owned after the Offering. See "TERMS OF THE OFFERING."
<F7> Norman G. Kelln is a former director of the Company.
<F8> Randy Sines is a former officer and director of the
Company.
<F9> David Sampson is a director of the Company.
<F10> Baglieri Associates is not affiliated with the
Company or its officers and directors and the Company does not
know the principals of Baglieri Associates.
<F11> Timothy Miles and Alan Schafler are the principals of
Pratt, Wylce & Lords, Ltd.
<F12> Alan Woinski and Kim Santangelo-Woinski are the
principals of Gaming Venture Corp., U.S.A.
<F13> Clinton Clark is the principal of Micro Cap World,
L.L.C.
<F14> Jay L. King, an officer and former director of the
Company, has agreed to lock up his 2,500 Common Shares being
registered in this Offering until completion of the Offering.
<F15> 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.
<F16> Glenn Fine is the principal of Casino Journal of
Nevada, Inc.
</FN>
</TABLE>
14
<PAGE>
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. Although the Class A Warrants were originally issued
to shareholders at the time of grant, certain holders of the
Class A Warrants assigned a portion of their Class A Warrants to
certain individuals who have provided additional financing to the
Company. See "DESCRIPTION OF SECURITIES - Warrants."
<TABLE>
<CAPTION>
TOTAL NUMBER TOTAL NUMBER
NAME ORIGINALLY ISSUED OWNED CURRENTLY
---- ----------------- ---------------
<S> <C> <C>
Norman G. Kelln<F1>............. 5,717 5,717
Sines-Forte Partnership<F2>..... 63,492 0
Cheryl Forte.................... 30,421 2,874
David Sampson................... 1,557 1,557
Randy Sines<F3>................. 30,421 2,874
Richard Huson<F4>............... 51,586 52,721
Stacey Haskins.................. 779 779
Martin Petri.................... 779 779
Michael Szeremeta............... 779 779
Leonard Hale.................... 779 779
David Krise..................... 4,624 4,624
John F. Curran.................. 513 513
Jay Willoughby<F4>.............. 2,516 19,295
David M. Goldsmith<F4>.......... 2,516 19,295
C. Culver Smith................. 1,509 1,509
Don Ludwick..................... 1,006 1,006
William Martin.................. 503 503
Adam Chase...................... 503 503
Richard S. Jaslow<F4>........... 0 50,336
VIP's Industries, Inc.<F4>,<F5>. 0 33,557
- ------------------
<FN>
<F1> Norman G. Kelln is a former director of the Company.
<F2> Sines-Forte was dissolved with its assets, including,
without limitation, the A Warrants, distributed to its partners,
Randy Sines and Cheryl Forte.
<F3> Randy Sines is a former officer and director of the
Company.
<F4> As an incentive to certain individuals for securing
convertible debt financing of $500,000, certain holders of Class
A Warrants assigned a portion of their Class A Warrants to the
individuals providing the convertible debt financing. The Class
A Warrants remain exercisable at $3.75 per underlying Common
Share. The assignment was at no cost to the Company and did not
create a gain or loss for the Company.
<F5> VIP's Industries, Inc. is an entity controlled by Bob
Smith, a director of the Company.
</FN>
</TABLE>
Pursuant to a previously filed Registration Statement on Form
SB-2/A (Post-Effective Amendment No. 1) filed with the Securities
and Exchange Commission on June 5, 1998, the Company registered
the Common Shares underlying its A, B and C Warrants (the
"Warrants") on behalf of its selling security holders. On
September 11, 1998, the Company's Board of Directors determined
that it was in the best interest of the Company and its
shareholders to call the Company's Class B and Class C Warrants.
Holders of the Class B and Class C Warrants may exercise such
Warrants at $4.00 and $6.00 per Common Share, respectively, until
October 11, 1998 at which time the holders of the Class B and
Class C Warrants will be entitled to receive $.001 per underlying
Common Share. As a result of such redemption and the termination
of the placement agreement with Travis Morgan Securities, Inc.,
there will be no transfer of any interests in the Class B and
Class C Warrants from such warrant holders to Travis Morgan
Securities, Inc.
15
<PAGE>
- -----------------------------------------------------------------
SOURCE AND USE OF PROCEEDS
- -----------------------------------------------------------------
If the maximum amount of securities is sold in the Offering, the
Company shall have net proceeds of $3,318,080 after the payment
of commissions of $375,000 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):
<TABLE>
<CAPTION>
<S> <C>
Total Proceeds $ 3,750,000
Less Commissions 375,000
Less Offering Expenses 41,920
-------------
Net Offering Proceeds $ 3,333,080
Building of product inventory 325,000
Research and development
to expand the current product line 450,000
International Marketing 200,000
Debt Reduction <F1> 750,000
Tooling and Equipment 130,000
Working Capital 1,475,080
-------------
$ 3,333,080
- --------------------
<FN>
<F1> The proposed debt reduction of $750,000 is to reduce the
indebtedness associated with the Forte Transaction. Although the
definitive documents for the Forte Transaction are currently
being negotiated, the parties have agreed in principle to the
purchase price of $2,351,705 in the form of a promissory note.
The parties have also agreed in principle to reduce the
outstanding principal of the promissory note by $750,000 if the
Company sells all 1,500,000 Common Shares in the Offering. 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 promissory
note by an amount calculated by multiplying $750,000 by the ratio
of the number of Common Shares sold for cash to 1,500,000 Common
Shares. See "MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "CERTAIN TRANSACTIONS - Related Party
Transactions."
</FN>
</TABLE>
If substantially less than the maximum proceeds is raised, the
priority for the use of proceeds is to (i) expand sales of
current products; (ii) increase inventory levels of current
products, (iii) expand tooling and equipment and (iv) reduce
debt. The proceeds are anticipated to be utilized over a twelve
month period.
The 2,107,973 Common Shares 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.
The Company is currently seeking lockup agreements from its
officers and directors and from certain shareholders. The
Company has received lockup agreements from its officers and
directors for 502,443 Common Shares and has requested lockup
agreements from certain shareholders for 1,203,821 Common Shares.
Any proceeds received from the subsequent exercise of the A
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 A
Warrants, no specific breakdown of uses have been established by
the Company. The aggregate amount of proceeds if all of the A
Warrants are exercised is $750,000.
16
<PAGE>
- -----------------------------------------------------------------
DILUTION
- -----------------------------------------------------------------
DILUTION. Assuming completion of maximum offering amount, there
will be a total of 7,679,944 Common Shares outstanding (does not
take into account the effect of the Forte Transaction). The
following table illustrates the per Common Share dilution as of
June 30, 1998, which may be experienced by investors upon
reaching the maximum offering.
<TABLE>
<CAPTION>
<S> <C>
Offering price $ 2.5000
Net tangible book value per Common Share
before the Offering (0.2558)
Increase per Common Share attributable to
investors 0.4820
-------------
Pro forma net tangible book value per Common
Share after the Offering 0.2262
-------------
Dilution to investors $2.2738
Dilution as a percentage of the offering price 90.95%
</TABLE>
COMPARATIVE PER COMMON SHARE DATA.
<TABLE>
<CAPTION>
TOTAL PRICE
NUMBER OF PAID PER CONSIDERA-
SHARES PERCENT SHARE TION PAID PERCENT
----------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders 6,179,638 80.47% $0.61 $3,782,807 50.22%
New Investors of Common Shares 1,500,000 19.53% $2.50 $3,750,000 49.78%
</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."
17
<PAGE>
- -----------------------------------------------------------------
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 5240 S. Eastern Avenue, First Floor, Las Vegas,
Nevada 89119. Its telephone number at such address is (702) 733-
7195. These offices consist of 4,000 square feet on a three-year
lease with payments of approximately $5,000 per month.
The Company's operations are the development, manufacturing and
marketing of certain gaming products and concepts acquired from
Sines-Forte and Gaming 2000. With the acquisition of certain
assets of Gaming 2000 and with the hiring of certain members of
Gaming 2000's management team, the Company has further
strengthened its management, marketing, distribution network and
product line. The Company intends to sell or lease its products
to the worldwide gaming industry directly, or through
subcontracts with non-affiliated manufacturers.
PRODUCTS. The Company has various gaming products, all of which
are ready for distribution. These products include what the
Company believes to be the most secure, truly random playing card
shuffler machine; a side-bet variation of Blackjack featuring a
$25,000 jackpot; a "smart bucket" for slot machine
accountability; a special playing card designed to prevent the
inadvertent exposure of the dealer's hole card; and a wide range
of table games. With the acquisition of certain assets from
Gaming 2000, the Company has added to its product line table
games that are generally variations of existing popular table
games, such as Blackjack and Poker.
The Shuffler is an automatic, six-deck playing card shuffler.
The Company believes that the Shuffler is currently faster and
jams less often than the playing card shuffling machines of its
competitors. Further, since the Shuffler randomly ejects playing
cards once rather than shuffling the playing cards over and over,
the Shuffler reduces the time required to shuffle playing cards.
The Company has completed field trials at Harrah's Las Vegas,
Fitzgerald's Casino Hotel and the Frontier Hotel and Gambling
Hall. The Company has completed production of approximately 50
units of the Shuffler.
Fantasy 21(TM) is a jackpot table game variation of Blackjack/21
involving a side wager of one dollar. If the player plays the
side wager and receives a hand of 20, 21 or Blackjack (a "High
Hand") during five consecutive hands, the player is eligible for
the $25,000 jackpot known as the Showdown Round. In the Showdown
Round, the player is dealt six hands simultaneously. If the
player receives six High Hands and the dealer receives a hand of
Blackjack, the player wins the $25,000 jackpot. Fantasy 21 also
offers other jackpots for other combinations of High Hands. Thus
far, Fantasy 21 has been tested at MGM Grand in Las Vegas and has
been installed at Harrah's Las Vegas. The Company has completed
production of approximately 50 units of Fantasy 21 and will lease
such units for $450 per month.
The Safety-Peek Card is a new type of playing card designed for
Blackjack/21. The key feature of its design is that it prevents
the exposure of a dealer's hole card, i.e. the card that is face
down, when used with a modified form of classic peeking action.
The Safety-Peek Card permits the dealer to "peek" at the opposite
corner of the playing card in order to determine the value of the
hole card without revealing the value of the playing card.
The SecureDrop Coin Bucket System ("SecureDrop") uses a "smart
bucket" to accurately tracks the number of coins in a slot
machine when the coins are transferred from the machine, counted
and later deposited by the slot machine operator. It is
estimated that slot machine operators lose millions in revenues
through lack of financial accountability. Two hundred fifty
units are in production.
Bonus Blackjack, a variation of standard Blackjack, has two
additional side wagers, one labeled as "Player" and the other
labeled as "Dealer." The player has the option of placing no
side wager, one side wager or both side wagers. If a side wager
is placed, the player is betting on whether the "Player" or
18
<PAGE>
"Dealer" is going to receive any two-card Blackjack, consisting
of an ace and any ten-value card. If the "Player" or "Dealer"
receives a Blackjack, the player will receive a 15 to 1 payoff
for the proper wager. In addition, Bonus Blackjack features a
bonus meter that tracks only that table's play. In order to win
the jackpot displayed on the bonus meter, the player must place
both side wagers and must be dealt the ace of spades and jack of
spades.
Wild Jackpot Poker, a variation of five-card stud, involves the
use of two jokers added to the deck. This is a straight-up poker
game where the players play against the dealer and not against
each other. If the player's hand beats the dealer's hand, the
player wins without the need for the dealer to "qualify" as with
other table games. In addition, if the player places a side
wager and receives a hand of a straight or better, the player
will receive an additional bonus payout according to the bonus
payout schedule at the table.
Twin Barracat is a variation of the standard baccarat game. The
object of the game is to simply have a higher total than the
dealer, closest to nine. The value of the cards 2 through 9 is
face value whereas aces are worth one and tens and face cards are
worth zero. The player is initially dealt two cards and the sum
of the cards, using only the single right-hand digit, represents
the player's total. The player can never have a bust hand. The
only exception is when the player, or the dealer, has a "Twin
Baccarat." Twin Baccarat occurs when the player's or dealer's
first two cards are any two nines. If the player receives a Twin
Baccarat, the player receives 3 to 2 on his wager and if the
dealer receives a Twin Baccarat, the dealer only takes the
player's original wager.
Danny's Jackpot Dice, a variation of the standard craps game,
employs an additional side wager made on consecutive points
thrown by the shooter. The wager must be made prior to the
shooter establishing the first "point" to be made. Once the
shooter establishes the first point, no one else can make this
wager until the shooter throws a seven and goes out. This side
wager will pay odds to the player based on how many consecutive
points were made during the shooter's turn. The shooter must
make at least three points before the player receives any odds on
his wager.
Greed is an original game that the Company believes is unlike any
other table game. In Greed, the player has the option of placing
up to five different wagers per round of play. The player is
playing for a point spread. The points are made by the dealer
turning over numbered cards one at a time, and progressively
adding the numbered cards. Once the "Greed" card appears, the
points stop and the game is over. All players that wagered on
the winning point spread would receive odds based on the point
spread on which they wagered.
Vegas Aces, a variation of stud poker, involves the initial deal
of three cards each to the player and dealer. The dealer exposes
two of the three dealt cards for review by the player. The
player must then make a challenge bet to continue. The player
and dealer both receive two additional cards. In order to be
eligible to win, the player must have an ace or card of higher
ranking and must beat the dealer's hand. Vegas Aces also offers
an optional side wager where the player wagers that he will have
the highest-ranking hand.
Countdown is a new table game based on the concept of a
countdown. The player can make a variety of wagers that pay from
even money to 500 to 1. Countdown uses a standard 52-card deck
plus six jokers. The object of Countdown is to go verbally
through the card sequence, from King to Ace, while laying down
the playing cards, without having the dealt card match the number
of card said. If such a match does not occur anywhere in the
sequence, a successful launch occurs and the player wins.
Jack Attack, a variation of the standard Blackjack game, has the
players playing against each other rather than against the
dealer. The players wager the same amount and the highest hand
takes the total wagered amount. In the event of a tie, the total
wagered amount will carry over to the next hand with a new ante
until a player has winning hand.
19
<PAGE>
Wild Hold'em Fold'em, a variation of stud poker, offers the
player the feel and decisions of a real-life poker game without
the concern of playing against anyone else. In Wild Hold'em
Fold'em, the player has three chances to wager should the player
continue to play to the end of the hand. First, the player
places a side wager and receives three cards. The player then
decides to either "Fold'em" and forego the side wager or
"Hold'em" and continue. If the player elects to "Hold'em" and
continue, the player must place a second side wager equal to the
first side wager. The player then receives a fourth card and
must decide again to either "Fold'em" and forego the side wagers
or "Hold'em" and continue. If the player elects to "Hold'em" and
continue, the player must place a third side wager double to the
first side wager. Once all third and final wagers are placed,
the player receives the fifth and last card face-up. All winning
hands are then resolved and paid according to the payout
schedule.
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
considerations 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: Issued U.S. Patent
Serial No: 08/228,609
Filing Date: April 18, 1994
20
<PAGE>
Patent No: 5,676,372
Issued Date: October 14, 1997
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: Issued Australian Patent
Serial No: 22936/95
Filing Date: April 18, 1995 (International Filing Date)
Patent No: 684937
Issue Date: April 23, 1998
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
21
<PAGE>
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: 08/603417
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
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
22
<PAGE>
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 $126,820, $464,304, $244,117 and $436,871 for the six
months ended June 30, 1998 and for the years ended December 31,
1997, 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 AND PRODUCTION. With respect to the manufacturing
capabilities of the Company, the Company has established a
manufacturing facility in Boise, Idaho for the purposes of
producing the Shuffler and Fantasy 21. The Company has 50
completed Fantasy 21 units that are in the quality assurance
process. These units will be shipped to the Company's offices in
Las Vegas, Nevada, by the fall of 1998. Fantasy 21 is produced
in batches of 50 units and, from the point of ordering components
to completion, takes twelve to fourteen weeks to produce each
batch. The Company employs a combination of employees and
contract laborers in the manufacturing process. As for the
Shuffler, the Company has ordered components that will enable its
manufacturing facility to produce several hundred units by the
end of 1998. As for SecureDrop, the Company is manufacturing the
necessary components at its principal offices in Las Vegas,
Nevada through the use of employees, contract laborers and third-
party manufacturers. The key third-party manufacturers for
SecureDrop are Tripp Plastics Components of Las Vegas, Nevada and
Three Rivers Electronics of Las Vegas, Nevada, both of which have
over fifteen years and twenty years of experience, respectively,
in the gaming industry. Currently, SecureDrop is in the third
and fourth rounds of production proofs. The Company is currently
producing 250 units of SecureDrop. Since the Company has
licensed the rights to the Safety-Peek Card to the George C.
Matheson Company ("GEMACO") and the US Playing Card Company, the
Company does not have manufacturing facilities for this product.
23
<PAGE>
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.
EXCLUSIVE DISTRIBUTORSHIP AGREEMENTS. The Company currently has
an exclusive distributorship agreement with Sodak Gaming, Inc.
The term of the agreement is five 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 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 includes 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 H. Joel Rahn (company name to be
designated). The term of the agreement is five years. The
Company agrees to offer to H. 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. The Company has also entered
into an exclusive five-year distributorship agreement with
Belgium Gaming Technology, a Belgian corporation, with respect to
all countries in the European Commonwealth, Eastern Europe and
Africa with the exclusion of South Africa and ferry ships.
EXCLUSIVE LICENSING AGREEMENTS. The Company has granted joint
exclusive licenses to 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 granted 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. On July 31, 1998, the
Company and Technology Development Center, LLC amended the
exclusive license such that
24
<PAGE>
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 and related expenses. The Company is
current on its obligations with Technology Development Center,
LLC.
EMPLOYEES. As of the date of this Prospectus, the Company has
ten full time and two part-time employees. The Company will, as
operations demand, sub-contract the balance of its personnel
through independent contractors or hire additional employees.
See "RISK FACTORS."
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. The 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.
With respect to its current products, the Company has received
approval from the Nevada Gaming Authorities to sell Fantasy 21,
Bonus Blackjack, Colorado Hold'em, Countdown, Danny's Jackpot
Dice, Raz and Wild Hold'em Fold'em. In addition, the Company is
currently conducting or has completed field trials for the Random
Ejection Shuffler and SecureDrop. The Company has not yet
received final approval for Twin Baccarat, Vegas Aces and Wild
Jackpot Poker.
As a condition to final approval for the Shuffler, the Nevada
State Gaming Control Board required the removal of Steven Forte
from the operations of the Company and the repurchase of all
Common Shares beneficially owned by Steven Forte. Accordingly,
the Company negotiated the Forte Transaction with Steven and
Cheryl Forte. On July 2, 1998, the Nevada State Gaming Control
Board approved the terms of the Forte Transaction and granted the
Company approval to conduct field trials for the Shuffler. The
Company has successfully completed field trials for the Shuffler
at Harrah's-Las Vegas, Fitzgerald's Casino Hotel, and the
Frontier Hotel and Gambling Hall. See "MANAGEMENT'S DISCUSSION
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "CERTAIN
TRANSACTIONS - Related Party Transactions".
25
<PAGE>
- -----------------------------------------------------------------
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 is developing
business plans and operations that are expected to permit the
Company to be self-supportive five to six months after normal
sales begin. Should the Company be able to complete this
Offering, the Shuffler, Fantasy 21, SecureDrop and the Company's
other table games will be brought to market. The ability of the
Company to obtain any necessary gaming licenses, authorizations
and approvals in certain key jurisdictions, such as Nevada and
New Jersey, will materially impact the Company's ability to
market its products. The Company received regulatory approval to
conduct field trials for the Shuffler on July 2, 1998. The
Company has successfully completed such field trials at
Harrah's-Las Vegas, Fitzgerald's Casino Hotel, and the Frontier
Hotel and Gambling Hall. Additional new products are in
conceptual design stages and, with adequate funding, are expected
to be brought to market within the next 12 months.
For the three months ended March 31, 1998 and the six months
ended June 30, 1998, the Company did not make any significant
acquisitions of plant and equipment. Inventory for parts to
assemble product increased $79,162 at the end of the second
quarter. There are no expectations for the purchase of
significant equipment or plant. Management of the manufacturing
process for the Shuffler has been relocated to the Company's
manufacturing facilities in Boise, Idaho.
At June 30, 1998, the Company's working capital deficit was
$1,848,947 compared to $1,031,024 at December 31, 1997. The
current ratio (the ratio of current assets to current
liabilities) as of June 30, 1998 was 0.18:1, compared to 0.26:1
at December 31, 1998. 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 of
$490,000 in the first six months of 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 June 30, 1998, the Company has received
proceeds of $354,750 from the sale of shares pursuant to the
Offering and has received an additional $325,000 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 alternative liquidity sources
in the event that the principal shareholder ceases to make
advances to the Company and the Offering is not successful.
The Company is currently negotiating the definitive documents for
the Forte Transaction. See "CERTAIN TRANSACTIONS - Related Party
Transactions." The negotiated purchase price is $2,351,705 in
the form of a promissory note (the "Forte Note"). The Forte Note
shall bear an interest rate of 6.5% for the first year and 8%
thereafter. The Forte Note shall be amortized over a 10 year
period with payments of interest only during the first year,
payable on the six month and one year anniversary of the Forte
Note, and payments of principal and interest thereafter, payable
on a monthly basis. On the five year anniversary of the Forte
Note, a balloon payment of the remaining unpaid principal and
interest will be due and payable. Since the definitive documents
with respect to the Forte Transaction are currently being
negotiated, the Forte Note is not dated and, accordingly, the
interest has not started to accrue. Therefore, there will be no
interest payments in 1998. In addition, as part of the Forte
Note, the Company
26
<PAGE>
has agreed to reduce the outstanding principal of the Forte Note
by $750,000 if the Company completes the Offering. 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 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. The
Company presently anticipates repaying the Forte Note through a
portion of the proceeds of the Offering, proceeds from any future
registered offering, future refinancings and cash flow from
operations.
On July 31, 1998, the Company and Technology Development Center,
LLC amended the terms of the exclusive license granted to the
Company and the terms of the associated promissory notes 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 and related expenses. The Company
is current on its obligations with Technology Development Center,
LLC.
The Company currently has no material commitments for capital
expenditures. The Company has planned expenditures of $900,000
for the cost of sales and $130,000 for additional tooling costs
of manufacturing. 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 affected if the
expenditures are made. In addition, as described in "LEGAL
PROCEEDINGS," the Company is obligated to pay a former third-
party supplier $150,000 by October 1, 1998 and, if the Company
fails to make such payment, an additional $125,000. The Company
believes that it has adequate sources of cash to make the payment
of $150,000 by October 1, 1998.
During December 1997 the Company entered into financing type
lease transactions with a leasing company whereby the Company
sold and leased back from the lessor all of its furniture and
equipment, tooling and a total of twenty six of its shuffler
machines.
Scheduled maturities of the obligations as of December 31, 1997
are as follows:
<TABLE>
<CAPTION>
Amount
------------
<S> <C>
1998 $209,425
1999 $170,097
2000 $170,097
------------
Minimum future lease payments $549,619
Less interest component ($102,519)
Present value of future net minimum lease payments $447,100
------------
Less current portion ($153,851)
------------
Due after one year $293,249
</TABLE>
Property recorded under capital leases includes the following as
of December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Office furniture and equipment $31,110
Tooling $271,500
------------
$302,610
Less accumulated amortization ($22,749)
------------
Net capitalization leased equipment $279,861
Shuffler machines, at cost $52,598
------------
Total assets subject to capital leases $332,459
</TABLE>
27
<PAGE>
Although the sale had an immediate positive effect on the cash
flow of the Company, the lease payments will have a future
negative effect on the liquidity of the Company.
As described above, the Company is developing business plans and
operations that are expected to permit the Company to be self-
supportive five to six months after normal sales begin. The
funding requirement to complete this time period is estimated to
be $550,000 and may come in the form of these 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 flow will be at a break-even point within six
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 expanded 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 has received $940,000 of additional debt
financing in the first eight months of 1998. Implementation of
either of the foregoing options could delay or diminish the
Company's planned growth and adversely affect its profitability.
For the year ended December 31, 1997, the Company acquired plant
and equipment valued at $296,156. The Company had an increase in
patents and trademarks of $29,110. As a result, the Company had
net cash used in investing activities of $325,266 for the year
ended December 31, 1997.
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 used
net cash in investing activities of $78,750 for the year ended
December 31, 1996.
For the year ended December 31, 1997, the Company sold common
stock for cash in the amount of $1,015,510. The Company received
proceeds from long-term debt of $547,100. The Company had an
increase in stockholder loans of $120,000 and the Company repaid
$38,886 of shareholder loans. As a result, net cash provided by
financing activities was $1,841,244 for the year ended December
31, 1997.
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, net cash
provided by financing activities was $1,517,433 for the year
ended December 31, 1996.
Management is of the opinion that upon completion of the
Offering, its current working capital and anticipated funds from
operations are sufficient to meet its cash requirements for
moderate growth in the year ahead.
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.
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.
28
<PAGE>
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 results of such failures and of any
contingency plans to be designed to address such events cannot be
determined at this time.
RESULTS OF OPERATIONS
Three Months and Six Months Ended June 30, 1998 and 1997
For the three months ended June 30, 1998 and the six months ended
June 30, 1998, the Company had a net loss of $754,880 and
$1,275,060, respectively. For the three months ended June 30,
1998 and the six months ended June 30, 1998, the Company had
depreciation and amortization of $37,210 and $44,175,
respectively.
For the three months ended June 30, 1998 and the six months ended
June 30, 1998, the Company had general and administrative
expenses of $705,080 and $1,060,867, respectively. For these
time periods, these expenses consisted of salaries and related
costs of $196,110 and $303,383, respectively, consulting services
of $123,741 and $202,242, respectively, cost of gaming industry
shows of $7,754 and $17,117, respectively, travel and
entertainment costs of $47,455 and $109,118, respectively,
printing and office expense, including rent of $36,532 and
$70,642, respectively, and legal expenses of $92,350 and
$106,930, respectively.
Years Ended December 31, 1997 and 1996
For the year ended December 31, 1997, the Company had a net loss
of $2,606,071. The Company had revenues from card royalties of
$2,226, interest income of $8,290 and the sale of patent rights
of $3,000 for the year ended December 31, 1997. The Company had
depreciation and amortization of $40,262 and amortized deferred
interest of $186,000 for the year ended December 31, 1997. The
Company had an increase in accounts receivable of $15,327, an
increase in prepaid expenses of $39,276, an increase in accounts
payable of $335,459 and a decrease in accrued expenses of
$57,809.
The Company issued stock for interest valued at $117,332. The
Company issued stock and options for services of 136,000. The
compensation value of cash stock sales was $177,000 for the year
ended December 31, 1997. For the year ended December 31, 1997,
the Company had net cash used in operating activities of
$1,949,467.
The Company had general and administrative expenses of
$1,826,250. These expenses consisted of salaries of $363,497,
payroll taxes & benefits of $49,604, travel and entertainment of
$313,425, fees to consultants of $627,913, legal expenses of
$72,785, gaming shows of $151,425, office rent of $26,646,
printing, video and other of $22,489, and miscellaneous expenses
of $198,416.
For the year ended December 31, 1996, the Company had 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.
29
<PAGE>
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.
30
<PAGE>
- -----------------------------------------------------------------
MANAGEMENT
- -----------------------------------------------------------------
OFFICERS AND DIRECTORS. Pursuant to the Company's Articles of
Incorporation, each Director shall serve until the annual meeting
of the stockholders, or until his or her 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 officers of the Company serve at the
pleasure of the Company's Board of Directors.
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 51 Chief Financial From May 27, 1998
Officer, Treasurer to present
and Secretary
Steven Blad, age 47 President, Chief From May 27, 1998
Executive Officer to present
and Director
Richard S. Huson, age 58 Chairman of From May 27, 1998
the Board of Directors to present
Jamie McKee, age 39 Director From May 27, 1998
to present
Bob Smith, age 60 Director From May 27, 1998
to present
David Sampson, age 57 Director From March 12, 1996
to present
</TABLE>
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 served as Vice President of Finance and
Controller and Director from March 1996 to May 27, 1998. Since
May 27, 1998, Mr. King has served as Chief Financial Officer,
Treasurer and Secretary. 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 J. 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
31
<PAGE>
and Marketing until April 30, 1997 when he was named President of
the Company. Mr. Blad served in that position until May 27, 1998
when he became Chief Executive Officer, President and Director 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.
DAVID E. 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,
LLC as General Manager and Director in October 1996 and still
holds that position. Rendova Boats is a boat manufacturer
located in Olympia, Washington. 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.
RICHARD S. HUSON. Mr. Huson has been Chairman of the Board of
Directors since May 1998. Mr. Huson is a Principal of the Crabbe
Huson Group, Inc., an investment advisory firm, which he co-
founded in 1980. Previously, Mr. Huson worked for three years as
a registered representative at Foster & Marshall, Inc. From 1974-
1977, Mr. Huson was Senior Vice President, and Investment
Director for the Boston Company Institutional Investors, Inc.
Mr. Huson previously managed mutual funds with Wellington
Management Company in Boston, Massachusetts and Financial
Programs, Inc. in Denver, Colorado. He began his career in
investments in 1966 as a securities analyst after earning a BS
degree with emphasis on finance and economics from Portland State
University.
JAMIE MCKEE. Ms. McKee has been a member of the Board of
Directors since May 1998. Ms. McKee has been the editor of
CASINO JOURNAL, a national trade publication for the gaming
industry, since February 1996. From April 1995 to February 1996,
Ms. McKee was a Public Relations Account Executive with DRGM
Advertising and Public Relations in Las Vegas, Nevada. From 1988
to April 1995, Ms. McKee was editor of the LAS VEGAS BUSINESS
PRESS, a weekly business publication in Las Vegas, Nevada. Ms.
McKee earned a Bachelor of Arts in English from the University of
Nevada, Las Vegas in 1983.
BOB L. SMITH. Mr. Smith has been a member of the Board of
Directors since May 1998. Mr. Smith also serves as Chairman of
the Board of Directors and Chief Executive Officer of VIP's
Industries, a company co-founded by Mr. Smith in 1968 that
oversees restaurant, hotel and real estate development in five
Western states. In 1966, he started the Bob L. Smith Real Estate
Company, concentrating on real estate and development in Oregon,
Washington and Northern California. From 1962 through 1965, Mr.
Smith was Real Estate Analyst and Marketing Supervisor with the
American Oil Company. Mr. Smith currently serves on the Board of
Directors of Centennial Bank, Regency of Oregon (formerly Blue
Cross and Blue Shield of Oregon), The Crabbe-Huson Funds, Inc.,
an investment management company, and Flying J. Inc, an
integrated oil company. Mr. Smith received a Bachelor of
Science in Business Administration from the University of Oregon
in 1962.
ADDITIONAL OFFICERS AND EMPLOYEES
WILLIAM O'HARA. Mr. O'Hara has been Senior Vice President of the
Company since August 1998. With almost forty years of sales
experience, Mr. O'Hara formerly held the positions of Senior Vice
President, Vice President of Field Operations, Executive Director
of Customer Relations and Director with Shuffle Master Gaming,
Inc., the Company's primary competitor. During his employment
with Shuffle Master Gaming, Inc., Mr. O'Hara created the sales,
marketing and service divisions. Mr. O'Hara currently sits on
the board of directors of seven gaming and business associations.
32
<PAGE>
DEAN BARNETT. Mr. Barnett, Vice President of Sales since August
1998, has over five years of sales experience in the gaming
industry. Mr. Barnett formerly held the position of National
Sales Manager for Shuffle Master Gaming, Inc. Prior to his
employment with Shuffle Master Gaming, Inc., Mr. Barnett worked
for Bally's Las Vegas as part of a special management team
focused on fraudulent player practices, such as card counting and
shuffle tracking.
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.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
----------------------------- -------------------------------
Awards Payouts
---------------------- -------
Other Securities
Annual Restricted Under- All Other
Compens Stock lying LTIP Compensa-
Name and Principal Year Salary Bonus ation Award(s) Options/ Payouts tion
Position ($) ($) ($) ($) SARs (#) ($) ($)
- ------------------ ---- ------ ------- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven Blad, 1997 19,500 -0- -0- 15,000 -0- -0- 152,780<F1>
Chief Executive 1996 -0- -0- -0- -0- -0- -0- 27,740<F1>
Officer, President
and Director 1995 -0- -0- -0- -0- -0- -0- -0-
- ----------------------------------------------------------------------------------------------------
Jay L. King, 1997 90,000 3,600 -0- -0- -0- -0- -0-
Chief Financial 1996 73,750 12,500 10,200 -0- -0- -0- -0-
Officer, Secretary
and Director 1995 -0- -0- -0- -0- -0- -0- -0-
- ----------------------------------------------------------------------------------------------------
David E. Sampson, 1997 -0- -0- 1,500 -0- -0- -0- -0-
Vice President and 1996 15,000 -0- -0- -0- -0- -0- -0-
Director
1995 -0- -0- -0- -0- -0- -0- -0-
- ----------------------------------------------------------------------------------------------------
Glen Pickell, 1997 -0- -0- -0- -0- -0- -0- 71,120<F1>
Chief Executive 1996 -0- -0- -0- -0- -0- -0- 20,479<F1>
Officer (Sept. 1996 -
May 1998) 1995 -0- -0- -0- -0- -0- -0- -0-
- ----------------------------------------------------------------------------------------------------
Randy Sines, 1997 80,000 -0- -0- -0- -0- -0- 15,641
President and 1996 40,000 -0- -0- -0- -0- -0- -0-
Director (Sept. 1996
to Aug. 1997) 1995 -0- -0- -0- -0- -0- -0- -0-
________________
<FN>
<F1> Affiliated entities of current and former officers and
directors received compensation in the fiscal years ended
December 31, 1996 and December 31, 1997: (i) the Arcus Group
controlled by Glen (Tom) Pickell, former officer and director of
the Company, provided management consulting services to the
Company and received $20,479 in 1996 and $71,210 in 1997;
(ii) Gametek controlled by Steven J. Blad provided sales,
marketing and management consulting services to the Company
received $152,780 in 1997 and $27,750 in 1996; and (iii) Designed
Devices, Co. controlled by Norman Kelln, former officer and
director of the Company, provided engineering and management
consulting services to the Company and received $302,551 in 1996
and $64,663 in 1997.
</FN>
</TABLE>
EMPLOYMENT AND PERSONAL SERVICES AGREEMENTS. The Company entered
into an employment agreement with Jay L. King, effective January
1, 1997, for a term of two years. Upon expiration, the
employment agreement shall be renewed for regular successive 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 Company's
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
33
<PAGE>
Share upon the following events: (i) stock options for 50,000
Common Shares upon successful completion of the SB-2; (ii) stock
options for 50,000 Common Shares upon Mr. King fulfilling his
obligations and the Company reaching its goals for 1997; and
(iii) stock options for 50,000 Common Shares upon Mr. King
fulfilling his obligations and the Company reaching its goals for
1998.
Effective June 1, 1998, Steven Blad entered into an employment
agreement (the "Blad Agreement") with the Company for a term
expiring December 31, 1999. Mr. Blad will receive base pay of
$12,500 per month through December 31, 1998 and $18,500 per month
for the remainder of the term. Mr. Blad 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 Mr. Blad 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.
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
34
<PAGE>
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.
35
<PAGE>
- -----------------------------------------------------------------
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 at the exercise price of $3.75
per Common Share, 200,000 B Warrants each exercisable into one
Common Share at the exercise price of $4.00 per Common Share and
250,000 C Warrants each exercisable into one Common Share at the
exercise price of $6.00 per Common Share. These distributions
were made to the owners of record of Common Shares on the books
of the Company as of July 22, 1996. On September 11, 1998, the
Company's Board of Directors called the B Warrants and C
Warrants. Holders of the B Warrants and the C Warrants may
exercise such warrants at $4.00 and $6.00, respectively, until
October 11, 1998, at which time such holders will be entitled to
receive $.001 per underlying Common Share. The remaining A
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.
CONSULTING AGREEMENTS. 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
acquisition of additional financing. The agreement was amended
on 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 products 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. The Company no longer employs the services
of GVC. 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 loaned the Company up to the full amount of GVC's CD
and charges 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. GVC has
elected to renew the CD on similar terms from the first 200 day
period such that the remaining principal of the loan will be due
on November 2, 1998.
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. This Agreement was
terminated effective as of June 1, 1998 upon effectiveness of the
Blad Agreement. See "MANAGEMENT - Employment and Personal
Services Agreements."
RELATED PARTY TRANSACTIONS. On May 28, 1998, the Company entered
into a letter agreement with Steven Forte, a former employee and
director of the Company, and Cheryl Forte through which the
Company has agreed to purchase, subject to the approval of the
Nevada State Gaming Control Board and
36
<PAGE>
to the dissolution of the Sines-Forte Partnership, from the
Forte's: (a) certain royalties from the sales of the Shuffler,
Fantasy 21 and the Safety-Peek Playing Card; (b) 20,000 options
exercisable by Mr. Forte at $1.50 per underlying share; and (c)
848,682 Common Shares at $2.50 per share. 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.
As consideration for the royalties, options and Common Shares,
the Company will execute a promissory note in the amount of
$2,351,705 (the "Forte Note"). The Forte Note shall bear an
interest rate of 6.5% for the first year and 8% thereafter. The
Forte Note shall be amortized over a 10 year period with payments
of interest only during the first year, payable on the six month
and one year anniversary of the Forte Note, and payments of
principal and interest thereafter, payable on a monthly basis.
On the five year anniversary of the Forte Note, a balloon payment
of the remaining unpaid principal and interest will be due and
payable. Since the definitive documents with respect to the
Forte Transaction are currently being negotiated, the Forte Note
is not dated and, accordingly, the interest has not started to
accrue. 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
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 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 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.
During the year ended December 31, 1997, Mr. Huson made
additional advances to the Company aggregating $120,000 which are
due on demand and bear interest at 9.5% per annum. The Company
made cash payments of principal ($18,866) and interest ($37,563)
against advances from two other shareholders during the year
ended December 31, 1997. In the first eight and one-half months
of 1998, Mr. Huson advanced an additional $150,000 for 6%
convertible unsecured notes and $615,000 in 9% demand notes.
During the year ended December 31, 1996, Steven Forte, a former
consultant, employee and director, Randy Sines, a former officer
and director, and Richard Huson, a principal shareholder and
director of the Company, made advances to the Company for working
capital purposes. The balances payable by the Company aggregated
$441,017 at December 31, 1997, including accrued interest. No
cash repayments have been made against the advances, which are
due on demand. Mr. Huson made an additional 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 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 principal and
interest due ($279,229.29) to 339,304 Common Shares (at $.82 per
Common Share).
37
<PAGE>
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. Sines' resignation, the parties confirmed and
modified each other's obligations under the Employment Agreement
and Funding Agreements.
38
<PAGE>
- ------------------------------------------------------------------
PRINCIPAL SHAREHOLDERS
- ------------------------------------------------------------------
As of September 11, 1998, there were 6,497,844 Common Shares
outstanding. Assuming exercise of the 200,000 A Warrants and
645,000 options currently outstanding, there would be 7,342,844
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 September 11, 1998, holds
of record or is known by Management to own beneficially more than
5% of the Common Shares and, in addition, by all directors and
officers of the Company individually and as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF OUTSTANDING
SHARES SHARES
NUMBER PERCENTAGE OUTSTANDING TO REFLECT
OF OF SHARES AFTER CONCLUSION
NAME AND ADDRESS SHARES<F1> OUTSTANDING OFFERING OF OFFERING
- ----------------------------- ------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Richard S. Huson<F2> 2,614,310 35.60% 2,614,310 30.67%
121 S.W. Morrison, Suite 1400
Portland, Oregon 97204
Steven Blad<F3> 310,000 4.22% 310,000 3.64%
286 Doe Run Circle
Henderson, Nevada 89012
David E. Sampson<F4> 100,653 1.37% 100,653 1.17%
4009 - 205th Avenue N.E.
Woodinville, Washington 98072
Jay L. King<F5> 100,000 1.36% 100,000 1.17%
4600 North Donna Street
North Las Vegas, Nevada 89031
Bob L. Smith<F6> 58,557 0.80% 58,557 0.69%
3136 River Road South
Salem, Oregon 97302
Jamie McKee 0 0% 0 0%
2811 Sesame Drive
Las Vegas, Nevada 89122
Randy D. Sines<F7> 908,434 12.37% 908,434 10.66%
4056 South Madelia
Spokane, Washington 99203
All Officers and Directors 3,083,520 41.99% 3,083,520 36.19%
as a Group (6 persons)
- --------------------
<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 52,271 Common Shares which may be issued upon
exercise of the A Warrants. Mr. Huson has agreed to lockup his
selling security holder shares until completion of the Offering.
In addition, Mr. Huson has agreed to lockup 1,363,551 shares
pursuant to an agreement dated August 27, 1998 by and between the
Company and Mr. Huson.
<F3> Includes 10,000 Common Shares issued to Gametek, Inc.,
200,000 Common Shares which may be issued upon exercise of
200,000 options, and 100,000 Common Shares which may be issued
upon exercise of an option granted by Mr. Huson. Mr. Blad has
agreed to lockup his shares until completion of the Offering.
<F4> Includes 1,557 Common Shares which may be issued upon
exercise of the A Warrants and 95,000 Common Shares which may be
issued upon exercise of 95,000 options. Mr. Sampson has agreed
to lockup his selling security holder shares.
39
<PAGE>
<F5> Includes 75,000 Common Shares which may be issued upon
exercise of 75,000 options. Mr. King has agreed to lockup his
selling security holder shares until completion of the Offering.
<F6> Includes 33,557 Common Shares which may be issued upon
exercise of the A Warrants by VIP's Industries, Inc., an entity
controlled by Mr. Smith, 20,000 Common Shares issued to VIP's
Industries, Inc., and 5,000 Common Shares issued to Mr. Smith.
Mr. Smith has agreed to lockup his shares until completion of the
Offering.
<F7> Includes 2,874 Common Shares which may be issued upon
exercise of the A Warrants and 20,000 Common Shares which may be
issued upon exercise of 20,000 options. In addition, Mr. Sines
has agreed to lockup 470,851 shares pursuant to an agreement
dated August 27, 1998 by and between the Company and Mr. Sines.
</FN>
</TABLE>
This table 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>
TOTAL NUMBER OF % OWNED AMOUNT % OWNED
A WARRANTS PRIOR TO OWNED AFTER
NAME OWNED OFFERING AFTER OFFERING OFFERING
---- ----- -------- -------------- --------
<S> <C> <C> <C> <C>
VIP's Industries, Inc. <F1>,<F2> 33,557 16.78% 33,557 16.78%
David E. Sampson 1,557 0.78% 1,557 0.78%
Jay L. King 0 0% 0 0%
Jamie McKee 0 0% 0 0%
Steven J. Blad 0 0% 0 0%
Richard S. Huson<F2> 52,721 26.36% 52,721 26.36%
Richard Jaslow<F2> 50,336 25.17% 50,336 25.17%
Jay Willoughby<F2> 19,295 9.67% 19,295 9.67%
David Goldsmith<F2> 19,295 9.67% 19,295 9.67%
All Officers and Directors As
a Group (6) 87,835 43.92% 87,835 43.92%
- -------------------
<FN>
<F1> VIP's Industries, Inc. is an entity controlled by Bob
L. Smith, a director of the Company.
<F2> As an incentive to certain individuals for securing
convertible debt financing of $500,000, certain holders of Class
A Warrants assigned a portion of their Class A Warrants to the
individuals providing the convertible debt financing. The Class
A Warrants remain exercisable at $3.75 per underlying Common
Share. The assignment was at no cost to the Company and did not
create a gain or loss for the Company.
</FN>
</TABLE>
Pursuant to a previously filed Registration Statement on Form
SB-2/A (Post-Effective Amendment No. 1) filed with the Securities
and Exchange Commission on June 5, 1998, the Company registered
the Common Shares underlying its A, B and C Warrants (the
"Warrants") on behalf of its selling security holders. On
September 11, 1998, the Company's Board of Directors determined
that it was in the best interest of the Company and its
shareholders to call the Company's Class B and Class C Warrants.
Holders of the Class B and Class C Warrants may exercise such
Warrants at $4.00 and $6.00 per Common Share, respectively, until
October 11, 1998 at which time the holders of the Class B and
Class C Warrants will be entitled to receive $.001 per underlying
Common Share. As a result of such redemption and the termination
of the placement agreement with Travis Morgan Securities, Inc.,
there will be no
40
<PAGE>
transfer of any interests in the Class B and Class C Warrants
from such warrant holders to Travis Morgan Securities, Inc.
There are currently outstanding options to purchase 645,000
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.
<TABLE>
<CAPTION>
TOTAL NUMBER OF % OWNED AMOUNT % OWNED
OPTIONS OWNED PRIOR TO OWNED AFTER
NAME PRIOR TO OFFERING OFFERING AFTER OFFERING OFFERING
---- ----------------- -------- -------------- --------
<S> <C> <C> <C> <C>
Bob L. Smith 0 0% 0 0%
Jay L. King 75,000 11.63% 75,000 11.63%
Steven Blad 200,000 31.01% 200,000 31.01%
Jamie McKee 0 0% 0 0%
Richard Huson 0 0% 0 0%
Norman Kelln 125,000 19.38% 125,000 19.38%
David Sampson 95,000 14.73% 95,000 14.73%
Donald Peterson 100,000 15.50% 100,000 15.50%
All Officers and Directors
As a Group (6) 370,000 57.36% 370,000 57.36%
</TABLE>
41
<PAGE>
- ------------------------------------------------------------------
SHARES ELIGIBLE FOR FUTURE SALE
- ------------------------------------------------------------------
As of September 11, 1998, the Company had 6,479,844 Common Shares
outstanding. Other securities that 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 year 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. Non-affiliates 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
Common Shares in the over-the-counter market, should a market
develop. Prior to this Offering, there has been no public market
for the Common Shares. 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 Common
Shares. Upon successful completion of this Offering, the Company
intends to apply to have the Common Shares 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 $.001 par value common stock, as of September 11, 1998
was approximately 120 shareholders.
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
$4,000,000 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 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 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
42
<PAGE>
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."
43
<PAGE>
- ------------------------------------------------------------------
TERMS OF OFFERING
- ------------------------------------------------------------------
PLAN OF DISTRIBUTION. The 1,500,000 Common Shares are being
offered for sale by the Company on a best efforts basis. The
Placement Agents have been retained to act as the exclusive
agents for the Company in connection with the arrangement of such
offers and sales on a best efforts basis. The Placement Agents
are not obligated to and do not intend to itself take (or
purchase) any of the Common Shares. It is anticipated that the
Placement Agents will obtain indications of interest from
potential investors for the amount of this Offering and that the
Placement Agents will sell Common Shares accordingly. The Company
has agreed to provide the Placement Agents a 10% discount on
Common Shares placed by the Placement Agents and indemnify the
Placement Agents against certain liabilities, including
liabilities under the Securities Act. The Company has also
agreed to grant to the Placement Agents warrants for 550,000
Common Shares at a price of $3.00 per Common Share in the event
that the Placement Agents sell the Common Shares remaining under
the Offering within sixty (60) days of the date of the underlying
placement agreement. The Common Shares underlying the warrants
are not registered but may be registered pursuant to certain
piggyback registration rights. The Company has terminated that
certain placement agreement dated May 29, 1998 by and between
the Company and Travis Morgan Securities, Inc.
No investor funds will be accepted prior to the effectiveness of
this Registration Statement. All investor funds will be placed
promptly, and following receipt, in an escrow account with Bank
West of Nevada. The Offering will not continue after the closing
date. The Company reserves the right to withdraw, cancel or
reject an offer in whole or in part. 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.
The Company has registered 2,107,973 Common Shares on behalf of
selling security holders. The Company has borne all costs,
expenses and fees in connection with the registration of such
shares. The Company is not selling any Common Shares on behalf
of selling security holders and has no control over such shares
with the exception of certain lock-up agreements between the
Company and certain shareholders. The Company, through its
Placement Agents, will undertake a best efforts offering at the
same time as the selling shareholders will be selling their
registered shares. Although officers and directors of the
Company are participating as selling security holders, current
and certain former officers and directors have entered into
written agreements not to sell their Common Shares until the
Offering is fully subscribed. In addition, the Company has
proposed to enter into written lockup agreements with its
officers and directors and with certain shareholders. Through
these lockup agreements, the relevant shareholders would agreed
to lockup their Common Shares for a period of one year. However,
if for any reason the last sale price of the Common Shares, (a)
on any stock exchange designated by the Company on which the
Common Shares may be listed, (b) if the Common Shares is not
traded on any stock exchange, by any reputable quotation
reporting service, or (c) if such quotations are not reported by
any such reporting service, by any dealer in securities dealing
in the Common Shares, exceeds $2.875 for ninety (90) consecutive
trading days, the lockup agreements shall be terminated. The
Company has secured lockup agreements for 502,443 Common Shares
held by officers and directors. The Company has contacted
shareholders holding 1,203,821 Common Shares with respect to the
lockup agreements. There is no guarantee that all of the
contacted shareholders will subject their respective Common
Shares to the terms of the lockup agreement. If all of the
Common Shares become subject to lockup agreements, there will
only be 401,709 Common Shares available for sale by selling
security holders. These lockup agreements will limit the number
of Common Shares available for establishing a market for the
Common Shares.
In addition, the Company has entered into an agreement dated
August 27, 1998 with Richard Huson and Randy Sines to lockup
1,834,402 Common Shares (1,363,551 shares and 470,851 shares,
respectively). The parties entered into this lockup agreement as
a condition of the California Department of
44
<PAGE>
Corporations to qualification of the Offering in California. The
lockup agreement shall terminate only on an order of the State of
California Department of Corporations upon the demonstration of
certain earnings by the Company.
Conflicts of interests may arise due to the fact that the
Offering and the secondary offering of the selling security
holders will be conducted contemporaneously. The Company shall
concentrate its sales efforts in the period immediately after the
effective date of the Offering until the Common Shares are listed
on the OTC Bulletin Board. Additionally, the Company may pursue
alternate financing to avoid said conflict of interests once
trading of the Common Shares commences.
The selling security holders 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 security holders may
effect such transactions by selling the Common 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 may act as agent or to whom they may sell as
principals, or both. The selling security holders 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.
There are no current or future plans, proposals, arrangements or
understandings by any selling security holders to distribute
their registered Common Shares to their respective outstanding
shareholders or partners. The Company contacted the selling
security holders and ascertained the following:
i. there are not any current or future plans, proposals,
arrangements or understandings by any selling security
holders to distribute their registered Common Shares to
their respective outstanding shareholders or partners.
ii. there are not any plans, arrangements or understandings
by any selling security holders to sell their registered
Common Shares to any particular individual(s) or to
use such registered shares to satisf y contractual
obligations.
iii. there are not any plans, arrangements or understandings
by any selling security holders to sell their registered
Common Shares to any party affiliated with the Offering.
iv. there are not any plans, arrangements or understandings
by any selling security holders to sell their registered
Common Shares to any person or entity related to the
expenses of the Offering.
To the extent there is any change in the intentions of selling
security holders regarding any of the above, the Company hereby
undertakes to file a post-effective amendment regarding such
change in the plan of distribution of selling security holders.
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.
45
<PAGE>
OFFERING PROCEDURE. This Offering will terminate on or before
December 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 March 31, 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 persons subscribing for the offered Common
Shares or copies of subscribers confirmations.
46
<PAGE>
- ------------------------------------------------------------------
DESCRIPTION OF SECURITIES
- ------------------------------------------------------------------
QUALIFICATION. The following statements constitute brief
summaries of the Company's Articles of Incorporation, as amended,
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 Articles of Incorporation and Bylaws.
The Company's Articles of Incorporation authorize it to issue up
to 20,000,000 Common Shares. Common Shares purchased in this
Offering will be fully paid and non-assessable. There are no
provisions in the Company's Articles of Incorporation or Bylaws
that would delay, defer or prevent a change-in-control of the
Company.
Pursuant to Section 23B.19.040 of the Washington Business
Corporation Act, 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 Washington Business Corporation Act
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. As of September 11, 1998, there were 6,497,844
Common Shares outstanding. As a result, up to 7,679,944 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, 645,000 shares reserved for
issuance to key employees and others pursuant to outstanding
options and commitments.
Holders of Common Shares 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. These distributions were to be made to the owners of
record of Common Shares on the books of the Company as of
July 22, 1996.
In April 1998, certain holders of the A Warrants transferred and
assigned a portion of their A Warrants to Richard S. Huson, VIP's
Industries, Inc. (an entity controlled by Bob Smith, a director
of the Company), David Goldsmith, Jay Willoughby, and Richard
Jaslow as a means of securing convertible debt financing
47
<PAGE>
for the Company. The convertible debt financing matures in
January 1999 and may be converted at a rate of $2.125 per Common
Share.
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.
On September 11, 1998, the Board of Directors called the B
Warrants and C Warrants. Holders of the B Warrants and the C
Warrants may exercise such warrants at $4.00 and $6.00 per Common
Share, respectively, until October 11, 1998, at which time the
holders of such warrants will be entitled to receive $.001 per
underlying Common Share. The remaining A 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. As
a result of such redemption and the termination of the placement
agreement with Travis Morgan Securities, Inc., there will be no
transfer of any interests in the Class B and Class C Warrants
from such warrant holders to Travis Morgan Securities, Inc.
Through the placement agreement dated September 17, 1998 by and
between the Company and First Global Securities, Inc. and Grant
Bettingen, Inc. (collectively, the "Placement Agents"), the
Company granted the Placement Agents contingent warrants for the
purchase of 550,000 Common Shares at an exercise price of $3.00
per Common Share. The Company will issue such warrants only if
the Placement Agents are successful in placing the Common Shares
remaining under the Offering within sixty (60) days after the
date of the placement agreement. The Common Shares underlying
the warrants are not registered but may be registered pursuant to
certain piggyback registration rights.
TRANSFER AGENT. The Company has retained Continental Stock
Transfer and Trust Company as transfer agent for the Company's
securities.
48
<PAGE>
- ------------------------------------------------------------------
LEGAL MATTERS
- ------------------------------------------------------------------
The due issuance of the Common Shares offered hereby will be
opined upon for the Company by Randall & Danskin, P.S., 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
- ------------------------------------------------------------------
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. If the Company is unable to pay the
$150,000 by October 1, 1998, the Company will be obligated to pay
an additional $125,000 thus reflecting the full amount of the
demand note.
Steven L. Forte, a former 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.
Due to this conviction, the Nevada State Gaming Control Board has
conditioned its approval of the Shuffler on the removal of Steven
Forte as an employee and shareholder of the Company. As a means
of addressing the potential effect of such convictions, the
Company and Mr. Forte have agreed to enter into the Forte
Transaction subject to the approval of the Nevada State Gaming
Control Board. See "MANAGEMENT'S DISCUSSION OF FINANCIAL
CONDITION AND RESULTS OF FINANCIAL OPERATIONS" and "CERTAIN
TRANSACTIONS B Related Party Transactions."
- ------------------------------------------------------------------
EXPERTS
- ------------------------------------------------------------------
The audited financial statements included in this Prospectus have
been so included in reliance on the report of James E. Scheifley
& Associates, 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.
49
<PAGE>
- ------------------------------------------------------------------
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, 1997, 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, 1997. 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, 1997, 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, 1997, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed
in Note 11 to the financial statements, the Company has suffered
recurring losses from operations, maintains a stockholders'
deficit and has made significant commitments, which raise
substantial doubts about its ability to continue as a going
concern. Management's plans in regard to these matters are also
described in Note 11. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
James E. Scheifley & Associates, P.C.
Certified Public Accountants
Englewood, Colorado
February 5, 1998
50
<PAGE>
<TABLE>
<CAPTION>
Casinovations Incorporated
(A Development Stage Company)
Balance Sheet
June 30, 1998 December 31, 1997
(Unaudited)
--------------- ------------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 28,294 $ 119,389
Accounts receivable, trade 9,927 75
Accounts receivable B employees 12,285 18,085
Inventories 308,411 129,695
Inventories subject to capital leases - 52,598
Prepaid expenses 48,490 40,000
------------- -------------
Total current assets 407,407 359,842
Property and equipment subject to capital lease
at cost, net of accumulated depreciation of $25,132 and
$59,814, respectively 266,349 279,861
Leasehold improvements, at cost net of accumulated
amortization of $2,383 - 4,966
Intangible assets, at cost, net of accumulated
amortization of $27,587 and $18,095, respectively 165,080 158,167
Deposits 53,361 47,719
------------- -------------
$ 892,197 $ 850,555
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable B bank $ 197,500 $ 197,500
Notes payable B other 605,000 75,000
Current portion of leases payable 149,616 153,851
Accounts payable 498,095 406,944
Accounts payable B related party - 35,367
Accrued wages 34,563 37,563
Accrued interest 65,449 26,315
Customer deposits 13,374 17,309
Shareholder loans 692,357 441,017
------------- -------------
Total current liabilities 2,255,954 1,390,866
Convertible debentures - 100,000
Leases payable B non-current 223,363 293,249
Stockholders' equity:
Common stock, $.001 par value,
20,000,000 shares authorized, 6,355,942 and
6,179,638, respectively, shares issued and outstanding 6,356 6,180
Additional paid-in capital 4,524,894 3,970,070
Unpaid subscriptions to common stock - (66,500)
Accumulated deficit during development stage, [Accumulated
deficit] (6,118,370) (4,843,310)
------------- -------------
(1,587,120) (933,560)
------------- -------------
$ 892,197 $ 850,555
============= =============
See accompanying notes to financial statements.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Casinovations Incorporated
(A Development Stage Company)
Statements of Operations
Three Months Ended June 30, 1998 and 1997
Years Ended December 31, 1997 and 1996
and Period From Inception (April 29, 1994) to June 30, 1998
PERIOD FROM
INCEPTION
THREE MONTHS ENDED (APRIL 29, 1994)
--------------------------- TO
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1997 1997 1996 1998
------------- ------------ ------------- ------------- ----------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Sales $ 3,943 $ - $ 2,226 $ 2,450 $ 9,249
Interest Income - 900 8,290 - 10,083
Other Income - 13,000 3,000 1,803 3,010
------------ ----------- ------------- ------------- --------------
3,943 13,900 13,516 4,253 22,342
Other Costs & Expenses
General and administrative 705,080 396,708 1,826,250 977,827 4,102,944
General and administrative B
related parties - 203,092 - 52,313 76,768
Research and Development 24,487 125,208 464,304 244,117 1,298,080
------------ ----------- ------------- ------------- --------------
729,567 725,008 2,290,554 1,274,257 5,477,792
(Loss) from operations (725,624) (711,108) (2,277,038) (1,270,004) (5,455,450)
Interest expense - - 34,515 14,780 86,823
Interest expense B related parties 29,256 145,152 294,518 399,943 728,483
------------ ------------ ------------- ------------- --------------
29,256 145,152 329,033 414,723 815,306
(Loss) before income taxes (754,880) (856,260) (2,606,071) (1,684,727) (6,270,756)
Provision for income taxes - - - - -
------------ ------------ ------------- ------------- --------------
Net (loss) $ (754,880) $ (856,260) $ (2,606,071) $ (1,684,727) $ (6,270,756)
============ =========== ============= ============= ==============
Basic (loss) per share $ (0.12) $ (0.16) $ (.47) $ (0.41) $ (1.39)
============ =========== ============= ============= ==============
Weighted average shares
outstanding 6,286,971 5,481,525 5,603,588 4,133,909 4,496,597
============ =========== ============= ============= ==============
See accompanying notes to financial statements.
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Casinovations Incorporated
(A Development Stage Company)
Statement of Changes in Stockholders' Equity
For the Period From Inception (April 29, 1994) to December 31, 1997
and to March 31, 1998
DEFICIT
ACCUMULATED
ADDITIONAL UNPAID DURING
COMMON STOCK PAID-IN STOCK DEVELOP-
ACTIVITY SHARES AMOUNT CAPITAL SUBSCRIPTIONS MENT STAGE TOTAL
<S> <C> <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 $1.00 130,000 130 129,870 130,000
(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 for cash 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 86,000 86 128,914 129,000
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 35,000 35 52,465 52,500
December 1996 at $1.50 175,000 175 262,325 262,000
Issuance of stock to related party
for debt conversion 327,000 327 490,173 490,500
Option granted to related party for
debt conversion 232,500 232,500
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)
53
<PAGE>
Issuance of stock for cash in private sales:
January 1997 at $1.50 236,667 237 354,764 355,001
May 1997 at $1.50 120,339 120 180,388 180,509
June 1997 at $1.50 43,000 43 64,457 64,500
July 1997 at $1.50 77,000 77 115,423 115,500
(plus compensation effect of shares
issued at a discount) 77,000 77,000
Exercise of common stock warrants
for cash:
September 1997 at $1.50 100,000 100 149,900 150,000
October 1997 at $1.50 100,000 100 149,900 150,000
(plus compensation effect of shares
issued at a discount) 100,000 100,000
Issuance of stock for future services:
February 1997 at $1.50 135,000 135 202,365 (187,500) 15,000
June 1997 at $1.50 20,000 20 29,980 (30,000) -
Amortization of unpaid stock
Subscriptions 136,000 136,000
Issuance of stock to related party for
Debt conversion:
March 1997 at $1.50 45,122 45 67,638 67,683
December 31, 1997 at $.82 339,000 339 277,891 278,230
(plus additional interest effect of
Shares issued at a discount) 11,705 11,705
Common stock subscribed for services
In May 1997 at $1.50 15,000 15,000
Net (loss) for the year - - - - (2,606,071) (2,606,071)
--------------------------------------------------------------------------
Balance, December 31, 1997 6,179,638 $6,180 $3,970,070 $ (66,500) $(4,843,310) $ (933,560)
Net (loss) for three months
ended March 31, 1998 - - - - (520,180) (520,180)
Balance, March 31, 1998 6,179,638 $6,180 $3,970,070 $ (66,500) $(5,363,489) $ (1,420,739)
========== ======= =========== ============= ============ =============
See accompanying notes to financial statements.
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Casinovations Incorporated
(A Development Stage Company)
Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997
Years Ended December 31, 1997 and 1996
Period From Inception (April 29, 1994) to June 30, 1998
PERIOD FROM
INCEPTION
(APRIL 29, 1994)
SIX MONTHS ENDED TO
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1997 1997 1996 1998
------------ ------------ -------------- ------------- ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net (loss) $(1,275,060) $(1,239,078) $ (2,606,071) $(1,684,727) $ (6,145,756)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 44,175 11,396 40,262 2,553 88,664
Stock and options used for services 191,500 309,999 136,000 700,500 978,000
Compensation value of cash stock sales - - 177,000 - 177,000
Stock and options issued for
additional interest - 59,053 117,332 - 117,332
Equipment exchanged for services - - - 2,903 2,903
Amortization of deferred interest - 93,000 186,000 46,500 232,500
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (4,052) (5,591) (15,327) (2,833) (22,212)
(Increase) decrease in inventory (126,118) - (181,437) - (308,411)
(Increase) decrease in prepaid expenses (8,490) (4,526) (39,276) (300) (48,490)
(Increase) decrease in other assets (5,642) (5,201) (41,600) (6,119) (53,361)
Increase (decrease) in accounts payable 55,783 (70,672) 335,459 (73,330) 498,094
Increase (decrease) in accrued expenses 32,200 (80,170) (57,809) 127,596 116,387
------------ ---------- -------------- ------------ --------------
Total adjustments 179,356 307,288 656,604 797,470 1,778,406
------------ ---------- -------------- ------------ --------------
Net cash (used in) operating activities $(1,095,704) $(931,790) $ (1,949,467) $ (887,257) $ (4,367,350)
------------ ---------- -------------- ------------ --------------
Cash flows from investing activities:
Acquisitions of plant and equipment (16,204) (18,996) (296,156) (12,969) (331,607)
Increase in patents and trademarks (16,406) (10,949) (29,110) (65,781) (191,389)
------------ ---------- -------------- ------------ --------------
Net cash (used in) investing activities (32,610) (29,945) (325,266) (78,750) (522,996)
------------ ---------- -------------- ------------ --------------
Cash flows from financing activities:
Common stock sold for cash 430,000 600,010 1,015,510 887,265 2,380,569
Capital contributions by partners - - - - 402,950
Proceeds from long-term debt 430,000 - 547,100 - 1,049,100
Proceeds of shareholder loans 290,000 - 120,000 630,168 1,060,168
Repayment of shareholder loans (38,660) (20,000) (38,866) - (97,526)
Repayment of leases payable (74,121) (9,155) - - 123,379
Proceeds from notes payable - - 197,500 - -
------------ ---------- -------------- ------------ --------------
Net cash provided by financing activities 1,037,219 570,855 1,841,244 1,517,433 4,918,640
------------ ---------- -------------- ------------ --------------
Increase (decrease) in cash (91,095) (390,880) (433,489) 551,426 28,294
Cash and cash equivalents,
Beginning of period $ 119,389 $ 552,878 $ 552,878 $ 1,452 -
------------ ---------- -------------- ------------ --------------
Cash and cash equivalents,
End of period $ 28,294 $ 161,998 $ 119,389 $ 552,878 $ 28,294
============ ========== ============== ============ ==============
See accompanying notes to financial statements.
</TABLE>
55
<PAGE>
CASINOVATIONS INCORPORATED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
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 also has secured a license agreement to develop and
market an electronically identified coin collection box for use
with coin operated gaming devices. 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. The
assets and liabilities of Sharps have been carried forward at
their historical basis. 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. 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. Sines retains a royalty
interest in certain intellectual property transferred as
described in Note 9.
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.
INVENTORY
Inventory is stated at the lower of cost or market using the
first in, first out method. Finished goods include raw
materials, direct labor and overhead. Raw materials include
purchase and delivery costs. Inventory consists of the following
at December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Raw materials $3,725
Work in progress $147,368
Finished goods $31,200
----------
$182,293
</TABLE>
Substantially all of the Company's inventory is produced by an
independent manufacturer of electronic devices. Work in progress
is located at facilities owned by the manufacturer.
A portion of the Company's inventory is pledged as collateral for
leases as described in Note 5.
56
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is
computed using the straight-line method over the estimated useful
lives of the assets. When assets are retired or otherwise
disposed of, the cost and the related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is
recognized in operations for the period. The cost of repairs and
maintenance is charged to operations as incurred and significant
renewals or betterments are capitalized.
Useful lives for property and equipment are as follows:
<TABLE>
<CAPTION>
<S> <C>
Office equipment 5 years
Computer software 3 years
Tooling 7 years
Leasehold improvements 2 years
</TABLE>
INTANGIBLE ASSETS
The Company has applied for patents for certain of its products.
Patent and trademark costs aggregating $169,868 are amortized
using the straight line method over a period of ten years
beginning in 1997. Amortization for the year ended December 31,
1997 amounted to $15,537.
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 $2,558 at December 31, 1997
and amortization expense in each of the two years then ended
amounted to $1,279.
The Company makes reviews for the impairment of long-lived assets
and certain identifiable intangibles whenever events or changes
in circumstances indicate that the carrying amount of an asset
may not be recoverable. Under SFAS No. 121, an impairment loss
would be recognized when estimated future cash flows expected to
result from the use of the asset and its eventual disposition is
less than its carrying amount. No such impairment losses have
been identified by the Company for the 1997 and 1996 fiscal
years.
LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 128, "Earnings Per Share." SFAS No. 128
supersedes and simplifies the existing computational guidelines
under Accounting Principles Board ("APB") Opinion No. 15,
"Earnings Per Share."
The statement is effective for financial statements issued for
periods ending after December 15, 1997. Among other changes,
SFAS No. 128 eliminates the presentation of primary earnings per
share and replaces it with basic earnings per share for which
common stock equivalents are not considered in the computation.
It also revises the computation of diluted earnings per share.
The Company has adopted SFAS No. 128 and there is no material
impact to the Company's earnings per share, financial condition,
or results of operations. The Company's earnings per share have
been restated for all periods presented to be consistent with
SFAS No. 128.
The basic 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. Loss per share is unchanged on a
diluted basis since the assumed exercise of common stock
equivalents would have an anti-dilutive effect.
57
<PAGE>
REVENUE RECOGNITION
The Company recognizes revenue from the sale of its products upon
shipment to the customer. Sales returns and allowances are
recorded after returned goods are received and inspected. The
Company expects to begin sales of its products in 1998 and plans
to provide currently for estimated product returns arising
therefrom.
STATEMENT OF CASH FLOW INFORMATION
Cash and cash equivalents consist of cash and other highly liquid
debt instruments with a maturity of less than three months. Cash
paid for interest expense amounted to $64,260 for the year ended
December 31, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's short-term financial instruments consist of cash
and cash equivalents, accounts and loans receivable, and accounts
payable 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. 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.
ADVERTISING
Advertising expenses are charged to expense upon first showing.
Amounts charged to expense were $17,393 and $733 for the years
ended December 31, 1997 and 1996, respectively.
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 7 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.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income", establishes
guidelines for all items that are to be recognized under
accounting standards as components of comprehensive income to be
reported in the financial statements. The statement is effective
for all periods beginning after December 15, 1997 and
reclassification of financial statements for earlier periods will
be required for comparative purposes. To date, the Company has
not engaged in transactions which would result in any significant
difference between its reported net loss and comprehensive net
loss as defined in the statement.
58
<PAGE>
Note 2. PROPERTY AND EQUIPMENT.
Property and equipment consist of the following at December 31,
1997:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures $31,110
Tooling $271,500
Leasehold improvements $7,349
----------
$309,959
Accumulated depreciation
and amortization $25,132
----------
$284,827
==========
</TABLE>
Depreciation expense charged to operations amounted
to $23,446 and $2,553 for the years ended
December 31, 1997 and 1996, respectively
The Company owns tooling used in the manufacture of certain
plastic components of its shuffler product. The tooling
maintained by an independent manufacturer of such plastic
components.
Substantially all of the Company's fixed assets secure debt
described in Note 5.
Note 3. NOTES PAYABLE
Note payable - bank consists of a $197,450 short term loan from a
bank secured during July 1997. The loan bears interest at 7.2%
per annum and is due on May 4, 1998. 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% of the certificate amount accrued
ratably over its 200 day term. The agreement also contains a
provision for one 200 day extension period and conversion
provisions whereby the consultant may elect to receive non-
restricted 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, May 4,
1998 unless further extended, based on a quoted market price of
the common stock during a five day period prior to the conversion
date.
Notes payable - others consist of two notes payable to
individuals having face amounts of $50,000 and $25,000. The
notes, which were secured during 1995 and are not collateralized,
are due on demand and accrue interest at 15% per annum.
Note 4. CONVERTIBLE DEBENTURES
During December 1997 and January 1998, the Company received
proceeds from unsecured convertible debentures aggregating
$100,000 during December 1997 and $400,000 during January 1998.
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.
As an incentive to these individuals for providing convertible
debt financing of $500,000, certain holders of Class A Warrants
assigned a portion of their Class A Warrants to the individuals
providing the convertible debt financing. The Class A Warrants
remain exercisable at $3.75 per underlying Common Share. The
assignment was at no cost to the Company and did not create a
gain or loss for the Company.
59
<PAGE>
Note 5. LEASES PAYABLE
During December 1997 the Company entered into financing type
lease transactions with a leasing company whereby the Company
sold and leased back from the lessor all of its furniture and
equipment, tooling and a total of twenty six of its shuffler
machines.
Scheduled maturities of the obligations as of December 31, 1997
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year Amount
1998 $209,425
1999 $170,097
2000 $170,097
-----------
Minimum future lease payments $549,619
Less interest component ($102,519)
Present value of future net
minimum lease payments $447,100
-----------
Less current portion ($153,851)
-----------
Due after one year $293,249
</TABLE>
Property recorded under capital leases includes the following as
of December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Office furniture and equipment $31,110
Tooling $271,500
-----------
$302,610
Less accumulated amortization ($22,749)
-----------
Net capitalization leased equipment $279,861
Shuffler machines, at cost $52,598
-----------
Total assets subject to capital leases $332,459
</TABLE>
Note 6. SHAREHOLDER LOANS
During the year ended December 31, 1997 and 1996, certain
officers and shareholders made advances to the Company for
working capital purposes. The balances payable by the Company
aggregated $441,017 as of December 31, 1997, including accrued
interest. No cash repayments were 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 shareholder 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 at the date of the loan ($1.50) was
recorded as deferred interest during 1996 with a corresponding
credit to paid-in capital. The deferred interest ($186,000) was
amortized as interest expense through December 31, 1997. At
December 31, 1997 the shareholder exercised his conversion rights
and the Company has recorded the issuance of 339,000 shares of
its restricted common stock for the conversion of the loan plus
accrued interest. The conversion of the accrued interest of
$28,230 at $.82 per share has resulted in a provision of
additional interest of $11,705 to increase the value of the stock
issued to fair market value of $2.50 per share.
60
<PAGE>
Another shareholder made a loan of $60,000 at 9 1/2% interest to
the Company in May 1996. The Note terms included conversion
rights at $1.00 per share. The shareholder elected to convert a
portion of the loan to 45,122 shares of stock in March 1997.
The conversion was recorded by the Company at $1.50 per share,
the market value at the date of conversion. The remaining
portion of the loan was paid off during March, 1997.
During the year ended December 31, 1997, the principal
shareholder made additional advances to the Company aggregating
$120,000 which are due on demand and bear interest at 9.5% per
annum. The Company made cash payments of principal ($18,866) and
interest ($37,563) against advances from two other shareholders
during the year ended December 31, 1997.
Note 7. 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.
Upon formation of the corporation, (September 29, 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. The 100,000 options to purchase
common stock were converted to common stock purchase warrants
during June, 1997. 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. The replacement
warrants were exercised during October 1997. 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
61
<PAGE>
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 491,510 shares of common
stock to private investors for net cash proceeds aggregating
$737,265.
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 September, 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.
During the period ended December 31, 1997 the Company issued
677,006 shares of its common stock for cash aggregating
$1,015,510 ($1.50 per share) in connection with the continuation
of its private sale of common stock and the exercise of common
stock warrants. One hundred seventy seven thousand of the shares
were issued in July and October 1997 and were valued at $2.50 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 $1.00 per share for these shares.
Additionally, the Company issued 155,000 shares of common stock
to consultants and others for services valued at $232,500 ($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. The
shares issued for services were for consulting and advertising
services to be provided to the Company during 1997 and 1998. The
unamortized amount of the services amounted to $81,500 at
December 31, 1997 and is included in the caption "Unpaid stock
subscriptions". This amount is offset by the value of common
stock subscribed for in exchange for services during April 1997
($15,000) for engineering services fully provided to the Company
at December 31, 1997.
The Company has an aggregate of 360,000 options to purchase
common stock at $1.00 per share (fair market value on the grant
date) and 258,000 options to purchase common stock at $1.50 per
share (fair market value on the grant date) outstanding at
December 31, 1997.
The weighted average fair value at the date of grant for options
granted during 1997 and 1996 as described above was $.35 per
option in 1997 and $.26 per option in 1996. The fair value of
the options at the date of grant was estimated using the Black-
Scholes model with assumptions as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
Market value $1.50 $1.50-$1.00
Expected life in years 2-5 2 5
Interest rate 6.56%-6.25% 5.15% 5.15%
Volatility 10% 10% 10%
Dividend yield 0.00% 0.00% 0.00%
</TABLE>
Stock based compensation costs would have increased pretax losses
by $89,184 ($.02 per share) and $105,209 ($.03 per share) in 1997
and 1996, respectively if the fair value of the options granted
during those years had been recognized as compensation expense.
62
<PAGE>
Note 8. 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 carry forward described below
has been fully reserved.
The Company currently has net operating loss carry forwards
aggregating approximately $3,425,000 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 and 1997 for services and
interest and options to purchase common stock at less than fair
market value in exchange for debt conversion rights and other
services.
Note 9. 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 $150 at December 31, 1997.
Additionally, the Company paid an aggregate of $71,210 in 1997
and $2,479 in 1996 to a company controlled by one of its officers
for administrative services provided to the Company. At December
31, 1997, the Company had a balance due to this officer and the
company of $35,367. The Company incurred research and
development costs aggregating $244,117 during the year ended
December 31, 1996 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 January 1997 the Company entered into a personal service
agreement with an officer which provides for aggregate monthly
compensation of $7,500 per month. The agreement has a term of
two years and includes cash and stock option bonus provisions
based upon the Company's attainment of certain corporate goals.
The Company has accrued $11,250 of compensation due to the
officer pursuant to the cash bonus provisions, however no grant
of stock options has been approved. An option to purchase up to
150,000 shares of common stock at $1.50 per share is provided for
in the contract upon approval.
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. No bonus
options were approved for the 1997 year however a cash bonus of
$6,000 has been accrued at December 31, 1997.
Note 10. COMMITMENTS AND CONTINGENCIES
During 1997, the Company contracted for the production of tooling
for certain plastic parts utilized in the manufacture of its
shuffler by an independent design and manufacturing company. The
Company has made payments of $271,500 for the tooling and has
prepaid $40,000 as an advance against an open purchase order with
the manufacturer. The purchase order requires the Company to
purchase an aggregate of $486,000 of the plastic parts through
May 1999.
63
<PAGE>
During October 1997, the Company entered into a license agreement
whereby the Company will develop and market an electronically
identified coin collection box for use with coin operated gaming
devices. The agreement provides for payments to the licensor for
use of certain intellectual property associated with the project
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 Fixed payment $80,000
Minimum royalties $50,000
1999 Minimum royalties $126,000
Thereafter $150,000
</TABLE>
Royalties are to be based on a rate of $7.50 per unit sold that
incorporate the licensed technology. The Company made $20,000 of
fixed payments to the licensor in 1997 which amount has been
charged to research and development expense. The Company has the
right to terminate the agreement upon sixty days written notice
to the licensor should it determine that the technology may be
unpatentable or it is determined by the Company that the licensed
products are uneconomical. The Company plans to charge
additional fixed payments to research and development expense as
they are made.
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 $32,328 and $8,939 for the
years ended December 31, 1997 and 1996, respectively.
Future minimum rentals under the lease are as follows:
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 through December
31, 1996 had been paid to an engineering and design company whose
principal shareholder is a member of the Company's board of
directors. 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.
Manufacture of the device began during September of 1997 with the
placement of orders for parts necessary to complete one hundred
units and at December 31, 1997, fifteen units had been completed.
The Company's ability to complete its development stage and begin
product sales is dependent upon the successful manufacture of
commercial quantities of its products.
Note 11. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a
"going concern" basis which contemplates the realization of
assets and the liquidation of liabilities in the ordinary course
of business.
The Company has incurred operating losses during the years ended
December 31, 1997 and 1996 aggregating $2,606,071 and $1,684,727,
respectively. Additionally, the Company has a stockholders'
deficit of $933,560 and negative working capital of $1,031,024
($590,007 exclusive of shareholder loans) at December 31, 1997.
64
<PAGE>
Profitable operations are dependent upon, among other factors,
the Company's ability to obtain equity or debt financing and the
Company's ability to finance, produce and sell its shuffler
product. Management plans to continue its efforts to complete a
public offering of its common stock at $2.50 per share and the
Company's principal shareholder has continued to fund the
Company's operating cash requirements on an interim basis.
65
<PAGE>
Casinovations Incorporated
(A Development Stage Company)
Notes to Financial Statements
Six months ended June 30, 1998
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 June 5, 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 six
months ended June 30, 1998.
During 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 $2.13 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
and June 30, 1998 aggregating $140,000 and $350,000 respectively.
The advances bear interest at 9.5% per annum.
During the quarter ended June 30, 1998, the Company sold an
aggregate of 166,000 shares of its $.001 par value common stock
for cash proceeds of $390,000 and $25,000 in services pursuant to
a public offering of the stock. Additionally, 10,000 shares of
the common stock were sold for services amounting to $15,000 in
connection with the completion of an outstanding contract.
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
66
<PAGE>
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 and 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. The Company is currently negotiating the definitive
documents for the Forte Transaction with Steven and Cheryl
Forte. Mr. Forte is no longer a consultant, director or
employee of the Company.
Although the definitive agreement between the Company and Steven
L. Forte and Cheryl Forte is currently being negotiated, 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. 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. As consideration, the Company has agreed to
issue a promissory note in favor of Steven L. Forte and Cheryl
Forte in the amount of $2,351,705. 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
Company's Random Ejection Shuffler and Fantasy 21 table game.
Since the definitive documents with respect to the Forte
Transaction are currently being negotiated, the associated
promissory note is not dated and, accordingly, the interest has
not started to accrue. 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
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
67
<PAGE>
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 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, John Kenny - Customer
Service Manager, and Tom Gayton - 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.
68
<PAGE>
<TABLE>
<CAPTION>
PART II
INFORMATION NOT REQUIRED BY PROSPECTUS
Item 27. Exhibit Index.
<S> <C>
(1) Form of Placement Agreement with Travis Morgan
Securities, Inc., incorporated by reference to Post-
Effective Amendment No. 1 on Form SB-2/A filed on
June 5, 1998.
(1.1) Form of Placement Agreement with First Global
Securities, Inc. and Grant Bettingen, Inc.,
incorporated by reference to Post-Effective Amendment
No. 2 on Form SB-2/A filed on September 18, 1998.
(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 SB-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 SB-2 filed on July 16, 1997, S.E.C. File Number
333-31373.
(3.3) Bylaws incorporated by reference to From SB-2 filed
on July 16, 1997, S.E.C. File Number 333-31373.
(3.4) Amended and Restated Bylaws, incorporated by
reference to Post-Effective Amendment No. 1 on
Form SB-2/A filed on June 5, 1998.
(4) Specimen certificate for Common Stock incorporated by
reference to Form SB-2 filed on July 16, 1997, S.E.C.
File Number 333-31373.
(4.1) Specimen Warrant certificate incorporated by
reference to Form SB-2 filed on July 16, 1997, S.E.C.
File Number 333-31373.
(5) Consent and Opinion of Randall & Danskin, P.S.
regarding legality of securities registered under
this Registration Statement, incorporated by
reference to Post- Effective Amendment No. 2 on
Form SB-2/A filed on September 18, 1998.
(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 SB-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.
69
<PAGE>
(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.
(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 incorporated by reference to Form SB-2 filed
on July 16, 1997, S.E.C. File Number 333-31373.
(10.8) Royalty Agreement with the 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. incorporated by reference to Amendment 1 to
Form SB-2 filed on September 17, 1997, S.E.C. File
Number 333-31373.
(10.11) Exclusive License Agreement with Technology
Development Center, LLC. Incorporated by reference to
Amendment 2 to Form SB-2 filed on November 12, 1997,
S.E.C. File Number 333-31373.
(10.12) Funding Agreement dated January 15, 1997 incorporated
by reference to Amendment 4 of Form SB-2 filed on
February 18, 1998, S.E.C. File Number 333-31373.
(10.13) Partnership Pledge and Security Agreement dated
January 15, 1996 incorporated by reference to
Amendment 4 to Form SB-2 filed on February 18, 1998,
S.E.C. File Number 333-31373.
(10.14) Promissory Note executed by Richard Huson in favor of
Randy Sines and Cheryl Forte dated January 15, 1996,
incorporated by reference to Amendment 4 to Form SB-2
filed on February 18, 1998, S.E.C. File Number
333-31373.
(10.15) Consents of Spouse of Irene Sines and Steven Forte
dated January 15, 1996, incorporated by reference to
Amendment 4 to Form SB-2 filed on February 18, 1998,
S.E.C. File Number 333-31373.
(10.16) Third Round Funding Agreement dated September 30,
1996, incorporated by reference to Amendment 4 to
Form SB-2 filed on February 18, 1998, S.E.C. File
Number 333-31373.
(10.17) Form of Convertible Unsecured Note, incorporated by
reference to Post-Effective Amendment No. 1 on Form
SB-2/A filed on June 5, 1998.
(10.18) Forte Letter Agreement dated May 28, 1998,
incorporated by reference to Post-Effective Amendment
No. 1 on Form SB-2/A filed on June 5, 1998.
(10.19) Exclusive Distributorship Agreement with Gaming 2000
L.L.C. dated May 28, 1998, incorporated by reference
to Post-Effective Amendment No.1 on Form SB-2/A filed
on June 5, 1998.
(10.20) Exclusive Distributorship Agreement with Belgium
Gaming Technology dated December 18, 1997,
incorporated by reference to Post-Effective Amendment
No. 1 on Form SB-2/A filed on June 5, 1998.
70
<PAGE>
(10.21) Asset Purchase Agreement dated August 14, 1998, by
and between Casinovations Incorporated and Gaming
2000, L.L.C., incorporated by reference to Post-
Effective Amendment No. 2 on Form SB-2/A filed on
September 18, 1998.
(10.22) Purchase Agreement with Steven L. Forte and Cheryl
Forte [to be filed by amendment].
(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) Consent of James E. Scheifley & Associates, P.C.,
incorporated by reference to Post-Effective
Amendment No. 2 on Form SB-2/A filed on
September 18, 1998.
(24) Power of Attorney, incorporated by reference to Post-
Effective Amendment No. 1 on Form SB-2/A filed on
June 5, 1998.
(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 SB-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 SB-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 SB-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 SB-2, S.E.C. File
Number 333-31373.
(99.4) Form of Lockup Agreement regarding Common Stock with
Officers, Directors and Richard Huson incorporated by
reference to Amendment 3 to Form SB-2 filed on
January 12, 1998, S.E.C. File Number 333-31373.
(99.5) Lock Up Agreement regarding Warrants between
Officers, Directors and Principal Shareholder
incorporated by reference to Amendment 6 to Form SB-2
filed on April 2, 1998, S.E.C. File Number 333-31373.
71
<PAGE>
(99.6) Revised Form of Lock Up Agreement regarding Warrants
between Officers, Directors and Principal Shareholder
incorporated by reference to Amendment 7 to Form SB-2
filed on April 9, 1998, S.E.C. File Number 333-31373.
(99.7) Revised Lock Up Agreement regarding Common Stock
between Officers, Directors and Richard Huson
incorporated by reference to Amendment 7 to Form
SB-2, S.E.C. File Number 333-31373.
(99.8) Employment Agreement with Steven Blad dated June 1,
1998, incorporated by reference to Post-Effective
Amendment No.1 on Form SB-2/A filed on June 5, 1998.
(99.9) Form of Lock-Up Agreement, incorporated by reference
to Post-Effective Amendment No.2 on Form SB-2/A filed
on September 18, 1998.
(99.10) Lock-Up Agreement dated August 27, 1998, by and
between Casinovations Incorporated and Richard Huson
and Randy Sines, incorporated by reference to Post-
Effective Amendment No.2 on Form SB-2/A filed on
September 18, 1998.
</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.
(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
72
<PAGE>
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.
73
<PAGE>
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 29th day of September 1998.
Casinovations Incorporated
By: /s/ Steven Blad
-------------------------------------
Steven Blad
President and Chief Executive Officer
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>
<CAPTION>
<S> <C> <C>
Signature Capacity Date
/s/ Steven J. Blad President, Chief Executive Officer September 29, 1998
- ------------------------ and Director
Steven J. Blad
/s/ Jay L. King Treasurer, Secretary September 29, 1998
- ------------------------ and Chief Financial Officer
Jay L. King
* Director September 29, 1998
- ------------------------
Richard S. Huson
* Director September 29, 1998
- ------------------------
Jamie McKee
* Director September 29, 1998
- ------------------------
David E. Sampson
* Director September 29, 1998
- ------------------------
Bob Smith
By: /s/ Steven J. Blad Attorney-in-Fact September 29, 1998
---------------------
Steven J. Blad
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S> <C> <C>
EXHIBIT
NO. DESCRIPTION PAGE
(1) Form of Placement Agreement with Travis Morgan
Securities, Inc., incorporated by reference to
Post-Effective Amendment No. 1 on Form SB-2/A
filed on June 5, 1998.
(1.1) Form of Placement Agreement with First Global
Securities, Inc. and Grant Bettingen, Inc.,
incorporated by reference to Post-Effective
Amendment No. 2 on Form SB-2/A filed on
September 18, 1998.
(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 SB-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 SB-2 filed on July 16, 1997, S.E.C. File
Number 333-31373.
(3.3) Bylaws incorporated by reference to From SB-2
filed on July 16, 1997, S.E.C. File
Number 333-31373.
(3.4) Amended and Restated Bylaws, incorporated by
reference to Post-Effective Amendment No. 1 on
Form SB-2/A filed on June 5, 1998.
(4) Specimen certificate for Common Stock
incorporated by reference to Form SB-2 filed on
July 16, 1997, S.E.C. File Number 333-31373.
(4.1) Specimen Warrant certificate incorporated by
reference to Form SB-2 filed on July 16, 1997,
S.E.C. File Number 333-31373.
(5) Consent and Opinion of Randall & Danskin,
P.S. regarding legality of securities
registered under this Registration Statement,
incorporated by reference to Post-Effective
Amendment No. 2 on Form SB-2/A filed on
September 18, 1998.
(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 SB-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.
75
<PAGE>
EXHIBIT
NO. DESCRIPTION PAGE
(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.
(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 incorporated by reference to Form
SB-2 filed on July 16, 1997, S.E.C. File Number
333-31373.
(10.8) Royalty Agreement with the 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. incorporated by reference to
Amendment 1 to Form SB-2 filed on September 17,
1997, S.E.C. File Number 333-31373.
(10.11) Exclusive License Agreement with Technology
Development Center, LLC. Incorporated by
reference to Amendment 2 to Form SB-2 filed
on November 12, 1997, S.E.C. File Number
333-31373.
(10.12) Funding Agreement dated January 15, 1997
incorporated by reference to Amendment 4 of
Form SB-2 filed on February 18, 1998, S.E.C.
File Number 333-31373.
(10.13) Partnership Pledge and Security Agreement
dated January 15, 1996 incorporated by
reference to Amendment 4 to Form SB-2 filed on
February 18, 1998, S.E.C. File Number
333-31373.
(10.14) Promissory Note executed by Richard Huson in
favor of Randy Sines and Cheryl Forte dated
January 15, 1996, incorporated by reference to
Amendment 4 to Form SB-2 filed on
February 18, 1998, S.E.C. File Number 33-31373.
(10.15) Consents of Spouse of Irene Sines and Steven
Forte dated January 15, 1996, incorporated by
reference to Amendment 4 to Form SB-2 filed
on February 18, 1998, S.E.C. File Number
333-31373.
(10.16) Third Round Funding Agreement dated
September 30, 1996, incorporated by reference
to Amendment 4 to Form SB-2 filed on
February 18, 1998, S.E.C. File Number
333-31373.
(10.17) Form of Convertible Unsecured Note,
incorporated by reference to Post-Effective
Amendment No.1 on Form SB-2/A filed on June 5,
1998.
(10.18) Forte Letter Agreement dated May 28, 1998,
incorporated by reference to Post-Effective
Amendment No. 1 on Form SB-2/A filed on June 5,
1998.
(10.19) Exclusive Distributorship Agreement with Gaming
2000 L.L.C. dated May 28, 1998, incorporated by
reference to Post-Effective Amendment No. 1 on
Form SB-2/A filed on June 5, 1998.
76
<PAGE>
EXHIBIT
NO. DESCRIPTION PAGE
(10.20) Exclusive Distributorship Agreement with
Belgium Gaming Technology dated December 18,
1997, incorporated by reference to Post-
Effective Amendment No. 1 on Form SB-2/A filed
on June 5, 1998.
(10.21) Asset Purchase Agreement dated August 14, 1998,
by and between Casinovations Incorporated and
Gaming 2000, L.L.C., incorporated by reference
to Post-Effective Amendment No. 2 on
Form SB-2/A filed on September 18, 1998.
(10.22) Purchase Agreement with Steven L. Forte and
Cheryl Forte [to be filed by amendment].
(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) Consent of James E. Scheifley & Associates,
P.C., incorporated by reference to Post-
Effective Amendment No. 2 on Form SB-2/A filed
on September 18, 1998.
(24) Power of Attorney, incorporated by reference
to Post-Effective Amendment No. 1 on
Form SB-2/A filed on June 5, 1998.
(25) Not Applicable
(26) Not Applicable
(27) Financial Data Schedule 79
(28) Not Applicable
(99) Employment Agreement of Jay L. King dated
January 1, 1997 incorporated by reference to
Form SB-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 SB-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 SB-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 SB-2, S.E.C. File Number 333-31373.
77
<PAGE>
EXHIBIT
NO. DESCRIPTION PAGE
(99.4) Form of Lockup Agreement regarding Common
Stock with Officers, Directors and Richard
Huson incorporated by reference to Amendment 3
to Form SB-2 filed on January 12, 1998, S.E.C.
File Number 333-31373.
(99.5) Lock Up Agreement regarding Warrants between
Officers, Directors and Principal Shareholder
incorporated by reference to Amendment 6 to
Form SB-2 filed on April 2, 1998, S.E.C. File
Number 333-31373.
(99.6) Revised Form of Lock Up Agreement regarding
Warrants between Officers, Directors and
Principal Shareholder incorporated by reference
to Amendment 7 to Form SB-2 filed on
April 9, 1998, S.E.C. File Number 333-31373.
(99.7) Revised Lock Up Agreement regarding Common
Stock between Officers, Directors and Richard
Huson incorporated by reference to Amendment 7
to Form SB-2, S.E.C. File Number 333-31373.
(99.8) Employment Agreement with Steven Blad dated
June 1, 1998, incorporated by reference to
Post-Effective Amendment No. 1 on Form SB-2/A
filed on June 5, 1998.
(99.9) Form of Lock-up Agreement, incorporated by
reference to Post-Effective Amendment No. 2
on Form SB-2/A filed on September 18, 1998.
(99.10) Lock-Up Agreement dated August 27, 1998, by
and between Casinovations Incorporated and
Richard Huson and Randy Sines, incorporated by
reference to Post-Effective Amendment No. 2 on
Form SB-2/A filed on September 18, 1998.
</TABLE>
78
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 28,294
<SECURITIES> 0
<RECEIVABLES> 22,212
<ALLOWANCES> 0
<INVENTORY> 308,411
<CURRENT-ASSETS> 407,407
<PP&E> 291,481
<DEPRECIATION> 25,132
<TOTAL-ASSETS> 892,197
<CURRENT-LIABILITIES> 2,255,954
<BONDS> 0
0
0
<COMMON> 6,366
<OTHER-SE> 4,524,884
<TOTAL-LIABILITY-AND-EQUITY> 892,197
<SALES> 4,288
<TOTAL-REVENUES> 4,288
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,187,684
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91,664
<INCOME-PRETAX> 1,275,060
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,275,060
<EPS-PRIMARY> 0
<EPS-DILUTED> (.20)
</TABLE>
