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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1999
--------------------------
OR
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
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Commission file number: 000-25855
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CASINOVATIONS INCORPORATED
- -----------------------------------------------------------------
(Exact name of small business issuer as
specified in its charter)
Nevada 91-1696010
- --------------------------------- ------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6744 S. Spencer Street, Las Vegas, Nevada 89119
- ----------------------------------------------------------------
(Address of principal executive offices)
(702) 733-7195
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(Issuer's telephone number)
- ----------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES NO X
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed
by court.
YES NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date:
7,094,687 shares of common stock, $.001 par value, as of
March 31, 1999
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Transitional Small Business Disclosure Format (check one);
YES NO X
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FORM 10-QSB
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Balance Sheet 3
Statement of Operations 4
Statement of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan
of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security
Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 16
EXHIBIT INDEX 17
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
CASINOVATIONS INCORPORATED
(A Development Stage Company)
BALANCE SHEET
(UNAUDITED)
March 31, 1999 December 31, 1998
---------------- -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 1,299,589 $ 200,749
Accounts receivable, trade 44,382 2,810
Accounts receivable - employees 31,520 11,347
Inventories 1,111,406 756,662
Prepaid expenses 42,052 38,896
---------------- ----------------
Total current assets 2,528,949 1,010,464
Property and equipment, at cost, net of
accumulated depreciation of $164,817 and $125,380 522,903 350,772
Intangible assets, at cost, net of
accumulated amortization of $42,458 and $37,369 156,376 157,916
Deferred interest 203,414 238,590
Deposits 164,572 142,821
---------------- ----------------
$ 3,576,214 $ 1,900,563
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable - bank $ 197,383 $ 197,383
Current portion of leases payable 592,970 219,758
Current portion of long term debt 13,805 3,232
Accounts payable 946,528 810,349
Accrued expenses 31,563 40,576
Accrued interest - stockholder loans 115,862 59,561
Current portion of stockholder loans 310,037 295,755
Customer deposits 27,688 15,874
---------------- ----------------
Total current liabilities $ 2,235,836 $ 1,642,488
Other long term debt - 13,948
Leases payable 630,024 -
Convertible debt 1,900,000 813,138
Stockholder loans 924,963 1,089,245
---------------- ----------------
Total liabilities $ 5,690,823 $ 3,558,819
Stockholders' equity:
Common stock, $.001 par value,
40,000,000 shares authorized, 7,094,687 shares and
6,767,106 shares issued and outstanding, respectively 7,094 6,767
Additional paid-in capital 7,441,624 6,676,430
Unpaid subscriptions to common stock (125,000) (125,000)
Deficit accumulated during development stage (9,438,327) (8,216,453)
---------------- ----------------
(2,114,609) (1,658,256)
---------------- ----------------
$ 3,576,214 $ 1,900,563
================ ================
</TABLE>
See accompanying notes to unaudited financial statements.
3
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<TABLE>
<CAPTION>
CASINOVATIONS INCORPORATED
(A Development Stage Company)
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
Three Months Ended
---------------------------------
March 31, March 31,
1999 1998
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<S> <C> <C>
Sales $ 17,705 $ 345
Rental income 46,520 -
Interest income 4,849 3
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69,074 348
Other costs and expenses:
Cost of sales 5,745 -
General and administrative 1,086,838 355,787
Research and development 69,661 102,333
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1,162,244 458,120
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(Loss) from operations (1,093,170) (457,772)
Interest expense 78,448 37,528
Interest expense - related parties 45,262 24,880
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123,710 62,408
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(Loss) before income taxes (1,216,880) (520,180)
Provision for income taxes - -
-------------- -------------
Net income (loss) $ (1,216,880) $ (520,180)
============== =============
Basic and diluted (loss) per share $ (0.17) $ (0.08)
============== =============
Weighted average shares outstanding 7,253,547 6,179,638
============== =============
</TABLE>
See accompanying notes to unaudited financial statements.
4
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<TABLE>
<CAPTION>
CASINOVATIONS INCORPORATED
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
Three Months Ended
----------------------------------
March 31, 1999 March 31, 1998
---------------- ---------------
<S> <C> <C>
Net (loss) $ (1,216,880) $ (520,180)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 44,527 16,965
Stock and options issued for services - 33,000
Amortization of deferred interest 35,176 -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (61,744) (25,400)
(Increase) decrease in inventory (354,743) (46,956)
(Increase) decrease in prepaid expenses 5,543 3,375
(Increase) decrease in other assets (30,451) (712)
Increase (decrease) in accounts payable (297,975) (46,243)
Increase (decrease) in accrued expenses 47,288 3,854
---------------- ---------------
Total adjustments (612,379) (62,117)
---------------- ---------------
Net cash (used in) operating activities (1,829,259) (582,297)
---------------- ---------------
Cash flows from investing activities:
Acquisition of plant and equipment (211,569) (8,376)
Increase in patents and trademarks (3,550) (3,368)
---------------- ---------------
Net cash (used in) investing activities (215,119) (11,744)
---------------- ---------------
Cash flows from financing activities:
Common stock sold for cash 1,210,523 -
Proceeds from long-term debt - 250,000
Proceeds of shareholder loans - 290,000
Repayment of shareholder loans (150,000) (27,245)
Proceeds from leases payable 295,182 -
Repayment of leases payable (109,111) (36,400)
Proceeds from convertible debentures 1,900,000 -
Repayment of notes payable (3,375) -
---------------- ---------------
Net cash provided by financing activities 3,143,219 476,355
---------------- ---------------
Increase (decrease) in cash 1,098,841 (117,686)
Cash and cash equivalents,
beginning of period 200,749 119,389
---------------- ---------------
Cash and cash equivalents,
end of period $ 1,299,590 $ 1,703
================ ===============
</TABLE>
See accompanying notes to unaudited financial statements.
5
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CASINOVATIONS INCORPORATED
(A Development Stage Company)
Notes to Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION.
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions incorporated in Regulation 10-SB of the Securities
and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring adjustments and accruals) considered necessary for a
fair presentation have been included.
The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full
year. The accompanying financial statements should be read in
conjunction with the Company's audited financial statements for
the year ended December 31, 1998 as included in the Company's
Annual Report on Form 10-KSB as filed with the Securities and
Exchange Commission on March 26, 1999.
Basic loss per share was computed using the weighted average
number of common shares outstanding.
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 - SUBSEQUENT EVENT.
On April 30, 1999, the Company completed the rescission of a
stock subscription agreement with an unaffiliated third party,
paying $450,000 cash to the former stockholder. As of said date,
the Company canceled the 200,000 shares returned under the
rescinded subscription agreement.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
STATEMENT ON FORWARD-LOOKING INFORMATION
Certain information included herein contains statements that
may be considered forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
such as statements relating to plans for future expansion,
capital spending, future operations, sources of liquidity and
financing sources. Such forward-looking information involves
important risks and uncertainties that could significantly affect
anticipated results in the future and, accordingly, such results
may differ from those expressed in any forward-looking statements
made herein. These risks and uncertainties include, but are not
limited to, those relating to liquidity requirements for the
Company, the continued growth of the gaming industry, the success
of the Company's product-development and marketing and sales
activities, vigorous competition in the gaming industry,
dependence on existing management, relocation of manufacturing
facilities, gaming regulations (including actions affecting
licensing and product approvals), leverage and debt service
(including sensitivity to fluctuations in interest rates), issues
related to the Year 2000, domestic or global economic conditions
and changes in federal or state tax laws or the administration of
such laws.
OVERVIEW
The Company's primary business is the development,
manufacturing and marketing of various gaming concepts and
products that increase the security, productivity and profits for
the global gaming industry.
From inception through December 31, 1998, the Company has
been a "Development Stage Company" performing research and
development, product prototyping, field testing of products,
development of manufacturing capabilities, acquiring inventory,
development of distribution channels, staffing (including the
four top sales executives from a major shuffler competitor) and
obtaining a building with sufficient capacity to house future
growth. Beginning January 1999, the Company has experienced
modest sales development and revenue growth.
The following discussion summarizes the Company's results of
operations for the three months ended March 31, 1999 and 1998 and
the Company's liquidity and capital resources.
RESULTS OF OPERATIONS
YEARS ENDED MARCH 31, 1999 AND 1998
REVENUES. For the three months ended March 31, 1999, the
Company generated total revenues of $69,074 compared to $348 for
the three months ended March 31, 1998. The revenues for the
three months ended March 31, 1999 consisted of Random Ejection
Shuffler (the "Shuffler") rentals of $18,523, Shuffler sales of
$15,500, table game (the "Fun Pit Collection") rentals of
$27,997, other sales of $2,205 and interest income of $4,849.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the
three months ended March 31, 1999, selling, general and
administrative expenses increased approximately $731,051, or
205%, to $1,086,838 compared to $355,787 for the three months
ended March 31, 1998. This increase was primarily attributable
to costs associated with the development and marketing of the
Company's products and the expansion of the Company's operations.
For the three months ended March 31, 1999, selling, general and
administrative expenses included: salaries and related costs of
$549,600; consulting services of $4,829; gaming industry show
costs of $77,277; travel and entertainment costs of $71,899;
printing and office
7
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expense, including rent, of $155,188; and legal expenses of
$67,837. In addition, the Company had depreciation and
amortization of $44,527 compared to $16,965 for the three months
ended March 31, 1999 and 1998, respectively.
INTEREST EXPENSE. For the three months ended March 31,
1999, the Company incurred interest expenses of $123,710 compared
to $62,408 for the three months ended March 31, 1998. This
increase was primarily attributable to the increased borrowings
by the Company.
NET INCOME (LOSS). For the three months ended March 31,
1999, the Company had a net loss of $1,216,880, compared to a net
loss of $520,180 for the three months ended March 31, 1998. The
increase in net loss was primarily due to continued development
of the Company's products and the expansion of the Company's
operations. Basic loss per share was $0.17 for the three months
ended March 31, 1999 compared to $0.08 for the three months ended
March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW. The Company has continued to focus on sales and
marketing efforts for its Shuffler and has begun to make
significant placements of Shufflers in a variety of gaming
facilities. As a result, Shuffler leases in Nevada and sales in
other jurisdictions are beginning to generate cash flow which is
expected to continue to build through the rest of the year. The
Company is continuing to expend cash to develop its SecureDrop
system, and these costs, together with product improvement
expenses, related marketing and regulatory costs and litigation
and legal expenses, are consuming cash resources. The Company
has begun to obtain sales orders from a variety of gaming
customers for the SecureDrop product. To ramp up increased
product production for both the Shuffler and the new production
line for the SecureDrop system, the Company will continue to
expend cash for which there will not be cash revenue generated
until later in the year. As a result, the Company has expended
most of the proceeds from both the common stock Offering and the
convertible note placement. Although the Company has third party
lease financing available, the cost of such funds is high, and
management believes that it will be advantageous to the Company
to explore other cash sources.
In May 1999, the Company contacted the holders of the
Company's convertible notes and Class E Warrants and proposed the
following: (1) accelerated conversion right for the convertible
notes from August 1999 to May 1999, (2) accelerated warrant
exercise right from August 1999 to May 1999, and (3) in exchange
for cash exercises, issuance of additional warrants at $3.00 per
share to such persons on a warrant for warrant basis for each
warrant exercised. This proposal was subject to exercise and
payment by the end of May 1999. The Company believes that most
holders will accept the foregoing, and as a result, the Company
expects to receive a maximum of $1,499,373 and issue a maximum of
1,230,552 shares of common stock.
Management believes that the above transaction, assuming
that all holders convert their debt and exercise their warrants,
will benefit the Company as follows: (1) cash on hand should
cover the Company's expected cash requirements through the middle
of the third quarter of 1999, by which time the Company
anticipates cash flows from Shuffler leases and sales and
SecureDrop sales will begin to meet the Company's liquidity
requirements, (2) up to $1,900,000 in debt would be removed from
the balance sheet to become stockholder equity, (3) cash interest
costs on convertible debt would be eliminated, and (4)
management would be able to focus on operations during the next
quarter, not on sources of funds. Although there is no assurance
that all of the convertible note holders will participate, the
Company believes most will. The Company believes that as a
result of this transaction, short-term liquidity requirements
will be met.
8
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WORKING CAPITAL. At March 31, 1999, the Company had cash,
cash equivalents and investments of $1,299,589 compared to $1,703
at March 31, 1998. At March 31, 1999, the Company's working
capital was $293,113 compared to a deficit of $1,645,859 at March
31, 1998. At March 31, 1999, the Company's current ratio, I.E.
the ratio of current assets to current liabilities, was 1.13:1
compared to 0.62:1 at December 31, 1998. Until the Company's
normalized sales levels are achieved, the Company will be relying
upon proceeds from the placement of convertible debentures and
other private and institutional sources of debt and equity
capital for working capital purposes.
CASH FLOW. For the three months ended March 31, 1999, net
cash used in operating activities was $1,829,259 compared to
$582,297 for the three months ended March 31, 1998. Cash used in
operating activities is net of depreciation and amortization of
$44,527, compared to $16,965 for the three months ended March 31,
1998; increases in accounts receivable of $61,744 compared to
$25,400 for the three months ended March 31, 1998; increases in
inventory of $354,743 compared to $46,956 for the three months
ended March 31, 1998; decreases in prepaid expenses of $5,543
compared to $3,375 for the three months ended March 31, 1998;
increases in other assets of $30,451 compared to $712 for the
three months ended March 31, 1998; decreases in accounts payable
of $297,975 compared to $46,243 for the three months ended March
31, 1998; and increases in accrued expenses of $47,288 compared
to $3,854 for the three months ended December 31, 1998.
For the three months ended March 31, 1999, net cash provided
by financing activities was $3,143,219 compared to $476,355 for
the three months ended March 31, 1998. The increase is primarily
attributable to the proceeds received from the Offering and the
placement of convertible debentures. The cash from financing
activities consisted of $1,210,523 from the sale of common stock,
proceeds of $1,900,000 from the placement of convertible
debentures and proceeds of $295,182 from leases payable reduced
by repayment of notes and leases payable of $262,486.
OFFERING. From April 1998 through January 1999, the Company
conducted a public offering for 1,500,000 shares of its common
stock at $2.50 per share (the "Offering"). In addition, the
Company registered 2,107,973 shares of common stock on behalf of
certain selling shareholders and 200,000 shares of common stock
underlying its Class A Warrants. The Company completed the
Offering on January 30, 1999. As a result of the sale of shares
pursuant to the Offering, the Company received gross proceeds of
$3,794,360. The Company used the proceeds from the Offering for
the payment of operating expenses, funding of working capital and
the reduction of debt. On April 30, 1999, through an agreement
dated March 24, 1999, the Company rescinded the sale of 200,000
shares issued in the Offering and returned $450,000 to the
stockholder.
CONVERTIBLE DEBT. The Company has received proceeds of
$1,900,000 from the placement of convertible debt in the first
quarter of 1999. The debt accrues interest at 9.5% per annum and
is convertible into restricted shares of common stock after six
months at $2.60 per share. Each purchaser of a $50,000 unit of
convertible debt also received warrants for the purchase of 9,100
shares of common stock at $3.00 per share. The convertible debt
issue was completed in March 1999. See, "Overview" above.
LEASE FINANCING. As of March 31, 1999, the Company
received proceeds of $295,182 from lease financing with unrelated
leasing companies whereby the Company sold and leased back all of
its furniture, equipment and tooling, and 70 units of the
Shuffler.
CAPITAL EXPENDITURES. In March 1999, the Company relocated
the balance of its manufacturing operations to its principal
offices in Las Vegas, Nevada at a cost of approximately $5,000.
In addition, the Company has planned expenditures of up to
$300,000 for additional tooling. For the three months ended
9
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March 31, 1999, the Company used net cash in investing activities
of $215,119 consisting of: acquisition of plant and equipment of
$211,569; and increased patents and trademarks by $3,550. For
the three months ended March 31, 1998, the Company used net cash
in investing activities of $11,744 consisting of: acquired plant
and equipment valued at $8,376; and increased patents and
trademarks by $3,368.
RETIREMENT OF DEBT. As part of a transaction where the
Company repurchased the shares of common stock, among other
things, from Steven L. Forte, a former employee, director and
shareholder of the Company, the Company executed a promissory
note in the original principal amount of $2,351,705. The
promissory note dated December 3, 1998 had an interest rate of
6.5% during the first year and 8% thereafter and was 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. Through a December 1998
letter agreement, the Company negotiated the cancellation of the
promissory note, as well as the cancellation of the security for
the promissory note and the cancellation of an unrelated
promissory note in the original principal amount of $130,047.46,
in exchange for three payments in the aggregate amount of
$1,250,000: $500,000 on December 7, 1998, $500,000 on December
28, 1998 and $250,000 on January 15, 1999. On January 15, 1999,
the Company made the last payment and cancelled the promissory
note, the security for the promissory note and the unrelated
promissory note.
OUTLOOK
Based on presently known commitments and plans, the Company
believes that it will be able to fund 1999 operations and
required expenditures through cash on hand, debt reduction from
the accelerated conversion of convertible debt and cash from
exercise of warrants, cash flow from operations and lease
financing services. In the event that such sources are
insufficient, the Company will need to seek cash from private or
public placements of debt or equity, institutional or other
lending sources or change operating plans to accommodate such
liquidity issues. No assurances can be given that the Company
will successfully obtain necessary liquidity sources.
YEAR 2000
During 1998, the Company undertook an assessment of the
information systems and software used in its operations to
determine whether or not those systems were Year 2000 compliant,
and assessed plans to upgrade systems and/or software that was
determined to not be Year 2000 compliant. The Company has begun
and is continuing to assess potential issues related to the
approach of the Year 2000 other than those relating to the
Company's internal information systems, such as critical supplier
readiness and potential problems associated with embedded
technologies, and will develop and implement plans to correct any
deficiencies found.
Based upon the Company's efforts to date, the Company
believes that the costs of addressing the Company's Year 2000
issues have not been and are not currently expected to be
material to the Company's results of operations or financial
position; however, should the Company and/or its critical
suppliers fail to identify and/or correct material Year 2000
issues, such failure could impact the Company's ability to
operate as it did before the Year 2000, and subsequently have a
material impact on the Company's results of operations or
financial position. In such an event, the Company will address
issues as they arise and strive to minimize any impact on the
Company's operations. The impact on the Company's operating
results of such failures and of any contingency plans to be
designed to address such events cannot be determined at this
time.
10
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RISK FACTORS AND FORWARD LOOKING INFORMATION
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND
SECTION 21E OF THE EXCHANGE ACT. SUCH STATEMENTS REFER TO EVENTS
THAT COULD OCCUR IN THE FUTURE OR MAY BE IDENTIFIED BY THE USE OF
WORDS SUCH AS "INTEND," "PLAN," "BELIEVE," CORRELATIVE WORDS, AND
OTHER EXPRESSIONS INDICATING THAT FUTURE EVENTS ARE CONTEMPLATED.
SUCH STATEMENTS ARE SUBJECT TO INHERENT RISKS AND UNCERTAINTIES,
AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN OF THE
RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS REPORT. IN
ADDITION TO THE OTHER INFORMATION CONTAINED HEREIN, INVESTORS
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS.
DEVELOPING BUSINESS; LACK OF OPERATING RESULTS; NO INDEPENDENT
MARKET RESEARCH OF POTENTIAL DEMAND FOR CURRENT OPERATIONS. The
Company has been in the development stage and has only recently
commenced sales and leases of its products. Until recently, 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, manufacturing its products
and commencing product sales. Although the Company has
experienced modest sales development and revenue growth in the
first quarter of 1999, there is no guarantee that the Company
will generate sufficient revenue to sustain its operations. No
independent organization has conducted market research providing
management with independent assurance from which to estimate
potential demand for the Company's business operations.
ADDITIONAL FINANCING MAY BE REQUIRED. Based on presently known
commitments and plans, the Company believes that it will be able
to fund its 1999 operations and required expenditures through
cash on hand, debt reduction from the accelerated conversion of
convertible debt and cash from exercise of warrants, cash flow
from operations, and lease financing sources. In the event that
such sources are insufficient, the Company will need to seek cash
from private or public placements of debt or equity,
institutional or other lending sources or change operating plans
to accommodate such liquidity issues. No assurances can be given
that the Company will successfully locate necessary liquidity
sources.
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.
INFLUENCE ON ELECTION OF DIRECTORS AND ALL OTHER MATTERS BY
CURRENT OFFICERS AND DIRECTORS. The officers and directors of
the Company own approximately 57.6% of the outstanding common
shares. As a result, the officers and directors of the Company,
through their aggregate ownership of the Company's common stock,
will be able to influence the election of directors and all other
matters submitted to a vote of the Company's stockholders.
UNCERTAINTY OF MARKET FOR COMPANY'S PRODUCTS. The Company has
various gaming products, such as the Shuffler and SecureDrop, and
variations of traditional games of Blackjack and Poker, that are
ready for distribution. Despite the additions to the Company's
product line, the Company has only recently
11
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completed the development process for some of its gaming
products. Although the market appears to be receptive to the
Company's products, there is no guarantee that the market will
remain receptive and that the Company's future products will be
received by the market in the same manner.
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.
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.
STOCKHOLDERS MAY BEAR RISK OF LOSS. The capital stock of the
Company is at risk of complete loss if the Company's operations
are unsuccessful.
FINANCIAL CONDITION. There can be no assurance that the Company
will have adequate funds to pay all of its operating expenses or
that the Company can be operated in a profitable manner.
Profitability depends upon many factors, including 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.
RISKS OF PROPRIETARY PRODUCTS AND GAMES. The Company places its
proprietary products and games, except SecureDrop, in casinos
under short-term lease arrangements, making these games
susceptible to replacement due to pressure from competitors,
changes in economic conditions, obsolescence, and declining
popularity. The Company intends to maintain and expand the
number of installed proprietary products and games through
enhancement of existing products and games, introduction of new
products and games, and customer service, but there can be no
assurance that these efforts will be successful. Introduction of
new proprietary products and games involves significant risks,
including whether the Company will be able to place its products
and games with casinos, the economic terms on which casinos will
accept the products and games, the popularity of the products and
games with gaming patrons, and whether a successful game can
maintain its popularity over the long term. If the Company is not
successful in introducing new games, the effects on the Company
could be adverse. The Company has filed trademark and patent
applications to protect its intellectual property rights in
certain of its trademarks and innovations on certain of its
proprietary games, respectively. At this time, however, the
United States Patent and Trademark Office has not acted upon all
of these applications. There can be no assurance that the pending
patent or trademark applications will actually issue as patents
or trademark registrations or that any of these rights will not
be infringed by others. Certain of the Company's products and
games may have independent protection of
12
<PAGE>
the game itself, and it is possible that competitors could
produce a similar product or game without violating any legal
rights of the Company. The Company intends to promote
aggressively its trademarks to build goodwill and customer
loyalty. In addition, the Company intends to improve and add
innovations to certain of its games, which may be subject to
legal protection. There can be no assurance, however, that the
Company will be successful in these efforts, that innovations
will be subject to legal protection, or that the innovations will
give a competitive advantage to the Company.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK. This Report
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 and Forward Looking Statements," 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 Report will be
accurate.
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.
DEPENDENCE ON KEY INDIVIDUALS. The future success of the Company
is highly dependent upon the management skills of its key
employees and the Company's ability to attract and retain
qualified key employees. The inability to obtain and employ
these individuals would have a serious effect upon the business
of the Company. The Company has entered into employment
agreements with certain employees. 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.
DEPENDENCE ON CHAIRMAN OF THE BOARD AND OTHER DIRECTORS. During
1998 and 1997, certain members of the Company's Board of Directors
made significant loans to the Company to provide necessary
liquidity to the Company. As of March 31, 1999, such outstanding
loans were $1,235,000. There is no obligation of any kind by such
persons to continue lending funds to the Company, and there is no
assurance whatsoever that such persons would be willing or able
to make such loans available in the future if the Company is in
need of funds.
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.
"PENNY" STOCK REGULATION OF BROKER-DEALER SALES OF COMPANY
SECURITIES. As the Nasdaq Stock Market has minimum quantitative
requirements and the OTC Bulleting does not, the Company will
attempt to lists its common stock on the OTC Bulletin Board.
Until the Company obtains a listing on the NASDAQ Stock Market,
if at all, the Company's securities may be covered by a Rule 15g-
9 under the Exchange Act 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
Exchange Act, 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
13
<PAGE>
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.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On March 18, 1999, Shuffle Master, Inc. ("Shuffle Master")
filed a complaint (Case No. A400777) in the District Court, Clark
County, State of Nevada (the "District Court") against former
employees of Shuffle Master (who are now employees of the
Company) and the Company. The complaint alleges, among other
things, fraud, breach of contract and conversion against certain
of these former employees of Shuffle Master and violation of
Nevada's Trade Secret Act, interference with contractual
relations, breach of contract, violations of the Lanham Act and
civil conspiracy to commit fraud against certain of these former
employees of Shuffle Master and the Company. On March 26, 1999,
the Company removed the action to the United States District
Court, District of Nevada (the "Federal Court"), and, on April 7,
1999, the Company filed a motion to dismiss certain of the causes
of action alleged by Shuffle Master in the complaint. In May
1999, the Federal Court denied the Company's motion to dismiss,
denied Shuffle Master's Motion to Remand to the District Court
the allegations regarding violations of the Lanham Act, and
remanded the allegations regarding fraud, civil conspiracy to
commit fraud, breach of contract, and conversion to the District
Court. Management believes that the complaint is without merit
and intends vigorously to defend the allegations contained
therein.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The Company placed $1,900,000 in convertible debt in the
first quarter of 1999. The convertible debt accrues interest at
9.5% per annum and is convertible into restricted shares of
common stock after six months at $2.60 per share. Each purchaser
of a $50,000 unit of convertible debt also received warrants for
the purchase of 9,100 shares of common stock at $3.00 per share.
The convertible debt issue was completed in March 1999. The
Company's Board of Directors is considering acceleration of the
conversion date and the warrant exercise date.
With respect to the convertible debt issued by the Company,
the Company relied upon Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act") in that the purchasers of
the convertible debt were all accredited investors with pre-
existing relationships with the Company. Accordingly, the
issuance of the convertible debt was exempt from the registration
requirements of Section 5 of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on March
29, 1999 (the "Annual Meeting"). With respect to the results of
the Annual Report, the Company makes reference to its Current
Report on Form 8-K dated March 29, 1999 and filed with the
Securities and Exchange Commission on April 5, 1999.
ITEM 5. OTHER INFORMATION.
On April 29, 1999, the Board expanded the Board by two
seats, appointing Richard Jaslow and Jill Bayless as new
directors to fill the vacancies. Richard S. Huson stepped down as
Chairman of the Board due to health reasons but continues as a
director; Bob L. Smith was appointed Chairman of the Board and
Jill Bayless was appointed Vice Chairman of the Board. The Board
15
<PAGE>
also created an Executive Committee consisting of the Chairman of
the Board, the Vice Chairman of the Board and the Chief Executive
Officer.
The Board also appointed an Audit Committee consisting of
Ronald Keil, Chairman, David Sampson and Jill Bayless.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS.
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
4.01 Form of 9.5% Convertible Note Due 2004
4.02 Form of Warrant
27.01 Financial Data Schedule
REPORT ON FORM 8-K.
During the three month period ended March 31, 1999, the
Company filed a Form 8-K dated March 29, 1999 with the Securities
and Exchange Commission on April 5, 1999 reporting, among other
things, the results of the Annual Meeting which changed the
Company's state of incorporation to Nevada.
SIGNATURE
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CASINOVATIONS INCORPORATED
---------------------------------
(Registrant)
Date: May 17, 1999 By: /s/ Steven J. Blad
-------------------------------------
Steven J. Blad
Its: President and Chief Executive Officer
16
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- --------- ------------------------------------------- --------
4.01 Form of 9.5% Convertible Note Due 2004 18
4.02 Form of Warrant 21
27.01 Financial Data Schedule ___
17
THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR REGISTERED OR QUALIFIED UNDER THE
SECURITIES OR BLUE SKY LAWS OF ANY STATE, AND THIS NOTE
MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR QUALIFICATION;
PROVIDED, HOWEVER, THAT THIS NOTE MAY BE SOLD, PLEDGED
OR OTHERWISE TRANSFERRED PURSUANT TO AN EXEMPTION FROM
REGISTRATION OR QUALIFICATION.
CASINOVATIONS INCORPORATED
9.5% CONVERTIBLE NOTE DUE 2004
$ _____,000.00 February ___, 1999
For Value Received, the undersigned Casinovations
Incorporated, a Washington corporation (the "Obligor"), hereby
promises to pay to the order of ________________ or its
registered assigns (the "Purchaser") on February 15, 2004, the
principal sum of _____________ Thousand and 00/100 Dollars
($______,000.00) and to pay interest on the unpaid principal
balance hereof from the date hereof at a rate of 9.5% per annum,
payable semiannually in arrears on August 15 and February 15 of
each year, to holders registered on the immediately preceding
August 1 and February 1. Interest on this Note will accrue from
the most recent date on which interest has been paid. Interest
will be computed on the basis of a 360-day year of twelve 30-day
months. The Note is unsecured. At its discretion, the Obligor
may, at anytime after the one-year anniversary of the Note,
redeem the Note without penalty upon payment of the face value of
the Note and any unpaid and accrued interest.
This Note is being issued as a part of a Unit consisting of
a Common Stock Purchase Warrant (the "Warrant") to purchase up to
_______ shares of Obligor's common stock (the "Common Stock").
This Note and the Warrant are not detachable unless and until the
Note is converted in accordance herewith. Exercise of certain
rights under the Warrant are expressly subject to certain
conditions contained therein and herein.
At the expiration of the later of (a) six months from the
date of the Note or (b) September 1, 1999, the Holder of this
Note is entitled, at its option, to convert this Note into fully
paid and non-assessable shares of restricted Common Stock of the
Obligor at the conversion price of $2.60 per share (the
"Conversion Price"), subject to such adjustment or adjustments,
if any, of such Conversion Price and the Common Stock issuable
upon conversion, upon surrender of this Note, duly endorsed or
assigned to the Obligor or in blank, to the Obligor, with the
conversion notice attached hereto, or accompanied by a separate
written notice substantially in the form of such conversion
notice, duly executed by the Holder and stating that the Holder
hereof elects to convert this Note, or if less than the entire
principal amount hereof is to be converted (but not less than
$25,000 increments), the portion hereof to be converted, all in
accordance with the provisions of the Subscription Agreement.
The Warrant may only be exercised if the full principal amount of
this Note is converted in accordance with this paragraph. No
fractional shares will be issued on
<PAGE>
conversion, but instead of any fractional interest, the Obligor
shall pay a cash adjustment. If the Company shall, prior to the
conversion or payment of the Note in full, (a) declare a dividend
or make a distribution on its Common Stock payable in shares of
its Common Stock, (b) subdivide its outstanding shares of Common
Stock into a greater number of shares of Common Stock, or
(c) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock, or (d) issue any shares of
capital stock of the Company by reclassification or capital
reorganization of its shares of Common Stock, then the conversion
privilege and the Conversion Price in effect immediately prior to
such action shall be adjusted so that the Holder of a Note
thereafter converted shall be entitled to receive the number and
kind of shares of Common Stock or other Capital Stock which the
Holder would have owned or have been entitled to receive
immediately after such action had the Holder converted the Note
immediately prior to the record date in the case of (a), or the
effective date in the case of (b), (c) or (d).
The Company shall prepare and, no sooner than nine months
and no later than twelve months after the date hereof, file with
United States Securities and Exchange Commission (the "SEC"), an
appropriate registration statement to effect a registration of
the Registrable Securities (as defined below) covering the resale
of the Registrable Securities issuable to Holder upon conversion
of this Note, which registration statement, to the extent
allowable under the Securities Act of 1933, as amended, and the
rules promulgated thereunder (including Rule 416), shall state
that such registration statement also covers such indeterminate
numbers of additional shares of Common Stock as may become
issuable upon conversion of the Note to prevent dilution
resulting from stock splits, stock dividends or similar
transactions. The Company shall use its best efforts to obtain
effectiveness of the registration statement as soon as
practicable. For purposes of this Agreement, the term
"Registrable Securities" means the shares of Common Stock issued
or issuable upon conversion of the Note and any shares of capital
stock issued or issuable as a dividend on or in exchange for or
otherwise with respect to any of the foregoing. All reasonable
expenses, other than underwriting discounts and commissions,
incurred by the Company in connection with registrations, filings
or qualifications pursuant to this paragraph, including without
limitation, all registration, listing and qualification fees,
printers and accounting fees, and the fees and disbursements of
counsel for the Company, shall be borne by the Company.
Obligor may issue other indebtedness from time to time prior
to or hereafter that has a senior ranking to this Note in
priority of payment and this Note will be subordinate in right of
payment thereto. In the event any action is taken to collect or
enforce the indebtedness evidenced by this Note (the
"Indebtedness") or any part thereof, the Obligor agrees to pay,
in addition to the principal and interest due and payable hereon,
all costs of collecting this Note, including reasonable
attorneys' fees and expenses. These costs shall include any
expenses incurred by the Purchaser in any bankruptcy,
reorganization, or other insolvency proceeding.
No delay or omission of any holder in exercising any right
or rights, shall operate as a waiver of such right or any other
rights. A waiver on one occasion shall not be construed as a bar
to or waiver of any right or remedy on any future occasion.
The liability of the Obligor under this Note (and the
liability of any endorsers of this Note) shall not be discharged,
diminished or in any way impaired by (a) any waiver by Purchaser
or failure to enforce or exercise rights under any of the terms,
covenants or conditions of this Note, (b) the granting of any
renewal, indulgence, extension of time to Obligor, or any other
obligors of the Indebtedness, or (c) the addition or release of
any person or entity primarily or secondarily liable for the
Indebtedness.
In no event shall the interest rate charged or received
hereunder at any time exceed the maximum interest rate permitted
under applicable law. Payments of interest received by Purchaser
hereunder which
2
<PAGE>
would otherwise cause the interest rate hereunder to exceed such
maximum interest rate shall, to the extent of such excess, be
deemed to be (and deemed to have been contracted as being)
prepayments of principal and applied as such.
This Note shall be binding upon the undersigned and its
successors and assigns and shall inure to the benefit of
Purchaser, its successors and assigns. Every person and entity at
any time liable for the payment of this Note hereby waives
demand, presentment, protest, notice of protest, notice of
nonpayment due and all other requirements otherwise necessary to
hold them immediately liable for payment hereunder.
This Note is governed by and shall be construed and enforced
in accordance with Nevada law.
Time is of the essence with respect to all of the terms and
provisions of this Note.
CASINOVATIONS INCORPORATED
By: _______________________________
Its:_______________________________
3
THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE
OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAW. THIS WARRANT OR SUCH SHARES MAY
NOT BE SOLD, DISTRIBUTED, PLEDGED, OFFERED FOR SALE,
ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF UNLESS:
(A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH ACT AND APPLICABLE STATE SECURITIES LAW COVERING
ANY SUCH TRANSACTION INVOLVING SAID SECURITIES; (B) THE
COMPANY (DEFINED BELOW) RECEIVES AN OPINION OF LEGAL
COUNSEL FOR THE HOLDER OF THIS WARRANT STATING THAT
SUCH TRANSACTION IS EXEMPT FROM REGISTRATION AND SUCH
OPINION IS IN FORM AND SUBSTANCE REASONABLY
SATISFACTORY TO THE COMPANY AND FROM COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY; OR (C) PURSUANT TO RULE
144 UNDER SUCH ACT.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
CASINOVATIONS INCORPORATED
This is to certify that, for value received,
____________________________ (the "Holder") is entitled, during a
specified period of time as set forth in Section 3 herein (the
"Exercise Period"), to purchase from Casinovations Incorporated,
a Washington corporation (the "Company"), ________ fully paid and
nonassessable shares of the Company's common stock, par value
$0.001 per share (the "Common Stock"), at an exercise price per
share as set forth in Section 1 herein (the "Exercise Price")
(such number of shares and the Exercise Price being subject to
adjustment as provided herein). The term "Warrant," as used
herein, refers to this Warrant to Purchase Shares of Common
Stock, the term "Warrant Shares," as used herein, refers to the
shares of Common Stock purchasable hereunder, and the term
"Parties," as used herein, refers collectively to the Holder and
the Company. This Warrant is issuable only as part of a Unit or
Units consisting of that certain $______,000 principal amount
9.5% Convertible Note Due 2004 dated as of the same date hereof
to Holder (as "Purchaser") and the Company (as "Obligor")
(collectively hereinafter the "Convertible Note"). Each Unit
shall consist of a This Warrant is only exercisable after
conversion of the Convertible Note.
TERMS AND CONDITIONS
This Warrant is subject to the following terms, provisions,
and conditions:
1. EXERCISE PRICE. The Exercise Price shall be $3.00 per
share.
2. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT
FOR SHARES. Subject to the provisions hereof, this Warrant may
be exercised by the Holder, in whole or in part (but not less
than 1,000 share increments), by the surrender of this Warrant,
together with an exercise agreement in the form attached hereto
(the "Exercise Agreement"), duly completed and executed by the
Holder, to the Company during normal business hours on any
business day at the Company's principal executive offices (or
such
<PAGE>
other location as the Company may designate by notice to the
Holder); and upon (a) the payment to the Company in cash, by
certified or official bank check or by wire transfer for the
account of the Company in the amount of the Exercise Price
multiplied by the number of Warrant Shares for which the Warrant
is being exercised.
The Warrant Shares so purchased shall be deemed to be
issued to the Holder as the record owner of such Warrant Shares,
as of the close of business on the date on which this Warrant
shall have been surrendered, the completed Exercise Agreement
shall have been delivered, and payment shall have been made for
such Warrant Shares as set forth above. Certificates for the
Warrant Shares so purchased, representing the aggregate number of
shares specified in the Exercise Agreement, shall be delivered to
the Holder within a reasonable time, not exceeding ten (10)
business days, after this Warrant shall have been so exercised.
The certificates so delivered shall be in such denominations as
may be reasonably requested by the Holder and shall be registered
in the name of the Holder or such other name as shall be
designated by the Holder. If this Warrant shall have been
exercised only in part, then, unless this Warrant has expired,
the Company shall, at its expense, at the time of delivery of
such certificates, deliver to the Holder a new warrant
representing the number of Warrant Shares with respect to which
this Warrant shall not then have been exercised.
3. EXERCISE PERIOD. This Warrant may be exercised any
time after August 1, 1999, and before 2:00 p.m., Las Vegas,
Nevada time, on February 1, 2001 (the "Exercise Period").
4. CONDITIONS PRECEDENT, CALL AND REDEMPTION.
Notwithstanding anything else herein to the contrary,
(a) The Warrant is not exercisable unless Holder has
exercised fully the conversion option under the Convertible
Note.
(b) This Warrant may be called and redeemed, if not
previously exercised, after the Company gives written notice
to Holder of the Company's election to call and redeem (the
"Redemption Notice") the Warrant and if, within thirty (30)
days of such Redemption Notice, Holder has not exercised the
Warrant pursuant to the terms hereof. In no event may the
Company elect to redeem the Warrant prior to February 1,
2000. In the event of such redemption, the Company must pay
to Holder consideration equal to the par value of the shares
issuable pursuant to the Warrant.
5. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby
covenants and agrees as follows:
(a) SHARES TO BE FULLY PAID. All Warrant Shares
shall, upon issuance in accordance with the terms of this
Warrant, be validly issued, fully paid, and non-assessable.
(b) RESERVATION OF SHARES. During the Exercise
Period, the Company shall at all times have authorized, and
reserved for the purpose of issuance upon exercise of this
Warrant, a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.
(c) SUCCESSORS AND ASSIGNS. This Warrant shall be
binding upon any entity succeeding to the Company by merger,
consolidation, or acquisition of all or substantially all
the Company's assets.
6. ADJUSTMENT PROVISIONS. During the Exercise Period, the
Exercise Price and the number of Warrant Shares shall be subject
to adjustment from time to time as provided in this Section 6.
If the Company shall, prior to the conversion or payment of the
Note in full, (a) declare a dividend or make a
-2-
<PAGE>
distribution on its Common Stock payable in shares of its Common
Stock, (b) subdivide its outstanding shares of Common Stock into
a greater number of shares of Common Stock, or (c) combine its
outstanding shares of Common Stock into a smaller number of
shares of Common Stock, or (d) issue any shares of capital stock
of the Company by reclassification or capital reorganization of
its shares of Common Stock, then the conversion privilege and
Exercise Price in effect immediately prior to such action shall
be adjusted so that the Holder shall be entitled to receive the
number and kind of shares of Common Stock or other Capital Stock
which the Holder would have owned or have been entitled to
receive immediately after such action had the Holder exercised
the Warrant immediately prior to the record date in the case of
(a), or the effective date in the case of (b), (c) or (d). In
the event that any adjustment of the Exercise Price as required
herein results in a fraction of a cent, such Exercise Price shall
be rounded up to the nearest cent.
7. PAYMENT OF EXPENSES. The Company and the Holder shall
each be responsible for their own costs and expenses payable in
connection with (a) the negotiation, preparation, execution and
delivery of this Agreement and the other agreements to be
executed in connection herewith; and (b) the issuance of
certificates for Warrant Shares upon the exercise of this
Warrant. The Company shall pay any issuance tax in connection
with the issuance of certificates for Warrant Shares; provided,
however, that the Holder shall be responsible for any income or
other taxes in connection with such issuance.
8. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. This
Warrant shall not entitle the Holder to any voting rights or
other rights as a stockholder of the Company. No provision of
this Warrant, in the absence of affirmative action by the Holder
to purchase Warrant Shares, and no mere enumeration herein of the
rights or privileges of the Holder, shall give rise to any
liability of such Holder for the Exercise Price or as a
stockholder of the Company, whether such liability is asserted by
the Company or by creditors of the Company.
9. TRANSFER, EXCHANGE, AND REPLACEMENT OF WARRANT. This
Warrant, nor any interest in this Warrant, may be sold,
distributed, assigned, offered, pledged or otherwise transferred
without the express written consent of the Company.
(a) EXCHANGE OF WARRANTS; REPLACEMENT OF WARRANTS.
This Warrant is exchangeable upon the surrender hereof by
the Holder to the Company at its office for new warrants of
like tenor and date representing in the aggregate the right
to purchase the number of shares of Common Stock purchasable
hereunder, each of such new Warrants to represent the right
to purchase such number of shares of Common Stock (not to
exceed the aggregate total number purchasable hereunder) as
shall be reasonably designated by the Holder at the time of
such surrender. Upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft,
destruction, or mutilation of this Warrant, and, in case of
loss, theft or destruction, of indemnity, or security
reasonably satisfactory to it, and upon, surrender and
cancellation of this Warrant, if mutilated, the Company will
make and deliver a new warrant of like tenor, in lieu of
this Warrant.
(b) CANCELLATION; PAYMENT OF EXPENSES. Upon the
surrender of this Warrant in connection with any transfer,
exchange, or replacement as provided in this Section 9, this
Warrant shall be promptly canceled by the Company. The
Company and the Holder shall each be responsible for their
own costs and expenses payable in connection with the
preparation, execution, and delivery of new warrants
pursuant to this Section 9. The Holder shall be responsible
for any tax which may be payable in connection with any
transfer of a certificate for Warrant Shares.
(c) REGISTRAR. The Company shall maintain, at its
principal executive offices (or such other location as the
Company may designate by notice to the Holder), a registrar
for this
-3-
<PAGE>
Warrant, in which the Company shall record the name and
address of the person in whose name this Warrant has been
issued, as well as the name and address of each transferee
and each prior owner of this Warrant.
10. AMENDMENTS. No amendment or modification of this
Warrant shall be deemed effective unless and until such amendment
or modification is an express writing executed by both of the
Parties.
11. GOVERNING LAW. This Warrant shall be governed by and
construed and enforced in accordance with the internal laws of
the State of Nevada without regard to the body of law controlling
conflicts of law. The parties hereto hereby submit to the
exclusive jurisdiction of the courts located in Las Vegas,
Nevada, with respect to any dispute arising under this Warrant
and the transactions contemplated hereby.
12. REGISTRATION RIGHTS.
(a) MANDATORY REGISTRATION. The Company shall prepare
and, no sooner than nine months and no later than twelve
months after the Issuance Date, file with United States
Securities and Exchange Commission (the "SEC"), an
appropriate registration statement to effect a registration
of the Registrable Securities (as defined below) covering
the resale of the Registrable Securities underlying this
Warrant, which registration statement, to the extent
allowable under the Securities Act of 1933, as amended, and
the rules promulgated thereunder (including Rule 416), shall
state that such registration statement also covers such
indeterminate numbers of additional shares of Common Stock
as may become issuable upon conversion of the Warrants (i)
to prevent dilution resulting from stock splits, stock
dividends or similar transactions or (ii) by reason of
changes in the Exercise Price in accordance with the terms
of this Warrant. The Company shall use its best efforts to
obtain effectiveness of the registration statement as soon
as practicable. For purposes of this Agreement, the term
"Registrable Securities" means the Warrant Shares issued or
issuable and any shares of capital stock issued or issuable
as a dividend on or in exchange for or otherwise with
respect to any of the foregoing.
(b) OBLIGATIONS OF THE HOLDER. It shall be a
condition precedent to the obligations of the Company to
complete the registration pursuant to this Warrant with
respect to the Registrable Securities of the Holder that
such Holder shall furnish to the Company such information
regarding itself, the Registrable Securities held by it and
the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to
effect the registration of such Registrable Securities and
shall execute such documents and otherwise cooperate with
the Company as reasonably requested by the Company in
connection with the preparation and filing of the
registration statement. At least three (3) business days
prior to the first anticipated filing date of the
Registration Statement, the Company shall notify the Holder
of the information the Company requires from each such
Holder.
(c) EXPENSE OF THE REGISTRATION. All reasonable
expenses, other than underwriting discounts and commissions,
incurred by the Company in connection with registrations,
filings or qualifications pursuant to this Section 12,
including without limitation, all registration, listing and
qualification fees, printers and accounting fees, and the
fees and disbursements of counsel for the Company, shall be
borne by the Company.
-4-
<PAGE>
13. EXPIRATION DATE. This Warrant shall expire and become
null and void and of no further force or effect at 5:00 p.m. Las
Vegas, Nevada time on February 1, 2001.
In Witness Whereof, the Company has caused this Warrant to
be signed by its duly authorized officer.
Casinovations Incorporated,
a Washington corporation
By:_______________________________
Name:________________________
Title:_______________________
Date:_____________________________
-5-
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<PERIOD-END> MAR-31-1999
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