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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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OR
TRANSITION REPORT PURSUANT TO 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 333-31373
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CASINOVATIONS INCORPORATED
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(Name of small business issuer in its charter)
Washington 91-1696010
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(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
6744 S. Spencer Street, Las Vegas, Nevada 89119
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(Address of principal executive offices) (Zip
Code)
Registrant's telephone number (702) 733-7195
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
N/A N/A
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Securities registered pursuant to Section 12(g) of the Act:
N/A
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(Title of class)
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Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
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Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K is not contained in this
form, and no disclosure will be contained, to the best of the
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent
fiscal year. $ 29,670
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State the aggregate market value of voting stock held by
non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of
such common equity, as of a specified date within the past
60 days. $9,355,045 (as of January 31, 1999)
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State the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $.001 par value 7,295,420 shares as of
January 31, 1999
DOCUMENTS INCORPORATED BY REFERENCE
None.
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CAUTIONARY NOTICE
This Annual Report of Casinovations Incorporated on Form 10-
KSB contains forward-looking statements in which the management
of Casinovations Incorporated shares its knowledge and judgement
about factors that it believes may materially affect performance
of Casinovations Incorporated in the future. Terms expressing
future expectations, outlook potential and anticipated growth in
the gaming industry, revenues and earnings, and like expressions
typically identify such statements.
All forward-looking statements, although made in good faith,
are subject to the uncertainties inherent in predicting the
future. They are necessarily speculative, and factors such as
unusual production problems, breakdown of quality control,
competitive pressures, customer dissatisfaction, failure to gain
new product acceptance by potential customers or approval by
regulatory authorities, proscription of gaming in jurisdictions
where it had been lawful, the unexpected rejection of legalized
gaming in new jurisdictions, onerous taxation and other adverse
government action, unusual risks attending foreign transactions,
Year 2000 problems and general deterioration in economic
conditions may cause results to differ materially from any that
are projected.
Forward-looking statements speak only as of the date they
are made, and readers are warned that Casinovations Incorporated
undertakes no obligation to update or revise such statements to
reflect new circumstances or unanticipated events as they occur.
Readers are urged to carefully review and consider
disclosures made by Casinovations Incorporated in this and other
reports that discuss factors germane to the business of
Casinovations Incorporated. See Part II. "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors and Forward Looking Statements."
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Casinovations Incorporated, a Washington corporation (the
"Company"), maintains its principal offices and manufacturing
facilities at 6744 S. Spencer Street, Las Vegas, Nevada 89119.
Its telephone number and facsimile number are (702) 733-7195 and
(702) 733-7197, respectively. The Company was incorporated in
the State of Washington on September 20, 1995. At its Annual
Meeting of Stockholders scheduled for March 29, 1999, the Company
is seeking stockholder approval to reincorporate in Nevada.
The Company's primary business is the development,
manufacturing and marketing of various gaming concepts and
products, including the Random Ejection Shuffler (the
"Shuffler"), certain table game concepts, including the Fantasy
21 table game ("Fantasy 21"), which are currently marketed by the
Company as the "Fun Pit Collection," and the SecureDrop Slot
Accounting System ("SecureDrop").
PRODUCTS
As part of its business strategy, the Company has developed
various gaming concepts and products designed to increase
security, productivity and profits for the global gaming
industry. The Company's products are protected under various
pending patents, patents, copyrights and trademarks. The
following is a brief description of some of the Company's more
important products and concepts.
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SHUFFLERS
RANDOM EJECTION SHUFFLER. The Shuffler is an automatic
playing card shuffler that utilizes a random number generator and
other features to enhance the card shuffle. The Shuffler will
shuffle one to six decks. 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 selects playing cards once rather than
shuffling the playing cards repeatedly, the Shuffler reduces the
time required to shuffle playing cards. Domestically, the
Company places the Shuffler in casinos on a lease basis, charging
lease fees based on the number of decks shuffled, which the
Company believes is desirable to the Company's customers.
Internationally, the Company intends to sell the Shuffler to
customers. The Company owns the Shuffler and manufactures the
Shuffler in Las Vegas. The Company received final regulatory
approval for the Shuffler from both the Nevada (December 1998)
and Mississippi (January 1999) gaming authorities and has begun
to place the Shuffler in several Nevada and Mississippi casinos.
As of March 1999, the Company has completed production of
approximately 170 units of the Shuffler.
PAIGOW TILE SHUFFLER. Through an agreement with Jinchun
International, Inc., the Company acquired the rights to market
and distribute the Paigow Tile Shuffler. The Paigow Tile
Shuffler is intended to increase playing efficiency and game
integrity by shuffling one set of tiles while another set of
tiles is in play. The Paigow Tile Shuffler shuffles the tiles as
follows: the dealer presses a button, which allows an area in the
table to open. The tiles are then pushed into the opening. The
dealer presses the button again, the opening closes and the
previous batch of tiles that have been shuffled are raised by an
elevator system to table level, all stacked and ready to be
dealt, while the other batch of tiles are being shuffled and
stacked randomly. This allows the dealer to deal out 150% more
games per hour. In the second quarter of 1999, the Company
intends to submit an application to the Nevada State Gaming
Control Board with respect to the approval of the Paigow Tile
Shuffler for placement in Nevada casinos.
FUN PIT COLLECTION
The Company markets various innovative casino table games
under the "Fun Pit Collection." Many of these games are
variations of existing popular table games, such as blackjack and
poker. The table games that comprise the Fun Pit Collection are
either owned by the Company or contracted for by the Company from
third party developers.
FANTASY 21. Fantasy 21 is a jackpot table game variation of
standard Blackjack/21 involving a side wager of one dollar. If
the player plays the side wager and receives a hand of 19, 20, 21
or Blackjack (a "High Hand") during five consecutive hands, the
player is eligible for a jackpot round of up to $25,000 (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
jackpot. Fantasy 21 also offers other jackpots for other
combinations of High Hands. The Company has produced
approximately 50 units of Fantasy 21 and presently intends to
lease such units on a monthly basis.
BONUS BLACKJACK. Bonus Blackjack, a variation of standard
Blackjack/21, 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 "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 wagers. 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.
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WILD JACKPOT POKER. 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. Although
offered at ten casinos located in Canada, Wild Jackpot Poker is
expected to begin regulatory field trials at the Las Vegas area
in Spring 1999.
TWIN BACCARAT. Twin Baccarat 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. 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.
WILD HOLD'EM FOLD'EM. Wild Hold'em Fold'em, a variation of
stud poker, offers the player the feel and decisions of a real-
live 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.
The player places the first wager and receives three cards. The
player then decides to either "Fold'em" and forfeit the side
wager or "Hold'em" and continue. If the player elects to
"Hold'em" and continue, the player must place a second wager
equal to the first wager. The player then receives a fourth card
and must decide again to either "Fold'em" and forfeit the two
wagers or "Hold'em" and continue. If the player elects to
"Hold'em" and continue, the player must place a third wager
double to the first 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.
SECUREDROP SLOT ACCOUNTING SYSTEM AND SECURESCALE DROP CART.
SECUREDROP. SecureDrop uses a "smart bucket" to track
various information from each slot machine through the
installation of a computer chip at the base of each smart bucket.
The information is stored in the computer chip until the smart
bucket is transferred to the count room where the data is
retrieved through a serial interface. The information can then
be relayed to the accounting/management system for control
purposes. Since gaming machine operators lose revenues through
lack of financial accountability, SecureDrop's function is to
provide the operator with realizable information to track the
number of coins in the coin bucket at the time it was removed
from the machine to the time it is brought to the count room. In
order to address the differing needs of its clients, the Company
has created the SecureDrop Series consisting of SecureDrop 2000,
SecureDrop 3000, SecureDrop 4000 and SecureDrop 5000. SecureDrop
2000 offers electronic bucket identification and time stamp, uses
the customer's current scale and interfaces with the customer's
current data system. SecureDrop 3000 offers the same features as
SecureDrop 2000 as well as the ability to read up to five hard
meters in the slot machine. SecureDrop 4000 offers the same
features as SecureDrop 3000, but also separates the coin drop
from the
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bill drop. SecureDrop 5000 possess all of the features of the
preceding levels of the SecureDrop Series as well as the ability
to read selected soft meters in the slot machine.
SECURESCALE DROP CART. As a complement to the SecureDrop
Series, the Company is developing the SecureScale Drop Cart which
consists of a mobile scale and a secure drop area built into the
cart. By installing a secure scale and drop area within the
cart, the information contained in the smart buckets is
immediately recorded, the coins are immediately secured, and the
lag associated with transferring the drop bucket to the count
room is eliminated.
The Company has received final approval of SecureDrop 2000
and SecureDrop 3000 from the Nevada State Gaming Control Board
and is awaiting final approval of SecureDrop 4000, SecureDrop
5000 and the SecureScale Drop Cart. The Company has filed the
appropriate applications for the SecureDrop Series and the
SecureScale Drop Cart with the Mississippi Gaming Commission and
anticipates approval of the same in the second quarter of 1999.
OTHER PRODUCTS.
SAFETY-PEEK CARD. 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 Safety-Peek Card is licensed
to the George C. Matheson Company ("GEMACO") and US Playing Card
Company, under which the Company receives certain royalties. See
Part I. "Item 1. Description of Business - Licensing."
In addition to the foregoing, the Company is in the process
of developing other gaming products and table games designed to
increase security, performance and profitability for the operator.
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's products generally fall within the classification of
"associated equipment". "Associated equipment" is equipment that
is not classified as a "gaming device", but which has an integral
relationship to the conduct of licensed gaming. Regulatory
authorities in some jurisdictions have discretion to require
manufacturers and distributors to meet licensing or suitability
requirements prior to or concurrent with the use of associated
equipment. In other jurisdictions, associated equipment must be
approved by the regulatory authorities in advance of its use at
licensed locations. The Company has obtained, or is seeking to
obtain, approval of its associated equipment in each jurisdiction
in which it conducts business that requires such approval.
NEVADA. The manufacture, sale and distribution of gaming
devices for use or play in Nevada or for distribution outside of
Nevada and the manufacture and distribution of associated
equipment for use in Nevada are subject to (i) the Nevada Gaming
Control Act and the regulations promulgated thereunder
(collectively, the "Nevada Act") and (ii) various local
ordinances and regulations. Such activities are subject to the
licensing and regulatory control of the Nevada Gaming Commission
(the "Nevada Commission"), the Nevada State Gaming Control Board
(the "Nevada Board"), and various local, city and county
regulatory agencies (collectively referred to as the "Nevada
Gaming Authorities").
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The laws, regulations and supervisory practices of the
Nevada Gaming Authorities are based upon declarations of public
policy having as their objectives (i) preventing any involvement,
direct or indirect, of any unsavory or unsuitable persons in
gaming or the manufacture or distribution of gaming devices at
any time or in any capacity; (ii) strictly regulating all
persons, locations, practices and activities related to the
operation of licensed gaming establishments and the manufacture
or distribution of gaming devices and equipment; (iii)
establishing and maintaining responsible accounting practices and
procedures; (iv) maintaining effective controls over the
financial practices of licensees (including requirements covering
minimum procedures for internal fiscal controls and safeguarding
assets and revenues, reliable recordkeeping and periodic reports
to be filed with Nevada Gaming Authorities); (v) preventing
cheating and fraudulent practices and (vi) providing and
monitoring sources of state and local revenue based on taxation
and licensing fees. Changes in such laws, regulations and
procedures, depending upon their nature, could have an adverse
effect on the Company's operations.
Although the Company is not registered with the Nevada Board
as a publicly traded corporation, the Company is currently
required to provide a copy of all periodic reports and other
filings made with the Securities and Exchange Commission to the
Nevada Board. Further, even though applications for the approval
of associated equipment go through a less comprehensive approval
process, the Nevada Board may investigate any individual who has
a material relationship to, or material involvement with, the
Company in order to determine whether such individual is suitable
or should be licensed as a business associate of the Company.
Officers, directors and certain key employees of the Company may
be required to be licensed or found suitable by the Nevada Gaming
Authorities. The Nevada Gaming Authorities may deny an
application for licensing for any cause that they deem
reasonable. A finding of suitability is comparable to licensing.
Both require submission of detailed personal and financial
information, which is followed by a thorough investigation. The
applicant for licensing or a finding of suitability must pay all
the costs of the investigation.
In the event that the Nevada Gaming Authorities were to find
an officer, director or key employee unsuitable for licensing or
unsuitable to continue having a relationship with the Company,
the Company would have to sever all relationships with that
individual. In addition, the Nevada Commission may require the
Company to terminate the employment of any person who refuses to
file appropriate applications. Determinations of suitability or
of questions pertaining to licensing are not subject to judicial
review in Nevada.
In the event that the Company be found to have violated the
Nevada Act, the licenses and/or approvals it holds could be
limited, conditioned, suspended or revoked. In addition, the
Company and the persons involved could be required to pay
substantial fines, at the discretion of the Nevada Board, for
each separate violation of the Nevada Act. The limitation,
conditioning or suspension of any license or approval held by the
Company could (and revocation of any license or approval would)
materially adversely affect the Company's operations.
As for security holders of the Company, any beneficial
holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application,
be investigated, and have his or her suitability as a beneficial
holder of the Company's voting securities determined if the
Nevada Board finds reason to believe that such ownership would
otherwise be inconsistent with the declared policies of the State
of Nevada. The applicant must pay all costs of investigation
incurred by the Nevada Gaming Authorities in conducting any such
investigation. Any person who fails or refuses to apply for a
finding of suitability or a license within thirty days after
being ordered to do so by the Nevada Commission or the Chairman
of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after
request, fails to identify the beneficial owner.
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With respect to its current products, the Company has
received associated equipment approval from the Nevada Gaming
Authorities for the Shuffler, Fantasy 21, Bonus Blackjack,
Danny's Jackpot Dice, Wild Hold'em Fold'em, SecureDrop 2000 and
SecureDrop 3000. Although the Company has not yet received final
approval for Twin Baccarat and Wild Jackpot Poker, the Company
will be conducting field trials for these products during the
second quarter of 1999.
In order to receive final approval of the Shuffler, the
Company repurchased from Steven L. Forte, a former employee and
director of the Company, and Cheryl Forte (i) 848,682 shares of
the Company's common stock (the "Forte Shares"); (ii) option to
purchase 20,000 shares of the Company's common stock; and
(iii) royalty rights on sales of the Shuffler, Fantasy 21 and the
Safety-Peek playing card (the "Forte Transaction"). As
conditions on the final approval of the Shuffler, the Company is
required to, among other things, submit a semi-annual report
summarizing any interaction with Steven Forte and submit copies
of periodic filings made with the Securities and Exchange
Commission to the Nevada Board.
As consideration, the Company executed a promissory note in
favor of Steven and Cheryl Forte in the principal amount of
$2,351,705 (the "Forte Note"), a security agreement in favor of
Steven and Cheryl Forte granting a first security interest in the
patents for the Shuffler, Fantasy 21 and the Safety-Peek playing
card, and a pledge agreement in favor of Steven and Cheryl Forte
whereby the Company pledged the Forte Shares as security for the
Forte Note. In December 1998, the Company negotiated the
cancellation of the Forte Note, the security agreement and pledge
agreement, as well as an unrelated pre-existing promissory note
in the principal amount of $130,047.46 (the "Pre-existing Forte
Note"), in exchange for $1,250,000 to be paid in three
installments of $500,000 on December 7, 1998, $500,000 on
December 28, 1998 and $250,000 on January 15, 1999. Upon payment
of the $1,250,000, the Company cancelled the Forte Note, the
security agreement, the pledge agreement and the Pre-existing
Forte Note and received a release from Steven and Cheryl Forte
releasing the Company from any and all claims related, either
directly or indirectly, to the Forte Transaction. Accordingly,
the Company has retired the Forte Shares from the number of
shares of common stock outstanding.
MISSISSIPPI AND OTHER JURISDICTIONS. The Company currently
distributes products in Mississippi and South Africa and intends
to distribute products in other states and countries. Although
the regulatory schemes in these jurisdictions are not identical,
their material attributes are substantially similar, as described
below.
The manufacture, sale and distribution of associated
equipment and the ownership in each jurisdiction are subject to
various provincial, state, county and/or municipal laws,
regulations and ordinances, which are administered by the
relevant regulatory agency or agencies in that jurisdiction (the
"Gaming Regulators"). These laws, regulations and ordinances
primarily concern the responsibility, financial stability and
character of gaming equipment manufacturers, distributors and
operators, as well as persons financially interested or involved
in gaming or liquor operations.
In many jurisdictions, manufacturing or distributing of
gaming supplies may not be conducted unless proper licenses are
obtained. An application for a license may be denied for any
cause which the Gaming Regulators deem reasonable. In order to
ensure the integrity of manufacturers and suppliers of gaming
supplies, most jurisdictions have the authority to conduct
background investigations of the Company, its key personnel and
significant stockholders. The Gaming Regulators may at any time
revoke, suspend, condition, limit or restrict a license for any
cause deemed reasonable by the Gaming Regulators. Fines for
violation of gaming laws or regulations may be levied against the
holder of a license and persons involved. The Company and its
key personnel have obtained all licenses necessary for the
conduct of the Company's business in the jurisdictions in which
it manufactures and sells its casino
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table game products. Suspension or revocation of such licenses
could have a material adverse effect upon the Company's
operations.
NATIVE AMERICAN GAMING REGULATION. Gaming on Native
American lands is extensively regulated under federal law,
tribal-state compacts and tribal law. The Indian Gaming
Regulatory Act of 1988 ("IGRA") provides the framework for
federal and state control over all gaming on Native American
land. IGRA regulates the conduct of gaming on Native American
lands and the terms and conditions of contracts with third
parties for management of gaming operations. IGRA is
administered by the Bureau of Indian Affairs and the National
Indian Gaming Commission ("NIGC").
IGRA classifies games that may be conducted on Native
American lands into three categories. "Class I Gaming" includes
social games solely for prizes of minimal value, or traditional
forms of Native American gaming engaged in by individuals as part
of, or in connection with, tribal ceremonies or celebrations.
"Class II Gaming" includes bingo, pulltabs, lotto, punch boards,
tip jars, instant bingo, and other games similar to bingo, if
those games are played at the same location as bingo is played.
"Class III Gaming" includes all other commercial forms of gaming,
such as table games, slots, video casino games, and other
commercial gaming (e.g. sports betting and pari-mutuel wagering).
Class I Gaming on Native American lands is within the
exclusive jurisdiction of the Native American tribes and is not
subject to the provisions of IGRA.
Class II Gaming is permitted on Native American lands if
(i) the state in which the Native American lands are located
permits such gaming for any purpose by any person, organization
or entity; (ii) the gaming is not otherwise specifically
prohibited on Native American lands by federal law; (iii) the
gaming is conducted in accordance with a tribal ordinance or
resolution which has been approved by the NIGC; (iv) a Native
American tribe has sole proprietary interest and responsibility
for the conduct of gaming; (v) the primary management officials
and key employees are tribally licensed; and (vi) miscellaneous
other requirements are met.
Class III Gaming is permitted on Native American lands if
the conditions applicable to Class II Gaming are met and, in
addition, the gaming is conducted in conformance with the terms
of a written agreement between a tribal government and the
government of the state within whose boundaries the tribe's lands
are located (a "tribal-state compact").
IGRA requires states to negotiate in good faith with Native
American tribes that seek to enter into a tribal-state compact
for the conduct of Class III gaming. Such tribal-state compact
may include provisions for the allocation of criminal and civil
jurisdiction between the state and the Native American tribe
necessary for the enforcement of such laws and regulations,
taxation by the Native American tribe of such activity in amounts
comparable to those amounts assessed by the state for comparable
activities, remedies for breach, standards for the operation of
such activity and maintenance of the gaming facility, including
licensing, and any other subjects that are directly related to
the operation of gaming activities. The terms of tribal-state
compacts vary from state to state. Tribal-state compacts within
one state tend to be substantially similar to each other. Tribal-
state compacts usually specify the types of permitted games,
entitle the state to inspect casinos, require background
investigations and licensing of casino employees, and may require
the tribe to pay a portion of the state's expenses for
establishing and maintaining regulatory agencies.
Since 1996, the Nevada Gaming Authorities have taken the
position that any Native American tribe operating Class III
gaming within the state of California, absent a valid compact
with the State of California, was doing so illegally. The
legality of certain California Native American compacts is
currently the subject of legal and other challenges.
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UNITED STATES - FEDERAL. The Federal Gambling Devices Act
of 1962 makes it unlawful for a person to manufacture, deliver or
receive gaming machines, gaming machine type devices and
components thereof across interstate lines unless that person has
first registered with the Department of Justice of the United
States.
APPLICATION OF FUTURE OR ADDITIONAL REGULATORY REQUIREMENTS.
In the future, the Company intends to seek the necessary
licenses, approvals and findings of suitability for the Company,
its products and its personnel in other jurisdictions throughout
the United States and the world where significant sales are
anticipated to be made. However, there can be no assurance that
such licenses, approvals or findings of suitability will be
obtained and if obtained will not be revoked, suspended or
conditioned or that the Company will be able to obtain the
necessary approvals for its future products as they are developed
in a timely manner, or at all. If a license, approval or finding
of suitability is required by a regulatory authority and the
Company fails to seek or does not receive the necessary license,
approval or finding of suitability, the Company may be prohibited
from selling it products for use in the respective jurisdiction
or may be required to sell its products through other licensed
entities at a reduced profit to the Company.
MARKETING
As the gaming industry becomes increasingly more
competitive, the Company's strategy is to develop cost-effective
niche products and services that increase the security,
productivity and profits for the global gaming industry. As part
of its strategy, the Company offers to lease or sell its products
to casinos and other lawful gaming establishments.
In order to maintain and expand the market presence of its
products, the Company is committed to providing a high level of
customer service and support. For example, with respect to the
Shuffler, the Company oversees all installations of the Shuffler
as well as provides training sessions on the operation of the
Shuffler. In addition, the Company offers to its clients located
in Nevada and Mississippi the ShuffleMaid service where the
Company provides on-site preventative maintenance, on-site repair
service and delivery of replacement Shufflers.
COMPETITION
The gaming industry is extremely competitive. Although the
Company has assembled an experienced marketing team that uses its
knowledge of the gaming industry to tailor the Company's products
and services to the needs of the gaming industry, the Company
competes with many established companies that possess resources
substantially greater than those of the Company. Generally, the
Company competes with other companies that 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.
Even though the Company's overall strategy is to compete on
the basis of quality and price, the competitive pressures of the
gaming industry will require the Company to invest in additional
research and development. The constant need to update and
innovate may result in increased costs for and reduced margins on
the Company's products and services.
MANUFACTURING
Until March 1999, the Company maintained a manufacturing
facility in Boise, Idaho for the production of the Shuffler and
Fantasy 21. In March 1999, the Company relocated the substantial
portion of its manufacturing facilities to its principal offices
in Las Vegas, Nevada. Fantasy 21 is produced in
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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, as
of March 1999, the Company has completed production of
170 units and has obtained components to produce approximately
350 additional units. 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 River Electronics of Las Vegas, Nevada,
both of which have over fifteen years and twenty years of
experience, respectively, in the gaming industry. The Company has
produced 200 units of SecureDrop and anticipates producing another
1,000 units by April 1999. Since the Company has licensed the
rights to the Safety-Peek Card to GEMACO and the US Playing Card
Company, the Company does not have manufacturing facilities for
this product.
RESEARCH AND DEVELOPMENT
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
$200,611, $464,304 and $244,117 for the years ended December 31,
1998, 1997 and 1996, respectively. These funds were expended on
engineering, tooling, parts and other related expenditures. To
develop innovative and competitive products, the Company intends
to emphasize research and development of new products as funding
and cash flow allow.
DISTRIBUTION
The Company presently intends to market and distribute its
products (1) directly through the Company's sales force;
(2) through distributors with a significant market presence in
certain specified markets; or (3) through original equipment
manufacturers ("OEM's"). An OEM is independent manufacturer who
utilizes and incorporates certain component parts or systems
manufactured by third parties, such as the Company, in the
manufacturing and/or assembling of products.
As a means of increasing the global exposure of the
Company's products, the Company entered into various exclusive
distribution agreements. The Company currently has an exclusive
five-year distributorship agreement with Sodak Gaming, Inc.
("Sodak") whereby the Company grants Sodak a certain exclusive
territory and offers 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 the Miss Marquette Riverboat and Casino, Marquette, Iowa.
The Company also has an exclusive five-year distributorship
agreement with RGB SDN BHD, a Malaysia corporation, whereby the
Company offers to RGB SDN BHD a discount similar to that given to
Sodak for 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 and Hong Kong. The territory specifically excludes
Japan, Australia and New Zealand which will be treated as common
distributor areas. Additionally, the Company has an exclusive
five-year distributorship agreement with H. Joel Rahn (company
name to be designated). The Company offers to H. Joel Rahn a
discount similar to that given to Sodak for a territory
consisting of South America, Central America, the Caribbean
Islands, the State of Florida and Cruise Ships worldwide,
excluding Cruise Ships based in Malaysia, Singapore, Hong Kong
and the Bahamas. The Company has also entered into an exclusive
five-year distributorship agreement with Belgian 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.
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LICENSING
The Company has granted joint exclusive licenses to GEMACO
and to The US Playing Card Company 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. Pursuant to
the terms of the license agreement, the Company agreed to pay
Technology Development Center, LLC (i) $50,000 in five monthly
installments beginning on November 14, 1997 and (ii) 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 licensed product sold. On July 31, 1998, the
Company and Technology Development Center, LLC amended the
license agreement 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 interest into 20,500 Common
Shares at a conversion rate of $2.50 per Common Share. Through
this amendment, the Company reduced its cash payment requirements
and related expenses.
INTELLECTUAL PROPERTY RIGHTS
The Company has secured and endeavors to secure, to the
extent possible, exclusive rights in its products and games,
primarily through federal and foreign intellectual property
rights, such as patents and trademarks. The United States Patent
and Trademark Office has issued patents to the Company or its
predecessors covering the Shuffler, Fantasy 21 and SecureDrop.
The Company has applied for various other patents with respect to
other concepts and products. Further, in order to protect
potential foreign sources of income, the Company has filed patent
applications and trademark applications in strategically selected
foreign countries. There can be no assurance that any of the
pending U.S. or foreign patent or trademark applications will
issue as patents or trademark registrations, respectively, or
that any of these rights will not be infringed by others or that
already issued patents or trademark registrations will not be
invalidated or canceled. None of the foregoing measures provides
assurance that the Company's proprietary games or the concepts
incorporated in the games could not be successfully duplicated by
third parties. Third parties could infringe on the Company's
rights, or the Company's proprietary products and games, and
could be successfully duplicated without infringing on the
Company's legal rights. Many elements incorporated in the
Company's proprietary products and games are in the public domain
or otherwise not susceptible to legal protection, and the steps
taken by the Company will not, in and of themselves, preclude
competition with the Company's proprietary products and games.
EMPLOYEES
As of February 28, 1999, the Company had 32 full-time
employees. The Company will, as operations demand, sub-contract
the balance of its employment needs through independent
contractors.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its principal offices and manufacturing
facilities at 6744 S. Spencer Street, Las Vegas, Nevada 89119.
The lease is for approximately 19,000 square feet with a monthly
cost of approximately $11,600. The Company believes that its
existing leased premises are sufficient for its
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current business operations. As described in Item 1. "Description
of Business-Manufacturing," the Company relocated the substantial
portion of its manufacturing facilities from Boise, Idaho to Las
Vegas, Nevada in March 1999.
ITEM 3. LEGAL PROCEEDINGS
On November 18, 1998, a complaint, JEWISH FEDERATION OF LAS
VEGAS V. CASINOVATIONS INCORPORATED (Eighth Judicial District
Court, Case No. A396031), was filed against the Company by the
owner of the premises at which the Company formerly located its
principal offices. This complaint alleges breach of contract
with respect to the lease agreement by and between the Company
and the owner when the Company vacated the premises on or about
June 1, 1998. The Company vacated the premises on grounds that
the premises were sinking and structurally unsound. Although the
owner has requested damages in excess of $10,000 and applicable
attorneys' fees, the matter has been assigned to arbitration.
Management intends to vigorously defend the Company against all
allegations.
On December 22, 1998, the Company received a letter from a
stockholder which purchased 200,000 shares of the Company's
common stock (the "Disputed Shares") issued in conjunction with
the Offering (as defined below). Although the stockholder's
subscription agreement was accepted by the Company on December 4,
1998 and although the Disputed Shares were issued to the
stockholder on December 14, 1998, the stockholder asserts that it
has the right to rescind said subscription agreement and that it
desires to rescind said subscription agreement. Since the receipt
of the letter, the Company, First Global Securities, Inc., the
placement agent involved with the sale of the Disputed Shares
("First Global"), and Noble Trenham, President of First Global,
have held certain discussions with the stockholder regarding
the matter. On February 26, 1999, the stockholder's counsel
sent a written demand for return of the subscription amount by
March 2, 1999 or a lawsuit would be filed against the Company,
the Company's directors, First Global and Mr. Trenham. As a
result of the demand made by the stockholder, the Company has
obtained an indemnification from First Global and Mr. Trenham.
First Global and Mr. Trenham have agreed to indemnify, defend and
hold harmless the Company of and from any and all claims, losses,
liens, expenses, costs, damages, obligations and liabilities of
any nature whatsoever incurred by the Company, including, without
limitation, reasonable attorneys' fees and costs incurred by the
Company, as a result of, or in connection with and all demands,
settlements, rulings, orders, findings or judgments against the
Company related to, the Disputed Shares and any other related
matter, including, but not limited to, the repayment of the funds
paid by the stockholder for the Disputed Shares and the return of
the commission paid by the Company to First Global with respect
to the Disputed Shares. On March 24, 1999, the Company agreed
to rescind the subscription on or before April 30, 1999, in
exchange for the Company's payment of $450,000. Mr. Trenham and
First Global have agreed to pay $50,000 to the stockholder. The
Company has reserved all rights to seek indemnification against
Mr. Trenham and First Global.
On March 18, 1999, Shuffle Master, Inc. ("Shuffle Master")
filed a complaint in the District Court, Clark County, State of
Nevada (Case No. A400777) 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. Management believes that the complaint is without
merit and intends vigorously to defend the allegations contained
therein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
The Company's common stock is not presently traded on a
public trading market, although the Company anticipates that
trading in the over-the-counter market will begin in the second
quarter of 1999.
COMMON STOCK, OPTIONS AND WARRANTS
As of January 31, 1999, there were 7,295,420 shares of the
Company's common stock outstanding and approximately 430 holders
of the Company's common stock. In connection with the resolution
of the stockholder dispute, the Company may reacquire 200,000
shares by April 30, 1999. See Part II. "Item 3. Legal
Proceedings."
As of December 31, 1998, the Company has issued options to
purchase an aggregate of 855,000 shares of the Company's common
stock. In addition, the Board of Directors of the Company adopted
the Casinovations Incorporated Stock Option Plan (the "Plan").
Under the Plan, which is subject to the approval of the Company's
shareholders, the Company is authorized to issue stock options
for a total up to 500,000 shares of the Company's common stock to
selected officers, directors, employees consultants, advisers,
independent contractors and agents of the Company. With respect
to administration of the Plan, the Board of Directors of the
Company has established a committee consisting of three outside
directors, Bob L. Smith, David E. Sampson and Ronald O. Keil.
In 1996 and 1997, the Company issued four classes of
warrants, Class A, Class B, Class C and Class D. In July 1996,
the Company's Board of Directors authorized the pro rata
distribution of 200,000 Class A Warrants, 200,000 Class B
Warrants and 250,000 Class C Warrants to all record shareholders
of the Company as of July 22, 1996. The Class A Warrants were
exercisable into shares of the Company's common stock at a
price of $3.75 per share, the Class B Warrants at a price of
$4.00 per share and the Class C Warrants at a price of $6.00 per
share. The Class A, Class B and Class C Warrants are exercisable
over a four-year period ending July 2000 and are callable with
thirty-day notice at a price of $.001 per under share of common
stock. Subsequently, in June 1997, the Company's Board of
Directors authorized the distribution of 200,000 Class D Warrants
to certain shareholders for financing purposes. The Class D
Warrants are exercisable into shares of the Company's common
stock at the purchase price of $1.50 per share. Although the
Class D Warrants are exercisable for two years beginning January
31, 1997, all Class D Warrants have been exercised.
In April 1998, certain holders of the Class A Warrants
transferred and assigned a portion of their Class A Warrants to
Richard S. Huson, VIP's Industries, Inc., an entity controlled by
Bob L. Smith, a director of the Company, David Goldsmith, Jay
Willoughby, and Richard Jaslow as a means of securing convertible
debt financing for the Company. On December 31, 1998, the holders
of such convertible debt financing converted their holdings at
a rate of $2.13 per share for an aggregate of 235,012 shares of
the Company's common stock.
On September 11, 1998, the Company's Board of Directors
called the Class B Warrants and Class C Warrants such that the
holders of the Class B Warrants and the Class C Warrants
possessed the right to exercise such warrants at $4.00 and $6.00
per share, respectively, until October 11, 1998. Since no
holders of the Class B Warrants and Class C Warrants exercised
such warrants, the Company issued to all holders of the Class B
Warrants and Class C Warrants $.001 per underlying share of
common stock pursuant to the terms of such warrants. Currently,
only the Class A Warrants are outstanding.
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<PAGE>
In addition to the Class A, Class B, Class C and Class D
Warrants, in connection with the "Offering" (defined below), the
Company agreed to grant First Global Securities, Inc. and Grant
Bettingen, Inc. (collectively, the "Placement Agents") warrants
to purchase 550,000 shares of common stock at an exercise price
of $3.00 per share. Pursuant to the placement agreement dated
September 17, 1998 by and between the Company and the Placement
Agents, as amended January 5, 1999, the Company agreed to grant
the Placement Agents warrants to purchase 332,500 shares of
common stock at an exercise price of $3.00 per share so long as
all of the shares under the Offering were sold by January 30,
1999. Although the Offering has been completed and all the
shares offered pursuant to the Offering have been sold, the
Company has not issued the aforementioned warrants to the
Placement Agents pending a resolution of the matter with a
certain stockholder. See Part I. "Item 3. Legal Proceedings."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its
common stock. The Company presently intends to retain earnings to
finance the operation and expansion of its business and does not
anticipate declaring cash dividends in the foreseeable future.
USE OF PROCEEDS
The Company filed a Registration Statement on Form SB-2
(Registration No. 333-31373) (the "Registration Statement") for,
among other things, the offer and sale of 1,500,000 shares
of the Company's common stock at $2.50 per share (the
"Offering"). In addition, the Registration Statement registered
2,107,973 shares on behalf of certain selling security holders,
consisting of 319,825 shares on behalf of Company officers,
directors and affiliates, 828,177 shares on behalf of persons
who acquired shares in previous private placements and 959,971
shares on behalf of unaffiliated shareholders and 200,000 shares
underlying the Class A Warrants.
On January 30, 1999, the Company concluded the Offering in
which the Company received gross proceeds of $3,794,360. After
the payment of commissions to the Placement Agents, the Company
received net proceeds of $ 3,567,613. The Company allocated the
net proceeds from the Offering as follows: (i) $1,250,000 for the
purposes of canceling, among other things, an indebtedness of
$2,351,705 owed by the Company to Steven and Cheryl Forte; (ii)
$50,000 for the purposes of reducing certain indebtedness owed to
Bob L. Smith, a director and shareholder of the Company; (iii)
$153,000 for the purposes of purchasing additional equipment
and tooling; (iv) $566,600 for inventory; and (v) $1,541,013 for
the purposes of funding working capital and other expenses. In
connection with the resolution of the stockholder dispute, the
Company may reacquire 200,000 shares by April 30, 1999. See Part
II. "Item 3. Legal Proceedings."
For the year ended December 31, 1998, the Company issued
446,416 shares of common stock without registering said shares of
common stock under the Securities Act of 1933, as amended (the
"Securities Act"). All 446,416 shares issued by the Company are
restricted securities. The Company issued the aforementioned
shares of common stock as follows: (i) 30,000 shares in August
1998 as part consideration for the purchase of certain assets of
Gaming 2000, LLC; (ii) 65,250 shares in November 1998 as a result
of the conversion of certain indebtedness owed by the Company;
(iii) 50,000 shares in December 1998 as payment for advertising
services; (iv) 2,000 shares in December 1998 as a gift to
employees of the Company; and (v) 299,166 shares in December 1998
as a result of the conversion of certain indebtedness owed by the
Company. As a result of the issuance of these shares of common
stock, the Company did not receive any cash proceeds.
With respect to the 2,000 shares of common stock issued to
the Company's employees, the Company issued the shares as a gift
such that the issuance did not constitute a "sale", "offer to
sell", "offer
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<PAGE>
for sale", or "offer" as contemplated under Section 2(3) of the
Securities Act. Accordingly, the issuance is exempt from the
registration requirements of Section 5 of the Securities Act. As
for the balance of the 446,416 shares issued by the Company, the
Company relied upon Section 4(2) of the Securities Act in that
the recipients of the shares of common stock were all accredited
investors with pre-existing relationships with the Company.
Accordingly, the issuance of these shares of common stock is
exempt from the registration requirements of Section 5 of the
Securities Act.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 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 activities, vigorous competition in the gaming
industry, dependence on existing management, relocation of
manufacturing facilities, gaming regulations (including actions
affecting licensing), leverage and debt service (including
sensitivity to fluctuations in interest rates), issues related
to the Year 2000, domestic or global economic conditions and
changes in federal or state tax laws or the administration of
such laws.
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 anticipates sales
development and revenue growth to be an operating company.
In December 1998, the Nevada Board issued its approval for
the Company to sell the Shuffler. As of February 22, 1999, the
Company had placed 54 Shufflers under rental contracts and had
commitments for an additional 158 units. The Company has the
majority of the parts required to build an additional 350
Shufflers. Additionally, the Company has received purchase
commitments for an aggregate of 1,200 units of its "SecureDrop"
products. The Company is currently negotiating for tooling and
product sufficient to build 60,000 SecureDrop units in 1999.
The Company believes that customer interest in both the Shuffler
and SecureDrop products continues to be very high.
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 the Class A Warrants. The Company used the proceeds
from the Offering for the payment of operating expenses, funding
of working capital and the reduction of debt. See Part II. "Item
5. Market for Common Equity and Related Stockholder Matters - Use
of Proceeds."
The following discussion summarizes the Company's results
of operations for the years ended December 31, 1998, 1997 and
1996 and the Company's liquidity and capital resources.
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RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES. For the twelve months ended December 31, 1998,
the Company generated total revenues of $29,670 compared to
$13,516 for the twelve months ended December 31, 1997. The
revenues for the twelve months ended December 31, 1998 consisted
of Shuffler rentals of $20,894, Shuffler sales of $3,860,
interest income of $1,215 and distributor's commissions and Fun
Pit Collection rentals of $1,230.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the
twelve months ended December 31, 1998, selling, general and
administrative expenses increased approximately $838,565, or 46%,
to $2,664,815 compared to $1,826,250 for the twelve months ended
December 31, 1997. 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 twelve months ended December 31, 1998, selling, general
and administrative expenses included: salaries and related costs
of $947,318; consulting services of $268,345; cost of gaming
industry shows $140,892; travel and entertainment costs of
$194,952; printing and office expense, including rent of
$332,544; and legal expenses of $135,431. In addition, the
Company had depreciation and amortization of $123,128 and
amortized deferred interest of $0 compared to $40,262 and
$186,000, respectively, for the twelve months ended December 31,
1998 and 1997, respectively.
INTEREST EXPENSE. For the twelve months ended December 31,
1998, the Company incurred interest expenses of $383,189
compared to $329,033 for the twelve months ended December 31,
1997. This increase was primarily attributable to the increased
borrowings of the Company.
OTHER INCOME. For the twelve months ended December 31,
1998, the Company received net proceeds of $2,088,630 from the
sale of common stock and received proceeds of $985,796 from the
issuance of long-term debt. In addition, for the twelve months
ended December 31, 1998, the Company received loans from
shareholders in the amount of $1,368,000 and repaid loans from
shareholders in the amount of $3,006. As a result, the Company
received $4,439,420 in net cash from financing activities.
NET INCOME (LOSS). For the twelve months ended December 31,
1998, the Company had a net loss of $3,373,144, an increase of
$767,073, compared to a net loss of $2,606,071 for the twelve
months ended December 31, 1997. 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 $.53 for the twelve months ended December 31, 1998
compared to $.47 the twelve months ended December 31, 1997.
YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES. For the twelve months ended December 31, 1997,
the Company generated total revenues of $13,516 compared to
$4,253 for the twelve months ended December 31, 1996. These
revenues consisted of card royalties of $2,226, interest income
of $8,290 and the sale of patent rights of $3,000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the
twelve months ended December 31, 1997, selling, general and
administrative expenses increased approximately $848,423, or 87%,
to $1,826,250 compared to $977,827 for the twelve months ended
December 31, 1996. 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 twelve months ended December 31, 1997,
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selling, general and administrative expenses included: salaries
and related costs of $419,101; consulting services of $627,913;
cost of gaming industry shows $151,425; travel and entertainment
costs of $313,475; printing and office expense, including rent of
$166,922; and legal expenses of $72,785. In addition, the
Company had depreciation and amortization of $40,262 and
amortized deferred interest of $186,000 compared to $2,553 and
$46,500, respectively, for the twelve months ended December 31,
1996, respectively.
INTEREST EXPENSE. For the twelve months ended December 31,
1997, the Company incurred interest expenses of $329,033
compared to $414,723 for the twelve months ended December 31,
1996.
OTHER INCOME. For the twelve months ended December 31,
1997, the Company received net proceeds of $1,015,510 from the
sale of common stock and received proceeds of $744,600 from the
sale of long-term debt. In addition, for the twelve months ended
December 31, 1997, the Company received loans from shareholders
in the amount of $120,000 and repaid loans from shareholders in
the amount of $38,866. As a result, the Company received
$1,841,244 in net cash from financing activities.
NET INCOME (LOSS). For the twelve months ended December 31,
1997, the Company had a net loss of $2,606,071, an increase of
$921,344, compared to a net loss of $1,684,727 for the twelve
months ended December 31, 1996. 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 $.47 for the twelve months ended December 31, 1997
compared to $.41 the twelve months ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW. Management is currently developing business plans
and operations such that the Company is expected to cover
operating expenses through cash flow from operations assuming
immediate commencement of normal sales activities. Although the
Company is currently relying upon the proceeds of the Offering
and advances from its principal shareholder for liquidity
requirements, the Company is constantly exploring and evaluating
additional sources of financing.
OFFERING. The Company completed its Offering of common
stock 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 received net proceeds of $2,088,630
during the twelve months ended December 31, 1998. See Part II.
"Item 5. Market for Common Equity and Related Stockholder
Matters." The Company has agreed to rescind the sale of 200,000
shares issued in the Offering. See Part I. "Item 3. Legal
Proceedings."
CONVERTIBLE DEBT. The Company has received proceeds of
$1,800,000 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.
WORKING CAPITAL. At December 31, 1998, the Company had
cash, cash equivalents and investments of $200,749 compared to
$119,389 at December 31, 1997. At December 31, 1998, the
Company's working capital deficit was $632,024 compared to a
deficit of $1,031,024 at December 31, 1997. At December 31,
1998, the Company's current ratio, I.E. the ratio of current
assets to current liabilities, was 0.62:1 compared to 0.26:1 at
December 31, 1997. During the twelve months ended December 31,
1998, the Company relied upon loans from its principal
shareholder and other directors, and other private and
institutional sources of debt and equity capital of $4,442,426.
Until the Company's
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normalized sales levels are achieved, the Company will be relying
upon cash generated from the Offering,loans from the Company's
principal shareholder and other directors, and other private and
institutional sources of debt and equity capital for working
capital purposes.
LEASE FINANCING. As of December 31, 1998, the Company
received proceeds of $947,100 from certain lease financing with
an unrelated leasing company whereby the Company sold and leased
back all of its furniture, equipment and tooling, and 70 units of
the Shuffler.
CASH FLOW. For the year ended December 31, 1998, net cash
used in operating activities was $(3,069,479) compared to
$(1,949,467) for the year ended December 31, 1997. The cash used
in operating activities reflects depreciation and amortization of
$123,128 compared to $40,262 for the year ended December 31,
1997; stock and options used for services of $541,108 compared to
$136,000 for the year ended December 31, 1997; compensation value
of cash stock sales of $0 compared to $177,000 for the year ended
December 31, 1997; stock and option issued for additional
interest of $133,124 compared to $117,332 for the year ended
December 31, 1997; amortization of deferred interest of $0
compared to $186,000 for the year ended December 31, 1997;
increases/decreases in accounts receivable of $(4,003) compared
to $15,327 for the year ended December 31, 1997;
increases/decreases in inventory of $574,369 compared to $181,437
for the year ended December 31, 1997; increases/decreases in
prepaid expenses of $(1,104) compared to $39,276 for the year
ended December 31, 1997; increases/decreases in other assets of
$95,102 compared to $41,600 for the year ended December 31, 1997;
increases/decreases in accounts payable of $368,038 compared to
$335,459 for the year ended December 31, 1997; and
increases/decreases in accrued expenses of $37,479 compared to
$(57,809) for the year ended December 31, 1997.
For the year ended December 31, 1998, net cash from
financing activities was $4,439,420 compared to $1,841,244 for
the year ended December 31, 1997. The increase is primarily
attributable to the proceeds received from the Company's
Offering. The cash from financing activities consisted of
$2,088,630 from the sale of common stock, proceeds of $985,796
from long-term debt, proceeds of $1,368,000 from shareholder
loans and repayment of notes payable of $3,006.
CAPITAL EXPENDITURES. In June 1998, the Company opened
its manufacturing facilities to Boise, Idaho. The Company
entered into a one-year lease for its new 4,000 square foot
manufacturing facility. The Company relocated its manufacturing
operations to its principal offices in Las Vegas, Nevada in
March 1999, at a cost of approximately $5,000. In addition, the
Company has planned expenditures of $300,000 for additional
tooling. For the twelve months ended December 31, 1998, the
Company used net cash in investing activities of $1,288,582
consisting of: acquired plant and equipment valued at $153,473;
increased patents and trademarks by $19,023; and purchased and
retired treasury stock for $1,116,086. For the twelve months
ended December 31, 1997, the Company used net cash in investing
activities of $325,266 consisting of: acquired plant and
equipment valued at $296,156; and increased patents and
trademarks by $29,110.
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
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<PAGE>
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.
In addition, the certain individuals, including three
directors of the Company, entered into a transaction with Randy
D. Sines, a former officer and director of the company, whereby
Mr. Sines would (i) sell to these individuals all of his shares
of the Company's common stock and (ii) transfer to and/or cancel
in favor of the Company certain debts, options and warrants, in
exchange for payment of $1,250,000 from these individuals. The
transaction involved the following items: (i) 885,560 shares of
the Company's common stock (including 470,851 shares with
restrictions imposed by the State of California Department of
Corporations, 326,153 shares restricted under Rule 144 and by
agreement, and 88,556 shares registered pursuant to the
Offering); (ii) options to purchase 20,000 shares of common stock
at $1.50 per share; (iii) options to purchase 175,000 shares of
common stock from the Company's principal shareholder; (iv) a
certain promissory note in the original principal amount of
$150,000; (v) certain warrants; and (vi) certain royalty rights
from the sale of the Shuffler, Fantasy 21 and Safety-Peek.
Although the Company did not pay any portion of the $1,250,000
paid to Mr. Sines, the Company did receive a benefit through the
cancellation of the aforementioned promissory note, options and
royalty rights.
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, cash flow from
operations, cash from private placement of debt 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 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.
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<PAGE>
RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS
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 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.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use
("SOP 98-1"). SOP 98-1 provides authoritative guidance on when
internal-use software costs should be capitalized and when these
costs should be expensed as incurred. Effective January 1, 1998,
the Company adopted SOP 98-1. Costs capitalized by the Company
during the year ended December 31, 1998 in accordance with these
guidelines were not significant.
In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities ("SFAS 133"), which is required to be adopted
in years beginning after June 15, 1999. SFAS 133 will require the
Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on
the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of hedged
assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings.
The Company has not yet determined what the effect of SFAS 133
will be on earnings and the financial position of the Company,
however it believes that it has not to date engaged in
significant transactions encompassed by the statement.
Effective December 31, 1998, the Company adopted SFAS No.
131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 131 superseded SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. SFAS
131 establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim
financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic
areas, and major customers. The adoption of SFAS 131 did not
affect results of operations or financial position. To date, the
Company has operated in one business segment only.
Effective December 31, 1998, the Company adopted the
provisions of SFAS No. 132, Employers' Disclosures about Pensions
and Other Post-retirement Benefits ("SFAS 132"). SFAS 132
supersedes the disclosure requirements in SFAS No. 87, Employers'
Accounting for Pensions, and SFAS No. 106, Employers' Accounting
for Post-retirement Benefits Other Than Pensions. The overall
objective of SFAS 132 is to improve and standardize disclosures
about pensions and other post-retirement benefits and to make the
required information more understandable. The adoption of SFAS
132 did not affect results of operations or financial position.
The Company is in its development stage and has not initiated
benefit plans to date, which would require disclosure under the
statement.
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<PAGE>
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
PROSPECTUS. IN ADDITION TO THE OTHER INFORMATION CONTAINED
HEREIN, INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS.
NO ESTABLISHED 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 of its products. 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 anticipates
sales development and revenue growth beginning with 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.
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. See Part I. "Item 1. Description of Business
- - Regulation."
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, cash flow from operations, proceeds from the sale
of common stock, cash from private placement of debt 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.
INFLUENCE ON ELECTION OF DIRECTORS AND ALL OTHER MATTERS BY
CURRENT OFFICERS AND DIRECTORS. The officers and directors of
the Company own approximately 52.4% of the outstanding common
shares. As a result, the officers and directors of the Company,
through their aggregate ownership of the Common Shares, will 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 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 completed the
development process for some of its gaming products. Although
the market appears to be
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<PAGE>
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. See Part I. "Item 1. Description of Business -
Competition."
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 do may have independent protection of 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
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<PAGE>
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.
See Part I. "Item 1. Description of Business - Intellectual
Property."
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. See Part II.
"Item 5. Market for Common Equity and Related Stockholder Matters
- - Dividend Policy."
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 Steven J. Blad, and Jay L. King and is currently
negotiating employment agreements with several of its 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, the Company's Chairman of the Board of Directors
and certain other directors have made significant loans to the
Company to provide necessary liquidity to the Company. As of
December 31, 1998, such outstanding loans were $1,385,000. 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. The Company intends to list its Common Stock, at
least initially, on the OTC Bulletin Board and, then, upon meeting
the requirements for a NASDAQ listing, on NASDAQ Small Cap Market,
if ever. The Company does 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 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
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<PAGE>
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 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.
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<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Independent Auditors' Report
Balance Sheets at December 31, 1998
Statements of Operations for the Years Ended December 31,
1998 and 1997 and Period from Inception (April 29, 1994) to
December 31, 1998
Statements of Changes in Stockholders' Equity for the Period
from Inception (April 29, 1994) to December 31, 1998
Statements of Cash Flows for the Years Ended December 31,
1998 and 1997 and the Period from Inception (April 29, 1994)
to December 31, 1997
Notes to Consolidated Financial Statements
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Casinovations Incorporated
(A Development Stage Company)
We have audited the balance sheet of Casinovations Incorporated
as of December 31, 1998, 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, 1998. 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, 1998, 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, 1998, in conformity with
generally accepted accounting principles.
James E. Scheifley & Associates, P.C.
Certified Public Accountants
Englewood, Colorado
February 5, 1999
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<PAGE>
<TABLE>
<CAPTION>
CASINOVATIONS INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
<S> <C>
Current assets:
Cash $ 200,749
Accounts receivable, trade 2,810
Accounts receivable - employees 11,347
Inventories 756,662
Prepaid expenses 38,896
--------------
Total current assets 1,010,464
Property and equipment, at cost, net of
accumulated depreciation of $125,380 350,772
Intangible assets, at cost, net of
accumulated amortization of $37,369 157,916
Deferred interest 238,590
Deposits 142,821
--------------
$ 1,900,563
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable - bank $ 197,383
Current portion of leases payable 219,758
Current portion of long term debt 3,232
Accounts payable 810,349
Accrued expenses 40,576
Accrued interest - shareholder loans 59,561
Shareholder loans - due currently 295,755
Customer deposits 15,874
--------------
Total current liabilities 1,642,488
Other long term debt 13,948
Leases payable - non-current 813,138
Shareholder loans 1,089,245
Stockholders' equity:
Common stock, $.001 par value,
20,000,000 shares authorized,
6,767,106 shares issued and outstanding 6,767
Additional paid-in capital 6,676,430
Unpaid subscriptions to common stock (125,000)
Deficit accumulated during development stage (8,216,453)
--------------
(1,658,256)
--------------
$ 1,900,563
==============
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
CASINOVATIONS INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND PERIOD FROM INCEPTION (APRIL 29, 1994) TO DECEMBER 31, 1998
Period from
Inception
(April 29, 1994)
to
December 31, December 31, December 31,
1998 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Sales $ 27,779 $ 2,226 $ 32,740
Interest income 1,216 8,290 11,299
Other income 675 3,000 3,685
---------------- ---------------- ----------------
29,670 13,516 47,724
Other costs and expenses:
Cost of sales 134,199 - 134,199
General and administrative 2,664,815 1,826,250 5,657,599
General and administrative - related parties - - 76,768
Research and development 220,611 464,304 1,391,871
---------------- ---------------- ----------------
3,019,625 2,290,554 7,260,437
---------------- ---------------- ----------------
(Loss) from operations (2,989,955) (2,277,038) (7,212,713)
Interest expense 133,574 34,515 182,869
Interest expense - related parties 249,615 294,518 973,257
---------------- ---------------- ----------------
383,189 329,033 1,156,126
(Loss) before income taxes (3,373,144) (2,606,071) (8,368,839)
Provision for income taxes - - -
---------------- ---------------- ----------------
Net (loss) $ (3,373,144) $ (2,606,071) $ (8,368,839)
================ ================ ================
Basic and diluted (loss) per share $ (0.53) $ (0.47) $ (1.72)
================ ================ ================
Weighted average shares outstanding 6,397,204 5,603,588 4,873,299
================ ================ ================
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
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<TABLE>
<CAPTION>
CASINOVATIONS INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (APRIL 29, 1994) TO DECEMBER 31, 1998
Deficit
Additional Unpaid Accumulated
Common Stock Paid-in Stock During 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 - - - (608,756) (608,756)
Reclassification of partnership losses (152,386) - 152,386 -
---------- ---------- ----------- ---------- ----------- -----------
Balance, December 31, 1995 3,905,000 3,905 369,453 - (552,511) (179,153)
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 $1.50 175,000 175 262,325 262,500
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 - (2,237,238) (43,615)
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
See Accompanying Notes to Financial Statements
</TABLE>
-31-
<PAGE>
<TABLE>
<CAPTION>
CASINOVATIONS INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE PERIOD FROM INCEPTION (APRIL 29, 1994) TO DECEMBER 31, 1998
Deficit
Additional Unpaid Accumulated
Common Stock Paid-in Stock During Develop-
ACTIVITY Shares Amount Capital Subscriptions ment Stage Total
---------- --------- ----------- ------------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
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) (4,843,309) (933,559)
Issuance of stock for cash in public offering:
April 1998 at $2.50 20,000 20 49,980 50,000
May 1998 at $2.50 96,000 96 239,904 240,000
June 1998 at $2.50 40,000 40 99,960 100,000
Julyl 1998 at $2.50 54,000 54 134,946 135,000
August 1998 at $2.50 14,000 14 34,986 35,000
September 1998 at $2.50 23,400 23 58,477 58,500
October 1998 at $2.50 17,000 17 42,483 42,500
November 1998 at $2.50 93,374 93 233,342 233,435
December 1998 at $2.50 571,460 571 1,428,079 1,428,650
Less expenses of offering (234,455) (234,455)
Issuance of stock for services and other consideration:
June 1998 at $2.50 20,000 20 49,980 50,000
Julyl 1998 at $2.50 20,500 21 51,230 51,250
August 1998 at $2.50 30,000 30 74,970 75,000
November 1998 at $2.50 20,000 20 49,980 50,000
December 1998 at $2.50 52,000 52 129,948 (125,000) 5,000
Issuance of stock for conversion of indebtedness:
November 1998 at $2.50 65,250 65 163,060 163,125
December 1998 at $2.50 299,166 299 747,616 747,915
Amortization of unpaid stock subscriptions 66,500 66,500
Compensation value of options issued 310,000 310,000
Forgiveness of shareholder indebtedness 157,063 157,063
Purchase and retirement of treasury stock (848,682) (849) (1,114,737) (1,115,586)
Redemption of common stock warrants (450) (450)
Net (loss) for the year - - - - (3,373,144) (3,373,144)
---------- ---------- ----------- ---------- ------------ ------------
6,767,106 $ 6,767 $6,676,430 $(125,000) $(8,216,453) $(1,658,256)
========== ========== =========== ========== ============ ============
See Accompanying Notes to Financial Statements
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
CASINOVATIONS INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND PERIOD FROM INCEPTION (APRIL 29, 1994) TO DECEMBER 31, 1997
Inception
(April 29, 1994)
to
December 31, 1998 December 31, 1997 December 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net (loss) $ (3,373,144) $ (2,606,071) $ (8,368,840)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 123,128 40,262 167,617
Stock and options issued for services 541,108 136,000 1,452,608
Compensation value of cash stock sales - 177,000 177,000
Stock and options issued for additional interest 133,124 117,332 250,456
Equipment exchanged for services - - 2,903
Amortization of deferred interest - 186,000 232,500
Loss on abandonment of leasehold improvements 3,743 - 3,743
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 4,003 (15,327) (14,157)
(Increase) decrease in inventory (574,369) (181,437) (756,662)
(Increase) decrease in prepaid expenses 1,104 (39,276) (38,896)
(Increase) decrease in deferred interest (238,590) - (238,590)
(Increase) decrease in other assets (95,102) (41,600) (142,821)
Increase (decrease) in accounts payable 368,038 335,459 810,349
Increase (decrease) in accrued expenses 37,479 (57,809) 121,666
----------------- ----------------- -----------------
Total adjustments 303,666 656,604 2,027,716
Net cash (used in) ----------------- ----------------- -----------------
operating activities (3,069,479) (1,949,467) (6,341,125)
----------------- ----------------- -----------------
Cash flows from investing activities:
Acquisition of plant and equipment (153,473) (296,156) (468,876)
Purchase and retirement of treasury stock (1,116,086) (1,116,086)
Increase in patents and trademarks (19,023) (29,110) (194,006)
----------------- ----------------- -----------------
Net cash (used in) investing activities (1,288,582) (325,266) (1,778,968)
----------------- ----------------- -----------------
Cash flows from financing activities:
Common stock sold for cash 2,088,630 1,015,510 4,039,199
Capital contributions by partners - - 402,950
Proceeds from long-term debt 985,796 547,100 1,604,896
Proceeds of shareholder loans 1,368,000 120,000 2,138,168
Repayment of shareholder loans - (38,866) (58,866)
Proceeds from notes payable - 197,500 197,500
Repayment of notes payable (3,006) - (3,006)
Net cash provided by ----------------- ----------------- -----------------
financing activities 4,439,420 1,841,244 8,320,841
----------------- ----------------- -----------------
Increase (decrease) in cash 81,360 (433,489) 200,749
Cash and cash equivalents,
beginning of period 119,389 552,878 -
Cash and cash equivalents, ----------------- ----------------- -----------------
end of period $ 200,749 $ 119,389 $ 200,749
================= ================= =================
See Accompanying Notes to Financial Statements
</TABLE>
-33-
<PAGE>
CASINOVATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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", an
electronically identified coin collection bucket for use with
coin operated gaming devices and playing cards designed to assist
the dealer in the game of "blackjack". The Company is a
continuation of a partnership known as Sharps International,
(Sharps) which was formed in April 1994 and whose principal
business activity was the development of an electronic card
shuffler. Pursuant to a funding agreement dated January 15,
1996, the partners of Sharps received shares of the Company's
common stock on a pro rata basis in exchange for their
partnership interests. 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. The foregoing financial statements present the
operations of the Company and the partnerships from their
inception, since the partnership interests of Sharps and Sines
are vested in the same individuals. Values assigned to the
acquired intellectual property rights were limited to
professional fees paid for patents and trademarks. During 1998,
Sines & Forte, in separate transactions, sold to the Company and
others all Company stock, stock options and license rights and as
of January 15, 1999 have no ongoing financial relationship with
the Company (see 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, 1998
<TABLE>
<CAPTION>
<S> <C>
Raw material $399,239
Work in progress 221,308
Finished goods 136,115
---------
$756,662
</TABLE>
A portion of the Company's inventory is pledged as collateral for
leases as described in Note 5.
-34-
<PAGE>
CASINOVATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
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.
<TABLE>
<CAPTION>
Useful lives for property and equipment are as follows:
<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 $188,890 are amortized
using the straight-line method over a period of ten years
beginning in 1997. Amortization for the years ended December 31,
1998 and 1997 amounted to $17,995 and $15,537, respectively.
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 $3,837 at December 31, 1998,
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 1998 and 1997 fiscal
years.
LOSS PER SHARE
EARNINGS PER SHARE (BASIC AND DILUTED)
Basic Earnings per Share ("EPS") is computed by dividing net
income available to common stockholders by the weighted average
number of common stock shares outstanding during the year.
Diluted EPS is computed by dividing net income available to
common stockholders by the weighted-average number of common
stock shares outstanding during the year plus potential dilutive
instruments such as stock options and warrants. The effect of
stock options on diluted EPS is determined through the
application of the treasury stock method, whereby proceeds
received by the Company based on assumed exercises are
hypothetically used to repurchase the Company's common stock at
the average market price during the period.
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
-35-
<PAGE>
CASINOVATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
since the assumed exercise of common stock equivalents would have
an anti-dilutive effect due to the existence of operating losses.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of its products upon
shipment to the customer. Revenue from rentals of shuffler
machines is recorded as revenue at the first of each month in
accordance with lease terms. Sales returns and allowances are
recorded after returned goods are received and inspected. The
Company began limited sales of its products in 1998 and expects
to begin full operations during 1999. The Company 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 $181,491 and $64,260 for
the years ended December 31, 1998 and 1997, respectively. No
cash was paid for income taxes during any period presented.
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, trade. During the year the Company
maintained cash deposits at financial institutions in excess of
the $100,000 limit covered by the Federal Deposit Insurance
Corporation.
ADVERTISING
Advertising expenses are charged to expense upon first showing.
Amounts charged to expense were $75,680 and $17,393 for the years
ended December 31, 1998 and 1997, 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 financial statements for earlier periods will be
required for comparative purposes. To
-36-
<PAGE>
CASINOVATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
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.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use
("SOP 98-1"). SOP 98-1 provides authoritative guidance on when
internal-use software costs should be capitalized and when these
costs should be expensed as incurred.
Effective January 1, 1998, the Company adopted SOP 98-1. Costs
capitalized by the Company during the year ended December 31,
1998 in accordance with these guidelines were not significant.
Effective December 31, 1998, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 131 superseded SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. SFAS
131 establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim
financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic
areas, and major customers. The adoption of SFAS 131 did not
affect results of operations or financial position. To date, the
Company has operated in one business segment only.
Effective December 31, 1998, the Company adopted the provisions
of SFAS No. 132, Employers' Disclosures about Pensions and Other
Post-retirement Benefits ("SFAS 132"). SFAS 132 supersedes the
disclosure requirements in SFAS No. 87, Employers' Accounting for
Pensions, and SFAS No. 106, Employers' Accounting for Post-
retirement Benefits Other Than Pensions. The overall objective of
SFAS 132 is to improve and standardize disclosures about pensions
and other post-retirement benefits and to make the required
information more understandable. The adoption of SFAS 132 did not
affect results of operations or financial position. The Company
is in its development stage and has not initiated benefit plans
to date, which would require disclosure under the statement.
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"), which is required to be adopted in years
beginning after June 15, 1999. SFAS 133 will require the Company
to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of hedged
assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings.
The Company has not yet determined what the effect of SFAS 133
will be on earnings and the financial position of the Company,
however it believes that it has not to date engaged in
significant transactions encompassed by the statement.
-37-
<PAGE>
CASINOVATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 2. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consist of the following at December 31,
1998:
<S> <C>
Furniture and fixtures $114,171
Manufacturing equipment 12,653
Tooling 291,732
Leasehold improvements 57,596
---------
$476,152
Accumulated depreciation and
amortization 125,380
---------
$350,772
=========
</TABLE>
Depreciation expense charged to operations amounted to $103,856
and $23,446 for the years ended December 31, 1998 and 1997,
respectively
The Company owns tooling used in the manufacture of certain
plastic components of its shuffler product. The tooling is
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 AND LONG-TERM DEBT
Note payable - bank consists of a $197,383 short term loan from a
bank secured during July 1997. The loan bears interest at 7.2%
per annum and is due on May 15, 1999. The loan is secured by a
certificate of deposit in the amount of $200,000 pledged as
collateral by the Company's principal shareholder.
Long-term debt consists of a vehicle purchase contract having a
balance at December 31, 1998 of $17,180. The loan bears interest
at 7.2% per year and is due in monthly installments of $367
through August 2003. The loan is secured by a truck used for
company purposes.
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 were due on or
before January 31, 1999. The principal amount of the debentures
was convertible at the holder's option into shares of the
Company's common stock at a conversion price of $2.98 per share.
During May 1998, the Company reduced the conversion price of the
debentures to $2.13 per share and completed the conversion of all
of the outstanding debentures into 234,742 shares of restricted
common stock during December 1998. Interest accrued on the
convertible notes was waived by the note holders. The difference
between the conversion rate of $2.13 per share and the fair value
of the common stock at the conversion date of $2.50 per share was
charged to interest expense for the aggregate of shares issued in
the conversion.
-38-
<PAGE>
CASINOVATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
NOTE 5. LEASES PAYABLE
During December 1998 and 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 substantially all of its finished
goods inventory.
<TABLE>
<CAPTION>
Scheduled maturities of the obligations as of December 31, 1998
are as follows:
YEAR AMOUNT
---- ------
<S> <C>
1999 $ 479,230
2000 533,321
2001 172,258
2002 67,142
------------
Minimum future lease payments 1,251,951
Less interest component (219,055)
------------
Present value of future net
minimum lease payments 1,032,896
------------
Less current portion (219,758)
Due after one year $ 813,138
</TABLE>
<TABLE>
<CAPTION>
Property recorded under capital leases includes the following as
of December 31, 1998:
<S> <C>
Office furniture and equipment $ 31,100
Tooling 271,500
------------
302,610
Less accumulated amortization (119,471)
------------
183,139
Net capitalized leased equipment
Shuffler and "Fantasy 21" machines,
at cost 258,100
------------
Total assets subject to capital leases $ 813,138
</TABLE>
The leases contain provisions for mandatory buy back of the
inventory and equipment at the end of the initial terms of the
leases. The future minimum lease payments scheduled above
include the buy out provisions due at the end of each lease term.
The net present value of the buy out provisions, $238,589 as of
December 31, 1998, has been included in other assets and
represents additional interest on the leases which will be
amortized to interest expense during the remaining lease terms.
NOTE 6. SHAREHOLDER LOANS
During the years ended December 31, 1998 and 1997, shareholders
who are also directors of the Company made advances to the
Company for working capital purposes. The balances payable by
the Company aggregated $1,444,561 at December 31, 1998, including
accrued interest of $59,561. The advances include short-term
demand notes made in 1998 due to two shareholders, which bear
interest at 9.5% per annum and aggregate $150,000 at December 31,
1998. The Company's principal shareholder has outstanding
advances to the Company aggregating $1,235,000 of which
$1,150,000 was received by the Company during the year ended
December 31, 1998. This aggregate amount plus accrued interest
of
-39-
<PAGE>
CASINOVATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
$53,976 at December 31, 1998 is to be repaid in monthly
installments of $42,814 beginning July 1, 1999 and includes
interest at 9.5%.
The Company's major shareholder made additional advances during
1996 in the amount of $250,000. The advances provided for
repayment 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
339,304 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.
At December 31, 1997 the Company had outstanding advances to two
officer/shareholders aggregating $312,972. One of the advances
amounting to $152,964 due to Sines was cancelled with no
continuing repayment obligation by the Company as a result of a
private transaction between Sines and a group which included the
Company's principal shareholder. The cancellation of the
indebtedness was accounted for by the Company as a contribution
to capital.
The second advance ($135,047 unpaid at August 31, 1998) which
was due to Forte was discharged in connection with the purchase
by the Company of all Forte shares, options and intellectual
property rights as described in Note 9.
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. Additionally, a
director of the Company made $100,000 of advances to the Company
during the year ended December 31, 1998. The advances plus
$2,395 of accrued interest were converted into 40,958 shares of
the Company's common stock at a conversion price of $2.50 per
share during December 1998.
NOTE 7. STOCKHOLDERS' EQUITY
During the periods covered by these financial statements the
Company issued certain of its 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. During
1998, the Company began a public offering of its common stock.
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.
-40-
<PAGE>
CASINOVATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
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
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 September 1998, the Company's Board of
Directors approved calls on the B and C warrants and the Company
completed the warrant calls prior to December 31, 1998.
Additionally the exercise price of the A warrants was reduced to
$3.75 per share.
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
240,000 shares (including the consulting shares described above)
to consultants and others. The shares were valued at fair value
of $1.50 per share.
-41-
<PAGE>
CASINOVATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
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 June 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.
During the period ended December 31, 1998 the Company issued
929,234 shares of its common stock for cash aggregating
$2,202,270 ($2.50 per share) after direct offering expenses of
$120,815 in connection with a public sale of common stock.
Additionally, the Company issued 142,500 shares of common stock
to consultants and others for services and other consideration
valued at $356,250 ($2.50 per share). A portion of the shares
issued for services were for consulting and advertising services
to be provided to the Company during 1999. The unamortized
amount of the services amounted to $125,000 at December 31, 1998
and is included in the caption "Unpaid stock subscriptions."
During the year ended December 31, 1998 the Company issued 88,716
shares for the conversion of debt of $88,716 to unrelated 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 dates ($2.50 per share) has been charged to
interest expense. Additionally, the Company issued 234,742
shares of its common stock for the conversion of debentures as
described in Note 4. and converted $102,395 of shareholder loans
and accrued interest into 40,958 shares of common stock.
Additionally during the year ended December 31, 1998 the Company
issued options to purchase 300,000 shares of the Company's common
stock to two key employees in recognition of services performed
at an exercise price of $1.50 per share. The difference between
the exercise price and the fair value of the stock at the vesting
date signifying the completion of the services approved by the
Company's Board of Directors ($2.50 per share) was charged to
compensation expense.
During the year ended December 31, 1998 the Company completed the
purchase of the Forte assets as described in Note 9. Among the
assets were 848,682 shares of the Company's common stock with an
ascribed value of $1,115,586. This amount has been charged to
paid in capital as it is the Company's intent to retire the
shares.
-42-
<PAGE>
CASINOVATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
The Company has an aggregate of 320,000 options to purchase
common stock at $1.00 per share and 505,000 options to purchase
common stock at $1.50 per share and 30,000 options to purchase
common stock at $2.50 per share outstanding at December 31, 1998.
The weighted average fair value at the date of grant for options
granted during 1998 and 1997 as described above was $.30 per
option in 1998 (after recording the additional compensation
attributed to options issued at $1.50 as described above) and
$.35 per option in 1997. The fair value of the options at the
date of grant was estimated using the Black-Scholes model with
assumptions as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Market value $2.50 $1.50
Expected life in years 2 - 5 2 - 5
Interest rate 6.5% - 6.2% 6.6% - 6.2%
Volatility 10% 10%
Dividend yield 0.00% 0.00%
</TABLE>
Stock based compensation costs would have increased pretax losses
by $99,796 ($.02 per share) and $89,184 ($.02 per share) in 1998
and 1997, respectively if the fair value of the options granted
during those years had been recognized as compensation expense.
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 carryforward described below
has been fully reserved.
The Company currently has net operating loss carryforwards
aggregating approximately $5,830,000 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, 1997 and 1988 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 previous directors/officers of the Company (Sines and
Forte) who were partners of Sines Forte partnership retained a 3%
royalty interest in the gross margin earned form the sale of
products covered by the intellectual property described in Note
1. During the year ended December 31, 1998 the Company severed
its relationship with the directors/officers in separate
transactions. The Company entered into this transaction to
disassociate itself from Forte, whose prior acts had caused
unreasonable delay in the Company's ability to obtain approval of
its business activities by the Nevada State Gaming Control Board.
As part of this transaction the Company repurchased the shares of
common stock, among other things, from a former employee,
director and shareholder (Forte) 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-
-43-
<PAGE>
CASINOVATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
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 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 a separate note for $135,047 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. Also
during 1998, Sines entered into a similar transaction to sell all
of his Casinovations assets, 885,560 shares of common stock
(including 470,851 shares with restrictions imposed by the State
of California Department of Corporations, 326,153 shares
restricted by agreement and under Rule 144 and 88,556 registered
shares), options to buy 20,000 shares of stock at $1.50, options
to buy 175,000 shares from Huson for $150,000, Note Payable from
the Company for $150,000 plus interest, warrants and Royalties.
Certain members of the Board of Directors and associates
purchased the Sines shares and agreed to the canceling in favor
of the Company all debt, options and warrants.
The Company paid an aggregate of $71,210 in 1997 and $20,479 in
1996 to a company controlled by one of its officers for
administrative services provided to the Company. At December 31,
1998, the Company had an aggregate balance due to this now former
officer and the company of $13,234.
During June 1998 the Company entered into a personal service
agreement with an officer which provides for aggregate monthly
compensation of $12,500 per month through December 31, 1998 and
$18,500 per month thereafter. The agreement has a term of
eighteen months and includes stock option bonus provisions based
upon the Company's attainment of certain corporate goals for 1998
and a stock option grant that vested to the officer at the
contract date. The Company's Board of Directors approved the
bonus stock option effective in November 1998. Option to
purchase up to 200,000 shares of common stock at $1.50 per share
were granted pursuant to the contract. The Company recorded
compensation expense related to the options granted for the
excess of the fair value of the underlying common stock at the
grant date ($2.50 per share) over the exercise price of $1.50 per
share during the year ended December 31, 1998.
NOTE 10. COMMITMENTS AND CONTINGENCIES
During 1997, the Company contracted for the production of tooling
for certain plastic parts utilized in the manufacture of it's
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. As of December 31, 1998, the manufacturer has not
indicated that it will demand delivery to the Company of the
unfilled purchase commitment and has continued to deliver parts
to meet the Company's manufacturing requirements. To date, the
Company has purchased an aggregate of $116,344 from the
manufacturer.
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:
-44-
<PAGE>
CASINOVATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C>
1999 Minimum royalties $126,000
Thereafter $150,000
</TABLE>
Minimum royalties that would have been due for the year ended
December 31, 1998 have been waived by the licensor. 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 note
payments to the licensor in 1997 which amount has been charged to
research and development expense. During 1998, the Company made
additional note payments of $30,000 and discharged the remaining
$50,000 of the note balance and accrued interest of $1,250 by
issuing 20,500 shares of common stock to the note holder. The
Company has charged the aggregate amount of the note payments
($80,000) to research and development expense during 1998. 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 patent
application was filed for this product during 1996 and notice of
patent issuance was dated February 8, 1999.
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. During June 1997, the Company vacated the
premises as a result of actions by the landlord, which in the
opinion of the Company, rendered the space uninhabitable. The
aggregate amount of unpaid rent which could be claimed by the
landlord as a result the Company's vacation is approximately
$25,000. During October 1998, the Company entered into a sixty
month lease for office, manufacturing and warehouse space in Las
Vegas, Nevada. The lease provides for an initial monthly rental
of $11,364 including estimated lease operating costs. Rent
expense was $57,320 and $32,328 for the years ended December 31,
1998 and 1997, respectively. The Company also leases certain
office equipment under non-cancelable operating leases having
monthly rentals of $561.
Future minimum rentals, including escalation provisions, under
the leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $131,731
2000 $201,461
2001 $206,207
2002 $200,040
2003 $200,040
2004 $16,670
</TABLE>
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 it's contractual
obligations to the design company and had 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. During the
-45-
<PAGE>
CASINOVATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
March 1998, the Company took over control of all product
development and the manufacture of all of its products. The
Company acquired manufacturing facilities and necessary equipment
and personnel. As of December 31, 1998, the Company has completed
the manufacture of 170 shuffler units and has inventory levels
sufficient to produce 350 additional units.
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 SUBSEQUENT EVENTS
Subsequent to December 31, 1998, the Company completed the public
offering of its common stock and has received additional gross
proceeds of $1,320,025.
Additionally, the Company has placed $1,250,000 of convertible
debt with interest at 9.5% per annum and a five year term. The
notes are convertible into shares of the Company's common stock
at a conversion rate of $2.60 per share. Additionally, the note
purchasers received warrants to purchase 9,100 shares of the
Company's common stock for each $50,000 increment of debt
purchased. The warrants expire after five years and are
exercisable at a price of $3.00 per share.
Subsequent to December 31, 1998, the Company has placed an
additional 54 shufflers under rental contracts and has
commitments for an additional 158 units. Additionally, the
Company has received purchase commitments for an aggregate of
1,200 units of its "SecureDrop" products.
-46-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
INFORMATION CONCERNING THE BOARD OF DIRECTORS AND EXECUTIVE
OFFICERS
The Board of Directors presently consists of six persons.
The Company's Bylaws provide for a Board of Directors consisting
of one to nine persons who are elected for a term of one year.
At the Company's Annual Meeting of Stockholders scheduled for
March 29, 1999, the Company's stockholders will vote upon several
matters, including, but not limited to, that certain Agreement
and Plan of Merger, dated March 6, 1999, by and between the
Company and the Company's wholly-owned subsidiary, a Nevada
corporation (the "Subsidiary") where the Company would merge with
and into the Subsidiary with the Subsidiary as the surviving
corporation (the "Merger"). The Merger would change the
Company's state of incorporation from Washington to Nevada and
would effect certain changes to the Company's corporate
governance, such as the classification of the Company's Board of
Directors. Accordingly, upon approval of the Merger by
stockholders, the Company will have a classified Board of
Directors consisting of three categories, A, B and C. Category A
directors, Richard S. Huson and Bob L. Smith, will have a three-
year term expiring 2002, Category B directors, Steven J. Blad and
Ronald O. Keil, will have a two-year term expiring 2001, and
Category C directors, David E. Sampson and Jamie McKee, will have
a one-year term expiring 2000. After their initial terms, the
directors will thereafter be elected for three-year terms such
that only one category of directors will stand for election at
each subsequent annual meeting of stockholders. In the event
that the Merger is not approved, each director's term will expire
in 2000.
The following information is furnished with respect to each
member of the Board of Directors and the Company's executive
officers who are not directors. There are no family
relationships between or among any directors or executive
officers of the Company.
DIRECTORS
<TABLE>
<CAPTION>
NAME AGE DIRECTOR POSITION DIRECTOR CATEGORY
SINCE AFTER THE MERGER
---- --- -------- -------- ----------------
<S> <C> <C> <C> <C>
Steven J. Blad 47 1998 Chief Executive Officer, B<F2>
President and Director
Richard S. Huson 59 1998 Chairman of the Board A<F1>
Ronald O. Keil 66 1998 Director B<F2>
Jamie McKee 40 1998 Director C<F3>
David E. Sampson 58 1996 Director C<F3>
Bob L. Smith 61 1998 Director A<F1>
- ----------------
<FN>
<F1> Should the Merger be approved, Category A directors will
initially be elected for a three year term expiring in 2002
and for three year terms thereafter.
<F2> Should the Merger be approved, Category B directors will
initially be elected for a two year term expiring in 2001
and for three year terms thereafter.
<F3> Should the Merger be approved, Category C directors will
initially be elected for a one year term expiring in 2000
and for three year terms thereafter.
</FN>
</TABLE>
- 47 -
<PAGE>
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 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.
RICHARD S. HUSON. Mr. Huson has been Chairman of the Board
of Directors since May 1998. Until February 1998, Mr. Huson was
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 to 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 Bachelor of Science degree
with emphasis on finance and economics from Portland State
University.
RONALD O. KEIL. Mr. Keil has been a member of the Board of
Directors since October 1998. Since July 1990, Mr. Keil and his
son, Rick, own and operate two supermarkets located in San Diego,
California. From March 1995 to June 1998, Mr. Keil was Managing
Partner of RJL Properties, Inc. that owned and operated four
hotels and a mini-storage facility. In addition, Mr. Keil owned
a 142-room Holiday Inn located at Idaho Falls, Idaho from October
1993 to January 1998. From August 1987 to May 1997, Mr. Keil
served as Chairman of the Board of Directors of Drypers
Corporation, a diaper manufacturing company. From January 1960
to March 1985, Mr. Keil owned and operated Keil's Food Stores, a
regional chain of supermarkets located in Washington and Oregon.
Mr. Keil is a founder and director of the Bank of Clark County,
Oregon. Mr. Keil earned a Bachelor of Science in Business
Administration from Lewis and Clark College and has completed
graduate work towards an MBA from the University of Oregon.
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.
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 was General Manager and
Director of Rendova Boats, LLC from October 1996 to December
1997. 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 in
1982.
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
- 48 -
<PAGE>
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
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 Company 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
Bachelor of Science in Accounting (1971) and an MBA (1973) from
the University of Utah and is a Certified Public Accountant.
On March 22, 1999, Mr. King submitted his letter of
resignation to the Company effective April 2, 1999. The Company
has accepted Mr. King's letter of resignation and the parties
have mutually agreed to terminate Mr. King's employment
agreement as of the effective date of the resignation.
WILLIAM E. O'HARA, JR. 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. 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 the Casino Management Association.
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.
COMPENSATION OF NON-EMPLOYEE DIRECTORS
Directors' fees were $500 per quarter/meeting for 1998 and
are $500 per quarter/meeting for 1999, and are paid to directors
who are not employees of the Company. All expenses for meeting
attendance or out-of-pocket expenses connected directly with
their representation on the Board of Directors will be reimbursed
by the Company. Directors who are employees of the Company or
its subsidiaries do not receive compensation for their services
as directors.
BOARD OF DIRECTORS MEETINGS
The Board of Directors generally meets quarterly, and in the
twelve months ended December 31, 1998, the Board of Directors
held three regular meetings. All directors attended at least 75%
of the meetings held.
- 49 -
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has one standing committee, the
Compensation Committee. The Board of Directors created the
Compensation Committee in January 1999 and appointed Bob L.
Smith, Ronald O. Keil and David E. Sampson as members of said
committee. The function of the Compensation Committee is to
review and make recommendations to the Board of Directors with
respect to the compensation of the Company's executive officers.
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following tables set forth compensation received by
Steven J. Blad, the Company's Chief Executive Officer, and other
executive officers of the Company whose total compensation for
the year ended December 31, 1998, exceeded $100,000.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation awarded to,
earned by or paid to, the Company's chief executive officer and
its four other most highly-compensated executive officers for
services rendered in all capacities during its fiscal years ended
December 31, 1998, 1997, 1996.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------- ----------------------
Awards Payouts
------ -------
Other Securities All
Annual Restricted Under- LTIP Other
Name and Principal Year Salary Bonus Compen- Stock Lying Payouts Compen-
Position ($) ($) sation Award(s) Options/ ($) sation
($) ($) SARs (#) ($)<F1>
- ------------------ ---- ------ ----- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven J. Blad, 1998 102,520 -0- -0- 10,000 200,000 -0- 91,500<F2>
Chief Executive 1997 19,500 -0- -0- 15,000 100,000 -0- 152,780<F2>
Officer,President
and Director 1996 -0- -0- -0- -0- -0- -0- 27,750<F2>
Glen Pickell, 1998 -0- -0- -0- -0- -0- -0- 27,239<F2>
Chief Executive Officer 1997 -0- -0- -0- -0- -0- -0- 71,120<F2>
(Sept. 1996-May 1998)
1996 -0- -0- -0- -0- -0- -0- 20,479<F2>
Jay L. King, 1998 90,000 15,000 -0- -0- 100,000 -0- -0-
Chief Financial 1997 90,000 14,850 -0- -0- -0- -0- -0-
Officer, Secretary
and Director 1996 73,750 12,500 10,200 -0- 75,000 -0- -0-
- --------------------
<FN>
<F1> The Company provides certain perquisites and other personal
benefits to some or all of the executives. The unreimbursed
incremental cost to the Company of providing perquisites and
other personal benefits did not exceed, as to any of the
executives for any year, the lesser of $50,000 or 10% of the
total salary and bonus paid to such executive for such year.
<F2> Affiliated entities of current and former officers and
directors received compensation in the fiscal years ended
December 31, 1998, 1997 and 1996: (i) the Arcus Group, an entity
controlled by Glen (Tom) Pickell, a former officer and director
of the Company that provided management consulting services to
the Company, received $27,239 in 1998, $71,210 in 1997 and
$20,479 in 1996; and (ii) Gametek, Inc., an entity controlled by
Steven J. Blad that provided sales, marketing and management
consulting services to the Company, received $91,500 in 1998,
$152,780 in 1997 and $27,750 in 1996.
</FN>
</TABLE>
- 50 -
<PAGE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding grants
of stock options during the fiscal year ended December 31, 1998
made to the named executive officers. There are no stock
appreciation rights.
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------------------------------
Number of Securities Percent of Total Exercise or
Name Underlying Options/ Options/SARs Granted to Base Price
SARs Granted (#) Employees in Fiscal Year<F1> ($/Share) Expiration Date
- ------------------- -------------------- ---------------------------- ----------- ---------------
<S> <C> <C> <C> <C>
Steven J. Blad 100,000 30.30% $1.50 June 1, 2003
Steven J. Blad 100,000 30.30% $1.50 November 15, 2003
Jay L. King 100,000 30.30% $1.50 November 15, 2003
- ---------------
<FN>
<F1> The total number of options granted to employees by the
Company for the year ended December 31, 1998 was 330,000 options.
</FN>
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
As none of the Company's named executive officers exercised
any stock options during the fiscal year ended December 31, 1998,
a table reflecting the same has been intentionally omitted.
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
As none of the Company's named executive officers received
any stock options under a long-term incentive plan during the
fiscal year ended December 31, 1998, a table reflecting the same
has been intentionally omitted.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with
Steven J. Blad and Jay L. King. Effective June 1, 1998, the
Company and Mr. Blad entered into an employment agreement 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 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.
Effective January 1, 1997, the Company entered into an
employment agreement with Jay L. King, 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 Mr. King's duties and the Company achieving its
goals. Additionally, Mr. King shall receive stock options to
purchase up to 150,000 shares of common stock at $1.50 per share
upon the following events: (i) stock options for 50,000 shares
of common stock upon successful completion of the Registration
Statement on Form SB-2; (ii) stock options
- 51 -
<PAGE>
for 50,000 shares of common stock upon Mr. King fulfilling his
obligations and the Company reaching its goals for 1997; and
(iii) stock options for 50,000 shares of common stock upon
Mr. King fulfilling his obligations and the Company reaching its
goals for 1998. On November 15, 1998, in accordance with the
terms of the employment agreement, the Company issued to Mr. King
options to purchase 100,000 shares of common stock at $1.50 per
share. In light of the letter of resignation submitted by Mr.
King, the Company and Mr. King have mutually agreed to terminate
Mr. King's employment agreement.
The Company is currently in the process of negotiating
employment agreements with its other officers and employees.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following is a list of the beneficial stock ownership as
of on January 31, 1999 of (1) all persons who beneficially owned
more than 5% of the outstanding shares of the Company's common
stock, (2) all directors, (3) all executive officers named in the
Summary Compensation Table (see page 50) and (4) all officers and
directors as a group at the close of business on January 31,
1999, according to record-ownership listings as of that date, and
according to verifications as of January 31, 1999, which the
Company solicited and received from each officer and director:
- 52 -
<PAGE>
<TABLE>
<CAPTION>
TITLE OF AMOUNT AND NATURE OF PERCENT OF
CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP<F1><F2> CLASS<F2>
- --------- ---------------- ---------------------------- ----------
<S> <C> <C> <C>
Common Richard S. Huson 2,884,223<F3> 39.3%
15 SW Colorado Avenue,
Suite 280
Bend, Oregon 97702
Common Steven J. Blad 541,316<F4> 7.1%
6744 S. Spencer Street
Las Vegas, Nevada 89119
Common Bob L. Smith 399,997<F5> 5.5%
280 Liberty Street,
S.E., Suite 300
Salem, Oregon 97301
Common Jay L. King 200,165<F6> 2.7%
6744 S. Spencer Street
Las Vegas, Nevada 89119
Common Ronald O. Keil 181,689 2.5%
2904 N.E. Burton,
Suite A
Vancouver, Washington 98661
Common David E. Sampson 137,512<F7> 1.9%
14009 - 205th Avenue N.E.
Woodinville, Washington 98072
Common Jamie McKee 0 <F*>
5240 S. Eastern Avenue
Las Vegas, Nevada 89119
Common All executive officers 4,114,902<F8> 51.7%
and directors as a
group (7 persons)
- -----------------
<FN>
<F*> Less than one percent.
<F1> Unless otherwise noted, the persons identified in this table
have sole voting and sole investment power with regard to the
shares beneficially owned by them.
<F2> Includes shares issuable upon the exercise of options and
warrants exercisable within 60 days of the stated date.
<F3> Includes 52,721 shares issuable upon the exercise of Class A
Warrants.
<F4> Includes 10,000 shares issued to Gametek, Inc., an entity
controlled by Mr. Blad, options to purchase 300,000 shares
granted by the Company, options to purchase 230,000 shares
granted by Richard S. Huson, 1,216 shares issued to the spouse of
Mr. Blad and 100 shares issued to Mr. Blad directly.
<F5> Includes 33,557 shares issuable upon the exercise of Class A
Warrants held by VIP's Industries, Inc., an entity controlled by
Mr. Smith, 147,906 shares issued to VIP's Industries, Inc., 1,000
shares issued jointly to Mr. Smith and his daughter, and 217,534
shares issued to Mr. Smith directly.
<F6> Includes options to purchase 175,000 shares issued by the
Company and 25,165 shares issued to Mr. King directly.
<F7> Includes 1,557 shares issuable upon the exercise of Class A
Warrants, options to purchase 95,000 shares and 40,955 shares
issued to Mr. Sampson directly.
<F8> Includes 87,835 shares issuable upon the exercise of Class A
Warrants and 570,000 shares issuable upon the exercise of stock
options.
</FN>
</TABLE>
- 53 -
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 1, 1997, the Company entered into a consulting
agreement with Gametek, Inc. and Steven Blad, an officer of the
Company. This agreement was terminated effective as of June 1,
1998 upon effectiveness of the employment agreement with Mr.
Blad. See Part III. "Item 10. Executive Compensation -
Employment Agreements."
Through a purchase agreement dated September 1998, the
Company agreed to purchase from Steven L. Forte, a former
employee and director of the Company, and Cheryl L. Forte:
(i) certain royalties from the sales of the Shuffler, Fantasy 21
and the Safety-Peek Playing Card; (ii) options to purchase 20,000
shares of common stock; and (iii) 848,682 shares of common stock
(the "Forte Transaction"). The Forte Transaction also involves
the termination of the employment agreement with Steven Forte and
the gifting of 82,000 shares of common stock by Steven and Cheryl
Forte to certain individuals. As consideration, the Company
executed a promissory note in favor of Steven and Cheryl Forte in
the principal amount of $2,351,705 (the "Forte Note"), a security
agreement in favor of Steven and Cheryl Forte granting a first
security interest in the patents for the Shuffler, Fantasy 21 and
the Safety-Peek playing card, and a pledge agreement in favor of
Steven and Cheryl Forte whereby the Company pledged the Forte
Shares as security for the Forte Note. In December 1998, the
Company negotiated the cancellation of the Forte Note, the
security agreement and pledge agreement, as well as an unrelated
pre-existing promissory note in the principal amount of
$130,047.46 (the "Pre-existing Forte Note"), in exchange for
$1,250,000 to be paid in three installments: $500,000 on December
7, 1998, $500,000 on December 28, 1998 and $250,000 on January
15, 1999. Upon payment of the $1,250,000, the Company cancelled
the Forte Note, the security agreement, the pledge agreement and
the Pre-existing Forte Note and received a release from Steven
and Cheryl Forte releasing the Company from any and all claims
related, either directly or indirectly, to the Forte Transaction.
Accordingly, the Company has retired the Forte Shares from the
number of shares of common stock outstanding.
During the years ended December 31, 1998 and 1997, Richard
S. Huson, Chairman and principal stockholder of the Company, and
Bob L. Smith and Ronald O. Keil, directors and stockholders of
the Company, made loans to the Company for working capital
purposes. The balances payable by the Company aggregated
$1,444,561 at December 31, 1998, including accrued interest of
$59,561. The advances include short term demand notes made in
1998 due to Messrs. Smith and Keil which bear interest at 9.5%
per annum and aggregate $150,000 at December 31, 1998. Mr. Huson
has outstanding advances to the Company aggregating $1,235,000 of
which $1,150,000 was received by the Company during the year
ended December 31, 1998. The Company executed a replacement
promissory representing the aggregate amount of advances made by
Mr. Huson where the outstanding principal and interest is to be
repaid at an interest rate of 9.5% per annum in monthly
installments of $42,814 beginning July 1, 1999.
At December 31, 1997, the Company had outstanding advances
to Randy Sines, a former officer and director of the Company,
aggregating $152,964 (the "Sines Advance"). In December 1998,
the Sines Advance was cancelled with no continuing repayment
obligation by the Company as a result of a private transaction
between Mr. Sines and four individuals which included directors
Richard S. Huson, Bob L. Smith and Ronald O. Keil. The
cancellation of the indebtedness was accounted for by the Company
as a contribution to capital.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
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
- 54 -
<PAGE>
is or was a director or officer of the Company, or served any
other enterprise as director, officer or employee at the request
of the Company. The Board of Directors, in its discretion, shall
have the power on behalf of the Company to indemnify any person,
other than a director or officer, made a party to any action,
suit or proceeding by reason of the fact that he/she is or was an
employee of the Company.
Insofar as indemnification for liabilities arising under the
Securities 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 Securities Act and will be governed by the final adjudication
of such issues.
Further, 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.
TRANSACTION REVIEW
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 stockholders entitled to
vote and they approve or ratify the contract or transaction in
good faith by a majority vote or written consent of stockholders
holding a majority of the shares of common stock entitled to vote
(the votes of the common or interested directors or officers
shall be counted in any such vote of stockholders); 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 stockholders approving the transaction.
- 55 -
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
2.01 Agreement and Plan of Merger dated as of March 6, 1999
by and between the Company and Casinovations Nevada
Incorporated.
3.01 Articles of Incorporation incorporated by reference from
the Company's Registration Statement on Form SB-2 ("Form
SB-2") filed on July 16, 1997, File Number 333-31373.
3.02 Amendment to Articles of Incorporation dated October 12,
1996 incorporated by reference from Form SB-2 filed on
July 16, 1997, File Number 333-31373.
3.03 Amendment to Articles of Incorporation dated January
1997 incorporated by reference from Form SB-2 filed on
July 16, 1997, File Number 333-31373.
3.04 Bylaws dated September 1995 incorporated by reference
from Form SB-2 filed on July 16, 1997, File Number 333-
31373.
3.05 Amended and Restated Bylaws, incorporated by reference
from Post-Effective Amendment No.1 on Form SB-2/A filed
on June 5, 1998.
4.01 Specimen certificate for Common Stock incorporated by
reference from Form SB-2 filed on July 16, 1997, File
Number 333-31373.
4.02 Specimen Warrant certificate incorporated by reference
from Form SB-2 filed on July 16, 1997, File Number 333-
31373.
4.03 Casinovations Incorporated 1999 Stock Option Plan.
10.01 Consulting Agreement of GameTek and Steven J. Blad dated
February 1, 1997 incorporated by reference from Form SB-
2 filed on July 16, 1997, File Number 333-31373.
10.02 Consulting Agreement with Gaming Venture Corp., U.S.A.
dated July 8, 1996 incorporated by reference from Form
SB-2 filed on July 16, 1997, File Number 333-31373.
10.03 Exclusive Distributorship Agreement with Sodak Gaming,
Inc. dated April 23, 1997 incorporated by reference from
Form SB-2 filed on July 16, 1997, File Number 333-31373.
10.04 Exclusive Distributorship Agreement with RGB SDN BHD
dated February 19, 1997 incorporated by reference from
Form SB-2 filed on July 16, 1997, File Number 333-31373.
10.05 Exclusive Distributorship Agreement with H. Joel Rahn
dated June 1, 1997 incorporated by reference from Form
SB-2 filed on July 16, 1997, File Number 333-31373.
10.06 Exclusive License Agreement with George C. Matteson Co.,
Inc. dated May 5, 1994 incorporated by reference from
Form SB-2 filed on July 16, 1997, File Number 333-31373.
- 56 -
<PAGE>
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
10.07 License Agreement with The United States Playing Card
Company dated March 16, 1995 incorporated by reference
from Form SB-2 filed on July 16, 1997, File Number 333-
31373.
10.08 Collateral Loan Agreement with Gaming Venture Corp.,
U.S.A. incorporated by reference from Amendment No. 1 to
Form SB-2 filed on September 17, 1997, File Number 333-
31373.
10.09 Exclusive License Agreement with Technology Development
Center, LLC incorporated by reference from Amendment No.
2 to Form SB-2 filed on November 12, 1997, File Number
333-31373.
10.10 Form of Convertible Unsecured Note, incorporated by
reference from Post-Effective Amendment No.1 on Form SB-
2/A filed on June 5, 1998.
10.11 Forte Letter Agreement dated May 28, 1998, incorporated
by reference from Post-Effective Amendment No.1 on Form
SB-2/A filed on June 5, 1998.
10.12 Exclusive Distributorship Agreement with Gaming 2000
L.L.C. dated May 28, 1998, incorporated by reference
from Post-Effective Amendment No.1 on Form SB-2/A filed
on June 5, 1998.
10.13 Exclusive Distributorship Agreement with Belgian Gaming
Technology dated December 18, 1997, incorporated by
reference from Post-Effective Amendment No.1 on Form SB-
2/A filed on June 5, 1998.
10.14 Asset Purchase Agreement dated August 14, 1998, by and
between Casinovations Incorporated and Gaming 2000,
L.L.C., incorporated by reference from Post-Effective
Amendment No.2 on Form SB-2/A filed on September 18,
1998.
10.15 Purchase Agreement dated September 1998 with Steven L.
Forte and Cheryl Forte.
10.16 Assignment Agreement dated December 16, 1998 by and
between Casinovations Incorporated and Randy D. Sines
and Irene C. Sines, incorporated by reference from Form
8-K filed on December 23, 1998, File Number 333-31373.
10.17 Form of Lock Up Agreement incorporated by reference from
Amendment No. 3 to Form SB-2 filed on January 12, 1998,
File Number 333-31373.
10.18 Form of Warrant Lock Up Agreement incorporated by
reference from Amendment No. 6 to Form SB-2 filed on
April 2, 1998, File Number 333-31373.
10.19 Form of Warrant Lock Up Agreement incorporated by
reference from Amendment No. 7 from Form SB-2 filed on
April 9, 1998, File Number 333-31373.
10.20 Lock Up Agreement incorporated by reference from
Amendment No. 7 to Form SB-2 filed on April 9, 1998,
File Number 333-31373.
10.21 Form of Lock-Up Agreement, incorporated by reference to
Post-Effective Amendment No.2 on Form SB-2/A filed on
September 18, 1998, File Number 333-31373.
- 57 -
<PAGE>
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
10.22 Shareholder 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, File Number 333-31373.
10.23 Lease Agreement dated October 7, 1998 by and between the
Company and Spencer Airport Center, LLC.
10.24 Promissory Note dated December 3, 1998 executed by the
Company in favor of Steven L. Forte and Cheryl Forte.
10.25 Shareholder Agreement dated December 14, 1998 by and
between Casinovations Incorporated and Richard Huson,
Bob Smith and Ron Keil.
10.26 Release and Assignment Agreement dated January 15, 1999
by and between Casinovations Incorporated and Steven L.
Forte and Cheryl Forte.
10.27 Agreement dated March 24, 1999 by and between
Casinovations Incorporated and Dominion Income
Management.
21.01 Subsidiaries of Registrant.
23.01 Consent of James E. Scheifley & Associates, P.C.
27.01 Financial Data Schedule.
99.01 Employment Agreement of Jay L. King dated January 1,
1997 incorporated by reference from Form SB-2 filed on
July 16, 1997, File Number 333-31373.
99.02 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,
File Number 333-31373.
(b) REPORTS ON FORM 8-K.
During the three month period ended December 31, 1998, the
Company filed a Form 8-K dated December 3, 1998 with the
Securities and Exchange Commission on December 23, 1998
reporting, among other things, the approval of the Random
Ejection Shuffler by the Nevada State Gaming Control Board. The
Company subsequently filed a Form 8-K dated December 31, 1998
with the Securities and Exchange Commission on January 7, 1999
reporting the extension of the Company's offering of 1,500,000
shares (subsequently amended to 1,517,744 shares) of common stock
for thirty days from December 31, 1998 to January 30, 1999.
- 58 -
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CASINOVATIONS INCORPORATED
March 25, 1999 By: /s/ Jay L. King
-----------------------------
Jay L. King, Secretary,
Treasurer and Chief
Financial Officer
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Steven J. Blad Chief Executive Officer, March 25, 1999
- -------------------- President and Director
Steven J. Blad (Principal Executive Officer)
/s/ Jay L. King Chief Financial Officer, March 25, 1999
- -------------------- Treasurer and Secretary
Jay L. King (Principal Financial and
Accounting Officer)
/s/ Richard S. Huson Chairman of the Board of March 25, 1999
- -------------------- Directors
Richard S. Huson
/s/ Bob L. Smith Director March 25, 1999
- --------------------
Bob L. Smith
/s/ Ronald O. Keil Director March 25, 1999
- --------------------
Ronald O. Keil
/s/ David E. Sampson Director March 25, 1999
- --------------------
David E. Sampson
/s/ Jamie McKee Director March 25, 1999
- --------------------
Jamie McKee
<PAGE>
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ ------------------- ----
2.01 Agreement and Plan of Merger dated as of March 6, 63
1999 by and between the Company and Casinovations
Nevada Incorporated.
3.01 Articles of Incorporation incorporated by reference
from the Company's Registration Statement on Form SB-
2 ("Form SB-2") filed on July 16, 1997, File Number
333-31373.
3.02 Amendment to Articles of Incorporation dated October
12, 1996 incorporated by reference from Form SB-2
filed on July 16, 1997, File Number 333-31373.
3.03 Amendment to Articles of Incorporation dated January
1997 incorporated by reference from Form SB-2 filed
on July 16, 1997, File Number 333-31373.
3.04 Bylaws dated September 1995 incorporated by
reference from Form SB-2 filed on July 16, 1997,
File Number 333-31373.
3.05 Amended and Restated Bylaws, incorporated by
reference from Post-Effective Amendment No.1 on Form
SB-2/A filed on June 5, 1998.
4.01 Specimen certificate for Common Stock incorporated
by reference from Form SB-2 filed on July 16, 1997,
File Number 333-31373.
4.02 Specimen Warrant certificate incorporated by
reference from Form SB-2 filed on July 16, 1997,
File Number 333-31373.
4.03 Casinovations Incorporated 1999 Stock Option Plan. 68
10.01 Consulting Agreement of GameTek and Steven J. Blad
dated February 1, 1997 incorporated by reference
from Form SB-2 filed on July 16, 1997, File Number
333-31373.
10.02 Consulting Agreement with Gaming Venture Corp.,
U.S.A. dated July 8, 1996 incorporated by reference
from Form SB-2 filed on July 16, 1997, File Number
333-31373.
10.03 Exclusive Distributorship Agreement with Sodak
Gaming, Inc. dated April 23, 1997 incorporated by
reference from Form SB-2 filed on July 16, 1997,
File Number 333-31373.
10.04 Exclusive Distributorship Agreement with RGB SDN BHD
dated February 19, 1997 incorporated by reference
from Form SB-2 filed on July 16, 1997, File Number
333-31373.
10.05 Exclusive Distributorship Agreement with H. Joel
Rahn dated June 1, 1997 incorporated by reference
from Form SB-2 filed on July 16, 1997, File Number
333-31373.
- 60 -
<PAGE>
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ ------------------- ----
10.06 Exclusive License Agreement with George C. Matteson
Co., Inc. dated May 5, 1994 incorporated by
reference from Form SB-2 filed on July 16, 1997,
File Number 333-31373.
10.07 License Agreement with The United States Playing
Card Company dated March 16, 1995 incorporated by
reference from Form SB-2 filed on July 16, 1997,
File Number 333-31373.
10.08 Collateral Loan Agreement with Gaming Venture Corp.,
U.S.A. incorporated by reference from Amendment No.
1 to Form SB-2 filed on September 17, 1997, File
Number 333-31373.
10.09 Exclusive License Agreement with Technology
Development Center, LLC incorporated by reference
from Amendment No. 2 to Form SB-2 filed on November
12, 1997, File Number 333-31373.
10.10 Form of Convertible Unsecured Note, incorporated by
reference from Post-Effective Amendment No.1 on Form
SB-2/A filed on June 5, 1998.
10.11 Forte Letter Agreement dated May 28, 1998,
incorporated by reference from Post-Effective
Amendment No.1 on Form SB-2/A filed on June 5, 1998.
10.12 Exclusive Distributorship Agreement with Gaming 2000
L.L.C. dated May 28, 1998, incorporated by reference
from Post-Effective Amendment No.1 on Form SB-2/A
filed on June 5, 1998.
10.13 Exclusive Distributorship Agreement with Belgium
Gaming Technology dated December 18, 1997,
incorporated by reference from Post-Effective
Amendment No.1 on Form SB-2/A filed on June 5, 1998.
10.14 Asset Purchase Agreement dated August 14, 1998, by
and between Casinovations Incorporated and Gaming
2000, L.L.C., incorporated by reference from Post-
Effective Amendment No.2 on Form SB-2/A filed on
September 18, 1998.
10.15 Purchase Agreement dated September 1998 with Steven 77
L. Forte and Cheryl Forte.
10.16 Assignment Agreement dated December 16, 1998 by and
between Casinovations Incorporated and Randy D.
Sines and Irene C. Sines, incorporated by reference
from Form 8-K filed on December 23, 1998, File
Number 333-31373.
10.17 Form of Lock Up Agreement incorporated by reference
from Amendment No. 3 to Form SB-2 filed on January
12, 1998, File Number 333-31373.
10.18 Form of Warrant Lock Up Agreement incorporated by
reference from Amendment No. 6 to Form SB-2 filed on
April 2, 1998, File Number 333-31373.
10.19 Form of Warrant Lock Up Agreement incorporated by
reference from Amendment No. 7 from Form SB-2 filed
on April 9, 1998, File Number 333-31373.
- 61 -
<PAGE>
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ ------------------- ----
10.20 Lock Up Agreement incorporated by reference from
Amendment No. 7 to Form SB-2 filed on April 9, 1998,
File Number 333-31373.
10.21 Form of Lock-Up Agreement, incorporated by reference
to Post-Effective Amendment No.2 on Form SB-2/A
filed on September 18, 1998, File Number 333-31373.
10.22 Shareholder 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, File Number 333-31373.
10.23 Lease Agreement dated October 7, 1998 by and between 79
Casinovations Incorporated and Spencer Airport
Center, LLC.
10.24 Promissory Note dated December 3, 1998 executed by 97
the Company in favor of Steven L. Forte and Cheryl
Forte.
10.25 Shareholder Agreement dated December 14, 1998 by and 103
between Casinovations Incorporated and Richard
Huson, Bob Smith and Ron Keil.
10.26 Release and Assignment Agreement dated January 15, 111
1999 by and between Casinovations Incorporated and
Steven L. Forte and Cheryl Forte.
10.27 Agreement dated March 24, 1999 by and between 116
Casinovations Incorporated and Dominion Income
Management.
21.01 Subsidiaries of Registrant. 124
23.01 Consent of James E. Scheifley & Associates, P.C. 126
27.01 Financial Data Schedule. 128
99.01 Employment Agreement of Jay L. King dated January 1,
1997 incorporated by reference from Form SB-2 filed
on July 16, 1997, File Number 333-31373.
99.02 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,
File Number 333-31373.
- 62 -
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made
and entered into as of this 6th day of March 1999, by and between
Casinovations Incorporated, a Washington corporation (the
"Washington Corporation"), and Casinovations Nevada Incorporated,
a Nevada corporation (the "Nevada Corporation" and collectively
with the Washington Corporation, the "Constituent Corporations").
W I T N E S S E T H:
WHEREAS, the Washington Corporation is a corporation
incorporated in the State of Washington on September 29, 1995 and
duly organized and existing under the laws of the State of
Washington, Title 23B of the Revised Code of Washington (the
"RCW").
WHEREAS, the Nevada Corporation is a corporation
incorporated in the State of Nevada on March 4, 1999 and duly
organized and existing under the laws of the State of Nevada,
Chapter 78 of the Nevada Revised Statutes (the "NRS").
WHEREAS, the principal offices of the Washington Corporation
and the Nevada Corporation are located at 6744 South Spencer
Street, Las Vegas, Nevada 89119.
WHEREAS, the Washington Corporation and the Nevada
Corporation have approved the merger of the Washington
Corporation with and into the Nevada Corporation with the Nevada
Corporation as the surviving corporation by a statutory merger
upon the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the several and mutual
promises, agreements, covenants, understandings, undertakings,
representations and warranties hereinafter set forth, and for
other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree
that the Recitals are true and correct and by this reference
incorporated herein as if fully set forth and further covenant
and agree as follows:
1. MERGER. At the Effective Date (as defined below), the
Washington Corporation shall be merged with and into the Nevada
Corporation (the "Merger"), and the Nevada Corporation shall be
the surviving corporation in accordance with the provisions of
Chapter 92A of the NRS and Title 23B.11 of the RCW. The Nevada
Corporation shall be and continue in existence as the surviving
corporation (the "Surviving Corporation") and the separate
corporate existence of the Washington Corporation shall cease.
2. EFFECTIVE DATE. Pursuant to Section 23B.01.230 of the
RCW and Section 92A.240 of the NRS, the Constituent Corporations
hereby designate April 1, 1999, as the effective date of the
Merger (the "Effective Date").
3. ARTICLES OF INCORPORATION. The Articles of
Incorporation of the Nevada Corporation in effect on the
Effective Date shall continue (until amended or repealed as
provided by applicable law) to be the Articles of Incorporation
of the Surviving Corporation after the Effective Date without
change or amendment with the exception of the amendment of
Article I that shall be amended to read in its entirety as
follows:
<PAGE>
ARTICLE I
NAME
The name of the corporation is:
Casinovations Incorporated (the "Corporation").
4. BYLAWS. The Bylaws of the Nevada Corporation in effect
on the Effective Date shall continue (until amended or repealed
as provided by applicable law) to be the Bylaws of the Surviving
Corporation after the Effective Date without change or amendment.
5. EFFECT OF MERGER. At the Effective Date, the Surviving
Corporation shall continue in existence and, without further
transfer, succeed to and possess all of the rights, privileges,
and purposes of each of the Constituent Corporations; and all of
the property, real and personal, including subscriptions to
shares, causes of action and every other asset of each of the
Constituent Corporations, shall vest in the Surviving Corporation
without further act or deed; and the Surviving Corporation shall
be liable for all of the liabilities, obligations and penalties
of each of the Constituent Corporations. No liability or
obligation due or to become due, claim or demand for any cause
existing against either Constituent Corporation, or any
stockholder, officer, director or employee thereof, shall be
released or impaired by the Merger. No action or proceeding,
whether civil or criminal, then pending by or against either
Constituent Corporation or any stockholder, officer, director or
employee thereof shall abate or be discontinued by the Merger,
but may be enforced, prosecuted, defended or settled or
compromised as if the Merger had not occurred or the Surviving
Corporation may be substituted in any action or proceeding in
place of either Constituent Corporation. If at any time the
Surviving Corporation shall consider or be advised that any
further assignments, conveyances or assurances in law are
necessary or desirable to vest, perfect or confirm of record in
the Surviving Corporation the title to any property or rights of
the Constituent Corporations, or otherwise to carry out the
provisions hereof, the proper officers and directors of the
Constituent Corporations, as of the Effective Date, shall execute
and deliver any and all things necessary or proper to vest,
perfect or confirm title to such property or rights in the
Surviving Corporation, and otherwise to carry out the provisions
hereof.
6. CONVERSION OF OUTSTANDING SHARES. Upon the Effective
Date and by virtue of the Merger and without any action on the
part of the holders thereof, each issued and outstanding share of
common stock of the Washington Corporation shall be immediately
canceled and converted into one share of common stock of the
Nevada Corporation. Outstanding stock certificates representing
shares of common stock of the Washington Corporation shall
thenceforth represent the same number of shares of common stock
of the Nevada Corporation, and the holder thereof shall be
entitled to precisely the same rights as a holder of certificates
issued by the Surviving Corporation. Upon the surrender to the
transfer agent of the Surviving Corporation, Continental Stock
Transfer & Trust Company, of any stock certificate representing
shares of common stock of the Washington Corporation, the holder
or transferee of the holder of such surrendered certificates
shall receive in exchange therefore a certificate or certificates
of shares of common stock of the Surviving Corporation.
7. CONVERSION OF STOCK OPTIONS AND WARRANTS. Upon the
Effective Date and by virtue of the Merger and without any action
on the part of the holders thereof, each issued and outstanding
option, warrant or right to purchase or otherwise acquire shares
of common stock of the Washington Corporation shall be converted
into and become an option or right to purchase or otherwise
acquire a proportionate number of shares of common stock of the
Nevada corporation on the same terms and conditions, and, in
connection therewith, a proportionate number of shares of common
stock of the Surviving Corporation
2
<PAGE>
shall be reserved for issuance by the Surviving Corporation as
were reserved by the Washington Corporation immediately prior to
the Effective Date.
8. BOARD OF DIRECTORS AND OFFICERS. The Board of
Directors and all officers of the Nevada Corporation in effect on
the Effective Date shall be the Board of Directors and the
officers of the Surviving Corporation.
9. SURVIVAL OF POLICIES. All corporate acts, plans,
policies, approvals and authorizations of the Washington
Corporation, its stockholders, Board of Directors, committees
elected or appointed by the Board of Directors, officers and
agents, which were valid and effective immediately prior to the
Effective Date shall be taken for all purposes as the acts,
plans, policies, approvals and authorizations of Surviving
Corporation and shall be as effective and binding thereon as they
were on the Washington Corporation.
10. TAX EFFECT. The Constituent Corporations intend the
Merger to qualify as a "tax-free" reorganization within the
definition of Section 386(a)(1)(F) of the Internal Revenue Code
of 1986, as amended.
11. APPROVAL OF STOCKHOLDERS. The Agreement shall be
submitted to the stockholders of each Constituent Corporation as
provided by the RCW and the NRS. There shall be required for the
adoption of the Agreement (a) the affirmative vote of not less
than a two thirds (2/3) of the holders of the common stock of the
Washington Corporation, and (b) the affirmative vote of more than
a majority of the voting power of the Nevada Corporation.
12. DISSENTERS' RIGHTS. The rights of dissenting
stockholders for either of the Constituent Corporations shall be
governed by the RCW and the NRS, respectively.
13. REGULATORY APPROVALS. The consummation of the Merger
shall be subject to obtaining any and all consents or approvals
determined by the respective Boards of Directors of the
Constituent Corporations to be necessary to effect the Merger.
14. TERMINATION OR ABANDONMENT. This Agreement may be
terminated and/or the Merger abandoned at any time prior to the
Effective Date by either the Washington Corporation or the Nevada
Corporation by action of their respective Boards of Directors.
In the event of termination of the Agreement and/or abandonment
of the Merger, this Agreement shall become void and of no further
force and effect without liability on the part of either of the
Constituent Corporations, its stockholders, Board of Directors
and officers thereof.
3
<PAGE>
IN WITNESS WHEREOF, each party to this Agreement and Plan of
Merger, pursuant to the authority duly given by their respective
Boards of Directors, has caused this Agreement and Plan of Merger
to be executed on its behalf by its President and attested to by
its Secretary as the date and year first written above.
CASINOVATIONS INCORPORATED,
a Washington Corporation
By: /s/ Steven J. Blad
-----------------------------------
Steven J. Blad, President and CEO
By: /s/ Jay L. King
-----------------------------------
Jay L. King, Secretary
CASINOVATIONS INCORPORATED,
a Nevada corporation
By: /s/ Steven J. Blad
-----------------------------------
Steven J. Blad, President and CEO
By: /s/ Jay L. King
-----------------------------------
Jay L. King, Secretary
4
<PAGE>
CASINOVATIONS INCORPORATED
1999 STOCK OPTION PLAN
AS APPROVED BY THE BOARD OF DIRECTORS ON JANUARY 5, 1999
1. PURPOSE
The purpose of the Casinovations Incorporated Stock Option
Plan is to further the interests of Casinovations Incorporated, a
Washington corporation (the "Company"), by encouraging and
enabling selected officers, directors, employees, consultants,
advisers, independent contractors and agents, upon whose
judgment, initiative and effort the Company is largely dependent
for the successful conduct of its business, to acquire and retain
a proprietary interest in the Company by ownership of its stock
through the exercise of stock options to be granted hereunder.
Options granted hereunder are either options intended to qualify
as "incentive stock options" within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended, or non-qualified
stock options.
2. DEFINITIONS
Whenever used herein the following terms shall have the
following meanings, respectively:
(a) "Board" shall mean the Board of Directors of the
Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Committee" shall mean the Stock Option or Compensation
Committee appointed by the Board, or if no committee has been
appointed, a reference to "Committee" shall be deemed to refer to
the Board.
(d) "Common Stock" shall mean the Company's Common Stock,
$.001 par value.
(e) "Company" shall mean Casinovations Incorporated, a
Washington corporation.
(f) "Employee" shall mean, in connection with Incentive
Options, only employees of the Company.
(g) "Fair Market Value Per Share" of the Common Stock on
any date shall mean, if the Common Stock is publicly traded, the
mean between the highest and lowest quoted selling prices of the
Common Stock on such date or, if not available, the mean between
the bona fide bid and asked prices of the Common Stock on such
date. In any situation not covered above or if there were no
sales on the date in question, the Fair Market Value Per Share
shall be determined by the Committee in accordance with Section
20.2031-2 of the Federal Estate Tax Regulations.
(h) "Incentive Option" shall mean an Option granted under
the Plan which is designated as and qualified as an incentive
stock option within the meaning of Section 422 of the Code.
(i) "Non-Employee Director" shall have the meaning set
forth in Rule 16b-3 promulgated by the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, as
amended, or any successor rule.
<PAGE>
(j) "Non-Qualified Option" shall mean an Option granted
under the Plan which is designated as a non-qualified stock
option and which does not qualify as an incentive stock option
within the meaning of Section 422 of the Code.
(k) "Option" shall mean an Incentive Option or a Non-
Qualified Option.
(l) "Optionee" shall mean any person who has been granted
an Option under the Plan.
(m) "Outside Director" shall have the meaning set forth in
Section 162(m) of the code.
(n) "Permanent Disability" shall mean termination of a
Relationship with the Company with the consent of the Company by
reason of permanent and total disability within the meaning of
Section 22(e)(3) of the Code.
(o) "Plan" shall mean the Casinovations Incorporated Stock
Option Plan, as amended.
(p) "Relationship" shall mean that the Optionee is or has
agreed to become an officer, director, employee, consultant,
adviser, independent contractor or agent of the Company or any
Subsidiary of the Company.
(q) "Termination for Cause" means the termination of any
employee's employment with the Company, whether voluntary or
involuntary, that is determined by the Committee to have resulted
from the discovery by the Company of the employee's dishonesty,
commission of a felony (regardless of whether or not prosecuted)
or fraud.
3. ADMINISTRATION
(a) The Plan shall be administered by a Committee of at
least two directors of the Company appointed by the Board, all
members of which are both Non-Employee Directors and Outside
Directors. The Board may from time to time appoint members of
the Committee in substitution for or in addition to members
previously appointed and may fill vacancies. In the event the
Board fails to designate a committee to administer the Plan, the
Plan shall be administered by the Board. To the extent not
inconsistent with applicable law, the Board or Committee may from
time to time delegate to one or more officers of the Company any
or all of its authorities granted hereunder except with respect
to awards to persons subject to Section 16 of the Securities
Exchange Act of 1934, as amended.
(b) Any action of the Committee with respect to the
administration of the Plan shall be taken by majority vote or by
written consent of a majority of its members, and all actions of
the Committee are subject to approval by the Board.
(c) Subject to the provisions of the Plan, the Committee
shall have the authority to construe and interpret the Plan, to
define the terms used therein, to determine the time or times an
Option may be exercised and the number of shares which may be
exercised at any one time, to prescribe, amend and rescind rules
and regulations relating to the Plan, to approve and determine
the duration of leaves of absence which may be granted to
participants without constituting a termination of their
employment for purposes of the Plan, and to make all other
determinations necessary or advisable for the administration of
the Plan.
(d) The Company shall indemnify and hold harmless the
members of the Board and the Committee from and against any and
all liabilities, costs and expenses incurred by such persons as a
result of any act, or omission to act, in connection with the
performance of such persons' duties, responsibilities
Page 2 of 8
<PAGE>
and obligations under the Plan, other than such liabilities,
costs and expenses as may result from the negligence, bad faith,
willful misconduct or criminal acts of such persons.
(e) The Company will provide financial information to the
Optionees on the same basis as the Company provides such
information to its shareholders.
(f) The Committee's interpretation and construction of any
provisions of this Plan or any option granted under this Plan
shall be final, conclusive and binding upon all Optionees, their
guardians, legal representatives and beneficiaries, the Company
and all other interested parties.
4. NUMBER OF SHARES SUBJECT TO PLAN
The aggregate number of shares of Common Stock subject to
Options which may be granted under the Plan shall not exceed
500,000 shares. The shares of Common Stock to be issued upon the
exercise of Options may be authorized but unissued shares, shares
issued and reacquired by the Company or shares purchased by the
Company on the open market. If any Option granted hereunder shall
expire or terminate for any reason without having been exercised
in full, the unpurchased shares subject thereto shall again be
available for the purposes of the Plan.
5. ELIGIBILITY AND PARTICIPATION
(a) Non-Qualified Options may be granted to any person who
has a Relationship with the Company or any of its Subsidiaries.
Incentive Options may be granted to any Employee. The Committee
shall determine the persons to who Options shall be granted, the
time or times at which such Options shall be granted and the
number of shares to be subject to each Option. An Optionee may,
if he is otherwise eligible, be granted an additional Option or
Options if the Committee shall so determine. An Employee may be
granted Incentive Options or Non-Qualified Options or both under
the Plan; provided, however, that the grant of Incentive Options
and Non-Qualified Options to an Employee shall be the grant of
separate Options and each Incentive Option and each Non-Qualified
Option shall be specifically designated as such.
(b) In no event shall the aggregate fair market value
(determined as of the time the Option is granted) of the shares
with respect to which Incentive Options (granted under the Plan
or any other plans of the Company or any Subsidiary or Parent
Corporation of the Company) are exercisable for the first time by
an Optionee in any calendar year exceed $100,000.
(c) In no event shall the aggregate number of shares of
Common Stock with respect to which Options may be granted to a
single Optionee during the term of the Plan exceed 20 percent of
the aggregate number of shares of Common Stock subject to Options
which may granted to all Optionees under the plan.
6. PURCHASE PRICE
The purchase price of each share covered by each Incentive
Option shall not be less than 100% of the Fair Market Value Per
Share of the Common Stock on the date the Incentive Option is
granted; provided, however, that if at the time an Incentive
Option is granted the Optionee owns or would be considered to own
by reasons of Section 424(d) of the Code more that 10% of the
total combined voting power of all classes of stock of the
Company or any Subsidiary or Parent Corporation of the Company,
the purchase price of the shares covered by such Incentive Option
shall not be less than 110% of the Fair Market Value Per Share of
the Common Stock on the date the Incentive Option is granted.
Page 3 of 8
<PAGE>
7. DURATION OF OPTIONS
The expiration date of the Option and all rights thereunder
shall be determined by the Committee. In the event the
Committee does not specify the expiration date of the Option,
the expiration date shall be 10 years from the date on which the
Option was granted, and shall be subject to earlier termination
as provided herein; provided, however, that if at any time an
Incentive option is granted the Optionee owns or would be
considered to own by reason of Section 424(d) of the code more
that 10% of the total combined voting power of all classes of
stock of the Company such Incentive Option shall expire five
years from the date the Incentive Option is granted unless the
Committee selects an earlier date.
8. EXERCISE OF OPTIONS
(a) An Option shall vest and become exercisable from time
to time in installments or otherwise in accordance with such
schedule and upon such other terms and conditions as the
Committee shall in its discretion determine at the time the
Option is granted. An Optionee may purchase less than the total
number of shares for which the Option is exercisable, provided
that a partial exercise of an Option may not be for less that 100
shares, unless the exercise is during the final year of the
Option, and shall not include any fractional shares. As a
condition to the exercise, in whole or in part, of any Option,
the Committee may in its sole discretion require the Optionee to
pay, in addition to the purchase price of the shares covered by
the Option, an amount equal to any federal, state or local taxes
that the Committee has determined are required to be paid in
connection with the exercise of such Option in order to enable
the Company to claim a deduction or otherwise. Furthermore, if
any Optionee disposes of any shares of stock acquired by exercise
of an Incentive Option prior to the expiration of either of the
holding periods specified in Section 422(a)(1) of the Code, the
Optionee shall pay to the Company, or the Company shall have the
right to withhold from any payment to be made to the Optionee, an
amount equal to any federal, state or local taxes that the
Committee has determined are required to be paid in connection
with the exercise of such Option in order to enable the Company
to claim a deduction.
(b) No Option will be exercisable (and any attempted
exercise will be deemed null and void) if such exercise would
create a right of recovery for "short-swing profits" under
Section 16(b) of the Securities Exchange Act of 1934, as amended.
This Section 8(b) is intended to protect persons subject to
Section 16(b) against inadvertent violations of Section 16(b) and
shall not apply with respect to any particular exercise of an
Option if expressly waived in writing by the Optionee at the time
of such exercise.
9. METHOD OF EXERCISE
(a) To the extent that an Option has become exercisable,
the Option may be exercised from time to time by giving written
notice to the Company stating the number of shares with respect
to which the Option is being exercised, accompanied by payment in
full, by cash or by certified or cashier's check payable to the
order of the Company or the equivalent thereof acceptable to the
Company, of the purchase price for the number of shares being
purchased and, if applicable, any federal, state or local taxes
required to be paid in accordance with the provisions of Section
8(a) hereof. The Company shall issue a separate certificate or
certificates with respect to each Option exercised by an
Optionee.
(b) In the Committee's discretion, payment of the purchase
price for the shares with respect to which the Option is being
exercised may be made in whole or in part with shares of Common
Stock. If payment is made with shares of Common Stock, the
Optionee, or other person entitled to exercise the Option, shall
deliver to the Company certificates representing the number of
shares of Common Stock in payment for the shares being purchased,
duly endorsed for transfer to the Company. If requested by the
Committee, prior to the acceptance of such certificates in
payment for such shares, the Optionee, or any
Page 4 of 8
<PAGE>
other person entitled to exercise the Option, shall supply the
Committee with a representation and warranty in writing that he
has good and marketable title to the shares represented by the
certificate(s), free and clear of all liens and encumbrances. The
value of the shares of Common Stock tendered in payment for the
shares being purchased shall be their Fair Market Value Per Share
on the date of the exercise.
(c) Notwithstanding the foregoing, the Company shall have
the right to postpone the time of delivery of the shares for
such period as may be required for it to comply, with reasonable
diligence, with any applicable listing requirements of any
national securities exchange or any federal, state or local law.
If an Optionee or other person entitled to exercise an Option
fails to accept delivery of or fails to pay for all or any
portion of the shares requested in the notice of exercise upon
tender of delivery thereof, the Committee shall have the right to
terminate his Option with respect to such shares.
10. NON-TRANSFERABILITY OF OPTIONS
No Option granted under the Plan shall be assignable or
transferable by the Optionee, either voluntarily or by operation
of law, otherwise than by will or the laws of descent and
distribution, and each Option shall be exercisable during the
Optionee's lifetime only by the Optionee.
11. CONTINUANCE OF RELATIONSHIP
Nothing contained in the Plan or in any Option granted under
the Plan shall confer upon any Optionee any right with respect to
the continuation of his employment by or other Relationship with
the Company, or interfere in any way with the right of the
Company at any time to terminate such employment or other
Relationship or to increase or decrease the compensation of the
Optionee from the rate in existence at the time of the grant of
an Option.
12. TERMINATION OF RELATIONSHIP OTHER THAN BY DEATH OR PERMANENT
DISABILITY
Except as the Committee may otherwise determine at any time
with respect to any particular Non-Qualified Option granted
hereunder:
(a) If an Optionee ceases to have a Relationship for any
reason other than his death or Permanent Disability, any Options
granted to him shall terminate 90 days from the date on which
such Relationship terminates unless such Optionee has resumed or
initiated a Relationship and has a Relationship on such date.
During the 90 day period, the Optionee may exercise any Option
granted to him but only to the extent such Option was exercisable
on the date of termination of his Relationship and provided that
such Option has not expired or otherwise terminated as provided
herein. A leave of absence approved in writing by the Committee
shall not be deemed a termination of Relationship for purposes of
this Section 12, but no Option may be exercised during any such
leave of absence, except during the first 90 days thereof.
(b) For purposes hereof, termination of an Optionees's
Relationship for reasons other than death or Permanent Disability
shall be deemed to take place upon the earliest to occur of the
following: (i) the date of the Optionee's retirement from
employment under the normal retirement policies of the Company;
(ii) the date of the Optionee's retirement from employment with
the approval of the Committee because of disability other than
Permanent Disability; (iii) the date the Optionee receives notice
or advice that his employment or other Relationship is
terminated; or (iv) the date the Optionee ceases to render the
services which he was employed, engaged or retained to render to
the Company or any Subsidiary (absences for temporary illness,
emergencies and vacations or leaves of absence approved in
writing by
Page 5 of 8
<PAGE>
the Committee excepted). The fact that the Optionee may receive
payment from the Company after termination for vacation pay, for
services rendered prior to termination, for salary in lieu of
notice or for other benefits shall not affect the termination
date.
(c) Notwithstanding anything in the Plan to the contrary,
no Option may be exercised or claimed following an Optionee's
termination of Relationship as a result of Termination for Cause,
and no Option may be exercised or claimed while the Optionee is
being investigated for a termination for Cause.
13. DEATH OR PERMANENT DISABILITY OF OPTIONEE
Except as the Committee may expressly determine otherwise at
any time with respect to any particular Non-Qualified Option
granted hereunder, if an Optionee shall die at a time when he is
in a Relationship or if the Optionee shall cease to have a
Relationship by reason of Permanent Disability, any Options
granted to him shall terminate one year after the date of his
death or termination of Relationship due to Permanent Disability
unless by its terms it shall expire before such date or otherwise
terminate as provided herein, and shall only be exercisable to
the extent that it would have been exercisable on the date of his
death or his termination of Relationship due to Permanent
Disability. In the case of death, the Option may be exercised by
the person or persons to whom the Optionee's rights under the
Option shall pass by will or by the laws of descent and
distribution.
14. STOCK PURCHASE NOT FOR DISTRIBUTION
Each Optionee shall, by accepting the grant of an Option
under the Plan, represent and agree, for himself and his
transferees by will or the laws of descent and distribution, that
all shares of stock purchased upon exercise of the Option will be
received and held without a view to distribution except as may be
permitted by the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder. After each notice
of exercise of any portion of an Option, if requested by the
Committee, the person entitled to exercise the Option shall agree
in writing that the shares of stock are being acquired in good
faith without a view to distribution.
15. PRIVILEGES OF STOCK OWNERSHIP
No person entitled to exercise any Option granted under the
Plan shall have any of the rights or privileges of a shareholder
of the Company with respect to any shares of Common Stock
issuable upon exercise of such Option until such person has
become the holder of record of such shares. No adjustment shall
be made for dividends or distributions of rights in respect of
such shares if the record date is prior to the date on which such
person becomes the holder of record, except as provided in
Section 16 hereof.
16. ADJUSTMENTS
(a) If the number of outstanding shares of Common Stock is
increased or decreased, or if such shares are exchanged for a
different number or kind of shares or securities of the Company
through reorganization, merger, recapitalization,
reclassification, stock dividend, stock split, combination of
shares or other similar transaction, the aggregate number of
shares of Common Stock subject to the Plan as provided in Section
4 hereof, the share of Common Stock subject to issued and
outstanding Option under the Plan and the aggregate number of
shares of Common Stock with respect to which Options may be
granted to a single Optionee as provided in Section 5(c) hereof
shall be appropriately and proportionately adjusted by the
Committee. Any such adjustment in the outstanding Options shall
be made without change in the aggregate purchase price applicable
to the unexercised portion of the Option but with an appropriate
adjustment in the price for each share or other unit of any
security covered by the
Page 6 of 8
<PAGE>
Option. No adjustment shall be made on account of any transaction
or event not specifically set forth in this Section 16(a),
including, without limitation, the issuance of Common Stock for
consideration.
(b) Notwithstanding the provision of Section 16(a), upon
the dissolution or liquidation of the Company or upon any
reorganization, merger or consolidation with one or more
corporations as a result of which the Company is not the
surviving corporation, or upon a sale of all or substantially all
of the assets of the Company to another corporation or entity,
the Committee may take such action, if any, as it in its
discretion may deem appropriate to accelerate the time within
which and the extent to which Options may be exercised, to
terminate Options at or prior to the date of any such event, or
to provide for the assumption of Options by surviving,
consolidated, successor or transferee corporations.
(c) Adjustments under this Section 16 shall be made by the
Committee, whose determination as to which adjustments shall be
made, and the extent thereof, shall be final, binding and
conclusive. No fractional shares of stock shall be issued under
the Plan or in connection with any such adjustment.
17. CHANGE OF CONTROL
Notwithstanding any other section this Plan, in the event of
a change of control, all share restrictions on all Restricted
Shares will lapse and vesting on all unexercised stock options
will accelerate to the change of control date. For purposes of
this plan, a "Change of Control" of the Company shall be deemed
to have occurred at such time as (a) any "person" (as that term
is used in Section 13(d) and 14(d) of the Securities Exchange Act
of 1934, as amended), other than Richard Huson, or his
affiliates, or an employee benefit plan of the Company becomes
the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended), directly or
indirectly, of securities of Rio representing 25.0% or more of
the combined voting power of the Company's outstanding securities
ordinarily having the right to vote at the election of directors;
or (b) individuals who constitute the Board on the date hereof
(the "Incumbent Board") cease for any reason to constitute at
least a majority thereof; or (c) the approval by the Company's
shareholders of the merger or consolidation of the Company with
any other corporation or business organization, the sale of all
or substantially all the assets of the Company, or the
liquidation or dissolution of the Company; or (d) a proxy
statement is distributed soliciting proxies from the shareholders
of the Company seeking shareholder approval of a plan of
reorganization, merger or consolidation of the Company with one
or more corporations as a result of which the outstanding shares
of the Company's securities are actually exchanged for or
converted into cash or property or securities not issued by the
Company; or (e) at least a majority of the Incumbent Board who
are in office immediately prior to any action proposed to be
taken by the Company determine that such proposed action, if
taken, would constitute a change of control of the Company and
such action is taken.
18. TAX WITHHOLDING
The Company shall have the right to deduct or withhold from
al payments or distributions amounts sufficient to cover any
federal, state or local taxes required by law to be withheld or
paid with respect to such payments of distributions. In the case
of non-qualified options, the Company may require that required
withholding taxes be paid to the Company at the time the option
is exercised. The Company may also permit any withholding tax
obligations incurred by reason of the exercise of any stock
option to be satisfied by withholding shares (that would
otherwise be obtained upon such exercise) having a fair market
value equal to the aggregate amount of taxes which are to be
withheld. In the case of persons subject to Section 16(b), such
withholding shall be on terms consistent with Rule 16b-3.
Page 7 of 8
<PAGE>
19. AMENDMENT AND TERMINATION OF PLAN
(a) The Board may from time to time, with respect to any
shares at the time not subject to Options, suspend or terminate
the Plan or amend or revise the terms of the Plan; provided that
any amendment to the Plan shall be approved by a majority of the
shares present and voting at either an annual or special meeting
called for such purpose, if the amendment would (i) materially
increase the benefits accruing to participants under the Plan,
(ii) increase the number of shares of Common Stock which may be
issued under the Plan, except as permitted under the provisions
of Section 16 hereof, or (iii) materially modify the requirements
as to eligibility for participation in the Plan.
(b) No amendment, suspension or termination of the Plan
shall, without the consent of the Optionee, alter or impair in a
manner adverse to the Optionee any right or obligation under any
Option theretofore granted to such Optionee.
(c) The terms and conditions of any Option granted to an
Optionee may be modified or amended only by a written agreement
executed by the Optionee and the Company; provided, however, that
if any amendment or modification of an Incentive Option would
constitute a "modification, extension or renewal" within the
meaning of Section 424(h) of the Code, such amendment shall be
null and void unless the amendment contains an acknowledgment by
the parties substantially in the following form: "The parties
hereto recognize and agree that this amendment constitutes a
modification, renewal or extension within the meaning of Section
424(h) of the Code, of the option granted on
___________________."
20. EFFECTIVE DATE OF PLAN
The Plan shall become effective upon adoption by the Board
and approval by the Company's shareholders; provided, however,
that prior to approval of the Plan by the Company's shareholders,
but after adoption by the Board, Options may be granted under the
Plan subject to obtaining the shareholders' approval of the
adoption of the Plan. Notwithstanding the foregoing,
shareholders' approval must occur no later than 12 months after
the date of adoption of the Plan by the Board. The date of
original adoption of the Plan by the Board was January 5, 1999.
21. TERM OF PLAN
No option shall be granted pursuant to the Plan after 10
years from the earlier of the date of adoption of the Plan by the
Board or the date of approval of the Plan by the Company's
shareholders.
Page 8 of 8
<PAGE>
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (this "Agreement") is made and
entered into as of the _____ day of September 1998 between
Casinovations Incorporated, a Washington corporation
("Purchaser"), and Steven L. Forte and Cheryl Forte, each
individuals (collectively, Steven L. Forte and Cheryl Forte are
referred to herein as "Sellers").
RECITALS
WHEREAS, Purchaser and Sellers have executed a letter
agreement dated May 28, 1998 with respect to the sale by Sellers
and purchase by Purchaser of certain assets of Sellers.
WHEREAS, pursuant to the terms and conditions set forth
herein, Seller desires to sell and assign the aforementioned
assets to Purchaser, and Purchaser desires to purchase and
acquire same from Seller;
NOW, THEREFORE, in consideration of the several and mutual
promises, agreements, covenants, understandings, undertakings,
representations and warranties hereinafter set forth, and for
other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged Sellers and Purchaser
agree that the Recitals are true and correct and by this
reference incorporated herein as if fully set forth, and Sellers
and Purchaser further covenant and agree as follows:
1. TERMS AND CONDITIONS. Subject to the terms and
provisions of the Transaction Documents, Sellers shall sell,
transfer, assign and deliver to Purchaser and Purchaser shall
purchase and acquire from Sellers, all right, title and interest
of Sellers in and to the certain assets and rights (contractual
or otherwise) of Sellers, wherever located, as follows: (a)
848,682 shares of Purchaser's common stock (the "Shares") for
$2.50 per share of common stock; (b) an option to purchase 20,000
shares of Purchaser's common stock (the "Option") for $1.50 per
underlying share of common stock; and (c) the right to receive a
royalty on sales of the Random Ejection Shuffler and Fantasy 21
table game (the "Royalty") for the price of Two Hundred Thousand
and no/100ths Dollars ($200,000.00).
2. CONSIDERATION. In exchange for the Shares, the Option
and the Royalty, the Company shall execute the following
documents on even date herewith: (a) a promissory note in the
amount of Two Million Three Hundred Fifty One Thousand Seven
Hundred Five and no/100ths Dollars ($2,351,705.00 U.S.); (b) a
security agreement; and (c) a stock pledge agreement.
3. AMENDMENTS. No provision hereof shall be modified or
limited except by an express written agreement executed by all
parties hereto.
4. APPLICABLE LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of Nevada.
5. COUNTERPARTS. This Agreement may be executed in
counterparts, all of which shall be deemed an original and all of
which, taken together, shall constitute one signed agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed
this Agreement as of the date first above written.
"PURCHASER" "SELLERS"
CASINOVATIONS INCORPORATED
By: /s/ Steven J. Blad /s/ Steven L. Forte
-------------------------- ----------------------------
Steven J. Blad Steven L. Forte
Its: Chief Executive Officer
/s/ Cheryl Forte
----------------------------
Cheryl Forte
STANDARD LEASE
SPENCER AIRPORT CENTER
ARTICLE 1 BASIC LEASE TERMS
1.01 Premises Leased
1.02 Project
1.03 Term
1.04 Rent
1.05 Operating Expenses
1.06 Security Deposit
1.07 Permitted Use
1.08 Addresses for Payments, Notices and Deliveries
1.09 Broker
1.10 Building Improvements
1.11 Payments Upon Execution
ARTICLE 2 PREMISES
2.01 Leased Premises
2.02 Delivery and Acceptance of Premises
2.03 Building Name and Address
ARTICLE 3 TERM
3.01 General
3.02 Tender of Possession by Lessor
3.03 Delay in Possession
3.04 Early Occupancy
3.05 Option Term(s)
ARTICLE 4 RENT AND OPERATING EXPENSES
4.01 Base Rent
4.02 Operating Expenses
4.03 Cost of Living Increases
4.04 Security Deposit
4.05 Option Rent
ARTICLE 5 USES
5.01 Use
5.02 Hazardous Materials
5.03 Signs and Auctions
5.04 Year 2000 Compliance
ARTICLE 6 COMMON FACILITIES AND VEHICLE PARKING
6.01 Operation and Maintenance of Common Facilities
6.02 Use of Common Facilities
6.03 Parking
6.04 Changes and Additions by Lessor
ARTICLE 7 MAINTENANCE, REPAIRS AND ALTERATIONS
7.01 Lessor's Obligations
7.02 Lessee's Obligations
7.03 Alterations and Additions
7.04 Utility Additions
7.05 Entry and Inspection
ARTICLE 8 TAXES AND ASSESSMENTS ON LESSEE'S PROPERTY
8.01 Taxes of Lessee's Property
ARTICLE 9 UTILITIES
ARTICLE 10 ASSIGNMENT AND SUBLETTING
10.01 Rights of Parties
10.02 Effect of Transfer
ARTICLE 11 INSURANCE AND INDEMNITY
11.01 Liability Insurance - Lessee
11.02 Lessor's Insurance
11.03 Waiver of Subrogation
11.04 Policies
11.05 Lessee's Indemnity
11.06 Lessor's Non-Liability
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<PAGE>
ARTICLE 12 DAMAGE OR DESTRUCTION
12.01 Restoration
ARTICLE 13 EMINENT DOMAIN
13.01 Total or Partial Taking
13.02 Temporary Taking
13.03 Taking of Parking Area
ARTICLE 14 SUBORDINATION, ESTOPPEL CERTIFICATE
14.01 Subordination
14.02 Estoppel Certificate
ARTICLE 15 DEFAULTS AND REMEDIES
15.01 Lessee's Defaults
15.02 Lessor's Remedies
15.03 Repayment of "Free" Rent
15.04 Cumulative Remedies
15.05 Late Payments
15.06 Right of Lessor to Perform
15.07 Default by Lessor
15.08 Expenses and Legal Fees
ARTICLE 16 END OF TERM
16.01 Holding Over
16.02 Merger on Termination
16.03 Surrender of Premises; Removal of Property
16.04 Termination; Advance Payments
ARTICLE 17 PAYMENTS AND NOTICES
ARTICLE 18 LIMITATION OF LIABILITY
ARTICLE 19 BROKER'S COMMISSION
ARTICLE 20 TRANSFER OF LESSOR'S INTEREST
ARTICLE 21 INTERPRETATION
21.01 Gender and Number
21.02 Headings
21.03 Joint and Several Liability
21.04 Successors
21.05 Time of Essence
21.06 Severability
21.07 Entire Agreement
21.08 Covenants and Conditions
21.09 Counterparts
21.10 Indemnities
21.11 Attachments
2
<PAGE>
LEASE
(FREESTANDING BUILDING)
This lease is hereby dated for reference purposes only as of
October 7,1998 by and between SPENCER AIRPORT CENTER, LLC, a
Delaware limited liability company (herein called "Lessor") and
CASINOVATIONS INCORPORATED, a Washington corporation (herein
called "Lessee").
ARTICLE 1 BASIC LEASE TERMS
Each reference in this Lease to the "Basic Lease Terms"
shall mean and refer to the following collective terms, the
application of which shall be governed by the provisions in the
remaining articles of this Lease.
1.01 Premises Leased:
a. Premises Address: 6744 Spencer Street
b. Rental Area: 19,160 approximate square feet
c. Building Designation: "A"
1.02 Project:
a. Project Name: Spencer Airport Center
b. Total Project Rental Area: 114,446 square
feet
1.03 Term:
a. Commencement Date: February 1, 1999
b. Number of Calendar Months (Initial Term): 60
months
c. Option to: One (1) five (5) year option.
1.04 Rent:
a. Base Rent: Initial Term (i) $9,796.00/month
during months one (1) through twelve (12); (ii) $14,370.00/month
during months thirteen (13) through twenty-four (24); (iii)
months twenty-five (25) through sixty (60) will have the first
CPI increases annually subject to annual rent adjustment per
Article 1.04b below. Where reference is made in this Lease to
rent as provided in Section 1.04a, or where such reference is
made to the term "Original Monthly Rent", such rent shall be
deemed to be $14,370.00. In addition, operating expenses are due
and payable throughout the term of the Lease.
b. Rent Adjustments: The base rent shall be
increased annually commencing the twenty-five (25) month of this
Lease in accordance with the Consumer Price Index, as provided in
Section 4.03. Said adjustment will have a cap of 3% per annum.
1.05 Operating Expenses: Lessor estimates Operating Expenses
during the calendar year when the Lease commences to be (i)
$1,568.00/month during months one (1) through twelve (12) (ii)
$2,300.00/month during months thirteen (13) through sixty (60).
Operating Expenses are in addition to the Base Rent set forth in
Section 1.04.
1.06 Security Deposit: $14,459.00. In addition to the cash
security deposit, Lessee shall provide to Lessor a performance
bond in the form of Exhibit C to this Lease, expiring not earlier
than twenty-four (24) months after the Commencement Date, in the
amount of one hundred seventy-five thousand dollars ($175,000.00)
(the "Bond Amount"), issued by a corporate surety (the "Surety")
acceptable to Lessor in its sole discretion. The performance
bond amount guarantees only the payment of monthly rent and
operating expenses for the twenty-four (24) months period
commencing on the Commencement date.
Before demanding payment under the performance bond, Lessor shall
provide written notice to both the Lessee and Surety of a default
due to payments not made under the terms of this lease. If such
default continues for thirty (30) days after written notice by
the Lessor to Lessee and Surety, the Lessor may demand payment of
the entire Bond Amount under the terms of the performance bond.
Upon receipt of the Bond Amount, Lessor will apply the Bond
Amount to any past due rent and operating expenses, and will hold
any remaining portion of the Bond Amount to pay rent and
operating expenses as they become due and payable. Any unapplied
funds will be returned to the Surety at the end of the lease
agreement. Notice to the Surety shall be provided to the
following address: 8625 SW Cascade Blvd., Suite 500, Beaverton,
OR 97008.
1.07 Permitted Use: Office and manufacturing of gaming products;
lessee may use the premises for any lawful purpose, not otherwise
prohibited by Section 5.01, providing no hazardous or
environmental materials are placed on the premises.
1.08 Addresses for Payments, Notices and Deliveries:
Lessor: Spencer Airport Center
6754 Spencer Street
Las Vegas, Nevada 89119
Lessee: Casinovations Incorporated
5240 South Eastern Avenue
Las Vegas, NV 89119
1.9 Brokers: Nevada Brokers, Inc.
6800 Paradise Road
Las Vegas, NV 8919
3
<PAGE>
1.10 Building Improvements: The tenant improvement allowance
including plans, permits and fees shall be $244,556.00. Should
Lessee anytime throughout the lease term, desire to perform
additional modifications at Lessee's cost, bids may be obtained
from Lessor's contractor or another licensed, bonded contractor
subject to Lessor's approval. If an outside contractor is
chosen, Lessee shall be subject to the following requirements:
Lessee must meet with Lessor to review the selected contractor's
bid in order to ascertain that all construction modifications
meet code requirements, prior to commencement of construction;
Provide Lessor with contractor's license and bond status; Comply
with the attached Tenant Specification Guidelines; Provide Lessor
with the buildout plans and subsequent permits for same prior to
construction; and Provide Lessor with the Building Department
final sign off and Certificate of Occupancy. Lessor will post
Notice of Non-Responsibility during said modification period.
1.11 Payments Upon Execution: The first installment of Base Rent
$9,860.00 the first month's Operating Expenses $1,740.00, and a
Security Deposit of $14,459.00 for a total of $26,059.00, which
shall be delivered to Lessor concurrently with Lessee's execution
of this Lease.
ARTICLE 2 PREMISES
2.01 Leased Premises: Lessor leases to Lessee and Lessee rents
from Lessor the Premises (herein the "Premises"), containing the
rental area set forth in Section 1.01b of the Basic Lease Terms.
The Premises are located at the building identified in the Basic
Lease Terms (which together with underlying real property is
called herein the "Building"), and is a portion of the project
including other buildings described in Section 1.02a of the Basic
Lease Terms (herein the "Center"). The Premises and the Center
are indicated on a site plan attached hereto as Exhibit "A". If,
upon completion of the space plans for the Premises, Lessor's
architect or space planner determines that the rentable square
footage of the Premises differs from that set forth in the Basic
Lease Terms, then Lessor shall so notify Lessee, and the Base
Rent (as shown in Section 1.04 of the Basic Lease Terms) shall be
promptly adjusted in proportion to the change in square footage.
Within ten (10) days following Lessor's request, the parties
shall memorialize the adjustments by executing a certificate to
this Lease prepared by Lessor, provided that the failure or
refusal by either party to execute the certificate shall not
affect its validity. The form of such certificate is Exhibit
"B".
2.02 Delivery and Acceptance of Premises: Lessor shall deliver
the Premises to Lessee clean and free of debris, on the
Commencement Date (unless Lessee is already in possession), and
Lessor further warrants to Lessee that the Common Facilities
referred to in Article 6, plumbing, heating, air conditioning,
ventilating, electrical, lighting facilities and equipment with
the Premises, fixtures, walls (interior and exterior),
foundations, ceilings, roofs, floors, windows, access doors,
loading doors, plate glass and skylights shall be in good
operating condition on the Commencement Date. In the event that
it is determined that this warranty has been violated, then it
shall be the obligation of the Lessor, after receipt of written
notice from Lessee setting forth with specificity the nature of
the violation, to promptly, at Lessor's sole cost, rectify such
violation. Lessee's failure to give such written notice to
Lessor within six (6) months after the Commencement Date shall
cause the conclusive presumption that Lessor has complied with
all of Lessor's obligations hereunder, unless such defect is not
readily ascertainable during that period of time. The warranty
contained in this Section shall be of no force or effect if prior
to the date of this Lease Lessee was the owner or occupant of the
Premises.
Except as otherwise provided in this Lease, Lessee hereby
accepts the Premises in their condition existing as of the
Commencement Date or the date that Lessee takes possession of the
Premises, whichever is earlier, subject to all applicable zoning,
municipal, county and state laws, ordinances and regulations
governing and regulating the use of the Premises and any
covenants or restrictions of record, and accepts this Lease
subject thereto and to all matters disclosed thereby and by any
exhibits attached hereto. Lessee acknowledges that neither
Lessor nor Lessor's agent has made any representation or warranty
as to the present or future suitability of the Premises for the
conduct of Lessee's business.
2.03 Building Name and Address: Lessee shall not utilize any
name selected by Lessor from time to time for the Building as any
part of Lessee's corporate or trade name. Lessor shall have the
right to change the name, number or designation of the Building
without notice or liability to Lessee.
ARTICLE 3 TERM
3.01 General: The term shall be for the period shown in Section
1.03b of the Basic Lease Terms. Subject to the provisions of
Section 3.03, the term shall commence on the commencement date
(herein "Commencement Date") on the earliest of (a) the Estimated
Commencement Date as set forth in Section 1.03a of the Basic
Lease Terms, or (b) the date Lessee acquires possession or
commences use of the Premises for any purpose other than
construction. Within ten (10) days after possession of the
Premises is tendered to Lessee, the parties shall execute the
Exhibit "B" Certificate form provided by Lessor, which shall
state the Commencement Date and the expiration date ("Expiration
Date") of the Lease. Lessee's failure to execute that form shall
not affect the validity of Lessor's determination of those dates.
3.02 Tender of Possession by Lessor: The Premises shall be
deemed ready for occupancy upon the tendered date, but only if
and when Lessor, to the extent applicable, (a) has provided
reasonable access to the Premises for Lessee so that it may be
used without unnecessary interference, (b) has substantially
completed all the work required to be done by Lessor in this
lease, and (c) has obtained requisite governmental approvals to
Lessee's occupancy.
3.03 Delay in Possession: Notwithstanding the provisions of
Section 3.01, if Lessor, for any reason whatsoever, cannot
deliver possession of the Premises to Lessee on/or before the
Estimated Commencement Date, this Lease shall
4
<PAGE>
not be void or voidable nor shall Lessor be liable to Lessee for
any resulting loss or damage. However, Lessee shall not be
liable for any rent and the Commencement Date shall not occur
until Lessor delivers possession of the Premises and the Premises
are in fact ready for occupancy in accordance with Section 3.02;
except that if Lessor's failure to so deliver possession on the
Estimated Commencement Date is attributable to any material
action or inaction by Lessee (including any tenant improvement
construction change order requested by Lessee or Lessee's failure
to supply any information required from Lessee or the furnishing
by Lessee of inaccurate or erroneous estimates, specifications,
data or other information), then the Commencement Date shall not
be advanced to the date on which possession of the Premises is
tendered to Lessee, and Lessor shall be entitled to full
performance by Lessee (including the payment of rent) from the
Estimated Commencement Date.
3.04 Early Occupancy: If Lessee occupies the Premises prior to
the Estimated Commencement Date, Lessee's occupancy of the
Premises shall be subject to all of the provisions of this Lease.
Early occupancy of the Premises shall not advance the expiration
date of this Lease. Lessee shall not pay Base Rent, Operating
Expenses and all other charges, including, without limitation,
insurance specified in this Lease for the early occupancy period,
upon Lessor's demand for same.
3.05 Option Term(s): Lessee is hereby granted the right and
option to extend this Lease for the additional term or terms as
provided in Section 1.03c (herein "Option Term" or "Option
Terms") commencing at the expiration of the Initial Term at a
mutually agreeable increase. Such option is granted upon the
following terms and conditions:
a. The Option Term(s) shall be on the same terms,
covenants, conditions, provisions and agreements as in this Lease
and any amendments thereto except for forgiveness of Base Rent,
if applicable.
b. Lessee duly and regularly pays the rent and all other
amounts required to be paid pursuant to this Lease and performs
each and every covenant, provision and agreement on the part of
the Lessee to be paid, rendered, observed and performed herein.
c. Lessee gives to Lessor and Lessor receives from Lessee
written notice of the exercise of each option to extend this
Lease no earlier than nine (9) months and no later than six (6)
months prior to the expiration of the term immediately preceding
the Option Term(s) to be exercised, time being of the essence.
If said notification is not given and received, the option to be
exercised shall automatically expire. Failure to exercise the
first option shall result in automatic expiration of the second
if one so exists.
ARTICLE 4 RENT AND OPERATING EXPENSES
4.01 Base Rent: From and after the Commencement Date, Lessee
shall pay without deduction or offset a Base Rent for the
Premises in the total amount shown (including subsequent
adjustments, if any) in Section 1.04a of the Basic Lease Terms.
The rent shall be due and payable in equal monthly installments
on the first day of each month, in advance, except that if the
Commencement Date occurs on a day other than the first day of the
month, the first installment of Base Rent shall include rent for
both the fractional month, if any, starting with the Commencement
Date and the following calendar month. No demand, notice or
invoice shall be required.
4.02 Operating Expenses:
a. Lessee shall pay to Lessor during the term hereof, in
addition to the Base Rent, Lessee's share, as hereinafter
defined, of all Operating Expenses, as hereinafter defined,
during each year of the term of this Lease.
b. "Lessee's Share" is defined, for purposes of this
Lease, as the percentage determined by dividing the square
footage of the Premises by the total square footage of the
rentable space contained in the Center. It is understood and
agreed that the square footage figures set forth in the Basic
Lease Terms are approximations which Lessor and Lessee agree are
reasonable and shall not be subject to revision except in
connection with an actual change in the size of the Premises or a
change in the space available for lease in the Center.
c. The term "Operating Expenses" shall include (i) all
expenses attributable to Lessor's obligations for operation,
replacement, repair and maintenance in neat, clean, good order
and condition of the Center, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways,
parkways, driveways, landscaped areas, striping, bumpers,
irrigation systems, common lighting facilities, fences and gates,
tenant directories and any other services to be provided by
Lessor under this Lease; (ii) property taxes, general or special
assessments, and costs and expenses in contesting the amount or
validity of any property tax by appropriate proceedings; (iii)
parkway water and sewer charges and other publicly mandated
services to the Center; (iv) insurance premiums for liability and
property insurance maintained by Lessor pursuant to Article 11 or
reasonable premium equivalents should Lessor elect to self-insure
any risk that Lessor is authorized to insure hereunder; (v)
license, permit and inspection fees; (vi) air conditioning
maintenance; (vii) supplies, materials, equipment, tools,
amortization of capital investments reasonably intended to
produce a reduction in operating charges or energy conservation,
labor, any expense incurred pursuant to Article 6, 7, 11 and 12,
and (viii) a reasonable overhead/management fee which shall
include, without limitation, allocated wages and salaries, fringe
benefits and payroll taxes for administrative, accounting and
other personnel applicable to the Center. It is understood that
Operating Expenses shall include competitive charges for direct
services provided by any subsidiary or division of Lessor,
including reasonable supervisory or overhead fees. The term
"property taxes" (billed separately) as used herein shall include
the following: (i) all real estate taxes or personal property
taxes (on Lessor's personal property used for the Center), as
such property
5
<PAGE>
taxes may be reassessed from time to time; (ii) other taxes,
documentary transfer fees, charges and assessments which are
levied with respect to this Lease or to the Premises and/or the
Center, and any improvements, fixtures and equipment and other
property of Lessor located in the Center, except that general net
income and franchise taxes imposed against Lessor which shall be
excluded; and (iii) any tax surcharge or assessment which shall
be levied in addition to or in lieu of real estate or personal
property taxes, other than taxes covered by Article 8. A copy of
Lessor's unaudited statement of expenses shall be made available
to Lessee upon request.
d. The inclusion of the improvements, facilities and
services set forth in the definition of Operating Expenses shall
not be deemed to impose an obligation upon Lessor to either have
said improvements or facilities or to provide those services
unless the Center already has the same, Lessor already provides
the services or Lessor has agreed elsewhere in this Lease to
provide the same or some of them.
e. Lessee's Share of Operating Expenses shall be payable
by Lessee within ten (10) days after a reasonably detailed
statement of actual expenses is presented to Lessee by Lessor.
At Lessor's option, however, an amount may be estimated by Lessor
from time to time of Lessee's share of annual Operating Expenses
and the same shall be payable monthly or quarterly, as Lessor
shall designate, during each calendar year of the Term, on the
same day as the Base Rent is due hereunder. In the event that
Lessee pays Lessor's estimate of the Lessee's Share of Operating
Expenses as aforesaid, Lessor shall deliver to lessee within
sixty (60) days after expiration of each calendar year a
reasonably detailed statement showing Lessee's share of the
actual Operating Expenses incurred during the preceding year. If
Lessee's payments under this subparagraph during said preceding
calendar year exceed Lessee's Share as indicated on said
statement, Lessee shall be entitled to credit in the amount of
such overpayment against Lessee's Share of Operating Expenses
next falling due. If Lessee's payments under this subparagraph
during said preceding calendar year were less than Lessee's Share
as indicated on said statement, Lessee shall pay to Lessor the
amount of the deficiency within thirty (30) days after delivery
by Lessor to Lessee of said statement. Changes in rental amounts
will be made March 1st of each year.
f. If, at any time during any calendar year, any one or
more of the Operating Expenses are increased to a rate(s) or
amount(s) in excess of the rate(s) or amount(s) used in
calculating the estimated Operating Expenses for the year, then
Lessee's estimated amount of Operating Expenses shall be
increased for the month in which the increase becomes effective
and for all succeeding months by an amount equal to Lessee's
proportionate share of the increase. Lessor shall give Lessee
written notice of the amount or estimated amount of the increase,
the month in which the increase will become effective, Lessee's
monthly share thereof and the months for which the payments are
due. Lessee shall pay the increase to Lessor as a part of the
Lessee's monthly payments of Estimated Operating Expenses as
provided in subparagraph "b" above, commencing with the month in
which effective.
g. Even though the Lease has terminated and Lessee has
vacated the Premises, when the final determination is made of
Lessee's Share of Operating Expenses for any prior calendar year
in which the Lease terminates, Lessee shall immediately upon
notice pay the entire increase due over the estimated expenses
paid. Conversely, any overpayment made in the event expenses
decrease shall be immediately rebated by Lessor to Lessee.
4.03 Cost of Living Increases: Upon the expiration date of the
month referenced in Section 1.04b of the Basic Lease Terms after
the commencement of the Term, and upon the expiration of each
twelve (12) calendar month period thereafter during the Term
hereof, rent shall be adjusted by multiplying the Base Rent as
referenced in Section 1.04a of the Basic Lease Terms by a
fraction, which fraction shall have as its numerator the Consumer
Price Index For All Urban Consumers using the U.S. City Average
(or alternative thereto as hereinafter provided) (Base Period
1982-84=100), as published by the U.S. Department of Labor,
Bureau of Labor Statistics, for the calendar month which is four
(4) months prior to the expiration of the applicable twelve (12)
month period, and which such fraction shall have as its
denominator said Consumer Price Index, as published for the
calendar month which is four (4) months prior to the commencement
of the Term. If the present base of said Index should hereafter
be changed, then the new base shall be converted to the base now
used. In the event that the Bureau should cease to publish said
Index figure, then any similar Index published by any other
branch or department of the U.S. Government shall be used. In
the event said Bureau shall publish more than one such index, the
index showing the greater proportionate increase shall be used,
and if none is so published, then another index generally
recognized as authoritative shall be substituted by agreement of
the parties hereto, or if no such agreement is reached within a
reasonable time, either party may make application to any court
of competent jurisdiction to designate such other index. In any
event, the base used by any new index shall be reconciled to the
1982-84=100 Base Index. In no event shall the rent to be paid by
Lessee pursuant hereto be less than the Base Rent set forth in
Section 1.04a of the Basic Lease Terms or the Base Rent as
adjusted with respect to the next preceding twelve (12) month
period, whichever is the greater. In the event the numerator of
said fraction is not available at the time of adjustment of the
rent as provided herein, Lessee shall continue to pay the rent
established for the immediately prior twelve (12) month period;
provided, however, Lessee shall promptly pay to Lessor any
deficiency at such time as said rent is adjusted. Said
adjustment will commence with the twenty-fifth (25) month of the
Term with a cap of 3% per annum.
4.04 Security Deposit: Concurrently with the execution of this
Lease, Lessee shall deposit with Lessor the sum stated in Section
1.06 of the Basic Lease Terms, to secure the faithful performance
of Lessee's obligations hereunder. If Lessee fails to pay Rent
or other charges due hereunder, or otherwise defaults with
respect to any provision of this Lease, Lessor may use, apply or
retain all or any portion of said deposit for the payment of any
rent or other charges in default or for the payment of any other
sum to which Lessor may become obligated by reason of Lessee's
default, or to compensate Lessor for any loss or damage which
Lessor may suffer thereby. If Lessor so uses or applies all or
any portion of said deposit, Lessee shall, within ten (10) days
after written demand therefor, deposit cash with Lessor in an
amount sufficient to restore said deposit to the full amount
hereinabove stated and lessee's failure to do so shall be a
material breach of this Lease. If the Base monthly rent shall,
from time to time, increase during the Term, Lessee
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shall thereupon deposit with Lessor additional security deposit
so that the amount of security deposit held by Lessor shall at
all times bear the same proportion to current rent as the
original security deposit bears to the original Base monthly rent
set forth in this Article. Lessor shall not be required to keep
said deposit separate from its general accounts. If Lessee
performs all of Lessee's obligations hereunder, said deposit, or
so much thereof as has not theretofore been applied by Lessor,
shall be returned, without payment of interest or other increment
for its use, to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest hereunder) at the
expiration of the Term hereof, and after Lessee has vacated the
Premises. No trust relationship is created herein between Lessor
and lessee with respect to said security deposit. In no event
may Lessee unilaterally apply or credit its deposit against the
last month's rent. Should Lessor sell its interest in the
Premises during the Term hereof and if Lessor deposits with the
Purchaser thereof, the then unappropriated funds deposited by
Lessee as aforesaid, thereupon Lessor shall be discharged from
any further liability with respect to such deposit.
4.05 Option Rent: If Lessee duly exercises its option to extend
this Lease as provided in Section 3.05 above, the rent payable
during the Option Term each annual CPI adjustment will have a cap
of 5% but no less than 3%.
ARTICLE 5 USES
5.01 Use: Lessee shall use the Premises only for the purposes
stated in Section 1.07 of the Basic Lease Terms. Lessee shall
not do, or permit anything to be done, in or about the Premises
which will in any way interfere with the rights of other
occupants of the Building, or use or allow the Premises to be
used for any improper, immoral, unlawful or objectionable
purpose, nor shall Lessee permit any nuisance or commit any waste
in the Premises. Lessee shall not do or permit to be done
anything which will invalidate or increase the cost of any
insurance policy(ies) covering the Building and/or their
contents, and shall comply with all applicable insurance
underwriters' rules and the requirements of the Pacific Fire
Rating Bureau or any other organization performing a similar
function. Lessee shall comply, at its expense, with all present
and future laws, ordinances and requirements of all governmental
authorities that pertain to Lessee or its use of the Premises,
including without limitation, all federal and state occupational
health and safety requirements, whether or not Lessee's
compliance will necessitate expenditures or interfere with its
use and enjoyment of the Premises. Lessee shall promptly upon
demand reimburse Lessor for any additional insurance premium
charged by reason of lessee's failure to comply with the
provisions of this Section, and shall indemnify Lessor from any
liability and/or expense resulting from Lessee's noncompliance.
5.02 Hazardous Materials: Lessee shall not cause, permit or
allow any Hazardous Materials (as defined below) to be brought
upon, kept or used in or about the Premises by Lessee, its
agents, employees, contractors or invitees, without the prior
written consent of Lessor (which consent Lessor shall not
unreasonably withhold as long as Lessee demonstrates to Lessor
reasonable satisfaction that such hazardous materials are
necessary to Lessee's business, and will be used, kept and stored
in a manner that complies with all Hazardous Materials Laws (as
defined below) regulating any such Hazardous materials so brought
upon, used or kept in or about the Premises). If (i) Lessee, its
employees, invitees or agents breach any obligation stated in the
preceding sentence, or (ii) the presence of Hazardous Materials
in the Premises caused or permitted by Lessee results in
contamination of the Premises, the Building, any structure,
system or improvement, any soil or water in, on, under or about
the Premises (collectively, the "Property"), or (iii)
contamination of the Property by Hazardous Materials otherwise
occurs for which Lessee is legally liable to Lessor for damage
resulting therefrom, then Lessee shall indemnify, defend and hold
Lessor and lessor's partners, affiliates, employees, contractors,
representatives, lenders, successors and assigns (collectively,
the "Indemnified Parties") harmless from any and all claims,
judgments, damages, penalties, fines, costs, liabilities, losses,
actions or causes of action (including, without limitation,
diminution in value of the Building, damages for the loss or
restriction on use of rentable or usable space or of any amenity,
damages arising from any adverse impact on marketing any of the
foregoing, and sums paid in settlement of claims, attorneys' fees
and costs incurred, consultant fees and expert fees) made,
brought or sought against or suffered or incurred by the
Indemnified Parties, or any of them, which arise during or after
the Term of this Lease as a result of such contamination. This
indemnification of Lessor by Lessee includes, without limitation,
attorneys' fees and expenses and costs incurred in connection
with any investigation of site conditions or any cleanup,
remedial, removal or restoration work required by any federal,
state or local governmental agency or political subdivision or
required to return the property to the condition existing prior
to the introduction of any such Hazardous Materials for which
lessee is responsible. Lessee's obligations hereunder shall
survive the expiration or earlier termination of the Term of this
Lease. Prior to lease commencement, Lessee will provide Lessor
with toxic management plans for glass and sign manufacturing.
Lessee shall at all times and in all respects comply with
all federal, state and local laws, ordinances and regulations
("Hazardous Materials Laws") relating to industrial hygiene,
environmental protection or the use, analysis, generation,
manufacture, storage, disposal or transportation of any oil or
petrochemical products, PCB, flammable materials, explosives,
asbestos, urea formaldehyde, radioactive materials or waste, or
other hazardous, toxic, contaminated or polluting materials,
substances or wastes, including, without limitation, any
substances defined as or included in the definition of "Hazardous
Materials", "toxic substances" or "chemicals known to the State
to cause cancer or reproductive toxicity" under any such
Hazardous Materials Laws (collectively, "Hazardous Materials").
5.03 Signs and Auctions: Lessee shall not place any signs on the
Premises without Lessor's prior written consent. Lessee shall
not conduct, nor permit to be conducted, either voluntarily or
involuntarily, any auctions or sheriff's sales from the Premises
without having first obtained Lessor's prior written consent,
which shall not be unreasonably withheld.
5.04 Year 2000 Compliance: The Lessee shall take reasonable
steps to ensure that all computer controlled facility components
that have been purchased or installed by Lessee, or over which
Lessee has control, are Year 2000
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compliant prior to January 1, 2000. Compliance shall be verified
by physical testing of the components and/or written confirmation
from the component or systems manufacturer. "Computer controlled
facility components" refers to software driven technology and
embedded microchip technology. This includes, but is not limited
to, programmable thermostats, HVAC controllers, auxiliary
elevator controllers, utility monitoring and control systems,
fire detection and suppression systems, alarms, security systems,
and any other facilities control systems utilizing microcomputer,
minicomputer, or programmable logic controllers. "Year 2000
compliant" means computer controlled facility components that
accurately process date/time data (including, but not limited to,
calculating, comparing, and sequencing) from, into, and between
the twentieth and twenty-first centuries, and the years 1999 and
2000 and leap year calculations.
ARTICLE 6 COMMON FACILITIES AND VEHICLE PARKING
6.01 Operation and Maintenance of Common Facilities: During the
Term, Lessor shall operate all Common Facilities within the
Center. The term "Common Facilities" shall mean all areas within
the exterior boundaries of the Building and other buildings in
the Center which are not held for exclusive use by persons
entitled to occupy space, and all other appurtenant areas and
improvements provided by Lessor for the common use of Lessor and
tenants and their respective employees and invitees, including,
without limitation, parking areas and structures, driveways,
sidewalks, landscaped and planted areas and common entrances not
located within the Premises of any tenant.
6.02 Use of Common Facilities: The occupancy by Lessee of the
Premises shall include the use of the Common Facilities in common
with Lessor and with others for whose convenience and use the
Common Facilities may be provided by Lessor, subject, however, to
compliance with all rules and regulations as are prescribed from
time to time by Lessor. Lessor shall operate and maintain the
Common Facilities in the manner Lessor may determine to be
appropriate. Lessor shall at all times during the Term have
exclusive control of the Common Facilities, and may restrain any
use or occupancy, except as authorized by lessor's rules and
regulations. Lessee shall keep the Common Facilities clear of
any obstruction or unauthorized use related to Lessee's
operations. Nothing in this Leas shall be deemed to impose
liability upon Lessor for any damage to or loss of the property
of, or for any injury to, Lessee, its invitees or employees.
Lessor may temporarily close any portion of the Common Facilities
for repairs or alterations, to prevent a public dedication or the
accrual of prescriptive rights, or for any other reason deemed
sufficient by Lessor. Under no circumstances shall the right
herein granted to use the Common Facilities be deemed to include
the right to store any property, temporarily or permanently, in
the Common Facilities. Any such storage shall be permitted only
by the prior written consent of Lessor or Lessor's designated
agent, which consent may be revoked at any time. In the event
that any unauthorized storage shall occur, then Lessor shall have
the right, without notice, in addition to such other rights and
remedies that it may have, to remove the property and charge the
cost to Lessee, which cost shall be immediately payable upon
demand by Lessor.
6.03 Parking: Subject to Lessor's right to adopt reasonable,
nondiscriminatory modifications and additions to the regulations
by written notice to Lessee, Lessee shall have the parking rights
set forth as follows:
a. Lessor agrees to maintain, or cause to be maintained,
an automobile parking area ("Parking Area") for the benefit and
use of the visitors and patrons and employees of Lessee, and
other tenants and occupants of the Center. The Parking Area
shall include the automobile parking stalls, driveways,
entrances, exits, sidewalks and attendant pedestrian passageways
and other areas designated for parking. Lessor shall have the
right and privilege of determining the nature and extent of the
Parking Area, and of making such changes to the Parking Area from
time to time which in its opinion are desirable and for the best
interests of all persons using the Parking Area. Lessor shall
keep the Parking Area in a neat, clean and orderly condition,
properly lighted and landscaped, and shall repair any damage to
its facilities. Nothing contained in this Lease shall be deemed
to create liability upon Lessor for any damage to motor vehicles
of visitors or employees, unless ultimately determined to be
caused by the sole negligence or willful misconduct of Lessor,
its agents, servants and employees. Unless otherwise instructed
by lessor, every user of the Parking Area shall park and lock his
or her own motor vehicle. Lessor shall also have the right to
establish, and from time to time amend, and to enforce against
all users of the Parking Area all reasonable rules and
regulations as Lessor may deem necessary and advisable for the
proper and efficient operation and maintenance of the Parking
Area.
b. Persons using the Parking Area shall observe all
directional signs and arrows and any posted speed limits. All
vehicles shall be parked entirely within painted stalls, and no
vehicles shall be parked in areas which are posted or marked as
"no parking" or on, or in ramps, driveways and aisles. Only one
(1) vehicle may be parked in a parking space. In no event shall
Lessee interfere with the use and enjoyment of the Parking Area
by other tenants of the Building or buildings within the Center
or their employees or invitees.
c. Parking areas shall be used only for parking vehicles.
Washing, waxing, cleaning or servicing of vehicles, or the
storage of vehicles for twenty-four (24) hour periods, in the
Parking Area (other than emergency services) by any user of the
Parking Area or his or her agents or employees is prohibited
unless otherwise authorized by Lessor. Lessee shall have no
right to install any fixtures, equipment or personal property
(other than vehicles) in the Parking Area, nor shall Lessee make
any alteration to the Parking Area.
6.04 Changes and Additions by Lessor: Lessor reserves the right
to make alterations or additions to the Building(s) or the
Center, or to the attendant fixtures, equipment and Common
Facilities. Lessor may at any time relocate or remove any of the
various buildings, parking areas and other common facilities, and
may add buildings and areas to the Center from time to time. No
change shall entitle Lessee to any abatement of rent or other
claim against Lessor, provided that the change does not deprive
Lessee of reasonable access to or use of the Premises.
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ARTICLE 7 MAINTENANCE, REPAIRS AND ALTERATIONS
7.1 Lessor's Obligations:
a. Subject to the provisions of Section 4.02 (Operating
Expenses), Article 5 (Uses), Article 6 (Building Parking),
Section 7.02 (Lessee's Obligations) and Article 12 (Damage or
Destruction), and except for damage caused by any negligent or
intentional act or omission of Lessee, Lessee's employees,
suppliers, shippers, customers or invitees, in which event Lessee
shall, at its sole cost and expense, repair the damage further
utilizing a contractor of Lessor's choice. Lessor at Lessor's
expense, subject to reimbursement pursuant to Section 4.02, shall
keep in good condition and repair the foundations, exterior
walls, structural condition of interior bearing walls, and roof
of the Premises, and utility installations of the Building and
all parts thereof, as well as providing the services for which
there is an Operating Expense pursuant to Section 4.02. Lessor
shall not, however, be obligated to paint the interior walls, nor
shall Lessor be required to maintain, repair or replace windows,
doors or plate glass of the Premises. Lessor shall have no
obligation to make repairs under this Section 7.01 until a
reasonable time after receipt of written notice from Lessee of
the need for such repairs. Lessor shall not be liable for
damages or loss of any kind or nature by reason of Lessor's
failure to furnish any such services when such failure is caused
by accident, breakage, repairs, strikes, lockout or any other
labor disturbances or disputes of any character, or by any other
cause beyond the reasonable control of Lessor.
b. Lessor shall warrant Lessee's heating-ventilation-air
conditioning (HVAC), plumbing and electrical throughout the first
lease year of the Initial Term only. In addition, Lessor will
successively perform quarterly air filter changes and annual
evaporative cooler winterizing, if applicable; however, Lessor
shall not be responsible for any other item pertaining to the
HVAC, plumbing or electrical following said warranty during the
Initial Term, including without limitation, repair or
replacement. Lessor's one year warranty shall immediately expire
if Lessee, its employees, invitees or agents modify or cause
damage to same and Lessee shall then assume all responsibility
for same, including without limitation, repair/replacement, etc.
After Lessor's one year HVAC warranty, Lessor reserves the right
to continue changing the HVAC filters on a quarterly basis and
further winterize the warehouse evaporative coolers on an annual
basis.
7.02 Lessee's Obligations:
a. Subject to the provisions of Article 5 (Use), Section
7.05 (Lessor's Obligations) and Article 12 (Damage or
Destruction), Lessee, at Lessee's expense, shall keep in good
order, condition and repair the Premises and every part thereof
(whether or not the damaged portion of the Premises or the means
of repairing same are reasonably or readily accessible to Lessee)
including, without limiting the generality of the foregoing, all
plumbing, heating, ventilating and air conditioning systems,
electrical and lighting facilities and equipment within the
Premises, fixtures, interior walls and interior surfaces of
exterior walls, ceilings, windows (including glass and casings),
doors (including casings), plate glass and skylights located
within the Premises.
b. If Lessee fails to perform Lessee's obligations under
this Section 7.02 or under any other paragraph of this Lease,
Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of emergency, in
which event, no notice shall be required), perform such
obligations on Lessee's behalf and put the Premises in good
order, condition and repair, and the cost thereof together with
interest thereon at fifteen percent (15%) per annum shall be due
and payable as additional rent to Lessor together with Lessee's
next Base Rent installment.
7.03 Alterations and Additions:
a. Lessee shall not, without Lessor's prior written
consent which shall not be unreasonably withheld, make any
alterations, improvements, additions or Utility Installments in,
on or about the Premises, except for nonstructural alterations to
the Premises not exceeding $5,000 in cumulative costs during the
Initial Term. In any event, whether or not in excess of $5,000
in cumulative cost, Lessee shall make no change or alteration to
the exterior of the Premises, without Lessor's prior written
consent. As used in this Lease, the term "Utility Installations"
shall mean carpeting, window coverings, air lines, power panels,
electrical distribution systems, lighting fixtures, space
heaters, air conditioning, plumbing and fencing. Lessor may
require that Lessee remove any and all of said alterations,
improvements, additions or Utility Installations at the
expiration of the Initial Term, as it may have been extended, and
restore the Premises to its prior condition. Lessor may require
Lessee to provide Lessor, at Lessee's sole cost and expense, a
lien and completion bond in an amount equal to one and one-half
times the estimated cost of such improvements, to insure Lessor
against any liability for mechanic's and materialman's liens and
to insure completion of the work. Should Lessee make any
alterations, improvements, additions or Utility Installations
without the prior approval of Lessor, Lessor may, at any time
during the term of this Lease, require that Lessee remove any or
all of same.
b. Any alterations, improvements, additions or Utility
Installations in or about the Premises that Lessee shall desire
to make and which requires the consent of Lessor, shall be
presented to Lessor in written form with proposed detailed plans.
If Lessor shall give its consent, the consent shall be deemed
conditioned upon Lessee acquiring a permit to perform the work
from appropriate governmental agencies, the furnishing of a copy
thereof to Lessor prior to the commencement of the work and the
compliance by Lessee of all conditions of said permit in a prompt
and expeditious manner.
c. Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for
Lessee at or for use in the Premises, which claims are, or may be
secured by, any mechanic's or
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materialman's lien against the Premises, or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice
prior to the commencement of any work in the Premises, and Lessor
shall have the right to post notices of non-responsibility in or
on the Premises or the Building as provided by law. If Lessee
shall in good faith contest the validity of any such lien, claim
or demand, then Lessee shall, at its sole expense, defend itself
and Lessor against the same and shall pay and satisfy any such
adverse judgment that may be rendered thereon, before the
enforcement thereof, against Lessor or the Premises upon the
condition that if Lessor shall require, Lessee shall furnish to
Lessor a surety bond satisfactory to Lessor in an amount equal to
such contested lien claim or demand indemnifying Lessor against
liability for the same and holding the Premises free from the
effect of such lien or claim. In addition, Lessor may require
Lessee to pay Lessor's attorneys fees and costs in participating
in such action if Lessor shall decide it is to Lessor's best
interest to do so.
d. All alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations
constitute trade fixtures of Lessee), which may be on the
Premises, shall be the property of Lessor and shall remain upon
and be surrendered with the Premises at the expiration of the
Initial Term, as it may have been extended, unless Lessor
requires their removal pursuant to subparagraph "a" above.
Notwithstanding the provisions of this paragraph, Lessee's
machinery and equipment, other than that which is affixed to the
Premises, and other than Utility Installations, shall remain the
property of Lessee and may be removed by Lessee subject to the
provisions of Section 7.02.
7.04 Utility Additions: Lessor reserves the right to install new
or additional utility facilities throughout the Building for the
benefit of Lessor or Lessee, including, but not limited to, such
utilities as plumbing, electrical systems, security systems,
communication systems and fire protection and detection systems,
so long as such installations do not unreasonably interfere with
Lessee's use of the Premises.
7.05 Entry and Inspection: Lessor shall at reasonable times have
the right to enter the Premises to inspect them, to supply
services in accordance with this Lease, to protect the interests
of Lessor in the Premises, to submit the Premises to prospective
or actual purchasers or encumbrance holders (or, during the last
one hundred and eighty (180) days of the Term, or when an uncured
tenant default exists, to prospective tenants), to alter, improve
or repair the Premises, or as otherwise permitted in this Lease,
all without being deemed to have caused an eviction of Lessee and
without abatement of rent except as provided elsewhere in this
Lease. If Lessee vacates the Premises, Lessor may enter the
Premises and alter them without abatement of rent and without
liability to Lessee. Lessor shall have the right to use any and
all means which Lessor may deem proper to open the doors in an
emergency in order to obtain entry to the Premises, and any entry
to the Premises obtained by Lessor shall not under any
circumstances be deemed to be a forcible or unlawful entry into,
or a detainer of the Premises, or any eviction of Lessee from the
Premises.
ARTICLE 8 TAXES AND ASSESSMENTS ON LESSEE'S PROPERTY
8.01 Taxes of Lessee's Property: Lessee shall be liable for and
shall pay, at least ten (10) days before delinquency, all taxes
and assessments levied against all personal property of Lessee
located in the Premises. When possible, Lessee shall cause its
personal property to be assessed and billed separately from the
real property of which the Premises form a part. If any taxes on
Lessee's personal property are levied against Lessor or Lessor's
property is increased by the inclusion of a value placed upon the
personal property of Lessee, and if Lessor pays the taxes based
upon the increased assessment, Lessee shall pay to Lessor the
taxes so levied against Lessor or the proportion of the taxes
resulting from the increase in the assessment. In calculating
what portion of any tax bill which is assessed against Lessor
separately, or Lessor and Lessee jointly, is attributable to
Lessee's fixtures and personal property, Lessor's reasonable
determination shall be conclusive.
ARTICLE 9 UTILITIES
Lessee shall fully and promptly pay for all gas and electric
(where applicable), water, telephone and trash removal for the
building and other utilities of every kind furnished to the
leased Premises, together with any personal property taxes
thereon, and all other costs and expenses of every kind
whatsoever, of, or in connection with the use, operation and
maintenance of the leased Premises and all activities conducted
thereon, and Lessor shall have no responsibility of any kind for
any thereof. Lessee shall put all such utilities in its own name
and not that of Lessor.
ARTICLE 10 ASSIGNMENT AND SUBLETTING
10.01 Rights of Parties:
a. No assignment (whether voluntary, involuntary or by
operation of law), and no subletting shall be valid or effective
without Lessor's prior written consent; such consent will not be
unreasonably withheld. Further, no assignment of subletting
shall relieve Lessee from its primary and ultimate obligations,
responsibilities or duties under the Lease.
b. Lessee may assign this Lease or sublet the Premises to
an assignee or subtenant which controls, is controlled by or is
under common control with Lessee or to any corporation resulting
from the merger of or consolidation with Lessee ("Lessee's
Affiliate"). In such case, any Lessee's Affiliate shall assume
in writing all of Lessee's obligations under this Lease. Lessee
shall in no event increase Lessee's Affiliate's rent from the
rate currently being charged Lessee under this Lease.
c. If Lessee, or any guarantor of Lessee ("Lessee's
Guarantor") is a corporation, or is an unincorporated association
or partnership, the transfer of any stock or interest
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which in one or more transfer, in the aggregate, constitutes a
transfer of more than 51% of the voting stock of the Lessee or
Lessee's Guarantor shall be deemed an assignment within the
meaning and provisions of this Article. In addition, any change
in the status of the entity, such as, but not limited to, the
withdrawal of a general partner, shall be deemed an assignment
within the meaning of this Article.
d. Lessee shall reimburse Lessor for Lessor's reasonable
costs and attorney's fees incurred in connection with the
processing and documentation of any requested transfer. In
addition, Lessee shall pay a transfer fee of $500.00 in the event
the transfer is approved.
10.02 Effect of Transfer: No subletting or assignment, even
with the consent of Lessor, shall relieve Lessee of its
obligation to pay rent and to perform all its other obligations
under this Lease. Moreover, Lessee shall indemnify and hold
Lessor harmless, as provided in Section 11.03, for any acts or
omission by Lessee's Affiliate. Each transferee, other than
Lessor, shall assume all obligations of Lessee under this Lease
and shall be liable jointly and severally with Lessee for the
payment of all rent, and for the due performance of all of
Lessee's obligations under this Lease. No transfer shall be
binding upon Lessor unless any document memorializing the
transfer is delivered to Lessor and, if the transfer is an
assignment or sublease, both the assignee/subtenant and Lessee
deliver to Lessor an executed document which contains (i) a
covenant of assumption by the assignee/subtenant, and (ii) an
indemnification agreement by Lessee, both satisfactory in
substance and form to Lessor and consistent with the requirements
of this Article; provided that the failure of the
assignee/subtenant or Lessee to execute the instrument of
assumption shall not release either from any obligation under
this Lease. The acceptance by Lessor of any payment due under
this Lease from any other person shall not be deemed to be a
waiver by Lessor of any provision of this Lease or to be a
consent to any transfer. Consent by Lessor to one or more
transfers shall not operate as a waiver or estoppel to the future
enforcement by Lessor of its rights under this Lease.
ARTICLE 11 INSURANCE AND INDEMNITY
11.01 Liability Insurance - Lessee: Lessee shall, at
Lessee's expense, obtain and keep in force during the term of
this Lease, a policy of Combined Single Limit Bodily Injury and
Property Damage insurance insuring Lessee and Lessor against any
liability arising out of the use, occupancy or maintenance of the
Premises. Such insurance shall be in an amount not less than
$1,000,000.00 per occurrence. The policy shall insure
performance by Lessee of the indemnity provisions of this
Article. The limits of said insurance shall not, however, limit
the liability of Lessee hereunder.
11.02 Lessor's Insurance: (Building insurance to be billed
separately by Lessor to Lessee). Lessor may, at its election,
provide any or all of the following types of insurance, with or
without deductible and in amounts and coverages as may be
determined by Lessor in its discretion: "all risk" property
insurance, subject to standard exclusions, covering the Premises,
and such other risks as Lessor or its mortgagees may from time to
time deem appropriate, and comprehensive public liability
coverage. Lessor shall not be required to carry insurance of any
kind on Lessee's property, including leasehold improvements,
trade fixtures, furnishings, equipment, plate glass, signs and
all other items of personal property, and shall not be obligated
to repair or replace the property should damage occur. All
proceeds of insurance maintained by Lessor upon the Premises
shall be the property of Lessor, whether or not Lessor is
obligated to, or elects, to make any repairs. In the event there
is a deductible clause in any standard form policy insuring the
Premises against fire, extended coverage and other property
insurance losses, then the amount deducted form the coverage
pursuant to such deductible clause shall be borne by Lessee. Any
insurance containing a deductible clause of $3,000 (per
occurrence) for fire, extended coverage and other property
losses, shall not, by virtue of such deductible clause, be
regarded as unsatisfactory. In the event Lessor assumes
supervision and control of the repair or restoration activity for
the improvements damaged or destroyed by reason of occurrences
embraced by the aforesaid standard form insurance policy, Lessor
shall provide Lessee with written notice of the actual cost of
repair and restoration, up to the full deductible amount, and
Lessee shall pay to Lessor such sum within thirty (30) days
thereafter. Failure to pay such sum shall constitute a breach of
the Lease and subject Lessee to any rights or remedies of Lessor
as provided in the Lease.
11.03 Waiver of Subrogation: Lessor and Lessee hereby waive
any rights each may have against the other on account of any loss
or damage occasioned to Lessor or Lessee, as the case may be, or
to the Premises or its contents, and which may arise out of or
incident to the perils insured against under Section 11.02, which
perils occur in, on or about the Premises, whether due to the
negligence of Lessor or Lessee or their agents, contractors
and/or invitees. The parties shall obtain from their respective
insurance companies insuring the property a waiver of any right
of subrogation which said insurance companies may have against
Lessor or Lessee as the case may be.
11.04 Policies: All insurance to be maintained by Lessee
under this Lease shall be procured from an insurance company or
companies rated "A" or better in "Best's Insurance Guide" and
authorized to do business in the State of Nevada, and Lessee
shall deliver to Lessor, prior to taking occupancy of the
Premises, copies of insurance binders required to be maintained
by Lessee hereunder, together with evidence of the payment of the
premiums thereof. Insurance binders shall name Lessor and all
members thereof as "Additional Insured." The binders evidencing
such insurance shall provide that they shall not be canceled or
modified except after thirty (30) days prior written notice of
intention to modify or cancel has been given to Lessor and any
encumbrancer named as beneficiary thereunder. At lease ninety
(90) days prior to the expiration date of any policy to be
maintained by Lessee hereunder, Lessee shall deliver to Lessor a
renewal policy or "binder" therefor.
11.05 Lessee's Indemnity: To the fullest extent permitted by
law, Lessee shall defend, indemnify and hold harmless Lessor, its
agents and any and all affiliates of Lessor, including, without
limitation, its members, co-venturers, corporations or other
entities controlling, controlled by or under common control with
Lessor, from and against any
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and all claims or liabilities arising either before or after the
Commencement Date from Lessee's use or occupancy of the Premises,
the Building, or from the conduct of its business, or from any
activity, work or thing done, permitted or suffered by Lessee or
its agents, employees, invitees or licensees in or about the
Premises, the Building, or from any default in the performance of
any obligation on Lessee's part to be performed under this Lease,
or from any act or negligence of Lessee or its agents, employees,
visitors, patrons, guests, invitees or licensees. In case
Lessor, its agent or affiliates are made a party to any
litigation commenced by or against Lessee (relating to Lessee's
use and occupancy of Premises), then Lessee shall protect and
hold Lessor harmless and shall pay all costs, expenses and
attorneys' fees incurred or paid by Lessor in connection with the
litigation. Lessor may, at its option, require Lessee to assume
Lessor's defense in any action covered by this Section through
counsel satisfactory to Lessor.
11.06 Lessor's Non-Liability: Lessor shall not be liable to
Lessee, its employees, agents and invitees, and Lessee hereby
waives all claims against Lessor for loss of or damage to any
property, or any injury to any person, or loss or interruption of
business or income, resulting from, but not limited to, fire,
explosion, falling plaster, steam, gas, electricity, water or
rain which may leak or flow from or into any part of the Premises
or from the breakage, leakage, obstruction or other defects of
the pipes, sprinklers, wires, appliances, plumbing, air
conditioning, electrical works or other fixtures in the Building,
whether the damage or injury results from conditions arising in
the Premises or in other portions of the Building, unless Lessor,
its agents, invitees and/or employees cause such loss, damage or
injury through their own negligence or willful misconduct.
Neither Lessor nor its agents shall be liable for interference
with light or other similar intangible interests. Lessee shall
immediately notify Lessor in case of fire or accident in the
Premises, the Building and of defects in any improvements or
equipment.
ARTICLE 12 DAMAGE OR DESTRUCTION
12.01 Restoration:
a. If the Building of which the Premises are a part is
damaged, Lessor shall repair that damage as soon as reasonably
possible, at its expense, unless: (i) Lessor reasonably
determines that the cost of repair would exceed ten percent (10%)
of the full replacement cost of the Building ("Replacement Cost")
and the damage is not covered by Lessor's fire and extended
coverage insurance (or by normal extended coverage policy should
Lessor fail to carry that insurance); or (ii) Lessor reasonably
determines that the cost of repair would exceed twenty-five
percent (25%) of the Replacement Cost; or (iii) Lessor reasonably
determines that the cost of repair would exceed ten percent (10%)
of the Replacement Cost and the damage occurs during the final
twelve (12) months of the Initial Term, as it may have been
extended. Should Lessor elect not to repair the damage for one
of the preceding reasons, Lessor shall so notify Lessee in
writing within sixty (60) days after the damage occurs and this
Lease shall terminate as of the date of that notice.
b. Unless Lessor elects to terminate this Lease in
accordance with subsection "a" above, this Lease shall continue
in effect for the remainder of the Initial Term, as it may have
been extended; provided that if the damage is so extensive as to
reasonably prevent Lessee's substantial use and enjoyment of the
Premises for more than six (6) months, then Lessee may elect to
terminate this Lease by written notice to Lessor within the sixty
(60) day period stated in subsection "a".
c. Commencing on the date of any damage to the Building,
and ending on the date the damage is repaired or this Lease is
terminated, whichever occurs first, the rental to be paid under
this Lease shall be abated in the same proportion that the floor
area of the Premises that is rendered unusable by the damage from
time to time bears to the total floor area of the Premises.
d. Notwithstanding the provisions of subsections "a", "b"
and "c" of this Section, the cost of any repairs shall be borne
by Lessee, and Lessee shall not be entitled to rental abatement
or termination rights if the damage is due to the fault or
neglect of Lessee or its employees, subtenants, invitees or
representatives. In addition, the provisions of this Section
shall not be deemed to require Lessor to repair any improvements
or fixtures that Lessee is obligated to repair or insure pursuant
to any other provisions of this Lease. Lessee will have
liability for repairs unless Lessor, its agents, invitees and/or
employees cause such damage through their own negligence or
willful misconduct or by such act of God.
ARTICLE 13 EMINENT DOMAIN
13.01 Total or Partial Taking: If all or a material portion
of the Premises is taken by any lawful authority by exercise of
the right of eminent domain, or sold to prevent a taking, either
Lessee or Lessor may terminate this Lease effective as of the
date possession is required to be surrendered to the authority.
In the event title to a portion of the Building, other than the
Premises, is taken or sold in lieu of taking, and if Lessor
elects to restore the Building in such a way as to alter the
Premises materially, Lessor may terminate this Lease, by written
notice to Lessee, effective on the date of vesting of title. In
the event neither party has elected to terminate this Leas as
provided above, then Lessor shall promptly, after receipt of a
sufficient condemnation award, proceed to restore the Premises to
substantially their condition prior to the taking, and a
proportionate allowance shall be made to Lessee for the rent
corresponding to the time during which, and to the part of the
Premises of which, Lessee is deprived on account of the taking
and restoration. In the event of a taking, Lessor shall be
entitled to the entire amount of the condemnation award without
deduction for any estate or interest of Lessee; provided that
nothing in this Section shall be deemed to give Lessor any
interest in, or prevent Lessee from seeking any award against the
taking authority for, the taking of personal property and
fixtures belonging to Lessee or for relocation recoverable from
the taking authority.
13.02 Temporary Taking: No temporary taking of the Premises
shall terminate this Lease or give Lessee any right to abatement
of rent, and any award specifically attributable to a temporary
taking of the Premises shall belong entirely
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to Lessee. A temporary taking shall be deemed to be a taking of
the use or occupancy of the Premises for a period not to exceed
ninety (90) days.
13.03 Taking of Parking Area: In the event there shall be a
taking of the Parking Area such that Lessor can no longer provide
sufficient parking to comply with this lease, Lessor may
substitute reasonably equivalent parking in a location reasonably
close to the Building; provided that if Lessor fails to make that
substitution within ninety (90) days following the taking and if
the taking materially impairs Lessee's use and enjoyment of the
Premise, Lessee may, at its option, terminate this Lease by
written notice to Lessor, and such termination shall be effective
thirty (30) days after written notice of termination is given by
Lessee. If this Lease is not so terminated by Lessee within
thirty (30) days after this taking, there shall be no abatement
of rent and this Lease shall continue in effect.
ARTICLE 14 SUBORDINATION; ESTOPPEL CERTIFICATE
14.01 Suborination:
a. This Lease shall be subordinate to all ground or
underlying leases, mortgages, deeds of trust and conditions,
covenants and restrictions, reciprocal easements and rights of
way, if any, which may hereafter affect the Premises, and to all
renewals, modifications, consolidations, replacements and
extensions thereof; provided, that so long as Lessee is not in
default under this Lease, this Lease shall not be terminated or
Lessee's quite enjoyment of the Premises disturbed in the event
of termination of any such ground or underlying lease, or the
foreclosure of any such mortgage or deed of trust, to which
Lessee has subordinated this Lease pursuant to this Section. In
the event of a termination or foreclosure, Lessee shall become a
tenant of and attorney to the successor-in-interest to Lessor
upon the same terms and conditions as are contained in this
Lease, and shall execute any instrument reasonably required by
Lessor's successor for that purpose. Lessee shall also, upon
written request of Lessor, execute and deliver all instruments as
may be required from time to time to subordinate the rights of
Lessee under this Lease to any ground or underlying lease or to
the lien of any mortgage or deed of trust, or if requested by
Lessor, to subordinate, in whole or in part, any ground or
underlying lease or the lien of any mortgage or deed of trust to
this Lease.
b. Failure of Lessee to execute any statements or
instruments necessary or desirable to effectuate the provisions
of this Article within ten (10) days after written request by
Lessor, shall constitute a default under this Lease. In the
event, Lessor, in addition to any other rights or remedies it
might have, shall have the right, by written notice to Lessee, to
terminate this Lease as of a date not less than twenty (20) days
after the date of Lessor's notice. Lessor's election to
terminate shall not relieve Lessee of any liability for its
default.
14.02 Estoppel Certificate:
a. Lessee shall, at any time upon not less than twenty
(20) days' prior written notice from Lessor, execute, acknowledge
and deliver to Lessor, in any form that Lessor may reasonably
require, a statement, in writing (i) certifying that this Lease
is unmodified and in full force and effect (or, if modified,
stating the nature of the modification and certifying that this
Lease is unmodified and in full force and effect) and the dates
to which the rental, additional rent and other charges have been
paid in advance, if any, and (ii) acknowledging that, to Lessee's
knowledge, there are no uncured defaults on the part of Lessor,
or specifying each default if any are claimed, and (iii) setting
forth all further information that Lessor may reasonably require.
Lessee's statement may be relied upon by any prospective
purchaser or encumbrancer of all or any portion of the Building.
b. Lessee's failure to deliver any estoppel statement
within the provided time shall be conclusive upon Lessee that (i)
this Lease is in full force and effect without modification
except as may be represented by Lessor, (ii) there are no uncured
defaults in Lessor's performance, and (iii) not more than one
month's rental has been paid in advance.
ARTICLE 15 DEFAULTS AND REMEDIES
15.01 Lessee's Defaults: In addition to any other event of
default set forth in this Lease, the occurrence of any one or
more of the following events shall constitute a default by
Lessee:
a. The abandonment of the Premises by Lessee. Abandonment
is defined to include, but not limited to, any absence by Lessee
from the Premises for ten (10) days or longer.
b. The failure by Lessee to make any payment of rent or
additional rent required to be made by Lessee, as and when due,
where the failure continues for a period of ten (10) days after
the date such payment was due. For purposes of these default and
remedies provisions, the term "additional rent" shall be deemed
to include all amounts of any type whatsoever, other than Base
Rent, to be paid by Lessee pursuant to the terms of this Lease.
c. Assignment, sublease, encumbrance or other transfer of
the Lease by Lessee, either voluntarily or by operation of law,
whether by judgment, execution transfer by intestacy or testacy,
or other means, without the prior written consent of Lessor.
d. The discovery by Lessor that any financial statement
provided by Lessee, or by any affiliate, successor or guarantor
of Lessee was materially false or misleading.
e. The failure or inability by Lessee to observe or
perform any of the express or implied covenants or provisions of
this Lease to be observed or performed by Lessee, other than as
specified in any other subsection of this
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Section, where the failure continues for a period of thirty (30)
days after written notice from Lessor to Lessee. However, if the
nature of the failure is such that more than thirty (30) days are
reasonably required for its cure, then Lessee shall not be deemed
to be in default if Lessee commences the cure within thirty (30)
days and thereafter diligently pursues the cure to completion in
a time period not to exceed thirty (30) days.
f. (i) The making by Lessee of any general assignment for
the benefit of creditors; (ii) the filing by or against Lessee of
a petition to have Lessee adjudged a Chapter 7 debtor under the
Bankruptcy Code or to have debts discharged or a petition for
reorganization or arrangement under any law relating to
bankruptcy (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the
appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or
of Lessee's interest in this Lease, if possession is not restored
to Lessee within thirty (30) days; (iv) the attachment, execution
or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease
where the seizure is not discharged within thirty (30) days; or
(v) Lessee's convening of a meeting of its creditors for the
purpose of effecting a moratorium upon or composition of its
debts. Lessor shall not be deemed to have knowledge of any event
described in this subsection unless notification in writing is
received by Lessor, nor shall there be any presumption
attributable to Lessor of Lessee's insolvency. In the event that
any provision of this subsection is contrary to applicable law,
the provision shall be of no force or effect.
15.02 Lessor's Remedies: On the occurrence of any default by
Lessee, Lessor may, at any time thereafter, with or without
notice or demand and without limiting Lessor in the exercise of
any right or remedy which Lessor may have:
a. Terminate Lessee's right to possession of the Premises
by any lawful means, in which case this Lease shall terminate and
Lessee shall immediately surrender possession of the Premises to
Lessor. In such event, Lessor shall be entitled to recover from
Lessee all damages incurred by Lessor by reason of Lessee's
default, including (i) the worth at the time of the award of the
unpaid Base Rent, additional rent and other charges which had
been earned at the time of the termination; (ii) the worth at the
time of the award of the amount by which the unpaid Base Rent,
additional rent and other charges which would have been earned
after termination until the time of the award exceeds the amount
of such rental loss that Lessor proves could not have been
reasonably avoided; (iii) the worth at the time of the award of
the amount by which the unpaid Base Rent, additional rent and
other charges which would have been paid for by the balance of
the term after the time of award exceeds the amount of such
rental loss that Lessor proves could not have been reasonably
avoided; and (iv) any other amount necessary to compensate Lessor
for all the detriment proximately caused by Lessee's failure to
perform its obligations under the Lease or which in the ordinary
course of things would be likely to result therefrom, including,
but not limited to, any costs or expenses incurred by Lessor in
maintaining or preserving the Premises after such default, the
cost of recovering possession of the Premises, expenses of
reletting, including necessary renovation or alteration of the
Premises, Lessor's reasonable attorneys' fees incurred in
connection therewith, and any real estate commission paid or
payable. As used in subparts "(i)" and "(ii)" above, the "worth
at the time of the award" is computed by allowing interest on
unpaid amounts at the rate of fifteen percent (15%) per annum, or
such lesser amount as may be then the maximum lawful rate. As
used in subpart "(iii)" above, the "worth at the time of the
award" is computing by discounting such amount at the discount
rate of the Federal Reserve Bank of San Francisco at the time of
the award, plus one percent (1%). If Lessee shall have abandoned
the Premises, Lessor shall have the option of (i) retaking
possession of the Premises and recovering from Lessee the amount
specified in this Section 15.02a, or (ii) proceeding under
Section 15.02b.
b. Maintain Lessee's right to possession, in which case
this Lease shall continue in effect whether or not Lessee shall
have abandoned the Premises. In such event, Lessor shall be
entitled to enforce all of Lessor's rights and remedies under
this Lease, including the right to recover the rent as it becomes
due hereunder.
c. Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state in which
the Property is located.
15.03 Repayment of "Free" Rent: If this Lease provides for a
postponement of any monthly rental payments, a period of "free"
rent, or other rent concession, such postponed rent or "free"
rent is called the "Abated Rent". Lessee shall be credited with
having paid all of the Abated Rent on the expiration of the Lease
Term only if Lessee has fully, faithfully and punctually
performed all of Lessee's obligations hereunder, including the
payment of all rent (other than Abated Rent) and all other
monetary obligations and the surrender of the property in the
physical condition required by this Lease. Lessee acknowledges
that its right to receive credit for the Abated Rent is
absolutely conditioned upon Lessee's full, faithful and punctual
performance of its obligations under this Lease. If Lessee
defaults and does not cure within any applicable grace period,
the Abate Rent shall immediately become due and payable in full
and this Lease shall be enforced as if there were no such rent
abatement or other rent concession. In such case, Abated Rent
shall be calculated based on the full initial rent payable under
this Lease.
15.04 Cumulative Remedies: Lessor's exercise of any right or
remedy shall not prevent it from exercising any other right or
remedy.
15.05 Late Payments: Any rent due under this Lease that is
not paid to Lessor within ten (10) days of the date when due
shall bear interest fifteen percent (15%) per annum from the date
due until fully paid. The payment of interest shall not cure any
default by Lessee under this Lease. In addition, Lessee
acknowledges that the late payment by Lessee to Lessor, of rent,
will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult and
impractical to ascertain. Those costs may include, but are not
limited to, administrative, processing and accounting charges,
and late charges which may be imposed on Lessor by the terms of
any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any rent due from Lessee shall not
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be received by Lessor or Lessor's designee within ten (10) days
after the date due, then Lessee shall pay to Lessor, in addition
to the interest provided above, a late charge in the amount of
ten percent (10%) of each delinquent payment. Acceptance of a
late charge by Lessor shall not constitute a waiver of Lessee's
default with respect to the overdue amount, nor shall it prevent
Lessor from exercising any of its other rights and remedies.
15.06 Right of Lessor to Perform: All covenants and
agreements to be performed by Lessee under this Lease shall be
performed at Lessee's sole cost and expense and without any
abatement of rent or right of set off. If Lessee fails to pay
any sum of money, other than rent, or fails to perform any other
act on its part to be performed under this Lease, and the failure
continues beyond any applicable grace period set forth in Section
15.01, then in addition to any other available remedies, Lessor
may, at its election, make the payment or perform the other act
on Lessee's part. Lessor's election to make the payment or
perform the act on Lessee's part shall not give rise to any
responsibility of Lessor to continue making the same or similar
payments or performing the same or similar acts. Lessee shall,
promptly upon demand by Lessor, reimburse Lessor for all sums
paid by Lessor and all necessary incidental costs, together with
interest at the maximum rate permitted by law from the date of
the payment by Lessor. Lessor shall have the same rights and
remedies if Lessee fails to pay those amounts as Lessor would
have in the event of a default by Lessee in the payment of rent.
15.07 Default by Lessor: Lessor shall not be deemed to be in
default in the performance of any obligation under this Lease
unless, and until, it has failed to perform the obligation within
thirty (30) days after written notice by Lessee to Lessor
specifying in reasonable detail the nature and extent of the
failure; provided, however, that if the nature of Lessor's
obligation is such that more than thirty (30) days are required
for its performance, then Lessor shall not be deemed to be in
default if it commences performance within the thirty (30) day
period and thereafter diligently pursues the cure to completion.
15.08 Expenses and Legal Fees: Lessee shall reimburse Lessor
upon demand, for any costs or expenses incurred by Lessor in
connection with any breach or default of Lessee under this Lease,
whether or not suit is commenced or judgment entered. Such costs
shall include legal fees and costs incurred for the negotiation
of a settlement, enforcement of rights or otherwise.
Furthermore, if any action for breach of, or to enforce, the
provisions of this Lease is commenced, the court in such action
shall award to the party in whose favor a judgment is entered, a
reasonable sum as attorneys' fees and costs. Such attorneys'
fees and costs shall be paid by the losing party in such action.
Lessee shall also indemnify Lessor against and hold lessor
harmless from all costs, expenses, demands and liability incurred
by Lessor if Lessor becomes or is made a party to any claim or
action (a) instituted by Lessee, or by any third party if due to
negligence by Lessee, or by or against any person holding any
interest under or using the Premises by license of or agreement
with Lessee; (b) for foreclosure for any lien for labor or
material furnished to or for Lessee or such other person; (c)
otherwise arising out of or resulting from any negligent act by
Lessee or such other person; or (d) necessary to protect Lessor's
interest under this Lease in a bankruptcy proceeding, or other
proceeding under Title 11 of the United States Code, as amended.
Lessee shall defend Lessor against any such claim or action at
Lessee's expense with counsel reasonably acceptable to lessor or,
at Lessee's election, Lessee shall reimburse Lessor for any legal
fees or costs incurred by Lessor in any such claim or action.
ARTICLE 16 END OF TERM
16.01 Holding Over: This Lease shall terminate without
further notice upon the expiration of the Term (herein
"Expiration Date"), and any holding over by Lessee after the
Expiration Date shall not constitute a renewal or extension of
this Lease, or give Lessee any rights under this Lease, except
when in writing, signed by both parties. If Lessee holds over
for any period after the Expiration (or earlier termination) of
the Term, Lessor may, at its option, treat Lessee as a tenant at
sufferance only, commencing on the first (1st) day following the
termination of this Lease and subject to all of the terms of this
Lease, except that the monthly rental shall be one hundred fifty
percent (150%) of the greater of (a) the total monthly rental for
the month immediately preceding the date of termination, or (b)
the then currently scheduled rent for comparable space in the
Building. If Lessee fails to surrender the Premises upon the
expiration of this Lease despite demand to do so by Lessor,
Lessee shall indemnify and hold Lessor harmless from all loss or
liability, including, without limitation, any claims made by any
succeeding tenant relating to such failure to surrender.
Acceptance by Lessor of rent after the termination shall not
constitute a consent to a holdover or result in a renewal of this
Lease. The foregoing provisions of this Section are in addition
to, and do not affect, Lessor's right of re-entry or any other
rights of Lessor under this Lease or at law.
16.02 Merger on Termination: The voluntary or other
surrender of this Lease by Lessee, or mutual termination of this
Lease, shall terminate any or all existing subleases unless
Lessor, at its option, elects in writing to treat the surrender
or termination as an assignment to it of any or all subleases
affecting the Premises.
16.03 Surrender of Premises: Removal of Property: Upon the
Expiration Date, or upon any earlier termination of this Lease,
Lessee shall quit and surrender possession of the Premises to
Lessor in as good order, condition and repair as when received or
as hereafter may be improved by Lessor or Lessee, reasonable wear
and tear and repairs, which are Lessor's obligation excepted, and
shall without expense to Lessor, remove or cause to be removed
from the Premises all personal property and debris, except for
any items that Lessor may by written authorization allow to
remain. Lessee shall repair all damage to the Premises resulting
from the removal, which repair shall include the patching and
filling of holes and repair of structural damage, provided that
Lessor may instead elect to repair any structural damage at
Lessee's expense. If Lessee shall fail to comply with the
provisions of this Section, Lessor may effect the removal and/or
make any repairs, and the cost to Lessor shall be additional rent
payable by Lessee upon demand. If requested by Lessor, Lessee
shall execute, acknowledge and deliver to Lessor an instrument in
writing releasing and quitclaiming to Lessor, all right, title
and interest of Lessee in the Premises.
15
<PAGE>
16.04 Termination; Advance Payments: Upon termination of
this Lease under Article 12 (Damage or Destruction), Article 13
(Eminent Domain) or any other termination not resulting from
Lessee's default, and after Lessee has vacated the Premises in
the manner required by this Lease, and equitable adjustment shall
be made concerning advance rent, and any other advance payments
made by Lessee or Lessor, and Lessor shall refund the unused
portion of the security deposit to Lessee or Lessee's successor.
ARTICLE 17 PAYMENTS AND NOTICES
All sums payable by Lessee to Lessor shall be paid, without
deduction or offset, in lawful money of the United States to
Lessor at its address set forth in Section 1.08 of the Basic
Lease Terms, or at any other place as Lessor may designate in
writing. Unless this Lease expressly provides otherwise, as for
example in the payment of rent pursuant to Section 4.01, all
payments shall be due and payable within five (5) days after
demand. All payments requiring proration shall be prorated on
the basis of a thirty (30) day month and a three hundred sixty
(360) day year. Any notice, election, demand, consent, approval
or other communication to be given, or other document to be
delivered by either party to the other, may be delivered in
person to an officer or duly authorized representative of the
other party, or may be deposited in the United States mail, duly
registered or certified, postage prepaid, return receipt
requested, and addressed to the other party at the address set
forth in Section 1.08 of the Basic Lease Terms, or if to Lessee,
at that address, or from and after the Commencement Date, at the
Premises (whether or not Lessee has departed from, abandoned or
vacated the Premises). Either party may, by written notice to
the other, served in the manner provided in this Article,
designate a different address. If any notice or other document
is sent by mail, it shall be deemed served or delivered upon
actual receipt or refusal thereof. If more than one Lessee is
named under this Lease, service of any notice upon any one of
them shall be deemed as service upon all of them.
ARTICLE 18 LIMITATION OF LIABILITY
In consideration of the benefits accruing hereunder, Lessee
agrees that in the event of any actual or alleged failure, breach
or default of this Lease by Lessor: (i) the sole and exclusive
remedy shall be against Lessor and its assets - Lessor's
liability shall be limited to its interest in the Center; (ii) no
member of Lessor shall be sued or named as a party in any suit or
action (except as may be necessary to secure jurisdiction of the
partnership); (iii) no service of process shall be made against
any member of Lessor (except as may be necessary to secure
jurisdiction of the partnership; (iv) no member of Lessor shall
be required to answer or otherwise plead to any service of
process; (v) no judgment may be taken against any member of
Lessor; (vi) any judgment taken against any member of Lessor may
be vacated and set aside at any time without hearing; (vii) no
writ of execution will ever be levied against the assets of any
member of Lessor; and (viii) these covenants and agreements are
enforceable both by Lessor and also by any member of Lessor.
Lessee agrees that each of the foregoing provisions shall be
applicable to any covenant or agreement either expressly
contained in this Lease or imposed by statute or at common law.
ARTICLE 19 BROKER'S COMMISSION
The parties recognize as the broker(s) who negotiated this
Lease, the firm(s), if any, whose name(s) is (are) stated Section
1.09 of the Basic Lease Terms, and agree that the party
designated in Section 1.09 shall be solely responsible for the
payment of brokerage commissions to those broker(s), and that the
other party shall have no responsibility for the commissions
unless otherwise provided in this Lease. Lessee warrants that it
has had no dealings with any other real estate broker or agent in
connection with the negotiation of this Lease, and Lessee agrees
to indemnify and hold Lessor harmless from any cost, expense or
liability (including reasonable attorneys' fees) for any
compensation, commissions or charges claimed by any other real
estate broker or agent employed or claiming to represent or to
have been employed by Lessee in connection with the negotiation
of this Lease. The foregoing agreement shall survive the
Expiration or earlier termination of this Lease. If Lessee fails
to take possession of the Premises or if this Lease otherwise
terminates prior to the Expiration Date, Lessor shall be entitled
to recover the unamortized portion of any brokerage commission
funded by Lessor in addition to any other damages to which Lessor
may be entitled.
ARTICLE 20 TRANSFER OF LESSOR'S INTEREST
In the event of any transfer of Lessor's Interest in the
Premises, including a so-called sale-leaseback, the transferor
shall be automatically relieved of all obligations on the part of
Lessor accruing under this Lease from and after the date of the
transfer, provided that any funds held by the transferor, in
which Lessee has an interest, shall be turned over, subject to
that interest, to the transferee, and Lessee is notified of the
transfer as required by law. No holder of a mortgage and/or deed
of trust to which this Lease is, or may be, subordinate, and no
landlord under a so-called sale-leaseback shall be responsible in
connection with the security deposit, unless the mortgagee or
holder of the deed of trust or the landlord actually receives the
security deposit. It is intended that the covenants and
obligations contained in this Lease on the part of the Lessor
shall, subject to the foregoing, be binding on Lessor, its
successors and assigns, only during, and in respect to, their
respective successive periods of ownership.
ARTICLE 21 INTERPRETATION
21.01 Gender and Number: Whenever the context of this Lease
requires, the words "Lessor" and "Lessee" shall include the
plural and well as the singular, and words used in neuter,
masculine or feminine genders shall include the others.
21.02 Headings: The captions and headings of the Articles
and Sections of this Lease are for convenience only, and are not
a part of this Lease and shall have no effect upon its
construction or interpretation.
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<PAGE>
21.03 Joint and Several Liability: If there is more than one
Lessee, the obligations imposed upon Lessee shall be joint and
several, and the act of, or notice from, or notice or refund to,
or the signature of, any one or more of them shall be binding on
all of them with respect to the tenancy of this Lease, including,
but not limited to, any renewal, extension, termination, or
modification of this Lease.
21.04 Successors: Subject to Articles 10 and 20, all rights
and liabilities given to or imposed upon Lessor and Lessee shall
extend to and bind their respective heirs, executors,
administrators, successors and assigns. Nothing contained in
this Section is intended, or shall be construed, to grant to any
person other than Lessor and Lessee and their successors and
assigns any rights or remedies under this Lease.
21.05 Time of Essence: Time is of the essence with respect
to the performance of every provision of this Lease, in which
time of performance is a factor.
21.06 Severability: If any term or provision of this Lease,
(the deletion of which would not adversely affect the receipt of
any material benefit by either party or the deletion of which is
consented to by the party adversely affected), shall be held
invalid or unenforceable to any extent, the remainder of this
Lease shall not be affected and each term and provision of this
Lease shall be valid and enforceable to the fullest extent
permitted by law.
21.07 Entire Agreement: The parties hereto declare and
represent that no promise, inducement or agreement not herein
expressed has been made to them, that this document embodies and
sets forth the entire agreement and understanding between them
relating to the subject matter hereof, and that it merges and
supersedes all prior discussions, agreements, understandings,
representations, conditions, warranties and covenants between
them on said subject matter.
21.08 Covenants and Conditions: All of the provisions of
this Lease shall be construed to be conditions as well as
covenants as though the words specifically expressing or
imparting covenants and conditions were used in each separate
provision.
21.09 Counterparts: This Lease may be executed in one or
more counterparts, each of which shall be deemed an original, but
all of which taken together shall constitute one and the same
instrument.
21.10 All indemnities set forth in this Lease shall survive
the expiration or earlier termination of this Lease.
21.11 Attachments: In addition to all of the exhibits
referred to above, attached are the following documents which
also constitute a part of this Lease: Utilities Information Form
and Center Signage Guidelines.
LESSOR: SPENCER AIRPORT CENTER LLC
By: Its Members
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
By: /s/ Michael Noulas
---------------------------------
Michael Noulas, Second Vice President, Real Estate
NEVADA REAL ESTATE GROUP, LLC, a Nevada limited liability company
By: /s/ Bradford H. Miller
---------------------------------
Bradford H. Miller, Manager
By: /s/ Lee W. Phelps
---------------------------------
Lee W. Phelps, Manager
LESSEE: CASINOVATIONS INCORPORATED
By: /s/ Steven J. Blad
------------------------------------------
Steven J. Blad, President and Chief Executive
Officer
By: /s/ Jay L. King
------------------------------------------
Jay L. King, Chief Financial Officer
If Lessee shall be a corporation, then authorized officers must
sign on behalf of the corporation. The Lease must be executed by
the President or Vice President and the Secretary or
Secretary/Treasurer, unless the By-Laws or a Resolution of the
Board of Directors shall otherwise provide, in which event, the
By-Laws, or a certified copy of the Resolution, as the case may
be, must be furnished. Also, the appropriate corporate seal must
be affixed.
17
<PAGE>
SECURED PROMISSORY NOTE
$2,351,705.00 (U.S) Las Vegas, Nevada
December 3, 1998
For value received, Casinovations Incorporated, a
Washington corporation (together with its successors and assigns,
"Borrower"), promises to pay to the order of Steven L. Forte and
Cheryl Forte (together with their successors and assigns who
become holders of this Note, "Lender"), the principal amount of
Two Million Three Hundred Fifty One Thousand Seven Hundred Five
and no/100ths Dollars ($2,351,705.00 U.S.).
1. INTEREST.
Borrower also promises to pay to the order of Lender
interest on the outstanding principal amount of this Promissory
Note ("Note") at a fixed rate of interest equal to six and one-
half percent (6 1/2%) percent per annum during the first year this
Note remains outstanding, and eight percent (8%) per annum
thereafter. Interest hereunder shall be calculated for the
actual number of days elapsed on the basis of a 360-day year.
This Note shall be amortized over a ten (10) year period from the
date hereof.
2. SCHEDULED PAYMENTS.
Throughout the first year this Note is outstanding, and
without prior demand therefor, Borrower shall make payments of
interest only, payable on the six month and one year anniversary
dates of this Note, in the amounts of $76,430.41 and $76,430.41,
respectively. Thereafter, Borrower shall make monthly payments
without prior demand therefor of principal and interest on the
amount outstanding hereunder, on the first day of each month
beginning on January 1, 2000, in the amount of $28,532.67 for
each such payment and continuing thereafter until December 3,
2003 ("Maturity Date"), at which time all unpaid principal and
all accrued and unpaid interest under this Note shall be due and
payable in full.
3. SECURITY.
This Note is secured by (i) 848,682 shares of the
common stock ("Common Stock") of Borrower, in accordance with the
terms of a certain Stock Pledge Agreement dated as of the date
hereof between Borrower and Lender and (ii) a first priority
security interest in Borrower's patents ("Patents") for the
Random Ejection Shuffler and Fantasy 21 table game, in accordance
with the terms of a certain Security Agreement dated as of the
date hereof between Borrower and Lender ("Security Agreement").
4. EARLY PAYMENT DISCOUNT.
In the event this Note is repaid in full within 180
days of the date hereof, Borrower shall be entitled to a five
percent (5%) discount (the "Discount") on the outstanding balance
of principal and interest hereunder at the time of repayment;
PROVIDED, HOWEVER, that the entitlement to the Discount is non-
transferable and is available to Borrower only to the extent that
a Change of Control (as hereinafter defined) has not occurred at
any time during such 180 day period. For purposes of this Note,
"Change of Control" means the acquisition of more than fifty
percent (50%) of the voting power of Borrower by a person other
than Richard S. Huson or his affiliates.
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<PAGE>
5. MANDATORY PRINCIPAL REDUCTIONS.
In the event that Borrower completes its offering of
1,500,000 shares of Common Stock (the "Offering") pending as of
the date hereof pursuant to that certain Registration Statement
Form SB-2/A (Commission File No. 333-31373), Borrower shall,
pursuant to the payment schedule set forth in the following two
paragraphs, make payments to reduce the outstanding principal of
this Note by no more than the amount of Seven Hundred Fifty
Thousand and no/100ths Dollars ($750,000.00 U.S.).
(a) Borrower shall make payments to reduce the
outstanding principal of this Note as follows: (i) upon the sale
of 500,000 shares of Common Stock for cash in the Offering,
Borrower shall reduce the outstanding principal of this Note in
the amount of Two Hundred Fifty Thousand and no/100ths Dollars
($250,000.00 U.S.) within fifteen (15) calendar days after the
receipt by Borrower of the proceeds from such sale; and (ii) upon
completion of the Offering and if Borrower sells 1,500,000 shares
of Common Stock in the Offering, Borrower shall repay an
additional Five Hundred Thousand and no/100ths Dollars
($500,000.00 U.S.) within forty-five (45) calendar days after the
close of the Offering.
(b) In the event that Borrower fails to complete the
entire Offering, but sells at least 500,000 shares of Common
Stock for cash in the Offering, Borrower shall make payments to
reduce the outstanding principal of this Note (the "Modified
Principal Reduction") as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Modified Principal = $750,000.00 x NUMBER OF SHARES OF COMMON STOCK SOLD FOR CASH
-----------------------------------------------
Reduction 1,500,000 Shares of Common Stock
</TABLE>
The Modified Principal Reduction shall be paid as
follows: (i) an initial principal reduction of up to Two Hundred
Fifty Thousand and no/100ths Dollars ($250,000.00 U.S.) shall be
paid within fifteen (15) calendar days after the receipt by
Borrower of the proceeds from the sale of 500,000 shares of
Common Stock for cash (if and only if such sum has not already
been paid pursuant to subparagraph 5(a)(i) hereof) and (ii) the
balance of the Modified Principal Reduction, if any, shall be
repaid on or before forty-five (45) calendar days after the close
of the Offering.
6. SUBSEQUENT OFFERING PRINCIPAL REDUCTION.
In the event that Borrower issues and sells shares of
Common Stock in a registered public offering subsequent to the
Offering (a "Subsequent Offering"), Borrower shall make
additional principal reductions of this Note pursuant to the
following three alternative principal reduction schedules.
FIRST, if Borrower receives net cash proceeds, excluding those
proceeds received by selling stockholders, from a Subsequent
Offering less than or equal to $3,000,000, Borrower shall reduce
the then outstanding principal of this Note by 25%. SECOND, if
Borrower receives net cash proceeds, excluding those proceeds
received by selling stockholders, from a Subsequent Offering of
greater than $3,000,000 and less than or equal to $10,000,000,
Borrower shall reduce the then outstanding principal of this Note
by 50%. THIRD, if Borrower receives net cash proceeds, excluding
those proceeds received by selling stockholders, from a
Subsequent Offering of greater than $10,000,000, Borrower shall
reduce the then outstanding principal of this Note by 100%;
PROVIDED, HOWEVER, that the obligation of Borrower to reduce the
outstanding principal of this Note upon the sale of shares in a
Subsequent Offering does not arise in the event that Borrower
registers shares of Common Stock with the Securities and Exchange
Commission on a (i) Registration Statement on Form S-8 or other
applicable
2
<PAGE>
form with respect to employee benefit plans, or (ii) Registration
Statement on Form S-4 or other applicable form in conjunction
with a reincorporation or reorganization of Borrower.
7. MANDATORY SECURITY RELEASE.
Notwithstanding any other provision hereof, Lender
shall release its security interest in the Patents in accordance
with Section 7 of the Security Agreement upon: (a) the request
of the Company for release of the security interest for the
purposes of future financing, either debt or equity, for the
Company, and (b) the reduction of fifty percent (50%) of the
outstanding principal of the Note by the Company. Upon the
occurrence of (a) and (b) of this Section 7, the following
actions shall occur in the order as follows: (y) Lender shall
release its security interest in the Patents in accordance with
Section 7 of the Security Agreement; and (z) the Note shall be
amended to reflect the release of the aforementioned security
interest and to include a due-on-sale provision whereby the
remaining balance of the Note will be due and owing upon a Change
of Control.
8. DEFAULT.
The occurrence of any of the following shall constitute
a default ("Default") under this Note, the Security Agreement,
Stock Pledge Agreement and that certain binding letter of intent
dated May 28, 1998 (the "Transaction Documents"):
(a) Failure of Borrower to make any payment under the
Transaction Documents and the failure of Borrower, after notice
of such failure, to cure such failure within ten (10) calendar
days of such notice;
(b) Failure of Borrower to perform any other covenant,
agreement or other obligations contained in the Transaction
Documents and the failure of Borrower, after notice of such
failure, to cure such failure to either: (i) cure such failure
within fifteen (15) calendar days (or within thirty (30) calendar
days if Borrower is not reasonably able to cure, to be extended
at the sole discretion of Lender); or (ii) (A) submit a written
plan to Lender within fifteen (15) calendar days of such notice
to cure such failure, and (B) pursue such written plan with due
diligence, but in no event more than thirty (30) days after
notice of such default is given;
(c) Falsity of any warranty, representation, or
statement made or furnished to Lender by Borrower in any material
respect when made or furnished, unless Lender determines in its
sole discretion that the value of all or a substantial portion of
the Collateral, or Lender's security interest in such Collateral,
is not materially impaired;
(d) Voluntary filing of petition under the Bankruptcy
Code of 1978, as amended, or any other similar or successor
federal statute relating to bankruptcy, insolvency arrangements
or reorganizations, or any state bankruptcy or insolvency
statute;
(e) Filing of an involuntary petition under the
Bankruptcy Code of 1978, as amended, or any other similar or
successor federal statute relating to bankruptcy, insolvency
arrangements or reorganizations, or any state bankruptcy or
insolvency statute, unless the same is discharged within sixty
(60) calendar days;
(f) Adjudication of bankruptcy or dissolution of
Borrower;
(g) Appointment of a trustee or receiver for Borrower
or Borrower's assets;
3
<PAGE>
(h) Seizure of any portion of Borrower's assets that
is not discharged within ten (10) calendar days;
(i) Transfer or encumbrance of all or any portion of
Borrower's interest in the Collateral without obtaining the prior
consent of Lender or as expressly permitted by the Transaction
Documents.
Upon the occurrence of a Default, Lender may declare
any or all of Borrower's obligations immediately due and payable,
without notice to or demand upon Borrower. In such event, Lender
shall have the rights and remedies to the fullest extent
possible, all of which shall be cumulative and not exclusive, of
a secured party under the Uniform Commercial Code of the State of
Nevada and any applicable federal statute. Where additional
notice or cure periods are required by law, said periods and
those contained in this Section 8 shall run concurrently.
Nothing in this Section 8 shall be construed as extending the
term of this Note or the date upon which a default occurs, and no
decision to forego any remedy for any given default shall be
deemed a waiver on the part of Lender of any right relating to
any other Default. No failure to give notice of any default
shall constitute a waiver of such default for any remedy which
may be available in connection therewith. This Section 8 shall
be strictly construed, and shall not impair the exercise of any
remedy not referred to herein immediately upon Default,
including, without limitation, a mandatory or prohibitive
injunction or restraining order or the appointment of a receiver.
9. GENERAL PROVISIONS.
(a) Both principal and interest shall be paid by
Borrower in lawful money of the United States of America such
that Lender shall have received immediately available funds for
the credit of Borrower by not later than 5:00 p.m. Pacific time
on the date that such payment is due. Any payment made after 5:00
p.m. Pacific time shall be deemed received on the next Business
Day. If any Payment becomes due on any day which is not a
Business Day, such Payment shall be made on the next succeeding
Business Day. The term "Business Day" means those weekdays which
are not local, state or national holidays.
(b) All payments hereunder shall be made to Lender at
the following address: 315 Francisco Street, Henderson, Nevada
89014, attn.: Steven L. Forte (or such other place as Lender may
designate to Borrower in writing). All payments hereunder shall
be credited first to the interest then due and the balance of any
such payment (if any) shall be credited to the outstanding
principal hereunder.
(c) Borrower may prepay the entire unpaid principal
balance and accrued interest under this Note (or any portion
thereof) at any time without penalty.
(d) All payments hereunder shall be made without
deduction for any present or future taxes, levies, imposts,
deductions, charges or withholdings, and any such amounts shall
be paid by Borrower. Borrower shall pay the amounts necessary
such that the gross amount of principal and interest payments
received by Lender is not less than that required by this Note.
All stamp and documentary taxes shall be paid by Borrower. If,
notwithstanding the foregoing sentences, Lender pays any such
taxes, Borrower shall reimburse Lender for the amount paid if, as
and to the extent such reimbursement is permitted by applicable
law. Borrower shall furnish to Lender official tax receipts or
other evidence of payment of all such taxes.
4
<PAGE>
(e) If any attorney is engaged by Lender or if Lender
incurs any costs, expenses or losses because of any Default or to
enforce or defend any provision of this Note, then Borrower shall
pay, upon demand, the reasonable attorneys' fees and all costs,
expenses and losses so incurred by Lender together with interest
thereon until paid as if such unpaid attorneys' fees and all
costs, expenses and losses had been added to the principal owing
hereunder. Interest on the amount of attorneys' fees and all
costs, expenses and losses so unpaid shall be compounded monthly
and shall be due and payable upon demand.
(f) No waiver of any Default shall be implied from any
failure of Lender to take or any delay by Lender in taking action
with respect to any such Default or from any previous waiver of
any similar or unrelated Default. A waiver of any term hereof
must be made in writing and shall be limited to the express
written terms of such waiver.
(g) Borrower waives presentment, demand, notice of
dishonor, notice of default or delinquency, notice of
acceleration, notice of protest and nonpayment, notice of costs,
expenses or losses and interest thereon, notice of interest on
interest and late charges and diligence in taking any action to
collect any sums owing under this Note.
(h) TIME IS OF THE ESSENCE WITH RESPECT TO EVERY
PROVISION HEREOF.
(i) This Note shall be construed and enforced in
accordance with the laws of the State of Nevada, except to the
extent that Lender shall at any time have greater rights under
Federal law; and all persons and entities in any manner obligated
under this Note consent to the jurisdiction of any Federal or
State court within the State of Nevada selected by Lender and
also consent to service of process by any means authorized by
Nevada or Federal law.
(j) This Note is hereby expressly limited so that in
no contingency or event whatsoever, whether by acceleration of
maturity of the debt evidenced hereby or otherwise, shall the
amount paid or agreed to be paid to Lender for the use,
forbearance or detention of the money advanced or to be advanced
under this Note exceed the highest lawful rate permissible under
the laws of the State of Nevada as applicable to Borrower. If,
from any circumstances whatsoever, fulfillment of any provision
hereof or of any other agreement, evidencing or securing the
debt, at the time performance of such provisions shall be due,
shall involve the payment of interest in excess of that
authorized by law, the obligation to be fulfilled shall be
reduced to the limit so authorized by law, and if from any
circumstances, Lender shall ever receive as interest an amount
which would exceed the highest lawful rate applicable to the
Borrower, such amount which would be excessive interest shall be
applied to the reduction of the unpaid principal balance of the
debt evidenced hereby and not to the payment of interest.
"BORROWER"
CASINOVATIONS INCORPORATED, a
Washington corporation
By:/s/ Steven J. Blad
---------------------------
Steven J. Blad
Its: Chief Executive Officer
5
<PAGE>
SHAREHOLDER AGREEMENT
THIS SHAREHOLDER AGREEMENT (this "Agreement") is made as of
this 14th day of December 1998 by and between Casinovations
Incorporated, a Washington corporation (the "Company"), Richard
Huson, an individual ("Huson"), Bob Smith, an individual
("Smith") and Ron Keil, an individual ("Keil", collectively with
Huson and Smith, the "Shareholders").
RECITALS
WHEREAS, the Department of Corporations of the State of
California has stated that, as a condition precedent to the
qualification of the Company's common stock for offer, sale or
issuance in the State of California, certain shareholders must
agree for themselves, their successors, assigns, heirs,
administrators or executors that certain shares of the Company's
common stock shall be subject to certain disabilities (the
"Disabilities") until such disabilities are removed by the
Commissioner of the Department of Corporations of the State of
California.
WHEREAS, Huson and Randy Sines ("Sines") have executed that
certain Shareholder Agreement dated August 27, 1998 whereby Huson
and Sines agreed to subject a certain number of their shares,
1,363,551 shares (the "Huson Restricted Shares") and 470,851
shares (the "Sines Restricted Shares"), respectively, to the
Disabilities;
WHEREAS, subject to the Disabilities, Sines desires to
transfer, sell and assign the Sines Restricted Shares to the
Shareholders and the Shareholders desire to purchase the Sines
Restricted Shares from Sines;
WHEREAS, the Shareholders and Sines have submitted that
certain Application for Consent to Transfer Securities Pursuant
to Section 25121 of the Corporate Securities Law of 1968 (the
"Application") to the Department of Corporations of the State of
California in order to obtain prior approval to the transfer of
the Sines Restricted Shares by Sines to the Shareholders (the
"Trasnfer");
WHEREAS, upon the approval of the Transfer by the Department
of Corporations of the State of California, the Shareholders
desire to subject a certain portion of their respective shares to
the aforementioned disabilities and desire to enter into this
Agreement for the purposes of subjecting such shares to the
Disabilities;
NOW, THEREFORE, in consideration of the several and mutual
promises, agreements, covenants, understandings, undertakings,
representations and warranties hereinafter set forth, and for
other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree
that the Recitals are true and correct and by this reference
incorporated herein as if fully set forth, and the parties
further covenant and agree as follows:
1. APPLICABLE SHARES. The Shareholders hereby agree that
the following shares shall be restricted pursuant to the terms of
this Agreement:
a. 181,788 shares of the Company's common stock to be
held of record by Huson upon consummation of the Transfer
(the "Huson Shares");
<PAGE>
b. 173,438 shares of the Company's common stock to be
held of record by Smith upon consummation of the Transfer
(the "Smith Shares"); and
c. 115,625 shares of the Company's common stock to be
held of record by Keil upon consummation of the Transfer
(the "Keil Shares", collectively with the Huson Shares and
the Smith Shares, the "Shareholder Shares").
The shares of the Company's common stock to be designated as
the Shareholder Shares shall be selected at the discretion of
Huson, Smith and Keil as long as the stock certificates
evidencing the respective shares of Huson, Smith and Keil are
surrendered to the Company as of or immediately after the
Effective Date (as defined herein) to comply with the terms of
this Agreement.
2. DISABILITIES. Subject to Section 3 of this Agreement,
the Shareholders hereby agree that the Shareholder Shares shall
be subject to the Disabilities as described below until such
Disabilities are removed by the Commissioner of the Department of
Corporations of the State of California:
a. The Shareholder Shares shall not participate in
cash or property dividends paid by the Company;
b. The Shareholder Shares shall not participate in or
be entitled to any distribution of assets in the event of a
liquidation of the Company;
c. All certificates evidencing the Shareholder Shares
shall bear upon their face a legend (the "Legend")
prominently stamped or printed thereon and in capital
letters of not less than ten-point type, as follows:
THE SHARES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS, INCLUDING WAIVERS OF
DIVIDENDS AND ASSETS; AND IT IS UNLAWFUL
TO CONSUMMATE A SALE OR TRANSFER OF
THEM, OR ANY INTEREST THEREIN, WITHOUT
THE PRIOR WRITTEN CONSENT OF THE
COMMISSIONER OF CORPORATIONS OR THE
STATE OF CALIFORNIA.
d. The holders or persons entitled to said
Shareholder Shares shall not consummate a sale or transfer
of such Shareholder Shares, or any interest therein, or
receive any consideration therefor, without the prior
written consent of the Commissioner of the Department of
Corporations of the State of California; except that
transfers may be effected without such consent pursuant to
the order or process of any court on condition that any
certificates evidencing the Shareholder Shares issued to
such transferee shall contain the Legend.
3. EFFECTIVE DATE. This Agreement shall become effective
immediately upon the date (the "Effective Date") of the approval
of the Department of Corporations of the State of California
authorizing the Transfer.
<PAGE>
4. TERMINATION. This Agreement shall terminate upon
written order or direction of the Commissioner of the Department
of Corporations of the State of California thus removing the
Disabilities. In the event that the Disabilities are removed as
to a portion of the Shares, the shares from which the
Disabilities have been removed will be allocated pro rate between
the Huson Shares and the Sines Shares.
5. COOPERATION. The Company and the Shareholders agree to
cooperate fully with one another in order to achieve the purposes
of this Agreement and to take all actions and execute and deliver
all documents. whether or not specifically described herein, that
may be required to carry out the purposes and intent of this
Agreement.
6. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Nevada.
7. AMENDMENTS AND MODIFICATIONS. The Company and the
Shareholders agree that no amendment or modification of this
Agreement shall be deemed effective unless and until it is an
express writing executed by both the Company and the
Shareholders, and notification of such amendment or modification
is provided to the Department of Corporations of the State of
California.
8. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an
original, but all of which together shall constitute one
instrument.
9. BINDING EFFECT. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective
successors, predecessors, parents, affiliates, subsidiaries,
divisions, officers, directors, shareholders, employees,
advisors, consultants, insurers, attorneys, heirs, executors,
administrators and any persons claiming rights by, through or
under them.
IN WITNESS WHEREOF, the Company and Shareholders have signed
this Agreement as of the date first written above.
"HUSON" "SMITH"
RICHARD HUSON BOB SMITH
By: /s/ Richard Huson By: /s/ Bob Smith
----------------------------- ----------------------------
Richard Huson, an individual Bob Smith, an individual
"KEIL" THE "COMPANY"
RON KEIL CASINOVATIONS INCORPORATED
By: /s/ Ron Keil By: /s/ Steven J. Blad
----------------------------- ----------------------------
Ron Keil, an individual Steven J. Blad, President
<PAGE>
RELEASE AND ASSIGNMENT AGREEMENT
THIS RELEASE AND ASSIGNMENT AGREEMENT (this "Agreement") is
made and entered into as of the 15th day of January 1999 (the
"Effective Date"), by and between Steven L. Forte, an individual,
and Cheryl Forte, an individual (collectively, the "Fortes"), and
Casinovations Incorporated, a Washington corporation (the
"Company", collectively with the Fortes, the "Parties").
RECITALS
WHEREAS, the Company executed a certain replacement promissory
note in the principal amount of $135,047.46 dated August 31, 1998
in favor of Steven and Cheryl Forte (the "Replacement Note");
WHEREAS, the Fortes agreed to sell, transfer, assign and
deliver to the Company and the Company agreed to purchase and
acquire from the Fortes all rights, titles and interests of the
Fortes in and to the certain assets and rights (contractual or
otherwise) of the Fortes, wherever located, as follows: (a)
848,682 shares of the Company's common stock (the "Shares") for
$2.50 per share of common stock; (b) an option to purchase 20,000
shares of Company's common stock (the "Option") for $1.50 per
underlying share of common stock; and (c) the right to receive a
royalty on sales of the Random Ejection Shuffler, Fantasy 21 table
game and the Safety-Peek playing card (the "Royalty) (collectively,
the "Forte Transaction").
WHEREAS, the Forte Transaction was evidenced by a purchase
agreement (the "Purchase Agreement"), a promissory note in the
principal amount of Two Million Three Hundred Fifty One Thousand
Seven Hundred Five and no/100ths Dollars ($2,351,705.00 U.S.) (the
"Note"), a security agreement (the "Security Agreement"), and a
stock pledge agreement (the "Pledge Agreement, collectively, with
the Replacement Note, the Purchase Agreement, the Note and the
Security Agreement, the Forte Documents").
WHEREAS, the execution and delivery of the Forte Documents
were contingent upon the approval by the Nevada State Gaming
Control Board (the "Board") of the Random Ejection Shuffler and the
terms and conditions of the Forte Transaction with such approval
granted by the Board on December 3, 1998.
WHEREAS, the Parties executed a letter agreement dated
December 4, 1998 in which the Parties agreed to, among other
things, cancel the Forte Documents in exchange for a series of
three payments by the Company to the Fortes of $500,000 on December
7, 1998, $500,000 on December 28, 1998 and $250,000 on January 15,
1998 (the "Payments").
WHEREAS, the Company has provided the Fortes with the payment
of $500,000 on December 7, 1998, $500,000 on December 28, 1998 and
$250,000 on January 15, 1999.
WHEREAS, the Parties desire to enter into this Agreement for
the purposes of acknowledging the delivery of the Payments and
releasing the Company from any of its obligations under the Forte
Transaction, the Forte Documents and any other matter related
thereto.
NOW, THEREFORE, for and in consideration of the several and
mutual promises, agreements, covenants, understandings,
undertakings, representations and warranties hereinafter set forth,
and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties agree that
the Recitals are true and correct and by this reference
incorporated herein as if fully set forth and further covenant and
agree as follows:
ARTICLE I
RELEASE AND ASSIGNMENT
1.1 ASSIGNMENT OF RIGHTS, TITLES, BENEFITS AND INTERESTS
In acknowledging the delivery of the Payments by the Company
to the Fortes, the Fortes hereby (a) deliver to the Company the
original Forte Documents; (b) absolutely and unconditionally
transfer, set over and
<PAGE>
assign to the Company the Forte Documents such that such documents
shall be of no further force and effect; (c) absolutely and
unconditionally transfer, set over and assign to the Company all of
the Fortes' acquired rights, titles, benefits and interests
currently owned or hereinafter acquired, as a result of the Forte
Transaction; and (d) forever relinquish to the Company any and all
past, present and future interests, rights or claims, direct or
indirect, in the Forte Documents, the Shares, the Option and the
Royalty.
1.2 RELEASE
For valuable consideration, the sufficiency of which is hereby
acknowledged, the Fortes, each jointly and/or individually, on
behalf of themselves, their respective affiliates, employees,
attorneys, heirs, executors and administrators, hereby remise,
acquit and forever release the Company, and its respective
successors, predecessors, parents, affiliates, subsidiaries,
divisions, including, but not limited to their respective officers,
directors, shareholders, managers, employees, advisors,
consultants, insurers, attorneys, heirs, executors, administrators
and authorized representatives from any and all claims, demands,
damages, debts, liabilities, actions, causes of action or suits of
whatsoever kind or nature, presently known or unknown, actual or
contingent, asserted or unasserted, foreseeable or unforeseeable,
unanticipated or unsuspected, which any of them has or may have now
or in the future, arising directly or indirectly out of or
involving the Shares, the Option, the Royalty, the Forte
Transaction, the Forte Documents and/or this Agreement and any
other matter related thereto, save and except for those matters for
addressed in Section 1.3, the representations and warranties
contained in Article II hereof and, as described in the Letter
Agreement, the mutually acceptable termination of that certain
employment and non-compete agreement by and between the Company and
Steven Forte dated March 15, 1996, and as amended June 15, 1996.
1.3 FUTURE LITIGATION
The Parties, jointly and/or individually, covenant and agree
to forever refrain from instituting, prosecuting, maintaining, or
assisting with any claims, suits and actions, which arise out of,
or is or may be, in whole or in part, based upon, related to or
connected with this Agreement, the Shares, the Option, the Royalty,
the Forte Transaction, the Forte Documents and any other matter
related thereto as they relate to the Parties.
1.4 FURTHER ASSURANCES
The Parties hereby acknowledge that they will use their best
efforts to take, or cause to be taken, all appropriate action, and
to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and
make effective the transactions contemplated by this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLERS
The Fortes hereby make the following representations and
warranties to the Company and warrant that the following are true
and accurate on the date hereof:
2.1 AUTHORITY
The Fortes have the full right, power, legal capacity and
authority to enter into, and perform its obligations under this
Agreement, including the execution and delivery of this Agreement
and the transfer, assignment, delivery and cancellation of the
Forte Documents in favor of the Company.
2.2 NO ASSIGNMENT
The Fortes hereby represent and warrant that they have not,
either directly or indirectly, transferred, assigned, granted or
otherwise forfeited any interest, claim, lien, pledge, option,
encumbrance, charge, agreement, or other arrangement with respect
to the Forte Documents.
-2-
<PAGE>
2.3 DIFFERENCE IN FACTS
The Fortes fully understand that the facts presently known to
them may later be found to be different, and expressly accept and
assume the risk that the facts may be found to be different. The
release and indemnification contained herein shall be effective in
all respects and shall not be subject to termination or rescission
because of any such difference in facts.
2.4 NO VIOLATION
Neither the execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby, nor the
fulfillment of the terms hereof by the Fortes will conflict with,
or result in a breach of or default under, any of the terms or
provisions of any agreement, note, indenture, mortgage, deed of
trust, instrument lease, franchise or any other understanding to
which Sellers are a party or by which it or any of its assets or
properties are bound.
ARTICLE III
GENERAL PROVISIONS
3.1 ENTIRE AGREEMENT
This Agreement (together with all exhibits, documents,
agreements and instruments executed or furnished in connection
herewith) constitutes the entire agreement between the parties
pertaining to the subject matter hereof, and supersedes any and all
prior or contemporaneous written or oral negotiations, agreements,
representations, and understandings of the parties with respect to
such subject matter.
3.2 EXPENSES
If any legal action or any arbitration or other proceeding is
brought for the enforcement of this Agreement, or because of an
alleged dispute, breach, default, or misrepresentation in
connection with any of the provisions of this Agreement, the
successful or prevailing party or parties shall be entitled to
recover reasonable attorneys' fees and other costs incurred in that
action or proceeding, in addition to any other relief to which it
may be entitled.
3.3 MODIFICATION, AMENDMENT OR WAIVER
This Agreement may not be amended, supplemented or otherwise
modified, and none of its terms may be waived, unless such
amendment, supplement, modification or waiver is in an express
writing and executed by the party or parties to be bound thereby.
The failure of any party at any time or times to require
performance of any provision hereof shall not affect the right of
such party at a later time to enforce the same, and no waiver of
any term or provision hereof on any one occasion shall be deemed to
be a waiver of the same or any other provision hereof at any
subsequent time or times.
3.4 BINDING EFFECT; ASSIGNMENT
This Agreement shall be binding upon and inure to the benefit
of the parties and their respective successors, predecessors,
parents, affiliates, subsidiaries, divisions, officers, directors,
shareholders, employees, advisors, consultants, insurers,
attorneys, heirs, executors, administrators and any persons claim
ing rights by, through or under them; provided, however, that no
assignment of any rights or delegation of any obligations provided
for herein may be made by either party to this Agreement without
the prior written consent of the other party.
3.5 CONSTRUCTION
This Agreement shall be construed in accordance with its
intent and without regard to any presumption or any other rule
requiring construction against the party causing the same to be
drafted.
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<PAGE>
3.6 GOVERNING LAW
This Agreement shall be governed by and construed in
accordance with the laws of the State of Nevada in effect on the
date of this Agreement without resort to any conflict of laws
principles, and the courts of the State of Nevada shall have sole
and exclusive jurisdiction over any matter brought under, or by
reason of, this Agreement.
3.7 SEVERABILITY
If any term, provision, covenant or condition of this
Agreement, or any application thereof, should be held by a court of
competent jurisdiction to be invalid, void or unenforceable, all
terms, provisions, covenants and conditions of this Agreement, and
all applications thereof, not held invalid, void or unenforceable,
shall continue in full force and effect and shall in no way be
affected, impaired or invalidated thereby, provided that the
invalidity, voidness or enforceability of such term, provision,
covenant or condition does not materially impair the ability of the
parties to consummate the transactions contemplated hereby.
3.8 NEUTRAL INTERPRETATION
The provisions contained herein shall not be construed in
favor of or against any party because that party or its counsel
drafted this Agreement, but shall be construed as if all parties
prepared this Agreement, and any rules of construction to the
contrary are hereby specifically waived. The terms of this
Agreement were negotiated at arm's length by the parties hereto.
3.9 COUNTERPARTS
This Agreement may be executed at different times and in
multiple counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the date first set forth above.
"FORTES" THE "COMPANY"
STEVEN L. FORTE, an CASINOVATIONS INCORPORATED,
individual a Washington corporation
/s/ Steven L. Forte By: /s/ Steven J. Blad
- ------------------------- ----------------------------
Steven L. Forte Steven J. Blad
Its: Chief Executive
Officer and President
CHERYL FORTE,
an individual
/s/ Cheryl Forte
- -------------------------
Cheryl Forte
<PAGE>
AGREEMENT
THIS AGREEMENT (this "Agreement") entered into as of the
24th day of March, 1999, by and between Dominion Income
Management, Inc., a Washington corporation ("Dominion"), and
Casinovations Incorporated, a Washington corporation and all
successors thereto ("Casinovations").
W I T N E S S E T H:
WHEREAS, by virtue of that certain Subscription Agreement
for Casinovations common stock dated December 4, 1998 by and
between Dominion and Casinovations (the "Subscription
Agreement"), Dominion offered to purchase 200,000 shares of
Casinovations common stock (the "Shares") for $500,000;
WHEREAS, Casinovations accepted the Subscription Agreement
and payment of $500,000 and caused to be issued and delivered to
Dominion that certain Casinovations Stock Certificate No. CVI
1088 dated December 14, 1998 in the amount of 200,000 shares (the
"Stock Certificate");
WHEREAS, First Global Securities, Inc., located at 390 East
Colorado Boulevard, Suite 500, Pasadena, California 91101, whose
principal is Noble Trenham, an individual (collectively and
hereinafter referred to as "Trenham/First Global"), acted for and
on behalf of Casinovations as placement agent in connection with
the execution of the Subscription Agreement and placement of the
Shares to Dominion;
WHEREAS, the Shares were placed pursuant to that certain
registration statement on Securities and Exchange Commission Form
SB-2, as amended, which registration statement was declared
effective by the Securities and Exchange Commission (Registration
No. 333-31373) (the "Registration Statement");
WHEREAS, Dominion has contacted Trenham/First Global and
Casinovations demanding the right to revoke and/or rescind the
Subscription Agreement;
WHEREAS, Dominion has alleged that it executed the
Subscription Agreement in reliance upon statements,
representations and assurances given to Dominion by Trenham/First
Global that were untrue or misleading and that such statements,
representations and assurances provide sufficient basis for
future legal action against Trenham/First Global and
Casinovations;
WHEREAS, Casinovations communicated Dominion's concerns and
allegations to Trenham/First Global and, as a result, received
from Trenham/First Global an indemnification, as memorialized in
that certain Indemnity Agreement dated January 15, 1999 by and
between Casinovations and Trenham/First Global, to hold
Casinovations and its successors harmless from any losses,
demands, settlements or other damages resulting from or related
to Dominion's concerns and allegations, the Subscription
Agreement, the Shares and any other matter related thereto.
WHEREAS, Casinovations, Dominion and Trenham/First Global
have had communications directly and through counsel regarding
the basis for Dominion's demand to
<PAGE>
revoke and/or rescind said Subscription Agreement and
Casinovations has continually asserted the validity of the
Subscription Agreement;
WHEREAS, although Casinovations neither admits nor denies
Dominion's concerns and allegations, Casinovations and Dominion
enter into this Agreement solely for the purposes of avoiding
litigation without agreeing with the other party's position with
respect to validity or claims of any kind whatsoever that
Casinovations and Dominion intend to fully pursue against
Trenham/First Global;
NOW THEREFORE, in consideration of the mutual covenants,
promises, representations, understandings and agreements
hereinafter set forth, Dominion and Casinovations hereto agree
that the recitals set forth above are true and accurate and are
hereby incorporated in and made a part of this Agreement, and
further covenant and agree as follows:
1. PAYMENT. At the Closing (as defined herein),
Casinovations will pay or cause to be paid to Dominion $450,000
in consideration for the rescission of the Subscription
Agreement. At the Closing, the Subscription Agreement will be
deemed rescinded, and null and void; however, the Shares will
remain issued and outstanding, subject to the offering terms of
the Registration Statement, and available, at Casinovations' sole
and absolute discretion, to be sold to an investor under the
terms of the Registration Statement or otherwise.
2. CLOSING. The Closing will take place on or before 5:00
p.m. Las Vegas, Nevada time on Friday, April 30, 1999 (the
"Closing"). The location of the Closing will be at a time and a
place mutually agreed by the parties. Further, Dominion and
Casinovations agree that the placement of the appropriate funds
and documents in the hands of their respective counsel by the
dates provided for herein shall be deemed satisfactory for the
Closing to occur.
(a) DELIVERY ITEM OF CASINOVATIONS. At the Closing,
Casinovations shall deliver the following:
(i) Cash, cashiers check, or certified funds
payable to Dominion in the amount of $450,000.
(b) DELIVERY ITEMS OF DOMINION. At the Closing,
Dominion shall deliver to Casinovations the following:
(i) The Stock Certificate, endorsed in blank and
with signature medallion;
(ii) An irrevocable stock or bond power for said
Shares in form and substance reasonably acceptable to
Casinovations and its counsel consistent with Section
2(b)(i); and
(iii) Such other and further documents and
instruments that may be reasonably required by
Casinovations to complete and facilitate the rescission
in accordance with this Agreement.
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<PAGE>
3. PERFORMANCE. Dominion agrees that performance by
Casinovations in accordance herewith will constitute full,
complete and unconditional performance by Casinovations.
Dominion will look solely to Trenham/First Global for
performance, payment, documentation and completion of all
obligations solely to and by Trenham/First Global, including, but
not limited to, the payment of $50,000 to Dominion, and will not
look to Casinovations for any performance, liability, obligation,
guaranty, satisfaction or performance whatsoever of any kind or
any nature by Casinovations in respect of the obligations of
Trenham/First Global.
4. FURTHER ASSURANCES. Dominion and Casinovations hereby
acknowledge that they will use their reasonable best efforts to
take, or cause to be taken, all appropriate action, and to do, or
cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective
the transactions contemplated by this Agreement. In case at any
time after the Closing any further action is necessary to carry
out the purposes of this Agreement, Dominion and Casinovations
will use their reasonable best efforts to take all such necessary
action.
5. AUTHORITY. Dominion and Casinovations, respectively,
have all requisite corporate power and authority to enter into
and perform this Agreement and to carry out their respective
obligations under this Agreement. This Agreement and the
transactions contemplated by this Agreement have been duly and
validly authorized by all necessary corporate action on the part
of both Dominion and Casinovations, respectively. This Agreement
has been duly executed and delivered by both Dominion and
Casinovations and constitutes the legal, valid and binding
obligation of both Dominion and Casinovations, enforceable
against either Dominion or Casinovations in accordance with its
terms.
6. IRREVOCABLE PROXY. As further consideration for this
Agreement, in accordance with Section 23B.07.220 of the Revised
Code of Washington, Dominion hereby grants to Casinovations an
irrevocable proxy coupled with an interest to Casinovations to
vote all of the Shares at the Casinovations Annual Meeting of
Stockholders scheduled for Monday, March 29, 1999, in Las Vegas,
Nevada, and to vote the Shares in such manner and for such items
as Casinovations shall determine in its sole and absolute
discretion, including, but not limited to, in favor of the agenda
items for (a) the election of all Casinovations' directors, (b)
the reincorporation of Casinovations from the state of Washington
to the state of Nevada, and (c) the approval of the Casinovations
Stock Option Plan, as described in that certain Proxy Statement
of Casinovations dated March 6, 1999, and for such other matters
that may come before the stockholders of Casinovations from time
to time through and including the Closing provided for herein.
7. RELEASE. From the Closing and that day forward, for
valuable consideration, the sufficiency of which is hereby
acknowledged, Dominion, on behalf of itself, its successors,
predecessors, parents, affiliates, subsidiaries, divisions,
including, but not limited to its officers, directors,
stockholders, managers, employees, advisors, consultants,
insurers, attorneys, heirs, executors, administrators and
authorized representatives, hereby remises, acquits and forever
releases Casinovations, and its successors, predecessors,
parents, affiliates, subsidiaries, divisions, including, but not
limited to its officers, directors, shareholders, managers,
employees, advisors, consultants, insurers, attorneys, heirs,
executors, administrators and authorized representatives from
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<PAGE>
any and all claims, demands, damages, debts, liabilities,
actions, causes of action or suits of whatsoever kind or nature,
presently known or unknown, actual or contingent, asserted or
unasserted, foreseeable or unforeseeable, unanticipated or
unsuspected, which any of them has or may have now or in the
future, arising directly or indirectly out of or involving the
obligations owed Trenham/First Global and any other matter
related thereto.
8. MUTUAL RELEASE. From the Closing and that day forward,
for valuable consideration, the sufficiency of which is hereby
acknowledged, Dominion and Casinovations, on behalf of
themselves, their respective successors, predecessors, parents,
affiliates, subsidiaries, divisions, including, but not limited
to their respective officers, directors, stockholders, managers,
employees, advisors, consultants, insurers, attorneys, heirs,
executors, administrators and authorized representatives, hereby
remise, acquit and forever release each other, and their
respective successors, predecessors, parents, affiliates,
subsidiaries, divisions, including, but not limited to their
respective officers, directors, shareholders, managers,
employees, advisors, consultants, insurers, attorneys, heirs,
executors, administrators and authorized representatives from any
and all claims, demands, damages, debts, liabilities, actions,
causes of action or suits of whatsoever kind or nature, presently
known or unknown, actual or contingent, asserted or unasserted,
foreseeable or unforeseeable, unanticipated or unsuspected, which
any of them has or may have now or in the future, arising
directly or indirectly out of or involving the Shares, the
Subscription Agreement and any other matter related thereto as
they relate to Dominion and Casinovations.
9. FUTURE LITIGATION. Dominion and Casinovations, on
behalf of themselves, their respective successors, predecessors,
parents, affiliates, subsidiaries, divisions, including, but not
limited to their respective officers, directors, stockholders,
managers, employees, advisors, consultants, insurers, attorneys,
heirs, executors, administrators and authorized representatives,
covenant and agree to forever refrain from instituting,
prosecuting, maintaining, or assisting with any claims, suits and
actions against the other, which arise out of, or is or may be,
in whole or in part, based upon, related to or connected with the
Shares, the Subscription Agreement and any other matter related
thereto as they relate to Dominion and Casinovations.
10. RESERVATION. By entry of this Agreement, and any
related agreements, amendments or writings between Dominion and
Casinovations, Dominion and Casinovations reserve all claims that
they have or may have against Trenham/First Global under any
agreements, understandings or otherwise and the entry by Dominion
and Casinovations into this Agreement, the transactions
contemplated by this Agreement or any other transaction by and
between Dominion and Casinovations shall in no way, by
implication or otherwise, be deemed or construed to be a waiver,
diminishment of claim, or release by Dominion or Casinovations,
their respective affiliates, stockholders or other parties
claiming by or through either Dominion or Casinovations against
Trenham/First Global.
11. GENERAL PROVISIONS.
(a) AMENDMENT; MODIFICATION; WAIVER. This Agreement
may not be amended, supplemented or otherwise modified, and
none of its terms may be waived, unless such amendment,
supplement, modification or waiver is in an express writing
and executed by the party or parties to be bound thereby.
The failure of any party at any time or times to require
performance of any provision hereof shall not affect the
right of such
-4-
<PAGE>
party at a later time to enforce the same, and no waiver of
any term or provision hereof on any one occasion shall be
deemed to be a waiver of the same or any other provision
hereof at any subsequent time or times.
(b) ASSIGNMENT; BINDING EFFECT. This Agreement shall
be binding upon and inure to the benefit of the parties and
their respective successors, predecessors, parents,
affiliates, subsidiaries, divisions, officers, directors,
shareholders, employees, advisors, consultants, insurers,
attorneys, heirs, executors, administrators and any persons
claiming rights by, through or under them; provided,
however, that no assignment of any rights or delegation of
any obligations provided for herein may be made by either
party to this Agreement without the prior written consent of
the other party.
(c) BINDING ARBITRATION. Any dispute, claim or
controversy of any kind, whether in contract or tort,
statutory or common law, legal or equitable, now existing or
hereafter arising under or in connection with, or in any way
pertaining to, this Agreement shall be resolved through
binding arbitration as governed by Chapter 38 of the Nevada
Revised Statutes. If a lawsuit is commenced by either
Dominion or Casinovations and an answer, not including an
application to compel arbitration, has been filed by the
other party, arbitration may thereafter be elected only upon
the consent of both Dominion or Casinovations. The decision
shall be binding on Dominion and Casinovations unless the
decision is vacated by the court as provided in Section
38.145 of the Nevada Revised Statutes.
(i) ARBITRATOR SELECTION. If arbitration is
elected, Dominion or Casinovations shall select an
arbitrator. If Dominion or Casinovations cannot agree
on one arbitrator, each party shall select an
arbitrator who will, in turn, select a third
arbitrator. The third arbitrator shall be a person who
has neither a business nor personal relationship with
either Dominion or Casinovations or their respective
legal counsel. All decisions made by a majority of the
arbitrators shall be binding on Dominion and
Casinovations.
(ii) ARBITRATION RULES. Except as provided by
Chapter 38 of the Nevada Revised Statutes or agreed
upon by Dominion and Casinovations, the arbitration
shall be conducted according to the Rules of the
American Arbitration Association now in effect or later
adopted. The arbitrator(s) shall rule on all relevant
aspects of the case, including the award of injunctive
relief, damages, or any other legal or equitable
remedies; the amount of attorneys' fees and the
decision as to who will pay them; and the costs
incurred to resolve the dispute, including the decision
as to whom is to pay the fees of the arbitrator(s).
(iii) JUDGMENT. Judgment, if any, upon award(s)
rendered by the arbitrator(s) may be entered into in
any court having competent jurisdiction.
(d) ENTIRE AGREEMENT. This Agreement (including all
exhibits, schedules and other documents referred to in this
Agreement (the "Incorporated Documents"), all of which are
hereby incorporated by reference), constitute the entire
agreement, and supersedes all prior discussions,
negotiations, agreements and understandings (both
-5-
<PAGE>
written and oral) among Dominion and Casinovations with
respect to the subject matter of this Agreement. All
obligations of either Dominion or Casinovations under any
Incorporated Document shall constitute an obligation of such
party under this Agreement. Any capitalized terms used in
any Incorporated Document which are not otherwise defined
therein shall have the respective meanings given such terms
in this Agreement.
(e) EXPENSES. Dominion and Casinovations shall each
pay all costs and expenses incurred or to be incurred by
each of them respectively in negotiating and preparing this
Agreement and in taking whatever actions may be necessary or
appropriate to consummate the transactions contemplated by
this Agreement, including the costs of obtaining any
consents or approvals.
(f) GOVERNING LAW; VENUE. This Agreement shall be
governed by and construed in accordance with the laws of the
State of Nevada in effect on the date of this Agreement
without resort to any conflict of laws principles, and the
courts of the State of Nevada shall have sole and exclusive
jurisdiction over any matter brought under, or by reason of,
this Agreement.
(g) NEUTRAL INTERPRETATION. The provisions contained
herein shall not be construed in favor of or against any
party because that party or its counsel drafted this
Agreement, but shall be construed as if all parties prepared
this Agreement, and any rules of construction to the
contrary are hereby specifically waived. The terms of this
Agreement were negotiated at arm's length by the parties
hereto.
(h) NO THIRD PARTIES BENEFITED. This Agreement is
made and entered into for the sole protection and benefit of
Dominion and Casinovations, their respective successors and
assigns, and no other person or persons shall have any
benefit or right of action hereon.
(i) NOTICE. Any and all notices required under this
Agreement shall be in writing and shall be either (i) hand-
delivered; (ii) mailed, first-class postage prepaid,
certified mail, return receipt requested; (iii) transmitted
via telecopier provided that confirmation is obtained; or
(iv) delivered via a nationally recognized overnight courier
service, using the following information:
To Casinovations: 6744 South Spencer Street
Las Vegas, Nevada 89119
Attention: President
Telephone: (702) 733-7195
Facsimile: (702) 733-7197
To Dominion: 15302 25th Drive S.E.
Mill Creek, Washington 98102
Telephone: (425) 742-2276
Facsimile: (425) 338-3175
(j) SEVERABILITY. If any term, provision, covenant or
condition of this Agreement, or any application thereof,
should be held by a court of competent
-6-
<PAGE>
jurisdiction to be invalid, void or unenforceable, all
terms, provisions, covenants and conditions of this
Agreement, and all applications thereof, not held invalid,
void or unenforceable, shall continue in full force and
effect and shall in no way be affected, impaired or
invalidated thereby, provided that the invalidity, voidness
or enforceability of such term, provision, covenant or
condition does not materially impair the ability of the
parties to consummate the transactions contemplated hereby.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
"Casinovations" "Dominion"
CASINOVATIONS INCORPORATED, DOMINION INCOME MANAGEMENT, INC.
a Washington corporation a Washington corporation
By: By:
-------------------------- ------------------------------
Steven J. Blad, Andrew Evans,
President and Chief _________________
Executive Officer
-7-
CASINOVATIONS INCORPORATED
SUBSIDIARIES OF REGISTRANT
Casinovations Nevada Incorporated
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS
We hereby consent to the use in this annual report on Form 10-KSB
for the year ended December 31, 1998 filed in behalf of
Casinovations Incorporated of our report dated February 5, 1999,
relating to the financial statements of Casinovations
Incorporated as of December 31, 1998.
/s/ James E. Scheifley & Associates, P.C.
James E. Scheifley & Associates, P.C.
Certified Public Accountants
March 25, 1999
Denver, Colorado
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 200,749
<SECURITIES> 0
<RECEIVABLES> 14,157
<ALLOWANCES> 0
<INVENTORY> 756,667
<CURRENT-ASSETS> 1,010,464
<PP&E> 476,152
<DEPRECIATION> 125,380
<TOTAL-ASSETS> 1,900,563
<CURRENT-LIABILITIES> (1,642,488)
<BONDS> 0
0
0
<COMMON> (6,767)
<OTHER-SE> 1,665,023
<TOTAL-LIABILITY-AND-EQUITY> (1,900,563)
<SALES> (27,779)
<TOTAL-REVENUES> (29,670)
<CGS> 134,199
<TOTAL-COSTS> 134,199
<OTHER-EXPENSES> 2,885,426
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 383,189
<INCOME-PRETAX> (3,373,144)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,373,144)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,373,144)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> (.53)
</TABLE>
