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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1999
---------------------------
OR
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
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Commission file number: 000-25855
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CASINOVATIONS INCORPORATED
- -----------------------------------------------------------------
(Exact name of small business issuer as
specified in its charter)
Nevada 91-1696010
- --------------------------- ---------------------------
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
6744 S. Spencer Street, Las Vegas, Nevada 89119
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(Address of principal executive offices)
(702) 733-7195
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(Issuer's telephone number)
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(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed
by court.
YES NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date:
9,707,148 shares of common stock, $.001 par value,
as of June 30, 1999
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Transitional Small Business Disclosure Format (check one);
YES NO X
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1
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FORM 10-QSB
TABLE OF CONTENTS
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Balance Sheet 3
Statement of Operations 4
Statement of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security
Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURE 20
EXHIBIT INDEX 21
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
CASINOVATIONS INCORPORATED
(A Development Stage Company)
BALANCE SHEET
(UNAUDITED)
June 30, 1999 December 31, 1998
--------------- -------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,773,363 $ 200,749
Accounts receivable, trade 148,077 2,810
Other receivables 2,666,652 11,347
Inventories 1,350,299 756,662
Prepaid expenses 32,095 38,896
--------------- -------------------
Total current assets 5,970,486 1,010,464
Property and equipment, including revenue producing equipment, at cost, net of
accumulated depreciation of $231,459 and $125,380 1,185,769 350,772
Intangible assets, at cost, net of
accumulated amortization of $47,657 and $37,369 154,326 157,916
Deferred interest 173,071 238,590
Deposits 263,049 142,821
--------------- -------------------
$ 7,746,701 $ 1,900,563
=============== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable - bank $ - $ 197,383
Current portion of leases payable 790,608 219,758
Current portion of long term debt - 3,232
Accounts payable 659,711 810,349
Accrued expenses 146,572 40,576
Accrued interest - stockholder loans - 59,561
Current portion of stockholder loans 104,532 295,755
Customer deposits 75,458 15,874
--------------- -------------------
Total current liabilities $ 1,776,881 $ 1,642,488
Other long term debt - 13,948
Leases payable 1,252,876 -
Convertible debt 1,500,000 813,138
Stockholder loans 235,887 1,089,245
--------------- -------------------
Total liabilities $ 4,765,644 $ 3,558,819
Stockholders' equity:
Common stock, $.001 par value,
40,000,000 shares authorized, 9,706,148 shares and
6,767,106 shares issued and outstanding, respectively 9,706 6,767
Additional paid-in capital 13,907,544 6,676,430
Unpaid subscriptions to common stock (125,000) (125,000)
Deficit accumulated during development stage (10,811,193) (8,216,453)
--------------- -------------------
Total stockholders' equity 2,981,057 (1,658,256)
--------------- -------------------
$ 7,746,701 $ 1,900,563
=============== ===================
</TABLE>
See accompanying notes to unaudited financial statements.
3
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<TABLE>
<CAPTION>
CASINOVATIONS INCORPORATED
(A Development Stage Company)
STATEMENT OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sales $ 80,945 $ 3,943 $ 98,650 $ 4,288
Rental income 103,845 150,365 -
---------------- --------------- --------------- ---------------
-
184,790 3,943 249,015 4,288
Cost of sales 359,422 - 437,912 -
---------------- --------------- --------------- ---------------
-
Gross margin (174,632) - (188,897) -
General and administrative 1,218,138 690,080 2,143,036 1,045,864
Research and development 185,457 24,487 344,313 126,820
---------------- --------------- --------------- ---------------
-
(Loss) from operations (1,578,227) (710,624) (2,676,246) (1,168,396)
Interest expense, net 115,574 - 212,992 37,528
Interest expense - related parties 28,929 29,256 50,372 54,136
---------------- --------------- --------------- ---------------
-
144,503 29,256 263,364 91,664
---------------- --------------- --------------- ---------------
-
(Loss) before income taxes (1,722,730) (739,880) (2,939,610) (1,260,060)
Provision for income taxes - - - -
---------------- --------------- --------------- ---------------
Net income (loss) $ (1,722,730) $ (739,880) $ (2,939,610) $ (1,260,060)
================ =============== =============== ===============
Basic earnings (loss) per share $ (0.21) $ (0.12) $ (0.38) $ (0.20)
================ =============== =============== ===============
Weighted average shares outstanding 8,400,418 6,283,638 7,661,566 6,231,638
================ =============== =============== ===============
</TABLE>
See accompanying notes to unaudited financial statements.
4
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<TABLE>
<CAPTION>
CASINOVATIONS INCORPORATED
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
Six Months Ended
-------------------------------------
June 30, 1999 June 30, 1998
--------------- ---------------
<S> <C> <C>
Net (loss) $ (2,939,610) $ (1,260,060)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 116,366 44,175
Stock and options issued for services - 176,500
Amortization of deferred interest 78,433 -
Changes in assets and liabilities:
(Increase) decrease in trade accounts receivable (145,267) (4,052)
(Increase) decrease in other receivables (55,305) (5,642)
(Increase) decrease in inventory (593,637) (126,118)
(Increase) decrease in prepaid expenses 6,801 (8,490)
Increase (decrease) in accounts payable (135,564) 55,783
Increase (decrease) in accrued expenses 46,435 32,200
Increase (decrease) in customer deposits 59,584 -
--------------- ---------------
Total adjustments (622,154) 164,356
--------------- ---------------
Net cash (used in) operating activities (3,561,764) (1,095,704)
--------------- ---------------
Cash flows from investing activities:
Acquisition of plant and equipment (381,922) (16,204)
Equipment produced and held for rental (554,400) -
Increase in patents and trademarks (6,698) (16,406)
--------------- ---------------
Net cash (used in) investing activities (943,020) (32,610)
--------------- ---------------
Cash flows from financing activities:
Common stock sold for cash 4,028,923 430,000
Payment for rescinded stock subscription agreement (450,000) -
Repayment of long-term debt (16,408) -
Proceeds of shareholder loans - 290,000
Repayment of shareholder loans (150,000) (38,660)
Proceeds from leases payable 1,226,513 430,000
Repayment of leases payable (264,247) (74,121)
Proceeds from convertible debentures 1,900,000 -
Repayment of notes payable (197,383) -
--------------- ---------------
Net cash provided by financing activities 6,077,398 1,037,219
--------------- ---------------
Increase (decrease) in cash 1,572,614 (91,095)
Cash and cash equivalents,
beginning of period 200,749 119,389
--------------- ---------------
Cash and cash equivalents,
end of period $ 1,773,363 $ 28,294
=============== ===============
</TABLE>
See accompanying notes to unaudited financial statements.
5
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CASINOVATIONS INCORPORATED
(A Development Stage Company)
Notes to Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION.
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions incorporated in Regulation 10-SB of the Securities
and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring adjustments and accruals) considered necessary for a
fair presentation have been included.
The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full
year. The accompanying financial statements should be read in
conjunction with the Company's audited financial statements for
the year ended December 31, 1998 as included in the Company's
Annual Report on Form 10-KSB as filed with the Securities and
Exchange Commission on March 26, 1999.
Certain reclassifications have been made to amounts presented in
prior periods for comparability to the current period
presentation.
Basic loss per share was computed using the weighted average
number of common shares outstanding.
NOTE 2 - STATEMENT REGARDING COMPUTATION OF LOSS PER SHARE.
Fully diluted loss per share excludes any dilutive effects of
options, warrants and convertible securities. Fully diluted loss
per share is not presented because the effect would be anti-
dilutive.
NOTE 3 - SUBSEQUENT EVENTS.
BUILDING LEASE. In July 1999, the Company agreed in
principle to lease from the Company's current landlord a new
building containing approximately 58,000 square feet beginning
October 1999, subject to the approval of the final building
plans by both parties. Under the terms of the proposed lease
agreement, the Company will be relieved from all obligations
under its current lease agreement with the landlord 15 months
after the execution of the proposed lease agreement. The term
under the proposed lease agreement will be for 86 months with one
option to extend for a five-year period. The effective rent
under the proposed lease agreement is expected to be $17,903 per
month for the first year and $42,968 per month for subsequent
years, subject to annual increases after the second year.
Increases to rent shall be based on the Consumer Price Index
and shall not exceed 3% per annum. The other material terms
of the proposed lease agreement are believed to be substantially
similar to those of the Company's current lease agreement. The
Company expects the new facility to be adequate for its facility
requirements for the foreseeable future.
VEHICLE FINANCING. In July 1999, a commercial leasing
company agreed to provide the Company with a $100,000 revolving
lease facility for the purchase of vehicles. The facility
requires the Company to pay 10% of the purchase price for the
vehicle and variable monthly payments for up to 48 months. The
interest rate is indexed to the 5 year U.S. Treasury Index and is
fixed for the term of the financing at the funding date. The
Company expects to treat vehicle acquisitions under this facility
as a capital lease.
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ITEM 2. 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 of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), such as statements
relating to plans for future expansion, capital spending, future
operations, sources of liquidity and financing sources. Such
forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results
in the future and, accordingly, such results may differ from
those expressed in any forward-looking statements made herein.
These risks and uncertainties include, but are not limited to,
those relating to liquidity requirements for the Company, the
continued growth of the gaming industry, the success of the
Company's product-development and marketing and sales activities,
vigorous competition in the gaming industry, dependence on
existing management, relocation of manufacturing facilities,
gaming regulations (including actions affecting licensing and
product approvals), leverage and debt service (including
sensitivity to fluctuations in interest rates), issues related to
the Year 2000, domestic or global economic conditions and changes
in federal or state tax laws or the administration of such laws.
OVERVIEW
The Company's primary business is the development,
manufacturing and marketing of various gaming concepts and
products that increase the security, productivity and profits for
the global gaming industry.
From its inception in 1995, 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 and obtaining a facility with
sufficient capacity to house future growth. Beginning January
1999, the Company has experienced modest sales development and
revenue growth.
The following discussion summarizes the Company's results of
operations for the three months ended June 30, 1999 and 1998, the
six months ended June 30, 1999 and 1998 and the Company's
liquidity and capital resources.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES. For the three months ended June 30, 1999, the
Company generated total revenues of $184,790 compared to $3,943
for the three months ended June 30, 1998. The revenues for the
three months ended June 30, 1999 consisted of Random Ejection
Shuffler (the "Shuffler") rentals of $69,414, Shuffler sales of
$66,500, table game rentals of $34,431, and other sales of
$14,445.
COST OF SALES. For the three months ended June 30, 1999, the
cost of sales was estimated by the Company to be $359,422. For
the three months ended June 30, 1998, the Company did not
separately report cost of sales because the Company generated an
immaterial amount of revenue during the twelve months ended
December 31, 1998. The estimated cost of sales for the three
months ended June 30, 1999 consists of approximately $4,200 of
depreciation expense associated with the Shufflers held for
rental, $209,200 of costs related to servicing the Shufflers held
for rental, $26,300 of costs related to sales of the Shuffler and
$119,722 of labor and other manufacturing costs in excess of the
Company's estimated total
7
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manufacturing costs during the three months ended June 30, 1999.
The Company expects its per unit costs of sales to decline in the
future as the manufacturing rate for the Shufflers increases and,
in turn, allows the Company to allocate costs over more units and
achieve greater production and servicing efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the
three months ended June 30, 1999, selling, general and
administrative expenses increased approximately $528,058, or
approximately 77%, to $1,218,138 compared to $690,080 for the
three months ended June 30, 1998. This increase was primarily
attributable to expenses associated with the development and
marketing of the Company's products and the expansion of the
Company's operations. For the three months ended June 30, 1999,
selling, general and administrative expenses included: salaries
and related costs of $669,943; advertising and marketing services
of $39,680; gaming industry show costs of $38,140; travel and
entertainment costs of $140,519; printing and office expense,
including rent, of $116,956; and legal expenses of $138,361. In
addition, the Company had depreciation and amortization of
$55,327 for the three months ended June 10, 1999 compared to
$27,210 for the three months ended June 30, 1998.
INTEREST EXPENSE. For the three months ended June 30, 1999,
the Company incurred interest expenses, net of interest income,
of 144,503 compared to $29,256 for the three months ended June
30, 1998. This increase was primarily attributable to the
increased borrowings by the Company.
NET INCOME (LOSS). For the three months ended June 30,
1999, the Company had a net loss of $1,722,730, compared to a net
loss of $739,880 for the three months ended June 30, 1998. The
increase in net loss was primarily due to continued development
of the Company's products and the expansion of the Company's
operations. Basic loss per share was $0.21, based on 8,400,418
weighted average shares outstanding, for the three months ended
June 30, 1999 compared to $0.12, based on 6,283,638 weighted
shares outstanding, for the three months ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES. For the six months ended June 30, 1999, the
Company generated total revenues of $249,015 compared to $4,288
for the six months ended June 30, 1998. The revenues for the six
months ended June 30, 1999 consisted of Shuffler rentals of
$87,937, Shuffler sales of $82,000, table game rentals of
$62,428, and other sales of $16,650.
COST OF SALES. For the six months ended June 30, 1999, the
cost of sales was estimated by the Company to be $437,912. For
the six months ended June 30, 1998, the Company did not
separately report cost of sales because the Company generated an
immaterial amount of revenue during the twelve months ended
December 31, 1998. The estimated cost of sales for the six month
period ended June 30, 1999 consists of approximately $17,000 of
depreciation expense associated with the Shufflers held for
rental, $281,955 of costs related to servicing the Shufflers held
for rental, $32,000 of costs related to sales of the Shuffler and
$106,000 of labor and other manufacturing costs in excess of the
Company's estimated total manufacturing costs during the six
months ended June 30, 1999. The Company expects its per unit
costs of sales to decline in the future as the manufacturing rate
for the Shufflers increases and, in turn, allows the Company to
allocate costs over more units and achieve greater production and
servicing efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the six
months ended June 30, 1999, selling, general and administrative
expenses increased approximately $1,097,172, or 105%, to
$2,143,036 compared to $1,045,864 for the six months ended June
30, 1998. This increase was primarily attributable to expenses
associated with the development and marketing of the Company's
products and the expansion of the Company's operations. For the
six months ended June 30, 1999, selling, general and
administrative expenses included: salaries and related costs of
$1,134,127; advertising and marketing services of
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$83,162; gaming industry show costs of $115,417; travel and
entertainment costs of $212,418; printing and office expense,
including rent, of $216,823; and legal expenses of $206,198.
In addition, the Company had depreciation and amortization of
$99,854 for the six months ended June 10, 1999 compared to
$44,175 for the six months ended June 30, 1998.
INTEREST EXPENSE. For the six months ended June 30, 1999,
the Company incurred interest expenses, net of interest income,
of $263,364 compared to $91,664 for the six months ended June 30,
1998. This increase was primarily attributable to the increased
borrowings by the Company.
NET INCOME (LOSS). For the six months ended June 30, 1999,
the Company had a net loss of $2,939,610, compared to a net loss
of $1,260,060 for the six months ended June 30, 1998. The
increase in net loss was primarily due to continued development
of the Company's products and the expansion of the Company's
operations. Basic loss per share was $0.38, based on 7,661,556
weighted average shares outstanding, for the six months ended
June 30, 1999 compared to $0.20, based on 6,231,635 weighted
shares outstanding, for the six months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW. The Company has continued to focus on sales and
marketing efforts for the Shuffler and has begun to make
significant placements of the Shuffler in a variety of gaming
facilities. As a result, rentals and sales of the Shuffler are
beginning to generate cash receipts which are expected to
continue to build through the rest of the year. The Company is
continuing to expend cash to develop its SecureDrop system, and
these costs, together with product improvement expenses, related
marketing and regulatory costs, and litigation and legal
expenses, are consuming cash resources. The Company has begun to
pursue sales orders from a variety of gaming customers for the
SecureDrop system. The Company expects to substantially discount
the price of initial orders to gain market acceptance. To ramp up
increased product production for both the Shuffler and the new
production line for the SecureDrop system, the Company will
continue to expend cash for which there will not be cash revenue
generated until later in the year. Because the Company's sales
strategy for Shufflers relies on monthly rental revenue, the
Company incurs cash expenditures well before generating cash
receipts sufficient to recoup its production costs. The Company
expects to sell its SecureDrop products for cash and normal trade
credit terms.
In May 1999, pursuant to notices distributed by the Company
to holders of the Company's 9.5% Convertible Notes Due 2004 (the
"Convertible Notes"), the Company offered to provide a one-time
two week window that expired on May 31, 1999 for the early
conversion of the Convertible Notes into shares of Common Stock
at the stated conversion rate of $2.60 per share. Pursuant to
their terms, the Convertible Notes may be converted beginning on
the later of six (6) months from the date of issuance or
September 1, 1999. Concurrently, pursuant to notices distributed
by the Company to holders of the Company's Class E Warrants, the
Company issued a voluntary call of the Class E Warrants to expire
on May 31, 1999 at the stated exercise price of $3.00 per share.
In exchange for the conversion of the Convertible Notes and the
exercise of the Class E Warrants, the Company offered to issue an
additional set of warrants equal to the number of and on similar
terms and conditions as the Class E Warrants exercised.
At the expiration of the conversion window and call period,
holders of the Convertible Notes converted $400,000 of
Convertible Notes into 153,843 shares of common stock and
exercised 72,800 Class E Warrants into 72,800 shares of common
stock for an aggregate of 226,643 shares of common stock. In
exchange for the conversion and exercise, the Company issued
72,800 warrants to the persons who converted their
Convertible Notes and exercised their Class E Warrants. As
a result, $1,500,000 of the Convertible Notes and 273,000 of the
Class E Warrants issued to holders of the Convertible Notes
remain outstanding. Through the conversion of the Convertible
Notes and the exercise of the Class E Warrants,
9
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the Company converted $400,000 of indebtedness into common stock
and received proceeds of $218,400. The Company intends to use
such proceeds for general working capital purposes.
In May 1999, the Company entered into a subscription
agreement with a stockholder of the Company whereby the
stockholder agreed to purchase 2,000,000 shares of the Company's
common stock for $2.60 per share for an aggregate subscription
amount of $5,200,000. Pursuant to the terms of the subscription
agreement, the stockholder delivered $1,300,000 upon execution of
the subscription agreement and agreed to pay the balance of
$3,900,000, in no more than three equal installments of not less
than $1,300,000, by July 10, 1999. The Company received the
payment of the balance of $3,900,000 prior to July 10, 1999.
In May 1999, the Company and the Richard S. Huson Revocable
Trust (the "Trust"), of which Richard S. Huson, a director and
principal stockholder of the Company, is co-trustee, entered into
a subscription agreement whereby the Trust agreed to convert a
certain portion of indebtedness owed by the Company to the Trust
in exchange for shares of common stock at a conversion rate of
$2.60 per share. Pursuant to the terms of the subscription
agreement, the Trust converted $999,999 of outstanding
indebtedness into 384,615 shares of common stock and received a
replacement promissory note for the balance of the indebtedness
outstanding.
As a result of the partial conversion of the Convertible
Notes, the proceeds received from the exercise of certain Class A
Warrants, the proceeds received from the sale of 2,000,000 shares
of common stock, the reduction of certain indebtedness for which
the Company issued shares of common stock, and other financing
activities, the Company believes it will have sufficient
liquidity to fund operating and development activities through
the end of the current fiscal year. In the event that cash from
operations are not sufficient to fund future operating and
development activities by the beginning of the year 2000, 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 its liquidity requirements.
WORKING CAPITAL. At June 30, 1999, the Company had cash,
cash equivalents and investments of $1,773,363 compared to
$200,749 at June 30, 1998. At June 30, 1999, the Company's
working capital was $4,193,605 compared to a working capital
deficit of $632,024 at June 30, 1998. At June 30, 1999, the
Company's current ratio, I.E. the ratio of current assets to
current liabilities, was 3.36:1 compared to 0.62:1 at December
31, 1998. Until the Company's normalized cash flows from
operations are achieved, the Company will be relying upon
existing cash balances and proceeds from the placement of private
and institutional sources of debt and equity capital for working
capital purposes.
CASH FLOW. For the six months ended June 30, 1999, net cash
used in operating activities was $3,561,764 compared to
$1,095,704 for the six months ended June 30, 1998. Cash used in
operating activities during the six month period ended June 30,
1999 is net of depreciation and amortization of $116,366,
compared to $44,175 for the six months ended June 30, 1998;
increases in accounts receivable of $145,267 compared to $4,052
for the six months ended June 30, 1998; increases in inventory of
$593,637 compared to $126,118 for the six months ended June 30,
1998; a decrease in prepaid expenses of $6,801 compared to an
increase of $8,490 for the six months ended June 30, 1998;
increases in other receivables of $55,305 compared to $5,642 for
the six months ended June 30, 1998; decreases in accounts payable
of $135,564 compared to an increase of $55,783 for the six months
ended June 30, 1998; increases in accrued expenses of $46,435
compared to $32,200 for the six months ended June 30, 1998; and
an increase in customer deposits of $59,584 compared to none for
the six months ended June 30, 1998.
For the six months ended June 30, 1999, net cash provided by
financing activities was $6,077,398 compared to $1,037,219 for
the six months ended June 30, 1998. The increase is primarily
attributable to
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the proceeds received from the public offering for 1,500,000
shares of the Company's common stock conducted from April 1998
through January 1999, the proceeds from the sale of 2,000,000
shares of common stock in May 1999 and the conversion of $400,000
of the Convertible Notes in May 1999. The cash from financing
activities consisted of $4,028,923 from the issuance of common
stock, proceeds of $1,900,000 from the placement of the
Convertible Notes and proceeds of $1,226,513 from leases payable,
reduced by the repayment of notes and leases payable of $363,791
and the payment for a rescinded stock subscription agreement of
$450,000.
CONVERTIBLE DEBT. The Company received proceeds of
$1,900,000 from the placement of the Convertible Notes in the
first quarter of 1999. The debt accrues interest until its
maturity in February 2004 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 the 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. As previously discussed, the holders of
$400,000 of the Convertible Notes agreed to convert their
Convertible Notes into 153,843 shares of common stock and
exercise warrants for 72,800 shares of common stock. As part of
the conversion and exercise, the Company received proceeds of
$218,400 from the exercise of the warrants and issued replacement
warrants for 72,800 shares of common stock.
EQUIPMENT FINANCING. As of June 30, 1999, the Company
received proceeds of $1,098,500 from loans with an unrelated
leasing company whereby the Company has financed substantially
all of its furniture, equipment and tooling, and 278 units of the
Shuffler.
CAPITAL EXPENDITURES. For the six months ended June 30,
1999, the Company used net cash in investing activities of
$943,020 consisting primarily of the acquisition of equipment and
tooling of $381,922 and the manufacture of Shufflers held for
rent of $554,400.
For the six months ended June 30, 1998, the Company used net
cash in investing activities of $32,610 consisting of acquired
plant and equipment valued at $16,204, and increased patents and
trademarks by $16,406.
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, existing working
capital, cash flow from operations and lease financing services.
In the event that such sources are insufficient in 1999, or in
the event that the Company's cash flow from operations after 1999
are not sufficient to fund its future operating and development
activities, 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, including the Company's internal
information systems, critical supplier readiness and potential
problems associated with embedded technologies, and will develop
and implement plans to correct any deficiencies found.
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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.
RISK FACTORS AND FORWARD LOOKING INFORMATION
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND
SECTION 21E OF THE EXCHANGE ACT. SUCH STATEMENTS REFER TO EVENTS
THAT COULD OCCUR IN THE FUTURE OR MAY BE IDENTIFIED BY THE USE OF
WORDS SUCH AS "INTEND," "PLAN," "BELIEVE," CORRELATIVE WORDS, AND
OTHER EXPRESSIONS INDICATING THAT FUTURE EVENTS ARE CONTEMPLATED.
SUCH STATEMENTS ARE SUBJECT TO INHERENT RISKS AND UNCERTAINTIES,
AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN OF THE
RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS REPORT. IN
ADDITION TO THE OTHER INFORMATION CONTAINED HEREIN, INVESTORS
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS.
DEVELOPING BUSINESS; LIMITED OPERATING RESULTS; NO
INDEPENDENT MARKET RESEARCH OF POTENTIAL DEMAND FOR CURRENT
OPERATIONS. The Company has been in the development stage and
has only recently commenced sales and leases of its products.
Until late 1998, the Company's activities have been limited to
analyzing the gaming industry, consulting with persons in the
gaming industry, negotiating interim financing arrangements,
developing products, establishing a distribution network for its
products, marketing its products to the gaming industry,
manufacturing its products and commencing product sales.
Although the Company has generated modest sales and rental
revenues in the first two quarters of 1999, there is no
guarantee that the Company will generate sufficient revenue to
sustain its operations. No independent organization has
conducted market research providing management with independent
assurance from which to estimate potential demand for the
Company's business operations.
ADDITIONAL FINANCING MAY BE REQUIRED. Based on presently
known commitments and plans, the Company believes that it will be
able to fund its 1999 operations and required expenditures
through cash on hand, cash flow from operations, and lease
financing sources. In the event that such sources are
insufficient, the Company will need to seek cash from private or
public placements of debt or equity, institutional or other
lending sources or change operating plans to accommodate such
liquidity issues. No assurances can be given that the Company
will successfully locate necessary liquidity sources.
REGULATION. The gaming industry is a highly regulated
industry and is subject to numerous statutes, rules and
regulations administered by the gaming commissions or similar
regulatory authorities of each jurisdiction. Generally, the
Company and other entities which seek to introduce gaming
products or concepts into such jurisdictions may be required to
submit applications relating to their activities or products
(including detailed background information concerning controlling
persons within their organization) which are then reviewed for
approval. The Company has incurred and expects to continue to
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 and maintain such approval
in any jurisdiction in which the Company has or seeks to
introduce its products or concepts could have a material adverse
effect on the Company's business.
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INFLUENCE ON ELECTION OF DIRECTORS AND ALL OTHER MATTERS BY
CURRENT OFFICERS AND DIRECTORS. At June 30, 1999, the officers
and directors of the Company beneficially owned approximately
48.2% of the outstanding common shares. As a result, the
officers and directors of the Company, through their aggregate
ownership of the Company's common stock, will be able to
influence the election of directors and all other matters
submitted to a vote of the Company's stockholders.
INFLUENCE ON ELECTION OF DIRECTORS AND ALL OTHER MATTERS BY
SIGNIFICANT STOCKHOLDERS. James E. Crabbe owns approximately
23.5% of the Company's outstanding common shares, and holds power-
of-attorney from Richard S. Huson, as an individual and as co-
trustee of the Richard S. Huson Revocable Trust, to vote an
additional 31.7% of the outstanding common shares. As a result,
Mr. Crabbe will be able to control the election of directors and
all other matters submitted to a vote of the Company's
stockholders.
UNCERTAINTY OF MARKET FOR COMPANY'S PRODUCTS. The Company
has various gaming products, such as the Shuffler and SecureDrop,
and variations of traditional games of Blackjack and Poker, that
are ready for distribution. Despite the additions to the
Company's product line, the Company has only recently completed
the development process for some of its gaming products.
Although the market appears to be receptive to the Company's
products, there is no guarantee that the market will remain
receptive and that the Company's future products will be received
by the market in the same manner.
BENEFIT TO MANAGEMENT. The Company may, in the future,
compensate the Company's management with substantial salaries and
other benefits. The payment of future larger salaries,
commissions and the costs of these benefits may be a burden on
the Company and may be a factor in limiting or preventing the
Company from achieving profitable operations in the future.
However, the Company would not continue to compensate management
with such substantial salaries and other benefits under
circumstances where to do so would have a material negative
effect on the Company's financial condition.
NO DIVERSIFICATION. The Company intends to manufacture and
market certain gaming products and concepts. Therefore, the
Company's financial viability will depend almost exclusively on
its ability to generate revenues from its operations, and the
Company will not have the benefit of reducing its financial risks
by relying on revenues derived from other operations.
STOCKHOLDERS MAY BEAR RISK OF LOSS. The capital stock of
the Company is at risk of complete loss if the Company's
operations are unsuccessful.
FINANCIAL CONDITION. There can be no assurance that the
Company will have adequate funds to pay all of its operating
expenses or that the Company can be operated in a profitable
manner. Profitability depends upon many factors, including the
success of the Company's operations.
COMPETITION. There is significant competition in the gaming
industry. The Company competes with established companies and
other entities (many of which possess substantially greater
resources than the Company). Almost all of the companies with
which the Company competes are substantially larger, have more
substantial histories, backgrounds, experience and records of
successful operations, greater financial, technical, marketing
and other resources, more employees and more extensive facilities
than the Company now has, or will have in the foreseeable future.
It is also likely that other competitors will emerge in the
near future. There is no assurance that the Company can compete
successfully with other established gaming product manufacturers.
The Company intends to compete on the basis of quality, service
and price. Inability to compete successfully might result in
increased costs, reduced yields and additional risks to the
investors herein.
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RISKS OF PROPRIETARY PRODUCTS AND GAMES. The Company places
its proprietary products and games, except SecureDrop, in casinos
under short-term rental 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 products and/or 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, and other
international agencies have not acted upon all of these
applications. There can be no assurance that the pending patent
or trademark applications will actually issue as patents or
trademark registrations or that any of these rights will not be
infringed by others. Certain of the Company's products and games
may not 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 Company
intends to promote aggressively its trademarks to build goodwill
and customer loyalty. In addition, the Company intends to improve
and add innovations to certain of its games, which may be subject
to legal protection. There can be no assurance, however, that the
Company will be successful in these efforts, that innovations
will be subject to legal protection, or that the innovations will
give a competitive advantage to the Company.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK. This Report
contains forward-looking statements including statements
regarding, among other items, the Company's growth strategies and
anticipated trends in the Company's business and demographics.
These forward-looking statements are based largely on the
Company's expectations and are subject to a number of risks and
uncertainties, certain of which are beyond the Company's control.
Actual results could differ materially from these forward-looking
statements as a result of the factors described in this section
"Risk Factors and Forward Looking Statements," including among
others, regulatory or economic influences. In light of these
risks and uncertainties, there can be no assurance that the
forward-looking information contained in this Report will be
accurate.
LACK OF DIVIDENDS. There can be no assurance that the
operations of the Company will become profitable. At the present
time, the Company intends to use any earnings which may be
generated to finance the growth of the Company's business, and it
does not intend to make cash distributions, or distributions of
any nature for the foreseeable future.
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 hire and retain these
individuals would have a serious effect upon the business of the
Company. The Company has entered into employment agreements
with certain employees. There can be no assurance that the
Company will be successful in retaining its key employees or that
it can attract or retain the additional skilled personnel
required.
DEPENDENCE ON CHAIRMAN OF THE BOARD AND OTHER DIRECTORS.
During 1998 and 1997, certain members of the Company's Board of
Directors made significant loans to the Company to provide
necessary liquidity to the Company. As of June 30, 1999, such
outstanding loans were $339,350. There is no obligation of any
kind by such persons to continue lending funds to the Company,
and there is no assurance
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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.
ABSENCE OF TRADING MARKET. The Company's common stock is
not presently traded in the over-the-counter market or any
exchange. As a result, the Company's stockholders may encounter
difficulty in selling shares of the Company's common stock.
"PENNY" STOCK REGULATION OF BROKER-DEALER SALES OF COMPANY
SECURITIES. The Nasdaq Stock Market has minimum quantitative
requirements, and the OTC Bulletin Board does not. Until the
Company obtains a listing on the Nasdaq Stock Market, if at all,
the Company's securities may be covered by a Rule 15g-9 under the
Exchange Act that imposes additional sales practice requirements
on broker-dealers who sell such securities to persons other than
established customers and institutional accredited investors
(generally institutions with assets in excess of $5,000,000 or
individuals with net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 jointly with their spouse).
For transactions covered by the rule, the broker-dealer must
furnish to all investors in penny stocks a risk disclosure
document required by Rule 15g-9 of the Exchange Act, make a
special suitability determination of the purchaser and have
received the purchaser's written agreement to the transaction
prior to the sale. In order to approve a 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 per
share equal to or greater than five dollars; 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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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In July 1999, the Company settled a complaint originally
filed on March 18, 1999 by Shuffle Master, Inc. ("Shuffle
Master"). The complaint (Case No. A400777) filed in the District
Court, Clark County, State of Nevada (the "District Court")
against former employees of Shuffle Master (who are now employees
of the Company) and the Company alleged, 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. The terms of the settlement relieve the
Company from all prior and future liability associated with the
allegations provided that the Company reimburse approximately
$20,000 related to certain relocation costs previously incurred
by Shuffle Master for one of its former employees. The Company
reimbursed Shuffle Master for those costs in July 1999.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
CONVERSION OF CONVERTIBLE NOTES; VOLUNTARY CALL OF CLASS E
WARRANTS. In May 1999, pursuant to notices distributed by the
Company to holders of the Company's 9.5% Convertible Notes Due
2004 (the "Convertible Notes"), the Company offered to provide a
one-time two week window that expired on May 31, 1999 for the
early the conversion of the Convertible Notes into shares of
Common Stock at the stated conversion rate of $2.60 per share.
Pursuant to their terms, the Convertible Notes may be converted
beginning on the later of six (6) months from the date of
issuance or September 1, 1999. Concurrently, pursuant to
notices distributed by the Company to holders of the Company's
Class E Warrants, the Company issued a voluntary call of the
Class E Warrants to expire on May 31, 1999 at the stated exercise
price of $3.00 per share. In exchange for the conversion of
the Convertible Notes and the exercise of the Class E Warrants,
the Company offered to issue an additional set of warrants equal
to the number of and on similar terms and conditions as the Class
E Warrants exercised.
At the expiration of the conversion window and call period,
holders of the Convertible Notes converted $400,000 of
Convertible Notes into 153,843 shares of common stock and
exercised 72,800 Class E Warrants into 72,800 shares of common
stock for an aggregate of 226,643 shares of common stock. In
exchange for the conversion and exercise, the Company issued
72,800 warrants to the persons who converted their Convertible
Notes and exercised their Class E Warrants. As a result,
$1,500,000 of the Convertible Notes and 273,000 of the Class E
Warrants issued to holders of the Convertible Notes remain
outstanding. Through the conversion of the Convertible Notes and
the exercise of the Class E Warrants, the Company converted
$400,000 of indebtedness into common stock and received proceeds
of $218,400. The Company intends to use such proceeds for
general working capital purposes.
PRIVATE PLACEMENT. In May 1999, the Company entered into a
subscription agreement with a stockholder of the Company whereby
the stockholder agreed to purchase 2,000,000 shares of the
Company's common stock for $2.60 per share for an aggregate
subscription amount of $5,200,000. Pursuant to the terms of the
subscription agreement, the stockholder delivered $1,300,000 upon
execution of the subscription agreement and agreed to pay the
balance of $3,900,000, in no more than three equal installments
of not less than $1,300,000, by July 10, 1999. The Company
received the payment of the balance of $3,900,000 prior to July
10, 1999.
CONVERSION OF OUTSTANDING INDEBTEDNESS. In May 1999, the
Company and the Richard S. Huson Revocable Trust (the "Trust"),
of which Richard S. Huson, a director and principal stockholder
of the
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Company, is co-trustee, entered into a subscription agreement
whereby the Trust agreed to convert a certain portion of
indebtedness owed by the Company to the Trust in exchange for
shares of common stock at a conversion rate of $2.60 per share.
Pursuant to the terms of the subscription agreement, the Trust
converted $999,999 of outstanding indebtedness into 384,615
shares of common stock and received a replacement promissory note
for the balance of the indebtedness outstanding.
With respect to the private placement of 2,000,000 shares of
common stock and the conversion of $999,999 of outstanding
indebtedness into 384,615 shares of common stock, the Company
relied upon Section 4(2) of the Securities Act in that the
relevant parties to the aforementioned transactions were all
accredited investors with pre-existing relationships with the
Company. Accordingly, the issuances of shares of common stock
were exempt from the registration requirements of Section 5 of
the Securities Act.
The Company intends to use the proceeds from the private
placement of 2,000,000 shares of common stock and the exercise of
72,800 Class E Warrants to fund operating losses, for general
corporate purposes, including product development and
manufacturing expansion and improvements, and working capital.
As the Company has not determined the amount of proceeds to be
used specifically for each of the foregoing purposes, the Company
will have significant flexibility in applying the proceeds.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
IRREVOCABLE POWER-OF-ATTORNEY GRANTING VOTING RIGHTS OF THE
COMPANY'S COMMON STOCK. In August 1999, Richard S. Huson, a
director and principal stockholder of the Company, executed an
irrevocable power of attorney granting voting rights of the
Company's common stock owned by the Trust to James E. Crabbe.
Mr. Crabbe currently owns approximately 23% of the Company's
outstanding common stock directly, and, as a result of this
agreement, will hold additional voting power of a approximately
31% of the Company's outstanding common stock.
GRANT OF STOCK APPRECIATION RIGHTS. In July 1999, the
Company announced that it would grant to each employee who was
employed by the Company as of July 31, 1999, approximately 80
individuals, a stock appreciation right to receive an amount of
cash based upon the appreciation in value of 500 shares of the
Company's common stock with an exercise price of $2.50. This non-
transferable stock appreciation right must be exercised in its
entirety and terminates upon the earlier of the termination of
the employee's employment, 180 days after the employee's death
and three years after the employee's retirement. As of the date
of this report, the Company has not formally issued the stock
appreciation rights to the eligible employees.
MARKET MAKER UPDATE. Although the Company has met and
continues to meet with various market makers for its common
stock, the Company has been unable to secure a first market maker
that, in the opinion of the management of the Company, will
reflect positively on the Company and its common stock.
The Company's Board of Directors believes that the Company should
affiliate only with credible market makers and is reluctant to
deal with those who do not meet its scrutiny. As a means of
enhancing the Company's ability to secure a first market maker,
the Company has entered into several transactions
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during the second quarter of 1999 to improve its balance sheet
and to secure sufficient working capital for the remainder of
the year. Although transactions such as the conversion of certain
indebtedness into common stock and the sale of 2,000,000 shares
of common stock have increased the Company's liquidity and
enhanced its balance sheet, there is no guarantee that the
Company will be able to secure a first market maker as a result
of these transactions. Although the Company had hoped to provide
its stockholders with an update with respect to the engagement of
a market maker, the Company has no news to report at this time
and will continue to interview and contact market makers who will
reflect positively on the Company and its common stock.
NEVADA GAMING APPROVAL OF THE SECUREDROP 2000 SYSTEM. On
August 4, 1999, the Company received approval from the Nevada
Gaming Control Board to sell its SecureDrop 2000 system in the
State of Nevada. Additionally, the Company received approval
from the Nevada Gaming Control Board, subject to successful
completion of field trials, to sell its SecureDrop 3000 and
mobile cart system in the State of Nevada. The Company has
identified several casino-gaming properties for the first
installment of the SecureDrop 2000 system and believes that one
or more installations of the SecureDrop 2000 system will occur in
the Company's third fiscal quarter. The Company is continuing
its development of the SecureDrop 4000 system and the SecureDrop
5000 system.
EMPLOYMENT AGREEMENT WITH STEVEN J. BLAD. On August 10,
1999, the Company entered into an employment agreement with
Steven J. Blad, the Company's President and Chief Executive
Officer. The new employment agreement is effective as of January
1, 2000, and continues for a term of three years. Pursuant to
the new employment agreement, Mr. Blad shall receive a monthly
base salary of $23,500.00 and 400,000 stock option rights with an
exercise price of $2.50. With respect to the vesting of the
options, 100,000 stock options will vest as of the effective date
of the new employment agreement with the balance to vest over a
three-year period thereafter as long as Mr. Blad remains employed
as the Company's President and Chief Executive Officer and
satisfies certain performance goals to be established by the
Company's Board of Directors. As with the current employment
agreement with Mr. Blad, the new employment agreement contains
provisions with respect to confidentiality and non-competion.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.01 First Security Bank of Nevada Master
Equipment Lease Agreement.
10.02 Employment Agreement with Steven J. Blad
dated August 10, 1999.
27.01 Financial Data Schedule.
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(b) REPORTS ON FORM 8-K.
During the three month period ended June 30, 1999, the
Company filed three current reports on Form 8-K on May 11, 1999
(dated April 30, 1999), July 9, 1999 (dated May 28, 1999) and
July 12, 1999 (dated June 24, 1999). These current reports on
Form 8-K reported, among other things, the appointment of Bob L.
Smith as the Company's Chairman of the Board; the Company's
agreement to rescind a subscription agreement for 200,000 shares
of the Company's common stock and return $450,000 to the
stockholder; the purchase of 2,000,000 shares of the Company's
common stock by James E. Crabbe for an aggregate subscription
amount of $5,200,000; the conversion of $999,999 of the Company's
outstanding indebtedness by the Trust into 384,615 shares of the
Company's common stock; the appointment of Timothy P. Leybold as
the Company's Chief Financial Officer; the conversion of $400,000
of the outstanding principal on the Convertible Notes into
153,843 shares of the Company's common stock; the Company's
receipt of $218,400 upon the exercise of 72,800 Class E Warrants;
and the distribution by the Company to all of its stockholders of
a letter dated June 24, 1999 from the Company's President and
Chief Executive Officer entitled "Stockholder Update".
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SIGNATURE
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CASINOVATIONS INCORPORATED
----------------------------------
(Registrant)
Date: August 12, 1999 By: /s/ Timothy P. Leybold
----------------------------------
Timothy P. Leybold
Its: Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
- -------------- ----------- -----------
10.01 First Security Bank of Nevada 22
Master Equipment Lease Agreement.
10.02 Employment Agreement with Steven J. 28
Blad dated August 10, 1999.
27.01 Financial Data Schedule. 36
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FIRST SECURITY BANK OF NEVADA
MASTER EQUIPMENT LEASE AGREEMENT
This MASTER EQUIPMENT LEASE AGREEMENT is between the FIRST SECURITY
BANK OF NEVADA ("Lessor") and the lessee or lessees specified below
("Lessee").
SECTION 1. DECLARATION OF INTENT TO LEASE; DELIVERY AND ACCEPTANCE OF
EQUIPMENT.
A. Subject to the terms hereof, Lessor agrees to make payment for
and to lease to Lessee the personal property described in Schedules, as
defined below, (hereinafter referred to collectively as "Equipment" and
individually as "Item" or "Item of Equipment"), and Lessee agrees to lease
each such Item of Equipment from Lessor for the Rental specified in the
Lease Schedules to Master Equipment Lease Agreement entered into pursuant
to this Agreement and making specific reference hereto (the "Schedules"),
subject to the terms and conditions set forth herein and in the Schedules.
B. There may be one or more Schedules under this Agreement executed
either simultaneously with or subsequent to the execution and delivery of
this Agreement. Each Schedule making specific reference to this Agreement
and incorporating the terms hereof shall constitute a separate lease which
will be identified by a Lease Number identified in such Schedule. The term
"Agreement" used herein shall refer to this Master Equipment Lease
Agreement and the Schedules. The lease created by a particular Schedule
and a copy of the Master Equipment Lease Agreement shall be referred to as
"a Lease." The terms of this Master Equipment Lease Agreement may be
changed, modified or supplemented in Section I of any Schedule.
SECTION 2. TERM; RENTAL AND LATE CHARGES.
A. The term of each Lease with respect to any Item of Equipment (the
"Term") shall commence on the date of acceptance indicated in the Schedules
hereof relating thereto (the "Acceptance Date") and shall end, unless
earlier terminated in accordance with the provisions of this Agreement, at the
expiration of the Term specified in the Schedule.
B. Lessee shall pay to Lessor Basic Rental and Interim Rental for each
Item of Equipment in the amounts and on the dates specified in the Schedules
(each a "Rental Payment Date").
C. In the event any Rental or other amount payable hereunder shall not
be paid within ten (10) days when due, Lessee shall pay to Lessor, as
supplemental rental, an amount equal to five percent (5%) of such
overdue Rental, plus interest on such overdue payment until paid, at the
rate of eighteen percent (18%) per annum.
D. All payments to Lessor provided for in this Lease shall be paid
to Lessor at the address indicated herein or at such other place as Lessor
shall specify in writing.
E. All Leases created hereunder are net leases and Lessee shall not
be entitled to any abatement of Rental, Residual Value or other charges
payable hereunder by Lessee or withholding thereof from Lessor or any
reduction thereof, including, but not limited to, abatements or reductions
due to any present or future claims of Lessee against Lessor or any
assigned under this Agreement or otherwise, or against the manufacturer or
vendor of the Equipment, nor, except as otherwise expressly provided
herein, shall this Agreement terminate, or the obligations of Lessee be
affected, by reason of any defect in or damage to or loss or destruction of
all or any of the Equipment from whatever cause, the interference with use
by any private person, corporation or governmental authority, the
invalidity, unenforceability or lack of due authorization of this Agreement
or lack of right, power or authority of Lessor to enter into this
Agreement, or for any other cause whether similar or dissimilar to the
foregoing.
SECTION 3. EARLY TERMINATION; RENEWAL; PURCHASE.
A. Provided no Event of Default shall have occurred and be
continuing hereunder, Lessee shall have the right during the Term, upon not
less than sixty (60) days' prior written notice to Lessor, to terminate a
Lease with respect to all, but not less than all, Items thereunder as of
the next succeeding Rental Payment Date following such notice, subject to
Lessor's receipt of the payments specified in the following sentence. On
or before the termination of a Lease, Lessee shall pay to Owner: (1) all
Rental due and to become due up to and including the next succeeding Rental
Payment Date following such notice; and (2) the Termination Value of the
Equipment being terminated as of such next succeeding Rental Payment Date.
Upon payment of all such amounts the obligation of Lessee to pay Rental on
each succeeding Rental Payment Date shall then terminate. The "Termination
Value" of an Item shall mean, as of any Rental Payment Date, the present
value of the sum of (i) all remaining installments of Rental (excluding the
installment due on such Rental Payment Date) and (ii) the Residual Value
indicated in the Schedule relating thereto, computed by discounting such
amounts at such rate and applying such penalties as shall then be
consistent with Lessor's normal business practices.
B. Provided no Event of Default shall have occurred and be
continuing hereunder, Lessee shall have the right, upon not less than sixty
(60) days' prior written notice to Lessor, to renew a Lease upon the
expiration of the term thereof with respect to all, but not less than all,
Items thereunder for such term as Lessor and Lessee agree and with Rental
payments which will fully amortize the Residual Value at then current
market rates.
C. Upon the expiration of the Term of a Lease, unless renewed or
terminated earlier in accordance herewith, Lessee shall pay to Lessor on
the final day of the Term an amount in cash equal to the Residual Value of
all, but not less than all, Items thereunder.
D. If Lessee shall determine upon the expiration of the Term of a
Lease or the termination thereof pursuant to this Section 3, to sell the
Equipment thereunder to a third party rather than to retain such Equipment,
Lessee shall notify Lessor in writing of such determination at least sixty
(60) days prior to such expiration or termination. Upon receipt of such
notice, Lessor shall act as the exclusive agent of Lessee to sell such
Equipment. Lessor shall use its best efforts to arrange a sale for cash of
the Equipment at then current market values. Lessee agrees to reimburse
Lessor for all expenses incurred by Lessor in connection with such sale
including the costs of repair or preparation of the Equipment and to pay a
reasonable fee for such services. Lessor shall be entitled to retain from
the proceeds of any such sale or lease any amounts then still due and owing
to Lessor. Any excess shall be paid to Lessee. Nothing in this paragraph
shall be construed to relieve Lessee of its obligation to pay the
applicable Termination Value and Residual Value on the date such payments
are due under Sections 3(A) and 3(C) hereof.
E. All sales pursuant to this Section 3 shall be made without any
representation, recourse or warranty on the part of Lessor except that
Lessor shall warrant that the Equipment is free and clear of all liens,
charges and encumbrances arising as a result of claims against Lessor not
related to its ownership of the Equipment. Lessor shall deliver to Lessee
or other buyer any and all documents reasonably requested to transfer title
to such Equipment on an as-is where-is basis.
SECTION 4. CONDITIONS PRECEDENT.
The obligation of Lessor to lease an Item of Equipment and to make
payment to the vendor therefor is subject to Lessee's supplying the
following, if requested by Lessor, at Lessee's expense, in form and
substance satisfactory to Lessor.
A. Articles of Incorporation and By-laws of Lessee, and resolutions
of the Board of Directors, each certified by the Secretary or an Assistant
Secretary duly authorizing each Lease of Equipment hereunder and the
execution, delivery and performance of this Agreement and each Schedule if
Lessee is a corporation;
B. Partnership Agreement, trust indenture, assumed name filings or
such other documents as Lessor may demand if lessee is not a corporation;
C. Evidence satisfactory to Lessor as to due compliance with the
insurance provisions of Section 11 hereof and Section G of the Schedules;
D. A favorable written opinion of counsel for Lessee satisfactory to
Lessor as to each of the matters set forth in Section 5(B)(i) - (vi) hereof
and as to such other matters as Lessor may reasonably request;
E. A completed and signed Schedule including a description of such
Item; and
F. Vendor's invoice of the Item.
SECTION 5. REPRESENTATIONS AND WARRANTIES.
A. Lessor's Representations and Warranties. Lessor warrants that
during the Term of any Lease, if no Event of Default has occurred, Lessee's
use of the Equipment shall not be interrupted by Lessor or anyone claiming
solely through or under Lessor.
The warranties set forth in the preceding paragraph are in lieu of all
other warranties of Lessor, whether written, oral or implied, and Lessor
shall not, by virtue of having executed this Agreement or any other
document pursuant to this Agreement, or for any other reason, be deemed to
have made any other warranties. LESSOR LEASES THE EQUIPMENT AS IS WITHOUT
WARRANTY OR REPRESENTATION, EITHER EXPRESSED OR IMPLIED, AS TO ANY MATTER
WHATSOEVER, INCLUDING WITHOUT LIMITATION (A) THE DESIGN, PERFORMANCE,
SPECIFICATIONS OR CONDITION OF ANY ITEM OR ITEMS OF EQUIPMENT, (B) THE
MERCHANTABILITY THEREOF, (C) THE FITNESS FOR ANY PARTICULAR PURPOSE
THEREOF, (D) THE LESSOR'S TITLE THERETO, (E) INTERFERENCE BY ANY PARTY
OTHER THAN LESSOR WITH LESSEE'S RIGHT TO THE QUIET ENJOYMENT THEREOF, OR
(F) THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF THE EQUIPMENT OR
CONFORMITY THEREOF TO THE PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE
ORDER RELATING THERETO, IT BEING AGREED THAT ALL SUCH RISKS AS BETWEEN
LESSOR AND LESSEE ARE TO BE BORNE BY LESSEE. LESSEE FURTHER UNDERSTANDS
AND AGREES THAT NEITHER THE EQUIPMENT SUPPLIER NOR ANY SALESPERSON OR OTHER
AGENT OR EMPLOYER OF SUCH SUPPLIER IS AN AGENT FOR OR HAS ANY AUTHORITY TO
SPEAK FOR OR TO BIND LESSOR IN ANY WAY. LESSOR IS NOT AN AGENT OR
REPRESENTATIVE OF SUCH SUPPLIER. Lessor hereby authorizes Lessee, at
Lessee's expense, to assert for Lessor's account during the Term of a
Lease, all of Lessor's rights under any manufacturer's vendor's or dealer's
warranty on the Equipment to the extent permitted by law and
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FIRST SECURITY BANK OF NEVADA
MASTER EQUIPMENT LEASE AGREEMENT
agreement, and Lessor agrees to cooperate with Lessee in asserting such
rights; provided, however, Lessee shall indemnify and hold harmless Lessor
from and against any and all claims, and all costs, expenses, damages,
losses and liabilities incurred or suffered by Lessor in connection
therewith, as a result of, or incident to, any action by Lessee pursuant to
the above authorization. Lessor shall not be responsible for special or
consequential damages relating to its obligations or performance under
their Agreement.
B. Lessee's Representations and Warranties. Lessee represents and
warrants that:
(i) Lessee, if a corporation, is duly organized and existing in
good standing under the laws of the state of its incorporation, and is duly
qualified to do business in those jurisdictions (including those where the
Equipment will be located) where such qualification is necessary to carry
on its present business operations;
(ii) Lessee, if a partnership, trust or other entity, is duly
organized, registered and validly existing under the laws of the
jurisdiction of its organization or residence and is duly qualified to do
business in those jurisdictions (including those where the Equipment will
be located) where such qualification is necessary to carry on its present
business operations;
(iii) Lessee has full power, authority and legal right to
execute, deliver and perform the terms of this Agreement. This Agreement
has been duly authorized by all necessary corporate action on the part of
Lessee and the execution, delivery and performance thereof do not require
any stockholder approval, do not require the approval of or the giving of
notice to any federal, state, local or foreign governmental authority, do
not contravene any law binding on Lessee or Lessee's certificate or
articles of incorporation or by-laws and do not contravene or constitute a
default under any indenture, credit agreement or other agreement to which
Lessee is a party or by which it is bound;
(iv) This Agreement constitutes a legal, valid and binding
obligation of Lessee, enforceable in accordance with its terms;
(v) There are no pending or threatened actions or proceedings before
any court, administrative agency or other tribunal or body or judgments
which may materially adversely affect Lessee's financial condition or
operations;
(vi) No approval, consent or withholding of objection is required
from any governmental authority with respect to the entering into or
performance by Lessee of this Agreement;
(VII) The balance sheet of Lessee for its most recent fiscal
year and the related earnings statement of Lessee for such fiscal year have
been furnished to Lessor and fairly present Lessee's financial condition as
of such date and the results of its operations for such year in accordance
with generally accepted accounting principles consistently applied, and
since such date there has been no material adverse change in such
conditions or operations; and
(VIII)Lessee shall not consolidate with or merge into any
other business entity or convey, transfer or lease substantially all of its
assets as an entirety to any third party without the prior written consent
of Lessor.
C. Year 2000 Compliant" shall mean, with regard to any entity, that
all software, hardware, firmware, equipment, goods or systems used by or
material to the business operations or financial condition of such entity
will properly perform date-sensitive functions before, during and after
January 1, 20000. Such date-sensitive functions shall include, without
limitations, (a) interpretation of years greater than 1999, (b) process
date data from, into, and between dates before January 1, 2000, and dates
on or after January 1, 2000, (c) recognizing numbers such as "99" as an
actual date rather than indefinite or an unknown information,
(d) recognizing that the year 2000 is a leap year, and (e) transferring
data between systems that used different methods to make the system Year
2000 Compliant. Lessee represents and warrants to Lessor that Lessee has
developed a detailed plan to ensure that Lessee, its affiliates, and all
customers, suppliers and vendors that are material to the Lessee's
business, become Year 2000 Compliant on or before June 30, 1999. The plan
(a) effectively prioritizes mission-critical systems, (b) has the
involvement of executive management, (c) includes assessment of Year 2000
Compliance of the customer, supplier, and vendors, (d) includes contingency
planning to mitigate risk from Year 2000 business interruptions affecting
key vendors, suppliers, or customers, and (e) has been allocated with
adequate resources within Lessee's abilities.
SECTION 6. MORTGAGES, LIENS, ETC.
Lessee will not directly or indirectly create, incur, assume or permit
the existence of any mortgage, security interest, pledge, lien, charge,
encumbrance or claim on or with respect to the Equipment, title thereto or
any interest therein except (a) the respective rights of Lessor and Lessee
as herein provided, (b) liens or encumbrances which result from claims
against Lessor except to the extent that such liens and encumbrances arise
from failure of Lessee to perform any of Lessee's obligations hereunder,
and (c) liens for taxes either not yet due or being contested in good faith
and by appropriate proceedings. Lessee will promptly, at its own expense,
take such action as may be necessary duly to discharge any such mortgage,
security interest, pledge, lien, charge encumbrance or claim not
specifically excepted above.
SECTION 7. TAXES.
Lessee agrees to pay promptly when due and to indemnify and hold
Lessor harmless from all sales, use, personal property, leasing, leasing
use, stamp or other taxes, levies, imposts, duties, charges, fees or
withholding of any nature (together with any penalties, fines or interest
thereon) imposed against Lessor, Lessee or the Equipment by any federal,
state, local or foreign government or taxing authority upon or with respect
to the Equipment or upon the purchase, ownership, delivery, leasing,
possession, use operation, return or other disposition thereof, or upon the
rentals, receipts or earnings arising therefrom, or upon or with respect to
any Lease (excluding, however, federal, state and local taxes on or
measured solely by the net income of Lessor) unless, and to the extent
only, that any such tax, levy, impost, duty, charge or withholding is being
contested by Lessee in good faith and by appropriate proceedings. In case
any report or return is required to be made with respect to any obligation
of Lessee under this Section Lessee will notify Lessor of such requirement
and make such report or return in such manner as shall be satisfactory to
Lessor. Lessor agrees to cooperate fully with lessee in the preparation of
any such reports or returns. Lessee agrees to remit all applicable sales
or use taxes to Lessor promptly upon receipt of an invoice therefor.
SECTION 8. TITLE; USE, MAINTENANCE AND OPERATION, IDENTIFICATION MARKING.
A. Lessor shall retain full legal title to the Equipment
notwithstanding delivery to and possession and use thereof by Lessee. Upon
delivery of the Equipment Lessee shall cause said Equipment to be duly
registered, and at all times thereafter to remain duly registered, in the
name of Lessor, or at Lessor's request shall furnish to Lessor such
information as may be required to enable Lessor to make application for
such registration and shall promptly furnish to Lessor such information as
may be required to enable Lessor to file timely any reports required to be
filed by it as Lessor under the Lease or as the owner of the Equipment with
any governmental authority.
B. Lessee agrees that the Equipment will be used solely in the
conduct of its business. Lessee further agrees to comply in all material
respects with all applicable governmental laws, regulations, requirements
and rules with respect to the use, maintenance and operation of each Item
of Equipment. Lessee agrees that each Item of Equipment (except Items
which prior to the execution of this Lease Lessee shall have advised Lessor
in writing are normally used or to be used in more than one location) will
be kept at the address shown in the Schedules with respect to such Item
unless Lessor shall first otherwise consent in writing. Lessee will
immediately give written notice to Lessor of any change in its principal
place of business.
C. Lessee, at its own cost and expense, will repair and maintain the
Equipment so as to keep it in a good condition as when delivered to Lessee
hereunder, ordinary wear and tear excepted. Lessee may from time to time
add further parts or accessories to any Item of Equipment provided that
such addition does not impair the value, utility or warranties of such Item
of Equipment and is readily removable without causing material damage to
such Item.
D. Lessee agrees at its own cost and expense to place such markings,
plates or other identification on the Equipment showing Lessor's title
thereto as Lessor may from time to time request, provided such
identification markings are placed so as not to interfere with the
usefulness of such Equipment. Except as above provided, Lessee will not
allow the name of any person, association or corporation to be placed on
the Equipment as a designation that might be interpreted as a claim of
ownership.
SECTION 9. INSPECTION.
Upon the request of Lessor, Lessee shall advise Lessor as to the
location of each Item of Equipment and shall, at any reasonable time, make
the Equipment available to Lessor or Lessor's agent for inspection at the
place where it is ordinarily located and shall make Lessee's records
pertaining to the Equipment available for Lessor's inspection.
SECTION 10. LOSS OR DESTRUCTION.
In the event any Item of Equipment shall be lost, stolen, destroyed,
damaged beyond repair or permanently rendered unfit for use for any reason
whatsoever ("Event of Loss"). Lessee shall promptly, but in any event
within ten (10) days of the Event of Loss, give written notification to
Lessor of said loss and the facts pertaining thereto. In addition, within
ten (10) days of the Event of Loss Lessee shall elect either: (a) to
replace such Item of Equipment at Lessee's own cost and expense of; or
(b) to pay to Lessor the Termination Value of the Item and shall notify
Lessor in writing of such election.
Should Lessee elect to replace such Item, any replacement Item shall
be free and clear of all liens, encumbrances and rights of others and shall
be of like kind and have substantially equal fair market value as the
replaced Item, as if such replaced Item were in the condition and repair
required to be maintained by the terms hereof.
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FIRST SECURITY BANK OF NEVADA
MASTER EQUIPMENT LEASE AGREEMENT
All such replacement Items shall become the property of Lessor and shall
immediately become subject to this Agreement, and shall be deemed part of
the Equipment for all purposes hereof, to the same extent as the property
originally comprising the Equipment. Such replaced Item of Equipment shall
no longer be deemed part of the Equipment leased hereunder, and Lessor will
transfer to Lessee, without recourse or warranty all of Lessor's right,
title and interest therein. In the event Lessee elects to replace such
Item of Equipment, Lessee's obligation to pay Rental as set forth in this
Lease Agreement shall remain unchanged. Lessee further agrees to execute
such documents in connection with such replacement as deemed necessary by
Lessor to insure Lessor's full title thereto.
Should Lessee elect not to replace such Item of Equipment, Lessee
shall pay to Lessor, on the next Rental Payment Date for such Item
following such Event of Loss, the Termination Value of such lost or
destroyed Item. The obligation of Lessee to pay Rental with respect to
such Item (including the Rental due on such Rental Payment Date) shall
continue undiminished until the payment of such Termination Value. After
the payment of such Termination Value, Lessee's obligation to pay Rental
for such Item shall cease, but Lessee's obligation to pay Rental for all
other Items of Equipment shall remain unchanged. After the payment of such
Termination Value, Lessor will transfer to Lessee, without recourse or
warranty, all of Lessor's right, title and interest in and to such Item of
Equipment suffering the Event of Loss.
SECTION 11. INSURANCE.
At its own expense, Lessee shall maintain comprehensive general
liability, products liability and property damage insurance acceptable to
Lessor with respect to each Item in an amount not less than the amount
specified in the Schedules relating thereto and , in any event, in an
amount sufficient to provide full coverage against all loss and liability.
Each such insurance policy shall name Lessor as an insured and as loss
payee and shall provide that it may be altered or canceled by the insurer
only after thirty (30) days prior to written notice to Lessor. Lessee
agrees to cause certificates or other evidence satisfactory to Lessor
showing the existence of such insurance, the terms and conditions of each
policy and payment of the premium therefor to be delivered to Lessor upon
demand thirty (30) days prior to expiration or cancellation showing renewal
or replacement of such policy. In the event Lessee shall fail to obtain
and/or maintain insurance in accordance with the provisions of this
paragraph, Lessor shall have the right to obtain such insurance as Lessor
deems necessary, and Lessee shall reimburse Lessor for the payment by
Lessor of all premiums therefor together with interest computed from the
date of Lessor's payment at the rate of eighteen percent (18%) per annum.
If (a) any insurance proceeds are received with respect to a loss with
respect to Equipment which does not constitute an Event of Loss under
Section 10, or (b) if Lessee elects to replace an Item or Items suffering
an Event of Loss under the provisions of Section 10 hereof, proceeds will
be applied in payment for repairs and replacement required pursuant to
Section 8 and 9 hereof, or to reimburse Lessee having made such payments.
SECTION 12. INDEMNIFICATION AND EXPENSES.
Lessee shall indemnify, protect and keep harmless Lessor or any
assignee or transferee of Lessor and their respective agents and servants
from and against all claims, causes of action, damages, liability
(including strict liability in tort), costs, fees or expenses (including
attorney's fees) incurred in any manner by or for the account of any of
them relating to the Equipment or any part thereof including without
limitation the construction, purchase, delivery, installation, ownership,
leasing or return of the Equipment or as a result of the use, maintenance,
repair, replacement, operation or condition thereof, (whether defects are
latent or discoverable by Lessor or by Lessee). This Section shall be
effective from the date the first Item of Equipment is ordered and shall
remain in effect notwithstanding the expiration or other termination of a
Lease with respect to any one or more Items of Equipment. Lessee agrees to
give Lessor prompt notice of any claim or liability hereby indemnified
against. Lessor agrees to cooperate with Lessee in any defense or other
action which Lessee is by this Section obligated to undertake.
SECTION 13. ASSIGNMENTS AND SUBLEASES.
Lessor may at any time, without notice, grant a security interest in,
transfer or assign any or all Leases, Items, or rights and remedies as
Lessor to any party, with such party assuming all, part or none of Lessor's
obligations. Lessee shall not assert against such party any defense,
counterclaim, or offset Lessee may have against Lessor. Lessee
acknowledges that any such grant, transfer or assignment would not
materially change Lessee's duties, risks or interests under the Agreement.
LESSEE SHALL NOT, WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, SUBLEASE OR
RELINQUISH POSSESSION OF ANY ITEM OR ASSIGN ANY OF ITS RIGHTS OR DELEGATE
ANY OF ITS OBLIGATIONS HEREUNDER. Lessee grants Lessor a security interest
in any existing or future sublease of an Item and the proceeds thereof,
whether or not such sublease is prohibited.
SECTION 14. EVENTS OF DEFAULT; REMEDIES
A. The following shall constitute Events of Default hereunder:
(i) Lessee shall fail to make any Interim or Basic Rental
payment or the Residual Value payment when due and such failure shall
continue unremedied for ten (10) days:
(ii) Lessee shall fail to make any payment other than Rental
required hereunder or shall fail to perform or observe any covenant,
condition or agreement to be
performed or observed by it under this Agreement, and such failure shall
continue unremedied for ten (10) days after notice from Lessor requiring
performance;
(iii) Any representation or warranty made by Lessee herein, in any
Schedule or any supplement or addition hereto, or in any document or
certificate furnished
Lessor in connection herewith shall prove to be incorrect at any time in
any material respect; or
(iv) Lessee shall become insolvent or bankrupt or make an
assignment for the benefit of creditors or consent to the appointment of a
trustee or receiver, or a trustee or a receiver shall be appointed for
Lessee or for a substantial part of its property without its consent and
shall not be dismissed within a period of sixty (60) days, or bankruptcy,
reorganization or insolvency proceedings shall be instituted by or against
Lessee and, if instituted against Lessee, shall not be dismissed for a
period of sixty (60) days.
(v) Any event of default or default as described in the
documentation executed in connection with any other credit or lease
facility extended by Lessor, or any affiliated company of Lessor, to
Lessee.
B. Upon the occurrence of an Event of Default Lessor may at its
option exercise one or more of the following remedies:
(i) Declare all unpaid Rentals under any Lease or all Leases to
be immediately due and payable;
(ii) Proceed by appropriate court action to enforce performance
by Lessee of the applicable covenants, of this Agreement and/or to recover
damages for the breach thereof; or
(iii) By notice in writing terminate any Lease or all Leases
whereupon all rights of Lessee to the use of the Equipment shall absolutely
cease and terminate, but
Lessee shall remain liable as hereinafter provided. Thereafter,
Lessee, if requested by Lessor, shall, at its own cost promptly deliver
possession of the Equipment to Lessor in such manner and to such place as
Lessor shall direct or Lessor may at any hour and without liability, except
for malicious acts by its agents, and without notice to Lessee enter upon
the premises of Lessee or other premises where any of the Equipment may be
located and take possession of or render unusable all or any of such
Equipment and attachments thereon whether or not the property of Lessor and
thenceforth hold, sell or re-lease such Equipment at its option. Lessor
shall thereupon have a right to recover from Lessee an amount equal to any
unpaid Rental due and payable up to and including the Rental Payment Date
following the date on which Lessor has given the termination notice
referred to above, any and all other amounts due and payable hereunder and
in addition thereto (a) as damages for loss of the bargain and not as
penalty an amount equal to the Termination Value as of such Rental Payment
Date, and (b) all expenses, including but not limited to reasonable
attorney's fees, which Lessor shall have sustained by reason of the breach
of any covenant of this Agreement, expenses for obtaining and storing the
Equipment and expenses in connection with locating another lessee or buyer.
C. The remedies in this Agreement in favor of Lessor shall not be
deemed exclusive, but shall be cumulative and shall be in addition to all
other remedies in its favor existing at law or in equity. Lessee hereby
waives any mandatory requirements of law, now or hereafter in effect, which
might limit or modify any of the remedies herein provided, to the extent
that such waiver is permitted by law. No express or implied waiver by
Lessor of any Event of Default hereunder shall in any way be, or be
construed to be, a waiver of any future or subsequent Event of Default.
The failure or delay of Lessor in exercising any rights granted it
hereunder upon any occurrence of any of the contingencies set forth in
Section 14 (A) shall not constitute a waiver of any such right upon the
continuation or recurrence of any such contingencies or similar
contingencies and any single or partial exercise of any particular right by
Lessor shall not exhaust the same or constitute a waiver of any other right
provided herein.
SECTION 15. LESSOR'S RIGHTS TO PERFORM FOR LESSEE.
If Lessee fails to perform or comply with any of its agreements
contained herein, Lessor may, but shall not be required to, make any
payment or perform or comply with any covenant or agreement contained
herein, and all reasonable expenses of Lessor incurred in connection
therewith shall be payable by Lessee upon demand together with interest at
the rate of eighteen percent (18%) per annum from the date of payment to
the date of reimbursement.
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FIRST SECURITY BANK OF NEVADA
MASTER EQUIPMENT LEASE AGREEMENT
SECTION 16. FURTHER ASSURANCE; FINANCIAL INFORMATION.
Lessee will promptly and duly execute and deliver to Lessor such
further documents or instruments of further assurance and take such further
action as Lessor may from time to time, reasonably request in order to
carry out the intent and purpose of this Agreement and to establish and
protect the rights and remedies created or intended to be created in favor
of Lessor hereunder, including, without limitation, if requested by Lessor,
at the expense of Lessee:
A. The execution and delivery of financing statements with respect
hereto, in accordance with the laws of such jurisdictions as Lessor may
from time to time deem advisable;
B. An audit report containing a balance sheet, income statement and
statement of sources and uses of funds prepared by independent certified
public accountants, or other accountant acceptable to Lessor within one
hundred twenty (120) days after the close of each fiscal year of Lessee; and
C. A report containing balance sheets as of the end of each
quarterly period of Lessee's fiscal year, income statement and statement of
sources and uses of funds certified as accurate by an officer of Lessee
within forty-five (45) days after the close of each such quarterly period.
SECTION 17. NOTICES.
All notices required by the terms hereof shall be in writing, and
shall become effective when deposited in the United States mail, with
proper postage for certified mail prepaid, addressed to the address shown
herein or to such other address as such party shall from time to time
designate for itself in writing to the other party. Notice to Lessor is
sufficient if mailed to: First Security Leasing Company, P.O. Box 30006,
Salt Lake City, Utah, 84130. Notice to Lessee is sufficient if mailed to
the address set forth on the signature page of this Agreement.
SECTION 18. MULTIPLE LESSEES.
If there is more than one Lessee named in this Agreement, the
liability of each shall be joint and several, and each Lessee has the
authority to enter into agreements with Lessor modifying or extending the
terms of the Agreement on behalf of each other Lessee. If used herein or
in any related document, the term "Co-Lessee" or "Co-Lessees" shall be
synonymous with "Lessee" as defined herein.
SECTION 19.YEAR 2000.
The Lessee shall take all actions that may be necessary or desirable,
or that Lessor may reasonably request, in order to ensure that the Lessee,
its affiliates and all customers, suppliers and vendors that are material
to the Lessee's business, become Year 2000 Compliant on or before June 30,
1999. Such actions shall include, without limitation, (a) performing a
comprehensive inventory, review and assessment of all of the Lessee's
systems and adopting a detailed plan with, itemized budget and timetable,
for the remediation, monitoring and testing such systems, and (b) making a
detailed inquiry of all material customers, suppliers and vendors to
ascertain whether such entities are aware of the need to be Year 2000
Compliant and are taking all appropriate steps to become Year 2000
Compliant on a timely basis. Lessee shall, promptly, upon request, provide
to Lessor such certifications or other evidence of Lessee's compliance
within the terms of this section as Lessor may, from time to time,
reasonably require.
SECTION 20. EXECUTION OF FINANCING STATEMENTS AND TITLE DOCUMENTS.
Lessee agrees to execute and deliver to Lessor such financing
statements and/or title documents as reasonably requested by Lessor to
protect and identify Lessor's interest in the Equipment. Lessee appoints
Lessor, or Lessor's agents or assigns, its true and lawful attorney-in-fact
to prepare, to execute and to sign any instrument or financing statement
concerning the Equipment, to sign the name of Lessee with the same force
and effect as if signed by Lessee, and to file the same at the locations
reasonably determined by Lessor.
SECTION 21. EFFECT OF INVALID PROVISION.
Any provision of this Agreement which may be determined by competent
authority to be prohibited or unenforceable in any jurisdiction shall, as
to such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and
any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other
jurisdiction. To the extent permitted by applicable law, Lessee hereby
waives any provision of law which renders any provision hereof prohibited
or unenforceable in any respect.
SECTION 22. MISCELLANEOUS.
This Agreement and other written documents executed by the parties
hereto contain the entire agreement between the parties and there are no
verbal representations, warranties, or agreements of any kind whatsoever.
No term or provision of this Agreement may be changed, waived,
discharged, or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. No third-party manufacturer, supplier,
salesperson, or broker, or any agent thereof, is Lessor's agent or is
authorized to waive or modify any provision of the Agreement.
This Agreement shall in all respects be governed by, and construed in
accordance with, the laws of the State of Utah. Any judicial proceeding
brought against Lessee with respect to this agreement may be brought in any
court of competent jurisdiction in the State of Utah. By its execution of
this Agreement and the Schedules, Lessee unconditionally accepts the
jurisdiction of the courts of the State of Utah and agrees to be bound by
any judgment rendered thereby with respect to this Agreement. If Lessee is
not a resident of the State of Utah, service of process upon Lessee by mail
shall constitute sufficient notice of any such proceeding. Lessee waives
any right to a jury trial in any proceeding concerning the Agreement.
The word "including" as used in the Agreement shall mean "including,
but not limited to". Nothing herein shall affect the right to serve
process in any other manner permitted by law or limit the right of Lessor
to bring proceedings against Lessee in the courts of any jurisdiction.
This Agreement shall inure to the benefit of and be binding upon the
heirs, successors, assigns and personal representatives of the parties
hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed on behalf of them as of this JULY 1999 and
signatories warrant their authority to bind their principals.
LESSEE: CASINOVATIONS INCORPORATED
a(n) NEVADA corporation
------------------
BY: /s/ Steven J. Blad
--------------------------------
TITLE: President/C.E.O.
-----------------------------
Address: 6744 S. SPENCER ST.
LAS VEGAS, NV 89119
Federal ID or Social Security Number: 91-1696010
----------
LESSOR: FIRST SECURITY BANK OF NEVADA
By:
----------------------------------------------
BRIAN C. STEGALL
TITLE: AVP AND AUTHORIZED REPRESENTATIVE
Address: c/o First Security Leasing Company
381 East Broadway, 2nd Floor
Salt Lake City, Utah 84111
4
<PAGE>
Lease No. 012-3004113
FIRST SECURITY BANK OF NEVADA
LEASE SCHEDULE TO
MASTER EQUIPMENT LEASE AGREEMENT
This Lease Schedule to Master Equipment Lease Agreement (the "Lease
Schedule") is entered into pursuant to terms of the Master Equipment Lease
Agreement (the "Agreement") between the signatories hereof dated JULY
1999 and constitutes a separate lease (the "Lease") thereunder.
All the terms and conditions of the Agreement are hereby incorporated
herein and made a part hereof as if such terms and conditions were set
forth in this Lease Schedule at length and all capitalized terms not
otherwise defined in this Lease Schedule shall have the meaning set out in
the Agreement. By their execution and delivery of this Lease Schedule
Lessor and Lessee hereby reaffirm on and as of the date hereof all the
terms, conditions, agreements, representations and warranties contained in
the Agreement. A copy of the signed Agreement attached to the Lease
Schedule, which attachment shall adopt the copied signatures on the
Agreement as of the date of the Lease Schedule, shall constitute an
original lease. A copy of the Agreement and the Lease Schedule shall alone
constitute the chattel paper for purposes of perfecting a security
interest.
[CAPTION]
<TABLE>
A. DESCRIPTION OF EQUIPMENT
ID NEW INVOICE
OR OR PURCHASE
QUANTITY VENDOR DESCRIPTION SERIAL # USED PRICE
- -------- ------ ----------- -------- ---- -----
<S> <C> <C> <C> <C> <C>
1 CHEVROLET TRACKER 2D
1 CASINOVATIONS INCORPORATED 2CNBE18C9X6909219 New $ 15,333.58
1 CHEVROLET TRACKER 2D
1 CASINOVATIONS INCORPORATED 2CNBE18C2X6924158 New $ 15,381.85
TOTAL INVOICE PURCHASE PRICE: $ 30,715.43
</TABLE>
B. TERM. 48 months.
C. RENTAL.
1. Frequency: MONTHLY
2. Advanced or Arrears: ARREARS
3. Rental Payment Dates: ___________, ____, and on the same day of each
MONTH with the final payment on __________, ___.
4. Basic Rental in an amount equal to 0.025846 of the total invoice
purchase price of all Items is payable on each Rental Payment Date.
5. Interim Rental in an amount equal to N/A of the invoice purchase
price for each Item for each day from and including the date of
acceptance for such Item to but excluding the first Rental Payment
Date will be payable on the first Rental Payment Date.
D. RESIDUAL VALUE. ___0___ of the invoice purchase price of each item.
E. LOCATION. The Equipment shall be located at:
Address: 6744 S. SPENCER ST. LAS VEGAS, NV 89119
County: CLARK
If required, the Equipment will be registered in NV.
F. SECURITY DEPOSIT. Concurrently with the execution hereof Lessee shall
deposit with Lessor the sum of N/A as a security deposit which Lessor
may use to satisfy any unpaid late charges, recording fees or other
amounts due and unpaid. Any unused portion of the deposit will be
returned to Lessee without interest upon expiration or earlier
termination of the Lease and upon payment of all sums then due and
owing to Lessor, or Lessee may, at its option, apply the unused
balance of the security deposit toward the last Rental payment.
G. INSURANCE. The minimum amount of insurance to be provided by Lessee
as required under the terms of the Agreement shall be as follows:
1. Liability:
$ 500,000.00 each individual
$ 500,000.00 each accident
$ 500,000.00 property damage liability
2. Physical Damage and Loss: $ 30,715.00
3. Additional riders, exclusions or special terms required by Lessor: NA.
H. OTHER TERMS.
N/A
I. EXECUTION OF FINANCING STATEMENTS AND TITLE DOCUMENTS.
Lessee agrees to execute and deliver to Lessor such financing
statements and/or title documents as reasonably requested by Lessor to protect
and identify Lessor's interest in the Equipment. Lessee appoints Lessor,
or Lessor's agents or assigns, its true and lawful attorney-in-fact to prepare,
to execute and to sign the name of Lessee with the same force and effect as if
signed by Lessee, and to file the same at the locations reasonably determined by
Lessor.
IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Schedule
to be duly executed on behalf of each of them on JULY 1999 and the
signatories warrant their authority to bind principals.
LESSEE: CASINOVATIONS INCORPORATED LESSOR: FIRST SECURITY BANK OF NEVADA
a(n) NEVADA Corporation
By:_______________________________________
BY: /s/ Steven J. Blad BRIAN C. STEGALL
------------------------------ Title: AVP AND AUTHORIZED REPRESENTATIVE
TITLE: President/C.E.O.
---------------------------
Addres: 6744 S. SPENCER ST. Address: c/o First Security Leasing Company
LAS VEGAS, NV 89119 381 East Broadway, 2nd Floor
Federal ID or Social Security Salt Lake City, Utah 84111
Number: 91-1696010
1
<PAGE>
EMPLOYMENT AGREEMENT
OF
STEVEN J. BLAD
THIS EMPLOYMENT AGREEMENT of STEVEN J. BLAD (this
"Agreement") is entered into this 10 of August 1999, and for all
intents and purposes is effective as of the 1st day of January,
2000 (the "Effective Date") by and between CASINOVATIONS
INCORPORATED, a Nevada corporation (the "Company") and
STEVEN J. BLAD (the "Employee").
The parties recite that:
(a) Employee is currently the President and Chief
Executive Officer of the Company, and the Company desires
to retain the services of said Employee under the terms
and conditions of this Agreement
(b) The Employee and the Company will receive benefits from
this Agreement, and as such, each agrees to be bound under the
terms and conditions of this Agreement, including the
non-competition and non-disclosure contained herein.
(c) The Company desires the knowledge, skills and
ability of the Employee for the benefit of the Company.
(d) The Employee wishes to be retained by the Company
in accordance with the terms of this Agreement.
(e) The Employee recognizes the legitimate need of the
Company for protection of its confidential information.
(f) The Company recognizes and acknowledges the value of
the Employee's services and deems it necessary and desirable to
retain the Employee's services for the period herein described.
NOW THEREFORE, in consideration of the mutual promises set
forth herein, the Company and the Employee agree as follows:
1. EMPLOYMENT
The Company hereby retains the Employee upon the terms and
conditions hereinafter set forth, and the Employee hereby accepts
said terms and conditions.
2. TERM AND RENEWAL
Except as otherwise provided, this Agreement shall commence
as of January 1, 2000, and continue for a term of three (3)
years, subject to the early termination provisions of Article 8.
At the expiration date of this Agreement, it shall be considered
renewed for regular successive one (1) year terms unless either
party submits a notice of termination thirty (30) days prior to
the end of the preceding period.
3. DUTIES
The Company hereby retains the Employee as President and
Chief Executive, and the Employee hereby promises to
perform the duties related thereto and to perform such
other duties as the Company may from time to time
1
<PAGE>
assign. As directed by the appropriate representative(s) of the
Company, the Employee shall also render services for and
perform duties for entities related to the Company and for
persons or entities having a contractual relationship with the
Company requiring the Company to provide such services. The
Employee shall perform all of his duties at such place or
places and at such times as the Company shall in good faith
require and as the interest, needs, business, or opportunity of
the Company shall require. The Company, through its Board of
Directors, retains the right to supervise the Employee in the
performance of his duties.
4. TIME AND EFFORTS OF EMPLOYEE
So long as this Agreement continues in effect, the Employee
promises to devote his exclusive time and energies to the
business affairs of the Company necessary to achieve the
business objectives of the Company; use his best efforts,
skills, and abilities to promote the Company's interest; perform
the duties described in Article 3 of this Agreement; and to
perform such other duties as may be assigned to him by the
Company.
5. COMPENSATION AND BENEFITS
5.1 Compensation. For all services rendered by the
Employee under this Agreement and the Employee's obligations
under Articles 6 and 7 herein, Employee will be compensated as
follows:
(a) Base Salary. The Employee shall receive a
"Base Salary" for each calendar month under the term of this
agreement of Twenty Three Thousand Five Hundred Dollars
($23,500.00) through December 31, 2000, or until such time as a
new Base Salary is negotiated. The Base Salary shall be reviewed
on an annual basis and shall be payable in equal semi-monthly
installments on the first and fifteenth of each month.
(b) Stock Options. In addition to the Base Salary,
Employee shall receive "Stock Options" to purchase up to four
hundred thousand (400,000) shares of the Company's common stock
("Shares") under the following terms and conditions:
(i) Upon the Effective Date of this Agreement,
the Employee shall have a vested right to acquire up
to one hundred thousand (100,000) Shares at Two
Dollars and Fifty Cents ($2.50) per Share.
(ii) Upon the Employee fulfilling his
obligations and the Company reaching its goals for
2000, as established by the Board of Directors of the
Company, the Employee shall have the right to acquire
up to an additional one hundred thousand (100,000)
Shares at Two Dollars and Fifty Cents ($2.50) per
Share. The determination of whether the Employee has
met his obligations and the Company has reached its
goals shall be made at the discretion of the Company's
Board of Directors. The Employee shall be entitled to
a meeting with the Board of Directors during January,
2001, to discuss the option to be paid hereunder, if
any. The Stock Options to be issued under this
subparagraph shall be vested in the Employee on
January 31, 2001, subject to the requirement that
Employee continue to be President and Chief Executive
Officer of the Company on January 31, 2001.
(iii) Upon the Employee fulfilling his
obligations and the Company reaching its goals for
2001, as established by the Board of Directors of the
Company, the Employee shall have the right to acquire
up to an additional one hundred thousand (100,000)
Shares at Two Dollars and Fifty Cents ($2.50) per
Share. The determination of whether the Employee has
met his obligations and the Company has reached its
goals shall be made at the discretion of the Company's
Board of Directors. The Employee shall be entitled to
a meeting with the Board of Directors during January,
2002, to discuss the option to be paid hereunder, if
any. The Stock Options to be issued under this
subparagraph shall be vested in the Employee on
January 31, 2002, subject to the requirement that
Employee continue to be President and Chief Executive
Officer of the Company on January 31, 2002.
2
<PAGE>
(iv) Upon the Employee fulfilling his
obligations and the Company reaching its goals for
2002, as established by the Board of Directors of the
Company, the Employee shall have the right to acquire
up to an additional one hundred thousand (100,000)
Shares at Two Dollars and Fifty Cents ($2.50) per
Share. The determination of whether the Employee has
met his obligations and the Company has reached its
goals shall be made at the discretion of the Company's
Board of Directors. The Employee shall be entitled to
a meeting with the Board of Directors during December,
2002, to discuss the option to be paid hereunder, if
any. The Stock Options to be issued under this
subparagraph shall be vested in the Employee on
December 31, 2002, subject to the requirement that
Employee continue to be President and Chief Executive
Officer of the Company on December 31, 2002.
(v) The Stock Options must be exercised within
five (5) years from the date the Employee's rights are
vested hereunder. The Shares will be issued within
thirty (30) days after the Employee notifies the
Company of his intent to exercise the options under
this Agreement and tenders the purchase price to the
Company. The Company offers no warranty as to the
tradability of the Shares or as to whether such Shares
will be registered with the Securities and Exchange
Commission.
(vi) If the Company is to be sold, the
portion of the Stock Options granted pursuant to
paragraph 5.1 (b)(i)-(iv) of this Agreement which have
not yet vested shall vest in the Employee thirty (30)
days prior to such sale.
(vii) If the Company is sold, all of the Stock
Options granted to Employee by virtue of paragraph
(vi) must be exercised as of the last business day
prior to the sale of the Company, unless Employee and
the purchaser of the Company agree otherwise.
(viii) For purposes of paragraph 5(b)(vi)
hereof, the Board of Directors shall notify the
Employee in writing of (1) the impending sale, (2) the
right of the Employee to exercise the Stock Options,
and (3) the terms and conditions of the proposed sale
of the Company. For purposes of this Agreement, the
Company shall be deemed sold if substantially all of
its assets are sold, including patents and goodwill,
or the Company's stock is sold or transferred causing
the person or persons who currently have majority
control of the Company to be the beneficial owners of
less than twenty (20%) of the issued and outstanding
stock of the Company. This Paragraph does not apply to
transfers of stock of the Company, (1) by an
assignment to a revocable living trust in which the
holder is and remains a trustee and a beneficiary, or
(2) by reason of death of the holder. It is within the
Employee's discretion to exercise the Stock Options
prior to the proposed sale. Any Stock Options vested
in this subparagraph shall remain vested in the
Employee, whether or not they are exercised before the
sale, under the terms of subparagraph (v).
5.2 Payment of Compensation. All payments made
hereunder shall be made to the Employee, unless the Employee
notifies the Company otherwise.
5.3 Other Benefits. The Employee shall be entitled to
participate on a reasonable basis in any deferred compensation,
medical reimbursement, pension, profit sharing, thrift, savings,
vacation, group insurance, or other plan or program, and to
receive any other benefits for which he is eligible and which the
Company may provide for him or for its employees generally. The
Employee is entitled to a car allowance of Seven Hundred and
Fifty Dollars ($750.00) per month.
6. CONFIDENTIAL INFORMATION
6.1 Disclosure of Confidential Information.
(a) Definition. "Confidential Information" shall
mean and include: (i) all records of the accounts of customers,
route books, customer lists, and any other records and
books relating in any manner to the customers and/or
3
<PAGE>
suppliers of the Company (whether such records, books, or lists
are prepared by the Employee or otherwise come into the
possession or use of the Employee); (ii) any product
information, technical data, know-how, specifications,
processes, drawings, sketches, formulas, computations, and any
other information of any kind whatsoever, whether written or
not, concerning any process, manufacture, composition of matter,
plant, design, idea, method, system, or plan in which the
Company has a possessory interest and which becomes known to
Employee; and (iii) any accounting, sales, advertising,
marketing or management information, methods or techniques, any
business plans, any computer programs and routines of the
Company and any other information of any kind whatsoever,
whether written or not, concerning, directly or indirectly, the
Company, its plans, programs or operations, which information is
not generally known in the businesses or industries in which the
Company is or may become engaged during Employee's period of
employment with the Company or during the term of this
Agreement.
(b) Restriction on use. Any Confidential
Information received or developed by Employee shall be used
only in the Employee's conduct of Company's business. Such
Confidential Information shall not be used by Employee for any
other purpose unless otherwise directed or authorized in writing
by the Board of Directors. The Employee acknowledges that the
Company's primary assets consist of its gaming products and
accessories. Any unauthorized disclosure of the design or
marketing of such products by the Employee shall violate this
Article.
(c) Protection of Confidential Information. The
Company and the Employee expressly recognize and acknowledge
that any Confidential Information disclosed to or developed by
Employee will not, at any time either during or after the term
of this Agreement, in any manner, either directly or
indirectly, be divulged, disclosed, or communicated to any
person, firm or corporation, or any other business entity by the
Employee, nor shall the Employee use for his own benefit or for
any other purpose than the exclusive benefit of the Company,
its subsidiaries, successors, or assigns, Confidential
Information or any information whatsoever concerning matters
affecting or relating to the business of the Company which the
Employee knows or has reason to know would be valuable to
competitors or potential competitors of the Company, including,
but not limited to, Confidential Information or information
relating to the Company's relationships with actual or potential
customers or suppliers and to the needs and requirements of any
such actual or potential customers. Furthermore, but not by way
of limitation of the foregoing, the Employee shall not: (i) make
known to any firm, person or corporation the names or addresses
of any of the customers of the Company or any other information
pertaining to them; or (ii) call on, solicit, or take away or
attempt to call on, solicit, or take away any of the customers of
the Company on whom the Employee called or with whom he became
acquainted during his tenure with the Company, either for himself
or for any other person, firm or corporation.
6.2 Books and Records. The Employee further promises that he
shall not without the prior written approval of the Company,
make copies of any books, drawings, documents, records, or
other written or printed, photographic, encoded, taped,
electrostatically or electromagnetically encoded data or
information of whatever nature (the "Documents") of the
Company; that he shall not, without the prior written approval
of the Company, remove any of the foregoing from the premises
of the Company, and that he shall not, without the prior
written approval of the Company, make available to third
parties access to said Documents of the Company. The Employee
agrees that all records and books relating in any manner
whosoever to the customers (whether actual or potential) of the
Company, whether prepared by the Employee or otherwise coming
into his possession, shall be the exclusive property of the
Company regardless of who actually purchased the original book
or record. All such books and records shall be immediately
returned to the Company by the Employee upon any termination of
this Agreement. If the Employee purchases any original book or
record, he shall immediately inform the Company, which shall
immediately reimburse the Employee.
6.3 Limitation. Nothing contained in this Article or in any
other part of this Agreement shall restrict the ability of the
Employee to make, with the written consent of the Company and in
the ordinary course of his employment, such disclosures as may
be necessary or appropriate to the effective and efficient
discharge of his duties to the Company.
6.4 Term. Notwithstanding any other provision of this
Agreement, the provisions of this Article 6 shall continue in
full force and effect following the expiration or termination of
this Agreement.
4
<PAGE>
7. EMPLOYEE'S COVENANT NOT TO COMPETE
7.1 Covenant Not to Compete.
(a) General. The Company and the Employee expressly
recognize and acknowledge that the Company is engaged in a
business which is highly competitive, that any knowledge of the
Company's Confidential Information or business affairs would
give a competitor or potential competitor an unfair competitive
advantage over the Company, that consulting or employment,
directly or indirectly, of the Employee anywhere in the area in
which the Company conducts its business (including, but not
limited to gaming and non-gaming security and productivity
equipment and products) would give to such competitor an unfair
competitive advantage, and that the Employee possesses valuable
skills and knowledge. In recognition of the aforementioned, the
Employee and the Company hereby expressly agree that the
restrictions on competition by the Employee contained in this
Article 7 are reasonable, will not overburden the Employee, and
are in the best interests of both the Employee and the Company.
(b) Time Period and Area Covered. The Employee promises
that, during the term of this Agreement, as set forth in
Article 2 hereof, and for a period of six (6) years after the
expiration or termination of this Agreement, he shall not, either
directly or indirectly, engage in competition with the Company,
or with any subsidiary, successor or appointee of the Company,
as constituted during the term of this Agreement as of his
resignation, departure, discharge or termination with the
Company in Nevada, and within a fifty (50) mile radius of any
other:
(i) place of business operated by the
Company; or (ii) location, establishment or business where
the equipment, product, or technology of the Company is
operating as of such date. The Employee acknowledges that
the Company's business is national and international in
scope and that the solicitation of the Company's domestic
or international clients in competition with the Company
is a violation of this Agreement.
(c) Affiliations Covered. The Employee further promises
that, during the term of this Agreement, as set forth in
Article 2 hereof and for a period of six (6) years after the
expiration or other termination of this Agreement, he shall not
engage, directly or indirectly, as a proprietor, partner,
shareholder, director, officer, employee, agent, or in any other
capacity or manner whatsoever, in any business activity
competitive with the business of the Company or of any
subsidiary, successor or appointee of the Company, as constituted
during his employment.
(d) Board of Directors Approval. Either or both of
the provisions contained in Subsections (b) and (c) above may be
waived at any time in writing by the Board of Directors of the
Company, in its sole discretion. No such waiver shall be
considered as a waiver of any other term, covenant or provision
of this Agreement, nor shall it be considered a waiver of any
subsequent action by the Employee.
7.2 Limitation. Nothing contained in this Article 7 shall
prevent the Employee from purchasing or causing or permitting to
be purchased for his direct or indirect benefit, securities of
any corporation whose securities are regularly traded on any
national or regional securities exchange; provided, however,
that such purchase must not, without the written approval of the
Company, result in the direct or indirect beneficial ownership
of more than one percent of any outstanding class of equity
securities of any corporation engaged directly or indirectly in
any trade or business activities competitive with that carried
on by the Company.
8. TERMINATION
8.1 Grounds for Termination. This Agreement shall terminate
as it relates to the Employee upon the first to occur of the
following events:
(a) The death of the Employee;
(b) Immediately upon five (5) days written notice from
the Company to the Employee "for cause." "For cause" is
defined as:
5
<PAGE>
(i) a breach of the terms and conditions
of this Agreement by the Employee (other than a breach
described in subparagraph 8.1(b)(ii) herein below),
including the performance of the Employee's
obligations and duties hereunder, which remains
uncured for a period of twenty (20) days after written
notice by the Company to the Employee of any such
breach;
(ii) a breach of the terms and conditions
of this Agreement by the Employee, which breach
consists of dishonest or criminal conduct, or such
breach constitutes gross negligence by the Employee in
failing to perform his duties and obligations under
this Agreement.
(c) Upon the passing of fifteen ( 15) days after
notice from the Company to the Employee of a bona fide decision
by the Company to terminate its business.
8.2 Severance Pay. If this Agreement is terminated for any
reason, other than for a reason under Section 8.1, the Company
shall pay the Employee, upon termination, severance pay in a
one time lump sum equal to seven (7) months of the Employee's
Base Salary in effect at the time of severance.
8.3 Effect of Termination on Stock Options. Under no
circumstances shall the Employee be entitled to any Stock
Option, which has not vested or accrued prior to the Employee's
termination.
8.4 Effect of Termination on Articles 6 and 7.
Notwithstanding the provisions of this Article, the provisions
of Articles 6 and 7 will not terminate upon the occurrence of
an event described above, but will continue in full force and
effect for the periods described in those Articles. The
severance pay shall constitute additional consideration for the
enforcement of such provisions.
9. MISCELLANEOUS
9.1 Assignment of Agreement. The knowledge and skills of the
Employee are unique, and his services bargained for by this
Agreement may not be delegated by the Employee to any other
person. This Agreement shall inure to the benefit of and be
binding upon the Employee and his testate or intestate
distributees, and the Company, its successors and assigns
including, without limitation, any person, partnership, trust,
corporation or other legal entity which may acquire all or
substantially all of the Company's assets or which may acquire
a controlling interest, either direct or beneficial, in the
Company or with or into which the Company may be consolidated
or merged. As used in this Agreement, the term "Company", shall
include any such successor or assignee.
9.2 Remedies. It is agreed that any breach of Article 6 or
7 of this Agreement by the Employee will result in irreparable
injury to the Company and will authorize recourse by the
Company to equitable remedies, including, but not limited to,
affirmative or negative injunctive relief. It is further
agreed that in the event of such breach, violation, or evasion
of any of the Articles hereinbefore mentioned, or of any other
Article herein, the Company may forthwith terminate this
Agreement and thereafter be released from all claims of the
Employee hereunder, provided, however, that such a termination
shall not release the Employee from any warrant, covenant,
term, or condition under Articles 6 or 7 of this Agreement.
Nothing contained herein shall be deemed to obligate the
Company to undertake such termination, and nothing contained
herein shall be deemed to preclude the Company from pursuing
any remedy, whether legal or equitable, which is available to
it in the event of any breach, violation or evasion of any
Article of this Agreement.
9.3 Enforcement Costs. The prevailing party shall be
entitled to all costs of enforcing this Agreement, regardless of
whether an action at law or in equity is commenced or
maintained, including but not limited to, court costs and
reasonable attorneys' fees.
9.4 Waiver of Breach. The waiver of the breach of any term
or condition of this Agreement shall not be deemed to constitute
the waiver of any other or subsequent breach of the same or any
other terms of condition.
6
<PAGE>
9.5 Severability. All terms and conditions contained in
this Agreement are severable, and in the event that any of them
shall be held or considered to be unenforceable by any court of
competent jurisdiction, this Agreement shall be interpreted as
if such unenforceable term or condition was not contained
herein.
9.6 Applicable Law. This Agreement shall be governed by and
interpreted according to the laws of the State of Nevada. Each
party submits to the personal jurisdiction of all courts,
whether Federal or State, within Nevada, and agrees that any
action pertaining to this Agreement shall be brought in a court
in Nevada.
9.7 Notice. Any notice required or permitted to be given
under this Agreement shall be sufficient if in writing, and if
sent by registered mail to his last residence as recorded on the
records of the Company in the case of the Employee, or to the
principal offices of the Company, in the case of the Company.
9.8 Modification of Agreement. No waiver or modification of
this Agreement or of any term or condition herein contained
shall be valid unless in writing and duly executed, nor shall
any waiver or modification of this Agreement not duly executed
as provided herein be deemed to be a part of this Agreement
under any circumstances.
9.9 Gender, Number, Etc. Where applicable, the singular
includes the plural, the masculine includes the feminine, and
vice versa.
IN WITNESS WHEREOF, the parties have executed this
Agreement, delivery of which is hereby acknowledged, as of the
date first above written.
CASINOVATIONS INCORPORATED
BY: /s/ Bob L. Smith
--------------------------------
Bob L. Smith
Its: Chairman
/s/ Steven J. Blad
--------------------------------
Steven J. Blad
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