U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 3
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
ADVANCED GAMING TECHNOLOGY, INC.
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(Name of Small Business Issuer in Its Charter)
Wyoming 98-015-222-6
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2482-650 West Georgia Street, P.O. Box 11610
Vancouver, British Columbia V6B 4N9
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(Address of principal executive offices) (Zip Code)
(604) 689-8841
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(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
None
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.005 Par Value
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(Title of Class)
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Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
PART I*
Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Directors, Executive Officers and Significant Employees . . . . . . . . . . . . 15
Item 4. Remuneration of Directors and Officers . . . . . . . . . . . . . . . . . . . . . 16
Item 5. Security Ownership of Management and Certain Security Holders . . . . . . . . . 18
Item 6. Interest of Management and Others in Certain Transactions . . . . . . . . . . . 19
Item 7. Description of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity
and Other Shareholder's Matters . . . . . . . . . . . . . . . . . . . . . 20
Item 2. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 3. Changes in and Disagreements with Accountants . . . . . . . . . . . . . . . . . 21
Item 4. Recent Sales of Unregistered Securities . . . . . . . . . . . . . . . . . . . . 21
Item 5. Indemnification of Directors and Officers . . . . . . . . . . . . . . . . . . . 25
PART F/S
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
PART III
Item 1. Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 2. Description of Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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* The Company has elected to provide the disclosure required by Alternative
2 of Part I of Form 10-SB (Items 6-12 of Model B of Form 1-A).
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INFORMATION REQUIRED IN REGISTRATION
STATEMENT
PART I*
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Advanced Gaming Technology, Inc., a Wyoming corporation (the
"Company"), is engaged in the design, assembly, supply, marketing and servicing
of gaming products, the core of which is its MAX Electronic Bingo Systems. The
Company is also engaged in developing and establishing gaming and entertainment
facilities in China and the Philippines, as well as designing and developing a
wireless, hand-held bingo unit for use in the United Kingdom. In addition, the
Company owns, through one of its wholly-owned subsidiaries, 178 acres of
undeveloped property in Stone County, Missouri. The Company's Common Stock is
traded on the National Association of Securities Dealers, Inc.'s (the "NASD's")
OTC Bulletin Board under the symbol "AGTI."
The Company was incorporated pursuant to the laws of the state of
Wyoming on November 20, 1963, under the name "MacTay Investment Co." On June
19, 1987, the Company's changed its name to "Auto N Corporation." On April 22,
1991, the Company changed its name again to "Advanced Gaming Technology, Inc."
when it acquired all of the assets and certain liabilities of Selectro Vision
Ltd., a California corporation, in exchange for 1,359,000 shares of the
Company's common stock, $.005 par value per share (the "Common Stock").
The Company has seven wholly-owned subsidiaries: (i) Executive Video
Systems, Inc., a Maryland corporation ("Executive Video"), (ii) Palace
Entertainment Limited, a company organized under the laws of the British Virgin
Islands ("Palace Entertainment"), (iii) Branson Signature Resorts, Inc., a
Nevada corporation ("Branson"), (iv) River Oaks Holdings, Inc., a Missouri
corporation ("River Oaks"), (v) Prisms, Inc., a North Carolina corporation
("Prisms"), (vi) Pleasure World Ltd., a company organized under the laws of the
Bahamas ("Pleasure World") and (vii) A.G.T. Acceptance Corp., a Nevada
corporation ("A.G.T. Acceptance Corp.").
Executive Video owns certain proprietary software and technology
relating to the Max Bingo Systems, and prior to the merger with the Company,
operated five bingo locations (three of the five locations are currently
operated by the Company). See "Description of Business -- Recent Acquisitions."
Palace Entertainment was organized in August 1996 to be a joint venture
partner with various entities in China for the operation of entertainment
centers in China. None of the entertainment centers are presently in operation.
See "Description of Business -- Proposed Operations in China."
Branson and its wholly owned subsidiaries are resort and land
developers located in Branson, Missouri, which owned two separate real estate
properties: (i) a resort property with limited existing development on site and
(ii) 178 acres of undeveloped property in Stone County, Missouri. On November
17, 1995, the Company disposed of the resort property. The Company transferred
the 178 acres of undeveloped property to River Oaks and is currently attempting
to sell such property. See "Description of Business -- Real Estate Holdings."
Prisms transferred certain patents to Prisms Bahamas Ltd., a
company organized under the laws of the Bahamas and a wholly-owned subsidiary
of Pleasure World ("Prisms Bahamas"), for the development of bingo and
other entertainment games which management of the Company believes favorably
complement the Company's MAX Electronic Bingo Systems. Prisms Inc. invented
seven games under the patents and Prisms Bahamas has trademarks in place for
such games. See "Description of Business -- Recent Acquisitions."
The principal executive offices of the Company are located at 2482-650
West Georgia Street, P.O. Box 11610, Vancouver, British Columbia, Canada, V6B
4N9. The Company also has a distribution center in Phoenix, Arizona, a
marketing office in Cleveland, Ohio, and an office in Branson, Missouri, where
its real estate holdings are located.
OPERATING LOSSES. The Company has incurred net losses of $5,629,961
and $8,983,277 for the fiscal years ended December 31, 1996 and December 31,
1995, respectively. Such operating losses reflect developmental and other
start-up activities. The Company expects to incur significant losses in the
near future. The Company's operations are subject to numerous risks associated
with establishing any new business, including unforeseen expenses, delays and
complications. There can be no assurance that the Company will achieve or
sustain profitable operations or that it will be able to remain in business.
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* The Company has elected to provide the disclosure required by Alternative
2 of Part I of Form 10-SB (Items 6-12 of Model B of Form 1-A).
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FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FUNDING. The Company
has generated minimal revenues from product distribution. Revenues are not yet
sufficient to support the Company's operating expenses and are not expected to
reach such levels during the next year. Since the Company's formation, it has
funded its operations and capital expenditures primarily through private
placements of debt and equity securities. See "Recent Sales of Unregistered
Securities." The Company expects that it
will be required to seek additional financing in the future. There can be no
assurance that such financing will be available at all or available on terms
acceptable to the Company.
GOVERNMENT REGULATION. The Company's operations are subject to state
and local gaming laws as well as various federal laws and regulations governing
business activities with Native American Tribes. The state and local laws in
the United States which govern the lease and use of gaming products are widely
disparate and continually changing due to legislative and administrative
actions and judicial interpretations. If any changes occur in gaming laws
through statutory enactment or amendment, judicial decision or administrative
action restricting the manufacture, distribution or use of some or all of the
Company's products, the Company's present and proposed business could be
adversely affected. The operation of gaming on Native American reservations is
subject to the Indian Gaming Regulatory Act ("IGRA"). Under IGRA certain types
of gaming activities are classified as Class I, Class II or Class III. The
Company's business will be impacted based upon how its products are ultimately
classified. See "Business -- Government Regulation" and "Business -- Native
American Bingo Operations."
RISK OF LOW-PRICED STOCKS. Rules 15g-1 through 15g-9 promulgated
under the Securities Exchange Act of 1934 (the "Exchange Act") impose sales
practice and disclosure requirements on certain brokers and dealers who engage
in certain transactions involving "a penny stock."
Currently, the Company's Common Stock is considered penny stock for
purposes of the Exchange Act. The additional sales practice and disclosure
requirements imposed on certain brokers and dealers could impede the sale of
the Company's Common Stock in the secondary market. In addition, the market
liquidity for the Company's securities may be severely adversely affected, with
concomitant adverse effects on the price of the Company's securities.
Under the penny stock regulations, a broker or dealer selling penny
stock to anyone other than an established customer or "accredited investor"
(generally, an individual with net worth in excess of $1,000,000 or annual
incomes exceeding $200,000, or $300,000 together with his or her spouse) must
make a special suitability determination for the purchaser and must receive the
purchaser's written consent to the transaction prior to sale, unless the broker
or dealer or the transaction is otherwise exempt. In addition, the penny stock
regulations require the broker or dealer to deliver, prior to any transaction
involving a penny stock, a disclosure schedule prepared by the Securities and
Exchange Commission (the "SEC") relating to the penny stock market, unless the
broker or dealer or the transaction is otherwise exempt. A broker or dealer is
also required to disclose commissions payable to the broker or dealer and the
registered representative and current quotations for the securities. In
addition, a broker or dealer is required to send monthly statements disclosing
recent price information with respect to the penny stock held in a customer's
account and information with respect to the limited market in penny stocks.
LACK OF TRADEMARK AND PATENT PROTECTION. The Company relies on a
combination of patent, trade secret, copyright and trademark law, nondisclosure
agreements and technical security measures to protect its products.
Notwithstanding these safeguards, it is possible for competitors of the Company
to obtain its trade secrets and to imitate its products. Furthermore, others
may independently develop products similar or superior to those developed or
planned by the Company. While the Company may obtain patents with respect to
certain of its products, the Company may not have sufficient resources to
defend such patents, such patents may not afford all necessary protection and
competitors may develop equivalent or superior products which may not infringe
such patents. See "Business -- Patents and Trademarks."
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PRODUCTS
The Company's MAX Electronic Bingo Systems products currently include
three different products:
MAX(PLUS) The MAX(PLUS) Bingo System is the first
proprietary electronic bingo system developed by the Company.
Approximately 440 MAX(PLUS) units are currently in use across the
United States.
MAX(PLUS) is designed to increase bingo revenue at bingo
halls, reduce administration costs and increase the excitement of play
and the opportunity for bingo players to win. MAX(PLUS) gives players
the opportunity to play electronically up to 300 bingo cards
simultaneously. The maximum physical number of cards that an average
bingo player can manually daub (cover) is approximately 18. The
electronically operated MAX(PLUS) system keeps track of each card and
gives the player the option to display on the screen those most likely
to reach bingo first (6 to 300 cards at any given time). As the bingo
numbers are called they can be entered manually or automatically. The
manual setting keeps the players focused and feeling part of the game
as if they were playing a paper-based system. The automatic setting
lets the players relax and concentrate on their paper daubing, if they
are playing paper as well, or eating, drinking or engaging in
conversation if they are not.
For the bingo hall operator, electronic bingo systems, such as
the MAX(PLUS) Bingo System, may increase the revenue generated on a
daily basis by allowing players to play many more cards at a time.
Concession stand sales may also increase because players can consume
greater amounts within the same bingo session. By generating greater
gross revenues, the hall operator may be able to increase the size of
the prizes awarded and thereby attract larger and more spendthrift
crowds. In addition, the MAX(PLUS) Bingo System lets the operator
track necessary financial and analysis information by providing a
fully integrated accounting package.
MAX(LITE) The MAX(LITE) Bingo System is the newest addition
to the Company's electronic bingo product line. It is a portable,
hand-held electronic bingo unit which stores up to 50 different games
and allows users to play up to 300 bingo cards per game. The unit
measures 12" x 9" and offers many of the advantages of the MAX(PLUS)
system in a lightweight wireless package, which allows players freedom
of movement in the bingo hall, thus increasing the players' enjoyment
and the hall operators' revenue. Approximately 400 MAX(LITE) units
are currently in use in the United States.
MAX(SPEED) is a pari-mutuel system which has five progressive
jackpots with five different patterns for each game. A percentage of
player purchases can be selected and allocated toward a jackpot, which
allows a jackpot to be offered on every game. MAX(SPEED) is a high
speed bingo game which can be played every 45/60 seconds.
SONIC BINGO. In addition to the products described above, the Company
entered into a Letter of Intent with Sega Gaming Technology, Inc. ("Sega"),
dated May 13, 1996 (the "Sega Letter of Intent"), to manufacture and test Sonic
Bingo, a new fast-action electronic speed bingo game, which uses the Company's
MAX(SPEED) software. The Sega Letter of Intent provides for the creation of a
new corporation, to be owned sixty percent (60%) by Sega and forty percent
(40%) by the Company.
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Sonic Bingo is a high-stakes electronic speed bingo unit capable of
playing multiple cards simultaneously in sixty (60) second intervals. The
Sonic Bingo units will be available in various styles capable of accommodating
from 4 to 250 stations. The system is capable of being networked throughout
gaming halls, cruise ships, as well as an entire city or even a country
(depending upon regulatory approvals), which facilitates games involving major
progressive jackpots.
The Sonic Bingo prototype was introduced to the market at the World
Gaming Show held in Las Vegas held from October 1 to October 4, 1996, and is
being developed for introduction in 1997.
The MAX Electronic Bingo Systems products are manufactured by Link
Technologies in Vancouver, British Columbia and Press Com Electronics in
Phoenix, Arizona. In addition, certain components of the products are purchased
from various sources and assembled by the Company's technicians in the Company's
Phoenix office.
SALES AND MARKETING
The MAX Electronic Bingo Systems are leased to bingo halls by a
network of sales representatives and distributors, some of which are employees
of the Company and some of which are independent contractors. The cost to the
hall operator is based on a daily lease rate per unit, which reduces the
initial capital outlay of the operator. The Company's MAX Electronic Bingo
Systems complement paper-based bingo halls. The systems are modular and,
consequently, as their popularity builds, additional units can be added to the
systems. The Company is actively working to expand its distribution network
across North America and intends to accelerate its expansion schedule as its
network of distributors increases.
TARGET MARKETS. Native American, charity, military, casino and cruise
line bingo operations are considered by the Company to be prospective markets
for the Company's electronic bingo systems. Currently, the Company is focusing
its marketing efforts on the Native American and charity markets.
Initially, the Company has targeted the United States and Canadian
markets due to their size, proximity and familiarity. Other world markets with
significant bingo operations are the United Kingdom, Australia, New Zealand and
Europe. A large potential for electronic bingo also exists in Asia and Central
and South America. The Company may pursue these and other international
markets in the future.
MARKET SEGMENTS. The key segments of the bingo market are as follows:
HIGH STAKES NATIVE AMERICAN BINGO. There are presently over
200 bingo operations located on Native American reservations in the
United States and Canada. The largest bingo games in the United States
are believed to be run on Native American reservations. The bingo
halls located on these reservations typically seat between 300 and
2,000 players. Bingo games are conducted three to seven days per
week, playing up to 28 bingo sessions per week. The Company currently
has approximately 165 MAX(PLUS) units and approximately 250 MAX(LITE)
units in use on Native American reservations.
CHARITY BINGO. Charity bingo sessions are conducted on a
regular basis by parochial, private and public schools, churches,
fraternal orders, sororities, little leagues, symphony orchestras,
cultural and civic organizations, auxiliaries, various clubs,
synagogues, day care centers, retirement associations and a host of
other not-for-profit organizations across the United States and
Canada. Some of these bingo operations, because of their small size
or infrequency of operation, are not candidates for permanent
electronic installations, although portable electronic systems may be
provided to certain operations on a predetermined date and removed
after completion of the session.
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In many states, it is legal for a number of charities to
associate with each other for the purpose of operating bingo halls.
In North America, it is estimated that the majority of charity bingo
is conducted in this manner. Under this concept, the association
leases a suitable hall, plays bingo seven days per week, with a
specific charity accepting responsibility for operations each day of
the week. In the United States, this type of operation is known as a
"bingo barn." The result is a bingo operation that is much more
efficient than isolated charity games. All of these charity bingo
operations are strong candidates for the electronic systems.
The Company currently has approximately 275 MAX(PLUS) units and
approximately 150 MAX(LITE) units in use by charitable organizations.
REAL ESTATE HOLDINGS
On June 22, 1995, pursuant to an Agreement and Plan of Reorganization
by and among the Company, Branson and certain shareholders of Branson, dated
June 1, 1995 (the "Exchange Agreement"), the Company acquired all the capital
stock of Branson and its wholly-owned subsidiaries in exchange for 5,999,820
shares of the Company's Common Stock. Branson and its subsidiaries are resort
and land developers located in Branson, Missouri, which owned two separate real
estate properties: (i) a resort property with limited existing development on
site and (ii) 178 acres of undeveloped property in Stone County, Missouri. On
November 17, 1995, the Company disposed of the resort property by forfeiture to
the mortgage holder. The Company is currently attempting to capitalize on the
178 acres of undeveloped property and has no present plans for the improvement
or development of such property.
The undeveloped property has been pledged to secure the repayment of
(i) promissory notes in an aggregate principal amount of $1,339,792 bearing
interest at nine percent (9%) per annum and due in July 2002, (ii) a promissory
note in the principal amount of $60,812 bearing interest at nine percent (9%)
per annum and due on demand (iii) a promissory note in the principal amount of
$500,000 bearing interest at 3% above the Chase Manhattan prime lending rate
and due in 2002 and (iv) convertible debentures in the aggregate principal
amount of $745,000 bearing interest at two percent (2%) per month, compounded
monthly, which are convertible into Common Stock at $.40 per share of Common
Stock until December 21, 1997.
RECENT ACQUISITIONS
PRISMS, INC. The Company entered into a Share Purchase Agreement, dated
September 26, 1996 (the "Prisms Agreement"), among (i) the Company, (ii) Prisms
and (iii) the shareholders of Prisms, to acquire all the issued and outstanding
shares of Prisms. The purchase price for the acquisition was $600,000, payable
in 300,000 shares of the Company's Common Stock, with such shares having a
deemed value of $2.00 per share (the "Acquisition Shares"). Prisms' primary
assets are certain patents for the development of bingo and other entertainment
games which management of the Company believes favorably complement the
Company's MAX Electronic Bingo Systems. Prisms has invented seven (7) games
under the patents (the "Patented Products") and has trademarks in place for the
Patented Products.
Pursuant to the Prisms Agreement, in the event the Acquisition Shares
do not trade at a minimum average closing price of $2.00 per share as reported
by the NASD for the ten (10) day trading period preceding October 1, 1997, the
Company is required to issue additional shares of Common Stock so that the
total value of the Acquisition Shares issued is equal to $600,000. In
addition, upon the receipt by the
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Company of $10,000 of net sales for a Patented Product, the Company is required
to issue an additional 28,572 shares of Common Stock, at a deemed value of
$2.00 per share, for each such Patented Product (the "Product Shares"). In the
event the issued Product Shares do not trade at a minimum average closing price
of $2.00 per share as reported by the NASD for a ten (10) day trading period
commencing 12 months after the issuance of the Product Shares, the Company is
required to issue additional shares of Common Stock so that the total value of
the Product Shares is $57,144. The Company has not issued any Product Shares.
The former Prisms shareholders are also entitled to a royalty, payable
on a quarterly basis, equal to two percent (2%) of the net sale price of the
products after deduction of packaging and shipping costs, allowances made for
defective products, excise duties, value-added taxes or other similar taxes
charged or included in the price to the customer.
EXECUTIVE VIDEO SYSTEMS, INC. On February 9, 1995, pursuant to an
Agreement of Sale between the Company and the shareholders of Executive Video,
which owns certain proprietary software and technology relating to the MAX Bingo
Systems, the Company acquired all of the capital stock of Executive Video. The
aggregate purchase price of $715,650 consisted of cash and a Promissory Note in
the principal amount of $515,650 (the "Promissory Note"), plus a three percent
(3%) royalty on the gross revenues from the sale or lease of MAX(PLUS) until
February 9, 1998. All of the capital stock of Executive Video, as well as
250,000 shares of Common Stock of the Company, are held in escrow as security
for the Promissory Note. During 1995, a total of $22,914 was paid in royalties,
and the outstanding amount on the Promissory Note was $35,017 at May 12, 1997.
NATIVE AMERICAN BINGO OPERATIONS
The Company currently has approximately 165 MAX(PLUS) units and
approximately 250 MAX(LITE) units in use on Native American reservations in
California, Connecticut, Iowa, New Mexico, Oklahoma and Washington.
THE INDIAN GAMING REGULATORY ACT. IGRA classifies games that may be
played on Native American land into three categories. Class I gaming includes
traditional Native American social and ceremonial games and is regulated only
by the tribes. Class II gaming includes bingo, pull-tabs, lotto, punch boards,
instant bingo, certain card games played under limited circumstances and other
games similar to bingo if those games are played at the same location where
bingo is played. Class III gaming consists of all forms of gaming that are not
Class I or Class II, such as video casino games, slot machines, most table
games such as black jack, craps and keno. Generally, Class II gaming may be
conducted on Native American lands if the state in which the Native American
reservation is located permits such gaming for any purpose by any person.
Class III gaming, on the other hand, may only be conducted pursuant to a
compact reached between the Native American tribe and the state in which the
tribe is located. See "Business -- Government Regulation."
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CHARITY OPERATIONS
The Company currently has approximately 275 MAX(PLUS) units and
approximately 150 MAX(LITE) units in use by charitable organizations in
California and Maryland.
The Company entered into a Lease License Agreement, dated December 7,
1995 (the "Lease License Agreement"), with G & J Production Trust ("G & J
Production"). Pursuant to the Lease License Agreement, G & J Production leased
the MAX(PLUS) Bingo System from the Company for use in G & J Production's bingo
operations located in Victorville, California.
As of January 23, 1997, G & J Production was approximately three months
behind in their payment to the Company and the Company removed its equipment
from Victorville. Since January, the Company has been able to replace most of
the Company's products formerly located in Victorville to other locations at a
higher rate than that which was contracted for with G & J Production. Because of
the higher rate, the revenue generated by the Company has not been materially
impacted by the termination of the Lease License Agreement.
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PROPOSED OPERATIONS IN CHINA
GAOMING CITY, GUANGDONG, CHINA. In February 1995, the Province of
Guangdong, China granted a business license and certificate of approval for the
formation of a joint venture between the Company and Gaoming City Santian
Economic Development Company, a company affiliated with the City of Gaoming,
Guangdong, China ("Santian") to manufacture and sell in China a variety of
electronic gaming machines, including the Company's electronic bingo products..
The Company will own eighty percent (80%) of the joint venture and Santian will
own twenty percent (20%.) Pursuant to the joint venture agreement, the Company
will contribute the technology and, in conjunction with a major gaming
manufacturer, will design and build the manufacturing facilities and provide
$5,000,000 in start-up capital. The Company is currently searching for a major
gaming manufacturer to pursue this project and to provide the financing.
Santian will contribute a twenty (20) acre parcel of land for the manufacturing
plant, offices in Gaoming City and provide skilled labor, sales coordination
and will acquire the necessary development permits, zoning approvals and other
required permits and approvals. A finder's fee of 500,000 shares of the
Company's Common Stock was paid to a party in Hong Kong to facilitate securing
of the license and joint venture.
ENTERTAINMENT CENTERS. In August 1996, Palace Entertainment entered
into a joint venture agreement (the "Hainan Bosun Joint Venture Agreement") with
Hainan Bosun Tourism & Amusement Co. Ltd., a company organized under the laws of
China ("Hainan Bosun") in connection with the operation of a 23 seat Royal Ascot
Horse Racing Machine (the "Royal Ascot Unit") in Haikou, Hainan Island, China.
Under the Hainan Bosun Joint Venture Agreement, Palace Entertainment is to
provide the Royal Ascot Unit and is responsible for the operation, maintenance
and repair of the machine as well as the hiring of personnel to operate the
machine. Hainan Bosun is responsible for providing certain licenses and permits
required for the operation and certain other costs and expenses. Palace
Entertainment will receive sixty percent (60%) and Hainan Bosun will receive
forty percent (40%) of the revenues (or losses) derived from the Royal Ascot
Unit, after deduction of certain expenses. The Hainan Bosun Joint Venture
Agreement terminates in August 1999.
The Company purchased the Royal Ascot Unit from Sega pursuant to a
Purchase, Finance and Security Agreement, dated February 21, 1996 (the 'Sega
Purchase Agreement").
In January 1996, the Company entered into a joint venture agreement
(the "Hainan Xin Joint Venture Agreement") with Hainan Xin Dao Trading Limited
("Hainan Xin") in connection with the operation of 150 slot/entertainment
machines (the "Slot Machines") in Haikou, Hainan Island, China . Under the
Hainan Xin Joint Venture Agreement, the Company is responsible for providing
the Slot Machines and working capital as well as managing the Slot Machines.
Hainan Xin is responsible for providing certain licenses and permits required
for the operation. The Company will receive thirty two percent (32%) and
Hainan Xin will receive sixty-eight percent (68%) of the net profits.
Currently, neither of these centers is operational due to the periodic
nationwide clean up of various black market activities, prostitution and
gambling. This clean up campaign ended at or about the end of July 1996, and
entertainment centers, such as the centers described above, which are not
considered gambling and therefore are legal, are gradually beginning to re-open
and new licenses are
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currently being issued. The Company is cautiously optimistic that both of the
entertainment centers described above will be operational in the near future.
Y.K.L. CORPORATION. Due to delays caused by the nationwide clean up in
China, the Company entered into a Letter of Agreement, dated December 17, 1996
(the "Letter Agreement"), with Y.K.L. Corporation, a company organized under the
laws of the Philippines ("Y.K.L."), pursuant to which Y.K.L. has agreed to
lease, for a period of 120 days commencing on the date of installation, 25 of
the Company's Slot Machines, which were originally to be used in the Hainan Xin
Joint Venture, for use on Y.K.L.'s luxury ocean liners. Under the Letter
Agreement, the Company will receive seventy percent (70%) of the gross revenues,
after payment of winnings, generated by the slot machines. 22 slot machines have
been retro-fitted and delivered to Y.K.L. and are awaiting installation on the
cruise ships.
PROPOSED OPERATIONS IN THE PHILIPPINES
PASAY. The Company is pursing approvals to import and operate slot
machines in the City of Pasay. The City of Pasay has drafted an ordinance
designating the Company as a licensed gaming operation and a request from the
Mayor of Pasay has gone to the President of the Philippine's office seeking
permission to enact this ordinance under the Charter of the City of Pasay. The
Company is cautiously optimistic that the President will approve the ordinance.
The initial license fee is $400,000.
POLITICAL, LEGAL, ECONOMIC AND OTHER UNCERTAINTIES IN DEVELOPING COUNTRIES
GENERAL
The Company's proposed operations in China are subject to political
instability and government regulations relating to the gaming industry and
foreign investors. Any changes in regulations or shifts in political
conditions are beyond the control of the Company and may materially adversely
affect its business. Corporations are affected in varying degrees by
government regulations with respect to restrictions on production of sales,
price controls, import/export controls, income tax, expropriation of property
and environmental legislation. Operations may also be materially affected by
political and economic instability, economic or other sanctions imposed by
other countries, terrorism, civil wars, guerrilla activities, military
repression, crime, extreme fluctuations in currency exchange rates and
inflation. The stability of China and the Philippines may make it more
difficult for the Company to attain any required project financing from lending
institutions or private funding sources because such lending institutions or
private funding sources may be unwilling to finance projects in these countries
due to the investment risk.
DOING BUSINESS IN CHINA
JOINT VENTURES IN CHINA. Joint ventures between Chinese and foreign
parties in China take two basic forms: equity joint ventures ("Equity JVs")
and cooperative joint ventures ("Cooperative JVs"). Such entities are governed
by the Law of the People's Republic of China on Joint Ventures Using Chinese
and Foreign Investment and the Law of the People's Republic of China on Chinese
and Foreign Cooperative Joint Venture Enterprises, respectively, and
implementing regulations related thereto.
An Equity JV is a distinct legal entity established and registered as
a limited liability corporation. The parties to an Equity JV have rights in the
returns of the joint venture in proportion to their respective joint venture
interests. The operations of Equity JVs are subject to a number of laws and
regulations governing such matters as registered capital, capital
distributions, accounting, taxation, foreign exchange, labor and liquidation.
Transfer of an interest in an Equity JV requires both government
- 9 -
<PAGE>
approval and agreement among the parties. In addition, the parties in an Equity
JV cannot recover their investment of registered capital until the expiration
of the term of the joint venture.
A Cooperative JV may be structured as a legal entity similar to a
partnership or as a limited liability company. Cooperative JVs allow more
flexibility in arrangements among the parties. For example, the rights of a
party to a Cooperative JV in its profits need not correspond to its relative
capital investment in the venture. Cooperative JVs are subject to many of the
same laws and regulations as Equity JVs governing such matters as registered
capital, accounting, taxation, foreign exchange, labor and liquidation.
Transfer of an interest in a Cooperative JV also requires both government
approval and agreement among the parties.
RESTRICTIONS ON FOREIGN CURRENCY EXCHANGE. In order to meet foreign
currency obligations and remit dividends to foreign owners, a joint venture
operating in China must convert a portion of its funds from the Chinese
currency, the Renminbi (the "RMB"), to other currencies. Because China controls
its foreign currency reserves, RMB earnings within China cannot be freely
converted into foreign currencies except with government permission and at
rates which are determined in part by supply and demand at authorized financial
institutions, such as the People's Bank of China. In the event of shortages of
foreign currencies, joint ventures may be unable to convert sufficient RMB into
foreign currencies to enable them to comply with their foreign currency payment
obligations or to make distributions to equity holders located outside of
China.
The laws and regulations of China provide that only accounting profits
after payment of taxes, provision for losses for prior years and contributions
to special funds (for enterprise expansion, employee welfare and bonuses and a
general reserve), are available for dividend distributions to the partners of a
joint venture.
VOLATILITY OF EXCHANGE RATES. There has been significant volatility
in the exchange rates of RMB to U.S. Dollars in the recent past and future
exchange rates may also experience significant volatility.
ENVIRONMENTAL REGULATION. The Company's proposed operations in China
will be subject to central, provincial and local environmental protection laws
and regulations, which currently impose a uniform fee on industrial wastewater
discharges and a graduated schedule of pollution fees for the discharge of
waste substances in excess of applicable standards, require the payment of
fines for violations of laws, regulations or decrees and provide for the
possible closure by the central, provincial or local government of any facility
which fails to comply with orders requiring it to cease or cure certain
activities causing environmental damage.
PROPOSED OPERATIONS IN THE UNITED KINGDOM
The Company entered into a Leasing and Service Agency Agreement, dated
September 15, 1996 (the "Service Agency Agreement") with the Edward Thompson
Group, a privately held corporation established in 1867 and organized under the
laws of the United Kingdom ("Edward Thompson"). Edward Thompson has been
producing bingo tickets since 1957 and, the Company believes, is the leading
manufacturer and supplier of bingo paper and related products in the United
Kingdom.
The Service Agency Agreement requires the Company to use its best
efforts to engineer, manufacture, design and develop a wireless electronic
hand-held bingo unit named PartiMAX ("PartiMAX") for the United Kingdom bingo
market. Under the Service Agency Agreement, Edward
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<PAGE>
Thompson is responsible for, among other things, the marketing, leasing,
installation, training, customer service, repair service, warranty and
maintenance service of PartiMAX, and for all administration and collection
costs. Edward Thompson is also responsible for obtaining all necessary United
Kingdom government approvals required for the sale of PartiMAX in the United
Kingdom.
Under the Service Agency Agreement, until the aggregate revenue
received by the parties equals the lesser of 500,000 pounds sterling or the
Company's documented cost of the design, engineering and development of
PartiMAX, Edward Thompson will receive sixty percent (60%) and the Company will
receive forty percent (40%) of the gross revenues generated from the leasing,
installation and maintenance of PartiMAX in the United Kingdom, and thereafter,
both parties will receive fifty percent (50%) of the gross revenues. The
Company has not received any revenues to date in connection with the Service
Agency Agreement.
The Company unveiled a prototype of the PartiMAX unit at the
International Casino Exhibition Show which was held in London, England in late
January, 1997. Since then the Company has continued the development of the
software.
PARTICIPATION AGREEMENT WITH FORTUNE ENTERTAINMENT CORPORATION
The Company entered into an Agreement, dated July 17, 1996 (the
"Participation Agreement"), with Fortune Entertainment Corporation, a company
organized under the laws of the Bahamas ("Fortune Entertainment"), under which
Fortune Entertainment has the right to receive a participating interest in the
Company's various international businesses (China, Philippines and United
Kingdom) as well as having the option to provide funding for the Company's
MAX(LITE) handset on a lease basis.
Under the Participation Agreement, Fortune Entertainment acquired or
has the right to acquire the following interests:
- upon receipt by the Company of $2,000,000 with respect to the
Company's gaming projects in China, a fifty percent (50%)
interest in the Company's interest in the Company's gaming
projects in China for $250,000 to be paid to the Company.
Fortune Entertainment is also entitled to acquire a fifty
percent (50%) interest in each additional slot parlor project
in China by payment of $250,000 with respect to each such
project. Fortune Entertainment will be required to pay its
pro rata share of the expenses and liabilities of the project.
Fortune Entertainment is also entitled to appoint one
representative to the board of directors of each joint venture
for every two directors appointed by the Company. See
"Business -- Proposed Operations in China."
- the right to acquire twenty five (25%) of the Company's
interest in each slot machine in the City of Pasay,
Philippines, for $250 for each slot machine. Fortune
Entertainment will also receive a minimum of twenty percent
(20%) in the complete City of Pasay project upon the receipt
of the Company of an aggregate of $1,000,000 with respect to
the slot machines. See "Business -- Proposed Operations in
the Philippines."
- the right to participate in the revenues received from the
leasing of the first 3,000 MAX(LITE) handsets. Fortune
Entertainment paid $1,000,000, in two separate payments, in
exchange for the right to receive $1.25 per day per MAX(LITE)
handset during the first year, $.75 per day per MAX(LITE)
handset during the second year and $.25 per day per MAX(LITE)
handset during the third and fourth years, based upon a 6-day
week and 52 week year. See "Business -- Products."
- 11 -
<PAGE>
- the right to acquire up to a fifteen percent (15%) carried
interest in the Company's bingo projects currently being
developed in the United Kingdom for $600,000 to be paid to the
Company. Fortune Entertainment must pay its pro rata share of
the costs and liabilities of the United Kingdom bingo
projects. On October 31, 1996, Fortune Entertainment exercised
its right and paid the Company $600,000.
- the right to acquire an 18.75% interest in the Company's
interest in the development of the Sega Sonic Bingo game in
exchange for $750,000 to be paid on or before September 30,
1996, of which $390,000 was paid to the Company on September
30, 1996. The Company and Fortune Entertainment are currently
negotiating the terms with respect to an extension of the
exercise date and payment terms.
- the right to acquire a fifty percent (50%) interest in the
Company's interest in the Sega Royal Ascot Horse Racing
Machine for approximately $375,000 for every unit installed.
See "Business -- Proposed Operations in China -- Entertainment
Centers."
If Fortune Entertainment exercises all of its rights under the
Participation Agreement, the Company will receive approximately $5,725,000 for
participating in the various ventures of the Company. As at May 12, 1997,
Fortune Entertainment had provided the Company with approximately $925,000.
GOVERNMENT REGULATION
In the United States, bingo is a legal gambling enterprise in the
District of Columbia and all states, except Utah and Hawaii. In 46 of those
States, it must be operated either by, or in association with, a not-for-profit
organization. The two states where it may be played under private ownership
for profit are Nevada and certain parts of Maryland. In any of the 48 states
where bingo and other forms of gaming are legal, bingo may be played on tribal
lands under tribal ordinance and with licensing approval by the tribes without
state regulation.
In each of the states where bingo is legal, the opening and operation
of a game requires a license. In other states licensing is controlled at the
state level. In some states it is controlled and issued at the local level.
Some states have formed and maintain formal gaming commissions. In several
states, the gaming commissions require that distributors, manufacturers and
suppliers of bingo products and equipment as well as their sales representative
obtain licenses. State regulations may limit the amount of revenues which the
Company can generate by limiting the number of sessions, revenues per session,
number of locations which may be operated, or other matters. The application
for administrative approval by the Nevada Gaming Control Board to market and
operate the Company's electronic bingo systems was filed to obtain access to
the Nevada market. The Company has also submitted applications for licenses in
several states where it expects to conduct business.
The state and local laws in the United States which govern the lease
and use of gaming products are widely disparate and continually changing due to
legislative and administrative actions and judicial interpretations. If any
changes occur in gaming laws through statutory enactment or amendment, judicial
decision or administrative action restricting the manufacture, distribution or
use of some or all of the Company's products, the Company's present and
proposed business could be adversely affected.
- 12 -
<PAGE>
Currently, the Company is leasing the majority of its products to
casinos and bingo halls operated by Native Americans. Under IGRA certain types
of gaming activities are classified as Class I, Class II or Class III. Class I
gaming includes traditional Native American social and ceremonial games and is
regulated only by the tribes. Class II gaming includes bingo, pull-tabs,
lotto, punch boards, instant bingo, certain card games played under limited
circumstances and other games similar to bingo if those games are played at the
same location where bingo is played. Class III gaming consists of all forms of
gaming that are not Class I or Class II, such as video casino games, slot
machines, most table games such as black jack, craps and keno. Generally,
Class II gaming may be conducted on Native American lands if the state in which
the Native American reservation is located permits such gaming for any purpose
by any person. Class III gaming, on the other hand, may only be conducted
pursuant to a compact reached between the Native American tribe and the state
in which the tribe is located. The Company's business will be impacted based
upon how its products are ultimately classified.
No assurances can be given that any of the Company's contracts will
be renewed upon the expiration of their term or that, if renewed, the terms
and conditions thereof will be favorable to the Company, nor can any assurances
be given that a tribe or tribes will not cancel any of such agreements prior to
expiration of their stated term. A failure to renew such contracts upon terms
favorable to the Company or the cancellation of a significant number of such
contracts would have a material adverse effect upon the Company's business and
results of operations.
COMPETITION
The fixed-base electronic bingo system market is presently an
established niche market in the bingo industry, but the portable electronic
bingo market has yet to be penetrated to any significant degree. The Company
believes it is well positioned to be one of the most advanced video style,
fixed-base bingo product and state-of-the-art portable electronic bingo
systems.
The Company believes it has approximately five main competitors, most
of which have substantially greater financial, marketing and technological
resources than the Company. In addition, since electronic bingo comprises only
a very small segment of the industry, it is conceivable that there will be new
products and new companies entering this area of business. Notwithstanding
this, the Company's management is of the opinion that with its constant
upgrading of its product and introduction of new products, the Company will be
able to attain a meaningful share of this relatively untapped market.
PATENTS AND TRADEMARKS
The Company relies on a combination of patent, trade secret, copyright
and trademark law, nondisclosure agreements and technical security measures to
protect its products. Notwithstanding these safeguards, it is possible for
competitors of the Company to obtain its trade secrets and to imitate its
products. Furthermore, others may independently develop products similar or
superior to those developed or planned by the Company. While the Company may
obtain patents with respect to certain of its products, the Company may not
have sufficient resources to defend such patents, such patents may not afford
all necessary protection and competitors may develop equivalent or superior
products which may not infringe such patents.
- 13 -
<PAGE>
RESEARCH AND DEVELOPMENT
During the fiscal years ended December 31, 1996 and 1995, research and
development expenses of the Company totaled approximately $1,691,546 and
$2,180,865 respectively. During 1996 and 1995 the majority of research and
development expenses were relating to the development of MAX(LITE), the
refinement of MAX(PLUS), and the development of PartiMAX.
EMPLOYEES
As of March 5, 1997, the Company had 30 full-time employees, none
of whom is represented by any labor union.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal executive offices are located in Vancouver,
British Columbia, Canada. In addition, the Company has a distribution center
in Phoenix, Arizona, a marketing office in Cleveland, Ohio and an office in
Branson, Missouri, where its real estate holdings are located. The Company
believes that such facilities are adequate to the Company's needs for the
foreseeable future.
Pursuant to lease dated March 13, 1995 and amended February 22, 1996
(the "Vancouver Lease"), the Company leases approximately 4,252 square feet in
Vancouver, British Columbia for its principal executive office. The annual
base rent under the Vancouver Lease is CDN $34,788. The Vancouver Lease
expires on March 31, 2000.
Pursuant to a lease dated July 1, 1996 (the "Phoenix Lease"), the
Company occupies 4,160 square feet as its showroom and distribution center in
Phoenix, Arizona. The annual base rent under the Phoenix Lease is
approximately $28,595. The Phoenix Lease expires June 30, 1999.
Pursuant to a lease, dated May 31, 1996 (the "Westlake Lease"), the
Company leases approximately 781 square feet in Westlake, Ohio. The annual
base rent under the Westlake Lease is $10,934. The Westlake Lease expires May
31, 1997.
The Company's wholly-owned subsidiary, River Oaks Holdings, Inc.
("River Oaks"), leases approximately 900 square feet in Branson, Missouri
pursuant to an Office Space Lease dated November 1, 1996 (the "Branson Lease").
River Oaks pays $300 per month rent under the Branson Lease. The Branson Lease
expires April 30, 1997.
On June 22, 1995, pursuant to the Exchange Agreement, the Company
acquired all the capital stock of Branson and its wholly-owned subsidiaries in
exchange for 5,999,820 shares of the Company's Common Stock. Branson is a
resort and land developer located in Branson, Missouri, which owned two
separate real estate properties: (i) a resort property with limited existing
development on site and (ii) 178 acres of undeveloped property in Stone County,
Missouri. On November 17, 1995, the Company disposed of the resort property by
forfeiture to the mortgage holder. The Company is currently attempting to
capitalize on the 178 acres of undeveloped property and has no present plans
for the improvement or development of such property.
The undeveloped property has been pledged to secure the repayment of
(i) promissory notes in an aggregate principal amount of $1,339,792 bearing
interest at nine percent (9%) per annum and due in July 2002, (ii) a promissory
note in the principal amount of $60,812 bearing interest at nine percent (9%)
per annum and due on demand (iii) a promissory note in the principal amount of
$500,000 bearing interest at three percent (3%) above the Chase Manhattan prime
lending rate and due in 2002 and (iv) convertible debentures in the aggregate
principal amount of $745,000 bearing interest at two percent (2%) per month,
compounded monthly, which are convertible at $.40 per share of Common Stock
until December 21, 1997.
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<PAGE>
ITEM 3. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The current executive officers, directors and significant employees of
the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Firoz Lakhani 52 President, Secretary and Chief Operating Officer and Director
Donald Robert MacKay 44 Chief Financial Officer
Robert C. Silzer, Jr.* 31 Vice President - Operations and Director
Robert C. Silzer, Sr.* 50 Chairman, Chief Executive Officer and Director
<FN>
- ----------
* Robert C. Silzer, Jr. is the son of Robert C. Silzer, Sr.
</FN>
</TABLE>
Pak Cheung resigned from the Board of Directors on March 27, 1997 to
pursue other business commitments. Robert C. Silzer, Jr., the son of Robert C.
Silzer, Sr., replaced Mr. Cheung on the Board of Directors until the next annual
meeting of shareholders of the Company.
Each director is elected to hold office until the next annual meeting
of stockholders and until his successor is elected and qualified. All officers
serve at the discretion of the Board of Directors.
The following sets forth certain biographical information with respect
to the directors and executive officers of the Company.
FIROZ LAKHANI has been the President, Chief Operating Officer and a
Director of the Company since September 1995 and the Secretary of the Company
since September 1996. Mr. Lakhani served as a Director at Olds Industries, Inc.,
a Canadian public company, from August 1993 to September 1995, and was employed
at Park Georgia Realty, a real estate and land development brokering company,
from July 1990 to August 1993. From 1979 to 1990, Mr. Lakhani was employed at
Montreal Trust Company, where he headed the Commercial Real Estate Division.
DONALD ROBERT MACKAY has been the Chief Financial Officer of the
Company since August 1995. Prior to joining the Company, Mr. MacKay served as
the Manager -- Business Analysis at TCG International Inc. from March 1994 to
July 1995. Prior to that, Mr. MacKay was the Controller of Attachmate
Canada, Inc. (formerly KEA Systems Ltd.) from September 1993 to March 1994 and
was a Senior Financial Accountant at GLENTEL, Inc. from 1989 to September 1993.
ROBERT C. SILZER, SR., has been the Chairman, Chief Executive Officer
and a Director of the Company since November 1993. He also currently serves as a
Director of InFOREtech Golf Technology Inc., since September 1995. From 1986 to
1992, Mr. Silzer served as President and Chief Executive Officer of Supercart
International, Inc.
- 15 -
<PAGE>
ROBERT C. SILZER, JR., has been a director of the Company since March
31, 1997 and the Vice President -- Operations since February 1994. From December
1992 through December 1993, Robert C. Silzer, Jr. worked as a sales
representative at Mills Printing in Vancouver.
ITEM 4. REMUNERATION OF DIRECTORS AND OFFICERS
The following table summarizes the aggregate annual
remuneration paid or accrued by the Company to each of the Company's three
highest paid persons during the last completed fiscal year and to all officers
and directors as a group.
<TABLE>
<CAPTION>
Name of individual Capacities in which Aggregate
or identity of group remuneration was received Remuneration
- ------------------------------------- ------------------------------------- ------------
<S> <C> <C>
Firoz Lakhani President, Secretary, Chief Operating Officer
and Director $150,492(1)
Robert C. Silzer, Jr. Vice President -- Operations $ 85,938
Robert C. Silzer, Sr. Chairman, Chief Executive Officer
and Director $201,692(2)
Officers and Directors
as a Group (4 persons) $560,622
<FN>
- --------------
(1) Amount includes (i) deferred salary of $33,333, (ii) an automobile
allowance of $9,600 and (iii) certain employee benefits.
(2) Amount includes (i) deferred salary of $37,500, (ii) an automobile
allowance of $10,800 and (iii) certain employee benefits.
</FN>
</TABLE>
COMPENSATION TO DIRECTORS
Directors do not receive any additional compensation in connection with
their services on the Company's Board of Directors.
EMPLOYMENT AGREEMENTS.
Effective January 1, 1994, the Company entered into an employment
agreement with Robert C. Silzer (the "Silzer Employment Agreement"), under which
Robert C. Silzer, Sr. serves as Chairman and Chief Executive Officer of the
Company. Pursuant to the Silzer Sr. Employment Agreement, Mr. Robert C. Silzer,
Sr. was paid a salary of $75,000 in 1994, $125,000 in 1995 and $137,500 in 1996.
He deferred $37,500 of his salary for the year 1996. Robert C. Silzer, Sr. will
be paid a salary of $225,000 in 1997, $275,000 in 1998, $325,000 in 1999 and
$375,000 in 2000. In addition, Robert C. Silzer, Sr. is eligible to receive an
annual bonus in an amount equal to 5% of the net income of the Company and its
subsidiaries (the Company and its subsidiaries did not have any net income in
1996). Robert C. Silzer, Sr. received a signing bonus of 250,000 shares of
Common Stock. Robert C. Silzer, Sr. was also paid an automobile allowance of
$800 per month in 1995 and $900 per month in 1996 and will be paid an additional
$100 per month for each calendar year of the term of the Silzer Sr. Employment
Agreement. Pursuant to the Silzer Sr. Employment Agreement, Robert C. Silzer,
Sr. was granted options to purchase (i) 500,000 shares of the Company's Common
Stock in 1995 at an exercise price of $.30 per share and (ii) 750,000 shares of
the Company's Common Stock in 1996 at an exercise price of $.50 per share and
will be granted options to purchase 1,000,000 shares of Common Stock of the
Company for each of the years 1997, 1998 and 1999, all at an exercise price
equal to fifty percent (50%) of the ten day average trading price prior to the
effective date of the option.
In addition, pursuant to the Silzer Sr. Employment Agreement, Robert C.
Silzer, Sr. is entitled to receive a lump sum payment equal to the present
value, using an eight percent (8%) discount factor, of his salary for the
unexpired term of the Silzer Sr. Employment Agreement, plus the amount of any
performance bonus, grants of Common Stock and options which Robert C. Silzer,
Sr. is entitled, which shall be a minimum of $5,500,000 (the "Silzer Severance
Payment") if (i) Robert C. Silzer, Sr. is terminated by the Company without
"just cause" as determined under the common law of British Columbia or (ii) (a)
there is a change of control (as defined), (b) the Company employs any other
senior executive without Robert C. Silzer, Sr.'s prior written consent or (c)
materially alters the duties of Robert C. Silzer, Sr. without Robert C. Silzer,
Sr.'s prior written consent. The Silzer Sr. Employment Agreement also provides
that Robert C. Silzer, Sr. shall not compete with the Company for a period of
twelve (12) months after termination of his employment with the Company. The
Silzer Sr. Employment Agreement terminates on December 31, 2000.
- 16 -
<PAGE>
Effective September 5, 1995, the Company entered into an employment
agreement with Firoz Lakhani (the "Lakhani Employment Agreement"), under which
Mr. Lakhani serves as President, Secretary and Chief Operating Officer of the
Company. Pursuant to the Lakhani Employment Agreement, Mr. Lakhani was paid a
salary of $6,250 per month from September 1, 1995 to December 31, 1995 and
$91,667 in 1996. He deferred $33,333 of his salary for the year 1996. Mr.
Lakhani will be paid a salary of $175,000 in 1997, $225,000 in 1998, $275,000 in
1999 and $325,000 in 2000. In addition, Mr. Lakhani is eligible to receive an
annual bonus in an amount equal to 3.5% of the net income of the Company and its
subsidiaries (the Company and its subsidiaries did not have any net income in
1996). Mr. Lakhani received a signing bonus of 200,000 shares of Common Stock.
Mr. Lakhani was also paid an automobile allowance of $700 per month in 1995 and
$800 per month in 1996 and will be paid an additional $100 per month for each
calendar year of the term of the Lakhani Employment Agreement. Pursuant to the
Lakhani Employment Agreement, Mr. Lakhani was granted options to purchase (i)
300,000 shares of the Company's Common Stock in 1995 at an exercise price of
$.30 per share and (ii) 500,000 shares of the Company's Common Stock in 1996 at
an exercise price of $.50 per share and will be granted options to purchase
750,000 shares of Common Stock of the Company for each of the years 1997, 1998
and 1999, all at an exercise price equal to fifty percent (50%) of the ten day
average trading price prior to the effective date of the option.
In addition, pursuant to the Lakhani Employment Agreement, Mr. Lakhani
is entitled to receive a lump sum payment equal to the present value, using an
eight percent (8%) discount factor, of his salary for the unexpired term of the
Lakhani Employment Agreement, plus the amount of any performance bonus, grants
of Common Stock an options which Mr. Lakhani is entitled, which shall be a
minimum of $4,250,000 (the "Lakhani Severance Payment") if (i) Mr. Lakhani is
terminated by the Company without "just cause" as determined under the common
law of British Columbia or (ii) (a) there is a change of control (as defined),
(b) the Company employs any other senior executive without Mr. Lakhani's prior
written consent or (c) materially alters the duties of Mr. Lakhani without Mr.
Lakhani's prior written consent. The Lakhani Employment Agreement also provides
that Mr. Lakhani shall not compete with the Company for a period of twelve (12)
months after termination of his employment with the Company. The Lakhani
Employment Agreement terminates on December 31, 2000.
Effective February 15, 1994, the Company entered into an employment
agreement with Robert C. Silzer, Jr. (the "Silzer Jr. Employment Agreement"),
under which Mr. Robert C. Silzer, Jr. serves as Vice President -- Operations of
the Company. Pursuant to the Silzer Jr. Employment Agreement, Robert C. Silzer,
Jr. was paid a salary of $49,500 in 1994, $55,000 in 1995 and $85,938 in 1996
and will be paid a salary of not less than $90,000 per annum in 1997, 1998,
1999. In addition, Robert C. Silzer, Jr. was granted options to purchase 50,000
shares of the Company's Common Stock on January 1, 1994, 1995, 1996 and 1997,
all at an exercise price of $1.00 per share and will be granted options to
purchase 50,000 shares of Common Stock on January 1, 1998 at an exercise price
of $1.00 per share.
STOCK OPTIONS
Pursuant to separate stock option agreements and employment
agreements, the Company has granted options to purchase shares of Common Stock
of the Company to certain officers, directors, employees and consultants of the
Company. The following table sets forth information with respect to stock
options granted to the officers and directors of the Company and all executive
officers as a group:
<TABLE>
<CAPTION>
SHARES ISSUABLE EXERCISE PRICE EXPIRATION
NAME UPON EXERCISE PER SHARE DATE
---- -------------- --------- ----
<S> <C> <C> <C>
Firoz Lakhani 500,000 $ .55 November 4, 2001
750,000 50% of the ten day January 1, 2000
average trading price
prior to the effective
date of the option
Donald Robert MacKay 225,000 $ .55 November 4, 1998
Robert Silzer, Jr. 207,693 $ .26 December 21, 1997
400,000 $ .55 November 4, 1998
50,000 $1.00 January 1, 1998
50,000 $1.00 January 1, 1999
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Robert Silzer, Sr. 517,000 $.26 December 20, 2001
800,000 $.55 November 4, 2001
1,000,000 50% of the ten day January 1, 2000
average trading price
prior to the effective
date of the option
Officers and Directors
as a Group (4 persons)
</TABLE>
ITEM 5. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS
The following table sets forth the beneficial ownership of Common Stock
of the Company by (i) each person who, at March 31, 1997, was known by the
Company to own beneficially more than ten percent (10%) of the 48,867,287
outstanding shares of Common Stock of the Company, (ii) each of the three
highest paid persons who are officers and directors of the Company and (iii) all
officers and directors as a group.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent
of Beneficial Owner Owned of Class
- -------------------------------------------- ---------------- --------
<S> <C> <C>
Paragon Holdings Ltd.(1) 3,650,000 7.4%
P.O. Box N-272
Nassau Bahamas
Robert C. Silzer, Sr.(2) 4,381,948(3) 8.56%(3)
2482-650 West Georgia Street
P.O. Box 11610
Vancouver, British Columbia
Firoz Lakhani 2,650,000(4) 5.35%(4)
2482-650 West Georgia Street
P.O. Box 11610
Vancouver, British Columbia
Robert C. Silzer, Sr. 1,025,000(5) 2.07%(5)
2482-650 West Georgia Street
P.O. Box 11610
Vancouver, British Columbia
All officers and directors
as a group (4 persons) 8,381,948(6) 16.64%(6)
<FN>
- -------------------
* Less than one percent (1%)
</FN>
</TABLE>
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<PAGE>
(1) Anthony L.M. Inder Rieden is the President of Paragon Holdings, Ltd.
(2) Robert C. Silzer, Jr. is the son of Robert C. Silzer, Sr.
(3) Includes stock options which are exercisable by Robert C. Silzer, Sr. to
acquire 2,317,000 shares of Common Stock and 165,000 share held by Madj
Silzer, Robert C. Silzer, Sr.'s wife.
(4) Includes stock options which are exercisable by Mr. Lakhani to acquire
680,000 shares of Common Stock.
(5) Includes stock options which are exercisable by Robert C. Silzer, Jr. to
acquire 657,693 shares of Common Stock.
(6) Includes all shares currently outstanding and those which are not
outstanding but which are subject to issuance upon exercise of stock
options. See footnotes (3), (4) and (5).
ITEM 6. INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Firoz Lakhani, the President, Chief Operating Officer, Secretary and a
Director of the Company, borrowed an aggregate principal amount of $444,000 from
the Company, pursuant to (i) a promissory note in the principal amount of
$250,000 dated January 30, 1996 and due on or before January 29, 2001, (ii) a
promissory note in the principal amount of $90,000 dated January 18, 1996 and
due on or before January 18, 2001 and (iii) a promissory note in the principal
amount of $104,000 dated January 3, 1996 and due on or before January 2, 2001
(the "Lakhani Notes"). Interest is paid monthly on the Lakhani Notes at the
United States Base Rate as may be set from time to time. At March 31, 1997, the
United States Base Rate was eight and one-half percent (8 1/2%).
Robert C. Silzer, Sr., the Chairman, Chief Executive Officer and a
Director of the Company, borrowed an aggregate principal amount of $597,800 from
the Company, pursuant to (i) a promissory note in the principal amount of
$375,000 dated January 30, 1996 and due on or before January 29, 2001, (ii) a
promissory note in the amount of $150,000 dated January 18, 1996 and due on or
before January 17, 2001, (iii) a promissory note in the principal amount of
$72,800 dated January 2, 1996 and due on or before January 17, 2001 (the "Silzer
Notes"). Interest is paid monthly on the Silzer Notes at the United States Base
Rate as may be set from time to time. At March 31, 1997, the United States Base
Rate was eight and one-half percent (8 1/2%).
ITEM 7. DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 150,000,000 shares
of Common Stock, par value $.005 per share (the "Common Stock"), and 4,000,000
shares of cumulative, 10% cumulative Preferred Stock, par value $.10 per share
(the "Preferred Stock"). As of March 31, 1997, there were 48,867,287 shares of
Common Stock outstanding and 286 holders of record. None of the Company's shares
of Preferred Stock have been issued or are outstanding.
Each of the shares of Common Stock has equal dividend, liquidation and
voting rights. Holders of shares of Common Stock are entitled to one vote per
share on all matters to be voted upon by shareholders. Holders of the shares
of Common Stock are entitled to receive dividends when, and if, declared by the
board of directors from funds legally available therefore. The shares of
Common Stock are not redeemable, have no conversion rights and carry no
preemptive or other rights to subscribe for additional shares.
The rights of holders of shares of Common Stock as described above
will be subject to, and may be adversely affected by, the rights of holders of
any Preferred Stock that may be issued in the future. The Board of Directors
currently does not contemplate the issuance of any Preferred Stock.
- 19 -
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
MARKET INFORMATION. The Company's Common Stock is traded on the
NASD's OTC Bulletin Board under the symbol "AGTI." The following table
presents the high and low bid quotations for the Common Stock as reported by
the NASD for each quarter during the last two years. Such prices reflect
inter-dealer quotations without adjustments for retail markup, markdown or
commission, and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Year Period Low High
---- ------ --- ----
<S> <C> <C> <C>
1995 Second Quarter .69 1.69
Third Quarter .28 1.13
Fourth Quarter .16 .44
1996 First Quarter .25 .99
Second Quarter .64 2.19
Third Quarter .99 1.61
Fourth Quarter .49 1.26
1997 First Quarter .45 1.04
</TABLE>
DIVIDENDS. The Company has never declared or paid any cash dividends.
It is the present policy of the Company to retain earnings to finance the
growth and development of the business and, therefore, the Company does not
anticipate paying dividends on its Common Stock in the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS.
In addition to ordinary routine litigation incidental to its business
operation, which the Company does not believe, in the aggregate, will have a
material adverse effect on the Company, or its operations, the Company is
engaged in the following lawsuits:
Braintech, Inc. ("Braintech") filed a statement of claim in the Supreme
Court of British Columbia on November 24, 1995 and amended on March 26, 1996
claiming default by the Company on three promissory notes. Braintech is claiming
damages in the amount of $200,000, plus interest of ten percent (10%) per annum,
and costs. The Company has filed a statement of defense denying the material
allegations of the statement of claim and has opposed a motion for summary
judgment.
In January 1996, Tierra Corporation ("Tierra") commenced an action in
the Circuit Court of Stone County, Missouri, claiming that River Oaks Resort and
Country Club, Inc., a Texas corporation and a subsidiary of Branson ("River Oaks
Resort") defaulted on a promissory note. Judgment is sought in the principal
amount of $74,105, plus interest since October 18, 1995, at 10% per annum. An
answer has been filed on behalf of River Oaks Resort averring that Tierra has
not performed conditions precedent to assessing any deficiency and that no
accounting regarding the disposition of security for such note has been provided
and, in addition, a counterclaim asserting Tierra disposed of stock collateral
in a commercially unreasonable manner. Preliminary discovery has occurred but no
depositions have been taken.
In February 1996, P.D.I., LLC, a Missouri limited liability company
("PDI") commenced an action in the Circuit Court of Stone County Missouri,
claiming breach of a real estate purchase agreement which provided, in part, for
the construction of a sewage treatment facility, for which damages are claimed,
including the awarding to P.D.I. of all escrow funds, costs and expenses
incurred by P.D.I. over and above the amount of escrow funds, and costs and
expenses, including attorneys fees in connection with the commencement of the
action.
- 20 -
<PAGE>
In response, the Company and River Oaks Resort have counterclaimed for damages,
in an amount to be determined at trial, incurred when plaintiff PDI withdrew
funds from the escrow fund created for construction of the sewage treatment
facility and the permit application for construction approval by the Missouri
Department of Natural Resources. Moreover, a claim has also made by River Oaks
Resort and the Company that subsequent development attempted by PDI has
encroached upon property development belonging to River Oaks Resort and the
Company without right to do so, including damages for disruption resulting
therefrom.
In April 1996, Larry Newman ("Newman") commenced a mechanics' lien in
the Circuit Court of Stone County, Missouri, seeking $177,282, plus interest,
for excavation work performed during the period between July 19, 1995 to
September 25, 1995 on a road across the River Oaks development in Stone County.
Thereafter, on or about June 24, 1996, Jack L. Holt ("Holt") filed a similar
petition in the Circuit Court of Stone County, Missouri, claiming a mechanics'
lien for engineering and land surveying during the period May 16, 1995 to July
4, 1995 for a road across the River Oaks development property in the amount of
$9,610, plus interest. The Holt case has now been consolidated in the case
originally filed by Newman. The Company has filed a counterclaim alleging
Newman and Holt extended the road beyond the boundaries of the River Oaks
development property onto land owned by Sunset Cove, Ltd., a Missouri
corporation. The court has since ordered Sunset Cove, Ltd. joined as a party
needed for just adjudication. Discovery has not yet commenced.
On November 15, 1996, Fortunet, Inc., a Nevada corporation
("Fortunet"), filed a patent infringement claim in the United States District
Court Southern District of California against the company and certain other
companies which manufacture and distribute electronic bingo systems, claiming
that the defendants, including the Company, infringed Fortunet's United States
Patent No. 4,624,462 (the "Patent"). Fortunet seeks to enjoin the defendants
from any further alleged infringement of the Patent and is seeking actual and
enhanced damages as well as attorneys fees and other costs.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
The Company retained the services of Grant Thornton LLP ("Grant
Thornton") to perform an audit for the Company's 1995 fiscal year. Subsequent
to the retention, the Company and Grant Thornton learned that the Securities
and Exchange Commission (the "SEC") commenced a private investigation of the
Company and others involving possible violations of the registration and
antifraud provisions of the federal securities laws of the United States. At
such time as Grant Thornton learned of the investigation, it elected to cease
all audit activities. In December 1996, the SEC terminated its inquiry of the
Company and indicated that no enforcement action had been recommended.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth certain information regarding sales of, and
other transactions with respect to, securities of the Company issued within the
past three years, which sales and other transactions were not registered
pursuant to the Securities Act of 1933, as amended (the "Securities Act").
Unless otherwise indicated, no underwriters were used in such transactions.
In August, 1994, 500,000 shares of the Company's Common Stock was paid
to a non-U.S. resident in an offshore transaction as a finders fee to facilitate
securing of the license and joint venture in Gaming City, Guangdong China. See
"Business--Proposed Operations in China." The shares were issued pursuant to the
exemption afforded by Regulation S under the Securities Act.
On June 22, 1995, pursuant to the Branson Exchange Agreement, the
Company acquired all the capital stock of Branson and its wholly-owned
subsidiaries in exchange for the issuance of 5,999,820 shares of the Company's
Common Stock to the shareholders of Branson, of which 3,423,720 were issued
pursuant to the exemption afforded by Regulations S under the Securities Act and
2,576,100 were issued pursuant to the exemption afforded by Section 4(2) of the
Securities Act based upon the fact that the issuance of the Company's Common
Stock was to a limited number of purchasers (31), such purchasers were given
access to financial and other information pursuant to a negotiated agreement and
plan of reorganization, management of the Company believes that such purchasers
or their representatives were sophisticated investors, such purchasers
represented that they were acquiring the shares of Common Stock for investment
and not with a view to distribution and the certificates evidencing such shares
bore appropriate restrictive transfer legends.
- 21 -
<PAGE>
In December 1995, the Company issued 6,666,666 shares of Common Stock
to Paragon Holdings Ltd, a Bahamian corporation at a price of $.15 per share
for net proceeds to the Company of $1,000,000. The shares were issued in
reliance upon the exemption afforded by Rule 504 of Regulation D of the
Securities Act.
In December 1995, the Company issued a convertible promissory note
(the "December 1995 Note") in the principal amount of $70,000 to a non-U.S.
resident in an offshore transaction for net proceeds to the Company of $70,000.
The December 1995 Note was converted into 100,000 shares of Common Stock. The
December 1995 Note and the shares issued upon conversion were issued pursuant
to the exemption afforded by Regulations S under the Securities Act.
Pursuant to a Subscription Agreement, dated December 20, 1995, the
Company sold to S.D.A. List Brokers, Inc., a company organized under the laws
of Bermuda (the "Purchaser"), 600 Convertible Debenture Units, with 450 issued
on December 20, 1995 and 150 issued on January 19, 1996 for an aggregate
purchase price of $600,000. Each Convertible Debenture Unit is comprised of a
convertible debenture (the "Convertible Debenture") in the principal amount of
$1,000 and 3333.33 transferable and detachable warrants to purchase shares of
the Company's Common Stock (the "Warrants"). The Purchaser is also entitled to
a bonus payment of $150,000 per year payable each December 20th of 1996, 1997,
1998 and 1999. The bonus payment for 1996 was added to the principal amount
owed to the Purchaser and was not paid by the Company. The Convertible
Debentures bear interest at the rate of two percent (2%) per month, compounded
monthly, and are convertible at a conversion price of $.40 per share of Common
Stock until December 20, 1997. The Warrants are exercisable until December 21,
1997 at an exercise price of $.40 per share of Common Stock. The Purchaser has
the option to acquire an additional 1,000 Convertible Debenture Units. The
Convertible Debenture Units, including the Convertible Debentures and Warrants
were issued pursuant to the exemption afforded by Regulations S under the
Securities Act.
In May, 1996, the Company issued 200,000 shares of Common Stock to
Firoz Lakhani and 250,000 shares of Common Stock to Robert C. Silzer, Sr. as
signing bonuses in connection with the execution of such officer's employment
agreements. The shares were issued pursuant to the exemption afforded by Section
4(2) of the Securities Act based upon the fact that the shares were issued to a
limited number of purchasers (2), and such purchasers were executive officers of
the Company. See "Remuneration of Directors and Officers -- Employment
Agreements."
On September 26, 1996, the Company entered into an Agreement with
Prisms and the shareholders of Prisms pursuant to which the Company acquired all
the issued and outstanding shares of Prisms in exchange for 300,000 shares of
Common Stock of the Company. The Company relied upon the exemption afforded by
Section 4(2) of the Securities Act based upon the fact that the issuance of the
Company's Common Stock was to a limited number of purchasers (6), such
purchasers were given access to financial and other information pursuant to a
negotiated share purchase agreement, and the certificates evidencing such
shares bore appropriate restrictive transfer legends. See "Business -- Recent
Acquisitions -- Prisms, Inc."
The Company and River Oaks Resort borrowed $1,125,000 from Transworld
Capital Ltd., a limited liability company organized under the laws of the Cayman
Islands ("Transworld") pursuant to a promissory note dated December 10, 1994 in
the principal amount of $1,125,000 (the "Transworld Note"). In June 1995, River
Oaks Resort, the Company and Transworld agreed to amend the promissory note
pursuant to which Transworld was issued 608,000 shares of the Company's Common
Stock and a promissory note in the amount of $500,000 by River Oaks Resort and
the Company in exchange for cancellation of the Transworld Note. The Company
relied upon the exemption afforded by Regulation S under the Securities Act.
- 22 -
<PAGE>
In January 1996, the Company issued an aggregate of $500,000 in
convertible promissory notes (the "January 1996 Notes") and warrants (the
"January 1996 Warrants") to non-U.S. residents in an offshore transaction for
net proceeds to the Company of $500,000. The January 1996 Notes are interest
bearing, at the United States Base Rate and are all due in July 1997. At
January 9, 1997, the United States Base Rate was 8.5%. The January 1996 Notes
are convertible at the option of the holder into shares of Common Stock of the
Company at a conversion price of $.25 per share. The January 1996 Warrants
have an exercise price of $.50 per share and are exercisable until July 1997.
The Company relied upon the exemption from registration afforded by Regulation
S. Robert Hand received a finder's fee of $50,000 for placing certain of the
January 1996 Notes in the form of a convertible promissory note (the "Hand
Note") bearing interest, unless converted, at the United States Bank Prime
Rate. The Hand Note is convertible until July 1997 at the option of the holder
into shares of Common Stock of the Company at a conversion price of $.25 per
share. The Company relied upon the exemption afforded by Regulation S of the
Securities Act for the issuance of the Hand Note.
The Company also issued in January 1996 a convertible promissory note
in the principal amount of $250,000 (the "8.5% January 1996 Note") to a
non-U.S. resident in an offshore transaction for net proceeds to the Company of
$250,000. The 8.5% January 1996 Note bears interest at 8.5% per annum and is
due on January 20, 1997. The Company is currently negotiating an extension of
the 8.5% January 1996 Note. The 8.5% January 1996 Note is convertible into
781,250 shares of the Company's Common Stock at a conversion price of $.32 per
share. The Company relied upon the exemption from registration afforded by
Regulation S under the Securities Act.
The Company also issued a convertible note in the principal amount of
$200,000 (the "February 1996 Note") and warrant (the "February 1996 Warrant") to
a non-U.S. resident in an offshore transaction for net proceeds to the Company
of $200,000. The February 1996 Note was converted in March, 1997. The February
1996 Warrant has an exercise price of $.80 per share and is exercisable until
July 1997. The Company relied upon the exemption from registration afforded by
Regulation S.
In April 1996, the Company issued an aggregate of $780,700 in
convertible notes (the "April 1996 Notes") and warrants (the "April 1996
Warrants") to non-U.S. residents in an offshore transaction for net proceeds to
the Company of $745,000. The April 1996 Notes do not bear interest and are all
due in April 1997. The April 1996 Notes are convertible at the option of the
holder into shares of Common Stock of the Company at a conversion price of $.50
per share. The April 1996 Warrants have an exercise price of $.70 per share. The
Company relied upon the exemption from registration afforded by Regulation S
with respect to the issuance of the April 1996 Notes. Kimbell Holdings Limited,
a Company organized under the laws of the Channel Islands ("Kimbell"), received
a finder's fee of $35,700 for placing certain of the April 1996 Notes in the
form of a convertible promissory note (the "Kimbell Note") bearing interest,
unless converted, at the United States Bank Prime Rate. The Kimbell Note was
converted in May 1997 into shares of Common Stock of the Company at a conversion
price of $.50 per share. The Company relied upon the exemption afforded by
Regulation S under the Securities Act.
The Company also issued an aggregate of $50,000 in convertible notes
(the "12% April 1996 Notes") and warrants (the "12% April 1996 Warrants") to
non-U.S. residents in an offshore transaction for net proceeds to the Company of
$50,000. The 12% April 1996 Notes, unless converted, bear interest at the rate
of 12% per annum and are due in October 1997. The 12% April 1996 Notes are
convertible at the
- 23 -
<PAGE>
option of the holder into shares of Common Stock of the Company at a conversion
price of $.50 per share. The 12% April 1996 Warrants have an exercise price of
$.80 per share and are exercisable until October 1997. The Company relied upon
the exemption from registration afforded by Regulation S.
In May 1996, the Company issued an aggregate of $450,000 in convertible
notes (the "May 1996 Notes") and warrants (the "May 1996 Warrants") to non-U.S.
residents in an offshore transaction for net proceeds to the Company of
$450,000. The May 1996 Notes, unless converted, bear interest at the United
States Bank Prime Rate and were all due in May 1997. Holders of the May 1996
Notes holding $250,000 principal amount of such notes were repaid the
outstanding principal and interest on such notes and such notes were cancelled.
Holders of the May 1996 Notes holding $200,000 principal amount of such notes
extended the due date on such notes until July 1997. The May 1996 Notes which
remain outstanding are convertible at the option of the holder into shares of
Common Stock of the Company at a conversion price of $1.00 per share. The
May 1995 Warrants have an exercise price of $1.30 per share and are exercisable
until July 1997. The Company relied upon the exemption from registration
afforded by Regulation S. Robert Taylor received a finder's fee of $45,000 for
placing certain of the May 1996 Notes in the form of a convertible promissory
note (the "Taylor Note") bearing interest, unless converted, at the United
States Bank Prime Rate. Mr. Taylor was repaid the outstanding principal and
interest on the Taylor Note and the Taylor Note was cancelled. The Company
relied upon the exemption afforded by Regulation S of the Securities Act for
the issuance of the Taylor Note.
The Company also issued in May 1996 four convertible notes to
sophisticated investors for an aggregate of $755,000 (the "May 1996 U.S. Notes")
and net proceeds to the Company of $755,000. The May 1996 U.S. Notes, unless
converted, bear interest at the United States Bank Prime Rate and were all due
in May 1997. The Company is currently negotiating an extension of the due date
with holders of the May 1996 U.S. Notes holding $255,000 principal amount of
such notes. Holders of the May 1996 U.S. Notes holding $500,000 principal amount
of such notes converted the notes into shares of Common Stock. One of the two
May 1996 U.S. Notes which remain outstanding are convertible at the option of
the holder into shares of Common Stock of the Company at a conversion price of
$1.20 per share and the other note is convertible at the conversion price of
$1.50 per share. The Company relied upon the exemption afforded by Section 4(2)
of the Securities Act based upon the fact that the issuance of the Company's
Common Stock was to a limited number of sophisticated investors who are believed
to have, or have had access to, such information about the Company as was
necessary to make an informed investment judgement.
The Company issued in August 1996 two convertible promissory notes to
sophisticated investors in the aggregate principal amount of $125,000 (the
"August 1996 Notes") for net proceeds to the Company of $125,000. The August
1996 Notes bear interest at the United States Bank Base Rate and are due in
August 1997. The August 1996 Notes are convertible into shares of the Company's
Common Stock on the basis of one share for every $.75 of the August 1996 Notes.
The Company relied upon the exemption afforded by Section 4(2) of the Securities
Act based upon the fact that the issuance of the Company's Common Stock was to a
limited number of purchasers who are believed to have been given or have had
access to, such information about the Company as was necessary to make an
informed investment judgement.
The Company issued in September 1996 two convertible promissory notes
in the aggregate principal amount of $254,545.45 (the "September 1996 Notes") to
non-U.S. residents in an offshore transaction for net proceeds to the Company of
$254,545.45. The September 1996 Notes bear interest at the United States Bank
Base Rate and are due in September 1997. The September 1996 Notes are
convertible into shares of the Company's Common Stock on the basis of one and
one-third (1 1/3) share for every $1.00 of the September 1996 Notes. The Company
relied upon the exemption afforded by Regulation S of the Securities Act.
The claims of the Section 4(2) exemptions for the shares of Common
Stock of the Company are based upon the fact that (a) such sales were made to a
limited number of knowledgeable and informed investors who are believed to have,
or to have had access to, such information about the Company as was necessary to
make an informed investment judgment, (b) the shares were acquired for
investment and with no view to distribution to the public and (c) the
certificates representing the shares bear legends which call attention to
restrictions on the distribution of the shares.
The claims of the Regulation S exemptions for the shares of Common
Stock of the Company are based upon the fact that (a) the purchasers were not
U.S. persons (as defined by Regulation S) and were outside the United States at
the time the buy was originated, (b) neither the Company nor any of the
Company's affiliates, nor any person acting on behalf of them, made any
directed selling efforts in the
- 24 -
<PAGE>
United States and (c) the certificates representing the shares bear legends
which call attention to restrictions on the distribution of the shares.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Wyoming Business Corporation Act ("WBCA"), W.S. 17-16-850 et seq.,
provides for indemnification of the Company's officers, directors, employees,
and agents against liabilities which they may incur in such capacities. A
summarization of circumstances in which such indemnification may be available
follows, but is qualified by reference to the Company's Articles of
Incorporation and the text of the statute.
In general, the Company may provide indemnification to any person made
a party to a proceeding because he is or was a director, officer, employee or
agent against liability incurred in the proceeding if such person (i) conducted
himself or herself in good faith; (ii) reasonably believed that his or her
conduct was in or at least not opposed to the Company's best interests; and
(iii) in the case of a criminal proceeding, has no reasonable cause to believe
that his or her conduct was unlawful. The Company may not, however, indemnify a
present or former director, officer, employee or agent in connection with (i) a
proceeding by or in the right of the Company in which the director, officer,
employee or agent was adjudged liable to the Company or (ii) any other
proceeding charging improper personal benefit to the director, officer,
employee or agent, whether or not involving action in his or her official
capacity, in which he or she was adjudged liable on the basis that personal
benefit was improperly received by such present or former director, officer,
employee or agent. The Company may pay for or reimburse the reasonable
expenses of present and former directors, officers, employees and agents who
are parties to a proceeding in advance of the final disposition of such
proceeding if the person seeking payment or reimbursement (i) furnishes a
written affirmation of his or her good faith belief that he or she met the
applicable standard of care under the WBCA; (ii) furnishes a written
undertaking to repay the advance if it is ultimately determined that he or she
did not meet the applicable standard of conduct; and (iii) it is determined, in
accordance with the WBCA, that the facts then known would not preclude
indemnification. The Company must indemnify a present or former director who is
wholly successful, on the merits or otherwise, in a proceeding against
reasonable expenses incurred in connection with the proceeding.
In addition, the Company has statutory authority to purchase insurance
to protect its officers, directors, employees, and agents against any
liabilities asserted against them, or incurred in connection with their service
in such capacities. Further, the Company may advance or reimburse funds to a
director who is a party to a proceeding, for reasonable expenses incurred in
connection with a proceeding.
- 25 -
<PAGE>
PART F/S
The following financial statements are filed as part of this
registration statement on Form 10-SB:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-1
Financial Statements
Consolidated Balance Sheets as of December 31, 1996
and 1995 F-2
Consolidated Statement of Operations for the years ended
December 31, 1996 and 1995 F-4
Consolidated Statement of Stockholders' Deficit
for the year ended December 31, 1995 F-5
Consolidated Statement of Stockholders' Deficit
for the year ended December 31, 1996 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995 F-7
Notes to Financial Statements F-9
</TABLE>
- 26 -
<PAGE>
PART III
Item 1. Index to Exhibits
The following list describes the exhibits filed as part of this
registration statement on Form 10-SB:
<TABLE>
<CAPTION>
Exhibit Number Exhibit Page
- -------------- --------------------------------------------------------------------- ----
<S> <C>
2.1 Articles of Amendment to Articles of Incorporation of the Company
dated July 16, 1996.*
2.2 Articles of Amendment to Articles of Incorporation of the Company
dated June 17, 1996.*
2.3 Articles of Amendment of Auto N Corporation.*
2.4 Articles of Amendment of MacTay Investment Co.*
2.5 Articles of Incorporation of MacTay Investment Co.*
2.6 Bylaws of the Company*
6.1 Leasing and Service Agency Agreement dated September 15, 1996 with the
Edward Thompson Group.*
6.2 Letter of Intent with Sega Gaming Technology, Inc., dated May 13, 1996.*
6.3 Agreement, dated July 17, 1996, with Fortune Entertainment Corporation.*
6.4 Share Purchase Agreement, dated September 26, 1994 among the Company,
Prisms and the shareholders of Prisms.*
6.5 Agreement of Sale dated July 14, 1994 between the Company and the
shareholders of Executive Video Systems, Inc.*
6.6 Agreement and Plan of Reorganization by and among the Company, Branson
Signature Resorts, Inc. and certain shareholders of Branson, dated June 1, 1995.*
6.7 Letter of Agreement, dated December 17, 1996, by and between the Company
and Y.K.L. Corporation.*
6.8 Joint Venture Agreement, dated August 1996, between Palace Entertainment
Limited and Hainan Bosun Tourism & Amusement Co. Ltd.*
6.9 Joint Venture Agreement dated January 1996, between the Company and Hainan
Xin Dao Trading Limited.*
6.10 Employment Agreement with Robert Silzer, Sr.*
6.11 Employment Agreement with Firoz Lakhani.*
6.12 Employment Agreement with Robert C. Silzer, Jr.*
6.13 $250,000 Promissory Note of Firoz Lakhani dated January 30, 1996.*
6.14 $90,000 Promissory Note of Firoz Lakhani dated January 18, 1996.*
6.15 $104,000 Promissory Note of Firoz Lakhani dated January 3, 1996.*
6.16 $150,000 Promissory Note of Robert Silzer, Sr. dated January 18, 1996.*
6.17 $375,000 Promissory Note of Robert Silzer, Sr. dated January 30, 1996.*
6.18 $72,800 Promissory Note of Robert Silzer, Sr. dated January 2, 1996.*
8.1 Consent of Accountants.*
27.1 Financial Data Schedule*
</TABLE>
- -----------------
* Previously filed
- 27 -
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ADVANCED GAMING TECHNOLOGY, INC.
DECEMBER 31, 1995 AND 1994
AND
SEPTEMBER 30, 1996 AND 1995 (UNAUDITED)
<PAGE>
CONTENTS
Page
----
Report of Independent Certified Public Accountants F-1
Financial Statements
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-4
Consolidated Statement of Stockholders'
Deficit for the year ended December 31, 1994 F-5
Consolidated Statements of Stockholders' Deficit
for the year ended December 31, 1995 F-6
Consolidated Statements of Cash Flows F-7
Notes to Financial Statements F-9
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Advanced Gaming Technology, Inc.
We have audited the accompanying consolidated balance sheets of Advanced Gaming
Technology, Inc. and subsidiaries as at December 31, 1996 and 1995, and the
consolidated statements of operation, stockholders' deficit, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Advanced Gaming Technology,
Inc. and subsidiaries as of December 31, 1996 and 1995 and the results of their
operations, and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Respectfully submitted,
/S/ ROBISON, HILL & CO.
----------------------------
Certified Public Accountants
Salt lake City, Utah
January 27, 1997
F-1
<PAGE>
Advanced Gaming Technology, Inc.
CONSOLIDATED BALANCE SHEETS
As at December 31
-------------------
1996 1995
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 76,615 $ 17,739
Accounts receivable, net of allowance of
$85,500 ($63,079 in 1995) 56,492 34,827
Inventory (note 2 (b)) 43,000 18,000
Prepaid expenses 129,969 71,705
Notes receivable (note 3) 129,426 --
---------- ----------
Total current assets 435,502 142,271
---------- ----------
Notes Receivable (note 3) 1,099,300 --
Property and Equipment (note 2(c))
Office equipment 103,985 43,408
Leasehold improvements 30,132 --
Display equipment 20,763 17,521
Product molds 330,718 --
Revenue generating equipment - uninstalled 930,564 226,667
Revenue generating equipment - installed 1,137,131 510,436
---------- ----------
2,553,293 798,032
Less - accumulated depreciation 583,412 248,798
---------- ----------
Net property and equipment 1,969,881 549,234
---------- ----------
Other Assets
Security deposit 50,930 50,930
Deferred development costs 131,313 --
Gaming equipment 765,138 175,359
Intangible assets (notes 2 (d) and 4) 856,069 1,061,782
Investment - Land 4,137,432 4,126,307
---------- ----------
Total other assets 5,940,882 5,414,378
---------- ----------
Total assets $9,445,565 $6,105,883
========== ==========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
Advanced Gaming Technology, Inc.
CONSOLIDATED BALANCE SHEETS
(Continued)
As at December 31
-------------------
1996 1995
---- ----
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Bank loan (note 5) $ 354,100 $ 175,897
Accounts payable 1,494,617 1,186,461
Accrued liabilities
Salaries, wages and other compensation 696,849 194,800
Other 984,644 1,192,975
Stockholders' loans (note 6) 28,387 931,462
Notes payable (note 7) 619,356 603,680
Convertible notes (note 8) 3,292,715 --
Deferred revenue (note 2(i)) 765,380 7,073
Current maturities of
long-term debt (note 9) 2,459,528 1,433,508
----------- -----------
Total current liabilities 10,695,576 5,725,856
Long-Term Debt (note 9) 1,911,864 2,376,941
----------- -----------
Total liabilities 12,607,440 8,102,797
----------- -----------
Commitments and Contingencies (notes 15 and 16)
Stockholders' Deficit
Preferred stock-10% cumulative $.10
par value; authorized 4,000,000
shares; issued - nil -- --
Common stock - $.005 par value;
authorized 150,000,000 shares;
issued and outstanding 42,248,368
in 1996 and 27,138,517 in 1995 211,242 135,693
Additional paid-in capital 20,000,471 15,611,020
Accumulated deficit (23,373,588) (17,743,627)
----------- -----------
Net stockholders' deficit (3,161,875) (1,996,914)
----------- -----------
Total liabilities and
stockholders' deficit $ 9,445,565 $ 6,105,883
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Advanced Gaming Technology, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended
December 31,
---------------------
1996 1995
---- ----
Revenues $ 1,155,035 $ 381,928
Cost of sales 282,509 66,782
----------- -----------
Gross margin 872,526 315,146
----------- -----------
Expenses
Research and development 1,691,546 2,180,865
General and administration 2,510,106 2,077,779
----------- -----------
4,201,652 4,258,644
----------- -----------
Operating loss (3,329,126) (3,943,498)
Other income (expense)
Foreign exchange adjustments(note 2 (e)) (6,616) 3,209
Financing costs and interest (1,223,210) (1,923,756)
China development costs and
equipment write-downs (976,129) --
Equipment write-down (94,880) --
Loss on sales of assets -- (23,728)
----------- -----------
Loss from continuing operations (5,629,961) (5,887,773)
Discontinued operations (note 10) -- (3,095,504)
----------- -----------
Net Loss $(5,629,961) $(8,983,277)
Net loss per common share
Loss from continuing operations $ (0.16) $ (0.34)
Loss from discontinued operations -- (0.18)
----------- -----------
Net loss $ (0.16) $ (0.52)
=========== ===========
Weighted average common shares outstanding
(note 2 (g)) 35,794,434 17,273,196
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
Advanced Gaming Technology, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
for the year ended December 31, 1995
<TABLE>
<CAPTION>
Price
Range Common Stock Additional
Per Share ----------------------- Paid-in Accumulated
($) Shares Amount Capital Deficit Total
---------- ---------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 10,106,516 $ 50,532 $ 6,196,851 $ (8,760,350) $(2,512,967)
Issuance of common shares
for cash, less finders fees of $75,000 0.15-0.63 2,666,667 13,333 794,167 -- 807,500
for security 0.26-1.60 1,535,000 7,675 -- -- 7,675
for financing costs and interest,
less finders fees of $54,219 0.26-1.75 880,206 4,401 676,894 -- 681,295
to settle stockholders loans 0.40-0.92 3,452,940 17,265 1,638,984 -- 1,656,249
to acquire subsidiary 0.63 5,999,820 30,000 3,807,158 -- 3,837,158
for signing bonuses 0.41-1.50 160,000 800 151,612 -- 152,412
for consulting services 0.39-1.82 1,279,368 6,397 915,644 -- 922,041
for share and warrant options 1.50 450,000 2,250 672,750 -- 675,000
to settle long-term debt 1.25 608,000 3,040 756,960 -- 760,000
Net loss for the year -- -- -- (8,983,277) (8,983,277)
---------- -------- ----------- ------------ -----------
Balance at December 31, 1995 27,138,517 $135,693 $15,611,020 $(17,743,627) $(1,996,914)
========== ======== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Advanced Gaming Technology, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
for the year ended December 31, 1996
<TABLE>
<CAPTION>
Price
Range Common Stock Additional
Per Share ----------------------- Paid-in Accumulated
($) Shares Amount Capital Deficit Total
---------- ---------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 27,138,517 $135,693 $15,611,020 $(17,743,627) $(1,996,914)
for cash, less finders fees of $30,000 0.15-0.50 7,266,666 36,333 1,233,667 -- 1,270,000
for security 0.45-0.61 1,099,794 5,499 -- -- 5,499
to settle stockholders loans 0.25-0.50 1,346,452 6,732 465,962 -- 472,694
to acquire subsidiary 1.25 300,000 1,500 373,500 -- 375,000
for signing bonuses 0.06 450,000 2,250 23,850 -- 26,100
for consulting services 0.30-0.79 105,000 525 43,650 -- 44,175
for share and warrant options 0.22-0.50 3,380,273 16,902 1,314,880 -- 1,331,782
to settle convertible notes 0.50-1.20 666,666 3,333 621,667 -- 625,000
for finders fees 0.20-1.20 395,000 1,975 290,775 -- 292,750
to terminate employment contract 0.22 100,000 500 21,500 -- 22,000
Net loss for the year -- -- -- (5,629,961) (5,629,961)
---------- -------- ----------- ------------ -----------
Balance at December 31, 1996 42,248,368 $211,242 $20,000,471 $(23,373,588) $(3,161,875)
========== ======== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
Advanced Gaming Technology, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
December 31,
-------------------
1996 1995
---- ----
Cash flows from operating activities:
Net loss $(5,629,961) $(8,983,277)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depreciation and amortization 1,178,357 448,986
Loss on sale of assets -- 23,728
Bad debt expense -- 35,401
Issuance of common stock for
expenses 471,955 1,828,369
Deferred revenue 758,307 7,073
Change in operating assets and liabilities:
Accounts receivable (21,665) (34,827)
Notes receivable -- 108,595
Minimum lease payments receivable -- 68,705
Inventory (25,000) 13,350
Prepaid expenses (58,264) (71,705)
Bank overdraft and revolving loan 178,203 175,897
Accounts payable 308,156 869,224
Accrued liabilities 293,718 1,025,733
----------- -----------
Net cash used in operating activities (2,546,194) (4,484,748)
----------- -----------
Cash flows from investing activities:
Intangible assets (414,432) --
Notes and advances 15,676 603,680
Purchase of property and
equipment (2,568,638) (915,064)
Security deposit -- (50,930)
Acquisition of subsidiary -- (200,000)
Acquisition of land (11,125) --
Deferred development costs (131,313) --
----------- -----------
Net cash used in investing activities (3,109,832) (562,314)
----------- -----------
F-7
<PAGE>
Advanced Gaming Technology, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the years ended
December 31,
-------------------
1996 1995
---- ----
Cash flows from financing activities:
Stockholders' loans 28,387 60,680
Proceeds from issuance of common stock 1,986,483 1,482,500
Proceeds from convertible notes 3,169,089 --
Finders' fees (30,000) --
Principal payments on notes payable (926,345) (853,462)
Proceeds from notes payable 1,487,288 4,189,898
----------- -----------
Net cash provided by financing activities 5,714,902 4,879,916
----------- -----------
Net increase (decrease) in cash
and cash equivalents 58,876 (167,146)
Cash and cash equivalents at beginning of year 17,739 184,885
----------- -----------
Cash and cash equivalents at end of year $ 76,615 $ 17,739
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 403,602 $ 52,138
Non cash investing and financing activities:
- --------------------------------------------
Issuance of common stock for finders' fees $ 292,750 $ 129,219
Issuance of common stock as settlement
of stockholders' loans $ 472,694 $ 1,656,249
Issuance of common stock for acquisition
of subsidiary $ 375,000 $ 3,837,158
Issuance of common stock for debt reduction $ -- $ 760,000
The accompany notes are an integral part of these financial statements.
F-8
<PAGE>
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995
NOTE 1 - HISTORY AND ORGANIZATION
The Company was incorporated under the laws of the State of Wyoming in 1963
under the name of Mactay Investment Co. At a special shareholders' meeting held
in 1987, the Corporation's name was changed to Auto N Corporation. The Company
changed its name to Advanced Gaming Technology, Inc. in 1991.
The Company's executive offices are in Vancouver, B.C. Canada. The Company
is principally engaged in the development and marketing of electronic bingo
equipment in the United States and the United Kingdom, and in the development of
gaming opportunities in Asia.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Advanced
Gaming Technology, Inc. and its wholly-owned subsidiaries, Executive Video
Systems, Inc. Palace Entertainment Limited, Branson Signature Resorts, Inc.,
Branson Bluffs Resorts, Inc., River Oaks Resorts and Country Club, Inc., Allied
Resorts, Inc., River Oaks Holding, Inc., and Prisms, Inc. All significant
intercompany accounts and transactions have been eliminated. Joint venture
operations are accounted for under the equity method of accounting.
(b) Inventory
Inventory consists of bingo equipment parts and is carried at lower of cost
(first-in, first-out method) and market value.
(c) Property and Equipment
Property and equipment is stated at cost. Depreciation is provided in
amounts sufficient to relate the cost of depreciable assets to operations over
their estimated service lives, principally on a straight-line basis from 3 to 5
years.
Upon sale or other disposition of property and equipment, the cost and
related accumulated depreciation or amortization are removed from the accounts
and any gain or loss is included in the determination of income or loss.
F-9
<PAGE>
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995
(Continued)
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (Continued)
Expenditures for maintenance and repairs are charged to expense as
incurred. Major overhauls and betterments are capitalized and depreciated over
their useful lives.
(d) Investment - Land
Investment in real estate is carried at the lower of cost or net realizable
value.
(e) Intangible Assets
Organization costs are recorded at their acquisition costs and are
amortized to operations over their estimated useful lives of five years.
Amortization is computed on the straight-line method.
Goodwill and software rights were created by the excess of the purchase
price over cost of acquisitions made in 1995 and 1996, and are amortized on a
straight-line basis over five years. Software rights are capitalized after
technological feasibility has been established. Capitalization of computer
software cost is discontinued when the computer software product is available to
be sold, leased or otherwise marketed. Cost for maintenance and customer support
are charged to expense when incurred or when the related revenue is recognized,
whichever occurs first. Management regularly assesses the carrying amount of
intangible assets and where, in their opinion, the value is less than the
carrying amount, the loss is recognized immediately. Unamortized computer
software costs that have been capitalized are reported at net realizable value.
The company has implemented the provisions of SFAS No. 121, "Accounting for
the impairment of Long-Lived Assets and for Long-Lived Assets Disposed of." SFAS
No. 121 requires that long-lived assets and certain identifiable intangibles to
be held and used by the Company be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If the sum of the expected future cash flows from the use of the
assets and its eventual disposition (undiscounted and without interest charges)
is less than the carrying amount of the asset, an impairment loss is recognized.
(f) Translation of Foreign Currency
All balance sheet accounts of foreign operations are translated into U.S.
dollars at the year-end rate of exchange and statement of operations items are
translated at the weighted average exchange rates for the year. The resulting
translation adjustments are made directly to a separate component of the
stockholders' equity. Certain foreign activities are considered to be an
extension of the U.S.
F-10
<PAGE>
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995
(Continued)
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (Continued)
operations, and the gain or loss resulting from re-measuring these transactions
into U.S. dollars is included in income. Gains or losses from other foreign
currency transactions, such as those resulting from the settlement of foreign
receivables or payables, are included in the Statements of Operations.
(g) Cash and Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
or to bach equivalents.
(h) Net Loss Per Common Share
Net loss per common share is calculated using the weighted average number
of common shares outstanding during each year. Common share equivalents are not
considered in the calculation of the weighted average number of shares
outstanding because they would decrease the net loss per common share.
(i) Revenue Recognition
Revenue is generated on operating leases and is recognized and amortized
over the lease term on a straight-line basis except where the agreement provides
for a percentage of gross revenue in which case it is recognized on an accrual
basis.
(j) Deferred Revenue
Revenues are deferred until commencement of the project operations and will
be recognized as revenue over the lesser of the project term and five years.
(k) Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made in the 1995 financial statements
to conform with the 1996 presentation.
F-11
<PAGE>
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995
(Continued)
NOTE 3 - NOTES RECEIVABLE
Notes receivable consist of the following:
1996 1995
---- ----
Due from employees pursuant to the exercise of
stock options, repayable over five years,
interest at U.S. base rate $ 103,595 $ --
Due from officers/directors pursuant to the
exercise of stock options, interest repayable
monthly at U.S. base rate, principal due 2001 1,125,131 --
---------- ----
1,228,726 --
Less current maturities (129,426) --
---------- ----
Net notes receivable $1,099,300 $ --
========== ====
NOTE 4 - INTANGIBLE ASSETS
Intangible assets consist of the following:
1996 1995
---- ----
Manufacturing license rights
Gross $ 500,000 $ 500,000
Accumulated amortization and allowance (500,000) (50,000)
---------- ----------
Net -- 450,000
---------- ----------
Software rights
Gross 1,106,837 692,405
Accumulated amortization (286,042) (121,171)
---------- ----------
Net 820,795 571,234
---------- ----------
Organization Costs
Gross 57,175 57,175
Accumulated amortization (21,901) (16,627)
---------- ----------
Net 35,274 40,548
---------- ----------
Net Intangible assets $ 856,069 $1,061,782
========== ==========
F-12
<PAGE>
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995
(Continued)
NOTE 5 - BANK LOAN
The Company's line-of-credit agreement with a bank has terminated
and these funds are due on demand, including interest at the bank's
prime rate plus 5%.
NOTE 6 - STOCKHOLDERS' LOANS
Stockholders' loans consist of the following:
1996 1995
---- ----
Due to employees, non-interest bearing $ -- $ 183,333
Due to officer/director, non-interest bearing 28,387 25,000
Due to stockholders, non-interest bearing -- 723,129
-------- ---------
28,387 931,462
Less current maturities (28,387) (931,462)
-------- ---------
Net stockholders' loans $ -- $ --
======== =========
Of the 1995 loans, $931,462 was settled in 1996 for stock.
Of the 1996 loans, $28,837 was settled in 1997, for stock.
NOTE 7 - NOTES PAYABLE
1996 1995
---- ----
Due to a corporation, interest at 12%, repayable
at $15,000 per month, secured by certain equipment
and 500,000 shares of the Company $109,785 $134,750
Due to individuals, interest equal to principal,
principal and interest repayable in January 1996,
unsecured -- 291,848
Due to a corporation, interest at 10%, principal
and interest due at year end, unsecured -- 24,172
Due to an individual, interest at U.S. base rate,
due on demand, unsecured 100,000 70,000
Due to a corporation, interest at 10%, principal
and interest due on demand, unsecured 199,910 82,910
Due to an individual, interest negotiated at $20,000,
secured by property, principal and interest due in
February 1997 106,441 --
Due to a corporation, interest negotiated at $10,000,
secured by property, principal and interest due in
February 1997 103,220 --
-------- --------
Total notes payable $619,356 $603,680
======== ========
F-13
<PAGE>
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995
(Continued)
NOTE 8 - CONVERTIBLE NOTES
Due to individuals and corporations, bearing interest at rates between U.S.
base rate and 12% per year with varying maturity dates up to October, 1997. The
notes are convertible into common stock of the Company at prices ranging from
$0.25 to $1.50 per share. Certain convertible notes have warrants attached
thereto granting the holders the option to purchase a total of 3,440,000 common
shares of the Company at prices ranging from $0.50 to $1.30 per share. These
warrants are included in Note 11 - Stock Options and Warrants.
NOTE 9 - LONG-TERM DEBT
Long-term debt consists of the following:
1996 1995
---- ----
Notes payable with interest at 9%, quarterly
interest only payments through July 2002,
principal due in July 2002, collateralized
by deed of trust $1,339,792 $1,339,792
Note payable with interest at 10%, quarterly
interest only, balance due on demand,
collateralized by deed of trust. 60,812 60,812
Loan payable with interest at 13.2%, due in
monthly installments of $31,000 including
interest, matures August 1997, secured by
equipment 293,862 --
Note payable with interest at 3% above the
Chase Manhattan prime lending rate, due
in quarterly principal installments of
$17,857 plus accrued interest, matures
January 2002 464,286 500,000
Note payable with interest at 10%, principal
is due at year end, and is secured by 100,000
shares of the Company 75,106 75,106
F-14
<PAGE>
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995
(Continued)
NOTE 9 - LONG-TERM DEBT (Continued)
1996 1995
---- ----
Note payable with interest at 10%, due in monthly
installments of $1,613 including interest,
collateralized by contract for deed $ 37,644 $ 37,644
Note payable with interest at 10%, due on demand 3,600 3,600
Note payable with interest at 9%, due on demand 55,000 55,000
Note payable with interest at 8%, due in August
1997, secured by software rights and 250,000
shares of the Company, repayable in monthly
installments of $11,828 94,020 496,516
Loan payable with interest at 20%, due in monthly
installments of $12,953 including interest,
matures June 1997, secured by 500,000 shares
of the Company; additionally, the Company is
required to pay 10% of net revenues from a
joint venture project. 102,965 191,979
Convertible Debenture, total facility $1,000,000
plus accrued interest, interest at 2% per month
compounded monthly, principal and accrued interest
convertible into common stock in whole or part at
holder's option, redeemable by the Company at any
time to maturity; subsequent to year end, $449,205
was converted to common stock of the Company. 1,098,492 450,000
Bonus consideration of $150,000 per year for four
years due on loan anniversary, convertible to stock
at holder's option. 600,000 600,000
Loan payable with interest at 13/2%, due in monthly
Loan payable with interest at 12%, due in monthly
installments of $1,000 including interest, matures
December 1999, secured by a patent 32,070 --
Loan payable with interest at 8.5%, due in monthly
installments of $56,121 including interest,
secured by equipment and 1,200,000 shares of
the Company 113,743 --
---------- ----------
4,371,392 3,810,449
Less current maturities 2,459,528 1,433,508
---------- ----------
Net long-term debt $1,911,864 $2,376,941
========== ==========
F-15
<PAGE>
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995
(Continued)
NOTE 9 - LONG-TERM DEBT (Continued)
Annual principal payments on long-term debt are as follows:
1997 $2,459,528
1998 375,034
1999 197,038
2000 --
2001 --
thereafter 1,339,792
----------
$4,371,392
==========
NOTE 10 - DISCONTINUED OPERATIONS
In June 1995, the Company acquired two separate real estate properties in
Branson, Missouri. The resort property (Branson Bluffs Resort, Inc.) had limited
existing development on the site (restaurant, golf course, motel, time share
units). In order to bring this resort operation into an economically viable
segment, a substantial capital injection had to be made. Since the Company's
focus is not on long-term real estate development, the Company disposed of this
holding by forfeiture to the mortgage holder on November 17, 1995.
The Company's remaining property comprises approximately 178 acres of prime
development site in Stone Country, Missouri. This asset has shown substantial
appreciation from the date of acquisition. The Company is currently attempting
to capitalize on this asset.
1996 1995
---- ----
Loss from operations (income taxes - nil) $ -- $ (83,594)
Loss on disposal (income taxes - nil) -- (3,011,910)
---- -----------
Total discontinued operations $ -- $(3,095,504)
==== ===========
F-16
<PAGE>
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995
(Continued)
NOTE 11 - STOCK OPTIONS AND WARRANTS
All Options and warrants have been granted at exercise prices greater than
the market value on the date of granting except for 4,225,000 options issued to
employees. All options vest 100% at date of grant.
1996 1995
---- ----
Options outstanding, beginning of year 7,224,097 625,000
Granted 11,791,667 6,999,097
Expired (1,212,124) (350,000)
Exercised (3,380,273) (50,000)
------------ ------------
Options and warrants outstanding, end of year 14,423,367 7,224,097
============ ============
Option and warrant price for options and
warrants outstanding, end of year $0.25 - 3.00 $0.25 - 2.19
============ ============
Options and warrants granted subsequent to
year end 1,850,000 2,611,400
============ ============
Option and warrant price range granted
subsequent to year end $0.50 - 1.00 $0.25 - 2.19
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." As permitted by the standard, the Company has elected to continue
to follow existing accounting guidance, Accounting Principles Board Opinion No.
25 and related interpretations (APB No. 25), for stock-based compensation.
However, SFAS No. 123 requires companies electing to follow existing accounting
rules to disclose in a note the pro forma effects as if the fair value based
method of accounting had been applied. The Company recorded compensation expense
of $1,074,453 and $92,275 for the years ended December 31, 1996 and 1995
respectively, in connection with its performance shares, restricted stock and
other stock compensation awards. In accordance with APB No. 25, no compensation
expense has been recognized for the Company's stock options. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions for grants
in 1996 and 1995, respectively: dividend yield of 0.0 percent for both years,
expected volatility of 149.05 percent for both years, risk-free interest rates
of 6.2 percent and 5.3 percent and expected lives of 5 years for both years. If
compensation expense for the Company's stock options granted in 1996 and 1995
had been determined based on the fair value at the grant dates for such awards
in accordance with SFAS No. 123, the effect on the Company's net income and
earnings per share for each of the years ended December 31, 1996 and 1995 would
have been immaterial.
F-17
<PAGE>
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995
(Continued)
NOTE 12 - SEGMENTED INFORMATION
Geographic segments:
1996 1995
---- ----
Revenue
United States $1,155,035 $ 381,928
Operating loss
Asia $ 461,017 $ 794,058
United States 779,278 507,530
Other corporate expenses 2,088,831 2,641,910
---------- ----------
$3,329,126 $3,943,498
========== ==========
1996 1995
---- ----
Assets
Asia $ 805,138 $ 666,359
United States 8,538,575 5,370,419
Canada 101,852 69,105
---------- ----------
$9,445,565 $6,105,883
========== ==========
NOTE 13 - INCOME TAXES
Deferred taxes result from temporary differences in the recognition of
income and expenses for income tax reporting and financial statement reporting
purposes. Deferred benefits of $1,914,000 and $3,000,000 for the years ended
December 31, 1996 and 1995 respectively, are the result of net operating losses
and the gaming license rights reserve.
The Company has recorded net deferred income taxes in the accompanying
consolidated balance sheets as follows:
As at December 31
-----------------------
1996 1995
---- ----
Future deductible temporary differences
related to reserves, accruals, and net
operating losses $ 8,000,000 $ 6,100,000
Valuation allowance (8,000,000) (6,100,000)
----------- -----------
Net deferred income tax $ -- $ --
=========== ===========
As of December 31, 1996, the Company had a net operating loss ("NOL")
carryforward for
F-18
<PAGE>
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995
(Continued)
NOTE 13 - INCOME TAXES (Continued)
income tax reporting purposes of approximately $23,000,000 available to offset
future taxable income. This net operating loss carryforward expires at various
dates between December 31, 2008 and 2011. A NOL generated in a particular year
will expire for federal tax purposes if not utilized within 15 years.
Additionally, the Internal Revenue Code contains provisions which could reduce
or limit the availability and utilization of these NOLs if certain ownership
changes have taken place or will take place. In accordance with SFAS No. 109, a
valuation allowance is provided when it is more likely than not that all or some
portion of the deferred tax asset will not be realized. Due to the uncertainty
with respect to the ultimate realization of the NOLs, the Company established a
valuation allowance for the entire net deferred income tax asset of $8,000,000
as of December 31, 1996, which includes $603,000 from the gaming license and
manufacturing rights reserve and $7,100,000 from net operating loss
carryforward. Also consistent with SFAS No. 109, an allocation of the income
(provision) benefit has been made to the loss from continuing operations.
The differences between the effective income tax rate and the federal
statutory income tax rate on the loss from continuing operations are presented
below.
For the years ended
December 31,
-------------------
1996 1995
---- ----
Benefit at the federal statutory rate of 34% $ 1,914,000 $ 3,000,000
Nondeductible expenses (20,000) (88,000)
Utilization of gaming license rights (212,000) --
Utilization of net operating loss carryforward (1,467,000) (2,919,000)
Other (215,000) 7,000
----------- -----------
$ -- $ --
=========== ===========
NOTE 14 - ACQUISITION OF SUBSIDIARIES (Continued)
(a) Prisms, Inc.
On September 26, 1996, pursuant to an agreement, the Company acquired all
of the capital stock of Prisms, Inc., a North Carolina corporation which holds
certain patents and trademarks for the development of bingo and other
entertainment games, in exchange for 300,000 shares of the Company. The
acquisition has been accounted for by the purchase method.
In the event that the shares of the Company trade at less than $2.00 per
share by October 1, 1997, the Company will issue additional shares sufficient to
adjust the purchase prices to an equivalent market value of $600,000.
F-19
<PAGE>
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995
(Continued)
NOTE 14 - ACQUISITION OF SUBSIDIARIES (Continued)
The Company is also required to issue up to 200,000 further shares at a
guaranteed price of $2.00 upon commencement of revenues from each patented
product developed. Additionally royalties of 2% will be payable on net revenues
generated.
(b) Executive Video Systems, Inc.
On February 9, 1995, pursuant to an agreement, the Company acquired all of
the capital stock of Executive Video Systems, Inc., a Maryland Corporation. The
acquisition has been accounted for by the purchase method.
The following is a summary of the assets acquired, at fair value assigned
thereto:
Equipment $ 22,672
Intangible assets - Software rights 692,978
--------
Total $715,650
========
Purchase consideration:
Cash $200,000
Promissory notes 515,650
--------
Total $715,650
========
The Company has issued 250,000 common shares held in escrow as security to
the promissory notes. All of the capital stock of Executive Video Systems, Inc.
is held in escrow as security to the promissory notes.
The Company is committed to pay to former stockholders of Executive Video
Systems, Inc. a royalty of three percent of gross revenues from the use of its
software rights until February 9, 1998. During 1996, a total of $22,914 was paid
in royalties ($10,342 in 1995).
(c) Branson Signature Resorts, Inc.
On June 22, 1995, pursuant to an agreement, the Company acquired all of the
capital stock of Branson Signature Resorts, Inc. and its wholly-owned
subsidiaries. Branson Signature Resorts, Inc. is a resort and land developer
located in Branson, Missouri. The acquisition was accounted for by the purchase
method. The following is a summary of the net assets acquired, at fair value
assigned thereto:
F-20
<PAGE>
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995
(Continued)
NOTE 14 - ACQUISITION OF SUBSIDIARIES (Continued)
Investment-land $ 4,090,000
Property and equipment 3,880,000
Current liabilities (573,322)
Long-term debt (2,783,303)
-----------
$ 4,613,375
===========
The Company issued 5,999,820 shares under Regulation S and 144 of the
Securities Act of 1934. On November 17,. 1995, the Company determined that it
was in the best interest of the Company to divest itself of the resort
operations segment of its business (note 10).
NOTE 15 - COMMITMENTS
The Company leases its offices and certain equipment under long-term
operating leases. Future minimum lease payments under these operating leases are
as follows:
1997 $146,436
1998 146,285
1999 145,663
2000 38,330
2001 664
NOTE 16 - CONTINGENCIES
(a) Proposed operations in China - In February 1995, the Province of
Guangdong, China granted a business license and certificate of approval for the
formation of a joint venture between the Company and Gaoming City Santian
Economic Development Company, a company affiliated with the City of Gaoming,
Guangdong, China to manufacture and sell in China a variety of electronic gaming
machines, including the Company's electronic bingo products. The Company will
own eighty percent of the joint venture and Santian will own twenty percent.
Pursuant to the joint venture agreement, the Company will contribute the
technology and, in conjunction with a major gaming manufacturer, will design and
build the manufacturing facilities and provide $5,000,000 in start-up capital.
The Company is currently searching for a major gaming manufacturer to pursue
this project and to provide the financing.
In August 1996, Palace Entertainment Limited, a wholly-owned subsidiary of
the Company under the laws of the British Virgin Islands entered into a joint
venture agreement with Hainan
F-21
<PAGE>
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995
(Continued)
NOTE 16 - CONTINGENCIES (Continued)
Bosun Tourism & Amusement Co. Ltd., a company organized under the laws of
China in connection with the operation of a 23 seat Royal Ascot Horse Racing
Machine in Haikou, Hainan Island, China. Under the Hainan Bosun Joint Venture
Agreement, Palace Entertainment is to provide the Royal Ascot Unit and is
responsible for the operation, maintenance and repair of the machine as well as
the hiring of personnel to operate the machine. The Company purchased the Royal
Ascot Unit from Sega pursuant to a Purchase, Finance and Security Agreement,
dated February 21, 1996.
In January 1996, the Company entered into a joint venture agreement with
Hainan Xin Dao Trading Limited in connection with the operation of 150
slot/entertainment machines in Haikou, Hainan Island, China. Under the Hainan
Xin Joint Venture Agreement, the Company is responsible for providing the slot
machines and working capital as well as managing the slot machines.
Currently, neither of these centers is operational due to the periodic
nationwide clean up of various black market activities, prostitution and
gambling. This clean up campaign ended at or about the end of July 1996, and
entertainment centers, such as the centers described above, which are not
considered gambling and therefore are legal, are gradually beginning to re-open
and new licenses are currently being issued. The Company is cautiously
optimistic that both of the entertainment centers described above will be
operational in the near future.
Due to delays caused by the nationwide clean up in China, the Company
entered into a Letter Agreement dated December 17, 1996 with Y.K.L. Corporation,
a company organized under the laws of the Philippines pursuant to which Y.K.L.
has agreed to lease, for a period of 120 days commencing on the date of
installation, 25 of the Company's slot machines, which were originally to be
used in the Hainan Xin Joint Venture, for use on Y.K.L.'s luxury ocean liners.
(b) Proposed operations in the United Kingdom - The Company entered into a
Leasing and Service Agency Agreement, dated September 15, 1996 with Edward
Thompson Group, a privately held corporation established in 1867 and organized
under the laws of the United Kingdom. Edward Thompson has been producing bingo
tickets since 1957 and, the Company believes the leading manufacturer and
supplier of bingo paper and related products in the United Kingdom.
F-22
<PAGE>
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995
(Continued)
NOTE 16 - CONTINGENCIES (Continued)
The Service Agency Agreement requires the Company to use its best efforts
to engineer, manufacturer, design and develop a wireless electronic hand-held
bingo unit named PartiMax for the United Kingdom bingo market.
(c) The Company entered into an Agreement, dated July 17, 1996 with Fortune
Entertainment Corporation, a company organized under the laws of the Bahamas,
under which Fortune Entertainment has the right to receive a participating
interest in the Company's various international ventures (China, Philippines and
United Kingdom). If Fortune Entertainment exercises all of its rights under the
Participation Agreement, the Company will receive approximately $5,725,000 for
participating in the various ventures of the Company. As of December 31, 1996,
Fortune Entertainment had provided the Company with approximately $990,000.
(d) Pursuant to the purchase of Prisms, Inc., on September 26, 1996, the
Company has a contingent obligation to issue additional shares of the Company to
the extent that the shares of the Company trade at less than $2.00 per share by
October 1, 1997. The number of shares to be issued will be determined by the
difference between the market price of the 300,000 shares originally issued and
$600,000. (See also Note 14(a)).
(e) In addition to ordinary routine litigation incidental to its business
operation, which the Company does not believe, in the aggregate, will have a
material adverse effect on the Company, or its operations, the Company is
engeged in the following lawsuits:
Braintech, Inc. filed a statement of claim in the Supreme Court of British
Columbia on November 24, 1995 and amended on March 26, 1996 claiming default by
the Company on three promissory notes. Braintech is claiming damages in the
amount of $200,000, plus interest of ten percent per annum, and costs. The
Company has filed a statement of defense denying the material allegations of the
statement of claim and has opposed a motion for summary judgement.
In January 1996, Tierra Corporation commenced an action in the Circuit
Court of Stone County, Missouri, claiming that River Oaks Resort and Country
Club, Inc. a Texas corporation and a subsidiary of Branson ("River Oaks Resort")
defaulted on a promissory note. Judgement is sought in the principal amount of
$75,106, plus interest since October 18, 1995 at 10% per annum. An answer has
been filed on behalf of River Oaks averring that Tierra has not performed
conditions precedent to assessing any such note has provided and, in addition, a
counterclaim asserting Tierra disposed of stock collateral in a
F-23
<PAGE>
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995
(Continued)
NOTE 16 - CONTINGENCIES (Continued)
commercially unreasonable manner. Preliminary discovery has occurred but no
depositions have been taken.
In February 1996, P.D.I., LLC, a Missouri limited liability company
commenced an action in the Circuit Court of Stone County Missouri, claiming
breach of a real estate purchase agreement which in part, provided for the
construction of a sewage treatment facility for which damages are claimed,
including the awarding to PDI of all escrow funds, costs and expenses incurred
by PDI over and above the amount of escrow funds and cost and expenses,
including attorney fees in connection with the commencement of the action.. In
response, the Company and River Oaks Resort have counterclaimed for damages, in
an amount to be determined at trial, incurred when plaintiff PDI withdrew funds
from the escrow fund created for construction of the sewage treatment facility
and the permit application for construction approval by the Missouri Department
of Natural Resources. Moreover, a claim has also been made River Oaks Resort and
the Company that subsequent development attempted by PDI has encroached upon
property development belonging to River Oaks Resort and the Company without
right to do so, including damages for disruption resulting therefrom.
In April 1996, Larry Newman commenced a mechanics' lien in the Circuit
Court of Stone County, Missouri, seeking $177,282, plus interest, for excavation
work performed during the period between July 19, 1995 to September 25, 1995 on
a road across the River Oaks development in Stone County. Thereafter, on or
about June 24, 1996, Jack Holt filed a similar petition in the Circuit Court of
Stone County, Missouri, claiming a mechanic's lien for engineering and land
survey during the period May 16, 1995 to July 4, 1995 for a road across the
River Oaks development property in the amount of $9,610, plus interest. The Holt
case has now been consolidated in the case originally filed by Newman. The
Company has filed a counterclaim alleging Newman and Holt extended the road
beyond the boundaries of the River Oaks development property onto land owned by
Sunset Cove, Ltd., a Missouri corporation. The court has since ordered Sunset
Cove, Ltd., joined as a party needed for just adjudication. Discovery has not
yet commenced.
On November 15, 1996, Fortunet, Inc., a Nevada corporation filed a patent
infringement claim in the United States district Court Southern District of
California against the company and certain other companies which manufacture and
distribute electronic bingo systems, claiming the that the defendants, including
the Company, infringed Fortunet's United States Patent No. 4,624,462. Fortunet
seeks to enjoin the defendants from any further alleged infringement of the
Patent and is seeking actual and enhanced damages as well as attorneys fees and
other costs.
F-24
<PAGE>
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995
(Continued)
NOTE 17 - SUBSEQUENT EVENTS
In January, 1997, the investigation of the Company previously commenced by
the United States Securities and Exchange Commission ("SEC"), in compliance with
which the Company furnished documents to the SEC, was terminated and no
enforcement action was recommended by the SEC.
On January 17, 1997 the Company filed a registration statement (Form 10SB)
with the SEC to register shares of its capital stock under Section 12 of the
Securities Act of 1934. This filing becomes effective 60 days after filing, at
which time the Company will become a "reporting issuer".
In February, 1997 the Company negotiated financing totaling $2,137,500 of
which $1,504,800 has been received. This financing is in the form of 12%
Subordinated Convertible Redeemable Debentures. These funds have been used to
meet the Company's working capital requirements and the settlement of bank and
other debt.
Subsequent to year end, $1,598,404 of certain debt and liabilities was
settled by the issuance of 4,634,129 common shares.
F-25
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant has duly caused this Amendment to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
Advanced Gaming Technology, Inc.
Date: July 14, 1997 By: /s/ Firoz Lakhani
---------------------------------
Firoz Lakhani, President, Chief
Operating Officer and Director
This registration statement has been signed by the following persons
in the capacities and on the dates indicated.
Name Title Date
- ---------------------- -------------------------- ---------------
/s/ Robert C. Silzer, Sr. Chairman, Chief Executive Officer July 14, 1997
- ---------------------- and Director
Robert C. Silzer, Sr.
/s/ Donald Robert MacKay Chief Financial Officer July 14, 1997
- ------------------------
Donald Robert MacKay
/s/ Firoz Lakhani President, Secretary, Chief July 14, 1997
- ---------------------- Operating Officer and Director
Firoz Lakhani
