U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB\A
AMENDMENT NO. 3
(Mark One)
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Fiscal Year Ended: December 31, 1996
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from To
Commission file number 000-21991
ADVANCED GAMING TECHNOLOGY, INC.
(Name of small business issuer in its charter)
Wyoming 98-0152226
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
(Address of principal executive offices)(Zip code)
Issuer's telephone number (604) 689-8841
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act:
Common Stock Par Value $.005
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing required for the past 90 days. Yes
No X
Total pages: 41
Exhibit Index Page: 39
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $ 1,155,035
As of June 30, 1997, there were 62,814,009 shares of
the Registrant's common stock, par value $0.005, issued and outstanding. The
aggregate market value of the Registrant's voting stock held by non-affiliates
of the Registrant was approximately $16,873,939 computed at the
average bid and asked price as of June 30, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) Into which the document is incorporated: (1) any annual report to
security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933
("Securities Act"):
None
Transitional Small Business Disclosure Format (check one): Yes; NO X
TABLE OF CONTENTS
Item Number and Caption Page
PART I
Item 1. Description of Business....................................... 4
Item 2. Description of Property....................................... 19
Item 3. Legal Proceedings............................................. 20
Item 4. Submission of Matters to a Vote of Security Holders........... 21
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...... 22
Item 6. Management's Discussion and Analysis or Plan of Operations..... 27
Item 7. Financial Statements........................................... 31
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure........................................... 31
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............. 32
Item 10. Executive Compensation........................................ 33
Item 11. Security Ownership of Certain Beneficial Owners and Management 36
Item 12. Certain Relationships and Related Transactions................ 37
Item 13. Exhibits and Reports on form 8-K.............................. 38
PART I
ITEM I 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 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: Executive Video Systems,
Inc., a Maryland Corporation ("Executive Video"), Palace Entertainment
Limited, a Company organized under the laws of the British Virgin Islands
("Palace Entertainment"), Branson Signature Resorts, Inc., a Nevada
Corporation ("Branson"), River Oaks Holdings, Inc., a Missouri Corporation
("River Oaks"), Prisms, Inc., a North Carolina Corporation ("Prisms"),
Pleasure World Ltd, a Company organized under the laws of the Bahamas
("Pleasure World"), and 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 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 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. 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, Inc. transferred certain patents to Prisms Bahamas Ltd., a
company organized under the laws of the Bahamas and a wholly-owned subsidiary
of Pleasure World ("Prims 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 has 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.
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 ("IGR"). Under IGR 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 it 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."
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 170 MAX(PLUS)units are
currently in use in 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 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 300 MAX (LITE) units are currently in use in the United States.
MAX (SPEED) is a pari-mutual 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. Approximately 30 MAX (SPEED) units are currently
in use in the United States.
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.
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 a
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 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 Delta, 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 Distribution Center.
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 130 MAX (PLUS) units and
approximately 100 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 most 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.
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 Signature Resorts, Inc. ("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 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 ten
percent (10%) per annum and due on demand (iii) a promissory note in the
principal amount of $464,286 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 $946,825 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").
Prism's 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 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
Systems, 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 1996, a total of
$22,914 was paid in royalties, and the outstanding amount on the Promissory
Note was $94,200 at December 31, 1996.
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,
Maryland, Iowa, New Mexico, Oklahoma and Washington.
THE INDIAN GAMING REGULATORY ACT. IGR 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."
CHARITY OPERATIONS
The Company currently has approximately 275 MAX (PLUS) units and
approximately 150 MAX (LITE) units in use by charitable organizations in
California.
The Company entered into a Lease License Agreement, dated December 7,
1995 with G&J Production Trust. Pursuant to the Lease License Agreement, G&J
Production Trust leased the MAX(PLUS) Bingo System from the Company for use in
G&J Production's bingo operation located in Victorville, California.
As of January 23, 1997, G&J Production Trust was approximately three
months behind in their payments 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 product formerly located in Victorville to other
locations at a higher rate than that which was contracted for with G&J
Production Trust. Because of the higher rate, the revenue generated by the
Company has not been materially impacted by the termination of the G&J
Production Trust agreement.
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 manufacturers 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 expense. 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 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 aby 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.
Twenty-two slot machines have been retro-fitted and delivered to Y.K.L and are
awaiting installation on the cruise ships.
PROPOSED OPERATION IN THE PHILIPPINES
PASAY. The Company is pursuing 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 JV's")
and cooperative joint ventures ("Cooperative JV's"). 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 JV's 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 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 JV's allow more
flexibility in arrangements among the parties. For example, the rights of a
party to a Cooperative JV in it profits need not correspond to its relative
capital investment in the venture. Cooperative JV's are subject to many of
the same laws and regulations as Equity JV's 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 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 distribution 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 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 (40%) and the Company will receive (60%) 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 January, 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. 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."
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 $7,50,000 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 December 31,
1996, Fortune Entertainment had provided the Company with $990,000.
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.
Currently, the Company is leasing the majority of its products to casinos
and bingo halls operated by Native Americans. Under IGR 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.
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 development of Parti MAX.
EMPLOYEES
As of March 5, 1997, the Company had 30 full-time employees, none of whom
is represented by an 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
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 Holding, 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. However,
the Company is negotiating with an entity interested in the development of a
portion of it's Branson, Missouri 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 ten
percent (10%) per annum and due on demand, (iii) a promissory note in the
principal amount of $464,286 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 $946,825 bearing interest at
two percent (2%) per month, compounded monthly, which are convertible at $.40
per share of Common Stock until December 21, 1997.
ITEM 3. 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
fur summary judgement.
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. Judgments 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 counter claim 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 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 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 electronics 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 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER 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.
Year Period Low High
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
Second Quarter .31 .83
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.
The number of shareholders of record of the Company's Common Stock as of
February 28, 1997 was 290.
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 finder's fee to facilitate
securing of the license and joint venture in Gaoming 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.
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 Offices
- - 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 to
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 on 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 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 of the Securities Act.
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 in February 1996 a convertible note in the
principal amount of $200,000 (the "February 1996 Note") and warrants (the
"February 1996 Warrant") to a non-U.S. residents 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 Regulations
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 at the option of the holder 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 of 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. The 12% 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 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 interst 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 in (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 are all due in May 1997. The company is currently negotiating an
extension of the due date with the 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 reain
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, 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 conv
ertible into shares of the Company's Common Stock on the basis of one and
one-third (1 1/3) shares 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 of
had, 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 exemption 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 United States and (c) the certificates representing the shares
bear legends which call attention to restrictions on the distribution of the
shares.
ITEM 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATIONS
GENERAL
The following discusses the financial position and results of operations
of the Company and its consolidated subsidiaries, Executive Video Systems,
Inc.; Branson Signature Resorts, Inc.; River Oaks Resort & Country Club, Inc.;
Branson Bluffs Resorts, Inc.; Allied Resorts, Inc.; and Prisms, Inc. The
Company acquired Executive Video Systems, Inc. on February 9, 1995 and Branson
Signature Resorts, Inc. and its wholly-owned subsidiaries on June 22, 1995,
Prisms, Inc. was acquired on September 26, 1996. These acquisitions are
accounted for under the purchase method of accounting.
Pursuant to an Agreement of Sale between the Company and the Shareholders
of Executive Video Systems, 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 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
1996, a total of $22,914 was paid in royalties, and the outstanding amount on
the Promissory Note was $94,200 at December 31, 1996.
Pursuant to an Agreement and Plan of Reorganization by and among the
Company, Branson Signature Resorts, Inc. and certain shareholders of Branson,
the Company acquired all of 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 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 sell the 178 acres of undeveloped
property and has no present plans for the improvement or development of such
property.
The Company entered into a Share Purchase Agreement among the Company,
Prisms, and the shareholders of Prisms, to acquire all of the issued and
outstanding shares of Prisms. The purchse price of 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. Prism's 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 games under patents
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
NASD for the ten 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 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. In the event
the issued Product Shares do not trade at a minimum average closing price of
$2.00 per share as reported by NASD for a ten day trading period commencing
twelve 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 of the net sales 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. As of December 31, 1996, no royalties
have been paid to the former Prisms shareholders.
The Company has incurred net losses of $5,629,961 and $8,983,277 for the
fiscal years ended December 31, 1996 and 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 unforseen 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.
RESULTS OF OPERATIONS
1996 Compared to 1995
On November 17, 1995, the Company disposed of the Branson resort property
by forfeiture to the mortgage holder. See "Business - - Real Estate Holdings"
and "Description of Property." The Company is currently attempting to
capitalize on the 178 acres of undeveloped property owned by Branson Signature
Resorts, Inc. and has no present plans for the improvement or development of
such property. Effective November 17, 1995, the Company discontinued the
resort property management and restaurant operations segment and closed down
Buckhorn Restaurant & Lodge; Branson Bluffs Resorts, Inc.; and River Oaks
Resorts & Country Club, Inc. For the approximate eight month period that the
resort property management and restaurant segment were in operations, the
subsidiaries generated $88,900 in revenues, with a cost of goods sold of
$32,200, resulting in a gross margin of $56,700. The resort and restaurant
segment had selling, general, and administrative costs of $176,200, interest
expense of $21,200 and net loss on disposal of assets of $3,011,910.
The gaming segment provided the net loss from continuing operations of
$5,629,961 in 1996 compared to a loss of $5,887,773 in 1995. Revenues from
continuing operations for 1996 were $1,155,035, an increase of 302% from
1995. The increase is primarily the result of a $290,000 non refundable
deposit received on one of the joint venture projects and a 226% increase in
product sales of $865,000 compared to $382,000 in 1995. In late 1996 and
early 1997 the Company completed the development of several new products that
were introduced to the market in early 1997.
Cost of sales increased $215,700 in 1996 and represented 24.4% of
revenues versus 17.4% in 1995. This increase in cost as a percent of sales
was primarily due to the change in mix of revenues and as the products are
introduced to the market a larger percent of customer support and maintenance
is charged to cost of sales rather than as research and development.
Selling, general, and administrative expenses increased by $432,000.
However, as a percent of sales this represents a decrease in 1996 compared to
1995.
Research and development expenses decreased $489,000 over the prior year
as a result of completing the development of several of the new products.
As more fully described under the heading "proposed operations in China"
the Company had obtained various licenses and transported equipment to China
in anticipation of opening entertainment centers in China. Due to the
nationwide clean up described earlier, the Company will need to obtain new
licenses or renew old licenses. This has resulted in the Company deducting as
an unusual expense under the caption "Other income (expense) $976,129.
INFLATION AND REGULATION
The Company's operations have not been, and in the near term are not
expected to be, materially affected by inflation or changing prices due in
part to the highly capital intensive nature of the majority of the business of
the Company thereby reducing the chances of competition providing for sales
price reductions while inflation in the costs are more likely to be passed
through to the customer.
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 ("IGR"). Under IGR 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. However, the Company does not believe that any
recently enacted or presently pending proposed legislation will have a
material adverse effect on its results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated minimal revenues from product sales. Revenues
are not yet sufficient to support the Company's operating expenses, however,
the Company is cautiously optimistic that operating revenues will be adequate
to meet operating expenses 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. The Company 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.
There are no formal commitments from banks or other lending sources for
lines of credit or similar short-term borrowing.
The increase in capital resources for 1996 is attributable to the private
placement of Common Stock and the conversion of debt to equity.
For the development of some of its new products, i.e. PartiMax and Sonic
Bingo, the Company has been successful in arranging some off Balance Sheet
financing to advance the development of these projects. In addition, the
Company is presently at an advanced stage of negotiations with a party to
provide substantial funding to complete the development of it's PartiMax
hand-held, wireless electronic bingo unit for the United Kingdom market. Also
the Company is negotiating with an entity interested in the development of a
portion of it's Branson, Missouri property.
Whilst there is no guarantee that either of these negotiations will
conclude successfully, a success in either one of these discussions will
reflect positively for the Company.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company and supplementary data are
included immediately following the signature page to this report. See Item 13
for a list of the financial statements and financial statement schedules
included.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
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. The SEC terminated its inquiry of the Company and
indicated that no enforcement action had been recommended. The Company was
informed of this decision in a letter dated December 31, 1996.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Director
Name, Age and Principal Employment for Past Five Years Since
Firoz Lakhani, 52, has been the President, Chief Operating Officer 1995
and Director since September, 1995. 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.
Robert C. Silzer, Sr., 50, has been the Chairman, Chief Executive 1993
Officer and 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.
Robert C. Silzer, Jr., 31, has been a director of the Company since 1997
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.
Robert C. Silzer, Jr., is the son of Robert C. Silzer, Sr.
The Company has one additional executive officer, Donald Robert MacKay,
the Chief Financial Officer, who is not a director and who is not named in the
above table. Mr. MacKay, 44, 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.
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of forms 3, 4, and 5 and amendments thereto,
furnished to the Company during or respecting its last fiscal year, no
director, officer, beneficial owner of more than 10% of any class of equity
securities of the Company or any other person known to be subject to Section
16 of the Exchange Act of 1934, as amended, failed to file on a timely basis
reports required by Section 16(a) of the Exchange Act for the last fiscal year
or prior fiscal years.
ITEM 10. EXECUTIVE COMPENSATION
The following summary compensation table sets forth certain information
regarding compensation paid each of the Company's last three fiscal years to
Robert C. Silzer, Sr., the Company's Chief Executive Officer and Firoz
Lakhani, the Company's President, Secretary and Chief Operating Officer.
Except as set forth below, no executive officer's salary and bonus exceeded
$100,000 during any of the Company's last three fiscal years:
Annual Compensation
Other All
Name and Principal Fiscal Annual Other
Position Year Salary Bonus Compensation Compensation(1)
Robert C. Silzer, Sr., 1994 $ 75,000 $ 130,000
Chairman and Chief 1995 $125,000 $ 14,500 $11,564
Executive Officer 1996 $175,000 (2) $ 10,000 $16,692
Firoz Lakhani 1996 $125,000 (3) $ 10,000 $15,492
(1) Amounts under "Other Annual Compensation" represent an automobile allowance
for Robert C. Silzer, Sr., of $9,600 for 1995 and $10,800 for 1996 and certain
employee benefits and an automobile allowance for Mr. Lakhani of $9,600 and
certain employee benefits.
(2) Includes $37,500 deferred by Robert C. Silzer, Sr.
(3) Includes $33,333 deferred by Mr. Lakhani.
Option Grants in Last Fiscal Year
The following table sets forth information covering the grant of options
to acquire Common Stock in the last year to the persons named in the Summary
Compensation Table.
% of Total
Options
Number of Granted to Exercise or
Options Employees Base Price Expiration
Name Granted in Year ($/Share) Date
Robert C. Silzer, Sr. 800,000 29.1% $.55 11/4/01
Firoz Lakhani 500,000 18.2% $.55 11/4/01
Aggregate Option Exercises in Last Year, and Year-End Option Values
The following table sets forth, for the persons named in the Summary
Compensation Table, information regarding aggregate exercises of options in
1996 and the number and value of unexercised options at December 31, 1996.
Value of Unexercised
Shares Number of Unexercised In-the-Money Options
Acquired on Value Options at FY-End (#) FY-End ($) (1)
Name Exercise(#) Realized($) Exercisable Unexercisable Exercised Unexercised
Robert C.
Silzer, Sr. 1,530,000 $597,800 1,317,500 $574,550
Firoz Lakhani 1,200,000 $444,000 500,000 $275,000
(1) Based upon the difference between the exercise price and the closing price
of the shares on December 31, 1996.
Employment Agreements
Effective January 1, 1994, the Company entered into an employment
agreement with Robert C. Silzer, Sr. (the "Silzer Sr. 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 net income in 1996). Robert C. Silzer, Sr. received a signing
bonus of 250,000 shares in 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.
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 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 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) there is a change of control (as defined), (b)
the Company employs any other 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 $49,000 in 1994, $55,000 in 1995 and $85,328
in 1996 and will be paid a salary of not less than $90,000 per annum in 1997,
1998, and 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 purchase 50,000 shares of Common Stock on January 1, 1998 at an
exercise price of $1.00 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information as of March 31, 1997 regarding
the beneficial ownership of Common stock of the Company by (i) the directors
of the Company, (ii) each executive named in the Summary Compensation Table
that appears under "Executive Compensation-Summary Compensation Table," (iii)
each person who was known by the Company to own beneficially more than 5% of
the outstanding shares of Common Stock of the Company and (iv) all officers
and directors as a group.
Name and address of Beneficial Owner Number of Shares Owned Percent of Class
Paragon Holding Ltd. 3,650,000 7.4%
P.O. Box N-272
Nassau Bahamas
Robert C. Silzer, Sr. (1) 4,381,948 (2) 8.56% (2)
2482-650 West Georgia Street
P.O. Box 11610
Vancouver, British Columbia
Firoz Lakhani 2,650,000 (3) 5.35% (3)
2482-650 West Georgia Street
P.O. Box 11610
Vancouver, British Columbia
Robert C. Silzer, Jr. (1) 1,025,000 (4) 2.07%
2482-650 West Georgia Street
P.O. Box 11610
Vancouver, British Columbia
All officers and directors
as a group (4 persons) 8,381,948 (5) 16.64% (5)
(1) Robert C. Silzer, Jr. is the son of Robert C. Silzer, Sr.
(2) Includes stock options which are exercisable by Mr. Robert C. Silzer, Sr.
to acquire 2,317,000 shares of Common Stock and 165,000 shares held by Madj
Silzer, Mr. Robert C. Silzer, Sr.'s wife.
(3) Includes stock options which are exercisable by Mr. Lakhani to acquire
680,000 shares of Common Stock.
(4) Includes stock options which are exercisable by Mr. Robert C. Silzer, Jr.
to acquire 657,693 shares of Common Stock.
(5) Includes all shares currently outstanding and those which are not
outstanding but which are subject to issuance upon exercise of stock
options. See footnotes (2), (3) and (4).
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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
$357,000 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 and (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%).
During the fiscal year ended December 31, 1996, the Board of Directors
held approximately 64 meetings. Mr. Pak Cheung, who resigned on March 27,
1997 to pursue other business commitments, attended fewer than 75% of all
meetings of the Board of Directors. The Company does not have a standing
audit committee, nominating committee or compensation committee.
ITEM 13. EXHIBITS, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
Page
Report of Robison, Hill & Co., Independent Certified Public Accountants F-1
Page
Consolidated Balance Sheets as of December 31, 1996, and 1995 F-2
Consolidated Statements 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
2. Financial Statement Schedules
The following financial statement schedules required by Regulation S-X
are included herein.
All Schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
3. Exhibits
The following exhibits are included as part of this report:
Exhibit
Number Exhibit
2.1 Articles of Amendment to Articles of Incorporation of the Company
dated July 16, 1996. (1)
2.2 Articles of Amendment to Articles of Incorporation of the Company
dated June 17, 1996.(1)
2.3 Articles of Amendment of Auto N Corporation.(1)
2.4 Articles of Amendment of MacTay Investment Co.(1)
2.5 Articles of Incorporation of MacTay Investment Co.(1)
2.6 Bylaws of the Company (1)
6.1 Leasing and Service Agency Agreement dated September 15, 1996 with
the Edward Thompson Group.(1)
6.2 Letter of Intent with Sega Gaming Technology, Inc. dated May 13,
1996.(1)
6.3 Agreement, dated July 17, 1996, with Fortune Entertainment
Corporation.(1)
6.4 Share Purchase Agreement, dated September 26, 1994 among the Company,
Prisms and the Shareholders of Prisms.(1)
6.5 Agreement of Sale dated February 9, 1995 between the Company and the
Shareholders of Executive Video Systems, Inc.(1)
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.(1)
6.7 Letter of Agreement, dated December 17, 1996, by and between the
Company and Y.K.L. Corp.(1)
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 (1)
6.11 Employment Agreement with Firoz Lakhani (1)
6.12 Employment Agreement with Robert C. Silzer, jr.
6.13 $250,000 Promissory note of Firoz Lakhani dated January 30, 1996.(1)
6.14 $90,000 Promissory Note of Firoz Lakhani dated January 18, 1996.(1)
6.15 $104,000 Promissory Note of Firoz Lakhani dated January 3,
1996.(1)
6.16 $150,000 Promissory Note of Robert Silzer dated January 18, 1996.(1)
6.17 $375,000 Promissory Note of Robert Silzer dated January 30, 1996.(1)
6.18 $72,800 Promissory Note of Robert Silzer dated January 2, 1996.(1)
8.1 Consent of Accountants.
(1) Incorporated by reference to the Registrant's registration statement
on Form 10-SB filed on January 16, 1997.
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed.
(c) The exhibits listed in Item 14(a)(3) are incorporated by reference.
(d) No financial statement schedules required by this paragraph are
required to be filed as a part of this form.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, hereunto duly authorized.
ADVANCED GAMING TECHNOLOGY, INC.
Dated: July 15, 1997 By /s/ Firoz Lakhani
Firoz Lakhani, President, Chief
Operating Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities indicated on this 15th day of July,
1997.
Signatures Title
/s/ Robert Silzer
Robert Silzer Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Donald Robert Mackay
Donald Robert MacKay Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Firoz Lakhani
Firoz Lakhani President, Chief Operating Officer and Director
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
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.
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.
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.
Advanced Gaming Technology, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
for the year ended December 31, 1995
Price range Additional
per share Common Stock Paid-in Accumulated
$ shares amount capital deficit Total
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)
The accompanying notes are an integral part of these financial statements.
Advanced Gaming Technology, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
for the year ended December 31, 1996
Price range Additional
per share Common Stock Paid-in Accumulated
$ shares amount capital deficit Total
Balance at
January 1, 1996 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)
The accompanying notes are an integral part of these financial statements.
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)
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.
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.
(b)Joint Venture Operations Accounting
Joint venture operations are accounted for under the equity method of
accounting.
(c)Inventory
Inventory consists of bingo equipment parts and is carried at lower of
cost (first-in, first-out method) and market value.
(d)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.
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)
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.
Expenditures for maintenance and repairs are charged to expense as
incurred. Major overhauls and betterments are capitalized and depreciated
over their useful lives.
(e)Investment - Land
Investment in real estate is carried at the lower of cost or net
realizable value.
(f)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.
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)
(g)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.
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.
(h)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.
(i)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.
(j)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.
(k)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.
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)
(l)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.
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
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995(Continued)
NOTE 4 - INTANGIBLE ASSETS( Continued)
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
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.
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995(Continued)
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
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
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
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
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
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
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
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.
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995(Continued)
NOTE 10 - DISCONTINUED OPERATIONS(Continued)
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)
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
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995(Continued)
NOTE 11 - STOCK OPTIONS AND WARRANTS (Continued)
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.
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
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995(Continued)
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 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.
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995(Continued)
NOTE 13 - INCOME TAXES (Continued)
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
(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.
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.
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 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:
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).
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995(Continued)
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. The Company uses the equity method of accounting for joint
venture operations.
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 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
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995(Continued)
NOTE 16 - CONTINGENCIES (Continued)
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. The Company uses the equity
method of accounting for joint venture operations.
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.
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
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995(Continued)
NOTE 16 - CONTINGENCIES (Continued)
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 and opposed a
motion for summary judgment.
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. 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 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 an agreement to construct a sewage treatment facility for which
damages are claimed, including alternative site development and attorney
fees. In response, the Company and River Oaks 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
Advanced Gaming Technology, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and December 31, 1995(Continued)
NOTE 16 - CONTINGENCIES (Continued)
facility and the permit application for construction approval by the
Missouri Department of Natural Resources. Moreover, a claim has also made
by encroached upon property development belonging to River Oaks 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 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.
The Company is vigorously defending these law suits and deny any
liability to the plaintiffs. However, no assurance can be given as to
the outcome of these cases, but in the opinion of management and counsel,
the ultimate liability will not have a material effect on its financial
position, results of operations or cash flows.
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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF ADVANCED GAMING TECHNOLOGY, INC. AS OF DECEMBER 31, 1996 AND THE
RELATED STATEMENTS OF OPERATIONS, EQUITY AND CASH FLOWS FOR THE YEAR THEN ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 77
<SECURITIES> 0
<RECEIVABLES> 142
<ALLOWANCES> 86
<INVENTORY> 43
<CURRENT-ASSETS> 436
<PP&E> 2553
<DEPRECIATION> 583
<TOTAL-ASSETS> 9446
<CURRENT-LIABILITIES> 10696
<BONDS> 0
0
0
<COMMON> 211
<OTHER-SE> (3373)
<TOTAL-LIABILITY-AND-EQUITY> 9446
<SALES> 1155
<TOTAL-REVENUES> 1155
<CGS> 283
<TOTAL-COSTS> 4202
<OTHER-EXPENSES> 2301
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1223
<INCOME-PRETAX> (5630)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5630)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5630)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 8.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in the Form 10-KSB/A of our report dated
January 27, 1997 on our audit of the financial statements of Advanced Gaming
Technology, Inc.
/s/ ROBISON, HILL & CO.
Certified Public Accountants
Salt Lake City, Utah
July 15, 1997
