-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OKaWOPENnrLt+RsQPFqyV6UBPnK/G+JL6N1upWmEcYYUGVXPB6i8cy/zUgfmiUh5 JTcXWNmvJFusATNJ7X3mJQ== 0000906477-99-000023.txt : 19990518 0000906477-99-000023.hdr.sgml : 19990518 ACCESSION NUMBER: 0000906477-99-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CASINOVATIONS INC CENTRAL INDEX KEY: 0001004673 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DURABLE GOODS, NEC [5099] IRS NUMBER: 911696010 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25855 FILM NUMBER: 99628579 BUSINESS ADDRESS: STREET 1: 6744 S SPENCER STREET CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 7027337195 MAIL ADDRESS: STREET 1: 6744 S SPENCER STREET CITY: LAS VEGAS STATE: NV ZIP: 89119 10-Q 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 1999 -------------------------- OR [ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: to ---------- ----------- Commission file number: 000-25855 --------------------------------------- CASINOVATIONS INCORPORATED - ----------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Nevada 91-1696010 - --------------------------------- ------------------------ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 6744 S. Spencer Street, Las Vegas, Nevada 89119 - ---------------------------------------------------------------- (Address of principal executive offices) (702) 733-7195 - ---------------------------------------------------------------- (Issuer's telephone number) - ---------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES NO X ----- ----- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by court. YES NO ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 7,094,687 shares of common stock, $.001 par value, as of March 31, 1999 - ----------------------------------------------------------------- Transitional Small Business Disclosure Format (check one); YES NO X ----- ----- FORM 10-QSB TABLE OF CONTENTS PAGE NUMBER ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 Balance Sheet 3 Statement of Operations 4 Statement of Cash Flows 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis or Plan of Operations 7 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURE 16 EXHIBIT INDEX 17 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS.
CASINOVATIONS INCORPORATED (A Development Stage Company) BALANCE SHEET (UNAUDITED) March 31, 1999 December 31, 1998 ---------------- ----------------- ASSETS Current assets: Cash $ 1,299,589 $ 200,749 Accounts receivable, trade 44,382 2,810 Accounts receivable - employees 31,520 11,347 Inventories 1,111,406 756,662 Prepaid expenses 42,052 38,896 ---------------- ---------------- Total current assets 2,528,949 1,010,464 Property and equipment, at cost, net of accumulated depreciation of $164,817 and $125,380 522,903 350,772 Intangible assets, at cost, net of accumulated amortization of $42,458 and $37,369 156,376 157,916 Deferred interest 203,414 238,590 Deposits 164,572 142,821 ---------------- ---------------- $ 3,576,214 $ 1,900,563 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable - bank $ 197,383 $ 197,383 Current portion of leases payable 592,970 219,758 Current portion of long term debt 13,805 3,232 Accounts payable 946,528 810,349 Accrued expenses 31,563 40,576 Accrued interest - stockholder loans 115,862 59,561 Current portion of stockholder loans 310,037 295,755 Customer deposits 27,688 15,874 ---------------- ---------------- Total current liabilities $ 2,235,836 $ 1,642,488 Other long term debt - 13,948 Leases payable 630,024 - Convertible debt 1,900,000 813,138 Stockholder loans 924,963 1,089,245 ---------------- ---------------- Total liabilities $ 5,690,823 $ 3,558,819 Stockholders' equity: Common stock, $.001 par value, 40,000,000 shares authorized, 7,094,687 shares and 6,767,106 shares issued and outstanding, respectively 7,094 6,767 Additional paid-in capital 7,441,624 6,676,430 Unpaid subscriptions to common stock (125,000) (125,000) Deficit accumulated during development stage (9,438,327) (8,216,453) ---------------- ---------------- (2,114,609) (1,658,256) ---------------- ---------------- $ 3,576,214 $ 1,900,563 ================ ================
See accompanying notes to unaudited financial statements. 3
CASINOVATIONS INCORPORATED (A Development Stage Company) STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED) Three Months Ended --------------------------------- March 31, March 31, 1999 1998 -------------- ------------- Sales $ 17,705 $ 345 Rental income 46,520 - Interest income 4,849 3 -------------- ------------- 69,074 348 Other costs and expenses: Cost of sales 5,745 - General and administrative 1,086,838 355,787 Research and development 69,661 102,333 -------------- ------------- 1,162,244 458,120 -------------- ------------- (Loss) from operations (1,093,170) (457,772) Interest expense 78,448 37,528 Interest expense - related parties 45,262 24,880 -------------- ------------- 123,710 62,408 -------------- ------------- (Loss) before income taxes (1,216,880) (520,180) Provision for income taxes - - -------------- ------------- Net income (loss) $ (1,216,880) $ (520,180) ============== ============= Basic and diluted (loss) per share $ (0.17) $ (0.08) ============== ============= Weighted average shares outstanding 7,253,547 6,179,638 ============== =============
See accompanying notes to unaudited financial statements. 4
CASINOVATIONS INCORPORATED (A Development Stage Company) STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED) Three Months Ended ---------------------------------- March 31, 1999 March 31, 1998 ---------------- --------------- Net (loss) $ (1,216,880) $ (520,180) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 44,527 16,965 Stock and options issued for services - 33,000 Amortization of deferred interest 35,176 - Changes in assets and liabilities: (Increase) decrease in accounts receivable (61,744) (25,400) (Increase) decrease in inventory (354,743) (46,956) (Increase) decrease in prepaid expenses 5,543 3,375 (Increase) decrease in other assets (30,451) (712) Increase (decrease) in accounts payable (297,975) (46,243) Increase (decrease) in accrued expenses 47,288 3,854 ---------------- --------------- Total adjustments (612,379) (62,117) ---------------- --------------- Net cash (used in) operating activities (1,829,259) (582,297) ---------------- --------------- Cash flows from investing activities: Acquisition of plant and equipment (211,569) (8,376) Increase in patents and trademarks (3,550) (3,368) ---------------- --------------- Net cash (used in) investing activities (215,119) (11,744) ---------------- --------------- Cash flows from financing activities: Common stock sold for cash 1,210,523 - Proceeds from long-term debt - 250,000 Proceeds of shareholder loans - 290,000 Repayment of shareholder loans (150,000) (27,245) Proceeds from leases payable 295,182 - Repayment of leases payable (109,111) (36,400) Proceeds from convertible debentures 1,900,000 - Repayment of notes payable (3,375) - ---------------- --------------- Net cash provided by financing activities 3,143,219 476,355 ---------------- --------------- Increase (decrease) in cash 1,098,841 (117,686) Cash and cash equivalents, beginning of period 200,749 119,389 ---------------- --------------- Cash and cash equivalents, end of period $ 1,299,590 $ 1,703 ================ ===============
See accompanying notes to unaudited financial statements. 5 CASINOVATIONS INCORPORATED (A Development Stage Company) Notes to Financial Statements (Unaudited) NOTE 1 - BASIS OF PRESENTATION. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions incorporated in Regulation 10-SB of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation have been included. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 1998 as included in the Company's Annual Report on Form 10-KSB as filed with the Securities and Exchange Commission on March 26, 1999. Basic loss per share was computed using the weighted average number of common shares outstanding. NOTE 2 - STATEMENT REGARDING COMPUTATION OF LOSS PER SHARE. Fully diluted loss per share excludes any dilutive effects of options, warrants and convertible securities. Fully diluted loss per share is not presented because the effect would be anti- dilutive. NOTE 3 - SUBSEQUENT EVENT. On April 30, 1999, the Company completed the rescission of a stock subscription agreement with an unaffiliated third party, paying $450,000 cash to the former stockholder. As of said date, the Company canceled the 200,000 shares returned under the rescinded subscription agreement. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. STATEMENT ON FORWARD-LOOKING INFORMATION Certain information included herein contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), such as statements relating to plans for future expansion, capital spending, future operations, sources of liquidity and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include, but are not limited to, those relating to liquidity requirements for the Company, the continued growth of the gaming industry, the success of the Company's product-development and marketing and sales activities, vigorous competition in the gaming industry, dependence on existing management, relocation of manufacturing facilities, gaming regulations (including actions affecting licensing and product approvals), leverage and debt service (including sensitivity to fluctuations in interest rates), issues related to the Year 2000, domestic or global economic conditions and changes in federal or state tax laws or the administration of such laws. OVERVIEW The Company's primary business is the development, manufacturing and marketing of various gaming concepts and products that increase the security, productivity and profits for the global gaming industry. From inception through December 31, 1998, the Company has been a "Development Stage Company" performing research and development, product prototyping, field testing of products, development of manufacturing capabilities, acquiring inventory, development of distribution channels, staffing (including the four top sales executives from a major shuffler competitor) and obtaining a building with sufficient capacity to house future growth. Beginning January 1999, the Company has experienced modest sales development and revenue growth. The following discussion summarizes the Company's results of operations for the three months ended March 31, 1999 and 1998 and the Company's liquidity and capital resources. RESULTS OF OPERATIONS YEARS ENDED MARCH 31, 1999 AND 1998 REVENUES. For the three months ended March 31, 1999, the Company generated total revenues of $69,074 compared to $348 for the three months ended March 31, 1998. The revenues for the three months ended March 31, 1999 consisted of Random Ejection Shuffler (the "Shuffler") rentals of $18,523, Shuffler sales of $15,500, table game (the "Fun Pit Collection") rentals of $27,997, other sales of $2,205 and interest income of $4,849. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months ended March 31, 1999, selling, general and administrative expenses increased approximately $731,051, or 205%, to $1,086,838 compared to $355,787 for the three months ended March 31, 1998. This increase was primarily attributable to costs associated with the development and marketing of the Company's products and the expansion of the Company's operations. For the three months ended March 31, 1999, selling, general and administrative expenses included: salaries and related costs of $549,600; consulting services of $4,829; gaming industry show costs of $77,277; travel and entertainment costs of $71,899; printing and office 7 expense, including rent, of $155,188; and legal expenses of $67,837. In addition, the Company had depreciation and amortization of $44,527 compared to $16,965 for the three months ended March 31, 1999 and 1998, respectively. INTEREST EXPENSE. For the three months ended March 31, 1999, the Company incurred interest expenses of $123,710 compared to $62,408 for the three months ended March 31, 1998. This increase was primarily attributable to the increased borrowings by the Company. NET INCOME (LOSS). For the three months ended March 31, 1999, the Company had a net loss of $1,216,880, compared to a net loss of $520,180 for the three months ended March 31, 1998. The increase in net loss was primarily due to continued development of the Company's products and the expansion of the Company's operations. Basic loss per share was $0.17 for the three months ended March 31, 1999 compared to $0.08 for the three months ended March 31, 1998. LIQUIDITY AND CAPITAL RESOURCES OVERVIEW. The Company has continued to focus on sales and marketing efforts for its Shuffler and has begun to make significant placements of Shufflers in a variety of gaming facilities. As a result, Shuffler leases in Nevada and sales in other jurisdictions are beginning to generate cash flow which is expected to continue to build through the rest of the year. The Company is continuing to expend cash to develop its SecureDrop system, and these costs, together with product improvement expenses, related marketing and regulatory costs and litigation and legal expenses, are consuming cash resources. The Company has begun to obtain sales orders from a variety of gaming customers for the SecureDrop product. To ramp up increased product production for both the Shuffler and the new production line for the SecureDrop system, the Company will continue to expend cash for which there will not be cash revenue generated until later in the year. As a result, the Company has expended most of the proceeds from both the common stock Offering and the convertible note placement. Although the Company has third party lease financing available, the cost of such funds is high, and management believes that it will be advantageous to the Company to explore other cash sources. In May 1999, the Company contacted the holders of the Company's convertible notes and Class E Warrants and proposed the following: (1) accelerated conversion right for the convertible notes from August 1999 to May 1999, (2) accelerated warrant exercise right from August 1999 to May 1999, and (3) in exchange for cash exercises, issuance of additional warrants at $3.00 per share to such persons on a warrant for warrant basis for each warrant exercised. This proposal was subject to exercise and payment by the end of May 1999. The Company believes that most holders will accept the foregoing, and as a result, the Company expects to receive a maximum of $1,499,373 and issue a maximum of 1,230,552 shares of common stock. Management believes that the above transaction, assuming that all holders convert their debt and exercise their warrants, will benefit the Company as follows: (1) cash on hand should cover the Company's expected cash requirements through the middle of the third quarter of 1999, by which time the Company anticipates cash flows from Shuffler leases and sales and SecureDrop sales will begin to meet the Company's liquidity requirements, (2) up to $1,900,000 in debt would be removed from the balance sheet to become stockholder equity, (3) cash interest costs on convertible debt would be eliminated, and (4) management would be able to focus on operations during the next quarter, not on sources of funds. Although there is no assurance that all of the convertible note holders will participate, the Company believes most will. The Company believes that as a result of this transaction, short-term liquidity requirements will be met. 8 WORKING CAPITAL. At March 31, 1999, the Company had cash, cash equivalents and investments of $1,299,589 compared to $1,703 at March 31, 1998. At March 31, 1999, the Company's working capital was $293,113 compared to a deficit of $1,645,859 at March 31, 1998. At March 31, 1999, the Company's current ratio, I.E. the ratio of current assets to current liabilities, was 1.13:1 compared to 0.62:1 at December 31, 1998. Until the Company's normalized sales levels are achieved, the Company will be relying upon proceeds from the placement of convertible debentures and other private and institutional sources of debt and equity capital for working capital purposes. CASH FLOW. For the three months ended March 31, 1999, net cash used in operating activities was $1,829,259 compared to $582,297 for the three months ended March 31, 1998. Cash used in operating activities is net of depreciation and amortization of $44,527, compared to $16,965 for the three months ended March 31, 1998; increases in accounts receivable of $61,744 compared to $25,400 for the three months ended March 31, 1998; increases in inventory of $354,743 compared to $46,956 for the three months ended March 31, 1998; decreases in prepaid expenses of $5,543 compared to $3,375 for the three months ended March 31, 1998; increases in other assets of $30,451 compared to $712 for the three months ended March 31, 1998; decreases in accounts payable of $297,975 compared to $46,243 for the three months ended March 31, 1998; and increases in accrued expenses of $47,288 compared to $3,854 for the three months ended December 31, 1998. For the three months ended March 31, 1999, net cash provided by financing activities was $3,143,219 compared to $476,355 for the three months ended March 31, 1998. The increase is primarily attributable to the proceeds received from the Offering and the placement of convertible debentures. The cash from financing activities consisted of $1,210,523 from the sale of common stock, proceeds of $1,900,000 from the placement of convertible debentures and proceeds of $295,182 from leases payable reduced by repayment of notes and leases payable of $262,486. OFFERING. From April 1998 through January 1999, the Company conducted a public offering for 1,500,000 shares of its common stock at $2.50 per share (the "Offering"). In addition, the Company registered 2,107,973 shares of common stock on behalf of certain selling shareholders and 200,000 shares of common stock underlying its Class A Warrants. The Company completed the Offering on January 30, 1999. As a result of the sale of shares pursuant to the Offering, the Company received gross proceeds of $3,794,360. The Company used the proceeds from the Offering for the payment of operating expenses, funding of working capital and the reduction of debt. On April 30, 1999, through an agreement dated March 24, 1999, the Company rescinded the sale of 200,000 shares issued in the Offering and returned $450,000 to the stockholder. CONVERTIBLE DEBT. The Company has received proceeds of $1,900,000 from the placement of convertible debt in the first quarter of 1999. The debt accrues interest at 9.5% per annum and is convertible into restricted shares of common stock after six months at $2.60 per share. Each purchaser of a $50,000 unit of convertible debt also received warrants for the purchase of 9,100 shares of common stock at $3.00 per share. The convertible debt issue was completed in March 1999. See, "Overview" above. LEASE FINANCING. As of March 31, 1999, the Company received proceeds of $295,182 from lease financing with unrelated leasing companies whereby the Company sold and leased back all of its furniture, equipment and tooling, and 70 units of the Shuffler. CAPITAL EXPENDITURES. In March 1999, the Company relocated the balance of its manufacturing operations to its principal offices in Las Vegas, Nevada at a cost of approximately $5,000. In addition, the Company has planned expenditures of up to $300,000 for additional tooling. For the three months ended 9 March 31, 1999, the Company used net cash in investing activities of $215,119 consisting of: acquisition of plant and equipment of $211,569; and increased patents and trademarks by $3,550. For the three months ended March 31, 1998, the Company used net cash in investing activities of $11,744 consisting of: acquired plant and equipment valued at $8,376; and increased patents and trademarks by $3,368. RETIREMENT OF DEBT. As part of a transaction where the Company repurchased the shares of common stock, among other things, from Steven L. Forte, a former employee, director and shareholder of the Company, the Company executed a promissory note in the original principal amount of $2,351,705. The promissory note dated December 3, 1998 had an interest rate of 6.5% during the first year and 8% thereafter and was amortized over a ten-year schedule with payments of interest only during the first year, payable on the six-month and twelve-month anniversary of the promissory note and payments of principal and interest thereafter on a monthly basis. Through a December 1998 letter agreement, the Company negotiated the cancellation of the promissory note, as well as the cancellation of the security for the promissory note and the cancellation of an unrelated promissory note in the original principal amount of $130,047.46, in exchange for three payments in the aggregate amount of $1,250,000: $500,000 on December 7, 1998, $500,000 on December 28, 1998 and $250,000 on January 15, 1999. On January 15, 1999, the Company made the last payment and cancelled the promissory note, the security for the promissory note and the unrelated promissory note. OUTLOOK Based on presently known commitments and plans, the Company believes that it will be able to fund 1999 operations and required expenditures through cash on hand, debt reduction from the accelerated conversion of convertible debt and cash from exercise of warrants, cash flow from operations and lease financing services. In the event that such sources are insufficient, the Company will need to seek cash from private or public placements of debt or equity, institutional or other lending sources or change operating plans to accommodate such liquidity issues. No assurances can be given that the Company will successfully obtain necessary liquidity sources. YEAR 2000 During 1998, the Company undertook an assessment of the information systems and software used in its operations to determine whether or not those systems were Year 2000 compliant, and assessed plans to upgrade systems and/or software that was determined to not be Year 2000 compliant. The Company has begun and is continuing to assess potential issues related to the approach of the Year 2000 other than those relating to the Company's internal information systems, such as critical supplier readiness and potential problems associated with embedded technologies, and will develop and implement plans to correct any deficiencies found. Based upon the Company's efforts to date, the Company believes that the costs of addressing the Company's Year 2000 issues have not been and are not currently expected to be material to the Company's results of operations or financial position; however, should the Company and/or its critical suppliers fail to identify and/or correct material Year 2000 issues, such failure could impact the Company's ability to operate as it did before the Year 2000, and subsequently have a material impact on the Company's results of operations or financial position. In such an event, the Company will address issues as they arise and strive to minimize any impact on the Company's operations. The impact on the Company's operating results of such failures and of any contingency plans to be designed to address such events cannot be determined at this time. 10 RISK FACTORS AND FORWARD LOOKING INFORMATION THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. SUCH STATEMENTS REFER TO EVENTS THAT COULD OCCUR IN THE FUTURE OR MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS "INTEND," "PLAN," "BELIEVE," CORRELATIVE WORDS, AND OTHER EXPRESSIONS INDICATING THAT FUTURE EVENTS ARE CONTEMPLATED. SUCH STATEMENTS ARE SUBJECT TO INHERENT RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN OF THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS REPORT. IN ADDITION TO THE OTHER INFORMATION CONTAINED HEREIN, INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS. DEVELOPING BUSINESS; LACK OF OPERATING RESULTS; NO INDEPENDENT MARKET RESEARCH OF POTENTIAL DEMAND FOR CURRENT OPERATIONS. The Company has been in the development stage and has only recently commenced sales and leases of its products. Until recently, the Company's activities have been limited to analyzing the gaming industry, consulting with persons in the gaming industry, negotiating interim financing arrangements, developing products, establishing a distribution network for its products, marketing its products to the gaming industry, manufacturing its products and commencing product sales. Although the Company has experienced modest sales development and revenue growth in the first quarter of 1999, there is no guarantee that the Company will generate sufficient revenue to sustain its operations. No independent organization has conducted market research providing management with independent assurance from which to estimate potential demand for the Company's business operations. ADDITIONAL FINANCING MAY BE REQUIRED. Based on presently known commitments and plans, the Company believes that it will be able to fund its 1999 operations and required expenditures through cash on hand, debt reduction from the accelerated conversion of convertible debt and cash from exercise of warrants, cash flow from operations, and lease financing sources. In the event that such sources are insufficient, the Company will need to seek cash from private or public placements of debt or equity, institutional or other lending sources or change operating plans to accommodate such liquidity issues. No assurances can be given that the Company will successfully locate necessary liquidity sources. REGULATION. The gaming industry is a highly regulated industry and is subject to numerous statutes, rules and regulations administered by the gaming commissions or similar regulatory authorities of each jurisdiction. Generally, the Company and other entities which seek to introduce gaming products or concepts into such jurisdictions may be required to submit applications relating to their activities or products (including detailed background information concerning controlling persons within their organization) which are then reviewed for approval. The Company may incur significant expenses in seeking to obtain licenses for its gaming products and concepts, and no assurance can be given that its products will be approved in any particular jurisdiction. The failure to obtain such approval in any jurisdiction in which the Company may seek to introduce its products or concepts, could have a material adverse effect on the Company's business. INFLUENCE ON ELECTION OF DIRECTORS AND ALL OTHER MATTERS BY CURRENT OFFICERS AND DIRECTORS. The officers and directors of the Company own approximately 57.6% of the outstanding common shares. As a result, the officers and directors of the Company, through their aggregate ownership of the Company's common stock, will be able to influence the election of directors and all other matters submitted to a vote of the Company's stockholders. UNCERTAINTY OF MARKET FOR COMPANY'S PRODUCTS. The Company has various gaming products, such as the Shuffler and SecureDrop, and variations of traditional games of Blackjack and Poker, that are ready for distribution. Despite the additions to the Company's product line, the Company has only recently 11 completed the development process for some of its gaming products. Although the market appears to be receptive to the Company's products, there is no guarantee that the market will remain receptive and that the Company's future products will be received by the market in the same manner. BENEFIT TO MANAGEMENT. The Company may, in the future, compensate the Company's management with substantial salaries and other benefits. The payment of future larger salaries, commissions and the costs of these benefits may be a burden on the Company and may be a factor in limiting or preventing the Company from achieving profitable operations in the future. However, the Company would not continue to compensate management with such substantial salaries and other benefits under circumstances where to do so would have a material negative effect on the Company's financial condition. NO DIVERSIFICATION. The Company intends to manufacture and market certain gaming products and concepts. Therefore, the Company's financial viability will depend almost exclusively on its ability to generate revenues from its operations and the Company will not have the benefit of reducing its financial risks by relying on revenues derived from other operations. STOCKHOLDERS MAY BEAR RISK OF LOSS. The capital stock of the Company is at risk of complete loss if the Company's operations are unsuccessful. FINANCIAL CONDITION. There can be no assurance that the Company will have adequate funds to pay all of its operating expenses or that the Company can be operated in a profitable manner. Profitability depends upon many factors, including the success of the Company's operations. COMPETITION. There is significant competition in the gaming industry. The Company competes with established companies and other entities (many of which possess substantially greater resources than the Company). Almost all of the companies with which the Company competes are substantially larger, have more substantial histories, backgrounds, experience and records of successful operations, greater financial, technical, marketing and other resources, more employees and more extensive facilities than the Company now has, or will have in the foreseeable future. It is also likely that other competitors will emerge in the near future. There is no assurance that the Company will continue to compete successfully with other established gaming product manufacturers. The Company shall compete on the basis of quality and price. Inability to compete successfully might result in increased costs, reduced yields and additional risks to the investors herein. RISKS OF PROPRIETARY PRODUCTS AND GAMES. The Company places its proprietary products and games, except SecureDrop, in casinos under short-term lease arrangements, making these games susceptible to replacement due to pressure from competitors, changes in economic conditions, obsolescence, and declining popularity. The Company intends to maintain and expand the number of installed proprietary products and games through enhancement of existing products and games, introduction of new products and games, and customer service, but there can be no assurance that these efforts will be successful. Introduction of new proprietary products and games involves significant risks, including whether the Company will be able to place its products and games with casinos, the economic terms on which casinos will accept the products and games, the popularity of the products and games with gaming patrons, and whether a successful game can maintain its popularity over the long term. If the Company is not successful in introducing new games, the effects on the Company could be adverse. The Company has filed trademark and patent applications to protect its intellectual property rights in certain of its trademarks and innovations on certain of its proprietary games, respectively. At this time, however, the United States Patent and Trademark Office has not acted upon all of these applications. There can be no assurance that the pending patent or trademark applications will actually issue as patents or trademark registrations or that any of these rights will not be infringed by others. Certain of the Company's products and games may have independent protection of 12 the game itself, and it is possible that competitors could produce a similar product or game without violating any legal rights of the Company. The Company intends to promote aggressively its trademarks to build goodwill and customer loyalty. In addition, the Company intends to improve and add innovations to certain of its games, which may be subject to legal protection. There can be no assurance, however, that the Company will be successful in these efforts, that innovations will be subject to legal protection, or that the innovations will give a competitive advantage to the Company. FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK. This Report contains forward-looking statements including statements regarding, among other items, the Company's growth strategies and anticipated trends in the Company's business and demographics. These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. Actual results could differ materially from these forward-looking statements as a result of the factors described in this section "Risk Factors and Forward Looking Statements," including among others, regulatory or economic influences. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Report will be accurate. LACK OF DIVIDENDS. There can be no assurance that the operations of the Company will become profitable. At the present time, the Company intends to use any earnings which may be generated to finance the growth of the Company's business. DEPENDENCE ON KEY INDIVIDUALS. The future success of the Company is highly dependent upon the management skills of its key employees and the Company's ability to attract and retain qualified key employees. The inability to obtain and employ these individuals would have a serious effect upon the business of the Company. The Company has entered into employment agreements with certain employees. There can be no assurance that the Company will be successful in retaining its key employees or that it can attract or retain the additional skilled personnel required. DEPENDENCE ON CHAIRMAN OF THE BOARD AND OTHER DIRECTORS. During 1998 and 1997, certain members of the Company's Board of Directors made significant loans to the Company to provide necessary liquidity to the Company. As of March 31, 1999, such outstanding loans were $1,235,000. There is no obligation of any kind by such persons to continue lending funds to the Company, and there is no assurance whatsoever that such persons would be willing or able to make such loans available in the future if the Company is in need of funds. VULNERABILITY TO FLUCTUATIONS IN THE ECONOMY. Demand for the Company's products is dependent on, among other things, general economic conditions and international currency fluctuations which are cyclical in nature. Prolonged recessionary periods may be damaging to the Company. "PENNY" STOCK REGULATION OF BROKER-DEALER SALES OF COMPANY SECURITIES. As the Nasdaq Stock Market has minimum quantitative requirements and the OTC Bulleting does not, the Company will attempt to lists its common stock on the OTC Bulletin Board. Until the Company obtains a listing on the NASDAQ Stock Market, if at all, the Company's securities may be covered by a Rule 15g- 9 under the Exchange Act that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and institutional accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse). For transactions covered by the rule, the broker-dealer must furnish to all investors in penny stocks, a risk disclosure document required by Rule 15g-9 of the Exchange Act, make a special suitability determination of the purchaser and have received the purchaser's written agreement to the transaction prior to the sale. In order to approve a 13 person's account for transactions in penny stock, the broker or dealer must (i) obtain information concerning the person's financial situation, investment experience and investment objectives; (ii) reasonably determine, based on the information required by paragraph (i) that transactions in penny stock are suitable for the person and that the person has sufficient knowledge and experience in financial matters that the person reasonably may be expected to be capable of evaluating the rights of transactions in penny stock; and (iii) deliver to the person a written statement setting forth the basis on which the broker or dealer made the determination required by paragraph (ii) in this section, stating in a highlighted format that it is unlawful for the broker or dealer to effect a transaction in a designated security subject to the provisions of paragraph (ii) of this section unless the broker or dealer has received, prior to the transaction, a written agreement to the transaction from the person; and stating in a highlighted format immediately preceding the customer signature line that the broker or dealer is required to provide the person with the written statement and the person should not sign and return the written statement to the broker or dealer if it does not accurately reflect the person's financial situation, investment experience and investment objectives and obtain from the person a manually signed and dated copy of the written statement. A penny stock means any equity security other than a security (i) registered, or approved for registration upon notice of issuance on a national securities exchange that makes transaction reports available pursuant to 17 CFR 11Aa3-1 (ii) authorized or approved for authorization upon notice of issuance, for quotation in the NASDAQ system; (iii) that has a price of five dollars or more; or (iv) whose issuer has net tangible assets in excess of $2,000,000 demonstrated by financial statements dated less than fifteen months previously that the broker or dealer has reviewed and has a reasonable basis to believe are true and complete in relation to the date of the transaction with the person. Consequently, the rule may affect the ability of broker-dealers to sell the Company's securities. 14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On March 18, 1999, Shuffle Master, Inc. ("Shuffle Master") filed a complaint (Case No. A400777) in the District Court, Clark County, State of Nevada (the "District Court") against former employees of Shuffle Master (who are now employees of the Company) and the Company. The complaint alleges, among other things, fraud, breach of contract and conversion against certain of these former employees of Shuffle Master and violation of Nevada's Trade Secret Act, interference with contractual relations, breach of contract, violations of the Lanham Act and civil conspiracy to commit fraud against certain of these former employees of Shuffle Master and the Company. On March 26, 1999, the Company removed the action to the United States District Court, District of Nevada (the "Federal Court"), and, on April 7, 1999, the Company filed a motion to dismiss certain of the causes of action alleged by Shuffle Master in the complaint. In May 1999, the Federal Court denied the Company's motion to dismiss, denied Shuffle Master's Motion to Remand to the District Court the allegations regarding violations of the Lanham Act, and remanded the allegations regarding fraud, civil conspiracy to commit fraud, breach of contract, and conversion to the District Court. Management believes that the complaint is without merit and intends vigorously to defend the allegations contained therein. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. The Company placed $1,900,000 in convertible debt in the first quarter of 1999. The convertible debt accrues interest at 9.5% per annum and is convertible into restricted shares of common stock after six months at $2.60 per share. Each purchaser of a $50,000 unit of convertible debt also received warrants for the purchase of 9,100 shares of common stock at $3.00 per share. The convertible debt issue was completed in March 1999. The Company's Board of Directors is considering acceleration of the conversion date and the warrant exercise date. With respect to the convertible debt issued by the Company, the Company relied upon Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") in that the purchasers of the convertible debt were all accredited investors with pre- existing relationships with the Company. Accordingly, the issuance of the convertible debt was exempt from the registration requirements of Section 5 of the Securities Act. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company held its Annual Meeting of Stockholders on March 29, 1999 (the "Annual Meeting"). With respect to the results of the Annual Report, the Company makes reference to its Current Report on Form 8-K dated March 29, 1999 and filed with the Securities and Exchange Commission on April 5, 1999. ITEM 5. OTHER INFORMATION. On April 29, 1999, the Board expanded the Board by two seats, appointing Richard Jaslow and Jill Bayless as new directors to fill the vacancies. Richard S. Huson stepped down as Chairman of the Board due to health reasons but continues as a director; Bob L. Smith was appointed Chairman of the Board and Jill Bayless was appointed Vice Chairman of the Board. The Board 15 also created an Executive Committee consisting of the Chairman of the Board, the Vice Chairman of the Board and the Chief Executive Officer. The Board also appointed an Audit Committee consisting of Ronald Keil, Chairman, David Sampson and Jill Bayless. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. EXHIBITS. EXHIBIT NUMBER DESCRIPTION -------------- ----------- 4.01 Form of 9.5% Convertible Note Due 2004 4.02 Form of Warrant 27.01 Financial Data Schedule REPORT ON FORM 8-K. During the three month period ended March 31, 1999, the Company filed a Form 8-K dated March 29, 1999 with the Securities and Exchange Commission on April 5, 1999 reporting, among other things, the results of the Annual Meeting which changed the Company's state of incorporation to Nevada. SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CASINOVATIONS INCORPORATED --------------------------------- (Registrant) Date: May 17, 1999 By: /s/ Steven J. Blad ------------------------------------- Steven J. Blad Its: President and Chief Executive Officer 16 EXHIBIT INDEX EXHIBIT PAGE NUMBER DESCRIPTION NUMBER - --------- ------------------------------------------- -------- 4.01 Form of 9.5% Convertible Note Due 2004 18 4.02 Form of Warrant 21 27.01 Financial Data Schedule ___ 17 EX-4 2 THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR QUALIFIED UNDER THE SECURITIES OR BLUE SKY LAWS OF ANY STATE, AND THIS NOTE MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR QUALIFICATION; PROVIDED, HOWEVER, THAT THIS NOTE MAY BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED PURSUANT TO AN EXEMPTION FROM REGISTRATION OR QUALIFICATION. CASINOVATIONS INCORPORATED 9.5% CONVERTIBLE NOTE DUE 2004 $ _____,000.00 February ___, 1999 For Value Received, the undersigned Casinovations Incorporated, a Washington corporation (the "Obligor"), hereby promises to pay to the order of ________________ or its registered assigns (the "Purchaser") on February 15, 2004, the principal sum of _____________ Thousand and 00/100 Dollars ($______,000.00) and to pay interest on the unpaid principal balance hereof from the date hereof at a rate of 9.5% per annum, payable semiannually in arrears on August 15 and February 15 of each year, to holders registered on the immediately preceding August 1 and February 1. Interest on this Note will accrue from the most recent date on which interest has been paid. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Note is unsecured. At its discretion, the Obligor may, at anytime after the one-year anniversary of the Note, redeem the Note without penalty upon payment of the face value of the Note and any unpaid and accrued interest. This Note is being issued as a part of a Unit consisting of a Common Stock Purchase Warrant (the "Warrant") to purchase up to _______ shares of Obligor's common stock (the "Common Stock"). This Note and the Warrant are not detachable unless and until the Note is converted in accordance herewith. Exercise of certain rights under the Warrant are expressly subject to certain conditions contained therein and herein. At the expiration of the later of (a) six months from the date of the Note or (b) September 1, 1999, the Holder of this Note is entitled, at its option, to convert this Note into fully paid and non-assessable shares of restricted Common Stock of the Obligor at the conversion price of $2.60 per share (the "Conversion Price"), subject to such adjustment or adjustments, if any, of such Conversion Price and the Common Stock issuable upon conversion, upon surrender of this Note, duly endorsed or assigned to the Obligor or in blank, to the Obligor, with the conversion notice attached hereto, or accompanied by a separate written notice substantially in the form of such conversion notice, duly executed by the Holder and stating that the Holder hereof elects to convert this Note, or if less than the entire principal amount hereof is to be converted (but not less than $25,000 increments), the portion hereof to be converted, all in accordance with the provisions of the Subscription Agreement. The Warrant may only be exercised if the full principal amount of this Note is converted in accordance with this paragraph. No fractional shares will be issued on conversion, but instead of any fractional interest, the Obligor shall pay a cash adjustment. If the Company shall, prior to the conversion or payment of the Note in full, (a) declare a dividend or make a distribution on its Common Stock payable in shares of its Common Stock, (b) subdivide its outstanding shares of Common Stock into a greater number of shares of Common Stock, or (c) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (d) issue any shares of capital stock of the Company by reclassification or capital reorganization of its shares of Common Stock, then the conversion privilege and the Conversion Price in effect immediately prior to such action shall be adjusted so that the Holder of a Note thereafter converted shall be entitled to receive the number and kind of shares of Common Stock or other Capital Stock which the Holder would have owned or have been entitled to receive immediately after such action had the Holder converted the Note immediately prior to the record date in the case of (a), or the effective date in the case of (b), (c) or (d). The Company shall prepare and, no sooner than nine months and no later than twelve months after the date hereof, file with United States Securities and Exchange Commission (the "SEC"), an appropriate registration statement to effect a registration of the Registrable Securities (as defined below) covering the resale of the Registrable Securities issuable to Holder upon conversion of this Note, which registration statement, to the extent allowable under the Securities Act of 1933, as amended, and the rules promulgated thereunder (including Rule 416), shall state that such registration statement also covers such indeterminate numbers of additional shares of Common Stock as may become issuable upon conversion of the Note to prevent dilution resulting from stock splits, stock dividends or similar transactions. The Company shall use its best efforts to obtain effectiveness of the registration statement as soon as practicable. For purposes of this Agreement, the term "Registrable Securities" means the shares of Common Stock issued or issuable upon conversion of the Note and any shares of capital stock issued or issuable as a dividend on or in exchange for or otherwise with respect to any of the foregoing. All reasonable expenses, other than underwriting discounts and commissions, incurred by the Company in connection with registrations, filings or qualifications pursuant to this paragraph, including without limitation, all registration, listing and qualification fees, printers and accounting fees, and the fees and disbursements of counsel for the Company, shall be borne by the Company. Obligor may issue other indebtedness from time to time prior to or hereafter that has a senior ranking to this Note in priority of payment and this Note will be subordinate in right of payment thereto. In the event any action is taken to collect or enforce the indebtedness evidenced by this Note (the "Indebtedness") or any part thereof, the Obligor agrees to pay, in addition to the principal and interest due and payable hereon, all costs of collecting this Note, including reasonable attorneys' fees and expenses. These costs shall include any expenses incurred by the Purchaser in any bankruptcy, reorganization, or other insolvency proceeding. No delay or omission of any holder in exercising any right or rights, shall operate as a waiver of such right or any other rights. A waiver on one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. The liability of the Obligor under this Note (and the liability of any endorsers of this Note) shall not be discharged, diminished or in any way impaired by (a) any waiver by Purchaser or failure to enforce or exercise rights under any of the terms, covenants or conditions of this Note, (b) the granting of any renewal, indulgence, extension of time to Obligor, or any other obligors of the Indebtedness, or (c) the addition or release of any person or entity primarily or secondarily liable for the Indebtedness. In no event shall the interest rate charged or received hereunder at any time exceed the maximum interest rate permitted under applicable law. Payments of interest received by Purchaser hereunder which 2 would otherwise cause the interest rate hereunder to exceed such maximum interest rate shall, to the extent of such excess, be deemed to be (and deemed to have been contracted as being) prepayments of principal and applied as such. This Note shall be binding upon the undersigned and its successors and assigns and shall inure to the benefit of Purchaser, its successors and assigns. Every person and entity at any time liable for the payment of this Note hereby waives demand, presentment, protest, notice of protest, notice of nonpayment due and all other requirements otherwise necessary to hold them immediately liable for payment hereunder. This Note is governed by and shall be construed and enforced in accordance with Nevada law. Time is of the essence with respect to all of the terms and provisions of this Note. CASINOVATIONS INCORPORATED By: _______________________________ Its:_______________________________ 3 EX-4 3 THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW. THIS WARRANT OR SUCH SHARES MAY NOT BE SOLD, DISTRIBUTED, PLEDGED, OFFERED FOR SALE, ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF UNLESS: (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAW COVERING ANY SUCH TRANSACTION INVOLVING SAID SECURITIES; (B) THE COMPANY (DEFINED BELOW) RECEIVES AN OPINION OF LEGAL COUNSEL FOR THE HOLDER OF THIS WARRANT STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION AND SUCH OPINION IS IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY AND FROM COUNSEL REASONABLY SATISFACTORY TO THE COMPANY; OR (C) PURSUANT TO RULE 144 UNDER SUCH ACT. WARRANT TO PURCHASE SHARES OF COMMON STOCK CASINOVATIONS INCORPORATED This is to certify that, for value received, ____________________________ (the "Holder") is entitled, during a specified period of time as set forth in Section 3 herein (the "Exercise Period"), to purchase from Casinovations Incorporated, a Washington corporation (the "Company"), ________ fully paid and nonassessable shares of the Company's common stock, par value $0.001 per share (the "Common Stock"), at an exercise price per share as set forth in Section 1 herein (the "Exercise Price") (such number of shares and the Exercise Price being subject to adjustment as provided herein). The term "Warrant," as used herein, refers to this Warrant to Purchase Shares of Common Stock, the term "Warrant Shares," as used herein, refers to the shares of Common Stock purchasable hereunder, and the term "Parties," as used herein, refers collectively to the Holder and the Company. This Warrant is issuable only as part of a Unit or Units consisting of that certain $______,000 principal amount 9.5% Convertible Note Due 2004 dated as of the same date hereof to Holder (as "Purchaser") and the Company (as "Obligor") (collectively hereinafter the "Convertible Note"). Each Unit shall consist of a This Warrant is only exercisable after conversion of the Convertible Note. TERMS AND CONDITIONS This Warrant is subject to the following terms, provisions, and conditions: 1. EXERCISE PRICE. The Exercise Price shall be $3.00 per share. 2. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES. Subject to the provisions hereof, this Warrant may be exercised by the Holder, in whole or in part (but not less than 1,000 share increments), by the surrender of this Warrant, together with an exercise agreement in the form attached hereto (the "Exercise Agreement"), duly completed and executed by the Holder, to the Company during normal business hours on any business day at the Company's principal executive offices (or such other location as the Company may designate by notice to the Holder); and upon (a) the payment to the Company in cash, by certified or official bank check or by wire transfer for the account of the Company in the amount of the Exercise Price multiplied by the number of Warrant Shares for which the Warrant is being exercised. The Warrant Shares so purchased shall be deemed to be issued to the Holder as the record owner of such Warrant Shares, as of the close of business on the date on which this Warrant shall have been surrendered, the completed Exercise Agreement shall have been delivered, and payment shall have been made for such Warrant Shares as set forth above. Certificates for the Warrant Shares so purchased, representing the aggregate number of shares specified in the Exercise Agreement, shall be delivered to the Holder within a reasonable time, not exceeding ten (10) business days, after this Warrant shall have been so exercised. The certificates so delivered shall be in such denominations as may be reasonably requested by the Holder and shall be registered in the name of the Holder or such other name as shall be designated by the Holder. If this Warrant shall have been exercised only in part, then, unless this Warrant has expired, the Company shall, at its expense, at the time of delivery of such certificates, deliver to the Holder a new warrant representing the number of Warrant Shares with respect to which this Warrant shall not then have been exercised. 3. EXERCISE PERIOD. This Warrant may be exercised any time after August 1, 1999, and before 2:00 p.m., Las Vegas, Nevada time, on February 1, 2001 (the "Exercise Period"). 4. CONDITIONS PRECEDENT, CALL AND REDEMPTION. Notwithstanding anything else herein to the contrary, (a) The Warrant is not exercisable unless Holder has exercised fully the conversion option under the Convertible Note. (b) This Warrant may be called and redeemed, if not previously exercised, after the Company gives written notice to Holder of the Company's election to call and redeem (the "Redemption Notice") the Warrant and if, within thirty (30) days of such Redemption Notice, Holder has not exercised the Warrant pursuant to the terms hereof. In no event may the Company elect to redeem the Warrant prior to February 1, 2000. In the event of such redemption, the Company must pay to Holder consideration equal to the par value of the shares issuable pursuant to the Warrant. 5. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and agrees as follows: (a) SHARES TO BE FULLY PAID. All Warrant Shares shall, upon issuance in accordance with the terms of this Warrant, be validly issued, fully paid, and non-assessable. (b) RESERVATION OF SHARES. During the Exercise Period, the Company shall at all times have authorized, and reserved for the purpose of issuance upon exercise of this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of this Warrant. (c) SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon any entity succeeding to the Company by merger, consolidation, or acquisition of all or substantially all the Company's assets. 6. ADJUSTMENT PROVISIONS. During the Exercise Period, the Exercise Price and the number of Warrant Shares shall be subject to adjustment from time to time as provided in this Section 6. If the Company shall, prior to the conversion or payment of the Note in full, (a) declare a dividend or make a -2- distribution on its Common Stock payable in shares of its Common Stock, (b) subdivide its outstanding shares of Common Stock into a greater number of shares of Common Stock, or (c) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (d) issue any shares of capital stock of the Company by reclassification or capital reorganization of its shares of Common Stock, then the conversion privilege and Exercise Price in effect immediately prior to such action shall be adjusted so that the Holder shall be entitled to receive the number and kind of shares of Common Stock or other Capital Stock which the Holder would have owned or have been entitled to receive immediately after such action had the Holder exercised the Warrant immediately prior to the record date in the case of (a), or the effective date in the case of (b), (c) or (d). In the event that any adjustment of the Exercise Price as required herein results in a fraction of a cent, such Exercise Price shall be rounded up to the nearest cent. 7. PAYMENT OF EXPENSES. The Company and the Holder shall each be responsible for their own costs and expenses payable in connection with (a) the negotiation, preparation, execution and delivery of this Agreement and the other agreements to be executed in connection herewith; and (b) the issuance of certificates for Warrant Shares upon the exercise of this Warrant. The Company shall pay any issuance tax in connection with the issuance of certificates for Warrant Shares; provided, however, that the Holder shall be responsible for any income or other taxes in connection with such issuance. 8. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. This Warrant shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company. No provision of this Warrant, in the absence of affirmative action by the Holder to purchase Warrant Shares, and no mere enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of such Holder for the Exercise Price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 9. TRANSFER, EXCHANGE, AND REPLACEMENT OF WARRANT. This Warrant, nor any interest in this Warrant, may be sold, distributed, assigned, offered, pledged or otherwise transferred without the express written consent of the Company. (a) EXCHANGE OF WARRANTS; REPLACEMENT OF WARRANTS. This Warrant is exchangeable upon the surrender hereof by the Holder to the Company at its office for new warrants of like tenor and date representing in the aggregate the right to purchase the number of shares of Common Stock purchasable hereunder, each of such new Warrants to represent the right to purchase such number of shares of Common Stock (not to exceed the aggregate total number purchasable hereunder) as shall be reasonably designated by the Holder at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, and, in case of loss, theft or destruction, of indemnity, or security reasonably satisfactory to it, and upon, surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new warrant of like tenor, in lieu of this Warrant. (b) CANCELLATION; PAYMENT OF EXPENSES. Upon the surrender of this Warrant in connection with any transfer, exchange, or replacement as provided in this Section 9, this Warrant shall be promptly canceled by the Company. The Company and the Holder shall each be responsible for their own costs and expenses payable in connection with the preparation, execution, and delivery of new warrants pursuant to this Section 9. The Holder shall be responsible for any tax which may be payable in connection with any transfer of a certificate for Warrant Shares. (c) REGISTRAR. The Company shall maintain, at its principal executive offices (or such other location as the Company may designate by notice to the Holder), a registrar for this -3- Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee and each prior owner of this Warrant. 10. AMENDMENTS. No amendment or modification of this Warrant shall be deemed effective unless and until such amendment or modification is an express writing executed by both of the Parties. 11. GOVERNING LAW. This Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of Nevada without regard to the body of law controlling conflicts of law. The parties hereto hereby submit to the exclusive jurisdiction of the courts located in Las Vegas, Nevada, with respect to any dispute arising under this Warrant and the transactions contemplated hereby. 12. REGISTRATION RIGHTS. (a) MANDATORY REGISTRATION. The Company shall prepare and, no sooner than nine months and no later than twelve months after the Issuance Date, file with United States Securities and Exchange Commission (the "SEC"), an appropriate registration statement to effect a registration of the Registrable Securities (as defined below) covering the resale of the Registrable Securities underlying this Warrant, which registration statement, to the extent allowable under the Securities Act of 1933, as amended, and the rules promulgated thereunder (including Rule 416), shall state that such registration statement also covers such indeterminate numbers of additional shares of Common Stock as may become issuable upon conversion of the Warrants (i) to prevent dilution resulting from stock splits, stock dividends or similar transactions or (ii) by reason of changes in the Exercise Price in accordance with the terms of this Warrant. The Company shall use its best efforts to obtain effectiveness of the registration statement as soon as practicable. For purposes of this Agreement, the term "Registrable Securities" means the Warrant Shares issued or issuable and any shares of capital stock issued or issuable as a dividend on or in exchange for or otherwise with respect to any of the foregoing. (b) OBLIGATIONS OF THE HOLDER. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Warrant with respect to the Registrable Securities of the Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents and otherwise cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the registration statement. At least three (3) business days prior to the first anticipated filing date of the Registration Statement, the Company shall notify the Holder of the information the Company requires from each such Holder. (c) EXPENSE OF THE REGISTRATION. All reasonable expenses, other than underwriting discounts and commissions, incurred by the Company in connection with registrations, filings or qualifications pursuant to this Section 12, including without limitation, all registration, listing and qualification fees, printers and accounting fees, and the fees and disbursements of counsel for the Company, shall be borne by the Company. -4- 13. EXPIRATION DATE. This Warrant shall expire and become null and void and of no further force or effect at 5:00 p.m. Las Vegas, Nevada time on February 1, 2001. In Witness Whereof, the Company has caused this Warrant to be signed by its duly authorized officer. Casinovations Incorporated, a Washington corporation By:_______________________________ Name:________________________ Title:_______________________ Date:_____________________________ -5- EX-27 4
5 3-MOS DEC-31-1999 MAR-31-1999 1,299,589 0 75,902 0 1,111,406 2,528,949 687,720 164,817 3,576,214 2,235,836 0 0 0 7,094 0 3,576,214 17,705 69,074 5,745 5,745 1,156,499 0 123,710 (1,216,880) 0 (1,216,880) 0 0 0 (1,216,880) (0.17) (0.17)
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