-----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, G26ddmKBN1QzeNpkmE25QsQlxgFN1NLYLv51sMtb9qDcuuUd/qt29ceMy+h1Plt3 uuWz+W9s3bDj2EwSq7vGCQ== 0000906477-98-000051.txt : 19981019 0000906477-98-000051.hdr.sgml : 19981019 ACCESSION NUMBER: 0000906477-98-000051 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19981016 SROS: NONE 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: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: SEC FILE NUMBER: 333-31373 FILM NUMBER: 98726517 BUSINESS ADDRESS: STREET 1: 3909 SOUTH MARYLAND PKWY STREET 2: STE 311 CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 7027337195 MAIL ADDRESS: STREET 1: 3909 SOUTH MARYLAND PKWY STREET 2: STE 311 CITY: LAS VEGAS STATE: NV ZIP: 89119 10QSB/A 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB/A (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 1998 ------------------------------ 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: ------------------------------------------- CASINOVATIONS INCORPORATED - ------------------------------------------------------------------ (Exact name of small business issuer as specified in its charter) Washington 91-1696010 - ---------------------------------- ------------------------ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 5240 S. Eastern Avenue, First Floor, 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: 6,355,942 shares of Common Stock, $.001 par value, as of June 30, 1998 - ----------------------------------------------------------------- Transitional Small Business Disclosure Format (check one); YES NO X ------- ------- 1 FORM 10-QSB TABLE OF CONTENTS PAGE NUMBER PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 Balance Sheet 3 Statement of Operations 4 Statement of Cash Flows 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 11 Item 2. Changes in Securities 11 Item 3. Defaults Upon Senior Securities 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURE 13 EXHIBIT INDEX 14 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS.
CASINOVATIONS INCORPORATED (A Development Stage Company) Balance Sheet June 30, 1998 ASSETS June 30, 1998 (Unaudited) --------------- Current assets: Cash $ 28,294 Accounts receivable, trade 9,927 Accounts receivable - employees 12,285 Inventories 308,411 Prepaid expenses 48,490 --------------- Total current assets 407,407 Property and equipment, at cost, net of accumulated depreciation of $25,132 266,349 Intangible assets, at cost, net of accumulated amortization of $18,095 165,080 Deposits 53,361 --------------- $ 892,197 =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable - bank $ 197,500 Notes payable - other 605,000 Current portion of leases payable 149,616 Accounts payable 498,095 Accrued wages 34,563 Accrued interest 65,449 Customer deposits 13,374 Shareholder loans 692,357 --------------- Total current liabilities 2,255,954 Leases payable - non-current 223,363 Stockholders' equity: Common stock, $.001 par value, 20,000,000 shares authorized, 6,355,942 shares issued and outstanding 6,356 Additional paid-in capital 4,509,894 Unpaid subscriptions to common stock - Deficit accumulated during development stage (6,103,370) --------------- (1,587,120) --------------- $ 892,197 =============== See accompanying notes to unaudited financial statements. 3
CASINOVATIONS INCORPORATED (A Development Stage Company) Statement of Operations Three Months Ended June 30, 1998 and 1997 Six Months Ended June 30, 1998 and 1997 and Period From Inception (April 29, 1994) to June 30, 1998 PERIOD FROM THREE MONTHS ENDED SIX MONTHS ENDED INCEPTION APRIL 29, 1994 JUNE 30, JUNE 30, JUNE 30, JUNE 30, TO 1998 1997 1998 1997 JUNE 30, 1998 ------------ ------------- ------------- ------------- --------------- Sales $ 3,943 $ - $ 4,288 $ 632 $ 9,249 Interest income - 900 - 7,074 10,083 Other income - 13,000 - 13,000 3,010 ------------ ------------ ------------- ------------- ------------- 3,943 13,900 4,288 20,706 22,342 Other costs and expenses: General and administrative 690,080 396,708 1,045,864 717,735 4,087,944 General and administrative - related parties - 203,092 - 203,092 76,768 Research and development 24,487 125,208 126,820 171,814 1,298,080 ------------ ------------ ------------- ------------- ------------- 714,567 725,008 1,172,684 1,092,641 5,462,792 ------------ ------------ ------------- ------------- ------------- (Loss) from operations (710,624) (711,108) (1,168,396) (1,071,935) (5,440,450) Interest expense - - 37,528 - 86,823 Interest expense - related parties 29,256 145,152 54,136 167,143 728,483 ------------ ------------ ------------- ------------- ------------- 29,256 145,152 91,664 167,143 815,306 (Loss) before income taxes (739,880) (856,260) (1,260,060) (1,239,078) (6,255,756) Provision for income taxes - - - - - ------------ ------------ ------------- ------------- ------------- Net (loss) $ (739,880) $ (856,260) $ (1,260,060) $ (1,239,078) $ (6,255,756) ============ ============ ============= ============= ============= Basic (loss) per share $ (0.12) $ (0.16) $ (0.20) $ (0.23) $ (1.40) ============ ============ ============= ============= ============= Weighted average shares outstanding 6,283,638 5,481,525 6,231,638 5,393,371 4,471,098 ============ ============ ============= ============= ============= See accompanying notes to unaudited financial statements. 4
CASINOVATIONS INCORPORATED (A Development Stage Company) Statement of Cash Flows Three Months Ended June 30, 1998 and 1997 and Period From Inception (April 29, 1994) to June 30, 1998 Inception (April 29, 1994) to June 30, 1998 June 30, 1997 June 30, 1998 ------------- ------------- ---------------- Net (loss) $ (1,260,060) $ (1,239,078) $ (6,255,756) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 44,175 11,396 88,664 Stock and options issued for services 176,500 309,999 1,088,000 Compensation value of cash stock sales - - 177,000 Stock and options issued for additional interest - 59,053 117,332 Equipment exchanged for services - - 2,903 Amortization of deferred interest - 93,000 232,500 Changes in assets and liabilities: (Increase) decrease in accounts receivable (4,052) (5,591) (22,212) (Increase) decrease in inventory (126,118) - (308,411) (Increase) decrease in prepaid expenses (8,490) (4,526) (48,490) (Increase) decrease in other assets (5,642) (5,201) (53,361) Increase (decrease) in accounts payable 55,783 (70,672) 498,094 Increase (decrease) in accrued expenses 32,200 (80,170) 116,387 ------------- ------------- --------------- Total adjustments 164,356 307,288 1,888,406 ------------- ------------- --------------- Net cash (used in) operating activities (1,095,704) (931,790) (4,367,350) ------------- ------------- --------------- Cash flows from investing activities: Acquisition of plant and equipment (16,204) (18,996) (331,607) Increase in patents and trademarks (16,406) (10,949) (191,389) ------------- ------------- --------------- Net cash (used in) investing activities (32,610) (29,945) (522,996) ------------- ------------- --------------- Cash flows from financing activities: Common stock sold for cash 430,000 600,010 2,380,569 Capital contributions by partners - - 402,950 Proceeds from long-term debt 430,000 - 1,049,100 Proceeds of shareholder loans 290,000 - 1,060,168 Repayment of shareholder loans (38,660) (20,000) (97,526) Repayment of leases payable (74,121) (9,155) 123,379 Proceeds from notes payable - - - ------------- ------------- --------------- Net cash provided by financing activities 1,037,219 570,855 4,918,640 ------------- ------------- --------------- Increase (decrease) in cash (91,095) (390,880) 28,294 Cash and cash equivalents, beginning of period 119,389 552,878 - ------------- ------------- --------------- Cash and cash equivalents, end of period $ 28,294 $ 161,998 $ 28,294 ============= ============= =============== See accompanying notes to unaudited financial statements. 5 CASINOVATIONS INCORPORATED (A Development Stage Company) Notes to Financial Statements 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, 1997 as included in the Company's Registration Statement on Form SB-2/A as last filed with the Securities and Exchange Commission on June 5, 1998 (Commission File No. 333-31373). Basic loss per share was computed using the weighted average number of common shares outstanding. Certain of the shares issued to a consultant during 1997 were for future services to be provided to the Company. The amounts attributable to unearned services have been accounted for as unpaid subscriptions to common stock in the accompanying balance sheet. The Company has amortized $66,500 of the unearned services to general and administrative expenses during the six months ended June 30, 1998. During January 1998, the Company received proceeds from convertible debentures aggregating $400,000. When added to the proceeds received in December 1997, the Company has received total proceeds of $500,000 from its convertible debentures. The debentures bear interest at 6% per annum and are due on or before January 31, 1999. The principal amount of the debentures is convertible at the holder's option into shares of the Company's common stock at a conversion price of $2.13 per share. Of the gross proceeds received from the convertible debentures, $150,000 was received from the Company's principal stockholder and has been included in shareholder loans in the accompanying balance sheet. Additionally, the principal stockholder made working capital advances to the Company during the quarters ended March 31, 1998 and June 30, 1998 aggregating $140,000 and $350,000 respectively. The advances bear interest at 9.5% per annum. During the quarter ended June 30, 1998, the Company sold an aggregate of 176,000 shares of its $.001 par value common stock for cash proceeds of $430,000 and $176,500. Additionally, 20,000 shares of the common stock were issued for services amounting to $50,000 in connection with the completion of an outstanding contract. 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 - EMPLOYMENT AGREEMENT. Effective June 1, 1998, the Company's president entered into an employment agreement with the Company for a term expiring December 31, 1999. The officer will receive base pay of $12,500 per month through December 31, 1998 and $18,500 per month for the remainder of the term. The officer also was granted options to purchase 100,000 shares at $1.50 per share effective immediately and is eligible to receive an 6 additional stock option for 100,000 shares at $1.50 per share upon attaining the Company's goals for 1998 as determined by the Board of Directors. An affiliated entity of the officer also agreed to the termination of a consulting agreement in exchange for $42,000, payable over 7 months, and 10,000 shares of the Company's Common Stock. The Company recognized $100,000 of compensation expense related to the stock option for 100,000 shares which is exercisable at a price that is $1.00 per share less than the current fair value of the stock and $25,000 of compensation expense related to the stock issuance of 10,000 shares during the quarter ended June 30, 1998. NOTE 4 - SUBSEQUENT EVENTS. On May 28, 1998, the Company entered into a letter agreement (the "Letter Agreement") with Steven L. Forte and Cheryl Forte with respect to, among other things, the proposed severance of the business relationship between the Company and Mr. Forte and the purchase by the Company of all of the share of Company common stock held by either Steven L. Forte and Cheryl Forte (the "Forte Shares"). The Forte Transaction also involves the termination of the employment agreement with Steven Forte and the gifting of 82,000 Common Shares by Steven and Cheryl Forte to certain individuals. The Company has negotiated the Forte Transaction due to the concerns of the Nevada State Gaming Control Board with the prior gaming-related conviction of Steven Forte. The Company elected to repurchase the Forte Shares instead of including the Forte Shares as part of the Offering because the Nevada State Gaming Control Board required such divestiture as a condition to final approval of the Shuffler for distribution in Nevada. In addition, the Company did not want to subject this divestiture of the Forte Shares to the public market risks that affect the Offering. On July 2, 1998, the Nevada State Gaming Control Board approved of the terms of the Forte Transaction and permitted the Company to conduct field trials of the Shuffler at certain hotel- casinos in Nevada. The Company is currently negotiating the definitive documents for the Forte Transaction with Steven and Cheryl Forte. Mr. Forte is no longer a consultant, director or employee of the Company. Although the definitive agreement between the Company and Steven L. Forte and Cheryl Forte is currently being negotiated, the Company has agreed in principle to, among other things, (a) terminate the employment and non-compete agreement between the Company and Mr. Forte; and (b) purchase (i) certain royalties granted to Mr. Forte from the sale of the Random Ejection Shuffler, Fantasy 21 and the Safety-Peek Playing Card for $200,000; (ii) options to purchase 20,000 shares of Company common stock for $30,000, and (iii) 848,682 shares of Company common stock for $2,121,705. The Forte Transaction also involves the termination of the employment agreement with Steven Forte and the gifting of 82,000 Common Shares by Steven and Cheryl Forte to certain individuals. As consideration, the Company has agreed to issue a promissory note in favor of Steven L. Forte and Cheryl Forte in the amount of $2,351,705. The promissory note shall bear an interest rate of 6.5% during the first year and 8% thereafter, be 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. On the fifth anniversary of the promissory note, the unpaid principal and interest will become due and payable. The promissory note will be secured by a security interest in the patents for the Company's Random Ejection Shuffler and Fantasy 21 table game. Since the definitive documents with respect to the Forte Transaction are currently being negotiated, the associated promissory note is not dated and, accordingly, the interest has not started to accrue. Therefore, there will be no interest payments in 1998. Although the Forte Note will be secured by the 848,682 Common Shares and by a first security interest in the patents for the Shuffler and Fantasy 21, Steven and Cheryl Forte have agreed to release their security interest in said patents for a principal reduction of 50% of the outstanding principal of the Forte Note and for a due-on-sale amendment to the Forte Note whereby the outstanding principal of the Forte Note will be due and owing upon a change of control of the Company. In addition, the Company has agreed to reduce the outstanding principal of the Forte Note by $750,000.00 if the Company completes the Offering of 7 1,500,000 Common Shares. In the event the Company fails to sell all 1,500,000 Common Shares yet sells at least 500,000 Common Shares for cash, the Company has agreed to reduce the outstanding principal of the Forte Note by an amount calculated by multiplying $750,000.00 by the ratio of the number of Common Shares sold for cash by 1,500,000 Common Shares. Further, in the event the Company issues and sells Common Shares in a subsequent registered public offering, the Company and Steven and Cheryl Forte have agreed to a schedule whereby the Company will reduce specified amounts of outstanding principal of the Forte Note according to specified proceeds received by the Company through such a public offering. On July 28, 1998, the Company and a third-party supplier entered into an agreement to settle all claims between the two parties. Pursuant to the terms of the settlement, the parties agreed to dismiss the aforementioned matters with prejudice and agreed to mutually release and indemnify each other with respect to the issues that were the subject matter of this litigation. Further, in exchange for certain component parts and equipment used for the assembly of the Company's products, the Company executed a demand note in the amount of $325,000 in favor of the third-party supplier which note the Company (i) has already paid $50,000, and (ii) will be able to satisfy in full at a discount if the Company pays an additional $150,000 to the third-party supplier by October 1, 1998. If the Company is unable to pay the $150,000 by October 1, 1998, the Company will be obligated to pay an additional $125,000 thus reflecting the full amount of the demand note. On July 31, 1998, the Company and Technology Development Center, LLC amended the terms of the exclusive license granted to the Company such that the Company will make monthly payments of $5,000 from August 1998 to October 1998, make a payment of $2,500 in November 1998, and convert the remaining balance of $51,250 in principal and future into 20,500 Common Shares at a conversion rate of $2.50 per Common Share. Through this amendment, the Company reduces its cash payment requirements and related expenses. The Company is current on its obligations with Technology Development Center, LLC. On August 13, 1998, the Company entered into an agreement with Gaming 2000, L.L.C. ("Gaming 2000") for the purchase of all of the assets of Gaming 2000 in exchange for $75,000, payable by delivery of 30,000 shares of the Company's common stock. In addition, the Company has hired the following members of Gaming 2000's management team: William O'Hara - Senior Vice President, Dean Barnett - Vice President of Sales, John Kenny - Customer Service Manager, and Tom Gayton - Account Executive. These individuals were all former employees of Shuffle Master, Inc. with Mr. O'Hara as a founding member of Shuffle Master, Inc., and Mr. Barnett as national sales director for Shuffle Master, Inc. The Company has received working capital advances from its principal shareholder in the amount of $290,000 in the first six months of 1998 for a total sum of $410,000 as of June 30, 1998. These amounts are in addition to a $150,000 convertible debenture also held by its principal shareholder. The conversion rate for the convertible debentures was adjusted downward the Company's board of directors from $2.98 to $2.13 to reflect the reduction of the offering price of the Company's offering from $3.50 per share to $2.50 per share. With respect to the accounting presentation, the Company has included the $500,000 convertible debentures issued to certain shareholders, including the Company's principal shareholder, under "Notes payable - other" entry of the balance sheet. These convertible debentures have a conversion rate of $2.13 per share. 8 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 of 1933 and Section 21E of the Securities Exchange Act of 1934, such as statements relating to plans for future operations, capital spending and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include, but are not limited to, those relating to adequate sources of cash, manufacturing and supply issues, marketing of and acceptance of the Company's products, dependence on existing management, gaming regulations (including actions affecting licensing), leverage and debt service (including sensitivity to fluctuations in interest rates), issues related to the Year 2000, domestic or global economic conditions and changes in federal or state tax laws or the administration of such laws. PLAN OF OPERATIONS. The Company has substantially completed its research and development stage of the Random Ejection Shuffler(TM)(the "Shuffler"), the Fantasy 21 table game and the SecureDrop Coin Bucket System ("SecureDrop"). In July 1998, the Company established a manufacturing facility in Boise, Idaho for the purposes of producing the Random Ejection Shuffler and Fantasy 21 and has hired a production manager to oversee the production process. The Company has 50 completed Fantasy 21 units in the quality assurance process which, upon assurance, will be shipped to the Company's offices in Las Vegas, Nevada, by the end of August 1998. The Company will employ a combination of employees and contract laborers in the manufacturing process. The Company expects to produce 85 units of the Random Ejection Shuffler by the end of August 1998 and has ordered components that will enable its manufacturing facility to produce an additional 250 units by the end of October 1998. The demand for the Company's products will be dependent on general economic conditions, economic conditions in the gaming industry and acceptance of new products in the marketplace. The Company is developing business plans that are anticipated to allow the Company to be self-supportive within the first five to six months from the beginning of sales. Should the Company be able to complete the successful offering of 1,500,000 shares of Common Stock presently pending pursuant to that certain Registration Statement on Form SB-2/A (Commission File No. 333- 31373) (the "Offering"), the Company expects that the Shuffler and the Fantasy 21(TM) table game will be brought to market and that the SecureDrop(TM) coin box system development will be completed and brought to market as well. The Company expects that the net proceeds from the Offering and cash flow from operations will be sufficient to meet the Company's liquidity requirements throughout the remainder of the year. In the event that either the Offering is not completed or that sales are inadequate to generate sufficient cash flow from operations, the Company will have to locate alternative sources of funds. At June 30,1998, the Company's working capital deficit was $1,848,947 compared to $1,031,024 at December 31, 1997. The current ratio (the ratio of current assets to current liabilities) as of June 30, 1998 was 0.18:1, compared to 0.26:1 at December 31, 1998. The Company is presently dependent on the success of the Offering to fund its current liquidity needs or it will need to locate alternative sources of funding for which there may not be sources available. The Company has also relied on working capital advances from its principal shareholder of $290,000 in the first six months of 1998 for a total of $410,000 as of June 30, 1998 (in addition to a $150,000 convertible debenture purchase) for liquidity requirements, without which the Company would not have been able to operate. Since June 30, 1998, the Company has received proceeds of $165,000 from the sale of shares pursuant to the Offering and has received and additional $250,000 loan from its principal shareholder. Although the Company is currently negotiating 9 with certain lenders for additional sources of funds and anticipates receiving such additional sources of funds, the Company may not be able to locate alternative liquidity sources in the event that the principal shareholder ceases to make advances to the Company and the Offering is not successful. The ability of the Company to obtain any necessary gaming licenses, authorizations and approvals in certain key jurisdictions, such as Nevada and New Jersey, may materially impact the Company's ability to market its products. Additional new products are in conceptual design stages and, with adequate funding, are expected to be brought to market within the next 12 months. With respect to the Nevada gaming authorities, the Company has received approval for the distribution of Fantasy 21 and approval to begin field trials for the Shuffler. Final approval of the Shuffler is dependent upon, INTER ALIA, the completion of the Forte transaction described in Part II, "Item 5. Other Information." For the three months ended March 31, 1998 and the six months ended June 30, 1998, the Company did not make any significant acquisitions of plant and equipment. Inventory for parts to assemble product increased $79,162 at the end of the second quarter. There are no expectations for the purchase of significant equipment or plant. Management of the manufacturing process for the Shuffler has been re-located to the Company's manufacturing facilities in Boise, Idaho. For the three months ended June 30, 1998 and the six months ended June 30, 1998, the Company has a net loss of $739,880 and $1,260,060, respectively. For the three months ended June 30, 1998 and the six months ended June 30, 1998, the Company had depreciation and amortization of $37,210 and $44,175, respectively. For the three months ended June 30, 1998 and the six months ended June 30, 1998, the Company had general and administrative expenses of $690,080 and $1,045,867. For these time periods, these expenses consisted of salaries and related costs of $96,110 and $203,383, respectively, consulting services of $108,741 and $187,242, respectively, cost of gaming industry shows of $7,754 and $17,117, respectively, travel and entertainment costs of $47,455 and $109,118, respectively, printing and office expense, including rent of $36,532 and $70,642, respectively, and legal expenses of $92,350 and $106,930, respectively. 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 THAT MAY AFFECT FUTURE RESULTS. The Company operates in the highly competitive gaming industry that involves a number of risks, some of which are beyond the Company's control. For a complete discussion of these risks, see the section entitled, "Risk Factors," included in the Company's Registration Statement on Form SB-2/A, as last filed with the Commission on June 5, 1998 (Commission File No. 333-31373). PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On April 24, 1998, a complaint was filed in District Court, Clark County, Nevada on behalf of the Company against Western Electronics, Inc. ("Western") and its Chief Executive Officer, John Wasden. The Complaint alleges causes of action for breach of contract, declaratory relief, unjust enrichment, interference with contractual relations, conversion and fraud--intentional misrepresentation, all stemming from purchase orders between the Company and Western for the Shuffler. The Complaint was served upon Western on April 27, 1998, and service upon Mr. Wasden is pending. Through this litigation, the Company seeks to recover component parts purchased for the assembly of the Shuffler or in the alternative to recover the monies expended for their purchase as well as other money damages. Subsequent to the filing of its answer, Western filed an amended answer and counterclaim in which Western alleged breach of contract and payment of amount. On July 28, 1998, the Company and Western entered into an agreement to settle all claims between the two parties. Pursuant to the terms of the settlement, the parties agreed to dismiss the aforementioned matters with prejudice and agreed to mutually release and indemnify each other with respect to the issues that were the subject matter of this litigation. Further, in exchange for certain component parts and equipment used for the assembly of the Company's products, the Company executed a demand note in the amount of $325,000 in favor of Western which note the Company (i) has already paid $50,000, and (ii) will be able to satisfy in full at a discount if the Company pays an additional $150,000 to Western by October 1, 1998. In the event that the Company is unable to pay the $150,000 by October 1, 1998, the Company will be obligated to pay an additional $125,000 thus reflecting the full amount of the demand note. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On May 27, 1998, the Company held its annual meeting of shareholders (the "Annual Meeting"). The purpose of the Annual Meeting was for the election of Steven J. Blad, Richard S. Huson, Jamie McKee, David E. Sampson, and Bob L. Smith (the "Nominees") as directors of the Company for a term of one year. The shareholders of the Company voted in favor of the Nominees. ITEM 5. OTHER INFORMATION. On May 28, 1998, the Company entered into a letter agreement (the "Letter Agreement") with Steven L. Forte and Cheryl Forte with respect to, among other things, the proposed severance of the business relationship between the Company and Mr. Forte and the purchase by the Company of all of the share of Company common stock held by either Steven L. Forte and Cheryl Forte (the "Forte Shares"). 11 The effectiveness of the Letter Agreement was subject to the approval of the Nevada State Gaming Control Board. On July 2, 1998, the Nevada State Gaming Control Board approved the terms of the Letter Agreement and authorized field trials for the Company's Random Ejection Shuffler. Although the definitive agreement between the Company and Steven L. Forte and Cheryl Forte is currently being negotiated, the Company has agreed in principle to, among other things, (a) terminate the employment and non-compete agreement between the Company and Mr. Forte; and (b) purchase (i) certain royalties granted to Mr. Forte from the sale of the Random Ejection Shuffler; (ii) options to purchase 20,000 shares of Company common stock, and (iii) 848,682 shares of Company common stock. As part of the transaction, the Company has agreed to issue a promissory note in favor of Steven L. Forte and Cheryl Forte in the amount of $2,351,705.00. The promissory note shall bear an interest rate of 6.5% during the first year and 8% thereafter, be 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. On the fifth anniversary of the promissory note, the unpaid principal and interest will become due and payable. The promissory note will be secured by a security interest in the patents for the Company's Random Ejection Shuffler and Fantasy 21 table game. On August 13, 1998, the Company entered into an agreement with Gaming 2000, L.L.C. ("Gaming 2000") for the purchase of all of the assets of Gaming 2000 in exchange for $75,000, payable by delivery of 30,000 shares of the Company's common stock. In addition, the Company has hired the following members of Gaming 2000's management team: William O'Hara - Senior Vice President, Dean Barnett - Vice President of Sales, John Kenny - Customer Service Manager, and Tom Gayton - Account Executive. These individuals were all former employees of Shuffle Master, Inc. with Mr. O'Hara as a founding member of Shuffle Master, Inc., and Mr. Barnett as national sales director for Shuffle Master, Inc. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. EXHIBIT NUMBER DESCRIPTION -------------- ----------- 27.01 Financial Data Schedule (b) REPORT ON FORM 8-K. None. 12 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: October 15, 1998 By: /s/ Jay L. King -------------------------------- Jay L. King Its: Chief Financial Officer and Secretary 13 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE NUMBER - -------------- ----------- ----------- 27.01 Financial Data Schedule 15 14
EX-27 2
5 6-MOS DEC-31-1998 JUN-30-1998 28,294 0 22,212 0 308,411 407,407 291,481 25,132 892,197 2,255,954 0 0 0 6,356 4,509,894 892,197 4,288 4,288 0 0 6,172,684 0 91,664 (1,260,000) 0 0 0 0 0 (1,260,060) (.20) 0
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