-----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, AOHW0qzGHeAc8Si3FF6BWBgjb7djaY34IsGX79sBNAPq0L7TYpKfYvoSYUCEpSZM CeTJkJ3eIqTooR+EYhUPjw== 0001014897-97-000037.txt : 19971114 0001014897-97-000037.hdr.sgml : 19971114 ACCESSION NUMBER: 0001014897-97-000037 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19971112 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: SB-2/A SEC ACT: SEC FILE NUMBER: 333-31373 FILM NUMBER: 97714456 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 SB-2/A 1 2 Commission File Number 333-31373 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM SB-2/A REGISTRATION STATEMENT Under The Securities Act of 1933 CASINOVATIONS INCORPORATED Washington 91-1696010 (State or other (Primary Standard Industrial (I.R.S. Employer jurisdictions Classification Code Number) Identification Number) of incorporation or organization) 3909 South Maryland Parkway Suite 311 Las Vegas, Nevada 89119 Telephone: 702-733-7195 Facsimile: 702-733-7197 (Address and telephone number of registrant's principal executive offices and principal place of business.) Jay L. King 3909 South Maryland Parkway Suite 311 Las Vegas, Nevada 89119 Telephone: 702-733-7195 Facsimile: 702-733-7197 (Name, address and telephone number of agent for service.) with copies to: Jody M. Walker Attorney At Law 7841 South Garfield Way Littleton, Colorado 80122 If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: | x | CALCULATION OF REGISTRATION FEE
Title of each Proposed Proposed Amount of class of Amount to be offering aggregate registration securities registered price offering price fee Common Stock $.001 par value 200,000 $3.50 $700,000 $218.75 Common Stock 2,119,041 $3.50 $7,416,644 $2,317.70 Common Stock 200,000 $4.00 $800,000 $250.00 Common Stock 200,000 $6.00 $1,200,000 $375.00 Common Stock 250,000 $8.00 $2,000,000 $625.00 Common Stock 100,000 $1.50 $150,000 $46.88 Total 3,069,041 $12,266,644 $3,833.33
[FN] Represents Common Stock to be registered on behalf of Selling Shareholders. Represents Common Stock underlying the A Warrants to be registered on behalf of Selling Shareholders. Represents Common Stock underlying the B Warrants to be registered on behalf of Selling Shareholders. Represents Common Stock underlying the C Warrants to be registered on behalf of Selling Shareholders. Represents Common Stock underlying the D Warrants to be registered on behalf of Selling Shareholders. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. 3 PRELIMINARY PROSPECTUS DATED OCTOBER 29, 1997 SUBJECT TO COMPLETION Up to a Maximum of 200,000 Common Shares 2,119,041 Common Shares on behalf of Selling Shareholders 200,000 Common Shares underlying the A Warrants 200,000 Common Shares underlying the B Warrants 250,000 Common Shares underlying the C Warrants 100,000 Common Shares underlying the D Warrants CASINOVATIONS INCORPORATED Common Stock ($.001 Par Value) The Company is offering up to a maximum of 200,000 Common Shares at the purchase price of $3.50 per Common Share. There is no minimum investment amount. The Company is registering 2,119,041 common shares on behalf of its selling security holders. The Company is registering the stock underlying its A, B, C and D Warrants on behalf of its selling security holders. The A Warrants are exercisable into one common share at the purchase price of $4.00. The A Warrants shall be exercisable for a period of four years from July, 1996 and shall be redeemable by the Company at $.001 per A Warrant upon thirty days notice. The B Warrants are exercisable into one common share at the purchase price of $6.00. The B Warrants shall be exercisable for a period of four years from July, 1996 and shall be redeemable by the Company at $.001 per B Warrant upon thirty days notice. The C Warrants are exercisable into one common share at the purchase price of $8.00. The C Warrants shall be exercisable for a period of four years from July, 1996 and shall be redeemable by the Company at $.001 per C Warrant upon thirty days notice. The D Warrants are exercisable into one common share at the purchase price of $1.50. The D Warrants shall be exercisable for a period of two years from January 31, 1997 and shall be redeemable by the Company at $.001 per D Warrant upon thirty days notice. The 2,119,041 common shares being registered on behalf of selling security holders consist of 513,511 Common Shares on behalf of the Company's officers, directors and affiliates, 1,211,516 Common Shares on behalf of shareholders who purchased in a previous private placement and 294,014 Common Shares to other unaffiliated shareholders. See "Selling Security Holders". Prior to the date hereof, there has been no trading market for the Common Stock of the company. There can be no assurance that the Common Stock will ever be quoted, that an active trading and/or a liquid market will ever develop or, if developed, that it will be maintained. THERE ARE MATERIAL RISKS IN CONNECTION WITH THE PURCHASE OF THE SECURITIES. SEE RISK FACTORS, PAGE 8. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sales of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any state. The Company is engaged in the manufacture and marketing of certain gaming products and concepts.
Price to Proceeds to Public Commissions Company Per Common Share 3.50 $.35 $3.15 Maximum Offering $700,000 $70,000 $630,000
(Footnotes on following page) The date of the Prospectus is October 29, 1997 4 [FN] The Common Shares are being offered on a "direct participation" basis by the Company (employees, officers and directors) and possibly selected broker- dealers. No sales commission will be paid for Common Shares sold by the Company. Selected broker-dealers shall receive a sales commission of up to 10% for any Common Shares sold by them. The Company reserves the right to withdraw, cancel or reject an offer in whole or in part. See "TERMS OF THE OFFERING - Plan of Distribution and Offering Period." This Offering will terminate on or before January 31, 1998. In the Company's sole discretion, the offering of Common Shares may be extended for up to three Thirty day periods, but in no event later than April 30, 1998. There is no minimum offering amount and no escrow account. Proceeds of this Offering are to be deposited directly into the operating account of the Company. See "TERMS OF THE OFFERING - Plan of Distribution." The amount as shown in the preceding table does not reflect the deductions of (1) general expenses payable by the Company; and (2) fees payable in connection with legal and accounting expenses incurred in this Offering. These expenses are estimated to be $41,919.53 if the total offering amount is obtained. The selling shareholders will not pay any of the expenses associated with this offering. REPORTS TO SECURITY HOLDERS Although the Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith will file reports and other information with the Securities and Exchange Commission, the Company has not yet filed any reports with the Securities and Exchange Commission. The reports and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission in Washington, D.C. and at the Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and the New York Regional Office, 7 World Trade Center, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission, Washington, D.C. 20549 at prescribed rates. The Company will furnish to shareholders: (i) an annual report containing financial information examined and reported upon by its certified public accountants; (ii) unaudited financial statements for each of the first three quarters of the fiscal year; and (iii) additional information concerning the business and operations of the Company deemed appropriate by the Board of Directors. EXHIBITS INCORPORATED BY REFERENCE The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement (together with all amendments and exhibits thereto, the "Registration Statement") under the Act with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the Rules and Regulations of the Commission. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement. Copies of such materials may be examined without charge at, or obtained upon payment of prescribed fees from, the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, at the Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and the New York Regional Office, 7 World Trade Center, New York, New York 10048. The Company will voluntarily file periodic reports in the event its obligation to file such reports is suspended under Section 15(d) of the Exchange Act. The Company will provide without charge to each person who receives a prospectus, upon written or oral request of such person, a copy of any of the information that was incorporated by reference in the prospectus. Requests for copies of said documents should be directed to Jay L. King, 3909 South Maryland Parkway, Suite 311, Las Vegas, Nevada 89119. The Commission maintains a Web site -- //www.sec.gov -- that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. UNTIL _____ , 1997 (90 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL PERSONS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THE OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF SUCH PERSONS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 5 NO DEALER, SALESMAN, AGENT OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, OR THE UNDERWRITER, IF AN UNDERWRITER ASSISTS IN THE SALE OF THE SECURITIES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION BY ANYONE TO ANY PERSON IN ANY STATE, TERRITORY OR POSSESSION OF THE UNITED STATES IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED BY THE LAWS THEREOF, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. 6 TABLE OF CONTENTS PROSPECTUS SUMMARY 7 RISK FACTORS 8 SELLING SECURITY HOLDERS 12 SOURCE AND USE OF PROCEEDS 16 DILUTION 16 THE COMPANY 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 22 MANAGEMENT 24 CERTAIN TRANSACTIONS 27 PRINCIPAL SHAREHOLDERS 30 SHARES ELIGIBLE FOR FUTURE SALE 34 MARKET FOR REGISTRANT'S COMMON EQUITY 34 TERMS OF THE OFFERING 35 DESCRIPTION OF SECURITIES 36 LEGAL MATTERS 37 LEGAL PROCEEDINGS 37 EXPERTS 37 INTERESTS OF NAMED EXPERTS AND COUNSEL 37
7 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, financial statements and notes to the financial statements including the notes thereto appearing elsewhere in this Prospectus. The Company. The Company was incorporated in the state of Washington on September 20, 1995. The Company's operations are the development and marketing of certain gaming products and concepts invented and developed by the Sines-Forte General Partnership ("Sines-Forte") of which Steve Forte, a Director of the Company and Randy Sines, former Vice President of the Company are general partners. The Company is authorized to issue a total of 20,000,000 shares of its capital stock (Common Shares), par value per share of $.001. The Company has four products that are completed or are near completion. First, the Random Ejection Shuffler, which can shuffle automatically up to six decks of playing cards in random order. There have been five proto types built and tested. The first production run is complete and parts have been ordered for the second, much larger run. Second, the Company has five pre-production units of the Fantasy 21 Table Game which were assembled on October 13, 1997 and are being used for sales demonstrations and field testing. Parts for the production run of Fantasy 21 Table Game have been ordered. Third, the Safety Peek Card, a new type of casino playing card, is already in use and is under distribution agreements with selected playing cards distributor. Fourth is the SecureDrop Coin Box system. This product was not developed internally by the Company, but has been exclusively licensed from an outside developer in an agreement dated October 10, 1997. The SecureDrop is in advanced development stages, with one working prototype available. Based on information from the developer, the Company expects to receive initial production units of the SecureDrop around January 1, 1998. The Company intends to sell or lease its products to the world-wide gaming industry directly, through distributors or subcontracts with non-affiliated manufacturers. The Company is in the process of negotiating distribution and marketing arrangements for its products, but has no significant history of operations and no profits. The Company's principal offices are located at 3909 South Maryland Parkway, Suite 311, Las Vegas, Nevada 89119. Its telephone number at such address is (702) 733-7195. The Offering. The Company hereby offers up to 200,000 Common Shares at $3.50 per Common Share. Common Shares outstanding prior to Public Offering 5,740,640 Common Shares to be outstanding after Offering 5,940,640 Percent of Common Shares owned by current shareholders after Maximum Offering 96.63% Gross Proceeds After Maximum Offering $700,000 Use of Proceeds. The Company intends to utilize the sale of its Common Shares for working capital. Thirty Five percent (35%) of all proceeds received will be used to pay down a $250,000 promissory note between the Company and Richard Huson, a principal shareholder of the Company. See "Source and Use of Proceeds." This Prospectus also relates to securities being registered on behalf of selling security holders and the Company will not receive any cash or other proceeds from the sale. Any proceeds received from the subsequent exercise of the A, B, C or D Warrants shall be used as working capital, to pay down the promissory note with Mr. Huson, if needed and to expand operations. See "Source and Use of Proceeds." 8 MARKET FOR COMMON STOCK AND WARRANTS. Prior to the date hereof, there has been no trading market for the Common Stock or Warrants of the Company. The Company has agreed to use its best efforts to apply for the quotation of its Common Stock on the Electronic Bulletin Board. There can be no assurance that the Common Stock will be quoted, that an active trading and/or a liquid market will develop or, if developed, that it will be maintained. See "Risk Factors" and "Market Listing." RESALES BY SELLING SHAREHOLDERS. This Prospectus relates to common Shares being registered on behalf of selling security holders. The Company will not receive any cash or other proceeds in connection with the subsequent sale. Current officers and directors do not plan on selling their Common Shares until the Company's offer is fully subscribed. The Company is not selling any Common Shares on behalf of Selling Shareholders and has no control or affect on these Selling Shareholders. See "Selling shareholders." RISK FACTORS There are material risks, such as uncertainty of future financial results, liquidity dependent on additional capital and debt financing and risks related to the gaming industry, in connection with the purchase of the securities. See "Risk Factors." Absence of Dividends; Dividend Policy The Company does not currently intend to pay regular cash dividends on its Common Stock; such policy will be reviewed by the Company's Board of Directors from time to time in light of, among other things, the Company's earnings and financial position. The Company does not anticipate paying dividends on its Common Stock in the foreseeable future. See "Risk Factors." Transfer Agent The Company acts as its own transfer agent for the Company's securities.
RISK FACTORS In analyzing this offering, prospective investors should read this entire Prospectus and carefully consider, among other things, the following Risk Factors: No Established Business/No Independent Market Research of Potential Demand for Current Operations. The Company is in the development stage and has only recently commenced formal efforts to manufacture and market its gaming devices. No independent organization has conducted market research providing management with independent assurance from which to estimate potential demand for the Company's business operations. Even in the event a market demand is independently identified, there is no assurance the Company will be successful. See "BUSINESS ACTIVITIES." 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 9 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. A 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. Newly Formed Corporation; Lack of Operating Results. The Company was formed in September of 1995, and its activities have been limited to product development, analyzing the gaming industry, consulting with persons in the industry, negotiating agreements with Sines-Forte and Sharps International Limited Partnership ("Sharps"), negotiating interim financing arrangements and developing and consummating the plan of reorganization with Sharps. Sines-Forte and Sharps are or were owned or controlled by persons who are also directors, executive officers and principal shareholders of the Company. Sharps has been dissolved. The Company is still in the development stage. Higher than normal operating expenses will in all likelihood be incurred during initial operations. Additional Financing May be Required. Even if all of the 200,000 Common Shares offered hereby are sold, the funds available to the Company may not be adequate for its business activities. Accordingly, the ultimate success of the Company may depend upon its ability to raise additional capital or to have other parties bear a portion of the required costs to further develop or exploit its business activities. Currently, the Company is seeking additional debt or equity financing, however, there can be no assurance that any additional financing can be obtained. See "USE OF PROCEEDS" AND "BUSINESS ACTIVITIES." Risks Attributable to a Direct Participation, Self-Underwritten Offering. This offering is being offered on a direct participation, self-underwritten basis. As a result, due to the absence of an underwriter, there may be less due diligence performed in conjunction with this offering than would be performed in an underwritten offering. Potential Adverse Impact of Sale of Shares by Selling Shareholders. Sales by selling shareholders may have an adverse impact on the Company's primary offering of securities at $3.50 per share. The current officers and directors do not plan on selling their registered Common Shares until the Company's offer is fully subscribed. However, the Company is not selling any Common Shares on behalf of the other Selling Shareholders and has not control over or affect on these Selling Shareholders. Influence on Election of Directors and All Other Matters by Current Officers and Directors. After the offering, the officers and directors of the Company will own 31.56% of the outstanding common shares. As a result, the officers and directors of the Company, through their aggregate ownership in the securities of the Company may be able to influence the election of directors and all other matters submitted to a vote of the Company's shareholders. Uncertainty of Market for Company's Products. The Company's products are still in the development status and, as such, the market for these products is uncertain. Future Sales of and Market for the Common Shares. Upon completion of the offering there shall be 5,940,640 Common Shares outstanding. This does not include any Common Shares which shall be issued upon conversion of the A, B, C or D Warrants, 75,000 Common Shares reserved for issuance pursuant to loan conversion options, 593,000 shares reserved pursuant to outstanding options for issuance to key employees and others. If the maximum number of Common Shares are sold, 3,721,599 of the Common Shares to be outstanding will be considered "restricted securities" as that term is defined in Rule 144 adopted under the United States Securities Act of 1933, as amended and in the future may be sold only in compliance with the resale provisions set forth therein. Rule 144 provides, in essence, that persons holding restricted securities for a period of one years may sell in brokerage transactions an amount equal to one percent of the Company's securities or outstanding Common Shares every three months. Additionally, if persons hold restricted securities for two years, there are virtually no resale limitations. Hence, the possibility of sale under Rule 144 may in the future have a depressive effect on the price of the Company's Common Shares in any market which may develop. Conflicts of Interest. Officers and directors of the Company are participating as selling shareholders in this offering while the Company undertakes its primary offering by its officers and directors. Additionally, some of the directors of the Company are currently principals of other businesses. As a result, conflicts of interest may arise. The directors shall immediately notify the other directors of any possible conflict which may arise due to their involvement with other businesses. The interested directors in any conflict shall refrain from voting on any matter in which a conflict of interest has arisen. The Company has adopted a policy that any transactions with directors, officers or entities of which they are also officers or directors or in which they have a financial interest, will only be on terms which are fair and reasonable to the Company and approved by a majority of the disinterested directors of the Company's Board of Directors. 10 For further discussion see "Management - Conflicts of Interest Policy." There can be no assurance that such other activities will not interfere with the officers' and directors' ability to discharge their obligation herein. Possible Affect on Company's Ability to Obtain Approval for the Licensing of the Company Due to Actions of Director of the Company. Steven L. Forte, a consultant to and director of the Company, was convicted of a gambling- related third degree felony in New Jersey in 1990, and in 1982 pled guilty to a misdemeanor trespass charge arising from a gambling related charge emanating from Harrah's Casino in Reno, Nevada. Such convictions could affect the Company's ability to obtain approval for the licensing of the Company, if required, in any number of prospective jurisdictions. 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. See "MANAGEMENT - Remuneration." 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. Dilution. Purchase of the Common Shares offered hereby will incur immediate dilution of $3.44 or 98.29% in the net tangible book value of their investment. This does not include any of the Common Shares to be issued upon exercise of the A, B, C and D Warrants. The Company has 75,000 Common Shares reserved for issuance pursuant to loan conversion options or 593,000 shares reserved for issuance pursuant to outstanding options and commitments to key employees and others. The Company may issue additional shares in private business transactions and may pursue a public offering in the future to complete its business plan. Any sales under Rule 144 after the applicable holding period may have a depressive effect upon the market price of the Company's Common Shares and investors in this offering upon conversion. As a result, the investors in this Offering may experience substantial dilution. See "DILUTION" and "CAPITALIZATION." Investors May Bear Risk of Loss. The capital required by the Company to acquire assets needed for its proposed operations is being sought from the proceeds of this Offering. Therefore, investors of this Offering may bear most of the risk of the Company's expansion of operations. Conversely, management stands to realize benefits from the payment of salaries, expenses and receipt of stock options regardless of the profitability of the Company. Financial Condition. Although the officers of the Company anticipate that the Company will have adequate funds to pay all of its operating expenses assuming the expansion and promotion of the Company's operations, there can be no assurance that this will in fact occur or that the Company can be operated in a profitable manner. Profitability depends upon many factors, including the success of this Offering and 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. See "The Company - Competition." Forward-Looking Statements and Associated Risk. This Prospectus, including the information incorporated herein by reference, 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," 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 Prospectus will be accurate. 11 Arbitrary Offering Price. The initial offering price of $3.50 per Common Share has been arbitrarily determined by the Company based upon such factors as the objectives of the Company, the proceeds to be raised by the Offering and the percentage of ownership to be held by the purchasers thereof. Having established that the total gross proceeds of the maximum offering would be $350,000, the actual price of $3.50 per Common Share was thereupon determined by the Company and accordingly bears no relationship whatsoever to assets, earnings, book value or any other objective standard of worth. See "DILUTION." 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. See "DESCRIPTION OF SECURITIES". 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 definitive employment agreements with Jay King and Randy Sines. Mr. Steven Forte has entered into a personal services agreement with the Company. Mr. Sines has recently resigned from the Company and will continue on a consultant basis. There can be no assurance that the Company will be successful in retaining its two remaining key employees or that it can attract or retain additional skill personnel required. The Company has not obtained any key man life Vulnerability to Fluctuations in the Economy. Demand for the Company's products is dependent on, among other things, general economic conditions which are cyclical in nature. Prolonged recessionary periods may be damaging to the Company. "Penny" Stock Regulation of Broker-Dealer Sales of Company Securities. The Company intends to list its Common Shares, at least initially, on the OTC Bulletin Board and on NASDAQ Small Cap Market upon meeting the requirements for a NASDAQ listing, if ever. Upon completion of this offering, the Company will not meet the requirements for a NASDAQ Small Cap Market listing. The OTC Bulletin Board has no quantitative written standards and is not connected with the NASD. Until the Company obtains a listing on the NASDAQ Small Cap Market, if ever, the Company's securities may be covered by a Rule 15g-9 under the Securities Exchange Act of 1934 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 Securities Exchange Act of 1934, make a special suitability determination of the purchaser and have received the purchaser's written agreement to the transaction prior to the sale. In order to approve a person's account for transactions in penny stock, the broker or dealer must (i) obtain information concerning the person's financial situation, investment experience and investment objectives; (ii) reasonably determine, based on the information required by paragraph (i) that transactions in penny stock are suitable for the person and that the person has sufficient knowledge and experience in financial matters that the person reasonably may be expected to be capable of evaluating the rights of transactions in penny stock; and (iii) deliver to the person a written statement setting forth the basis on which the broker or dealer made the determination required by paragraph (ii) in this section, stating in a highlighted format that it is unlawful for the broker or dealer to effect a transaction in a designated security subject to the provisions of paragraph (ii) of this section unless the broker or dealer has received, prior to the transaction, a written agreement to the transaction from the person; and stating in a highlighted format immediately preceding the customer signature line that the broker or dealer is required to provide the person with the written statement and the person should not sign and return the written statement to the broker or dealer if it does not accurately reflect the person's financial situation, investment experience and investment objectives and obtain from the person a manually signed and dated copy of the written statement. A penny stock means any equity security other than a security (i) registered, or approved for registration upon notice of issuance on a national securities exchange that makes transaction reports available pursuant to 17 CFR 11Aa3-1 (ii) authorized or approved for authorization upon notice of issuance, for quotation in the NASDAQ system; (iii) that has a price 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 and also may affect the ability of purchasers in this Offering to sell their shares in the secondary market. See "Market for Registrant's Common Equity and Related Stockholder Matters - Broker-Dealer Sales of Company's Securities." 12 SELLING SECURITY HOLDERS The Company shall register pursuant to this prospectus 2,119,041 Common Shares currently outstanding for the account of the following individuals or entities. The percentage owned prior to and after the offering reflects all of the then outstanding common shares. The amount and percentage owned after the offering assumes the sale of all of the Common Shares being registered on behalf of the selling shareholders.
Name and Amount Total Number % Owned Number of % Owned Being Registered Owned Prior to Shares Owned After Currently Offering After Offering Offering Stacy Haskins - 15,478 15,478 .27% 0 0% Martin Petri - 15,478 15,478 .27% 0 0% Michael Szeremeta -15,477 15,477 .27% 0 0% Glen (Tom) Pickell - 700 7,000 .12% 6,300 .11% Sines-Forte Partnership 126,190 1,261,900 22.78% 1,135,710 19.78% Cheryl Forte - 25,461 254,610 4.52% 229,149 3.99% Cheryl & Steve Forte - 4,512 45,122 .80% 40,610 .71% Richard S. Huson - 312,229 2,322,285 38.71% 2,010,056 34.41% Leonard A. Hale - 15,478 15,478 .27% 0 0% David A. Krise - 91,910 91,910 1.63% 0 0% Norman G. Kelln - 11,362 113,628 2.01% 102,266 1.78% John F. Curran - 10,193 10,193 .18% 0 0% Randy D. Sines - 25,461 254,610 4.51% 229,149 3.99% David E. Sampson-4,096 40,955 .73% 36,859 .64% Jay Willoughby - 50,000 50,000 .89% 0 0% David Goldsmith - 50,000 50,000 .89% 0 0% C. Culver Smith - 30,000 30,000 .53% 0 0% Don Ludwick - 20,000 20,000 .35% 0 0% William Martin - 10,000 10,000 .18% 0 0% Adam Chase - 10,000 10,000 .18% 0 0% Adam W. Jaslow - 30,000 30,000 .53% 0 0% Jennifer L. Jaslow-50,000 50,000 .89% 0 0% Jennifer L. Jaslow Trust - 50,000 50,000 .89% 0 0% John Horstmann - 6,000 6,000 .11% 0 0% Richard S. Jaslow, IRA - 100,000 100,000 1.77% 0 0% Lori K. Jaslow Trust - 20,000 20,000 .35% 0 0% Adam Jaslow Trust - 70,000 70,000 1.24% 0 0% John Plati - 20,000 20,000 .35% 0 0% Doris Ljubicich - 3,400 3,400 .06% 0 0% Joseph Hroncich - 3,000 3,000 .05% 0 0% John S. Cole - 3,000 3,000 .05% 0 0% Vito Bavaro - 3,000 3,000 .05% 0 0% Lori K. Jaslow, Trust - 80,000 80,000 1.42% 0 0% Kevo Plumbing & Heating - 10,000 10,000 .18% 0 0% Tami L. Dirienzo - 6,000 6,000 .11% 0 0% Peter Jankowski - 10,000 10,000 .18% 0 0% Renaldo C. Forcellati - 3,000 3,000 .05% 0 0% Frank Stein - 3,000 3,000 .05% 0 0% Joan Carranza - 3,000 3,000 .05% 0 0% Joseph Criscione Sr. - 3,000 3,000 .05% 0 0% Paul M. Reichenberg - 6,000 6,000 .11% 0 0% Kathleen M. Mahaffey - 3,000 3,000 .05% 0 0% Balieri Associates - 3,000 3,000 .05% 0 0% William S. Dean - 6,000 6,000 .11% 0 0% Pratt, Wylce & Lords - 29,100 29,100 .52% 0 0% Clinton Clark - 60,900 60,900 1.89% 0 0% Victor & Lana Woinski - 3,000 3,000 .05% 0 0% James J. & Sheila Criscione - 3,000 3,000 .05% 0 0% Catherine O'Connell - 3,400 3,400 .06% 0 0% Joseph & Ida Dellaroba - 3,000 3,000 .05% 0 0% Mark R. Alleman - 3,000 3,000 .05% 0 0% William Megnin - 3,400 3,400 .05% 0 0% James P. Rose - 3,000 3,000 .05% 0 0% Mark Megnin - 3,000 3,000 .05% 0 0% Daniel Morgan & Sara Andelina - 3,010 3,010 .05% 0 0% Richard P. Keshishian - 3,000 3,000 .05% 0 0% Robert Jouas - 4,000 4,000 .07% 0 0% David E. & Margaret Winkelman - 3,000 3,000 .05% 0 0% Carl & Birte Mainardi - 3,400 3,400 .06% 0 0% 13 Mark Megnin & Helen Connor - 3,400 3,400 .06% 0 0% Paul S. & Renee Spiegler - 6,500 6,500 .12% 0 0% Diana Forcellati - 3,000 3,000 .05% 0 0% Richard Napolitano - 3,000 3,000 .05% 0 0% Gaming Venture Corp. - 200,000 200,000 3.55% 0 0% Jeremy B. & W. Stern - 10,000 10,000 .18% 0 0% Aldo R. Beretta 1993 Family Trust - 10,000 10,000 .18% 0 0% Dr. David Adelberg - 10,000 10,000 .18% 0 0% Michael Schaeffer - 10,000 10,000 .18% 0 0% Joseph & Julie Vaccaro - 7,000 7,000 .11% 0 0% George & Selma Spiegler - 3,000 3,000 .05% 0 0% Susan Jaslow - 50,000 50,000 .89% 0 0% Maria Cunha IRA - 8,500 8,500 .15% 0 0% Henry and John Horstmann - 8,000 8,000 .14% 0 0% Antonio Tommolillo - 3,000 3,000 .05% 0% Salvatore LaCognata - 3,000 3,000 .05% 0 0% Harry & Adele Conti - 3,000 3,000 .05% 0 0% Nicola Attanasio - 5,000 5,000 .09% 0 0% Lawrence Mendosa - 5,000 5,000 .09% 0 0% Janet Ausiello - 5,000 5,000 .09% 0 0% Michael Ausiello - 5,000 5,000 .09% 0 0% Mark Malzberg - 6,000 6,000 .11% 0 0% Laura Giostra - 6,700 6,700 .12% 0 0% David Lupo - 3,000 3,000 .05% 0 0% Peter O'Hare, Jr. - 4,000 4,000 .07% 0 0% Giovanni Granata - 3,000 3,000 .05% 0 0% Mario Tommolillo - 4,000 4,000 .07% 0 0% Jeffrey Kerne - 6,000 6,000 .11% 0 0% Gino Ramundo - 6,000 6,000 .11% 0 0$ Evelyn Alleman - 3,000 3,000 .05% 0 0% Thelma Zube - 3,400 3,400 .06% 0 0% Vincent & F. Ponte - 6,667 6,667 .12% 0 0% Laura Giostra - 6,700 6,700 .12% 0 0% Philip & Concetta Vincenti - 6,800 6,800 .12% 0 0% Andrew Lesnak - 3,400 3,400 .06% 0 0% Susan Miller - 6,700 6,700 .12% 0 0% Uphill c/o Paul Scott - 9,400 9,400 .17% 0 0% Martin Feldman - 3,400 3,400 .06% 0 0% Mark DeLorenzo - 3,000 3,000 .05% 0 0% Steven Blad - 1,000 10,000 .18% 9,000 .16% Micro Cap World, L.L.C. - 10,000 10,000 .18% 0 0% Jay L. King - 2,500 25,000 .44% 22,500 .40% Jayport Holdings, Inc. (BUI) - 20,339 20,339 .36% 0 0% Glenn Fine - 30,000 30,000 .53% 0 0% Casino Journal of Nevada, Inc. - 20000 20,000 .35% 0 0% Robert Smith - 6,000 6,000 .11% 0 0% John Wasden - 5,000 5,000 .09% 0 0% Althea Duggins - 1,000 1,000 .02% 0 0% James Beard - 1,000 1,000 .02% 0 0%
[FN] Mr. Pickell is currently an officer and director of the Company. Randy Sines, a former officer and director of the Company and Steven Forte, a current officer and director of the Company are general partners of Sines-Forte Partnership. Cheryl Forte is married to Randy Sines, a former director of the Company. Steve Forte is a director of the Company. Norman G. Kelln is a director of the Company. Randy Sines was an officer and director of the Company. David Sampson is a director of the Company. Steven Blad is an officer of the Company. Jay L. King is an officer and director of the Company. The Company shall register pursuant to this prospectus the 200,000 Common Shares underlying the Class A Warrants currently outstanding for the account of the following individuals or entities. The percentage owned prior to and after the offering reflects all of the then outstanding Class A Warrants. The amount and percentage owned after the offering assumes the exercise of all of the Class A Warrants and sale of underlying Common Shares being registered on behalf of the selling shareholders. 14
Name and Amount Total Number % Owned Number of % Owned Being Registered Owned Prior to Warrants Owned After Currently Offering After Offering Offering Norman G. Kelln 5,717 2.86% 0 0% Sines/Forte Partnership 63,492 31.75% 0 0% Cheryl Forte 30,421 15.21% 0 0% David Sampson 1,557 .78% 0 0% Randy Sines 30,421 15.21% 0 0% Richard Huson 51,586 25.79% 0 0% Stacey Haskins 779 .39% 0 0% Martin Petri 779 .39% 0 0% Michael Szeremeta 779 .39% 0 0% Leonard Hale 779 .39% 0 0% David Krise 4,624 2.31% 0 0% John F. Curran 513 .26% 0 0% Jay Willoughby 2,516 1.26% 0 0% David M. Goldsmith EVP Director Buchingham Research Group 2,516 1.26% 0 0% C. Culver Smith 1,509 .75% 0 0% Don Ludwick 1,006 .50% 0 0% William Martin 503 .25% 0 0% Adam Chase 503
[FN] Randy Sines and Steve Forte are General Partners of Sines-Forte partnership and would be deemed to be beneficial owners of the 63,492 Class A Warrants shown above. Steve Forte is married to Cheryl Forte and would be deemed to be a beneficial owners of the 30,421 Class A Warrants shown above. The Company shall register pursuant to this prospectus the 200,000 Common Shares underlying the Class B Warrants currently outstanding for the account of the following individuals or entities. The percentage owned prior to and after the offering reflects all of the then outstanding Class B Warrants. The amount and percentage owned after the offering assumes the exercise of all of the Class B Warrants and sale of underlying Common Shares being registered on behalf of the selling shareholders. 15
Name and Amount Total Number % Owned Number of % Owned Being Registered Owned Prior to Warrants Owned After Currently Offering After Offering Offering Norman G. Kelln 5,717 2.86% 0 0% Sines/Forte Partnership 63,492 31.75% 0 0% Cheryl Forte 30,421 15.21% 0 0% David Sampson 1,557 .78% 0 0% Randy Sines 30,421 15.21% 0 0% Richard Huson 51,586 25.79% 0 0% Stacey Haskins 779 .39% 0 0% Martin Petri 779 .39% 0 0% Michael Szeremeta 779 .39% 0 0% Leonard Hale 779 .39% 0 0% David Krise 4,624 2.31% 0 0% John F. Curran 513 .26% 0 0% Jay Willoughby 2,516 1.26% 0 0% David M. Goldsmith EVP Director Buchingham Research Group 2,516 1.26% 0 0% C. Culver Smith 1,509 .75% 0 0% Don Ludwick 1,006 .50% 0 0% William Martin 503 .25% 0 0% Adam Chase 503 .25% 0 0%
[FN] Randy Sines and Steve Forte are General Partners of Sines-Forte Partnership and would be deemed to be beneficial owners of the 63,492 Class B Warrants shown above. Steve Forte is married to Cheryl Forte and would be deemed to be a beneficial owners of the 30,421 Class B Warrants shown above. The Company shall register pursuant to this prospectus the 250,000 Common Shares underlying the Class C Warrants currently outstanding for the account of the following individuals or entities. The percentage owned prior to and after the offering reflects all of the then outstanding Class C Warrants. The amount and percentage owned after the offering assumes the exercise of all of the Class C Warrants and sale of underlying Common Shares being registered on behalf of the selling shareholders.
Name and Amount Total Number % Owned Number of % Owned Being Registered Owned Prior to Warrants Owned After Currently Offering After Offering Offering Norman G. Kelln 7,146 2.86% 0 0% Sines/Forte Partnership 79,385 31.75% 0 0% Cheryl Forte 38,026 15.21% 0 0% David Sampson 1,947 .78% 0 0% Randy Sines 38,026 15.21% 0 0% Richard Huson 64,483 25.79% 0 0% Stacey Haskins 973 .39% 0 0% Martin Petri 973 .39% 0 0% Michael Szeremeta 973 .39% 0 0% Leonard Hale 973 .39% 0 0% David Krise 5,781 2.31% 0 0% John F. Curran 641 .26% 0 0% Jay Willoughby 3,145 1.26% 0 0% David M. Goldsmith EVP Director Buckingham Research Group 3,145 1.26% 0 0% C. Culver Smith 1,667 .75% 0 0% Don Ludwick 1,258 .50% 0 0% William Martin 629 .25% 0 0% Adam Chase 629 .25% 0 0%
[FN] Randy Sines and Steve Forte are General Partners of Sines-Forte Partnership and would be deemed to be beneficial owners of the 79,365 Class C Warrants shown above. Steve Forte is married to Cheryl Forte and would be deemed to be a beneficial owners of the 38,026 Class C Warrants shown above. The Company shall register pursuant to this prospectus 100,000 Common Shares underlying the Class D Warrants currently outstanding for the account of the following individuals or entities. There are currently outstanding 100,000 D Warrants issued to Gaming Venture Corp., U.S.A., a consultant to the Company 16 - -------------------------------------------------------------- SOURCE AND USE OF PROCEEDS - -------------------------------------------------------------- If the maximum amount of securities is sold in the offering, the Company shall have net proceeds of $588,080 after the payment of commissions of $35,000 and offering expenses of $41,920. The Company shall utilize the net proceeds from the sale of its Common Shares for working capital, including (approximately) Building of product inventory $100,000 Research and development to expand the current product line 50,000 Development of new products 50,000 Employee compensation 300,000 Other 88,080 ----------- $588,080 If substantially less than the maximum proceeds is raised, the priority for the use of proceeds is i) to expand sales of current products; ii) to increase inventory levels of current products; and iii) to develop new products. The proceeds are anticipated to be utilized over a six month period. Securities are being registered on behalf of the selling security holders and the Company will not receive any cash or other proceeds in connection with the subsequent sale. Any proceeds received from the subsequent exercise of the A, B, C or D Warrants shall be used as working capital and to expand operations. Due to the uncertainty of the timing and amount of actual funds which may be received upon exercise of the Warrants, no specific breakdown of uses have been established by the Company. The aggregate amount of proceeds if all of the Warrants are exercised is $4,000,000. If all of the A, B, C or D Warrants are exercised, the proceeds shall be utilized over a two year period. Pursuant to a promissory note with the principal amount of $250,000 plus interest of 9.5% with a maturity date of December 31, 1997 between the Company and Mr. Richard Huson, a principal shareholder of the Company, 35% of all equity proceeds raised by the Company shall be utilized to pay down the promissory note until said note is retired. The proceeds of the note were used for operating expenses. In accordance with the note, 35% of net proceeds from either the sale of common stock of the exercise of the A, B, C, or D Warrants will be used to reduce the note payable. - ------------------------------------------------------- DILUTION - ------------------------------------------------------- Dilution. Assuming completion of maximum offering amount, there will be a total of 5,940,640 Common Shares outstanding. The following table illustrates the per Share dilution as of the date of this Prospectus, which may be experienced by investors upon reaching the maximum offering. Offering price $3.50 Net tangible book value per Share before offering (.0357) Increase per Share .0957 attributable to investors ------ Pro forma net tangible book value per Common Share after offering .06 ----- Dilution to investors 3.44 Dilution as a percent of offering price 98.29% Comparative Per Common Share Data. Maximum Offering Amount Total Price Number of Paid Per Consider- Shares % Share ation Paid % Existing Shareholders 5,740,640 96.63% $ .48 2,829,246 80.17% New Investors of Common Shares 200,000 3.37% $3.50 700,000 19.83%
17 Further Dilution. The Company may issue additional restricted Common Shares pursuant to private business transactions. Any sales under Rule 144 after the applicable holding period may have a depressive effect upon the market price of the Company's Common Shares and investors in this offering upon conversion. See "SALES OF STOCK PURSUANT TO RULE 144." - ------------------------------------------------------- THE COMPANY - ------------------------------------------------------- The Company. The Company was incorporated in the State of Washington on September 20, 1995. The Company's principal offices are located at 3909 South Maryland Parkway, Suite 311, Las Vegas, Nevada 89119. Its telephone number at such address is (702) 733-7195. These offices consist of 2,100 square feet on a month to month lease with a lease payment of $2,800 per month. The Company's operations are the development and marketing of certain gaming products and concepts invented and developed by Sines-Forte, and others, which are indirectly affiliated with the Company. The Company intends to sell or lease its products to the world-wide gaming industry directly, or through subcontracts with non-affiliated manufacturers. The Company is in the process of negotiating distribution and marketing arrangements for its products, but has no significant history of operations and no profits. Products. The Company currently has four different types of products and is considering variations of said products: (i) Random Ejection Shuffler - an automatic, multi-deck card shuffler. The machine can shuffle up to six decks of playing cards. The shuffler shall lease for approximately $10-15 per day. Additionally, the Company intends to offer a maintenance contract for approximately $50 per month which would include annual refurbishing of the Random Ejection Shuffler. The sales price of the shuffler is in the process of being determined. There have been five proto types built and tested. The first production run is complete and parts have been ordered for the second, much larger run. (ii) Fantasy 21 Table Game - a jackpot table game variation of Casino 21. This game incorporates a jackpot and bonus payment schedule based on consecutive player high hands (counts of 20 or 21) or dealer busts, allowing players to win very large jackpots while playing the traditional game and wagering minimum side bets or antes. The game utilizes a modern version of the traditional table layout and features an electronic tracking and display system that documents each player's progress toward the jackpots. As few as three successive high hands are required to win the smallest jackpot and eleven successive high hands for the super jackpot. As a result of the ante structure, simplicity of operation and probable patterns of play, the casino's profit potential can be significantly higher than that of the traditional game. The Fantasy 21 Table Game may be leased at the basis of approximately $400 per month. The Company has five pre-production units of the Fantasy 21 Table Game which were assembled on October 13, 1997 and are being used for sales demonstrations and field testing. Parts for the production run of Fantasy 21 Table Game have been ordered. (iii) Safety Peek Card - a new type of Casino 21 playing card. This product features a new playing card design which eliminates the holecard problem in the game of Casino 21 when used with a modified form of the classic peeking action. In the game of Casino 21, if the dealer is showing an ace of face card, they will generally peek at the hole or down card. With this peeking action, there is the chance of players seeing the hole card and adjusting their bets accordingly. With the patented card design of the Safety Peek Card, the dealer, by peeking at the opposite corner (which is considered a modified form of peeking action) can determine if the hole card is an ace without showing any card value. The Safety Peek Card, a new type of casino playing card, is already in use and is under distribution agreements with selected playing cards distributor. (iv) SecureDrop coin box system - An electronic method to accurately track the number of coins in a slot machine when the funds are transferred from the machine, counted and later deposited with a banking institution. This product was not developed internally by the Company, but has been exclusively licensed from an outside developer in an agreement dated October 10, 1997. The SecureDrop is in advanced development stages, with one working prototype available. Based on information from the developer, the Company expects to receive initial production units of the SecureDrop around January 1, 1998. Proprietary Technology. The Company's products are protected under various pending patents, patents, copyrights and trademarks. All patent applications filed before June 8, 1995 will have a term which is either 17 years from the date of issue or 20 years from the filing date (or priority date). U.S. patent applications filed on or after June 8, 1995 have a term of 20 years from the filing date of the application or filing date of any parent patent application upon which priority is claimed. 18 Design patents have a term of 14 years from the issue date. utility patents require maintenance fees be paid to have the full term. The term of patents may vary depending upon other consideration in special cases. The Safety Peek Playing cards patent claims are directed at both the novel playing cards and methods for playing blackjack using the novel playing cards. Title: Cards and Methods for Playing Casino 21 or Blackjack Status: Issued U.S. Patent Serial No: 08/165,302 Filing Date: December 9, 1993 Patent No: 5,403,015 Issue Date: April 4, 1995 Title: Cards and Methods for Playing Blackjack Status: issued U.S. Patent Serial No: 08/353,526 Filing Date: December 8, 1994 Patent No.: 5,518,249 Issue Date: May 21, 1996 Title: Blackjack Card Deck Status: Issued U.S. Design Patent Serial No: 29/028,882 Filing Date: September 23, 1994 Patent No. Des. 366,503 Issue Date: January 23, 1996 Patents for the Playing Card Shuffling Machine have been applied for and their status is as follows: Title: Playing Card Shuffler Status: Pending U.S. Patent Application - case has been allowed and issue fee has been paid. Patent is expected at any time. Serial No: 08/228,609 Filing Date: April 18, 1994 Patent No: Not Issued Issued Date: Not Issued Title: Playing Card Shuffling Machines and Methods Status: Issued U.S. Patent Serial No: 08/423/408 Filing Date: April 18, 1995 Patent No: 5,584,483 Issue Date: December 17, 1996 Title: Playing Card Shuffling Machines and Methods Status: Pending Canadian Patent Application Serial No. 2,188,137 Filing Date April 18, 1995 (International Filing Date) Patent No. Not issued Issue Date: Not issued Title: Playing Card Shuffling Machines and Methods Status: Pending European Patent Application Serial No: 95916434.4 Filing Date: April 18, 1995 (International Filing Date) Patent No: Pending European Patent Application Issue Date: Not issued Title: Playing Card Shuffling Machines and Methods Status: Pending Australian Patent Application Serial No: 22936/95 Filing Date: April 18, 1995 (International Filing Date) Patent No: Not issued Issue Date: Not issued The Blackjack Game System and Methods patent claims are as follows: Title: Blackjack Game System and Methods Status: Pending application Serial No: 08/242,229 Filing Date: May 13, 1994 Patent No: Not issued Issue Date: Not issued Title: Blackjack Game System and Methods Status: Issued Patent Serial No: 08/439,687 Filing Date: May 12, 1995 Patent No: 5,586,766 Issue Date: December 24, 1996 19 Title: Blackjack Game System and Methods Status: Pending Canadian patent application Serial No: 2190266 Registration #1483441 and #1483442 Filing Date: November 13, 1996 Patent No: Not issued Issue Date: Not issued Title: Blackjack Game System and Methods Status: Pending European patent application Serial No: 95920444.7 Filing Date: May 12, 1995 Patent No: Not issued Issue Date: Not issued Title: Blackjack Game System and Methods Status: Pending Australian patent application Serial No: 25892/95 Filing Date: November 12, 1996 Patent No: Not issued Issue Date: Not issued Title: Blackjack Game System and Methods Status: Pending Patent Cooperation Treaty patent application Designates about 80 foreign countries for possible patents Serial No: PCT/US95/12908 Filing Date: October 13, 1995 Patent No: not issued Issue Date: Not issued The Company has applied for the following additional patents: Title: Slot Machine and Methods of Operation Status: Pending U.S. Patent Application Serial No: 08/60317 Filing Date: 2/2/96 Patent No: Not issued Issue Date: Not issued Title: Drop Slot Game Machine Status: Pending U.S. Patent Application Serial No: 08/649821 Filing Date: 5/17/96 Patent No: Not issued Issue Date: Not issued Title: Blackjack Game System and Methods Status: unknown Serial No: 08/798642 Filing Date: 2/11/97 Patent No: Not issued Issue Date: Not issued Title: Slot Machine and Methods of Operation Status: Pending Patent Cooperation Treaty patent application Designates about 80 foreign countries for possible patents Serial No: PCT/US96/02157 Filing Date: 2/20/96 U.S. trademark registrations issued or renewed prior to November 16, 1989 remain in force for 20 years from their date of issue or renewal. Those U.S. trademark registrations issued or renewed on or after November 16, 1989 have a term of 10 years unless canceled or surrendered. The Company has made and received the following trademarks. Mark: SAFETY PEEK Status: Registered U.S. trademark Serial No: 74/640,372 Filing Date: February 21, 1995 Reg. No: 1,944,346 Reg. Date: December 26, 1995 Mark: FANTASY 21 Status: Pending U.S. Trademark Application Serial No: 74/456,337 Filing Date: November 3, 1993 Reg. No: Not yet registered Reg. Date: Not yet registered Mark: CASINOVATIONS Status: Pending U.S. Trademark Application Serial No: 74/640,371 Filing Date: February 21, 1995 Reg. No: Not yet registered Reg. Date: Not yet registered Proprietary information is available to investors upon signature of a Non- Disclosure Agreement. 20 Research and Development. Prior to the incorporation of the Company and to date, most of the time and effort of the Company has been spent on research and product development. The Company or its predecessors incurred research and development costs aggregating $244,117 and $436,871 for the years ended December 31, 1996 and 1995, respectively. These funds were expended on engineering, tooling, parts and other related expenditures. The Company intends to have a continued emphasis on research and development as funding and cash flow allow. Manufacturing. The Company shall manufacture the Random Ejection Shuffler and Fantasy 21 through Western Electronics Corporation, an independent third party supplier. The Safety Peek Card is currently being manufactured by the George C. Mattheson Company ("GEMACO"), and distributed to the U.S. Playing Card Company. Production. It is anticipated that the actual production for the Random Ejection Shuffler and Fantasy 21 will be subcontracted to Western Electronics Corporation in Boise, Idaho, a contract manufacturing company. Packaging and Transportation. The Company shall utilize custom boxes on which its name, logo and a silk screen of the product itself will be printed. It is expected that transportation will be by UPS ground or a similar carrier in the continental United States, and by other arrangements as appropriate. Initial installations will be made by the Company's sales and/or service personnel, or, if distributors are used, by their sales and service personnel. Service and Maintenance Policy. The Company intends to establish appropriate service capabilities for each product in each market it services, either through its distributors or with in-house personnel. Marketing. The Company shall market and distribute its products in one of three ways, depending upon the regulatory market and the specific product. (I) Directly by the Company's sales force; (ii) Through OEM's who incorporate a Company's product into a product they manufacture; or (iii) Through distributors with a significant market presence in one or more regulatory markets. OEM's, original equipment manufacturers, are manufacturers who build product to the product owner's specifications and place the owner's name on the product. Exclusive Distributorship Agreements. The Company currently has an exclusive distributorship agreement with Sodak Gaming, Inc. The term of the agreement is Five (5) years. The Company agrees to offer to Sodak a minimum discount of twenty-five percent (25%) less than the promoted retail price in Nevada. The territory includes all Indian lands of the United States and First Nation/Aboriginal Lands in Canada, Deadwood, South Dakota and Miss Marquette Riverboat and Casino, Marquette, Iowa. The Company also has an exclusive distributorship agreement with RGB SDN BHD. , a Malaysia corporation. The term of the agreement is Five (5) years. The Company agrees to offer to RGB SDN BHD a minimum discount of twenty-five percent (25%) less than the promoted retail price in Nevada. The territory including the entire Asian RIM area including but not limited to Malaysia, Singapore, China, Hong Kong, Korea, Vietnam, Indonesia, Thailand, The Philippines, Nepal, Cambodia, India, Sri Lanka, Macau, Myanmar, Laos, Cruise Ships based in Malaysia, Singapore & Hong Kong and the Islands in the Asian areas. The territory specifically excludes Japan, Australia and New Zealand which will be treated as common distributor areas. Additionally, the Company has an exclusive distributorship agreement with B. Joel Rahn (company name to be designated). The term of the agreement is Five (5) years. The Company agrees to offer to B. Joel Rahn a minimum discount of twenty-five percent (25%) less than the promoted retail price in Nevada. The territory consists of South America, Central America, the Caribbean Islands, the State of Florida and Cruise Ships worldwide, excluding Cruise Ships based in Malaysia, Singapore and Hong Kong. The territory consisting of the Bahamas shall be non-exclusive. Exclusive Licensing Agreements. The Company has granted joint exclusive licenses to the George C. Matheson Company ("Gemaco" ) and to The US Playing Card Company specifically for the Safety Peek Playing Card. The terms of the Gemaco agreement provides for a royalty of $.04 per deck of playing cards being paid to the Company on a quarterly basis. Additionally, Gemaco agreed that during the term of the agreement, it will use .02 on each deck for promotion and advertising of the product. The US Playing Card Company pays a royalty of $.075 per deck. Technology Development Center, LLC, has grant an exclusive license to the Company relating to its technology known as a "Coin Operating Machine Having An Electronically Identified Coin Collection Box"....The geographical scope of the license is the United States of America and all foreign countries. As consideration for the exclusive license, the Company executed a promissory note secured by assets of the Company payable to Technology Development Center, LLC, for $50,000 payable in five monthly installments beginning on November 14, 1997 and a promissory note secured by the assets of the Company, payable to Technology Development Center, LLC for $50,000 payable in twelve monthly installments beginning on April 15, 1998. The Company shall pay a 21 royalty of $7.50 per each licensed product sold, rented, leased, or otherwise used for profit, provided that the Company receives a net compensation in excess of $7.50 for each Product Development and Ownership History. Sines- Forte, a general partnership formed in September, 1993 owned the rights to currently existing patents and trademarks to a variety of gaming devices, including the Safety Peek Playing Cards, Fantasy 21 and the Random Ejection Card Shuffler. Pursuant to the terms of a financing agreement dated January 15, 1996 between the Company, Sines-Forte and Sharps International Limited Partnership ("Sharps") which initially held exclusive rights to manufacture and market these gaming products and concepts under the terms of a licensing agreement with Sines-Forte, and certain of their affiliates, substantially all of the gaming products and concepts owned by Sines-Forte and licensed to Sharps were transferred and assigned to Sharps. Subsequently, the ownership of these products/concepts was transferred to the Company as part of the reorganization transaction. Sines-Forte and Sharps are or were owned or controlled by persons who are also directors, executive officers and principal shareholders of the Company. Effective January 1, 1996, the Company and Sharps concluded a plan of reorganization whereby all of the outstanding general and limited partnership interests in Sharps were exchanged for shares of the Company in a tax-free transaction, at the rate of 5,160 shares of Capital Stock for each unit of general or limited partnership interest in Sharps. An aggregate of 2,513,000 shares of Capital Stock of the Company were issued to the Sharps' partners in this transaction. In addition, 1,261,900 shares of Capital Stock were issued to Sines-Forte in exchange for substantially all of Sines-Forte's assets and an additional 130,000 shares of Capital Stock were issued to certain investors at the price of $1.00 per share. As a consequence of the reorganization transaction, Sharps was liquidated, and all of its assets and liabilities were assumed by the Company. Such assets included substantially all of the gaming products and concepts formerly owned by Sharps, together with certain contractual arrangements relating to the manufacture and sale of the Safety Peek Playing Cards. Royalty Agreement with Sines-Forte. Pursuant to the aforementioned financing agreement, the Company assumed an obligation of Sharps to pay royalties to Sines-Forte generated from revenues received by the Company on certain intellectual properties. Sines-Forte is to receive a quarterly royalty fee of 3% of the net revenues earned by the Company with respect to certain products and an option to purchase from the Company 40,000 shares of the Company's common stock at the price of $1.00 per share. Royalties owed in a given period shall not be a credit toward any royalties owed for a past or future royalty period. The term "Net Revenues" means gross cash revenues received by the Company for the relevant quarter attributable to the products, minus the Company's cost of such goods sold for such quarter. If the Company leases product instead of selling or having others sell in their behalf, or if leasing of product otherwise occurs under the Agreement, the Company shall be obligated to pay royalties on the same terms as if the lease payments are considered to be Net Revenues. Such treatment of leasing for determination of royalties shall not apply where a third party pays the Company and acts as a financial leasing agent or where the Company actually receives payments on a basis other than the actual lease payments. In such cases, royalties are determined based on the amount and timing of payments received by the Company and not those received by any financing and leasing organization. Employees. As of the date of this Prospectus, the Company has four full time and two part time employees. See "RISK FACTORS." The Company will, as operations demand, sub-contract the balance of its personnel through independent contractors or hire additional employees. 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. 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 22 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. A 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. - ----------------------------------------------------------------- MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ---------------------------------------------------------------- Trends and Uncertainties. Demand for the Company's products will be dependent on, among other things, general economic conditions which are cyclical in nature. Inasmuch as a major portion of the Company's activities is the manufacture and sale of gaming products and concepts, new technologies may reduce and/or restrict the Company's activities. In addition, the outcome of this offering is uncertain. The lack of sales of this offering would negatively impact the Company's ability to successfully continue operations. Capital and Source of Liquidity. The Company currently has no material commitments for capital expenditures. The Company has planned expenditures of $900,000 for the cost of sales and $140,000 for additional tooling costs of manufacturing the Random Ejection Shuffler. These costs will be less if the sales projections are not met. The Company intends to use a majority of the proceeds of this offering to make a portion of the proposed expenditures. If this offering is not successful, the Company's cash flow will be negatively effected if the expenditures are The Company has commitments under its consulting agreements and employment agreements. The payments to Mr. Blad of $12,500 per month plus commissions of 3.73% on the gross margin received by the Company on its product sold though sales arranged and completed primarily by the efforts of Mr. Blad, $10,000 per month to Mr. Forte, and $7,500 per month for Mr. King will negatively impact the liquidity of the Company. The Company shall attempt to develop business plans, operations and sales that will permit the Company to be self-supportive 30 to 60 days after production begins. The funding requirement to complete this time period is estimated to be between $100,000 and $300,000 and may come in the form of this offering proceeds, deposits on future sales or debt financing. Based on the completion of a successful offering subscription and final product development and refinement, the Company anticipates that the monthly cash flow will be at a break-even point within four months. No additional capital needs are anticipated. This planning, if effective, would permit funds raised in this offering, if any, to be used to develop new products in the next six months. If the Company has to add a significant amount of capital equipment to develop an in-house production capacity, this will impact cash flow in a potentially significant way. The Company expects that the net proceeds from this offering and the cash flow from operations will be sufficient to allow the Company to meet the expected growth in demand for its products for at least the next twelve months. However, there can be no assurance that sufficient capital will be raised or that future product sales will meet the Company's growth expectations. Should either of these fail to occur, the Company may elect to (i) reduce the planned introduction of new products to a level consistent with its resources or (ii) pursue other financing alternatives such as loans. Implementation of either of the foregoing options could delay or diminish the Company's planned growth and adversely affect its profitability. For the six months ended June 30, 1997, the Company acquired plant and equipment valued at $18,996. The Company had an increase in patents and trademarks of $10,949. As a result, the Company had net cash used in investing activities of $29,945 for the six months ended June 30, 1997. For the six months ended June 30, 1996, the Company acquired plant and equipment valued at $2,600. The Company had an increase in patents and trademarks of $36,049. As a result, the Company had net cash used in investing activities of $38,649 for the six months ended June 30, 1996. For the year ended December 31, 1996, the Company acquired plant and equipment valued at $12,969. The Company had an increase in patents and trademarks of $65,781. As a result, the Company had net cash used in investing activities of $78,750 for the year ended December 31, 1996. For the six months ended June 30, 1997, the Company sold common stock for cash in the amount of $600,010. The Company had an increase in amounts due officers and shareholder of $100,377. As a result, the Company had net cash provided by financing activities of $700,347 for the six months ended June 30, 1997. 23 For the six months ended June 30, 1996, the Company sold common stock for cash in the amount of $45,000. The Company had an increase in amounts due officers and shareholder of $486,202. As a result, the Company had net cash provided by financing activities of $531,202 for the six months ended June 30, 1996. For the year ended December 31, 1996, the Company sold common stock for cash in the amount of $887,265. The Company had an increase in stockholder loans of $630,168. As a result, the Company had net cash provided by financing activities of $1,517,433 for the year ended December 31, 1996. Management is of the opinion that its current working capital and anticipated funds from operations are sufficient to meet its cash requirements for moderate growth in the year ahead. However, in order to achieve the Company's plans for growth, additional capital is required. On a long term basis, liquidity is dependent on increased revenues from operations, additional infusions of capital and debt financing. The Company believes that additional capital and debt financing in the short term will allow the Company to commence its marketing and sales efforts and thereafter result in revenue and greater liquidity in the long term. However, there can be no assurance that the Company will be able to obtain additional equity or debt financing in the future, if at all. Results of Operations. For the six months ended June 30, 1997, the Company has a net loss of $1,069,517. The Company had revenues from card royalties of $632, interest income of $7,074 and the sale of patent rights of $13,000 for the six months ended June 30, 1997. The Company had depreciation and amortization of $11,396 and amortized deferred interest of $93,000 for the six months ended June 30, 1997. Due to the commencement of operations, the Company had an increase in accounts receivable of $5,591, an increase in prepaid expenses of $4,526, and an increase in accounts payable and accrued expenses of $150,842. The Company issued stock for services valued at $69,999. For the six months ended June 30, 1997, the Company had net cash used in operating activities of $1,069,282. The Company had general and administrative expenses of $200,538. These expenses consisted of salaries of $116,000, payroll taxes & benefits of $9,854, travel and entertainment of $14,707, fees to consultants of $77,772, legal expenses of $41,295 and miscellaneous expenses of $902. For the six months ended June 30, 1996, the Company has a net loss of $526,709. The Company had depreciation and amortization of $2,854 for the six months ended June 30, 1996. Due to the commencement of operations, the Company had an increase in accounts receivable of $100 and an increase in accounts payable of $16,700. The Company issued stock for services valued at $45,000. For the six months ended June 30, 1996, the Company had net cash used in operative activities of $495,655. The Company had general and administrative expenses of $677,735. These expenses consisted of salaries of $128,566, payroll taxes & benefits of $22,975, travel and entertainment of $73,995, gaming show expenses of $46,567, office expense of $36,178, fees to consultants of $255,387, legal expenses of $34,139, interest expense of $51,582 and miscellaneous expenses of $4,857. For the year ended December 31, 1996, the Company has a net loss of $1,638,227. The Company had revenues in card royalties of $2,450 and interest income of $1,803 for the year ended December 31, 1996. The Company issued stock for services valued at $700,500. Interest added to loan balances was $23,245. The Company exchanged equipment valued at $2,903 for services. The Company had depreciation and amortization of $2,553 for the year ended December 31, 1996. Due to the commencement of operations, the Company had an increase in accounts receivable of $2,833, an increase in prepaid expenses of $300, an increase in other assets of $6,119, and increase in accounts payable of $73,330 and an increase in accrued expenses of $104,351 for the year ended December 31, 1996. For the year ended December 31, 1996, the Company had net cash used in operative activities of $887,257. For the year ended December 31, 1996, the Company had general and administrative expenses of $1,318,327. These expenses consisted of consulting services valued at $826,824, salaries and wages of $254,200, legal and accounting of $108,510, development costs of 68,520, reimbursement of services of $33,497, patent and trademark costs of $27,312, telephone of $12,880, travel of $24,943, and other miscellaneous expenses of $38,359. The Company also paid general and administrative expenses of $52,313 to a related party. Research and development costs to a related party for the year ended December 31, 1996 was $244,117. The Company shall seek to maintain low operating and administrative expenses while expanding operations and increasing the number of distributors and operating revenues. However, increased marketing expenses will probably occur in future periods as the Company attempts to further increase its marketing and sales efforts. 24 - --------------------------------------------------------- MANAGEMENT - --------------------------------------------------------- Officers and Directors. Pursuant to the Articles of Incorporation, each Director shall serve until the annual meeting of the stockholders, or until his successor is elected and qualified. The Company's basic philosophy mandates the inclusion of directors who will be representative of management, employees and the minority shareholders of the Company. Directors may only be removed for "cause". The term of office of each officer of the Company is at the pleasure of the Company's Board. The principal executive officers and directors of the Company will be as follows:
Name Position Term(s) of Office Jay L. King, age 50 Vice President From March 12, 1996 of Finance & Controller to present and Director Steven Blad, age 45 President and Chief From April 30, 1997 Operations Officer to present Norman G. Kelln, age 62 Director From March 12, 1996 to present 22 Glen (Tom) Pickell, age 52 Director From March 12, 1996 to present Chief Executive Officer From Sept. 24, 1996 and President to April 30, 1997 Chairman of the Board and Chief Executive officer From April 30, 1997 to present Steven Forte, age 40 Director From March 12, 1996 to present David Sampson, age 55 Director From March 12, 1996 to present Mr. Randy Sines resigned as an officer and director of the Company on August 27, 1997. Resumes: Jay L. King. Mr. King has extensive experience in all phases of financial management for a variety of companies and circumstances. He was Controller for Sigma Game, Inc., a manufacturer and developer of electronic based and software driven gaming machines from December 1994 to October 1995. Mr. King was consultant to the corporation from November 1995 through February 1996 and elected Vice President of Finance and Controller and Director in March 1996. He still serves in these positions. From July 1993 to November 1994, Mr. King was an independent financial consultant and Chief Financial Officer for I.C. Refreshment Corporation, a startup beverage company. From 1986 to 1993, Mr. King was director of financial management for PG&E, a public utility company. Mr. King managed full financial responsibilities for engineering, construction and manufacturing business unit. Mr. King holds a BS in Accounting (1971) and an MBA (1973) from the University of Utah and is a Certified Public Accountant. Steven Blad. Mr. Blad was President and Chief Executive Officer of Flagship Games International from 1987 to July 1991. From July 1991 to September 1994, Mr. Blad was a consultant for Marketing and Gaming in Atlanta, Georgia. From October 1994 to September 1996, Mr. Blad was a consultant for Spintek Gaming Technologies. Mr. Blad joined the Company in October 1996 as Vice President of Sales and Marketing until April 30, 1997 when he was named President of the Company. Mr. Blad received a Bachelor of Arts degree in 1973 from Carson Newman. He obtained a Masters of Arts degree in 1975 from Southern Baptist Graduate School. From 1975 to 1976, Mr. Blad attended additional graduate studies at the University of Alabama. 25 Norman G. Kelln. Mr. Kelln has been President and sole owner of Designed Devices Co., a Spokane, Washington consulting engineering firm since 1980. During his career, Mr. Kelln has worked in various engineering capacities for several well-known companies including RCA, Tally Corporation, Boeing, Keytronic Corporation and ISC Systems, Inc. Glen (Tom) Pickell. Mr. Pickell has been President of The Arcus Group, a financial and management consulting firm he formed since 1989. From 1981 to 1988, Mr. Pickell was Chief Financial Officer and Vice President of Finance and Administration for Chronicle Broadcasting. Mr. Pickell graduated magna cum laude with a Bachelor of Science degree in accounting from Golden Gate University in San Francisco in 1975 and held a CPA certificate in California. Mr. Pickell also serves as an advisor to Mr. Richard Huson who is a major shareholder of the Company. Steven Forte. Mr. Forte is currently the President of his own consulting company, International Gaming Specialists. In this capacity Mr. Forte provides consulting assistance in the areas of security, employee productivity and profitability to casinos throughout the world. Mr. Forte's recent clients include some of the largest and most successful casino operations in the world, including Harrahs, Caesar's Palace, The Mirage, Resorts International and the world's largest casinos in Malaysia and Austria. Numerous law enforcement agencies have employed his services, including the FBI and The Royal Canadian Mounted Police. Mr. Forte is currently a general partner of the Sines-Forte General Partnership which was formed to hold certain ownership rights and to receive certain product royalties developed by the two partners. Before entering the consulting business, Mr. Forte was employed by several different casinos and is experienced in all aspects of gaming management from dealer to casino manager. Mr. Forte also gambled professionally for seven years. He has published several books, articles and video tapes on various gaming topics. Steven L. Forte, a consultant to, and an employee and director of the Company, was convicted of a gambling-related third degree felony in New Jersey in 1990, and in 1982 pled guilty to a misdemeanor trespass charge arising from a gambling related charge emanating from Harrah's Casino in Reno, Nevada. Such convictions could affect the Company's ability to obtain approval for the licensing of the Company, if required, in any number of prospective jurisdictions. Were this to occur, Mr. Forte has agreed that he and the Company would restructure Mr. Forte's relationship with the Company, and in particular, the terms of Mr. Forte's Personal Services Agreement with the Company, in order to conform to the gaming requirements of such jurisdictions. David Sampson. From August, 1985 to 1991, Mr. Sampson was the owner and manager of University Bistro in Seattle, Washington. From March 1994 to April 1996, Mr. Sampson has served as President and Chairman of MITT USA Corporation, a sporting goods manufacturer. Mr. Sampson joined Rendova Boats as General Manager and Director of Rendova Boats, L.L.C., a boat manufacturer located in Olympia, Washington, in October 1996 and still holds that position. Mr. Sampson received a Bachelor of Science at Oregon State University in Social Science in 1965. He received a Masters degree in Political Science from the State University of New York at Buffalo in 1968 and a post-graduate degree from the Pacific Coast Banking School at the University of Washington. Remuneration. The following table sets forth certain summary information concerning the total remuneration paid or accrued by the Company, to or on behalf of the Company's Chief Executive Officer and the Company's four most highly compensated executive officers determined as of the end of each of the last three years. SUMMARY COMPENSATION TABLE
Long Term Compensation Annual Compensation Awards Payouts (a) (b) (c) (d) (e) (f) (g) (h) (I) Other ALL Name Annual Restricted LTIP Other and Compen- Stock Options/ Pay- compen- Principal Salary Bonus sation Awards SARs Outs sation Position(1) Year ($) ($) ($) ($) ($) ($) ($) Randy Sines 1994 - - - - - - - President 1995 - - - - - - - 1996 40,000 (2) (2) (2) - - - David E. Sampson 1994 - - - - - - - Vice President 1995 - - - - - - - 1996 15,000 - - - - - - Jay King 1994 - - - - - - - Vice President 1995 - - - - - - - 1996 73,750 12,500 10,200 - - - - 26 Steven Blad 1994 - - - - - - - President 1995 - - - - - - - 1996 - - - - - - 27,750 Glen (Tom) Pickell 1994 - - - - - - - President 1995 - - - - - - - 1996 - - - - - - 20,479
(1) Affiliated entities of current officers and directors received compensation in fiscal year ended December 31, 1996. The Arcus Group controlled by Glen (Tom) Pickell provides management consulting services to the Company and received $20,479, Gametek controlled by Steven J. Blad provides sales, marketing and management consulting services to the Company received $27,750 and Designed Devices, Co. controlled by Norman Kelln provides engineering and management consulting services to the Company received $302,551. (2) Effective January 15, 1996, the Company, Sines-Forte, Randy D. Sines, Steven L. Forte, Cheryl L. Forte and Richard S. Huson entered into a series of transactions to provide additional financing to Sharps. Mr. Huson is a major shareholder of the Company; Mr. Sines is a director and was president of the Company and a partner of Sines-Forte; Mr. Forte is a consultant to, employee and a director of the Company, and a partner of Sines-Forte; and Cheryl L. Forte is the spouse of Steven L. Forte. Employment and Personal Services Agreements. Mr. Forte entered into a Personal Service Agreement with the Company providing for monthly compensation to each of $10,000 per month on a pro rata basis for time worked and restricting either from competing, directly or indirectly with the Company during the terms of the agreements and for a period of two years thereafter, or from using trade secrets or other proprietary information of the Company except in furtherance of the Company's business. The personal service agreements will be terminable by the Company for cause (which is defined to include breach of the agreement; deception; fraudulent, dishonest or illegal acts; the failure or refusal to carry out the reasonable directions of the board of directors; or a willful failure or refusal to comply in any material respect with the reasonable policies or procedures of the Company), or without cause (in which event the terminated individual will be entitled to six months' compensation). The Company entered into an employment agreement with Jay L. King, effective January 1, 1997 for a term of two years. At the expiration date of this agreement, it shall be considered renewed for regular successive periods of one year terms unless either party submits a notice of termination thirty days prior to the end of the preceding period. Mr. King receives a monthly base salary of $7,500 and shall be entitled to a quarterly bonus in an amount not to exceed $2,500 per month upon the Company achieving its goals as set by the Board of Directors, upon the fulfillment of the Employees duties and the Company achieving its goals. Additionally, Mr. King shall receive stock options to purchase up to 150,000 Common Shares of the Company at $1.50 per Common Share I) 50,000 Common Shares upon successful completion of the SB-2, ii) 50,000 Common Shares upon Mr. King fulfilling his obligations and the Company reaching its goals for 1997 and iii) 50,000 Common Share upon Mr. King fulfilling his obligations and the Company reaching its goals for 1998. Board of Directors Compensation. Members of the Board of Directors will receive $500 per meeting if said Directors are not separately compensated by the Company and will be required to attend a minimum of four meetings per fiscal year. All expenses for meeting attendance or out of pocket expenses connected directly with their Board representation will be reimbursed by the Company. No differentiation is made in the compensation of "outside Directors" and those officers of the Company serving in that capacity. The Company has obtained Directors and Officers Insurance. Pursuant to the policy with National Union Fire Insurance Company, the coverage includes Company reimbursement and sections action claims entity coverage. The coverage has a $1,000,000 aggregate limit of liability in each policy year (inclusive of defense costs) and there is a retention of $25,000 for each claim. Conflicts of Interest Policy. The Company has adopted a policy that any transactions with directors, officers or entities of which they are also officers or directors or in which they have a financial interest, will only be on terms consistent with industry standards and approved by a majority of the disinterested directors of the Company's Board of Directors. The Bylaws of the Company provide that no such transactions by the Company shall be either void or voidable solely because of such relationship or interest of directors or officers or solely because such directors are present at the meeting of the Board of Directors of the Company or a committee thereof which approves such transactions, or solely because their votes are counted for such purpose if: (i) the fact of such common directorship or financial interest is disclosed or known by the Board of Directors or committee and noted in the minutes, and the Board or committee authorizes, approves or ratifies the contract or transaction in good faith by a vote for that purpose without counting the vote or votes of such interested directors; or (ii) the fact of such common directorship or financial interest is disclosed to or known by the shareholders entitled to vote and they approve or ratify the 27 contract or transaction in good faith by a majority vote or written consent of shareholders holding a majority of the Common Shares entitled to vote (the votes of the common or interested directors or officers shall be counted in any such vote of shareholders), or (iii) the contract or transaction is fair and reasonable to the Company at the time it is authorized or approved. In addition, interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors of the Company or a committee thereof which approves such transactions. If there are no disinterested directors, the Company shall obtain a majority vote of the shareholders approving the transaction. Indemnification. The Company shall indemnify to the fullest extent permitted by, and in the manner permissible under the laws of the State of Washington, any person made, or threatened to be made, a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he is or was a director or officer of the Company, or served any other enterprise as director, officer or employee at the request of the Company. The Board of Directors, in its discretion, shall have the power on behalf of the Company to indemnify any person, other than a director or officer, made a party to any action, suit or proceeding by reason of the fact that he/she is or was an employee of the Company. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Company, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceedings) is asserted by such director, officer, or controlling person in connection with any securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issues. INDEMNIFICATION OF OFFICERS OR PERSONS CONTROLLING THE COMPANY FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF 1933, IS HELD TO BE AGAINST PUBLIC POLICY BY THE SECURITIES AND EXCHANGE COMMISSION AND IS THEREFORE UNENFORCEABLE. - ------------------------------------------------------ CERTAIN TRANSACTIONS - ------------------------------------------------------ Distribution of Securities. In July, 1996, the Board of Directors authorized the distribution of 200,000 A Warrants each exercisable into one Common Share of the Company at the exercise price of $4.00 per Common Share, 200,000 B Warrants each exercisable into one Common Share of the Company at the exercise price of $6.00 per Common Share and 250,000 C Warrants each exercisable into one Common Share of the Company at the exercise price of $8.00 per Common Share. The A, B and C Warrants are exercisable for a period of 48 months from the date of issue and are callable with 30 days notice at a price of $.001 per warrant. These distributions were made to the owners of record of Common Shares on the books of the Company as of July 22, 1996. Consulting Agreement. On July 15, 1996, the Company entered into a consulting agreement with Pratt, Wylce & Lords, Ltd. ("Pratt") to assist the Company in its capitalization and the obtainment of additional financing. The agreement was amended January 28, 1997 and subsequently canceled. The net payment to Pratt after amendment and termination of the consulting agreement was $35,000 cash and 25,000 Common Shares. Due to the date of the consulting agreement, the Company distributed A, B and C Warrants to Pratt, however, Pratt disclaimed the A, B and C Warrants and these Warrants were then redistributed on a pro rata basis to the remaining shareholders. Additionally, the Company entered into a consulting agreement with Gaming Venture Corp., U.S.A. (GVC) to assist the Company with the promotion of its product and its Common Shares. The original agreement with GVC was dated July 8, 1996 and was amended on December 1, 1996 and again on February 1, 1997. The contract began on July 8, 1996, and by amendment, will run through July 7, 1998. GVC received 200,000 shares of the Company, $45,000 in cash and Options to acquire an additional 100,000 Common Shares. By action of the Company's Board of Directors, on April 30, 1997, the options were exchanged for D Warrants, which are included in this offering. Loan Collateralized by Related Party. On July 11, 1997, GVC placed $200,000 in a 200 day Certificate of Deposit with Bank West located at 3500 West Sahara Avenue in Las Vegas, Nevada. Bank West lent the Company up to the full amount of GVC's CD and charge the Company an interest rate which is the rate of the CD plus 2%. The Company agreed to pay GVC a payment equal to 8.5% of the total amount of the CD when the Company pays off the principal of the loan to Bank West. The payment will be 8.5% of the principal of $200,000 or a total of $17,000. If the Company is unable to pay off the loan balance after the 200 day 28 period, half of the $17,000 payment must be paid to GVC. GVC will then have the option of renewing the CD and allowing the Company to continue with the loan or convert the principal balance of the loan into the Company's common stock with registration rights. If GVC elects to renew the CD, the same terms from the first 200 day period will be in effect including a full 8.5% of the principal being due when the loan is repaid. The $8,500 which is due after the first 200 day period will not be deducted from the 8.5% due when the loan is repaid if the CD is rolled over for another 200 day period. Consulting Agreement with Related Party. On February 1, 1997, the Company entered into a consulting agreement with Gametek, and Steven Blad, an officer of the Company. Mr. Blad is a consultant to Gametek. Pursuant to the agreement, Mr. Blad shall, for two years commencing January 1, 1997, act as an officer of the Company and shall receive a base salary of $12,500 per month. Additionally, Mr. Blad shall receives a commission of 3.73% on the Gross Margin received by the Company on its product sold through sales arranged and completed primarily by the efforts of Mr. Blad. Mr. Blad is also entitled to a one time licensing bonus of 10,000 Common Shares of the Company each time Mr. Blad successfully obtains a license from the Nevada Gaming Commission approving current products of the Company for use in the gaming industry. Mr. Blad is entitled to receive a bonus, payable on a quarterly basis and in an amount not to exceed $2,000 per month upon the Company achieving its goals as set by the Board of Directors, The bonus payable shall be reduced by the commissions received during the same period. In addition to the base salary, commissions, licensing bonus and quarterly bonus stated above, the Mr. Blad shall receive "Stock Options" to purchase up to three hundred thousand (300,000) shares of the Company's common stock ("Shares") under the following terms and conditions: (i) Upon execution of the consulting agreement, the Consultant received the right to acquire up to one hundred thousand (100,000) Shares at One Dollar and Fifty Cents ($1.50) per Share. (ii) Upon the Consultant fulfilling his obligations and the Company reaching its goals for 1997, the Consultant shall have the right to acquire up to an additional one hundred thousand (100,000) Shares at One Dollar and Fifty Cents ($1,50) per Share. The determination of whether Mr. Blad has met his obligations and the Company has reached its goals shall be made at the discretion of the President and Chief Executive Officer and approved by the Company's Board of Directors. Mr. Blad shall be entitled to a meeting with the President and Chief Executive Officer during January 1998 to discuss the bonus to be paid hereunder, if any. The Stock Options to be issued shall be vested in the Consultant no later than January 31, 1998. (iii) Upon Mr. Blad fulfilling his obligations and the Company reaching its goals for 1998, Mr. Blad shall have the right to acquire up to an additional one hundred thousand (100,000) Shares at One Dollar and Fifty Cents ($1,50) per Share. The determination of whether Mr. Blad has met his obligations and the Company has reached its goals shall be made at the discretion of the President and Chief Executive Officer and approved by the Company's Board of Directors. Mr. Blad shall be entitled to a meeting with the President and Chief Executive Officer during January 1999 to discuss the bonus to be paid hereunder, if any. The Stock Options to be issued shall be vested in Mr. Blad no later than January 31, 1999. (iv) The Stock Options must be exercised within Five (5) years from the date Mr. Blad's rights are vested. The Shares will be issued within Thirty (30) days from when Mr. Blad notifies his intent to exercise the options and tenders the purchase price to the Company. The Company offers no warranty as to the tradability of the Shares or as to whether such shares will be registered with the Securities and Exchange Commission. (v) If the Company is to be sold, a portion of the Stock Options not yet issued hereinabove shall vest in the Consultant thirty (30) days prior to such sale. The number of Stock Options to vest under this subparagraph shall be determined pro rata based upon the number of Stock Options that Mr. Blad may be entitled to for the year and the number of months Mr. Blad was retained under the Agreement during this same year. For example, if the Company was to be sold on April 1, 1998, Mr. Blad would have an additional twenty-five thousand Stock Options vest on March 1, 1998. [(100,000 stock options for 1998) x (3 months of consulting/12 months)]. The Company shall notify Mr. Blad in writing of (1) the impending sale, (2) the right of Mr. Blad to exercise the Stock Options and (3) the terms and conditions of the proposed sale of the Company. For purposes herein, the Company shall be deemed sold if substantially all of its assets are sold, including patents and goodwill, or the Company's stock is sold or transferred causing a change in the person or persons who currently have majority control of the Company. This Paragraph does not apply to transfers of stock of the Company, (1) by an assignment to a revocable living trust in which the holder is and remains a trustee and a beneficiary, or (2) by reason of death of the holder. It is Mr. Blad's discretion to exercise the Stock Options prior to the proposed sale. Any Stock Options vested in this subparagraph shall remain vested in Mr. Blad, whether or not they are exercised before the sale, under the terms of subparagraph (vi). Related Party Transaction. Steven Forte, who was a partner of Sines-Forte partnership retains a 3% royalty interest in the gross margin earned from the sale of products covered by intellectual property rights which were exchanged by the partnership for Common Shares of the Company. Royalty amounts due pursuant to the royalty interest amounted to $136 at December 31, 1996. 29 During the year ended December 31, 1996, Steven Forte, an officer and director, Randy Sines, a former director and Richard Huson, a principal shareholder of the Company made advances to the Company for working capital purposes. The balances payable by the Company aggregated $650,034 at December 31, 1996. No cash repayments have been made against the advances, which are due on demand. Mr. Huson made an addition advance in the amount of $300,000 on January 15, 1996. The advance was due on July 15, 1996. The advance was collateralized by partnership shares of Sharps equivalent to 700,000 Common Shares of the Company controlled by Steven and Cheryl Forte and Randy Sines. On October 1, 1996, Mr. Huson exercised his rights against the collateral and as a result, the collection rights to the advance plus accrued interest, which aggregated $320,168 at October 1, 1996, transferred to the other officer/shareholders. The advances accrue interest at between 9.5% and 14.5% per annum. One of the advances in the amount of $250,000 from Mr. Huson provides for repayment of the loan by December 31, 1997 or, upon default, at the option of the shareholder, by the issuance of the Company's common shares at a conversion rate of $.82 per share. During September 1996, the Company entered into personal services agreements with two of its officers which provide for aggregate monthly compensation of up to $20,000 per month on a pro rata basis for time spent on Company related business. The agreements had a term of two years. Amendment to Employment Agreement (Personal Service Agreement) and Covenant Not to Compete and Funding Agreements with Randy Sines. The Company and Randy Sines had previously entered into an Employment Agreement (Personal Service Agreement) and Covenant Not to Compete dated March 31, 1996. In connection with the Employment Agreement, the parties entered into a Funding Agreement dated January 15, 1996 and Third Round Funding Agreement dated September 30, 1996. The Third Round Funding Agreement subordinated the $300,000 promissory note assigned to Cheryl Forte/Steve Forte and the Employee to the $500,000 promissory note, dated September 30, 1996, payable to Richard S. Huson. This subordination requires payments of $10,000 each to Employee and Cheryl Forte. The $300,000 promissory note was further subordinated by the agreement, dated July 8, 1997, to the $45,000 promissory note, dated July 8, 1997, payable to Richard S. Huson. (These agreements and their amendments are referred to as the "Funding Agreements"). Mr. Sines resigned as an officer, director and employee of the Company effective August 27, 1997. As a result of Mr. Sine's resignation, the parties confirmed and modified each other's obligations under the Employment Agreement and Funding Agreements. 1. Assignment of Drop Slot and Anticipation Slot Concepts. Pursuant to a letter dated June 26, 1997, the Company attempted to transfer to Mr. Sines all of the Company's right, title and interest in the Drop Slot and Anticipation Slot inventions/concepts for the sum of $15,000. Pursuant to the above referenced letter, the payment was reflected in a reduction of the debt owed to the Mr. Sines from the Company. The parties have raised questions surrounding the purported transfer and have agreed to restate and settle on the terms and conditions of the assignment as follows: a. The Company assigned all of its right, title and interest to the Drop Slot and Anticipation Slot concepts to Mr. Sines. b. The obligations owed by the Company to Mr. Sines contained in the Funding Agreements will be decreased by the sum of $5,000, not the $15,000 as previously agreed, in return for the assignment of the Royalty to the Company provided herein below. c. Mr. Sines agreed to reduce the monetary obligations owed by the Company to him under the Funding Agreements to an interest rate at nine and one-half percent (9 1/2%) per annum, effective October 1, 1997 and to extend the due date of such obligations for a twelve (12) month period from this same date. If the obligations are not paid on or before September 30, 1998, the interest rate shall increase at such date to fourteen and one-half percent (14 1/2%) per annum. All other terms of the Funding Agreements, including the subordination provisions, remain unchanged. d. Mr. Sines agreed to pay to the Company a five percent (5%) Royalty on the Net Revenue received by Mr. Sines, his heirs or assigns from the sale, development, or manufacture of the Drop Sot and Anticipation Slot concepts, including any derivatives or accessories pertaining thereto. The term "Net Revenue" is defined as gross cash (or equivalents) revenues received by Mr. Sines, his heirs or assigns from the sale, development, or manufacture of the Drop Slot and Anticipation Slot concepts minus the cost of goods sold for such products. In determining the cost of goods sold, Generally Accepted Accounting Principles shall be used. Mr. Sines shall remit the Royalty payments to the Company on a calendar quarter basis. The Royalty payments due for each calendar quarter shall be paid within thirty (30) days after the expiration of each quarter. Interest shall accrue at the rate of nine and one-half percent (9 1/2%) per annum on any Royalty payments that are not paid when due. Mr. Sines will use prudent efforts to protect the intellectual and proprietary rights associated with the Drop Slot and Anticipation Slot concepts, including but not limited to, the procurement and the filing of patents, trade names or copyrights as may be applicable. Upon thirty (30) days written notice, Mr. Sines agreed to provide access to the Company or 30 its auditors to review and audit Mr. Sine's books and records containing information pertinent to calculating the Royalty due the Company under this agreement. The Company allowed Mr. Sine's termination to be effective August 27, 1997. Mr. Sines remains obligated under the terms and conditions of the Employment Agreement, as amended for those clauses which by their terms survive termination and consist only of the Non-Competition, Confidential Information, and Personal Property clauses. It is agreed and understood that the execution of the agreement is additional consideration from the parties for the amendment to the Non-Competition clause of the Employment Agreement as contained herein. 3. Amendment. The parties agreed to amend Paragraph 14, Non- Competition, ("Non-Competition Clause") of the Employment Agreement to increase the term to three (3) years and to limit its scope as follows: a. The Non-Competition Clause was amended to exclude from its restrictions the Drop Slot and Anticipation Slot inventions/concepts and any accessories or derivatives pertaining thereto. Mr. Sines is permitted to market, develop and sell the Drop Slot and Anticipation Slot concepts so long as such business actions are limited solely to such products and do not involve any other gaming product not otherwise excluded herein below. b. It is understood and agreed by the parties that Mr. Sines will not be in violation of the Non-Competition Clause as amended herein for those activities that are limited to the invention and development of gaming products (not manufacturing or marketing), provided that such invention and development does not pertain to the Company's Current Products and Future Products defined herein below in sub-paragraph (d). c. Mr. Sines shall only be required to abide by the terms of the Non- Competition Clause as it is currently written and as amended herein by Paragraph 3(a) and (3)(b) for a period of six (6) months, beginning as of August 27, 1997, with the exception of Paragraphs 3(d) and 3(e). d. After the expiration of the six (6) month period stated above, Mr. Sines agreed to remain obligated under the terms of the Non- Competition Clause for an additional eighteen (18) months, but this restriction shall be limited solely to products that are substantially similar to the Company's current products (the "Current Products") and to the Company's future products referred to or described in the letter dated August 28, 1997, executed by Steve Forte. e. After the expiration of the two (2) year period stated above in sub- paragraph (b) and (c), Mr. Sines agreed not to compete with the Company as defined in the Employment Agreement for an additional one (1) year period only as to such products that are substantially similar to the Future Products defined previously herein. - ---------------------------------------------------------------- PRINCIPAL SHAREHOLDERS - ---------------------------------------------------------------- There are currently 5,640,640 Common Shares outstanding. Assuming exercise of the 200,000 A Warrants, 200,000 B Warrants, 250,000 C Warrants and 593,000 options currently outstanding, there would be 6,983,640 Common Shares outstanding on a fully diluted basis. The following tabulates holdings of shares of the Company by each person who, subject to the above, as of August 30, 1997, holds of record or is known by Management to own beneficially more than 5.0% of the Common Shares and, in addition, by all directors and officers of the Company individually and as a group. Shareholdings at Date of This Prospectus
Percentage of Outstanding Shares as Adjusted to Reflect Percentage Number of Conclusion Number Prior to shares outstanding of the Name and Address of Shares Offering after offering Offering Richard S. Huson 2,389,940 34.22 2,177,711 30.74% 121 S.W. Morrison Suite 1400 Portland, Oregon 97204 Steve and Cheryl Forte 1,906,849 27.30% 1,902,337 26.86% 315 San Francisco Street Henderson, Nevada 89014 31 Randy D. Sines 1,861,727 27.30% 1,607,117 22.69% 4056 South Madelia Spokane, Washington 99203 Sines-Forte Partnership 1,508,249 21.60% 1,382,059 19.51% 315 Francisco Street Henderson, Nevada 89014 Steven Blad 110,000 1.58% 109,000 1.54% 286 Doe Run Circle Henderson, Nevada 89012 Norman G. Kelln 257,208 3.68% 245,846 3.47% 2031 S. Eastern Lane Spokane, Washington 99212 Glen (Tom) Pickell 7,000 .10% 6,300 .09% 115 NW Oregon Avenue, Suite 20 Bend, Oregon 97701 Jay L. King 4600 North Donna Street North Las Vegas, Nevada 89031 100,000 1.43% 97,500 1.38% David E. Sampson 141,016 2.02% 136,925 1.93% 4009 - 205th Avenue N.E. Woodinville, Washington 98072 All Officers and Directors 2,522,073 36.11% 2,320,796 32.76% as a Group (7 persons)
[FN] Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended, beneficial ownership of a security consists of sole or shared voting power (including the power to vote or direct the voting) and/or sole or shared investment power (including the power to dispose or direct the disposition) with respect to a security whether through a contract, arrangement, understanding, relationship or otherwise. Unless otherwise indicated, each person indicated above has sole power to vote, or dispose or direct the disposition of all shares beneficially owned, subject to applicable community property laws. Includes 167,655 Common Shares which may be issued upon exercise of A, B and C Warrants. Includes 206,349 Common Shares which may be issued to Sine/Forte Partnership upon exercise of the A, B and C Warrants 98,868 Common Shares which may be issued to Cheryl Forte upon exercise of the A, B and C Warrants, and 40,000 Common Shares which may be issued to Sines/Forte Partnership. Additionally, Steven Forte is a General Partners of Sines-Forte Partnership and would be deemed to be beneficial owners of the 1,2508,249 Common Shares shown above. Former partners of Sharps International Limited Partnership. Includes 206,349 Common Shares which may be issued to Sine/Forte Partnership upon exercise of the A, B and C Warrants and 40,000 Common Shares which may be issued to Sines/Forte partnership. Additionally, Randy Sines is a General Partner of Sines-Forte Partnership and would be deemed to be beneficial owners of the 1,261,900 Common Shares shown above. Includes 100,000 Common Shares which may be issued upon exercise of 100,000 options. Includes 18,580 Common shares which may be issued upon exercise of the Warrants and 125,000 Common Shares which may be issued upon exercise of 125,000 options. Includes 75,000 Common Shares which may be issued upon exercise of 75,000 options. Includes 5,061 Common Shares which may be issued upon exercise of the warrants and 95,000 Common Shares which may be issued upon exercise of 95,000 options. This does not include 75,000 Common Shares reserved for issuance pursuant to loan conversion options. Additionally On September 24, 1996, Mr. Huson agreed to loan up to $500,000 to the Company for a period not to exceed December 31, 1997. The note shall be secured by agreement of Randy Sines and Cheryl Forte to provide Mr. Huson a minimum of 51% of the voting rights by pledging sufficient voting rights of their Common Shares in the Company until the note is paid in full and a total of $2.4 million is raised through all sources. See "Certain Transactions" for further discussion. There are currently 200,000 A Warrants outstanding. The following tabulates holdings of A Warrants of the Company by each person who, subject to the above, at the date of this Prospectus, holds of record or is known by Management to own beneficially more than 5.0% of the A Warrants and, in addition, by all directors and officers of the Company individually and as a group. 32
Name Total Number Of % Amount % A Warrants Owned Owned Owned Owned Prior to After After Offering Offering Offering Tom Pickell 0 0% 0 0% Jay L. King 0 0% 0 0% Steven Blad 0 0% 0 0% Norman G. Kelln 5,717 2.86% 5,717 2.86% Sines/Forte Partnership 63,492 31.75% 63,492 31.75% Cheryl Forte 30,421 15.21% 30,421 15.21% David Sampson 1,557 .78% 1,557 .78% Randy Sines 30,421 15.21% 30,421 15.21% Richard Huson 51,586 25.79% 51,586 25.79% All Officers and Directors As a Group (6) 131,608 65.80% 131,608 65.80%
[FN] Randy Sines and Steve Forte are General Partners of Sines-Forte partnership and would be deemed to be beneficial owners of the 63,492 Class A Warrants shown above. Steve Forte is married to Cheryl Forte and would be deemed to be a beneficial owners of the 30,421 Class A Warrants shown above. There are currently 200,000 B Warrants outstanding. The following tabulates holdings of B Warrants of the Company by each person who, subject to the above, at the date of this Prospectus, holds of record or is known by Management to own beneficially more than 5.0% of the B Warrants and, in addition, by all directors and officers of the Company individually and as a group.
Name Total Number Of % Amount % B Warrants Owned Owned Owned Owned Prior to After After Offering Offering Offering Tom Pickell 0 0% 0 0% Jay L. King 0 0% 0 0% Steven Blad 0 0% 0 0% Norman G. Kelln 5,717 2.86% 5,717 2.86% Sines/Forte Partnership 63,492 31.75% 63,492 31.75% Cheryl Forte 30,421 15.21% 30,421 15.21% David Sampson 1,557 .78% 1,557 .78% Randy Sines 30,421 15.21% 30,421 15.21% Richard Huson 51,586 25.79% 51,536 25.79% All Officers and Directors As a Group (7) 131,608 65.80% 131,608 65.80%
[FN] Randy Sines and Steve Forte are General Partners of Sines-Forte Partnership and would be deemed to be beneficial owners of the 63,492 Class B Warrants shown above. Steve Forte is married to Cheryl Forte and would be deemed to be a beneficial owners of the 30,421 Class B Warrants shown above. There are currently 250,000 C Warrants outstanding. The following tabulates holdings of C Warrants of the Company by each person who, subject to the above, at the date of this Prospectus, holds of record or is known by Management to own beneficially more than 5.0% of the C Warrants and, in addition, by all directors and officers of the Company individually and as a group. 33
Name Total Number Of % Amount % C Warrants Owned Owned Owned Owned Prior to After After Offering Offering Offering Tom Pickell 0 0% 0 0% Jay L. King 0 0% 0 0% Steven Blad 0 0% 0 0% Norman G. Kelln 7,146 2.86% 7,146 2.86% Sines/Forte Partnership 79,365 31.75% 79,365 31.75% Cheryl Forte 38,026 15,21% 38,026 15.21% David Sampson 1,947 .78% 1,947 .78% Randy Sines 38,026 15.21% 38,026 15.21% Richard Huson 64,483 25.79% 64,483 25.79% All Officers and Directors As a Group (6) 164,510 65.80% 164,510 65.80%
[FN] Randy Sines and Steve Forte are General Partners of Sines-Forte Partnership and would be deemed to be beneficial owners of the 79,365 Class C Warrants shown above. Steve Forte is married to Cheryl Forte and would be deemed to be a beneficial owners of the 38,026 Class C Warrants shown above. There are currently outstanding 200,000 D Warrants which were issued to Richard Huson, a majority shareholder of the Company (100,000 D Warrants) and Gaming Venture Corp., U.S.A., a consultant to the Company (100,000 D Warrants). There are currently outstanding options to purchase 593,000 Common Shares of the Company. The following tabulates holdings of options of the Company by each person who, subject to the above, at the date of this Prospectus, holds of record or is known by Management to own beneficially more than 5.0% of D Warrants and, in addition, by all directors and officers of the Company individually and as a group.
Name Total Number Of % Amount % Options Owned Owned Owned Owned Prior to After After Offering Offering Offering Tom Pickell 0 0% 0 0% Jay L. King 75,000 12.65% 75,000 12.65% Steven Blad 100,000 16.86% 100,000 16.86% Sine/Forte Partnership 40,000 6.75% 40,000 6.75% Steven Forte 0 0% 0 0% Randy Sines 0 0% 0 0% Norman Kelln 125,000 21.08% 125,000 21.08% David Sampson 95,000 16.02% 95,000 16.02% Donald Peterson 100,000 16.86% 100,000 16.86% John Wasden 45,000 7.59% 45,000 7.59% All Officers and Directors As a Group (7) 435,000 73.35% 435,000 73.35%
(1)Randy Sines and Steve Forte are General Partners of Sines-Forte Partnership and would be deemed to be beneficial owners of the 40,000 options shown above. 34 - ---------------------------------------------------------- SHARES ELIGIBLE FOR FUTURE SALE - ---------------------------------------------------------- The Company currently has 5,740,640 shares of Common Stock outstanding. Other securities may be issued, in the future, in private transactions pursuant to an exemption from the Securities Act are "restricted securities" and may be sold in compliance with Rule 144 adopted under the Securities Act of 1933, as amended. Rule 144 provides, in essence, that a person who has held restricted securities for a period of one years may sell every three months in a brokerage transaction or with a market maker an amount equal to the greater of 1% of the Company's outstanding shares or the average weekly trading volume, if any, of the shares during the four calendar weeks preceding the sale. The amount of "restricted securities" which a person who is not an affiliate of the Company may sell is not so limited. Nonaffiliates may each sell without limitation shares held for three years. The Company will make application for the listing of its Shares in the over- the-counter market. Sales under Rule 144 may, in the future, depress the price of the Company's Shares in the over-the-counter market, should a market develop. Prior to this offering, there has been no public market for the Common Stock of the Company. The effect, if any, of a public trading market or the availability of shares for sale at prevailing market prices cannot be predicted. Nevertheless, sales of substantial amounts of shares in the public market could adversely effect prevailing market prices. - ---------------------------------------------------------- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ---------------------------------------------------------- Prior to this Offering, there has been no market for the Company's common stock. Upon successful completion of this offering, the Company intends to apply to have its common stock traded in the over-the-counter market and listed on the OTC Bulletin Board. Holders. The approximate number of holders of record of the Company's .0010 par value common stock, as of May 31, 1997 was One Hundred (100). Dividends. Holders of the Company's common stock are entitled to receive such dividends as may be declared by its Board of Directors. Broker-Dealer Sales of Company Securities. " The Company intends to list its Common Shares, at least initially, on the OTC Bulletin Board and on NASDAQ Small Cap Market upon meeting the requirements for a NASDAQ listing, if ever. Upon completion of this offering, the Company will not meet the requirements for a NASDAQ Small Cap Market listing. The OTC Bulletin Board has no quantitative written standards and is not connected with the NASD. Until the Company obtains a listing on the NASDAQ Small Cap Market, if ever, the Company's securities may be covered by a Rule 15g-9 under the Securities Exchange Act of 1934 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 Securities Exchange Act of 1934, make a special suitability determination of the purchaser and have received the purchaser's written agreement to the transaction prior to the sale. In order to approve a person's account for transactions in penny stock, the broker or dealer must (i) obtain information concerning the person's financial situation, investment experience and investment objectives; (ii) reasonably determine, based on the information required by paragraph (i) that transactions in penny stock are suitable for the person and that the person has sufficient knowledge and experience in financial matters that the person reasonably may be expected to be capable of evaluating the rights of transactions in penny stock; and (iii) deliver to the person a written statement setting forth the basis on which the broker or dealer made the determination required by paragraph (ii) in this section, stating in a highlighted format that it is unlawful for the broker or dealer to effect a transaction in a designated security subject to the provisions of paragraph (ii) of this section unless the broker or dealer has received, prior to the transaction, a written agreement to the transaction from the person; and stating in a highlighted format immediately preceding the customer signature line that the broker or dealer is required to provide the person with the written statement and the person should not sign and return the written statement to the broker or dealer if it does not accurately reflect the person's financial situation, investment experience and investment objectives and obtain from the person a manually signed and dated copy of the written statement. A penny stock means any equity security other than a security (i) registered, or approved for registration upon notice of issuance on a national securities exchange that makes transaction reports available pursuant to 17 CFR 11Aa3-1 (ii) authorized or approved for authorization upon notice of issuance, for quotation in the NASDAQ system; (iii) that has a price 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 35 transaction with the person. Consequently, the rule may affect the ability of broker-dealers to sell the Company's securities and also may affect the ability of purchasers in this Offering to sell their shares in the secondary market. See "Market for Registrant's Common Equity and Related Stockholder Matters - Broker-Dealer Sales of Company's Securities." - ---------------------------------------------------------- TERMS OF OFFERING - ---------------------------------------------------------- Plan of Distribution. The Company hereby offers up to 200,000 Common Shares at the purchase price of $3.50 per Common Share. The Common Shares are being offered on a "direct participation" basis by the Company (employees, officers and directors) and possibly selected broker-dealers. The employees, officers and directors who shall sell the offering on behalf of the Company are Jay L. King, Steven Blad, Glen (Tom) Pickell, David Sampson and Norman Kelln. These individuals will be relying on the safe harbor in Rule 3a4-1 of the Securities Exchange Act of 1934 to sell the Company's securities. No sales commission will be paid for Common Shares sold by the Company. Selected broker-dealers shall receive a sales commission of up to 10% for any Common Shares sold by them. The Company reserves the right to withdraw, cancel or reject an offer in whole or in part. The Common Shares offered hereby will not be sold to insiders, control persons, or affiliates of the Company. There are no plans, proposals, arrangements or understandings with any potential sales agent with respect to participating in the distribution of the Company's securities. When, in the future, assuming such participation develops, the registration statement will be amended to identify such persons. The Company, through its officers and directors, will undertake a direct participation self-underwritten offering at the same time as the selling shareholders will be selling their registered shares. Officers and directors of the Company are participating as selling shareholders. Current officers and directors do not plan on selling their Common Shares until the Company's offer is fully subscribed. The Company is not selling any Common Shares on behalf of Selling Shareholders and has no control or affect on these Selling Shareholders. The Selling Shareholders may sell the Common Shares offered hereby in one or more transactions (which may include "block" transactions in the over-the- counter market, in negotiated transactions or in a combination of such methods of sales, at fixed prices which may be changed, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. The Selling Shareholders may effect such transactions by selling the Shares directly to purchasers, or may sell to or through agents, dealers or underwriters designated from time to time, and such agents, dealers or underwriters may receive compensation in the form of discounts, concessions or commissions from the Selling Shareholders and/or the purchaser(s) of the Common Shares for whom they my act as agent or to whom they may sell as principals, or both. The Selling Shareholders and any agents, dealers or underwriters that act in connection with the sale of the Common Shares might be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act, and any discount or commission received by them and any profit on the resale of the Common Shares as principal might be deemed to be underwriting discounts or commissions under the Securities Act. The Company will receive no portion of the proceeds from the sale of the Common Shares by the selling shareholder and will bear all of the costs relating to the registration of this Offering (other than any fees and expenses of counsel for the Selling Shareholders). Any commissions, discounts or other fees payable to a broker, dealer, underwriter, agent or market maker in connection with the sale of any of the Common Shares will be borne by the Selling Shareholders. Determination of Offering Price. The offering price and other terms of the Common Shares were arbitrarily determined by the Company after considering the total offering amount needed and the possible dilution to existing and new shareholders. Offering Procedure. This Offering will terminate on or before January 31, 1998. In the Company's sole discretion, the offering of Common Shares may be extended for up to three Thirty day periods, but in no event later than April 30, 1998. Subscription Procedure. The full amount of each subscription will be required to be paid with a check payable to the Company in the amount of the subscription. Such payments are to be remitted directly to the Company by the purchaser or by the soliciting broker/dealer before 12:00 noon, on the following business day, together with a list showing the names and addresses of the person subscribing for the offered Common Shares or copies of subscribers confirmations. No Escrow Account. There is no minimum offering amount and no escrow account. As a result, any and all offering proceeds will be deposited directly into the operating account of the Company. 36 - -------------------------------------------------------------- DESCRIPTION OF SECURITIES - -------------------------------------------------------------- Qualification. The following statements constitute brief summaries of the Company's Certificate of Incorporation and Bylaws, as amended. Such summaries do not purport to be complete and are qualified in their entirety by reference to the full text of the Certificate of Incorporation and Bylaws. The Company's articles of incorporation authorize it to issue up to 20,000,000 Common Shares. Shares of common stock purchased in this offering will be fully paid and non-assessable. There are no provisions in the Company's articles of incorporation or by-laws that would delay, defer or prevents a change-in-control of the Company. Pursuant to Section 23B.19.040 of the Revised Code of Washington, a target corporation shall not engage in any significant business transaction for a period of five years following the acquiring person's share acquisition time unless the significant business transaction or the purchase of shares made by the acquiring person is approved prior to the acquiring person's share acquisition time by a majority of the members of the board of directors of the target corporation. Additionally, Section 23B.11.030 of the Revised Code of Washington requires that shareholder approval be obtained to approve any plan of merger or share exchange. These provisions could delay, defer or prevent a change-in-control of the Company. Common Stock. There are presently outstanding 5,640,640 Common Shares. As a result, up to 5,740,640 Common Shares will be outstanding upon completion of this Offering. This does not include 75,000 Common Shares reserved for issuance pursuant to loan conversion options, 593,000 shares reserved for issuance to key employees and others pursuant to outstanding options and commitments. Holders of Common Shares of the Company are entitled to cast one vote for each share held at all shareholders meetings for all purposes. There are no cumulative voting rights. Upon liquidation or dissolution, each outstanding Common Share will be entitled to share equally in the assets of the Company legally available for distribution to shareholders after the payment of all debts and other liabilities. Common Shares are not redeemable, have no conversion rights and carry no preemptive or other rights to subscribe to or purchase additional Common Shares in the event of a subsequent offering. All outstanding Common Shares are, and the shares offered hereby will be when issued, fully paid and non-assessable. There are no limitations or restrictions upon the rights of the Board of Directors to declare dividends out of any funds legally available therefor. The Company has not paid dividends to date and it is not anticipated that any dividends will be paid in the foreseeable future. The Board of Directors initially may follow a policy of retaining earnings, if any, to finance the future growth of the Company. Accordingly, future dividends, if any, will depend upon, among other considerations, the Company's need for working capital and its financial conditions at the time. Warrants. In July, 1996, the Board of Directors authorized the distribution of 200,000 A Warrants each exercisable into one Common Share of the Company at the exercise price of $4.00 per Common Share, 200,000 B Warrants each exercisable into one Common Share of the Company at the exercise price of $6.00 per Common Share and 250,000 C Warrants each exercisable into one Common Share of the Company at the exercise price of $8.00 per Common Share. The A, B and C Warrants are exercisable for a period of four years from July, 1996 and are callable with 30 days notice at a price of $.001 per warrant. The Warrants have the same expiration period, which the Board of Directors arbitrarily determined was sufficient in length to allow for the growth of the Company such that the Warrants could be deemed attractive to current Warrantholders for exercise. These distributions were be made to the owners of record of Common Shares on the books of the Company as of July 22, 1996. In June 1997, the Company authorized the issuance of 200,000 Class D Warrants. The D Warrants are exercisable into one common share at the purchase price of $1.50. The D Warrants shall be exercisable for a period of two years from January 31, 1997 and shall be redeemable by the Company at $.001 per D Warrant upon thirty days notice. To date, 100,000 Class D Warrants have been exercised. The Company is registering the stock underlying its A, B, C and D Warrants on behalf of its selling security holders. Transfer Agent. The Company acts as its own transfer agent. Subsequent to the offering, the Company shall retain a separate transfer agent. 37 - ----------------------------------------------------------- LEGAL MATTERS - ----------------------------------------------------------- The due issuance of the Common Shares offered hereby will be opined upon for the Company by J. M. Walker, Attorney-At-Law, in which opinion Counsel will rely on the validity of the Certificate and Articles of Incorporation issued by the State of Washington, as amended and the representations by the management of the Company that appropriate action under Washington law has been taken by the Company. - -------------------------------------------------------- LEGAL PROCEEDINGS - -------------------------------------------------------- The Company is not involved in any legal proceedings as of the date of this Prospectus. Steven L. Forte, a consultant to, and an employee and director of the Company, was convicted of a gambling-related third degree felony in New Jersey in 1990, and in 1982 pled guilty to a misdemeanor trespass charge arising from a gambling related charge emanating from Harrah's Casino in Reno, Nevada. Such convictions could affect the Company's ability to obtain approval for the licensing of the Company, if required, in any number of prospective jurisdictions. Were this to occur, Mr. Forte has agreed that he and the Company would restructure Mr. Forte's relationship with the Company, and in particular, the terms of Mr. Forte's Personal Services Agreement with the Company, in order to conform to the gaming requirements of such jurisdictions. - -------------------------------------------------------- EXPERTS - -------------------------------------------------------- The audited financial statements included in this Prospectus have been so included in reliance on the report of Winter, Scheifley & Associates, Inc., P.C., Certified Public Accountants, on the authority of such firm as experts in auditing and accounting. - -------------------------------------------------------- INTERESTS OF NAMED EXPERTS AND COUNSEL - -------------------------------------------------------- None of the experts or counsel named in the Prospectus are affiliated with the Company. 38 Casinovations Incorporated (A Development Stage Company) Balance Sheet June 30, 1997 (Unaudited)
ASSETS Current assets: Cash $ 161,998 Accounts receivable, trade 8,424 Inventories 856 Prepaid expenses 5,250 Total current assets 176,528 Property and equipment, at cost, net of accumulated depreciation of $4,326 28,473 Intangible assets 148,066 Deferred interest expense 93,000 Deposits 11,320 ----------- $ 457,387 LIABILITIES AND STOCKHOLDERS' EQUITY =========== Current liabilities: Accounts payable $ 36,180 Accrued wages 24,181 Current portion of long-term debt 80,624 Shareholder loans 621,404 ------------ Total current liabilities 762,389 Stockholders' equity: Common stock, $.001 par value, 20,000,000 shares authorized, 5,563,638 shares issue and outstanding 5,564 Additional paid-in capital 3,328,251 Unpaid subscriptions to common stock (162,500) Accumulated deficit (3,476,317) ------------ (305,002) ------------ $ 457,387 ============
See accompanying notes to financial statements. 39 Casinovations Incorporated (A Development Stage Company) Statements of Operations Six Months Ended June 30, 1997 and 1996 (Unaudited)
Period from Inception (April 29, 1994) to June 30, 1997 June 30, 1996 June 30, 1997 Sales $ 632 $ 113 $ 3,367 Interest income 7,074 10 8,867 Other income 13,000 - 13,010 ----------- ----------- ----------- 20,706 123 25,244 Other costs and expenses: General and administrative 717,735 200,538 1,899,050 General and administrative - related party 203,092 6,578 279,860 Research and development 171,814 175,134 878,770 ----------- ----------- ----------- 1,092,641 382,250 3,057,680 ----------- ----------- ----------- Income (loss) from operations (1,071,935) (382,127) (3,032,436) Interest expense - related parties 167,143 144,582 596,267 ----------- ----------- ----------- Income (loss) before income taxes (1,239,078) (526,709) (3,628,703) Provision for income taxes - - - ----------- ----------- ----------- Net income (loss) $ (1,239,078) $ (526,700) $ (3,628,703) ============ ============ ============ Earnings (loss) per share: Net income (loss) $ (.23) $ (.13) $ (.95) ============ ============ ============ Weighted average shares outstanding 5,393,371 3,928,333 3,820,729 ============ ============ ============
See accompanying notes to financial statements. 40 Casinovations Incorporated Statements of Cash Flows (A Development Stage Company) Six Months Ended June 30, 1997 and 1996 (Unaudited)
Inception (April 29, 1994) to June 30, 1997 June 30, 1996 June 30, 1997 Net income (loss) $(1,239,078) $ (526,709) $(3,628,703) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 11,396 2,854 15,623 Interest added to loan balances 36,492 74,137 Stock issued for services 309,999 45,000 1,085,499 Stock issued for interest 22,561 22,561 Equipment exchanged for services 2,903 Amortization of deferred interest 93,000 139,500 Changes in assets and liabilities: (Increase) decrease in accounts receivable (5,591) (100) (8,424) (Increase) decrease in inventory (856) (Increase) decrease in prepaid expenses (4,526) (5,250) (Increase) decrease in other assets (5,201) (11,320) Increase (decrease) in accounts payable and accrued expenses (150,842) (15,050) 60,361 Total adjustments 307,288 32,704 1,374,734 Net cash (used in) operating activities (931,790) (495,655) (2,253,969) Cash flows from investing activities: Acquisition of plant and equipment (18,996) (2,600) (38,243) Increase in patents and trademarks (10,949) (36,049) (156,822) Net cash (used in) investing activities (29,945) (38,649) (195,065) Cash flows from financing activities: Common stock sold for cash 600,010 45,000 1,535,069 Capital contributions by partners 402,950 Proceeds from long-term debt 72,000 Repayment of shareholder loans (20,000) (40,000) Repayment of long-term debt (9,155) (9,155) Increase in amounts due officers and shareholder 486,202 650,168 Net cash provided by financing activities 570,855 531,202 2,611,032 Increase (decrease) in cash (390,880) (1,452) 161,998 Cash and cash equivalents, beginning of period 552,878 1,452 - Cash and cash equivalents, end of period $ 161,998 $ - $ 161,998
See accompanying notes to financial statements. 41 Casinovations Incorporated (A Development Stage Company) Notes to Financial Statements 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 financial statements for the year ended December 31, 1996, included elsewhere herein. Loss per share was computed using the weighted average number of common shares outstanding. Advances in the amount of $250,000 during October 1996 from the Company's major stockholder provides for repayment of the loan by December 31, 1997 or, upon default, at the option of the stockholder, by the issuance of the Company's common stock at a conversion rate of $.82 per share. The difference between this amount and the fair value of the stock ($1.50 per share) has been recorded as deferred interest on the Company's balance sheet with a corresponding credit to paid-in capital. The deferred interest is being amortized as interest expense through December 31, 1997. Unamortized interest amounted to $93,000 at June 30, 1997. During the period ended June 30, 1997 the Company issued 400,000 shares of its common stock for cash aggregating $600,010. Additionally, the Company issued 135,000 shares of common stock to consultants and others for services valued at $202,500 ($1.50 per share) and issued 45,122 shares for the conversion of debt of $45,122 to related parties pursuant to conversion provisions included in the debt instruments. The difference between the conversion price for the debt ($1.00 per share) and the fair value of the shares issued ($1.50 per share) has been charged to interest expense. During June 1997, the Company issued 20,000 shares of its common stock for services provided by a consultant. The shares were valued at $3.50 per share as the timing of their issuance was considered to be contemporaneous with the Company's decision to offer its common stock to the public at that price. Additionally in June 1997, 100,000 Class D Warrants were issued to the Company's major shareholder at a conversion price of $1.50 per share. The difference between conversion price of the warrants and the assumed fair value of the stock amounted to $200,000 and has been charged to general and administrative expenses - related parties. An additional 100,000 Class D Warrants were issued to a consultant during this period, however, the warrants replaced options to purchase 100,000 shares of common stock at $1.50 per share that were granted to the consultant at a time when the fair value of the stock was equal to the option price. The Company has not recorded compensation expense with respect to the replacement warrants. Certain of the shares issued to a consultant and an advertiser 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. 42 INDEPENDENT AUDITOR'S REPORT Board of Directors and Stockholders Casinovations Incorporated (A Development Stage Company) We have audited the balance sheet of Casinovations Incorporated as of December 31, 1996, and the related statements of income, changes in stockholders' equity, and cash flows for each of the two years in the period then ended and for the period from inception (April 29, 1994) to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above, present fairly, in all material respects, the financial position of Casinovations Incorporated as of December 31, 1996, and the results of its operations and cash flows for each of the two years in the period then ended and for the period from inception (April 29, 1994) to December 31, 1996, in conformity with generally accepted accounting principles. Winter, Scheifley & Associates, P.C. Certified Public Accountants Englewood, Colorado March 27, 1997 (Except for Note 7. For which the date is July 15, 1997) 43 Casinovations Incorporated (A Development Stage Company) Balance Sheet December 31, 1996
ASSETS 1996 Current assets: Cash $ 552,878 Accounts receivable 2,833 Inventory 856 Prepaid expenses 724 ----------- Total current assets 557,291 Property and equipment, at cost, net of accumulated depreciation of $1,686 12,117 Other assets: Patents and trademarks 145,873 Deferred interest expense 186,000 Other 6,119 ----------- 337,992 ----------- $ 907,400 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, trade $ 45,186 Accounts payable - related parties 61,666 Accrued wages 91,950 Accrued expenses 12,401 Amounts due affiliates 650,034 ----------- Total current liabilities 861,237 Long term debt 89,779 Commitments and contingencies (Note 5) Stockholders' equity: Common stock, $.001 par value, 20,000,000 shares authorized, 4,963,510 issued and outstanding 4,964 Additional paid-in capital 2,188,659 (Deficit) accumulated during development stage (2,237,239) ----------- (43,616) ----------- $ 907,400 ==========
See accompanying notes to financial statements. 44 Casinovations Incorporated (A Development Stage Company) Statements of Operations For the Years Ended December 31, 1996 and 1995 And For the Period From Inception (April 29, 1994) to December 31, 1996
Period from Inception (April 29, 1994) to December 31, 1996 1995 1996 ------ ------ ------ Revenues $ 2,450 $ 285 $ 2,735 Other income 1,803 1,803 ----------- ----------- ----------- 4,253 28 4,538 Costs and expenses: General and administrative expenses 977,827 133,315 1,521,815 General and administrative expenses - related party 52,313 24,455 76,768 Research and development - related party 244,117 436,871 706,956 ----------- ----------- ----------- 1,274,257 594,641 2,305,539 Interest expense - related parties 414,723 14,401 42,124 ----------- ----------- ----------- 414,723 14,401 42,124 Net (loss) $ (1,684,727) $ (608,757) $ (2,343,125) =========== =========== =========== Earnings (loss) per share: Net income (loss) $ (0.41) $ (0.21) $ (0.71) =========== =========== =========== Weighted average shares outstanding 4,133,909 2,867,165 3,306,649 =========== =========== ===========
See accompanying notes to financial statements. 45 Casinovations Incorporated (A Development Stage Company) Statement of Changes in Stockholders' Equity For the Period From Inception (April 29, 1994) to December 31, 1996
Deficit Additional Accumulated Common Stock Paid -in During Develop- ACTIVITY Shares Amount Capital ment Stage Total Capital contributed by partners $ $ 101,845 $ $ 101,845 Net (loss) for the period (96,141) (96,141) ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1994 101,845 (96,141) 5,704 Issue shares to founders (September 1995) 3,775,000 3,775 297,330 301,105 Issuance of stock in private sales: October 1995 at $1.00 130,000 13 129,870 130,000 (less cost of offering) (7,206) (7,206) Net (loss) for the year (608,757) (608,757) Reclassification of partnership losses (152,386) 152,386 ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1995 3,905,000 3,905 369,453 (552,512) (179,154) Issuance of stock in private sales: March 1996 at $1.50 20,000 20 29,980 30,000 April 1996 at $1.50 10,000 10 14,990 15,000 July 1996 at $1.50 10,000 10 14,990 15,000 October 1996 at $1.50 36,000 36 53,964 54,000 November 1996 at $1.50 302,400 302 453,298 453,600 December 1996 at $1.50 63,110 63 94,602 94,665 Issuance of stock for services: June 1996 at $1.50 30,000 30 44,970 45,000 October 1996 at $1.50 85,000 85 127,415 127,500 December 1996 at $1.50 175,000 175 262,325 262,500 Issuance of stock to related party for debt conversion - October 1996 327,000 327 490,173 490,500 Option granted to related party for 235,500 232,500 debt conversion Net (loss) for the year (1,684,727) (1,684,727) ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1996 4,963,510 $ 4,964 $ 2,188,659 $(2,237,239) $ (43,616) ========== ========== ========== ========== ==========
See accompanying notes to financial statements. 46 Casinovations Incorporated (A Development Stage Company) Statements of Cash Flows For the Years Ended December 31, 1996 and 1995 And For the Period From Inception (April 29, 1994) to December 31, 1996
Period from Inception (April 29, 1994) to December 31, 1996 1995 1996 ------ ------ ------ Net income (loss) $ (1,684,727) $ (608,757) $ (2,343,125) Adjustments to reconcile net income to net cash provided by operating activities: Stock issued for services 775,500 700,500 Interest added to loan balances 23,245 23,245 Amortization of deferred interest 46,500 Equipment exchanged for services 2,903 2,903 Depreciation and amortization 2,553 73 4,227 Changes in assets and liabilities: (Increase) in accounts receivable (2,833) (2,833) (Increase) in inventory (856) (856) (Increase) in prepaid expenses (300) (424) (724) (Increase) in other assets (6,119) (6,119) Increase (decrease) in accounts payable (73,330) 180,182 106,852 Increase in accrued expenses 104,351 104,351 ----------- ----------- ----------- Total adjustments 872,470 179,634 931,546 ----------- ----------- ----------- Net cash provided by (used in) operating activities (812,257) (429,123) (1,411,579) Cash flows from investing activities: Acquisition of plant and equipment (12,969) (19,247) Increase patents and trademarks (65,781) (67,909) (145,873) ----------- ----------- ----------- Net cash provided by (used in) investing activities (78,750) (67,909) (165,120) Cash flows from financing activities: Capital contributions by partners 301,105 402,950 Common stock sold for cash 812,265 122,794 1,010,059 Increase in stockholder loans 630,168 66,400 716,568 ----------- ----------- ----------- Net cash provided by (used in) financing activities 1,442,433 490,299 2,129,577 ----------- ----------- ----------- Increase (decrease) in cash 551,426 (6,733) 552,878 Cash and cash equivalents, beginning of period 1,452 8,185 - ----------- ----------- ----------- Cash and cash equivalents, end of period $ 552,878 $ 1,452 $ 552,878 =========== =========== =========== Supplemental cash flow information: Cash paid for interest $ - $ - $ - Cash paid for income taxes $ - $ - $ -
See accompanying notes to financial statements. 47 Casinovations Incorporated Notes to Financial Statements December 31, 1996 and 1995 Note 1. ORGANIZATION The Company. was incorporated on September 20, 1995, in the State of Washington. The Company is in the business of developing and distributing products related to the gaming industry. The Company has not recorded significant revenues to date and is considered to be in its development stage. The Company's principal products are an electronic card shuffling device, a table game similar to the card game "blackjack" and playing cards designed to assist the dealer in the game of "blackjack". The Company is a continuation of a partnership known as Sharps International, (Sharps) which was formed in April 1994 and whose principal business activity was the development of an electronic card shuffler. Pursuant to a funding agreement dated January 15, 1996, the partners of Sharps received shares of the Company's common stock on a pro rata basis in exchange for their partnership interests. The assets and liabilities of Sharps have been carried forward at their historical basis. Additional shares were issued to partners of the Sines-Forte general partnership (Sines) in exchange for the assets of Sines. Such assets consisted of certain intellectual property rights for products which the Company plans to exploit. The transaction was accounted for as a reorganization of partnerships into corporate form. The foregoing financial statements present the operations of the Company and the partnerships from their inception. Values assigned to the acquired intellectual property rights are limited to professional fees paid for patents and trademarks. Sines retains a royalty interest in certain intellectual property transferred as described in Note 4. SIGNIFICANT ACCOUNTING POLICIES Estimates: The preparation of the Company's financial statements requires management to make estimates and assumptions that effect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Fixed assets: The Company depreciates its office equipment utilizing the straight line method over a period of five years. Depreciation expense amounted to $2,553 and $732 for the years ended December 31, 1996 and 1995, respectively. Intangible assets The Company has applied for patents for certain of its products. Patent and trademark costs aggregating $145,873 will be amortized using the straight line method over a period of ten years beginning in 1997. Organization costs aggregating $6,395 are amortized using the straight line method over a period of five years and are stated net of accumulated amortization of $1,279 at December 31, 1996. Net loss per share: The net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding for the period. Common stock equivalents are excluded from the computation as their effect would be anti-dilutive. Revenue recognition: The Company recognizes revenue from the sale of its products upon shipment to the customer. Cash and cash equivalents Cash and cash equivalents consist of cash and other highly liquid debt instruments with a maturity of less than three months. Fair value of financial instruments The Company's short-term financial instruments consist of cash and cash equivalents, accounts and loans receivable, and payables and accruals. The carrying amounts of these financial instruments approximates fair value because of their short-term maturities. Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and accounts receivable, trade. During the year the Company maintained cash deposits at financial institutions in excess of the $100,000 limit covered by the Federal Deposit Insurance Corporation. Stock-based Compensation The Company adopted Statement of Financial Accounting Standard No. 123 (FAS 123), Accounting for Stock-Based Compensation beginning with the Company's first quarter of 1996. Upon adoption of FAS 123, the Company continued to measure compensation expense for its stock-based employee compensation plans using the intrinsic value method 48 prescribed by APB No. 25, Accounting for Stock Issued to Employees, and has provided in Note 2 pro forma disclosures of the effect on net income and earnings per share as if the fair value-based method prescribed by FAS 123 had been applied in measuring compensation expense. Note 2. Stockholders' EQUITY During the periods covered by these financial statements the Company issued securities in reliance upon an exemption from registration with the Securities and Exchange Commission. Although the Company believes that the sales did not involve a public offering and that it did comply with the exemptions from registration, it could be liable for rescission of said sales if such exemption was found not to apply. The Company has not received a request for rescission of shares nor does it believe that it is probable that its shareholders would pursue rescission nor prevail if such action were undertaken At inception, (September 20, 1995) the Company issued 2,513,000 shares of its $.001 par value common stock to the partners of Sharps on a pro rata basis in exchange for their respective partnership interests and 1,262,000 shares to the partners of Sines for intellectual property rights as described in Note 1. During October 1995 the Company sold 130,000 shares of its common stock to a limited group of investors for cash at $1.00 per share. During July 1996 the Company entered into a one year consulting agreement with an entity whereby the entity would provide to the Company financial consulting services. Pursuant to the agreement the entity agreed to assist the Company in preparing a private placement memorandum to obtain equity financing of a minimum amount of $450,000 and to assist the Company in completing the offering. In exchange for these services the Company agreed to pay $45,000 in cash and to issue 100,000 shares of its $.001 par value common stock valued at $150,000. The Company also granted the consultant an option to purchase 50,000 shares of common stock at $1.50 for a two year period. During February 1997, the Company issued an additional 100,000 shares and granted options to purchase an additional 50,000 shares of common stock at $1.50 to the consultant for a one year extension of the contract. The shares were valued at $150,000. Additionally, in 1996, the Company issued 75,000 shares of its $.001 par value common stock valued at $112,500 to other unrelated individuals for consulting services provided to the Company. These amounts have been included in general and administrative expenses in 1996 in the accompanying Statement of Operations. During July 1996, the Company authorized the issuance of 200,000 each of A, B, and 250,000 of C stock purchase warrants exercisable as follows: $ 4.00 plus one A warrant for each share of common stock $ 6.00 plus one B warrant for each share of common stock $ 8.00 plus one C warrant for each share of common stock The warrants are exercisable for a period of 48 months from the date of issue, and are callable with 30 days notice at a price of $.001 per warrant. During March 1996 the Company began offering shares of its common stock at $1.50 per share pursuant to a private placement. Through December 31, 1996, the Company issued 441,510 shares of common stock to private investors for net cash proceeds aggregating $662,265. Additionally during 1996 the Company issued an aggregate of 290,000 shares (including the consulting shares described above) to consultants and others. The shares were valued at fair value of $1.50 per share. During June, 1996 the Company agreed to issue 327,000 shares of its common stock to its principal shareholder in exchange for conversion of $150,000 of cash advanced to the Company during 1996. The excess of the fair value of the stock at $1.50 per share over the loan amount was charged to interest expense - related parties. The weighted average fair value at the date of grant for options granted during 1996 as described above was $.17 per option. The fair value of the options at the date of grant was estimated using the Black-Scholes model with assumptions as follows: Market value $1.50 Expected life 2 Interest rate 5.15% Volatility 10% Dividend yield 0.00% 49 Stock based compensation costs would have reduced pretax income by $8,600 in 1996 ($.00 per share) if the fair value of the options granted during 1996 had been recognized as compensation expense. Note 3. INCOME TAXES Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. The deferred tax asset resulting from the operating loss carryforward described below has been fully reserved. The Company currently has net operating loss carryforwards aggregating approximately $ 1,400 000 which expire beginning in 2010. The principal difference between the Company's book operating losses and income tax operating losses results from the issuance of common stock during 1996 for services and options to purchase common stock at less than fair market value in exchange for debt conversion rights. Note 4. RELATED PARTY TRANSACTIONS Certain officers of the Company who were partners of Sines retain a 3% royalty interest in the gross margin earned from the sale of products covered by the intellectual property described in Note 1. Royalty amounts due pursuant to the royalty interest amounted to $136 at December 31, 1996. During the year ended December 31, 1996, certain officers and shareholders made advances to the Company for working capital purposes. The balances payable by the Company aggregated $650,034 at December 31, 1996, including accrued interest. No cash repayments have been made against the advances, which are due on demand (except as described below). An advance in the amount of $300,000 was made by a principal shareholder of the Company on January 15, 1996. The advance was due on July 15, 1996. The advance was collateralized by partnership shares of Sharps equivalent to 700,000 shares of the Company's common stock controlled by two other officer/shareholders. On October 1, 1996, the principal shareholder exercised his rights against the collateral and as a result, the collection rights to the advance plus accrued interest, which aggregated $320,168 at October 1, 1996, transferred to the other officer/shareholders. The advances accrue interest at between 9.5% and 14.5% per annum. One of the advances in the amount of $250,000 from the Company's major stockholder provides for repayment of the loan by December 31, 1997 or, upon default, at the option of the stockholder, by the issuance of the Company's common stock at a conversion rate of $.82 per share. The difference between this amount and the fair value of the stock ($1.50) has been recorded as deferred interest on the Company's balance sheet with a corresponding credit to paid-in capital. The deferred interest is being amortized as interest expense through December 31, 1997. Additionally, the Company paid an aggregate of $24,455 in 1995 and $52,313 in 1996 to a company controlled by one of its officers for administrative services provided to the Company. At December 31, 1996, the Company had a balance due to this company of $1,882. The Company incurred research and development costs aggregating $244,117 and $436,871 during the years ended December 31, 1996 and 1995, respectively from a company controlled by a member of its board of directors, and had a balance due to this company of $59,784 at December 31, 1996. During September, 1996 the Company entered into personal service agreements with two of its officers which provide for aggregate monthly compensation of up to $20,000 per month on a pro rata basis for time spent on Company related business. The agreements have a term of two years. During February 1997, the Company entered into a consulting agreement with an officer which provides for monthly base salary of $12,500 and a commission of 3.73% of the gross margin on sales attributable to the officer. The agreement has a term of two years and provides for options to purchase up to 300,000 shares of the Company's common stock at $1.50 per share depending upon the achievement of certain corporate goals as approved by the board of directors. 50 Note 5. LONG-TERM DEBT During 1995, the Company borrowed $72,000 from two individuals with interest payable at 15% per annum due January 2, 1998. Interest accrued through December 31, 1996 has been added to the loan amounts. Note 6. COMMITMENTS AND CONTINGENCIES During October, 1996 (amended March 26, 1997), the Company entered into a lease for office space for a thirty month period ending March 31, 1999 at a monthly rental of $2,694, including maintenance costs. Rent expense was $8,939 for the year ended December 31, 1996. The Company shared office space with the affiliated company discussed in Note 4 prior to October 1996. Future minimum rentals under the lease are as follows: 1997: $32,328 1998: $32,328 1999: $8,082 The Company has granted joint exclusive licenses to two entities for marketing rights to one of its products which provide for royalty payments to the Company of $.04 and $.075 per unit sold. Amounts paid pursuant to the licenses have not been material. The Company's primary business activity since its inception has been the completion of research and development for its electronic shuffling machine. Substantially all of the costs associated with this research and development have been paid to an unaffiliated engineering and design company. A prototype shuffling machine was delivered to the Company during 1996. The Company believes that it has fulfilled its contractual obligations to the design company and has retained the services of another company for refinements to the prototype and commencement of manufacture of the device. The Company's ability to complete its development stage and begin product sales is dependent upon the successful manufacture of its products. Note 7. SUBSEQUENT EVENTS Subsequent to December 31, 1996 (January 1, 1997 to July 15, 1997) the Company sold an additional 477,000 shares of its common stock pursuant to the private placement described in Note 2 for an aggregate of $715,010 and issued 127,500 shares to consultants for services valued at $191,250. Additionally, the Company issued Class D Warrants to purchase 100,000 shares of the Company's common stock for $1.50 per share to the Company's principal shareholder and converted options to purchase 100,000 shares of common stock at $1.50 per share previously granted to the consultant described in Note 2 to Class D Warrants. The Class D Warrants have an exercise price of $1.50 per share and are exercisable after January 31, 1997 for a two year period. During July 1997, the Company secured a $200,000 principal amount loan with a bank for a period of 200 days with interest accruing at 7.5% per year. The loan is collateralized by a certificate of deposit placed at the bank by the consultant described in Note 2. The Company has a collateral agreement with the consultant which provides for additional interest at 8.5 % per year on the full amount of the certificate of deposit. Should the Company be unable to repay the bank loan according to its terms, the consultant has the option of extending the collateral agreement under the same terms for an additional 200 day period or of accepting shares of the Company's common stock in payment of its obligations to the consultant for release of the collateral to the bank plus any accrued interest. The number of shares of the Company's common stock to be paid to the consultant upon conversion will be determined based upon the average closing price of the stock for a five day period prior to the due date of the loan. 51 PART II INFORMATION NOT REQUIRED BY PROSPECTUS Item 24. Indemnification of Officers and Directors. The By-Laws of the Company provides that a director of the registrant shall have no personal liability to the Registrant or its stockholders for monetary damages for breach of a fiduciary duty as a director, except for liability (a) for any breach of the director's duty of loyalty to the Registrant or its stockholders, (b) for acts and omissions not in good faith or which involve intentional misconduct or a knowing violation of law, and (c) pursuant to Canadian law for any transaction form which the director derived an improper personal benefit. Registrant's By-Laws exculpates and indemnifies the directors, officers, employees, and agents of the registrant from and against certain liabilities. Further the By-Laws also provides that the Registrant shall indemnify to the full extent permitted under Canadian law any director, officer employee or agent of Registrant who has served as a director, officer, employee or agent or the Registrant or, at the Registrant's request, has served as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. INDEMNIFICATION OF OFFICERS OR PERSONS CONTROLLING THE COMPANY FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF 1933, IS HELD TO BE AGAINST PUBLIC POLICY BY THE SECURITIES AND EXCHANGE COMMISSION AND IS THEREFORE UNENFORCEABLE. Item 25. Other Expenses of Issuance and Distribution. Other expenses in connection with this offering which will be paid by Casinovations Incorporated (hereinafter in this Part II referred to as the "Company") are estimated to be substantially as follows: Amount Payable Item By Company S.E.C. Registration Fees 3,919.53 State Securities Laws (Blue Sky) Fees and Expenses 3,500.00 Printing and Engraving Fees 7,500.00 Legal Fees 15,000.00 Accounting Fees and Expenses 8,000.00 Transfer Agent's Fees 1,500.00 Miscellaneous 2,500.00 --------- Total 41,919.53
Item 26. Recent Sales of Unregistered Securities. In September, 1995, the Company issued common shares to the partners of Sharps on a pro rata basis in exchange for their respective partnership interests. These issuances were made in reliance on Section 4(2) by Registrant's management to sophisticated investors who had access to information on the Company necessary to make an informed investment decision.
Name Total Number of Shares Date Issued Stacy Haskins 15,478 9/1/95 Martin Petri 15,478 9/1/95 Michael Szeremeta 15,477 9/1/95 Sines-Forte Partnership 1,261,900 9/1/95 Cheryl Forte 254,610 9/1/95 Richard S. Huson 1,025,285 9/1/95 Leonard A. Hale 15,478 9/1/95 David A. Krise 61,910 9/1/95 Norman G. Kelln 113,628 9/1/95 John F. Curran 10,193 9/1/95 Randy D. Sines 254,610 9/1/95 David E. Sampson 40,955 9/1/95
During October, 1995, the Company issued 130,000 for cash consideration of $130,000. These issuances were made in reliance on Section 4(2) by Registrant's management to sophisticated investors who had access to information on the Company necessary to make an informed investment decision. 52
Name Total Number Cash of Shares Date Issued Consideration Jay Willoughby 50,000 10/6/95 $50,000 David Goldsmith 50,000 10/6/95 $50,000 C. Culver Smith 30,000 10/27/95 $30,000
From March 15, 1995 to January 28, 1997, the Company pursued a private placement at $1.50 per common shares and issued a total of 828,177 to the following individuals for aggregate cash consideration of $1,232,265.50. These issuances were made in compliance with Rule 505, Regulation D of the Securities Act of 1933 by Registrant's management, consultants and selected broker/dealers. No commissions or other remuneration was paid to anyone. No general solicitation was utilized. All of the investors were accredited investors. The determination of whether an investor was accredited or nonaccredited was based on the responses in the subscription agreement filled out by each investor. Name Total Number Cash of Shares Date Issued Consideration Don Ludwick 20,000 3/26/96 $30,000 William Martin 10,000 4/12/96 $15,000 Adam Chase 10,000 7/11/96 $15,000 Adam W. Jaslow 30,000 10/25/96 $45,000 Jennifer L. Jaslow 100,000 10/25/96 $150,000 John Horstmann 6,000 10/25/96 $9,000 Richard S. Jaslow, IRA 100,000 11/1/97 $150,000 Lori K. Jaslow Trust 20,000 11/1/96 $30,000 Adam Jaslow Trust 70,000 11/1/96 $105,000 John Plati 20,000 11/12/96 $30,000 Doris Ljubicich 3,400 11/12/96 $5,100 Joseph Hroncich 3,000 11/12/96 $4,500 John S. Cole 3,000 11/12/96 $4,500 Vito Bavaro 3,000 11/12/96 $4,500 Lori K. Jaslow, Trust 80,000 11/14/96 $120,000 Kevo Plumbing & Heating 10,000 11/16/96 $20,000 Tami L. Dirienzo 6,000 11/16/96 $9,000 Peter Jankowski 10,000 11/16/96 $15,000 Renaldo C. Forcellati 3,000 11/16/96 $4,500 Frank Stein 3,000 11/16/96 $4,500 Joan Carranza 3,000 11/16/96 $4,500 Joseph Criscione Sr. 3,000 11/16/96 $4,500 Paul M. Reichenberg 6,000 11/16/96 $9,000 Kathleen M. Mahaffey 3,000 11/16/96 $4,500 Balieri Associates 3,000 11/16/96 $4,500 William S. Dean 6,000 12/1/96 $9,000 Victor & Lana Woinski 3,000 12/11/96 $4,500 James J. & Sheila Criscione 3,000 12/11/96 $4,500 Catherine O'Connell 3,400 12/11/96 $5,100 Joseph & Ida Dellaroba 3,000 12/11/96 $4,500 Mark R. Alleman 3,000 12/11/96 $4,500 William Megnin 3,400 12/11/96 $5,100 James P. Rose 3,000 12/11/96 $4,500 Mark Megnin 3,000 12/11/96 $4,500 Danial Morgan & Sara Andelina 3,010 12/11/96 $4,515 Richard P. Keshishian 3,000 12/11/96 $4,500 Robert Jouas 4,000 12/11/96 $6,000 David E. & Margaret Winkelman 3,000 12/11/96 $3,000 Carl & Birte Mainardi 3,400 12/11/96 $5,100 Mark Megnin & Helen Connor 3,400 12/11/96 $5,100 Paul S. & Renee Spiegler 6,500 12/11/96 $9,750 Diana Forcellati 3,000 12/16/96 $4,500 Richard Napolitano 3,000 12/11/96 $4,500 Jeremy B. & W. Stern 10,000 1/6/97 $15,000 Aldo R. Beretta 1993 Family Trust 10,000 1/6/97 $15,000 Dr. David Ade 10,000 1/6/97 $15,000 Michael Schaeffer 10,000 1/6/97 $15,000 Joseph & Julie Vaccaro 7,000 1/6/97 $10,500 George & Selma Spiegler 3,000 1/6/97 $4,500 Susan Jaslow 50,000 1/27/97 $75,000 Maria Cunha IRA 8,500 1/28/97 $12,750 Henry and John Horstmann 8,000 1/28/97 $12,000 Antonio Tommolillo 3,000 1/28/97 $4,500 Salvatore LaCognata 3,000 1/28/97 $4,500 Harry & Adele Conti 3,000 1/28/97 $4,500 Nicola Attanasio 5,000 1/28/97 $7,500 Lawrence Mendosa 5,000 1/28/97 $7,500 Janet Ausiello 5,000 1/28/97 $7,500 Michael Ausiello 5,000 1/28/97 $7,500 Mark Malzberg 6,000 1/28/97 $9,000 Laura Giostra 6,700 1/28/97 $10,050 David Lupo 3,000 1/28/97 $4,500 Peter O'Hare, Jr. 4,000 1/28/97 $6,000 53 Giovanni Granata 3,000 1/28/97 $4,500 Mario Tommolillo 4,000 1/28/97 $6,000 Jeffrey Kerne 6,000 1/28/97 $9,000 Gino Ramundo 6,000 1/28/97 $9,000 Evelyn Alleman 3,000 1/28/97 $3,000 Thelma Zube 3,400 1/28/97 $5,100 Vincent & F. Ponte 6,667 1/28/97 $10,000 Laura Giostra 6,700 1/28/97 $10,050 Philip & Concetta Vincenti 6,800 1/28/97 $10,200 Andrew Lesnak 3,400 1/28/97 $5,100 Susan Miller 6,700 1/28/97 $10,050 Uphill c/o Paul Scott 9,400 1/28/97 $14,100 Martin Feldman 3,400 1/28/97 $5,100 Mark DeLorenoz 3,000 1/28/97 $4,500
On June 29, 1996, the Company issued 30,000 Common Shares to David Krise in exchange for patents valued at $45,000. This issuance was made in reliance on Section 4(2) by Registrant's management to a sophisticated investor who had access to information on the Company necessary to make an informed investment decision. In July, 1996, the Board of Directors authorized the distribution of 200,000 A Warrants each exercisable into one Common Share of the Company at the exercise price of $4.00 per Common Share, 200,000 B Warrants each exercisable into one Common Share of the Company at the exercise price of $6.00 per Common Share and 250,000 C Warrants each exercisable into one Common Share of the Company at the exercise price of $8.00 per Common Share. The A, B and C Warrants are exercisable for a period of 48 months from the date of issue and are callable with 30 days notice at a price of $.001 per warrant. These distributions were be made to the owners of record of Common Shares on the books of the Company as of July 22, 1996. These issuances were made in reliance on Section 4(2) by Registrant's management to sophisticated investors who had access to information on the Company necessary to make an informed investment decision. During October, 1996, the Company issued 327,000 Common Shares to Richard Huson for the conversion of a loan and accrued interest amounting to $340,500. This issuance was made in reliance on Section 4(2) by Registrant's management to an accredited investor. In the fourth quarter of 1996 and the first quarter of 1997, the Corporation issued an aggregate of 345,000 common shares to consultants who had access to information on the Company necessary to make an informed investment decision for services valued at $545,000 in the aggregate and officers and directors of the Corporation (Steven Blad, David Sampson and Jay L. King) pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933.
Name Total Number Services of Shares Date Issued Valued At Gaming Venture Corp. 100,000 12/28/96 $150,000 50,000 2/20/97 $75,000 50,000 2/28/97 $75,000 Pratt, Wylce & Lords 25,000 12/2/96 $37,500 4,100 2/20/97 $6,150 Clinton Clark 50,000 12/2/96 $75,000 10,900 2/20/97 $16,350 Steven Blad 10,000 2/20/97 $15,000 Micro Cap World, L.L.C. 10,000 2/20/97 $15,000 Jay L. King 25,000 10/02/96 $37,500 David Sampson 10,000 10/02/96 $15,000
Gaming Venture Corp. provides management and capital acquisition consulting. Pratt, Wylce & Lords provided management and capital acquisition consulting services. Clinton Clark provided management and capital acquisition consulting services. Micro Cap World, L.L.C. provided management consulting services On March 31, 1997, the Corporation issued 45,122 Common Shares to Cheryl and Steve Forte for the conversion of a loan whose principal and interest amount was $45,122. This issuance was made in reliance on Section 4(2) by Registrant's management to sophisticated investors who had access to information on the Company necessary to make an informed investment decision. During May and June, 1997, the Corporation issued the following Common Shares to sophisticated investors who had access to information on the Company necessary to make an informed investment decision for cash consideration or services pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933. 54
Name Total Number Cash of Shares Date Issued Consideration (1) or Services Valued At (2) Jayport Holdings, Inc. (BUI) 20,339 5/2/97 $30,509 Glenn Fine 30,000 6/5/97 $45,000 Casino Journal of Nevada, Inc. 20,000 6/5/97 $30, Robert Smith 6,000 6/12/97 $9,000 John Wasden 5,000 6/12/97 $7,500 Althea Duggins 1,000 6/12/97 $1,500 James Beard 1,000 6/12/97 $1,500
[FN] These individuals or entities paid cash consideration. Jayport Holdings, Inc. is a nonaffiliate. Casino Journal of Nevada, Inc. provided advertising services. The principal of Casino Journal of Nevada, Inc. is Glenn Fine. In June 1997, the Company issued 100,000 Class D Warrants to Richard Huson, a majority shareholder of the Company and 100,000 D Warrants to Gaming Venture Corp., U.S.A., a consultant of the Company for services valued at $2,000. Mr. Huson subsequently exercised all of his Class D Warrants in October, 1997. These issuances were made in reliance on Section 4(2) by Registrant's management to Mr. Huson, an accredited investor and Gaming Venture Corp., U.S.A. a sophisticated investor who had access to information on the Company necessary to make an informed investment decision.. Item 27. Exhibit Index. (1) Not Applicable (2) Not Applicable (3) Certificate of Incorporation incorporated by reference to Form BS-2 filed on July 16, 1997, S.E.C. File Number 333- 31373 (3.1) Amendment to Articles of Incorporation dated October 14, 1996 incorporated by reference to Form BS-2 filed on July 16, 1997, S.E.C. File Number 333-31373 (3.2) Amendment to Articles of Incorporation dated February 18, 1997 incorporated by reference to Form BS-2 filed on July 16, 1997, S.E.C. File Number 333-31373 (3.3) Bylaws incorporated by reference to Form BS-2 filed on July 16, 1997, S.E.C. File Number 333-31373 (4) Specimen certificate for Common Stock incorporated by reference to Form BS-2 filed on July 16, 1997, S.E.C. File Number 333-31373 (4.1) Specimen Warrant certificate incorporated by reference to Form BS-2 filed on July 16, 1997, S.E.C. File Number 333- 31373 (5) Consent and Opinion of Jody M. Walker regarding legality of securities registered under this Registration Statement and to the references to such attorney in the Prospectus filed as part of this Registration Statement (6) Not Applicable (7) Not Applicable (8) Not Applicable (9) Not Applicable (10.1) Consulting Agreement of GameTek and Steven J. Blad dated February 1, 1997 incorporated by reference to Form BS-2 filed on July 16, 1997, S.E.C. File Number 333-31373 (10.2) Consulting Agreement with Gaming Venture Corp., U.S.A. dated July 8, 1996 incorporated by reference to Form BS-2 filed on July 16, 1997, S.E.C. File Number 333-31373 (10.3) Exclusive Distributorship Agreement with Sodak Gaming, Inc. dated April 23, 1997 incorporated by reference to Form BS-2 filed on July 16, 1997, S.E.C. File Number 333-31373 (10.4) Exclusive Distributorship Agreement with RGB SDN BHD dated February 19, 1997 incorporated by reference to Form BS-2 filed on July 16, 1997, S.E.C. File Number 333-31373 (10.5) Exclusive Distributorship Agreement with B. Joel Rahn dated June 1, 1997 incorporated by reference to Form BS-2 filed on July 16, 1997, S.E.C. File Number 333-31373 (10.6) Exclusive License Agreement with George C. Matteson Co., Inc. incorporated by reference to Form BS-2 filed on July 16, 1997, S.E.C. File Number 333-31373 (10.7) License Agreement with United States Playing Card Company 55 (10.8) Royalty Agreement with Sines/Forte Partnership dated June 15, 1996 incorporated by reference to Form BS-2 filed on July 16, 1997, S.E.C. File Number 333-31373 (10.9) Promissory Note with Richard Huson dated July 8, 1997 incorporated by reference to Form BS-2 filed on July 16, 1997, S.E.C. File Number 333-31373 (10.10) Collateral Loan Agreement with Gaming Venture Corp., U.S.A. (10.11) Exclusive License Agreement with Technology Development Center, LLC. (11) Not Applicable (12) Not Applicable (13) Not Applicable (14) Not Applicable (15) Not Applicable (16) Not Applicable (17) Not Applicable (18) Not Applicable (19) Not Applicable (20) Not Applicable (21) Not Applicable (22) Not Applicable (23) Not Applicable (24) Consent of Winter, Scheifley & Associates, P.C. (25) Not Applicable (26) Not Applicable (27) Financial Data Schedule (28) Not Applicable (99) Employment Agreement of Jay L. King dated January 1, 1997 incorporated by reference to Form BS-2 filed on July 16, 1997, S.E.C. File Number 333-31373 (99.1) Employment Agreement with Randy D. Sines dated March 31, 1996 incorporated by reference to Form BS-2 filed on July 16, 1997, S.E.C. File Number 333-31373 (99.2) Employment Agreement with Steven L. Forte dated March 31, 1996 incorporated by reference to Form BS-2 filed on July 16, 1997, S.E.C. File Number 333-31373 (99.3) Amendment to Employment Agreement (Personal Service Agreement) and Covenant Not to Compete and Funding Agreements dated September 8, 1997
Item 28. Undertaking. The undersigned registrant hereby undertakes: (a)(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (I) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the formation set forth in the Registration Statement. (iii) To include any additional or changed material information on the plan of distribution. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Delivery of Certificates. The undersigned registrant hereby undertakes to provide to the Transfer Agent at the closing, certificates in such denominations and registered in such names as are required by the Transfer Agent to permit prompt delivery to each purchaser. (c) Indemnification. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions set forth in the Company's Articles of Incorporation or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is 56 asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 57 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Las Vegas, State of Nevada on the 29th the day of October, 1997. Casinovations, Inc. /s/Steven Blad -------------------------------- By:, Steven Blad President In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated. Signature Capacity Date /s/Glen (Tom) Pickell Chief Executive Officer - ------------------- Director October 29, 1997 /s/Jay L. King controller/Director - ------------------- Principal Financial Officer October 29, 1997 /s/Steven Forte Director October 29, 1997 - ------------------- /s/David Sampson Director October 29, 1997 - ------------------- /s/Norman Kelln Director October 29, 1997 - -------------------
EX-5 2 58 Jody M. Walker 7841 South Garfield Way Littleton, Colorado 80122 Telephone (303) 850-7637 Facsimile (303) 220-9902 October 29, 1997 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Dear Sirs: Re: OPINION RE: LEGALITY AND CONSENT OF COUNSEL TO USE OF NAME IN AMENDMENT 2 TO THE REGISTRATION STATEMENT ON FORM SB-2 OF CASINOVATIONS, INC. I am securities counsel for the above mentioned corporation and I have prepared Amendment 2 to the registration statement on Form SB-2. I hereby consent to the inclusion and reference to my name in Amendment 2 to the Registration Statement on Form SB-2 for Casinovations, Inc. It is my opinion that the securities of Casinovations, Inc. and those which are registered with the Securities and Exchange Commission pursuant to Form SB-2 Registration Statement of Casinovations, Inc. have been legally issued and will be, when sold, legally issued, fully paid and non-assessable. Yours very truly, /s/ Jody M. Walker -------------------- EX-10.11 3 59 EXCLUSIVE LICENSE AGREEMENT CASINOVATIONS INCORPORATED AND TECHNOLOGY DEVELOPMENT CENTER, LLC. 1. PARTIES 1.1 This Agreement is made by and between; (a) Casinovations Incorporated, a Washington corporation doing business in Nevada, whose business address is 3909 S. Maryland Pkwy, Suite 311, Las Vegas, Nevada 89119, hereinafter referred to as "Licensee"; and, (b) Technology Development Center, LLC. whose address is 2603 S. Highland Drive, Las Vegas, Nevada 89109, hereinafter referred to as 'Licensor". 2. BACKGROUND 2.1 Licensor has acquired or developed technology known as a "Coin Operating Machine Having An Electronically Identified Coin Collection Box" and has devoted substantial time, effort and money to that development. As a result of Licensor's efforts it now owns certain claims to pending patent rights, trade secrets, know-how and other proprietary information relating to such technology. 2.2 Licensee is engaged in the development and marketing of equipment in the gaming industry. Licensee desires to acquire exclusive rights to the technology developed by or for Licensor and to distribute, sell, lease, use, service and promote products utilizing such technology. 2.3 In consideration of the premises, covenants and agreements contained herein, and intending to be legally bound hereby, the parties hereto have agreed to the terms and conditions provided in this Agreement. 3. DEFINITIONS 3.1 Licensor is the owner of all right, title, and interest to the inventions described in: (a) U.S. Patent Application Serial No. 08-675,899, originally filed July 5, 1996, entitled "Coin Operating Machine Having An Electronically Identified Coin Collection Box"; (b) Any and all patents and/or patent applications, including foreign patent and patent applications which Licensor has filed, relating to any one of the above referenced patents or patent applications which Licensor has filed. 3.2 "Licensed Inventions", "Licensed Patents" and "Licensed Patent Rights"; The inventions so described above will be referred to herein as the "Licensed Inventions". Licensed Inventions also include any inventions included in any application filed on Licensed Technology as defined hereinafter. Said patent applications and any other patents granted on the Licensed Inventions will be referred to herein as the "Licensed Patents". The Licensed Patents have associated Patent Rights and will be referred to herein as "Licensed Patent Rights". 3.3 "Licensed Technology"; In addition to the technical information contained in the referenced patent applications, other related technical and business information have also been developed by Licensor generally relating to the inventions described in the above-referenced patent applications and prototypes and subsequent designs developed for the filing of such patent applications. Exclusive rights under the laws of trade secrets and know-how protect all or substantially all of such proprietary information. The Licensed Inventions, Licensed Patents, and Licensed Patent Rights which may be granted thereon, and related trade secrets, know-how, production tooling, and other proprietary information to be licensed under this Agreement are hereinafter referred to for convenience and brevity as "Licensed Technology". 3.4 "Licensed Copyright Works"; Additionally, Licensor may provide works having copyrights (herein referred to as the "Copyrights") in certain writings, including computer software, business plans. technical descriptions, and related drawings, writings and other works produced by or for Licensor which relate specifically to the Licensed Technology. Such works are also being licensed under this Agreement and are hereinafter referred to as the "Licensed Copyright Works". The subject matter of such Licensed Copyright Works may include proprietary, trade secret or know-how information within the definition of Licensed Technology. 3.5 "Licensed Technology Rights"; Licensor has exclusive property rights under the laws of the United States and foreign countries in such Licensed Technology including potential patent rights, copyrights, trade secret rights, know-how rights and technical information rights. Such exclusive rights shall herein be referred to as the "Licensed Technology Rights". Additionally, there are rights in the Licensed Copyright Works which exist for the written. graphic or other expression which is legally and conceptually separable from the technological content being expressed. Such 60 expressions are protected under the Copyrights associated with such Licensed copyright Works and the Copyrights associated therewith may outlive any exclusive rights in the Licensed Technology. 3.6 "Licensed Trademarks" and "Licensed Trademark Rights"; Licensor further desires to license certain trademarks which may be created for use in connection with the Licensed Technology. Any such trademarks agreed to be licensed hereunder by the parties are herein referred to as "Licensed Trademarks". The rights associated with such Licensed Trademarks are herein referred to as "Licensed Trademark Rights". 3.7 "Licensed Products"; Products which use the Licensed Technology and/or Licensed Copyright Works and/or Licensed Trademarks are herein referred to as "Licensed Products". Use of the Licensed Technology and/or Licensed Copyright Works and/or Licensed Trademarks for purposes of this definition shall include products which incorporate designs which are based on the Licensed Technology and/or Licensed Copyright Works and/or Licensed Trademarks, products which use any products included in the Licensed Technology and/or Licensed Copyright Works and/or Licensed Trademarks, and products which are produced using any new production processes included in the Licensed Technology and/or Licensed Copyright Works and/or Licensed Trademarks. 4. PURPOSE OF AGREEMENT 4.1 Licensee wishes to gain access to the proprietary information embodying and describing the Licensed Technology and to obtain exclusive licenses under the Licensed Technology Rights, Licensed Copyrights and Licensed Trademark Rights for purposes of conducting business using such Licensed Technology, Licensed Copyrights and Licensed Trademarks. 5. GRANT OF EXCLUSIVE TECHNOLOGY AND PATENT LICENSE 5.1 Licensor hereby grants to Licensee exclusive licenses under the Licensed Technology to: (a) Distribute, sell, lease, use, service and promote products or practice methods under the Licensed Patents; (b) Distribute, sell, lease, use, service and promote products which incorporate or use the Licensed Technology; (c) Practice methods contained in the Licensed Technology; and, (d) Practice methods or processes contained in the Licensed Technology. 5.2 The rights provided in this part include an exclusive license under the Licensed Patent Rights obtained by Licensor on the Licensed Technology, except as otherwise provided in this Agreement. 6. GEOGRAPHICAL SCOPE OF THE EXCLUSIVE TECHNOLOGY AND PATENT RIGHTS 6.1 The geographical scope of the technology licenses granted shall be the United States of America and all foreign countries. 7. GRANT OF TRADEMARK LICENSE 7.1 Licensor hereby grants to Licensee a exclusive license to use the Licensed Trademarks, in connection with the sale, distribution, promotion or use of the Licensed Products except as otherwise provided in this Agreement. 8. GEOGRAPHICAL SCOPE OF TRADEMARK LICENSE 8.1 The geographical scope of the trademark license granted above shall be the United States of America and all foreign countries. 9. GRANT OF COPYRIGHT WORKS LICENSE 9.1 Licensor hereby grants to Licensee a exclusive license to exercise any rights available under copyrights in the United States and all foreign countries in which there are rights in the Licensed Copyright Works, in connection with the sale, distribution, promotion or use the Licensed Products except as otherwise provided in this Agreement. 10. GEOGRAPHICAL SCOPE OF COPYRIGHT WORKS LICENSE 10.1 The geographical scope of the Copyright Works License above shall be the United States of America and all foreign countries. 11. MANUFACTURE OF LICENSED PRODUCTS 11.1 Licensee may either manufacture the Licensed Products directly or have such manufactured by others, on it's behalf. 61 12. LICENSE ACQUISITION PAYMENTS 12.1 To acquire this license agreement and in consideration for the rights and license granted hereunder, Licensee agrees to pay or transfer to Licensor upon signing of this Agreement; (a) A Promissory Note Secured by assets of Licensee, payable to Licensor, for Fifty Thousand Dollars ($50,000) payable in 5 monthly installments of Ten Thousand Dollars ($10,000) each, first payment due on November 14, 1997. (b) A Promissory Note Secured by assets of Licensee, payable to Licensor, for Fifty Thousand Dollars ($50,000) payable in 12 equal monthly installments plus simple interest at ten (10) percent per year, first payment and interest due on April 15, 1998. 12.2 All payments, notes and payments on notes as set forth in this section are non refundable. 13. ROYALTIES 13.1 Licensee shall pay to Licensor Seven Dollars and Fifty Cents ($7.50) per each Licensed Product sold, rented, leased, or otherwise used for profit, by Licensee, provided that the Licensee receives a net compensation in excess of $7.50 for each Licensed Product sold, rented, leased or otherwise used for profit. 13.2 Licensee shall be entitled to a credit against the amount of any future royalties payable to Licensor for any: (a) Licensed Product sold by Licensee under this Agreement but for which full credit is granted to a customer due to defect in the Licensed Product, and; (b) Licensed Product that are lost or damaged in transit and for which Licensee is not reimbursed by insurance payments or otherwise. (c) Licensed Product sold by Licensee under this Agreement for which Licensee cannot collect payment. (d) Licensed Product sold by Licensee under this Agreement but for which full credit is granted to a customer due to returned items. 13.3 Royalties owed under this Agreement will be paid quarterly, with each quarterly payment payable within thirty (30) days after the expiration of each calendar quarter. 13.4 All monetary amounts specified in this Agreement are in United States Dollars. 13.5 All payments made by Licensee hereunder shall be made payable to Licensor, Technology Development Center, LLC., at Licensor's address indicated herein or to Licensor's assignee at such place as shall be designated in writing by Licensor from time to time. 13.6 Any royalties, payments or other compensation not paid by the due date shall bear simple interest at the rate of one and one-half percent (l 1/2%) per month or any part of a month overdue, unless a smaller rate applies by law in which case the legal rate nearest thereto shall apply. 13.7 Licensor shall have the right to terminate this agreement, with proper notice, if any royalties, payments, or other compensation is not paid within 6 months of the due date, unless such failure to make payment is the result of any breach of this agreement by Licensor. 13.8 All royalty payments as set forth in this section are non refundable. 14. PERFORMANCE BY LICENSEE 14.1 Licensee shall sell or lease Licensed Product in minimum quantities to meet the following minimum royalty payments, or in the alternative, pay to Licensor minimum royalties according to the following schedule. Failure by Licensee to achieve the specified minimum sale or lease of Licensed Products, or in the alternative, pay to Licensor minimum royalties according to the following schedule shall be deemed a material breach of this Agreement.; (a) Starting from the date of the signing of this agreement to the last day of June, 1998, minimum royalties totaling Twenty Five Thousand Dollars ($25,000) shall have been paid to Licensor; (b) Starting from July 1, 1998 to the last day of the year 1998, minimum royalties totaling Twenty Five Thousand Dollars ($25,000) shall have been paid to Licensor; (c) Starting from January 1, 1999 to the last day of June, 1999, minimum royalties totaling Sixty Three Thousand Dollars ($63,000) shall have been paid to Licensor; 62 (d) Starting from July 1, 1999 to the last day of the year 1999, minimum royalties totaling Sixty Three Thousand Dollars ($63,000) shall have been paid to Licensor; (e) Starting from January 1, 2000, and continuing in perpetuity every six (6) months thereafter, minimum royalties totaling Seventy Five Thousand Dollars ($75,000) shall have been paid to Licensor for each six (6) month period provided this Agreement is in full force and effect. 14.2 The Licensee shall be under no obligation to sell or lease the Licensed Products and pay the minimum royalties described herein above in Section 14.1 during the time that any of the following events are in existence and materially impair the ability of the Licensee to sell or lease the licensed products; (a) Patent, copyrights or trademark infringement claims are made by a third party that materially impair the ability of the Licensee to sell or lease the licensed products. (b) The existence of any law, rule or regulation pertaining to the Licensed Products which substantially impairs or impedes the ability of the Licensor to sell or lease the Licensed Products. (c) Delays in the sale or lease of Licensed Products due to fire, flood, the elements, strikes, labor disputes or shortages, utility curtailments, acts of God or public enemy, war, law, orders or actions of governmental, civil or military authorities, government requisitions, shortages of equipment or supplies, unavailability of transportation, acts or omission of third parties or any other cause beyond the licensee's control. 15. TRANSFER OF DOCUMENTATION 15.1 Licensor shall disclose to Licensee at its chosen location, equipment and documentation, including without limitation, drawings, lab books, sketches, design layouts, software, hardware, source codes, copies of patents, copies of patent applications, and related matters currently held by Licensor, that are reasonably needed by Licensee to sell, lease and service the Licensed Product. Licensee shall notify Licensor within thirty (30) days of receipt of said information if more information is required, after which time Licensor's obligation under this paragraph is thereby considered fulfilled and that licensee has obtained all documentation required under this section. 16. PATENT APPLICATION 16.1 Rights to File - Licensee shall have the right to have applications for patents, utility models, design patents and similar forms of legal protection (hereinafter collectively referred to as "patents") filed in Licensor's name, or assigned to Licensor on all patentable inventions or otherwise protectible interests contained within the Licensed Technology with written approval from Licensor. Licensee shall have primary responsibility but not the obligation for preparing, filing and prosecuting any such patent applications, and that all such work shall be done and paid for at Licensee's cost and expense. If Licensee elects in writing not to pay or pursue efforts to secure patent protection, or elects to terminate efforts to secure patent protection in any country, then Licensor may proceed at it's own cost and expense. 16.2 Licensee shall proceed in good faith to timely file and pursue foreign patents within a six month period from the signing of this Agreement. 16.3 Licensee shall provide to Licensor a list of Countries that Licensee will proceed to secure patent protection in within a 3 month period from the signing of this Agreement. 17. QUALITY CONTROL INVOLVING LICENSED PRODUCTS 17.1 Licensee shall notify Licensor in writing prior to the initial distribution of any new Licensed Products as defined in this Agreement, or the initial distribution of Licensed Products into any country. The notification shall explain the products to be distributed and the planned date of first distribution. 17.2 Licensee agrees that Licensor shall have the right during normal business hours, to enter upon or have its representatives enter upon the premises of Licensee or any subcontractors to inspect the quality of Licensed Products being sold, services rendered based on Licensed Products, facilities for manufacturing and packaging of Licensed Products or services which otherwise use or are related to the Licensed Technology. 18. LICENSOR INSOLVENCY 18.1 In the event that Licensor becomes insolvent, bankrupt or unable to conduct business, or appointment of any trustee, receiver or liquidator for substantially all of the assets of Licensor, or institution of any proceedings of the same, or the attachment or seizure of substantially all of the assets of Licensor, this Agreement will remain in full force and effect. 63 19. CERTIFICATION OF LICENSED PRODUCTS 19.1 Licensee is responsible for timely obtaining any and all licensing, or other certification as required or deemed desirable from state gaming commissions or other government entities as required by law before selling or offering for sale any Licensed Product. Licensee shall bear all costs related to obtaining such licensing, or other certification. 20. PRODUCTION TOOLING 20.1 Upon termination of this Agreement, Licensor shall have the right but shall not be obligated to purchase production tooling at a reasonable price not to exceed the initial costs incurred by Licensee plus (10) ten percent. 21. DISCLOSURE OF TECHNOLOGY 21.1 The Licensed Technology communicated to Licensee hereunder shall remain the exclusive property of Licensor subject to the licenses granted herein. Except as otherwise expressly contemplated, both Licensor and Licensee agree to use its best efforts to prevent the disclosure of the Licensed Technology insofar as it is proprietary to Licensor to any third party not affiliated with Licensee or Licensor. 22. CONFIDENTIALITY OF DISCLOSURE AND LICENSED TECHNOLOGY 22.1 Licensor and Licensee agree that disclosure from Licensor to Licensee under this Agreement is done in confidence except for the information contained in any issued Licensed Patent. All materials embodying Licensed Technology shall be maintained in confidence as a trade secret and not disclosed except as expressly allowed in this Agreement. Incidental writings and information included in the materials describing and disclosing Licensed Technology are not bound to secrecy and nondisclosure if such writings and information are generally known in the trade or if such writings or information later become generally known in the trade or to the public through no fault of Licensee or Licensor, and such writings and information do not contain confidential information concerning the Licensed Technology. 22.2 Licensor and Licensee agree to mark all materials which include confidential information relating to the Licensed Technology and that said materials shall be marked "Proprietary", "Confidential", "Secret". or with words of similar meaning. All materials embodying confidential Licensed Technology shall remain the property of Licensor. 22.3 Nothing herein shall be implied as restricting Licensee's ability to market Licensed Products. 22.4 Licensor and Licensee agree to keep each others business affairs strictly confidential, except for that which is already publicly known. 23. REGISTRATION OF LICENSE 23.1 If under the law of any jurisdiction other than the United States of America the execution or registration of any registered user or similar agreement in respect of any of the Patents or Licensed Technology is required or permitted in order for Licensee to obtain the full benefit of this Agreement, Licensee may, at its own cost and expense register this Agreement or execute or register the appropriate registered user or similar agreement in order that Licensee shall obtain such full benefit as aforesaid. 24. REIMBURSEMENT FOR EXPENSES 24.1 Licensor agrees to make available reasonable technical assistance free of charge as may be necessary for the employees of Licensee, skilled in the fabrication and design of the Licensed Products, to utilize the technical information licensed hereunder. Such free technical assistance shall be limited to a maximum of (80) eighty hours, as permitted by Licensor's schedule and manpower, and at times specified by Licensor, as may be reasonably requested by Licensee. Travel and other expenses incurred in providing such services shall be paid by Licensee. 24.2 Licensor in its sole discretion may make available to Licensee additional technical assistance at Licensee's request. Licensee agrees to reimburse Licensor for any such services at Licensor's then prevailing rates, which is currently $200 per hour. Travel and other expenses incurred in providing such services shall be paid by Licensee. 25. IMPROVEMENTS AND DEVELOPMENTS IN LICENSED TECHNOLOGY 25.1 Improvements by Licensor - Improvements, enhancements, trademarks, copyrights or additional inventions that specifically apply and fit within the scope of the Licensed Technology, that are developed by or acquired by Licensor, shall be disclosed to Licensee within one, (1) month of discovery and Licensee shall have the same rights and obligations with respect to such Improvements, enhancements, trademarks, copyrights and additional inventions, starting with disclosure to Licensee, as applies to Licensed Technology in general under this Agreement. Patent applications on any Licensor Improvements shall be handled as indicated in this agreement. Further 64 trademarks created by Licensor may be added to the subject matter of Licensed Trademarks through written trademark addenda submitted by Licensor to Licensee. 25.2 Improvements by Licensee - Improvements, enhancements, trademarks, copyrights or additional inventions that specifically apply and fit within the scope of the Licensed Technology, that are developed by or acquired by Licensee or it's employees, shall be disclosed to Licensor within one, (1) month of discovery and Rights in any improvements, enhancements, trademarks, copyrights or additional inventions shall revert to or be assigned to Licensor. Licensee shall be responsible for any and all costs of obtaining patent protection on any Licensee improvements. If necessary, Licensee shall provide Licensor such reasonable assistance as is necessary to allow Licensor to file any patent applications on Licensee developed improvements. 26. EMPLOYEE INVENTION AGREEMENTS 26.1 Licensee agrees that all Licensee employees, agents and consultants given access to the Licensed Technology shall sign a confidentiality agreement and invention assignment agreement whereby any improvements, enhancements and new inventions relating to the Licensed Technology are required to be disclosed and assigned to the Licensee and then the Licensor. 27. REPORTS AND ACCOUNTING 27.1 Records - Licensee shall keep accurate and timely records of all transactions related to this agreement, including but not limited to; quantity of Licensed Product sold, rented, leased, manufactured, destroyed or otherwise used, by Licensee. 27.2 Reports - Licensee shall provide to Licensor quarterly reports indicating the total quantity of Licensed Product sold, rented, leased, manufactured, destroyed or otherwise used, by Licensee. Such reports shall indicate the total number of such Licensed Product categorized by each organization and the total value of royalties and any other payments owed by Licensee. The reports shall be sent to Licensor by the same due date as any royalty payments which are due or would be due. Reports shall be made even if no royalties are believed owed. 27.3 Accounting - Licensor shall have the right to inspect the records of Licensee and subcontractors which are relevant to the Licensed Technology to indicate the amount of royalties or other compensation owed or paid in connection with this Agreement. Licensor shall also have the right to inspect the records of Licensee and all Subcontractors which are relevant to the quality of Licensed Products so produced by or for Licensee. The rights to inspect indicated herein include the right to have an audit conducted by an appropriate auditing or accounting firm. If an audit indicates that an amount in excess of Five Thousand Dollars is owed to Licensor which should have been previously paid under the provisions of this Agreement, then the cost of the audit shall be fully paid by Licensee. 28. MARKING OF PRODUCTS EMBODYING PATENT RIGHTS, TRADEMARKS AND COPYRIGHTS 28.1 Licensee agrees to mark all labels, advertising, packaging and other instances of use of the Licensed Trademarks with the notification (TM) or with the symbol consisting of an R within a circle to indicate such trademarks are registered, if and when such trademarks do become registered by the United States Patent and Trademark Office. Usage of the Licensed Trademarks by Licensee in the U.S. and/or any foreign country shall comply with all established practices of such Countries for notifying or indicating that the Licensed Trademarks are claimed as exclusive. 28.2 Licensee agrees that all Licensed Products sold, leased or distributed hereunder which is within the scope of any claim issued in a U.S. or foreign patent shall be marked with one or more patent numbers or other notices in a manner consistent with and as required by the laws of the jurisdiction in which the Licensed Products are to be sold or otherwise used or distributed. Failure to so mark all patented products and equipment will subject Licensee to liability to Licensor for losses associated with such failure to mark. 28.3 Licensee also agrees to mark all reproductions, copies and derivative works based on Licensed Copyright Works with notice of the claim to copyrights as required to fully protect such Licensed Copyright Works under the laws of the jurisdiction in which the reproductions, copies or derivative works are to be sold or distributed. Failure to so mark all patented products and equipment will subject Licensee to liability to Licensor for losses associated with such failure to mark. 29. ASSIGNMENT OF RIGHTS AND OBLIGATIONS AND SUBLICENSE 29.1 Because of the nature of Rights and obligation granted hereunder, Licensee can not assign any rights or obligations under this Agreement unless the Licensee has received written authorization from the Licensor. 29.2 Licensee has the right to issue sublicenses only upon written authorization from the Licensor, such authorization shall not be unreasonably withheld. Each sublicense authorization will be issued on a case by case basis through a separate agreement between Licensee, Licensor and third-party sublicensee. 65 30. LIABILITY RISK AND INDEMNIFICATION 30.1 Licensee agrees to assume all risk of legal liability which may arise from Licensee activities, including but not limited to, providing services, designing, manufacturing, transporting, distributing and selling products licensed under this Agreement. Licensee further warrants and agrees to hold harmless, defend and indemnify Licensor against claims arising from Licensee's activities, including but not limited to, providing services, designing, manufacturing, transporting, distributing and selling products licensed under this Agreement, including any patent, copyright or trademark infringement claims made by third-parties. 31. INSURANCE POLICY FOR MANUFACTURING AND SALE OF PRODUCTS 31.1 If Licensee is engaged in the manufacture or sale of any services other than technical consulting relating to the Licensed Technology, then Licensee shall, throughout the term of this Agreement, obtain and maintain at its own cost and expense, from a qualified insurance company, standard Product Liability Insurance. Such policy shall provide protection against any and all claims, demands, and cause of action arising out of any defects or failure to perform, alleged or otherwise, of the Licensed Products, or any use thereof. The amount of coverage shall be one million dollars ($1,000,000) or an amount which Licensee and Licensor shall establish in writing from time to time. The Licensee agrees to furnish the Licensor a certificate of insurance evidencing same before beginning manufacture or sale of any product or beginning services other than technical consulting services relating to the Licensed Technology. 32. BEST EFFORTS AND DILIGENCE Licensee shall use its best efforts to diligently market Licensed Products and Licensed Services. A determination of best efforts and diligence under this part may consider various relevant factors. 33. WARRANTIES OF LICENSOR 33.1 Licensor makes only the warranties expressly made below; (a) To Licensor's knowledge, up to the date of this Agreement, Licensor has no information indicating that the subject matter of the Licensed Patents infringes any U.S. or foreign patents; (b) Up to the date of this Agreement there are no actions, suits or proceedings pending or, to the knowledge of Licensor threatened against Licensor in any court or before any administrative agency which would prevent Licensor from completing the transactions provided for herein; Licensor has complied with all laws (including rules and regulations thereunder) of federal, state, and local governments (and all agencies thereof), and no charge, complaint, action, suit, proceeding, hearing, investigation, claim, demand, or notice has been filed or commenced against Licensor alleging any failure to comply with any such law or regulation; (c) Licensor warrants that prior to this Agreement, no other licenses have been granted to any other persons or entities for the Licensed Technology as defined in this Agreement; (d) To Licensor's knowledge, as of the date of this Agreement, the Licensed Technology and Licensed Products do not violate any law, rule or regulation of any government or governmental agency. (e) Licensor makes no other warranties. 33.2 The Licensor shall indemnify and hold harmless the Licensee from any and all damages or expenses incurred by the Licensee from a breach of the warranties made herein, including the Licensee's attorney fees and costs. 34. DISCLAIMER OF WARRANTIES BY LICENSOR 34.1 Licensor hereby disclaims all warranties not expressly made herein and further specifically disclaims as set forth below; (a) No warranty or representation is made that practice of the Licensed Technology by Licensee as allowed under this Agreement will not infringe upon patent, trademark or other rights of a third party; (b) No warranty or representation is made that additional patent protection will necessarily be obtained or that a patent will issue on the Licensed Technology; (c) No warranty or representation is made to indemnify Licensee for any claims arising from Licensee's activities under this Agreement; (d) No warranty or representation is made as to the accuracy, sufficiency, suitability or fitness for Licensee's use of the Licensed Technology nor for the quality or quantity of any licensed item made hereunder and Licensor assumes no responsibility or liability which might arise out of Licensee's use thereof. 66 (e) No warranty or representation is made as to the application of Licensed Technology to any particular use or market or is a economically viable product; (f) Forgoing warranties are in lieu of all other warranties, express or implied, whether arising by law, custom or conduct; In no event shall Licensor be liable for consequential damages. 35. ENFORCEMENT OF PATENT RIGHTS 35.1 Licensee shall have the right to enforce any Licensed Patents against infringers thereof. Licensee, at its option and cost may institute legal proceedings for infringement. If Licensee refuses to institute legal action, then Licensor may at it's election sue for infringement or other cause. Any recovery under such legal actions shall be first used to pay attorney fees, court costs and all other litigation expenses, and second be used to pay Licensor for any payments which are due under this Agreement. The remainder shall be divided between the parties based upon their relative payment of the total litigation costs. Licensor agrees to allow Licensee to take legal action solely in Licensee's name and to additionally include or join Licensor as a party, if necessary. 36. NOTIFICATION OF INFRINGEMENT 36.1 Licensee and Licensor both agree to notify the other within ten (10) days of becoming aware of any infringement of Licensed Technology by third parties. 37. INTERCHANGE OF TECHNICAL AND MARKET INFORMATION 37.1 Licensor and Licensee agree to Interchange all technical and market information which comes to the attention of Licensor or Licensee, and which relates to the Licensed Technology in the marketing, sale, distribution, design and other aspects of licensing development and marketing of the Licensed Technology. 38. COMPLIANCE WITH EXPORT OF TECHNOLOGY AND OTHER LAWS 38.1 Licensee agrees to comply with all U.S. and foreign government statutes governing import and export of technological information, taxes and other applicable laws. Since the technological information licensed hereunder is initially subject to the laws of the United States, no disclosure to individuals or organizations which constitutes a violation of the export of technology laws or other U.S. or state statute of similar nature or effect, shall occur. The distribution of Licensed Products shall also similarly be controlled by U.S. law or the law of any foreign nation in which such inventions or improvements are created, or as otherwise made applicable under such U.S. or foreign law. 39. TERMINATION BY LICENSOR 39.1 Licensor shall have the right to terminate this Agreement for material breaches by Licensee if Licensee fails to make payments under this Agreement, or if Licensee becomes insolvent, bankrupt or unable to conduct business, or appointment of any trustee, receiver or liquidator for substantially all of the assets of Licensee, or institution of any proceedings of the same, or the attachment or seizure of substantially all of the assets of Licensee, or if Licensee otherwise materially breaches this Agreement, then Licensor may terminate the licenses granted herein. Such termination shall be effectuated by Licensor sending a certified letter, return receipt requested, containing a notice indicating the breach and that termination pursuant to this Agreement will be made if Licensee does not cure the breach. Licensee shall then have a cure period with a duration of sixty (60) days (or if the breach reasonably cannot be cured with the time period allowed within, the breaching party will be allowed such time is reasonably necessary to cure such breach) starting from the date the notification of breach is delivered or presented at the last known notification address during which to cure the breach. If Licensee fails to cure, then termination shall occur upon Licensor's mailing of a notice by certified mail, of termination after the expiration of the cure period. 40. EFFECT OF TERMINATION BY LICENSOR 40.1 If this Agreement is terminated, no Licensed Products may be sold or distributed or any promotional material used, or any Licensed Technology Rights, Trademark Rights or Copyrights by Licensee. 40.2 Upon termination of this Agreement, all payments then owed shall become immediately due and payable, all amounts owed after termination shall be paid within thirty (30) days of the invoiced sale, rental payment or other event creating an obligation to pay. 40.3 Upon termination of this Agreement, all rights licensed herein shall revert to the Licensor who may assign or license to others to use the Licensed Technology, Licensed Trademarks and Licensed Copyrights. 40.4 Upon termination of this Agreement, any and all sublicenses will remain in full force and effect, as stated in those individual sublicense agreements. 67 40.5 Upon termination of this Agreement, Licensee shall provide to Licensor free of charge the following related materials; a) Copies of all patents and patent applications related to Licensed Technology. b) Copies of all documentation related to the Licensed Technology, including but not limited to, drawings, lab books, sketches, design layouts, source codes. 40.6 Upon termination of this Agreement Licensor shall have the right, but not the obligation to purchase all other materials relating to the Licensed Technology, including but not limited to, equipment, software, hardware, , Licensed Products, all production tooling, and related matters currently held by Licensee, that were needed by Licensee to sell, lease and service the Licensed Product at a reasonable price not to exceed the initial costs incurred by Licensee plus (10) ten percent. 40.7 Upon termination of this Agreement Licensee agrees to stop all further use of the Licensed Technology. The Licensee shall be responsible for any damages caused by the unauthorized use of such materials or reproduction materials which are not turned over. 40.8 Following termination by Licensor, Licensor shall have no obligation to repay to Licensee any monies paid by Licensee under this Agreement. 41. TERMINATION BY LICENSEE 41.1 Licensee shall have the right to terminate this Agreement for material breaches by Licensor. Such termination shall he effectuated by Licensee sending a certified letter, return receipt requested, containing a notice indicating the breach and that termination pursuant to this Agreement will be made if Licensor does not cure the breach. Licensor shall then have a cure period with a duration of sixty (60) days starting from the date the notification of breach is delivered or presented at the last known notification address during which to cure the breach. If Licensor fails to cure, then termination shall occur upon Licensee's mailing of a notice of termination by certified mail, after the expiration of the cure period. 41.2 Notwithstanding anything in the agreement to the contrary, Licensee shall also have the right to terminate this agreement upon sixty (60) days written notice to the Licensor for any of the following reasons: (a) The Licensee is unable, after reasonable efforts, to obtain a patent for the protection of the Licensed Technology and Licensed Products. (b) Patent, Copyright or Trademark infringement claims are made by a third party that materially impair the ability of the Licensee to sell or lease the Licensed Products. (c) The Licensee determines that it is no longer economical to offer the Product to the marketplace. 41.3 The termination of this Agreement under this section 41 shall terminate its obligations to pay the minimum royalties and the balance owed on the second Promissory Note issued in 12.1(b) , as of the date of termination. If the Licensee is in default under the terms of the Promissory Notes at the time of termination under this section 41 , the Licensee shall only be relieved of the obligations under the Promissory Note for the amount that would have been due had the Licensee been current under the terms of the Promissory note and the current minimum royalties stated above. All rights and obligations relating to termination will apply as defined in section 42 titled "EFFECT OF TERMINATION BY LICENSEE". 42. EFFECT OF TERMINATION BY LICENSEE 42.1 If this Agreement is terminated, no Licensed Products may be sold or distributed or any promotional material used, or any Licensed Technology Rights, Trademark Rights or Copyrights by Licensee. 42.2 Upon termination of this Agreement, all payments then owed shall become immediately due and payable, all amounts owed after termination shall be paid within thirty (30) days of the invoiced sale, rental payment or other event creating an obligation to pay. 42.3 Upon termination of this Agreement, all rights licensed herein shall revert to the Licensor who may assign or license to others to use the Licensed Technology, Licensed Trademarks and Licensed Copyrights. 42.4 Upon termination of this Agreement, any and all sublicenses will remain in full force and effect, as stated in those individual sublicense agreements. 42.5 Upon termination of this Agreement, Licensee shall provide to Licensor free of charge the following related materials; a) Copies of all patents and patent applications related to Licensed Technology. 68 b) Copies of all documentation related to the Licensed Technology, including but not limited to, drawings, lab books, sketches, design layouts, source codes. 42.6 Upon termination of this Agreement Licensor shall have the right, but not the obligation to purchase all other materials relating to the Licensed Technology, including but not limited to, equipment, software, hardware, , Licensed Products, all production tooling, and related matters currently held by Licensee, that were needed by Licensee to sell, lease and service the Licensed Product at a reasonable price not to exceed the initial costs incurred by Licensee plus (10) ten percent. 42.7 Upon termination of this Agreement Licensee agrees to stop all further use of the Licensed Technology. The Licensee shall be responsible for any damages caused by the unauthorized use of Such materials or reproduction materials which are not turned over. 42.8 Following termination by Licensee, Licensor shall have no obligation to repay to Licensee any monies paid by Licensee under this Agreement. 43. MODIFICATION OF AGREEMENT 43.1 No modification of this Agreement shall be valid or binding unless the modification is executed in writing and signed by all parties to this Agreement. 44. NO WAIVER 44.1 No waiver by either party of a breach or a default hereunder shall be deemed a waiver by such party of a subsequent breach or default of a like or similar nature. 45. SEVERABILITY 45.1 In the event that any term or provision of this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other term or provision of this Agreement and shall be interpreted and construed as if such term or provision, to the extent the same shall have been held to be invalid, Illegal, or unenforceable, had never been contained herein. 46. APPLICABLE LAW 46.1 This Agreement shall be construed and governed in accordance with the laws of the State of Nevada. 47. JURISDICTION AND VENUE 47.1 The parties hereto agree that jurisdiction and venue shall be proper as provided for under law. 48. HEADINGS 48.1 The headings, titles and subtitles in this Agreement are inserted for convenience of reference only, and in no way define or limit the terms, scope or interpretation of any provisions of this Agreement. 49. GENDER AND INTERPRETATION OF TERMS AND PROVISIONS 49.1 The reference to any Party and/or Parties, and/or any nouns, pronouns and/or the like utilized to refer to any Party or Parties as the context may suggest or require in this Agreement shall likewise include both the singular and the plural, a corporation, co-partnership, individual or person acting in any fiduciary capacity, as the intent, purpose and language of this Agreement may imply, infer, state or suggest. All covenants and representations by any Party or Parties to this Agreement shall be joint and several as the context of this Agreement suggests or requires. 50. LEGAL NOTICES 50.1 All notices required to be sent to either party shall be in writing and sent by registered or certified mail, postage prepaid, return receipt requested, charges prepaid to the parties at the addresses given hereinabove, or such future addresses as the parties shall designate in writing. Payments and royalty reports can be sent by first class mail. 51. RELATIONSHIP OF THE PARTIES 51.1 This Agreement does not create a partnership or joint venture between the parties and the Licensee shall have no power to obligate or bind the Licensor in any manner whatsoever, except as specifically expressed in this Agreement. 69 52. ATTORNEY'S FEES 52.1 If either of the parties to this Agreement institute arbitration or legal proceedings to enforce the terms of this Agreement, to declare rights hereunder or to dispute, question or raise any question of fact, law or issue set forth in and resolved by the express terms of this Agreement, as the result of a breach of any covenant, condition or representation of this Agreement, or for any other reason, the parties agree that the unsuccessful party to such arbitration or legal proceedings shall pay the reasonable attorney's fees and legal costs of both parties, as the same may be approved by the arbitrator or court having jurisdiction over such proceedings. 53. INTEGRATION, ENTIRE AGREEMENT 53.1 This Agreement constitutes the entire Agreement between the Parties hereto pertaining to the subject matter hereof and supersedes all prior or contemporaneous agreements, terms, conditions, offers, understandings, warranties, statements, representations, negotiations or discussions, whether oral or written, of the Parties in connection with the subject matter hereof, except as specifically set forth herein. No supplements or modifications or waivers of this Agreement shall be binding unless executed in writing by the Party or Parties to be bound thereby. No waiver of any provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision herein or therein (whether or not similar), nor shall any such waiver constitute a continuing waiver unless otherwise expressly provided. Both parties hereby acknowledge that the execution of this Agreement was not induced or motivated by any promise or representation made by any other party, other than the promises and representations expressly set forth in this Agreement. 54. BINDING ON SUCCESSORS 54.1 All of the terms and provisions of this Agreement shall be binding upon and shall inure to the benefit of the Parties hereto, their assigns if permitted, heirs, administrators, executors, representatives, successors, agents, servants and employees. 55. INTERPRETATION 55.1 The Parties hereto acknowledge and agree that each has been given the opportunity to independently review this Agreement with legal counsel, and/or has the requisite experience and sophistication to understand, interpret, and agree to the particular language of the provisions hereof without benefit of legal counsel. In the event of an ambiguity in or dispute regarding the interpretation of any portion of this Agreement, the interpretation of this Agreement shall not be resolved by any rule of interpretation providing for interpretation against the Party who causes the uncertainty to exist or against the draftsman. In the event of an ambiguity in or dispute over the interpretation of, or conflict between the provisions, or rights and remedies authorized in this Agreement, the provisions and terms of this Agreement shall be superior and controlling on all Parties hereto. 56. GOOD FAITH AND FAIR DEALING 56.1 The covenant of good faith and fair dealing shall apply to each and every term, covenant, condition and provision of this Agreement. 57. TIME OF ESSENCE 57.1 Time is of the essence of this Agreement. 58. AUTHORITY 58.1 The undersigned individuals and/or entities executing this Agreement on behalf of themselves and/or their respective Parties represent and warrant that said individuals or entities are authorized to enter into and execute this Agreement on behalf of such Parties, the appropriate corporate resolutions or other consents have been passed and/or obtained, and that this Agreement shall be binding on the Party on whose behalf they are executing this Agreement. Without limiting the generality of the foregoing, the board of directors of the Licensee have duly authorized the execution, delivery, and performance of this Agreement by the Licensee, all of which are intended to be enforceable in accordance with the terms and conditions. 59. ACTIONS AND CLAIMS 59.1 There are no actions, suits or proceedings pending or, to the knowledge of Licensee threatened against Licensee in any court or before any administrative agency which would prevent Licensee from completing the transactions provided for herein, or in the Promissory Notes. The Licensee has complied with all laws (including rules and regulations thereunder) of federal, state, and local governments (and all agencies thereof), and no charge, complaint, action, suit, proceeding, hearing, investigation, claim, demand, or notice has been filed or commenced against Licensee alleging any failure to comply with any such law or regulation. 70 60. TITLE TO TECHNOLOGY 60.1 Licensor has good and marketable title to the Licensed Technology and the related Patent applications and Licensee shall not do anything after the date hereof which would render its title to the Licensed Technology and the Patent applications unmarketable, or impair the return of a clear title to Licensor in the event of Licensee's default. Provided, however, it is not the intention of this provision to limit Licensee's ability to use and contract for the use of the Licensed Technology in the ordinary course of its business. 62. FACSIMILE EXECUTION OF AGREEMENT 62.1 For the convenience of the parties hereto, it is agreed that this Agreement may be initially executed with facsimile signatures and in said event such facsimile signatures shall have the same binding force and effect as original signatures. In the event that facsimile signatures are utilized, the parties further covenant and agree to immediately exchange and execute as many original copies of this Agreement as are necessary, by mail or other means as expeditiously as possible so that each party to the Agreement shall have a copy of the Agreement fully executed with original signatures. 63. COUNTERPART ORIGINAL AGREEMENTS 63.1 This Agreement shall be executed in multiple original counterparts with each party retaining one copy thereof. 64. EFFECTIVE DATE OF AGREEMENT AND TERM OF AGREEMENT 64.1 The effective date of this Agreement is the date as of which this Agreement has been executed by all parties hereto. 64.2 This Agreement shall terminate when terminated by Licensor or Licensee as provided in this Agreement. If neither party terminates this Agreement as provided herein, then appropriate provisions of this Agreement shall be applied until complete cessation of all use of the Licensed Trademarks, Licensed Copyrights, and Licensed Technology by Licensee, or until no further payments are due hereunder, whichever is longer. 65. ARBITRATION 65.1 Any controversy or claim arising out of or relating to this Agreement or tile breach of any representation, warranty, covenant or agreement contained herein, shall be decided by arbitration in accordance with the Commercial Arbitration Rules (C.A.R.') of the American Arbitration Association (A.A.A.) unless the parties otherwise mutually agree in writing, The dispute shall be decided by a panel of three arbitrators (each an 'Arbitrator' and collectively, the 'Arbitrators') one arbitrator chosen by each of the Licensor and Licensee, and the third by the two selected arbitrators in accordance with C.A.R. and A.A.A. The decision and the award of damages rendered by a majority of the Arbitrators shall be final and in binding and judgment may be entered upon it in any court having jurisdiction thereof. 65.2 The arbitration shall be held as promptly as practicable after actual receipt of notice that the other party has filed a notice for arbitration with the A.A.A. (the "Notice') on such date, and at such a place and time convenient to the parties and to the Arbitrators, except that if the parties cannot agree, the Arbitrators shall decide such date, place and time. The Arbitrators shall make their decision promptly and any award of damages shall be made, unless otherwise mutually agreed by the parties in writing, no later than fifteen (15) days from the date of closing of the hearings or if oral hearings have been waived. from the date of transmitting the final statements and proofs to the Arbitrators. 66. EXECUTION BY LICENSEE - CASINOVATIONS INCORPORATED Date: By: State of Nevada ) ) ss. County of Clark ) I certify that I know or have satisfactory evidence that signed this instrument, and upon oath acknowledged that he had authority to act in behalf of Casinovations, Incorporated and further acknowledged this instrument to be the free and voluntary act of such party for the uses and purposes mentioned in this instrument. Dated: Notary Public Residing it [SEAL] My appointment expires: 71 67. EXECUTION BY LICENSOR- TECHNOLOGY DEVELOPMENT CENTER, LLC Date: By: State of Nevada ) ) ss. County of Clark ) I certify that I know or have satisfactory evidence that signed this instrument, and upon oath acknowledged that he had authority to act in behalf off Bitstream Technologies, Inc. manager of Technology Development Center, LLC. and further acknowledged this instrument to be the free and voluntary act of such party for the uses and purposes mentioned in this instrument. Dated: Notary Public Residing at [SEAL] My appointment expires: EX-24 4 72 INDEPENDENT AUDITOR'S CONSENT We do hereby consent to the use of our report dated March 27, 1997 (except for Note 7 for which the date is July 15, 1997 on the financial statements of Casinovations, Inc. as of December 31, 1996 included in and made part of the registration statement of Casinovations, Inc. dated September 11, 1997. October 29, 1997 /s/ Winter, Scheifley & Associates, P.C. Certified Public Accountant EX-27 5
5 6-MOS DEC-31-1997 JUN-30-1997 161,998 0 8,424 0 856 176,528 28,473 4,326 457,387 855,389 0 5,564 0 0 (403,566) 457,387 632 20,706 0 0 (852,009) 0 237,582 (1,069,517) 0 (1,069,517) 0 0 0 (1,069,517) (.20) (.20)
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