-----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, BjHLtXqv+Ets31gWMqSyycKAll5/PoWOC7F9qQproJHR8AgxxJGPfDX+pdw5Fdck FHZc6qPZvEEHL+OUhrebUg== 0001019687-01-500643.txt : 20010815 0001019687-01-500643.hdr.sgml : 20010815 ACCESSION NUMBER: 0001019687-01-500643 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VENDINGDATA CORP CENTRAL INDEX KEY: 0001004673 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DURABLE GOODS, NEC [5099] IRS NUMBER: 911696010 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-25855 FILM NUMBER: 1712952 BUSINESS ADDRESS: STREET 1: 6830 SPENCER STREET CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 7027337195 MAIL ADDRESS: STREET 1: 6830 SPENCER STREET CITY: LAS VEGAS STATE: NV ZIP: 89119 FORMER COMPANY: FORMER CONFORMED NAME: CASINOVATIONS INC DATE OF NAME CHANGE: 19970710 FORMER COMPANY: FORMER CONFORMED NAME: CVI TECHNOLOGY INC DATE OF NAME CHANGE: 20000508 10QSB 1 vending_10q-063001.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2001 ----------------------------- OR [ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: to --------------- -------------- Commission file number: 000-25855 ----------------------------------------------- VendingData Corporation - -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Nevada 91-1696010 - --------------------------------- -------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 6830 Spencer Street, Las Vegas, Nevada 89119 - -------------------------------------------------------------------------------- (Address of principal executive offices) (702) 733-7195 - -------------------------------------------------------------------------------- (Issuer's telephone number) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO -------- ------ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by court. YES NO -------- ------ APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 11,259,302 shares of common stock, $.001 par value, as of June 30, 2001 - -------------------------------------------------------------------------------- Transitional Small Business Disclosure Format (check one); YES NO X -------- ------ FORM 10-QSB TABLE OF CONTENTS PAGE NUMBER ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 Balance Sheet 3 Statement of Operations 4 Statement of Cash Flows 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities and Use of Proceeds 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURE 20 EXHIBIT INDEX 21 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. VENDINGDATA CORPORATION BALANCE SHEET
June 30, 2001 December 31, 2000 ------------- ------------- ASSETS (UNAUDITED) Current assets: Cash and cash equivalents $ 254,879 $ 432,070 Accounts receivable, trade 671,284 885,338 Other receivables 186,428 45,445 Inventories 1,983,927 1,539,005 Prepaid expenses 14,242 55,142 ------------- ------------- Total current assets 3,110,759 2,957,000 Property and equipment, including revenue producing equipment, at cost, net of accumulated depreciation of $1,681,739 and $1,312,591, respectively 2,172,192 2,440,508 Intangible assets, at cost, net of accumulated amortization of $111,483 and $93,054, respectively 413,925 239,186 Deferred interest 591,443 631,672 Deposits 646,533 591,266 ------------- ------------- $ 6,934,852 $ 6,859,632 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes and credit line payable $ 1,550,000 $ 2,275,358 Current portion of leases payable 2,223,926 1,715,223 Accounts payable 1,079,238 952,512 Accrued expenses 505,039 405,722 Stockholder loans 3,781,194 - Accrued interest 203,852 310,152 Customer deposits 523,636 281,253 ------------- ------------- Total current liabilities 9,866,885 5,940,220 Leases payable 2,571,128 3,030,572 Convertible debt 3,300,000 3,300,000 Stockholder loans - 151,836 Deferred charges 162,787 198,769 ------------- ------------- Total liabilities 15,900,799 12,621,397 Stockholders' equity: Common stock, $.001 par value, 40,000,000 shares authorized, 11,259,302 shares and 10,746,144 shares issued and outstanding, respectively 11,259 10,855 Additional paid-in capital 17,825,352 17,238,756 Deficit accumulated during development stage (26,802,558) (23,011,376) ------------- ------------- Total stockholders' equity (8,965,947) (5,761,765) ------------- ------------- $ 6,934,852 $ 6,859,632 ============= ============= See accompanying notes to unaudited financial statements.
3 VENDINGDATA CORPORATION STATEMENT OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED)
Three Months Ended Six Months Ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 ------------------- ------------------- ------------------- ------------------ Sales $ 205,591 $ 1,093,012 $ 818,371 $ 2,460,973 Rental income 322,529 282,452 614,546 600,871 Other income - 33,161 - 56,615 ------------------- ------------------- ------------------- ------------------ 528,120 1,408,625 1,432,917 3,118,459 Cost of sales 1,000,711 1,225,562 2,150,404 2,490,984 ------------------- ------------------- ------------------- ------------------ Gross margin (472,591) 183,063 (717,487) 627,475 General and administrative 922,428 955,167 1,639,883 1,890,813 Research and development 314,871 323,568 553,213 704,538 ------------------- ------------------- ------------------- ------------------ (Loss) from operations (1,709,890) (1,095,675) (2,910,583) (1,967,876) Interest expense, net 289,264 229,608 591,295 401,469 Interest expense - related parties 157,115 49,254 288,864 91,869 ------------------- ------------------- ------------------- ------------------ 446,379 278,862 880,159 493,338 ------------------- ------------------- ------------------- ------------------ (Loss) before income taxes (2,156,269) (1,374,537) (3,790,742) (2,461,214) Provision for income taxes 427 508 441 508 ------------------- ------------------- ------------------- ------------------ Net (loss) $ (2,156,696) $ (1,375,045) $ (3,791,183) $ (2,461,722) =================== =================== =================== ================== Basic (loss) per share $ (0.19) $ (0.13) $ (0.35) $ (0.23) =================== =================== =================== ================== Weighted average shares outstanding 11,100,654 10,834,504 10,982,136 10,790,325 =================== =================== =================== ================== See accompanying notes to unaudited financial statements.
4 VENDINGDATA CORPORATION STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED)
Six Months Ended ------------------------------- June 30, 2001 June 30, 2000 ------------ ------------ Net (loss) $(3,791,183) $(2,461,722) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 387,577 400,165 Amortization of deferred interest 160,645 150,554 Changes in assets and liabilities: (Increase) decrease in trade accounts receivable 214,054 (1,932,090) (Increase) decrease in other receivables (140,983) 108,863 (Increase) decrease in inventory (444,922) (314,515) (Increase) decrease in prepaid expenses 40,900 206,957 Increase (decrease) in accounts payable 126,726 571,813 Increase (decrease) in accrued expenses (6,983) 267,484 Increase (decrease) in customer deposits 242,383 64,452 Increase (decrease) in deferred charges (35,983) - ------------ ------------ Total adjustments 543,414 (476,317) ------------ ------------ Net cash (used in) operating activities (3,247,769) (2,938,039) ------------ ------------ Cash flows from investing activities: Acquisition of plant and equipment (119,261) (220,689) Equipment produced and held for rental - - Increase in patents and trademarks (174,739) (22,455) Deposits (55,267) (71,494) ------------ ------------ Net cash (used in) investing activities (349,267) (314,638) ------------ ------------ Cash flows from financing activities: Common stock sold for cash 587,000 282,502 Proceeds from (repayment of) stockholder loans 3,629,358 (51,728) Proceeds from leases payable 802,769 1,481,899 Repayment of leases payable (873,926) (654,431) Proceeds from convertible debentures - 1,450,000 Proceeds from (repayment of) notes payable (725,358) - ------------ ------------ Net cash provided by financing activities 3,419,844 2,508,242 ------------ ------------ (Decrease) in cash (177,192) (744,435) Cash and cash equivalents, beginning of period 432,070 1,169,924 ------------ ------------ Cash and cash equivalents, end of period $ 254,878 $ 425,489 ============ ============
See accompanying notes to unaudited financial statements. 5 VendingData Corporation Notes to Financial Statements (Unaudited) NOTE 1 - BASIS OF PRESENTATION. The accompanying unaudited financial statements of VendingData Corporation (the "Company") and its wholly-owned subsidiaries (collectively with the Company, the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions incorporated in Regulation S-B of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation have been included. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2000, as included in the Company's Annual Report on Form 10-KSB as filed with the Securities and Exchange Commission on March 30, 2001. Certain reclassifications have been made to amounts presented in prior periods for comparability to the current period presentation. Basic loss per share was computed using the weighted average number of common shares outstanding. NOTE 2 - STATEMENT REGARDING COMPUTATION OF LOSS PER SHARE. Fully diluted loss per share excludes any dilutive effects of options, warrants and convertible securities. Fully diluted loss per share is not presented because the effect would be anti-dilutive. NOTE 3 - DEBT AND WARRANTS. Effective June 21, 2001 warrants to purchase 200,000 shares of the Company's common stock were exercised. NOTE 4 - RETIREMENT OF COMMON STOCK/TECHNOLOGY ACQUISITION. On June 26, 2001, the Company purchased from Technology Development Center, LLC ("TDC"), the worldwide right, title and interest to the patents, pending patent applications, and all patent rights to the Coin Operated Machine Having An Electronically Identified Coin Collection Box and the Electronically Identified Coin Collection Box (collectively, the "Patent Rights"). These Patent Rights relate to the technology utilized in the Company's SecureDrop(TM) product line. As payment for the Patent Rights, the Company paid $175,000 in cash. As part of the transaction, the parties cancelled the Exclusive License Agreement pursuant to which the Company was the exclusive licensee of the Patent Rights, and TDC surrendered to the Company all of its VendingData Corporation $.001 par value common stock, totaling 20,500 shares. NOTE 5 - EQUIPMENT FINANCING. For the three months ending June 30, 2001, the Company received proceeds of $416,423 from a third-party leasing company through which the Company has financed most of its furniture, equipment, and tooling. The leases have a mandatory buyout and terms ranging from 24 to 39 months. 6 NOTE 6 - STOCKHOLDER RIGHTS OFFERING. On June 14, 2001, the Company's board of directors declared a distribution of rights to purchase the Company's common stock to stockholders of record as of June 15, 2001, or the record date, and holders of vested options, warrants and convertible notes that possess anti-dilution rights as of the record date. Through the Company's Registration Statement on Form S-3 (File No. 333-64012), as declared effective on July 13, 2001, the Company offered an aggregate of 26,869,770 shares of its common stock upon the exercise of these rights by rightsholders. The rights issued to California residents may not be exercised by California residents until the California Department of Corporation issues an order regarding the effectiveness of the Company's registration of the shares of its common stock underlying the rights issued to California residents by coordination pursuant to Section 25111 of the California Corporations Code. All rights issued to non-California residents expired at 5:00 p.m., Las Vegas, Nevada time on August 13, 2001. NOTE 7 - BRIDGE LOANS. Through the quarter ended June 30, 2001, the Company has obtained short term loans totaling $2,504,000 from a lender who is a controlling stockholder and a member of its board of directors. The Company anticipates that each of these loans will be applied to the stockholder's purchase of shares through the Company's rights offering in the stockholder's capacity as a stockholder and as the Company's standby purchaser for any unexercised rights remaining in the rights offering. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. STATEMENT ON FORWARD-LOOKING INFORMATION Certain information included herein contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), such as statements relating to plans for future expansion, capital spending, future operations, sources of liquidity and financing sources. Such statements refer to events that could occur in the future and may be identified by the use of words such as "intend," "plan," "believe," correlative words, and other expressions indicating that future events are contemplated. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include, but are not limited to, those relating to liquidity requirements for VendingData Corporation (the "Company"), the continued growth of the gaming industry, the success of the Company's product-development, marketing and sales activities, vigorous competition in the gaming industry, dependence on existing management, gaming regulations (including actions affecting licensing and product approvals), locating and obtaining sources of liquidity, completion of the pending rights offering and the standby purchase agreement in connection therewith, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, and changes in federal or state tax laws or the administration of such laws. For a description of additional risk factors and information related to forward-looking statements, see "Risk Factors and Forward-Looking Information" below. OVERVIEW The Company's primary business is the development, manufacturing and marketing of various concepts and products focused primarily on products that increase security, productivity, and profitability for the gaming industry. As of June 30, 2001, the Company had placed 486 of its Random Ejection Shuffler(TM) ("Shuffler") under rental contracts compared to 455 at December 31, 2000. As of June 30, 2001, the Company had placed 29 units of its Continuous Random Ejection Shuffler (the "Continuous Shuffler") under rental contract, with an additional 13 units on trial. The Company maintains parts inventories required to build additional Shufflers and Continuous Shufflers. During the period of January 1, 2001 through June 30, 2001 the Company sold and installed 4,988 units of the SecureDrop(TM) 2000 System and 195 units of the SecureDrop(TM) 3000 System. The following discussion summarizes the Company's results of operations for the three months and six months ended June 30, 2001 and 2000, respectively, and the Company's liquidity and capital resources. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2001 AND 2000 REVENUES. For the three months ended June 30, 2001, the Company generated total revenues of $528,120 compared to $1,408,625 for the three months ended June 30, 2000. The revenues for the three months ended June 30, 2001, consisted of Shuffler rentals of $322,529, Shuffler sales of $8,800, and SecureDrop(TM) sales of $196,791. The decrease of $880,505, or 63%, in revenues from the three months ended June 30, 2000, to the three months ended June 30, 2001, resulted from a decrease of $524,946 in SecureDrop(TM) sales, a decrease of $362,475 in Shuffler sales, and a decrease of $33,161 in other sales, offset 8 by an increase of $40,077 in Shuffler rentals. SecureDrop(TM) sales were delayed as customers reviewed the acceptance of coinless gaming machines and the benefit of the hard count system. The decrease in Shuffler sales resulted from the conversion in 2000 of several rental contracts into purchases. The decrease in other sales results from the Company's discontinuance of its table games product line. The increase in Shuffler rentals is a direct result of the addition of dedicated Shuffler sales representatives. Despite the decrease in revenues, the Company believes revenue will increase through additional SecureDrop(TM) sales, as the different SecureDrop(TM) modules gain additional regulatory approvals, through sales of Shufflers through international distributors and through continued Shuffler rental. COST OF SALES. For the three months ended June 30, 2001, the cost of sales was $1,000,711 compared to $1,225,562 for the three months ended June 30, 2000. The cost of sales for the three months ended June 30, 2001, consisted of approximately $212,408 for the Company's SecureDrop(TM) products, $106,150 for depreciation expense associated with the Shufflers held for rental, $252,927 for costs related to servicing the Shufflers held for rental, $11,200 for costs related to sales of the Shuffler, and $418,026 for labor and other manufacturing costs. The decrease of $224,851, or 18%, in cost of sales from the three months ended June 30, 2000 to the three months ended June 30, 2001 resulted from a decrease of $275,284 for the Company's SecureDrop(TM) products and a decrease of $109,386 related to Shuffler sales, offset by an increase of $7,590 in depreciation expense associated with the Shufflers held for rental, an increase of $84,909 for costs related to servicing the Shufflers held for rental, and an increase of $ 67,320 in other manufacturing costs. The increases in Shuffler depreciation and service costs result from additional rental placements in 2001 and the addition of service personnel. The increase in other manufacturing costs resulted from Shuffler modifications required by the Michigan Gaming Control Board. GROSS MARGIN. For the three months ended June 30, 2001, the gross margin was $(472,591) compared to $183,063 for the three months ended June 30, 2000, a decrease of $655,654. As a result, the gross margin percentage on revenues for the three months ended June 30, 2001 was (89)% compared to 13% for the three months ended June 30, 2000. The decrease in gross margin and negative gross margin percentage resulted primarily from the decrease in revenues and an increase in service labor and other manufacturing costs associated with Shuffler modifications. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months ended June 30, 2001, selling, general and administrative expenses decreased approximately $32,739, or approximately 3%, to $922,428, compared to $955,167 for the three months ended June 30, 2000. For the three months ended June 30, 2001, selling, general and administrative expenses included: salaries and related costs of $351,365; advertising and marketing services of $106,985; travel and entertainment costs of $67,880; printing and office expenses of $26,015; depreciation and amortization of $55,175; office rent and utilities of $75,543; professional fees of $121,217; bad debt accrual of $30,000; regulatory expense of $62,712 and $25,536 in miscellaneous expenses. The decrease of $32,739 resulted from a decrease in salaries of $49,509, a decrease in travel and entertainment expenses of $45,065, a decrease in depreciation and amortization of $18,746, a decrease in bad debt accrual of $162, 259 and a decrease in miscellaneous expenses of $7,790, offset by an increase in advertising and marketing costs of $96,618, an increase in printing and office expenses of $10,723, an increase in office rent and utilities of $8,168, an increase in professional fees of $72,679, and an increase of $62,712 in regulatory expenses. The Company incurred increased costs for advertising and marketing, professional and regulatory expenses as it moved to expand into new market regions; however, these were offset by reductions in salary, travel and entertainment, and bad debt accrual expense. RESEARCH AND DEVELOPMENT. For the three months ended June 30, 2001, research and development expenses decreased $8,697, or approximately 3%, to $314,871, compared to $323,568 for the three months ended June 30, 2000. 9 INTEREST EXPENSE, NET. For the three months ended June 30, 2001, the Company incurred interest expenses, net of interest income, of $446,379 compared to $278,862 for the three months ended June 30, 2000, an increase of $167,517, or 60%. This increase was attributable to the increased borrowings during the three month period by the Company. NET INCOME (LOSS). For the three months ended June 30, 2001, the Company had a net loss of $2,156,696 compared to a net loss of $1,375,045 for the three months ended June 30, 2000, an increase of $781,651. The larger net loss was primarily due to a decrease in SecureDrop(TM) and Shuffler sales, a decrease in gross margin and an increase in service, manufacturing and total interest expense, net. Basic loss per share was $.19, based on 11,100,654 weighted average shares outstanding, for the three months ended June 30, 2001, compared to $.13, based on 10,834,504 weighted shares outstanding, for the three months ended June 30, 2000. SIX MONTHS ENDED JUNE 30, 2001 AND 2000 REVENUES. For the six months ended June 30, 2001, the Company generated total revenues of $1,432,917 compared to $3,118,459 for the six months ended June 30, 2000. The revenues for the six months ended June 30, 2001, consisted of Shuffler rentals of $614,546, Shuffler sales of $52,250, and SecureDrop(TM) sales of $766,121. The decrease of $1,685,542, or 54%, in revenues from the six months ended June 30, 2000, to the six months ended June 30, 2001, resulted from a decrease of $1,042,942 in SecureDrop(TM) sales, a decrease of $599,660 in Shuffler sales, and a decrease of $113,657 in other sales, offset by an increase of $70,717 in Shuffler rentals. SecureDrop(TM) sales were delayed as customers reviewed the acceptance of coinless gaming machines and the benefit of the hard count system. The decrease in Shuffler sales resulted from the conversion in 2000 of several rental contracts into purchases. The decrease in other sales results from the Company's discontinuance of its table games product line. The increase in Shuffler rentals is a direct result of the addition of dedicated Shuffler sales representatives. Despite the decrease in revenues, the Company believes revenue will increase through additional SecureDrop(TM) sales, as the different SecureDrop(TM) modules gain additional regulatory approvals, through sales of Shufflers through international distributors and through continued Shuffler rental. COST OF SALES. For the six months ended June 30, 2001, the cost of sales was $2,150,404 compared to $2,490,984 for the six months ended June 30, 2000. The cost of sales for the six months ended June 30, 2001, consisted of approximately $649,960 for the Company's SecureDrop(TM) products, $212,300 for depreciation expense associated with the Shufflers held for rental, $503,843 for costs related to servicing the Shufflers held for rental, $27,600 for costs related to sales of the Shuffler, and $756,701 for labor and other manufacturing costs. The decrease of $340,580, or 14% in cost of sales from the six months ended June 30, 2000 to the six months ended June 30, 2001 resulted from a decrease of $513,875 for the Company's SecureDrop(TM) products and a decrease of $189,291 related to shuffler sales, offset by an increase of $15,180 in depreciation expense associated with the Shufflers held for rental, an increase of $54,487 for costs related to servicing the Shufflers held for rental, and an increase of $ 292,919 in other manufacturing costs. The increases in Shuffler depreciation and service costs result from additional rental placements in 2001 and the addition of service personnel. The increase in other manufacturing costs resulted from Shuffler modifications required by the Michigan Gaming Control Board, costs related to preparations for the SecureDrop(TM) workshops, and recognition of royalties for paid SecureDrop(TM) installations. GROSS MARGIN. For the six months ended June 30, 2001, the gross margin was $(717,487) compared to $627,475 for the six months ended June 30, 2000, a decrease of $1,344,962. As a result, the gross margin percentage on revenues for the six months ended June 30, 2001 was (50)% compared to 20% for the six months ended June 30, 2000. The decrease in gross margin and negative gross margin percentage resulted primarily from the decrease in revenues and an increase in service labor, SecureDrop(TM) workshops preparation and other manufacturing costs. 10 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the six months ended June 30, 2001, selling, general and administrative expenses decreased approximately $250,930, or approximately 13%, to $1,639,883, compared to $1,890,813 for the six months ended June 30, 2000. For the six months ended June 30, 2001, selling, general and administrative expenses included: salaries and related costs of $688,569; advertising and marketing services of $147,428; travel and entertainment costs of $121,972; printing and office expenses of $43,529; depreciation and amortization of $105,165; office rent and utilities of $167,150; professional fees of $141,835; bad debt accrual of $90,000; regulatory expense of $62,712 and $71,523 in other miscellaneous expenses. The decrease of $250,930 resulted from a decrease in salaries of $102,727, a decrease in travel and entertainment expense of $63,009, a decrease in depreciation and amortization of $16,662, a decrease in bad debt accrual of $102,259, a decrease in gaming show expense of $186,809, and a decrease in printing and office expenses of $35,640, offset by an increase in advertising and marketing costs of $110,394, an increase in office rent and utilities of $15,359, an increase in professional fees of $56,369, an increase of $62,712 in regulatory expenses, and an increase of $11,612 in miscellaneous expenses. The Company incurred increased costs for advertising and marketing and professional and regulatory expenses as it moved to expand into new market regions; however, these were offset by reductions in salary, travel and entertainment, gaming show expenses, printing and office expenses and bad debt accrual expenses. RESEARCH AND DEVELOPMENT. For the six months ended June 30, 2001, research and development expenses decreased $151,325, or approximately 21%, to $553,213, compared to $704,538 for the six months ended June 30, 2000. The decrease is due to reduced spending on basic SecureDrop(TM) research and delay of work on the Specialty Shuffler model while modifying the Shuffler. INTEREST EXPENSE, NET. For the six months ended June 30, 2001, the Company incurred interest expenses, net of interest income, of $880,159 compared to $493,338 for the six months ended June 30, 2000, an increase of $386,821, or 78%. This increase was attributable to the increased borrowings during the six month period by the Company. NET INCOME (LOSS). For the six months ended June 30, 2001, the Company had a net loss of $3,791,183 compared to a net loss of $2,461,722 for the six months ended June 30, 2000, an increase of $1,329,461. The larger net loss was primarily due to a decrease in SecureDrop(TM) and Shuffler sales, a decrease in gross margin and an increase in service, manufacturing and total interest expense, net. Basic loss per share was $.35, based on 10,982,136 weighted average shares outstanding, for the six months ended June 30, 2001, compared to $.23, based on 10,790,325 weighted shares outstanding, for the six months ended June 30, 2000. LIQUIDITY AND CAPITAL RESOURCES OVERVIEW. The Company has generated cash flow deficits from operations, including cash used in operating activities of $3,247,769 and $2,938,039 in the six months ended June 30, 2001 and 2000, respectively. To fund development activities, the Company used cash in investing activities of $349,267 and $314,638 in the six months ended June 30, 2001 and 2000, respectively. Consequently, the Company has been substantially dependent on cash from financing activities to fund development and operating activities, receiving cash from financing activities of $3,419,844 and $2,508,242 in the six months ended June 30, 2001 and 2000, respectively. The Company will continue to require cash from financing activities for both its current operating needs and to fund its anticipated expansion of present gaming sales and marketing activities and the Company's intended expansion into non-gaming sales markets. This reliance on financing activities will continue until operations begin to generate sufficient cash flow to support such cash requirements. 11 CASH AND WORKING CAPITAL. At June 30, 2001, the Company had cash, cash equivalents and investments of $254,878, compared to $432,070 at December 31, 2000, a decrease of $177,192. At June 30, 2001, the Company's working capital was $(6,756,126), compared to $(2,983,220) at December 31, 2000. At June 30, 2001, the Company's current ratio, I.E. the ratio of current assets to current liabilities, was .32 compared to .50 at December 31, 2000. Until the Company reaches a level of cash flow from operations to sustain its development and operating activities, the Company will be relying upon existing cash balances, accounts receivable collections, placements of debt or equity and institutional sources of debt and equity capital for working capital purposes. CASH FLOW. For the six months ended June 30, 2001, net cash used in operating activities was $3,247,769, compared to $2,938,039 for the six months ended June 30, 2000. Cash used in operating activities during the six months ended June 30, 2001, is net of depreciation and amortization of $387,577, compared to $400,165 for the six months ended June 30, 2000 and amortization of deferred interest of $160,645 for the six months ended June 30, 2001, compared to $150,554 for the six months ended June 30, 2000, and reflects a decrease in accounts receivable of $214,054, compared to an increase of $1,932,090 for the six months ended June 30, 2000; an increase in inventory of $444,922, compared to an increase of $314,515 for the six months ended June 30, 2000; a decrease in prepaid expenses of $40,900, compared to a decrease of $206,957 for the six months ended June 30, 2000; an increase in other receivables of $140,983, compared to a decrease of $108,863 for the six months ended June 30, 2000; an increase in accounts payable of $126,726, compared to an increase of $571,813 for the six months ended June 30, 2000; a decrease in accrued expenses of $6,983, compared to an increase of $267,484 for the six months ended June 30, 2000; an increase in customer deposits of $242,383, compared to an increase of $64,452 for the six months ended June 30, 2000; and a decrease in deferred charges of $35,983, compared to $0 for the six months ended June 30, 2000. For the six months ended June 30, 2001, the Company used net cash from investing activities of $349,267 compared to $314,638 for the six months ended June 30, 2000. Cash used in investing activities for the six months ended June 30, 2001 was used for the acquisition of equipment and tooling in the amount of $119,261, the acquisition of patents and trademarks in the amount of $174,739 and deposits of $55,267. For the six months ended June 30, 2001, net cash provided by financing activities was $3,419,844 compared to $2,508,242 for the six months ended June 30, 2000. The increase in cash from financing activities is attributable to the private placement of several notes with private individuals for working capital. For the six months ended June 30, 2001, cash from financing activities consisted of $587,000 from the private placement of common stock and proceeds of $802,769 from leases payable, reduced by the repayment of leases payable of $873,926, and the funding of stockholder loans in the amount of $2,904,000. The amount of $725,358 was reclassified from notes payable to stockholder loans. DEBT. Through the quarter ended June 30, 2001, the Company has obtained short term loans totaling $2,504,000 from a lender who is a controlling stockholder and a member of its board of directors. The Company anticipates that each of these loans will be applied to the stockholder's purchase of shares through the Company's stockholder rights offering in the stockholder's capacity as a stockholder and as the Company's standby purchaser for any unexercised rights remaining in the rights offering. EQUIPMENT FINANCING. For the six months ending June 30, 2001, the Company received proceeds of $802,769 from a third-party leasing company through which the Company has financed most of its furniture, equipment, and tooling. The leases have a mandatory buyout and terms ranging from 24 to 39 months. 12 STOCKHOLDER RIGHTS OFFERING. On June 14, 2001, the Company's board of directors declared a distribution of rights to purchase the Company's common stock to stockholders of record as of June 15, 2001, or the record date, and holders of vested options, warrants and convertible notes that possess anti-dilution rights as of the record date. Through the Company's Registration Statement on Form S-3 (File No. 333-64012), as declared effective on July 13, 2001, the Company offered an aggregate of 26,869,770 shares of its common stock upon the exercise of these rights by rightsholders. The rights issued to California residents may not be exercised by California residents until the California Department of Corporation issues an order regarding the effectiveness of the Company's registration of the shares of its common stock underlying the rights issued to California residents by coordination pursuant to Section 25111 of the California Corporations Code. All rights issued to non-California residents expired at 5:00 p.m., Las Vegas, Nevada time on August 13, 2001. OUTLOOK Based on presently known commitments and plans, the Company believes that it will be able to fund its operations and required expenditures for the remainder of 2001 through cash on hand, cash flow from operations, the receipt of proceeds from the Company's rights offering and the standby commitment entered into with the Company's controlling stockholder, and cash from private placements of debt or equity or from lease financing sources. In the event that such sources are insufficient or unavailable, the Company will need to seek cash from public or private placements of debt or equity, institutional or other lending sources, sell certain assets or change operating plans to accommodate such liquidity issues. No assurances can be given that the Company will successfully obtain necessary liquidity sources necessary to fund the Company's operations in the upcoming year. 13 RISK FACTORS AND FORWARD-LOOKING INFORMATION THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. SUCH STATEMENTS REFER TO EVENTS THAT COULD OCCUR IN THE FUTURE AND MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS "INTEND," "PLAN," "BELIEVE," CORRELATIVE WORDS, AND OTHER EXPRESSIONS INDICATING THAT FUTURE EVENTS ARE CONTEMPLATED. SUCH STATEMENTS ARE SUBJECT TO INHERENT RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN OF THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS QUARTERLY REPORT. ADDITIONAL FINANCING WILL BE REQUIRED. Based on presently known commitments and plans, the Company believes that it will be able to fund its operations and required expenditures for the remainder of 2001 through cash on hand, cash flow from operations, the receipt of proceeds from the Company's rights offering, including the standby commitment from the Company's controlling stockholder, and cash from private placements of debt or equity or from lease financing sources. In the event that such sources are insufficient or unavailable, the Company will need to seek cash from public placements of debt or equity, institutional or other lending sources, sell certain assets or change operating plans to accommodate such liquidity issues. No assurances can be given that the Company will successfully obtain necessary liquidity sources necessary to fund the Company's operations in the upcoming year. LIMITED OPERATING RESULTS; NO INDEPENDENT MARKET RESEARCH OF POTENTIAL DEMAND FOR CURRENT OPERATIONS. Until January 2000, the Company was in the development stage and had limited sales of its products. The Company's activities had been limited to analyzing the gaming industry, consulting with persons in the gaming industry, negotiating interim financing arrangements, developing products, establishing a distribution network for its products, marketing its products to the gaming industry, manufacturing its products and commencing product sales. There is no guarantee that the Company will generate sufficient revenue to sustain its operations. No independent organization has conducted market research providing management with independent assurance from which to estimate potential demand for the Company's business operations. COINLESS GAMING. Certain gaming operators have tested and employed as part of their current operations certain gaming devices that have eliminated the use of coin or tokens, or use a combination of coin and "cashless" vouchers. The acceptance and expansion of coinless gaming devices may reduce the demand for the SecureDrop(TM) System and may adversely affect the Company's operations in the future. FOCUS ON NON-GAMING MARKETS. The Company has recently begun to explore the shift of its focus to the non-gaming application of certain of its products and technology. The refocus to non-gaming markets will have significant risks for the Company, including, but not limited to, management's lack of experience in non-gaming markets, the need to hire sales and technical persons with expertise in non-gaming markets, additional research, development, distribution and marketing expenses necessary to proceed into non-gaming application of the Company's products and technology, significant competitive factors and forces applicable to non-gaming markets and a variety of other factors. There is no assurance that the Company will be able to successfully execute the strategy to refocus a significant portion of its marketing and product technology strategies to the non-gaming markets. REGULATION. The gaming industry is a highly regulated industry and is subject to numerous statutes, rules and regulations administered by the gaming commissions or similar regulatory authorities of each jurisdiction. Generally, the Company and other entities which seek to introduce gaming products or concepts into such jurisdictions may be required to submit applications relating to their activities or products (including detailed background information concerning controlling persons within their organization) which are then reviewed for approval. The Company may incur significant expenses in seeking to obtain licenses for its gaming products and concepts, and no assurance can be given that its products will be approved in any particular jurisdiction. The failure to obtain such approval in any jurisdiction in which the Company may seek to introduce its products or concepts could have a material adverse effect on the Company's business. 14 INFLUENCE BY CONTROLLING STOCKHOLDERS. The Company's executive officers and members of the Company's Board of Directors beneficially own 8,957,010.5 shares of common stock, or approximately 79.5% of the outstanding shares of the Company's common stock, assuming exercise of options, warrants and convertible debentures. These stockholders have the power to influence all matters requiring approval by the Company's stockholders, including the election of directors and approval of mergers and other significant corporate transactions. This concentration of ownership also has the effect to delay, prevent or expedite, as the case may be, a change in control of the Company. UNCERTAINTY OF MARKET FOR COMPANY'S PRODUCTS. The Company has completed development and begun distribution of the Shufflers and the SecureDrop(TM) System. Although the market appears to be receptive to the Company's products, there is no guarantee that the market will remain receptive and that the Company's future products will be received by the market in the same manner. CUSTOMER PREFERENCE FOR ONE SHUFFLER VENDOR. There is no guarantee the Company's development of the specialty shufflers will be successfully completed. The failure to successfully complete the development and marketing of the specialty shuffler could negatively impact the Company's ability to distribute its remaining shuffler products. Since the Company's customers have demonstrated a strong preference to conduct business with only one provider of automatic shuffler products, the Company's inability to complete its shuffler product line may adversely affect the Company. CONTINUED CUSTOMER ACCEPTANCE. To the Company's knowledge, although the Company's shufflers have not proved vulnerable to card counters or expert players, and although the Company's casino customers have not experienced financial loss from their use of the shufflers, there is no guaranty that the shufflers will not become vulnerable to card counters or expert players or that the use of the Company's shufflers will not result in financial losses for the Company's customers. The occurrence of such events could have a material adverse effect on the Company. BENEFIT TO MANAGEMENT. The Company may, in the future, compensate the Company's management with substantial salaries and other benefits. The payment of future larger salaries, commissions and the costs of these benefits may be a burden on the Company and may be a factor in limiting or preventing the Company from achieving profitable operations in the future. However, the Company would not continue to compensate management with such substantial salaries and other benefits under circumstances where to do so would have a material negative effect on the Company's financial condition. NO DIVERSIFICATION. To date, the Company has intended to manufacture and market certain gaming products and concepts. Therefore, the Company's financial viability has depended almost exclusively on its ability to generate revenues from its operations, and the Company has not had the benefit of reducing its financial risks by relying on revenues derived from other operations. ILLIQUID INVESTMENT; RISK OF LOSS. The capital stock of the Company is at risk of complete loss if the Company's operations are unsuccessful. In addition, there has been no trading market for the Company's common stock. There can be no assurance that the Company's 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 Company's common stock. 15 COMPETITION. There is significant competition in the gaming industry. The Company competes with established companies and other entities (many of which possess substantially greater resources than the Company). Almost all of the companies with which the Company competes are substantially larger, have more substantial histories, backgrounds, experience and records of successful operations, greater financial, technical, marketing and other resources, more employees and more extensive facilities than the Company now has, or will have in the foreseeable future. It is also likely that other competitors will emerge in the near future. There is no assurance that the Company will continue to compete successfully with other established gaming product manufacturers. The Company shall compete on the basis of quality and price. Inability to compete successfully might result in increased costs, reduced yields and additional risks to the investors herein. RISKS OF PROPRIETARY PRODUCTS AND GAMES. The Company places its proprietary products, except SecureDrop(TM), in casinos under short-term lease arrangements, making these products susceptible to replacement due to pressure from competitors, changes in economic conditions, obsolescence, and declining popularity. The Company intends to maintain and expand the number of installed proprietary products through enhancement of existing products, introduction of new products, and customer service, but there can be no assurance that these efforts will be successful. Introduction of new proprietary products involves significant risks, including whether the Company will be able to place its products with casinos and non-gaming industries, the economic terms on which these industries will accept the products, and the popularity of the products. The Company has filed trademark and patent applications to protect its intellectual property rights in certain of its trademarks and innovations on certain of its proprietary products, respectively. At this time, however, the United States Patent and Trademark Office has not acted upon all of these applications. There can be no assurance that the pending patent or trademark applications will actually issue as patents or trademark registrations or that any of these rights will not be infringed by others. Certain of the Company's products and games do or may have independent protection of the game itself, and it is possible that competitors could produce a similar product or game without violating any legal rights of the Company. The Company intends to promote aggressively its trademarks to build goodwill and customer loyalty. There can be no assurance, however, that the Company will be successful in these efforts, that innovations will be subject to legal protection, or that the innovations will give a competitive advantage to the Company. LACK OF DIVIDENDS. There can be no assurance that the operations of the Company will become profitable. At the present time, the Company intends to use any earnings which may be generated to finance the growth of the Company's business. DEPENDENCE ON KEY INDIVIDUALS. The future success of the Company is highly dependent upon the management skills of its key employees and the Company's ability to attract and retain qualified key employees. The inability to obtain and employ these individuals would have a serious effect upon the business of the Company. The Company has entered into employment agreements with Steven J. Blad and seven additional key employees. There can be no assurance that the Company will be successful in retaining its key employees or that it can attract or retain the additional skilled personnel required. VULNERABILITY TO FLUCTUATIONS IN THE ECONOMY. The demand for the Company's products is dependent on, among other things, certain economic and business factors to which the economy is subject. These factors are beyond the control of the Company. Such factors include, without limitation: (a) general economic conditions, such as inflation, business cycle fluctuation, interest rates, and the availability of financing; (b) the possibility of recession; (c) increases in operating expenses, taxes, insurance or maintenance costs which might not be offset by increased revenues from the Company's business; and (d) international currency fluctuations. 16 "PENNY" STOCK REGULATION OF BROKER-DEALER SALES OF COMPANY SECURITIES. The Company does not presently 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 Rule 15g-9 under the Exchange Act which imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and institutional accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse). For transactions covered by the rule, the broker-dealer must furnish to all investors in penny stocks, a risk disclosure document required by Rule 15g-9 of the Exchange Act, make a special suitability determination of the purchaser and have received the purchaser's written agreement to the transaction prior to the sale. In order to approve a 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. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On November 22, 1999, Moll Industries, Inc. filed a complaint (Case No. 817296) against the Company in the Superior Court of the State of California for the County of Orange, California. The parties have entered into a settlement agreement, the fulfillment of which will lead to the dismissal of this litigation. On May 18, 2000, Heath Electronics Manufacturing Corporation filed a complaint (Case No. CV OC 00-02422D) against the Company in the District Court of the Fourth Judicial District of the State of Idaho, Ada County. The Company has answered the Complaint, which requests payment for goods in the amount of $89,569 plus interest and costs, and has filed a counterclaim alleging claims for breach of contract, breach of express warranty, breach of the implied warranty of merchantability, and breach of the implied warranty of fitness for a particular purpose. Trial has been continued until November 20, 2001. On March 21, 2001, RNB Enterprises, Inc. and other plaintiffs filed a complaint (Case No. A432250) against the Company in the District Court of the State of Nevada, Clark County. The complaint alleges claims for breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment/equitable set-off, intentional interference with contractual relations/business, and fraud and/or misrepresentation. This matter has been set for arbitration on September 6, 2001. 17 On May 17, 2001, Century Productions, Inc. filed a complaint (Case No. A434825) against the Company in the District Court of the State of Nevada, Clark County. The parties have entered into a stipulation, the fulfillment of which will lead to the dismissal of this litigation. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. ASSET ACQUISITION. On June 26, 2001, the Company purchased from Technology Development Center, LLC ("TDC"), the worldwide right, title and interest to the patents, pending patent applications, and all patent rights to the Coin Operated Machine Having An Electronically Identified Coin Collection Box and the Electronically Identified Coin Collection Box (collectively, the "Patent Rights"). These Patent Rights relate to the technology utilized in the Company's SecureDrop(TM) product line. As payment for the Patent Rights, the Company paid $175,000 in cash. As part of the transaction, the parties cancelled the Exclusive License Agreement pursuant to which the Company was the exclusive licensee of the Patent Rights, and TDC surrendered to the Company all of its shares of the Company's common stock, totaling 20,500 shares. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. STOCKHOLDER RIGHTS OFFERING. On June 14, 2001, the Company's board of directors declared a distribution of rights to purchase the Company's common stock to stockholders of record as of June 15, 2001, or the record date, and holders of vested options, warrants and convertible notes that possess anti-dilution rights as of the record date. Through the Company's Registration Statement on Form S-3 (File No. 333-64012), as declared effective on July 13, 2001, the Company offered an aggregate of 26,869,770 shares of its common stock upon the exercise of these rights by rightsholders. The rights issued to California residents may not be exercised by California residents until the California Department of Corporation issues an order regarding the effectiveness of the Company's registration of the shares of its common stock underlying the rights issued to California residents by coordination pursuant to Section 25111 of the California Corporations Code. All rights issued to non-California residents expired at 5:00 p.m., Las Vegas, Nevada time on August 13, 2001. REGULATORY UPDATE. On July 19, 2001, the Mississippi Gaming Commission renewed the license of the Company's wholly-owned subsidiary, Casinovations Sales Incorporated. The current license expires in 2004. The Jackson Rancheria Tribal Gaming Agency granted the Company a license certificate, effective July 19, 2001. The license certificate is valid through July 19, 2003. EMPLOYMENT AGREEMENTS. On July 20, 2001, the Company entered into employment agreements with seven key employees. Each agreement has a term of two years and is renewable for successive one year terms. Through the agreements, the Company granted an aggregate of 1,461,000 stock options and agreed to pay a minimum of $832,500 per year in aggregate salaries. The agreements contain confidentiality and non-competition provisions. 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a. Exhibits. -------- 10.01 Form of Employment Agreement. b. Reports on Form 8-K. ------------------- During the three month period ended June 30, 2001, the Company filed with the Securities and Exchange Commission Current Reports on Forms 8-K dated as of: (i) June 27, 2001, announcing approval by the Company's Board of Directors and stockholders an amendment to the Company's Articles of Incorporation increasing the Company's authorized shares from 40 million shares of common stock, $.001 par value, and 10 million shares of blank-check preferred stock, $.001 par value, to 80 million shares of common stock, $.001 par value and 10 million shares of blank-check preferred stock, $.001 par value, to ensure a sufficient number of authorized shares for the Rights Offering and to provide additional flexibility with respect to future financings; reporting the commitment from James E. Crabbe, a director and controlling stockholder, to provide a bridge loan in the original principal amount of up to $3,000,000; announcing the termination of the engagement of Josephthal & Co. Inc. as the Company's placement agent with respect to the Company's proposed private placement of convertible debentures; disclaiming the financial projections set forth in the Company's Current Report on Form 8-K, as filed with the Commission on April 6, 2001; and announcing the Rights Offering; and (ii) June 29, 2001, reporting the June 26, 2001, acquisition of the Patent Rights from TDC, the cancellation of the Company's Exclusive License Agreement with TDC pursuant to which the Company was the exclusive licensee of the Patent Rights, and the surrender of 20,500 shares of the Company's common stock by TDC. 19 SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VendingData Corporation ------------------------------------------ (Registrant) Date: August 14, 2001 By: /s/ Steven J. Blad ------------------------------------------ Steven J. Blad Its: President, Chief Executive Officer and Treasurer 20 EXHIBIT INDEX Exhibit Number Description Page Number - -------------- ----------- ----------- 10.01 Form of Employment Agreement 22 21 EX-10.1 3 vending_ex10-1.txt FORM OF EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT OF --------------------- THIS EMPLOYMENT AGREEMENT of ____________________ (this "Agreement") is entered into this 20th day of July 2001, and for all intents and purposes is effective as of the 20th day of July 2001, (the "Effective Date") by and between VENDINGDATA CORPORATION, a Nevada corporation (the "Company") and ____________________ (the "Employee"). RECITALS WHEREAS, the Employee is currently the Company's _________________________________________, and the Company desires to retain the services of the Employee under the terms and conditions of this Agreement; WHEREAS, the Employee and the Company will receive benefits from this Agreement, and as such, each agrees to be bound under the terms and conditions of this Agreement, including the non-competition and non-disclosure provisions contained herein; WHEREAS, the Company desires the knowledge, skills and ability of the Employee for the benefit of the Company; WHEREAS, the Employee wishes to be retained by the Company in accordance with the terms of this Agreement; WHEREAS, the Employee recognizes the legitimate need of the Company for protection of its confidential information; and WHEREAS, the Company recognizes and acknowledges the value of the Employee's services and deems it necessary and desirable to retain the Employee's services for the period herein described. NOW THEREFORE, in consideration of the mutual promises set forth herein, the Company and the Employee agree as follows: 1. EMPLOYMENT. The Company hereby retains the Employee upon the terms and conditions hereinafter set forth, and the Employee hereby accepts said terms and conditions. 2. TERM AND RENEWAL. Except as otherwise provided, this Agreement shall commence as of July 20, 2001, and continue for a term of two (2) years, subject to the early termination provisions of Article 8. Upon the expiration of this Agreement, this Agreement shall be considered renewed for regular successive one (1) year terms unless either party submits a notice of termination not less than thirty (30) days prior to the end of the preceding period. 3. DUTIES. The Company hereby retains the Employee as __________________________________, and the Employee hereby promises to perform the duties related thereto and to perform such other duties as the Company may, from time to time, assign. As directed by the appropriate representative(s) of the Company, the Employee shall also render services for and perform duties for entities related to the Company and for persons or entities having a contractual relationship with the Company requiring the Company to provide such services. The Employee shall perform all of these duties at such place or places and at such times as the Company shall in good faith require and as the interest, needs, business, or opportunity of the Company shall require. The Company retains the right to supervise the Employee in the performance of his duties. 4. TIME AND EFFORTS OF EMPLOYEE. So long as this Agreement continues in effect, the Employee promises to devote his time and energies to the business affairs of the Company as necessary to achieve the business objectives of the Company, to use his best efforts, skills, and abilities to promote the Company's interest, to perform the duties described in Article 3 of this Agreement, and to perform such other duties as may be assigned to him by the Company. 22 5. COMPENSATION AND BENEFITS. 5.1 COMPENSATION. For all services rendered by the Employee under this Agreement and the Employee's obligations under Articles 6 and 7 herein, the Employee shall be compensated as follows: (a) BASE SALARY. From the Effective Date through August 31, 2001, the Employee shall receive the salary in effect as of the Effective Date. Beginning September 1, 2001, the Employee shall receive a "Base Salary" of not less than ____________________ Dollars ($_______) for each calendar year during the term of this Agreement, or until such time as a new Base Salary is negotiated. The Base Salary shall be reviewed and increased at least on an annual basis, or more frequently, and shall be payable in equal semi-monthly installments. (b) STOCK OPTIONS. In addition to the Base Salary, the Employee shall receive "Stock Options" to purchase ___________________________ (_______) shares of the Company's $.001 par value common stock ("Shares") under the following terms and conditions: (i) Upon the Effective Date of this Agreement, the Employee shall have a vested right to acquire ______________ (______) Shares at Two Dollars and Sixty Cents ($2.60) per Share and ______________ (______) Shares at Thirty-Five Cents ($.35) per Share. (ii) Upon the Employee fulfilling his obligations through the first year of the term of this Agreement, the Employee shall have the right to acquire up to an additional ______________ (______) Shares at Thirty-Five Cents ($.35) per Share. The Stock Options to be issued under this subparagraph shall be vested in the Employee on the one year anniversary of this Agreement, subject to the requirement that Employee continue to be employed by the Company on the one year anniversary of this Agreement. (iii) Upon the Employee fulfilling his obligations, though the second year of the term of this Agreement, the Employee shall have the right to acquire up to an additional ______________ (______) Shares at Thirty-Five Cents ($.35) per Share. The Stock Options to be issued under this subparagraph shall be vested in the Employee on the second year anniversary of this Agreement, subject to the requirement that Employee continue to be employed by the Company on the second year anniversary of this Agreement. (iv)The Stock Options must be exercised within five (5) years from the date the Employee's rights are vested hereunder. The Shares will be issued within thirty (30) days after the Employee notifies the Company of his intent to exercise the options under this Agreement 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, the portion of the Stock Options granted pursuant to paragraph 5.1(b)(i-iii) of this Agreement that have not yet vested shall vest in the Employee thirty (30) days prior to such sale. (vi)If the Company is sold, all of the Stock Options granted to the Employee by virtue of paragraph 5.1(b) must be exercised as of the last business day prior to the sale of the Company, unless the Employee and the purchaser of the Company agree otherwise. (vii) For purposes of paragraph 5(b)(v) hereof, the Company shall notify the Employee in writing of (1) the impending sale, (2) the right of the Employee to exercise the Stock Options, and (3) the terms and conditions of the proposed sale of the Company. For purposes of this Agreement, 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 the person or persons who currently have majority control of the Company to be the beneficial owners of less than twenty (20%) of the issued and outstanding stock of 23 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 within the Employee's discretion to exercise the Stock Options prior to the proposed sale. Any Stock Options vested in this subparagraph shall remain vested in the Employee, whether or not they are exercised before the sale, under the terms of subparagraph (iv). 5.2 PAYMENT OF COMPENSATION. All payments made hereunder shall be made to the Employee, unless the Employee notifies the Company otherwise. 5.3 OTHER BENEFITS. The Employee shall be entitled to participate on a reasonable basis in any deferred compensation, medical reimbursement, pension, profit sharing, thrift, savings, vacation, group insurance, or other plan or program, and to receive any other benefits for which he is eligible and which the Company may provide for him or for its employees generally. 6. CONFIDENTIAL INFORMATION 6.1 DISCLOSURE OF CONFIDENTIAL INFORMATION. (a) DEFINITION. "Confidential Information" shall mean and include: (i) all records of the accounts of customers, route books, customer lists, and any other records and books relating in any matter to the customers and/or suppliers of the Company (whether such records, books, or lists are prepared by the Employee or otherwise come into the possession or use of the Employee); (ii) any product information, technical data, know-how, specifications, processes, drawing, sketches, formulas, computations, and any other information of any kind whatsoever, whether written or not, concerning any process, manufacture, composition of matter, plant, design, idea, method, system, or plan in which the Company has a possessory interest and which becomes known to Employee; and (iii) any accounting, sales, advertising, marketing or management information, methods or techniques, any business plans, any computer programs and routines of the Company and any other information of any kind whatsoever, whether written or not, concerning, directly or indirectly, the Company, its plans, programs or operations, which information is not generally known in the businesses or industries in which the Company is or may become engaged during Employee's period of employment with the Company or during the term of this Agreement. (b) RESTRICTION ON USE. Any Confidential Information received or developed by the Employee shall be used only in the Employee's conduct of the Company's business. The Confidential Information shall not be used by the Employee for any other purpose unless otherwise directed or authorized in writing by the Board of Directors. The Employee acknowledges that the Company's primary assets consist of its gaming products and accessories. Any unauthorized disclosure of the design or marketing of these products by the Employee shall violate this Agreement. (c) PROTECTION OF CONFIDENTIAL INFORMATION. The Company and the Employee expressly recognize and acknowledge that any Confidential Information disclosed to or developed by Employee will not, at any time either during or after the term of this Agreement, in any manner, either directly or indirectly, be divulged, disclosed, or communicated to any person, firm or corporation, or any other business entity by the Employee, nor shall the Employee use for his own benefit for any purpose other than the exclusive benefit of the Company, its subsidiaries, successors, or assigns, Confidential Information or any information whatsoever concerning matters effecting or relating to the business of the Company which the Employee knows or has reason to know would be valuable to competitors or potential competitors of the Company, including, but not limited to, Confidential Information or information relating to the Company's relationships with actual or potential customers or suppliers and to the needs and requirements of any such actual or potential customers. Furthermore, but not by way of limitation of the foregoing, the Employee shall not: (i) make known to any firm, person or corporation the names or addresses of any of the customers of the Company or any other information pertaining to them; or (ii) call on, solicit, or take away or attempt to call on, solicit, or take away any of the customers of the Company on whom the Employee called or with whom he became acquainted during his tenure with the Company, either for himself or for any other person, firm or corporation. 24 6.2 BOOKS AND RECORDS. The Employee further promises that he shall not, without the prior written approval of the Company, make copies of any books, drawings, documents, records, or other written or printed, photographic, encoded, taped, electrostatically or electromagnetically encoded data or information of whatever nature (the "Documents") of the Company; that he shall not, without the prior written approval of the Company, remove any of the foregoing from the premises of the Company, and that he shall not, without the prior written approval of the Company, make available to third parties access to the Documents of the Company. The Employee agrees that all records and books relating in any manner whatsoever to the customers (whether actual or potential) of the Company, whether prepared by the Employee or otherwise coming into his possession, shall be the exclusive property of the Company regardless of who actually purchased or created the original book or record. All such books and records shall be immediately returned to the Company by the Employee upon any termination of this Agreement. If the Employee purchases an original book or record, he shall immediately inform the Company, which shall immediately reimburse the Employee. 6.3 LIMITATION. Nothing contained in this Article or in any other part of this Agreement shall restrict the ability of the Employee to make, with the written consent of the Company and in the ordinary course of his employment, such disclosures as may be necessary or appropriate for the effective and efficient discharge of his duties to the Company. 6.4 TERM. Notwithstanding any other provision of this Agreement, the provisions of this Article 6 shall continue in full force and effect following the expiration or termination of this Agreement. 7. EMPLOYEE'S COVENANT NOT TO COMPETE 7.1 COVENANT NOT TO COMPETE. (a) GENERAL. The Company and the Employee expressly recognize and acknowledge that the Company is engaged in a business which is highly competitive, that any knowledge of the Company's Confidential Information or business affairs would give a competitor or potential competitor an unfair competitive advantage over the Company, that consulting or employment, directly or indirectly, of the Employee anywhere in the area in which the Company conducts its business (including, but not limited to gaming and non-gaming, security and productivity equipment and products) would give to such competitor an unfair competitive advantage, and that the Employee possesses valuable skills and knowledge. In recognition of the aforementioned, the Employee and the Company hereby expressly agree that the restrictions on competition by the Employee contained in this Article 7 are reasonable, will not overburden the Employee, and are in the best interests of both the Employee and the Company. (b) TIME PERIOD AND AREA COVERED. The Employee promises that, during the term of this Agreement, as set forth in Article 2 hereof, and for a period of one (1) year after the expiration or termination of this Agreement, he shall not, either directly or indirectly, engage in competition with the Company, or with any subsidiary, successor or appointee of the Company, as constituted during the term of this Agreement as of his resignation, departure, discharge or termination with the Company in Nevada, and within a fifty (50) mile radius of any other: (i) place of business operated by the Company or (ii) location, establishment or business where the equipment, product, or technology of the Company is operating as of such date. The Employee acknowledges that the Company's business is national and international in scope and that the solicitation of the Company's domestic or international clients in competition with the Company is a violation of this Agreement. (c) AFFILIATIONS COVERED. The Employee further promises that, during the term of this Agreement, as set forth in Article 2 hereof and for a period of one (1) year after the expiration or other termination of this Agreement, he shall not engage, directly or indirectly, as a proprietor, partner, shareholder, director, officer, employee, agent, or in any other capacity or manner whatsoever, in any business activity competitive with the business of the Company or of any subsidiary, successor or appointee of the Company, as constituted during his employment. (d) BOARD OF DIRECTORS APPROVAL. Either or both of the provisions contained in Subsections (b) and (c) above may be waived at any time in writing by the Board of Directors of the Company, in its sole discretion. No such waiver shall be considered as a waiver of any other term, covenant or provision of this Agreement, nor shall it be considered a waiver of any subsequent action by the Employee. 25 7.2 LIMITATION. Nothing contained in this Article 7 shall prevent the Employee from purchasing or causing or permitting to be purchased for his direct or indirect benefit, securities of any corporation whose securities are regularly traded on any national or regional securities exchange; provided, however, that such purchase must not, without the written approval of the Company, result in the direct or indirect beneficial ownership of more than one percent of any outstanding class of equity securities of any corporation engaged directly or indirectly in any trade or business activities competitive with that carried on by the Company. 8. TERMINATION 8.1 GROUNDS FOR TERMINATION. This Agreement shall terminate as it relates to the Employee upon the first to occur of the following events: (a) The death of the Employee; (b) Immediately upon five (5) days written notice from the Company to the Employee "for cause". "For cause" is defined as: (i) a breach of the terms and conditions of this Agreement by the Employee (other than a breach described in subparagraph 8.1(b)(ii) herein below), including the performance of the Employee's obligations and duties hereunder, which remains uncured for a period of twenty (20) days after written notice by the Company to the Employee of any such breach; or (ii) a breach of the terms and conditions of this Agreement by the Employee, which consists of dishonest or criminal conduct, or which constitutes gross negligence by the Employee in failing to perform his duties and obligations under this Agreement. (c) Upon the passing of fifteen (15) days after notice from the Company to the Employee of a bona fide decision by the Company to terminate its business. 8.2 SEVERANCE PAY. If this Agreement is terminated for any reason, other than for a reason under Section 8.1, the Company shall pay the Employee, upon termination, severance pay in a one time lump sum equal to seven (7) months of the Employee's Base Salary in effect at the time of severance. 8.3 EFFECT OF TERMINATION ON STOCK OPTIONS. Under no circumstances shall the Employee be entitled to any Stock Option that has not vested or accrued prior to the Employee's termination. 8.4 EFFECT OF TERMINATION ON ARTICLES 6 AND 7. Notwithstanding the provisions of this Article, the provisions of Articles 6 and 7 will not terminate upon the occurrence of an event described above, but will continue in full force and effect for the periods described in those Articles. The severance pay shall constitute additional consideration for the enforcement of such provisions. 9. MISCELLANEOUS 9.1 ASSIGNMENT OF AGREEMENT. The knowledge and skills of the Employee are unique, and his services bargained for by this Agreement may not be delegated by the Employee to any other person. This Agreement shall inure to the benefit of and be binding upon the Employee and his testate or intestate distributees, and the Company, its successors and assigns including, without limitation, any person, partnership, trust, corporation or other legal entity which may acquire all or substantially all of the Company's assets or which may acquire a controlling interest, either direct or beneficial, in the Company or with or into which the Company may be consolidated or merged. As used in this Agreement, the term "Company", shall include any such successors or assignees. 9.2 REMEDIES. It is agreed that any breach of Article 6 or 7 of this Agreement by the Employee will result in irreparable injury to the Company and will authorize recourse by the Company to equitable remedies, including, but not limited to, affirmative or negative injunctive relief. It is further agreed that in the event of such breach, violation, or evasion of any of the Articles hereinbefore mentioned, or of any other Article herein, the Company may forthwith terminate this Agreement and thereafter be released from all claims of the Employee hereunder, provided, however, that such a termination shall not 26 release the Employee from any warrant, covenant, term, or condition under Articles 6 or 7 of this Agreement. Nothing contained herein shall be deemed to obligate the Company to undertake such termination, and nothing contained herein shall be deemed to preclude the Company from pursuing any remedy, whether legal or equitable, which is available to it in the event of any breach, violation or evasion of any Article of this Agreement. 9.3 ENFORCEMENT COSTS. The prevailing party shall be entitled to all costs of enforcing this Agreement, regardless of whether an action at law or in equity is commenced or maintained, including but not limited to, court costs and reasonable attorneys' fees. 9.4 WAIVER OF BREACH. The waiver of the breach of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other or subsequent breach of the same or any other terms or conditions. 9.5 SEVERABILITY. All terms and conditions contained in this Agreement are severable, and in the event that any of them shall be held or considered to be unenforceable by any court of competent jurisdiction, this Agreement shall be interpreted as if such unenforceable term or condition was not contained herein. 9.6 APPLICABLE LAW. This Agreement shall be governed by and interpreted according to the laws of the State of Nevada. Each party submits to the personal jurisdiction of all courts, whether Federal or State, within Nevada, and agrees that any action pertaining to this Agreement shall be brought in a court in Clark County, Nevada. 9.7 NOTICE. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing, and if sent by registered mail to his last residence as recorded on the records of the Company in the case of the Employee, or to the principal office of the Company, in the case of the Company. 9.8 MODIFICATION OF AGREEMENT. No waiver or modification of this Agreement or of any terms or conditions contained herein shall be valid unless in writing and signed by the parties hereto. 9.9 GENDER, NUMBER, ETC. Where applicable, the singular includes the plural, the masculine includes the feminine, and vice versa. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. VENDINGDATA CORPORATION BY:___________________________________ Steven J. Blad Its: President & Chief Executive Officer EMPLOYEE --------------------------------------- -------------------- 27 -----END PRIVACY-ENHANCED MESSAGE-----