UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 000-25855
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VendingData Corporation
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(Name of small business issuer in its charter)
Nevada 91-1696010
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6830 Spencer Street, Las Vegas, Nevada 89119
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(Address and telephone number of principal executive offices) (Zip Code)
Issuer's telephone number: (702) 733-7195
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of each class)
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(Title of each class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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 [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $2,250,777
State the aggregate market value of voting stock held by non-affiliates
computed by reference to the price at which the common equity was sold, or the
average bid and asked price of such common equity, as of a specified date within
the past 60 days. $851,194.23 ($.35 per share as of January 31, 2002)
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.001 par value 38,129,072 shares as of January 31, 2002
DOCUMENTS INCORPORATED BY REFERENCE
None.
CAUTIONARY NOTICE
This Annual Report of VendingData Corporation on Form 10-KSB contains
forward-looking statements in which the management of VendingData Corporation
shares its knowledge and judgment about factors which it believes may materially
affect the performance of VendingData Corporation in the future. Terms
expressing future expectations, outlook potential and anticipated growth in
gaming and non-gaming industries, revenues and earnings, and like expressions
typically identify such statements.
All forward-looking statements, although made in good faith, are
subject to the uncertainties inherent in predicting the future. Such forward
looking statements involve known & unknown risks, uncertainties and other
important factors that could cause actual results, performance or achievements
of the Company or industry results to differ materially from future results,
performance or achievements expressed or implied by such forward-looking
statements. Such risks, uncertainties and other important factors include, among
others: general economic and business conditions; industry trends; competition;
changes in business strategies and development plans; availability of capital,
changes in or the failure or inability to comply with governmental regulations;
dependence on key personnel and other factors.
Forward-looking statements speak only as of the date they are made, and
readers are warned that VendingData Corporation undertakes no obligation to
update or revise such statements to reflect new circumstances or unanticipated
events as they occur.
Readers are urged to carefully review and consider disclosures made by
VendingData Corporation in this and other reports which discuss factors germane
to the business of VendingData Corporation. See Part II. "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors and Forward-Looking Information."
PART I
ITEM 1. DESCRIPTION OF BUSINESS
VendingData Corporation, a Nevada corporation (the "Company"),
maintains its principal offices and manufacturing facilities at 6830 Spencer
Street, Las Vegas, Nevada 89119. Its telephone number and facsimile number are
(702) 733-7195 and (702) 733-7197, respectively. 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. The Company's initial product research
and development included playing cards, several table games, video machines,
card shufflers, video recognition systems and automated dealing shoes. In 1998,
new management shifted the Company's focus to a few main products representing
the largest potential for growth. The Company's principal products are the
Random Ejection Shuffler(TM), a computer-based card shuffling device introduced
in early 1999, and the SecureDrop(TM) Slot Accounting System (the
"SecureDrop(TM) System"), which was introduced in September 1999. In addition to
these product lines, the Company also offers other gaming-related products, such
as table games. and playing cards.
The Company was incorporated in the State of Washington on September
21, 1995, and reincorporated in Nevada on March 4, 1999. In March 2000, the
Company amended its Articles of Incorporation to change the name of the Company
from "Casinovations Incorporated" to "CVI Technology, Inc." In June 2000, the
Company again amended its Articles of Incorporation to change the name of the
Company from "CVI Technology, Inc." to "VendingData Corporation."
-2-
The Company has two wholly-owned Nevada subsidiaries, Casinovations,
Inc., which focuses on the Company's Shuffler-related products and services; and
VendingData.com, Inc., which will focus on expanding the Company's
technology-based products to certain non-gaming markets.
RECENT DEVELOPMENTS
2002 CONVERTIBLE DEBT PROGRAM
On February 21, 2002, the Company's Board of Directors authorized a
private placement of $4,999,995 of convertible notes. The convertible notes
accrue interest at 9.5% per annum, mature one year from the date of issuance
(where the holder has the discretion to extend maturity date for up to four
one-year periods) and are convertible into shares of the Company's common stock
one year after issuance at a rate of $.35 per share. The $4,999,995 of
convertible notes are convertible into a maximum of 14,285,700 shares of the
Company's common stock. In addition, for each convertible note of $49,999.95,
the Company will issue a warrant to purchase 12,500 shares of the Company's
common stock with an exercise price of $0.35. The Company intends to rely upon
the exemption from registration provided by Section 4(2) of the Securities Act
and Rule 506 of Regulation D thereunder. The Company has not yet placed any
convertible notes pursuant to this private placement.
TRANSFER OF CASINOVATIONS SALES INCORPORATED
On February 26, 2002, the Company transferred its shares of stock of
its wholly-owned subsidiary, Casinovations Sales Incorporated, which has
received approval from the Mississippi Gaming Commission for the conduct of
business in Mississippi, to an employee of the Company, Robert G. Pietrosanto.
The transfer of stock was authorized by the Company's Board of Directors and by
the Mississippi Gaming Commission.
SECUREDROP(TM) SYSTEM HARD COUNT MODULE
Almost every slot machine in the world accepts coins in order to play
the game. These coins drop into a container inside the slot machine called a
"drop bucket" which contains the profits from the slot machine. Traditionally,
the procedure in most casinos is that the drop buckets are collected from each
gaming machine, stacked on an open cart, brought to the count room, correlated
to a specific machine and weighed. The coins are counted, and the actual amounts
are reconciled with the electronic data from each machine. This process is time
consuming, labor intensive, inefficient, error prone and vulnerable from a
security perspective. For example, a casino with 200 slot machines may take 4-6
hours to complete the process, and a Las Vegas mega-size casino with 2,000 slot
machines may take up to 11 hours to complete the coin collection process.
The Company launched the SecureDrop(TM) System in September 1999 to
provide casino operators with time and labor savings, enhanced security and
accountability in the slot machine coin collection process. The technology
utilizes a specially designed bucket that houses a memory chip, which works in
conjunction with a sensor base beneath the gaming machine. The electronic chip
system tracks each coin dropped during play, automatically tracks to which
machine the drop bucket belongs and transfers the data for electronic
processing. Using a cart with a built-in scale, data recording device and
lock-box (the "Mobile Scale"), the coins are weighed using a highly sensitive
electronic scale, all of the relevant information is captured from the bucket's
memory chip, the coins are emptied into a mobile coin vault, the drop bucket is
cleared of its data and reset, the drop bucket is replaced in any machine, and
the machine becomes immediately available for play.
-3-
Since gaming machine operators experience some loss of revenues through
lack of financial accountability, a key function of the SecureDrop(TM) System is
to provide the operator with reliable information to track the number of coins
in the coin bucket from the time it is removed from the machine to the time the
coins are secured in the Mobile Scale's secured vault and brought to the count
room.
Once the Mobile Scale's coin vault is transported to the secure count
room of the casino, the coins are moved to a coin wrapping machine using
automated conveyor systems provided by the Company. These conveyor systems are
designed and built to interface with the existing coin wrapping equipment
already owned by the casino, allowing for easy installation. The collected data
is then electronically transferred to the casino's accounting system.
Management estimates that some of the best run casinos experience a
0.5% to 0.9% shortfall in actual coins arriving in the count rooms and that some
operators have losses as high as several percentage points. With the
SecureDrop(TM) System, discrepancies are negligible (0.2% or less), and
personnel and collection times are cut by 40%-60%. These factors provide the
potential for a rapid return on investment.
In order to address the differing needs of its customers, the Company
has created a product series for the SecureDrop(TM) System Hard Count Module
that currently consists of the 2000 and 3000 series and will soon include the
5000 series.
SECUREDROP(TM) 2000 SYSTEM
The SecureDrop(TM) 2000 System offers electronic identification and
time/date stamps and interfaces with the customer's current data system. It also
enables gaming operators to electronically track all buckets and slot machines
on the floor and provide gaming operators with more accurate data collection and
labor savings.
The Company has received approval or approval waivers for
SecureDrop(TM) 2000 System from the Nevada Gaming Control Board (the "Nevada
Board") and gaming regulators in Colorado, Illinois, Indiana, Iowa, Michigan,
Mississippi, North Dakota, Saskatchewan, Canada, and from various Native
American gaming regulators.
SECUREDROP(TM) 3000 SYSTEM
The SecureDrop(TM) 3000 System adds the ability to track and record up
to five `hard meters' from a slot machine for gaming properties that do not have
on-line accounting systems. The system will record data such as (1) coins in,
(2) coins out, and (3) coins paid by the attendant. The system determines any
variance between the machine's recorded coin count and the actual weight amount
and provides an efficient method to collect key data from the machines on the
floor.
SECUREDROP(TM) MOBILE SCALE SYSTEM
The SecureDrop(TM) Mobile Scale System was introduced in March 2000 and
consists of a highly accurate mobile scale and data recording device along with
a coin lock-box area built into the cart. The Mobile Scale System can be can be
integrated with the SecureDrop(TM) 2000, 3000 and 5000 Systems. The Mobile Scale
System allows for the collection of the data and the coins at each gaming
machine. Productivity and security are improved while buckets are pulled and
weighed, data is collected, coins are secured and the cleared buckets are
returned to the machines. The Mobile Scale System is separately approved. Gaming
regulators have issued the Company key product approvals, which include most
recent approvals or approval waivers of the Mobile Scale System from the Nevada
(October 2000), Mississippi (November 2000), Michigan (December 2000), Illinois
(December 2000), Iowa (January 2001) and Louisiana (March 2001) regulators. In
addition, the Company has 19 tribal gaming licenses/approvals, of which 12 are
in California.
-4-
SECUREDROP(TM) 5000 SYSTEM
The SecureDrop(TM) 5000 System is designed to provide the ability to
read soft meters, which are meters provided by the software that controls the
gaming machines. This system functions as an advanced data collection system for
up to 100 soft meters. Since a major portion of the worldwide market is composed
of casinos without on-line systems, both the 3000 and 5000 series are important
additions to the product line. Management believes that in certain locations,
the 5000 series may be used as the casino's central database system and expects
strong demand from international markets. A prototype system was developed and
displayed to a limited audience in October 2000, at the World Gaming Congress.
The SecureDrop(TM) 5000 System is currently in the research and development
stage.
INSTALLATIONS OF THE SECUREDROP(TM) SYSTEM HARD COUNT MODULE
During 2001, the Company installed an additional 5,549 SecureDrop(TM)
units. Currently, the Company has a total installed base of 25,000
SecureDrop(TM) Hard Count Module units in over 29 different gaming properties,
including Joker's Wild Casino, Henderson, NV (a property of Boyd Gaming
Corporation); Casino Magic, Bay St. Louis, MS; Mystic Lake Casino, Prior Lake,
MN; Viejas Casino and Turf Club, Alpine, CA; and Lima Marriott, Peru.
SECUREDROP(TM) SYSTEM - SOFT COUNT MODULE
The Company debuted SecureDrop(TM) System Soft Count Module in April,
2001, to provide casino operators with enhanced security and accountability in
collecting paper money from slot machines. The SecureDropTM Soft Count Module
provides a bill canister identification system that enables gaming operators to
electronically track, secure and identify all bill canisters on the casino floor
and in the count room.
The SecureDropTM time stamp system deters canister switching, theft and
loss by recording all phases of the drop process, accounting for the canister's
removal from the game, time in transport, and the time of the canister's arrival
in the soft count room. Using the comprehensive SecureDropTM database system,
all bill canisters can be identified, tracked and accounted for with the highest
degree of security.
The electronic canister featuring the patented SecureDropTM
identification technology works with enhanced controls inside the slot machine
to record an audit trail, and specially designed and fully customizable Canister
Transport Vaults that accept and identify the bill canister, secure the currency
and continue to monitor the canister during transport on the slot floor. In the
count room, the Canister Docking Station gathers the electronically stored
information. A bar-coded ticket is then printed that shows the game
identification number and a complete history of each canister's movement from
the game and to the soft count room.
ELECTRONIC CANISTERS
Each bill canister is specially equipped with an iButton(TM) memory
chip that works with enhanced electronics inside the slot machine to identify
the slot machine each canister is placed in and to record the times the canister
is placed in and removed from the machine. The electronics in the slot machine
can notify an online system in the event of an unauthorized removal of the bill
canister. The canister also works in conjunction with the secure Canister
Transport Vault and the Command Center computer/software system to continue to
electronically monitor and track every movement of the canister.
-5-
CANISTER TRANSPORT VAULT
The SecureDrop(TM) Canister Transport Vault immediately secures
canisters on the slot floor, reducing exposure and increasing security. Once a
valid canister is secured on the vault, it is monitored throughout the drop
process. Alarms may be customized to sound in the event of an unauthorized
removal of a canister, an incorrect placement of a cold canister, and the
detection of an invalid audit trail in canister memory.
MOBILE COMMAND CENTER
The SecureDrop(TM) Mobile Command Center consists of a mobile
data-recording device along with an onboard computer and software built into the
cart. The Mobile Command Center allows for the collection of the data and the
canisters at each gaming machine. Productivity and security are improved while
canisters are pulled, secured and data is collected on the slot floor.
CANISTER DOCKING STATION
In the count room, the SecureDrop(TM) Canister Docking Station gathers
the electronically stored information and prints a barcoded ticket showing the
machine ID number, and a hard copy of the canister's audit trail. Canisters are
pulled from the Canister Transport Vault and placed on the Canister Docking
Station. Within seconds, data from the canister is downloaded a final time into
the SecureDrop(TM) database and verified. The canister is cleared and can be
returned to any slot machine. The Canister Docking Station then prints a
barcoded ticket, which is bundled with the currency, tickets or coupons from the
canister. The barcoded ticket can then be scanned by the currency counting
equipment, thereby completing the electronic data transfer.
ELECTRONIC METER READING MODULE
The SecureDrop(TM) Soft Count Meter Reading Module adds the ability to
read the soft meters provided by the software that controls gaming machines.
This system functions as an advanced data collection system for up to 100 soft
meters. The Soft Meter Module has the capability to be utilized as a casino's
central database system. This system eliminates all manually-entered data, can
be utilized as a casino's central database system, and saves times and reduces
labor.
MARKET FOR THE SECUREDROP(TM) SYSTEM
The market for the SecureDrop(TM) System is coin and/or paper money
based gaming machines in casinos, gaming halls or other venues with 100 machines
or more. The world gaming machine market is complex and segmented based on
different machines in terms of technology, winnings, payout, range of bets and
losses and regulatory environments.
There are an estimated 8 million gaming machine installed world-wide
and include casino-style slot machines, amusement with payout ("AWP") machines,
Pachinko machines (found mostly in Japan) and video lottery terminals ("VLT's").
Of the installed world-wide base, management estimates that at least 3 million
gaming machines are in locations with at least 100 units and represent the
principal market for the Company's SecureDrop(TM) System.
-6-
SHUFFLER PRODUCT LINE
The motivating factors for casino operators to adopt automatic
shufflers on gaming tables include: increasing dealer productivity in terms of
the number of games played per hour; reducing the exposure to fraud and cheating
by dealers, players or both; and reducing the need for experienced dealers,
especially in newer gaming markets. In addition, casino operators are more
likely to have higher "holds" from automatic shufflers than from manual shuffles
as knowledgeable players may take advantage of manual shuffles.
The Company's computer-based shufflers are available in two different
types: batch shufflers (Random Ejection Shuffler(TM)), which incorporates two
separate and distinct groups of cards, and continuous shufflers (Continuous
Random Ejection Shuffler), which continuously recycle the same group of cards.
Each type of shuffler accommodates different blackjack/baccarat card games. From
a manufacturing perspective, the Company produces one shuffler that performs as
a batch shuffler capable of shuffling between one and eight decks of cards that
may be converted to a continuous shuffler with a very slight and inexpensive
modification. Even when converted, the continuous shuffler may still be used as
a batch shuffler with the flip of a switch. The Company believes that its
product line is the most versatile line on the market and allows operators to
change game applications as determined by customer demand. Currently,
competitors produce different models to meet the needs imposed by various game
applications, which increases the customer's capital cost and reduces an
operator's flexibility.
The Company began shipping its initial batch shuffler in the spring of
1999 and has spent considerable engineering time and resources to improve its
speed and reliability. In the fourth quarter of 2000, the Company began to ship
its continuous shuffler. The Company believes that its research and development
are substantially complete and that its products have begun to perform to or
above specifications. However, in order to meaningfully penetrate the overall
shuffler market, the Company is developing a specialty shuffler, utilizing its
existing shuffler technology.
Specialty shufflers are used only in single deck poker variation games
such as Caribbean Stud(TM), Let It Ride(TM), Pai Gow Poker, and Three Card
Poker. The specialty shuffler re-stacks the deck and delivers into packets the
required number of cards (either 3, 5 or 7 cards) using a batch system method.
Management expects that the software and hardware design of the unit will be
complete in the second quarter 2002 and that beta testing will begin in the
second quarter 2002, with customer shipments beginning around the third quarter
2002.
In many markets, shufflers require regulatory approval before being
leased or sold. The Company has actively pursued numerous regulatory or
licensing approvals over the past two years. The Company has received approvals
or approval waivers for the Random Ejection Shuffler(TM) in 19 jurisdictions,
and approval for the Continuous Random Ejection Shuffler from the Nevada Board
in August 2000.
SHUFFLER MARKET
There are 40,000 gaming tables worldwide. Presently, automatic
shufflers are installed on approximately 15% of all gaming tables. Most of these
installations are on specialty gaming tables, which represent about 20% of the
40,000 gaming tables. Several companies have introduced automatic shufflers for
the general market, but for the most part, these efforts have been unsuccessful.
There is no meaningful penetration by any competitor in the general gaming table
market (blackjack and baccarat tables) to date.
-7-
There are several factors that have resulted in low acceptance of
automatic shufflers for the general market, including security issues,
reliability/productivity and player confidence. The Company believes that its
technology and ergonomic design will allow it to overcome industry concerns and
that its shuffler will successfully penetrate the blackjack/baccarat market for
the following reasons:
SECURITY. The design of existing shufflers has proven vulnerable to
cheating and card counting schemes. The Company believes that its combination of
patented computer and mechanical technology safeguards against cheating schemes.
The Random Ejection Shuffler(TM) produces a computer generated, truly random and
completely untrackable shuffle, and the Continuous Random Ejection Shuffler
eliminates advantage achieved by knowledgeable players, as each card is
available for the next round of play by producing a "full" deck(s) of
continuously shuffled random cards. This has the added benefit of giving the
casino a higher hold from the gaming table since the shuffler preserves the
original odds of each game that favor the "house".
RELIABILITY/PRODUCTIVITY. Given the paper handling demands placed on
card shufflers, they are prone to jamming and breakdown. The Company has
designed its shufflers to be easily accessed by dealers so they can hand-deal
cards until the unit can be put back in service and not shut down the table. In
addition, the dealer, with little interruption, can easily put the unit back
into play in most cases. In contrast, competitive units cannot accommodate
hand-dealing, thereby shutting down table play until the units are put back in
service. Dealer productivity and uptime of playing tables (one of the benefits
of using shufflers) has an important impact on casino operator's revenues and
profitability.
PLAYER CONFIDENCE. To reduce cheating schemes, many existing shufflers
completely cover or shield from players the deck(s) being shuffled, thereby
reducing player confidence in a fair game. The design of the Company's shufflers
allows players to see the cards being ejected and re-stacked through a frosted
cover without compromising security, which the Company believes will gain better
player acceptance.
SHUFFLER INSTALLATIONS
Through the year ended December 31, 2001, the cumulative installation
of the Company's shuffler products increased from 481 units to 569 units. The
cumulative number of shuffler installations represents the number of revenue
generating shufflers installed at casinos through sale or rental agreements.
Continuous Random Ejection Shufflers account for 52 of these installed units. As
of March 2002, the Company has 572 shufflers installed, 40 of these the
Continuous model, at over 78 different gaming properties. Several large casino
properties have standardized on the Company's shuffler for their Blackjack and
Baccarat applications. Customers include Soaring Eagle and Greektown Casinos in
Michigan, numerous tribal Casinos in California, Mandalay Resort Group, Park
Place Entertainment, Inc., Station Casinos, Inc. and Boyd Gaming Corporation.
ADDITIONAL PRODUCTS
In an attempt to focus its resources on the SecureDrop(TM) Systems and
shuffler product line, the Company has reduced the number of table games from
its portfolio. In this regard, on May 12, 2000, the Company entered into an
Acquisition and Exclusive License Agreement with DigiDeal Corporation whereby
the Company sold its intellectual property rights relating to Fantasy 21(TM) and
became the exclusive licensee of the intellectual property rights for paper and
plastic playing cards. The Company's remaining products are SecureHopper(TM),
Fantasy 21(TM), Danny's Jackpot Dice and the Safety-Peek Card.
-8-
SECUREHOPPER(TM). SecureHopper(TM) is designed to work hand-in-hand
with the SecureDrop(TM) line of products. The SecureHopper(TM) system records
and reports information regarding hopper contents. Of special interest are the
time periods when the main door of the slot machine is opened. Typically, at
this time, a hopper fill is being performed. The SecureHopper(TM) can determine
the amount of coins added to the hopper during this time. This information can
be permanently recorded in the SecureDrop(TM) bucket memory. Here, it is stored
until data collection is performed at a later time. In this manner, the
SecureDrop(TM) system will act as a backup data system to the SecureHopper(TM)
system.
With SecureHopper(TM) it is known how many coins enter and exit the
game at all times, including when the door is open. SecureHopper(TM) utilizes
technology, which enables the hopper and its contents to be "weighed". This
weight is then translated into the number of coins in the hopper.
A major benefit of SecureHopper(TM) is the ability to conduct
"pre-fills" on games that contain less than a pre-determined number of coins.
Once a hopper falls below that threshold, SecureHopper(TM) activates an L.E.D.
located on top of the candle, notifying a floor attendant the game is in need of
a fill.
Before this technology, there was no way of knowing how many coins were
in a slot machine's hopper. The core of SecureHopper(TM) is an advanced weighing
technology, which uses a "load cell" for weighing hopper contents. The
SecureHopper(TM) can be calibrated for any coin or token and focuses on three
major areas: hopper security, hopper fill notification and hopper fill
verification. Hopper security is enhanced by SecureHopper(TM)'s ability to
monitor each slot door Open and Close, attaching a hopper level quantity and a
time stamp to every transaction. This allows the system to isolate any variances
occurring from door open to door close. This information is a deterrent to
pilfering, resulting in a more efficient slot floor operation. Assessing hopper
contents without opening the game is perhaps SecureHopper(TM)'s most important
function. The ability to "Pre-Fill" games on the floor, thus diminishing
downtime for fills, may lead to an increase in slot revenue and player
satisfaction. In the year 2002, the Company does not anticipate to generate
significant revenue from this product.
FANTASY 21(TM). Fantasy 21(TM) is a jackpot table game variation of
standard blackjack/21 involving a side wager of one dollar. If the player places
the side wager and receives a hand of 19, 20, 21 or blackjack (a "High Hand")
during five consecutive hands, the player is eligible for a jackpot round of up
to $25,000 (the "Showdown Round"). In the Showdown Round, the player is dealt
six hands simultaneously. If the player receives six High Hands, and the dealer
receives a hand of blackjack, the player wins the jackpot. Fantasy 21(TM) also
offers other jackpots for other combinations of High Hands. In the year 2002,
the Company does not expect to generate significant revenue from this product.
DANNY'S JACKPOT DICE. Danny's Jackpot Dice, a variation of the standard
craps game, employs an additional side wager made on consecutive points thrown
by the shooter. The wager must be made prior to the shooter establishing the
first "point" to be made. Once the shooter establishes the first point, no one
else can make this wager until the shooter throws a seven and goes out. This
side wager will pay odds to the player based on how many consecutive points were
made during the shooter's turn. The shooter must make at least three points
before the player receives any odds on his wager. In the year 2002, the Company
does not expect to generate significant revenue from this product.
SAFETY-PEEK CARD. The Safety-Peek Card is a type of playing card
designed for blackjack/21. The key feature of its design is that it prevents the
exposure of a dealer's hole card, I.E. the card that is face down, when used
with a modified form of classic peeking action. The Safety-Peek Card permits the
dealer to "peek" at the opposite corner of the playing card in order to
determine the value of the hole card without revealing the value of the playing
card. The Safety-Peek Card is licensed to the George C. Matheson Company
("GEMACO") and US Playing Card Company, under which the Company receives certain
royalties. In the year 2002, the Company does not expect to generate significant
revenue from this product.
-9-
REGULATIONS AND LICENSING
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 that 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's products generally fall within the classification of
"associated equipment". "Associated equipment" is equipment which is not
classified as a "gaming device", but which has an integral relationship to the
conduct of licensed gaming. Regulatory authorities in some jurisdictions have
discretion to require manufacturers and distributors to meet licensing or
suitability requirements prior to or concurrent with the use of associated
equipment. In other jurisdictions, associated equipment must be approved by the
regulatory authorities in advance of its use at licensed locations. The Company
has obtained, or is seeking to obtain, approval of its associated equipment in
each jurisdiction in which it conducts business that requires such approval.
Domestic gaming regulators have issued the Company key product
approvals, which include approvals or approval waivers of the SecureDrop(TM)
2000 and Mobile Scale Systems from the Illinois (August 2000), Nevada (October
2000), Iowa (November 2000), Mississippi (November 2000), Michigan (December
2000) and Louisiana (March 2001) regulators. The SecureDrop(TM) 2000 is also
approved in the states of Colorado (November 1999) and Indiana (June 2000), with
the Mobile Scale System eligible for field trial in Colorado. The SecureDrop(TM)
Soft Count Module has received approval waivers in Illinois (August 2001) and
Nevada (July 2001).
The Random Ejection Shuffler(TM) is approved for use in Nevada
(December 1998), Mississippi (May 1999), Michigan (June 1999), South Dakota
(January 1998) and Washington (January 1999). The Continuous Random Ejection
Shuffler is approved in Nevada (August 2000), and Mississippi (May 2001) and may
be placed in all tribal casinos where the Company is currently licensed.
Various tribal casinos throughout the United States, which have formed
their own gaming regulatory structures and which operate in connection with the
requirements of the National Indian Gaming Commission, also utilize the
Company's products. Presently, the Company has been approved to conduct business
and holds 18 tribal gaming licenses for its products in the states of
California, Michigan, Minnesota, New Mexico, and Washington. Requests for five
additional licenses are currently pending in California.
Internationally, the Company's SecureDrop(TM) 3000 System is currently
in use in Argentina, Burma, Columbia, Czechoslovakia, South Korea, Peru, and
Sweden. These international jurisdictions typically represent minimal regulatory
barriers. The Random Ejection Shuffler(TM) has been approved in the Bahamas, and
the SecureDrop(TM) 2000 and Mobile Scale(TM) Systems were approved in the
province of Saskatchewan, Canada.
NEVADA. The manufacture, sale and distribution of gaming devices for
use or play in Nevada or for distribution outside Nevada and the manufacture and
distribution of associated equipment for use in Nevada are subject to (i) the
Nevada Gaming Control Act and the regulations promulgated thereunder
(collectively, the "Nevada Act") and (ii) various local ordinances and
regulations. Such activities are subject to the licensing and regulatory control
of the Nevada Gaming Commission (the "Nevada Commission"), the Nevada Board, and
various local, city and county regulatory agencies (collectively referred to as
the "Nevada Gaming Authorities").
-10-
The laws, regulations and supervisory practices of the Nevada Gaming
Authorities are based upon declarations of public policy having as their
objectives: (i) preventing any involvement, direct or indirect, of any unsavory
or unsuitable persons in gaming or in the manufacture or distribution of gaming
devices at any time or in any capacity; (ii) strictly regulating all persons,
locations, practices and activities related to the operation of licensed gaming
establishments and the manufacture or distribution of gaming devices and
equipment; (iii) establishing and maintaining responsible accounting practices
and procedures; (iv) maintaining effective controls over the financial practices
of licensees (including requirements covering minimum procedures for internal
fiscal controls and safeguarding assets and revenues, reliable record keeping
and periodic reports to be filed with Nevada Gaming Authorities); (v) preventing
cheating and fraudulent practices; and (vi) providing and monitoring sources of
state and local revenue based on taxation and licensing fees. Changes in such
laws, regulations and procedures, depending upon their nature, could have an
adverse effect on the Company's operations.
Although the Company is not registered with the Nevada Board as a
publicly traded corporation, the Company is currently required to provide a copy
of all periodic reports and other filings made with the Securities and Exchange
Commission to the Nevada Board. Further, even though applications for the
approval of associated equipment are subject to a less comprehensive approval
process, the Nevada Board may investigate any individual who has a material
relationship to, or material involvement with, the Company in order to determine
whether such individual is suitable or should be licensed as a business
associate of the Company. Officers, directors and certain key employees of the
Company may be required to be licensed or found suitable by the Nevada Gaming
Authorities. The Nevada Gaming Authorities may deny an application for licensing
for any cause that they deem reasonable. A finding of suitability is comparable
to licensing. Both require submission of detailed personal and financial
information, which is followed by a thorough investigation. The applicant for
licensing or a finding of suitability must pay all costs of the investigation.
In the event that the Nevada Gaming Authorities were to find an
officer, director or key employee unsuitable for licensing or unsuitable to
continue having a relationship with the Company, the Company would have to sever
all relationships with that individual. In addition, the Nevada Commission may
require the Company to terminate the employment of any person who refuses to
file appropriate applications. Determinations of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.
In the event that the Company be found to have violated the Nevada Act,
the licenses and/or approvals it holds could be limited, conditioned, suspended
or revoked. In addition, the Company and the persons involved could be required
to pay substantial fines, at the discretion of the Nevada Board, for each
separate violation of the Nevada Act. The limitation, conditioning or suspension
of any license or approval held by the Company could (and revocation of any
license or approval would) materially adversely affect the Company's operations.
As for security holders of the Company, any beneficial holder of the
Company's voting securities, regardless of the number of shares owned, may be
required to file an application, be investigated, and have his or her
suitability as a beneficial holder of the Company's voting securities determined
if the Nevada Board finds reason to believe that such ownership would otherwise
be inconsistent with the declared policies of the State of Nevada. The applicant
must pay all costs of investigation incurred by the Nevada Gaming Authorities in
conducting any such investigation. Any person who fails or refuses to apply for
a finding of suitability or a license within thirty days after being ordered to
do so by the Nevada Commission or the Chairman of the Nevada Board may be found
unsuitable. The same restrictions apply to a record owner if the record owner,
after request, fails to identify the beneficial owner.
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LOUISIANA, MICHIGAN, WASHINGTON AND OTHER JURISDICTIONS. The Company
currently distributes products in Louisiana, Michigan, Mississippi, and
Washington, and intends to distribute products in other states and
jurisdictions. Although the regulatory schemes in these jurisdictions are not
identical, their material attributes are substantially similar, as described
below.
The manufacture, sale, distribution and ownership of associated
equipment and the ownership in each jurisdiction are subject to various
provincial, state, county and/or municipal laws, regulations and ordinances,
which are administered by the relevant regulatory agency or agencies in that
jurisdiction (the "Gaming Regulators"). These laws, regulations and ordinances
primarily concern the responsibility, financial stability and character of
gaming equipment manufacturers, distributors and operators, as well as persons
financially interested or involved in gaming or liquor operations.
In many jurisdictions, the manufacture or distribution of gaming
supplies may not be conducted unless proper licenses are obtained. An
application for a license may be denied for any cause which the Gaming
Regulators deem reasonable. In order to ensure the integrity of manufacturers
and suppliers of gaming supplies, most jurisdictions have the authority to
conduct background investigations of the Company, its key personnel and
significant stockholders. The Gaming Regulators may, at any time, revoke,
suspend, condition, limit or restrict a license for any cause deemed reasonable
by the Gaming Regulators. Fines for violation of gaming laws or regulations may
be levied against the holder of a license and persons involved. The Company and
its key personnel have obtained all licenses necessary for the conduct of the
Company's business in the jurisdictions in which it manufactures and leases or
sells its casino products. Suspension or revocation of such licenses could have
a material adverse effect upon the Company's operations.
NATIVE AMERICAN GAMING REGULATION. Gaming on Native American lands is
extensively regulated under federal law, tribal-state compacts and tribal law.
The Indian Gaming Regulatory Act of 1988 ("IGRA") provides the framework for
federal and state control over all gaming on Native American lands. IGRA
regulates the conduct of gaming on Native American lands and the terms and
conditions of contracts with third parties for management of gaming operations.
IGRA is administered by the Bureau of Indian Affairs and the National Indian
Gaming Commission ("NIGC").
IGRA classifies games that may be conducted on Native American lands
into three categories: (i) Class I Gaming; (ii) Class II Gaming; and (iii) Class
III Gaming. Class I Gaming includes social games solely for prizes of minimal
value, or traditional forms of Native American gaming engaged in by individuals
as part of, or in connection with, tribal ceremonies or celebrations. Class I
Gaming on Native American lands is within the exclusive jurisdiction of the
Native American tribes and is not subject to the provisions of IGRA.
Class II Gaming includes bingo, pulltabs, lotto, punch boards, tip
jars, instant bingo, and other games similar to bingo, if those games are played
at the same location where bingo is played. Class II Gaming is permitted on
Native American lands if (i) the state in which the Native American lands are
located permits such gaming for any purpose by any person, organization or
entity; (ii) the gaming is not otherwise specifically prohibited on Native
American lands by federal law; (iii) the gaming is conducted in accordance with
a tribal ordinance or resolution which has been approved by the NIGC; (iv) a
Native American tribe has sole proprietary interest in and responsibility for
the conduct of gaming; (v) the primary management officials and key employees
are tribally licensed; and (vi) miscellaneous other requirements are met.
Class III Gaming includes all other commercial forms of gaming, such as
table games, slots, video casino games, and other commercial gaming (e.g. sports
betting and pari-mutuel wagering). Class III Gaming is permitted on Native
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American lands if the conditions applicable to Class II Gaming are met and, in
addition, the gaming is conducted in conformance with the terms of a written
agreement between a tribal government and the government of the state within
whose boundaries the tribe's lands are located (a "tribal-state compact").
IGRA requires states to negotiate in good faith with Native American
tribes which seek to enter into a tribal-state compact for the conduct of Class
III gaming. Such tribal-state compact may include provisions for the allocation
of criminal and civil jurisdiction between the state and the Native American
tribe necessary for the enforcement of such laws and regulations, taxation by
the Native American tribe of such activity in amounts comparable to those
amounts assessed by the state for comparable activities, remedies for breach,
standards for the operation of such activity and maintenance of the gaming
facility, including licensing, and any other subjects that are directly related
to the operation of gaming activities. The terms of tribal-state compacts vary
from state to state. Tribal-state compacts within one state tend to be
substantially similar to each other. Tribal-state compacts usually specify the
types of permitted games, entitle the state to inspect casinos, require
background investigations and licensing of casino employees, and may require the
tribe to pay a portion of the state's expenses for establishing and maintaining
regulatory agencies.
On March 7, 2000, California voters approved California's tribal gaming
initiative known as Proposition 1A, and California's constitution was amended to
allow the Governor to compact with tribes for the operation of casinos including
the operation of traditional slot machines. Since then, the Governor, with
legislative approval, has entered into compacts with a significant number of
California tribes. The Company has approvals for certain California Native
American casinos and applications for additional licenses are pending.
UNITED STATES-FEDERAL. The Federal Gambling Devices Act of 1962 makes
it unlawful for a person to manufacture, deliver or receive gaming machines,
gaming machine type devices and components thereof across interstate lines
unless that person has first registered with the Department of Justice of the
United States.
APPLICATION OF FUTURE OR ADDITIONAL REGULATORY REQUIREMENTS. In the
future, the Company intends to seek the necessary licenses, approvals and
findings of suitability for the Company, its products and its personnel in other
jurisdictions throughout the United States and the world where significant sales
are anticipated to be made. However, there can be no assurance that such
licenses, approvals or findings of suitability will be obtained, and if obtained
that they will not be revoked, suspended or conditioned or that the Company will
be able to obtain the necessary approvals for its future products as they are
developed in a timely manner, or at all. If a license, approval or finding of
suitability is required by a regulatory authority and the Company fails to seek
or does not receive the necessary license, approval or finding of suitability,
the Company may be prohibited from selling its products for use in the
respective jurisdiction or may be required to sell its products through other
licensed entities at a reduced profit to the Company.
MARKETING
As the gaming industry becomes increasingly more competitive, the
Company's strategy is to develop cost-effective niche products and services,
which increase the security, productivity and profitability for the global
gaming industry. As part of its strategy, the Company offers to lease or sell
its products to casinos and other lawful gaming establishments.
In order to maintain and expand the market presence of its products,
the Company is committed to providing a high level of customer service and
support. In this regard, the Company operates domestic regional service centers
in Berkley, Michigan, and Tukwila, Washington, and has service personnel located
in New Jersey, Florida, and Mississippi, with a total of nine full-time service
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personnel. These employees provide casinos with installation and maintenance
services domestically on all the Company's products. Service for the Nevada and
California markets are supported by nine corporate office service personnel. In
addition, the Company maintains a training center to provide support and
training to its distributors, who are responsible for servicing their own
products.
DISTRIBUTION
The Company sells directly to gaming operators and indirectly through
distributors with direct sales accounting for 95% of the Company's revenue. The
Company has a sales staff of four full-time employees. In addition, the
Company's Chief Executive Officer and Vice President SecureDrop(TM) both
actively participate in sales efforts. The Company also markets its products at
domestic and international trade shows.
Sales by distributors account for 5% of the Company's revenue. As a
means of increasing the global exposure of the Company's products, the Company
has entered into various distributorship agreements for the Australia, New
Zealand, Europe and South America. The Company plans to utilize distributors in
certain geographic areas where distributors with a local presence could be more
effective than the Company's sales force. In this regard, the Company has
entered into a semi-exclusive distributorship agreement with Vallasey, SA, a
Uruguay company, with respect to Uruguay, Argentina, Brazil, France, Italy, and
Spain. The Company also has an exclusive distributorship agreement with
Mainstream Global Enterprises for the distribution of the Random Ejection
Shuffler(TM) in the Canadian Provinces of Alberta, British Columbia, Manitoba,
and Saskatchewan. Additionally, the Company has an exclusive agreement with
IndoPacific Gaming for the distribution of the Shuffler in Australia and New
Zealand. Domestically, the Company has entered into: (i) a non-exclusive
Independent Contractor Agreement with Money Processing Systems, Inc., a New
Mexico corporation, for the distribution of the SecureDrop(TM) Systems in
Arizona, Colorado, New Mexico and Texas; (ii) an exclusive distributorship
agreement with Gitchi Gaming, Inc., a Minnesota corporation, for the
distribution of the Shuffler in Wisconsin and Minnesota; and (iii) an exclusive
distributorship agreement with Data Financial Business Services Incorporated, a
Wisconsin corporation, for the distribution of the SecureDrop(TM) Systems in
Wisconsin and to all Native American casinos in Michigan.
COMPETITION
The gaming industry is extremely competitive. Although the Company has
assembled an experienced marketing team which uses its knowledge of the gaming
industry to tailor the Company's products and services to the needs of the
gaming industry, the Company competes with many established companies which
possess resources substantially greater than those of the Company. Generally,
the Company competes with other companies that 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. Even though the Company's overall strategy is to
compete on the basis of quality and price, the competitive pressures of the
gaming industry will require the Company to invest in additional research and
development. The constant need to update and innovate may result in increased
costs for and reduced margins on the Company's products and services.
The SecureDrop(TM) System is the only method of computerized bucket
management and one-step processing of the coins on the floor. The existing coin
collection method utilizes handwritten slips of paper or bar code tickets to
identify which bucket came from what machine. Full buckets are replaced with
empty buckets and "hauled" into the count room where they are processed one at a
time. The slip of paper or bar code ticket must be located, so the information
can be entered into the casino's accounting system when the bucket is weighed.
-14-
One area of competition for the SecureDrop(TM) System Hard Count Module
could be coinless gaming. Since 1987 several companies have attempted to develop
coinless slot machines. To date, there has been limited acceptance of coinless
slot machine systems. California tribal casinos used "coinless" slots for 8
years until the Indian tribes executed compacts governing the terms of gaming
with the Governor of California beginning in May 2000, at which time the
California tribal casinos immediately began replacing coinless slot machines
with the traditional coin versions.
In 2000, International Gaming Technology ("IGT") introduced the EZ
Pay(TM) system. The EZ Pay(TM) system attempts to reduce operating costs and
machine downtime by providing gaming operators with machines that drop coins for
smaller payouts and print tickets for larger, predetermined payouts. As a result
of the issuance of tickets, players are not required to wait for attendants in
order to be paid larger payouts and may use their tickets at other machines
equipped with the EZ Pay(TM) system. Although there are a limited number of slot
operations with an online system that permits the use of the EZ Pay(TM) system,
the concept behind the EZ Pay(TM) system has received positive customer
responses. The Company believes that the use of the EZ Pay(TM) system will
actually result in larger coin drops and enhance the need for the SecureDrop(TM)
System because payouts would be made by ticket, rather than in coin, resulting
in a larger coin drop.
Despite the potential competition of coinless gaming with regard to the
SecureDrop(TM) Hard Count System, coinless gaming would cause potentially
greater use of the Company's SecureDrop(TM) Soft Count System, which tracks
bills, rather then coins.
Competition in the shuffler market is more intense. Presently, Shuffle
Master, Inc. ("Shuffle Master") is the market leader with a penetration of 15%
of the total market. Of the Shuffle Master installations, 85% - 90% is in poker
and other specialty games. In the specialty market, Shuffle Master offers the
only product. Other competitors include International Thunderbird Gaming
Corporation, Casinos Austria International, and ProShuffle, which have a
collective market share of less than 3%.
The Company believes its shufflers have a competitive advantage over
other shufflers with respect to vulnerability to player cheating and card
counting, reliability, and player dissatisfaction. The ergonomic design and ease
of operation of the Company's shufflers increase customer satisfaction and
reduce the need for experienced dealers, a concern which has arisen in emerging
gaming markets. In order to better compete in and to meaningfully penetrate the
overall shuffler market, the Company is developing a specialty shuffler which
will provide the Company with a complete shuffler product line and which will
provide the first direct competition for Shuffle Master in the specialty
shuffler market, the market segment in which it has proven most successful. As
Shuffle Master possesses greater financial resources, greater industry
recognition, and more gaming licenses than the Company, there is no guarantee
that the Company will continue to successfully compete in the shuffler market.
RESEARCH AND DEVELOPMENT; MANUFACTURING
At its principal offices, the Company maintains a state-of-the-art
facility for its product development and manufacturing divisions. In addition,
the Company has nine employees in research and development and twenty-nine
employees in manufacturing and service.
To facilitate development and assure manufacturing quality control, the
Company maintains four dedicated laboratory facilities. Within these labs, the
Company continuously develops the SecureDrop(TM) Systems, conducts real-time
testing for the Random Ejection Shufflers(TM), and prepares quality assurance
analyses and internal product trials. The service and refurbishment center for
the Company's shufflers is also located on the premises.
-15-
At the heart of the Company's principal offices is the manufacturing
center with its state-of-the-art machine shop outfitted with robotic equipment,
a receiving lab featuring optical comparators, to conduct components inspections
and a series of product assembly lines for the Random Ejection Shuffler(TM),
Mobile Scale System, coin vaults, bucket identification systems, Canister
Transport Vaults, bill acceptor retrofits, and cable assemblies. In addition,
the Company has contracted with a third party to provide various parts and
supplies for its products, primarily for the SecureDrop(TM) System products.
INTELLECTUAL PROPERTY
The Company has secured and endeavors to secure, to the extent
possible, exclusive rights in its products, primarily through federal and
foreign intellectual property rights, such as patents, copyrights and
trademarks. The United States Patent and Trademark Office has issued patents
covering the SecureDrop(TM) System and the Company's shufflers. The Company has
applied for various other patents with respect to other concepts and products,
including potential non-gaming application of its technology.
Further, in order to protect potential foreign sources of income, the
Company has filed patent applications and trademark applications in
strategically selected foreign countries. There can be no assurance that any of
the claims contained in the Company's pending U.S. or foreign patent or
trademark applications will be issued, that any of these rights will not be
infringed by others or that already issued patents or trademark registrations
will not be invalidated or canceled. Third parties could infringe on the
Company's rights, or the Company's proprietary products and could be
successfully duplicated without infringing on the Company's legal rights. Many
elements incorporated in the Company's proprietary products are in the public
domain or otherwise not amendable to legal protection, and the steps taken by
the Company will not, in and of themselves, preclude competition with the
Company's proprietary products.
The Company has granted joint exclusive licenses to GEMACO and to The
US Playing Card Company for the Safety-Peek Playing Card. The GEMACO agreement
provides for a royalty equal to $.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 to the Company a royalty of $.075
per deck.
EMPLOYEES
As of March 12, 2002, the Company had 58 full-time employees. None of
the Company's employees are represented by a labor union, and the Company
considers its relationships with its employees to be satisfactory. All employees
have signed confidentiality agreements, which prohibit them from disclosing any
of the Company's confidential information at any time during or after their
employment with the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 58,725 square feet for its
headquarters at 6830 Spencer Street, Las Vegas, Nevada, 89119, which houses the
Company's corporate offices, including sales, engineering, and manufacturing
departments. The current lease is approximately $55,000 per month, expires in
October, 2006, and has an option exercisable by the Company for an additional
term of five years. The Company believes its current headquarters are sufficient
for the Company's operations through 2005.
-16-
The Company also leases approximately 1,105 square feet in Boise, Idaho
for its shuffler research and development facility and leases approximately
1,500 square feet for its service center in Tukwila, Washington. The Company
intends to renew each of these current leases. The Company leases approximately
1,150 square feet for its service center in Berkley, Michigan and intends to
lease a larger facility of approximately 1,900 square feet.
ITEM 3. LEGAL PROCEEDINGS
On November 22, 1999, Moll Industries, Inc. ("Moll") 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 ("Heath")
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. The trial in this matter concluded on December 13, 2001, and
the parties are awaiting the determination of the Court.
On March 27, 2002, Shuffle Master filed a complaint (Case No.
CV-S-02-0438-JCM-PAL) against the Company in the United States District Court,
District of Nevada. The complaint alleges, among other things, claims for patent
infringement and requests treble damages, an injunction enjoining the Company
from infringing Shuffle Master's patent, an accounting of the Company's gains
and profits that resulted from its alleged infringement, and for interest, costs
and attorneys' fees. As the Company was only served with this complaint on March
29, 2002, it has not yet had an opportunity to assess whether this litigation
will materially affect its operations. The Company intends to vigorously defend
the allegations made by Shuffle Master.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2001, the Company held its annual meeting
of stockholders on December 21, 2001. At the annual meeting, the Company's
stockholders were asked to: (i) elect the Company's directors; and (ii) transact
such other business as may properly come before the Annual Meeting of
Stockholders and any adjournments thereof. The affirmative vote of a majority of
the outstanding shares of the Company's common stock is required for the
election of the Company's directors.
At the annual meeting, there were 38,129,072 shares of the Company's
common stock outstanding. The votes of the Company's stockholders were as
follows:
ELECTION OF DIRECTORS
NAME VOTES FOR ABSTENTIONS
--------------------- ---------------------- --------------------
Steven J. Blad 31,448,787 shares 56,100 shares
Ronald O. Keil 31,462,287 shares 42,600 shares
From the votes cast by the Company's stockholders, the Company's
directors were elected by a majority of the outstanding shares of the Company's
common stock.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's authorized capital stock consists of 80,000,000 shares of
common stock, $0.001 par value, and 10,000,000 shares of preferred stock, $0.001
par value. The Company's common stock and preferred stock may be issued from
time to time without action by the stockholders and may be issued for such
consideration as may be fixed from time to time by the Board.
MARKET INFORMATION
The Company's common stock is not traded on a national or regional
exchange and is not quoted over an electronic medium. The Company is not aware
of any established market for the trading of its common stock. The Company has
entered into lockup agreements with certain stockholders and directors. Through
these lockup agreements, the relevant stockholders have agreed to lockup
1,834,402 shares of common stock until such time as the Commissioner of the
Department of Corporations of the State of California consents to the sale or
transfer of such shares.
COMMON STOCK
As of January 11, 2002, there were 38,129,072 shares of the Company's
common stock outstanding and approximately 397 holders of the Company's common
stock. Holders of common stock are entitled to one vote per share on all matters
submitted to a vote of the shareholders. The Company does not allow cumulative
voting of any kind, and is not required to do so under Nevada law. Subject to
preferences that may be applicable to any then outstanding preferred stock, the
holders of common stock will be entitled to receive dividends, if any, as may be
declared from time to time by the board out of legally available funds. Upon
liquidation, dissolution, or winding up of the Company, the holders of the
Company's common stock will be entitled to a pro rata share of the Company's
assets that are legally available for distribution after payment of all debts
and other liabilities and subject to the prior rights of any preferred stock
then outstanding. Holders of the Company's common stock have no preemptive,
subscription, redemption, or conversion rights.
From April 1998 through January 1999, the Company conducted a public
offering of up to 1,500,000 shares of its common stock pursuant to a
Registration Statement on Form SB-2. In conjunction with this offering, the
Company also registered its common stock pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result of
this registration, the Company became subject to the reporting requirements of
the Exchange Act and has filed the appropriate reports, proxy statements and
other information with the Commission. Although the Company had begun
negotiations with various market makers with respect to its common stock, the
Board determined that the Company should be affiliated only with credible market
makers and terminated discussions with those market makers that did not meet the
Board's scrutiny.
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of undesignated
preferred stock. None of the undesignated preferred stock is issued or
outstanding, and the Company has no present plans to issue shares of
undesignated preferred stock. Without further action by the Company's
stockholders, the Board is empowered to issue one or more series of undesignated
preferred stock with such rights, preferences, restrictions and privileges as
may be fixed by the Board. The issuance of the undesignated preferred stock
could adversely affect the rights, including voting rights, of the holders of
the Company's common stock and could impede an attempted takeover of the
Company.
-18-
OPTIONS
As of March 18, 2002, there were options outstanding to purchase
4,273,850 shares of the Company's common stock at exercise prices ranging from
$0.35 to $3.00 per share with a weighted average exercise price per share of
$1.08. The Company will not grant any options to purchase common stock at an
exercise price of less than 85% of the fair market value of the Company's common
stock on the date of grant.
WARRANTS
As of March 12, 2002, the Company issued warrants to purchase 450,000
shares of the Company's common stock at an exercise price of $2.60. These
warrants were granted as part of the Company's private placement of convertible
debentures in 2001 and are exercisable beginning on the six-month anniversary of
their respective issuance. In addition to these warrants, the Company has issued
warrants to Dan Purjes to purchase 250,000 shares of the Company's common stock
at an exercise price of $2.50, and, in conjunction with the Company's purchase
of the AccuHopper(R) technology, has issued to Malcolm C. Davenport V warrants
to purchase 225,000 shares of the Company's common stock at per share an
exercise price of $10.00.
CONVERTIBLE DEBENTURES
As of March 12, 2002, the Company had issued two series of unsecured
convertible debentures, one series for $1,500,000 and another series for
$1,800,000. These convertible debentures are convertible at a rate of $2.60 per
share into 1,269,231 shares of the Company's common stock. A majority of the
outstanding convertible debentures are held by James E. Crabbe, the Company's
Chairman of the Board and controlling stockholder. In addition, these
convertible debentures were issued with warrants to purchase 937,291 shares of
the Company's common stock at an exercise price of $2.60 per share.
In addition to the aforementioned series of unsecured convertible
debentures, the Company's Board of Directors authorized a private placement of
$4,999,995 of convertible notes on February 21, 2002. The convertible debentures
accrue interest at 9.5% per annum, mature one year from the date of issuance
(where the holder has the discretion to extend maturity date for up to four
one-year periods) and are convertible into shares of the Company's common stock
one year after issuance at a rate of $.35 per share. The $4,999,995 of
convertible notes are convertible into a maximum of 14,285,700 shares of the
Company's common stock. In addition, for each convertible note of $49,999.95,
the Company will issue a warrant to purchase 12,500 shares of the Company's
common stock with an exercise price of $0.35. The Company intends to rely upon
the exemption from registration provided by Section 4(2) of the Securities Act
and Rule 506 of Regulation D thereunder. The Company has not yet placed any
convertible notes pursuant to this private placement.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its common
stock. The Company presently intends to retain earnings to finance the operation
and expansion of its business and does not anticipate declaring cash dividends
in the foreseeable future.
STOCKHOLDER RIGHTS OFFERING
On June 14, 2001, the Company's board of directors declared a
distribution of rights to purchase shares of common stock to stockholders of
record as of June 15, 2001, or the record date, and holders of vested options
and warrants and convertible notes that possess anti-dilution rights as of the
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record date. Through this rights offering, the Company offered an aggregate of
26,869,770 shares of common stock upon the exercise of these rights by
rightsholders.
On August 13, 2001, and September 24, 2001, all rights that the Company
issued to non-California and California residents, respectively, for the
purchase of the Company's $.001 par value common stock ("Common Stock") through
the Company's Registration Statement on Form S-3 (File No. 333-64012), as
declared effective on July 13, 2001, expired. As of September 24, 2001,
rightsholders had purchased a total of 8,566,584 shares of Common Stock.
Rightsholders applied a total of $1,891,631.40 in amounts payable under
short-term notes or bridge loans toward the purchase price of the rights shares,
and the Company received a total of $1,106,672.80 in cash proceeds from the
exercise of the rights.
On August 14, 2001, the Company's standby purchaser, James E. Crabbe, a
director and the Company's controlling stockholder, purchased 16,409,068 shares
of Common Stock. Mr. Crabbe applied $850,000 in short-term notes and $2,504,000
in bridge loans toward the purchase of these shares and tendered the remaining
amount of the purchase price, $2,389,174.00, in cash. On October 5, 2001, as
standby purchaser, Mr. Crabbe purchased 1,894,118 shares of Common Stock and
tendered the purchase price for these shares, $662,941.30, in cash.
As of October 5, 2001, rights for the purchase of all 26,869,770 shares
offered in the rights offering had been purchased.
POSSIBLE DILUTION FROM ADDITIONAL ISSUANCES OF SECURITIES
Since the Company's revenue is not sufficient to support our
operations, the Company currently anticipates the need to raise funds through
private or public offerings of our equity or convertible debt securities. The
issuance of additional equity or convertible debt securities will have the
effect of reducing the percentage ownership of the Company's current
stockholders. In addition, these equity or convertible debt securities may have
additional rights, preferences or privileges to those of the Company's common
stock, such as registration rights. In the event the Company is required to
raise additional funds to support its operations, the Company cannot assure its
stockholders that the additional funds will be available on terms favorable to
the Company, or at all. If adequate funds are not available or are not available
on acceptable terms, the Company may not be able to fund operations or otherwise
continue as a going-concern.
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ITEM 6. 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 and Section 21E of the Exchange Act, such as statements relating
to plans for future expansion, capital spending and financing sources. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made herein. These risks and uncertainties include, but are not limited to,
those relating to liquidity requirements for the Company, the continued growth
of the gaming industry, the success of the Company's product-development
activities, vigorous competition in the gaming industry, dependence on existing
management, gaming regulations (including actions affecting licensing), 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.
OVERVIEW
The Company is headquartered in Las Vegas, Nevada, and develops,
manufactures and distributes products that increase security, productivity and
profitability for the gaming industry. Its principal products are an
electronically identified coin collection and accounting system for gaming
machines, a bill canister tracking system for gaming machines, and
computer-based card shuffling devices. The Company is developing advancements
for its present product line as well as additional technology for the expansion
of its products to the vending and amusement industries.
Until January 2000, the Company was in the development stage and had
limited sales of its products. Prior to January 2000, the Company was
characterized as a "development stage company" performing research and
development, product prototyping, field testing of products, development of
manufacturing capabilities, inventory acquisition, development of distribution
channels, staffing and obtaining a building with sufficient capacity to house
future growth. During 2000, the Company had sufficient sales development and
revenue growth such that the Company was considered an operating company.
Although the Company anticipates significant sales development, revenue and
profit growth, there is no guarantee that the Company will generate sufficient
revenue, cash flow or profit 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.
In December 1998, the Company received its first gaming approval from
the Nevada Board for the Random Ejection Shuffler(TM). As of March 15, 2002, the
Company had sold or placed under rental contracts 572 of its shufflers. As for
the SecureDrop(TM) System, gaming regulators have issued to the Company key
product approvals, which include approvals or approval waivers of the
SecureDrop(TM) 2000 and Mobile Scale Systems from the Illinois (August 2000),
Nevada (October 2000), Iowa (November 2000), Mississippi (November 2000),
Michigan (December 2000) and Louisiana (March 2001) regulators. The
SecureDrop(TM) Soft Count Module has received approval waivers in Illinois
(August 2001) and Nevada (July 2001). In addition, the Company has 19 tribal
gaming licenses, of which 12 are in California. Additional license applications
are pending and should open up additional markets in 2002. Although the Company
believes that customer interest in both the shufflers and SecureDrop(TM)
products continues to be strong, there is no assurance that the Company will be
successful in placing additional shufflers or SecureDrop(TM) products in the
future.
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ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect reported amounts and disclosures, some of
which may require revision in future periods. Actual results could differ from
these estimates. The following is a summary of what management believes are the
critical accounting policies related to the Company. The application of these
policies, in some cases, requires the Company's management to make subjective
judgments regarding the effect of matters that are inherently uncertain. See
Note 1, "Significant Accounting Policies," to the Company's Financial Statements
included in Item 7 for a more detailed discussion of the Company's accounting
policies.
REVENUE RECOGNITION. The Company recognizes revenue from the sale of
its products upon installation at customer locations. Revenue from rentals of
shufflers is recorded as revenue at the first of each month in accordance with
lease terms. Sales returns and allowances are recorded after returned goods are
received and inspected. The Company plans to provide currently for estimated
product returns arising therefrom.
INVENTORY. Inventory is stated at the lower of cost or market using the
first in, first out method. Finished goods include raw materials, direct labor
and overhead. Raw materials include purchase and delivery costs.
PROPERTY AND EQUIPMENT. Property and equipment are carried at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. When assets are retired or otherwise disposed of,
the cost and the related accumulated depreciation are removed from the accounts,
and any resulting gain or loss is recognized in operations for the period. The
cost of repairs and maintenance is charged to operations as incurred, and
significant renewals or betterments are capitalized. The useful lives for office
equipment, computer software and leasehold improvements is five years and for
tooling is three years.
NEW ACCOUNTING PRONOUNCEMENTS. In June 2001, the Financial Accounting
Standards Board issued SFAS No. 141, Business Combinations ("SFAS 141"), which
is required to be adopted for business combinations initiated after June 30,
2001. SFAS 141 prohibits the use of the pooling of interest method of
accounting. The Company's management believes that the adoption of SFAS No. 141
has had no impact on the Company for the year ended December 31, 2001. In June
2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and
Other Intangible Assets ("SFAS 142"), which is required to be adopted for fiscal
years beginning after December 15, 2001. The Company plans to adopt SFAS 142
during the first quarter of its 2002 fiscal year. SFAS 142 establishes
accounting rules for recording goodwill and other intangible assets. It
prohibits the amortization of goodwill and intangible assets that have an
indefinite useful life. Such assets are required to be tested for impairment on
an annual basis. Company plans to follow the requirements of SFAS 142 to account
for any merger that it may enter into. The Company's management believes that
the adoption of SFAS No. 142 has had no impact on the Company for the year ended
December 31, 2001.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUES. For the year ended December 31, 2001, the Company generated
total revenues of $2,250,777 compared to $4,432,769 for the year ended December
31, 2000, a decrease of 49.2%. The revenues for the year ended December 31,
2001, consisted of shuffler rentals of $1,181,899, shuffler sales of $93,330,
SecureDrop(TM) sales of $953,026, interest income of $11,755 and miscellaneous
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other income of $10,767. The decrease in total revenues is due primarily to the
reduced demand for the SecureDrop(TM) products as customers awaited the
completion of the soft count module and the reduced sales related to the
Company's shufflers.
COST OF SALES. For the year ended December 31, 2001, cost of sales
decreased $2,039,214 to $2,956,425 compared to $4,995,639 for the year ended
December 31, 2000, a decrease of 40.8%. This decrease was primarily due to the
reduced costs resulting from the reduced demand for the SecureDrop(TM) products
as customers awaited the completion of the soft count module and the reduced
sales related to the Company's shufflers. Cost of sales included: SecureDrop(TM)
cost of sales of $739,553, Shuffler cost of sales of $46,806, Shuffler
depreciation of $438,940, Shuffler service costs of $928,729, and manufacturing
costs of $802,397.
GROSS MARGIN. The gross margin on revenue was ($705,648) for the year
ended December 31, 2001 compared to ($562,870) for the year ended December 31,
2000. The gross margin percentage was (31.3%) for the year ended December 31,
2001 compared to (12.7%) for the year ended December 31, 2000. The increases in
gross margin deficit of $142,778 and in negative gross margin percentage were
due primarily to the decrease in revenues generated by the lower sales of the
SecureDrop(TM) product line and the Company's shufflers.
GENERAL AND ADMINISTRATIVE EXPENSES. For the year ended December 31,
2001, general and administrative expenses increased approximately $151,241, or
4%, to $3,768,560 compared to $3,617,319 for the year ended December 31, 2000.
For the year ended December 31, 2001, general and administrative expenses
primarily included: salaries and related costs of $1,298,930; advertising and
marketing costs of $43,742; consulting services of $49,465; cost of gaming
industry shows of $43,117; travel and entertainment costs of $411,833; printing
and office expenses of $139,494; rent and maintenance expense of $625,980;
supplies of $200,400; legal expense of $239,214; insurance expenses of $114,098;
and other expense of $227,284. For additional information regarding the
Company's general and administrative expenses, see Note 11 to the Company's
financial statements. In addition, for the year ended December 31, 2001, the
Company had depreciation and amortization of $807,544 and amortized deferred
interest of $353,531 compared to $817,692 and $314,117, respectively, for the
year ended December 31, 2000.
RESEARCH AND DEVELOPMENT EXPENSES. For the year ended December 31,
2001, research and development expenses were $1,364,264 compared to $1,260,684
for the year ended December 31, 2000, an increase of $103,580, or 8.2%. The
increase in research and development expenses was primarily due to continued
testing and development of the products related to the SecureDrop(TM) Soft Count
Module and continued development of the Company's specialty shuffler.
INTEREST EXPENSE. For the year ended December 31, 2001, the Company
incurred interest expenses of $1,727,618 compared to $1,213,824 for the year
ended December 31, 2000, an increase of $513,794, or 42.3%. This increase of
$513,794 was primarily attributable to the increased borrowings of the Company.
NET LOSS. For the year ended December 31, 2001, the Company had a net
loss of $7,566,090, an increase of $911,393, compared to a net loss of
$6,656,561 for the year ended December 31, 2000. The increase in net loss was
primarily due to lower revenues related to the Company's the SecureDrop(TM) and
shuffler products than the prior year combined with continuing operating
expenses. Basic loss per share was $0.34 for the year ended December 31, 2001,
compared to $0.62 for the year ended December 31, 2000. The reduction in basic
loss per share reflects the additional shares issued by the Company pursuant to
its rights offering in 2001 which had the effect of distributing the Company's
losses over a greater number of shares.
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LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW. Because of the Company's efforts to transition from a
development stage company to an operating company, it has generated substantial
cash flow deficits from operations, including cash used in operating activities
of $5,598,153 and $5,099,493 in the years ended December 31, 2001 and 2000,
respectively. In addition, to fund its development activities, the Company been
provided cash in financing activities of $6,430,282 and $4,878,392 in the years
ended December 31, 2001 and 2000, respectively. Consequently, the Company has
been substantially dependent on cash from financing activities to fund its
development and operating activities. The Company will continue to require cash
from financing activities for both its current operating needs and to fund its
anticipated expansion into non-gaming areas until operations begin to generate
sufficient cash flow to provide for such cash requirements.
WORKING CAPITAL. At December 31, 2001, the Company had cash, cash
equivalents and investments of $866,998 compared to $432,070 at December 31,
2000. At December 31, 2001, the Company's working capital was a deficit of
$2,940,604 compared to a deficit of $1,423,868 at December 31, 2000. At December
31, 2001, the Company's current ratio, I.E. the ratio of current assets to
current liabilities, was 0.49:1 compared to 0.50:1 at December 31, 2000. During
the year ended December 31, 2001, the Company relied substantially upon loans
from certain stockholders and directors and other private sources of debt and
equity capital of $4,029,402. Until the Company's normalized sales levels are
achieved and the Company's sales are sufficient to sustain its operations, the
Company will be relying upon loans from the Company's principal stockholder and
other directors, and other private and institutional sources of debt and equity
capital for working capital purposes. Despite such reliance, neither the
Company's principal stockholder nor the Company's directors are obligated to
provide additional financing to the Company, and the Company's principal
stockholder and directors are free to decline to make additional financings to
Company at any time. In such event, the Company may have substantial
difficulties in raising additional financings.
LEASE FINANCING. For the three years ended December 31, 2001, the
Company has received proceeds of $1,335,306 from certain lease financing with an
unrelated leasing company whereby the Company sold and leased back most of its
furniture, equipment, tooling, and shufflers. These leases were not recorded as
sales because the leases included a mandatory buy back provision.
CASH USED IN OPERATING ACTIVITIES. For the year ended December 31,
2001, net cash used in operating activities was $5,598,153 compared to
$5,099,492 for the year ended December 31, 2000. The cash used in operating
activities was offset by depreciation and amortization of $807,544 compared to
$817,692 for the year ended December 31, 2000; amortization of deferred interest
of $353,531 for the year ended December 31, 2001 compared to $314,117 for the
year ended December 31, 2000; a decrease in accounts payable of $386,085 for the
year ended December 31, 2000 compared to an increase of $99,450 for the year
ended December 31, 2000; increases in accrued expenses of $87,069 for the year
ended December 31, 2001 compared to $464,570 for the year ended December 31,
2000; increases in customer deposits of $601,320 compared to $110,185 for the
year ended December 31, 2000; decreases in inventory of $24,932 for the year
ended December 31, 2001, compared to a decrease of $103,190 for the year ended
December 31, 2000; an increase in prepaid expenses of $216,791 for the year
ended December 31, 2001, compared to a decrease of $235,799 for the year ended
December 31, 2000 and an increase of other assets of $34,862 for the year ended
December 31, 2001 compared to $0 for the year ended December 31, 2000. Cash
usage was decreased by a decrease in accounts receivable of $731,279 for the
year ended December 31, 2001 compared to an increase of $587,915 for the year
ended December 31, 2000.
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NET CASH USED IN OPERATING ACTIVITIES. For the year ended December 31,
2001, net cash used in operating activities was $5,598,153 compared to
$5,099,492 for the year ended December 31, 2000, an increase of $498,661. The
net cash used in operating activities for the year ended December 31, 2001
reflected a net loss of $7,566,090, offset, in part by, depreciation and
amortization of $807,544, amortization of deferred interest of $353,531 and
adjustments in assets and liabilities of $806,862. The increase of $498,661 in
net cash used in operating activities for the year ended December 31, 2001
compared to the year ended December 31, 2000 was due, in part, to the increase
of $909,529 in net loss, the increase of $216,791 in prepaid expenses and the
decrease of $386,085 in accounts payable, offset, in part, by the decrease
731,279 decrease in accounts receivable and the $601,320 in customer deposits.
NET CASH PROVIDED BY INVESTING ACTIVITIES. For the year ended December
31, 2001, the Company used net cash in investing activities of $397,201,
compared to $516,754 for the year ended December 31, 2000. The net cash used in
investing activities for the year ended December 31, 2001 consisted of acquired
plant and equipment valued at $72,867, increased patent and trademark expenses
of $209,620 and an increase in deposits of $114,714. The net cash used in
investing activities for the year ended December 31, 2000 consisted of acquired
plant and equipment valued at $406,563, increased patent and trademark expenses
of $26,747 and an increase in deposits of $83,443.
NET CASH USED IN FINANCING ACTIVITIES. For the year ended December 31,
2001, net cash from financing activities was $6,430,282 compared to $4,878,392
for the year ended December 31, 2000, an increase of $1,551,890. The increase is
primarily attributable to the Company's increased cash needs as the Company
experienced delays in the sales of its SecureDrop(TM) products and lower sales
of its shuffler products. The cash from financing activities consisted of
$4,169,092 from the sale of common stock, $4,029,402 in convertible debt and
notes, and proceeds of $1,335,306 from leases, offset by repayment of leases of
$1,824,118, payoffs of notes and the line of credit of $716,000 and repayment of
stockholder loans of $563,400.
PRIVATE PLACEMENT OF COMMON STOCK. On April 14, 2000, the Company
entered into subscription agreements with four individuals whereby these
individuals agreed to purchase in the aggregate 108,655 shares of common stock
for $2.60 per share for an aggregate subscription amount of $282,503. The
Company received the funds on April 18, 2000, and used the proceeds from this
private placement for general working capital purposes. The exemptions from
registration relied upon by the Company for this private placement was Section
4(2) of the Securities Act and Rule 506 of Regulation D.
CONVERTIBLE DEBT. On May 25, 2000, the Board authorized a private
placement of $2.2 million of convertible notes. The convertible notes accrue
interest at 9.5% per annum, mature two years from the date of issuance (where
the holder has the discretion to extend maturity date for up to three one-year
periods) and are convertible into shares of the Company's common stock one year
after issuance at a rate of $2.60 per share. The $2.2 million of convertible
notes are convertible into a maximum of 846,153 shares of the Company's common
stock. In addition, for each convertible note of $50,000, the Company issued a
warrant to purchase 12,500 shares of the Company's common stock with an exercise
price of $2.60.
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With the approval of the Board, certain members of the Board and a
controlling stockholder, the Huson Trust, participated in the Company's private
placement of convertible notes. The following table summarizes the purchases of
convertible notes by the relevant members of the Board and certain stockholders.
NAME AMOUNT WARRANTS MATURITY CONVERTIBILITY
------------------------------ -------------- -------------- ---------------------- -----------------------
The James E. Crabbe $1,000,000 250,000 May 30, 2002 May 30, 2001
Revocable Trust
VIP's Industries, Inc. $200,000 50,000 May 31, 2002 May 31, 2001
Eric Huson $100,000 25,000 June 1, 2002 June 1, 2001
The Huson Trust $150,000 37,500 June 9, 2002 June 9, 2001
Richard S. Jaslow $100,000 25,000 July 20, 2002 July 20, 2001
Richard S. Jaslow $100,000 25,000 August 18, 2002 August 18, 2001
Ronald O. Keil $100,000 25,000 September 28, 2002 September 28, 2001
Richard S. Jaslow $50,000 12,500 November 10, 2002 November 10, 2001
------------------------------ -------------- --------------
TOTAL $1,800,000 450,000
The $200,000 in convertible notes purchased by and the warrants to
purchase 50,000 shares of the Company's common stock issued to VIP's Industries,
Inc., an entity controlled by the Chairman of the Board, were in exchange for
the cancellation of a prior convertible note dated March 22, 2000 in the
original principal amount of $200,000.
In addition, on February 21, 2002, the Company's Board of Directors
authorized a private placement of $4,999,995 of convertible notes with attached
warrants. The convertible notes accrue interest at 9.5% per annum, mature one
year from the date of issuance (where the holder has the discretion to extend
maturity date for up to four one-year periods) and are convertible into shares
of the Company's common stock one year after issuance at a rate of $.35 per
share. For each convertible note of $49,999,95, the Company will issue a warrant
to purchase 12,500 shares of the Company's common stock with an exercise price
of $0.35. The Company has not yet placed any convertible notes pursuant to this
private placement.
EQUIPMENT FINANCING. For the 12 months ending December 31, 2001, the
Company received proceeds of $1,335,306 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 a term of 36 to 39 months.
SHORT TERM NOTES PAYABLE. For the 12 months ending December 31, 2001,
the Company received proceeds of $4,029,402, from members of the Board, a
current stockholder and an individual. The terms of the notes range from 9% to
10.5%. The notes also range from 16 months to 24 months in term. As of December
31, 2001, $3,354,000 of the short term notes was applied to the purchase price
of shares in the rights offering and $100,000 of the short term notes was
repaid. As a result, the Company had outstanding $575,402 of the short term
notes.
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CONTRACTUAL CASH OBLIGATIONS. The Company's contractual cash
obligations under its debt agreements, capital leases and operating leases for
the next five years are as follows:
PAYMENTS DUE BY PERIOD
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
------------------------- ---------------- ------------------ ------------------ ----------------- ------------------
Debt Agreements $ 3,223,868 $ 620,791 $ 2,603,077 $ - $ -
Capital Leases 4,848,793 2,721,607 2,127,186 - -
Operating Leases 3,189,095 611,015 1,546,848 1,031,232 -
------------------------- ---------------- ------------------ ------------------ ----------------- ------------------
TOTAL $ 11,261,756 $ 3,953,413 $ 6,277,111 $ 1,031,232 $ -
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 2002 through cash on hand, cash flow from operations, 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. If we continue to generate
significant losses from our operations and we are not able to located additional
sources of liquidity, we may be unable to continue as a going concern.
RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS
SFAS No. 130, "Reporting Comprehensive Income", establishes guidelines
for all items that are to be recognized under accounting standards as components
of comprehensive income to be reported in the financial statements. The
statement is effective for all periods beginning after December 15, 1997, and
reclassification financial statements for earlier periods will be required for
comparative purposes. To date, the Company has not engaged in transactions which
would result in any significant difference between its reported net loss and
comprehensive net loss as defined in the statement.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides
authoritative guidance on when internal-use software costs should be capitalized
and when these costs should be expensed as incurred. Effective January 1, 1998,
the Company adopted SOP 98-1. Costs capitalized by the Company during the year
ended December 31, 1998, in accordance with these guidelines, were not
significant.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which is required to be adopted in years beginning after June 15, 1999. SFAS 133
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company has not
yet determined what the effect of SFAS 133 will be on earnings and the financial
position of the Company, however it believes that it has not to date engaged in
significant transactions encompassed by the statement.
-27-
Effective December 31, 1998, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 superseded SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise. SFAS 131 establishes standards for the way that public
business enterprises report information concerning operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS 131 did not affect
results of operations or financial position. To date, the Company has operated
in one business segment only.
Effective December 31, 1998, the Company adopted the provisions of SFAS
No. 132, Employers' Disclosures about Pensions and Other Post-retirement
Benefits ("SFAS 132"). SFAS 132 supersedes the disclosure requirements in SFAS
No. 87, Employers' Accounting for Pensions, and SFAS No. 106, Employers'
Accounting for Post-retirement Benefits Other Than Pensions. The overall
objective of SFAS 132 is to improve and standardize disclosures about pensions
and other post-retirement benefits and to make the required information more
understandable. The adoption of SFAS 132 did not affect results of the Company's
operations or financial position.
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 ANNUAL REPORT. IN ADDITION TO THE OTHER INFORMATION CONTAINED
HEREIN, INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS.
ADDITIONAL FINANCING WILL BE REQUIRED. Since the Company's revenue is
not sufficient to support our operations, the Company currently anticipates the
need to raise funds through private or public offerings of our equity or
convertible debt securities. The issuance of additional equity or convertible
debt securities will have the effect of reducing the percentage ownership of the
Company's current stockholders. In addition, these equity or convertible debt
securities may have additional rights, preferences or privileges to those of the
Company's common stock, such as registration rights.
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 2002 through cash on hand, cash flow from operations, and cash from
the Company's recent private placement of convertible debentures. In the event
that such sources are insufficient, 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. If adequate funds are not available or are not available on
acceptable terms, the Company may not be able to fund operations or otherwise
continue as a going-concern.
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 have been limited to analyzing the gaming industry, consulting with
persons in the gaming industry, negotiating interim financing arrangements,
developing products, establishing a distribution network for its products,
marketing its products to the gaming industry, manufacturing its products and
commencing product sales. Although the Company anticipates significant sales
development and revenue growth during 2002, 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.
-28-
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 Hard Count Module 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.
RELIANCE ON THE GAMING INDUSTRY. Nearly all of our revenue is generated
by the sale or placement of our products to existing gaming properties. The
economic health of the gaming industry, and, therefore, our revenues, are
affected by a number of factors beyond our control, including general economic
conditions, levels of disposable income of gaming patrons, acts of terrorism and
anti-terrorism efforts, increased transportation costs resulting in decreased
travel by gaming patrons, changes or proposed changes in tax laws, legal and
regulatory issues affecting the development, operation and licensing of gaming
properties and competitive conditions in the gaming industry. These factors may
impact the demand for the Company's products and could materially affect
revenues that the Company realizes on the sale or placement of our products.
EFFECT OF EXTRAORDINARY EVENTS, SUCH AS TERRORIST ATTACKS, ON OUR
BUSINESS. Extraordinary events, such as terrorist attacks or acts of war, may
cause damage or disruption to the Company and its employees, facilities and
customers, which, in turn, could significantly impact the Company's revenues,
costs and expenses, and financial condition. The terrorist attacks that took
place in the United States on September 11, 2001 were unprecedented events that
have created many economic and political uncertainties, especially to the gaming
industry, some of which have materially adversely affected the Company's
business, results of operations, and financial condition and may do so again in
the future. In particular, the gaming industry has been affected by the downturn
in the tourist industry as a result of the September 11 attacks. Because our
business is closely tied to the gaming industry, the long-term effects on the
Company from the September 11, 2001 attacks are unknown. The potential for
future terrorist attacks, the national and international responses to terrorist
attacks, and other acts of war or hostility have created many economic and
political uncertainties, which could materially adversely affect our business,
results of operations, and financial condition in ways that we currently cannot
predict.
The strength and profitability of our business depends on the overall
demand for our products and growth in the gaming industry. Further, gaming
industry revenues are sensitive to general economic conditions and generally
rise or fall more rapidly in relation to the condition of the overall economy.
Although the Company cannot accurately estimate the economic impact of the
recent terrorist attacks at this time, the gaming industry has been negatively
affected by the reduction in air travel and tourism, and the Company expects
that any significant decline in the economic health or growth of the lodging
industry will reduce demand for our products.
-29-
REGULATION. The gaming industry is a highly regulated industry and is
subject to numerous statutes, rules and regulations administered by the gaming
commissions or similar regulatory authorities of each jurisdiction. Generally,
the Company and other entities which seek to introduce gaming products or
concepts into such jurisdictions may be required to submit applications relating
to their activities or products (including detailed background information
concerning controlling persons within their organization) which are then
reviewed for approval. The Company may incur significant expenses in seeking to
obtain licenses for its gaming products and concepts, and no assurance can be
given that its products will be approved in any particular jurisdiction. The
failure to obtain such approval in any jurisdiction in which the Company may
seek to introduce its products or concepts could have a material adverse effect
on the Company's business.
INFLUENCE BY CONTROLLING STOCKHOLDERS. The executive officers and
members of the Board beneficially own 35,697,088.5 shares of common stock, or
approximately 86.95% of the outstanding shares of 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 only
recently completed development and begun distribution of the shuffler 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.
-30-
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. Persons should not invest unless they can afford to lose their
entire investment. There are material risks in connection with the Company's
common stock.
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. See Part I. "Item 1.
Description of Business - Intellectual Property."
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 an employment agreement
with Steven J. Blad and seven other 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.
-31-
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; (d)
international currency fluctuations; and (e) the possibility of future terrorist
attacks.
"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.
-32-
ITEM 7. FINANCIAL STATEMENTS
Independent Auditors' Report
Balance Sheet at December 31, 2001
Statements of Operations for the Years Ended December 31, 2001 and
2000.
Statements of Changes in Stockholders' Equity for the Period from
December 31, 1999 to December 31, 2001.
Statements of Cash Flows for the Years Ended December 31, 2001 and
2000.
Notes to Consolidated Financial Statements
-33-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
VendingData Corporation
We have audited the balance sheet of VendingData Corporation as of December 31,
2001, and the related statements of income, changes in stockholders' equity, and
cash flows for each of the two years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 VendingData Corporation as of
December 31, 2001, and the results of its operations and cash flows for each of
the two years in the period then ended, in conformity with generally accepted
accounting principles.
James E. Scheifley & Associates, P.C.
Certified Public Accountants
Englewood, Colorado
February 22, 2002
-34-
VENDINGDATA CORPORATION
BALANCE SHEET
DECEMBER 31, 2001
ASSETS
Current assets:
Cash $ 866,998
Accounts receivable, trade 159,065
Accounts receivable - other 40,438
Inventories 1,514,073
Prepaid expenses 271,933
-------------
Total current assets 2,852,507
Property and equipment, at cost, net of
accumulated depreciation of $2,081,582 2,150,291
Intangible assets, at cost, net of
accumulated amortization of $131,606 403,078
Other Assets 34,862
Deferred interest 542,790
Deposits 705,980
-------------
$ 6,689,508
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of leases payable 2,721,607
Accounts payable 566,427
Accrued expenses 441,538
Accrued Wages 221,718
Accrued interest 338,457
Shareholder loans - due currently 620,791
Customer deposits 882,573
-------------
Total current liabilities 5,793,111
Leases payable - non-current 2,127,186
Convertible debt 2,603,077
Stockholder loans - non-current 16,000
-------------
Total Liabilities 10,539,374
Stockholders' equity:
Common stock, $.001 par value,
80,000,000 shares authorized,
38,129,072 shares issued and outstanding 38,129
Additional paid-in capital 26,689,477
Deficit accumulated during development stage (30,557,860)
-------------
Total stockholders' equity (3,849,866)
-------------
$ 6,689,508
=============
See Accompanying Notes to Financial Statements
-35-
VENDINGDATA CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
December 31, December 31,
2001 2000
------------ ------------
SecureDrop(TM)sales $ 953,026 $ 2,594,430
Shuffler sales 93,330 667,670
Shuffler rentals 1,181,899 1,056,780
Game rentals 0 67,969
Other income 22,522 45,920
------------ ------------
2,250,777 4,432,769
Cost of sales 2,956,425 4,995,639
------------ ------------
Gross margin (705,648) (562,870)
General and administrative 3,768,560 3,617,319
Research and development 1,364,264 1,260,684
------------ ------------
5,132,824 4,878,003
------------ ------------
(Loss) from operations (5,838,472) (5,440,873)
Interest expense 1,223,125 955,481
Interest expense - related parties 504,493 258,343
------------ ------------
1,727,618 1,213,824
(Loss) before income taxes (7,566,090) (6,654,697)
Provision for income taxes - 1,864
------------ ------------
Net (loss) $(7,566,090) $(6,656,561)
============ ============
Basic and diluted (loss) per share $ (0.34) $ (0.62)
============ ============
Weighted average shares outstanding 22,000,283 10,822,740
============ ============
See Accompanying Notes to Financial Statements
-36-
VENDINGDATA CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM DECEMBER 31, 1999 TO DECEMBER 31, 2001
Deficit
Accumulated
Additional Unpaid During
Common Stock Paid -in Stock Development
ACTIVITY Shares Amount Capital Subscriptions Stage Total
------------ ---------- ------------- -------------- ------------- -------------
Balance, December 31, 1999 10,746,144 10,746 16,956,362 -- (16,354,821) 612,289
Issuance of stock for cash in private
sale at $2.60 108,657 109 282,394 282,502
Net (loss) for the year -- -- -- -- (6,656,561) (6,656,561)
------------ ---------- ------------- -------------- ------------- -------------
Balance, December 31, 2000 10,854,801 10,855 17,238,756 (23,011,382) (5,761,771)
Issuance of stock for cash in private
sale at $.35 11,905,976 11,906 4,155,186 4,167,092
Stock issued for conversion of debt at
$.35 14,963,796 14,963 5,222.365 5,237,328
Stock issued for assets purchased 225,000 225 78,525 78,750
Exercise of common stock options 200,000 200 1,800 2,000
Stock reacquired and cancelled (20,500) (20) (7,155) (7,175)
Net (loss) for the year (7,566,090) (7,566,090)
Balance, December 31, 2001 38,129,072 38,129 26,689,477 (30,577,472) (3,849,866)
============ ========== ============= ============== ============= =============
See Accompanying Notes to Financial Statements
-37-
VENDINGDATA CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
December 31, December 31,
2001 2000
------------ ------------
Net (loss) $(7,566,090) $(6,656,561)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 807,544 817,692
Amortization of deferred interest 353,531 314,117
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 731,279 (587,915)
(Increase) decrease in inventory 24,932 103,190
(Increase) decrease in prepaid expenses (216,791) 235,779
(Increase) decrease in other assets (34,862) -
Increase (decrease) in accounts payable (386,085) 99,450
Increase (decrease) in accrued expenses 87,069 265,801
Increase (decrease) in customer deposits 601,320 110,185
Increase (decrease) in deferred charges - 198,769
------------ ------------
Total adjustments 1,967,937 1,557,069
------------ ------------
Net cash (used in)
operating activities (5,598,153) (5,099,492)
------------ ------------
Cash flows from investing activities:
Acquisition of plant and equipment (72,867) (406,563)
Increase in patents and trademarks (114,714) (26,747)
Increase in deposits (209,620) (83,443)
------------ ------------
Net cash (used in) investing activities (397,201) (516,754)
------------ ------------
Cash flows from financing activities:
Common stock sold for cash 4,169,092 282,502
Proceeds from leases 1,335,306 2,207,675
Proceeds from line of credit - 450,000
Proceeds from shareholder loans 4,029,402 1,716,000
Proceeds from convertible debt - 1,800,000
Repayment of leases (1,824,118) (1,543,572)
Repayment of notes and line of credit (716,000) -
Repayment of shareholder loans (563,400) (34,213)
------------ ------------
Net cash provided by
financing activities 6,430,282 4,878,392
------------ ------------
Increase (decrease) in cash 434,928 (737,854)
Cash and cash equivalents,
beginning of period 432,070 1,169,924
------------ ------------
Cash and cash equivalents,
end of period $ 866,988 $ 432,070
============ ============
See Accompanying Notes to Financial Statements
-38-
VENDINGDATA CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
December 31, December 31,
2001 2000
------------ ------------
Supplemental cash flow information
Cash paid for interest 1,345,782 608,088
Cash paid for income taxes - -
Non-cash financing activities:
Loans converted into common stock 5,237,328 -
Stock issued for asset acquisition 78,750 -
See Accompanying Notes to Financial Statements
-39-
VENDINGDATA CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1. ORGANIZATION
The Company was incorporated on September 21, 1995, in the State of
Washington and reorganized as a Nevada corporation with Articles of Merger filed
on April 1, 1999, in Washington and on April 2, 1999, in Nevada. The Company is
in the business of developing and distributing products related to the gaming
industry. The Company's principal products are electronic card shuffling
devices, an electronically identified coin collection bucket and collection cart
for use with coin operated gaming and vending devices and a "softcount"
collection system for control over soft currency from gaming and vending
devices. The Company operates principally in the United States of America,
however a portion of its revenues are derived from sales to customers in foreign
countries.
SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES
The preparation of the Company's financial statements requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from these estimates.
INVENTORY
Inventory is stated at the lower of cost or market using the first in,
first out method. Finished goods include raw materials, direct labor and
overhead. Raw materials include purchase and delivery costs. Inventory consisted
of the following at December 31, 2001:
Raw material $1,219,710
Work in progress 276,363
Finished goods 18,000
-----------
$1,514,073
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
When assets are retired or otherwise disposed of, the cost and the related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is recognized in operations for the period. The cost of repairs and
maintenance is charged to operations as incurred, and significant renewals or
betterments are capitalized.
Useful lives for property and equipment are as follows:
Office equipment 5 years
Computer software 5 years
Tooling 3 years
Leasehold improvements 5 years
INTANGIBLE ASSETS
-40-
The Company has applied for patents for certain of its products. Patent
and trademark costs (aggregating $534,684 at December 31, 2001) are amortized
using the straight-line method over a period of ten years. Amortization for the
years ended December 31, 2001 and 2000 amounted to $45,567 and $31,506,
respectively.
Organization costs aggregating $6,395 have been fully amortized.
The Company makes reviews for the impairment of long-lived assets and
certain identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Under SFAS
No. 121, an impairment loss would be recognized when estimated future cash flows
expected to result from the use of the asset, and its eventual disposition is
less than its carrying amount. No such impairment losses have been identified by
the Company for the 2001 and 2000 fiscal years.
EARNINGS PER SHARE (BASIC AND DILUTED)
Basic Earnings per Share ("EPS") is computed by dividing net income
available to common stockholders by the weighted average number of common stock
shares outstanding during the year. Diluted EPS is computed by dividing net
income available to common stockholders by the weighted-average number of common
stock shares outstanding during the year plus potential dilutive instruments
such as stock options, warrants and convertible debt. The effect of stock
options on diluted EPS is determined through the application of the treasury
stock method, whereby proceeds received by the Company based on assumed
exercises are hypothetically used to repurchase the Company's common stock at
the average market price during the period.
The basic 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. Loss per share is unchanged on a diluted basis since the assumed
exercise of common stock equivalents would have an anti-dilutive effect due to
the existence of operating losses.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of its products upon
installation at customer locations. Revenue from rentals of shuffler machines is
recorded as revenue at the first of each month in accordance with lease terms.
Sales returns and allowances are recorded after returned goods are received and
inspected. The Company plans to provide currently for estimated product returns
arising therefrom.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's short-term financial instruments consist of cash and cash
equivalents, accounts and loans receivable, and accounts payable and accruals.
The carrying amounts of these financial instruments approximate 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.
ADVERTISING
Advertising expenses are charged to expense upon first showing. Amounts
charged to expense were $43,742 and $70,886 for the years ended December 31,
2001 and 2000, respectively.
-41-
STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standard No. 123
("SFAS 123"), Accounting for Stock-Based Compensation, and beginning with the
Company's first quarter of 1996. Upon adoption of SFAS 123, the Company
continued to measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by APB No. 25,
Accounting for Stock Issued to Employees, and has provided in Note 7 pro forma
disclosures of the effect on net income and earnings per share as if the fair
value-based method prescribed by SFAS 123 had been applied in measuring
compensation expense.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations ("SFAS 141"), which is required to be adopted for
business combinations initiated after June 30, 2001. SFAS 141 prohibits the use
of the pooling of interest method of accounting.
Management believes that the adoption of SFAS No. 141 has had no impact
on the Company for the year ended December 31, 2001.
In June 2001, the Financial Accounting Standards Board issued SFAS No.
142, Goodwill and Other Intangible Assets ("SFAS 142"), which is required to be
adopted for fiscal years beginning after December 15, 2001. The Company plans to
adopt SFAS 142 during the first quarter of its 2002 fiscal year. SFAS 142
establishes accounting rules for recording goodwill and other intangible assets.
It prohibits the amortization of goodwill and intangible assets that have an
indefinite useful life. Such assets are required to be tested for impairment on
an annual basis. Company plans to follow the requirements of SFAS 142 to account
for any merger that it may enter into.
Management believes that the adoption of SFAS No. 142 has had no impact
on the Company for the year ended December 31, 2001.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
144"), which is required to be adopted for fiscal years beginning after December
15, 2001. SFAS 144 establishes accounting rules for recognition and measurement
of impairment losses of certain long-lived assets.
Management believes that the adoption of SFAS No. 144 has had no impact
on the Company for the year ended December 31, 2001.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 2001:
Furniture and fixtures 240,655
Manufacturing equipment 835,624
Equipment held for rent 2,407,400
Tooling 498,970
Leasehold improvements 249,224
-----------
$4,231,873
Accumulated depreciation and
amortization 2,081,582
-----------
$2,150,291
===========
-42-
Depreciation expense charged to operations amounted to $779,794 and
$779,794 for the years ended December 31, 2001 and 2000, respectively.
The Company owns tooling used in the manufacture of certain plastic
components of its shuffler product.
Substantially all of the Company's fixed assets secure leases described
in Note 6.
NOTE 3. LINE OF CREDIT
The Company has obtained a $1,200,000 line of credit based on a
percentage of the Company's accounts receivable and inventory. At December 31,
2000 the Company had drawn $450,000 of the line. The line was collateralized by
the accounts receivable, inventory and most other unencumbered assets. The line
of credit was repaid in full and cancelled during the year ended December 31,
2001.
NOTE 4. NOTES PAYABLE
During the year ended December 31, 2000, the Company received proceeds
of $1,740,000, from members of the Board of Directors, a current shareholder and
an individual. The interest rates for the notes ranged from 9% to 10.5%. During
the year ended December 31, 2000, the Company received additional note proceeds
from certain of these individuals and another investor amounting to $3,676,403
and made repayments in cash of $563,400. An additional $4,477,406 of the notes
was converted into common stock of the Company as discussed in Note 7. The
balance of the notes amounted to $636,791 at December 31, 2001 of which $620,791
is due currently. The remaining notes had interest rates of from 9.5% to 10%.
NOTE 5. CONVERTIBLE DEBT AND WARRANTS
On December 31, 1999, the Company had outstanding convertible notes to
individuals including certain shareholders amounting to $1,500,000. The notes
accrue interest at 9.5% and are convertible into shares of common stock at a
rate of $2.60 per share (subsequently reduced to $.35 per share). The $1.5
million of convertible notes are convertible into a maximum of 4,285,714 shares
of the Company's common stock. In addition, for each convertible note of
$50,000, the Company issued a warrant to purchase 9,100 shares of the Company's
common stock with an exercise price of $3.00. At December 31, 2001 the warrants
had expired.
On May 25, 2000, the Company's Board of Directors authorized a private
placement of $2.2 million of convertible notes. The convertible notes accrue
interest at 9.5% per annum, mature two years from the date of issuance (where
the holder has the discretion to extend maturity date for up to three one-year
periods) and are convertible into shares of the Company's common stock one year
after issuance at a rate of $2.60 per share (subsequently reduced to $.35 per
share). The $2.2 million of convertible notes are convertible into a maximum of
6,285,714 shares of the Company's common stock. In addition, for each
convertible note of $50,000, the Company issued a warrant to purchase 12,500
shares of the Company's common stock with an exercise price of $2.60.
-43-
With the approval of the Board, certain members of the Board and a
controlling stockholder, the Huson Trust, participated in the Company's private
placement of convertible notes. The following table summarizes the purchases of
convertible notes by the relevant members of the Board and certain stockholders.
NAME AMOUNT WARRANTS MATURITY CONVERTIBILITY
------------------------------- --------------- ------------- ---------------------- -----------------------
The James E. Crabbe Revocable $1,000,000 250,000 May 30, 2002 May 30, 2001
Trust
VIP's Industries, Inc. $200,000 50,000 May 31, 2002 May 31, 2001
Eric Huson $100,000 25,000 June 1, 2002 June 1, 2001
The Huson Trust $150,000 37,500 June 9, 2002 June 9, 2001
Richard S. Jaslow $100,000 25,000 July 20, 2002 July 20, 2001
Richard S. Jaslow $100,000 25,000 August 18, 2002 August 18, 2001
Ronald O. Keil $100,000 25,000 September 28, 2002 September 28, 2001
Richard S. Jaslow $50,000 12,500 November 10, 2002 November 10, 2001
------------------------------- --------------- -------------
TOTAL $1,800,000 450,000
The proceeds from the private placement of convertible debt were used
for general working capital purposes. The exemptions from registration relied
upon by the Company for these private placements were Section 4(2) of the
Securities Act of 1933 and Rule 506 of Regulation D.
During the year ended December 31, 2001, $696,923 of the notes was
converted into 1,991,209 shares of the Company's common stock.
NOTE 6. LEASES PAYABLE
From 1997 through 2001, the Company entered into financing type lease
transactions (capital leases) with leasing companies whereby the Company leased
or sold and leased back from the lessor all of its furniture and equipment,
tooling and some equipment.
Scheduled maturities of the obligations as of December 31, 2001 are as
follows:
Year Amount
2002 $ 2,983,020
2003 1,743,119
2004 514,610
-----------------
Minimum future lease payments 5,240,749
Less interest component (934,746)
Plus deferred interest 542,790
-----------------
Present value of future net
minimum lease payments 4,848,793
Less current portion (2,721,607)
-----------------
Due after one year $(2,127,186)
-44-
Property recorded under capital leases includes the following as of
December 31, 2001:
Capitalized leased equipment and
Shuffler machines, at cost $1,560,834
Furniture and equipment 355,095
Tooling 271,500
----------------
2,187,429
Less accumulated depreciation (1,098,158)
----------------
Total assets subject to capital leases $1,089,271
The leases contain provisions for mandatory buy back of the inventory
and equipment at the end of the initial terms of the leases. The future minimum
lease payments scheduled above include the buy out provisions due at the end of
each lease term. The net present value of the buy out provisions, $542,790 as of
December 31, 2001, has been included in other assets and represents additional
interest on the leases which will be amortized to interest expense during the
remaining lease terms.
NOTE 7. STOCKHOLDERS' EQUITY
On April 14, 2000 the Company entered into subscription agreements with
four individuals whereby these individuals agreed to purchase in the aggregate
108,567 shares of Common Stock for $2.60 per share for an aggregate subscription
amount of $282,503. The Company received the funds on April 18, 2000, and used
the proceeds from this private placement for general working capital purposes.
The exemptions from registration relied upon by the Company for this private
placement were Section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D.
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. All rights expired on or before 5:00 p.m., Las Vegas,
Nevada time on September 24, 2001. As of October 5, 2001, all 26,869,770 shares
offered in the rights offering had been purchased. Rightsholders purchased
8,566,584 shares of common stock. Rightsholders applied $1,883,325 in amounts
payable under short-term notes or bridge loans toward the purchase of the rights
shares, and the Company received a total of $1,114,977 in cash proceeds from the
exercise of these rights. The Company's standby purchaser, James E. Crabbe, the
Company's controlling stockholder and Chairman of the Board of Directors,
purchased 18,303,186 shares of common stock. Mr. Crabbe paid $3,052,115 in cash
and applied $850,000 in short-term notes and $2,504,000 in bridge loans for the
purchase of these shares.
CONVERTIBLE DEBT. For additional information with respect to the
Company's issuance of convertible debt in 2000, see Note 5.
-45-
STOCK OPTIONS. The Company has an aggregate of 320,000 options to
purchase common stock at $1.00 per share, 825,000 options to purchase common
stock at $1.50 per share, 430,500 options to purchase common stock at $2.50 per
share, and 114,100 options to purchase common stock at $2.60 and 2,000 options
to purchase common stock at $3.00 per share outstanding at December 31, 2001.
The following is a summary of transactions involving stock options:
Range of Average
Shares Exercise Prices Price
---------------------------------------------------------
Balance 12/31/99 1,173,500 $1.00 - $2.60 $1.67
Granted 169,500 $2.50 - $3.00 $2.75
Canceled 76,400 $2.60 $2.60
Balance 12/31/00 1,266,600 $1.00 - $3.00 $2.00
Granted 3,260,750 $.35 - $2.60 $.84
Canceled 354,000 $1.00 - $3.00 $1.15
Balance 12/31/01 4,173,350 $1.00 - $3.00 $1.08
The weighted average fair value at the date of grant for options
granted during 2001 and 2000 as described above was $0.13 per option in 2001 and
$0.71 per option in 2000. The fair value of the options at the date of grant was
estimated using the Black-Scholes model with assumptions as follows:
2001 2000
-------------- ----------------
Market value $.35 and $1.50 $2.50, $2.60 and
$3.00
Expected life in years 3 to 10 3
Interest rate 7% 7%
Volatility 10% 10%
Dividend yield 0.00% 0.00%
Stock based compensation costs would have increased pretax losses by
$436,660 ($0.02 per share) and $119,616 ($0.01 per share) in 2001 and 2000,
respectively, if the fair value of the options granted during those years had
been recognized as compensation expense.
WARRANTS. The Company has outstanding an aggregate of 450,000 warrants
to purchase common stock at $2.60 per share, 250,000 warrants to purchase common
stock at $2.50 per share and 225,000 warrants to purchase common stock at $10.00
per share outstanding at December 31, 2001.
NOTE 8. 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 which 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 net operating loss ("NOL") carryforward described
below has been fully reserved.
-46-
The Company has fully reserved approximately $10,140,000 for the asset
related to the portion of the loss carryforward that more likely than not will
not be utilized in future years. The reserve increased by approximately
$2,572,000 during the year ended December 31, 2001. To date, the Company has
generated taxable income in any of its years of operation and no tax liabilities
exist to utilize the NOL carryover.
At December 31, 2001, the Company had net operating loss carryforwards
aggregating approximately $29,824,755, which expire as follows:
2015: $ 172,303
2016: $ 1,721,318
2017: $ 2,534,394
2018: $ 3,040,719
2019: $ 8,133,370
2020: $ 6,656,561
2021: $ 7,566,090
The principal difference between the Company's book operating losses
and income tax operating losses results from the issuance of common stock during
1996, 1997 and 1988 for services, interest and options to purchase common stock
at less than fair market value in exchange for debt conversion rights and other
services.
NOTE 9. RELATED PARTY TRANSACTIONS
In August 1999, the Company issued a new agreement with Steve Blad,
CEO, effective January 1, 2000 to December 31, 2002. The agreement provides
monthly compensation of $23,500 through December 31, 2002, upon which time the
compensation is to be renegotiated. The agreement provides that 100,000 options
(exercisable at a price of $2.50 per share) be granted upon the effective date
of the agreement. The Company recorded compensation expense related to the
options granted for the excess of the fair value of the underlying common stock
at the grant date ($2.60 per share) over the exercise price of $2.50 per share
during January 2000. The agreement also provide for the granting of 100,000
options ($2.50 per share) for each year (2000, 2001, 2002) based upon the
Company meeting its goals provided by the Board of Directors. Options were
granted in January 2001 for 100,000 shares pursuant to the contract. The
exercise price of the January 2001 options was set by the Board of Directors at
$1.50 per share. No compensation expense was recorded in connection with the
options as the fair value of the underlying stock was considered to be
substantially less than $2.50 per share and subsequent sales of common stock for
cash were made for $.35 per share. In November 2001, the Company entered into a
First Amendment to Employment Agreement, which extended the term of the
employment agreement of Mr. Blad through December 31, 2004. The First Amendment
provides that 2,000,000 options (exercisable at a price of $.35 per share) be
granted upon the effective date of the First Amendment. Of the 2,000,000
options, 670,000 options were vested as of the effective date of the First
Amendment, 665,000 options will vest on the first anniversary of the First
Amendment, and another 665,000 options will vest on the second anniversary of
the First Amendment.
CONVERTIBLE DEBT. In 2000, the Company received proceeds of $1,600,000
from and issued warrants to purchase 400,000 shares of Common Stock to certain
directors and controlling stockholders of the Company as part of a private
placement of convertible notes. In addition, the Company cancelled a 10%
convertible note dated March 22, 2000 in the original principal amount of
$200,000 held by VIP's Industries, Inc., an entity controlled by the Chairman of
the Board of the Company, in exchange for the issuance of a 9.5% convertible
note dated May 31, 2000 and warrants to purchase 50,000 shares of Common Stock.
In 2001, the Company received proceeds of $4,029,402 from certain directors and
controlling stockholders of the Company as part of a private placement of notes
payable. In addition, the Company cancelled an aggregate of $5,237,328 in
connection with a rights offering of common stock to existing stockholders. The
Company also received an aggregate of $4,169,092 in cash for additional shares
sold pursuant to the rights offering. For additional information with respect to
the issuance of notes, shares and warrants to the certain directors and
controlling stockholders of the Company, see Notes 5 and 7.
-47-
NOTE 10. COMMITMENTS AND CONTINGENCIES
During October 1997, the Company entered into a license agreement
whereby the Company would develop and market an electronically identified coin
collection box for use with coin operated gaming devices. The agreement provided
for royalty payments to the licensor for use of certain intellectual property
associated with the project. The Company had the right to terminate the
agreement upon sixty days written notice to the licensor should it determine
that the technology may be unpatentable or that the licensed products are
uneconomical. The patent application was filed for this product in 1996, and
notice of patent issuance was dated February 8, 1999.
During the year ended December 31, 2001 the Company made a one-time
payment of $175,000 to the licensor for the purchase of the technology rights
and the patents associated with the project. In connection with the acquisition,
the licensor returned 20,500 shares of the Company's common stock that it had
previously been issued. The fair value of the stock received was $.35 per share
based upon the cash sale price of the stock.
BUILDING LEASE. In September 1999, the Company agreed to lease,
beginning November 1999, from the Company's then current landlord, a new
building containing approximately 58,000 square feet. Under the terms of the
lease agreement, the Company was relieved from all obligations under its
pre-existing lease agreement with the landlord on the earlier of December 1,
2000, or the date upon which an assignment of the former leased premises lease
agreement became effective. The term under the new lease agreement is for 86
months with one (1) option to extend for a five-year period. The new lease
agreement provides for no rent for the first seven (7) months of the lease. Base
monthly rent during months eight (8) through twenty-six (26) shall be $42,968,
and during months twenty-seven (27) through eighty-six (86), base monthly rent
shall be $42,968 per month plus an annual Consumer Price Index increase not to
exceed 3% per annum. The other material terms of the lease agreement are
substantially similar to those of the Company's pre-existing lease agreement.
The Company expects the new facility to be adequate for its facility
requirements for the foreseeable future. The Company also leases four office
locations in Idaho, Washington, Mississippi and Michigan. The monthly rent
attributed for these locations is $1,200, $1,245, $1,200 and $1,200
respectively. Rent expense was $601,326 and $559,376 for the years ended
December 31, 2001 and 2000, respectively.
The Company also leases certain office equipment under non-cancelable
operating leases having monthly rentals of $6,474.
Future minimum rentals, including escalation provisions, under the
leases are as follows:
2002 $573,262
2003 $551,870
2004 $515,616
2005 $515,616
2006 $515,616
Thereafter $558,584
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 $0.04 and $0.075 per unit sold. Amounts paid pursuant to the
licenses have not been material.
-48-
NOTE 11. SUPPLEMENTAL STATEMENT OF OPERATIONS INFORMATION
During the years ended December 31, 2001 and 2000, the Company incurred
$3,768,560 and $3,617,319 of general and administrative expenses respectively,
the components of which are as follows:
2001 2000
Salaries and related costs 1,298,930 1,377,808
Consulting services 49,465 25,421
Advertising / Marketing 43,742 87,354
Travel / Entertainment 411,833 370,770
Gaming Industry shows 43,117 420,698
Rent 524,120 354,020
Legal Expense 239,214 147,029
Depreciation & amortization 374,998 252,553
Telephone 90,863 -
Printing 17,449 5,334
Bad Debt 17,134 321,059
Supplies 200,405 -
Repairs & maintenance 101,860 -
Insurance 114,098 45,442
Sales Tax 14,048 97,767
Other Expenses 227,284 112,064
============== ==============
$3,768,560 $3,617,319
NOTE 12. SUBSEQUENT EVENTS
On February 21, 2001, the Company's Board of Directors authorized a
private placement of $4,999,995 of convertible notes on February 21, 2002. The
convertible debentures accrue interest at 9.5% per annum, mature one year from
the date of issuance (where the holder has the discretion to extend maturity
date for up to four one-year periods) and are convertible into shares of the
Company's common stock one year after issuance at a rate of $.35 per share. The
$4,999,995 of convertible notes are convertible into a maximum of 14,285,700
shares of the Company's common stock. In addition, for each convertible note of
$49,999.95, the Company will issue a warrant to purchase 12,500 shares of the
Company's common stock with an exercise price of $0.35. The Company has not yet
placed any convertible notes pursuant to this private placement.
-49-
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the Company's
current executive officers and directors.
NAME AGE POSITION
---------------------- -------- ---------------------------------------------------------------
Steven J. Blad 50 Chief Executive Officer, President, Director & Treasurer
James E. Crabbe 56 Chairman of the Board
Eric S. Huson 32 Director
Ronald O. Keil 69 Director
Bob L. Smith 64 Vice-Chairman of the Board
STEVEN J. BLAD joined the Company in October 1996 and served as Vice
President of Sales and Marketing until April 30, 1997, when he was named
President of the Company. Mr. Blad served in that position until May 27, 1998,
when he became Chief Executive Officer, President and Director of the Company.
Previously, 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 received a bachelor's degree in 1973 from Carson Newman. He obtained a
Masters of Education degree in 1975 from Southern Baptist Graduate School. From
1975 to 1976, Mr. Blad attended additional graduate studies at the University of
Alabama.
JAMES E. CRABBE became a member and Vice-Chairman of the Board on May
25, 2000 and was elected Chairman of the Board on August 16, 2001. Since 1980,
and until November, 2000, Mr. Crabbe has been the President of the Crabbe Huson
Group, Inc., an investment management company in Portland, Oregon. Mr. Crabbe
was granted a Series 63 Securities Dealer License in 1989 and earned a
bachelor's degree from the University of Oregon in 1967.
ERIC S. HUSON became a member of the Board on May 25, 2000. Mr. Huson
was an Equities Researcher with Despain & Coby LLC. Prior to working at Despain
& Coby, LLC, Mr. Huson was Operations Manager at Rendova Boats LLC, Port
Orchard, Washington. Mr. Huson has a bachelor's degree in History from Linfield
College.
RONALD O. KEIL has been a member of the Board since April 1999. Since
July 1999, Mr. Keil has owned and operated two supermarkets in San Diego,
California. Mr. Keil was also Managing Partner of RJL Properties, Inc., which
owned and operated four hotels and a mini-storage facility. In addition, Mr.
Keil owned a 142 room Holiday Inn in Idaho Falls and owned and operated Keil's
Food Stores, a regional chain of supermarkets in Washington and Oregon. Mr. Keil
is a founder and director of the Bank of Clark County, Oregon. He earned a
bachelor's degree in Business Administration from Lewis and Clark College and
has completed graduate work towards an MBA from the University of Oregon.
-50-
BOB L. SMITH joined the Board in May 1998 and has served as Chairman of
the Board from April 29, 1999 until August 16, 2001, when he became
Vice-Chairman of the Board. Mr. Smith also serves as Chairman of the Board and
Chief Executive Officer of VIP's Industries, Inc., a company co-founded by Mr.
Smith in 1968 that oversees restaurant, hotel and real estate development in
five Western states. In 1966, he founded the Bob L. Smith Real Estate Company,
and was also Real Estate Analyst and Marketing supervisor with the American Oil
Company. Mr. Smith serves on the Board of Directors of Centennial Bank and
Regency of Oregon (formerly Blue Cross and Blue Shield of Oregon), and
previously served on the Board of Directors of the Crabbe-Huson Funds, Inc., an
investment management company, and Flying J. Inc., an integrated oil company.
Mr. Smith received a bachelor's degree in Business Administration from the
University of Oregon in 1962.
The following section sets forth information regarding the key
employees of the Company.
NAME AGE POSITION
-------------------------- ------------ ----------------------------------------
Stacie L. Brown 31 Corporate Counsel
Robert G. Pietrosanto 40 President of Casinovations, Inc.
D. Dean Barnett 44 Vice President Sales
Kenneth R. Dickinson 46 Vice President SecureDrop(TM)Systems
William B. Roquemore 47 Vice President Manufacturing and Service
Joseph D. Corradino 52 Director of Shuffler Sales
*THE COMPANY'S CONTROLLER, DONALD CUNNINGHAM, IS HANDLING THE RESPONSIBILITY FOR
THE COMPANY'S FINANCIAL AFFAIRS UNDER THE DIRECTION OF THE CEO.
STACIE L. BROWN joined the Company in July 1999, as Corporate Counsel.
Previously, she was in private practice with Dickerson, Dickerson, Consul &
Pocker in Las Vegas, Nevada, from 1995 to 1999, where she assisted in the
representation of the Las Vegas Convention and Visitors Authority. Ms. Brown has
been admitted to the State Bar of Nevada and the District of Columbia Bar and is
admitted to practice before the U.S. District Court, District of Nevada, the
U.S. Courts of Appeal for the Ninth and District of Columbia Circuits and the
United States Supreme Court. Ms. Brown earned her Juris Doctor from the
University of Michigan Law School in 1995 and received a bachelor's degree from
Ball State University in 1992 majoring in French, Political Science and
Telecommunications.
ROBERT G. PIETROSANTO has been the President of Casinovations, Inc.
since September 6, 2000, and joined the Company in January 1999 as Director of
North American Sales. Prior to joining the Company, Mr. Pietrosanto was the
top-performing sales executive for Shuffle Master from 1992 to 1999. Before
joining Shuffle Master, Mr. Pietrosanto began his career in the gaming business
as a card dealer in 1984 and went on to work in several casinos, including
Binion's Horseshoe, the Continental, the Sands and the Showboat, holding various
key management positions. Mr. Pietrosanto studied business administration at
Alfred University in Alfred, New York from 1980 to 1983.
D. DEAN BARNETT has been Vice President Sales since August 1998 and has
over seven years of sales experience in the gaming industry. Mr. Barnett
formerly held the position of National Sales Manager for Shuffle Master from
1992 to 1997. Prior to his employment with Shuffle Master, he worked for Bally's
Las Vegas, from 1984 to 1992, as part of a special management team focused on
fraudulent player practices, such as card counting and shuffle tracking. Mr.
Barnett studied business management at the University of Nevada, Las Vegas from
1978 to 1980 and spent two years (1983 and 1984) in the National Football League
with the Denver Broncos as a tight end before injuries forced an early
retirement.
-51-
KENNETH R. DICKINSON has been Vice President SecureDrop(TM) Systems
since 1998. Before joining the Company, he was Engineering Manager at Bally
Gaming from 1989 to 1998, where he was responsible for the design and
development of Bally's first Touchscreen Lottery game and the GameMaker, the
first of its kind with a multi-game touch screen gaming device. Before entering
the gaming industry, Mr. Dickinson was in the video communications field from
1986 to 1989 as Director of Engineering for Datapoint Corporation in San
Antonio, Texas and was also an Engineering Manager for Interand Corporation in
Chicago, Illinois from 1981 to 1986. Mr. Dickinson assisted in developing the
"Telestrator," which gained fame as the CBS chalkboard seen every Sunday
afternoon on NFL football. Mr. Dickinson attended Michigan Technical University
and graduated in 1977.
WILLIAM B. ROQUEMORE joined the Company in January 1999, and serves as
Vice President Manufacturing and Service. Before joining the Company, Mr.
Roquemore worked for Softbank as Site Manager from 1997 to 1999, and served 20
years in the production and service areas of computer electronics manufacturing.
Mr. Roquemore earned a degree in Applied Electronics from the United Electronics
Institute in Dallas, Texas in 1978 and also studied manufacturing and quality
control at Richland College in Dallas, Texas in 1980.
JOSEPH D. CORRADINO joined the Company in November 2000 as Director of
Shuffler Sales. Mr. Corradino has over 26 years of casino experience and has
held positions in international and domestic casino management. Prior to joining
the Company, Mr. Corradino served as Vice President of Casino Operations for the
Santa Fe Hotel and Casino from 1993 to 2000. Before his employment with the
Santa Fe Hotel and Casino, he held numerous positions in the gaming industry,
including Casino Manager at the Hacienda Hotel from 1989 to 1993, Shift Manager
at the Sahara Hotel Casino from 1985 to 1989, and Casino and Assistant Casino
Manager at the Flamingo Beach Casino in the Netherland Antilles from 1983 to
1984. Mr. Corradino earned a bachelor's degree in Transportation, Tourism and
Travel from Niagara University in 1971.
COMPOSITION OF THE BOARD
The Board presently consists of five persons. Directors are to serve
until their successors are elected and have qualified. The Company's Bylaws
provide for a Board consisting of one to ten persons. Effective February 1,
2001, the Company reconfigured the Board through an amendment to its Bylaws,
which removed the classification of the Company's Board of Directors.
COMMITTEES OF THE BOARD
The Board has two standing committees, the Executive Committee, which
performs the functions of a compensation committee, and the Audit Committee.
The Executive Committee is comprised of Messrs. Blad, Crabbe and Smith.
This committee has the responsibility of reviewing the Company's financial
records to determine overall compensation and benefits for executive officers
and establishing and administering the policies which govern employee salaries
and benefit plans. The Audit Committee is comprised of Messrs. Keil and Huson.
This committee has the responsibility of recommending the firm that will serve
as the Company's independent public accountants, reviewing the scope and results
of the audit and services provided by the independent public accountants and
meeting with the Company's financial staff to review accounting procedures and
policies.
DIRECTOR COMPENSATION
Non-employee directors of the Company receive an attendance fee of $500
per meeting attended. In addition, non-employee directors receive stock options
to purchase 1,000 shares of common stock at the annual meeting at which they
were elected to serve as director and additional stock options to purchase 1,000
shares of common stock on January 1 of each successive year of service on the
Board. Directors who are employees of the Company or its subsidiaries do not
receive compensation for their services as directors.
-52-
MEETINGS OF THE BOARD
The Board generally meets quarterly, and in the year ended December 31,
2001, the Board held five meetings. A majority of the directors attended at
least 75% of the meetings held.
STOCK OPTION PLANS
1999 STOCK OPTION PLAN
The Company's 1999 Stock Option Plan (the "1999 Plan") was adopted by
the board on January 5, 1999, and approved by the stockholders on March 29,
1999. The 1999 Plan provides the Company with the vehicle to grant to employees,
officers and consultants stock options and bonuses in the form of stock and
options. Under the 1999 Plan, the Company can grant awards for the purchase of
up to 500,000 shares of the Company's common stock in the aggregate, including
"incentive stock options" within the meaning of Section 422 of the United States
Internal Revenue Code of 1986 and non-qualified stock options. To date, the
Company has issued options to purchase 687,750 shares of common stock under the
1999 Plan, 232,900 of which have reverted back to the 1999 Plan, and 454,850 of
which are outstanding. The Company's executive committee has authority to
determine the persons to whom awards will be granted, the nature of the awards,
the number of shares to be covered by each grant, the terms of the grant and
with respect to options, whether the options granted are intended to be
incentive stock options, the duration and rate of exercise of each option, the
option price per share, the manner of exercise and the time, manner and form of
payment upon exercise of an option.
DIRECTORS' STOCK OPTION PLAN
The Company's Directors' Stock Option Plan (the "Directors' Plan") was
adopted by the board on December 13, 1999, and approved by the stockholders on
July 14, 2000. The Directors' Plan provides the Company with the vehicle to
grant to directors stock options and bonuses in the form of stock and options.
Under the Directors' Plan, the Company can grant awards for the purchase of up
to 100,000 shares of the Company's common stock in the aggregate, including
"incentive stock options" within the meaning of Section 422 of the United States
Internal Revenue Code of 1986 and non-qualified stock options. To date, the
Company has issued options to purchase 28,000 shares of common stock under the
Directors' Plan, of which 26,000 remain outstanding and 2,000 have been
cancelled. The Directors' Plan committee, comprised of Messrs. Crabbe and Smith,
has authority to determine the number of shares to be covered by each grant, the
terms of the grant and with respect to options, whether the options granted are
intended to be incentive stock options, the duration and rate of exercise of
each option, the option price per share, the manner of exercise and the time,
manner and form of payment upon exercise of an option.
SECTION 16 BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and persons who own more than 10% of the Company's common
stock (collectively, "Reporting Persons") to file with the SEC initial reports
of ownership and changes in ownership of the Company's common stock. Reporting
Persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) reports they file.
-53-
To the Company's knowledge, based solely on its review of the copies of
such reports received or written representations from certain Reporting Persons
that no other reports were required, the Company believes that during its fiscal
year ended December 31, 2001, all Reporting Persons complied with all applicable
filing requirements, with the following exceptions: (i) James E. Crabbe filed a
late Form 4 for the month of March, 2001 on September 7, 2001; (ii) Eric Huson
filed a late Form 4 for the month of March, 2001 on September 7, 2001; (iii)
Yvonne Huson filed a late Form 4 for the month of March, 2001 on September 7,
2001.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth compensation received by the Company's
executive officers who received total compensation for the year ended December
31, 2001 that exceeded $100,000.
SUMMARY COMPENSATION TABLE
---------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
-------------------------------------
Awards Payouts
-------------------------------------
Other Restricted Securities
Annual Stock Underlying LTIP
Salary Bonus Compensation Award(s) Options/ SARs Payouts
Name and Principal Position Year ($) ($) ($) ($) (#) ($)
---------------------------------------------------------------------------------------------------------------------------------
Steven J. Blad, 2001 282,000 -0- -0- -0- 2,425,000 -0-
Chief Executive Officer, 2000 280,888 -0- -0- -0- 100,000 -0-
President, Director and Treasurer 1999 218,363 -0- -0- -0- 600 -0-
Stacie L. Brown, Secretary 2001 101,547 -0- -0- -0- 91,000 -0-
---------------------------------------------------------------------------------------------------------------------------------
In addition to the annual compensation disclosed above, the Company
provides certain perquisites and other personal benefits to some or all of the
executives. The unreimbursed incremental cost to the Company of providing
perquisites and other personal benefits did not exceed, as to any of the
executives for any year, the lesser of $50,000 or 10% of the total salary and
bonus paid to such executive for such year.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding grants of stock
options during the fiscal year ended December 31, 2001 made to the named
executive officers. There are no stock appreciation rights.
Individual Grants
----------------------------- ----------------------------- ---------------- -----------------------
Number of Securities Percent of Total Exercise or
Underlying Options/ SARs Options/SARs Granted to Base Price
Name Granted (#) Employees in Fiscal Year ($/Share) Expiration Date
----------------------- ----------------------------- ----------------------------- ---------------- -----------------------
Steven J. Blad 100,000 3.0% $2.50 January 1, 2006
Steven J. Blad 325,000 9.8% $1.50 January 31, 2006
Steven J. Blad 670,000 20.2% $0.35 November 20, 2006
Steven J. Blad 665,000 20.0% $0.35 November 20, 2007
Steven J. Blad 665,000 20.0% $0.35 November 20, 2008
Stacie L. Brown 35,000 1.1% $2.60 July 20, 2006
Stacie L. Brown 36,000 1.1% $0.35 July 20, 2006
----------------------- ----------------------------- ----------------------------- ---------------- -----------------------
Total 2,496,000 75.2%
-54-
The shares of common stock underlying the options granted to the
Company's executive officers represented approximately 75.2% of the total number
of options granted to the Company's employees. The total number of options
granted by the Company for the year ended December 31, 2001 was 3,319,750.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
In the fiscal year ended December 31, 2001, the Company's named
executive officers did not exercise any stock options. The following table sets
forth information related to the fiscal year-end value of unexercised stock
options held by the Company's named executive officers. Although the Company's
common stock is not traded on an exchange or quoted on an electronic medium, the
Company has recently sold shares of the Company's common stock at a rate of $.35
per share.
Number of securities underlying Value of unexercised
unexercised options/SARs at fiscal in-the-money options/SARs at
year-end fiscal year-end
---------------------- ----------------------- --------------------- -------------------
Name Exercisable Unexercisable Exercisable Unexercisable
------------------------- ---------------------- ----------------------- --------------------- -------------------
Steven J. Blad 55,000 0 $0 N/A
Steven J. Blad 1,495,000 0 $0 N/A
Steven J. Blad 0 1,330,000 N/A $0
------------------------- ---------------------- ----------------------- --------------------- -------------------
Total 1,550,000 1,330,000 $0 N/A
------------------------- ---------------------- ----------------------- --------------------- -------------------
Stacie L. Brown 91,000 0 $0 N/A
Stacie L. Brown 0 74,000 N/A $0
------------------------- ---------------------- ----------------------- --------------------- -------------------
Total 91,000 74,000 $ 0 N/A
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
As the Company's named executive officers did not receive any stock
options under a long-term incentive plan during the fiscal year ended December
31, 2001, a table reflecting the same has been intentionally omitted.
EMPLOYMENT AGREEMENTS
In August 1999, the Company entered into a new agreement with Steven J.
Blad with an effective date of January 1, 2000 and a term of three years.
Pursuant to the employment agreement, Mr. Blad shall receive a monthly base
salary of $23,500 and 400,000 stock option rights with an exercise price of
$2.50. With respect to the vesting of the options, 100,000 stock options vested
as of the effective date of the employment agreement with the balance to vest
over a three-year period thereafter as long as Mr. Blad remains employed as the
Company's President and Chief Executive Officer and satisfies certain
performance goals to be established by the Board. As with the prior employment
agreement with Mr. Blad, the present employment agreement contains provisions
with respect to confidentiality and non-competition. The Company recorded
compensation expense related to the options granted for the excess of the fair
value of the underlying common stock at the grant date ($2.60 per share) over
the exercise price of $2.50 per share during January 2000. In November 2001, the
Company entered into a First Amendment to Employment Agreement, which extended
the term of the employment agreement of Mr. Blad through December 31, 2004. The
First Amendment provides that 2,000,000 options (exercisable at a price of $.35
per share) be granted upon the effective date of the First Amendment. Of the
2,000,000 options, 670,000 options were vested as of the effective date of the
First Amendment, 665,000 options will vest on the first anniversary of the First
Amendment, and another 665,000 options will vest on the second anniversary of
the First Amendment.
-55-
INSURANCE
The Company maintains directors and officers liability insurance of
$3,000,000 on behalf of its officers and directors insuring them against
liability that they may incur in such capacities or arising out of such status.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Sections 78.7502 and 78.751 of the Nevada Revised Statutes provide for
the indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities, including reimbursement for expenses incurred, arising under the
Securities Act. The Company's articles of incorporation provides for
indemnification of its directors, officers, employees and other agents to the
extent and under the circumstances permitted by Sections 78.7502 and 78.751 of
the Nevada Revised Statutes.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to the Company's directors, officers and controlling
persons pursuant to the provisions contained in its articles of incorporation,
bylaws, Nevada law or otherwise, the Company has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. If a claim for
indemnification against such liabilities, other than the payment by the Company
of expenses incurred or paid by one of the Company's directors, officers or
controlling persons in the successful defense of any action, suit, or
proceeding, is asserted by such director, officer or controlling person, 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 the Company is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of this issue.
There is no pending litigation or proceeding involving any of our
directors or officers as to which indemnification is being sought, nor is the
Company aware of any pending or threatened litigation that may result in claims
for indemnification by any director or officer.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the
Company's common stock as of March 13, 2002 by: (i) its executive officers and
its directors, individually; (ii) its executive officers and directors, as a
group; and (iii) all persons who beneficially owned more than 5% of the
outstanding shares of the Company's common stock. The beneficial ownership is
calculated based on 38,129,072 shares of our common stock outstanding as of
March 13, 2002. Beneficial ownership is determined in accordance with the rules
of the Commission and generally includes voting or investment power with respect
to securities.
Unless otherwise indicated, each person or entity named in the table
has sole voting power and investment power, or shares voting and investment
power with his or her spouse, with respect to all shares of capital stock listed
as owned by such person. Shares issuable upon the exercise of options, warrants
or other securities convertible into the Company's common stock that are
currently exercisable or become exercisable within sixty days of March 13, 2002
are considered outstanding for the purpose of calculating the percentage of
outstanding shares of our common stock held by the individual, but not for the
purpose of calculating the percentage of outstanding shares of our common stock
held by another individual. Unless otherwise indicated, the address of the
following stockholders is c/o VendingData Corporation, 6830 Spencer Street, Las
Vegas, Nevada 89119.
NUMBER OF SHARES PERCENTAGE OF SHARES
NAME OF EXECUTIVE OFFICERS AND DIRECTORS BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------------------------------ ------------------- ---------------------
Steven J. Blad(1) 1,726,316.0 4.35%
Stacie L. Brown(2) 91,000.0 0.23%
James E. Crabbe(3) 28,811,493.0 73.48%
Eric S. Huson(4) 135,461 3.54%
Ronald O. Keil(5) 625,116.0 1.63%
Bob L. Smith(6) 1,925,139.0 5.03%
------------------- ---------------------
Executive officers and directors as a 33,314,525 83.90%
group (6 persons)
(1) Reflects 175,100 shares of common stock owned by Mr. Blad; 1,216
shares of common stock owned by Joanna Blad (spouse); and options to purchase
1,550,000 shares of common stock.
(2) Reflects options to purchase 91,000 shares of common stock.
(3) Reflects 22,870,328 shares of common stock owned by the James E.
Crabbe Revocable Trust; 4,862,243 shares of common stock owned by certain
individuals for which Mr. Crabbe possesses the voting power; 826,922 shares of
common stock issuable upon conversion of certain outstanding convertible
debentures; 250,000 shares of common stock issuable upon the exercise of certain
warrants; and options to purchase 2,000 shares of common stock.
(4) Reflects 70,000 shares of common stock owned by Tower Rock
Partners, LLC, an entity in which Mr. Huson holds an interest; 38,461 shares of
common stock issuable upon the conversion of an outstanding convertible
debenture; 25,000 shares of common stock issuable upon the exercise of certain
warrants; and options to purchase 2,000 shares of common stock. Does not reflect
2,382,563.5 shares of common stock owned by the Richard S. Huson Marital Trust
U/T/A dated 9/4/98 for which Mr. Huson is a beneficiary and the voting power
over which is held by Mr. Crabbe.
(5) Reflects 567,786 shares of common stock owned by Mr. Keil; 28,330
shares of common stock owned by Susan Keil (spouse); 25,000 shares of common
stock issuable upon the exercise of certain warrants; and options to purchase
4,000 shares of common stock.
(6) Reflects 820,051 shares of common stock owned by Mr. Smith; 995,088
shares of common stock owned by VIP's Industries, Inc., an entity controlled by
Mr. Smith; 1,000 shares of common stock owned jointly with Christina Smith
(daughter); 50,000 shares of common stock issuable upon the exercise of certain
warrants; and options to purchase 59,000 shares of common stock.
-57-
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the years ended December 31, 1999 and 1998, Richard S. Huson,
former Chairman of the Board and controlling stockholder of the Company, made
loans to the Company for working capital purposes. The balances payable by the
Company aggregated $295,407 at December 31, 1999 and $261,194 at December 31,
2000. The Company executed a replacement promissory note representing the
aggregate amount of advances made by Mr. Huson where the outstanding principal
and interest is to be repaid at an interest rate of 9.5% per annum in monthly
installments of $10,791 beginning July 1, 1999.
CONVERSION OF OUTSTANDING INDEBTEDNESS. In May 1999, the Company and
the Richard S. Huson Revocable Trust U/T/A dated 09/04/98 (the "Huson Trust"),
of which Richard S. Huson, a former director and principal stockholder of the
Company, was co-trustee, entered into a subscription agreement whereby the Huson
Trust agreed to convert a certain portion of indebtedness owed by the Company to
the Huson Trust in exchange for shares of common stock at a conversion rate of
$2.60 per share. Pursuant to the terms of the subscription agreement, the Huson
Trust converted $999,999 of outstanding indebtedness into 384,615 shares of
common stock and received a replacement promissory note for the balance of the
outstanding indebtedness.
PRIVATE PLACEMENT OF COMMON STOCK. In May 1999, the Company entered
into a subscription agreement with a stockholder of the Company whereby the
stockholder agreed to purchase 2,000,000 shares of the Company's common stock
for $2.60 per share for an aggregate subscription amount of $5,200,000. Pursuant
to the terms of the subscription agreement, the stockholder delivered $1,300,000
upon execution of the subscription agreement and agreed to pay the balance of
$3,900,000, in no more than three equal installments of not less than
$1,300,000, by July 10, 1999. The Company received the payment of the balance of
$3,900,000 prior to July 10, 1999. The Company used proceeds from this private
placement for general working capital purposes.
On September 22, 1999, the Company entered into subscription agreements
with certain stockholders of the Company whereby the stockholders agreed to
purchase 1,000,000 shares of the Company's common stock for $2.60 per share for
an aggregate subscription amount of $2,600,000. Of the 1,000,000 shares
purchased, three directors of the company purchased an aggregate of 140,000
shares and Mr. Crabbe Trust purchased 860,000 shares. The Company used the
proceeds from the private placement for working capital purposes.
For the 12 months ending December 31, 2000, the Company received
proceeds of $1,700,000, from members of the Board, a current shareholder and an
individual. The terms of the notes range from 9% to 10.5%. The notes also range
from 16 months to 22 months in term.
CONVERTIBLE DEBT. On May 25, 2000, the Board authorized a private
placement of $2.2 million of convertible notes. The convertible notes accrue
interest at 9.5% per annum, mature two years from the date of issuance (where
the holder has the discretion to extend maturity date for up to three one-year
periods) and are convertible into shares of the Company's common stock one year
after issuance at a rate of $2.60 per share. The $2.2 million of convertible
notes are convertible into a maximum of 846,153 shares of the Company's common
stock. In addition, for each convertible note of $50,000, the Company issued a
warrant to purchase 12,500 shares of the Company's common stock with an exercise
price of $2.60.
With the approval of the Board, certain members of the Board and a
controlling stockholder, the Huson Trust, participated in the Company's private
placement of convertible notes. The following table summarizes the purchases of
convertible notes by the relevant members of the Board and certain stockholders.
-58-
NAME AMOUNT WARRANTS MATURITY CONVERTIBILITY
------------------------------ -------------- -------------- ---------------------- -----------------------
The James E. Crabbe $1,000,000 250,000 May 30, 2002 May 30, 2001
Revocable Trust
VIP's Industries, Inc. $200,000 50,000 May 31, 2002 May 31, 2001
Eric Huson $100,000 25,000 June 1, 2002 June 1, 2001
The Huson Trust $150,000 37,500 June 9, 2002 June 9, 2001
Richard S. Jaslow $100,000 25,000 July 20, 2002 July 20, 2001
Richard S. Jaslow $100,000 25,000 August 18, 2002 August 18, 2001
Ronald O. Keil $100,000 25,000 September 28, 2002 September 28, 2001
Richard S. Jaslow $50,000 12,500 November 10, 2002 November 10, 2001
------------------------------ -------------- --------------
TOTAL $1,800,000 450,000
The $200,000 in convertible notes purchased by and the warrants to
purchase 50,000 shares of the Company's common stock issued to VIP's Industries,
Inc., an entity controlled by the Chairman of the Board, were in exchange for
the cancellation of a prior convertible note dated March 22, 2000 in the
original principal amount of $200,000.
On February 21, 2002, the Company's board of directors authorized a
private placement of $4,999,995 of convertible notes. For additional
information, see "Item 1. Business - Recent Developments."
STOCKHOLDER RIGHTS OFFERING. On June 14, 2001, the Company's board of
directors declared a distribution of rights to purchase shares of common stock
to stockholders of record as of June 15, 2001, or the record date, and holders
of vested options and warrants and convertible notes that possess anti-dilution
rights as of the record date. Through this rights offering, the Company offered
an aggregate of 26,869,770 shares of common stock upon the exercise of these
rights by rightsholders.
On August 13, 2001, and September 24, 2001, all rights that the Company
issued to non-California and California residents, respectively, for the
purchase of the Company's $.001 par value common stock through the Company's
Registration Statement on Form S-3 (File No. 333-64012), as declared effective
on July 13, 2001, expired. As of September 24, 2001, rightsholders had purchased
a total of 8,566,584 shares of common stock. Rightsholders applied a total of
$1,891,631.40 in amounts payable under short-term notes or bridge loans toward
the purchase price of the rights shares, and the Company received a total of
$1,106,672.80 in cash proceeds from the exercise of the rights.
On August 14, 2001, the Company's standby purchaser, James E. Crabbe, a
director and the Company's controlling stockholder, purchased 16,409,068 shares
of common stock. Mr. Crabbe applied $850,000 in short-term notes and $2,504,000
in bridge loans toward the purchase of these shares and tendered the remaining
amount of the purchase price, $2,389,174.00, in cash. On October 5, 2001, as
standby purchaser, Mr. Crabbe purchased 1,894,118 shares of common stock and
tendered the purchase price for these shares, $662,941.30, in cash.
As of October 5, 2001, rights for the purchase of all 26,869,770 shares
offered in the rights offering had been purchased.
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TRANSACTION REVIEW
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
Board. 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 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 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 stockholders entitled to vote, and they approve or
ratify the contract or transaction in good faith by a majority vote or written
consent of stockholders holding a majority of the shares of common stock
entitled to vote (the votes of the common or interested directors or officers
shall be counted in any such vote of stockholders); 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 or a committee thereof which
approves such transactions. If there are no disinterested directors, the Company
shall obtain a majority vote of the stockholders approving the transaction.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
See exhibits listed on the Exhibit Index following the signature page
of this Annual Report on Form 10-KSB which is incorporated herein by reference.
(b) Reports on Form 8-K.
-------------------
On September 11, 2001, the Company filed a Current Report on Form 8-K
dated September 7, 2001 to report the resignation of Dr. Richard S. Jaslow from
the Company's board of directors due to other time commitments of Dr. Jaslow.
On October 9, 2001, the Company filed a Current Report on Form 8-K
dated September 24, 2001 to report the closing of the Company's rights offering
for 26,869,770 shares of the Company's common stock.
On December 21, 2001, the Company filed a Current Report on Form 8-K to
report the results of the Company's annual meeting of stockholders. At such
meeting, the Company's stockholders elected Steven J. Blad and Ronald O. Keil to
the Company's board of directors.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VENDINGDATA CORPORATION
By: /s/ Steven J. Blad
----------------------------------------
Steven J. Blad, Chief Executive Officer,
President, Treasurer and Director
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
/s/ Steven J. Blad Chief Executive Officer, President, Treasurer and March 26, 002
--------------------------------- Director (Principal Executive Officer and Acting
Steven J. Blad Principal Financial Officer)
/s/ James E. Crabbe Chairman of the Board March 26, 2002
---------------------------------
James E. Crabbe
/s/ Eric S. Huson Director March 26, 2002
---------------------------------
Eric S. Huson
/s/ Ronald O. Keil Director March 26, 2002
---------------------------------
Ronald O. Keil
/s/ Bob L. Smith Director March 25, 2002
---------------------------------
Bob L. Smith
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EXHIBIT INDEX
-------------
Exhibit
Number Exhibit Description Page
------ ------------------- ----
2.1 Agreement and Plan of Merger dated as of March 6, 1999, by and --
between the Company and Casinovations Nevada Incorporated,
incorporated by reference from the Company's Annual Report on
Form 10-KSB filed on March 26, 1999.
3.1 Amended and Restated Articles of Incorporation dated July 24, --
2000, incorporated by reference from Form 8-K filed on July
28, 2000, Exhibit 10.1.
3.2 Amended and Restated Bylaws of VendingData Corporation dated --
June 19, 2001, incorporated by reference from Form 8-K filed
on July 28, 2000, Exhibit 10.2.
3.3 Amended and Restated Bylaws of VendingData Corporation, --
incorporated by reference from Form 8-K filed on February 7,
2001, Exhibit 10.1.
4.1 Specimen certificate for Common Stock, incorporated by --
reference from Form SB-2 filed on July 16, 1997.
4.2 VendingData Corporation 1999 Stock Option Plan, incorporated --
by reference from the Company's Annual Report on Form 10-KSB
filed on March 26, 1999.
4.3 Form of 9.5% Convertible Note Due 2004, incorporated by --
reference from the Company's Quarterly Report on Form 10-QSB
filed on May 17, 1999.
4.4 Form of Warrant Associated with 9.5% Convertible Note Due --
2004, incorporated by reference from the Company's Quarterly
Report on Form 10-QSB filed on May 17, 1999.
10.1 Consulting Agreement of Gametek and Steven J. Blad dated --
February 1, 1997, incorporated by reference from Form SB-2
filed on July 16, 1997.
10.2 License Agreement with The United States Playing Card Company --
dated March 16, 1995, incorporated by reference from Form SB-2
filed on July 16, 1997.
10.3 Exclusive License Agreement with Technology Development --
Center, LLC, incorporated by reference from Amendment No. 2 to
Form SB-2 filed on November 12, 1997.
10.4 Employment Agreement of Steven J. Blad dated June 1, 1998, --
incorporated by reference to Post-Effective Amendment No.1 on
Form SB-2/A filed on June 5, 1998.
10.5 Lease Agreement dated August 19, 1999, by and between the --
Company and Spencer Airport Center, LLC for 6830 Spencer
incorporated by reference from the Company's Quarterly Report
on Form 10-QSB filed on November 15, 1999.
10.6 Shareholder Agreement dated December 14, 1998, by and between --
VendingData Corporation and Richard Huson, Bob Smith and Ron
Keil, incorporated by reference from the Company's Annual
Report on Form 10-KSB filed on March 26, 1999.
10.7 Agreement dated March 24, 1999, by and between VendingData --
Corporation and Dominion Income Management, incorporated by
reference from the Company's Annual Report on Form 10-KSB
filed on March 26, 1999.
10.8 First Security Bank of Nevada Master Equipment Lease --
Agreement, incorporated by reference from the Company's
Quarterly Report on Form 10-QSB filed on August 13, 1999.
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Exhibit
Number Exhibit Description Page
------ ------------------- ----
10.9 VendingData Corporation 1999 Directors' Stock Option Plan, --
incorporated by reference from the Company's Quarterly Report
on Form 10-QSB filed on November 15, 1999.
10.10 Durable Power of Attorney Granting Voting Rights of the --
Company's Common Stock, incorporated by reference from the
Company's Quarterly Report on Form 10-QSB filed on November
15, 1999.
10.11 Wild Hold `em Fold `em Settlement Agreement dated February 18, --
2000, incorporated by reference from the Company's Current
Report on Form 8-K filed on March 16, 2000.
10.12 Bonus Blackjack Settlement Agreement dated February 18, 2000, --
incorporated by reference from the Company's Current Report on
Form 8-K filed on March 16, 2000.
10.13 Employment Agreement of Steven J. Blad dated August 10, 1999, --
incorporated by reference from the Company's Quarterly Report
on Form 10-QSB filed on August 13, 1999.
10.14 Agreement by and between the Company and Josephthal & Co. Inc. --
dated December 14, 2000.
10.15 Stand-By Credit Agreement by and between the Company and
Josephthal & Co. Inc. dated as of February 6, 2001.
10.16 Form of Promissory Note, attached as an exhibit to the --
Stand-By Credit Agreement by and between the Company and
Josephthal & Co. Inc. dated as of February 6, 2001.
10.17 Form of Warrant, attached as an exhibit to the Stand-By Credit --
Agreement by and between the Company and Josephthal & Co. Inc.
dated as of February 6, 2001.
10.18 Security Agreement by and between the Company and Josephthal & --
Co. Inc. dated as of February 6, 2001.
21.1 Subsidiaries of Registrant. 64
23.1 Consent of James E. Scheifley & Associates, P.C. 65
23.2 First Amendment to Employment Agreement of Steven J. Blad 66
23.3 Standby Purchase Agreement 67
-63-