<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO________
Commission File No. 0-22482
INNOVATIVE GAMING CORPORATION OF AMERICA
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1713864
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4750 TURBO CIRCLE
RENO, NEVADA 89502
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(702) 823-3000
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
par value
Indicate by check mark whether the registrant (1) has 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K. [X]
As of March 18, 1999, 7,301,175 shares of the Registrant's Common Stock were
outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the Registrant on such date, based upon the last sale price of
the Common Stock as reported on the Nasdaq National Market on March 18, 1999,
was $7,832,719. For purposes of this computation, affiliates of the Registrant
are the Registrant's executive officers and directors and Lakes Gaming, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
PART III - Portions of the Registrant's definitive proxy statement in connection
with the annual meeting of the shareholders to be held on May 28, 1999, are
incorporated by reference into Items 10 through 13, inclusive.
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The Company has restated its results of operations for the years ended
December 31, 1996 and 1998. In July 1999, the Company engaged its independent
public accountants to audit its financial statements for the years ending
December 31, 1996 and 1997, which were originally audited by the Company's
predecessor independent public accountants. In the previously issued statements
of operations, the Company recorded a $720,000 provision for income taxes in
1998 to provide a full valuation allowance on a deferred tax asset. Based on the
historical information available during the re-audit of the December 31, 1996
and 1997 financial statements, management believes that this provision should be
recorded in the year ended December 31, 1996. The restated financial statements
reflect the transfer of this tax provision from 1998 to 1996.
LIST OF ITEMS AMENDED
PART II
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8 Financial Statements
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K
This Amendment on Form 10-K/A amends the above listed Items in the
Company's Annual Report on Form 10-K previously filed for the year ended
December 31, 1998. This amendment is filed in connection with the Company's
restatement of its financial statements for the years ended December 31, 1998,
1997 and 1996.
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ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain consolidated statement of operations, cash
flow and balance sheet information for the Company as of and for the years ended
December 31, 1998, 1997, 1996 and 1995, and the five months ended December 31,
1994. The following financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Consolidated Financial Statements of Innovative Gaming
Corporation of America and Subsidiary (in thousands except per share data).
<TABLE>
<CAPTION>
For the Year For the Year For the Year For the Year For the Five
Ended Ended Ended Ended Months Ended
December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales $ 8,509 $ 10,292 $ 2,664 $ 6,352 $ 470
Gross profit 1,375 3,103 529 1,589 199
Operating loss (4,444) (2,182) (6,592) (2,765) (2,179)
Net loss (4,338) (1,935) (6,899) (2,114) (1,129)
Net loss per common share (0.63) (0.43) (1.09) (0.38) (0.20)
Cash flow data:
Cash provided by (used for):
Operating activities (2,106) (7,516) (2,726) 591 (1,226)
Investing activities (92) 555 3,784 (4,399) (1,033)
Financing activities 3,297 4,486 1,038 (87) (1,044)
Increase (decrease) in cash
and cash equivalents 1,099 (2,475) 2,096 (3,895) (3,303)
Balance sheet data (end of period):
Cash, cash equivalents and
available-for-sale securities 1,617 518 5,959 8,749 5,796
Working capital 12,100 12,603 11,996 16,039 17,616
Total assets 17,093 18,461 15,256 18,929 21,417
Long-term debt (net of
current maturities) 856 509 -- -- 5
Redeemable Preferred Stock -- -- -- -- 983
Total stockholders' equity 14,872 16,482 14,730 18,531 19,693
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and this Form 10-K contains forward-looking statements
that involve risks and uncertainties relating to future events. Actual events or
the Company's results may differ materially from those discussed in such
forward-looking statements. Factors that might cause actual results to differ
from those indicated by such forward-looking statements include, but are not
limited to: customer acceptance of the Company's products, need for additional
financing, Preferred Stock conversions, decline in demand for gaming products or
reduction in the growth rate of new markets, failure or delay in obtaining
gaming licenses and regulatory approvals, delays in developing or manufacturing
new products, delays in orders and shipment of products, changing economic
conditions, approval of pending patent applications or infringement upon
existing patents, the effects of regulatory and governmental actions and
increased competition.
OVERVIEW - The Company was formed in 1991 to develop, manufacture, market and
distribute multi-player and other specialty video gaming machines. The Company
manufactures, markets and distributes BJ Blitz(TM), Hot Shot Dice(TM), Lightning
Strike Roulette(TM), Supersuits Progressive Blackjack(TM) and Bonus Streak(TM)
to certain gaming markets worldwide. Since inception, the Company has focused
most of its resources on the development of games, the regulatory approval
process and the sale and installation of its games. The Company has begun to
expand and diversify its product line by developing and marketing single player
games such as Bonus Streak and Mythical Reels.
REGULATION - The Company distributes its products both directly to the gaming
marketplace and through licensed agents and distributors. The Company is
currently licensed and/or has the necessary regulatory approvals as a gaming
product manufacturer and distributor in Nevada, Colorado, Mississippi,
Louisiana, North Carolina, Minnesota, Iowa, Arizona, South Dakota, certain New
Mexico tribal jurisdictions, Quebec and the Atlantic Lottery (four Canadian
Maritime provinces). In certain jurisdictions where the Company is licensed,
such as Arizona and Colorado, the Company may elect to market its products
through a licensed distributor pursuant to any necessary regulatory approvals.
In certain jurisdictions where licensure is not required, such as Australia, the
Company may use an existing licensed distributor to sell its products pursuant
to any necessary regulatory transaction approvals. Previously registered in
Alberta, Manitoba, Saskatchewan, Quebec and the Atlantic Lottery Corporation,
the Company has applications pending in British Columbia and Ontario. The
Company has an agent to market its products in Canada. As of July 1999, the
Company has submitted and has a pending application in Connecticut and has
submitted games for approval in New Jersey and, through its distributor, in
France. The Company intends to apply for necessary licenses or approvals in
other jurisdictions both domestically and internationally where gaming is
permitted.
In March 1999, in order to expedite the timing of gaming regulatory approval in
certain jurisdictions, the Company repurchased 400,000 shares of its outstanding
Common Stock, at market price, from a shareholder. The Company entered into a
Stock Redemption Agreement with such shareholder pursuant to which the Company
redeemed 400,000 shares of Company Common Stock beneficially owned by such
shareholder in exchange for a four year convertible note and a warrant to
purchase 50,000 shares of the Company's Common Stock. In April 1999, the Company
redeemed 700,000 shares of Common Stock from Lakes Gaming, Inc. on substantially
the same terms as the redemption described above. This redemption was also to
expedite the timing of gaming regulatory approvals in certain jurisdictions.
These notes are unsecured, pay interest of 5% per annum and will be convertible
at the closing market price of the Company's Common Stock on the date of the
issuance of the notes. The notes may not be converted in the first year
following issuance. The exercise price of the warrants will be the same as the
conversion price of the notes. The Company also granted "piggyback" registration
rights for shares of Common Stock issuable upon conversion of both the notes and
the warrants. See "Common Stock Redemption" and Item 1. - "Business -
Regulation."
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DISTRIBUTORS - In February 1996, the Company entered into a five-year
distribution agreement with Aristocrat Leisure Industries of New South Wales,
Australia to exclusively market and distribute the Company's multi-station
products in Australia, New Zealand and surrounding gaming markets. Sales to this
Australian distributor declined in the third and particularly fourth quarters of
1998, and the Company has not forecasted sales to this customer in 1999. In
March 1996, the Company entered into a three-year exclusive distribution
agreement with Ludi S.F.M. of France and its related entity Eurusa, to market
and distribute the Company's multi-station products to select western European
gaming markets. In January 1997, the Company granted a three-year exclusive
distribution license to Vista Gaming Corporation to distribute and service the
Company's multi-station blackjack and roulette, and Bonus Streak products in
Colorado. In March 1998, the Company entered into a one-year business consulting
agreement with Jean D. Leclair and the Leclair Group ("Leclair"). Under the
agreement Leclair will, in addition to consulting, assist in securing agreements
for the purchase of the Company's products in Quebec and Atlantic Canada. In May
1998, the Company entered into a one-year exclusive agency agreement with Bill
Engle to represent certain of the Company's products for sale in specified
provinces of Canada. In December 1998, the Company granted a three-year
exclusive distribution license to DGS, Inc. to distribute the Company's
multi-station blackjack and 21 Stud products in South Carolina. In January 1999,
the Company granted a two-year exclusive distribution license to Par 4 to
distribute certain of the Company's products in Atlantic City, New Jersey and
Connecticut, subject to the Company's approval to sell products and approval of
its products.
RELATIONSHIP WITH LAKES GAMING, INC. - Lakes Gaming, Inc. ("LGI") (formerly
Grand Casinos, Inc.) is in the business of managing and developing casinos.
Under an existing machine purchase agreement, LGI may purchase up to an
aggregate of 125 of the Company's multi-station blackjack, craps and roulette
games in quantity purchases at distributor level prices. Pursuant to this
agreement, the Company has sold 42 blackjack machines, 11 craps machines and 8
roulette machines. Previous quantity sales were also made to LGI at distributor
level prices for the purpose of testing, evaluating and marketing the Company's
blackjack, craps and roulette games. Under an agreement between the Company and
LGI, used multi-player machines which LGI previously purchased from the Company
may be placed on consignment with the Company to be refurbished and sold into
legal markets. The proceeds from sales of up to three of the consignment games
may be applied to the purchase of one new Bonus Streak game from the Company and
minimum proceeds of $5,000 must be credited to LGI for each game sold by the
Company. There are potentially 31 such used multi-player games which LGI may
submit the Company for sale under the consignment agreement. Through December
31, 1998, 17 such used multi-player games were submitted to the Company on
consignment under this agreement. The Company made no multi-station machine
sales to LGI during 1997. The Company sold six Bonus Streak games and no
multi-station machines to LGI in 1998.
OTHER - On February 2, 1996, the Company completed the acquisition of all
remaining patents, trademarks, copyrights and other intellectual property
related to its games from its principal supplier. The Company also signed an
agreement to receive discounted pricing on key game components for a two-year
period, which is expected to lower its per game manufacturing costs. The Company
will receive deliveries under this agreement until July 1999.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1997.
For the year ended December 31, 1998, the Company reported a net loss of
$4,710,000, or $.63 per share, compared to a net loss of $2,889,000, or $.43 per
share, for the year ended December 31, 1997. Results from operations for both
years have been adjusted for preferred stock accretion and preferred stock
dividends paid. The greater loss in 1998 was primarily due to a decline in
revenues and gross profit and higher expenses for engineering and product
development.
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SALES, COST OF SALES AND GROSS PROFIT
Sales decreased to $8,509,000 during the year ended December 31, 1998 compared
to $10,292,000 in the year ended December 31, 1997, due to a decrease in
multi-station machine sales from 166 in 1997 to 123 in 1998. This decrease was
partially offset by an increase in sales of single player Bonus Streak games
from 6 in 1997 to 53 in 1998. The following table presents the comparative sales
revenue and percentage of revenue derived from each of the Company's product
lines for the years ending December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Sales revenue $ 8,509,000 $10,292,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Percentage of Percentage of
Product line: revenue: revenue:
------------- -------------
<S> <C> <C>
Multi-player games 78% 92%
Single player games 9% 1%
Parts sales and other 8% 4%
Lease participation 5% 3%
----------- -----------
Total 100% 100%
=========== ===========
</TABLE>
The Company was granted technical game approval of its blackjack machine in
Colorado and its three multi-player video machines in Nevada in early 1997,
allowing the Company to pursue placement of its products in those jurisdictions.
In the third quarter of 1997, the Company's multi-station blackjack and roulette
games received interim approval for use in the club market of New South Wales,
Australia. Subsequent to receiving such approval, the Company's Australian
distributor commenced marketing the Company's products in this market. The
decline in multi-station machine sales is partially attributable to reduced
purchases by this distributor in 1998. A total of 86 machines were sold to this
distributor in 1998, with the majority of those sales occurring in the first and
second quarters, compared to 99 machines in 1997. Due to the declining
multi-player game sales in their territory, sales to this distributor declined,
particularly in the third and fourth quarters of 1998, and the Company has not
forecasted sales to this customer in 1999. Also contributing to the decreased
revenue were sales to a North Carolina casino, which purchased 12 machines in
1998 compared to 30 machines in 1997.
Delays in acquiring required gaming licenses in key gaming jurisdictions have
limited the markets available to expand sales of the Company's products in 1998.
During 1997 and 1998, the Company has continued its efforts to expand its
markets by pursuing licensing in new jurisdictions, however, sales will continue
to be volatile until, among other things, the Company obtains new jurisdictional
licenses, marketing efforts are successfully completed and products are accepted
by the market place.
The Company also recognized lease/participation revenues in 1998 attributable to
placement of games in Colorado and Nevada casinos. In Nevada, game placements
under lease/participation agreements have been slower than originally expected
due to increasing customer resistance with participation arrangements. The
Company has expanded its marketing strategy in Nevada to attract a greater
number of casino operators by also offering its games for sale. To date, game
placements in Nevada have been fewer than anticipated by management.
The gross margin in 1998 was 16.2% compared to 30.1% in 1997. The lower gross
margin in 1998 was primarily due to unabsorbed labor and overhead costs
attributable to lower production volume in the second half of the year. In the
years ended December 31, 1998 and 1997, there were no sales to LGI under their
discounted price arrangement.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense for the year ended December 31, 1998
was $5,819,000 compared to $5,285,000 during fiscal year 1997. This increase in
expense is primarily attributable to higher expenditures for engineering and
development costs for new product development. Expenses also increased for
professional fees, particularly legal fees and other costs associated with
licensing and product approvals.
INTEREST INCOME
Interest income for the year December 31, 1998 was $106,000 compared to $247,000
for fiscal year 1997. This interest income decrease was due to reduced amounts
invested in interest bearing accounts, including interest bearing notes
receivable from the sale of product.
PREFERRED STOCK ACCRETION ADJUSTMENT
On May 13, 1998, the Company issued 3,000 shares of Series B Convertible
Preferred Stock (the "Series B Preferred Stock") at a price of $1,000 per share
in a private placement (see Note 7 of Notes to Consolidated Financial
Statements). The Series B Preferred Stock is convertible into shares of the
Company's Common Stock at a conversion price of 91% of the average closing bid
price of the Company's Common Stock of the three consecutive day average of the
lowest closing bid price of the Company's Common Stock over the twenty-day
trading period ending the day prior to conversion. The intrinsic value of the
beneficial conversion feature was $296,703, which was accreted to Series B
Preferred Stock and charged against net income or loss to arrive at net income
or loss attributable to common shareholders over the period in which the right
to convert the Preferred Stock became vested. The $296,703 value of the
beneficial conversion feature was recognized during the second, third and fourth
quarters of 1998.
On April 11, 1997, the Company issued 4,000 shares of Series A Convertible
Preferred Stock (the "Series A Preferred Stock") at a price of $1,000 per share
in a private placement (see Note 7 of Notes to Consolidated Financial
Statements). The Series A Preferred Stock was convertible into shares of the
Company's Common Stock at a conversion price of 82% of the average closing bid
price of the Company's Common Stock over the ten-day trading period ending the
day prior to conversion. The intrinsic value of the beneficial conversion
feature was $878,048, which was accreted to Preferred Stock and charged against
net income or loss to arrive at net income or loss attributable to common
shareholders over the period in which the right to convert the Preferred Stock
became vested. The $878,048 value of the beneficial conversion feature was
recognized during the second and third quarters of 1997.
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RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1996.
For the year ended December 31, 1997, the Company reported a net loss of
$2,889,000, or $.43 per share, compared to a net loss of $6,899,000, or $1.09
per share, for the year ended December 31, 1996. For the 1997 period, results
from operations have been adjusted for preferred stock accretion and preferred
stock dividends paid. The greater loss in 1996 was primarily due to a one time
restructuring charge of $1,716,000, a tax provision recorded to provide a full
valuation allowance on the Company's deferred tax asset and lower sales volume.
SALES, COST OF SALES AND GROSS PROFIT
Sales increased to $10,292,000 during the year ended December 31, 1997 compared
to $2,664,000 in the year ended December 31, 1996, due to an increase in unit
sales from 33 in 1996 to 172 in 1997. The following table presents the
comparative sales revenue and percentage of revenue derived from each of the
Company's product lines for the years ending December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Sales revenue $10,292,000 $ 2,664,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Percentage of Percentage of
Product line: revenue: revenue:
------------- -------------
<S> <C> <C>
Multi-player games 92% 91%
Single player games 1% - %
Parts sales and other 4% 9%
Lease participation 3% - %
----------- -----------
Total 100% 100%
=========== ===========
</TABLE>
Delays in acquiring required gaming licenses in key gaming jurisdictions limited
the markets available to sell the Company's products in 1996. The Company was
granted technical game approval of its blackjack machine in Colorado and its
three multi-player video machines in Nevada in early 1997, allowing the Company
to pursue placement of its products in those jurisdictions. In the third quarter
of 1997, the Company's multi-station blackjack and roulette games received
interim approval for use in the club market of New South Wales, Australia.
Subsequent to receiving such approval, the Company's Australian distributor
commenced marketing the Company's products in this market. A total of 99 games
were sold to the Australian distributor in 1997. Also contributing to the
increased revenue were sales of 30 games, representing replacements and
additional games, to a North Carolina casino.
The gross margin in 1997 was 30.1% compared to 19.8% in 1996. The improved gross
margin in 1997 is primarily attributable to lower cost of games due to design
changes to reduce production costs, purchasing materials domestically at more
competitive prices than were previously paid to foreign sources, and increased
direct customer sales versus discounted sales to distributors. In 1996, all of
the games sold by the Company were to distributors, which generally yield lower
gross margins than direct sales. Additionally, the product sales mix in 1996 was
comprised primarily of lower margin products. In the years ended December 31,
1997 and 1996, there were no sales to LGI under their discounted price
arrangement.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense for the year ended December 31, 1997
was $5,285,000 compared to $5,405,000 during fiscal year 1996. The decrease is
attributable primarily to increased productivity resulting in expenses being
incorporated into the cost of assembled games. During 1996, expenses incurred in
establishing the production operation were charged to operating expense. In
1997, when production operations commenced, the costs were included in cost of
sales as labor and overhead included in the products assembled and sold. This
expense reduction more than offset increased product development, marketing and
administrative expenses.
INTEREST INCOME
Interest income for the year December 31, 1997 was $247,000 compared to $568,000
for fiscal year 1996. This interest income decrease was due to reduced amounts
invested in interest bearing accounts, including interest bearing notes
receivable from the sale of product.
PROVISION FOR INCOME TAXES
In accordance with Statement of Financial Accounting Standards No. 109 -
"Accounting for Income Taxes"- (SFAS No. 109), the Company recorded a $875,000
provision for income taxes during the year ended December 31, 1996 to provide a
full valuation allowance on its deferred tax asset. As required by SFAS No. 109,
and taking into consideration past losses and the ability of the Company to
"more likely than not" realize such benefit, the Company recorded the additional
valuation reserve.
PREFERRED STOCK ACCRETION ADJUSTMENT
On April 11, 1997, the Company issued 4,000 shares of Series A Convertible
Preferred Stock (the "Preferred Stock") at a price of $1,000 per share in a
private placement (see Note 7 of Notes to Consolidated Financial Statements).
The Preferred Stock was convertible into shares of the Company's Common Stock at
a conversion price of 82% of the average closing bid price of the Company's
Common Stock over the ten-day trading period ending the day prior to conversion.
The intrinsic value of the beneficial conversion feature was $878,048, which was
accreted to Preferred Stock and charged against net income or loss to arrive at
net income or loss attributable to common shareholders over the period in which
the right to convert the Preferred Stock became vested. The $878,048 value of
the beneficial conversion feature was recognized during the second and third
quarters of 1997.
LIQUIDITY AND CAPITAL RESOURCES
PREFERRED STOCK ISSUES
On May 13, 1998, the Company issued 3,000 shares of Series B Convertible
Preferred Stock (the "Preferred Stock") at a price of $1,000 per share in a
private placement for total proceeds of $3,000,000. The Company received net
proceeds of approximately $2,804,000 after the payment of fees and expenses
associated with such private placement. An annual dividend of 4% shall be paid
quarterly in arrears either in Preferred Stock of the Company or cash at the
Company's discretion.
Each share of Preferred Stock is convertible into shares of the Company's Common
Stock at a conversion price of 91% of the three consecutive day average of the
lowest closing bid price of the Company's Common Stock over the twenty-day
trading period ending the day prior to conversion (the "Conversion Price"). The
Conversion Price may not exceed $5.16, which represents 135 % of the ten-day
average of the closing bid price of the Company's Common Stock ending on May 12,
1998. The maximum number of shares of Common Stock that may be issued upon
conversion is 1,505,000. In the event there is a holder of Preferred Stock that
is unable to convert shares of Preferred Stock into Common Stock at a discount
because either a) 1,505,000 shares have been issued at a
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<PAGE> 10
discount or b) such holder would beneficially own in excess of 4.9% of the
Company's Common Stock, then the Company may either 1) redeem any unconverted
Preferred Stock for cash at a price equal to 115% of the liquidation value of
the shares or 2) convert such unconverted shares without a discount into Common
Stock and pay cash to the holder of such unconverted shares equal to the
economic value that would have been received by such holder if able to convert
at a discount. The Company has the right to redeem the Preferred Stock at 115%
of par in cash. As of December 31, 1998, all of the Preferred Stock was
convertible into Common Stock, at the election of the holder thereof. A holder
of Preferred Stock may not convert such stock into Common Stock if, following
such conversion, the holder beneficially owns in excess of 4.9% of the Company's
Common Stock. As of December 31, 1998, no Preferred Stock had been converted
into Common Stock.
A Registration Statement related to the Common Stock was filed by, and at the
expense of, the Company pursuant to obligations contained in a Registration
Rights Agreement dated May 13, 1998. The effective date of the Registration
Statement filed with the Securities and Exchange Commission was September 3,
1998, and all necessary gaming regulatory approvals have been received.
The 9% beneficial conversion feature is accounted for as an additional Preferred
Stock dividend, which was determined on the date the Preferred Stock was issued.
The total value of the beneficial conversion feature or dividend is $296,703,
which reduces income available for holders of the Company's Common Stock and
therefore reduces earnings per share on a pro rata basis over the period from
issuance of the Preferred Stock to the earliest conversion date. The $296,703
value of the beneficial conversion feature was recognized during the second,
third and fourth quarters of 1998.
INVENTORY
As of December 31, 1998, inventories totaled $9.4 million, approximately 1.3
times the amount recorded as cost of sales in 1998. This level of inventory was
due to lower than expected product sales and fewer than expected placements of
games in casinos on a participation basis during 1998. Additionally, sales to
the Company's Australian distributor were lower than expected, particularly in
the third and fourth quarters when this distributor failed to order games in
accordance with forecasts previously provided to the Company. The Company had
relied on the forecasts provided by the distributor as a basis for making
inventory purchases. Additionally, placements of games in Nevada casinos were
fewer than planned as the Company met with resistance to placement of games
under revenue sharing agreements. The Company has subsequently revised its
marketing strategies to include the option of selling games to casinos in
Nevada. Management has evaluated the composition of the inventory for product
marketability under its current business plan and recorded reserves to reduce
the carrying value to a level it believes is realizable. The Company had
long-term debt of $856,000 as of December 31, 1998.
ADDITIONAL FINANCING
In June 1999, the Company received an aggregate of $1,742,000 from a private
placement of notes and Series C Preferred stock. The three-year convertible
secured notes totaling $1,550,000 were issued to a group of investors including
a current shareholder of the Company. Interest is paid quarterly at a rate of
12% per annum, and the principal balance is due June 1, 2002. At any time after
June 1, 2000, and until the principal balance is paid in full, the holders of
the notes may convert the notes into Common Stock of the Company at a conversion
price of $1.50 per share. The note holders may not convert the notes into Common
Stock if such conversion would result in beneficial ownership by such note
holder of more than 4.9% of the Company's issued and outstanding Common Stock.
The note holders were also granted an aggregate of 282,500 warrants to purchase
shares of the Company's Common Stock at an exercise price of $1.25 per share.
Also in June 1999, the Company received net proceeds of approximately $192,000
from the issuance of Series C Convertible Preferred Stock.
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<PAGE> 11
LIQUIDITY
The Company had $1,617,000 and $518,000 in cash, cash equivalents and
available-for-sale securities as of December 31, 1998 and December 31, 1997,
respectively. The Company has experienced negative cash flow from operations of
$2.1 million, $7.5 million and $2.7 million for the years ended December 31,
1998, 1997 and 1996, respectively. In addition, sales in the first half of 1999
have been below management's expectations. In June 1999, management took steps
to address their future liquidity and cash flow requirements by obtaining
additional financing in the aggregate amount of $1,742,000 as described above.
As of July 30, 1999, the Company had cash of approximately $1,080,000. The
Company estimates that its cash and anticipated funds from operations will be
adequate to fund cash requirements into the fourth quarter of 1999, which
assumes, among other things, market acceptance of new games being developed by
the Company (which cannot be assured). Management believes that the costly
process of product development and introduction will require the Company to seek
additional financing to successfully complete any such future development and
introduction. There can be no assurance that the Company will be successful in
obtaining any additional financing on terms acceptable to the Company. Failure
to obtain additional financing would have a material adverse effect on the
Company, and the Company would have to consider liquidating all or part of the
Company's assets and potentially discontinuing operations.
COMMON STOCK REDEMPTION
In March 1999, in order to expedite the timing of gaming regulatory approval in
certain jurisdictions, the Company repurchased 400,000 shares of its outstanding
Common Stock, at market price, from a shareholder. The Company entered into a
Stock Redemption Agreement with such shareholder pursuant to which the Company
redeemed 400,000 shares of Company Common Stock beneficially owned by such
shareholder in exchange for a four year convertible note and a warrant to
purchase 50,000 shares of the Company's Common Stock. In April 1999, the Company
redeemed 700,000 shares of Common Stock from Lakes Gaming, Inc. on substantially
the same terms as the redemption described above. This redemption was also to
expedite the timing of gaming regulatory approval in certain jurisdictions.
These notes are unsecured, pay interest of 5% per annum and will be convertible
at the closing market price of the Company's Common Stock on the date of the
issuance of the notes. The notes may not be converted in the first year
following issuance. The exercise price of the warrants will be the same as the
conversion price of the notes. The Company also granted "piggyback" registration
rights for shares of Common Stock issuable upon conversion of both the notes and
the warrants. See Item 1. - - "Business - - Regulation."
OTHER
At December 31, 1998, Company had a $500,000 standby letter of credit primarily
to facilitate acquisition of components and supplies from a foreign vendor. As
of December 31, 1998, no amount was outstanding. The facility is collateralized
by short-term investments of the Company.
Gains and losses on foreign currency transactions are recognized currently in
earnings. The Company's revenues from foreign markets are expected to increase
in the future, further subjecting the Company to the effects of fluctuations in
exchange rates. The Company does not consider this to be a significant risk at
this time.
-11-
<PAGE> 12
YEAR 2000 UPDATE
As of December 31, 1998, the Company continued its assessment to identify and
evaluate the risks of the Year 2000 issue. The Company's Year 2000 assessment
considered the following: (1) the Company's products; (2) the manufacturing
process of the products; (3) the Company's vendors and suppliers of materials
utilized in either the Company's gaming machine products or the manufacturing
process; (4) the Company's internal business information and accounting systems
and (5) the Company's principal customers. To implement its assessment, the
Company assigned internal staff to monitor and facilitate efficient Year 2000
Compliance. The Company has not utilized third-party consultants to evaluate its
Year 2000 readiness.
First, none of the Company's products contain software or embedded
microprocessors that are time-sensitive. Second, the Company's manufacturing
process is not automated to the extent that any part of the process is
computerized or relies upon time-sensitive software. The process of
manufacturing the Company's games is largely a mechanical process. Third, the
Company is seeking to obtain assurance from its primary material vendors and
suppliers to determine the extent which the Company is vulnerable to Year 2000
issues because such vendor or supplier is or may not be Year 2000 compliant.
With respect to the Company's internal business information and accounting
systems, the Company has reviewed its financial reporting systems, IT based and
otherwise, to ensure that they are Year 2000 compliant. The Company's software
vendors have made assurances that their software is either Year 2000 compliant
or that timely updates will be made to ensure that such software will be Year
2000 complaint. In the process of reviewing the Company's internal business
information and accounting systems, the Company has determined that some of its
personal computers utilized by its corporate staff are not Year 2000 compliant
and will have to be replaced. The Company presently anticipates that it will
replace such computers by mid-1999.
Finally, the Company is in the process of evaluating its customers, including
major distributors to determine whether such customers Year 2000 readiness could
cause a loss of business that could be material to the Company.
CONTINGENCY PLANS
The Company has not yet seen the need to develop any widespread contingency
plans for the Year 2000 issue, but this will continuously be monitored as the
Company gains more information about the compliance programs of its vendors and
customers. Given that some risks are beyond the control of the Company, the
Company does not believe that it can develop a contingency plan that will
totally shield the Company from an economic ripple effect throughout the entire
economy should others fail to resolve their own Year 2000 problems.
COST
Based on the Company's current assessment, the costs of addressing potential
Year 2000 problems are not expected to be material or have a material adverse
impact on the Company's financial position. The current estimated cost of
replacing the Company's five or six corporate personal computers should not
exceed $15,000. However, the estimated costs relating to the resolution of the
Company's Year 2000 compliance issues cannot be fully and finally determined at
this time.
-12-
<PAGE> 13
RISKS
While the Company fully anticipates achieving Year 2000 compliance well in
advance of January 1, 2000, there are certain risks, which exist with respect to
the Company's business and the Year 2000. Those risks range from slight delays
and inefficiencies in processing data and carrying out accounting and financial
functions to the most reasonable likely worst case scenario, extensive and
costly inability to process data, provide vital accounting functions and
communicate with customers and suppliers. Furthermore, if significant customers
or vendors identify Year 2000 issues in the future and are unable to resolve
such issues in a timely manner, it could result in material financial risks.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The foregoing Management's Discussion and Analysis contains various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Sections 21E of the Securities Exchange Act of
1934, as amended, which represent the Company's expectations or beliefs
concerning future events, including statements regarding the demand for the
Company's products in certain key jurisdictions such as Nevada and Australia. In
addition, statements containing expressions such as "believes," "anticipates,"
"hopeful" or "expects" used in the Company's periodic reports on Forms 10-K and
10-Q filed with the SEC are intended to identify forward looking statements. The
Company cautions that these and similar statements included in this report and
in previously filed periodic reports including reports filed on Forms 10-K and
10-Q are further qualified by important factors that could cause actual results
to differ materially from those in the forward-looking statement, including,
without limitation, the following: the inability to successfully develop,
license, manufacture and market new products in a timely manner; decline in
demand for gaming products or reduction in the growth rate of new markets;
increased competition; the effect of economic conditions; a decline in the
market acceptability of gaming; ability to obtain additional financing through
leasing, equity or other arrangements; political and economic instability in
developing international markets; a decrease in the desire of established
casinos to upgrade machines in response to added competition from newly
constructed casinos; the loss of a distributor; loss or retirement of key
executives; approval of pending patent applications or infringement upon
existing patents; the effect of regulatory and governmental actions; the
Company's expectations as to achieving year 2000 readiness and the cost of
achieving such readiness; unfavorable determination of suitability by regulatory
authorities with respect to officers, directors or key employees; the
limitation, conditioning or suspension of any gaming license; adverse results of
significant litigation matters; fluctuation in exchange rates, tariffs and other
barriers. Investors are referred to the full discussion of risks and
uncertainties associated with forward-looking statements contained in this Form
10-K in ITEM 1. - BUSINESS, under the caption "Certain Factors". Many of the
foregoing factors have been discussed in the Company's prior SEC filings and,
had the amendments to the Securities Act of 1933 and Securities Exchange Act of
1934 become effective at a different time, would have been discussed in an
earlier filing.
-13-
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Innovative Gaming Corporation of
America:
We have audited the accompanying consolidated balance sheet of
Innovative Gaming Corporation of America and Subsidiary as of December 31, 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Innovative
Gaming Corporation of America and Subsidiary at December 31, 1998, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
negative cash flow from operations that raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to addressing the future liquidity and cash flow requirements of the Company are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying schedule is
presented for purposes of complying with the Securities and Exchange Commission
rules and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
KAFOURY, ARMSTRONG & CO.
Reno, Nevada
February 26, 1999 (Except with respect
to the matter discussed in Note 11, as
to which the date is July 16, 1999)
- 14-
<PAGE> 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Innovative Gaming Corporation of
America:
We have audited the accompanying consolidated balance sheet of
Innovative Gaming Corporation of America and Subsidiary as of December 31, 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two year periods ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated balance sheet as of December
31, 1997 and the related consolidated statement of operations, stockholders'
equity and cash flows for each of the two year periods ended December 31, 1997,
were audited by other auditors whose opinion dated March 12, 1998 was
unqualified. As discussed in Note 11 to the financial statements, the Company
has restated its 1997 and 1996 financial statements. The other auditors reported
on the 1997 and 1996 financial statements before the restatement.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Innovative
Gaming Corporation of America and Subsidiary at December 31, 1997, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
negative cash flow from operations that raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to addressing the future liquidity and cash flow requirements of the Company are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying schedule is
presented for purposes of complying with the Securities and Exchange Commission
rules and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
KAFOURY, ARMSTRONG & CO.
Reno, Nevada
July 16, 1999
-15-
<PAGE> 16
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
Consolidated Balance Sheets
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
As of December 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,617 $ 518
Restricted investments 700 1,000
Accounts receivable, net of allowances of $85 and $100 1,186 1,929
Current portion of notes receivable 334 276
Inventories, net 9,244 10,191
Prepaid expenses and other 384 159
-------- --------
Total current assets 13,465 14,073
NOTES RECEIVABLE, less current portion 362 552
PROPERTY AND EQUIPMENT, net 1,389 2,107
INTANGIBLES ASSETS, net 1,877 1,729
-------- --------
TOTAL ASSETS $ 17,093 $ 18,461
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 313 $ 568
Accrued liabilities 524 423
Notes payable - current portion 528 322
Customer deposits -- 157
-------- --------
Total current liabilities 1,365 1,470
Notes payable - net of current portion 856 509
-------- --------
Total liabilities 2,221 1,979
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 9) -- --
STOCKHOLDERS' EQUITY:
Series B Convertible Preferred Stock, $.01 par value, nonvoting,
4,000 shares authorized, 3,000 and 0 shares outstanding, respectively -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
7,535,211 shares issued and outstanding 75 75
Additional paid-in capital 32,676 29,575
Accumulated deficit (17,879) (13,168)
-------- --------
Total stockholders' equity 14,872 16,482
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,093 $ 18,461
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
-16-
<PAGE> 17
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the Year For the Year For the Year
Ended Ended Ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 8,509 $ 10,292 $ 2,664
COST OF SALES 7,134 7,189 2,135
-------- -------- --------
Gross profit 1,375 3,103 529
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,819 5,285 5,405
RESTRUCTURING COSTS -- -- 1,716
-------- -------- --------
Operating loss (4,444) (2,182) (6,592)
INTEREST INCOME, net 106 247 568
-------- -------- --------
Loss before income taxes (4,338) (1,935) (6,024)
PROVISION FOR INCOME TAXES -- -- 875
-------- -------- --------
Net loss (4,338) (1,935) (6,899)
PREFERRED STOCK DIVIDENDS 75 76 --
PREFERRED STOCK ACCRETION 297 878 --
-------- -------- --------
Net loss attributable to common shareholders $ (4,710) $ (2,889) $ (6,899)
======== ======== ========
LOSS PER SHARE OF COMMON STOCK $ (0.63) $ (0.43) $ (1.09)
======== ======== ========
Weighted average common shares outstanding 7,535 6,744 6,356
======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-17-
<PAGE> 18
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(In Thousands)
<TABLE>
<CAPTION>
Class B Non-Voting Convertible
Common Stock Common Stock Preferred Stock
------------------ ------------------- ---------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 4,969 $50 1,025 $ 10 -- --
Class B common stock exchange
for common stock 1,025 10 (1,025) (10) -- --
Stock options and warrants exercised 258 3 -- -- -- --
Common stock issued for
purchase of intangible assets 225 2 -- -- -- --
Unearned compensation adjustments -- -- -- -- -- --
Unrealized loss on
available-for-sale securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
----- --- ------ ---- ------ -------
BALANCE, December 31, 1996 6,477 65 -- -- -- --
Series A preferred stock issued -- -- -- -- 4,000 3,122
Preferred stock accretion adjustment -- -- -- -- -- 878
Series A preferred stock
conversion to common stock 1,055 10 -- -- (4,000) (4,000)
Preferred stock dividends paid 3 -- -- -- -- --
Unrealized gain on
available-for-sale securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
----- --- ------ ---- ------ -------
BALANCE, December 31, 1997 7,535 75 -- -- -- --
Series B preferred stock issued -- -- -- -- 3,000 --
Preferred stock accretion adjustment -- -- -- -- -- --
Preferred stock dividends paid -- -- -- -- -- --
Net loss -- -- -- -- -- --
----- --- ------ ---- ------ -------
BALANCE, December 31, 1998 7,535 $75 -- $ -- 3,000 $ --
===== === ====== ==== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Additional Gain/(Loss) on
Paid-in Accumulated Unearned Available-for-
Capital Deficit Compensation Sale Securities Total
---------- ---------- ------------ ---------------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 $21,858 $ (3,380) $(10) 3 $ 18,531
Class B common stock exchange
for common stock -- -- -- -- --
Stock options and warrants exercised 1,014 -- -- -- 1,017
Common stock issued for
purchase of intangible assets 2,079 -- -- -- 2,081
Unearned compensation adjustments -- -- 10 -- 10
Unrealized loss on
available-for-sale securities -- -- -- (10) (10)
Net loss -- (6,899) -- -- (6,899)
------- -------- ---- ---- --------
BALANCE, December 31, 1996 24,951 (10,279) -- (7) 14,730
Series A preferred stock issued 622 -- -- -- 3,744
Preferred stock accretion adjustment -- (878) -- -- 0
Series A preferred stock
conversion to common stock 3,990 -- -- -- 0
Preferred stock dividends paid 12 (76) -- -- (64)
Unrealized gain on
available-for-sale securities -- -- -- 7 7
Net loss -- (1,935) -- -- (1,935)
------- -------- ---- ---- --------
BALANCE, December 31, 1997 29,575 (13,168) -- -- 16,482
Series B preferred stock issued 2,804 -- -- -- 2,804
Preferred stock accretion adjustment 297 (297) -- -- --
Preferred stock dividends paid -- (76) -- -- (76)
Net loss -- (4,338) -- -- (4,338)
------- -------- ---- ---- --------
BALANCE, December 31, 1998 $32,676 $(17,879) $ -- $ -- $ 14,872
======= ======== ==== ==== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-18-
<PAGE> 19
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
Consolidated Statements Of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
For the Year For the Year For the Year
Ended Ended Ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(4,338) $(1,935) $ (6,899)
Adjustments to reconcile net loss to
cash flows used for operating activities -
Depreciation and amortization 936 889 566
Stock option compensation earned -- -- 10
Loss on sale of assets -- 2 103
Deferred income taxes -- -- 854
Provision for inventory obsolescence 571 112 1,308
Book value of fixed assets charged to cost of sales 26 424 --
Provision for bad debts -- 9 78
Changes in operating assets and liabilities:
Accounts and notes receivable 875 (2,106) 1,202
Inventories 376 (5,574) (232)
Prepaid expenses and other (224) 14 177
Accounts payable and accrued expenses (171) 492 107
Customer deposits (157) 157 --
------- ------- --------
Net cash used for operating activities (2,106) (7,516) (2,726)
------- ------- --------
INVESTING ACTIVITIES:
Purchases of available-for-sale securities -- (1,042) (5,936)
Release of restricted investments 300 -- --
Proceeds from sale of available-for-sale securities -- 4,013 10,350
Payment on covenant not to compete -- -- (92)
Inventory (capitalized for use in) returned from gaming operations 363 (2,028) --
Proceeds from sale of property and equipment -- -- 45
Purchases of property and equipment (255) (388) (583)
Purchases of intangible assets (500) -- --
------- ------- --------
Net cash provided by (used for) investing activities (92) 555 3,784
------- ------- --------
FINANCING ACTIVITIES:
Proceeds from financing agreements 955 873 26
Payments on long-term obligations (402) (67) (5)
Preferred stock dividends paid (60) (64) --
Net proceeds from sale of common stock -- -- 1,017
Net proceeds from sale of preferred stock 2,804 3,744 --
------- ------- --------
Net cash provided by financing activities 3,297 4,486 1,038
------- ------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,099 (2,475) 2,096
CASH AND CASH EQUIVALENTS, beginning of period 518 2,993 897
------- ------- --------
CASH AND CASH EQUIVALENTS, end of period $ 1,617 $ 518 $ 2,993
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest $ 80 $ 1 $ 3
======= ======= ========
Cash paid (refund received) for income taxes $ (1) $ (3) $ 4
======= ======= ========
Noncash transactions:
Preferred Stock converted to common stock $ -- $ 4,000 $ --
======= ======= ========
Preferred Stock dividends paid with common stock $ -- $ 12 $ --
======= ======= ========
Exchange of common stock for intangible assets $ -- $ -- $ 2,081
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
The accompanying notes are an integral part of
these consolidated financial statements.
-19-
<PAGE> 20
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS AND RISK FACTORS
Innovative Gaming Corporation of America ("the Company") was incorporated in the
State of Minnesota on September 19, 1991. The Company, through its wholly-owned
subsidiary, Innovative Gaming, Inc., is in the business of developing,
manufacturing, marketing and distributing gaming equipment. The Company
distributes its products to certain gaming markets worldwide.
The Company has experienced negative cash flow from operations of $2.1 million,
$7.5 million and $2.7 million for the years ended December 31, 1998, 1997 and
1996, respectively. In addition, sales in the first half of 1999 have been below
management's expectations. In June 1999, management took steps to address their
future liquidity and cash flow requirements by obtaining additional financing in
the aggregate amount of $1,742 (See Note 11 - Subsequent Events - Additional
Financing). As of July 30, 1999, the Company had cash of approximately $1,080.
The Company estimates that its cash and anticipated funds from operations will
be adequate to fund cash requirements into the fourth quarter of 1999, which
assumes, among other things, market acceptance of new games being developed by
the Company (which cannot be assured). Management believes that the costly
process of product development and introduction will require the Company to seek
additional financing to successfully complete any such future development and
introduction. There can be no assurance that the Company will be successful in
obtaining any additional financing on terms acceptable to the Company. Failure
to obtain additional financing would have a material adverse effect on the
Company, and the Company would have to consider liquidating all or part of the
Company's assets and potentially discontinuing operations.
The Company's ability to execute its long-term business strategy also depends to
a significant degree on its ability to finance the development, marketing and
production of its products. There can be no assurance that the Company will be
successful in obtaining financing on terms acceptable to the Company, if such
need arises. Any new investors may seek and obtain substantially better terms
than were granted to its present investors and the issuance of such securities
would result in dilution to its existing shareholders.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Ultimate results could differ from those estimates.
REGULATION
The manufacture, distribution and sale of the Company's products are regulated
by various jurisdictions and entities, including requirements to obtain licenses
and product approval. The Company is presently seeking, or plans to seek,
licenses and product approval in several jurisdictions. Failure to successfully
obtain licenses, approvals, or meet other regulatory requirements could
materially impact the expansion and future operation of the Company.
-20-
<PAGE> 21
CERTAIN RISKS AND UNCERTAINTIES
A significant portion of the Company's operations are generated from a limited
number of gaming jurisdictions. A change in general economic conditions or the
regulatory environment of these jurisdictions could adversely affect the
Company's operating results.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Innovative Gaming
Corporation of America and its wholly owned subsidiary, Innovative Gaming, Inc.
All significant intercompany transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all financial instruments which are highly liquid and have
original maturities of three months or less to be cash and cash equivalents
which are readily convertible to cash. Cash equivalents consist primarily of
demand deposits.
The Company classifies all investments which are not cash equivalents as
available-for-sale securities with all gross unrealized gains or losses included
as a separate component of equity.
RESTRICTED INVESTMENTS
At December 31, 1998 and 1997, the Company had restricted investments of $700
and $1,000, respectively, Of these amounts, $500 and $1,000, respectively, were
pledged as collateral against certain bank credit arrangements.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost with depreciation provided for using
the straight-line method over the useful lives of the assets or the lease term,
whichever is shorter. Maintenance, repairs and minor renewals are expensed when
incurred. Depreciation expense recorded in the years ended December 31, 1998,
1997 and 1996 was $584, $537 and $146, respectively.
<TABLE>
<CAPTION>
Useful Life 1998 1997
----------- ------- -------
<S> <C> <C> <C>
Office equipment 5 years $ 942 $ 453
Display games 5 years 142 142
Gaming operations equipment 2.5 years 543 1,459
Manufacturing equipment 5 years 358 345
Leasehold improvements Life of lease 307 303
------- -------
Total property and equipment 2,292 2,702
Less: Accumulated depreciation (903) (595)
------- -------
Total property and equipment, net $ 1,389 $ 2,107
======= =======
</TABLE>
-21-
<PAGE> 22
INVENTORIES
Inventories are recorded at the lower of cost or market value. Cost is
determined according to the first-in, first-out accounting method. Inventories
consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Game components and parts $ 5,021 $ 6,602
Work in process 231 698
Finished goods 4,939 3,772
Inventory reserves (947) (881)
------- --------
Total inventories, net $ 9,244 $ 10,191
======= ========
</TABLE>
INTANGIBLES
The Company amortizes intangibles on a straight-line basis over their estimated
economic lives while the technology is being utilized (See Note 5).
PRODUCT SALES/REVENUE RECOGNITION
The Company makes product sales for cash, on normal terms of 90 days or less,
over longer term installments, and, in Nevada, through participation in the net
win of the games until the purchase price is paid. Revenue from the sale of
products is recognized upon transfer of title and risk of loss to the customer.
Deposits received from customers in advance of delivery are deferred.
CONCENTRATIONS OF RISK
During 1998, a majority of the Company's sales were to one customer, a
distributor, Aristocrat Leisure Industries ("Aristocrat"), which accounted for
54.1% of sales. Sales to Aristocrat declined in the third and particularly
fourth quarters of 1998 when this distributor failed to order games in
accordance with forecasts previously provided to the Company. The Company has
not forecasted sales to this customer in 1999. During 1997, a majority of the
Company's sales were to two customers. Sales to one distributor, Aristocrat,
accounted for 48.4% of sales and direct sales to one customer, Harrah's Smoky
Mountain Casino, accounted for 19.4% of sales. During 1996, a majority of the
Company's sales were to three distributors. These three distributors accounted
for 37%, 32% and 24% of sales, respectively. For the years ended December 31,
1998, 1997 and 1996, no other distributors or customers accounted for greater
than 10% of sales.
The Company maintains deposits in excess of federally insured limits. Statement
of Financial Accounting Standards No. 105 identifies these items as a
concentration of risk requiring disclosure, regardless of the degree of risk.
The risk is managed by maintaining all deposits in high quality financial
institutions.
The Company purchases certain key electronic components, which are not available
from other sources, from a Japanese supplier, Irem Software Engineering, Inc.,
at a negotiated fixed price for a period extending to mid-1999. The total
purchase commitment remaining at December 31, 1998, was approximately $462. The
Company is developing an alternative product design to eliminate dependence on
this sole source vendor.
-22-
<PAGE> 23
The financial instruments that subject the Company to concentrations of credit
risk consists principally of accounts and notes receivable. Accounts and notes
receivable are concentrated in specific legalized gaming jurisdictions. Notes
receivable are collateralized by the equipment sold. The Company has no secured
interest in the trade accounts receivable. At December 31, 1998, the following
concentrations of credit risk existed:
<TABLE>
<S> <C>
Nevada 46%
Germany 11%
Colorado 10%
Canada 10%
South Carolina 8%
California 8%
Delaware and Other 7%
----
Total 100%
===
</TABLE>
RESEARCH AND DEVELOPMENT COSTS
The Company engages in the development of new and existing products. Research
and development costs are expensed as incurred. The Company expensed
approximately $2,353, $1,884 and $1,132 for the years ended December 31, 1998,
1997 and 1996, respectively. These amounts are included in selling, general and
administrative expenses.
RESTRUCTURING COSTS
In 1996, the Company recognized $1,716 of restructuring costs, which included
expenses related to the Company's relocation to Reno, Nevada, management
transition and product focus.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 -"Accounting for Income Taxes" (SFAS No. 109),
whereby deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be removed or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
To the extent the amount deductible for income tax purposes from stock option
plans exceeds the amount charged to operations for financial statement purposes,
the related tax benefits are credited to capital stock when realized.
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share"-(SFAS No. 128). SFAS No. 128 is effective for periods
ending after December 15, 1997, and replaces previously reported earnings per
share with "basic" and "diluted" earnings per share. The earnings per share data
for all periods presented is based on weighted average common shares outstanding
and on the same basis as "basic" earnings per share calculated under SFAS No.
128. Diluted earnings per share is not presented because the resulting earnings
per share would be antidilutive for each period reported.
FOREIGN CURRENCY TRANSACTIONS
Transactions which occur in currencies other than U.S. dollars are translated to
U.S. dollars for financial reporting purposes. Gains and losses from this
process are recorded in the results of operations.
-23-
<PAGE> 24
LONG-LIVED ASSETS
During 1995, the Company adopted Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of'" - (SFAS No.121). SFAS No.121 establishes accounting
standards for the recognition and measurement of impairment of long-lived assets
and certain identifiable intangibles and goodwill either to be held or disposed
of.
Management reviews long-lived assets, including intangibles, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. For assets which produce future cash flows, an
estimate of undiscounted future cash flows is compared to the carrying amount to
determine if an impairment exists. For assets which do not produce quantifiable
future cash flows, such as intangibles, impairment is measured at the enterprise
level. No impairment existed at December 31, 1998 and 1997.
2. RELATIONSHIP WITH LAKES GAMING, INC.:
Lakes Gaming, Inc. ("LGI") (formerly Grand Casinos, Inc.) is in the business of
managing and developing casinos. Lyle Berman, who was Chairman of the Board of
the Company until June 24, 1998, is a principal shareholder and Chairman of the
Board of LGI, and was Chief Executive Officer of LGI from October 1991 through
March 1998. Mr. Berman continues to serve on the Board of Directors of the
Company. Under an existing machine purchase agreement, LGI may purchase up to an
aggregate of 125 of the Company's multi-station blackjack, craps and roulette
games in quantity purchases at distributor level prices. Previous quantity sales
were also made to LGI at distributor level prices for the purpose of testing,
evaluating and marketing the Company's blackjack, craps and roulette games.
Under an agreement between the Company and LGI, used multi-player machines which
LGI previously purchased from the Company may be placed on consignment with the
Company to be refurbished and sold into legal markets. The proceeds from sales
of up to three of the consignment games may be applied to the purchase of one
new Bonus Streak game from the Company and minimum proceeds of $5 must be
credited to LGI for each game sold by the Company. There are potentially 31 such
used multi-player games which LGI may submit the Company for sale under the
consignment agreement. Through December 31, 1998, 17 such used multi-player
games were submitted to the Company on consignment under this agreement. The
Company made no multi-station machine sales to LGI during 1997. The Company sold
six Bonus Streak games and no multi-station machines to LGI in 1998.
3. AVAILABLE-FOR-SALE SECURITIES:
The Company had no available-for-sale securities at December 31, 1998 and 1997.
Proceeds from the sale of available-for-sale securities were $4,013 for the year
ended December 31, 1997 and $10,350 for the year ended December 31, 1996.
4. NOTES RECEIVABLE:
The Company has granted certain customers extended payment terms under sales
contracts. These contracts are generally for terms of one to five years with
interest recognized at prevailing rates and are collateralized by the equipment
sold. Stated interest rates in the contracts range from 10% to 10.5%. On
contracts with no stated interest to be paid, interest is imputed at prime plus
2%. At December 31, 1998, the face amount of notes receivable was $816. The
carrying value of notes receivable approximates their fair value. Certain of the
Company's notes receivable are pledged as security for a note payable to Finova
Capital Corporation. The
-24-
<PAGE> 25
following table represents the estimated future collections of notes receivable,
net of amounts to be recognized as interest income, at December 31, 1998:
<TABLE>
<CAPTION>
Estimated
Years Ending December 31, Receipts
---------
<S> <C>
1999 $334
2000 117
2001 102
2002 63
2003 and after 80
----
Total $696
====
</TABLE>
5. INTANGIBLE ASSETS:
Intangible assets consisted of the following at December 31:
<TABLE>
<CAPTION>
Useful Life 1998 1997
----------- ------- -------
<S> <C> <C> <C>
Product patent and technology rights 5 to 10 $ 2,832 $ 2,332
years
Nevada distribution rights 10 years 250 250
------- -------
Total intangible assets 3,082 2,582
Less: accumulated amortization (1,205) (853)
------- -------
Total intangible assets, net $ 1,877 $ 1,729
======= =======
</TABLE>
Amortization recorded for intangibles was $352, $352 and $420 in the years ended
December 31, 1998, 1997 and 1996, respectively.
On February 2, 1996, the Company acquired the balance of all remaining
intellectual property including patents, trademarks, picture rights and
copyrights for its games from its Japanese suppliers in exchange for an
aggregate 225,000 shares of IGCA common stock.
During 1998, the Company entered into agreements with various companies to
acquire rights to technology and intellectual property for use in games which
the Company intends to develop, manufacture and market.
Under an agreement with Quick Silver Development Co. Inc ("Quick Silver"), a
California corporation, the Company purchased the Patent and Technology for a
game concept entitled "Revolving Rings Gaming Apparatus", for a purchase price
of $50. The Company will also pay a per day game fee to Quick Silver for gaming
devices embodying the Patent technology and placed in locations under
participation agreements between the location and the Company. The per day game
fees will vary based upon the number of games placed and are subject to
regulatory approval. The cost of this patent and technology will be amortized
over the period such technology is used in the Company's products. No such
amortization was recorded in 1998.
The Company purchased rights to a game concept developed by Vista Gaming
("Vista"), a Colorado corporation, for a purchase price of $100. The Company
will also pay game fees to Vista for gaming devices embodying the game concept
sold or placed in locations under participation agreements between the location
and the Company. The game fees will vary based upon the number of games placed
and are subject to regulatory approval. The cost of these game rights will be
amortized over the period they are used in the Company's products. No such
amortization was recorded in 1998.
-25-
<PAGE> 26
The Company purchased rights to intellectual property related to two game
concepts developed by Gametronics for a purchase price of $500. A note
receivable from Gametronics in the amount of $400 was converted and applied
toward payment of the purchase price. The Company will also pay game fees to
Gametronics for gaming devices embodying the game concept sold or placed in
locations under participation agreements between the location and the Company.
The game fees for sold games will be at a fixed fee and per day games fees for
games placed under participation agreements will vary based upon the number of
games placed and are subject to regulatory approval. The rights acquired allow
the Company to develop, manufacture, market and distribute the games in Nevada
and Mississippi. The cost of this intellectual property will be amortized over
the period it is used in the Company's products. No such amortization was
recorded in 1998.
Under a purchase agreement with Metropolitan Gaming LLC ("Metropolitan"), the
Company purchased a sublicense for rights to use three dimensional projection
technology in one if its gaming machine products, for a purchase price of $75.
The Company will also pay a per day signage technology fee to Metropolitan for
gaming devices embodying the technology and placed in locations under
participation agreements between the location and the Company. The per game
signage technology fees will vary based upon the total number of games placed
utilizing the three dimensional projection technology and are subject to
regulatory approval. The cost of these technology rights will be amortized over
the period such rights are used in the Company's products. No such amortization
was recorded in 1998.
6. FINANCING ARRANGEMENTS:
LETTER OF CREDIT
At December 31, 1998 and 1997, the Company had a standby letter of credit with a
bank in the amount of $500 and $1,000, respectively. At December 31, 1998 and
1997, the Company had certificates of deposit of $700 and $1,000, respectively,
which were included in the accompanying balance sheets as restricted
investments, of which $500 and $1,000, respectively, were pledged as security
for the standby letters of credit. This standby letter of credit is primarily to
facilitate the acquisition of component parts and supplies. At December 31, 1998
and 1997, no amount was outstanding on the standby letter of credit.
NOTES PAYABLE
Notes payable consists of amounts owed IGT, a wholly-owned subsidiary of
International Game Technology, for the purchase of slant top slot machines
incorporated in the Company's Bonus Streak game, an operating capital loan from
Finova Capital Corporation and financed insurance premiums.
Under the agreement with IGT, the Company shares equally in the net revenues
received from customers under participation agreement sales until IGT is paid in
full for the sales price of the slant top slot machine acquired by the Company.
Thereafter the Company receives 90% and IGT receives 10% of the net revenues
from the customer. For cash sales, the Company must pay IGT the purchase price
of the slant top slot machines from the proceeds of the sale. Management has
estimated the portion of current notes payable to represent those amounts
expected to be paid to IGT under participation arrangements and from cash sales
in 1999.
In March 1998, Innovative Gaming, Inc., a wholly-owned subsidiary of the
Company, entered into a loan commitment securing $2 million from Finova Capital
Corporation. The initial funding of approximately $910 was completed on April
13, 1998. The loan is payable in 36 equal installments including interest paid
in arrears at a rate of 12.06 percent. This financing is secured by certain of
the Company's long-term receivables and a
-26-
<PAGE> 27
corporate guarantee from the Company. Additional funding under this arrangement
was available through December 1, 1998. The Company's borrowing capacity under
this arrangement was dependent upon the level of receivables generated through
"bucket sales" agreements. The Company did not borrow any additional amounts
under this arrangement.
The financed insurance premiums are paid in monthly installments over a period
of less than twelve months.
The following table represents the estimated future payments of notes payable at
December 31, 1998:
<TABLE>
<CAPTION>
Years Ending Estimated
December 31, Receipts
------------ ---------
<S> <C>
1999 $ 528
2000 528
2001 319
2002 9
------
Total $1,384
======
</TABLE>
7. STOCKHOLDERS' EQUITY:
PREFERRED STOCK
On April 11, 1997, the Company issued 4,000 shares of Series A Convertible
Preferred Stock at a price of $1,000 per share in a private placement for total
proceeds of $4,000. The Company received net proceeds of approximately $3,744
from such private placement after the payment of fees and expenses associated
with such private placement. An annual dividend of 4% was paid quarterly in
arrears in cash. Each share of Preferred Stock was convertible into shares of
the Company's Common Stock at a conversion price of 82% of the average closing
bid price of the Company's Common Stock over the ten-day trading period ending
the day prior to conversion (the "Conversion Price"). The Conversion Price was
not to exceed $8.1725 per share. A holder of Preferred Stock was not permitted
to convert such stock into Common Stock if, following such conversion, the
holder beneficially would own in excess of 4.9% of the Company's Common Stock. A
Registration Statement related to the Common Stock was filed by, and at the
expense of, the Company pursuant to obligations contained in a Registration
Rights Agreement dated April 10, 1997. The Effective Date of the Registration
Statement was July 28, 1997, and all necessary gaming regulatory approvals were
received. As of October 22, 1997, all shares of Preferred Stock were converted
into an aggregate of 1,058,696 shares of Common Stock.
On May 13, 1998, the Company issued 3,000 shares of Series B Convertible
Preferred Stock (the "Preferred Stock") at a price of $1,000 per share in a
private placement for total proceeds of $3,000. The stated par value per share
is $.01, resulting in a total par value of thirty dollars being recorded as
Series B Convertible Preferred Stock, and the balance of approximately $3.0
million is included in Additional Paid-in Capital. The Company received net
proceeds of approximately $2,804 after the payment of fees and expenses
associated with such private placement. An annual dividend of 4% shall be paid
quarterly in arrears either in Preferred Stock of the Company or cash at the
Company's discretion.
Each share of Series B Preferred Stock is convertible into shares of the
Company's Common Stock at a conversion price of 91% of the three consecutive day
average of the lowest closing bid price of the Company's Common Stock over the
twenty-day trading period ending the day prior to conversion (the "Conversion
Price"). The Conversion Price may not exceed $5.16, which represents 135 % of
the ten-day average of the closing bid price of the Company's Common Stock
ending on May 12, 1998. The maximum number of shares of Common
-27-
<PAGE> 28
Stock that may be issued upon conversion is 1,505,000. In the event there is a
holder of Preferred Stock that is unable to convert shares of Preferred Stock
into Common Stock at a discount because either a) 1,505,000 shares have been
issued at a discount or b) such holder would beneficially own in excess of 4.9%
of the Company's Common Stock, then the Company may either 1) redeem any
unconverted Preferred Stock for cash at a price equal to 115% of the liquidation
value of the shares or 2) convert such unconverted shares without a discount
into Common Stock and pay cash to the holder of such unconverted shares equal to
the economic value that would have been received by such holder if able to
convert at a discount. The Company has the right to redeem the Preferred Stock
at 115% of par in cash. As of December 31, 1998, all of the Preferred Stock was
convertible into Common Stock, at the election of the holder thereof. All
outstanding shares of Preferred Stock will automatically be converted into
Common Stock on November 13, 1999. A holder of Preferred Stock may not convert
such stock into Common Stock if, following such conversion, the holder
beneficially owns in excess of 4.9% of the Company's Common Stock. As of
December 31, 1998, no Preferred Stock had been converted into Common Stock.
A Registration Statement related to the Common Stock was filed by, and at the
expense of, the Company pursuant to obligations contained in a Registration
Rights Agreement dated May 13, 1998. The effective date of the Registration
Statement filed with the Securities and Exchange Commission was September 3,
1998, and all necessary gaming regulatory approvals have been received. The 9%
beneficial conversion feature is accounted for as an additional Preferred Stock
dividend, which was determined on the date the Preferred Stock was issued. The
total value of the beneficial conversion feature or dividend is $297, which
reduces income available for holders of the Company's Common Stock and therefore
reduces earnings per share on a pro rata basis over the period from issuance of
the Preferred Stock to the earliest conversion date. Income available to holders
of Common Stock was reduced by approximately $141, $144 and $12 during the
second, third and fourth quarters of 1998, respectively.
STOCK REPURCHASE PLAN
On October 20, 1994, the Company's Board of Directors authorized the Company to
repurchase up to 500,000 shares of its outstanding common stock from time to
time on the open market or in privately negotiated transactions. As of December
31, 1998, the Company had repurchased 248,500 shares at prices ranging from
$3.56 to $6.08 per share, for total consideration of $1,199. All such shares
were repurchased in 1994 and 1995. No shares were repurchased in 1998.
ISSUANCE AND EXCHANGE OF CLASS B STOCK
On October 20, 1994, the Company issued 1,025,000 shares of its Class B
Non-Voting Common Stock in exchange for 1,025,000 shares of common stock held by
Grand Casinos, Inc.("GCI") (Grand Casinos, Inc. subsequently changed its name to
Lakes Gaming, Inc.) On December 1, 1995, the Company and GCI amended their
earlier agreement to provide that if the Company did not receive certain
approvals from the Nevada Gaming Commission ("the Nevada Approvals") on or
before December 31, 1995, GCI would, subject to approval of the Minnesota
Commissioner of Commerce, exchange its 1,025,000 shares of Class B non-voting
common stock for 1,025,000 shares of the Company's common stock. The Company did
not receive the Nevada Approvals on or before December 31, 1995. On March 21,
1996, GCI converted 1,025,000 shares of Class B non-voting common stock into
1,025,000 shares of the Company's common stock.
-28-
<PAGE> 29
At the time of the original exchange, the Company granted GCI certain
registration rights and the option to purchase 102,500 shares of common stock at
$7.00 per share, increased the number of games GCI may purchase under the
existing discount machine purchase agreement by 50 games (up to an aggregate 125
games) and entered into a transition plan with respect to Board of Directors'
positions based upon the timing of the Company's receipt of regulatory
approvals.
STOCK OPTIONS AND WARRANTS
The Company has a 1992 Employee Stock Option and Compensation Plan (the "1992
Plan"), pursuant to which options and other awards to acquire an aggregate of
1,350,000 shares of the Company's common stock may be granted. Stock options,
stock appreciation rights, restricted stock, other stock and cash awards may be
granted under the Plan. All employees are eligible to participate in the 1992
Plan. The Company also has a 1998 Non-Executive Stock Option Plan (the "1998
Plan"), pursuant to which options to acquire an aggregate of 200,000 shares of
the Company's common stock may be granted. Non-Executive employees who are
full-time employees of the Company are eligible to participate in the 1998 Plan.
Both the 1992 Plan and the 1998 Plan are administered by a stock option
committee which has the discretion to determine the number and purchase price of
shares subject to stock options (which may be below the fair value of the common
stock on the date thereof), the term of each option and the time or times during
its term when the option becomes exercisable. Options are generally exercisable
in equal amounts over a five-year period from the date of grant. During 1995 and
1994, the exercise prices of certain options ranging from $6.00 to $15.75 were
reduced to $4.00 (fair market value on the date of repricing). On October 8,
1996, the exercise prices of certain options ranging from $7.00 to $11.50 were
reduced to $4.75 (fair market value on the date of repricing). In December 1998,
current employees of the Company were allowed to elect repricing of outstanding
options, adjusting the exercise price to the current market price in exchange
for delaying the vesting of one-half of all then unvested options by twelve
months. All current employees elected to reprice their options under the terms
offered. The existing options were cancelled and the repriced options were
recorded as new grants. The new grants to all Non-Executive employees totaled
313,050, which were issued from the 1998 Plan subject to Board of Directors
approval to increase the available shares in excess of the 200,000 shares
originally authorized.
The Company accounts for the both stock option plans under APB Opinion No. 25
- -"Accounting for Stock Options Issued to Employees", under which no compensation
cost has been recognized. Statement of Accounting Standards No. 123 -"Accounting
for Stock-Based Compensation" (SFAS No. 123), was issued in 1995 and, if fully
adopted, changes the methods for recognition of cost on plans similar to that of
the Company. Adoption of SFAS No. 123 is optional; however, pro forma
disclosures as if the Company had adopted the cost recognition method are
required. Had compensation cost for the Plan been determined consistent with
SFAS No. 123, the Company's results of operations and earnings per share would
have been changed to the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C> <C>
Net loss: As reported $ (4,710) $ (2,889)
Pro forma $ (5,420) $ (3,831)
Primary and fully-diluted EPS: As reported $ (0.63) $ (0.43)
Pro forma $ (0.72) $ (0.57)
</TABLE>
-29-
<PAGE> 30
A summary of the status of the 1992 Employee Stock Option and Compensation Plan
at December 31, 1998, 1997 and 1996, and changes during the periods then ended
is presented in the tables and narrative below:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
---------------------- ---------------------- ----------------------
Wtd Avg Wtd Avg Wtd Avg
Number Ex Price Number Ex Price Number Ex Price
------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 825,400 $4.69 606,500 $4.67 352,600 $3.99
Granted 550,400 1.14 271,550 4.75 540,500 4.75
Exercised -- -- -- -- (207,600) 3.94
Forfeited (765,800) 4.63 (52,650) 4.91 (79,000) 4.16
Expired -- -- -- -- -- --
------- ----- ------- ----- ------- -----
Outstanding at end of period 610,000 $1.56 825,400 $4.69 606,500 $4.67
======= ======= =======
Exercisable at end of period 361,800 $1.74 290,933 $4.61 131,000 $4.52
Weighted average fair value
of options granted on grant date $ 0.83 $ 2.91 $ 2.95
</TABLE>
<TABLE>
<CAPTION>
Detail composition of options outstanding December 31, 1998:
--------------------------------------------------------------------------
Avg. contractual
Options Exercise life remaining Options
outstanding price (Years) exercisable
------------- ------------- ----------------- -------------
<S> <C> <C> <C>
11,600 $5.75 8.00 2,400
38,000 4.75 7.70 37,000
1,400 4.13 8.42 1,400
35,000 4.00 5.29 35,000
4,000 2.25 9.00 --
220,000 1.13 9.96 70,000
300,000 1.00 10.00 216,000
------- -------
610,000 361,800
======= =======
</TABLE>
The fair value of each option grant under the 1992 Employee Stock Option and
Compensation Plan is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions used for the 1998, 1997 and
1996 grants: risk-free interest rate of 4.9, 6.5 and 6.2 percent; expected
dividend yield of 0.0 percent; expected lives of 5 years; expected volatility of
91.5, 90.3 and 61.8 percent, respectively.
-30-
<PAGE> 31
A summary of the status of the 1998 Non-Executive Stock Option Plan at December
31, 1998 and changes during the period then ended is presented in the table and
narrative below:
<TABLE>
<CAPTION>
December 31, 1998
------------------------
Wtd Avg
Number Ex Price
------ --------
<S> <C> <C>
Outstanding at beginning of period -- $ --
Granted 313,050 1.11
Exercised -- --
Forfeited -- --
Expired -- --
-------
Outstanding at end of period 313,050 $1.11
=======
Exercisable at end of period 102,750 $1.11
Weighted average fair value of
options granted on grant date $ 0.81
</TABLE>
As of December 31, 1998, the 313,050 options outstanding in the 1998
Non-Executive Stock Option Plan had an average exercise price of $1.11 with a
weighted average remaining contractual life of 9.97 years. The options
exercisable had exercise prices of $1.00 to $1.18.
The fair value of each option grant under the 1998 Non-Executive Stock Option
Plan is estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions used for the 1998 grants: risk-free
interest rate of 4.9 percent; expected dividend yield of 0.0 percent; expected
life of 5 years; expected volatility of 92.4%. The Company adopted a Director
Stock Option Plan (the "Director Option Plan") in 1997, pursuant to which
options and other awards to acquire an aggregate of 100,000 shares of the
Company's common stock may be granted.
A summary of the status of the Directors Option Plan at December 31, 1998 and
1997, and changes during the periods then ended is presented in the table and
narrative below:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------ -----------------------
Wtd Avg Wtd Avg
Number Ex Price Number Ex Price
-------- -------- ------- --------
<S> <C> <C> <C>
Outstanding at beginning of period 40,000 $5.06 -- $ --
Granted -- -- 40,000 5.06
Exercised -- -- -- --
Forfeited (30,000) 5.04 -- --
Expired -- -- -- --
-------- -------
Outstanding at end of period 10,000 $5.13 40,000 $5.06
======== =======
Exercisable at end of period 10,000 $5.13 10,000 $5.06
Weighted average fair of options
granted on grant date $ -- $ 3.80
</TABLE>
-31-
<PAGE> 32
As of December 31, 1998, the 10,000 options outstanding in the Director Option
Plan had an average exercise price of $5.13, with a weighted average remaining
contractual life of 0.5 years. The options exercisable had exercise prices of
$5.13.
The fair value of each option grant under the Director Stock Option Plan is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used for the 1997 grants: risk-free interest rate of
6.5 percent; expected dividend yield of 0.0 percent; expected life of 5 years;
expected volatility of 95.1%.
The Company has issued stock purchase warrants with a variety of terms and
conditions. During 1996, the exercise prices of certain warrants were reduced
from $11.00 and $15.00 to $10.00 and $13.00, respectively. The following
summarizes stock purchase warrant transactions during the period:
<TABLE>
<CAPTION>
Number Exercise Prices
-------- ---------------
<S> <C> <C>
Outstanding December 31, 1995 652,500 4.00 - 15.00
Granted -- --
Exercised (50,000) 4.00
Canceled/Expired -- --
-------- --------------
Outstanding December 31, 1996 602,500 6.90 - 13.00
Granted -- --
Exercised -- --
Canceled/Expired -- --
-------- --------------
Outstanding December 31, 1997 602,500 6.90 - 13.00
Granted 5,000 3.19
Exercised -- --
Canceled/Expired (325,000) 6.90 - 13.00
-------- --------------
Outstanding December 31, 1998 282,500 $3.19 - $13.00
======== ==============
</TABLE>
At December 31, 1998, 282,500 warrants were exercisable. The warrants expire at
various dates through September, 2001.
8. INCOME TAXES:
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
For the Year For the Year For the Year
Ended Ended Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ 21
State -- -- --
------ ------ ------
Subtotal -- -- 21
Deferred -- -- 854
------ ------ ------
Total $ -- $ -- $ 875
====== ====== ======
</TABLE>
-32-
<PAGE> 33
The tax effects of temporary differences giving rise to the deferred items are
as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards $ 4,783 $ 3,603
Inventory reserves 1,255 1,115
Other 252 787
------- -------
Total deferred tax assets 6,290 5,505
Valuation allowance (6,290) (5,505)
------- -------
Deferred tax assets, net of allowance $ -- $ --
======= =======
</TABLE>
In accordance with SFAS No. 109, the gross deferred tax asset at December 31,
1998 and 1997, of $6,290 and $5,505, respectively, has been reduced to zero by a
full valuation allowance. The Company recorded a $875 provision for income taxes
during 1996, which included a full valuation allowance on its deferred tax
asset. As required by SFAS No. 109, and taking into consideration past losses,
the Company recorded the additional valuation reserve.
At December 31, 1998, the Company has approximately $13,667 of net operating
loss carry forwards for federal income tax purposes. These losses expire
beginning 2009 through 2012. The use of approximately $498 of these losses is
limited to approximately $249 per year for the next two years because the loss
was generated in a short tax year.
9. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company has entered into certain noncancelable operating lease agreements
related to office and warehouse space and equipment. Total lease expense under
operating leases was $281, $272 and $222 for the years ended December 31, 1998,
1997 and 1996, respectively. The minimum annual rental commitments under
operating leases are as follows for the years ending December 31:
<TABLE>
<S> <C>
1999 $304
2000 304
2001 241
2002 3
----
Total $852
====
</TABLE>
LITIGATION
The Company is involved in legal actions in the ordinary course of its business.
While no reasonable estimates of potential liability can be determined,
management believes that such legal actions will be resolved without a material
effect on the Company's financial position or results of operations.
-33-
<PAGE> 34
EMPLOYMENT CONTRACTS
The Company has employment contracts with various officers with remaining terms
ranging from one to three years at amounts approximating their current levels of
compensation. The Company's remaining aggregate commitment at December 31, 1998,
under such contracts is approximately $1,439. These agreements may also include
additional compensation to officers related to sales commission bonuses that
could be equal to two percent of the Company's sales.
10. DISTRIBUTORSHIP AND SALES AGENCY AGREEMENTS:
In February 1996, the Company entered into an exclusive distribution agreement
with Aristocrat Leisure Industries ("Aristocrat") of New South Wales, Australia
for the marketing and distribution of games in Australia, New Zealand, Papua New
Guinea, Taiwan, New Caledonia, Malaysia, the Philippines and Singapore
(hereinafter "Australasia"). The Company has granted Aristocrat an initial
five-year exclusive license expiring February 2001 to distribute its blackjack,
craps and roulette games to all legalized Australasia video gaming
jurisdictions. Pursuant to the agreement, the Company has agreed to sell its
games at discounted distributor's pricing in exchange for a minimum purchase
quantity of 100 units per year. Aristocrat commenced marketing the Company's
blackjack, and roulette games subsequent to obtaining technical approval from
New South Wales, Australia gaming authorities in September 1997. Pursuant to
this agreement, the Company sold an aggregate of 99 games in 1997 and 86 games
in 1998. Due to the declining multi-player game sales in their territory, sales
to this distributor declined in the third and particularly fourth quarters of
1998, and the Company has not forecasted sales to this customer in 1999.
In March 1998, the Company entered into a business consulting agreement with
Jean D. Leclair and the Leclair Group ("Consultant"), under which the Consultant
provides business consulting services to the Company in Quebec, Canada.
Additionally, the Consultant may also assist the Company in securing agreements
for the purchase of the Company's products in Quebec and Atlantic Canada. For
services to the Company in securing agreements for the purchase of the Company's
products, the Consultant will be paid a commission for game sales acquired with
Loto Quebec and the Atlantic Lottery Corporation. This agreement is for an
initial period of one year, with provision for renewal on a month to month basis
upon mutual written agreement.
In May 1998, the Company entered into a one-year exclusive agency agreement with
Bill Engle, an individual. Under the agreement, the agent represents the
Company's products for sale in the Canadian provinces of British Columbia,
Ontario, Nova Scotia (for casino customers only), Saskatchewan, Alberta and
Manitoba. The agent receives a commission equal to the difference between the
amount received for sales initiated by the agent and prices stated in the
agreement for each product. . This agreement may be renewed for up to two
successive one-year terms upon the agreement of the parties and on the terms and
conditions set forth in the agency agreement.
In December 1998, the Company entered into a three-year exclusive agreement with
DGS, Inc. ("DGS") for the distribution and service of the Company's blackjack
and 21 Stud products in the State of South Carolina. The Company and DGS will
negotiate minimum sales targets for each year of the agreement. If DGS fails to
purchase for resale the minimum number of units in any contract year, the
Company may give notice to terminate the agreement. This agreement provides for
automatic renewal annually after the original term, up to a total of eight
years, and may be terminated by either party under certain circumstances.
The Company has submitted its applications for licensure in New Jersey and
Connecticut, and will apply for approval of its various games. Once the Company
is able to sell product in these jurisdictions, it will be represented by Par 4
("Agent") under terms of a two-year exclusive agency agreement entered into in
January
-34-
<PAGE> 35
1999. Under the agreement, the agent represents certain of the Company's
products for sale in Atlantic City, New Jersey and the State of Connecticut. The
Company and Agent will negotiate minimum sales targets for each year of the
agreement. If Agent fails to obtain sales orders for at least 75 percent of the
target number of units in any contract year, the Company may give notice to
terminate the agreement. This agreement provides for automatic renewal annually
after the original term and may be terminated by either party under certain
circumstances.
The Company also has exclusive distributorship agreements with Vista Gaming
Corporation, Ludi S.F.M. and with S.A.M. Eurusa.
11. SUBSEQUENT EVENTS:
REPURCHASE OF COMMON STOCK
In March 1999, in order to expedite the timing of gaming regulatory approval in
certain jurisdictions, the Company repurchased 400,000 shares of its outstanding
Common Stock, at market price, from a shareholder. The Company entered into a
Stock Redemption Agreement with such shareholder pursuant to which the Company
redeemed 400,000 shares of Company Common Stock beneficially owned by such
shareholder in exchange for a four year convertible note and a warrant to
purchase 50,000 shares of the Company's Common Stock. In April 1999, the Company
redeemed 700,000 shares of Common Stock from Lakes Gaming, Inc. on substantially
the same terms as the redemption described above. This redemption was also to
expedite the timing of gaming regulatory approval in certain jurisdictions.
These notes are unsecured, paying interest of 5% per annum and will be
convertible at the closing market price of the Company's Common Stock on the
date of the issuance of the notes. The notes may not be converted in the first
year following issuance. The exercise price of the warrants will be the same as
the conversion price of the notes. The Company also granted "piggyback"
registration rights for shares of Common Stock issuable upon conversion of both
the notes and the warrants. See "Common Stock Redemption" and Item 1. -
"Business - Regulation."
ADDITIONAL FINANCING
In June 1999, the Company received an aggregate of $1,742 from a private
placement of notes and Series C Preferred stock. The three-year convertible
secured notes totaling $1,550 were issued to a group of investors including a
current shareholder of the Company. Interest is paid quarterly at a rate of 12%
per annum, and the principal balance is due June 1, 2002. At any time after June
1, 2000, and until the principal balance is paid in full, the holders of the
notes may convert the notes into Common Stock of the Company at a conversion
price of $1.50 per share. The note holders may not convert the notes into Common
Stock if such conversion would result in beneficial ownership by such note
holder of more than 4.9% of the Company's issued and outstanding Common Stock.
The note holders were also granted an aggregate of 282,500 warrants to purchase
shares of the Company's Common Stock at an exercise price of $1.25 per share.
Also in June 1999, the Company received net proceeds of approximately $192 from
the issuance of Series C Convertible Preferred Stock.
RESTATEMENT OF OPERATING RESULTS
The Company has restated its results of operations for the years ended December
31, 1996 and 1998. In July 1999, the Company engaged its independent public
accountants to audit its financial statements for the years ending December 31,
1996 and 1997, which were originally audited by the Company's predecessor
independent public accountants. In the previously issued statements of
operations, the Company recorded a $720 provision for income taxes in 1998 to
provide a full valuation allowance on a deferred tax asset. Based on the
historical information available during the re-audit of the December 31, 1996
and 1997 financial statements, management believes that this provision should be
recorded in the year ended December 31, 1996. The restated financial statements
reflect the transfer of this tax provision from 1998 to 1996.
- 35 -
<PAGE> 36
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
Schedule II - Valuation and Qualifying Accounts
(In Thousands)
<TABLE>
<CAPTION>
Balance Charged to Amount Balance
Beginning Costs and Written End of
Description of Period Expenses Off Period
- ----------- ------------ ---------- ------- --------
<S> <C> <C> <C> <C>
Reserve for inventory obsolescence:
For the year ended 12/31/96 $ 649 $ 1,308 $ 64 $ 1,893
For the year ended 12/31/97 1,893 112 1,124 881
For the year ended 12/31/98 881 571 505 947
</TABLE>
<TABLE>
<CAPTION>
Balance
Beginning Charged/ Amount Balance
of Period (Credited) Written End of
Description and Expenses to Costs Off Period
- ----------- ------------ ---------- ------- --------
<S> <C> <C> <C> <C>
Allowance for doubtful notes and
accounts receivable:
For the year ended 12/31/96 $ 70 $ 78 $ -- $ 148
For the year ended 12/31/97 148 (48) -- 100
For the year ended 12/31/98 100 -- 15 85
</TABLE>
-36-
<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants - Kafoury, Armstrong & Co .............. 14
Consolidated Balance Sheets as of December 31, 1998 and 1997 ..................... 16
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 ................................................ 17
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996 ........................................... 18
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 ................................................. 19
Notes to the Consolidated Financial Statements ................................... 20
</TABLE>
- 37 -
<PAGE> 38
(a)(3) Exhibits
3.1(a) Articles of Incorporation, as amended (Incorporated herein by reference
to Exhibit 3.1 to the Company's registration Statement on Form SB-2
(File No. 33-61492C) (the "SB-2")
3.1(b) Certificate of Designation relating to Series B Convertible Preferred
Stock (Incorporated herein by reference to Exhibit 4 to the Company's
report on Form 10-Q for the quarter ended March 31, 1998) (the "March
31, 1998 10-Q")
3.2 Bylaws (Incorporated herein by reference to Exhibit 3.2 to the SB-2)
10.1 1992 Stock Option and Compensation Plan, as amended (Incorporated herein
by reference to Annex B to the Company's Schedule 14A filed April 24,
1997)+
10.2 Agreement by and between the Company and Grand Casinos, Inc., dated as
of July 28, 1994 (Incorporated herein by reference to Exhibit 10.26 to
the Company's report on Form 10-K for the fiscal year ended July 31,
1994)
10.3 Employment Agreement between the Company and Edward G. Stevenson dated
as of February 15, 1996 (Incorporated herein by reference to Exhibit
10.16 to the Company's report on Form 10-K for the fiscal year ended
December 31,1995) (the "December 31, 1995 10-K")
10.4 Exclusive Distributorship Agreement between the Company and Aristocrat
Leisure Industries PTY LTD dated February 7, 1996 (Incorporated herein
by reference to Exhibit 10.18 to the Company's December 31,1995 10-K)
10.5 Assignment between the Company, NANAO and IREM dated February 2, 1996
(Incorporated herein by reference to Exhibit 10.19 to the Company's
December 31, 1995 10-K)
10.6 Parts Supply Agreement between the Company and IREM dated February 2,
1996 (Incorporated herein by reference to Exhibit 10.20 to the Company's
December 31, 1995 10-K)
10.7 Agreement between the Company and H Square Corporation dated April 26,
1996 (Incorporated herein by reference to Exhibit 10.21 to the Company's
December 31,1995 10-K)
10.8 Second Amendment to Share Exchange Agreement between the Company and
Grand Casinos, Inc. dated December 1, 1995 (Incorporated herein by
reference to Exhibit 10.23 to the Company's December 31, 1995 10-K)
10.9 Exclusive Distributorship Agreement between the Company and Ludi S.F.M.
dated March 5, 1996 (Incorporated herein by reference to Exhibit 10.24
to the Company's December 31, 1995 10-K)
10.10 Exclusive Distributorship Agreement between the Company and S.A.M. EURSA
dated March 5, 1996 (Incorporated herein by reference to Exhibit 10.25
to the Company's December 31, 1995 10-K)
10.11 Product Development and Revenue Sharing Agreement between the Company
and IGT, dated November 18, 1996 (Incorporated herein by reference to
Exhibit 10.18 to the Company's report on Form 10-K for the fiscal year
ended December 31, 1996) (the "December 31, 1996 10-K")
10.12 Lease agreement between the Company and Dermody Properties, dated July
9, 1996 (Incorporated herein by reference to Exhibit 10.20 to the
Company's December 31, 1996 10-K)
10.13 Loan Agreement between the Company and Finova Capital Management dated
as of April 13, 1998 (Incorporated herein by reference to Exhibit 10.1
to the Company's March 31, 1998 10-Q)
10.14 Form of Subscription Agreement dated May 13,1998 (Incorporated herein by
reference to Exhibit 10.2 to the Company's March 31, 1998 10-Q)
10.15 Form of Registration Rights Agreement dated May 13, 1998 (Incorporated
herein by reference to Exhibit 10.3 to the Company's March 31, 1998
10-Q)
10.16 1997 Director Stock Option Plan (Incorporated herein by reference to
Annex A to the Company's Schedule 14A filed April 24, 1997)
10.17 1998 Non-Executive Employee Stock Option Plan (incorporated herein by
reference to Exhibit 10.17 to the Company's Report on Form 10-K for
the fiscal year ended December 31, 1998) (the "December 31, 1998 10-K")
10.18 Agreement between the Company and Edward G. Stevenson dated January 1,
1999 (incorporated herein by reference to Exhibit 10.18 to the Company's
December 31, 1998 10-K)
21 List of Subsidiaries (incorporated herein by reference to Exhibit 21 to
the Company's December 31, 1998 10-K)
23.1 Consent of Kafoury, Armstrong & Co.
23.2 [DELETED]
27 Financial Data Schedule - which is only submitted electronically to the
Securities and Exchange Commission for EDGAR information purposes.
- ----------
+ Agreement relates to Executive Compensation
(b) Reports on Form 8-K
On October 30, 1998, the Company filed a Form 8-K to report the resignation of
its independent accountants.
-38-
<PAGE> 39
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this amended report on Form 10-K/A to be signed on its behalf by the
undersigned, thereunto duly authorized.
INNOVATIVE GAMING CORPORATION OF AMERICA
Registrant
Date: August 2, 1999 By: /s/ Edward G. Stevenson
------------------------------------
Name: Edward G. Stevenson
Title: Chief Executive Officer
and Chairman
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 indicated on
August 2, 1999.
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
/s/ Edward G. Stevenson Chief Executive Officer and Chairman
- ----------------------------------- (principal executive officer)
Edward G. Stevenson
/s/ Scott Shackelton Vice President-Finance, Chief
- ----------------------------------- Financial Officer
Scott Shackelton (principal accounting officer)
</TABLE>
- 39-
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
3.1(a) Articles of Incorporation, as amended (Incorporated herein by reference
to Exhibit 3.1 to the Company's registration Statement on Form SB-2
(File No. 33-61492C) (the "SB-2")
3.1(b) Certificate of Designation relating to Series B Convertible Preferred
Stock (Incorporated herein by reference to Exhibit 4 to the Company's
report on Form 10-Q for the quarter ended March 31, 1998) (the "March
31, 1998 10-Q")
3.2 Bylaws (Incorporated herein by reference to Exhibit 3.2 to the SB-2)
10.1 1992 Stock Option and Compensation Plan, as amended (Incorporated herein
by reference to Annex B to the Company's Schedule 14A filed April 24,
1997)+
10.2 Agreement by and between the Company and Grand Casinos, Inc., dated as
of July 28, 1994 (Incorporated herein by reference to Exhibit 10.26 to
the Company's report on Form 10-K for the fiscal year ended July 31,
1994)
10.3 Employment Agreement between the Company and Edward G. Stevenson dated
as of February 15, 1996 (Incorporated herein by reference to Exhibit
10.16 to the Company's report on Form 10-K for the fiscal year ended
December 31,1995) (the "December 31, 1995 10-K")
10.4 Exclusive Distributorship Agreement between the Company and Aristocrat
Leisure Industries PTY LTD dated February 7, 1996 (Incorporated herein
by reference to Exhibit 10.18 to the Company's December 31,1995 10-K)
10.5 Assignment between the Company, NANAO and IREM dated February 2, 1996
(Incorporated herein by reference to Exhibit 10.19 to the Company's
December 31, 1995 10-K)
10.6 Parts Supply Agreement between the Company and IREM dated February 2,
1996 (Incorporated herein by reference to Exhibit 10.20 to the Company's
December 31, 1995 10-K)
10.7 Agreement between the Company and H Square Corporation dated April 26,
1996 (Incorporated herein by reference to Exhibit 10.21 to the Company's
December 31,1995 10-K)
10.8 Second Amendment to Share Exchange Agreement between the Company and
Grand Casinos, Inc. dated December 1, 1995 (Incorporated herein by
reference to Exhibit 10.23 to the Company's December 31, 1995 10-K)
10.9 Exclusive Distributorship Agreement between the Company and Ludi S.F.M.
dated March 5, 1996 (Incorporated herein by reference to Exhibit 10.24
to the Company's December 31, 1995 10-K)
10.10 Exclusive Distributorship Agreement between the Company and S.A.M. EURSA
dated March 5, 1996 (Incorporated herein by reference to Exhibit 10.25
to the Company's December 31, 1995 10-K)
10.11 Product Development and Revenue Sharing Agreement between the Company
and IGT, dated November 18, 1996 (Incorporated herein by reference to
Exhibit 10.18 to the Company's report on Form 10-K for the fiscal year
ended December 31, 1996) (the "December 31, 1996 10-K")
10.12 Lease agreement between the Company and Dermody Properties, dated July
9, 1996 (Incorporated herein by reference to Exhibit 10.20 to the
Company's December 31, 1996 10-K)
10.13 Loan Agreement between the Company and Finova Capital Management dated
as of April 13, 1998 (Incorporated herein by reference to Exhibit 10.1
to the Company's March 31, 1998 10-Q)
10.14 Form of Subscription Agreement dated May 13,1998 (Incorporated herein by
reference to Exhibit 10.2 to the Company's March 31, 1998 10-Q)
10.15 Form of Registration Rights Agreement dated May 13, 1998 (Incorporated
herein by reference to Exhibit 10.3 to the Company's March 31, 1998
10-Q)
10.16 1997 Director Stock Option Plan (Incorporated herein by reference to
Annex A to the Company's Schedule 14A filed April 24, 1997)
10.17 1998 Non-Executive Employee Stock Option Plan (incorporated herein by
reference to Exhibit 10.17 to the Company's Report on Form 10-K for
the fiscal year ended December 31, 1998) (the "December 31, 1998 10-K")
10.18 Agreement between the Company and Edward G. Stevenson dated January 1,
1999 (incorporated herein by reference to Exhibit 10.18 to the Company's
December 31, 1998 10-K)
21 List of Subsidiaries (incorporated herein by reference to Exhibit 21 to
the Company's December 31, 1998 10-K)
23.1 Consent of Kafoury, Armstrong & Co.
23.2 [DELETED]
27 Financial Data Schedule - which is only submitted electronically to the
Securities and Exchange Commission for EDGAR information purposes.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our reports included in this Form 10-K/A, into the Company's
previously filed Registration Statements on Form S-8 (File Nos. 33-73764,
333-06669, 333-37813 and 333-37815).
KAFOURY, ARMSTRONG & CO.
Reno, Nevada
August 2, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,617
<SECURITIES> 700
<RECEIVABLES> 1,520
<ALLOWANCES> 0
<INVENTORY> 9,244
<CURRENT-ASSETS> 13,465
<PP&E> 1,389
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,093
<CURRENT-LIABILITIES> 1,365
<BONDS> 0
0
0
<COMMON> 75
<OTHER-SE> 14,797
<TOTAL-LIABILITY-AND-EQUITY> 17,093
<SALES> 8,509
<TOTAL-REVENUES> 8,509
<CGS> 7,134
<TOTAL-COSTS> 7,134
<OTHER-EXPENSES> 5,819
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (106)
<INCOME-PRETAX> (4,338)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,338)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,338)
<EPS-BASIC> (.63)
<EPS-DILUTED> (.63)
</TABLE>
