<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ______________to________________
Commission file number 0-22482
INNOVATIVE GAMING CORPORATION OF AMERICA
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Minnesota 41-1713864
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
4725 Aircenter Circle, Reno, Nevada 89502
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(775) 823-3000
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(Issuer's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Address, If Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: At November 5, 1999 there were
8,272,742 shares of Common Stock, $0.01 par value, outstanding.
Page 1 of 17
<PAGE> 2
INNOVATIVE GAMING CORPORATION OF AMERICA
Form 10-Q Index
September 30, 1999
<TABLE>
<S> <C> <C>
Part I: Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
September 30, 1999 (Unaudited) and December 31, 1998 3
Consolidated Condensed Statements of Operations -
for the three and nine months ended
September 30, 1999 and 1998 (Unaudited) 4
Consolidated Condensed Statements of Cash Flows -
for the nine months ended
September 30, 1999 and 1998 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Part II: Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
Page 2 of 17
<PAGE> 3
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
------------- ------------
1999 1998
------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 465 $ 1,617
Restricted investments -- 700
Accounts receivable 549 1,186
Current portion of notes receivable 331 334
Inventories 7,715 9,244
Prepaid expenses and other 303 384
------------- ------------
Total current assets 9,363 13,465
NOTES RECEIVABLE, LESS CURRENT PORTION 164 362
PROPERTY AND EQUIPMENT, NET 1,397 1,389
INTANGIBLE ASSETS, NET 1,867 1,877
------------- ------------
TOTAL ASSETS $ 12,791 $ 17,093
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 588 $ 313
Accrued liabilities 530 524
Notes payable - current portion 921 528
------------- ------------
Total current liabilities 2,039 1,365
Notes payable - net of current portion 3,396 856
------------- ------------
Total liabilities 5,435 2,221
------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series B convertible preferred stock, $.01 par value, nonvoting,
4,000 shares authorized, 825 and 3,000 shares outstanding, respectively -- --
Series C convertible preferred stock, $.01 par value, nonvoting,
2,000 shares authorized, 1,400 and 0 shares outstanding, respectively -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
7,501,648 and 7,535,211 shares issued and outstanding, respectively 75 75
Additional paid-in capital 31,715 32,676
Accumulated deficit (24,434) (17,879)
------------- ------------
Total stockholders' equity 7,356 14,872
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,791 $ 17,093
============= ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
Page 3 of 17
<PAGE> 4
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
SALES $ 646 $ 1,169 $ 2,897 $ 7,373
COST OF SALES 1,775 1,204 4,239 5,723
------- ------- ------- -------
Gross profit (1,129) (35) (1,342) 1,650
SELLING, GENERAL AND ADMINISTRATIVE 1,732 1,713 4,935 4,227
------- ------- ------- -------
Loss from operations (2,861) (1,748) (6,277) (2,577)
INTEREST INCOME (EXPENSE), NET (68) 33 (73) 83
------- ------- ------- -------
NET LOSS (2,929) (1,715) (6,350) (2,494)
Preferred stock accretion adjustment 87 143 120 284
Preferred stock dividends 27 30 84 46
------- ------- ------- -------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(3,043) $(1,888) $(6,554) $(2,824)
======= ======= ======= =======
BASIC - LOSS PER SHARE OF COMMON STOCK $ (0.42) $ (0.25) $ (0.91) $ (0.37)
======= ======= ======= =======
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 7,187 7,535 7,221 7,535
======= ======= ======= =======
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
Page 4 of 17
<PAGE> 5
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------------
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,350) $(2,494)
Adjustments to reconcile net loss to
cash flows from operating activities -
Depreciation and amortization 853 700
Provision for inventory obsolescence 1,169 262
Changes in operating assets and liabilities 1,566 (106)
------- -------
Cash flows used in operating activities (2,762) (1,638)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Inventory returned from (capitalized for use in) gaming operations (626) 487
Release of restricted investments 700 --
Purchases of property and equipment (76) (206)
Purchase of intangible assets (150) (50)
------- -------
Cash flows provided from (used in) investing activities (152) 231
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends paid (86) (30)
Proceeds from sale of common stock 35 --
Proceeds from sale of preferred stock 1,292 2,804
Payment to redeem preferred stock (1,100) --
Proceeds from financing agreements 1,950 910
Payments on financing agreements (329) (269)
------- -------
Cash flows provided from financing activities 1,762 3,415
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,152) 2,008
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,617 1,518
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 465 $ 3,526
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest $ 132 $ 50
======= =======
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
Page 5 of 17
<PAGE> 6
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. Although management believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
interim consolidated condensed financial statements be read in conjunction with
the Company's most recent audited consolidated financial statements and notes
thereto included in the Company's Annual Report to Shareholders and Form 10-K
for the year ended December 31, 1998. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented have been made. Operating results for
the nine months ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999.
(2) COMMITMENTS AND CONTINGENCIES
The manufacture, distribution and sale of the Company's products are regulated
by various jurisdictions and entities, including requirements to obtain licenses
and product approvals in several jurisdictions. The Company has obtained
required licenses and product approvals in certain jurisdictions and is
continuing efforts to obtain such approvals in other jurisdictions. Failure to
successfully obtain and/or maintain such licenses and approvals, or meet other
regulatory requirements could materially impact the expansion and future
operation of the Company. Additionally, there is no assurance that the Company's
products will be accepted in the marketplace upon obtaining regulatory
approvals. As a result, the Company's quarterly results may be volatile until
all such licenses and product approvals have been obtained, appropriate
marketing efforts have been successfully performed and the Company's products
are accepted in major gaming markets.
(3) RELATED PARTY TRANSACTIONS
Lakes Gaming, Inc. ("LGI"), (formerly Grand Casinos, Inc.) which is in the
business of owning, managing and developing casinos, is a stockholder of the
Company. 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 Grand Casinos, Inc. from October 1991 through March
1998. Mr. Berman served on the Board of Directors of the Company until July 16,
1999. Under an existing machine purchase agreement, LGI may purchase up to an
aggregate of 125 of the Company's 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 a 1998 agreement between the Company and LGI, used multi-player machines
which LGI previously purchased from the Company could 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 could be applied to the
purchase of one new Bonus Streak game from the Company and with minimum proceeds
of $5,000 to be credited to LGI for each game sold by the Company. During 1998,
LGI submitted 15 such used multi-player games to the Company for sale under the
consignment agreement. In the first quarter of fiscal 1999, the Company
delivered 5 Bonus Streak games to casinos managed by LGI in exchange for the
used multi-player games submitted to the Company for sale under this agreement.
The Company made sales of six Bonus Streak(TM) games and no multi-player machine
sales to LGI during the nine-month period ended September 30, 1998 and no
machine sales during the nine-month period ended September 30, 1999.
In April 1999, in order to expedite the timing of gaming regulatory approval in
certain jurisdictions, the Company repurchased 700,000 shares of Common Stock
from LGI. The Company entered into a Stock Redemption Agreement with LGI
pursuant to which the Company redeemed 700,000 shares of Company Common Stock in
exchange for a four-year convertible note and a warrant to purchase 87,500
shares of the Company's Common Stock.
Page 6 of 17
<PAGE> 7
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1999
(UNAUDITED)
The note is unsecured, pays interest of 5% per annum and is convertible at $1.25
per share (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 until April 22, 2000.
The exercise price of the warrants is $1.25 per share. The Company also granted
"piggyback" registration rights for shares of Common Stock issuable upon
conversion of both the note and the warrant.
(4) INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No. 109-
"Accounting for Income Taxes" - (SFAS No. 109) under which deferred income tax
assets and liabilities are recognized for differences between financial and
income tax reporting basis of assets and liabilities based on currently enacted
rates and laws. The Company had cumulative federal net operating loss carry
forwards of approximately $13,667,000 as of December 31, 1998. These losses, if
not used, begin to expire in 2009 through 2012. The use of approximately
$498,000 of these losses is limited to approximately $249,000 per year for the
next two years because the loss was generated in a short tax year. Future
changes in the ownership of the Company may place limitations on the use of
these net operating loss carry forwards.
(5) 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 the periods presented is based on weighted average common shares
outstanding, which is equivalent to "basic" earnings per share as 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.
(6) PREFERRED STOCK PRIVATE PLACEMENT
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 for total proceeds of $3,000,000 prior to any offering
expenses. The stated par value per share is $.01, resulting in a total par value
of thirty dollars being recorded as Series B Preferred Stock, and the balance of
approximately $3.0 million is included in Additional Paid-in Capital. 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 Stock that may be issued upon
conversion is 1,505,000. In the event a holder of Series B Preferred Stock is
unable to convert shares of Preferred Stock into Common Stock at a discount
because 1,505,000 shares have been issued at a discount, then the Company may
either 1) redeem any unconverted Series B Preferred Stock for cash at a price
equal to 115% of the liquidation value of the shares or 2) issue Series C
Convertible Preferred Stock in an amount 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 Series B Preferred Stock at 115% of par in cash. On
June 1, 1999, the Company redeemed $1,100,000 of the Series B Preferred Stock at
100% of par in cash. As of September 30, 1999, shares representing $1,075,000 of
Series B Preferred Stock had been converted into Common Stock, and all of the
remaining outstanding balance of $825,000 of Series B Preferred Stock is
convertible into Common Stock, at the election of the holder thereof. All
outstanding shares of Series B Preferred Stock will automatically be converted
into Common Stock on June 1, 2001. A holder of Series B 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.
Page 7 of 17
<PAGE> 8
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1999
(UNAUDITED)
The 9% beneficial conversion feature was accounted for as an additional
Preferred Stock dividend, which was determined on the date the Series B
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 Series B Preferred Stock to the
earliest conversion date. Income available to holders of Common Stock was
reduced by approximately $140,934, $143,406 and $12,363 during the second, third
and fourth quarters of 1998, respectively.
On June 1, 1999, as part of a financial restructuring, the Company issued 1,400
shares of Series C Convertible Preferred Stock (the "Series C Preferred Stock")
at a price of $1,000 per share in a private placement for total proceeds of
$1,400,000 prior to any offering expenses. The stated par value per share is
$.01, resulting in a total par value of fourteen dollars being recorded as
Series C Convertible Preferred Stock, and the balance of approximately $1.4
million is included in Additional Paid-in Capital. 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 C 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
$1.877, which represents 135% of the ten day average of the closing bid price
of the Company's Common Stock ending on May 28, 1999. Twenty-five percent (25%)
of the Series C Preferred Stock was convertible into Common Stock, at the
election of the holder thereof, on August 29, 1999. Fifty percent (50%) of the
Series C Preferred Stock is convertible 30 days after the Effective Date;
seventy five percent (75%) of the Series C Preferred Stock is convertible 60
days after the Effective Date; and one hundred percent (100%) of the Series C
Preferred Stock is convertible 90 days after the Effective Date. The maximum
number of shares of Common Stock that may be issued upon conversion is
1,331,500. The Company has the right to redeem the Series C Preferred Stock at
115% of par in cash beginning August 31, 1999. The effective date of the
Registration Statement filed with the Securities and Exchange Commission
relating to the Common Stock to be issued upon conversion of the Series C
Convertible Preferred Stock was September 24, 1999, and all necessary gaming
regulatory approvals have been received. All outstanding shares of Series C
Preferred Stock will automatically be converted into Common Stock on June 1,
2001. 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.
The 9% beneficial conversion feature was accounted for as an additional
Preferred Stock dividend, which was determined on the date the Series C
Preferred Stock was issued. The total value of the beneficial conversion feature
or dividend is $138,462, 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 Series C Preferred Stock to the
earliest conversion date. Income available to holders of Common Stock is being
reduced by approximately $32,885, $87,115 and $18,462 during the second, third
and fourth quarters of 1999, respectively.
(7) 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 are 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
Page 8 of 17
<PAGE> 9
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1999
(UNAUDITED)
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.
(8) FINANCIAL RESTRUCTURING
On June 1, 1999, the Company completed a financial restructuring in which the
Company received an aggregate $1,742,000 in net proceeds from a private
placement of convertible notes and warrants, and Series C Convertible Preferred
Stock.
The three-year convertible secured notes totaling $1,550,000 were issued to a
group of investors June 1, 1999. Interest on such notes 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.
As a part of this restructuring, the Company issued 1,400 shares of Series C
Convertible Preferred Stock at a price of $1,000 per share in a private
placement for total proceeds of $1,400,000 prior to any offering expenses (See
Note 6 - "Preferred Stock Private Placement"). Additionally, the holders of the
Series B Convertible Preferred Stock agreed to amend the conversion terms the
Series B Convertible Preferred Stock, changing the automatic conversion date
from November 13, 1999, to June 1, 2001 in exchange for a warrant to acquire
350,000 shares of Common Stock of the Company at $1.50 per share. The amendments
also provide that if the holders of the Series B Convertible Preferred Stock are
unable to convert such preferred stock to Common Stock of the Company because
the maximum number of shares of Common Stock have been issued as allowed under
terms of the Series B Convertible Preferred Stock, the Company may redeem the
Series B Convertible Preferred Stock at 115% of the liquidation value of such
shares or, at the option of the Company, issue Series C Convertible Preferred
Stock in an amount equal to the number of Series B Convertible Preferred Stock
which cannot be converted into the Company's Common Stock.
(9) RESIGNATION OF DIRECTOR
On September 15, 1999, Wayne Mills resigned from the Board of Directors of the
Company.
(10) SUBSEQUENT EVENTS:
PROPOSED ACQUISITION OF INTERNET MORTGAGE COMPANY
On October 12, 1999, the Company and Equitex, Inc., jointly announced that they
had entered into a letter of intent whereby the Company will acquire Equitex's
wholly-owned subsidiary, First Bankers Mortgage Services, Inc. in a tax free
exchange of stock. Under terms of the letter of intent the stockholders of the
Company will retain 25% of the newly merged company on a post-merger basis.
Closing of the proposed transaction is subject to, among other things, executing
a mutually acceptable definitive agreement, successful completion of due
diligence, completion of certain other documents, obtaining corporate and any
necessary regulatory approvals, approval by the Company's shareholders, and
other customary pre-closing conditions.
Under the proposed agreement, concurrent with the merger, the Company would
divest its gaming assets. Exploratory talks have been held with several gaming
manufacturers with a goal of selling the gaming machine business intact to a
company capable of effectively marketing the Company's recently approved video
slot machine and its multi-player games line.
First Bankers is a direct lender headquartered in Ft. Lauderdale, Florida,
offering both retail and wholesale mortgage financing. First Bankers recently
announced the debut of its online mortgage system, "nMortgage.com". Upon
consummation of the transaction, Innovative Gaming Corporation of America would
be renamed nMortgage.com.
Page 9 of 17
<PAGE> 10
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1999
(UNAUDITED)
PREFERRED STOCK PRIVATE PLACEMENT
During October 1999, the Company issued a total of 2,450 shares of Series D
Convertible Preferred Stock (the "Series D Preferred Stock") at a price of
$1,000 per share in a private placement for total proceeds of $2,450,000, prior
to any offering expenses, and warrants (the "Warrants") to acquire 245,000
shares of the Company's Common Stock at $2.75 per share. An annual dividend of
6% shall be paid quarterly in arrears either in Common Stock of the Company or
cash at the Company's discretion. Each share of Series D Preferred Stock is
convertible into shares of the Company's Common Stock at a conversion price of
the lesser of $3.00 or 75% of the average of closing bid price of the Company's
Common Stock for the five consecutive days immediately preceding the conversion
date. The Company has reserved 1,750,000 shares of Common Stock for issuance
upon conversion of the Series D Preferred Stock and 245,000 shares of Common
Stock to be issued upon the exercise of the Warrants. The Company has the right
to redeem the Series D Preferred Stock at 135% of par in cash if the market
price is lower than the market price on the date the Series D Preferred Stock
was issued. A Registration Statement related to the Common Stock to be issued
will be filed by, and at the expense of, the Company pursuant to obligations
contained in Registration Rights Agreements dated October 14 to 22, 1999.
All outstanding shares of Series D Preferred Stock will automatically be
converted into Common Stock on the fifth anniversary of its issuance. 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company was formed in 1991 to develop, manufacture, market and distribute
group participation and other specialty gaming machines. The Company
manufactures, markets and distributes BJ Blitz(TM), Hot Shot Dice(TM), Lightning
Strike Roulette(TM), Supersuits Progressive Blackjack(TM), Bonus Streak(TM) and
Mythical Reels(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. The
Company has also developed a new series of video slot machines which incorporate
a unique PC platform operating system, which the Company plans to begin
marketing in late 1999 after obtaining regulatory approvals.
The Company is continuing the expansion of its customer markets by submitting
applications for licensing in additional gaming jurisdictions and, where
licensed, submitting its products for technical approval. Also in April 1999,
the Company received a temporary manufacturer's license and distributor's
license from the South Dakota Gaming Commission. Previously registered with
Alberta, Manitoba, Saskatchewan, Quebec and the Atlantic Lottery Corporation,
the Company has applications pending in British Columbia, Ontario and Nova
Scotia. The Company has an agent to market its products in Canada. In December
1998, the Company's Bonus Streak(TM) game received approval in Mississippi and,
during the first quarter of fiscal 1999, its Mythical Reels(TM) game received
approval in Nevada, Louisiana, Colorado, Arizona, New Mexico, and Alberta,
Canada. In February 1999, the Company submitted its single player video slot
machine to the Nevada Gaming Control Board for approval. As of November 1999,
the Company has submitted and has pending applications in Connecticut, Illinois
and Indiana, and has submitted games for approval in New Jersey.
The Company distributes its products both directly to the gaming marketplace and
through licensed distributors. In certain jurisdictions, the Company has
received technical game approval but has not sought or received its
distributor's license. In certain jurisdictions the Company may use an existing
licensed distributor to sell its products pursuant to any necessary Tribal or
regulatory transaction approvals. The Company has applied for necessary licenses
or technical game approvals in key jurisdictions both domestically and
internationally where legalized electronic gaming is permitted.
Page 10 of 17
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
On October 12, 1999, the Company and Equitex, Inc., jointly announced that they
had entered into a letter of intent whereby the Company will acquire Equitex's
wholly-owned subsidiary, First Bankers Mortgage Services, Inc. in a tax free
exchange of stock. Under the proposed agreement, concurrent with the merger, the
Company would divest its gaming assets. Exploratory talks have been held with
several gaming manufacturers with a goal of selling the gaming machine business
intact to a company capable of effectively marketing the Company's recently
approved video slot machine and its multi-player games line. First Bankers is a
direct lender headquartered in Ft. Lauderdale, Florida, offering both retail and
wholesale mortgage financing. First Bankers recently announced the debut of its
online mortgage system, "nMortgage.com". Upon consummation of the transaction,
Innovative Gaming Corporation of America would be renamed nMortgage.com.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998
For the three and nine months ended September 30, 1999, the Company recorded
losses attributable to Common Stock shareholders of $3,043,000, or $.42 per
share, and $6,554,000, or $.91 per share, respectively, compared to losses of
$1,888,000, or $.25 per share, and $2,824,000, or $.37 per share, for the three
and nine months ended September 30, 1998, respectively. The loss attributable to
common shareholders for each period included adjustments for preferred stock
accretion and preferred stock dividends. The increased operating loss in the
fiscal 1999 periods was primarily attributable to low sales volume, increased
provisions for inventory obsolescence and increased expenses incurred related to
the Company's continuing efforts to develop/enhance and license its products and
introduce those products into new markets.
SALES, COST OF SALES AND GROSS PROFIT
Total sales for the quarter ended September 30, 1999, were $646,000 compared to
$1,169,000 recorded in the quarter ended September 30, 1998. This decrease in
revenues was primarily due to a decrease in sales of multi-player games from 14
in 1998 to 1 in 1999. Total sales for the nine months ended September 30, 1999,
were $2,897,000 compared to $7,373,000 in the nine months ended September 30,
1998. Multi-player game sales declined from 111 in the 1998 period to 31 in the
1999 period. There can be no assurance that sales revenue in subsequent quarters
will increase.
The table below presents the comparative sales revenue and percentage of revenue
derived from each of the Company's product lines for the three and nine-month
periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended Three months ended Nine months ended Nine months ended
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
<S> <C> <C> <C> <C>
Sales revenue $646,000 $1,169,000 $2,897,000 $7,373,000
Product line: Percentage of revenue: Percentage of revenue: Percentage of revenue: Percentage of revenue:
---------------------- ---------------------- ---------------------- ----------------------
Multi-player games 9% 67% 51% 83%
Single player games 35% 0% 21% 6%
Parts sales and other 34% 23% 19% 7%
Lease participation 22% 10% 9% 4%
Total 100% 100% 100% 100%
</TABLE>
Sales for the three and nine months ended September 30, 1998, included 11 and 83
multi-player games, respectively, to the Company's distributor in Australia,
while no sales were made to this customer in the comparable 1999 periods. 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. Overall
Company sales will continue to be volatile until, among other things, the
Company's products are accepted by the market place and new jurisdictional
licenses and/or distribution agreements are obtained.
Page 11 of 17
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998 - CONTINUED
The Company recorded a negative gross margin for the three-month and nine-month
periods ended September 30, 1999, and in the three-month period ended September
30, 1998. The gross margin for the nine-month period ended September 30, 1998
was 22.4%. The negative gross margin in the periods noted was primarily due to
unabsorbed labor and overhead costs attributable to low production volume and,
in the three and nine-month periods ended September 30, 1999, increased
provisions for inventory obsolescence.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense for the three months ended September
30, 1999 was $1,732,000 compared to $1,713,000 for the three months ended
September 30, 1998. Selling, general and administrative expense for the nine
months ended September 30, 1999 was $4,935,000 compared to $4,227,000 for the
nine months ended September 30, 1998. These increases in expense were due
primarily to an increased investment in engineering and development costs for
new product development and costs associated with applications for licensing in
various jurisdictions.
INTEREST INCOME
In the quarter ended September 30, 1999, net interest expense was $68,000
compared to net interest income of $33,000 in the quarter ended September 30,
1998. In the nine months ended September 30, 1999, net interest expense was
$73,000 compared to net interest income of $83,000 in the nine months ended
September 30, 1998. These unfavorable changes in net interest were due to a
decrease in investments in interest bearing accounts and additional interest
expense incurred on debt.
PREFERRED STOCK DIVIDENDS
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 for total proceeds of $3,000,000. As of September 30,
1999, 1,075 shares of the Series B Preferred Stock had been converted to Common
Stock of the Company and 1,100 shares were redeemed by the Company. On June 1,
1999, the Company issued 1,400 shares of Series C Convertible Preferred Stock
(the "Series C Preferred Stock") at a price of $1,000 per share. As of September
30, 1999, none of the Series C Preferred Stock had been converted to Common
Stock of the Company. An annual dividend of 4% is paid quarterly in arrears on
the Series B and Series C Preferred Stock, and may be paid either in Preferred
Stock of the Company or cash at the Company's discretion.
ACCUMULATED DEFICIT
The Company had an accumulated deficit of $24,434,000 as of September 30, 1999.
Due to weaker than expected demand for the Company's current products, the
Company's short-term capital requirements, the high degree of regulation and
other factors of the business environment in which the Company operates, the
likelihood of future profitable quarters cannot be predicted. Future short-term
results are highly dependent on the Company's ability to, among other things,
finance production and distribution new products, gain customer acceptance of
its existing and new products and the necessary Company licenses and/or product
approvals in various jurisdictions in order to expand its market base. There can
also be no assurance as to the time frame during which such anticipated
approvals may occur due to uncertain time periods involved in the regulatory
approval process.
On October 12, 1999, the Company and Equitex, Inc., jointly announced that they
had entered into a letter of intent whereby the Company will acquire Equitex's
wholly-owned subsidiary, First Bankers Mortgage Services, Inc. in a tax free
exchange of stock. Under the proposed agreement, concurrent with the merger, the
Company would divest its gaming assets. Upon consummation of the transaction,
Innovative Gaming Corporation of America would be renamed nMortgage.com. Future
long-term operating results cannot be predicted at this time due to the change
in
Page 12 of 17
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998 - CONTINUED
business direction that will result from this transaction. Closing of the
proposed transaction is subject to, among other things, executing a mutually
acceptable definitive agreement, successful completion of due diligence,
completion of certain other documents, obtaining corporate and any necessary
regulatory approvals, approval by the Company's shareholders, and other
customary pre-closing conditions.
LIQUIDITY AND CAPITAL RESOURCES
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 for total proceeds of $3,000,000 prior to any offering
expenses.
In March 1999, in order to expedite the timing of gaming regulatory approval in
certain jurisdictions, the Company entered into a Stock Redemption Agreement
with a 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 are convertible at $1.094 and $1.25 per share,
respectively. 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.
On June 1, 1999, the Company completed a financial restructuring in which the
Company received an aggregate $1,742,000 in net proceeds from a private
placement of convertible notes and Series C Convertible Preferred Stock.
The three-year convertible secured notes totaling $1,550,000 were issued to a
group of investors including a current director 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 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.
On June 1, 1999, the Company issued 1,400 shares of Series C Convertible
Preferred Stock (the "Series C Preferred Stock") at a price of $1,000 per share
in a private placement for total proceeds of $1,400,000 prior to any offering
expenses.
Each share of the Series B and Series C Preferred Stock (collectively the
"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 of the Preferred Stock may not exceed $5.16 for the Series B
Preferred Stock and $1.877 for the Series C Preferred Stock. The maximum number
of shares of Common Stock that may be issued upon conversion of the Series B and
Series C Preferred Stock is 1,505,000 and 1,331,500, respectively. In the event
a holder of Preferred Stock that is unable to convert shares of Preferred Stock
into Common Stock at a discount because the maximum number shares have been
issued at a discount, the Company may, in the case of the Series B Preferred
Stock, either 1) redeem any unconverted Series B Preferred Stock for cash at a
price equal to 115% of the liquidation value of the shares or 2) issue Series C
Preferred Stock equal to the value that would have been received by such holder
if able to convert at a discount, or in the case of Series C Preferred Stock,
redeem any unconverted Series C Preferred Stock for cash at a price equal to
115% of the liquidation value. As of September 30, 1999, Series B Preferred
Stock totaling $1,075,000 had been converted into Common Stock of the Company
and the Company had redeemed $1,100,000 of the Series B Preferred Stock.
Twenty-five percent (25%) of the Series C Preferred Stock was convertible into
Common Stock, at the election of the holder thereof, on August 29, 1999. Fifty
percent (50%) of the Series C Preferred Stock is convertible 30 days after the
Effective Date; seventy five percent (75%) of the Series C Preferred Stock is
convertible 60 days after the Effective Date; and one
Page 13 of 17
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
hundred percent (100%) of the Series C Preferred Stock is convertible 90 days
after the Effective Date. The effective date of the Registration Statement filed
with the Securities and Exchange Commission relating to the Common Stock to be
issued upon conversion of the Series C Convertible Preferred Stock was September
24, 1999, and all necessary gaming regulatory approvals have been received. The
Company has the right to redeem the Series C Preferred Stock at 115% of par in
cash beginning August 31, 1999. On June 1, 1999, the Company redeemed $1,100,000
of Series B Preferred Stock at 100% of par in cash. All outstanding shares of
Preferred Stock will automatically be converted into Common Stock on June 1,
2001. 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.
During October 1999, the Company issued a total of 2,450 shares of Series D
Convertible Preferred Stock (the "Series D Preferred Stock") at a price of
$1,000 per share in a private placement for total proceeds of $2,450,000, prior
to any offering expenses, and warrants (the "Warrants") to acquire 245,000
shares of the Company's Common Stock at $2.75 per share. An annual dividend of
6% shall be paid quarterly in arrears either in Common Stock of the Company or
cash at the Company's discretion. Each share of Series D Preferred Stock is
convertible into shares of the Company's Common Stock at a conversion price of
the lesser of $3.00 or 75% of the average of closing bid price of the Company's
Common Stock for the five consecutive days immediately preceding the conversion
date. The Company has reserved 1,750,000 shares of Common Stock for issuance
upon conversion of the Series D Preferred Stock and 245,000 shares of Common
Stock to be issued upon the exercise of the Warrants. The Company has the right
to redeem the Series D Preferred Stock at 135% of par in cash if the market
price is lower than the market price on the date the Series D Preferred Stock
was issued. A Registration Statement related to the Common Stock to be issued
will be filed by, and at the expense of, the Company pursuant to obligations
contained in Registration Rights Agreements dated October 14 to 22, 1999. All
outstanding shares of Series D Preferred Stock will automatically be converted
into Common Stock on the fifth anniversary of its issuance. 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.
On October 12, 1999, the Company and Equitex, Inc., jointly announced that they
had entered into a letter of intent whereby the Company will acquire Equitex's
wholly-owned subsidiary, First Bankers Mortgage Services, Inc. in a tax free
exchange of stock. Under the proposed agreement, concurrent with the merger, the
Company would divest its gaming assets. Exploratory talks have been held with
several gaming manufacturers with a goal of selling the gaming machine business
intact to a company capable of effectively marketing the Company's recently
approved video slot machine and its multi-player games line. First Bankers is a
direct lender headquartered in Ft. Lauderdale, Florida, offering both retail and
wholesale mortgage financing. First Bankers recently announced the debut of its
online mortgage system, "nMortgage.com". Upon consummation of the transaction,
Innovative Gaming Corporation of America would be renamed nMortgage.com.
Completion of this transaction is presently planned to occur in the first
quarter of 2000.
The Company had $465,000 and $1,617,000 in cash as of September 30, 1999 and
December 31, 1998, respectively. The Company has experienced negative cash flow
from operations $2,762,000 for the nine months ended September 30, 1999. In
addition, sales in the first ten months of 1999 have been below management's
expectations. In October 1999, management took steps to address their future
liquidity and cash flow requirements by obtaining additional financing in the
aggregate amount of $2,450,000, prior to any offering expenses, through the
private placement of Series D Convertible Preferred Stock as described above. As
of November 5, 1999, the Company had cash of approximately $870,000. The Company
estimates that its cash and anticipated funds from operations will be adequate
to fund cash requirements until completion of the merger with Equitex, Inc.,
which is presently planned to occur in the first quarter of 2000 as described
above. If the merger is not completed as planned, the Company will require
additional financing to fund further production, marketing and distribution of
the Company's products. There can be no assurance that the Company will be
successful on obtaining such additional financing on terms
Page 14 of 17
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
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. Management is continuing in its efforts to control costs and, among
other actions taken, has reduced staffing by approximately 23 percent.
YEAR 2000 UPDATE
As of September 30, 1999, 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 has sought 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. As of November 5,
1999, all such vendors and suppliers have given assurance that they are, or will
be, Year 2000 compliant prior to December 31, 1999.
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 determined that some of its
personal computers utilized by its corporate staff were not Year 2000 compliant
and have been replaced.
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 cost of replacing six of the
Company's corporate personal computers was approximately $7,000. However, the
final costs relating to the resolution of the Company's Year 2000 compliance
issues cannot be fully and finally determined at this time.
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.
Page 15 of 17
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
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. 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 consummate the Merger on a
timely basis, if at all, the ability to find a suitable buyer for the Company's
gaming assets, 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 the
Company's report on Form 10-K filed with the Securities and Exchange Commission
for the fiscal year ended December 31, 1998. 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.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
During October 1999, the Company issued a total of 2,450 shares of
Series D Convertible Preferred Stock (the "Series D Preferred Stock") at
a price of $1,000 per share, or a aggregate offering price of
$2,450,000. Each share of Series D Preferred Stock is convertible into
shares of the Company's Common Stock at a conversion price of the lesser
of $3.00 or 75% of the average of closing bid price of the Company's
Common Stock for the five consecutive days immediately preceding the
conversion date. The Company also issued to the investors warrants to
acquire 245,000 shares of the Company's Common Stock at $2.75 per share.
There were no underwriters involved in the transaction. The shares were
sold to several institutional investors who are "accredited investors"
as such term is defined in Rule 501(a) of Regulation D promulgated under
the Securities Act of 1933, as amended ("Regulation D"). The Company
relied upon Rule 506 of Regulation D as the exception for such private
placement.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule - which is only
submitted electronically to the Securities and Exchange
Commission for EDGAR information purposes.
(b) Reports on Form 8-K
None.
Page 16 of 17
<PAGE> 17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INNOVATIVE GAMING CORPORATION OF AMERICA
/s/ EDWARD G. STEVENSON
----------------------------------------
Edward G. Stevenson
Chief Financial Officer
(Principal Accounting Officer)
Date: November 12, 1999
Page 17 of 17
<PAGE> 18
INNOVATIVE GAMING CORPORATION OF AMERICA
Form 10-Q Index
September 30, 1999
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 465
<SECURITIES> 0
<RECEIVABLES> 880
<ALLOWANCES> 0
<INVENTORY> 7,715
<CURRENT-ASSETS> 9,363
<PP&E> 1,397
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,791
<CURRENT-LIABILITIES> 2,039
<BONDS> 0
0
0
<COMMON> 75
<OTHER-SE> 7,281
<TOTAL-LIABILITY-AND-EQUITY> 12,791
<SALES> 2,897
<TOTAL-REVENUES> 2,897
<CGS> 4,239
<TOTAL-COSTS> 4,239
<OTHER-EXPENSES> 4,935
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73
<INCOME-PRETAX> (6,350)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,350)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,350)
<EPS-BASIC> (.91)
<EPS-DILUTED> (.91)
</TABLE>
