<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A NO. 2
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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.)
4725 AIRCENTER CIRCLE
RENO, NEVADA 89502
------------ -----
(Address of principal executive offices) (Zip Code)
(775) 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. [ ]
As of March 21, 2000, 9,008,738 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 21, 2000,
was $16,273,963. For purposes of this computation, affiliates of the Registrant
are the Registrant's executive officers and directors.
DOCUMENTS INCORPORATED BY REFERENCE
PART III - Portions of the Registrant's definitive proxy statement in connection
with the annual meeting of the shareholders are incorporated by reference into
Items 10 through 13, inclusive.
<PAGE> 2
On June 30, 2000, the U.S. Securities and Exchange Commission ("SEC") issued a
letter of comment to the Company. Comments included in this letter related to
their review of the Company's report on Form 10-K for the year ended December
31, 1999 (the "December 31, 1999 10-K") filed on March 30, 2000, Amendment No. 1
to a Registration Statement on Form S-3 filed on May 24, 2000, and Amendment No.
1 to Schedule 14A filed on May 12, 2000, which related to the merger of the
Company with nMortgage and the sale of the Company's gaming manufacturing assets
to Xertain, Inc. Based on those comments, the Company has restated its results
of operations for the year ended December 31, 1999. The revisions include
enhancement to certain notes to provide clarification on selected events
occurring during the year. The most significant of the revisions relate to the
presentation of the December 31, 1999 financial statements. The statements, as
originally filed in the December 31, 1999 10-K, presented the sale of the gaming
assets as discontinued operations in accordance with the Accounting Principles
Board ("APB") No 30. Comments made by the SEC suggested that this transaction
should not be presented in this manner until shareholder approval has been
obtained. While management believes its original presentation is in accordance
with professional standards, the accompanying consolidated balance sheets and
consolidated statements of operations, shareholder's equity and cash flows have
been revised in accordance with the request made by the SEC.
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, 1999. This amendment is filed in connection with the Company's
restatement of its financial statements for the year ended December 31, 1999.
-2-
<PAGE> 3
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, 1999, 1998, 1997, 1996 and 1995. 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 For the For the Five
Ended Ended Year Ended Year Ended Months Ended
December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales $4,026 $8,509 $10,292 $2,664 $6,352
Gross profit (4,605) 1,375 3,103 529 1,589
Operating loss (12,729) (4,444) (2,182) (6,592) (2,765)
Net loss (12,876) (4,338) (1,935) (6,899) (2,114)
Net loss per common share: (1.80) (0.63) (0.43) (1.09) (0.38)
Cash flow data:
Cash provided by (used for):
Operating activities (5,123) (2,106) (7,516) (2,726) 591
Investing activities (38) (92) 555 3,784 (4,399)
Financing activities 3,684 3,297 4,486 1,038 (87)
Increase (decrease) in cash
and cash equivalents 1,477 1,099 (2,475) 2,096 (3,895)
Balance sheet data (end of period):
Cash, cash equivalents and
available-for-sale 140 1,617 518 5,959 8,749
securities
Working capital 4,580 12,100 12,603 11,996 16,039
Total assets 8,058 17,093 18,461 15,256 18,929
Long-term debt (net of
current maturities) 3,131 856 509 - -
Total stockholders' equity 3,189 14,872 16,482 14,730 18,531
</TABLE>
-3-
<PAGE> 4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and this Form 10-K/A 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: successful completion of the proposed merger
with nMortage, Inc. and the related gaming asset divestiture, 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.
On October 8, 1999, the Company entered into a non-binding letter of intent with
Equitex, Inc., which outlined the terms of a contemplated merger between the
Company and Equitex's subsidiary, nMortgage, Inc. ("nMortgage") in a tax-free
exchange of stock (the "Merger"). On December 31, 1999, the Company, Equitex and
nMortgage executed a definitive merger agreement governing the Merger. Pursuant
to the merger agreement, the stockholders of the Company will retain 25% of the
surviving corporation to the Merger on a post-merger basis. As a condition to
the Merger, concurrent with the Merger, the Company must divest substantially
all of its gaming assets. (See Note 11 - Agreement for Merger and Note 12 -
Subsequent Events - Gaming Asset Divestiture Agreement).
On February 1, 2000, the Company entered into a definitive asset purchase
agreement with Xertain, Inc. ("Xertain"), pursuant to which Xertain will
purchase substantially all of the Company's gaming assets. In exchange for the
gaming assets of the Company, Xertain will pay an aggregate purchase price of
$4,000,000 plus a promissory note payable to IGCA in an amount equal to the
accounts receivable of IGCA as of the closing date, adjusted for certain
payments to be made by Xertain and IGCA as provided for in the note, and Xertain
will assume certain liabilities of IGCA ( the "Gaming Asset Divestiture"). The
accounts receivable promissory note will be secured by the accounts receivable
of IGCA which are being acquired by Xertain.
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 single player video slot machines incorporating state of the
art graphics and sound.
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 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.
-4-
<PAGE> 5
Previously registered in 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 agents to market its
products in Canada and Europe. As of March 2000, the Company has submitted and
has pending applications in Connecticut, Illinois and Indiana, and has submitted
games for approval in New Jersey.
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 is 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."
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, there were no game sales to this distributor in 1999 and there were no
game sales to this distributor in the first quarter of 2000. In March 2000, the
Company and Aristocrat terminated the distribution agreement. 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. This
agreement provides for automatic one year extensions up to a cumulative maximum
term of eight years unless either party terminates the agreement. 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 May 1999, the
Company granted an extension for one year to an 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. In April 1999, the Company entered into a two-year exclusive
agency agreement with Stuart Black to represent the Company's products for sale
in specific territories in Europe.
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 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
-5-
<PAGE> 6
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
StreakTM games and no multi-player machine sales to LGI during 1998 and no
machine sales in 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. 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.
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. The Company received the final delivery under this agreement in July
1999.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1998
For the year ended December 31, 1999, the Company reported a net loss
attributable to common shareholders of $13,547,000, or $1.80 per share. The
Company recorded a net loss attributable to common shareholders of $4,710,000,
or $.63 per share, for the year ended December 31, 1998. Results from operations
for both years have been adjusted for preferred stock accretion and preferred
stock dividends paid. The increased loss in 1999 was primarily due to a write
down of inventory, property and equipment and intangible assets to market value
due to the Company's anticipated merger and divestiture of its gaming
manufacturing assets (See Note 11 - Agreement for Merger and Note 12 -
Subsequent Events - Gaming Asset Divestiture Agreement), a decline in revenues
and gross profit and increased expenses incurred related to the Company's
efforts to develop/enhance and license its products and introduce those products
into new markets.
SALES, COST OF SALES AND GROSS PROFIT
Net sales were $4,026,000 during the year ended December 31, 1999 compared to
$8,509,000 in the year ended December 31, 1998. This decline in sales is
primarily due to a decrease in sales of multi-player game sales from 123 in 1998
to 41 in the 1999.
-6-
<PAGE> 7
The following table presents the comparative sales revenue and percentage of
revenue derived from each of the Company's product lines recorded for the years
ending December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1999 December 31, 1998
--------------------- ----------------------
<S> <C> <C>
Sales revenue $4,026,000 $8,509,000
--------------------- ---------------------
Product line: Percentage of revenue Percentage of revenue:
--------------------- ---------------------
Multi-player games 53% 78%
Single player games 21% 9%
Parts sales and other 17% 8%
Lease participation 9% 5%
--------------------- ----------------------
Total 100% 100%
===================== ======================
</TABLE>
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. 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, there were no game sales made to this distributor in
1999, and the Company has not forecasted sales to this distributor in 2000.
During 1997, 1998 and 1999, 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 Company recorded a negative gross margin in 1999 compared to a gross profit
of 16.2% in 1998. The negative gross margin in 1999 was primarily due to a
$3,318,000 write-down of inventory to market value due to the anticipated merger
and divestiture of gaming manufacturing assets, and unabsorbed labor and
overhead costs attributable to lower production volume. In the years ended
December 31, 1999 and 1998, there were no sales to LGI under their discounted
price arrangement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense for the year ended December 31, 1999
was $6,787,000 compared to $5,819,000 during fiscal year 1998. The increase in
expenses for 1999 was primarily attributable to higher expenditures for
engineering and development of new products and enhancements to existing
products. Expenses also increased related to licensing the Company's products
and costs to introduce those products into new markets.
-7-
<PAGE> 8
WRITE DOWN ASSETS TO MARKET VALUE
The $1,337,000 expense recorded in 1999 represents a reduction in carrying value
of the Company's property and equipment and intangible assets to the amount
expected to be realized upon the closing of the anticipated divestiture of the
Company's gaming assets (See Note 12 - Subsequent Events - Gaming Asset
Divestiture Agreement).
INTEREST INCOME AND EXPENSE
Net interest expense for the year ended December 31, 1999 was $147,000 compared
to net interest income of $106,000 for fiscal year 1998. Interest expense
increased due to increased debt and interest income declined due to reduced
amounts invested in interest bearing accounts, and interest bearing notes
receivable from the sale of products.
PREFERRED STOCK ACCRETION ADJUSTMENT
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 (Note 7 of Stockholder's Equity-Preferred Stock). 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.
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. 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 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. The Series C 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 $138,462, which was accreted to
Series C 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 $138,462 value of the
beneficial conversion feature was recognized during the second, third and fourth
quarters of 1999.
During October 1999, the Company issued 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. The 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
-8-
<PAGE> 9
average of closing bid price of the Company's Common Stock for the five
consecutive days immediately preceding the conversion date. The intrinsic value
of the beneficial conversion feature was $816,721, which is being accreted to
Series D 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 becomes vested. The $816,721 value of the
beneficial conversion feature is being recognized during the fourth quarter of
1999 and the first quarter of 2000.
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.
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
--------------------- ---------------------
Product line: Percentage of revenue Percentage of revenue:
--------------------- ---------------------
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.
-9-
<PAGE> 10
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.
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-
-10-
<PAGE> 11
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 "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.
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 December 31, 1999, Series B Preferred Stock
totaling $1,620,000 had been converted into Common Stock of the Company and the
Company had redeemed $1,100,000 of the Series B Preferred Stock. The remaining
$280,000 of Series B Convertible Preferred Stock was convertible into Common
Stock of the Company at the election of the holder thereof. 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. As of
December 31, 1999, Series C Preferred Stock totaling $500,000 had been converted
into Common Stock of the Company and the remaining $900,000 of Series C
Convertible Preferred Stock was convertible into Common Stock of the Company at
the election of the holder thereof. 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
-11-
<PAGE> 12
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 has been filed
by, and at the expense of, the Company pursuant to obligations contained in
Registration Rights Agreements dated October 14 to 22, 1999. Such Registration
Statement had not been declared effective by the Securities and Exchange
Commission as of March 30, 2000. 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.
1999 CONVERTIBLE DEBT FINANCING
In June 1999, 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.
LIQUIDITY
The Company had $140,000 and $1,617,000 in cash, cash equivalents as of December
31, 1999 and December 31, 1998, respectively. The Company has experienced
negative cash flow from operations of $5.1 million, $2.1 million and $7.5
million for the years ended December 31, 1999, 1998, and 1997, respectively. As
of July 25, 2000, the Company had cash of approximately $236,000. The Company
presently estimates that if current sales forecasts are met its cash and
anticipated funds from operations will be adequate to fund cash requirements
through the August 2000. 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
if the Merger is not completed on a timely basis, if at all. There can be no
assurance that the Company will be successful in closing the Merger on a timely
basis, if at all, or 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 Registration Rights Agreements relating to the Company's October 1999
issuance of the Company's Series D Convertible Preferred Stock require the
Company to register the shares of Common Stock issuable upon conversion of such
preferred shares within 180 days or by April 13, 2000 or pay certain liquidated
damages. These provisions include 2% of the gross proceeds of the Series D
Convertible Preferred Stock sold (i.e. $49,000) if such Common Stock is not
registered by April 13, 2000 and 3.5% per month (i.e. $85,750) for each month
thereafter that such Common Stock is not registered. A registration statement
relating to such Common Stock was filed with the Securities and Exchange
Commission on January 13, 2000. As of July 25, 2000, the registration statement
relating to such Common Stock had not yet been declared effective. A majority of
the Company's holders of Series D Convertible Preferred Stock agreed to amend
the Registration Rights Agreement relating to such shares to provide that the
Company can issue additional shares of Common Stock, at its option, in lieu of
any cash payment due for liquidated damages resulting from the delay in having
such registration statement declared effective. The cumulative number of shares
due will be issued to the holders of Series D Convertible Preferred Stock when
such registration statement is declared effective.
-12-
<PAGE> 13
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
Gains and losses on foreign currency transactions are recognized currently in
earnings. The Company's revenues from foreign markets are typically negotiated
for payment in United States currency, and the Company does not consider foreign
transactions to be a significant risk at this time.
YEAR 2000 UPDATE
During 1999, the Company completed the process of preparing for the Year 2000
date change. This process involved identifying and remediating date recognition
issues in the Company's computer systems, products and services, working with
third parties to address their Year 2000 issues, and developing contingency
plans to address potential risks in the event of Year 2000 failures. The
Company's Year 2000 computer testing and contingency planning was successful, as
the Company has experienced no problems with systems or customers' accounts as
the date changed from 1999 to 2000. The Company will continue to monitor its
computer systems, products and services, including interaction with clients,
major vendors and suppliers throughout 2000 to address any issues. The costs to
address the Year 2000 related issues through March 20, 2000, were approximately
$7,000. The Company does not anticipate such costs to become material in the
future. Although the Company is not aware of any material operational or
financial Year 2000 related issues not being addressed, the Company cannot
assure that its computer systems, products and services or the computers and
other systems of others upon which the Company depends will not incur Year 2000
issues, that the costs of its Year 2000 program will not become material or that
the Company's alternative plans will be adequate. If any such risks (either with
respect to the Company or its customers or suppliers) materialize, the Company
could experience material adverse consequences to its business.
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
-13-
<PAGE> 14
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 successful completion of the merger with nMortgage and the
related gaming asset divestiture, 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; 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.
-14-
<PAGE> 15
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 sheets of
Innovative Gaming Corporation of America and Subsidiary as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Innovative Gaming
Corporation of America and Subsidiary as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, 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.
As more fully discussed in Note 12, during 1999, the Company made plans
to discontinue its gaming equipment manufacturing segment through the sale of
the assets related thereto. Historically, assets and operations of the gaming
equipment manufacturing segment have represented a substantial portion of the
Company's total assets and results of operations.
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
March 21, 2000 (Except with respect
to the matters discussed in Note 12,
as to which the date is June 30, 2000)
-15-
<PAGE> 16
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
Consolidated Balance Sheets
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
As of December 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 140 $ 1,617
Restricted investments - 700
Accounts receivable, net of allowances of $280 and $85 759 1,186
Current portion of notes receivable 188 334
Inventories, net 4,576 9,244
Prepaid expenses and other 655 384
-------- --------
Total current assets 6,318 13,465
NOTES RECEIVABLE, less current portion 268 362
PROPERTY AND EQUIPMENT, net 707 1,389
INTANGIBLES ASSETS, net 765 1,877
-------- --------
TOTAL ASSETS $ 8,058 $ 17,093
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 585 $ 313
Accrued liabilities 561 524
Notes payable - current portion 592 528
-------- --------
Total current liabilities 1,738 1,365
Notes payable - net of current portion 3,131 856
-------- --------
Total liabilities 4,869 2,221
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 9) - -
STOCKHOLDERS' EQUITY:
Series B Convertible Preferred Stock, $.01 par value, nonvoting,
4,000 shares authorized, 280 and 3,000 shares outstanding, respectively - -
Series C Convertible Preferred Stock, $.01 par value, nonvoting,
2,000 shares authorized, 900 and 0 shares outstanding, respectively - -
Series D Convertible Preferred Stock, $.01 par value, nonvoting,
3,000 shares authorized, 1,612.5 and 0 shares outstanding, respectively - -
Common stock, $.01 par value, 100,000,000 shares authorized,
8,952,366 and 7,535,211 shares issued and outstanding, respectively 90 75
Additional paid-in capital 34,525 32,676
Accumulated deficit (31,426) (17,879)
-------- --------
Total stockholders' equity 3,189 14,872
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,058 $ 17,093
======== ========
</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,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NET SALES $ 4,026 $ 8,509 $ 10,292
COST OF SALES 5,313 7,134 7,189
WRITE DOWN INVENTORY TO MARKET VALUE (Notes 1 and 12) 3,318 - -
-------- -------- --------
Gross profit (4,605) 1,375 3,103
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,787 5,819 5,285
WRITE DOWN ASSETS TO MARKET VALUE (Notes 1 and 12) 1,337 - -
-------- -------- --------
Operating loss (12,729) (4,444) (2,182)
INTEREST INCOME, net (147) 106 247
-------- -------- --------
Loss before income taxes (12,876) (4,338) (1,935)
PROVISION FOR INCOME TAXES - - -
-------- -------- --------
Net loss (12,876) (4,338) (1,935)
PREFERRED STOCK DIVIDENDS 124 75 76
PREFERRED STOCK ACCRETION 547 297 878
-------- -------- --------
Net loss attributable to common shareholders ($13,547) ($ 4,710) ($ 2,889)
======== ======== ========
LOSS PER SHARE OF COMMON STOCK ($ 1.80) ($ 0.63) ($ 0.43)
======== ======== ========
Weighted average common shares outstanding 7,525 7,535 6,744
======== ======== ========
</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>
Convertible Unrealized
Common Stock Preferred Stock Additional Gain/(Loss) on
----------------- --------------- Paid-in Accumulated Available-for-
Shares Amount Shares Amount Capital Deficit Sale Securities Total
------- ------- ------ ------ --------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 6,477 $ 65 - - $ 24,951 $ (9,559) (7) $ 15,450
Series A preferred stock issued - - 4 3,122 622 - - 3,744
Preferred stock accretion
adjustment - - - 878 - (878) - 0
Series A preferred stock
conversion to common stock 1,055 10 (4) (4,000) 3,990 - - 0
Preferred stock dividends paid 3 - - - 12 (76) - (64)
Unrealized gain on
available-for-sale securities - - - - - - 7 7
Net loss - - - - - (1,935) - (1,935)
-------- -------- -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1997 7,535 75 - - 29,575 (12,448) - 17,202
Series B preferred stock issued - - 3 - 2,804 - - 2,804
Preferred stock accretion
adjustment - - - - 297 (297) - -
Preferred stock dividend paid - - - - - (76) - (76)
Net loss - - - - - (5,058) - (5,058)
-------- -------- -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1998 7,535 75 3 - 32,676 (17,879) - 14,872
Series C preferred stock issued - - 1 - 1,291 - - 1,291
Series D preferred stock issued - - 3 - 2,389 - - 2,389
Preferred stock conversions to
common stock:
Series B preferred stock 1,410 14 (2) - (14) - - 0
Series C preferred stock 388 4 - - (4) - - 0
Series D preferred stock 674 7 (1) - (7) - - 0
Series B preferred stock
redemption - - (1) - (1,100) - - (1,100)
Preferred stock accretion
adjustments - - - - 547 (547) - 0
Preferred stock dividends 7 - - - 9 (124) - (115)
Repurchase of common stock (1,100) (11) - - (1,302) - - (1,313)
Stock options exercised 38 1 - - 40 - - 41
Net loss - - - - - (12,876) - (12,876)
-------- -------- -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1999 8,952 $ 90 3 $ - $ 34,525 $(31,426) - $ 3,189
======== ======== ======== ======== ======== ======== ======== ========
</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,
1999 1998 1997
------------ ------------ --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss ($12,876) ($ 4,338) ($ 1,935)
Adjustments to reconcile net loss to
cash flows used for operating activities -
Depreciation and amortization 1,194 936 889
Loss on sale of assets - - 2
Provision for inventory obsolescence 1,170 571 112
Write down inventory to market value 3,318 - -
Write down assets to market value 1,337 - -
Book value of fixed assets charged to cost of sales - 26 424
Provision for bad debts 198 - 9
Changes in operating assets and liabilities:
Accounts and notes receivable 470 875 (2,106)
Inventories 29 376 (5,574)
Prepaid expenses and other (272) (224) 14
Accounts payable and accrued expenses 309 (171) 492
Customer deposits - (157) 157
-------- -------- --------
Net cash used for operating activities (5,123) (2,106) (7,516)
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of available-for-sale securities - - (1,042)
Release of restricted investments 700 300 -
Proceeds from sale of available-for-sale securities - - 4,013
Inventory (capitalized for use in) returned from gaming operations (511) 363 (2,028)
Purchases of property and equipment (77) (255) (388)
Purchases of intangible assets (150) (500) -
-------- -------- --------
Net cash provided by (used for) investing activities (38) (92) 555
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from financing agreements 2,028 955 873
Payments on long-term obligations (840) (402) (67)
Preferred stock dividends paid (125) (60) (64)
Net proceeds from sale of common stock 40 - -
Net proceeds from sale of preferred stock 3,681 2,804 3,744
Payment to redeem preferred stock (1,100) - -
-------- -------- --------
Net cash provided by financing activities 3,684 3,297 4,486
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,477) 1,099 (2,475)
CASH AND CASH EQUIVALENTS, beginning of period 1,617 518 2,993
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 140 $ 1,617 $ 518
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest $ 214 $ 80 $ 1
======== ======== ========
Cash paid (refund received) for income taxes $ 1 ($1) ($3)
======== ======== ========
Noncash transactions:
Preferred Stock converted to common stock $ 2,957 $- $ 4,000
======== ======== ========
Preferred Stock dividends paid with common stock $ 9 $- $ 12
======== ======== ========
Notes payable issued to redeem common stock $ 1,313 $- $-
======== ======== ========
</TABLE>
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.("IGI"), is in the business of developing,
manufacturing, marketing and distributing gaming equipment. The Company
distributes its products to certain gaming markets worldwide.
On October 8, 1999, the Company entered into a non-binding letter of intent with
Equitex, Inc.("Equitex"), which outlined the terms of a contemplated merger
between the Company and Equitex's subsidiary, nMortgage, Inc. ("nMortgage") in a
tax-free exchange of stock (the "Merger"). On December 31, 1999, the Company,
Equitex and nMortgage executed a definitive merger agreement governing the
Merger. Pursuant to the merger agreement, the stockholders of the Company will
retain 25% of the surviving corporation to the Merger on a post-merger basis. As
a condition to the Merger, concurrent with the merger, the Company must divest
substantially all of its gaming assets. (See Note 11 - Agreement for Merger and
Note 12 - Subsequent Events - Gaming Asset Divestiture Agreement).
nMortgage is a direct lender headquartered in Fort Lauderdale, Florida and
offers both retail and wholesale mortgage financing through its subsidiary First
Bankers Mortgage Services, Inc. Upon closing of the Merger, the Company would be
renamed "nMortgage.com, Inc." The closing of the Merger is subject to, among
other things, obtaining approval of the Company's shareholders and of certain
governmental authorities, as well as other customary pre-closing conditions.
The Company has experienced negative cash flow from operations of $5.1 million,
$2.1 million and $7.5 million for the years ended December 31, 1999, 1998, and
1997, respectively. As of July 25, 2000, the Company had cash of approximately
$236. The Company estimates that its cash and anticipated funds from operations
will be adequate to fund cash requirements through August 2000. 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 if the Merger is not completed. 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.
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 licenses and product
approval in several jurisdictions. Failure to successfully obtain licenses,
approvals, or meet other regulatory requirements could materially impact the
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, the Company had restricted investments of $700, of which
$500 was pledged as collateral against certain bank credit arrangements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company has provided for an allowance for doubtful accounts for the years
ended December 31, 1999 and 1998, based on management's estimate of the
collectibilty of accounts receivable.
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, 1999,
1998 and 1997 was $852, $584, and $537, respectively.
<TABLE>
<CAPTION>
Useful Life 1999 1998
------------ ------ -------
<S> <C> <C> <C>
Office equipment 5 years $899 $942
Display games 5 years 142 142
Gaming operations equipment 2.5 years 790 543
Manufacturing equipment 5 years 359 358
Leasehold improvements Life of 317 307
lease
------ -------
Total property and equipment 2,507 2,292
Less: Accumulated depreciation (1,482) (903)
Write down to market value (318) - -
------ -------
Total property and equipment, net $707 $1,389
====== ======
</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>
1999 1998
---------- ---------
<S> <C> <C>
Game components and parts $5,320 $5,021
Work in process 418 231
Finished goods 3,926 4,939
Inventory reserves (1,770) (947)
Write down to market value (3,318) --
---------- ---------
Total inventories, net $4,576 $9,244
========== =========
</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 1999, the Company made sales to one customer, a distributor, Black Hills
Novelty Co., which accounted for 18.9% of sales for the year. 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. 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. In March
2000, the Company and Aristocrat terminated the distribution agreement. For the
years ended December 31, 1999, 1998, and 1997, 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 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.
-22-
<PAGE> 23
At December 31, 1999, the following concentrations of credit risk existed:
<TABLE>
<S> <C>
Nevada 34%
Arizona 24%
Canada 14%
Colorado 13%
Australia 7%
Palestine 6%
Other 2%
------
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 $3,309, $2,353 and $1,884 for the years ended December 31, 1999,
1998 and 1997, respectively. These amounts are included in selling, general and
administrative expenses.
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.
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.
-23-
<PAGE> 24
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. At December 31, 1999, the carrying values of long-lived assets were
evaluated, and taking into consideration the planned sale of the gaming assets
to Xertain, Inc. which is a prerequisite to the proposed merger with
nMortgage.com, the carrying values were reduced to reflect the amount expected
to be realized upon the closing of the asset sale and merger. The total
impairment amount of $1,337, which is presented separately on the face of the
statement of operations, was attributable to the write-down to market value of
property and equipment in the amount of $318 and intangible assets in the amount
of $1,019. No impairment existed at December 31, 1998.
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 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 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 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 StreakTM games and no
multi-player machine sales to LGI during 1998 and no machine sales in 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. 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.
3. AVAILABLE-FOR-SALE SECURITIES:
The Company had no available-for-sale securities at December 31, 1999 and 1998.
Proceeds from the sale of available-for-sale securities were $4,013 for the year
ended December 31, 1997.
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. The contracts typically have no stated interest to be paid, and interest
is imputed at prime plus
-24-
<PAGE> 25
2%. At December 31, 1999, the face amount of notes receivable was $517. 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 following table represents the estimated future
collections of notes receivable, net of amounts to be recognized as interest
income, at December 31, 1999:
<TABLE>
<CAPTION>
Years Ending December 31, Estimated
Receipts
<S> <C>
2000 $188
2001 111
2002 110
2003 47
----------
Total $456
==========
</TABLE>
5. INTANGIBLE ASSETS:
Intangible assets consisted of the following at December 31:
<TABLE>
<CAPTION>
Useful Life 1999 1998
----------- ------------ ----------
<S> <C> <C> <C>
Product patent and technology rights 5 to 10 $3,082 $2,832
years
Nevada distribution rights 10 years 250 250
------------ ----------
Total intangible assets 3,332 3,082
Less: accumulated amortization (1,548) (1,205)
write down to market value (1,019) - -
------------ ----------
Total intangible assets, net $765 $1,877
============ ==========
</TABLE>
Amortization recorded for intangibles was $977, $352 and $352 in the years ended
December 31, 1999, 1998, and 1997, respectively.
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 $50 cost of this patent and technology was fully
written down in 1999 based on management's estimation that no economic benefit
would be realized in the future.
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 1999.
-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 $500 cost of this intellectual property was fully written
down in 1999 based on management's estimation that no economic benefit would be
realized in the future.
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 $100.
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 $100 cost of this sublicense was fully written down in
1999 based on management's estimation that no economic benefit would be realized
in the future.
6. FINANCING ARRANGEMENTS:
LETTER OF CREDIT
At December 31, 1998 , the Company had a standby letter of credit with a bank in
the amount of $500. At December 31, 1998, the Company had a certificate of
deposit of $700, which was included in the accompanying balance sheet as
restricted investments, of which $500 was pledged as security for the standby
letter of credit. This standby letter of credit was primarily to facilitate the
acquisition of component parts and supplies. In July 1999, upon expiration of
the standby letter of credit and the maturity of the certificate of deposit, the
Company elected not to renew the credit arrangement and the proceeds from the
certificate of deposit were transferred to the Company's checking account. At
December 31, 1998, no amount was outstanding on the standby letter of credit.
NOTES PAYABLE
Notes payable consists of convertible notes issued for the repurchase of Common
Stock of the Company from Lakes Gaming, Inc. and another shareholder,
convertible notes issued to a group of investors as part of a financial
restructuring to raise operating capital, 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.
In March 1998, Innovative Gaming, Inc., a wholly-owned subsidiary of the
Company, entered into a loan commitment securing available funding of $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 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.
-26-
<PAGE> 27
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 in the amount of $438
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. in exchange for a four year convertible note in the amount of $875 and a
warrant to purchase 87,500 shares of the Company's Common Stock. 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 to Common Stock of the Company at $1.09375 and $1.25 per share,
respectively. Interest is paid quarterly on the first note and is due at
maturity on the second note. The notes may not be converted in the first year
following issuance. The exercise price of the warrants is the same as the
conversion price of the notes.
On June 1, 1999, the Company completed a financial restructuring which included
a private placement of three-year convertible secured notes totaling $1,550
issued to a group of investors. 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. These notes are secured by the furniture, fixtures and equipment,
inventory and intangible property of the Company.
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. IGT has agreed to
accept the return of the slant top slot machines and grant credit for the
balance due on the games returned. 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 2000.
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, 1999:
<TABLE>
<CAPTION>
Years Ending December 31, Estimated
Payments
<S> <C>
2000 $592
2001 213
2002 1,599
2003 5
2004 1,314
---------
Total $3,723
=========
</TABLE>
-27-
<PAGE> 28
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 prior to any offering expenses. 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, 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 Convertible 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 of the Series B Preferred
Stock at 100% of par in cash. As of December 31, 1999, shares representing
$1,620 of Series B Preferred Stock had been converted into Common Stock, and all
of the remaining outstanding balance of $280 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.
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 $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 Series B 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.
-28-
<PAGE> 29
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 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. As of December 31, 1999, shares
representing $500 of Series C Preferred Stock had been converted into Common
Stock, and all of the remaining outstanding balance of $900 of Series C
Preferred Stock is convertible into Common Stock, at the election of the holder
thereof. 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, 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 was reduced by
approximately $33, $87 and $18 during the second, third and fourth quarters of
1999, respectively.
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, 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. The stated par value per share
is $.01, resulting in a total par value of twenty-five dollars being recorded as
Series D Convertible Preferred Stock, and the balance of approximately $2.4
million is included in Additional Paid-in Capital. 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
has been filed by, and at the expense of, the Company pursuant to obligations
contained in Registration Rights Agreements dated October 14 to 22, 1999. Such
Registration Statement has not been declared effective by the Securities and
Exchange Commission.
The 25% beneficial conversion feature was accounted for as an additional
Preferred Stock dividend, which was determined on the date the Series D
Preferred Stock was issued. The total value of the beneficial conversion feature
or dividend is $816, which reduces income available for holders of the Company's
Common Stock and
-29-
<PAGE> 30
therefore reduces earnings per share on a pro rata basis over the period from
issuance of the Series D Preferred Stock to the earliest conversion date. Income
available to holders of Common Stock is being reduced by approximately $408 in
the fourth quarter of 1999 and approximately $408 in the first quarter of 2000.
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.
The Registration Rights Agreements relating to the Company's October 1999
issuance of the Company's Series D Convertible Preferred Stock require the
Company to register the shares of Common Stock issuable upon conversion of such
preferred shares within 180 days or by April 13, 2000 or pay certain liquidated
damages. These provisions include 2% of the gross proceeds of the Series D
Convertible Preferred Stock sold (i.e. $49,000) if such Common Stock is not
registered by April 13, 2000 and 3.5% per month (i.e. $85,750) for each month
thereafter that such Common Stock is not registered. A registration statement
relating to such Common Stock was filed with the Securities and Exchange
Commission on January 13, 2000. As of July 25, 2000, the registration statement
relating to such Common Stock had not yet been declared effective. A majority of
the Company's holders of Series D Convertible Preferred Stock agreed to amend
the Registration Rights Agreement relating to such shares to provide that the
Company can issue additional shares of Common Stock, at its option, in lieu of
any cash payment due for liquidated damages resulting from the delay in having
such registration statement declared effective.
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 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.
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 492,950 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
-30-
<PAGE> 31
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.
The Company accounts for both stock option plans under Accounting Principles
Board ("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>
1999 1998
---- ----
<S> <C> <C> <C>
Net loss: As reported $(13,547) $(4,710)
Pro forma $(14,341) $(5,420)
Primary and fully-diluted EPS: As reported $(1.80) $(0.63)
Pro forma $(1.91) $(0.72)
</TABLE>
A summary of the status of the 1992 Employee Stock Option and Compensation Plan
at December 31, 1999, 1998 and 1997, and changes during the periods then ended
is presented in the tables and narrative below:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
---------------------- --------------------- ----------------------
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 610,000 $1.56 825,400 $4.69 606,500 $4.67
Granted 250,000 2.06 550,400 1.14 271,550 4.75
Exercised - - - - - -
Forfeited (115,000) 2.87 (765,800) 4.63 (52,650) 4.91
Expired - - - - - -
--------- -------- --------
Outstanding at end of
period 745,000 $1.53 610,000 $1.56 825,400 $4.69
========= ======== ========
Exercisable at end of
period 383,000 $1.30 361,800 $1.74 290,933 $4.61
Weighted average fair
value of options
granted on grant date $1.76 $0.83 $2.91
</TABLE>
-31-
<PAGE> 32
<TABLE>
<CAPTION>
Detail composition of options outstanding December 31, 1999:
-------------------------------------------------------------------------
Avg. contractual
Options Exercise life remaining Options
outstanding price (Years) exercisable
---------------- ------------- ----------------- -------------
<S> <C> <C> <C>
35,000 $4.00 4.29 35,000
300,000 1.00 9.00 258,000
160,000 1.13 8.96 90,000
250,000 2.06 9.71 -
------- --------
745,000 383,000
======= ========
</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 1999, 1998 and
1997 grants: risk-free interest rate of 6.5, 4.9 and 6.5 percent; expected
dividend yield of 0.0 percent; expected lives of 5 years; expected volatility of
121.5, 91.5 and 90.3 percent, respectively.
A summary of the status of the 1998 Non-Executive Stock Option Plan at December
31, 1999 and 1998 and changes during the periods then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------ -------------------------
Wtd Avg Wtd Avg
Number Ex Price Number Ex Price
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of period 313,050 $1.11 - $ -
Granted 194,250 1.64 313,050 1.11
Exercised (37,600) 1.07 - -
Forfeited (55,075) 1.14 - -
Expired - - - -
------- -------
Outstanding at end of
period 414,625 $1.36 313,050 $1.11
======= =======
Exercisable at end of
period 130,000 $1.23 102,750 $1.11
Weighted average fair
value of options
granted on grant date $1.27 $0.81
</TABLE>
<TABLE>
<CAPTION>
Detail composition of options outstanding December 31, 1999:
-------------------------------------------------------------------------
Avg. contractual
Options Exercise life remaining Options
outstanding price (Years) exercisable
---------------- ------------- ----------------- -------------
<S> <C> <C> <C>
83,350 $1.13 8.96 32,875
70,525 1.18 8.96 33,125
69,150 1.06 8.96 21,350
25,700 1.00 9.00 12,300
8,750 1.13 9.00 6,350
20,000 1.25 9.38 4,000
94,650 1.82 9.50 15,000
25,000 1.88 9.58 5,000
17,500 1.88 9.83 - -
------- -------
414,625 130,000
======= =======
</TABLE>
-32-
<PAGE> 33
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 1999 and 1998 grants:
risk-free interest rate of 6.5 and 4.9 percent; expected dividend yield of 0.0
percent; expected life of 5 years; expected volatility of 99.5% and 92.4%,
respectively.
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, 1999, 1998
and 1997, and changes during the periods then ended is presented in the table
and narrative below:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
---------------------- --------------------- ----------------------
Wtd Avg Wtd Avg Number Wtd Avg
Number Ex Price Number Ex Price Ex Price
----------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period 10,000 $5.13 40,000 $5.06 - $ -
Granted 99,000 1.42 - - 40,000 5.06
Exercised - - - - - -
Forfeited (10,000) 5.13 (30,000) 5.04 - -
Expired - - - - - -
------- ------- -----
Outstanding at end of
period 99,000 $1.42 10,000 $5.13 40,000 $5.06
======= ======= ======
Exercisable at end of
period 15,000 $1.00 10,000 $5.13 10,000 $5.06
Weighted average fair
value of options
granted on grant date $1.09 $ - $3.80
</TABLE>
<TABLE>
<CAPTION>
Detail composition of options outstanding December 31, 1999
-------------------------------------------------------------------------
Avg. contractual
Options Exercise life remaining Options
outstanding price (Years) exercisable
---------------- ------------- ----------------- -------------
<S> <C> <C> <C>
60,000 $1.00 9.29 15,000
39,000 2.06 9.71 - -
------ ------
99,000 15,000
====== ======
</TABLE>
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 1999 and 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 92.2% and 95.1%, respectively.
-33-
<PAGE> 34
The Company has issued stock purchase warrants with a variety of terms and
conditions. The following table summarizes stock purchase warrant transactions
during the period:
<TABLE>
<CAPTION>
Exercise
Number Prices
--------- --------------
<S> <C> <C>
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
Granted 1,285,000 1.063 - 2.75
Exercised - -
Canceled/Expired (177,500) 7.00 - 13.00
--------- --------------
Outstanding December 31, 1999 1,390,000 $1.063 - $9.00
========= ==============
</TABLE>
At December 31, 1999, 930,000 warrants were exercisable. The warrants expire at
various dates through October, 2004.
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, 1999 Dec. 31, 1998 Dec. 31, 1997
------------- -------------- ---------------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State - - -
------------- -------------- ---------------
Subtotal - - -
Deferred - - -
------------- -------------- ---------------
Total $ - $ - $ -
============= ============== ===============
</TABLE>
The tax effects of temporary differences giving rise to the deferred items are
as follows for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards $8,087 $4,783
Inventory reserves 2,045 1,255
Other 597 252
------ ------
Total deferred tax assets 10,729 6,290
Valuation allowance (10,729) (6,290)
------ ------
Deferred tax assets, net of $ - $ -
allowance ====== ======
</TABLE>
-34-
<PAGE> 35
In accordance with SFAS No. 109, the gross deferred tax asset at December 31,
1999 and 1998, of $10,792 and $6,290, respectively, has been reduced to zero by
a full valuation allowance.
At December 31, 1999, the Company has approximately $23,105 of net operating
loss carry forwards for federal income tax purposes. These losses expire
beginning 2009 through 2014.
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 $317, $281 and $272 for the years ended December 31, 1999,
1998 and 1997, respectively. The minimum annual rental commitments under
operating leases are as follows for the years ending December 31:
<TABLE>
<S> <C>
2000 310
2001 241
2002 3
----
Total $554
====
</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.
EMPLOYMENT CONTRACTS
The Company has employment contracts with various officers with remaining terms
ranging from one to two years at amounts approximating their current levels of
compensation. The Company's remaining aggregate commitment at December 31, 1999,
under such contracts is approximately $1,208. Certain of these agreements may
also include additional compensation to sales staff related to sales commission
bonuses that are contingent on the amount of the Company's sales. The Company
has made an accrual for a portion of this obligation in the provision for
operating losses during the phase-out period (See Note 12 - Discontinued
Operations/Gaming Asset Divestiture Agreement).
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
-35-
<PAGE> 36
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, there were no sales to this distributor in 1999, and
there were no sales to this distributor in the first quarter of 2000. In March
2000, the Company and Aristocrat terminated the distribution 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 provides 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 May 1999, this agreement was renewed for
an additional one-year period.
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 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.
In April 1999, the Company entered into a two-year exclusive agency agreement
with Stuart Black, an individual. Under the agreement, the agent represents the
Company's products for sale in specific territories in Europe. The agent
receives a commission on sales of the Company's products. The Company and Agent
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. AGREEMENT FOR MERGER:
On October 8, 1999, the Company entered into a non-binding letter of intent with
Equitex, Inc., which outlined the terms of a contemplated merger between the
Company and Equitex's subsidiary, nMortgage, Inc. ("nMortgage") in a tax-free
exchange of stock (the "Merger"). On December 31, 1999, the Company, Equitex and
nMortgage executed a definitive merger agreement governing the Merger. Pursuant
to the merger agreement, nMortgage will be merged with and into IGCA Merger
Subsidiary, a Minnesota corporation and wholly-owned subsidiary of the Company.
Upon closing of the Merger, IGCA Merger Subsidiary will be the surviving
corporation in the Merger. At the effective time of the Merger, each outstanding
share of nMortgage capital stock will be automatically
-36-
<PAGE> 37
converted into the right to receive a pro rata share of the greater of (i) an
aggregate of Forty Six Million (46,000,000) shares of common stock of IGCA, or
(ii) 75% of the then outstanding common stock of IGCA on a fully-diluted basis.
The IGCA shareholders will retain 25% of the surviving corporation to the Merger
calculated on a fully-diluted basis. Upon closing of the Merger, IGCA would be
renamed "nMortgage.com, Inc." nMortgage is a direct lender headquartered in Fort
Lauderdale, Florida, and offers both retail and wholesale mortgage financing
through its subsidiary, First Bankers Mortgage Services, Inc. nMortgage recently
announced the debut of its online mortgage system known as "nMortgage.com".
As an additional condition to the Merger, concurrent with the merger, the
Company must divest substantially all of its gaming assets (See Note 12 -
Subsequent Event - Gaming Asset Divestiture Agreement). The closing of the
Merger is subject to, among other things, obtaining approval of the Company's
shareholders and of certain governmental authorities, as well as other customary
pre-closing conditions.
12. SUBSEQUENT EVENTS:
GAMING ASSET DIVESTITURE AGREEMENT
On February 1, 2000, the Company entered into a definitive asset purchase
agreement with Xertain, Inc. ("Xertain"), pursuant to which Xertain will
purchase substantially all of the Company's gaming assets. Xertain is a
privately owned Delaware corporation located in Las Vegas, Nevada, with its
primary business predicated on gaming related technologies and international
manufacturing.
In exchange for the gaming assets of the Company, Xertain will pay an aggregate
purchase price of $4,000 plus a promissory note payable to IGCA in an amount
equal to the accounts receivable of IGCA as of the closing date, adjusted for
certain payments to be made by Xertain and IGCA as provided for in the note, and
Xertain will assume certain liabilities of IGCA (" the "Gaming Asset
Divestiture"). The accounts receivable promissory note will be secured by the
accounts receivable of IGCA which are being acquired by Xertain.
Of the $4,000 referenced above as part of the purchase price, $1,000 will be
paid in cash at the closing of the Gaming Asset Divestiture, provided that prior
to such time Xertain has obtained interim approval from Nevada gaming regulatory
authorities to manufacture gaming machines. If Xertain has not obtained such
interim approval prior to the closing, Xertain will deliver either (i) a $1,000
unsecured promissory note due upon Xertain's obtaining approval from Nevada
gaming regulatory authorities (but in no event later than September 1, 2000), or
(ii) an irrevocable letter of credit in the amount of $750. The remaining $3,000
will be paid in the form of an unsecured convertible promissory note, which will
have a 36-month term, bear interest at 8.5% per annum, and have interest and
principal payable at the maturity date. At the holder's option, such promissory
note will be convertible into Xertain common stock at $4.50 per share upon the
earlier of (a) twelve months from the closing date of the Gaming Asset
Divestiture, or (b) upon initial public offering of Xertain common stock.
Following consummation of the Gaming Asset Divestiture, IGCA will not own or
have any interest in its gaming related assets.
In addition to various standard conditions of closing, the Gaming Asset
Divestiture is subject to the simultaneous closing of the Merger, shareholder
approval and the termination of various employment agreements of certain key
employees of IGCA. The Company anticipates the disposal of the gaming equipment
manufacturing segment to be completed approximately June 1, 2000.
-37-
<PAGE> 38
SECURITIES AND EXCHANGE COMMISSION LETTER OF COMMENT
On June 30, 2000 the U.S. Securities and Exchange Commission ("SEC") issued a
letter of comment to the Company. Comments included in this letter related to
their review of the Company's report on Form 10-K for the year ended December
31, 1999 (the "December 31, 1999 10-K") filed on March 30, 2000, Amendment No. 1
to a Registration Statement on Form S-3 filed on May 24, 2000, and Amendment No.
1 to Schedule 14A filed on May 12, 2000, which related to the merger with
nMortgage and the divestiture of the gaming assets as previously described.
Based on those comments, certain revisions have been made to the December 31,
1999 10-K filed by the Company. These revisions include enhancement to certain
notes to provide clarification on selected events occurring during the year. The
most significant of the revisions relate to the presentation of the December 31,
1999 financial statements. The statements, as originally filed in the December
31, 1999 10-K, presented the sale of the gaming assets as discontinued
operations in accordance with the Accounting Principles Board ("APB") No 30.
Comments made by the SEC suggested that this transaction should not be presented
in this manner until shareholder approval has been obtained. While management
believes its original presentation is in accordance with professional standards,
the accompanying consolidated balance sheets and consolidated statements of
operations, shareholder's equity and cash flows have been revised in accordance
with the request made by the SEC.
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
Schedule II - Valuation and Qualifying Accounts
(In Thousands)
<TABLE>
<CAPTION>
Description Balance Charged to Amount Balance
----------- Beginning Costs and Written End of
of Period Expenses Off Period
---------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Reserve for inventory obsolescence
and write down to market value:
For the year ended 12/31/97 $ 1,893 $112 $1,124 $881
For the year ended 12/31/98 881 571 505 947
For the year ended 12/31/99 947 4,488 347 5,088
</TABLE>
<TABLE>
<CAPTION>
Charged/
Description Balance (Credited) Amount Balance
----------- Beginning to Costs Written End of
of Period and Expenses Off Period
---------- ------------- --------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful notes
and accounts receivable:
For the year ended 12/31/97 $148 $(48) $ - $100
For the year ended 12/31/98 100 - 15 85
For the year ended 12/31/99 85 198 3 280
</TABLE>
-38-
<PAGE> 39
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 . . . . . 15
Consolidated Balance Sheets as of December 31, 1999 and 1998 . . . . . . . . 16
Consolidated Statements of Operations for the years ended December 31, 1999,
1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1999, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . 20
</TABLE>
-39-
<PAGE> 40
(a)(3) Exhibits
<TABLE>
<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")
3.1(c) Certificate of Designation relating to Series C Convertible Preferred
Stock (Incorporated herein by reference to Exhibit 3.1(d) to the
Company's Registration Statement on Form S-3 filed August 3, 1999)
3.1(d) Certificate of Designation relating to Series D Convertible Preferred
Stock (Incorporated herein by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-3 filed January 13, 2000)
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 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)
10.3 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)
10.4 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)
10.5 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)
10.6 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")
10.7 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)
10.8 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)
10.9 Form of Subscription Agreement dated June 1, 1999 (Incorporated herein
by reference to Exhibit 10.8 to the Company's Registration Statement on
Form S-3 filed August 3, 1999)
10.10 Securities Purchase Agreement dated October 13, 1999 (Incorporated
herein by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-3 filed January 13, 2000)
10.11 Form of Registration Rights Agreement dated June 1, 1999 (Incorporated
herein by reference to Exhibit 10.9 to the Company's Registration
Statement on Form S-3 filed August 3, 1999)
10.12 Form of Registration Rights Agreement dated October 13, 1999
(Incorporated herein by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-3 filed January 13, 2000)
10.13 1997 Director Stock Option Plan (Incorporated herein by reference to
Annex A to the Company's Schedule 14A filed April 24, 1997)
10.14 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")
10.15 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)
10.16 Agreement and Plan of Merger dated December 31, 1999, by and among
nMortgage Inc., Equitex Inc., Innovative Gaming Corporation of America
and IGCA Acquisition Corp, (Incorporated herein by reference to Annex
B to the Company's Schedule 14A filed March 1, 2000)
21 List of Subsidiaries (Incorporated herein by reference to Exhibit 21 to
the Company's December 31, 1998 10-K)
23 Consent of Kafoury, Armstrong & Co.
27 Financial Data Schedule - which is only submitted electronically to the
Securities and Exchange Commission for EDGAR information purposes.
</TABLE>
+Agreement relates to Executive Compensation
(b) Reports on Form 8-K
On October 25, 1999, the Company filed a Form 8-K to report signing of a letter
of intent to acquire an internet mortgage company.
-40-
<PAGE> 41
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 7, 2000 By: /s/ Ronald A. Johnson
----------------------
Name: Ronald A. Johnson
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 7, 2000.
<TABLE>
<CAPTION>
Name Title
---- ----
<S> <C>
/s/ Ronald A. Johnson Chief Executive Officer, Chief Financial
---------------------- Officer and Chairman
Ronald A. Johnson (principal executive officer,
principal accounting officer)
</TABLE>
-41-
<PAGE> 42
EXHIBIT INDEX
<TABLE>
EXHIBIT
NUMBER 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")
3.1(c) Certificate of Designation relating to Series C Convertible Preferred
Stock (Incorporated herein by reference to Exhibit 3.1(d) to the
Company's Registration Statement on Form S-3 filed August 3, 1999)
3.1(d) Certificate of Designation relating to Series D Convertible Preferred
Stock (Incorporated herein by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-3 filed January 13, 2000)
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 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)
10.3 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)
10.4 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)
10.5 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)
10.6 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")
10.7 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)
10.8 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)
10.9 Form of Subscription Agreement dated June 1, 1999 (Incorporated herein
by reference to Exhibit 10.8 to the Company's Registration Statement on
Form S-3 filed August 3, 1999)
10.10 Securities Purchase Agreement dated October 13, 1999 (Incorporated
herein by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-3 filed January 13, 2000)
10.11 Form of Registration Rights Agreement dated June 1, 1999 (Incorporated
herein by reference to Exhibit 10.9 to the Company's Registration
Statement on Form S-3 filed August 3, 1999)
10.12 Form of Registration Rights Agreement dated October 13, 1999
(Incorporated herein by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-3 filed January 13, 2000)
10.13 1997 Director Stock Option Plan (Incorporated herein by reference to
Annex A to the Company's Schedule 14A filed April 24, 1997)
10.14 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")
10.15 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)
10.16 Agreement and Plan of Merger dated December 31, 1999, by and among
nMortgage Inc., Equitex Inc., Innovative Gaming Corporation of America
and IGCA Acquisition Corp, (Incorporated herein by reference to Annex
B to the Company's Schedule 14A filed March 1, 2000)
21 List of Subsidiaries (Incorporated herein by reference to Exhibit 21 to the
Company's December 31, 1998 10-K) 23 Consent of Kafoury, Armstrong & Co.
27 Financial Data Schedule - which is only submitted electronically to the
Securities and Exchange Commission for EDGAR information purposes.
</TABLE>
+Agreement relates to Executive Compensation
(b) Reports on Form 8-K
On October 25, 1999, the Company filed a Form 8-K to report signing of a letter
of intent to acquire an internet mortgage company.
