<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2000
--------------------------------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ____________ to ____________.
Commission file number 0-22482 .
-----------------------
INNOVATIVE GAMING CORPORATION OF AMERICA
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Minnesota 41-1713864
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
4725 Aircenter Circle, Reno, Nevada 89502
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(775) 823-3000
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Address, If Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: At May 1, 2000 there were 9,416,735
shares of Common Stock, $0.01 par value, outstanding.
Page 1 of 17
<PAGE> 2
INNOVATIVE GAMING CORPORATION OF AMERICA
Form 10-Q Index
March 31, 2000
<TABLE>
<S> <C> <C>
Part I: Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
March 31, 2000 (Unaudited) and December 31, 1999 3
Consolidated Condensed Statements of
Operations - for the three months ended
March 31, 2000 and 1999 (Unaudited) 4
Consolidated Condensed Statements of Cash
Flows - for the three months ended March 31,
2000 and 1999 (Unaudited) 5
Notes to Consolidated Condensed
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Part II: Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
Page 2 of 17
<PAGE> 3
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 412 $ 140
Accounts receivable 339 759
Current portion of notes receivable 117 188
Inventories 4,324 4,576
Prepaid expenses and other 525 655
Accrued revenue estimate for phase-out period 4,495 5,883
-------- --------
Total current assets 10,212 12,201
NOTES RECEIVABLE, LESS CURRENT PORTION 269 268
PROPERTY AND EQUIPMENT, NET 558 707
INTANGIBLE ASSETS, NET 683 765
-------- --------
TOTAL ASSETS $ 11,722 $ 13,941
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 365 $ 585
Accrued liabilities 445 561
Notes payable - current portion 585 592
Customer deposits 732 --
Accrued expense estimate for phase-out period 4,041 6,432
-------- --------
Total current liabilities 6,168 8,170
Notes payable - net of current portion 2,917 3,131
-------- --------
Total liabilities 9,085 11,301
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series B convertible preferred stock, $.01 par value, nonvoting,
4,000 shares authorized, 30 and 280 shares outstanding, respectively -- --
Series C convertible preferred stock, $.01 par value, nonvoting,
2,000 shares authorized, 900 shares outstanding -- --
Series D convertible preferred stock, $.01 par value, nonvoting,
3,000 shares authorized, 1,612.5 shares outstanding -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
9,128,447 and 8,952,366 shares issued and outstanding, respectively 91 90
Additional paid-in capital 34,965 34,525
Accumulated deficit (32,419) (31,975)
-------- --------
Total stockholders' equity 2,637 2,640
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,722 $ 13,941
======== ========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
Page 3 of 17
<PAGE> 4
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
2000 1999
------- -------
<S> <C> <C>
DISCONTINUED OPERATIONS (NOTES 8 AND 9):
SALES $ -- $ 825
COST OF SALES -- 1,029
------- -------
Gross profit/(loss) -- (204)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE -- 1,459
------- -------
Loss from operations -- (1,663)
INTEREST INCOME, NET -- 15
------- -------
Loss from operations of discontinued gaming
equipment manufacturing (net of applicable
income taxes of $0) -- (1,648)
Preferred stock accretion adjustment 408 --
Preferred stock dividends 36 29
------- -------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (444) $(1,677)
======= =======
BASIC - LOSS PER SHARE OF COMMON STOCK:
Loss from operations of discontinued gaming
equipment manufacturing (net of applicable
income taxes of $0) $ (0.05) $ (0.22)
======= =======
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 8,977 7,505
======= =======
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
Page 4 of 17
<PAGE> 5
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
2000 1999
------- -------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR ) OPERATING ACTIVITIES $ 434 $ (942)
CASH FLOWS FROM INVESTING ACTIVITIES:
Inventory returned from (capitalized for use in) gaming operations -- (158)
Purchases of property and equipment -- (13)
Purchase of intangible assets -- (100)
------- -------
Cash flows used in investing activities -- (271)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends paid (37) (29)
Proceeds from sale of common stock 32 --
Payments on long-term obligations (157) (128)
------- -------
Cash flows used in financing activities (162) (157)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS 272 (1,370)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 140 1,617
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 412 $ 247
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest $ 83 $ 24
======= =======
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
Page 5 of 17
<PAGE> 6
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. Although management believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
interim consolidated condensed financial statements be read in conjunction with
the Company's most recent audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim periods
presented have been made. Operating results for the three months ended March 31,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000.
Certain accounts in the prior year financial statements have been reclassified
for comparative purposes to conform with the presentation in the current period
interim financial statements. These reclassifications had no effect on
previously reported net income or stockholders' equity.
(2) COMMITMENTS AND CONTINGENCIES
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 8 - Agreement for Merger and Note 9 -
Discontinued Operations/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.
The manufacture, distribution and sale of the Company's products are regulated
by various jurisdictions and entities, including requirements to obtain licenses
and product approvals in several jurisdictions. The Company has obtained
required licenses and product approvals in certain jurisdictions and is
continuing efforts to obtain such approvals in other jurisdictions. Failure to
successfully obtain and/or maintain such licenses and approvals, or meet other
regulatory requirements could materially impact the future operation of the
Company. Additionally, there is no assurance that the Company's products will be
accepted in the marketplace upon obtaining regulatory approvals.
(3) RELATED PARTY TRANSACTIONS
Lakes Gaming, Inc. ("LGI"), (formerly Grand Casinos, Inc.) which is in the
business of owning, managing and developing casinos, is a stockholder of the
Company. Lyle Berman, who was Chairman of the Board of the Company until June
24, 1998, is a principal shareholder and Chairman of the Board of LGI, and was
Chief Executive Officer of Grand Casinos, Inc. from October 1991 through March
1998. Mr. Berman served on the Board of Directors of the Company until July 16,
1999. Under an existing machine purchase agreement, LGI may purchase up to an
aggregate of 125 of the Company's blackjack, craps and roulette games in
quantity purchases at distributor level prices. Previous quantity sales were
also made to LGI at distributor level prices for the purpose of testing,
evaluating and marketing the Company's blackjack, craps and roulette games.
Under a 1998 agreement
Page 6 of 17
<PAGE> 7
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 2000
(UNAUDITED)
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 no machine sales
to LGI during the three-month periods ended March 31, 1999 or 2000.
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.
On June 1, 1999, the Company issued an aggregate of $1,550,000 in convertible
notes to a group of investors including Wayne Mills. Edward G. Stevenson, the
Chairman, Chief Executive Officer and Chief Financial Officer of the Company,
personally guaranteed the repayment of $250,000 of the convertibles notes. In
exchange for such personal guarantee, the Company issued Mr. Stevenson two
3-year warrants, each to purchase 25,000 shares of the Company's common stock at
$1.25 per share and $1.75 per share, respectively. The shares issuable upon
exercise of the warrants were registered on Registration Statement on Form S-3
(Registration No. 333-84413) filed with the Securities and Exchange Commission
on August 1, 1999, and amended by Amendment No. 1 to Form S-3 filed on September
23, 1999.
On March 5, 1999, the Company and Wayne Mills ("Mills"), who was a director of
the Company from July 22, 1999 until September 15, 1999, entered into a Stock
Redemption Agreement pursuant to which the Company agreed to redeem 400,000
shares of the Company's Common Stock beneficially owned by Mills (the "Mills
Redemption") in exchange for a convertible note (the "Mills Note") and a warrant
to acquire 50,000 shares of Common Stock (the "Warrant"). Prior to the Mills
Redemption, Mills beneficially owned in excess of 5% of the Company's
outstanding Common Stock. The Company's Board of Directors believed it would
improve the Company's ability to obtain timely licensing in certain key gaming
jurisdictions if Mills beneficially owned 4.9% or less of the Company's
outstanding Common Stock.
Pursuant to the Mills Redemption, the Company issued the Mills Note with a
principal amount of $437,500, convertible into Common Stock at $1.09375 per
share, the closing sales price of the Company's Common Stock on the day
immediately prior to the date of the consummation of the Mills Redemption. The
Mills Note became convertible on March 5, 2000 and is unsecured. The Company may
require conversion of all or a portion of the principal amount of the Mills Note
after March 5, 2000. Principal and interest on the Mills Note, which is five
percent (5%) per annum, is due March 5, 2004.
The Warrant has a term of three years and an exercise price of $1.09375 per
share, the closing sales price of the Company's Common Stock on the date of the
consummation of the Mills Redemption. Neither the Mills Note may be converted
nor the Warrant exercised if, immediately following such conversion or exercise,
as the case may be, Mills would beneficially own in excess of 4.9% of the
Company's outstanding Common Stock. The Mills Note has "piggyback" registration
rights that require the Company to register the shares issuable upon conversion
of the Mills Note in the event that the Company files certain types of
registration statements with the Securities and Exchange Commission. Pursuant to
similar "piggy-back" registration rights, the shares issuable upon exercise of
the Warrant were registered on Registration Statement on Form S-3 (Registration
No. 333-84413) filed with the Securities and Exchange Commission on August 1,
1999, and amended by Amendment No. 1 to Form S-3 filed on September 23, 1999.
Page 7 of 17
<PAGE> 8
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 2000
(UNAUDITED)
(4) INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No. 109-
"Accounting for Income Taxes" - (SFAS No. 109) under which deferred income tax
assets and liabilities are recognized for differences between financial and
income tax reporting basis of assets and liabilities based on currently enacted
rates and laws. The Company had cumulative federal net operating loss carry
forwards of approximately $23,105,000 as of December 31, 1999. These losses, if
not used, begin to expire in 2009 through 2014. Future changes in the ownership
of the Company may place limitations on the use of these net operating loss
carry forwards.
(5) EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share"-(SFAS No. 128). The earnings per share data for the periods
presented is based on weighted average common shares outstanding, which is
equivalent to "basic" earnings per share as calculated under SFAS No. 128.
Diluted earnings per share is not presented because the resulting earnings per
share would be antidilutive for each period reported.
(6) PREFERRED STOCK PRIVATE PLACEMENTS
On May 13, 1998, the Company issued 3,000 shares of Series B Convertible
Preferred Stock (the "Series B Preferred Stock") at a price of $1,000 per share
in a private placement for total proceeds of $3,000,000 prior to any offering
expenses. The stated par value per share is $.01, resulting in a total par value
of thirty dollars being recorded as Series B Preferred Stock, and the balance of
approximately $3.0 million is included in Additional Paid- in-Capital. An annual
dividend of 4% shall be paid quarterly in arrears either in Preferred Stock of
the Company or cash at the Company's discretion. Each share of Series B
Preferred Stock is convertible into shares of the Company's Common Stock at a
conversion price of 91% of the three consecutive day average of the lowest
closing bid price of the Company's Common Stock over the twenty-day trading
period ending the day prior to conversion (the "Conversion Price"). The
Conversion Price may not exceed $5.16, which represents 135 % of the ten day
average of the closing bid price of the Company's Common Stock ending on May 12,
1998. The maximum number of shares of Common Stock that may be issued upon
conversion is 1,505,000. In the event a holder of Series B Preferred Stock is
unable to convert shares of Preferred Stock into Common Stock at a discount
because 1,505,000 shares have been issued at a discount, then the Company may
either 1) redeem any unconverted Series B Preferred Stock for cash at a price
equal to 115% of the liquidation value of the shares or 2) issue Series C
Convertible Preferred Stock in an amount equal to the economic value that would
have been received by such holder if able to convert at a discount. The Company
has the right to redeem the Series B Preferred Stock at 115% of par in cash. On
June 1 1999, the Company redeemed $1,100,000 of the Series B Preferred Stock at
100% of par in cash. As of March 31, 2000, shares representing $1,870,000 of
Series B Preferred Stock had been converted into Common Stock, and the remaining
outstanding balance of $30,000 of Series B Preferred Stock is convertible into
Common Stock, at the election of the holder thereof. All outstanding shares of
Series B Preferred Stock will automatically be converted into Common Stock on
June 1, 2001. A holder of Series B Preferred Stock may not convert such stock
into Common Stock if, following such conversion, the holder beneficially owns in
excess of 4.9% of the Company's Common Stock.
The 9% beneficial conversion feature was accounted for as an additional
Preferred Stock dividend, which was determined on the date the Series B
Preferred Stock was issued. The total value of the beneficial conversion feature
or dividend is $296,703, which reduces income available for holders of the
Company's Common Stock and therefore reduces earnings per share on a pro rata
basis over the period from issuance of the Series B Preferred Stock to the
earliest conversion date.
On June 1, 1999, as part of a financial restructuring, the Company issued 1,400
shares of Series C Convertible Preferred Stock (the "Series C Preferred Stock")
at a price of $1,000 per share in a private placement for total proceeds of
$1,400,000 prior to any offering expenses. The stated par value per share is
$.01, resulting in a total par value of fourteen dollars being recorded as
Series C Convertible Preferred Stock, and the balance of approximately
Page 8 of 17
<PAGE> 9
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 2000
(UNAUDITED)
$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 March 31, 2000,
shares representing $500,000 of Series C Preferred Stock had been converted into
Common Stock, and all of the remaining outstanding balance of $900,000 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 $138,462, which reduces income available for holders of the
Company's Common Stock and therefore reduces earnings per share on a pro rata
basis over the period from issuance of the Series C Preferred Stock to the
earliest conversion date. Income available to holders of Common Stock is being
reduced by approximately $32,885, $87,115 and $18,462 during the second, third
and fourth quarters of 1999, respectively.
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. 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 $816,000, 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 D Preferred Stock to the
earliest conversion date. Income available to holders of Common Stock was
reduced by approximately $408,000 in the fourth quarter of 1999 and
approximately $408,000 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.
Page 9 of 17
<PAGE> 10
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 2000
(UNAUDITED)
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 March 31, 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 have 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 in the event such Common Stock is not registered by April
13, 2000, and for each month thereafter.
(7) FINANCIAL RESTRUCTURING
On June 1, 1999, the Company completed a financial restructuring in which the
Company received an aggregate $1,742,000 in net proceeds from a private
placement of convertible notes and warrants, and Series C Convertible Preferred
Stock.
The three-year convertible secured notes totaling $1,550,000 were issued to a
group of investors June 1, 1999. Interest on such notes is paid quarterly at a
rate of 12% per annum, and the principal balance is due June 1, 2002. At any
time after June 1, 2000, and until the principal balance is paid in full, the
holders of the notes may convert the notes into Common Stock of the Company at a
conversion price of $1.50 per share. The note holders may not convert the notes
into Common Stock if such conversion would result in beneficial ownership by
such note holder of more than 4.9% of the Company's issued and outstanding
Common Stock. The note holders were also granted an aggregate of 282,500
warrants to purchase shares of the Company's Common Stock at an exercise price
of $1.25 per share.
As a part of this restructuring, the Company issued 1,400 shares of Series C
Convertible Preferred Stock at a price of $1,000 per share in a private
placement for total proceeds of $1,400,000 prior to any offering expenses (See
Note 6 - "Preferred Stock Private Placement"). Additionally, the holders of the
Series B Convertible Preferred Stock agreed to amend the conversion terms the
Series B Convertible Preferred Stock, changing the automatic conversion date
from November 13, 1999, to June 1, 2001 in exchange for a warrant to acquire
350,000 shares of Common Stock of the Company at $1.50 per share. The amendments
also provide that if the holders of the Series B Convertible Preferred Stock are
unable to convert such preferred stock to Common Stock of the Company because
the maximum number of shares of Common Stock have been issued as allowed under
terms of the Series B Convertible Preferred Stock, the Company may redeem the
Series B Convertible Preferred Stock at 115% of the liquidation value of such
shares or, at the option of the Company, issue Series C Convertible Preferred
Stock in an amount equal to the number of Series B Convertible Preferred Stock
which cannot be converted into the Company's Common Stock.
(8) 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 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, Inc."
Page 10 of 17
<PAGE> 11
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 2000
(UNAUDITED)
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".
As an additional condition to the Merger, concurrent with the merger, the
Company must divest substantially all of its gaming assets (See Note 9 -
Discontinued Operations/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.
(9) DISCONTINUED OPERATIONS/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 $4,000,000 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 $4,000,000 referenced above as part of the purchase price, $1,000,000
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 $1,000,000 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 $750,000. The
remaining $3,000,000 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 presently anticipates the disposal of the gaming
equipment manufacturing segment to be completed in July 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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
Page 11 of 17
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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 8 -
Agreement for Merger and Note 9 - Discontinued Operations/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.
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, Bonus Streak TM and
single player video slot machines 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.
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. 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 agents to
market its products in Canada and Europe.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2000 COMPARED TO MARCH 31, 1999
For the three months ended March 31, 2000, the Company recorded a pretax loss
attributable to Common Stock shareholders of $444,000, or $.05 per share. For
the three months ended March 31, 1999, the Company recorded a net loss of
$1,677,000, or $.22 per share. Results from operations for the fiscal 2000
period include only adjustments for preferred stock accretion and preferred
stock dividends. Due to the Company's anticipated merger and divestiture of its
gaming manufacturing assets, all existing operations of the Company are reported
as "Discontinued Operations" (See Note 8 - Agreement for Merger and Note 9 -
Discontinued Operations/Gaming Asset Divestiture Agreement). As a result of the
commitment to the merger plan and related disposition of the gaming assets at
the beginning of October 1999, estimated operating revenue and expenses expected
to occur during the phase-out period were included in the loss on disposal of
gaming manufacturing equipment recorded during the fourth quarter of 1999.
Results of operations for the fiscal 1999 period include the operating results
for the period and adjustments for preferred stock accretion and preferred stock
dividends.
LOSS FROM OPERATIONS OF DISCONTINUED GAMING EQUIPMENT MANUFACTURING
Because estimated operating revenue and expenses expected to occur during the
phase-out period were recorded during the fourth quarter of 1999, there are no
elements of operating income for comparison between the three months ended March
31, 2000 and the three months ended March 31, 1999.
Page 12 of 17
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2000 COMPARED TO MARCH 31, 1999 - CONTINUED
PREFERRED STOCK ACCRETION ADJUSTMENT
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 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 was recognized during the fourth quarter of
1999 and the first quarter of 2000.
ACCUMULATED DEFICIT
The Company had an accumulated deficit of $32,419,000 as of March 31, 2000. Due
to weaker than expected demand for the Company's current products, the Company's
short-term capital requirements, the high degree of regulation and other factors
of the business environment in which the Company operates, the likelihood of
future profitable quarters cannot be predicted. Future short-term results are
highly dependent on the consummation of the Merger or, in the event the Merger
is not consummated, on the Company's ability to, among other things, finance
production and distribution new products, gain customer acceptance of its
existing and new products and the necessary Company licenses and/or product
approvals in various jurisdictions in order to expand its market base. There can
also be no assurance as to the time frame during which such anticipated
approvals may occur due to uncertain time periods involved in the regulatory
approval process.
On October 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. Upon consummation of the transaction, Innovative
Gaming Corporation of America would be renamed nMortgage.com. Future long-term
operating results cannot be predicted at this time due to the change in business
direction that will result from this transaction. Closing of the proposed Merger
and Gaming Asset Divestiture is subject to, among other things, shareholder
approval and the termination of various employment agreements of certain key
employees of IGCA.
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
Page 13 of 17
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES-CONTINUED
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 March 31, 2000, Series B Preferred Stock totaling $1,870,000 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 $30,000 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 March 31, 2000, 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 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 relating to such Common Stock was filed
with the Securities and Exchange Commission on January 13, 2000. As of March 31,
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 have 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 in the event such Common Stock
is not registered by April 13, 2000, and for each month thereafter. 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
Page 14 of 17
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES-CONTINUED
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
232,500 warrants to purchase shares of the Company's Common Stock at an exercise
price of $1.25 per share.
LIQUIDITY
The Company had $412,000 and $140,000 in cash as of March 31, 2000 and December
31, 1999, 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. Given the relatively large
fluctuations in the frequency and size of the Company's sales, the Company
continues to experience significant fluctuations in its cash position. For the
first eight days of May, 2000, the Company's average cash on hand was
approximately $242,000, while the Company has over $1.0 million in open sales
order backlog for product delivery. 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 date of the Merger, which
is presently anticipated for July 2000. However, if current sales forecasts are
not met, or if accounts receivables for such sales are not collected as
anticipated, or if the closing of the Merger is significantly delayed beyond
July 2000, the Company may not have enough cash to fund operations and the
Company would have to consider a number of strategic alternatives, including
sales of additional capital stock at discounted prices or discontinue operations
and/or file for bankruptcy.
Furthermore, there can be no assurance that the Company will be successful in
closing the Merger on a timely basis, if at all, or achieving its current sales
forecast and receivables collections, 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. Management believes that the costly process of product
development and introduction would 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.
Furthermore, assuming the Merger is consummated on a timely basis, there can be
no assurance as to cash requirements of the merged Company. There can be no
assurance that the post-Merger Company will be able to raise additional
financing to fund its 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 March 31, 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 have 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 in the event such Common Stock is not registered by April
13, 2000, and for each month thereafter.
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
Page 15 of 17
<PAGE> 16
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.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The foregoing Management's Discussion and Analysis contains various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Sections 21E of the Securities Exchange Act of
1934, as amended, which represent the Company's expectations or beliefs
concerning future events, including statements regarding the demand for the
Company's products in certain key jurisdictions such as Nevada and Australia. In
addition, statements containing expressions such as "believes," "anticipates,"
"hopeful" or "expects" used in the Company's periodic reports on Forms 10-K and
10-Q filed with the SEC are intended to identify forward looking statements. The
Company cautions that these and similar statements included in this report and
in previously filed periodic reports including reports filed on Forms 10-K and
10-Q are further qualified by important factors that could cause actual results
to differ materially from those in the forward-looking statement, including,
without limitation, the following: the timing and successful completion of the
merger with nMortgage and the related gaming asset divestiture, the ability to
achieve current sales forecasts, 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 the Company's report on Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1999. Many of the foregoing
factors have been discussed in the Company's prior SEC filings and, had the
amendments to the Securities Act of 1933 and Securities Exchange Act of 1934
become effective at a different time, would have been discussed in an earlier
filing.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 - Form of Amendment to Series D Convertible Preferred
Stock Registration Rights Agreement
Exhibit 27 - Financial Data Schedule - which is only submitted
electronically to the Securities and Exchange Commission for EDGAR
information purposes.
(b) Reports on Form 8-K
On January 6, 2000, the Company filed a Form 8-K to report signing
of a definitive agreement whereby the Company will acquire
nMortgage, Inc., a majority owned subsidiary of Equitex, Inc., in a
tax free exchange of stock.
Page 16 of 17
<PAGE> 17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INNOVATIVE GAMING CORPORATION OF AMERICA
/s/ Edward G. Stevenson
----------------------------------------
Edward G. Stevenson
Chief Financial Officer
(Principal Accounting Officer)
Date: May 9, 2000
Page 17 of 17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.1 Form of Amendment to Series D Convertible Preferred Stock Registration Rights
Agreement
27 Financial Data Schedule - which is only submitted electronically to the Securities
and Exchange Commission for EDGAR information purposes.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
THIS AMENDMENT TO REGISTRATION RIGHTS AGREEMENT, effective as April 13,
2000 (this "AGREEMENT"), between Innovative Gaming Corporation of America (the
"COMPANY") and _________________________(the "INVESTOR").
WHEREAS, the Investor has previously executed a Registration Rights
Agreement (the "INITIAL AGREEMENT") dated as of October 13, 1999, pursuant to
which the Company has agreed to provide certain registration rights to Investor;
WHEREAS, pursuant to the Section 9 of the Initial Agreement, any
provision contained therein may be amended in writing by the Company and
investors holding a majority of the Registrable Securities and the parties
hereto have agreed to amend certain of the provisions of the Initial Agreement
in accordance with Section 9 thereof.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereto, intending to be legally
bound, hereby amend the Agreement as follows:
1. AMENDMENT TO SECTION 2(B) OF THE INITIAL AGREEMENT. Section 2(b)
of the Agreement is hereby amended in its entirety and replaced with the
provision set forth below:
"2. REGISTRATION
(b) REGISTRATION DEFAULT. If the Registration Statement
covering the Registrable Securities required to be filed by the Company
pursuant to Section 2(a) is not (i) filed with the Commission within 90
days after the Closing Date or (ii) declared effective by the Commission
within 180 days after the Closing Date (either of which, without
duplication, an "INITIAL DATE"), then the Company shall make the
payments to the Initial Investor as provided in the next sentence as
liquidated damages and not as a penalty. The amount to be paid by the
Company to the Initial Investor shall be determined as of each
Computation Date (as defined below), and such amount shall be equal to
2% (the "LIQUIDATED DAMAGE RATE") of the Purchase Price (as defined in
the Securities Purchase Agreement) from the Initial Date to the first
Computation Date and 3.5% for each Computation Date thereafter,
calculated on a pro rata basis to the date on which the Registration
Statement is filed with (in the event of an Initial Date pursuant to
clause (i) above) or declared effective by (in the event of an Initial
Date pursuant to clause (ii) above) the Commission (the "PERIODIC
AMOUNT").
At the option of the Company, the full Periodic Amount shall be
paid by the Company to the Initial Investor within three days after each
Computation Date either (x) by wire transfer of immediately available
funds within three days after each Computation Date, or (y) through the
issuance of duly and validly authorized and issued, fully paid and
nonassessable shares of Common Stock valued at the Market Price (as such
term is defined in the Company's Certificate of Designation of Series D
6% Convertible Preferred Stock), provided, however, that to the extent
that funds are not available for the payment of the Periodic Amount by
wire transfer of immediately available funds, the Periodic Amount shall
be paid as provided in clause (y) above. The Common Stock to be
<PAGE> 2
issued in lieu of cash payments shall be registered for resale in the
Registration Statement.
As used in this Section 2(b), "COMPUTATION DATE" means the date
which is 30 days after the Initial Date and, if the Registration
Statement required to be filed by the Company pursuant to Section 2(a)
has not theretofore been declared effective by the Commission, each date
which is 30 days after the previous Computation Date until such
Registration Statement is so declared effective.
Notwithstanding the above, if the Registration Statement covering
the Registrable Securities required to be filed by the Company pursuant
to Section 2(a) is not filed with the Commission by the 90th day after
the Closing Date, the Company shall be in default of this Registration
Rights Agreement."
2. MISCELLANEOUS.
(a) ENTIRE AGREEMENT. This Amendment and the Initial
Agreement embody the entire agreement and understanding of the
parties hereto in respect of the subject matter contained herein
and therein.
(b) DEFINED TERMS. Except as otherwise expressly
provided, or unless the context otherwise requires, all
capitalized terms used herein have the meanings ascribed to them
in the Initial Agreement.
(c) COUNTERPARTS. This Amendment may be executed in any
number of counterparts, each of which shall be deemed an
original, but all of which shall constitute but one and the same
document.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
INNOVATIVE GAMING CORPORATION OF AMERICA
By: ____________________________________
Name: Edward G. Stevenson
Title: Chief Executive Officer
Investor:
By: ____________________________________
Name: ______________________________
2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 412
<SECURITIES> 0
<RECEIVABLES> 456
<ALLOWANCES> 0
<INVENTORY> 4,324
<CURRENT-ASSETS> 10,212
<PP&E> 558
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,722
<CURRENT-LIABILITIES> 6,168
<BONDS> 0
0
0
<COMMON> 91
<OTHER-SE> 2,546
<TOTAL-LIABILITY-AND-EQUITY> 11,722
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (444)
<CHANGES> 0
<NET-INCOME> (444)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
