10-K/A 1 e10-ka.txt AMENDMENT NO.2 TO FORM 10-K YEAR ENDED 12/31/1999 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. 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- 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).
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 ------------ ------------ ------------ ------------ ------------- 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
-3- 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- 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- 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- 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:
Year ended Year ended December 31, 1999 December 31, 1998 --------------------- ---------------------- 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% ===================== ======================
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- 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- 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:
Year ended Year ended December 31, 1998 December 31, 1997 --------------------- --------------------- 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% ===================== =====================
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- 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- 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- 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- 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- 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- 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- 16 INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY Consolidated Balance Sheets (In Thousands, Except Share Data)
As of December 31, ----------------------- 1999 1998 -------- -------- 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 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. -16- 17 INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY Consolidated Statements of Operations (In Thousands, Except Per Share Data)
For the Year For the Year For the Year Ended Ended Ended December 31, December 31, December 31, 1999 1998 1997 -------- -------- -------- 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 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. -17- 18 INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY Consolidated Statements of Stockholders' Equity (In Thousands)
Convertible Unrealized Common Stock Preferred Stock Additional Gain/(Loss) on ----------------- --------------- Paid-in Accumulated Available-for- Shares Amount Shares Amount Capital Deficit Sale Securities Total ------- ------- ------ ------ --------- --------- --------------- --------- 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 ======== ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. -18- 19 INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY Consolidated Statements Of Cash Flows (In Thousands)
For the Year For the Year For the Year Ended Ended Ended December 31, December 31, December 31, 1999 1998 1997 ------------ ------------ -------------- 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 $- $- ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. -19- 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- 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.
Useful Life 1999 1998 ------------ ------ ------- 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 ====== ======
-21- 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:
1999 1998 ---------- --------- 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 ========== =========
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- 23 At December 31, 1999, the following concentrations of credit risk existed: Nevada 34% Arizona 24% Canada 14% Colorado 13% Australia 7% Palestine 6% Other 2% ------ Total 100% ======
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- 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- 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:
Years Ending December 31, Estimated Receipts 2000 $188 2001 111 2002 110 2003 47 ---------- Total $456 ==========
5. INTANGIBLE ASSETS: Intangible assets consisted of the following at December 31:
Useful Life 1999 1998 ----------- ------------ ---------- 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 ============ ==========
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- 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- 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:
Years Ending December 31, Estimated Payments 2000 $592 2001 213 2002 1,599 2003 5 2004 1,314 --------- Total $3,723 =========
-27- 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- 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- 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- 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:
1999 1998 ---- ---- 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)
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:
December 31, 1999 December 31, 1998 December 31, 1997 ---------------------- --------------------- ---------------------- Wtd Avg Wtd Avg Wtd Avg Number Ex Price Number Ex Price Number Ex Price ----------- ---------- ---------- ---------- ----------- ---------- 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
-31- 32
Detail composition of options outstanding December 31, 1999: ------------------------------------------------------------------------- Avg. contractual Options Exercise life remaining Options outstanding price (Years) exercisable ---------------- ------------- ----------------- ------------- 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 ======= ========
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:
December 31, 1999 December 31, 1998 ------------------------ ------------------------- Wtd Avg Wtd Avg Number Ex Price Number Ex Price ----------- ------------ ------------ ------------ 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
Detail composition of options outstanding December 31, 1999: ------------------------------------------------------------------------- Avg. contractual Options Exercise life remaining Options outstanding price (Years) exercisable ---------------- ------------- ----------------- ------------- 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 ======= =======
-32- 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:
December 31, 1999 December 31, 1998 December 31, 1997 ---------------------- --------------------- ---------------------- Wtd Avg Wtd Avg Number Wtd Avg Number Ex Price Number Ex Price Ex Price ----------- ---------- ---------- ---------- ----------- ---------- 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
Detail composition of options outstanding December 31, 1999 ------------------------------------------------------------------------- Avg. contractual Options Exercise life remaining Options outstanding price (Years) exercisable ---------------- ------------- ----------------- ------------- 60,000 $1.00 9.29 15,000 39,000 2.06 9.71 - - ------ ------ 99,000 15,000 ====== ======
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- 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:
Exercise Number Prices --------- -------------- 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 ========= ==============
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:
For the Year For the Year For the Year Ended Ended Ended Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997 ------------- -------------- --------------- Current: Federal $ - $ - $ - State - - - ------------- -------------- --------------- Subtotal - - - Deferred - - - ------------- -------------- --------------- Total $ - $ - $ - ============= ============== ===============
The tax effects of temporary differences giving rise to the deferred items are as follows for the years ended December 31:
1999 1998 ------ ------ 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 ====== ======
-34- 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: 2000 310 2001 241 2002 3 ---- Total $554 ====
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- 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- 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- 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)
Description Balance Charged to Amount Balance ----------- Beginning Costs and Written End of of Period Expenses Off Period ---------- ------------ --------- ---------- 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
Charged/ Description Balance (Credited) Amount Balance ----------- Beginning to Costs Written End of of Period and Expenses Off Period ---------- ------------- --------- --------- 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
-38- 39 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements:
Page ---- 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
-39- 40 (a)(3) Exhibits 3.1(a) Articles of Incorporation, as amended (Incorporated herein by reference to Exhibit 3.1 to the Company's registration Statement on Form SB-2 (File No. 33-61492C) (the "SB-2") 3.1(b) Certificate of Designation relating to Series B Convertible Preferred Stock (Incorporated herein by reference to Exhibit 4 to the Company's report on Form 10-Q for the quarter ended March 31, 1998) (the "March 31, 1998 10-Q") 3.1(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.
+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- 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.
Name Title ---- ---- /s/ Ronald A. Johnson Chief Executive Officer, Chief Financial ---------------------- Officer and Chairman Ronald A. Johnson (principal executive officer, principal accounting officer)
-41- 42 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------- ----------- 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.
+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.