-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OYiq3be9nqsjQmsrsbKcXNBpWOQhsC3SEdwpzgPkAfzDxUPlaCWIrGFqiGh0DKbS TnDH/ob7xEWOI7dsEZvj4A== 0000891618-99-003441.txt : 19990811 0000891618-99-003441.hdr.sgml : 19990811 ACCESSION NUMBER: 0000891618-99-003441 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990803 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVATIVE GAMING CORP OF AMERICA CENTRAL INDEX KEY: 0000897795 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS MANUFACTURING INDUSTRIES [3990] IRS NUMBER: 411713864 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-22482 FILM NUMBER: 99676800 BUSINESS ADDRESS: STREET 1: 4725 AIRCENTER CIRCLE CITY: RENO STATE: NV ZIP: 89502 BUSINESS PHONE: 7028233000 MAIL ADDRESS: STREET 1: 4725 AIRCENTER CIRCLE CITY: RENO STATE: NV ZIP: 89502 10-K405/A 1 FORM 10-K405/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO________ Commission File No. 0-22482 INNOVATIVE GAMING CORPORATION OF AMERICA ------------------------------------------------------ (Exact name of registrant as specified in its charter) MINNESOTA 41-1713864 --------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 4750 TURBO CIRCLE RENO, NEVADA 89502 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (702) 823-3000 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 18, 1999, 7,301,175 shares of the Registrant's Common Stock were outstanding. The aggregate market value of the Common Stock held by non-affiliates of the Registrant on such date, based upon the last sale price of the Common Stock as reported on the Nasdaq National Market on March 18, 1999, was $7,832,719. For purposes of this computation, affiliates of the Registrant are the Registrant's executive officers and directors and Lakes Gaming, Inc. DOCUMENTS INCORPORATED BY REFERENCE PART III - Portions of the Registrant's definitive proxy statement in connection with the annual meeting of the shareholders to be held on May 28, 1999, are incorporated by reference into Items 10 through 13, inclusive. 2 The Company has restated its results of operations for the years ended December 31, 1996 and 1998. In July 1999, the Company engaged its independent public accountants to audit its financial statements for the years ending December 31, 1996 and 1997, which were originally audited by the Company's predecessor independent public accountants. In the previously issued statements of operations, the Company recorded a $720,000 provision for income taxes in 1998 to provide a full valuation allowance on a deferred tax asset. Based on the historical information available during the re-audit of the December 31, 1996 and 1997 financial statements, management believes that this provision should be recorded in the year ended December 31, 1996. The restated financial statements reflect the transfer of this tax provision from 1998 to 1996. LIST OF ITEMS AMENDED PART II Item 6 Selected Financial Data Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8 Financial Statements PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K This Amendment on Form 10-K/A amends the above listed Items in the Company's Annual Report on Form 10-K previously filed for the year ended December 31, 1998. This amendment is filed in connection with the Company's restatement of its financial statements for the years ended December 31, 1998, 1997 and 1996. -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, 1998, 1997, 1996 and 1995, and the five months ended December 31, 1994. The following financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Consolidated Financial Statements of Innovative Gaming Corporation of America and Subsidiary (in thousands except per share data).
For the Year For the Year For the Year For the Year For the Five Ended Ended Ended Ended Months Ended December 31, December 31, December 31, December 31, December 31, 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ Statement of operations data: Net sales $ 8,509 $ 10,292 $ 2,664 $ 6,352 $ 470 Gross profit 1,375 3,103 529 1,589 199 Operating loss (4,444) (2,182) (6,592) (2,765) (2,179) Net loss (4,338) (1,935) (6,899) (2,114) (1,129) Net loss per common share (0.63) (0.43) (1.09) (0.38) (0.20) Cash flow data: Cash provided by (used for): Operating activities (2,106) (7,516) (2,726) 591 (1,226) Investing activities (92) 555 3,784 (4,399) (1,033) Financing activities 3,297 4,486 1,038 (87) (1,044) Increase (decrease) in cash and cash equivalents 1,099 (2,475) 2,096 (3,895) (3,303) Balance sheet data (end of period): Cash, cash equivalents and available-for-sale securities 1,617 518 5,959 8,749 5,796 Working capital 12,100 12,603 11,996 16,039 17,616 Total assets 17,093 18,461 15,256 18,929 21,417 Long-term debt (net of current maturities) 856 509 -- -- 5 Redeemable Preferred Stock -- -- -- -- 983 Total stockholders' equity 14,872 16,482 14,730 18,531 19,693
-3- 4 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and this Form 10-K contains forward-looking statements that involve risks and uncertainties relating to future events. Actual events or the Company's results may differ materially from those discussed in such forward-looking statements. Factors that might cause actual results to differ from those indicated by such forward-looking statements include, but are not limited to: customer acceptance of the Company's products, need for additional financing, Preferred Stock conversions, decline in demand for gaming products or reduction in the growth rate of new markets, failure or delay in obtaining gaming licenses and regulatory approvals, delays in developing or manufacturing new products, delays in orders and shipment of products, changing economic conditions, approval of pending patent applications or infringement upon existing patents, the effects of regulatory and governmental actions and increased competition. OVERVIEW - The Company was formed in 1991 to develop, manufacture, market and distribute multi-player and other specialty video gaming machines. The Company manufactures, markets and distributes BJ Blitz(TM), Hot Shot Dice(TM), Lightning Strike Roulette(TM), Supersuits Progressive Blackjack(TM) and Bonus Streak(TM) to certain gaming markets worldwide. Since inception, the Company has focused most of its resources on the development of games, the regulatory approval process and the sale and installation of its games. The Company has begun to expand and diversify its product line by developing and marketing single player games such as Bonus Streak and Mythical Reels. REGULATION - The Company distributes its products both directly to the gaming marketplace and through licensed agents and distributors. The Company is currently licensed and/or has the necessary regulatory approvals as a gaming product manufacturer and distributor in Nevada, Colorado, Mississippi, Louisiana, North Carolina, Minnesota, Iowa, Arizona, South Dakota, certain New Mexico tribal jurisdictions, Quebec and the Atlantic Lottery (four Canadian Maritime provinces). In certain jurisdictions where the Company is licensed, such as Arizona and Colorado, the Company may elect to market its products through a licensed distributor pursuant to any necessary regulatory approvals. In certain jurisdictions where licensure is not required, such as Australia, the Company may use an existing licensed distributor to sell its products pursuant to any necessary regulatory transaction approvals. Previously registered in Alberta, Manitoba, Saskatchewan, Quebec and the Atlantic Lottery Corporation, the Company has applications pending in British Columbia and Ontario. The Company has an agent to market its products in Canada. As of July 1999, the Company has submitted and has a pending application in Connecticut and has submitted games for approval in New Jersey and, through its distributor, in France. The Company intends to apply for necessary licenses or approvals in other jurisdictions both domestically and internationally where gaming is permitted. In March 1999, in order to expedite the timing of gaming regulatory approval in certain jurisdictions, the Company repurchased 400,000 shares of its outstanding Common Stock, at market price, from a shareholder. The Company entered into a Stock Redemption Agreement with such shareholder pursuant to which the Company redeemed 400,000 shares of Company Common Stock beneficially owned by such shareholder in exchange for a four year convertible note and a warrant to purchase 50,000 shares of the Company's Common Stock. In April 1999, the Company redeemed 700,000 shares of Common Stock from Lakes Gaming, Inc. on substantially the same terms as the redemption described above. This redemption was also to expedite the timing of gaming regulatory approvals in certain jurisdictions. These notes are unsecured, pay interest of 5% per annum and will be convertible at the closing market price of the Company's Common Stock on the date of the issuance of the notes. The notes may not be converted in the first year following issuance. The exercise price of the warrants will be the same as the conversion price of the notes. The Company also granted "piggyback" registration rights for shares of Common Stock issuable upon conversion of both the notes and the warrants. See "Common Stock Redemption" and Item 1. - "Business - Regulation." -4- 5 DISTRIBUTORS - In February 1996, the Company entered into a five-year distribution agreement with Aristocrat Leisure Industries of New South Wales, Australia to exclusively market and distribute the Company's multi-station products in Australia, New Zealand and surrounding gaming markets. Sales to this Australian distributor declined in the third and particularly fourth quarters of 1998, and the Company has not forecasted sales to this customer in 1999. In March 1996, the Company entered into a three-year exclusive distribution agreement with Ludi S.F.M. of France and its related entity Eurusa, to market and distribute the Company's multi-station products to select western European gaming markets. In January 1997, the Company granted a three-year exclusive distribution license to Vista Gaming Corporation to distribute and service the Company's multi-station blackjack and roulette, and Bonus Streak products in Colorado. In March 1998, the Company entered into a one-year business consulting agreement with Jean D. Leclair and the Leclair Group ("Leclair"). Under the agreement Leclair will, in addition to consulting, assist in securing agreements for the purchase of the Company's products in Quebec and Atlantic Canada. In May 1998, the Company entered into a one-year exclusive agency agreement with Bill Engle to represent certain of the Company's products for sale in specified provinces of Canada. In December 1998, the Company granted a three-year exclusive distribution license to DGS, Inc. to distribute the Company's multi-station blackjack and 21 Stud products in South Carolina. In January 1999, the Company granted a two-year exclusive distribution license to Par 4 to distribute certain of the Company's products in Atlantic City, New Jersey and Connecticut, subject to the Company's approval to sell products and approval of its products. RELATIONSHIP WITH LAKES GAMING, INC. - Lakes Gaming, Inc. ("LGI") (formerly Grand Casinos, Inc.) is in the business of managing and developing casinos. Under an existing machine purchase agreement, LGI may purchase up to an aggregate of 125 of the Company's multi-station blackjack, craps and roulette games in quantity purchases at distributor level prices. Pursuant to this agreement, the Company has sold 42 blackjack machines, 11 craps machines and 8 roulette machines. Previous quantity sales were also made to LGI at distributor level prices for the purpose of testing, evaluating and marketing the Company's blackjack, craps and roulette games. Under an agreement between the Company and LGI, used multi-player machines which LGI previously purchased from the Company may be placed on consignment with the Company to be refurbished and sold into legal markets. The proceeds from sales of up to three of the consignment games may be applied to the purchase of one new Bonus Streak game from the Company and minimum proceeds of $5,000 must be credited to LGI for each game sold by the Company. There are potentially 31 such used multi-player games which LGI may submit the Company for sale under the consignment agreement. Through December 31, 1998, 17 such used multi-player games were submitted to the Company on consignment under this agreement. The Company made no multi-station machine sales to LGI during 1997. The Company sold six Bonus Streak games and no multi-station machines to LGI in 1998. OTHER - On February 2, 1996, the Company completed the acquisition of all remaining patents, trademarks, copyrights and other intellectual property related to its games from its principal supplier. The Company also signed an agreement to receive discounted pricing on key game components for a two-year period, which is expected to lower its per game manufacturing costs. The Company will receive deliveries under this agreement until July 1999. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997. For the year ended December 31, 1998, the Company reported a net loss of $4,710,000, or $.63 per share, compared to a net loss of $2,889,000, or $.43 per share, for the year ended December 31, 1997. Results from operations for both years have been adjusted for preferred stock accretion and preferred stock dividends paid. The greater loss in 1998 was primarily due to a decline in revenues and gross profit and higher expenses for engineering and product development. -5- 6 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 =========== ===========
Percentage of Percentage of Product line: revenue: 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. 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. -6- 7 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expense for the year ended December 31, 1998 was $5,819,000 compared to $5,285,000 during fiscal year 1997. This increase in expense is primarily attributable to higher expenditures for engineering and development costs for new product development. Expenses also increased for professional fees, particularly legal fees and other costs associated with licensing and product approvals. INTEREST INCOME Interest income for the year December 31, 1998 was $106,000 compared to $247,000 for fiscal year 1997. This interest income decrease was due to reduced amounts invested in interest bearing accounts, including interest bearing notes receivable from the sale of product. PREFERRED STOCK ACCRETION ADJUSTMENT On May 13, 1998, the Company issued 3,000 shares of Series B Convertible Preferred Stock (the "Series B Preferred Stock") at a price of $1,000 per share in a private placement (see Note 7 of Notes to Consolidated Financial Statements). The Series B Preferred Stock is convertible into shares of the Company's Common Stock at a conversion price of 91% of the average closing bid price of the Company's Common Stock of the three consecutive day average of the lowest closing bid price of the Company's Common Stock over the twenty-day trading period ending the day prior to conversion. The intrinsic value of the beneficial conversion feature was $296,703, which was accreted to Series B Preferred Stock and charged against net income or loss to arrive at net income or loss attributable to common shareholders over the period in which the right to convert the Preferred Stock became vested. The $296,703 value of the beneficial conversion feature was recognized during the second, third and fourth quarters of 1998. On April 11, 1997, the Company issued 4,000 shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock") at a price of $1,000 per share in a private placement (see Note 7 of Notes to Consolidated Financial Statements). The Series A Preferred Stock was convertible into shares of the Company's Common Stock at a conversion price of 82% of the average closing bid price of the Company's Common Stock over the ten-day trading period ending the day prior to conversion. The intrinsic value of the beneficial conversion feature was $878,048, which was accreted to Preferred Stock and charged against net income or loss to arrive at net income or loss attributable to common shareholders over the period in which the right to convert the Preferred Stock became vested. The $878,048 value of the beneficial conversion feature was recognized during the second and third quarters of 1997. -7- 8 RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996. For the year ended December 31, 1997, the Company reported a net loss of $2,889,000, or $.43 per share, compared to a net loss of $6,899,000, or $1.09 per share, for the year ended December 31, 1996. For the 1997 period, results from operations have been adjusted for preferred stock accretion and preferred stock dividends paid. The greater loss in 1996 was primarily due to a one time restructuring charge of $1,716,000, a tax provision recorded to provide a full valuation allowance on the Company's deferred tax asset and lower sales volume. SALES, COST OF SALES AND GROSS PROFIT Sales increased to $10,292,000 during the year ended December 31, 1997 compared to $2,664,000 in the year ended December 31, 1996, due to an increase in unit sales from 33 in 1996 to 172 in 1997. The following table presents the comparative sales revenue and percentage of revenue derived from each of the Company's product lines for the years ending December 31, 1997 and 1996:
Year ended Year ended December 31, 1997 December 31, 1996 ----------------- ----------------- Sales revenue $10,292,000 $ 2,664,000 =========== ===========
Percentage of Percentage of Product line: revenue: revenue: ------------- ------------- Multi-player games 92% 91% Single player games 1% - % Parts sales and other 4% 9% Lease participation 3% - % ----------- ----------- Total 100% 100% =========== ===========
Delays in acquiring required gaming licenses in key gaming jurisdictions limited the markets available to sell the Company's products in 1996. The Company was granted technical game approval of its blackjack machine in Colorado and its three multi-player video machines in Nevada in early 1997, allowing the Company to pursue placement of its products in those jurisdictions. In the third quarter of 1997, the Company's multi-station blackjack and roulette games received interim approval for use in the club market of New South Wales, Australia. Subsequent to receiving such approval, the Company's Australian distributor commenced marketing the Company's products in this market. A total of 99 games were sold to the Australian distributor in 1997. Also contributing to the increased revenue were sales of 30 games, representing replacements and additional games, to a North Carolina casino. The gross margin in 1997 was 30.1% compared to 19.8% in 1996. The improved gross margin in 1997 is primarily attributable to lower cost of games due to design changes to reduce production costs, purchasing materials domestically at more competitive prices than were previously paid to foreign sources, and increased direct customer sales versus discounted sales to distributors. In 1996, all of the games sold by the Company were to distributors, which generally yield lower gross margins than direct sales. Additionally, the product sales mix in 1996 was comprised primarily of lower margin products. In the years ended December 31, 1997 and 1996, there were no sales to LGI under their discounted price arrangement. -8- 9 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expense for the year ended December 31, 1997 was $5,285,000 compared to $5,405,000 during fiscal year 1996. The decrease is attributable primarily to increased productivity resulting in expenses being incorporated into the cost of assembled games. During 1996, expenses incurred in establishing the production operation were charged to operating expense. In 1997, when production operations commenced, the costs were included in cost of sales as labor and overhead included in the products assembled and sold. This expense reduction more than offset increased product development, marketing and administrative expenses. INTEREST INCOME Interest income for the year December 31, 1997 was $247,000 compared to $568,000 for fiscal year 1996. This interest income decrease was due to reduced amounts invested in interest bearing accounts, including interest bearing notes receivable from the sale of product. PROVISION FOR INCOME TAXES In accordance with Statement of Financial Accounting Standards No. 109 - "Accounting for Income Taxes"- (SFAS No. 109), the Company recorded a $875,000 provision for income taxes during the year ended December 31, 1996 to provide a full valuation allowance on its deferred tax asset. As required by SFAS No. 109, and taking into consideration past losses and the ability of the Company to "more likely than not" realize such benefit, the Company recorded the additional valuation reserve. PREFERRED STOCK ACCRETION ADJUSTMENT On April 11, 1997, the Company issued 4,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock") at a price of $1,000 per share in a private placement (see Note 7 of Notes to Consolidated Financial Statements). The Preferred Stock was convertible into shares of the Company's Common Stock at a conversion price of 82% of the average closing bid price of the Company's Common Stock over the ten-day trading period ending the day prior to conversion. The intrinsic value of the beneficial conversion feature was $878,048, which was accreted to Preferred Stock and charged against net income or loss to arrive at net income or loss attributable to common shareholders over the period in which the right to convert the Preferred Stock became vested. The $878,048 value of the beneficial conversion feature was recognized during the second and third quarters of 1997. LIQUIDITY AND CAPITAL RESOURCES PREFERRED STOCK ISSUES On May 13, 1998, the Company issued 3,000 shares of Series B Convertible Preferred Stock (the "Preferred Stock") at a price of $1,000 per share in a private placement for total proceeds of $3,000,000. The Company received net proceeds of approximately $2,804,000 after the payment of fees and expenses associated with such private placement. An annual dividend of 4% shall be paid quarterly in arrears either in Preferred Stock of the Company or cash at the Company's discretion. Each share of Preferred Stock is convertible into shares of the Company's Common Stock at a conversion price of 91% of the three consecutive day average of the lowest closing bid price of the Company's Common Stock over the twenty-day trading period ending the day prior to conversion (the "Conversion Price"). The Conversion Price may not exceed $5.16, which represents 135 % of the ten-day average of the closing bid price of the Company's Common Stock ending on May 12, 1998. The maximum number of shares of Common Stock that may be issued upon conversion is 1,505,000. In the event there is a holder of Preferred Stock that is unable to convert shares of Preferred Stock into Common Stock at a discount because either a) 1,505,000 shares have been issued at a -9- 10 discount or b) such holder would beneficially own in excess of 4.9% of the Company's Common Stock, then the Company may either 1) redeem any unconverted Preferred Stock for cash at a price equal to 115% of the liquidation value of the shares or 2) convert such unconverted shares without a discount into Common Stock and pay cash to the holder of such unconverted shares equal to the economic value that would have been received by such holder if able to convert at a discount. The Company has the right to redeem the Preferred Stock at 115% of par in cash. As of December 31, 1998, all of the Preferred Stock was convertible into Common Stock, at the election of the holder thereof. A holder of Preferred Stock may not convert such stock into Common Stock if, following such conversion, the holder beneficially owns in excess of 4.9% of the Company's Common Stock. As of December 31, 1998, no Preferred Stock had been converted into Common Stock. A Registration Statement related to the Common Stock was filed by, and at the expense of, the Company pursuant to obligations contained in a Registration Rights Agreement dated May 13, 1998. The effective date of the Registration Statement filed with the Securities and Exchange Commission was September 3, 1998, and all necessary gaming regulatory approvals have been received. The 9% beneficial conversion feature is accounted for as an additional Preferred Stock dividend, which was determined on the date the Preferred Stock was issued. The total value of the beneficial conversion feature or dividend is $296,703, which reduces income available for holders of the Company's Common Stock and therefore reduces earnings per share on a pro rata basis over the period from issuance of the Preferred Stock to the earliest conversion date. The $296,703 value of the beneficial conversion feature was recognized during the second, third and fourth quarters of 1998. INVENTORY As of December 31, 1998, inventories totaled $9.4 million, approximately 1.3 times the amount recorded as cost of sales in 1998. This level of inventory was due to lower than expected product sales and fewer than expected placements of games in casinos on a participation basis during 1998. Additionally, sales to the Company's Australian distributor were lower than expected, particularly in the third and fourth quarters when this distributor failed to order games in accordance with forecasts previously provided to the Company. The Company had relied on the forecasts provided by the distributor as a basis for making inventory purchases. Additionally, placements of games in Nevada casinos were fewer than planned as the Company met with resistance to placement of games under revenue sharing agreements. The Company has subsequently revised its marketing strategies to include the option of selling games to casinos in Nevada. Management has evaluated the composition of the inventory for product marketability under its current business plan and recorded reserves to reduce the carrying value to a level it believes is realizable. The Company had long-term debt of $856,000 as of December 31, 1998. ADDITIONAL FINANCING In June 1999, the Company received an aggregate of $1,742,000 from a private placement of notes and Series C Preferred stock. The three-year convertible secured notes totaling $1,550,000 were issued to a group of investors including a current shareholder of the Company. Interest is paid quarterly at a rate of 12% per annum, and the principal balance is due June 1, 2002. At any time after June 1, 2000, and until the principal balance is paid in full, the holders of the notes may convert the notes into Common Stock of the Company at a conversion price of $1.50 per share. The note holders may not convert the notes into Common Stock if such conversion would result in beneficial ownership by such note holder of more than 4.9% of the Company's issued and outstanding Common Stock. The note holders were also granted an aggregate of 282,500 warrants to purchase shares of the Company's Common Stock at an exercise price of $1.25 per share. Also in June 1999, the Company received net proceeds of approximately $192,000 from the issuance of Series C Convertible Preferred Stock. -10- 11 LIQUIDITY The Company had $1,617,000 and $518,000 in cash, cash equivalents and available-for-sale securities as of December 31, 1998 and December 31, 1997, respectively. The Company has experienced negative cash flow from operations of $2.1 million, $7.5 million and $2.7 million for the years ended December 31, 1998, 1997 and 1996, respectively. In addition, sales in the first half of 1999 have been below management's expectations. In June 1999, management took steps to address their future liquidity and cash flow requirements by obtaining additional financing in the aggregate amount of $1,742,000 as described above. As of July 30, 1999, the Company had cash of approximately $1,080,000. The Company estimates that its cash and anticipated funds from operations will be adequate to fund cash requirements into the fourth quarter of 1999, which assumes, among other things, market acceptance of new games being developed by the Company (which cannot be assured). Management believes that the costly process of product development and introduction will require the Company to seek additional financing to successfully complete any such future development and introduction. There can be no assurance that the Company will be successful in obtaining any additional financing on terms acceptable to the Company. Failure to obtain additional financing would have a material adverse effect on the Company, and the Company would have to consider liquidating all or part of the Company's assets and potentially discontinuing operations. COMMON STOCK REDEMPTION In March 1999, in order to expedite the timing of gaming regulatory approval in certain jurisdictions, the Company repurchased 400,000 shares of its outstanding Common Stock, at market price, from a shareholder. The Company entered into a Stock Redemption Agreement with such shareholder pursuant to which the Company redeemed 400,000 shares of Company Common Stock beneficially owned by such shareholder in exchange for a four year convertible note and a warrant to purchase 50,000 shares of the Company's Common Stock. In April 1999, the Company redeemed 700,000 shares of Common Stock from Lakes Gaming, Inc. on substantially the same terms as the redemption described above. This redemption was also to expedite the timing of gaming regulatory approval in certain jurisdictions. These notes are unsecured, pay interest of 5% per annum and will be convertible at the closing market price of the Company's Common Stock on the date of the issuance of the notes. The notes may not be converted in the first year following issuance. The exercise price of the warrants will be the same as the conversion price of the notes. The Company also granted "piggyback" registration rights for shares of Common Stock issuable upon conversion of both the notes and the warrants. See Item 1. - - "Business - - Regulation." OTHER At December 31, 1998, Company had a $500,000 standby letter of credit primarily to facilitate acquisition of components and supplies from a foreign vendor. As of December 31, 1998, no amount was outstanding. The facility is collateralized by short-term investments of the Company. Gains and losses on foreign currency transactions are recognized currently in earnings. The Company's revenues from foreign markets are expected to increase in the future, further subjecting the Company to the effects of fluctuations in exchange rates. The Company does not consider this to be a significant risk at this time. -11- 12 YEAR 2000 UPDATE As of December 31, 1998, the Company continued its assessment to identify and evaluate the risks of the Year 2000 issue. The Company's Year 2000 assessment considered the following: (1) the Company's products; (2) the manufacturing process of the products; (3) the Company's vendors and suppliers of materials utilized in either the Company's gaming machine products or the manufacturing process; (4) the Company's internal business information and accounting systems and (5) the Company's principal customers. To implement its assessment, the Company assigned internal staff to monitor and facilitate efficient Year 2000 Compliance. The Company has not utilized third-party consultants to evaluate its Year 2000 readiness. First, none of the Company's products contain software or embedded microprocessors that are time-sensitive. Second, the Company's manufacturing process is not automated to the extent that any part of the process is computerized or relies upon time-sensitive software. The process of manufacturing the Company's games is largely a mechanical process. Third, the Company is seeking to obtain assurance from its primary material vendors and suppliers to determine the extent which the Company is vulnerable to Year 2000 issues because such vendor or supplier is or may not be Year 2000 compliant. With respect to the Company's internal business information and accounting systems, the Company has reviewed its financial reporting systems, IT based and otherwise, to ensure that they are Year 2000 compliant. The Company's software vendors have made assurances that their software is either Year 2000 compliant or that timely updates will be made to ensure that such software will be Year 2000 complaint. In the process of reviewing the Company's internal business information and accounting systems, the Company has determined that some of its personal computers utilized by its corporate staff are not Year 2000 compliant and will have to be replaced. The Company presently anticipates that it will replace such computers by mid-1999. Finally, the Company is in the process of evaluating its customers, including major distributors to determine whether such customers Year 2000 readiness could cause a loss of business that could be material to the Company. CONTINGENCY PLANS The Company has not yet seen the need to develop any widespread contingency plans for the Year 2000 issue, but this will continuously be monitored as the Company gains more information about the compliance programs of its vendors and customers. Given that some risks are beyond the control of the Company, the Company does not believe that it can develop a contingency plan that will totally shield the Company from an economic ripple effect throughout the entire economy should others fail to resolve their own Year 2000 problems. COST Based on the Company's current assessment, the costs of addressing potential Year 2000 problems are not expected to be material or have a material adverse impact on the Company's financial position. The current estimated cost of replacing the Company's five or six corporate personal computers should not exceed $15,000. However, the estimated costs relating to the resolution of the Company's Year 2000 compliance issues cannot be fully and finally determined at this time. -12- 13 RISKS While the Company fully anticipates achieving Year 2000 compliance well in advance of January 1, 2000, there are certain risks, which exist with respect to the Company's business and the Year 2000. Those risks range from slight delays and inefficiencies in processing data and carrying out accounting and financial functions to the most reasonable likely worst case scenario, extensive and costly inability to process data, provide vital accounting functions and communicate with customers and suppliers. Furthermore, if significant customers or vendors identify Year 2000 issues in the future and are unable to resolve such issues in a timely manner, it could result in material financial risks. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The foregoing Management's Discussion and Analysis contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Sections 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events, including statements regarding the demand for the Company's products in certain key jurisdictions such as Nevada and Australia. In addition, statements containing expressions such as "believes," "anticipates," "hopeful" or "expects" used in the Company's periodic reports on Forms 10-K and 10-Q filed with the SEC are intended to identify forward looking statements. The Company cautions that these and similar statements included in this report and in previously filed periodic reports including reports filed on Forms 10-K and 10-Q are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statement, including, without limitation, the following: the inability to successfully develop, license, manufacture and market new products in a timely manner; decline in demand for gaming products or reduction in the growth rate of new markets; increased competition; the effect of economic conditions; a decline in the market acceptability of gaming; ability to obtain additional financing through leasing, equity or other arrangements; political and economic instability in developing international markets; a decrease in the desire of established casinos to upgrade machines in response to added competition from newly constructed casinos; the loss of a distributor; loss or retirement of key executives; approval of pending patent applications or infringement upon existing patents; the effect of regulatory and governmental actions; the Company's expectations as to achieving year 2000 readiness and the cost of achieving such readiness; unfavorable determination of suitability by regulatory authorities with respect to officers, directors or key employees; the limitation, conditioning or suspension of any gaming license; adverse results of significant litigation matters; fluctuation in exchange rates, tariffs and other barriers. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in this Form 10-K in ITEM 1. - BUSINESS, under the caption "Certain Factors". Many of the foregoing factors have been discussed in the Company's prior SEC filings and, had the amendments to the Securities Act of 1933 and Securities Exchange Act of 1934 become effective at a different time, would have been discussed in an earlier filing. -13- 14 ITEM 8. FINANCIAL STATEMENTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Innovative Gaming Corporation of America: We have audited the accompanying consolidated balance sheet of Innovative Gaming Corporation of America and Subsidiary as of December 31, 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Innovative Gaming Corporation of America and Subsidiary at December 31, 1998, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring negative cash flow from operations that raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to addressing the future liquidity and cash flow requirements of the Company are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The accompanying schedule is presented for purposes of complying with the Securities and Exchange Commission rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. KAFOURY, ARMSTRONG & CO. Reno, Nevada February 26, 1999 (Except with respect to the matter discussed in Note 11, as to which the date is July 16, 1999) - 14- 15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Innovative Gaming Corporation of America: We have audited the accompanying consolidated balance sheet of Innovative Gaming Corporation of America and Subsidiary as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two year periods ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated balance sheet as of December 31, 1997 and the related consolidated statement of operations, stockholders' equity and cash flows for each of the two year periods ended December 31, 1997, were audited by other auditors whose opinion dated March 12, 1998 was unqualified. As discussed in Note 11 to the financial statements, the Company has restated its 1997 and 1996 financial statements. The other auditors reported on the 1997 and 1996 financial statements before the restatement. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Innovative Gaming Corporation of America and Subsidiary at December 31, 1997, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring negative cash flow from operations that raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to addressing the future liquidity and cash flow requirements of the Company are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The accompanying schedule is presented for purposes of complying with the Securities and Exchange Commission rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. KAFOURY, ARMSTRONG & CO. Reno, Nevada July 16, 1999 -15- 16 INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY Consolidated Balance Sheets (In Thousands, Except Share Data)
As of December 31, ----------------------- 1998 1997 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,617 $ 518 Restricted investments 700 1,000 Accounts receivable, net of allowances of $85 and $100 1,186 1,929 Current portion of notes receivable 334 276 Inventories, net 9,244 10,191 Prepaid expenses and other 384 159 -------- -------- Total current assets 13,465 14,073 NOTES RECEIVABLE, less current portion 362 552 PROPERTY AND EQUIPMENT, net 1,389 2,107 INTANGIBLES ASSETS, net 1,877 1,729 -------- -------- TOTAL ASSETS $ 17,093 $ 18,461 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 313 $ 568 Accrued liabilities 524 423 Notes payable - current portion 528 322 Customer deposits -- 157 -------- -------- Total current liabilities 1,365 1,470 Notes payable - net of current portion 856 509 -------- -------- Total liabilities 2,221 1,979 -------- -------- COMMITMENTS AND CONTINGENCIES (Note 9) -- -- STOCKHOLDERS' EQUITY: Series B Convertible Preferred Stock, $.01 par value, nonvoting, 4,000 shares authorized, 3,000 and 0 shares outstanding, respectively -- -- Common stock, $.01 par value, 100,000,000 shares authorized, 7,535,211 shares issued and outstanding 75 75 Additional paid-in capital 32,676 29,575 Accumulated deficit (17,879) (13,168) -------- -------- Total stockholders' equity 14,872 16,482 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,093 $ 18,461 ======== ========
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, 1998 1997 1996 ------------ ------------ ------------ NET SALES $ 8,509 $ 10,292 $ 2,664 COST OF SALES 7,134 7,189 2,135 -------- -------- -------- Gross profit 1,375 3,103 529 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,819 5,285 5,405 RESTRUCTURING COSTS -- -- 1,716 -------- -------- -------- Operating loss (4,444) (2,182) (6,592) INTEREST INCOME, net 106 247 568 -------- -------- -------- Loss before income taxes (4,338) (1,935) (6,024) PROVISION FOR INCOME TAXES -- -- 875 -------- -------- -------- Net loss (4,338) (1,935) (6,899) PREFERRED STOCK DIVIDENDS 75 76 -- PREFERRED STOCK ACCRETION 297 878 -- -------- -------- -------- Net loss attributable to common shareholders $ (4,710) $ (2,889) $ (6,899) ======== ======== ======== LOSS PER SHARE OF COMMON STOCK $ (0.63) $ (0.43) $ (1.09) ======== ======== ======== Weighted average common shares outstanding 7,535 6,744 6,356 ======== ======== ========
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)
Class B Non-Voting Convertible Common Stock Common Stock Preferred Stock ------------------ ------------------- --------------------- Shares Amount Shares Amount Shares Amount ------ ------ ------- ------ ------ ------ BALANCE, December 31, 1995 4,969 $50 1,025 $ 10 -- -- Class B common stock exchange for common stock 1,025 10 (1,025) (10) -- -- Stock options and warrants exercised 258 3 -- -- -- -- Common stock issued for purchase of intangible assets 225 2 -- -- -- -- Unearned compensation adjustments -- -- -- -- -- -- Unrealized loss on available-for-sale securities -- -- -- -- -- -- Net loss -- -- -- -- -- -- ----- --- ------ ---- ------ ------- BALANCE, December 31, 1996 6,477 65 -- -- -- -- Series A preferred stock issued -- -- -- -- 4,000 3,122 Preferred stock accretion adjustment -- -- -- -- -- 878 Series A preferred stock conversion to common stock 1,055 10 -- -- (4,000) (4,000) Preferred stock dividends paid 3 -- -- -- -- -- Unrealized gain on available-for-sale securities -- -- -- -- -- -- Net loss -- -- -- -- -- -- ----- --- ------ ---- ------ ------- BALANCE, December 31, 1997 7,535 75 -- -- -- -- Series B preferred stock issued -- -- -- -- 3,000 -- Preferred stock accretion adjustment -- -- -- -- -- -- Preferred stock dividends paid -- -- -- -- -- -- Net loss -- -- -- -- -- -- ----- --- ------ ---- ------ ------- BALANCE, December 31, 1998 7,535 $75 -- $ -- 3,000 $ -- ===== === ====== ==== ====== =======
Additional Gain/(Loss) on Paid-in Accumulated Unearned Available-for- Capital Deficit Compensation Sale Securities Total ---------- ---------- ------------ ---------------- -------- BALANCE, December 31, 1995 $21,858 $ (3,380) $(10) 3 $ 18,531 Class B common stock exchange for common stock -- -- -- -- -- Stock options and warrants exercised 1,014 -- -- -- 1,017 Common stock issued for purchase of intangible assets 2,079 -- -- -- 2,081 Unearned compensation adjustments -- -- 10 -- 10 Unrealized loss on available-for-sale securities -- -- -- (10) (10) Net loss -- (6,899) -- -- (6,899) ------- -------- ---- ---- -------- BALANCE, December 31, 1996 24,951 (10,279) -- (7) 14,730 Series A preferred stock issued 622 -- -- -- 3,744 Preferred stock accretion adjustment -- (878) -- -- 0 Series A preferred stock conversion to common stock 3,990 -- -- -- 0 Preferred stock dividends paid 12 (76) -- -- (64) Unrealized gain on available-for-sale securities -- -- -- 7 7 Net loss -- (1,935) -- -- (1,935) ------- -------- ---- ---- -------- BALANCE, December 31, 1997 29,575 (13,168) -- -- 16,482 Series B preferred stock issued 2,804 -- -- -- 2,804 Preferred stock accretion adjustment 297 (297) -- -- -- Preferred stock dividends paid -- (76) -- -- (76) Net loss -- (4,338) -- -- (4,338) ------- -------- ---- ---- -------- BALANCE, December 31, 1998 $32,676 $(17,879) $ -- $ -- $ 14,872 ======= ======== ==== ==== ========
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, 1998 1997 1996 ------------ ------------ ------------ OPERATING ACTIVITIES: Net loss $(4,338) $(1,935) $ (6,899) Adjustments to reconcile net loss to cash flows used for operating activities - Depreciation and amortization 936 889 566 Stock option compensation earned -- -- 10 Loss on sale of assets -- 2 103 Deferred income taxes -- -- 854 Provision for inventory obsolescence 571 112 1,308 Book value of fixed assets charged to cost of sales 26 424 -- Provision for bad debts -- 9 78 Changes in operating assets and liabilities: Accounts and notes receivable 875 (2,106) 1,202 Inventories 376 (5,574) (232) Prepaid expenses and other (224) 14 177 Accounts payable and accrued expenses (171) 492 107 Customer deposits (157) 157 -- ------- ------- -------- Net cash used for operating activities (2,106) (7,516) (2,726) ------- ------- -------- INVESTING ACTIVITIES: Purchases of available-for-sale securities -- (1,042) (5,936) Release of restricted investments 300 -- -- Proceeds from sale of available-for-sale securities -- 4,013 10,350 Payment on covenant not to compete -- -- (92) Inventory (capitalized for use in) returned from gaming operations 363 (2,028) -- Proceeds from sale of property and equipment -- -- 45 Purchases of property and equipment (255) (388) (583) Purchases of intangible assets (500) -- -- ------- ------- -------- Net cash provided by (used for) investing activities (92) 555 3,784 ------- ------- -------- FINANCING ACTIVITIES: Proceeds from financing agreements 955 873 26 Payments on long-term obligations (402) (67) (5) Preferred stock dividends paid (60) (64) -- Net proceeds from sale of common stock -- -- 1,017 Net proceeds from sale of preferred stock 2,804 3,744 -- ------- ------- -------- Net cash provided by financing activities 3,297 4,486 1,038 ------- ------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,099 (2,475) 2,096 CASH AND CASH EQUIVALENTS, beginning of period 518 2,993 897 ------- ------- -------- CASH AND CASH EQUIVALENTS, end of period $ 1,617 $ 518 $ 2,993 ======= ======= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid for interest $ 80 $ 1 $ 3 ======= ======= ======== Cash paid (refund received) for income taxes $ (1) $ (3) $ 4 ======= ======= ======== Noncash transactions: Preferred Stock converted to common stock $ -- $ 4,000 $ -- ======= ======= ======== Preferred Stock dividends paid with common stock $ -- $ 12 $ -- ======= ======= ======== Exchange of common stock for intangible assets $ -- $ -- $ 2,081 ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. -19- 20 INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NATURE OF BUSINESS AND RISK FACTORS Innovative Gaming Corporation of America ("the Company") was incorporated in the State of Minnesota on September 19, 1991. The Company, through its wholly-owned subsidiary, Innovative Gaming, Inc., is in the business of developing, manufacturing, marketing and distributing gaming equipment. The Company distributes its products to certain gaming markets worldwide. The Company has experienced negative cash flow from operations of $2.1 million, $7.5 million and $2.7 million for the years ended December 31, 1998, 1997 and 1996, respectively. In addition, sales in the first half of 1999 have been below management's expectations. In June 1999, management took steps to address their future liquidity and cash flow requirements by obtaining additional financing in the aggregate amount of $1,742 (See Note 11 - Subsequent Events - Additional Financing). As of July 30, 1999, the Company had cash of approximately $1,080. The Company estimates that its cash and anticipated funds from operations will be adequate to fund cash requirements into the fourth quarter of 1999, which assumes, among other things, market acceptance of new games being developed by the Company (which cannot be assured). Management believes that the costly process of product development and introduction will require the Company to seek additional financing to successfully complete any such future development and introduction. There can be no assurance that the Company will be successful in obtaining any additional financing on terms acceptable to the Company. Failure to obtain additional financing would have a material adverse effect on the Company, and the Company would have to consider liquidating all or part of the Company's assets and potentially discontinuing operations. The Company's ability to execute its long-term business strategy also depends to a significant degree on its ability to finance the development, marketing and production of its products. There can be no assurance that the Company will be successful in obtaining financing on terms acceptable to the Company, if such need arises. Any new investors may seek and obtain substantially better terms than were granted to its present investors and the issuance of such securities would result in dilution to its existing shareholders. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates. REGULATION The manufacture, distribution and sale of the Company's products are regulated by various jurisdictions and entities, including requirements to obtain licenses and product approval. The Company is presently seeking, or plans to seek, licenses and product approval in several jurisdictions. Failure to successfully obtain licenses, approvals, or meet other regulatory requirements could materially impact the expansion and future operation of the Company. -20- 21 CERTAIN RISKS AND UNCERTAINTIES A significant portion of the Company's operations are generated from a limited number of gaming jurisdictions. A change in general economic conditions or the regulatory environment of these jurisdictions could adversely affect the Company's operating results. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Innovative Gaming Corporation of America and its wholly owned subsidiary, Innovative Gaming, Inc. All significant intercompany transactions have been eliminated. CASH AND CASH EQUIVALENTS The Company considers all financial instruments which are highly liquid and have original maturities of three months or less to be cash and cash equivalents which are readily convertible to cash. Cash equivalents consist primarily of demand deposits. The Company classifies all investments which are not cash equivalents as available-for-sale securities with all gross unrealized gains or losses included as a separate component of equity. RESTRICTED INVESTMENTS At December 31, 1998 and 1997, the Company had restricted investments of $700 and $1,000, respectively, Of these amounts, $500 and $1,000, respectively, were pledged as collateral against certain bank credit arrangements. PROPERTY AND EQUIPMENT Property and equipment are carried at cost with depreciation provided for using the straight-line method over the useful lives of the assets or the lease term, whichever is shorter. Maintenance, repairs and minor renewals are expensed when incurred. Depreciation expense recorded in the years ended December 31, 1998, 1997 and 1996 was $584, $537 and $146, respectively.
Useful Life 1998 1997 ----------- ------- ------- Office equipment 5 years $ 942 $ 453 Display games 5 years 142 142 Gaming operations equipment 2.5 years 543 1,459 Manufacturing equipment 5 years 358 345 Leasehold improvements Life of lease 307 303 ------- ------- Total property and equipment 2,292 2,702 Less: Accumulated depreciation (903) (595) ------- ------- Total property and equipment, net $ 1,389 $ 2,107 ======= =======
-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:
1998 1997 ------- -------- Game components and parts $ 5,021 $ 6,602 Work in process 231 698 Finished goods 4,939 3,772 Inventory reserves (947) (881) ------- -------- Total inventories, net $ 9,244 $ 10,191 ======= ========
INTANGIBLES The Company amortizes intangibles on a straight-line basis over their estimated economic lives while the technology is being utilized (See Note 5). PRODUCT SALES/REVENUE RECOGNITION The Company makes product sales for cash, on normal terms of 90 days or less, over longer term installments, and, in Nevada, through participation in the net win of the games until the purchase price is paid. Revenue from the sale of products is recognized upon transfer of title and risk of loss to the customer. Deposits received from customers in advance of delivery are deferred. CONCENTRATIONS OF RISK During 1998, a majority of the Company's sales were to one customer, a distributor, Aristocrat Leisure Industries ("Aristocrat"), which accounted for 54.1% of sales. Sales to Aristocrat declined in the third and particularly fourth quarters of 1998 when this distributor failed to order games in accordance with forecasts previously provided to the Company. The Company has not forecasted sales to this customer in 1999. During 1997, a majority of the Company's sales were to two customers. Sales to one distributor, Aristocrat, accounted for 48.4% of sales and direct sales to one customer, Harrah's Smoky Mountain Casino, accounted for 19.4% of sales. During 1996, a majority of the Company's sales were to three distributors. These three distributors accounted for 37%, 32% and 24% of sales, respectively. For the years ended December 31, 1998, 1997 and 1996, no other distributors or customers accounted for greater than 10% of sales. The Company maintains deposits in excess of federally insured limits. Statement of Financial Accounting Standards No. 105 identifies these items as a concentration of risk requiring disclosure, regardless of the degree of risk. The risk is managed by maintaining all deposits in high quality financial institutions. The Company purchases certain key electronic components, which are not available from other sources, from a Japanese supplier, Irem Software Engineering, Inc., at a negotiated fixed price for a period extending to mid-1999. The total purchase commitment remaining at December 31, 1998, was approximately $462. The Company is developing an alternative product design to eliminate dependence on this sole source vendor. -22- 23 The financial instruments that subject the Company to concentrations of credit risk consists principally of accounts and notes receivable. Accounts and notes receivable are concentrated in specific legalized gaming jurisdictions. Notes receivable are collateralized by the equipment sold. The Company has no secured interest in the trade accounts receivable. At December 31, 1998, the following concentrations of credit risk existed: Nevada 46% Germany 11% Colorado 10% Canada 10% South Carolina 8% California 8% Delaware and Other 7% ---- 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 $2,353, $1,884 and $1,132 for the years ended December 31, 1998, 1997 and 1996, respectively. These amounts are included in selling, general and administrative expenses. RESTRUCTURING COSTS In 1996, the Company recognized $1,716 of restructuring costs, which included expenses related to the Company's relocation to Reno, Nevada, management transition and product focus. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 -"Accounting for Income Taxes" (SFAS No. 109), whereby deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be removed or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. To the extent the amount deductible for income tax purposes from stock option plans exceeds the amount charged to operations for financial statement purposes, the related tax benefits are credited to capital stock when realized. EARNINGS PER SHARE The Company has adopted Statement of Financial Accounting Standards No. 128 "Earnings Per Share"-(SFAS No. 128). SFAS No. 128 is effective for periods ending after December 15, 1997, and replaces previously reported earnings per share with "basic" and "diluted" earnings per share. The earnings per share data for all periods presented is based on weighted average common shares outstanding and on the same basis as "basic" earnings per share calculated under SFAS No. 128. Diluted earnings per share is not presented because the resulting earnings per share would be antidilutive for each period reported. FOREIGN CURRENCY TRANSACTIONS Transactions which occur in currencies other than U.S. dollars are translated to U.S. dollars for financial reporting purposes. Gains and losses from this process are recorded in the results of operations. -23- 24 LONG-LIVED ASSETS During 1995, the Company adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of'" - (SFAS No.121). SFAS No.121 establishes accounting standards for the recognition and measurement of impairment of long-lived assets and certain identifiable intangibles and goodwill either to be held or disposed of. Management reviews long-lived assets, including intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. For assets which produce future cash flows, an estimate of undiscounted future cash flows is compared to the carrying amount to determine if an impairment exists. For assets which do not produce quantifiable future cash flows, such as intangibles, impairment is measured at the enterprise level. No impairment existed at December 31, 1998 and 1997. 2. RELATIONSHIP WITH LAKES GAMING, INC.: Lakes Gaming, Inc. ("LGI") (formerly Grand Casinos, Inc.) is in the business of managing and developing casinos. Lyle Berman, who was Chairman of the Board of the Company until June 24, 1998, is a principal shareholder and Chairman of the Board of LGI, and was Chief Executive Officer of LGI from October 1991 through March 1998. Mr. Berman continues to serve on the Board of Directors of the Company. Under an existing machine purchase agreement, LGI may purchase up to an aggregate of 125 of the Company's multi-station blackjack, craps and roulette games in quantity purchases at distributor level prices. Previous quantity sales were also made to LGI at distributor level prices for the purpose of testing, evaluating and marketing the Company's blackjack, craps and roulette games. Under an agreement between the Company and LGI, used multi-player machines which LGI previously purchased from the Company may be placed on consignment with the Company to be refurbished and sold into legal markets. The proceeds from sales of up to three of the consignment games may be applied to the purchase of one new Bonus Streak game from the Company and minimum proceeds of $5 must be credited to LGI for each game sold by the Company. There are potentially 31 such used multi-player games which LGI may submit the Company for sale under the consignment agreement. Through December 31, 1998, 17 such used multi-player games were submitted to the Company on consignment under this agreement. The Company made no multi-station machine sales to LGI during 1997. The Company sold six Bonus Streak games and no multi-station machines to LGI in 1998. 3. AVAILABLE-FOR-SALE SECURITIES: The Company had no available-for-sale securities at December 31, 1998 and 1997. Proceeds from the sale of available-for-sale securities were $4,013 for the year ended December 31, 1997 and $10,350 for the year ended December 31, 1996. 4. NOTES RECEIVABLE: The Company has granted certain customers extended payment terms under sales contracts. These contracts are generally for terms of one to five years with interest recognized at prevailing rates and are collateralized by the equipment sold. Stated interest rates in the contracts range from 10% to 10.5%. On contracts with no stated interest to be paid, interest is imputed at prime plus 2%. At December 31, 1998, the face amount of notes receivable was $816. The carrying value of notes receivable approximates their fair value. Certain of the Company's notes receivable are pledged as security for a note payable to Finova Capital Corporation. The -24- 25 following table represents the estimated future collections of notes receivable, net of amounts to be recognized as interest income, at December 31, 1998:
Estimated Years Ending December 31, Receipts --------- 1999 $334 2000 117 2001 102 2002 63 2003 and after 80 ---- Total $696 ====
5. INTANGIBLE ASSETS: Intangible assets consisted of the following at December 31:
Useful Life 1998 1997 ----------- ------- ------- Product patent and technology rights 5 to 10 $ 2,832 $ 2,332 years Nevada distribution rights 10 years 250 250 ------- ------- Total intangible assets 3,082 2,582 Less: accumulated amortization (1,205) (853) ------- ------- Total intangible assets, net $ 1,877 $ 1,729 ======= =======
Amortization recorded for intangibles was $352, $352 and $420 in the years ended December 31, 1998, 1997 and 1996, respectively. On February 2, 1996, the Company acquired the balance of all remaining intellectual property including patents, trademarks, picture rights and copyrights for its games from its Japanese suppliers in exchange for an aggregate 225,000 shares of IGCA common stock. During 1998, the Company entered into agreements with various companies to acquire rights to technology and intellectual property for use in games which the Company intends to develop, manufacture and market. Under an agreement with Quick Silver Development Co. Inc ("Quick Silver"), a California corporation, the Company purchased the Patent and Technology for a game concept entitled "Revolving Rings Gaming Apparatus", for a purchase price of $50. The Company will also pay a per day game fee to Quick Silver for gaming devices embodying the Patent technology and placed in locations under participation agreements between the location and the Company. The per day game fees will vary based upon the number of games placed and are subject to regulatory approval. The cost of this patent and technology will be amortized over the period such technology is used in the Company's products. No such amortization was recorded in 1998. The Company purchased rights to a game concept developed by Vista Gaming ("Vista"), a Colorado corporation, for a purchase price of $100. The Company will also pay game fees to Vista for gaming devices embodying the game concept sold or placed in locations under participation agreements between the location and the Company. The game fees will vary based upon the number of games placed and are subject to regulatory approval. The cost of these game rights will be amortized over the period they are used in the Company's products. No such amortization was recorded in 1998. -25- 26 The Company purchased rights to intellectual property related to two game concepts developed by Gametronics for a purchase price of $500. A note receivable from Gametronics in the amount of $400 was converted and applied toward payment of the purchase price. The Company will also pay game fees to Gametronics for gaming devices embodying the game concept sold or placed in locations under participation agreements between the location and the Company. The game fees for sold games will be at a fixed fee and per day games fees for games placed under participation agreements will vary based upon the number of games placed and are subject to regulatory approval. The rights acquired allow the Company to develop, manufacture, market and distribute the games in Nevada and Mississippi. The cost of this intellectual property will be amortized over the period it is used in the Company's products. No such amortization was recorded in 1998. Under a purchase agreement with Metropolitan Gaming LLC ("Metropolitan"), the Company purchased a sublicense for rights to use three dimensional projection technology in one if its gaming machine products, for a purchase price of $75. The Company will also pay a per day signage technology fee to Metropolitan for gaming devices embodying the technology and placed in locations under participation agreements between the location and the Company. The per game signage technology fees will vary based upon the total number of games placed utilizing the three dimensional projection technology and are subject to regulatory approval. The cost of these technology rights will be amortized over the period such rights are used in the Company's products. No such amortization was recorded in 1998. 6. FINANCING ARRANGEMENTS: LETTER OF CREDIT At December 31, 1998 and 1997, the Company had a standby letter of credit with a bank in the amount of $500 and $1,000, respectively. At December 31, 1998 and 1997, the Company had certificates of deposit of $700 and $1,000, respectively, which were included in the accompanying balance sheets as restricted investments, of which $500 and $1,000, respectively, were pledged as security for the standby letters of credit. This standby letter of credit is primarily to facilitate the acquisition of component parts and supplies. At December 31, 1998 and 1997, no amount was outstanding on the standby letter of credit. NOTES PAYABLE Notes payable consists of amounts owed IGT, a wholly-owned subsidiary of International Game Technology, for the purchase of slant top slot machines incorporated in the Company's Bonus Streak game, an operating capital loan from Finova Capital Corporation and financed insurance premiums. Under the agreement with IGT, the Company shares equally in the net revenues received from customers under participation agreement sales until IGT is paid in full for the sales price of the slant top slot machine acquired by the Company. Thereafter the Company receives 90% and IGT receives 10% of the net revenues from the customer. For cash sales, the Company must pay IGT the purchase price of the slant top slot machines from the proceeds of the sale. Management has estimated the portion of current notes payable to represent those amounts expected to be paid to IGT under participation arrangements and from cash sales in 1999. In March 1998, Innovative Gaming, Inc., a wholly-owned subsidiary of the Company, entered into a loan commitment securing $2 million from Finova Capital Corporation. The initial funding of approximately $910 was completed on April 13, 1998. The loan is payable in 36 equal installments including interest paid in arrears at a rate of 12.06 percent. This financing is secured by certain of the Company's long-term receivables and a -26- 27 corporate guarantee from the Company. Additional funding under this arrangement was available through December 1, 1998. The Company's borrowing capacity under this arrangement was dependent upon the level of receivables generated through "bucket sales" agreements. The Company did not borrow any additional amounts under this arrangement. The financed insurance premiums are paid in monthly installments over a period of less than twelve months. The following table represents the estimated future payments of notes payable at December 31, 1998:
Years Ending Estimated December 31, Receipts ------------ --------- 1999 $ 528 2000 528 2001 319 2002 9 ------ Total $1,384 ======
7. STOCKHOLDERS' EQUITY: PREFERRED STOCK On April 11, 1997, the Company issued 4,000 shares of Series A Convertible Preferred Stock at a price of $1,000 per share in a private placement for total proceeds of $4,000. The Company received net proceeds of approximately $3,744 from such private placement after the payment of fees and expenses associated with such private placement. An annual dividend of 4% was paid quarterly in arrears in cash. Each share of Preferred Stock was convertible into shares of the Company's Common Stock at a conversion price of 82% of the average closing bid price of the Company's Common Stock over the ten-day trading period ending the day prior to conversion (the "Conversion Price"). The Conversion Price was not to exceed $8.1725 per share. A holder of Preferred Stock was not permitted to convert such stock into Common Stock if, following such conversion, the holder beneficially would own in excess of 4.9% of the Company's Common Stock. A Registration Statement related to the Common Stock was filed by, and at the expense of, the Company pursuant to obligations contained in a Registration Rights Agreement dated April 10, 1997. The Effective Date of the Registration Statement was July 28, 1997, and all necessary gaming regulatory approvals were received. As of October 22, 1997, all shares of Preferred Stock were converted into an aggregate of 1,058,696 shares of Common Stock. On May 13, 1998, the Company issued 3,000 shares of Series B Convertible Preferred Stock (the "Preferred Stock") at a price of $1,000 per share in a private placement for total proceeds of $3,000. The stated par value per share is $.01, resulting in a total par value of thirty dollars being recorded as Series B Convertible Preferred Stock, and the balance of approximately $3.0 million is included in Additional Paid-in Capital. The Company received net proceeds of approximately $2,804 after the payment of fees and expenses associated with such private placement. An annual dividend of 4% shall be paid quarterly in arrears either in Preferred Stock of the Company or cash at the Company's discretion. Each share of Series B Preferred Stock is convertible into shares of the Company's Common Stock at a conversion price of 91% of the three consecutive day average of the lowest closing bid price of the Company's Common Stock over the twenty-day trading period ending the day prior to conversion (the "Conversion Price"). The Conversion Price may not exceed $5.16, which represents 135 % of the ten-day average of the closing bid price of the Company's Common Stock ending on May 12, 1998. The maximum number of shares of Common -27- 28 Stock that may be issued upon conversion is 1,505,000. In the event there is a holder of Preferred Stock that is unable to convert shares of Preferred Stock into Common Stock at a discount because either a) 1,505,000 shares have been issued at a discount or b) such holder would beneficially own in excess of 4.9% of the Company's Common Stock, then the Company may either 1) redeem any unconverted Preferred Stock for cash at a price equal to 115% of the liquidation value of the shares or 2) convert such unconverted shares without a discount into Common Stock and pay cash to the holder of such unconverted shares equal to the economic value that would have been received by such holder if able to convert at a discount. The Company has the right to redeem the Preferred Stock at 115% of par in cash. As of December 31, 1998, all of the Preferred Stock was convertible into Common Stock, at the election of the holder thereof. All outstanding shares of Preferred Stock will automatically be converted into Common Stock on November 13, 1999. A holder of Preferred Stock may not convert such stock into Common Stock if, following such conversion, the holder beneficially owns in excess of 4.9% of the Company's Common Stock. As of December 31, 1998, no Preferred Stock had been converted into Common Stock. A Registration Statement related to the Common Stock was filed by, and at the expense of, the Company pursuant to obligations contained in a Registration Rights Agreement dated May 13, 1998. The effective date of the Registration Statement filed with the Securities and Exchange Commission was September 3, 1998, and all necessary gaming regulatory approvals have been received. The 9% beneficial conversion feature is accounted for as an additional Preferred Stock dividend, which was determined on the date the Preferred Stock was issued. The total value of the beneficial conversion feature or dividend is $297, which reduces income available for holders of the Company's Common Stock and therefore reduces earnings per share on a pro rata basis over the period from issuance of the Preferred Stock to the earliest conversion date. Income available to holders of Common Stock was reduced by approximately $141, $144 and $12 during the second, third and fourth quarters of 1998, respectively. STOCK REPURCHASE PLAN On October 20, 1994, the Company's Board of Directors authorized the Company to repurchase up to 500,000 shares of its outstanding common stock from time to time on the open market or in privately negotiated transactions. As of December 31, 1998, the Company had repurchased 248,500 shares at prices ranging from $3.56 to $6.08 per share, for total consideration of $1,199. All such shares were repurchased in 1994 and 1995. No shares were repurchased in 1998. ISSUANCE AND EXCHANGE OF CLASS B STOCK On October 20, 1994, the Company issued 1,025,000 shares of its Class B Non-Voting Common Stock in exchange for 1,025,000 shares of common stock held by Grand Casinos, Inc.("GCI") (Grand Casinos, Inc. subsequently changed its name to Lakes Gaming, Inc.) On December 1, 1995, the Company and GCI amended their earlier agreement to provide that if the Company did not receive certain approvals from the Nevada Gaming Commission ("the Nevada Approvals") on or before December 31, 1995, GCI would, subject to approval of the Minnesota Commissioner of Commerce, exchange its 1,025,000 shares of Class B non-voting common stock for 1,025,000 shares of the Company's common stock. The Company did not receive the Nevada Approvals on or before December 31, 1995. On March 21, 1996, GCI converted 1,025,000 shares of Class B non-voting common stock into 1,025,000 shares of the Company's common stock. -28- 29 At the time of the original exchange, the Company granted GCI certain registration rights and the option to purchase 102,500 shares of common stock at $7.00 per share, increased the number of games GCI may purchase under the existing discount machine purchase agreement by 50 games (up to an aggregate 125 games) and entered into a transition plan with respect to Board of Directors' positions based upon the timing of the Company's receipt of regulatory approvals. STOCK OPTIONS AND WARRANTS The Company has a 1992 Employee Stock Option and Compensation Plan (the "1992 Plan"), pursuant to which options and other awards to acquire an aggregate of 1,350,000 shares of the Company's common stock may be granted. Stock options, stock appreciation rights, restricted stock, other stock and cash awards may be granted under the Plan. All employees are eligible to participate in the 1992 Plan. The Company also has a 1998 Non-Executive Stock Option Plan (the "1998 Plan"), pursuant to which options to acquire an aggregate of 200,000 shares of the Company's common stock may be granted. Non-Executive employees who are full-time employees of the Company are eligible to participate in the 1998 Plan. Both the 1992 Plan and the 1998 Plan are administered by a stock option committee which has the discretion to determine the number and purchase price of shares subject to stock options (which may be below the fair value of the common stock on the date thereof), the term of each option and the time or times during its term when the option becomes exercisable. Options are generally exercisable in equal amounts over a five-year period from the date of grant. During 1995 and 1994, the exercise prices of certain options ranging from $6.00 to $15.75 were reduced to $4.00 (fair market value on the date of repricing). On October 8, 1996, the exercise prices of certain options ranging from $7.00 to $11.50 were reduced to $4.75 (fair market value on the date of repricing). In December 1998, current employees of the Company were allowed to elect repricing of outstanding options, adjusting the exercise price to the current market price in exchange for delaying the vesting of one-half of all then unvested options by twelve months. All current employees elected to reprice their options under the terms offered. The existing options were cancelled and the repriced options were recorded as new grants. The new grants to all Non-Executive employees totaled 313,050, which were issued from the 1998 Plan subject to Board of Directors approval to increase the available shares in excess of the 200,000 shares originally authorized. The Company accounts for the both stock option plans under APB Opinion No. 25 - -"Accounting for Stock Options Issued to Employees", under which no compensation cost has been recognized. Statement of Accounting Standards No. 123 -"Accounting for Stock-Based Compensation" (SFAS No. 123), was issued in 1995 and, if fully adopted, changes the methods for recognition of cost on plans similar to that of the Company. Adoption of SFAS No. 123 is optional; however, pro forma disclosures as if the Company had adopted the cost recognition method are required. Had compensation cost for the Plan been determined consistent with SFAS No. 123, the Company's results of operations and earnings per share would have been changed to the following pro forma amounts:
1998 1997 --------- --------- Net loss: As reported $ (4,710) $ (2,889) Pro forma $ (5,420) $ (3,831) Primary and fully-diluted EPS: As reported $ (0.63) $ (0.43) Pro forma $ (0.72) $ (0.57)
-29- 30 A summary of the status of the 1992 Employee Stock Option and Compensation Plan at December 31, 1998, 1997 and 1996, and changes during the periods then ended is presented in the tables and narrative below:
December 31, 1998 December 31, 1997 December 31, 1996 ---------------------- ---------------------- ---------------------- Wtd Avg Wtd Avg Wtd Avg Number Ex Price Number Ex Price Number Ex Price ------- -------- ------- -------- -------- -------- Outstanding at beginning of period 825,400 $4.69 606,500 $4.67 352,600 $3.99 Granted 550,400 1.14 271,550 4.75 540,500 4.75 Exercised -- -- -- -- (207,600) 3.94 Forfeited (765,800) 4.63 (52,650) 4.91 (79,000) 4.16 Expired -- -- -- -- -- -- ------- ----- ------- ----- ------- ----- Outstanding at end of period 610,000 $1.56 825,400 $4.69 606,500 $4.67 ======= ======= ======= Exercisable at end of period 361,800 $1.74 290,933 $4.61 131,000 $4.52 Weighted average fair value of options granted on grant date $ 0.83 $ 2.91 $ 2.95
Detail composition of options outstanding December 31, 1998: -------------------------------------------------------------------------- Avg. contractual Options Exercise life remaining Options outstanding price (Years) exercisable ------------- ------------- ----------------- ------------- 11,600 $5.75 8.00 2,400 38,000 4.75 7.70 37,000 1,400 4.13 8.42 1,400 35,000 4.00 5.29 35,000 4,000 2.25 9.00 -- 220,000 1.13 9.96 70,000 300,000 1.00 10.00 216,000 ------- ------- 610,000 361,800 ======= =======
The fair value of each option grant under the 1992 Employee Stock Option and Compensation Plan is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for the 1998, 1997 and 1996 grants: risk-free interest rate of 4.9, 6.5 and 6.2 percent; expected dividend yield of 0.0 percent; expected lives of 5 years; expected volatility of 91.5, 90.3 and 61.8 percent, respectively. -30- 31 A summary of the status of the 1998 Non-Executive Stock Option Plan at December 31, 1998 and changes during the period then ended is presented in the table and narrative below:
December 31, 1998 ------------------------ Wtd Avg Number Ex Price ------ -------- Outstanding at beginning of period -- $ -- Granted 313,050 1.11 Exercised -- -- Forfeited -- -- Expired -- -- ------- Outstanding at end of period 313,050 $1.11 ======= Exercisable at end of period 102,750 $1.11 Weighted average fair value of options granted on grant date $ 0.81
As of December 31, 1998, the 313,050 options outstanding in the 1998 Non-Executive Stock Option Plan had an average exercise price of $1.11 with a weighted average remaining contractual life of 9.97 years. The options exercisable had exercise prices of $1.00 to $1.18. The fair value of each option grant under the 1998 Non-Executive Stock Option Plan is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for the 1998 grants: risk-free interest rate of 4.9 percent; expected dividend yield of 0.0 percent; expected life of 5 years; expected volatility of 92.4%. The Company adopted a Director Stock Option Plan (the "Director Option Plan") in 1997, pursuant to which options and other awards to acquire an aggregate of 100,000 shares of the Company's common stock may be granted. A summary of the status of the Directors Option Plan at December 31, 1998 and 1997, and changes during the periods then ended is presented in the table and narrative below:
December 31, 1998 December 31, 1997 ------------------------ ----------------------- Wtd Avg Wtd Avg Number Ex Price Number Ex Price -------- -------- ------- -------- Outstanding at beginning of period 40,000 $5.06 -- $ -- Granted -- -- 40,000 5.06 Exercised -- -- -- -- Forfeited (30,000) 5.04 -- -- Expired -- -- -- -- -------- ------- Outstanding at end of period 10,000 $5.13 40,000 $5.06 ======== ======= Exercisable at end of period 10,000 $5.13 10,000 $5.06 Weighted average fair of options granted on grant date $ -- $ 3.80
-31- 32 As of December 31, 1998, the 10,000 options outstanding in the Director Option Plan had an average exercise price of $5.13, with a weighted average remaining contractual life of 0.5 years. The options exercisable had exercise prices of $5.13. The fair value of each option grant under the Director Stock Option Plan is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for the 1997 grants: risk-free interest rate of 6.5 percent; expected dividend yield of 0.0 percent; expected life of 5 years; expected volatility of 95.1%. The Company has issued stock purchase warrants with a variety of terms and conditions. During 1996, the exercise prices of certain warrants were reduced from $11.00 and $15.00 to $10.00 and $13.00, respectively. The following summarizes stock purchase warrant transactions during the period:
Number Exercise Prices -------- --------------- Outstanding December 31, 1995 652,500 4.00 - 15.00 Granted -- -- Exercised (50,000) 4.00 Canceled/Expired -- -- -------- -------------- Outstanding December 31, 1996 602,500 6.90 - 13.00 Granted -- -- Exercised -- -- Canceled/Expired -- -- -------- -------------- Outstanding December 31, 1997 602,500 6.90 - 13.00 Granted 5,000 3.19 Exercised -- -- Canceled/Expired (325,000) 6.90 - 13.00 -------- -------------- Outstanding December 31, 1998 282,500 $3.19 - $13.00 ======== ==============
At December 31, 1998, 282,500 warrants were exercisable. The warrants expire at various dates through September, 2001. 8. INCOME TAXES: The provision for income taxes consists of the following components:
For the Year For the Year For the Year Ended Ended Ended Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996 ------------- ------------- ------------- Current: Federal $ -- $ -- $ 21 State -- -- -- ------ ------ ------ Subtotal -- -- 21 Deferred -- -- 854 ------ ------ ------ Total $ -- $ -- $ 875 ====== ====== ======
-32- 33 The tax effects of temporary differences giving rise to the deferred items are as follows for the years ended December 31:
1998 1997 ------- ------- Deferred tax assets: Net operating loss carry forwards $ 4,783 $ 3,603 Inventory reserves 1,255 1,115 Other 252 787 ------- ------- Total deferred tax assets 6,290 5,505 Valuation allowance (6,290) (5,505) ------- ------- Deferred tax assets, net of allowance $ -- $ -- ======= =======
In accordance with SFAS No. 109, the gross deferred tax asset at December 31, 1998 and 1997, of $6,290 and $5,505, respectively, has been reduced to zero by a full valuation allowance. The Company recorded a $875 provision for income taxes during 1996, which included a full valuation allowance on its deferred tax asset. As required by SFAS No. 109, and taking into consideration past losses, the Company recorded the additional valuation reserve. At December 31, 1998, the Company has approximately $13,667 of net operating loss carry forwards for federal income tax purposes. These losses expire beginning 2009 through 2012. The use of approximately $498 of these losses is limited to approximately $249 per year for the next two years because the loss was generated in a short tax year. 9. COMMITMENTS AND CONTINGENCIES: OPERATING LEASES The Company has entered into certain noncancelable operating lease agreements related to office and warehouse space and equipment. Total lease expense under operating leases was $281, $272 and $222 for the years ended December 31, 1998, 1997 and 1996, respectively. The minimum annual rental commitments under operating leases are as follows for the years ending December 31: 1999 $304 2000 304 2001 241 2002 3 ---- Total $852 ====
LITIGATION The Company is involved in legal actions in the ordinary course of its business. While no reasonable estimates of potential liability can be determined, management believes that such legal actions will be resolved without a material effect on the Company's financial position or results of operations. -33- 34 EMPLOYMENT CONTRACTS The Company has employment contracts with various officers with remaining terms ranging from one to three years at amounts approximating their current levels of compensation. The Company's remaining aggregate commitment at December 31, 1998, under such contracts is approximately $1,439. These agreements may also include additional compensation to officers related to sales commission bonuses that could be equal to two percent of the Company's sales. 10. DISTRIBUTORSHIP AND SALES AGENCY AGREEMENTS: In February 1996, the Company entered into an exclusive distribution agreement with Aristocrat Leisure Industries ("Aristocrat") of New South Wales, Australia for the marketing and distribution of games in Australia, New Zealand, Papua New Guinea, Taiwan, New Caledonia, Malaysia, the Philippines and Singapore (hereinafter "Australasia"). The Company has granted Aristocrat an initial five-year exclusive license expiring February 2001 to distribute its blackjack, craps and roulette games to all legalized Australasia video gaming jurisdictions. Pursuant to the agreement, the Company has agreed to sell its games at discounted distributor's pricing in exchange for a minimum purchase quantity of 100 units per year. Aristocrat commenced marketing the Company's blackjack, and roulette games subsequent to obtaining technical approval from New South Wales, Australia gaming authorities in September 1997. Pursuant to this agreement, the Company sold an aggregate of 99 games in 1997 and 86 games in 1998. Due to the declining multi-player game sales in their territory, sales to this distributor declined in the third and particularly fourth quarters of 1998, and the Company has not forecasted sales to this customer in 1999. In March 1998, the Company entered into a business consulting agreement with Jean D. Leclair and the Leclair Group ("Consultant"), under which the Consultant provides business consulting services to the Company in Quebec, Canada. Additionally, the Consultant may also assist the Company in securing agreements for the purchase of the Company's products in Quebec and Atlantic Canada. For services to the Company in securing agreements for the purchase of the Company's products, the Consultant will be paid a commission for game sales acquired with Loto Quebec and the Atlantic Lottery Corporation. This agreement is for an initial period of one year, with provision for renewal on a month to month basis upon mutual written agreement. In May 1998, the Company entered into a one-year exclusive agency agreement with Bill Engle, an individual. Under the agreement, the agent represents the Company's products for sale in the Canadian provinces of British Columbia, Ontario, Nova Scotia (for casino customers only), Saskatchewan, Alberta and Manitoba. The agent receives a commission equal to the difference between the amount received for sales initiated by the agent and prices stated in the agreement for each product. . This agreement may be renewed for up to two successive one-year terms upon the agreement of the parties and on the terms and conditions set forth in the agency agreement. In December 1998, the Company entered into a three-year exclusive agreement with DGS, Inc. ("DGS") for the distribution and service of the Company's blackjack and 21 Stud products in the State of South Carolina. The Company and DGS will negotiate minimum sales targets for each year of the agreement. If DGS fails to purchase for resale the minimum number of units in any contract year, the Company may give notice to terminate the agreement. This agreement provides for automatic renewal annually after the original term, up to a total of eight years, and may be terminated by either party under certain circumstances. The Company has submitted its applications for licensure in New Jersey and Connecticut, and will apply for approval of its various games. Once the Company is able to sell product in these jurisdictions, it will be represented by Par 4 ("Agent") under terms of a two-year exclusive agency agreement entered into in January -34- 35 1999. Under the agreement, the agent represents certain of the Company's products for sale in Atlantic City, New Jersey and the State of Connecticut. The Company and Agent will negotiate minimum sales targets for each year of the agreement. If Agent fails to obtain sales orders for at least 75 percent of the target number of units in any contract year, the Company may give notice to terminate the agreement. This agreement provides for automatic renewal annually after the original term and may be terminated by either party under certain circumstances. The Company also has exclusive distributorship agreements with Vista Gaming Corporation, Ludi S.F.M. and with S.A.M. Eurusa. 11. SUBSEQUENT EVENTS: REPURCHASE OF COMMON STOCK In March 1999, in order to expedite the timing of gaming regulatory approval in certain jurisdictions, the Company repurchased 400,000 shares of its outstanding Common Stock, at market price, from a shareholder. The Company entered into a Stock Redemption Agreement with such shareholder pursuant to which the Company redeemed 400,000 shares of Company Common Stock beneficially owned by such shareholder in exchange for a four year convertible note and a warrant to purchase 50,000 shares of the Company's Common Stock. In April 1999, the Company redeemed 700,000 shares of Common Stock from Lakes Gaming, Inc. on substantially the same terms as the redemption described above. This redemption was also to expedite the timing of gaming regulatory approval in certain jurisdictions. These notes are unsecured, paying interest of 5% per annum and will be convertible at the closing market price of the Company's Common Stock on the date of the issuance of the notes. The notes may not be converted in the first year following issuance. The exercise price of the warrants will be the same as the conversion price of the notes. The Company also granted "piggyback" registration rights for shares of Common Stock issuable upon conversion of both the notes and the warrants. See "Common Stock Redemption" and Item 1. - "Business - Regulation." ADDITIONAL FINANCING In June 1999, the Company received an aggregate of $1,742 from a private placement of notes and Series C Preferred stock. The three-year convertible secured notes totaling $1,550 were issued to a group of investors including a current shareholder of the Company. Interest is paid quarterly at a rate of 12% per annum, and the principal balance is due June 1, 2002. At any time after June 1, 2000, and until the principal balance is paid in full, the holders of the notes may convert the notes into Common Stock of the Company at a conversion price of $1.50 per share. The note holders may not convert the notes into Common Stock if such conversion would result in beneficial ownership by such note holder of more than 4.9% of the Company's issued and outstanding Common Stock. The note holders were also granted an aggregate of 282,500 warrants to purchase shares of the Company's Common Stock at an exercise price of $1.25 per share. Also in June 1999, the Company received net proceeds of approximately $192 from the issuance of Series C Convertible Preferred Stock. RESTATEMENT OF OPERATING RESULTS The Company has restated its results of operations for the years ended December 31, 1996 and 1998. In July 1999, the Company engaged its independent public accountants to audit its financial statements for the years ending December 31, 1996 and 1997, which were originally audited by the Company's predecessor independent public accountants. In the previously issued statements of operations, the Company recorded a $720 provision for income taxes in 1998 to provide a full valuation allowance on a deferred tax asset. Based on the historical information available during the re-audit of the December 31, 1996 and 1997 financial statements, management believes that this provision should be recorded in the year ended December 31, 1996. The restated financial statements reflect the transfer of this tax provision from 1998 to 1996. - 35 - 36 INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY Schedule II - Valuation and Qualifying Accounts (In Thousands)
Balance Charged to Amount Balance Beginning Costs and Written End of Description of Period Expenses Off Period - ----------- ------------ ---------- ------- -------- Reserve for inventory obsolescence: For the year ended 12/31/96 $ 649 $ 1,308 $ 64 $ 1,893 For the year ended 12/31/97 1,893 112 1,124 881 For the year ended 12/31/98 881 571 505 947
Balance Beginning Charged/ Amount Balance of Period (Credited) Written End of Description and Expenses to Costs Off Period - ----------- ------------ ---------- ------- -------- Allowance for doubtful notes and accounts receivable: For the year ended 12/31/96 $ 70 $ 78 $ -- $ 148 For the year ended 12/31/97 148 (48) -- 100 For the year ended 12/31/98 100 -- 15 85
-36- 37 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 .............. 14 Consolidated Balance Sheets as of December 31, 1998 and 1997 ..................... 16 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 ................................................ 17 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 ........................................... 18 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 ................................................. 19 Notes to the Consolidated Financial Statements ................................... 20
- 37 - 38 (a)(3) Exhibits 3.1(a) Articles of Incorporation, as amended (Incorporated herein by reference to Exhibit 3.1 to the Company's registration Statement on Form SB-2 (File No. 33-61492C) (the "SB-2") 3.1(b) Certificate of Designation relating to Series B Convertible Preferred Stock (Incorporated herein by reference to Exhibit 4 to the Company's report on Form 10-Q for the quarter ended March 31, 1998) (the "March 31, 1998 10-Q") 3.2 Bylaws (Incorporated herein by reference to Exhibit 3.2 to the SB-2) 10.1 1992 Stock Option and Compensation Plan, as amended (Incorporated herein by reference to Annex B to the Company's Schedule 14A filed April 24, 1997)+ 10.2 Agreement by and between the Company and Grand Casinos, Inc., dated as of July 28, 1994 (Incorporated herein by reference to Exhibit 10.26 to the Company's report on Form 10-K for the fiscal year ended July 31, 1994) 10.3 Employment Agreement between the Company and Edward G. Stevenson dated as of February 15, 1996 (Incorporated herein by reference to Exhibit 10.16 to the Company's report on Form 10-K for the fiscal year ended December 31,1995) (the "December 31, 1995 10-K") 10.4 Exclusive Distributorship Agreement between the Company and Aristocrat Leisure Industries PTY LTD dated February 7, 1996 (Incorporated herein by reference to Exhibit 10.18 to the Company's December 31,1995 10-K) 10.5 Assignment between the Company, NANAO and IREM dated February 2, 1996 (Incorporated herein by reference to Exhibit 10.19 to the Company's December 31, 1995 10-K) 10.6 Parts Supply Agreement between the Company and IREM dated February 2, 1996 (Incorporated herein by reference to Exhibit 10.20 to the Company's December 31, 1995 10-K) 10.7 Agreement between the Company and H Square Corporation dated April 26, 1996 (Incorporated herein by reference to Exhibit 10.21 to the Company's December 31,1995 10-K) 10.8 Second Amendment to Share Exchange Agreement between the Company and Grand Casinos, Inc. dated December 1, 1995 (Incorporated herein by reference to Exhibit 10.23 to the Company's December 31, 1995 10-K) 10.9 Exclusive Distributorship Agreement between the Company and Ludi S.F.M. dated March 5, 1996 (Incorporated herein by reference to Exhibit 10.24 to the Company's December 31, 1995 10-K) 10.10 Exclusive Distributorship Agreement between the Company and S.A.M. EURSA dated March 5, 1996 (Incorporated herein by reference to Exhibit 10.25 to the Company's December 31, 1995 10-K) 10.11 Product Development and Revenue Sharing Agreement between the Company and IGT, dated November 18, 1996 (Incorporated herein by reference to Exhibit 10.18 to the Company's report on Form 10-K for the fiscal year ended December 31, 1996) (the "December 31, 1996 10-K") 10.12 Lease agreement between the Company and Dermody Properties, dated July 9, 1996 (Incorporated herein by reference to Exhibit 10.20 to the Company's December 31, 1996 10-K) 10.13 Loan Agreement between the Company and Finova Capital Management dated as of April 13, 1998 (Incorporated herein by reference to Exhibit 10.1 to the Company's March 31, 1998 10-Q) 10.14 Form of Subscription Agreement dated May 13,1998 (Incorporated herein by reference to Exhibit 10.2 to the Company's March 31, 1998 10-Q) 10.15 Form of Registration Rights Agreement dated May 13, 1998 (Incorporated herein by reference to Exhibit 10.3 to the Company's March 31, 1998 10-Q) 10.16 1997 Director Stock Option Plan (Incorporated herein by reference to Annex A to the Company's Schedule 14A filed April 24, 1997) 10.17 1998 Non-Executive Employee Stock Option Plan (incorporated herein by reference to Exhibit 10.17 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1998) (the "December 31, 1998 10-K") 10.18 Agreement between the Company and Edward G. Stevenson dated January 1, 1999 (incorporated herein by reference to Exhibit 10.18 to the Company's December 31, 1998 10-K) 21 List of Subsidiaries (incorporated herein by reference to Exhibit 21 to the Company's December 31, 1998 10-K) 23.1 Consent of Kafoury, Armstrong & Co. 23.2 [DELETED] 27 Financial Data Schedule - which is only submitted electronically to the Securities and Exchange Commission for EDGAR information purposes. - ---------- + Agreement relates to Executive Compensation (b) Reports on Form 8-K On October 30, 1998, the Company filed a Form 8-K to report the resignation of its independent accountants. -38- 39 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this amended report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized. INNOVATIVE GAMING CORPORATION OF AMERICA Registrant Date: August 2, 1999 By: /s/ Edward G. Stevenson ------------------------------------ Name: Edward G. Stevenson Title: Chief Executive Officer and Chairman In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on August 2, 1999.
Name Title ---- ----- /s/ Edward G. Stevenson Chief Executive Officer and Chairman - ----------------------------------- (principal executive officer) Edward G. Stevenson /s/ Scott Shackelton Vice President-Finance, Chief - ----------------------------------- Financial Officer Scott Shackelton (principal accounting officer)
- 39- 40 EXHIBIT INDEX
Exhibit 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") 3.2 Bylaws (Incorporated herein by reference to Exhibit 3.2 to the SB-2) 10.1 1992 Stock Option and Compensation Plan, as amended (Incorporated herein by reference to Annex B to the Company's Schedule 14A filed April 24, 1997)+ 10.2 Agreement by and between the Company and Grand Casinos, Inc., dated as of July 28, 1994 (Incorporated herein by reference to Exhibit 10.26 to the Company's report on Form 10-K for the fiscal year ended July 31, 1994) 10.3 Employment Agreement between the Company and Edward G. Stevenson dated as of February 15, 1996 (Incorporated herein by reference to Exhibit 10.16 to the Company's report on Form 10-K for the fiscal year ended December 31,1995) (the "December 31, 1995 10-K") 10.4 Exclusive Distributorship Agreement between the Company and Aristocrat Leisure Industries PTY LTD dated February 7, 1996 (Incorporated herein by reference to Exhibit 10.18 to the Company's December 31,1995 10-K) 10.5 Assignment between the Company, NANAO and IREM dated February 2, 1996 (Incorporated herein by reference to Exhibit 10.19 to the Company's December 31, 1995 10-K) 10.6 Parts Supply Agreement between the Company and IREM dated February 2, 1996 (Incorporated herein by reference to Exhibit 10.20 to the Company's December 31, 1995 10-K) 10.7 Agreement between the Company and H Square Corporation dated April 26, 1996 (Incorporated herein by reference to Exhibit 10.21 to the Company's December 31,1995 10-K) 10.8 Second Amendment to Share Exchange Agreement between the Company and Grand Casinos, Inc. dated December 1, 1995 (Incorporated herein by reference to Exhibit 10.23 to the Company's December 31, 1995 10-K) 10.9 Exclusive Distributorship Agreement between the Company and Ludi S.F.M. dated March 5, 1996 (Incorporated herein by reference to Exhibit 10.24 to the Company's December 31, 1995 10-K) 10.10 Exclusive Distributorship Agreement between the Company and S.A.M. EURSA dated March 5, 1996 (Incorporated herein by reference to Exhibit 10.25 to the Company's December 31, 1995 10-K) 10.11 Product Development and Revenue Sharing Agreement between the Company and IGT, dated November 18, 1996 (Incorporated herein by reference to Exhibit 10.18 to the Company's report on Form 10-K for the fiscal year ended December 31, 1996) (the "December 31, 1996 10-K") 10.12 Lease agreement between the Company and Dermody Properties, dated July 9, 1996 (Incorporated herein by reference to Exhibit 10.20 to the Company's December 31, 1996 10-K) 10.13 Loan Agreement between the Company and Finova Capital Management dated as of April 13, 1998 (Incorporated herein by reference to Exhibit 10.1 to the Company's March 31, 1998 10-Q) 10.14 Form of Subscription Agreement dated May 13,1998 (Incorporated herein by reference to Exhibit 10.2 to the Company's March 31, 1998 10-Q) 10.15 Form of Registration Rights Agreement dated May 13, 1998 (Incorporated herein by reference to Exhibit 10.3 to the Company's March 31, 1998 10-Q) 10.16 1997 Director Stock Option Plan (Incorporated herein by reference to Annex A to the Company's Schedule 14A filed April 24, 1997) 10.17 1998 Non-Executive Employee Stock Option Plan (incorporated herein by reference to Exhibit 10.17 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1998) (the "December 31, 1998 10-K") 10.18 Agreement between the Company and Edward G. Stevenson dated January 1, 1999 (incorporated herein by reference to Exhibit 10.18 to the Company's December 31, 1998 10-K) 21 List of Subsidiaries (incorporated herein by reference to Exhibit 21 to the Company's December 31, 1998 10-K) 23.1 Consent of Kafoury, Armstrong & Co. 23.2 [DELETED] 27 Financial Data Schedule - which is only submitted electronically to the Securities and Exchange Commission for EDGAR information purposes.
EX-23.1 2 CONSENT OF KAFOURY, ARMSTRONG & CO. 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports included in this Form 10-K/A, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 33-73764, 333-06669, 333-37813 and 333-37815). KAFOURY, ARMSTRONG & CO. Reno, Nevada August 2, 1999 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1,617 700 1,520 0 9,244 13,465 1,389 0 17,093 1,365 0 0 0 75 14,797 17,093 8,509 8,509 7,134 7,134 5,819 0 (106) (4,338) 0 (4,338) 0 0 0 (4,338) (.63) (.63)
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