10-Q 1 inngam10q_sept2002.txt UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2002 ----------------------------------------------- [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to . ----------------- ------------------- Commission file number 0-22482 . ------------------------------------- INNOVATIVE GAMING CORPORATION OF AMERICA -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Minnesota 41-1713864 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 333 Orville Wright Court, Las Vegas, NV 89119 -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (702) 614-7199 -------------------------------------------------------------------------------- (Issuer's Telephone Number, Including Area Code) -------------------------------------------------------------------------------- (Former Address, If Changed Since Last Report) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: At October 25, 2002 there were 3,408,978 shares of common stock, $0.01 par value, outstanding. INNOVATIVE GAMING CORPORATION OF AMERICA Form 10-Q Index September 30, 2002 Part I: Financial Information Item 1. Financial Statements Consolidated Condensed Balance Sheets - September 30, 2002 (Unaudited) and December 31, 2001 3 Consolidated Condensed Statements of Operations - for the three and six months ended September 30, 2002 and 2001 (Unaudited) 4 Consolidated Condensed Statements of Cash Flows - for the six months ended September 30, 2002 and 2001 (Unaudited) 5 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 Item 4 Disclosure required by Item 307 of Regulation S-K Part II: Other Information 13 Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 5. Other Matters 14 Item 6. Exhibits and Reports 14 Signatures 15 2

INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) ~~June~~September 30, December 31, 2002 2001 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 130 $ 21 Accounts receivable 1,~~444~~227 300 Current portion of notes receivable 265 95 Inventories 3,~~630~~840 4,400 Prepaid expenses and other 12,~~283~~661 1,212 -------- -------- Total current assets 68,~~623~~023 6,028 NOTES RECEIVABLE, LESS CURRENT PORTION 8058 118 PROPERTY AND EQUIPMENT, NET ~~592~~569 770 PREPAID NONCURRENT 1,~~750~~418 1,985 INTANGIBLE ASSETS, NET ~~668~~681 442 -------- -------- TOTAL ASSETS $ 910,~~713~~749 $ 9,343 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accounts payable $ 32,~~244~~260 $ 3,169 Accrued liabilities 12,~~057~~477 706 Accrued Preferred Stock Dividends ~~170~~-- 319 Accrued Wages ~~245~~1,081 164 Deferred Revenue Lease-Back 9949 197 Notes payable - current portion 2,~~387~~591 1,895 -------- -------- Total current liabilities 78,~~202~~458 6,450 Notes payable - net of current portion 62,179 7 -------- -------- TOTAL LIABILITIES 710,~~208~~637 6,457 -------- -------- COMMITMENTS AND CONTINGENCIES -- -- STOCKHOLDERS' EQUITY: Series B convertible preferred stock, $.01 par value, nonvoting, 4,000 shares authorized, 0 and 0 shares outstanding, respectively -- -- Series C convertible preferred stock, $.01 par value, nonvoting, 2,000 shares authorized, 0 and 0 shares outstanding, respectively -- -- Series E convertible preferred stock, $.01 par value, nonvoting, 400,000 shares authorized, 30,000 and 42,000 shares outstanding, respectively -- -- Series F convertible preferred stock, $.01 par value, nonvoting, 400,000 shares authorized, ~~209~~200,~~170~~000 and 230,000 shares outstanding, respectively 2 2 Series J convertible preferred stock, $.01 par value, nonvoting, 1,500,000 shares authorized, 0 and 0 shares outstanding, respectively -- 1 Series K convertible preferred stock, $.01 par value, nonvoting, 5,000 shares authorized, 4,~~297~~062 and 4,553 shares outstanding, respectively -- -- Common stock, $.01 par value, 100,000,000 shares authorized, 263,~~368~~555,~~772~~819 and 24,208,339 shares issued and outstanding, respectively ~~319~~35 242 Additional paid-in capital 5354,~~451~~088 51,445 Accumulated deficit (5154,~~267~~013) (48,804) -------- -------- Total stockholders' equity ~~2,505~~112 2,886 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 910,~~713~~749 $ 9,343 ======== ======== See Notes to Consolidated Condensed Financial Statements. ~~Page 3 of 15~~

INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Three Months ~~Six~~Nine months Ended ~~June~~September 30, Ended ~~June~~September 30, --------------------- --------------------- 2002 2001 2002 2001 ------- ------- ------- ------- SALES $ ~~2,628~~736 $ ~~4,728~~697 $ 34,~~848~~585 $ 67,~~819~~516 COST OF SALES ~~1,247 1,~~722 1612 2,~~922~~644 2,~~330~~943 ------- ------- ------- ------- Gross profit ~~(loss)~~14 ~~1,381~~85 ~~3,006~~ 1,~~926~~941 4,~~489~~573 SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 21,~~011~~707 28,~~455~~856 35,~~638~~345 312,~~694~~550 ------- ------- ------- ------- ~~Income~~ (~~loss~~Loss) from operations (~~630~~1,693) ~~551~~(8,771) (13,~~712~~404) ~~794~~(7,977) INTEREST EXPENSE, NET (~~259~~497) (~~151~~170) (~~527~~1,023) (~~168~~338) LOSS ON INVESTMENT IN XERTAIN, INC. -- (989) -- (989) ------- ------- ------- ------- ~~NET~~(LOSS) ~~INCOME~~before cumulative effect of accounting change (~~LOSS~~2,190) (~~889~~9,930) ~~400~~(4,427) (9,304) CUMULATIVE EFFECT OF ACCOUNTING CHANGE (398) ------- ------- ------- ------- NET (LOSS) (2,~~239~~190) ~~626~~(9,930) (4,825) (9,304) Preferred stock accretion adjustment -- ~~197~~1,167 -- ~~464~~1,631 Preferred stock dividends ~~107~~159 93125 ~~224~~384 ~~881~~1,006 ------- ------- ------- ------- NET ~~INCOME~~ (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (~~996~~2,349) $(11,222) ~~110~~ $ (25,~~463~~209) $ (~~719~~11,941) ======= ======= ======= ======= BASIC - ~~INCOME~~ (LOSS) PER SHARE OF COMMON STOCK $ (0.0366) $ (0.0156) $ (01.0946) $ (0.0573) ======= ======= ======= ======= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 293,~~522~~364 1520,~~558~~125 272,~~438~~953 1416,~~398~~335 ======= ======= ======= ======= See Notes to Consolidated Condensed Financial Statements. 4

INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) ~~Six~~Nine months Ended ~~June~~September 30, ---------------------------- 2002 2001 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net ~~income~~ (loss) $ (24,~~239~~825) $ ~~626~~(9,304) Adjustments to reconcile net loss to cash flows from operating activities - Depreciation and amortization ~~181~~321 ~~210~~280 Provision for inventory obsolescence (1410) (24317) Write down inventory to market value (~~128~~134) (~~291~~482) Changes in operating assets and liabilities 1,~~076~~506 (25,~~483)~~291 ------------ ------------ CASH FLOWS (USED FOR) OPERATING ACTIVITIES (13,~~124~~142) (14,~~962~~532) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Inventory returned from (capitalized for use in) gaming operations ~~106~~46 (23257) Purchases of property and equipment -- (~~115~~223) Purchase of intangible assets (~~334~~404) (11350) ------------ ------------ CASH FLOWS (USED IN) INVESTING ACTIVITIES (~~228~~358) (~~149~~830) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of common stock ~~391~~395 32339 Proceeds from sale of preferred stock -- ~~471~~3,496 Proceeds from financing agreements ~~942~~3,117 12,700 Payments on long-term obligations (13) (~~116~~1,121) ------------ ------------ CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 13,~~332~~509 25,~~087~~414 ------------ ------------ INCREASE ~~(DECREASE)~~ IN CASH AND CASH EQUIVALENTS ~~(20)~~9 ~~(24)~~52 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 21 321 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 130 $ ~~297~~373 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid for interest $ 164 $ 4052 ============ ============ Non-cash Transactions: Preferred stock converted to common stock $ 1,~~364~~556 35,~~598~~248 ============ ============ Notes Payable converted to common stock $ 450 -- ============ ============ Preferred Stock Dividends paid with common stock $ ~~373~~702 221 ============ ============ Common Stock issued for expenses $ ~~824~~887 --977 ============ ============ See Notes to Consolidated Condensed Financial Statements. ~~Page 5 of 15~~

5 INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS September 30, 2002 (UNAUDITED) (1) BASIS OF FINANCIAL STATEMENT PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although management believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim consolidated condensed financial statements be read in conjunction with the Company's most recent audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented have been made. Operating results for the nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. Certain accounts in the prior year financial statements have been reclassified for comparative purposes to conform with the presentation in the current period interim financial statements. These reclassifications had no effect on previously reported net income or stockholders' equity. (2) COMMITMENTS AND CONTINGENCIES The manufacture, distribution and sale of the Company's products are regulated by various jurisdictions and entities, including requirements to obtain licenses and product approvals in several jurisdictions. The Company has obtained required licenses and product approvals in certain jurisdictions and is continuing efforts to obtain such approvals in other jurisdictions. Failure to successfully obtain and/or maintain such licenses and approvals, or meet other regulatory requirements could materially impact the future operation of the Company. Additionally, there is no assurance that the Company's products will be accepted in the marketplace upon obtaining regulatory approvals. (3) INCOME TAXES The Company has adopted Statement of Financial Accounting Standards No. 109- "Accounting for Income Taxes" - (SFAS No. 109) under which deferred income tax assets and liabilities are recognized for differences between financial and income tax reporting basis of assets and liabilities based on currently enacted rates and laws. The Company had cumulative federal net operating loss carry forwards of approximately $39,388,000 as of December 31, 2001. These losses, if not used, begin to expire in 2009 through 2015. Future changes in the ownership of the Company may place limitations on the use of these net operating loss carry forwards. (4) EARNINGS PER SHARE The Company has adopted Statement of Financial Accounting Standards No. 128 "Earnings Per Share"-(SFAS No. 128). The earnings per share data for the periods presented is based on weighted average common shares outstanding, which is equivalent to "basic" earnings per share as calculated under SFAS No. 128. Diluted earnings per share is not presented because the resulting earnings per share would be antidilutive for each period reported. 6 INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS September 30, 2002 (UNAUDITED) (5) STOCKHOLDERS' EQUITY PREFERRED STOCK During the three months ended September 30, 2002, 9,170 shares of Series F Convertible Preferred Stock were converted into 422,580 shares of common stock prior to the 1 for 10 stock split. During the three months ending September 30, 2002, 100 shares of Series K Convertible Preferred Stock were converted to 413,223 shares of common stock prior to the 1 for 10 stock split. COMMON STOCK On September 9, 2002 the Company effectuated 1 for 10 reverse common stock split. During the three months ending September 30, 2002, 773,721 shares of pre split common stock were issued for payment of dividends on Series F convertible preferred stock and 195,652 shares of pre split common stock were issued for payment of dividends on Series E convertible preferred stock. During the three months ending September 30, 2002, 94,098 shares of post split common stock were issued for payment of dividends on Series K convertible preferred stock; 5,921 shares of post split common stock were issued for payment of dividends on Series E convertible preferred stock; 39,977 shares of post split common stock were issued for payment of dividends on Series F convertible preferred that were due for the period ending September 30, 2002. During the three months ending September 30, 2002, 6,845 shares of post split common stock were issued pursuant to the employee stock purchase program. During the three months ending September 30, 2002, 370,736 shares of pre split common stock were issued for expenses. (6) LONG-TERM DEBT: On August 21, 2002, the Company issued convertible notes of $2,000,000, with interest due quarterly at 5.5%. Also, on September 20, 2002 the Company borrowed an additional $175,000. The notes are due February 21, 2004. The notes are convertible into A-1 5.5% convertible preferred stock each share of which consists of 5,000 shares of Preferred Stock with a par value of $0.01 per share, and a stated value of $1,000 per share. Series A-1 Preferred Stock is convertible into fully paid and non-assessable Common shares at a conversion price of $.0295 per share of pre split value. (7) CHANGE IN REVENUE RECOGNITION: During the third quarter of 2002, the Company changed its accounting policy of revenue recognition. Prior to this change, the Company was recognizing revenue upon shipment of gaming machines prior to the expiration of any right of return. In addition, the Company was reviewing each sale and estimating a sales return reserve. After the change, the Company has now adopted a policy to report revenue only upon the expiration of the right of return. As a result of this change, net income decreased $390,000 for the nine months ending September 30, 2002. 7 INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS September 30, 2002 (UNAUDITED) (8) SUBSEQUENT EVENTS: On November 5, 2002, the Company's common stock was delisted from the NASDAQ SmallCap Market and began trading on the electronic bulletin board. During October 2002, Edward J. Harris resigned as Director and Chief Operating Officer. On November 11, 2002, Kevin J. Malley resigned from the Board of Directors. On November 14, 2002, Ronald E. Eibensteiner resigned from the Board of Directors. On November 14, 2002, the Company furloughed approximately 40% of its employees subject to recall on the receipt of additional capital. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and this Form 10-Q contain 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: the need for and ability to obtain additional financing on terms favorable to the Company, the management of the Company's accounts payable, customer acceptance of the Company's products, 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 gaming or financing 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, the ability of the Company to maintain its listing on the NASDAQ Stock Market, 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 its products 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 incorporating state of the art graphics and sound. RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO SEPTEMBER 30, 2001 For the three months ended September 30, 2002, the Company recorded a loss attributable to Common Stock shareholders of $2,349,000, or $.66 per share post stock split, compared to a loss of $11,222,000, or $.56 per share pre stock split, for the three months ended September 30, 2001. For the nine months ended September 30, 2002, the Company recorded a loss attributable to Common Stock shareholders of $5,209,000, or $1.46 per share of post stock split, compared to a loss of $11,941,000, or $.73 per share of pre stock split, for the nine months ended September 30, 2001. The income or loss attributable to common shareholders for each period included adjustments for preferred stock accretion and preferred stock dividends. The favorable change in operating results for the fiscal 2002 periods was attributable to a bad debt reserve established in 2001 for the one time sale in 2001 for a licensing agreement in the amount of $3,000,000 in addition another $2,100,000 reserved for bad debt was established for the accounts receivable balance in 2001 for the same company that was given the licensing agreement. Also during this period in 2001 the merger with Xertain was terminated and a write off of $989,000 of cost associated with the merger was recorded. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Accounts Receivable increased at September 30, 2002 to $1,227,000 from December 31, 2001 balance of $300,000. This increase is the result of increased sales on account and financing of Right of Return products from 3rd quarter 2002 of $1,126,000 and extended terms on sales of 2nd quarter sales compared to 4th quarter 2001 of $532,000. Notes Receivable increased at September 30, 2002 to $323,000 from December 31, 2001 balance of $213,000 from a sale with an 18 month note for $170,000. Accounts Payable at September 30, 2002 is $2,260,000 of which $1,694,000 are 91 days or more past due. The Company has made payment plans with 80% of the amount of the 91 days or more past due balances. Notes Payable increased to $4,770,000 at September 30, 2002 from $1,902,000 at December 31, 2001. This increases are from third party short term financing and a two year Debenture of $350,000, and long term financing of notes during the 3rd quarter 2002 for $2,175,000 5.5% interest convertible notes due February 21, 2004. SALES, COST OF SALES AND GROSS PROFIT Total sales for the quarter ended September 30, 2002, were $736,000 compared to $697,000 recorded in the quarter ended September 30, 2001. Total sales for the nine months ended September 30, 2002, were $4,585,000 compared to $7,516,000 in the nine months ended September 30, 2001. The table below presents the comparative sales revenue and percentage of revenue derived from each of the Company's product lines for the three and nine-month periods ended September 30, 2002 and 2001:

Three months ended Three months ended ~~Six~~Nine months ended ~~Six~~Nine months ended ~~June~~September 30, 2002 ~~June~~September 30, 2001 ~~June~~September 30, 2002 ~~June~~September 30, 2001 Sales revenue $2736,~~628,~~000 $4697,~~728,~~000 $34,~~848~~585,000 $67,~~819~~516,000 Product line: Percentage of revenue: Percentage of revenue: Percentage of revenue: Percentage of revenue: ---------------------- ---------------------- ---------------------- ---------------------- Multi-player games 433% 1024% 40% 24% Single player games 4144% 2229% 3726% 27% Parts sales and other 512% 217% 69% 23% Lease participation 1141% 230% 1725% 36% License fees --% 64--% --% 4440% Total 100% 100% 100% 100%

Overall Company revenues will continue to be volatile due to, among other things, the ability of the Company to continue financing its operations and obtain supplies and parts, fluctuations in demand for the Company's current products, market acceptance of new products introduced by the Company and the Company's ability to obtain licensing and successfully market its products in new jurisdictions. The Company recorded gross margins of 1.9% and 42.3% for the three-month and nine-month periods ended September 30, 2002, respectively, compared to 12.2% and 60.8% for the three-month and nine-month periods ended September 30, 2001. The sale of a one-time license of the Company's technology had no associated direct cost, which significantly increased the gross margins for the year to date 2001. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expense for the three months ended September 30, 2002 was $1,707,000 compared to $8,856,000 for the three months ended September 30, 2001. Selling, general and administrative expense for the nine months ended September 30, 2002 was $5,345,000 compared to $12,550,000 for the nine months ended September 30, 2001. The reduced cost in 2002 was the affect of the bad debt reserve for 2001 for license and game sales for a foreign distributor and the write off of the cost of the termination of the merger with Xertain. INTEREST EXPENSE In the quarter ended September 30, 2002, net interest expense was $497,000 compared to $170,000 in the quarter ended September 30, 2001. For the nine months ended September 30, 2002, net interest expense was $1,023,000 compared to $338,000 in the nine months ended September 30, 2001. The increases in net interest expense were due to additional interest expense incurred on increased debt. ACCUMULATED DEFICIT The Company had an accumulated deficit of $54,013,000 as of September 30, 2002. Due to the Company's short-term capital requirements, the high degree of regulation and other factors of the business environment in which the Company operates, the likelihood of future profitable quarters, if any, cannot be predicted. Future short-term results are highly dependent on the Company's ability to, among other things, finance production and distribution new products, gain customer acceptance of its existing and new products and the necessary Company licenses and/or product approvals in various jurisdictions in order to expand its market base. There can also be no assurance as to the time frame during which such anticipated approvals may occur due to uncertain time periods involved in the regulatory approval process. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY The Company had $30,000 and $21,000 in cash as of September 30, 2002 and December 31, 2001, respectively. The Company has experienced negative cash flow from operations of $4.8 million, $1.7 million, and $5.1 million for the years ended December 31, 2001, 2000, and 1999, respectively. Management believes that the costly process of product development and introduction will require the Company to seek additional financing to successfully compete in the market place. On August 20, 2002, the Company entered into Securities Purchase Agreements for one or more convertible secured promissory notes in an aggregate principal amount not to exceed $5,000,000. Interest rate is 5.5%, payable quarterly. These notes are convertible into Series A-1 Convertible Preferred Stock (the "Series A-1 Preferred Stock") . The security for the notes are, inventory, receivables, equipment and fixtures, financial assets, general intangibles. The Series A-1 Preferred Stock has a par value of $0.01 per share, and a stated value of $1,000.00 per share. Dividends of 5.5% are due quarterly. Series A-1 Preferred Stock is convertible into shares of common stock at a price post split of $0.295 per share. On August 21, 2002, the Company issued long term secured notes for $2,000,000 at a 5.5% interest rate, payable quarterly, with the notes due February 21, 2004. On September 20, 2002, the Company issued an additional amount of $175,000 secured notes due [ ]creating a total of $2,175,000 of the maximum of $5,000,000. The Company has been informed that the note holders do not presently intend to or are not able to purchase additional notes towards the maximum of $5,000,000. The Company is currently seeking other potential third party investors to purchase the notes. Given the Company's limited cash on hand as of November 19, 2002, in the event the Company is unable to obtain third party financing by November 27, 2002, 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED the Company will have to consider a number of strategic options, including but limited to liquidating some or all of the Company's assets or bankruptcy. There can be no assurance that the Company will be successful in obtaining additional short-term financing or any additional financing on terms acceptable to the Company. The Company believes that any such short-term or long-term financing would be on terms that would be dilutive to the Company's existing shareholders. Failure to obtain short-term or additional financing would have a material adverse effect on the Company, and the Company would have to consider liquidating all or part of the Company's assets and potentially discontinuing operations. The Registration Rights Agreement relating to the Company's recent issuances of the Company's Series K Convertible Preferred Stock requires the Company to register the shares of Common Stock issuable upon conversion of shares of Series K Convertible Preferred Stock within 180 days or pay certain liquidated damages. The liquidated-damages provisions were scheduled to take effect on January 29, 2002, and require the Company to pay 2% of the gross proceeds of the Series K Convertible Preferred Stock sold for the first 30 days after issuance if such Common Stock is not registered by January 29, 2002. In addition, the Company would be required to pay 3.5% of the gross proceeds to a major investor for each successive 30-day period thereafter during which the Common Stock is not registered. For other investors, the Company would be required to pay 2% of the gross proceeds for each successive 30-day period thereafter during which the Common Stock is not registered. Beginning April 1, 2002, the liquidated damages would be approximately $73,125 and would increase substantially each succeeding month, as further disclosed in the Notes to the Company's financial statements. A registration statement relating to such Common Stock was filed on September 28, 2001 and amended on January 16, 2002 , February 12, 2002 and September 27, 2002, but had not been declared effective as of November 1, 2002. Unless the Company can obtain a waiver of such provisions from the holders of the Company's Series K Convertible Preferred Stock, the Company will be contractually required to make such payments, which could have a material adverse impact on the Company's liquidity. PREFERRED STOCK During the three months ended September 30, 2002, 9,170 shares of Series F Convertible Preferred Stock were converted into 422,580 shares of common stock prior to the 1 for 10 stock split. During the three months ending September 30, 2002, 100 shares of Series K Convertible Preferred Stock were converted to 413,223 shares of common stock prior to the 1 for 10 stock split. COMMON STOCK On September 9, 2002 the Company effectuated a 1 for 10 reverse common stock split. During the three months ending September 30, 2002, 773,721 shares of pre split common stock were issued for payment of dividends on Series F convertible preferred stock and 195,652 shares of pre split common stock were issued for payment of dividends on Series E convertible preferred stock. During the three months ending September 30, 2002, 94,098 shares of post split common stock were issued for payment of dividends on Series K convertible preferred stock; 5,921 shares of post split common stock were issued for payment of dividends on Series E convertible preferred stock; 39,977 shares of post split common stock were issued for payment of dividends on Series F convertible preferred that were due for the period ending September 30, 2002. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED During the three months ending September 30, 2002, 6,845 shares of post split common stock were issued pursuant to the employee stock purchase program. During the three months ending September 30, 2002, 370,736 shares of pre split common stock were issued for expenses. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information about market risks for the three months ending September 30, 2002 does not differ materially from that discussed in our Annual Report on From 10-K for 2001. 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 Holland. 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: ability to obtain additional financing through leasing, equity or other arrangements; the ability to achieve current sales forecasts; the Company's ability to manage its accounts payable, 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; 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 ability of the Company to maintain its listing on the NASDAQ Stock Market; unfavorable determination of suitability by regulatory authorities with respect to officers, directors or key employees; the limitation, conditioning or suspension of any gaming license; adverse results of significant litigation matters; fluctuation in exchange rates, tariffs and other barriers. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in the Company's report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2001. 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. ITEM 4. DISCLOSURE REQUIRED BY ITEM 307 OF REGULATION S-K Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), within 90 days of the filing date of this report. Based on their evaluation, our principal executive officer and principal accounting officer concluded that the Company's disclosure controls and procedures are effective. There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced above. 14 PART II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS None. Item 2. CHANGES IN SECURITIES The Company effectuated a 1-for-10 reverse stock split, with a record date of August 30, 2002 and an effective date of September 9, 2002. During the three months ending September 30, 2002, 370,736 shares of unregistered Common Stock were issued for expenses in the amount of $101,221 pursuant to the Section 4(2) exemption under the Securities Act of 1933, as amended. During August & September 2002, the company entered into convertible notes of $2,175,000. These notes are convertible into A-1 preferred stock. The company has relied on 506 of Regulation B. 5. OTHER MATTERS On August 1, 2002, the Company received notice from NASDAQ that it does not meet NASDAQ's new $2,500,000 stockholder equity requirement. As of March 31, 2002, the Company's stockholder equity was $2,217,000. As of June 30, 2002, the Company's stockholder's equity was $2,505,000. On August 13, 2002, the Company failed to gain compliance with NASDAQ Marketplace Rules requiring that the company's common stock trade above $1.00 per share for a period of time. The compliance deadline was indicated in NASDAQ's letter of February 14, 2002 to the Company. The Company had its hearing with NASDAQ on September 27, 2002. On November 6, 2002, the Company was delisted from Nasdaq's Smallcap Market and trades on the OTCBB. On August 1, 2002, the Company received notice from NASDAQ that the Company does not have a sufficient number of independent directors, as is required under NASDAQ Marketplace Rules. The Company on September 4, 2002 announced the addition of 3 new board members, Ron Eibensteiner, Kevin Malley and Edward Harris. [Indicate the dates these directors resigned] Item 6. EXHIBITS AND REPORTS (a) Exhibits: Please refer to the Exhibit Index contained on page 15. (b) Reports on Form 8-K: None. 14 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INNOVATIVE GAMING CORPORATION OF AMERICA /s/ ---------------------------------------- Laus M. Abdo President, Chief Executive Officer, Chief Financial Officer Date: November 19, 2002 Pursuant to U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned hereby certifies in his capacity as an officer of Innovative Gaming Corporation of America (the "Company) that (a) the Quarterly Report of the Company on Form 10-Q for the period ended June 30, 2002 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and (b) the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period. /s/ ---------------------------------------- Laus M. Abdo President, Chief Executive Officer, Chief Financial Officer 15 CT I, Laus M. Abdo, Chief Executive Officer and Chief Financial Officer of the Company, certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filling date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective action with regard to significant deficiencies and material weaknesses. Date: November 19, 2002 /s/ ------------------------------------ Laus M. Abdo President, Chief Executive Officer, Chief Financial Officer 16 EXHIBIT INDEX Exhibit No. Description Manner of Filing ----------- -------------------------------------------- ---------------- 10.13 Accountants concur with change in revenue Filed with this recognition policy, dated November 6, 2002. Report. 17

EXHIBIT INDEX Exhibit No. Description Manner of Filing ----------- ----------- ---------------- 3.1(a) Articles of Incorporation Incorporated 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 E Incorporated by reference to Exhibit 3.1(f) to the Convertible Preferred Stock Company's report on Form 8-K filed February 14, 2001 (the "February 14, 2001 8-K"). 3.1(c) Certificate of Designation relating to Series F Incorporated by reference to Exhibit 3.1(g) to the February Convertible Preferred Stock 14, 2001 8-K. 3.1(d) Certificate of Designation relating to Series K Incorporated by reference to Exhibit 3(4) to the Company's Convertible Preferred Stock quarterly report on Form 10-Q, filed on August 14, 2001. 3.2 Bylaws Incorporated by reference to Exhibit 3.2 to the SB-2. 10.1 Form of Securities Purchase Agreement dated Incorporated herein by reference to Exhibits 10.1 and 10.3 November 1, 2000. to the February 14, 2001 8-K. 10.2 Form of Securities Purchase Agreement dated Incorporated by reference to Exhibit 10.4 to the February December 1, 2000 14, 2001 8-K. 10.3 Severance Agreement dated October 17, 2001. Incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001, filed on April 16, 2002. 10.4 Form of Registration Rights Agreement for Series Incorporated by reference to Exhibit 10.2 to the February E Convertible Preferred Stock dated November 1, 14, 2001 8-K. 2000. 10.5 Form of Registration Rights Agreement for Series Incorporated by reference to the February 14, 2001 8-K. F Convertible Preferred Stock, dated December 1, 2000. 10.6 Form of Registration Rights Agreement for Series Incorporated by reference to Exhibit 10(4) to the August K Convertible Preferred Stock dated August 1, 14, 2001 10-Q. 2000. 10.7 Note to Blake Capital Partners, LLC, dated April Incorporated by reference to Exhibit 4(1) to the August 14, 12, 2001. 2001 10-Q. 10.8 Securities Purchase Agreement with Blake Capital Incorporated by reference to Exhibit 4(1) to the August 14, Partners, LLC, dated April 12, 2001. 2001 10-Q. 10.9 Amended and Restated Consulting Agreement, dated Incorporated by reference to Exhibit 10(2) to the August April 4, 2001. 14, 2001 10-Q. 10.10 Consultant Agreement, dated July 1, 2001. Incorporated by reference to Exhibit 10(5) to the August 14, 2001 10-Q. 10.11 Form of Change of Control Agreement by and Incorporated by reference to Exhibit 10(6) to the August between the Company and each of Roland M. Thomas, 14, 2001 10-Q. Michael Mackenzie, Steven Peterson and Loren A. Piel. 10.12 Subscription Agreement, dated April 30, 2002. Filed with this Report.

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