U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 1996.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ________ to ________.
Commission file number O-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)
4750 Turbo Circle, Reno, Nevada 89502
(Address of Principal Executive Offices)
(702) 823-3000
(Issuer's Telephone Number, Including Area Code)
12700 Industrial Park Boulevard, Suite 60, Plymouth, Minnesota 55441
(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 August 5, 1996 there were
6,456,515 shares of common stock, $0.01 par value outstanding.
INNOVATIVE GAMING CORPORATION OF AMERICA
Form 10-Q Index
June 30, 1996
Part I: Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
June 30, 1996 and December 31, 1995 3
Consolidated Condensed Statements of Operations -
for the three and six months ended
June 30, 1996 and 1995 4
Consolidated Condensed Statements of Cash Flows -
for the three and six months ended
June 30, 1996 and 1995 5
Notes to Consolidated Condensed
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Part II: Other Information
Item 4: Submission of Matters to a Vote of Security Holders 13
Item 6: Exhibits and Reports on Form 8-K 13
Signatures 14
Index of Exhibits 15
Exhibits 16
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 313 $ 897
Available-for-sale securities 7,507 7,852
Restricted investments 542 542
Accounts receivable 476 116
Current portion of notes receivable 783 873
Inventories 4,673 5,806
Prepaid expenses and other 367 351
-------- --------
Total current assets 14,661 16,437
NOTES RECEIVABLE, LESS CURRENT PORTION 300 951
PROPERTY AND EQUIPMENT, NET 415 359
DEFERRED INCOME TAXES 720 854
INTANGIBLE ASSETS, NET 2,257 328
-------- --------
$ 18,353 $ 18,929
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 378 $ 335
Accrued expenses 353 63
-------- --------
Total liabilities 731 398
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized,
6,417,515 and 4,968,915 shares issued and outstanding, respectively 64 50
Class B non-voting common stock, $.01 par value, 1,025,000 shares
authorized, 0 and 1,025,000 shares issued and outstanding, respectively -- 10
Additional paid-in capital 24,726 21,848
Accumulated deficit (7,119) (3,380)
Unrealized holding gain (loss) on available-for-sale securities (49) 3
-------- --------
Total stockholders' equity 17,622 18,531
-------- --------
$ 18,353 $ 18,929
======== ========
</TABLE>
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES $ 730 $ 2,515 $ 1,236 $ 5,842
COST OF SALES 495 1,656 869 3,649
----------- ----------- ----------- -----------
Gross profit 235 859 367 2,193
SELLING, GENERAL AND ADMINISTRATIVE 1,353 1,119 2,565 2,372
RESTRUCTURING COSTS 1,716 -- 1,716 --
----------- ----------- ----------- -----------
Loss from operations (2,834) (260) (3,914) (179)
INTEREST INCOME, NET 154 149 330 291
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (2,680) (111) (3,584) 112
Provision for (benefit of) income taxes 155 (49) 155 (14)
----------- ----------- ----------- -----------
NET INCOME (LOSS) (2,835) (62) (3,739) 126
Preferred stock dividends paid -- 20 -- 40
Preferred stock accretion adjustment -- 5 -- 10
----------- ----------- ----------- -----------
INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS ($ 2,835) ($ 87) ($ 3,739) $ 76
=========== =========== =========== ===========
INCOME (LOSS) PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS:
PRIMARY AND FULLY DILUTED ($ 0.45) ($ 0.01) ($ 0.60) $ 0.01
=========== =========== =========== ===========
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 6,367,845 5,803,216 6,258,688 6,071,491
=========== =========== =========== ===========
</TABLE>
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -----------------------------
1996 1995 1996 1995
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($2,835) ($ 62) ($3,739) $ 126
Adjustments to reconcile net income (loss) to
cash flows from operating activities -
Depreciation and amortization 203 84 322 168
Deferred income taxes 134 (49) 134 (34)
Loss on sale of property and equipment 99 -- 99 --
(Gain) loss on sale of securities and investments 7 -- 25 (2)
Increase in allowance for uncollectible accounts 78 -- 78 --
Stock option compensation earned 3 10 4 15
Changes in operating assets and liabilities 980 657 1,706 (509)
------- ------- ------- -------
Cash flows from operating activities (1,331) 640 (1,371) (236)
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities and investments (1,104) (1,107) (5,936) (9,301)
Proceeds from sale of securities and investments 1,500 1,100 6,204 8,700
Purchase of property and equipment (40) (1) (279) (3)
Proceeds from sale of property and equipment 45 -- 45 --
Payments on non-compete agreement (25) -- (42) --
------- ------- ------- -------
Cash flows from investing activities 376 (8) (8) (604)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations (1) (8) (2) (17)
Preferred stock dividends paid -- (20) -- (40)
Net proceeds from sale of common stock 443 460 797 460
Payments on repurchase of common stock -- -- -- (203)
------- ------- ------- -------
Cash flows from financing activities 442 432 795 200
------- ------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (513) 1,064 (584) (640)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 826 3,088 897 4,792
------- ------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 313 $ 4,152 $ 313 $ 4,152
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Noncash transactions:
Class B common stock converted to common stock -- -- $ 10 --
Intangible assets acquired with common stock -- -- $ 2,081 --
</TABLE>
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996
(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 to Shareholders and Form 10-K
for the year ended December 31, 1995. In the opinion of management, all
adjustments (including recurring adjustments) necessary for a fair presentation
of the financial position, results of operations and cash flows for the interim
period presented have been made. Operating results for the six months ended June
30, 1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996, however losses are expected to continue for
the near term.
(2) COMMITMENTS AND CONTINGENCIES
The manufacture, distribution and sale of the Company's products is regulated by
various jurisdictions and entities, including requirements to obtain licenses
and product approval in several jurisdictions. Failure to successfully obtain
these licenses, approvals, or meet other regulatory requirements could
materially impact the expansion and future operation of the Company. As a result
of these factors, the Company expects quarterly results to be volatile until
corporate and game license approvals in major gaming markets are obtained and
appropriate marketing efforts in new jurisdictions have been performed. Until
all major gaming market approvals and game licenses are received, future sales
and earnings levels are expected to continue to be negatively impacted.
On May 14, 1996, the Company entered into a noncancelable operating lease
agreement for office and warehouse space in Reno, Nevada. On July 9, 1996, this
lease was extended through October 2001. The lease requires monthly payments of
$19,000 and requires minimum annual rental commitments of $148,000, $229,000,
$230,000, $234,000, $251,000 and $221,000 for the years ending December 31, 1996
through 2001, respectively.
(3) RELATED PARTY TRANSACTIONS
Sales of approximately $224,000 were made to Grand Casinos, Inc. ("GCI") during
the quarter ended June 30, 1995. Total sales to GCI for the six months ended
June 30, 1995 were $493,000. There were no sales to GCI for the six months ended
June 30, 1996. GCI is a stockholder of the Company which is in the business of
owning, managing and developing casinos. These sales were made at reduced prices
for the purpose of testing, evaluating and marketing Live Video Blackjack, Live
Video Craps and Live Video Roulette. On October 20, 1994, the Company issued
1,025,000 shares of its Class B non-voting common stock in exchange for: i)
1,025,000 shares of common stock held by GCI, ii) an option to purchase 102,500
additional shares of common stock at $7.00 per share including registration
rights on the additional shares, and iii) an increase in the number of games GCI
may purchase under the existing discount machine purchase agreement by 50 games
(up to an aggregate of 125 games). 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.
(4) ACQUISITION OF INTANGIBLE ASSETS
On February 2, 1996, the Company acquired the balance of all remaining patents,
copyrights and other proprietary information related to its products from
certain Japanese suppliers in exchange for 225,000 shares of common stock, which
had a market value of $2,081,000 on the date of the exchange. The Company is
amortizing the acquired intangible assets over their useful lives which range
from five to ten years.
(5) COMMON STOCK
On October 20, 1994, the Company's Board of Directors authorized the Company to
repurchase up to 500,000 shares of its currently outstanding common stock from
time to time on the open market or in privately negotiated transactions
depending on market conditions. As of June 30, 1996, the Company had repurchased
248,500 shares at prices ranging from $3.56 to $6.08 per share for total
consideration of $1,199,000. A total of 50,000 shares were repurchased during
the six months ended June 30, 1995. No shares were repurchased during the six
months ended June 30, 1996.
(6) INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", 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 carryforwards of
approximately $2,900,000 as of December 31, 1995. These losses if not used will
begin to expire in 2009. The use of approximately $1,250,000 of these losses is
limited to approximately $250,000 per year for the next five years because the
loss was generated in a short tax year. Future changes in the ownership of the
Company may place limitations on the use of these net operating loss
carryforwards.
(7) DISTRIBUTION AGREEMENTS
On February 7, 1996, the Company entered into a distribution agreement with
Aristocrat Leisure Industries PTY LTD to exclusively distribute the Company's
games in Australia, New Zealand and other Asian-Pacific territories. The term of
the agreement is five years with minimum game purchase requirements of 100 units
per year. The agreement is also subject to certain regulatory and product
licensing requirements in various jurisdictions prior to product sales.
On March 5, 1996, the Company entered into distribution agreements with Ludi
S.F.M. and S.A.M. Eurusa to exclusively distribute the Company's games in
France, Monaco, Morocco, Tunisia and Italy. Ludi is affiliated with Eurusa. The
agreements have terms of three years and are subject to certain regulatory and
product licensing requirements in various jurisdictions prior to product sales.
(8) EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into employment contracts with certain of its executive
officers which generally provide for base compensation, bonus compensation and
stock option grants. In addition the Company has entered into a consulting and
noncompete agreement with its former chief executive officer.
(9) RESTRUCTURING PLAN
During the quarter ended June 30, 1996, the Company formalized details of a
comprehensive restructuring plan designed to reduce costs and improve efficiency
of operations. Included in the restructuring plan was the consolidation and
relocation of corporate facilities to Reno, Nevada, replacement of management
with Nevada gaming experienced management, and an overall evaluation of the
Company's product lines and new markets. As a result of this restructuring plan,
the Company recorded a one-time charge against earnings in the second quarter
totaling $1,716,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company was formed in 1991 to develop, manufacture, market and distribute
group participation and other specialty video gaming machines. The Company
manufactures, distributes and markets Live Video Blackjack, Live Video Craps,
Live Video Roulette and Supersuits Progressive Blackjack to gaming markets
worldwide. Since inception, the Company has focused most of its resources on the
regulatory approval process and the sale and installation of Live Video
Blackjack, Live Video Craps, Live Video Roulette, Supersuits Progressive
Blackjack and the development of other products.
In the second quarter, the Company initiated a restructuring plan which included
relocating to Reno, Nevada as described in Note 9 of the Notes to Consolidated
Condensed Financial Statements. On May 14, 1996 the Company entered into a
noncancelable operating lease for office and warehouse space in Reno to relocate
its corporate and manufacturing headquarters in order to draw from a more
experienced vendor and employee pool and to work more closely with a significant
number of potential customers in designing, developing and marketing the
Company's product. In June 1996 the Company began the process of relocating its
corporate offices, inventory and manufacturing activities. The Company
anticipates the move will be completed by mid-August 1996.
The Company and Grand Casinos, Inc. ("GCI") have entered into an agreement which
will allow casinos owned or managed by GCI or its affiliates to purchase up to
125 of the Company's video gaming machines at prices lower than the price the
Company charges unrelated parties. From inception through June 30, 1996, the
Company has sold 42 Live Video Blackjack machines, 11 Live Video Craps machines
and 8 Live Video Roulette machines to casinos either owned or managed by GCI.
The Company distributes its products both directly to the gaming marketplace and
through licensed distributors. In certain jurisdictions, the Company has
received technical game approval but has not received its distributor's license.
In certain jurisdictions the Company may use an existing licensed distributor to
sell its products pursuant to any necessary Tribal or regulatory transaction
approvals. The Company at this time has active applications for
manufacturer/distributor gaming licenses in Colorado and the Atlantic Lottery
(four Canadian Maritime provinces). The Company's games are presently under
consideration for technical approvals in Nevada and New South Wales, Australia.
The Company intends to apply for necessary licenses or approvals in key
jurisdictions both domestically and internationally where Class III type gaming
is permitted.
The Company has granted Sodak Gaming, Inc. a five-year non-exclusive license to
distribute Live Video Blackjack, Live Video Craps and Live Video Roulette
machines to North American Indian casinos (excluding the states of Minnesota and
Nevada) and to non-Indian casinos in the states of North Dakota, South Dakota
and Wyoming. The Company has also granted Drew Distributing a three-year
exclusive license to distribute Live Video Blackjack, Live Video Craps and Live
Video Roulette in South Carolina.
On February 7, 1996, the Company entered into a distribution agreement with
Aristocrat Leisure Industries PTY LTD to exclusively distribute the Company's
games in Australia, New Zealand and other Asian-Pacific territories. The term of
the agreement is five years with minimum game purchase requirements of 100 units
per year. The agreement is also subject to certain regulatory and product
licensing requirements in various jurisdictions. On March 5, 1996, the Company
entered into distribution agreements with Ludi S.F.M. and S.A.M. Eurusa to
exclusively distribute the Company's games in France, Monaco, Morocco, Tunisia
and Italy. Ludi is affiliated with Eurusa. The agreements have terms of three
years and are subject to certain regulatory and product licensing requirements
in various jurisdictions.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 COMPARED
TO JUNE 30, 1995
For the second quarter and year-to-date periods ended June 30, 1996, the Company
incurred losses attributable to common shareholders of $2,835,000 or $.45 per
share and $3,739,000 or $.60 per share, respectively. These losses resulted
primarily from a restructuring charge recorded in the second quarter (described
below), lower sales volumes and expenses for preparing the Company's games for
introduction into the Australia and Nevada markets.
Sales, Cost of Sales and Gross Profit
Sales for the quarter ended June 30, 1996 ("second quarter 1996") decreased
$1,785,000 to $730,000 from $2,515,000 for the quarter ended June 30, 1995
("second quarter 1995"). Net sales included 9 games for second quarter 1996,
compared to 40 games for second quarter 1995. Sales for the six months ended
June 30, 1996, decreased $4,606,000 to $1,236,000 from $5,842,000 for the six
months ended June 30, 1995. The first six months of 1995 included the Company's
entrance into the markets of Arizona (Roulette), Wisconsin and North Carolina
which resulted in the sale of 30 games, and 41 games sold into South Carolina.
Five games were sold into those markets during the first six months of 1996,
with all those sales occurring in the second quarter. Delays in acquiring
certain gaming licenses in key jurisdictions has limited the markets available
to sell product. Sales will continue to be volatile while new jurisdictional
licenses and/or distribution agreements are obtained. The Company anticipates
technical game review in the key jurisdictions of Nevada and Australia will be
completed in the near future so that subsequent field testing and approval can
be received not later than the first quarter of 1997.
The gross margin for the second quarter of 1996 was 32.2 %, which decreased 1.9%
from 34.1% for the second quarter 1995. The gross margin for the six months
ended June 30, 1996 was 29.7%, which decreased 7.8% from the six months ended
June 30, 1995. These declines were due to higher cost of game components as a
result of unfavorable Yen exchange rates and due to shrinking demand for the
Company's product in certain existing licensed Indian and riverboat
jurisdictions. Also, 100% and 83% of the Company's game sales for the six months
ended June 30, 1996 and 1995, respectively, were sold through either
distributors or to GCI. Sales through distributors and GCI are typically at a
lower gross margin than direct sales made by the Company. Gross margins are
expected to remain lower than historical levels until new gaming jurisdictions
can be obtained.
Selling, General and Administrative Expenses
Selling, general and administrative expense for the second quarter 1996
increased $234,000 to $1,353,000 compared to the second quarter 1995. Selling,
general and administrative expense for the six months ended June 30, 1996,
increased $193,000 from the six months ended June 30, 1995. These increases in
selling, general and administrative expenses for the second quarter 1996 and the
six months ended June 30, 1996, were primarily due to; i) product engineering
and development expenses related to preparing the Company's blackjack and
roulette games for sale in Australia and other jurisdictions, ii) an increase in
the Company's allowance for uncollectible accounts and notes receivable, and
iii) an increase in patent amortization primarily due to the first quarter 1996
acquisition of intellectual property.
Restructuring Costs
The Company recognized $1,716,000 of restructuring costs, which included
expenses relating to the Company's relocation to Reno, management transition and
product focus. The Company has accrued all anticipated expenses related to its
relocation as of June 30, 1996. During the move the Company maintained
operations in both Reno and Plymouth for over two months, which resulted in the
duplication of various expenses. Additionally, the Company incurred a loss upon
the sale and disposal of its unusable office equipment, computer equipment and
leasehold improvements when moving out of the Plymouth office as part of the
relocation to Reno.
During its restructuring the Company's management also focused on the product
lines it feels are necessary to provide the salability, manufacturing capability
and ultimately the profit margins necessary to achieve and sustain future
growth. As part of this process the Company recorded an inventory obsolescence
reserve on certain of its prior products.
Interest Income
Interest income for the second quarter 1996 was $154,000, which was a $5,000
increase over the second quarter 1995. Interest income for the six months ended
June 30, 1996, increased $39,000 over the six months ended June 30, 1995.
Interest income increased due to larger amounts invested in interest bearing
accounts, which increased over the past year from the collection of accounts and
notes receivable, a reduction of inventory and the exercise of stock options.
Provision for Income Taxes
The Company recorded a $155,000 provision for income taxes during the second
quarter 1996 to record a full valuation allowance on the Company's deferred tax
asset relating to its net operating loss carryforwards.
Accumulated Deficit
The Company had an accumulated deficit of $7,119,000 as of June 30, 1996. Due to
the highly regulated environment in which the Company operates, the likelihood
of future profitable quarters cannot be predicted. Future results are highly
dependent on the Company's ability to obtain the necessary license and/or
product approvals in various jurisdictions in order to expand its market base.
There can be no assurance as to the time frame during which such anticipated
approvals will occur due to the lead times involved in the regulatory approval
process. Due to the unique nature and price of the Company's products, it is
difficult to predict the appropriate selling cycle time frame involved in each
new jurisdiction.
As a result of these factors, the Company expects quarterly results to be
volatile until licenses and approvals in major gaming markets are obtained and
appropriate marketing efforts in new jurisdictions have been performed. The
Company has experienced delays in acquiring certain gaming licenses in key
jurisdictions. These delays are expected to continue to negatively impact
anticipated future sales and earnings levels.
Liquidity and Capital Resources
The Company entered into a $542,000 standby letter of credit/revolving credit
arrangement to facilitate acquisition of components and supplies from foreign
vendors. The facility is collateralized by short-term investments of the
Company.
On October 20, 1994, the Company's Board of Directors authorized the Company to
repurchase up to 500,000 shares of its currently outstanding common stock from
time to time on the open market or in privately negotiated transactions,
depending on market conditions. As of June 30, 1996, the Company had repurchased
248,500 shares at prices ranging from $3.56 to $6.08 per share for total
consideration of $1,199,000. A total of 50,000 shares were repurchased during
the six months ended June 30, 1995. No shares were repurchased during the six
months ended June 30, 1996.
The Company had $8,362,000 and $9,291,000 in cash and cash equivalents,
available-for-sale securities and restricted investments as of June 30, 1996 and
December 31, 1995, respectively. The Company believes that its cash and cash
equivalents, available-for-sale securities, restricted investments, cash
generated from operations and additional financing capacity will be sufficient
to meet the Company's current and long term liquidity and capital needs. The
Company had no long-term debt as of June 30, 1996.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the 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 Company's timetable
of game approval in Nevada and Australia and anticipated relocation completion.
In addition, statements containing expressions such as "believes," "anticipates"
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: decline in demand for gaming products or
reduction in the growth rate of new markets; 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; changes in interest rates
causing a reduction of investment income or in the market interest rate
sensitive investments; loss or retirement of key executives; approval of pending
patent applications or infringement upon existing patents; the effect of
regulatory and governmental actions; unfavorable determination of suitability by
regulatory authorities with respect to officers, directors or key employees; the
limitation, conditioning or suspension of any gaming license; adverse results of
significant litigation matters; fluctuations in exchange rates, tariffs and
other barriers. Many of the foregoing factors have been discussed in the
Company's prior SEC filings and, had the amendments to the Securities Act of
1933 and Securities Exchange Act of 1934 become effective at a different time,
would have been discussed in an earlier filing.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
On May 28, 1996, Innovative Gaming Corporation of America, Inc. held its annual
meeting of shareholders. Of the 6,307,515 shares of Common Stock eligible to
vote, 5,926,634 shares were present and entitled to vote. The following were the
votes on the following matters:
1. The votes cast for the three (3) directors to serve until the
next annual meeting of shareholders were:
Name Votes For Votes Withheld
Edward G. Stevenson 5,924,934 1,700
Lyle Berman 5,924,334 2,300
Stanley M. Taube 5,920,284 6,350
2. The votes cast to approve an amendment to the Company's 1992
Stock Option and Compensation Plan to increase the number of
shares of Common Stock reserved for issuance thereunder by
445,000 shares were:
Votes For Votes Against Votes Withheld Broker Non-Vote
3,308,072 201,949 20,350 2,396,263
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.33 Employment Agreement between the Company and Scott
Shackelton dated June 10, 1996
(b) Reports on Form 8-K
None.
Exhibit 27 - Financial Data Schedule - which is only submitted
electronically to the Securities and Exchange Commission for
EDGAR information purposes
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/ Scott Shackelton
Scott Shackelton
Chief Financial Officer
(Principal Accounting Officer)
Date: August 12, 1996
EXHIBIT INDEX
Sequential
Exhibit No. Description Page
10.33 Employment Agreement between the Company and
Scott Shackelton dated June 10, 1996 15
EXHIBIT 10.33
EMPLOYMENT AGREEMENT
PARTIES:
Innovative Gaming Corporation of America, Inc.
4750 Turbo Circle
Reno, NV 89502 (the "Company")
Scott Shackleton
4160 Longknife Road
Reno, Nevada (the "Executive")
DATE: June 10, 1996
RECITALS:
A. The parties wish to provide for the employment of the Executive by the
Company.
B. The Executive wishes to receive compensation from the Company for the
Executive's services, and the Company wants reasonable protection of
its confidential business and technical information that has been
acquired and is being developed by the Company at substantial expense.
C. The Company wishes to obtain reasonable protection against unfair
competition from the Executive following termination of employment and
to further protect against unfair use of its confidential business and
technical information and the Executive is willing to grant the Company
the benefits of a covenant-not-to-compete for these purposes.
AGREEMENT:
The Company and the Executive, each intending to be legally bound, agree as
follows:
1. Employment. Subject to all of the terms and conditions of this
Agreement, the Company agrees to employ the Executive as Vice President of
Finance and Chief Financial Officer, and the Executive accepts such employment.
2. Duties. The Executive will devote substantially all of his business
hours to and, during such time, make the best use of his energy, knowledge and
training in advancing the Company's interests. The Executive will diligently and
conscientiously perform the duties of the Executive's position within the
general guidelines to be determined by the Company's Board of Directors (the
"Board of Directors"). While the Executive is employed by the Company, Executive
will keep the Company informed of any other business activities, and will
promptly stop any activity or employment that might conflict with the Company's
interests or adversely affect the performance of the Executive's duties for the
Company. This shall not restrict Executive's right to invest in the Securities
of Public Companies, subject to Company policies regarding such investments.
3. Term. This Agreement is effective June 10, 1996 and shall have an
initial term of two years. This Agreement shall automatically renew for
successive one year terms after June 10, 1998 unless terminated sooner in
accordance with its termination provisions. Any change in compensation or
benefits in a renewal will require the agreement of the President of the Company
and Executive.
4. Termination. Subject to the respective continuing obligations of the
Company and the Executive under Sections 6, 7 and 8 hereof:
(a) The Company may terminate this Agreement immediately upon
written notice to the Executive "for cause," which shall include: (i)
dishonesty, fraud, material and deliberate injury or attempted injury,
in each case related to the Company or its business, (ii) any criminal
activity of a serious nature, (iii) the continued failure by Executive
to satisfactorily perform the duties assigned to him pursuant to
Section 2 of this Agreement for a period of 60 days after a written
demand by the Board of Directors for such satisfactory performance
which specifically identifies the manner in which it is alleged that
Executive has not satisfactorily performed such duties, provided that
the Company shall have no right to terminate Executive pursuant to this
clause (iii) during any twelve (12) month period following a change in
Executive's direct supervisor, or (iv) the failure to receive or the
loss of any required gaming license. In the event of termination of
this Agreement for cause pursuant to this Section 4(a), Executive will
be paid at the usual rate Executive's annual Base Salary through the
date of termination specified in any notice of termination and
Executive will have no right to receive any bonus for the period after
which the termination occurs or any future periods, provided that such
payments will be made within 30 days after termination for cause
pursuant to this Section 4(a).
(b) This Agreement will terminate upon the Executive's death
or permanent disability.
5. Compensation.
(a) Base Salary. In consideration for the Executive's services
under this Agreement, the Company agrees to pay the Executive an
initial base salary at a rate of One Hundred Thirty Five Thousand
Dollars ($135,000.00) per year (the "Base Salary"). Such Base Salary
shall be paid no less often than monthly in accordance with the
standard payroll practices of the Company. Such Base Salary may be
adjusted from time to time by the President of the Company but may not
be decreased during the term of this Agreement.
(b) Bonus. In addition to other compensation to be paid under
this Section 5, the Company will pay Executive an annual bonus or a
merit increase of up to 25% of the current year's Base Salary for each
year in which he performs services under this Agreement, the exact
amount to be determined by the Board of Directors based upon
Executive's and the Company's attainment during the preceding year of
specified annual objectives established by the Board of Directors in
consultation with the Executive. In addition to such bonus, the Company
will pay Executive an additional annual bonus of up to 25% of the
current year's Base Salary for each year in which he performs services
under this Agreement, the exact amount to be determined pursuant to a
profit formula to be determined by the Compensation Committee of the
Company's Board of Directors.
(c) Options. Subject to the approval of the Compensation
Committee of the Board of Directors and to the approval of the
shareholders of the Company of an amendment increasing the number of
shares authorized under the Company's 1992 Stock Option and Incentive
Plan, the Company awards Executive pursuant to an Option Agreement to
be entered into for the option to purchase up to 60,000 shares of the
Company's Common Stock pursuant to the Company's 1992 Stock Option and
Incentive Plan. These options, to the extent not exercised, shall vest
on a cumulative basis as follows:
No. of Shares as
Initial Date to which Options
of Exercisability Become Exercisable
June 10, 1996 10,000
June 10, 1997 20,000
June 10, 1998 30,000
June 10, 1999 40,000
June 10, 2000 50,000
June 10, 2001 60,000
(d) Reimbursement of Business Expenses. In addition to payment
of Base Salary, the Company agrees to reimburse the Executive for all
reasonable out-of-pocket business expenses incurred by the Executive on
behalf of the Company, provided that the Executive properly accounts to
the Company for all such expenses in accordance with the rules and
regulations of the Internal Revenue Service under the Internal Revenue
Code of 1986, as amended, and in accordance with the standard policies
of the Company relating to reimbursement of business expenses.
(e) Benefits and Vacation. The Executive will be entitled to
participate in all benefit plans accorded other officers. The Executive
will be entitled to an annual paid vacation of three weeks and all
legal holidays observed by the Company, in each case, in accordance
with the Company's policies as in effect from time to time.
(f) Termination Without Cause. If the Company terminates this
Agreement without cause, the Company shall pay or grant to Executive:
(i) the greater of (a) the Base Salary (or such greater amount as it
may be at the time of such termination) for a twelve (12) month period
after the date of such termination or (b) base salary for the balance
of the remaining Agreement term; (ii) any accrued bonus to be paid
pursuant to Section 5(b) of this Agreement for the period through the
date of termination; (iii) all vested options granted pursuant to the
option agreement as indicated in Section 5(c) hereof; (iv) the
unreimbursed out-of-pocket business expenses incurred by the Executive
on behalf of the Company and accounted for pursuant to an option
agreement as indicated in Section 5(d) of this Agreement; and (v) a
continuation of health, life and disability insurance benefits for a
twelve (12) month period after the date of termination on the same
basis as Executive's health, life and disability insurance benefits
immediately prior to such termination.
6. Inventions.
(a) "Inventions," as used in this Section 6, means any
discoveries, improvements and ideas (whether or not they are in writing
or reduced to practice) or works of authorship (whether or not they can
be patented or copyrighted) that the Executive makes, authors, or
conceives (either alone or with others) and that:
(i) concern directly the Company's business or the
Company's present or demonstrably anticipated future research
or development;
(ii) result from any work the Executive performs for
the Company;
(iii) use the Company's equipment, supplies,
facilities, or trade secret information; or
(iv) the Executive develops during the time the
Executive is performing employment duties for the Company.
(b) The Executive agrees that all Inventions made by the
Executive during or within six (6) months after the term of this
Agreement will be the Company's sole and exclusive property. The
Executive will, with respect to any Invention:
(i) keep current, accurate, and complete records,
which will belong to the Company and be kept and stored on the
Company's premises while the Executive is employed by the
Company;
(ii) promptly and fully disclose the existence and
describe the nature of the Invention to the Company in writing
(and without request);
(iii) assign (and the Executive does hereby assign)
to the Company all of his rights to the Invention, any
applications he makes for patents or copyrights in any
country, and any patents or copyrights granted to him in any
country; and
(iv) acknowledge and deliver promptly to the Company
any written instruments, and perform any other acts necessary
in the Company's opinion to preserve property rights in the
Invention against forfeiture, abandonment or loss and to
obtain and maintain letters patent and/or copyrights to the
Invention and to vest the entire right and title to the
Invention in the Company.
The requirements of this subsection 6(b) do not apply to an Invention
for which no equipment, supplies, facility or trade secret information
of the Company was used and which was developed entirely on the
Executive's own time, and (1) which does not relate directly to the
Company's business or to the Company's actual or demonstrably
anticipated research or development, or (2) which does not result from
any work the Executive performed for the Company. Except as previously
disclosed to the Company in writing, the Executive does not have, and
will not assert, any claims to or rights under any Inventions as having
been made, conceived, authored or acquired by the Executive prior to
his employment by the Company. With respect to any obligations
performed by the Executive under this subsection 6(b) following
termination of employment, the Company will pay the Executive
reasonable hourly compensation (consistent with the last Base salary)
and will pay or reimburse all reasonable out-of-pocket expenses.
7. Confidential Information.
(a) "Confidential Information," as used in this Section 7,
means information that is not generally known and that is proprietary
to the Company or that the Company is obligated to treat as
proprietary. Any information that the Executive reasonably considers
Confidential Information, or that the Company treats as Confidential
Information, will be presumed to be Confidential Information (whether
the Executive or others originated it and regardless of how the
Executive obtained it).
(b) Except as specifically permitted by an authorized officer of the
Company or by written Company policies, the Executive will never, either during
or after his employment by the Company, use Confidential Information for any
purpose other than the business of the Company or disclose it to any person who
is not also an Executive of the Company. When the Executive's employment with
the Company ends, the Executive will promptly deliver to the Company all records
and any compositions, articles, devices, apparatus and other items that
disclose, describe or embody Confidential Information, including all copies,
reproductions and specimens of the Confidential Information in the Executive's
possession, regardless of who prepared them and will promptly deliver any other
property of the Company in the Executive's possession, whether or not
Confidential Information.
8. Competitive Activities. The Executive agrees that, during the term
of employment with the Company and the period during which severance is paid, if
any, under this Agreement following termination of employment (if this Agreement
is terminated by the Company without cause or upon a change of control pursuant
to Section 5(f)), then the Executive will not alone, or in any capacity with
another firm,
(a) directly engage in any commercial activity that competes
with the Company's business, as the Company has conducted it during the
two (2) years before the Executive's employment with the Company ends,
within any state in the United States or within any country in which
the Company directly markets or services products or provides services,
(b) in any way interfere or attempt to interfere with the
Company's relationships with any of its current or potential customers,
or
(c) employ or attempt to employ any of the Company's then
Executives on behalf of any other entity competing with the Company.
This Section 8 shall cease to be applicable to any activity of the Executive
from and after such time as the Company (i) shall have ceased all business
activities for a period of sixty (60) days or (ii) shall have made a decision
through its Board of Directors not to continue, or shall have ceased for a
period of sixty (60) days, the business activities with which such activity of
the Executive would be competitive.
9. Conflicts of Interest. The Executive agrees that he will not,
directly or indirectly, transact business with the Company personally, or as
agent, owner, partner or shareholder of any other entity; provided, however,
that any such transaction may be entered into if approved by the Board of
Directors.
10. No Adequate Remedy. The Executive understands that if the Executive
fails to fulfill the Executive's obligations under this Agreement, the damages
to the Company would be very difficult to determine. Therefore, in addition to
any other rights or remedies available to the Company at law, in equity, or by
statute, the Executive hereby consents to the specific enforcement of this
Agreement by the Company through an injunction or restraining order issued by an
appropriate court.
11. Miscellaneous.
(a) Successors and Assigns. This Agreement is binding on and
inures to the benefit of the Company's successors and assigns, all of
which are included in the term the "Company" as it is used in this
Agreement; provided, however, that the Company may assign this
Agreement only in connection with a merger, consolidation, assignment,
sale or other disposition of substantially all of its assets or
business.
(b) Modification. This Agreement may be modified or amended
only by a written statement signed by both the Company and the
Executive.
(c) Governing law. The laws of Nevada will govern the
validity, construction, and performance of this Agreement. Any legal
proceeding related to this Agreement will be brought in an appropriate
Nevada court, and both the Company and the Executive hereby consent to
the exclusive jurisdiction of that court for this purpose.
(d) Construction. Wherever possible, each provision of this
Agreement will be interpreted so that it is valid under the applicable
law. If any provision of this Agreement is to any extent invalid under
the applicable law, that provision will still be effective to the
extent it remains valid. The remainder of this Agreement also will
continue to be valid, and the entire Agreement will continue to be
valid in other jurisdictions.
(e) Waivers. No failure or delay by either the Company or the
Executive in exercising any right or remedy under this Agreement will
waive any provision of the Agreement. Nor will any single or partial
exercise by either the Company or the Executive of any right or remedy
under this Agreement preclude either of them from otherwise or further
exercising these rights or remedies, or any other rights or remedies
granted by any law or any related document.
(f) Captions. The headings in this Agreement are for
convenience only and do not affect this Agreement's interpretation.
(g) Entire Agreement. This Agreement supersedes all previous
and contemporaneous oral negotiations, commitments, writings and
understandings between the parties concerning the matters in this
Agreement, including without limitation any policy or personnel manuals
of the Company.
(h) Notices. All notices and other communications required or
permitted under this Agreement shall be in writing and shall be hand
delivered or sent by registered or certified first-class mail, postage
prepaid, and shall be effective upon delivery if hand delivered, or
three (3) days after mailing if mailed to the addresses stated at the
beginning of this Agreement. These addresses may be changed at any time
by like notice.
IN WITNESS WHEREOF, the Company and the Executive have executed this
Agreement as of the date first above written.
INNOVATIVE GAMING CORPORATION EXECUTIVE
OF AMERICA
By s/ Edward G. Stevenson s/ Scott Shackleton
Its President Scott Shackleton
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