<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1997
-----------------------------
[ ] 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)
4750 Turbo Circle, Reno, Nevada 89502
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(702) 823-3000
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(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 November 7, 1997 there were
7,535,211 shares of Common Stock, $0.01 par value, outstanding.
Page 1 of 13
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INNOVATIVE GAMING CORPORATION OF AMERICA
Form 10-Q Index
September 30, 1997
Part I: Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
September 30, 1997 (Unaudited) and December 31, 1996 3
Consolidated Condensed Statements of Operations -
for the three months and nine months ended
September 30, 1997 and 1996 (Unaudited) 4
Consolidated Condensed Statements of Cash
Flows for the nine months ended September 30,
1997 and 1996 (Unaudited) 5
Notes to Consolidated Condensed
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II: Other Information
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Page 2 of 13
<PAGE> 3
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
CURRENT ASSETS: (UNAUDITED)
Cash and cash equivalents $ 1,064 $ 2,993
Available-for-sale securities 107 2,966
Restricted investments 1,000 1,000
Accounts receivable 2,431 483
Notes receivable - - 177
Inventories 9,835 4,729
Prepaid expenses and other 82 174
-------- --------
Total current assets 14,519 12,522
PROPERTY AND EQUIPMENT, NET 753 653
GAME OPERATIONS EQUIPMENT, NET 1,874 - -
DEFERRED INCOME TAXES 720 720
INTANGIBLE ASSETS, NET 1,817 2,081
-------- --------
$ 19,683 $ 15,976
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,506 $ 246
Accrued liabilities 381 254
Notes payable 517 26
Customer deposits 256 - -
-------- --------
Total current liabilities 2,660 526
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, no par value, $1,000 stated
value, nonvoting, 4,000 shares authorized,
2,350 and 0 shares issued and outstanding, respectively 2,350 - -
Common stock, $.01 par value, 100,000,000 shares authorized,
6,910,455 and 6,476,515 shares issued and outstanding 69 65
Additional paid-in capital 27,236 24,951
Accumulated deficit (12,632) (9,559)
Unrealized holding (loss) on available-for-sale securities - - (7)
-------- --------
Total stockholders' equity 17,023 15,450
-------- --------
$ 19,683 $ 15,976
======== ========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
Page 3 of 13
<PAGE> 4
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
SALES $ 3,873 $ 733 $ 5,423 $ 1,969
COST OF SALES 2,355 526 3,707 1,395
------- ------- ------- -------
Gross profit 1,518 207 1,716 574
SELLING, GENERAL AND ADMINISTRATIVE 1,240 1,502 4,066 4,067
RESTRUCTURING COSTS -- -- -- 1,716
------- ------- ------- -------
Income (loss) from operations 278 (1,295) (2,350) (5,209)
INTEREST INCOME, NET 48 136 225 466
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 326 (1,159) (2,125) (4,743)
Provision for income taxes -- -- -- 155
------- ------- ------- -------
NET INCOME (LOSS) 326 (1,159) (2,125) (4,898)
Preferred stock accretion adjustment 252 -- 878 --
Preferred stock dividends 34 -- 70 --
------- ------- ------- -------
INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 40 $(1,159) $(3,073) $(4,898)
======= ======= ======= =======
INCOME (LOSS) PER SHARE OF COMMON STOCK $ 0.01 $ (0.18) $ (0.47) $ (0.77)
======= ======= ======= =======
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 6,630 6,446 6,528 6,352
======= ======= ======= =======
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
Page 4 of 13
<PAGE> 5
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,125) $(4,898)
Adjustments to reconcile net loss to
cash flows from operating activities -
Depreciation and amortization 596 439
Deferred income taxes -- 134
Provision for inventory obsolescence 60 --
Loss on sale of assets -- 98
Loss on sale of securities and investments 2 27
Provision for bad debts 9 78
Stock option compensation earned -- 7
Changes in operating assets and liabilities (5,231) 2,628
------- -------
Cash flows used in operating activities (6,689) (1,487)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (1,043) (5,936)
Proceeds from sale of available-for-sale securities 3,906 9,912
Purchases of property and equipment (2,306) (350)
Proceeds from sale of property and equipment -- 45
Payments on covenant not to compete -- (66)
------- -------
Cash flows provided by investing activities 557 3,605
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 524 --
Payments on note payable (33) (3)
Net proceeds from sale of preferred stock 3,752 --
Net proceeds from sale of common stock -- 934
Preferred stock dividends paid (40) --
------- -------
Cash flows provided by financing activities 4,203 931
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,929) 3,049
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,993 897
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,064 $ 3,946
======= =======
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
Series A preferred stock converted to common stock $ 1,650 --
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
Page 5 of 13
<PAGE> 6
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(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, 1996. 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, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997.
(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 approval 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 expansion and future operation of the
Company. As a result, the Company expects quarterly results to be volatile until
all product approvals have been obtained and appropriate marketing efforts have
been successfully performed in major gaming markets. Until all major gaming
market approvals are received and marketing efforts successfully performed,
future sales and earnings are expected to continue to be negatively impacted.
(3) RELATED PARTY TRANSACTIONS
Grand Casinos, Inc. ("GCI"), which is in the business of owning, managing and
developing casinos, is a stockholder of the Company. Lyle Berman, Chairman of
the Board of the Company, is Chairman and Chief Executive Officer, and a
principal shareholder of GCI. Under an existing machine purchase agreement, GCI
may purchase up to an aggregate of 125 games in quantity purchases at
distributor level prices. Previous quantity sales were also made to GCI at
distributor level prices for the purpose of testing, evaluating and marketing
the Company's blackjack, craps and roulette games. The Company made no machine
sales to GCI during the nine-month periods ended September 30, 1996 or 1997.
(4) 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 September 30, 1997, 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. No shares were repurchased during the
nine-month periods ended September 30, 1996 or 1997.
(5) 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 carry forwards of
approximately $8,385,000 as of December 31, 1996. 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 carry forwards.
Page 6 of 13
<PAGE> 7
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997
(UNAUDITED)
(6) EARNINGS PER SHARE
The Company is adopting Statement of Financial Accounting Standards ("SFAS") No.
128 "Earnings Per Share". SFAS No. 128 is effective for periods ending after
December 15, 1997, and replaces previously reported earnings per share with
"basic" and "diluted" earnings per share. The earnings per share data presented
for the three and nine months ended September 30, 1997 and 1996 are based on
weighted average common shares outstanding and on the same as "basic" earnings
per share calculated under SFAS No. 128. Diluted earnings per share is not
presented because the resulting earnings per share would be antidilutive for
each period reported. For the three months ended September 30, 1997, the
antidilutive effect on earnings per share is caused by adding back to earnings
the preferred stock dividends under the assumption that the Company's
Convertible Preferred Stock would have been converted to common stock at the
beginning of the period.
(7) 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, realignment of 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 quarter ended June 30, 1996, totaling $1,716,000.
(8) PREFERRED STOCK PRIVATE PLACEMENT
On April 11, 1997, the Company issued 4,000 shares of Series A Convertible
Preferred Stock (the "Preferred Stock") at a price of $1,000 per share in a
private placement. The Company received net proceeds of approximately $3,752,000
from such private placement after the payment of fees and expenses associated
with such private placement. An annual dividend of 4% on such Preferred Stock
shall be paid quarterly in arrears either in Common Stock of the Company or cash
at the Company's discretion.
The Preferred Stock is convertible into shares of the Company's Common Stock at
a conversion price of 82% of the average closing bid price of the Company's
Common Stock over the ten-day trading period ending the day prior to conversion
(the "Conversion Price"). The Conversion Price may not exceed $8.1725 per share.
Twenty-five percent (25%) of the Preferred Stock is convertible into Common
Stock, at the election of the holder thereof, at the later of July 9, 1997 or
the date of effectiveness of the Registration Statement with the Securities and
Exchange Commission (the "Effective Date") and all necessary gaming regulatory
approvals. Twenty-five percent (25%) of the Preferred Stock is convertible 30
days after the Effective Date; (25%) of the Preferred Stock is convertible 60
days after the Effective Date; and the remaining (25%) of the Preferred Stock is
convertible 90 days after the Effective Date. All outstanding shares of
Preferred Stock will automatically be converted into Common Stock eleven months
following the Effective Date. A holder of Preferred Stock may not convert such
stock into Common Stock if, following such conversion, the holder beneficially
owns in excess of 4.9% of the Company's Common Stock.
A Registration Statement related to the Common Stock was filed by, and at the
expense of, the Company pursuant to obligations contained in a Registration
Rights Agreement dated April 10, 1997. The Effective Date of the Registration
Statement was July 28, 1997, and all necessary gaming regulatory approvals have
been received. In the three months ended September 30, 1997, 1,650 shares of the
Preferred Stock with a value of $1,000 per share, plus dividends accrued but not
paid as of the date of conversion, were converted into 433,940 shares of Common
Stock. On October 22, 1997, 2,350 shares of Preferred Stock, the remaining
balance, was converted into common stock.
Page 7 of 13
<PAGE> 8
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 gaming machines. The Company
manufactures, distributes and markets electronic blackjack (including
progressive blackjack), craps, roulette and Bonus StreakTM machines 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
its machines and the development of other products.
In February 1997, the Company received technical game approval for its
multi-station blackjack machine from Colorado regulatory authorities. The
Company, through its Colorado distributor, Vista Gaming Corporation, commenced
placing its blackjack games in Colorado casinos on a lease basis in late
February 1997. In February and March 1997, the Nevada Gaming Commission granted
the Company technical game approval of its Hot Shot DiceTM , BJ BlitzTM and
Lightning StrikeTM Roulette machines for use in Nevada. In May 1997, the Nevada
Gaming Commission granted the Company technical game approval of its Bonus
StreakTM specialty game. In the third quarter of 1997, the Company received
interim approval for its multi-station blackjack and roulette games for use in
the club markets of New South Wales, Australia.
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 sought or 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 has, and/or intends to apply for
necessary licenses or technical game approvals in key jurisdictions both
domestically and internationally where legalized electronic gaming is permitted.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996
For the three months ended September 30, 1997, the Company recorded income
attributable to common shareholders of $40,000, or $.01 per share, compared to a
loss of $1,159,000, or $.18 per share, recorded for the three months ended
September 30, 1996. The improved operating results were primarily attributable
to an increase in revenues and productivity gains. For the nine month periods
ended September 30, 1997 and 1996, the Company incurred net losses attributable
to common shareholders of $3,073,000, or $.47 per share, and $4,898,000, or $.77
per share, respectively. The operating losses were primarily attributable to low
sales volume and gross profit while expenses were incurred related to the
Company's continuing efforts to develop/enhance and license its products and
introduce those products into new markets. The larger loss in 1996 was primarily
attributable to a restructuring charge recorded in the second quarter. The
income/losses attributable to common shareholders for the 1997 periods includes
adjustments for preferred stock accretion and preferred stock dividends.
SALES, COST OF SALES AND GROSS PROFIT
Total sales for the quarter ended September 30, 1997, were $3,873,000 compared
to $733,000 recorded in the quarter ended September 30, 1996. The Company sold
62 games in the current period compared to 9 games in the prior year period.
Total sales for the nine months ended September 30, 1997, were $5,423,000
compared to $1,969,000 recorded in the nine months ended September 30, 1996. The
Company sold 86 games in the 1997 period compared to 24 games in the 1996
period. Sales for the three and nine month periods ended September 30, 1997,
included 40 and 54 games, respectively, sold to the Company's distributor in
Australia. In August 1997, the Company received an order from its distributor in
Australia for game shipments totaling $7.0 million, which were originally
planned for shipment through December 1997. The distributor subsequently revised
the scheduled shipment of the games to extend through the first quarter of 1998.
Sales will continue to be volatile while new jurisdictional licenses and/or
distribution agreements are obtained and marketing efforts successfully
performed.
Page 8 of 13
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996 - CONTINUED
The Company also recognized lease/participation revenues in 1997 from initial
placement of games in Colorado and Nevada casinos, subsequent to receiving
regulatory approval in those jurisdictions in the first half of 1997. In Nevada,
game placements under lease/participation agreements have been slower than
originally expected due to increasing customer resistance with participation
arrangements. The Company has expanded its marketing strategy in Nevada to
attract a greater number of casino operators by also offering its games for
sale.
The gross margin for the third quarter of 1997 was 39.2% compared to 28.2% for
the third quarter of 1996. The gross margin for the nine months ended September
30, 1997 was 31.6% compared to 29.2% for nine months ended September 30, 1996.
The higher gross margin in 1997 was primarily due to the increase in revenues
and spreading fixed overhead costs over the larger number of units sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense for the three months ended September
30, 1997 was $1,240,000 compared to $1,502,000 for the three months ended
September 30, 1996. The higher expense in the prior year third quarter was
primarily attributable to costs incurred in the start-up of manufacturing
operations in Reno, Nevada, after moving operations from Plymouth, Minnesota.
Selling, general and administrative expense for the nine months ended September
30, 1997 was $4,066,000, approximately equal to the nine months ended September
30, 1996.
RESTRUCTURING COSTS
In the quarter ended June 30, 1996, the Company recognized $1,716,000 in
restructuring costs, which included expenses relating to the Company's
relocation to Reno, management transition and product focus. All anticipated
expenses related to the relocation and restructuring were accrued in the quarter
ended June 30, 1996. As part of the restructuring, the Company recorded an
inventory obsolescence reserve on certain of its inventory.
INTEREST INCOME
In the quarter ended September 30, 1997, interest income was $48,000 compared to
$136,000 in the quarter ended September 30, 1996. For the nine months ended
September 30, 1997, interest income was $225,000 compared to $466,000 in the
nine months ended September 30, 1996. The decrease in interest income was due to
a decrease in notes receivable and investments in interest bearing accounts.
PREFERRED STOCK ACCRETION ADJUSTMENT
On April 11, 1997, the Company issued 4,000 shares of Series A Convertible
Preferred Stock (the "Preferred Stock") at a price of $1,000 per share in a
private placement (see Note 7 of Notes to Consolidated Condensed Financial
Statements). The Preferred Stock is convertible into shares of the Company's
Common Stock at a conversion price of 82% of the average closing bid price of
the Company's Common Stock over the ten-day trading period ending the day prior
to conversion. The intrinsic value of the beneficial conversion feature was
$878,048, which was accreted to Preferred Stock and charged against net income
or loss to arrive at net income or loss attributable to common shareholders over
the period in which the right to convert the Preferred Stock became vested. The
$878,048 value of the beneficial conversion feature was recognized in the amount
of $625,611 during the quarter ended June 30, 1997 and $252,437 during the
quarter ended September 30, 1997.
Page 9 of 13
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996 - CONTINUED
ACCUMULATED DEFICIT
The Company had an accumulated deficit of $12,632,000 as of September 30, 1997.
Due to the high degree of regulation and other factors of the business
environment in which the Company operates, the likelihood of future profitable
quarters cannot be predicted. Future results are highly dependent on the
Company's ability to, among other things, obtain the necessary licenses and/or
product approvals in various jurisdictions in order to expand its market base.
There can be no assurance as the time frame during which such anticipated
approvals may occur due to uncertain time periods involved in the regulatory
approval process. Due to the unique nature and prices 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 are obtained in certain major gaming
markets and appropriate marketing efforts can be performed in new jurisdictions.
The Company has experienced delays in acquiring certain gaming licenses and/or
product approvals in key jurisdictions. Future sales and earnings levels are
expected to continue to be negatively impacted until, among other things,
approvals are acquired in new jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $1,000,000 standby letter of credit/revolving credit
arrangement primarily to facilitate acquisition of components and supplies from
a foreign vendor. 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 at
prices ranging from $3.56 to $6.08 per share for total consideration of
$1,199,000. No shares were repurchased during the nine months ended September
30, 1996 or 1997.
As previously mentioned, on April 11, 1997, the Company issued 4,000 shares of
Series A Convertible Preferred Stock at a price of $1,000 per share in a private
placement for total proceeds of $4,000,000. The Company received net proceeds of
approximately $3,752,000 from such private placement after the payment of fees
and expenses associated with such private placement. An annual dividend of 4%
shall be paid quarterly in arrears either in Common Stock of the Company or cash
at the Company's discretion. In the three months ended September 30, 1997, 1,650
shares at a value of $1,000 per share, plus dividends accrued but not paid as of
the date of conversion, were converted into 433,940 shares of common stock.
Each share of Preferred Stock is convertible into shares of the Company's Common
Stock at a conversion price of 82% of the average closing bid price of the
Company's Common Stock over the ten-day trading period ending the day prior to
conversion (the "Conversion Price"). The Conversion Price may not exceed $8.1725
per share. Twenty-five percent (25%) of the Preferred Stock is convertible into
Common Stock, at the election of the holder thereof, at the later of July 9,
1997 or the date of effectiveness of the Registration Statement with the
Securities and Exchange Commission (the "Effective Date") and all necessary
gaming regulatory approvals. Twenty-five percent (25%) of the Preferred Stock is
convertible 30 days after the Effective Date; (25%) of the Preferred Stock is
convertible 60 days after the Effective Date; and the remaining (25%) of the
Preferred Stock is convertible 90 days
Page 10 of 13
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996 - CONTINUED
after the Effective Date. All outstanding shares of Preferred Stock will
automatically be converted into Common Stock eleven months following the
Effective Date. A holder of Preferred Stock may not convert such stock into
Common Stock if, following such conversion, the holder beneficially owns in
excess of 4.9% of the Company's Common Stock. A Registration Statement related
to the Common Stock was filed by, and at the expense of, the Company pursuant to
obligations contained in a Registration Rights Agreement dated April 10, 1997.
The Effective Date of the Registration Statement was July 28, 1997, and all
necessary gaming regulatory approvals have been received. As of October 22,
1997, all shares of Preferred Stock were converted into an aggregate of
1,058,696 shares of Common Stock.
The Company had $2,171,000 and $6,959,000 in cash and cash equivalents,
available-for-sale securities and restricted investments as of September 30,
1997 and December 31, 1996, respectively. The decrease in these resources is
primarily due to the purchase of additional inventory to meet forecast demand
for the Company's products and to fund the additional operating equipment
required for placement of games in casinos under lease/participation agreements.
The Company believes that its cash and cash equivalents, available-for-sale
securities and restricted investments, and additional financing capacity from
additional equity or debt arrangements will be sufficient to meet the Company's
current liquidity and capital requirements. These resources and cash generated
from operations are expected to meet the Company's long-term capital
requirements. The Company had no long-term debt as of September 30, 1997.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The foregoing Management's Discussion and Analysis contains various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Sections 21E of the Securities Exchange Act of
1934, as amended, which represent the Company's expectations or beliefs
concerning future events, including statements regarding the demand for the
Company's products in certain key jurisdictions such as Nevada and Australia. In
addition, statements containing expressions such as "believes," "anticipates,"
"hopeful" or "expects" used in the Company's periodic reports on Forms 10-K and
10-Q filed with the SEC are intended to identify forward looking statements. The
Company cautions that these and similar statements included in this report and
in previously filed periodic reports including reports filed on Forms 10-K and
10-Q are further qualified by important factors that could cause actual results
to differ materially from those in the forward-looking statement, including,
without limitation, the following: decline in demand for gaming products or
reduction in the growth rate of new markets; increased competition; the effect
of economic conditions; a decline in the market acceptability of gaming; ability
to obtain additional financing through leasing, equity or other arrangements;
political and economic instability in developing international markets; a
decrease in the desire of established casinos to upgrade machines in response to
added competition from newly constructed casinos; the loss of a distributor;
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; fluctuation
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.
Page 11 of 13
<PAGE> 12
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule - which is only submitted
electronically to the Securities and Exchange Commission for EDGAR
information purposes.
(b) Reports on Form 8-K
None.
Page 12 of 13
<PAGE> 13
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: November 12, 1997
Page 13 of 13
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,064
<SECURITIES> 1,107
<RECEIVABLES> 2,431
<ALLOWANCES> 0
<INVENTORY> 9,835
<CURRENT-ASSETS> 14,519
<PP&E> 2,627
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,683
<CURRENT-LIABILITIES> 2,660
<BONDS> 0
2,350
0
<COMMON> 69
<OTHER-SE> 14,604
<TOTAL-LIABILITY-AND-EQUITY> 19,683
<SALES> 5,423
<TOTAL-REVENUES> 5,423
<CGS> 3,707
<TOTAL-COSTS> 3,707
<OTHER-EXPENSES> 4,066
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (225)
<INCOME-PRETAX> (2,125)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,125)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,125)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
