<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 June 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 August 8, 1997 there were
6,476,515 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
June 30, 1997
<TABLE>
<S> <C> <C>
Part I: Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
June 30, 1997 (Unaudited) and December 31, 1996 3
Consolidated Condensed Statements of
Operations - for the three months and six
months ended June 30, 1997 and 1996
(Unaudited) 4
Consolidated Condensed Statements of Cash
Flows - for the three months and six months
ended June 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 2. Changes in Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
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>
June 30, December 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,969 $ 2,993
Available-for-sale securities 108 2,966
Restricted investments 1,000 1,000
Accounts receivable 1,173 483
Current portion of notes receivable 5 177
Inventories 7,931 4,729
Prepaid expenses and other 74 174
-------- --------
Total current assets 14,260 12,522
PROPERTY AND EQUIPMENT, NET 1,587 653
DEFERRED INCOME TAXES 720 720
INTANGIBLE ASSETS, NET 1,905 2,081
-------- --------
$ 18,472 $ 15,976
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,181 $ 246
Accrued liabilities 413 254
Notes payable 143 26
-------- --------
Total current liabilities 1,737 526
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, no par value, $100 stated value,
nonvoting, 4,000 shares authorized, 4,000 and 0 shares outstanding,
respectively 3,747 --
Common stock, $.01 par value, 100,000,000 shares authorized,
6,476,515 shares issued and outstanding 65 65
Additional paid-in capital 25,594 24,951
Accumulated deficit (12,671) (9,559)
Unrealized holding gain (loss) on available-for-sale securities -- (7)
-------- --------
Total stockholders' equity 16,735 15,450
-------- --------
$ 18,472 $ 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 Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
SALES $ 1,083 $ 730 $ 1,550 $ 1,236
COST OF SALES 953 495 1,352 869
------- ------- ------- -------
Gross profit 130 235 198 367
SELLING, GENERAL AND ADMINISTRATIVE 1,397 1,353 2,826 2,565
RESTRUCTURING COSTS -- 1,716 -- 1,716
------- ------- ------- -------
Loss from operations (1,267) (2,834) (2,628) (3,914)
INTEREST INCOME, NET 92 154 177 330
------- ------- ------- -------
LOSS BEFORE INCOME TAXES (1,175) (2,680) (2,451) (3,584)
Provision for income taxes -- 155 -- 155
------- ------- ------- -------
NET LOSS (1,175) (2,835) (2,451) (3,739)
Preferred stock accretion adjustment 626 -- 626 --
Preferred stock dividends 36 -- 36 --
------- ------- ------- -------
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(1,837) $(2,835) $(3,113) $(3,739)
======= ======= ======= =======
LOSS PER SHARE OF COMMON STOCK $ (0.28) $ (0.45) $ (0.48) $ (0.60)
======= ======= ======= =======
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 6,477 6,368 6,477 6,259
======= ======= ======= =======
</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>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,175) $(2,835) $(2,451) $(3,739)
Adjustments to reconcile net loss to
cash flows from operating activities -
Depreciation and amortization 179 203 317 322
Deferred income taxes -- 134 -- 134
Provision for inventory obsolescence -- -- 35 --
Loss on sale of assets -- 99 -- 99
Loss on sale of securities and investments -- 7 2 25
Provision for bad debts 39 78 39 78
Stock option compensation earned -- 3 -- 4
Changes in operating assets and liabilities (2,433) 980 (2,635) 1,706
------- ------- ------- -------
Cash flows from operating activities (3,390) (1,331) (4,693) (1,371)
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities -- (1,104) (1,043) (5,936)
Proceeds from sale of available-for-sale securities 2,145 1,500 3,906 6,204
Purchases of property and equipment (821) (40) (1,076) (279)
Proceeds from sale of property and equipment -- 45 -- 45
Payments on covenant not to compete -- (25) -- (42)
------- ------- ------- -------
Cash flows from investing activities 1,324 376 1,787 (8)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 137 -- 137 --
Payments on note payable (10) (1) (20) (2)
Net proceeds from sale of preferred stock 3,765 -- 3,765 --
Net proceeds from sale of common stock -- 443 -- 797
------- ------- ------- -------
Cash flows from financing activities 3,892 442 3,882 795
------- ------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,826 (513) 976 (584)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,143 826 2,993 897
------- ------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,969 $ 313 $ 3,969 $ 313
======= ======= ======= =======
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>
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
JUNE 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 (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, 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 key 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 performed in major gaming markets. Until all major
gaming market approvals are received and marketing efforts 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 six-month periods ended June 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 June 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 six-month
periods ended June 30, 1996 or 1997.
Page 6 of 13
<PAGE> 7
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1997
(UNAUDITED)
(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.
(6) 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, reorganization 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.
(7) 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 $3,765,000
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.
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 video gaming machines. The Company
manufactures, distributes and markets electronic blackjack, craps, roulette and
progressive blackjack 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. The Company has
commenced placing these games in Nevada casinos utilizing alternative terms and
pricing methods including lease "participation" basis wherein the Company
receives a percentage of the games' net win at percentages similar to those
received by other specialty game suppliers in casino locations. As of June 30,
1997, a total of 38 games were in place on a lease/participation basis. The cost
of these games is included in property and equipment.
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 approvals in key jurisdictions both domestically
and internationally where legalized electronic gaming is permitted.
The Company has exclusive or nonexclusive distributorship agreements with
Aristocrat Leisure Industries PTY LTD, Bally Gaming International, Drew
Distributing, Ludi S.F.M., S.A.M. Eurusa, Sodak Gaming Inc. and Vista Gaming
Corporation. Ludi is affiliated with Eurusa.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED JUNE 30, 1997 COMPARED TO JUNE 30, 1996
For the three and six month periods ended June 30, 1997, the Company incurred
losses attributable to common shareholders of $1,837,000, or $.28 per share, and
$3,113,000, or $.48 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 loss attributable to
common shareholders includes adjustments for preferred stock accretion and
preferred stock dividends. For the three and six month periods ended June 30,
1996, the Company incurred net losses 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, low sales volume and
expenses incurred in preparing the Company's products for introduction into new
markets.
SALES, COST OF SALES AND GROSS PROFIT
Total sales for the quarter ended June 30, 1997, were $1,083,000 compared to
$730,000 recorded in the quarter ended June 30, 1996. The Company sold 18 games
in the current period compared to 9 games in the prior year period. Total sales
for the six months ended June 30, 1997, were $1,550,000 compared to $1,236,000
recorded in the six months ended June 30, 1996. The Company sold 24 games in the
1997 period compared to 15 games in the 1996 period. The current quarter sales
included 14 games sold to the Company's distributor in Australia,
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 SIX MONTHS ENDED
JUNE 30, 1997 COMPARED TO JUNE 30, 1996 - CONTINUED
representing the Company's first sale into that market of provisionally approved
machines. The Company's distributor in Australia is pursuing final game approval
in that key jurisdiction.
Sales in Australia and other new markets will continue to be volatile while new
jurisdictional licenses and/or distribution agreements are obtained. Regulatory
timing delays in acquiring certain gaming licenses/approvals in key
jurisdictions have limited the markets available to sell the Company's products.
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 late in the first quarter of 1997.
The gross margin for the second quarter of 1997 was 12.0% compared to 32.2% for
the second quarter of 1996. The gross margin for the six months ended June 30,
1997 was 12.8% compared to 29.7% for six months ended June 30, 1996. The lower
gross margin in 1997 was primarily due to high production costs attributable to
product design revisions causing rework, production delays due to parts
shortages and costs associated with commencement of leasing games to casinos.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense for the three months ended June 30,
1997 was $1,397,000, an increase of $44,000 compared to the three months ended
June 30, 1996. Selling, general and administrative expense for the six months
ended June 30, 1997 increased $261,000 to $2,826,000 compared to the six months
ended June 30, 1996. These expense increases were primarily due to higher
product engineering and development expenses and licensing costs related to
introduction of the Company's products into new jurisdictions, and increased
sales and marketing expenses.
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. During the relocation process, the Company maintained
operations in both Reno and Plymouth for over two months, which resulted in
duplication of various expenses. Additionally, the Company incurred a loss upon
the sale and disposal of unusable office equipment, computer equipment and
leasehold improvements when moving out of the Plymouth office.
As part of the restructuring, 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 inventory.
INTEREST INCOME
In the quarter ended June 30, 1997, interest income was $92,000 compared to
$154,000 in the quarter ended June 30, 1996. For the six months ended June 30,
1997, interest income was $177,000 compared to $330,000 in the six months ended
June 30, 1996. The decrease in interest income was due to a decrease in notes
receivable and investments in interest bearing accounts.
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 SIX MONTHS ENDED
JUNE 30, 1997 COMPARED TO JUNE 30, 1996 - CONTINUED
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 is
$878,048, which is being 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
becomes vested. The $878,048 value of the beneficial conversion feature is being
recognized in the amount of $625,611 during the quarter ended June 30, 1997 and
$252,437 during the quarter ended September 30, 1997.
ACCUMULATED DEFICIT
The Company had an accumulated deficit of $12,671,000 as of June 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 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 approvals are acquired in
key 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 six months ended June 30, 1996
or 1997.
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
$3,765,000 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.
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 SIX MONTHS ENDED
JUNE 30, 1997 COMPARED TO JUNE 30, 1996 - CONTINUED
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 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.
The Company had $5,077,000 and $6,959,000 in cash and cash equivalents,
available-for-sale securities and restricted investments as of June 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 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 June 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 Company's timetable
of game approval in 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; 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 on 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 2. CHANGES IN SECURITIES
On April 11, 1997, the Company issued 4,000 shares of Series A
Convertible Preferred Stock at a price of $1,000 per share. There were
no underwriters involved in the transaction. The purchasers were two
institutional investors who are "accredited investors" as such term is
defined in Rule 501(a) of Regulation D promulgated under the Securities
Act of 1933, as amended ("Regulation D"). Following payment of legal,
financial consulting and accounting fees, the Company received net
proceeds of approximately $3,765,000. The Company relied upon Rule 506
of Regulation D as the exception for such private placement.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 30, 1997, Innovative Gaming Corporation of America held its
annual meeting of shareholders. Of the 6,476,515 shares of common stock
eligible to vote, 5,867,482 were present and entitled to vote. The
following were the votes on the matters presented:
1. The votes cast for the three (3) directors to serve until the next
annual meeting of shareholders were:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
<S> <C> <C>
Edward G. Stevenson 5,660,173 207,309
Lyle Berman 5,658,873 208,609
Paul A. Bible 5,660,173 207,309
</TABLE>
2. The votes cast to adopt the Company's 1997 Director Stock Option
plan were:
<TABLE>
<CAPTION>
Votes For Votes Against Votes Withheld
<S> <C> <C>
3,076,653 390,144 71,373
</TABLE>
3. 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 under the plan by 250,000 shares were:
<TABLE>
<CAPTION>
Votes For Votes Against Votes Withheld
<S> <C> <C>
2,932,752 655,350 83,733
</TABLE>
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: August 12, 1997
Page 13 of 13
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------ --------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,969
<SECURITIES> 1,108
<RECEIVABLES> 1,178
<ALLOWANCES> 0
<INVENTORY> 7,931
<CURRENT-ASSETS> 14,260
<PP&E> 1,587
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,472
<CURRENT-LIABILITIES> 1,737
<BONDS> 0
3,747
0
<COMMON> 65
<OTHER-SE> 12,923
<TOTAL-LIABILITY-AND-EQUITY> 18,472
<SALES> 1,550
<TOTAL-REVENUES> 1,550
<CGS> 1,352
<TOTAL-COSTS> 1,352
<OTHER-EXPENSES> 2,826
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (177)
<INCOME-PRETAX> (2,451)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,451)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,451)
<EPS-PRIMARY> (.48)
<EPS-DILUTED> (.48)
</TABLE>
