<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, 1998
[ ] 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
- --------------------------------------------------------------------------------
(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 7, 1998 there were
7,535,211 shares of Common Stock, $0.01 par value, outstanding.
Page 1 of 14
<PAGE> 2
INNOVATIVE GAMING CORPORATION OF AMERICA
Form 10-Q Index
June 30, 1998
<TABLE>
<S> <C> <C>
Part I: Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
June 30, 1998 (Unaudited) and December 31, 1997 3
Consolidated Condensed Statements of Operations -
for the three and six months ended
June 30, 1998 and 1997 (Unaudited) 4
Consolidated Condensed Statements of Cash Flows -
for the six months ended
June 30, 1998 and 1997 (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 13
Item 2. Changes in Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
Page 2 of 14
<PAGE> 3
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,754 $ 518
Restricted investments 800 1,000
Accounts receivable 2,394 1,929
Current portion of notes receivable 595 276
Inventories 9,698 10,191
Prepaid expenses and other 248 159
------------ ------------
Total current assets 17,489 14,073
Notes receivable, less current portion 567 552
Property and equipment, net 1,426 2,107
Deferred income taxes 720 720
Intangible assets, net 1,553 1,729
------------ ------------
TOTAL ASSETS $ 21,755 $ 19,181
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 421 $ 568
Accrued liabilities 448 423
Notes payable - current portion 534 322
Customer deposits 58 157
------------ ------------
Total current liabilities 1,461 1,470
Notes payable - net of current portion 1,081 509
------------ ------------
Total liabilities 2,542 1,979
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series B convertible preferred stock, no par value, $100 stated value,
nonvoting, 4,000 shares authorized,
3,000 and 0 shares outstanding, respectively 2,844 --
Common stock, $.01 par value, 100,000,000 shares authorized,
7,535,211 shares issued and outstanding 75 75
Additional paid-in capital 29,678 29,575
Accumulated deficit (13,384) (12,448)
------------ ------------
Total stockholders' equity 19,213 17,202
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,755 $ 19,181
============ ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
Page 3 of 14
<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,
---------------------------- ----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 3,955 $ 1,083 $ 6,204 $ 1,550
Cost of sales 2,892 953 4,519 1,352
---------- ---------- ---------- ----------
Gross profit 1,063 130 1,685 198
Selling, General and Administrative 1,300 1,397 2,514 2,826
---------- ---------- ---------- ----------
Loss from operations (237) (1,267) (829) (2,628)
Interest income, net 19 92 50 177
---------- ---------- ---------- ----------
Net loss (218) (1,175) (779) (2,451)
Preferred stock accretion adjustment 141 626 141 626
Preferred stock dividends 16 36 16 36
---------- ---------- ---------- ----------
Net loss attributable to common shareholders ($ 375) ($ 1,837) ($ 936) ($ 3,113)
========== ========== ========== ==========
Basic - Loss per share of common stock ($ 0.05) ($ 0.28) ($ 0.12) ($ 0.48)
========== ========== ========== ==========
Weighted average
common shares outstanding 7,535 6,477 7,535 6,477
========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
Page 4 of 14
<PAGE> 5
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 779) ($ 2,451)
Adjustments to reconcile net loss to
cash flows from operating activities -
Depreciation and amortization 468 317
Provision for inventory obsolescence 158 35
Loss on sale of securities and investments -- 2
Provision for bad debts -- 39
Changes in operating assets and liabilities (789) (2,635)
---------- ----------
Cash flows (used in) operating activities (942) (4,693)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities and investments -- (1,043)
Proceeds from sale of securities and investments -- 3,906
Inventory returned from (capitalized for use in) gaming operations 572 (852)
Purchases of property and equipment (184) (224)
---------- ----------
Cash flows provided from investing activities 388 1,787
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 910 137
Payments on notes payable (126) (20)
Net proceeds from sale of preferred stock 2,806 3,765
---------- ----------
Cash flows provided from financing activities 3,590 3,882
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 3,036 976
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,518 2,993
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,554 $ 3,969
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest $ 23 --
========== ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
Page 5 of 14
<PAGE> 6
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998
(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, 1997. 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 six months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998.
(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. Additionally, there is no assurance that the Company's products will be
accepted in the marketplace upon obtaining regulatory approvals. As a result,
the Company's quarterly results may be volatile until all product approvals have
been obtained, appropriate marketing efforts have been successfully performed
and the Company's products are accepted in major gaming markets.
The Company purchases certain key electronic components, which are not available
from other sources, from a Japanese supplier at a negotiated fixed price for a
period extending into mid-1999.
(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, who was
Chairman of the Board of the Company until June 24, 1998, is a principal
shareholder and Chairman of the Board of GCI, and was Chief Executive Officer
from October 1991 through March 1998. Mr. Berman continues to serve on the Board
of Directors of the Company. Under an existing machine purchase agreement, GCI
may purchase up to an aggregate of 125 of the Company's blackjack, craps and
roulette 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. Under an agreement between the Company and GCI, used multi-player
machines which GCI previously purchased from the Company may be placed on
consignment with the Company to be refurbished and sold into legal markets. The
proceeds from sales of up to three of the consignment games may be applied to
the purchase of one new Bonus Streak game from the Company and minimum proceeds
of $5,000 must be credited to GCI for each game sold by the Company. There are
potentially 31 such used multi-player games which GCI may submit the Company for
sale under the consignment agreement. The Company made no machine sales to GCI
during the six-month period ended June 30, 1997 and sales of six Bonus StreakTM
games and no multi-player machine sales to GCI during the six-month period ended
June 30, 1998.
(4) 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 $10,294,000 as of December 31, 1997. These losses, if
Page 6 of 14
<PAGE> 7
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998
(UNAUDITED)
not used, begin to expire in 2009 through 2012. 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.
(5) EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share"-(SFAS No. 128). SFAS No. 128 is effective for periods
ending after December 15, 1997, and replaces previously reported earnings per
share with "basic" and "diluted" earnings per share. The earnings per share data
for the periods presented is based on weighted average common shares
outstanding, which is equivalent to "basic" earnings per share as calculated
under SFAS No. 128. Diluted earnings per share is not presented because the
resulting earnings per share would be antidilutive for each period reported.
(6) FINANCING ARRANGEMENT
In March 1998, Innovative Gaming, Inc. entered into a loan commitment securing
$2 million from a third party lender. The initial funding of approximately
$910,000 was completed on April 13, 1998. The loan is payable in 36 equal
installments including interest paid in arrears at a rate of 12.06 percent. This
financing is secured by certain of the Company's long-term receivables and a
corporate guarantee from IGCA. Additional funding under this arrangement is
available through December 1, 1998. The Company's borrowing capacity under this
arrangement is dependent upon the level of receivables generated through "bucket
sales" agreements.
(7) PREFERRED STOCK PRIVATE PLACEMENT
On May 13, 1998, the Company issued 3,000 shares of Series B Convertible
Preferred Stock (the "Preferred Stock") at a price of $1,000 per share in a
private placement for total proceeds of $3,000,000. The Company received net
proceeds of approximately $2,806,000 after the payment of fees and expenses
associated with such private placement. An annual dividend of 4% shall be paid
quarterly in arrears either in Preferred Stock of the Company or cash at the
Company's discretion.
Each share of Preferred Stock is convertible into shares of the Company's Common
Stock at a conversion price of 91% of the three consecutive day average of the
lowest closing bid price of the Company's Common Stock over the twenty-day
trading period ending the day prior to conversion (the "Conversion Price"). The
Conversion Price may not exceed 135 % of the ten day average of the closing bid
price of the Company's Common Stock ending on May 12, 1998. The maximum number
of shares of Common Stock that may be issued upon conversion is 1,505,000. The
Company has the right to redeem the Preferred Stock at 115% of par in cash
beginning July 13, 1998. Twenty-five percent (25%) of the Preferred Stock is
convertible into Common Stock, at the election of the holder thereof, at the
earlier of August 14, 1998 or the date of effectiveness of the Registration
Statement with the Securities and Exchange Commission (the "Effective Date"). If
the Company's Registration Statement is not declared effective with the
Securities and Exchange Commission by September 10, 1998, the Company is
required to pay the holders of Preferred Stock one percent of the aggregate
subscription price paid by such holders. The Company must receive all necessary
gaming regulatory approvals prior to the effectiveness of the Registration
Statement. 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 eighteen
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 May 13, 1998.
Page 7 of 14
<PAGE> 8
INNOVATIVE GAMING CORPORATION OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998
(UNAUDITED)
The 9% beneficial conversion feature is accounted for as an additional Preferred
Stock dividend, which was determined on the date the Preferred Stock was issued.
The total value of the beneficial conversion feature or dividend is $296,703,
which reduces income available for holders of the Company's Common Stock and
therefore reduces earnings per share on a pro rata basis over the period from
issuance of the Preferred Stock to the earliest conversion date. Income
available to holders of Common Stock will be reduced by approximately $140,934,
$143,406 and $12,363 during the second, third and fourth quarters of 1998,
respectively.
(8) NOTE RECEIVABLE
On June 19, 1998, the Company entered into an agreement loaning $300,000 to a
third party gaming equipment developer. The agreement was subsequently amended
and the loan increased to $400,000 on July 20, 1998. The note bears interest at
10% annually, and is to be repaid in 12 equal monthly payments commencing
October 19, 1998, and is personally guaranteed by the President and CEO of the
subject company.
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 September 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 is continuing expansion of its customer markets by submitting
applications for licensing in key jurisdictions and, where licensed, submitting
its products for technical approval. In May 1998, the Company submitted an
application to the New Jersey Casino Control Commission for a casino service
industry license. Also in May 1998, the Company submitted its Bonus Streak
specialty game to the Mississippi Gaming Commission Lab for technical review.
The Company has also submitted gaming supplier registration applications in
major Canadian markets and appointed a sales agent for British Columbia,
Ontario, Quebec, Alberta and the Atlantic Provinces. In July 1998, the Company's
Lightning Strike Roulette game received technical approval from the Quebec
Gaming Laboratory. The game was subsequently placed on field trial at one of the
Quebec casinos operated by the casino operating arm of Loto Quebec. Also in July
1998, a temporary license was granted in Alberta pending review of the
application for a permanent license and the Company's Bonus Streak games were
placed on field trial by the Alberta Gaming and Liquor Commission.
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.
Page 8 of 14
<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, 1998 COMPARED TO JUNE 30, 1997
For the three and six months ended June 30, 1998, the Company recorded losses
attributable to common shareholders of $375,000, or $.05 per share and $936,000,
or $.12 per share, respectively, compared to $1,837,000, or $.28 per share and
$3,113,000, or $.48 per share, for the three and six months ended June 30, 1997,
respectively. The loss attributable to common shareholders for each period
included adjustments for preferred stock accretion and preferred stock
dividends. The improved operating results in 1998 were primarily attributable to
increased revenues, productivity gains and lower charges for the preferred stock
accretion and dividends. The operating loss in the prior year was 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.
SALES, COST OF SALES AND GROSS PROFIT
Total sales for the quarter ended June 30, 1998, were $3,955,000 compared to
$1,083,000 recorded in the quarter ended June 30, 1997. The Company sold 81
games in the 1998 period compared to 18 games in the prior year period. Total
sales for the six months ended June 30, 1998 were $6,204,000 compared to
$1,550,000 recorded in the six months ended June 30, 1997. Game sales totaled
124 for the 1998 period compared to 24 games sold in the 1997 period. Sales for
the three and six month periods ended June 30, 1998, included 53 and 72 games,
respectively, sold to the Company's distributor in Australia, while no sales
were made to this customer in the comparable 1997 period. Sales will continue to
be volatile until, among other things, new jurisdictional licenses and/or
distribution agreements are obtained, marketing efforts are successfully
performed and the Company's products are accepted by the market place. In
addition, the Company believes that sales to its Australian distributor will
continue to account for a significant portion of the Company's 1998 sales, but
they are expected to decline from the level recorded in the second quarter of
1998. Disruption in this agreement could have a material adverse affect on the
Company's financial position and 1998 results of operations and cash flows.
The Company also recognized lease/participation revenues in 1998 attributable to
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. To date game placements in Nevada have been fewer than anticipated by
management.
The gross margin for the second quarter of 1998 was 26.9% compared to 12.0% for
the second quarter of 1997. The gross margin for the six months ended June 30,
1998 was 27.2% compared to 12.8% for the six months ended June 30, 1997. The
higher gross margin in 1998 was primarily due to the increase in revenues and
spreading fixed overhead costs over the larger number of units produced, design
changes to reduce production costs and purchasing materials domestically at more
competitive prices than were previously paid to foreign sources.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense for the three months ended June 30,
1998 was $1,300,000 compared to $1,397,000 for the three months ended June 30,
1997. This decrease in expense was due primarily to lower product engineering
and development costs and reserves for bad debts. Selling, general and
administrative expense for the six months ended June 30, 1998 was $2,514,000
compared to $2,826,000 for the six months ended June 30, 1997. This favorable
variance was primarily due to the absence of expenses incurred in the first
quarter of 1997 related to establishing the production operation, which were
charged to operating expense. In 1998, with full production operations
implemented, the costs were included in cost of sales as labor and overhead
included in the products assembled and sold.
Page 9 of 14
<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, 1998 COMPARED TO JUNE 30, 1997 - CONTINUED
INTEREST INCOME
In the quarter ended June 30, 1998, net interest income was $19,000 compared to
$92,000 in the quarter ended June 30, 1997. In the six months ended June 30,
1998, net interest income was $50,000 compared to $177,000 in the six months
ended June 30, 1997. The decrease in net interest income was due to a decrease
in investments in interest bearing accounts and interest expense incurred on
increased debt.
ACCUMULATED DEFICIT
The Company had an accumulated deficit of $13,384,000 as of June 30, 1998. 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 and
customer acceptance of its products. There can be no assurance as to the time
frame during which such anticipated approvals may occur due to uncertain time
periods involved in the regulatory approval process. 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. Operating results
are also affected by seasonal factors in certain markets, cycles of casino
expansions and equipment replacements, changing technology and the expansion or
addition of gaming markets.
As a result of these and other factors, the Company expects quarterly results to
be volatile until licenses and approvals are obtained in certain major gaming
markets, appropriate marketing efforts can be performed in new jurisdictions and
the Company's products are accepted by the market place. 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 received in
new jurisdictions and the Company's products are accepted by the market place.
The Company has applied to be licensed in various jurisdictions, both foreign
and domestic, which allow gaming, and has or will apply for technical game
approval of its products in such jurisdictions after appropriate licenses have
been granted by regulatory authorities.
LIQUIDITY AND CAPITAL RESOURCES
In March 1998, Innovative Gaming, Inc., a wholly-owned subsidiary of the
Company, entered into a loan commitment securing $2 million from a third party
lender. The initial funding of approximately $910,000 was completed on April 13,
1998. The loan is payable in 36 equal installments including interest paid in
arrears at a rate of 12.06 percent. This financing is secured by certain of the
Company's long-term receivables and a corporate guarantee from IGCA. Additional
funding under this arrangement is available through December 1, 1998. The
Company's borrowing capacity under this arrangement is dependent upon the level
of receivables generated through "bucket sales" agreements.
On May 13, 1998, the Company issued 3,000 shares of Series B Convertible
Preferred Stock (the "Preferred Stock") at a price of $1,000 per share in a
private placement for total proceeds of $3,000,000. The Company received net
proceeds of approximately $2,806,000 after the payment of fees and expenses
associated with such private placement. An annual dividend of 4% shall be paid
quarterly in arrears either in Preferred Stock of the Company or cash at the
Company's discretion.
Page 10 of 14
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
Each share of Preferred Stock is convertible into shares of the Company's Common
Stock at a conversion price of 91% of the three consecutive day average of the
lowest closing bid price of the Company's Common Stock over the twenty-day
trading period ending the day prior to conversion (the "Conversion Price"). The
Conversion Price may not exceed 135 % of the ten day average of the closing bid
price of the Company's Common Stock ending on May 12, 1998. The maximum number
of shares of Common Stock that may be issued upon conversion is 1,505,000. The
Company has the right to redeem the Preferred Stock at 115% of par in cash
beginning July 13, 1998. Twenty-five percent (25%) of the Preferred Stock is
convertible into Common Stock, at the election of the holder thereof, at the
earlier of August 14, 1998 or the date of effectiveness of the Registration
Statement with the Securities and Exchange Commission (the "Effective Date"). If
the Company's Registration Statement is not declared effective with the
Securities and Exchange Commission by September 10, 1998, the Company is
required to pay the holders of Preferred Stock one percent of the aggregate
subscription price paid by such holders. The Company must receive all necessary
gaming regulatory approvals prior to the effectiveness of the Registration
Statement. 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 eighteen
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 May 13, 1998.
The 9% beneficial conversion feature is accounted for as an additional Preferred
Stock dividend, which was determined on the date the Preferred Stock was issued.
The total value of the beneficial conversion feature or dividend is $296,703,
which reduces income available for holders of the Company's Common Stock and
therefore reduces earnings per share on a pro rata basis over the period from
issuance of the Preferred Stock to the earliest conversion date. Income
available to holders of Common Stock will be reduced by approximately $140,934,
$143,406 and $12,363 during the second, third and fourth quarters of 1998,
respectively.
On June 19, 1998, the Company entered into an agreement loaning $300,000 to a
third party gaming equipment developer. The agreement was subsequently amended
and the loan increased to $400,000 on July 20, 1998. The note bears interest at
10% annually, and is to be repaid in 12 equal monthly payments commencing
October 19, 1998, and is personally guaranteed by the President and CEO of the
subject company.
As of June 30, 1998, the Company had a $800,000 standby letter of credit
primarily to facilitate acquisition of components and supplies from a foreign
vendor. As of June 30, 1998, no amount was outstanding pursuant to this
facility. This facility is collateralized by short-term investments of the
Company.
The Company had $3,754,000 and $518,000 in cash and cash equivalents as of June
30, 1998 and December 31, 1997, respectively. As mentioned above, the Company
secured a loan commitment in March 1998 and obtained initial funding of
approximately $910,000 under the agreement in April 1998, and in May 1998
completed a private placement of $3 million in convertible preferred stock with
net proceeds of approximately $2,806,000. The Company believes that its cash and
cash equivalents, restricted investments, and existing debt arrangements will be
sufficient to meet the Company's immediate liquidity and capital requirements.
Long-term capital requirements are expected to be fulfilled through cash flows
from operations and, if necessary, additional debt and equity financings. No
assurance can be given that the Company can obtain, or obtain on terms
acceptable to the Company, such additional debt and equity financing. The
Company had long-term debt of $1,081,000 as of June 30, 1998.
Page 11 of 14
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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. Investors are referred to the
full discussion of risks and uncertainties associated with forward-looking
statements contained in the Company's report on Form 10-K filed with the
Securities and Exchange Commission for the fiscal year ended December 31, 1997.
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 12 of 14
<PAGE> 13
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
On May 13, 1998, the Company issued 3,000 shares of Series Convertible
Preferred Stock at a price of $1,000 per share. There were no
underwriters involved in the transaction. The purchaser was an
institutional investor who is an "accredited investor" 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 $2,806,000. 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 29, 1998, Innovative Gaming Corporation of America held its
annual meeting of shareholders. Of the 7,535,211 shares of common stock
eligible to vote, 6,161,292 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 6,092,334 68,958
Lyle Berman 6,081,234 80,058
Paul A. Bible 6,093,084 68,208
</TABLE>
Item 5. OTHER INFORMATION
Discretionary Proxy Voting Authority/Shareholder Proposals
On May 21, 1998, the Securities and Exchange Commission adopted an
amendment to Rule 14a-4, as promulgated under the Securities Exchange
Act of 1934. The amendment to Rule 14a-4(c)(1) governs the Company's use
of its discretionary proxy voting authority with respect to a
shareholder proposal which the shareholder has not sought to include in
the Company's proxy statement. The new amendment provides that if a
proponent of a proposal fails to notify the Company at least 45 days
prior to the month and day of mailing of the prior year's proxy
statement, then the management proxies will be allowed to use their
discretionary voting authority when the proposal is raised at the
meeting, without any discussion of the matter in the proxy statement.
With respect to the Company's 1999 Annual Meeting of Shareholders, if
the Company is not provided notice of a shareholder proposal, which the
shareholder has not previously sought to include in the Company's proxy
statement, by March 10, 1999, the management proxies will be allowed to
use their discretionary authority as outlined above.
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 13 of 14
<PAGE> 14
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INNOVATIVE GAMING CORPORATION OF AMERICA
/s/ Scott Shackelton
-----------------------------
Scott Shackelton
Chief Financial Officer
(Principal Accounting Officer)
Date: August 13, 1998
Page 14 of 14
<PAGE> 15
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,754
<SECURITIES> 800
<RECEIVABLES> 2,989
<ALLOWANCES> 0
<INVENTORY> 9,698
<CURRENT-ASSETS> 17,489
<PP&E> 1,426
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,755
<CURRENT-LIABILITIES> 1,461
<BONDS> 0
2,844
0
<COMMON> 75
<OTHER-SE> 16,294
<TOTAL-LIABILITY-AND-EQUITY> 21,755
<SALES> 6,204
<TOTAL-REVENUES> 6,204
<CGS> 4,519
<TOTAL-COSTS> 4,519
<OTHER-EXPENSES> 2,514
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (50)
<INCOME-PRETAX> (779)
<INCOME-TAX> 0
<INCOME-CONTINUING> (779)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (779)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
