1
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------------
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
(Commission File No.) 0-22498
--------------------------------------------------
ACRES GAMING INCORPORATED
(Exact name of Registrant as specified in its charter)
NEVADA 88-0206560
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
--------------------------------------------------
7115 AMIGO, SUITE 150, LAS VEGAS, NEVADA 89119
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(702) 263-7588
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant computed by reference to the price at which the
common equity was sold, or the average bid and asked prices of such common
equity, as of August 31, 2000 was $11,919,719. For purposes of this computation,
all executive officers and directors of the Registrant have been deemed
affiliates. This shall not be deemed an admission that such persons are
affiliates.
The number of shares outstanding of the Registrant's Common Stock, par value
$.01 per share, as of August 31, 2000 was 8,916,931 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference the Company's Proxy Statement to be filed in
connection with the Company's 2000 Annual Meeting of Stockholders to be held
December 15, 2000.
2
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS................................................................ 1
General............................................................... 1
The Market............................................................ 1
Products.............................................................. 1
Communication Protocol................................................ 4
Research and Development.............................................. 4
Customers............................................................. 4
Marketing............................................................. 5
Production and Manufacturing.......................................... 5
Patents............................................................... 5
Competition........................................................... 6
Government Regulation................................................. 7
Employees............................................................. 10
Forward-Looking Statements............................................ 10
ITEM 2. PROPERTIES.............................................................. 11
ITEM 3. LEGAL PROCEEDINGS....................................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................... 13
EXECUTIVE OFFICERS OF REGISTRANT........................................ 13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................ 14
ITEM 6. SELECTED FINANCIAL DATA................................................. 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 15
FACTORS THAT MAY AFFECT FUTURE RESULTS.................................. 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................. 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.................................................... 36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................... 36
ITEM 11. EXECUTIVE COMPENSATION.................................................. 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......... 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................... 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.................. 37
SIGNATURES ............................................................. 38
3
PART I
ITEM 1. BUSINESS
GENERAL
The Company develops, manufactures and markets electronic game
promotions, equipment and games for the casino gaming industry. The Company's
principal products are based on its proprietary Acres Bonusing Technology(TM)
and are designed to enhance casino profitability by providing entertainment and
incentives to players of gaming machines. Acres Bonusing Technology improves the
efficiency of bonus and incentive programs currently offered by many casinos,
and makes possible bonus and incentive programs that have not previously been
offered.
THE MARKET
In recent years, legalized gaming has significantly expanded in the
United States. As part of this expansion, casino-style gaming has become an
increasingly important component of the "leisure time" industry. The expansion
resulted from the introduction of riverboat-style gaming in the Midwestern
United States, the legalization of Native American casino gaming in California
in March 2000, the growth of Native American casino gaming in other states and
growth in the established Nevada market.
Casino gaming has also grown rapidly worldwide, including in Australia,
Canada, Europe and Africa, as well as in parts of the former Soviet Union and
South America. The Company estimates that approximately 880,000 casino-style
gaming machines are currently in use throughout the world, including
approximately 440,000 in the United States.
The Company believes that increased competition among casinos will lead
to increased demand for game promotions and entertainment enhancements of the
type offered by the Company. New or expanding casinos represent a significant
part of the potential market for the Company's products. Existing casinos also
represent a significant potential market as casino managers seek to maintain or
improve casino profitability by employing bonusing and other promotional
programs for gaming machines.
PRODUCTS
Acres Bonusing Technology was conceived to provide the gaming industry
with a system to enable the design and delivery of bonuses and other promotions
directly to players at the point of play and at the time of play. The Company
currently offers bonusing products directly to casinos in the form of standard
and customized bonusing promotions that can be applied casino-wide or to a
limited number of gaming machines. In addition to bonusing products, the Company
also offers slot accounting, player tracking, coinless wagering and visual
analysis modules that may be purchased and installed individually or as
components of an integrated system. The Company offers products primarily in two
major categories:
1) Casino-wide, fully integrated applications offered as the Acres
Advantage(TM)
2) Bonus Games comprised of single or a linked group of traditional
slot machines that activate a secondary "bonus" game when certain
milestones are reached on the traditional games.
ACRES ADVANTAGE
An Acres Advantage installation in a casino includes electronic hardware
installed in the gaming machines, microprocessor-based controllers for groups of
gaming machines and computers and software that gather data, operate bonuses and
generate reports for casino management. The Acres Advantage is based on a
Microsoft(R) SQL Server(TM) version 7.0 platform and is designed to take
advantage of future improvements in Microsoft's SQL technology. The Acres
Advantage system has more than enough capacity to serve the world's largest
casinos.
1
4
Various components of the Acres Advantage casino-wide system are
installed in high profile casinos such as Mandalay Resort Group's Mandalay Bay
and MotorCity Casino located in Las Vegas, Nevada and Detroit, Michigan,
respectively and MGM Mirage's Bellagio and Beau Rivage located in Las Vegas,
Nevada and Biloxi, Mississippi, respectively. International Acres Advantage
installations include Star City in Sydney Australia and Crown South Bank Casino
in Melbourne, Australia. The Company is currently installing Acres Advantage in
MonteCasino in Johannesburg, South Africa.
Components of the Acres Advantage and the software used in many popular
gaming machines that support the Acres Advantage have been approved by the
Nevada Gaming Control Board and regulatory authorities for several other states
and for two states in Australia and approval is pending in the Gauteng Province
in South Africa. (See "Communication Protocol" and "Government Regulation").
The Acres Advantage casino-wide system currently includes Wizard(TM)
slot accounting, Merlin(TM) graphical floor analysis, Prophet(TM) player
tracking, Coinless Transit(TM) cashless wagering and Acres Bonusing(TM). The
Company has developed and installed certain sub-modules of the Guardian(TM)
cage, credit and pit management software module and expects to complete the
entire Guardian product in the fall of 2000.
Wizard Slot Accounting. Wizard slot accounting products collect play
data about each gaming device. This information is transmitted to a central
computer system where it is immediately available to the casino management, and
where it is stored for future analysis and reporting. The equipment is
configured to monitor all slot machine functions including coins deposited in
the machine, coins paid out of the machine, coins available to "drop", number of
games played, jackpot occurrences and other machine functions.
Merlin Graphical Floor Analysis. This software product provides a visual
rendition of the casino's slot accounting database, graphically projected as a
map of the casino floor, which allows casino management to graphically see the
numerical statistics of the casino operations. This product allows for quick
recognition of the play and service activity occurring at each gaming machine on
the casino floor.
Prophet Player Tracking. This module builds upon a casino's accounting
system to gather and record information about individual players, much like an
airline's "frequent flyer" program. Each customer who elects to enroll in the
casino's "players club" is given a plastic card that uniquely identifies the
player. The player inserts the card into an electronic card reader on the gaming
machine and the system automatically records the player's level of play. Casino
management can use this information to provide special incentives and rewards to
individual players or groups of players in order to increase player loyalty.
Acres Advantage is designed to further enhance player loyalty by requiring the
use of a player tracking card to qualify for certain bonuses.
Guardian Cage, Credit and Pit Management. Scheduled for full
availability in the fall of 2000, certain functions of the Guardian module have
been completed and installed at a casino location. The completed product
provides ability to track and manage the casino's cash, chips and credit
vouchers for table games and the cashiers' cage. Guardian will also provide
automated mechanisms for enabling players to obtain credit through online or
in-house credit facilities and will use a touch screen mechanism for inputting
players' table games activity into the Prophet player tracking module.
Coinless Transit. This product allows players club members to transfer
game credits from one gaming machine to another or to a redemption kiosk at
which the game credits can be cashed out. By reducing the number of cash
replenishments, or machine fills, that are required when slot players cash out
their winnings, this feature reduces the casino's floor staffing expenses.
Players also receive greater convenience by eliminating delays caused when
machines run out of coins.
The following bonuses and promotions are contained in the Acres Bonusing
module of Acres Advantage. Customers may purchase and implement these bonuses
individually or collectively.
Xtra Credit(TM). This patent pending feature is used to award special
incentive bonuses to players club members. With just a few keystrokes, casino
personnel can establish Xtra Credit bonuses to provide incentives for
2
5
players club members to attend the casino's special promotional events or to
celebrate the player's special events such as birthdays or anniversaries at the
casino. Xtra Credit bonus awards can dramatically reduce the casino's existing
cash voucher mailing and redemption costs and provide a wide variety of
marketing opportunities for the casino to retain customers.
Xtra Credit may also be used by other bonus applications as an award
mechanism to allow the players to redeem their points earned or bonus awards won
for free games on the gaming machines. In this application of the product, an
award given to the player is posted to the player's club account rather than the
gaming machine's credit meter. The amount of the award is shown on the gaming
machine's player tracking display. The amount is reduced as the player uses the
award to make a wager. Nevada gaming regulators have ruled that amounts wagered
by the player through the use of Xtra Credits are excluded for gaming tax
purposes.
PointPlay(TM). This feature allows casino players to earn points for
slot play in a manner consistent with a standard player tracking system where
the casino can configure the rates at which points are earned and values at
which they are redeemed. PointPlay allows players to redeem their points for
free games directly at the gaming machine.
ReturnPlay(TM). To encourage players to return to the casino at a later
date, the ReturnPlay feature awards a bonus to players that earn a predetermined
number of slot club points. The ReturnPlay bonus is automatically redeemed when
the player returns to the casino at a future date and inserts their players club
card into the game.
Personal Progressive(R). Although the vast majority of gaming machine
players never experience the excitement of winning a progressive jackpot, the
Personal Progressive bonus creates an individual progressive jackpot for each
players club member that only he or she can win. The Personal Progressive
jackpot grows as the customer plays, which adds excitement and provides an
incentive to continue to visit the casino.
Appreciation Time(TM). Casino personnel may reward players with multiple
jackpots anywhere from two to nine times the normal payout for winning
combinations. This promotion can be used to reward a casino's best customers or
can be used to improve play in certain areas or at slow times of the day.
Appreciation Time can be applied to the whole casino or only to a specific bank
of gaming machines. This bonus provides greater control over appreciation gifts
by insuring the gifts go to customers who are actually playing the games.
Lucky Coin(R). These progressive jackpot bonuses are granted to the
player inserting the "nth coin" where the frequency of "n" and the funding
parameters of the bonus are established by the casino. Awards can be created
that vary between small jackpots every few minutes and life-changing jackpots
every few weeks. These bonuses can be applied to any number of gaming machines
(from one machine to every machine in the casino) and any one gaming machine may
be tied to multiple bonuses. These promotions also have the ability to alert
players with custom audio sequences just before the bonus is awarded. The casino
may elect to award smaller Celebration Prizes(TM) prizes to some or all of the
players in the casino at the time the Lucky Coin bonus is awarded. Celebration
Prizes may be awarded to players club members only or in varying amounts to
players club VIPs, regular players club members and non-members.
BONUS GAMES
The Company develops proprietary bonus games that it operates on a
revenue-sharing basis.
The Company has four bonus games that are approved for distribution in
Nevada. Two of these games, Money Mint(R) and Add `Em Up(TM), have been
installed under revenue-sharing arrangements in casinos in Las Vegas. All of the
Company's bonus games incorporate full-color, high-resolution plasma screens
over one or more traditional slot machines. Dynamic animated sequences are
displayed on the plasma screens to attract, instruct, entertain and communicate
bonus awards to the players. State-of-the-art sound packages complement the
animation.
The Money Mint bonus game incorporates a linked bank of four to six
traditional slot machines, or base games. Players of these base games are
selected to play the secondary "bonus" game when a Money Mint symbol
3
6
appears in the base game's payline. The bonus game, viewed on a single overhead
plasma display, includes animated minting equipment and allows the player to
spin a bonus wheel for a guaranteed award.
The Add `Em Up bonus game is comprised of a single slot machine under a
single overhead plasma display picturing three spinning slot machine reels. An
Add `Em Up symbol on the base game's payline allows the player to play the bonus
game by spinning the video reels of the bonus game. The dollar amounts on the
video reels are added together to arrive at the bonus game award. Every play on
the secondary bonus game results in a bonus being awarded to the slot player.
The Company jointly developed a Three Stooges(TM) themed bonus game with
Shuffle Master, Inc. This bonus game incorporates the novelty of the famous
comedy trio where players reaching the bonus round win cash bonuses as vintage
Three Stooges video clips are displayed on overhead and in-machine video
displays.
COMMUNICATION PROTOCOL
The Company and International Game Technology ("IGT") have jointly
developed a communication protocol known as SAS4. The protocol is used to
communicate instructions and messages between Acres Bonusing and gaming
machines. The communication of these instructions and messages is essential to
the operation of bonuses. Although the Company and IGT have agreed that the
Company can use SAS4 in connection with certain installations, IGT has stated
that the Company does not have an unrestricted right to use SAS4 with non-IGT
games. The Company believes that it has joint ownership of the protocol and the
ability to use and license the protocol. In 2000, IGT released an updated
version of the protocol known as SAS5, which includes some additional coinless
wagering protocol messages. SAS5 has been offered to the Company under terms IGT
states are equivalent to the terms offered to other gaming equipment suppliers.
The Company has not yet adopted the SAS5 protocol.
The Company is a founding member of the Gaming Manufacturers Association
("GAMMA") which, among other things, is jointly developing a standardized
communication protocol that will be licensed to all GAMMA members. This protocol
may be a viable alternative to SAS4 but this new protocol is not available for
implementation at this time.
RESEARCH AND DEVELOPMENT
The Company devotes significant resources to the development of new
products and the enhancement of existing products. The Company had 42 full-time
employees involved in research and development as of August 31, 2000. Research
and development expenses were $5.1 million, $6.4 million and $5.2 million in the
years ended June 30, 2000, 1999 and 1998, respectively.
CUSTOMERS
Large casinos with more than 1,000 gaming machines represent the
principal market for Acres Advantage. Casinos of this size are generally large
enough to support a professional management staff capable of using the
analytical and promotional tools provided by Acres Advantage. This market
includes many casinos in Las Vegas, Reno and Laughlin, Nevada, and Atlantic
City, New Jersey, as well as a number of Native American and riverboat casinos
in various other states and a number of casinos in Australia, South Africa and
Europe.
Sales to Crown Casino, MotorCity Casino, Star City and MonteCasino
amounted to 37 percent, 23 percent, 19 percent and 10 percent of the Company's
net revenues in 2000, respectively. The sale to Mandalay Bay accounted for 51
percent of the Company's net revenues in 1999. Sales to IGT accounted for 23
percent and 75 percent of the Company's net revenues in 1999 and 1998,
respectively. Sales of components to Anchor Gaming ("Anchor"), primarily related
to their Wheel of Gold bonusing game, accounted for 18 percent of the Company's
net revenues in 1998. The Company's backlog of orders for its products were
approximately $6.7 million, $9.6 million and $2.1 million as of June 30, 2000,
1999 and 1998, respectively. Backlog, however, may not be a meaningful
indication of future sales. Sales to the Company's customers are made pursuant
to purchase orders or sales agreements for specific system installations and
products are often delivered within several months of receipt of the order. The
4
7
Company does not have any ongoing long-term sales contracts. The Company's
revenues and results of operations may be materially affected, in the near term,
by the receipt or loss of any one order.
MARKETING
The Company currently markets its products and provides service to
customers from its headquarters in Las Vegas, Nevada and its office in
Corvallis, Oregon.
PRODUCTION AND MANUFACTURING
Through fiscal 1999, the Company's manufacturing operation consisted
primarily of the assembly of electronic circuit boards and cables from
components purchased from third parties. In July 1999, in conjunction with the
relocation of the Company's headquarters to Las Vegas, Nevada, the Company began
outsourcing almost all of the hardware components of its products. The circuit
boards are manufactured and assembled to the Company's specifications by
contract manufacturers. A key component of each product is computer software
that is copied onto electronic chips by contract manufacturers. The Company
believes that its component parts and services can be obtained from multiple
sources and therefore that it is not overly reliant on any single vendor.
Company engineers conduct the development, testing and maintenance of the
software.
PATENTS
The Company has applied for United States and foreign patents on certain
features of its product line, and may in the future apply for other United
States patents and corresponding foreign patents. The following patents have
been issued to the Company:
- ---------------------------------------------------------------------------------------------------
ISSUE DATE PATENT EXAMPLES OF PATENT PROTECTION
NUMBER
- ---------------------------------------------------------------------------------------------------
August 1997 5,655,961 This patent protects the implementation of a bonus pay table in a
gaming machine and the implementation of a "Bonus Pool". A Bonus
Pool is configurable by casino management to control the total
amount of special bonuses paid, thus making it possible for such
promotions to be kept within a casino's budget.
- ---------------------------------------------------------------------------------------------------
December 1997 5,702,304 This patent protects the Company's illuminated card reader, a
player tracking system component, which indicates the point of
card insertion and communicates bonus eligibility to the players
and communicates game and player status to the casino through the
use of various colors.
- ---------------------------------------------------------------------------------------------------
April 1998 5,741,183 This patent protects a method of identifying and categorizing
individual gaming devices that are connected to a casino's
computer network. It includes a memory device that allows for the
identification and coding of each piece of gaming equipment with
its individual configurations even when they are disconnected or
moved to another location within the casino.
- ---------------------------------------------------------------------------------------------------
May 1998 5,752,882 This patent protects a method of operating gaming machines in
which the casino is able to pre-select which games participate in
a variety of bonusing promotions such as linked progressive
jackpots or linked random bonuses.
- ---------------------------------------------------------------------------------------------------
October 1998 5,820,459 This patent protects a networked gaming bonusing system that
enables a casino to pre-select which games participate in bonusing
promotions.
- ---------------------------------------------------------------------------------------------------
November 1998 5,836,817 This patent protects a method of operating gaming machines in
which the casino is able to pre-select which games participate in
a variety of bonusing promotions such as linked progressive jackpots
or linked random bonuses.
- ---------------------------------------------------------------------------------------------------
5
8
- ---------------------------------------------------------------------------------------------------
December 1998 5,854,542 This patent protects the Company's fluorescent flashing and dimming
lamps that are placed on gaming machines and operate to indicate
promotional features.
- ---------------------------------------------------------------------------------------------------
March 1999 5,876,284 This patent protects a method and means for implementing jackpot
bonuses on networked gaming devices such as the Company's multiple
jackpot time bonus.
- ---------------------------------------------------------------------------------------------------
June 1999 SA99/4107 This South African patent protects a method for awarding variable
bonus awards to gaming machines over a network.
- ---------------------------------------------------------------------------------------------------
October 1999 SA98/03158 This South African patent protects a method and means for promoting
play on a network of gaming machines.
- ---------------------------------------------------------------------------------------------------
December 1999 SA99/2942 This South African patent protects the method and means for
implementing video in a secondary game in response to player
interaction in a primary game.
- ---------------------------------------------------------------------------------------------------
December 1999 SA99/2943 This South African patent protects the method of transferring credits
from one gaming machine to another.
- ---------------------------------------------------------------------------------------------------
December 1999 SA99/2945 This South African patent protects a method for crediting a player
of a gaming machine.
- ---------------------------------------------------------------------------------------------------
December 1999 SA99/2946 This South African patent protects the ability to use bonus tokens
on networked gaming devices.
- ---------------------------------------------------------------------------------------------------
December 1999 6,008,784 This patent protects electronic displays with a curved face.
- ---------------------------------------------------------------------------------------------------
March 2000 6,043,615 This patent protects the Company's fluorescent flashing and
dimming lamps that are placed on gaming machines and operate to
indicate promotional features.
- ---------------------------------------------------------------------------------------------------
No assurance can be given that any patents that are applied for will be
issued or, if issued, will provide any significant competitive advantage to the
Company. In addition, the Company has a variety of other intellectual property
that it treats as trade secrets. The Company takes reasonable steps to protect
its intellectual property but it is possible that others may make unauthorized
use of such intellectual property and the Company may or may not be able to
prevent such use. (See "Legal Proceedings").
COMPETITION
The Company believes that its products compete principally on the basis
of functionality, price and service. The Company believes that its proprietary
Acres Bonusing Technology provides a competitive advantage. In addition to the
recently issued patents discussed above, the Company has several other patents
pending which cover many additional aspects of its Acres Bonusing Technology.
Several other companies have products that compete with the slot
accounting and player tracking modules of the Acres Advantage product line. Each
of these competitors has financial and other resources that are greater than
those of the Company. IGT, the largest manufacturer of gaming machines in the
world, has an additional competitive advantage in selling its slot accounting
and player tracking systems to its existing gaming machine customer base.
Although several competitors claim to have the ability to offer bonusing
products with functionality similar to Acres Advantage, the Company is aware of
significant installations of those products only by Casino Data Systems ("CDS")
and Mikohn Gaming Corporation ("Mikohn"). The Company believes that CDS and
Mikohn's initial bonusing products, which have been installed in several
casinos, infringe the Company's recently issued patents and will infringe
certain of the Company's pending patents, if issued. The Company has notified
CDS, Mikohn and their customers of the patent infringement and initiated patent
infringement litigation. (See "Legal Proceedings").
While the Company attempts to differentiate its bonusing products from
progressive jackpot systems, the Company's bonusing products compete for casino
floor space with other companies' progressive jackpot systems. The market for
progressive jackpot systems is served primarily by Mikohn and CDS.
The Company's bonus game product line competes with the products of
major gaming machine manufacturers and resellers including IGT, Anchor, Williams
Gaming Inc. and Bally Gaming. Each of these
6
9
competitors has financial and other resources that are greater than those of the
Company. Several smaller competitors, some of which have financial and other
resources that are greater than those of the Company, also offer games that
compete with the Company's bonus game product line.
GOVERNMENT REGULATION
The Company is subject to the licensing and regulatory control of the
gaming authorities in each jurisdiction in which its products are sold or used
by persons licensed to conduct gaming activities. Although licensing of the
Company may not be required in a jurisdiction, its products generally must be
approved by the regulatory authority for use in each licensed location within
the jurisdiction.
REGULATION OF PRODUCTS
The Company has complied with the approval process and has either been
issued a license, temporary license, certificate, approval or other permit
allowing it to sell its products in Arizona, California, Colorado, Connecticut,
Indiana, Louisiana, Michigan, Mississippi, Missouri, Nevada, New Jersey, North
Dakota, Wisconsin, Victoria and New South Wales, Australia and Gauteng Province,
South Africa. Not all of the Company's products have been approved for sale in
all jurisdictions. In most jurisdictions, a model of the gaming equipment that
the Company seeks to place in operation must be submitted for testing by an
approved testing laboratory prior to use in any gaming operation. To obtain such
approval, the Company must submit, at its expense, each model of its equipment
to the specified laboratory for testing, examination and analysis. Upon
completion of the testing, the laboratory submits a report of its findings and
conclusions to the applicable gaming authority, together with any
recommendations for modifications to the equipment or the addition of equipment
or devices to such gaming equipment.
The Company intends to seek approval of its bonusing technology for use
in any other jurisdiction in which a sale arises. Failure of the Company to
obtain approval for the use of bonusing technology by a gaming licensee in a
jurisdiction would prevent the use of such technology at the licensee's location
and also will prevent any other gaming licensee within that jurisdiction from
using the products until the appropriate approvals have been obtained or
requirements complied with.
CORPORATE REGULATION
Nevada
The manufacture, sale and distribution of gaming devices are subject to:
(i) the Nevada Gaming Control Act and the regulations promulgated thereunder
(collectively, the "Nevada Act"); and (ii) various local regulation. Generally,
gaming activities may not be conducted in Nevada unless licenses are obtained
from the Nevada Gaming Commission (the "Nevada Commission"), the Nevada State
Gaming Control Board (the "Nevada Board"), and appropriate county and municipal
licensing agencies. The Nevada Commission, the Nevada Board and the various
county and municipal licensing agencies are collectively referred to as the
"Nevada Gaming Authorities".
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy that are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) to provide a source of state and local revenues
through taxation and licensing fees. Change in such laws, regulations and
procedures could have an adverse effect on the Company.
On December 21, 1995, the Nevada Commission registered the Company as a
publicly traded corporation ("Registered Corporation") and granted
manufacturer's and distributor's licenses to the Company's wholly-owned
7
10
subsidiary, AGI Distribution, Inc. ("AGID"), a Nevada corporation. The
Commission also granted AGID a nonrestricted license as the operator of a slot
machine route ("Slot Route License"). As a Registered Corporation, the Company
is required to periodically submit detailed financial and operating reports to
the Nevada Commission and furnish any other information that the Nevada
Commission may require.
AGID's manufacturer's, distributor's and Slot Route Licenses require the
periodic payment of fees and taxes and are not transferable. No person may
become a stockholder of, or receive any percentage of profits from, AGID without
first obtaining licenses and approvals from the Nevada Gaming Authorities. The
Company and AGID have obtained from the Nevada Gaming Authorities the various
registrations, approvals, permits and licenses required in order to engage in
gaming activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or AGID in
order to determine whether such individual is suitable or should be licensed as
a business associate of a gaming licensee. Officers, directors and certain key
employees of AGID must file applications with the Nevada Gaming Authorities and
are required to be licensed by the Nevada Gaming Authorities. Officers,
directors and key employees of the Company who are actively and directly
involved in the gaming activities of AGID may be required to be licensed or
found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities
may deny an application for licensing or a finding of suitability for any cause
they deem reasonable. A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Changes in licensed
positions must be reported to the Nevada Gaming Authorities and in addition to
their authority to deny an application for a finding of suitability or
licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or
key employee unsuitable for licensing or to continue having a relationship with
the Company or AGID, the companies involved would have to sever all
relationships with such person. In addition, the Nevada Commission may require
the Company or AGID to terminate the employment of any person who refuses to
file appropriate applications. Determinations of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.
The Company and AGID are required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities and similar financing transactions by AGID, must be
reported to or approved by the Nevada Commission.
If it was determined that the Nevada Act was violated by the Company or
AGID, the gaming registrations, licenses and approvals they hold could be
limited, conditioned, suspended or revoked, subject to compliance with certain
statutory and regulatory procedures. In addition, AGID, the Company and the
persons involved could be subject to substantial fines for each separate
violation of the Nevada Act at the discretion of the Nevada Commission.
Limitation, conditioning or suspension of any gaming license could (and
revocation of any gaming license would) materially adversely affect AGID and the
Company.
Any beneficial holder of the Company's voting securities, regardless of
the number of shares owned, may be required to file an application, be
investigated and have his suitability as a beneficial holder of the Company's
voting securities determined if the Nevada Commission has reason to believe that
such ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of the
Company's voting securities to report the acquisition to the Nevada Commission.
The Nevada Act requires that beneficial owners of more than 10% of the Company's
voting securities apply to the Nevada Commission for a finding of suitability
within thirty days after the Chairman of the Nevada Board mails a written notice
requiring such filing. Under certain circumstances, an "institutional investor",
as defined in the Nevada Act, which acquires more than 10% but not more than 15%
of the Company's voting securities, may apply to the Nevada Commission for a
waiver of such finding of suitability if such institutional investor holds the
voting securities for investment purposes only. An institutional investor shall
not be
8
11
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Company, any change in the corporate charter, bylaws, management,
policies or operations of the Company or any of its gaming affiliates, or any
other action which the Nevada Commission finds to be inconsistent with holding
the Company's voting securities for investment purposes only. Activities that
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent. If
the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or
a license within thirty days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable. The
same restrictions apply to a record owner if the record owner, after request,
fails to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company or AGID, the
Company: (i) pays that person any dividend or interest upon voting securities of
the Company; (ii) allows that person to exercise, directly or indirectly, any
voting right conferred through securities held by that person; (iii) pays
remuneration in any form to that person for services rendered or otherwise; or
(iv) fails to pursue all lawful efforts to require such unsuitable person to
relinquish his voting securities for cash at fair market value. Additionally,
the Clark County Liquor and Gaming Licensing Board has taken the position that
it has the authority to approve all persons owning or controlling the stock of
any corporation controlling a gaming license.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file an application, be
investigated and found suitable to own the debt security of a Registered
Corporation. If the Nevada Commission determines that a person is unsuitable to
own such security, then pursuant to the Nevada Act, the Registered Corporation
can be sanctioned, including the loss of its approvals, if without the prior
approval of the Nevada Commission, it: (i) pays to the unsuitable person any
dividend, interest, or any distribution whatsoever; (ii) recognizes any voting
right by such unsuitable person in connection with such securities; (iii) pays
the unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
The Company is required to maintain a current stock ledger in Nevada
that may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder may
be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such disclosure may be grounds for finding
the record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates to bear a
legend indicating that such securities are subject to the Nevada Act. However,
to date, the Nevada Commission has not imposed such a requirement on the
Company.
The Company may not make a public offering of any securities without the
prior approval of the Nevada Commission if the securities or the proceeds
therefrom are intended to be used to construct, acquire or finance gaming
facilities in Nevada or to retire or extend obligations incurred for such
purposes. Such approval, if given, does not constitute a finding, recommendation
or approval by the Nevada Commission or the Nevada Board as to the accuracy or
adequacy of the prospectus or the investment merits of the securities. Any
representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock
or asset acquisitions, management or consulting agreements or any act or conduct
by a person whereby he obtains control, may not occur without the prior approval
of the Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must
9
12
satisfy the Nevada Board and the Nevada Commission concerning a variety of
stringent standards prior to assuming control of such Registered Corporation.
The Nevada Commission may also require controlling stockholders, officers,
directors and other persons having a material relationship or involvement with
the entity proposing to acquire control, to be investigated and licensed as part
of the approval process of the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licensees and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environmental for the orderly governance of
corporate affairs. Approvals are, in certain circumstances, required from the
Nevada Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Company's
board of directors in response to a tender offer made directly to the Registered
Corporation's stockholders for the purpose of acquiring control of the
Registered Corporation.
Any person who is licensed, required to be licensed, registered,
required to be registered or is under common control with such persons
(collectively, "Licensees"), and who proposes to become involved in a gaming
venture outside of Nevada, is required to deposit with the Nevada Board and,
thereafter, maintain a revolving fund in the amount of $10,000 to pay the
expenses of investigation by the Nevada Board of their participation in such
foreign gaming. The revolving fund is subject to increase or decrease in the
discretion of the Nevada Commission. Thereafter, Licensees are also required to
comply with certain reporting requirements imposed by the Nevada Act. Licensees
are also subject to disciplinary action by the Nevada Commission if they
knowingly violate any laws of the foreign jurisdiction pertaining to the foreign
gaming operation, fail to conduct the foreign gaming operation in accordance
with the standards of honesty and integrity required of Nevada gaming
operations, engage in activities that are harmful to the State of Nevada or its
ability to collect gaming taxes and fees, or employ a person in the foreign
operation who has been denied a license or a finding of suitability in Nevada on
the ground of personal unsuitability.
Other Jurisdictions
Other jurisdictions in which the Company's products are sold or used
require various licenses, permits and approvals in connection with such sale or
use, typically involving restrictions similar in most respects to those of
Nevada. The Company has complied with the approval process for use of the
products it has sold in these other jurisdictions, including the receipt of
manufacturer and distributor licenses, permits or certificates in each such
state. Not all of the Company's products have been approved for sale in all
jurisdictions. No assurances can be given that such required licenses, permits,
certificates or approvals will be given or renewed in the future.
EMPLOYEES
At August 31, 2000, the Company had 76 full-time employees of whom 42
were involved in research and development, 10 in customer service and support, 7
in material control, 5 in sales and marketing and 12 in administration and
management. None of the Company's employees are represented by a labor union or
covered by a collective bargaining agreement. The Company has not experienced
any work stoppages and believes that its employee relations are good.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K contain "forward-looking"
information (as defined in Section 27A of the Securities Act of 1933, as
amended) that involves risks and uncertainties that may cause actual results to
differ materially from those predicted in the forward-looking statements.
Forward-looking statements can be identified by their use of such verbs as
expects, anticipates, believes or similar verbs or conjugations of such verbs.
If any of the Company's assumptions on which the statements are based prove
incorrect or should unanticipated circumstances
10
13
arise, the Company's actual results could materially differ from those
anticipated by such forward-looking statements.
Forward-looking statements relate to the Company's plans and
expectations as to: future performance; growth opportunities; expansion;
competition; communication protocols; agreement with IGT; sales backlog;
adequacy of cash and equivalents balances to fund the Company's operations;
compliance with debt covenants and ability to draw on line of credit;
anticipated future sales; revenue recognition; cash collections; scheduled
product installation dates; new product development and introduction; patent
protection and anticipated effects of the Year 2000.
Such plans and expectations involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking statements.
For a discussion of these risk factors, see "Factors that May Affect Future
Results". In addition, from time to time, the Company may issue other
forward-looking statements. Any forward-looking statements, including other
written or oral forward-looking statements made by the Company or persons acting
on its behalf, should be considered in light of these risk factors and other
risk factors referred to from time to time in the Company's press releases,
periodic reports or communications with stockholders.
ITEM 2. PROPERTIES
In July 1999, the Company's administrative headquarters was relocated
and combined with the Company's sales, marketing, customer service and new
product development office in Las Vegas, Nevada at 7115 Amigo Street, Suite 150,
Las Vegas, Nevada. This facility encompasses approximately 31,500 square feet.
The lease commenced on June 15, 1998 and will expire on June 15, 2003. The base
rent is approximately $38,000 per month, plus $6,000 per month for property
taxes, building insurance and common area maintenance.
In September 1999, the Company's leased facility at 815 N.W. Ninth
Street, Corvallis, Oregon was reduced to approximately 11,000 square feet from
approximately 39,000 square feet. The new lease commenced on September 1, 1999
and will expire on February 28, 2002. The base rent for the total facility is
approximately $15,000 per month, which includes property taxes, building
insurance and common area maintenance.
The Company owns manufacturing and engineering equipment that it uses in
its assembly operations and research and development efforts. Such equipment is
available from a variety of sources and the Company believes that it currently
owns or can readily acquire equipment required for its current and anticipated
levels of operations.
ITEM 3. LEGAL PROCEEDINGS
Two related lawsuits have been filed in the U.S. District Court for the
District of Nevada that allege violation of the federal securities laws by the
Company and its executive officers. Those suits have been consolidated into one
combined action that received class certification for a class consisting of the
purchasers of the Company's Common Stock during the period from March 26, 1997
to December 11, 1997. No trial date or discovery cut-off date has been set. The
defense of this suit has been tendered to and accepted by the Company's
directors and officer's insurance carrier subject to a $1.0 million policy
limit. In September 2000, the Company and the plaintiffs agreed in principle to
settle the litigation, subject to final documentation and approval by the Court.
The Company will pay $660,000 in cash, of which approximately $200,000 will come
from the Company's insurance carrier, and issue warrants to purchase one million
shares of the Company's Common Stock exercisable over a 10 year period at a
price of $2.50 per share. The value of the warrants is approximately $1.6
million. The Company recorded a one-time charge of $2.0 million in the year
ending June 30, 2000, to account for the settlement.
Two lawsuits have been filed regarding ownership of the Wheel of Gold
("WOG") technology that is the subject of two patents (the "WOG Patents") that
have been assigned to Anchor. In the first suit, now pending in U.S. District
Court for the District of Nevada, Anchor, Anchor Coin, and Spin for Cash Wide
Area Progressive Joint Venture, Anchor's joint venture with IGT, (together, the
"Plaintiffs") have brought patent infringement, breach of warranty and breach of
contract actions against the Company, based on the WOG Patents and the Company's
supply agreement with Anchor. Plaintiffs seek to enjoin the Company from
infringing the WOG Patents and from
11
14
competing with it in the sale of wheel styled bonus gaming devices. The
Plaintiffs also seek unspecified compensatory damages, treble damages, costs of
suit, and attorney's fees. The Company has denied the allegations and has filed
a counterclaim in that proceeding for a declaration that the Company is the sole
or joint owner of the WOG Patents. The defense of this suit was tendered to and
initially accepted by the Company's former professional errors and omissions
insurance carrier. In April 2000, the Company's former insurance carrier denied
coverage. In May 2000, the Company filed suit, now pending in the U.S. District
Court of Oregon, against its former insurance carrier claiming breach of
insurance contract. In June 2000, the Company's former insurance carrier filed
suit in U.S. District Court of Nevada for declaratory relief requesting the
Court find that: no coverage is provided for the claim; if coverage is provided
it should be provided by the prior insurance carrier; and the Company must
reimburse the insurance carrier for nominal amounts paid under its insurance
policy to defend the Company.
In the second action, now pending in U.S. District Court for the
District of Nevada, the Company has filed suit against Anchor and Spin for Cash
Wide Area Progressive Joint Venture alleging that Anchor wrongfully used the
Company's intellectual property to obtain the WOG Patents, that the filing of
the patent applications was fraudulently concealed from the Company, that Anchor
was unjustly enriched by retaining the benefits of the Company's technology
without compensating the Company and that Anchor breached fiduciary duties owed
to the Company. The Company seeks $40 million in compensatory damages, treble
damages, costs of suit, and attorney's fees.
Four related lawsuits have been filed in the U.S. District Court for the
District of Nevada resulting from the Company's efforts to enforce its patent
rights: Mikohn Gaming Corp. v. Acres Gaming Incorporated ("Suit I"); Mikohn
Gaming Corp. v. Acres Gaming Incorporated ("Suit II"); Acres Gaming Incorporated
v. Mikohn Gaming Corp., Casino Data Systems, New York New York Hotel and Casino
and Sunset Station Hotel and Casino ("Suit III"); and Acres Gaming Incorporated
v. Mikohn Gaming Corporation ("Suit IV"). Suits I, II and III have now been
consolidated. The Company denies all asserted allegations and intends to
vigorously defend itself and its intellectual property rights. No trial date has
been set.
In Suit I, Mikohn asserted a claim for declaratory judgment of
noninfringement and invalidity of U.S. Patent No. 5,655,961 ("the `961 patent")
owned by the Company. Mikohn also asserted claims for "intentional interference
with a business relationship," "intentional interference with prospective
business relationship," "unfair competition: trade libel" and "unfair
competition: disparagement." Mikohn's complaint sought unspecified damages,
punitive damages, attorney's fees, interest on the alleged damages, an
injunction against the conduct alleged in the complaint, and a declaration that
the `961 patent is invalid and not infringed by Mikohn or its customers. The
Company has filed a counterclaim for infringement of the `961 patent, and has
denied Mikohn's other allegations.
In Suit II, Mikohn asserted a claim for declaratory judgment of
noninfringement and invalidity of U.S. Patent No. 5,741,183 ("the `183 patent")
owned by the Company. Mikohn's complaint sought no damages, but requested an
award of attorney's fees and a declaration that the `183 patent is invalid and
not infringed by Mikohn. Because the Company is not aware of any infringement by
Mikohn, the Court granted summary judgment on the noninfringement claim.
Mikohn's invalidity claim is still pending.
In Suit III, the Company sued Mikohn, CDS, New York New York Hotel and
Casino and Sunset Station Hotel and Casino for infringement of the Company's
U.S. Patent No. 5,752,882 ("the `882 patent"). Mikohn counterclaimed in Suit
III, seeking a declaratory judgment of invalidity and noninfringement of the
`882 patent and asserted claims for "false and misleading representations",
"interference with prospective economic relations," "unfair competition: trade
libel" and "unfair competition: disparagement." Mikohn's counterclaims seek
unspecified damages, as well as a trebling of the damages, punitive damages,
attorney's fees and an injunction against the Company's "continuing to commit
the unlawful acts" alleged in the counterclaims.
In Suit IV, the Company sued Mikohn and CDS for infringement of the
Company's U.S. Patent Nos. 5,820,459 and 5,836,817. The defendants
counterclaimed for declaratory judgment of noninfringement and invalidity of the
patents. In addition, CDS counterclaimed for: "patent misuse"; "Sherman Act
Section 2 -- attempted monopolization"; "spoliation of evidence"; "unfair
competition -- intentional interference with prospective economic
12
15
advantage" and "misappropriation of trade secrets". CDS's counterclaims seek
unspecified damages, as well as a trebling of the damages, punitive damages, and
attorney's fees.
In separate but related actions, the Company has filed suit, now pending
in the 9th Circuit Court of Appeals, against its former general liability
insurance carrier for breach of insurance contract related to the cost of
defense in Suit I and II. In addition, in May 2000, the Company filed suit, now
pending in U.S. District Court for the District of Oregon, against another
former general liability insurance carrier for breach of insurance contract
related to the cost of defense of CDS's counterclaims in Suit IV. In June 2000,
the insurance carrier filed suit in U.S. District Court of Nevada for
declaratory relief requesting the Court find that: no coverage is provided for
the claim; if coverage is provided it should be provided by the prior insurance
company; and the Company must reimburse the insurance carrier for nominal
amounts paid under its insurance policy to defend the Company.
Unfavorable outcomes in one or more of these suits could have a material
adverse effect on the Company.
The Company from time to time is involved in other various legal
proceedings arising in the normal course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter
ended June 30, 2000.
EXECUTIVE OFFICERS OF REGISTRANT
As of August 31, 2000, the executive officers of the Company were as set
forth below:
EXECUTIVE
NAME AGE POSITIONS AND OFFICES OFFICER SINCE
---- --- --------------------- -------------
Floyd W. Glisson 53 Chairman and Chief 1998
Executive Officer
Richard J. Schneider 43 President and Chief 1999
Operating Officer
Reed M. Alewel 36 Senior Vice President, 1999
Chief Financial Officer,
Treasurer and Secretary
There are no family relationships among executive officers of the
Company.
Floyd W. Glisson became Chairman of the Board of Directors in April 2000
and has served as the Chief Executive Officer since July 1998. Mr. Glisson also
served as President from July 1998 to April 2000. Mr. Glisson was senior vice
president, finance and administration and chief financial officer for ConAgra
Grocery Products Company, a unit of ConAgra, Inc., from June 1993 to July 1998.
Prior to June 1993, Mr. Glisson was senior vice president, finance and
administration and chief financial officer of Hunt Wesson, Inc., a food
processing company that is a subsidiary of ConAgra, Inc. In addition to normal
staff functions, Mr. Glisson was also responsible for Food Service and
International Operations.
Reed M. Alewel joined the Company in October 1996 as Controller and
Assistant Secretary. He was elected Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary in July 1999. In November 1999, Mr. Alewel was
elected Secretary and in July 2000, was promoted to Senior Vice President. Mr.
Alewel was the manager of financial planning and analysis for the American
Italian Pasta Company, a food manufacturing company, from May 1992 to October
1996. Mr. Alewel is a Certified Public Accountant.
13
16
Richard J. Schneider joined the Company in December 1997 as the Vice
President of Game Development. In July 1999, Mr. Schneider was elected Vice
President and Chief Operating Officer. In April 2000, Mr. Schneider was elected
President. From September 1995 to December 1997, Mr. Schneider was the vice
president of game engineering for CDS. From 1992 to 1995, Mr. Schneider was the
director of engineering for United Coin Machine Company.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq SmallCap Market under
the symbol "AGAM". The following table sets forth, for the periods indicated,
the range of high, low and end of period market prices for the Company's common
stock as reported by the Nasdaq SmallCap Market.
MARKET PRICE PER SHARE
----------------------
LOW HIGH END OF PERIOD
--- ---- -------------
FISCAL YEAR ENDED JUNE 30, 2000:
First quarter..................... $1.44 $2.19 $1.50
Second quarter.................... .88 1.56 .91
Third quarter..................... .91 2.88 1.63
Fourth quarter.................... .88 1.94 1.75
FISCAL YEAR ENDED JUNE 30, 1999:
First quarter..................... $3.19 $6.00 $3.19
Second quarter.................... 1.63 4.38 2.44
Third quarter..................... 2.00 3.13 2.75
Fourth quarter.................... 1.06 3.50 2.00
The Company estimates that there are approximately 3,375 beneficial
owners of the Company's common stock.
The Company has never paid or declared any cash dividends on its common
stock and does not intend to pay cash dividends on its common stock in the
foreseeable future. The Company expects to retain its earnings to finance the
development and expansion of its business. The payment by the Company of
dividends, if any, on its common stock in the future is subject to the
discretion of the Board of Directors and will depend on the Company's earnings,
financial condition, capital requirements and other relevant factors.
14
17
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information concerning
the Company and should be read in conjunction with the audited financial
statements and notes included in "Financial Statements and Supplementary Data".
YEARS ENDED JUNE 30,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands except per share data)
STATEMENTS OF OPERATIONS DATA:
Net revenues ................................. $ 17,002 $ 13,972 $ 17,573 $ 20,455 $ 6,942
Gross profits ................................ 8,593 5,719 6,623 10,902 3,335
Income (loss) from operations ................ (2,231) (7,248)(2) (4,660)(3) 1,425 (1,665)
Net income (loss) ............................ (4,159)(1) (6,988)(2) (4,177)(3) 1,798 (1,641)
Net income (loss) per common share-basic ..... $ (.47)(1) $ (.79)(2) $ (.48)(3) $ .21 $ (.22)
Net income (loss) per common share-diluted ... $ (.47)(1) $ (.79)(2) $ (.48)(3) $ .20 $ (.22)
(1) During 2000, the Company recorded a charge of $2.0 million ($.23 per
share) for the settlement of the shareholder litigation.
(2) During 1999, the Company recorded a non-recurring charge of $400,000
($.04 per share) for the costs of the Company's relocation of its
headquarters to Las Vegas, Nevada.
(3) During 1998, the Company recorded a non-recurring charge of $745,000
($.08 per share) for the costs of the Company's change in business
focus to the Acres Bonusing and bonus game product lines.
AS OF JUNE 30,
---------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands)
BALANCE SHEET DATA:
Working capital ........................... $ 3,308 $ 4,649 $ 12,091 $ 16,474 $ 2,552
Total assets .............................. 10,732 16,097 17,194 21,323 7,631
Current liabilities ....................... 4,834 8,050 2,435 2,545 3,644
Long-term debt ............................ -- -- -- -- --
Redeemable convertible preferred stock .... 4,948 4,948 4,948 4,948 --
Stockholders' equity ...................... (1,060) 3,099 9,811 13,830 3,987
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, manufactures and markets electronic game
promotions, equipment and games for the casino gaming industry. The Company's
products are based on its proprietary Acres Bonusing Technology and are designed
to enhance casino profitability by providing entertainment and incentives to
players of gaming machines. The bonusing technology improves the efficiency of
bonus and incentive programs currently offered by many casinos, and makes
possible some bonus and incentive programs that have not previously been
offered.
The Company's financial position and operating results may be materially
affected by a number of factors, including the timing of receipt, installation
and regulatory approval of any one order, availability of additional capital,
competition and technological change. Historically, three or fewer customers
have accounted for more than 65 percent of annual revenues. (See "Business --
Customers" and "Factors That May Affect Future Results").
15
18
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED JUNE 30, 2000 AND 1999
The Company's net revenues during the year ended June 30, 2000 were
$17.0 million, an increase of $3.0 million over the prior year's revenues of
$14.0 million. The Company's revenues fluctuate significantly based on the
timing of the delivery of any large order. Revenues in fiscal 2000 were
primarily comprised of Acres Advantage sales to one domestic casino and three
foreign casinos. Revenues in fiscal 1999 were primarily comprised of sales of
hardware and software components to IGT and sales of Acres Advantage to one
domestic casino.
Component materials purchased primarily from computer and electronics
vendors comprised 50 percent of the cost of revenues in 2000 and 55 percent in
1999. Manufacturing, procurement, software customization, service and
installation labor and expenses accounted for the remaining cost of revenues.
Changes in the components of the cost of revenues result from changes in the mix
of products sold.
Gross profit margin improved to 51% in fiscal 2000 from 41% in fiscal
1999. This increase was primarily the result of changes in the mix of products
sold and the absorption of certain fixed manufacturing and service costs over a
higher sales volume.
The Company's research and development expenses decreased to $5.1
million in 2000, from $6.4 million in the prior year. Reductions in staffing
generated $1.4 million in research and development expense savings. These
savings were partially offset by a $408,000 reduction in amounts capitalized as
software development costs. The Company expects to continue to spend a
significant portion of its revenue on research and development in order to
enhance and expand the capabilities of Acres Advantage and develop additional
bonus games.
Selling, general and administrative costs decreased to $5.7 million in
2000 from $6.1 million in the prior year. Reductions in staffing generated
$808,000 in selling, general and administrative expense savings. These savings
were partially offset by a $212,000 increase in legal costs.
Operating expenses in fiscal 1999 include a non-recurring charge of
$400,000 ($.04 per share) related to the Company's relocation of its
headquarters to Las Vegas, Nevada.
In September 2000, the Company and the plaintiffs agreed in principle to
settle the outstanding shareholder litigation, subject to final documentation
and approval by the Court. The Company will pay $660,000 in cash, of which
approximately $200,000 will come from the Company's insurance carrier, and issue
warrants to purchase one million shares of the Company's Common Stock
exercisable over a 10 year period at a price of $2.50 per share. The value of
the warrants is approximately $1.6 million. The Company recorded a one-time
charge of $2.0 million in the year ending June 30, 2000, to account for the
settlement.
Other income, primarily comprised of interest income, decreased by
$178,000 as a result of reduced balances of invested cash and equivalents.
The Company has cumulative net operating losses of approximately $17.6
million available to offset future taxable income through 2020. As the
realizability of these net operating loss carryforwards is uncertain, the
Company has provided a valuation allowance for the entire amount and did not
record an income tax benefit for the years ended June 30, 2000 or 1999. The net
loss for the year ended June 30, 2000 was $4.2 million ($0.47 per share)
compared to a net loss of $7.0 million ($0.79 per share) in the prior year.
COMPARISON OF THE YEARS ENDED JUNE 30, 1999 AND 1998
The Company's net revenues during the year ended June 30, 1999 were
$14.0 million, a decrease of $3.6 million from the $17.6 million of net revenues
in 1998. The Company's revenues fluctuate significantly based on the timing of
the delivery of any large order. In fiscal 1999, sales to IGT decreased by $9.9
million of which $4.1 million was due to the Company's granting of manufacturing
rights to IGT pursuant to which the Company receives
16
19
royalty payments on certain hardware manufactured by IGT. In fiscal 1998, when
the Company manufactured and sold hardware to IGT, the Company recorded higher
per unit revenue on the hardware, although gross profit was approximately the
same. Additionally, fiscal 1999 sales of components to Anchor decreased by $2.7
million from the prior year. These decreases in revenue were partially offset by
$8.2 million of system sales made directly to casinos.
Component materials purchased primarily from computer and electronics
vendors comprised 55 percent of the cost of revenues in 1999 and 66 percent in
1998. Manufacturing, procurement, software customization, service and
installation labor and expenses accounted for the remaining cost of revenues.
Changes in the components of the cost of revenues result from changes in the mix
of products sold.
Gross profit margin improved to 41% in fiscal 1999 from 38% in fiscal
1998. The shift to royalty-based revenues resulted in an increase in gross
profit margin of 9 percentage points. This increase was partially offset by the
absorption of certain fixed manufacturing and service costs over a smaller sales
volume and changes in the mix of products sold.
The Company's research and development expenses increased to $6.4
million in 1999, from $5.2 million in the prior year. This increase is primarily
due to the cost of development of enhancements and additional modules for Acres
Advantage and the increased size of the Las Vegas office facility, a large
portion of which is used for research and development activities.
Selling, general and administrative costs increased to $6.1 million in
1999 from $5.3 million in the prior year. This increase was the result of
approximately $1.4 million of incremental legal fees incurred to secure and
defend the Company's intellectual property rights for new and existing bonusing
products. The increase in legal fees was partially offset by changes in the
Company's business focus to the Acres Advantage and bonus game product lines
that resulted in reductions in sales and marketing salaries and promotional
activities.
Operating expenses in fiscal 1999 include a non-recurring charge of
$400,000 ($.04 per share) related to the Company's relocation of its
headquarters to Las Vegas, Nevada. Operating expenses in fiscal 1998 include a
non-recurring charge of $745,000 to recognize severance and inventory costs of
discontinuing its Legacy slot accounting and player tracking system.
Other income, primarily comprised of interest income, decreased by
$223,000 as a result of reduced balances of invested cash and equivalents. The
Company had cumulative net operating losses available to offset future taxable
income. As the realizability of these net operating loss carryforwards is
uncertain, the Company has provided a valuation allowance for the entire amount
and did not record an income tax benefit for the years ended June 30, 1999 or
1998. The net loss for the year ended June 30, 1999 was $7.0 million ($0.79 per
share) compared to a net loss of $4.2 million ($0.48 per share) in the prior
year.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company had cash and equivalents of $789,000,
compared to $5.9 million as of June 30, 1999. The Company invests its cash in
highly liquid marketable securities with maturities of three months or less at
date of purchase. The Company does not invest in market risk sensitive
instruments except that it did enter into forward exchange contracts during
fiscal 2000 to manage a well-defined foreign currency risk related to a sale in
Australia. (See "Factors That May Affect Future Results-Foreign Currency
Exchange Rate Risk").
The Company does not have any debt outstanding but has secured a
revolving credit facility to provide up to $3.5 million in financing secured by
inventory and accounts receivable. As of August 31, 2000, the Company was not in
compliance with certain debt covenants. The Company may not be able to borrow
under its line of credit until the covenants are met or it obtains a waiver of
such covenants from its lender. The Company believes it will be in compliance
with the covenants during the second fiscal quarter of 2001.
At June 30, 2000, the Company had collected $855,000 in advance deposits
against its order backlog of approximately $6.7 million. Backlog, however, may
not be a meaningful indication of future sales. Sales are made pursuant to
purchase orders or sales agreements for specific system installations and
products are often delivered
17
20
within several months of receipt of an order. The Company does not have any
material ongoing long-term sales contracts. The Company's revenues and results
of operations may be materially affected, in the near term, by the receipt or
loss of any one order.
The Company believes that it can complete the deliveries and
installations comprising its order backlog, and obtain and complete enough
additional sales to provide sufficient operating cash flow for fiscal 2001.
Failure to successfully deliver the products comprising the order backlog,
failure to obtain additional orders or failure to subsequently collect the
resulting revenues could have a material adverse affect on the Company's
liquidity. The Company has the ability to reduce operating expenses by reducing
staffing and other expenses.
The Company's operations have historically used cash. During the year
ended June 30, 2000, the Company's net loss, net of non-cash items, used
$258,000 of cash. An additional $3.8 million of net cash was used by operating
activities, primarily as a result of reductions in advance deposits collected
from customers and increases in accounts receivable balances, offset by
reductions in inventories, due to higher sales in the Company's fourth fiscal
quarter.
During the year ended June 30, 1999, $1.7 million of cash was used by
operating activities primarily as a result of the Company's net operating loss,
net of non-cash items, and to fund the purchase of inventory necessary to
support Acres Advantage installations scheduled for the first half of fiscal
2000. These uses of cash were partially offset by increases in the collection of
advance deposits from customers and increases in amounts payable for purchases
of inventory and services.
During the year ended June 30, 1998, $2.3 million of net cash was
generated by operating activities as the collection of accounts receivable and
reductions in inventories more than offset the effects of the Company's net
operating loss.
The Company made capital expenditures of $731,000, $1.8 million and $1.9
million in 2000, 1999 and 1998, respectively, primarily on computers and
equipment to support research and development efforts. The Company capitalized
$326,000 and $734,000 of software development costs incurred in the development
of additional modules of the Acres Advantage product line in 2000 and 1999,
respectively.
The Company's principal sources of liquidity have been net proceeds of
$7.2 million from its initial public offering in November 1993, $6.2 million
from the exercise of the redeemable warrants in October 1996 and $4.9 million
from the issuance of 519,481 shares of Series A Convertible Preferred Stock to
IGT in January 1997.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements in this Form 10-K contain "forward-looking"
information (as defined in Section 27A of the Securities Act of 1933, as
amended) that involves risks and uncertainties that could cause actual results
to differ materially from the results discussed in the forward-looking
statements. Such factors include, but are not limited to, the following:
YEAR 2000
The Year 2000 issue results from computer programs operating incorrectly
due to date-sensitive software incorrectly recognizing dates in the year 2000.
This could result in system failure or miscalculations and could cause
disruptions of operations, including, among other things, a temporary inability
to engage in normal business activities. The Company has not incurred any
material interruptions in its products or business activities related to the
Year 2000.
The Company has evaluated its technology and data, including imbedded
non-information technology, used in the creation and delivery of its Legacy
products and in its internal operations and has identified no significant Year
2000 issues. The Company's core business systems are compliant. Compliant
upgrades for the Company's Legacy slot accounting and player tracking products
have been developed and were made available to all customers
18
21
prior to December 31, 1999. The Company has tested its most recent generation of
products and did not identify any material Year 2000 issues. The Company has not
incurred material costs associated with addressing the Year 2000 issue and
believes that future costs will not have a material effect on the Company's
financial results.
Although the Company has inquired of certain of its significant vendors
as to the status of their Year 2000 compliance initiatives, no binding
assurances have been received. The Company believes that it is not overly
reliant on any single vendor because its component parts and services can be
obtained from multiple sources. Failure of telephone service providers or other
utilities could have a significant detrimental effect on the Company's
operations. The Company does not know the status of its customers' Year 2000
compliance initiatives. Failure of the Company's customers to adequately address
such issues could negatively affect their ability to purchase the Company's
products.
The Company has developed a contingency plan to address the most
reasonably likely "worst-case" scenario. Such contingency plan includes manually
conducting operations in the short-term, which would be less efficient, but
would not be expected to have a material adverse effect on the Company.
COMMUNICATION PROTOCOL
The Company and IGT have jointly developed a communication protocol
known as SAS4. The protocol is used to communicate instructions and messages
between Acres Bonusing and gaming machines. The communication of these
instructions and messages is essential to the operation of bonuses. Although the
Company and IGT have agreed that the Company can use SAS4 in connection with
certain installations, IGT has stated that the Company may not have an
unrestricted right to use SAS4 with non-IGT games. The Company believes that it
has joint ownership of the protocol and the ability to use and license the
protocol. In 2000, IGT released an updated version of the protocol known as
SAS5, which includes some additional coinless wagering protocol messages. SAS5
has been offered to the Company under terms that IGT states are equivalent to
the terms offered to other gaming equipment suppliers. The Company has not yet
adopted the SAS5 protocol.
The Company is a founding member of the Gaming Manufacturers Association
("GAMMA") which, among other things, is jointly developing a standardized
communication protocol that will be licensed to all GAMMA members. This protocol
may be a viable alternative to SAS4 but this new protocol is not available for
implementation at this time.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company only enters into derivative instruments to manage
well-defined foreign currency risks. The Company has entered into forward
exchange contracts to hedge the value of sales contracts and accounts receivable
denominated in Australian dollars. Foreign exchange contracts have gains and
losses that are recognized at the settlement date. The impact of changes in
exchange rates on the forward contracts will be substantially offset by the
impact of such changes on the value of the related sales contracts and accounts
receivable. At June 30, 2000, the Company held a foreign exchange contract
totaling $945,000 and maturing in July 2000. The fair market value of that
foreign exchange contract approximated its carrying value at June 30, 2000. The
Company's results of operations have not been affected by the foreign exchange
contract. The counterparty to the foreign exchange contract is a large, widely
recognized bank resulting in minimal risk of credit loss due to non-performance
by the bank. The net effect of an immediate 10 percent change in exchange rates
on the forward exchange contracts and the underlying hedged positions would not
be material to the Company's financial condition or results of operations.
OTHER RISKS
Liquidity. Historically, the Company's operations have used cash and
three or fewer customers have accounted for more than 65% of annual revenues.
Although management believes that sufficient revenues will be generated during
fiscal 2001 to meet operating, product development and other cash flow
requirements, such revenues will depend on the successful receipt of future
orders.
The Company does not have any debt outstanding but has secured a
revolving credit facility to provide up to $3.5 million in financing secured by
inventory and accounts receivable. As of August 31, 2000, the Company was not
in compliance with certain debt covenants. The Company may not be able to
borrow under its line of credit until the covenants are met or it obtains a
waiver of such covenants from its lender. The Company believes it will be in
compliance with the covenants during the second fiscal quarter of 2001.
Sufficient funds to maintain new product development efforts and
expected levels of operations may not be available and additional capital, if
and when needed by the Company, may not be available on terms acceptable to
Company.
Litigation. The Company is engaged in a number of litigation matters as
more fully discussed in Item 3. Legal Proceedings. The continuing cost of this
litigation is expensive and could have a material adverse effect on the Company.
Additionally, an unfavorable outcome in one or more of these suits could have a
material adverse effect on the Company.
19
22
Availability of hardware components. Certain of the Company's hardware
components have long lead times and may be difficult to obtain within a
reasonable period of time. Additionally, components can be discontinued by the
Company's vendors requiring modifications to the Company's hardware to utilize
similar, but more readily available, components. The inability to obtain
components within a reasonable period of time could negatively effect the
receipt or delivery of orders.
Government Regulation; Potential Restrictions on Sales. The Company is
subject to gaming regulations in each jurisdiction in which its products are
sold or are used by persons licensed to conduct gaming activities. The Company's
products generally are regulated as "associated equipment", pursuant to which
gaming regulators have discretion to subject the Company, its officers,
directors, key employees, other affiliates, and certain shareholders to
licensing, approval and suitability requirements. In the event that gaming
authorities determine that any person is unsuitable to act in such capacity, the
Company would be required to terminate its relationship with such person, and
under certain circumstances, the Company has the right to redeem its securities
from persons who are found unsuitable. Products offered and expected to be
offered by the Company include features that are not available on products
currently in use. These new features may, in some cases, result in additional
regulatory review and licensing requirements for the products or the Company.
Compliance with such regulatory requirements may be time consuming and
expensive, and may delay or prevent a sale in one or more jurisdictions. In
addition, associated equipment generally must be approved by the regulatory
authorities for use by each licensed location within the jurisdiction,
regardless of whether the Company is subject to licensing, approval, or
suitability requirements. Failure by the Company to obtain, or the loss or
suspension of, any necessary licenses, approvals or suitability findings, may
prevent the Company from selling or distributing its product in such
jurisdiction. Such results may have a material adverse effect on the Company.
The Company often enters into contracts that are contingent upon the Company
and/or the customer obtaining the necessary regulatory approvals to sell or use
the Company's products or to operate a casino. Failure to timely obtain such
approvals may result in the termination of the contract and the return of
amounts paid pursuant to such contract.
Changes in Business and Economic Conditions Generally and in the Gaming
Industry. The strength and profitability of the Company's business depends on
the overall demand for bonusing products and growth in the gaming industry.
Gaming industry revenues are sensitive to general economic conditions and
generally rise or fall more rapidly in relation to the condition of the overall
economy. In a period of reduced demand, the Company may not be able to lower its
costs rapidly enough to counter a decrease in revenues.
Product Concentration; Competition; Risks of Technological Change. The
Company expects to derive most of its revenues from the sale of Acres Advantage
products and the Company's future success will depend in part upon its ability
to continue to generate sales of these products. A decline in demand or prices
for the Company's products, whether as a result of new product introduction or
price competition from competitors, technological change, or failure of the
Company's products to address customer requirements or otherwise, could have a
material adverse effect on the Company's revenues and operating results. The
markets in which the Company competes are highly competitive and subject to
frequent technological change and one or more of the Company's competitors may
develop alternative technologies for bonusing or game promotions. The Company's
future results of operations will depend in part upon its ability to improve and
market its existing products and to successfully develop, manufacture and market
new products. While the Company expends a significant portion of its revenues on
research and development and on product enhancement, the Company may not be able
to continue to improve and market its existing products or develop and market
new products, or technological developments may cause the Company's products to
become obsolete or noncompetitive. Many of the Company's competitors have
substantially greater financial, marketing and technological resources than the
Company and the Company may not be able to compete successfully with them.
Patents and Trademarks. The Company relies on a combination of patent,
trade secret, copyright and trademark law, nondisclosure agreements and
technical security measures to protect its products. The Company has received
U.S. and foreign patents on certain features of its bonusing product line, has
applied for additional U.S. and foreign patents and may in the future apply for
other U.S. patents and corresponding foreign patents. The Company may also file
for patents on certain features of products that the Company may develop in the
future. Notwithstanding these safeguards, it is possible for competitors of the
Company to obtain its trade secrets and to
20
23
imitate its products. Furthermore, others may independently develop products
similar or superior to those developed or planned by the Company. While the
Company may obtain patents with respect to certain of its products, the Company
may not have sufficient resources to defend such patents, such patents may not
afford all necessary protection and competitors may develop equivalent or
superior products which may not infringe such patents.
Fluctuations in Quarterly Operating Results. The Company's quarterly
operating results have fluctuated in the past, and may fluctuate significantly
in the future, due to a number of factors, including, among others, the size and
timing of customer orders and deliveries of orders, the timing and market
acceptance of new products introduced by the Company, changes in the level of
operating expenses, technological advances and new product introductions by the
Company's competitors, competitive conditions in the industry, regulatory
approval and general economic conditions. Product development and marketing
costs are often incurred in periods before any revenues are recognized from the
sales of products, and gross margins are lower and operating expenses are higher
during periods in which such product development expenses are incurred and
marketing efforts are commenced. The Company's quarterly revenues and results of
operations may be materially affected by the receipt or loss of any one order
and by the timing of the delivery, installation and regulatory approval of any
one order. The Company may not be able to achieve or maintain profitable
operations on a consistent basis. The Company believes that period to period
comparisons of its financial results may not be meaningful and should not be
relied upon as indications of future performance. Fluctuations in operating
results may result in volatility in the price of the Company's Common Stock.
Management of Growth; Liquidity. To compete effectively and to manage
future growth, the Company must continue to improve its financial and management
controls, reporting systems and procedures on a timely basis and expand, train
and manage its employees. Any failure by the Company to implement and improve
any of the foregoing could have a material adverse effect on the Company's
business, operating results and financial condition.
21
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Public Accountants......................................... 23
Consolidated Balance Sheets...................................................... 24
Consolidated Statements of Operations............................................ 25
Consolidated Statements of Stockholders' Equity.................................. 26
Consolidated Statements of Cash Flows............................................ 27
Notes to Consolidated Financial Statements....................................... 28
22
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Acres Gaming Incorporated:
We have audited the accompanying consolidated balance sheets of Acres
Gaming Incorporated (a Nevada Corporation) and subsidiary as of June 30, 2000
and 1999 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Acres Gaming
Incorporated and subsidiary as of June 30, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2000, in conformity with accounting principles generally accepted
in the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule listed
in Item 14 (a) (2) is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
August 16, 2000
(except with respect to the matter
discussed in Note 8, as to which
the date is September 26, 2000)
23
26
ACRES GAMING INCORPORATED
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND 1999
ASSETS
2000 1999
-------- --------
(in thousands)
CURRENT ASSETS:
Cash and equivalents $ 789 $ 5,949
Receivables, net of allowance of $15,000 3,541 1,576
Inventories 3,729 4,909
Prepaid expenses 83 265
-------- --------
Total current assets 8,142 12,699
-------- --------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 1,562 1,625
Equipment 3,935 3,918
Leasehold improvements 421 932
Accumulated depreciation (4,446) (4,101)
-------- --------
Property and equipment, net 1,472 2,374
-------- --------
OTHER ASSETS, NET 1,118 1,024
-------- --------
TOTAL ASSETS $ 10,732 $ 16,097
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,785 $ 2,407
Accrued expenses 1,194 1,491
Customer deposits 855 4,152
--------- ---------
Total current liabilities 4,834 8,050
--------- ---------
LITIGATION SETTLEMENT OBLIGATION 2,010 --
REDEEMABLE CONVERTIBLE PREFERRED STOCK 4,948 4,948
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50 million shares
authorized, 8.9 million shares issued and
outstanding 89 89
Additional paid-in capital 19,904 19,904
Accumulated deficit (21,053) (16,894)
-------- --------
Total stockholders' equity (1,060) 3,099
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,732 $ 16,097
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
24
27
ACRES GAMING INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
2000 1999 1998
-------- -------- --------
(in thousands except per share data)
NET REVENUES $ 17,002 $ 13,972 $ 17,573
COST OF REVENUES 8,409 8,253 10,950
-------- -------- --------
GROSS PROFIT 8,593 5,719 6,623
-------- -------- --------
OPERATING EXPENSES:
Research and development 5,097 6,440 5,210
Selling, general and administrative 5,727 6,127 5,328
Non-recurring charge - 400 745
-------- -------- --------
Total operating expenses 10,824 12,967 11,283
-------- -------- --------
LOSS FROM OPERATIONS (2,231) (7,248) (4,660)
SETTLEMENT OF LITIGATION (2,010) - -
OTHER INCOME 82 260 483
-------- -------- --------
NET LOSS $ (4,159) $ (6,988) $ (4,177)
======== ======== ========
NET LOSS PER SHARE -- BASIC & DILUTED $ (.47) $ (.79) $ (.48)
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
25
28
ACRES GAMING INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
COMMON STOCK ADDITIONAL
---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- -------- ----------- ----------- --------
(in thousands)
Balance as of June 30, 1997 8,764 $ 88 $ 19,321 $ (5,579) $ 13,830
Issuance of common stock 56 -- 233 -- 233
Net income -- -- -- (4,177) (4,177)
Preferred stock dividends -- -- -- (75) (75)
-------- -------- -------- -------- --------
Balance as of June 30, 1998 8,820 88 19,554 (9,831) 9,811
Issuance of common stock 93 1 350 -- 351
Net loss -- -- -- (6,988) (6,988)
Preferred stock dividends -- -- -- (75) (75)
-------- -------- -------- -------- --------
Balance as of June 30, 1999 8,913 89 19,904 (16,894) 3,099
Net loss -- -- -- (4,159) (4,159)
-------- -------- -------- -------- --------
Balance as of June 30, 2000 8,913 $ 89 $ 19,904 $(21,053) $ (1,060)
======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
26
29
ACRES GAMING INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
2000 1999 1998
------- ------- -------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,159) $(6,988) $(4,177)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 1,891 1,806 1,493
Non-recurring charge -- 400 745
Settlement of litigation 2,010 -- --
Changes in assets and liabilities:
Receivables (1,965) 353 1,951
Inventories 1,180 (2,302) 2,098
Prepaid expenses 182 (162) 352
Accounts payable and accrued expenses 81 2,078 (726)
Customer deposits (3,297) 3,137 532
------- ------- -------
Net cash from operating activities (4,077) (1,678) 2,268
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (731) (1,815) (1,922)
Capitalized software costs (326) (734) --
Other, net (26) 13 65
------- ------- -------
Net cash from investing activities (1,083) (2,536) (1,857)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock -- 351 233
Preferred stock dividends -- (75) (75)
------- ------- -------
Net cash from financing activities -- 276 158
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (5,160) (3,938) 569
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 5,949 9,887 9,318
------- ------- -------
CASH AND EQUIVALENTS AT END OF YEAR $ 789 $ 5,949 $ 9,887
======= ======= =======
Supplemental Disclosure of Non-cash Activities
In fiscal year 2000, the Company recorded a $2.0 million charge for settlement
of shareholder litigation that is expected to result in a cash payment of
$460,000 and a non-cash payment of warrants valued at $1.5 million.
The accompanying notes are an integral part of these consolidated statements.
27
30
ACRES GAMING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND COMPANY OPERATIONS:
COMPANY OPERATIONS AND BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Acres
Gaming Incorporated and its wholly owned subsidiary, AGI Distribution, Inc. (the
"Company"). All intercompany accounts and transactions have been eliminated.
The Company develops, manufactures and markets electronic game
promotions, equipment and games for the casino gaming industry. The Company's
principal products are based on its proprietary Acres Bonusing Technology and
are designed to enhance casino profitability by providing entertainment and
incentives to players of gaming machines. The bonusing technology improves the
efficiency of bonus and incentive programs currently offered by many casinos,
and makes possible bonus and incentive programs that have not previously been
offered. The Company primarily sells its products in the United States,
Australia and South Africa. Sales in Australia totaled $9.5 million, $384,000
and $1.2 million, for the years ended June 30, 2000, 1999 and 1998,
respectively. Sales to South Africa totaled $1.7 million and $316,000 for the
years ended June 30, 2000 and 1999, respectively.
The Company's financial position and operating results may be materially
affected by a number of factors, including the timing of receipt, installation
and regulatory approval of any one order, availability of additional capital,
competition and technological change.
Certain prior year amounts have been reclassified to conform to the
current year presentation. These reclassifications had no effect on the results
of operations or stockholders' equity as previously reported.
REVENUE RECOGNITION
The Company sells certain of its products under contracts that generally
provide for a deposit to be paid before commencement of the project and for a
final payment to be made after completion of the project. Revenue is generally
recognized as hardware components are shipped and software components are
installed. Customer deposits received under sales agreements are reflected as
liabilities until the related revenue is recognized.
The Company has entered into certain manufacturing royalty agreements
where revenue is recognized as the licensed manufacturer sells the related
hardware products.
For certain contracts requiring significant product customization,
revenue is recognized on the percentage-of-completion method. Labor costs
incurred for customization and installation are the basis for determining
percentage-of-completion, giving effect to the most recent estimates of such
total labor costs. The effect of changes to total estimated customization and
installation labor costs is recognized in the period in which such changes are
determined. The Company defers revenue subject to forfeiture, refund, or other
concession until such revenue meets the criteria for collectibility. Provisions
for estimated losses are made in the period in which the loss first becomes
apparent.
Included in accounts receivable are unbilled receivables of $1.0 million
at June 30, 2000 and 1999. Unbilled receivables represent revenues recognized in
excess of billings on certain contracts accounted for under the percentage of
completion method. Unbilled receivables were not billable at the balance sheet
date but are recoverable as billings are made in accordance with the contract
terms.
28
31
MAJOR CUSTOMERS
Sales to Crown Casino, MotorCity Casino, Star City and MonteCasino
amounted to 37 percent, 23 percent, 19 percent and 10 percent of the Company's
net revenues in 2000, respectively. The sale to Mandalay Bay accounted for 51
percent of the Company's net revenues in 1999. Sales to IGT accounted for 23
percent and 75 percent of the Company's net revenues in 1999 and 1998,
respectively. Sales of components to Anchor accounted for 18 percent of the
Company's net revenues in 1998.
RELATED PARTY
The Company had sales transactions with the holder of the Series A
Preferred Stock of $473,000, $3.2 million and $13.0 million for the years ended
June 30, 2000, 1999 and 1998, respectively.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates in effect in the years
in which the differences are expected to reverse.
CASH AND EQUIVALENTS
Cash and equivalents include cash on hand, amounts held in and due from
banks and highly liquid marketable securities with maturities of three months or
less at date of purchase.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of receivables. At June 30,
2000 and 1999, the fair value of the Company's receivables approximated their
carrying value.
INVENTORIES
Inventories consist of electronic components and other hardware, which
are recorded at the lower of cost (first-in, first-out) or market. Inventories
consist of the following:
INVENTORIES AT JUNE 30,
------------------------
2000 1999
------ ------
(in thousands)
Raw materials $1,809 $1,114
Work-in-progress 110 1,398
Finished goods 1,810 2,397
------ ------
Total inventories $3,729 $4,909
====== ======
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed on
the straight-line basis over the assets' estimated useful lives of two to five
years. Leasehold improvements are amortized over the lease term. Expenditures
for maintenance and repairs are charged to operations when incurred.
INTANGIBLE ASSETS
Intangible assets consist of costs associated with the establishment of
patents, gaming licenses and gaming product approvals in various jurisdictions.
Amortization of patents is calculated using the straight-line method over
29
32
the estimated life of the patent. Gaming licenses and product approvals are
amortized over periods of five years and two years, respectively. Intangible
assets, net of accumulated amortization, were $252,000 and $259,000 at June 30,
2000 and 1999, respectively, and are included in other assets.
CAPITALIZED SOFTWARE AND RESEARCH AND DEVELOPMENT COSTS
Software development costs for certain projects are capitalized from the
time technological feasibility is established to the time the resulting software
product is commercially feasible. Capitalized software costs, net of accumulated
amortization, were $745,000 and $647,000 at June 30, 2000 and 1999, respectively
and are included in other assets. Capitalized costs are amortized on a
straight-line basis over the estimated life of the product beginning when the
product becomes commercially feasible. All research and development costs are
expensed as incurred.
NON-RECURRING CHARGES
During fiscal 1999, the Company elected to outsource almost all of its
manufacturing functions and initiated a relocation of its headquarters from
Corvallis, Oregon to Las Vegas, Nevada. The Company recorded a $400,000
non-recurring charge to recognize the related severance, recruiting and moving
expenses.
During fiscal 1998, the Company changed its business focus to the Acres
Advantage and bonus game product lines and recorded a non-recurring charge of
$745,000 to recognize severance and inventory costs of discontinuing its Legacy
slot accounting and player tracking system.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSACTIONS
The Company only enters into derivative instruments to manage
well-defined foreign currency risks. The Company has entered into forward
exchange contracts to hedge the value of sales contracts and accounts receivable
denominated in Australian dollars. Foreign exchange contracts have gains and
losses that are recognized at the settlement date. The impact of changes in
exchange rates on the forward contracts will be substantially offset by the
impact of such changes on the value of the related sales contracts and accounts
receivable. At June 30, 2000, the Company held a foreign exchange contract
totaling $945,000 and maturing in July 2000. The fair market value of that
foreign exchange contract approximated its carrying value at June 30, 2000. The
Company's results of operations have not been effected by the foreign exchange
contract. The counterparty to the foreign exchange contract is a large, widely
recognized bank resulting in minimal risk of credit loss due to non-performance
by the bank. The net effect of an immediate 10 percent change in exchange rates
on the forward exchange contracts and the underlying hedged positions would not
be material to the Company's financial condition or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) in June 1998. SFAS 133
requires the Company to recognize all derivatives on the balance sheet at fair
value. The Company only enters into derivative instruments for hedging sales
contracts and receivables denominated in international currencies. Changes in
the fair value of the derivatives will be offset against the change in fair
value of the receivable. The change in the derivative's fair value related to
the ineffective portion of a hedge, if any, will be immediately recognized in
earnings. The Company expects to adopt this Standard as of the beginning of its
fiscal year 2001. The effect of adopting this standard is not expected to have a
material effect on the Company's financial condition or results of operations.
30
33
2. INCOME TAXES:
At June 30, 2000, the Company had cumulative net operating losses
totaling approximately $17.6 million that are available to offset future taxable
income through 2020. The Company has provided a valuation allowance for the
remaining amount of the benefit related to these net operating loss
carryforwards as realizability is uncertain.
Deferred income taxes are provided for the temporary differences between
the carrying amounts of the Company's assets and liabilities for financial
statement purposes and their tax bases. Deferred tax liabilities were
insignificant as of June 30, 2000 and 1999. The sources of the differences that
give rise to the deferred income tax assets and liabilities as of June 30, 2000
and 1999, along with the income tax effects of each, are as follows:
DEFERRED INCOME TAX
ASSETS AND LIABILITIES
AT JUNE 30,
-----------------------
2000 1999
------- -------
(in thousands)
Operating loss carryforwards $ 6,712 $ 5,899
Research and development tax credit 1,158 921
Property and equipment 363 429
Accruals and reserves 1,014 273
Intangible and other assets 54 34
------- -------
Total deferred tax assets 9,301 7,556
Deferred tax liabilities resulting from
intangible assets (83) --
------- -------
9,218 7,556
------- -------
Less valuation allowance (9,218) (7,556)
------- -------
Net deferred tax assets $ 0 $ 0
======= =======
The Company's research and development tax credits are available to
offset future taxable income through 2020. The valuation allowance related to
deferred tax assets increased by $1.7 million and $2.6 million in 2000 and 1999,
respectively.
3. COMMITMENTS AND CONTINGENCIES:
LITIGATION
Two related lawsuits have been filed in the U.S. District Court that
allege violation of the federal securities laws by the Company and its executive
officers. Those suits have been consolidated into one combined action that
received class certification for a class consisting of the purchasers of the
Company's Common Stock during the period from March 26, 1997 to December 11,
1997. No trial date or discovery cut-off date has been set. The defense of this
suit has been tendered to and accepted by the Company's directors and officer's
insurance carrier subject to a $1.0 million insurance policy. In September 2000,
the Company and the plaintiffs agreed in principle to a settlement agreement
that is more fully discussed in Note 8.
Two lawsuits have been filed regarding ownership of the WOG technology
that is the subject of two patents that have been assigned to Anchor. In the
first suit, now pending in U.S. District Court for the District of Nevada, the
WOG plaintiffs brought patent infringement, breach of warranty and breach of
contract actions against the Company based on the WOG Patents and the Company's
supply agreement with Anchor. Plaintiffs seek to enjoin the Company from
infringing the WOG Patents and from competing with it in the sale of wheel
styled bonus gaming devices. The plaintiffs also seek unspecified compensatory
damages, treble damages, costs of suit, and attorney's fees. The Company has
denied the allegations and has filed a counterclaim in that proceeding for a
declaration that the Company is the sole or joint owner of the WOG Patents. The
defense of this suit had been tendered to and was accepted by the Company's
former professional errors and omissions insurance carrier. In April 2000, the
Company's former insurance carrier denied coverage. In May 2000, the Company
filed suit, now pending in the U.S. District Court of Oregon, against its former
insurance carrier claiming breach of insurance contract. In June
31
34
2000, the Company's former insurance carrier filed suit in U.S. District Court
of Nevada for declaratory relief requesting the Court find that: no coverage is
provided for the claim; if coverage is provided it should be provided by the
prior insurance carrier; and the Company must reimburse the insurance carrier
for to recover nominal amounts paid under its insurance policy to defend the
Company.
In the second action, now pending in U.S. District Court for the
District of Nevada, the Company has filed suit against Anchor and Spin for Cash
Wide Area Progressive Joint Venture alleging that Anchor wrongfully used the
Company's intellectual property to obtain the WOG Patents, that the filing of
the patent applications was fraudulently concealed from the Company, that Anchor
was unjustly enriched by retaining the benefits of the Company's technology
without compensating the Company and that Anchor breached fiduciary duties owed
to the Company. The Company seeks $40 million in compensatory damages, treble
damages, costs of suit, and attorney's fees.
Four related lawsuits have been filed in the U.S. District Court
resulting from the Company's efforts to enforce its patent rights. Three of
those suits have now been consolidated. The Company denies all asserted
allegations and intends to vigorously defend itself and its intellectual
property rights. No trial date has been set.
In Suit I, Mikohn asserted a claim for declaratory judgment of
noninfringement and invalidity of U.S. Patent No. 5,655,961 ("the `961 patent")
owned by the Company. Mikohn also asserted claims for "intentional interference
with a business relationship," "intentional interference with prospective
business relationship," "unfair competition: trade libel" and "unfair
competition: disparagement." Mikohn's complaint sought unspecified damages,
punitive damages, attorney's fees, interest on the alleged damages, an
injunction against the conduct alleged in the complaint, and a declaration that
the `961 patent is invalid and not infringed by Mikohn or its customers. The
Company has filed a counterclaim for infringement of the `961 patent, and has
denied Mikohn's other allegations.
In Suit II, Mikohn asserted a claim for declaratory judgment of
noninfringement and invalidity of U.S. Patent No. 5,741,183 ("the `183 patent")
owned by the Company. Mikohn's complaint sought no damages, but requested an
award of attorney's fees and a declaration that the `183 patent is invalid and
not infringed by Mikohn. Because the Company is not aware of any infringement by
Mikohn, the court granted summary judgment on the noninfringement claim.
Mikohn's invalidity claim is still pending.
In Suit III, the Company sued Mikohn, CDS, New York-New York Hotel and
Casino and Sunset Station Hotel and Casino for infringement of the Company's
U.S. Patent No. 5,752,882 ("the `882 patent"). Mikohn counterclaimed in Suit
III, seeking a declaratory judgment of invalidity and noninfringement of the
`882 patent and asserted claims for "false and misleading representations,"
"interference with prospective economic relations," "unfair competition: trade
libel" and "unfair competition: disparagement." Mikohn's counterclaims seek
unspecified damages, as well as a trebling of the damages, punitive damages,
attorney's fees and an injunction against the Company's "continuing to commit
the unlawful acts" alleged in the counterclaims.
In Suit IV, the Company sued Mikohn and CDS for infringement of the
Company's U.S. Patent Nos. 5,820,459 and 5,836,817. The defendants
counterclaimed for declaratory judgment of noninfringement and invalidity of the
patents. In addition, CDS counterclaimed for: "patent misuse", "Sherman Act
section 2 -- attempted monopolization", "spoliation of evidence", "unfair
competition -- intentional interference with prospective economic advantage" and
"misappropriation of trade secrets". CDS's counterclaims seek unspecified
damages, as well as a trebling of the damages, punitive damages, and attorney's
fees.
In a separate but related action, the Company has filed suit, now
pending in the 9th Circuit Court of Appeals, against its former general
liability insurance carrier for breach of insurance contract related to the cost
of defense in Suit I and II. In addition, in May 2000,the Company filed suit,
now pending in U.S. District Court for the District of Oregon, against another
former general liability insurance carrier for breach of insurance contract
related to the cost of defense of CDS's counterclaims in Suit IV. In June 2000,
the insurance carrier filed suit in U.S. District Court of Nevada for
declaratory relief requesting the Court find that: no coverage is provided for
the claim; if coverage is provided it should be provided by the prior insurance
carrier; and the Company must reimburse the insurance carrier for nominal
amounts paid under its insurance policy to defend the Company.
32
35
Unfavorable outcomes in one or more of these suits could have a material
adverse effect on the Company.
The Company from time to time is involved in other various legal
proceedings arising in the normal course of business.
OPERATING LEASES
The Company leases its office facilities under operating leases that
extend through June 15, 2003. Future minimum lease payments under these
non-cancelable operating leases as of June 30, 2000 are $538,000, $532,000, and
$508,000 in 2001, 2002 and 2003, respectively. Total lease expense was $786,000,
$822,000 and $567,000 for the years ended June 30, 2000, 1999 and 1998,
respectively.
4. REDEEMABLE PREFERRED STOCK:
In January 1997, the Company created an initial series of preferred
stock, consisting of 1,038,961 shares, which it designated Series A Convertible
Preferred Stock (the "Series A Stock") and issued 519,481 shares for net
proceeds of approximately $4.9 million. The Series A Stock is entitled to
receive non-cumulative dividends at a rate per share equal to 3 percent of
$9.625, the initial per share purchase price. Holders of the Series A Stock have
the option, upon notice to the Company, to convert shares of Series A Stock into
shares of Common Stock based upon the applicable conversion price in effect at
the time of conversion. The initial conversion price for each share of Series A
Stock is the lesser of the price at which the Series A Stock was initially
issued and the average closing price of the Company's Common Stock for the
period of thirty trading days prior to the date of conversion of shares of
Series A Stock. The conversion price is subject to adjustments for certain
events relating to the Common Stock including stock splits and combinations,
dividends and distributions, reclassification, exchange, substitution,
reorganization, merger or sale of assets. The Series A Stock is subject to
redemption at the option of either the Company or holders of the Series A Stock,
on or after January 28, 2002 or upon the Company's primary shareholder reducing
its ownership to fewer than one million shares of Common Stock. The redemption
price would be equal to the purchase price plus any declared but unpaid
dividends. As of June 30, 2000, all declared dividends have been paid. Due to
the Company's financial position and results of operations, no dividends related
to the years ended June 30, 2000 or 1999 were declared or paid. In July 1998,
$75,000 of dividends related to the six-month period ended June 30, 1998 were
declared and paid.
So long as at least 130,000 of the shares of Series A Stock originally
issued by the Company remain outstanding, holders of the Series A Stock are
entitled as a class to elect one director and must approve any amendments to the
Company's articles of incorporation including, among other things, amendments to
facilitate the sale or merger of the Company. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of the Series A Stock will be entitled to receive a liquidation preference of
$9.625 per share, plus any declared but unpaid dividends, prior to the
distribution of any of the Company's assets to holders of the Common Stock. Any
assets remaining after the distribution to holders of the Series A Stock will be
distributed to holders of the Common Stock.
5. STOCKHOLDERS' EQUITY:
In November 1993, the Company completed its initial public offering and
issued 1,667,500 units (the "Units") consisting of 1,667,500 shares of Common
Stock and 833,750 redeemable warrants. In connection with the offering, the
Company granted the underwriter warrants to purchase 145,000 Units at $6.00 per
share. The net proceeds of the offering were $7.2 million. In October 1996,
substantially all of the redeemable warrants were exercised, resulting in net
proceeds to the Company of approximately $6.2 million. The underwriter warrants
were exercised in October 1996 resulting in net proceeds to the Company of
approximately $1.4 million.
In June 1995, the Company issued 400,000 shares of Common Stock to a
group of private investors for net proceeds of approximately $2.3 million.
33
36
In 1995, the Company issued warrants to purchase 195,000 shares of
Common Stock to two companies and two individuals in exchange for services. At
June 30, 2000, warrants to purchase 125,000 shares at $9.00 were outstanding and
expire on September 15, 2000.
The Company has a Stock Option Plan (the "Plan") that permits the
granting of awards to directors, employees and consultants of the Company in the
form of stock options. Stock options granted under the Plan may be incentive
stock options or nonqualified options. Options generally vest over five years
and expire in ten years. The Company accounts for the Plan under APB Opinion No.
25 "Accounting for Stock Issued to Employees", under which no compensation cost
is recognized. Had compensation cost for the Plan been determined consistent
with FASB Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), the Company's net loss and loss per
share would have approximated the following pro forma amounts:
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------
2000 1999 1998
--------- --------- -----------
(in thousands except per share data)
NET LOSS: As reported $ (4,159) $ (6,988) $ (4,177)
Pro forma (4,700) (8,226) (4,863)
LOSS PER SHARE -- BASIC & DILUTED: As reported $ (.47) $ (.79) $ (.48)
Pro forma (.53) (.92) (.55)
A total of 1,750,000 shares of the Company's Common Stock have been
reserved for issuance pursuant to awards granted under the Plan. Under the Plan,
the Company has granted 1,515,692 options, net of cancellations, through June
30, 2000. In addition to issuances under the Plan, the Company issued 185,000
options to purchase Common Stock that were not subject to the provisions of the
Plan. Stock option activity is summarized below:
FOR THE YEARS ENDED JUNE 30,
-------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- ---------- ---------
Outstanding at beginning of year 1,196,925 $5.05 1,041,175 $5.34 1,132,950 $6.25
Granted at exercise prices equal to
market prices 556,300 1.14 422,500 4.40 329,750 5.18
Exercised -- -- (93,300) 3.75 (55,525) 4.19
Canceled (398,983) 4.23 (173,450) 5.94 (366,000) 8.18
---------- ---------- ----------
Outstanding at end of year 1,354,242 3.68 1,196,925 5.05 1,041,175 5.34
========== ========== ==========
Exercisable at end of year 847,444 3.93 702,991 4.81 523,748 4.76
========== ========== ==========
Weighted average fair value of
options granted $ .88 $ 3.28 $ 3.79
========== ========== ==========
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
2000 1999 1998
------- ------- --------
Risk free interest rate 6.3% 5.0% 5.8%
Expected life of option 5 years 5 years 5 years
Expected volatility 99% 93% 91%
Dividends none none none
34
37
The following table summarizes the options to purchase Common Stock
outstanding at June 30, 2000:
WEIGHTED WEIGHTED
OPTIONS FOR WEIGHTED AVERAGE OPTIONS FOR AVERAGE EXERCISE
EXERCISE SHARES AVERAGE CONTRACTUAL SHARES PRICE OF SHARES
PRICES OUTSTANDING EXERCISE PRICE LIFE EXERCISABLE EXERCISABLE
-------------- ----------- -------------- ------------ ----------- ----------------
$0.94 - $1.00 410,800 $ 1.00 9.5 years 272,602 $ 1.00
$1.03 - $4.56 320,625 2.71 7.1 years 158,475 3.23
$4.63 - $4.87 399,800 4.85 7.8 years 229,450 4.85
$4.94 - $8.50 150,550 6.37 6.2 years 128,050 6.39
$8.60 - $15.00 72,467 11.16 6.8 years 58,867 10.41
-------------- --------- --------
$0.94 - $15.00 1,354,242 3.68 7.9 years 847,444 3.93
============== ========= ========
6. EMPLOYEE BENEFIT PLAN:
The Company has a profit sharing plan that operates under the provisions
of section 401(k) of the Internal Revenue Code and covers substantially all
full-time employees. Employer contributions may be made at the discretion of the
Board of Directors. To date, there have been no employer contributions.
7. PER SHARE COMPUTATION:
The Company reports basic and diluted earnings per share. Only the
weighted average number of common shares issued and outstanding is used to
compute basic earnings per share. The computation of diluted earnings per share
includes the effect of stock options, warrants and redeemable convertible
preferred stock, if such effect is dilutive. Where necessary, prior year amounts
have been restated.
FOR THE YEAR ENDED JUNE 30,
-----------------------------------
2000 1999 1998
------- ------- -------
(in thousands except per share data)
Net loss $(4,159) $(6,988) $(4,177)
Preferred stock dividends -- (75) (75)
------- ------- -------
Net loss allocable to common stockholders $(4,159) $(7,063) $(4,252)
======= ======= =======
Weighted average number of shares of common stock and common
stock equivalents outstanding:
Weighted average number of common shares outstanding 8,913 8,897 8,804
Dilutive effect of warrants and employee stock
options after application of the treasury stock method -- -- --
Dilutive effect of redeemable convertible preferred
stock after application of the if-converted method -- -- --
Weighted average number of common shares outstanding
for computing diluted earnings per share 8,913 8,897 8,804
======= ======= =======
Loss per share -- basic & diluted $ (.47) $ (.79) $ (.48)
======= ======= =======
35
38
The following common stock equivalents were excluded from the earnings
per share computations because their effect would have been anti-dilutive:
BALANCE OUTSTANDING AS OF JUNE 30,
----------------------------------
2000 1999 1998
------- -------- -------
(in thousands)
Warrants and employee stock options 1,479 1,361 1,206
Redeemable convertible preferred stock, if converted,
assuming conversion at rates in effect at each
respective year end 2,228 2,228 1,053
The Stock Purchase Agreement between IGT and the Company pursuant to
which IGT purchased 519,481 shares of Series A Stock restricts IGT's ownership
of the Company's Common Stock. Without the consent of the Company, IGT may not
own more than 20% of the outstanding Common Stock, including, for purposes of
the calculation, the shares of Common Stock into which the Series A Stock owned
by IGT is convertible. The Company believes that this provision operates to
limit IGT's right to convert shares of Series A Stock as well as limiting IGT's
rights to purchase additional shares of Common Stock. IGT has asserted that the
agreement does not limit the number of shares into which the Series A Stock may
be converted. If there were no limit on IGT's right to convert shares of Series
A Stock into Common Stock, as of June 30, 2000, the Series A Stock could have
been converted into 4,617,000 shares of Common Stock, or 34.1% of the then
outstanding Common Stock. IGT has not indicated it plans to convert any shares
of Series A Stock into Common Stock.
8. SUBSEQUENT EVENT:
In September 2000, the Company and the plaintiffs agreed in principle to
settle the outstanding shareholder litigation, subject to final documentation
and approval by the Court. The Company will pay $660,000 in cash, of which
approximately $200,000 will come from the Company's insurance carrier, and issue
warrants to purchase one million shares of the Company's Common Stock
exercisable over a 10 year peiord at a price of $2.50 per share. The value of
the warrants is approximately $1.6 million and is based on the Black-Scholes
pricing model using the market price of the Company's Common Stock at June 30,
2000, risk free interest rate of 6.3%, 10 year expected life of the warrant,
expected volatility of 99% and no Common Stock dividends. The Company recorded a
one-time charge of $2.0 million in the year ending June 30, 2000, to account for
the settlement.
As of August 31, 2000, the Company was not in compliance with certain debt
covenants. The Company may not be able to borrow under the line of credit until
the covenants are met or it obtains a waiver of such covenants from its
commercial lender. The Company believes it will be in compliance with the
covenants during the second fiscal quarter of 2001.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in, or disagreements with, accountants which required
reporting on Form 8-K have occurred within the three-year period ended June 30,
2000.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors of the Company is incorporated
herein by reference to the Company's Proxy Statement that will be filed pursuant
to Regulation 14A within 120 days of June 30, 2000.
36
39
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to Executive Compensation is incorporated
herein by reference to the Company's Proxy Statement that will be filed pursuant
to Regulation 14A within 120 days of June 30, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to Security Ownership of Certain Beneficial
Owners and Management is incorporated herein by reference to the Company's Proxy
Statement that will be filed pursuant to Regulation 14A within 120 days of June
30, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to Certain Relationships and Related Transactions is
incorporated herein by reference to the Company's Proxy Statement that will be
filed pursuant to Regulation 14A within 120 days of June 30, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
See "Item 8. Financial Statements and Supplementary Data"
(2) FINANCIAL STATEMENT SCHEDULES
ACRES GAMING INCORPORATED
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
BALANCES AMOUNTS
AT ADDITIONS CHARGED
BEGINNING CHARGED OFF, NET OF BALANCES AT
OF YEAR TO INCOME COLLECTIONS END OF YEAR
--------- --------- ----------- -----------
(in thousands)
ALLOWANCE FOR UNCOLLECTIBLE
ACCOUNTS
2000 $ 15 $ -- $ -- $ 15
1999 50 -- (35) 15
1998 322 25 (297) 50
ALLOWANCE FOR NON-RECURRING
CHARGES AND SETTLEMENT OF
LITIGATION
2000 $386 $2,010 $(386) $2,010
1999 $475 $ 400 $(489) $ 386
1998 0 745 (270) 475
(3) EXHIBITS
See "Index to Exhibits".
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
37
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ACRES GAMING INCORPORATED
Date: September 26, 2000 By: /s/ Floyd W. Glisson
----------------------------------------
Floyd W. Glisson
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
Date: September 26, 2000 /s/ Richard J. Schneider
------------------------------------------
Richard J. Schneider
President and Chief Operating Officer
Date: September 26, 2000 /s/ Reed M. Alewel
------------------------------------------
Reed M. Alewel
Senior Vice President, Chief
Financial Officer, Treasurer and
Secretary
(Principal Financial and Accounting
Officer)
Date: September 26, 2000 /s/ Robert W. Brown
------------------------------------------
Robert W. Brown
Director
Date: September 26, 2000 /s/ Richard A. Carone
------------------------------------------
Richard A. Carone
Director
38
41
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Articles of Incorporation of Acres Gaming Incorporated, as
amended(4)
3.2 Bylaws of Acres Gaming Incorporated, as amended(3)
+10.1 Acres Gaming Incorporated 1993 Stock Option and Incentive Plan,
as amended(4)
10.2 Lease dated August 5, 1999, between the Company and Avery
Investments(1)
10.3 System Upgrade Agreement dated June 7, 1999 between Crown Limited
and the Company(5)
+10.4 Employment Agreement dated July 1, 1996 between the Company and
John F. Acres(4)
10.5 Stock Purchase Agreement between the Company and IGT dated
January 28, 1997(4)
10.6 Registration Rights Agreement between the Company and IGT dated
January 28, 1997(4)
10.7 Master Agreement for Product Development, Purchase and Sale
between the Company and International Game Technology, Inc. dated
January 27, 1997(4)
10.8 Lease dated March 3, 1998 between the Company and #26 McCarran
Center, LC(2)
+10.9 Amendment to Employment Agreement dated July 20, 1998 between the
Company and John F. Acres(6)
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants
27.1 Financial Data Schedule for year ended June 30, 1999
- -----------------------------
+ Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1999,
previously filed with the Commission.
(2) Incorporated by reference to the exhibits to the Company's Annual Report
on Form 10-K for the year ended June 30, 1998, previously filed with the
Commission.
(3) Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1996,
previously filed with the Commission.
(4) Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended December 31, 1996,
previously filed with the Commission.
(5) Incorporated by reference to the exhibits to the Company's Annual Report
on Form 10-K for the year ended June 30, 1999, previously filed with the
Commission.
(6) Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1998,
previously filed with the Commission.