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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission File Number 0-22498
ACRES GAMING INCORPORATED
(Exact name of registrant as specified in its charter)
NEVADA 88-0206560
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7115 AMIGO STREET, SUITE 150
LAS VEGAS, NV 89119
(Address of principal executive offices)
702-263-7588
(Registrant's telephone number)
Check whether the registrant (1) 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 [ ]
The number of shares of Common Stock, $.01 par value, outstanding on
January 31, 2001 was 8,946,981.
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ACRES GAMING INCORPORATED
Table of Contents
Page
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at December 31, 2000 and June 30, 2000 1
Statements of Operations for the Three and Six Months Ended
December 31, 2000 and 1999 2
Statements of Cash Flows for the Six Months Ended
December 31, 2000 and 1999 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II -- OTHER INFORMATION 12
SIGNATURES 13
INDEX TO EXHIBITS 14
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACRES GAMING INCORPORATED
BALANCE SHEETS
DECEMBER 31, 2000 JUNE 30, 2000
(UNAUDITED)
----------------- -------------
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 5,532 $ 789
Receivables, net of allowance of $50 and $15, respectively 6,620 3,541
Inventories 4,078 3,729
Prepaid expenses 168 83
-------- --------
Total current assets 16,398 8,142
-------- --------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 1,624 1,562
Equipment 4,045 3,935
Leasehold improvements 421 421
Accumulated depreciation (4,913) (4,446)
-------- --------
Total property and equipment 1,177 1,472
OTHER ASSETS 852 1,118
-------- --------
TOTAL ASSETS $ 18,427 $ 10,732
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 4,208 $ 2,785
Accrued expenses 1,286 1,194
Customer deposits 7,111 855
-------- --------
Total current liabilities 12,605 4,834
-------- --------
LITIGATION SETTLEMENT OBLIGATION 2,010 2,010
REDEEMABLE CONVERTIBLE PREFERRED STOCK 4,948 4,948
STOCKHOLDERS' DEFICIT:
Common Stock, $.01 par value, 50 million shares
authorized, 8.9 million shares issued and outstanding 89 89
Additional paid-in capital 19,938 19,904
Accumulated deficit (21,163) (21,053)
-------- --------
Total stockholders' deficit (1,136) (1,060)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 18,427 $ 10,732
======== ========
The accompanying notes are an integral part of these balance sheets.
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ACRES GAMING INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- ------------------------
2000 1999 2000 1999
---------- --------- --------- ----------
(in thousands except per share data)
NET REVENUES $10,222 $ 5,367 $12,960 $11,591
COST OF REVENUES 6,116 2,506 8,233 5,570
------- ------- ------- -------
GROSS PROFIT 4,106 2,861 4,727 6,021
------- ------- ------- -------
OPERATING EXPENSES:
Research and development 1,034 1,261 2,115 2,532
Selling, general and administrative 1,589 1,210 2,741 2,727
------- ------- ------- -------
Total operating expenses 2,623 2,471 4,856 5,259
------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS 1,483 390 (129) 762
OTHER INCOME 23 30 19 52
------- ------- ------- -------
NET INCOME (LOSS) $ 1,506 $ 420 $ (110) $ 814
======= ======= ======= =======
NET INCOME (LOSS) PER SHARE - BASIC $ .17 $ .05 $ (.01) $ .09
======= ======= ======= =======
NET INCOME (LOSS) PER SHARE - DILUTED $ .13 $ .04 $ (.01) $ .07
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
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ACRES GAMING INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
----------------------------------
2000 1999
-------------- -------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (110) $ 814
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization 789 936
Changes in assets and liabilities:
Receivables (3,079) (1,346)
Inventories (349) 2,276
Prepaid expenses (85) 174
Accounts payable and accrued expenses 1,515 (632)
Customer deposits 6,256 (4,100)
------- -------
Net cash from operating activities 4,937 (1,878)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (288) (557)
Capitalized software costs -- (184)
Other, net 60 32
------- -------
Net cash from investing activities (228) (709)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 34 --
------- -------
Net cash from financing activities 34 --
------- -------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 4,743 (2,587)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 789 5,949
------- -------
CASH AND EQUIVALENTS AT END OF PERIOD $ 5,532 $3,362
======= =======
The accompanying notes are an integral part of these statements.
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ACRES GAMING INCORPORATED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. Unaudited Financial Statements
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted from these unaudited financial statements. These statements
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended June 30, 2000 filed with the Securities and Exchange Commission.
In the opinion of management, the interim financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary in order
to make the financial statements not misleading. The results of operations for
the six-month period ended December 31, 2000 are not necessarily indicative of
the operating results for the full year or future periods.
2. 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 recognized
as hardware components are shipped and software components are installed. The
Company accounts for software sales in accordance with Statement of Position
97-2 - Software Revenue Recognition. Software sales are considered multiple
element arrangements because they include software, installation, training and
post customer support. Customer deposits received under sales agreements are
reflected as liabilities until the related revenue is recognized. The Company
offers optional product maintenance agreements to its customers at standard
prices.
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 penalty, forfeiture, refund or
other concession until such factors have expired and the 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 at June 30, 2000 are unbilled receivables
of $1.0 million. The Company did not have any unbilled receivables at December
31, 2000. 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.
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3. 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:
DECEMBER 31, JUNE 30,
2000 2000
-------------- ---------------
(in thousands)
Raw Materials $2,621 $1,809
Work-in-progress 101 110
Finished Goods 1,356 1,810
------ ------
Total inventories $4,078 $3,729
------ ------
4. Capitalized Software
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. Technological feasibility is deemed to be
established when the Company, using the detail program design method, completes
the research necessary to determine that the software can be produced to
function according to required specifications at an economically feasible cost.
Capitalized software costs, net of accumulated amortization, were $568,000 and
$745,000 at December 31, 2000 and June 30, 2000, 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 products become
commercially feasible. All research and development costs, including the costs
to establish technological feasibility, are expensed as incurred.
5. Income Taxes
At December 31, 2000, the Company had cumulative net operating losses of
approximately $17.7 million that are available to offset future taxable income
through 2020. The Company has provided a valuation allowance for the entire
amount of the benefit related to these net operating loss carryforwards as
realizability is uncertain. Deferred tax liabilities were insignificant as of
December 31, 2000 and June 30, 2000.
6. Contingencies
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 officers'
insurance carrier subject to a $1.0 million insurance policy.
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 recorded a one-time charge of $2.0
million in the year ended June 30, 2000, to account for the settlement.
Two lawsuits have been filed regarding ownership of the Wheel of Gold(TM)
("WOG") technology that is the subject of two patents that have been assigned to
Anchor Gaming ("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
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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 cannot
predict the outcome, nor estimate the range of possible loss, if any, related to
this suit but believes that an unfavorable outcome could have a material adverse
effect on the Company's financial condition and results of operations. 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 Nevada,
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. The Company cannot predict the outcome of this suit but believes
that an unfavorable outcome would not have a material adverse effect on the
Company's financial condition or results of operations.
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 attorneys' 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. The
Company cannot predict the outcome, nor estimate the range of possible loss, if
any, related to these suits but believes that an unfavorable outcome could have
a material adverse effect on the Company's financial condition and results of
operations. A trial date has been set for March 2001.
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
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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. CDS's counterclaim regarding spoliation of evidence was subsequently
dismissed by the Court under a motion of summary judgment.
In a separate but related action, the Company has filed suit against its
former general liability insurance carrier for breach of insurance contract
related to the cost of defense in Suit I and II. In January 2001, the Company
reached a settlement with the former insurance carrier and received a $200,000
reimbursement of defense costs. In addition, in May 2000, the Company filed
suit, now pending in U.S. District Court for the District of Nevada, 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. The Company
cannot predict the outcome of this suit but believes that an unfavorable outcome
would not have a material adverse effect on the Company's financial condition or
results of operations.
The Company from time to time is involved in other various legal
proceedings arising in the normal course of business.
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.
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FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
-------------------- ------------------
2000 1999 2000 1999
-------- --------- ------- ------
(in thousands except per share data)
Net income (loss) $ 1,506 $ 420 $ (110) $ 814
Preferred stock dividends -- -- -- --
------- ------- ------ -------
Net income (loss) allocable to common stockholders $ 1,506 $ 420 $ (110) $ 814
======= ======= ====== =======
Weighted average number of shares of common stock
and common stock equivalents outstanding:
Weighted average number of common shares
outstanding for computing basic earnings per
share 8,941 8,913 8,928 8,913
Dilutive effect of warrants and employee stock
options after application of the treasury
stock method 123 12 -- 18
Dilutive effect of redeemable convertible
preferred stock after application of the
if-converted method 2,229 2,228 -- 2,228
------- ------- ------ -------
Weighted average number of common shares
outstanding for computing diluted earnings per
share 11,293 11,153 8,928 11,159
======= ======= ====== =======
Earnings (loss) per share - basic $ .17 $ .05 $ (.01) $ .09
======= ======= ====== =======
Earnings (loss) per share - diluted $ .13 $ .04 $ (.01) $ .07
======= ======= ====== =======
The following common stock equivalents were excluded from the earnings per
share computations because their effect would have been anti-dilutive:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
-------------------- ------------------
2000 1999 2000 1999
-------- --------- ------- ------
(in thousands)
Warrants and employee stock options 800 1,413 1,253 1,457
Redeemable convertible preferred stock, if
converted, assuming conversion at rates in
effect at each respective year end -- -- 2,228 --
The Stock Purchase Agreement between International Game Technology ("IGT")
and the Company pursuant to which IGT purchased 519,481 shares of Redeemable
Convertible Preferred Stock (the "Preferred 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 Preferred Stock owned by
IGT is convertible. The Company believes that this provision operates to limit
IGT's right to convert shares of Preferred 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 Preferred Stock may
be converted. If there were no limit on IGT's right to convert shares of
Preferred Stock into Common
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Stock, as of December 31, 2000, the Preferred Stock could have been converted
into 3,304,000 shares of common stock, or 27.0% of the then outstanding common
stock.
8. Subsequent Event
In February 2001, the Company was notified by Nasdaq that the Company's
securities will be delisted from the Nasdaq SmallCap Market due to the
Company's failure to comply with the minimum $2 million net tangible assets
requirement for continued listing set forth in Nasdaq Marketplace Rule
4310(c)(2)(B). The Company will appeal this determination at a hearing on March
23, 2001 before a Nasdaq Listing Qualifications panel and the delisting of the
Company's securities is delayed until the panel completes its review. There can
be no assurance that the panel will grant the Company's request for continued
listing. If the Company's securities are delisted from the Nasdaq market, the
Company's stock may be quoted on the OTC Bulletin Board.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, manufactures and markets electronic equipment and
software for the casino gaming industry. The Company's 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 some
bonus and incentive programs that have not previously been offered.
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, table game management and visual
analysis modules that may be purchased and installed individually or as
components of an integrated system marketed as the Acres Advantage(TM).
RESULTS OF OPERATIONS
The Company's net revenues for the three months ended December 31, 2000
were $10.2 million versus net revenues of $5.4 million during the three months
ended December 31, 1999. The Company's revenues can fluctuate significantly
based on the timing of the delivery of orders. Net revenues for the current
quarter were primarily from Acres Advantage(TM) products for properties operated
by Station Casinos, Inc., MGM MIRAGE and Mandalay Resort Group as well as
MonteCasino in South Africa and five Native American casinos in California. In
the prior year quarter, revenues were primarily from Acres Advantage products
for MotorCity Casino, a Mandalay Resort Group property in Detroit, Michigan, and
Crown Casino in Australia.
For the six-month period ended December 31, 2000, net revenues were $13.0
million versus $11.6 million in the same period in the prior year. Net revenues
for the first half of the current fiscal year were primarily from Acres
Advantage(TM) products for properties operated by Station Casinos, Inc., MGM
MIRAGE and Mandalay Resort Group as well as MonteCasino in South Africa and five
Native American casinos in California. In the first half of the prior fiscal
year, net revenues were primarily from Acres Advantage products for MotorCity
Casino, Crown Casino and Star City Casino in Sydney Australia.
Gross profit margin was 40 percent in the current quarter versus 53
percent in the prior year quarter. For the first half of fiscal 2001, gross
profit margin was 36 percent versus 52 percent for the same period of fiscal
2000. Gross profit margins decreased primarily due to differences in mix of
products sold but were also partially reduced by additional expenses associated
with increases in the Company's customer service and support staff through
hiring of new personnel and shifting efforts of certain employees from
development activities to customer support activities. Partially offsetting
these items, gross profit margin in the current quarter was favorably impacted
by spreading certain fixed costs over a greater revenue volume.
Net operating expenses were $2.6 million in the current quarter versus
$2.5 million in the prior year quarter. This increase was the result of
increased general and administrative costs partially offset by a $205,000
reduction related to the shift of certain employee efforts from development
activities to customer support activities that are reported as cost of sales.
For the first half of fiscal 2001, the shift of employee efforts
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amounted to $383,000 and accounted for the majority of the reduction in
operating expenses, which decreased to $4.9 million for such period versus
$5.3 million in the same period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, the Company had cash and equivalents of $5.5
million, compared to $789,000 as of June 30, 2000. The Company invests its cash
in highly liquid marketable securities with a maturity of three months or less
at the 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 well-defined foreign currency risk related to a sale in
Australia.
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 December 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. Although the Company believes it will be in
compliance with the covenants during the third quarter of fiscal 2001, it does
not expect to utilize the line of credit during this fiscal year.
At December 31, 2000, the Company had collected $7.1 million of customer
deposits against its order backlog of $19.5 million. Backlog, however, may not
be a meaningful indication of future sales. Sales are made pursuant to purchase
orders or sales agreements for specific installations. Products are generally
delivered within one to six months of receipt of an order depending on the
nature of the order and the products being delivered. The Company expects the
majority of its backlog to be delivered in fiscal 2001. 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 effect 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 first
half of fiscal 2001, the Company's operations, net of non-cash items, provided
$679,000 of cash. Collections of advance deposits provided a net increase of
$6.3 million in cash as a result of an increase in orders taken during the
six-month period ended December 31, 2000. Increases in cash were also provided
by a $1.5 million increase in accounts payable. These increases in cash were
partially offset by a $3.1 million increase in accounts receivable. During the
first half of 2001, the Company made capital expenditures of $288,000.
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.
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
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impact of such changes on the value of the related sales contracts and accounts
receivable. No foreign exchange contracts were held as of December 31, 2000.
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 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 monopolistic
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.
FORWARD-LOOKING INFORMATION
Certain statements in this Form 10-Q 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 forward-looking statements are
based prove incorrect or should unanticipated circumstances arise, the Company's
actual results could differ materially from those anticipated by such
forward-looking statements. The differences could be caused by a number of
factors or combination of factors including, but not limited to, the risks
detailed in the Company's Securities and Exchange Commission filings, including
the Company's Form 10-K for the fiscal year ended June 30, 2000.
Forward-looking statements contained in this Form 10-Q relate to the
Company's plans and expectations as to: potential Nasdaq delisting; sales
backlog; adequacy of cash and equivalents balances to fund the Company's
operations; anticipated future sales; revenue recognition; cash collections;
scheduled product installation dates; new product development and
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introduction; the availability of funds under the line of credit on terms
acceptable to both the Company and the lending bank; patent protection;
litigation settlements; and anticipated effects of the Year 2000.
The following factors, among others, could cause actual results to differ
from those indicated in the forward-looking statements: the possibility that
changes in the agreement between IGT and MGM MIRAGE (to which the Company is not
a party) could adversely affect revenues anticipated by the Company from IGT;
the Company's ability to obtain the necessary gaming licenses and product
approvals in South Africa; the possibility that the Company's suppliers may
not be able to meet required delivery schedules for components of the products;
outcome of the hearing to review Nasdaq's decision to delist the Company's
securities from the Nasdaq SmallCap Market; the possibility that future sales
may not occur or product offerings may not be developed as planned; the
possibility that future product installations may not be completed;
developments in the Company's relationship with IGT; the risk that patents may
not be issued; the expense and unpredictability of patent and other litigation;
the timing of development, regulatory approval and installation of products;
the timing of receipt and shipment of orders; the ability of the Company to
borrow under the line of credit; competition; government regulation; market
acceptance; customer concentration; technological change; the effect of
economic conditions on the gaming industry generally and the results of pending
litigation.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company filed suit in June 1998 in the u.S. District Court for the
District of Oregon against Atlantic Mutual Insurance Company, its former general
liability insurance carrier, for breach of insurance contract relating to the
cost of defense in two related lawsuits between Mikohn and the Company involving
allegations of infringement and invalidity of certain of the Company's patents.
The case is now pending in the 9th Circuit Court of Appeals. In January 2001,
the Company reached a settlement with Atlantic Mutual Insurance Company and
received a $200,000 reimbursement of the Company's defense costs in connection
with the litigation with Mikohn.
ITEM 5. OTHER INFORMATION
In February 2001, the Company was notified by Nasdaq that the Company's
securities will be delisted from the Nasdaq SmallCap Market due to the Company's
failure to comply with the minimum $2 million net tangible assets requirement
for continued listing set forth in Nasdaq Marketplace Rule 4310(c)(2)(B). The
Company will appeal this determination at a hearing on March 23, 2001 before a
Nasdaq Listing Qualifications panel and the delisting of the Company's
securities is delayed until the panel completes its review. There can be no
assurance that the panel will grant the Company's request for continued listing.
If the Company's securities are delisted from the Nasdaq market, the Company's
stock may be quoted on the OTC Bulletin Board.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered by this
Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACRES GAMING INCORPORATED
(Registrant)
Date: February 14, 2001 By /s/ Reed M. Alewel
--------------------
Reed M. Alewel
Senior Vice President, Chief Financial
Officer,
Treasurer and Secretary
(authorized officer and principal financial
and chief accounting officer)
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 Articles of Incorporation of Acres Gaming Incorporated, as amended(1)
3.2 Bylaws of Acres Gaming Incorporated, as amended(2)
10.1 Product Sales, Delivery and License Agreement dated December 8, 2000
between Acres Gaming Incorporated and IGT.
10.2 Acres Software Maintenance Agreement dated December 8, 2000 between
Acres Gaming Incorporated and IGT
- --------------
(1) 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.
(2) 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.
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