U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
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 September 30, 2001
[ ] 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 outstanding of the Registrant's Common Stock, par
value $.01 per share, as of October 31, 2001 was 9,273,206.
ACRES GAMING INCORPORATED
Table of Contents
Page
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at September 30, 2001 and June 30, 2001 1
Statements of Operations for the Three Months Ended
September 30, 2001 and 2000 2
Statements of Cash Flows for the Three Months Ended
September 30, 2001 and 2000 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II -- OTHER INFORMATION 11
SIGNATURES 11
INDEX TO EXHIBITS 12
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACRES GAMING INCORPORATED
BALANCE SHEETS
ASSETS
SEPTEMBER 30,
2001 JUNE 30,
(UNAUDITED) 2001
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(in thousands)
CURRENT ASSETS:
Cash and equivalents $ 8,826 $ 11,958
Receivables, net of allowance of $1.0 million and $592, respectively 2,610 3,266
Inventories 5,445 4,764
Prepaid expenses 256 167
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Total current assets 17,137 20,155
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PROPERTY AND EQUIPMENT:
Furniture and fixtures 2,105 2,006
Equipment 4,246 4,278
Leasehold improvements 477 439
Accumulated depreciation (5,661) (5,422)
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Total property and equipment 1,167 1,301
OTHER ASSETS 689 773
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TOTAL ASSETS $ 18,993 $ 22,229
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,869 $ 3,104
Accrued compensation 886 1,270
Accrued other expenses 621 958
Customer deposits 5,555 6,663
Litigation settlement obligation 1,332 2,010
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Total current liabilities 10,263 14,005
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REDEEMABLE CONVERTIBLE PREFERRED STOCK 4,948 4,948
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50 million shares authorized, 9.3
million shares issued and outstanding 93 93
Additional paid-in capital 20,952 20,944
Deferred stock-based compensation, net (796) (877)
Accumulated deficit (16,467) (16,884)
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Total stockholders' equity 3,782 3,276
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,993 $ 22,229
======== ========
The accompanying notes are an integral part of these balance sheets.
1
ACRES GAMING INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
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(in thousands except
per share data)
NET REVENUES $6,092 $ 2,739
COST OF REVENUES 3,079 2,117
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GROSS PROFIT 3,013 622
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OPERATING EXPENSES:
Research and development 1,496 1,082
Selling, general and administrative 1,163 1,152
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Total operating expenses 2,659 2,234
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INCOME (LOSS) FROM OPERATIONS 354 (1,612)
OTHER INCOME (EXPENSE) 63 (4)
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NET INCOME (LOSS) $ 417 $(1,616)
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NET INCOME (LOSS) PER SHARE - BASIC $ .05 $ (.18)
====== =======
NET INCOME (LOSS) PER SHARE - DILUTED $ .04 $ (.18)
====== =======
The accompanying notes are an integral part of these statements.
2
ACRES GAMING INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
2001 2000
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(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 417 $(1,616)
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization 358 423
Amortization of deferred stock-based compensation 81 --
Provision for doubtful accounts 411 --
Changes in assets and liabilities:
Receivables 245 1,144
Inventories (681) (447)
Prepaid expenses (89) (124)
Accounts payable and accrued expenses (1,956) 759
Accrued litigation settlement obligation (678) --
Customer deposits (1,108) 1,551
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Net cash from operating activities (3,000) 1,690
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (120) (126)
Other, net (20) 43
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Net cash from investing activities (140) (83)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net 8 3
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Net cash from financing activities 8 3
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (3,132) 1,610
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 11,958 789
-------- -------
CASH AND EQUIVALENTS AT END OF PERIOD $ 8,826 $ 2,399
======== =======
The accompanying notes are an integral part of these statements.
3
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, 2001 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 three-month period ended September 30, 2001 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. Customer deposits
received under sales agreements are reflected as liabilities until the related
revenue is recognized.
Revenue for hardware sales is generally recognized when hardware
components are shipped. For software license revenue, the Company applies the
provisions of Statement of Position 97-2, Software Revenue Recognition ("SOP
97-2"), and Statement of Position 98-9 Modification of SOP 97-2 ("SOP 98-9"),
Software Revenue Recognition with Respect to Certain Transactions, which amends
SOP 97-2. The Company's sales of software products generally include multiple
elements such as installation of software, training, post contract customer
support and maintenance services. SOP 97-2 and SOP 98-9, as amended, generally
require revenue earned on software arrangements involving multiple elements to
be allocated to each element based on the relative fair values of the elements.
The fair value of an element must be based on the evidence that is specific to
the vendor ("VSOE"). The Company follows the residual method under SOP 97-2 for
software product sales with multiple elements. Software license revenue is
recognized upon acceptance of the software. The only undelivered element at the
time of revenue recognition for software is generally support and maintenance
services. The Company uses renewal rates to establish VSOE for support and
maintenance services. Revenue allocated to support and maintenance is recognized
ratably over the maintenance term.
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.
4
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:
SEPTEMBER 30, JUNE 30,
2001 2001
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(in thousands)
Raw Materials $3,257 $2,792
Work-in-progress 49 47
Finished Goods 2,139 1,925
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Total inventories $5,445 $4,764
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4. 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. 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 of $758,000 and
$670,000, were $303,000 and $391,000 at September 30, 2001 and June 30, 2001,
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. The Company recorded $88,000 and
$88,000 of amortization for the three-month period ended September 30, 2001 and
September 30, 2000, respectively. All research and development costs are
expensed as incurred.
5. Income Taxes
At September 30, 2001, the Company has cumulative net operating losses
of approximately $12.4 million available to offset future taxable income through
2020. The full realizability of these net operating loss carryforwards is
uncertain and the Company has provided a valuation allowance for the entire
amount. Accordingly, no income tax benefit was recorded for the quarter ended
September 30, 2001. Net operating loss carryforwards are expected to be utilized
to reduce any taxable income in fiscal 2002, and therefore no income tax
provision has been recorded for the quarter ended September 30, 2001.
6. Commitments and Contingencies
Two related lawsuits were filed in the U.S. District Court alleging
violation of the federal securities laws by the Company and its executive
officers. Those suits were 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. In
September 2000, the Company and the plaintiffs agreed to settle the litigation.
Under the terms of the settlement, the Company became obligated to pay $435,000
and could elect to make additional cash payments aggregating $1.6 million by
January 31, 2002 or issue warrants to purchase an aggregate of one million
shares of the Company's Common Stock at $2.50 per share, valued at $1.6 million.
The Company recorded a one-time charge of $2.0 million in the year ended June
30, 2000, to account for the settlement. In April 2001, the Company selected the
cash payment option.
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 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. Discovery in the lawsuit is formally closed.
Currently pending before the Court are four summary judgment motions and one
discovery-related motion filed by Anchor, as well as one summary judgment motion
filed by the Company. No
5
trial date has been set. 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 defense of this suit with Anchor was accepted by the Company's
former professional errors and omissions insurance carrier. However, in April
2000, the carrier denied coverage. The Company is involved in litigation, now
pending in the U.S. District Court of Nevada, with its former insurance carrier
regarding such coverage. Summary judgment motions have been filed by both
parties and are pending. 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 regarding the WOG patents, now pending in U.S.
District Court for the District of Oregon, the Company has filed suit against
Anchor and Spin for Cash Wide Area Progressive Joint Venture (collectively,
"Anchor") 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. The lawsuit has been stayed pending resolution of the first
Anchor lawsuit.
A series of related lawsuits resulting from the Company's efforts to
enforce its patent rights or third parties' efforts to challenge the Company's
patent rights, have been settled or adjudicated. The suits were consolidated in
the U.S. District Court for the District of Nevada under Acres Gaming
Incorporated v. Mikohn Gaming Corp., et al. In separate settlements, all claims
in that litigation between the Company and Casino Data Systems ("CDS"), Sunset
Station Hotel and Casino, respectively, were dismissed with prejudice. In March
2001, a jury validated four of the Company's patents and found that Mikohn had
infringed two of the Company's patents. The Company was awarded damages against
Mikohn by a jury in the amount of $1.5 million. The Court denied Mikohn's
post-trial motions to overturn the jury verdict and ruled that the Company is
entitled to recover additional damages for Mikohn's infringement after June
1999. Mikohn has filed a notice of appeal.
In a separate but related action, the Company sued its former general
liability insurance carrier for breach of insurance contract related to the cost
of defense of the claims alleged by Mikohn. In January 2001, the Company reached
a settlement with the former insurance carrier and received a $200,000
reimbursement of defense costs. 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 the claims alleged by CDS. In June 2000, this 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. Summary judgment motions have been
filed by both parties and are pending. 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.
The Company entered into an employment agreement with Floyd W. Glisson
effective as of January 1, 2001 (the "Glisson Employment Agreement"), pursuant
to which Mr. Glisson received a base salary of $250,000 for the period from
January 1, 2001 to June 30, 2001, was granted a restricted stock award for
300,000 shares of the Company's common stock, and received a bonus of $250,000
for the fiscal year ended June 30, 2001. Half, or 150,000 shares, of the
restricted stock become unrestricted on June 30, 2003, and the remaining 150,000
shares become unrestricted on June 30, 2005, subject to acceleration of a
ratable portion of the remaining restricted shares in the applicable period if
Mr. Glisson's employment is terminated by the Company without cause. Pursuant to
the Glisson Employment Agreement, Mr. Glisson will receive severance payments
equal to 1.6 times his annual base salary under certain circumstances.
Currently, Mr. Glisson's annual compensation under the Glisson Employment
Agreement consists of a base salary of $275,000 and a bonus of up to ninety
percent of his annual base salary depending on the Company's performance as
measured against targets set by the Board of Directors.
6
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.
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
--------------------
2001 2000
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(in thousands except
per share data)
Weighted average number of shares of common stock
and common stock equivalents outstanding $ 417 $(1,616)
Weighted average number of common shares
outstanding - basic 9,022 8,915
Dilutive effect of warrants and employee
stock options after application of the
treasury stock method 204 --
Dilutive effect of redeemable convertible
preferred stock after application of the
if-converted method 1,598 --
Weighted average number of common shares
outstanding - diluted 10,824 8,915
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Earnings (loss) per share - basic $ .05 $ (.18)
======= =======
Earnings (loss) per share - diluted $ .04 $ (.18)
======= =======
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 ENDED
SEPTEMBER 30,
------------------
2001 2000
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(in thousands)
Warrants and employee stock options 357 822
Redeemable convertible preferred stock, if
converted, assuming conversion at rates in
effect at each respective period end -- 2,228
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. As of September 30, 2001, the Series A Stock could have been
converted into 1,598,467 shares of Common Stock, or 14.7% of the post-conversion
shares outstanding.
7
8. Deferred Compensation
The Company entered into an employment agreement with Floyd W. Glisson
effective as of January 1, 2001 (the "Glisson Employment Agreement"), pursuant
to which Mr. Glisson received a base salary of $250,000 for the period from
January 1, 2001 to June 30, 2001, was granted a restricted stock award for
300,000 shares of the Company's common stock, and received a bonus of $250,000
for the fiscal year ended June 30, 2001. Half, or 150,000 shares, of the
restricted stock become unrestricted on June 30, 2003, and the remaining 150,000
shares become unrestricted on June 30, 2005, subject to acceleration of a
ratable portion of the remaining restricted shares in the applicable period if
Mr. Glisson's employment is terminated by the Company without cause. Pursuant to
the Glisson Employment Agreement, Mr. Glisson will receive severance payments
equal to 1.6 times his annual base salary under certain circumstances.
Currently, Mr. Glisson's annual compensation under the Glisson Employment
Agreement consists of a base salary of $275,000 and a bonus of up to ninety
percent of his annual base salary depending on the Company's performance as
measured against targets set by the Board of Directors.
The 300,000 restricted shares of the Company's Common Stock issued to
Mr. Glisson have been included in the Common Stock issued and outstanding
presented in the Company's balance sheet. As of September 30, 2001 and as of
June 30, 2001, approximately 58,000 and 33,000 would become unrestricted if Mr.
Glisson's employment is terminated by the Company, respectively. The Company
recorded approximately $81,000 and $0 of compensation expense for the
three-month period ended September 30, 2001 and September 30, 2000,
respectively. Approximately $796,000 and $877,000 of deferred compensation has
been recorded to reflect the remaining restricted balance of the stock as of
September 30, 2001 and June 30, 2001, respectively.
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. Many of 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. 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.
RESULTS OF OPERATIONS
The Company's net revenues during the quarter ended September 30, 2001
were $6.1 million, an increase of $3.4 million, or 122% over the revenues in the
quarter ended September 30, 2000 of $2.7 million. The increase in revenues is
primarily attributable to an increase in the number of customers the Company had
during the quarter compared to the prior year quarter. The Company's revenues
fluctuate significantly based on the timing of the delivery of any large order.
Revenues for the quarter ended September 30, 2001 consisted of $3.5 million in
hardware components sold to a variety of customers with approximately 76% of
this amount being delivered through IGT for the MGM Grand installation of the
Company's products. The remaining $2.6 million in revenues for the quarter was
for software and services sold to a number of customers. Revenues in the quarter
ended September 30, 2000 consisted of $1.9 million in hardware sales and
$808,000 of software and service sales, both being derived from a smaller number
of customers than during the current quarter.
Gross profit margin increased to 49% in the quarter ended September 30,
2001, from 23% in the quarter ended September 30, 2000. The increase in gross
profit margin was primarily attributable to the fact that software sales, which
made up a greater percentage of the current quarter sales, carry a higher gross
profit margin than the hardware sales recorded in the quarter ended September
30, 2000. The increase in gross profit margins was partially offset by an
increase in overhead expenses of approximately 29% related to an increase in
staffing this quarter compared to the prior year quarter.
8
The Company's research and development expenses increased to $1.5
million in the quarter ended September 30, 2001, from $1.1 million for the
quarter ended September 30, 2000. This increase resulted primarily from an
increase in research and development personnel. 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 Bonusing software and bonus games.
Selling, general and administrative expenses increased by $11,000 during
the current quarter compared to the quarter ended September 30, 2000. This
increase resulted primarily from increased sales volume in the current quarter
as compared to the same quarter in the prior year. As a percentage of
revenue, selling, general and administrative expenses decreased to 19% during
the current quarter from 42% in the prior year quarter, due to increased
revenues in the current quarter as compared to the quarter ended September 30,
2000 and the fixed nature of many of these expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, the Company had cash and equivalents of $8.8
million, compared to $12.0 million as of June 30, 2001. The decrease is
primarily attributed to the decrease in current liabilities of $3.7 million
during the quarter. The Company invests its cash in highly liquid marketable
securities with maturities of three months or less at date of purchase.
IGT owns 519,481 shares of the Company's Series A Convertible Preferred
Stock. IGT and the Company each has the right to cause the Company to redeem
such shares for a price equal to the original purchase price of the shares,
which was approximately $5.0 million, plus any declared but unpaid dividends on
or after the earlier of January 28, 2002 or when the Company's major common
stockholder reduces his ownership to fewer than 1 million shares of the
Company's common stock. If the Company redeems the Series A Stock, such
redemption could have a material adverse effect on the Company's liquidity. The
Company has no present intention to call the Series A Stock for redemption, nor
does the Company have any information concerning whether or when IGT intends to
cause the Company to redeem the Series A Stock.
The Company has no debt outstanding but has secured a revolving credit
facility to provide up to $3.5 million in financing secured by inventory and
accounts receivable. The revolving credit facility contains certain financial
covenants including minimum net worth, minimum cash flow, net income and
operating income requirements. As of September 30, 2001, the Company had no
borrowings outstanding and was in compliance with all financial covenants. The
current credit facility will expire in January 2002.
At September 30, 2001, the Company had collected $5.6 million in advance
deposits against its order backlog of approximately $18.5 million. Backlog,
however, may not be a meaningful indication of future sales. Sales are made
pursuant to purchase orders or sales agreements for specific system
installations and products are often delivered several months after the 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, loss or delivery over an extended
period of time of any one order.
Pursuant to the settlement agreement with respect to its shareholder
litigation, the Company is obligated to pay $2.3 million in cash, of which $1.0
million had been paid as of September 30, 2001. The remaining $1.3 million is
payable by January 31, 2002. The Company believes that these payments will not
have a material adverse effect on the Company's liquidity.
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 2002.
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 to improve
liquidity, by reducing personnel and other expenses.
FOREIGN CURRENCY EXCHANGE RATE RISK
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 relating to
the value of sales contracts and accounts receivable denominated in Australian
dollars. The counterparty to the foreign exchange contract was a large, widely
recognized bank resulting in minimal risk of credit loss due to non-performance
by the bank. 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 are substantially offset by the impact of such changes on
the value of the related sales contracts and accounts receivable.
9
The Company's results of operations were not affected by the foreign
exchange contract. The Company had no foreign exchange contracts during fiscal
2001 and has no current plans to enter into any such contracts.
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, 2001.
Forward-looking statements contained in this Form 10-Q relate to the
Company's plans and expectations as to: 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 introduction; the availability of funds under the line
of credit on terms acceptable to both the Company and the lending bank; patent
protection; and litigation results and settlements.
The following factors, among others, could cause actual results to
differ from those indicated in the forward-looking statements: the risk that
revenues could be negatively affected as the result of the effects on the U.S.
economy and the gaming industry of the terrorist attacks of September 11, 2001;
the possibility that changes in the agreement between IGT and MGM MIRAGE to
provide the Company's products for installation in MGM MIRAGE properties (to
which the Company is not a party) could adversely affect revenues anticipated by
the Company from IGT; the possibility that the Company's suppliers may not be
able to meet required delivery schedules for components of the products; 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 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: November 14, 2001 By /s/ Patrick W. Cavanaugh
----------------------------------
Patrick W. Cavanaugh
Senior Vice President, Chief Financial
Officer and Treasurer
(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 Employment Agreement between Acres Gaming Incorporate and Floyd W.
Glisson, dated effective as of January 1, 2001.
- --------------------
+ 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 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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