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 March 31, 2002
[ ] 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 April 30, 2002 was 9,290,531.
ACRES GAMING INCORPORATED
Table of Contents
Page
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2002 (unaudited) and June 30, 2001 1
Consolidated Statements of Operations for the Three and Nine Months Ended
March 31, 2002 and 2001 (unaudited) 2
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 2002 and 2001 (unaudited) 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II -- OTHER INFORMATION 12
SIGNATURES 14
INDEX TO EXHIBITS 15
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACRES GAMING INCORPORATED
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002
(UNAUDITED) JUNE 30, 2001
---------------- --------------
(in thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 7,307 $ 11,958
Receivables, net of allowance of $932 and $592, respectively 4,120 3,266
Inventories 4,600 4,764
Prepaid expenses 161 167
-------- --------
Total current assets 16,188 20,155
-------- --------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 2,113 2,006
Equipment 4,388 4,278
Leasehold improvements 486 439
Accumulated depreciation (6,029) (5,422)
-------- --------
Total property and equipment, net 958 1,301
OTHER ASSETS, Net 971 773
-------- --------
TOTAL ASSETS $ 18,117 $ 22,229
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,895 $ 3,104
Accrued compensation 496 1,270
Accrued other expenses 263 958
Customer deposits 5,323 6,663
Litigation settlement obligation -- 2,010
Convertible subordinated debentures, current 3,000 --
Note payable, current 100 --
-------- --------
Total current liabilities 11,077 14,005
Convertible subordinated debentures, net of current portion and discount 1,496 --
Note payable, net of current portion 394 --
-------- --------
Total liabilities 12,967 14,005
REDEEMABLE CONVERTIBLE PREFERRED STOCK -- 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 20,965 20,944
Additional paid-in capital debenture warrants 720 --
Deferred stock-based compensation, net (633) (877)
Accumulated deficit (15,995) (16,884)
-------- --------
Total stockholders' equity 5,150 3,276
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,117 $ 22,229
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
1
ACRES GAMING INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(in thousands except per share data)
NET REVENUES $ 5,632 $ 17,465 $ 17,069 $ 30,425
COST OF REVENUES 2,853 11,180 7,888 19,413
-------- -------- -------- --------
GROSS PROFIT 2,779 6,285 9,181 11,012
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 1,451 1,233 4,437 3,348
Selling, general and administrative 1,374 2,530 4,054 5,271
-------- -------- -------- --------
Total operating expenses 2,825 3,763 8,491 8,619
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS (46) 2,522 690 2,393
OTHER INCOME (EXPENSE), Net (213) 74 199 93
-------- -------- -------- --------
NET INCOME (LOSS) $ (259) $ 2,596 $ 889 $ 2,486
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE - BASIC $ (.03) $ .29 $ .10 $ .28
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE - DILUTED $ (.03) $ .25 $ .09 $ .24
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
2
ACRES GAMING INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
-----------------------
2002 2001
-------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 889 $ 2,486
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 995 1,163
Amortization of debt issuance costs 84 --
Amortization of debt discount 175 --
Amortization of deferred stock-based compensation 244 16
Provision for doubtful accounts 340 120
Changes in assets and liabilities:
Receivables (1,194) (6,492)
Inventories 164 (1,093)
Prepaid expenses 6 (198)
Accounts payable and accrued expenses (2,678) 4,184
Accrued litigation settlement obligation (2,010) --
Customer deposits (1,340) 7,878
-------- --------
Net cash provided by (used in) operating activities (4,325) 8,064
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (411) (649)
Other, net (607) (6)
-------- --------
Net cash used in investing activities (1,018) (655)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of preferred stock (4,948) --
Issuance of common stock, net 741 43
Proceeds from convertible subordinated debentures 5,000 --
Debt issuance costs (595) --
Proceeds from issuance of note payable 494 --
-------- --------
Net cash provided by financing activities 692 43
-------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (4,651) 7,452
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 11,958 789
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 7,307 $ 8,241
======== ========
Supplemental Disclosure of Non-cash Financing Activities:
Value of warrants issued in conjunction with convertible subordinated debentures $ 595 --
Value of warrants issued as debt issuance costs $ 125 --
Value of warrants issued as a cost of equity $ 128 --
The accompanying notes are an integral part of these
consolidated financial statements.
3
ACRES GAMING INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Unaudited Consolidated 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 consolidated 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 consolidated financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results of the interim
period. The results of operations for the three- and nine-month periods ended
March 31, 2002 are not necessarily indicative of the expected 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.
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.
During the nine months ended March 31, 2002, the Company settled ongoing
litigation with Mikohn Gaming Corporation and entered into a royalty agreement
to license bonusing patents to Mikohn. Mikohn paid the Company $1.5 million, of
which $1.2 million related to past royalties and is included in net revenues for
the nine months ended March 31, 2002, and the remaining $339,000 is included in
other income as a gain on litigation settlement for the nine months ended March
31, 2002.
The Company has entered into certain manufacturing royalty agreements
where revenue is recognized as the licensed manufacturer sells the related
hardware products.
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:
MARCH 31,
2002 JUNE 30,
(unaudited) 2001
----------- --------
(in thousands)
Raw materials $ 2,663 $ 2,792
Work-in-progress 56 47
Finished goods 1,881 1,925
-------- --------
Total inventories $ 4,600 $ 4,764
======== ========
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 $900,000 and
$670,000, were $161,000 and $391,000 at March 31, 2002 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 $230,000 and
$265,000 of amortization expense for the nine-month periods ended March 31, 2002
and March 31, 2001, respectively.
All research and development costs are expensed as incurred.
5. Income Taxes
At March 31, 2002, the Company had cumulative net operating losses of
approximately $12.0 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
March 31, 2002.
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 for patent infringement
and breach of contract, compensatory damages substantially in excess of $1
million for breach of warranty, 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
5
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 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, results of operations or cash flows. 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. On motions for summary judgment, the court found on February 28, 2002
that the insurance carrier had a duty to defend the Company against the lawsuit.
The insurance carrier has filed a motion seeking to have the court reconsider
its decision, which is pending. The Company cannot predict the outcome of this
suit.
In the second action regarding the WOG patents, now pending in U.S.
District Court for the District of Oregon, the Company 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. Effective December 27, 2001,
the Company and Mikohn settled this litigation. Pursuant to the settlement
agreement, Mikohn agreed to license the Company's bonusing patents, paid the
Company a settlement of $1.5 million for use of the patents prior to September
1, 2001 and agreed to pay additional royalties for future use of those patents.
In a separate but related action, the Company sued a former general
liability insurance carrier for breach of insurance contract related to the cost
of defense of the claims alleged by defendants. That suit is now pending in U.S.
District Court for the District of Nevada. The insurance carrier seeks a
declaration 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. On motions for summary judgment, the court found
on February 28, 2002 that the insurance carrier did not have a duty to defend
the Company against the lawsuit and that the Company must repay the insurance
carrier for approximately $170,000 in defense costs previously paid by that
insurance carrier. The Company has filed a motion seeking to have the court
reconsider its decision, which is 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, results of
operations or cash flows.
Wild Game NG, LLC, a Nevada limited liability company, which owns and
operates Siena Hotel Spa Casino in Reno, Nevada, filed a lawsuit against the
Company in November 2001 in the Second Judicial District Court of the State of
Nevada in the County of Washoe. Siena alleges that the Company failed to perform
its obligations under a $1.8 million Equipment Sale Agreement to install and
maintain a networked slot accounting, cage and credit and player tracking system
in Siena's casino. Siena seeks unspecified damages in excess of $10,000. The
Company believes that Siena's claims are unfounded and has filed counterclaims
seeking, among other things, payments Siena owes the Company for installation of
the Company's hardware in Siena's casino. 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, results of operations or
cash flows.
The Company from time to time is involved in other various legal
proceedings arising in the normal course of business.
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 FOR THE NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
----------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(in thousands, except per share data)
(unaudited)
Net income (loss) allocable to common stockholders $ (259) $ 2,596 $ 889 $ 2,486
Dilutive effect of interest on convertible
subordinated debentures -- -- 84 --
-------- -------- -------- --------
Net income (loss) allocable to common
shareholders $ (259) $ 2,596 $ 973 $ 2,486
======== ======== ======== ========
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 9,074 9,009 9,121 8,940
Dilutive effect of warrants and employee stock
options after application of the treasury
stock method -- 262 243 187
Dilutive effect of redeemable convertible
debentures after application of the
if-converted method -- -- 1,077 --
Dilutive effect of redeemable convertible
preferred stock after application of the
if-converted method -- 1,291 -- 1,291
-------- -------- -------- --------
Weighted average number of common shares
outstanding for computing diluted earnings per
share 9,074 10,562 10,441 10,418
======== ======== ======== ========
-------- -------- -------- --------
Earnings (loss) per share - basic $ (.03) $ .29 $ .10 $ .28
======== ======== ======== ========
-------- -------- -------- --------
Earnings (loss) per share - diluted $ (.03) $ .25 $ .09 $ .24
======== ======== ======== ========
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 NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
-------------------- --------------------
2002 2001 2002 2001
------ ------ ------ ------
(in thousands)
(unaudited)
Warrants and employee stock options 648 419 686 465
Redeemable convertible subordinated
debentures, if converted, assuming conversion
at rates in effect at each respective period end 1,077 -- -- --
Effective January 28, 2002, the Company redeemed all of the 519,481
outstanding shares of its Series A Convertible Preferred Stock from IGT at a
price of $9.625 per share, for an aggregate cost of $5.0 million. The Company
used the proceeds from the sale of 6% convertible subordinated debentures to
fund this redemption.
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 March 31, 2002 and as of June
30, 2001, approximately 83,000 and 33,000 shares, respectively would become
unrestricted if Mr. Glisson's employment were terminated by the Company. The
Company recorded approximately $244,000 and $98,000 of compensation expense for
the nine-month periods ended March 31, 2002 and March 31, 2001, respectively.
Approximately $633,000 and $877,000 of deferred compensation has been recorded
to reflect the remaining restricted balance of the stock as of March 31, 2002
and June 30, 2001, respectively.
9. Redeemable Convertible Debentures
On December 21, 2001, the Company sold to three institutional investors
$5,000,000 principal amount of 6% convertible subordinated debentures that are
convertible into shares of the Company's common stock at $4.6433 per share. The
investors also acquired warrants to purchase 177,674 shares of the Company's
common stock at an exercise price of $4.6433 per share. Interest on the
debentures at the rate of 6% is due semi-annually starting in April 2002.
Principal payments of $300,000 are due monthly from June 2002 to August 2003 and
principal payments of $500,000 are due monthly from September 2003 until the
principal is repaid. The Company may elect to pay the principal of and interest
on the debentures in shares of its common stock at a discounted price rather
than cash, in the case of principal payments, or market price, in the case of
interest payments, as more fully described below. The Company also issued a
warrant to purchase 75,317 shares of its common stock at an exercise price of
$4.6433 per share to the placement agent in connection with the sale of the
debentures and warrants. Pursuant to a Form S-3 Registration Statement, which
became effective as of February 25, 2002, the Company has registered sufficient
shares of common stock to be issued upon conversion of the debentures or
exercise of the warrants.
The Company may elect to repay the outstanding principal amount of the
debentures in shares of its common stock, rather than in cash, at a conversion
price equal to the lesser of $4.6433 or 90% of an average market price per share
(the average of the five lowest daily volume-weighted average prices of the
Company's common stock on the Nasdaq Small Cap Market for the 22 consecutive
trading days immediately preceding the conversion date). The Company may also
elect to make interest payments due under the debentures in shares of its common
stock, rather than in cash, at an interest conversion price, which will be
calculated as the average of the daily volume-weighted average prices of the
Company's common stock on the Nasdaq SmallCap Market for the five consecutive
trading days immediately preceding the interest payment date.
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
8
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, operating results or cash flows 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 March 31, 2002 were
$5.6 million compared to $17.5 million in the same quarter of fiscal 2001. The
decrease in revenues is primarily attributable to the fact that for the quarter
ended March 31, 2002, the Company's contract with Station Casinos contains
provisions that restrict our ability to recognize revenue until certain
additional bonuses are installed and the Company recorded fewer hardware
deliveries to and software installations for large customers compared to the
same quarter of fiscal 2001. The Company's revenues fluctuate significantly
based on the timing of the delivery of any large order. Revenues for the quarter
ended March 31, 2002 consisted of $3.0 million for hardware components and $2.6
million for software and services sold to a number of customers. Revenues in the
quarter ended March 31, 2001 consisted of $15.8 million in hardware sales and
$1.7 million of software and service sales.
For the nine-month period ending March 31, 2002, net revenues were $17.1
million compared to $30.4 million during the same period in the prior year.
Revenues for the nine months ended March 31, 2002 included $1.2 million in
royalty revenue for fees the Company received from Mikohn Gaming Corporation for
the license of certain of its bonusing patents in connection with the settlement
of litigation for past royalties. The balance of the revenues included $7.8
million for hardware components and $8.1 million for software and services sold
to a number of customers. In the first nine months of the prior fiscal year, net
revenues were primarily from sales of the Company's products for properties
operated by Station Casinos, Inc., and from sales of the Company's products to
MGM MIRAGE through IGT and to Mandalay Resort Group as well as to MonteCasino in
South Africa and to five Native American casinos in California. The decrease in
revenues is primarily attributable to the fact that for the nine-month period
ended March 31, 2002, the Company recorded fewer hardware deliveries to and
software installation for large customers compared to the same period of fiscal
2001.
Gross profit margin increased to 49 percent in the current quarter from
36 percent in the same quarter of fiscal 2001. For the first nine months of
fiscal 2002, gross profit margins were 54 percent versus 36 percent in the same
period of fiscal 2001. The increase in gross profit margins was primarily
attributable to the fact that software sales and royalty fees, which made up a
greater percentage of revenue in the current quarter and first nine months of
fiscal 2002, carry a higher gross profit margin than the hardware sales which
made up a larger percentage of revenue recorded in the same periods of fiscal
2001.
The Company's research and development expenses increased to $1.5
million in the quarter ended March 31, 2002, from $1.2 million for the quarter
ended March 31, 2001. For the nine-month period ended March 31, 2002, research
and development expenses increased to $4.4 million from $3.3 million in the same
period of the prior year. 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 decreased by $1.2 million
during the quarter ended March 31, 2002, compared to the quarter ended March 31,
2001. For the nine-month period ended March 31, 2002, selling, general and
administrative expenses decreased by $1.2 from $5.3 million for the same period
in the prior year. These decreases resulted primarily from a reduction in legal
expenses during the three- and nine-month periods ended March 31, 2002, compared
to the same periods ended March 31, 2001.
Other income (expense), net, was $(213,000) for the current quarter
compared to $74,000 in the same quarter of fiscal 2001. This decrease in other
income (expense) consisted principally of an increase in interest expense and
amortization of debt issuance costs of $230,000 during the current quarter
compared to the prior year quarter. Other income was $199,000 for the nine-month
period ended March 31, 2002, compared to $93,000 for the same period in fiscal
2001. The increase in other income in the first nine months of fiscal 2002 is
primarily due to the gain resulting from settlement of litigation with Mikohn
which was partially offset by the increase in interest expense for the
nine-month period ended March 31, 2002, compared to the same period in the prior
fiscal year.
9
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, the Company had $7.3 million in cash and equivalents.
On December 21, 2001, the Company sold $5.0 million principal amount of 6%
convertible subordinated debentures and warrants in a private placement.
Interest on the debentures at the rate of 6% is due semi-annually starting in
April 2002. Principal payments of $300,000 are due monthly from June 2002 to
August 2003 and principal payments of $500,000 are due monthly from September
2003 until the principal is repaid.
Effective January 28, 2002, the Company used the proceeds from the sale
of 6% convertible subordinated debentures to redeem all of its 519,481
outstanding shares of Series A Convertible Preferred Stock for an aggregate cost
of $5.0 million.
At March 31, 2002, the Company had collected $5.3 million in advance
deposits against its order backlog of approximately $24.3 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 was obligated to pay $2.0 million in cash, of which the
final $654,000 was paid on January 30, 2002.
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 occasionally enters into forward exchange contracts to manage a foreign
currency risk related to sales that are denominated in foreign currency.
OTHER MATTERS
In July 2001, the Financial Accounting Standards Board issued Statement
No. 141, "Business Combinations" and Statement No. 142, "Goodwill and Other
Intangible Assets". SFAS 141 is effective as follows: (a) use of the
pooling-of-interests method is prohibited for business combinations initiated
after June 30, 2001; and (b) the provisions of SFAS 141 also apply to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. There are also transition provisions that apply to business
combinations completed before July 1, 2001 which were accounted for by the
purchase method.
SFAS 142 is effective for fiscal years beginning after December 15, 2001
and applies to all goodwill and other intangible assets recognized in an
entity's statement of financial position at that date, regardless of when those
assets were initially recognized.
In August 2001, the Financial Accounting Standards Board issued
Statement No. 143, "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets". The objectives of SFAS 143 are to establish accounting
standards for the recognition and measurement of an asset retirement obligation
and its associated asset retirement cost. SFAS 143 is effective for fiscal years
beginning after June 15, 2002.
In October 2001, the Financial Accounting Standards Board issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 is effective for fiscal
years beginning after December 15, 2001 and, generally, is to be applied
prospectively.
10
The Company is currently evaluating the provisions of SFAS 142, SFAS 143
and SFAS 144 and it does not anticipate that the effects of these changes will
have a material impact on its financial position, results of operations or cash
flows. The Company does not expect the impact of the adoption of SFAS 141 to be
material to its financial position, results of operations or cash flows.
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 Annual Report on 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 and adequacy of cash flow; scheduled
product installation dates; new product development and introduction; 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 possibility
that changes in the agreement between the Company and Station Casinos to install
the Company's products in Station Casinos' properties could affect the timing of
revenues anticipated by the Company from Station Casinos; 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; 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;
competition; government regulation; market acceptance; customer concentration;
technological change; the risk that revenue could be negatively affected as the
result of the effects of economic conditions on the gaming industry generally
and the results of pending litigation.
11
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Two lawsuits were filed in 1999 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 for patent infringement
and breach of contract, compensatory damages substantially in excess of $1
million for breach of warranty, 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 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, results of operations or cash flows. 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. On motions for summary judgment, the court found on February 28, 2002
that the insurance carrier had a duty to defend the Company against the lawsuit.
The insurance carrier has filed a motion seeking to have the court reconsider
its decision, which is pending. The Company cannot predict the outcome of this
suit.
In the second action regarding the WOG patents, now pending in U.S.
District Court for the District of Oregon, the Company 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.
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 Casino Data Systems. 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. On motions for summary judgment, the
court found on February 28, 2002 that the insurance carrier did not have a duty
to defend the Company against the lawsuit and that the Company must repay the
insurance carrier for approximately $170,000 in defense costs previously paid by
that insurance carrier. The Company has filed a motion seeking to have the court
reconsider its decision, which is 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, results of
operations or cash flows.
Wild Game NG, LLC, a Nevada limited liability company, dba Siena Hotel
Spa Casino, sued the Company in the Second Judicial District Court of the State
of Nevada in the County of Washoe in November 2001. Siena owns and operates a
casino located in Reno, Nevada. Siena alleges that the Company failed to perform
its obligations under a $1.8 million Equipment Sale Agreement to install and
maintain a networked slot accounting, cage and credit and player tracking system
in Siena's casino. In its complaint Siena seeks unspecified damages in excess of
$10,000. The Company believes that Siena's claims are unfounded and has filed
counterclaims seeking, among other things, payments Siena owes the Company for
installation of the Company's hardware in Siena's casino. On April 12, 2002, the
Company filed a third-party complaint against Barney Ng, individually, and
certain unnamed defendants. Mr. Ng has moved to dismiss the third-party
complaint which is pending. In its third-party complaint, the Company alleges
that Mr. Ng and the unnamed defendants are personally liable for the payments
owed by Siena to the Company. The Company does not expect the outcome of the
litigation to have a material adverse effect on its financial condition, results
of operations or cash flows.
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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: May 14, 2002 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)
14
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)
- --------------------
(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.
15