1
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 December 31, 1997
[ ] 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)
815 NW NINTH STREET
CORVALLIS, OREGON 97330
(Address of principal executive offices)
541-753-7648
(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, 1998 was 8,819,081.
2
ACRES GAMING INCORPORATED
Table of Contents
Page
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at December 31, 1997 and
June 30, 1997 1
Statements of Operations for the Three and Six Months Ended
December 31, 1997 and 1996 2
Statements of Cash Flows for the Six Months Ended
December 31, 1997 and 1996 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
PART II -- OTHER INFORMATION 8
SIGNATURES 10
INDEX TO EXHIBITS 11
3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACRES GAMING INCORPORATED
BALANCE SHEETS
ASSETS
DECEMBER 31, 1997
(UNAUDITED) JUNE 30, 1997
----------------- -------------
(in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 9,846 $ 9,318
Receivables 2,780 3,880
Inventories 3,961 5,366
Prepaid expenses 278 455
-------- --------
Total current assets 16,865 19,019
-------- --------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 539 541
Equipment 4,190 2,804
Leasehold improvements 559 526
Accumulated depreciation (2,595) (2,075)
-------- --------
Total property and equipment 2,693 1,796
OTHER ASSETS 465 508
-------- --------
$ 20,023 $ 21,323
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,673 $ 1,339
Accrued expenses 524 723
Customer deposits 457 483
-------- ---------
Total current liabilities 2,654 2,545
-------- --------
REDEEMABLE CONVERTIBLE PREFERRED STOCK 4,948 4,948
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value,
50 million shares authorized,
8.8 million shares issued and
outstanding at December 31, 1997 and
June 30, 1997 88 88
Additional paid-in capital 19,505 19,321
Accumulated deficit (7,172) (5,579)
-------- --------
Total stockholders' equity 12,421 13,830
-------- --------
$ 20,023 $ 21,323
======== ========
The accompanying notes are an integral part of these balance sheets.
1
4
ACRES GAMING INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ -------------------
1997 1996 1997 1996
------- ------ ------- -------
(in thousands except per share data)
NET REVENUES $ 3,876 $5,675 9,765 $12,243
COST OF REVENUES 2,452 2,306 5,677 5,414
------- ------ ------- -------
GROSS PROFIT 1,424 3,369 4,088 6,829
------- ------ ------- -------
OPERATING EXPENSES:
Research and development 1,148 1,117 2,171 1,985
Selling, general and administrative 1,474 970 2,981 2,108
Non-recurring charge 745 -- 745 --
------- ------ ------- -------
Total operating expenses 3,367 2,087 5,897 4,093
------- ------ ------- -------
INCOME (LOSS) FROM OPERATIONS (1,943) 1,282 (1,809) 2,736
OTHER INCOME 132 84 253 119
------- ------ ------- -------
NET INCOME (LOSS) $(1,811) $1,366 $(1,556) $ 2,855
======= ====== ======= =======
NET INCOME (LOSS) PER SHARE -- BASIC $ (.21) $ 0.16 $ (0.18) $ 0.35
======= ====== ======= =======
NET INCOME (LOSS) PER SHARE -- DILUTED $ (.21) $ 0.15 $ (0.18) $ 0.32
======= ====== ======= =======
The accompanying notes are an integral part of these statements.
2
5
ACRES GAMING INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
1997 1996
-------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,556) $ 2,855
Adjustments to reconcile net income (loss) to net cash
from operations:
Depreciation and amortization 591 415
Non-recurring charge 745 --
Changes in assets and liabilities:
Receivables 1,100 (3,510)
Inventories 744 (1,617)
Prepaid expenses 177 (132)
Accounts payable and accrued expenses 51 (359)
Customer deposits (26) (1,206)
------- -------
Net cash from operating activities 1,826 (3,554)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,442) (650)
Other, net (3) (112)
------- -------
Net cash from investing activities (1,445) (762)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 184 8,066
Preferred stock dividends (37) --
------- -------
Net cash from financing activities 147 8,066
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 528 3,750
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,318 2,500
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,846 $ 6,250
======= =======
The accompanying notes are an integral part of these statements.
3
6
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, 1997 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 and six months ended December 31, 1997 are not
necessarily indicative of the operating results for the full year or future
periods.
2. 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,
1997 1997
------------ --------
(in thousands)
Raw Materials $1,693 $2,787
Work-in-progress 436 621
Finished Goods 1,832 1,958
------ ------
$3,961 $5,366
====== ======
3. Income Taxes
At December 31, 1997, the Company had cumulative net operating losses of
approximately $7.0 million which are available to offset future taxable
income through 2011. 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, 1997.
4. Redeemable Convertible Preferred Stock
In January 1997, the Company created a series of preferred stock, which it
designated Series A Convertible Preferred Stock (the "Series A Stock"), and
issued 519,481 shares for net proceeds of approximately $4.9 million. The
Series A Stock is entitled to receive non-cumulative dividends at a rate per
share equal to 3 percent of $9.625, the per share purchase price. Holders of
the Series A Stock have the option to convert shares of Series A Stock into
shares of Common Stock based upon the applicable conversion price in effect
at the time of conversion. The Series A Stock is subject to redemption, at
the option of the Company and the holders, subject to certain conditions, at
a price equal to the purchase price plus any declared but unpaid dividends.
4
7
5. Per Share Computation
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share" ("SFAS 128") in the quarter ended December 31, 1997.
SFAS 128 replaced the former reporting of primary and fully diluted earnings
per share with its required reporting of basic and diluted earnings per
share. Under the new requirements, the dilutive effect of stock options and
redeemable convertible preferred stock is excluded from basic earnings per
share but included in the computation of diluted earnings per share. For
purposes of these earnings per share computations, earnings have not been
reduced by preferred stock dividends in accordance with the "if-converted
method" of accounting for convertible securities. All earnings per share
amounts in the following table are presented and, where necessary, restated
to conform to the SFAS 128 requirements.
FOR THE THREE
MONTHS ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED DECEMBER 31,
------------------ -------------------
1997 1996 1997 1996
-------- ------- -------- --------
(in thousands except per share data)
Earnings (loss) $(1,811) $1,366 $(1,556) $2,855
======= ====== ======= ======
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 8,804 8,482 8,790 8,054
Dilutive effect of warrants and employee stock
options after application of the treasury
stock method * 735 * 812
Dilutive effect of redeemable convertible
preferred stock after application of the
if-converted method * -- * --
------- ------ ------- ------
Weighted average number of common shares
outstanding for computing diluted earnings per
share 8,804 9,217 8,790 8,866
======= ====== ======= ======
Earnings (loss) per share -- basic $ (.21) $ .16 $ (.18) $ .35
------- ------ ------- ------
Earnings (loss) per share -- diluted $ (.21) $ .15 $ (.18) $ .32
======== ======= ======= ======
* The following weighted average common stock equivalents are excluded from
the earnings per share calculation as their effect would have been
anti-dilutive:
FOR THE THREE
MONTHS ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED DECEMBER 31,
------------------ -------------------
1997 1996 1997 1996
-------- ------- -------- --------
(in thousands except per share data)
Warrants and employee stock options 223 -- 316 --
Redeemable convertible preferred stock 855 -- 855 --
5
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, manufactures and markets electronic game
promotions, equipment and games for the casino gaming industry. The Company's
products are based on its proprietary Acres Bonusing Technology(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.
RESULTS OF OPERATIONS
The Company's net revenues for the three months ended December 31, 1997
were $3.9 million as compared to net revenues of $5.7 million during the three
months ended December 31, 1996. For the six-month period ended December 31,
1997, net revenues were $9.8 million as compared to $12.2 million for the first
half of the prior fiscal year. The Company's revenues can fluctuate
significantly based on the timing of the delivery of any large order. Revenues
for the first two quarters of fiscal 1997 included significant sales of products
for Crown Ltd.'s casino in Melbourne, Australia, sales of the Company's now
discontinued slot accounting/player tracking system, and sales of components to
a gaming machine developer for which sales continue but at a lower volume.
Combined, such sales decreased from the prior year by $3.4 million during the
quarter ended December 31, 1997, and by $7.9 million during the six months ended
December 31, 1997. These declines were partially offset by sales under the
strategic alliance with International Game Technology ("IGT") under which the
Company's Acres Bonusing System(TM) ("ABS") is marketed and integrated with the
new IGT Gaming System ("IGS"). Such sales increased over the prior year
by $1.8 million and $5.7 million during the quarter and six-month period ended
December 31, 1997, respectively.
Gross profit as a percentage of net revenue was 37% in the three-month
period ended December 31, 1997, compared to 59% for the same period in the prior
year. For the six-month period ended December 31, 1997, gross margin decreased
to 42% from 56% for the same period in 1996. Gross profit is generally higher on
products which feature Acres Bonusing Technology, including the Company's own
slot accounting/player tracking system, the system used for the Crown casino and
the products sold to the gaming machine developer. These sales were
substantially replaced with sales of lower margin hardware components to IGT.
When deliveries of the combined IGS and ABS begin, the Company expects its gross
profit margin to increase as it will also recognize revenues from its bonusing
software.
The Company has increased its operating expenses over the past year
primarily due to the hiring of additional personnel to expand future product
offerings based on its Acres Bonusing Technology. The Company may not realize
significant revenue benefits from these new product offerings in the current
fiscal year. Operating expenses, exclusive of the non-recurring charge,
increased to $2.6 million in the quarter ended December 31, 1997 from $2.1
million in the same quarter in 1996 and increased to $5.2 million for the
six-month period ended December 31, 1997 from $4.1 million in the same period in
1996.
The Company recorded a non-recurring charge of $745,000 primarily to
reduce excess inventory of its own slot accounting/player tracking system during
the quarter ended December 31, 1997. The Company originally expected to be able
to liquidate the majority of the excess inventory to existing slot
accounting/player tracking customers and smaller casinos. These sales have not
been realized and the significant improvements now available in the combined
IGS/ABS system make future sales unlikely.
6
9
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have historically used cash. However, during
the six months ended December 31, 1997, $1.8 million of net cash was generated
by operating activities primarily from the collection of accounts receivable and
reductions in inventory. During the same period, the Company spent $1.4 million
on capital equipment.
The Company's principal sources of liquidity have been net proceeds from
sales of equity securities; $7.2 million from its initial public offering in
November 1993, $7.6 million from the exercise of warrants in October 1996 and
$4.9 million from the issuance of 519,481 shares of Series A Convertible
Preferred Stock in January 1997.
As of December 31, 1997, the Company had cash and cash equivalents of
$9.8 million, compared to $9.3 million as of June 30, 1997. The Company does not
have any debt. The Company's cash and cash equivalents balances are expected to
be sufficient to fund the Company's operations for at least the next 12 months.
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 involve risks and uncertainties which may cause actual results to
differ materially from those predicted in the forward-looking statements. Such
risks and uncertainties include, but are not limited to: developments in the
Company's strategic alliance with IGT; the timing of receipt, installation and
regulatory approval of orders; competition; government regulation; market
acceptance; product development; customer concentration; technological change;
the effect of economic conditions on the gaming industry generally; the results
of pending litigation and other 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, 1997.
7
10
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1997, the Company received Patent No. 5,655,961 for a "method
of operating networked gaming devices." In September 1997, the Company notified
Mikohn Gaming Corporation ("Mikohn") and certain of its customers that the
Mikohn product "MoneyTime(TM)" appeared to infringe at least some of the claims
of the Company's patent, although such infringement could not be conclusively
determined without a better understanding of the structure and operation of the
Money Time product. In October 1997, Mikohn filed an action in the United States
District Court for the District of Nevada (Case No. CV-S-97-01383-HDM
(LRL))seeking a declaratory judgment that the Mikohn products do not infringe
the Company's patent, that the Company's patent is invalid, and that the Mikohn
products do not infringe any pending patent applications by the Company. The
complaint also seeks to enjoin the Company from disparaging Mikohn's products,
and seeks the payment of unspecified compensatory and punitive damages,
attorneys' fees and costs, together with interest. In December 1997, the court
issued orders preliminarily enjoining the Company from making any direct or
indirect, oral or written statements to Mikohn's customers regarding Mikohn's
product infringing the Company's patents. In January 1998, the Company appealed
the preliminary injunction. The Company believes it has acted appropriately, has
confidence in the validity of its patent and intends to vigorously defend its
position.
In December 1997, the Company received notice that a complaint had been
filed in the United States District Court for the District of Nevada (Townsend
v. Acres Gaming et al) by a single shareholder who is seeking to serve as a
class representative. The complaint alleges the Company made false and
misleading statements and/or omissions concerning the finances and business
prospects of the Company to artificially maintain the Company's stock price in
violation of the federal securities laws. The complaint names the Company and
certain of its officers as defendants and seeks compensatory damages, interest
and fees. The action has not been certified as a class action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on November 12,
1997. The following actions were taken at the Annual Meeting:
Election of Directors. John F. Acres, Jo Ann Acres, Richard A. Carone, Floyd W.
Glisson and Joseph A. Huseonica were elected to serve as directors for a term of
one year. The holders of 7,701,114 shares voted FOR the election as a group,
holders of 23,849 shares voted AGAINST and no shareholders ABSTAINED.
Approval of Amendments to the 1993 Stock Option and Incentive Plan (the "Plan").
Amendments to the Plan were approved which: 1) add certain provisions with
respect to the administration of the Plan by "nonemployee directors" as required
by Rule 16b-3 of the Securities Exchange Act of 1934, as amended, and "outside
directors" as contemplated by Section 162(m) of the Internal Revenue Code of
1986, as amended; and 2) expand the Plan to cover directors of the Company. The
holders of 6,906,613 shares voted FOR the amendments, the holders of 295,877
shares voted AGAINST and the holders of 46,567 shares ABSTAINED. The holders of
475,906 shares did not vote in accordance with broker non-vote policies.
Ratification of Appointment of Arthur Andersen LLP as Independent Public
Accountants. The Board of Directors' appointment of Arthur Andersen as
independent public accountants was ratified. The holders of 7,126,356 shares
voted FOR the ratification, holders of 583,357 shares voted AGAINST and holders
of 15,250 shares ABSTAINED.
8
11
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.
9
12
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 11, 1998 By /s/ Robert W. Brown
------------------------------------
Robert W. Brown
Executive Vice President,
Chief Financial Officer,
Secretary and Treasurer
(principal financial and
chief accounting officer)
10
13
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 Acres Gaming Incorporated 1993 Stock Option and Incentive Plan,
as amended(3)*
27.1 Financial Data Schedule
- ----------
* 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.
(3) Incorporated by reference to Appendix 1 to the Company's Definitive Proxy
Statement on Schedule 14A for the 1997 Annual Meeting of Stockholders,
filed with the Commission on October 1, 1997.
11