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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] 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
April 30, 1998 was 8,819,981.
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ACRES GAMING INCORPORATED
Table of Contents
Page
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at March 31, 1998 and June 30, 1997 1
Statements of Operations for the Three and Nine Months Ended
March 31, 1998 and 1997 2
Statements of Cash Flows for the Nine Months Ended
March 31, 1998 and 1997 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 9
INDEX TO EXHIBITS 10
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACRES GAMING INCORPORATED
BALANCE SHEETS
ASSETS
MARCH 31, 1998
(UNAUDITED) JUNE 30, 1997
-------- --------
(in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 9,682 $ 9,318
Receivables 1,276 3,880
Inventories 3,498 5,366
Prepaid expenses 186 455
-------- --------
Total current assets 14,642 19,019
-------- --------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 549 541
Equipment 4,344 2,804
Leasehold improvements 583 526
Accumulated depreciation (3,086) (2,075)
-------- --------
Total property and equipment 2,390 1,796
OTHER ASSETS 444 508
-------- --------
$ 17,476 $ 21,323
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,156 $ 1,339
Accrued expenses 428 723
Customer deposits 427 483
-------- --------
Total current liabilities 2,011 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 March 31, 1998 and June 30, 1997 88 88
Additional paid-in capital 19,554 19,321
Accumulated deficit (9,125) (5,579)
-------- --------
Total stockholders' equity 10,517 13,830
======== ========
$ 17,476 $ 21,323
======== ========
The accompanying notes are an integral part of these balance sheets.
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ACRES GAMING INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands except per share data)
NET REVENUES $ 2,764 $ 2,710 $ 12,529 $ 14,953
COST OF REVENUES 2,287 1,461 7,964 6,875
-------- -------- -------- --------
GROSS PROFIT 477 1,249 4,565 8,078
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 1,120 1,381 3,291 3,366
Selling, general and administrative 1,442 1,336 4,423 3,444
Non-recurring charge -- -- 745 --
-------- -------- -------- --------
Total operating expenses 2,562 2,717 8,459 6,810
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS (2,085) (1,468) (3,894) 1,268
OTHER INCOME 170 119 423 238
-------- -------- -------- --------
NET INCOME (LOSS) $ (1,915) $ (1,349) $ (3,471) $ 1,506
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE - BASIC $ (0.22) $ (0.15) $ (0.39) $ 0.18
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.22) $ (0.15) $ (0.39) $ 0.17
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
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ACRES GAMING INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
-------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,471) $ 1,506
Adjustments to reconcile net income (loss) to net cash
from operations:
Depreciation and amortization 1,095 664
Non-recurring charge 745 --
Changes in assets and liabilities:
Receivables 2,604 (2,724)
Inventories 1,207 (2,581)
Prepaid expenses 269 (57)
Accounts payable and accrued expenses (562) 32
Customer deposits (56) (1,092)
-------- --------
Net cash from operating activities 1,831 (4,252)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,630) (826)
Other, net 5 (269)
-------- --------
Net cash from investing activities (1,625) (1,095)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 233 8,027
Proceeds from issuance of redeemable convertible preferred -- 4,948
stock, net
Preferred stock dividends (75) --
-------- --------
Net cash from financing activities 158 12,975
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 364 7,628
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,318 2,500
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,682 $ 10,128
======== ========
The accompanying notes are an integral part of these statements.
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ACRES GAMING INCORPORATED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. Unaudited Financial Statements
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted from these unaudited financial statements.
These statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended June 30, 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 nine months ended March 31, 1998 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:
MARCH 31, JUNE 30,
1998 1997
------ ------
(in thousands)
Raw Materials $1,354 $2,787
Work-in-progress 219 621
Finished Goods 1,925 1,958
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$3,498 $5,366
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3. Income Taxes
At March 31, 1998, the Company had cumulative net operating losses of
approximately $8.9 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 March 31, 1998.
4. Redeemable Convertible Preferred Stock
In January 1997, the Company created a series of preferred stock, 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.
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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.
Under the new requirements, the Company reports basic and diluted earnings
per share. Only the weighted average number of common shares issued and
outstanding are 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
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. Earnings per share amounts
in the following table conform to the SFAS 128 requirements. Where
necessary, prior year amounts have been restated.
FOR THE THREE MONTHS FOR THE NINE
ENDED MARCH 31, MONTHS ENDED MARCH 31,
--------------------- ---------------------
1998 1997 1998 1997
======= ======= ======= =======
(in thousands except per share data)
Net income (loss) $(1,915) $(1,349) $(3,471) $ 1,506
======= ======= ======= =======
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 8,816 8,749 8,798 8,281
share
Dilutive effect of warrants and employee stock
options after application of the treasury -- -- -- 647
stock method
Dilutive effect of redeemable convertible
preferred stock after application of the -- -- -- 127
if-converted method
------- ------- ------- -------
Weighted average number of common shares
outstanding for computing diluted earnings per share 8,816 8,749 8,798 9,055
======= ======= ======= =======
------- ------- ------- -------
Earnings (loss) per share - basic $ (0.22) $ (0.15) $ (0.39) $ 0.18
======= ======= ======= =======
------- ------- ------- -------
Earnings (loss) per share - diluted $ (0.22) $ (0.15) $ (0.39) $ 0.17
======= ======= ======= =======
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,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
(in thousands)
Warrants and employee stock options outstanding 1,268 1,103 1,268 224
Redeemable convertible preferred stock
outstanding 519 519 519 --
----- ----- ----- -----
Total common stock equivalents outstanding 1,787 1,622 1,787 224
===== ===== ===== =====
Total common stock equivalents outstanding
adjusted for application of the treasury stock
and if-converted methods 1,073 777 1,224 --
===== ===== ===== =====
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Under the treasury stock and if-converted methods, the assumed net proceeds
from the exercise of the weighted average number of common stock equivalents
outstanding during the period are assumed to be used to repurchase common
stock at its average market price during the period. Such repurchase of
common stock reduces the dilutive effect of the common stock equivalents.
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 March 31, 1998
were $2.8 million as compared to net revenues of $2.7 million during the three
months ended March 31, 1997. For the nine months ended March 31, 1998, net
revenues were $12.5 million as compared to $15.0 million for the nine months of
the prior fiscal year. The Company's revenues can fluctuate significantly based
on the timing of the delivery of any large order. 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"), increased over the prior year by approximately $500,000
during the quarter ended March 31, 1998. Such sales increased by $6.2 million
during the nine months ended March 31, 1998. Revenues for the first half 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 $7.9 million during the nine months ended March
31, 1998.
Gross profit as a percentage of net revenue was 17% in the three months
ended March 31, 1998, compared to 46% for the same period in the prior year. For
the nine months ended March 31, 1998, gross margin decreased to 36% from 54% for
the same period in 1997. 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.
Operating expenses for the three months ended March 31, 1998 have
remained consistent with the prior year. For the nine months ended March 31,
1998, operating expenses, exclusive of the non-recurring charge discussed below,
increased to $7.7 million from $6.8 million in the same period in 1997. 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 will not realize significant revenue
from these new products in the current fiscal year.
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 available in the combined IGS/ABS
system make future sales unlikely.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have historically used cash. However, during
the nine months ended March 31, 1998, $1.8 million of net cash was generated by
operating activities as the collection of accounts receivable and reductions in
inventories more than offset the effects of the operating loss. During the same
period, the Company spent $1.6 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 March 31, 1998, the Company had cash and cash equivalents of $9.7
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 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 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.
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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 an order 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, a single shareholder, seeking to serve as a class
representative, filed an action in the United States District Court for the
District of Nevada (Townsend v. Acres Gaming et al., Case No. CV-S-97-01848-DWH
(RJJ)) . In April 1998, a consolidated and amended complaint was filed combining
the Townsend case and a subsequently filed case, Johnson v. Acres Gaming, et
al., Case No. CV-S-98-002620PMP (RJJ) into a single consolidated action. The
amended 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. It further alleges a proposed class period commencing on March
26, 1997 and ending on December 11, 1997. The amended 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 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 8, 1998 By /s/ Robert W. Brown
----------------------------------
Robert W. Brown
Executive Vice President, Chief Financial
Officer, Secretary and Treasurer
(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 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.
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