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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, 1999
[ ] 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, 1999 was 8,913,281.
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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, 1999 and June 30, 1998 1
Statements of Operations for the Three and Nine Months Ended
March 31, 1999 and 1998 2
Statements of Cash Flows for the Nine Months Ended
March 31, 1999 and 1998 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II -- OTHER INFORMATION 11
SIGNATURES 13
INDEX TO EXHIBITS 14
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACRES GAMING INCORPORATED
BALANCE SHEETS
ASSETS
MARCH 31, 1999
(UNAUDITED) JUNE 30, 1998
-------------- -------------
(in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 7,129 $ 9,887
Receivables 734 1,929
Inventories 3,913 2,607
Prepaid expenses 253 103
-------- --------
Total current assets 12,029 14,526
-------- --------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 703 540
Equipment 4,561 4,003
Leasehold improvements 955 627
Accumulated depreciation (3,717) (2,919)
-------- --------
Total property and equipment 2,502 2,251
OTHER ASSETS 945 417
-------- --------
$ 15,476 $ 17,194
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,319 $ 982
Accrued expenses 1,020 438
Customer deposits 6 1,015
-------- --------
Total current liabilities 3,345 2,435
-------- --------
REDEEMABLE CONVERTIBLE PREFERRED STOCK 4,948 4,948
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50 million shares
authorized, 8.9 and 8.8 million shares issued
and outstanding at March 31, 1999 and
June 30, 1998, respectively 89 88
Additional paid-in capital 19,903 19,554
Accumulated deficit (12,809) (9,831)
-------- --------
Total stockholders' equity 7,183 9,811
======== ========
$ 15,476 $ 17,194
======== ========
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, 1999 AND 1998
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands, except per share data)
NET REVENUES $ 6,414 $ 2,764 $ 12,761 $ 12,529
COST OF REVENUES 3,485 2,287 6,875 7,964
-------- -------- -------- --------
GROSS PROFIT 2,929 477 5,886 4,565
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 1,498 1,282 4,702 3,709
Selling, general and administrative 1,364 1,280 4,292 4,005
Non-recurring charge -- -- -- 745
-------- -------- -------- --------
Total operating expenses 2,862 2,562 8,994 8,459
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS 67 (2,085) (3,108) (3,894)
OTHER INCOME 16 170 205 423
======== ======== ======== ========
NET INCOME (LOSS) $ 83 $ (1,915) $ (2,903) $ (3,471)
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE - BASIC $ .01 $ (.22) $ (0.33) $ (0.39)
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE - DILUTED $ .01 $ (.22) $ (0.33) $ (0.39)
======== ======== ======== ========
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, 1999 AND 1998
(UNAUDITED)
1999 1998
------- -------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,903) $(3,471)
Adjustments to reconcile net loss to net cash from operations:
Depreciation and amortization 1,349 1,095
Non-recurring charge -- 745
Changes in assets and liabilities:
Receivables 1,195 2,604
Inventories (1,306) 1,207
Prepaid expenses (150) 269
Accounts payable and accrued expenses 1,919 (562)
Customer deposits (1,009) (56)
------- -------
Net cash from operating activities (905) 1,831
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,554) (1,630)
Capitalized software costs (627) --
Other, net 53 5
------- -------
Net cash from investing activities (2,128) (1,625)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 350 233
Preferred stock dividends (75) (75)
------- -------
Net cash from financing activities 275 158
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,758) 364
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,887 9,318
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,129 $ 9,682
======= =======
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, 1998 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-month periods ended March 31, 1999 are not necessarily
indicative of the operating results for the full year or future periods.
Certain prior year amounts have been reclassified to conform to the
current year presentation. These reclassifications had no effect on the results
of operations or stockholders' equity as previously reported.
2. Revenue Recognition
The Company sells certain of its products under contracts that generally
provide for a deposit to be paid before commencement of the project and for a
final payment to be made after completion of the project. Revenue is recognized
as individual units are installed or, in those instances where the contract does
not provide for the Company to install the equipment, upon shipment. Customer
deposits received under sales agreements are reflected as liabilities until the
related revenue is recognized.
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 forfeiture, refund, or other
concession until such revenue meets the criteria for collectibility. Provisions
for estimated losses are made in the period in which the loss first becomes
apparent.
Included in accounts receivable are unbilled receivables of $152,000 at
March 31, 1999. The Company did not have any unbilled receivables at June 30,
1998. Unbilled receivables represent revenues recognized in excess of billings
on contracts accounted for under the percentage-of-completion method. Unbilled
receivables were not billable at the balance sheet date but are recoverable as
billings are made in accordance with the contract terms.
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3. Inventory
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,
1999 1998
------ -------
(in thousands)
Raw Materials $1,190 $ 957
Work-in-progress 286 124
Finished Goods 2,437 1,526
------ ------
$3,913 $2,607
------ ------
4. Capitalized Software
Software development costs for certain projects are capitalized from the
time technological feasibility is established to the time the resulting software
product is commercially feasible. Capitalized software costs were $627,000 at
March 31, 1999 and are included in other assets. There were no capitalized
software costs at June 30, 1998. Capitalized costs are amortized on a
straight-line basis over the estimated life of the product beginning when the
products become commercially feasible.
5. Income Taxes
At March 31, 1999, the Company had cumulative net operating losses of
approximately $11.2 million that are available to offset future taxable income
through 2018. 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, 1999.
6. Contingencies
Two related lawsuits have been filed in the U.S. District Court that
allege violation of the federal securities laws by the Company and certain of
its current and former executive officers. Those suits have been consolidated
into one combined action that seeks class certification. The Company denies the
allegations and intends to vigorously defend itself. (See "Part II - Item 1.
Legal Proceedings").
Four related lawsuits have been filed in the U.S. District Court
resulting from the Company's efforts to enforce its patent rights. Three of
those suits have now been consolidated. The Company intends to aggressively
enforce its intellectual property rights. The Company denies all allegations
asserted against it in these lawsuits and intends to vigorously defend itself.
In separate but related actions, the Company has filed suits against its former
and current general liability insurance carriers for breach of insurance
contract. The Company's suits are based on the insurers' refusal to defend
certain counterclaims brought against the Company in certain of the four related
patent lawsuits. The Company anticipates that these suits against its insurance
carriers will be resolved by cross motions for summary judgment. (See "Part II -
Item 1. Legal Proceedings").
Two lawsuits have been filed regarding the Wheel of Gold(TM) technology
that is the subject of two patents (the "WOG" Patents) that have been assigned
to Anchor Gaming ("Anchor"). In the first suit, Anchor has brought a patent
infringement action against the Company, based on the WOG Patents, which is now
pending in U.S. District Court in Las Vegas. The Company has filed a
counterclaim in that proceeding for a declaration that the Company is the sole
or joint owner of the WOG patents. In the second action, the Company has filed
suit in state court in Oregon alleging
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that Anchor wrongfully used the Company's technology to obtain the WOG Patents.
(See "Part II - Item 1. Legal Proceedings").
7. Per Share Computation
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. Where necessary, prior year amounts
have been restated.
FOR THE THREE FOR THE NINE MONTHS
MONTHS ENDED MARCH 31, ENDED MARCH 31,
----------------------- ------------------------
1999 1998 1999 1998
------- ------- ------- -------
(in thousands, except per share data)
Net income (loss) $ 83 $(1,915) $(2,903) $(3,471)
======= ======= ======= =======
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 8,913 8,816 8,891 8,798
Dilutive effect of warrants and employee stock
options after application of the treasury
stock method 1 -- -- --
Dilutive effect of redeemable convertible
preferred stock after application of the
if-converted method 1,812 -- -- --
------- ------- ------- -------
Weighted average number of common shares
outstanding for computing diluted earnings per
share 10,726 8,816 8,891 8,798
======= ======= ======= =======
Earnings (loss) per share - basic $ .01 $ (.22) $ (.33) $ (.39)
======= ======= ======= =======
Earnings (loss) per share - diluted $ .01 $ (.22) $ (.33) $ (.39)
======= ======= ======= =======
The following common stock equivalents are excluded from the earnings per
share calculation as their effect would have been anti-dilutive:
FOR THE THREE FOR THE NINE MONTHS
MONTHS ENDED MARCH 31, ENDED MARCH 31,
------------------- -------------------
1999 1998 1999 1998
----- ----- ----- -----
(in thousands)
Warrants and employee stock options 1,430 1,268 1,436 1,268
Redeemable convertible preferred stock -- 519 519 519
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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.
The Company currently offers bonusing products to casinos in the form of
standard and customized bonusing promotions that can be applied casino-wide or
to a limited number of gaming machines. The Company's bonusing products form a
modular system and may be purchased and installed individually or as components
of an integrated system. Casino-wide, fully integrated bonusing applications are
offered as Acres Bonusing(TM). Linked groups of traditional slot machines that
activate a secondary "bonus" game when certain milestones are reached are
offered as part of the Company's Bonus Game product line.
RESULTS OF OPERATIONS
The Company's net revenues for the three months ended March 31, 1999
(the "current quarter") increased to $6.4 million from net revenues of $2.8
million during the three months ended March 31, 1998 (the "prior year quarter").
The Company's revenues can fluctuate significantly based on the timing of the
delivery of any large order. The increase in net revenues over the prior year
quarter included $5.1 million of revenue related to a contract to provide
casino-wide Acres Bonusing applications, audio-visual products and a custom
integrated slot accounting system for Mandalay Bay Resort & Casino in Las Vegas,
Nevada (the "Mandalay Bay Contract"). Partially offsetting the increase
resulting from the Mandalay Bay Contract revenue was a decrease in net revenues
of $484,000 related to the Company's granting of manufacturing rights to IGT
pursuant to which the Company receives royalty payments on hardware manufactured
by IGT. In the prior year quarter, when the Company manufactured and sold
hardware to IGT, the Company recorded higher per unit revenue, although per unit
gross profit was approximately the same. In addition to royalty-related
decreases, volume-related decreases in net revenues resulting from reduced
hardware sales to IGT amounted to $1.4 million.
For the nine-month period ended March 31, 1999, net revenues were $12.8
million as compared to $12.5 million for the same period in the prior fiscal
year. Although net revenue increased by less than 2%, there were significant
changes in the sources of the revenue. New sources of revenue included in the
current nine-month period were $7.2 million from the Mandalay Bay Contract, $1.1
million from bonusing software sales to IGT and $883,000 from custom bonus games
and displays. These new sources of revenue were almost entirely offset by
reductions of $3.8 million related to the shift to royalties on hardware
manufactured by IGT, $2.6 million related to decreased sales to a gaming machine
developer and $2.8 million related to volume-related decreases in hardware sales
to IGT.
Gross profit as a percentage of net revenue was 46% in the current
quarter as compared to 17% for the prior year quarter. For the nine-month period
ended March 31, 1999, gross profit margin increased to 46% from 36% for the same
period in the prior fiscal year. The increases in gross profit margins related
to the shift to royalty-based revenues were three percentage points and 11
percentage points in the current quarter and nine-month period ended March 31,
1999, respectively. Because the Company defers recognition of revenue that is
subject to performance penalties until such penalties have expired or are no
longer applicable, the gross profit margin in the current quarter includes eight
percentage points resulting from the expiration of certain performance penalties
related to the Mandalay Bay Contract. The current quarter's gross profit margin
also increased 11 percentage points as a result of absorbing certain fixed
manufacturing and service costs over a larger sales volume. The remaining
favorable gross profit margin variance in the current quarter is a result of
changes in the mix of products sold.
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Operating expenses increased to $2.9 million in the current quarter from
$2.6 million in the prior year quarter and increased to $9.0 million for the
nine-month period ended March 31, 1999 from $7.7 million, exclusive of the
non-recurring charge, for the same period in the prior fiscal year. Operating
expenses increased over the prior periods as a result of the Company's
continuing development of products utilizing the patented Acres Bonusing
Technology and the costs of litigation to protect that technology.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had cash and cash equivalents of $7.1
million, as compared to $9.9 million as of June 30, 1998. In April 1999, the
number of software products to be delivered under the Mandalay Bay Contract was
reduced, which caused a reduction of $3.1 million in the payments due under that
contract and resulted in a negative material effect on cash flows for the second
half of fiscal 1999.
At March 31, 1999, the Company's backlog of orders for its products was
approximately $550,000. The Company does not believe that backlog is a
meaningful indication of sales. Sales to the Company's customers are made
pursuant to purchase orders or sales agreements for specific system
installations and products are often delivered within a few months of receipt of
an order. The Company does not have any material ongoing long-term sales
contracts. At its current stage of operations, the Company's revenues and
results of operations may be materially affected, in the near term, by the
receipt or loss of any one order.
The Company is in negotiations with a number of current customers for
additional products (the "Pending Sales Agreements"), the aggregated value of
which could exceed $10 million. However, even if finalized, those orders are not
expected to significantly affect fourth quarter operating results.
The Company expects to complete the negotiation of the Pending Sales
Agreements and expects that payments under those agreements will provide
sufficient operating cash flow for the fourth quarter of fiscal 1999 and the
first quarter of fiscal 2000. Failure to obtain the Pending Sales Agreements or,
if obtained, failure to successfully deliver the products covered by the Pending
Sales Agreements or failure to subsequently collect the resulting revenues could
have a material adverse affect on the Company's liquidity.
In May 1999, the Company announced that it will move its headquarters to
Las Vegas, Nevada from Corvallis, Oregon. Expenses associated with the
relocation are anticipated to approximate $400,000. The Company expects that
such relocation will allow it to better serve its customers and reduce its
annual operating expenses by in excess of $1.0 million. Additionally, the
Company has the ability to further reduce operating expenses by reducing
staffing and other expenses.
As of March 31, 1999, the Company did not have any debt, but does have
access to a $2.0 million short-term line of credit from a bank. This line of
credit expires on May 31, 1999. The Company plans to seek an extension of the
line of credit, but there can be no assurance that an extension will be
obtained. The Company does not invest in derivative securities.
The Company's operations have historically used cash. During the first
nine months of fiscal 1999, $905,000 of net cash was used by operating
activities primarily as a result of the operating loss adjusted for the non-cash
effect of depreciation and amortization and the realization of revenue
previously collected as deposits. These uses of cash were partially offset by
the collection of $1.2 million of accounts receivable. Additionally, the Company
increased inventory levels and the related accounts payable balances in
anticipation of future demand for its Acres Bonusing products. During the
nine-month period ended March 31, 1999, the Company spent $1.6 million on
capital equipment and capitalized software development costs of $627,000.
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The Company's principal sources of liquidity have been net proceeds of
$7.2 million from its initial public offering in November 1993 and $7.6 million
from the exercise of warrants in October 1996. In addition, in January 1997, the
Company issued 519,481 shares of Series A Convertible Preferred Stock for net
proceeds of $4.9 million.
YEAR 2000
The Year 2000 issue results from computer programs operating incorrectly
when the calendar year changes to January 1, 2000. Computer programs that have
date-sensitive software may recognize a two-digit date using "00" as calendar
year 1900 rather than the year 2000. This could result in system failure or
miscalculations and could cause disruptions of operations, including, among
other things, a temporary inability to engage in normal business activities.
The Company has evaluated its technology and data, including imbedded
non-information technology, used in the creation and delivery of its previous
generations of products and services (the "Legacy" products) and in its internal
operations and has identified no significant Year 2000 issues. The core business
systems are compliant. Compliant upgrades for the Company's Legacy slot
accounting and player tracking products have been developed and will be made
available to all customers prior to December 31, 1999. The Company is also
testing its most recent generation of slot accounting, player tracking and
bonusing systems to identify any Year 2000 issues, but the Company believes that
these systems are compliant in all material respects. The Company has not
incurred material costs and believes that future costs associated with
addressing the Year 2000 issue will have an immaterial effect on the Company's
financial results.
Although the Company has inquired of certain of its significant vendors
as to the status of their Year 2000 compliance initiatives, no binding
assurances have been received. The Company believes that it is not overly
reliant on any single vendor because its component parts and services can be
obtained from multiple sources. Failure of telephone service providers or other
monopolistic utilities could have a significant detrimental effect on the
Company's operations. The Company does not know the status of its customers'
Year 2000 compliance initiatives. Failure of the Company's customers to
adequately address such issues could negatively affect their ability to purchase
bonusing products. There can be no assurances that such third parties will
successfully address their own Year 2000 issues over which the Company has no
control.
The Company has developed a contingency plan to address the most
reasonably likely "worst-case" scenario. Such contingency plan includes manually
conducting operations in the short-term, which would be less efficient, but
would not be expected to have a material adverse effect on the Company.
FORWARD-LOOKING INFORMATION
Certain statements in this Form 10-Q contain "forward-looking"
information (as defined in Section 27A of the Securities Act of 1933, as
amended) that involve 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 statements are based prove
incorrect or should unanticipated circumstances arise, the Company's actual
results could materially differ 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, 1998.
Forward-looking statements relate to: the Pending Sales Agreements;
sales backlog; adequacy of cash and cash equivalent balances to fund the
Company's operations; anticipated future sales; anticipated costs of relocating
the Company's headquarters and the amount of expected annual operating cost
savings related to such relocation; revenue recognition; cash collections;
scheduled product installation dates; new product development and introduction;
the
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availability of an extension on the Company's line of credit; patent protection;
and anticipated effects of the Year 2000.
The following factors, among others, could cause actual results to
differ from those indicated in the forward-looking statements: the possibility
that future sales, such as the Pending Sales Agreements, may not occur or
product offerings may not be developed as planned; the possibility that future
product installations may not be completed; the failure to realize anticipated
savings from the corporate headquarters relocation; the failure to accurately
forecast the cost of relocation; 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 obtain an extension on the Company's 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.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Two related lawsuits have been filed in the U.S. District Court for the
District of Nevada involving the Company that allege violation of the federal
securities laws by the Company and certain of its current and former executive
officers: Townsend, et al. v. Acres Gaming Incorporated, et al.
CV-S-97-01848-PMP (RJJ) and Jason, et al. v. Acres Gaming Incorporated,
CV-S-98-00262-PMP (RJJ). Those suits have been consolidated into one combined
action styled: In re Acres Gaming Securities Litigation, CV-S-97-01848-PMP
(RJJ). The combined action seeks class certification for a proposed class
consisting of the purchasers of the Company's stock during the period from March
26, 1997 to December 11, 1997. The court has not yet ruled on class
certification. No trial date or discovery cut-off date has been set. The defense
of this suit has been tendered to and accepted by the Company's directors and
officer's insurance carrier.
Two lawsuits have been filed regarding ownership of the Wheel of Gold
("WOG") technology that is the subject of the WOG Patents. In the first suit,
Anchor, Anchor Coin, and Spin for Cash Wide Area Progressive Joint Venture,
Anchor's partnership with International Game Technology, (together, the
"Plaintiffs") sued the Company for infringement of the WOG Patents, breach of
warranty, and breach of contract: Anchor Gaming, et al. v. Acres Gaming
Incorporated, No. CV-S-99-00245-LDG (LRL). Plaintiffs seek to enjoin the Company
from infringing the WOG Patents and from competing with it in the sale of WOG
gaming devices. The Plaintiffs also seek unspecified compensatory damages,
treble damages, costs of suit, and attorney's fees. The Company has
counterclaimed seeking to correct inventorship by naming Company employees as
inventors on the WOG Patents. No trial date or discovery cut-off has been set.
The defense of this suit has been tendered to and accepted by the Company's
general liability insurance carrier.
In a second action, the Company filed suit in Benton County, Oregon
against Anchor and Spin for Cash Wide Area Progressive Joint Venture: Acres
Gaming Incorporated v. Anchor Gaming, et al., No. 99-10125. The suit alleges
that Anchor wrongfully used the Company's intellectual property to obtain the
WOG Patents without the consent of the Company, 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 attorney's fees.
Four related lawsuits have been filed in the U.S. District Court for the
District of Nevada resulting from the Company's efforts to enforce its patent
rights: Mikohn Gaming Corp. v. Acres Gaming Incorporated, No. CV-S-98-1383 HDM
(LRL) ("Suit I"); Mikohn Gaming Corp. v. Acres Gaming Incorporated, No.
CV-S-98-738 HDM (LRL) ("Suit II"); Acres Gaming Incorporated v. Mikohn Gaming
Corp., Casino Data Systems, New York New York Hotel and Casino and Sunset
Station Hotel and Casino; No. CV-S-98 794 PMP (LRL) ("Suit III"); and Acres
Gaming Incorporated v. Mikohn Gaming Corporation, et al , No. CV-S-98-01462 PMP
(RJJ) ("Suit IV"). Suits I, II and III have now been consolidated.
In Suit I, Mikohn Gaming Corp. ("Mikohn") asserted a claim for
declaratory judgment of noninfringement and invalidity of U.S. Patent No.
5,655,961 ("the `961 patent") owned by the Company. Mikohn also asserted claims
for "intentional interference with a business relationship," "intentional
interference with prospective business relationship," "unfair competition: trade
libel" and "unfair competition: disparagement." Mikohn's complaint sought
unspecified damages, punitive damages, attorney's fees, interest on the alleged
damages, an injunction against the conduct alleged in the complaint, and a
declaration that the `961 patent is invalid and not infringed by Mikohn or its
customers. The Company has filed a counterclaim for infringement of the `961
patent, and has denied Mikohn's other allegations.
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In Suit II, Mikohn asserted a claim for declaratory judgment of
noninfringement and invalidity of U.S. Patent No. 5,741,183 ("the `183 patent")
owned by the Company. Mikohn's complaint sought no damages, but requested an
award of attorney's fees and a declaration that the `183 patent is invalid and
not infringed by Mikohn. The Company is not aware of any infringement by Mikohn,
and therefore sought to dismiss the complaint for lack of a case or controversy.
The court denied the Company's motion.
In Suit III, the Company sued Mikohn, Casino Data Systems ("CDS"), New
York New York Hotel and Casino and Sunset Station Hotel and Casino for
infringement of the Company's U.S. Patent No. 5,752,882 ("the `882 patent").
Mikohn counterclaimed in Suit III, seeking a declaratory judgment of invalidity
and noninfringement of the `882 patent and asserted claims for "false and
misleading representations" under 11 U.S.C. Section 1125, "interference with
prospective economic relations," "unfair competition: trade libel" and "unfair
competition: disparagement." Mikohn's counterclaims seek unspecified damages, as
well as a trebling of the damages, punitive damages, attorney's fees and an
injunction against the Company's "continuing to commit the unlawful acts"
alleged in the counterclaims.
In Suit IV, the Company sued Mikohn and CDS for infringement of the
Company's U.S. Patent Nos. 5,820,459 and 5,836,817. The defendants
counterclaimed for declaratory judgment of noninfringement and invalidity of the
patents. In addition, CDS counterclaimed for: "patent misuse"; "Sherman Act
Section 2 - Attempted Monopolization"; "spoilation of evidence"; "unfair
competition - intentional interference with prospective economic advantage" and
"misappropriation of trade secrets". CDS's counterclaims seek unspecified
damages, as well as a trebling of the damages, punitive damages, and attorney's
fees. No trial date has been set.
In separate but related actions, the Company has filed suit against its
former general liability insurance carrier for breach of insurance contract:
Acres Gaming Incorporated v. Atlantic Mutual Insurance Company, filed June 26,
1998 and now pending in U.S. District Court for the District of Oregon. The
Company's suit is based on the insurer's refusal to pay more than nominal
amounts of the costs of defense in Suit I. In addition, the Company has filed
suit against its current general liability insurance carrier for breach of
insurance contract : Acres Gaming Incorporated v. St. Paul Fire & Marine
Insurance Co., filed March 20, 1999, now pending in U.S. District Court for the
District of Oregon. This suit is based on the insurer's refusal to defend
against CDS's counterclaims in Suit IV. The Company anticipates that both of
these matters will be resolved by cross motions for summary judgment.
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, 1999 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)
27.1 Financial Data Schedule
- ----------
(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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