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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 September 30, 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)
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 of Common Stock, $.01 par value, outstanding on
October 31, 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 September 30, 1999 and June 30, 1999 1
Statements of Operations for the Three Months Ended
September 30, 1999 and 1998 2
Statements of Cash Flows for the Three Months Ended
September 30, 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 10
SIGNATURES 12
INDEX TO EXHIBITS 13
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACRES GAMING INCORPORATED
BALANCE SHEETS
ASSETS
SEPTEMBER 30, JUNE 30,
1999 1999
(UNAUDITED)
(in thousands)
CURRENT ASSETS:
Cash and equivalents $ 5,203 $ 5,949
Receivables 2,929 1,576
Inventories 3,002 4,909
Prepaid expenses 91 265
-------- --------
Total current assets 11,225 12,699
-------- --------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 827 743
Equipment 4,972 4,778
Leasehold improvements 423 954
Accumulated depreciation (3,982) (4,101)
-------- --------
Total property and equipment 2,240 2,374
OTHER ASSETS 1,139 1,024
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$ 14,604 $ 16,097
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,087 $ 2,407
Accrued expenses 1,227 1,491
Customer deposits 2,849 4,152
-------- --------
Total current liabilities 6,163 8,050
-------- --------
REDEEMABLE CONVERTIBLE PREFERRED STOCK 4,948 4,948
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50 million shares
authorized, 8.9 million shares issued and outstanding 89 89
Additional paid-in capital 19,904 19,904
Accumulated deficit (16,500) (16,894)
-------- --------
Total stockholders' equity 3,493 3,099
-------- --------
$ 14,604 $ 16,097
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The accompanying notes are an integral part of these balance sheets.
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ACRES GAMING INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
------- -------
(in thousands except per
share data)
NET REVENUES $ 6,224 $ 3,288
COST OF REVENUES 3,064 1,330
------- -------
GROSS PROFIT 3,160 1,958
------- -------
OPERATING EXPENSES:
Research and development 1,187 1,418
Selling, general and administrative 1,601 1,505
------- -------
Total operating expenses 2,788 2,923
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INCOME (LOSS) FROM OPERATIONS 372 (965)
OTHER INCOME, NET 22 119
------- -------
NET INCOME (LOSS) $ 394 $ (846)
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NET INCOME (LOSS) PER SHARE - BASIC $ .04 $ (.10)
======= =======
NET INCOME (LOSS) PER SHARE - DILUTED $ .04 $ (.10)
======= =======
The accompanying notes are an integral part of these statements.
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ACRES GAMING INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
------- -------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 394 $ (846)
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization 464 468
Changes in assets and liabilities:
Receivables (1,353) 54
Inventories 1,907 (1,063)
Prepaid expenses 174 (134)
Accounts payable and accrued expenses (584) 1,187
Customer deposits (1,303) (666)
------- -------
Net cash from operating activities (301) (1,000)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (290) (894)
Capitalized software costs (184) (512)
Other, net 29 (1)
------- -------
Net cash from investing activities (445) (1,407)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net -- 350
Preferred stock dividends -- (75)
------- -------
Net cash from financing activities -- 275
------- -------
NET DECREASE IN CASH AND EQUIVALENTS (746) (2,132)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 5,949 9,887
------- -------
CASH AND EQUIVALENTS AT END OF PERIOD $ 5,203 $ 7,755
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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, 1999 filed with the Securities and Exchange Commission.
In the opinion of management, the interim financial statements include
all adjustments, consisting only of normal recurring adjustments, necessary in
order to make the financial statements not misleading. The results of operations
for the three-month period ended September 30, 1999 are not necessarily
indicative of the operating results for the full year or future periods.
2. Recent Accounting Pronouncements
The Financial Accounting Standards Board issued "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) in June 1998. SFAS 133
requires the Company to recognize all derivatives on the balance sheet at fair
value. The Company only enters into derivative instruments for hedging sales
contracts and receivables denominated in international currencies. Changes in
the fair value of the derivatives will be offset against the change in fair
value of the receivable. The change in the derivative's fair value related to
the ineffective portion of a hedge, if any, will be immediately recognized in
earnings. The Company expects to adopt this Standard as of the beginning of its
fiscal year 2002. The effect of adopting this standard is not expected to have a
material effect on the Company's financial condition or results of operations.
3. 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. The Company
did not have any unbilled receivables at September 30, 1999. At June 30, 1999
the Company had $1.0 million in unbilled receivables. Unbilled receivables
represent revenues recognized in excess of billings on certain contracts.
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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4. Inventories
Inventories consist of electronic components and other hardware, which
are recorded at the lower of cost (first-in, first-out) or market. Inventories
consist of the following:
SEPTEMBER 30, JUNE 30,
1999 1999
------------- --------
(in thousands)
Raw Materials $ 992 $1,114
Work-in-progress 44 1,398
Finished Goods 1,966 2,397
------ ------
$3,002 $4,909
------ ------
5. 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, net of
accumulated amortization, were $779,000 and $647,000 at September 30, 1999 and
June 30, 1999, 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 products become commercially feasible. All research and
development costs are expensed as incurred.
6. Income Taxes
At September 30, 1999, the Company had cumulative net operating losses
of approximately $15.1 million that are available to offset future taxable
income through 2019. 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
September 30, 1999 and June 30, 1999.
7. 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 class action. The Company denies the allegations and intends
to vigorously defend itself. 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, now pending in U.S. District
Court, Anchor has 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. 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 alleging, among
other things, that Anchor wrongfully used the Company's technology to obtain the
WOG Patents. 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 denies all allegations
asserted against it and intends to vigorously defend itself and its intellectual
property rights. 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 the Company against certain counterclaims brought against the Company in
certain of the four related patent lawsuits. See "Part II - Item 1. Legal
Proceedings".
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8. 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.
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
1999 1998
(in thousands except per
share data)
Net income (loss) $ 394 $ (846)
Preferred stock dividends -- (75)
-------- --------
Net income (loss) allocable to common stockholders $ 394 $ (921)
======== ========
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 8,848
Dilutive effect of warrants and employee stock options
after application of the treasury stock method -- --
Dilutive effect of redeemable convertible preferred stock
after application of the if-converted method 2,228 --
Weighted average number of common shares outstanding for -------- --------
computing diluted earnings per share 11,141 8,848
======== ========
-------- --------
Earnings (loss) per share - basic $ .04 $ (.10)
======== ========
-------- --------
$ .04 $ (.10)
======== ========
The following common stock equivalents were excluded from the earnings
per share computations because their effect would have been anti-dilutive:
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
1999 1998
(in thousands)
Warrants and employee stock options 1,326 1,400
Redeemable convertible preferred stock, if converted,
assuming conversion at rates in effect at September 30, 1998 -- 1,305
The Stock Purchase Agreement between International Game Technology
("IGT") and the Company pursuant to which IGT purchased 519,481 shares of
Redeemable Convertible Preferred Stock (the "Preferred Stock") restricts IGT's
ownership of the Company's common stock. Without the consent of the Company, IGT
may not own more than 20% of the outstanding common stock, including, for
purposes of the calculation, the shares of common stock into which the Preferred
Stock owned by IGT is convertible. The Company believes that this provision
operates to limit IGT's right to convert shares of Preferred Stock as well as
limiting IGT's rights to purchase additional shares of common stock. IGT
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has asserted that the agreement does not limit the number of shares into which
the Preferred Stock may be converted. If there were no limit on IGT's right to
convert shares of Preferred Stock into common stock, as of September 30, 1999,
the Preferred Stock could have been converted into 2,951,594 shares of common
stock, or 24.9% of the then outstanding common stock, and diluted earnings per
share would have been reduced to $.03 per share. IGT has not indicated it plans
to convert any shares of Preferred Stock into common stock.
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. 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. Acres 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.
Acres Bonusing Technology was conceived to provide the gaming industry
with a system to enable the design and delivery of bonuses and other promotions
directly to players at the point of play and at the time of play. The Company
currently offers bonusing products directly 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. In addition to bonusing products, the Company
also offers slot accounting, player tracking and visual analysis modules that
may be purchased and installed individually or as components of an integrated
system marketed as the Acres Advantage(TM).
RESULTS OF OPERATIONS
The Company's net revenues for the three months ended September 30, 1999
increased to $6.2 million from net revenues of $3.3 million during the three
months ended September 30, 1998. The Company's revenues can fluctuate
significantly based on the timing of the delivery of any large order. Deliveries
of Acres Advantage hardware to MotorCity in Detroit, Michigan, and bonusing
software to the Star City Casino, in Sydney, Australia, comprised the majority
of the revenues in the current quarter. In the prior year quarter, revenues were
comprised of hardware royalty payments received from IGT, bonusing software
delivered to IGT primarily for Mirage Resort's Bellagio property and custom
bonus games and displays delivered directly to Bellagio.
In the current quarter, the gross profit margin decreased to 51% from
60% in the prior year quarter. Hardware sales, such as the current quarter sales
to MotorCity, carry a lower gross profit margin than the software sales and
royalty payments recorded in the quarter ended September 30, 1998.
Operating expenses in the current year quarter were $135,000 less than
in the prior year quarter due primarily to reductions in staffing and other cost
savings resulting from the relocation of the Company's headquarters to Las
Vegas. The relocation was substantially complete at the end of September 1999.
The savings resulting from the relocation were partially offset by an increase
in the cost of defending the Company's intellectual property rights.
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had cash and equivalents of $5.2
million, compared to $5.9 million as of June 30, 1999. The Company invests its
cash in highly liquid marketable securities with a maturity of three months or
less at the date of purchase.
At September 30, 1999 the Company had collected $2.8 million of advance
deposits against its order backlog of approximately $6.7 million. Backlog,
however, may not be a meaningful indication of future sales. Sales are made
pursuant to purchase orders or sales agreements for specific installations.
Products are generally delivered within one to six months of receipt of an order
depending on the nature of the order and the products being delivered. 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 by the receipt or loss of any one order.
The Company expects to complete the deliveries and installations
comprising its order backlog and expects that payments under those contracts
will provide sufficient operating cash flow for fiscal 2000. Failure to
successfully deliver the products comprising the order backlog or failure to
subsequently collect the resulting revenues could have a material adverse effect
on the Company's liquidity. The company does not have any debt outstanding at
September 30, 1999 but intends to obtain a short-term line of credit. The
Company may not be able to obtain a line of credit. The Company has the ability
to reduce operating expenses by reducing staffing and other expenses.
The Company's operations have historically used cash. During the current
quarter, $301,000 of cash was used by operating activities. The cash provided by
the Company's net income, adjusted for non-cash items, was completely offset by
changes in accounts receivable, inventories and customer deposits resulting from
the quarter's sales activities. During the current quarter, the Company made
capital expenditures of $290,000 and capitalized software development cost of
$184,000.
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.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company only enters into derivative instruments to manage
well-defined foreign currency risks. The Company has entered into forward
exchange contracts to hedge the value of sales contracts and accounts receivable
denominated in Australian dollars. Foreign exchange contracts have gains and
losses that are recognized at the settlement date. The impact of changes in
exchange rates on the forward contracts will be substantially offset by the
impact of such changes on the value of the related sales contracts and accounts
receivable. At September 30, 1999, the Company held a foreign exchange contract
totaling $2.1 million and maturing in February 2000. The counterparty to the
foreign exchange contract is a large, widely recognized bank resulting in
minimal risk of credit loss due to non-performance by the bank. The net effect
of an immediate 10 percent change in exchange rates on the forward exchange
contracts and the underlying hedged positions would not be material to the
Company's financial condition or results of operations.
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.
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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 Company's
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 has
tested its most recent generation of products and did not identify any material
Year 2000 issues. The Company has not incurred material costs associated with
addressing the Year 2000 issue and believes that future costs will not have a
material 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.
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 forward-looking statements are
based prove incorrect or should unanticipated circumstances arise, the Company's
actual results could differ materially from those anticipated by such
forward-looking statements. The differences could be caused by a number of
factors or combination of factors including, but not limited to, the risks
detailed in the Company's Securities and Exchange Commission filings, including
the Company's Form 10-K for the fiscal year ended June 30, 1999.
Forward-looking statements contained in this Form 10-Q relate to the
Company's plans and expectations as to: sales backlog; adequacy of cash and
equivalents balances to fund the Company's operations; anticipated future sales;
revenue recognition; cash collections; scheduled product installation dates; new
product development and introduction; the availability of a line of credit;
patent protection; litigation settlements; 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 may not occur or product offerings may not be developed as
planned; the possibility that future product installations may not be completed;
developments in the Company's relationship with IGT; the risk that patents may
not be issued; the expense and unpredictability of patent and other litigation;
the timing of development, regulatory approval and installation of products; the
timing of receipt and shipment of orders; the ability of the Company to obtain a
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 that allege violation of the federal securities laws by the
Company and its 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 has received class certification
for a class consisting of the purchasers of the Company's stock during the
period from March 26, 1997 to December 11, 1997. The defense of this suit has
been tendered to and accepted by the Company's directors and officer's insurance
carrier. The Company denies the allegations and intends to vigorously defend
itself.
Two lawsuits have been filed regarding ownership of the Wheel of Gold
("WOG") technology that is the subject of two patents (the "WOG Patents"). In
the first suit, Anchor, Anchor Coin, and Spin for Cash Wide Area Progressive
Joint Venture, Anchor's partnership with IGT, (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). This action is now pending in U.S. District Court.
Plaintiffs seek to enjoin the Company from infringing the WOG Patents and from
competing with it in the sale of wheel styled bonus gaming devices. The
Plaintiffs also seek unspecified compensatory damages, treble damages, costs of
suit, and attorney's fees. The Company has filed a counterclaim in that
proceeding for a declaration that the Company is the sole or joint owner of the
WOG Patents. The defense of this suit has been tendered to and accepted by the
Company's general liability insurance carrier.
In the second action, the Company has filed suit against Anchor and Spin
for Cash Wide Area Progressive Joint Venture and is now pending in U.S. District
Court for the District of Oregon in Eugene, Oregon: Acres Gaming Incorporated v.
Anchor Gaming, et al., No. CV99-698-HO. The Company alleges 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 attorney's fees.
Four related lawsuits have been filed in the U.S. District Court for the
District of Nevada involving the Company and its 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. The Company
denies all asserted allegations and intends to vigorously defend itself and its
intellectual property rights.
In Suit I, 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.
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
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award of attorney's fees and a declaration that the `183 patent is invalid and
not infringed by Mikohn. Because the Company is not aware of any infringement by
Mikohn, the Court granted summary judgment on the noninfringement claim.
Mikohn's invalidity claim is still pending.
In Suit III, the Company sued Mikohn, 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.
The Company has tendered the defense of Mikohn's counterclaims to its former
general liability insurance carrier. The insurer has not responded to the tender
of Suit III's defense.
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.
In separate but related actions, the Company has filed suit in U.S.
District Court for the District of Oregon against its former general liability
insurance carrier for breach of insurance contract: Acres Gaming Incorporated v.
Atlantic Mutual Insurance Company. The Company has reached a partial settlement
with Atlantic Mutual that included reimbursement of certain defense costs of
Suit I. The Company is continuing to pursue reimbursement of additional defense
costs of Suit I.
In addition, the Company has filed suit in U.S. District Court for the
District of Oregon against its current general liability insurance carrier for
breach of insurance contract: Acres Gaming Incorporated v. St. Paul Fire &
Marine Insurance Co. This suit is based on the insurer's refusal to defend the
Company against CDS's counterclaims in Suit IV. The Company anticipates that
this matter will be resolved through settlement discussions.
Unfavorable outcomes in one or more of these suits could have a material
adverse effect on the Company.
The Company from time to time is involved in other various legal
proceedings arising in the normal course of business.
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.
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.
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ACRES GAMING INCORPORATED
(Registrant)
Date: November 12, 1999 By /s/ Reed M. Alewel
-----------------------------------------
Reed M. Alewel
Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
(authorized officer and principal financial
and chief accounting officer)
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
--- -----------
3.1 Articles of Incorporation of Acres Gaming Incorporated, as
amended(1)
3.2 Bylaws of Acres Gaming Incorporated, as amended(2)
10.1 Lease dated August 5, 1999 between the Company and Avery
Investments
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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