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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to_______
Commission File Number 0-22498
Acres Gaming Incorporated
(Exact name of registrant as specified in its charter)
Nevada 88-0206560
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
815 NW Ninth Street
Corvallis, Oregon 97330
(Address of principal executive offices)
541-753-7648
(Registrant's telephone number)
Indicate by check mark 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, 1997 was 8,748,856.
ACRES GAMING INCORPORATED
Table of Contents
Page
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at March 31, 1997 and June 30, 1996 3
Statements of Operations for the Three and Nine Months Ended
March 31, 1997 and 1996 4
Statements of Cash Flows for the Nine Months Ended
March 31, 1997 and 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II -- OTHER INFORMATION 10
SIGNATURES 11
INDEX TO EXHIBITS 12
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
ACRES GAMING INCORPORATED
BALANCE SHEETS
ASSETS
31-Mar-97
(unaudited) 30-Jun-96
CURRENT ASSETS:
Cash and cash equivalents $10,128,000 $2,500,000
Receivables 3,634,000 910,000
Inventories 5,273,000 2,692,000
Prepaid expenses 151,000 94,000
Total current assets 19,186,000 6,196,000
PROPERTY AND EQUIPMENT:
Furniture and fixtures 525,000 515,000
Equipment 2,157,000 1,348,000
Leasehold improvements 513,000 506,000
Accumulated depreciation (1,849,000) (1,329,000)
Total property and equipment 1,346,000 1,040,000
OTHER ASSETS 520,000 395,000
$21,052,000 $7,631,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,256,000 $1,456,000
Accrued expenses 672,000 440,000
Customer deposits 656,000 1,748,000
Total current liabilities 2,584,000 3,644,000
REDEEMABLE CONVERTIBLE PREFERRED STOCK 4,948,000 --
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value,
50,000,000 shares authorized,
8,748,856 and 7,601,150 shares
issued and outstanding at March
31, 1997 and June 30, 1996 87,000 76,000
Additional paid-in capital 19,240,000 11,224,000
Accumulated deficit (5,807,000 (7,313,000)
Total stockholders' equity 13,520,000 3,987,000
$21,052,000 $7,631,000
The accompanying notes are an integral part of these balance sheets.
ACRES GAMING INCORPORATED
STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended March 31, 1997 and 1996
(unaudited)
Three months ended Nine months ended
March 31, March 31,
1997 1996 1997 1996
NET REVENUES $2,710,000 $1,451,000 $14,953,000 $3,311,000
COST OF REVENUES 1,461,000 764,000 6,875,000 1,781,000
GROSS PROFIT 1,249,000 687,000 8,078,000 1,530,000
OPERATING EXPENSES:
Research and development 1,381,000 535,000 3,366,000 1,613,000
Selling, general and
administrative 1,336,000 643,000 3,444,000 1,998,000
Total operating expenses 2,717,000 1,178,000 6,810,000 3,611,000
INCOME (LOSS) FROM
OPERATIONS (1,468,000) (491,000) 1,268,000 (2,081,000)
OTHER INCOME (LOSS) 119,000 (11,000) 238,000 1,000
NET INCOME (LOSS) $(1,349,000) $(502,000) $1,506,000 $(2,080,000)
NET INCOME (LOSS) PER SHARE $(0.15) $(0.07) $0.17 $(0.27)
SHARES USED IN PER
SHARE COMPUTATION 8,749,000 7,557,000 9,055,000 7,644,000
The accompanying notes are an integral part of these statements.
ACRES GAMING INCORPORATED
STATEMENTS OF CASH FLOWS
For the Nine Months Ended March 31, 1997 and 1996
(unaudited)
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,506,000 $(2,080,000)
Adjustments to reconcile net income (loss)
to net cash from operations:
Depreciation and amortization 664,000 474,000
Amortization of warrants -- 56,000
Changes in assets and liabilities
Receivables (2,724,000) 113,000
Inventories (2,581,000) 128,000
Prepaid expenses (57,000) 13,000
Accounts payable and accrued expenses 32,000 (160,000)
Customer deposits (1,092,000) 696,000
Net cash from operating activities (4,252,000) (760,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (826,000) (231,000)
Capitalized software costs -- (70,000)
Other, net (269,000) (135,000)
Net cash from investing activities (1,095,000) (436,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 8,027,000 358,000
Proceeds from issuance of redeemable
convertible preferred stock, net 4,948,000 --
Net cash from financing activities 12,975,000 358,000
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 7,628,000 (838,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,500,000 1,325,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,128,000 $487,000
The accompanying notes are an integral part of these statements.
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, 1996 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 nine month period ended March 31, 1997 are not necessarily
indicative of the operating results for the full year or future periods.
2. Inventories consist of the following:
March 31, 1997 June 30, 1996
Raw Materials $2,427,000 $1,464,000
Work-in-progress 1,334,000 718,000
Finished Goods 1,512,000 510,000
$5,273,000 $2,692,000
3. Income Taxes
At March 31, 1997, the Company had cumulative net operating losses of
approximately $5,494,000 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 at this time. Deferred tax liabilities were
insignificant as of March 31, 1997.
4. Per Share Computation
Net income (loss) per share was computed by dividing net income (loss)by the
weighted average number of shares of common stock and dilutive common stock
equivalents outstanding using the treasury stock method. Common stock
equivalents include shares issuable upon exercise of outstanding stock
options and warrants and shares issuable upon conversion of redeemable
convertible preferred stock.
5. Stockholders' Equity
In November 1993, the Company completed its initial public offering and
issued 1,667,500 units ("Units"), consisting of 1,667,500 shares of common
stock and 833,750 Redeemable Warrants. In connection with the offering, the
Company granted the underwriter warrants to purchase 145,000 Units at $6.00
per share. The net proceeds of the offering were $7,153,000. The Redeemable
Warrants expired on October 27, 1996. Prior to the expiration date,
substantially all of the warrants were exercised resulting in net proceeds
to the Company of approximately $6,170,000. The underwriter warrants were all
exercised in October, 1996, resulting in net proceeds to the Company of
approximately $1,400,000.
In June 1995, the Company issued 400,000 shares of common stock to a group
of private investors for net proceeds of $2,255,000. In connection with this
offering, the Company granted warrants to purchase 40,000 shares of the
Company's common stock at $7.20 per share which approximated market value
at that date.
In exchange for services, the Company issued warrants in 1995 to purchase
195,000 shares of common stock to two companies and two individuals.
Exercise prices of the warrants range from $4.75 to $9.00 per share. The
warrants expire between April, 1998 and September, 2000. Of these, warrants
to purchase 50,000 shares were valued at $96,000 and recorded as paid in
capital and amortized over the term of the related service agreement. For
the three and nine month periods ended March 31, 1996, expense associated
with these warrants was $8,000 and $56,000, respectively.
6. Redeemable Preferred Stock
In January 1997, the Company created an initial series of preferred stock,
consisting of 1,038,961 shares, which it designated Series A Convertible
Preferred Stock ("Series A Stock") and issued 519,481 shares for net proceeds
of $4,948,000. The Series A Stock is entitled to receive non-cumulative
dividends at a rate per share equal to 3 percent of $9.625, the initial per
share purchase price. Holders of the Series A Stock have the option, upon
notice to the Company, 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 initial conversion price for each share of Series A
Stock is the lesser of the price at which the Series A Stock was initially
issued and the average closing price of the Company's Common Stock for the
period of thirty days prior to the date of conversion of shares of Series A
Stock. The conversion price is subject to adjustments for certain events
relating to the Common Stock including stock splits and combinations,
dividends and distributions, reclassification, exchange, substitution,
reorganization, merger, or sale of assets. The Series A Stock is subject
to redemption, subject to certain conditions, at a price equal to the
purchase price plus any declared but unpaid dividends. No dividends have
been declared as of March 31, 1997.
So long as at least 25 percent of the shares of Series A Stock originally
issued by the Company remain outstanding, holders of the Series A Stock are
entitled as a class to elect one director. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the
holders of the Series A Stock will be entitled to receive a liquidation
preference of $9.625 per share, plus any declared but unpaid dividends, prior
to the distribution of any of the Company's assets to holders of the Common
Stock. Any assets remaining after the distribution to holders of the Series
A Stock will be distributed to holders of the Common Stock.
ACRES GAMING INCORPORATED
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company's Concept III products are designed to enhance casino
profitability by making gaming machines more fun to play while providing the
control, accounting and security functions necessary to ensure more efficient
casino operation.
Results of Operations
The Company's net revenues for the three months ended March 31, 1997 were
$2,710,000, an increase of 87% over net revenues of $1,451,000 during the
three months ended March 31, 1996. For the nine-month period ended March 31,
1997, net revenues were $14,953,000, an increase of 352% over $3,311,000 for
the first nine months of the prior fiscal year. These increases in revenues
were primarily the result of significant volume shipments of bonusing
components to other game manufacturers, the delivery of a slot bonusing
system and progressive jackpot displays for a casino being developed in
Melbourne, Australia and the installation of slot systems, including
bonusing, slot accounting and player tracking, at three domestic casinos.
Gross profit as a percentage of net revenue was 46% in the three-month period
ended March 31, 1997, compared to 47% for the same period in the prior year.
For the nine-month period ended March 31, 1997, gross margin increased to 54%
from 46% for the same period in 1996. The increase in gross margin is a
result of changes in the mix of products sold and the economies of absorbing
certain fixed costs over larger sales volumes.
In order to support growth in revenue and continue to develop its products,
the Company has hired additional personnel and expanded a sales and service
office in Las Vegas, Nevada. As a result, operating expenses increased to
$2,717,000 in the three-month period ended March 31, 1997 from $1,178,000 in
the same period in 1996 and, for the nine-month period ended March 31,
increased to $6,810,000 in 1997 from $3,611,000 in 1996.
Liquidity and Capital Resources
The Company's operations have historically used cash. During the nine
months ended March 31, 1997, net cash used by operating activities was
$4,252,000, primarily resulting from volume-related increases in working
capital, including changes in accounts receivable, inventory and customer
deposits. During the same period, the Company spent $826,000 on capital
equipment.
The Company's principal sources of liquidity have been net proceeds from its
initial public offering (IPO) in November, 1993 and from exercise of the
Redeemable Warrants in October, 1996. Net proceeds to the Company from the
IPO and from the exercise of the Redeemable Warrants were $7,153,000 and
$6,170,000, respectively. In addition, in January 1997, the Company entered
into agreements to form a strategic alliance with IGT and issued 519,481
shares of Series A Convertible Preferred Stock for net proceeds of
$4,948,000. IGT may purchase up to an additional 519,480 shares of the
Series A Convertible Preferred Stock, at the same price as its initial
purchase, in increments not less than 103,896 shares on or before August 8,
1997.
ACRES GAMING INCORPORATED
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued).
As of March 31, 1997, the Company had cash and cash equivalents of
$10,128,000, compared to $2,500,000 as of June 30, 1996. 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.
Recently Issued Accounting Standards
In March 1997, the Financial Accounting Standards Board issued Statement No.
128 "Earnings per Share" (SFAS 128) which modifies the computation and
disclosures related to earnings per share. Consistent with the provisions of
the statement, the Company will adopt SFAS 128 effective with the Company's
fiscal quarter ending December 31, 1997. SFAS 128 would have had no effect
on earnings per share reported for the three-month periods ended March 31,
1997 and 1996 or the nine-month period ended March 31, 1996. The pro-forma
effect of the accounting change on earnings per share reported for the
nine-month period ended March 31, 1997 is as follows:
Pro-forma earnings per share for the
nine-months ended March 31, 1997
Basic Diluted
Primary and Fully Diluted EPS as reported $.17 $.17
Effect of SFAS 128 .01 .00
Pro-forma Basic and Diluted EPS $.18 $.17
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, including, but not limited to, developments
in the Company's strategic alliance with IGT, the timing of receipt,
installation and regulatory approval of orders, competition, government
regulation, market acceptance, product development, customer concentration,
technological change, the effect of economic conditions on the gaming
industry generally, 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, 1996.
PART II -- OTHER INFORMATION
Item 2. Changes in Securities
In January 1997, the Company created an initial series of preferred stock,
consisting of 1,038,961 shares, which it designated Series A Convertible
Preferred Stock ("Series A Stock") and issued 519,481 shares for which the
Company received gross proceeds of $5,000,000. The Series A Stock was
issued to IGT under an Exemption from registration pursuant to Rule 506 of
Regulation D of the Securities Act of 1993, in reliance on IGT's status as
an accredited investor. The Series A Stock is entitled to receive
non-cumulative dividends at a rate per share equal to 3 percent of $9.625,
the initial per share purchase price. Holders of the Series A Stock will
have the option, upon notice to the Company, 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 initial conversion price for each
share of Series A Stock is the lesser of the price at which the Series A
Stock was initially issued and the average closing price of the Company's
Common Stock for the period of thirty days prior to the date of conversion of
shares of Series A Stock. The conversion price is subject to adjustments for
certain events relating to the Common Stock including stock splits and
combinations, dividends and distributions, reclassification, exchange,
substitution, reorganization, merger, or sale of assets. The Series A Stock
is subject to redemption, subject to certain conditions, at a price equal to
the purchase price plus any declared but unpaid dividends.
So long as at least 25 percent of the shares of Series A Stock originally
issued by the Company remain outstanding, holders of the Series A Stock are
entitled as a class to elect one director. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the
holders of the Series A Stock will be entitled to receive a liquidation
preference of $9.625 per share, plus any declared but unpaid dividends, prior
to the distribution of any of the Company's assets to holders of the Common
Stock. Any assets remaining after the distribution to holders of the Series
A Stock will be distributed to holders of the Common Stock.
The Company has granted to IGT, the sole holder of shares of the Series A
Stock, certain rights to demand registration of the Common Stock underlying
the Series A Stock which may be exercised on or after December 31, 1997.
Those rights require the Company to register with the SEC the shares of
Common Stock issuable on conversion of the Series A Stock. The Company has
agreed to pay all the expenses of one such registration. The Company has
agreed to indemnify certain parties in connection with such registration,
including any underwriters. The Company also granted piggy-back and S-3
rights to IGT.
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.
ACRES GAMING INCORPORATED
(Registrant)
Date: May 2, 1997 By /s/ Robert W. Brown
Robert W. Brown
Executive Vice President, Chief Financial
Officer, Secretary and Treasurer
(Principal Accounting and Financial Officer)
INDEX TO EXHIBITS
Exhibit
No. Description
3.1 Articles of Incorporation of Acres Gaming Incorporated, as
amended (1)
3.2 Bylaws (2)
4.1 Preferred Stock Certificate (1)
10.1 Employment contract between Acres Gaming Incorporated and
John F. Acres (1)
10.2 Acres Gaming Incorporated 1993 Stock Option and Incentive
Plan, as Amended (3)
10.3 Stock Purchase Agreement between Acres Gaming Incorporated
and IGT dated January 28, 1997 (1)
10.4 Registration Rights Agreement between Acres Gaming
Incorporated and IGT dated January 28, 1997 (1)
10.5 Master Agreement for Product Development, Purchase and Sales
between Acres Gaming Incorporated and International Game
Technology, Inc., dated January 27, 1997 (1)
11.1 Statement of Computation of Earnings Per Share
27.1 Financial Data Schedule
(1) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the period ended December 31, 1996.
(2) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1996.
(3) Incorporated by reference from the Company's Definitive Proxy Statement
on Form 14A dated October 31, 1996.
Exhibit 11.1
ACRES GAMING INCORPORATED
COMPUTATION OF EARNINGS PER SHARE
For Three Months Ended For Nine Months Ended
March 31, March 31,
1997 1996 1997 1996
Net Income (Loss) $(1,349,000) $(502,000) $1,506,000 ($2,080,000)
Weighted Average Number
of Shares of Common Stock
and Common Stock
Equivalents Outstanding:
Weighted average number of
common shares outstanding 8,749,000 7,557,000 8,281,000 7,644,000
Dilutive effect of warrants
and employee stock options
after application of the
treasury stock method * * 647,000 *
Dilutive effect of redeemable
convertible preferred stock
after application of the
if-converted method * -- 127,000 --
Total shares used in per
share computation 8,749,000 7,557,000 9,055,000 7,644,000
Net Income (Loss) Per Share $(0.15) $(0.07) $0.17 $(0.27)
* Effect of common stock equivalents is anti-dilutive and therefore not
included.
Exhibit 27.1
Acres Gaming Incorporated
Financial Data Schedule