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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 10549
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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
Filed by the Registrant /X/
Filed by a Party other than the
Registrant / /
</TABLE>
<TABLE>
<S> <C>
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or
</TABLE>
ACRES GAMING INCORPORATED
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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<PAGE>
ACRES GAMING INCORPORATED
815 N.W. NINTH STREET
CORVALLIS, OREGON 97330
------------------------
NOVEMBER 1, 1996
------------------------
Dear Shareholder:
You are cordially invited to attend the 1996 Annual Meeting of Shareholders
(the "Annual Meeting") of Acres Gaming Incorporated (the "Company").
<TABLE>
<S> <C>
Place: Company's Offices
7220 Bermuda Road
Las Vegas, NV 89119
Date: Tuesday, November 12, 1996
Time: 3 p.m. local time
</TABLE>
The Notice of the Annual Meeting and Proxy Statement accompany this letter.
The Proxy Statement describes the business to be transacted at the meeting and
provides other information concerning the Company. The principal business to be
transacted at the Annual Meeting will be election of a director, amendment of
the Articles of Incorporation to authorize a class of Preferred Stock to be
designated by the Board of Directors, amendment of the Acres Gaming Incorporated
1993 Stock Option and Incentive Plan to increase the number of shares issued
thereunder by 750,000 shares and ratification of the appointment of Arthur
Andersen LLP as the Company's independent public accountants for the fiscal year
ending June 30, 1997. The Board of Directors recommends that shareholders vote
for election of the nominated director, amendment of the Articles of
Incorporation, amendment of the 1993 Stock Option and Incentive Plan and
ratification of Arthur Andersen LLP as the Company's independent public
accountants.
We know that many of our shareholders will be unable to attend the Annual
Meeting. Proxies are therefore solicited so that each shareholder has an
opportunity to vote on all matters that are scheduled to come before the
meeting. Whether or not you plan to attend the Annual Meeting, we hope that you
will have your stock represented by marking, signing, dating and returning your
proxy card in the enclosed envelope as soon as possible. Your stock will be
voted in accordance with the instructions you have given in your proxy card. You
may, of course, attend the Annual Meeting and vote in person even if you have
previously returned your proxy card.
Sincerely,
Joseph A. Huseonica
PRESIDENT AND CHIEF OPERATING OFFICER
IMPORTANT
A proxy card is enclosed herewith. All shareholders are urged to complete and
mail the proxy card promptly. The enclosed envelope for return of the proxy card
requires no postage. Any shareholder attending the Annual Meeting may personally
vote on all matters that are considered, in which event the signed proxy will be
revoked.
IT IS IMPORTANT THAT YOUR STOCK BE VOTED
<PAGE>
ACRES GAMING INCORPORATED
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 12, 1996
---------------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the "Annual
Meeting") of Acres Gaming Incorporated, a Nevada corporation (the "Company"),
will be held on Tuesday, November 12, 1996, at 3:00 p.m. local time, at the
Company's offices at 7220 Bermuda Road, Las Vegas, Nevada, for the following
purposes:
1. To elect one director to the Company's Board of Directors.
2. To amend the Company's Articles of Incorporation to authorize a
class of Preferred Stock to be designated by the Board of Directors.
3. To amend the Acres Gaming Incorporated 1993 Stock Option and
Incentive Plan to increase the number of shares issuable thereunder by
750,000 shares.
4. To ratify the appointment of Arthur Andersen LLP as independent
public accountants for the fiscal year ending June 30, 1997.
5. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Only shareholders of record at the close of business on October 18, 1996,
will be entitled to notice of and to vote at the Annual Meeting or any
adjournment thereof.
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. WHETHER
OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE URGED TO COMPLETE, SIGN
AND DATE THE ENCLOSED PROXY CARD AND RETURN IT AS PROMPTLY AS POSSIBLE IN THE
ENCLOSED POSTAGE PREPAID ENVELOPE IN ORDER THAT THE PRESENCE OF A QUORUM MAY BE
ASSURED. THE GIVING OF SUCH PROXY DOES NOT AFFECT YOUR RIGHT TO REVOKE IT LATER
OR VOTE YOUR SHARES IN PERSON IN THE EVENT THAT YOU SHOULD ATTEND THE ANNUAL
MEETING.
By Order of the Board of Directors
John F. Acres,
CHIEF EXECUTIVE OFFICER AND SECRETARY
Corvallis, Oregon
November 1, 1996
<PAGE>
ACRES GAMING INCORPORATED
815 N.W. NINTH STREET
CORVALLIS, OREGON 97330
------------------------
PROXY STATEMENT
---------------------
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON TUESDAY, NOVEMBER 12, 1996
---------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
This Proxy Statement is furnished by the Board of Directors of Acres Gaming
Incorporated, a Nevada corporation (the "Company"), in connection with the
solicitation of proxies by the Board of Directors for use at the Company's
Annual Meeting of Shareholders (the "Annual Meeting") to be held at 3 p.m. local
time on Tuesday, November 12, 1996, at the Company's office, 7720 Bermuda Road,
Las Vegas, Nevada.
This Proxy Statement and the enclosed form of proxy are being mailed to
shareholders on or about November 1, 1996.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of the Company's Common Stock at the close of
business on October 18, 1996, are entitled to notice of and to vote at the
Annual Meeting. On that date, 7,982,524 shares of the Company's Common Stock
were outstanding (the "Outstanding Shares").
SOLICITATION OF PROXIES
The cost of preparing, printing and mailing this Proxy Statement and the
proxy solicited hereby has been or will be borne by the Company. In addition to
the use of the mails, proxies may be solicited by directors, officers and other
employees of the Company, without additional remuneration, in person or by
telephone or facsimile transmission. The Company will also request brokerage
firms, bank nominees, custodians, and fiduciaries to forward proxy materials to
the beneficial owners of the Common Stock as of the record date and will provide
reimbursement for the cost of forwarding the proxy materials in accordance with
customary practice. Your cooperation in promptly completing, signing, dating and
returning the enclosed proxy card will help avoid additional expense.
QUORUM AND VOTING
Each Outstanding Share entitles the holder thereof to one vote upon each
matter to be presented at the Annual Meeting. A quorum, consisting of a majority
of the Outstanding Shares, must be present in person or by proxy for the
transaction of business. If a quorum is present:
(i) a nominee for election to the Board of Directors will be elected by
a plurality of the votes cast by holders of the Outstanding Shares;
(ii) the amendment of the Articles of Incorporation to authorize a class
of Preferred Stock will be approved if it receives the affirmative vote of a
majority of the Outstanding Shares;
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(iii) the amendment of the Acres Gaming Incorporated 1993 Stock Option
and Incentive Plan to increase the number of shares issuable thereunder by
750,000 shares will be approved if it receives the affirmative vote of a
majority of the Outstanding Shares; and
(iv) the appointment of Arthur Andersen, LLP, will be ratified if the
proposal receives the affirmative vote of a majority of the Outstanding
Shares represented at the meeting.
Abstentions and other non-votes are counted for purposes of determining whether
a quorum exists at the Annual Meeting, but have no effect on the determination
of whether a plurality exists with respect to a given nominee. An abstention or
other non-vote has the effect of a vote against a proposal. Proxies and ballots
will be received and tabulated by Norwest Bank Minnesota, N.A., the Company's
transfer agent.
REVOCABILITY OF PROXIES
Any proxy delivered pursuant to this solicitation is revocable at the option
of the person giving it at any time before it is exercised. A proxy may be
revoked prior to its exercise by delivering to the Company's Secretary a written
notice of revocation or a duly executed proxy card bearing a later date, or by
attending the Annual Meeting and voting in person. Attendance at the Annual
Meeting will not in and of itself constitute a revocation of a proxy.
Each proxy returned to the Company will be voted in accordance with the
instructions indicated thereon. If no instructions are indicated, the shares
will be voted "FOR" (i) election of the nominee for the Board of Directors named
in this Proxy Statement; (ii) amendment of the Company's Articles of
Incorporation to authorize a class of Preferred Stock; (iii) amendment of the
Acres Gaming Incorporated 1993 Stock Option and Incentive Plan to increase the
number of shares issuable thereunder by 750,000 shares; and (iv) ratification of
the appointment of Arthur Andersen LLP as independent public accountants for the
fiscal year ending June 30, 1997. While the Board of Directors knows of no other
matters to be presented at the Annual Meeting or any adjournment thereof, all
proxies returned to the Company will be voted on any such matter in accordance
with the judgment of the proxy holders.
PROPOSAL NO. 1--ELECTION OF DIRECTOR
ELECTION OF DIRECTOR
The business and affairs of the Company are managed under the direction of
its Board of Directors. The Company's Bylaws provide that the Board of Directors
shall consist of not less than one nor more than 15 members. The Board of
Directors currently consists of one member, John F. Acres. Members of the Board
of Directors are elected for a term of one year or until their successors are
elected.
The Board of Directors has nominated Mr. Acres to serve as the sole director
of the Company. Unless authority is withheld, all proxies received in response
to this solicitation will be voted for the election of Mr. Acres. If Mr. Acres
becomes unable to serve prior to the Annual Meeting, the proxies received in
response to this solicitation will be voted for a replacement nominee selected
in accordance with the best judgment of the proxy holders named therein.
INFORMATION ABOUT THE DIRECTOR NOMINEE
<TABLE>
<CAPTION>
DIRECTOR
NAME POSITIONS WITH THE COMPANY AGE SINCE
- --------------- ----------------------------------------------------- --- -----------
<S> <C> <C> <C>
John F. Acres.. Chief Executive Officer, Secretary and Director 42 1985
</TABLE>
JOHN F. ACRES, the founder of the Company, has served as Chief Executive
Officer, Secretary and a director of the Company since its inception in 1985.
Mr. Acres served as President of the Company from January 1985 to January 1996.
Mr. Acres has been involved in the gaming industry since 1972, and has
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<PAGE>
designed slot data collection systems, player tracking systems, and equipment
for progressive jackpot systems that are widely used in the industry.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEE.
BOARD COMMITTEES, ACTIONS AND COMPENSATION
The Board of Directors does not have a standing Audit Committee,
Compensation Committee or Nominating Committee. During the fiscal year ended
June 30, 1996, the Board of Directors took action by written resolutions rather
than at meetings. There were 30 sets of written resolutions filed in the
Company's Minute Book in fiscal 1996.
MANAGEMENT INFORMATION
EXECUTIVE OFFICERS
The following discussion sets forth information about the executive officers
of the Company who are not directors.
<TABLE>
<CAPTION>
NAME POSITIONS WITH THE COMPANY AGE OFFICER SINCE
- ------------------------------------------------- ------------------------------------------ --- ---------------
<S> <C> <C> <C>
Joseph A. Huseonica.............................. President and Chief Operating Officer 52 1996
Robert W. Brown.................................. Chief Financial Officer and Treasurer 41 1993
</TABLE>
JOSEPH A. HUSEONICA joined the Company in January 1996 as President and
Chief Operating Officer. From July 1994 to December 1995, Mr. Huseonica served
as chief operating officer for Centric Corporation, a Portland, Oregon marketing
services company. From August 1993 to July 1994, Mr. Huseonica was a consultant
to various companies. From October 1991 to August 1993, Mr. Huseonica was vice
president, marketing & sales for Radisys Corporation, a manufacturer of embedded
computer systems based in Beaverton, Oregon. For more than 10 years prior to
1991, Mr. Huseonica held various senior management positions at Intel
Corporation, including general manager of its OEM platforms operations.
ROBERT W. BROWN joined the Company in July 1993 as Chief Financial Officer
and Treasurer. From June 1991 through May 1993, Mr. Brown was the chief
financial officer of Color & Design Exhibits, Inc., a manufacturer of
interpretive and trade show exhibits in Portland, Oregon. From September 1983
through May 1991, Mr. Brown held financial management positions with Floating
Point Systems, Inc., a Beaverton, Oregon manufacturer of mini-supercomputers,
and served as its corporate controller from November 1989 through May 1991.
Prior to 1983, Mr. Brown was employed by Arthur Andersen LLP for more than six
years. Mr. Brown is a certified public accountant.
EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth certain information for each of the fiscal
years ended June 30, 1996, 1995 and 1994 regarding compensation paid to the
Company's Chief Executive Officer and each officer who was paid compensation in
excess of $100,000 in the fiscal year ended June 30, 1996 (the "Named Executive
Officers").
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
- ------------------------------------------------------------------------------------ --------- ---------- ---------
<S> <C> <C> <C>
John F. Acres....................................................................... 1996 $ 180,000 --
Chief Executive Officer and Secretary 1995 $ 180,000 --
1994 $ 180,000 --
Robert W. Brown..................................................................... 1996 $ 100,000 --
Chief Financial Officer and Treasurer 1995 $ 95,000 --
1994 $ 80,000 --
Joseph A. Huseonica................................................................. 1996 $ 87,500 25,000
Chief Operating Officer and President 1995 -- --
1994 -- --
</TABLE>
The following table sets forth certain information regarding options granted
during the fiscal year ended June 30, 1996, to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED ANNUAL
PERCENT OF RATES OF STOCK PRICE
NUMBER OF TOTAL OPTIONS APPRECIATION FOR OPTION
SECURITIES GRANTED TO EXERCISE TERM(5)
UNDERLYING EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME OPTIONS FISCAL YEAR ($/SHARE) DATE(1) 5% 10%
- -------------------------------------------- ------------ --------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
John F. Acres............................... 160,000(1) 28.4% $ 3.50 2/1/2006 $ 912,000 $ 1,451,200
Robert W. Brown............................. 15,000(2) 7.1% $ 4.82 4/1/2006 $ 117,750 $ 356,750
25,000(3) $ 5.50 4/9/2006 $ 224,000 $ 187,500
Joseph A. Huseonica......................... 160,000(4) 28.4% $ 3.75 1/23/2006 $ 977,600 $ 1,556,800
</TABLE>
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(1) One-sixth of the options vest six months from the date of grant, with an
additional one-sixth vesting semi-annually thereafter until all options are
vested. The options expire ten years from the date of grant.
(2) One-third of the options vest two years from the date of grant, another
one-third vest three years from date of grant and options become fully
exercisable four years from the date of grant. The options expire ten years
from the date of grant.
(3) One-half of the options vest six months from the date of grant with the
remainder vesting one year from the date of grant. The options expire ten
years from the date of grant.
(4) With respect to 100,000 options, 13,325 options vest approximately six
months from the date of grant, with an additional 13,325 options vesting
semi-annually thereafter for a period of two and one-half years and a final
20,050 options vesting approximately three years from the date of grant.
With respect to 60,000 options, one-sixth vest approximately six months from
the date of grant, with an additional one-sixth vesting semi-annually
thereafter until all options are vested. The options expire ten years from
the date of grant.
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(5) Future value of current year grants assuming appreciation of 5% and 10% per
year over the ten-year option period. The actual value realized may be
greater than or less than the potential realizable values set forth in the
table.
The following table sets forth the number of securities underlying
unexercised options and the value of unexercised in-the-money options at fiscal
year end.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FY-END (#) AT FY-END ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ----------------------------------------- ----------------------- --------------------------
<S> <C> <C>
John F. Acres............................ 0/160,000 $0/$940,000
Robert W. Brown.......................... 60,000/40,000 $382,500/$165,200
Joseph A. Huseonica...................... 23,325/136,675 $131,203/$768,797
</TABLE>
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(1) The per share fair market value for the Company's Common Stock was $9.375 at
June 30, 1996.
RETIREMENT SAVINGS PLAN
The Company maintains a profit sharing and savings plan (the "401(k) Plan")
under Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code"), which allows employees to contribute up to 15% of their pre-tax income
to the 401(k) Plan. The 401(k) Plan includes a discretionary matching
contribution by the Company and provides that the Company may make an additional
discretionary contribution out of profits at the end of any year. The Company
has not made any discretionary matching contributions nor any additional
discretionary contributions under the 401(k) Plan.
STOCK OPTIONS
The Acres Gaming Incorporated 1993 Stock Option and Incentive Plan (the
"1993 Plan") was adopted by the Board of Directors of the Company and approved
by the shareholders in 1993. The 1993 Plan permits the granting of awards to
employees and consultants of the Company in the form of stock options and grants
of restricted stock. Stock options granted under the 1993 Plan may be "incentive
stock options" meeting the requirements of Section 422 of the Code or
non-qualified options which do not meet the requirements of Section 422. A total
of 1,000,000 shares of the Company's Common Stock has been reserved for issuance
pursuant to awards granted under the 1993 Plan. The Board of Directors has
reserved, subject to shareholder approval, an additional 750,000 shares for
issuance under the 1993 Plan. See Proposal No. 3 "Approval of Amendment to the
1993 Stock Option and Incentive Plan to Increase Number of Shares." As of
October 18, 1996, an aggregate of 1,031,100 shares were subject to outstanding
stock options, and 718,900 shares were available for grant. The exercise prices
for currently outstanding stock options range from $3.00 to $16.00 per share.
Options for 154,525 shares have been exercised under the 1993 Plan. No grants of
restricted stock have been made under the 1993 Plan.
The 1993 Plan is administered by the Board of Directors of the Company, or
by a committee appointed by the Board of Directors. The 1993 Plan gives broad
powers to the committee to administer and interpret the 1993 Plan, including the
authority to select the individuals to be granted options and to prescribe the
particular form and conditions of each option granted. Options may be granted
pursuant to the 1993 Plan through July 2003. The 1993 Plan may be terminated
earlier by the Board of Directors in its sole discretion.
5
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EMPLOYMENT CONTRACT
The Company entered into an Employment Agreement with Mr. Joseph A.
Huseonica on January 2, 1996 (the "Employment Agreement"). The initial term of
the Employment Agreement runs through December 13, 1998, subject, however, to
prior termination. The Company may terminate the Employment
Agreement upon 180 days written notice. The Company may terminate for cause (as
defined in the Employment Agreement) immediately and without notice. Mr.
Huseonica may terminate the Employment Agreement upon 60 days written notice.
The Employment Agreement renews automatically for successive two year terms
unless either party elects to the contrary 90 days prior to the expiration of
the then-current term. The Employment Agreement provides for a base salary of
$175,000 per year and a target bonus of $50,000 per year based on Mr.
Huseonica's successful completion of certain objectives mutually agreed upon by
Mr. Huseonica and the Board of Directors. The Employment Agreement provides
that, following termination of employment, Mr. Huseonica will not, directly or
indirectly, be connected in any manner with any business that competes with the
Company, or divert any customer of the Company or induce any employee or
consultant of the Company to terminate his or her relationship with the Company.
COMPENSATION COMMITTEE
The Company has no compensation committee. During the fiscal year ended June
30, 1996, the Company's sole Director, John F. Acres, determined executive
officer compensation.
REPORT ON EXECUTIVE COMPENSATION
The underlying objectives of the Company's compensation strategy are to
attract and retain the best possible executive talent, to motivate those
executives to achieve optimum operating performance for the Company, to link
executive and shareholder interests through equity-based plans and to provide a
compensation package that recognizes individual contributions as well as overall
business results. There are three components to the Company's executive
compensation: base salary, long-term incentives in the form of stock options,
and incentive (bonus) payments.
BASE SALARY. Base salary for each executive officer, other than the
President and Chief Operating Officer, was subjectively determined by an
assessment of his sustained performance, advancement potential, experience,
responsibility, scope and complexity of the position, and current salary in
relation to salary levels for comparable positions in the industry, based on the
Company's general awareness of such salary levels. Mr. Huseonica's base salary
for the fiscal year ending June 30, 1996 was based on the Employment Agreement
entered into in January 1996. In addition, the Chief Executive Officer's base
salary takes into consideration his technological ability and a recognition of
his position as a key innovator in the industry.
LONG-TERM INCENTIVES. Stock options have been granted to the Chief
Executive Officer and other executive officers to encourage management of the
Company from the perspective of an owner with an equity interest in the Company.
Vesting is used to encourage key employees to continue their employment with the
Company. For 1996, Mr. Acres was granted options to acquire 160,000 shares and
Mr. Brown was granted options to acquire 40,000 shares in recognition of their
contributions to the Company's continued growth. In addition, options to acquire
160,000 shares were granted to Mr. Huseonica in connection with his joining the
Company.
ANNUAL INCENTIVES. Under his Employment Agreement, Mr. Huseonica will
receive a performance bonus targeted at $50,000 per year upon successful
completion of certain objectives agreed upon by Mr. Huseonica and the Board of
Directors. Except for Mr. Huseonica, none of the Company's executive officers
were awarded bonuses for the fiscal year ended June 30, 1996.
6
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PERFORMANCE GRAPH
The following graph compares total cumulative return to holders of the
Company's Common Stock with the cumulative total return of the Nasdaq US Stock
Market and the Dow Jones Industry Group CNO Index for the period beginning
October 27, 1993, the first trading day of the Common Stock, and ending June 30,
1996.
PERFORMANCE GRAPH
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ACRES GAMING NASDAQ US STOCK MARKET DOW JONES GROUP CNO
<S> <C> <C> <C>
10/27/93 $ 100.00 $ 100.00 $ 100.00
6/30/94 $ 110.00 $ 91.46 $ 65.12
6/30/95 $ 115.00 $ 120.93 $ 109.06
6/30/96 $ 187.50 $ 153.52 $ 141.98
</TABLE>
Assumes $100 invested in Acres Gaming Incorporated (at the initial public
offering price of $5.00 per share), the Nasdaq US Stock Market and the Dow Jones
Industry Group CNO Index, with all dividends reinvested. Stock price shown above
for the Common Stock is historical and not necessarily indicative of future
price performance.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires that the Company's officers, directors and persons who
own more than 10 percent of the Common Stock file with the Securities and
Exchange Commission (the "SEC") initial reports of beneficial ownership on Forms
3 and reports of changes in beneficial ownership of Common Stock and other
equity securities of the Company on Form 4. Officers, directors and greater than
10 percent shareholders of the Company are required by SEC regulations to
furnish to the Company copies of all Section 16(a) reports that they file. To
the Company's knowledge, based solely on a review of copies of such reports
furnished to the Company and written representation that no other reports are
required, during the 1996 fiscal year all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10 percent beneficial
owners were complied with by such persons.
7
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PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of shares of the Company's Common Stock by (i) each director of the
Company, (ii) each Named Executive Officer, (iii) all directors and executive
officers of the Company as a group, and (iv) each shareholder who is known by
the Company to own more than 5% of the Company's Common Stock as of October 18,
1996.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENT OF
BENEFICIAL OWNER OWNED(1) OUTSTANDING(2)
- ---------------------------------------------------------------------------- -------------------- ---------------
<S> <C> <C>
John F. Acres............................................................... 2,801,152 (3) 35.0%
Robert W. Brown............................................................. 80,500 (4) 1.0%
Joseph A. Huseonica......................................................... 23,325 (5) *
All directors and executive officers as a group (3 persons)................. 2,904,977 (6) 36.4%
</TABLE>
- ------------------------
*Less than 1%.
(1) "Beneficial Ownership" is defined pursuant to Rule 13d-3 of the Exchange
Act, and generally means any person who directly or indirectly has or shares
voting or investment power with respect to a security. A person shall be
deemed to be the beneficial owner of a security if that person has the right
to acquire beneficial ownership of such security within 60 days, including,
but not limited to, any right to acquire such security through the exercise
of any option or warrant or through the conversion of a security. Any
securities not outstanding that are subject to such options or warrants
shall be deemed to be outstanding for the purpose of computing the
percentage of outstanding securities of the class owned by such person, but
shall not be deemed to be outstanding for the purpose of computing the
percentage of the class owned by any other person. Each person has sole
voting and sole dispositive power with respect to all outstanding shares,
except as noted.
(2) Based on 7,982,524 shares outstanding at October 18, 1996.
(3) Includes 2,574,186 shares held by a revocable trust established by Mr. Acres
and his wife, with respect to which Mr. Acres has shared voting and shared
dispositive powers. Also includes 199,500 shares beneficially owned by Mr.
Acres' children who reside in his household, with respect to which Mr. Acres
has no voting or dispositive powers. Also includes 26,666 shares subject to
options exercisable within 60 days of October 18, 1996.
(4) Includes 2,000 shares beneficially owned by Mr. Brown's wife with respect to
which Mr. Brown has no voting or dispositive powers. Also includes 72,500
shares subject to options exercisable within 60 days of October 18, 1996.
(5) Includes 23,325 shares subject to options exercisable within 60 days of
October 18, 1996.
(6) Includes 122,491 shares subject to options exercisable within 60 days of
October 18, 1996.
PROPOSAL NO. 2--APPROVAL OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
Article IV of the Company's Articles of Incorporation currently authorizes
issuance of 50,000,000 shares of Common Stock, $.01 par value per share. The
Board of Directors has adopted a resolution to amend the Articles of
Incorporation to authorize a class of 20,000,000 shares of Preferred Stock, $.01
par value, to be issued from time to time in one or more series, in any manner
permitted by law, as determined from time to time by the Board of Directors. The
text of the Amendment to the Articles of Incorporation (the "Amendment") is set
forth as Appendix 1 to this Proxy Statement. The Board of Directors will have
the authority to fix and determine the rights and preferences of the shares of
any series so established,
8
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including dividends, conversion prices, voting rights, redemption prices,
maturity dates and similar matters without further action by the shareholders.
INTRODUCTION
Publicly held companies, such as the Company, often have a capital structure
which includes Preferred Stock which may be issued from time to time in order to
respond to financing needs. The Board of Directors believe it is in the
Company's interest to have a variety of financing alternatives available to
allow the Company to address its capital requirements in rapidly changing
capital markets. Moreover, the Company is seeking to amend its Articles of
Incorporation to authorize Preferred Stock in connection with a proposed
strategic alliance with International Game Technology ("IGT"), the largest
manufacturer of slot machines in the world.
IGT STRATEGIC ALLIANCE
On August 8, 1996, the Company and IGT entered into a letter of intent to
form a strategic alliance (the "Strategic Alliance"). Under the proposed
Strategic Alliance, the Company plans to (i) create proprietary games, using IGT
equipment as the foundation, to be installed under leasing or revenue sharing
agreements in casinos; (ii) sell its Concept III Bonusing Technology and player
tracking components for use in IGT Smart System-TM- player tracking/slot
accounting installations; (iii) eventually withdraw from part of the player
tracking/slot accounting business; (iv) have its displays and other game
enhancement tools incorporated into IGT's slot machines; and (v) develop
promotions for use on IGT's Wide Area Network that supports "Megabucks,"
"QuarterMania" and other progressive jackpot promotions.
PRELIMINARY TERMS OF SERIES A STOCK
In connection with the Strategic Alliance, the Company has agreed in
principle (subject to shareholder approval of the Amendment and agreement on
definitive documentation) to authorize and issue to IGT 519,481 shares of Series
A Convertible Preferred Stock (the "Series A Stock") at a price of $9.625 per
share and to grant to IGT the option, exercisable until August 7, 1997, to
purchase an additional 519,481 shares of Series A Stock at $9.625 per share. The
final terms of the Series A Stock have not yet been determined, but the
following is a description of what the Company believes will be the significant
features of the Series A Stock:
The Series A Stock will be entitled to receive non-cumulative dividends at a
rate per share equal to 3 percent of $9.625, the initial purchase price. Any
dividends declared and not paid in cash may be paid in additional shares of
Series A Stock or credits to purchase the Company's products. 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 rate in effect at the time of conversion. The initial conversion rate
will be one share of Common Stock for each share of Series A Stock. The
conversion rate is subject to certain adjustments for issuances of Common Stock
without consideration. The Series A Stock will be subject to redemption on or
after five years from the date of the initial issuance, at the option of the
holders of the Series A Stock or the Company, at a price equal to the purchase
price plus any declared but unpaid dividends.
Holders of the Series A Stock will be 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. If no shares of Common Stock are outstanding at the time of distribution,
the assets remaining after payment of the liquidation preference to the holders
of the Series A Stock will be divided ratably among the holders of the Series A
Stock.
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So long as shares of the Series A Stock are outstanding, the Company cannot
effect any sale, lease, assignment, transfer or other conveyance of all or
substantially all of the assets of the Company, or any consolidation or merger
in which the Company is not the surviving corporation or in which the holders of
the capital stock of the Company before the consolidation or merger own less
than 50 percent of the Company after the consolidation or merger, or any
reclassification or other change of any stock, or any recapitalization of the
Company, or any voluntary dissolution, liquidation or winding up of the Company,
without the approval of the holders of the Series A Stock.
Shares of the Series A Stock and shares of Common Stock issuable upon
conversion of the Series A Stock will be "restricted securities" under the
federal securities laws and may not be resold without registration under the
Securities Act of 1933, as amended, unless an exemption from registration is
available.
The Company expects to grant to IGT 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 would require the Company to register with
the SEC the shares of Common Stock issuable on conversion of the Series A Stock.
The Company will likely agree to pay all the expenses of one such registration.
The Company will agree to indemnify certain parties in connection with such
registration, including any underwriters. The Company also expects to grant
piggy-back and rights to registrations on Form S-3.
As one of the conditions to closing of the Strategic Alliance, the Company
shall enter into a five year employment and noncompetition agreement with John
Acres, the Company's Chairman and Chief Executive Officer. Although the Company
and Mr. Acres have been discussing an employment agreement, no agreement has
been reached.
NEVADA CORPORATION LAW
The Company is governed by Nevada law, including the provisions of Chapter
78 of Nevada Revised Statutes. Section 78.379 provides that an "acquiring
person" shall obtain only such rights in "acquired control shares" as are
conferred by a resolution of the shareholders of a corporation. Generally, this
section applies to the acquisition, directly or indirectly, of beneficial
ownership of shares that would, when added to all other shares beneficially
owned by the acquiring person, enable the acquiring person to exercise 20% or
more of all the voting power of the corporation in the election of directors. In
general, Section 78.438 prohibits a resident domestic Nevada corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. "Business combination" includes mergers, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is a person who is the beneficial
owner, directly or indirectly, of 10% or more of the corporation's voting stock
or who is an affiliate or associate of the corporation and at any time within
three years prior to the date in question was the beneficial owner, directly or
indirectly, of 10% or more of the corporation's voting stock.
NEVADA GAMING REGULATION
The holders of any form of gaming license in Nevada are subject to: (i) the
Nevada Gaming Control Act and the regulations promulgated thereunder
(collectively, "Nevada Act"); and (ii) various local regulations. The Company's
gaming operations are subject to the licensing and regulatory control of the
Nevada Commission, the Nevada State Gaming Control Board ("Nevada Board"), the
Clark County Liquor and Gaming Licensing Board and any other local jurisdiction
within which the Company does business in Nevada. The Nevada Commission, the
Nevada Board and the local gaming regulatory authorities are collectively
referred to as the "Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
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capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) to provide a source of state and local revenues
though taxation and licensing fees.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or any
subsidiary of the Company in order to determine whether such individual is
suitable or should be licensed as a business associate of a gaming licensee or
registered corporation. Officers, directors, shareholders and key employees of
the Company, or any subsidiary of the Company, directly involved in gaming
activities are required to be licensed or found suitable by the Nevada Gaming
Authorities. Changes in licensed positions must be reported to the Nevada Gaming
Authorities and in addition to their authority to deny an application for a
finding of suitability or licensure, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his or her suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
state of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who individually, or in conjunction with
others, directly or indirectly acquires beneficial ownership of more than 5% of
the voting securities of the Company to report such acquisition to the Nevada
Commission within ten days following the required, or voluntary, reporting of
such acquisition with the SEC. Likewise, the Nevada Act requires any person who
individually, or in conjunction with others, directly or indirectly acquires
beneficial ownership of more than 10% of the voting securities of the Company to
report such acquisition to the Nevada Commission in the same manner, and
further, to apply to the Nevada Commission for a finding of suitability to be
associated with the Company within thirty days after the chairman of the Nevada
Board mails a written notice to such person(s) requiring such filing.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any shareholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
registered corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a shareholder or to have any other relationship with the Company, or any
subsidiary of the Company, the Company (i) pays that person any dividend or
interest upon voting securities of the Company, (ii) allows that person to
exercise, directly or indirectly, any voting right conferred through securities
held by that person, (iii) pays remuneration in any form to that person for
services rendered or otherwise, or (iv) fails to pursue all lawful efforts to
require such unsuitable person to relinquish his voting securities for cash at
fair market value. Additionally, at least one local gaming regulatory authority,
the Clark County Liquor and Gaming Licensing Board, has taken the position that
it has the authority to approve all persons owning or controlling the stock of
any corporation controlling a slot route operator's license, in this case the
Company.
IGT is also subject to Nevada Gaming Authorities. The Company expects that
the investment by IGT will be approved by Nevada Gaming Authorities and other
gaming authorities who have jurisdiction over the Company or IGT.
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The Company is required to maintain a current stock ledger in Nevada which
may be examined by the Nevada Gaming Authorities at any time. If any securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act. However, to
date, the Nevada Commission has not imposed such a requirement on the Company.
The Company may not make a public offering of its securities without the
prior approval of the Nevada Commission if the securities or the proceeds
therefrom are intended to be used to construct, acquire or finance gaming
operations in Nevada, or to retire or extend obligations incurred for such
purposes. Such approval, if given, does not constitute a finding, recommendation
or approval by the Nevada Commission or the Nevada Board as to the accuracy or
adequacy of the prospectus or the investment merits of the securities. Any
representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby he or she obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
registered corporation must satisfy the Nevada Board and Nevada Commission in a
variety of stringent standards prior to assuming control of such registered
corporation. The Nevada Commission may also require controlling shareholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction.
If shareholders approve the Amendment, the Company will be able to negotiate
and finalize the IGT transaction without further shareholder action. The
issuance of Series A Stock may have the effect of delaying, deferring or
preventing a change in control of the Company, may discourage bids for the
Common Stock at a premium over the market price of the Common Stock and may
adversely affect the market price of and the voting and other rights of the
holders of the Common Stock.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT TO
THE ARTICLES OF INCORPORATION.
PROPOSAL NO. 3--APPROVAL OF AMENDMENT TO THE 1993 STOCK OPTION
AND INCENTIVE PLAN TO INCREASE THE NUMBER OF SHARES
DESCRIPTION OF PLAN
An aggregate of 1,000,000 shares (subject to adjustment in the event of any
stock dividend or split, recapitalization, reclassification, combination,
exchange of shares, or other similar corporate change) of the Company's Common
Stock is currently reserved for issuance pursuant to awards under the 1993 Plan.
On August 26, 1996, subject to shareholder approval, the Board of Directors
increased the shares reserved under the 1993 Plan by 750,000 shares to a total
of 1,750,000 shares. The Board of Directors believes that the availability of an
adequate number of shares reserved for issuance under the 1993 Plan is an
important factor in attracting, retaining and motivating qualified officers and
employees essential to the success of the Company. The Board of Directors
believes that the 750,000 additional shares of Common Stock available for
issuance as a result of the amendment to the 1993 Plan should be sufficient to
meet the Company's requirements for approximately two years.
As of October 18, 1996, an aggregate of 1,031,100 shares were subject to
outstanding stock options. Options for a total of 31,100 shares are subject to
shareholder approval of the increase in shares authorized under the 1993 Plan.
The exercise prices for currently outstanding stock options range from $3.00 to
$16.00
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per share. Options for 154,525 shares have been exercised under the 1993 Plan.
No grants of restricted stock have been made under the 1993 Plan.
ELIGIBILITY
Under the 1993 Plan, the Company may grant incentive stock options (ISOs),
nonqualified stock options (NSOs) or restricted stock awards. Any employee or
consultant of the Company or any of its "Affiliates" (as such term is defined in
the 1993 Plan) is eligible for awards under the 1993 Plan; provided, however,
that only employees of the Company may be awarded ISOs. As of June 30, 1996,
approximately 71 persons were eligible to receive awards under the 1993 Plan.
Since awards under the 1993 Plan are discretionary, awards thereunder for the
current fiscal year are not currently determinable. In the fiscal year ended
June 30, 1996, options to purchase an aggregate of 360,000 shares of Common
Stock were granted to all executive officers as a group and options to purchase
an aggregate of 202,400 shares of Common Stock were granted to all other
employees of the Company as a group (including officers who are not executive
officers) at exercise prices ranging from $3.00 to $16.00. Options granted
during the fiscal year ended June 30, 1996, to the Company's Named Executive
Officers are set forth in this Proxy Statement under "Options Grants in Last
Fiscal Year."
ADMINISTRATION
The 1993 Plan is currently administered by the Company's Board of Directors,
which has the sole authority, subject to the provisions of the 1993 Plan, to
determine the persons to whom awards will be made, the type, amount, size and
terms of awards and other terms, conditions and restrictions of the awards.
TERMS AND CONDITIONS OF OPTIONS
The number of shares that may be purchased upon the exercise of options and
the price at which shares may be purchased will be established by the Board of
Directors; provided, however, that with regard to ISOs, the aggregate fair
market value of shares (determined at the time the ISO is granted) with respect
to which ISOs are exercisable for the first time by an employee during any
calendar year may not exceed $100,000.
With regard to ISOs, the exercise price cannot be less than the fair market
value of the Common Stock on the date of grant or 110 percent of such fair
market value in the case of ISOs granted to individuals who hold 10 percent or
more of the Common Stock on the date of grant. The exercise price of NSOs cannot
be less than 85 percent of the fair market value of the Common Stock on the date
of grant. Upon exercise of any option, payment for shares as to which an option
is being exercised may be made in cash, in shares of the Company's Common Stock
having an aggregate fair market value on the date of exercise which is not less
than the exercise price of the option, or by a combination of cash and such
shares, as the Board of Directors may determine.
No option will be exercisable more than 121 months after the date on which
it is granted.
Options granted under the 1993 Plan are non-transferable except to the
extent permitted by the agreement evidencing such option; provided, however,
that no option will be transferable by any optionee other than by will or the
laws of descent and distribution.
TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS
Restricted stock awards granted pursuant to the 1993 Plan entitle the holder
to receive shares of the Company's Common Stock, subject to forfeiture to the
Company if specified conditions are not satisfied by the end of a specified
period. The Board of Directors is to establish a period (the "Restricted
Period") at the time a restricted stock award is granted during which the holder
will not be permitted to sell, transfer, pledge, encumber, or assign the shares
of Common Stock subject to the award.
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During the Restricted Period, the holder of shares subject to a restricted
stock award will have all of the rights of a shareholder of the Company with
respect to such shares, including the right to vote the shares and to receive
any dividends or other distributions with respect to the shares. Except to the
extent otherwise provided in the restricted stock agreement governing each
restricted stock award, if prior to the expiration of the Restricted Period, the
holder ceases to be an employee or consultant to the Company or its Affiliates,
or any condition established by the Board of Directors for the release of any
restriction has not occurred, all shares of the Common Stock then subject to any
restriction will be forfeited to the Company without further obligation of the
Company to the holder thereof, and all rights to the holder with respect to such
shares will terminate.
The Board of Directors may permit a gift of restricted stock to the holder's
spouse, child, stepchild, grandchild, or legal dependent, or to a trust whose
sole beneficiary (or beneficiaries) is the holder of the stock, and/or any one
or more of such persons; provided, that the donee enters into an agreement with
the Company pursuant to which it agrees that the restricted shares will be
subject to the same restrictions in the hands of such donee as it was in the
hands of the donor.
TERMINATION AND AMENDMENT
The 1993 Plan will terminate on the earlier of the date on which the 1993
Plan is terminated by the Board of Directors or July 20, 2003. The 1993 Plan may
be amended at any time by the Board of Directors, subject to approval by
shareholders, holding a majority of the voting stock, of any amendment that will
(i) materially increase the benefits accruing to participants under the 1993
Plan; (ii) increase the number of shares available for issuance or sale pursuant
to the 1993 Plan (other than as permitted in certain circumstances provided by
the 1993 Plan); or (iii) materially modify the requirements as to eligibility
for participation in the 1993 Plan.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
consequences of participation in the 1993 Plan. The discussion is general in
nature and does not address issues related to the tax circumstances of any
particular participant in the 1993 Plan. The discussion is based on federal
income tax laws in effect on the date hereof and is, therefore, subject to
possible future changes in law. The discussion does not address state, local or
foreign consequences.
NON-QUALIFIED STOCK OPTIONS. There are no tax consequences to the Company
or the optionee upon the grant of an NSO under the 1993 Plan. Upon the exercise
of an NSO, an optionee recognizes ordinary income equal to the difference
between the exercise price for the shares and the fair market value of the
shares on the date of exercise. The Company is entitled to a corresponding tax
deduction equal to the amount of income recognized by the optionee at the time
of recognition by the optionee, provided that the Company meets its federal
income and employment tax withholding obligations and that the deduction is not
otherwise disallowed by the Code.
INCENTIVE STOCK OPTIONS. An optionee does not recognize income upon the
grant or exercise of an ISO, except that the excess of the fair market value of
the shares at the time of exercise over the option price will be income for
purposes of calculating the optionee's alternative minimum tax, if any. An
option loses its status as an ISO if the optionee exercises the ISO (i) more
than three months after the optionee terminates employment or retires for
reasons other than death or disability or (ii) more than one year after the
optionee terminates employment because of disability. If an optionee does not
make a "disqualifying disposition" (defined below) of an ISO, the gain, if any,
upon a subsequent sale (i.e., the excess of the proceeds received over the
option price) will be long-term capital gain.
For shares acquired through exercise of an ISO, a "disqualifying
disposition" is a transfer of the shares (i) within two years after the grant of
the ISO or (ii) within one year after the transfer of the shares to the optionee
pursuant to the ISO's exercise. If the optionee makes a disqualifying
disposition, the optionee generally will recognize income in the year of the
disqualifying disposition equal to the excess of the
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amount received for the shares over the option price. Of that income, the
portion equal to the excess of the fair market value of the shares at the time
the ISO was exercised over the option price will be ordinary income and the
balance, if any, will be long-term or short-term capital gain, depending on
whether the shares were sold more than one year after the ISO was exercised. If,
however, the optionee sells the shares to an unrelated party at a price that is
below the fair market value of the shares at the time the ISO was exercised and
the sale is a disqualifying disposition, the amount of ordinary income will be
limited to the amount realized on the sale over the option price.
The Company is entitled to a deduction with respect to an ISO only in the
taxable year in which a disqualifying disposition occurs. In that event, the
deduction would be equal to the ordinary income, if any, recognized by the
optionee upon disposition of the shares, provided that the deduction is not
otherwise disallowed under the Code.
RESTRICTED STOCK AWARDS. A participant who receives an award of restricted
stock under the 1993 Plan generally will recognize ordinary income at the time
at which the restrictions on such shares (the "Restrictions") lapse, in an
amount equal to the excess of (i) the fair market value of such shares at the
time the Restrictions lapse, over (ii) the price, if any, paid for such shares.
If the participant makes an election with respect to such shares under Section
83(b) of the Code, not later than 30 days after the date shares are transferred
to the participant pursuant to such award, the participant will recognize
ordinary income at the time of transfer in an amount equal to the excess of (i)
the fair market value of the shares covered by the award (determined without
regard to any restriction other than a restriction which by its terms will never
lapse) at the time of such transfer over (ii) the price, if any, paid for such
shares.
A participant's tax basis in shares received pursuant to a restricted stock
award granted under the 1993 Plan will be equal to the sum of the price paid for
such shares, if any, and the amount of ordinary income recognized by such
participant with respect to the transfer of such shares or the lapse of the
Restrictions thereon. The participant's holding period for such shares for
purposes of determining gain or loss on a subsequent sale will begin immediately
after the transfer of such shares to the participant, if a Section 83(b)
election is made with respect to such shares, or immediately after the
Restrictions on such shares lapse, if no Section 83(b) election is made.
Generally, a deduction will be allowed to the Company, for federal income
tax purposes, in an amount equal to the ordinary income recognized by a
participant with respect to shares awarded pursuant to the 1993 Plan, provided
that such amount constitutes an ordinary and necessary business expense of the
Company and is reasonable.
If, subsequent to the lapse of Restrictions on his or her shares, the
participant sells such shares, the difference, if any, between the amount
realized from such sale and the tax basis of such shares to the holder will be
taxed as long-term or short-term capital gain or loss, depending on whether the
participant's holding period for such shares exceeds the applicable holding
period at the time of sale and provided that the participant holds such shares
as a capital asset at such time.
If a Section 83(b) election is made and, before the Restrictions on the
shares lapse, the shares which are subject to such election are resold to the
Company or are forfeited, (i) no deduction would be allowed to such participant
for the amount included in the income of such participant by reason of such
Section 83(b) election, and (ii) the participant would realize a loss in an
amount equal to the excess, if any, of the amount paid for such shares over the
amount received by the participant upon such resale or forfeiture (which loss
would be a capital loss if the shares are held as a capital asset at such time).
In such event, the Company would be required to include in its income the amount
of any deduction previously allowable to it in connection with the transfer of
such shares.
As of October 25, 1996, the last reported sale price per share of Common
Stock on the Nasdaq National Market was $16.625.
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
AMENDMENT OF THE 1993 STOCK OPTION AND INCENTIVE PLAN TO INCREASE THE
NUMBER OF SHARES ISSUABLE THEREUNDER BY 750,000 SHARES.
PROPOSAL NO. 4--RATIFICATION OF THE
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors will request that the shareholders ratify the
appointment of Arthur Andersen LLP as independent public accountants to examine
the financial statements of the Company for the fiscal year ending June 30,
1997. The firm of Arthur Andersen LLP has served as the Company's public
accountants since 1993. A representative of Arthur Andersen LLP will be present
at the Annual Meeting, will have an opportunity to make a statement if he or she
desires to do so, and will be available to respond to appropriate questions from
shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF ARTHUR ANDERSEN LLP AS INDEPENDENT PUBLIC ACCOUNTANTS OF THE
COMPANY.
PROPOSALS OF SHAREHOLDERS
Any shareholder wishing to have a proposal considered for inclusion in the
proxy materials for the Company's 1997 Annual Meeting of Shareholders must set
forth such proposal in writing and file it with the Secretary of the Company no
later than July 1, 1997.
OTHER BUSINESS
At the date of this Proxy Statement, management knows of no other business
that may properly come before the Annual Meeting. However, if any other matters
properly come before the meeting, the persons named in the enclosed form of
proxy will vote the proxies received in response to this solicitation in
accordance with their best judgment on such matters.
INCORPORATION BY REFERENCE
The Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's Annual
Report to Shareholders for the fiscal year ended June 30, 1996, transmitted with
the Proxy Statement, are hereby incorporated by reference. No other portions of
the Annual Report shall be deemed incorporated herein.
FINANCIAL INFORMATION
THE COMPANY'S 1996 ANNUAL REPORT TO SHAREHOLDERS ACCOMPANIES THESE
MATERIALS. COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED JUNE 30, 1996 MAY BE OBTAINED FROM THE COMPANY WITHOUT CHARGE UPON
WRITTEN REQUEST TO THE COMPANY. REQUESTS SHOULD BE DIRECTED TO THE CHIEF
FINANCIAL OFFICER, ACRES GAMING INCORPORATED, 815 NW NINTH STREET, CORVALLIS,
OREGON 97330.
By Order of the Board of Directors
John F. Acres, Chief Executive Officer
and Secretary
November 1, 1996
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APPENDIX 1
AMENDMENT TO THE
ARTICLES OF INCORPORATION OF
ACRES GAMING INCORPORATED
Article IV of the Company's Articles of Incorporation shall be deleted in
its entirety and the following substituted therefor.
ARTICLE IV
A. AUTHORIZED CAPITAL.
The corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares of stock which the corporation shall have authority to issue shall be
70,000,000, consisting of 50,000,000 shares of Common Stock with a par value of
$.01 per share, and 20,000,000 shares of Preferred Stock with a par value of
$.01 per share.
B. COMMON STOCK.
Subject to any preferential or other rights granted to any series of
Preferred Stock, the holders of shares of the Common Stock shall be entitled to
receive dividends out of funds of the corporation legally available therefor, at
the rate and at the time or times as may be provided by the Board of Directors
and shall be entitled to receive distributions legally payable to stockholders
on the liquidation of the corporation. The holders of shares of Common Stock, on
the basis of one vote per share, shall have the right to vote for the election
of members of the Board of Directors of the corporation and the right to vote on
all other matters, except where a separate class or series of the corporation's
stockholders vote by class or series.
C. PREFERRED STOCK.
Shares of Preferred Stock may be issued from time to time in one or more
series, in any manner permitted by law, as determined from time to time by the
Board of Directors and stated in the resolution or resolutions providing the
issuance thereof, prior to the issuance of any shares thereof. The Board of
Directors shall have the authority to fix and determine the voting powers,
designations, preferences, limitations, restructuring and relative rights of the
shares of any series so established
D. PREEMPTIVE RIGHTS.
No holder of outstanding shares of this corporation shall have any
preemptive rights with respect to (i) any shares of any class of stock of this
corporation, whether now or hereafter authorized, (ii) any warrants, rights, or
options to purchase any such shares, or (iii) any obligations convertible into
any such shares or into warrants, rights, or options to purchase any such
shares.
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APPENDIX 2
ACRES GAMING INCORPORATED
1993 STOCK OPTION AND INCENTIVE PLAN
The purpose of the Acres Gaming Incorporated 1993 Stock Option and Incentive
Plan (the "Plan") is to promote the growth and profitability of Acres Gaming
Incorporated (the "Company") and its Affiliates by providing its key employees
and consultants with an incentive to achieve long-term corporate objectives, to
attract and retain persons of outstanding competence, and to provide such
persons with an equity interest in the Company.
1. STOCK SUBJECT TO PLAN. An aggregate of 1,750,000 shares (the "Shares")
of the Common Stock, par value $.01 per share ("Common Stock") of the Company
may be subject to awards granted under the Plan. Such Shares may be authorized
but unissued Common Stock or authorized and issued Common Stock that has been or
may be acquired by the Company. Shares that are subject to an award which
expires or is terminated unexercised, or which are reacquired by the Company
upon the forfeiture of restricted Shares, shall again be available for issuance
under the Plan.
2. ADMINISTRATION.
A. COMMITTEE. The Plan shall be administered by the Compensation
Committee (the "Committee") of the Board of Directors of the Company (the
"Board"). The Committee shall be comprised of the entire Board or, if the
Board so determines, of two or more members of the Board.
B. POWERS AND DUTIES. The Committee shall have the authority to make
rules and regulations governing the administration of the Plan; to select
the eligible employees and consultants to whom awards shall be granted; to
determine the type, amount, size, and terms of awards; to determine the time
when awards shall be granted; to determine whether any restrictions shall be
placed on Shares purchased pursuant to any option or issued pursuant to any
award; and to make all other determinations necessary or advisable for the
administration of the Plan. The Committee's determinations need not be
uniform, and may be made by it selectively among persons who are eligible to
receive awards under the Plan, whether or not such persons are similarly
situated. All interpretations, decisions, or determinations made by the
Committee pursuant to the Plan shall be final and conclusive.
3. ELIGIBILITY. Any employee of or consultant to the Company or of any of
its Affiliates shall be eligible to receive awards under the Plan. A person who
has been granted an award under this Plan, or under any predecessor plan, may be
granted additional awards if the Committee shall so determine. Except to the
extent otherwise provided in the agreement evidencing an award, the granting of
an award under this Plan shall not affect any outstanding award previously
granted under this Plan or under any other plan of the Company or any Affiliate.
For purposes of the Plan, the term "Affiliate" shall mean any "parent
corporation" or "subsidiary corporation" of the Company, as those terms are
defined in Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as
amended.
4. AWARDS. The Committee may make awards to eligible persons in the form
of stock options which are intended to qualify as "Incentive Stock Options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, or stock options which are not intended to so qualify ("Nonqualified
Options"), or awards of restricted stock, or any combination thereof.
5. STOCK OPTIONS. A stock option granted pursuant to the Plan shall
entitle the optionee, upon exercise, to purchase Shares at a specified price
during a specified period. Options shall be subject to such terms and conditions
as the Committee shall from time to time approve; provided, that each option
shall be subject to the following requirements:
A. TYPE OF OPTION. Each option shall be identified in the agreement
pursuant to which it is granted as an Incentive Stock Option or as a
Nonqualified Option, as the case may be.
1
<PAGE>
B. TERM. No option shall be exercisable more than 121 months after the
date on which it is granted.
C. PAYMENT. The purchase price of Shares subject to an option shall be
payable in full at the time the option is exercised. Payment may be made in
cash, in shares of Common Stock having an aggregate fair market value on the
date of exercise which is not less than the option price, or by a
combination of cash and such shares, as the Committee may determine, and
subject to such terms and conditions as the Committee deems appropriate.
D. PURCHASE PRICE OF NONQUALIFIED OPTIONS. The purchase price of
Shares that are subject to Nonqualified Options shall also be determined by
the Committee at the time such Options are granted, but in no event shall
such purchase price be less than 85% of the fair market value of such shares
on the date of the grant.
E. OPTIONS NOT TRANSFERABLE. Options shall not be transferable except
to the extent permitted by the agreement evidencing such option; PROVIDED,
that in no event shall any option be transferable by the optionee, other
than by will or the laws of descent and distribution. Options shall be
exercisable during an optionee's lifetime only by such optionee. If,
pursuant to the agreement evidencing any option, such option remains
exercisable after the optionee's death, it may be exercised, to the extent
permitted by such agreement, by the personal representative of the
optionee's estate or by any person who acquired the right to exercise such
option by bequest, inheritance, or otherwise by reason of the optionee's
death.
F. INCENTIVE STOCK OPTIONS. If an option is an Incentive Stock Option,
it shall be subject to the following additional requirements:
i. Incentive Stock Options may be granted only to persons who are
employees of the Company or of an Affiliate.
ii. The purchase price of Shares that are subject to an Incentive
Stock Option shall not be less than 100% of the fair market value of such
Shares at the time the option is granted, as determined in good faith by
the Committee.
iii. The aggregate fair market value (determined at the time the
option is granted) of the Shares with respect to which Incentive Stock
Options are exercisable by the Optionee for the first time during any
calendar year, under this Plan or any other plan of the Company or any
Affiliate, shall not exceed $100,000.
iv. An Incentive Stock Option shall not be exercisable more than
ten years after the date on which it is granted.
v. The purchase price of Shares that are subject to an Incentive
Stock Option granted to an employee who, at the time such option is
granted, owns 10% or more of the total combined voting power of all
classes of stock of the Company or of any Affiliate shall not be less
than 110% of the fair market value of such Shares on the date such option
is granted, and such option may not be exercisable more than five years
after the date on which it is granted. For the purposes of this
subparagraph, the rules of Section 424(d) of the Code shall apply in
determining the stock ownership of any employee.
Subject to the foregoing, options may be made exercisable in one or more
installments, upon the happening of certain events, upon the fulfillment of
certain conditions, or upon such other terms and conditions as the Committee
shall determine.
6. RESTRICTED STOCK. Restricted stock awards granted pursuant to the Plan
shall entitle the holder to receive Shares, subject to forfeiture if specified
conditions are not satisfied at the end of a specified period.
2
<PAGE>
Restricted stock awards shall be subject to such terms and conditions as the
Committee shall from time to time approve; PROVIDED, that each award shall be
subject to the following requirements:
A. RESTRICTED PERIOD. The Committee shall establish a period (the
"Restricted Period") at any time an award is granted during which the holder
will not be permitted to sell, transfer, pledge, encumber, or assign the
Shares subject to the award. The Committee may provide for the lapse of
restrictions in installments, or upon the occurrence of certain events,
where deemed appropriate. Any attempt by a holder to dispose of restricted
Shares in a manner contrary to the applicable restrictions shall be void,
and of no force and effect.
B. RIGHTS DURING THE RESTRICTED PERIOD. Except to the extent otherwise
provided in this paragraph 6 or under the terms of any restricted stock
agreement, during the Restricted Period, the holder of restricted Shares
shall have all of the rights of a stockholder in the Company with respect to
such Shares, including the right to vote the Shares and to receive dividends
and other distributions with respect to the Shares; PROVIDED, that all stock
dividends, stock rights, and stock issued upon split-ups or
reclassifications of Shares shall be subject to the same restrictions as the
Shares with respect to which such stock dividends, rights, or additional
stock are issued, and may be held in custody as provided below in this
paragraph 6 until the restrictions thereon shall have lapsed.
C. FORFEITURES. Except to the extent otherwise provided in the
restricted stock agreement, all Shares then subject to any restriction shall
be forfeited to the Company without further obligation of the Company to the
holder thereof, and all rights of the holder with respect to such Shares
shall terminate, if the holder shall cease to be an employee of or
consultant to the Company and its Affiliates, or if any condition
established by the Committee for the release of any restriction shall not
have occurred, prior to the expiration of the Restricted Period.
D. CUSTODY. The Committee may provide that the certificates evidencing
restricted Shares shall be held in custody by a bank or other institution,
or by the Company or any Affiliate, until the restrictions thereon have
lapsed, and may require that the holder of any restricted Shares shall have
delivered to the Company one or more stock powers, endorsed in blank,
relating to the restricted Shares as a condition of receiving the award.
E. CERTIFICATES. A recipient of a restricted stock award shall be
issued a certificate or certificates evidencing the Shares subject to such
award. Such certificates shall be registered in the name of the recipients,
and may bear an appropriate legend referring to the terms, conditions, and
restrictions applicable to such award, which legend shall be in
substantially the following form:
"The transferability of this certificate and the shares
represented hereby are subject to the terms and conditions
(including forfeiture) of the Acres Gaming Incorporated 1993 Stock
Option and Incentive Plan and an Agreement entered into between
the registered owner and Acres Gaming Incorporated. Copies of such
Plan and Agreement are on file in the offices of Acres Gaming
Incorporated."
F. GIFTS, ETC. Notwithstanding any other provision of this paragraph
6, the Committee may permit a gift of restricted stock to the holder's
spouse, child, stepchild, grandchild, or legal dependent, or to a trust
whose sole beneficiary or beneficiaries shall be the holder and/or any one
of such persons: PROVIDED, that the donee shall have entered into an
agreement with the Company pursuant to which it agrees that the restricted
stock shall be subject to the same restrictions in the hands of such donee
as it was in the hands of the donor.
7. AGREEMENTS. Each option or award granted pursuant to the Plan shall be
evidenced by an agreement setting forth the terms and conditions upon which it
is granted. Multiple options or awards may be evidenced by a single agreement.
Subject to the limitations set forth in the Plan, the Committee may, with the
consent of the person to whom an award has been granted, amend any such
agreement to modify the terms or conditions governing the award evidenced
thereby.
3
<PAGE>
8. ADJUSTMENTS. In the event of any changes in the outstanding Shares of
Common Stock by reason of any stock dividend or split, recapitalization,
reclassification, combination, or exchange of Shares or other similar corporate
change, then if the Committee shall determine, in its sole discretion, that such
change necessarily or equitably requires an adjustment in the number of shares
subject to an award, in the option price or value of an award, or in the maximum
number of Shares subject to this Plan, such adjustments shall be made by the
Committee and shall be conclusive and binding for all purposes of this Plan. No
adjustment shall be made in connection with the issuance by the Company of any
warrants, rights, or options to acquire additional Common Stock or of securities
convertible into Common Stock.
9. MERGER, CONSOLIDATION, REORGANIZATION, LIQUIDATION, ETC. Subject to the
provisions of the agreement evidencing any award, if the Company shall become a
party to any corporate merger, consolidation, major acquisition of property for
stock, reorganization, or liquidation, the Board of Directors of the Company
shall have the power to make any arrangement it deems advisable with respect to
outstanding awards and in the number of Shares subject to this Plan, which shall
be binding for all purposes of this Plan, including, but not limited to, the
substitution of new awards for any awards then outstanding, the assumption of
any such awards, and the termination of such awards.
10. EXPENSES OF PLAN. The expenses of administering this Plan shall be
borne by the Company and its Affiliates.
11. RELIANCE ON REPORTS. Each member of the Committee and each member of
the Board of Directors shall be fully justified in relying or acting in good
faith upon any report made by the independent public accountants of the Company
and its Affiliates and upon any other information furnished in connection with
this Plan by any person or persons other than himself. In no event shall any
person who is or shall have been a member of the Committee or of the Board of
Directors be liable for any determination made or other action taken or omitted
in reliance upon any such report or information, or for any action taken or
omitted, including the furnishing of information, in good faith.
12. RIGHTS AS STOCKHOLDER. Except to the extent otherwise specifically
provided hereon, no recipient of any award shall have any rights as a
stockholder with respect to Shares sold or issued pursuant to the Plan until
certificates for such Shares have been issued to such person.
13. GENERAL RESTRICTIONS. Each award granted pursuant to the Plan shall be
subject to the requirement that if, in the opinion of the Committee:
a. the listing, registration, or qualification of any Shares related
thereto upon any securities exchange or under any state or federal law;
b. the consent or approval of any regulatory body; or
c. an agreement by the recipient with respect to the disposition of any
such Shares;
is necessary or desirable as a condition of the issuance or sale of such Shares,
such award shall not be consummated unless and until such listing, registration,
qualification, consent, approval, or agreement is effected or obtained in form
satisfactory to the Committee.
14. EMPLOYMENT RIGHTS. Nothing in this Plan, or in any agreement entered
into hereunder, shall confer upon any person the right to continue to serve as
an employee of or consultant to the Company or an Affiliate, or affect the right
of the Company or Affiliate to terminate such person's service at any time, with
or without cause.
15. WITHHOLDING. If the Company proposes or is required to issue Shares
pursuant to the Plan, it may require the recipient to remit to it, or may
withhold from such award or from the recipient's other compensation, an amount,
in the form of cash or Shares, sufficient to satisfy any applicable federal,
state, or local tax withholding requirements prior to the delivery of any
certificates for such Shares.
4
<PAGE>
16. AMENDMENTS. The Board of Directors of the Company may at any time, and
from time to time, amend the Plan in any respect, except that no amendment that
would:
a. materially increase the benefits accruing to participants under the
Plan;
b. increase the number of Shares available for issuance or sale
pursuant to the Plan (other than as permitted by paragraphs 8 and 9); or
c. materially modify the requirements as to eligibility for
participation in the Plan;
shall be made without the affirmative vote of stockholders holding at least a
majority of the voting stock of the Company represented in person or by proxy at
a duly held stockholders' meeting.
17. STOCKHOLDER APPROVAL. Any award granted under the Plan prior to the
date on which the Plan is approved by stockholders holding at least a majority
of the voting stock of the Company represented in person or by proxy at a duly
held stockholders' meeting shall be contingent upon such approval.
18. DURATION. No options or rights shall be granted under the Plan after
the earlier of: (a) the date on which the Plan is terminated by the Board of
Directors of the Company; or (b) July 20, 2003.
5
<PAGE>
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 12, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Joseph A. Huseonica and John F. Acres, and
each of them, as Proxies, with full power of substitution, and hereby authorizes
them to represent and to vote, as designed below, all the shares of Common Stock
of Acres Gaming Incorporated held of record by the undersigned on October 18,
1996, at the Annual Meeting of Shareholders to be held on November 12, 1996, or
at any adjournment thereof.
<TABLE>
<S> <C> <C> <C> <C>
1. ELECTION OF DIRECTOR. Election of the following nominee to serve as director for a one-year
term or until his successor is duly elected.
JOHN F. ACRES
/ / FOR NOMINEE / / WITHHOLD AUTHORITY TO VOTE FOR NOMINEE
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
2. AMENDMENT OF THE COMPANY'S ARTICLES OF INCORPORATION. Amend the Company's Articles of
Incorporation to authorize a class of Preferred Stock to be designated by the Board of Directors.
/ / FOR / / AGAINST / / ABSTAIN
- ----------------------------------------------------------------------------------------------------
3. AMENDMENT OF THE ACRES GAMING INCORPORATED 1993 STOCK OPTION AND INCENTIVE PLAN. Amend the
Acres Gaming Incorporated 1993 Stock Option and Incentive Plan to increase the number of shares
issuable thereunder by 750,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
- ----------------------------------------------------------------------------------------------------
4. RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS FOR 1996. Ratify the selection of Arthur
Andersen LLP as the Company's independent public accountants for the fiscal year ending June 30,
1997.
/ / FOR / / AGAINST / / ABSTAIN
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
In their discretion, the Proxies are authorized to vote upon such other business as may properly
come before the meeting. This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR THE NOMINEE" IN
ITEM 1 AND "FOR" ITEMS 2, 3 AND 4.
</TABLE>
Please sign below exactly as your
name appears on your stock
certificate. When shares are held
jointly, each person should sign.
When signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such. An
authorized person should sign on
behalf of corporations,
partnerships and associations and
give his or her title.
Dated: ______________________, 1996
___________________________________
Signature
___________________________________
Signature if held jointly
YOUR VOTE IS IMPORTANT. PROMPT RETURN OF THIS PROXY CARD WILL HELP SAVE THE
EXPENSE OF ADDITIONAL SOLICITATION EFFORTS
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was founded to pursue new concepts in slot machine game promotion
and bonusing for the casino industry. Although there was and is significant
competition in the slot accounting and player tracking business, the
Company's initial focus was the sale of these systems in order to establish
relationships with casinos with products the industry understood and was then
using. The Company was able to achieve some market success in this business
because of its commitment to provide follow-on promotion and bonusing
products designed to enhance casino profitability by providing entertainment
and incentives to slot machine players. The Company installed the first
Concept III bonus product in November 1994. In fiscal 1996 and 1995, it
derived revenues of $5,394,000 and $159,000 based on bonusing products.
The Company's strategic alliance with IGT will allow the Company to focus
its efforts on bonusing technology and the creation of proprietary games. The
Company anticipates that it will withdraw from direct participation in the
slot accounting and player tracking business in fiscal 1997 and will instead
sell these products to IGT for inclusion in IGT's Smart System-TM-. At its
current stage of operations, the Company's financial position and operating
results may be materially affected by a number of factors, including the
timing of receipt, installation and regulatory approval of any one order,
availability of additional capital, competition and technological change.
Historically, three or fewer customers have accounted for more than 60% of
annual revenues.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED JUNE 30, 1996 AND 1995
The Company's net revenues during the year ended June 30, 1996 were
$6,942,000, an increase of 73% over the $4,006,000 of net revenues in 1995.
The increase in revenues resulted primarily from sales to Anchor Gaming of
components used in the Wheel of Gold game, sales under an agreement with
Aristocrat Leisure Industries to provide Concept III bonusing capability for
a casino under development by Crown Ltd. in Melbourne, Australia, and the
sale of a bonusing, slot accounting player tracking system to the Sundowner
Hotel & Casino.
Gross Profit as a percentage of net revenue increased to 48% in 1996 from
36% in 1995. Gross profit increased primarily as a result of Concept III
bonusing products comprising a larger percentage of sales in 1996. The
Company realizes larger margins for bonusing products.
Operating expenses increased to $5,020,000 in the year ended June 30,
1996 from $3,925,000 in the year ended June 30, 1995, an increase of 28%. The
increase in
<PAGE>
operating expenses resulted primarily from the addition of personnel and
expansion of the sales and service office in Las Vegas. The expansion was
undertaken in order to support growth in revenue and to expand development of
Concept III products.
The Company's research and development expenses increased to $2,341,000 in
the year ended June 30, 1996 from $1,900,000 in the year ended June 30, 1995.
The Company expects to spend a significant portion of its revenue on research
and development in order to enhance and expand the capabilities of its
Concept III system, including the development of additional promotions which
utilize the system's bonusing capabilities. The Company believes the
enhancement and expansion of its Concept IIIsystem will lead to increased
revenues from sales of its products.
The net loss for the year ended June 30, 1996 was $1,641,000 ($0.22 per
share) compared to $2,505,000 ($0.35 per share) in the prior year. Although
the Company had a net loss for the full year, during the three months ended
June 30, 1996, the Company had net income of $439,000 ($0.06 per share),
compared to a net loss of $698,000 ($0.10 per share) for the same period in
the prior year.
COMPARISON OF THE YEARS ENDED JUNE 30, 1995 AND 1994
The Company's net revenues during the year ended June 30, 1995, were
$4,006,000, an increase of 40% over the $2,852,000 of net revenues in 1994.
The increase in revenues resulted primarily from sales of a slot accounting
and player tracking system to the Rio Suite Hotel and Casino in Las Vegas,
Nevada, and of player tracking systems to casinos operated by the Ho-Chunk
Nation in Wisconsin.
Gross profit as a percentage of net revenue increased to 36% in 1995 from
30% in 1994. Gross profit in 1994 was adversely affected by the initial
sales of the player tracking module. The costs to manufacture and install
these initial orders was higher than on subsequent installations. In
addition, certain optional features which are separately priced on later
orders were installed at no additional cost to the customer in order for the
Company to be able to demonstrate such features to prospective customers.
In order to support growth in revenue and to expand development of its
Concept III products, the company hired additional personnel, made capital
expenditures for computer and other equipment, leased additional space to
serve as its headquarters and opened a sales and service office in Las Vegas
during the year ended June 30, 1994. As a result, operating expenses
increased to $3,925,000 in 1995 from $2,495,000 in the year ended June 30,
1994.
The net loss for the year ended June 30, 1995, was $2,505,000 compared to
$2,598,000 in the prior year. A charge of $898,000 was recorded during the
year ended June 30, 1994 for the expenses and settlement of patent
infringement litiga-
<PAGE>
tion. See Note 5 "Patent Infringement Litigation" in "Notes to Consolidated
Financial Statements."
COMPARISONS OF THE YEAR ENDED JUNE 30, 1994 AND 1993
The company's net revenues during the year ended June 30, 1994, were
$2,862,000, an increase of 480% over the $492,000 of net revenues during the
prior year. The first significant orders for the Company's Concept III slot
accounting and player tracking system were received during the three months
ended June 30, 1993. Delivery of those orders for slot accounting and player
tracking systems to the Gold Shore Casino in Mississippi and for slot
accounting systems to casinos operated by the Ho-Chunk Nation in Wisconsin
during the year ended June 30, 1994, was the principal reason for the
increase in revenues.
Gross profit as a percentage of net revenues decreased to 30% in 1994 from
59% in 1993. The decrease resulted from costs to manufacture and install
initial orders of the player tracking system.
In order to support revenue growth and develop its Concept III products,
the company hired additional personnel, made capital expenditures for
computer and other equipment, leased additional space to serve as its
headquarters and opened a sales and service office in Las Vegas. As a result,
operating expenses increased to $2,495,000 in the year ended June 30, 1994
from $805,000 in the year ended June 30, 1993.
A charge of $898,000 was recorded during fiscal 1994 for the expenses and
settlement of patent infringement litigation (See Note 5, "Patent
Infringement Litigation" in Notes to Consolidated Financial Statements).
Including the charge for the litigation settlement, the net loss was
$2,598,000 ($0.39 per share) in 1994, compared to $536,000 ($0.10 per share)
in 1993.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had a balance of cash and cash equivalents of
$2,500,000 compared to a balance of $1,325,000 as of June 30, 1995. The
Company had no debt. During the year ended June 30, 1996, net cash generated
by operating activities was $1,150,000 and proceeds from issuance of common
stock for stock option and warrant exercises was $610,000. Cash used for
capital expenditures and other investing activities was $585,000. The major
components of the net cash generated by operating activities were the net
loss of $1,641,000 offset by depreciation of $540,000 and increases of
$1,355,000 in customer deposits and of $987,000 in accounts payable and
accrued expenses.
The 833,600 redeemable warrants which were outstanding as of June 30, 1996
<PAGE>
from the Company's initial public offering have an exercise price of $7.50
per share and expire in October, 1996. If exercised in full, such redeemable
warrants would provide gross proceeds to the Company of approximately
$6,252,000. Any proceeds from the exercise of the warrants would be used to
help fund the Company's anticipated growth and product development efforts.
See Note 6 - "Stockholders' Equity" in Notes to Consolidated Financial
Statements.
In August, 1996 the Company entered into a letter of intent agreement to
form a strategic alliance with International Game Technology (IGT) under
which the Company will initially issue approximately 519,000 shares of
preferred stock for gross proceeds of $5,000,000. IGT has the option,
through August 8, 1997, to purchase up to an additional 519,000 shares of
preferred stock at the same price. IGT will also have the right to elect one
member of the Company's Board of Directors. Closing of the initial preferred
stock sale is subject to approval of the issuance of preferred stock by the
Company's shareholders, receipt of approval by gaming and other regulatory
agencies and completion of definitive agreements with IGT.
The Company's sources of liquidity include its cash balances and cash
generated by operations, including payment terms which generally include
deposits with the receipt of customer orders. The proceeds from the exercise
of the redeemable warrants and the issuance of preferred stock to IGT
referred to above will provide additional cash. The sources of liquidity are
expected to be sufficient to fund the Company's operations for at least the
next twelve months.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March, 1995, the Financial Accounting Standards Board (FASB) issued
statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assests to be Disposed of," which requires the Company to
review for impairment of Long-Lived assets, certain identifiable intangibles,
and goodwill related to those assets whenever events or changes in
circumstances indicate that the carrying amount of an asset might not be
recoverable. In certain situations, an impairment loss would be recognized.
The Company has adopted the provisions of this Statement, which did not have
material effect on the financial statements.
In October, 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation," which establishes a fair value based method of
accounting for stock-based compensation plans and requires additional
disclosures for those companies that elect not to adopt the new method of
accounting. The Company will continue to account for employee stock options
under APB Opinion No. 25, "Accounting for Stock Issued to Employees." The
disclosures required by Statement No. 123 will be effective for the Company's
fiscal year ending June 30, 1997.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Acres Gaming Incorporated:
We have audited the accompanying consolidated balance sheets of Acres Gaming
Incorporated (a Nevada Corporation) and subsidiary as of June 30, 1996 and
1995 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June
30, 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Acres Gaming Incorporated and subsidiary as of June 30, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Portland, Oregon,
August 9, 1996
<PAGE>
ACRES GAMING INCORPORATED & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996 AND 1995
ASSETS
1996 1995
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,500,000 $ 1,325,000
Receivables 910,000 967,000
Inventories 2,692,000 2,395,000
Prepaid Expenses 94,000 73,000
------------- -------------
Total current assets 6,196,000 4,760,000
------------- -------------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 515,000 508,000
Equipment 1,348,000 1,014,000
Leasehold improvements 506,000 498,000
Accumulated depreciation (1,329,000) (789,000)
------------- -------------
Total property and equipment 1,040,000 1,231,000
------------- -------------
OTHER ASSETS, NET 395,000 273,000
------------- -------------
$ 7,631,000 $ 6,264,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,456,000 $ 427,000
Accrued expenses 440,000 482,000
Customer deposits 1,748,000 393,000
------------- -------------
Total current liabilities 3,644,000 1,302,000
------------- -------------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value,
50,000,000 shares authorized,
7,601,150 and 7,494,500 shares
issued and outstanding at June
30, 1996 and 1995 76,000 75,000
Additional paid-in capital 11,224,000 10,615,000
Accumulated deficit (7,313,000) (5,672,000)
Deferred charge-warrants - (56,000)
------------- -------------
Total stockholders' equity 3,987,000 4,962,000
------------- -------------
$ 7,631,000 $ 6,264,000
------------- -------------
------------- -------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED BALANCE SHEETS.
<PAGE>
ACRES GAMING INCORPORATED & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
NET REVENUES $ 6,942,000 $ 4,006,000 $ 2,852,000
COST OF REVENUES 3,587,000 2,570,000 2,001,000
----------- ----------- -----------
GROSS PROFIT 3,355,000 1,436,000 851,000
----------- ----------- -----------
OPERATING EXPENSES:
Research and development 2,341,000 1,900,000 1,352,000
Selling, general and
administrative 2,679,000 2,025,000 1,143,000
----------- ----------- -----------
Total operating expenses 5,020,000 3,925,000 2,495,000
----------- ----------- -----------
LOSS FROM OPERATIONS (1,665,000) (2,489,000) (1,644,000)
LITIGATION SETTLEMENT - - (898,000)
OTHER INCOME (EXPENSE 24,000 (16,000) (56,000)
----------- ----------- -----------
NET LOSS $(1,641,000) $(2,505,000) $(2,598,000)
----------- ----------- -----------
----------- ----------- -----------
NET LOSS PER SHARE $ (0.22) $ (0.35) $ (0.39)
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK
OUTSTANDING 7,552,000 7,145,000 6,629,000
----------- ----------- -----------
----------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED BALANCE SHEETS.
<PAGE>
ACRES GAMING INCORPORATED & SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock Additional Deferred
--------------------- Paid-In Accumulated Charge-
Shares Amount Capital Deficit Warrants Total
---------- --------- ------------ ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE
June 30, 1993 4,852,000 $ 49,000 $ 704,000 $(1,434,000) $ - $ (681,000)
Issuance of common
stock 2,215,750 22,000 8,331,000 - - 8,353,000
Reclassification of
cumulative S
corporation losses - - (865,000) 865,000) - -
Net loss - - - (2,598,000) - (2,598,000)
---------- -------- ------------ ------------ --------- ----------
BALANCE
June 30, 1994 7,067,750 71,000 8,170,000 (3,167,000) - 5,074,000
Issuance of common
stock 426,750 4,000 2,349,000 - - 2,353,000
Net loss - - - (2,505,000) - (2,505,000)
Issuance of warrants - - 96,000 - (96,000) -
Amortization of
warrants - - - - 40,000 40,000
---------- -------- ------------ ------------ --------- ----------
BALANCE
June 30, 1995 7,494,500 75,000 10,615,000 (5,672,000) (56,000) 4,962,000
Issuance of common
stock 106,650 1,000 609,000 - - 610,000
Net loss - - - (1,641,000) - (1,641,000)
Amortization of
warrants - - - - 56,000 56,000
---------- -------- ------------ ------------ --------- ----------
BALANCE
June 30, 1996 7,601,150 $ 76,000 $ 11,224,000 $ (7,313,000) $ - $3,987,000
---------- -------- ------------ ------------ --------- ----------
---------- -------- ------------ ------------ --------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED STATEMENTS.
<PAGE>
ACRES GAMING INCORPORATED & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,641,000) $ (2,505,000) $ (2,598,000)
Adjustments to reconcile net loss to net cash
from operating activities-Depreciation 540,000 449,000 161,000
Amortization of warrants 56,000 40,000 -
Amortization of capitalized software costs 89,000 - -
Amortization of other long term assets 25,000 - -
Changes in assets and liabilities:
Receivables 57,000 (697,000) (171,000)
Inventories (297,000) (409,000) (1,935,000)
Prepaid expenses (21,000) (73,000) (18,000)
Accounts payable and accrued expenses 987,000 (229,000) 1,051,000
Customer deposits 1,355,000 304,000 (1,160,000)
------------ ------------ ------------
Net cash from operating activities 1,150,000 (3,120,000) (4,670,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (349,000) (198,000) (1,562,000)
Capitalized software costs (82,000) (148,000) -
Investment in intangible assets (154,000) (107,000) -
------------ ------------ ------------
Net cash from investing activities (585,000) (453,000) (1,562,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 610,000 2,353,000 8,353,000
Payments under notes payable to bank - - (37,000)
------------ ------------ ------------
Net cash from financing activities 610,000 2,353,000 8,316,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,175,000 (1,220,000) 2,084,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 1,325,000 2,545,000 461,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,500,000 $ 1,325,000 $ 2,545,000
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 12,000 $ 22,000 $ 3,000
------------ ------------ ------------
------------ ------------ ------------
NONCASH FINANCING ACTIVITIES:
Issuance of warrants $ - $ 96,000 $ -
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED STATEMENTS.
<PAGE>
ACRES GAMING INCORPORATED & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND COMPANY OPERATIONS:
COMPANY OPERATIONS
The consolidated financial statements include the accounts of Acres Gaming
Incorporated and its wholly-owned subsidiary, AGI Distribution, Inc. (the
Company). The Company develops, manufactures and markets electronic tools
which game manufacturers and casinos can use to increase the playability and
entertainment value of their slot games while supporting more efficient and
profitable casino operations. These tools include a combination of custom
electronics, software and computers. The Company presently sells its products
in the United States and in Australia. Sales to Australia totaled $1,416,000,
or 20% of net revenues, for the year ended June 30, 1996.
During September 1993, JFA Enterprises, Inc. (JFA) merged two companies
under common ownership into JFA in exchange for newly issued shares of JFA
common stock. JFA subsequently changed its name to Acres Gaming Incorporated.
The transaction was accounted for similar to a pooling of interests and,
accordingly, the Company's financial statements include the accounts of the
merged companies for all periods presented. In connection with this merger,
the Company executed a 6-for-1 stock split. This stock split has been
retroactively reflected for the period ended June 30, 1994.
In November, 1993, the Company issued 1,667,500 units (consisting of
1,667,500 shares of common stock and 833,750 warrants) in an initial public
offering resulting in net proceeds of $7,153,000. 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. The proceeds of these transactions are being used to
expand and enhance the Company's Concept III product line, expand sales and
support activities, fund capital expenditures for computer and other
equipment, and provide working capital. At its current stage of operations,
the Company's financial position and operating results may be materially
affected by a number of factors, including the timing of receipt,
installation and regulatory approval of any one order, availability of
additional capital, competition and technological change.
PRINCIPLES OF CONSOLIDATION
All intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION
The Company sells its products under contracts which generally provide that
the price be paid in installments as progress is made toward completion and
that final payment be made after the completion of the contract. 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. During 1996, three
customers accounted for 43%, 20% and 12% of net revenues. During 1995, two
other customers accounted for 44% and 17% of net revenues and, during 1994,
two other customers accounted for 48% and 20% of net revenues.
CAPITALIZED SOFTWARE AND RESEARCH AND DEVELOPMENT COSTS
Software development costs for certain projects are capitalized from the time
technological feasibility is established to the time the resulting software
product is first shipped. Capitalized software costs, net of accumulated
amortization, were $141,000 at June 30, 1996 and $148,000 at June 30, 1995,
and are included in other assets. Amortization, generally on a two-year
straight-line basis, begins when the products are first shipped. All other
research and development costs are expensed as incurred.
INCOME TAXES
Certain of the companies involved in the merger discussed in Note 1 had
previously elected to be taxed as S corporations. As an S corporation, a
company generally is not responsible for income taxes. Instead, the
stockholders are taxed on the Company's taxable income at the stockholders'
individual federal and state income tax rates. These companies have incurred
losses since inception.
<PAGE>
At the time of the merger described, the S corporation status of the
companies discussed above was terminated and, accordingly, the Company has
been subject to federal and state income taxes from the effective date of the
merger. The Company recognizes deferred taxes for cumulative temporary
differences between financial reporting and tax reporting. Such deferred
taxes are based on the cumulative temporary differences at the date of the
merger. If the termination of the S corporation status had occurred at June
30, 1993, deferred taxes would not have been significant. Upon termination of
the S corporation status, cumulative losses of approximately $865,000
attributable to the entities which had elected S corporation status were
reclassified to additional paid-in capital from accumulated deficit.
The Company accounts for income taxes under the liability method whereby
deferred taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
NET LOSS PER SHARE
Net loss per share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the period.
CASH AND CASH EQUIVALENTS
The Company considers investments with an initial maturity of three months or
less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of receivables. At June 30, 1996
and 1995, the fair value of the Company's receivables approximated their
carrying value.
INVENTORIES
Inventories consist of electronic components and other hardware which are
recorded at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed on the
straight-line basis over the assets' estimated useful lives of four or five
years. Leasehold improvements are amortized over the lease term.
Expenditures for maintenance and repairs are charged to operations when
incurred.
INTANGIBLE ASSETS
Intangible assets consist of costs associated with the establishment of
patents, trademarks, gaming licenses, and gaming product approvals in various
jurisdictions. Amortization started in 1996 and is calculated using the
straight-line method over a period of 2 to 15 years. Intangible assets, net
of accumulated amortization, were $254,000 at June 30, 1996 and $125,000 at
June 30, 1995 and are included in other assets.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECENT PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," which requires the Company to
review for impairment of long-lived assets, certain identifiable intangibles,
and goodwill related to those assets whenever events or changes in
circumstances indicate that the carrying amount of an asset might not be
recoverable. In certain situations, an impairment loss would be recognized.
The Company has adopted the provisions of this Statement, which did not have
a material effect on the financial statements.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation," which establishes a fair value based method of
accounting for stock-based compensation plans and
<PAGE>
requires additional disclosures for those companies that elect not to adopt
the new method of accounting. The Company will continue to account for
employee stock options under APB Opinion No. 25, "Accounting for Stock Issued
to Employees." The disclosures required by Statement No. 123 will be
effective for the Company's fiscal year ending June 30, 1997.
2. INVENTORIES:
1996 1995
---------- ----------
Inventories consist of the following:
Raw Materials $1,464,000 $1,930,000
Work-in-progress 718,000 292,000
Finished Goods 510,000 173,000
---------- ----------
$2,692,000 $2,395,000
---------- ----------
---------- ----------
3. INCOME TAXES:
At June 30, 1996, the Company had cumulative net operating losses totaling
approximately $7,000,000, 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
its realizability is uncertain at this time. Total deferred tax liabilities
were insignificant as of June 30, 1996.
4. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities under operating leases that extend
through March, 2001. Future minimum lease payments under these noncancelable
operating leases as of June 30, 1996 are $239,000 in 1997, $254,000 in 1998,
$227,000 in 1999, $97,000 in 2000, and $13,000 in 2001. Total lease expenses
for the years ended June 30, 1996, 1995 and 1994 was $228,000, $189,000 and
$86,000, respectively.
5. PATENT INFRINGEMENT LITIGATION
The Company and a customer were named as defendants in a lawsuit filed in
August 1993, which alleged patent infringement and sought to enjoin the
Company from selling progressive jackpot table games. In April 1994, the
Company was found to have infringed on certain patents and the patents were
held to be valid. A charge of $898,000 was recorded in the statement of
operations for the settlement reached after conclusion of the trial, as well
as all expenses related to the trial and the settlement agreement. The
Company had sold only four of the table games and had not considered them a
part of its primary business plan.
6. STOCKHOLDERS' EQUITY:
In November 1993, the Company completed its initial public offering and
issued 1,667,500 units, consisting of 1,667,500 shares of common stock and
833,750 Redeemable Warrants. The net proceeds of the offering were
$7,153,000. The Redeemable Warrants, which expire October 27, 1996, allow
the holder to purchase one share of common stock at $7.50 per share. In
connection with the offering, the Company granted the underwriter warrants to
purchase 145,000 shares of the Company's units at $6 per share. The warrants
expire in November 1998.
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 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. Expense
associated with these warrants was $56,000 in 1996 and $40,000 in 1995.
The Company has a Stock Option Plan (the Plan) which permits the granting
of awards to directors, employees and consultants of the Company in the form
of stock options. Stock options granted under the Plan may be incentive stock
options or nonqualified options. A total of 1,000,000 shares of
<PAGE>
the Company's common stock has been reserved for issuance pursuant to awards
granted under the Plan. Options to purchase 278,000,000 shares of common
stock were exercisable at June 30, 1996.
Activity under the plan is summarized below:
Aggregate
Number Amount Price
of Shares Per Share (in Thousands)
--------- ------------ -------------
Options outstanding at June 30, 1993 - $ - $ -
Granted 310,000 3.00-10.00 1,501
Exercised (250) 3.00 (1)
--------- ------------ -------------
Options outstanding at June 30, 1994 309,750 $3.00-10.00 $ 1,500
Granted 165,500 4.16-6.50 909
Exercised (26,750) 3.00-5.50 (98)
Lapsed (56,875) 3.00-10.00 (421)
--------- ------------ -------------
Options outstanding at June 30, 1995 391,625 3.00-10.00 1,890
Granted 562,400 3.50-10.00 2,582
Exercised (91,500) 3.00-6.50 (526)
Lapsed (106,150) 4.16-10.00 (743)
--------- ------------ -------------
Options outstanding at June 30, 1996 756,375 $ 3.00-10.00 $ 3,203
--------- ------------ -------------
--------- ------------ -------------
7. EMPLOYEE BENEFIT PLAN:
The Company has a profit sharing plan which operates under the provisions of
Section 401(k) of the Internal Revenue Code and covers substantially all
full-time employees. Employer contributions may be made at the discretion of
the Board of Directors. To date, there have been no employer contributions.
8. SUBSEQUENT EVENT:
In August 1996, the Company executed a letter of intent to implement a
strategic alliance with International Game Technology (IGT). IGT is the
largest manufacturer of slot machines in the world. The agreement includes a
$5 million investment from IGT in return for 519,481 newly issued shares of
the Company's 3% convertible preferred stock, with a twelve-month option to
purchase an additional 519,481 preferred shares at the same price. Under the
strategic alliance, the Company and IGT will be allied in four product areas:
1) The Company will create specialty games, using IGT equipment as the
foundation, to be installed under leasing and/or revenue sharing agreements
in casinos; 2) the Company will sell its Concept III promotions and player
tracking components for use in IGT Smart System-TM- player tracking/ slot
accounting installations; 3) IGT will be able to incorporate into its slot
machines the Company's displays and other game enhancement tools, and; 4) the
Company will develop promotions for use on IGT's Wide Area Network that
supports "Megabucks," "QuarterMania" and other progressive jackpot promotions.
IGT will have the right to elect one member of the Company's Board of
Directors. Closing of the investment transaction is subject to the approval
of the new class of preferred stock by the Company's shareholders, execution
of definitive agreements, and approval of gaming and other regulatory
authorities.
