<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission File Number 0-22498
ACRES GAMING INCORPORATED
(Exact name of registrant as specified in its charter)
NEVADA 88-0206560
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
815 NW NINTH STREET
CORVALLIS, OREGON 97330
(Address of principal executive offices)
541-753-7648
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock, $.01 par value, outstanding on
October 31, 1997 was 8,804,481.
<PAGE> 2
ACRES GAMING INCORPORATED
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at September 30, 1997 and
June 30, 1997 1
Statements of Income for the Three Months Ended
September 30, 1997 and 1996 2
Statements of Cash Flows for the Three Months Ended
September 30, 1997 and 1996 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
PART II -- OTHER INFORMATION 8
SIGNATURES 9
INDEX TO EXHIBITS 10
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACRES GAMING INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30,
1997
(UNAUDITED) JUNE 30, 1997
------------- -------------
(in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,954 $ 9,318
Receivables 4,618 3,880
Inventories 4,639 5,366
Prepaid expenses 364 455
------- -------
Total current assets 18,575 19,019
------- -------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 530 541
Equipment 3,637 2,804
Leasehold improvements 559 526
Accumulated depreciation (2,306) (2,075)
------- -------
Total property and equipment 2,420 1,796
OTHER ASSETS 487 508
------- -------
$21,482 $21,323
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,312 $ 1,339
Accrued expenses 564 723
Customer deposits 430 483
------- -------
Total current liabilities 2,306 2,545
------- -------
REDEEMABLE CONVERTIBLE PREFERRED STOCK 4,948 4,948
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50 million shares
authorized, 8.8 million shares issued and outstanding
at September 30, 1997 and June 30, 1997 88 88
Additional paid-in capital 19,464 19,321
Accumulated deficit (5,324) (5,579)
------- -------
Total stockholders' equity 14,228 13,830
------- -------
$21,482 $21,323
======= =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
1
<PAGE> 4
ACRES GAMING INCORPORATED
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
1997 1996
-------------- --------------
(in thousands except per share data)
<S> <C> <C>
NET REVENUES $5,889 $6,568
COST OF REVENUES 3,225 3,108
------ ------
GROSS PROFIT 2,664 3,460
------ ------
OPERATING EXPENSES:
Research and development 1,023 868
Selling, general and administrative 1,507 1,138
------ ------
Total operating expenses 2,530 2,006
------ ------
INCOME FROM OPERATIONS 134 1,454
OTHER INCOME 121 35
------ ------
NET INCOME $ 255 $1,489
====== ======
NET INCOME PER SHARE $ 0.03 $0.18
====== ======
SHARES USED IN PER SHARE COMPUTATION 9,650 8,409
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 5
ACRES GAMING INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------ ------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 255 $1,489
Adjustments to reconcile net income to net cash from
operations:
Depreciation and amortization 276 233
Changes in assets and liabilities:
Receivables (738) (1,820)
Inventories 727 (325)
Prepaid expenses 91 5
Accounts payable and accrued expenses (186) 728
Customer deposits (53) 228
------ ------
Net cash from operating activities 372 538
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (880) (218)
Other, net 1 (70)
------ ------
Net cash from investing activities (879) (288)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 143 839
------ ------
Net cash from financing activities 143 839
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (364) 1,089
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,318 2,500
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $8,954 $3,589
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 6
ACRES GAMING INCORPORATED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. Unaudited Financial Statements
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted from these unaudited financial statements.
These statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended June 30, 1997 filed with the
Securities and Exchange Commission.
In the opinion of management, the interim financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary in
order to make the financial statements not misleading. The results of
operations for the three month period ended September 30, 1997 are not
necessarily indicative of the operating results for the full year or future
periods.
2. Inventories consist of electronic components and other hardware which are
recorded at the lower of cost (first-in, first-out) or market. Inventories
consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- --------
(in thousands)
<S> <C> <C>
Raw Materials $2,145 $2,787
Work-in-progress 748 621
Finished Goods 1,746 1,958
------ ------
$4,639 $5,366
====== ======
</TABLE>
3. Income Taxes
At September 30, 1997, the Company had cumulative net operating losses of
approximately $5.2 million which are available to offset future taxable
income through 2011. The Company has provided a valuation allowance for the
entire amount of the benefit related to these net operating loss
carryforwards as realizability is uncertain. Deferred tax liabilities were
insignificant as of September 30, 1997.
4. Per Share Computation
Net income per share is computed by dividing net income by the weighted
average number of shares of common stock and dilutive common stock
equivalents outstanding during the period using the treasury stock method.
Common stock equivalents include shares issuable upon exercise of
outstanding stock options and warrants and shares issuable upon conversion
of redeemable convertible preferred stock.
5. Redeemable Convertible Preferred Stock
In January 1997, the Company created an initial series of preferred stock,
consisting of 1,038,961 shares, which it designated Series A Convertible
Preferred Stock (the "Series A Stock") and issued 519,481 shares for net
proceeds of approximately $4.9 million. The Series A Stock is entitled to
receive non-cumulative dividends at a rate per share equal to 3 percent of
$9.625, the per share purchase price. Holders of the Series A Stock have the
option, upon notice to the Company, to convert shares of Series A Stock into
shares of Common Stock based upon the applicable conversion price in effect
at the time of conversion. The initial conversion price for each share of
Series A Stock is the lesser of the price at which the Series A Stock was
initially issued and the average closing price of the Company's Common Stock
for the period of thirty trading days prior to the date of conversion of
shares of Series A Stock. The conversion price is subject to adjustments
4
<PAGE> 7
for certain events relating to the Common Stock including stock splits and
combinations, dividends and distributions, reclassification, exchange,
substitution, reorganization, merger, or sale of assets. The Series A Stock
is subject to redemption, at the option of the Company and the holders,
subject to certain conditions, at a price equal to the purchase price plus
any declared but unpaid dividends.
So long as at least 130,000 of the shares of Series A Stock originally
issued by the Company remain outstanding, holders of the Series A Stock are
entitled as a class to elect one director and must approve certain
amendments to the Company's articles of incorporation, including, among
other things, amendments to facilitate the sale or merger of the Company. 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.
6. Stockholders' Equity
In November 1993, the Company completed its initial public offering and
issued 1,667,500 units (the "Units"), consisting of 1,667,500 shares of
Common Stock and 833,750 Redeemable Warrants. In connection with the
offering, the Company granted the underwriter warrants to purchase 145,000
Units at $6.00 per share. The net proceeds of the offering were $7.2
million. The Redeemable Warrants expired on October 27, 1996. Prior to the
expiration date, substantially all of the Redeemable Warrants and
underwriter warrants were exercised resulting in net proceeds to the Company
of approximately $7.6 million.
In June 1995, the Company issued 400,000 shares of Common Stock to a group
of private investors for net proceeds of approximately $2.3 million. In
connection with this offering, the Company granted a five year warrant to
purchase 40,000 shares of the Common Stock at $7.20 per share, which
approximated market value at that date.
In 1995, the Company issued warrants to purchase 195,000 shares of Common
Stock to two companies and two individuals in exchange for services.
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, recorded as paid-in capital
and amortized over the term of the related service agreement.
7. Recently Issued Accounting Standards
In March 1997, the Financial Accounting Standards Board issued Statement No.
128 "Earnings per Share" ("SFAS 128") which modifies the computation and
disclosures related to earnings per share. Consistent with the provisions of
the statement, the Company will adopt SFAS 128 effective with the Company's
fiscal quarter ending December 31, 1997. SFAS 128 would have had no effect
on earnings per share reported for the three-month period ended September
30, 1997. The pro-forma effect of the accounting change on earnings per
share reported for the three-month period ended September 30, 1996 is as
follows:
<TABLE>
<CAPTION>
PRO-FORMA EARNINGS PER SHARE FOR THE
THREE-MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------
BASIC DILUTED
-------------------------------------
<S> <C> <C>
Primary and Fully Diluted EPS as reported $.18 $.18
Effect of SFAS 128 .02 .00
Pro-forma Basic and Diluted EPS ------------------ --------------------
$.20 $.18
================== ====================
</TABLE>
5
<PAGE> 8
ACRES GAMING INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, manufactures and markets electronic game
promotions, equipment and games for the casino gaming industry. The Company's
products are based on its proprietary Acres Bonusing Technology(TM) and are
designed to enhance casino profitability by providing entertainment and
incentives to players of gaming machines. The bonusing technology improves the
efficiency of bonus and incentive programs currently offered by many casinos,
and makes possible some bonus and incentive programs that have not previously
been offered.
RESULTS OF OPERATIONS
The Company's net revenues for the three months ended September 30, 1997
were $5.9 million as compared to net revenues of $6.6 million during the three
months ended September 30, 1996. In January 1997, the Company formed a strategic
alliance with International Game Technology ("IGT") to market its Acres Bonusing
System(TM) ("ABS"). ABS is the casino-wide application of Acres Bonusing
Technology and is integrated with the new IGT Gaming System ("IGS"). Upon
entering the IGT alliance, the Company discontinued offering its own slot
accounting/player tracking system, sales of which had made significant
contributions to revenue during the quarter ended September 30, 1996. The
prior-year quarter also included significant sales to Crown Ltd.'s casino in
Melbourne, Australia and to a gaming machine developer which utilizes Acres
Bonusing Technology to enhance the excitement of its games. Sales to the gaming
machine developer continue, but at lower volume.
Gross profit as a percentage of net revenue was 45% in the three-month
period ended September 30, 1997, compared to 53% for the same period in the
prior year. Gross profit is generally higher on products which feature Acres
Bonusing Technology, including the Company's own slot accounting/player tracking
system, the system used for the Crown casino and the products sold to the gaming
machine developer. Sales of such products decreased $4.5 million from the first
quarter of 1996 to the first quarter of 1997, and were substantially replaced
with lower margin hardware component sales to IGT. When deliveries of the
combined IGS and ABS begin, the Company expects its gross profit margin to
increase as it will also recognize revenues from its bonusing software.
The Company has increased its operating expenses over the past year,
primarily by adding personnel to expand future product offerings based on its
Acres Bonusing Technology. As a result, operating expenses increased to $2.5
million in the three-month period ended September 30, 1997 from $2.0 million in
the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have historically used cash. However, during
the three months ended September 30, 1997, $372,000 of net cash was generated by
operating activities. During the same period, the Company spent $880,000 on
capital equipment.
The Company's principal sources of liquidity have been net proceeds from
sales of equity securities; $7.2 million from its initial public offering in
November 1993, $7.6 million from the exercise of warrants in October 1996 and
$4.9 million from the issuance of 519,481 shares of Series A Convertible
Preferred Stock in January 1997.
6
<PAGE> 9
As of September 30, 1997, the Company had cash and cash equivalents of
$9.0 million, compared to $9.3 million as of June 30, 1997. The Company does not
have any debt. The Company's cash and cash equivalents balances are expected to
be sufficient to fund the Company's operations for at least the next 12 months.
FORWARD-LOOKING INFORMATION
Certain statements in this Form 10-Q contain "forward-looking"
information (as defined in Section 27A of the Securities Act of 1933, as
amended) that involve risks and uncertainties which may cause actual results to
differ materially from those predicted in the forward-looking statements. Such
risks and uncertainties include, but are not limited to: developments in the
Company's strategic alliance with IGT; the timing of receipt, installation and
regulatory approval of orders; competition; government regulation; market
acceptance; product development; customer concentration; technological change;
the effect of economic conditions on the gaming industry generally; and other
risks detailed in the Company's Securities and Exchange Commission filings,
including the Company's Form 10-K for the fiscal year ended June 30, 1997.
7
<PAGE> 10
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1997, the Company received Patent No. 5,655,961 for a "method
of operating networked gaming devices." In September 1997, the Company notified
Mikohn Gaming Corporation ("Mikohn") and certain of its customers that the
Mikohn product "MoneyTime(TM)" appeared to infringe Acres' patent. In October
1997, Mikohn filed an action in the United States District Court for the
District of Nevada (Case No. CV-S-97-01383-HDM (LRL))seeking a declaratory
judgment that the Mikohn products do not infringe Acres' patent, that the Acres
patent is invalid, and that the Mikohn products do not infringe any pending
patent applications by Acres. The complaint also seeks to enjoin Acres from
disparaging Mikohn's products, and seeks the payment of unspecified compensatory
and punitive damages, attorneys' fees and costs, together with interest. On
October 31, 1997, Mikohn filed a motion for a preliminary injunction seeking to
prevent Acres from disparaging its MoneyTime product and from "interfering with
its customers and prospective economic relationships." The Company expects to
file its response to the motion in mid-November. The Company expects the court
to rule on the motion in December or January. The Company believes it has acted
appropriately, has confidence in the validity of its patent and intends to
vigorously defend its position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered by
this Form 10-Q.
8
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ACRES GAMING INCORPORATED
(Registrant)
Date: November 7, 1997 By /s/ Robert W. Brown
------------------------------------------------
Robert W. Brown
Executive Vice President, Chief Financial
Officer, Secretary and Treasurer
(principal financial and chief accounting officer)
9
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.1 Articles of Incorporation of Acres Gaming Incorporated, as amended(1)
3.2 Bylaws of Acres Gaming Incorporated, as amended(2)
11.1 Statement of Computation of Earnings per Share
27.1 Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference to the exhibits to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended December 31, 1996, previously
filed with the Commission.
(2) Incorporated by reference to the exhibits to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1996, previously
filed with the Commission.
<PAGE> 1
EXHIBIT 11.1
ACRES GAMING INCORPORATED
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- ----------
(in thousands except per
share data)
<S> <C> <C>
Net income $ 255 $1,489
====== ======
Weighted average number of shares of common stock
and common stock equivalents outstanding:
Weighted average number of common shares
outstanding 8,777 7,634
Dilutive effect of warrants and employee stock
options after application of the treasury stock
method 354 775
Dilutive effect of redeemable convertible
preferred stock after application of the 519 -
if-converted method
Total shares used in per share computation ------ ------
9,650 8,409
====== ======
Net income per share ------ ------
$.03 $.18
====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACRES GAMING
INCORPORATED FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,954,000
<SECURITIES> 0
<RECEIVABLES> 4,849,000
<ALLOWANCES> (231,000)
<INVENTORY> 4,639,000
<CURRENT-ASSETS> 18,575,000
<PP&E> 4,726,000
<DEPRECIATION> 2,306,000
<TOTAL-ASSETS> 21,482,000
<CURRENT-LIABILITIES> 2,306,000
<BONDS> 0
0
4,948,000
<COMMON> 19,552,000
<OTHER-SE> (5,324,000)
<TOTAL-LIABILITY-AND-EQUITY> 21,482,000
<SALES> 5,889,000
<TOTAL-REVENUES> 5,889,000
<CGS> 3,225,000
<TOTAL-COSTS> 2,530,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (121,000)
<INCOME-PRETAX> 255,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 255,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 255,000
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
