<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, 1998
[ ] 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, 1998 was 8,913,281.
<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, 1998 and June 30, 1998 1
Statements of Operations for the Three Months Ended
September 30, 1998 and 1997 2
Statements of Cash Flows for the Three Months Ended
September 30, 1998 and 1997 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II -- OTHER INFORMATION 10
SIGNATURES 11
INDEX TO EXHIBITS 12
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACRES GAMING INCORPORATED
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
(UNAUDITED) JUNE 30, 1998
------------------ -------------
(in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,755 $ 9,887
Receivables 1,875 1,929
Inventories 3,670 2,607
Prepaid expenses 237 103
------------- -------------
Total current assets 13,537 14,526
------------- -------------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 685 540
Equipment 4,424 4,003
Leasehold improvements 955 627
Accumulated depreciation (3,360) (2,919)
------------- -------------
Total property and equipment 2,704 2,251
OTHER ASSETS 903 417
------------- -------------
$ 17,144 $ 17,194
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,138 $ 982
Accrued expenses 469 438
Customer deposits 349 1,015
------------- -------------
Total current liabilities 2,956 2,435
------------- -------------
REDEEMABLE CONVERTIBLE PREFERRED STOCK 4,948 4,948
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50 million shares authorized,
8.9 and 8.8 million shares issued and outstanding at
September 30, 1998 and June 30, 1998, respectively 89 88
Additional paid-in capital 19,903 19,554
Accumulated deficit (10,752) (9,831)
------------- -------------
Total stockholders' equity 9,240 9,811
------------- -------------
$ 17,144 $ 17,194
============= =============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
1
<PAGE> 4
ACRES GAMING INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1998 1997
------------- -------------
(in thousands except per share data)
<S> <C> <C>
NET REVENUES $3,288 $5,889
COST OF REVENUES 1,330 3,225
------ ------
GROSS PROFIT 1,958 2,664
------ ------
OPERATING EXPENSES:
Research and development 1,418 1,189
Selling, general and administrative 1,505 1,341
------ ------
Total operating expenses 2,923 2,530
------ ------
INCOME (LOSS) FROM OPERATIONS (965) 134
OTHER INCOME 119 121
====== ======
NET INCOME (LOSS) $ (846) $ 255
====== ======
NET INCOME (LOSS) PER SHARE - BASIC $ (.10) $ .03
====== ======
NET INCOME (LOSS) PER SHARE - DILUTED $ (.10) $ .03
====== ======
</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, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------- ------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (846) $ 255
Adjustments to reconcile net income (loss) to net cash
from operations:
Depreciation and amortization 468 276
Changes in assets and liabilities:
Receivables 54 (738)
Inventories (1,063) 727
Prepaid expenses (134) 91
Accounts payable and accrued expenses 1,187 (186)
Customer deposits (666) (53)
------- ------
Net cash from operating activities (1,000) 372
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (894) (880)
Capitalized software costs (512) --
Other, net (1) 1
------- ------
Net cash from investing activities (1,407) (879)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 350 143
Preferred stock dividends (75) --
------- ------
Net cash from financing activities 275 143
------- ------
NET INCREASE IN CASH AND CASH EQUIVALENTS (2,132) (364)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,887 9,318
======= ======
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,755 $8,954
======= ======
</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, 1998 filed with the Securities and Exchange Commission.
In the opinion of management, the interim financial statements include
all adjustments, consisting only of normal recurring adjustments, necessary in
order to make the financial statements not misleading. The results of operations
for the three months ended September 30, 1998 are not necessarily indicative of
the operating results for the full year or future periods.
Certain prior year amounts have been reclassified to conform to the
current year presentation. These reclassifications had no effect on the results
of operations or stockholders' equity as previously reported.
2. Inventory
Inventories consist of electronic components and other hardware, which
are recorded at the lower of cost (first-in, first-out) or market. Inventories
consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
------------- ----------
(in thousands)
<S> <C> <C>
Raw Materials $1,453 $ 957
Work-in-progress 275 124
Finished Goods 1,942 1,526
------ ------
$3,670 $2,607
====== ======
</TABLE>
3. Capitalized Software
Software development costs for certain projects are capitalized from the
time technological feasibility is established to the time the resulting software
product is first shipped. Capitalized software costs were $512,000 at September
30, 1998 and are included in other assets. There were no capitalized software
costs at June 30, 1998. Amortization, on a two year straight-line basis, begins
when the products are first shipped.
4. Income Taxes
At September 30, 1998, the Company had cumulative net operating losses
of approximately $10.3 million which are available to offset future taxable
income through 2012. 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, 1998.
4
<PAGE> 7
5. Contingencies
Two related lawsuits have been filed in the U.S. District Court that
allege violation of the federal securities laws by the Company and its executive
officers. Those suits have been consolidated into one combined action that seeks
class certification. The Company denies the allegations and intends to
vigorously defend itself. (See "Part II -- Item 1. Legal Proceedings").
Four related lawsuits have been filed in the U.S. District Court
resulting from the Company's efforts to enforce its patent rights. Three of
those suits have now been consolidated. The Company intends to vigorously
enforce its intellectual property rights. The Company denies all allegations
asserted against it in these lawsuits and intends to vigorously defend itself.
(See "Part II -- Item 1. Legal Proceedings").
In a separate but related action, the Company has filed suit in U.S.
District Court against its general liability insurance carrier for breach of
insurance contract. The Company's suit is based on the insurer's refusal to pay
more than nominal amounts of the costs of defense in certain of the four patent
related lawsuits. The Company anticipates that this matter will be resolved by
cross motions for summary judgment. (See "Part II -- Item 1. Legal
Proceedings").
In fiscal 1998, the Company provided a money-back guarantee on $1.5
million of bonusing software licensed to IGT. The $1.5 million license fee was
paid in June 1998 following installation at the Orleans Hotel & Casino in Las
Vegas (the "Orleans"), the initial installation of ABS in the United States. The
Company has not provided this guarantee to IGT on any other sales. Under the
terms of the guarantee, the Company has 30 days to correct any system
deficiencies or refund the $1.5 million purchase price. In November 1998, IGT
referred to problems at the Orleans and requested a refund of the purchase
price. The Company is working with IGT and the Orleans to determine whether the
problems are related to the Company's products, the gaming machines or are
caused by IGT's system. The Company believes it will be able to correct any
deficiencies in its products within the contractual 30 day period.
5
<PAGE> 8
6. Per Share Computation
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share" in the quarter ended December 31, 1997. Under the new
requirements, the Company reports basic and diluted earnings per share. Only the
weighted average number of common shares issued and outstanding are used to
compute basic earnings per share. The computation of diluted earnings per share
includes the effect of stock options, warrants and redeemable convertible
preferred stock, if such effect is dilutive. Where necessary, prior year amounts
have been restated.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1998 1997
--------------- ---------------
(in thousands except per
share data)
<S> <C> <C>
Net income (loss) $ (846) $ 255
====== ======
Weighted average number of shares of common stock and common stock
equivalents outstanding:
Weighted average number of common shares outstanding for
computing basic earnings per share 8,848 8,777
Dilutive effect of warrants and employee stock options
after application of the treasury stock method -- 354
Dilutive effect of redeemable convertible preferred stock
after application of the if-converted method -- 519
------ ------
Weighted average number of common shares outstanding for
computing diluted earnings per share 8,848 9,650
====== ======
Earnings (loss) per share - basic $ (.10) $ .03
====== ======
Earnings (loss) per share - diluted $ (.10) $ .03
====== ======
</TABLE>
The following common stock equivalents were excluded from the earnings
per share computations because their effect would have been anti-dilutive:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
------------- -------------
(in thousands)
<S> <C> <C>
Warrants and employee stock options outstanding 1,400 509
Redeemable convertible preferred stock outstanding 519 --
----- ---
Total common stock equivalents outstanding 1,919 509
===== ===
</TABLE>
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, manufactures and markets electronic game
promotions, equipment and games for the casino gaming industry. The Company's
products are based on its proprietary Acres Bonusing Technology(TM) and are
designed to enhance casino profitability by providing entertainment and
incentives to players of gaming machines. The bonusing technology improves the
efficiency of bonus and incentive programs currently offered by many casinos,
and makes possible some bonus and incentive programs that have not previously
been offered.
The Company currently offers bonusing products to casinos in the form of
standard and customized bonusing promotions that can be applied casino-wide or
to a limited number of gaming machines. The Company's bonusing products form a
modular system and may be purchased and installed individually or as components
of an integrated system. Casino-wide, fully integrated bonusing applications are
offered as the Acres Bonusing System(TM) ("ABS"). Linked groups of traditional
slot machines that activate a secondary "bonus" game when certain milestones are
reached are offered as part of the Company's Bonus Game product line.
RESULTS OF OPERATIONS
The Company's net revenues for the three months ended September 30, 1998
(the "current quarter") decreased to $3.3 million from net revenues of $5.9
million during the three months ended September 30, 1997 (the "prior year
quarter"). The Company's revenues can fluctuate significantly based on the
timing of the delivery of any large order. Of this decrease, $1.4 million was
related to the Company's granting of manufacturing rights to IGT whereby the
Company receives royalty payments on hardware manufactured by IGT. In the prior
year quarter, the Company manufactured and sold the hardware to IGT. In addition
to royalty-related decreases, volume-related decreases in sales to IGT amounted
to $1.5 million. The prior year quarter also included $1.7 million of sales to a
gaming machine developer which did not recur in the current quarter. These
decreases were partially offset by bonusing software sales to IGT amounting to
$864,000 primarily for Mirage Resorts' Bellagio property, sales made directly to
Bellagio for custom bonus games and displays amounting to $671,000 and increases
in other miscellaneous sales of approximately $500,000.
Gross profit as a percentage of net revenue was nearly 60% in the
current quarter compared to 45% for the prior year quarter. This increase is due
to the shift to royalty-based revenue and a change in sales mix to Acres
Bonusing Technology products which have higher gross profit margins than
hardware-only products.
Operating expenses for the current quarter increased by $393,000 over
the prior year quarter as a result of the Company's continuing commitment of
resources toward the Bonus Game product line and costs of litigation to protect
the Company's patented ABS technology. The Company does not expect to realize
significant revenue from the Bonus Game product line in the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had cash and cash equivalents of
$7.8 million, compared to $9.9 million as of June 30, 1998. The Company does not
have any debt or borrowing arrangements. The Company does not invest in
derivative securities.
The Company expects to incur a net loss in the first half of fiscal
1999. Revenues are expected to decrease from the same period in the prior year.
Operating expenses are expected to increase from the same period in the prior
year as the Company continues to develop, enhance and market its ABS and bonus
games and defend its intellectual
7
<PAGE> 10
property rights. The Company's cash and cash equivalents balances are expected
to be sufficient to fund the Company's operations during this period.
The Company expects to generate net income and positive cash flow in the
second half of fiscal 1999 primarily as a result of a $10.2 million sales
agreement (the "Sales Agreement") entered into in October 1998 to provide
casino-wide ABS bonusing applications, audio-visual products and an integrated
slot accounting system for a new casino in Las Vegas, Nevada. The sales
agreement provides for progress payments to be made to the Company as
pre-defined milestones are reached. The timing of the progress payments is
expected to provide sufficient cash and cash equivalent balances to fund the
Company's operations during the second half of fiscal 1999.
The Company's operations have historically used cash. During the current
quarter, $1.0 million of net cash was used by operating activities primarily as
a result of the operating loss adjusted for non-cash effects of depreciation and
the realization of revenue previously collected as deposits. The Company
increased inventory levels and corresponding accounts payable balances by over
$1.0 million during the current quarter to build products deliverable under the
Sales Agreement. During the current quarter, the Company spent $894,000 on
capital equipment and capitalized software development costs of $512,000.
The Company's principal sources of liquidity have been net proceeds of
$7.2 million from its initial public offering in November 1993 and $7.6 million
from the exercise of warrants in October 1996. In addition, in January 1997, the
Company issued 519,481 shares of Series A Convertible Preferred Stock for net
proceeds of $4.9 million.
YEAR 2000
The Year 2000 issue results from computer programs operating incorrectly
when the calendar year changes to January 1, 2000. Computer programs that have
date-sensitive software may recognize a two-digit date using "00" as calendar
year 1900 rather than the year 2000. This could result in system failure or
miscalculations and could cause disruptions of operations, including, among
other things, a temporary inability to engage in normal business activities.
The Company has evaluated its technology and data, including imbedded
non-information technology, used in the creation and delivery of its products
and services and in its internal operations and has identified no significant
Year 2000 issues. The core business systems are compliant, or a migration path
to a compliant version will be in place by the year 2000. Compliant upgrades for
the Company's existing slot accounting and player tracking products have been
developed, submitted to regulatory authorities, made available to all customers
and, in some cases, installed at the customers' sites. The Company has not
incurred material costs and believes that future costs associated with
addressing the Year 2000 issue will have an immaterial effect on the Company's
financial results.
Although the Company has inquired of certain of its significant vendors
as to the status of their Year 2000 compliance initiatives, no binding
assurances have been received. The Company believes that its component parts and
services can be obtained from multiple sources and therefore the Company is not
overly reliant on any single vendor. Failure of telephone service providers or
other monopolistic utilities could have a significant detrimental effect on the
Company's operations. The Company does not know the status of its customers'
Year 2000 compliance initiatives. Failure of the Company's customers to
adequately address such issues could negatively affect their ability to purchase
bonusing products. There can be no assurances that such third parties will
successfully address their own Year 2000 issues over which the Company has no
control.
A formal contingency plan to address most reasonably likely "worst-case"
scenarios has not yet been created, but the Company expects to develop such a
plan during the next 12 months.
8
<PAGE> 11
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.
Forward-looking statements relate to: adequacy of cash and cash equivalent
balances to fund the Company's operations; anticipated future sales; scheduled
casino opening dates; new product introductions; patent protection; anticipated
effects of the Year 2000; developments in the strategic alliance with IGT; and
developments in the money back guarantee for certain software sales.
The following factors, among others, could cause actual results to
differ from those indicated in the forward-looking statements: the possibility
that future sales may not occur or product offerings may not be developed as
planned; the possibility that future product installations may not be completed;
developments in the Company's strategic alliance with IGT; developments in the
money back guarantee provided to IGT for certain software sales; the risk that
patents may not be issued; the expense and unpredictability of patent and other
litigation; the timing of development, regulatory approval and installation of
products; the timing of receipt and shipment of orders; competition; government
regulation; market acceptance; customer concentration; technological change; the
effect of economic conditions on the gaming industry generally; the results of
pending litigation 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, 1998.
9
<PAGE> 12
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Two related lawsuits have been filed in the U.S. District Court for the
District of Nevada involving the Company which allege violation of the federal
securities laws by the Company and its executive officers: Townsend, et al. v.
Acres Gaming Incorporated, et al. CV-S-97-01848-PMP (RJJ) and Jason, et al. v.
Acres Gaming Incorporated, CV-S-98-00262-PMP (RJJ). Those suits have been
consolidated into one combined action styled: In re Acres Gaming Securities
Litigation, CV-S-97-01848-PMP (RJJ). The combined action seeks class
certification for a proposed class consisting of the purchasers of the Company's
stock during the period from March 26, 1997 to December 11, 1997. The court has
not yet ruled on class certification. The Company has moved to dismiss this suit
and discovery has been stayed pending resolution of this motion.
Four related lawsuits have been filed in the U.S. District Court for the
District of Nevada resulting from the Company's efforts to enforce its patent
rights: Mikohn Gaming Corp. v. Acres Gaming Incorporated, No. CV-S-98-1383 HDM
(LRL) ("Suit I"); Mikohn Gaming Corp. v. Acres Gaming Incorporated, No.
CV-S-98-738 HDM (LRL) ("Suit II"); Acres Gaming Incorporated v. Mikohn Gaming
Corp., Casino Data Systems, New York New York Hotel and Casino and Sunset
Station Hotel and Casino; No. CV-S-98 794 PMP (LRL) ("Suit III"); and Mikohn
Gaming Corporation v. Acres Gaming Incorporated, No. CV-S-98-01529 (RLH) ("Suit
IV"). Suits I, II and III have now been consolidated.
In Suit I, Mikohn asserted a claim for declaratory judgment of
noninfringement and invalidity of U.S. Patent No. 5,655,961 ("the `961 patent")
owned by the Company. Mikohn also asserted claims for "intentional interference
with a business relationship," "intentional interference with prospective
business relationship," "unfair competition: trade libel" and "unfair
competition: disparagement." Mikohn's complaint sought unspecified damages,
punitive damages, attorney's fees, interest on the alleged damages, an
injunction against the conduct alleged in the complaint, and a declaration that
the `961 patent is invalid and not infringed by Mikohn or its customers. The
Company has filed a counterclaim for infringement of the `961 patent, and has
denied Mikohn's other allegations.
In Suit II, Mikohn asserted a claim for declaratory judgment of
noninfringement and invalidity of U.S. Patent No. 5,741,183 ("the `183 patent")
owned by the Company. Mikohn's complaint sought no damages, but requested an
award of attorney's fees and a declaration that the `183 patent is invalid and
not infringed by Mikohn. The Company is not aware of any infringement by Mikohn,
and therefore sought to dismiss the complaint for lack of a case or controversy.
The court denied the Company's motion.
In Suit III, the Company sued Mikohn, Casino Data Systems, New York New
York Hotel and Casino and Sunset Station Hotel and Casino for infringement of
the Company's U.S. Patent No. 5,752,882 ("the `882 patent"). Mikohn
counterclaimed in Suit III, seeking a declaratory judgment of invalidity and
noninfringement of the `882 patent and asserted claims for "false and misleading
representations" under 11 U.S.C. Section 1125, "interference with prospective
economic relations," "unfair competition: trade libel" and "unfair competition:
disparagement." Mikohn's counterclaims seek unspecified damages, as well as a
trebling of the damages, punitive damages, attorney's fees and an injunction
against the Company's "continuing to commit the unlawful acts" alleged in the
counterclaims.
In Suit IV, Mikohn asserted a claim for declaratory judgment of
noninfringement, invalidity and unenforceability of U.S. Patent No. 5,741,459
("the '459 patent") owned by the Company. Mikohn's complaint sought no damages,
but requested an award of attorney's fees and costs and a declaration that the
'459 patent is invalid, unenforceable by the Company and not infringed by
Mikohn. The Company will respond to Mikohn's complaint on November 19, 1998.
10
<PAGE> 13
In a separate but related action, the Company has filed suit against its
general liability insurance carrier for breach of insurance contract: Acres
Gaming Incorporated v. Atlantic Mutual Insurance Company, filed June 26, 1998
and now pending in U.S. District Court for the District of Oregon. The Company's
suit is based on the insurer's refusal to pay more than nominal amounts of the
costs of defense in Suit I. The Company anticipates that this matter will be
resolved by cross motions for summary judgment. In addition, the Company has
tendered the defense of Mikohn's counterclaims in Suit III to the same insurer.
To date the insurer has not responded to the tender of Suit III's defense.
ITEM 5. OTHER INFORMATION
In January 1997, the Company entered into a strategic alliance with IGT
(the "Strategic Alliance") which included a Master Agreement for Product
Development, Purchase and Sales and a $5 million investment by IGT in the
Company's preferred stock. Sales to IGT under the Strategic Alliance have not
met the Company's expectations. Certain casinos, including the new casino in Las
Vegas, Nevada (See "Liquidity and Capital Resources"), have expressed an
interest in purchasing the Company's ABS without also purchasing the IGT Gaming
System(TM) which was integrated with the ABS under the Strategic Alliance.
Representatives of the Company and IGT are working to redefine the relationship.
As part of the redefinition, the Company has given notice to IGT that the Master
Agreement for Product Development, Purchase and Sales, the component of the
Strategic Alliance under which the companies jointly developed and marketed
certain products, will be terminated on January 2, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered by
this Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACRES GAMING INCORPORATED
(Registrant)
Date: November 11, 1998 By /s/ Robert W. Brown
------------------------------------------------
Robert W. Brown
Executive Vice President, Chief Financial Officer,
Secretary and Treasurer
(principal financial and chief accounting officer)
11
<PAGE> 14
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)
*10.1 Amendment to Employment Agreement dated July 20, 1998 between the
Company and John F. Acres
27.1 Financial Data Schedule
</TABLE>
- ---------
* Management contract or compensatory plan or arrangement.
(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.
12
<PAGE> 1
EXHIBIT 10.1
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is entered into as of July 20, 1998, by
and between John F. Acres of 62 Incline Village Court, Henderson, NV 89014
("Employee"), and Acres Gaming, Inc., a Nevada corporation with its principal
place of business located at 1815 N.W. Ninth Street, Corvallis, Oregon
("Employer").
RECITALS
A. Employer and Employee entered into an Employment Agreement dated as of
July 1, 1996 ("Agreement"), pursuant to which Employee was employed as
Chief Executive Officer of the Company;
B. Employer and Employee have agreed that it is in their mutual best
interest that Floyd W. Glisson be elected as President and Chief
Executive Officer of the Company;
C. Employer and Employee have agreed that it is appropriate that Employee's
bonus be reduced.
In consideration of the foregoing and the mutual promises and agreements
set forth herein, Employer and Employee agree as follows:
SECTION 1. DUTIES
The first sentence of Section 1.2 of the Agreement is hereby amended to
read as follows:
"During the term of this Agreement, Employee shall perform
faithfully and to the best of Employee's ability such management duties
appropriate to the Chairman of the Board of Directors as may be assigned
from time to time by the Board of Directors of Employer."
SECTION 2. COMPENSATION
Section 3(b) of the Agreement is hereby amended to read as follows:
(b) An annual bonus ("Bonus") payable on or before September 30
of each year with respect to the preceding fiscal year, determined in
accordance with the table below.
<PAGE> 2
<TABLE>
<CAPTION>
FISCAL
YEAR
ENDING PROFITS BONUS
- ------ ------- -----
<S> <C> <C>
June 30, If less than $1,000,000 $50,000
1997 If $1,000,000 or more $100,000, plus 5% of the amount by
which Profits exceed $1,000,000
June 30, If less than $1,000,000 None
1998 If $1,000,000 or more but less than $50,000
$2,000,000
If $2,000,000 or more $100,000, plus 5% of the amount by
which Profits exceed $2,000,000
June 30, If less than $2,000,000 None
1999 If $2,000,000 or more but less than $50,000
$3,000,000
If $3,000,000 or more $100,000, plus 3% of the amount by
which Profits exceed $3,000,000
June 30, If less than $2,000,000 None
2000 If $2,000,000 or more but less than $50,000
$3,000,000
If $3,000,000 or more $100,000, plus 1% of the amount by
which Profits exceed $3,000,000
June 30, If less than $2,000,000 None
2001 If $2,000,000 or more but less than $50,000
$3,000,000
If $3,000,000 or more $100,000
</TABLE>
"Profits" of Employer shall mean Income Before Income Taxes as adjusted
to add back any bonus paid pursuant to this Section 3(b). Profits for each
fiscal year shall be calculated by the certified public accountants regularly
employed to audit the books of Employer. Such calculation shall be in accordance
with generally accepted accounting principles applied on a basis consistent with
the practices of Employer.
SECTION 3. JURISDICTION; SERVICE OF PROCESS
The first sentence of Section 21 of the Agreement is amended by
replacing County of Washo with County of Clark.
All other provisions of the Agreement shall remain in full force and
effect.
In witness whereof, the parties have executed this Amendment in Las
Vegas, Nevada, as of the date first above written.
EMPLOYEE EMPLOYER
Acres Gaming, Inc.,
a Nevada corporation
- -------------------------------
John F. Acres By:
-----------------------------
Its:
----------------------------
<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, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 7,755,000
<SECURITIES> 0
<RECEIVABLES> 1,890,000
<ALLOWANCES> (15,000)
<INVENTORY> 3,670,000
<CURRENT-ASSETS> 13,537,000
<PP&E> 6,064,000
<DEPRECIATION> 3,360,000
<TOTAL-ASSETS> 17,144,000
<CURRENT-LIABILITIES> 2,956,000
<BONDS> 0
0
4,948,000
<COMMON> 19,992,000
<OTHER-SE> (10,752,000)
<TOTAL-LIABILITY-AND-EQUITY> 17,144,000
<SALES> 3,288,000
<TOTAL-REVENUES> 3,288,000
<CGS> 1,330,000
<TOTAL-COSTS> 2,293,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (119,000)
<INCOME-PRETAX> (846,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (846,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (846,000)
<EPS-PRIMARY> (0.10)<F1>
<EPS-DILUTED> (0.10)<F1>
<FN>
<F1>THIS INFORMATION HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO. 128. BASIC AND
DILUTED EPS HAVE BEEN ENTERED IN PLACE OF PRIMARY AND FULLY DILUTED EPS,
RESPECTIVELY.
</FN>
</TABLE>
