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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
(Commission File No.) 0-22498
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ACRES GAMING INCORPORATED
(Exact name of Registrant as specified in its charter)
NEVADA 88-0206560
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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7115 AMIGO, SUITE 150, LAS VEGAS, NEVADA 89119
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(702) 263-7588
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant computed by reference to the price at which the
common equity was sold, or the average bid and asked prices of such common
equity, as of August 31, 1999 was $12,486,000. For purposes of this computation,
all executive officers and directors of the Registrant have been deemed
affiliates. This shall not be deemed an admission that such persons are
affiliates.
The number of shares outstanding of the Registrant's Common Stock, par value
$.01 per share, as of August 31, 1999 was 8,913,281 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference the Company's Proxy Statement to be filed in
connection with the Company's 1999 Annual Meeting of Stockholders to be held
December 3, 1999.
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TABLE OF CONTENTS
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PAGE
PART I
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ITEM 1. BUSINESS.................................................................1
General................................................................1
The Market.............................................................1
Products...............................................................1
Strategic Alliance with IGT............................................4
Communication Protocol.................................................4
Research and Development...............................................4
Customers..............................................................5
Marketing..............................................................5
Production and Manufacturing...........................................5
Patents................................................................6
Competition............................................................6
Government Regulation..................................................7
Employees.............................................................11
Forward-Looking Statements............................................11
ITEM 2. PROPERTIES..............................................................11
ITEM 3. LEGAL PROCEEDINGS.......................................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................13
EXECUTIVE OFFICERS OF REGISTRANT........................................14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................15
ITEM 6. SELECTED FINANCIAL DATA.................................................16
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................................16
FACTORS THAT MAY AFFECT FUTURE RESULTS..................................19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE....................................................37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................37
ITEM 11. EXECUTIVE COMPENSATION..................................................37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K..................38
SIGNATURES..............................................................39
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PART I
ITEM 1. BUSINESS
GENERAL
The Company develops, manufactures and markets electronic game
promotions, equipment and games for the casino gaming industry. The Company's
principal products are based on its proprietary Acres Bonusing Technology(TM)
and are designed to enhance casino profitability by providing entertainment and
incentives to players of gaming machines. Acres Bonusing Technology improves the
efficiency of bonus and incentive programs currently offered by many casinos,
and makes possible bonus and incentive programs that have not previously been
offered.
THE MARKET
In recent years, legalized gaming has significantly expanded in the
United States. As part of this expansion, casino-style gaming has become an
increasingly important component of the "leisure time" industry. The expansion
resulted from the introduction of riverboat-style gaming in the Midwestern
United States, the growth of Native American casino gaming and growth in the
established Nevada market.
Casino gaming has also grown rapidly worldwide, including in Australia,
Canada, Europe and Africa, as well as in parts of the former Soviet Union and
South America. The Company estimates that approximately 800,000 casino-style
gaming machines are currently in use throughout the world, including
approximately 430,000 in the United States.
The Company believes that increased competition among casinos will lead
to increased demand for game promotions and entertainment enhancements of the
type offered by the Company. New or expanding casinos represent a significant
part of the potential market for the Company's products. Existing casinos also
represent a significant potential market as casino managers seek to maintain or
improve casino profitability by employing bonusing and other promotional
programs for gaming machines.
PRODUCTS
Acres Bonusing Technology was conceived to provide the gaming industry
with a system to enable the design and delivery of bonuses and other promotions
directly to players at the point of play and at the time of play. The Company
currently offers bonusing products directly to casinos in the form of standard
and customized bonusing promotions that can be applied casino-wide or to a
limited number of gaming machines. In addition to bonusing products, the Company
also offers slot accounting and visual analysis modules that may be purchased
and installed individually or as components of an integrated system. The Company
offers products primarily in two major categories:
1) Casino-wide, fully integrated applications offered as the Acres
Advantage(TM)
2) Bonus Games comprised of single or a linked group of traditional
slot machines that activate a secondary "bonus" game when certain
milestones are reached on the traditional games.
ACRES ADVANTAGE
An Acres Advantage installation in a casino includes electronic hardware
installed in the gaming machines, microprocessor-based controllers for groups of
gaming machines and computers and software that gather data, operate bonuses and
generate reports for casino management. The Acres Advantage is based on a
Microsoft(R) SQL Server(TM) version 7.0 platform and is designed to take
advantage of future improvements in Microsoft's SQL technology. The Acres
Advantage system has more than enough capacity to serve the world's largest
casinos.
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Various components of the Acres Advantage casino-wide system are installed in
high profile casinos such as Mandalay Resort Group's Mandalay Bay in Las Vegas,
Nevada and Mirage Resort's Bellagio and Beau Rivage located in Las Vegas and
Biloxi, Mississippi, respectively. International Acres Advantage installations
include Star City in Sydney Australia and Crown South Bank Casino in Melbourne,
Australia. The Company is currently installing Acres Advantage in Mandalay
Resort Group's MotorCity Casino in Detroit, Michigan.
Components of the Acres Advantage and the software used in many popular
gaming machines that support the Acres Advantage have been approved by the
Nevada Gaming Control Board and regulatory authorities for several other states
and for two states in Australia. (See "Communication Protocol" and "Government
Regulation").
The Acres Advantage casino-wide system currently includes Wizard(TM)
slot accounting, Merlin(TM) casino mapping and Acres Bonusing(TM). The Company
has developed the Prophet(TM) player tracking module that is expected to be
available for installation in the fall of 1999 and Coinless Transit(TM), a
method of using a player tracking card to facilitate cashless and coinless
wagering, that is expected to be available for installation by December 1999.
Wizard Slot Accounting. Wizard slot accounting products collect play
data about each gaming device. This information is transmitted to a central
computer system where it is immediately available to the casino management, and
where it is stored for future analysis and reporting. The equipment is
configured to monitor all slot machine functions including coins deposited in
the machine, coins paid out of the machine, coins available to "drop", number of
games played, jackpot occurrences and other machine functions.
Merlin Casino Mapping. This software product provides a visual rendition
of the casino's slot accounting database, graphically projected as a map of the
casino floor, which allows casino management to graphically see the numerical
statistics of the casino operations. This product allows for quick recognition
of the play and service activity occurring at each gaming machine on the casino
floor.
Prophet Player Tracking. Scheduled for availability in the fall of 1999,
the Company's Prophet player tracking module builds upon a casino's accounting
system to gather and record information about individual players, much like an
airline's "frequent flyer" program. Each customer who elects to enroll in the
casino's "players club" is given a plastic card that uniquely identifies the
player. The player inserts the card into an electronic card reader on the gaming
machine and the system automatically records the player's level of play. Casino
management can use this information to provide special incentives and rewards to
individual players or groups of players in order to increase player loyalty.
Acres Advantage is designed to further enhance player loyalty by requiring the
use of a player tracking card to qualify for certain bonuses.
Coinless Transit. Scheduled for availability in December 1999, this
product allows players club members to transfer game credits from one gaming
machine to another or to a redemption kiosk at which the game credits can be
cashed out. By reducing the number of cash replenishments, or machine fills,
that are required when slot players cash out their winnings, this feature
reduces the casino's floor staffing expenses. Players also receive greater
convenience by eliminating delays caused when machines run out of coins.
The following bonuses and promotions are contained in the Acres Bonusing
module of Acres Advantage. Customers may purchase and implement these bonuses
individually or collectively.
XtraCredit(TM). This patent pending feature is used to award special
incentive bonuses to players club members. With just a few keystrokes, casino
personnel can establish XtraCredit bonuses to provide incentives for players
club members to attend the casino's special promotional events or to celebrate
the player's special events such as birthdays or anniversaries at the casino.
XtraCredit bonus awards dramatically reduce the casino's existing cash voucher
mailing and redemption costs and provide a wide variety of marketing
opportunities for the casino to retain customers.
XtraCredit may also be used by other bonus applications as an award
mechanism to allow the players to redeem their points earned or bonus awards won
for free games on the gaming machines. Nevada gaming
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regulators have ruled that amounts wagered by the player through the use of
XtraCredits are excluded for gaming tax purposes. This ruling results in savings
from using XtraCredit of nearly 6.25% of the cost of players club awards. In
addition to the tax savings, players' time at the gaming machine may be
increased, as players no longer have to visit the players club booth to collect
their rewards. Finally, by offering the XtraCredit redemption, the casino may
reduce the amount of players club points that are exchanged for cash awards that
can be spent outside of their casino.
PointPlay(TM). This feature allows casino players to earn points for
slot play in a manner consistent with a standard player tracking system where
the casino can configure the rates at which points are earned and values at
which they are redeemed. PointPlay allows players to redeem their points for
free games directly at the gaming machine.
ReturnPlay(TM). To encourage players to return to the casino at a later
date, the ReturnPlay feature awards a bonus to players that earn a predetermined
number of slot club points. The ReturnPlay bonus is automatically redeemed when
the player returns to the casino at a future date and inserts their players club
card into the game.
Personal Progressive(R). Although the vast majority of gaming machine
players never experience the excitement of winning a progressive jackpot, the
Personal Progressive bonus creates an individual progressive jackpot for each
players club member that only they can win. The Personal Progressive jackpot
grows as the customer plays, which adds excitement and provides an incentive to
continue to visit the casino.
Appreciation Time(TM). Casino personnel may reward players with multiple
jackpots anywhere from two to nine times the normal payout for winning
combinations. This promotion can be used to reward a casino's best customers or
can be used to improve play in certain areas or at slow times of the day.
Appreciation Time can be applied to the whole casino or only to a specific bank
of gaming machines. This bonus provides greater control over appreciation gifts
by insuring the gifts go to customers who are actually playing the games.
Random Riches(TM) and Lucky Coin(TM). These progressive jackpot bonuses
are granted to the player inserting the "nth coin" where the frequency of "n"
and the funding parameters of the bonus are established by the casino. Awards
can be created that vary between small jackpots every few minutes and
life-changing jackpots every few weeks. These bonuses can be applied to any
number of gaming machines (from one machine to every machine in the casino) and
any one gaming machine may be tied to multiple bonuses. These promotions also
have the ability to alert players with custom audio sequences just before the
bonus is awarded. The casino may elect to award smaller Celebration Prizes(TM)
or Near Winner(TM) prizes to some or all of the players in the casino at the
time the Lucky Coin bonus is awarded. Celebration Prizes may be awarded to
players club members only or in varying amounts to players club VIPs, regular
players club members and non-members.
BONUS GAMES
The Company develops proprietary bonus games that it operates on a
revenue-sharing basis.
The Company has four bonus games that are approved for distribution in
Nevada. Two of these games, Money Mint(TM) and Add `Em Up(TM), have been
installed under revenue-sharing arrangements in casinos in Las Vegas. All of the
Company's bonus games incorporate full-color, high-resolution plasma screens
over one or more traditional slot machines. Dynamic animated sequences are
displayed on the plasma screens to attract, instruct, entertain and communicate
bonus awards to the players. State-of-the-art sound packages complement the
animation. These bonus games have not been in operation long enough to indicate
if there will be a strong demand for either game.
The Money Mint bonus game incorporates a linked bank of four to six
traditional slot machines, or base games. Players of these base games are
selected to play the secondary "bonus" game when a Money Mint symbol appears in
the base game's payline. The bonus game, viewed on a single overhead plasma
display, includes animated minting equipment and allows the player to spin a
bonus wheel for a guaranteed award.
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The Add `Em Up bonus game is comprised of a single slot machine under a
single overhead plasma display picturing three spinning slot machine reels. An
Add `Em Up symbol on the base game's payline allows the player to play the bonus
game by spinning the video reels of the bonus game. The dollar amounts on the
video reels are added together to arrive at the bonus game award. Every play on
the secondary bonus game results in a bonus being awarded to the slot player.
The Company is also jointly developing a Three Stooges(TM) themed bonus
game with Shuffle Master, Inc. that is expected to be released in the Fall of
1999. This bonus game incorporates the novelty of the famous comedy trio where
players reaching the bonus round win cash bonuses as vintage Three Stooges video
clips are displayed on overhead and in-machine video displays.
STRATEGIC ALLIANCE WITH IGT
In January 1997, the Company entered into a strategic alliance (the
"Strategic Alliance") with International Game Technology ("IGT") which included
a Master Agreement for Product Development, Purchase and Sales and a $5 million
investment by IGT in the Company's preferred stock. At that time, the Company
discontinued development of the Company's DOS-based slot accounting and player
tracking system (the "Legacy" products) and instead, developed and sold
component parts and Acres Bonusing to IGT for inclusion in casino installations
with the IGT Smart System and IGS slot accounting and player tracking systems.
Sales to IGT under the Strategic Alliance did not meet the Company's
expectations. Certain casinos expressed an interest in purchasing Acres Bonusing
without also purchasing IGS. In October 1998 the Company signed a sales
agreement to install Acres Bonusing in Mandalay Bay in Las Vegas, Nevada. The
Company decided that pursuing direct sales of Acres Bonusing while also selling
through IGT would not be feasible. The Company ended the Strategic Alliance on
January 2, 1999. The Company continues to work with IGT to support existing
installations of the combined Acres/IGS system.
In September 1998, Albert Crosson, Vice Chairman of IGT, resigned from
the Company's Board of Directors.
COMMUNICATION PROTOCOL
The Company and IGT have jointly developed a communication protocol
known as SAS4. The protocol is used to communicate instructions and messages
between Acres Bonusing and gaming machines. The communication of these
instructions and messages is essential to the operation of bonuses. Although the
Company and IGT have agreed that the Company can use SAS4 in connection with
certain installations, IGT has stated that the Company does not have an
unrestricted right to use SAS4 with non-IGT games. The Company believes that it
has joint ownership of the protocol and the ability to use and license the
protocol.
The Company is a founding member of the Gaming Manufacturers Association
("GAMMA") which, among other things, is jointly developing a standardized
communication protocol that will be licensed to all GAMMA members. This protocol
may be a viable alternative to SAS4 but this new protocol is not available for
implementation at this time.
RESEARCH AND DEVELOPMENT
The Company devotes significant resources to the development of new
products and the enhancement of existing products. The Company had 46 full-time
employees involved in research and development as of August 31, 1999. Research
and development expenses were $6.4 million, $5.2 million and $5.1 million in the
years ended June 30, 1999, 1998 and 1997, respectively.
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CUSTOMERS
Large casinos with more than 1,000 gaming machines represent the
principal market for Acres Advantage. Casinos of this size are generally large
enough to support a professional management staff capable of using the
analytical and promotional tools provided by Acres Advantage. This market
includes many casinos in Las Vegas, Reno and Laughlin, Nevada, and Atlantic
City, New Jersey, as well as a number of Native American and riverboat casinos
in various other states and a number of casinos in Australia, South Africa and
Europe.
Sales of Acres Advantage to Mandalay Bay accounted for 51 percent of the
Company's net revenues in 1999. Sales to IGT accounted for 23 percent, 75
percent and 28 percent of the Company's net revenues in 1999, 1998 and 1997,
respectively. (See "Strategic Alliance with IGT"). Sales of components to Anchor
Gaming ("Anchor"), primarily related to their Wheel of Gold bonusing game,
accounted for 18 percent and 28 percent of the Company's net revenues in 1998
and 1997, respectively. Sales of the system components and bonusing applications
to Aristocrat for the Crown Casino in Melbourne, Australia accounted for 12
percent of the Company's net revenues in 1997.
The Company's backlog of orders for its products were approximately $9.6
million, $2.1 million and $6.1 million as of June 30, 1999, 1998 and 1997,
respectively. Backlog, however, may not be a meaningful indication of future
sales. Sales to the Company's customers are made pursuant to purchase orders or
sales agreements for specific system installations and products are often
delivered within several months of receipt of the order. The Company does not
have any ongoing long-term sales contracts. At its current stage of operations,
the Company's revenues and results of operations may be materially affected, in
the near term, by the receipt or loss of any one order.
MARKETING
The Company currently markets its products and provides service to
customers from its headquarters in Las Vegas, Nevada and its office in
Corvallis, Oregon.
PRODUCTION AND MANUFACTURING
Through fiscal 1999, the Company's manufacturing operation consisted
primarily of the assembly of electronic circuit boards and cables from
components purchased from third parties. In July 1999, in conjunction with the
relocation of the Company's headquarters to Las Vegas, Nevada, the Company began
outsourcing almost all of the hardware components of its products. The circuit
boards are manufactured and assembled to the Company's specifications by
contract manufacturers. A key component of each product is computer software
that is copied onto electronic chips by contract manufacturers. The Company
believes that its component parts and services can be obtained from multiple
sources and therefore that it is not overly reliant on any single vendor.
Company engineers conduct the development, testing and maintenance of the
software.
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PATENTS
The Company has applied for United States and foreign patents on certain
features of its product line, and may in the future apply for other United
States patents and corresponding foreign patents. The following patents have
been issued to the Company:
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ISSUE DATE PATENT EXAMPLES OF PATENT PROTECTION
NO.
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August 1997 5,655,961 This patent protects the implementation of a bonus pay table in a
gaming machine and the implementation of a "Bonus Pool." A Bonus
Pool is configurable by casino management to control the total
amount of special bonuses paid, thus making it possible for such
promotions to be kept within a casino's budget.
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January 1998 5,702,304 This patent protects the Company's illuminated card reader, a
player tracking system component, which indicates the point of
card insertion and communicates bonus eligibility to the players
and communicates game and player status to the casino through the
use of various colors.
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April 1998 5,741,183 This patent protects a method of identifying and categorizing
individual gaming devices that are connected to a casino's
computer network. It includes a memory device which allows for
the identification and coding of each piece of gaming equipment
with its individual configurations even when they are disconnected
or moved to another location within the casino.
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May 1998 5,752,882 This patent protects a method of operating gaming machines in
which the casino is able to pre-select which games participate in
a variety of bonusing promotions such as linked progressive
jackpots or linked random bonuses.
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October 1998 5,820,459 This patent protects a networked gaming bonusing system which
enables a casino to pre-select which games participate in bonusing
promotions.
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November 1998 5,836,817 This patent protects a method of operating gaming machines in
which the casino is able to pre-select which games participate in
a variety of bonusing promotions such as linked
progressive jackpots or linked random bonuses.
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December 1998 5,854,542 This patent protects the Company's proprietary fluorescent
flashing and diming lamps which are placed on gaming machines and
operate to indicate promotional features.
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March 1999 5,876,284 The patent protects a networked gaming bonusing system, namely the
Company's Hurricane Zone(R) bonus promotion.
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No assurance can be given that any patents that are applied for will be
issued or, if issued, will provide any significant competitive advantage to the
Company. In addition, the Company has a variety of other intellectual property
which it treats as trade secrets. The Company takes reasonable steps to protect
its intellectual property but it is possible that others may make unauthorized
use of such intellectual property and the Company may or may not be able to
prevent such use. (See "Legal Proceedings").
COMPETITION
The Company believes that its products compete principally on the basis
of functionality, price and service. The Company believes that its proprietary
Acres Bonusing Technology provides a competitive advantage. In addition to the
recently issued patents discussed above, the Company has several other patents
pending which cover many additional aspects of its Acres Bonusing Technology.
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Several other companies have products that compete with the slot
accounting and player tracking modules of the Acres Advantage product line. Each
of these competitors has financial and other resources that are greater than
those of the Company. IGT, the largest manufacturer of gaming machines in the
world, has an additional competitive advantage in selling its slot accounting
and player tracking systems to its existing gaming machine customer base. (See
"Strategic Alliance with IGT").
Although several competitors claim to have the ability to offer bonusing
products with functionality similar to Acres Advantage, the Company is aware of
significant installations of those products only by Casino Data Systems ("CDS")
and Mikohn Gaming Corporation ("Mikohn"). The Company believes that CDS and
Mikohn's initial bonusing products, which have been installed in several
casinos, infringe the Company's recently issued patents and will infringe
certain of the Company's pending patents, if issued. The Company has notified
CDS, Mikohn and their customers of the patent infringement and initiated patent
infringement litigation. (See "Legal Proceedings").
While the Company attempts to differentiate its bonusing products from
progressive jackpot systems, the Company's bonusing products compete for casino
floor space with other companies' progressive jackpot systems. The market for
progressive jackpot systems is served primarily by Mikohn and CDS.
The Company's bonus game product line competes with the products of
major gaming machine manufacturers and resellers including IGT, Anchor, Williams
Gaming Inc. and Bally Gaming. Each of these competitors has financial and other
resources that are greater than those of the Company. Several smaller
competitors, some of which have financial and other resources that are greater
than those of the Company, also offer games that compete with the Company's
bonus game product line.
GOVERNMENT REGULATION
The Company is subject to the licensing and regulatory control of the
gaming authorities in each jurisdiction in which its products are sold or used
by persons licensed to conduct gaming activities. Although licensing of the
Company may not be required in a jurisdiction, its products generally must be
approved by the regulatory authority for use in each licensed location within
the jurisdiction.
REGULATION OF PRODUCTS
The Company has complied with the approval process and has either been
issued a license, temporary license, certificate, approval or other permit
allowing it to sell its products in Arizona, Colorado, Connecticut, Indiana,
Louisiana, Michigan, Mississippi, Missouri, Nevada, New Jersey, North Dakota,
Wisconsin and Victoria and New South Wales, Australia. Not all of the Company's
products have been approved for sale in all jurisdictions. In most
jurisdictions, a model of the gaming equipment that the Company seeks to place
in operation must be submitted for testing by an approved testing laboratory
prior to use in any gaming operation. To obtain such approval, the Company must
submit, at its expense, each model of its equipment to the specified laboratory
for testing, examination and analysis. Upon completion of the testing, the
laboratory submits a report of its findings and conclusions to the applicable
gaming authority, together with any recommendations for modifications to the
equipment or the addition of equipment or devices to such gaming equipment.
The Company has filed applications for licenses in Minnesota and
Ontario, Canada, and intends to seek approval of its bonusing technology for use
in any other jurisdiction in which a sale arises. Failure of the Company to
obtain approval for the use of bonusing technology by a gaming licensee in a
jurisdiction would prevent the use of such technology at the licensee's location
and also will prevent any other gaming licensee within that jurisdiction from
using the products until the appropriate approvals have been obtained or
requirements complied with.
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CORPORATE REGULATION
Nevada
The manufacture, sale and distribution of gaming devices are subject to:
(i) the Nevada Gaming Control Act and the regulations promulgated thereunder
(collectively, the "Nevada Act"); and (ii) various local regulation. Generally,
gaming activities may not be conducted in Nevada unless licenses are obtained
from the Nevada Gaming Commission (the "Nevada Commission"), the Nevada State
Gaming Control Board (the "Nevada Board"), and appropriate county and municipal
licensing agencies. The Nevada Commission, the Nevada Board, and the various
county and municipal licensing agencies 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 that 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
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
through taxation and licensing fees. Change in such laws, regulations and
procedures could have an adverse effect on the Company.
On December 21, 1995, the Nevada Commission registered the Company as a
publicly traded corporation ("Registered Corporation") and granted
manufacturer's and distributor's licenses to the Company's wholly-owned
subsidiary, AGI Distribution, Inc. ("AGID"), a Nevada corporation. The
Commission also granted AGID a nonrestricted license as the operator of a slot
machine route ("Slot Route License"). As a Registered Corporation, the Company
is required to periodically submit detailed financial and operating reports to
the Nevada Commission and furnish any other information which the Nevada
Commission may require.
AGID's manufacturer's, distributor's and Slot Route Licenses require the
periodic payment of fees and taxes and are not transferable. No person may
become a stockholder of, or receive any percentage of profits from, AGID without
first obtaining licenses and approvals from the Nevada Gaming Authorities. The
Company and AGID have obtained from the Nevada Gaming Authorities the various
registrations, approvals, permits and licenses required in order to engage in
gaming activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or AGID in
order to determine whether such individual is suitable or should be licensed as
a business associate of a gaming licensee. Officers, directors and certain key
employees of AGID must file applications with the Nevada Gaming Authorities and
are required to be licensed by the Nevada Gaming Authorities. Officers,
directors and key employees of the Company who are actively and directly
involved in the gaming activities of AGID may be required to be licensed or
found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities
may deny an application for licensing or a finding of suitability for any cause
they deem reasonable. A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. 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.
If the Nevada Gaming Authorities were to find an officer, director or
key employee unsuitable for licensing or to continue having a relationship with
the Company or AGID, the companies involved would have to sever all
relationships with such person. In addition, the Nevada Commission may require
the Company or AGID
8
<PAGE> 11
to terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
The Company and AGID are required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities and similar financing transactions by AGID, must be
reported to or approved by the Nevada Commission.
If it was determined that the Nevada Act was violated by the Company or
AGID, the gaming registrations, licenses and approvals they hold could be
limited, conditioned, suspended or revoked, subject to compliance with certain
statutory and regulatory procedures. In addition, AGID, the Company and the
persons involved could be subject to substantial fines for each separate
violation of the Nevada Act at the discretion of the Nevada Commission.
Limitation, conditioning or suspension of any gaming license could (and
revocation of any gaming license would) materially adversely affect AGID and the
Company.
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 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 acquires more than 5% of the
Company's voting securities to report the acquisition to the Nevada Commission.
The Nevada Act requires that beneficial owners of more than 10% of the Company's
voting securities apply to the Nevada Commission for a finding of suitability
within thirty days after the Chairman of the Nevada Board mails a written notice
requiring such filing. Under certain circumstances, an "institutional investor,"
as defined in the Nevada Act, which acquires more than 10% but not more than 15%
of the Company's voting securities, may apply to the Nevada Commission for a
waiver of such finding of suitability if such institutional investor holds the
voting securities for investment purposes only. An institutional investor shall
not be deemed to hold voting securities for investment purposes unless the
voting securities were acquired and are held in the ordinary course of business
as an institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Company, any change in the corporate charter, bylaws, management,
policies or operations of the Company or any of its gaming affiliates, or any
other action which the Nevada Commission finds to be inconsistent with holding
the Company's voting securities for investment purposes only. Activities that
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent. If
the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
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 stockholder 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 stockholder or to have any other relationship with the Company or AGID, 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,
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 gaming license.
9
<PAGE> 12
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file an application, be
investigated and found suitable to own the debt security of a Registered
Corporation. If the Nevada Commission determines that a person is unsuitable to
own such security, then pursuant to the Nevada Act, the Registered Corporation
can be sanctioned, including the loss of its approvals, if without the prior
approval of the Nevada Commission, it: (i) pays to the unsuitable person any
dividend, interest, or any distribution whatsoever; (ii) recognizes any voting
right by such unsuitable person in connection with such securities; (iii) pays
the unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
The Company is required to maintain a current stock ledger in Nevada
that 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 such 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 any 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
facilities 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 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 the Nevada Commission
concerning a variety of stringent standards prior to assuming control of such
Registered Corporation. The Nevada Commission may also require controlling
stockholders, 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 of the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licensees, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environmental for the orderly governance of
corporate affairs. Approvals are, in certain circumstances, required from the
Nevada Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Company's
board of directors in response to a tender offer made directly to the Registered
Corporation's stockholders for the purpose of acquiring control of the
Registered Corporation.
Any person who is licensed, required to be licensed, registered,
required to be registered, or is under common control with such persons
(collectively, "Licensees"), and who proposes to become involved in a gaming
venture outside of Nevada, is required to deposit with the Nevada Board and,
thereafter, maintain a revolving fund in the amount of $10,000 to pay the
expenses of investigation by the Nevada Board of their participation in such
foreign gaming. The revolving fund is subject to increase or decrease in the
discretion of the Nevada Commission. Thereafter, Licensees are also required to
comply with certain reporting requirements imposed by the Nevada Act. Licensees
are also subject to disciplinary action by the Nevada Commission if they
knowingly violate any laws of
10
<PAGE> 13
the foreign jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities that
are harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employ a person in the foreign operation who has been denied a license
or a finding of suitability in Nevada on the ground of personal unsuitability.
Other Jurisdictions
Other jurisdictions in which the Company's products are sold or used
require various licenses, permits, and approvals in connection with such sale or
use, typically involving restrictions similar in most respects to those of
Nevada. The Company has complied with the approval process for use of the
products it has sold in these other jurisdictions, including the receipt of
manufacturer and distributor licenses, permits, or certificates in each such
state. Not all of the Company's products have been approved for sale in all
jurisdictions. No assurances can be given that such required licenses, permits,
certificates or approvals will be given or renewed in the future.
EMPLOYEES
At August 31, 1999, the Company had 89 full-time employees of whom 46
were involved in research and development, 16 in customer service and support, 6
in material control, 5 in sales and marketing and 16 in administration and
management. None of the Company's employees are represented by a labor union or
covered by a collective bargaining agreement. The Company has not experienced
any work stoppages and believes that its employee relations are good.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K contain "forward-looking"
information (as defined in Section 27A of the Securities Act of 1933, as
amended) that involve risks and uncertainties that may cause actual results to
differ materially from those predicted in the forward-looking statements.
Forward-looking statements can be identified by their use of such verbs as
expects, anticipates, believes or similar verbs or conjugations of such verbs.
If any of the Company's assumptions on which the statements are based prove
incorrect or should unanticipated circumstances arise, the Company's actual
results could materially differ from those anticipated by such forward-looking
statements.
Forward-looking statements relate to the Company's plans and
expectations as to: future performance, growth opportunities, expansion,
competition, communication protocols, sales backlog, adequacy of cash and
equivalents balances to fund the Company's operations; anticipated future sales;
anticipated costs of relocating the Company's headquarters and the amount of
expected annual operating cost savings related to such relocation; revenue
recognition; cash collections; scheduled product installation dates; new product
development and introduction; patent protection; and anticipated effects of the
Year 2000.
Such plans and expectations involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking statements.
For a discussion of these risk factors, see "Factors that May Affect Future
Results." In addition, from time to time, the Company may issue other
forward-looking statements. Any forward-looking statements, including other
written or oral forward-looking statements made by the Company or persons acting
on its behalf, should be considered in light of these risk factors and other
risk factors referred to from time to time in the Company's press releases,
periodic reports or communications with stockholders.
ITEM 2. PROPERTIES
In July 1999, the Company's administrative headquarters was relocated
and combined with the Company's sales, marketing, customer service and new
product development office in Las Vegas, Nevada at 7115 Amigo Street, Suite 150,
Las Vegas, Nevada. This facility encompasses approximately 31,500 square feet.
The
11
<PAGE> 14
lease commenced on June 15, 1998 and will expire on June 15, 2003. The base rent
is approximately $36,000 per month, plus $5,000 per month for property taxes,
building insurance and common area maintenance.
In September 1999, the Company's leased facility at 815 N.W. Ninth
Street, Corvallis, Oregon was reduced to approximately 11,000 square feet from
approximately 39,000 square feet. The new lease commenced on September 1, 1999
and will expire on February 28, 2002. The base rent for the total facility is
approximately $15,000 per month, which includes property taxes, building
insurance and common area maintenance.
The Company owns manufacturing and engineering equipment which it uses
in its assembly operations and research and development efforts. Such equipment
is available from a variety of sources and the Company believes that it
currently owns or can readily acquire equipment required for its current and
anticipated levels of operations.
ITEM 3. LEGAL PROCEEDINGS
Two related lawsuits have been filed in the U.S. District Court for the
District of Nevada that allege violation of the federal securities laws by the
Company and its executive officers: Townsend, et al. v. Acres Gaming
Incorporated, et al. CV-S-97-01848-PMP (RJJ) and Jason, et al. v. Acres Gaming
Incorporated, CV-S-98-00262-PMP (RJJ). Those suits have been consolidated into
one combined action styled: In re Acres Gaming Securities Litigation,
CV-S-97-01848-PMP (RJJ). The combined action 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. No trial date or discovery cut-off date has been set. The
defense of this suit has been tendered to and accepted by the Company's
directors and officer's insurance carrier. The Company denies the allegations
and intends to vigorously defend itself.
Two lawsuits have been filed regarding ownership of the Wheel of Gold
("WOG") technology that is the subject of two patents (the "WOG Patents"). In
the first suit, Anchor, Anchor Coin, and Spin for Cash Wide Area Progressive
Joint Venture, Anchor's partnership with IGT, (together, the "Plaintiffs") sued
the Company for infringement of the WOG Patents, breach of warranty and breach
of contract: Anchor Gaming, et al. v. Acres Gaming Incorporated, No.
CV-S-99-00245-LDG (LRL). This action is now pending in U.S. District Court.
Plaintiffs seek to enjoin the Company from infringing the WOG Patents and from
competing with it in the sale of wheel styled bonus gaming devices. The
Plaintiffs also seek unspecified compensatory damages, treble damages, costs of
suit, and attorney's fees. The Company has filed a counterclaim in that
proceeding for a declaration that the Company is the sole or joint owner of the
WOG Patents. The defense of this suit has been tendered to and accepted by the
Company's general liability insurance carrier.
In the second action, the Company has filed suit against Anchor and Spin
for Cash Wide Area Progressive Joint Venture and is now pending in U.S. District
Court for the District of Oregon in Eugene, Oregon: Acres Gaming Incorporated v.
Anchor Gaming, et al., No. CV99-698-HO. The Company alleges that Anchor
wrongfully used the Company's intellectual property to obtain the WOG Patents,
that the filing of the patent applications was fraudulently concealed from the
Company, that Anchor was unjustly enriched by retaining the benefits of the
Company's technology without compensating the Company and that Anchor breached
fiduciary duties owed to the Company. The Company seeks $40 million in
compensatory damages, treble damages, costs of suit, and attorney's fees.
Four related lawsuits have been filed in the U.S. District Court for the
District of Nevada involving the Company and its efforts to enforce its patent
rights: Mikohn Gaming Corp. v. Acres Gaming Incorporated, No. CV-S-98-1383 HDM
(LRL) ("Suit I"); Mikohn Gaming Corp. v. Acres Gaming Incorporated, No.
CV-S-98-738 HDM (LRL) ("Suit II"); Acres Gaming Incorporated v. Mikohn Gaming
Corp., Casino Data Systems, New York New York Hotel and Casino and Sunset
Station Hotel and Casino; No. CV-S-98 794 PMP (LRL) ("Suit III"); and Acres
Gaming Incorporated v. Mikohn Gaming Corporation, et al., No. CV-S-98-01462 PMP
(RJJ) ("Suit IV"). Suits I, II and III have now been consolidated. The Company
denies all asserted allegations and intends to vigorously defend itself and its
intellectual property rights.
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<PAGE> 15
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. Because the Company is not aware of any infringement by
Mikohn, the Court granted summary judgment on the noninfringement claim.
Mikohn's invalidity claim is still pending.
In Suit III, the Company sued Mikohn, CDS, New York New York Hotel and
Casino and Sunset Station Hotel and Casino for infringement of the Company's
U.S. Patent No. 5,752,882 ("the `882 patent"). Mikohn counterclaimed in Suit
III, seeking a declaratory judgment of invalidity and noninfringement of the
`882 patent and asserted claims for "false and misleading representations" under
11 U.S.C. Section 1125, "interference with prospective economic relations,"
"unfair competition: trade libel" and "unfair competition: disparagement."
Mikohn's counterclaims seek unspecified damages, as well as a trebling of the
damages, punitive damages, attorney's fees and an injunction against the
Company's "continuing to commit the unlawful acts" alleged in the counterclaims.
The Company has tendered the defense of Mikohn's counterclaims to its former
general liability insurance carrier. The insurer has not responded to the tender
of Suit III's defense.
In Suit IV, the Company sued Mikohn and CDS for infringement of the
Company's U.S. Patent Nos. 5,820,459 and 5,836,817. The defendants
counterclaimed for declaratory judgment of noninfringement and invalidity of the
patents. In addition, CDS counterclaimed for: "patent misuse"; "Sherman Act
Section 2 - Attempted Monopolization"; "spoilation of evidence"; "unfair
competition - intentional interference with prospective economic advantage" and
"misappropriation of trade secrets". CDS's counterclaims seek unspecified
damages, as well as a trebling of the damages, punitive damages, and attorney's
fees.
In separate but related actions, the Company has filed suit in U.S.
District Court for the District of Oregon against its former general liability
insurance carrier for breach of insurance contract: Acres Gaming Incorporated v.
Atlantic Mutual Insurance Company. The Company's suit is based on the insurer's
refusal to pay more than nominal amounts of the costs of defense in Suit I. In
addition, the Company has filed suit in U.S. District Court for the District of
Oregon against its current general liability insurance carrier for breach of
insurance contract: Acres Gaming Incorporated v. St. Paul Fire & Marine
Insurance Co. This suit is based on the insurer's refusal to defend the Company
against CDS's counterclaims in Suit IV. The Company anticipates that each of
these matters will be resolved by cross motions for summary judgment.
Unfavorable outcomes in one or more of these suits could have a material
adverse effect on the Company.
The Company from time to time is involved in other various legal
proceedings arising in the normal course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter
ended June 30, 1999.
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<PAGE> 16
EXECUTIVE OFFICERS OF REGISTRANT
As of August 31, 1999, the executive officers of the Company were as set
forth below:
<TABLE>
<CAPTION>
EXECUTIVE
NAME AGE POSITIONS AND OFFICES OFFICER SINCE
---- --- --------------------- -------------
<S> <C> <C> <C>
John F. Acres 45 Chairman 1985
Floyd W. Glisson 52 Chief Executive Officer, 1998
President and Director
Reed M. Alewel 35 Vice President, Chief 1999
Financial Officer,
Treasurer and Assistant
Secretary
Richard J. Schneider 42 Vice President and Chief 1999
Operating Officer
Gerald D. Haynes 41 Vice President, General 1999
Counsel and Secretary
</TABLE>
There are no family relationships among executive officers of the
Company.
John F. Acres, the founder of the Company, has served as the Chairman of
the Company since its inception in 1985. Mr. Acres served as the Chief Executive
Officer from January 1985 until July 1998. He also served as President of the
Company from January 1985 to January 1996 and from February 1998 to July 1998
and as Secretary from January 1985 to January 1997. Mr. Acres has been involved
in the gaming industry since 1972 and has designed slot data collection systems,
player tracking systems and equipment for progressive jackpot systems that are
widely used in the industry. In 1981, he founded Electronic Data Technology
("EDT") to manufacture and sell progressive jackpot system designs. While with
EDT, he designed one of the first slot data collection systems and invented the
electronic player tracking system. He sold a majority interest in EDT to IGT in
1983 and remained as president of EDT until 1985. The player tracking system
designed by Mr. Acres while with EDT is installed on approximately 100,000
gaming machines throughout the world and was actively marketed by IGT until
1997. In 1985, Mr. Acres co-founded Mikohn. He served as vice president and a
director of Mikohn until 1988.
Floyd W. Glisson became President and Chief Executive Officer of the
Company in July 1998. Mr. Glisson was senior vice president, finance and
administration and chief financial officer for ConAgra Grocery Products Company,
a unit of ConAgra, Inc., from June 1993 to July 1998. Prior to June 1993, Mr.
Glisson was senior vice president, finance and administration and chief
financial officer of Hunt Wesson, Inc., a food processing company that is a
subsidiary of ConAgra, Inc. In addition to normal staff functions, Mr. Glisson
was also responsible for Food Service and International Operations.
Reed M. Alewel joined the Company in October 1996 as Controller and
Assistant Secretary. He was elected Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary in July 1999. Mr. Alewel was the manager of
financial planning and analysis for the American Italian Pasta Company, a food
manufacturing company, from May 1992 to October 1996. Mr. Alewel is a Certified
Public Accountant.
Richard J. Schneider joined the Company in December 1997 as the Vice
President of Game Development. In July 1999, Mr. Schneider was elected Vice
President and Chief Operating Officer. From July 1997 to December 1997, Mr.
Schneider was the vice president of game engineering for CDS. From 1992 to 1997,
Mr. Schneider was the director of engineering for United Coin Machine Company.
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<PAGE> 17
Gerald D. Haynes joined the Company in December 1997 as Vice President,
Corporate Counsel. In February 1999, Mr. Haynes was promoted to Vice President
and General Counsel and in July 1999, Mr. Haynes was also elected as Secretary
of the Company. From January 1997 to December 1997, Mr. Haynes was general
counsel and vice president of Oxis International, Inc., a biopharmaceutical
company. From November 1994 to January 1997, Mr. Haynes, as a sole practitioner,
functioned among other things, as patent counsel for Kaiser Aluminum & Chemical
Corp. and general counsel for Oxis International, Inc.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq SmallCap Market under
the symbol "AGAM". The following table sets forth, for the periods indicated,
the range of high, low and end of period market prices for the Company's common
stock as reported by the Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
MARKET PRICE PER SHARE
----------------------
LOW HIGH END OF PERIOD
--- ---- -------------
<S> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1999:
First quarter..................... $3.19 $ 6.00 $ 3.19
Second quarter.................... 1.63 4.38 2.44
Third quarter..................... 2.00 3.13 2.75
Fourth quarter.................... 1.06 3.50 2.00
FISCAL YEAR ENDED JUNE 30, 1998:
First quarter..................... $7.63 $12.00 $11.31
Second quarter.................... 3.75 12.75 4.38
Third quarter..................... 4.31 6.56 4.88
Fourth quarter.................... 4.31 5.25 5.00
</TABLE>
The Company estimates that there are approximately 4,160 beneficial
owners of the Company's common stock.
The Company has never paid or declared any cash dividends on its common
stock and does not intend to pay cash dividends on its common stock in the
foreseeable future. The Company expects to retain its earnings to finance the
development and expansion of its business. The payment by the Company of
dividends, if any, on its common stock in the future is subject to the
discretion of the Board of Directors and will depend on the Company's earnings,
financial condition, capital requirements and other relevant factors.
15
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information concerning
the Company and should be read in conjunction with the audited financial
statements and notes included in "Financial Statements and Supplementary Data".
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues ..................................... $ 13,972 $ 17,573 $ 20,455 $ 6,942 $ 4,006
Gross profits .................................... 5,719 6,623 10,902 3,355 1,436
Income (loss) from operations .................... (7,248)(1) (4,660)(2) 1,425 (1,665) (2,489)
Net income (loss) ................................ (6,988)(1) (4,177)(2) 1,798 (1,641) (2,505)
Net income (loss) per common share-basic ......... $ (.79)(1) $ (.47)(2) $ .21 $ (0.22) $ (0.35)
Net income (loss) per common share-diluted ....... $ (.79)(1) $ (.47)(2) $ .20 $ (0.22) $ (0.35)
</TABLE>
(1) During 1999, the Company recorded a non-recurring charge of $400,000 ($.04
per share) for the costs of the Company's relocation of its headquarters to
Las Vegas, Nevada.
(2) During 1998, the Company recorded a non-recurring charge of $745,000 ($.08
per share) for the costs of the Company's change in business focus to the
Acres Bonusing and bonus game product lines.
<TABLE>
<CAPTION>
AS OF JUNE 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ............................. $ 4,649 $12,091 $16,474 $ 2,552 $ 3,458
Total assets ................................ 16,097 17,194 21,323 7,631 6,264
Current liabilities ......................... 8,050 2,435 2,545 3,644 1,302
Long-term debt .............................. -- -- -- -- --
Redeemable convertible preferred stock ...... 4,948 4,948 4,948 -- --
Stockholders' equity ........................ 3,099 9,811 13,830 3,987 4,962
</TABLE>
ITEM 7. 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 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.
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 65 percent
of annual revenues. (See "Business - Customers" and "Factors That May Affect
Future Results").
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<PAGE> 19
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED JUNE 30, 1999 AND 1998
The Company's net revenues during the year ended June 30, 1999 were
$14.0 million, a decrease of $3.6 million from the $17.6 million of net revenues
in 1998. The Company's revenues can fluctuate significantly based on the timing
of the delivery of any large order. In the current year, sales to IGT decreased
by $9.9 million of which $4.1 million was due to the Company's granting of
manufacturing rights to IGT pursuant to which the Company receives royalty
payments on certain hardware manufactured by IGT. In the prior year, when the
Company manufactured and sold hardware to IGT, the Company recorded higher per
unit revenue on the hardware, although gross profit was approximately the same.
Additionally, sales of components to Anchor decreased by $2.7 million from the
prior year. These decreases in revenue were partially offset by $8.2 million of
system sales made directly to casinos.
Component materials purchased primarily from computer and electronics
vendors comprised 55 percent of the cost of revenues in 1999 and 66 percent in
1998. Manufacturing, procurement, software customization, service and
installation labor and expenses accounted for the remaining cost of revenues.
Changes in the components of the cost of revenues result from changes in the mix
of products sold.
Gross profit margin improved to 41% in fiscal 1999 from 38% in fiscal
1998. The shift to royalty-based revenues resulted in an increase in gross
profit margin of 9 percentage points. This increase was partially offset by the
absorption of certain fixed manufacturing and service costs over a smaller sales
volume and changes in the mix of products sold.
The Company's research and development expenses increased to $6.4
million in 1999, from $5.2 million in the prior year. This increase is primarily
due to the cost of development of enhancements and additional modules for Acres
Advantage and the increased size of the Las Vegas office facility, a large
portion of which is used for research and development activities. The Company
expects to continue to spend a significant portion of its revenue on research
and development in order to enhance and expand the capabilities of Acres
Advantage and develop additional bonus games.
Selling, general and administrative costs increased to $6.1 million in
1999 from $5.3 million in the prior year. This increase was the result of
approximately $1.4 million of incremental legal fees incurred to secure and
defend the Company's intellectual property rights for new and existing bonusing
products. The increase in legal fees was partially offset by changes in the
Company's business focus to the Acres Bonusing and bonus game product lines
which resulted in reductions in sales and marketing salaries and promotional
activities.
Operating expenses in fiscal 1999 include a non-recurring charge of
$400,000 ($.04 per share) related to the Company's relocation of its
headquarters to Las Vegas, Nevada.
Other income, primarily comprised of interest income, decreased by
$223,000 as a result of reduced balances of invested cash and equivalents. The
Company has cumulative net operating losses of approximately $15.5 million
available to offset future taxable income through 2019. As the realizability of
these net operating loss carryforwards is uncertain, the Company has provided a
valuation allowance for the entire amount and did not record an income tax
benefit for the years ended June 30, 1999 or 1998. The net loss for the year
ended June 30, 1999 was $7.0 million ($0.79 per share) compared to a net loss of
$4.2 million ($0.47 per share) in the prior year.
COMPARISON OF THE YEARS ENDED JUNE 30, 1998 AND 1997
The Company's net revenues during the year ended June 30, 1998 were
$17.6 million, a decrease of $2.9 million from the $20.5 million of net revenues
in 1997. Although sales to IGT during the year ended June 30, 1998 increased
over the prior year by approximately $7.5 million, sales of products for the
Crown Casino in Melbourne, Australia decreased by $3.8 million, sales of the
Company's Legacy slot accounting and player tracking system
17
<PAGE> 20
decreased by $2.7 million, sales of components to Anchor decreased by $2.6
million and sales of custom bonusing applications decreased by $1.3 million from
the prior year.
Component materials purchased primarily from computer and electronics
vendors comprised 66 percent of the cost of revenues in 1998 and 72 percent in
1997. Manufacturing, procurement, service and installation labor and expenses
accounted for the remaining cost of revenues. Changes in the components of the
cost of revenues result from changes in the mix of products sold.
Gross profit as a percentage of net revenue was 38 percent for 1998,
compared to 53 percent for 1997. Gross profit is generally higher on products
that feature Acres Bonusing Technology, including the Company's Legacy products,
the system for the Crown Casino and components sold to Anchor. During the year
ended June 30, 1998, these sales were substantially replaced with sales of lower
margin hardware components to IGT that resulted in a decrease in gross margin of
approximately 7 percentage points. Gross margin was also reduced by 5 percentage
points due to the costs of installing and removing certain custom bonus
applications that were unsuccessfully placed under revenue-sharing arrangements
in 1998 and an additional 3 percentage points as a result of absorbing certain
fixed manufacturing costs over a smaller sales volume.
The Company's research and development expenses increased slightly to
$5.2 million in 1998, from $5.1 million in the prior year.
Selling, general and administrative costs increased to $5.3 million in
1998 from $4.4 million in the prior year. This increase was primarily the result
of approximately $450,000 of incremental legal fees incurred to secure and
defend the Company's intellectual property rights for new and existing bonusing
products and approximately $250,000 of incremental rent expense resulting from
the expansion of the Company's production facility in Corvallis, Oregon in May
1997.
During the second quarter of fiscal 1998, the Company changed its
business focus to providing Acres Bonusing products and to developing and
marketing bonus games. In conjunction with this change, the Company recorded a
non-recurring charge of $745,000 to recognize severance and inventory costs of
discontinuing its Legacy slot accounting and player tracking system. The Company
originally expected to be able to liquidate the majority of the excess Legacy
inventory to existing slot accounting and player tracking customers and smaller
casinos. These sales have not been realized and the significant improvements
available in currently offered products make future sales unlikely.
Other income increased by $110,000 as a result of interest income
received on investments of cash and equivalents. In fiscal 1998, the Company had
cumulative net operating loss carryforwards for which the realizability was
uncertain. The Company provided a valuation allowance for the entire amount and
did not record an income tax benefit in fiscal 1998. An income tax provision was
not recorded in fiscal 1997 due to the utilization of net operating loss
carryforwards that were available at that time. The net loss for the year ended
June 30, 1998 was $4.2 million ($0.47 per share) compared to a net income of
$1.8 million ($0.20 per share - diluted) in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had cash and equivalents of $5.9
million, compared to $9.9 million as of June 30, 1998. The Company invests its
cash in highly liquid marketable securities with maturities of three months or
less at date of purchase. The Company does not invest in market risk sensitive
instruments.
At June 30, 1999, the Company had collected $4.2 million in advance
deposits against its order backlog of approximately $9.6 million. In September
1999, the Company signed a sales agreement with Mandalay Resorts Group for their
MotorCity Casino being built in Detroit, Michigan that should generate an
additional $3.6 million
18
<PAGE> 21
of revenue in fiscal 2000. Backlog, however, may not be a meaningful indication
of future sales. Sales are made pursuant to purchase orders or sales agreements
for specific system installations and products are often delivered within
several months of receipt of an order. The Company does not have any material
ongoing long-term sales contracts. At its current stage of operations, the
Company's revenues and results of operations may be materially affected, in the
near term, by the receipt or loss of any one order.
The Company expects to complete the deliveries and installations
comprising its order backlog, including the order for the MotorCity Casino, and
expects that payments under those contracts will provide sufficient operating
cash flow for fiscal 2000. Failure to successfully deliver the products
comprising the order backlog or failure to subsequently collect the resulting
revenues could have a material adverse affect on the Company's liquidity. The
Company does not have any debt outstanding at June 30, 1999 but intends to
obtain a short-term line of credit. There can be no assurances that a line of
credit will be obtained. The Company has the ability to reduce operating
expenses by reducing staffing and other expenses.
In July 1999, the Company moved its headquarters to Las Vegas, Nevada
from Corvallis, Oregon. Expenses associated with the relocation are anticipated
to total approximately $400,000 and were accrued as of June 30, 1999. The
Company expects that this relocation will allow it to better serve its customers
and reduce its annual operating expenses by an excess of $1.0 million.
The Company's operations have historically used cash. During the year
ended June 30, 1999, $1.7 million of cash was used by operating activities
primarily as a result of the Company's net operating loss, net of non-cash
items, and to fund the purchase of inventory necessary to support Acres
Advantage installations scheduled for the first half of fiscal 2000. These uses
of cash were partially offset by increases in the collection of advance deposits
from customers and increases in amounts payable for purchases of inventory and
services. During the year ended June 30, 1998, $2.3 million of net cash was
generated by operating activities as the collection of accounts receivable and
reductions in inventories more than offset the effects of the Company's net
operating loss. During the year ended June 30, 1997, net cash used by operating
activities was $4.4 million, primarily resulting from volume-related increases
in working capital, including changes in accounts receivable, inventory and
customer deposits.
The Company made capital expenditures of $1.8 million, $1.9 million, and
$1.5 million in 1999, 1998 and 1997, respectively, primarily on computers and
equipment to support research and development efforts. In fiscal 1999, the
Company capitalized $734,000 of software development costs incurred in the
development of additional modules of the Acres Advantage product line.
The Company's principal sources of liquidity have been net proceeds of
$7.2 million from its initial public offering in November 1993 and $6.2 million
from the exercise of the Redeemable Warrants in October 1996. In addition, as
part of the Strategic Alliance with IGT entered into in January 1997, the
Company issued 519,481 shares of Series A Convertible Preferred Stock for net
proceeds of $4.9 million.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements in this Form 10-K contain "forward-looking"
information (as defined in Section 27A of the Securities Act of 1933, as
amended) that involve risks and uncertainties that could cause actual results to
differ materially from the results discussed in the forward-looking statements.
Such factors include, but are not limited to, the following:
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
19
<PAGE> 22
normal business activities.
The Company has evaluated its technology and data, including imbedded
non-information technology, used in the creation and delivery of its Legacy
products and in its internal operations and has identified no significant Year
2000 issues. The Company's core business systems are compliant. Compliant
upgrades for the Company's Legacy slot accounting and player tracking products
have been developed and will be made available to all customers prior to
December 31, 1999. The Company has tested its most recent generation of products
and did not identify any material Year 2000 issues. The Company has not incurred
material costs associated with addressing the Year 2000 issue and believes that
future costs will not have a material effect on the Company's financial results.
Although the Company has inquired of certain of its significant vendors
as to the status of their Year 2000 compliance initiatives, no binding
assurances have been received. The Company believes that it is not overly
reliant on any single vendor because its component parts and services can be
obtained from multiple sources. Failure of telephone service providers or other
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 the Company's
products.
The Company has developed a contingency plan to address the most
reasonably likely "worst-case" scenario. Such contingency plan includes manually
conducting operations in the short-term, which would be less efficient, but
would not be expected to have a material adverse effect on the Company.
COMMUNICATION PROTOCOL
The Company and IGT have jointly developed a communication protocol
known as SAS4. The protocol is used to communicate instructions and messages
between Acres Bonusing and gaming machines. The communication of these
instructions and messages is essential to the operation of bonuses. Although the
Company and IGT have agreed that the Company can use SAS4 in connection with
certain installations, IGT has stated that the Company may not have an
unrestricted right to use SAS4 with non-IGT games. The Company believes that it
has joint ownership of the protocol and the ability to use and license the
protocol.
The Company is a founding member of the Gaming Manufacturers Association
("GAMMA") which, among other things, is jointly developing a standardized
communication protocol that will be licensed to all GAMMA members. This protocol
may be a viable alternative to SAS4 but this new protocol is not available for
implementation at this time.
OTHER RISKS
Bonus Games. The creation of bonus games and the deployment of those
games into casinos on a revenue-sharing basis are key parts of the Company's
business plan. The Company may not be able to develop successful bonus games or
convince casinos to implement such games on a revenue-sharing basis.
Government Regulation; Potential Restrictions on Sales. The Company is
subject to gaming regulations in each jurisdiction in which its products are
sold or are used by persons licensed to conduct gaming activities. The Company's
products generally are regulated as "associated equipment", pursuant to which
gaming regulators have discretion to subject the Company, its officers,
directors, key employees, other affiliates, and certain shareholders to
licensing, approval and suitability requirements. In the event that gaming
authorities determine that any person is unsuitable to act in such capacity, the
Company would be required to terminate its relationship with such person, and
under certain circumstances, the Company has the right to redeem its securities
from persons who are found unsuitable. Products offered and expected to be
offered by the Company include features that are not available on products
currently in use. These new features may, in some cases, result in additional
regulatory review and licensing requirements for the products or the Company.
Compliance with such regulatory requirements may be time consuming and
expensive, and may delay or prevent a sale in one or more jurisdictions.
20
<PAGE> 23
In addition, associated equipment generally must be approved by the regulatory
authorities for use by each licensed location within the jurisdiction,
regardless of whether the Company is subject to licensing, approval, or
suitability requirements. Failure by the Company to obtain, or the loss or
suspension of, any necessary licenses, approvals or suitability findings, may
prevent the Company from selling or distributing its product in such
jurisdiction. Such results may have a material adverse effect on the Company.
The Company often enters into contracts that are contingent upon the Company
and/or the customer obtaining the necessary regulatory approvals to sell or use
the Company's products or to operate a casino. Failure to timely obtain such
approvals may result in the termination of the contract and the return of
amounts paid pursuant to such contract.
Changes in Business and Economic Conditions Generally and in the Gaming
Industry. The strength and profitability of the Company's business depends on
the overall demand for bonusing products and growth in the gaming industry.
Gaming industry revenues are sensitive to general economic conditions and
generally rise or fall more rapidly in relation to the condition of the overall
economy. In a period of reduced demand, the Company may not be able to lower its
costs rapidly enough to counter a decrease in revenues.
Product Concentration; Competition; Risks of Technological Change. The
Company expects to derive most of its revenues from the sale of bonusing
products and the Company's future success will depend in part upon its ability
to continue to generate sales of these products. A decline in demand or prices
for the Company's bonusing products, whether as a result of new product
introduction or price competition from competitors, technological change, or
failure of the Company's bonusing products to address customer requirements or
otherwise, could have a material adverse effect on the Company's revenues and
operating results. The markets in which the Company competes are highly
competitive and subject to frequent technological change and one or more of the
Company's competitors may develop alternative technologies for bonusing or game
promotions. The Company's future results of operations will depend in part upon
its ability to improve and market its existing products and to successfully
develop, manufacture and market new products. While the Company expends a
significant portion of its revenues on research and development and on product
enhancement, the Company may not be able to continue to improve and market its
existing products or develop and market new products, or technological
developments may cause the Company's products to become obsolete or
noncompetitive. Many of the Company's competitors have substantially greater
financial, marketing and technological resources than the Company and the
Company may not be able to compete successfully with them.
Patents and Trademarks. The Company relies on a combination of patent,
trade secret, copyright and trademark law, nondisclosure agreements and
technical security measures to protect its products. The Company has received
U.S. patents on certain features of its bonusing product line, has applied for
additional U.S. patents and may in the future apply for other U.S. patents and
corresponding foreign patents. The Company may also file for patents on certain
features of products that the Company may develop in the future. Notwithstanding
these safeguards, it is possible for competitors of the Company to obtain its
trade secrets and to imitate its products. Furthermore, others may independently
develop products similar or superior to those developed or planned by the
Company. While the Company may obtain patents with respect to certain of its
products, the Company may not have sufficient resources to defend such patents,
such patents may not afford all necessary protection and competitors may develop
equivalent or superior products which may not infringe such patents.
Fluctuations in Quarterly Operating Results. The Company's quarterly
operating results have fluctuated in the past, and may fluctuate significantly
in the future, due to a number of factors, including, among others, the size and
timing of customer orders, the timing and market acceptance of new products
introduced by the Company, changes in the level of operating expenses,
technological advances and new product introductions by the Company's
competitors, competitive conditions in the industry, regulatory approval and
general economic conditions. Product development and marketing costs are often
incurred in periods before any revenues are recognized from the sales of
products, and gross margins are lower and operating expenses are higher during
periods in which such product development expenses are incurred and marketing
efforts are commenced. At its current stage of operations, the Company's
quarterly revenues and results of operations may be materially affected by the
receipt or loss of any one order and by the timing of the delivery, installation
and regulatory approval of any one order. The Company may not be able to achieve
or maintain profitable operations on a consistent basis. The Company believes
that period to period comparisons of its financial results may not be meaningful
and should not
21
<PAGE> 24
be relied upon as indications of future performance. Fluctuations in operating
results may result in volatility in the price of the Company's Common Stock.
Management of Growth; Liquidity. To compete effectively and to manage
future growth, the Company must continue to improve its financial and management
controls, reporting systems and procedures on a timely basis and expand, train
and manage its employees. Any failure by the Company to implement and improve
any of the foregoing could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, sufficient
funds to maintain new product development efforts and expected levels of
operations may not be available and additional capital, if and when needed by
the Company, may not be available on terms acceptable to the Company.
22
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................ 24
Consolidated Balance Sheets............................................. 25
Consolidated Statements of Operations................................... 26
Consolidated Statements of Stockholders' Equity......................... 27
Consolidated Statements of Cash Flows................................... 28
Notes to Consolidated Financial Statements.............................. 29
</TABLE>
23
<PAGE> 26
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, 1999
and 1998 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 financial statements referred to above present
fairly, in all material respects, the financial position of Acres Gaming
Incorporated and subsidiary as of June 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
July 29, 1999
24
<PAGE> 27
ACRES GAMING INCORPORATED
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 5,949 $ 9,887
Receivables, net of allowance of $15,000 and $50,000 1,576 1,929
Inventories 4,909 2,607
Prepaid expenses 265 103
-------- --------
Total current assets 12,699 14,526
-------- --------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 743 540
Equipment 4,778 4,003
Leasehold improvements 954 627
Accumulated depreciation (4,101) (2,919)
-------- --------
Property and equipment, net 2,374 2,251
-------- --------
OTHER ASSETS, NET 1,024 417
-------- --------
$ 16,097 $ 17,194
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,407 $ 982
Accrued expenses 1,491 438
Customer deposits 4,152 1,015
-------- --------
Total current liabilities 8,050 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 in 89 88
1999 and 1998, respectively
Additional paid-in capital 19,904 19,554
Accumulated deficit (16,894) (9,831)
-------- --------
Total stockholders' equity 3,099 9,811
-------- --------
$ 16,097 $ 17,194
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
25
<PAGE> 28
ACRES GAMING INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(in thousands except per share data)
<S> <C> <C> <C>
NET REVENUES $ 13,972 $ 17,573 $ 20,455
COST OF REVENUES 8,253 10,950 9,553
-------- -------- --------
GROSS PROFIT 5,719 6,623 10,902
-------- -------- --------
OPERATING EXPENSES:
Research and development 6,440 5,210 5,090
Selling, general and administrative 6,127 5,328 4,387
Non-recurring charge 400 745 --
-------- -------- --------
Total operating expenses 12,967 11,283 9,477
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS (7,248) (4,660) 1,425
OTHER INCOME 260 483 373
-------- -------- --------
NET INCOME (LOSS) $ (6,988) $ (4,177) $ 1,798
======== ======== ========
NET INCOME (LOSS) PER SHARE - BASIC $ (.79) $ (.47) $ .21
======== ======== ========
NET INCOME (LOSS) PER SHARE - DILUTED $ (.79) $ (.47) $ .20
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
26
<PAGE> 29
ACRES GAMING INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- -------- ---------- ----------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance as of June 30, 1996 7,601 $ 76 $ 11,224 $ (7,313) $ 3,987
Issuance of common stock 1,163 12 8,097 -- 8,109
Net income -- -- -- 1,798 1,798
Preferred stock dividends -- -- -- (64) (64)
-------- -------- -------- -------- --------
Balance as of June 30, 1997 8,764 88 19,321 (5,579) 13,830
Issuance of common stock 56 -- 233 -- 233
Net loss -- -- -- (4,177) (4,177)
Preferred stock dividends -- -- -- (75) (75)
-------- -------- -------- -------- --------
Balance as of June 30, 1998 8,820 88 19,554 (9,831) 9,811
Issuance of common stock 93 1 350 -- 351
Net loss -- -- -- (6,988) (6,988)
Preferred stock dividends -- -- -- (75) (75)
-------- -------- -------- -------- --------
Balance as of June 30, 1999 8,913 $ 89 $ 19,904 $(16,894) $ 3,099
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
27
<PAGE> 30
ACRES GAMING INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,988) $ (4,177) $ 1,798
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization 1,806 1,493 931
Non-recurring charge 400 745 --
Changes in assets and liabilities:
Receivables 353 1,951 (2,970)
Inventories (2,302) 2,098 (2,674)
Prepaid expenses (162) 352 (361)
Accounts payable and accrued expenses 2,078 (726) 166
Customer deposits 3,137 532 (1,265)
-------- -------- --------
Net cash from operating activities (1,678) 2,268 (4,375)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,815) (1,922) (1,502)
Capitalized software costs (734) -- --
Other, net 13 65 (298)
-------- -------- --------
Net cash from investing activities (2,536) (1,857) (1,800)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 351 233 8,109
Net proceeds from issuance of preferred stock -- -- 4,948
Preferred stock dividends (75) (75) (64)
-------- -------- --------
Net cash from financing activities 276 158 12,993
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (3,938) 569 6,818
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 9,887 9,318 2,500
-------- -------- --------
CASH AND EQUIVALENTS AT END OF YEAR $ 5,949 $ 9,887 $ 9,318
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
28
<PAGE> 31
ACRES GAMING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND COMPANY OPERATIONS:
COMPANY OPERATIONS AND BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Acres
Gaming Incorporated and its wholly owned subsidiary, AGI Distribution, Inc. (the
"Company"). All intercompany accounts and transactions have been eliminated.
The Company develops, manufactures and markets electronic game
promotions, equipment and games for the casino gaming industry. The Company's
principal products are based on its proprietary Acres Bonusing Technology 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 bonus and incentive programs that have not previously been
offered. The Company primarily sells its products in the United States and in
Australia. Sales in Australia totaled $384,000, $1.2 million and $4.8 million,
for the years ended June 30, 1999, 1998 and 1997, respectively.
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.
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.
REVENUE RECOGNITION
The Company sells certain of its products under contracts that generally
provide for a deposit to be paid before commencement of the project and for a
final payment to be made after completion of the project. Revenue is recognized
as individual units are installed or, in those instances where the contract does
not provide for the Company to install the equipment, upon shipment. Customer
deposits received under sales agreements are reflected as liabilities until the
related revenue is recognized.
The Company has entered into certain manufacturing royalty agreements
where revenue is recognized as the licensed manufacturer sells the related
hardware products.
For certain contracts requiring significant product customization,
revenue is recognized on the percentage-of-completion method. Labor costs
incurred for customization and installation are the basis for determining
percentage-of-completion, giving effect to the most recent estimates of such
total labor costs. The effect of changes to total estimated customization and
installation labor costs is recognized in the period in which such changes are
determined. The Company defers revenue subject to forfeiture, refund, or other
concession until such revenue meets the criteria for collectibility. Provisions
for estimated losses are made in the period in which the loss first becomes
apparent.
Included in accounts receivable are unbilled receivables of $1.0 million
at June 30, 1999. The Company did not have any unbilled receivables at June 30,
1998. Unbilled receivables represent revenues recognized in excess of billings
on certain contracts. Unbilled receivables were not billable at the balance
sheet date but are recoverable as billings are made in accordance with the
contract terms.
29
<PAGE> 32
MAJOR CUSTOMERS
One customer accounted for 51 percent of the Company's net revenues in
1999. Another customer accounted for 23 percent, 75 percent and 28 percent of
the Company's net revenues in 1999, 1998 and 1997, respectively. A third
customer accounted for 18 percent and 28 percent of the Company's net revenues
in 1998 and 1997, respectively. A fourth customer provided 12 percent of the
Company's net revenues in 1997.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates in effect in the years
in which the differences are expected to reverse.
CASH AND EQUIVALENTS
Cash and equivalents include cash on hand, amounts held in and due from
banks and highly liquid marketable securities with maturities of three months or
less at date of purchase.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of receivables. At June 30,
1999 and 1998, 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. Inventories
consist of the following:
<TABLE>
<CAPTION>
INVENTORIES AT JUNE 30,
----------------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Raw materials $ 1,114 $ 957
Work-in-progress 1,398 124
Finished goods 2,397 1,526
------- -------
Total inventories $ 4,909 $ 2,607
======= =======
</TABLE>
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 two to 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, gaming licenses and gaming product approvals in various jurisdictions.
Amortization of patents is calculated using the straight-line method over the
estimated life of the patent. Gaming licenses and product approvals are
amortized over periods of five years and two years, respectively. Intangible
assets, net of accumulated amortization, were $259,000 and $345,000 at June 30,
1999 and 1998, respectively, and are included in other assets.
30
<PAGE> 33
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 commercially feasible. Capitalized software costs, net of accumulated
amortization, were $647,000 at June 30, 1999 and are included in other assets.
There were no capitalized software costs at June 30, 1998. Capitalized costs are
amortized on a straight-line basis over the estimated life of the product
beginning when the product becomes commercially feasible. All research and
development costs are expensed as incurred.
NON-RECURRING CHARGES
During the fourth quarter of fiscal 1999, the Company elected to
outsource almost all of its manufacturing functions and initiated a relocation
of its headquarters from Corvallis, Oregon to Las Vegas, Nevada. The Company
recorded a $400,000 non-recurring charge to recognize the related severance,
recruiting and moving expenses.
During the second quarter of fiscal 1998, the Company changed its
business focus to the Acres Bonusing and bonus game product lines and recorded a
non-recurring charge of $745,000 to recognize severance and inventory costs of
discontinuing its Legacy slot accounting and player tracking system.
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 amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. INCOME TAXES:
At June 30, 1999, the Company had cumulative net operating losses
totaling approximately $15.5 million that are available to offset future taxable
income through 2019. A portion of the net operating loss carryforwards was used
to offset income for the year ended June 30, 1997. The Company has provided a
valuation allowance for the remaining amount of the benefit related to these net
operating loss carryforwards as realizability is uncertain.
Deferred income taxes are provided for the temporary differences between
the carrying amounts of the Company's assets and liabilities for financial
statement purposes and their tax bases. Deferred tax liabilities were
insignificant as of June 30, 1999 and 1998. The sources of the differences that
give rise to the deferred income tax assets as of June 30, 1999 and 1998, along
with the income tax effects of each, are as follows:
<TABLE>
<CAPTION>
DEFERRED INCOME TAX
ASSETS AT JUNE 30,
-----------------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Operating loss carryforwards $ 5,899 $ 3,621
Research and development tax credit 921 632
Property and equipment 429 367
Accruals and reserves 273 355
Intangible assets 34 23
------- -------
7,556 4,998
Less valuation allowance (7,556) (4,998)
------- -------
Net deferred tax assets $ 0 $ 0
======= =======
</TABLE>
The valuation allowance related to deferred tax assets increased by $2.6
million and $2.7 million in 1999 and 1998, respectively.
31
<PAGE> 34
3. COMMITMENTS AND CONTINGENCIES:
LITIGATION
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 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. No trial date or discovery
cut-off date has been set. The defense of this suit has been tendered to and
accepted by the Company's directors and officer's insurance carrier. The Company
denies the allegations and intends to vigorously defend itself.
Two lawsuits have been filed regarding ownership of the WOG technology
that is the subject of two patents (the "WOG Patents") that have been assigned
to Anchor. In the first suit, now pending in U.S. District Court, the WOG
plaintiffs brought patent infringement, breach of warranty and breach of
contract actions against the Company based on the WOG Patents and the Company's
supply agreement with Anchor. Plaintiffs seek to enjoin the Company from
infringing the WOG Patents and from competing with it in the sale of wheel
styled bonus gaming devices. The plaintiffs also seek unspecified compensatory
damages, treble damages, costs of suit, and attorney's fees. The Company has
filed a counterclaim in that proceeding for a declaration that the Company is
the sole or joint owner of the WOG Patents. The defense of this suit has been
tendered to and accepted by the Company's general liability insurance carrier.
In the second action, the Company has filed suit alleging that Anchor
wrongfully used the Company's technology to obtain the WOG Patents, that the
filing of the patent applications was fraudulently concealed from the Company,
that Anchor was unjustly enriched by retaining the benefits of the Company's
technology without compensating the Company and that Anchor breached fiduciary
duties owed to the Company. The Company seeks $40 million in compensatory
damages, treble damages, costs of suit, and attorney's fees.
Four related lawsuits have been filed in the U.S. District Court
resulting from the Company's efforts to enforce its patent rights. Three of
those suits have now been consolidated. The Company denies all asserted
allegations and intends to vigorously defend itself and its intellectual
property rights.
In Suit I, Mikohn asserted a claim for declaratory judgment of
noninfringement and invalidity of U.S. Patent No. 5,655,961 ("the `961 patent")
owned by the Company. Mikohn also asserted claims for "intentional interference
with a business relationship," "intentional interference with prospective
business relationship," "unfair competition: trade libel" and "unfair
competition: disparagement." Mikohn's complaint sought unspecified damages,
punitive damages, attorney's fees, interest on the alleged damages, an
injunction against the conduct alleged in the complaint, and a declaration that
the `961 patent is invalid and not infringed by Mikohn or its customers. The
Company has filed a counterclaim for infringement of the `961 patent, and has
denied Mikohn's other allegations.
In Suit II, Mikohn asserted a claim for declaratory judgment of
noninfringement and invalidity of U.S. Patent No. 5,741,183 ("the `183 patent")
owned by the Company. Mikohn's complaint sought no damages, but requested an
award of attorney's fees and a declaration that the `183 patent is invalid and
not infringed by Mikohn. Because the Company is not aware of any infringement by
Mikohn, the court granted summary judgment on the noninfringement claim.
Mikohn's invalidity claim is still pending.
In Suit III, the Company sued Mikohn, CDS, New York New York Hotel and
Casino and Sunset Station Hotel and Casino for infringement of the Company's
U.S. Patent No. 5,752,882 ("the `882 patent"). Mikohn counterclaimed in Suit
III, seeking a declaratory judgment of invalidity and noninfringement of the
`882 patent and asserted claims for "false and misleading representations,"
"interference with prospective economic relations," "unfair competition: trade
libel" and "unfair competition: disparagement." Mikohn's counterclaims seek
unspecified damages, as well as a trebling of the damages, punitive damages,
attorney's fees and an injunction against the Company's "continuing to commit
the unlawful acts" alleged in the counterclaims. The Company has
32
<PAGE> 35
tendered the defense of Mikohn's counterclaims to its former general liability
insurance carrier. To date the insurer has not responded to the tender of Suit
III's defense.
In Suit IV, the Company sued Mikohn and CDS for infringement of the
Company's U.S. Patent Nos. 5,820,459 and 5,836,817. The defendants
counterclaimed for declaratory judgment of noninfringement and invalidity of the
patents. In addition, CDS counterclaimed for: "patent misuse," "Sherman Act
section 2 - attempted monopolization," "spoilation of evidence," "unfair
competition - intentional interference with prospective economic advantage" and
"misappropriation of trade secrets". CDS's counterclaims seek unspecified
damages, as well as a trebling of the damages, punitive damages, and attorney's
fees. No trial date has been set.
In a separate but related action, the Company has filed suit in U.S.
District Court against its former 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 Suit I. In addition,
the Company has filed suit against its current general liability insurance
carrier for breach of insurance contract based on the insurer's refusal to
defend the Company against CDS's counterclaims in Suit IV. The Company
anticipates that each of these matters will be resolved by cross motions for
summary judgment.
Unfavorable outcomes in one or more of these suits could have a material
adverse effect on the Company.
The Company from time to time is involved in other various legal
proceedings arising in the normal course of business.
OPERATING LEASES
The Company leases its office facilities under operating leases that
extend through June 15, 2003. Future minimum lease payments under these
non-cancelable operating leases as of June 30, 1999 are $709,000, $674,000,
$613,000, and $472,000 in 2000, 2001, 2002 and 2003, respectively. Total lease
expense was $822,000, $567,000 and $255,000 for the years ended June 30, 1999,
1998 and 1997, respectively.
4. REDEEMABLE PREFERRED STOCK:
In January 1997, the Company created an initial series of preferred
stock, consisting of 1,038,961 shares, which it designated Series A Convertible
Preferred Stock (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 initial per share purchase price. Holders of the Series A Stock have
the option, upon notice to the Company, to convert shares of Series A Stock into
shares of Common Stock based upon the applicable conversion price in effect at
the time of conversion. The initial conversion price for each share of Series A
Stock is the lesser of the price at which the Series A Stock was initially
issued and the average closing price of the Company's Common Stock for the
period of thirty trading days prior to the date of conversion of shares of
Series A Stock. The conversion price is subject to adjustments for certain
events relating to the Common Stock including stock splits and combinations,
dividends and distributions, reclassification, exchange, substitution,
reorganization, merger, or sale of assets. The Series A Stock is subject to
redemption, subject to certain conditions, at a price equal to the purchase
price plus any declared but unpaid dividends. As of June 30, 1999, all declared
dividends have been paid. Due to the Company's financial position and results of
operations, no dividends related to the year ended June 30, 1999 were declared
or paid. In July 1998, $75,000 of dividends related to the six month period
ended June 30, 1998 were declared and paid.
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 any 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
33
<PAGE> 36
$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.
5. 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. In October 1996,
substantially all of the Redeemable Warrants were exercised, resulting in net
proceeds to the Company of approximately $6.2 million. The underwriter warrants
were exercised in October 1996 resulting in net proceeds to the Company of
approximately $1.4 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 warrants which expire in June
2000 to purchase 40,000 shares of 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. At
June 30, 1999, warrants to purchase 125,000 shares at $9.00 remain outstanding
with an expiration date in September 2000.
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. Options generally vest over five years
and expire in ten years. The Company accounts for the Plan under APB Opinion No.
25 "Accounting for Stock Issued to Employees", under which no compensation cost
is recognized. Had compensation cost for the Plan been determined consistent
with FASB Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), the Company's net income (loss) and
earnings (loss) per share would have approximated the following pro forma
amounts:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands except per share data)
<S> <C> <C> <C> <C>
NET INCOME (LOSS): As reported $ (6,988) $ (4,177) $ 1,798
Pro forma (8,226) (4,863) 535
EARNINGS (LOSS) PER SHARE - BASIC: As reported $ (.79) $ (.47) $ .21
Pro forma (.92) (.55) .06
EARNINGS (LOSS) PER SHARE - DILUTED: As reported $ (.79) $ (.47) $ .20
Pro forma (.92) (.55) .06
</TABLE>
34
<PAGE> 37
A total of 1,750,000 shares of the Company's Common Stock have been
reserved for issuance pursuant to awards granted under the Plan. The Company has
granted 1,403,550 options, net of cancellations, through June 30, 1999. Activity
under the Plan is summarized below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
---------------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,041,175 $ 5.34 1,132,950 $ 6.25 756,375 $ 4.23
Granted at exercise prices equal to
market prices 422,500 4.40 329,750 5.18 352,450 9.53
Granted at exercise prices
exceeding market prices -- -- -- -- 230,500 10.47
Exercised (93,300) 3.75 (55,525) 4.19 (77,625) 4.67
Canceled (173,450) 5.94 (366,000) 8.18 (128,750) 11.92
---------- ---------- ----------
Outstanding at end of year 1,196,925 5.05 1,041,175 5.34 1,132,950 6.25
========== ========== ==========
Exercisable at end of year 702,991 4.81 523,748 4.76 468,007 4.71
========== ========== ==========
Weighted average fair value of
options granted $ 3.28 $ 3.79 $ 5.35
========== ========== ==========
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Risk free interest rate 5.0% 5.8% 6.2%
Expected life of option 5 years 5 years 5 years
Expected volatility 93% 91% 97%
Dividends none none none
</TABLE>
The following table summarizes the options to purchase Common Stock
outstanding at June 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
OPTIONS FOR WEIGHTED AVERAGE OPTIONS FOR AVERAGE EXERCISE
EXERCISE SHARES AVERAGE CONTRACTUAL SHARES PRICE OF SHARES
PRICES OUTSTANDING EXERCISE PRICE LIFE EXERCISABLE EXERCISABLE
--------------- ------------- ---------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
$1.75 - $ 3.00 155,000 $ 2.83 6.4 years 117,000 $ 2.96
$3.13 - $ 5.00 776,275 4.48 8.2 years 411,349 4.27
$5.06 - $ 9.00 201,600 6.82 7.4 years 146,242 6.74
$9.13 - $15.00 64,050 11.64 7.7 years 28,400 10.34
-------------- --------- ---------
$1.75 - $15.00 1,196,925 5.05 7.8 years 702,991 4.81
============== ========= =========
</TABLE>
6. EMPLOYEE BENEFIT PLAN:
The Company has a profit sharing plan that 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.
35
<PAGE> 38
7. PER SHARE COMPUTATION:
The Company reports basic and diluted earnings per share. Only the
weighted average number of common shares issued and outstanding are used to
compute basic earnings per share. The computation of diluted earnings per share
includes the effect of stock options, warrants and redeemable convertible
preferred stock, if such effect is dilutive. Where necessary, prior year amounts
have been restated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
------------------------------------------
1999 1998 1997
-------- -------- --------
(in thousands except per share data)
<S> <C> <C> <C>
Net income (loss) $ (6,988) $ (4,177) $ 1,798
======== ======== ========
Weighted average number of shares of common stock and common
stock equivalents outstanding:
Weighted average number of common shares outstanding 8,897 8,804 8,399
Dilutive effect of warrants and employee stock
options after application of the treasury stock
method -- -- 400
Dilutive effect of redeemable convertible preferred
stock after application of the if-converted method -- -- 272
-------- -------- --------
Weighted average number of common shares outstanding
for computing diluted earnings per share 8,897 8,804 9,071
======== ======== ========
Earnings (loss) per share - basic $ (.79) $ (.47) $ .21
======== ======== ========
Earnings (loss) per share - diluted $ (.79) $ (.47) $ .20
======== ======== ========
</TABLE>
The following common stock equivalents were excluded from the earnings
per share computations because their effect would have been anti-dilutive:
<TABLE>
<CAPTION>
BALANCE OUTSTANDING AS OF JUNE 30,
-------------------------------------
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Warrants and employee stock options 1,361 1,206 101
Redeemable convertible preferred stock, if converted,
assuming conversion at rates in effect at June 30,
1999 and 1998, respectively 2,603 1,053 --
</TABLE>
36
<PAGE> 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in, or disagreements with, accountants which required
reporting on Form 8-K have occurred within the three-year period ended June 30,
1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors of the Company is incorporated
herein by reference to the Company's Proxy Statement that will be filed pursuant
to Regulation 14A within 120 days of June 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to Executive Compensation is incorporated
herein by reference to the Company's Proxy Statement that will be filed pursuant
to Regulation 14A within 120 days of June 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to Security Ownership of Certain Beneficial
Owners and Management is incorporated herein by reference to the Company's Proxy
Statement that will be filed pursuant to Regulation 14A within 120 days of June
30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to Certain Relationships and Related
Transactions is incorporated herein by reference to the Company's Proxy
Statement that will be filed pursuant to Regulation 14A within 120 days of June
30, 1999.
37
<PAGE> 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
See "Item 8. Financial Statements and Supplementary Data"
(2) FINANCIAL STATEMENT SCHEDULES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT
SCHEDULE
To Acres Gaming Incorporated:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Acres Gaming Incorporated's 1999
Annual Report on Form 10-K, and have issued our report thereon dated July 29,
1999. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The Valuation and Qualifying Accounts schedule is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. The schedule has been subjected to
the auditing procedures applied in our audits of the basic consolidated
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Portland, Oregon
July 29, 1999
ACRES GAMING INCORPORATED
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
BALANCES AMOUNTS
AT ADDITIONS CHARGED BALANCES
BEGINNING CHARGED OFF, NET OF AT END OF
OF YEAR TO INCOME COLLECTIONS YEAR
----------- ----------- ------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
1999 $ 50 $ -- $ (35) $ 15
1998 322 25 (297) 50
1997 0 317 5 322
ALLOWANCE FOR NON-RECURRING CHARGES
1999 $ 475 $ 400 $ (489) $ 386
1998 0 745 (270) 475
</TABLE>
(3) EXHIBITS
See "Index to Exhibits".
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
38
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ACRES GAMING INCORPORATED
Date: September 24, 1999 By: /s/ Floyd W. Glisson
----------------------------------------
Floyd W. Glisson
Chief Executive Officer, President
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
Date: September 24, 1999 /s/ John F. Acres
---------------------------------------------
John F. Acres
Chairman of the Board
Date: September 24, 1999 /s/ Floyd W. Glisson
---------------------------------------------
Floyd W. Glisson
Chief Executive Officer, President
and Director
(Principal Executive Officer)
Date: September 24, 1999 /s/ Reed M. Alewel
---------------------------------------------
Reed M. Alewel
Vice President, Chief Financial
Officer, Treasurer and Assistant
Secretary
(Principal Financial and Accounting
Officer)
Date: September 24, 1999 /s/ Jo Ann Acres
---------------------------------------------
Jo Ann Acres
Director
Date: September 24, 1999 /s/ Richard A. Carone
---------------------------------------------
Richard A. Carone
Director
Date: September 24, 1999 /s/ Donald J. Massaro
---------------------------------------------
Donald J. Massaro
Director
39
<PAGE> 42
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
3.1 Articles of Incorporation of Acres Gaming Incorporated, as
amended(4)
3.2 Bylaws of Acres Gaming Incorporated, as amended(3)
+10.1 Acres Gaming Incorporated 1993 Stock Option and Incentive Plan,
as amended(4)
10.2 Lease dated January 4, 1994, between the Company and Avery
Investments(1)
10.3 Agreement dated April 12, 1999 and executed purchase order dated
May 17, 1999 between Star City Pty Ltd and the Company for the
Supply of Goods and Services
10.4 System Upgrade Agreement dated June 7, 1999 between Crown Limited
and the Company
+10.5 Employment Agreement dated July 1, 1996 between the Company and
John F. Acres(4)
10.6 Stock Purchase Agreement between the Company and IGT dated
January 28, 1997(4)
10.7 Registration Rights Agreement between the Company and IGT dated
January 28, 1997(4)
10.8 Master Agreement for Product Development, Purchase and Sale
between the Company and International Game Technology, Inc. dated
January 27, 1997(4)
10.9 Form of sublease between the Company and Hewlett-Packard dated
May 22, 1998(5)
10.10 Lease dated March 3, 1998 between the Company and #26 McCarran
Center, LC(2)
10.11 Equipment Sale Agreement dated October 29, 1998 between AGI
Distribution, Inc., dba Acres Gaming Incorporated and Mandalay
Corp., dba Mandalay Bay Resort & Casino(6)
+10.12 Amendment to Employment Agreement dated July 20, 1998 between the
Company and John F. Acres(7)
10.13 Equipment Sales Agreement dated effective June 30, 1999 between
AGI Distribution, Inc., dba Acres Gaming and Detroit
Entertainment, L.L.C. dba MotorCity Casino
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants
27.1 Financial Data Schedule for year ended June 30, 1999
</TABLE>
- --------------
+ Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the exhibits to the Company's Annual Report
on Form 10-KSB for the year ended June 30, 1994, previously filed with
the Commission.
(2) Incorporated by reference to the exhibits to the Company's Annual Report
on Form 10-K for the year ended June 30, 1998, previously filed with the
Commission.
(3) 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.
(4) 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.
(5) Incorporated by reference to the exhibits to the Company's Annual Report
on Form 10-K for the year ended June 30, 1997, previously filed with the
Commission.
(6) Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended December 31, 1998,
previously filed with the Commission.
(7) Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1998,
previously filed with the Commission.
<PAGE> 1
EXHIBIT 10.3
AGREEMENT
BETWEEN
STAR CITY PTY LTD
AND
ACRES GAMING INCORPORATED
========================================
AGREEMENT FOR THE SUPPLY OF
GOODS AND SERVICES
[CONTROLLED CONTRACT - CC279]
DATED: 12 APRIL 1999
========================================
[LOGO]
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. INTERPRETATION 1
2. TERMS 2
3. ORDER AND SPECIFICATION 3
4. PRICE AND FEES 3
5. TERMS OF PAYMENT AND INVOICES 4
6. DELIVERY 5
7. ACCEPTANCE OF GOODS 6
8. PACKAGING AND LABELLING 7
9. QUALITY CONTROL 7
10. RISK AND PROPERTY 7
11. GENERAL WARRANTIES 8
12. WARRANTY 9
13. LIABILITY 9
14. YEAR 2000 COMPLIANCE 10
15. ASSIGNMENT 12
16. NOT USED 12
17. TERMINATION 12
18. CO-OPERATION AND SUPPORT 13
19. CASINO CONTROL ACT 1992 15
20. OBLIGATION TO CASINO CONTROL AUTHORITY 16
21. GRATUITY 16
22. CONFIDENTIALITY 16
23. OCCUPATION HEALTH AND SAFETY ISSUES 17
24. GENERAL 17
25. FORCE MAJEURE 18
26. FUTURE ORDERS 18
27. STAR CITY PREMISES 19
28. EQUIPMENT 19
29. RELATIONSHIP 19
30. SUB-CONTRACTORS 19
31. INTELLECTUAL PROPERTY 20
32. INSURANCE 20
33. SPECIAL CONDITIONS 21
SCHEDULE 2 24
EXECUTION 25
</TABLE>
<PAGE> 3
[CONTROLLED CONTRACT]
THIS AGREEMENT IS MADE ON THE 12 DAY OF APRIL 1999
BETWEEN STAR CITY PTY LIMITED
(ACN 060 510 410)
OF 80 PYRMONT STREET, PYRMONT, NEW SOUTH WALES, AUSTRALIA ("STAR CITY")
AND ACRES GAMING INCORPORATED
OF 815 NW 9TH STREET, CORVALLIS, OREGON, USA ("THE SUPPLIER")
RECITALS
A. Star City is the operator of Star City ("the Casino").
B. The Supplier wishes to sell goods to Star City.
C. Star City intends to acquire services from the Supplier at the same time
and in conjunction with the supply of the goods.
D. The parties have agreed to establish standard conditions for the supply of
those goods and services to Star City.
PROVISIONS
1. INTERPRETATION
1.1 In this agreement, the following words shall have the meanings set out
below:
"Agreement" or "agreement" means the agreement for the sale and
purchase of the Goods and the provision of the Services between the
Supplier and Star City of which this agreement, the Order, the
Specification and any other incorporated documents form part;
"Business Day" means a day (not being a public holiday or weekend)
on which banks are generally open for business in Sydney;
"Commencement Date" means the date of execution of this agreement;
"Delivery Address" means the address for delivery of Goods or
performance of the Services set out in an Order;
"Purchasing Director" means the person from time to time occupying
the office designated by that title at Star City;
"Fees" means the fees to be paid to the Supplier for provision of
the Services as specified in Schedule 1;
"Guarantor" means the person so described in Schedule 1;
"Goods" means the goods described in Schedule 1;
"Intellectual Property" means all inventions, patents, patent
applications, trade marks, designs, copyright (including copyright
in any computer software or hardware or any works associated with
such software or hardware), technical know-how or commercially
sensitive or valuable information which is provided to a party by
the other party during the course of this agreement;
<PAGE> 4
"Order" means an official authorised purchase order issued by Star
City (as amended or replaced from time to time);
"Order Number" means the identifying number shown on an Order placed
by Star City in relation to the supply of Goods and Services;
"Premises" means the permanent premises of Star City at Pyrmont, New
South Wales;
"Price" means the price of the Goods set out in Schedule 1;
"Services" means the services provided by the Supplier in connection
with the Goods as set out in Schedule 1;
"Specification" includes any descriptions, plans, drawings, data,
design, information or specification relating to the Goods;
"Star City Contact" means the Star City contact person specified in
Schedule 1 or such other person as notified by Star City to the
Supplier from time to time.
"Term" means the term of the Agreement commencing on the
Commencement Date and ending upon termination in accordance with
clause 17.
1.2 Words importing the singular shall include the plural and vice
versa.
1.3 The headings in this agreement are for convenience only and shall
not affect their interpretation.
1.4 Where the Supplier comprises more than one person, this agreement
shall bind each person comprising the Supplier collectively and
individually.
2. TERMS
2.1 Subject to clause 2.2, this agreement applies to all agreements for
the purchase of Goods and associated services by Star City from the
Supplier and shall prevail over any other terms and conditions
(including any terms or conditions of supply subject to which an
Order is accepted or purported to be accepted by the Supplier). Star
City appoints the Supplier to provide the Services subject to the
terms of this agreement and the Supplier accepts the appointment.
2.2 An Order placed by Star City on the Supplier constitutes an offer by
Star City to purchase the Goods and Services subject to this
agreement. The Order shall be deemed to be accepted by the Supplier
unless otherwise notified in writing to the Purchasing Director
within 5 Business Days from receipt of the Order by the Supplier.
2.3 Goods and Services shall only be ordered by Star City on an Order.
The Supplier shall not recognise any purported order which does not
comply with this clause 2.3.
2.4 An Order may only be amended by authorised personnel of Star City's
purchasing department in writing. The Supplier shall be deemed to
have accepted any amendment unless the Supplier otherwise notifies
an authorised
<PAGE> 5
personin the Star City purchasing department in writing within (5)
Business Days from receipt of the amendment.
2.5 The appointment in clause 2.1 continues until terminated in
accordance with clauses 17 or 19, or if specified in Schedule 1,
until the expiration of the Term.
3. ORDER AND SPECIFICATION
3.1 The Supplier shall supply the quantity of Goods specified in an
Order.
3.2 The Supplier shall in relation to the manufacture and supply of the
Goods and to the provision of the Services, to Star City comply
with:
(a) this agreement;
(b) all applicable laws and regulations; and
(c) the standards of quality (if any) set out in Schedule 1.
3.3 The Supplier shall perform the Services at the times and in the
manner specified in Schedule 1.
3.4 The Supplier shall fully inform itself of Star City's requirements
from time to time and for that purpose shall consult with Star City
throughout the Term.
3.5 If the Supplier considers reasonably that it requires any
information, documents or other particulars to be made available to
it by Star City to enable the Supplier to provide the Goods or the
Services in accordance with the Agreement, the Supplier will advise
Star City of its requirements in writing and Star City shall use
reasonable endeavours to provide such information, documents or
other particulars.
3.6 If the Supplier is required to have a licence or other approval in
order to provide the Goods or the Services, the Supplier at its own
cost shall obtain and hold such licence or approval prior to the
Commencement Date and throughout the Term, and provide Star City
with a copy of the same on request.
3.7 The Supplier shall not represent itself, and shall ensure that its
employees and sub-contractors do not represent themselves, as being
employees or agents of Star City.
4. PRICE AND FEES
4.1 Unless provided otherwise in the Order or the Specifications, any
Price or Fees quoted to Star City shall be inclusive of all charges
for packaging, packing, shipping, carriage, insurance and delivery
of the Goods to the Delivery Address and any government or other
taxes, duties, imposts or levies including sales tax.
4.2 Unless otherwise specified in Schedule 1, no increase in the Price
or Fees may be made for any reason whatsoever without the prior
consent in writing of Star City.
<PAGE> 6
4.3 Star City shall be entitled to any discount for payment, bulk
purchase or volume purchase customarily granted by the Supplier,
whether or not shown in Schedule 1 or in the Order.
5. TERMS OF PAYMENT AND INVOICES
5.1 Invoices may be rendered to Star City at the same time as or after
the subject Goods are delivered to the Delivery Address or the
Services are provided unless other payment terms have been agreed to
in advance in writing. Star City will not pay invoices until all
requirements in an Order, the Specifications or this agreement have
been satisfied in respect of the subject Goods and Services and such
invoice has been properly rendered on Star City, unless delivery of
the Goods by installment is approved by Star City (in which case
Star City will pay for the Goods actually delivered).
5.2 Invoices must be properly completed by the Supplier, rendered at the
time of delivery of the Goods or provision of the Services, or
forwarded to the address listed in Schedule 1 and must state the
following:
(a) the applicable Order Number;
(b) the contract reference number;
(c) the name of the contact stated in the Order;
(d) full particulars of Goods and Services supplied (including but
not limited to dates of delivery or performance);
(e) the quantity of Goods the subject of the invoice;
(f) the name and telephone number of a contact person of the
Supplier; and
(g) the amount of sales tax (if any) included in the Price.
If invoices are rendered at the time that Goods and Services are
delivered or supplied (respectively), and the Supplier has not
completed a delivery docket in accordance with clause 6.3, the
invoices must also state the information required in clause 6.3(e).
5.3 Invoices rendered on Star City must either be countersigned by a
representative of Star City or be accompanied by a delivery docket
countersigned by a representative of Star City as evidence that the
Goods have been delivered and the Services have been provided.
5.4 Star City may set off or deduct from any monies due to the Supplier
all or any part of monies owed by the Supplier to Star City for any
reason. Such monies may include without limitation any monies owed
to Star City in relation to:
(a) discounts to which Star City is entitled;
(b) any sum in dispute between Star City and the Supplier;
(c) any shortfall in the quantity of Goods delivered; or
(d) any Goods which have been rejected by Star City or for which
Star City has refused to take delivery.
<PAGE> 7
5.5 Unless otherwise stated in an Order and subject to clause 5.1, Star
City will pay properly rendered invoices within 30 days of receipt
of the invoice.
5.6 If the Supplier offers a discount in respect of the sale of Goods or
supply of Services for payment within a certain period, that period
will not commence until the date of receipt by Star City of the
invoice relating to such Goods or Services.
5.7 The Supplier must take all reasonable steps to legally minimise the
sales tax payable in respect of all Goods and/or Services supplied.
5.8 The Supplier must pass on to Star City any reduction in sales tax on
the Goods and /or Services that occurs due to the application of any
exemption.
5.9 The Supplier must reimburse to Star City any refund or credit of
sales tax received by the Supplier in respect of the Goods and/or
Services as soon as reasonably practical after it is received by or
credited to the Supplier.
6. DELIVERY
6.1 The Supplier shall deliver the Goods to the Delivery Address on the
date or within the period specified in the Order or Schedule 1 or,
if not so specified, within 60 Business Days of Star City placing an
Order on the Supplier.
6.2 Time for delivery of the Goods is of the essence. The Supplier must
notify Star City immediately if the Supplier becomes aware that
Goods (or part thereof) will not be delivered to Star City within
the time specified in clause 6.1 If Goods (or part thereof) are not
delivered in accordance with clause 6.1, Star City may without
prejudice to any other remedy:
(a) cancel the Order without liability to Star City; or
(b) refuse to take delivery of the Goods.
6.3 The Supplier must ensure that the delivery docket for each delivery
of the Goods is displayed prominently and:
(a) quotes the applicable Order Number;
(b) states the name of the contact shown in the Order;
(c) shows full particulars of the Goods;
(d) shows the quantity of Goods delivered;
(e) shows the name of the person delivering the Goods to Star City;
and
(f) states the name and telephone number of a contact person of the
Supplier.
6.4 The Supplier must ensure that each delivery of Goods is accompanied
by any documents specified in Schedule 1.
6.5 Star City's acknowledgment of receipt of Goods by the signing of a
delivery docket shall not infer that Star City has accepted the
Goods in any way whatsoever.
<PAGE> 8
6.6 If specified in an Order that the Goods are to be delivered by
installments, the agreement will be deemed to be a single contract
and shall not be severable.
6.7 The Supplier shall deliver all Goods during usual business hours,
unless otherwise stated in the Order or otherwise agreed in writing
by Star City. The Supplier shall be responsible for unloading all
Goods at the Delivery Address.
6.8 Where the Delivery Address is a third party warehouse, Star City may
accept delivery of the number of containers specified in the
delivery docket. Such acceptance will not be acceptance of the Goods
for the purpose of clause 7. The Supplier will be liable for
shortages in or breakage to the Goods until Star City has inspected
the Goods pursuant to clause 7. The Supplier will not be liable for
shortages in or breakages to the goods after 14 days from delivery
to the third party warehouse, unless Star City gives written notice
to the Supplier of any shortages or breakages in accordance with
clause 7.
7. ACCEPTANCE OF GOODS
7.1 Star City shall be entitled to reject any Goods not delivered in
accordance with this agreement. Star City shall be deemed to have
accepted Goods unless it has notified the Supplier within 14 days
after delivery that such Goods have been rejected by Star City, or
if the Goods have been used or sold by Star City.
7.2 (a) The Supplier shall be responsible for any costs or charges
incurred in returning rejected Goods to the Supplier.
(b) Unless provided otherwise in Schedule 1, Star City shall not
be obliged to return any packaging or packing material for the
Goods to the Supplier, whether or not any Goods are accepted
by Star City.
7.3 Without prejudice to any other remedy, if any Goods are supplied in
breach of any warranty or representation of the Supplier or are
otherwise not in accordance with the Order or the Specifications,
then Star City may at Star City's sole option:
(a) require the Supplier to repair the Goods or to supply
replacement Goods in accordance with this agreement within the
time period specified by Star City;
(b) require the Supplier, at the Supplier's expense, to accept the
Goods for return and refund any monies paid by Star City in
respect of the Goods;
(c) if the Supplier fails to repair the Goods within the period
referred to in paragraph (a), rectify or have rectified any
defect in the Goods at the Supplier's expense and set off such
expenses against any amount due to the Supplier; or
(d) whether or not Star City has previously required the Supplier
to repair the Goods or supply any replacement goods, treat the
Order as discharged by the Supplier's breach and require the
repayment of any monies which have been paid in respect of the
Goods.
<PAGE> 9
7.4 For the purpose of inspection and testing, Star City may, at its
option, select a random sample of the Goods in such proportion to
the whole as Star City may consider appropriate, having regard to
the nature of the Goods. In such cases, the result for the sample
shall be used for the purposes of this clause 7. In the event that
any part of the sample of the Goods fails to comply with the Order
or the Specification, Star City may:
(a) reject the whole or part of the Goods; or
(b) require the Supplier to rectify the Goods; and
(c) require the Supplier to submit same for testing and inspection
again.
7.5 Where Star City does not inspect and accept the Goods prior the
shipment, Star City must inspect the Goods or a sample of the Goods
within 14 days of delivery and any notice of Star City's requirement
pursuant to clause 7.4 must be given to the Supplier within that
period.
8. PACKAGING AND LABELLING
8.1 The Supplier shall package all Goods in accordance with any
requirements stated in the Order or the Specification, and if not so
stated, Goods shall be packaged in such a way and by such means as
will ensure that:
(a) the Goods shall be delivered to Star City in good order and
condition and free from damage;
(b) the Goods may be conveniently and properly inspected on
delivery;
(c) the exterior of each separate container is endorsed with the
number and date of the purchase order; and
(d) each separate container, pallet or package is labelled with an
identifying number and the total number of containers, for
example, "Container 1 of 6".
8.2 The Supplier shall at all times comply with all applicable laws and
regulations or the requirements of any carrier in packaging and
packing Goods.
9. QUALITY CONTROL
9.1 If stated in Schedule 1 or the Specification, the Supplier shall
develop and implement quality control systems and procedures
acceptable to Star City. The Supplier shall provide evidence
acceptable to Star City of any third party certification or approval
of the quality systems and procedures.
9.2 The Supplier agrees to grant access to Star City at any time for the
purposes of inspection and verification of the Supplier's quality
systems and procedures.
10. RISK AND PROPERTY
10.1 Risk of loss in and associated with the Goods shall pass to Star
City upon acceptance by Star City in accordance with this agreement.
While risk in the Goods remains with the Supplier, the Supplier
shall insure the Goods with a
<PAGE> 10
reputable insurer for their full replacement value in respect of any
loss and damage of any kind however caused.
10.2 Title to the Goods shall pass to Star City upon delivery.
11. GENERAL WARRANTIES
11.1 The Supplier represents, warrants and undertakes to Star City that:
(a) the Goods:
(i) will be new on delivery to Star City;
(ii) will be of merchantable quality;
(iii) will be fit for the purposes for which the Goods are
ordinarily used;
(iv) will be fit for the purposes stated in Schedule 1 or
the Specification (if any);
(v) will conform to any description or any sample provided
by the Supplier;
(vi) will conform to the Specification;
(vii) will be free from any defects in materials or
workmanship;
(viii) will conform to any applicable Australian product
standards, which conformity is deemed established when
the Goods are approved by the NSW Casino Control
Authority for operation in the casino;
(b) the Supplier is the owner or licensee of all intellectual
property rights subsisting in the Goods;
(c) no use or sale of the Goods by Star City shall infringe upon
the intellectual property rights of any third party;
(d) the Services will be performed with due care and skill, in a
conscientious, diligent and professional manner which is
higher than or equal to the degree of skill, care and
diligence normally exercised by a recognised professional or
trades person supplies services of a similar nature; and
(e) any goods or materials supplied by the Supplier in conjunction
with the Services will be fit for the purpose for which they
are supplied.
11.2 Except for the express warranties stated in clause 11.1 above,
Supplier disclaims all warranties with regard to the Goods sold
under this agreement including all implied warranties of
merchantability and fitness for a specific purpose.
11.3 The Supplier represents, warrants and undertakes to Star City that
each of the warranties in clause 11.1 is true and correct on the
Commencement Date and the date of each delivery of Goods in
accordance with this agreement.
11.4 The Supplier warrants that at the date the Goods and Services are
provided and at all times during the Term:
<PAGE> 11
(a) it has the right and authority to enter into this agreement
and to do all things which it is required to do by this
agreement;
(b) all action has been taken by the Supplier to render the
Agreement binding upon it and legally enforceable against it
in accordance with its terms;
(c) the execution of this agreement and its performance in
accordance with its terms by the Supplier:
(i) complies with all necessary consents, registrations,
approvals, licences or permits required by statute,
regulation, governmental policy or administrative
requirement or by any agreement, order or arrangement
binding upon the Supplier; and
(ii) does not violate any law, regulation, government order or
decree or any consent, registration, approval, licence or
permit referred to in sub-clause (i) above or any
agreement or arrangement binding upon the Supplier;
11.5 A breach of any of the warranties in clause 11.1 shall entitle Star
City to give notice to the Supplier under clause 17.
12. WARRANTY
12.1 Without limiting the provisions of clause 11, the Supplier shall:
(a) at Supplier's sole option, repair or replace any defective
Goods during the warranty period stated in Schedule 1 at the
Supplier's expense;
(b) if the Supplier is not the manufacturer of the Goods, provide
to Star City or hold for the benefit of Star City any warranty
offered by the manufacturer of the Goods;
(c) if Star City requires, produce written evidence of any such
manufacturer's warranty and Star City's entitlement under it;
and
(d) at Supplier's sole option, perform any Services again or pay
Star City the cost to it of having those Services provided by
a third party, if the Services delivered are defective or do
not meet the standards required by this agreement.
12.2 If the Supplier fails to correct any defective goods or re-perform
any defective Services, Star City may arrange for the defective
goods and consequential effects to be remedied, or the Services
re-performed, at the Supplier's expense.
12.3 At its own cost and expense, the Supplier shall effect product
liability insurance in respect of the Goods and if so requested,
provide evidence to Star City of the currency of the insurance,
including copies of any applicable policies of insurance.
13. LIABILITY
13.1 The Supplier acknowledges that a breach of this agreement by the
Supplier may result in loss or damage to Star City.
<PAGE> 12
13.2 Except for liability or damages resulting from Star City's
negligence, the Supplier releases and discharges Star City from all
liability of whatever kind from damage or injury suffered by the
Supplier, its staff, employees and agents as a result or as a
consequence of, or which might arise from providing the Services
under this Agreement.
13.2A In no event shall the Supplier be liable for loss of profits,
indirect, special, incidental, or consequential damages arising out
of any breach of, or obligations under, this agreement.
13.3 The Supplier indemnifies Star City and agrees to hold harmless Star
City from and against all actions, proceedings, suits, claims,
demands, damages, losses, costs, charges and expenses arising in any
way out of the performances of the Services as a result of any:
(a) breach of this agreement by the Supplier;
(b) negligent act or omission of the Supplier (other than an act
done or omitted to be done on Star City's direction) or any
other employee of the Supplier;
(c) actual or alleged infringement of patent, design, trademark,
trade-name, copyright or other proprietary rights owned or
controlled by third parties in connection with the methods of
operations employed by the Supplier or its employees in the
performance of the Services; and
(d) breach of any Federal, State or local law, regulation, ruling,
guideline, standard or directive or of any industry guideline
or standard with respect to the Services supplied by the
Supplier.
13.4 Star City indemnifies the Supplier and agrees to hold harmless the
Supplier from and against all actions, proceedings, suits, claims,
demands, damages, losses, costs, charges and expenses arising from
or as a result of any:
(a) negligent act or omission of Star City (other than an act done
or omitted to be done on the Supplier's direction) or any
employee of Star City; or
(b) breach by Star City of clauses 22 or 31 of this agreement.
14. YEAR 2000 COMPLIANCE
14.1 The Supplier warrants that the Goods/Services supplied by the
Supplier are year 2000 compliant.
14.2 Year 2000 compliant shall mean that neither performance nor
functionality is affected by dates prior to, during and after the
year 2000. In particular:
Rule 1. No value for current date will cause any interruption in
operation.
Rule 2 Date-based functionality must behave consistently for
dates prior to, during and after year 2000.
Rule 3 In all interfaces and data storage, the century in any
date must be specified either explicitly or by unambiguous
algorithms or inferencing rules.
Rule 4 Year 2000 must be recognised as a leap year.
14.3 Amplification of the definition and rules:
Rule 1
1.1 This rule is sometimes known as general integrity.
<PAGE> 13
1.2 If this requirement is satisfied, roll-over between all
significant time demarcations (eg, days, months, year,
centuries) will be performed correctly.
1.3 Current date means today's date as known to the equipment or
product.
Rule 2
2.1 This rule is sometimes known as date integrity.
2.2 This rule means that all equipment and products must
calculate, manipulate and represent dates correctly for the
purposes for which they were intended.
2.3 The meaning of functionality includes both processes and the
results of those processes.
2.4 If desired, a reference point for date values and
calculations may be added by organisations, eg, as defined
by the Gregorian calendar.
2.5 No equipment or product shall use particular date values for
special meanings, eg, "99" to signify "no endvalue" or "end
of file" or "00" to mean "not applicable" or "beginning of
file".
Rule 3
3.1 This rule is sometimes known as explicit/implicit century.
3.2 It covers two general approaches:
(a) explicit representation of the year in dates: eg, by
using four digits or by including a century
indicator. In this case, a reference may be inserted
(eg, 4-digit years as allowed by ISO standard
8601:1998) and it may be necessary to allow for
exceptions where domain-specific standards (eg,
standards relating to Electronic Data Interchange,
Automatic Teller Machines or Bankers Automated
Clearing Services) should have precedence.
(b) the use of inferencing rules: eg, two-digit years
with a value greater than 50 imply 19XX, those with a
value equal to or less than 50 imply 20XX. Rules for
century inferencing as a whole must apply to all
contexts in which the date is used, although
different inferencing rules may apply to different
datesets.
14.4 GENERAL NOTES
Where a term century is used, clear distinction should be made
between the "value" denoting the century (eg, 20th) and its
representation in dates (eg, 19XX); similarly, 21st and 20XX.
<PAGE> 14
15. ASSIGNMENT
Neither party shall assign the whole or any part of its obligations under
this agreement, except to a purchaser of the business to which this
agreement pertains, without the prior written consent of the non-assigning
party.
16. NOT USED
17. TERMINATION
17.1 If the Goods are standard stock merchandise, Star City may cancel
any unshipped portion of an Order without further obligation except
to make payment for the Goods actually shipped prior to
cancellation. If the Goods are to be manufactured or fabricated to
Star City's specification, then before completion of the work, Star
City may cancel an Order and the Supplier will stop all work except
as otherwise directed by Star City. Upon cancellation, Star City
will pay to the Supplier the actual out-of-pocket expenses to the
date of cancellation, as approved by Star City, and, unless the
Supplier is in default in delivery or of any other terms or
conditions, an additional 5% of such expenses. In no event will the
total amount to be paid exceed the Price of the Goods which are the
subject of the cancellation. Upon payment, any materials or
uncompleted portions of the work will be the property of Star City.
The Supplier will not be entitled to any prospective profits or
damages by reason of such cancellation.
17.2 Star City shall be entitled to terminate this agreement (and cancel
any unfulfilled Orders) without liability to the Supplier
immediately by giving notice to the Supplier at any time if:
(a) the Supplier enters into any composition with its creditors,
enters into liquidation, suffers the appointment of a
receiver, a receiver and manager, an administrator or similar
officer over all or part of its assets, or an application is
made for, or an event occurs which would allow, any such
person to be so appointed;
(b) the beneficial ownership of, or management of, the Supplier
changes such that control (as that term is defined in the
Corporations Law) passes to persons other than those who
control the Supplier at the Commencement Date;
(c) the Supplier ceases, or threatens to cease, to carry on
business;
(d) the Supplier commits any material breach of a warranty or
provision of this agreement; or
(e) the continuance of dealings would have a detrimental impact on
the ability of Star City to be qualified to hold or maintain
any licences, permits or approvals issued or to be granted by
any Regulatory Authority.
17.3 The Supplier shall be entitled to terminate this agreement (and
cancel any unfulfilled Orders) without liability to Star City
immediately by giving notice to Star City at any time if:
<PAGE> 15
(a) Star City enters into any composition with its creditors,
enters into liquidation, suffers the appointment of a
receiver, a receiver and manager, an administrator or similar
officer over all or part of its assets, or an application is
made for, or an event occurs which would allow, any such
person to be so appointed; or
(b) Star City ceases, or threatens to cease, to carry on business.
17.4 Either party may, upon ninety days notice, terminate this agreement,
provided that such termination shall not affect the parties'
obligations in any other agreements which the parties have entered
prior to the date of termination of this agreement.
18. CO-OPERATION AND SUPPORT
18.1 The Supplier acknowledges that Goods and Services to be supplied
under this agreement will need to interface and remain compatible
with the gaming management system proprietary to International Game
Technology Inc and supplied and installed at the Casino by IGT's
Australian subsidiary ("IGT System"). The IGT System is currently
operational at Star City and the Supplier's Goods will need to work
with that system in order to provide an operational and functioning
system for Star City's purposes.
The Supplier warrants that it will during the course of this
agreement:
(a) work and co-operate with IGT and its staff;
(b) keep its software and associated equipment compatible with the
IGT System; and
(c) at the request of Star City, keep IGT and its staff involved
with the IGT System informed of developments, modifications,
improvements or upgrades to its Goods and related
documentation as required to achieve the purposes of this
agreement, provided however that the Supplier is not required
to submit such information to IGT unless IGT agrees to
maintain it in confidence and executes a non-disclosure
agreement suitable to the Supplier to achieve this purpose.
Likewise, the Supplier will maintain IGT confidential
information in confidence and will execute a non-disclosure
agreement suitable to IGT for this purpose.
It is the intention of these warranties that the Supplier will use
its best endeavours to ensure that the interface or interfaces
between its Goods and the IGT System will be and remain compatible
and workable so that Star City has a complete working system for the
provision of a world class gaming product to its customers.
Star City acknowledges that it will maintain a relationship with
IGT, particularly that covering maintenance and/or support of the
IGT System. Star City intends, subject to negotiating acceptable
commercial terms (including terms similar to those set out in this
clause 18), to enter into a maintenance and/or support contract with
IGT which will oblige IGT to work and co-operate with the Supplier
<PAGE> 16
and its staff in order to provide an operational and functioning
system for Star City's purposes.
18.2 The Supplier will ensure that sufficient resources (including
technical support) are made available in Sydney, Australia, during
the course of this agreement to comply with the warranties contained
in this agreement. Any additional contractual terms applicable to
maintenance or support services to be provided by the Supplier will
be the subject of negotiation and agreement between the partners.
The fees associated with those services will be agreed on an annual
basis, or as otherwise agreed, and will not exceed industry
standards.
18.3 The Supplier acknowledges and agrees that Goods to be supplied under
this agreement may be deemed by the NSW Casino Control Authority
("CCA") to be gaming equipment and therefore must be tested and
approved by or on behalf of the CCA prior to commissioning at the
Casino. The Supplier will provide all reasonable assistance and
co-operation to Star City and the CCA (or its nominated testing
agency) to obtain the relevant approval for any Goods. Star City
will pay the costs of the CCA in doing so, but the Supplier will
bear its own costs associated with that testing and approval
process. Any delay in testing and/or approval of Goods due to or
arising from the Supplier will give rise to a commensurate delay in
Star City being obliged to perform its obligations under this
agreement. If the approval of the CCA (or its nominated testing
agency) cannot be obtained at all, or a material delay will be
caused by failure to obtain that approval, Star City may
(notwithstanding any other clause in this agreement) to cancel any
Order for Goods and the Supplier will not be entitled to any payment
or compensation in relation to those Goods or any related Services.
In particular, and without limiting the generality of the foregoing,
the Supplier acknowledges that it is aware of the requirements of
the CCA concerning the IGT System. These requirements are set out in
schedule 2 to this agreement. The Supplier acknowledges that in
supplying its Goods or Services under this agreement, those
requirements are fundamental to Star City's continued ability to use
the IGT System.
18.4 The parties will agree on suitable acceptance tests for computer
related software and hardware supplied under this agreement. Those
tests will be agreed between Star City and the Supplier prior to
delivery of Goods and will:
(a) contain a specific set of tests and a test schedule;
(b) set out required levels of functionality, compatibility,
resistance, reliability and performance levels;
(c) oblige the Supplier to verify, diagnose and correct any
malfunction, defect or suspected error in the Goods;
(d) provide for printed evidence of suspected faults to be
obtained; and
(e) set out a regime for recording faults during testing and the
actions to be taken and timeframe needed by the Supplier to
remedy those faults.
<PAGE> 17
18.5 Star City will use its best efforts to support the Supplier in
interfacing and co-ordinating with:
(a) the CCA and other applicable regulatory bodies;
(b) Star City suppliers, including both but not limited to IGT;
and
(c) organisations and contractors who may affect the Supplier's
ability to perform under this agreement.
19. CASINO CONTROL ACT 1992
19.1 The parties covenant to provide information to the Casino Control
Authority which it requires and to comply with any lawful notice
from the Casino Control Authority including a notice requiring this
agreement to be terminated.
19.2 The parties agree that if this agreement is terminated by either
party in response to a notice of the Casino Control Authority under
Section 39 of the Casino Control Act or by operations of the Act,
neither party shall thereafter have any claim against the other,
other than for any antecedent breach by a party of any obligation
under this agreement.
19.3 This contract is a controlled contract within the meaning of the
Casino Control Act 1992 ("the Act").
Parties to this contract may be required to provide information to
the Casino Control Authority ("the Authority").
This contract may be terminated in certain circumstances.
A party to this contract may be served with a notice in writing by
the Authority affording the party an opportunity to show cause
within 14 days why the contract should not be terminated on the
grounds that, for reasons specified in the notice, it is not in the
public interest for the contract to remain in force.
A party served with a notice may, within the period of 14 days
specified in the notice, arrange with the Authority for the making
of submissions as to why the contract should not be terminated.
After considering any submissions so made, the Authority may, by
notice in writing served on each party to the contract, require the
contract to be terminated within a time specified in the notice.
If the contract is not terminated as required by the notice it is
terminated by the operation of section 39 of the Act.
If the contract is terminated in accordance with Division 2 of Part
3 (sections 36-42) of the Act:
(a) the termination does not affect a right acquired, or a liability
incurred, before that termination by a person who was a party to the
contract, as a result of the performance before that termination of
any obligation imposed by the contract; and
(b) no liability for breach of contract is incurred by a person who was
a party to the contract by reason only of that termination; and
<PAGE> 18
(c) neither the Crown nor the Authority incurs any liability by reason of
that termination.
A party to a contract terminated in accordance with Division 2 of Part
3 of the Act commits an offence under section 41 of the Act and is
liable to a penalty not exceeding 100 penalty units if the party gives
any further effect to any part of the contract.
20. OBLIGATION TO CASINO CONTROL AUTHORITY
If the Supplier has or is required to complete an Enterprise Assessment
Form it undertakes to advise the Authority in writing, of any material
change or new information in relation to its state of affairs within 14
days of the change occurring. A material change or new information would
include but is not limited to, a change in directors, the granting or
release of security, the appointment of an administrator, any legal
proceedings threatened or commenced against the Supplier and financial
statements prepared and/or lodged with any governmental authority.
21. GRATUITY
The Supplier is prohibited from making any offer of payment in any form by
way of payment, discount, rebate, offer, gift, intangible benefit or other
benefit to any employee, representative, agent, consultant, operator or
other persons associated with Star City or any other Star City group
company.
22. CONFIDENTIALITY
22.1 In this clause, "Confidential Information" means any statement,
contract, agreement, specification, drawing, report, data, plans,
forecasts, knowledge or information at any time disclosed (whether
in writing or orally) to, or acquired by the Supplier in relation to
the Goods, the Services, the Casino and its related operations
except to the extent that such statement, contract, agreement,
specification, drawing, report, data, plans, forecasts, knowledge or
information was at the time of such disclosure or acquisition, or
thereafter comes into the lawful possession of the relevant person
or the public other than through a breach of the terms of this
agreement or where such confidential information is required by law
to be disclosed.
22.2 The parties agreed that for a period of 5 years from date of
receipt, they will treat all Confidential Information received from
the other party as confidential and will not without the prior
written consent of the other party:
(a) disclose, publish or communicate or permit the disclosure,
publication or communication of the Confidential Information
or any part of it to any person, firm or company other than
for the performance of this agreement; or
(b) make copies or permit the making of copies of the Confidential
Information or any part of it except to the extent reasonably
necessary to perform this agreement.
<PAGE> 19
22.3 The receiving party must, on the request of the disclosing party
following the termination or suspension of negotiations of the
fulfillment of this agreement, return all documents and other
materials in its possession relating to or containing any
Confidential Information and the receiving party must not retain any
copies or replicas of any such documents.
22.4 The obligations contained in this Article 22 shall survive the
termination of this agreement.
23. OCCUPATION HEALTH AND SAFETY ISSUES
23.1 Where chemicals are used in the supply of the Goods or in connection
with the supply of any services (including the Services) by the
Supplier, the Supplier will provide to Star City in respect of each
chemical product a Material Safety Data Sheet.
23.2 The Supplier shall generally and where appropriate, supply adequate
health and safety information concerning the Goods and shall ensure
that the Goods will be safe when properly used and/or stored. The
Supplier shall at all times keep Star City informed of all relevant
information which becomes known to the Supplier concerning the use,
supply, maintenance and/or storing of the Goods.
23.3 All information required to be provided to Star City in accordance
with clauses 23.1 and 23.2 will be provided by the Supplier to the
Star City Contact.
23.4 The Supplier will comply with all obligations imposed on it by law
including any relevant Occupational Health and Safety legislation.
24. GENERAL
24.1 All rights given to Star City by this agreement may be exercised by
any related corporation (as defined by the Corporations Law) of Star
City.
24.2 Any notice required or permitted to be given by either party to the
other under this agreement shall be in writing addressed to the
other party at the address specified in Schedule 1 or on the Order
or such other address as may at the relevant time have been notified
pursuant to this provision to the party giving the notice. Such
notices may be given by personal delivery, facsimile or pre-paid
post.
24.3 Any indulgence, forbearance or extension of time which Star City may
grant to the Supplier in relation to this agreement or any matter or
thing relating to or arising from it shall not in any way prejudice
or interfere with Star City's rights under this agreement and shall
not be claimed to constitute a waiver of it.
24.4 If any provision of this agreement is held by any competent
authority to be invalid or unenforceable in whole or in part, the
validity of the other provisions of this agreement and the remainder
of the provision in question shall not be affected thereby.
<PAGE> 20
24.5 This agreement shall be governed by the laws of the State of New
South Wales and the parties agree to submit to the non-exclusive
jurisdiction of the courts of that State.
24.6 If there is any conflict between this agreement and an Order, the
Order shall prevail to the extent of any inconsistency.
25. FORCE MAJEURE
25.1 If a party is unable either wholly or partially, as a result of a
force majeure, to carry out its obligations under this agreement,
and:
(a) notifies the other party promptly of the force majeure giving
details of the force majeure, the extent to which it is unable
to perform its obligations; and
(b) attempts to remove the force majeure as quickly as possible;
then that party's obligations will be suspended for the period of
time it is affected by the force majeure.
25.2 If after a period of 1 month, the force majeure has not ceased, the
parties will meet in good faith to attempt to achieve a mutually
satisfactory resolution to the problem.
25.3 The requirement to remove a force majeure does not impose any
obligation on a party to settle strikes or any industrial disputes
or demands by a government on terms adverse to it.
25.4 In this clause, "force majeure" means an act of God, strike,
industrial dispute, declaration of war, blockade, disturbance,
lightning, fire, earthquake, storm, flood, explosion, governmental
or semi-government restraint, expropriation, prohibition,
intervention, direction, embargo, and any other cause which is not
reasonably within the party's control.
26. FUTURE ORDERS
26.1 The Supplier agrees that the terms and conditions set out in this
agreement will apply to the future provision of Goods or Services
by the Supplier, subject to such conditions and particulars as may
be set out in future purchase orders and subsequent agreements
submitted to the Supplier by Star City. Any terms and conditions
set out in this agreement which are inconsistent with future
purchase orders shall not apply. Additional and associated Services
or variations to the existing Services may be requested by Star
City from time to time. Confirmation of variations and additional
Services will not be valid, unless Star City issues an Order to the
Supplier.
26.2 An Order shall not be deemed to have been issued and shall not be
capable of acceptance by a Supplier unless the Order bears an Order
Number and is signed by an employee of Star City authorised for
that purpose and is issued by Star City's Purchasing Department to
the Supplier.
<PAGE> 21
26.3 No Order will be recognised by Star City for any purpose, and no
invoice rendered by a Supplier will be accepted by Star City,
unless the applicable Order Number is shown on the relevant Order
or invoice in accordance with clause 5.2. Star City shall have no
liability to any Supplier in the event Services are supplied
contrary to the requirements of this Agreement, and the supply of
such Services shall be entirely at the Supplier's risk.
27. STAR CITY PREMISES
27.1 The Supplier shall, when using the Premises or any facilities
occupied by Star City, comply with all directions, procedures and
policies of Star City from time to time relating to occupational
health and safety, security or otherwise in relation to the use of
and access to the Premises or in regard to any facilities on the
Premises.
27.2 The Supplier shall ensure that:
(a) no injury or damage is caused to persons or to property; and
(b) no trespass to property is committed, arising out of or in
connection with this agreement,
by the Supplier or any employee or agent of the Supplier.
28. EQUIPMENT
28.1 The Supplier shall provide all equipment necessary for use in
connection with the provision of the Services.
28.2 The Supplier shall ensure that all equipment is maintained in good
working order, repair and condition at all times and is fit for the
purpose of providing the Services.
29. RELATIONSHIP
29.1 Nothing in this agreement constitutes a relationship of employer and
employee, principal and agent, or partnership between Star City or
its related bodies corporate (as defined in the Corporations law)
and the Supplier.
29.2 The Supplier must not, and will ensure that its staff do not, assume
or create or attempt to assume or create, directly or indirectly,
any obligation on behalf of or in the name of Star City or a related
body corporate (as defined in the Corporations law) of Star City.
30. SUB-CONTRACTORS
30.1 The Supplier shall advise Star City of the details of any
sub-contractors engaged by the Supplier. No sub-contractor shall be
engaged by the Supplier to provide Services without the prior
consent of Star City. The Supplier shall be fully responsible for
the performance of the Services notwithstanding the consent of Star
City or that the Supplier has sub-contracted the performance of any
part of the Services.
<PAGE> 22
30.2 The Supplier shall be responsible for ensuring the suitability of
any proposed sub-contractor for any specific work envisaged and that
all work performed by sub-contractors meets the requirements of this
agreement.
31. INTELLECTUAL PROPERTY
31.1 The Supplier acknowledges that Star City is the proprietor of all
Intellectual Property of Star City provided to the Supplier prior to
or in the course of this agreement and that it is supplied to the
Supplier for the purposes of providing Services under this agreement
only.
31.1A Star City acknowledges that the computer programs, system protocols,
system documentation manuals, and trademarks supplied by the
Supplier to Star City are proprietary to the Supplier. Star City
agrees with the Supplier that the programs, documentation and all
information or data supplied by Supplier in machine-readable form
are trade secrets of the Supplier, are protected by civil and
criminal law, and by the law of copyright, are very valuable to the
Supplier, and that their use and disclosure must be carefully and
continuously controlled. Accordingly, at no additional royalty or
fee, Star City shall execute Supplier's End User Software License
Agreement (the terms of which are to be agreed between the parties)
prior to installation of such software at the Casino.
31.2 Except as otherwise provided in this agreement, nothing contained in
this agreement shall be deemed, by implication, estoppel or
otherwise, to grant to Star City any right or licence in respect of
any of the Intellectual Property of the Supplier at any time.
31.3 The Supplier at its own expense will defend and indemnify Star City
in any action brought against Star City to the extent that it is
based on a claim that the Goods used within the scope of this
agreement infringe any trademark, patent or copyright, provided that
the Supplier is immediately notified in writing of such claim. The
Supplier shall have the right to control the defence of all such
claims, lawsuits and other proceedings. In no event shall Star City
settle any such claim, lawsuit or proceeding without the Supplier's
prior written approval.
If, as a result of any claim of infringement against any patent or
copyright, Star City is enjoined from using the Goods, or if the
Supplier believes that the Goods are likely to become the subject of
a claim of infringement, the Supplier at its option and expense may
procure the right for Star City to continue to use the Goods, or
replace or modify the Goods so as to make them non-infringing. The
foregoing states the entire liability of the Supplier with respect
to infringement of any trademarks, copyrights or patents by the
Goods.
32. INSURANCE
32.1 The Supplier must maintain and effect at its own expense during the
term of this agreement valid and enforceable insurance policies with
insurers approved by Star City, which:
<PAGE> 23
(a) name the Supplier, and Star City and other interested parties
as notified by Star City to the Supplier (and include their
personnel), as co-insured persons in relation to the supply
of Goods and/or provision of Services pursuant to this
agreement;
(b) in relation to any public liability insurance, include a
cross liability clause enabling one insured person to claim
against the insurer even if the party making the claim
against the insured person is also insured under the policy;
(c) where specified, provide at least the level and types of
coverage specified in Schedule 1 for each occurrence; and
(d) be on terms acceptable to Star City.
32.3 The Supplier:
(a) must effect and maintain statutory workers' compensation
insurance to cover any claim by any employee of the Supplier;
(b) provide certification of workers' compensation arrangements
to Star City if requested; and
(c) irrevocably waives all rights it may (but for this clause)
have had from time to time against Star City in relation to
or in connection with any claim by any employee of the
Supplier.
32.2 At the request of Star City, the Supplier shall provide
certificates of currency of its insurance policies or such other
documentary evidence as may be required by Star City from time to
time.
33. SPECIAL CONDITIONS
33.1 The Supplier shall ensure that:
(a) it renders the Services at all times in a polite and helpful
manner and shall provide the Services in a safe manner;
(b) all persons engaged by it in the provision of the Services
shall be of neat and clean appearance at all times and shall
comply with any specific dress and other requirements set out
by Star City from time to time;
(c) all persons engaged by it in the provision of the Services
wear such uniforms and identifying materials (e.g. name tags
or badges) as may reasonably be requested by Star City from
time to time;
(d) any uniforms worn by persons in the provision of the Services
are in good repair and the Supplier shall be responsible for
and shall arrange regular cleaning of all such uniforms to
the satisfaction of Star City;
(e) without limiting sub-clause (c), any security cards or
identity cards issued by Star City to the Supplier's
personnel must be worn by all such personnel at all times
during and promptly returned to Star City at the conclusion
of the provision of the Services;
<PAGE> 24
(f) Star City may, without assigning any reason, notify the
Supplier that any particular employee of the Supplier is
unsuitable by reason of matters of security, confidentiality
or other matter relevant to the conduct of the Star City
business to perform Services under this agreement where upon
Star City shall be entitled to deny access to the Premises to
such person;
(g) the Supplier shall be responsible to ensure that all its
employees who come onto the Premises for the purposes of this
agreement are over the age of 18 years. The Supplier shall
indemnify and keep indemnified Star City for any loss, cost
or expense incurred by reason of any such employee being less
than 18 years of age;
(h) the Supplier shall ensure that it complies with all
Commonwealth and State industrial relations legislation,
including any award, agreement, industrial instrument or
arrangement it has entered or is required to comply with,
pursuant to or arising from such industrial relations
legislation; and
(i) In accordance with s127 of the Industrial Relations Act 1996
(NSW), the Supplier shall ensure that at the time of seeking
payment for services under this contract, it will provide
Star City with a statement that all remuneration payable to
the relevant employees for work under the contract has been
paid for that period of time for which payment is sought.
33.2 The Supplier shall have in place policies and procedures for
the training of its staff including policies of the Supplier in
relation to occupational health, health and safety, industrial
relations policy, security awareness (if applicable) and quality
assurance and systems procedures (if applicable).
<PAGE> 25
SCHEDULE 1
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------
Clause 1.1 Description of Goods and Services: Prices and Fees
Supply electronic gaming equipment Each element of the Goods and Services
and all other additional or will be negotiated on an individual basis
related services required by Star with Orders being placed for each
City and normally provided by the separate component and will be subject to
Supplier incidental to such Goods the terms and conditions of this
and Services agreement.
- ---------------------------------------------------------------------------------------------------
Clause 4.2 Price Adjustment: Once an Order has been placed by Star City
there will be no price adjustment. Pricing
will be based on the quote received from
the Supplier.
- ---------------------------------------------------------------------------------------------------
Clause 5.2 Address for submission of Invoices: ACCOUNTS PAYABLE, FINANCE DEPARTMENT, STAR
CITY, PO BOX Q192, QVB POST OFFICE 1230.
- ---------------------------------------------------------------------------------------------------
Clause 6.1 Delivery deadline: as described in Star City's Orders from
time to time
- ---------------------------------------------------------------------------------------------------
Clause 6.4 Documents required with delivery as described in Star City's Orders from of
Goods: time to time
- ---------------------------------------------------------------------------------------------------
Clause 7.2(b) Return of Packaging Material: STAR CITY WILL NOT BE RETURNING PACKAGING
MATERIAL TO THE SUPPLIER
- ---------------------------------------------------------------------------------------------------
Clause 9.1 Quality Systems and Procedures: TO BE ADVISED
- ---------------------------------------------------------------------------------------------------
Clause 11.1 Purpose of Goods: Electronic Gaming
- ---------------------------------------------------------------------------------------------------
Clause 12 Period of Warranty: 12 MONTHS FROM DELIVERY AND INSTALLATION
OF THE GOODS AND SERVICES.
- ---------------------------------------------------------------------------------------------------
Clause 24.2 Address for Notices: Star City:
80 Pyrmont Street, Pyrmont NSW 2009
Tel: 612 9777 9000
Fax: 612 9657 8344
Supplier:
815 NW 9th Street, Corvallis Oregon USA
97330
Tel: 541 7537648
Fax: 541 7537524
- ---------------------------------------------------------------------------------------------------
Clause 32 Insurance 1. Public liability insurance covering
bodily injury, death and property
danger in an amount of not less
than $5,000,000 for each and every
occurrence and $6,000,000 in the
aggregate for any one period of
insurance.
2. Professional indemnity insurance
$10,000,000
- ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 26
SCHEDULE 2
REQUIREMENTS OF THE CCA
The IGT system is required to provide Star City and regulatory officials with
the following features:
1. Analysis
to provide daily, weekly, monthly and annual analysis of turnover (ie,
handle), revenue (ie, cash box amount), percentage payout, cancelled
credits, and payout for gaming devices (by individual device, type of
device, or in total).
2. Machine Security
to provide computer screen viewing, terminal alarm and hard copy
transaction listing of all mains power failures and access to machine
door, hopper, cash box and logic board.
3. Jackpots
to provide computer screen viewing, terminal alarm and hard copy
transaction listing of jackpot wins (stand alone machines and linked
progressive machines).
4. Generation of Documents
to provide computer generation of documents in the coin bank for hopper
refills, cancelled credits and jackpot payouts.
5. Revenue Count
to provide storage and recording and revenue data transmitted from
computerised scale weighing (hard count process) of cash box contents from
each machine and highlight any variances from the cash count with the
amount recorded on the machines electronic meter.
<PAGE> 27
EXECUTION
STAR CITY PTY LIMITED
Signed for and on behalf of STAR CITY PTY LTD by its duly authorised officer
- ----------------------------------------
Signature of authorised officer
- ----------------------------------------
Name of authorised officer
- ----------------------------------------
Title of authorised officer
before me:
- ----------------------------------------
Signature of witness
- ----------------------------------------
Name of witness
Signed for and on behalf of ACRES GAMING INCORPORATED by its duly authorised
officer
- ----------------------------------------
Signature of authorised officer
- ----------------------------------------
Name of authorised officer
- ----------------------------------------
Title of authorised officer
before me:
- ----------------------------------------
Signature of witness
- ----------------------------------------
Name of witness
<PAGE> 28
PURCHASE ORDER
DATE 17/05/99
<TABLE>
<S> <C>
SUPPLIER: ACRES GAMING INCORPORATED BILL TO: STAR CITY PTY LTD SHIP TO:
SERVICES ONLY
815 NW 9TH STREET ACCOUNTS PAYABLE DEPT.
CORVALLIS, PO BOX Q192
OREGON 97330 QVB POST OFFICE 1290
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
DESCRIPTION BRAND, PART OR CATALOGUE DELIVERY QUANTITY UOM UNIT COST EXTENDED COST
NUMBER DATE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
17/05/1999 1.000 EA 1,324,352.9000 1,324,352.90
ACRES BONUSING SYSTEM - PHASE 1 US$875,000
NOTE: INDICATIVE RATE OF .6607 DATED
17/5/99 USED TO CONVERT TO $AUD
ACRES BONUSING SYSTEM - 2ND PAYMENT
NOTE: PAYABLE 30 DAYS AFTER APPROVED 17/05/1999 1.000 EA 1,324,352.9000 1,324,352.90
INSTALLATION. INDICATIVE RATE OF .6607
USED TO CONVERT TO $AUD
ACRES BONUSING SYSTEM - FINAL PAYMENT
NOTE: PAYABLE 18 MONTHS FROM DATE OF 17/05/1999 1.000 EA 2,389,147.8700 2,389,147.87
APPROVED INSTALLATION. THIS ORDER IS
PLACED PURSUANT TO CONTROLLED CONTRACT
00279 AND IS SUBJECT TO THE TERMS OF
THE ATTACHED ACRES BONUS SYSTEM, STAR
CITY UPGRADE DATED 10 MAY '99. THE
CONTROLLED CONTRACT PREVAILS OVER ANY
INCONSISTENT TERMS.
- -------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------
TOTAL INCLUSIVE OF SALES TAX AND DELIVERY CHARGES 5,037,853.67
------------------------------------------------------------------------------
</TABLE>
THIS ORDER IS SUBJECT TO STAR CITY PTY LIMITED STANDARD TERMS AND CONDITIONS OF
PURCHASE OR, IF A SUPPLY AGREEMENT IS IN PLACE BETWEEN STAR CITY PTY LIMITED AND
THE SUPPLIER, THEN IT IS SUBJECT TO THE TERMS AND CONDITIONS OF THAT AGREEMENT.
<PAGE> 29
ACRES BONUS SYSTEM
STAR CITY UPGRADE
This proposal outlines costs, terms, timelines, Star City requirements and
specifications for upgrading the current Star City system to support Phase 1
bonuses.
BONUS UPGRADE COSTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Qty Description Price Each Total
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
1,500 CCCE cable harnesses * *
- ----------------------------------------------------------------------------------
1 CCCE Software * *
- ----------------------------------------------------------------------------------
1,500 Phase 1 Bonus Upgrade Software * *
- ----------------------------------------------------------------------------------
TOTAL $3,328,510
- ----------------------------------------------------------------------------------
</TABLE>
* -- confidential portion omitted and filed separately with the SEC
Prices are in US dollars and exclude shipping, taxes, duties and installation
travel and lodging expenses. While technical support for regulatory approvals is
included, any fees charged by testing agencies or regulatory authorities are
excluded.
Shipping, travel and lodging expenses are billed to Star City at cost. Whenever
possible, Star City facilities will be used for food and lodging.
PAYMENT TERMS
<TABLE>
<S> <C>
Deposit with Order $ 875,000
2nd Payment after 30 days of satisfactory operation in Star City's $ 875,000
production environment.
18 equal payments (beginning 60 days after start of satisfactory operation) $ 87,695
==========================================================================================
Total $3,328,510
</TABLE>
A discount of $250,000 (US) is offered if, in lieu of 2nd payment described
above, a final payment of $2,203,510 is received resulting in a net price of
$3,078,510, exclusive of shipping, duties, travel, etc.
WARRANTY
All bonus software is warranted for 90 days. If Star City contracts with Acres
Gaming for a maintenance contract on the basic system, Acres Gaming will extend
warranty support on these bonuses until June 30, 2002 or until Star City
discontinues the basic service contract, whichever comes first. For as long as
the basic service contract remains in effect, terms of support, response time
and training for the bonus upgrade features described in this proposal will be
identical to the support, response time and training provisions outlined in the
basic service contract agreement.
<PAGE> 30
TIMELINE
Receipt of Order and Deposit Start of project
Shipment of 1,500 cable harnesses +3 weeks
Beginning of installation in test bed +4 weeks
Beginning of regulatory testing +5 weeks
Estimated installation on floor (pending approval) +9 weeks
Bonusing becomes operational 9 weeks after receipt of order, based upon a four
week regulatory testing and approval cycle. For an August 1, 1999 startup, the
order must be received no later than May 21. An earlier beginning is highly
recommended.
STAR CITY REQUIREMENTS
- - Test bed must be available continuously for 6 weeks prior to date on which
bonuses are to be launched (June 15th for an August 1 opening).
- - Star City is responsible for installation of CCCE cable harnesses in
gaming machines
- - Star City contracts with regulatory testing agency and gains all required
approvals. Acres Gaming provides full technical support for all
submissions and testing. Approval applications are the responsibility of
Star City
- - Star City is responsible for all player education, marketing and
collateral material.
- - Star City makes appropriate employees available for training at least two
weeks prior to launch of bonusing.
- - Star City must assist in causing IGT to make required changes in the IGS
system to properly support bonuses.
In order to implement bonusing, specific changes are required in the IGS
host system. Star City, and Acres gaming will, on a best efforts basis,
cause IGT to make such changes. Given Star City's commercial influence
with IGT, it would be a requirement that Star City take the lead in all
such transactions. However, Acres gaming would assist where possible, in
similar fashion to that stated in cooperation related clauses in the
controlled contract.
It is noted that Acres Gaming has limited influence with IGT, however it
is anticipated that Acres Gaming can increase this level of influence
through formalising arrangements relating to MEAL system changes in ABS,
off-set against bonusing changes in IGS. There will be no charge to Star
City, Acres Gaming or IGT for the efforts required under this arrangement.
PHASE 1 - BONUSES SPECIFICATIONS
CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SEC
<PAGE> 1
EXHIBIT 10.4
[BLAKE DAWSON WALDRON LAWYERS LETTERHEAD]
SYSTEM UPGRADE AGREEMENT
ACRES GAMING INC
CROWN LIMITED
7 June 1999
<PAGE> 2
CONTENTS
<TABLE>
<S> <C>
1. INTERPRETATION 1
2. ACRES'S OBLIGATIONS 4
3. CROWN'S OBLIGATIONS 4
4. LICENCE AND ESCROW ARRANGEMENT 5
5. DELIVERY, INSTALLATION AND COMMISSIONING 5
6. ACCEPTANCE 6
7. COOPERATION 6
8. UPGRADES OF SOFTWARE AND ASSOCIATED DOCUMENTATION 6
9. TRAINING 7
10. PAYMENT 7
11. PRICE 7
12. WARRANTY SUPPORT 8
13. HARDWARE ACCEPTANCE 8
14. INTELLECTUAL PROPERTY WARRANTIES AND INDEMNITY 8
15. CONFIDENTIALITY 9
16. WARRANTIES 10
17. REPRESENTATIONS AND WARRANTIES 10
18. LIABILITY OF ACRES IS LIMITED 11
19. TERMINATION 11
20. CONTROLLED CONTRACT PROVISIONS 12
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
21. FORCE MAJEURE EVENTS 13
22. DISPUTES 14
23. NOTICES 14
24. MUTUAL CO-OPERATION 15
25. GENERAL 15
SCHEDULE
1. FUNCTIONAL SPECIFICATION 17
2. PRICE SCHEDULE 18
3 TIME LINE 20
4 END USER SOFTWARE LICENSE AGREEMENT 21
5 LIST OF EQUIPMENT TO BE RETURNED TO ACRES 26
</TABLE>
ii
<PAGE> 4
SYSTEM UPGRADE AGREEMENT
DATE 7 June 1999
PARTIES
ACRES GAMING INC of 815 NW Ninth Street, Corvallis Oregon, USA ("ACRES")
CROWN LIMITED ACN 006 973 262 of 99 Queensbridge Street, Southbank
Victoria, Australia ("CROWN")
RECITALS
A. Crown has installed at the Southbank Complex the System which is made up
of components created by Aristocrat, Acres and Crown.
B. Crown wishes to upgrade the System.
C. Crown and Acres have agreed that Acres will upgrade part of the System by
delivering and installing the Acres Component on the terms set out in
this agreement.
OPERATIVE PROVISIONS:
1. INTERPRETATION
1.1 DEFINITIONS
In this Agreement, unless the context otherwise requires:
"ACCEPTANCE NOTIFICATION" has the meaning given in clause 6;
"ACRES COMPONENT" means that part of the System to be upgraded by Acres
as set out in the Functional Specification;
"ARISTOCRAT" means Aristocrat Leisure Industries Pty Ltd ACN 001 660 715
of 71 Longueville Road, Lane Cove, NSW 2066;
"ARISTOCRAT COMPONENT" means that part of the System to be upgraded by
Aristocrat as set out in the Functional Specification;
"ASSOCIATED DOCUMENTATION" means the operating, programming and user
manuals, modification manuals, flow charts, drawings, design
documentation and other materials relating to the Software and as amended
from time to time under this agreement;
"CONFIDENTIAL INFORMATION" means in relation to a party, information
that:
(a) is by nature confidential; or
(b) is designated by a party to be confidential; or
(c) the other party knows or ought reasonably to know is confidential
including:
(i) information comprised of or relating to any intellectual
property rights of the party;
<PAGE> 5
(ii) information relating to the financial position of the
party, and in particular, includes information relating to
the assets or liabilities of the party and any other matter
that does or may affect the financial position or
reputation of the parties;
(iii) information relating to the internal management structure
of the party, or the personnel, policies and strategies of
the parties;
(iv) business plans;
(v) information of the party to which the other party has
access other than information referred to in paragraphs
(i), (ii) and (iii) that has any actual potential
commercial value to the first party or to the person or
corporation which supplied that information; and
(vi) information in the party's possession relating to another
party's clients or suppliers, and like information;
"CROWN COMPONENT" means that part of the System to be upgraded by Crown
as set out in the Functional Specification;
"INTELLECTUAL PROPERTY RIGHTS" means all and any intellectual and
industrial property rights whether conferred under statute, or common law
or in equity including without limitation rights to patents, designs,
trade marks, trade names, circuit layouts, confidential information and
copyright;
"END USER SOFTWARE LICENSE AGREEMENT" means the software license
agreement set out in Schedule 4;
"FUNCTIONAL SPECIFICATION" means the functional design specification for
the upgraded System set out in Schedule 1;
"HARDWARE" means the hardware forming part of the Acres Component and
such items described as hardware in the Functional Specification which
are purchased by Crown from time to time;
"PRICE" means the amount payable to Acres calculated in accordance with
clause 11;
"PRICE SCHEDULE" means the schedule of components and unit prices set out
in Schedule 2;
"SOFTWARE" means the software forming part of the Acres Component
(together with user manuals and any enhancement, modification or new
release), any software of Acres used in the System (other than the Acres
Component) and such items described as Software in the Functional
Specification which are purchased by or licensed to Crown from time to
time;
"SOUTHBANK COMPLEX" means the Crown Casino complex in Melbourne,
Victoria;
"SYSTEM" means the gaming machine management system as operated by Crown
at the Southbank Complex;
"TIME LINE" means the time line set out in Schedule 3;
"VCGA" means the Victorian Casino and Gaming Authority;
"VCGA TECHNICAL REQUIREMENTS DOCUMENT" means the document issued by the
VCGA entitled "Technical Requirements for Gaming Machines and Electronic
Monitoring systems in the Melbourne Casino - Version 2.0";
"WARRANTY PERIOD" means the period of 12 months commencing on the date
Acceptance Notification is given by Crown to Acres;
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<PAGE> 6
"WARRANTY SUPPORT" means service and support provided by Acres to Crown
sufficient to ensure that the Acres Component functions at all times in
accordance with the Functional Specification so as to maintain
satisfactory functionality performance and response times provided always
that "Warranty Support" will not include any defect or fault in the Acres
Component which arises out of or is caused by:
(i) improper use of the Acres Component by Crown;
(ii) operation of the Acres Component other than in accordance with
Associated Documentation;
(iii) modification of the whole or any part of the Acres Component not
approved by Acres; and
(iv) use of the Acres Component contrary to law or other than for the
purpose of legal gaming; and
"YEAR 2000 COMPLIANT" means that neither the performance nor the
functionality of the Acres Component will be affected by dates prior to,
during or after the year 2000 and in particular:
(a) no value for current dates will cause any interruption in
operation;
(b) date-based functionality will behave consistently for dates prior
to, during and after the year 2000;
(c) in all interfaces and data storage, the century in any date will
be specified either explicitly or by unambiguous algorithms or
inferencing rules;
(d) the year 2000 will be recognised as a leap year in terms of
handling the 29th of February and day 366; and
(e) the Acres Component will satisfy VCGA year 2000 testing
requirements;
1.2 GENERAL
In this agreement, unless the context otherwise requires:
(a) a reference to any legislation or legislation provision includes
any statutory modification or re-enactment of or legislative
provision substituted for, any subordinate legislation issued
under, that legislation or legislative provision;
(b) a reference to a recital, clause, schedule, annexure or exhibit is
to a recital, clause, schedule, annexure or exhibit of or to this
agreement;
(c) a recital, schedule, annexure or a description of the parties
forms part of this agreement;
(d) a reference to any agreement or document is to that agreement or
document (and, where applicable, any of its provisions) as
amended, novated, supplemented or replaced from time to time;
(e) a reference to any party to this agreement or any other document
or arrangement includes that party's executors, administrators,
substitutes, successors and permitted assigns;
(f) where an expression is defined, another part of speech or
grammatical form of that expression has a corresponding meaning;
(g) the singular includes the plural and vice versa;
(h) a reference to an individual or person includes a corporation,
partnership, joint venture, association, authority, trust, state
or government or vice versa;
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<PAGE> 7
(i) a reference to an act or omission by a party includes a reference
to an act or omission by that party's employees, servants and
agents; and
(j) a reference to "dollars" and "$" is to Australian currency.
1.3 HEADINGS
In this agreement, headings are for convenience of reference only and do
not affect interpretation.
2. ACRES'S OBLIGATIONS
2.1 In consideration of Crown complying with its obligations set out in
clause 3 it is a fundamental term of this agreement that Acres shall:
(a) develop, deliver and commission at the Southbank Complex the Acres
Component, (free from encumbrances) which must comply with the
Functional Specification;
(b) assist and support installation by Crown of the Software;
(c) use its best efforts to comply with the Time Line;
(d) grant a licence (or secure the grant of a licence or sub-licence)
to Crown of the Intellectual Property Rights in the Acres
Component in accordance with clause 4;
(e) promptly provide all upgraded versions of the Software and
Associated Documentation in accordance with clause 8;
(f) train Crown personnel in accordance with clause 9;
(g) write and produce the necessary copies of the Associated
Documentation;
(h) while at the Southbank Complex performing its obligations under
this agreement:
(i) comply with all reasonable directions given by Crown; and
(ii) comply with all approvals, laws and regulations necessary
to perform its obligations under this agreement;
(i) participate in VCGA testing and assist Crown with obtaining VCGA
approval of the Acres Component at the Southbank Complex,
including, without limitation, supplying to Crown the items
specified in paragraph 7.2(d) of the Functional Specification; and
(j) fully cooperate with VCGA testers so as to ensure the timely
approval of the Acres Component by the VCGA.
3. CROWN'S OBLIGATIONS
In consideration of Acres complying with its obligations set out in
clause 2, Crown agrees to:
(a) pay to Acres the Price in accordance with clause 10;
(b) prepare the Southbank Complex, at its expense, in order to allow
Acres to perform its obligations under this agreement and without
limitation to this clause, further agrees to ensure that there
will be
4
<PAGE> 8
for the purpose of installation an adequate supply of electricity,
adequate electrical items and fittings and appropriate
environmental conditions for the Acres Component;
(c) allow reasonable access to Acres's employees or contractors to the
Southbank Complex or such other premises owned or occupied by
Crown, to permit Acres to perform its obligations under this
agreement;
(d) only use the Acres Component at the Southbank Complex and not
sub-license to any third party the whole or any part of the Acres
Component;
(e) use its best efforts to comply with the Time Line;
(f) procure the cooperation of any third parties, including gaming
machine vendors and the VCGA, required to implement the upgrade to
the System;
(g) pay for and manage the obtaining of VCGA approval for the upgrade
to the System; and
(h) at Crown's expense, return to Acres the items listed in Schedule
5.
4. LICENCE AND ESCROW ARRANGEMENT
4.1 Crown acknowledges that the Software and Associated Documentation
supplied by Acres to Crown are the property of Acres, and Crown agrees to
execute the End User Software License Agreement upon giving Acceptance
Notification to Acres.
4.2 In the case of third party software that is supplied by Acres for the
operation of the Software, Acres shall procure for the benefit of Crown
the right to implement and use such third party software in connection
with the Software.
4.3 Immediately after receiving the Acceptance Notification pursuant to
clause 6.3, Acres shall provide Crown with a complete copy of the
Software and a further copy of the Associated Documentation.
4.4 Acres undertakes that after receipt by Acres of the Acceptance
Notification, when and if requested to do so by Crown, it will deposit
the source code of all Software with a third party ("the Escrow
Custodian"). The deposit of the source code with the Escrow Custodian
shall be at Crown's expense and must be governed by an agreement,
acceptable to Crown, to which Acres, Crown and the Escrow Custodian are
parties, under which the source code will be released to Crown if Acres
becomes or is at serious and substantial risk of becoming subject to any
form of insolvency, administration or receivership or anything analogous
or Acres ceases or threatens to cease trading.
5. DELIVERY, INSTALLATION AND COMMISSIONING
5.1 Acres shall deliver to Crown the Hardware at an address in Melbourne
nominated by Crown and shall ensure that the Hardware is ready for use by
Crown and is configured and able to be operated in accordance with the
Functional Specification on or before the dates specified in the Time
Line unless otherwise agreed between the parties.
5.2 Acres shall deliver to Crown the Software at an address in Melbourne
nominated by Crown and shall ensure that the Software is ready for use by
Crown and is configured and able to be operated in accordance with the
Functional Specification on or before the dates specified in the Time
Line unless otherwise agreed between the parties. Acres shall assist and
support Crown in the installation of the Software.
5.3 Acres shall immediately notify Crown once it has complied with its
obligations under clauses 5.1 and 5.2.
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<PAGE> 9
5.4 Subject to clause 10 and clause 19, title in the Hardware passes to Crown
upon full payment of the Price in accordance with the provisions of this
agreement.
5.5 Risk of loss or damage to any part of the Acres Component passes to Crown
on the date of its installation at the Southbank Complex.
6. ACCEPTANCE
6.1 After completion of installation and commissioning of the Acres Component
at the Southbank Complex, Crown or its nominee will carry out such tests
and assessments of the Acres Component as it considers necessary to
ensure that the Acres Component conforms to the Functional Specification.
Acres may appoint a representative to be present at that meeting.
6.2 The parties acknowledge that the VCGA will conduct compliance and
approvals testing to ensure the Acres Component meets the requirements of
the VCGA Technical Requirements Document. Crown's testing and assessment
referred to in clause 6.1 will take into account the results and
recommendations of the VCGA testing.
6.3 The testing of the Acres Component under clause 6.1 will be based on a
reasonable judgement of "pass" or "fail" and Crown will:
(a) notify Acres when a successful acceptance test under clause 6.1
has been carried out in respect of the installation and
commissioning ("Acceptance Notification"); or
(b) advise Acres in writing if the Acres Component or the relevant
part of the Acres Component fails to satisfy the relevant
acceptance tests and will specify the manner in which the Acres
Component is not acceptable.
6.4 If the Acres Component fails to perform in accordance with the Functional
Specification or fails to satisfy any of the relevant acceptance tests
referred to in clause 6.1, Acres will (at its own expense) take steps to
correct the Acres Component and the relevant acceptance test will be
repeated at reasonable intervals until the Acres Component performs in
accordance with the Functional Specification.
6.5 Crown reserves the right to withhold payment under clause 10.1(b) if the
Acres Component does not satisfy the acceptance tests.
6.6 Acres undertakes to promptly rectify any conditions imposed by the VCGA
or Crown.
6.7 Notwithstanding any other provision of this agreement, if either party
considers it necessary to make minor variations to the Functional
Specification, that party shall first notify the other party of its
requirements and the other party shall consider the request for
variation, acceptance of which shall not be unreasonably withheld.
7. COOPERATION
In carrying out its obligations under this agreement, Acres shall:
(a) comply with the reasonable directions of Crown; and
(b) cooperate with all third parties.
8. UPGRADES OF SOFTWARE AND ASSOCIATED DOCUMENTATION
6
<PAGE> 10
8.1 Acres will advise Crown of all upgraded versions of the Software and, at
Crown's request and expense, upon execution of an applicable software
licence agreement and payment of a licensing fee as may be agreed between
the parties, Acres will provide to Crown those upgraded versions on
diskette, magnetic tape and/or other appropriate electronic medium. The
upgraded version will be accompanied by instructions for the installation
of the upgrade. Associated Documentation will be provided for upgraded
versions of the Software.
8.2 Acres agrees to provide Crown with six copies of each of the Associated
Documentation and any amendments, revisions, supplementary user manuals
or other relevant Associated Documentation as Acres may produce or
receive from time to time. Two copies will also be provided to the VCGA.
8.3 Acres warrants that the Associated Documentation will contain sufficient
information for the proper operation of the Acres Component.
9. TRAINING
Acres will provide to three personnel nominated by Crown at mutually
acceptable times during the commissioning and acceptance testing of the
Acres Component at the Southbank Complex training in relation to the
operation and maintenance of the Acres Component as Crown considers
appropriate to enable the personnel to operate and maintain the Acres
Component confidently and without assistance.
10. PAYMENT
10.1 Subject to this clause 10, Crown agrees to pay the Price to Acres in
accordance with the following instalments:
(a) 60% of the Price is to be paid to Acres on signing of this
agreement; and
(b) the final 40% of the Price being the balance of all amounts
payable under this agreement will be paid upon Acceptance
Notification being given by Crown to Acres.
10.2 The Price is CIF to Melbourne locations (as nominated by Crown) and is
inclusive of all taxes and duties (including sales tax and/or a goods and
services tax) levied or based on this agreement or the provision of the
goods and/or services by Acres to Crown.
10.3 Crown's obligation to pay any amount under this agreement shall remain at
all times subject to Acres not being in breach of any material term of
this agreement and payment may be withheld by Crown until such breach is
rectified by Acres.
10.4 If Acres breaches its obligation to deliver the Hardware and Software it
is required to deliver by 1 November 1999 under the Time Line, Acres will
have until 30 November 1999 to remedy such breach without penalty, but if
Acres fails to remedy such breach by 30 November 1999, the outstanding
balance of the Price payable by Crown will be reduced by an amount equal
to 1 (one) per cent of the Price for each 15 days that such breach
remains unremedied past 30 November 1999.
10.5 If Crown does not give Acceptance Notification to Acres by 29 February
2000 by reason of a failure by Acres to promptly comply with clause 6.4
or clause 6.6, the outstanding balance of the Price payable by Crown will
be reduced by an amount equal to 1 (one) per cent of the Price for each
15 days that such failure remains unremedied past 29 February 2000.
11. PRICE
11.1 The Price payable for the Acres Component and all of the rights granted
to Crown by Acres under this Agreement are set out in the Price Schedule.
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<PAGE> 11
11.2 Notwithstanding anything else in this agreement, the Price shall be the
total amount payable for development, delivery, installation and
commissioning of the Acres Component and all services to be performed by
Acres under this agreement except for:
(a) maintenance services (if any) which are to be negotiated by the
parties from time to time; and
(b) upgrades of Software and Associated Documentation provided
pursuant to clause 8.
12. WARRANTY SUPPORT
12.1 Acres will provide Crown with Warranty Support for the duration of the
Warranty Period at no charge to Crown.
12.2 After expiry of the Warranty Period, Acres will offer to Crown
maintenance services including telephone, facsimile or remote modem
control support in response to any operational difficulties with the
Acres Component (including investigation and correction of suspected
errors in the Software) available on a 24 hour basis on terms and
conditions to be agreed between the parties.
13. HARDWARE ACCEPTANCE
Acres shall deliver to Crown samples of the Hardware as specified in the
Time Line. Crown shall inspect these samples to assess compliance with
the Functional Specification and Crown's instructions as to physical
design and appearance and shall either accept or reject the samples. If
the samples are accepted by Crown, Acres shall deliver the entire
Hardware to Crown in accordance with this agreement. If the samples are
rejected, Acres shall rectify any defect identified by Crown and resubmit
the samples to Crown for consideration in accordance with this clause.
14. INTELLECTUAL PROPERTY WARRANTIES AND INDEMNITY
14.1 Acres warrants that each of the Software and the Associated Documentation
used within the scope of the End User Software License Agreement, do not
infringe the Intellectual Property Rights of any person.
14.2 Acres warrants that the use of the Hardware does not infringe the
Intellectual Property Rights of any person.
14.3 Acres warrants that all Intellectual Property Rights in and to the
Software and Associated Documentation, including without limitation the
copyright which Acres has or purports to have are owned by Acres and
Acres has the right to grant the rights granted to Crown in this
agreement and in the End User Software License Agreement;
14.4 Acres indemnifies Crown (including its officers, servants, agents,
assignees and contractors) against all claims, liability, loss, costs and
expenses whether direct or indirect which may be incurred by any of them
arising out of or in connection with any claim, action or proceeding by a
person alleging that the exercise of the rights granted under this
agreement by Crown infringes the Intellectual Property Rights of that
person ("Claim").
14.5 Crown shall notify Acres as soon as practicable of any Claim or suspected
Claim arising from Crown's use of the Software or any part of it.
14.6 On request from Crown, Acres shall, at its own cost, conduct the defence
of a Claim. Acres must observe Crown's reasonable directions relating in
any way to that defence or to negotiations for settlement of the Claim.
14.7 Crown shall, if requested by Acres, at Acres's cost, provide Acres with
reasonable assistance in conducting the defence of such a Claim
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<PAGE> 12
14.8 Without limiting the generality of clause 14.6, as part of the settlement
of any Claim or if a Claim is successful or if Acres agrees (such
agreement not to be unreasonably withheld) that there is an infringement
of a person's Intellectual Property Rights or Acres believes that the
Software is likely to become the subject of a claim of infringement,
Acres shall, at its option and cost, either:
(a) modify or replace the Software, or any part thereof, or Associated
Documentation so as to render the grant of rights to Crown under
the terms of this agreement non-infringing; or
(b) procure for Crown the rights to continue enjoying the benefit of
this agreement.
14.9 If the solutions in clause 14.8(a) or (b) cannot promptly be achieved,
Acres must refund to Crown the Price.
15. CONFIDENTIALITY
15.1 All Confidential Information exchanged between the parties under this
agreement or during the negotiations preceding this agreement is
confidential to them and may not be disclosed to any person except:
(a) to employees, legal advisers, auditors and other consultants of
the party or its related bodies corporate requiring the
Confidential Information for the purposes of this agreement; or
(b) with the consent of the party who supplied the Confidential
Information; or
(c) if the Confidential Information is lawfully in the possession of
the recipient of the Confidential Information through sources
other than the party who supplied the Confidential Information; or
(d) if required by law; or
(e) if strictly and necessarily required in connection with legal
proceedings relating to this agreement; or
(f) the VCGA or persons nominated by the VCGA; or
(g) if the Confidential Information is generally and publicly
available other than as a result of breach of confidence by the
person receiving the Confidential Information.
15.2 A party disclosing Confidential Information under clauses 15.1(a), (b) or
(e) must use all reasonable endeavours to ensure that persons receiving
Confidential Information from it do not disclose the Confidential
Information except in the circumstances permitted in clause 14.9.
15.3 A party who has received Confidential Information from the other party
under this agreement must, on the request of the other party, immediately
deliver to the other party all documents or other materials containing or
referring to that Confidential Information which is in its possession,
power or control or in the possession, power or control of persons who
have received Confidential Information from it under clauses 15.1(a), (b)
or (e).
15.4 For the purposes of this agreement, each party (the "Receiving party")
must do all things necessary to ensure that the remaining party may
receive and handle any Confidential Information received by the Receiving
party from any third person in the course of conducting any activities
relevant to this agreement on the same terms and conditions as to
confidentiality which apply to the Receiving party.
15.5 The obligations of the Parties in this clause 14.9 survive termination of
this Agreement.
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<PAGE> 13
16. WARRANTIES
16.1 Acres warrants that from execution of this agreement until the end of the
Warranty Period, the Software and the Hardware will be free from defects
and in good working order. In the event of a defect in the Software or
the Hardware, Acres will promptly restore the Software or the Hardware to
good working condition by adjustment, repair or replacement, at Acres'
option. Acres shall pay any shipping expenses necessary to undertake such
adjustment, repair or replacement and return the Hardware or Hardware to
Crown. In addition to any other warranty, express or implied in this
agreement, Acres warrants that from the execution of this agreement until
the end of the Warranty Period:
(a) Acres has or will immediately procure the requisite technology,
skill/personnel and ability sufficient to enable it to perform its
obligations under this agreement;
(b) the Hardware will at all times and for all purposes relevant to
this agreement conform with the samples agreed to by Crown as
specified in the Time Line and comply with the Functional
Specification and Crown's instructions as to physical design and
appearance.
(c) the Hardware is suitable for normal use as reasonably contemplated
by Crown;
(d) the Acres Component and all items purchased under this agreement
shall be free from material defects, shall be properly installed
and shall perform in accordance with the Functional Specification;
(e) the Associated Documentation contains sufficient information to
enable Crown to use and maintain the Software;
(f) any replacement software (excluding upgrades) provided in
accordance with the terms of this agreement shall satisfy the
warranties contained in this agreement;
(g) the Acres Component will be of merchantable quality and will be
fit for purpose and shall otherwise be delivered and installed
without any material defects in material and workmanship;
(h) the Acres Component will be Year 2000 Compliant;
(i) the Acres Component and all items purchased under this agreement
will comply, in all respects, with the Functional Specification;
16.2 Any unauthorised modification, alteration or revision of all or a portion
of the Software or Hardware shall cause the warranties described in this
clause to be null and void.
16.3 Except as specifically provided in this agreement, there are no other
warranties, express or implied. Acres acknowledges that the warranties in
this clause 16 do not affect the operation of the warranties given by
Acres in clauses 14 and 17 and those warranties shall continue to apply
after the expiration of the Warranty Period.
17. REPRESENTATIONS AND WARRANTIES
Each party warrants and represents to the other party, as an inducement
to the other party to enter into this agreement that at the date of this
agreement:
(a) its execution and delivery of this agreement has been properly
authorised by all necessary corporate action;
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(b) this agreement constitutes a legal, valid and binding obligation
on it and, subject to discretions exercisable by the courts in
relation to the granting of equitable remedies, is enforceable in
accordance with its terms by appropriate legal remedy;
(c) this agreement does not conflict with or result in the breach of
or default under any provision of its memorandum or articles of
association or any material term or provision of any agreement or
deed or any writ, order or injunction, judgement, law, rule or
regulation to which it is a party or is subject, or by which it is
bound;
(d) all information provided by the party in writing is true and
correct; and
(e) to Acres's knowledge, there are no actions, claims, proceedings or
investigations pending or threatened against it or by, against or
before any person which may have a material effect on the subject
matter of this agreement.
18. LIABILITY OF ACRES IS LIMITED
18.1 Subject to any provision of this agreement which provides for an express
remedy or indemnity for breach of this agreement, Acres is not liable to
Crown for any loss or damage (including consequential loss and damage)
suffered or incurred or arising directly or indirectly as a result of
Acres's performance of this agreement or its supply of the Acres
Component and services provided for in this agreement.
18.2 Except for warranties and terms implied by law, only those warranties and
terms which are expressly contained in this agreement apply. If any
further warranty or term is, by statute implied into this agreement
("Statutory Term") and that statute avoids or prohibits provisions in a
contract excluding or modifying the application or exercise of or
liability under that Statutory Term, that Statutory Term is deemed to be
included in this agreement, and the liability of Acres for any breach of
a Statutory Term is limited, at Acres's option, to any one or more of the
following:
(a) If the breach relates to goods, promptly:
(i) replacing the goods or supplying equivalent goods;
(ii) repairing the goods;
(iii) paying the cost of replacing or repairing the goods or of
acquiring equivalent goods; or
(iv) paying the cost of having the goods repaired; and
(b) If the breach relates to services, promptly:
(i) supplying the services again; or
(ii) paying the cost of having the services supplied again.
19. TERMINATION
19.1 Either party may terminate this Agreement forthwith upon the happening of
any of the following events:
(a) the other party commits a material breach of this agreement and
fails to remedy such breach within thirty (30) days after notice
has been given to the party in breach;
11
<PAGE> 15
(b) the other party commits an act of insolvency or a petition is
presented for winding-up of the other or a resolution is passed
for the winding-up of the other otherwise than for the purpose of
amalgamation or reconstruction;
(c) the other party enters a compromise or arrangement with creditors
or a receiver or official manager or administrator is appointed;
or
19.2 In the event that this agreement is terminated under clause 19.1 then:
(a) each party shall do all such things and execute all such documents
as its attorneys may reasonably request in order to record or give
effect to such termination; and
(b) each party shall upon or within a reasonable time after
termination release or return to the other party all documents and
other things in tangible form which contain any Confidential
Information obtained from the other party pursuant to this
Agreement or if any Confidential Information is embodied
invaluable property belonging to the party receiving the
Confidential Information, the receiving party shall certify that
it has observed its obligations by erasure or other appropriate
means as authorised by the party to whom such Confidential
Information belongs.
19.3 In the event that this agreement is terminated by Crown because of:
(a) a material breach by Acres which is unremedied in accordance with
clause 19.1(a), Acres shall refund to Crown the Price or any part
of the Price paid by Crown;
(b) an insolvency event of Acres identified in clause 19.1(b) or
19.1(c) which occurs prior to Crown giving Acceptance
Notification, Acres shall deliver the Software at the stage of
completion at the time of termination (including the source code
to the Software) to Crown so as to enable Crown to complete the
upgrade of the System without any further payment by Crown. Title
to any Hardware delivered to Crown by Acres shall pass to Crown.
19.4 In the event that this agreement is terminated by Acres because of a
material breach by Crown which is unremedied in accordance with clause
19.1(a), and Crown has paid the Price or any part of the Price, Crown
shall be entitled to:
(a) retain, without further payment, all Hardware supplied by Acres to
Crown under this agreement (and title to such Hardware shall pass
to Crown); and
(b) a refund of the difference between the Price or any part of the
Price paid by Crown to Acres and the reasonable cost incurred by
Acres as at the date of termination in respect of:
(i) the Hardware; and
(ii) development of the Acres Component.
20. CONTROLLED CONTRACT PROVISIONS
20.1 If this agreement falls within the definition of a controlled contract
under section 29(1) of the Casino Control Act 1991 (Vic) (the "Act"),
this clause is included in the agreement.
20.2 This agreement is of no force or effect unless or until either:
(a) the Casino Control Authority ("the Authority") has approved the
entry into this Agreement; or
12
<PAGE> 16
(b) the period during which the Authority is empowered to give written
notice of its objection to the proposed entry into this agreement
has expired without notice having been given to Crown by the
Authority, in accordance with section 30 of the Act.
20.3 This agreement may be terminated by the Authority pursuant to its powers
under section 32 of the Act or by any party upon receipt of a written
notice from the Authority lawfully requiring the termination of this
agreement, in accordance with the terms of that notice.
20.4 Acres must, if requested by Crown, co-operate with Crown and do all
things which are reasonably required by Crown to persuade the Authority,
in accordance with section 32 of the Act, as to why this agreement should
not be terminated.
20.5 The parties acknowledge that, in accordance with section 33 of the Act:
(a) termination under clause 20.3 does not affect a right acquired, or
a liability incurred, before that termination; and
(b) no liability for breach of contract is incurred by a party by
reason only of that termination.
20.6 This agreement may only be varied, amended or supplemented by written
document which includes a provision to the effect of clause 20.2 and is
signed by the parties.
20.7 If the Act is amended so that there are amended or additional
requirements which must be satisfied prior to the entry into or the
giving effect to this agreement, this agreement is of no force or effect
until those requirements are satisfied or waived by the Authority. The
provisions of clause 20.2 only have force or effect while they reflect
the requirements of section 30 of the Act.
21. FORCE MAJEURE EVENTS
21.1 DEFINITION
"FORCE MAJEURE EVENT," means any act, occurrence or omission, as a result
of which the party relying on it is prevented from or delayed in
performing any of its obligations under this agreement, and which is
beyond the control of that party, including (without limitation) civil
disturbance or commotion, act of God, war, blockade, riot, revolution,
earthquake, flood, storm, tempest, other natural calamity, prolonged
atmospheric interference and legal or government enactment, order,
requirement or regulation.
21.2 A party that becomes aware of any matter likely to constitute a Force
Majeure Event affecting the obligations of either party must immediately
give notice of that fact, and of all relevant particulars, to the other
party.
21.3 Immediately a Force Majeure Event occurs a party the performance of whose
obligations is affected by that Force Majeure Event (the "Affected
Party") must give to the other party notice containing full particulars
of the Force Majeure Event including its nature and likely duration, the
obligations affected by it and the nature and extent of its effect on
those obligations ("Suspension Notice").
21.4 The obligations of the Affected Party are suspended, to the extent that
they are affected by the Force Majeure Event, from the date the Affected
Party gives a Suspension Notice in respect of that Force Majeure Event
until the cessation of the Force Majeure Event.
21.5 The Affected Party must use its best endeavours to remove the effect of
each Force Majeure Event affecting its performance of this agreement
(except in the case of industrial action where the Affected Party must
use reasonable endeavours to resolve it).
13
<PAGE> 17
21.6 During the period of suspension of any obligation of the Affected Party
under clause 21.4 the other party may (but need not) make alternative
arrangements for the performance, whether by another person or otherwise,
of any obligation so suspended without incurring any liability to the
Affected Party.
21.7 An Affected Party must give immediate notice to the other party of the
cessation of each Force Majeure Event the subject of a Suspension Notice
and must immediately after cessation of that Force Majeure Event resume
performance of any obligation suspended as a result of it.
21.8 If a Force Majeure Event continues for a period of one month after a
Suspension Notice is given in respect of that Force Majeure Event, this
Agreement may be terminated by either party on not less than five
business days' notice given to the other without any liability for breach
of contract in respect of that termination.
22. DISPUTES
22.1 Any dispute arising in connection with this agreement which cannot be
settled by negotiation between the parties or their representatives shall
be submitted to arbitration in accordance with the Rules for the Conduct
of Commercial Arbitrations for the time being of the Institute of
Arbitrators and Mediators Australia. During such arbitration, both
Parties may be legally represented.
22.2 Prior to referring a matter to arbitration pursuant to subclause 1, the
Parties shall:
(a) formally refer the dispute to their respective contract managers
for consideration;
(b) in good faith explore the prospect of mediation.
22.3 Nothing in this clause shall prevent a Party from seeking urgent
equitable relief before an appropriate court.
23. NOTICES
23.1 A notice under this agreement must be signed by or on behalf of the
person giving it, it must be addressed to the person to whom it is to be
given and be:
(a) delivered at that person's address; or
(b) sent by pre-paid mail to that person's address; or
(c) transmitted by facsimile to that person's address.
23.2 A notice given to a party in accordance with this clause is treated as
having been given and received:
(a) if delivered to a party's address, on the day of delivery if
delivered before 12 noon on that business day, otherwise on the
next business day;
(b) if sent by pre-paid mail, on the third business day after posting;
(c) if transmitted by facsimile to a party's address and a correct and
complete transmission report is received by the transmitting
party, on the day of transmission if the transmission is completed
before 12 noon on that business day, otherwise on the next
business day.
23.3 For the purposes of this clause the address of a party is the address set
out adjacent to the parties name on page 1 of this agreement or as a
party may otherwise notify the other under this clause.
14
<PAGE> 18
24. MUTUAL CO-OPERATION
Each party agrees to provide the other party with the necessary
assistance and cooperation in order to facilitate the other party's
performance of its obligations under this agreement.
25. GENERAL
25.1 NO ASSIGNMENT
No party to this agreement shall assign or purport to assign its rights
or obligations under this agreement without the prior consent of the
other party.
25.2 FURTHER ASSURANCES
Each party agrees to do all such things and execute all such deeds,
instruments, transfers or other documents as may be necessary or
desirable to give full effect to the provisions of this agreement and the
transactions contemplated by it.
25.3 WAIVER
The non-exercise of or delay in exercising any power or right of a party
does not operate as a waiver of that power or right nor does any single
exercise of the power or right preclude any other or further exercise of
it or the exercise of any other power or right. A power or right may only
be waived in writing, signed by the party bound by the waiver.
25.4 AMENDMENT
This agreement may only amended or supplemented in writing, signed by the
parties.
25.5 SEVERABILITY
Any provision in this agreement which is invalid or unenforceable in any
jurisdiction is to be read down for the purposes of that jurisdiction, if
possible, so as to be valid and enforceable, and is otherwise capable of
being severed to the extent of the invalidity or unenforceability,
without affecting the remaining provisions of this agreement or affecting
the validity or enforceability of that provision in any jurisdiction.
25.6 ENTIRE AGREEMENT
This agreement is the entire agreement of the parties on the subject
matter. The only enforceable obligations and liabilities of the parties
in relation to the subject matter are those that arise out of the
provisions contained in this agreement. All representations,
communications and prior agreements in relation to the subject matter are
merged in and superseded by this agreement.
25.7 EXCLUSION OF AGENCY PARTNERSHIP AND JOINT VENTURE
Nothing is this agreement is to be treated as creating a partnership or
joint venture between the parties under the laws of any applicable
jurisdiction and no party may act or has any authority to act as agent of
or in any way by to commit the other party to any obligations.
25.8 PERFORMANCE OF FUNCTIONS
Each party shall carry out its responsibility under this agreement:
(a) in a timely and expeditious manner to the reasonable satisfaction
of the other;
15
<PAGE> 19
(b) in a good, commercially prudent and reasonable manner; and
(c) shall conduct itself in a manner designed to minimise any
disruption to the other party's activities (or third parties'
activities) being conducted at the Southbank Complex.
25.9 GOVERNING LAW
This agreement is governed by the law in force in the State of Victoria,
Australia. The parties submit to the exclusive jurisdiction of the courts
of Victoria and any courts which may hear appeals from those courts in
respect of any proceedings in connection with this agreement.
25.10 EXPENSES
Each party shall bear and be responsible for its own legal and accounting
costs and expenses in connection with the preparation, completion and
carrying into effect of this agreement, unless the parties otherwise
agree.
EXECUTED as an agreement
SIGNED, SEALED and DELIVERED for )
CROWN LIMITED ACN 006 973 262 ) -----------------------------------
under power of attorney ) Signature of attorney
in the presence of: )
PETER ALAN DAVID RONEC
- ----------------------------------- -----------------------------------
Signature of witness Name of attorney
26 April 1995
- ----------------------------------- -----------------------------------
Name of witness Date of power of attorney
EXECUTED by ACRES GAMING INC:
- ----------------------------------- -----------------------------------
Signature of director Signature of director/secretary
- ----------------------------------- -----------------------------------
Name of director Name of director/secretary
16
<PAGE> 20
SCHEDULE 1
FUNCTIONAL SPECIFICATION
Confidential portion omitted and filed separately with the SEC
17
<PAGE> 21
SCHEDULE 2
PRICE SCHEDULE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
COMPONENT UNIT PRICE QTY SUB TOTAL
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Hardware
- -------------------------------------------------------------------------------
BE2 UPGRADE KITS INCLUDING: * 2600 *
Large VFD, inclusive of inclusive of
all taxes, all taxes,
Illuminated Card Reader, duties and duties and
shipping shipping
Bonus Button,
Power Supply,
12 button backlit keypad,
Player tracking brackets including
assembly and testing of VFD, Card Reader,
Bonus Button and Keypad
- -------------------------------------------------------------------------------
Software
- -------------------------------------------------------------------------------
ACRES COMPONENT AS PER THE FUNCTIONAL * 1 *
SPECIFICATION INCLUDING:
Machine Credits Transfer
Card Balance Adjustment
Cashless Transaction Server
Key Distribution Server
Cashless Transaction Change Booth
Terminal
Transaction Replication Database
BE2 incorporating ASP 1000 V2.04
plus current version of ASP 1000
Automated Xtra Credits(TM)
Transaction Balancing Software
Concentrator
Translator
Bonus Server
Configuration WorkStation
Bank Controller
- -------------------------------------------------------------------------------
Direct Costs
- -------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 22
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
INSTALLATION, COMMISSIONING SUPPORT AND * 1 *
DOCUMENTATION
- -------------------------------------------------------------------------------
TOTAL $A8,250,000
- -------------------------------------------------------------------------------
</TABLE>
THE PRICE IS INCLUSIVE OF ALL TRAVEL, FOOD AND LODGING COSTS FOR THE PROVISION
OF SUCH ON-SITE PERSONNEL OF ACRES AS ARE REASONABLY REQUESTED BY CROWN TO BE
PRESENT AT THE SOUTHBANK COMPLEX UNTIL CROWN GIVES ACCEPTANCE NOTIFICATION.
19
*Confidential portion omitted and filed separately with the SEC
<PAGE> 23
SCHEDULE 3
TIME LINE
* CROWN and Acres execute System Upgrade Agreement and Crown
pays to Acres first instalment of the Price.
* ARISTOCRAT delivers ASP specifications and support kits to
designated EGM vendors
* ACRES delivers samples of Player Tracking Brackets (as
referred to in section 8.2 of the Functional Specification)
for Aristocrat Mk V, Aristocrat MVP, IGT GameKing and
Olympic OA3 EGMs with installed BE-2 upgrade kits (as
referred to in section 3.3(c) of the Functional
Specification) to Crown for approval
ARISTOCRAT delivers final modified ASP 1000 simulator to
each game vendor for integration testing.
* ACRES obtains ESD and safety approval of large VFD and 12
Button Backlit Keypad
* ACRES installs upgraded system software in Crown testbed.
Crown commences initial integration testing and notifies
VCGA that the System is available for testing.
ACRES installs Software comprising MCI emulator version of
BE-2 code in Crown test bed.
* ACRES BE-2 MCI emulator Software recommended for approval
* ACRES begins installation of Automated PointPlay and
Cashless Wagering Hardware and Software in Crown test bed
CROWN installs Cashless version of Syco in test bed.
All EGM vendors begin installation of upgraded ASP protocol
in Crown test bed.
ACRES obtains VCGA approval of MCI emulator software for
BE-2 upgrade kits
ACRES ships first of three weekly shipments of 800, 900 and
900 BE-2 upgrade kits (2,550 of which are installed within
Player Testing Brackets) tested
* CROWN technicians begin installation of BE-2 upgrade kits on
casino floor
VCGA begins final testing of Acres and EGM Hardware and
Software
* ACRES Cashless Wagering and PointPlay Software recommended
for final approval
CROWN Syco software recommended for final approval
CROWN finishes installation of all BE-2 upgrade kits on
floor.
* CROWN completes installation of System Hardware
Crown commences installation of ASP Version 2.04 EGM
Software.
CROWN seeks approval to commence trial of new System.
20
*Confidential portion omitted and filed separately with the SEC
<PAGE> 24
SCHEDULE 4
END USER SOFTWARE LICENSE AGREEMENT
1.1 END-USER SOFTWARE LICENSE AGREEMENT
This End-User Software License Agreement ("Agreement") is made
effective on the date last signed below between Acres Gaming
Incorporated, a Nevada corporation, having an office at 815 N.W.
Ninth Street, Corvallis, Oregon 97330 ("Licensor") and Crown Limited
ACN 006 973 262, a corporation organized under the laws of Australia
and having an office at 99 Queensbridge Street, Southbank Victoria,
Australia ("Licensee").
1. LICENSE
(a) In accordance with the terms herein, Licensor grants to
Licensee, and Licensee accepts from Licensor, a perpetual
non-exclusive and non-transferable license to use the
Licensor's software and firmware as described in Schedule A to
this agreement (the "Software").
(b) The Software shall be used only on equipment and at
location(s) identified in Schedule B. The Software shall be
used only for Licensee's own business, which includes
operating gaming devices for the benefit of its customers and
clients. Licensee shall not: (1) permit any third party to use
the Software, (2) use the Software for any purpose other than
operating gaming devices, or (3) allow access to the licensed
Software through terminals located outside Licensee's business
premises identified in Schedule B.
2. DESCRIPTION OF OTHER RIGHTS AND LIMITATIONS
(a) Licensee may not reverse engineer, decompile, or disassemble
the Software, except and only to the extent that such activity
is expressly permitted by applicable law notwithstanding this
limitation.
(b) Licensee must maintain all copyright notices on all copies of
the Software.
(c) Licensee may not distribute copies of the Software to third
parties, save for copies which the Licensee must provide to
the Victorian Casino and Gaming Authority for the Licensee to
comply with its obligations under the Casino Control Act 1991
(Vic)..
(d) Licensee may not adapt or modify the Software.
3. NO ROYALTY
The license granted herein is granted by Licensor pursuant to the
System Upgrade Agreement between Licensee and Licensor dated _______,
and is granted in consideration of such Agreement. No further license
fee or royalty shall be payable to Licensor by Licensee.
4. SOFTWARE OWNERSHIP
Licensor warrants and represents that it is the owner of the Software
and all portions thereof and that it has the right to modify same and
to grant Licensee a license for its use.
5. TITLE TO SOFTWARE, CONFIDENTIALITY, AND INSPECTION
(a) The Software and all programs developed hereunder and all
copies thereof are proprietary to Licensor and title thereto
remains in Licensor. All applicable rights to patents,
copyrights, trademarks and trade secrets in the Software or
any modifications made at Licensee's request are and shall
21
<PAGE> 25
remain in Licensor. Licensee shall not sell, transfer, publish,
disclose, display or otherwise make available the Software or
copies thereof to others. Licensee agrees to secure and protect
each module, software product, documentation and copies thereof
in a manner consistent with the maintenance of Licensor's
rights therein and to take appropriate action by instruction or
agreement with its employees or consultants who are permitted
access to each program or software product to satisfy its
obligations hereunder. All copies made by the Licensee of the
Software and other programs developed hereunder, including
translations, compilations, partial copies with modifications
and updated works, are the property of Licensor. Violation of
any provision of this paragraph shall be the basis for
immediate termination of this License Agreement.
(b) To assist Licensor in the protection of its proprietary rights,
Licensee shall permit representatives of Licensor to inspect at
all reasonable times any location at which Software is being
used.
6. WARRANTIES AND INDEMNITIES
The Licensor gives the warranties and indemnities in respect of the
Software that are set out in the System Upgrade Agreement.
7. TERMINATION
(a) Licensor shall have the right to terminate this agreement and
license(s) granted herein: (i) in the event that Licensee, its
officers or employees violates any provision of this License
Agreement and such violation is not remedied by the Licensee
within thirty (30) days of written notice by the Licensor, and
(ii) in the event Licensee (A) terminates or suspends its
business; (B) becomes subject to any bankruptcy or insolvency
proceeding under Federal or state statute or (C) becomes
insolvent or becomes subject to direct control by a trustee,
receiver or similar authority.
(b) In the event of termination by reason of the Licensee's failure
to comply with any part of this agreement, or upon any act
which shall give rise to Licensor's right to terminate,
Licensor shall have the right, to terminate the license(s) in
accordance with clause 7(a) and take immediate possession of
the Software and documentation and all copies wherever located.
Within five (5) days after termination of the license(s),
Licensee will return to Licensor the Software in the form
provided by Licensor or as modified by the Licensee, or upon
request by Licensor destroy the Software and all copies, and
certify in writing that they have been destroyed. Termination
under this paragraph shall not relieve Licensee of its
obligations regarding confidentiality of the Software.
(c) Without limiting any of the above provisions, in the event of
termination as a result of the Licensee's failure to comply
with any of its obligations under this License Agreement, the
Licensee shall continue to be obligated for any payments due.
Termination of the license(s) shall be in addition to and not
in lieu of any equitable remedies available to Licensor.
(d) In the event that the Licensor (A) terminates or suspends its
business; (B) becomes subject to any bankruptcy or insolvency
proceeding under Federal or state statute or (C) becomes
insolvent or becomes subject to direct control by a trustee,
receiver or similar authority, the provisions of the source
code deposit agreement referred to in clause 4.4 of the System
Upgrade Agreement shall apply.
8. LICENSED LOCATIONS
Use of the Software by the Licensee at any location other than those
described above in Article 1 shall be the basis for immediate
termination of this License Agreement. Termination of the License
Agreement shall be in addition to, and not in lieu of, any equitable
remedies available to Licensor.
9. LIMITATION OF LIABILITY
22
<PAGE> 26
EXCEPT FOR NON-EXCLUDABLE WARRANTIES AND TERMS REQUIRED BY STATUTE,
ONLY THOSE WARRANTIES AND TERMS WHICH ARE EXPRESSLY CONTAINED IN THIS
AGREEMENT AND THE SYSTEM UPGRADE AGREEMENT APPLY.
10. GENERAL PROVISIONS
(a) Notice. Any notice, request, demand, or other communication
that is required or permitted under this Agreement shall be
deemed properly given if it is deposited in the U.S. mail,
certified, return, receipt requested, postage prepaid, properly
addressed to the respective addresses as set forth above.
(b) Limitation of Action. No action, regardless of form, arising
out of this Agreement may be brought by Licensee more than one
year after the cause of action has arisen.
(c) Attorneys' Fees. If either party brings any legal action or
other proceeding for breach of this Agreement, the prevailing
party shall be entitled to recover its reasonable attorneys'
fees and costs.
(d) Divisibility. If any provision of this Agreement is found to be
prohibited by law and invalid, or for any other reason if any
provision held to be unenforceable, in whole or in part, such
provision shall be ineffective to the extent of the prohibition
or unenforceability without invalidating or having any other
adverse effect upon any other provision of this Agreement.
(e) Entire Agreement. This Agreement shall be read in conjunction
with the System Upgrade Agreement and together with that
agreement, shall constitute the entire agreement between the
parties relating to the subject matter. No extension,
modification or amendment of this Agreement shall be binding
upon a party unless such extension, modification or amendment
is set forth in a written instrument, which is executed and
delivered on behalf of such party.
In Witness Whereof, the parties hereto have duly executed this Agreement,
including the Exhibits attached hereto and incorporated herein by reference, as
of the date last signed below.
ACRES GAMING INCORPORATED CROWN LIMITED
By: By:
-------------------------------- --------------------------------
Title: Title:
----------------------------- -----------------------------
Date: Date:
------------------------------ ------------------------------
23
<PAGE> 27
SCHEDULE A (TO END USER SOFTWARE LICENSE AGREEMENT)
DESCRIPTION OF SOFTWARE
THE SOFTWARE SUPPLIED BY THE LICENSOR UNDER THE SYSTEM UPGRADE AGREEMENT DATED
[INSERT DATE] BETWEEN THE LICENSOR AND THE LICENSEE AS DEFINED IN THAT
AGREEMENT, INCLUDING SOFTWARE FOR THE FOLLOWING ITEMS:
(a) Translator
(b) Concentrator
(c) Bonus server
(d) Configuration work station
(e) Bank controller
(f) Bonus engine 2
(g) Coinless transaction server
(h) Coinless transaction database
(i) Key distribution centre
(j) Cashless transaction enquiry terminal
24
<PAGE> 28
SCHEDULE B (TO END USER SOFTWARE LICENSE AGREEMENT)
LICENSED LOCATION
CROWN ENTERTAINMENT COMPLEX, SOUTHBANK, VICTORIA, AUSTRALIA.
25
<PAGE> 29
SCHEDULE 5
LIST OF EQUIPMENT TO BE RETURNED TO ACRES
2,600 units of:
(k) Machine Communication Interface (MCI);
(l) Magnetic Stripe Card Reader;
(m) Three colour illuminated bezel;
(n) Bonus button; and
(o) Vacuum Florescent Display (VFD).
26
<PAGE> 1
EXHIBIT 10.13
EQUIPMENT SALE AGREEMENT
This Equipment Sale Agreement (the "Agreement"), effective June 30,
1999, is entered into by and between AGI Distribution , Inc., dba Acres Gaming,
having a place of business at 815 N.W. 9th Street, Corvallis, OR 97330 ("Acres")
and Detroit Entertainment, L.L.C. dba MotorCity Casino, having a place of
business at 1922 Cass, Detroit, MI 48226 ("Customer").
BACKGROUND
Customer desires to engage Acres to provide the Game Hardware Kits (as
defined below) for a state of the art networked gaming, bonusing, slot
accounting, and player tracking system (the "System") at the MotorCity Casino,
located temporarily at 2901 Grand River, Detroit, MI 48201 (the "Casino
Location"), and Acres desires to provide Customer with such Game Hardware Kits.
Accordingly, the parties agree as follows:
1. DEFINITIONS
- - "Game Hardware Kits" means the components necessary to integrate Games into
the System, namely, a player tracking card reader, a bonus button, a fluro
flasher, a keypad, a VFD display, a location identifier, harness cabling,
internal game electronics, and a sufficient number of bank controllers for
operation of the System.
- - "Games" means the gaming machines, including, but not limited to, slot
machines and video poker machines, to be used by Customer at the Casino
Location.
2. DELIVERY OF GAME HARDWARE KITS
Not later than September 1, 1999, Acres will deliver 2628 Game Hardware Kits to
Customer and/or such vendors as Customer designates, at such locations as
Customer designates. Items shipped by Acres to or for the benefit of Customer
will be shipped FOB Casino Location or such other location as is designated by
Customer.
3. PRICE AND PAYMENT TERMS
(a) Price. Customer shall pay Acres [Confidential portion omitted and filed
separately with the SEC], for a total price of $3,350,700, plus applicable taxes
(the "Total Price").
(b) Payment Schedule. Not later than September 20, 1999, Customer shall pay
Acres the Total Price.
4. INSTALLATION
Acres shall install or, where applicable, supervise the installation of the Game
Hardware Kits in
<PAGE> 2
good working order, including testing and verifying that they have been
successfully installed. Customer and Acres shall cooperate fully with each other
with respect to such activities.
5. WARRANTY
ACRES WARRANTS THAT FOR A PERIOD OF TWELVE (12) MONTHS FOLLOWING "GO LIVE", THE
GAME HARDWARE KITS PROVIDED HEREUNDER WILL BE FREE FROM DEFECTS AND IN GOOD
WORKING ORDER. IN THE EVENT OF A DEFECT, ACRES WILL EXPEDITIOUSLY RESTORE THE
APPLICABLE GAME HARDWARE KITS TO GOOD WORKING CONDITION BY ADJUSTMENT, REPAIR OR
REPLACEMENT, AT ACRES' OPTION. EXCEPT AS SPECIFICALLY PROVIDED IN THIS
AGREEMENT, THERE ARE NO OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT
LIMITED TO, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
6. SUPPLEMENTAL REMEDIES
In the event that any of the Game Hardware Kits supplied pursuant to this
Agreement do not substantially conform to specifications or representations set
forth in this Agreement, are not suitable for use at the Casino Location, or are
not timely delivered, installed or tested, in addition to other rights and
remedies available to Customer at law or equity, Customer may elect to: (1)
receive a refund of the payment for said Game Hardware Kit(s) provided Customer
returns the applicable Game Hardware Kit(s) to Acres or (2) retain said Game
Hardware Kit(s) and have Acres procure and provide suitable alternative Game
Hardware Kit(s).
7. LIMITATION OF LIABILITY
In no event shall Acres' liability for Customer's damages under this Agreement
exceed the Total Price.
8. TITLE
Title to each Game Hardware Kit shall vest in Customer upon receipt by Customer
or its designated vendor, as applicable, of the applicable Game Hardware Kit.
9. INDEMNITY
(a) Acres at its own expense will defend, indemnify and hold Customer harmless
in any action brought against Customer to the extent that it is based on a claim
that any one or more of the Game Hardware Kits or any component(s) thereof
infringe(s) any patents, copyrights, licenses or other property rights, provided
that Acres is promptly notified in writing of such claim. Acres shall have the
right to control the defense of all such claims, lawsuits and other proceedings.
In no event shall Customer settle any such claim, lawsuit or proceeding without
Acres' prior written approval.
<PAGE> 3
(b) If, as a result of any claim of infringement against any patent, copyright,
license or other property right, Acres or Customer are enjoined from using any
one or more of the Game Hardware Kits or any component(s) thereof, or if Acres
believes that any one or more of the Game Hardware Kits or any component(s)
thereof are likely to become the subject of a claim of infringement, Acres at
its option and expense may procure the right for Customer to continue to use the
applicable Game Hardware Kits or component(s) thereof or replace or modify same
with components of equal quality and function so that they are non-infringing.
The foregoing Subsections (a) and (b) state the entire liability of Acres with
respect to infringement of any license, property rights, copyrights or patents
by the Game Hardware Kits or any component(s) thereof.
(c) Acres will defend, indemnify and hold Customer harmless from and against any
claims, demands, liability(ies) or judgments resulting from a malfunction of any
one or more of the Game Hardware Kits or any component(s) thereof because of
design or manufacturing defects, or otherwise attributable to Acres' acts or
omissions. Customer will defend, indemnify and hold Acres harmless from and
against any claims, demands, liability(ies) or judgments resulting from
Customer's breach of this Agreement, negligence in operation of the Game
Hardware Kits or any component(s) thereof, or otherwise attributable to
Customer's acts or omissions.
10. GENERAL PROVISIONS
(a) Force Majeure. Neither party shall be responsible for any failure to perform
or delay in performing any of its obligations hereunder where and to the extent
that such failure or delay results from a force majeure event, meaning: strike,
boycott, lockout or other labor trouble; storm, fire, earthquake or other Act of
God; riot, civil disturbance, or any act of war or of the public enemy;
shortage, unavailability or disruption in the supply of electrical or other
utility service; or any other cause or contingency beyond the control of the
applicable party, but only during such time as such party is unable due to a
specified reason herein to perform its obligations hereunder. Licensing delays
shall not be considered a force majeure event.
(b) Attorneys' Fees. If either party brings any legal action or other proceeding
for breach of this Agreement, the prevailing party shall be entitled to recover
its reasonable attorneys' fees and costs.
(c) Divisibility. If any provision of this Agreement is found to be prohibited
by law and invalid, or for any other reason if any provision is held to be
unenforceable, in whole or in part, such provision shall be ineffective to the
extent of the prohibition or unenforceability without invalidating or having any
other adverse effect upon any other provision of this Agreement.
(d) Licensing. Acres warrants that it holds all requisite licenses, permits
and/or approvals required for it to perform all of its obligations hereunder and
shall comply with all applicable codes, laws, ordinances, approvals, rules and
regulations. Acres understands and acknowledges that this Agreement, at
Customer's discretion, may be subject to Acres and its principals being found
suitable by Customer's Compliance Committee. Notwithstanding any other provision
in this Agreement to the contrary, Customer may terminate this Agreement without
further
<PAGE> 4
obligation or liability to Acres if, in the judgment of Customer's Compliance
Committee, the relationship with Acres or Acres' principals could negatively
impact Customer's business or the business of Mandalay Resort Group or any of
its subsidiaries or affiliates.
(e) Addendum. For additional terms and conditions, see the Addendum attached
hereto and incorporated herein by this reference. In the event of any
inconsistency between this Agreement and the Addendum, the Addendum shall
control.
(f) Entire Agreement. This Agreement, including the Addendum, constitutes the
entire agreement between the parties relating to its subject matter and
supersedes all prior or contemporaneous negotiations or agreements, whether oral
or written, relating to the subject matter hereof. No extension, modification or
amendment of this Agreement shall be binding upon a party unless such extension,
modification or amendment is set forth in a written instrument, which is
executed and delivered on behalf of such party.
(g) Counterparts/facsimile. This Agreement may be executed in counterparts, each
of which shall be deemed an original and all of which together shall constitute
a single Agreement. Each party may rely upon the facsimile signature of the
other.
The parties hereto have duly executed this Agreement the 16th day of September,
1999.
AGI DISTRIBUTION, INC. DETROIT ENTERTAINMENT, L.L.C.
By: ___________________________ By: ______________________________
Title: ________________________ Title: ___________________________
<PAGE> 5
ADDENDUM
1. This Agreement is subject to review by the Michigan Gaming
Control Board ("Board") for compliance with the Michigan Gaming
Control and Revenue Act, MCL 432.201, et. seq., as amended,
supplemented, or construed, and the rules, regulations and orders
promulgated pursuant thereto, plus other such requirements, if
any, as are imposed by the Board (collectively, the "MGCB
Requirements"). Because the Board currently requires inclusion of
the following language in every contract that Detroit
Entertainment signs, the following language, to the extent
applicable, is made a part of the Agreement (with the term
"contract" referring to the Agreement, the terms "Applicant" and
"Licensee" referring to Detroit Entertainment, and the term
"Contractor" referring to Vendor):
(a) Upon execution of this contract and in accordance with the
Michigan Gaming Control and Revenue Act ("Act") MCL 432.201, et.
seq., and the rules promulgated pursuant thereto ("Rules", as
well as Michigan Gaming Control Board ("Board") orders and
regulations, the Contractor shall cooperate with the Applicant or
Licensee and its designees and provide information on an as
needed basis, directly or, if so directed by the Applicant or
Licensee, through the Applicant or Licensee to representatives of
the Board regarding this contract and its implementation. In
addition, the Contractor shall allow the Board or its
representatives on an as needed basis, to inspect the books and
records of the Contractor regarding this contract.
(b) The Contractor and any and all subcontractors shall adhere to
and comply with the following:
(i) The Act and the Rules, orders and regulations of the
Board issued and to be issued thereunder, as may hereafter
be amended, supplemented or construed. The Contractor
further acknowledges that the Act imposes and will
continue to impose requirements upon the Contractor, and
any and all subcontractors, and the Applicant or Licensee,
and may call for the submission and approval of this
contract by the Board or its designees.
(ii) Any and all requirements imposed upon each of them by
the Act and the Board, including, but not limited to, any
licensing, notification, disclosure, or registration
requirements imposed thereby. The Contractor and all
subcontractors shall assist the Applicant or Licensee in
complying with any requirements imposed on the Applicant
or Licensee by the Act or Board by reason of the project
or work contemplated hereunder.
(iii) All applicable federal, state, county, city, local
or other statues, ordinances, rules and regulations and
other laws including, but not limited to, the aforesaid
statutes and administrative rules and regulations.
(c) The Contractor shall supervise and oversee compliance with
the requirements of the Act by the Contractor and by each of the
Contractor's associates, employees, consultants and all persons,
contractors, subcontractors and any other consultants and
engineers retained by the Contractor in connection with the
Project (as defined below). The Contractor shall prepare such
reports as shall be required by the Board.
(d) The Contractor shall qualify to do business and obtain such
license, identification number, registration and other permits as
may be required for the performance of the services required to
be performed by the Contractor under this contract.
(e) This contract shall be subject to review by the Board for
compliance with the Act and Rules and is subject to termination
if so ordered by said Board. If the Board should disapprove of or
order termination of this contract by reason of finding that the
Contractor or any person associated with the Contractor, or any
of their affiliated companies, is unsuitable or is otherwise
prohibited from doing business with Applicants or Licensees,
neither the Applicant or Licensee, nor any of its members,
partners, shareholders, officers, directors, or employees, shall
be liable in any way to the Contractor by reason of such
disapproval or termination.
<PAGE> 6
(f) If the Board should disapprove of or order termination of
this contract by reason of finding that the Applicant or Licensee
or any person associated with the Applicant or Licensee or any of
their affiliated companies, is unsuitable or is otherwise
prohibited from doing business with Applicants or Licensee, said
parties shall not be liable in any way for any consequences,
losses or damage suffered or incurred by the Contractor by reason
of such disapproval or termination.
(g) Detroit Entertainment is entitled to terminate this contract
if the Board determines that this contract does not comply with
the Act or the MGCB Requirements.
2. Detroit Entertainment is also required by agreement with the City
of Detroit to include in its contracts certain other provisions.
Accordingly, to the extent applicable, Vendor further agrees as
follows:
(a) Vendor agrees to use its best efforts in a manner consistent
with City of Detroit Executive Order 4 to purchase at least 30%
of goods, services and supplies purchased for this Project (as
defined below) from vendors who meet the definition of
"Detroit-Based Businesses", "Detroit Resident Businesses", "Small
Business Concerns", "Minority Owned Businesses" and "Women Owned
Businesses" at the time the contract is awarded. Further, Vendor
agrees to work to achieve higher participation, if possible.
Vendor agrees that it will maintain appropriate records and will
require each of its subcontractors to maintain appropriate
records to permit confirmation of compliance with the provisions
of this paragraph.
(b) Vendor and its subcontractors shall comply with all licensing
requirements established by the City of Detroit, the County of
Wayne and the State of Michigan including, but not limited to,
the licensing requirements established by the Act and the Rules.
In furtherance thereof, Vendor expressly acknowledges that the
ability of Vendor and its subcontractors to obtain licensure in
Michigan is contingent upon such parties' key persons (as those
terms are defined under applicable Michigan law, rules and
regulations) meeting applicable licensing standards and otherwise
complying with all applicable laws, rules, regulations and
restrictions. Vendor shall do all things necessary (including
complying with any licensing, notification, disclosure or
registration requirements) and shall cooperate in all respects to
allow compliance with the applicable laws, rules, regulations and
restrictions.
(c) Vendor agrees to perform its services in a manner which is
consistent with and in full compliance with the terms and
conditions of the March 12, 1998 Development Agreement entered
into by and among the City of Detroit, The Economic Development
Corporation of the City of Detroit and Detroit Entertainment, as
amended from time to time. In furtherance thereof, Vendor agrees
to include in all of its contracts relating to Detroit
Entertainment's business ("Project") a provision requiring its
subcontractors to perform services in a manner which is
consistent with and in full compliance with the terms and
conditions of the March 12, 1998 Development Agreement entered
into by and among the City of Detroit, The Economic Development
Corporation of the City of Detroit and Detroit Entertainment,
L.L.C., as amended from time to time.
<PAGE> 7
(d) In the event that any provision of this Agreement is
determined to be inconsistent with the requirements of the March
12, 1998 Development Agreement entered into by and among the City
of Detroit, The Economic Development Corporation of the City of
Detroit and Detroit Entertainment, as amended from time to time,
the Act, the Rules and/or any other applicable law, rule or
regulation, then the provisions of the Development Agreement
and/or the applicable law, rule or regulation shall prevail and
this Agreement shall be interpreted and enforced accordingly.
(e) Vendor shall include the following in all of its contracts
regarding the Project: In the event that the Board does not
approve this contract, where approval is required, and/or
requests or requires that this contract be terminated, then this
contract shall immediately terminate.
(f) Vendor expressly acknowledges that this Project is subject to
comprehensive statutory, regulatory and contractual requirements.
The failure of Vendor and/or any of Vendor's subcontractors to
comply with said comprehensive statutory, regulatory and
contractual requirements, all of which are hereby expressly
incorporated herein as a part hereof as though fully set forth
herein, may result in a termination of this Agreement and Vendor
acknowledges and agrees to this condition and restriction. All of
Vendor's contracts on this Project shall contain a like contract
provision which is consistent with the provisions of this
paragraph.
(g) If this Agreement constitutes a construction contract, then
the following provisions are included to the extent applicable:
(1) Vendor agrees (a) that the rates, wages and fringe
benefits that Vendor and its subcontractors pay to each
class of employees on this Project shall not be less than
the wage and fringe benefit rates prevailing in the City
of Detroit as established by the most recent survey by the
Michigan Department of Labor for prevailing wages
determined under Act 166, P.A. 1965 (Act 166 P.A. 1965,
MCLA 408.551 et seq., MSA 17.256(a) et seq.) and (b) to
the extent applicable, to comply with the provisions of
the Davis-Bacon Act (40 U.S.C. 276a et seq. (1997). In
furtherance thereof, Vendor agrees to hire subcontractors
(including materials suppliers) who agree (a) to include
in their construction contracts an express term that the
rates, wages and fringe benefits that the subcontractor
and each of its subcontractors pay to each class of
employees on this Project shall not be less than the wage
and fringe benefit rates prevailing in the City of Detroit
as established by the most recent survey by the Michigan
Department of Labor for prevailing wages determined under
Act 166, P.A. 1965 (Act 166 P.A. 1965, MCLA 408.551 et
seq., MSA 17.256(a) et seq.) and, (b) to the extent
applicable, to comply with the provisions of the
Davis-Bacon Act, 40 U.S.C. 276a et seq. (1997).
(2) Vendor agrees to commit to the goal of maximizing, to
the greatest extent possible, the number of Detroit
resident apprentices who advance to journeyman status by
agreeing to, and by requiring Vendor's subcontractor(s) to
agree to utilize to the greatest extent possible unions
that do or will operate apprentice programs on the Project
that are open to all Detroit residents.
(3) Vendor agrees to implement an equal opportunity
employment plan which is a voluntary plan for the
employment, recruitment, training and upgrading of women
and minorities which conforms to all applicable laws and
which is consistent with Executive Order 22 of the City of
Detroit. Vendor agrees to require each of its
subcontractor(s) and their subcontractors to implement an
equal employment plan consistent with the provisions of
this paragraph.
3. Vendor represents and warrants that all goods furnished
hereunder, whether supplied by Vendor or by someone else, will
(1) be new and of first quality, (2) be free from defects in
materials and workmanship, (3) conform to the specifications
supplied by Detroit Entertainment, (4) be free from design and
specification defects, whether or not manufactured to Vendor's
specifications, (5) be fit for the purpose for which intended,
(6) be of merchantable quality and fit
Page 7
<PAGE> 8
and safe for consumer use, (7) be free and clear of all liens and
encumbrances at the time of shipment, (8) be "Y2K Compliant" as
described below. For purposes of this Addendum, a device
(software application, computer hardware, embedded chip, etc.)
that is Year 2000 compliant ("Y2K Compliant") accurately
processes date/time data (including, but not limited to,
calculating, comparing, and sequencing) from, into, and between
the 20th and 21st centuries, and the years 1999 and 2000, and
accurately performs leap year calculations for the year 2000 and
into the 21st century. In addition:
- The device shall not end operation abnormally or provide invalid
or incorrect results as a result of processing date data.
- No acceptable value for current date shall cause interruptions in
normal operations of systems using the device.
- All manipulations of time-related data (dates, duration, days of
week, etc.) shall produce the desired results for all valid date
values within the operational date range specified for the
device.
- Date elements in interfaces and data storage for the device shall
permit specifying century to eliminate date ambiguity.
For any date element represented without a century value, the device
shall unambiguously determine the correct century for all
manipulations involving that element. In addition interface
documentation clearly describes how the correct century value is
determined.
The device shall accurately process date/time data with other Year 2000
compliant devices whenever such data is exchanged in accordance with the
device's documented interface specification.
AGI DISTRIBUTION, INC. DETROIT ENTERTAINMENT, L.L.C.
By: ___________________________ By: ______________________________
Title: ________________________ Title: ___________________________
Page 8
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Name State of Incorporation
---- ----------------------
AGI Distribution, Inc. Nevada
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K into the Company's
previously filed Registration Statements (Form S-8, No. 33-75570 and Forms S-3,
No. 333-2258 and No. 333-21913).
ARTHUR ANDERSEN LLP
Portland, Oregon
September 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated financial statements included in form 10-K and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,949,000
<SECURITIES> 0
<RECEIVABLES> 1,591,000
<ALLOWANCES> (15,000)
<INVENTORY> 4,909,000
<CURRENT-ASSETS> 12,699,000
<PP&E> 6,475,000
<DEPRECIATION> 4,101,000
<TOTAL-ASSETS> 16,097,000
<CURRENT-LIABILITIES> 8,050,000
<BONDS> 0
0
4,948,000
<COMMON> 19,993,000
<OTHER-SE> (16,894,000)
<TOTAL-LIABILITY-AND-EQUITY> 16,097,000
<SALES> 13,972,000
<TOTAL-REVENUES> 13,972,000
<CGS> 8,253,000
<TOTAL-COSTS> 12,967,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (260,000)
<INCOME-PRETAX> (6,988,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,988,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,988,000)
<EPS-BASIC> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
