<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission File Number 0-22498
ACRES GAMING INCORPORATED
(Exact name of registrant as specified in its charter)
NEVADA 88-0206560
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
815 NW NINTH STREET
CORVALLIS, OREGON 97330
(Address of principal executive offices)
541-753-7648
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock, $.01 par value, outstanding on
January 31, 1998 was 8,913,281.
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ACRES GAMING INCORPORATED
Table of Contents
<TABLE>
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Page
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at December 31, 1998 and June 30, 1998 1
Statements of Operations for the Three and Six Months Ended
December 31, 1998 and 1997 2
Statements of Cash Flows for the Six Months Ended
December 31, 1998 and 1997 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II -- OTHER INFORMATION 10
SIGNATURES 12
INDEX TO EXHIBITS 13
</TABLE>
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACRES GAMING INCORPORATED
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998
(UNAUDITED) JUNE 30, 1998
----------------- -------------
(in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,776 $ 9,887
Receivables 3,812 1,929
Inventories 4,601 2,607
Prepaid expenses 224 103
-------- --------
Total current assets 11,413 14,526
-------- --------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 700 540
Equipment 4,908 4,003
Leasehold improvements 955 627
Accumulated depreciation (3,749) (2,919)
-------- --------
Total property and equipment 2,814 2,251
OTHER ASSETS 1,000 417
-------- --------
$ 15,227 $ 17,194
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,196 $ 982
Accrued expenses 466 438
Customer deposits 517 1,015
-------- --------
Total current liabilities 3,179 2,435
-------- --------
REDEEMABLE CONVERTIBLE PREFERRED STOCK 4,948 4,948
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50 million shares authorized, 8.9 and 8.8
million shares issued and outstanding at December 31, 1998 and
June 30, 1998, respectively 89 88
Additional paid-in capital 19,903 19,554
Accumulated deficit (12,892) (9,831)
-------- --------
Total stockholders' equity 7,100 9,811
-------- --------
$ 15,227 $ 17,194
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
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ACRES GAMING INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
(in thousands except per share data)
<S> <C> <C> <C> <C>
NET REVENUES $ 3,059 $ 3,876 $ 6,347 $ 9,765
COST OF REVENUES 2,060 2,452 3,390 5,677
------- ------- ------- -------
GROSS PROFIT 999 1,424 2,957 4,088
------- ------- ------- -------
OPERATING EXPENSES:
Research and development 1,786 1,238 3,204 2,427
Selling, general and administrative 1,423 1,384 2,928 2,725
Non-recurring charge -- 745 -- 745
------- ------- ------- -------
Total operating expenses 3,209 3,367 6,132 5,897
------- ------- ------- -------
LOSS FROM OPERATIONS (2,210) (1,943) (3,175) (1,809)
OTHER INCOME 70 132 189 253
------- ------- ------- -------
NET LOSS $(2,140) $(1,811) $(2,986) $(1,556)
======= ======= ======= =======
NET LOSS PER SHARE - BASIC $ (.24) $ (.21) $ (0.34) $ (0.18)
======= ======= ======= =======
NET LOSS PER SHARE - DILUTED $ (.24) $ (.21) $ (0.34) $ (0.18)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
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ACRES GAMING INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------- -------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,986) $(1,556)
Adjustments to reconcile net loss to net cash from operations:
Depreciation and amortization 901 591
Non-recurring charge -- 745
Changes in assets and liabilities:
Receivables (1,883) 1,100
Inventories (1,994) 744
Prepaid expenses (121) 177
Accounts payable and accrued expenses 1,242 51
Customer deposits (498) (26)
------- -------
Net cash from operating activities (5,339) 1,826
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,419) (1,442)
Capitalized software costs (627) --
Other, net (1) (3)
------- -------
Net cash from investing activities (2,047) (1,445)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 350 184
Preferred stock dividends (75) (37)
------- -------
Net cash from financing activities 275 147
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,111) 528
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,887 9,318
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,776 $ 9,846
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
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ACRES GAMING INCORPORATED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. Unaudited Financial Statements
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted from these unaudited financial statements. These statements
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended June 30, 1998 filed with the Securities and Exchange Commission.
In the opinion of management, the interim financial statements include
all adjustments, consisting only of normal recurring adjustments, necessary in
order to make the financial statements not misleading. The results of operations
for the three- and six-month periods ended December 31, 1998 are not necessarily
indicative of the operating results for the full year or future periods.
Certain prior year amounts have been reclassified to conform to the
current year presentation. These reclassifications had no effect on the results
of operations or stockholders' equity as previously reported.
2. 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 hours
incurred for customization and installation are the basis for determining
percentage-of-completion, giving effect to the most recent estimates of such
total labor hours. The effect of changes to total estimated customization and
installation labor hours 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 $2.1 million
at December 31, 1998. The Company did not have any unbilled receivables at June
30, 1998. Unbilled receivables represent revenues recognized in excess of
billings on contracts accounted for under the percentage-of-completion method.
Unbilled receivables were not billable at the balance sheet date but are
recoverable as billings are made in accordance with the contract terms.
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3. Inventory
Inventories consist of electronic components and other hardware, which
are recorded at the lower of cost (first-in, first-out) or market. Inventories
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
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(in thousands)
<S> <C> <C>
Raw Materials $1,078 $ 957
Work-in-progress 718 124
Finished Goods 2,805 1,526
------ ------
$4,601 $2,607
------ ------
</TABLE>
4. Capitalized Software
Software development costs for certain projects are capitalized from the
time technological feasibility is established to the time the resulting software
product is commercially feasible. Capitalized software costs were $627,000 at
December 31, 1998 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
products become commercially feasible.
5. Income Taxes
At December 31, 1998, the Company had cumulative net operating losses of
approximately $11.3 million which are available to offset future taxable income
through 2018. The Company has provided a valuation allowance for the entire
amount of the benefit related to these net operating loss carryforwards as
realizability is uncertain. Deferred tax liabilities were insignificant as of
December 31, 1998.
6. Contingencies
Two related lawsuits have been filed in the U.S. District Court that
allege violation of the federal securities laws by the Company and its executive
officers. Those suits have been consolidated into one combined action that seeks
class certification. The Company denies the allegations and intends to
vigorously defend itself. (See "Part II --- Item 1. Legal Proceedings").
Four related lawsuits have been filed in the U.S. District Court
resulting from the Company's efforts to enforce its patent rights. Three of
those suits have now been consolidated. The Company intends to aggressively
enforce its intellectual property rights. The Company denies all allegations
asserted against it in these lawsuits and intends to vigorously defend itself.
(See "Part II --- Item 1. Legal Proceedings").
In a separate but related action, the Company has filed suit in U.S.
District Court against its general liability insurance carrier for breach of
insurance contract. The Company's suit is based on the insurer's refusal to pay
more than nominal amounts of the costs of defense in certain of the four patent
related lawsuits. The Company anticipates that this matter will be resolved by
cross motions for summary judgment. (See "Part II --Item 1. Legal Proceedings").
The Company and International Game Technology ("IGT") have re-defined
the relationship between the companies. In January 1999, an agreement was
reached under which: 1) Acres Gaming will sell its products directly to casinos;
2) the companies will negotiate a working relationship that includes future
cooperation regarding the ongoing development and support of the SAS4 protocol
used to communicate instructions and messages between
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Acres Bonusing and IGT gaming machines; 3) IGT's request for a refund of $1.5
million for bonusing software licensed to IGT for a Las Vegas casino is resolved
by enabling IGT to transfer the bonusing software licenses to another customer;
and 4) The companies will develop a plan to sell IGT's inventory of certain
Acres Bonusing hardware components costing approximately $1 million and equally
share the resulting profit or loss.
7. Per Share Computation
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share" in the quarter ended December 31, 1997. Under the new
requirements, the Company reports basic and diluted earnings per share. Only the
weighted average number of common shares issued and outstanding are used to
compute basic earnings per share. The computation of diluted earnings per share
includes the effect of stock options, warrants and redeemable convertible
preferred stock, if such effect is dilutive. Where necessary, prior year amounts
have been restated.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED DECEMBER 31,
---------------------- ----------------------
1998 1997 1998 1997
------- ------- ------- -------
(in thousands except per share data)
<S> <C> <C> <C> <C>
Net loss $(2,140) $(1,811) $(2,986) $(1,556)
======== ========= ========= =======
Weighted average number of shares of common stock and common stock
equivalents outstanding:
Weighted average number of common shares
outstanding for computing basic earnings per share 8,913 8,804 8,880 8,790
Dilutive effect of warrants and employee stock
options after application of the treasury stock method -- -- -- --
Dilutive effect of redeemable convertible
preferred stock after application of the if-converted method -- -- -- --
Weighted average number of common shares ------- ------- ------- -------
outstanding for computing diluted earnings per share 8,913 8,804 8,880 8,790
======= ======= ======= =======
Earnings (loss) per share - basic $ (.24) $ (.21) $ (.34) $ (.18)
======= ======= ======= =======
Earnings (loss) per share - diluted $ (.24) $ (.21) $ (.34) $ (.18)
======= ======= ======= =======
</TABLE>
The following common stock equivalents are excluded from the earnings
per share calculation as their effect would have been anti-dilutive:
<TABLE>
<CAPTION>
BALANCE OUTSTANDING
AS OF DECEMBER 31,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Warrants and employee stock options 1,410 1,337
Redeemable convertible preferred stock 519 519
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company develops, manufactures and markets electronic game
promotions, equipment and games for the casino gaming industry. The Company's
products are based on its proprietary Acres Bonusing Technology(TM) and are
designed to enhance casino profitability by providing entertainment and
incentives to players of gaming machines. The bonusing technology improves the
efficiency of bonus and incentive programs currently offered by many casinos,
and makes possible some bonus and incentive programs that have not previously
been offered.
The Company currently offers bonusing products to casinos in the form
of standard and customized bonusing promotions that can be applied casino-wide
or to a limited number of gaming machines. The Company's bonusing products form
a modular system and may be purchased and installed individually or as
components of an integrated system. Casino-wide, fully integrated bonusing
applications are offered as the Acres Bonusing System(TM) ("ABS"). Linked groups
of traditional slot machines that activate a secondary "bonus" game when certain
milestones are reached are offered as part of the Company's Bonus Game product
line.
RESULTS OF OPERATIONS
The Company's net revenues for the three months ended December 31, 1998
(the "current quarter") decreased to $3.1 million from net revenues of $3.9
million during the three months ended December 31, 1997 (the "prior year
quarter"). The Company's revenues can fluctuate significantly based on the
timing of the delivery of any large order. Of the current quarter decrease, $1.9
million was related to the Company's granting of manufacturing rights to IGT
whereby the Company receives royalty payments on hardware manufactured by IGT.
In the prior year quarter, the Company manufactured and sold the hardware to IGT
whereby the Company records higher revenue, although gross profit is
approximately the same. Sales to a gaming machine developer also decreased by
$897,000 from the prior year quarter. Partially offsetting these decreases, the
Company recorded $2.1 million of revenue related to a $10.2 million contract to
provide casino-wide ABS bonusing applications, audio-visual products and a
custom integrated slot accounting system for Mandalay Bay Resort & Casino in Las
Vegas, Nevada (the "Mandalay Bay Contract").
For the six-month period ended December 31, 1998, net revenues were
$6.3 million as compared to $9.8 million for the first half of the prior fiscal
year. Of this decrease, $3.3 million was related to the shift to royalties on
hardware manufactured by IGT and $2.6 million was related to decreased sales to
a gaming machine developer. In addition to royalty-related decreases,
volume-related decreases in hardware sales to IGT amounted to $1.5 million.
These decreases were partially offset by $2.1 million of Mandalay Bay Contract
revenue, bonusing software sales to IGT amounting to $850,000 and sales of
custom bonus games and displays amounting to $768,000.
Gross profit as a percentage of net revenue was 33% in the current
quarter compared to 37% for the prior year quarter. For the six-month period
ended December 31, 1998, gross margin increased to 47% from 42% for the same
period in 1997. Increases in gross profit margins related to the shift to
royalty-based revenues were realized in both the current quarter and six-month
period ended December 31, 1998. These increases were offset in the current
quarter and partially offset in the first half of fiscal 1999 by the effect of a
lower gross margin on the Mandalay Bay Contract revenue recorded during the
current quarter. Initial gross profit margins on the Mandalay Bay Contract are
lower because the Company defers recognition of revenue that is subject to
performance penalties until such penalties have expired or are no longer
applicable. The Company expects such performance penalties to expire in the
second half of fiscal 1999 generating higher gross profit margins during that
period.
Operating expenses, exclusive of the non-recurring charge recorded in
the prior year, increased to $3.2 million in the current quarter from $2.6
million in the prior year quarter and increased to $6.1 million for the
six-month period ended December 31, 1998 from $5.2 million in the same period in
1997. Operating expenses increased
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over the prior periods as a result of the Company's continuing development of
products utilizing the patented ABS technology and the costs of litigation to
protect that technology.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash and cash equivalents of
$2.8 million, compared to $9.9 million as of June 30, 1998. As of December 31,
1998, the Company did not have any debt or borrowing arrangements. In January
1999, the Company arranged for a $2.0 million short-term line of credit from a
bank. The Company does not invest in derivative securities.
The Company expects to generate net income and positive cash flow in
the second half of fiscal 1999 primarily as a result of anticipated recognition
of revenue and anticipated collections of installment payments as progress is
made on the Mandalay Bay Contract. Such collections are expected to provide
sufficient cash and cash equivalent balances to fund the Company's operations
during the second half of fiscal 1999.
The Company's operations have historically used cash. During the first
half of fiscal 1999, $5.3 million of net cash was used by operating activities
primarily as a result of the operating loss adjusted for the non-cash effect of
depreciation, the increase in unbilled accounts receivable related to the
Mandalay Bay Contract and investments in inventory made primarily to support the
direct offering of casino-wide Acres Bonusing. The increased inventory levels
generated a smaller but related increase in accounts payable. During the
six-month period ended December 31, 1998, the Company spent $1.4 million on
capital equipment and capitalized software development costs of $627,000.
The Company's principal sources of liquidity have been net proceeds of
$7.2 million from its initial public offering in November 1993 and $7.6 million
from the exercise of warrants in October 1996. In addition, in January 1997, the
Company issued 519,481 shares of Series A Convertible Preferred Stock for net
proceeds of $4.9 million.
YEAR 2000
The Year 2000 issue results from computer programs operating
incorrectly when the calendar year changes to January 1, 2000. Computer programs
that have date-sensitive software may recognize a two-digit date using "00" as
calendar year 1900 rather than the year 2000. This could result in system
failure or miscalculations and could cause disruptions of operations, including,
among other things, a temporary inability to engage in normal business
activities.
The Company has evaluated its technology and data, including imbedded
non-information technology, used in the creation and delivery of its products
and services and in its internal operations and has identified no significant
Year 2000 issues. The core business systems are compliant. Compliant upgrades
for the Company's existing slot accounting and player tracking products have
been developed, submitted to regulatory authorities, made available to all
customers and, in some cases, installed at the customers' sites. The Company has
not incurred material costs and believes that future costs associated with
addressing the Year 2000 issue will have an immaterial effect on the Company's
financial results.
Although the Company has inquired of certain of its significant vendors
as to the status of their Year 2000 compliance initiatives, no binding
assurances have been received. The Company believes that 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
monopolistic utilities could have a significant detrimental effect on the
Company's operations. The Company does not know the status of its customers'
Year 2000 compliance initiatives. Failure of the Company's customers to
adequately address such issues could negatively affect their ability to purchase
bonusing products. There can be no assurances that such third parties will
successfully address their own Year 2000 issues over which the Company has no
control.
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The Company has developed a contingency plan to address the most
reasonably likely "worst-case" scenario. Such contingency plans include
short-term, less-efficient manual operations which would not be expected to have
a material adverse effect on the Company.
FORWARD-LOOKING INFORMATION
Certain statements in this Form 10-Q contain "forward-looking"
information (as defined in Section 27A of the Securities Act of 1933, as
amended) that involve risks and uncertainties which may cause actual results to
differ materially from those predicted in the forward-looking statements.
Forward-looking statements 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. The differences could be caused by a number of factors or
combination of factors including but not limited to, the risks detailed in the
Company's Securities and Exchange Commission filings, including the Company's
Form 10-K for the fiscal year ended June 30, 1998.
Forward-looking statements relate to: adequacy of cash and cash
equivalent balances to fund the Company's operations; anticipated future sales;
revenue recognition, cash collections, performance penalties and gross profit
margins related to the Mandalay Bay Contract; scheduled casino opening dates;
new product introductions; patent protection; anticipated effects of the Year
2000; and developments in the Company's relationship with IGT.
The following factors, among others, could cause actual results to
differ from those indicated in the forward-looking statements: the possibility
that future sales may not occur or product offerings may not be developed as
planned; the possibility that future product installations may not be completed;
developments in the Company's relationship with IGT; the effect of changes in
the estimates of total hours expected to be incurred to complete the Mandalay
Bay Contract; the risk that performance penalties may be incurred related to the
Mandalay Bay Contract; the risk that patents may not be issued; the expense and
unpredictability of patent and other litigation; the timing of development,
regulatory approval and installation of products; the timing of receipt and
shipment of orders; competition; government regulation; market acceptance;
customer concentration; technological change; the effect of economic conditions
on the gaming industry generally; and the results of pending litigation.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Two related lawsuits have been filed in the U.S. District Court for the
District of Nevada involving the Company which allege violation of the federal
securities laws by the Company and certain of its current and former 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.
Four related lawsuits have been filed in the U.S. District Court for
the District of Nevada resulting from the Company's efforts to enforce its
patent rights: Mikohn Gaming Corp. v. Acres Gaming Incorporated, No.
CV-S-98-1383 HDM (LRL) ("Suit I"); Mikohn Gaming Corp. v. Acres Gaming
Incorporated, No. CV-S-98-738 HDM (LRL) ("Suit II"); Acres Gaming Incorporated
v. Mikohn Gaming Corp., Casino Data Systems, New York New York Hotel and Casino
and Sunset Station Hotel and Casino; No. CV-S-98 794 PMP (LRL) ("Suit III"); and
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.
In Suit I, Mikohn asserted a claim for declaratory judgment of
noninfringement and invalidity of U.S. Patent No. 5,655,961 ("the `961 patent")
owned by the Company. Mikohn also asserted claims for "intentional interference
with a business relationship," "intentional interference with prospective
business relationship," "unfair competition: trade libel" and "unfair
competition: disparagement." Mikohn's complaint sought unspecified damages,
punitive damages, attorney's fees, interest on the alleged damages, an
injunction against the conduct alleged in the complaint, and a declaration that
the `961 patent is invalid and not infringed by Mikohn or its customers. The
Company has filed a counterclaim for infringement of the `961 patent, and has
denied Mikohn's other allegations.
In Suit II, Mikohn asserted a claim for declaratory judgment of
noninfringement and invalidity of U.S. Patent No. 5,741,183 ("the `183 patent")
owned by the Company. Mikohn's complaint sought no damages, but requested an
award of attorney's fees and a declaration that the `183 patent is invalid and
not infringed by Mikohn. The Company is not aware of any infringement by Mikohn,
and therefore sought to dismiss the complaint for lack of a case or controversy.
The court denied the Company's motion.
In Suit III, the Company sued Mikohn, Casino Data Systems, New York New
York Hotel and Casino and Sunset Station Hotel and Casino for infringement of
the Company's U.S. Patent No. 5,752,882 ("the `882 patent"). Mikohn
counterclaimed in Suit III, seeking a declaratory judgment of invalidity and
noninfringement of the `882 patent and asserted claims for "false and misleading
representations" under 11 U.S.C. Section 1125, "interference with prospective
economic relations," "unfair competition: trade libel" and "unfair competition:
disparagement." Mikohn's counterclaims seek unspecified damages, as well as a
trebling of the damages, punitive damages, attorney's fees and an injunction
against the Company's "continuing to commit the unlawful acts" alleged in the
counterclaims.
In Suit IV, 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"; and "unfair
competition --- intentional interference with
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prospective economic advantage". CDS's counterclaims seek unspecified damages,
as well as a trebling of the damages, punitive damages, and attorney's fees. No
trial date or discovery cut-off date has been set. The Company has tendered the
defense of CDS's counterclaims to its general liability insurer, which to date,
has neither accepted nor rejected the tender.
In a separate but related action, the Company has filed suit against
its former general liability insurance carrier for breach of insurance contract:
Acres Gaming Incorporated v. Atlantic Mutual Insurance Company, filed June 26,
1998 and now pending in U.S. District Court for the District of Oregon. The
Company's suit is based on the insurer's refusal to pay more than nominal
amounts of the costs of defense in Suit I. The Company anticipates that this
matter will be resolved by cross motions for summary judgment. In addition, the
Company has tendered the defense of Mikohn's counterclaims in Suit III to the
same insurer. To date the insurer has not responded to the tender of Suit III's
defense.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on November 18,
1998. The following actions were taken at the Annual Meeting:
Election of Directors. John F. Acres, Jo Ann Acres, Richard A. Carone,
Floyd W. Glisson and Donald J. Massaro were elected to serve as directors for a
term of one year. The holders of 8,317,829 shares voted FOR the election as a
group, holders of 40,490 shares voted AGAINST and no shareholders ABSTAINED.
Ratification of Appointment of Arthur Andersen LLP as Independent
Public Accountants. The Board of Directors' appointment of Arthur Andersen as
independent public accountants was ratified. The holders of 8,316,968 shares
voted FOR the ratification, holders of 29,140 shares voted AGAINST and holders
of 12,211 shares ABSTAINED.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered
by this Form 10-Q.
11
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACRES GAMING INCORPORATED
(Registrant)
Date: February 12, 1999 By /s/ Robert W. Brown
-------------------------------------
Robert W. Brown
Executive Vice President, Chief
Financial Officer, Secretary and
Treasurer (principal financial and
chief accounting officer)
12
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --- -----------
<S> <C>
3.1 Articles of Incorporation of Acres Gaming Incorporated, as amended(1)
3.2 Bylaws of Acres Gaming Incorporated, as amended(2)
10.1 Equipment Sale Agreement dated October 29, 1998 between AGI
Distribution, Inc., dba Acres Gaming Incorporated and Mandalay Corp.,
dba Mandalay Bay Resort & Casino
27.1 Financial Data Schedule
(1) Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended December 31, 1996,
previously filed with the Commission.
(2) Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1996,
previously filed with the Commission.
</TABLE>
13
<PAGE> 1
EXHIBIT 10.1
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED BASED UPON A REQUEST FOR
CONFIDENTIAL TREATMENT; SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE SEC
EQUIPMENT SALE AGREEMENT
This Equipment Sale Agreement, effective October 29, 1998, 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 Mandalay
Corp., dba Mandalay Bay Resort & Casino, having a place of business at 3950 Las
Vegas Boulevard South, Las Vegas, Nevada 89193-6778 ("Customer").
0. BACKGROUND
Customer desires to engage Acres to provide a turn-key state of the art
networked gaming, bonusing, and slot accounting system (the "System") at the
Mandalay Bay Resort & Casino, located at 3950 Las Vegas Boulevard South, Las
Vegas, Nevada (the "Casino Location") and to provide such professional services
as may be appropriate ancillary thereto. Acres agrees to provide Customer with
such a System at the Casino Location and to perform such ancillary professional
services exercising the utmost skill, care and diligence. Accordingly, the
parties agree as follows:
1. DEFINITIONS
- - "Final Acceptance Test" has the meaning as set forth in Section 6(b).
- - "Functional Requirements" has the meaning as set forth in Section 2(c).
- - "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, delivered to Customer for use at the
Casino Location.
- - "Initial Acceptance Test" has the meaning as set forth in Section 6(b).
- - "NVGCB" means the Nevada Gaming Control Board.
- - "Opening Day" means the date upon which the Casino Location is opened
to the public for gaming and other commercial activities.
<PAGE> 2
2. ACRES SUPPLIED PRODUCTS
(a) Hardware
<TABLE>
<CAPTION>
Quantity Equipment Description
-------- ---------------------
<S> <C>
2,400 Game Hardware Kits
1,200 Audio Speaker/Amplifier Units
120 Fantasy(TM) Plasma Displays
1 Translator
1 Concentrator
6 Bonus Servers
1 Configuration Workstation
1 Database Server
</TABLE>
(b) Software
<TABLE>
<CAPTION>
License Fee
Quantity Software Module Per Module
-------- --------------- -----------
<S> <C> <C>
2,400 Bonus Foundation Software
- PointPlay(TM)
- ReturnPlay(TM)
- XtraCredit(TM)
- Personal Progressive(R)
- Appreciation Time(TM) *
2,400 Progressive/Lucky Coin(TM) *
2,400 Time-Based Bonus *
1 Accounting Database & Reports *
1 Security & Exception Messaging *
1 Mapping & Analysis *
1 Player Tracking Interface *
</TABLE>
* CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SEC
(c) Functional Requirements. The parties have developed and agreed upon
a functional requirements specification, which is attached hereto as Exhibit D,
which defines functional and operational performance criteria for the System,
namely: (i) System structure and configuration to assure real time processing;
(ii) data storage schemes; (iii) System parameters; (iv) accounting processes;
(v) analysis functions and reports; (vi) slot floor configuration management;
(vii) bonusing configuration and operation; (viii) player tracking interfaces
and operation; (ix) System interfaces; and (x) System related slot floor
operations.
<PAGE> 3
(d) Customer Hardware. Customer shall provide, install, and commission:
(i) an Ethernet datapoint connection for each bank controller, bonus server, and
configuration workstation location; (ii) all computers and terminals, except
those listed in (a) above, necessary for System operation; (iii) category 5
network cables from each bank of Games to each location of the corresponding
bank controller, including furnishing hubs and terminations for all such cables;
(iv) report printer, slip printers, fill/jackpot terminals and card readers, and
radio paging system. All Customer hardware shall be as specified in Exhibit E or
as otherwise agreed to by Acres. Except as set forth herein, Customer shall have
no other obligation to provide any component of the System.
3. PRICE, PAYMENT TERMS AND PROMOTIONAL ALLOWANCE
(a) Payment Schedule. Customer shall pay Acres a total sum of Ten
Million Two-Hundred Forty-Seven Thousand Dollars ($10,247,000.00) plus
applicable taxes, according to the following schedule:
- - $3,415,666.00 payable incrementally after successful completion of the
a) Initial Acceptance Test testing criteria for each section of the
Casino Location, b) escrow of the source code software and c) proof of
transfer of title for hardware to Customer.
- - $3,415,666.00 plus applicable taxes paid to Acres upon the earlier of
Opening Day or May 1, 1999; however, such payment will not be made
until satisfactory completion of the System and all other conditions to
receiving the first payment have been satisfied. In the event, upon the
earlier of Opening Day or May 1, 1999, that a) at least 95% of the
Games have passed the Initial Acceptance Test and, b) the other Games
have passed the Initial Acceptance Test with the exception of the
"Bonus Configuration and Operation" test, the payment of $3,415.666.00
plus applicable taxes due under this paragraph will be paid to Acres.
- - $2,415,668.00 plus applicable taxes paid to Acres upon completing the
Final Acceptance Test, however, such payment will not be made until
receipt of written notification from NVGCB that the purchased software
modules have been approved for use at Mandalay Bay.
- - Discretionary payment of $1,000,000.00 plus applicable taxes paid to
Acres if Mr. Tony C. Alamo, Sr.Vice President, Operations is completely
satisfied with the System, exercising his sole and absolute discretion.
(b) Taxes. Customer is responsible for all sales, gaming, and other
taxes or governmental fees associated with the purchase, installation, and
operation of the System.
<PAGE> 4
(c) Promotional Allowance. Subject to applicable laws and regulations,
so long as the System is in operation at the Casino Location and is functioning
properly, for a period of forty-eight (48) months after Opening Day, Customer
shall utilize and feature the Acres trademark XtraCredit(TM) (and associated
bonusing trademarks where applicable) in all Customer slot club identification
and slot club advertising in connection with the Casino Location.
4. ACRES RESPONSIBILITIES
(a) Acres will provide all the hardware and software comprising the
System and timely perform all functions necessary for the delivery,
installation, training, and testing of the System well in advance of the Opening
Day, so that the System can be effectively operated by Customer's personnel by
February 15, 1999, provided that Customer has installed the Games, provided
access to the casino floor, and adequate electric power for computer operation,
for at least five weeks prior thereto.
(b) Acres will fully submit all software modules and System Hardware
for Gaming approval by December 1, 1998 if such approval is required. Field
trial approval must occur by January 1, 1999, unless delayed through no fault of
Acres.
(c) Acres will timely supply all Game manufacturers designated by
Customer on Exhibit F with all System information and Game Hardware Kits they
require to equip the Games to be compliant with System requirements.
5. CUSTOMER RESPONSIBILITIES
(a) Customer will use its best efforts to support Acres in interfacing
and coordinating with the NVGCB and Customer's suppliers, organizations, and
contractors who may affect Acres' ability to perform under this Agreement.
6. INSTALLATION AND ACCEPTANCE TESTING
(a) Installation. Acres shall arrange for delivery of the System
components to the Casino Location or the Games manufacturers as necessary. At no
additional charge to Customer, Acres shall deliver, install and supervise
installation of the System in good working order, including testing and
verifying that all components of the System have been successfully installed.
Customer and Acres shall cooperate fully with such delivery and installation.
(b) Acceptance Testing. Acceptance testing of the Acres Supplied
Products will be performed at the Casino Location. Acres Supplied Products will
be deemed accepted when they have successfully satisfied the acceptance criteria
in accordance with the procedures defined in the Initial Acceptance Test set
forth in Exhibit A and the Final Acceptance Test set forth in
<PAGE> 5
Exhibit B and are otherwise of good and merchantable quality and fit for
Customer's needs. Acceptance testing will be performed utilizing the actual
hardware system to be used with the software system. Acres shall supply Customer
and Customer shall be entitled to modify the Acceptance Testing criteria.
Acceptance Testing criteria is attached hereto with Exhibits A and B.
7. ACRES INTELLECTUAL PROPERTY RIGHTS
Customer acknowledges that the computer programs, system protocols,
system documentation manuals, and trademarks supplied by Acres to Customer are
the property of Acres, but Customer shall have a license, which is hereby
granted by Acres, to use the computer programs, system protocols, system
documentation manuals and Acres trademark in connection with its use of the
System.
8. SOURCE CODE ESCROW
Acres shall place the Acres Software source code in escrow for
Customer's use in accordance with the Source Code Escrow Agreement attached as
Exhibit C.
9. WARRANTY
(a) Hardware. All Acres supplied equipment is warranted against defects
in workmanship and materials, will comply with Acres representations and the
attached Exhibit D, will be of good and merchantable quality and fit for
Customer's needs under normal use and service for a period of twelve (12) months
from the later of the date of installation in good working order or Opening Day.
This warranty is contingent upon proper use in the application for which the
equipment was intended and is not applicable to equipment which has been
modified without Acres' written approval, or which has been subjected to unusual
physical or electrical stress, or on which the original identification marks
have been removed or altered. This warranty will not apply if adjustment,
repair, or parts replacement is required because of accident, neglect, misuse,
failure of electrical power, air conditioning, humidity control, transportation,
or causes other than ordinary use.
(b) Software. All Acres software will be of good and merchantable
quality and fit for Customer's needs under normal use and service, and will
comply with Acres representations and the attached Exhibit D. For twelve (12)
months from the later of the date of installation in good working order or
Opening Day, Acres will design, code, checkout, document and deliver promptly
any amendments or alterations to the software that may be required pursuant to
the warranty. This warranty is contingent upon Customer giving Acres written
notice in accordance with Acres prescribed reporting procedures, within the
twelve (12) month period.
<PAGE> 6
(c) System Features. A condition of this Agreement shall be that the
System as installed by Acres will not be capable of displaying Bonus amounts in
excess of $100,000 and will only display pre-programmed bonus amounts which will
range between the parameters established by Customer but not in excess of
$15,000, unless any increase above the $15,000 limit is initiated and approved
by two independent departments, using assigned passwords and other security
measures and no Bonus will display outside of its Bonus group. The Bonus feature
will not be designed or installed in such a manner as to allow the display of
bonus and/or pay-out information while the System is malfunctioning or a Game to
which it is installed is exhibiting a coin-in or Jackpot/win signal malfunction.
Acres covenants that the only Game malfunctions which could affect the Bonus
feature are the coin-in and Jackpot/win signals. The System will not be capable
of sending any data/information, etc. to a Game, whether the System is
functioning properly or malfunctioning, which will change the Game outcome or
display erroneous pay-out information.
(d) No Other Warranties. Except for the express warranties stated in
(a), (b) and (c) above, Acres disclaims all warranties with regard to the Acres
products sold under this Agreement.
10. PERFORMANCE PENALTIES
(a) Functional Performance. If Customer elects not to terminate this
Agreement for default, for each software module that fails to meet the Initial
Acceptance Test by February 15, 1999, Customer may assess a penalty, payable by
Acres and solely to compensate Customer for inconvenience as a result of a delay
in delivery, equal to two percent (2%) of the software module license fee as set
forth in Article 2 and a five percent (5%) penalty for each thirty day period
thereafter. If only certain Games for a particular software module fail the
Initial Acceptance Test, then Customer may only assess penalties of this
paragraph on a pro rata basis based on the number of failing Games, but
penalties will not be assessed for Games which fail for reasons attributable to
the manufacturer's or Customer's fault. In no event, shall the penalties
assessed under this paragraph 10 exceed twenty-five (25%) of a software module
license fee, if the software module ultimately passes the Initial Acceptance
Test.
(b) If Customer elects not to terminate this Agreement for default, for
each software module that fails to meet the Final Acceptance Test by March 1,
1999 excluding item 1, Customer may assess a penalty, payable by Acres and
solely to compensate Customer for inconvenience as a result of a delay in
delivery, equal to two percent (2%) of the software module license fee as set
forth in Article 2 and a five percent (5%) penalty for each thirty day period
thereafter. If only certain Games for a particular software module fail the
Final Acceptance Test, then Customer may only assess penalties of this paragraph
on a pro rata basis based on the number of failing Games but penalties will not
be assessed for Games which fail for reasons attributable to the manufacturer's
or Customer's fault. In no event, shall the penalties
<PAGE> 7
assessed under this paragraph 10 exceed twenty-five (25%) of a software module
license fee, if the software module ultimately passes the Final Acceptance Test.
(c) Gaming Approval. For each software module remaining unapproved for
use at Mandalay Bay, but that has received approval in accordance with paragraph
4(b), by NVGCB within a reasonable field trial period following Opening Day,
Customer may assess a penalty, payable by Acres, equal to two percent (2%) of
the license fee as set forth in Article 2 for the unapproved software module and
a five percent (5%) penalty for each month thereafter that the subject module
has not been approved by NVGCB for use at Mandalay Bay. In no event, shall the
penalties assessed under this paragraph 10 exceed twenty-five percent (25%) of a
software module license fee, if the software module ultimately receives NVGCB
approval. Acres shall not be liable, and no penalties may be assessed by
Customer, for delay resulting from causes outside the control of Acres,
including, but not limited to, changes to applicable gaming laws and regulations
or delays in NVGCB final approval due to NVGCB staff capacity.
Customer shall use its best efforts to assist and cooperate with Acres,
NVGCB, and Customer's vendors.
11. SUPPLEMENTAL REMEDIES
In the event that any of Acres' hardware or software modules are not
suitable for use at the Casino Location, not timely delivered, installed or
tested, or other act of Acres is likely to result in the System not being ready
by Opening Day, in addition to all other rights and remedies available to
Customer, in this Agreement, or at law or equity, at Customer's election,
Customer shall retain all hardware and software supplied by Acres and/or Acres
shall be solely responsible for procuring and providing suitable alternative
hardware or software modules, including but not limited to, obtaining all
required approvals, consents, licenses, etc. to enable Customer to operate a
different system at the Casino Location by Opening Day.
12. LIMITATION OF LIABILITY
In no event shall Acres' liability for Customer's damages exceed
$10,247,000.
13. TITLE AND SECURITY INTEREST
Title to the System shall vest in Customer upon delivery of the System
and components therefor to the Casino Location. Customer shall keep the System
in good order and repair until the purchase price has been paid in full and
shall promptly pay all taxes and assessments based upon the purchase or use of
the System excluding taxes on Acres' income. Acres shall retain a security
interest in the System until all monies due hereunder are paid in full. Customer
shall execute, upon request of Acres, financing statements deemed necessary or
desirable by Acres to
<PAGE> 8
perfect its security interest in the System, but such security interests shall
be subordinate to Customer's entitlement to the software modules and hardware
should Acres default. Customer authorizes Acres to file a copy of this security
agreement or a financing statement in order to perfect Acres' security interest.
A financing statement may be filed without Customer's signature on the basis of
this security agreement where allowed by law.
14. 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 the System used within the scope of this Agreement infringes any
patents, copyrights, license or other property right, 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.
(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 the System, or if Acres believes that the System is 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 System, or replace or modify the
System with components of equal quality and function so as to make it
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 System or any parts thereof.
(c) Acres shall not be liable for any infringement or claim based upon
use of the System in combination with other equipment not contemplated by this
Agreement or with software not supplied by Acres or with modifications made by
Customer.
(d) Acres will defend, indemnify and hold Customer harmless from and
against any claims, demands, liability or judgements resulting from a
malfunction of the System, hardware or software 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 or judgements resulting from Customer's breach of
this Agreement, negligence in operation of the System, hardware or software or
otherwise attributable to Customer's acts or omissions.
15. 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 force majeure causes.
<PAGE> 9
(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.
(e) Entire Agreement. This Agreement, including the documents and the
instruments referred to herein, 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.
The parties hereto have duly executed this Agreement as of the date first
written above.
AGI DISTRIBUTION, INC. MANDALAY CORP.
By: ___________________________ By: ______________________________
Title: ________________________ Title: ___________________________
Date: _________________________ Date: ____________________________
<PAGE> 10
EXHIBIT A
INITIAL ACCEPTANCE TEST
The Initial Acceptance Test will confirm all slot system network operations and
connectivity to each gaming machine to be part of the opening configuration of
the casino. Acres will commence Initial Acceptance Testing by January 2, 1999,
or on the first date thereafter that Customer's facilities are suitable for
testing.
Passing each test as set forth in the following testing program after the System
is installed in its entirety (exclusive of Game Hardware Kits for Games not yet
installed on the Casino Location floor) shall constitute satisfaction of the
Initial Acceptance Test.
Prerequisites for the Test are as follows:
a. At least 30% of the slot machines are installed and configured on the
Casino Location floor and are connected to the System.
b. At least 30% of the bank controllers are installed on the Casino
Location floor and connected to the System.
c. The slot system database server, translator, concentrator,
configuration work station and at least two bonus servers are operating
at the Casino Location. Depending upon the availability and access to
the computer room this equipment may be installed at a temporary
location.
d. At least 30% of the fill jackpot terminals are installed and operating
on the Casino Location floor. Depending upon the availability and
access to change booths this equipment may be installed in a temporary
location.
e. At least 10% of the overhead meters and displays are installed on the
Casino Location floor and connected to the System.
f. Compliance with all representations and requirements.
The tests to be conducted will cover operation aspects of the gaming machines
and System and will indicate the functional performance of the System. Testing
will be structured in such a way that proper operation of the System and its
components can be observed and verified, as follows:
1. Initial Game Connection Test
The purpose of these tests is to ensure that the System can communicate
with each game type and that accounting and event data is properly
transmitted through the System. The tests and expected results are as
follows:
a. On-line test
Each game type will be configured on the slot system and then
"brought on line". On-line status will be confirmed by
displaying the player tracking normal "attract" message.
<PAGE> 11
b. Event Test
A standard event sequence test will be performed at the slot
machine to confirm proper detection and reporting of the
following events:
-Unauthorized Main Door open/close
-Authorized Main Door open/close
-Unauthorized Drop Door open/close
-Authorized Drop Door open/close
-Unauthorized Bill Stacker Door open/close
-Authorized Bill Stacker Door open/close
-Power on/off
-Card in/out
c. Machine Accounting Data Test
A standard accounting meter test will be performed whereby
machine meters are read and verified against the System
collected meters. The test will include inserting coins and
bills, playing games, collecting money and the payment of
bonus prizes to the game.
Meter reconciliation will be performed for Coin In, Coin Out,
Bill In, True Coin In, True Coin Out, Coin to Drop, Games
played, Bonuses In, Handpays and Jackpot.
2. Bonus Configuration and Operation
Once games have passed the initial connection tests the testing will
enter the Bonus Configuration and operation phase. Bonus configuration
will be set up to emulate the actual operational parameters and
controlled testing will confirm the proper operation of each game type
during bonusing, including:
-accurate pool incrementation
-receipt of bonus payments
-receipt of celebration payments
-handpay lock up conditions
Bonus configurations will also be changed during the test to simulate
actual operational circumstances such as adding machines, retiring
machines, changing pool increment rates, changing pool values.
The bonusing tests will also confirm proper operation of overhead
displays and sound systems associated with the bonus configurations.
<PAGE> 12
3. Fill/Jackpot System Tests
Fill/Jackpots are an important element of the slot floor operation.
Testing will be conducted to confirm proper operation of the
fill/jackpot system including:
-fills
-handpay jackpots
-cancel credits
-short pays
-supervisor overrides
-voids
-manual entry
The expected results of this testing phase are proper operation of the
fill/jakpot terminal, accurate fill/jackpot slips, reconciliation with
system held transactions and proper entry and auditability of manual
transactions.
4. System Accounting and Reporting
The System accounting and reporting tests will be conducted by
simulating a number of casino trading days and verifying proper and
accurate recording of transactions and reports.
The test will include:
-coin drop
-note drop
-meter reconciliations and adjustments
-report production
-variance reporting
-work order production and tracking
-machine moves-including retirement/addition/configuration changes
The Initial Acceptance Test shall be completed by February 15, 1999.
<PAGE> 13
EXHIBIT B
FINAL ACCEPTANCE TEST
The System will be deemed to have completed the Final Acceptance Test when the
following conditions are met:
1. Written notification from NVGCB that the System has successfully completed
the trial period and is approved for use at Mandalay Bay.
2. The System is fully installed, of good and merchantable quality, fit for
Location's needs and operates substantially in compliance with Acres'
representations and the operational and Functional Requirements
3. The Casino Location staff are sufficiently proficient in using the System,
including functions such as:
--end of day posting
--accounting reports production
--adjustments
--graphical view system operation
--machine movement and reconfiguration
--configuration of bonus software parameters
Final Acceptance Test steps 2 and 3 will be completed by March 1, 1999.
<PAGE> 14
EXHIBIT C
SOURCE CODE ESCROW AGREEMENT
This Escrow Agreement, effective__________, 1998, is entered into by
and among AGI Distribution, Inc., dba Acres Gaming, having a place of business
at 815 NW 9th Street, Corvallis, OR 97330 ("Acres") and Mandalay Corp., dba
Mandalay Bay Resort & Casino, having a place of business at 3950 Las Vegas
Boulevard South, Las Vegas, Nevada 89193-6778 ("Customer") and
__________________________having its principal place of business at
__________________________________________________("Escrow Agent").
The parties agree as follows:
1. Deposit. Within five (5) business days of the acceptance of
this Agreement and five (5) business days following completion of the Initial
Acceptance Test and five (5) business days following final NVGCB approval, Acres
shall deposit with the Escrow Agent in CD ROM form the following; 1) a fully
compilable copy of the Source Code; 2) a fully compiled program; 3) name,
version number and copy of the software used to compile Source Code; and 4) a
hardcopy listing of all programs on the CD ROM.
Acres will also deposit the materials described above within five (5)
days of completion of System modifications and/or version changes. Customer may
require supplemental escrow deposits when it determines that sufficient
modifications have been made so as to make the escrow contents obsolete.
2. Fees. Customer shall be responsible for any and all fees
due and payable to Escrow Agent for Escrow Agent's performance of duties under
this Agreement.
3. Term. This Escrow Agreement shall remain in effect for five
(5) years or until the parties agree to a mutual termination. Termination of
this Escrow Agreement is automatic upon delivery of the deposited Source Code to
Customer in accordance with this Agreement.
4. Default. A default by Acres shall be deemed to have
occurred under this Escrow Agreement upon receipt by the Escrow Agent and Acres
of an affidavit executed by a responsible officer of Customer stating any of the
following:
(a) Acres has availed itself of, or been subjected by any
third party, to a Chapter 7 or 11 proceeding in bankruptcy in which Acres is the
named debtor and such proceeding has not been terminated without prejudice to
Customer's rights or interest under the Agreement within (30) thirty days; or
(b) Acres has ceased its on-going business operations or
support of the Acres Software; or
<PAGE> 15
(c) Acres has defaulted in any material obligation to
Customer.
5. Notice of Default. Customer shall give written notice of a
default to Escrow Agent and Acres and within five (5) business days following
such notice Escrow Agent shall deliver to Customer in accordance with Customer's
instructions the entire Source Code with respect to the Acres Software then
being held by Escrow Agent.
6. Liability. Escrow Agent shall not, by reason of its
execution of this Escrow Agreement, assume any responsibility or liability for
any transaction between Acres and Customer, other than the performance of its
obligations as Escrow Agent, with respect to the Source Code held by it in
accordance with this Escrow Agreement.
7. Confidentiality. Except as provided in this Escrow
Agreement, Escrow Agent agrees that it shall not divulge or disclose or
otherwise make available to any third person whatsoever, or make any use
whatsoever, of the Source Code without the express written consent of either
party.
8. Address. All notices or other communications required or
contemplated herein shall be in writing, sent by certified mail, return receipt
requested, addressed to the other party at the address indicated below or as
same may be changed from time to time by notice similarly given.
If to Acres: Acres Gaming Incorporated
815 NW 9th Street
Corvallis, OR 97330
Attention: Vice President and Corporate Counsel
If to Customer: Mandalay Bay Resort & Casino
3950 Las Vegas Boulevard South
Las Vegas, NV 89193-6778
Attention: Controller
If to Escrow Agent: __________________
__________________
9. Assignment. Neither this Escrow Agreement, nor any rights,
liabilities or obligations hereunder may be assigned by Escrow Agent without the
prior written consent of Customer and Acres.
<PAGE> 16
10. No Access. Except with the prior written consent of
Customer, Acres shall not be permitted access to or have the ability to withdraw
any escrowed Source Code.
11. Customer Audit Rights. Customer shall have the right to
audit the Source Code from time to time to verify Source Code has been deposited
in compliance with this Agreement. Acres shall have the right to observe
Customer's audit.
12. Exploitation. Customer shall have the unrestricted right
to use, modify, change, alter and exploit the Source Code, which it is permitted
to access in accordance with this Agreement. All such rights to the Source Code
are limited to its intended use at Mandalay Bay Resort & Casino.
IN WITNESS WHEREOF, the parties have executed this Escrow
Agreement as of the day and year set forth above.
ESCROW AGENT By:_____________________________
CUSTOMER By:_____________________________
ACRES By: ____________________________
<PAGE> 17
SCHEDULE A
SOURCE CODE TO BE ESCROWED
Accounting Subsystem
Accounting Module
Jackpot/Fill Module
Translator
Concentrator
Bank Controller
In-Machine Communications
Mapping & Analysis
Player Tracking Interface
Paging
Bonus Modules
<PAGE> 18
EXHIBIT D
FUNCTIONAL REQUIREMENTS SPECIFICATION
CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SEC
<PAGE> 19
EXHIBIT E
CUSTOMER HARDWARE
- - IBM 4695 POS terminals with Integrated Touchscreen (estimated
quantity:15)
- - Epson TM-U200 ticket printers (estimated quantity: 12)
- - Dot Matrix printers for W2G and 1024S forms (estimated quantity: 25)
- - Laser report printers
- - PC Workstations
- - Network Hubs and wiring required to connect Bank Controllers to the
Concentrator
<PAGE> 20
EXHIBIT F
DESIGNATION OF GAME MANUFACTURERS
The Game manufacturers Customer designated below are to be supplied by Acres
with all information and equipment they require to equip their Game(s) to be
compliant with System requirements:
1. International Game Technology (IGT)
2. WMS Gaming, Inc.
3. Alliance Gaming Corporation (Bally Gaming)
4. Casino Data Systems (CDS)
5. Sigma Games
6. Silicon Gaming, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACRES GAMING
INCORPORATED FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 2,776,000
<SECURITIES> 0
<RECEIVABLES> 3,827,000
<ALLOWANCES> (15,000)
<INVENTORY> 4,601,000
<CURRENT-ASSETS> 11,413,000
<PP&E> 6,563,000
<DEPRECIATION> 3,749,000
<TOTAL-ASSETS> 15,227,000
<CURRENT-LIABILITIES> 3,179,000
<BONDS> 0
0
4,948,000
<COMMON> 19,992,000
<OTHER-SE> (12,892,000)
<TOTAL-LIABILITY-AND-EQUITY> 15,227,000
<SALES> 6,347,000
<TOTAL-REVENUES> 6,347,000
<CGS> 3,390,000
<TOTAL-COSTS> 6,132,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (189,000)
<INCOME-PRETAX> (2,986,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,986,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,986,000)
<EPS-PRIMARY> (.34)<F1>
<EPS-DILUTED> (.34)<F1>
<FN>
<F1>This information has been prepared in accordance with SFAS No. 128. Basic and
diluted EPS have been entered in place of primary and fully diluted EPS,
respectively.
</FN>
</TABLE>
