<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] 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)
7115 AMIGO STREET, SUITE 150
LAS VEGAS, NV 89119
(Address of principal executive offices)
702-263-7588
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [x] No [ ]
The number of shares of Common Stock, $.01 par value, outstanding on
October 31, 1999 was 8,913,281.
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ACRES GAMING INCORPORATED
Table of Contents
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at September 30, 1999 and June 30, 1999 1
Statements of Operations for the Three Months Ended
September 30, 1999 and 1998 2
Statements of Cash Flows for the Three Months Ended
September 30, 1999 and 1998 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>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACRES GAMING INCORPORATED
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
(UNAUDITED)
(in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 5,203 $ 5,949
Receivables 2,929 1,576
Inventories 3,002 4,909
Prepaid expenses 91 265
-------- --------
Total current assets 11,225 12,699
-------- --------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 827 743
Equipment 4,972 4,778
Leasehold improvements 423 954
Accumulated depreciation (3,982) (4,101)
-------- --------
Total property and equipment 2,240 2,374
OTHER ASSETS 1,139 1,024
-------- --------
$ 14,604 $ 16,097
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,087 $ 2,407
Accrued expenses 1,227 1,491
Customer deposits 2,849 4,152
-------- --------
Total current liabilities 6,163 8,050
-------- --------
REDEEMABLE CONVERTIBLE PREFERRED STOCK 4,948 4,948
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50 million shares
authorized, 8.9 million shares issued and outstanding 89 89
Additional paid-in capital 19,904 19,904
Accumulated deficit (16,500) (16,894)
-------- --------
Total stockholders' equity 3,493 3,099
-------- --------
$ 14,604 $ 16,097
======== ========
</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 MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
------- -------
(in thousands except per
share data)
<S> <C> <C>
NET REVENUES $ 6,224 $ 3,288
COST OF REVENUES 3,064 1,330
------- -------
GROSS PROFIT 3,160 1,958
------- -------
OPERATING EXPENSES:
Research and development 1,187 1,418
Selling, general and administrative 1,601 1,505
------- -------
Total operating expenses 2,788 2,923
------- -------
INCOME (LOSS) FROM OPERATIONS 372 (965)
OTHER INCOME, NET 22 119
------- -------
NET INCOME (LOSS) $ 394 $ (846)
======= =======
NET INCOME (LOSS) PER SHARE - BASIC $ .04 $ (.10)
======= =======
NET INCOME (LOSS) PER SHARE - DILUTED $ .04 $ (.10)
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
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ACRES GAMING INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 394 $ (846)
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization 464 468
Changes in assets and liabilities:
Receivables (1,353) 54
Inventories 1,907 (1,063)
Prepaid expenses 174 (134)
Accounts payable and accrued expenses (584) 1,187
Customer deposits (1,303) (666)
------- -------
Net cash from operating activities (301) (1,000)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (290) (894)
Capitalized software costs (184) (512)
Other, net 29 (1)
------- -------
Net cash from investing activities (445) (1,407)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net -- 350
Preferred stock dividends -- (75)
------- -------
Net cash from financing activities -- 275
------- -------
NET DECREASE IN CASH AND EQUIVALENTS (746) (2,132)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 5,949 9,887
------- -------
CASH AND EQUIVALENTS AT END OF PERIOD $ 5,203 $ 7,755
======= =======
</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, 1999 filed with the Securities and Exchange Commission.
In the opinion of management, the interim financial statements include
all adjustments, consisting only of normal recurring adjustments, necessary in
order to make the financial statements not misleading. The results of operations
for the three-month period ended September 30, 1999 are not necessarily
indicative of the operating results for the full year or future periods.
2. Recent Accounting Pronouncements
The Financial Accounting Standards Board issued "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) in June 1998. SFAS 133
requires the Company to recognize all derivatives on the balance sheet at fair
value. The Company only enters into derivative instruments for hedging sales
contracts and receivables denominated in international currencies. Changes in
the fair value of the derivatives will be offset against the change in fair
value of the receivable. The change in the derivative's fair value related to
the ineffective portion of a hedge, if any, will be immediately recognized in
earnings. The Company expects to adopt this Standard as of the beginning of its
fiscal year 2002. The effect of adopting this standard is not expected to have a
material effect on the Company's financial condition or results of operations.
3. 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. The Company
did not have any unbilled receivables at September 30, 1999. At June 30, 1999
the Company had $1.0 million in unbilled receivables. 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.
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4. 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>
SEPTEMBER 30, JUNE 30,
1999 1999
------------- --------
(in thousands)
<S> <C> <C>
Raw Materials $ 992 $1,114
Work-in-progress 44 1,398
Finished Goods 1,966 2,397
------ ------
$3,002 $4,909
------ ------
</TABLE>
5. 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, net of
accumulated amortization, were $779,000 and $647,000 at September 30, 1999 and
June 30, 1999, respectively, and are included in other assets. Capitalized costs
are amortized on a straight-line basis over the estimated life of the product
beginning when the products become commercially feasible. All research and
development costs are expensed as incurred.
6. Income Taxes
At September 30, 1999, the Company had cumulative net operating losses
of approximately $15.1 million that are available to offset future taxable
income through 2019. The Company has provided a valuation allowance for the
entire amount of the benefit related to these net operating loss carryforwards
as realizability is uncertain. Deferred tax liabilities were insignificant as of
September 30, 1999 and June 30, 1999.
7. 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 certain of
its current and former executive officers. Those suits have been consolidated
into one combined class action. The Company denies the allegations and intends
to vigorously defend itself. See "Part II - Item 1. Legal Proceedings".
Two lawsuits have been filed regarding the Wheel of Gold(TM) technology
that is the subject of two patents (the "WOG Patents") that have been assigned
to Anchor Gaming ("Anchor"). In the first suit, now pending in U.S. District
Court, Anchor has 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. 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. In the second action, the Company has filed suit alleging, among
other things, that Anchor wrongfully used the Company's technology to obtain the
WOG Patents. 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 denies all allegations
asserted against it and intends to vigorously defend itself and its intellectual
property rights. In separate but related actions, the Company has filed suits
against its former and current general liability insurance carriers for breach
of insurance contract. The Company's suits are based on the insurers' refusal to
defend the Company against certain counterclaims brought against the Company in
certain of the four related patent lawsuits. See "Part II - Item 1. Legal
Proceedings".
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8. 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.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
1999 1998
(in thousands except per
share data)
<S> <C> <C>
Net income (loss) $ 394 $ (846)
Preferred stock dividends -- (75)
-------- --------
Net income (loss) allocable to common stockholders $ 394 $ (921)
======== ========
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 8,848
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 2,228 --
Weighted average number of common shares outstanding for -------- --------
computing diluted earnings per share 11,141 8,848
======== ========
-------- --------
Earnings (loss) per share - basic $ .04 $ (.10)
======== ========
-------- --------
$ .04 $ (.10)
======== ========
</TABLE>
The following common stock equivalents were excluded from the earnings
per share computations because their effect would have been anti-dilutive:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
1999 1998
(in thousands)
<S> <C> <C>
Warrants and employee stock options 1,326 1,400
Redeemable convertible preferred stock, if converted,
assuming conversion at rates in effect at September 30, 1998 -- 1,305
</TABLE>
The Stock Purchase Agreement between International Game Technology
("IGT") and the Company pursuant to which IGT purchased 519,481 shares of
Redeemable Convertible Preferred Stock (the "Preferred Stock") restricts IGT's
ownership of the Company's common stock. Without the consent of the Company, IGT
may not own more than 20% of the outstanding common stock, including, for
purposes of the calculation, the shares of common stock into which the Preferred
Stock owned by IGT is convertible. The Company believes that this provision
operates to limit IGT's right to convert shares of Preferred Stock as well as
limiting IGT's rights to purchase additional shares of common stock. IGT
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has asserted that the agreement does not limit the number of shares into which
the Preferred Stock may be converted. If there were no limit on IGT's right to
convert shares of Preferred Stock into common stock, as of September 30, 1999,
the Preferred Stock could have been converted into 2,951,594 shares of common
stock, or 24.9% of the then outstanding common stock, and diluted earnings per
share would have been reduced to $.03 per share. IGT has not indicated it plans
to convert any shares of Preferred Stock into common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, manufactures and markets electronic equipment and
software 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. Acres 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.
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, player tracking and visual analysis modules that
may be purchased and installed individually or as components of an integrated
system marketed as the Acres Advantage(TM).
RESULTS OF OPERATIONS
The Company's net revenues for the three months ended September 30, 1999
increased to $6.2 million from net revenues of $3.3 million during the three
months ended September 30, 1998. The Company's revenues can fluctuate
significantly based on the timing of the delivery of any large order. Deliveries
of Acres Advantage hardware to MotorCity in Detroit, Michigan, and bonusing
software to the Star City Casino, in Sydney, Australia, comprised the majority
of the revenues in the current quarter. In the prior year quarter, revenues were
comprised of hardware royalty payments received from IGT, bonusing software
delivered to IGT primarily for Mirage Resort's Bellagio property and custom
bonus games and displays delivered directly to Bellagio.
In the current quarter, the gross profit margin decreased to 51% from
60% in the prior year quarter. Hardware sales, such as the current quarter sales
to MotorCity, carry a lower gross profit margin than the software sales and
royalty payments recorded in the quarter ended September 30, 1998.
Operating expenses in the current year quarter were $135,000 less than
in the prior year quarter due primarily to reductions in staffing and other cost
savings resulting from the relocation of the Company's headquarters to Las
Vegas. The relocation was substantially complete at the end of September 1999.
The savings resulting from the relocation were partially offset by an increase
in the cost of defending the Company's intellectual property rights.
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had cash and equivalents of $5.2
million, compared to $5.9 million as of June 30, 1999. The Company invests its
cash in highly liquid marketable securities with a maturity of three months or
less at the date of purchase.
At September 30, 1999 the Company had collected $2.8 million of advance
deposits against its order backlog of approximately $6.7 million. Backlog,
however, may not be a meaningful indication of future sales. Sales are made
pursuant to purchase orders or sales agreements for specific installations.
Products are generally delivered within one to six months of receipt of an order
depending on the nature of the order and the products being delivered. 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 by the receipt or loss of any one order.
The Company expects to complete the deliveries and installations
comprising its order backlog 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 effect
on the Company's liquidity. The company does not have any debt outstanding at
September 30, 1999 but intends to obtain a short-term line of credit. The
Company may not be able to obtain a line of credit. The Company has the ability
to reduce operating expenses by reducing staffing and other expenses.
The Company's operations have historically used cash. During the current
quarter, $301,000 of cash was used by operating activities. The cash provided by
the Company's net income, adjusted for non-cash items, was completely offset by
changes in accounts receivable, inventories and customer deposits resulting from
the quarter's sales activities. During the current quarter, the Company made
capital expenditures of $290,000 and capitalized software development cost of
$184,000.
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.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company only enters into derivative instruments to manage
well-defined foreign currency risks. The Company has entered into forward
exchange contracts to hedge the value of sales contracts and accounts receivable
denominated in Australian dollars. Foreign exchange contracts have gains and
losses that are recognized at the settlement date. The impact of changes in
exchange rates on the forward contracts will be substantially offset by the
impact of such changes on the value of the related sales contracts and accounts
receivable. At September 30, 1999, the Company held a foreign exchange contract
totaling $2.1 million and maturing in February 2000. The counterparty to the
foreign exchange contract is a large, widely recognized bank resulting in
minimal risk of credit loss due to non-performance by the bank. The net effect
of an immediate 10 percent change in exchange rates on the forward exchange
contracts and the underlying hedged positions would not be material to the
Company's financial condition or results of operations.
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.
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The Company has evaluated its technology and data, including imbedded
non-information technology, used in the creation and delivery of its previous
generations of products and services (the "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
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.
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.
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 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 forward-looking statements are
based prove incorrect or should unanticipated circumstances arise, the Company's
actual results could differ materially 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, 1999.
Forward-looking statements contained in this Form 10-Q relate to the
Company's plans and expectations as to: sales backlog; adequacy of cash and
equivalents balances to fund the Company's operations; anticipated future sales;
revenue recognition; cash collections; scheduled product installation dates; new
product development and introduction; the availability of a line of credit;
patent protection; litigation settlements; and anticipated effects of the Year
2000.
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 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; the ability of the Company to obtain a
line of credit; 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 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 has received class certification
for a class consisting of the purchasers of the Company's stock during the
period from March 26, 1997 to December 11, 1997. 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.
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
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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 has reached a partial settlement
with Atlantic Mutual that included reimbursement of certain defense costs of
Suit I. The Company is continuing to pursue reimbursement of additional defense
costs of 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
this matter will be resolved through settlement discussions.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered by
this Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
13
<PAGE> 14
ACRES GAMING INCORPORATED
(Registrant)
Date: November 12, 1999 By /s/ Reed M. Alewel
-----------------------------------------
Reed M. Alewel
Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
(authorized officer and principal financial
and chief accounting officer)
14
<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 Lease dated August 5, 1999 between the Company and Avery
Investments
27.1 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended December 31, 1996,
previously filed with the Commission.
(2) Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1996,
previously filed with the Commission.
15
<PAGE> 1
EXHIBIT 2.1
LEASE
PARTIES
For reference purposes only, this Lease is dated August 5, 1999, and the
parties to this lease are AVERY INVESTMENTS, LLC, AN OREGON LIMITED LIABILITY
COMPANY, hereinafter referred to as "Lessor," and ACRES GAMING, INC. A NEVADA
CORPORATION, hereinafter referred to as "Lessee."
PREMISES
The real property of which the premises are a part is legally described
on Exhibit "A" and by this reference incorporated herein. The "Premises" are
further defined as follows:
Approximately 11,209+/- square feet located on the second floor in Avery
Square Shopping Center located at 815 NW Ninth Street, Corvallis, Oregon
97330, consisting of the southern portion of U-203 and the Phone Room,
as outlined in red on Exhibit "A-1" and by this reference, incorporated
herein. The use and occupancy by Lessee shall include the use, in common
with others entitled thereto, of the walkways, common areas, and
customer parking facilities.
TERM/RENT
In consideration of the mutual covenants, promises, and conditions
hereinafter set forth, Lessor leases the Premises to Lessee for a term
commencing September 1, 1999 and continuing thru February 28, 2002 at the
following monthly rental, which sums shall be payable in advance on or before
the 1st day of each calendar month throughout the lease term:
<TABLE>
<S> <C>
September 1, 1999 thru August 31, 2000 $14,796.00 per mo.
September 1, 2000 thru August 31, 2001 $15,020.00 per mo.
September 1, 2001 thru February 28, 2002 $15,244.00 per mo.
...Option, if Exercised...
March 1, 2002 thru August 31, 2002 $15,244.00 per month
September 1, 2002 thru August 31, 2003 $15,468.00 per month
September 1, 2003 thru August 31, 2004 $15,693.00 per month
</TABLE>
Page 1 OF 19
<PAGE> 2
Provided Lessee is not then in default under the terms and conditions of
the Lease at the time the Option to Renew is exercised, Lessee shall have one
(1) option to extend the term of this Lease for a period of thirty (30) months
commencing on the date following expiration of the primary term provided Lessee
shall have given a minimum of one hundred twenty (120) days' advanced written
notice to Lessor of Lessee's intention to extend the term of the Lease. All
terms and conditions shall remain the same excepting the rental rate, which
shall be as outlined above. Nothing contained herein shall be construed as an
extension of the term hereof or as a consent of Lessor to any holding over by
Lessee, except through exercise of the Option provided herein.
This lease is subject to the following terms to which the parties agree:
SECTION 1: OCCUPANCY
1.1 PAYMENT OF RENT. Lessee shall pay the specified rent when due in
lawful money of the United States at Lessor's address stated in this lease or
such other address as Lessor shall designate by notice to Lessee. Any rent not
paid within 10 days from the due date shall bear interest in the manner stated
in paragraph 13.6.
1.2 DELIVERY OF POSSESSION. Delivery of Possession of the Premises shall
occur on the date set for commencement of the Lease Term.
1.3 CONDITION OF PREMISES. Lessor makes no warranty as to the adequacy
of the Premises for the intended use by Lessee, and Lessee accepts the Premises
in its current "where is, as is" condition, based upon its own inspection and
not upon any representation by Lessor or its agents except as may be stated in
this lease.
SECTION 2. USE OF THE PREMISES
2.1 PERMITTED USE. Lessee shall use and permit the Premises to be used
for the following purposes only:
general and administrative offices
2.2 RESTRICTIONS ON USE. In connection with its use of the Premises
Lessee shall:
(a) Refrain from conducting any activity or creating any conditions on
the Premises in violation of any federal, state or municipal laws or orders;
Page 2 OF 19
<PAGE> 3
(b) Refrain from any activity or the maintenance of any condition that
would in any way tend to create a nuisance, damage the reputation of the
Premises, or be reasonably offensive to Lessor, other Lessees of the Building in
which the Premises may be located or other owners or users of adjoining
property;
(c) Refrain from any use of the Premises that would cause the fire
insurance rates on the Premises or the Building to be increased, or that will
prevent Lessor from taking advantage of any future ruling of the Oregon
Insurance Rating Bureau or its successor that would permit reduced premium rates
for long-term policies on the Premises. If Lessee shall fail to comply with this
restriction upon reasonable notice from Lessor, Lessee shall pay any extra cost
of fire insurance upon receipt of billings from Lessor;
(d) Refrain from any activity or installation that will, in the opinion
of a qualified engineer or architect selected by Lessor, overload the floors or
create undue stress upon any part of the Premises;
(e) Refrain from the use of any electrical equipment that will, in the
opinion of a qualified electrician selected by Lessor, overload the electrical
circuits from which Lessee obtains current, or interfere with the reasonable use
of such circuits by Lessor or other tenants of Lessor using the same circuits.
Any changes to the wiring necessary to prevent Lessee's use from overloading the
circuits shall be paid for by the Lessee.
(f) Refrain from smoking in or about the Premises, common area hallways,
restrooms, courtyard, or other areas of Avery Square, excepting in those areas
as may be designated by Landlord from time to time.
2.3 SIGNS AND ATTACHMENTS. Lessee shall not, without Lessor's prior
written consent as to design, scale, and placement, place any sign,
advertisement, notice, marquee, awning, decoration, aerial or attachment in, on
or to the roof, front, windows, doors or exterior walls of the Premises or the
Building. Any such sign or attachment placed upon the Premises by Lessee with
Lessor's consent shall be removed at Lessee's expense upon termination of this
lease, and all damage caused by the installation and/or removal shall be
repaired at Lessee's expense. Lessee acknowledges that Lessor, at Lessor's sole
cost and expense, has installed a set of oversized sign panels on the monument
signage identifying Tenant's presence within Avery Square. Lessor, at Lessor's
sole discretion, reserves the right to reduce the area of said signage to that
of the other sign panels on the monument signage at Lessor's cost. Lessor shall
install and maintain at the entrance to the building, and at other portions of
the common facilities as may be reasonable, directional signage which clearly
identifies the location of Lessee's leased Premises.
Page 3 OF 19
<PAGE> 4
2.4 REMOVAL OF DEBRIS. Lessee shall keep the common areas abutting the
leased Premises free and clear of debris and obstructions of every kind.
2.5 ALTERATIONS. Lessee shall make no alterations, additions, or
improvements to the Premises, including the installation of window coverings,
without Lessor's prior written consent. Any such additions, alterations or
improvements, except for unattached movable trade fixtures, shall at once become
a part of the realty and belong to Lessor and shall not be removed later by
Lessee unless the terms of the applicable consent provide otherwise.
SECTION 3. MAINTENANCE AND REPAIR
3.1 LESSEE'S OBLIGATION TO MAINTAIN AND REPAIR. Lessee shall at all
times maintain the Premises in a neat condition, free of trash and debris and in
good order and repair. Lessee's responsibilities shall include, without
limitation, the following:
(a) Performance of all routine maintenance and repair upon the
electrical fixtures, switches, and wiring from the service panel, plumbing,
water lines, sewer facilities from point of entry to the Premises, doors,
windows and related hardware, ceilings, interior walls and floor; provided,
however, Lessor shall be responsible for the replacement of plumbing and the
electrical equipment, excepting light bulbs and ballasts, by reason of
obsolescence and defects not caused by any neglect on the part of the Lessee,
its agents, or employees.
(b) Replacement of all broken or cracked glass with glass of quality
equal to that existing at the commencement of the term.
(c) Performance of all routine maintenance and repairs and inspections
upon the heating plant, any air conditioning unit used in connection with the
Premises, and any fixtures and equipment installed by Lessor or Lessee in the
Premises.
(d) Not permitting any waste upon the Premises.
3.2 LESSOR'S OBLIGATION TO MAINTAIN AND REPAIR. Lessor agrees to
maintain in good order and repair during the term of this lease the exterior
walls, roof, gutters, down spouts, common areas, and foundations of the building
in which the demised Premises are situated and the sidewalks, parking lot, and
grounds thereabout. Lessor shall be responsible for major repairs or replacement
of the HVAC system, plumbing to point of entry to the Premises, and electrical
systems to the service panel, or other items not included in Section 3.1, unless
such repairs/replacement is due to a negligent act or omission by Lessee, its
invitees, agents, or employees.
Page 4 OF 19
<PAGE> 5
3.3 CONDITIONS OF LESSORS' LIABILITY. Lessor shall have no duty to make
any repairs which are its obligation under this lease until Lessee shall have
given written notice to Lessor of the repairs to be made or condition to be
corrected. Lessor shall have no liability for failure to make any repair
required of it if the repair is completed within a reasonable time following the
notice from Lessee.
3.4 LESSOR'S INTERFERENCE WITH LESSEE. Any repairs, replacements,
alterations, or other work performed on or around the leased Premises by Lessor
shall be done in such a way so as to interfere as little as reasonably possible
with the use of the Premises by Lessee. Lessee shall have no right to an
abatement of rent nor any claim against Lessor for any inconvenience or
disturbance resulting from Lessor's activities performed in conformance with the
requirement of this provision.
SECTION 4. UTILITIES, TAXES, ASSESSMENTS, AND INSURANCE
4.1 UTILITIES. Lessee shall pay when due all charges for lights, heat,
janitorial service or other utilities of any kind furnished to the Premises at
Lessee's request, excepting water and garbage which shall be the responsibility
of the Lessor. If Lessor receives and pays bills for any utilities furnished to
the Premises, Lessee shall reimburse Lessor upon demand.
4.2 TAXES. Lessee shall pay when due all taxes assessed against its
personal property located on the Premises. Lessor shall pay all real property
taxes in connection with the leased Premises. However, Tenant shall be
responsible for its prorata share of any increase in the real property taxes
above the base year of 1999/2000 during the term of this Lease.
4.3 ASSESSMENTS. Lessee shall be responsible for its pro rata share of
any assessments or charges of any governmental body made against the leased
Premises during the term of this Lease for any public improvements, including,
but not limited to, providing paving, sidewalks, sewers, core shopping area,
public finance improvements or charges, or public parking facilities. Each such
assessment or charge for which Lessee is responsible shall be bonded (if public
Bancroft type bonding is available) by Lessor on the most lenient, long-time
payment plan possible, and Lessee shall pay only those installment payments,
including interest, coming due during the term of this Lease or any extension
thereof. If Lessor prepays in full any such assessment, Lessee shall pay the
same amount to Lessor as it would have paid had the assessments not be prepaid.
Notwithstanding the above, this provision shall apply only during the option
period, if exercised by Lessee, as outlined herein.
4.4 INSURANCE. Lessee shall insure (by self insurance if desired) all
plate
Page 5 OF 19
<PAGE> 6
glass for which Lessee is responsible under paragraph 3.1. Lessee shall also
keep in force a standard form of fire insurance and extended coverage which
shall provide adequate coverage of the fixtures, equipment, and all improvements
for which Lessee is responsible under paragraphs 3.1 and 5.3. Such insurance
shall be in a form, amount, and company satisfactory to Lessor with loss payable
to Lessor, excepting that which would apply to Lessee's personal property. All
such insurance policies or certificates from the issuers evidencing the required
coverage and requiring 10 days' written notice to Lessor prior to any
cancellation or change in policy terms shall be delivered to Lessor. Lessor
shall maintain fire insurance on the building leased, but not on the fixtures or
personal property of Lessee.
4.5 WAIVER OF SUBROGATION. Neither party shall be liable to the other,
or to the other successors or assigns, for any loss or damage caused by fire or
any of the risks enumerated in a standard fire insurance policy with an extended
coverage endorsement, and in the event of insured loss, neither party's
insurance company shall have a subrogated claim against the other.
SECTION 5. DAMAGE TO OR DESTRUCTION OF THE PREMISES
5.1 PARTIAL DAMAGE. If either the Building or the Premises shall be
partially damaged by fire, windstorm or other casualties and paragraph 5.2 does
not apply, Lessor shall, subject to paragraph 5.3, repair the damage and restore
to a condition comparable to that existing prior to the damage. Repair shall be
accomplished with all reasonable dispatch, subject to interruptions and delays
from labor disputes and other causes beyond Lessor's reasonable control. Rent
shall be abated during the period and to the extent the Premises are not
reasonably usable for the use permitted by this lease, except where the damage
is the fault of the Lessee or Lessee is otherwise liable for the cost of repair.
5.2 DESTRUCTION. If either the Building or the Premises is damaged such
that the cost of restoration as reasonably estimated by Lessor equals or exceeds
40 percent of the value of the Premises (or the Building), exclusive of
foundations, just prior to the occurrence of the damage, or if the damage occurs
when the remaining term of this lease (excluding any optional renewal periods)
is 20 percent or less of the original term, then the parties shall proceed as
follows:
(a) Either party may elect to terminate this Lease by written notice to
the other party given within ninety (90) days following date of damage:
(b) Absent such an election, Lessor shall, subject to paragraph 5.3,
proceed to restore the Premises (or Building) to condition substantially the
same as that existing prior to the damage, so as to provide Lessee with usable
space equivalent in quantity and character to that existing at the commencement
of the term. Work shall be
Page 6 OF 19
<PAGE> 7
commenced as soon as reasonably possible following the period for Lessor's
election not to rebuild and thereafter shall proceed in the manner stated in
paragraph 5.1. Rent may be abated in the manner and under the conditions stated
in paragraph 5.1.
5.3 REPAIR OF LESSEE'S PROPERTY. Repair, replacement or restoration of
any fixture or personal property owned by Lessee or any additions or
improvements to the Premises constructed by the Lessee shall be the
responsibility of the Lessee regardless of the cause of the damage. Lessee shall
pay all costs of moving its property when this is required in connection with
repairs of the Premises for which Lessor is responsible.
SECTION 6. EMINENT DOMAIN
6.1 PARTIAL TAKING. If a portion of the Premises is condemned or
purchased in lieu of condemnation and paragraph 6.2 does not apply, this lease
shall continue on the following terms.
(a) Lessor shall be entitled to all of the proceeds of condemnation and
Lessee shall have no claim against the Lessor as a result of the condemnation;
(b) Subject to paragraph 5.3 relating to Lessee's improvements and
property, Lessor shall proceed as soon as reasonably possible to make such
repairs and alterations to the Premises as are necessary to restore the
remaining Premises to a condition as comparable as reasonably practicable to
that existing at the time of the condemnation. Lessor may, but shall not be
required to, perform alterations prior to the actual taking after the portion to
be taken has been finally determined. Rents shall be abated to the extent the
Premises are untenable during the period of alteration and repair;
(c) After the date on which title vests in the condemning authority or
an earlier date on which alterations are commenced by Lessor to restore the
balance of the Premises in an anticipation of taking, the rent shall be reduced
in proportion to the reduction in reasonable value of the Premises for Lessee
use caused by the condemnation.
6.2 TOTAL TAKING. If a condemning authority takes all of the building or
leased Premises or a portion sufficient to render the remaining Premises
reasonably unsuitable for the use which Lessee was then making of the Premises,
the Lease shall terminate as of the date the title vests in the condemning
authorities or the date that Lessee surrenders possession of the property,
whichever is later, and the provisions of Section 11 covering termination shall
apply. In such event, Lessor shall be entitled to all of the proceeds of
condemnation, and Lessee shall have no claim against Lessor as a result of the
condemnation.
Page 7 OF 19
<PAGE> 8
SECTION 7. LIABILITY TO THIRD PERSONS;
LESSOR'S LIABILITY TO LESSEE
7.1 INDEMNIFICATION OF LESSOR. Lessee shall indemnify and defend Lessor
from any claim, liability, damage or loss arising out of or relating to any
activity of the Lessee, its agents, invitees, or visitors on the Premises or any
condition existing in the Premises. However, this provision shall not be
construed to relieve Lessor from responsibility for any loss or damage caused to
Lessee or others as a result of the negligence or willful acts of Lessor or its
employees.
7.2 ACTS OF OTHER TENANTS. Lessor shall have no liability to Lessee for
acts of other tenants who may be occupying the Building or adjacent Premises.
7.3 LIENS. Lessee shall pay as due all claims for work done on and for
services rendered or materials furnished to the Premises at its request, and
shall keep the Premises free from any liens. If Lessee fails to pay any such
claims or to discharge any lien, Lessor may do so and collect all costs of such
discharge, including its reasonable attorneys' fees. Such actions by Lessor
shall not constitute a waiver of any right or remedy which Lessor may have on
account of Lessee's default. If a lien is filed as a result of nonpayment Lessee
shall, within 10 days after knowledge of the filing, secure the discharge of the
lien or deposit with Lessor cash or a sufficient corporate surety bond in an
amount sufficient to discharge the lien plus any costs, attorney fees and other
charges that could accrue as a result of a foreclosure or sale under the lien.
7.4 LIABILITY INSURANCE. Lessee shall at its expense carry public
liability and property damage insurance with a combined single limit of not less
than $1,000,000 per occurrence. Such insurance shall be in a form satisfactory
to Lessor, shall protect Lessor and Lessee against the claims of third persons
and shall include an endorsement covering the indemnification liability assumed
by the Lessee under paragraph 7.1 of this lease. Lessee shall furnish
certificates evidencing the insurance coverage and bearing endorsements
requiring 10 days' written notice to Lessor prior to any change or cancellation
of the policy.
SECTION 8. ASSIGNMENT AND SUBLEASE
PROHIBITION ON ASSIGNMENT. No part of the Premises may be assigned,
mortgaged or subleased by Lessee, nor may a right to use any portion of the
Premises be conferred on any third person by any other means, without Lessor's
prior written consent. This provision shall apply to all transfers by operation
of law and transfers to and by trustees in bankruptcy, receivers,
administrators, executors and legatees. No consent in one instance shall prevent
this provision from applying to a subsequent instance. Lessor shall have the
right to charge a reasonable fee for administrative
Page 8 OF 19
<PAGE> 9
expenses in connection with any assignment or sublease to which it gives its
consent.
SECTION 9. DEFAULT
The following shall be the events of default:
9.1 NONPAYMENT BY LESSEE. Lessee's failure to pay rent when due or any
other charge under this lease within ten (10) days after written notice by
Lessor.
9.2 NONCOMPLIANCE BY LESSEE. Lessee's failure to comply with any term or
condition or fulfill any obligation of this lease (other than the payment of
rent or other charges) within fifteen (15) days after written notice by Lessor
specifying the nature of the default. If the default is of such nature that it
cannot be completely remedied within the fifteen (15) day period, this provision
shall be complied with if Lessee begins correction of the default within the
fifteen (15) day period and thereafter proceeds with reasonable diligence and in
good faith to effect the remedy as soon as practicable.
9.3 INSOLVENCY OF LESSEE. An assignment by Lessee for the benefit of
creditors; the filing by Lessee of a voluntary petition in bankruptcy, and
adjudication that Lessee is bankrupt or the receiver of the property of the
Lessee; the filing of an involuntary petition of bankruptcy and Lessees failure
to secure a dismissal of such petition within sixty (60) days after filing;
attachment or levying of execution upon the leasehold interest and failure of
Lessee to secure discharge of such attachment or release of such levy within
thirty (30) days. If Lessee consists of two or more individuals or business
entities, the events of default specified in this paragraph shall apply to each
individual unless within 10 days after an event of default occurs, the remaining
individuals produce evidence satisfactory to Lessor that they have
unconditionally acquired the interests of the one causing the default.
SECTION 10. REMEDIES ON DEFAULT
10.1 RE-ENTRY. In the event of a default, Lessor may elect to terminate
Lessee's right to possession of the Premises by notice to Lessee. Following such
notice, Lessor may re-enter, take possession of the Premises and remove any
persons or property by legal action or by self-help, with the use of reasonable
force and without liability for damages. Lessor shall have a security interest
in Lessee's property on the Premises at the time of re-entry to secure all sums
owed or to become owing Lessor under the lease. Perfection of such security
interest shall be by taking possession of the property, except for clinical
records which in all cases will remain the property of the Lessee, or otherwise
as provided by law.
10.2 RELETTING. Following a re-entry by Lessor because of Lessee's
default,
Page 9 OF 19
<PAGE> 10
Lessor may relet the Premises for a term longer or shorter than the term of this
lease and upon any reasonable terms including the granting or rent concessions
to the new tenant. Lessor may alter, refurnish or change the character or use of
the Premises in connection with such reletting. No such reletting by Lessor
following Lessee's default shall be construed as an acceptance of a surrender of
the Premises. If rent received upon reletting exceeds rent received under this
lease, Lessee shall have no claim to the excess.
10.3 DAMAGES FOR DEFAULT. Following re-entry, Lessor shall have the
right to recover from Lessee the following damages:
(a) All unpaid rent or other charges for the period prior to re-entry,
plus interest as provided in paragraph 13.6.
(b) An amount equal to the rental lost during any period in which the
Premises are not relet.
(c) All costs incurred in reletting or attempting to relet the Premises,
including without limitations, the cost of clean up and repair in preparation
for a new Lessee, the cost of correcting any defaults or restoring any
unauthorized alterations and the amount of any real estate commissions or
advertising expenses.
(d) Reasonable attorneys' fees incurred in connection with the default,
whether or not any litigation is commenced.
10.4 ACTIONS ON DEFAULT. Lessor may sue periodically to recover damages
as they accrue throughout the lease term and no action for accrued damages shall
be a bar to a later action for damages subsequently accruing. To avoid a
multiplicity of actions, Lessor may obtain a decree of specific performance
requiring Lessee to pay the damages stated in paragraph 10.3 as they accrue.
Alternatively, Lessor may elect in any one action to recover accrued damages
plus damages attributable to the remaining term of the lease equal to the
difference between the rent under this lease and the reasonable rental value of
the Premises for the remainder of the term, discounted to the time of the
judgment at the maximum rate permitted by law.
10.5 LESSEE'S POSSESSION FOLLOWING DEFAULT. In the event that Lessee
remains in possession following default and Lessor does not elect to re-enter,
Lessor may recover all unpaid rent or other charges, and shall have the right to
cure any nonmonetary default and recover the cost of such cure from Lessee, plus
interest at 12% per annum from the date of the expenditure. In addition, Lessor
shall be entitled to recover attorneys' fees reasonably incurred in connection
with the default, whether or not litigation is commenced. Lessor may sue to
recover such amounts as they accrue, and no one action for accrued damages shall
bar a later action for
Page 10 OF 19
<PAGE> 11
damages subsequently accruing.
10.6 REMEDIES CUMULATIVE. The foregoing remedies shall not be exclusive
but shall be in addition to all other remedies and rights provided under
applicable law, and no election to pursue one remedy shall preclude resort to
another consistent remedy.
SECTION 11. SURRENDER ON TERMINATION
11.1 SURRENDER OF PREMISES. Upon expiration of the lease term or earlier
termination because of default, Lessee shall deliver all keys to Lessor and
surrender the Premises to Lessor broom clean. Alterations constructed by Lessee
pursuant to Lessor's permission shall not be removed or restored to the original
condition unless the terms of permission for the alterations so require.
Depreciation and wear from ordinary use for the purposes for which the Premises
were let need not be restored, but all repair for which Lessee is responsible
shall be completed prior to such surrender. Lessee's obligation under this
paragraph shall not apply in case of termination of the lease because of
destruction of the Premises.
11.2 FIXTURES. With the exception of Lessee's movable trade fixtures,
all other fixtures placed upon the Premises during the term shall, at Lessor's
option, become the property of Lessor. Lessor may elect to require Lessee to
remove all such fixtures which would otherwise remain the property of Lessor,
and to repair any damage resulting from the removal. Should Lessee fail to
effect such removals or make such repairs, Lessor may do so and charge the cost
to Lessee with interest at 12% per annum from the date of expenditure.
11.3 REMOVAL OF LESSEE'S PROPERTY. Lessee shall remove all furnishings,
furniture and trade fixtures that remain the property of Lessee. Failure to do
so shall be an abandonment of the property and Lessee shall have no further
rights therein and Lessor may retain or dispose of the property as it sees fit.
11.4 HOLDOVER. Should Lessee fail to vacate the Premises when required,
Lessor may elect to treat Lessee as a tenant from month to month at a rental
rate equal to 125% of that required to be paid during the month immediately
prior to expiration and subject to all provisions of this lease except for
provisions for term, or Lessor may elect to take legal action to eject Lessee
from the Premises and to collect any damages caused by Lessee's wrongful holding
over.
Lessee's failure to remove property as required by paragraph 11.3 above
shall constitute a failure to vacate to which paragraph 11.4 shall apply if the
property not removed will substantially interfere with occupancy of the Premises
by another tenant
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<PAGE> 12
or with occupancy by Lessor for any purpose including preparation for a new
tenant.
SECTION 12. ARBITRATION
12.1 DISPUTES ARBITRABLE. If any dispute arises between the parties to
this lease regarding the extent of rent abatement under paragraph 5.1, the
extent of damage under paragraph 5.1, the extent of rent reduction to be made
under paragraph 6.1 (c), or whether paragraph 6.2 applies following a partial
taking of the Premises by condemnation, either party may request arbitration and
appoint as arbitrator one independent real estate broker or appraiser having
knowledge regarding evaluation of rental property comparable to the Premises. If
the dispute is not resolved within 10 days after such notice, the responding
party shall likewise choose an arbitrator meeting the above qualifications. The
two arbitrators shall within 5 days choose a third having the above
qualifications. If the choice of the second or third arbitrator is not made
within 5 days after the end of the period in which the choice is to be made,
then either party may apply to the presiding judge of the Judicial District in
which the Premises are located who shall appoint the required arbitrator.
12.2 SUBMISSION OF DISPUTE. At any time within 20 days after appointment
of the third arbitrator either party may submit the dispute for settlement by
the arbitrators.
12.3 PROCEDURE FOR ARBITRATION. The arbitrator(s) shall proceed
according to the Oregon statutes governing arbitration, and the award of the
arbitrators shall have the effect therein provided. The arbitration shall take
place in the county in which the leased Premises are located. Cost of the
arbitration shall be shared equally by the parties, but each party shall pay its
own attorney fees incurred in connection with the arbitration.
SECTION 13. GENERAL PROVISIONS
13.1 NONWAIVER. Waiver by Lessor of strict performance of any provision
of this lease shall not be a waiver of or prejudice the Lessor's right otherwise
to require strict performance of the same provision or any other provision.
13.2 ACTIONS AND SUITS. If suit or action is instituted in connection
with any controversy arising out of this lease, the prevailing party shall be
entitled to recover in addition to costs such sum as the court may adjudge
reasonable as attorneys' fees at trial and upon any appeal of such suit or
action. In any action brought to enforce this lease or arising out of the
relationship between the parties created by this lease, the parties agree that
all issues in any such actions shall be tried by a judge and not by a jury.
Page 12 OF 19
<PAGE> 13
13.3 NOTICES. Any notice under this lease shall be in writing and shall
be effective when actually delivered, to the address for the parties stated in
this lease, or to such other address as the party may specify by notice to the
other party. Notices to Lessee shall be sufficient if posted in a conspicuous
place on the Premises, and any such notice shall be effective as of the time of
posting.
13.4 SUCCESSION. Subject to the prescribed limitations on transfer of
Lessee's interest, this lease shall be binding upon and inure to the benefit of
the parties, their respective successors and assigns.
13.5 ENTRY FOR INSPECTION. Lessor shall have the right to enter upon the
Premises only at reasonable times, after giving reasonable notice (such notice
shall be defined as 24 hours minimum) to Lessee to determine Lessee's compliance
with this lease, to make repairs to the Building or to the Premises, or to show
the Premises to any prospective tenant or purchaser, and in addition have the
right, to place upon the Building or Premises any notices for selling of the
Building or Premises, and at any time during the last two months of the term of
this lease, to place and maintain upon the Premises notices for leasing of the
Premises.
Notwithstanding anything herein contained to the contrary, Lessor shall,
at all times during the term of this Lease, have access to the phone room and
roof, which access requires entry through the Premises. Access to the phone room
and roof shall be accomplished by entering the Premises during normal business
hours or at any other times by contacting the Lessee, who will provide 24-hour
access. The parties recognize that it is necessary for the Lessee to know when
all entries are made to the Premises.
13.6 INTEREST ON RENT AND OTHER CHARGES. Any rent or other payment
required of Lessee by this lease shall, if not received by Lessor within 10 days
after it is due, be subject to a $50.00 late charge as additional rent. Any
unpaid monies due shall accrue interest at 12% per annum from the due date until
paid.
13.7 PRORATION OF RENT. In the event of commencement or termination of
this lease at a time other than the beginning or end of one of the specified
rental periods, then the rent shall be prorated as of the date of commencement
or termination and in the event of termination for reasons other than default,
all prepaid rent shall be refunded to Lessee or paid on his account.
13.8 LESSOR'S CONVEYANCE. Any conveyance of the Premises by Lessor
during the term of this lease shall be subject to this lease, and following any
such conveyance, Lessor shall be discharged from all obligations under this
lease except
Page 13 OF 19
<PAGE> 14
those already accrued.
13.9 IMPROVEMENTS BY LESSEE. Lessee, at its sole cost, expense and
coordination, shall be responsible for the installation of all phone lines,
furnishings, fixtures, or other items deemed necessary for intended use not
provided by Lessor.
13.10 PARKING. Lessee shall be entitled to the nonexclusive right to
park in the parking areas located in the eastern lot of the Center or as
otherwise directed by Lessor from time to time for the use of Lessee's invitees
and employees. Provided, however, Lessee shall endeavor to limit its consumption
of parking to its pro rata share of the total parking spaces existing within the
Center, or as may be added thereto, excluding handicap parking stalls (including
those which may be added pursuant to Code) and those spaces as may be identified
as "visitor parking", based upon the ratio of the square feet of the leased
premises to the total square feet of all space capable of being leased within
the building, agreed to be 12.81 percent (12.81%). In no event shall Lessee
direct its employees to park in the northern lot of the Center. Lessor reserves
the right, at Lessor's sole discretion, to allocate and assign numbered parking
spaces to Lessee on the pro rata share as defined herein. Additionally, Lessor
reserves the right to designate a percentage of those spaces in the eastern half
of the northern lot of this Center as "visitor parking" and/or "car pool";
provided, however the Lessee's prorated share of remaining parking shall not be
reduced thereby. In the event Lessor allocates and assigns numbered spaces to
Lessee, as outlined herein, the overflow parking by Lessee, if any, shall be
directed off-site at Lessee's sole risk and responsibility. Any off-site parking
provided by Lessor shall have a nightly illumination equivalent to that offered
at Avery Square.
13.11 ADA STANDARDS. Lessor shall be responsible for any alterations,
modifications or improvements required to be made upon the common areas in the
building due to any applicable Federal, State, County or City law, order,
regulation, or ordinance, and shall indemnify and hold Lessee harmless from any
action as a result thereof. Lessee shall be responsible for any alternations or
modifications within the demised leased Premises (as outlined on Exhibit "A-1")
as may be required by virtue of any Federal, State, County or City law, order,
regulation, or ordinance. Lessee shall indemnify and hold Lessor harmless from
any actions as a result thereof. Each party agrees to notify the other party
immediately upon the receipt of any claims, asserted or threatened, arising out
of an alleged failure to comply with the ADA or any regulations promulgated
thereunder with respect to the leased Premises.
13.12 ACCESS TO THE PREMISES. Lessee and Lessee's employees shall be
granted twenty-four (24) hours access to the Premises. As soon as reasonably
practical after full execution of this Lease and prior to possession by Lessee,
Lessor shall install a code-activated system for the purpose of access into the
building outside
Page 14 OF 19
<PAGE> 15
of normal operating hours through an entrance or entrances of Lessor's choice.
13.13 PHONE ROOM ACCESS. Lessee maintains a phone/communication room as
depicted on the attached Exhibit "B" and labeled "Acres Phone Room", which will
require access through premises which may be occupied by another Lessee of the
Building. Lessee shall have twenty-four (24) hour access to said phone room,
provided, however, if said premises are occupied, the need for such access
during occupant's hours of business shall be coordinated with the Lessee of the
area requiring through access in advance for an appropriate time as may be
reasonably determined by said occupant.
13.14 LESSOR'S ALTERATIONS. Lessor shall install doorways and doors with
lockset in those locations identified on Exhibit "B", in compliance with
applicable code, at time of possession. Additionally Lessor, reserves the right
at Lessor's expense to replace the carpeting in the main hallway, as highlighted
in blue on Exhibit "B", to match the new carpeting to be installed on the second
floor common area walkways. Lessor shall provide Lessee with reasonable advance
notification prior to commencement thereof.
13.15 TENANT MIX. For those situations within the control of Lessor and
subsequent to the date of execution of this Lease by all parties, Lessor agrees
to refrain from leasing any other premises within the building for the purpose
of an arcade, amusement center, or other similar use. If for any reason
whatsoever this prohibition shall be deemed a violation of any federal or state
statutes, it shall be null and void without force or effect, and the remainder
of this Lease shall continue in full force or effect to its scheduled
conclusion. In the event Lessor is required by Lessee to defend this provision,
then and in that event, Lessee shall pay to Lessor expenses, costs, attorney
fees, fines, judgments, or penalties in connection therewith and as may be
incurred by or assessed against Lessor.
ALL PARTIES ARE ADVISED AND ENCOURAGED BY BROKER TO CONTACT HIS OR HER
ATTORNEY AS TO ANY QUESTIONS THAT MAY EXIST PRIOR TO THE EXECUTION OF THIS
DOCUMENT.
No warranties, recommendations, or representations are made by broker as
to the accuracy, the legal sufficiency, legal effect, or tax consequences of the
above referenced document.
IN WITNESS WHEREOF, the parties hereto have executed this instrument in
duplicate at the place and on the day and year first above written, any
corporate signature being by authority by the board of directors.
LESSEE: LESSOR:
Page 15 OF 19
<PAGE> 16
ACRES GAMING, INC. AVERY INVESTMENTS, LLC
By:____________________________ By:_____________________________
Date:__________________________ Date:____________________________
ADDRESS FOR NOTICES: ADDRESS FOR NOTICES:
Acres Gaming, Inc. Avery Investments, LLC.
Attn: __________________________ Attn: Eric Bunn
815 NW 9th Street, Suite #203 c/o Avery Square
Corvallis, OR 97330 P. O. Box 807
Corvallis, OR 97339
Page 16 OF 19
<PAGE> 17
EXHIBIT "A"
Property Layout
Page 17 OF 19
<PAGE> 18
EXHIBIT "A"
(Continued)
Page 18 OF 19
<PAGE> 19
EXHIBIT "A-1"
Phone Room Layout
Page 19 OF 19
<PAGE> 20
EXHIBIT "B"
Phone Room Access Layout
Page 20 OF 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACRES
GAMING INCORPORATED FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> SEP-30-1999
<CASH> 5,203,000
<SECURITIES> 0
<RECEIVABLES> 2,944,000
<ALLOWANCES> (15,000)
<INVENTORY> 3,002,000
<CURRENT-ASSETS> 11,225,000
<PP&E> 6,222,000
<DEPRECIATION> 3,982,000
<TOTAL-ASSETS> 14,604,000
<CURRENT-LIABILITIES> 6,163,000
<BONDS> 0
0
4,948,000
<COMMON> 19,993,000
<OTHER-SE> (16,500,000)
<TOTAL-LIABILITY-AND-EQUITY> 14,604,000
<SALES> 6,224,000
<TOTAL-REVENUES> 6,224,000
<CGS> 3,064,000
<TOTAL-COSTS> 2,788,000
<OTHER-EXPENSES> 31,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (53,000)
<INCOME-PRETAX> 394,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 394,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 394,000
<EPS-BASIC> .04<F1>
<EPS-DILUTED> .04<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>
