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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
(Commission File No.) 0-22498
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ACRES GAMING INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 88-0206560
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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815 NW NINTH STREET, CORVALLIS, OREGON 97330
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER INCLUDING:
(541) 753-7648
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
Redeemable Common Stock Purchase Warrants
Units (one share of Common Stock and one-half Redeemable Common Stock Purchase
Warrant)
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of August 31, 1996 was $50,719,000
The number of shares outstanding of the Registrant's Common Stock, par value
$.01 per share as of August 31, 1996 was 7,621,600 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference the Company's Proxy Statement to be filed in
connection with the Company's 1996 Annual Meeting of Shareholders to be held
November 12, 1996.
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Market. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Concept III . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Strategic Alliance With IGT . . . . . . . . . . . . . . . . . . 4
Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Production and Manufacturing. . . . . . . . . . . . . . . . . . 7
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Government Regulation . . . . . . . . . . . . . . . . . . . . . 8
Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Forward-Looking Statements. . . . . . . . . . . . . . . . . . . 13
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . 14
EXECUTIVE OFFICERS OF REGISTRANT. . . . . . . . . . . . . . . . . 14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . 16
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . 16
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . 34
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K. . . . . . 34
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
PART I
ITEM 1. BUSINESS
GENERAL
The Company develops, manufactures and markets electronic game promotion,
slot accounting, and game monitoring systems to the casino gaming industry. Its
Concept III products are designed to enhance casino profitability by providing
entertainment and incentives to players of slot machines and collecting and
analyzing data for use by casino managers. The Concept III technology improves
the efficiency of bonus and incentive programs currently offered by many
casinos, and makes possible bonus and incentive programs that have not
previously been offered. A number of the primary manufacturers of slot machines
have made extensive changes to the software used in their machines to support
the Concept III technology.
The Company currently offers products in four major categories:
- Bonusing
- Progressive jackpots
- Slot accounting
- Player tracking
Bonusing and progressive jackpot systems, which provide players with
opportunities for additional play and special pay-outs, are designed to enhance
interest in the machines and games to which they are attached. The slot
accounting products collect, analyze and report data to casino managers to
satisfy accounting and regulatory requirements and to enable casino management
to analyze the performance of each gaming device by type and location. Player
tracking systems allow a casino to monitor the playing patterns of individual
players or selected groups of players and to develop incentives and promotions
to those players.
In August 1996, the Company executed a letter of intent to implement a
strategic alliance with International Game Technology ("IGT"). IGT is the
largest manufacturer of slot machines in the world. The agreement includes a $5
million investment from IGT in return for 519,481 newly issued shares of the
Company's 3% convertible preferred stock, with a twelve-month option to purchase
an additional 519,481 shares at the same price. IGT will also have the right to
elect one member to the Company's board of directors. See "Strategic Alliance
with IGT."
In connection with the anticipated strategic alliance with IGT, the
Company expects to sell its Concept III bonusing and player tracking
components (which have been designed to interface with the Company's bonusing
components) for use in IGT Smart System-TM- player tracking/slot accounting
installations and expects to partially discontinue offering its slot
accounting and player tracking modules. See "Strategic Alliance with IGT."
THE MARKET
Casino gaming is found in more than 15 states in the United States. Iowa
and Illinois legalized limited gaming on riverboats in the late 1980s.
Subsequently, Mississippi, Missouri, Louisiana and Indiana have also legalized
riverboat or dockside casinos. Land-based gaming is permitted in Colorado,
South Dakota and Louisiana. The Indian Gaming Regulatory Act of 1988 has
resulted in a significant expansion of casino gaming on Indian lands. Casinos
currently are found on Indian lands in a number of states, including Arizona,
California, Connecticut, Minnesota, Oregon, Washington and Wisconsin. Gaming in
the traditional markets of Nevada and New Jersey has continued to grow even as
gaming has been introduced into additional jurisdictions.
Casino gaming has also grown rapidly world-wide, including in Australia,
Canada, Europe and Africa, as well as in parts of the former Soviet Union and
South America.
1
The Company estimates that approximately 750,000 casino-style machines are
currently in use throughout the world, including approximately 400,000 in the
United States.
The Company believes that increased competition among casinos will lead to
increased demand for game promotion, automated slot accounting, and game
monitoring systems of the type offered by the Company.
New or expanding casinos represent a significant part of the potential
market for the Company's products. Existing casinos also represent a
significant potential market as casino managers seek to maintain or improve
casino profitability by employing bonusing and other promotional programs for
slot machines.
CONCEPT III
The Concept III system was conceived to provide to the gaming industry 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 four Concept III products directly to casinos: bonusing, slot
accounting, player tracking, and progressive jackpot systems for gaming
machines. Concept III and its component products are a modular, integrated
system. The bonusing, progressive jackpot, slot accounting, and player tracking
modules can be purchased and installed individually or as components of an
integrated system. The Company intends that future products it may develop will
also be integrated into the Concept III system.
The Company also offers Concept III to OEM manufacturers of specialty slot
machines. An OEM manufacturer can use the ability of Concept III to coordinate
lights, sound and other special effects and its ability to cause a slot machine
to pay special bonuses. By adding these capabilities of Concept III to regular
slot machines, entirely new games can be created which offer unique and
entertaining experiences for slot players.
A Concept III installation in a casino includes electronic hardware
installed in the slot machines, personal computers that serve as controllers for
groups of slot machines, software to operate bonusing systems and progressive
jackpot systems and software to record and analyze data and generate reports to
casino management. Concept III employs personal computer technology, and is
designed to take advantage of future improvements in such technology. Under the
agreement with IGT, the Company expects to discontinue offering the software
which records and analyzes data and generates reports.
Up to 10,000 slot machines can be connected in a Concept III installation.
A single controller can serve up to 2,000 machines, and up to 5 controllers can
be included in a Concept III installation. The largest installation for which
the Company has received an order was approximately 2,500 slot machines. The
world's largest casino currently has approximately 4,000 slot machines.
The primary manufacturers of slot machines, including IGT and Bally Gaming
International, Inc. ("Bally"), have made extensive changes to the software used
in their machines to support the Concept III technology. The changes permit the
slot machines to accept instructions from the Concept III system, primarily in
connection with the bonusing system module. New software supporting the Concept
III system on IGT's S+ series and Players Edge Plus series of machines and
Bally's 5500 Pro Series of machines, as well as the Concept III system itself,
has been approved by the Nevada Gaming Control Board. See "Government
Regulation."
The initial installation of the Concept III slot accounting module was at
the Casino Royale casino in Las Vegas, Nevada, in January 1993. The player
tracking module was initially installed during July 1994 at casinos operated by
the Ho-Chunk Nation (formerly named the Wisconsin Winnebago Nation). The
Treasure Island Resort in Las Vegas installed the progressive jackpot system for
slot machines for casino-wide use. In November 1994, the initial installation
of the bonusing system module was installed at the Casino Royale to operate a
Double Jackpot Time promotion. After review of a field trial period, the
bonusing system was released for general installation in Nevada in April, 1995.
2
Aristocrat Leisure Industries of Australia ("Aristocrat") is the leading
manufacturer of slot machines in Australia and the second largest in the world.
In February 1996, the Company entered into a sales agreement with Aristocrat
under which the Company is providing its Concept III system for a new casino
under development by Crown Ltd. in Melbourne, Australia, which is scheduled to
open in early 1997.
BONUSING SYSTEM
Many casinos offer promotions such as double jackpots at certain times of
the day. While such promotions have in many cases been successful in
increasing play at slot machines during the double jackpot periods, they have
required extensive administrative effort to manage. Concept III, with its
ability to deliver instructions to the slot machine, enables the casino to
automate the payment of and accounting for double jackpot and other bonus
programs. In addition, the Concept III technology allows a double jackpot or
other bonus program to operate on a random basis, or to operate only when a
minimum level of activity is present. A display can be mounted on the slot
machine to inform players when the bonus program is operative. In addition,
the bonusing system can include lighting, sound, signage and other special
effects to call players' attention to the bonusing event as it begins and
progresses. The Company is using such special effects to simulate clouds,
lightning, thunder and wind, which, combined with a double and five-time
jackpot bonus application, create a promotion called Hurricane Zone.
Many casinos have also offered promotions where they provide free play to
entice players to visit the casino. Such promotions have required extensive
administrative effort to manage and there has been no assurance that the money
given to potential customers will be played in the casino's slot machines.
Using the capabilities of Concept III, this type of promotion can be automated
and, instead of giving money directly to the customer, the Concept III system
can match each coin played in the slot machine ("Match Play") or provide free
play ("Reel Money") by adding a free coin under parameters controlled by the
casino. The capabilities of Concept III also allow implementation of the
Personal Progressive promotion, where each qualifying player can build up a
progressive jackpot which only that player is eligible to win.
Installation of the Match Play and Personal Progressive promotions was
completed in November 1995 on 50 slot machines at the Treasure Island Casino in
Las Vegas. The first installation of the Hurricane Zone promotion was completed
on 34 machines at the Edgewater Hotel & Casino in Laughlin, Nevada, in May 1996.
The first installation of Reel Money was completed at the Sundowne Hotel &
Casino in Reno, Nevada, in June 1996.
PROGRESSIVE JACKPOTS FOR SLOT MACHINES
A progressive jackpot system links a number of slot machines to generate a
collective jackpot. As coins are played in the machines, a portion of each coin
is allocated to the creation of the jackpot. Other progressive jackpot systems
require a controller to be installed at the same location as the machines that
are linked to the jackpot. In contrast, a Concept III progressive jackpot
system is programmed remotely from a personal computer. This method of
programming enables the casino manager to determine which machines are to be
linked to the progressive jackpot, and to establish various parameters such as
starting jackpot amounts, rates of increment, and limits, if any, on the
jackpot. The flexibility provided by Concept III enables the casino manager to
design, alter and readily implement new progressive jackpot promotions which may
be created from time to time.
SLOT ACCOUNTING
The slot accounting module automatically collects play data about each
gaming device. This information is transmitted to a central computer system
where it is immediately available to the casino manager, and where it is stored
for future analysis and reporting. The equipment is configured to monitor all
slot machine functions, including coins deposited in the machine, coins paid out
of the machine, coins available to "drop," number of games played, jackpot
occurrences and other machine functions, and recognizes players who use player
identification cards.
3
PLAYER TRACKING
Player tracking systems collect performance data about individual players
or groups of players. The player tracking module of Concept III builds upon the
casino accounting module to gather and record information about individual
players, much like a "frequent flyer" program. Each customer who elects to
enroll is given a plastic card that uniquely identifies the player. The player
inserts the card into a slot on any game he or she chooses to play, and the
system automatically records the player's level of play. The casino management
can use this information to provide special incentives and rewards to individual
players or groups of players.
OTHER PRODUCTS
The bonusing capabilities of the Concept III system can be combined with
products produced by other manufacturers. For example, the Company provides
electronic and certain other components to a company which develops and operates
specialty games. The components provided by the Company comprise a special
bonusing system where the slot player periodically spins a wheel mounted above
the slot machine. The Concept III bonusing system communicates the results of
the wheel spin to the slot machine, which pays the bonus to the player.
RESEARCH AND DEVELOPMENT
The Company devotes significant resources to the development of new
products and the enhancement of existing products. The Company had 44 employees
involved in product engineering as of August 31, 1996. Research and development
expenses were $2,341,000, $1,900,000 and $1,352,000 in the years ended June 30,
1996, 1995 and 1994, respectively.
STRATEGIC ALLIANCE WITH IGT
In August 1996, the Company executed a letter of intent to implement a
strategic alliance with IGT. IGT is the largest manufacturer of slot machines
in the world. The agreement includes a $5 million investment from IGT in return
for 519,481 newly issued shares of the Company's 3% convertible preferred stock,
with a 12-month option to purchase an additional 519,481 shares at the same
price. IGT will also have the right to elect one member to the Company's Board
of Directors.
The Company and IGT have not yet executed definitive documents and it is
possible that no final agreement will be reached. Before the Company can issue
preferred stock to IGT, the Company's shareholders must approve an amendment to
the Articles of Incorporation to authorize Preferred Stock. The Company expects
to submit the proposal to shareholders at its Annual Meeting of Shareholders to
be held on November 12, 1996.
If the strategic alliance is fully implemented, the Company anticipates
that:
1) the Company will create proprietary games, using IGT equipment as the
foundation, to be installed under leasing or revenue sharing agreements in
casinos;
2) the Company will sell its Concept III Bonusing Technology and player
tracking components for use in IGT Smart System-TM- player tracking/slot
accounting installations and the Company will eventually withdraw from part
of the player tracking/slot accounting business;
3) IGT will incorporate the Company's displays and other game enhancement
tools into its slot machines; and;
4) the Company will develop promotions for use on IGT's Wide Area Network
that supports "Megabucks," "QuarterMania" and other progressive jackpot
promotions.
The Company believes that the strategic alliance with IGT provides it
significant benefits in the slot system market by providing access to IGT's
larger sales and service organizations, and the potential to provide its
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Concept III bonusing technology to a large installed base. The agreement also
allows the Company to focus its resources on development of Bonusing Technology
by reducing the resources required to maintain and develop slot accounting and
player tracking applications.
CUSTOMERS
The Company's initial sales of Concept III systems were to casinos with
fewer than 250 slot machines, as it sought to establish the viability of its
products. Large casinos with more than 250 slot machines in a single location
represent the principal market for Concept III products. This market includes
most casinos in Las Vegas, Reno and Laughlin, Nevada, and Atlantic City, New
Jersey, as well as a number of casinos on Indian land, riverboat and dockside
casinos in the States of Illinois, Iowa and Mississippi, and some casinos in
Colorado. A number of casinos in Australia, South Africa and Europe are also
included in this market. The Company currently focuses its marketing efforts on
management groups with at least 800 slot machines in one or more locations.
Installations of this size generally are large enough to support a professional
management staff capable of using the analytical and promotional tools provided
by Concept III.
Anchor Gaming, a developer of proprietary slot machines which uses Concept
III components in its Wheel of Gold game, accounted for 43% of the Company's
net revenues in 1996. Two other customers, Aristocrat Leisure Industries and
Sundowner Hotel & Casino, accounted for 20% and 12% of its net revenues in 1996,
respectively. Rio Suite Hotel & Casino and the Ho-Chunk Nation accounted for
44% and 17% of the Company's net revenues in 1995, respectively. In 1994 Ho-
Chunk Nation accounted for 48% and Gold Shore Casino accounted for 20% of the
Company's net revenues.
The Company's backlog of orders for its products were approximately
$6,500,000 and $800,000 as of June 30, 1996 and 1995, respectively.
The Company does not believe that backlog is a meaningful indication of sales.
Sales to the Company's customers are made pursuant to purchase orders or sales
agreements for specific system installations, the Company does not have any
ongoing, long-term contracts and products are often delivered within a few
months of receipt of order. At its current stage of operations, the Company's
revenues and results of operations may be materially affected, in the near term,
by the receipt or loss of any one order.
5
The Company has installed or has obtained contracts for Concept III
installations in the following casinos:
CASINO MODULES DATE OF INSTALLATION SIZE OF INSTALLATION
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Casino Royale Slot accounting January 1992 700 slot machines
Las Vegas, NV Concept III Bonusing September, 1994
Black Diamond Casino Slot accounting August 1992 61 slot machines
Cripple Creek, CO
Bronco Billy's Casino Slot accounting August 1992 221 slot machines
Cripple Creek, CO
Bronco Billy's Casino Slot accounting January 1993 183 slot machines
Black Hawk, CO
Curacao Caribbean Casino Slot accounting May 1993 150 slot machines
Curacao, Netherlands
Princess Beach Casino Slot accounting May 1993 214 slot machines
Curacao, Netherlands
Sky Ute Casino Slot accounting August 1993 103 slot machines
Ignacio, CO
Majestic Pines Casino Slot accounting November 1993 300 slot machines
(Ho-Chunk Nation) Player tracking September 1994
Black River Falls, WI
Rainbow Casino Slot accounting November 1993 600 slot machines
(Ho-Chunk Nation) Player tracking June 1994
Nekoosa, WI
Ho-Chunk Casino Slot accounting November 1993 1,600 slot machines
(Ho-Chunk Nation) Player tracking June 1994
Dells, WI
Rio Suite Hotel & Casino Slot accounting September 1994 2,500 slot machines
Las Vegas, NV Player tracking
Rio Suite Hotel & Casino Slot accounting November 1996 600 slot machines
Las Vegas, NV Player tracking
Treasure Island Resort Progressive jackpots October 1993 250 slot machines
Las Vegas, NV for slot machines
Concept III bonusing October 1995 50 slot machines
Gold Shore Riverboat & Casino Slot accounting June 1994 1,100 slot machines
Biloxi, MS Player tracking June 1994
Golden Nugget Casino Progressive jackpots June 1994 250 slot machines
Las Vegas, NV for slot machines
Tropicana Cruise Ship Slot Accounting December, 1994 150 slot machines
Miami, Florida Player Tracking September, 1995
Concept III bonusing September, 1995
Colorado Grande Casino Slot Accounting July, 1995 200 slot machines
Cripple Creek, CO Player Tracking July, 1995
6
Concept III bonusing April, 1996
Sundowner Hotel & Casino Slot Accounting June, 1996 620 slot machines
Reno, Nevada Player Tracking June, 1996
Virginian Hotel & Casino Slot Accounting August, 1996 460 slot machines
Reno, Nevada Player Tracking August, 1996
Spirit Lake Casino Slot Accounting August, 1996 450 slot machines
Spirit Lake, South Dakota Player Tracking August, 1996
Sands Regency Hotel & Casino Slot Accounting August, 1996 700 slot machines
Reno, Nevada Player Tracking August, 1996
Edgewater Hotel & Casino Concept III bonusing May, 1996 34 slot machines
Laughlin, Nevada
Bally's Saloon & Gambling Hall Concept III bonusing May, 1996 50 slot machines
Tunica, Mississippi
Crown Ltd. Concept III bonusing Early 1997 2,500 slot machines
Melbourne, Australia
MARKETING
The Company currently markets its products and provides service to
customers from its office in Las Vegas, Nevada and its headquarters in
Corvallis, Oregon. The Company expects to expand its sales, marketing and
customer service operations to include offices in other key markets and, upon
closing of the transaction with IGT, through IGT's sales and service
organizations.
PRODUCTION AND MANUFACTURING
The Company's manufacturing operations consists primarily of the assembly
of electronic circuit boards and cables from components purchased from third
parties. The circuit boards are manufactured to the Company's specifications
and assembled by contract manufacturers. A key component of each product is
computer software which is copied onto an electronic memory chip. The copying
of the software onto the chip is performed by contract manufacturers. The
development, testing and maintenance of the software is conducted by Company
engineers in Corvallis, Oregon.
COMPETITION
The Company currently has four principal competitors in the market for slot
accounting and player tracking systems. The two largest competitors are IGT and
Bally Systems, a division of Bally Gaming International, Inc. Electronic Data
Technology ("EDT") was founded by John F. Acres, the Company's principal
stockholder, in 1981 and was acquired by IGT in 1983. The player tracking
system currently sold by IGT is based on the design developed by Mr. Acres while
employed by EDT.
The Bally Systems products are based on mainframe or minicomputer
technology, rather than personal computer technology. Both of these competitors
have greater financial, technical and marketing resources than the Company. In
addition, IGT is the largest manufacturer of gaming machines in the world, which
gives it a competitive advantage in selling its product to purchasers of IGT
gaming machines. The Company expects to sell its Concept III player tracking
components for use in IGT Smart System player tracking and slot accounting
installations.
7
The Company also competes with Casino Data Systems, Inc., which offers
collection and player tracking products based on personal computer technology.
Casino Data Systems, Inc. does not currently offer bonusing systems, but its
slot accounting and player tracking systems have been well received. In
addition, Casino Data Systems, Inc. has greater financial resources than the
Company. Mikohn Gaming Corporation also offers a data collection and player
tracking product.
The market for progressive jackpot systems for slot machines owned by
casinos is served primarily by two companies other than the Company. Mikohn
Gaming Corporation has the largest share of the market. Mikohn Gaming
Corporation was founded by John F. Acres in 1985. Mr. Acres disposed of his
interest in Mikohn Gaming Corporation in 1988. Casino Data Systems, Inc. also
manufactures and sells progressive jackpot systems.
The Company believes that its products compete principally on the basis
of functionality, price and service. The Company believes the bonusing
technology of its Concept III system is unique and is not aware of any other
companies offering similar products.
GOVERNMENT REGULATION
The Company is subject to the licensing and regulatory control of the
gaming authorities in each jurisdiction in which its products are sold or used
by persons licensed to conduct gaming activities. Although licensing of the
Company may not be required in a jurisdiction, its products generally must be
approved by the regulatory authority for use in each licensed location within
the jurisdiction.
The Company has complied with the approval process for use of the products
it has sold in Nevada, Colorado, Wisconsin, Mississippi, New Jersey and
Connecticut, including the receipt of manufacturer and distributor licenses,
permits, or certificates in each such state. Not all of the Company's products
have been approved for sale in all jurisdictions. The Company is under a
continuing duty to file written amendments to its license applications whenever
any material or significant change of facts or circumstances has occurred with
respect to any matter set forth in its original application or any renewal. On
a periodic basis, the Company is required to file an application for renewal of
its licenses, permits, or certificates in most states in which it has received
such an authorization to conduct its business. Notwithstanding the renewal
process, a change in any item that is a condition of the original license or any
renewal must be approved by the applicable gaming authority, and no material
change in ownership of the Company will be effective until such time as the
proposed change has been approved by all gaming regulatory authorities having
jurisdiction over the Company's operations. In such case, the proposed new
owner may be required to submit an application together with evidence that such
new owner is qualified to receive such a license, certificate or permit. In
addition, the Company's current licenses and permits require the Company to
cooperate with the applicable gaming authorities in any inquiry or investigation
and to provide any supplementary information requested by such gaming
authorities.
The gaming laws and regulations of most jurisdictions provide for the
continuing compliance with the related laws and regulations of such
jurisdictions and allow for the suspension, refusal to renew or revocation of a
license, certificate or permit. In particular, the New Jersey Casino Control
Act ("the New Jersey Act") provides for suspension, refusal to renew or
revocation of a license for: a violation of any provision of the New Jersey
Act; conduct which would disqualify the Company, or any person required to be
qualified, if such person were applying for an original license; failure to
comply with all applicable federal, state, and local statutes, ordinances, and
regulations; or a material departure from any representation made in the
application for licensure.
Further, in most jurisdictions, a model of the gaming equipment which the
Company seeks to place in operation must be submitted for testing by an approved
testing laboratory prior to use in any gaming operation. To obtain such
approval, the Company must submit, at its expense, each model of its equipment
to the specified laboratory for testing, examination and analysis. Upon
completion of the testing, the laboratory submits a report of
8
its findings and conclusions to the applicable gaming authority, together with
any recommendations for modifications to the equipment or the addition of
equipment or devices to such gaming equipment.
The Company intends to seek approval of Concept III for use in any other
jurisdiction in which a sale arises. Failure of the Company to obtain approval
for the use of Concept III by a gaming licensee in a jurisdiction will prevent
the use of Concept III at such licensee's location and also will prevent any
other gaming licensee within that jurisdiction from using Concept III products
until the appropriate approvals have been obtained or requirements complied
with.
Until May 1995, the Company had not been required to obtain a manufacturer
or distributor license to sell any of its products in Nevada. In May 1995, the
regulatory authorities in Nevada determined that, because of the ability of the
Concept III bonusing system to deliver instructions which cause slot machines to
pay coins out of their hoppers (the "Pay Command"), the Company is required to
obtain licensing before any promotions using the Pay Command will be approved.
At the same time, the Nevada authorities determined that the implementation of
Match Play and Personal Progressive promotions were approvable as associated
equipment. On December 21, 1995, the Nevada Gaming Commission ("Nevada
Commission") registered the Company as a publicly traded corporation,
("Registered Corporation"), found certain individuals suitable to be associated
with the Company as officers, shareholders and controlling shareholders, and
granted nonrestricted Manufacturer's and Distributor's licenses to the Company's
wholly-owned subsidiary, AGI Distribution, Inc. ("AGI"), a Nevada corporation .
The Nevada Commission also granted AGI a nonrestricted Slot Route Operator's
license, provided however, that said license shall not issue until AGI's
fulfillment of certain conditions within a one-year time period. The Nevada
Commission also granted individual gaming licenses to the officers and sole
director of AGI. In granting the aforementioned registration, findings of
suitability and licenses, the Nevada Commission also imposed certain reporting
and investigative criteria on the Company to help insure that the Nevada
Commission remains fully informed regarding the Company's activities in Nevada
and other jurisdictions where the Company is licensed to engage, or doing
business in, the gaming industry.
The regulatory authorities in any jurisdiction in which the Company is
subject to licensing may: (a) impose certain corporate structure requirements on
the Company, including requiring that the Company form a wholly-owned subsidiary
to apply for licensing to manufacture and distribute the Company's products in
the particular jurisdiction; (b) require the officers, directors, key employees
or affiliates of the Company and/or any of the Company's subsidiaries to be
licensed or found suitable; (c) require some or all of the holders of any debt
or equity security of the Company to be licensed or be found suitable, or to
divest their holdings of the Company's securities; or (d) subject the Company,
any subsidiary, or the officers, directors, key employees, affiliates, or
holders of any debt or equity security of the Company or any subsidiary to any
other restriction that is deemed reasonable by the regulatory authority.
Generally, regulatory authorities may deny applications for licenses or findings
of suitability for any cause they deem reasonable. In the event a regulatory
authority were to find an officer, director, key employee or affiliate of the
Company or any subsidiary, or any other person, including a stockholder,
unsuitable to act in such capacity or to continue to have a relationship with
the Company, the Company would be required to terminate all relationships with
such person or entity. The regulatory authorities also may have authority to
disapprove a change in a licensed position, including a material change in
ownership, which change must be reported to the regulatory authorities in
question.
If a license or finding of suitability is required by a regulatory
authority and the Company fails to seek or does not receive the necessary
license or finding, the Company may be prohibited from selling its product for
use in the respective jurisdiction. Licensing requirements and regulations vary
from jurisdiction to jurisdiction, and the licensing process can be lengthy and
expensive. There can be no assurance that the Company will not be subject to
licensing or suitability requirements in one or more jurisdictions, or that the
Company will receive the necessary licenses or approvals.
9
NEVADA GAMING REGULATION
The holders of any form of gaming license in Nevada are subject to: (i) the
Nevada Gaming Control Act and the regulations promulgated thereunder
(collectively, "Nevada Act"); and (ii) various local regulation. The Company's
gaming operations are subject to the licensing and regulatory control of the
Nevada Commission, the Nevada State Gaming Control Board ("Nevada Board"), the
Clark County Liquor and Gaming Licensing Board and any other local jurisdiction
within which the Company does business in Nevada. The Nevada Commission, the
Nevada Board and the local gaming regulatory authorities are collectively
referred to as the "Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) to provide a source of state and local revenues
though taxation and licensing fees. Change in such laws, regulations and
procedures could have an adverse effect on the Company's gaming operations.
As noted above, on December 21, 1995, AGI was licensed by the Nevada
Commission to manufacture and distribute gaming devices. AGI also anticipates
operating as a slot route operator. The gaming license requires the periodic
payment of fees and taxes and is not transferable. On the same date the Company
was also granted Registered Corporation status, and as such, it is required
periodically to submit detailed financial and operating reports to the Nevada
Commission and furnish any other information which the Nevada Commission may
require. No person may become a stockholder, officer or director of, or receive
any percentage of profits from AGI without first obtaining licenses and
approvals from the Nevada Gaming Authorities.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or AGI in
order to determine whether such individual is suitable or should be licensed as
a business associate of a gaming licensee or Registered Corporation. Officers,
directors and certain key employees of AGI must file applications with the
Nevada Gaming Authorities and may be required to be licensed or found suitable
by the Nevada Gaming Authorities. Officers, directors, shareholders and key
employees of the Company who are actively and directly involved in gaming
activities of AGI are required to be licensed or found suitable by the Nevada
Gaming Authorities. The Nevada Gaming Authorities may deny an application for
licensing for any cause which they deem reasonable. The application process for
a finding of suitability or licensure is, for all intents and purposes,
identical, and both require submission of detailed personal and financial
information followed by a thorough investigation. The applicant for licensing
or a finding of suitability must pay all the costs of the investigation.
Changes in licensed positions must be reported to the Nevada Gaming Authorities
and in addition to their authority to deny an application for a finding of
suitability or licensure, the Nevada Gaming Authorities have jurisdiction to
disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or AGI, the companies involved would have to sever
all relationships with such person. In addition, the Nevada Commission may
require the Company or AGI to terminate the employment of any person who refuses
to file appropriate applications. Determinations of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.
The Company and AGI are required to submit periodic detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities and similar financing transactions by the Company
and AGI must be reported to, or pre-approved by, the Nevada Commission.
10
If it were determined that the Nevada Act was violated by the Company or
AGI, its officers, directors and/or employees, the gaming licenses it holds,
including the individual gaming licenses or findings of suitability issued to
their officers, directors, shareholders, controlling shareholders and/or key
employees could be limited, conditioned, suspended or revoked, subject to
compliance with certain statutory and regulatory procedures. In addition, the
Company, AGI, and the persons involved could be subject to substantial fines for
each separate violation of the Nevada Act at the discretion of the Nevada
Commission. Further, a supervisor could be appointed by the Nevada Commission
to operate AGI's gaming business in Nevada and, under certain circumstances,
earnings generated during the supervisor's appointment (except for the
reasonable rental value of AGI's business properties) could be forfeited to the
State of Nevada. Limitation, conditioning or suspension of any gaming license
or the appointment of a supervisor could (and revocation of any gaming license
would) materially adversely affect the gaming operations of the Company or AGI.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
state of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who individually, or in conjunction with
others, directly or indirectly acquires beneficial ownership of more than 5% of
the voting securities of the Company to report such acquisition to the Nevada
Commission within ten days following the required, or voluntary, reporting of
such acquisition with the Securities and Exchange Commission ("SEC"). Likewise,
the Nevada Act requires any person who individually, or in conjunction with
others, directly or indirectly acquires beneficial ownership of more than 10% of
the voting securities of the Company to report such acquisition to the Nevada
Commission in the same manner, and further, to apply to the Nevada Commission
for a finding of suitability to be associated with the Company within thirty
days after the chairman of the Nevada Board mails a written notice to such
person(s) requiring such filing. Under certain circumstances, an "institutional
investor," as defined in the Nevada Act, which acquires more than 10%, but not
more than 15%, of the voting securities of the Company may apply to the Nevada
Commission for a waiver of such finding of suitability if such institutional
investor holds the voting securities for investment purposes only. An
institutional investor shall not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired and are held in
the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the board of directors of the Company, any change in the Company's
corporate charter, bylaws, management, policies or operations of the Company, or
any of its gaming affiliates, including, but not limited to, AGI, or any other
action which the Nevada Commission finds to be inconsistent with holding the
voting securities of the Company for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent.
If the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. The Company is subject
to disciplinary action if, after it receives notice that a person is unsuitable
to be a stockholder or to have any other relationship with the Company or AGI,
the Company (i) pays that person any dividend or interest upon voting securities
of the Company, (ii) allows that person to
11
exercise, directly or indirectly, any voting right conferred through securities
held by that person, (iii) pays remuneration in any form to that person for
services rendered or otherwise, or (iv) fails to pursue all lawful efforts to
require such unsuitable person to relinquish his voting securities for cash at
fair market value. Additionally, at least one local gaming regulatory
authority, the Clark County Liquor and Gaming Licensing Board, has taken the
position that it has the authority to approve all persons owning or controlling
the stock of any corporation controlling a Slot Route Operator's license, in
this case the Company.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation (the Company) to file applications, be
investigated and be found suitable to own the debt security of a Registered
Corporation. If the Nevada Commission determines that a person is unsuitable to
own such security, then pursuant to the Nevada Act, the Registered Corporation
can be sanctioned, including the loss of its approvals, if without the prior
approval of the Nevada Commission, it: (i) pays to the unsuitable person any
dividend, interest, or any distribution whatsoever; (ii) recognizes any voting
right by such unsuitable person in connection with such securities; (iii) pays
the unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
The Company is required to maintain a current stock ledger in Nevada which
may be examined by the Nevada Gaming Authorities at any time. If any securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act. However,
to date, the Nevada Commission has not imposed such a requirement on the
Company.
The Company may not make a public offering of its securities without the
prior approval of the Nevada Commission if the securities or the proceeds
therefrom are intended to be used to construct, acquire or finance gaming
operations in Nevada, or to retire or extend obligations incurred for such
purposes. Such approval, if given, does not constitute a finding,
recommendation or approval by the Nevada Commission or the Nevada Board as to
the accuracy or adequacy of the prospectus or the investment merits of the
securities. Any representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby he obtains control, may not occur without the prior approval
of the Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and Nevada Commission in a variety of
stringent standards prior to assuming control of such Registered Corporation.
The Nevada Commission may also require controlling stockholders, officers,
directors and other persons having a material relationship or involvement with
the entity proposing to acquire control, to be investigated and licensed as part
of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licenses, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of those business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Company's
Board of Directors in response to a tender offer made directly to the Registered
Corporation's stockholders for the purpose of acquiring control of the
Registered Corporation.
12
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon
either: (i) a percentage of the gross revenues received; (ii) the number of
gaming devices operated; or (iii) the number of table games operated. Nevada
licensees that hold a license as an operator of a slot route, or a
manufacturer's or distributor's license also pay certain fees and taxes to the
State of Nevada.
Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved, or is already involved, in a
gaming venture outside of Nevada is required to deposit with the Nevada Board,
and thereafter maintain, a revolving fund in the amount of $10,000 to pay the
expenses of investigation of the Nevada Board of their participation in such
foreign gaming. The revolving fund is subject to increase or decrease in the
discretion of the Nevada Commission. Thereafter, Licensees are required to
comply with certain reporting requirements imposed by the Nevada Act. Licensees
are also subject to disciplinary action by the Nevada Commission if they
knowingly violate any laws of the foreign jurisdiction pertaining to the foreign
gaming operation, fail to conduct the foreign gaming operation in accordance
with the standards of honesty and integrity required of Nevada gaming
operations, engage in activities that are harmful to the State of Nevada or its
ability to collect gaming taxes and fees, or employ a person in the foreign
operation who has been denied a license or finding of suitability in Nevada on
the ground of personal unsuitability.
PATENTS
The Company has applied for U.S. patents on certain features of its
Concept III product line, and may in the future apply for other U.S. patents and
corresponding foreign patents. No assurance can be given that any patents that
are applied for will be issued, or, if issued, will be valid or will provide any
significant competitive advantage to the Company. In addition, the Company has
a variety of other intellectual property which it treats as trade secrets. The
Company takes reasonable steps to protect its intellectual property, but it is
possible that others may make unauthorized use of such intellectual property and
the Company may or may not be able to prevent such use.
EMPLOYEES
At August 31, 1996, the Company had 93 full-time employees of whom 44 were
involved in engineering, 18 in production and quality control, 18 in sales,
marketing, technical service and customer service, and 13 in administration and
management. None of the Company's employees are represented by a labor union or
are covered by a collective bargaining agreement. The Company has not
experienced any work stoppages and believes that its employee relations are
good.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements regarding the Company's
plan and expectations as to: future performance, growth opportunities,
expansion, new products and services, competition, capital expenditures, its
strategic alliance with IGT and its withdrawal from the slot accounting and
player tracking systems segments of the business. Such plans and expectations
involve risks and uncertainties. The following factors are among those that
could cause actual results to differ materially from the forward-looking
statements: business and economic conditions generally and in the gaming
industry; alterations in the Company's strategic alliance with IGT; timing,
receipt, installation and regulatory approval of any one order; technological
change; new products; potential obsolecence; competition; government regulation;
potential restrictions on sales; and availability of additional capital. In
addition, from time to time, the Company may issue other forward-looking
statements. Any forward-looking statements, including other written or oral
forward-looking statements made by the Company or persons acting on its behalf,
should be considered in light of these factors and other factors referred to
from time to time in the Company's press releases, periodic reports or
communications with shareholders.
13
ITEM 2. PROPERTIES
The Company is headquartered in a leased facility at 815 N.W. Ninth Street,
Corvallis, Oregon, 97330. The lease commenced on April 15, 1994, and will
expire on April 15, 1999. The Company expects to lease additional space
contiguous to its headquarters, expanding its facility from approximately 22,000
square feet to approximately 27,500 square feet. The base rent for the
expanded facility will be approximately $14,100 per month, and will increase to
approximately $16,100 on May 1, 1997, and includes property taxes, building
insurance and common area maintenance.
The Company's sales, marketing and customer service office in Las Vegas,
Nevada, is in a leased facility of approximately 8,500 square feet. The lease
commenced on September 1, 1995, and expires on August 31, 2000. The base rent
is $8,105 per month, plus $1,220 per month for property taxes, building
insurance and common area maintenance.
The Company owns manufacturing and engineering equipment, located at its
facility in Corvallis, Oregon, used in its assembly operations and research and
development efforts. Such equipment is available from a variety of sources, and
the Company believes that it currently owns or can readily acquire equipment
required for its current and anticipated levels of operations.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is involved in various legal proceedings
arising in the normal course of business. At August 31, 1996, the Company was
not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended June 30, 1996.
EXECUTIVE OFFICERS OF REGISTRANT
As of August 31, 1996, the executive officers of the Company were as set
forth below.
Name Age Positions and Offices Executive Officer Since
- ---- --- --------------------- -----------------------
John F. Acres 42 Chief Executive Officer, 1985
Director and Secretary
Joseph A. Huseonica 52 President and Chief Operating Officer 1996
Robert W. Brown 41 Chief Financial Officer and Treasurer 1993
There are no family relationships among directors or executive officers of the
Company.
JOHN F. ACRES is the founder of the Company and has been the Chief
Executive Officer, Secretary and a director since its inception. He also served
as its President until January, 1996. Mr. Acres, who has been involved in the
gaming industry since 1972, has designed slot data collection systems, player
tracking systems, and equipment for progressive jackpot systems that are in
widespread use. In 1981, he founded Electronic Data Technology ("EDT") to
manufacture and sell progressive jackpot system designs. While with EDT, he
designed one of the first slot data collection systems, and invented the
electronic player tracking system. He sold a majority interest in EDT to IGT in
1983, and remained as president of EDT until 1985. The player tracking system
designed by Mr. Acres while with EDT is installed on approximately 50,000 slot
machines throughout the world and is still actively marketed by IGT. In 1985,
Mr. Acres co-founded Mikohn, Inc.. He served as Vice President and a director
of Mikohn, Inc. until 1988.
14
JOSEPH A. HUSEONICA joined the Company in January 1996 as President and
Chief Operating Officer. From July 1994 to December 1995, Mr. Huseonica served
as Chief Operating Officer for Centric Corporation, a Portland, Oregon marketing
services company. From August 1993 to July 1994, Mr. Huseonica was a consultant
to various companies. From October 1991 to August 1993, Mr. Huseonica was Vice
President, Marketing & Sales for Radisys Corporation, a manufacturer of embedded
computer systems based in Beaverton, Oregon. For more than 10 years prior to
1991, Mr. Huseonica held various senior management positions at Intel
Corporation, including General Manager of its OEM Platforms Operations.
ROBERT W. BROWN joined the Company in July 1993 as Chief Financial Officer
and Treasurer. From June 1991 through May 1993, Mr. Brown was the Chief
Financial Officer of Color & Design Exhibits, Inc., a manufacturer of
interpretive and trade show exhibits in Portland, Oregon. From September 1983
through May 1991, Mr. Brown held financial management positions with Floating
Point Systems, Inc., a Beaverton, Oregon manufacturer of mini-supercomputers,
and served as its Corporate Controller from November 1989 through May 1991.
Prior to 1983, Mr. Brown was employed by Arthur Andersen LLP for more than six
years. Mr. Brown is a Certified Public Accountant.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq Small-Cap Market under the
symbol "AGAM." The following table sets forth, for the periods indicated, the
range of high and low bid prices for the Company's common stock as reported by
the Nasdaq Small-Cap Market. The following quotations represent prices between
dealers, do not include retail mark-ups, mark-downs or commissions, and do not
necessarily represent actual transactions.
BID
----------------
LOW HIGH
----- ------
FISCAL YEAR ENDED JUNE 30, 1995:
First quarter. . . . . . . . . . $3.50 $ 6.38
Second quarter . . . . . . . . . $4.25 $ 6.63
Third quarter. . . . . . . . . . $4.75 $ 7.00
Fourth quarter . . . . . . . . . $5.75 $ 7.63
FISCAL YEAR ENDED JUNE 30, 1996:
First quarter. . . . . . . . . . $7.00 $ 9.00
Second quarter . . . . . . . . . $4.50 $ 8.00
Third quarter. . . . . . . . . . $3.50 $ 5.63
Fourth quarter . . . . . . . . . $4.63 $12.75
At August 31, 1996, there were approximately 230 record holders of the
Company's common stock. The Company estimates that there are over 1,000
beneficial owners of the Company's common stock. .
The Company has never paid or declared any cash dividends on its common
stock and does not intend to pay cash dividends on its common stock in the
foreseeable future. The Company expects to retain its earnings to finance the
development and expansion of its business. The payment by the Company of
dividends, if any, on its common stock in the future is subject to the
discretion of the Board of Directors and will depend on the Company's earnings,
financial condition, capital requirements and other relevant factors.
15
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information concerning
the Company and should be read in conjunction with the audited financial
statements and notes thereto included elsewhere herein.
YEARS ENDED JUNE 30,
------------------------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net revenues . . . . . . . . . . . . . . . $101 $492 $2,852 $4,006 $6,942
Gross profits. . . . . . . . . . . . . . . 46 291 851 1,436 3,355
Loss from operations . . . . . . . . . . . (184) (514) (1,644) (2,489 (1,665)
Net Loss . . . . . . . . . . . . . . . . . (201) (536) (2,598) (2,505) (1,641)
Net loss per common share. . . . . . . . . $(0.05) $(0.10) $(0.39) $(0.35) $(0.22)
Weighted average number of shares of
common stock and common stock
equivalents outstanding. . . . . . . . . . . 4,429 5,225 6,629 7,145 7,552
YEARS ENDED JUNE 30,
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Working capital (deficit). . . . . . . . . $(145) $(762) $3,574 $3,458 $2,552
Total assets . . . . . . . . . . . . . . . 99 692 6,301 6,264 7,631
Current liabilities. . . . . . . . . . . . 244 1,373 1,227 1,302 3,644
Long-term debt . . . . . . . . . . . . . . -- -- -- -- --
Stockholders' equity (deficit) . . . . . . (145) (681) 5,074 4,962 $3,987
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company was founded to pursue new concepts in slot machine game
promotion and bonusing for the casino industry. Although there was and is
significant competition in the slot accounting and player tracking business, the
Company's initial focus was the sale of these systems, in order to establish
relationships with casinos with products the industry understood and was then
using. The Company was able to achieve some market success in this business
because of its commitment to provide follow-on promotion and bonusing products
designed to enhance casino profitability by providing entertainment and
incentives to slot machine players. The Company installed the first Concept III
bonus product in November 1994. In fiscal 1996 and 1995, it derived revenues of
$5,394,000 and $159,000 based on bonusing products.
The Company's strategic alliance with IGT will allow the Company to focus
its efforts on bonusing technology and the creation of proprietary games. The
Company anticipates that it will withdraw from direct participation in the slot
accounting and player tracking business in fiscal 1997 and will instead sell
these products to IGT for inclusion in IGT's Smart System.
At its current stage of operations, the Company's financial position and
operating results may be materially affected by a number of factors, including
the timing of receipt, installation and regulatory approval of
16
any one order, availability of additional capital, competition and technological
change. Historically, three or fewer customers have accounted for more than 60%
of annual revenues.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED JUNE 30, 1996 AND 1995.
Company's net revenues during the year ended June 30,
1996, were $6,942,000, an increase of 73% over the $4,006,000 of net revenues in
1995. The increase in revenues resulted primarily from sales to Anchor Gaming
of components used in the Wheel of Gold game, sales under an agreement with
Aristocrat Leisure Industries to provide Concept III bonusing capability for a
casino under development by Crown Ltd. in Melbourne, Australia, and the sale of
a bonusing, slot accounting and player tracking system to the Sundowner Hotel
and Casino in Reno, Nevada.
Gross profit as a percentage of net revenue increased to 48%
in 1996 from 36% in 1995. Gross profit increased primarily as a result of
Concept III bonusing products comprising a larger percentage of sales in 1996.
The Company realizes larger margins for bonusing products.
Operating expenses increased to $5,020,000 in the year
ended June 30, 1996 from $3,925,000 in the year ended June 30, 1995, an increase
of 28%. The increase in operating expenses resulted primarily from the addition
of personnel and expansion of the sales and service office in Las Vegas. The
expansion was undertaken in order to support growth in revenue and to expand
development of Concept III products.
The Company's research and development expenses
increased to $2,341,000 in the year ended June 30, 1996, from $1,900,000 in the
year ended June 30, 1995. The Company expects to spend a significant portion of
its revenue on research and development in order to enhance and expand the
capabilities of its Concept III system, including the development of additional
promotions which utilize the system's bonusing capabilities. The Company
believes that enhancement and expansion of its Concept III system will lead to
increased revenues from sales of its products.
The net loss for the year ended June 30, 1996, was $1,641,000
($0.22 per share) compared to $2,505,000 ($0.35 per share) in the prior year.
Although the Company had a net loss for the full year, during the three months
ended June 30, 1996, the Company had net income of $439,000 ($0.06 per share),
compared to a net loss of $698,000 ($0.10 per share) for the same period in the
prior year.
COMPARISON OF THE YEARS ENDED JUNE 30, 1995 AND 1994.
The Company's net revenues during the year ended June 30,
1995, were $4,006,000, an increase of 40% over the $2,852,000 of net revenues in
1994. The increase in revenues resulted primarily from sales of a slot
accounting and player tracking system to the Rio Suite Hotel and Casino in Las
Vegas, Nevada, and of player tracking systems to casinos operated by the Ho-
Chunk Nation in Wisconsin.
Gross profit as a percentage of net revenue increased to 36%
in 1995 from 30% in 1994. Gross profit in 1994 was adversely affected by the
initial sales of the player tracking module. The costs to manufacture and
install these initial orders was higher than on subsequent installations. In
addition, certain optional features which are separately priced on later orders
were installed at no additional cost to the customer in order for the Company to
be able to demonstrate such features to prospective customers.
In order to support growth in revenue and to expand
development of its Concept III products, the Company hired additional personnel,
made capital expenditures for computer and other equipment, leased additional
space to serve as its headquarters and opened a sales and service office in Las
Vegas during the
17
year ended June 30, 1994. As a result, operating expenses increased to
$3,925,000 in 1995 from $2,495,000 in the year ended June 30, 1994.
The net loss for the year ended June 30, 1995 was $2,505,000 compared to
$2,598,000 in the prior year. A charge of $898,000 was recorded during the
year ended June 30, 1994 for the expenses and settlement of patent
infringement litigation. See Note 5 "Patent Infringement Litigation" in
"Notes to Consolidated Financial Statements."
COMPARISONS OF THE YEARS ENDED JUNE 30, 1994 AND 1993
The Company's net revenues during the year ended June 30, 1994, were
$2,852,000, an increase of 480% over the $492,000 of net revenues during the
prior year. The first significant orders for the Company's Concept III slot
accounting and player tracking system were received during the three months
ended June 30, 1993. Delivery of those orders for slot accounting and player
tracking systems to the Gold Shore Casino in Mississippi and for slot
accounting systems to casinos operated by the Ho-Chunk Nation in Wisconsin
during the year ended June 30, 1994, was the principal reason for the
increase in revenues.
Gross profit as a percentage of net revenues decreased to 30% in 1994
from 59% in 1993. The decrease resulted from costs to manufacture and
install initial orders of the player tracking system.
In order to support revenue growth and develop its Concept III products,
the Company hired additional personnel, made capital expenditures for
computer and other equipment, leased additional space to serve as its
headquarters and opened a sales and service office in Las Vegas. As a
result, operating expenses increased to $2,495,000 in the year ended June 30,
1994 from $805,000 in the year ended June 30, 1993.
A charge of $898,000 was recorded during fiscal 1994 for the expenses and
settlement of patent infringement litigation (See Note 5, "Patent
Infringement Litigation" in "Notes to Consolidated Financial Statements").
Including the charge for the litigation settlement, the net loss was
$2,598,000 ($0.39 per share) in 1994, compared to $536,000 ($0.10 per share)
in 1993. At its current stage of operation, the Company's revenues and
results of operations may be materially affected, in the near term, by the
receipt or loss of any one order.
LIQUIDITY AND CAPITAL RESOURCES.
At June 30, 1996, the Company had a balance of cash and cash equivalents of
$2,500,000, compared to a balance of $1,325,000 as of June 30, 1995. The
Company has no debt. During the year ended June 30, 1996, net cash generated by
operating activities was $1,150,000 and proceeds from issuance of common stock
for stock option and warrant exercises were $610,000. Cash used for capital
expenditures and other investing activities was $585,000. The major components
of the net cash generated by operating activities were the net loss of
$1,641,000, offset by depreciation of $540,000, and increases of $1,355,000 in
customer deposits and of $987,000 in accounts payable and accrued expenses.
The 833,600 redeemable warrants which were outstanding as of June 30, 1996,
from the Company's initial public offering have an exercise price of $7.50 per
share and expire in October, 1996. If exercised in full, such redeemable
warrants would provide gross proceeds to the Company of approximately
$6,252,000. Any proceeds from the exercise of the warrants will be used to help
fund the Company's anticipated growth and product development efforts. See Note
6 of "Notes to Consolidated Financial Statements."
In August, 1996, the Company entered into a letter of intent to form a
strategic alliance with IGT under which the Company will initially issue
approximately 519,000 shares of preferred stock for gross proceeds of
$5,000,000. IGT will also have the option, through August 8, 1997, to purchase
up to an additional 519,000 shares of preferred stock at the same price. IGT
will also have the right to elect one member to the Company's
18
Board of Directors. Closing of the initial preferred stock sale is subject to
approval of the issuance of preferred stock by the Company's shareholders,
receipt of approval by gaming and other regulatory agencies and completion of
definitive agreements with IGT.
The Company's sources of liquidity include its cash balances and cash
generated by operations, including payment terms which generally include
deposits with the receipt of customer orders. The proceeds from the exercise of
the redeemable warrants and the issuance of preferred stock to IGT referred to
above will provide additional cash. These sources of liquidity are expected to
be sufficient to fund the Company's operations for at least the next 12 months.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," which requires the Company to review for
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying amount of an asset might not be recoverable. In certain
situations, an impairment loss would be recognized. The Company has adopted the
provisions of this Statement, which did not have a material effect on the
financial statements.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-
Based Compensation," which establishes a fair value based method of accounting
for stock-based compensation plans and requires additional disclosures for those
companies that elect not to adopt the new method of accounting. The Company
will continue to account for employee stock options under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The disclosures required by
Statement No. 123 will be effective for the Company's fiscal year ending June
30, 1997.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . 21
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . 22
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . 23
Consolidated Statements of Stockholders' Equity. . . . . . . . . . . . . . 24
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . 25
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 26
20
Report of Independent Public Accountants
To Acres Gaming Incorporated:
We have audited the accompanying consolidated balance sheets of Acres Gaming
Incorporated (a Nevada Corporation) and subsidiary as of June 30, 1996 and 1995
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Acres Gaming Incorporated and subsidiary as of June 30, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1996 in conformity with generally accepted
accounting principles.
Portland, Oregon,
August 9, 1996
ACRES GAMING INCORPORATED & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996 AND 1995
ASSETS
1996 1995
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 2,500,000 $ 1,325,000
Receivables 910,000 967,000
Inventories 2,692,000 2,395,000
Prepaid expenses 94,000 73,000
----------- -----------
Total current assets 6,196,000 4,760,000
----------- -----------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 515,000 508,000
Equipment 1,348,000 1,014,000
Leasehold improvements 506,000 498,000
Accumulated depreciation (1,329,000) (789,000)
----------- -----------
Total property and equipment 1,040,000 1,231,000
OTHER ASSETS, NET 395,000 273,000
----------- -----------
$ 7,631,000 $ 6,264,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,456,000 $ 427,000
Accrued expenses 440,000 482,000
Customer deposits 1,748,000 393,000
----------- -----------
Total current liabilities 3,644,000 1,302,000
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000,000
shares authorized, 7,601,150 and 7,494,500
shares issued and outstanding at
June 30, 1996 and 1995 76,000 75,000
Additional paid-in capital 11,224,000 10,615,000
Accumulated deficit (7,313,000) (5,672,000)
Less- Deferred charge-warrants - (56,000)
----------- -----------
Total stockholders' equity 3,987,000 4,962,000
----------- -----------
$ 7,631,000 $ 6,264,000
----------- -----------
----------- -----------
The accompanying notes are an integral part of these
consolidated balance sheets.
22
ACRES GAMING INCORPORATED & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
NET REVENUES $ 6,942,000 $ 4,006,000 $ 2,852,000
COST OF REVENUES 3,587,000 2,570,000 2,001,000
----------- ----------- -----------
GROSS PROFIT 3,355,000 1,436,000 851,000
----------- ----------- -----------
OPERATING EXPENSES:
Research and development 2,341,000 1,900,000 1,352,000
Selling, general and administrative 2,679,000 2,025,000 1,143,000
----------- ----------- -----------
Total operating expenses 5,020,000 3,925,000 2,495,000
----------- ----------- -----------
LOSS FROM OPERATIONS (1,665,000) (2,489,000) (1,644,000)
LITIGATION SETTLEMENT - - (898,000)
OTHER INCOME (EXPENSE) 24,000 (16,000) (56,000)
----------- ----------- -----------
NET LOSS $(1,641,000) $(2,505,000) $(2,598,000)
----------- ----------- -----------
----------- ----------- -----------
NET LOSS PER SHARE $ (0.22) $ (0.35) $ (0.39)
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 7,552,000 7,145,000 6,629,000
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these consolidated statements.
23
ACRES GAMING INCORPORATED & SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
Common Stock Additional Deferred
------------------ Paid-In Accumulated Charge-
Shares Amount Capital Deficit Warrants Total
--------- -------- ------------ ------------ -------- ------------
BALANCE,
June 30, 1993 4,852,000 $ 49,000 $ 704,000 $(1,434,000) $ - $ (681,000)
Issuance of
common
stock 2,215,750 22,000 8,331,000 - - 8,353,000
Reclassifica-
tion of
cumulative
S corpora-
tion losses - - (865,000) 865,000 - -
Net loss - - - (2,598,000) - (2,598,000)
--------- -------- ----------- ----------- -------- -----------
BALANCE,
June 30, 1994 7,067,750 71,000 8,170,000 (3,167,000) - 5,074,000
Issuance of
common
stock 426,750 4,000 2,349,000 - - 2,353,000
Net loss - - - (2,505,000) - (2,505,000)
Issuance of
warrants - - 96,000 - (96,000) -
Amortization
of warrants - - - - 40,000 40,000
--------- -------- ----------- ----------- -------- -----------
BALANCE,
June 30, 1995 7,494,500 75,000 10,615,000 (5,672,000) (56,000) 4,962,000
Issuance of
common
stock 106,650 1,000 609,000 - - 610,000
Net loss - - - (1,641,000) - (1,641,000)
Amortization
of warrants - - - - 56,000 56,000
--------- -------- ----------- ----------- -------- -----------
BALANCE,
June 30, 1996 7,601,150 $ 76,000 $11,224,000 $(7,313,000) $ - $ 3,987,000
--------- -------- ----------- ----------- -------- -----------
--------- -------- ----------- ----------- -------- -----------
The accompanying notes are an integral part of these consolidated statements.
24
ACRES GAMING INCORPORATED & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1996 1995 1994
------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,641,000) $(2,505,000) $(2,598,000)
Adjustments to reconcile net loss to net
cash from operating activities-
Depreciation 540,000 449,000 161,000
Amortization of warrants 56,000 40,000 -
Amortization of capitalized software
costs 89,000 - -
Amortization of other long-term
assets 25,000 - -
Changes in assets and liabilities:
Receivables 57,000 (697,000) (171,000)
Inventories (297,000) (409,000) (1,935,000)
Prepaid expenses (21,000) (73,000) (18,000)
Accounts payable and accrued
expenses 987,000 (229,000) 1,051,000
Customer deposits 1,355,000 304,000 (1,160,000)
----------- ----------- -----------
Net cash from operating activities 1,150,000 (3,120,000) (4,670,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (349,000) (198,000) (1,562,000)
Capitalized software costs (82,000) (148,000) -
Investment in intangible assets (154,000) (107,000) -
----------- ----------- -----------
Net cash from investing activities (585,000) (453,000) (1,562,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common
stock 610,000 2,353,000 8,353,000
Payments under notes payable to bank - - (37,000)
----------- ----------- -----------
Net cash from financing activities 610,000 2,353,000 8,316,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,175,000 (1,220,000) 2,084,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 1,325,000 2,545,000 461,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,500,000 $ 1,325,000 $ 2,545,000
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 12,000 $ 22,000 $ 3,000
----------- ----------- -----------
----------- ----------- -----------
NONCASH FINANCING ACTIVITIES:
Issuance of warrants $ - $ 96,000 $ -
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these consolidated statements.
25
ACRES GAMING INCORPORATED & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND COMPANY OPERATIONS:
COMPANY OPERATIONS
The consolidated financial statements include the accounts of Acres Gaming
Incorporated and its wholly-owned subsidiary, AGI Distribution, Inc. (the
Company). The Company develops, manufactures and markets electronic tools which
game manufacturers and casinos can use to increase the playability and
entertainment value of their slot games while supporting more efficient and
profitable casino operations. These tools include a combination of custom
electronics, software and computers. The Company presently sells its products in
the United States and in Australia. Sales to Australia totaled $1,416,000, or
20% of net revenues, for the year ended June 30, 1996.
During September 1993, JFA Enterprises, Inc. (JFA) merged two companies under
common ownership into JFA in exchange for newly issued shares of JFA common
stock. JFA subsequently changed its name to Acres Gaming Incorporated. The
transaction was accounted for similar to a pooling of interests and,
accordingly, the Company's financial statements include the accounts of the
merged companies for all periods presented. In connection with this merger, the
Company executed a 6-for-1 stock split. This stock split has been retroactively
reflected for the period ended June 30, 1994.
In November, 1993, the Company issued 1,667,500 units (consisting of 1,667,500
shares of common stock and 833,750 warrants) in an initial public offering
resulting in net proceeds of $7,153,000. In June, 1995, the Company issued
400,000 shares of common stock to a group of private investors for net proceeds
of $2,255,000. The proceeds of these transactions are being used to expand and
enhance the Company's Concept III product line, expand sales and support
activities, fund capital expenditures for computer and other equipment, and
provide working capital. At its current stage of operations, the Company's
financial position and operating results may be materially affected by a number
of factors, including the timing of receipt, installation and regulatory
approval of any one order, availability of additional capital, competition and
technological change.
PRINCIPLES OF CONSOLIDATION
All intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION
The Company sells its products under contracts which generally provide that the
price be paid in installments as progress is made toward completion and that
final payment be made after the completion of the contract. 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. During 1996, three
customers accounted for 43%, 20% and 12% of net revenues. During 1995, two
other customers accounted for 44% and 17% of net revenues. During 1994, two
customers accounted for 48% and 20% of net revenues.
26
CAPITALIZED SOFTWARE AND RESEARCH AND DEVELOPMENT COSTS
Software development costs for certain projects are capitalized from the time
technological feasibility is established to the time the resulting software
product is first shipped. Capitalized software costs, net of accumulated
amortization, were $141,000 at June 30, 1996 and $148,000 at June 30, 1995, and
are included in other assets. Amortization, generally on a two-year straight-
line basis, begins when the products are first shipped. All other research and
development costs are expensed as incurred.
INCOME TAXES
Certain of the companies involved in the merger discussed in Note 1 had
previously elected to be taxed as S corporations. As an S corporation, a
company generally is not responsible for income taxes. Instead, the
stockholders are taxed on the Company's taxable income at the stockholders'
individual federal and state income tax rates. These companies have incurred
losses since inception.
At the time of the merger described in Note 1, the S corporation status of the
companies discussed above was terminated and, accordingly, the Company has been
subject to federal and state income taxes from the effective date of the merger.
The Company recognizes deferred taxes for cumulative temporary differences
between financial reporting and tax reporting. Such deferred taxes are based on
the cumulative temporary differences at the date of the merger. If the
termination of the S corporation status had occurred at June 30, 1993, deferred
taxes would not have been significant. Upon termination of the S corporation
status, cumulative losses of approximately $865,000 attributable to the entities
which had elected S corporation status were reclassified to additional paid-in
capital from accumulated deficit.
The Company accounts for income taxes under the liability method whereby
deferred taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
NET LOSS PER SHARE
Net loss per share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the period.
CASH AND CASH EQUIVALENTS
The Company considers investments with an initial maturity of three months or
less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of receivables. At June 30, 1996
and 1995, the fair value of the Company's receivables approximated their
carrying value.
INVENTORIES
Inventories consist of electronic components and other hardware which are
recorded at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed on the
straight-line basis over the assets' estimated useful lives of four or five
years. Leasehold improvements are amortized over the lease term. Expenditures
for maintenance and repairs are charged to operations when incurred.
27
INTANGIBLE ASSETS
Intangible assets consist of costs associated with the establishment of patents,
trademarks, gaming licenses, and gaming product approvals in various
jurisdictions. Amortization started in 1996 and is calculated using the
straight-line method over a period of 2 to 15 years. Intangible assets, net of
accumulated amortization, were $254,000 at June 30, 1996 and $125,000 at
June 30, 1995 and are included in other assets.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECENT PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-Lived
Assets to be Disposed of," which requires the Company to review for impairment
of long-lived assets, certain identifiable intangibles, and goodwill related to
those assets whenever events or changes in circumstances indicate that the
carrying amount of an asset might not be recoverable. In certain situations, an
impairment loss would be recognized. The Company has adopted the provisions of
this Statement, which did not have a material effect on the financial
statements.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value based method of accounting for
stock-based compensation plans and requires additional disclosures for those
companies that elect not to adopt the new method of accounting. The Company
will continue to account for employee stock options under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The disclosures required by
Statement No. 123 will be effective for the Company's fiscal year ending June
30, 1997.
2. INVENTORIES:
Inventories consist of the following:
1996 1995
---------- ----------
Raw Materials $1,464,000 $1,930,000
Work-in-progress 718,000 292,000
Finished Goods 510,000 173,000
---------- ----------
$2,692,000 $2,395,000
---------- ----------
---------- ----------
3. INCOME TAXES:
At June 30, 1996, the Company had cumulative net operating losses totaling
approximately $7,000,000 which are available to offset future taxable income
through 2011. The Company has provided a valuation allowance for the entire
amount of the benefit related to these net operating loss carryforwards as its
realizability is uncertain at this time. Deferred tax liabilities were
insignificant as of June 30, 1996.
28
4. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities under operating leases that extend
through March, 2001. Future minimum lease payments under these noncancelable
operating leases as of June 30, 1996 are $239,000 in 1997, $254,000 in 1998,
$227,000 in 1999, $97,000 in 2000, and $13,000 in 2001. Total lease expense for
the years ended June 30, 1996, 1995 and 1994 was $228,000, $189,000 and $86,000,
respectively.
5. PATENT INFRINGEMENT LITIGATION:
The Company and a customer were named as defendants in a lawsuit filed in August
1993, which alleged patent infringement and sought to enjoin the Company from
selling progressive jackpot table games. In April 1994, the Company was found
to have infringed on certain patents and the patents were held to be valid. A
charge of $898,000 was recorded in the statement of operations for the
settlement reached after conclusion of the trial, as well as all expenses
related to the trial and the settlement agreement. The Company had sold only
four of the table games and had not considered them a part of its primary
business plan.
6. STOCKHOLDERS' EQUITY:
In November 1993, the Company completed its initial public offering and issued
1,667,500 units, consisting of 1,667,500 shares of common stock and 833,750
Redeemable Warrants. The net proceeds of the offering were $7,153,000. The
Redeemable Warrants, which expire October 27, 1996, allow the holder to purchase
one share of common stock at $7.50 per share. In connection with the offering,
the Company granted the underwriter warrants to purchase 145,000 shares of the
Company's units at $6 per share. The warrants expire in November 1998.
In June 1995, the Company issued 400,000 shares of common stock to a group of
private investors for net proceeds of $2,255,000. In connection with this
offering, the Company granted warrants to purchase 40,000 shares of common stock
at $7.20 per share, which approximated market value at that date.
In exchange for services, the Company issued warrants in 1995 to purchase
195,000 shares of common stock to two companies and two individuals. Exercise
prices of the warrants range from $4.75 to $9.00 per share. The warrants expire
between April, 1998 and September, 2000. Of these, warrants to purchase 50,000
shares were valued at $96,000 and recorded as paid-in capital and amortized over
the term of the related service agreement. Expense associated with these
warrants was $56,000 in 1996 and $40,000 in 1995.
The Company has a Stock Option Plan (the Plan) which permits the granting of
awards to directors, employees and consultants of the Company in the form of
stock options. Stock options granted under the Plan may be incentive stock
options or nonqualified options. A total of 1,000,000 shares of the Company's
common stock has been reserved for issuance pursuant to awards granted under the
Plan. Options to purchase 278,000 shares of common stock were exercisable at
June 30, 1996.
29
Activity under the Plan is summarized below:
Aggregate
Number Amount Price
of Shares Per Share (in Thousands)
--------- ----------- --------------
Options outstanding at June 30, 1993 - $ - $ -
Granted 310,000 3.00-10.00 1,501
Exercised (250) 3.00 (1)
-------- ----------- -------
Options outstanding at June 30, 1994 309,750 3.00-10.00 1,500
Granted 165,500 4.16-6.50 909
Exercised (26,750) 3.00-5.50 (98)
Lapsed (56,875) 3.00-10.00 (421)
-------- ----------- -------
Options outstanding at June 30, 1995 391,625 3.00-10.00 1,890
Granted 562,400 3.50-10.00 2,582
Exercised (91,500) 3.00-6.50 (526)
Lapsed (106,150) 4.16-10.00 (743)
-------- ----------- -------
Options outstanding at June 30, 1996 756,375 $3.00-10.00 $ 3,203
-------- ----------- -------
-------- ----------- -------
7. EMPLOYEE BENEFIT PLAN:
The Company has a profit sharing plan which operates under the provisions of
section 401(k) of the Internal Revenue Code and covers substantially all full-
time employees. Employer contributions may be made at the discretion of the
Board of Directors. To date, there have been no employer contributions.
8. SUBSEQUENT EVENT:
In August 1996, the Company executed a letter of intent to implement a strategic
alliance with International Game Technology (IGT). IGT is the largest
manufacturer of slot machines in the world. The agreement includes a $5 million
investment from IGT in return for 519,481 newly issued shares of the Company's
3% convertible preferred stock, with a twelve-month option to purchase an
additional 519,481 preferred shares at the same price. Under the strategic
alliance, the Company and IGT will be allied in four product areas: 1) The
Company will create specialty games, using IGT equipment as the foundation, to
be installed under leasing and/or revenue sharing agreements in casinos; 2) the
Company will sell its Concept III promotions and player tracking components for
use in IGT Smart System-TM- player tracking/slot accounting installations; 3)
IGT will be able to incorporate into its slot machines the Company's displays
and other game enhancement tools, and; 4) the Company will develop promotions
for use on IGT's Wide Area Network that supports "Megabucks," "QuarterMania" and
other progressive jackpot promotions.
IGT will have the right to elect one member of the Company's Board of Directors.
Closing of the investment transaction is subject to the approval of the new
class of preferred stock by the Company's shareholders, execution of definitive
agreements, and approval of gaming and other regulatory authorities.
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in or disagreements with accountants which required reporting on
Form 8-K have occurred within the two-year period ended June 30, 1996.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors of the Company is incorporated
herein by reference to the Company's Proxy Statement which will be filed
pursuant to Regulation 14A within 120 days of June 30, 1996.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to Executive Compensation is incorporated herein
by reference to the Company's Proxy Statement, which will be filed pursuant to
Regulation 14A within 120 days of June 30, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to Security Ownership of Certain Beneficial Owners
and Management is incorporated herein by reference to the Company's Proxy
Statement which will be filed pursuant to Regulation 14A within 120 days of
June 30, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to Certain Relationships and Related Transactions
is incorporated herein by reference to the Company's Proxy Statement which will
be filed pursuant to Regulation 14A within 120 days of June 30, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
See Item 8.
(2) FINANCIAL STATEMENT SCHEDULES
None.
(3) EXHIBITS
See Exhibit Index.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
city of Corvallis, State of Oregon, on September 26, 1996.
ACRES GAMING INCORPORATED
By: /s/ John F. Acres
------------------------------------
John F. Acres
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated on September 26, 1996..
/s/ John F. Acres
----------------------------------------
John F. Acres
Chief Executive Officer
and Director
(Principal Executive Officer
and Sole Director)
/s/ Robert W. Brown
----------------------------------------
Robert W. Brown
Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
32
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
* 3.1 Articles of Incorporation of Acres Gaming Incorporated,
as amended
3.2 Bylaws of Acres Gaming Incorporated, as amended
* 4.1 Warrant Agreement, including form of Redeemable Warrant
* 4.2 Underwriting Agreement, including form of Underwriter's
Unit Purchase Warrant
+ 10.1 Acres Gaming Incorporated 1993 Stock Option and Incentive
Plan
** 10.2 Lease dated January 4, 1994, between the Company and Avery
Investments
*** 10.3 Lease dated June 27, 1995, between the Company and
McCarran Center, LLC
+ 10.4 Employment Agreement dated January 2, 1996 between the
Company and Joseph A. Huseonica
11.1 Statement of Computation of Earnings per Share
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants
27.1 Financial Data Schedule
- -------------------------
+Management contract or compensatory plan or arrangement.
*Incorporated by reference to the same numbered Exhibit to the Company's
Registration Statement on Form SB-2 (No. 33-69110-S), which was declared
effective October 27, 1993, pursuant to Rule 12b-32.
**Incorporated by reference to the same numbered Exhibit to the Company's Annual
Report on Form 10-KSB, for the year ended June 30, 1994.
***Incorporated by reference to the same numbered Exhibit to the Company's
Annual Report on Form 10-KSB for the year ended June 30, 1995.
33