-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PGMNzIyQmCPjGAUN3S5NtgoQeK0FMVdZplS8G/hI2K+IPCBZ3zq4InpS256TPqOF kHT6BPbjJ0sFEvgtHkw1Gw== 0000891020-99-001615.txt : 19990928 0000891020-99-001615.hdr.sgml : 19990928 ACCESSION NUMBER: 0000891020-99-001615 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990927 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACRES GAMING INC CENTRAL INDEX KEY: 0000912601 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 880206560 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22498 FILM NUMBER: 99717819 BUSINESS ADDRESS: STREET 1: 815 NW NINTH ST CITY: CORVALLIS STATE: OR ZIP: 97330 BUSINESS PHONE: 5037537648 MAIL ADDRESS: STREET 1: 815 NW NINTH STREET CITY: CORVALLIS STATE: OR ZIP: 97330 10-K405 1 FORM 10-K FOR PERIOD ENDED JUNE 30, 1999 1 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------------------------- FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] FOR THE FISCAL YEAR ENDED JUNE 30, 1999 (Commission File No.) 0-22498 -------------------------------------------------- ACRES GAMING INCORPORATED (Exact name of Registrant as specified in its charter) NEVADA 88-0206560 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) -------------------------------------------------- 7115 AMIGO, SUITE 150, LAS VEGAS, NEVADA 89119 (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (702) 263-7588 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01 par value (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of August 31, 1999 was $12,486,000. For purposes of this computation, all executive officers and directors of the Registrant have been deemed affiliates. This shall not be deemed an admission that such persons are affiliates. The number of shares outstanding of the Registrant's Common Stock, par value $.01 per share, as of August 31, 1999 was 8,913,281 shares. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates by reference the Company's Proxy Statement to be filed in connection with the Company's 1999 Annual Meeting of Stockholders to be held December 3, 1999. 2 TABLE OF CONTENTS
PAGE PART I ITEM 1. BUSINESS.................................................................1 General................................................................1 The Market.............................................................1 Products...............................................................1 Strategic Alliance with IGT............................................4 Communication Protocol.................................................4 Research and Development...............................................4 Customers..............................................................5 Marketing..............................................................5 Production and Manufacturing...........................................5 Patents................................................................6 Competition............................................................6 Government Regulation..................................................7 Employees.............................................................11 Forward-Looking Statements............................................11 ITEM 2. PROPERTIES..............................................................11 ITEM 3. LEGAL PROCEEDINGS.......................................................12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................13 EXECUTIVE OFFICERS OF REGISTRANT........................................14 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................15 ITEM 6. SELECTED FINANCIAL DATA.................................................16 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................16 FACTORS THAT MAY AFFECT FUTURE RESULTS..................................19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................23 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................................................37 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................37 ITEM 11. EXECUTIVE COMPENSATION..................................................37 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........37 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................37 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K..................38 SIGNATURES..............................................................39
3 PART I ITEM 1. BUSINESS GENERAL The Company develops, manufactures and markets electronic game promotions, equipment and games for the casino gaming industry. The Company's principal products are based on its proprietary Acres Bonusing Technology(TM) and are designed to enhance casino profitability by providing entertainment and incentives to players of gaming machines. Acres Bonusing Technology improves the efficiency of bonus and incentive programs currently offered by many casinos, and makes possible bonus and incentive programs that have not previously been offered. THE MARKET In recent years, legalized gaming has significantly expanded in the United States. As part of this expansion, casino-style gaming has become an increasingly important component of the "leisure time" industry. The expansion resulted from the introduction of riverboat-style gaming in the Midwestern United States, the growth of Native American casino gaming and growth in the established Nevada market. Casino gaming has also grown rapidly worldwide, including in Australia, Canada, Europe and Africa, as well as in parts of the former Soviet Union and South America. The Company estimates that approximately 800,000 casino-style gaming machines are currently in use throughout the world, including approximately 430,000 in the United States. The Company believes that increased competition among casinos will lead to increased demand for game promotions and entertainment enhancements of the type offered by the Company. New or expanding casinos represent a significant part of the potential market for the Company's products. Existing casinos also represent a significant potential market as casino managers seek to maintain or improve casino profitability by employing bonusing and other promotional programs for gaming machines. PRODUCTS Acres Bonusing Technology was conceived to provide the gaming industry with a system to enable the design and delivery of bonuses and other promotions directly to players at the point of play and at the time of play. The Company currently offers bonusing products directly to casinos in the form of standard and customized bonusing promotions that can be applied casino-wide or to a limited number of gaming machines. In addition to bonusing products, the Company also offers slot accounting and visual analysis modules that may be purchased and installed individually or as components of an integrated system. The Company offers products primarily in two major categories: 1) Casino-wide, fully integrated applications offered as the Acres Advantage(TM) 2) Bonus Games comprised of single or a linked group of traditional slot machines that activate a secondary "bonus" game when certain milestones are reached on the traditional games. ACRES ADVANTAGE An Acres Advantage installation in a casino includes electronic hardware installed in the gaming machines, microprocessor-based controllers for groups of gaming machines and computers and software that gather data, operate bonuses and generate reports for casino management. The Acres Advantage is based on a Microsoft(R) SQL Server(TM) version 7.0 platform and is designed to take advantage of future improvements in Microsoft's SQL technology. The Acres Advantage system has more than enough capacity to serve the world's largest casinos. 1 4 Various components of the Acres Advantage casino-wide system are installed in high profile casinos such as Mandalay Resort Group's Mandalay Bay in Las Vegas, Nevada and Mirage Resort's Bellagio and Beau Rivage located in Las Vegas and Biloxi, Mississippi, respectively. International Acres Advantage installations include Star City in Sydney Australia and Crown South Bank Casino in Melbourne, Australia. The Company is currently installing Acres Advantage in Mandalay Resort Group's MotorCity Casino in Detroit, Michigan. Components of the Acres Advantage and the software used in many popular gaming machines that support the Acres Advantage have been approved by the Nevada Gaming Control Board and regulatory authorities for several other states and for two states in Australia. (See "Communication Protocol" and "Government Regulation"). The Acres Advantage casino-wide system currently includes Wizard(TM) slot accounting, Merlin(TM) casino mapping and Acres Bonusing(TM). The Company has developed the Prophet(TM) player tracking module that is expected to be available for installation in the fall of 1999 and Coinless Transit(TM), a method of using a player tracking card to facilitate cashless and coinless wagering, that is expected to be available for installation by December 1999. Wizard Slot Accounting. Wizard slot accounting products collect play data about each gaming device. This information is transmitted to a central computer system where it is immediately available to the casino management, and where it is stored for future analysis and reporting. The equipment is configured to monitor all slot machine functions including coins deposited in the machine, coins paid out of the machine, coins available to "drop", number of games played, jackpot occurrences and other machine functions. Merlin Casino Mapping. This software product provides a visual rendition of the casino's slot accounting database, graphically projected as a map of the casino floor, which allows casino management to graphically see the numerical statistics of the casino operations. This product allows for quick recognition of the play and service activity occurring at each gaming machine on the casino floor. Prophet Player Tracking. Scheduled for availability in the fall of 1999, the Company's Prophet player tracking module builds upon a casino's accounting system to gather and record information about individual players, much like an airline's "frequent flyer" program. Each customer who elects to enroll in the casino's "players club" is given a plastic card that uniquely identifies the player. The player inserts the card into an electronic card reader on the gaming machine and the system automatically records the player's level of play. Casino management can use this information to provide special incentives and rewards to individual players or groups of players in order to increase player loyalty. Acres Advantage is designed to further enhance player loyalty by requiring the use of a player tracking card to qualify for certain bonuses. Coinless Transit. Scheduled for availability in December 1999, this product allows players club members to transfer game credits from one gaming machine to another or to a redemption kiosk at which the game credits can be cashed out. By reducing the number of cash replenishments, or machine fills, that are required when slot players cash out their winnings, this feature reduces the casino's floor staffing expenses. Players also receive greater convenience by eliminating delays caused when machines run out of coins. The following bonuses and promotions are contained in the Acres Bonusing module of Acres Advantage. Customers may purchase and implement these bonuses individually or collectively. XtraCredit(TM). This patent pending feature is used to award special incentive bonuses to players club members. With just a few keystrokes, casino personnel can establish XtraCredit bonuses to provide incentives for players club members to attend the casino's special promotional events or to celebrate the player's special events such as birthdays or anniversaries at the casino. XtraCredit bonus awards dramatically reduce the casino's existing cash voucher mailing and redemption costs and provide a wide variety of marketing opportunities for the casino to retain customers. XtraCredit may also be used by other bonus applications as an award mechanism to allow the players to redeem their points earned or bonus awards won for free games on the gaming machines. Nevada gaming 2 5 regulators have ruled that amounts wagered by the player through the use of XtraCredits are excluded for gaming tax purposes. This ruling results in savings from using XtraCredit of nearly 6.25% of the cost of players club awards. In addition to the tax savings, players' time at the gaming machine may be increased, as players no longer have to visit the players club booth to collect their rewards. Finally, by offering the XtraCredit redemption, the casino may reduce the amount of players club points that are exchanged for cash awards that can be spent outside of their casino. PointPlay(TM). This feature allows casino players to earn points for slot play in a manner consistent with a standard player tracking system where the casino can configure the rates at which points are earned and values at which they are redeemed. PointPlay allows players to redeem their points for free games directly at the gaming machine. ReturnPlay(TM). To encourage players to return to the casino at a later date, the ReturnPlay feature awards a bonus to players that earn a predetermined number of slot club points. The ReturnPlay bonus is automatically redeemed when the player returns to the casino at a future date and inserts their players club card into the game. Personal Progressive(R). Although the vast majority of gaming machine players never experience the excitement of winning a progressive jackpot, the Personal Progressive bonus creates an individual progressive jackpot for each players club member that only they can win. The Personal Progressive jackpot grows as the customer plays, which adds excitement and provides an incentive to continue to visit the casino. Appreciation Time(TM). Casino personnel may reward players with multiple jackpots anywhere from two to nine times the normal payout for winning combinations. This promotion can be used to reward a casino's best customers or can be used to improve play in certain areas or at slow times of the day. Appreciation Time can be applied to the whole casino or only to a specific bank of gaming machines. This bonus provides greater control over appreciation gifts by insuring the gifts go to customers who are actually playing the games. Random Riches(TM) and Lucky Coin(TM). These progressive jackpot bonuses are granted to the player inserting the "nth coin" where the frequency of "n" and the funding parameters of the bonus are established by the casino. Awards can be created that vary between small jackpots every few minutes and life-changing jackpots every few weeks. These bonuses can be applied to any number of gaming machines (from one machine to every machine in the casino) and any one gaming machine may be tied to multiple bonuses. These promotions also have the ability to alert players with custom audio sequences just before the bonus is awarded. The casino may elect to award smaller Celebration Prizes(TM) or Near Winner(TM) prizes to some or all of the players in the casino at the time the Lucky Coin bonus is awarded. Celebration Prizes may be awarded to players club members only or in varying amounts to players club VIPs, regular players club members and non-members. BONUS GAMES The Company develops proprietary bonus games that it operates on a revenue-sharing basis. The Company has four bonus games that are approved for distribution in Nevada. Two of these games, Money Mint(TM) and Add `Em Up(TM), have been installed under revenue-sharing arrangements in casinos in Las Vegas. All of the Company's bonus games incorporate full-color, high-resolution plasma screens over one or more traditional slot machines. Dynamic animated sequences are displayed on the plasma screens to attract, instruct, entertain and communicate bonus awards to the players. State-of-the-art sound packages complement the animation. These bonus games have not been in operation long enough to indicate if there will be a strong demand for either game. The Money Mint bonus game incorporates a linked bank of four to six traditional slot machines, or base games. Players of these base games are selected to play the secondary "bonus" game when a Money Mint symbol appears in the base game's payline. The bonus game, viewed on a single overhead plasma display, includes animated minting equipment and allows the player to spin a bonus wheel for a guaranteed award. 3 6 The Add `Em Up bonus game is comprised of a single slot machine under a single overhead plasma display picturing three spinning slot machine reels. An Add `Em Up symbol on the base game's payline allows the player to play the bonus game by spinning the video reels of the bonus game. The dollar amounts on the video reels are added together to arrive at the bonus game award. Every play on the secondary bonus game results in a bonus being awarded to the slot player. The Company is also jointly developing a Three Stooges(TM) themed bonus game with Shuffle Master, Inc. that is expected to be released in the Fall of 1999. This bonus game incorporates the novelty of the famous comedy trio where players reaching the bonus round win cash bonuses as vintage Three Stooges video clips are displayed on overhead and in-machine video displays. STRATEGIC ALLIANCE WITH IGT In January 1997, the Company entered into a strategic alliance (the "Strategic Alliance") with International Game Technology ("IGT") which included a Master Agreement for Product Development, Purchase and Sales and a $5 million investment by IGT in the Company's preferred stock. At that time, the Company discontinued development of the Company's DOS-based slot accounting and player tracking system (the "Legacy" products) and instead, developed and sold component parts and Acres Bonusing to IGT for inclusion in casino installations with the IGT Smart System and IGS slot accounting and player tracking systems. Sales to IGT under the Strategic Alliance did not meet the Company's expectations. Certain casinos expressed an interest in purchasing Acres Bonusing without also purchasing IGS. In October 1998 the Company signed a sales agreement to install Acres Bonusing in Mandalay Bay in Las Vegas, Nevada. The Company decided that pursuing direct sales of Acres Bonusing while also selling through IGT would not be feasible. The Company ended the Strategic Alliance on January 2, 1999. The Company continues to work with IGT to support existing installations of the combined Acres/IGS system. In September 1998, Albert Crosson, Vice Chairman of IGT, resigned from the Company's Board of Directors. COMMUNICATION PROTOCOL The Company and IGT have jointly developed a communication protocol known as SAS4. The protocol is used to communicate instructions and messages between Acres Bonusing and gaming machines. The communication of these instructions and messages is essential to the operation of bonuses. Although the Company and IGT have agreed that the Company can use SAS4 in connection with certain installations, IGT has stated that the Company does not have an unrestricted right to use SAS4 with non-IGT games. The Company believes that it has joint ownership of the protocol and the ability to use and license the protocol. The Company is a founding member of the Gaming Manufacturers Association ("GAMMA") which, among other things, is jointly developing a standardized communication protocol that will be licensed to all GAMMA members. This protocol may be a viable alternative to SAS4 but this new protocol is not available for implementation at this time. RESEARCH AND DEVELOPMENT The Company devotes significant resources to the development of new products and the enhancement of existing products. The Company had 46 full-time employees involved in research and development as of August 31, 1999. Research and development expenses were $6.4 million, $5.2 million and $5.1 million in the years ended June 30, 1999, 1998 and 1997, respectively. 4 7 CUSTOMERS Large casinos with more than 1,000 gaming machines represent the principal market for Acres Advantage. Casinos of this size are generally large enough to support a professional management staff capable of using the analytical and promotional tools provided by Acres Advantage. This market includes many casinos in Las Vegas, Reno and Laughlin, Nevada, and Atlantic City, New Jersey, as well as a number of Native American and riverboat casinos in various other states and a number of casinos in Australia, South Africa and Europe. Sales of Acres Advantage to Mandalay Bay accounted for 51 percent of the Company's net revenues in 1999. Sales to IGT accounted for 23 percent, 75 percent and 28 percent of the Company's net revenues in 1999, 1998 and 1997, respectively. (See "Strategic Alliance with IGT"). Sales of components to Anchor Gaming ("Anchor"), primarily related to their Wheel of Gold bonusing game, accounted for 18 percent and 28 percent of the Company's net revenues in 1998 and 1997, respectively. Sales of the system components and bonusing applications to Aristocrat for the Crown Casino in Melbourne, Australia accounted for 12 percent of the Company's net revenues in 1997. The Company's backlog of orders for its products were approximately $9.6 million, $2.1 million and $6.1 million as of June 30, 1999, 1998 and 1997, respectively. Backlog, however, may not be a meaningful indication of future sales. Sales to the Company's customers are made pursuant to purchase orders or sales agreements for specific system installations and products are often delivered within several months of receipt of the order. The Company does not have any ongoing long-term sales contracts. At its current stage of operations, the Company's revenues and results of operations may be materially affected, in the near term, by the receipt or loss of any one order. MARKETING The Company currently markets its products and provides service to customers from its headquarters in Las Vegas, Nevada and its office in Corvallis, Oregon. PRODUCTION AND MANUFACTURING Through fiscal 1999, the Company's manufacturing operation consisted primarily of the assembly of electronic circuit boards and cables from components purchased from third parties. In July 1999, in conjunction with the relocation of the Company's headquarters to Las Vegas, Nevada, the Company began outsourcing almost all of the hardware components of its products. The circuit boards are manufactured and assembled to the Company's specifications by contract manufacturers. A key component of each product is computer software that is copied onto electronic chips by contract manufacturers. The Company believes that its component parts and services can be obtained from multiple sources and therefore that it is not overly reliant on any single vendor. Company engineers conduct the development, testing and maintenance of the software. 5 8 PATENTS The Company has applied for United States and foreign patents on certain features of its product line, and may in the future apply for other United States patents and corresponding foreign patents. The following patents have been issued to the Company:
- ------------------------------------------------------------------------------------------------- ISSUE DATE PATENT EXAMPLES OF PATENT PROTECTION NO. - ------------------------------------------------------------------------------------------------- August 1997 5,655,961 This patent protects the implementation of a bonus pay table in a gaming machine and the implementation of a "Bonus Pool." A Bonus Pool is configurable by casino management to control the total amount of special bonuses paid, thus making it possible for such promotions to be kept within a casino's budget. - ------------------------------------------------------------------------------------------------- January 1998 5,702,304 This patent protects the Company's illuminated card reader, a player tracking system component, which indicates the point of card insertion and communicates bonus eligibility to the players and communicates game and player status to the casino through the use of various colors. - ------------------------------------------------------------------------------------------------- April 1998 5,741,183 This patent protects a method of identifying and categorizing individual gaming devices that are connected to a casino's computer network. It includes a memory device which allows for the identification and coding of each piece of gaming equipment with its individual configurations even when they are disconnected or moved to another location within the casino. - ------------------------------------------------------------------------------------------------- May 1998 5,752,882 This patent protects a method of operating gaming machines in which the casino is able to pre-select which games participate in a variety of bonusing promotions such as linked progressive jackpots or linked random bonuses. - ------------------------------------------------------------------------------------------------- October 1998 5,820,459 This patent protects a networked gaming bonusing system which enables a casino to pre-select which games participate in bonusing promotions. - ------------------------------------------------------------------------------------------------- November 1998 5,836,817 This patent protects a method of operating gaming machines in which the casino is able to pre-select which games participate in a variety of bonusing promotions such as linked progressive jackpots or linked random bonuses. - ------------------------------------------------------------------------------------------------- December 1998 5,854,542 This patent protects the Company's proprietary fluorescent flashing and diming lamps which are placed on gaming machines and operate to indicate promotional features. - ------------------------------------------------------------------------------------------------- March 1999 5,876,284 The patent protects a networked gaming bonusing system, namely the Company's Hurricane Zone(R) bonus promotion. - -------------------------------------------------------------------------------------------------
No assurance can be given that any patents that are applied for will be issued or, if issued, will provide any significant competitive advantage to the Company. In addition, the Company has a variety of other intellectual property which it treats as trade secrets. The Company takes reasonable steps to protect its intellectual property but it is possible that others may make unauthorized use of such intellectual property and the Company may or may not be able to prevent such use. (See "Legal Proceedings"). COMPETITION The Company believes that its products compete principally on the basis of functionality, price and service. The Company believes that its proprietary Acres Bonusing Technology provides a competitive advantage. In addition to the recently issued patents discussed above, the Company has several other patents pending which cover many additional aspects of its Acres Bonusing Technology. 6 9 Several other companies have products that compete with the slot accounting and player tracking modules of the Acres Advantage product line. Each of these competitors has financial and other resources that are greater than those of the Company. IGT, the largest manufacturer of gaming machines in the world, has an additional competitive advantage in selling its slot accounting and player tracking systems to its existing gaming machine customer base. (See "Strategic Alliance with IGT"). Although several competitors claim to have the ability to offer bonusing products with functionality similar to Acres Advantage, the Company is aware of significant installations of those products only by Casino Data Systems ("CDS") and Mikohn Gaming Corporation ("Mikohn"). The Company believes that CDS and Mikohn's initial bonusing products, which have been installed in several casinos, infringe the Company's recently issued patents and will infringe certain of the Company's pending patents, if issued. The Company has notified CDS, Mikohn and their customers of the patent infringement and initiated patent infringement litigation. (See "Legal Proceedings"). While the Company attempts to differentiate its bonusing products from progressive jackpot systems, the Company's bonusing products compete for casino floor space with other companies' progressive jackpot systems. The market for progressive jackpot systems is served primarily by Mikohn and CDS. The Company's bonus game product line competes with the products of major gaming machine manufacturers and resellers including IGT, Anchor, Williams Gaming Inc. and Bally Gaming. Each of these competitors has financial and other resources that are greater than those of the Company. Several smaller competitors, some of which have financial and other resources that are greater than those of the Company, also offer games that compete with the Company's bonus game product line. GOVERNMENT REGULATION The Company is subject to the licensing and regulatory control of the gaming authorities in each jurisdiction in which its products are sold or used by persons licensed to conduct gaming activities. Although licensing of the Company may not be required in a jurisdiction, its products generally must be approved by the regulatory authority for use in each licensed location within the jurisdiction. REGULATION OF PRODUCTS The Company has complied with the approval process and has either been issued a license, temporary license, certificate, approval or other permit allowing it to sell its products in Arizona, Colorado, Connecticut, Indiana, Louisiana, Michigan, Mississippi, Missouri, Nevada, New Jersey, North Dakota, Wisconsin and Victoria and New South Wales, Australia. Not all of the Company's products have been approved for sale in all jurisdictions. In most jurisdictions, a model of the gaming equipment that the Company seeks to place in operation must be submitted for testing by an approved testing laboratory prior to use in any gaming operation. To obtain such approval, the Company must submit, at its expense, each model of its equipment to the specified laboratory for testing, examination and analysis. Upon completion of the testing, the laboratory submits a report of its findings and conclusions to the applicable gaming authority, together with any recommendations for modifications to the equipment or the addition of equipment or devices to such gaming equipment. The Company has filed applications for licenses in Minnesota and Ontario, Canada, and intends to seek approval of its bonusing technology for use in any other jurisdiction in which a sale arises. Failure of the Company to obtain approval for the use of bonusing technology by a gaming licensee in a jurisdiction would prevent the use of such technology at the licensee's location and also will prevent any other gaming licensee within that jurisdiction from using the products until the appropriate approvals have been obtained or requirements complied with. 7 10 CORPORATE REGULATION Nevada The manufacture, sale and distribution of gaming devices are subject to: (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, the "Nevada Act"); and (ii) various local regulation. Generally, gaming activities may not be conducted in Nevada unless licenses are obtained from the Nevada Gaming Commission (the "Nevada Commission"), the Nevada State Gaming Control Board (the "Nevada Board"), and appropriate county and municipal licensing agencies. The Nevada Commission, the Nevada Board, and the various county and municipal licensing agencies are collectively referred to as the "Nevada Gaming Authorities." The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy that are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) to provide a source of state and local revenues through taxation and licensing fees. Change in such laws, regulations and procedures could have an adverse effect on the Company. On December 21, 1995, the Nevada Commission registered the Company as a publicly traded corporation ("Registered Corporation") and granted manufacturer's and distributor's licenses to the Company's wholly-owned subsidiary, AGI Distribution, Inc. ("AGID"), a Nevada corporation. The Commission also granted AGID a nonrestricted license as the operator of a slot machine route ("Slot Route License"). As a Registered Corporation, the Company is required to periodically submit detailed financial and operating reports to the Nevada Commission and furnish any other information which the Nevada Commission may require. AGID's manufacturer's, distributor's and Slot Route Licenses require the periodic payment of fees and taxes and are not transferable. No person may become a stockholder of, or receive any percentage of profits from, AGID without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company and AGID have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or AGID in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of AGID must file applications with the Nevada Gaming Authorities and are required to be licensed by the Nevada Gaming Authorities. Officers, directors and key employees of the Company who are actively and directly involved in the gaming activities of AGID may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing or a finding of suitability for any cause they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or to continue having a relationship with the Company or AGID, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company or AGID 8 11 to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. The Company and AGID are required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by AGID, must be reported to or approved by the Nevada Commission. If it was determined that the Nevada Act was violated by the Company or AGID, the gaming registrations, licenses and approvals they hold could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, AGID, the Company and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Limitation, conditioning or suspension of any gaming license could (and revocation of any gaming license would) materially adversely affect AGID and the Company. Any beneficial holder of the Company's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of the Company's voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires more than 5% of the Company's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of the Company's voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the Chairman of the Nevada Board mails a written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10% but not more than 15% of the Company's voting securities, may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Company, any change in the corporate charter, bylaws, management, policies or operations of the Company or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Company's voting securities for investment purposes only. Activities that are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a Registered Corporation beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or AGID, the Company (i) pays that person any dividend or interest upon voting securities of the Company, (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) pays remuneration in any form to that person for services rendered or otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities for cash at fair market value. Additionally, the Clark County Liquor and Gaming Licensing Board has taken the position that it has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license. 9 12 The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file an application, be investigated and found suitable to own the debt security of a Registered Corporation. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. The Company is required to maintain a current stock ledger in Nevada that may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to require the Company's stock certificates to bear a legend indicating that such securities are subject to the Nevada Act. However, to date, the Nevada Commission has not imposed such a requirement on the Company. The Company may not make a public offering of any securities without the prior approval of the Nevada Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful. Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and the Nevada Commission concerning a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process of the transaction. The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environmental for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Company can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Company's board of directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purpose of acquiring control of the Registered Corporation. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively, "Licensees"), and who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada Board and, thereafter, maintain a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are also required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of 10 13 the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operation who has been denied a license or a finding of suitability in Nevada on the ground of personal unsuitability. Other Jurisdictions Other jurisdictions in which the Company's products are sold or used require various licenses, permits, and approvals in connection with such sale or use, typically involving restrictions similar in most respects to those of Nevada. The Company has complied with the approval process for use of the products it has sold in these other jurisdictions, including the receipt of manufacturer and distributor licenses, permits, or certificates in each such state. Not all of the Company's products have been approved for sale in all jurisdictions. No assurances can be given that such required licenses, permits, certificates or approvals will be given or renewed in the future. EMPLOYEES At August 31, 1999, the Company had 89 full-time employees of whom 46 were involved in research and development, 16 in customer service and support, 6 in material control, 5 in sales and marketing and 16 in administration and management. None of the Company's employees are represented by a labor union or covered by a collective bargaining agreement. The Company has not experienced any work stoppages and believes that its employee relations are good. FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-K contain "forward-looking" information (as defined in Section 27A of the Securities Act of 1933, as amended) that involve risks and uncertainties that may cause actual results to differ materially from those predicted in the forward-looking statements. Forward-looking statements can be identified by their use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. If any of the Company's assumptions on which the statements are based prove incorrect or should unanticipated circumstances arise, the Company's actual results could materially differ from those anticipated by such forward-looking statements. Forward-looking statements relate to the Company's plans and expectations as to: future performance, growth opportunities, expansion, competition, communication protocols, sales backlog, adequacy of cash and equivalents balances to fund the Company's operations; anticipated future sales; anticipated costs of relocating the Company's headquarters and the amount of expected annual operating cost savings related to such relocation; revenue recognition; cash collections; scheduled product installation dates; new product development and introduction; patent protection; and anticipated effects of the Year 2000. Such plans and expectations involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. For a discussion of these risk factors, see "Factors that May Affect Future Results." In addition, from time to time, the Company may issue other forward-looking statements. Any forward-looking statements, including other written or oral forward-looking statements made by the Company or persons acting on its behalf, should be considered in light of these risk factors and other risk factors referred to from time to time in the Company's press releases, periodic reports or communications with stockholders. ITEM 2. PROPERTIES In July 1999, the Company's administrative headquarters was relocated and combined with the Company's sales, marketing, customer service and new product development office in Las Vegas, Nevada at 7115 Amigo Street, Suite 150, Las Vegas, Nevada. This facility encompasses approximately 31,500 square feet. The 11 14 lease commenced on June 15, 1998 and will expire on June 15, 2003. The base rent is approximately $36,000 per month, plus $5,000 per month for property taxes, building insurance and common area maintenance. In September 1999, the Company's leased facility at 815 N.W. Ninth Street, Corvallis, Oregon was reduced to approximately 11,000 square feet from approximately 39,000 square feet. The new lease commenced on September 1, 1999 and will expire on February 28, 2002. The base rent for the total facility is approximately $15,000 per month, which includes property taxes, building insurance and common area maintenance. The Company owns manufacturing and engineering equipment which it uses in its assembly operations and research and development efforts. Such equipment is available from a variety of sources and the Company believes that it currently owns or can readily acquire equipment required for its current and anticipated levels of operations. ITEM 3. LEGAL PROCEEDINGS Two related lawsuits have been filed in the U.S. District Court for the District of Nevada that allege violation of the federal securities laws by the Company and its executive officers: Townsend, et al. v. Acres Gaming Incorporated, et al. CV-S-97-01848-PMP (RJJ) and Jason, et al. v. Acres Gaming Incorporated, CV-S-98-00262-PMP (RJJ). Those suits have been consolidated into one combined action styled: In re Acres Gaming Securities Litigation, CV-S-97-01848-PMP (RJJ). The combined action seeks class certification for a proposed class consisting of the purchasers of the Company's stock during the period from March 26, 1997 to December 11, 1997. The court has not yet ruled on class certification. No trial date or discovery cut-off date has been set. The defense of this suit has been tendered to and accepted by the Company's directors and officer's insurance carrier. The Company denies the allegations and intends to vigorously defend itself. Two lawsuits have been filed regarding ownership of the Wheel of Gold ("WOG") technology that is the subject of two patents (the "WOG Patents"). In the first suit, Anchor, Anchor Coin, and Spin for Cash Wide Area Progressive Joint Venture, Anchor's partnership with IGT, (together, the "Plaintiffs") sued the Company for infringement of the WOG Patents, breach of warranty and breach of contract: Anchor Gaming, et al. v. Acres Gaming Incorporated, No. CV-S-99-00245-LDG (LRL). This action is now pending in U.S. District Court. Plaintiffs seek to enjoin the Company from infringing the WOG Patents and from competing with it in the sale of wheel styled bonus gaming devices. The Plaintiffs also seek unspecified compensatory damages, treble damages, costs of suit, and attorney's fees. The Company has filed a counterclaim in that proceeding for a declaration that the Company is the sole or joint owner of the WOG Patents. The defense of this suit has been tendered to and accepted by the Company's general liability insurance carrier. In the second action, the Company has filed suit against Anchor and Spin for Cash Wide Area Progressive Joint Venture and is now pending in U.S. District Court for the District of Oregon in Eugene, Oregon: Acres Gaming Incorporated v. Anchor Gaming, et al., No. CV99-698-HO. The Company alleges that Anchor wrongfully used the Company's intellectual property to obtain the WOG Patents, that the filing of the patent applications was fraudulently concealed from the Company, that Anchor was unjustly enriched by retaining the benefits of the Company's technology without compensating the Company and that Anchor breached fiduciary duties owed to the Company. The Company seeks $40 million in compensatory damages, treble damages, costs of suit, and attorney's fees. Four related lawsuits have been filed in the U.S. District Court for the District of Nevada involving the Company and its efforts to enforce its patent rights: Mikohn Gaming Corp. v. Acres Gaming Incorporated, No. CV-S-98-1383 HDM (LRL) ("Suit I"); Mikohn Gaming Corp. v. Acres Gaming Incorporated, No. CV-S-98-738 HDM (LRL) ("Suit II"); Acres Gaming Incorporated v. Mikohn Gaming Corp., Casino Data Systems, New York New York Hotel and Casino and Sunset Station Hotel and Casino; No. CV-S-98 794 PMP (LRL) ("Suit III"); and Acres Gaming Incorporated v. Mikohn Gaming Corporation, et al., No. CV-S-98-01462 PMP (RJJ) ("Suit IV"). Suits I, II and III have now been consolidated. The Company denies all asserted allegations and intends to vigorously defend itself and its intellectual property rights. 12 15 In Suit I, Mikohn asserted a claim for declaratory judgment of noninfringement and invalidity of U.S. Patent No. 5,655,961 ("the `961 patent") owned by the Company. Mikohn also asserted claims for "intentional interference with a business relationship," "intentional interference with prospective business relationship," "unfair competition: trade libel" and "unfair competition: disparagement." Mikohn's complaint sought unspecified damages, punitive damages, attorney's fees, interest on the alleged damages, an injunction against the conduct alleged in the complaint, and a declaration that the `961 patent is invalid and not infringed by Mikohn or its customers. The Company has filed a counterclaim for infringement of the `961 patent, and has denied Mikohn's other allegations. In Suit II, Mikohn asserted a claim for declaratory judgment of noninfringement and invalidity of U.S. Patent No. 5,741,183 ("the `183 patent") owned by the Company. Mikohn's complaint sought no damages, but requested an award of attorney's fees and a declaration that the `183 patent is invalid and not infringed by Mikohn. Because the Company is not aware of any infringement by Mikohn, the Court granted summary judgment on the noninfringement claim. Mikohn's invalidity claim is still pending. In Suit III, the Company sued Mikohn, CDS, New York New York Hotel and Casino and Sunset Station Hotel and Casino for infringement of the Company's U.S. Patent No. 5,752,882 ("the `882 patent"). Mikohn counterclaimed in Suit III, seeking a declaratory judgment of invalidity and noninfringement of the `882 patent and asserted claims for "false and misleading representations" under 11 U.S.C. Section 1125, "interference with prospective economic relations," "unfair competition: trade libel" and "unfair competition: disparagement." Mikohn's counterclaims seek unspecified damages, as well as a trebling of the damages, punitive damages, attorney's fees and an injunction against the Company's "continuing to commit the unlawful acts" alleged in the counterclaims. The Company has tendered the defense of Mikohn's counterclaims to its former general liability insurance carrier. The insurer has not responded to the tender of Suit III's defense. In Suit IV, the Company sued Mikohn and CDS for infringement of the Company's U.S. Patent Nos. 5,820,459 and 5,836,817. The defendants counterclaimed for declaratory judgment of noninfringement and invalidity of the patents. In addition, CDS counterclaimed for: "patent misuse"; "Sherman Act Section 2 - Attempted Monopolization"; "spoilation of evidence"; "unfair competition - intentional interference with prospective economic advantage" and "misappropriation of trade secrets". CDS's counterclaims seek unspecified damages, as well as a trebling of the damages, punitive damages, and attorney's fees. In separate but related actions, the Company has filed suit in U.S. District Court for the District of Oregon against its former general liability insurance carrier for breach of insurance contract: Acres Gaming Incorporated v. Atlantic Mutual Insurance Company. The Company's suit is based on the insurer's refusal to pay more than nominal amounts of the costs of defense in Suit I. In addition, the Company has filed suit in U.S. District Court for the District of Oregon against its current general liability insurance carrier for breach of insurance contract: Acres Gaming Incorporated v. St. Paul Fire & Marine Insurance Co. This suit is based on the insurer's refusal to defend the Company against CDS's counterclaims in Suit IV. The Company anticipates that each of these matters will be resolved by cross motions for summary judgment. Unfavorable outcomes in one or more of these suits could have a material adverse effect on the Company. The Company from time to time is involved in other various legal proceedings arising in the normal course of business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended June 30, 1999. 13 16 EXECUTIVE OFFICERS OF REGISTRANT As of August 31, 1999, the executive officers of the Company were as set forth below:
EXECUTIVE NAME AGE POSITIONS AND OFFICES OFFICER SINCE ---- --- --------------------- ------------- John F. Acres 45 Chairman 1985 Floyd W. Glisson 52 Chief Executive Officer, 1998 President and Director Reed M. Alewel 35 Vice President, Chief 1999 Financial Officer, Treasurer and Assistant Secretary Richard J. Schneider 42 Vice President and Chief 1999 Operating Officer Gerald D. Haynes 41 Vice President, General 1999 Counsel and Secretary
There are no family relationships among executive officers of the Company. John F. Acres, the founder of the Company, has served as the Chairman of the Company since its inception in 1985. Mr. Acres served as the Chief Executive Officer from January 1985 until July 1998. He also served as President of the Company from January 1985 to January 1996 and from February 1998 to July 1998 and as Secretary from January 1985 to January 1997. Mr. Acres has been involved in the gaming industry since 1972 and has designed slot data collection systems, player tracking systems and equipment for progressive jackpot systems that are widely used in the industry. In 1981, he founded Electronic Data Technology ("EDT") to manufacture and sell progressive jackpot system designs. While with EDT, he designed one of the first slot data collection systems and invented the electronic player tracking system. He sold a majority interest in EDT to IGT in 1983 and remained as president of EDT until 1985. The player tracking system designed by Mr. Acres while with EDT is installed on approximately 100,000 gaming machines throughout the world and was actively marketed by IGT until 1997. In 1985, Mr. Acres co-founded Mikohn. He served as vice president and a director of Mikohn until 1988. Floyd W. Glisson became President and Chief Executive Officer of the Company in July 1998. Mr. Glisson was senior vice president, finance and administration and chief financial officer for ConAgra Grocery Products Company, a unit of ConAgra, Inc., from June 1993 to July 1998. Prior to June 1993, Mr. Glisson was senior vice president, finance and administration and chief financial officer of Hunt Wesson, Inc., a food processing company that is a subsidiary of ConAgra, Inc. In addition to normal staff functions, Mr. Glisson was also responsible for Food Service and International Operations. Reed M. Alewel joined the Company in October 1996 as Controller and Assistant Secretary. He was elected Vice President, Chief Financial Officer, Treasurer and Assistant Secretary in July 1999. Mr. Alewel was the manager of financial planning and analysis for the American Italian Pasta Company, a food manufacturing company, from May 1992 to October 1996. Mr. Alewel is a Certified Public Accountant. Richard J. Schneider joined the Company in December 1997 as the Vice President of Game Development. In July 1999, Mr. Schneider was elected Vice President and Chief Operating Officer. From July 1997 to December 1997, Mr. Schneider was the vice president of game engineering for CDS. From 1992 to 1997, Mr. Schneider was the director of engineering for United Coin Machine Company. 14 17 Gerald D. Haynes joined the Company in December 1997 as Vice President, Corporate Counsel. In February 1999, Mr. Haynes was promoted to Vice President and General Counsel and in July 1999, Mr. Haynes was also elected as Secretary of the Company. From January 1997 to December 1997, Mr. Haynes was general counsel and vice president of Oxis International, Inc., a biopharmaceutical company. From November 1994 to January 1997, Mr. Haynes, as a sole practitioner, functioned among other things, as patent counsel for Kaiser Aluminum & Chemical Corp. and general counsel for Oxis International, Inc. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on the Nasdaq SmallCap Market under the symbol "AGAM". The following table sets forth, for the periods indicated, the range of high, low and end of period market prices for the Company's common stock as reported by the Nasdaq SmallCap Market.
MARKET PRICE PER SHARE ---------------------- LOW HIGH END OF PERIOD --- ---- ------------- FISCAL YEAR ENDED JUNE 30, 1999: First quarter..................... $3.19 $ 6.00 $ 3.19 Second quarter.................... 1.63 4.38 2.44 Third quarter..................... 2.00 3.13 2.75 Fourth quarter.................... 1.06 3.50 2.00 FISCAL YEAR ENDED JUNE 30, 1998: First quarter..................... $7.63 $12.00 $11.31 Second quarter.................... 3.75 12.75 4.38 Third quarter..................... 4.31 6.56 4.88 Fourth quarter.................... 4.31 5.25 5.00
The Company estimates that there are approximately 4,160 beneficial owners of the Company's common stock. The Company has never paid or declared any cash dividends on its common stock and does not intend to pay cash dividends on its common stock in the foreseeable future. The Company expects to retain its earnings to finance the development and expansion of its business. The payment by the Company of dividends, if any, on its common stock in the future is subject to the discretion of the Board of Directors and will depend on the Company's earnings, financial condition, capital requirements and other relevant factors. 15 18 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial information concerning the Company and should be read in conjunction with the audited financial statements and notes included in "Financial Statements and Supplementary Data".
YEARS ENDED JUNE 30, ------------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (in thousands except per share data) STATEMENTS OF OPERATIONS DATA: Net revenues ..................................... $ 13,972 $ 17,573 $ 20,455 $ 6,942 $ 4,006 Gross profits .................................... 5,719 6,623 10,902 3,355 1,436 Income (loss) from operations .................... (7,248)(1) (4,660)(2) 1,425 (1,665) (2,489) Net income (loss) ................................ (6,988)(1) (4,177)(2) 1,798 (1,641) (2,505) Net income (loss) per common share-basic ......... $ (.79)(1) $ (.47)(2) $ .21 $ (0.22) $ (0.35) Net income (loss) per common share-diluted ....... $ (.79)(1) $ (.47)(2) $ .20 $ (0.22) $ (0.35)
(1) During 1999, the Company recorded a non-recurring charge of $400,000 ($.04 per share) for the costs of the Company's relocation of its headquarters to Las Vegas, Nevada. (2) During 1998, the Company recorded a non-recurring charge of $745,000 ($.08 per share) for the costs of the Company's change in business focus to the Acres Bonusing and bonus game product lines.
AS OF JUNE 30, ----------------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- (in thousands) BALANCE SHEET DATA: Working capital ............................. $ 4,649 $12,091 $16,474 $ 2,552 $ 3,458 Total assets ................................ 16,097 17,194 21,323 7,631 6,264 Current liabilities ......................... 8,050 2,435 2,545 3,644 1,302 Long-term debt .............................. -- -- -- -- -- Redeemable convertible preferred stock ...... 4,948 4,948 4,948 -- -- Stockholders' equity ........................ 3,099 9,811 13,830 3,987 4,962
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company develops, manufactures and markets electronic game promotions, equipment and games for the casino gaming industry. The Company's products are based on its proprietary Acres Bonusing Technology and are designed to enhance casino profitability by providing entertainment and incentives to players of gaming machines. The bonusing technology improves the efficiency of bonus and incentive programs currently offered by many casinos, and makes possible some bonus and incentive programs that have not previously been offered. At its current stage of operations, the Company's financial position and operating results may be materially affected by a number of factors, including the timing of receipt, installation and regulatory approval of any one order, availability of additional capital, competition and technological change. Historically, three or fewer customers have accounted for more than 65 percent of annual revenues. (See "Business - Customers" and "Factors That May Affect Future Results"). 16 19 RESULTS OF OPERATIONS COMPARISON OF THE YEARS ENDED JUNE 30, 1999 AND 1998 The Company's net revenues during the year ended June 30, 1999 were $14.0 million, a decrease of $3.6 million from the $17.6 million of net revenues in 1998. The Company's revenues can fluctuate significantly based on the timing of the delivery of any large order. In the current year, sales to IGT decreased by $9.9 million of which $4.1 million was due to the Company's granting of manufacturing rights to IGT pursuant to which the Company receives royalty payments on certain hardware manufactured by IGT. In the prior year, when the Company manufactured and sold hardware to IGT, the Company recorded higher per unit revenue on the hardware, although gross profit was approximately the same. Additionally, sales of components to Anchor decreased by $2.7 million from the prior year. These decreases in revenue were partially offset by $8.2 million of system sales made directly to casinos. Component materials purchased primarily from computer and electronics vendors comprised 55 percent of the cost of revenues in 1999 and 66 percent in 1998. Manufacturing, procurement, software customization, service and installation labor and expenses accounted for the remaining cost of revenues. Changes in the components of the cost of revenues result from changes in the mix of products sold. Gross profit margin improved to 41% in fiscal 1999 from 38% in fiscal 1998. The shift to royalty-based revenues resulted in an increase in gross profit margin of 9 percentage points. This increase was partially offset by the absorption of certain fixed manufacturing and service costs over a smaller sales volume and changes in the mix of products sold. The Company's research and development expenses increased to $6.4 million in 1999, from $5.2 million in the prior year. This increase is primarily due to the cost of development of enhancements and additional modules for Acres Advantage and the increased size of the Las Vegas office facility, a large portion of which is used for research and development activities. The Company expects to continue to spend a significant portion of its revenue on research and development in order to enhance and expand the capabilities of Acres Advantage and develop additional bonus games. Selling, general and administrative costs increased to $6.1 million in 1999 from $5.3 million in the prior year. This increase was the result of approximately $1.4 million of incremental legal fees incurred to secure and defend the Company's intellectual property rights for new and existing bonusing products. The increase in legal fees was partially offset by changes in the Company's business focus to the Acres Bonusing and bonus game product lines which resulted in reductions in sales and marketing salaries and promotional activities. Operating expenses in fiscal 1999 include a non-recurring charge of $400,000 ($.04 per share) related to the Company's relocation of its headquarters to Las Vegas, Nevada. Other income, primarily comprised of interest income, decreased by $223,000 as a result of reduced balances of invested cash and equivalents. The Company has cumulative net operating losses of approximately $15.5 million available to offset future taxable income through 2019. As the realizability of these net operating loss carryforwards is uncertain, the Company has provided a valuation allowance for the entire amount and did not record an income tax benefit for the years ended June 30, 1999 or 1998. The net loss for the year ended June 30, 1999 was $7.0 million ($0.79 per share) compared to a net loss of $4.2 million ($0.47 per share) in the prior year. COMPARISON OF THE YEARS ENDED JUNE 30, 1998 AND 1997 The Company's net revenues during the year ended June 30, 1998 were $17.6 million, a decrease of $2.9 million from the $20.5 million of net revenues in 1997. Although sales to IGT during the year ended June 30, 1998 increased over the prior year by approximately $7.5 million, sales of products for the Crown Casino in Melbourne, Australia decreased by $3.8 million, sales of the Company's Legacy slot accounting and player tracking system 17 20 decreased by $2.7 million, sales of components to Anchor decreased by $2.6 million and sales of custom bonusing applications decreased by $1.3 million from the prior year. Component materials purchased primarily from computer and electronics vendors comprised 66 percent of the cost of revenues in 1998 and 72 percent in 1997. Manufacturing, procurement, service and installation labor and expenses accounted for the remaining cost of revenues. Changes in the components of the cost of revenues result from changes in the mix of products sold. Gross profit as a percentage of net revenue was 38 percent for 1998, compared to 53 percent for 1997. Gross profit is generally higher on products that feature Acres Bonusing Technology, including the Company's Legacy products, the system for the Crown Casino and components sold to Anchor. During the year ended June 30, 1998, these sales were substantially replaced with sales of lower margin hardware components to IGT that resulted in a decrease in gross margin of approximately 7 percentage points. Gross margin was also reduced by 5 percentage points due to the costs of installing and removing certain custom bonus applications that were unsuccessfully placed under revenue-sharing arrangements in 1998 and an additional 3 percentage points as a result of absorbing certain fixed manufacturing costs over a smaller sales volume. The Company's research and development expenses increased slightly to $5.2 million in 1998, from $5.1 million in the prior year. Selling, general and administrative costs increased to $5.3 million in 1998 from $4.4 million in the prior year. This increase was primarily the result of approximately $450,000 of incremental legal fees incurred to secure and defend the Company's intellectual property rights for new and existing bonusing products and approximately $250,000 of incremental rent expense resulting from the expansion of the Company's production facility in Corvallis, Oregon in May 1997. During the second quarter of fiscal 1998, the Company changed its business focus to providing Acres Bonusing products and to developing and marketing bonus games. In conjunction with this change, the Company recorded a non-recurring charge of $745,000 to recognize severance and inventory costs of discontinuing its Legacy slot accounting and player tracking system. The Company originally expected to be able to liquidate the majority of the excess Legacy inventory to existing slot accounting and player tracking customers and smaller casinos. These sales have not been realized and the significant improvements available in currently offered products make future sales unlikely. Other income increased by $110,000 as a result of interest income received on investments of cash and equivalents. In fiscal 1998, the Company had cumulative net operating loss carryforwards for which the realizability was uncertain. The Company provided a valuation allowance for the entire amount and did not record an income tax benefit in fiscal 1998. An income tax provision was not recorded in fiscal 1997 due to the utilization of net operating loss carryforwards that were available at that time. The net loss for the year ended June 30, 1998 was $4.2 million ($0.47 per share) compared to a net income of $1.8 million ($0.20 per share - diluted) in the prior year. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1999, the Company had cash and equivalents of $5.9 million, compared to $9.9 million as of June 30, 1998. The Company invests its cash in highly liquid marketable securities with maturities of three months or less at date of purchase. The Company does not invest in market risk sensitive instruments. At June 30, 1999, the Company had collected $4.2 million in advance deposits against its order backlog of approximately $9.6 million. In September 1999, the Company signed a sales agreement with Mandalay Resorts Group for their MotorCity Casino being built in Detroit, Michigan that should generate an additional $3.6 million 18 21 of revenue in fiscal 2000. Backlog, however, may not be a meaningful indication of future sales. Sales are made pursuant to purchase orders or sales agreements for specific system installations and products are often delivered within several months of receipt of an order. The Company does not have any material ongoing long-term sales contracts. At its current stage of operations, the Company's revenues and results of operations may be materially affected, in the near term, by the receipt or loss of any one order. The Company expects to complete the deliveries and installations comprising its order backlog, including the order for the MotorCity Casino, and expects that payments under those contracts will provide sufficient operating cash flow for fiscal 2000. Failure to successfully deliver the products comprising the order backlog or failure to subsequently collect the resulting revenues could have a material adverse affect on the Company's liquidity. The Company does not have any debt outstanding at June 30, 1999 but intends to obtain a short-term line of credit. There can be no assurances that a line of credit will be obtained. The Company has the ability to reduce operating expenses by reducing staffing and other expenses. In July 1999, the Company moved its headquarters to Las Vegas, Nevada from Corvallis, Oregon. Expenses associated with the relocation are anticipated to total approximately $400,000 and were accrued as of June 30, 1999. The Company expects that this relocation will allow it to better serve its customers and reduce its annual operating expenses by an excess of $1.0 million. The Company's operations have historically used cash. During the year ended June 30, 1999, $1.7 million of cash was used by operating activities primarily as a result of the Company's net operating loss, net of non-cash items, and to fund the purchase of inventory necessary to support Acres Advantage installations scheduled for the first half of fiscal 2000. These uses of cash were partially offset by increases in the collection of advance deposits from customers and increases in amounts payable for purchases of inventory and services. During the year ended June 30, 1998, $2.3 million of net cash was generated by operating activities as the collection of accounts receivable and reductions in inventories more than offset the effects of the Company's net operating loss. During the year ended June 30, 1997, net cash used by operating activities was $4.4 million, primarily resulting from volume-related increases in working capital, including changes in accounts receivable, inventory and customer deposits. The Company made capital expenditures of $1.8 million, $1.9 million, and $1.5 million in 1999, 1998 and 1997, respectively, primarily on computers and equipment to support research and development efforts. In fiscal 1999, the Company capitalized $734,000 of software development costs incurred in the development of additional modules of the Acres Advantage product line. The Company's principal sources of liquidity have been net proceeds of $7.2 million from its initial public offering in November 1993 and $6.2 million from the exercise of the Redeemable Warrants in October 1996. In addition, as part of the Strategic Alliance with IGT entered into in January 1997, the Company issued 519,481 shares of Series A Convertible Preferred Stock for net proceeds of $4.9 million. FACTORS THAT MAY AFFECT FUTURE RESULTS Certain statements in this Form 10-K contain "forward-looking" information (as defined in Section 27A of the Securities Act of 1933, as amended) that involve risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Such factors include, but are not limited to, the following: YEAR 2000 The Year 2000 issue results from computer programs operating incorrectly when the calendar year changes to January 1, 2000. Computer programs that have date-sensitive software may recognize a two-digit date using "00" as calendar year 1900 rather than the year 2000. This could result in system failure or miscalculations and could cause disruptions of operations, including, among other things, a temporary inability to engage in 19 22 normal business activities. The Company has evaluated its technology and data, including imbedded non-information technology, used in the creation and delivery of its Legacy products and in its internal operations and has identified no significant Year 2000 issues. The Company's core business systems are compliant. Compliant upgrades for the Company's Legacy slot accounting and player tracking products have been developed and will be made available to all customers prior to December 31, 1999. The Company has tested its most recent generation of products and did not identify any material Year 2000 issues. The Company has not incurred material costs associated with addressing the Year 2000 issue and believes that future costs will not have a material effect on the Company's financial results. Although the Company has inquired of certain of its significant vendors as to the status of their Year 2000 compliance initiatives, no binding assurances have been received. The Company believes that it is not overly reliant on any single vendor because its component parts and services can be obtained from multiple sources. Failure of telephone service providers or other utilities could have a significant detrimental effect on the Company's operations. The Company does not know the status of its customers' Year 2000 compliance initiatives. Failure of the Company's customers to adequately address such issues could negatively affect their ability to purchase the Company's products. The Company has developed a contingency plan to address the most reasonably likely "worst-case" scenario. Such contingency plan includes manually conducting operations in the short-term, which would be less efficient, but would not be expected to have a material adverse effect on the Company. COMMUNICATION PROTOCOL The Company and IGT have jointly developed a communication protocol known as SAS4. The protocol is used to communicate instructions and messages between Acres Bonusing and gaming machines. The communication of these instructions and messages is essential to the operation of bonuses. Although the Company and IGT have agreed that the Company can use SAS4 in connection with certain installations, IGT has stated that the Company may not have an unrestricted right to use SAS4 with non-IGT games. The Company believes that it has joint ownership of the protocol and the ability to use and license the protocol. The Company is a founding member of the Gaming Manufacturers Association ("GAMMA") which, among other things, is jointly developing a standardized communication protocol that will be licensed to all GAMMA members. This protocol may be a viable alternative to SAS4 but this new protocol is not available for implementation at this time. OTHER RISKS Bonus Games. The creation of bonus games and the deployment of those games into casinos on a revenue-sharing basis are key parts of the Company's business plan. The Company may not be able to develop successful bonus games or convince casinos to implement such games on a revenue-sharing basis. Government Regulation; Potential Restrictions on Sales. The Company is subject to gaming regulations in each jurisdiction in which its products are sold or are used by persons licensed to conduct gaming activities. The Company's products generally are regulated as "associated equipment", pursuant to which gaming regulators have discretion to subject the Company, its officers, directors, key employees, other affiliates, and certain shareholders to licensing, approval and suitability requirements. In the event that gaming authorities determine that any person is unsuitable to act in such capacity, the Company would be required to terminate its relationship with such person, and under certain circumstances, the Company has the right to redeem its securities from persons who are found unsuitable. Products offered and expected to be offered by the Company include features that are not available on products currently in use. These new features may, in some cases, result in additional regulatory review and licensing requirements for the products or the Company. Compliance with such regulatory requirements may be time consuming and expensive, and may delay or prevent a sale in one or more jurisdictions. 20 23 In addition, associated equipment generally must be approved by the regulatory authorities for use by each licensed location within the jurisdiction, regardless of whether the Company is subject to licensing, approval, or suitability requirements. Failure by the Company to obtain, or the loss or suspension of, any necessary licenses, approvals or suitability findings, may prevent the Company from selling or distributing its product in such jurisdiction. Such results may have a material adverse effect on the Company. The Company often enters into contracts that are contingent upon the Company and/or the customer obtaining the necessary regulatory approvals to sell or use the Company's products or to operate a casino. Failure to timely obtain such approvals may result in the termination of the contract and the return of amounts paid pursuant to such contract. Changes in Business and Economic Conditions Generally and in the Gaming Industry. The strength and profitability of the Company's business depends on the overall demand for bonusing products and growth in the gaming industry. Gaming industry revenues are sensitive to general economic conditions and generally rise or fall more rapidly in relation to the condition of the overall economy. In a period of reduced demand, the Company may not be able to lower its costs rapidly enough to counter a decrease in revenues. Product Concentration; Competition; Risks of Technological Change. The Company expects to derive most of its revenues from the sale of bonusing products and the Company's future success will depend in part upon its ability to continue to generate sales of these products. A decline in demand or prices for the Company's bonusing products, whether as a result of new product introduction or price competition from competitors, technological change, or failure of the Company's bonusing products to address customer requirements or otherwise, could have a material adverse effect on the Company's revenues and operating results. The markets in which the Company competes are highly competitive and subject to frequent technological change and one or more of the Company's competitors may develop alternative technologies for bonusing or game promotions. The Company's future results of operations will depend in part upon its ability to improve and market its existing products and to successfully develop, manufacture and market new products. While the Company expends a significant portion of its revenues on research and development and on product enhancement, the Company may not be able to continue to improve and market its existing products or develop and market new products, or technological developments may cause the Company's products to become obsolete or noncompetitive. Many of the Company's competitors have substantially greater financial, marketing and technological resources than the Company and the Company may not be able to compete successfully with them. Patents and Trademarks. The Company relies on a combination of patent, trade secret, copyright and trademark law, nondisclosure agreements and technical security measures to protect its products. The Company has received U.S. patents on certain features of its bonusing product line, has applied for additional U.S. patents and may in the future apply for other U.S. patents and corresponding foreign patents. The Company may also file for patents on certain features of products that the Company may develop in the future. Notwithstanding these safeguards, it is possible for competitors of the Company to obtain its trade secrets and to imitate its products. Furthermore, others may independently develop products similar or superior to those developed or planned by the Company. While the Company may obtain patents with respect to certain of its products, the Company may not have sufficient resources to defend such patents, such patents may not afford all necessary protection and competitors may develop equivalent or superior products which may not infringe such patents. Fluctuations in Quarterly Operating Results. The Company's quarterly operating results have fluctuated in the past, and may fluctuate significantly in the future, due to a number of factors, including, among others, the size and timing of customer orders, the timing and market acceptance of new products introduced by the Company, changes in the level of operating expenses, technological advances and new product introductions by the Company's competitors, competitive conditions in the industry, regulatory approval and general economic conditions. Product development and marketing costs are often incurred in periods before any revenues are recognized from the sales of products, and gross margins are lower and operating expenses are higher during periods in which such product development expenses are incurred and marketing efforts are commenced. At its current stage of operations, the Company's quarterly revenues and results of operations may be materially affected by the receipt or loss of any one order and by the timing of the delivery, installation and regulatory approval of any one order. The Company may not be able to achieve or maintain profitable operations on a consistent basis. The Company believes that period to period comparisons of its financial results may not be meaningful and should not 21 24 be relied upon as indications of future performance. Fluctuations in operating results may result in volatility in the price of the Company's Common Stock. Management of Growth; Liquidity. To compete effectively and to manage future growth, the Company must continue to improve its financial and management controls, reporting systems and procedures on a timely basis and expand, train and manage its employees. Any failure by the Company to implement and improve any of the foregoing could have a material adverse effect on the Company's business, operating results and financial condition. In addition, sufficient funds to maintain new product development efforts and expected levels of operations may not be available and additional capital, if and when needed by the Company, may not be available on terms acceptable to the Company. 22 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page ---- Report of Independent Public Accountants................................ 24 Consolidated Balance Sheets............................................. 25 Consolidated Statements of Operations................................... 26 Consolidated Statements of Stockholders' Equity......................... 27 Consolidated Statements of Cash Flows................................... 28 Notes to Consolidated Financial Statements.............................. 29
23 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Acres Gaming Incorporated: We have audited the accompanying consolidated balance sheets of Acres Gaming Incorporated (a Nevada Corporation) and subsidiary as of June 30, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Acres Gaming Incorporated and subsidiary as of June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Portland, Oregon, July 29, 1999 24 27 ACRES GAMING INCORPORATED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1999 AND 1998 ASSETS
1999 1998 -------- -------- (in thousands) CURRENT ASSETS: Cash and equivalents $ 5,949 $ 9,887 Receivables, net of allowance of $15,000 and $50,000 1,576 1,929 Inventories 4,909 2,607 Prepaid expenses 265 103 -------- -------- Total current assets 12,699 14,526 -------- -------- PROPERTY AND EQUIPMENT: Furniture and fixtures 743 540 Equipment 4,778 4,003 Leasehold improvements 954 627 Accumulated depreciation (4,101) (2,919) -------- -------- Property and equipment, net 2,374 2,251 -------- -------- OTHER ASSETS, NET 1,024 417 -------- -------- $ 16,097 $ 17,194 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,407 $ 982 Accrued expenses 1,491 438 Customer deposits 4,152 1,015 -------- -------- Total current liabilities 8,050 2,435 -------- -------- REDEEMABLE CONVERTIBLE PREFERRED STOCK 4,948 4,948 STOCKHOLDERS' EQUITY: Common Stock, $.01 par value, 50 million shares authorized, 8.9 and 8.8 million shares issued and outstanding in 89 88 1999 and 1998, respectively Additional paid-in capital 19,904 19,554 Accumulated deficit (16,894) (9,831) -------- -------- Total stockholders' equity 3,099 9,811 -------- -------- $ 16,097 $ 17,194 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. 25 28 ACRES GAMING INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997 -------- -------- -------- (in thousands except per share data) NET REVENUES $ 13,972 $ 17,573 $ 20,455 COST OF REVENUES 8,253 10,950 9,553 -------- -------- -------- GROSS PROFIT 5,719 6,623 10,902 -------- -------- -------- OPERATING EXPENSES: Research and development 6,440 5,210 5,090 Selling, general and administrative 6,127 5,328 4,387 Non-recurring charge 400 745 -- -------- -------- -------- Total operating expenses 12,967 11,283 9,477 -------- -------- -------- INCOME (LOSS) FROM OPERATIONS (7,248) (4,660) 1,425 OTHER INCOME 260 483 373 -------- -------- -------- NET INCOME (LOSS) $ (6,988) $ (4,177) $ 1,798 ======== ======== ======== NET INCOME (LOSS) PER SHARE - BASIC $ (.79) $ (.47) $ .21 ======== ======== ======== NET INCOME (LOSS) PER SHARE - DILUTED $ (.79) $ (.47) $ .20 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 26 29 ACRES GAMING INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
COMMON STOCK ADDITIONAL ---------------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL -------- -------- ---------- ----------- -------- (in thousands) Balance as of June 30, 1996 7,601 $ 76 $ 11,224 $ (7,313) $ 3,987 Issuance of common stock 1,163 12 8,097 -- 8,109 Net income -- -- -- 1,798 1,798 Preferred stock dividends -- -- -- (64) (64) -------- -------- -------- -------- -------- Balance as of June 30, 1997 8,764 88 19,321 (5,579) 13,830 Issuance of common stock 56 -- 233 -- 233 Net loss -- -- -- (4,177) (4,177) Preferred stock dividends -- -- -- (75) (75) -------- -------- -------- -------- -------- Balance as of June 30, 1998 8,820 88 19,554 (9,831) 9,811 Issuance of common stock 93 1 350 -- 351 Net loss -- -- -- (6,988) (6,988) Preferred stock dividends -- -- -- (75) (75) -------- -------- -------- -------- -------- Balance as of June 30, 1999 8,913 $ 89 $ 19,904 $(16,894) $ 3,099 ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 27 30 ACRES GAMING INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997 -------- -------- -------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (6,988) $ (4,177) $ 1,798 Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 1,806 1,493 931 Non-recurring charge 400 745 -- Changes in assets and liabilities: Receivables 353 1,951 (2,970) Inventories (2,302) 2,098 (2,674) Prepaid expenses (162) 352 (361) Accounts payable and accrued expenses 2,078 (726) 166 Customer deposits 3,137 532 (1,265) -------- -------- -------- Net cash from operating activities (1,678) 2,268 (4,375) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (1,815) (1,922) (1,502) Capitalized software costs (734) -- -- Other, net 13 65 (298) -------- -------- -------- Net cash from investing activities (2,536) (1,857) (1,800) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 351 233 8,109 Net proceeds from issuance of preferred stock -- -- 4,948 Preferred stock dividends (75) (75) (64) -------- -------- -------- Net cash from financing activities 276 158 12,993 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (3,938) 569 6,818 CASH AND EQUIVALENTS AT BEGINNING OF YEAR 9,887 9,318 2,500 -------- -------- -------- CASH AND EQUIVALENTS AT END OF YEAR $ 5,949 $ 9,887 $ 9,318 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 28 31 ACRES GAMING INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND COMPANY OPERATIONS: COMPANY OPERATIONS AND BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of Acres Gaming Incorporated and its wholly owned subsidiary, AGI Distribution, Inc. (the "Company"). All intercompany accounts and transactions have been eliminated. The Company develops, manufactures and markets electronic game promotions, equipment and games for the casino gaming industry. The Company's principal products are based on its proprietary Acres Bonusing Technology and are designed to enhance casino profitability by providing entertainment and incentives to players of gaming machines. The bonusing technology improves the efficiency of bonus and incentive programs currently offered by many casinos, and makes possible bonus and incentive programs that have not previously been offered. The Company primarily sells its products in the United States and in Australia. Sales in Australia totaled $384,000, $1.2 million and $4.8 million, for the years ended June 30, 1999, 1998 and 1997, respectively. At its current stage of operations, the Company's financial position and operating results may be materially affected by a number of factors, including the timing of receipt, installation and regulatory approval of any one order, availability of additional capital, competition and technological change. Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on the results of operations or stockholders' equity as previously reported. REVENUE RECOGNITION The Company sells certain of its products under contracts that generally provide for a deposit to be paid before commencement of the project and for a final payment to be made after completion of the project. Revenue is recognized as individual units are installed or, in those instances where the contract does not provide for the Company to install the equipment, upon shipment. Customer deposits received under sales agreements are reflected as liabilities until the related revenue is recognized. The Company has entered into certain manufacturing royalty agreements where revenue is recognized as the licensed manufacturer sells the related hardware products. For certain contracts requiring significant product customization, revenue is recognized on the percentage-of-completion method. Labor costs incurred for customization and installation are the basis for determining percentage-of-completion, giving effect to the most recent estimates of such total labor costs. The effect of changes to total estimated customization and installation labor costs is recognized in the period in which such changes are determined. The Company defers revenue subject to forfeiture, refund, or other concession until such revenue meets the criteria for collectibility. Provisions for estimated losses are made in the period in which the loss first becomes apparent. Included in accounts receivable are unbilled receivables of $1.0 million at June 30, 1999. The Company did not have any unbilled receivables at June 30, 1998. Unbilled receivables represent revenues recognized in excess of billings on certain contracts. Unbilled receivables were not billable at the balance sheet date but are recoverable as billings are made in accordance with the contract terms. 29 32 MAJOR CUSTOMERS One customer accounted for 51 percent of the Company's net revenues in 1999. Another customer accounted for 23 percent, 75 percent and 28 percent of the Company's net revenues in 1999, 1998 and 1997, respectively. A third customer accounted for 18 percent and 28 percent of the Company's net revenues in 1998 and 1997, respectively. A fourth customer provided 12 percent of the Company's net revenues in 1997. INCOME TAXES The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates in effect in the years in which the differences are expected to reverse. CASH AND EQUIVALENTS Cash and equivalents include cash on hand, amounts held in and due from banks and highly liquid marketable securities with maturities of three months or less at date of purchase. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of receivables. At June 30, 1999 and 1998, the fair value of the Company's receivables approximated their carrying value. INVENTORIES Inventories consist of electronic components and other hardware, which are recorded at the lower of cost (first-in, first-out) or market. Inventories consist of the following:
INVENTORIES AT JUNE 30, ---------------------- 1999 1998 ------- ------- (in thousands) Raw materials $ 1,114 $ 957 Work-in-progress 1,398 124 Finished goods 2,397 1,526 ------- ------- Total inventories $ 4,909 $ 2,607 ======= =======
PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is computed on the straight-line basis over the assets' estimated useful lives of two to five years. Leasehold improvements are amortized over the lease term. Expenditures for maintenance and repairs are charged to operations when incurred. INTANGIBLE ASSETS Intangible assets consist of costs associated with the establishment of patents, gaming licenses and gaming product approvals in various jurisdictions. Amortization of patents is calculated using the straight-line method over the estimated life of the patent. Gaming licenses and product approvals are amortized over periods of five years and two years, respectively. Intangible assets, net of accumulated amortization, were $259,000 and $345,000 at June 30, 1999 and 1998, respectively, and are included in other assets. 30 33 CAPITALIZED SOFTWARE AND RESEARCH AND DEVELOPMENT COSTS Software development costs for certain projects are capitalized from the time technological feasibility is established to the time the resulting software product is commercially feasible. Capitalized software costs, net of accumulated amortization, were $647,000 at June 30, 1999 and are included in other assets. There were no capitalized software costs at June 30, 1998. Capitalized costs are amortized on a straight-line basis over the estimated life of the product beginning when the product becomes commercially feasible. All research and development costs are expensed as incurred. NON-RECURRING CHARGES During the fourth quarter of fiscal 1999, the Company elected to outsource almost all of its manufacturing functions and initiated a relocation of its headquarters from Corvallis, Oregon to Las Vegas, Nevada. The Company recorded a $400,000 non-recurring charge to recognize the related severance, recruiting and moving expenses. During the second quarter of fiscal 1998, the Company changed its business focus to the Acres Bonusing and bonus game product lines and recorded a non-recurring charge of $745,000 to recognize severance and inventory costs of discontinuing its Legacy slot accounting and player tracking system. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. INCOME TAXES: At June 30, 1999, the Company had cumulative net operating losses totaling approximately $15.5 million that are available to offset future taxable income through 2019. A portion of the net operating loss carryforwards was used to offset income for the year ended June 30, 1997. The Company has provided a valuation allowance for the remaining amount of the benefit related to these net operating loss carryforwards as realizability is uncertain. Deferred income taxes are provided for the temporary differences between the carrying amounts of the Company's assets and liabilities for financial statement purposes and their tax bases. Deferred tax liabilities were insignificant as of June 30, 1999 and 1998. The sources of the differences that give rise to the deferred income tax assets as of June 30, 1999 and 1998, along with the income tax effects of each, are as follows:
DEFERRED INCOME TAX ASSETS AT JUNE 30, ----------------------- 1999 1998 ------- ------- (in thousands) Operating loss carryforwards $ 5,899 $ 3,621 Research and development tax credit 921 632 Property and equipment 429 367 Accruals and reserves 273 355 Intangible assets 34 23 ------- ------- 7,556 4,998 Less valuation allowance (7,556) (4,998) ------- ------- Net deferred tax assets $ 0 $ 0 ======= =======
The valuation allowance related to deferred tax assets increased by $2.6 million and $2.7 million in 1999 and 1998, respectively. 31 34 3. COMMITMENTS AND CONTINGENCIES: LITIGATION Two related lawsuits have been filed in the U.S. District Court that allege violation of the federal securities laws by the Company and its executive officers. Those suits have been consolidated into one combined action that seeks class certification for a proposed class consisting of the purchasers of the Company's stock during the period from March 26, 1997 to December 11, 1997. The court has not yet ruled on class certification. No trial date or discovery cut-off date has been set. The defense of this suit has been tendered to and accepted by the Company's directors and officer's insurance carrier. The Company denies the allegations and intends to vigorously defend itself. Two lawsuits have been filed regarding ownership of the WOG technology that is the subject of two patents (the "WOG Patents") that have been assigned to Anchor. In the first suit, now pending in U.S. District Court, the WOG plaintiffs brought patent infringement, breach of warranty and breach of contract actions against the Company based on the WOG Patents and the Company's supply agreement with Anchor. Plaintiffs seek to enjoin the Company from infringing the WOG Patents and from competing with it in the sale of wheel styled bonus gaming devices. The plaintiffs also seek unspecified compensatory damages, treble damages, costs of suit, and attorney's fees. The Company has filed a counterclaim in that proceeding for a declaration that the Company is the sole or joint owner of the WOG Patents. The defense of this suit has been tendered to and accepted by the Company's general liability insurance carrier. In the second action, the Company has filed suit alleging that Anchor wrongfully used the Company's technology to obtain the WOG Patents, that the filing of the patent applications was fraudulently concealed from the Company, that Anchor was unjustly enriched by retaining the benefits of the Company's technology without compensating the Company and that Anchor breached fiduciary duties owed to the Company. The Company seeks $40 million in compensatory damages, treble damages, costs of suit, and attorney's fees. Four related lawsuits have been filed in the U.S. District Court resulting from the Company's efforts to enforce its patent rights. Three of those suits have now been consolidated. The Company denies all asserted allegations and intends to vigorously defend itself and its intellectual property rights. In Suit I, Mikohn asserted a claim for declaratory judgment of noninfringement and invalidity of U.S. Patent No. 5,655,961 ("the `961 patent") owned by the Company. Mikohn also asserted claims for "intentional interference with a business relationship," "intentional interference with prospective business relationship," "unfair competition: trade libel" and "unfair competition: disparagement." Mikohn's complaint sought unspecified damages, punitive damages, attorney's fees, interest on the alleged damages, an injunction against the conduct alleged in the complaint, and a declaration that the `961 patent is invalid and not infringed by Mikohn or its customers. The Company has filed a counterclaim for infringement of the `961 patent, and has denied Mikohn's other allegations. In Suit II, Mikohn asserted a claim for declaratory judgment of noninfringement and invalidity of U.S. Patent No. 5,741,183 ("the `183 patent") owned by the Company. Mikohn's complaint sought no damages, but requested an award of attorney's fees and a declaration that the `183 patent is invalid and not infringed by Mikohn. Because the Company is not aware of any infringement by Mikohn, the court granted summary judgment on the noninfringement claim. Mikohn's invalidity claim is still pending. In Suit III, the Company sued Mikohn, CDS, New York New York Hotel and Casino and Sunset Station Hotel and Casino for infringement of the Company's U.S. Patent No. 5,752,882 ("the `882 patent"). Mikohn counterclaimed in Suit III, seeking a declaratory judgment of invalidity and noninfringement of the `882 patent and asserted claims for "false and misleading representations," "interference with prospective economic relations," "unfair competition: trade libel" and "unfair competition: disparagement." Mikohn's counterclaims seek unspecified damages, as well as a trebling of the damages, punitive damages, attorney's fees and an injunction against the Company's "continuing to commit the unlawful acts" alleged in the counterclaims. The Company has 32 35 tendered the defense of Mikohn's counterclaims to its former general liability insurance carrier. To date the insurer has not responded to the tender of Suit III's defense. In Suit IV, the Company sued Mikohn and CDS for infringement of the Company's U.S. Patent Nos. 5,820,459 and 5,836,817. The defendants counterclaimed for declaratory judgment of noninfringement and invalidity of the patents. In addition, CDS counterclaimed for: "patent misuse," "Sherman Act section 2 - attempted monopolization," "spoilation of evidence," "unfair competition - intentional interference with prospective economic advantage" and "misappropriation of trade secrets". CDS's counterclaims seek unspecified damages, as well as a trebling of the damages, punitive damages, and attorney's fees. No trial date has been set. In a separate but related action, the Company has filed suit in U.S. District Court against its former general liability insurance carrier for breach of insurance contract. The Company's suit is based on the insurer's refusal to pay more than nominal amounts of the costs of defense in Suit I. In addition, the Company has filed suit against its current general liability insurance carrier for breach of insurance contract based on the insurer's refusal to defend the Company against CDS's counterclaims in Suit IV. The Company anticipates that each of these matters will be resolved by cross motions for summary judgment. Unfavorable outcomes in one or more of these suits could have a material adverse effect on the Company. The Company from time to time is involved in other various legal proceedings arising in the normal course of business. OPERATING LEASES The Company leases its office facilities under operating leases that extend through June 15, 2003. Future minimum lease payments under these non-cancelable operating leases as of June 30, 1999 are $709,000, $674,000, $613,000, and $472,000 in 2000, 2001, 2002 and 2003, respectively. Total lease expense was $822,000, $567,000 and $255,000 for the years ended June 30, 1999, 1998 and 1997, respectively. 4. REDEEMABLE PREFERRED STOCK: In January 1997, the Company created an initial series of preferred stock, consisting of 1,038,961 shares, which it designated Series A Convertible Preferred Stock (the "Series A Stock") and issued 519,481 shares for net proceeds of approximately $4.9 million. The Series A Stock is entitled to receive non-cumulative dividends at a rate per share equal to 3 percent of $9.625, the initial per share purchase price. Holders of the Series A Stock have the option, upon notice to the Company, to convert shares of Series A Stock into shares of Common Stock based upon the applicable conversion price in effect at the time of conversion. The initial conversion price for each share of Series A Stock is the lesser of the price at which the Series A Stock was initially issued and the average closing price of the Company's Common Stock for the period of thirty trading days prior to the date of conversion of shares of Series A Stock. The conversion price is subject to adjustments for certain events relating to the Common Stock including stock splits and combinations, dividends and distributions, reclassification, exchange, substitution, reorganization, merger, or sale of assets. The Series A Stock is subject to redemption, subject to certain conditions, at a price equal to the purchase price plus any declared but unpaid dividends. As of June 30, 1999, all declared dividends have been paid. Due to the Company's financial position and results of operations, no dividends related to the year ended June 30, 1999 were declared or paid. In July 1998, $75,000 of dividends related to the six month period ended June 30, 1998 were declared and paid. So long as at least 130,000 of the shares of Series A Stock originally issued by the Company remain outstanding, holders of the Series A Stock are entitled as a class to elect one director and must approve any amendments to the Company's articles of incorporation including, among other things, amendments to facilitate the sale or merger of the Company. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Series A Stock will be entitled to receive a liquidation preference of 33 36 $9.625 per share, plus any declared but unpaid dividends, prior to the distribution of any of the Company's assets to holders of the Common Stock. Any assets remaining after the distribution to holders of the Series A Stock will be distributed to holders of the Common Stock. 5. STOCKHOLDERS' EQUITY: In November 1993, the Company completed its initial public offering and issued 1,667,500 units (the "Units") consisting of 1,667,500 shares of Common Stock and 833,750 Redeemable Warrants. In connection with the offering, the Company granted the underwriter warrants to purchase 145,000 Units at $6.00 per share. The net proceeds of the offering were $7.2 million. In October 1996, substantially all of the Redeemable Warrants were exercised, resulting in net proceeds to the Company of approximately $6.2 million. The underwriter warrants were exercised in October 1996 resulting in net proceeds to the Company of approximately $1.4 million. In June 1995, the Company issued 400,000 shares of Common Stock to a group of private investors for net proceeds of approximately $2.3 million. In connection with this offering, the Company granted warrants which expire in June 2000 to purchase 40,000 shares of Common Stock at $7.20 per share, which approximated market value at that date. In 1995, the Company issued warrants to purchase 195,000 shares of Common Stock to two companies and two individuals in exchange for services. At June 30, 1999, warrants to purchase 125,000 shares at $9.00 remain outstanding with an expiration date in September 2000. The Company has a Stock Option Plan (the "Plan") which permits the granting of awards to directors, employees and consultants of the Company in the form of stock options. Stock options granted under the Plan may be incentive stock options or nonqualified options. Options generally vest over five years and expire in ten years. The Company accounts for the Plan under APB Opinion No. 25 "Accounting for Stock Issued to Employees", under which no compensation cost is recognized. Had compensation cost for the Plan been determined consistent with FASB Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's net income (loss) and earnings (loss) per share would have approximated the following pro forma amounts:
FOR THE YEARS ENDED JUNE 30, ----------------------------------------- 1999 1998 1997 --------- --------- --------- (in thousands except per share data) NET INCOME (LOSS): As reported $ (6,988) $ (4,177) $ 1,798 Pro forma (8,226) (4,863) 535 EARNINGS (LOSS) PER SHARE - BASIC: As reported $ (.79) $ (.47) $ .21 Pro forma (.92) (.55) .06 EARNINGS (LOSS) PER SHARE - DILUTED: As reported $ (.79) $ (.47) $ .20 Pro forma (.92) (.55) .06
34 37 A total of 1,750,000 shares of the Company's Common Stock have been reserved for issuance pursuant to awards granted under the Plan. The Company has granted 1,403,550 options, net of cancellations, through June 30, 1999. Activity under the Plan is summarized below:
FOR THE YEARS ENDED JUNE 30, --------------------------------------------------------------------------------------- 1999 1998 1997 ------------------------- ------------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- -------- ---------- -------- ---------- -------- Outstanding at beginning of year 1,041,175 $ 5.34 1,132,950 $ 6.25 756,375 $ 4.23 Granted at exercise prices equal to market prices 422,500 4.40 329,750 5.18 352,450 9.53 Granted at exercise prices exceeding market prices -- -- -- -- 230,500 10.47 Exercised (93,300) 3.75 (55,525) 4.19 (77,625) 4.67 Canceled (173,450) 5.94 (366,000) 8.18 (128,750) 11.92 ---------- ---------- ---------- Outstanding at end of year 1,196,925 5.05 1,041,175 5.34 1,132,950 6.25 ========== ========== ========== Exercisable at end of year 702,991 4.81 523,748 4.76 468,007 4.71 ========== ========== ========== Weighted average fair value of options granted $ 3.28 $ 3.79 $ 5.35 ========== ========== ==========
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
1999 1998 1997 ------- ------- ------- Risk free interest rate 5.0% 5.8% 6.2% Expected life of option 5 years 5 years 5 years Expected volatility 93% 91% 97% Dividends none none none
The following table summarizes the options to purchase Common Stock outstanding at June 30, 1999:
WEIGHTED WEIGHTED OPTIONS FOR WEIGHTED AVERAGE OPTIONS FOR AVERAGE EXERCISE EXERCISE SHARES AVERAGE CONTRACTUAL SHARES PRICE OF SHARES PRICES OUTSTANDING EXERCISE PRICE LIFE EXERCISABLE EXERCISABLE --------------- ------------- ---------------- ------------- ------------- ----------------- $1.75 - $ 3.00 155,000 $ 2.83 6.4 years 117,000 $ 2.96 $3.13 - $ 5.00 776,275 4.48 8.2 years 411,349 4.27 $5.06 - $ 9.00 201,600 6.82 7.4 years 146,242 6.74 $9.13 - $15.00 64,050 11.64 7.7 years 28,400 10.34 -------------- --------- --------- $1.75 - $15.00 1,196,925 5.05 7.8 years 702,991 4.81 ============== ========= =========
6. EMPLOYEE BENEFIT PLAN: The Company has a profit sharing plan that operates under the provisions of section 401(k) of the Internal Revenue Code and covers substantially all full-time employees. Employer contributions may be made at the discretion of the Board of Directors. To date, there have been no employer contributions. 35 38 7. PER SHARE COMPUTATION: The Company reports basic and diluted earnings per share. Only the weighted average number of common shares issued and outstanding are used to compute basic earnings per share. The computation of diluted earnings per share includes the effect of stock options, warrants and redeemable convertible preferred stock, if such effect is dilutive. Where necessary, prior year amounts have been restated.
FOR THE YEAR ENDED JUNE 30, ------------------------------------------ 1999 1998 1997 -------- -------- -------- (in thousands except per share data) Net income (loss) $ (6,988) $ (4,177) $ 1,798 ======== ======== ======== Weighted average number of shares of common stock and common stock equivalents outstanding: Weighted average number of common shares outstanding 8,897 8,804 8,399 Dilutive effect of warrants and employee stock options after application of the treasury stock method -- -- 400 Dilutive effect of redeemable convertible preferred stock after application of the if-converted method -- -- 272 -------- -------- -------- Weighted average number of common shares outstanding for computing diluted earnings per share 8,897 8,804 9,071 ======== ======== ======== Earnings (loss) per share - basic $ (.79) $ (.47) $ .21 ======== ======== ======== Earnings (loss) per share - diluted $ (.79) $ (.47) $ .20 ======== ======== ========
The following common stock equivalents were excluded from the earnings per share computations because their effect would have been anti-dilutive:
BALANCE OUTSTANDING AS OF JUNE 30, ------------------------------------- 1999 1998 1997 ------- ------- ------- (in thousands) Warrants and employee stock options 1,361 1,206 101 Redeemable convertible preferred stock, if converted, assuming conversion at rates in effect at June 30, 1999 and 1998, respectively 2,603 1,053 --
36 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No changes in, or disagreements with, accountants which required reporting on Form 8-K have occurred within the three-year period ended June 30, 1999. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to Directors of the Company is incorporated herein by reference to the Company's Proxy Statement that will be filed pursuant to Regulation 14A within 120 days of June 30, 1999. ITEM 11. EXECUTIVE COMPENSATION Information with respect to Executive Compensation is incorporated herein by reference to the Company's Proxy Statement that will be filed pursuant to Regulation 14A within 120 days of June 30, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to Security Ownership of Certain Beneficial Owners and Management is incorporated herein by reference to the Company's Proxy Statement that will be filed pursuant to Regulation 14A within 120 days of June 30, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to Certain Relationships and Related Transactions is incorporated herein by reference to the Company's Proxy Statement that will be filed pursuant to Regulation 14A within 120 days of June 30, 1999. 37 40 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS See "Item 8. Financial Statements and Supplementary Data" (2) FINANCIAL STATEMENT SCHEDULES REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To Acres Gaming Incorporated: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Acres Gaming Incorporated's 1999 Annual Report on Form 10-K, and have issued our report thereon dated July 29, 1999. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The Valuation and Qualifying Accounts schedule is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. The schedule has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Portland, Oregon July 29, 1999 ACRES GAMING INCORPORATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
BALANCES AMOUNTS AT ADDITIONS CHARGED BALANCES BEGINNING CHARGED OFF, NET OF AT END OF OF YEAR TO INCOME COLLECTIONS YEAR ----------- ----------- ------------- ------------ (in thousands) ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS 1999 $ 50 $ -- $ (35) $ 15 1998 322 25 (297) 50 1997 0 317 5 322 ALLOWANCE FOR NON-RECURRING CHARGES 1999 $ 475 $ 400 $ (489) $ 386 1998 0 745 (270) 475
(3) EXHIBITS See "Index to Exhibits". (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the last quarter of the period covered by this report. 38 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ACRES GAMING INCORPORATED Date: September 24, 1999 By: /s/ Floyd W. Glisson ---------------------------------------- Floyd W. Glisson Chief Executive Officer, President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated. Date: September 24, 1999 /s/ John F. Acres --------------------------------------------- John F. Acres Chairman of the Board Date: September 24, 1999 /s/ Floyd W. Glisson --------------------------------------------- Floyd W. Glisson Chief Executive Officer, President and Director (Principal Executive Officer) Date: September 24, 1999 /s/ Reed M. Alewel --------------------------------------------- Reed M. Alewel Vice President, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial and Accounting Officer) Date: September 24, 1999 /s/ Jo Ann Acres --------------------------------------------- Jo Ann Acres Director Date: September 24, 1999 /s/ Richard A. Carone --------------------------------------------- Richard A. Carone Director Date: September 24, 1999 /s/ Donald J. Massaro --------------------------------------------- Donald J. Massaro Director 39 42 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- 3.1 Articles of Incorporation of Acres Gaming Incorporated, as amended(4) 3.2 Bylaws of Acres Gaming Incorporated, as amended(3) +10.1 Acres Gaming Incorporated 1993 Stock Option and Incentive Plan, as amended(4) 10.2 Lease dated January 4, 1994, between the Company and Avery Investments(1) 10.3 Agreement dated April 12, 1999 and executed purchase order dated May 17, 1999 between Star City Pty Ltd and the Company for the Supply of Goods and Services 10.4 System Upgrade Agreement dated June 7, 1999 between Crown Limited and the Company +10.5 Employment Agreement dated July 1, 1996 between the Company and John F. Acres(4) 10.6 Stock Purchase Agreement between the Company and IGT dated January 28, 1997(4) 10.7 Registration Rights Agreement between the Company and IGT dated January 28, 1997(4) 10.8 Master Agreement for Product Development, Purchase and Sale between the Company and International Game Technology, Inc. dated January 27, 1997(4) 10.9 Form of sublease between the Company and Hewlett-Packard dated May 22, 1998(5) 10.10 Lease dated March 3, 1998 between the Company and #26 McCarran Center, LC(2) 10.11 Equipment Sale Agreement dated October 29, 1998 between AGI Distribution, Inc., dba Acres Gaming Incorporated and Mandalay Corp., dba Mandalay Bay Resort & Casino(6) +10.12 Amendment to Employment Agreement dated July 20, 1998 between the Company and John F. Acres(7) 10.13 Equipment Sales Agreement dated effective June 30, 1999 between AGI Distribution, Inc., dba Acres Gaming and Detroit Entertainment, L.L.C. dba MotorCity Casino 21.1 Subsidiaries of the Registrant 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants 27.1 Financial Data Schedule for year ended June 30, 1999
- -------------- + Management contract or compensatory plan or arrangement. (1) Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-KSB for the year ended June 30, 1994, previously filed with the Commission. (2) Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1998, previously filed with the Commission. (3) Incorporated by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996, previously filed with the Commission. (4) Incorporated by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1996, previously filed with the Commission. (5) Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1997, previously filed with the Commission. (6) Incorporated by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1998, previously filed with the Commission. (7) Incorporated by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998, previously filed with the Commission. EX-10.3 2 AGREEMENT DATED APRIL 12,1999 1 EXHIBIT 10.3 AGREEMENT BETWEEN STAR CITY PTY LTD AND ACRES GAMING INCORPORATED ======================================== AGREEMENT FOR THE SUPPLY OF GOODS AND SERVICES [CONTROLLED CONTRACT - CC279] DATED: 12 APRIL 1999 ======================================== [LOGO] 2 TABLE OF CONTENTS 1. INTERPRETATION 1 2. TERMS 2 3. ORDER AND SPECIFICATION 3 4. PRICE AND FEES 3 5. TERMS OF PAYMENT AND INVOICES 4 6. DELIVERY 5 7. ACCEPTANCE OF GOODS 6 8. PACKAGING AND LABELLING 7 9. QUALITY CONTROL 7 10. RISK AND PROPERTY 7 11. GENERAL WARRANTIES 8 12. WARRANTY 9 13. LIABILITY 9 14. YEAR 2000 COMPLIANCE 10 15. ASSIGNMENT 12 16. NOT USED 12 17. TERMINATION 12 18. CO-OPERATION AND SUPPORT 13 19. CASINO CONTROL ACT 1992 15 20. OBLIGATION TO CASINO CONTROL AUTHORITY 16 21. GRATUITY 16 22. CONFIDENTIALITY 16 23. OCCUPATION HEALTH AND SAFETY ISSUES 17 24. GENERAL 17 25. FORCE MAJEURE 18 26. FUTURE ORDERS 18 27. STAR CITY PREMISES 19 28. EQUIPMENT 19 29. RELATIONSHIP 19 30. SUB-CONTRACTORS 19 31. INTELLECTUAL PROPERTY 20 32. INSURANCE 20 33. SPECIAL CONDITIONS 21 SCHEDULE 2 24 EXECUTION 25
3 [CONTROLLED CONTRACT] THIS AGREEMENT IS MADE ON THE 12 DAY OF APRIL 1999 BETWEEN STAR CITY PTY LIMITED (ACN 060 510 410) OF 80 PYRMONT STREET, PYRMONT, NEW SOUTH WALES, AUSTRALIA ("STAR CITY") AND ACRES GAMING INCORPORATED OF 815 NW 9TH STREET, CORVALLIS, OREGON, USA ("THE SUPPLIER") RECITALS A. Star City is the operator of Star City ("the Casino"). B. The Supplier wishes to sell goods to Star City. C. Star City intends to acquire services from the Supplier at the same time and in conjunction with the supply of the goods. D. The parties have agreed to establish standard conditions for the supply of those goods and services to Star City. PROVISIONS 1. INTERPRETATION 1.1 In this agreement, the following words shall have the meanings set out below: "Agreement" or "agreement" means the agreement for the sale and purchase of the Goods and the provision of the Services between the Supplier and Star City of which this agreement, the Order, the Specification and any other incorporated documents form part; "Business Day" means a day (not being a public holiday or weekend) on which banks are generally open for business in Sydney; "Commencement Date" means the date of execution of this agreement; "Delivery Address" means the address for delivery of Goods or performance of the Services set out in an Order; "Purchasing Director" means the person from time to time occupying the office designated by that title at Star City; "Fees" means the fees to be paid to the Supplier for provision of the Services as specified in Schedule 1; "Guarantor" means the person so described in Schedule 1; "Goods" means the goods described in Schedule 1; "Intellectual Property" means all inventions, patents, patent applications, trade marks, designs, copyright (including copyright in any computer software or hardware or any works associated with such software or hardware), technical know-how or commercially sensitive or valuable information which is provided to a party by the other party during the course of this agreement; 4 "Order" means an official authorised purchase order issued by Star City (as amended or replaced from time to time); "Order Number" means the identifying number shown on an Order placed by Star City in relation to the supply of Goods and Services; "Premises" means the permanent premises of Star City at Pyrmont, New South Wales; "Price" means the price of the Goods set out in Schedule 1; "Services" means the services provided by the Supplier in connection with the Goods as set out in Schedule 1; "Specification" includes any descriptions, plans, drawings, data, design, information or specification relating to the Goods; "Star City Contact" means the Star City contact person specified in Schedule 1 or such other person as notified by Star City to the Supplier from time to time. "Term" means the term of the Agreement commencing on the Commencement Date and ending upon termination in accordance with clause 17. 1.2 Words importing the singular shall include the plural and vice versa. 1.3 The headings in this agreement are for convenience only and shall not affect their interpretation. 1.4 Where the Supplier comprises more than one person, this agreement shall bind each person comprising the Supplier collectively and individually. 2. TERMS 2.1 Subject to clause 2.2, this agreement applies to all agreements for the purchase of Goods and associated services by Star City from the Supplier and shall prevail over any other terms and conditions (including any terms or conditions of supply subject to which an Order is accepted or purported to be accepted by the Supplier). Star City appoints the Supplier to provide the Services subject to the terms of this agreement and the Supplier accepts the appointment. 2.2 An Order placed by Star City on the Supplier constitutes an offer by Star City to purchase the Goods and Services subject to this agreement. The Order shall be deemed to be accepted by the Supplier unless otherwise notified in writing to the Purchasing Director within 5 Business Days from receipt of the Order by the Supplier. 2.3 Goods and Services shall only be ordered by Star City on an Order. The Supplier shall not recognise any purported order which does not comply with this clause 2.3. 2.4 An Order may only be amended by authorised personnel of Star City's purchasing department in writing. The Supplier shall be deemed to have accepted any amendment unless the Supplier otherwise notifies an authorised 5 personin the Star City purchasing department in writing within (5) Business Days from receipt of the amendment. 2.5 The appointment in clause 2.1 continues until terminated in accordance with clauses 17 or 19, or if specified in Schedule 1, until the expiration of the Term. 3. ORDER AND SPECIFICATION 3.1 The Supplier shall supply the quantity of Goods specified in an Order. 3.2 The Supplier shall in relation to the manufacture and supply of the Goods and to the provision of the Services, to Star City comply with: (a) this agreement; (b) all applicable laws and regulations; and (c) the standards of quality (if any) set out in Schedule 1. 3.3 The Supplier shall perform the Services at the times and in the manner specified in Schedule 1. 3.4 The Supplier shall fully inform itself of Star City's requirements from time to time and for that purpose shall consult with Star City throughout the Term. 3.5 If the Supplier considers reasonably that it requires any information, documents or other particulars to be made available to it by Star City to enable the Supplier to provide the Goods or the Services in accordance with the Agreement, the Supplier will advise Star City of its requirements in writing and Star City shall use reasonable endeavours to provide such information, documents or other particulars. 3.6 If the Supplier is required to have a licence or other approval in order to provide the Goods or the Services, the Supplier at its own cost shall obtain and hold such licence or approval prior to the Commencement Date and throughout the Term, and provide Star City with a copy of the same on request. 3.7 The Supplier shall not represent itself, and shall ensure that its employees and sub-contractors do not represent themselves, as being employees or agents of Star City. 4. PRICE AND FEES 4.1 Unless provided otherwise in the Order or the Specifications, any Price or Fees quoted to Star City shall be inclusive of all charges for packaging, packing, shipping, carriage, insurance and delivery of the Goods to the Delivery Address and any government or other taxes, duties, imposts or levies including sales tax. 4.2 Unless otherwise specified in Schedule 1, no increase in the Price or Fees may be made for any reason whatsoever without the prior consent in writing of Star City. 6 4.3 Star City shall be entitled to any discount for payment, bulk purchase or volume purchase customarily granted by the Supplier, whether or not shown in Schedule 1 or in the Order. 5. TERMS OF PAYMENT AND INVOICES 5.1 Invoices may be rendered to Star City at the same time as or after the subject Goods are delivered to the Delivery Address or the Services are provided unless other payment terms have been agreed to in advance in writing. Star City will not pay invoices until all requirements in an Order, the Specifications or this agreement have been satisfied in respect of the subject Goods and Services and such invoice has been properly rendered on Star City, unless delivery of the Goods by installment is approved by Star City (in which case Star City will pay for the Goods actually delivered). 5.2 Invoices must be properly completed by the Supplier, rendered at the time of delivery of the Goods or provision of the Services, or forwarded to the address listed in Schedule 1 and must state the following: (a) the applicable Order Number; (b) the contract reference number; (c) the name of the contact stated in the Order; (d) full particulars of Goods and Services supplied (including but not limited to dates of delivery or performance); (e) the quantity of Goods the subject of the invoice; (f) the name and telephone number of a contact person of the Supplier; and (g) the amount of sales tax (if any) included in the Price. If invoices are rendered at the time that Goods and Services are delivered or supplied (respectively), and the Supplier has not completed a delivery docket in accordance with clause 6.3, the invoices must also state the information required in clause 6.3(e). 5.3 Invoices rendered on Star City must either be countersigned by a representative of Star City or be accompanied by a delivery docket countersigned by a representative of Star City as evidence that the Goods have been delivered and the Services have been provided. 5.4 Star City may set off or deduct from any monies due to the Supplier all or any part of monies owed by the Supplier to Star City for any reason. Such monies may include without limitation any monies owed to Star City in relation to: (a) discounts to which Star City is entitled; (b) any sum in dispute between Star City and the Supplier; (c) any shortfall in the quantity of Goods delivered; or (d) any Goods which have been rejected by Star City or for which Star City has refused to take delivery. 7 5.5 Unless otherwise stated in an Order and subject to clause 5.1, Star City will pay properly rendered invoices within 30 days of receipt of the invoice. 5.6 If the Supplier offers a discount in respect of the sale of Goods or supply of Services for payment within a certain period, that period will not commence until the date of receipt by Star City of the invoice relating to such Goods or Services. 5.7 The Supplier must take all reasonable steps to legally minimise the sales tax payable in respect of all Goods and/or Services supplied. 5.8 The Supplier must pass on to Star City any reduction in sales tax on the Goods and /or Services that occurs due to the application of any exemption. 5.9 The Supplier must reimburse to Star City any refund or credit of sales tax received by the Supplier in respect of the Goods and/or Services as soon as reasonably practical after it is received by or credited to the Supplier. 6. DELIVERY 6.1 The Supplier shall deliver the Goods to the Delivery Address on the date or within the period specified in the Order or Schedule 1 or, if not so specified, within 60 Business Days of Star City placing an Order on the Supplier. 6.2 Time for delivery of the Goods is of the essence. The Supplier must notify Star City immediately if the Supplier becomes aware that Goods (or part thereof) will not be delivered to Star City within the time specified in clause 6.1 If Goods (or part thereof) are not delivered in accordance with clause 6.1, Star City may without prejudice to any other remedy: (a) cancel the Order without liability to Star City; or (b) refuse to take delivery of the Goods. 6.3 The Supplier must ensure that the delivery docket for each delivery of the Goods is displayed prominently and: (a) quotes the applicable Order Number; (b) states the name of the contact shown in the Order; (c) shows full particulars of the Goods; (d) shows the quantity of Goods delivered; (e) shows the name of the person delivering the Goods to Star City; and (f) states the name and telephone number of a contact person of the Supplier. 6.4 The Supplier must ensure that each delivery of Goods is accompanied by any documents specified in Schedule 1. 6.5 Star City's acknowledgment of receipt of Goods by the signing of a delivery docket shall not infer that Star City has accepted the Goods in any way whatsoever. 8 6.6 If specified in an Order that the Goods are to be delivered by installments, the agreement will be deemed to be a single contract and shall not be severable. 6.7 The Supplier shall deliver all Goods during usual business hours, unless otherwise stated in the Order or otherwise agreed in writing by Star City. The Supplier shall be responsible for unloading all Goods at the Delivery Address. 6.8 Where the Delivery Address is a third party warehouse, Star City may accept delivery of the number of containers specified in the delivery docket. Such acceptance will not be acceptance of the Goods for the purpose of clause 7. The Supplier will be liable for shortages in or breakage to the Goods until Star City has inspected the Goods pursuant to clause 7. The Supplier will not be liable for shortages in or breakages to the goods after 14 days from delivery to the third party warehouse, unless Star City gives written notice to the Supplier of any shortages or breakages in accordance with clause 7. 7. ACCEPTANCE OF GOODS 7.1 Star City shall be entitled to reject any Goods not delivered in accordance with this agreement. Star City shall be deemed to have accepted Goods unless it has notified the Supplier within 14 days after delivery that such Goods have been rejected by Star City, or if the Goods have been used or sold by Star City. 7.2 (a) The Supplier shall be responsible for any costs or charges incurred in returning rejected Goods to the Supplier. (b) Unless provided otherwise in Schedule 1, Star City shall not be obliged to return any packaging or packing material for the Goods to the Supplier, whether or not any Goods are accepted by Star City. 7.3 Without prejudice to any other remedy, if any Goods are supplied in breach of any warranty or representation of the Supplier or are otherwise not in accordance with the Order or the Specifications, then Star City may at Star City's sole option: (a) require the Supplier to repair the Goods or to supply replacement Goods in accordance with this agreement within the time period specified by Star City; (b) require the Supplier, at the Supplier's expense, to accept the Goods for return and refund any monies paid by Star City in respect of the Goods; (c) if the Supplier fails to repair the Goods within the period referred to in paragraph (a), rectify or have rectified any defect in the Goods at the Supplier's expense and set off such expenses against any amount due to the Supplier; or (d) whether or not Star City has previously required the Supplier to repair the Goods or supply any replacement goods, treat the Order as discharged by the Supplier's breach and require the repayment of any monies which have been paid in respect of the Goods. 9 7.4 For the purpose of inspection and testing, Star City may, at its option, select a random sample of the Goods in such proportion to the whole as Star City may consider appropriate, having regard to the nature of the Goods. In such cases, the result for the sample shall be used for the purposes of this clause 7. In the event that any part of the sample of the Goods fails to comply with the Order or the Specification, Star City may: (a) reject the whole or part of the Goods; or (b) require the Supplier to rectify the Goods; and (c) require the Supplier to submit same for testing and inspection again. 7.5 Where Star City does not inspect and accept the Goods prior the shipment, Star City must inspect the Goods or a sample of the Goods within 14 days of delivery and any notice of Star City's requirement pursuant to clause 7.4 must be given to the Supplier within that period. 8. PACKAGING AND LABELLING 8.1 The Supplier shall package all Goods in accordance with any requirements stated in the Order or the Specification, and if not so stated, Goods shall be packaged in such a way and by such means as will ensure that: (a) the Goods shall be delivered to Star City in good order and condition and free from damage; (b) the Goods may be conveniently and properly inspected on delivery; (c) the exterior of each separate container is endorsed with the number and date of the purchase order; and (d) each separate container, pallet or package is labelled with an identifying number and the total number of containers, for example, "Container 1 of 6". 8.2 The Supplier shall at all times comply with all applicable laws and regulations or the requirements of any carrier in packaging and packing Goods. 9. QUALITY CONTROL 9.1 If stated in Schedule 1 or the Specification, the Supplier shall develop and implement quality control systems and procedures acceptable to Star City. The Supplier shall provide evidence acceptable to Star City of any third party certification or approval of the quality systems and procedures. 9.2 The Supplier agrees to grant access to Star City at any time for the purposes of inspection and verification of the Supplier's quality systems and procedures. 10. RISK AND PROPERTY 10.1 Risk of loss in and associated with the Goods shall pass to Star City upon acceptance by Star City in accordance with this agreement. While risk in the Goods remains with the Supplier, the Supplier shall insure the Goods with a 10 reputable insurer for their full replacement value in respect of any loss and damage of any kind however caused. 10.2 Title to the Goods shall pass to Star City upon delivery. 11. GENERAL WARRANTIES 11.1 The Supplier represents, warrants and undertakes to Star City that: (a) the Goods: (i) will be new on delivery to Star City; (ii) will be of merchantable quality; (iii) will be fit for the purposes for which the Goods are ordinarily used; (iv) will be fit for the purposes stated in Schedule 1 or the Specification (if any); (v) will conform to any description or any sample provided by the Supplier; (vi) will conform to the Specification; (vii) will be free from any defects in materials or workmanship; (viii) will conform to any applicable Australian product standards, which conformity is deemed established when the Goods are approved by the NSW Casino Control Authority for operation in the casino; (b) the Supplier is the owner or licensee of all intellectual property rights subsisting in the Goods; (c) no use or sale of the Goods by Star City shall infringe upon the intellectual property rights of any third party; (d) the Services will be performed with due care and skill, in a conscientious, diligent and professional manner which is higher than or equal to the degree of skill, care and diligence normally exercised by a recognised professional or trades person supplies services of a similar nature; and (e) any goods or materials supplied by the Supplier in conjunction with the Services will be fit for the purpose for which they are supplied. 11.2 Except for the express warranties stated in clause 11.1 above, Supplier disclaims all warranties with regard to the Goods sold under this agreement including all implied warranties of merchantability and fitness for a specific purpose. 11.3 The Supplier represents, warrants and undertakes to Star City that each of the warranties in clause 11.1 is true and correct on the Commencement Date and the date of each delivery of Goods in accordance with this agreement. 11.4 The Supplier warrants that at the date the Goods and Services are provided and at all times during the Term: 11 (a) it has the right and authority to enter into this agreement and to do all things which it is required to do by this agreement; (b) all action has been taken by the Supplier to render the Agreement binding upon it and legally enforceable against it in accordance with its terms; (c) the execution of this agreement and its performance in accordance with its terms by the Supplier: (i) complies with all necessary consents, registrations, approvals, licences or permits required by statute, regulation, governmental policy or administrative requirement or by any agreement, order or arrangement binding upon the Supplier; and (ii) does not violate any law, regulation, government order or decree or any consent, registration, approval, licence or permit referred to in sub-clause (i) above or any agreement or arrangement binding upon the Supplier; 11.5 A breach of any of the warranties in clause 11.1 shall entitle Star City to give notice to the Supplier under clause 17. 12. WARRANTY 12.1 Without limiting the provisions of clause 11, the Supplier shall: (a) at Supplier's sole option, repair or replace any defective Goods during the warranty period stated in Schedule 1 at the Supplier's expense; (b) if the Supplier is not the manufacturer of the Goods, provide to Star City or hold for the benefit of Star City any warranty offered by the manufacturer of the Goods; (c) if Star City requires, produce written evidence of any such manufacturer's warranty and Star City's entitlement under it; and (d) at Supplier's sole option, perform any Services again or pay Star City the cost to it of having those Services provided by a third party, if the Services delivered are defective or do not meet the standards required by this agreement. 12.2 If the Supplier fails to correct any defective goods or re-perform any defective Services, Star City may arrange for the defective goods and consequential effects to be remedied, or the Services re-performed, at the Supplier's expense. 12.3 At its own cost and expense, the Supplier shall effect product liability insurance in respect of the Goods and if so requested, provide evidence to Star City of the currency of the insurance, including copies of any applicable policies of insurance. 13. LIABILITY 13.1 The Supplier acknowledges that a breach of this agreement by the Supplier may result in loss or damage to Star City. 12 13.2 Except for liability or damages resulting from Star City's negligence, the Supplier releases and discharges Star City from all liability of whatever kind from damage or injury suffered by the Supplier, its staff, employees and agents as a result or as a consequence of, or which might arise from providing the Services under this Agreement. 13.2A In no event shall the Supplier be liable for loss of profits, indirect, special, incidental, or consequential damages arising out of any breach of, or obligations under, this agreement. 13.3 The Supplier indemnifies Star City and agrees to hold harmless Star City from and against all actions, proceedings, suits, claims, demands, damages, losses, costs, charges and expenses arising in any way out of the performances of the Services as a result of any: (a) breach of this agreement by the Supplier; (b) negligent act or omission of the Supplier (other than an act done or omitted to be done on Star City's direction) or any other employee of the Supplier; (c) actual or alleged infringement of patent, design, trademark, trade-name, copyright or other proprietary rights owned or controlled by third parties in connection with the methods of operations employed by the Supplier or its employees in the performance of the Services; and (d) breach of any Federal, State or local law, regulation, ruling, guideline, standard or directive or of any industry guideline or standard with respect to the Services supplied by the Supplier. 13.4 Star City indemnifies the Supplier and agrees to hold harmless the Supplier from and against all actions, proceedings, suits, claims, demands, damages, losses, costs, charges and expenses arising from or as a result of any: (a) negligent act or omission of Star City (other than an act done or omitted to be done on the Supplier's direction) or any employee of Star City; or (b) breach by Star City of clauses 22 or 31 of this agreement. 14. YEAR 2000 COMPLIANCE 14.1 The Supplier warrants that the Goods/Services supplied by the Supplier are year 2000 compliant. 14.2 Year 2000 compliant shall mean that neither performance nor functionality is affected by dates prior to, during and after the year 2000. In particular: Rule 1. No value for current date will cause any interruption in operation. Rule 2 Date-based functionality must behave consistently for dates prior to, during and after year 2000. Rule 3 In all interfaces and data storage, the century in any date must be specified either explicitly or by unambiguous algorithms or inferencing rules. Rule 4 Year 2000 must be recognised as a leap year. 14.3 Amplification of the definition and rules: Rule 1 1.1 This rule is sometimes known as general integrity. 13 1.2 If this requirement is satisfied, roll-over between all significant time demarcations (eg, days, months, year, centuries) will be performed correctly. 1.3 Current date means today's date as known to the equipment or product. Rule 2 2.1 This rule is sometimes known as date integrity. 2.2 This rule means that all equipment and products must calculate, manipulate and represent dates correctly for the purposes for which they were intended. 2.3 The meaning of functionality includes both processes and the results of those processes. 2.4 If desired, a reference point for date values and calculations may be added by organisations, eg, as defined by the Gregorian calendar. 2.5 No equipment or product shall use particular date values for special meanings, eg, "99" to signify "no endvalue" or "end of file" or "00" to mean "not applicable" or "beginning of file". Rule 3 3.1 This rule is sometimes known as explicit/implicit century. 3.2 It covers two general approaches: (a) explicit representation of the year in dates: eg, by using four digits or by including a century indicator. In this case, a reference may be inserted (eg, 4-digit years as allowed by ISO standard 8601:1998) and it may be necessary to allow for exceptions where domain-specific standards (eg, standards relating to Electronic Data Interchange, Automatic Teller Machines or Bankers Automated Clearing Services) should have precedence. (b) the use of inferencing rules: eg, two-digit years with a value greater than 50 imply 19XX, those with a value equal to or less than 50 imply 20XX. Rules for century inferencing as a whole must apply to all contexts in which the date is used, although different inferencing rules may apply to different datesets. 14.4 GENERAL NOTES Where a term century is used, clear distinction should be made between the "value" denoting the century (eg, 20th) and its representation in dates (eg, 19XX); similarly, 21st and 20XX. 14 15. ASSIGNMENT Neither party shall assign the whole or any part of its obligations under this agreement, except to a purchaser of the business to which this agreement pertains, without the prior written consent of the non-assigning party. 16. NOT USED 17. TERMINATION 17.1 If the Goods are standard stock merchandise, Star City may cancel any unshipped portion of an Order without further obligation except to make payment for the Goods actually shipped prior to cancellation. If the Goods are to be manufactured or fabricated to Star City's specification, then before completion of the work, Star City may cancel an Order and the Supplier will stop all work except as otherwise directed by Star City. Upon cancellation, Star City will pay to the Supplier the actual out-of-pocket expenses to the date of cancellation, as approved by Star City, and, unless the Supplier is in default in delivery or of any other terms or conditions, an additional 5% of such expenses. In no event will the total amount to be paid exceed the Price of the Goods which are the subject of the cancellation. Upon payment, any materials or uncompleted portions of the work will be the property of Star City. The Supplier will not be entitled to any prospective profits or damages by reason of such cancellation. 17.2 Star City shall be entitled to terminate this agreement (and cancel any unfulfilled Orders) without liability to the Supplier immediately by giving notice to the Supplier at any time if: (a) the Supplier enters into any composition with its creditors, enters into liquidation, suffers the appointment of a receiver, a receiver and manager, an administrator or similar officer over all or part of its assets, or an application is made for, or an event occurs which would allow, any such person to be so appointed; (b) the beneficial ownership of, or management of, the Supplier changes such that control (as that term is defined in the Corporations Law) passes to persons other than those who control the Supplier at the Commencement Date; (c) the Supplier ceases, or threatens to cease, to carry on business; (d) the Supplier commits any material breach of a warranty or provision of this agreement; or (e) the continuance of dealings would have a detrimental impact on the ability of Star City to be qualified to hold or maintain any licences, permits or approvals issued or to be granted by any Regulatory Authority. 17.3 The Supplier shall be entitled to terminate this agreement (and cancel any unfulfilled Orders) without liability to Star City immediately by giving notice to Star City at any time if: 15 (a) Star City enters into any composition with its creditors, enters into liquidation, suffers the appointment of a receiver, a receiver and manager, an administrator or similar officer over all or part of its assets, or an application is made for, or an event occurs which would allow, any such person to be so appointed; or (b) Star City ceases, or threatens to cease, to carry on business. 17.4 Either party may, upon ninety days notice, terminate this agreement, provided that such termination shall not affect the parties' obligations in any other agreements which the parties have entered prior to the date of termination of this agreement. 18. CO-OPERATION AND SUPPORT 18.1 The Supplier acknowledges that Goods and Services to be supplied under this agreement will need to interface and remain compatible with the gaming management system proprietary to International Game Technology Inc and supplied and installed at the Casino by IGT's Australian subsidiary ("IGT System"). The IGT System is currently operational at Star City and the Supplier's Goods will need to work with that system in order to provide an operational and functioning system for Star City's purposes. The Supplier warrants that it will during the course of this agreement: (a) work and co-operate with IGT and its staff; (b) keep its software and associated equipment compatible with the IGT System; and (c) at the request of Star City, keep IGT and its staff involved with the IGT System informed of developments, modifications, improvements or upgrades to its Goods and related documentation as required to achieve the purposes of this agreement, provided however that the Supplier is not required to submit such information to IGT unless IGT agrees to maintain it in confidence and executes a non-disclosure agreement suitable to the Supplier to achieve this purpose. Likewise, the Supplier will maintain IGT confidential information in confidence and will execute a non-disclosure agreement suitable to IGT for this purpose. It is the intention of these warranties that the Supplier will use its best endeavours to ensure that the interface or interfaces between its Goods and the IGT System will be and remain compatible and workable so that Star City has a complete working system for the provision of a world class gaming product to its customers. Star City acknowledges that it will maintain a relationship with IGT, particularly that covering maintenance and/or support of the IGT System. Star City intends, subject to negotiating acceptable commercial terms (including terms similar to those set out in this clause 18), to enter into a maintenance and/or support contract with IGT which will oblige IGT to work and co-operate with the Supplier 16 and its staff in order to provide an operational and functioning system for Star City's purposes. 18.2 The Supplier will ensure that sufficient resources (including technical support) are made available in Sydney, Australia, during the course of this agreement to comply with the warranties contained in this agreement. Any additional contractual terms applicable to maintenance or support services to be provided by the Supplier will be the subject of negotiation and agreement between the partners. The fees associated with those services will be agreed on an annual basis, or as otherwise agreed, and will not exceed industry standards. 18.3 The Supplier acknowledges and agrees that Goods to be supplied under this agreement may be deemed by the NSW Casino Control Authority ("CCA") to be gaming equipment and therefore must be tested and approved by or on behalf of the CCA prior to commissioning at the Casino. The Supplier will provide all reasonable assistance and co-operation to Star City and the CCA (or its nominated testing agency) to obtain the relevant approval for any Goods. Star City will pay the costs of the CCA in doing so, but the Supplier will bear its own costs associated with that testing and approval process. Any delay in testing and/or approval of Goods due to or arising from the Supplier will give rise to a commensurate delay in Star City being obliged to perform its obligations under this agreement. If the approval of the CCA (or its nominated testing agency) cannot be obtained at all, or a material delay will be caused by failure to obtain that approval, Star City may (notwithstanding any other clause in this agreement) to cancel any Order for Goods and the Supplier will not be entitled to any payment or compensation in relation to those Goods or any related Services. In particular, and without limiting the generality of the foregoing, the Supplier acknowledges that it is aware of the requirements of the CCA concerning the IGT System. These requirements are set out in schedule 2 to this agreement. The Supplier acknowledges that in supplying its Goods or Services under this agreement, those requirements are fundamental to Star City's continued ability to use the IGT System. 18.4 The parties will agree on suitable acceptance tests for computer related software and hardware supplied under this agreement. Those tests will be agreed between Star City and the Supplier prior to delivery of Goods and will: (a) contain a specific set of tests and a test schedule; (b) set out required levels of functionality, compatibility, resistance, reliability and performance levels; (c) oblige the Supplier to verify, diagnose and correct any malfunction, defect or suspected error in the Goods; (d) provide for printed evidence of suspected faults to be obtained; and (e) set out a regime for recording faults during testing and the actions to be taken and timeframe needed by the Supplier to remedy those faults. 17 18.5 Star City will use its best efforts to support the Supplier in interfacing and co-ordinating with: (a) the CCA and other applicable regulatory bodies; (b) Star City suppliers, including both but not limited to IGT; and (c) organisations and contractors who may affect the Supplier's ability to perform under this agreement. 19. CASINO CONTROL ACT 1992 19.1 The parties covenant to provide information to the Casino Control Authority which it requires and to comply with any lawful notice from the Casino Control Authority including a notice requiring this agreement to be terminated. 19.2 The parties agree that if this agreement is terminated by either party in response to a notice of the Casino Control Authority under Section 39 of the Casino Control Act or by operations of the Act, neither party shall thereafter have any claim against the other, other than for any antecedent breach by a party of any obligation under this agreement. 19.3 This contract is a controlled contract within the meaning of the Casino Control Act 1992 ("the Act"). Parties to this contract may be required to provide information to the Casino Control Authority ("the Authority"). This contract may be terminated in certain circumstances. A party to this contract may be served with a notice in writing by the Authority affording the party an opportunity to show cause within 14 days why the contract should not be terminated on the grounds that, for reasons specified in the notice, it is not in the public interest for the contract to remain in force. A party served with a notice may, within the period of 14 days specified in the notice, arrange with the Authority for the making of submissions as to why the contract should not be terminated. After considering any submissions so made, the Authority may, by notice in writing served on each party to the contract, require the contract to be terminated within a time specified in the notice. If the contract is not terminated as required by the notice it is terminated by the operation of section 39 of the Act. If the contract is terminated in accordance with Division 2 of Part 3 (sections 36-42) of the Act: (a) the termination does not affect a right acquired, or a liability incurred, before that termination by a person who was a party to the contract, as a result of the performance before that termination of any obligation imposed by the contract; and (b) no liability for breach of contract is incurred by a person who was a party to the contract by reason only of that termination; and 18 (c) neither the Crown nor the Authority incurs any liability by reason of that termination. A party to a contract terminated in accordance with Division 2 of Part 3 of the Act commits an offence under section 41 of the Act and is liable to a penalty not exceeding 100 penalty units if the party gives any further effect to any part of the contract. 20. OBLIGATION TO CASINO CONTROL AUTHORITY If the Supplier has or is required to complete an Enterprise Assessment Form it undertakes to advise the Authority in writing, of any material change or new information in relation to its state of affairs within 14 days of the change occurring. A material change or new information would include but is not limited to, a change in directors, the granting or release of security, the appointment of an administrator, any legal proceedings threatened or commenced against the Supplier and financial statements prepared and/or lodged with any governmental authority. 21. GRATUITY The Supplier is prohibited from making any offer of payment in any form by way of payment, discount, rebate, offer, gift, intangible benefit or other benefit to any employee, representative, agent, consultant, operator or other persons associated with Star City or any other Star City group company. 22. CONFIDENTIALITY 22.1 In this clause, "Confidential Information" means any statement, contract, agreement, specification, drawing, report, data, plans, forecasts, knowledge or information at any time disclosed (whether in writing or orally) to, or acquired by the Supplier in relation to the Goods, the Services, the Casino and its related operations except to the extent that such statement, contract, agreement, specification, drawing, report, data, plans, forecasts, knowledge or information was at the time of such disclosure or acquisition, or thereafter comes into the lawful possession of the relevant person or the public other than through a breach of the terms of this agreement or where such confidential information is required by law to be disclosed. 22.2 The parties agreed that for a period of 5 years from date of receipt, they will treat all Confidential Information received from the other party as confidential and will not without the prior written consent of the other party: (a) disclose, publish or communicate or permit the disclosure, publication or communication of the Confidential Information or any part of it to any person, firm or company other than for the performance of this agreement; or (b) make copies or permit the making of copies of the Confidential Information or any part of it except to the extent reasonably necessary to perform this agreement. 19 22.3 The receiving party must, on the request of the disclosing party following the termination or suspension of negotiations of the fulfillment of this agreement, return all documents and other materials in its possession relating to or containing any Confidential Information and the receiving party must not retain any copies or replicas of any such documents. 22.4 The obligations contained in this Article 22 shall survive the termination of this agreement. 23. OCCUPATION HEALTH AND SAFETY ISSUES 23.1 Where chemicals are used in the supply of the Goods or in connection with the supply of any services (including the Services) by the Supplier, the Supplier will provide to Star City in respect of each chemical product a Material Safety Data Sheet. 23.2 The Supplier shall generally and where appropriate, supply adequate health and safety information concerning the Goods and shall ensure that the Goods will be safe when properly used and/or stored. The Supplier shall at all times keep Star City informed of all relevant information which becomes known to the Supplier concerning the use, supply, maintenance and/or storing of the Goods. 23.3 All information required to be provided to Star City in accordance with clauses 23.1 and 23.2 will be provided by the Supplier to the Star City Contact. 23.4 The Supplier will comply with all obligations imposed on it by law including any relevant Occupational Health and Safety legislation. 24. GENERAL 24.1 All rights given to Star City by this agreement may be exercised by any related corporation (as defined by the Corporations Law) of Star City. 24.2 Any notice required or permitted to be given by either party to the other under this agreement shall be in writing addressed to the other party at the address specified in Schedule 1 or on the Order or such other address as may at the relevant time have been notified pursuant to this provision to the party giving the notice. Such notices may be given by personal delivery, facsimile or pre-paid post. 24.3 Any indulgence, forbearance or extension of time which Star City may grant to the Supplier in relation to this agreement or any matter or thing relating to or arising from it shall not in any way prejudice or interfere with Star City's rights under this agreement and shall not be claimed to constitute a waiver of it. 24.4 If any provision of this agreement is held by any competent authority to be invalid or unenforceable in whole or in part, the validity of the other provisions of this agreement and the remainder of the provision in question shall not be affected thereby. 20 24.5 This agreement shall be governed by the laws of the State of New South Wales and the parties agree to submit to the non-exclusive jurisdiction of the courts of that State. 24.6 If there is any conflict between this agreement and an Order, the Order shall prevail to the extent of any inconsistency. 25. FORCE MAJEURE 25.1 If a party is unable either wholly or partially, as a result of a force majeure, to carry out its obligations under this agreement, and: (a) notifies the other party promptly of the force majeure giving details of the force majeure, the extent to which it is unable to perform its obligations; and (b) attempts to remove the force majeure as quickly as possible; then that party's obligations will be suspended for the period of time it is affected by the force majeure. 25.2 If after a period of 1 month, the force majeure has not ceased, the parties will meet in good faith to attempt to achieve a mutually satisfactory resolution to the problem. 25.3 The requirement to remove a force majeure does not impose any obligation on a party to settle strikes or any industrial disputes or demands by a government on terms adverse to it. 25.4 In this clause, "force majeure" means an act of God, strike, industrial dispute, declaration of war, blockade, disturbance, lightning, fire, earthquake, storm, flood, explosion, governmental or semi-government restraint, expropriation, prohibition, intervention, direction, embargo, and any other cause which is not reasonably within the party's control. 26. FUTURE ORDERS 26.1 The Supplier agrees that the terms and conditions set out in this agreement will apply to the future provision of Goods or Services by the Supplier, subject to such conditions and particulars as may be set out in future purchase orders and subsequent agreements submitted to the Supplier by Star City. Any terms and conditions set out in this agreement which are inconsistent with future purchase orders shall not apply. Additional and associated Services or variations to the existing Services may be requested by Star City from time to time. Confirmation of variations and additional Services will not be valid, unless Star City issues an Order to the Supplier. 26.2 An Order shall not be deemed to have been issued and shall not be capable of acceptance by a Supplier unless the Order bears an Order Number and is signed by an employee of Star City authorised for that purpose and is issued by Star City's Purchasing Department to the Supplier. 21 26.3 No Order will be recognised by Star City for any purpose, and no invoice rendered by a Supplier will be accepted by Star City, unless the applicable Order Number is shown on the relevant Order or invoice in accordance with clause 5.2. Star City shall have no liability to any Supplier in the event Services are supplied contrary to the requirements of this Agreement, and the supply of such Services shall be entirely at the Supplier's risk. 27. STAR CITY PREMISES 27.1 The Supplier shall, when using the Premises or any facilities occupied by Star City, comply with all directions, procedures and policies of Star City from time to time relating to occupational health and safety, security or otherwise in relation to the use of and access to the Premises or in regard to any facilities on the Premises. 27.2 The Supplier shall ensure that: (a) no injury or damage is caused to persons or to property; and (b) no trespass to property is committed, arising out of or in connection with this agreement, by the Supplier or any employee or agent of the Supplier. 28. EQUIPMENT 28.1 The Supplier shall provide all equipment necessary for use in connection with the provision of the Services. 28.2 The Supplier shall ensure that all equipment is maintained in good working order, repair and condition at all times and is fit for the purpose of providing the Services. 29. RELATIONSHIP 29.1 Nothing in this agreement constitutes a relationship of employer and employee, principal and agent, or partnership between Star City or its related bodies corporate (as defined in the Corporations law) and the Supplier. 29.2 The Supplier must not, and will ensure that its staff do not, assume or create or attempt to assume or create, directly or indirectly, any obligation on behalf of or in the name of Star City or a related body corporate (as defined in the Corporations law) of Star City. 30. SUB-CONTRACTORS 30.1 The Supplier shall advise Star City of the details of any sub-contractors engaged by the Supplier. No sub-contractor shall be engaged by the Supplier to provide Services without the prior consent of Star City. The Supplier shall be fully responsible for the performance of the Services notwithstanding the consent of Star City or that the Supplier has sub-contracted the performance of any part of the Services. 22 30.2 The Supplier shall be responsible for ensuring the suitability of any proposed sub-contractor for any specific work envisaged and that all work performed by sub-contractors meets the requirements of this agreement. 31. INTELLECTUAL PROPERTY 31.1 The Supplier acknowledges that Star City is the proprietor of all Intellectual Property of Star City provided to the Supplier prior to or in the course of this agreement and that it is supplied to the Supplier for the purposes of providing Services under this agreement only. 31.1A Star City acknowledges that the computer programs, system protocols, system documentation manuals, and trademarks supplied by the Supplier to Star City are proprietary to the Supplier. Star City agrees with the Supplier that the programs, documentation and all information or data supplied by Supplier in machine-readable form are trade secrets of the Supplier, are protected by civil and criminal law, and by the law of copyright, are very valuable to the Supplier, and that their use and disclosure must be carefully and continuously controlled. Accordingly, at no additional royalty or fee, Star City shall execute Supplier's End User Software License Agreement (the terms of which are to be agreed between the parties) prior to installation of such software at the Casino. 31.2 Except as otherwise provided in this agreement, nothing contained in this agreement shall be deemed, by implication, estoppel or otherwise, to grant to Star City any right or licence in respect of any of the Intellectual Property of the Supplier at any time. 31.3 The Supplier at its own expense will defend and indemnify Star City in any action brought against Star City to the extent that it is based on a claim that the Goods used within the scope of this agreement infringe any trademark, patent or copyright, provided that the Supplier is immediately notified in writing of such claim. The Supplier shall have the right to control the defence of all such claims, lawsuits and other proceedings. In no event shall Star City settle any such claim, lawsuit or proceeding without the Supplier's prior written approval. If, as a result of any claim of infringement against any patent or copyright, Star City is enjoined from using the Goods, or if the Supplier believes that the Goods are likely to become the subject of a claim of infringement, the Supplier at its option and expense may procure the right for Star City to continue to use the Goods, or replace or modify the Goods so as to make them non-infringing. The foregoing states the entire liability of the Supplier with respect to infringement of any trademarks, copyrights or patents by the Goods. 32. INSURANCE 32.1 The Supplier must maintain and effect at its own expense during the term of this agreement valid and enforceable insurance policies with insurers approved by Star City, which: 23 (a) name the Supplier, and Star City and other interested parties as notified by Star City to the Supplier (and include their personnel), as co-insured persons in relation to the supply of Goods and/or provision of Services pursuant to this agreement; (b) in relation to any public liability insurance, include a cross liability clause enabling one insured person to claim against the insurer even if the party making the claim against the insured person is also insured under the policy; (c) where specified, provide at least the level and types of coverage specified in Schedule 1 for each occurrence; and (d) be on terms acceptable to Star City. 32.3 The Supplier: (a) must effect and maintain statutory workers' compensation insurance to cover any claim by any employee of the Supplier; (b) provide certification of workers' compensation arrangements to Star City if requested; and (c) irrevocably waives all rights it may (but for this clause) have had from time to time against Star City in relation to or in connection with any claim by any employee of the Supplier. 32.2 At the request of Star City, the Supplier shall provide certificates of currency of its insurance policies or such other documentary evidence as may be required by Star City from time to time. 33. SPECIAL CONDITIONS 33.1 The Supplier shall ensure that: (a) it renders the Services at all times in a polite and helpful manner and shall provide the Services in a safe manner; (b) all persons engaged by it in the provision of the Services shall be of neat and clean appearance at all times and shall comply with any specific dress and other requirements set out by Star City from time to time; (c) all persons engaged by it in the provision of the Services wear such uniforms and identifying materials (e.g. name tags or badges) as may reasonably be requested by Star City from time to time; (d) any uniforms worn by persons in the provision of the Services are in good repair and the Supplier shall be responsible for and shall arrange regular cleaning of all such uniforms to the satisfaction of Star City; (e) without limiting sub-clause (c), any security cards or identity cards issued by Star City to the Supplier's personnel must be worn by all such personnel at all times during and promptly returned to Star City at the conclusion of the provision of the Services; 24 (f) Star City may, without assigning any reason, notify the Supplier that any particular employee of the Supplier is unsuitable by reason of matters of security, confidentiality or other matter relevant to the conduct of the Star City business to perform Services under this agreement where upon Star City shall be entitled to deny access to the Premises to such person; (g) the Supplier shall be responsible to ensure that all its employees who come onto the Premises for the purposes of this agreement are over the age of 18 years. The Supplier shall indemnify and keep indemnified Star City for any loss, cost or expense incurred by reason of any such employee being less than 18 years of age; (h) the Supplier shall ensure that it complies with all Commonwealth and State industrial relations legislation, including any award, agreement, industrial instrument or arrangement it has entered or is required to comply with, pursuant to or arising from such industrial relations legislation; and (i) In accordance with s127 of the Industrial Relations Act 1996 (NSW), the Supplier shall ensure that at the time of seeking payment for services under this contract, it will provide Star City with a statement that all remuneration payable to the relevant employees for work under the contract has been paid for that period of time for which payment is sought. 33.2 The Supplier shall have in place policies and procedures for the training of its staff including policies of the Supplier in relation to occupational health, health and safety, industrial relations policy, security awareness (if applicable) and quality assurance and systems procedures (if applicable). 25 SCHEDULE 1 - --------------------------------------------------------------------------------------------------- Clause 1.1 Description of Goods and Services: Prices and Fees Supply electronic gaming equipment Each element of the Goods and Services and all other additional or will be negotiated on an individual basis related services required by Star with Orders being placed for each City and normally provided by the separate component and will be subject to Supplier incidental to such Goods the terms and conditions of this and Services agreement. - --------------------------------------------------------------------------------------------------- Clause 4.2 Price Adjustment: Once an Order has been placed by Star City there will be no price adjustment. Pricing will be based on the quote received from the Supplier. - --------------------------------------------------------------------------------------------------- Clause 5.2 Address for submission of Invoices: ACCOUNTS PAYABLE, FINANCE DEPARTMENT, STAR CITY, PO BOX Q192, QVB POST OFFICE 1230. - --------------------------------------------------------------------------------------------------- Clause 6.1 Delivery deadline: as described in Star City's Orders from time to time - --------------------------------------------------------------------------------------------------- Clause 6.4 Documents required with delivery as described in Star City's Orders from of Goods: time to time - --------------------------------------------------------------------------------------------------- Clause 7.2(b) Return of Packaging Material: STAR CITY WILL NOT BE RETURNING PACKAGING MATERIAL TO THE SUPPLIER - --------------------------------------------------------------------------------------------------- Clause 9.1 Quality Systems and Procedures: TO BE ADVISED - --------------------------------------------------------------------------------------------------- Clause 11.1 Purpose of Goods: Electronic Gaming - --------------------------------------------------------------------------------------------------- Clause 12 Period of Warranty: 12 MONTHS FROM DELIVERY AND INSTALLATION OF THE GOODS AND SERVICES. - --------------------------------------------------------------------------------------------------- Clause 24.2 Address for Notices: Star City: 80 Pyrmont Street, Pyrmont NSW 2009 Tel: 612 9777 9000 Fax: 612 9657 8344 Supplier: 815 NW 9th Street, Corvallis Oregon USA 97330 Tel: 541 7537648 Fax: 541 7537524 - --------------------------------------------------------------------------------------------------- Clause 32 Insurance 1. Public liability insurance covering bodily injury, death and property danger in an amount of not less than $5,000,000 for each and every occurrence and $6,000,000 in the aggregate for any one period of insurance. 2. Professional indemnity insurance $10,000,000 - ---------------------------------------------------------------------------------------------------
26 SCHEDULE 2 REQUIREMENTS OF THE CCA The IGT system is required to provide Star City and regulatory officials with the following features: 1. Analysis to provide daily, weekly, monthly and annual analysis of turnover (ie, handle), revenue (ie, cash box amount), percentage payout, cancelled credits, and payout for gaming devices (by individual device, type of device, or in total). 2. Machine Security to provide computer screen viewing, terminal alarm and hard copy transaction listing of all mains power failures and access to machine door, hopper, cash box and logic board. 3. Jackpots to provide computer screen viewing, terminal alarm and hard copy transaction listing of jackpot wins (stand alone machines and linked progressive machines). 4. Generation of Documents to provide computer generation of documents in the coin bank for hopper refills, cancelled credits and jackpot payouts. 5. Revenue Count to provide storage and recording and revenue data transmitted from computerised scale weighing (hard count process) of cash box contents from each machine and highlight any variances from the cash count with the amount recorded on the machines electronic meter. 27 EXECUTION STAR CITY PTY LIMITED Signed for and on behalf of STAR CITY PTY LTD by its duly authorised officer - ---------------------------------------- Signature of authorised officer - ---------------------------------------- Name of authorised officer - ---------------------------------------- Title of authorised officer before me: - ---------------------------------------- Signature of witness - ---------------------------------------- Name of witness Signed for and on behalf of ACRES GAMING INCORPORATED by its duly authorised officer - ---------------------------------------- Signature of authorised officer - ---------------------------------------- Name of authorised officer - ---------------------------------------- Title of authorised officer before me: - ---------------------------------------- Signature of witness - ---------------------------------------- Name of witness 28 PURCHASE ORDER DATE 17/05/99 SUPPLIER: ACRES GAMING INCORPORATED BILL TO: STAR CITY PTY LTD SHIP TO: SERVICES ONLY 815 NW 9TH STREET ACCOUNTS PAYABLE DEPT. CORVALLIS, PO BOX Q192 OREGON 97330 QVB POST OFFICE 1290
- ------------------------------------------------------------------------------------------------------- DESCRIPTION BRAND, PART OR CATALOGUE DELIVERY QUANTITY UOM UNIT COST EXTENDED COST NUMBER DATE - ------------------------------------------------------------------------------------------------------- 17/05/1999 1.000 EA 1,324,352.9000 1,324,352.90 ACRES BONUSING SYSTEM - PHASE 1 US$875,000 NOTE: INDICATIVE RATE OF .6607 DATED 17/5/99 USED TO CONVERT TO $AUD ACRES BONUSING SYSTEM - 2ND PAYMENT NOTE: PAYABLE 30 DAYS AFTER APPROVED 17/05/1999 1.000 EA 1,324,352.9000 1,324,352.90 INSTALLATION. INDICATIVE RATE OF .6607 USED TO CONVERT TO $AUD ACRES BONUSING SYSTEM - FINAL PAYMENT NOTE: PAYABLE 18 MONTHS FROM DATE OF 17/05/1999 1.000 EA 2,389,147.8700 2,389,147.87 APPROVED INSTALLATION. THIS ORDER IS PLACED PURSUANT TO CONTROLLED CONTRACT 00279 AND IS SUBJECT TO THE TERMS OF THE ATTACHED ACRES BONUS SYSTEM, STAR CITY UPGRADE DATED 10 MAY '99. THE CONTROLLED CONTRACT PREVAILS OVER ANY INCONSISTENT TERMS. - ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------ TOTAL INCLUSIVE OF SALES TAX AND DELIVERY CHARGES 5,037,853.67 ------------------------------------------------------------------------------
THIS ORDER IS SUBJECT TO STAR CITY PTY LIMITED STANDARD TERMS AND CONDITIONS OF PURCHASE OR, IF A SUPPLY AGREEMENT IS IN PLACE BETWEEN STAR CITY PTY LIMITED AND THE SUPPLIER, THEN IT IS SUBJECT TO THE TERMS AND CONDITIONS OF THAT AGREEMENT. 29 ACRES BONUS SYSTEM STAR CITY UPGRADE This proposal outlines costs, terms, timelines, Star City requirements and specifications for upgrading the current Star City system to support Phase 1 bonuses. BONUS UPGRADE COSTS
- ---------------------------------------------------------------------------------- Qty Description Price Each Total - ---------------------------------------------------------------------------------- 1,500 CCCE cable harnesses * * - ---------------------------------------------------------------------------------- 1 CCCE Software * * - ---------------------------------------------------------------------------------- 1,500 Phase 1 Bonus Upgrade Software * * - ---------------------------------------------------------------------------------- TOTAL $3,328,510 - ----------------------------------------------------------------------------------
* -- confidential portion omitted and filed separately with the SEC Prices are in US dollars and exclude shipping, taxes, duties and installation travel and lodging expenses. While technical support for regulatory approvals is included, any fees charged by testing agencies or regulatory authorities are excluded. Shipping, travel and lodging expenses are billed to Star City at cost. Whenever possible, Star City facilities will be used for food and lodging. PAYMENT TERMS Deposit with Order $ 875,000 2nd Payment after 30 days of satisfactory operation in Star City's $ 875,000 production environment. 18 equal payments (beginning 60 days after start of satisfactory operation) $ 87,695 ========================================================================================== Total $3,328,510
A discount of $250,000 (US) is offered if, in lieu of 2nd payment described above, a final payment of $2,203,510 is received resulting in a net price of $3,078,510, exclusive of shipping, duties, travel, etc. WARRANTY All bonus software is warranted for 90 days. If Star City contracts with Acres Gaming for a maintenance contract on the basic system, Acres Gaming will extend warranty support on these bonuses until June 30, 2002 or until Star City discontinues the basic service contract, whichever comes first. For as long as the basic service contract remains in effect, terms of support, response time and training for the bonus upgrade features described in this proposal will be identical to the support, response time and training provisions outlined in the basic service contract agreement. 30 TIMELINE Receipt of Order and Deposit Start of project Shipment of 1,500 cable harnesses +3 weeks Beginning of installation in test bed +4 weeks Beginning of regulatory testing +5 weeks Estimated installation on floor (pending approval) +9 weeks Bonusing becomes operational 9 weeks after receipt of order, based upon a four week regulatory testing and approval cycle. For an August 1, 1999 startup, the order must be received no later than May 21. An earlier beginning is highly recommended. STAR CITY REQUIREMENTS - - Test bed must be available continuously for 6 weeks prior to date on which bonuses are to be launched (June 15th for an August 1 opening). - - Star City is responsible for installation of CCCE cable harnesses in gaming machines - - Star City contracts with regulatory testing agency and gains all required approvals. Acres Gaming provides full technical support for all submissions and testing. Approval applications are the responsibility of Star City - - Star City is responsible for all player education, marketing and collateral material. - - Star City makes appropriate employees available for training at least two weeks prior to launch of bonusing. - - Star City must assist in causing IGT to make required changes in the IGS system to properly support bonuses. In order to implement bonusing, specific changes are required in the IGS host system. Star City, and Acres gaming will, on a best efforts basis, cause IGT to make such changes. Given Star City's commercial influence with IGT, it would be a requirement that Star City take the lead in all such transactions. However, Acres gaming would assist where possible, in similar fashion to that stated in cooperation related clauses in the controlled contract. It is noted that Acres Gaming has limited influence with IGT, however it is anticipated that Acres Gaming can increase this level of influence through formalising arrangements relating to MEAL system changes in ABS, off-set against bonusing changes in IGS. There will be no charge to Star City, Acres Gaming or IGT for the efforts required under this arrangement. PHASE 1 - BONUSES SPECIFICATIONS CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SEC EX-10.4 3 SYSTEM UPGRADE AGREEMENT DATED JUNE 7, 1999 1 EXHIBIT 10.4 [BLAKE DAWSON WALDRON LAWYERS LETTERHEAD] SYSTEM UPGRADE AGREEMENT ACRES GAMING INC CROWN LIMITED 7 June 1999 2 CONTENTS 1. INTERPRETATION 1 2. ACRES'S OBLIGATIONS 4 3. CROWN'S OBLIGATIONS 4 4. LICENCE AND ESCROW ARRANGEMENT 5 5. DELIVERY, INSTALLATION AND COMMISSIONING 5 6. ACCEPTANCE 6 7. COOPERATION 6 8. UPGRADES OF SOFTWARE AND ASSOCIATED DOCUMENTATION 6 9. TRAINING 7 10. PAYMENT 7 11. PRICE 7 12. WARRANTY SUPPORT 8 13. HARDWARE ACCEPTANCE 8 14. INTELLECTUAL PROPERTY WARRANTIES AND INDEMNITY 8 15. CONFIDENTIALITY 9 16. WARRANTIES 10 17. REPRESENTATIONS AND WARRANTIES 10 18. LIABILITY OF ACRES IS LIMITED 11 19. TERMINATION 11 20. CONTROLLED CONTRACT PROVISIONS 12
3 21. FORCE MAJEURE EVENTS 13 22. DISPUTES 14 23. NOTICES 14 24. MUTUAL CO-OPERATION 15 25. GENERAL 15 SCHEDULE 1. FUNCTIONAL SPECIFICATION 17 2. PRICE SCHEDULE 18 3 TIME LINE 20 4 END USER SOFTWARE LICENSE AGREEMENT 21 5 LIST OF EQUIPMENT TO BE RETURNED TO ACRES 26
ii 4 SYSTEM UPGRADE AGREEMENT DATE 7 June 1999 PARTIES ACRES GAMING INC of 815 NW Ninth Street, Corvallis Oregon, USA ("ACRES") CROWN LIMITED ACN 006 973 262 of 99 Queensbridge Street, Southbank Victoria, Australia ("CROWN") RECITALS A. Crown has installed at the Southbank Complex the System which is made up of components created by Aristocrat, Acres and Crown. B. Crown wishes to upgrade the System. C. Crown and Acres have agreed that Acres will upgrade part of the System by delivering and installing the Acres Component on the terms set out in this agreement. OPERATIVE PROVISIONS: 1. INTERPRETATION 1.1 DEFINITIONS In this Agreement, unless the context otherwise requires: "ACCEPTANCE NOTIFICATION" has the meaning given in clause 6; "ACRES COMPONENT" means that part of the System to be upgraded by Acres as set out in the Functional Specification; "ARISTOCRAT" means Aristocrat Leisure Industries Pty Ltd ACN 001 660 715 of 71 Longueville Road, Lane Cove, NSW 2066; "ARISTOCRAT COMPONENT" means that part of the System to be upgraded by Aristocrat as set out in the Functional Specification; "ASSOCIATED DOCUMENTATION" means the operating, programming and user manuals, modification manuals, flow charts, drawings, design documentation and other materials relating to the Software and as amended from time to time under this agreement; "CONFIDENTIAL INFORMATION" means in relation to a party, information that: (a) is by nature confidential; or (b) is designated by a party to be confidential; or (c) the other party knows or ought reasonably to know is confidential including: (i) information comprised of or relating to any intellectual property rights of the party; 5 (ii) information relating to the financial position of the party, and in particular, includes information relating to the assets or liabilities of the party and any other matter that does or may affect the financial position or reputation of the parties; (iii) information relating to the internal management structure of the party, or the personnel, policies and strategies of the parties; (iv) business plans; (v) information of the party to which the other party has access other than information referred to in paragraphs (i), (ii) and (iii) that has any actual potential commercial value to the first party or to the person or corporation which supplied that information; and (vi) information in the party's possession relating to another party's clients or suppliers, and like information; "CROWN COMPONENT" means that part of the System to be upgraded by Crown as set out in the Functional Specification; "INTELLECTUAL PROPERTY RIGHTS" means all and any intellectual and industrial property rights whether conferred under statute, or common law or in equity including without limitation rights to patents, designs, trade marks, trade names, circuit layouts, confidential information and copyright; "END USER SOFTWARE LICENSE AGREEMENT" means the software license agreement set out in Schedule 4; "FUNCTIONAL SPECIFICATION" means the functional design specification for the upgraded System set out in Schedule 1; "HARDWARE" means the hardware forming part of the Acres Component and such items described as hardware in the Functional Specification which are purchased by Crown from time to time; "PRICE" means the amount payable to Acres calculated in accordance with clause 11; "PRICE SCHEDULE" means the schedule of components and unit prices set out in Schedule 2; "SOFTWARE" means the software forming part of the Acres Component (together with user manuals and any enhancement, modification or new release), any software of Acres used in the System (other than the Acres Component) and such items described as Software in the Functional Specification which are purchased by or licensed to Crown from time to time; "SOUTHBANK COMPLEX" means the Crown Casino complex in Melbourne, Victoria; "SYSTEM" means the gaming machine management system as operated by Crown at the Southbank Complex; "TIME LINE" means the time line set out in Schedule 3; "VCGA" means the Victorian Casino and Gaming Authority; "VCGA TECHNICAL REQUIREMENTS DOCUMENT" means the document issued by the VCGA entitled "Technical Requirements for Gaming Machines and Electronic Monitoring systems in the Melbourne Casino - Version 2.0"; "WARRANTY PERIOD" means the period of 12 months commencing on the date Acceptance Notification is given by Crown to Acres; 2 6 "WARRANTY SUPPORT" means service and support provided by Acres to Crown sufficient to ensure that the Acres Component functions at all times in accordance with the Functional Specification so as to maintain satisfactory functionality performance and response times provided always that "Warranty Support" will not include any defect or fault in the Acres Component which arises out of or is caused by: (i) improper use of the Acres Component by Crown; (ii) operation of the Acres Component other than in accordance with Associated Documentation; (iii) modification of the whole or any part of the Acres Component not approved by Acres; and (iv) use of the Acres Component contrary to law or other than for the purpose of legal gaming; and "YEAR 2000 COMPLIANT" means that neither the performance nor the functionality of the Acres Component will be affected by dates prior to, during or after the year 2000 and in particular: (a) no value for current dates will cause any interruption in operation; (b) date-based functionality will behave consistently for dates prior to, during and after the year 2000; (c) in all interfaces and data storage, the century in any date will be specified either explicitly or by unambiguous algorithms or inferencing rules; (d) the year 2000 will be recognised as a leap year in terms of handling the 29th of February and day 366; and (e) the Acres Component will satisfy VCGA year 2000 testing requirements; 1.2 GENERAL In this agreement, unless the context otherwise requires: (a) a reference to any legislation or legislation provision includes any statutory modification or re-enactment of or legislative provision substituted for, any subordinate legislation issued under, that legislation or legislative provision; (b) a reference to a recital, clause, schedule, annexure or exhibit is to a recital, clause, schedule, annexure or exhibit of or to this agreement; (c) a recital, schedule, annexure or a description of the parties forms part of this agreement; (d) a reference to any agreement or document is to that agreement or document (and, where applicable, any of its provisions) as amended, novated, supplemented or replaced from time to time; (e) a reference to any party to this agreement or any other document or arrangement includes that party's executors, administrators, substitutes, successors and permitted assigns; (f) where an expression is defined, another part of speech or grammatical form of that expression has a corresponding meaning; (g) the singular includes the plural and vice versa; (h) a reference to an individual or person includes a corporation, partnership, joint venture, association, authority, trust, state or government or vice versa; 3 7 (i) a reference to an act or omission by a party includes a reference to an act or omission by that party's employees, servants and agents; and (j) a reference to "dollars" and "$" is to Australian currency. 1.3 HEADINGS In this agreement, headings are for convenience of reference only and do not affect interpretation. 2. ACRES'S OBLIGATIONS 2.1 In consideration of Crown complying with its obligations set out in clause 3 it is a fundamental term of this agreement that Acres shall: (a) develop, deliver and commission at the Southbank Complex the Acres Component, (free from encumbrances) which must comply with the Functional Specification; (b) assist and support installation by Crown of the Software; (c) use its best efforts to comply with the Time Line; (d) grant a licence (or secure the grant of a licence or sub-licence) to Crown of the Intellectual Property Rights in the Acres Component in accordance with clause 4; (e) promptly provide all upgraded versions of the Software and Associated Documentation in accordance with clause 8; (f) train Crown personnel in accordance with clause 9; (g) write and produce the necessary copies of the Associated Documentation; (h) while at the Southbank Complex performing its obligations under this agreement: (i) comply with all reasonable directions given by Crown; and (ii) comply with all approvals, laws and regulations necessary to perform its obligations under this agreement; (i) participate in VCGA testing and assist Crown with obtaining VCGA approval of the Acres Component at the Southbank Complex, including, without limitation, supplying to Crown the items specified in paragraph 7.2(d) of the Functional Specification; and (j) fully cooperate with VCGA testers so as to ensure the timely approval of the Acres Component by the VCGA. 3. CROWN'S OBLIGATIONS In consideration of Acres complying with its obligations set out in clause 2, Crown agrees to: (a) pay to Acres the Price in accordance with clause 10; (b) prepare the Southbank Complex, at its expense, in order to allow Acres to perform its obligations under this agreement and without limitation to this clause, further agrees to ensure that there will be 4 8 for the purpose of installation an adequate supply of electricity, adequate electrical items and fittings and appropriate environmental conditions for the Acres Component; (c) allow reasonable access to Acres's employees or contractors to the Southbank Complex or such other premises owned or occupied by Crown, to permit Acres to perform its obligations under this agreement; (d) only use the Acres Component at the Southbank Complex and not sub-license to any third party the whole or any part of the Acres Component; (e) use its best efforts to comply with the Time Line; (f) procure the cooperation of any third parties, including gaming machine vendors and the VCGA, required to implement the upgrade to the System; (g) pay for and manage the obtaining of VCGA approval for the upgrade to the System; and (h) at Crown's expense, return to Acres the items listed in Schedule 5. 4. LICENCE AND ESCROW ARRANGEMENT 4.1 Crown acknowledges that the Software and Associated Documentation supplied by Acres to Crown are the property of Acres, and Crown agrees to execute the End User Software License Agreement upon giving Acceptance Notification to Acres. 4.2 In the case of third party software that is supplied by Acres for the operation of the Software, Acres shall procure for the benefit of Crown the right to implement and use such third party software in connection with the Software. 4.3 Immediately after receiving the Acceptance Notification pursuant to clause 6.3, Acres shall provide Crown with a complete copy of the Software and a further copy of the Associated Documentation. 4.4 Acres undertakes that after receipt by Acres of the Acceptance Notification, when and if requested to do so by Crown, it will deposit the source code of all Software with a third party ("the Escrow Custodian"). The deposit of the source code with the Escrow Custodian shall be at Crown's expense and must be governed by an agreement, acceptable to Crown, to which Acres, Crown and the Escrow Custodian are parties, under which the source code will be released to Crown if Acres becomes or is at serious and substantial risk of becoming subject to any form of insolvency, administration or receivership or anything analogous or Acres ceases or threatens to cease trading. 5. DELIVERY, INSTALLATION AND COMMISSIONING 5.1 Acres shall deliver to Crown the Hardware at an address in Melbourne nominated by Crown and shall ensure that the Hardware is ready for use by Crown and is configured and able to be operated in accordance with the Functional Specification on or before the dates specified in the Time Line unless otherwise agreed between the parties. 5.2 Acres shall deliver to Crown the Software at an address in Melbourne nominated by Crown and shall ensure that the Software is ready for use by Crown and is configured and able to be operated in accordance with the Functional Specification on or before the dates specified in the Time Line unless otherwise agreed between the parties. Acres shall assist and support Crown in the installation of the Software. 5.3 Acres shall immediately notify Crown once it has complied with its obligations under clauses 5.1 and 5.2. 5 9 5.4 Subject to clause 10 and clause 19, title in the Hardware passes to Crown upon full payment of the Price in accordance with the provisions of this agreement. 5.5 Risk of loss or damage to any part of the Acres Component passes to Crown on the date of its installation at the Southbank Complex. 6. ACCEPTANCE 6.1 After completion of installation and commissioning of the Acres Component at the Southbank Complex, Crown or its nominee will carry out such tests and assessments of the Acres Component as it considers necessary to ensure that the Acres Component conforms to the Functional Specification. Acres may appoint a representative to be present at that meeting. 6.2 The parties acknowledge that the VCGA will conduct compliance and approvals testing to ensure the Acres Component meets the requirements of the VCGA Technical Requirements Document. Crown's testing and assessment referred to in clause 6.1 will take into account the results and recommendations of the VCGA testing. 6.3 The testing of the Acres Component under clause 6.1 will be based on a reasonable judgement of "pass" or "fail" and Crown will: (a) notify Acres when a successful acceptance test under clause 6.1 has been carried out in respect of the installation and commissioning ("Acceptance Notification"); or (b) advise Acres in writing if the Acres Component or the relevant part of the Acres Component fails to satisfy the relevant acceptance tests and will specify the manner in which the Acres Component is not acceptable. 6.4 If the Acres Component fails to perform in accordance with the Functional Specification or fails to satisfy any of the relevant acceptance tests referred to in clause 6.1, Acres will (at its own expense) take steps to correct the Acres Component and the relevant acceptance test will be repeated at reasonable intervals until the Acres Component performs in accordance with the Functional Specification. 6.5 Crown reserves the right to withhold payment under clause 10.1(b) if the Acres Component does not satisfy the acceptance tests. 6.6 Acres undertakes to promptly rectify any conditions imposed by the VCGA or Crown. 6.7 Notwithstanding any other provision of this agreement, if either party considers it necessary to make minor variations to the Functional Specification, that party shall first notify the other party of its requirements and the other party shall consider the request for variation, acceptance of which shall not be unreasonably withheld. 7. COOPERATION In carrying out its obligations under this agreement, Acres shall: (a) comply with the reasonable directions of Crown; and (b) cooperate with all third parties. 8. UPGRADES OF SOFTWARE AND ASSOCIATED DOCUMENTATION 6 10 8.1 Acres will advise Crown of all upgraded versions of the Software and, at Crown's request and expense, upon execution of an applicable software licence agreement and payment of a licensing fee as may be agreed between the parties, Acres will provide to Crown those upgraded versions on diskette, magnetic tape and/or other appropriate electronic medium. The upgraded version will be accompanied by instructions for the installation of the upgrade. Associated Documentation will be provided for upgraded versions of the Software. 8.2 Acres agrees to provide Crown with six copies of each of the Associated Documentation and any amendments, revisions, supplementary user manuals or other relevant Associated Documentation as Acres may produce or receive from time to time. Two copies will also be provided to the VCGA. 8.3 Acres warrants that the Associated Documentation will contain sufficient information for the proper operation of the Acres Component. 9. TRAINING Acres will provide to three personnel nominated by Crown at mutually acceptable times during the commissioning and acceptance testing of the Acres Component at the Southbank Complex training in relation to the operation and maintenance of the Acres Component as Crown considers appropriate to enable the personnel to operate and maintain the Acres Component confidently and without assistance. 10. PAYMENT 10.1 Subject to this clause 10, Crown agrees to pay the Price to Acres in accordance with the following instalments: (a) 60% of the Price is to be paid to Acres on signing of this agreement; and (b) the final 40% of the Price being the balance of all amounts payable under this agreement will be paid upon Acceptance Notification being given by Crown to Acres. 10.2 The Price is CIF to Melbourne locations (as nominated by Crown) and is inclusive of all taxes and duties (including sales tax and/or a goods and services tax) levied or based on this agreement or the provision of the goods and/or services by Acres to Crown. 10.3 Crown's obligation to pay any amount under this agreement shall remain at all times subject to Acres not being in breach of any material term of this agreement and payment may be withheld by Crown until such breach is rectified by Acres. 10.4 If Acres breaches its obligation to deliver the Hardware and Software it is required to deliver by 1 November 1999 under the Time Line, Acres will have until 30 November 1999 to remedy such breach without penalty, but if Acres fails to remedy such breach by 30 November 1999, the outstanding balance of the Price payable by Crown will be reduced by an amount equal to 1 (one) per cent of the Price for each 15 days that such breach remains unremedied past 30 November 1999. 10.5 If Crown does not give Acceptance Notification to Acres by 29 February 2000 by reason of a failure by Acres to promptly comply with clause 6.4 or clause 6.6, the outstanding balance of the Price payable by Crown will be reduced by an amount equal to 1 (one) per cent of the Price for each 15 days that such failure remains unremedied past 29 February 2000. 11. PRICE 11.1 The Price payable for the Acres Component and all of the rights granted to Crown by Acres under this Agreement are set out in the Price Schedule. 7 11 11.2 Notwithstanding anything else in this agreement, the Price shall be the total amount payable for development, delivery, installation and commissioning of the Acres Component and all services to be performed by Acres under this agreement except for: (a) maintenance services (if any) which are to be negotiated by the parties from time to time; and (b) upgrades of Software and Associated Documentation provided pursuant to clause 8. 12. WARRANTY SUPPORT 12.1 Acres will provide Crown with Warranty Support for the duration of the Warranty Period at no charge to Crown. 12.2 After expiry of the Warranty Period, Acres will offer to Crown maintenance services including telephone, facsimile or remote modem control support in response to any operational difficulties with the Acres Component (including investigation and correction of suspected errors in the Software) available on a 24 hour basis on terms and conditions to be agreed between the parties. 13. HARDWARE ACCEPTANCE Acres shall deliver to Crown samples of the Hardware as specified in the Time Line. Crown shall inspect these samples to assess compliance with the Functional Specification and Crown's instructions as to physical design and appearance and shall either accept or reject the samples. If the samples are accepted by Crown, Acres shall deliver the entire Hardware to Crown in accordance with this agreement. If the samples are rejected, Acres shall rectify any defect identified by Crown and resubmit the samples to Crown for consideration in accordance with this clause. 14. INTELLECTUAL PROPERTY WARRANTIES AND INDEMNITY 14.1 Acres warrants that each of the Software and the Associated Documentation used within the scope of the End User Software License Agreement, do not infringe the Intellectual Property Rights of any person. 14.2 Acres warrants that the use of the Hardware does not infringe the Intellectual Property Rights of any person. 14.3 Acres warrants that all Intellectual Property Rights in and to the Software and Associated Documentation, including without limitation the copyright which Acres has or purports to have are owned by Acres and Acres has the right to grant the rights granted to Crown in this agreement and in the End User Software License Agreement; 14.4 Acres indemnifies Crown (including its officers, servants, agents, assignees and contractors) against all claims, liability, loss, costs and expenses whether direct or indirect which may be incurred by any of them arising out of or in connection with any claim, action or proceeding by a person alleging that the exercise of the rights granted under this agreement by Crown infringes the Intellectual Property Rights of that person ("Claim"). 14.5 Crown shall notify Acres as soon as practicable of any Claim or suspected Claim arising from Crown's use of the Software or any part of it. 14.6 On request from Crown, Acres shall, at its own cost, conduct the defence of a Claim. Acres must observe Crown's reasonable directions relating in any way to that defence or to negotiations for settlement of the Claim. 14.7 Crown shall, if requested by Acres, at Acres's cost, provide Acres with reasonable assistance in conducting the defence of such a Claim 8 12 14.8 Without limiting the generality of clause 14.6, as part of the settlement of any Claim or if a Claim is successful or if Acres agrees (such agreement not to be unreasonably withheld) that there is an infringement of a person's Intellectual Property Rights or Acres believes that the Software is likely to become the subject of a claim of infringement, Acres shall, at its option and cost, either: (a) modify or replace the Software, or any part thereof, or Associated Documentation so as to render the grant of rights to Crown under the terms of this agreement non-infringing; or (b) procure for Crown the rights to continue enjoying the benefit of this agreement. 14.9 If the solutions in clause 14.8(a) or (b) cannot promptly be achieved, Acres must refund to Crown the Price. 15. CONFIDENTIALITY 15.1 All Confidential Information exchanged between the parties under this agreement or during the negotiations preceding this agreement is confidential to them and may not be disclosed to any person except: (a) to employees, legal advisers, auditors and other consultants of the party or its related bodies corporate requiring the Confidential Information for the purposes of this agreement; or (b) with the consent of the party who supplied the Confidential Information; or (c) if the Confidential Information is lawfully in the possession of the recipient of the Confidential Information through sources other than the party who supplied the Confidential Information; or (d) if required by law; or (e) if strictly and necessarily required in connection with legal proceedings relating to this agreement; or (f) the VCGA or persons nominated by the VCGA; or (g) if the Confidential Information is generally and publicly available other than as a result of breach of confidence by the person receiving the Confidential Information. 15.2 A party disclosing Confidential Information under clauses 15.1(a), (b) or (e) must use all reasonable endeavours to ensure that persons receiving Confidential Information from it do not disclose the Confidential Information except in the circumstances permitted in clause 14.9. 15.3 A party who has received Confidential Information from the other party under this agreement must, on the request of the other party, immediately deliver to the other party all documents or other materials containing or referring to that Confidential Information which is in its possession, power or control or in the possession, power or control of persons who have received Confidential Information from it under clauses 15.1(a), (b) or (e). 15.4 For the purposes of this agreement, each party (the "Receiving party") must do all things necessary to ensure that the remaining party may receive and handle any Confidential Information received by the Receiving party from any third person in the course of conducting any activities relevant to this agreement on the same terms and conditions as to confidentiality which apply to the Receiving party. 15.5 The obligations of the Parties in this clause 14.9 survive termination of this Agreement. 9 13 16. WARRANTIES 16.1 Acres warrants that from execution of this agreement until the end of the Warranty Period, the Software and the Hardware will be free from defects and in good working order. In the event of a defect in the Software or the Hardware, Acres will promptly restore the Software or the Hardware to good working condition by adjustment, repair or replacement, at Acres' option. Acres shall pay any shipping expenses necessary to undertake such adjustment, repair or replacement and return the Hardware or Hardware to Crown. In addition to any other warranty, express or implied in this agreement, Acres warrants that from the execution of this agreement until the end of the Warranty Period: (a) Acres has or will immediately procure the requisite technology, skill/personnel and ability sufficient to enable it to perform its obligations under this agreement; (b) the Hardware will at all times and for all purposes relevant to this agreement conform with the samples agreed to by Crown as specified in the Time Line and comply with the Functional Specification and Crown's instructions as to physical design and appearance. (c) the Hardware is suitable for normal use as reasonably contemplated by Crown; (d) the Acres Component and all items purchased under this agreement shall be free from material defects, shall be properly installed and shall perform in accordance with the Functional Specification; (e) the Associated Documentation contains sufficient information to enable Crown to use and maintain the Software; (f) any replacement software (excluding upgrades) provided in accordance with the terms of this agreement shall satisfy the warranties contained in this agreement; (g) the Acres Component will be of merchantable quality and will be fit for purpose and shall otherwise be delivered and installed without any material defects in material and workmanship; (h) the Acres Component will be Year 2000 Compliant; (i) the Acres Component and all items purchased under this agreement will comply, in all respects, with the Functional Specification; 16.2 Any unauthorised modification, alteration or revision of all or a portion of the Software or Hardware shall cause the warranties described in this clause to be null and void. 16.3 Except as specifically provided in this agreement, there are no other warranties, express or implied. Acres acknowledges that the warranties in this clause 16 do not affect the operation of the warranties given by Acres in clauses 14 and 17 and those warranties shall continue to apply after the expiration of the Warranty Period. 17. REPRESENTATIONS AND WARRANTIES Each party warrants and represents to the other party, as an inducement to the other party to enter into this agreement that at the date of this agreement: (a) its execution and delivery of this agreement has been properly authorised by all necessary corporate action; 10 14 (b) this agreement constitutes a legal, valid and binding obligation on it and, subject to discretions exercisable by the courts in relation to the granting of equitable remedies, is enforceable in accordance with its terms by appropriate legal remedy; (c) this agreement does not conflict with or result in the breach of or default under any provision of its memorandum or articles of association or any material term or provision of any agreement or deed or any writ, order or injunction, judgement, law, rule or regulation to which it is a party or is subject, or by which it is bound; (d) all information provided by the party in writing is true and correct; and (e) to Acres's knowledge, there are no actions, claims, proceedings or investigations pending or threatened against it or by, against or before any person which may have a material effect on the subject matter of this agreement. 18. LIABILITY OF ACRES IS LIMITED 18.1 Subject to any provision of this agreement which provides for an express remedy or indemnity for breach of this agreement, Acres is not liable to Crown for any loss or damage (including consequential loss and damage) suffered or incurred or arising directly or indirectly as a result of Acres's performance of this agreement or its supply of the Acres Component and services provided for in this agreement. 18.2 Except for warranties and terms implied by law, only those warranties and terms which are expressly contained in this agreement apply. If any further warranty or term is, by statute implied into this agreement ("Statutory Term") and that statute avoids or prohibits provisions in a contract excluding or modifying the application or exercise of or liability under that Statutory Term, that Statutory Term is deemed to be included in this agreement, and the liability of Acres for any breach of a Statutory Term is limited, at Acres's option, to any one or more of the following: (a) If the breach relates to goods, promptly: (i) replacing the goods or supplying equivalent goods; (ii) repairing the goods; (iii) paying the cost of replacing or repairing the goods or of acquiring equivalent goods; or (iv) paying the cost of having the goods repaired; and (b) If the breach relates to services, promptly: (i) supplying the services again; or (ii) paying the cost of having the services supplied again. 19. TERMINATION 19.1 Either party may terminate this Agreement forthwith upon the happening of any of the following events: (a) the other party commits a material breach of this agreement and fails to remedy such breach within thirty (30) days after notice has been given to the party in breach; 11 15 (b) the other party commits an act of insolvency or a petition is presented for winding-up of the other or a resolution is passed for the winding-up of the other otherwise than for the purpose of amalgamation or reconstruction; (c) the other party enters a compromise or arrangement with creditors or a receiver or official manager or administrator is appointed; or 19.2 In the event that this agreement is terminated under clause 19.1 then: (a) each party shall do all such things and execute all such documents as its attorneys may reasonably request in order to record or give effect to such termination; and (b) each party shall upon or within a reasonable time after termination release or return to the other party all documents and other things in tangible form which contain any Confidential Information obtained from the other party pursuant to this Agreement or if any Confidential Information is embodied invaluable property belonging to the party receiving the Confidential Information, the receiving party shall certify that it has observed its obligations by erasure or other appropriate means as authorised by the party to whom such Confidential Information belongs. 19.3 In the event that this agreement is terminated by Crown because of: (a) a material breach by Acres which is unremedied in accordance with clause 19.1(a), Acres shall refund to Crown the Price or any part of the Price paid by Crown; (b) an insolvency event of Acres identified in clause 19.1(b) or 19.1(c) which occurs prior to Crown giving Acceptance Notification, Acres shall deliver the Software at the stage of completion at the time of termination (including the source code to the Software) to Crown so as to enable Crown to complete the upgrade of the System without any further payment by Crown. Title to any Hardware delivered to Crown by Acres shall pass to Crown. 19.4 In the event that this agreement is terminated by Acres because of a material breach by Crown which is unremedied in accordance with clause 19.1(a), and Crown has paid the Price or any part of the Price, Crown shall be entitled to: (a) retain, without further payment, all Hardware supplied by Acres to Crown under this agreement (and title to such Hardware shall pass to Crown); and (b) a refund of the difference between the Price or any part of the Price paid by Crown to Acres and the reasonable cost incurred by Acres as at the date of termination in respect of: (i) the Hardware; and (ii) development of the Acres Component. 20. CONTROLLED CONTRACT PROVISIONS 20.1 If this agreement falls within the definition of a controlled contract under section 29(1) of the Casino Control Act 1991 (Vic) (the "Act"), this clause is included in the agreement. 20.2 This agreement is of no force or effect unless or until either: (a) the Casino Control Authority ("the Authority") has approved the entry into this Agreement; or 12 16 (b) the period during which the Authority is empowered to give written notice of its objection to the proposed entry into this agreement has expired without notice having been given to Crown by the Authority, in accordance with section 30 of the Act. 20.3 This agreement may be terminated by the Authority pursuant to its powers under section 32 of the Act or by any party upon receipt of a written notice from the Authority lawfully requiring the termination of this agreement, in accordance with the terms of that notice. 20.4 Acres must, if requested by Crown, co-operate with Crown and do all things which are reasonably required by Crown to persuade the Authority, in accordance with section 32 of the Act, as to why this agreement should not be terminated. 20.5 The parties acknowledge that, in accordance with section 33 of the Act: (a) termination under clause 20.3 does not affect a right acquired, or a liability incurred, before that termination; and (b) no liability for breach of contract is incurred by a party by reason only of that termination. 20.6 This agreement may only be varied, amended or supplemented by written document which includes a provision to the effect of clause 20.2 and is signed by the parties. 20.7 If the Act is amended so that there are amended or additional requirements which must be satisfied prior to the entry into or the giving effect to this agreement, this agreement is of no force or effect until those requirements are satisfied or waived by the Authority. The provisions of clause 20.2 only have force or effect while they reflect the requirements of section 30 of the Act. 21. FORCE MAJEURE EVENTS 21.1 DEFINITION "FORCE MAJEURE EVENT," means any act, occurrence or omission, as a result of which the party relying on it is prevented from or delayed in performing any of its obligations under this agreement, and which is beyond the control of that party, including (without limitation) civil disturbance or commotion, act of God, war, blockade, riot, revolution, earthquake, flood, storm, tempest, other natural calamity, prolonged atmospheric interference and legal or government enactment, order, requirement or regulation. 21.2 A party that becomes aware of any matter likely to constitute a Force Majeure Event affecting the obligations of either party must immediately give notice of that fact, and of all relevant particulars, to the other party. 21.3 Immediately a Force Majeure Event occurs a party the performance of whose obligations is affected by that Force Majeure Event (the "Affected Party") must give to the other party notice containing full particulars of the Force Majeure Event including its nature and likely duration, the obligations affected by it and the nature and extent of its effect on those obligations ("Suspension Notice"). 21.4 The obligations of the Affected Party are suspended, to the extent that they are affected by the Force Majeure Event, from the date the Affected Party gives a Suspension Notice in respect of that Force Majeure Event until the cessation of the Force Majeure Event. 21.5 The Affected Party must use its best endeavours to remove the effect of each Force Majeure Event affecting its performance of this agreement (except in the case of industrial action where the Affected Party must use reasonable endeavours to resolve it). 13 17 21.6 During the period of suspension of any obligation of the Affected Party under clause 21.4 the other party may (but need not) make alternative arrangements for the performance, whether by another person or otherwise, of any obligation so suspended without incurring any liability to the Affected Party. 21.7 An Affected Party must give immediate notice to the other party of the cessation of each Force Majeure Event the subject of a Suspension Notice and must immediately after cessation of that Force Majeure Event resume performance of any obligation suspended as a result of it. 21.8 If a Force Majeure Event continues for a period of one month after a Suspension Notice is given in respect of that Force Majeure Event, this Agreement may be terminated by either party on not less than five business days' notice given to the other without any liability for breach of contract in respect of that termination. 22. DISPUTES 22.1 Any dispute arising in connection with this agreement which cannot be settled by negotiation between the parties or their representatives shall be submitted to arbitration in accordance with the Rules for the Conduct of Commercial Arbitrations for the time being of the Institute of Arbitrators and Mediators Australia. During such arbitration, both Parties may be legally represented. 22.2 Prior to referring a matter to arbitration pursuant to subclause 1, the Parties shall: (a) formally refer the dispute to their respective contract managers for consideration; (b) in good faith explore the prospect of mediation. 22.3 Nothing in this clause shall prevent a Party from seeking urgent equitable relief before an appropriate court. 23. NOTICES 23.1 A notice under this agreement must be signed by or on behalf of the person giving it, it must be addressed to the person to whom it is to be given and be: (a) delivered at that person's address; or (b) sent by pre-paid mail to that person's address; or (c) transmitted by facsimile to that person's address. 23.2 A notice given to a party in accordance with this clause is treated as having been given and received: (a) if delivered to a party's address, on the day of delivery if delivered before 12 noon on that business day, otherwise on the next business day; (b) if sent by pre-paid mail, on the third business day after posting; (c) if transmitted by facsimile to a party's address and a correct and complete transmission report is received by the transmitting party, on the day of transmission if the transmission is completed before 12 noon on that business day, otherwise on the next business day. 23.3 For the purposes of this clause the address of a party is the address set out adjacent to the parties name on page 1 of this agreement or as a party may otherwise notify the other under this clause. 14 18 24. MUTUAL CO-OPERATION Each party agrees to provide the other party with the necessary assistance and cooperation in order to facilitate the other party's performance of its obligations under this agreement. 25. GENERAL 25.1 NO ASSIGNMENT No party to this agreement shall assign or purport to assign its rights or obligations under this agreement without the prior consent of the other party. 25.2 FURTHER ASSURANCES Each party agrees to do all such things and execute all such deeds, instruments, transfers or other documents as may be necessary or desirable to give full effect to the provisions of this agreement and the transactions contemplated by it. 25.3 WAIVER The non-exercise of or delay in exercising any power or right of a party does not operate as a waiver of that power or right nor does any single exercise of the power or right preclude any other or further exercise of it or the exercise of any other power or right. A power or right may only be waived in writing, signed by the party bound by the waiver. 25.4 AMENDMENT This agreement may only amended or supplemented in writing, signed by the parties. 25.5 SEVERABILITY Any provision in this agreement which is invalid or unenforceable in any jurisdiction is to be read down for the purposes of that jurisdiction, if possible, so as to be valid and enforceable, and is otherwise capable of being severed to the extent of the invalidity or unenforceability, without affecting the remaining provisions of this agreement or affecting the validity or enforceability of that provision in any jurisdiction. 25.6 ENTIRE AGREEMENT This agreement is the entire agreement of the parties on the subject matter. The only enforceable obligations and liabilities of the parties in relation to the subject matter are those that arise out of the provisions contained in this agreement. All representations, communications and prior agreements in relation to the subject matter are merged in and superseded by this agreement. 25.7 EXCLUSION OF AGENCY PARTNERSHIP AND JOINT VENTURE Nothing is this agreement is to be treated as creating a partnership or joint venture between the parties under the laws of any applicable jurisdiction and no party may act or has any authority to act as agent of or in any way by to commit the other party to any obligations. 25.8 PERFORMANCE OF FUNCTIONS Each party shall carry out its responsibility under this agreement: (a) in a timely and expeditious manner to the reasonable satisfaction of the other; 15 19 (b) in a good, commercially prudent and reasonable manner; and (c) shall conduct itself in a manner designed to minimise any disruption to the other party's activities (or third parties' activities) being conducted at the Southbank Complex. 25.9 GOVERNING LAW This agreement is governed by the law in force in the State of Victoria, Australia. The parties submit to the exclusive jurisdiction of the courts of Victoria and any courts which may hear appeals from those courts in respect of any proceedings in connection with this agreement. 25.10 EXPENSES Each party shall bear and be responsible for its own legal and accounting costs and expenses in connection with the preparation, completion and carrying into effect of this agreement, unless the parties otherwise agree. EXECUTED as an agreement SIGNED, SEALED and DELIVERED for ) CROWN LIMITED ACN 006 973 262 ) ----------------------------------- under power of attorney ) Signature of attorney in the presence of: ) PETER ALAN DAVID RONEC - ----------------------------------- ----------------------------------- Signature of witness Name of attorney 26 April 1995 - ----------------------------------- ----------------------------------- Name of witness Date of power of attorney EXECUTED by ACRES GAMING INC: - ----------------------------------- ----------------------------------- Signature of director Signature of director/secretary - ----------------------------------- ----------------------------------- Name of director Name of director/secretary 16 20 SCHEDULE 1 FUNCTIONAL SPECIFICATION Confidential portion omitted and filed separately with the SEC 17 21 SCHEDULE 2 PRICE SCHEDULE
- ------------------------------------------------------------------------------- COMPONENT UNIT PRICE QTY SUB TOTAL - ------------------------------------------------------------------------------- Hardware - ------------------------------------------------------------------------------- BE2 UPGRADE KITS INCLUDING: * 2600 * Large VFD, inclusive of inclusive of all taxes, all taxes, Illuminated Card Reader, duties and duties and shipping shipping Bonus Button, Power Supply, 12 button backlit keypad, Player tracking brackets including assembly and testing of VFD, Card Reader, Bonus Button and Keypad - ------------------------------------------------------------------------------- Software - ------------------------------------------------------------------------------- ACRES COMPONENT AS PER THE FUNCTIONAL * 1 * SPECIFICATION INCLUDING: Machine Credits Transfer Card Balance Adjustment Cashless Transaction Server Key Distribution Server Cashless Transaction Change Booth Terminal Transaction Replication Database BE2 incorporating ASP 1000 V2.04 plus current version of ASP 1000 Automated Xtra Credits(TM) Transaction Balancing Software Concentrator Translator Bonus Server Configuration WorkStation Bank Controller - ------------------------------------------------------------------------------- Direct Costs - -------------------------------------------------------------------------------
18 22 - ------------------------------------------------------------------------------- INSTALLATION, COMMISSIONING SUPPORT AND * 1 * DOCUMENTATION - ------------------------------------------------------------------------------- TOTAL $A8,250,000 - -------------------------------------------------------------------------------
THE PRICE IS INCLUSIVE OF ALL TRAVEL, FOOD AND LODGING COSTS FOR THE PROVISION OF SUCH ON-SITE PERSONNEL OF ACRES AS ARE REASONABLY REQUESTED BY CROWN TO BE PRESENT AT THE SOUTHBANK COMPLEX UNTIL CROWN GIVES ACCEPTANCE NOTIFICATION. 19 *Confidential portion omitted and filed separately with the SEC 23 SCHEDULE 3 TIME LINE * CROWN and Acres execute System Upgrade Agreement and Crown pays to Acres first instalment of the Price. * ARISTOCRAT delivers ASP specifications and support kits to designated EGM vendors * ACRES delivers samples of Player Tracking Brackets (as referred to in section 8.2 of the Functional Specification) for Aristocrat Mk V, Aristocrat MVP, IGT GameKing and Olympic OA3 EGMs with installed BE-2 upgrade kits (as referred to in section 3.3(c) of the Functional Specification) to Crown for approval ARISTOCRAT delivers final modified ASP 1000 simulator to each game vendor for integration testing. * ACRES obtains ESD and safety approval of large VFD and 12 Button Backlit Keypad * ACRES installs upgraded system software in Crown testbed. Crown commences initial integration testing and notifies VCGA that the System is available for testing. ACRES installs Software comprising MCI emulator version of BE-2 code in Crown test bed. * ACRES BE-2 MCI emulator Software recommended for approval * ACRES begins installation of Automated PointPlay and Cashless Wagering Hardware and Software in Crown test bed CROWN installs Cashless version of Syco in test bed. All EGM vendors begin installation of upgraded ASP protocol in Crown test bed. ACRES obtains VCGA approval of MCI emulator software for BE-2 upgrade kits ACRES ships first of three weekly shipments of 800, 900 and 900 BE-2 upgrade kits (2,550 of which are installed within Player Testing Brackets) tested * CROWN technicians begin installation of BE-2 upgrade kits on casino floor VCGA begins final testing of Acres and EGM Hardware and Software * ACRES Cashless Wagering and PointPlay Software recommended for final approval CROWN Syco software recommended for final approval CROWN finishes installation of all BE-2 upgrade kits on floor. * CROWN completes installation of System Hardware Crown commences installation of ASP Version 2.04 EGM Software. CROWN seeks approval to commence trial of new System. 20 *Confidential portion omitted and filed separately with the SEC 24 SCHEDULE 4 END USER SOFTWARE LICENSE AGREEMENT 1.1 END-USER SOFTWARE LICENSE AGREEMENT This End-User Software License Agreement ("Agreement") is made effective on the date last signed below between Acres Gaming Incorporated, a Nevada corporation, having an office at 815 N.W. Ninth Street, Corvallis, Oregon 97330 ("Licensor") and Crown Limited ACN 006 973 262, a corporation organized under the laws of Australia and having an office at 99 Queensbridge Street, Southbank Victoria, Australia ("Licensee"). 1. LICENSE (a) In accordance with the terms herein, Licensor grants to Licensee, and Licensee accepts from Licensor, a perpetual non-exclusive and non-transferable license to use the Licensor's software and firmware as described in Schedule A to this agreement (the "Software"). (b) The Software shall be used only on equipment and at location(s) identified in Schedule B. The Software shall be used only for Licensee's own business, which includes operating gaming devices for the benefit of its customers and clients. Licensee shall not: (1) permit any third party to use the Software, (2) use the Software for any purpose other than operating gaming devices, or (3) allow access to the licensed Software through terminals located outside Licensee's business premises identified in Schedule B. 2. DESCRIPTION OF OTHER RIGHTS AND LIMITATIONS (a) Licensee may not reverse engineer, decompile, or disassemble the Software, except and only to the extent that such activity is expressly permitted by applicable law notwithstanding this limitation. (b) Licensee must maintain all copyright notices on all copies of the Software. (c) Licensee may not distribute copies of the Software to third parties, save for copies which the Licensee must provide to the Victorian Casino and Gaming Authority for the Licensee to comply with its obligations under the Casino Control Act 1991 (Vic).. (d) Licensee may not adapt or modify the Software. 3. NO ROYALTY The license granted herein is granted by Licensor pursuant to the System Upgrade Agreement between Licensee and Licensor dated _______, and is granted in consideration of such Agreement. No further license fee or royalty shall be payable to Licensor by Licensee. 4. SOFTWARE OWNERSHIP Licensor warrants and represents that it is the owner of the Software and all portions thereof and that it has the right to modify same and to grant Licensee a license for its use. 5. TITLE TO SOFTWARE, CONFIDENTIALITY, AND INSPECTION (a) The Software and all programs developed hereunder and all copies thereof are proprietary to Licensor and title thereto remains in Licensor. All applicable rights to patents, copyrights, trademarks and trade secrets in the Software or any modifications made at Licensee's request are and shall 21 25 remain in Licensor. Licensee shall not sell, transfer, publish, disclose, display or otherwise make available the Software or copies thereof to others. Licensee agrees to secure and protect each module, software product, documentation and copies thereof in a manner consistent with the maintenance of Licensor's rights therein and to take appropriate action by instruction or agreement with its employees or consultants who are permitted access to each program or software product to satisfy its obligations hereunder. All copies made by the Licensee of the Software and other programs developed hereunder, including translations, compilations, partial copies with modifications and updated works, are the property of Licensor. Violation of any provision of this paragraph shall be the basis for immediate termination of this License Agreement. (b) To assist Licensor in the protection of its proprietary rights, Licensee shall permit representatives of Licensor to inspect at all reasonable times any location at which Software is being used. 6. WARRANTIES AND INDEMNITIES The Licensor gives the warranties and indemnities in respect of the Software that are set out in the System Upgrade Agreement. 7. TERMINATION (a) Licensor shall have the right to terminate this agreement and license(s) granted herein: (i) in the event that Licensee, its officers or employees violates any provision of this License Agreement and such violation is not remedied by the Licensee within thirty (30) days of written notice by the Licensor, and (ii) in the event Licensee (A) terminates or suspends its business; (B) becomes subject to any bankruptcy or insolvency proceeding under Federal or state statute or (C) becomes insolvent or becomes subject to direct control by a trustee, receiver or similar authority. (b) In the event of termination by reason of the Licensee's failure to comply with any part of this agreement, or upon any act which shall give rise to Licensor's right to terminate, Licensor shall have the right, to terminate the license(s) in accordance with clause 7(a) and take immediate possession of the Software and documentation and all copies wherever located. Within five (5) days after termination of the license(s), Licensee will return to Licensor the Software in the form provided by Licensor or as modified by the Licensee, or upon request by Licensor destroy the Software and all copies, and certify in writing that they have been destroyed. Termination under this paragraph shall not relieve Licensee of its obligations regarding confidentiality of the Software. (c) Without limiting any of the above provisions, in the event of termination as a result of the Licensee's failure to comply with any of its obligations under this License Agreement, the Licensee shall continue to be obligated for any payments due. Termination of the license(s) shall be in addition to and not in lieu of any equitable remedies available to Licensor. (d) In the event that the Licensor (A) terminates or suspends its business; (B) becomes subject to any bankruptcy or insolvency proceeding under Federal or state statute or (C) becomes insolvent or becomes subject to direct control by a trustee, receiver or similar authority, the provisions of the source code deposit agreement referred to in clause 4.4 of the System Upgrade Agreement shall apply. 8. LICENSED LOCATIONS Use of the Software by the Licensee at any location other than those described above in Article 1 shall be the basis for immediate termination of this License Agreement. Termination of the License Agreement shall be in addition to, and not in lieu of, any equitable remedies available to Licensor. 9. LIMITATION OF LIABILITY 22 26 EXCEPT FOR NON-EXCLUDABLE WARRANTIES AND TERMS REQUIRED BY STATUTE, ONLY THOSE WARRANTIES AND TERMS WHICH ARE EXPRESSLY CONTAINED IN THIS AGREEMENT AND THE SYSTEM UPGRADE AGREEMENT APPLY. 10. GENERAL PROVISIONS (a) Notice. Any notice, request, demand, or other communication that is required or permitted under this Agreement shall be deemed properly given if it is deposited in the U.S. mail, certified, return, receipt requested, postage prepaid, properly addressed to the respective addresses as set forth above. (b) Limitation of Action. No action, regardless of form, arising out of this Agreement may be brought by Licensee more than one year after the cause of action has arisen. (c) Attorneys' Fees. If either party brings any legal action or other proceeding for breach of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs. (d) Divisibility. If any provision of this Agreement is found to be prohibited by law and invalid, or for any other reason if any provision held to be unenforceable, in whole or in part, such provision shall be ineffective to the extent of the prohibition or unenforceability without invalidating or having any other adverse effect upon any other provision of this Agreement. (e) Entire Agreement. This Agreement shall be read in conjunction with the System Upgrade Agreement and together with that agreement, shall constitute the entire agreement between the parties relating to the subject matter. No extension, modification or amendment of this Agreement shall be binding upon a party unless such extension, modification or amendment is set forth in a written instrument, which is executed and delivered on behalf of such party. In Witness Whereof, the parties hereto have duly executed this Agreement, including the Exhibits attached hereto and incorporated herein by reference, as of the date last signed below. ACRES GAMING INCORPORATED CROWN LIMITED By: By: -------------------------------- -------------------------------- Title: Title: ----------------------------- ----------------------------- Date: Date: ------------------------------ ------------------------------ 23 27 SCHEDULE A (TO END USER SOFTWARE LICENSE AGREEMENT) DESCRIPTION OF SOFTWARE THE SOFTWARE SUPPLIED BY THE LICENSOR UNDER THE SYSTEM UPGRADE AGREEMENT DATED [INSERT DATE] BETWEEN THE LICENSOR AND THE LICENSEE AS DEFINED IN THAT AGREEMENT, INCLUDING SOFTWARE FOR THE FOLLOWING ITEMS: (a) Translator (b) Concentrator (c) Bonus server (d) Configuration work station (e) Bank controller (f) Bonus engine 2 (g) Coinless transaction server (h) Coinless transaction database (i) Key distribution centre (j) Cashless transaction enquiry terminal 24 28 SCHEDULE B (TO END USER SOFTWARE LICENSE AGREEMENT) LICENSED LOCATION CROWN ENTERTAINMENT COMPLEX, SOUTHBANK, VICTORIA, AUSTRALIA. 25 29 SCHEDULE 5 LIST OF EQUIPMENT TO BE RETURNED TO ACRES 2,600 units of: (k) Machine Communication Interface (MCI); (l) Magnetic Stripe Card Reader; (m) Three colour illuminated bezel; (n) Bonus button; and (o) Vacuum Florescent Display (VFD). 26 EX-10.13 4 EQUIPTMENT SALE AGREEMENT 1 EXHIBIT 10.13 EQUIPMENT SALE AGREEMENT This Equipment Sale Agreement (the "Agreement"), effective June 30, 1999, is entered into by and between AGI Distribution , Inc., dba Acres Gaming, having a place of business at 815 N.W. 9th Street, Corvallis, OR 97330 ("Acres") and Detroit Entertainment, L.L.C. dba MotorCity Casino, having a place of business at 1922 Cass, Detroit, MI 48226 ("Customer"). BACKGROUND Customer desires to engage Acres to provide the Game Hardware Kits (as defined below) for a state of the art networked gaming, bonusing, slot accounting, and player tracking system (the "System") at the MotorCity Casino, located temporarily at 2901 Grand River, Detroit, MI 48201 (the "Casino Location"), and Acres desires to provide Customer with such Game Hardware Kits. Accordingly, the parties agree as follows: 1. DEFINITIONS - - "Game Hardware Kits" means the components necessary to integrate Games into the System, namely, a player tracking card reader, a bonus button, a fluro flasher, a keypad, a VFD display, a location identifier, harness cabling, internal game electronics, and a sufficient number of bank controllers for operation of the System. - - "Games" means the gaming machines, including, but not limited to, slot machines and video poker machines, to be used by Customer at the Casino Location. 2. DELIVERY OF GAME HARDWARE KITS Not later than September 1, 1999, Acres will deliver 2628 Game Hardware Kits to Customer and/or such vendors as Customer designates, at such locations as Customer designates. Items shipped by Acres to or for the benefit of Customer will be shipped FOB Casino Location or such other location as is designated by Customer. 3. PRICE AND PAYMENT TERMS (a) Price. Customer shall pay Acres [Confidential portion omitted and filed separately with the SEC], for a total price of $3,350,700, plus applicable taxes (the "Total Price"). (b) Payment Schedule. Not later than September 20, 1999, Customer shall pay Acres the Total Price. 4. INSTALLATION Acres shall install or, where applicable, supervise the installation of the Game Hardware Kits in 2 good working order, including testing and verifying that they have been successfully installed. Customer and Acres shall cooperate fully with each other with respect to such activities. 5. WARRANTY ACRES WARRANTS THAT FOR A PERIOD OF TWELVE (12) MONTHS FOLLOWING "GO LIVE", THE GAME HARDWARE KITS PROVIDED HEREUNDER WILL BE FREE FROM DEFECTS AND IN GOOD WORKING ORDER. IN THE EVENT OF A DEFECT, ACRES WILL EXPEDITIOUSLY RESTORE THE APPLICABLE GAME HARDWARE KITS TO GOOD WORKING CONDITION BY ADJUSTMENT, REPAIR OR REPLACEMENT, AT ACRES' OPTION. EXCEPT AS SPECIFICALLY PROVIDED IN THIS AGREEMENT, THERE ARE NO OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 6. SUPPLEMENTAL REMEDIES In the event that any of the Game Hardware Kits supplied pursuant to this Agreement do not substantially conform to specifications or representations set forth in this Agreement, are not suitable for use at the Casino Location, or are not timely delivered, installed or tested, in addition to other rights and remedies available to Customer at law or equity, Customer may elect to: (1) receive a refund of the payment for said Game Hardware Kit(s) provided Customer returns the applicable Game Hardware Kit(s) to Acres or (2) retain said Game Hardware Kit(s) and have Acres procure and provide suitable alternative Game Hardware Kit(s). 7. LIMITATION OF LIABILITY In no event shall Acres' liability for Customer's damages under this Agreement exceed the Total Price. 8. TITLE Title to each Game Hardware Kit shall vest in Customer upon receipt by Customer or its designated vendor, as applicable, of the applicable Game Hardware Kit. 9. INDEMNITY (a) Acres at its own expense will defend, indemnify and hold Customer harmless in any action brought against Customer to the extent that it is based on a claim that any one or more of the Game Hardware Kits or any component(s) thereof infringe(s) any patents, copyrights, licenses or other property rights, provided that Acres is promptly notified in writing of such claim. Acres shall have the right to control the defense of all such claims, lawsuits and other proceedings. In no event shall Customer settle any such claim, lawsuit or proceeding without Acres' prior written approval. 3 (b) If, as a result of any claim of infringement against any patent, copyright, license or other property right, Acres or Customer are enjoined from using any one or more of the Game Hardware Kits or any component(s) thereof, or if Acres believes that any one or more of the Game Hardware Kits or any component(s) thereof are likely to become the subject of a claim of infringement, Acres at its option and expense may procure the right for Customer to continue to use the applicable Game Hardware Kits or component(s) thereof or replace or modify same with components of equal quality and function so that they are non-infringing. The foregoing Subsections (a) and (b) state the entire liability of Acres with respect to infringement of any license, property rights, copyrights or patents by the Game Hardware Kits or any component(s) thereof. (c) Acres will defend, indemnify and hold Customer harmless from and against any claims, demands, liability(ies) or judgments resulting from a malfunction of any one or more of the Game Hardware Kits or any component(s) thereof because of design or manufacturing defects, or otherwise attributable to Acres' acts or omissions. Customer will defend, indemnify and hold Acres harmless from and against any claims, demands, liability(ies) or judgments resulting from Customer's breach of this Agreement, negligence in operation of the Game Hardware Kits or any component(s) thereof, or otherwise attributable to Customer's acts or omissions. 10. GENERAL PROVISIONS (a) Force Majeure. Neither party shall be responsible for any failure to perform or delay in performing any of its obligations hereunder where and to the extent that such failure or delay results from a force majeure event, meaning: strike, boycott, lockout or other labor trouble; storm, fire, earthquake or other Act of God; riot, civil disturbance, or any act of war or of the public enemy; shortage, unavailability or disruption in the supply of electrical or other utility service; or any other cause or contingency beyond the control of the applicable party, but only during such time as such party is unable due to a specified reason herein to perform its obligations hereunder. Licensing delays shall not be considered a force majeure event. (b) Attorneys' Fees. If either party brings any legal action or other proceeding for breach of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs. (c) Divisibility. If any provision of this Agreement is found to be prohibited by law and invalid, or for any other reason if any provision is held to be unenforceable, in whole or in part, such provision shall be ineffective to the extent of the prohibition or unenforceability without invalidating or having any other adverse effect upon any other provision of this Agreement. (d) Licensing. Acres warrants that it holds all requisite licenses, permits and/or approvals required for it to perform all of its obligations hereunder and shall comply with all applicable codes, laws, ordinances, approvals, rules and regulations. Acres understands and acknowledges that this Agreement, at Customer's discretion, may be subject to Acres and its principals being found suitable by Customer's Compliance Committee. Notwithstanding any other provision in this Agreement to the contrary, Customer may terminate this Agreement without further 4 obligation or liability to Acres if, in the judgment of Customer's Compliance Committee, the relationship with Acres or Acres' principals could negatively impact Customer's business or the business of Mandalay Resort Group or any of its subsidiaries or affiliates. (e) Addendum. For additional terms and conditions, see the Addendum attached hereto and incorporated herein by this reference. In the event of any inconsistency between this Agreement and the Addendum, the Addendum shall control. (f) Entire Agreement. This Agreement, including the Addendum, constitutes the entire agreement between the parties relating to its subject matter and supersedes all prior or contemporaneous negotiations or agreements, whether oral or written, relating to the subject matter hereof. No extension, modification or amendment of this Agreement shall be binding upon a party unless such extension, modification or amendment is set forth in a written instrument, which is executed and delivered on behalf of such party. (g) Counterparts/facsimile. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute a single Agreement. Each party may rely upon the facsimile signature of the other. The parties hereto have duly executed this Agreement the 16th day of September, 1999. AGI DISTRIBUTION, INC. DETROIT ENTERTAINMENT, L.L.C. By: ___________________________ By: ______________________________ Title: ________________________ Title: ___________________________ 5 ADDENDUM 1. This Agreement is subject to review by the Michigan Gaming Control Board ("Board") for compliance with the Michigan Gaming Control and Revenue Act, MCL 432.201, et. seq., as amended, supplemented, or construed, and the rules, regulations and orders promulgated pursuant thereto, plus other such requirements, if any, as are imposed by the Board (collectively, the "MGCB Requirements"). Because the Board currently requires inclusion of the following language in every contract that Detroit Entertainment signs, the following language, to the extent applicable, is made a part of the Agreement (with the term "contract" referring to the Agreement, the terms "Applicant" and "Licensee" referring to Detroit Entertainment, and the term "Contractor" referring to Vendor): (a) Upon execution of this contract and in accordance with the Michigan Gaming Control and Revenue Act ("Act") MCL 432.201, et. seq., and the rules promulgated pursuant thereto ("Rules", as well as Michigan Gaming Control Board ("Board") orders and regulations, the Contractor shall cooperate with the Applicant or Licensee and its designees and provide information on an as needed basis, directly or, if so directed by the Applicant or Licensee, through the Applicant or Licensee to representatives of the Board regarding this contract and its implementation. In addition, the Contractor shall allow the Board or its representatives on an as needed basis, to inspect the books and records of the Contractor regarding this contract. (b) The Contractor and any and all subcontractors shall adhere to and comply with the following: (i) The Act and the Rules, orders and regulations of the Board issued and to be issued thereunder, as may hereafter be amended, supplemented or construed. The Contractor further acknowledges that the Act imposes and will continue to impose requirements upon the Contractor, and any and all subcontractors, and the Applicant or Licensee, and may call for the submission and approval of this contract by the Board or its designees. (ii) Any and all requirements imposed upon each of them by the Act and the Board, including, but not limited to, any licensing, notification, disclosure, or registration requirements imposed thereby. The Contractor and all subcontractors shall assist the Applicant or Licensee in complying with any requirements imposed on the Applicant or Licensee by the Act or Board by reason of the project or work contemplated hereunder. (iii) All applicable federal, state, county, city, local or other statues, ordinances, rules and regulations and other laws including, but not limited to, the aforesaid statutes and administrative rules and regulations. (c) The Contractor shall supervise and oversee compliance with the requirements of the Act by the Contractor and by each of the Contractor's associates, employees, consultants and all persons, contractors, subcontractors and any other consultants and engineers retained by the Contractor in connection with the Project (as defined below). The Contractor shall prepare such reports as shall be required by the Board. (d) The Contractor shall qualify to do business and obtain such license, identification number, registration and other permits as may be required for the performance of the services required to be performed by the Contractor under this contract. (e) This contract shall be subject to review by the Board for compliance with the Act and Rules and is subject to termination if so ordered by said Board. If the Board should disapprove of or order termination of this contract by reason of finding that the Contractor or any person associated with the Contractor, or any of their affiliated companies, is unsuitable or is otherwise prohibited from doing business with Applicants or Licensees, neither the Applicant or Licensee, nor any of its members, partners, shareholders, officers, directors, or employees, shall be liable in any way to the Contractor by reason of such disapproval or termination. 6 (f) If the Board should disapprove of or order termination of this contract by reason of finding that the Applicant or Licensee or any person associated with the Applicant or Licensee or any of their affiliated companies, is unsuitable or is otherwise prohibited from doing business with Applicants or Licensee, said parties shall not be liable in any way for any consequences, losses or damage suffered or incurred by the Contractor by reason of such disapproval or termination. (g) Detroit Entertainment is entitled to terminate this contract if the Board determines that this contract does not comply with the Act or the MGCB Requirements. 2. Detroit Entertainment is also required by agreement with the City of Detroit to include in its contracts certain other provisions. Accordingly, to the extent applicable, Vendor further agrees as follows: (a) Vendor agrees to use its best efforts in a manner consistent with City of Detroit Executive Order 4 to purchase at least 30% of goods, services and supplies purchased for this Project (as defined below) from vendors who meet the definition of "Detroit-Based Businesses", "Detroit Resident Businesses", "Small Business Concerns", "Minority Owned Businesses" and "Women Owned Businesses" at the time the contract is awarded. Further, Vendor agrees to work to achieve higher participation, if possible. Vendor agrees that it will maintain appropriate records and will require each of its subcontractors to maintain appropriate records to permit confirmation of compliance with the provisions of this paragraph. (b) Vendor and its subcontractors shall comply with all licensing requirements established by the City of Detroit, the County of Wayne and the State of Michigan including, but not limited to, the licensing requirements established by the Act and the Rules. In furtherance thereof, Vendor expressly acknowledges that the ability of Vendor and its subcontractors to obtain licensure in Michigan is contingent upon such parties' key persons (as those terms are defined under applicable Michigan law, rules and regulations) meeting applicable licensing standards and otherwise complying with all applicable laws, rules, regulations and restrictions. Vendor shall do all things necessary (including complying with any licensing, notification, disclosure or registration requirements) and shall cooperate in all respects to allow compliance with the applicable laws, rules, regulations and restrictions. (c) Vendor agrees to perform its services in a manner which is consistent with and in full compliance with the terms and conditions of the March 12, 1998 Development Agreement entered into by and among the City of Detroit, The Economic Development Corporation of the City of Detroit and Detroit Entertainment, as amended from time to time. In furtherance thereof, Vendor agrees to include in all of its contracts relating to Detroit Entertainment's business ("Project") a provision requiring its subcontractors to perform services in a manner which is consistent with and in full compliance with the terms and conditions of the March 12, 1998 Development Agreement entered into by and among the City of Detroit, The Economic Development Corporation of the City of Detroit and Detroit Entertainment, L.L.C., as amended from time to time. 7 (d) In the event that any provision of this Agreement is determined to be inconsistent with the requirements of the March 12, 1998 Development Agreement entered into by and among the City of Detroit, The Economic Development Corporation of the City of Detroit and Detroit Entertainment, as amended from time to time, the Act, the Rules and/or any other applicable law, rule or regulation, then the provisions of the Development Agreement and/or the applicable law, rule or regulation shall prevail and this Agreement shall be interpreted and enforced accordingly. (e) Vendor shall include the following in all of its contracts regarding the Project: In the event that the Board does not approve this contract, where approval is required, and/or requests or requires that this contract be terminated, then this contract shall immediately terminate. (f) Vendor expressly acknowledges that this Project is subject to comprehensive statutory, regulatory and contractual requirements. The failure of Vendor and/or any of Vendor's subcontractors to comply with said comprehensive statutory, regulatory and contractual requirements, all of which are hereby expressly incorporated herein as a part hereof as though fully set forth herein, may result in a termination of this Agreement and Vendor acknowledges and agrees to this condition and restriction. All of Vendor's contracts on this Project shall contain a like contract provision which is consistent with the provisions of this paragraph. (g) If this Agreement constitutes a construction contract, then the following provisions are included to the extent applicable: (1) Vendor agrees (a) that the rates, wages and fringe benefits that Vendor and its subcontractors pay to each class of employees on this Project shall not be less than the wage and fringe benefit rates prevailing in the City of Detroit as established by the most recent survey by the Michigan Department of Labor for prevailing wages determined under Act 166, P.A. 1965 (Act 166 P.A. 1965, MCLA 408.551 et seq., MSA 17.256(a) et seq.) and (b) to the extent applicable, to comply with the provisions of the Davis-Bacon Act (40 U.S.C. 276a et seq. (1997). In furtherance thereof, Vendor agrees to hire subcontractors (including materials suppliers) who agree (a) to include in their construction contracts an express term that the rates, wages and fringe benefits that the subcontractor and each of its subcontractors pay to each class of employees on this Project shall not be less than the wage and fringe benefit rates prevailing in the City of Detroit as established by the most recent survey by the Michigan Department of Labor for prevailing wages determined under Act 166, P.A. 1965 (Act 166 P.A. 1965, MCLA 408.551 et seq., MSA 17.256(a) et seq.) and, (b) to the extent applicable, to comply with the provisions of the Davis-Bacon Act, 40 U.S.C. 276a et seq. (1997). (2) Vendor agrees to commit to the goal of maximizing, to the greatest extent possible, the number of Detroit resident apprentices who advance to journeyman status by agreeing to, and by requiring Vendor's subcontractor(s) to agree to utilize to the greatest extent possible unions that do or will operate apprentice programs on the Project that are open to all Detroit residents. (3) Vendor agrees to implement an equal opportunity employment plan which is a voluntary plan for the employment, recruitment, training and upgrading of women and minorities which conforms to all applicable laws and which is consistent with Executive Order 22 of the City of Detroit. Vendor agrees to require each of its subcontractor(s) and their subcontractors to implement an equal employment plan consistent with the provisions of this paragraph. 3. Vendor represents and warrants that all goods furnished hereunder, whether supplied by Vendor or by someone else, will (1) be new and of first quality, (2) be free from defects in materials and workmanship, (3) conform to the specifications supplied by Detroit Entertainment, (4) be free from design and specification defects, whether or not manufactured to Vendor's specifications, (5) be fit for the purpose for which intended, (6) be of merchantable quality and fit Page 7 8 and safe for consumer use, (7) be free and clear of all liens and encumbrances at the time of shipment, (8) be "Y2K Compliant" as described below. For purposes of this Addendum, a device (software application, computer hardware, embedded chip, etc.) that is Year 2000 compliant ("Y2K Compliant") accurately processes date/time data (including, but not limited to, calculating, comparing, and sequencing) from, into, and between the 20th and 21st centuries, and the years 1999 and 2000, and accurately performs leap year calculations for the year 2000 and into the 21st century. In addition: - The device shall not end operation abnormally or provide invalid or incorrect results as a result of processing date data. - No acceptable value for current date shall cause interruptions in normal operations of systems using the device. - All manipulations of time-related data (dates, duration, days of week, etc.) shall produce the desired results for all valid date values within the operational date range specified for the device. - Date elements in interfaces and data storage for the device shall permit specifying century to eliminate date ambiguity. For any date element represented without a century value, the device shall unambiguously determine the correct century for all manipulations involving that element. In addition interface documentation clearly describes how the correct century value is determined. The device shall accurately process date/time data with other Year 2000 compliant devices whenever such data is exchanged in accordance with the device's documented interface specification. AGI DISTRIBUTION, INC. DETROIT ENTERTAINMENT, L.L.C. By: ___________________________ By: ______________________________ Title: ________________________ Title: ___________________________ Page 8 EX-21.1 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Name State of Incorporation ---- ---------------------- AGI Distribution, Inc. Nevada EX-23.1 6 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K into the Company's previously filed Registration Statements (Form S-8, No. 33-75570 and Forms S-3, No. 333-2258 and No. 333-21913). ARTHUR ANDERSEN LLP Portland, Oregon September 24, 1999 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Company's consolidated financial statements included in form 10-K and is qualified in its entirety by reference to such financial statements. YEAR JUN-30-1999 JUN-30-1999 5,949,000 0 1,591,000 (15,000) 4,909,000 12,699,000 6,475,000 4,101,000 16,097,000 8,050,000 0 0 4,948,000 19,993,000 (16,894,000) 16,097,000 13,972,000 13,972,000 8,253,000 12,967,000 0 0 (260,000) (6,988,000) 0 (6,988,000) 0 0 0 (6,988,000) (0.79) (0.79)
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