-----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, DYxiHNFC8dSkSv+fbE1P8aBNrHgn5aYWHtBvxUax33RwgNsSfNvj9FvSo8Vc/khM uZwAJbl5ZtXZ6ntU6wM2fA== 0000912057-96-021574.txt : 19961001 0000912057-96-021574.hdr.sgml : 19961001 ACCESSION NUMBER: 0000912057-96-021574 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960930 SROS: NASD 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22498 FILM NUMBER: 96637336 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-K 1 FORM 10-K - -------------------------------------------------------------------------------- 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, 1996 (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 IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) -------------------------------------------------- 815 NW NINTH STREET, CORVALLIS, OREGON 97330 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER INCLUDING: (541) 753-7648 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01 par value Redeemable Common Stock Purchase Warrants Units (one share of Common Stock and one-half Redeemable Common Stock Purchase Warrant) (TITLE OF CLASS) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10. The aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of August 31, 1996 was $50,719,000 The number of shares outstanding of the Registrant's Common Stock, par value $.01 per share as of August 31, 1996 was 7,621,600 shares. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates by reference the Company's Proxy Statement to be filed in connection with the Company's 1996 Annual Meeting of Shareholders to be held November 12, 1996. - -------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ---- PART I ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The Market. . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Concept III . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Strategic Alliance With IGT . . . . . . . . . . . . . . . . . . 4 Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Production and Manufacturing. . . . . . . . . . . . . . . . . . 7 Competition . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Government Regulation . . . . . . . . . . . . . . . . . . . . . 8 Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Forward-Looking Statements. . . . . . . . . . . . . . . . . . . 13 ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . 14 EXECUTIVE OFFICERS OF REGISTRANT. . . . . . . . . . . . . . . . . 14 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . 15 ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . 16 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . 16 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . 20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . 34 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . 34 ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . 34 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 34 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K. . . . . . 34 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 PART I ITEM 1. BUSINESS GENERAL The Company develops, manufactures and markets electronic game promotion, slot accounting, and game monitoring systems to the casino gaming industry. Its Concept III products are designed to enhance casino profitability by providing entertainment and incentives to players of slot machines and collecting and analyzing data for use by casino managers. The Concept III technology improves the efficiency of bonus and incentive programs currently offered by many casinos, and makes possible bonus and incentive programs that have not previously been offered. A number of the primary manufacturers of slot machines have made extensive changes to the software used in their machines to support the Concept III technology. The Company currently offers products in four major categories: - Bonusing - Progressive jackpots - Slot accounting - Player tracking Bonusing and progressive jackpot systems, which provide players with opportunities for additional play and special pay-outs, are designed to enhance interest in the machines and games to which they are attached. The slot accounting products collect, analyze and report data to casino managers to satisfy accounting and regulatory requirements and to enable casino management to analyze the performance of each gaming device by type and location. Player tracking systems allow a casino to monitor the playing patterns of individual players or selected groups of players and to develop incentives and promotions to those players. In August 1996, the Company executed a letter of intent to implement a strategic alliance with International Game Technology ("IGT"). IGT is the largest manufacturer of slot machines in the world. The agreement includes a $5 million investment from IGT in return for 519,481 newly issued shares of the Company's 3% convertible preferred stock, with a twelve-month option to purchase an additional 519,481 shares at the same price. IGT will also have the right to elect one member to the Company's board of directors. See "Strategic Alliance with IGT." In connection with the anticipated strategic alliance with IGT, the Company expects to sell its Concept III bonusing and player tracking components (which have been designed to interface with the Company's bonusing components) for use in IGT Smart System-TM- player tracking/slot accounting installations and expects to partially discontinue offering its slot accounting and player tracking modules. See "Strategic Alliance with IGT." THE MARKET Casino gaming is found in more than 15 states in the United States. Iowa and Illinois legalized limited gaming on riverboats in the late 1980s. Subsequently, Mississippi, Missouri, Louisiana and Indiana have also legalized riverboat or dockside casinos. Land-based gaming is permitted in Colorado, South Dakota and Louisiana. The Indian Gaming Regulatory Act of 1988 has resulted in a significant expansion of casino gaming on Indian lands. Casinos currently are found on Indian lands in a number of states, including Arizona, California, Connecticut, Minnesota, Oregon, Washington and Wisconsin. Gaming in the traditional markets of Nevada and New Jersey has continued to grow even as gaming has been introduced into additional jurisdictions. Casino gaming has also grown rapidly world-wide, including in Australia, Canada, Europe and Africa, as well as in parts of the former Soviet Union and South America. 1 The Company estimates that approximately 750,000 casino-style machines are currently in use throughout the world, including approximately 400,000 in the United States. The Company believes that increased competition among casinos will lead to increased demand for game promotion, automated slot accounting, and game monitoring systems of the type offered by the Company. New or expanding casinos represent a significant part of the potential market for the Company's products. Existing casinos also represent a significant potential market as casino managers seek to maintain or improve casino profitability by employing bonusing and other promotional programs for slot machines. CONCEPT III The Concept III system was conceived to provide to the gaming industry a system to enable the design and delivery of bonuses and other promotions directly to players at the point of play and at the time of play. The Company currently offers four Concept III products directly to casinos: bonusing, slot accounting, player tracking, and progressive jackpot systems for gaming machines. Concept III and its component products are a modular, integrated system. The bonusing, progressive jackpot, slot accounting, and player tracking modules can be purchased and installed individually or as components of an integrated system. The Company intends that future products it may develop will also be integrated into the Concept III system. The Company also offers Concept III to OEM manufacturers of specialty slot machines. An OEM manufacturer can use the ability of Concept III to coordinate lights, sound and other special effects and its ability to cause a slot machine to pay special bonuses. By adding these capabilities of Concept III to regular slot machines, entirely new games can be created which offer unique and entertaining experiences for slot players. A Concept III installation in a casino includes electronic hardware installed in the slot machines, personal computers that serve as controllers for groups of slot machines, software to operate bonusing systems and progressive jackpot systems and software to record and analyze data and generate reports to casino management. Concept III employs personal computer technology, and is designed to take advantage of future improvements in such technology. Under the agreement with IGT, the Company expects to discontinue offering the software which records and analyzes data and generates reports. Up to 10,000 slot machines can be connected in a Concept III installation. A single controller can serve up to 2,000 machines, and up to 5 controllers can be included in a Concept III installation. The largest installation for which the Company has received an order was approximately 2,500 slot machines. The world's largest casino currently has approximately 4,000 slot machines. The primary manufacturers of slot machines, including IGT and Bally Gaming International, Inc. ("Bally"), have made extensive changes to the software used in their machines to support the Concept III technology. The changes permit the slot machines to accept instructions from the Concept III system, primarily in connection with the bonusing system module. New software supporting the Concept III system on IGT's S+ series and Players Edge Plus series of machines and Bally's 5500 Pro Series of machines, as well as the Concept III system itself, has been approved by the Nevada Gaming Control Board. See "Government Regulation." The initial installation of the Concept III slot accounting module was at the Casino Royale casino in Las Vegas, Nevada, in January 1993. The player tracking module was initially installed during July 1994 at casinos operated by the Ho-Chunk Nation (formerly named the Wisconsin Winnebago Nation). The Treasure Island Resort in Las Vegas installed the progressive jackpot system for slot machines for casino-wide use. In November 1994, the initial installation of the bonusing system module was installed at the Casino Royale to operate a Double Jackpot Time promotion. After review of a field trial period, the bonusing system was released for general installation in Nevada in April, 1995. 2 Aristocrat Leisure Industries of Australia ("Aristocrat") is the leading manufacturer of slot machines in Australia and the second largest in the world. In February 1996, the Company entered into a sales agreement with Aristocrat under which the Company is providing its Concept III system for a new casino under development by Crown Ltd. in Melbourne, Australia, which is scheduled to open in early 1997. BONUSING SYSTEM Many casinos offer promotions such as double jackpots at certain times of the day. While such promotions have in many cases been successful in increasing play at slot machines during the double jackpot periods, they have required extensive administrative effort to manage. Concept III, with its ability to deliver instructions to the slot machine, enables the casino to automate the payment of and accounting for double jackpot and other bonus programs. In addition, the Concept III technology allows a double jackpot or other bonus program to operate on a random basis, or to operate only when a minimum level of activity is present. A display can be mounted on the slot machine to inform players when the bonus program is operative. In addition, the bonusing system can include lighting, sound, signage and other special effects to call players' attention to the bonusing event as it begins and progresses. The Company is using such special effects to simulate clouds, lightning, thunder and wind, which, combined with a double and five-time jackpot bonus application, create a promotion called Hurricane Zone. Many casinos have also offered promotions where they provide free play to entice players to visit the casino. Such promotions have required extensive administrative effort to manage and there has been no assurance that the money given to potential customers will be played in the casino's slot machines. Using the capabilities of Concept III, this type of promotion can be automated and, instead of giving money directly to the customer, the Concept III system can match each coin played in the slot machine ("Match Play") or provide free play ("Reel Money") by adding a free coin under parameters controlled by the casino. The capabilities of Concept III also allow implementation of the Personal Progressive promotion, where each qualifying player can build up a progressive jackpot which only that player is eligible to win. Installation of the Match Play and Personal Progressive promotions was completed in November 1995 on 50 slot machines at the Treasure Island Casino in Las Vegas. The first installation of the Hurricane Zone promotion was completed on 34 machines at the Edgewater Hotel & Casino in Laughlin, Nevada, in May 1996. The first installation of Reel Money was completed at the Sundowne Hotel & Casino in Reno, Nevada, in June 1996. PROGRESSIVE JACKPOTS FOR SLOT MACHINES A progressive jackpot system links a number of slot machines to generate a collective jackpot. As coins are played in the machines, a portion of each coin is allocated to the creation of the jackpot. Other progressive jackpot systems require a controller to be installed at the same location as the machines that are linked to the jackpot. In contrast, a Concept III progressive jackpot system is programmed remotely from a personal computer. This method of programming enables the casino manager to determine which machines are to be linked to the progressive jackpot, and to establish various parameters such as starting jackpot amounts, rates of increment, and limits, if any, on the jackpot. The flexibility provided by Concept III enables the casino manager to design, alter and readily implement new progressive jackpot promotions which may be created from time to time. SLOT ACCOUNTING The slot accounting module automatically collects play data about each gaming device. This information is transmitted to a central computer system where it is immediately available to the casino manager, and where it is stored for future analysis and reporting. The equipment is configured to monitor all slot machine functions, including coins deposited in the machine, coins paid out of the machine, coins available to "drop," number of games played, jackpot occurrences and other machine functions, and recognizes players who use player identification cards. 3 PLAYER TRACKING Player tracking systems collect performance data about individual players or groups of players. The player tracking module of Concept III builds upon the casino accounting module to gather and record information about individual players, much like a "frequent flyer" program. Each customer who elects to enroll is given a plastic card that uniquely identifies the player. The player inserts the card into a slot on any game he or she chooses to play, and the system automatically records the player's level of play. The casino management can use this information to provide special incentives and rewards to individual players or groups of players. OTHER PRODUCTS The bonusing capabilities of the Concept III system can be combined with products produced by other manufacturers. For example, the Company provides electronic and certain other components to a company which develops and operates specialty games. The components provided by the Company comprise a special bonusing system where the slot player periodically spins a wheel mounted above the slot machine. The Concept III bonusing system communicates the results of the wheel spin to the slot machine, which pays the bonus to the player. RESEARCH AND DEVELOPMENT The Company devotes significant resources to the development of new products and the enhancement of existing products. The Company had 44 employees involved in product engineering as of August 31, 1996. Research and development expenses were $2,341,000, $1,900,000 and $1,352,000 in the years ended June 30, 1996, 1995 and 1994, respectively. STRATEGIC ALLIANCE WITH IGT In August 1996, the Company executed a letter of intent to implement a strategic alliance with IGT. IGT is the largest manufacturer of slot machines in the world. The agreement includes a $5 million investment from IGT in return for 519,481 newly issued shares of the Company's 3% convertible preferred stock, with a 12-month option to purchase an additional 519,481 shares at the same price. IGT will also have the right to elect one member to the Company's Board of Directors. The Company and IGT have not yet executed definitive documents and it is possible that no final agreement will be reached. Before the Company can issue preferred stock to IGT, the Company's shareholders must approve an amendment to the Articles of Incorporation to authorize Preferred Stock. The Company expects to submit the proposal to shareholders at its Annual Meeting of Shareholders to be held on November 12, 1996. If the strategic alliance is fully implemented, the Company anticipates that: 1) the Company will create proprietary games, using IGT equipment as the foundation, to be installed under leasing or revenue sharing agreements in casinos; 2) the Company will sell its Concept III Bonusing Technology and player tracking components for use in IGT Smart System-TM- player tracking/slot accounting installations and the Company will eventually withdraw from part of the player tracking/slot accounting business; 3) IGT will incorporate the Company's displays and other game enhancement tools into its slot machines; and; 4) the Company will develop promotions for use on IGT's Wide Area Network that supports "Megabucks," "QuarterMania" and other progressive jackpot promotions. The Company believes that the strategic alliance with IGT provides it significant benefits in the slot system market by providing access to IGT's larger sales and service organizations, and the potential to provide its 4 Concept III bonusing technology to a large installed base. The agreement also allows the Company to focus its resources on development of Bonusing Technology by reducing the resources required to maintain and develop slot accounting and player tracking applications. CUSTOMERS The Company's initial sales of Concept III systems were to casinos with fewer than 250 slot machines, as it sought to establish the viability of its products. Large casinos with more than 250 slot machines in a single location represent the principal market for Concept III products. This market includes most casinos in Las Vegas, Reno and Laughlin, Nevada, and Atlantic City, New Jersey, as well as a number of casinos on Indian land, riverboat and dockside casinos in the States of Illinois, Iowa and Mississippi, and some casinos in Colorado. A number of casinos in Australia, South Africa and Europe are also included in this market. The Company currently focuses its marketing efforts on management groups with at least 800 slot machines in one or more locations. Installations of this size generally are large enough to support a professional management staff capable of using the analytical and promotional tools provided by Concept III. Anchor Gaming, a developer of proprietary slot machines which uses Concept III components in its Wheel of Gold game, accounted for 43% of the Company's net revenues in 1996. Two other customers, Aristocrat Leisure Industries and Sundowner Hotel & Casino, accounted for 20% and 12% of its net revenues in 1996, respectively. Rio Suite Hotel & Casino and the Ho-Chunk Nation accounted for 44% and 17% of the Company's net revenues in 1995, respectively. In 1994 Ho- Chunk Nation accounted for 48% and Gold Shore Casino accounted for 20% of the Company's net revenues. The Company's backlog of orders for its products were approximately $6,500,000 and $800,000 as of June 30, 1996 and 1995, respectively. The Company does not believe that backlog is a meaningful indication of sales. Sales to the Company's customers are made pursuant to purchase orders or sales agreements for specific system installations, the Company does not have any ongoing, long-term contracts and products are often delivered within a few months of receipt of order. At its current stage of operations, the Company's revenues and results of operations may be materially affected, in the near term, by the receipt or loss of any one order. 5 The Company has installed or has obtained contracts for Concept III installations in the following casinos:
CASINO MODULES DATE OF INSTALLATION SIZE OF INSTALLATION - ------ ------- -------------------- -------------------- Casino Royale Slot accounting January 1992 700 slot machines Las Vegas, NV Concept III Bonusing September, 1994 Black Diamond Casino Slot accounting August 1992 61 slot machines Cripple Creek, CO Bronco Billy's Casino Slot accounting August 1992 221 slot machines Cripple Creek, CO Bronco Billy's Casino Slot accounting January 1993 183 slot machines Black Hawk, CO Curacao Caribbean Casino Slot accounting May 1993 150 slot machines Curacao, Netherlands Princess Beach Casino Slot accounting May 1993 214 slot machines Curacao, Netherlands Sky Ute Casino Slot accounting August 1993 103 slot machines Ignacio, CO Majestic Pines Casino Slot accounting November 1993 300 slot machines (Ho-Chunk Nation) Player tracking September 1994 Black River Falls, WI Rainbow Casino Slot accounting November 1993 600 slot machines (Ho-Chunk Nation) Player tracking June 1994 Nekoosa, WI Ho-Chunk Casino Slot accounting November 1993 1,600 slot machines (Ho-Chunk Nation) Player tracking June 1994 Dells, WI Rio Suite Hotel & Casino Slot accounting September 1994 2,500 slot machines Las Vegas, NV Player tracking Rio Suite Hotel & Casino Slot accounting November 1996 600 slot machines Las Vegas, NV Player tracking Treasure Island Resort Progressive jackpots October 1993 250 slot machines Las Vegas, NV for slot machines Concept III bonusing October 1995 50 slot machines Gold Shore Riverboat & Casino Slot accounting June 1994 1,100 slot machines Biloxi, MS Player tracking June 1994 Golden Nugget Casino Progressive jackpots June 1994 250 slot machines Las Vegas, NV for slot machines Tropicana Cruise Ship Slot Accounting December, 1994 150 slot machines Miami, Florida Player Tracking September, 1995 Concept III bonusing September, 1995 Colorado Grande Casino Slot Accounting July, 1995 200 slot machines Cripple Creek, CO Player Tracking July, 1995
6
Concept III bonusing April, 1996 Sundowner Hotel & Casino Slot Accounting June, 1996 620 slot machines Reno, Nevada Player Tracking June, 1996 Virginian Hotel & Casino Slot Accounting August, 1996 460 slot machines Reno, Nevada Player Tracking August, 1996 Spirit Lake Casino Slot Accounting August, 1996 450 slot machines Spirit Lake, South Dakota Player Tracking August, 1996 Sands Regency Hotel & Casino Slot Accounting August, 1996 700 slot machines Reno, Nevada Player Tracking August, 1996 Edgewater Hotel & Casino Concept III bonusing May, 1996 34 slot machines Laughlin, Nevada Bally's Saloon & Gambling Hall Concept III bonusing May, 1996 50 slot machines Tunica, Mississippi Crown Ltd. Concept III bonusing Early 1997 2,500 slot machines Melbourne, Australia
MARKETING The Company currently markets its products and provides service to customers from its office in Las Vegas, Nevada and its headquarters in Corvallis, Oregon. The Company expects to expand its sales, marketing and customer service operations to include offices in other key markets and, upon closing of the transaction with IGT, through IGT's sales and service organizations. PRODUCTION AND MANUFACTURING The Company's manufacturing operations consists primarily of the assembly of electronic circuit boards and cables from components purchased from third parties. The circuit boards are manufactured to the Company's specifications and assembled by contract manufacturers. A key component of each product is computer software which is copied onto an electronic memory chip. The copying of the software onto the chip is performed by contract manufacturers. The development, testing and maintenance of the software is conducted by Company engineers in Corvallis, Oregon. COMPETITION The Company currently has four principal competitors in the market for slot accounting and player tracking systems. The two largest competitors are IGT and Bally Systems, a division of Bally Gaming International, Inc. Electronic Data Technology ("EDT") was founded by John F. Acres, the Company's principal stockholder, in 1981 and was acquired by IGT in 1983. The player tracking system currently sold by IGT is based on the design developed by Mr. Acres while employed by EDT. The Bally Systems products are based on mainframe or minicomputer technology, rather than personal computer technology. Both of these competitors have greater financial, technical and marketing resources than the Company. In addition, IGT is the largest manufacturer of gaming machines in the world, which gives it a competitive advantage in selling its product to purchasers of IGT gaming machines. The Company expects to sell its Concept III player tracking components for use in IGT Smart System player tracking and slot accounting installations. 7 The Company also competes with Casino Data Systems, Inc., which offers collection and player tracking products based on personal computer technology. Casino Data Systems, Inc. does not currently offer bonusing systems, but its slot accounting and player tracking systems have been well received. In addition, Casino Data Systems, Inc. has greater financial resources than the Company. Mikohn Gaming Corporation also offers a data collection and player tracking product. The market for progressive jackpot systems for slot machines owned by casinos is served primarily by two companies other than the Company. Mikohn Gaming Corporation has the largest share of the market. Mikohn Gaming Corporation was founded by John F. Acres in 1985. Mr. Acres disposed of his interest in Mikohn Gaming Corporation in 1988. Casino Data Systems, Inc. also manufactures and sells progressive jackpot systems. The Company believes that its products compete principally on the basis of functionality, price and service. The Company believes the bonusing technology of its Concept III system is unique and is not aware of any other companies offering similar products. GOVERNMENT REGULATION The Company is subject to the licensing and regulatory control of the gaming authorities in each jurisdiction in which its products are sold or used by persons licensed to conduct gaming activities. Although licensing of the Company may not be required in a jurisdiction, its products generally must be approved by the regulatory authority for use in each licensed location within the jurisdiction. The Company has complied with the approval process for use of the products it has sold in Nevada, Colorado, Wisconsin, Mississippi, New Jersey and Connecticut, including the receipt of manufacturer and distributor licenses, permits, or certificates in each such state. Not all of the Company's products have been approved for sale in all jurisdictions. The Company is under a continuing duty to file written amendments to its license applications whenever any material or significant change of facts or circumstances has occurred with respect to any matter set forth in its original application or any renewal. On a periodic basis, the Company is required to file an application for renewal of its licenses, permits, or certificates in most states in which it has received such an authorization to conduct its business. Notwithstanding the renewal process, a change in any item that is a condition of the original license or any renewal must be approved by the applicable gaming authority, and no material change in ownership of the Company will be effective until such time as the proposed change has been approved by all gaming regulatory authorities having jurisdiction over the Company's operations. In such case, the proposed new owner may be required to submit an application together with evidence that such new owner is qualified to receive such a license, certificate or permit. In addition, the Company's current licenses and permits require the Company to cooperate with the applicable gaming authorities in any inquiry or investigation and to provide any supplementary information requested by such gaming authorities. The gaming laws and regulations of most jurisdictions provide for the continuing compliance with the related laws and regulations of such jurisdictions and allow for the suspension, refusal to renew or revocation of a license, certificate or permit. In particular, the New Jersey Casino Control Act ("the New Jersey Act") provides for suspension, refusal to renew or revocation of a license for: a violation of any provision of the New Jersey Act; conduct which would disqualify the Company, or any person required to be qualified, if such person were applying for an original license; failure to comply with all applicable federal, state, and local statutes, ordinances, and regulations; or a material departure from any representation made in the application for licensure. Further, in most jurisdictions, a model of the gaming equipment which the Company seeks to place in operation must be submitted for testing by an approved testing laboratory prior to use in any gaming operation. To obtain such approval, the Company must submit, at its expense, each model of its equipment to the specified laboratory for testing, examination and analysis. Upon completion of the testing, the laboratory submits a report of 8 its findings and conclusions to the applicable gaming authority, together with any recommendations for modifications to the equipment or the addition of equipment or devices to such gaming equipment. The Company intends to seek approval of Concept III for use in any other jurisdiction in which a sale arises. Failure of the Company to obtain approval for the use of Concept III by a gaming licensee in a jurisdiction will prevent the use of Concept III at such licensee's location and also will prevent any other gaming licensee within that jurisdiction from using Concept III products until the appropriate approvals have been obtained or requirements complied with. Until May 1995, the Company had not been required to obtain a manufacturer or distributor license to sell any of its products in Nevada. In May 1995, the regulatory authorities in Nevada determined that, because of the ability of the Concept III bonusing system to deliver instructions which cause slot machines to pay coins out of their hoppers (the "Pay Command"), the Company is required to obtain licensing before any promotions using the Pay Command will be approved. At the same time, the Nevada authorities determined that the implementation of Match Play and Personal Progressive promotions were approvable as associated equipment. On December 21, 1995, the Nevada Gaming Commission ("Nevada Commission") registered the Company as a publicly traded corporation, ("Registered Corporation"), found certain individuals suitable to be associated with the Company as officers, shareholders and controlling shareholders, and granted nonrestricted Manufacturer's and Distributor's licenses to the Company's wholly-owned subsidiary, AGI Distribution, Inc. ("AGI"), a Nevada corporation . The Nevada Commission also granted AGI a nonrestricted Slot Route Operator's license, provided however, that said license shall not issue until AGI's fulfillment of certain conditions within a one-year time period. The Nevada Commission also granted individual gaming licenses to the officers and sole director of AGI. In granting the aforementioned registration, findings of suitability and licenses, the Nevada Commission also imposed certain reporting and investigative criteria on the Company to help insure that the Nevada Commission remains fully informed regarding the Company's activities in Nevada and other jurisdictions where the Company is licensed to engage, or doing business in, the gaming industry. The regulatory authorities in any jurisdiction in which the Company is subject to licensing may: (a) impose certain corporate structure requirements on the Company, including requiring that the Company form a wholly-owned subsidiary to apply for licensing to manufacture and distribute the Company's products in the particular jurisdiction; (b) require the officers, directors, key employees or affiliates of the Company and/or any of the Company's subsidiaries to be licensed or found suitable; (c) require some or all of the holders of any debt or equity security of the Company to be licensed or be found suitable, or to divest their holdings of the Company's securities; or (d) subject the Company, any subsidiary, or the officers, directors, key employees, affiliates, or holders of any debt or equity security of the Company or any subsidiary to any other restriction that is deemed reasonable by the regulatory authority. Generally, regulatory authorities may deny applications for licenses or findings of suitability for any cause they deem reasonable. In the event a regulatory authority were to find an officer, director, key employee or affiliate of the Company or any subsidiary, or any other person, including a stockholder, unsuitable to act in such capacity or to continue to have a relationship with the Company, the Company would be required to terminate all relationships with such person or entity. The regulatory authorities also may have authority to disapprove a change in a licensed position, including a material change in ownership, which change must be reported to the regulatory authorities in question. If a license or finding of suitability is required by a regulatory authority and the Company fails to seek or does not receive the necessary license or finding, the Company may be prohibited from selling its product for use in the respective jurisdiction. Licensing requirements and regulations vary from jurisdiction to jurisdiction, and the licensing process can be lengthy and expensive. There can be no assurance that the Company will not be subject to licensing or suitability requirements in one or more jurisdictions, or that the Company will receive the necessary licenses or approvals. 9 NEVADA GAMING REGULATION The holders of any form of gaming license in Nevada are subject to: (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, "Nevada Act"); and (ii) various local regulation. The Company's gaming operations are subject to the licensing and regulatory control of the Nevada Commission, the Nevada State Gaming Control Board ("Nevada Board"), the Clark County Liquor and Gaming Licensing Board and any other local jurisdiction within which the Company does business in Nevada. The Nevada Commission, the Nevada Board and the local gaming regulatory authorities are collectively referred to as the "Nevada Gaming Authorities." The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) to provide a source of state and local revenues though taxation and licensing fees. Change in such laws, regulations and procedures could have an adverse effect on the Company's gaming operations. As noted above, on December 21, 1995, AGI was licensed by the Nevada Commission to manufacture and distribute gaming devices. AGI also anticipates operating as a slot route operator. The gaming license requires the periodic payment of fees and taxes and is not transferable. On the same date the Company was also granted Registered Corporation status, and as such, it is required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information which the Nevada Commission may require. No person may become a stockholder, officer or director of, or receive any percentage of profits from AGI without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or AGI in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee or Registered Corporation. Officers, directors and certain key employees of AGI must file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. Officers, directors, shareholders and key employees of the Company who are actively and directly involved in gaming activities of AGI are required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. The application process for a finding of suitability or licensure is, for all intents and purposes, identical, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Company or AGI, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company or AGI to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. The Company and AGI are required to submit periodic detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by the Company and AGI must be reported to, or pre-approved by, the Nevada Commission. 10 If it were determined that the Nevada Act was violated by the Company or AGI, its officers, directors and/or employees, the gaming licenses it holds, including the individual gaming licenses or findings of suitability issued to their officers, directors, shareholders, controlling shareholders and/or key employees could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, the Company, AGI, and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor could be appointed by the Nevada Commission to operate AGI's gaming business in Nevada and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of AGI's business properties) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect the gaming operations of the Company or AGI. Any beneficial holder of the Company's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of the Company's voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the state of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who individually, or in conjunction with others, directly or indirectly acquires beneficial ownership of more than 5% of the voting securities of the Company to report such acquisition to the Nevada Commission within ten days following the required, or voluntary, reporting of such acquisition with the Securities and Exchange Commission ("SEC"). Likewise, the Nevada Act requires any person who individually, or in conjunction with others, directly or indirectly acquires beneficial ownership of more than 10% of the voting securities of the Company to report such acquisition to the Nevada Commission in the same manner, and further, to apply to the Nevada Commission for a finding of suitability to be associated with the Company within thirty days after the chairman of the Nevada Board mails a written notice to such person(s) requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of the voting securities of the Company may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Company, any change in the Company's corporate charter, bylaws, management, policies or operations of the Company, or any of its gaming affiliates, including, but not limited to, AGI, or any other action which the Nevada Commission finds to be inconsistent with holding the voting securities of the Company for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a Registered Corporation beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or AGI, the Company (i) pays that person any dividend or interest upon voting securities of the Company, (ii) allows that person to 11 exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) pays remuneration in any form to that person for services rendered or otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities for cash at fair market value. Additionally, at least one local gaming regulatory authority, the Clark County Liquor and Gaming Licensing Board, has taken the position that it has the authority to approve all persons owning or controlling the stock of any corporation controlling a Slot Route Operator's license, in this case the Company. The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation (the Company) to file applications, be investigated and be found suitable to own the debt security of a Registered Corporation. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. The Company is required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to require the Company's stock certificates to bear a legend indicating that the securities are subject to the Nevada Act. However, to date, the Nevada Commission has not imposed such a requirement on the Company. The Company may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming operations in Nevada, or to retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful. Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licenses, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of those business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Company can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Company's Board of Directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purpose of acquiring control of the Registered Corporation. 12 License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the Nevada licensee's respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either: (i) a percentage of the gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of table games operated. Nevada licensees that hold a license as an operator of a slot route, or a manufacturer's or distributor's license also pay certain fees and taxes to the State of Nevada. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively, "Licensees"), and who proposes to become involved, or is already involved, in a gaming venture outside of Nevada is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. PATENTS The Company has applied for U.S. patents on certain features of its Concept III product line, and may in the future apply for other U.S. patents and corresponding foreign patents. No assurance can be given that any patents that are applied for will be issued, or, if issued, will be valid or will provide any significant competitive advantage to the Company. In addition, the Company has a variety of other intellectual property which it treats as trade secrets. The Company takes reasonable steps to protect its intellectual property, but it is possible that others may make unauthorized use of such intellectual property and the Company may or may not be able to prevent such use. EMPLOYEES At August 31, 1996, the Company had 93 full-time employees of whom 44 were involved in engineering, 18 in production and quality control, 18 in sales, marketing, technical service and customer service, and 13 in administration and management. None of the Company's employees are represented by a labor union or are covered by a collective bargaining agreement. The Company has not experienced any work stoppages and believes that its employee relations are good. FORWARD-LOOKING STATEMENTS This Form 10-K contains forward-looking statements regarding the Company's plan and expectations as to: future performance, growth opportunities, expansion, new products and services, competition, capital expenditures, its strategic alliance with IGT and its withdrawal from the slot accounting and player tracking systems segments of the business. Such plans and expectations involve risks and uncertainties. The following factors are among those that could cause actual results to differ materially from the forward-looking statements: business and economic conditions generally and in the gaming industry; alterations in the Company's strategic alliance with IGT; timing, receipt, installation and regulatory approval of any one order; technological change; new products; potential obsolecence; competition; government regulation; potential restrictions on sales; and availability of additional capital. In addition, from time to time, the Company may issue other forward-looking statements. Any forward-looking statements, including other written or oral forward-looking statements made by the Company or persons acting on its behalf, should be considered in light of these factors and other factors referred to from time to time in the Company's press releases, periodic reports or communications with shareholders. 13 ITEM 2. PROPERTIES The Company is headquartered in a leased facility at 815 N.W. Ninth Street, Corvallis, Oregon, 97330. The lease commenced on April 15, 1994, and will expire on April 15, 1999. The Company expects to lease additional space contiguous to its headquarters, expanding its facility from approximately 22,000 square feet to approximately 27,500 square feet. The base rent for the expanded facility will be approximately $14,100 per month, and will increase to approximately $16,100 on May 1, 1997, and includes property taxes, building insurance and common area maintenance. The Company's sales, marketing and customer service office in Las Vegas, Nevada, is in a leased facility of approximately 8,500 square feet. The lease commenced on September 1, 1995, and expires on August 31, 2000. The base rent is $8,105 per month, plus $1,220 per month for property taxes, building insurance and common area maintenance. The Company owns manufacturing and engineering equipment, located at its facility in Corvallis, Oregon, used in its assembly operations and research and development efforts. Such equipment is available from a variety of sources, and the Company believes that it currently owns or can readily acquire equipment required for its current and anticipated levels of operations. ITEM 3. LEGAL PROCEEDINGS The Company from time to time is involved in various legal proceedings arising in the normal course of business. At August 31, 1996, the Company was not a party to any legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended June 30, 1996. EXECUTIVE OFFICERS OF REGISTRANT As of August 31, 1996, the executive officers of the Company were as set forth below.
Name Age Positions and Offices Executive Officer Since - ---- --- --------------------- ----------------------- John F. Acres 42 Chief Executive Officer, 1985 Director and Secretary Joseph A. Huseonica 52 President and Chief Operating Officer 1996 Robert W. Brown 41 Chief Financial Officer and Treasurer 1993
There are no family relationships among directors or executive officers of the Company. JOHN F. ACRES is the founder of the Company and has been the Chief Executive Officer, Secretary and a director since its inception. He also served as its President until January, 1996. Mr. Acres, who has been involved in the gaming industry since 1972, has designed slot data collection systems, player tracking systems, and equipment for progressive jackpot systems that are in widespread use. In 1981, he founded Electronic Data Technology ("EDT") to manufacture and sell progressive jackpot system designs. While with EDT, he designed one of the first slot data collection systems, and invented the electronic player tracking system. He sold a majority interest in EDT to IGT in 1983, and remained as president of EDT until 1985. The player tracking system designed by Mr. Acres while with EDT is installed on approximately 50,000 slot machines throughout the world and is still actively marketed by IGT. In 1985, Mr. Acres co-founded Mikohn, Inc.. He served as Vice President and a director of Mikohn, Inc. until 1988. 14 JOSEPH A. HUSEONICA joined the Company in January 1996 as President and Chief Operating Officer. From July 1994 to December 1995, Mr. Huseonica served as Chief Operating Officer for Centric Corporation, a Portland, Oregon marketing services company. From August 1993 to July 1994, Mr. Huseonica was a consultant to various companies. From October 1991 to August 1993, Mr. Huseonica was Vice President, Marketing & Sales for Radisys Corporation, a manufacturer of embedded computer systems based in Beaverton, Oregon. For more than 10 years prior to 1991, Mr. Huseonica held various senior management positions at Intel Corporation, including General Manager of its OEM Platforms Operations. ROBERT W. BROWN joined the Company in July 1993 as Chief Financial Officer and Treasurer. From June 1991 through May 1993, Mr. Brown was the Chief Financial Officer of Color & Design Exhibits, Inc., a manufacturer of interpretive and trade show exhibits in Portland, Oregon. From September 1983 through May 1991, Mr. Brown held financial management positions with Floating Point Systems, Inc., a Beaverton, Oregon manufacturer of mini-supercomputers, and served as its Corporate Controller from November 1989 through May 1991. Prior to 1983, Mr. Brown was employed by Arthur Andersen LLP for more than six years. Mr. Brown is a Certified Public Accountant. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on the Nasdaq Small-Cap Market under the symbol "AGAM." The following table sets forth, for the periods indicated, the range of high and low bid prices for the Company's common stock as reported by the Nasdaq Small-Cap Market. The following quotations represent prices between dealers, do not include retail mark-ups, mark-downs or commissions, and do not necessarily represent actual transactions. BID ---------------- LOW HIGH ----- ------ FISCAL YEAR ENDED JUNE 30, 1995: First quarter. . . . . . . . . . $3.50 $ 6.38 Second quarter . . . . . . . . . $4.25 $ 6.63 Third quarter. . . . . . . . . . $4.75 $ 7.00 Fourth quarter . . . . . . . . . $5.75 $ 7.63 FISCAL YEAR ENDED JUNE 30, 1996: First quarter. . . . . . . . . . $7.00 $ 9.00 Second quarter . . . . . . . . . $4.50 $ 8.00 Third quarter. . . . . . . . . . $3.50 $ 5.63 Fourth quarter . . . . . . . . . $4.63 $12.75 At August 31, 1996, there were approximately 230 record holders of the Company's common stock. The Company estimates that there are over 1,000 beneficial owners of the Company's common stock. . The Company has never paid or declared any cash dividends on its common stock and does not intend to pay cash dividends on its common stock in the foreseeable future. The Company expects to retain its earnings to finance the development and expansion of its business. The payment by the Company of dividends, if any, on its common stock in the future is subject to the discretion of the Board of Directors and will depend on the Company's earnings, financial condition, capital requirements and other relevant factors. 15 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial information concerning the Company and should be read in conjunction with the audited financial statements and notes thereto included elsewhere herein.
YEARS ENDED JUNE 30, ------------------------------------------------------------------ 1992 1993 1994 1995 1996 ------ ------ ------ ------ ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Net revenues . . . . . . . . . . . . . . . $101 $492 $2,852 $4,006 $6,942 Gross profits. . . . . . . . . . . . . . . 46 291 851 1,436 3,355 Loss from operations . . . . . . . . . . . (184) (514) (1,644) (2,489 (1,665) Net Loss . . . . . . . . . . . . . . . . . (201) (536) (2,598) (2,505) (1,641) Net loss per common share. . . . . . . . . $(0.05) $(0.10) $(0.39) $(0.35) $(0.22) Weighted average number of shares of common stock and common stock equivalents outstanding. . . . . . . . . . . 4,429 5,225 6,629 7,145 7,552 YEARS ENDED JUNE 30, 1992 1993 1994 1995 1996 ------ ------ ------ ------ ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Working capital (deficit). . . . . . . . . $(145) $(762) $3,574 $3,458 $2,552 Total assets . . . . . . . . . . . . . . . 99 692 6,301 6,264 7,631 Current liabilities. . . . . . . . . . . . 244 1,373 1,227 1,302 3,644 Long-term debt . . . . . . . . . . . . . . -- -- -- -- -- Stockholders' equity (deficit) . . . . . . (145) (681) 5,074 4,962 $3,987
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company was founded to pursue new concepts in slot machine game promotion and bonusing for the casino industry. Although there was and is significant competition in the slot accounting and player tracking business, the Company's initial focus was the sale of these systems, in order to establish relationships with casinos with products the industry understood and was then using. The Company was able to achieve some market success in this business because of its commitment to provide follow-on promotion and bonusing products designed to enhance casino profitability by providing entertainment and incentives to slot machine players. The Company installed the first Concept III bonus product in November 1994. In fiscal 1996 and 1995, it derived revenues of $5,394,000 and $159,000 based on bonusing products. The Company's strategic alliance with IGT will allow the Company to focus its efforts on bonusing technology and the creation of proprietary games. The Company anticipates that it will withdraw from direct participation in the slot accounting and player tracking business in fiscal 1997 and will instead sell these products to IGT for inclusion in IGT's Smart System. At its current stage of operations, the Company's financial position and operating results may be materially affected by a number of factors, including the timing of receipt, installation and regulatory approval of 16 any one order, availability of additional capital, competition and technological change. Historically, three or fewer customers have accounted for more than 60% of annual revenues. RESULTS OF OPERATIONS COMPARISON OF THE YEARS ENDED JUNE 30, 1996 AND 1995. Company's net revenues during the year ended June 30, 1996, were $6,942,000, an increase of 73% over the $4,006,000 of net revenues in 1995. The increase in revenues resulted primarily from sales to Anchor Gaming of components used in the Wheel of Gold game, sales under an agreement with Aristocrat Leisure Industries to provide Concept III bonusing capability for a casino under development by Crown Ltd. in Melbourne, Australia, and the sale of a bonusing, slot accounting and player tracking system to the Sundowner Hotel and Casino in Reno, Nevada. Gross profit as a percentage of net revenue increased to 48% in 1996 from 36% in 1995. Gross profit increased primarily as a result of Concept III bonusing products comprising a larger percentage of sales in 1996. The Company realizes larger margins for bonusing products. Operating expenses increased to $5,020,000 in the year ended June 30, 1996 from $3,925,000 in the year ended June 30, 1995, an increase of 28%. The increase in operating expenses resulted primarily from the addition of personnel and expansion of the sales and service office in Las Vegas. The expansion was undertaken in order to support growth in revenue and to expand development of Concept III products. The Company's research and development expenses increased to $2,341,000 in the year ended June 30, 1996, from $1,900,000 in the year ended June 30, 1995. The Company expects to spend a significant portion of its revenue on research and development in order to enhance and expand the capabilities of its Concept III system, including the development of additional promotions which utilize the system's bonusing capabilities. The Company believes that enhancement and expansion of its Concept III system will lead to increased revenues from sales of its products. The net loss for the year ended June 30, 1996, was $1,641,000 ($0.22 per share) compared to $2,505,000 ($0.35 per share) in the prior year. Although the Company had a net loss for the full year, during the three months ended June 30, 1996, the Company had net income of $439,000 ($0.06 per share), compared to a net loss of $698,000 ($0.10 per share) for the same period in the prior year. COMPARISON OF THE YEARS ENDED JUNE 30, 1995 AND 1994. The Company's net revenues during the year ended June 30, 1995, were $4,006,000, an increase of 40% over the $2,852,000 of net revenues in 1994. The increase in revenues resulted primarily from sales of a slot accounting and player tracking system to the Rio Suite Hotel and Casino in Las Vegas, Nevada, and of player tracking systems to casinos operated by the Ho- Chunk Nation in Wisconsin. Gross profit as a percentage of net revenue increased to 36% in 1995 from 30% in 1994. Gross profit in 1994 was adversely affected by the initial sales of the player tracking module. The costs to manufacture and install these initial orders was higher than on subsequent installations. In addition, certain optional features which are separately priced on later orders were installed at no additional cost to the customer in order for the Company to be able to demonstrate such features to prospective customers. In order to support growth in revenue and to expand development of its Concept III products, the Company hired additional personnel, made capital expenditures for computer and other equipment, leased additional space to serve as its headquarters and opened a sales and service office in Las Vegas during the 17 year ended June 30, 1994. As a result, operating expenses increased to $3,925,000 in 1995 from $2,495,000 in the year ended June 30, 1994. The net loss for the year ended June 30, 1995 was $2,505,000 compared to $2,598,000 in the prior year. A charge of $898,000 was recorded during the year ended June 30, 1994 for the expenses and settlement of patent infringement litigation. See Note 5 "Patent Infringement Litigation" in "Notes to Consolidated Financial Statements." COMPARISONS OF THE YEARS ENDED JUNE 30, 1994 AND 1993 The Company's net revenues during the year ended June 30, 1994, were $2,852,000, an increase of 480% over the $492,000 of net revenues during the prior year. The first significant orders for the Company's Concept III slot accounting and player tracking system were received during the three months ended June 30, 1993. Delivery of those orders for slot accounting and player tracking systems to the Gold Shore Casino in Mississippi and for slot accounting systems to casinos operated by the Ho-Chunk Nation in Wisconsin during the year ended June 30, 1994, was the principal reason for the increase in revenues. Gross profit as a percentage of net revenues decreased to 30% in 1994 from 59% in 1993. The decrease resulted from costs to manufacture and install initial orders of the player tracking system. In order to support revenue growth and develop its Concept III products, the Company hired additional personnel, made capital expenditures for computer and other equipment, leased additional space to serve as its headquarters and opened a sales and service office in Las Vegas. As a result, operating expenses increased to $2,495,000 in the year ended June 30, 1994 from $805,000 in the year ended June 30, 1993. A charge of $898,000 was recorded during fiscal 1994 for the expenses and settlement of patent infringement litigation (See Note 5, "Patent Infringement Litigation" in "Notes to Consolidated Financial Statements"). Including the charge for the litigation settlement, the net loss was $2,598,000 ($0.39 per share) in 1994, compared to $536,000 ($0.10 per share) in 1993. At its current stage of operation, the Company's revenues and results of operations may be materially affected, in the near term, by the receipt or loss of any one order. LIQUIDITY AND CAPITAL RESOURCES. At June 30, 1996, the Company had a balance of cash and cash equivalents of $2,500,000, compared to a balance of $1,325,000 as of June 30, 1995. The Company has no debt. During the year ended June 30, 1996, net cash generated by operating activities was $1,150,000 and proceeds from issuance of common stock for stock option and warrant exercises were $610,000. Cash used for capital expenditures and other investing activities was $585,000. The major components of the net cash generated by operating activities were the net loss of $1,641,000, offset by depreciation of $540,000, and increases of $1,355,000 in customer deposits and of $987,000 in accounts payable and accrued expenses. The 833,600 redeemable warrants which were outstanding as of June 30, 1996, from the Company's initial public offering have an exercise price of $7.50 per share and expire in October, 1996. If exercised in full, such redeemable warrants would provide gross proceeds to the Company of approximately $6,252,000. Any proceeds from the exercise of the warrants will be used to help fund the Company's anticipated growth and product development efforts. See Note 6 of "Notes to Consolidated Financial Statements." In August, 1996, the Company entered into a letter of intent to form a strategic alliance with IGT under which the Company will initially issue approximately 519,000 shares of preferred stock for gross proceeds of $5,000,000. IGT will also have the option, through August 8, 1997, to purchase up to an additional 519,000 shares of preferred stock at the same price. IGT will also have the right to elect one member to the Company's 18 Board of Directors. Closing of the initial preferred stock sale is subject to approval of the issuance of preferred stock by the Company's shareholders, receipt of approval by gaming and other regulatory agencies and completion of definitive agreements with IGT. The Company's sources of liquidity include its cash balances and cash generated by operations, including payment terms which generally include deposits with the receipt of customer orders. The proceeds from the exercise of the redeemable warrants and the issuance of preferred stock to IGT referred to above will provide additional cash. These sources of liquidity are expected to be sufficient to fund the Company's operations for at least the next 12 months. RECENTLY ISSUED ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which requires the Company to review for impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. In certain situations, an impairment loss would be recognized. The Company has adopted the provisions of this Statement, which did not have a material effect on the financial statements. In October 1995, the FASB issued Statement No. 123, "Accounting for Stock- Based Compensation," which establishes a fair value based method of accounting for stock-based compensation plans and requires additional disclosures for those companies that elect not to adopt the new method of accounting. The Company will continue to account for employee stock options under APB Opinion No. 25, "Accounting for Stock Issued to Employees." The disclosures required by Statement No. 123 will be effective for the Company's fiscal year ending June 30, 1997. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page ---- Report of Independent Public Accountants . . . . . . . . . . . . . . . . . 21 Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . 22 Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . 23 Consolidated Statements of Stockholders' Equity. . . . . . . . . . . . . . 24 Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . 25 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 26 20 Report of Independent Public Accountants To Acres Gaming Incorporated: We have audited the accompanying consolidated balance sheets of Acres Gaming Incorporated (a Nevada Corporation) and subsidiary as of June 30, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Acres Gaming Incorporated and subsidiary as of June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996 in conformity with generally accepted accounting principles. Portland, Oregon, August 9, 1996 ACRES GAMING INCORPORATED & SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1996 AND 1995 ASSETS 1996 1995 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 2,500,000 $ 1,325,000 Receivables 910,000 967,000 Inventories 2,692,000 2,395,000 Prepaid expenses 94,000 73,000 ----------- ----------- Total current assets 6,196,000 4,760,000 ----------- ----------- PROPERTY AND EQUIPMENT: Furniture and fixtures 515,000 508,000 Equipment 1,348,000 1,014,000 Leasehold improvements 506,000 498,000 Accumulated depreciation (1,329,000) (789,000) ----------- ----------- Total property and equipment 1,040,000 1,231,000 OTHER ASSETS, NET 395,000 273,000 ----------- ----------- $ 7,631,000 $ 6,264,000 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,456,000 $ 427,000 Accrued expenses 440,000 482,000 Customer deposits 1,748,000 393,000 ----------- ----------- Total current liabilities 3,644,000 1,302,000 ----------- ----------- STOCKHOLDERS' EQUITY: Common Stock, $.01 par value, 50,000,000 shares authorized, 7,601,150 and 7,494,500 shares issued and outstanding at June 30, 1996 and 1995 76,000 75,000 Additional paid-in capital 11,224,000 10,615,000 Accumulated deficit (7,313,000) (5,672,000) Less- Deferred charge-warrants - (56,000) ----------- ----------- Total stockholders' equity 3,987,000 4,962,000 ----------- ----------- $ 7,631,000 $ 6,264,000 ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these consolidated balance sheets. 22 ACRES GAMING INCORPORATED & SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994 1996 1995 1994 ----------- ----------- ----------- NET REVENUES $ 6,942,000 $ 4,006,000 $ 2,852,000 COST OF REVENUES 3,587,000 2,570,000 2,001,000 ----------- ----------- ----------- GROSS PROFIT 3,355,000 1,436,000 851,000 ----------- ----------- ----------- OPERATING EXPENSES: Research and development 2,341,000 1,900,000 1,352,000 Selling, general and administrative 2,679,000 2,025,000 1,143,000 ----------- ----------- ----------- Total operating expenses 5,020,000 3,925,000 2,495,000 ----------- ----------- ----------- LOSS FROM OPERATIONS (1,665,000) (2,489,000) (1,644,000) LITIGATION SETTLEMENT - - (898,000) OTHER INCOME (EXPENSE) 24,000 (16,000) (56,000) ----------- ----------- ----------- NET LOSS $(1,641,000) $(2,505,000) $(2,598,000) ----------- ----------- ----------- ----------- ----------- ----------- NET LOSS PER SHARE $ (0.22) $ (0.35) $ (0.39) ----------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING 7,552,000 7,145,000 6,629,000 ----------- ----------- ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these consolidated statements. 23 ACRES GAMING INCORPORATED & SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
Common Stock Additional Deferred ------------------ Paid-In Accumulated Charge- Shares Amount Capital Deficit Warrants Total --------- -------- ------------ ------------ -------- ------------ BALANCE, June 30, 1993 4,852,000 $ 49,000 $ 704,000 $(1,434,000) $ - $ (681,000) Issuance of common stock 2,215,750 22,000 8,331,000 - - 8,353,000 Reclassifica- tion of cumulative S corpora- tion losses - - (865,000) 865,000 - - Net loss - - - (2,598,000) - (2,598,000) --------- -------- ----------- ----------- -------- ----------- BALANCE, June 30, 1994 7,067,750 71,000 8,170,000 (3,167,000) - 5,074,000 Issuance of common stock 426,750 4,000 2,349,000 - - 2,353,000 Net loss - - - (2,505,000) - (2,505,000) Issuance of warrants - - 96,000 - (96,000) - Amortization of warrants - - - - 40,000 40,000 --------- -------- ----------- ----------- -------- ----------- BALANCE, June 30, 1995 7,494,500 75,000 10,615,000 (5,672,000) (56,000) 4,962,000 Issuance of common stock 106,650 1,000 609,000 - - 610,000 Net loss - - - (1,641,000) - (1,641,000) Amortization of warrants - - - - 56,000 56,000 --------- -------- ----------- ----------- -------- ----------- BALANCE, June 30, 1996 7,601,150 $ 76,000 $11,224,000 $(7,313,000) $ - $ 3,987,000 --------- -------- ----------- ----------- -------- ----------- --------- -------- ----------- ----------- -------- -----------
The accompanying notes are an integral part of these consolidated statements. 24 ACRES GAMING INCORPORATED & SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1996 1995 1994 ------------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(1,641,000) $(2,505,000) $(2,598,000) Adjustments to reconcile net loss to net cash from operating activities- Depreciation 540,000 449,000 161,000 Amortization of warrants 56,000 40,000 - Amortization of capitalized software costs 89,000 - - Amortization of other long-term assets 25,000 - - Changes in assets and liabilities: Receivables 57,000 (697,000) (171,000) Inventories (297,000) (409,000) (1,935,000) Prepaid expenses (21,000) (73,000) (18,000) Accounts payable and accrued expenses 987,000 (229,000) 1,051,000 Customer deposits 1,355,000 304,000 (1,160,000) ----------- ----------- ----------- Net cash from operating activities 1,150,000 (3,120,000) (4,670,000) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (349,000) (198,000) (1,562,000) Capitalized software costs (82,000) (148,000) - Investment in intangible assets (154,000) (107,000) - ----------- ----------- ----------- Net cash from investing activities (585,000) (453,000) (1,562,000) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 610,000 2,353,000 8,353,000 Payments under notes payable to bank - - (37,000) ----------- ----------- ----------- Net cash from financing activities 610,000 2,353,000 8,316,000 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,175,000 (1,220,000) 2,084,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,325,000 2,545,000 461,000 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,500,000 $ 1,325,000 $ 2,545,000 ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 12,000 $ 22,000 $ 3,000 ----------- ----------- ----------- ----------- ----------- ----------- NONCASH FINANCING ACTIVITIES: Issuance of warrants $ - $ 96,000 $ - ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated statements. 25 ACRES GAMING INCORPORATED & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND COMPANY OPERATIONS: COMPANY OPERATIONS The consolidated financial statements include the accounts of Acres Gaming Incorporated and its wholly-owned subsidiary, AGI Distribution, Inc. (the Company). The Company develops, manufactures and markets electronic tools which game manufacturers and casinos can use to increase the playability and entertainment value of their slot games while supporting more efficient and profitable casino operations. These tools include a combination of custom electronics, software and computers. The Company presently sells its products in the United States and in Australia. Sales to Australia totaled $1,416,000, or 20% of net revenues, for the year ended June 30, 1996. During September 1993, JFA Enterprises, Inc. (JFA) merged two companies under common ownership into JFA in exchange for newly issued shares of JFA common stock. JFA subsequently changed its name to Acres Gaming Incorporated. The transaction was accounted for similar to a pooling of interests and, accordingly, the Company's financial statements include the accounts of the merged companies for all periods presented. In connection with this merger, the Company executed a 6-for-1 stock split. This stock split has been retroactively reflected for the period ended June 30, 1994. In November, 1993, the Company issued 1,667,500 units (consisting of 1,667,500 shares of common stock and 833,750 warrants) in an initial public offering resulting in net proceeds of $7,153,000. In June, 1995, the Company issued 400,000 shares of common stock to a group of private investors for net proceeds of $2,255,000. The proceeds of these transactions are being used to expand and enhance the Company's Concept III product line, expand sales and support activities, fund capital expenditures for computer and other equipment, and provide working capital. At its current stage of operations, the Company's financial position and operating results may be materially affected by a number of factors, including the timing of receipt, installation and regulatory approval of any one order, availability of additional capital, competition and technological change. PRINCIPLES OF CONSOLIDATION All intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION The Company sells its products under contracts which generally provide that the price be paid in installments as progress is made toward completion and that final payment be made after the completion of the contract. Revenue is recognized as individual units are installed or, in those instances where the contract does not provide for the Company to install the equipment, upon shipment. Customer deposits received under sales agreements are reflected as liabilities until the related revenue is recognized. During 1996, three customers accounted for 43%, 20% and 12% of net revenues. During 1995, two other customers accounted for 44% and 17% of net revenues. During 1994, two customers accounted for 48% and 20% of net revenues. 26 CAPITALIZED SOFTWARE AND RESEARCH AND DEVELOPMENT COSTS Software development costs for certain projects are capitalized from the time technological feasibility is established to the time the resulting software product is first shipped. Capitalized software costs, net of accumulated amortization, were $141,000 at June 30, 1996 and $148,000 at June 30, 1995, and are included in other assets. Amortization, generally on a two-year straight- line basis, begins when the products are first shipped. All other research and development costs are expensed as incurred. INCOME TAXES Certain of the companies involved in the merger discussed in Note 1 had previously elected to be taxed as S corporations. As an S corporation, a company generally is not responsible for income taxes. Instead, the stockholders are taxed on the Company's taxable income at the stockholders' individual federal and state income tax rates. These companies have incurred losses since inception. At the time of the merger described in Note 1, the S corporation status of the companies discussed above was terminated and, accordingly, the Company has been subject to federal and state income taxes from the effective date of the merger. The Company recognizes deferred taxes for cumulative temporary differences between financial reporting and tax reporting. Such deferred taxes are based on the cumulative temporary differences at the date of the merger. If the termination of the S corporation status had occurred at June 30, 1993, deferred taxes would not have been significant. Upon termination of the S corporation status, cumulative losses of approximately $865,000 attributable to the entities which had elected S corporation status were reclassified to additional paid-in capital from accumulated deficit. The Company accounts for income taxes under the liability method whereby deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. NET LOSS PER SHARE Net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. CASH AND CASH EQUIVALENTS The Company considers investments with an initial maturity of three months or less to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of receivables. At June 30, 1996 and 1995, the fair value of the Company's receivables approximated their carrying value. INVENTORIES Inventories consist of electronic components and other hardware which are recorded at the lower of cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is computed on the straight-line basis over the assets' estimated useful lives of four or five years. Leasehold improvements are amortized over the lease term. Expenditures for maintenance and repairs are charged to operations when incurred. 27 INTANGIBLE ASSETS Intangible assets consist of costs associated with the establishment of patents, trademarks, gaming licenses, and gaming product approvals in various jurisdictions. Amortization started in 1996 and is calculated using the straight-line method over a period of 2 to 15 years. Intangible assets, net of accumulated amortization, were $254,000 at June 30, 1996 and $125,000 at June 30, 1995 and are included in other assets. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECENT PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed of," which requires the Company to review for impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. In certain situations, an impairment loss would be recognized. The Company has adopted the provisions of this Statement, which did not have a material effect on the financial statements. In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation," which establishes a fair value based method of accounting for stock-based compensation plans and requires additional disclosures for those companies that elect not to adopt the new method of accounting. The Company will continue to account for employee stock options under APB Opinion No. 25, "Accounting for Stock Issued to Employees." The disclosures required by Statement No. 123 will be effective for the Company's fiscal year ending June 30, 1997. 2. INVENTORIES: Inventories consist of the following: 1996 1995 ---------- ---------- Raw Materials $1,464,000 $1,930,000 Work-in-progress 718,000 292,000 Finished Goods 510,000 173,000 ---------- ---------- $2,692,000 $2,395,000 ---------- ---------- ---------- ---------- 3. INCOME TAXES: At June 30, 1996, the Company had cumulative net operating losses totaling approximately $7,000,000 which are available to offset future taxable income through 2011. The Company has provided a valuation allowance for the entire amount of the benefit related to these net operating loss carryforwards as its realizability is uncertain at this time. Deferred tax liabilities were insignificant as of June 30, 1996. 28 4. COMMITMENTS AND CONTINGENCIES: The Company leases its office facilities under operating leases that extend through March, 2001. Future minimum lease payments under these noncancelable operating leases as of June 30, 1996 are $239,000 in 1997, $254,000 in 1998, $227,000 in 1999, $97,000 in 2000, and $13,000 in 2001. Total lease expense for the years ended June 30, 1996, 1995 and 1994 was $228,000, $189,000 and $86,000, respectively. 5. PATENT INFRINGEMENT LITIGATION: The Company and a customer were named as defendants in a lawsuit filed in August 1993, which alleged patent infringement and sought to enjoin the Company from selling progressive jackpot table games. In April 1994, the Company was found to have infringed on certain patents and the patents were held to be valid. A charge of $898,000 was recorded in the statement of operations for the settlement reached after conclusion of the trial, as well as all expenses related to the trial and the settlement agreement. The Company had sold only four of the table games and had not considered them a part of its primary business plan. 6. STOCKHOLDERS' EQUITY: In November 1993, the Company completed its initial public offering and issued 1,667,500 units, consisting of 1,667,500 shares of common stock and 833,750 Redeemable Warrants. The net proceeds of the offering were $7,153,000. The Redeemable Warrants, which expire October 27, 1996, allow the holder to purchase one share of common stock at $7.50 per share. In connection with the offering, the Company granted the underwriter warrants to purchase 145,000 shares of the Company's units at $6 per share. The warrants expire in November 1998. In June 1995, the Company issued 400,000 shares of common stock to a group of private investors for net proceeds of $2,255,000. In connection with this offering, the Company granted warrants to purchase 40,000 shares of common stock at $7.20 per share, which approximated market value at that date. In exchange for services, the Company issued warrants in 1995 to purchase 195,000 shares of common stock to two companies and two individuals. Exercise prices of the warrants range from $4.75 to $9.00 per share. The warrants expire between April, 1998 and September, 2000. Of these, warrants to purchase 50,000 shares were valued at $96,000 and recorded as paid-in capital and amortized over the term of the related service agreement. Expense associated with these warrants was $56,000 in 1996 and $40,000 in 1995. The Company has a Stock Option Plan (the Plan) which permits the granting of awards to directors, employees and consultants of the Company in the form of stock options. Stock options granted under the Plan may be incentive stock options or nonqualified options. A total of 1,000,000 shares of the Company's common stock has been reserved for issuance pursuant to awards granted under the Plan. Options to purchase 278,000 shares of common stock were exercisable at June 30, 1996. 29 Activity under the Plan is summarized below: Aggregate Number Amount Price of Shares Per Share (in Thousands) --------- ----------- -------------- Options outstanding at June 30, 1993 - $ - $ - Granted 310,000 3.00-10.00 1,501 Exercised (250) 3.00 (1) -------- ----------- ------- Options outstanding at June 30, 1994 309,750 3.00-10.00 1,500 Granted 165,500 4.16-6.50 909 Exercised (26,750) 3.00-5.50 (98) Lapsed (56,875) 3.00-10.00 (421) -------- ----------- ------- Options outstanding at June 30, 1995 391,625 3.00-10.00 1,890 Granted 562,400 3.50-10.00 2,582 Exercised (91,500) 3.00-6.50 (526) Lapsed (106,150) 4.16-10.00 (743) -------- ----------- ------- Options outstanding at June 30, 1996 756,375 $3.00-10.00 $ 3,203 -------- ----------- ------- -------- ----------- ------- 7. EMPLOYEE BENEFIT PLAN: The Company has a profit sharing plan which operates under the provisions of section 401(k) of the Internal Revenue Code and covers substantially all full- time employees. Employer contributions may be made at the discretion of the Board of Directors. To date, there have been no employer contributions. 8. SUBSEQUENT EVENT: In August 1996, the Company executed a letter of intent to implement a strategic alliance with International Game Technology (IGT). IGT is the largest manufacturer of slot machines in the world. The agreement includes a $5 million investment from IGT in return for 519,481 newly issued shares of the Company's 3% convertible preferred stock, with a twelve-month option to purchase an additional 519,481 preferred shares at the same price. Under the strategic alliance, the Company and IGT will be allied in four product areas: 1) The Company will create specialty games, using IGT equipment as the foundation, to be installed under leasing and/or revenue sharing agreements in casinos; 2) the Company will sell its Concept III promotions and player tracking components for use in IGT Smart System-TM- player tracking/slot accounting installations; 3) IGT will be able to incorporate into its slot machines the Company's displays and other game enhancement tools, and; 4) the Company will develop promotions for use on IGT's Wide Area Network that supports "Megabucks," "QuarterMania" and other progressive jackpot promotions. IGT will have the right to elect one member of the Company's Board of Directors. Closing of the investment transaction is subject to the approval of the new class of preferred stock by the Company's shareholders, execution of definitive agreements, and approval of gaming and other regulatory authorities. 30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No changes in or disagreements with accountants which required reporting on Form 8-K have occurred within the two-year period ended June 30, 1996. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to Directors of the Company is incorporated herein by reference to the Company's Proxy Statement which will be filed pursuant to Regulation 14A within 120 days of June 30, 1996. ITEM 11. EXECUTIVE COMPENSATION Information with respect to Executive Compensation is incorporated herein by reference to the Company's Proxy Statement, which will be filed pursuant to Regulation 14A within 120 days of June 30, 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to Security Ownership of Certain Beneficial Owners and Management is incorporated herein by reference to the Company's Proxy Statement which will be filed pursuant to Regulation 14A within 120 days of June 30, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to Certain Relationships and Related Transactions is incorporated herein by reference to the Company's Proxy Statement which will be filed pursuant to Regulation 14A within 120 days of June 30, 1996. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS See Item 8. (2) FINANCIAL STATEMENT SCHEDULES None. (3) EXHIBITS See Exhibit Index. (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the last quarter of the period covered by this report. 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Corvallis, State of Oregon, on September 26, 1996. ACRES GAMING INCORPORATED By: /s/ John F. Acres ------------------------------------ John F. Acres Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated on September 26, 1996.. /s/ John F. Acres ---------------------------------------- John F. Acres Chief Executive Officer and Director (Principal Executive Officer and Sole Director) /s/ Robert W. Brown ---------------------------------------- Robert W. Brown Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 32 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - ------- ----------- * 3.1 Articles of Incorporation of Acres Gaming Incorporated, as amended 3.2 Bylaws of Acres Gaming Incorporated, as amended * 4.1 Warrant Agreement, including form of Redeemable Warrant * 4.2 Underwriting Agreement, including form of Underwriter's Unit Purchase Warrant + 10.1 Acres Gaming Incorporated 1993 Stock Option and Incentive Plan ** 10.2 Lease dated January 4, 1994, between the Company and Avery Investments *** 10.3 Lease dated June 27, 1995, between the Company and McCarran Center, LLC + 10.4 Employment Agreement dated January 2, 1996 between the Company and Joseph A. Huseonica 11.1 Statement of Computation of Earnings per Share 21.1 Subsidiaries of the Registrant 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants 27.1 Financial Data Schedule - ------------------------- +Management contract or compensatory plan or arrangement. *Incorporated by reference to the same numbered Exhibit to the Company's Registration Statement on Form SB-2 (No. 33-69110-S), which was declared effective October 27, 1993, pursuant to Rule 12b-32. **Incorporated by reference to the same numbered Exhibit to the Company's Annual Report on Form 10-KSB, for the year ended June 30, 1994. ***Incorporated by reference to the same numbered Exhibit to the Company's Annual Report on Form 10-KSB for the year ended June 30, 1995. 33 EX-3.2 2 EXHIBIT 3.2 BY-LAWS OF ARTICLE I - OFFICES The principal office of the Corporation shall be located at 701 EAST BRIDGER AVE., SUITE 801, LAS VEGAS, NEVADA, and it may be changed from time to time by the Board of Directors. The Corporation may also maintain offices at such other places within or without the United States as the Board of Directors may, from time to time, determine. ARTICLE II - MEETING OF STOCKHOLDERS SECTION 1 - ANNUAL MEETINGS: The annual meeting of the stockholders of the Corporation shall be held at such time as may be determined by the Board of Directors, for the purposes of electing directors and transacting such other business as may properly come before the meeting. SECTION 2 - SPECIAL MEETINGS: Special meetings of the stockholders may be called at any time by the Board of Directors or by the President, and shall be called by the President or the Secretary at the written request of the holders of twenty-five percent (25%) of the shares then outstanding and entitled to vote thereat, or as otherwise required by law. SECTION 3 - PLACE OF MEETINGS: All meetings of stockholders shall be held at the principal office of the Corporation, or at such other places as shall be designated in the notices or waivers of notice of such meetings. Page (1) of By-Laws SECTION 4 - NOTICE OF MEETINGS: (a) Except as otherwise provided by statute, written notice of each meeting of stockholders, whether annual or special, stating the time when and place where it is to be held, shall be served either personally or by mail, not less than ten or more than sixty (60) days before the meeting, upon each stockholder of record entitled to vote at such meeting, and to any other stockholder to whom the giving of notice may be required by law. Notice of a special meeting shall also state the purpose or purposes for which the meeting is called, and shall indicate that it is being issued by, or at the direction of, the person or persons calling the meeting. If, at any meeting, action is proposed to be taken that would, if taken, entitle stockholders to receive payment for their shares pursuant to statute, the notice of such meeting shall include a statement of that purpose and to that effect. If mailed, such notice shall be directed to each such stockholder at his address, as it appears on the records of the stockholders of the Corporation, unless he shall have previously filed with the Secretary of the Corporation a written request that notices intended for him be mailed to some other address, in which case, it shall be mailed to the address designated in such request. (b) Notice of any meeting need not be given to any person who may become a stockholder of record after the mailing of such notice and prior to the meeting, or to any stockholder who attends such meeting, in person or by proxy, or to any stockholder who, in person or by proxy, submits a signed waiver of notice either before or after such meeting. Notice of any adjourned meeting of stockholders need not be given, unless otherwise required by statute. SECTION 5 - QUORUM: (a) Except as otherwise provided herein, or by statute, or in the Certificate of Incorporation (such certificate and any amendments thereof being hereinafter collectively referred to as the "Certificate of Incorporation"), at all meetings of stockholders of the Corporation, the presence at the commencement of such meetings in person or by proxy of stockholders holding of record 51% of the total number of shares of the Corporation then issued and outstanding and entitled to vote, shall be necessary and sufficient to constitute a quorum for the transaction of any business. The withdrawal of any stockholder after the commencement of a meeting shall have no effect on the existence of a quorum, after a quorum has been established at such meeting. (b) Despite the absence of a quorum at any annual or special meeting of stockholders, the stockholders, by a majority of the votes cast by the holders of shares entitled to vote thereat, may adjourn the meeting. At any such adjourned meeting at which a quorum is present, any business may be transacted at the meeting as originally called if a quorum had been present. Page (2) of By-Laws SECTION 6 - VOTING (a) Except as otherwise provided by statute or by the Certificate of Incorporation, any corporate action, other than the election of directors, to be taken by vote of the stockholders, shall be authorized by a majority of votes cast at a meeting of stockholders by the holders of shares entitled to vote thereat. (b) Except as otherwise provided by statute or by the Certificate of Incorporation, at each meeting of stockholders, each holder or record of stock of the Corporation entitled to vote thereat, shall be entitled to one vote for each share of stock registered in his name on the books of the Corporation. (c) Each stockholder entitled to vote or to express consent or dissent without a meeting, may do so by proxy; provided, however, that the instrument authorizing such proxy to act shall have been executed in writing by the stockholder himself, or by his attorney-in-fact thereunto duly authorized in writing. No proxy shall be valid after the expiration of eleven (11) months from the date of its execution, unless the person executing it shall have specified therein the length of time it is to continue in force. Such instrument shall be exhibited to the Secretary at the meeting and shall be filed with the minutes of the meeting. (d) Any action, except election of directors, which may be taken by a vote of stockholders at a meeting, may be taken without a meeting if authorized by a written consent of shareholders holding at least a majority of the voting power; provided that if a greater proportion of voting power is required by such action at such meeting, then such greater proportion of written consents shall be required. ARTICLE III - BOARD OF DIRECTORS SECTION 1 - NUMBER, ELECTION AND TERM OF OFFICE: (a) The number of the directors of the Corporation shall be not less than 1 not more than 9, unless and until otherwise determined by vote of a majority of the entire Board of Directors. The number of Directors shall not be less than three (3), unless all of the outstanding shares of stock are owned beneficially and of record by less than three (3) stockholders, in which event the number of directors shall not be less than the number of stockholders or the minimum permitted by statute. Page (3) of By-Laws (b) Except as may otherwise be provided herein or in the Certificate of Incorporation by way of cumulative voting rights the members of the Board of Directors of the Corporation, who need not be stockholders, shall be elected by a majority of the votes cast at a meeting of stockholders, by the holders of shares of stock present in person or by proxy, entitled to vote in the election. (c) Each director shall hold office until the annual meeting of the stockholders next succeeding his election, and until his successor is elected and qualified, or until his prior death, resignation, or removal. SECTION 2 - DUTIES AND POWERS: The Board of Directors shall be responsible for the control and management of the affairs, property and interests of the Corporation and may exercise all powers of the Corporation, except as are in the Certificate of Incorporation or by statute expressly conferred upon or reserved to the stockholders. SECTION 3 - ANNUAL AND REGULAR MEETINGS; NOTICE: (a) A regular annual meeting of the Board of Directors shall be held immediately following the annual meeting of the stockholders, at the place of such annual meeting of stockholders. (b) The Board of Directors, from time to time, may provide by resolution for the holding of other regular meetings of the Board of Directors, and may fix the time and place thereof. (c) Notice of any regular meeting of the Board of Directors shall not be required to be given and, if given, need not specify the purpose of the meeting; provided, however, that in case the Board of Directors shall fix or change the time or place of any regular meeting, notice of such action shall be given to each director who shall not have been present at the meeting at which such change was made within the time limited, and in the manner set forth in Paragraph (b) Section 4 of this Article III, with respect to special meetings, unless such notice shall be waived in the manner set forth in Paragraph (c) of such Section 4. SECTION 4 - SPECIAL MEETING; NOTICE: (a) Special meetings of the Board of Directors shall be held whenever called by the President or by one of the directors, at such time and place as may be specified in the respective notices or waivers of notice thereof. Page (4) of By-Laws (b) Except as otherwise required by statute, notice of special meetings shall be mailed directly to each director, addressed to him at his residence or usual place of business, at least four (4) days before the day on which the meeting is to be held, or shall be sent to him at such place by telegram, radio or cable, or shall be delivered to him personally or given to him orally, not later than the day before the day on which the meeting is to be held. A notice, or waiver of notice except as required by Section 8 or this Article III, need not specify the purpose of the meeting. (c) Notice of any special meeting shall not be required to be given to any director who shall attend such meeting without protesting prior thereto or at its commencement, the lack of notice to him or who submits a signed waiver of notice, whether before or after the meeting. Notice of any adjourned meeting shall not be required to be given. SECTION 5 - CHAIRMAN: At all meetings of the Board of Directors, the Chairman of the Board, if any and if present, shall preside. If there shall be no Chairman, or he shall be absent, then the Vice Chairman shall preside, and in his absence, a Chairman chosen by the directors shall preside. SECTION 6 - QUORUM AND ADJOURNMENTS: (a) At all meetings of the Board of Directors, the presence of a majority of the entire Board shall be necessary and sufficient to constitute a quorum for the transaction of business, except as otherwise provided by law, by the Certificate of Incorporation, or by these By-Laws. (b) A majority of the directors, present at the time and place of any regular or special meeting, although less than a quorum, may adjourn the same from time to time without notice, until a quorum shall be present. SECTION 7 - MANNER OF ACTING: (a) At all meetings of the Board of Directors, each director present shall have one vote, irrespective of the number of shares of stock, if any, which he may hold. (b) Except as otherwise provided by statute, by the Certificate of Incorporation, or by these By-Laws, the action of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. (c) Unless otherwise required by amendment to the Articles of Incorporation or statute, any action required or permitted to be taken at any meeting of the Board of Directors or any Committee thereof may be taken without a meeting if a written consent thereto is signed by all the members of the Board of Committee. Such written consent shall be filed with the minutes of the proceedings of the Board or Committee. Page (5) of By-Laws (d) Unless otherwise prohibited by Amendments to the Articles of Incorporation or statute, members of the Board of Directors or of any Committee of the Board of Directors may participate in a meeting of such Board or Committee by means of a conference telephone network or a similar communications method by which all persons participating in the meeting can hear each other. Such participation is constituted presence of all of the participating persons at such meeting, and each person participating in the meeting shall sign the minutes thereof, which may be signed in counterparts. SECTION 8 - VACANCIES: Any vacancy in the Board of Directors, occurring by reason of an increase in the number of directors, or by reason of the death, resignation, disqualification, removal (unless vacancy created by the removal of a director by the stockholders shall be filled by the stockholders at the meeting at which the removal was effected) or inability to act of any director, or otherwise, shall be filled for the unexpired portion of the term by a majority vote of the remaining directors, though less than a quorum, at any regular meeting or special meeting of the Board of Directors called for that purpose. SECTION 9 - RESIGNATION: Any director may resign at any time by giving written notice to the Board of Directors, the President or the Secretary of the Corporation. Unless otherwise specified in such written notice such resignation shall take effect upon receipt thereof by the Board of Directors or such officer, and the acceptance of such resignation shall not be necessary to make it effective. SECTION 10 - REMOVAL: Any director may be removed with or without cause at any time by the affirmative vote of stockholders holding of record in the aggregate at least a majority of the outstanding shares of stock of the Corporation at a special meeting of the stockholders called for that purpose, and may be removed for cause by action of the Board. SECTION 11 - SALARY: No stated salary shall be paid to directors, as such, for their services, but by resolution of the Board of Directors a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board; provided, however, that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Page (6) of By-Laws SECTION 12 - CONTRACTS: (a) No contract or other transaction between this Corporation and any other corporation shall be impaired, affected or invalidated, nor shall any director be liable in any way by reason of the fact that any one or more of the directors of this Corporation is or are interested in, or is a director or officer, or are directors or officers of such other corporation, provided that such facts are disclosed or made known to the Board of Directors, prior to their authorizing such transaction. (b) Any director, personally and individually, may be a party to or may be interested in any contract or transaction of this Corporation, and no director shall be liable in any way by reason of such interest, provided that the fact of such interest be disclosed or made known to the Board of Directors prior to their authorization of such contract or transaction, and provided that the Board of Directors shall authorize, approve or ratify such contract or transaction by the vote (not counting the vote any such Director) of a majority of a quorum, notwithstanding the presence of any such director at the meeting at which such action is taken. Such director or directors may be counted in determining the presence of a quorum at such meeting. This Section shall not be construed to impair or invalidate or in any way affect any contract or other transaction which would otherwise be valid under the law (common, statutory or otherwise) applicable thereto. SECTION 13 - COMMITTEES: The Board of Directors, by resolution adopted by a majority of the entire Board, may from time to time designate from among its members an executive committee and such other committees, and alternate members thereof, as they may deem desirable, with such powers and authority (to the extent permitted by law) as may be provided in such resolution. Each such committee shall serve at the pleasure of the Board. ARTICLE IV - OFFICERS SECTION 1 - NUMBER, QUALIFICATIONS, ELECTION AND TERM OF OFFICE: (a) The officers of the Corporation shall consist of a President, a Secretary, a Treasurer, or a President and Secretary-Treasurer, and such other officers, including a Chairman of the Board of Directors, and one or more Vice Presidents, as the Board of Directors may from time to time deem advisable. Any officer other than the Chairman or Vice Chairman of the Board of Directors may be, but is not required to be a director of the Corporation. Any two or more offices may be held by the same person. Page (7) of By-Laws (b) The officers of the Corporation shall be elected by the Board of Directors at the regular annual meeting of the Board following the annual meeting of stockholders. (c) Each officer shall hold office until the annual meeting of the Board of Directors next succeeding his election, and until his successor shall have been elected and qualified or until his death, resignation or removal. SECTION 2 - RESIGNATION: Any officer may resign at any time by giving written notice of such resignation to the Board of Directors, or to the President or the Secretary of the Corporation. Unless otherwise specified in such written notice, such resignation shall take effect upon receipt thereof by the Board of Directors or by such officer, and the acceptance of such resignation shall not be necessary to make it effective. SECTION 3 - REMOVAL: Any officer may be removed, either with or without cause, and a successor elected by a majority vote of the Board of Directors at any time. SECTION 4 - VACANCIES: A vacancy in any office by reason of death, resignation, inability to act, disqualification, or any other cause, may at any time be filled for the unexpired portion of the term by a majority vote of the Board of Directors. SECTION 5 - DUTIES OF OFFICERS: Officers of the Corporation shall, unless otherwise provided by the Board of Directors, each have such powers and duties as generally pertain to their respective offices as well as such powers and duties as may be set forth in these by-laws, or may from time to time be specifically conferred or imposed by the Board of Directors. The President shall be the chief executive officer of the Corporation. SECTION 6 - SURETIES AND BONDS: In case the Board of Directors shall so require any officer, employee, or agent of the Corporation shall execute to the Corporation a bond in such sum, and with such surety or sureties as the Board of Directors may direct, conditioned upon the faithful performance of his duties to the Corporation, including responsibility for negligence for the accounting for all property, funds or securities of the corporation which may come into his hands. Page (8) of By-Laws SECTION 7 - SHARES OF STOCK OF OTHER CORPORATIONS: Whenever the Corporation is the holder of shares of stock of any other corporation, any right or power of the Corporation as such stockholder (including the attendance, acting and voting at stockholder's meetings and execution of waivers, consents proxies or other instruments) may be exercised on behalf of the Corporation by the President, any Vice President or such other person as the Board of Directors may authorized. ARTICLE V - SHARES OF STOCK SECTION 1 - CERTIFICATE OF STOCK: (a) The certificates representing shares of the Corporation's stock shall be in such form as shall be adopted by the Board of Directors, and shall be numbered and registered in the order issued. They shall bear the holder's name and the number of shares of stock and shall be signed by (i) the Chairman of the Board or the President or a Vice President, and (ii) the Secretary or Treasurer, or any Assistant Secretary or Assistant Treasurer, and shall bear the corporate seal. (b) No certificate representing shares of stock shall be issued until the full amount of consideration therefor has been paid, except as otherwise permitted by law. (c) To the extent permitted by law, the Board of Directors may authorize the issuance of certificates for fractions of a share of stock which shall entitle the holder to exercise voting rights, receive dividends and participate in liquidating distributions, in proportion to the fractional holdings; or it may authorize the payment in cash of the fair value of fractions of a share of stock as of the time when those entitled to receive such fractions are determined; or it may authorize the issuance, subject to such conditions as may be permitted by law, of scrip in registered or bearer form over the signature of an officer or agent of the Corporation, exchangeable as therein provided for full shares of stock, but such scrip shall not entitle the holder to any rights of a stockholder, except as therein provided. SECTION 2 - LOST OR DESTROYED CERTIFICATES: The holder of any certificate representing shares of stock of the Corporation shall immediately notify the Corporation of any loss or destruction of the certificate representing the same. The Corporation may issue a new certificate in the place of any certificate theretofore issued by it, alleged to have been lost or destroyed. On production of Page (9) of By-Laws such evidence of loss or destruction as the Board of Directors in its discretion may require, the Board of Directors may, in its discretion, require the owner of the lost or destroyed certificate, or his legal representatives, to give the corporation a bond in such sum as the Board may direct, and with such surety or sureties as may be satisfactory to the Board, to indemnify the Corporation against any claims, loss, liability or damage it may suffer on account of the issuance of the new certificate. A new certificate may be issued without requiring any such evidence or bond when, in the judgment of the Board of Directors, it is proper to do so. SECTION 3 - TRANSFER OF SHARES: (a) Transfer of shares of stock of the Corporation shall be made on the stock ledger of the Corporation only by the holder of record thereof, in person or by his duly authorized attorney, upon surrender for cancellation of the certificate or certificates representing such shares of stock with an assignment or power of transfer endorsed thereon or delivered therewith, duly executed, with such proof of the authenticity of the signature and of authority to transfer and of payment of taxes as the Corporation or its agents may require. (b) The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the absolute owner thereof for all purposes and, accordingly, shall not be bound to recognize any legal, equitable or other claim to, or interest in, such share or shares of stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by law. SECTION 4 - RECORD DATE: In lieu of closing the stock ledger of the Corporation, the Board of Directors may fix, in advance, a date not exceeding sixty (60) days, nor less than ten (10) days, as the record date for the determination of stockholders entitled to receive notice of, or to vote at, any meeting of stockholders, or to consent to any proposal without a meeting, or for the purpose of determining stockholders entitled to receive payment of any dividends or allotment of any rights, or for the purpose of any other action. If no record date is fixed, the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if no notice is given, the day preceding the day on which the meeting is held; the record date for determining stockholders for any other purpose shall be at the close of business on Page (10) of By-Laws the day on which the resolution of the directors relating thereto is adopted. When a determination of stockholders of record entitled to notice of or to vote at any meeting of stockholders has been made as provided for herein, such determination shall apply to any adjournment thereof, unless the directors fix a new record date for the adjourned meeting. ARTICLE VI - DIVIDENDS Subject to applicable law, dividends may be declared and paid out of any funds available therefor, as often, in such amounts, and at such time or times as the Board of Directors may determine. ARTICLE VII - FISCAL YEAR The fiscal year of the Corporation shall be 1-1 to 12-31 and may be changed by the Board of Directors from time to time subject to applicable law. ARTICLE VIII - CORPORATE SEAL The corporate seal shall be in such form as shall be approved from time to time by the Board of Directors. ARTICLE IX - INDEMNITY (a) Any person made a party to any action, suit or proceeding, by reason of the fact that he, his testator or interstate representative is or was a director, officer or employee or the Corporation, or of any Corporation in which he served as such at the request of the Corporation, shall be indemnified by the Corporation against the reasonable expenses, including attorneys' fees, actually and necessarily incurred by him in connection with the defense of such action, suit or proceedings, or in connection with any appeal therein, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding, or in connection with any appeal therein that such officer, director or Page (11) of By-Laws employee is liable for gross negligence or misconduct in the performance of his duties. (b) The foregoing right of indemnification shall not be deemed exclusive of any other rights to which any officer or director or employee may be entitled apart from the provisions of this section. (c) The amount of indemnity to which any officer or any director may be entitled shall be fixed by the Board of Directors, except that in any case where there is no disinterested majority of the Board available, the amount shall be fixed by arbitration pursuant to the then existing rules of the American Arbitration Association. ARTICLE X - AMENDMENTS SECTION 1 - BY STOCKHOLDERS: All by-laws of the Corporation shall be subject to alteration or repeal, and new by-laws may be made, by the affirmative vote of the stockholders holding of record in the aggregate at least a majority of the outstanding shares of stock entitled to vote in the election of directors at any annual or special meeting of stockholders, provided that the notice or waiver of notice of such meeting shall have summarized or set forth in full therein, the proposed amendment. SECTION 2 - BY DIRECTORS: The Board of Directors shall have the power to make, adopt, alter, amend and repeal, from time to time, by-laws of the Corporation; provided, however, that the stockholders entitled to vote with respect thereto as in this Article X above-provided may alter, amend or repeal by-laws made by the Board of Directors, except that the Board of Directors shall have no power to change the quorum for meetings of stockholders or of the Board of Directors or to change any provisions of the by-laws with respect to the removal of directors of the filling of vacancies in the Board resulting from the removal by the stockholders. In any by-law regulating an impending election of directors is adopted, amended, or repealed by the Board of Directors, there shall be set forth in the notice of the next meeting of stockholders for the election of directors, the by-laws so adopted, amended or repealed, together with a concise statement of the changes made. Page (12) of By-Laws EX-10.1 3 EXHIBIT 10.1 ACRES GAMING INCORPORATED 1993 STOCK OPTION AND INCENTIVE PLAN The purpose of the Acres Gaming Incorporated 1993 Stock Option and Incentive Plan (the "Plan") is to promote the growth and profitability of Acres Gaming Incorporated (the "Company") and its Affiliates by providing its key employees and consultants with an incentive to achieve long-term corporate objectives, to attract and retain persons of outstanding competence, and to provide such persons with an equity interest in the Company. 1. STOCK SUBJECT TO PLAN. An aggregate of 1,000,000 shares (the "Shares") of the Common Stock, par value $.01 per share ("Common Stock") of the Company may be subject to awards granted under the Plan. Such Shares may be authorized but unissued Common Stock or authorized and issued Common Stock that has been or may be acquired by teh Company. Shares that are subject to an award which expires or is terminated unexercised, or which are reacquired by the Company upon the forfeiture of restricted Shares, shall again be available for issuance under the Plan. 2. ADMINISTRATION. A. COMMITTEE. The Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board"). The Committee shall be comprised of the entire Board or, if the Board so determines, of two or more members of the Board. B. POWERS AND DUTIES. The Committee shall have the authority to make rules and regulations governing the administration of the Plan; to select the eligible employees and consultants to whom awards shall be granted; to determine the type, amount, size, and terms of awards; to determine the time when awards shall be granted; to determine whether any restrictions shall be placed on Shares purchased pursuant to any option or issued pursuant to any award; and to make all other determinations necessary or advisable for the administration of the Plan. The Committee's determinations need not be uniform, and may be made by it selectively among persons who are eligible to receive awards under the Plan, whether or not such persons are similarly situated. All interpretations, decisions, or determinations made by the Committee pursuant to the Plan shall be final and conclusive. 3. ELIGIBILITY. Any employee of or consultant to the Company or of any of its Affiliates shall be eligible to receive awards under the Plan. A person who has been granted an award under this Plan, or under any predecessor plan, may be granted additional awards if the Committee shall so determine. Except to the extent otherwise provided in the agreement evidencing an award, the granting of an award under this Plan shall not affect any outstanding award previously granted under this Plan or under any other plan of the Company or any Affiliate. For purposes of the Plan, the term "Affiliate" shall mean any "parent corporation" or "subsidiary corporation" of the Company, as those terms are defined in Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended. 4. AWARDS. The Committee may make awards to eligible persons in the form of stock options which are intended to qualify as "Incentive Stock Options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or stock options which are not intended to so qualify ("Nonqualified Options"), or awards of restricted stock, or any combination thereof. 5. STOCK OPTIONS. A stock option granted pursuant to the Plan shall entitle the optionee, upon exercise, to purchase Shares at a specified price during a specified period. Options shall be subject to such terms and conditions as the Committee shall from time to time approve; PROVIDED, that each option shall be subject to the following requirements: A. TYPE OF OPTION. Each option shall be identified in the agreement pursuant to which it is granted as an Incentive Stock Option or as a Nonqualified Option, as the case may be. B. TERM. No option shall be exercisable more than 121 months after the date on which it is granted. C. PAYMENT. The purchase price of Shares subject to an option shall be payable in full at the time the option is exercised. Payment may be made in cash, in shares of Common Stock having an aggregate fair market value on the date of exercise which is not less than the option price, or by a combination of cash and such shares, as the Committee may determine, and subject to such terms and conditions as the Committee deems appropriate. D. PURCHASE PRICE OF NONQUALIFIED OPTIONS. The purchase price of Shares that are subject to Nonqualified Options shall also be determined by the Committee at the time such Options are granted, but in no event shall such purchase price be less than 85% of the fair market value of such shares on the date of the grant. E. OPTIONS NOT TRANSFERABLE. Options shall not be transferable except to the extent permitted by the agreement evidencing such option; PROVIDED, that in no event shall any option be transferable by the optionee, other than by will or the laws of descent and distribution. Options shall be exercisable during an optionee's lifetime only by such optionee. If, pursuant to the agreement evidencing any option, such option remains exercisable after the optionee's death, it may be exercised, to the extent permitted by such agreement, by the personal representative of the optionee's estate or by any person who acquired the right to exercise such option by bequest, inheritance, or otherwise by reason of the optionee's death. F. INCENTIVE STOCK OPTIONS. If an option is an Incentive Stock Option, it shall be subject to the following additional requirements: i. Incentive Stock Options may be granted only to persons who are employees of the Company or of an Affiliate, ii. The purchase price of Shares that are subject to an Incentive Stock Option shall not be less than 100% of the fair market value of such Shares at the time the option is granted, as determined in good faith by the Committee. iii. The aggregate fair market value (determined at the time the option is granted) of the Shares with respect to which Incentive Stock Options are -2- exercisable by the Optionee for the first time during any calendar year, under this Plan or any other plan of the Company or any Affiliate, shall not exceed $100,000. iv. An Incentive Stock Option shall not be exercisable more than ten years after the date on which it is granted. v. The purchase price of Shares that are subject to an Incentive Stock Option granted to an employee who, at the time such option is granted, owns 10% or more of the total combined voting power of all classes of stock of the Company or of any Affiliate shall not be less than 110% of the fair market value of such Shares on the date such option is granted, and such option may not be exercisable more than five years after the date on which it is granted. For the purposes of this subparagraph, the rules of Section 424(d) of the Code shall apply in determining the stock ownership of any employee. Subject to the foregoing, options may be made exercisable in one or more installments, upon the happening of certain events, upon the fulfillment of certain conditions, or upon such other terms and conditions as the Committee shall determine. 6. RESTRICTED STOCK. Restricted stock awards granted pursuant to the Plan shall entitle the holder to receive Shares, subject to forfeiture if specified conditions are not satisfied at the end of a specified period. Restricted stock awards shall be subject to such terms and conditions as the Committee shall from time to time approve; PROVIDED, that each award shall be subject to the following requirements: A. RESTRICTED PERIOD. The Committee shall establish a period (the "Restricted Period") at any time an award is granted during which the holder will not be permitted to sell, transfer, pledge, encumber, or assign the Shares subject to the award. The Committee may provide for the lapse of restrictions in installments, or upon the occurrence of certain events, where deemed appropriate. Any attempt by a holder to dispose of restricted Shares in a manner contrary to the applicable restrictions shall be void, and of no force and effect. B. RIGHTS DURING THE RESTRICTED PERIOD. Except to the extent otherwise provided in this paragraph 6 or under the terms of any restricted stock agreement, during the Restricted Period, the holder of restricted Shares shall have all of the rights of a stockholder in the Company with respect to such Shares, including the right to vote the Shares and to receive dividends and other distributions with respect to the Shares; PROVIDED, that all stock dividends, stock rights, and stock issued upon split-ups or reclassifications of Shares shall be subject to the same restrictions as the Shares with respect to which such stock dividends, rights, or additional stock are issued, and may be held in custody as provided below in this paragraph 6 until the restrictions thereon shall have lapsed. C. FORFEITURES. Except to the extent otherwise provided in the restricted stock agreement, all Shares then subject to any restriction shall be forfeited to the -3- Company without further obligation of the Company to the holder thereof, and all rights of the holder with respect to such Shares shall terminate, if the holder shall cease to be an employee of or consultant to the Company and its Affiliates, or if any condition established by the Committee for the release of any restriction shall not have occurred, prior to the expiration of the Restricted Period. D. CUSTODY. The Committee may provide that the certificates evidencing restricted Shares shall be held in custody by a bank or other institution, or by the Company or any Affiliate, until the restrictions thereon have lapsed, and may require that the holder of any restricted Shares shall have delivered to the Company one or more stock powers, endorsed in blank, relating to the restricted Shares as a condition of receiving the award. E. CERTIFICATES. A recipient of a restricted stock award shall be issued a certificate or certificates evidencing the Shares subject to such award. Such certificates shall be registered in the name of the recipients, and may bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, which legend shall be in substantially the following form: "The transferability of this certificate and the shares represented hereby are subject to the terms and conditions (including forfeiture) of the Acres Gaming Incorporated 1993 Stock Option and Incentive Plan and an Agreement entered into between the registered owner and Acres Gaming Incorporated. Copies of such Plan and Agreement are on file in the offices of Acres Gaming Incorporated. F. GIFTS, ETC. Notwithstanding any other provision of this paragraph 6, the Committee may permit a gift of restricted stock to the holder's spouse, child, stepchild, grandchild, or legal dependent, or to a trust whose sole beneficiary or beneficiaries shall be the holder and/or any one of such persons: PROVIDED, that the donee shall have entered into an agreement with the Company pursuant to which it agrees that the restricted stock shall be subject to the same restrictions in the hands of such donee as it was in the hands of the donor. 7. AGREEMENTS. Each option or award granted pursuant to the Plan shall be evidenced by an agreement setting forth the terms and conditions upon which it is granted. Multiple options or awards may be evidenced by a single agreement. Subject to the limitations set forth in the Plan, the Committee may, with the consent of the person to whom an award has been granted, amend any such agreement to modify the terms or conditions governing the award evidenced thereby. 8. ADJUSTMENTS. In the event of any changes in the outstanding Shares of Common Stock by reason of any stock dividend or split, recapitalization, reclassification, combination, or exchange of Shares or other similar corporate change, then if the Committee shall determine, in its sole discretion, that such change necessarily or equitably requires an adjustment in the number of shares subject to an award, in the option price or value of an award, or in the maximum number of Shares subject to this Plan, such adjustments shall be made by the -4- Committee and shall be conclusive and binding for all purposes of this Plan. No adjustment shall be made in connection with the issuance by the Company of any warrants, rights, or options to acquire additional Common Stock or of securities convertible into Common Stock. 9. MERGER, CONSOLIDATION, REORGANIZATION, LIQUIDATION, ETC. Subject to the provisions of the agreement evidencing any award, if the Company shall become a party to any corporate merger, consolidation, major acquisition of property for stock, reorganization, or liquidation, the Board of Directors of the Company shall have the power to make any arrangement it deems advisable with respect to outstanding awards and in the number of Shares subject to this Plan, which shall be binding for all purposes of this Plan, including, but not limited to, the substitution of new awards for any awards then outstanding, the assumption of any such awards, and the termination of such awards. 10. EXPENSES OF PLAN. The expenses of administering this Plan shall be borne by the Company and its Affiliates. 11. RELIANCE ON REPORTS. Each member of the Committee and each member of the Board of Directors shall be fully justified in relying or acting in good faith upon any report made by the independent public accountants of the Company and its Affiliates and upon any other information furnished in connection with this Plan by any person or persons other than himself. In no event shall any person who is or shall have been a member of the Committee or of the Board of Directors be liable for any determination made or other action taken or omitted in reliance upon any such report or information, or for any action taken or omitted, including the furnishing of information, in good faith. 12. RIGHTS AS STOCKHOLDER. Except to the extent otherwise specifically provided hereon, no recipient of any award shall have any rights as a stockholder with respect to Shares sold or issued pursuant to the Plan until certificates for such Shares have been issued to such person. 13. GENERAL RESTRICTIONS. Each award granted pursuant to the Plan shall be subject to the requirement that if, in the opinion of the Committee: a. the listing, registration, or qualification of any Shares related thereto upon any securities exchange or under any state or federal law; b. the consent or approval of any regulatory body; or c. an agreement by the recipient with respect to the disposition of any such Shares; is necessary or desirable as a condition of the issuance or sale of such Shares, such award shall not be consummated unless and until such listing, registration, qualification, consent, approval, or agreement is effected or obtained in form satisfactory to the Committee. 14. EMPLOYMENT RIGHTS. Nothing in this Plan, or in any agreement entered into hereunder, shall confer upon any person the right to continue to serve as an employee of or -5- consultant to the Company or an Affiliate, or affect the right of the Company or Affiliate to terminate such person's service at any time, with or without cause. 15. WITHHOLDING. If the Company proposes or is required to issue Shares pursuant to the Plan, it may require the recipient to remit to it, or may withhold from such award or from the recipient's other compensation, an amount, in the form of cash or Shares, sufficient to satisfy any applicable federal, state, or local tax withholding requirements prior to the delivery of any certificates for such Shares. 16. AMENDMENTS. The Board of Directors of the Company may at any time, and from time to time, amend the Plan in any respect, except that no amendment that would: a. materially increase the benefits accruing to participants under the Plan; b. increase the number of Shares available for issuance or sale pursuant to the Plan (other than as permitted by paragraphs 8 and 9); or c. materially modify the requirements as to eligibility for participation in the Plan; shall be made without the affirmative vote of stockholders holding at least a majority of the voting stock of the Company represented in person or by proxy at a duly held stockholders' meeting. 17. STOCKHOLDER APPROVAL. Any award granted under the Plan prior to the date on which the Plan is approved by stockholders holding at least a majority of the voting stock of the Company represented in person or by proxy at a duly held stockholders' meeting shall be contingent upon such approval. 18. DURATION. No options or rights shall be granted under the Plan after the earlier of: (a) the date on which the Plan is terminated by the Board of Directors of the Company; or (b) July 20, 2003. -6- EX-10.4 4 EXHIBIT 10.4 EMPLOYMENT AGREEMENT This Employment Agreement, herein referred to as "Agreement", is entered into as of January 2, 1996 by and between Joseph A. Huseonica of 1976 Palisades Terrace Drive, Lake Oswego, OR, herein referred to as Employee, and Acres Gaming, Inc., a Nevada corporation whose principal place of business is located at 815 NW 9th Street, Corvallis Oregon, herein referred to as Employer. RECITALS: WHEREAS Employer is engaged in the development, manufacture, and marketing of electronic casino, accounting, game monitoring and game promotion systems; and WHEREAS Employee is willing to be employed by Employer and Employer is willing to employ Employee on the terms, conditions and agreements hereinafter set forth. For the reasons set forth above, and in consideration of the mutual promises and agreements hereinafter set forth, Employer and Employee hereby agrees as follows: SECTION ONE EMPLOYMENT Employer hereby employs, engages and hires Employee as its President and Chief Operating Officer and Employee, hereby accepts and agrees to such hiring, engagement and employment subject to the advice, direction, regulations and supervision of Employer. Employee shall, subject to Employer's instructions and guidelines, perform such management, administrative and operational duties on behalf of Employer, as are customarily performed by one holding a comparable position as a chief operating officer in other businesses or enterprises as that engaged in by Employer. Employee shall also render such other and related services and duties as may be assigned to Employee from time to time by Employer's Board of Directors. Employer's Board of Directors shall have the absolute right to determine not only what specific duties shall be performed by the Employee but also the means and the manner by which those duties shall be performed. Employee agrees to fully and faithfully observe and comply with all of the rules, regulations, policies and procedures which may, from time to time, be issued by the Employer's Board of Directors; provided, however that in the event of an irreconcilable conflict between any such rule, regulation, policy or procedure and any term or provision of this Agreement, the terms and provisions of this Agreement shall govern. 1 SECTION TWO BEST EFFORTS OF EMPLOYEE Employee agrees that he will, at all times, faithfully, industriously, and to the best of his ability, experience and talents, perform all of the duties that may be required of and from him pursuant to the express and implied terms hereof, to the full and complete satisfaction of Employer's Board of Directors. Such duties shall be rendered in Benton County, Oregon and Clark County, Nevada, and at such other place or places as Employer's Board of Directors shall in good faith require or as the interests, needs, business or opportunities of the Employer shall require. Employee shall conduct himself at all times so as not to detract from, or reflect adversely upon, the reputation of the Employer. Employee shall also, at all times during and after the term of this Agreement, neither criticize nor negatively comment upon the Employer or the Employer's business. SECTION THREE TERMS OF EMPLOYMENT The term of this Agreement shall be for an initial period of three years, commencing on January 2, 1996, and terminating on December 31, 1998, subject, however, to prior termination as hereinafter provided. This Agreement and the employment provided for hereunder shall automatically renewed for successive two (2) year terms, unless and until either party gives the other at least ninety (90) days written notice before the end of the then-current term of his intent not to renew. SECTION FOUR COMPENSATION OF EMPLOYEE Employer shall pay Employee, and Employee shall accept from Employer, in full payment for all of the Employee's services hereunder, an annual base salary of one hundred and seventy-five thousand dollars ($175,000). Such salary shall be payable at the same intervals as the other hourly and salaried employees of the Employer are paid and shall be subject to customary withholding taxes and other employment taxes as required by law. Employee acknowledges and agrees that he is an "exempt" employee under federal employment laws and that to the extent he is required to devote more than forty (40) hours per week or eight (8) hours per day to the performance of his duties hereunder, additional "overtime" compensation shall not be paid by the Employer and Employee shall have no right to same. Any increase or decrease in the annual salary specified herein must be approved in writing by Employer's Board of Directors and Employee. In addition to the aforementioned base salary, the Employer shall pay the Employee a performance bonus targeted at fifty thousand dollars ($50,000) per year, payable semi-annually in twenty-five thousand dollar ($25,000) increments. The payment of the bonus shall be based on the Employee's successful completion of certain objectives to be defined and mutually agreed to in writing by the Employee and the Board of Directors. 2 SECTION FIVE FACILITIES AND EXPENSES/ADDITIONAL BENEFITS (a) FACILITIES AND EXPENSES. The Employee shall be provided with an office, secretarial and technical help, and such other facilities and services as may be suitable to his position and adequate for the performance of his duties. The Employee is encouraged and expected, from time to time, to incur reasonable expenses for promoting the business of the Employer, including expenses for civic club membership and participation, entertainment, travel, and similar items. The cost of such activities, shall be at the expense of the Employer unless, because of unusual circumstances, the Board of Directors of the Employer shall determine that such activities of the Employee should not be authorized as an expense of the Employer. (b) ADDITIONAL BENEFITS. The Employee shall have the right to receive and participate in any additional "fringe benefits", which may from time to time be made available by the Board of Directors to the Employer's executive officers, including, but not limited to, health and accident insurance, disability insurance or other insurance programs for the Employer's executive officers and their families and any pension or profit-sharing plans and stock option plans. SECTION SIX VACATION/SICK LEAVE (a) VACATION. Employee shall accrue paid vacation days during each full month of employment at the rate of one and onequarter (1.25) days for each month worked. In addition, the Employee shall be entitled to such paid holidays as Employer may approve. Upon the termination of this Agreement and Employee's employment hereunder, Employee shall receive payment for any vacation days earned during the year of termination which had not been used by the Employee; provided, however, that unused days of vacation may not be carried over and accumulated from one year to another. (b) SICK. The Employee shall be entitled to ninety (90) calendar day(s) of paid sick leave because of sickness or accident (not otherwise resulting in the Employee's becoming "permanently disabled" as that term is defined in Section Twelve below) without any adjustment in his salary. Upon request of Employer, Employee will provide written doctor certification to substantiate sick leave days used. Unused sick leave may neither be carried over from one year to another nor used for additional vacation. SECTION SEVEN OTHER EMPLOYMENT Employee shall devote his full and undivided time, attention, knowledge and skills solely to the Employer's business-during such hours as may be designated by Employer from time to time during the term of this Agreement. 3 SECTION EIGHT RECOMMENDATIONS FOR IMPROVING OPERATIONS Employee shall make available to Employer all information, suggestions, and recommendations which Employee may have that may benefit Employer in the conduct of its business. SECTION NINE TRADE SECRETS/COVENANT NOT TO COMPETE (a) Employee acknowledges that the business of Employer is a unique and unusual business consisting of the development, manufacture, and marketing of electronic casino, accounting, game monitoring and game promotion systems; that the information which Employer has developed and will develop in its business is not readily accessible to the public or its competitors and the disclosure thereof would be harmful to Employer, and that the Employee in the performance of his duties will have available to him all of Employer's confidential information and if any such information is disclosed, such disclosure would be extremely harmful to Employer and give an advantage to its competitors. Employee acknowledges that Employee will come into contact with and have access to confidential matters and confidential information and "know-how" pertaining to Employer's methods of operation, future products, formulations, product research, product tests, marketing and development in its business. Employee acknowledges that the formulas, documents and other information disclosing the confidential information are not under lock and key during regular business hours because of extensive use by Employer and its employees, including the Employee, and that because of such access, Employer is relying upon the Employee's good faith in the use and handling of such documents to insure that they are not used improperly or to the disadvantage of Employer. Employee shall not, during the term of this Agreement or at any time thereafter, divulge, furnish or make accessible to anyone (other than in the regular course of Employer's business) any knowledge or information with respect to any confidential information concerning the business, methods of operation, products and other aspects of the business of Employer as now or hereafter conducted. All inventions, work products notebooks, ideas and other matters created by Employee in the performance of his duties hereunder, whether or not the same are capable of being patented or copyrighted, shall be the exclusive property of Employer, and Employee shall have no rights of any nature thereto. Employee agrees to execute whatever documents Employer may reasonably require to confirm the foregoing. (b) Employee may not, during the term hereof, be engaged or interested in any manner, directly or indirectly, as a partner, owner, officer, director, stockholder, advisor, 4 employee, agent or in any other capacity, in any other activity, business or entity which, in whole or in part, is competitive with or substantially similar to Employer's business. Furthermore, for a period of one (1) year from the date of the termination of this Agreement, Employee may not be engaged or interested in any manner, directly or indirectly, as a partner, owner, officer, director, stockholder, advisor, employee, agent or in any other capacity, in any business, firm, corporation, association, partnership or other entity, which, in whole or in part, is competitive with or substantially similar to Employer's business in any state in which the Employer's sale of merchandise or services, or both, generated at least ten percent (10%) of the Employer's gross revenue for the twelve month period ending at the end of the month immediately preceding the date of such termination. For example, if this agreement were terminated as of the date hereof, the territorial scope of the one year non-competition covenant would, be as follows: Nevada, Colorado, and Wisconsin. In the event the provisions of this section 9(b) should be deemed to exceed the time or geographic limitations permitted by applicable law, then such provisions shall be reformed to the maximum time or geographic limitation permitted by applicable law. (c) Employee will not employ or associate in a business relationship with (i) any other employee of Employer, or (ii) any person who shall have been an employee of Employer within the six (6) month period prior to the date of expiration or termination of this Agreement or who shall have been in the employ of Employer six (6) months after the date of the expiration or termination of this agreement. SECTION TEN EMPLOYEE'S OBLIGATION AFTER TERMINATION OF THIS AGREEMENT All of the Employee's obligations and liabilities under Sections Two, Nine (a), and Fourteen through Twenty-Seven of this Agreement shall survive the expiration or termination of this Agreement and shall remain in full force and effect even after the termination of Employee's employment. SECTION ELEVEN INJUNCTIVE RELIEF Employer shall be entitled to injunctive and/or other equitable relief to prevent or remedy a breach of any of the provisions of this Agreement (including any of the provisions of Section Nine hereof) and to secure their enforcement, in addition to all other remedies or damages as may be available to Employer at law or in equity; all of which shall be deemed to be cumulative as provided in Section Twenty-Four below. SECTION TWELVE TERMINATION (a) The Employer, at any time, may terminate this Agreement, WITHOUT CAUSE, upon One Hundred Eighty (180) days' written notice to the Employee, and the Employer shall only be obligated to continue to pay the Employee the base salary compensation due him and a 5 pro-rated portion of any bonuses in effect under this Agreement up to the date of termination together with such amount as may be due under Section Six hereof. (b) The Employee, at any time, may terminate this Agreement WITHOUT CAUSE, upon Sixty (60) days' written notice to the Employer, and Employer shall be obligated only to continue to pay the Employee the compensation due him under this Agreement up to the date of termination together with such amount as may be due under Section Six hereof. (c) Employer shall have the right to immediately and without notice terminate this Agreement and Employee's employment hereunder in the event of any fraud, embezzlement, dishonesty or other illegal act by Employee which adversely effects Employer or in the event Employee is deemed unsuitable by any governmental licensing authority having jurisdiction over the Employer and shall be entitled to such further remedies and damages as may be available at law or in equity. (d) In the event of a breach or evasion by either party of any of the terms of this Agreement, which has not been cured within thirty (30) days after written notice specifying such breach or evasion has been given by the non-breaching party, the non-breaching party thereupon may immediately and without further notice, terminate this Agreement and shall be entitled to such further remedies or damages as may be available at law or in equity. (e) If the event of the Employee's death during the term of this Agreement, this Agreement shall terminate immediately and without notice, and the Employee's estate shall be entitled to receive only the compensation due the Employee under this Agreement up to the date of termination together with such amount as may be due under Section Six hereof. (f) This Agreement shall also terminate after 90 days notification to the Employee by the Employer, unless otherwise agreed by the Employer's Board of Directors, in the event the Employee shall become permanently disabled (i.e. shall have been continuously unable or unwilling to perform his material duties hereunder for at least seventy-five percent (75%) of the time during any consecutive six (6) month period, because of ill health, physical or mental disability or for any cause beyond his control). SECTION THIRTEEN (THIS SECTION NOT USED.) SECTION FOURTEEN HOLD HARMLESS (a) Employee shall indemnify, defend and hold Employer harmless from and against any and all claims, damages, losses, liabilities, actions, expenses and other obligations and responsibilities of whatsoever kind or nature, including, without limitation, all legal fees and costs, arising out of or connected with, directly or indirectly, (i) Employee's breach or evasion of 6 any of his obligations under this Agreement or (ii) Employee's negligence or willful misconduct in the performance of any of his Employee minimum duties and responsibilities hereunder. (b) Employer shall indemnify, defend and hold Employee harmless from and against any and all claims, damages, losses, liabilities, actions, expenses and other obligations and responsibilities of whatsoever kind or nature, including, without limitation, all legal fees and costs, arising out of or connected with, directly or indirectly, Employer's breach or evasion of any of its obligations under this Agreement. SECTION FIFTEEN ENTIRE AGREEMENT This Agreement contains the complete agreement concerning the employment arrangement between the parties and shall as of the effective date hereof, supersede all other prior agreements between the parties. Neither party has relied on any prior representations in entering into this Agreement. SECTION SIXTEEN MODIFICATION OF CONTRACT No cancellation, waiver, alteration or modification of this Agreement or of any covenant, condition, or limitation herein contained shall be valid unless in writing and duly executed by the party to be charged therewith, and no evidence of any cancellation, waiver, alteration or modification shall be offered or received in evidence in any proceeding, arbitration, or litigation between the parties hereto arising out of or affecting this Agreement, or the rights or obligations of the parties hereunder, unless such cancellation, waiver, alteration or modification is in writing, duly executed as aforesaid. The parties further agree that the provisions of this Section may not be waived except as herein set forth and that any oral or implied agreement which conflicts with any of the foregoing shall be void, unenforceable and of no force and effect. SECTION SEVENTEEN SEVERABILITY OF TERMS If any term or provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other terms, covenants, conditions and provisions of this Agreement shall nevertheless remain in full force and effect, provided that the invalidity, illegality or unenforceability of such term or provision does not materially impair either (i) the parties' ability to consummate, or (ii) the economic substance of, the transaction contemplated hereby. If the invalidity, illegality or unenforceability of any term or other provision materially impairs either (i) the parties' ability to consummate the transaction in the manner contemplated hereby, or (ii) the economic substance of the transaction and the parties hereto shall, if at all possible, amend this Agreement so as to effect the original intention of the parties to the fullest extent. 7 SECTION EIGHTEEN ASSIGNMENT The parties agree that the services covered by this Agreement are strictly personal and that this Agreement is not assignable or transferable by Employee or Employer either voluntarily or by operation of law without the prior written consent of the other party. SECTION NINETEEN NOTICES All notices, requests, approvals, demands or other communication of any kind which any party may be required or may desire to serve on the other in connection with this Agreement shall be in writing and shall be deemed to have been duly and sufficiently given if: (a) personally delivered with proof of delivery thereof (any notice so delivered shall be deemed to have been received at the time so delivered), (b) sent by Federal Express (or other similar overnight courier) designating early morning delivery (any notice so delivered shall be deemed to have been received on the next Business Day following receipt by the courier), (c) sent by United States registered or certified mail, return receipt requested, postage prepaid, at a post office regularly maintained by the United States Postal Service (any notice so sent shall be deemed to have been received two (2) Business Days after mailing in the United States), or, (d) sent by telecopier or facsimile machine which automatically generates a transmission report that states the date and time of the transmission, the length of the document transmitted and the telephone number of the recipient's telecopier of facsimile machine (with a copy thereof sent in accordance with subparagraphs (a),(b),(c) above) (any notice so delivered shall be deemed to have been received (i) on the date of transmission, if so transmitted before 5:30 p.m. (local time of the recipient) on a Business Day, or (ii) on the next Business Day, if so transmitted on or after 5:30 p.m. (local time of the recipient) on a Business Day or if transmitted on a day other than a Business Day), addressed to the parties at their respective addresses designated below. All notices shall be addressed to the parties at the addresses as set forth below. Either party may, by notice given pursuant to this Section, change the person or persons and/or address or addresses, or designate an additional person or persons or an additional address or addresses, for its notices, but notice of a change of address shall only be effective upon receipt. If to Employer: Acres Gaming, Inc 815 N.W. 9th Street Corvallis, OR 97330 If to Employee: Joseph A. Huseonica 1976 Palisades Terrace Drive Lake Oswego, OR 97034 SECTION TWENTY -------------- JURISDICTION/ATTORNEY'S FEES If legal action is initiated relative to this Agreement or the rights or obligations of any party hereunders, the parties hereto stipulate and agree that such action must seek only the remedies available to the parties hereunder and must be initiated, maintained and continued in Clark County, Nevada. The nonprevailing parties in such action shall pay reasonable attorneys' fees to the prevailing parties, with the amounts to be determined by the court, or the arbitrators, in said action. SECTION TWENTY-ONE ------------------ BINDING EFFECT This Agreement shall be binding upon and inure to the benefit of Employee and Employer and their respective heirs, executors, administrators, successors and permitted assigns (if any). SECTION TWENTY-TWO ------------------ CAPTIONS Captions of the Sections of this Agreement are for convenience of reference only, and the words contained therein shall in no way be held to explain, modify, amplify, or aid in the interpretation, construction or meaning of the provisions of this Agreement. SECTION TWENTY-THREE -------------------- WAIVER OF BREACH No waiver of any breach of any of the terms Of provisions of this Agreement shall be, or be construed to be, a waiver of any preceding or succeeding breach of the same or any other provision hereof. 9 SECTION TWENTY-FOUR ------------------- CUMULATIVE RIGHTS No failure on the part of the Employer to exercise, and no delay in exercising, any right, power, privilege or remedy granted herein shall operate as a waiver thereof; nor shall any single or partial exercise of any such right power or privilege preclude any other or further exercise thereof or the exercise of any other right. The rights and remedies provided herein are cumulative and not exclusive of any other rights or remedies which Employer shall otherwise have at law or equity. SECTION TWENTY-FIVE ------------------- CHOICE OF LAW It is the intention of the parties hereto that this Agreement and the performance hereunder and all suits and special proceedings hereunder be governed by and construed in accordance with and pursuant to the laws of the State of Nevada and that in any action, special proceeding or other proceeding that may be brought arising our of, in connection with, or by reason of this Agreement, the laws of the State of Nevada shall be a applicable and shall govern to the exclusion of the law of any other forum, without regard to the jurisdiction in which any action or special proceeding may be instituted. SECTION TWENTY-SIX ------------------ GENDER, NUMBER, DISCRETION Masculine, feminine and neuter pronouns shall be substituted freely for each other, and the plural and singular forms of pronouns shall be substituted freely for each other in any provision of this Agreement in which the context appropriately requires such substitution. All article, sections, paragraph and exhibit references used in this Agreement are to this Agreement unless otherwise specified. Any reference herein to time of day refers to local time in Las Vegas, Nevada. Unless the context of this Agreement clearly requires otherwise, (i) the words "includes" or "including" shall mean "including without limitation," and (ii) the words "hereof", "herein", "hereunder", and similar terms in this Agreement shall refer to this Agreement as a whole and not any particular section or article in which such words appear. Currency amounts referenced herein are in United States Dollars. Reference in this Agreement to the "discretion" of a party means the party's sole and absolute discretion and shall not be subject to any external standards, including but not limited to, any standard of custom, "good faith" or reasonableness. SECTION TWENTY-SEVEN -------------------- ARBITRATION All claims, disputes and questions whatsoever except those requiring an equitable remedy (e.g. an injunction against a breach of any restrictive covenant in Section Nine hereof), which shall arise either during the term of this Agreement or afterward between the parties hereto or their respective representatives, relating to this Agreement, or the construction or application 10 hereof, or any other matter in any way relating to the rights, duties, and liabilities of either party hereunder, shall be referred to a board of arbitration as follows: Each party shall select one arbitrator, within ten (10) calendar days of its receipt of a written demand therefor, and these two arbitrators so chosen shall within ten (10) calendar days of their appointment, appoint a third arbitrator, and said arbitrators shall, by majority decision within sixty (60) calendar days thereafter, determine the matter in dispute. Said arbitrators shall be bound by the terms of this Agreement and such arbitration shall, be conducted in accordance with the Uniform Arbitration Act as has been adopted in Chapter 38 of the Nevada Revised Statutes and as may be amended from time to time. Such determination shall be final and binding upon the parties. Judgment may be entered upon such determination and may be specifically enforced in accordance with applicable law in any court having jurisdiction thereof. The expenses of the arbitration shall be borne equally by the parties to the arbitration, provided that each party shall pay for and bear the cost of its own experts, witness and counsels fees and provided further that any award shall include a prevailing party's costs, including a reasonable counsel's fee. THE UNDERSIGNED EMPLOYEE ACKNOWLEDGES THAT HE HAS READ THE FOREGOING AGREEMENT AND FULLY UNDERSTANDS THE MEANING AND CONSEQUENCES OF EACH AND EVERY TERM CONTAINED HEREIN. THE UNDERSIGNED EMPLOYEE FURTHER ACKNOWLEDGES THAT, TO THE EXTENT DEEMED APPROPRIATE, HE HAS EMPLOYED AND CONSULTED WITH HIS OWN COUNSEL CONCERNING THIS AGREEMENT AND HAVING CONSIDERED SUCH LEGAL ADVICE, HE HAS EXECUTED IT AS HIS FREE AND VOLUNTARY ACT AND DEED. IN WITNESS WHEREOF, the parties have executed this Agreement at Corvallis, Oregon, as of the date above written. "EMPLOYEE" "EMPLOYER" Acres Gaming, Inc., a Nevada Corporation /s/ JOSEPH A. HUSEONICA By: JOHN F. ACRES - ----------------------------- ------------------------------ Joseph A. Huseonica John F. Acres Its: Director 11 EX-11.1 5 EXHIBIT 11.1 Exhibit 11.1 ACRES GAMING INCORPORATED COMPUTATION OF EARNINGS PER SHARE
For the Year Ended June 30 -------------------------- 1996 1995 1994 ----------------------------------------------- Net Loss ($1,641,000) ($2,505,000) (2,598,000) ------------ ------------- ------------ Weighted Average Number of Common Shares Outstanding 7,552,000 7,145,000 6,629,000 Effect of Common Stock Equivalents * * * ------------ ------------ ------------ Weighted Average Number of Common Shares Outstanding 7,552,000 7,145,000 6,629,000 ------------ ------------- ----------- ------------ ------------- ----------- Net Loss Per Share ($0.22) ($0.35) ($0.39) ---------- ---------- ---------- ---------- ---------- ----------
*Effect of common stock equivalents is anti-dilutive and therefore not included. EX-21.1 6 EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT Name State of Incorporation - ---- ---------------------- AGI Distribution, Inc. Nevada EX-23.1 7 EXHIBIT 23.1 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 Form S-3, No. 333-2258). It should be noted that we have not audited any financial statements of the Company subsequent to June 30, 1996, or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Portland, Oregon September 26, 1996 EX-27 8 EXHIBIT 27
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-30-1996 JUN-30-1996 2,500,000 0 910,000 0 2,692,000 6,196,000 2,369,000 (1,329,000) 7,631,000 3,644,000 0 0 0 11,300,000 (7,313,000) 7,631,000 6,942,000 6,942,000 3,587,000 5,020,000 0 0 (24,000) (1,641,000) 0 0 0 0 0 (1,641,000) (0.22) (0.22)
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