U.S. SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2003
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________to__________
Commission File Number 0-22498
Acres Gaming Incorporated
| Nevada | 88-0206560 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
7115 Amigo Street, Suite 150
Las Vegas, NV 89119
(Address of principal executive offices)
702-263-7588
(Registrant’s telephone number)
Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the Registrant’s Common Stock, par value $.01 per share, as of April 30, 2003 was 9,992,631.
ACRES GAMING INCORPORATED
Table of Contents
| Page | ||
| PART I — FINANCIAL INFORMATION | ||
| Item 1. Financial Statements | ||
| Consolidated Balance Sheets at March 31, 2003 (unaudited) and June 30, 2002 | 1 | |
| Consolidated Statements of Operations for the Three Months and Nine Months Ended March 31, 2003 and 2002 (unaudited) | 2 | |
| Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2003 and 2002 (unaudited) | 3 | |
| Notes to Unaudited Consolidated Financial Statements | 5 | |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 16 | |
| Item 4. Controls and Procedures | 16 | |
| PART II — OTHER INFORMATION | ||
| Item 1. Legal Proceedings | 17 | |
| Item 6. Exhibits and Reports on Form 8-K | 17 | |
| SIGNATURES | 18 | |
| 302 CERTIFICATIONS | 19 | |
| INDEX TO EXHIBITS | 21 |
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
ACRES GAMING INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
| March 31, 2003 | June 30, 2002 | |||||||||
| (unaudited) | ||||||||||
| (in thousands, except share data) | ||||||||||
CURRENT ASSETS: |
||||||||||
Cash and equivalents |
$ | 14,481 | $ | 7,312 | ||||||
Receivables, net of allowance of $1,154 and $932, respectively |
10,744 | 7,582 | ||||||||
Inventories |
5,146 | 3,985 | ||||||||
Deferred taxes |
4,002 | — | ||||||||
Prepaid expenses |
363 | 439 | ||||||||
Total current assets |
34,736 | 19,318 | ||||||||
PROPERTY AND EQUIPMENT: |
||||||||||
Furniture and fixtures |
1,996 | 1,944 | ||||||||
Equipment |
4,014 | 3,618 | ||||||||
Leasehold improvements |
487 | 486 | ||||||||
Accumulated depreciation |
(5,701 | ) | (5,280 | ) | ||||||
Total property and equipment |
796 | 768 | ||||||||
OTHER ASSETS, Net |
696 | 786 | ||||||||
TOTAL ASSETS |
$ | 36,228 | $ | 20,872 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||
CURRENT LIABILITIES: |
||||||||||
Accounts payable |
$ | 3,288 | $ | 2,277 | ||||||
Accrued compensation |
992 | 654 | ||||||||
Accrued other expenses |
340 | 254 | ||||||||
Deferred revenue |
8,086 | 4,375 | ||||||||
Convertible subordinated debentures, current |
1,820 | 3,600 | ||||||||
Note payable, current |
100 | 100 | ||||||||
Total current liabilities |
14,626 | 11,260 | ||||||||
Convertible subordinated debentures, net of current portion and discount |
— | 677 | ||||||||
Note payable, net of current portion |
294 | 369 | ||||||||
Total Liabilities |
14,920 | 12,306 | ||||||||
COMMITMENTS AND CONTINGENCIES |
||||||||||
STOCKHOLDERS’ EQUITY: |
||||||||||
Common Stock, $.01 par value, 50 million shares authorized, 9.9 million
and 9.4 million shares issued and outstanding, respectively |
99 | 94 | ||||||||
Additional paid-in capital |
24,487 | 22,003 | ||||||||
Deferred stock-based compensation |
(308 | ) | (552 | ) | ||||||
Accumulated deficit |
(2,970 | ) | (12,979 | ) | ||||||
Total stockholders’ equity |
21,308 | 8,566 | ||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 36,228 | $ | 20,872 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
ACRES GAMING INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended March 31, 2003 and 2002
(unaudited)
| Three months ended | Nine months ended | |||||||||||||||||
| March 31, | March 31, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
| (in thousands except per share data) | ||||||||||||||||||
NET REVENUES |
$ | 9,487 | $ | 5,632 | $ | 27,027 | $ | 17,069 | ||||||||||
COST OF REVENUES |
2,272 | 2,853 | 8,954 | 7,888 | ||||||||||||||
GROSS PROFIT |
7,215 | 2,779 | 18,073 | 9,181 | ||||||||||||||
OPERATING EXPENSES: |
||||||||||||||||||
Research and development |
1,786 | 1,451 | 5,023 | 4,437 | ||||||||||||||
Selling, general and administrative |
2,145 | 1,374 | 6,535 | 4,054 | ||||||||||||||
Total operating expenses |
3,931 | 2,825 | 11,558 | 8,491 | ||||||||||||||
INCOME (LOSS) FROM OPERATIONS |
3,284 | (46 | ) | 6,515 | 690 | |||||||||||||
INTEREST AND OTHER INCOME (EXPENSE),
NET |
(211 | ) | (213 | ) | (684 | ) | 199 | |||||||||||
INCOME (LOSS) BEFORE INCOME TAXES |
3,073 | (259 | ) | 5,831 | 889 | |||||||||||||
INCOME TAX BENEFIT |
4,178 | — | 4,178 | — | ||||||||||||||
NET INCOME(LOSS) |
$ | 7,251 | $ | (259 | ) | $ | 10,009 | $ | 889 | |||||||||
NET INCOME (LOSS) PER SHARE — BASIC |
$ | .75 | $ | (.03 | ) | $ | 1.06 | $ | .10 | |||||||||
NET INCOME (LOSS) PER SHARE — DILUTED |
$ | .67 | $ | (.03 | ) | $ | .95 | $ | .09 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements
2
ACRES GAMING INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended March 31, 2003 and 2002
(unaudited)
| Nine months ended | ||||||||||||
| March 31, | ||||||||||||
| 2003 | 2002 | |||||||||||
| (in thousands) | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income |
$ | 10,009 | $ | 889 | ||||||||
Adjustments to reconcile net income to net cash provided by (used
in) operating activities: |
||||||||||||
Depreciation and amortization |
736 | 995 | ||||||||||
Amortization of debt issuance costs |
264 | 84 | ||||||||||
Amortization of debt discount |
244 | 175 | ||||||||||
Amortization of deferred stock-based compensation |
244 | 244 | ||||||||||
Provision for doubtful accounts |
222 | 340 | ||||||||||
Changes in assets and liabilities: |
||||||||||||
Receivables |
(3,384 | ) | (1,194 | ) | ||||||||
Inventories |
(1,161 | ) | 164 | |||||||||
Deferred tax assets |
(4,295 | ) | — | |||||||||
Prepaid expenses |
76 | 6 | ||||||||||
Accounts payable and accrued expenses |
1,435 | (2,678 | ) | |||||||||
Accrued litigation settlement obligation |
— | (2,010 | ) | |||||||||
Deferred revenue |
3,711 | (1,340 | ) | |||||||||
Net cash provided by (used in) operating activities |
8,101 | (4,325 | ) | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Purchase of property and equipment |
(644 | ) | (411 | ) | ||||||||
Other, net |
(2 | ) | (607 | ) | ||||||||
Net cash used in investing activities |
(646 | ) | (1,018 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Redemption of preferred stock |
— | (4,948 | ) | |||||||||
Issuance of common stock, net |
89 | 741 | ||||||||||
Proceeds from convertible subordinated debentures |
— | 5,000 | ||||||||||
Debt issuance costs |
— | (595 | ) | |||||||||
Proceeds from issuance of note payable |
— | 494 | ||||||||||
Payments for convertible subordinated debentures |
(300 | ) | — | |||||||||
Payments on note payable |
(75 | ) | — | |||||||||
Net cash provided by (used in) financing activities |
(286 | ) | 692 | |||||||||
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS |
7,169 | (4,651 | ) | |||||||||
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD |
7,312 | 11,958 | ||||||||||
CASH AND EQUIVALENTS AT END OF PERIOD |
$ | 14,481 | $ | 7,307 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
ACRES GAMING INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Nine Months Ended March 31, 2003 and 2002
(unaudited)
| Nine months ended | |||||||||
| March 31, | |||||||||
| 2003 | 2002 | ||||||||
| Supplemental disclosure of cash flow information: | (in thousands) | ||||||||
Cash paid for interest |
$ | 153,000 | $ | 9,000 | |||||
Supplemental disclosure of non-cash financing activities: |
|||||||||
Common stock issued in satisfaction of principal redemptions under
convertible subordinated debentures, based on election of debenture holders |
$ | 2,400 | — | ||||||
Value of warrants issued in conjunction with convertible subordinated debentures |
— | $ | 595 | ||||||
Value of warrants issued as debt issuance costs |
— | $ | 125 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
ACRES GAMING INCORPORATED
Notes to Unaudited Consolidated Financial Statements
1. Unaudited Consolidated Financial Statements
Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted from these unaudited consolidated financial statements. These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2002 filed with the Securities and Exchange Commission.
In the opinion of management, the interim consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of the interim period. The results of operations for the three- and nine-month periods ended March 31, 2003 are not necessarily indicative of the expected operating results for the full year or future periods.
2. Significant Accounting Policies
Revenue Recognition
The Company sells certain of its products under contracts that generally provide for a deposit to be paid before commencement of the project and for a final payment to be made after completion of the project. Customer deposits received under sales agreements are reflected as deferred revenue until the related revenue is recognized.
Revenue for hardware sales is recognized when hardware components and primary application software have been installed and have been accepted by the customer. For software license revenue, the Company applies the provisions of Statement of Position 97-2, Software Revenue Recognition (“SOP 97-2”), and Statement of Position 98-9 Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions (“SOP 98-9”), which amends SOP 97-2. The Company’s sales of software products generally include multiple elements such as installation of software, training, post contract customer support and maintenance services. SOP 97-2 and SOP 98-9, as amended, generally require revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on the evidence that is specific to the vendor (vendor-specific objective evidence or “VSOE”). The Company follows the residual method under SOP 97-2 for software product sales with multiple elements. Software license revenue is recognized upon acceptance of the software. The only undelivered element at the time of revenue recognition for software is generally support and maintenance services. The Company uses renewal rates to establish VSOE for support and maintenance services. Revenue allocated to support and maintenance is recognized ratably over the maintenance term.
The Company has entered into certain manufacturing royalty agreements where revenue is recognized as the licensed manufacturer sells the related hardware products.
For certain contracts requiring significant product customization, revenue is recognized on the percentage-of-completion method. Labor costs incurred for customization and installation are the basis for determining percentage-of-completion, giving effect to the most recent estimates of such total labor costs. The effect of changes to total estimated customization and installation labor costs is recognized in the period in which such changes are determined. The Company defers revenue subject to penalty, forfeiture, refund or other concession until such factors have expired and the revenue meets the criteria for collectibility. Provisions for estimated losses are made in the period in which the loss first becomes apparent.
Included in accounts receivable are unbilled receivables of $1,031,000 and $757,000 at March 31, 2003 and June 30, 2002, respectively. Unbilled receivables represent revenues recognized in excess of billings on certain contracts accounted for under the percentage of completion method. Unbilled receivables were not billable at the balance sheet date, but are recoverable as billings are made in accordance with the contract terms.
5
Stock Options
The Financial Accounting Standards Board has issued Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). This Statement defines a fair market value based method of accounting for an employee stock option in which companies account for stock options by recognizing, as compensation expense in the statement of operations, the fair value of stock options granted over the vesting period of the option. The statement also permits companies to continue accounting for stock options under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). The company has elected to account for stock options under APB 25 and to disclose the pro forma impact on net income and earnings per share as if the Company had used the fair value method recommended by SFAS 123, as amended by Statement No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FAS 123.” The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition principles of SFAS 123 to stock-based compensation:
| For the Three Months | For the Nine Months | |||||||||||||||||
| Ended March 31, | Ended March 31, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Net income (loss), as reported—basic |
$ | 7,251 | $ | (259 | ) | $ | 10,009 | $ | 889 | |||||||||
Net income (loss), as reported—diluted |
$ | 7,290 | $ | (259 | ) | $ | 10,167 | 973 | ||||||||||
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards, net
of related tax effects |
124 | 156 | 371 | 467 | ||||||||||||||
Pro forma net income (loss)—basic |
$ | 7,127 | $ | (415 | ) | $ | 9,638 | $ | 422 | |||||||||
Pro forma net income (loss)—diluted |
$ | 7,166 | $ | (415 | ) | $ | 9,796 | $ | 506 | |||||||||
Earnings (loss) per share: |
||||||||||||||||||
Basic—as reported |
$ | .75 | $ | (.03 | ) | $ | 1.06 | $ | .10 | |||||||||
Basic—pro forma |
$ | .74 | $ | (.05 | ) | $ | 1.02 | $ | .05 | |||||||||
Diluted—as reported |
$ | .67 | $ | (.03 | ) | $ | .95 | $ | .09 | |||||||||
Diluted—pro forma |
$ | .66 | $ | (.05 | ) | $ | .91 | $ | .05 | |||||||||
3. Recent Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements concerning the guarantor’s obligations under certain guarantees that it has issued. FIN 45 also clarifies (for guarantees issued after January 1, 2003) that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligations undertaken in issuing the guarantee. The Company does not have any outstanding guarantees and accordingly the adoption of FIN 45 had no effect on its financial position, results of operations or cash flows.
In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities” (“FIN 46”), which addresses the requirements for business enterprises to consolidate related entities in which they are determined to be the primary economic beneficiary as a result of their variable economic interests. The interpretation is intended to provide guidance in judging multiple economic interests in an entity and in determining the primary beneficiary. The interpretation outlines disclosure requirements for variable interest entities (“VIEs”) created after January 31, 2003. The Company has reviewed its major relationships and its overall economic interests with other companies and other suppliers to determine the extent of its variable economic interest in these parties, and has determined that it would not be judged to be the primary beneficiary in any material relationships, or that any material entities would be judged to be VIEs of the Company.
6
In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” which provides guidance on accounting for arrangements involving the delivery or performance of multiple products, services and/or rights to use assets. The provisions of Issue 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company has not yet determined the affect that the adoption of EITF 00-21 may have on the Company’s financial position, results of operations, or cash flows.
4. Inventories
Inventories consist of electronic components and other hardware, which are recorded at the lower of cost (first-in, first-out) or market. Inventories consist of the following:
| March 31, | June 30, | |||||||