Acres Gaming Reports Decline for Q2 2002

7 February 2002

Acres Gaming Incorporated

Net income for the quarter was $729,000, or $.07 per diluted share, compared to $1.5 million, or $.13 per diluted share in the prior year quarter. Net income for the first half of fiscal 2002 totaled $1.1 million, or $.10 per diluted share, an increase of $1.2 million over the net loss of $110,000, or ($.01) per diluted share for the first half of fiscal 2001.

Revenues for the quarter ended December 31, 2001 were $5.3 million, compared to $10.2 million in the prior year quarter. During the quarter, the Company recorded $1.2 million in royalty revenue for fees it received from Mikohn Gaming Corporation for the license of certain of its bonusing patents in connection with the settlement of litigation for past royalties. The current run-rate for the ongoing fees to be received from this license is $50,000 per quarter. Revenues for the first half of fiscal 2002 were $11.4 million, compared to $13.0 million in the same period in the prior year.

The Company recorded no revenue during the first half of fiscal 2002 from Station Casinos on its Xtra Play Cash and Random Xtra Play Cash Bonusing modules already installed due to the contractual requirement to deliver other Bonusing modules in the future. The Company's order backlog at December 31, 2001 was $20.1 million, compared to $19.5 million at December 31, 2000. Backlog, however, may not be a meaningful indicator of future revenues. The Company's revenues fluctuate significantly based on the timing of the delivery of any large order.

Bud Glisson, Acres' CEO said, ``While the lack of revenue recognition for Bonusing already installed at Station Casinos is disappointing from a financial standpoint, indications are that they have been successful with what has been implemented thus far. Both Station and Acres remain committed to successful completion of the remaining work.

``Prospects for new orders have improved as business has returned to more normal conditions since September 11, and we have several new contracts under negotiation for delivery during this fiscal year,'' Glisson continued. ``However, until the timing of revenue recognition and associated earnings on Station Bonusing becomes clear, earnings expectations for this fiscal year have to account for this uncertainty, which has more to do with contract terms and revenue recognition than the work actually completed. The estimated impact of Station Bonusing on this year's earnings is approximately $4 million; with full revenue recognition we would expect earnings of up to $8 million, and without any revenue recognition, we would expect earnings of $4 million.''

Gross profit margin increased to 63 percent in the current quarter versus 40 percent in the prior year quarter. For the first half of fiscal 2002, gross profit margins were 56 percent versus 36 percent in the same period of fiscal 2001. The increase in gross profit margins was primarily attributable to the fact that software sales and royalty fees, which made up a greater percentage of the current quarter and first half of fiscal 2002 sales, carry a higher gross profit margin than the hardware sales recorded in the prior year quarter and first half.

Net operating expenses increased to $3.0 million in the current quarter from $2.6 million in the prior year quarter. For the six-month period ended December 31, 2001, net operating expenses increased to $5.7 million from $4.9 million in the same period of the prior year. The increase in net operating expenses resulted primarily from an increase in research and development staff.

Other income, net, consisting principally of gain on settlement of litigation of $339,000, was $347,000 for the current quarter compared to $23,000 in the prior year quarter. Other income was $411,000 for the six-month period ended December 31, 2001, compared to $19,000 for the prior year period. The increase in other income is primarily due to the gain on settlement of litigation with Mikohn recorded during the current quarter.

At December 31, 2001, the Company had $12.6 million in cash and equivalents. During the quarter, the Company sold $5 million principal amount of 6% subordinated convertible debentures in a private placement. Effective January 28, 2002, the Company used the proceeds from the debentures to redeem all of its 519,481 outstanding shares of Series A Convertible Preferred Stock on the redemption date.