Acres Gaming Reports Loss for Q3

16 May 2002

Acres Gaming Incorporated

Revenues for the quarter ended March 31, 2002 were $5.6 million, compared to $17.5 million in the prior year quarter. Net loss for the quarter was $(259,000), or $(.03) per diluted share, compared to net income of $2.6 million, or $.25 per diluted share in the prior year quarter. Revenues for the first nine months of fiscal 2002 were $17.1 million, compared to $30.4 million in the same period in the prior year. Net income for the first nine months of fiscal 2002 totaled $889,000, or $.09 per diluted share, compared to net income of $2.5 million, or $.24 per diluted share for the first nine months of fiscal 2001.

"Our business momentum is quite strong," said Bud Glisson, Acres' Chairman and CEO. "However, the company has recorded virtually no revenue from Station Casinos Bonusing."

The company has delivered and installed Xtra Play Cash and Random Xtra Play Cash, which are both in use at all six Station Casinos properties and has delivered another bonus that is awaiting final gaming approval before being installed at all six Station properties. No revenue (other than a small amount for Green Valley Ranch) has been recognized on these deliveries during the first nine months of fiscal 2002 or prior due to contractual requirements that Acres deliver other Bonusing modules in the future.

Glisson continued, "Even without any Station Bonusing revenue, we expect net income during the fourth quarter of this fiscal year to exceed the $2.6 million net income from last year's third quarter, which was the Company's best quarter ever. Although we're currently trailing last year's fiscal nine month net income by $1.6 million, we continue to expect net income for this fiscal year (ending June 30, 2002) to at least equal last year's $4 million, and net income could be as much as $8 million depending upon revenue recognition on Station Bonusing deliveries."

"We expect revenues in the range of $28 million to $32 million for the year, again depending on Station Bonusing. 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 Bonusing modules actually delivered."

The Company's order backlog at March 31, 2002 was $24.3 million, including the unrecognized sales value of the Station Casinos Bonuses discussed above, compared to $21.1 million at June 30, 2001. 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.

Gross profit margin increased to 49 percent in the current quarter versus 36 percent in the prior year quarter. For the first nine months of fiscal 2002, gross profit margins were 54 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 nine months of fiscal 2002 sales, carry a higher gross profit margin than the hardware sales recorded in the prior year quarter and first nine months.

Net operating expenses decreased to $2.8 million in the current quarter from $3.8 million in the prior year quarter. For the nine-month period ended March 31, 2002, net operating expenses decreased to $8.5 million from $8.6 million in the same period of the prior year. The decrease in net operating expenses resulted primarily from a decrease in legal expenses, which was partially offset by an increase in research and development expenses during the current quarter and nine-month periods, compared to the respective prior year periods.

Other income (expense), net, consisting principally of interest, was $(213,000) for the current quarter compared to $74,000 in the prior year quarter. Other income (expense) was $199,000 for the nine-month period ended March 31, 2002, compared to $93,000 for the prior year period. The increase in other income (expense) during the current quarter compared to the prior year quarter is primarily due to the increase in interest expense and amortization of debt issuance costs on convertible debentures. The increase in other income (expense) during the first nine months of Fiscal 2002 is primarily due to the gain on settlement of litigation with Mikohn recorded during the prior quarter, which was partially offset by an increase in interest expense and amortization of debt issuance costs during the current quarter.

At March 31, 2002, the Company had $7.3 million in cash and equivalents. During the prior 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.