Spin for Cash Wide Area Progressive Joint Venture
Financial Statements for the years ended September 30, 2000, October 2, 1999
and September 30, 1998 and Independent Auditors' Report
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Co-Venturers of the Spin for Cash Wide Area Progressive Joint Venture:
We have audited the accompanying balance sheets of the Spin for Cash Wide Area
Progressive Joint Venture (the "Venture") as of September 30, 2000 and October
2, 1999, and the related statements of income, venturers' capital, and cash
flows for the years ended September 30, 2000, October 2, 1999 and September 30,
1998. These financial statements are the responsibility of the Venture's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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, such financial statements present fairly, in all material
respects, the financial position of the Venture as of September 30, 2000 and
October 2, 1999, and the results of its operations and its cash flows for the
years ended September 30, 2000, October 2, 1999 and September 30, 1998, in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Reno, Nevada
November 6, 2000
<PAGE>
SPIN FOR CASH WIDE AREA PROGRESSIVE JOINT VENTURE
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended
September 30, October 2, September 30,
2000 1999 1998
------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
REVENUES:
Gaming operations $375,379 $293,460 $246,851
-------- -------- --------
COSTS AND EXPENSES:
Cost of gaming operations 139,329 121,774 99,768
Depreciation 25,206 20,405 15,124
Research and development 3,853 3,216 2,088
Selling, general, and administrative 300 177 189
Provision for bad debts 28 - 125
-------- -------- --------
Total expenses 168,716 145,572 117,294
-------- -------- --------
INCOME FROM OPERATIONS 206,663 147,888 129,557
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income 9,778 6,307 3,745
Interest expense (4,494) (4,234) (2,323)
Loss on investments - (3) -
Foreign currency valuation (15) - -
-------- -------- --------
Total other income (expense), net 5,269 2,070 1,422
-------- -------- --------
NET INCOME $211,932 $149,958 $130,979
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SPIN FOR CASH WIDE AREA PROGRESSIVE JOINT VENTURE
BALANCE SHEETS
September 30, October 2,
2000 1999
-------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 70,279 $ 57,783
Accounts receivable, net of allowance for doubtful
accounts of $102 and $74 35,785 24,674
Investments to fund liabilities to jackpot winners 6,558 4,741
Prepaid royalties 27,443 15,238
Prepaid expenses and other 3,396 931
-------- --------
Total current assets 143,461 103,367
-------- --------
FURNITURE, FIXTURES AND EQUIPMENT, at cost 91,208 51,688
Less accumulated depreciation (49,879) (29,309)
-------- --------
Furniture, fixtures and equipment, net 41,329 22,379
-------- --------
PREPAID ROYALTIES - 24,164
-------- --------
INVESTMENTS TO FUND LIABILITIES TO JACKPOT
WINNERS 68,274 50,033
-------- --------
TOTAL ASSETS $253,064 $199,943
======== ========
LIABILITIES AND VENTURERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable to IGT $ 3,260 $ 27,997
Accounts payable to Anchor 18 715
Jackpot liabilities 26,592 26,529
Commissions and other payables 866 1,297
Capital lease payable to IGT - 398
-------- --------
Total current liabilities 30,736 56,936
LONG-TERM JACKPOT LIABILITIES 81,575 66,197
-------- --------
Total liabilities 112,311 123,133
VENTURERS' CAPITAL 140,753 76,810
-------- --------
TOTAL LIABILITIES AND VENTURERS' CAPITAL $253,064 $199,943
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SPIN FOR CASH WIDE AREA PROGRESSIVE JOINT VENTURE
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
-------------------------------------------
September 30, October 2, September 30,
2000 1999 1998
---------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $211,932 $149,958 $130,979
-------- -------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 25,206 20,405 15,124
Provision for bad debts 28 - 125
Increase in accounts receivable (11,139) (4,495) (8,517)
(Increase) decrease in prepaid expenses and other 12,186 (38,494) (1,725)
Increase (decrease) in accounts payable and
accrued expenses (26,263) 17,370 (13,526)
-------- -------- --------
Total adjustments 18 (5,214) (8,519)
-------- -------- --------
Net cash provided by operating activities 211,950 144,744 122,460
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in furniture, fixtures, and equipment (46,552) (10,749) (31,802)
Proceeds from the sale of furniture, fixtures,
and equipment 2,396 2,735 2,774
Proceeds from investments to fund liabilities to
jackpot winners 4,684 35,449 5,892
Purchase of investments to fund liabilities to
jackpot winners (24,742) (21,105) (63,653)
-------- -------- --------
Net cash provided by (used in) investing activities (64,214) 6,330 (86,789)
---------- -------- --------
</TABLE>
<PAGE>
SPIN FOR CASH WIDE AREA PROGRESSIVE JOINT VENTURE
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------
September 30, October 2, September 30,
2000 1999 1998
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on jackpot liabilities $ (79,823) $ (87,096) $ (5,892)
Collection from systems to fund jackpot liabilities 92,572 85,045 79,024
Capital contributions 22,275 22,275 -
Distributions (170,264) (159,350) (102,143)
---------- ----------- ---------
Net cash used in financing activities (135,240) (139,126) (29,011)
---------- ----------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 12,496 11,948 6,660
CASH AND CASH EQUIVALENTS:
Beginning of year 57,783 45,835 39,175
---------- ----------- ---------
End of year $ 70,279 $ 57,783 $ 45,835
========== =========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
INFORMATION -
Cash paid for interest during the year $ 4,494 $ 4,512 $ 3,696
========== =========== =========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES -
Capital lease additions $ - $ 201 $ 2,128
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SPIN FOR CASH WIDE AREA PROGRESSIVE JOINT VENTURE
STATEMENTS OF VENTURERS' CAPITAL
--------------------------------------------------------------------------------
(Dollars in thousands)
Anchor IGT Total
---------- --------- ---------
BALANCE, OCTOBER 1, 1997 $ 17,674 $ 17,417 $ 35,091
Distributions (51,200) (50,943) (102,143)
Net income 65,489 65,490 130,979
-------- -------- ---------
BALANCE, SEPTEMBER 30, 1998 31,963 31,964 63,927
Capital contributions - 22,275 22,275
Distributions (79,675) (79,675) (159,350)
Net income 74,979 74,979 149,958
-------- -------- ---------
BALANCE, OCTOBER 2, 1999 27,267 49,543 76,810
Capital contributions 22,275 - 22,275
Distributions (85,132) (85,132) (170,264)
Net income 105,966 105,966 211,932
-------- -------- ---------
BALANCE, SEPTEMBER 30, 2000 $ 70,376 $ 70,377 $ 140,753
======== ======== =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SPIN FOR CASH WIDE AREA PROGRESSIVE JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. ORGANIZATION
The Spin for Cash Wide Area Progressive Joint Venture (the Venture) is
owned equally by IGT, a wholly owned subsidiary of International Game
Technology, and Anchor Gaming (Anchor). The Joint Venture Agreement was
signed on December 3, 1996. The first machines operated by the Venture
were placed into operation on December 12, 1996.
The primary purpose of the Venture is to develop and install innovative
gaming machines which utilize shared expertise and knowledge. As of
September 30, 2000, the Venture was operating in Canada, Colorado,
Indiana, Louisiana, Michigan, Mississippi, Missouri, Native American
markets, Nevada, New Jersey, South Dakota and cruise ship markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The financial statements of the Venture are
maintained in accordance with applicable accounting principles generally
accepted in the United States of America.
Revenues - Substantially all of the revenues of the Venture are from the
operation of linked progressive slot machines. In Colorado, Louisiana,
Michigan, Mississippi, Missouri, Native American markets, Nevada, and
South Dakota, the Venture provides the machines and operates the central
monitoring system. The casinos pay a percentage of the play to the
Venture.
In New Jersey, each progressive system is operated by an independent trust
managed by representatives from participating casinos. The Venture
receives revenues based upon a set annual fee per machine per system.
Payments to the jackpot winners are made by the trust.
In Canada, Indiana, and the cruise ship markets, where machines are not
linked, the Venture provides games for a set daily lease fee. In addition
the Venture has stand alone machines in which the Venture participates in
the revenue from the machine on a percentage or fee basis. Revenues are
recognized as earned.
Operating Expenses - IGT and Anchor provide most of the services
associated with the operation of the Venture. The cost of these operations
are billed to the Venture using methodologies that best approximate the
actual cost of these services to the respective partner. Interest is
accrued at an annual rate of approximately 8.53% and is billed monthly on
balances payable to the partners that are greater than 30 days old and on
inventories held for the Venture. Management believes that the methods
used to allocate these costs are reasonable.
Third Party Expenses - IGT and Anchor receive and pay all invoices from
third parties for the delivery of goods or services. The partners invoice
the Venture for these costs which are recorded by the Venture.
Research and Development - IGT and Anchor perform substantially all of the
engineering development work for the Venture and invoice the Venture for
these services at cost. Research and development charges are expensed as
incurred.
<PAGE>
Cash and Cash Equivalents - Amounts include cash required for funding
current progressive systems jackpot payments and purchasing investments to
meet obligations for making payments to jackpot winners. Cash in excess of
daily requirements is generally invested in various short-term marketable
securities with maturities of 90 days or less. Such investments are stated
at cost, which approximates market value.
Depreciation - Substantially all of the Venture's depreciable assets are
used directly in gaming operations and are provided by the partners who
invoice the Venture for these assets at their approximate cost.
Depreciation is recorded on the straight-line method over the following
estimated useful lives:
Gaming operations equipment 2 to 3 years
Furniture, fixtures, and equipment 5 years
Prepaid Royalties - Amounts include prepayments for registered trademarks
used for various Venture products.
Estimates - The preparation of financial statements in conformity with
accounting principals generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts 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.
Reclassifications - Certain amounts in the 1999 and 1998 financial
statements have been reclassified to be consistent with the presentation
used in 2000.
3. INVESTMENTS TO FUND LIABILITIES TO JACKPOT WINNERS
These investments represent discounted US government treasury securities
purchased to meet obligations for making payments to linked progressive
systems jackpot winners. At September 30, 2000, the Venture had both the
intent and ability to hold these investments to maturity and, therefore,
classified them as held-to-maturity. Accordingly, these investments are
stated at cost, adjusted for amortization of premiums and accretion of
discounts over the term of the security, using the interest method.
Securities in this portfolio have maturity dates through 2025.
Investments to fund liabilities to jackpot winners at September 30, 2000
and October 2, 1999 are as follows:
Amortized Gross Unrealized Market
------------------
Cost Gains Losses Value
--------------------------------------------------------------------
(Dollars in thousands)
September 30, 2000
US government obligations $74,832 $1,240 $(1,237) $74,835
======= ====== ======= =======
October 2, 1999
US government obligations $54,774 $ 679 $(2,382) $53,071
======= ====== ======= =======
Federal legislation passed in October 1998 permits jackpot winners to
elect to receive the discounted value of progressive jackpots won in lieu
of annual installments. For jackpots won after the date of the
legislation, the winner was able to make this election after July 1, 1999.
Upon a winner's election after July 1, 1999, investments held by the
Venture to fund the winner's liability were sold to settle the
<PAGE>
liability. The offer for these past winners to elect a single cash
payment has now expired. Therefore, we do not anticipate additional
sales of held-to-maturity investments.
Proceeds from the sale of these securities were paid to jackpot winners.
Therefore, the net realized loss was offset by an equal gain on the
settlement of winner liabilities. Below is a summary of sales of these
securities:
Fiscal Fiscal
2000 1999
----------------------------------------------
(Dollars in thousands)
Proceeds from sale $898 $32,798
Gross realized gains - 107
Gross realized losses 108 1,215
4. CAPITAL LEASES
During fiscal 2000, the Venture discontinued leasing machines under
capital leases. During fiscal 1999, the Venture leased machines for the
operation of Louisiana and Missouri linked progressive systems. The
machines were leased from IGT at a rate of 1/36 of the value of the assets
each month. As of October 2, 1999, the assets had a net value of $398,000.
5. LIABILITIES TO JACKPOT WINNERS
The Venture receives a percentage of the amount played or machine rental
and service fees from the linked progressive systems to fund the related
jackpot payments in Colorado, Louisiana, Michigan, Mississippi, Missouri,
Native American, Nevada, and South Dakota systems. Winners may elect to
receive a single payment of the discounted value of the jackpot won or
annual installments. Equal annual installments are paid over 20 to 26
years without interest. Future gross payments due to jackpot winners under
these systems at September 30, 2000 are as follows:
Fiscal Year Ending Payment
------------------------------------
(Dollars in thousands)
2001 $ 18,551
2002 6,558
2003 6,558
2004 6,558
2005 6,558
2006 and after 96,132
--------
$140,915
<PAGE>
Jackpot liabilities in the amount of the present value of the jackpots are
recorded concurrently with the recognition of the related revenue. Jackpot
liabilities include discounted payments due to winners for jackpots won
and amounts accrued for jackpots not yet won that are contractual
obligations of the Venture. Jackpot liabilities consist of the following:
September 30, October 2,
2000 1999
-------------------------------------------------------------------
(Dollars in thousands)
Gross payments due to jackpot winners $140,915 $ 188,918
Unamortized discount on payments to
jackpot winners (60,227) (138,608)
Accrual for jackpots not yet won 27,479 42,416
-------- ---------
Total jackpot liabilities 108,167 92,726
Less current liabilities (26,592) (26,529)
-------- ---------
Long-term jackpot liabilities $ 81,575 $ 66,197
======== =========
The Venture amortizes the discount on the winner liabilities, recognizing
it as interest expense. During fiscal years 2000, 1999, and 1998, the
Venture recorded interest expense on jackpot liabilities of $3.8 million,
$4.2 million, and $2.3 million. The Venture is required to maintain cash
and investments relating to systems liabilities in separate accounts.
During fiscal years 2000, 1999, and 1998, the Venture recorded interest
income on jackpot investments of $3.8 million, $4.2 million, and $2.3
million.
6. INCOME TAXES
The Venture has not made any provision for federal income taxes due to its
election to be taxed as a pass-through entity under Internal Revenue Code,
Section 704A. Under this election, income of the Venture is taxable to the
individual venturers.
7. RELATED-PARTY TRANSACTIONS
Substantially all of the goods and services recorded by the Venture are
provided by or paid for by IGT and Anchor. These transactions are recorded
by the Venture as a trade payable. At September 30, 2000 and October 2,
1999, the payable to IGT was $3.3 million and $28.0 million. As of
September 30, 2000 and October 2, 1999, $18,000 and $715,000 was payable
to Anchor. The Venture incurred interest expense to IGT of $703,000 during
fiscal 2000, $50,000 in fiscal 1999 and $31,000 in fiscal 1998.
******
