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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL REPORT AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
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/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, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
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FOR THE TRANSITION PERIOD FROM TO TO
COMMISSION FILE NUMBER 0-23124
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ANCHOR GAMING
(Exact name of Registrant as specified in its charter)
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NEVADA 88-0304253
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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815 PILOT ROAD
SUITE G
LAS VEGAS, NEVADA
89119
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER: (702) 896-7568
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, $.01 PAR VALUE THE NASDAQ STOCK MARKET'S NATIONAL MARKET
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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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-K: / /
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant at September 26, 1997 based on the $86.38 per
share closing price for the Company's common stock on the Nasdaq National Market
was approximately $522,142,317.
The number of shares of the Registrant's Common Stock outstanding as of
September 26, 1997 was 12,958,107.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on or about November 24, 1997 (to be filed)
are incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
1 Business...................................................................................... 1
2 Properties.................................................................................... 23
3 Legal Proceedings............................................................................. 24
4 Submission of Matters to a Vote of Securityholders............................................ 24
PART II
5 Market for Registrant's Common Equity and Related Stockholder Matters......................... 25
6 Selected Financial Data....................................................................... 26
7 Management's Discussion and Analysis of Financial Condition and Results of Operations......... 27
8 Financial Statements and Supplementary Data................................................... 33
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 51
PART III
10 Directors and Executive Officers of the Registrant............................................ 51
11 Executive Compensation........................................................................ 51
12 Security Ownership of Certain Beneficial Owners and Management................................ 51
13 Certain Relationships and Related Transactions................................................ 51
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 52
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PART I
ITEM 1. BUSINESS.
GENERAL
Anchor Gaming ("Anchor" or the "Company") is a diversified gaming company
that seeks to capitalize on its experience as an operator and developer of
gaming machines and casinos by developing gaming oriented businesses. Anchor
develops and distributes unique proprietary games, operates two casinos in
Colorado, and operates one of the largest gaming machine routes in Nevada.
References in this Annual Report on Form 10-K to Anchor or the Company include
subsidiaries unless the context requires otherwise.
REORGANIZATION. The current structure of the Company is the result of a
reorganization (the "Reorganization") effected by the Company and its current
subsidiaries, which were previously controlled by the Company's principal
stockholder, Stanley E. Fulton, and his family--Anchor Coin, Colorado Grande
Enterprises, Inc., C.G. Investments, Inc., and D D Stud, Inc. (the
"Subsidiaries"). The reorganization was completed concurrently with the closing
of the Company's initial public offering in February 1994 (the "IPO"). Pursuant
to the Reorganization, stockholders of the Subsidiaries exchanged their capital
stock for common stock of Anchor Gaming according to exchange ratios based on
the fair market value of the respective Subsidiary. The Company then repurchased
shares of its common stock from certain minority stockholders of Colorado Grande
Enterprises, Inc. Minority stockholders unaffiliated with the Fulton family
continue to own a 20% interest in Colorado Grande Enterprises, while all other
Subsidiaries are wholly owned by the Company. In addition to the Reorganization,
in connection with the IPO, the Company also acquired Global Gaming Products,
L.L.C. and Global Gaming Distributors, Inc.'s rights to the game Silver Strike.
Prior to the acquisition, Stanley E. Fulton owned 50% of Global Gaming Products,
L.L.C.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS
REFER TO EVENTS THAT COULD OCCUR IN THE FUTURE OR MAY BE IDENTIFIED BY THE USE
OF WORDS SUCH AS "INTEND," "PLAN," "BELIEVE," CORRELATIVE WORDS, AND OTHER
EXPRESSIONS INDICATING THAT FUTURE EVENTS ARE CONTEMPLATED. SUCH STATEMENTS ARE
SUBJECT TO INHERENT RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN OF THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS ANNUAL REPORT
ON FORM 10-K. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS ANNUAL
REPORT ON FORM 10-K, INVESTORS SHOULD CAREFULLY CONSIDER THE RISK FACTORS
BEGINNING ON PAGE 16.
PROPRIETARY GAMES
GENERAL. Anchor develops proprietary games, which it both markets to
unaffiliated casinos and uses in its own gaming operations. The Company's
strategy is to develop games that provide casinos with a higher win per machine
than their existing gaming devices while generating significant recurring
revenues to the Company from royalty, revenue participation, or other similar
agreements. Although the Company initially developed proprietary games as a
complement to its own gaming machine operations, since February 1993 the Company
has been actively marketing its proprietary games to unaffiliated casinos. The
Company currently provides proprietary games to virtually every major casino in
the United States, as well as its own casinos. In September 1996, the Company
entered into a strategic alliance (the "Strategic Alliance") with International
Game Technology ("IGT"), the largest manufacturer of computerized gaming casino
products, to enhance the Company's ability to develop and distribute proprietary
games. Through this strategic alliance the Company and IGT have formed a joint
venture (the "Anchor IGT JV") to develop, integrate, and distribute proprietary
game concepts on a wide area progressive system ("WAP").
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The Company, seeking to capitalize on its established sales and marketing
infrastructure, its extensive base of existing casino customers, and its
licenses in virtually all major domestic gaming jurisdictions, has been actively
developing proprietary games, which can be classified as either a dedicated
proprietary game, a proprietary game on a WAP, or a converted proprietary game.
The Company's proprietary games are designed to increase gaming customer play
levels by either enticing the customer to play longer or to wager more coins per
play.
DEDICATED PROPRIETARY GAMES. The Company has successfully developed or
acquired the rights to five proprietary games that are currently installed and
approved for use in unaffiliated casinos. Anchor's dedicated proprietary games
include Wheel of Gold, Totem Pole, Silver Strike, Clear Winner, and
Rock'N'Reels. All of the machines are placed in casinos free of charge allowing
the casino to avoid up-front purchase costs and providing significant recurring
revenues to Anchor under royalty, revenue participation, or other similar
agreements. The machines utilize numerous unique concepts and designs in order
to increase overall gaming customer play levels. For example, the Company's two
most popular dedicated proprietary games, Totem Pole and Wheel of Gold, each
incorporate innovative game features that contribute to higher play levels.
Totem Pole comprises three games in one slot machine creating a unique visual
presentation in the casino environment. Greater play levels are realized on
Totem Pole because the player must insert the maximum number of coins to
activate all three games and benefit from the addition of a "wild" symbol.
Players on the Wheel of Gold machine have the opportunity to activate on the
same machine a three dimensional "roulette" type wheel with significantly higher
potential winnings, providing a secondary game event and additional excitement
to the customer through the Company's "game within a game" concept. Anchor's
"game within a game" concept provides the player an incentive to increase play
through the secondary game event, thereby maximizing customer playing time.
Wheel of Gold is the first generation of the Company's "game within a game"
concept that management believes will form the basis of a significant portion of
its future dedicated game designs. The Company has additional innovative game
machine concepts in various stages of development using the Company's "game
within a game" concept and other unique concepts.
WAP PROPRIETARY GAMES. A WAP is a system that electronically links
individual slot machines among multiple locations, allowing all the machines to
share a common jackpot. The WAP jackpot increases, or progresses, by a certain
percentage of each coin inserted into any one of the machines on the WAP
network, thereby allowing the jackpot to increase rapidly to a significant
amount. Management believes that the large jackpots offered by WAP machines
attract a distinct portion of a customer's gaming budget as compared to a
non-progressive slot machine. In order to capture this portion of a customer's
gaming budget, the Company has entered into a strategic alliance resulting in
the Anchor IGT JV for the purpose of developing and installing WAP machines
based on both existing dedicated proprietary games and other proprietary
designs. The Company and IGT share in the management of the Anchor IGT JV and
will share equally in its profits and losses. The first WAP machine introduced
by the Anchor IGT JV is the Wheel of Fortune-TM-, a game that is very similar to
the Company's Wheel of Gold. Additionally, the Anchor IGT JV has recently
introduced Totem Pole on a WAP and has other WAP concepts at various stages of
development.
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The following is a description of the Company's proprietary games that are
currently being distributed.
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- - Double Down Stud.... Double Down Stud is a software conversion kit introduced in 1993
that is installed in casino customers' gaming machines to allow
players to play a unique version of video poker.
- - Silver Strike....... Silver Strike is a standard slot machine, the rights to which were
acquired at the time of the IPO in 1994, that pays out souvenir
tokens for certain winning combinations. Anchor furnishes Silver
Strike machines free of charge to its casino customers, who agree to
purchase the silver tokens exclusively from the Company.
- - Clear Winner........ Clear Winner is a standard slot machine introduced in 1995 that is
remanufactured into a clear cabinet so that players can observe all
of its inner workings. The game includes state of the art signage
and a custom designed cabinet.
- - Wheel of Gold....... Wheel of Gold is a standard slot machine introduced in 1995 that has
the added dimension of giving players the opportunity to activate on
the same machine a three-dimensional "roulette type" wheel with
significantly higher potential winnings, providing additional
excitement to the player through the Company's "game within a game"
concept.
- - Totem Pole.......... Introduced in 1996, Totem Pole incorporates three games in one
device, each of which is activated by inserting two coins. Each
successive game played provides the possibility of greater payback
to the player. When the player activates all three games by playing
six coins, the player is rewarded with a "wild" symbol common to all
three games.
- - Rock'N'Reels........ Introduced in 1996, Rock'N'Reels is a specially packaged standard
slot machine designed to evoke the image of a vintage juke box. The
game is enhanced with state of the art sound and signage.
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The Company derives recurring revenues on these machines in various forms,
including daily or similar royalties, revenue participation agreements, and
other similar agreements with casinos, and, in the case of Silver Strike, by
selling the souvenir tokens to casinos.
DEVELOPMENT. Anchor is continually engaged both in the development of new
proprietary games and in the improvement of existing games. After the Company
has identified the basic concept for a new game, it works to refine the new game
to maximize player appeal. The Company's efforts include computer simulated
studies of the game probabilities to determine the optimal pay schedules;
research of, and application for, any significant intellectual property rights
that can be claimed; design of packaging for the game; establishment of a
pricing strategy for the game; and application for the necessary regulatory
approvals. Anchor then solicits feedback from potential casino customers to
further refine the game. At the production stage, Anchor and the manufacturer
refine the technology and construction of the game. Prior to the release of any
new game, Anchor must receive necessary regulatory approvals.
DISTRIBUTION. Anchor has an established sales organization with offices in
Nevada, Missouri, Mississippi, Louisiana, and New Jersey servicing an
established customer base of over 200 casinos at June 30, 1997. The Company
distributes its proprietary games primarily through a direct sales effort in
which sales representatives call on casinos and other potential customers.
Anchor also uses distributors in a limited number of jurisdictions.
ANCHOR IGT STRATEGIC ALLIANCE. As part of the Strategic Alliance, the
Anchor IGT JV is using IGT's WAP system for a variety of the Company's dedicated
proprietary game concepts including Wheel of Gold
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and Totem Pole. Property, including intellectual property, developed through the
Anchor IGT JV is owned by the Anchor IGT JV. The Anchor IGT JV joint venture
agreement has an initial duration of ten years and terminates unless the parties
thereto agree to an extension. After the initial ten year term, either party may
terminate the Anchor IGT JV upon at least one year's prior notice. The Anchor
IGT JV does not acquire any rights to the intellectal property rights of each of
Anchor and IGT that are developed outside of the Anchor IGT JV. In the event
that any particular state jurisdiction prohibits the equal share of profits and
losses, management responsibility, or allocation of expenses in the Anchor IGT
JV, it is contemplated that alternative arrangements will be made to satisfy
such regulatory objections.
INTELLECTUAL PROPERTY RIGHTS. Anchor has secured and endeavors to secure,
to the extent possible, exclusive rights in its games, primarily through federal
and foreign intellectual property rights, such as patents and trademarks. The
United States Patent and Trademark Office has issued four patents covering the
Double Down Stud games in the United States. These patents expire on March 31,
2009. The United States Patent and Trademark Office has issued one patent
covering innovations of the Silver Strike game in the United States, but there
is no independent protection of the game itself. This patent expires on March
14, 2012. In 1993, the Company received a U.S. patent relating to a system it
developed that allows players of gaming devices to participate in a group game,
such as bingo, without leaving the gaming device they are playing. In order to
protect potential foreign sources of income, the Company has filed patent
applications and trademark applications in strategically selected foreign
countries. There can be no assurance that any of the pending U.S. or foreign
patent or trademark applications will issue as patents or trademark
registrations, respectively, or that any of these rights will not be infringed
by others or that already issued patents or trademark registrations will not be
invalidated or canceled. None of the foregoing measures provides assurance that
Anchor's proprietary games or the concepts incorporated in the games could not
be successfully duplicated by third parties. Third parties could infringe on
Anchor's rights, or Anchor's proprietary games could be successfully duplicated
without infringing on Anchor's legal rights. Many elements incorporated in
Anchor's proprietary games are in the public domain or otherwise not susceptible
to legal protection, and the steps taken by Anchor will not, in and of
themselves, preclude competition with Anchor's proprietary games.
Double Down Stud, Colorado Central Station Casino, Silver Strike, and Fast
Track Express are registered trademarks of Anchor. Anchor also has applications
pending on several other trademarks and/ or service marks, including Anchor
Coin, Anchor Gaming, Anchor Games, Spin for Cash, Wheel of Gold, Clear Winner,
Colorado Grande, Totem Pole, CashBall, KenoBucks, Rock'N'Reels, Maggie's Slot
Club, and Fast Track Slot Club. There can be no assurance that the pending
trademark or patent applications will be issued, that the Company's applications
will not be opposed by a third party, or that Anchor will not face third
parties' claims to prior use of one or more of these marks or patents.
Double Down Stud-Registered Trademark-, Colorado Central Station
Casino-Registered Trademark-, Silver Strike-Registered Trademark-, and Fast
Track Express-Registered Trademark- are registered trademarks, and Anchor
Coin-TM-, Anchor Gaming-TM-, Anchor Games-TM-, Spin for Cash-TM-, Wheel of
Gold-TM-, Clear Winner-TM-, Colorado Grande-TM-, Totem Pole-TM-, CashBall-TM-,
KenoBucks-TM-, Rock'N'Reels-TM-, Maggie's Slot Club-TM-, and Fast Track Slot
Club-TM- are trademarks of the Company.
CASINOS
GENERAL. In November 1990, the state of Colorado approved limited stakes
gaming ($5.00 or less per wager) in two historic gold mining areas, Black
Hawk/Central City and Cripple Creek. Because of the $5.00 maximum bet, Anchor's
casinos in Colorado emphasize gaming machine play. Anchor currently operates a
casino in each of these markets, the Colorado Central Station Casino in Black
Hawk and the Colorado Grande Casino in Cripple Creek. Black Hawk and Central
City are contiguous and are located approximately 40 miles from Denver and 10
miles from Interstate 70, the main highway connecting Denver to many of
Colorado's major ski resorts. Cripple Creek is located approximately 45 miles
from Colorado Springs and 75 miles from Pueblo. Casinos located in the Black
Hawk/Central City area serve primarily the residents of Denver and Boulder,
Colorado and surrounding communities, an area with a total population
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in excess of 1.8 million. Approximately three million people live within a
100-mile radius of the Black Hawk/Central City area. Casinos located in Cripple
Creek serve primarily the residents of Colorado Springs, Pueblo, and surrounding
communities. More than two million people live within a 100-mile radius of
Cripple Creek.
COLORADO CENTRAL STATION CASINO. On December 25, 1993, the Company opened
the Colorado Central Station Casino in Black Hawk at a cost of approximately
$25.0 million. The Colorado Central Station Casino is currently the highest
revenue producing and most profitable casino in the state. After completion of a
2,750 square foot expansion in 1996, the casino building has approximately
49,000 square feet of main facility area, with 16,637 square feet of gaming
space over three floors. The Colorado Central Station Casino features more than
680 gaming machines, ten blackjack tables, nine poker tables, and a food court
restaurant area. The casino is the first casino encountered by customers
traveling from Denver to the Black Hawk/Central City area. In addition, the
Colorado Central Station Casino offers more than 770 parking spaces. The
Colorado Central Station Casino is also the closest casino to Black Hawk's 3,000
space public parking facility, located one and one-half miles from the casino,
and is the first stop from the parking facility on the parking lot shuttle bus
route. The Colorado Central Station Casino is situated on approximately 1.8
acres of land on the south end of Black Hawk, near Main Street and Colorado
State Highway 119.
The Colorado Central Station Casino is fashioned in the style of a 19th
century mining town railroad station. According to information on file with the
Colorado Historic Preservation Office, the Colorado Central Station Casino
property is within the Black Hawk Registered Historic District and meets the
historical guidelines for use as a gaming establishment. In contrast, the
Colorado Central Station Casino was constructed specifically for gaming
activities, and as a result offers a more open, spacious gaming area, while
using the maximum square footage allowed under Colorado law, which limits the
square footage of a casino that may be used for gaming activities to 35% of the
building and 50% of any one floor. At June 30, 1997, the Colorado Central
Station Casino employed approximately 444 people and by law is allowed to be
open seven days a week from 8:00 a.m. to 2:00 a.m.
All gaming machines at the Colorado Central Station Casino offer bill
validators that accept $1, $5, $10, $20, $50, and $100 bills. In addition, the
Company has installed an automated player tracking system at the casino that is
tied into the Company's accounting system to provide detailed management reports
regarding gaming machine use. The system facilitates the casino's Fast Track
Slot Club, which is designed to attract and retain gaming patrons by enabling
the Company to identify, market to, and reward its loyal customers.
COLORADO GRANDE CASINO. The Company operates (through an 80% owned
subsidiary) the Colorado Grande Casino in Cripple Creek, which is located
approximately 45 miles from Colorado Springs and 75 miles from Pueblo. The
Colorado Grande Casino, which opened October 11, 1991, is located at one of the
principal intersections in Cripple Creek and features more than 210 gaming
machines, 44 adjacent parking spaces, and a full service restaurant and bar. In
August 1995, the Company completed the installation of an automated player
tracking system and a player slot club, "Maggie's Slot Club." Maggie's Slot Club
and the player tracking system have enabled the casino to implement marketing
programs designed to attract and increase the number of loyal casino customers.
At June 30, 1997, the Colorado Grande Casino employed approximately 101 people
and by law is allowed to be open seven days a week from 8:00 a.m. to 2:00 a.m.
CANADA. In January 1997, the Company entered into an agreement with Revenue
Properties Company (the "Anchor RPC JV") for the purpose of submitting a
proposal to operate charity based gaming club operations in the Province of
Ontario. In September 1997 the Ontario provincial government granted the Anchor
RPC JV permission to run six permanent full-time and one part-time seasonal
charity based gaming clubs in Ontario, Canada. The full-time charity gaming
clubs awarded to the Anchor RPC JV are located in: Toronto-North York; Fort
Erie; Toronto-South Etobicoke/York; Hamilton/Oakville/ Burlington;
Kitchner/Waterloo; and Sarnia. The part-time seasonal gaming club awarded to the
Anchor
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RPC JV is in South Western Ontario (Branford). Fort Erie is located directly
across the U.S. border from Buffalo, NY and Sarnia is located directly across
the U.S. border from Port Huron, MI. The charity based gaming clubs are being
introduced by the provincial government to stabilize funding to charities and to
increase control, supervision, and accountability in this gaming sector. Each
permanent charity based gaming club will be limited to a total of 150 video
lottery terminals and 40 table games. The permanent charity based gaming clubs
will be operated under management agreement with the provincial government,
which will provide the Anchor RPC JV with 10% of video lottery terminal revenue,
5% of table game, retail, food and beverage and all other revenue, and 10% of
defined net income. See "Risk Factors--Risks of Pursuing New Casino Gaming
Operations."
ROUTE OPERATIONS
GENERAL. Anchor is one of the largest gaming machine route operators in
Nevada with 801 gaming
machines in 58 locations at June 30, 1997, up from 692 gaming machines in 50
locations at June 30, 1996. The Company's gaming machine route operations in
Nevada involve the installation, operation, and service of gaming machines
(virtually all video poker machines) under space leases with retail chains and
under revenue participation agreements with local taverns and retail stores,
principally in the Las Vegas area. In 1996, the Company extended its exclusive
space lease agreement with Smith's Food and Drug Centers, Inc. ("Smiths"), its
largest route customer, for an additional five years at current rates through
2010. At June 30, 1997, 716 of the Company's 801 gaming machines in Nevada were
located in or near Las Vegas, which has been one of the fastest growing cities
in the United States in recent years.
LOCATIONS AND LEASES. Anchor's agreements for its locations generally are
in the form of either written space lease agreements or revenue sharing
contracts and generally give Anchor the exclusive right to install gaming
machines at such locations. Two of the Company's gaming route agreements are
space leases with major retail chains that require payments of fixed monthly
fees based on the amount of space used or the number of gaming machines
installed at each location. The remainder of the Company's gaming route
agreements are revenue participation arrangements, which provide for the payment
to the location owner of a percentage of revenues generated by Anchor's machines
at such location. A location owner is not permitted to receive a percentage of
revenues unless such owner is licensed by the Nevada Gaming Commission. See
"--Regulation--Nevada."
In 1996, Anchor extended its space lease agreement with its largest gaming
machine route customer, Smiths, which was scheduled to expire in the year 2005,
for five additional years at current rates through 2010. Anchor paid $5.0
million to Smiths for this extension. The agreement with Smiths provides for a
fixed monthly rental fee per store throughout the term of the agreement and
grants Anchor the exclusive right to install gaming machines at all Smiths
stores in Nevada, including stores opened in the future.
Anchor's space leases and revenue participation arrangements generally
require Anchor to pay all installation, maintenance, and insurance expenses
related to its operations at each location. Applicable taxes are paid by Anchor
under space leases and are generally shared on the same basis as revenues under
revenue participation arrangements. The leases generally provide that if Anchor
fails to pay the required rental or license fees or defaults in the performance
of any of its other obligations, the location operator can terminate the lease.
Anchor believes that it is not in default under any of its present space leases
or revenue participation arrangements. Generally, in the ordinary course of
business, Anchor has lease and other security deposits, prepaid rent, and
advances held by the owners of chain stores and other location operators.
SERVICES AND OPERATIONS. Anchor attempts to attract and retain gaming
machine route patrons by offering an attractive selection of gaming machines.
Prior to installing machines at a location, Anchor studies the market potential
and customer base and determines the appropriate machine mix for the location.
Progressive jackpots are also offered at most of the Company's locations.
Virtually all of the gaming machines operated by the Company's route operation
are video poker machines because Anchor
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believes that interactive electronic games, such as video poker, are more
attractive to its gaming machine route patrons than simple, mechanical reel-type
slot machines.
In marketing its services to the owners of retail stores and taverns, the
Company also emphasizes quality service. The Company operates and services its
machines using its own employees, who routinely repair and maintain the
Company's gaming machines in order to improve reliability and in-service time.
Management believes that the Company's gaming machines and related equipment are
well maintained and in good working condition. In addition to physical service
of the gaming machines, employees of the Company remove coins from the machines,
refill machines that have exhausted their supply of coins, and provide payment
of jackpots in excess of machine limits. Anchor also operates change booths at
certain of its retail store locations.
SUPPLIERS
Anchor has contracted with several manufacturers to develop both Anchor's
existing and future product requirements. To date, the Company has purchased
substantially all of the gaming machines used in its route operations from IGT.
Silver Strike machines are currently produced by either IGT or Sigma Game, Inc.
The primary components of Wheel of Gold are purchased from Bally Gaming
International, Inc. and Acres Gaming. Totem Pole was originally manufactured for
the Company by Universal Distributing of Nevada, Inc. Since that time, the
Company has also contracted with Bally Gaming International, Inc. and IGT for
the manufacture of Totem Pole. The Company is expected to continue its reliance
on third parties for the manufacture of its proprietary games. An inability to
obtain quality gaming machines, production parts, and replacement parts on
reasonable terms or on a timely basis could have an adverse effect on Anchor.
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COMPETITION
GENERAL. Anchor is subject to intense competition in all of its markets,
and management believes that national, regional, state, and local competition in
the gaming industry in general will be extremely high during the foreseeable
future, as gaming activities continue to expand in both traditional and new
gaming jurisdictions. In addition, many of the Company's competitors have
greater financial resources than the Company. See "Risk Factors--Competition."
PROPRIETARY GAMES. Intense competition characterizes the market for
proprietary games. Management believes that the primary bases for competition in
the casino game market are price and potential profit to gaming location
operators that install the games. The perceived popularity of games with casino
patrons as well as the economics of the game are, management believes, factors
considered by potential casino customers. The popularity of any of the Company's
games may decline over time as consumer preferences change or as new, competing
games are introduced. As a result, Anchor must continually anticipate and adapt
its products to consumer preferences to maximize the economics of the game to
the Company. There can be no assurance, however, that Anchor will continue to be
successful in developing and marketing its products. If the Company fails to
develop games that achieve market acceptance or if existing games become
obsolete due to the introduction of popular games by Anchor's competitors the
effects on Anchor could be material and adverse. Competitors in the game
industry include manufacturers of gaming devices and other companies marketing
gaming products and conversion kits that compete directly with the Company for
the limited gaming spaces available at casinos.
Anchor's strategy of creating recurring revenues from its proprietary games
by placing the games in casinos under a royalty, revenue participation, or
similar agreements involves a departure from the traditional practice of casinos
of owning or leasing gaming devices. To the extent that casinos are reluctant to
enter into arrangements that generate recurring revenues for suppliers of casino
games, the market for Anchor's proprietary games could be limited. Competition
within the market for games that generate recurring revenues could intensify as
other suppliers of gaming devices enter this market or offer competitive
products or terms.
CASINOS. Intense competition also characterizes the Black Hawk/Central City
and Cripple Creek markets. Since limited stakes gaming was instituted in
Colorado in 1991, a number of Colorado casinos have ceased operations and others
have filed for protection under Chapter 11 of the Bankruptcy Code. Others have
closed temporarily or reduced the number of employees, and many casinos may not
be operating profitably. Several proposals have been made to open new casinos or
to expand existing casinos in Black Hawk, some of which have been abandoned or
modified. Two casinos are being developed in Black Hawk located across the
intersection from the Company's Colorado Central Station Casino. Casino America
and Nevada Gold & Casinos have commenced construction of a casino scheduled to
open in early 1999, which facility is expected to include 1,100 slot machines,
24 table games, and a 1,000 car parking garage. Riviera Holdings Corporation has
announced that it plans to develop a gaming facility with 1,000 slot machines,
14 table games, and a 500 space covered parking garage, scheduled to open in the
Spring of 1999. A joint venture between Black Hawk Gaming & Development Company,
Inc. and Jacobs Entertainment Ltd. is constructing a gaming facility located
near Colorado Central Station. The facility is scheduled to be completed in June
1998 and is expected to include 800 slot machines, 20 table games, and 500
parking spaces. In addition, construction is proceeding on a third major
intersection off State Highway 119, which will provide access directly to one of
the new casinos from State Highway 119, which is the primary access from the
Denver metropolitan area. From time to time other casino companies have publicly
expressed an interest in pursuing development or expansion in the Black
Hawk/Central City market, and proposals to develop competitive projects are
ongoing.
It appears that national, regional, state, and local competition for the
casino gaming market in general will remain extremely high during the
foreseeable future, as casino gaming activities expand in traditional gaming
states and in new jurisdictions. In addition, passage of the Indian Gaming
Regulatory Act in 1988
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has led to rapid increases in Native American gaming operations, and the
Company's two casinos may compete for customers with casinos located on Indian
reservations in far southwestern Colorado. The Company expects many competitors
to enter new jurisdictions that authorize gaming, some of whom may have greater
financial and other resources than the Company. Such proliferation of gaming
activities could adversely affect the Company's business. In particular, the
legalization of casino gaming in or near any metropolitan area, such as Denver,
Colorado, from which the Company draws customers would have a material adverse
effect on the Company's business. The Company believes, however, that
proliferation of gaming activities into new jurisdictions presents an
opportunity for it to expand its proprietary games operations.
Colorado law requires an amendment to the State Constitution followed by
local voter approval for any expansion of limited stakes gaming. State and local
public initiatives regarding limited gaming in Colorado are being actively
pursued by many persons. Several cities within Colorado have active citizens'
lobbies that were able to place limited gaming initiatives on the November 1994
and November 1996 statewide ballot. Although these initiatives failed by
substantial margins, new initiatives could be introduced on future statewide
ballots to allow expansion of gaming in Colorado. Future initiatives, if passed,
could significantly increase the competition for gaming customers, thereby
adversely affecting Anchor's current casino operations in Colorado. In addition,
Anchor's casinos in Colorado compete with casinos in other parts of the United
States, as legalized gambling continues to proliferate.
ROUTE OPERATIONS. Gaming machines and gaming of all types are available in
Nevada casinos and in restricted gaming locations similar to those in which the
Company operates gaming machines, and all of these gaming establishments compete
directly or indirectly with Anchor's route operations. In addition, Anchor is
subject to substantial competition for the operation of gaming machines in
approved locations from numerous small gaming machine route operators and some
large operators, located principally in Las Vegas and Reno, Nevada, and their
surrounding areas. The principal methods of competition for gaming machine
locations are the lease, sublease, license, or revenue sharing terms, the
service provided by the route operator, the reputation of the route operator,
and the financial strength of the route operator. As existing space lease and
revenue participation arrangements expire, competition for renewals can be
expected to increase the amounts payable to location owners as compared to
amounts payable under existing agreements. Anchor's route is the only route
operation that features Double Down Stud, as the Company does not offer the game
to competing route operators. Providing a proprietary game in its route
operation is one of the ways Anchor differentiates itself from its competitors.
SECURITY
Anchor's casino and gaming machine route operations generate, and require
the Company to maintain, a large supply of available cash. In order to mitigate
the risks of loss associated with maintaining such a supply, the Company employs
physical security measures and utilizes strict internal accounting and custodial
controls on receipts and disbursements. There can be no assurance, however, that
the Company's precautions, internal controls, and physical security will provide
security for its employees or prevent cash shortages resulting from employee
errors or from theft. In addition, the Company maintains insurance to mitigate
this risk.
EMPLOYEES
At June 30, 1997, Anchor employed 869 persons, the substantial majority of
whom are nonmanagement personnel. Of this total, approximately 545 people worked
at the Colorado Central Station Casino and the Colorado Grande Casino. The
balance of the Company's nonmanagement employees is involved in route and
proprietary games operations. None of Anchor's employees is covered by a
collective bargaining agreement, and Anchor believes that it has satisfactory
employee relations.
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SEASONALITY
The Company's operations as a whole are not subject to significant seasonal
variations. However, in general, the highest levels of business activity at its
Colorado casinos occurs during the tourist season from July to October of each
year. In addition, operations at the Colorado casinos during the winter months
could be significantly affected by weather and road conditions in Colorado. The
Company's proprietary games operations typically have their highest levels of
business during the summer tourist season when its casino customers experience
heavier tourist traffic.
REGULATION
NEVADA. The manufacturing and distribution of gaming devices and the
ownership and operation of gaming machine routes in Nevada are subject to (i)
the Nevada Gaming Control Act and the regulations promulgated thereunder
(collectively, the "Nevada Act") and (ii) various local regulations. Generally,
gaming activities may not be conducted in Nevada unless licenses are obtained
from the Nevada Gaming Commission (the "Nevada Commission") and appropriate
county and city licensing agencies. The Nevada Commission, the Nevada State
Gaming Control Board (the "Nevada Board"), and the various county and city
licensing agencies 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 that 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) providing a source of state and local
revenues through taxation and licensing fees. Changes in such laws, regulations,
and procedures could have an adverse effect on Anchor.
Anchor Coin, which is the Company's subsidiary engaged in the distribution
of gaming devices and route operations, is licensed by the Nevada Gaming
Authorities. Anchor Coin is also licensed as a manufacturer to enable it to
develop its proprietary games. Anchor Coin's gaming licenses require the
periodic payment of fees and taxes and are not transferable. Anchor is
registered by the Nevada Commission as a publicly traded corporation
("Registered Corporation") and, as such, is required periodically to submit
detailed financial and operating reports to the Nevada Commission and furnish
any other information that the Nevada Commission may require. No person may
become a stockholder of, or receive any percentage of profits from, Anchor Coin
without first obtaining licenses and approvals from the Nevada Gaming
Authorities. The Company and Anchor Coin have obtained from the Nevada Gaming
Authorities the various registrations, approvals, permits, and licenses required
in order to engage in gaming activities in Nevada.
Anchor Coin's operator's license enables it to operate gaming machines on
premises owned by others. At locations with 15 or fewer gaming machines, the
operation is considered to be a "restricted" gaming location. At locations with
more than 15 gaming machines, the operation is considered to be a
"nonrestricted" gaming location. Only one of the Company's route locations is a
nonrestricted location. The nonrestricted regulatory requirements are reduced to
some extent because no more than 35 gaming machines, and no table games, are
operated at this location. Slot machines operated at restricted and
nonrestricted locations are subject to various fixed fees and per-machine taxes
levied on a quarterly and annual basis by the Nevada Gaming Authorities.
Nonrestricted locations are subject to a tax on their gross revenues (the
difference between amounts wagered by casino patrons and payments to casino
patrons) that ranges from 3.0% to 6.25%. In its space lease agreements with
retail chains, Anchor has agreed to pay all taxes and fees relating to the
operation of gaming machines, and in its participation arrangements, taxes
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and fees are typically shared on the same basis as revenues. Significant
increases in the fixed fees or taxes currently levied per machine or the tax
currently levied on gross revenues could have a material adverse effect on the
Company.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or Anchor
Coin in order to determine whether such individual is suitable or should be
licensed as a business associate of a gaming licensee. Officers, directors, and
certain key employees of Anchor Coin must file applications with the Nevada
Gaming Authorities and are required to be licensed by the Nevada Gaming
Authorities. Officers, directors, and key employees of the Company who are
actively and directly involved in the gaming activities of Anchor Coin may be
required to be licensed or found suitable by the Nevada Gaming Authorities. The
Nevada Gaming Authorities may deny an application for licensing or a finding of
suitability for any cause they deem reasonable. A finding of suitability is
comparable to licensing, 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 to have a continuing relationship with the
Company or Anchor Coin, the companies involved would have to sever all
relationships with such person. In addition, the Nevada Commission may require
the Company or Anchor Coin 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 Anchor Coin are required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities, and similar financing transactions by Anchor Coin
must be reported to or approved by, the Nevada Commission.
If it were determined that the Nevada Act was violated by Anchor Coin, the
gaming licenses it holds could be limited, conditioned, suspended, or revoked,
subject to compliance with certain statutory and regulatory procedures. In
addition, Anchor Coin, the Company, 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 the Company's nonrestricted locations, and,
under certain circumstances, earnings generated during the supervisor's
appointment (except for the reasonable rental value of the Company's gaming
property) 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 and adversely affect
Anchor.
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 or her 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 acquires more than five percent of
the Company's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that beneficial owners of more than 10% of
the Company's voting securities apply to the Nevada Commission for a finding of
suitability within thirty days after the Chairman of the Nevada Board mails a
written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, that acquires more than
10% but not more than 15% of the Company's voting securities, may apply to the
Nevada Commission for a waiver of such finding of suitability if such
institutional investor holds the
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voting securities for investment purposes only. An institutional investor will
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 or bylaws,
management, policies, or operations of the Company or any of its gaming
affiliates, or any other action that the Nevada Commission finds to be
inconsistent with holding the Company's voting securities for investment
purposes only. Activities that 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 that must be found suitable is a corporation, partnership, or trust,
it must submit detailed business and financial information including a list of
its 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 30 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 identity
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 Anchor
Coin, the Company (i) pays that person any dividend or interest upon voting
securities of the Company; (ii) allows that person to 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 or her voting securities for cash at fair market value.
Additionally, the Clark County, Nevada 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 gaming license.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation 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 that
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 such 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
facilities in Nevada, or to retire or extend obligations incurred for such
purposes.
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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 such person 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 the Nevada Commission
concerning 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 of 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 licensees 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 these 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.
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 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 by
the Nevada Board of the Licensees' participation in such foreign gaming. The
revolving fund is subject to increase or decrease in the discretion of the
Nevada Commission. Thereafter, Licensees are also 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 a finding of suitability in Nevada on the ground of personal
unsuitability.
The placement and number of gaming machines that may be operated in various
locations are subject to limitation and control by local city and county laws
and ordinances. Acting through their zoning powers and their powers to regulate
gaming, local government entities determine the number of gaming machines that
may be operated at non-casino locations and the types of locations where gaming
operations may be conducted. Accordingly, changes in such local zoning laws and
ordinances could have a material adverse effect on Anchor.
COLORADO. The ownership and operation of gaming facilities in Colorado are
subject to extensive state and local regulation. No gaming may be conducted in
Colorado unless licenses are obtained from the Colorado Limited Gaming Control
Commission (the "Colorado Commission"). In addition, the State of Colorado
created the Division of Gaming (the "Colorado Division") within its Department
of Revenue to license, implement, regulate, and supervise the conduct of limited
stakes gaming. The Director (the "Colorado Director") of the Colorado Division,
under the supervision of the Colorado Commission, has been granted broad powers
to ensure compliance with the law and regulations. The Colorado Commission, the
Colorado Division, the Colorado Director, and city authorities in Black Hawk,
Central City, and Cripple Creek that have responsibility for regulation of
gaming are collectively referred to as the "Colorado Gaming Authorities."
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The laws, regulations, and supervisory procedures of the Colorado Gaming
Authorities seek to maintain public confidence and trust that licensed limited
gaming is conducted honestly and competitively, that the rights of the creditors
of licensees are protected, and that gaming is free from criminal and corruptive
elements. It is the stated policy of the Colorado Gaming Authorities that public
confidence and trust can be maintained only by strict regulation of all persons,
locations, practices, associations, and activities related to the operation of
licensed gaming establishments and the manufacture or distribution of gaming
devices and equipment.
The Colorado Commission is empowered to issue five types of gaming and
gaming related licenses. Anchor's casinos in Colorado each require a retail
gaming license, which must be renewed each year, and the Colorado Division has
broad discretion to revoke, suspend, condition, limit, or restrict a licensee at
any time. No person or entity can have an ownership interest in more than three
retail gaming licenses. The Colorado Grande Casino and the Colorado Central
Station Casino have each obtained the required retail gaming licenses.
In addition to retail gaming licenses for its casinos, all of Anchor's
casino employees involved in gaming activities must apply for and receive a
support gaming license prior to commencing employment. "Key" employees, which
are defined as any executive, employee, or agent of a licensee having the power
to exercise a significant influence over decisions concerning any part of the
operations of any licensee, must obtain key licenses. At least one key license
holder must be on the premises of each casino at all times. Anchor pays the cost
of obtaining and maintaining key licenses. All licenses are revocable,
nontransferable, and valid only for the particular location initially
authorized, except that support and key employee licenses move with the approved
individual and are not location specific.
Any person or group of related persons that acquires beneficial ownership of
between 5.0% and 9.99% of the outstanding Common Stock must report the
acquisition to the Colorado Commission within ten days of acquiring such
interest and may be required to provide additional information to the Colorado
Commission and be found suitable. Any person or group of related persons that
acquires beneficial ownership of 10% (or, with respect to institutional
investors, 15%) or more of the outstanding Common Stock must apply to the
Colorado Commission within 45 days after acquiring such interest and submit to
investigation for suitability by the Colorado Commission. Certain qualifying
institutional investors, at the Colorado Commission's discretion, may acquire up
to 15% ownership before a finding of suitability is required if such investors
provide certain information to the Colorado Commission regarding investment
intent and other matters. In order to be found suitable, a stockholder must be a
person of good moral character, honesty, integrity, and, in general terms, must
be free from previous criminal or unsavory convictions or similar acts. The
Colorado Commission may require substantial information in connection with a
suitability investigation, including personal background and financial
information, source of funding information, and a sworn statement that such
person or entity is not holding the Common Stock for any other party, and also
may require fingerprints. Until a finding of suitability occurs for a
stockholder who is undergoing a suitability investigation, Anchor cannot pay any
dividends to such stockholder nor may the stockholder exercise any voting rights
with respect to the Common Stock. A stockholder that is found to be unsuitable
must transfer its Common Stock to a suitable person within 60 days after the
finding of unsuitability. Otherwise, Anchor may offer such person the lesser of
the cash equivalent of such person's investment in the Common Stock or the
current market price of the Common Stock as of the date of the finding of
unsuitability, and the stockholder will be required to sell his or her Common
Stock to Anchor. Anchor's Articles of Incorporation include a statement that all
transfers of voting securities are subject to the regulations of the Colorado
Commission and each other regulatory body to which the Company's activities are
subject and detail the possibility of a repurchase if a stockholder is found
unsuitable.
The Colorado Commission has adopted comprehensive rules and regulations that
require Anchor to maintain adequate books and records and prescribe minimum
operating, security, and payoff procedures. Regulated operating procedures
include hours of operation and rules of play. Rules regarding gaming, cheating,
and fraudulent practices have also been adopted, which Anchor is obligated to
police and
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enforce. Upon request, Anchor must submit copies of all written gaming contracts
and summaries of all oral gaming contracts to which it is a party or intends to
become a party. Anchor and its subsidiaries must also promptly inform the
Colorado Commission of any change in their officers or directors and any such
new officer or director will be subject to possible investigation prior to
approval. Further, if any casino employee possessing a support license changes
employment, is terminated, or resigns, Anchor must notify the Colorado Director.
Anchor may not make a public offering of its securities without notifying
the Colorado Commission. The notification must occur within 10 business days
after the initial filing of a registration statement with the Securities and
Exchange Commission or, if the offering will not be registered with the
Securities and Exchange Commission, 10 days prior to the public use or
distribution of any offering document. The notification procedures apply to any
offering by Anchor where the proceeds will be used or intended for use (i) in
constructing gaming facilities; (ii) in financing the operation of gaming
facilities by any licensee; (iii) in acquiring any direct or indirect interest
in Colorado gaming facilities; or (iv) in retiring or extending obligations
incurred for any of the above purposes. The notification must disclose, among
other things, a description of the securities to be offered, the proposed terms
of the offering, its anticipated gross and net proceeds, and the use of the
proceeds.
Colorado law requires statewide voter approval of an amendment to the State
Constitution for any expansion of limited gaming into additional locations and,
depending on the authorization approved by the statewide vote, requires, in
addition, voter approval from the locality in question. In 1994, Colorado voters
defeated by a margin of 93% to 7% a proposal to permit gaming in Manitou Springs
(located near Colorado Springs and Cripple Creek) and slot machines in airports.
On November 5, 1996, Colorado voters defeated by a margin of 69% to 31% a
proposal to allow gaming in the community of Trinidad, located on the New Mexico
border. Recently, the state legislature passed, but the Governor vetoed, a bill
that would have permitted video lottery terminals at dog and horse racetracks
under certain terms and conditions. Several cities within Colorado have active
citizens' lobbies that were able to place gaming initiatives on recent statewide
ballots. Although these initiatives have failed, new initiatives could be
introduced on future statewide ballots to allow expansion of gaming in Colorado
or prohibit gaming in the particular markets in Colorado where the Company
operates. Future initiatives, if passed, could significantly increase the
competition for gaming customers, thereby adversely affecting the Company's
operations in Colorado. Additionally, there can be no assurance that future
legislation will not be enacted that would impose additional restrictions or
prohibitions on, or assess additional fees with respect to, the Company's
business.
The sale of alcoholic beverages at Anchor's casinos is subject to licensing,
control, and regulation by the applicable state and local authorities. All
alcoholic beverages licenses are revocable and are not transferable. The
agencies involved have full power to limit, condition, suspend, or revoke any
such license, and any such disciplinary action could (and revocation would) have
a material adverse effect on Anchor.
The State of Colorado has enacted an annual tax on adjusted gross proceeds,
as defined under Colorado law ("AGP") (gross gaming revenue being defined
generally as the total amount wagered minus the total amount paid out in prizes)
of 2% of the first $2.0 million of AGP, 4% from $2.0 million to $4.0 million of
AGP, 14% from $4.0 million to $5.0 million of AGP, 18% from $5.0 million to
$10.0 million of AGP, and 20% of amounts in excess of $10.0 million of AGP.
During the first year of gaming, casinos operated under a three-tiered tax
system in which they paid 4% on the first $440,000 of AGP, 8% from $440,000 to
$1.2 million of AGP, and 15% above $1.2 million of AGP. During the second gaming
year, October 1, 1992 to September 30, 1993, casinos paid 2% on the first $1.0
million of AGP and 20% on any amount above $1.0 million of AGP. In the third
year, October 1, 1993 to September 30, 1994, casinos paid 2% on the first $1.0
million of AGP, 8% from $1.0 million to $2.0 million of AGP, 15% from $2.0
million to $3.0 million of AGP, and 18% above $3.0 million of AGP. During the
fourth and fifth years, October 1, 1994 through September 30, 1996, casinos paid
2% on the first $2.0 million of AGP, 8% from $2.0 million to $4.0 million of
AGP, 15% from $4.0 million to
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$5.0 million of AGP, and 18% above $5.0 million of AGP. During the sixth year,
October 1, 1996 through September 30, 1997, casinos paid 2% on the first $2.0
million of AGP, 4% from $2.0 million to $4.0 million of AGP, 14% from $4.0
million to $5.0 million of AGP, 18% from $5.0 million to $10.0 million of AGP,
and 20% of amounts in excess of $10.0 million of AGP. During the sixth year,
October 1, 1996 through September 30, 1997, casinos paid 2% of the first $2.0
million of AGP, 4% from $2.0 million to $4.0 million, 14% from $4.0 million to
$5.0 million, 18% from $5.0 million to $10.0 million, and 20% of amounts in
excess of $10.0 million. Effective October 1 of each year, the Colorado Gaming
Commission establishes the gross gaming revenue tax for the following 12 months.
Under the Colorado Constitution, the Commission is authorized to increase the
gaming tax rate to as much as 40%. There can be no assurance that the taxes or
fees applicable to the Company will not be increased in the future, either by
the Colorado electorate, legislation, or action by the Colorado Commission
resulting in an adverse effect on the Company's operations.
In addition, a "device fee" is required for each gaming device (i.e., each
gaming machine and each gaming table). The State of Colorado currently imposes
an annual fee of $75 per device (reduced from $100 effective October 1, 1994),
and Black Hawk and Cripple Creek currently impose annual fees per device of $750
and $1,200, respectively. Black Hawk and Cripple Creek also impose liquor
licensing fees, restaurant fees, and parking impact fees. Further, Anchor has
paid, and in the future may be required to pay, local parking and other
municipal "impact fees" based on the square footage of its facilities.
Significant increases in the applicable taxes or fees, or the imposition of new
taxes or fees, could have a material adverse effect on Anchor, and it is not
unreasonable to expect that such taxes or fees could be increased or new taxes
or fees imposed.
PROPRIETARY GAMES APPROVAL
Anchor is licensed in several gaming jurisdictions as a distributor or
manufacturer of gaming machines. These jurisdictions exert substantial
regulatory controls over the Company and may impose restrictions on ownership of
the Company's securities and require findings of suitability of individuals
associated with the Company. Each of the Company's games must be approved and
licensed in each jurisdiction in which it is played. Obtaining required
approvals and licenses can be time consuming and costly and there can be no
assurance of success. In addition, there can be no assurance that regulations
adopted or taxes imposed by other states will permit profitable operations by
the Company.
OTHER JURISDICTIONS
FEDERAL GAMBLING DEVICES ACT OF 1962. The Federal Gambling Devices Act of
1962 (the "Federal Act") makes it unlawful, in general, for a person to
manufacture, deliver, or receive gaming machines, gaming machine type devices,
and components across state lines or to operate gaming machines unless that
person has first registered with the Attorney General of the United States. The
Federal Act does not apply to the Company's proprietary table games but does
apply to the Company's proprietary gaming machines. Anchor has registered under
the Federal Act and must renew its registration annually. In addition, various
record keeping and equipment identification requirements are imposed by the
Federal Act. Violation of the Federal Act may result in seizure and forfeiture
of the equipment, as well as other penalties. Any expansion of Anchor's gaming
activities in Nevada and Colorado may require, and any expansion into other
jurisdictions would require, additional approvals, licenses, and permits from
various gaming authorities.
NATIONAL GAMBLING IMPACT AND POLICY COMMISSION. In August 1996, the United
States Congress passed legislation creating the National Gambling Impact and
Policy Commission to conduct a comprehensive study of all matters relating to
the economic and social impact of gaming in the United States. The legislation
provides that, not later than two years after the enactment of such legislation,
the commission must issue a report to the President and to Congress containing
its findings and conclusions, together with recommendations for legislation and
administrative actions. Any such recommendations, if enacted into
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law, could adversely impact the gaming industry and have a material adverse
effect on the Company's business or results of operations. The Company is unable
to predict whether this study will result in legislation that would impose
regulations on gaming industry operators, including the Company, or whether such
legislation, if any, would have a material adverse effect on the Company.
Additionally, from time to time, certain federal legislators have proposed the
imposition of a federal tax on gaming revenues. Any such tax could have a
material adverse effect on the Company's financial condition or results of
operations.
ENVIRONMENTAL CONSIDERATIONS
The Colorado Central Station Casino is located in an area that has been
designated by the Environmental Protection Agency (the "EPA") as a superfund
site on the National Priorities List, known as the Central City-Clear Creek
Superfund Site (the "Site"), as a result of contamination from historic mining
activity in the area. The EPA is entitled to proceed against owners and
operators of properties located within the Site for remediation and response
costs associated with their properties and with the entire Site. The Colorado
Central Station Casino is located within the drainage basin of North Clear Creek
and is therefore subject to potentially contaminated surface and ground water
from upstream mining-related sources. Soil and ground water samples on the Site
indicate that several contaminants exist in concentrations exceeding drinking
water standards. Records relating to historical uses of the Site are uncertain
as to whether mining actually occurred below the Company's property. Records do
indicate, however, that an ore loading dock for a railroad depot was once
located on adjacent property, and railroad tracks were present on the Company's
property. Management is not aware of any environmental issues associated with
these activities.
RISK FACTORS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS
REFER TO EVENTS THAT COULD OCCUR IN THE FUTURE OR MAY BE IDENTIFIED BY THE USE
OF WORDS SUCH AS "INTEND," "PLAN," "BELIEVE," CORRELATIVE WORDS, AND OTHER
EXPRESSIONS INDICATING THAT FUTURE EVENTS ARE CONTEMPLATED. SUCH STATEMENTS ARE
SUBJECT TO INHERENT RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN OF THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS ANNUAL REPORT
ON FORM 10-K. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS ANNUAL
REPORT ON FORM 10-K, INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS.
RISKS OF PROPRIETARY GAMES. The Company places its proprietary games in
casinos at no cost to the casinos under short-term arrangements, making these
games susceptible to replacement due to pressure from competitors, changes in
economic conditions, obsolescence, and declining popularity. Anchor intends to
maintain and expand the number of installed proprietary games through
enhancement of existing games, introduction of new games, and customer service,
but there can be no assurance that these efforts will be successful.
Introduction of new proprietary games involves significant risks, including
whether the Company will be able to place its games with casinos, the economic
terms on which casinos will accept the machines, the popularity of the games
with gaming patrons, and whether a successful game can maintain its popularity
over the long term. If the Company is not successful in introducing new games,
the effects on Anchor could be adverse.
Anchor derives revenues from the sale of souvenir tokens that are paid out
by Silver Strike machines. The primary raw material for the tokens is silver,
the price of which is subject to wide fluctuations. As silver prices rise, the
Company may be unable to pass price increases through to its casino customers.
Anchor has filed trademark and patent applications to protect its
intellectual property rights in certain of its trademarks and innovations on
certain of its proprietary games, respectively. At this time, however,
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the United States Patent and Trademark Office has not acted upon all of these
applications. There can be no assurance that the pending patent or trademark
applications will actually issue as patents or trademark registrations or that
any of these rights will not be infringed by others. Certain of the Company's
games, including Silver Strike, Totem Pole, and Clear Winner, do not have
independent protection of the game itself. Anchor intends to promote
aggressively its trademarks to build goodwill and customer loyalty. In addition,
Anchor intends to improve and add innovations to certain of its games, which may
be subject to legal protection. There can be no assurance, however, that the
Company will be successful in these efforts, that innovations will be subject to
legal protection, or that the innovations will give a competitive advantage to
the Company. None of the foregoing measures provides assurance that Anchor's
proprietary games or the concepts incorporated in the games could not be
successfully duplicated by third parties. Third parties could infringe on
Anchor's rights, or Anchor's proprietary games could be successfully duplicated
without infringing on Anchor's legal rights. Many elements incorporated in
Anchor's proprietary games are in the public domain or otherwise not susceptible
to legal protection, and the steps taken by Anchor will not, in and of
themselves, preclude competition with Anchor's proprietary games.
Anchor also derives revenues from the sale of souvenir tokens that are paid
out by Silver Strike machines. The primary raw material for the tokens is
silver, the price of which is subject to wide fluctuations. As silver prices
rise, the Company may be unable to pass price increases through to its casino
customers.
COMPETITION. Intense competition characterizes the market for proprietary
games. Competitors in the game industry include manufacturers of gaming devices
and other companies marketing gaming products and conversion kits, which compete
directly with the Company for the limited gaming spaces available at casinos.
The popularity of any of the Company's games may decline over time as consumer
preferences change or as new, competing games are introduced. The Company's
competitors are engaged in intense efforts to produce proprietary games that
compete with those of the Company. As a result, Anchor must continually
anticipate and adapt its products to consumer preferences in order to maximize
the economics of the game to the Company. There can be no assurance, however,
that Anchor will continue to be successful in developing and marketing its
products. If the Company fails to develop games that achieve market acceptance
or if existing games become obsolete due to the introduction of popular games by
Anchor's competitors the effects on Anchor could be material and adverse.
Anchor's strategy of creating recurring revenues from its proprietary games
by placing the games in casinos under a royalty, revenue participation, or
similar agreements involves a departure from the traditional practice of casinos
of owning or leasing gaming devices. To the extent that casinos are reluctant to
enter into arrangements that generate recurring revenues for suppliers of casino
games, the market for Anchor's proprietary games could be limited. Competition
within the market for games that generate recurring revenues could intensify as
other suppliers of gaming devices enter this market or offer competitive
products or terms.
Intense competition also characterizes the Black Hawk/Central City and
Cripple Creek markets. Since limited stakes gaming was instituted in Colorado in
1991, a number of Colorado casinos have ceased operations and others have filed
for protection under Chapter 11 of the Bankruptcy Code. Others have closed
temporarily or reduced the number of employees, and many casinos may not be
operating profitably. Several proposals have been made to open new casinos or to
expand existing casinos in Black Hawk, some of which have been abandoned or
modified. Two casinos are being developed in Black Hawk located across the
intersection from the Company's Colorado Central Station Casino. Casino America
and Nevada Gold & Casinos have commenced construction of a casino scheduled to
open in early 1999, which facility is expected to include 1,100 slot machines,
24 table games, and a 1,000 car parking garage. Riviera Holdings Corporation has
announced that it plans to develop a gaming facility with 1,000 slot machines,
14 table games, and a 500 space covered parking garage, scheduled to open in the
Spring of 1999. A joint venture between Black Hawk Gaming & Development Company,
Inc. and Jacobs Entertainment Ltd. is constructing a gaming facility located
near Colorado Central Station. The facility is scheduled to be
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completed in June 1998 and is expected to include 800 slot machines, 20 table
games, and 500 parking spaces. In addition, construction is proceeding on a
third major intersection off State Highway 119, which will provide access
directly to one of the new casinos from State Highway 119, which is the primary
access from the Denver metropolitan area. From time to time other casino
companies have publicly expressed an interest in pursuing development or
expansion in the Black Hawk/Central City market, and proposals to develop
competitive projects are ongoing.
It appears that national, regional, state, and local competition for the
casino gaming market in general will remain extremely high during the
foreseeable future, as casino gaming activities expand in traditional gaming
states and in new jurisdictions. In addition, passage of the Indian Gaming
Regulatory Act in 1988 has led to rapid increases in Native American gaming
operations, and the Company's two casinos may compete for customers with casinos
located on Indian reservations in southwestern Colorado. The Company expects
many competitors to enter new jurisdictions that authorize gaming, some of whom
may have greater financial and other resources than the Company. Such
proliferation of gaming activities could adversely affect the Company's
business. In particular, the legalization of casino gaming in or near any
metropolitan area, such as Denver, Colorado, from which the Company draws
customers would have a material adverse effect on the Company's business. The
Company believes, however, that proliferation of gaming activities into new
jurisdictions presents an opportunity for it to expand its proprietary games
operations.
Gaming machines and gaming of all types are available in Nevada casinos and
in restricted gaming locations similar to those in which the Company operates
gaming machines, and all of these gaming establishments compete directly or
indirectly with Anchor's route operations. In addition, Anchor is subject to
substantial competition for the operation of gaming machines in approved
locations from numerous small gaming machine route operators and some large
operators, located principally in Las Vegas and Reno, Nevada, and their
surrounding areas. The principal methods of competition for gaming machine
locations are the lease, sublease, license, or revenue sharing terms, the
service provided by the route operator, the reputation of the route operator,
and the financial strength of the route operator. As existing space lease and
revenue participation arrangements expire, competition for renewals can be
expected to increase the amounts payable to location owners as compared to
amounts payable under existing agreements.
RISKS OF PURSUING NEW CASINO GAMING OPPORTUNITIES. The Company is actively
seeking to expand its casino operations into jurisdictions that have legalized
or are expected to legalize gaming in the future. There can be no assurance,
however, that the Company will be able to identify suitable casino projects in
which to invest or will be able to complete any such project as scheduled or
contemplated. The Company's ability to complete and operate new casino projects
will be dependent on a number of factors, many of which are beyond Anchor's
control, including identifying suitable investment partners (if appropriate),
negotiating acceptable terms, securing required state, foreign, and local
licenses, permits, and approvals, securing adequate financing on acceptable
terms, identifying and securing suitable locations (which management expects
will be limited and in high demand), voter and other political approvals,
demographic trends, and consumers' gaming preferences. As a result, there can be
no assurance that the Company will be able to develop new or expand its current
casino operations. In particular, there can be no assurance that Anchor will be
successful in its effort to secure management contracts or multiple site
contracts or if successful, which locations, the number of contracts, the time
frame in which they might be awarded, or when the sites will be operational, in
Ontario, Canada. See "Business--Casinos--Canadian Opportunity." In addition, the
Company may incur costs in connection with pursuing new gaming opportunities
that it cannot recover and may be required to expense certain of these costs,
which may negatively affect the Company's reported operating performance for the
periods during which such costs are expensed.
RISKS OF DEPENDENCE ON SUPPLIERS. The Company utilizes outside vendors,
some of which are competitors of the Company, to manufacture a significant
portion of its proprietary game machines and
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parts. An inability to obtain gaming machines and components, production parts,
and replacement parts on reasonable terms or on a timely basis could have an
adverse effect on Anchor.
GAMING REGULATIONS AND TAXES. The Company's operations are subject to
extensive state and local regulation and taxation in Nevada, Colorado, and other
jurisdictions in which Anchor operates, and any future activities in additional
jurisdictions will be similarly regulated and taxed. State and local authorities
require various licenses, permits, and approvals to be held by the Company, and
these authorities may, among other things, revoke the license of any entity
licensed as a gaming corporation, the registration of any entity registered as a
holding company of a gaming corporation, or the license of any individual
licensed as an officer, director, control person, employee, or stockholder of a
licensed or registered entity. Gaming licenses and related approvals are deemed
to be privileges under Nevada and Colorado law and the laws of other
jurisdictions, and no assurances can be given that existing licenses will not be
revoked. Regulatory changes or increases in applicable taxes or fees in Nevada
or Colorado or the laws of other jurisdictions in which the Company operates
could have a material adverse effect on the Company. There can be no assurance
that regulations adopted or taxes imposed by Nevada, Colorado, or other
jurisdictions will not have a material adverse effect on the Company. See
"Regulation."
Colorado law requires statewide voter approval of an amendment to the State
Constitution for any expansion of limited gaming into additional locations and,
depending on the authorization approved by the statewide vote, requires, in
addition, voter approval from the locality in question. In 1994, Colorado voters
defeated by a margin of 93% to 7% a proposal to permit gaming in Manitou Springs
(located near Colorado Springs and Cripple Creek) and slot machines in airports.
On November 5, 1996, Colorado voters defeated by a margin of 69% to 31% a
proposal to allow gaming in the community of Trinidad, located on the New Mexico
border. Recently, the state legislature passed, but the Governor vetoed, a bill
that would have permitted video lottery terminals at dog and horse racetracks
under certain terms and conditions. Several cities within Colorado have active
citizens' lobbies that were able to place gaming initiatives on recent statewide
ballots. Although these initiatives have failed, new initiatives could be
introduced on future statewide ballots to allow expansion of gaming in Colorado
or prohibit gaming in the particular markets in Colorado where the Company
operates. Future initiatives, if passed, could significantly increase the
competition for gaming customers, thereby adversely affecting the Company's
operations in Colorado. Additionally, there can be no assurance that future
legislation will not be enacted that would impose additional restrictions or
prohibitions on, or assess additional fees with respect to, the Company's
business.
Each of the Company's proprietary games must be approved and licensed in
each jurisdiction in which it is placed. The Company must still obtain approvals
for certain of its games in certain gaming jurisdictions before it can fill all
of its orders to place machines. Obtaining required licenses can be time
consuming and costly and there can be no assurance that any game will be
successfully licensed in any jurisdiction.
Any beneficial holder of the Common Stock may be subject to investigation by
gaming authorities in Nevada, Colorado, and other jurisdictions in which Anchor
does business if such authorities have reason to believe that such ownership may
be inconsistent with a state's gaming policies. Persons who acquire beneficial
ownership of more than certain designated percentages of the Common Stock may be
subject to certain reporting and qualification procedures. The Company's
Articles of Incorporation provide that all transfers of voting securities are
subject to the regulations of each regulatory body to which the Company's
activities are subject and provide for a mandatory repurchase of Common Stock if
a stockholder is found unsuitable. In addition, changes in control of the
Company and certain other corporate transactions may not be effected without the
prior approval of gaming authorities in Nevada, Colorado, and other
jurisdictions in which the Company does business. Such provisions could
adversely affect the marketability of the Common Stock or prevent certain
corporate transactions, including mergers or other business combinations. See
"Regulation."
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In August 1996, the United States Congress passed legislation creating the
National Gambling Impact and Policy Commission to conduct a comprehensive study
of all matters relating to the economic and social impact of gaming in the
United States. The legislation provides that, not later than two years after the
enactment of such legislation, the commission must issue a report to the
President and to Congress containing its findings and conclusions, together with
recommendations for legislation and administrative actions. Any such
recommendations, if enacted into law, could adversely impact the gaming industry
and have a material adverse effect on the Company's business or results of
operations. The Company is unable to predict whether this study will result in
legislation that would impose additional regulations on gaming industry
operators, including the Company, or whether such legislation, if any, would
have a material adverse effect on the Company. Additionally, from time to time,
certain federal legislators have proposed the imposition of a federal tax on
gaming revenues. Any such tax could have a material adverse effect on the
Company's financial condition or results of operations.
RISKS OF EXISTING COLORADO OPERATIONS: ACCESS TO BLACK HAWK AND CRIPPLE
CREEK. The cities of Black Hawk and Cripple Creek are located in the Colorado
Rockies and each is serviced by winding mountain roads that require extremely
cautious driving, especially in bad weather. These roads also have tunnels that
are subject to closure. Congestion on the roads leading into Black Hawk and
Cripple Creek is not uncommon during the peak summer season, holidays, and other
times of the year, and such congestion may discourage potential customers from
traveling to the Company's casinos. In addition, concerns about the overall
availability of convenient parking in Black Hawk and, to a lesser extent,
Cripple Creek may discourage some potential customers. Further, Black Hawk and,
to a lesser extent, Cripple Creek have experienced unanticipated demands for
their municipal systems, including water and sewage treatment facilities.
Increased levels of activity in the area may exacerbate old or pose new
municipal and environmental problems, the costs of which could be imposed on the
gaming industry and in part by the Company.
RISKS OF EXISTING COLORADO OPERATIONS: ENVIRONMENTAL CONSIDERATIONS. The
Colorado Central Station Casino is located in an area that has been designated
by the Environmental Protection Agency (the "EPA") as a superfund site on the
National Priorities List, known as the Central City-Clear Creek Superfund Site
(the "Site"), as a result of contamination from historic mining activity in the
area. The EPA is entitled to proceed against owners and operators of properties
located within the Site for remediation and response costs associated with their
properties and with the entire Site. The Colorado Central Station Casino is
located within the drainage basin of North Clear Creek and is therefore subject
to potentially contaminated surface and ground water from upstream
mining-related sources. Soil and ground water samples on the Site indicate that
several contaminants exist in concentrations exceeding drinking water standards.
Records relating to historical uses of the Site are uncertain as to whether
mining actually occurred below the Company's property. Records do indicate,
however, that an ore loading dock for a railroad depot was once located on
adjacent property, and railroad tracks were present on the Company's property.
Management is not aware of any environmental issues associated with these
activities.
DEPENDENCE ON KEY PERSONNEL. The success of Anchor is largely dependent on
the efforts and skills of Stanley E. Fulton, its Chairman of the Board, and
other key officers and employees of Anchor. The loss of Mr. Fulton's or such
other key officers' or employees' services could have a material adverse effect
on Anchor. The expansion of Anchor's businesses may require additional managers
with gaming industry experience, as well as additional skilled employees. A
shortage of skilled management personnel exists in the gaming industry, which
may make it more difficult and expensive to attract and retain qualified
managers and employees. In addition, some of the Company's key employees perform
their services under contracts that do not contain covenants not to compete with
the Company, and it is therefore possible that competitors could attempt to hire
certain of the Company's key employees. One of the Company's key game
development employees has a contract that allows him to pursue certain gaming
related businesses for an entity not controlled by Anchor, and it is therefore
possible that this key employee could devote substantial attention to
enterprises other than Anchor.
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CONTROL OF THE COMPANY. On August 29, 1997, Anchor Gaming filed a
Registration Statement on Form S-3 with the Securities and Exchange Commission
covering an offering (the "Offering") of 1,800,000 shares of common stock, of
Anchor (the "Common Stock") to be offered by certain selling stockholders,
including Stanley E. Fulton, Chairman and Chief Executive Officer of the Company
(657,700 shares), and Elizabeth Fulton and the six Fulton children (1,142,300
shares). Stanley E. Fulton will also grant to the underwriters of the Offering
an over-allotment option to purchase an additional 270,000 shares of Common
Stock. Upon completion of the Offering, the officers and directors of the
Company and members of their respective families will own beneficially
approximately 40.5% of the outstanding Common Stock (38.4% if the Underwriters'
over-allotment option is exercised in full). The ability to vote these shares
gives such persons the ability to exert substantial influence over any matter
coming to a vote of stockholders of the Company, including the election of
directors and certain mergers, asset sales, or other major corporate
transactions affecting the Company. All six of Mr. Fulton's children and a third
party have granted him an irrevocable proxy expiring on December 31, 1998 to
vote their shares of Common Stock. As a result, Mr. Fulton will have voting
control of 39.2% of the Common Stock to be outstanding after the Offering. Such
voting power, together with certain anti-takeover provisions included in the
Company's Articles of Incorporation and Bylaws and a Shareholder Rights Plan
(described below), could have the effect of delaying or discouraging an
unsolicited takeover of the Company.
RIGHTS PLAN. The board of directors of Anchor has authorized the Company to
enter into a Stockholder Rights Plan (the "Rights Plan") providing that one
right (a "Right") will be attached to each share of Common Stock as of a record
date to be determined by the board of directors (the "Record Date"). Each Right
will entitle the registered holder to purchase from the Company a unit (a
"Unit") consisting of one one-thousandth of a share of Series A Preferred at a
Purchase Price of $400.00 per Unit (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are to be set forth in the
Rights Agreement (the "Rights Agreement"), between the Company and a bank or
financial institution to be selected by the Company as Rights Agent (the "Rights
Agent").
Initially, the Rights will be attached to all Common Stock certificates
representing shares outstanding as of the Record Date, and no separate
certificate (a "Rights Certificate") will be distributed. The Rights will
separate from the Common Stock and a "Distribution Date" will occur upon the
earlier of (i) 10 days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding shares of Common Stock (the "Stock Acquisition Date"), (ii) 10
business days following the commencement of a tender offer or exchange offer
that would result in a person or group beneficially owning 15% or more of such
outstanding shares of Common Stock, or (iii) 10 business days after the board of
directors of the Company determines that any person or entity or group has
become the beneficial owner of an amount of Common Stock that the board of
directors determines to be substantial (which amount will in no event be less
than 10% of the shares of Common Stock outstanding) and that (a) such person or
entity or group intends to cause the Company to repurchase the Common Stock
beneficially owned by such person or entity or group or to exert pressure
against the Company to take any action or enter into any transaction or series
of transactions with the intent or the effect of providing such person or entity
or group with short-term gains or profits under circumstances in which the board
of directors determines that the long-term interests of the Company and its
stockholders would not be served by taking such action or entering into such
transactions or series of transactions, or (b) beneficial ownership by such
person or entity or group is reasonably likely to have a material adverse effect
on the business, competitive position, prospects, or financial condition of the
Company and its subsidiaries (an "Adverse Person"). Until the Distribution Date,
(i) the Rights will be evidenced by the Common Stock certificates and will be
transferred with and only with such Common Stock certificates; (ii) new Common
Stock certificates will contain a notation incorporating the Rights Agreement by
reference; and (iii) the surrender for transfer of any certificates for Common
Stock outstanding will also constitute the transfer of the Rights associated
with the Common Stock represented by such certificate. The Rights Agreement
provides that Stanley E. Fulton, and certain of his transferees, donees, or
successors, who together were beneficial owners of more
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than 52.4% of the Common Stock of the Company outstanding on August 27, 1997,
are excluded from the definition of "Acquiring Person." Mr. Fulton is also
excluded from the definition of "Adverse Person."
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on the tenth anniversary of the Rights Agreement,
unless earlier redeemed by the Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates will
be mailed to holders of record of the Common Stock as of the close of business
on the Distribution Date and, thereafter, the separate Rights Certificates alone
will represent the Rights. Except as otherwise determined by the board of
directors, only shares of Common Stock outstanding prior to the Distribution
Date will be issued with Rights.
In the event that (i) the Company is the surviving corporation in a merger
or combination with any Acquiring Person or any Adverse Person, or any associate
or affiliate of any Acquiring Person or Adverse Person, and its Common Stock
remains outstanding; (ii) any Acquiring Person or any Adverse Person, or any
associate or affiliate of any Acquiring Person or Adverse Person, engages in one
or more "self-dealing" transactions to be set forth in the Rights Agreement;
(iii) an Acquiring Person becomes the beneficial owner of 15% or more of the
then outstanding shares of Common Stock (unless such acquisition is made
pursuant to a tender or exchange offer for all outstanding shares of the
Company, at a price determined by a majority of the Continuing Directors of the
Company (as defined below) who are not representatives, nominees, affiliates, or
associates of an Acquiring Person, to be fair and otherwise in the best interest
of the Company and its stockholders); (iv) during such time as there is an
Acquiring Person or Adverse Person an event occurs that results in such
Acquiring Person's or Adverse Person's ownership interest being increased by
more than 1% (E.G., a reverse stock split or recapitalization); or (v) the board
of directors determines that a person is an Adverse Person, each holder of a
Right will thereafter have the right to receive, upon exercise, Common Stock
(or, in certain circumstances, cash, property, or other securities of the
Company), having a value equal to two times the Exercise Price of the Right. The
Exercise Price is the Purchase Price times the number of shares of Common Stock
associated with each Right (initially, one). Notwithstanding any of the
foregoing, following the occurrence of any of the events set forth in this
paragraph (the "Flip-In Events"), all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by any
Acquiring Person or any Adverse Person, or an associate or affiliate of any
Acquiring Person or Adverse Person, will be null and void. However, Rights are
not exercisable following the occurrence of any of the Flip-In Events set forth
above until such time as the Rights are no longer redeemable by the Company as
set forth below.
In the event that following the Stock Acquisition Date, (i) the Company is
acquired in a merger or consolidation in which the Company is not the surviving
corporation (other than a merger that follows a tender offer that the board of
directors has found to be fair to the stockholders of the Company, as described
above); or (ii) 50% or more of the Company's assets or earning power is sold or
transferred, each holder of a Right (except Rights which have previously been
voided as set forth above) will thereafter have the right to receive, upon
exercise of the Right, Common Stock of the acquiring company having a value
equal to two times the Exercise Price of the Right.
The Purchase Price payable, and the number of Units of Series A Preferred or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination, or reclassification of, the Series A
Preferred; (ii) if holders of the Series A Preferred are granted certain rights
or warrants to subscribe for Series A Preferred or convertible securities at
less than the current market price of the Series A Preferred; or (iii) upon the
distribution to holders of the Series A Preferred of evidences of indebtedness
or assets (excluding regular quarterly cash dividends) or of subscription rights
or warrants (other than those referred to above).
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With certain exceptions, no adjustments in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional Units will be issued and, in lieu thereof, an adjustment in
cash will be made based on the market price of the Series A Preferred on the
last trading date prior to the date of exercise.
At any time until 10 days following the Stock Acquisition Date, the Company
may redeem the Rights in whole, but not in part, at a price of $.01 per Right.
The ten day redemption period may be extended by the board of directors so long
as the Rights are still redeemable. Under certain circumstances, the decision to
redeem will require the concurrence of a majority of the Continuing Directors
referred to below. Immediately upon the action of the board of directors
ordering redemption of the Rights, the Rights will terminate and the only right
of the holders of Rights will be to receive the $.01 redemption price.
The term "Continuing Director" means any member of the board of directors of
the Company who was a member of the board of directors prior to the adoption of
the Rights Plan and any person who is subsequently elected to the board of
directors if such person is recommended or approved by a majority of the
Continuing Directors, but will not include an Acquiring Person or any Adverse
Person, or an affiliate or associate of an Acquiring Person or Adverse Person,
or any representative of the foregoing entities.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company, including, without limitation, the right to
vote or to receive dividends. While the distribution of the Rights will not be
taxable to stockholders or to the Company, stockholders may, depending upon the
circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Stock (or other consideration) of the Company as set
forth above.
Other than those provisions relating to the principal economic terms of the
Rights, any of the provisions of the Rights Agreement may be amended by the
board of directors of the Company prior to the Distribution Date. After the
Distribution Date, the provisions of the Rights Agreement may be amended by the
board of directors (in certain circumstances, with the concurrence of the
Continuing Directors) in order to cure any ambiguity, to make changes which do
not adversely affect the interests of holders of Rights (excluding the interest
of any Acquiring Person or any Adverse Person), or to shorten or lengthen any
time period under the Rights Agreement; provided that no amendment to adjust the
time period governing redemption will be made at such time as the Rights are not
redeemable.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
in certain circumstances. Accordingly, the existence of the Rights may deter
certain acquirors from making takeover proposals or tender offers. However, the
Rights are not intended to prevent a takeover, but rather are designed to
enhance the ability of the board of directors to negotiate with an acquiror on
behalf of all of the shareholders.
ITEM 2. PROPERTIES.
The Company's principal properties consist of (i) the Colorado Central
Station Casino in Black Hawk, Colorado, (ii) the Colorado Grande Casino in
Cripple Creek, Colorado, and (iii) corporate headquarters in Las Vegas, Nevada.
The Colorado Central Station Casino is situated on approximately 1.8 acres
of land on the south end of Black Hawk, near Main Street and Colorado State
Highway 119. Black Hawk, Colorado is approximately 40 miles from Denver,
Colorado. The Colorado Central Station has more than 680 gaming machines, 19
table games, and food-court restaurant area. The Colorado Central Station Casino
building has approximately 49,000 square feet of floor space, with 16,637 square
feet of gaming area over three floors. The casino has more than 770 parking
spaces and is the first shuttle stop from Black Hawk's 3000-space public
facility.
The Colorado Grande Casino is located 45 miles from Colorado Springs and 75
miles from Pueblo, Colorado. The facility, which is leased, occupies 15,000
square feet of a commercial facility, of which 3,125
23
<PAGE>
square feet are devoted to gaming. The casino is located at one of the principal
intersections in Cripple Creek and has 44 adjacent parking spaces and a separate
lot for employee parking. The casino features more than 210 gaming machines, a
full service restaurant, and bar.
In October 1994, the Company consolidated its Las Vegas offices into a new
headquarters facility, also located in Las Vegas. Since that time it has
expanded to 17,000 square feet of office space and 30,000 square feet of
sub-assembly and warehouse space, all of which is leased.
ITEM 3. LEGAL PROCEEDINGS.
The Company is from time to time a party to legal proceedings that arise in
the ordinary course of business. Management does not believe that any such
pending or threatened legal proceedings are material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
Not applicable.
24
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is listed on the Nasdaq National
Market-Registered Trademark- and trades under the symbol "SLOT." The following
table sets forth the high and low closing prices per share of the Company's
Common Stock on the Nasdaq National Market for the described periods. The
Company has not declared any dividends from the time of the IPO until the
present.
<TABLE>
<CAPTION>
PRICE RANGE
------------------
FISCAL 1996 HIGH LOW
- ---------------------------------------- ------- -------
<S> <C> <C>
First quarter........................... $26 1/4 $20 1/2
Second quarter.......................... $25 $18 7/8
Third quarter........................... $32 1/4 $21 3/4
Fourth quarter.......................... $69 $32 3/4
<CAPTION>
FISCAL 1997 HIGH LOW
- ---------------------------------------- ------- -------
<S> <C> <C>
First quarter........................... $68 3/4 $50 1/2
Second quarter.......................... $64 1/2 $30 1/8
Third quarter........................... $40 3/4 $27 7/8
Fourth quarter.......................... $47 3/4 $25
</TABLE>
As of September 18, 1997, there were approximately 4,000 beneficial holders
of the Company's common stock.
The board of directors intends to retain any earnings of the Company to
support operations and to finance expansion and does not intend to pay cash
dividends on the Common Stock of Anchor in the foreseeable future. The Company
is a party to a revolving credit facility with a bank that prohibits the payment
of dividends. Subject to contractual restrictions, any future determinations as
to the payment of dividends will be at the discretion of the board of directors
of the Company, and will depend on the Company's financial condition, results of
operations, capital requirements, and such other factors as the board of
directors deems relevant.
Because the Company's principal operating entities were S corporations from
their inception until the consummation of the initial public offering, a
substantial portion of Anchor Gaming's net income in past years was distributed
to its stockholders.
25
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial and operating information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes included elsewhere or incorporated by reference in this Prospectus. The
income statement and balance sheet data for each of the five fiscal years ended
June 30, 1997 are derived from the audited consolidated financial statements of
the Company.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------
1997 1996 1995 1994 (1) 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Casino operations........................................... $ 69,223 $ 65,125 $ 56,184 $ 23,713 $ 3,896
Proprietary games........................................... 49,716 21,457 14,159 4,147 117
Route operations............................................ 33,509 28,651 25,818 26,123 25,018
Food and beverage........................................... 1,300 1,233 1,250 786 446
--------- --------- --------- --------- ---------
Total revenues............................................ 153,749 116,466 97,411 54,769 29,477
Total costs and expenses:
Casino operations........................................... 29,100 26,830 21,500 8,199 1,326
Proprietary games........................................... 11,039 12,114 9,851 3,047 141
Route operations............................................ 19,905 17,158 15,659 15,416 14,869
Food and beverage........................................... 1,432 1,300 1,387 768 478
Selling, general, and administrative........................ 28,164 21,074 20,949 10,375 3,573
Preopening costs............................................ -- -- -- 731 --
Project cost write-downs.................................... 2,117 -- -- -- --
Depreciation and amortization............................... 8,798 4,110 3,215 2,121 1,317
--------- --------- --------- --------- ---------
Total costs and expenses.................................. 100,555 82,586 72,561 40,657 21,704
--------- --------- --------- --------- ---------
Income from operations........................................ 53,194 33,881 24,850 14,112 7,773
Interest income............................................... 3,793 2,028 1,105 379 88
Interest expense.............................................. (288) (429) (732) (1,314) (954)
Other income (expense) (2).................................... (22) 43 244 244 87
--------- --------- --------- --------- ---------
Income before provision for income taxes...................... 56,677 35,523 25,467 13,421 6,994
Historical and pro forma provision for income taxes (3)....... 21,001 13,188 9,486 4,702 2,378
--------- --------- --------- --------- ---------
Net income and pro forma net income (3)....................... $ 35,676 $ 22,335 $ 15,981 $ 8,719 $ 4,616
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common and common equivalent shares
outstanding (4)............................................. 13,691 12,153 11,447 8,481 6,459
Earnings and pro forma earnings per common and common
equivalent share (3)........................................ $ 2.61 $ 1.84 $ 1.40 $ 1.03 $ 0.71
OTHER DATA:
EBITDA (5).................................................... $ 61,992 $ 37,990 $ 28,065 $ 16,233 $ 9,088
Capital expenditures.......................................... 38,108 27,916 7,834 17,921 5,142
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
-----------------------------------------------------
1997 1996 1995 1994 (1) 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................... $ 66,427 $ 78,113 $ 26,132 $ 10,472 $ 3,872
Total assets.................................................. 188,876 162,312 79,266 58,903 22,576
Long term notes payable, principal stockholder................ 2,800 3,650 5,989 6,927 17,243
Stockholders' equity (6)...................................... 171,331 146,307 64,832 47,001 3,840
</TABLE>
- ------------------------------
(1) Reflects six months of operations at the Company's Colorado Central Station
Casino in Black Hawk, Colorado, which opened December 25, 1993, and five
months of proprietary games operations acquired in conjunction with the
Company's IPO.
(2) Other income (expense) consists of minority interest in earnings of
consolidated subsidiary, and other income (expense).
26
<PAGE>
(3) A pro forma provision for federal income taxes (assuming a 34% effective tax
rate through fiscal 1994) has been calculated for all periods prior to the
IPO as if the principal subsidiaries of the Company had not elected to be
treated as S corporations during those periods.
(4) Weighted average shares outstanding are presented as if the reorganization
completed in conjunction with the Company's IPO took place July 1, 1992.
(5) EBITDA consists of income from operations plus depreciation and
amortization. EBITDA is not a measure of performance or financial condition
under generally accepted accounting principles, but is presented solely as
supplemental disclosure because the Company believes that it enhances the
understanding of the ability to service debt. EBITDA should not be
considered in isolation or as a substitute for other measures of financial
performance or liquidity under generally accepted accounting principles.
(6) Because the principal subsidiaries of the Company elected to be treated as S
corporations prior to the Company's IPO, a substantial portion of the
Company's net income prior to the IPO was distributed to its stockholders.
Subsequent to its IPO, earnings have been retained to support operations and
to finance expansion.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
In February 1994, Anchor completed its IPO of 3,162,500 shares of Common
Stock at a price of $12 per share. Simultaneously with the closing of the IPO,
Anchor became the holding company for its current subsidiaries, Anchor Coin,
Colorado Grande Enterprises, Inc., C.G. Investments, Inc., and D D Stud, Inc.,
each of which had been operated under different ownership structures controlled
primarily by Stanley E. Fulton, the Chairman of the Board, Chief Executive
Officer, and acting Chief Financial Officer of Anchor. Also at the time of the
IPO, the Company acquired all of the beneficial ownership of Global Gaming
Products, L.L.C. and certain related assets from Global Distributors, Inc. (the
"Acquisition"), which were primarily involved in the distribution of the
proprietary game Silver Strike. Stanley E. Fulton also owned 50% of Global
Gaming Products, L.L.C. prior to the Acquisition. The financial position and
operating results of Colorado Grande Enterprises, Inc. are included in the
consolidated financial statements as an 80% consolidated subsidiary.
On April 23, 1996, the Company completed a secondary offering of 2.3 million
shares of Common Stock at a price of $37 per share. 1.55 million of these shares
were sold by the Company (the "Secondary Offering") and the remaining 750,000
shares were sold by selling stockholders. Net proceeds to the Company from the
Secondary Offering were $53.9 million.
The following table sets forth the percentage of Anchor's total revenues
attributable to casino operations, proprietary games operations, gaming machine
route operations, and food and beverage operations during the fiscal years ended
June 30, 1997, 1996, and 1995. The growth in proprietary games revenue as a
percentage of total revenues is attributable primarily to the Company's
introduction of the new proprietary game Wheel of Gold, which began generating
revenue in the third quarter of fiscal 1996 and to a lesser extent, the
commencement of the Strategic Alliance with IGT during the second half of fiscal
1997. The Company's food and beverage revenues are derived primarily from its
casino operations and, to a lesser extent, from its route operations.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
SOURCES OF REVENUES:
Casino operations....................................................... 45.0% 55.9% 57.7%
Proprietary games operations............................................ 32.4 18.4 14.5
Route operations........................................................ 21.6 24.6 26.5
Food and beverage operations............................................ 0.8 1.1 1.3
----- ----- -----
Total revenues...................................................... 100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
</TABLE>
27
<PAGE>
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
REVENUES. Total revenues were $153.7 million for the fiscal year ended June
30, 1997, an increase of $37.2 million or 31.9% from $116.5 million for the
fiscal year ended June 30, 1996.
Revenues from casino operations were $69.2 million for the fiscal year ended
June 30, 1997, an increase of $4.1 million or 6.3% from $65.1 million for the
fiscal year ended June 30, 1996. The increase is primarily due to increased
revenues at the Colorado Central Station Casino and, to a lesser extent, due to
increased revenues at the Colorado Grande Casino.
Revenues from proprietary games operations were $49.7 million for the fiscal
year ended June 30, 1997, an increase of $28.2 million or 131.2% from $21.5
million for the fiscal year ended June 30, 1996. The increase is primarily due
to revenues generated from the Company's proprietary game, Wheel of Gold,
introduced December 29, 1995, as well as revenues from the Company's strategic
alliance with IGT and, to a lesser extent, from its newest proprietary game,
Totem Pole, and increased revenues generated from the proprietary game Clear
Winner. These increases were offset to some extent by decreased revenues
generated from the proprietary game Silver Strike.
Revenues from route operations were $33.5 million for the fiscal year ended
June 30, 1997, an increase of $4.8 million or 16.7% from $28.7 million for the
fiscal year ended June 30, 1996. Machines on route increased to 801 at June 30,
1997, from 692 at June 30, 1996, while average machines on route during fiscal
1997 were 106 machines greater than fiscal 1996.
COSTS AND EXPENSES. Total costs and expenses were $100.6 million for the
fiscal year ended June 30, 1997, an increase of $18.0 million or 21.8% from
$82.6 million for the fiscal year ended June 30, 1996. Total costs and expenses
as a percentage of total revenues decreased to 65.5% during fiscal 1997 from
70.9% during fiscal 1996.
Costs and expenses of casino operations were $29.1 million for the fiscal
year ended June 30, 1997, an increase of $2.3 million or 8.6% from $26.8 million
for the fiscal year ended June 30, 1996. Casino costs and expenses as a
percentage of casino revenue increased to 42.0% during fiscal year 1997 from
41.2% during fiscal year 1996. The increase in casino costs and expenses was
primarily due to increased gaming taxes and promotions at both of the Company's
casinos.
Costs and expenses of proprietary games operations were $11.0 million for
the fiscal year ended June 30, 1997, a decrease of $1.1 million or 9.1% from
$12.1 million for the fiscal year ended June 30, 1996. Prior to the introduction
of Wheel of Gold, most of the proprietary games operations' costs were
associated with the production of Silver Strike tokens. Costs and expenses of
proprietary games operations decreased primarily due to a decrease in Silver
Strike token sales in fiscal year 1997 compared to fiscal year 1996. Proprietary
games costs and expenses as a percentage of proprietary games revenues decreased
to 22.1% during fiscal year 1997 from 56.3% during fiscal year 1996. The
decrease in proprietary games costs and expenses as a percentage of revenue is a
result of increased revenues from the Company's newer proprietary games, which
incur less costs and expenses as a percentage of revenue than the Company's
Silver Strike game, which previously accounted for most of the Company's
proprietary games revenue.
Costs and expenses of route operations were $19.9 million for the fiscal
year ended June 30, 1997, an increase of $2.7 million or 15.7% from $17.2
million for the fiscal year ended June 30, 1996. Costs and expenses of route
operations as a percentage of route revenue remained fairly constant at 59.4%
during fiscal year 1997 compared to 59.9% during fiscal year 1996. The increase
in route costs and expenses was primarily due to increased location costs and,
to a lesser extent, increased direct payroll costs, both related to increased
machines on route.
Selling, general, and administrative ("SG&A") expenses were $28.2 million
for the fiscal year ended June 30, 1997, an increase of $7.1 million or 33.7%
from $21.1 million for the fiscal year ended June 30, 1996. SG&A expenses as a
percentage of total revenue remained fairly constant at 18.4% during fiscal year
28
<PAGE>
1997 compared to 18.1% during fiscal year 1996. The increase in total SG&A
expenses is primarily due to increased expenses in the Company's proprietary
games operations of approximately $4.7 million primarily due to increased
research, development, and licensing costs and an increase in SG&A expenses at
the Colorado Central Station Casino of approximately $2.0 million.
In November 1996, the Company announced it was re-evaluating the scope and
nature of its proposed addition of a new casino across the street from the
Colorado Central Station Casino. During the fourth quarter of fiscal year 1997,
the Company determined it was necessary to recognize a project cost write-down
of $2.1 million. The project costs were specifically related to architectural
fees, building design costs, and deferred rent that were determined to have no
future benefit.
Depreciation and amortization expense was $8.8 million for the fiscal year
ended June 30, 1997, an increase of $4.7 million or 114.6% from $4.1 million for
the fiscal year ended June 30, 1996. This increase is primarily due to increased
depreciation and amortization expense incurred in the Company's proprietary
games operations.
INCOME FROM OPERATIONS. As a result of the factors discussed above, income
from operations was $53.2 million for the fiscal year ended June 30, 1997, an
increase of $19.3 million or 56.9% from $33.9 million for the fiscal year ended
June 30, 1996. As a percentage of total revenues, income from operations
increased to 34.6% during fiscal year 1997 from 29.1% during fiscal year 1996.
INTEREST INCOME. Interest income was $3.8 million for the fiscal year ended
June 30, 1997, an increase of $1.8 million or 90.0% from $2.0 million for the
fiscal year ended June 30, 1996. The increase is due to increased short-term
investments resulting from an increase in working capital generated from
operations as well as cash invested from the Secondary Offering.
INTEREST EXPENSE. Interest expense was $288,000 for the fiscal year ended
June 30, 1997, a decrease of $141,000 or 32.9% from $429,000 for the fiscal year
ended June 30, 1996. The decrease is due to reduced average notes payable during
fiscal year 1997 as compared to fiscal year 1996.
NET INCOME. As a result of the factors discussed above, net income was $35.7
million for the fiscal year ended June 30, 1997, an increase of $13.4 million or
60.1% from $22.3 million for the fiscal year ended June 30, 1996.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
REVENUES. Total revenues were $116.5 million for the fiscal year ended June
30, 1996, an increase of $19.1 million or 19.6% from $97.4 million for the
fiscal year ended June 30, 1995.
Revenues from casino operations were $65.1 million for the fiscal year ended
June 30, 1996, an increase of $8.9 million or 15.8% from $56.2 million for the
fiscal year ended June 30, 1995. The increase is primarily due to increased
revenue at the Colorado Central Station Casino and, to a lesser extent, due to
increased revenues at the Colorado Grande Casino.
Revenues from proprietary games operations were $21.5 million for the fiscal
year ended June 30, 1996, an increase of $7.3 million or 51.4% from $14.2
million for the fiscal year ended June 30, 1995. The increase is primarily due
to revenues generated from the Company's proprietary game, Wheel of Gold,
introduced December 29, 1995, as well as increased revenues generated from the
proprietary games Clear Winner and Silver Strike.
Revenues from route operations were $28.7 million for the fiscal year ended
June 30, 1996, an increase of $2.9 million or 11.2% from $25.8 million for the
fiscal year ended June 30, 1995. Machines on route increased to 692 at June 30,
1996, from 606 at June 30, 1995, while average machines on route during fiscal
year 1996 were 70 machines greater than fiscal year 1995.
29
<PAGE>
COSTS AND EXPENSES. Total costs and expenses were $82.6 million for the
fiscal year ended June 30, 1996, an increase of $10.0 million or 13.8% from
$72.6 million for the fiscal year ended June 30, 1995. Total costs and expenses
as a percentage of total revenues decreased to 70.9% during fiscal 1996 from
74.5% during fiscal 1995.
Costs and expenses of casino operations were $26.8 million for the fiscal
year ended June 30, 1996, an increase of $5.3 million or 24.7% from $21.5
million for the fiscal year ended June 30, 1995. Casino costs and expenses as a
percentage of casino revenue increased to 41.2% during fiscal year 1996 from
38.3% during fiscal year 1995. The increase in casino costs and expenses was
primarily due to increased gaming taxes, direct payroll, and promotions at both
of the Company's casinos.
Costs and expenses of proprietary games operations were $12.1 million for
the fiscal year ended June 30, 1996, an increase of $2.2 million or 22.2% from
$9.9 million for the fiscal year ended June 30, 1995. Proprietary games costs
and expenses as a percentage of proprietary games revenues decreased to 56.3%
during fiscal year 1996 from 69.7% during fiscal year 1995. The decrease in
proprietary games costs as a percentage of revenue is a result of the
introduction during fiscal year 1996 of Wheel of Gold which incurs less costs
and expenses as a percentage of revenue than the Company's other proprietary
games.
Costs and expenses of route operations were $17.2 million for the fiscal
year ended June 30, 1996, an increase of $1.5 million or 9.6% from $15.7 million
for the fiscal year ended June 30, 1995. Costs and expenses of route operations
as a percentage of route revenue decreased to 59.9% during fiscal year 1996 from
60.9% during fiscal year 1995. The increase in route costs and expenses was
primarily due to increased location costs, related to increased machines on
route and, to a lesser extent, increased direct payroll costs.
SG&A expenses were $21.1 million for the fiscal year ended June 30, 1996, an
increase of $125,000 or 0.6% from $20.9 million for the fiscal year ended June
30, 1995. SG&A expenses as a percentage of total revenue decreased to 18.1%
during fiscal year 1996 from 21.5% during fiscal year 1995. The increase in SG&A
expenses is primarily due to increased expenses at the Company's Colorado
Central Station Casino of approximately $1.2 million and an increase in SG&A
expenses in the Company's proprietary games operations of approximately
$828,000, mostly offset by a reduction in corporate development costs. The
Company incurred $269,000 in development costs during the fiscal year ended June
30, 1996 as compared to approximately $2.1 million during the fiscal year ended
June 30, 1995.
Depreciation and amortization expense was $4.1 million for the fiscal year
ended June 30, 1996, an increase of $895,000 or 28.0% from $3.2 million for the
fiscal year ended June 30, 1995. The increase is primarily due to increased
depreciation and amortization expense incurred in the Company's proprietary
games operations.
INCOME FROM OPERATIONS. As a result of the factors discussed above, income
from operations was $33.9 million for the fiscal year ended June 30, 1996, an
increase of $9.0 million or 36.1% from $24.9 million for the fiscal year ended
June 30, 1995. As a percentage of total revenues, income from operations
increased to 29.1% during fiscal year 1996 from 25.6% during fiscal year 1995.
INTEREST INCOME. Interest income was $2.0 million for the fiscal year ended
June 30, 1996, an increase of $923,000 or 83.9% from $1.1 million for the fiscal
year ended June 30, 1995. The increase is due to increased short-term
investments resulting from an increase in working capital generated from
operations as well as cash invested from the Secondary Offering.
INTEREST EXPENSE. Interest expense was $429,000 for the fiscal year ended
June 30, 1996, a decrease of $303,000 or 41.4% from $732,000 for the fiscal year
ended June 30, 1995. The decrease is due to reduced average notes payable during
fiscal year 1996 as compared to fiscal year 1995.
30
<PAGE>
NET INCOME. As a result of the factors discussed above, net income was $22.3
million for the fiscal year ended June 30, 1996, an increase of $6.3 million or
39.4% from $16.0 million for the fiscal year ended June 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Anchor's principal sources of liquidity have been cash flows from operations
and the net proceeds from the Secondary Offering in April 1996 and the IPO in
February 1994. Net proceeds to the Company from the Secondary Offering were
$53.9 million, and net proceeds from the IPO were $34.1 million. Net cash
provided by operating activities was $43.4 million during fiscal year 1997 and
$28.8 million during fiscal year 1996. At June 30, 1997, the Company had cash
and cash equivalents of $66.4 million, working capital of $64.6 million, and a
$10.0 million unsecured revolving bank line of credit (the "Bank Revolver").
In fiscal year 1997, the Company spent $38.1 million on capital
expenditures, primarily related to the purchase of gaming devices and equipment
for use in its proprietary games operations of approximately $30.0 million. In
addition, the Company spent $5.7 million during fiscal year 1997 related to
projects in Colorado including the expansion of the existing Colorado Central
Station Casino to accommodate an additional 65 gaming machines, the expansion
and improvement of parking facilities at the Colorado Central Station Casino,
and the planned development of a second casino in Black Hawk, Colorado. The
Company spent $2.1 million on architectural and design costs for the planned
development of the second casino in fiscal year 1997 and fiscal year 1996 which
was ultimately written off in fiscal year 1997. The Company anticipates that
capital expenditures for the fiscal year ending June 30, 1998 will be at least
$17.0 million, which will consist primarily of expenditures to purchase gaming
devices and equipment for use in its proprietary games operations.
In April 1997, the board of directors authorized a repurchase of up to
1,000,000 shares of Common Stock. At September 26, 1997, the Company had
repurchased 514,000 shares of Common Stock at a cost of $23.9 million.
During fiscal year 1997, the Company made $3.1 million in advances to a 50%
owned joint venture engaged in the operation of proprietary gaming devices.
In November 1996, the Company's $20 million secured bank line of credit
expired. In April 1997, the Company entered into the Bank Revolver, which
expires November 30, 1998. The Bank Revolver bears interest at the prime rate of
interest or LIBOR plus 2%, at the Company's option. The Company has agreed to
maintain certain financial and non-financial covenants customary with lending
arrangements of this type. The Company has complied with the covenants
throughout the term of the expired credit facility and the Bank Revolver. During
fiscal year 1997 the Company did not borrow under the Bank Revolver or the line
of credit.
The Company believes its principal liquidity requirements will be the
purchase of additional proprietary gaming machines in formats that have already
been introduced to the market, the development and purchase of proprietary
gaming machines in formats that have not yet been introduced, and depending upon
the outcome of the Company's re-evaluation of the scope and nature of its
Colorado expansion options, the funding of such an expansion. At June 30, 1997,
the Company had commitments to purchase gaming equipment for approximately $5.6
million. The Company believes that cash on hand, cash flow from operations, and
available borrowings under the Bank Revolver will be sufficient to fund its
currently planned capital projects and operations.
The Company continually seeks opportunities to expand its gaming oriented
businesses in new and existing gaming jurisdictions. If successful in pursuing
another opportunity in any gaming oriented business and depending on the amount
of funding required, the Company may be required to obtain additional financing.
31
<PAGE>
RECENTLY ADOPTED 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" ("SFAS 121"). SFAS 121 requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS 121 is effective for
fiscal years beginning after December 15, 1995. Adoption of SFAS 121 in the
current year did not have a material effect on the consolidated financial
statements of the Company.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), which establishes financial accounting
and reporting standards for stock-based employee compensation plans and for
transactions in which an entity issues its equity instruments to acquire goods
or services from nonemployees. The Company continues to account for stock based
compensation arrangements in accordance with Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees," and therefore the adoption of SFAS
123 had no effect on the financial position or results of operations of the
Company. The Company has included additional disclosures about stock-based
employee compensation plans as required by SFAS 123 in its financial statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the FASB issued Statement No. 128, "Earnings per Share."
This statement establishes standards for computing and presenting earnings per
share and is effective for financial statements issued for periods ending after
December 15, 1997. Earlier application of this statement is not permitted and
upon adoption requires restatement (as applicable) of all prior-period earnings
per share data presented. Management believes that the implementation of this
standard will not have a significant effect on earnings per share.
In February 1997, the FASB issued Statement No. 129, "Disclosure of
Information about Capital Structure." This statement establishes standards for
disclosing information about an entity's capital structure. Management intends
to comply with the disclosure requirements of this statement, which are
effective for periods ending after December 15, 1997.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). This statement requires companies to classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS 130 is effective for financial statements issued for
fiscal years beginning after December 15, 1997. Management does not believe that
SFAS 130 will have a material effect on Anchor's financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosure About Segments
of an Enterprise and Related Information" ("SFAS 131"). This statement
establishes additional standards for segment reporting in the financial
statements and is effective for fiscal years beginning after December 15, 1997.
The Company believes the segment information required to be disclosed under SFAS
131 will be more comprehensive than previously provided, including expanded
disclosure of income statement and balance sheet items for each of its
reportable segments under SFAS 131. However, the Company has not yet completed
its analysis of which operating segments will be subject to this reporting
requirement.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
-------------
<S> <C>
Independent Auditors' Report of Deloitte & Touche LLP................................................... 34
Consolidated Balance Sheets as of June 30, 1997 and 1996................................................ 35
Consolidated Statements of Income for Fiscal Years Ended June 30, 1997, 1996, and 1995.................. 36
Consolidated Statements of Stockholders' Equity for Fiscal Years Ended June 30, 1997, 1996, and 1995.... 37
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 1997, 1996, and 1995.......... 38
Notes to Consolidated Financial Statements.............................................................. 39
</TABLE>
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Anchor Gaming and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Anchor
Gaming and subsidiaries (the "Company") as of June 30, 1996 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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
misstatements. 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 principals 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 consolidated financial statements present fairly, in
all material respects, the financial position of Anchor Gaming and subsidiaries
at June 30, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended June 30, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
August 1, 1997
34
<PAGE>
ANCHOR GAMING
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................... $ 66,427,369 $ 78,112,530
Accounts receivable, net....................................................... 6,358,052 4,720,689
Current portion of notes receivable, net....................................... 45,619 881,173
Inventory...................................................................... 3,196,918 3,197,955
Prepaid expenses............................................................... 1,835,913 1,739,263
Other current assets........................................................... 400,180 300,761
-------------- --------------
Total current assets....................................................... 78,264,051 88,952,371
Property and equipment, net...................................................... 85,033,436 57,776,237
Long-term notes receivable, net.................................................. 1,543,159 311,856
Intangible assets, net........................................................... 2,128,306 2,054,710
Deposits and other............................................................... 21,907,417 13,216,623
-------------- --------------
Total assets............................................................... $ 188,876,369 $ 162,311,797
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion, long-term notes payable....................................... $ -- $ 100,000
Accounts payable............................................................... 2,663,156 4,574,213
Accrued salaries, wages and vacation pay....................................... 2,712,764 2,488,014
Income tax payable............................................................. 2,138,934 281,886
Other current liabilities...................................................... 6,103,394 3,530,130
-------------- --------------
Total current liabilities.................................................. 13,618,248 10,974,243
Long-term notes payable, principal stockholder................................... 2,800,000 2,800,000
Long-term notes payable, net of current portion.................................. -- 850,000
Other long-term liabilities...................................................... 143,691 707,318
Minority interest in consolidated subsidiary..................................... 983,562 672,955
-------------- --------------
Total liabilities and minority interest in consolidated subsidiary......... 17,545,501 16,004,516
-------------- --------------
Commitments and contingencies.................................................... -- --
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, 0 shares issued
and outstanding at June 30, 1997 and 1996.................................... -- --
Common Stock, $.01 par value, 50,000,000 shares authorized, 13,579,575 issued,
and 13,052,807 outstanding at June 30, 1997; 25,000,000 shares authorized,
13,474,150 issued, and 13,283,382 outstanding at June 30, 1996............... 135,796 134,742
Additional paid-in capital..................................................... 107,267,684 104,448,080
Treasury stock at cost, 526,768 shares at June 30, 1997, 190,768 shares at June
30, 1996..................................................................... (16,569,329) (3,095,830)
Retained earnings.............................................................. 80,496,717 44,820,289
-------------- --------------
Total stockholders' equity................................................. 171,330,868 146,307,281
-------------- --------------
Total liabilities and stockholders' equity................................. $ 188,876,369 $ 162,311,797
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
ANCHOR GAMING
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Casino operations............................................. $ 69,223,321 $ 65,125,194 $ 56,183,629
Proprietary games operations.................................. 49,715,779 21,457,135 14,158,737
Route operations.............................................. 33,509,497 28,650,989 25,818,170
Food and beverage............................................. 1,300,002 1,233,003 1,250,593
-------------- -------------- --------------
Total revenues.............................................. 153,748,599 116,466,321 97,411,129
-------------- -------------- --------------
Costs and expenses:
Casino operations............................................. 29,100,285 26,830,475 21,500,172
Proprietary games operations.................................. 11,039,227 12,113,595 9,850,963
Route operations.............................................. 19,904,608 17,158,172 15,659,336
Food and beverage............................................. 1,431,734 1,300,012 1,386,438
Selling, general and administrative........................... 28,163,608 21,073,631 20,949,047
Project cost write-downs...................................... 2,116,968 -- --
Depreciation and amortization................................. 8,798,163 4,109,835 3,215,017
-------------- -------------- --------------
Total costs and expenses.................................... 100,554,593 82,585,720 72,560,973
-------------- -------------- --------------
Income from operations.......................................... 53,194,006 33,880,601 24,850,156
-------------- -------------- --------------
Other income (expense):
Interest income............................................... 3,792,739 2,028,347 1,105,212
Interest expense.............................................. (287,711) (428,991) (731,954)
Other income.................................................. 288,703 260,439 405,831
Minority interest in earnings of consolidated subsidiary...... (310,607) (217,793) (162,262)
-------------- -------------- --------------
Total other income.......................................... 3,483,124 1,642,002 616,827
-------------- -------------- --------------
Income before provision for income taxes........................ 56,677,130 35,522,603 25,466,983
Income tax provision............................................ 21,000,702 13,187,559 9,486,451
-------------- -------------- --------------
Net income...................................................... $ 35,676,428 $ 22,335,044 $ 15,980,532
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average common and common equivalent shares
outstanding................................................... 13,691,158 12,153,419 11,446,646
-------------- -------------- --------------
-------------- -------------- --------------
Earnings per common and common equivalent share................. $ 2.61 $ 1.84 $ 1.40
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
ANCHOR GAMING
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------------ ---------------------- ADDITIONAL RETAINED
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL EARNINGS TOTAL
----------- ----------- -------- ------------ --------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--July 1, 1994.............. 11,377,100 $ 113,771 (163,789) $ (1,799,830) $ 42,181,989 $ 6,504,713 $ 47,000,643
Stock issued for exercise of
options........................ 128,450 1,285 1,544,615 1,545,900
Tax effects of stock option
transactions................... 304,495 304,495
Net income....................... 15,980,532 15,980,532
----------- ----------- -------- ------------ --------------- ----------- ------------
Balance--June 30, 1995............. 11,505,550 115,056 (163,789) (1,799,830) 44,031,099 22,485,245 64,831,570
Stock issued for exercise of
warrants and options........... 418,600 4,186 (26,979) (1,296,000) 5,694,414 4,402,600
Shares issued in public
offering....................... 1,550,000 15,500 53,859,015 53,874,515
Tax effects of stock option
transactions................... 863,552 863,552
Net income....................... 22,335,044 22,335,044
----------- ----------- -------- ------------ --------------- ----------- ------------
Balance--June 30, 1996............. 13,474,150 134,742 (190,768) (3,095,830) 104,448,080 44,820,289 146,307,281
Stock issued for exercise of
warrants and options........... 105,425 1,054 1,285,403 1,286,457
Treasury shares purchased........ (336,000) (13,473,499) (13,473,499)
Tax effects of stock option
transactions................... 1,534,201 1,534,201
Net income....................... 35,676,428 35,676,428
----------- ----------- -------- ------------ --------------- ----------- ------------
Balance--June 30, 1997............. 13,579,575 $ 135,796 (526,768) $(16,569,329) $107,267,684 $80,496,717 $171,330,868
----------- ----------- -------- ------------ --------------- ----------- ------------
----------- ----------- -------- ------------ --------------- ----------- ------------
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
ANCHOR GAMING
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 35,676,428 $ 22,335,044 $ 15,980,532
------------- ------------ ------------
Adjustments to reconcile net income to net cash provided by operating
activities:
(Gain) loss on disposal of assets, including project cost write-
downs............................................................ 2,208,878 -- (140,022)
Depreciation and amortization...................................... 8,955,446 4,085,573 3,337,356
Provision for doubtful accounts and notes.......................... 364,000 105,000 10,000
Minority interest in earnings of consolidated subsidiary........... 310,607 217,793 162,262
(Increase) decrease in assets:
Accounts receivable................................................ (2,001,363) (1,802,054) (1,206,323)
Inventory.......................................................... 1,037 (842,765) (472,432)
Other current assets............................................... (83,898) 34,772 836,890
Prepaid expenses................................................... (96,650) (105,769) 40,788
Deposits and other assets.......................................... (5,606,169) 58,925 1,490,739
Increase (decrease) in liabilities:
Accounts payable................................................... (1,911,057) 2,763,320 828,756
Accrued salaries, wages and vacation pay........................... 224,750 380,048 593,835
Income tax payable................................................. 2,955,801 776,683 1,173,316
Other liabilities.................................................. 2,394,423 762,794 1,015,529
------------- ------------ ------------
Total adjustments................................................ 7,715,805 6,434,320 7,670,694
------------- ------------ ------------
Net cash provided by operating activities.............................. 43,392,233 28,769,364 23,651,226
------------- ------------ ------------
Cash flows from investing activities:
Acquisition and construction of property and equipment............... (38,108,284) (27,916,341) (7,834,258)
Expenditures for intangible assets................................... (488,715) (274,013) (250,000)
Proceeds from sale of equipment...................................... 117,254 530,377 514,166
Issuance of notes receivable......................................... (1,405,157) (114,614) (252,557)
Principal reductions on notes receivable............................. 1,009,408 947,678 973,243
Payments to extend operating leases.................................. -- (5,000,000) (1,750,000)
Advances to joint venture............................................ (3,100,000) -- --
------------- ------------ ------------
Net cash used in investing activities.............................. (41,975,494) (31,826,913) (8,599,406)
------------- ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of stock and warrants......................... 1,321,600 58,277,115 1,545,900
Treasury stock purchases............................................. (13,473,500) -- --
Principal payments on loans from related parties..................... -- (3,189,447) (937,393)
Principal payments on other loans.................................... (950,000) (50,000) --
------------- ------------ ------------
Net cash provided by (used in) financing activities................ (13,101,900) 55,037,668 608,507
------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents................... (11,685,161) 51,980,119 15,660,327
Cash and cash equivalents, beginning of period......................... 78,112,530 26,132,411 10,472,084
------------- ------------ ------------
Cash and cash equivalents, end of period............................... $ 66,427,369 $ 78,112,530 $ 26,132,411
------------- ------------ ------------
------------- ------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for interest............................................... $ 257,994 $ 392,643 $ 636,602
------------- ------------ ------------
------------- ------------ ------------
Cash paid for income taxes........................................... $ 18,044,900 $ 12,404,763 $ 7,710,000
------------- ------------ ------------
------------- ------------ ------------
Supplemental schedule of noncash investing and financing transactions:
Stock issued for warrants in cashless exercise....................... $ 1,296,000
------------
------------
Property and equipment acquired by assuming debt..................... $ 1,000,000
------------
------------
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
ANCHOR GAMING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Anchor Gaming ("Anchor" or the "Company") is a diversified gaming company
that seeks to capitalize on its experience as an operator and developer of
gaming machines and casinos by developing gaming oriented businesses. Anchor
develops and distributes unique proprietary games, currently operates two
casinos in Colorado, and operates one of the largest gaming machine routes in
Nevada.
Anchor Gaming was formed July 28, 1993 and completed its initial public
offering ("IPO") in February 1994. Simultaneous with the closing of the IPO,
Anchor became the holding company of Anchor Coin, C.G. Investments, Inc.
("CGI"), Colorado Grande Enterprises, Inc. ("Colorado Grande") and D D Stud,
Inc. ("DD Stud") (collectively the "Subsidiaries"), which had been operated
under different ownership structures controlled primarily by Stanley E. Fulton,
the Chairman of the Board, Chief Executive Officer and principal stockholder of
Anchor. Also at the time of the IPO, the Company acquired all of the beneficial
ownership of Global Gaming Products, L.L.C. and certain related assets from
Global Distributors, Inc. (the "Acquisition"), which were primarily involved in
the distribution of the proprietary game Silver Strike. The accounts of the
Subsidiaries are consolidated in the accompanying financial statements. All
significant intercompany accounts and transactions have been eliminated. The
financial position and operating results of Colorado Grande Enterprises, Inc.
are included in the consolidated financial statements as an 80% consolidated
subsidiary.
On April 23, 1996, Anchor completed a secondary offering of 2.3 million
shares of common stock at a price of $37 per share, with 1.55 million of these
shares being sold by the Company (the "Secondary Offering") and the remaining
750,000 shares were sold by selling stockholders. Net proceeds to the Company
from the Secondary Offering were $53.9 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments purchased with
maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, trade
receivables, and trade payables approximates fair value because of the short
maturities of these instruments. The Company estimates fair value on its
long-term obligations based on quoted market prices or on the current rates
offered to the Company for debt of the same remaining maturities. The estimated
fair values of the obligations closely approximated the carrying values at June
30, 1997 and 1996.
INVESTMENTS IN DEBT SECURITIES
The Company's investment securities, along with certain cash and cash
equivalents that are not deemed securities under Statement No. 115 ("SFAS 115"),
are carried on the consolidated balance sheets in the cash and cash equivalents
category. Management determines the appropriate classification of its investment
securities at the time of purchase as either held-to-maturity, trading, or
available for sale and re-evaluates such determination at each balance sheet
date. The Company has classified its investment securities as of June 30, 1997
and 1996 as held-to-maturity. Held-to-maturity securities are required to be
39
<PAGE>
ANCHOR GAMING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
carried at amortized cost. The securities classified as held-to-maturity consist
of the following amortized costs at June 30:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Debt securities issued by the U.S.
Treasury and other U.S. government
agencies.............................. $52,734,000 $34,915,000
Repurchase agreements................... -- 30,013,000
----------- -----------
$52,734,000 $64,928,000
----------- -----------
----------- -----------
</TABLE>
All of the Company's investment securities mature in three months or less
from the date of purchase. The estimated fair value of the Company's portfolio
of investment securities at June 30, 1997 and 1996 closely approximated
amortized cost because of the short term nature of the portfolio.
ACCOUNTS RECEIVABLE
Accounts receivable result from the sale of products and services to gaming
properties primarily in the United States. The Company performs credit
evaluations of its customers and does not require collateral. Management reviews
customer balances for potential credit losses and maintains an allowance for
amounts deemed uncollectible. The amounts reserved at June 30, 1997 and 1996
were $665,605 and $278,821, respectively.
INVENTORY
Inventory consists of silver and silver tokens, parts for gaming machines,
and food and beverage items. Silver inventory of $594,615 and $1,092,671 at June
30, 1997 and 1996, respectively, is classified as raw material. The remainder of
inventory is classified as finished goods. All inventories are stated at the
lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Ordinary maintenance and
repairs are charged to expense as incurred. Costs that materially increase the
life or value of existing assets are capitalized. Assets that have been placed
in service are depreciated over their estimated useful lives or amortized over
lease terms using either straight-line or accelerated methods. Estimated useful
lives for furniture and equipment are 5 to 7 years, for leasehold improvements
are 4 1/2 years to 31 1/2 years and for buildings and improvements are 30 years.
INTANGIBLE ASSETS
Intangible assets include goodwill associated with the Acquisition, which is
amortized on a straight-line basis over 10 years. Intangible assets also include
amounts paid to acquire leases for route locations and casino property, amounts
to acquire route participation agreements, costs of patents issued, and
organization costs. These amounts are amortized on a straight-line basis over
the lives of the leases or agreements ranging from 2 to 15 years.
40
<PAGE>
ANCHOR GAMING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUITY INVESTMENTS
Equity investments in joint ventures and other entities that are 20% to 50%
owned are included in deposits and other assets and are accounted for using the
equity method. Income from the joint ventures is included in proprietary games
revenue on the income statements. During fiscal year 1997, the Company made $3.1
million in advances to a 50% owned Joint Venture.
REVENUE RECOGNITION
In accordance with industry practice, the Company recognized gaming revenues
as the net win from gaming operations, which is the difference between amounts
wagered by customers and payments to customers. Proprietary games revenue is
derived from royalty, revenue participation, or other similar short-term
recurring revenue arrangements.
Revenues exclude the retail value of complimentary food and beverage
furnished gratuitously to customers. The estimated departmental costs of
providing such goods and services as included in casino expense are $1,365,897,
$1,162,495, and $822,467 for the fiscal years ended June 30, 1997, 1996, and
1995, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and are included in
selling, general, and administrative costs.
EARNINGS PER SHARE
Earnings per share on the income statement is computed by dividing net
income by the weighted average number of common and common equivalent shares
outstanding. Common equivalent shares include the effect of shares issuable upon
the exercise of warrants and stock options. Fully diluted earnings per share
amounts are substantially the same as primary per share amounts for the periods
presented.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Significant estimates in the financial statements include the
estimated depreciable lives of property and equipment and certain estimated
liabilities and valuation reserves. Actual results could differ from those
estimates.
RECENTLY ADOPTED 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" ("SFAS 121"). SFAS 121 requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS 121 is effective for
fiscal years beginning after December 15, 1995. Adoption of SFAS 121 in the
current year did not have a material impact on the consolidated financial
statements of the Company.
41
<PAGE>
ANCHOR GAMING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In October 1995, the FASB issued Statement No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), which establishes financial accounting
and reporting standards for stock-based employee compensation plans and for
transactions in which an entity issues its equity instruments to acquire goods
or services from nonemployees. The Company continues to account for stock based
compensation arrangements in accordance with Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees", and therefore the adoption of SFAS
123 had no effect on the financial position or results of operations of the
Company. The Company has included additional disclosures about stock-based
employee compensation plans as required by SFAS 123 (see Note 8).
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the FASB issued Statement No. 128, "Earnings per Share."
This statement establishes standards for computing and presenting earnings per
share and is effective for financial statements issued for periods ending after
December 15, 1997. Earlier application of this statement is not permitted and
upon adoption requires restatement (as applicable) of all prior-period earnings
per share data presented. Management believes that the implementation of this
standard will not have a significant impact on earnings per share.
In February 1997, the FASB issued Statement No. 129, "Disclosure of
Information about Capital Structure." This statement establishes standards for
disclosing information about an entity's capital structure. Management intends
to comply with the disclosure requirements of this statement which are effective
for periods ending after December 15, 1997.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). This statement requires companies to classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS 130 is effective for financial statements issued for
fiscal years beginning after December 15, 1997. Management does not believe this
new standard will have a material impact on the Company's financial statements.
In June 1997, the FASB issued Statement No. 131 "Disclosure About Segments
of an Enterprise and Related Information" ("SFAS 131"). This statement
establishes additional standards for segment reporting in the financial
statements and is effective for fiscal years beginning after December 15, 1997.
The Company believes the segment information required to be disclosed under SFAS
131 will be more comprehensive than previously provided, including expanded
disclosure of income statement and balance sheet items for each of its
reportable segments under SFAS 131. However, the Company has not yet completed
its analysis of which operating segments it will report on.
3. NOTES RECEIVABLE
Notes receivable include notes due from an unaffiliated gaming company and
its stockholders for business development, which accrue interest at the prime
rate (8.5% at June 30, 1997) and notes due from various slot route location
owners with interest rates ranging from 8% to 12% to be paid over periods
ranging from three months to 5 years. At June 30, 1996, notes receivable also
include a note due from an unaffiliated Nevada gaming company with route
operations in Louisiana with interest accruing at the
42
<PAGE>
ANCHOR GAMING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NOTES RECEIVABLE (CONTINUED)
prime rate plus a percentage of net cash flow (as defined in the loan
documents). This note was paid in full during the year ended June 30, 1997.
Notes receivable consist of the following at June 30:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Loans to unaffiliated gaming companies............................ $ 610,905 $ 1,418,338
Location loans for operating rights............................... 700,435 662,918
Loans to employees................................................ 1,200,000 --
Loans to related parties.......................................... -- 27,142
------------ ------------
2,511,340 2,108,398
Less allowance for doubtful accounts.............................. 922,562 915,369
------------ ------------
1,588,778 1,193,029
------------ ------------
Less current portion:.............................................
Loans to unaffiliated gaming companies.......................... -- 829,315
Location loans for operating rights............................. 45,619 24,716
Loans to related parties........................................ -- 27,142
------------ ------------
Notes receivable, current......................................... 45,619 881,173
------------ ------------
Long-term notes receivable, net................................... $ 1,543,159 $ 311,856
------------ ------------
------------ ------------
</TABLE>
Loans to related parties at June 30, 1996 consist of advances made by the
Company to a slot route operation owned by the principal stockholder of the
Company, which were paid in full on July 11, 1996.
Loans to employees at June 30, 1997 consist of a $1.2 million line of credit
arrangement with an entity controlled by an employee of the Company. Loans
outstanding under the line of credit bear interest at prime rate plus 1%.
Payment of all principal and accrued interest is due on August 13, 1998 if
certain licensing events have not occurred as of that date. If the licensing
events have occurred, payment terms may be extended.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30:
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Land and improvements......................................... $ 15,316,178 $ 14,725,645
Buildings and improvements.................................... 13,023,440 11,326,850
Gaming equipment.............................................. 61,641,351 30,276,982
Furniture, fixtures and equipment............................. 5,144,212 3,953,544
Leasehold improvements........................................ 6,143,415 3,657,726
Construction in progress...................................... 1,496,089 3,362,235
-------------- -------------
102,764,685 67,302,982
Less accumulated depreciation................................. 17,731,249 9,526,745
-------------- -------------
Total..................................................... $ 85,033,436 $ 57,776,237
-------------- -------------
-------------- -------------
</TABLE>
43
<PAGE>
ANCHOR GAMING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT (CONTINUED)
On November 11, 1996, the Company announced that it was re-evaluating the
scope and nature of its proposed addition of a new casino across the street from
the Colorado Central Station Casino. During the fourth quarter of the year ended
June 30, 1997, the Company determined that it was necessary to recognize a
write-down of costs associated with the new casino in the amount of $2,116,968.
The costs were specifically related to architectural fees, building design
costs, and deferred rent that were determined to have no future benefit.
Although the Company has proceeded with this asset write-down, it has not
abandoned the concept of an expansion and will continue to re-evaluate its
Colorado expansion options.
5. INTANGIBLE ASSETS
Intangible assets consist of the following at June 30:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Lease acquisition costs........................................... $ 2,312,951 $ 2,085,857
Goodwill.......................................................... 1,134,865 1,134,865
Patents........................................................... 98,595 98,595
Organization costs and other...................................... 221,310 221,310
------------ ------------
3,767,721 3,540,627
Less accumulated amortization..................................... 1,639,415 1,485,917
------------ ------------
Total......................................................... $ 2,128,306 $ 2,054,710
------------ ------------
------------ ------------
</TABLE>
6. NOTES PAYABLE
Notes payable consist of the following at June 30:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
PRINCIPAL STOCKHOLDER
Unsecured note payable to principal stockholder, interest at 8%,
due July 1, 1998(a)........................................... $ 2,300,000 $ 2,300,000
Unsecured note payable to principal stockholder, interest at 8%,
due July 1, 1998.............................................. 500,000 500,000
------------ ------------
Long-term notes payable, principal stockholder.................. $ 2,800,000 $ 2,800,000
------------ ------------
------------ ------------
OTHER
Note payable secured by land, interest at 6%, due in 120 equal
monthly principal installments plus interest, final payment
due December 2005. Paid in full during the year ended June 30,
1997.......................................................... $ -- $ 950,000
Less current portion............................................ -- 100,000
------------ ------------
Long-term portion............................................... $ -- $ 850,000
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(a) At June 30, 1997, the stockholder amended the terms of the notes to be due
July 1, 1998.
44
<PAGE>
ANCHOR GAMING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE (CONTINUED)
Notes payable to the principal stockholder and related party resulted in
interest expense of $223,693, $289,373, and $623,060 for the years ended June
30, 1997, 1996, and 1995, respectively, and accrued interest payable of $18,400
at June 30, 1997 and 1996.
7. OTHER DEBT
In April 1997, the Company entered into a $10 million unsecured revolving
bank line of credit (the "Bank Revolver") expiring November 30, 1998. The Bank
Revolver bears interest at the prime rate, or LIBOR plus 2%, at the Company's
option. The Company has agreed to maintain certain financial and non-financial
covenants customary with lending arrangements of this type. Financial covenants
include maintenance of minimum cash and cash equivalent balances, tangible net
worth, annual EBITDA, and maximum funded debt to EBITDA ratio. The covenants
also restrict payment of cash dividends. The Company has remained in compliance
with the covenants throughout the term of the credit facility. As of June 30,
1997, the Company had not borrowed under the Bank Revolver.
8. OPTIONS AND WARRANTS
As of June 30, 1997, 1,085,000 shares of common stock were reserved for
issuance upon exercise of employee and director stock options under an employee
stock option plan. Employee and director options to purchase 930,500 shares at
the fair market values at the grant dates have been granted as of June 30, 1997.
As of June 30, 1997, options to purchase 402,475 shares had been exercised. Of
the 930,500 options, 100,000 vest in equal quarterly increments over two years,
93,000 vest in equal annual increments over five years, 50,000 vest in a single
installment six months after issuance, 20,000 vest in decreasing annual
increments over five years, 250,000 vest in varying increments and periods over
five years, 8,000 vest at the end of three years and the remainder vest in equal
quarterly increments over five years.
An additional 40,000 shares are reserved for issuance upon exercise of
vested options at the IPO price that were granted to a relative of certain
minority stockholders (none of which were exercised at June 30, 1997), and
250,000 shares are reserved for issuance upon exercise of vested warrants
granted to the managing underwriters of the IPO (and their designees)
exercisable at 120% of the IPO price, all of which were exercised at June 30,
1997.
Options to purchase an additional 600,000 shares were granted at the fair
market value at the grant date to certain employees outside of the employee
stock option plan. These options vest in varying increments over periods from
nine months to eight years.
45
<PAGE>
ANCHOR GAMING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. OPTIONS AND WARRANTS (CONTINUED)
Summarized information for all options is as follows for the years ended
June 30:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of the
year............................. 670,700 $ 17.79 820,300 $ 12.95 954,500 $ 12.80
Granted......................... 600,000 31.88 288,000 25.07 8,000 16.81
Exercised....................... (105,425) 12.54 (418,600) 13.57 (128,450) 12.18
Canceled........................ (32,250) 44.44 (19,000) 12.00 (13,750) 12.00
---------- ---------- ----------
Outstanding, end of the year...... 1,133,025 24.98 670,700 17.79 820,300 12.95
---------- ---------- ----------
---------- ---------- ----------
Exercisable at end of the year.... 245,475 16.11 148,050 12.31 453,950 13.44
---------- ---------- ----------
---------- ---------- ----------
Options available for grant....... 189,500 107,250 26,250
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table summarizes information about the options outstanding at
June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- --------------------------
NUMBER WEIGHTED NUMBER WEIGHTED
OUTSTANDING WEIGHTED AVERAGE AVERAGE EXERCISABLE AVERAGE
AT JUNE 30, REMAINING EXERCISE AT JUNE 30, EXERCISE
RANGE OF EXERCISE PRICES 1997 CONTRACTUAL LIFE PRICE 1997 PRICE
- ----------------------------------- ------------- ------------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$12.00 - $13.50 268,125 6.6 $ 12.13 142,375 $ 12.14
14.75 - 21.75 256,900 8.0 21.61 103,100 21.60
31.88 - 46.88 608,000 9.7 32.07 -- --
------------- -------------
1,133,025 8.6 24.98 245,475 16.11
------------- -------------
------------- -------------
</TABLE>
The Company is authorized to issue 1,000,000 shares of preferred stock, $.01
par value per share (the "Preferred Stock"), in one or more series, and to
designate the rights, preferences, limitations, and restrictions of and upon
shares of each series, including voting, redemption, and conversion rights. The
board of directors of the Company also may designate dividend rights and
preferences in liquidation. The board of directors of Anchor has authorized the
Company to designate a series of Series A Junior Participating Preferred Stock
in connection with the Rights Plan discussed in Note 12. In connection with the
authorization of the Rights Plan, the board of directors of the Company has
authorized the designation of 50,000 shares of Preferred Stock as Series A
Junior Participating Preferred Stock.
The Company has adopted the disclosures-only provision of Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). The Company applies APB
Opinion No. 25 and related interpretations in accounting for its stock options.
Under APB 25, no compensation cost has been recognized in the financial
statements for the Stock Option Plan or other stock options granted. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. Had compensation cost for the stock option
grants been determined based on the fair value at the date of grant for awards
consistent with the provision of SFAS 123, the Company's net income per common
and
46
<PAGE>
ANCHOR GAMING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. OPTIONS AND WARRANTS (CONTINUED)
common equivalent share would have been decreased to the pro forma amounts
indicated below for the years ended June 30:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net income--as reported........................................ $ 35,676,428 $ 22,335,044
Net income--pro forma.......................................... 34,940,303 21,758,657
Earnings per common and common
equivalent shares--as reported............................... $ 2.61 $ 1.84
Earnings per common and common
equivalent shares--pro forma................................. 2.55 1.79
</TABLE>
The fair value of each option granted in fiscal year 1997 and 1996 was
estimated using the following assumptions for the Black-Scholes option pricing
model: (i) no dividends; (ii) expected volatility for both years of 50%; (iii)
risk free interest rates averaging 6% for both years; and (iv) the expected
average life of 3.6 years for 1997 and 3.2 years for 1996. The weighted average
fair value of the options granted in 1997 and 1996 were $9.82 and $9.03,
respectively. Because the SFAS 123 method of accounting has not been applied to
options granted prior to July 1, 1995, the resulting pro forma net income may
not be representative of that to be expected in future years.
9. OTHER RELATED PARTY TRANSACTIONS
The principal stockholder of the Company owned 100% of the common stock of
an Anchor Gaming slot route location. On January 31, 1996, the principal
stockholder sold the location to an unaffiliated third party. For providing the
gaming machines and slot route services, the Company received a percentage of
the net win of the location similar to other route locations. The Company held a
note receivable from the slot route operation in the amount of $284,704 at
January 31, 1996 of which $257,562 was assumed by the new owner. The remaining
balance of the loan due from the principal stockholder at June 30, 1996 of
$27,142 was paid in full on July 11, 1996. The slot route operation, under the
ownership of the principal stockholder, accounted for $180,822 and $295,502 of
gaming revenue during the years ended June 30, 1996 and 1995, respectively and
$145,684 and $279,059 of route costs during the years ended June 30, 1996 and
1995, respectively.
In August 1996, the Company made certain payments to an entity controlled by
an employee of the Company. These funds were used to repay a debt of $500,000
owed by the employee and his affiliate to the principal stockholder of the
Company.
47
<PAGE>
ANCHOR GAMING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
The provision (benefit) for income taxes for the years ended June 30, 1997,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
Currently payable per tax return:
Federal........................................ $ 20,066,284 $ 11,750,029 $ 8,976,859
State.......................................... 1,369,887 846,278 474,051
------------- ------------- ------------
21,436,171 12,596,307 9,450,910
------------- ------------- ------------
Deferred:
Federal........................................ (399,219) 579,569 (381,402)
State.......................................... (36,250) 11,683 416,943
------------- ------------- ------------
(435,469) 591,252 35,541
------------- ------------- ------------
Total........................................ $ 21,000,702 $ 13,187,559 $ 9,486,451
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
The historical provision for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory federal income tax rate
to pre-tax income from continuing operations as a result of the following
differences:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. tax rate...................... $ 19,836,995 35.0% $ 12,432,911 35.0% $ 8,913,449 35.0%
Increase (decrease) in tax resulting from:
State income taxes, net of federal tax
effect................................... 866,864 1.5 557,674 1.6 579,147 2.3
Other, net................................... 296,843 .6 196,974 .5 (6,145) (.1)
------------- ----- ------------- ----- ------------- -----
Actual provision for income taxes............ $ 21,000,702 37.1% $ 13,187,559 37.1% $ 9,486,451 37.2%
------------- ----- ------------- ----- ------------- -----
------------- ----- ------------- ----- ------------- -----
</TABLE>
Statement No. 109 "Accounting for Income Taxes" requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or income tax
returns. Deferred income taxes included in other current assets, deposits and
other, and other long-term liabilities on the consolidated balance sheets
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting
48
<PAGE>
ANCHOR GAMING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
purposes and the amounts used for income tax purposes. The tax items comprising
the Company's net deferred tax asset as of June 30, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Deferred tax assets:
Receivable reserve............................................. $ 617,000 $ 478,000
Pre-opening expenditures....................................... 86,000 140,000
Reserves not currently deductible.............................. 417,000 229,000
------------ -------------
1,120,000 847,000
Deferred tax liabilities:
Difference between book and tax basis of property.............. (876,000) (1,038,000)
------------ -------------
Net deferred tax asset (liability)............................... $ 244,000 $ (191,000)
------------ -------------
------------ -------------
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
NON-CANCELABLE OPERATING LEASES:
The Company leases parking lot space, office space, casino space, and slot
route locations under non-cancelable operating leases. The original terms of the
leases range from 3 to 15 years with various renewal options from 1 to 15 years.
The casino space lease has contingent rentals based on gaming revenues of
the casino occupying the space. The lease provides for a monthly payment of the
greater of a base amount of $12,000 or 5% of adjusted gross gaming revenue, with
a payment ceiling of $400,000 per year. Contingent rentals paid above base
amounts were $254,472, $184,312, and $100,898 for the years ended June 30, 1997,
1996, and 1995, respectively.
Future minimum rentals under non-cancelable operating leases at June 30,
1997 are:
<TABLE>
<S> <C>
Year ending June 30,
1998............................................ $ 10,656,000
1999............................................ 10,571,000
2000............................................ 7,990,000
2001............................................ 7,875,000
2002............................................ 7,864,000
Thereafter...................................... 57,230,000
------------
$102,186,000
------------
------------
</TABLE>
Operating lease rental expense was $10,940,000, $9,539,000, and $7,706,000
for the fiscal years ended June 30, 1997, 1996, and 1995, respectively.
Included in deposits at June 30, 1997 and 1996 is a space lease deposit of
$3,300,000, which is held by the lessor of several slot route locations pursuant
to an agreement that provides that the deposit, or any portion thereof, may, at
the option of the Company, be applied against rents owing during the last two
years of the lease agreement. Also included in deposits are payments totaling
$10,750,000 to this lessor to extend the lease term for these locations through
the year 2010. The lease extension payments are
49
<PAGE>
ANCHOR GAMING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
amortized to rent expense on a straight-line basis over the remaining term of
the lease. The Company's slot route operations at locations leased from this
lessor accounted for more than 10% of the Company's total revenues for the years
ended June 30, 1997, 1996, and 1995.
GAMING REGULATIONS
The Company's route operations are subject to the licensing and regulatory
requirements of the Nevada State Gaming Control Board and the Nevada Gaming
Commission. The Company's casino operations are subject to the licensing and
regulatory requirements of the Colorado Limited Gaming Control Commission. The
Company's proprietary games operations are subject to the licensing and
regulatory requirements of multiple jurisdictions throughout the United States
and Canada including the Nevada and Colorado requirements. The Company's gaming
licenses are subject to certain conditions and periodic renewal. Management
believes that the conditions will continue to be satisfied and that subsequent
license renewals will be granted.
ENVIRONMENTAL MATTERS
The Colorado Central Station Casino is located in an area that has been
designated by the Environmental Protection Agency ("EPA") as a superfund site on
the National Priorities List, known as the Central City-Clear Creek Superfund
Site (the "Site") as a result of contamination from historic mining activity in
the area. The EPA is entitled to proceed against owners and operators of
properties located within the Site for remediation and response costs associated
with their properties and with the entire Site. The Colorado Central Station
Casino is located within the drainage basin of North Clear Creek and is
therefore subjected to potentially contaminated surface and ground water from
upstream mining-related sources. Soil and ground water samples on the Site
indicate that several contaminants exist in concentrations exceeding drinking
water standards. Records relating to historical uses of the Site are uncertain
as to whether mining actually occurred below the Company's property. Records do
indicate that an ore loading dock for a railroad depot was once located on an
adjacent property, and railroad tracks were present on the Company's property.
Management is not aware of any environmental issues associated with these
activities.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with seven executives and
top management personnel. The agreements vary in starting date and are for
periods ranging from two to five years. Agreements with aggregate annual
salaries of $1,435,000 are terminable at the Company's option with 90 days to
one year severance pay.
LITIGATION
The Company is party to several routine lawsuits arising from normal
operations. Management does not believe that the outcome of such litigation in
the aggregate will have a material adverse effect on the consolidated financial
statements of the Company.
PURCHASE COMMITMENTS
At June 30, 1997, the Company had entered into various purchase agreements
to purchase gaming equipment for approximately $5,594,000.
50
<PAGE>
ANCHOR GAMING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENT
In August 1997, the board of directors of Anchor authorized the Company to
enter into a Stockholder Rights Plan (the "Rights Plan") providing that one
right (a "Right") will be attached to each share of Common Stock as of a record
date to be determined by the board of directors of Anchor (the "Record Date").
Each Right will entitle the registered holder to purchase from the Company a
unit (a "Unit") consisting of one one-thousandth of a share of Series A Junior
Participating Preferred Stock, par value $20.00 per share, to be authorized by
the Company at a Purchase Price of $400.00 per Unit, subject to adjustment. The
Rights convert in certain circumstances into a right to purchase Common Stock or
securities of a successor entity. The description and terms of the Rights are to
be set forth in the Rights Agreement, between the Company and a bank or
financial institution to be selected by the Company as Rights Agent.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference to the Company's proxy statement for the
November 24, 1997 Annual Meeting of Stockholders under the caption
"Management--Directors and Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference to the Company's proxy statement for the
November 24, 1997 Annual Meeting of Stockholders under the caption "Executive
Compensation and Other Information", provided that the Performance Graph and the
Compensation Committee Report on Executive Compensation are expressly not
incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference to the Company's proxy statement for the
November 24, 1997 Annual Meeting of Stockholders under the caption "Security
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference to the Company's proxy statement for the
November 24, 1997 Annual Meeting of Stockholders under the caption "Executive
Compensation and Other Information-- Compensation Committee Interlocks and
Insider Participation."
51
<PAGE>
ANCHOR GAMING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The following documents are filed as part of this Report:
<TABLE>
<S> <C>
Consolidated Balance Sheets as of June 30, 1997 and 1996
Consolidated Statements of Income for the fiscal years ended June 30,
1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity for the fiscal years
ended June 30, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the fiscal years ended June
30, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
Independent Auditors' Report of Deloitte & Touche LLP
</TABLE>
(a)(2) The following accountants' reports and financial schedules for fiscal
years ending June 30, 1997, 1996, and 1995 are submitted herewith:
<TABLE>
<S> <C>
Independent Auditors' Report of Deloitte & Touche LLP on Schedule II
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable
</TABLE>
(a)(3) Management Contract or Compensatory Plan
<TABLE>
<S> <C>
See Index to Exhibits. Each of the following Exhibits described on the
Index to Exhibits is a management contract or compensatory plan:
Exhibits 10.10 through 10.28 and 10.32 through 10.36...................
</TABLE>
(b) Reports on Form 8-K
<TABLE>
<S> <C>
No reports on Form 8-K have been filed during the fourth quarter of the
fiscal year ended June 30, 1997
</TABLE>
(c) Exhibits
<TABLE>
<S> <C>
See Index to Exhibits.
</TABLE>
(d) Financial Statement Schedule filed in Part IV of this report is as follows:
<TABLE>
<S> <C>
SCHEDULES:
II--Valuation and Qualifying Account--Years Ended June 30, 1997, 1996,
and 1995.
</TABLE>
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Anchor Gaming has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
ANCHOR GAMING
By: /s/ STANLEY E. FULTON
-----------------------------------------
Stanley E. Fulton
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER AND
ACTING CHIEF FINANCIAL OFFICER
By: /s/ GEOFFREY A. SAGE
-----------------------------------------
Geoffrey A. Sage
CORPORATE CONTROLLER AND
PRINCIPAL ACCOUNTING OFFICER
Date: September 29, 1996
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ STANLEY E. FULTON
- ------------------------------ Director September 29, 1997
Stanley E. Fulton
/s/ STUART D. BEATH
- ------------------------------ Director September 29, 1997
Stuart D. Beath
/s/ ELIZABETH F. JONES
- ------------------------------ Director September 29, 1997
Elizabeth F. Jones
/s/ GARRET A. SCHOLZ
- ------------------------------ Director September 29, 1997
Garret A. Scholz
/s/ GLEN J. HETTINGER
- ------------------------------ Director September 29, 1997
Glen J. Hettinger
/s/ MICHAEL B. FULTON
- ------------------------------ Director September 29, 1997
Michael B. Fulton
/s/ MICHAEL D. RUMBOLZ
- ------------------------------ Director September 29, 1997
Michael D. Rumbolz
53
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
- -----------
<C> <S>
2.1 Reorganization Agreement (the "Reorganization Agreement") among Anchor Gaming, Anchor Coin, D D Stud,
Inc., C. G. Investments, Inc., Colorado Grande Enterprises, Inc., New AC, New DD, New CG, and certain
stockholders of such corporations. (Incorporated by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-71870)).
2.2 Amendment No. 1 to the Reorganization Agreement, dated as of January 25, 1993. (Incorporated by
reference to Exhibit 2.2 to the Company's Registration Statement on Form S-1 (Registration No.
33-71870)).
2.3 Purchase Agreement (Global Gaming Products, L.L.C.) between Stanley E. Fulton, William Randall Adams,
Global Products, Inc., Michael S. Stone, Thomas J. Matthews, James R. Purdy, and Anchor Gaming, dated
as of December 22, 1993. (Incorporated by reference to Exhibit 2.3 to the Company's Registration
Statement on Form S-1 (Registration No. 33-71870)).
2.4 Purchase Agreement (Global Gaming Distributors, Inc.) between Global Gaming Distributors, Michael S.
Stone, Thomas J. Matthews, James R. Purdy, and Anchor Gaming, dated as of December 22, 1993.
(Incorporated by reference to Exhibit 2.4 to the Company's Registration Statement on Form S-1
(Registration No. 33-71870)).
3.1 Restated Articles of Incorporation of Anchor Gaming. (Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (Registration No. 33-71870)).
3.2 Restated Bylaws of Anchor Gaming. (Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Registration No. 33-71870)).
4.1 Specimen of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-71870)).
4.2 Form of Rights Agreement between the Company and the Rights Agent (Incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-3 (File No. 333-34755)).
9.1 Irrevocable Proxy of Elizabeth F. Jones in favor of Stanley E. Fulton. (Incorporated by reference to
Exhibit 9.1 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
9.2 Irrevocable Proxy of Lucinda F. Tischer in favor of Stanley E. Fulton. (Incorporated by reference to
Exhibit 9.2 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
9.3 Irrevocable Proxy of Stanley M. Fulton in favor of Stanley E. Fulton. (Incorporated by reference to
Exhibit 9.3 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
9.4 Irrevocable Proxy of Deborah J. Fulton in favor of Stanley E. Fulton (Incorporated by reference to
Exhibit 9.4 to the Company's June 30, 1996 Annual Report on Form 10-K (File No. 0-23124))
9.5 Irrevocable Proxy of Elizabeth F. Jones in favor of Stanley E. Fulton (Incorporated by reference to
Exhibit 9.5 to the Company's June 30, 1996 Annual Report on Form 10-K (File No. 0-23124)).
9.6 Irrevocable Proxy of Stanley M. Fulton in favor of Stanley E. Fulton (Incorporated by reference to
Exhibit 9.6 to the Company's June 30, 1996 Annual Report on Form 10-K (File No. 0-23124)).
</TABLE>
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9.7 Irrevocable Proxy of Michael B. Fulton in favor of Stanley E. Fulton (Incorporated by reference to
Exhibit 9.7 to the Company's June 30, 1996 Annual Report on Form 10-K (File No. 0-23124)).
9.8 Irrevocable Proxy of Lucinda F. Tischer in favor of Stanley E. Fulton (Incorporated by reference to
Exhibit 9.8 to the Company's June 30, 1996 Annual Report on Form 10-K (File No. 0-23124)).
9.9 Irrevocable Proxy of Virginia L. Fulton in favor of Stanley E. Fulton (Incorporated by reference to
Exhibit 9.9 to the Company's June 30, 1996 Annual Report on Form 10-K (File No. 0-23124)).
10.1 Settlement Agreement between Anchor Gaming, Stanley E. Fulton, and Michael B. Fulton, dated as of
December 22, 1993. (Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement
on Form S-1 (Registration No. 33-71870)).
10.2 Commercial Note of Pelican Gaming, Inc. to Anchor Coin dated March 15, 1995. (Incorporated by reference
to Exhibit 10.1 to the Company's March 31, 1994 Quarterly Report on Form 10-Q (File No. 0-23124)).
10.3 Promissory Notes of Anchor Coin, D D Stud, Inc., and C. G. Investments, Inc. to Stanley E. Fulton.
(Incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1
(Registration No. 33-71870)).
10.4 Loan Agreement of Pelican Gaming, Inc. to Anchor Coin dated as of March 15, 1994. (Incorporated by
reference to Exhibit 10.2 to the Company's March 31, 1994 Quarterly Report on Form 10-Q (File No.
0-23124)).
10.5 Promissory Note of Colorado Grande Enterprises, Inc. to C.G. Investments, Inc. (Incorporated by
reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No.
33-71870)).
10.6 Promissory Notes of Anchor Coin to Michael B. Fulton, Stanley M. Fulton, Elizabeth Fulton Jones, Lucinda
Fulton Tischer, Virginia L. Fulton, and Deborah J. Fulton. (Incorporated by reference to Exhibit 10.6
to the Company's Registration Statement on Form S-1 (Registration No. 33-71870)).
10.7 Promissory Note of Anchor Coin to Elizabeth Fulton and related Stock Option Agreement. (Incorporated by
reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No.
33-71870)).
10.8 Loan Agreement between Bank of America Nevada and Anchor Coin, dated as of June 13, 1994. (Incorporated
by reference to Exhibit 10.6 to the Company's June 30, 1994 Annual Report on Form 10-K (File No.
0-23124)).
10.9 Lease and Sublease Agreement between Smith's Food & Drug Centers, Inc. and Anchor Coin, dated July 28,
1993. (Confidential Treatment for a portion of this document was requested and granted pursuant to
Rule 406 under the Securities Act). (Incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (Registration No. 33-71870)).
10.10 Employment Agreement between Anchor Gaming and Stanley E. Fulton. (Incorporated by reference to Exhibit
10.10 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.11 Employment Agreement between Anchor Gaming and Michael S. Stone. (Incorporated by reference to Exhibit
10.11 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.12 Employment Agreement between Anchor Gaming and Thomas J. Matthews. (Incorporated by reference to Exhibit
10.12 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
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10.13 Employment Agreement between Anchor Gaming and Joseph Murphy. (Incorporated by reference to Exhibit
10.13 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.14 Employment Agreement between Anchor Gaming and James R. Purdy. (Incorporated by reference to Exhibit
10.14 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.15 Employment Agreement between Anchor Gaming and Nick E. Greenwood. (Incorporated by reference to Exhibit
10.15 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.16 Employment Agreement between Anchor Gaming and William Randall Adams. (Incorporated by reference to
Exhibit 10.16 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.17 Employment Agreement between Anchor Gaming and Salvatore T. DiMascio. (Incorporated by reference to
Exhibit 10.17 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.18 Option Agreement between Michael S. Stone and Anchor Gaming. (Incorporated by reference to Exhibit 10.18
to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.19 Option Agreement between Thomas J. Matthews and Anchor Gaming. (Incorporated by reference to Exhibit
10.19 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.20 Option Agreement between Joseph Murphy and Anchor Gaming. (Incorporated by reference to Exhibit 10.20 to
the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.21 Option Agreement between William Randall Adams and Anchor Gaming. (Incorporated by reference to Exhibit
10.21 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.22 Option Agreement between Nick E. Greenwood and Anchor Gaming. (Incorporated by reference to Exhibit
10.22 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.23 Option Agreement between James R. Purdy and Anchor Gaming. (Incorporated by reference to Exhibit 10.23
to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.24 Option Agreement between Salvatore T. DiMascio and Anchor Gaming. (Incorporated by reference to Exhibit
10.24 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.25 Option Agreement between Anchor Gaming and Geoffrey A. Sage. (Incorporated by reference to Exhibit 10.25
to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.26 Option Agreement between the Company and Stuart D. Beath. (Incorporated by reference to Exhibit 10.26 to
the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.27 Option Agreement between the Company and Garret A. Scholz. (Incorporated by reference to Exhibit 10.27
to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.28* Form of Stock Option Agreement between the Company and Glen J. Hettinger
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10.29 Form of Indemnification Agreement between the Company and Officers and Directors. (Incorporated by
reference to Exhibit 10.28 to the Company's June 30, 1994 Annual Report on Form 10-K (File No.
0-23124)).
10.30* Form of Indemnification Agreement between the Company and Glen H. Hettinger
10.31 Tax Indemnification Agreement between Stanley E. Fulton, Anchor Gaming and its subsidiaries.
(Incorporated by reference to Exhibit 10.29 to the Company's June 30, 1994 Annual Report on Form 10-K
(File No. 0-23124)).
10.32 Option Agreement between the Company and Elizabeth Fulton. (Incorporated by reference to Exhibit 10.30
to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.33 Option Agreement between the Company and Michael D. Rumbolz. (Incorporated by reference to Exhibit 10.31
to the Company's June 30, 1995 Annual Report on Form 10-K (File No. 0-23124)).
10.34 Employment Agreement between the Company and Michael D. Rumbolz. (Incorporated by reference to Exhibit
10.31 to the Company's June 30, 1995 Annual Report on Form 10-K (File No. 0-23124)).
10.35 Anchor Gaming 1995 Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.31 to the
Company's June 30, 1995 Annual Report on Form 10-K (File No. 0-23124)).
10.36 Addendum Agreement to amend the Employment and Stock Option Agreements between the Company and Salvatore
T. DiMascio (Incorporated by reference to Exhibit 10.34 to the Company's June 30, 1996 Annual Report
on Form 10-K (File No. 0-23124)).
10.37* Joint Venture Agreement, dated as of December 3, 1996 by and between Anchor Games, a d.b.a. of Anchor
Coin, a Nevada corporation and Subsidiary of the Company, and IGT.
21.1* List of Subsidiary Corporations.
27.1* Financial Data Schedule
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* Filed herewith
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EXHIBIT 10.28
FORM OF STOCK OPTION AGREEMENT
THIS AGREEMENT (this "AGREEMENT"), effective as of __________, 1997 is
made and entered into by and between Anchor Gaming, a Nevada Company (the
"COMPANY"), and Glen J. Hettinger (the "OPTIONEE")
RECITALS:
A. Optionee has agreed to serve as a director of the Company;
B. The Company has agreed to grant to the Optionee an option (the
"OPTION") to purchase shares of Common Stock, $.01 par value, of the Company
(the "COMMON STOCK"), subject to certain conditions;
C. The Board of Directors has approved the grant of the Option;
D. The parties hereto desire to evidence in writing the terms and
conditions of the Option.
NOW, THEREFORE, in consideration of the premises and mutual covenants
and promises set forth in this Agreement, and other good and valuable
consideration the receipt and sufficiency of which are mutually acknowledged,
the parties agree as follows:
1. GRANT OF OPTION.
(a) The Company hereby grants to the Optionee, upon the terms and
subject to the conditions, limitations and restrictions set forth in this
Agreement, an Option to acquire 25,000 shares of Common Stock, at an exercise
price per share of $72.75 (the "EXERCISE PRICE"), effective as of the date of
this Agreement (the "AWARD DATE"). The Optionee hereby accepts the Option
from the Company.
(b) In the event that the average closing price of the index set forth
on Exhibit A to this Agreement falls to an amount less than 80% of the level
of the closing price thereof on the Award Date and remains at such level or
below for a period of 60 consecutive business days, the exercise price of the
Option will be reduced to the average closing price of the Common Stock as
traded on the Nasdaq National Market during such 60 day period.
2. EXERCISE.
(a) The Option will become exercisable in ten equal installments of
2,500 shares each (each an "EXERCISABLE PORTION") on each anniversary of the
Award Date. In
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order to exercise the Option with respect to any Exercisable Portion, the
Optionee will provide written notice (the "EXERCISE NOTICE") to the Company
at its principal executive office stating the number of shares in respect of
which the option is being exercised. The Exercise Notice must be signed by
the Optionee and must include his complete address and social security
number. If the person exercising the Option is a transferee of the Optionee
by will or under the laws of descent and distribution, the Exercise Notice
must be accompanied by appropriate proof of the right of such transferee to
exercise this Option. At the time of exercise, the Optionee will pay to the
Company the exercise price per share set forth in SECTION 1 times the number
of shares as to which the Option is being exercised. The Optionee will make
such payment (i) by certified check; (ii) at the Company's option, by the
delivery of shares of Common Stock having a Fair Market Value (defined below)
on the date immediately preceding the exercise date equal to the aggregate
exercise price; (iii) cancellation of the Option with respect to a number of
shares having an aggregate Fair Market Value on the date immediately
preceding the date of exercise that exceeds the aggregate Exercise Price by
the amount of the Exercise Price due with respect to such Exercise Notice .
If the Option is exercised in full, the Optionee will surrender this
Agreement to the Company at the Company's option for cancellation. If the
Option is exercised in part, the Optionee will surrender this Agreement to
the Company, at the Company's option, so that the Company may make
appropriate notation on this Agreement or cancel this Agreement and issue a
new agreement representing the unexercised portion of the Option. The Option
may not be exercised for less than 100 shares at a time or the remaining
shares purchasable under the Option, if less than 100 shares. "FAIR MARKET
VALUE" means (i) the last reported sale price, regular way or the Common
Stock on the Nasdaq National Market or other market or exchange on which the
Common Stock is traded; or (ii) if there is no reported price information for
the Common Stock, the Fair Market Value as determined in good faith by the
Board of Directors.
(b) Notwithstanding the foregoing, upon the occurrence of an
Acceleration Event (as defined below), the Option will become exercisable in
full and may be exercised by the Optionee at any time during the remaining
stated term of the Option; provided that if, following a Acceleration Event,
the Optionee ceases to be a director of the Company or a subsidiary of the
Company, then the Option may be exercised by the Optionee at any time within
a period of one year after the date of such cessation or, if shorter, during
the remaining stated term of the Option. "ACCELERATION EVENT" means the
occurrence of any of the following events: (a) the Company is merged, or
consolidated or reorganized into or with another entity and as a result of
such merger, consolidation, or reorganization, less than 50% of the combined
voting power of the then outstanding securities of such entity or its
ultimate parent immediately after such transaction are received in respect of
or exchange for voting securities of the Company pursuant to such
transaction; (b) the Company sells all or a majority of its assets to any
other entity and as a result of such sale less than 50% of the combined
voting power of the then outstanding voting securities of such entity or its
ultimate parent immediately after such transaction are received in respect of
or exchange for voting securities of the Company pursuant to such sale; (c)
any person not beneficially owning in excess of 5%
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of the outstanding voting securities on the date of this Agreement (including
any "person" as such term is used in Section 13(d)(3) or Section 14(d)(2) of
the Securities Exchange Act of 1934 (the "EXCHANGE ACT")) has become the
beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3
or any successor rule or regulation promulgated under the Exchange Act) of
securities which when added to any securities already owned would represent
in the aggregate 50% or more of the combined voting power of the then
outstanding voting securities of the Company; provided, however, that any
transfer of voting securities by Stanley E. Fulton to a charitable or other
trust for estate planning purposes or to his legal representatives, heirs, or
assigns by will or the laws of succession, shall not be deemed or otherwise
trigger a Vesting Event; or (d) any other event or series of related events
transpires that constitutes a "change of control" under Form 8-K promulgated
under the Exchange Act or any successor form.
(c) If the shares to be purchased are covered by an effective
registration statement under the Securities Act of 1933, as amended (the
"ACT"), the Option may be exercised by a broker-dealer acting on behalf of
the Optionee if (a) the broker-dealer has received from the Optionee or the
Company a fully and duly endorsed agreement evidencing such option, together
with instructions signed by the Optionee requesting the Company to deliver
the shares of Common Stock subject to such option to the broker-dealer on
behalf of the Optionee and specifying the account into which such shares
should be deposited, (b) adequate provision has been made with respect to the
payment of any withholding taxes due upon such exercise, and (c) the
broker-dealer and the Optionee have otherwise complied with Section
220.3(e)(4) of Regulation T, 12 CFR Part 220, or any successor provision.
(d) The Option will be exercisable during the lifetime of the Optionee
only by the Optionee. To the extent exercisable after the Optionee's death,
the Option will be exercised only by the Optionee's representatives,
executors, successors or beneficiaries.
3. EXPIRATION OF OPTION. The Option will expire, and will not be
exercisable with respect to any Exercisable Portion as to which the Option
has not been exercised, on the first to occur of: (a) the eleventh
anniversary of the Award Date; or (b) one year after any Acceleration Event
4. TAX WITHHOLDING. Any provision of this Agreement to the contrary
notwithstanding, the Company may take such steps as it deems necessary or
desirable for the withholding of any taxes that it is required by law or
regulation of any governmental authority, federal, state, or local, domestic
or foreign, to withhold in connection with any of the shares of Common Stock
subject hereto, including requiring the Optionee to pay to the Company the
amount of such withholding tax before the Company issued any shares pursuant
to the exercise of the Option.
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5. DILUTION. If the number of shares of Common Stock outstanding is
changed by reason of a stock dividend, stock split, recapitalization, or
combination of shares, the number of shares of Common Stock then issuable
upon exercise of the Option and the exercise price per share will be
appropriately adjusted. In the event of any merger, consolidation,
reorganization, or recapitalization of the Company pursuant to which holders
of the Common Stock receive other securities (a "REORGANIZATION TRANSACTION"),
then upon any subsequent exercise of the Option, the Optionee will be entitled
to receive, for each share of Common Stock issuable upon exercise of the Option
prior to such Reorganization Transaction, the number and kind of securities and
other property received in respect of one share of Common Stock as a result of
such Reorganization Transaction.
6. TRANSFER OF OPTION. The Optionee will not, directly or indirectly,
sell, transfer, pledge, encumber or hypothecate ("TRANSFER") any of the
Option or the rights and privileges pertaining thereto except for the
Exercisable Portion. In addition, the Optionee will not, directly or
indirectly, transfer any portion of the Option or any shares of Common Stock
acquired upon exercise of the Option other than (i) with the prior written
consent of the Company, (ii) by will or the laws of descent and distribution,
(iii) with respect to shares of Common Stock acquired upon exercise of the
Option, pursuant to an effective registration statement filed under the Act,
or (iv) with respect to shares of Common Stock acquired upon exercise of the
Option, pursuant to an exemption from the registration requirements of the
Act. Any permitted transferee to whom the Optionee transfers the Option
pursuant to (i) or (ii) above will agree to be bound by this Agreement.
Neither the Option nor the underlying shares of Common Stock is liable for or
subject to, in whole or in part, the debts, contracts, liabilities or torts
of the Optionee, nor will they be subject to garnishment, attachment,
execution, levy, or other legal or equitable process.
7. CERTAIN LEGAL RESTRICTIONS. The Company will not be obligated to
sell or issue any shares of Common Stock upon the exercise of the Option or
otherwise unless the issuance and delivery of such shares complies with all
relevant provisions of law and other legal requirements including, without
limitation, any applicable federal or state securities laws and the
requirements of any stock exchange upon which shares of the Common Stock may
then be listed. As a condition to the exercise of the Option or the sale by
the Company of any additional shares of Common Stock to the Optionee, the
Company may require the Optionee to make such representations and warranties
as may be necessary to assure the availability of an exemption from the
registration requirements of applicable gaming regulations or federal or
state securities laws. The Company will not be liable for refusing to sell
or issue any shares if the Company cannot obtain authority from the
appropriate regulatory bodies deemed by the Company to be necessary to
lawfully sell or issue such shares. In addition, the Company will have no
obligation to the Optionee, express or implied, to list, register or
otherwise qualify any of the Optionee's shares of Common Stock. The shares
of Common Stock issued upon the exercise of the Option may not be transferred
except in accordance with applicable federal or state securities laws. At
the Company's option, the certificate
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evidencing shares of Common Stock issued to the Optionee will bear
appropriate legends restricting transfer under gaming and other applicable
law.
Any Common Stock issued pursuant to the exercise of Options granted
pursuant to this Agreement during the Optionee's service as an director of
the Company under Rule 16b-3 will not be transferred until at least six
months have elapsed from the date of grant of such Option to the date of a
disposition of the Common Stock underlying such Option.
8. MISCELLANEOUS.
(a) The granting of the Option will impose no obligation upon the
Optionee to exercise the Option or any part thereof.
(b) Neither the Optionee nor any person claiming under or through
the Optionee will be or will have any of the rights or privileges of a
stockholder of the Company in respect of any of the shares issuable upon
the exercise of the Option unless and until certificates representing such
shares have been issued and delivered to the Optionee or such Optionee's
agent.
(c) Any notice to be given to the Company under the terms of this
Agreement or any deliver of the Option to the Company will be addressed to
the Company at its principal executive offices, and any notice to be given
to the Optionee will be addressed to the Optionee at the address set forth
beneath his signature on this Agreement, or at such other address for a
party as such party may hereafter designate in writing to the other. Any
such notice will be deemed to have been duly given if mailed, postage
prepaid, addressed as aforesaid. Subject to the limitations in this
Agreement on the transferability by the Optionee of the Option and any
shares of Common Stock, this Agreement will be binding upon and inure to
the benefit of the representatives, executors, successors or beneficiaries
of the parties hereto.
(d) THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS
AGREEMENT SHALL BE GOVERNED BY THE LAW: OF THE STATE OF NEVADA AND THE
UNITED STATES, AS APPLICABLE, WITHOUT REFERENCE TO THE CONFLICT OF LAWS
PROVISIONS THEREOF.
(e) If any provision of this Agreement is declared or found to be
illegal, unenforceable, or void, in whole or in part, then the parties
will be relieved of all obligations arising under such provision, but only
to the extent that it is illegal, unenforceable, or void, it being the
intent and agreement of the parties that this Agreement shall be deemed
amended by modifying such provision to the extent necessary to make it
legal and enforceable while preserving its intent or, if that is
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not possible, by substituting therefor another provision that is legal and
enforceable and achieves the same objectives.
(f) All section titles and captions in this Agreement are for
convenience only, will not be deemed part of this Agreement, and in no way
will define, limit, extend, or describe the scope or intent of any
provisions of this Agreement.
(g) The parties will execute all documents, provide all information,
and take or refrain from taking all actions as may be necessary or
appropriate to achieve the purposes of this Agreement
(h) This Agreement constitutes the entire agreement between the
parties to this Agreement pertaining to the subject matter of this
Agreement and supersedes all prior agreements and understandings
pertaining to such subject matter.
(i) No failure by any party to insist upon the strict performance of
any covenant, duty, agreement, or condition of this Agreement or to
exercise any right or remedy consequent upon a breach thereof will
constitute waiver of any such breach or any other covenant, duty,
agreement, or condition.
(j) This Agreement may be executed in counterparts, all of which
together will constitute one agreement binding on all the parties to this
Agreement, notwithstanding that all such parties are not signatories to
the original or the same counterpart.
(k) No supplement, modification, or amendment of this Agreement or
waiver of any provision of this Agreement will be binding unless executed
in writing by all parties to this Agreement. No waiver of any of the
provisions of this Agreement will be deemed or will constitute a waiver of
any other provision of this Agreement (regardless of whether similar), nor
will any such waiver constitute a continuing waiver unless otherwise
expressly provided.
(l) Optionee shall file a Form 3 with the Securities and Exchange
Commission within 10 days of the date of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
COMPANY:
ANCHOR GAMING
By:
-------------------------------------
Stan Fulton
Chairman of the Board/Chief Executive
Officer
OPTIONEE:
----------------------------------------
Glen J. Hettinger
c/o Hughes & Luce, L.L.P
1717 Main Street
Suite 2800
Dallas, Texas 75201
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EXHIBIT 10.30
FORM OF INDEMNIFICATION AGREEMENT
This Indemnification Agreement (this "AGREEMENT") is made as of this
___th day of ________ 1997, by and between Anchor Gaming, a Nevada
corporation (the "Company"), and Glen J. Hettinger (the "INDEMNITEE").
RECITALS
A. It is essential to the Company to retain and attract as directors
and officers the most capable persons available.
B. The Indemnitee has agreed to serve as a director of the Companin
part in reliance on the benefits provided for in this Agreement.
C. Both the Company and the Indemnitee recognize that competent and
experienced persons are becoming more reluctant to serve as directors and
officers of a corporation unless they are protected by comprehensive
insurance and/or indemnification agreements, especially in light of the
increased risk of litigation and other claims being asserted against the
directors and officers of public companies.
D. The Articles of Incorporation and Bylaws of the Company authorize
the Company to indemnify and advance expenses to its directors and officers
to the full extent permitted by law, and the Indemnitee has agreed to serve
as a director of the Company, in part, in reliance on such provisions.
Accordingly, and in order to induce the Indemnitee to continue to serve
in the Indemnitee's present capacity, the Company and the Indemnitee agree as
follows:
1. SERVICE. The Indemnitee will serve as a director of the Company so
long as the Indemnitee is duly elected and qualified to serve in such
capacity or until the Indemnitee resigns or is removed.
2. INDEMNITY ARRANGEMENT.
(a) The Company will indemnify the Indemnitee in the event that the
Indemnitee was, is, or becomes a party to or witness or other participant in,
or is threatened to be made a party to any threatened, pending or completed
action, suit or
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proceeding, whether civil, criminal, administrative, or investigative, formal
or informal, and any appeals therefrom (a "PROCEEDING"), by reason of the
fact that the Indemnitee is or was or had agreed to become a director,
officer, employee or agent of the Company, or is or was serving as or had
agreed to serve at the request of the Company as a director, officer,
partner, member, trustee, employee, or agent (each an "AUTHORIZED CAPACITY")
of another corporation, partnership, joint venture, employee benefit plan, or
other enterprise (each "ANOTHER ENTITY"), or by reason of any action alleged
to have been taken or omitted in such capacity, against any and all costs,
charges, and expenses (including attorney's fees), judgments, fines, and
amounts paid in settlement actually and reasonably incurred by the Indemnitee
in connection with such Proceeding if the Indemnitee acted in good faith and
in a manner that the Indemnitee reasonably believed to be in or not opposed
to the best interests of the Company, and that, with respect to any criminal
action, the Indemnitee had reasonable cause to believe that his conduct was
lawful. The termination of any Proceeding by judgment, order, settlement,
conviction, or upon a plea of NOLO CONTENDERE or its equivalent will not, of
itself, adversely affect the right of the Indemnitee to indemnification or
create a presumption that the Indemnitee did not meet the foregoing standard
of conduct to the extent applicable thereto.
(b) The Company will indemnify the Indemnitee when the Indemnitee was
or is involved in as witness, deponent, or other participant in or is
threatened to be made so involved in any Proceeding by or in the right of the
Company to procure a judgment in its favor by reason of the fact that the
Indemnitee is or was or had agreed to become a director, officer, employee,
or agent of the Company, or is or was serving or had agreed to serve at the
request of the Company in an Authorized Capacity of or for Another Entity,
against any and all costs, charges, and expenses (including attorneys' fees)
actually and reasonably incurred by the Indemnitee in connection with the
defense or settlement of such Proceeding if the Indemnitee acted in good
faith and in a manner that the Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company, except that no indemnification
will be made in respect of any claim, issue, or matter as to which the
Indemnitee shall have been adjudged to be liable to the Company, unless and
only to the extent that a court of competent jurisdiction determines upon
application that, despite the adjudication of liability but in view of all
the circumstances of the case, the person is fairly and reasonably entitled
to indemnity for such expenses as the court deems proper.
(c) Notwithstanding anything in this Agreement to the contrary, the
Indemnitee will not be entitled to indemnification or advancement of expenses
hereunder in connection with any Proceeding initiated by the Indemnitee
against the Company (except for any Proceeding to enforce the terms of this
Agreement) unless the Company has joined in or consented to the initiation of
such Proceeding. The
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Indemnitee will not be entitled to any payment by the Company (i) in
connection with any fine or similar governmental imposition which the Company
is prohibited by applicable law from paying and that results from a final,
non-appealable order; or (ii) to the extent based upon or attributable to the
Indemnitee gaining in fact a personal profit to which the Indemnitee was not
legally entitled, including, without limitation, profits made from the
purchase and sale of equity securities of the Company that are recoverable by
the Company pursuant to Section 16(b) of the Securities Exchange Act of 1934,
as amended (the "EXCHANGE ACT"), and profits arising from transactions in
securities that were effected in violation of Section 10(b) or Section 14(e)
of the Exchange Act, including Rule 10b-5 and Rule 14e-3 promulgated
thereunder.
(d) No change in the Company's Articles of Incorporation or Bylaws or
in the Nevada General Corporation Law subsequent to the date of this
Agreement will have the effect of limiting or eliminating the indemnification
available under this Agreement. The rights to indemnification and to
advancement of expenses set forth in the Articles of Incorporation and Bylaws
of the Company as of the date hereof will be deemed to be contractual rights
of the Indemnitee, and are in addition to the rights under this Agreement.
This Agreement will not in any way limit the rights of the Indemnitee under
applicable law or the Articles of Incorporation and Bylaws of the Company.
If any change after the date of this Agreement in any applicable law, statute
or rule expands the power of the Company to indemnify the Indemnitee, such
change will to the same extent expand the Indemnitee's rights and the
Company's obligations under this Agreement. If any change in any applicable
law, statute, or rule diminishes the power of the Company to Indemnify the
Indemnitee, such change, except to the extent otherwise required by law,
statute, or rule to be applied to this Agreement, will have no effect on this
Agreement or the parties' rights and obligations under this Agreement.
3. PROCEDURES RELATING TO INDEMNIFICATION AND ADVANCEMENT OF
EXPENSES.
(a) In order to be indemnified under this Agreement, Indemnitee will
submit to the Company, to the attention of the Secretary, a statement of
request for indemnification, together with such documents supporting the
request as are reasonably available to the Indemnitee and are reasonably
necessary to determine whether, and to what extent, the Indemnitee is
entitled to indemnification under this Agreement. Upon receipt of any such
indemnification statement, the Company will promptly advise the Board of
Directors of the Company in writing that such request has been made.
(b) The Indemnitee's entitlement to indemnification under this
Agreement will be determined promptly following the Indemnitee's submission
of a request, and in any
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event, not less than thirty (30) calendar days after receipt by the Company
of the request. The Indemnitee's entitlement to indemnification under this
Agreement will be determined by majority vote of a quorum consisting of
directors who are or were not parties to the Proceeding ("DISINTERESTED
DIRECTORS"), or by written opinion of independent legal counsel selected by a
majority of the Disinterested Directors. Independent legal counsel will be a
law firm or member of a law firm that neither at the time in question or
three years preceding such time has been retained to represent the Company or
its affiliates, or the Indemnitee in any material matter. The Company will
pay the fees and expenses of such independent legal counsel.
(c) Submission of a request for indemnification and supporting
documentation to the Company will create a presumption that the Indemnitee is
entitled to indemnification.
(d) If a determination is made or deemed to have been made that the
Indemnitee is entitled to indemnification, the Company will pay to the
Indemnitee, the amounts to which the Indemnitee is entitled within ten (10)
business days after such determination is made.
(e) In order to obtain advancement of expenses, the Indemnitee will
submit to the Company a written undertaking, executed personally or on the
Indemnitee's behalf (the "UNDERTAKING"), stating that (i) the Indemnitee
incurred or will incur actual expenses in defending a Proceeding and (ii) if
and to the extent required by law at the time of such advance, the Indemnitee
undertakes to repay such amounts advanced as to which it may ultimately be
determined that the Indemnitee is not entitled. Upon receipt of an
Undertaking, the Company will make, within ten (10) business days make
payment of the costs, charges and expenses requested.
4. CHANGE IN CONTROL.
(a) The Company agrees that if there is a Change in Control of the
Company, then with respect to all matters thereafter arising concerning the
rights of Indemnitee to indemnify payments and advances under this Agreement,
or any Certificate of Incorporation or Bylaw provision now or hereinafter in
effect relating to an Indemnifiable Event the Company will seek legal advice
from independent legal counsel selected by the Indemnitee and approved by the
Company, which approval will not be unreasonably withheld. Such counsel will
render a written opinion to the Company and Indemnitee as to whether and to
what extent the Indemnitee is entitled to indemnification under this
Agreement and under applicable law. The Company agrees to pay the reasonable
fees of the Independent legal counsel.
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(b) Change in Control: A "CHANGE IN CONTROL" will be deemed to have
occurred if (i) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board of Directors and any
new directors, whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at least
three quarters of the directors then still in office who neither were
directors at the beginning of the period or whose election or nomination for
election was previously so approved the ("INCUMBENT DIRECTORS") cease for any
reason to constitute a majority thereof; or (ii) any individual, partnership,
firm, corporation or other entity is or becomes the beneficial owner (as
defined under Rule 13-d as promulgated under the Securities Exchange Act of
1934, as amended) directly or indirectly, of securities representing 30% or
more of the total voting power represented by the Company's then outstanding
securities, in a transaction that has not been approved by the Incumbent
Directors; (iii) the stockholders of the Company approve a merger or
consolidation that has not been approved by the Incumbent Directors; or (iv)
the stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
a majority of the Company's assets.
(c) "INDEMNIFIABLE EVENTS" mean any events or occurrences related to
the fact that Indemnitee is or was a director or officer of the Company, or
is or was serving at the request of the Company as a director, officer or
trustee of an Authorized Entity, or by reason of any act or omission by
Indemnitee in such capacity.
5. DUPLICATION OF PAYMENTS. The Company will not be liable under this
Agreement to make any payment in connection with any claim made against the
Indemnitee to the extent the Indemnitee has actually received payment under
any insurance policy, or otherwise, of the amount otherwise payable hereunder.
6. PARTIAL INDEMNITY. If the Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines, penalties, and amounts paid in
settlement, but not for a total amount thereof, the Company will indemnify
Indemnitee for the portion thereof to which the Indemnitee is entitled.
7. ENFORCEMENT. If a request for indemnification or advancement of
expenses made to the Company is not timely paid as specified under this
Agreement, the Indemnitee will be entitled to seek judicial enforcement of
the Company's obligations to make such payments. In the event that it is
determined that the Indemnitee is entitled to indemnification or advancement
of expenses under this Agreement, the Company will pay the costs of
enforcement of the Indemnitee's rights under this Agreement.
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8. NONEXCLUSIVITY. The right to indemnification and advancement of
expenses provided by this Agreement is not exclusive of an other right to
which Indemnitee may be entitled under the Bylaws, Nevada General Corporation
Law, any other statute, insurance policy, agreement, vote of stockholders, or
of directors or otherwise, as to actions in Indemnitee's official capacity
with the Company.
9. SEVERABILITY. The provisions of this Agreement will be severable
in the event that any of the provisions hereof is held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable in any
respect, and the validity and enforceability of any such provision in every
other respect and of the remaining provisions hereof shall not be in any way
impaired and shall remain enforceable to the full extent permitted by law.
10. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Nevada without giving effect to the principles of conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the date first above written.
ANCHOR GAMING
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
INDEMNITEE
----------------------------------------
Glen J. Hettinger
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JOINT VENTURE AGREEMENT
THIS JOINT VENTURE AGREEMENT (this "Agreement"), effective as of 12-3,
1996 (the "Effective Date"), is entered into by and between IGT, a Nevada
corporation ("IGT"), and Anchor Games, a d.b.a. of Anchor Coin, a Nevada
corporation ("Anchor").
WHEREAS, each of IGT and Anchor possesses unique expertise and products
relating to wagering systems and gaming technology; and
WHEREAS, IGT and Anchor desire to establish their strategic alliance in
order to benefit both parties in the marketplace of wagering systems and
gaming technology, in accordance with the terms and conditions of this
Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and conditions contained in this Agreement, IGT and Anchor agree as
follows:
ARTICLE I - DEFINITIONS
As used in this Agreement, the following terms shall have the indicated
meanings:
1.1 "Intellectual Properties" shall mean patents, copyrights, trademarks, trade
names, service marks, ideas, designs, concepts, techniques, discoveries or
improvements including any and all devices and computer software, whether
or not patentable and pending applications relating thereto.
1.2 "Venturers" shall mean IGT and Anchor and their permitted successors and
assigns, and "Venturer" shall mean IGT and Anchor individually.
1.3 "Participating Interest" shall mean the undivided interest of each of the
Venturers in the assets, rights and benefits of the Joint Venture as set
forth in Section 6.2 hereof.
1.4 "Property" shall mean all of the interest in property or property rights
that are owned by the Joint Venture from time to time whether personal,
real or otherwise, including the rights and benefits attached thereto or
associated therewith.
1.5 "Spin for Cash" means a gaming device that incorporates the concept of
[Confidential information set forth here has been filed separately with
the Securities and Exchange Commission under Rule 24b-2 under the
Securities Exchange Act of 1934.]
1.6 "Spin for Cash Wide Area Progressive System" means a linked wide-area
progressive gaming device system employing (i) Anchor's Spin for Cash
commonly referred to as "Wheel of Gold" or IGT's Spin for Cash commonly
referred to as "Wheel of Fortune" and (ii) the linked progressive gaming
device technology of IGT and its affiliates.
1.7 "linked wide-area progressive gaming device system" means a system
comprised of gaming devices which devices are (i) located in more than one
gaming property; (ii) all inter-connected;
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and (iii) which all contribute a portion of "coin-in" to a common,
shared progressive jackpot. This definition is specifically intended to
exclude video lottery devices and systems.
ARTICLE II - INTERPRETATION OF AGREEMENT
2.1 ASSIGNMENT - Neither this Agreement nor any rights or obligations of any
Venturer hereunder shall be assigned or otherwise transferred nor the
duties hereunder delegated, by operation of law or otherwise by one
Venturer without the prior written consent of the other Venturer, except
that either Venturer may assign it rights under this Agreement to a direct
or indirect wholly owned subsidiary that agrees in writing to be bound by
the terms of this Agreement.
2.2 DESIGNATED SUCCESSORS - The terms and conditions contained in this
Agreement shall be binding upon and shall inure to the benefit of the
Venturers hereto and their respective permitted heirs, executors, personal
administrators, lawful legal representatives, successors and assigns.
2.3 ENFORCEABILITY OF PROVISIONS - If any covenant, obligation or provision
contained in this Agreement or the application thereof to any person or
circumstance shall to any extent be found to be invalid or unenforceable(as
to time, scope or otherwise), such invalid or unenforceable covenant,
obligation or provision will be curtailed to the minimum extent necessary
so as to be valid and enforceable to the fullest extent permitted by law.
2.4 ENTIRE AGREEMENT - This Agreement and the Schedules and Exhibits hereto
constitute the entire agreement between the Venturers and supersedes all
other prior written and prior or contemporaneous oral contracts,
agreements, negotiations and undertakings relating to the subject matter of
this Agreement between the Venturers. There are no representations,
warranties, collateral agreements or conditions affecting this transaction
other than as expressed or referred to herein.
2.5 HEADINGS - The headings herein contained are intended for convenience of
reference only and shall not form a part hereof nor affect the
interpretation of this Agreement.
2.6 JURISDICTION - This Agreement shall be governed by and interpreted in
accordance with the laws in force in the State of Nevada. The Venturers,
for themselves and on behalf of their respective agents, employees and
subsidiaries, irrevocably agree to the exclusive jurisdiction of the Courts
of the State of Nevada (or such judicial district of a court of the United
States as shall include the same) for the determination of all matters
arising hereunder.
2.7 MODIFICATION - None of the terms of this Agreement may be waived or
modified except by an express agreement in writing signed by authorized
signatories of each Venturer. The failure or delay of either Venturer in
enforcing any of its rights under this Agreement shall not be deemed a
continuing waiver or a modification by such Venturer of such right.
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ARTICLE III - FORMATION OF JOINT VENTURE
3.1 FORMATION - IGT and Anchor hereby agree to form a joint venture which shall
be known as the "SPIN FOR CASH WIDE AREA PROGRESSIVE JOINT VENTURE," for
the limited purposes set forth and described in Section 3.3 hereof; subject
to the terms and conditions of this Agreement.
3.2 COMMENCEMENT - The business of the Joint Venture shall be conducted in
accordance with the provisions of this Agreement and shall commence on the
Effective Date and continue until terminated as provided in this Agreement.
3.3 JOINT VENTURE PURPOSE - The sole purpose of the Joint Venture shall be to
develop and market the Spin for Cash Wide Area Progressive System.
3.4 OWNERSHIP OF ASSETS - All Property owned by the Joint Venture shall be
owned by the Joint Venture as an entity in the name of " Spin for Cash Wide
Area Progressive Joint Venture." It is understood by the parties that
various governmental or regulatory agencies may not permit the ownership
structure of assets as set forth in this section. In such event, the
parties agree to negotiate in good faith and to make such commercially
reasonable accommodations to comply with permitted ownership structures or
to take such actions as are necessary to change such rules or regulations
so as to carry out the purposes of this Joint Venture. Insofar as
permitted by applicable law, no Venturer shall have any ownership interest
in such Property in its individual name or right; and each Venturer's
interest in the Joint Venture shall be personal property for all purposes.
The Venturers shall use the Joint Venture's credit and assets solely for
the benefit of the Joint Venture. No asset of the Joint Venture shall be
transferred or encumbered for or in payment of any individual obligation of
any Venturer.
3.5 PARTNERSHIP - The Joint Venture will be constituted as a partnership under
the laws of the State of Nevada. The Joint Venture shall have all powers
conferred upon partnerships under the laws of the State of Nevada in
furtherance of its purposes as set forth in Section 3.3. The Joint Venture
and the Venturers shall promptly make any and all required governmental
filings required to constitute the Joint Venture under applicable law.
Notwithstanding the foregoing, the Venturers will negotiate in good faith
and mutually agree upon such restructuring and reorganization of the Joint
Venture into a corporate entity (including, without limitation, in the form
of a limited liability company) as may be reasonably necessary and
appropriate for purposes of minimization of each Venturer's tax burden and
liability exposure.
3.6 PARTICIPATING INTERESTS - The Participating Interests of the Venturers will
be as follows:
ANCHOR IGT
50% 50%
3.7 EFFORTS - IGT and Anchor agree that during the term of the Joint Venture
they both shall devote such time, attention and resources as necessary to
adequately promote the interests of the Joint Venture and the mutual
interests of the Venturers in the success of the Joint Venture and the Spin
for Cash Wide Area Progressive System. It is specifically understood,
however, that no
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Venturer will be required to devote full time to the Joint Venture and
that each Venturer will be entitled, subject to the terms of this
Agreement, to engage in and possess interests in other business
ventures of any and every type and description, independently or with
others, and that neither the Joint Venture nor the other Venturers
shall, by virtue of this Agreement, have any right, title or interest
in or to such other business ventures or the earnings or profits
therefrom.
3.8 EXCLUSIVITY - In consideration of mutual covenants in this Agreement, and
as a material inducement to the other Venturer to enter into this
Agreement, the Venturers hereby agree as follows:
(a) During the term of this Agreement, without IGT's prior written
consent, Anchor will not, directly or indirectly, by contract,
through affiliates or otherwise, within [Confidential information
set forth here has been filed separately with the Securities and
Exchange Commission under Rule 24b-2 under the Securities Exchange
Act of 1934], provide or sell under any terms to any third party
[Confidential information set forth here has been filed separately
with the Securities and Exchange Commission under Rule 24b-2 under
the Securities Exchange Act of 1934.]
(b) During the term of this Agreement, without Anchor's prior written
consent, IGT will not, directly or indirectly, by contract, through
affiliates or otherwise, within [Confidential information set forth
here has been filed separately with the Securities and Exchange
Commission under Rule 24b-2 under the Securities Exchange Act of
1934], provide or sell under any terms to any third party
[Confidential information set forth here has been filed separately
with the Securities and Exchange Commission under Rule 24b-2 under
the Securities Exchange Act of 1934.]
(c) Each Venturer hereby acknowledges and agrees that the limitations as
to time, geographical area and scope of activity contained in this
Section 3.8 are fair and reasonable and do not impose a greater
restraint than is reasonably necessary to protect the goodwill and
other business interests of the other Venturer.
3.9 MUTUAL RELEASE - Anchor hereby releases and forever discharges IGT of and
from any and all claims, debts, demands, actions, cross-claims, causes of
action, suits and liabilities whatsoever, both at law, statutory, in equity
or otherwise, which Anchor may now have or may hereafter claim to have
against IGT arising out of any infringement, violation or misappropriation
by IGT of Anchor's Intellectual Properties prior to the Effective Date.
IGT hereby releases and forever discharges Anchor of and from any and all
claims, debts, demands, actions, cross-claims, causes of action, suits and
liabilities whatsoever, both at law, statutory, in equity or otherwise,
which IGT may now have or may hereafter claim to have against Anchor
arising out of any infringement, violation or misappropriation by Anchor of
IGT's Intellectual Properties prior to the Effective Date.
ARTICLE IV - MANAGEMENT OF JOINT VENTURE
4.1 ADMINISTRATION AND MANAGEMENT - All decisions respecting any matter set
forth in this Agreement or otherwise affecting or arising out of the
conduct of the business of the Joint Venture shall be made by a management
committee (the "Management Committee") consisting of two individuals
appointed by each Venturer. Without limiting the generality of the
foregoing, the Management Committee shall be responsible for the following
tasks:
(a) establishing pricing for the Spin for Cash Wide Area Progressive
System;
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(b) establishing a detailed budget for each fiscal year of the Joint
Venture;
(c) establishing billing procedures;
(d) developing a schedules, goals and plans for implementation for the
development of the Spin for Cash Wide Area Progressive System in
cooperation with each of the Venturers;
(e) contract with such parties, whether third parties or a party to
this Agreement, to perform such services or activities as are
necessary to accomplish the objectives of this Agreement, and to
comply with applicable gaming rules and regulations; and
(f) determine a model for such direct costs as may be allocated by
each Venturer to the Joint Venture.
The Management Committee shall make such decisions and take such actions as
may be necessary or desirable to carry out the purpose of the Joint Venture
and shall have all the powers that are necessary for such purpose. No
person or entity other than the Management Committee and those it expressly
authorizes in writing shall have the authority to bind the Joint Venture.
4.2 QUORUM - All four (4) members of the Management Committee are required to
constitute a quorum for any action to be taken by the Management Committee.
4.3 MEETINGS - Unless otherwise agreed, regular meetings of the Management
Committee shall be held at least every other month alternating between the
offices of Anchor in Las Vegas and IGT in Reno beginning on December 1st,
1996 on the first Thursday of the month or at such other time as all
members of the Management Committee may agree, and special meetings of the
Management Committee may be called by any member of the Management
Committee.
4.4 NOTICE - Notice of the time and place of any special meeting of the
Management Committee shall be given to each member of the Management
Committee not less than seven (7) days before the time when the meeting is
to be held by personal delivery, facsimile transmission, telegram, cable or
telex to a member's business address, from time to time. A member of the
Management Committee may, in any manner, waive notice of a meeting. The
attendance of a member of the Management Committee at a meeting of the
Management Committee shall constitute a waiver of notice of the meeting,
unless such member is attending for the sole purpose of disputing notice.
4.5 REQUISITE VOTE - Unless specifically indicated in this Agreement, at all
meetings of the Management Committee, every issue arising at such meeting
shall be decided by no less than three (3) of the four (4) members of the
Management Committee.
4.6 PARTICIPATION - A member of the Management Committee may participate in a
meeting by means of telephone or such other communication facility as may
permit all persons participating in the meeting to hear each other.
Notwithstanding any other provision of this Agreement, any action that the
Management Committee may take at a meeting duly called and held must be
taken by written consent and signed by all the members of the Management
Committee.
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4.7 RESOLUTION RECORDING - The Management Committee shall cause to be prepared
and entered into books provided for the purpose all resolutions of the
Management Committee.
4.8 TRAVEL COSTS - The costs for travel and other expenses properly incurred by
each member of the Management Committee in attending meetings thereof shall
be reimbursed to them by the Venturer who appointed the member to the
Management Committee.
4.9 APPOINTMENT OF MANAGERS - The Management Committee may, from time to time,
appoint one or more managers to manage the day to day business and affairs
of the Joint Venture. Such managers shall exercise such powers and have
such authority as may be delegated to them by the Management Committee.
4.10 MANAGER ACCOUNTABILITY - The Management Committee and any employee, agent
or other representative appointed by the Management Committee shall not be
liable in any way to the Joint Venture or to any Venturer for action or
omission taken in good faith without gross negligence or a willful
disregard of such person's duties. Without limiting the generality of the
foregoing, except where grossly negligent or in willful disregard of their
duties, neither the Management Committee nor any employee, agent or other
representative appointed by the Management Committee shall be answerable or
accountable for any loss or liability arising out of or resulting from:
(a) acts or omissions or defaults of contractors or agents, engaged by the
Management Committee or any managers appointed by the Management
Committee or any managers appointed by the Management Committee in any
operation or work conducted for the account of or engaged for any
purpose of the Joint Venture or incidental to the business of the
Joint Venture;
(b) omission to pay rental or fees or to perform obligations imposed by
governmental authority;
(c) loss or destruction of the Joint Venture's assets from fire, explosion
or any hazard, in excess of proceeds of insurance in force and effect
at the time of loss;
(d) loss or destruction of the Joint Venture's assets from uninsurable
hazards;
(e) accounting or secretarial errors of any type.
4.11 MANAGEMENT INDEMNIFICATION - The Venturers jointly and severally shall
indemnify each present and former member of the Management Committee,
and each present and former employee, agent or other representative of
the Joint Venture, and the heirs, executors, administrators, successors
and assigns of the foregoing, from and against any and all liabilities,
costs, charges and expenses sustained or incurred in respect of any
action, suit or proceeding that is proposed or commenced against them
for or in respect of anything done or permitted by them to be done in
respect of the execution of the duties of their office. Such
indemnification shall include, without limitation, all costs, charges
and expenses that they sustain or incur in respect of the affairs of the
Joint Venture, except where such liability or costs are finally
determined to relate to their willful disregard for their duties or
gross negligence .
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ARTICLE V - SALES OR LEASES
5.1 SALES OR LEASES. From time to time, a Venturer will sell or lease such
items as may be reasonably requested by the Joint Venture and agreed by such
Venturer, in which event such Venturer will sell or lease such items to the
Joint Venture at cost. With respect to any such lease, (i) the term will be
coterminous with the Joint Venture, (ii) the monthly lease payments to such
Venturer will be equal to 1/36th of the total cost of such items for the
first 36 months of each lease, and (iii) the lease payments to such Venturer
will be reduced to one dollar ($1) per month at such time as the Joint
Venture has repaid the total cost of the leased items. If there is not
sufficient available cash for the Joint Venture to meet its obligation under
each Lease, then lease payments will be apportioned between Venturers
ratably in accordance with the cost of the goods leased to the Joint Venture
by the respective Venturers.
ARTICLE VI - FINANCIAL CONTRIBUTIONS AND INTERESTS
6.1 LICENSES.
(a) Upon execution of this Agreement, Anchor and the Joint Venture will
enter into a license agreement pursuant to which Anchor will grant to
the Joint Venture a non-exclusive, royalty-free and paid-up license
under any of Anchor's patent rights whether owned or acquired, in its
Wheel of Gold gaming device to make, sell and use the Spin For Cash
Wide Area Progressive System. A form of such license agreement shall
be attached hereto as Exhibit A.
(b) Upon execution of this Agreement, IGT and the Joint Venture will enter
into a license agreement pursuant to which IGT will grant to the Joint
Venture a non-exclusive, royalty-free and paid-up license under any of
IGT's patent rights in its Wheel of Fortune gaming device, whether
owned or acquired, and in its wide area inter-linked progressive
wagering system, whether owned or acquired, to make, sell and use the
Spin For Cash Wide Area Progressive System. A form of such license
agreement shall be attached hereto as Exhibit B.
6.2 NO EXPENSES - Except for payments under the Anchor Lease and the IGT Lease
or as approved by the Management Committee , neither Venturer nor any of
their affiliates will be entitled to any compensation for their services or
to be reimbursed for out-of-pocket, overhead or general administrative
expenses.
6.3 ALLOCATIONS - The Venturers shall share profits and losses in proportion to
their respective Participating Interests. For Federal income tax purposes,
each item of income, gain, loss, deduction or credit entering into the
computation of the Joint Venture's taxable income shall be allocated in
proportion to their respective participating interests. A Venturer's
capital account shall be credited with (i) its contributions to the capital
of the Joint Venture; and (ii) its allocable share of Joint Venture income
and gains, and shall be debited with (i) its allocable share of Joint
venture deductions and losses; and (ii) the amount of any distributions of
the Joint Venture. The Venturers may be requested to make additional
contributions to the Joint
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Venture based upon the unanimous recommendations of the Management
Committee. The Participating Interests of the Venturers shall remain
the same unless the other Venturer agrees otherwise and shall not be
increased by virtue of any loan, gift or other contribution made by a
Venturer unless the other Venturer agrees otherwise.
6.4 DISTRIBUTIONS - The Venturers agree that the calculation of revenues and
expenses pursuant to this Agreement shall be in accordance with generally
accepted accounting principles. The Joint Venture will distribute to the
Venturers all cash of the Joint Venture (less the amount that the
Management Committee agrees shall constitute a reasonable reserve for
working capital and anticipated expenses) to the Venturers in proportion to
their Participating Interest within 30 days after the end of each fiscal
quarter of IGT. Cash distributions shall be in accordance with the
following priority schedule (i) payments to vendors, including trade
payables to either of the Joint Venturers (ii) payments for any licensing
or regulatory fees applicable to the Joint Venture (iii) payments of any
taxes applicable to the Joint Venture and (iv) payments of any royalties of
lease fees as agreed upon by the Management Committee.
6.5 JOINT VENTURE ACCOUNTING IGT shall provide all accounting services to the
Joint Venture which shall include, but are not limited to, collection of
all accounts of the Joint Venture, payment of all debts of the Joint
Venture, maintaining complete accounting records of the Joint Venture in
accordance with the generally accepted accounting principles.
6.4 AUDITING RIGHTS - Both Venturers shall have the absolute right to review
and make copies of all books, records, and papers of the Joint Venture and
to have audits of the Joint Venture performed any time and from time to
time. The cost of one annual audit shall be borne by the Joint Venture
each year and any additional audits will be paid for by the Venturer
requesting the audit.
ARTICLE VII - PROPRIETARY TECHNOLOGY RIGHTS
7.1 OWNERSHIP - Except as otherwise provided in this Agreement, each Venturer
shall retain all rights to ownership, title or interests to any proprietary
information, any inventions and any Intellectual Properties independently
developed (without any design or technological input from the other
Venturer) by them prior to the Commencement Date of this Agreement and
during the term of the Joint Venture. All independently developed
Intellectual Properties shall remain the property of the Venturer that
developed it. It is expressly agreed that all new jointly developed (with
input from the other Venturer) Intellectual Properties that are developed
as a direct result of the Joint Venture, including tradenames and
trademarks, shall be the Property of the Joint Venture until the expiration
or termination of this Agreement for any reason, at which time all new
jointly developed intellectual property shall be jointly owned by IGT and
Anchor. No rights to the Intellectual Properties or technology of any
party is granted to the other party except as expressly set forth in this
Agreement. If the ownership of any Intellectual Property is not permitted
in a gaming jurisdiction in which the Joint Venture chooses to pursue
business, the parties agree to negotiate in good faith and make such
commercially reasonable accommodations to comply with permitted ownership
structures or to take such actions as are necessary to change such rules or
regulations so as to carry out the purposes of this Joint Venture.
8
<PAGE>
7.2 NO INFRINGEMENT - Each Venturer hereby acknowledges the other Venturer's
Intellectual Properties with respect to the other Venturer's proprietary
gaming devices, including without limitation such [Confidential
information set forth here has been filed separately with the Securities
and Exchange Commission under Rule 24b-2 under the Securities Exchange
Act of 1934] gaming devices first originated by the other Venturer as
listed on Exhibit C attached hereto. Each Venturer hereby agrees that
it will fully respect and will not infringe or misappropriate any and
all such Intellectual Properties of the other Venturer. Each Venturer
hereby stipulates that the gaming devices as listed on Exhibit C are,
for the purposes of this Section 7.2 and without limitation, first
originated by each respective Venturer as listed. As such, it is the
intention of the parties and each Venturer agrees to not replicate,
produce, sell or distribute such or substantially similar games of the
other Venturer as are listed in Exhibit C, either individually, or
through affiliates, distributors, subsidiaries, partners or otherwise,
except as specifically set forth in this Agreement. Exhibit C shall be
appended from time to time to include such [Confidential information set
forth here has been filed separately with the Securities and Exchange
Commission under Rule 24b-2 under the Securities Exchange Act of 1934]
games as defined above or by mutual consent, or both.
ARTICLE VIII -CONFIDENTIALITY
8.1 INFORMATION DEVELOPED PRIOR TO COMMENCEMENT DATE - The Venturers agree that
during the term (and any extension) of this Agreement and continuing
perpetually thereafter, neither Anchor nor IGT shall disclose to any third
party or use for any purpose other than those specific purposes set forth
in this Agreement, without the prior written consent of the other party,
which consent shall be in the sole discretion of the party from whom such
consent is requested, any Confidential Information (as defined below)
except as provided for below. For the purposes of this Agreement
"Confidential Information" means all proprietary concepts, designs,
customer data bases, documents, information, processes, procedures, data,
results, conclusions, know-how and similar information (including knowledge
of the terms of and actions taken pursuant to this Agreement) that was or
is developed prior to the Commencement Date of this Agreement and that is
disclosed or submitted to one party by the other in connection with this
Agreement.
8.2 INFORMATION DEVELOPED DURING THE JOINT VENTURE - Notwithstanding Section
8.1, the Venturers agree that during the term of and any subsequent
extension of this Agreement and for a period of ten (10) years thereafter,
all Confidential Information, as defined in Section 8.1, that is developed
during this Agreement in connection with the Joint Venture which is
disclosed to one party by the other shall not be disclosed to any third
party or used for any purpose other than those purposes specifically set
forth in this Agreement, without the prior written consent of the other
party.
8.3 EXCLUSIONS - Anchor and IGT shall have no obligation with respect to any
portion of such Confidential Information under Section 8.1 or 8.2 that:
(a) is or later becomes generally available to the public through no fault
of the party receiving the Confidential Information; or
(b) is obtained from a third party who had the legal right to disclose the
same to the party; or
9
<PAGE>
(c) is already rightfully possessed by the party receiving such
information as evidenced by that party's written records, predating
receipt thereof from the other party at any time; or
(d) such party can prove by clear and convincing evidence that such
information was independently developed by the receiving party without
reference to or knowledge of the disclosed information.
8.4 MAINTAINING CONFIDENTIALITY - Each Venturer agrees to use reasonable
efforts to ensure that information described in Section 8.1 and 8.2 is held
in strict confidence. Such steps shall include, but are not limited to,
explicitly labeling as "CONFIDENTIAL" all written information relating to
technology which is considered proprietary and confidential, and requiring
all employees and subcontractors who are exposed to such information in
connection with this Agreement, to execute a non-disclosure agreement
containing terms and conditions consistent with those set forth in this
Article VIII, obligating each employee and subcontractor to maintain such
information as confidential. Each Venturer will be liable for any non-
compliance with the terms and conditions of such non-disclosure agreement
by each of its employees and subcontractors. The parties agree that, in
addition to the foregoing provisions, the confidentiality letter attached
to this Agreement as Exhibit D will remain in full force and effect.
ARTICLE IX - WARRANTIES AND REPRESENTATION
9.1 WARRANTIES AND REPRESENTATIONS OF ANCHOR - Anchor warrants, as of the date
of this Agreement, that the terms of this Agreement are not inconsistent
with Anchor's other contractual arrangements relating to any and all Anchor
business activities. The Board of Directors of Anchor has taken all
actions required to be taken by law, its Articles of Incorporation, its By-
Laws or other organizational documents to authorize the execution and
delivery of this Agreement.
9.2 WARRANTIES AND REPRESENTATIONS OF IGT- IGT warrants, as of the date of this
Agreement, that the terms of this Agreement are not inconsistent with IGT's
other contractual arrangements relating to any and all IGT business
activities, and that the Board of Directors of IGT have taken all actions
required to be taken by law, its Articles of Incorporation, its By-Laws, or
other organizational documents to authorize the execution and delivery of
this Agreement.
ARTICLE X - LIABILITY
10.1 NO WARRANTY - EXCEPT AS SPECIFICALLY STATED IN ARTICLE IX, THE VENTURERS
MAKE NO EXPRESS OR IMPLIED WARRANTY AS TO ANY MATTER WHATSOEVER, WHETHER
TANGIBLE OR INTANGIBLE, DEVELOPED UNDER THIS AGREEMENT, OR THE OWNERSHIP,
MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE OF ANY INVENTION,
TEST, OR PRODUCT. IN NO EVENT WILL ANY VENTURER BE LIABLE TO THE JOINT
VENTURE OR ANY OTHER VENTURER FOR ANY PUNITIVE, SPECIAL, INCIDENTAL,
INDIRECT, OR CONSEQUENTIAL DAMAGES, INCLUDING ANY LOSS OF INCOME, PROFITS,
COST-SAVINGS, GOODWILL OR BUSINESS.
10
<PAGE>
10.2 LIABILITY SEVERAL - The obligation of the Venturers under this Agreement to
one another shall be in every case several and shall not be, or construed
to be, either joint or joint and several .
10.3 FORCE MAJEURE - Neither Venturer shall be liable for any unforeseeable
event beyond its reasonable control not caused by the fault or negligence
of such Venturer, that causes such Venturer to be unable to perform its
obligations under this Agreement, and that it has been unable to overcome
by the exercise of commercially reasonable steps. In the event of the
occurrence of such a force majeure event, the Venturer unable to perform
shall promptly notify the other Venturer. The disabled Venturer shall
further use reasonable efforts to resume performance as quickly as possible
and shall suspend performance only for such period of time as is necessary
as a result of the force majeure event.
10.4 LIABILITY FOR ACTIONS BROUGHT OUTSIDE OF NEVADA - In the event that a
dispute, claim or suit is brought in a jurisdiction other than the State of
Nevada, against the Joint Venture or either Venturer for activities of the
Joint Venture, the Joint Venture or Venturer shall use its commercially
reasonable efforts to have the action removed to Courts of the State of
Nevada or the federal courts having jurisdiction over the state of Nevada.
If removal cannot be accomplished, it is understood that each Venturer
shall be liable for all expenses, costs, damages, losses, obligations and
liabilities, including reasonable attorney's fees, that are required to be
paid by the Joint Venture or either Venturer as a result of such action in
proportion to their Participating Interests unless said loss is due to the
gross negligence or willful misconduct of a Joint Venturer in which event
that Venturer shall bear such liabilities to the extent caused by such
gross negligence or willful misconduct.
10.5 INTELLECTUAL PROPERTY INDEMNITY. Each party agrees to defend, indemnify,
pay reasonable attorneys' fees, and hold harmless the other party against
all claims, demands, suits, losses, damages, costs, and expenses that the
other party may sustain or incur by reason of any infringement or violation
of any patent, trademark, copyright or other proprietary right of a third
party for any intellectual property provided solely by the indemnifying
party pursuant to this Agreement.
ARTICLE XI - TERM, TERMINATION AND SURVIVING RIGHTS
11.1 TERM. The initial term of this agreement shall be for a period of ten (10)
years following the Commencement Date (the "Initial Term")
11.2 TERMINATION BY MUTUAL CONSENT - Unless otherwise agreed, this Agreement
shall end on the last day of the end of the Initial Term. IGT and Anchor
may elect to terminate this Agreement, or portions thereof, by mutual
written consent at any earlier date, such consent shall be effective when
signed by authorized signatories of both Venturers.
11.3 TERMINATION FOR CAUSE - If either Venturer at any time commits a material
breach of any covenant or agreement contained herein, and fails to remedy
any such breach within thirty (30) days after receiving written notice
thereof, which notice shall specify the manner in which the Agreement has
been breached by the other Venturer, such Venturer may, at its option and
in
11
<PAGE>
addition to any other remedy that it might be entitled to, terminate
this Agreement by notice in writing, which will be effective upon receipt.
11.4 TERMINATION WITHOUT CAUSE -. Subsequent to the Initial Term either
Venturer may terminate this Agreement without cause upon one (1) year's
prior written notice to the other Venturer.
11.5 TERMINATION AND RIGHTS IN THE EVENT OF BANKRUPTCY, INSOLVENCY - In the
event (a) either Venturer shall become insolvent or shall suspend business
or shall file a voluntary petition or answer admitting the jurisdiction of
the Court and the material allegations charged therein or shall consent to
an involuntary petition pursuant to or purporting to be pursuant to any
reorganization or insolvency law in any jurisdiction or shall make an
assignment for the benefit of creditors, or shall apply for or consent to
the appointment of a receiver or trustees of a substantial part of its
property, and (b) no credit-worthy affiliate of such Venturer that is not
affected by such proceeding or event undertakes to assume its obligations
under the provisions of this Agreement within ninety (90) days from the
date on which the Venturer becomes so disabled, then to the extent
permitted by law, the other Venturer may thereafter immediately terminate
this Agreement by giving written notice of termination to the disabled
Venturer.
11.6 ASSIGNMENT OF RIGHTS AFTER TERMINATION. - Upon termination or dissolution
of the Joint Venture, both Venturers shall be prohibited from assigning
their individual rights and interests in the Joint Venture without the
prior written approval of the other Venturer, which approval shall not be
unreasonably withheld.
11.7 SURVIVAL - Expiration or termination of this Agreement or the Joint Venture
for any reason will not release either party from any liabilities or
obligations set forth in this Agreement that (a) the parties have expressly
agreed will survive any such expiration or termination, or (b) remain to be
performed or by their nature would be intended to be applicable following
any such expiration or termination.
11.8 COMPLIANCE WITH LAW. - This Agreement and the obligations of each party
and the Spin for Cash Wide Area Progressive Joint Venture are subject to
any and all applicable laws, rules and regulations.
11.9 RIGHTS TO FULFILL & GRANT. Each party hereto hereby represents and
warrants to the other that it has all of the rights, licenses and
authority to fulfill all of its obligations under this Agreement and to
grant those rights and licenses granted by this Agreement.
ARTICLE XII -DISPUTES
12.1 SETTLEMENT AND CONTINUATION OF WORK - The Joint Venturers agree to use all
reasonable efforts to reach a fair settlement of any dispute relating to
the Joint Venture. If such efforts are unsuccessful, in either case,
remaining issues in dispute will be referred to the Management Committee
for resolution. Pending the resolution of any dispute of claim pursuant to
this Article, the Joint Venturers agree that performance of all obligations
under this Agreement shall be diligently pursued.
12
<PAGE>
12.2 DEADLOCK:
(a) If the Management Committee becomes deadlocked (referred to as a
"Deadlocked Management Committee"), the matter creating such
Deadlocked Management Committee shall be submitted, in writing to an
Escalation Review Officer of each Joint Venturer, being the party so
designated by such Joint Venturer. A Deadlocked Management Committee
shall be deemed to be established when:
(i) a dispute arises among the Management Committee representatives
pertaining to a matter which cannot be resolved by the requisite
vote of the Management Committee within thirty (30) days after
the matter is initially submitted to the Management Committee, as
evidenced by either failure to reach a unanimous vote for matters
where a unanimous vote is specified, during the time specified;
or
(ii) the Management Committee representatives appointed by a Joint
Venturer fails to attend, or be represented by proxy, for two
consecutive meetings of the Management Committee which were duly
called.
(b) Any resolution by the Escalation Review Officers shall be made by
unanimous written consent and shall be final and binding on the Joint
Venture and Joint Venturers.
(c) Failure to Resolve a Deadlocked Management Committee - If a matter
with respect to which a Deadlocked Management Committee exists cannot
be resolved by the Escalation Review Officers, the Joint Venturers
shall employ the following mechanisms in an attempt to resolve any
matters over which a deadlock exists:
(i) Alternate Dispute Resolution - Prior to commencing any formal
litigation, the Joint Venturers will attempt to settle any
dispute arising out of this Agreement which is not the subject of
a Deadlocked Management Committee through good faith consultation
and negotiations. If those attempts fail, any Joint Venturer may
request, by written notice to the other Joint Venturer,
application of alternate dispute resolution techniques ("ADR") to
such dispute. The Joint Venturers shall select a mutually agreed
mediator or some other form of ADR, such as neutral fact-finding
within thirty (30) days of receipt of such notice by any such
Joint Venturer. No Joint Venturer may unreasonably withhold
consent to the selection of a mediator or other form of non-
binding, non-arbitration ADR and the Joint Venturers will share
the cost of ADR equally.
(ii) Litigation - If any dispute cannot be resolved by the Joint
Venturers through negotiation, mediation or another form of ADR
pursuant to (i) above within two (2) months of the notice, the
dispute may be submitted to a Nevada court for resolution. The
use of any ADR procedures will not be construed under the
doctrine of laches, waiver or estoppel to adversely affect the
right of either Joint Venturer. Nothing in this paragraph will
prevent any Joint Venturer from commencing formal litigation if
the (A) good faith efforts to resolve the dispute under these
procedures may have been unsuccessful and/or (B) any delay
13
<PAGE>
resulting from an effort to mediate such dispute could result in
serious and irreparable injury to such Joint Venturer.
12.3 NEVADA LAW - The covenants under this Agreement are subject to
applicable laws and treaties. This Agreement shall be construed
according to the laws of the State of Nevada, United States of America.
12.4 JURISDICTION - In the event of any dispute arising between the parties
hereto that cannot be resolved in accordance with the mediation provision
of Paragraph 12.2, both parties agree to submit to the jurisdiction of the
State and/or Federal Courts situated in the State of Nevada.
ARTICLE XIII - MISCELLANEOUS
13.1 INSURANCE - Each Venturer, at its own expense, shall maintain insurance
against all risks of loss or damage from every cause whatsoever for not
less than the full replacement value thereof as determined by the
Management Committee. Each Venturer shall, at its own expense, carry
public liability and property damage insurance protecting itself with
respect to liabilities for injuries to persons and damage to property of
others resulting from the use of the Property. Such insurance shall
provide coverage of not less than $1,000,000 per occurrence, $2,000,000
aggregate. Such insurance as stated above shall be in form and with
companies acceptable to the Management Committee and shall name IGT and
Anchor as Additional Insureds and Loss Payees and provide for thirty (30)
day prior written notice to IGT and Anchor of any alteration or
cancellation of such coverage shall be provided to IGT's Insurance
Administrator, c/o IGT, P.O. Box 10102, Reno, Nevada 89510-0120 and to
Anchor 815 Pilot Road, Suite G, Las Vegas, Nevada 89119.
13.2 PUBLIC RELATIONS/USE OF NAME - Each Venturer shall only have the right to
publicize the Joint Venture and use the name of the other Venturer with the
prior written consent of the other Venturer and solely for the furtherance
of the interests of the Joint Venture. Each Venturer agrees to furnish
the other with the exact text to be used in publicity regarding the Joint
Venture for approval. Approval shall be in the sole discretion of the
party whose consent is sought, unless disclosure is required by applicable
law in the judgment of counsel for the Venturer making such disclosure.
Each Venturer agrees to promptly complete a review of the proposed
publicity and deliver a response thereto.
13.3 NOTICES - All notices pertaining to or required by this Agreement shall be
in writing and shall be signed by an authorized representative. They shall
be delivered by hand or sent by certified mall, return receipt requested,
with postage prepaid, addressed as follows:
If to Anchor: With Copies To:
T.J. Matthews Mark Hettinger
Executive Vice President Contracts Manager
ANCHOR COIN ANCHOR COIN
815 Pilot Road, Suite G 815 Pilot Road, Suite G
Las Vegas, Nevada 89119 Las Vegas, Nevada 89119
14
<PAGE>
If to IGT: With Copies To:
Robert A. Bittman Marc Foodman
Executive Vice President Associate General Counsel
IGT IGT
5250 Neil Road 5270 Neil Road
Reno, NV 89502 Reno, NV 89502
Either Venturer may change the addressee or address by notice in writing
given to the other Venturer.
13.4 COMPLIANCE WITH GAMING REGULATIONS - Each Venturer agrees to fully comply
with all rules and regulations governing gaming and the use of gaming
devices in each and every jurisdiction in which it transacts business.
Neither Venturer shall conduct its business or act in a manner that could
reasonably be expected to jeopardize the other Venturer's gaming license or
its ability to operate its business in any jurisdiction at any time. In
the event that either Venturer does not comply with all rules and
regulations governing gaming and does not correct such non-compliance in a
prompt manner as requested by either the gaming regulatory authorities or
by the other Venturer or acts in any manner that could reasonably be
expected to jeopardize the other's gaming license, this Agreement may be
terminated by the other party if, after 5 days' written notice such
situation is not cured. Said termination is specifically limited to a
termination of this Agreement with and only with respect to the
jurisdiction(s) directly impacted by said non-compliance. This Agreement
will remain in full force and effect for all non-impacted jurisdictions.
13.5 ADDITIONAL DOCUMENTS - The Venturers covenant and agree to execute and
deliver such further documents, deeds, agreements and assurances as may be
necessary or advisable from time to time to carry out the terms and
conditions of this Agreement in accordance with its true intent.
IN WITNESS WHEREOF, the Venturers have caused this Agreement to be
executed by their duly authorized representatives as follows:
ANCHOR GAMES IGT
By: /s/ STAN FULTON By: /s/ CHARLES N. MATHEWSON
---------------------- ---------------------------
Stan Fulton Charles N. Mathewson
C.E.O. & Chairman of the Board C.E.O. & Chairman of the Board
15
<PAGE>
EXHIBIT A
LICENSE AGREEMENT
[None.]
A-1
<PAGE>
EXHIBIT B
LICENSE AGREEMENT
[None.]
B-1
<PAGE>
EXHIBIT C
[Confidential information set forth here has been filed separately with
the Securities and Exchange Commission under Rule 24b-2 under the
Securities Exchange Act of 1934.]
D-1
<PAGE>
Exhibit D
CONFIDENTIALITY AGREEMENT
Anchor Gaming, a Nevada corporation, and its subsidiaries
(collectively, the "Company"), and IGT, a Nevada corporation, and its
subsidiaries (collectively, the "Recipient"), are evaluating a possible
transaction (the "Transaction") relating to Anchor's WHEEL OF GOLD-TM-
Gaming Device, [Confidential information set forth here has been filed
separately with the Securities and Exchange Commission under Rule 24b-2
under the Securities Exchange Act of 1934] whereby the Company may
engage Recipient to manufacture a gaming device developed by the Company
employing the WOG concept.
In connection with evaluating the possible Transaction and, if
consummated, in fulfilling its obligations under any agreement or arrangement
concerning the Transaction, the Company, its employees, agents or
representatives has and will furnish to Recipient certain nonpublic,
confidential or proprietary information concerning the Project and/or the
business, operations or assets of the Company, including, without
limitation, plans, details, designs, stratagem, ideas, patent applications,
trademarks, copyrights, specifications, concepts and other forms of
intellectual property. All of such information, together with any additional
information such as analyses, compilations, studies or documents, prepared by
Recipient, its employees, agents or representatives or by any other
individual or entity that obtains or receives such information from or
through the Recipient, that incorporate, utilize, or is derived in any manner
from information provided by the Company, or its employees, agents
representatives relating to the WOG concept; is referred to in this Agreement
as the "Confidential Information".
In consideration of the receipt of the Confidential
Information, Recipient agrees as follows:
1. Recipient will keep the Confidential Information
confidential and will use the Confidential Information solely for the purpose
of evaluating whether to engage in a Transaction with the Company and, if
consummated, in fulfilling Recipient's obligations under any arrangement or
agreement concerning the Transaction. Without the prior written consent of
the Company, Recipient will not disclose the Confidential Information to any
individual or entity, except to its employees, agents or representatives who
in its reasonable judgment need to know the Confidential Information solely
and exclusively in connection with evaluating a possible Transaction or, if
consummated, in fulfilling Recipient's obligations under any arrangement or
agreement concerning the Transaction, and who agree in writing to be bound by
the terms of this Agreement. Recipient will be responsible and jointly and
severally liable for any breach of this Agreement by any of its employees,
agents or representatives or by any other individual or entity that obtains
or receives Confidential Information from or through the Recipient.
Recipient agrees to reimburse, indemnify and hold harmless the Company and
its employees, agents and representatives from any damage, loss or expense
incurred as a result of any use of the Confidential Information by Recipient,
its employees, agents or representatives, or any other individual or entity
that obtains or receives Confidential Information from or through the
Recipient, contrary to the terms of this Agreement.
1
<PAGE>
2. The term Confidential Information as used in this
Agreement does not include any information that: a) is or becomes generally
available in the public domain other than through a breach of this Agreement;
b) is already known to Recipient at the time of disclosure; c) is
independently developed by Recipient without reference to the Confidential
Information; or d) is disclosed by a third party to Recipient without similar
restriction on disclosure.
3. Recipient acknowledges and agrees that the Confidential
Information has been and is being furnished to Recipient based on Recipient's
agreement that it will not use or exploit the Confidential Information or
permit the Confidential Information to be used or exploited other than as
provided in this Agreement, and that Recipient may not use or exploit the
Confidential Information or permit it to be used or exploited in any manner
that is harmful to or competitive with the business or operations of the
Company, including, without limitation, with respect to the Company's
licensees, customers (including gaming route locations and casinos),
suppliers, employees, marketing, research and development, production,
pricing, distribution or otherwise. Company further represents and Recipient
acknowledges and agrees that Company owns the rights to the WOG concept and
also all of the patents, trademarks, copyrights, and other intellectual
property associated therewith and arising therefrom (the "Company IP
rights"). Recipient agrees to respect Company's ownership in the WOG concept
and the Company's IP rights and further agrees that Recipient will not take
any action that adversely affects Company's ability to maximize Company's
exploitation of the WOG.
4. Recipient agrees that if no Transaction is effected
between Recipient and the Company or upon any request by the Company
(including, without limitation, upon the conclusion of any transaction
between the Company and Recipient), Recipient will promptly deliver to the
Company all physical embodiments containing any of the Confidential
Information, without retaining any copy, in whole or in part, and will
destroy any notes, memoranda, analyses, compilations, studies or other
documents or media prepared by Recipient or its employees, agents and/or
representatives, or any other individual or entity that obtains or receives
Confidential Information from or through the Recipient, that incorporate or
utilize or is derived in any manner from Confidential Information provided by
the Company or its employees, agents or representatives. If requested by the
Company, Recipient shall confirm such destruction to the Company in writing.
5. In the event that Recipient or any individual or entity
to whom Recipient transmits or provides, directly or indirectly, any
Confidential Information in accordance with this Agreement is requested or
legally required by oral questions, document subpoena, civil investigative
demand, interrogatories, requests for information or other similar process to
disclose any of the Confidential Information, Recipient will promptly provide
the Company with notice of such request or requirement so that the Company
may seek a protective order or take other appropriate actions. Recipient
will cooperate with the Company in its efforts to obtain such remedies and
take such other actions. In the event that such protective order or other
remedy is not obtained, Recipient will disclose only that portion of the
Confidential Information that is legally required to be disclosed and will
make reasonable efforts to obtain reliable assurance that confidential
treatment will be accorded to the Confidential Information.
2
<PAGE>
6. Recipient agrees that money damages would not be a
sufficient remedy for any breach of this Agreement and that, in addition to
all other available legal or equitable remedies, the Company will be entitled
to equitable relief, including injunctive relief and specific performance,
for any breach of this Agreement by Recipient. Recipient agrees to reimburse
the Company for all costs and expenses, including attorneys' fees, incurred
by it in successfully enforcing Recipient's obligations hereunder.
7. Recipient understands and agrees that no failure or delay
by the Company in exercising any right, power or privilege under this
Agreement will operate as a waiver thereof, nor will any single or partial
exercise of such a right, power or privilege preclude any other or further
exercise thereof.
8. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF NEVADA, WITHOUT GIVING
EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
9. This Agreement constitutes the entire agreement and
supersedes any prior written and prior or contemporaneous oral agreements and
understandings between Recipient and the Company with respect to protection
of the confidentiality of the Confidential Information.
IN WITNESS WHEREOF, the undersigned has executed this
Agreement for the benefit of the Company and its affiliates, intending to be
legally bound.
Dated as of 3-8, 1996.
ANCHOR GAMING
By: /s/ THOMAS J. MATTHEWS
----------------------------
Name: THOMAS J. MATTHEWS
----------------------------
Title: SECRETARY
----------------------------
AGREED AND ACCEPTED:
IGT
By: /s/ MICK ROEMER
------------------------
Name: MICK ROEMER
------------------------
Title: VP MKT.
------------------------
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Anchor Coin
DD Stud, Inc.
C. G. Investments, Inc.
Colorado Grande Enterprises, Inc.*
Green Mountain Enterprises, Inc.
* Colorado Grande Enterprises, Inc. is 80% controlled by Anchor Gaming.
Approximately 50% of this subsidiary is held through C.G. Investments, Inc.
and the remaining 30% is held by Anchor Gaming.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 66,427,369
<SECURITIES> 0
<RECEIVABLES> 7,023,657
<ALLOWANCES> 665,605
<INVENTORY> 3,196,918
<CURRENT-ASSETS> 78,264,051
<PP&E> 102,764,685
<DEPRECIATION> 17,731,249
<TOTAL-ASSETS> 188,876,369
<CURRENT-LIABILITIES> 13,618,248
<BONDS> 0
0
0
<COMMON> 135,796
<OTHER-SE> 171,195,072
<TOTAL-LIABILITY-AND-EQUITY> 188,876,369
<SALES> 153,748,599
<TOTAL-REVENUES> 153,748,599
<CGS> 0
<TOTAL-COSTS> 100,554,593
<OTHER-EXPENSES> 310,607
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 287,711
<INCOME-PRETAX> 56,677,130
<INCOME-TAX> 21,000,702
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,676,428
<EPS-PRIMARY> 2.61
<EPS-DILUTED> 0
</TABLE>
