<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K A
FOR ANNUAL REPORT AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-23124
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ANCHOR GAMING
(Exact name of Registrant as specified in its charter)
NEVADA 88-0304253
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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:
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) 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
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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 o
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 22, 1998 based on the $63.50 per
share closing price for the Company's common stock on the Nasdaq National Market
was approximately $538,733,238.
The number of shares of the Registrant's Common Stock outstanding as of
September 22, 1998 was 12,423,532.
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 23, 1998 (to be filed)
are incorporated by reference into Part III of this Form 10-K.
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<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
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<S> <C>
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 Rights Agreement between the Company and the Rights Agent.
(Incorporated by reference to Exhibit 4.2 to the Company's June 30,
1998 Annual Report on Form 10-K (File No. 0-23124)).
4.3 Certificate of Designation, Preferences, and Rights of Series A
Junior Participating Preferred Stock. (Incorporated by reference to
Exhibit 4.3 to the Company's June 30, 1998 Annual Report on Form 10-K
(File No. 0-23124)).
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)).
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)).
</TABLE>
2
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<TABLE>
<S> <C>
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)).
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)).
</TABLE>
3
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<TABLE>
<S> <C>
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 (Incorporated by reference to Exhibit 10.28 to the Company's
June 30, 1996 Annual Report on Form 10-K (File No. 000-23124)).
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 Indemnification Agreement between the Company and Glen J. Hettinger
(Incorporated by reference to Exhibit 10.30 to the Company's June 30,
1998 Annual Report on Form 10-K (File No. 0-23124)).
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 (File No. 000-23124)).
(Incorporated by reference to Exhibit 10.37 to the Company's June 30,
1997 Annual Report on Form 10-K (File No. 0-23124)).
10.38 Stock Option Agreement of William Adams dated April 2, 1997
(Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (File No. 333-53257)).
10.39 Stock Option Agreement of Thomas J. Matthews dated April 2, 1997
(Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-8 (File No. 333-53257)).
10.40 Stock Option Agreement of Joseph Murphy dated April 2, 1997
(Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8 (File No. 333-53257)).
* 99.10 Financial statements of Spin for Cash Joint Venture for the years
ended September 30, 1998 and 1997.
</TABLE>
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* Filed herewith
4
<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
By: /s/ GEOFFREY A. SAGE
-----------------------------------------
Geoffrey A. Sage
CHIEF FINANCIAL OFFICER
</TABLE>
Date: December 23, 1998
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.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ STANLEY E. FULTON
- ------------------------------ Director December 23, 1998
Stanley E. Fulton
/s/ STUART D. BEATH
- ------------------------------ Director December 23, 1998
Stuart D. Beath
/s/ ELIZABETH F. JONES
- ------------------------------ Director December 23, 1998
Elizabeth F. Jones
/s/ GLEN J. HETTINGER
- ------------------------------ Director December 23, 1998
Glen J. Hettinger
/s/ MICHAEL B. FULTON
- ------------------------------ Director December 23, 1998
Michael B. Fulton
/s/ MICHAEL D. RUMBOLZ
- ------------------------------ Director December 23, 1998
Michael D. Rumbolz
</TABLE>
<PAGE>
SPIN FOR CASH JOINT VENTURE
AND MASTER LICENSE AGREEMENT
Financial Statements for the year ended September 30, 1998,
and for the period from
December 3, 1996 (inception) through September 30, 1997
Exhibit 99.10
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Co-venturers of the Spin for Cash
Joint Venture and Master License Agreement:
We have audited the accompanying balance sheets of the Spin for Cash Joint
Venture and Master License Agreement (the "Venture") as of September 30,
1998 and 1997, and the related statements of income, Venturers' capital, and
cash flows for the year ended September 30, 1998, and the period from
December 3, 1996 (Inception) through September 30, 1997. These financial
statements are the responsibility of the Venture's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with 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 misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
aspects, the financial position of the Venture as of September 30, 1998 and
1997, and the results of its operations and its cash flows for the year ended
September 30, 1998, and the period from December 3, 1996 (Inception) through
September 30, 1997, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
November 3, 1998
<PAGE>
SPIN FOR CASH JOINT VENTURE AND
MASTER LICENSE AGREEMENT
STATEMENTS OF INCOME FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND FOR
THE PERIOD FROM DECEMBER 3, 1996 (INCEPTION) THROUGH SEPTEMBER
30,1997
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
<S> <C> <C>
Revenues
Gaming operations $246,851 $60,672
Cost and Expenses
Gaming operations 101,655 26,979
Depreciation 13,237 2,586
Research and development 2,088 1,587
Selling, general and administrative 189 50
Bad debt expense 125 -
Total expenses 117,294 31,202
Income from Operations 129,557 29,470
Other Income (Expense)
Interest income (expense) 1,422 (322)
Income from Operations Before Taxes $130,979 $29,148
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
SPIN FOR CASH JOINT VENTURE AND
MASTER LICENSE AGREEMENT
BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 45,835 $39,175
Accounts receivable, net 20,179 11,787
Investments to fund liabilities to
jackpot winners 5,900 956
Prepaid expenses and other 1,839 114
Total Current Assets 73,753 52,032
Furniture, fixtures and equipment,
at cost
Equipment 49,564 23,382
Furniture and fixtures - 72
Total 49,564 23,454
Less accumulated depreciation (14,792) (2,586)
Furniture, fixtures and equipment, net 34,772 20,868
Investments to fund liabilities to
jackpot winners 63,217 10,400
Total Assets $171,742 $83,300
Liabilities and Venturers' Capital
Current liabilities
Accounts payable to International
Game Technology $ 3,182 $22,927
Accounts payable 1,348 -
Jackpot liabilities 7,826 1,891
Commissions and other payable 2,932 1,842
Royalties payable 3,455 1,340
Capital lease payable to International
Game Technology 2,120 454
Total Current Liabilities 20,863 28,454
Long-term jackpot liabilities 86,952 19,755
Total Liabilities 107,815 48,209
Venturers' Capital 63,927 35,091
Total Liabilities and Venturers'
Capital $171,742 $83,300
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
SPIN FOR CASH JOINT VENTURE AND
MASTER LICENSE AGREEMENT
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND
FOR THE PERIOD FROM DECEMBER 3, 1996 (INCEPTION) THROUGH SEPTEMBER
30,1997
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 130,979 $ 29,148
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 13,237 2,586
Bad debt expense 125 -
Loss on sale of assets 1,887 -
Increase in assets:
Accounts Receivable (8,517) (11,788)
Deferred and prepaid expenses (1,725) (114)
Increase (decrease) in accounts payable
and accrued expenses (13,526) 25,280
Total adjustments (8,519) 15,964
Net cash provided by operating
activities 122,460 45,112
Cash Flows from Investing Activities
Investment in furniture, fixtures
and equipment (31,802) (22,171)
Investment in systems annuity assets (57,761) (11,356)
Proceeds from the sale of furniture,
fixtures and equipment 2,774 -
Net cash used in investing activities (86,789) (33,527)
Cash Flows from Financing Activities
Payment on systems annuity liability (5,892) (1,002)
Collection from systems to fund annuity
liability 79,024 22,649
Capital contributions (distributions) (102,143) 5,943
Cash provided by (used in) financing
activities (29,011) 27,590
Net increase in cash and cash equivalents 6,660 39,175
Cash and cash equivalents:
Beginning of Period 39,175 -
End of Period $ 45,835 $ 39,175
Supplemental disclosures of cash flows
information:
Cash paid during the year for interest $ 1,348 $ -
Supplemental disclosures of non-cash
investing and financing activities:
Capital lease additions $ 2,128 $ 1,380
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
SPIN FOR CASH JOINT VENTURE AND
MASTER LICENSE AGREEMENT
STATEMENTS OF VENTURERS' CAPITAL FOR THE YEAR ENDED SEPTEMBER 30,
1998 AND FOR THE PERIOD FROM DECEMBER 3, 1996 (INCEPTION) THROUGH
SEPTEMBER 30,1997
<TABLE>
<CAPTION>
(Dollars in thousands) Anchor IGT Total
<S> <C> <C> <C>
Balance at December 3, 1996
(Inception) $ - $ - $ -
Capital contributions 3,100 2,843 5,943
Net income 14,574 14,574 29,148
Balance at September 30, 1997 17,674 17,417 35,091
Capital distributions (51,200) (50,943) (102,143)
Net Income 65,489 65,490 130,979
Balance at September 30, 1998 $ 31,963 $ 31,964 $ 63,927
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
1. Organization
The Spin for Cash Joint Venture and Master License Agreement (the "Venture")
is owned equally by International Game Technology ("IGT") and Anchor Gaming
("Anchor"). The Joint Venture Agreement was signed on December 3, 1996. The
Master License Agreement, dated December 3, 1996 is utilized in jurisdictions
where the Spin for Cash Joint Venture has not been approved to operate. The
first machines operated by the Venture were placed into operation on December
12, 1996.
The Venture's primary purpose is to utilize IGT's experience and technology
along with Anchor's proprietary game library in order to develop a variety of
spinning reel slot, video top box and other innovative games for the
MegaJackpots and lease game markets. As of September 30, 1998, the Venture
was operating in Indiana, Louisiana, Missouri, Mississippi, Native American
markets, Nevada, New Jersey and South Dakota.
2. Summary of Significant Accounting Policies
Basis of Presentation - A complete stand alone set of books is maintained
for the Venture in accordance with applicable generally accepted accounting
principles.
Revenues - Substantially all of the revenues of the venture are from the
operation of linked progressive slot machines. Revenues are recognized based
upon invoicing to the participating casinos.
In New Jersey, each progressive system is operated by an independent trust
managed by representatives from participating casinos. The Venture receives
revenues based upon a set annual fee per machine per system. Payments to the
jackpot winners are made by the trust.
In Louisiana, Missouri, Mississippi, Native American markets, Nevada
and South Dakota, the Venture provides the machines and operates the
central monitoring system and the casinos pay a percentage of the
play to the Venture.
In Indiana, where mutli-link progressives are currently prohibited, the
Venture provides games for a set daily lease fee.
Operating Expenses - IGT and Anchor provide nearly all of the services
associated with the operation of the Venture. The cost of these operations is
billed to the Venture using methodologies that best approximate the actual
cost of these services to the respective partner. Interest on payables
balances greater than 30 days and on inventories held for the Venture is
accrued at an annual rate of approximately 5% and is billed monthly.
Management believes that the methods used to allocate these costs are
reasonable.
Third Party Expenses - All invoices received from third parties for the
delivery of goods or services are paid by the partners. IGT and Anchor
invoice the Venture for these costs and the amounts are properly recorded on
the books of the Venture.
<PAGE>
Research and Development - IGT and Anchor perform all of the engineering
development work for the Venture and invoice the Venture for these services
at cost. Research and development charges are expensed as incurred.
Cash and Cash Equivalents - Amounts include cash required for funding current
systems jackpot payments as well as purchasing investments to meet
obligations for making payments to jackpot winners. Cash in excess of daily
requirements is generally invested in various short term marketable
securities with maturities of 90 days or less. Such investments are stated at
cost.
Depreciation - Substantially all of the Venture's depreciable assets are
directly used in gaming operations and are provided by IGT. IGT invoices the
Venture for these assets at their approximate cost. Depreciation is recorded
on the straight-line method over the following estimated useful lives:
Gaming operations equipment 1 to 3 years
Furniture, fixtures and equipment 5 years
Estimates - 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. Actual results could differ from those estimates.
Reclassifications - Certain amounts in the 1997 consolidated financial
statements have been reclassified to be consistent with the presentation used
in 1998.
3. Investments to Fund Liabilities to Jackpot Winners
These investments represent discounted U.S. Treasury securities purchased to
meet obligations for making payments to linked progressive systems jackpot
winners. At September 30, 1998, the Company has both the intent and ability
to hold these investments to maturity and, therefore, has classified them as
held-to-maturity. Accordingly, these investments are stated at cost, adjusted
for amortization of premiums and accretion of discounts over the term of the
security using the interest method. There were no gross unrealized losses or
gains at September 30, 1998 and 1997. Securities in this portfolio have
maturity dates through 2017.
Federal legislation was passed October 21, 1998 which would permit jackpot
winners to elect to receive the discounted value of progressive jackpots won
in lieu of annual installments. For jackpots won after this date, the Company
will make this offer to winners in jurisdictions which have also permitted
such payments. For jackpots won prior to the effective date of the
legislation, the winner may make this election after July 1, 1999. Upon the
winner's election after July 1, 1999, investments currently held by the
Company to fund these liabilities will be sold to settle the liability.
Management believes that this change in circumstance will not be inconsistent
with the classification of these investments as held to maturity and does not
expect a material impact to fiscal 1999 operating results as a result of this
change.
4. Capital Leases
All assets recorded under capital leases relate to the operation of Louisiana
and Missouri linked progressive systems. The machines are leased from IGT at
a rate of 1/36th of the value of the assets each month. As of September 30,
1998 and 1997, the assets had a net value of $2,120,412 and $453,871,
respectively.
<PAGE>
5. Liabilities to Jackpot Winners
From the Indiana, Louisiana, Missouri, Mississippi, Native American, Nevada
and South Dakota systems, the Venture receives a percentage of the amount
played or machine rental and service fees from the linked progressive systems
to fund the related jackpot payments. The jackpots are paid in twenty equal
annual installments without interest.
The following schedule sets forth the future fiscal year payments for the
jackpot winners under these systems at September 30, 1998:
<TABLE>
<CAPTION>
Years Ending September 30, Payments
<S> <C>
(Dollars in thousands)
1999 $ 5,914
2000 5,914
2001 5,914
2002 5,919
2003 5,919
Thereafter 87,865
Total $117,445
</TABLE>
Jackpot liabilities in the amount of the present value of the jackpots are
recorded concurrently with the recognition of the related revenue. Jackpot
liabilities include discounted payments due to winners for jackpots won and
amounts accrued for jackpots not yet won that are contractual obligations of
the Venture. Jackpot liabilities consist of the following:
<TABLE>
<CAPTION>
September 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Gross payments due to jackpot winners $117,445 $ 19,423
Unamortized discount on payments to
jackpot winners (57,397) (8,001)
Accrual for jackpots not yet won 34,730 10,224
Total jackpot liabilities 94,778 21,646
Less current liabilities (7,826) (1,891)
Long-term jackpot liabilities $ 86,952 $ 19,755
</TABLE>
The Venture amortizes the discount on the liabilities, recognizing it as
interest expense and records commensurate interest income on the purchased
investments to fund the payments to the jackpot winners. During fiscal 1998
and 1997, the Venture recorded interest expense on jackpot liabilities and
interest income on jackpot investments of $2,322,928 and $176,634,
respectively. The Venture is required to maintain cash and investments
relating to systems liabilities in separate accounts.
6. Income Taxes
The Venture has not made any provision for federal income taxes due to its
election to be taxed as a pass through entity under Internal Revenue Code
Section 704A. Under this election, income of the Venture is taxable to the
individual Venturers.
<PAGE>
7. Related Party Transactions
Substantially all of the goods and services provided to the Venture
are provided by and/or paid for by IGT and Anchor. These
transactions are recorded on the books of the Venture as a trade
payable. As of September 30, 1998 and 1997, the payable to IGT had a
balance of $3,181,612 and $22,926,711, respectively. These amounts
included interest of $30,706 for 1998 and $645,398 for 1997. As of
September 30, 1998 there was $1,348,597 payable to Anchor, none of
which was for interest. There were no amounts payable to Anchor as
of September 30, 1997.
