ANCHOR GAMING, 10-Q, 1999-05-14

ANCHOR GAMING
10-Q, 1999-05-14
MISCELLANEOUS AMUSEMENT & RECREATION

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<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 1999

[ ] 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 000-23124

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)
(Zip Code)

(702) 896-7568
(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since
last report)

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
--- ---

Shares outstanding of each of the registrant's classes of common stock as of
May 12, 1999:

<TABLE>
<CAPTION>
Class Outstanding as of May 12, 1999
----- ------------------------------
<S> <C>
Common stock, $.01 par value 11,877,607
</TABLE>

-1-
<PAGE>

ANCHOR GAMING

FORM 10-Q
QUARTER ENDED MARCH 31, 1999

INDEX

<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information

Item 1. Consolidated Condensed Financial Statements

Consolidated Condensed Balance Sheets at
March 31, 1999 and June 30, 1998 (unaudited) 3

Consolidated Condensed Statements of
Income for the three months ended
March 31, 1999 and 1998 (unaudited) 4

Consolidated Condensed Statements of
Income for the nine months ended
March 31, 1999 and 1998 (unaudited) 5

Consolidated Condensed Statements of Cash
Flows for the nine months ended
March 31, 1999 and 1998 (unaudited) 6

Notes to Consolidated Condensed Financial Statements (unaudited) 7

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11

Part II. Other Information

Item 1. Legal Proceedings 22

Item 6. Exhibits 22

Signatures 23
</TABLE>

-2-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
ANCHOR GAMING MARCH 31, JUNE 30,
CONSOLIDATED CONDENSED -------------------------------------
BALANCE SHEETS (UNAUDITED) 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 89,334,138 $ 73,187,295
Accounts receivable, net 7,167,496 8,977,254
Inventory 2,793,557 3,869,496
Prepaid expenses 2,007,181 1,951,947
Other current assets 981,502 53,688
------------- -------------
Total current assets 102,283,874 88,039,680
Property and equipment, net 89,914,073 94,791,189
Long-term notes receivable, net 2,207,391 2,234,856
Intangible assets, net 2,753,110 3,534,048
Investments in unconsolidated affiliates 26,883,017 32,638,738
Deposits and other 30,004,042 23,895,032
------------- -------------
Total assets $ 254,045,507 $ 245,133,543
------------- -------------
------------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,633,620 $ 5,994,029
Accrued salaries, wages and vacation pay 3,010,153 3,905,951
Income tax payable 6,508,624 12,469,108
Other current liabilities 10,139,657 11,221,310
------------- -------------
Total current liabilities 24,292,054 33,590,398
Minority interest in consolidated subsidiary 1,249,975 1,061,470
------------- -------------
Total liabilities and minority interest in
consolidated subsidiary 25,542,029 34,651,868
------------- -------------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, 0 shares issued and outstanding at
March 31, 1999 and June 30, 1998 - -
Common stock, $.01 par value, 50,000,000 shares
authorized, 13,782,050 issued and 11,971,607
outstanding at March 31, 1999, 13,758,375 issued
and 12,593,232 outstanding at June 30, 1998 137,821 137,584
Additional paid-in capital 114,886,596 114,179,417
Treasury stock at cost, 1,810,443 shares at March 31, 1999,
1,165,143 shares at June 30, 1998 (85,584,963) (52,731,940)
Retained earnings 199,064,024 148,896,614
------------- -------------
Total stockholders' equity 228,503,478 210,481,675
------------- -------------
Total liabilities and stockholders' equity $ 254,045,507 $ 245,133,543
------------- -------------
------------- -------------
</TABLE>

The accompanying notes are an integral part of
these consolidated condensed financial statements

-3-
<PAGE>

<TABLE>
<CAPTION>
ANCHOR GAMING THREE MONTHS ENDED MARCH 31,
CONSOLIDATED CONDENSED -----------------------------------
STATEMENTS OF INCOME (UNAUDITED) 1999 1998
- ----------------------------------------------------------------- -----------------------------------
<S> <C> <C>
Revenues:
Proprietary games operations $ 29,094,227 $ 29,635,818
Casino operations 20,923,112 20,884,467
Route operations 9,436,259 8,211,542
Other operations 366,164 452,199
------------ ------------
Total revenues 59,819,762 59,184,026
------------ ------------

Costs and expenses:
Proprietary games operations 4,402,320 3,937,249
Casino operations 10,883,122 9,933,192
Route operations 6,251,717 5,359,083
Other operations 419,463 658,296
Selling, general and administrative 10,885,451 8,973,042
Depreciation and amortization 4,525,623 3,254,283
------------ ------------
Total costs and expenses 37,367,696 32,115,145
------------ ------------
Income from operations 22,452,066 27,068,881
------------ ------------

Other income (expense):
Interest income 917,545 494,002
Interest expense - (55,233)
Other income 53,373 107,021
Minority interest in earnings of consolidated subsidiary (174,283) (142,105)
------------ ------------
Total other income 796,635 403,685
------------ ------------

Income before provision for income taxes 23,248,701 27,472,566

Income tax provision 8,776,366 10,302,213
------------ ------------
Net income $ 14,472,335 $ 17,170,353
------------ ------------
------------ ------------

Basic earnings per share $ 1.20 $ 1.37
------------ ------------
------------ ------------
Weighted average shares outstanding 12,063,496 12,525,132
------------ ------------
------------ ------------

Diluted earnings per share $ 1.18 $ 1.33
------------ ------------
------------ ------------
Weighted average common and common equivalent
shares outstanding 12,304,067 12,910,222
------------ ------------
------------ ------------
</TABLE>

The accompanying notes are an integral part of these
consolidated condensed financial statements

-4-
<PAGE>

<TABLE>
<CAPTION>
ANCHOR GAMING NINE MONTHS ENDED MARCH 31,
CONSOLIDATED CONDENSED -------------------------------------
STATEMENTS OF INCOME (UNAUDITED) 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Proprietary games operations $ 93,104,023 $ 81,105,784
Casino operations 64,008,452 59,159,624
Route operations 27,907,631 25,594,873
Other operations 1,239,448 1,314,238
------------- -------------
Total revenues 186,259,554 167,174,519
------------- -------------

Costs and expenses:
Proprietary games operations 13,343,714 11,329,817
Casino operations 32,590,084 27,746,262
Route operations 18,359,450 15,963,653
Other operations 1,432,519 1,909,237
Selling, general and administrative 29,873,815 23,448,152
Depreciation and amortization 12,597,738 9,182,634
------------- -------------
Total costs and expenses 108,197,320 89,579,755
------------- -------------

Income from operations 78,062,234 77,594,764
------------- -------------

Other income (expense):
Interest income 2,829,094 2,159,329
Interest expense - (168,080)
Other income 236,419 777,881
Minority interest in earnings of consolidated subsidiary (537,532) (492,874)
------------- -------------
Total other income 2,527,981 2,276,256
------------- -------------

Income before provision for income taxes 80,590,215 79,871,020

Income tax provision 30,422,805 29,951,633
------------- -------------
Net income $ 50,167,410 $ 49,919,387
------------- -------------
------------- -------------

Basic earnings per share $ 4.09 $ 3.90
------------- -------------
------------- -------------
Weighted average shares outstanding 12,253,734 12,809,968
------------- -------------
------------- -------------

Diluted earnings per share $ 4.00 $ 3.78
------------- -------------
------------- -------------
Weighted average common and common equivalent
Shares outstanding 12,537,183 13,204,109
------------- -------------
------------- -------------
</TABLE>

The accompanying notes are an integral part of these
consolidated condensed financial statements

-5-
<PAGE>

<TABLE>
<CAPTION>
ANCHOR GAMING NINE MONTHS ENDED MARCH 31,
CONSOLIDATED CONDENSED -----------------------------------
STATEMENTS OF CASH FLOWS (UNAUDITED) 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net cash provided by operating activities $ 61,506,793 $ 46,046,251
------------ ------------
Cash flows from investing activities:
Acquisition and construction of property and equipment (12,020,621) (19,803,716)
Expenditures for intangible assets (72,000) (371,817)
Issuance of notes receivable (859,334) (1,325,302)
Principal reductions on notes receivable 160,929 142,880
------------ ------------
Net cash used in investing activities (12,791,026) (21,357,955)
------------ ------------

Cash flows from financing activities:
Net proceeds from sale of stock and warrants 284,099 1,589,225
Treasury stock purchases (32,853,023) (36,162,611)
------------ ------------
Net cash used in financing activities (32,568,924) (34,573,386)
------------ ------------
Net increase (decrease) in cash and cash equivalents 16,146,843 (9,885,090)

Cash and cash equivalents, beginning of period 73,187,295 66,427,369
------------ ------------
Cash and cash equivalents, end of period $ 89,334,138 $ 56,542,279
------------ ------------
------------ ------------

Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ 167,466
------------ ------------
------------ ------------
Cash paid for income taxes $ 42,431,221 $ 25,616,526
------------ ------------
------------ ------------
</TABLE>

The accompanying notes are an integral part of these
consolidated condensed financial statements

-6-
<PAGE>

ANCHOR GAMING
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

The consolidated condensed financial statements include the accounts of
Anchor Gaming and its subsidiaries ("the Company" or "Anchor"), Anchor Coin,
C.G. Investments, Inc. ("CGI"), Colorado Grande Enterprises, Inc. ("Colorado
Grande") and D D Stud, Inc. ("DD Stud"), which conduct gaming operations in
Nevada, in Black Hawk and Cripple Creek, Colorado, and various other gaming
jurisdictions (collectively the "Subsidiaries"). All significant intercompany
accounts and transactions have been eliminated.

BASIS OF PRESENTATION

In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments necessary to present
fairly the results of its operations for the three-month and nine-month periods
ended March 31, 1999 and 1998, its cash flows for the nine months ended March
31, 1999 and 1998 and its financial position at March 31, 1999. These financial
statements should be read in conjunction with the Company's audited consolidated
financial statements for the fiscal year ended June 30, 1998. The operating
results for the three months and nine months and cash flows for the nine months
ended March 31, 1999 are not necessarily indicative of the results that will be
achieved in future periods.

INVENTORY

Inventories consist of silver and silver tokens, parts for gaming machines,
and food and beverage items. Silver inventory of $681,000 and $1,067,000 at
March 31, 1999 and June 30, 1998, 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.

DEPOSITS AND OTHER ASSETS

Included in deposits and other assets are $16,860,000 and $10,630,000 in
deferred state and federal tax assets at March 31, 1999 and June 30, 1998,
respectively.

OTHER CURRENT LIABILITIES

Included in other current liabilities are $3,645,000 and $3,519,000 in
employee royalties payable and $3,663,000 and $3,452,000 in accrued gaming,
property, sales and use taxes at March 31, 1999 and June 30, 1998, respectively.

-7-
<PAGE>

INVESTMENTS IN UNCONSOLIDATED AFFILIATE

The Company has an investment in an unconsolidated affiliate that is
accounted for under the equity method. Under the equity method, original
investments are recorded at cost and adjusted by the Company's share of
earnings, losses and distributions of these affiliates. Investments in
unconsolidated affiliates consist of a 50% interest in a joint venture (the
"Joint Venture") with International Game Technology ("IGT"). The primary
business of the Joint Venture is to distribute gaming machines on wide-area
progressive systems. The Company's share of net earnings from the Joint Venture
and related activities are included in revenue from proprietary games
operations.

The Joint Venture operates on a September 30 year-end and began operations
during the quarter ended March 31, 1997. For the three months ended March 31,
1999, operating revenues for the Joint Venture were $70,269,000, operating
expenses were $35,137,000, operating income was $35,132,000 and net income was
$35,633,000. For the three months ended March 31, 1998, revenues were
$60,624,000, expenses were $28,827,000, operating income was $31,797,000 and net
income was $32,289,000. For the nine months ended March 31, 1999, operating
revenues for the Joint Venture were $215,809,000, operating expenses were
$107,407,000, operating income was $108,402,000 and net income was $109,773,000.
For the nine months ended March 31, 1998, revenues were $146,497,000, expenses
were $69,889,000, operating income was $76,608,000 and net income was
$76,884,000.

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.

RECLASSIFICATIONS

Certain amounts in the consolidated condensed financial statements for the
three months and nine months ended March 31, 1998 have been reclassified to be
consistent with the presentation used for the three months and nine months ended
March 31, 1999.

EARNINGS PER SHARE

During the year ended June 30, 1998, the Company adopted FASB Statement No.
128 "Earnings per Share." This statement established standards for computing and
presenting earnings per share and required restatement of all prior-period
earnings per share data presented. A reconciliation of income and shares for
basic and diluted earnings per share (EPS) is as follows:

-8-
<PAGE>

<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
-------------------------------------- --------------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
----------- ---------- ------ ----------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net Income $14,472,335 12,063,496 $ 1.20 $17,170,353 12,525,132 $ 1.37
Effect of Dilutive
Securities:
Options 240,571 (0.02) 385,090 (0.04)
----------- ---------- ------ ----------- ---------- ------
Diluted EPS:
Net Income $14,472,335 12,304,067 $1.18 $17,170,353 12,910,222 $ 1.33
----------- ---------- ------ ----------- ---------- ------
----------- ---------- ------ ----------- ---------- ------
</TABLE>

<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
March 31, 1999 March 31, 1998
-------------------------------------- --------------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
----------- ---------- ------ ----------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net Income $50,167,410 12,253,734 $4.09 $49,919,387 12,809,968 $ 3.90
Effect of Dilutive
Securities:
Options 283,449 (0.09) 394,141 (0.12)
----------- ---------- ------ ----------- ---------- ------
Diluted EPS:
Net Income $50,167,410 12,537,183 $ 4.00 $49,919,387 13,204,109 $ 3.78
----------- ---------- ------ ----------- ---------- ------
----------- ---------- ------ ----------- ---------- ------
</TABLE>

2. COMMITMENTS AND CONTINGENCIES

LITIGATION

In February 1999, the Company and the Joint Venture, filed an action in
U.S. district court against Acres Gaming, Inc. ("Acres"). The complaint alleges
infringement of the Company's recently issued secondary event patents as well as
various contract breaches by Acres. In April 1999, Acres responded to the
Company's lawsuit against Acres by filing an answer and counterclaim against the
Company and the Joint Venture. Additionally, in April 1999, Acres filed an
action in Oregon state circuit court against the Company and the Joint Venture
alleging wrongful use of Acres intellectual property and breach of fiduciary
duties. The Company believes Acres' counterclaim and state circuit court lawsuit
are without merit and intends to vigorously contest the claims.

-9-
<PAGE>

both in federal and state court. The consolidated federal action, captioned
IN RE ANCHOR GAMING SECURITIES LITIGATION, Civil Action No. CV-S-97-01751-PMP
(RJJ), was dismissed on January 6, 1999 with the court entering a judgement
in favor of Anchor Gaming. The consolidated state action, captioned RYAN, ET
AL. V. ANCHOR GAMING, ET AL., Civil No. A383456, has been stayed by order of
the court. Certain other actions have been transferred and/or dismissed. The
Company believes that the claims are without merit, and the Company intends
to vigorously contest the lawsuits. The Company cannot presently state the
nature of further proceedings, if any, in the state or federal actions.

The Company is party to several routine lawsuits arising from normal
operations. Management does not believe that the outcome of such litigation will
have a material adverse effect on the consolidated financial statements of the
Company.

POWERHOUSE ACQUISITION

In March 1999, the Company announced plans for a merger with
Powerhouse Technologies, Inc. (Nasdaq: PWRH) ("Powerhouse"). Under the
announced plan, Powerhouse will be acquired by the Company for $19.50 per
share for each share of Powerhouse common stock plus net debt at closing. The
total estimated purchase price of $290 million ($220 million equity value
plus $70 million in net debt) is expected to be funded through a combination
of the Company's available cash and debt financing. The Company has received
a commitment from Bank of America National Trust and Savings Association and
NationsBanc Montgomery Securities LLC regarding a $300 million senior credit
facility ("Senior Credit Facility") for use in the acquisition. Terms of the
Senior Credit Facility have not been finalized and are subject to final
negotiation. The acquisition of Powerhouse is subject to approval by
Powerhouse's shareholders and by gaming authorities in several states. The
Powerhouse shareholders will vote on the proposed acquisition at a meeting to
be held June 7, 1999. The Company expects the acquisition to close in the
quarter ended September 30, 1999.

-10-
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

THIS REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, AND OTHER APPLICABLE SECURITIES LAWS. ALL STATEMENTS OTHER THAN
STATEMENTS OF HISTORICAL FACT ARE "FORWARD-LOOKING STATEMENTS" FOR PURPOSES
OF THESE PROVISIONS, INCLUDING ANY PROJECTIONS OF EARNINGS, REVENUES OR OTHER
FINANCIAL ITEMS; ANY STATEMENTS OF THE PLANS, STRATEGIES, AND OBJECTIVES OF
MANAGEMENT FOR FUTURE OPERATION; ANY STATEMENTS CONCERNING PROPOSED NEW
PRODUCTS, SERVICES, OR DEVELOPMENTS; ANY STATEMENTS REGARDING FUTURE ECONOMIC
CONDITIONS OR PERFORMANCE; STATEMENTS OF BELIEF; AND ANY STATEMENT OF
ASSUMPTIONS UNDERLYING ANY OF THE FOREGOING. SUCH FORWARD-LOOKING STATEMENTS
ARE SUBJECT TO INHERENT RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED OR ASSUMED IN THE
COMPANY'S FORWARD-LOOKING STATEMENTS. THESE RISKS AND UNCERTAINTIES INCLUDE,
BUT ARE NOT LIMITED TO: RISKS OF PROPRIETARY GAMES SUCH AS PRESSURE FROM
COMPETITORS, CHANGES IN ECONOMIC CONDITIONS, OBSOLESCENCE, DECLINING
POPULARITY OF EXISTING GAMES, FAILURE OF NEW GAME IDEAS OR CONCEPTS TO BECOME
POPULAR, DUPLICATION BY THIRD PARTIES AND CHANGES IN INTEREST RATES AS THEY
RELATE TO THE WIDE AREA PROGRESSIVE MACHINE OPERATIONS WITHIN THE COMPANY'S
JOINT VENTURE WITH IGT; COMPETITION IN BLACK HAWK, COLORADO; DEPENDENCE ON
SUPPLIERS; CHANGES IN GAMING REGULATIONS AND TAXES; DEPENDENCE UPON KEY
PERSONNEL; UNCERTAINTY WITH RESPECT TO THE POWERHOUSE ACQUISITION; AND OTHER
FACTORS DESCRIBED FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE COMPANY'S FORM 10-K FOR THE
YEAR ENDED JUNE 30, 1998. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENT.

OVERVIEW

The following table sets forth the percentage of Anchor's total
revenues attributable to proprietary games operations, casino operations,
gaming machine route operations, and other operations during the three months
and nine months ended March 31, 1999 and 1998.

<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
----------------------- -----------------------
Sources of Revenues 1999 1998 1999 1998
- -------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Proprietary games operations 48.6% 50.1% 50.0% 48.5%
Casino operations 35.0 35.4 34.3 35.4
Route operations 15.8 13.9 15.0 15.3
Other operations .6 .6 .7 .8
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>

-11-
<PAGE>

THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998

REVENUES. Total revenues were $59.8 million for the three months ended
March 31, 1999 an increase of $600,000 or 1.0% from $59.2 million for the three
months ended March 31, 1998.

Revenues from proprietary games operations were $29.1 million for
the three months ended March 31, 1999, a decrease of $500,000 or 1.7% from
$29.6 million for the three months ended March 31, 1998. The decrease is
primarily due to a reduction in proprietary games revenues generated by
Anchor's business that operates outside the Joint Venture (the "stand-alone
business"). Revenues generated from the stand-alone business were $10.6
million for the three months ended March 31, 1999, a decrease of $2.9 million
or 21.5% from $13.5 million for the three months ended March 31, 1998. The
decreased revenue resulted from reduced average net win per unit during the
March 31, 1999 quarter versus the March 31, 1998 quarter, and to a lesser
extent, a lower number of units producing revenue from casinos at March 31,
1999 as compared to March 31, 1998. Most of the decrease during the quarter
was due to decreased revenues from the Company's Wheel of Gold-TM- game.
Additional revenue decreases were due to reduced token sales for the Silver
Strike-TM- game and decreased revenues generated by the Totem Pole-TM- and
Clear Winner-TM- games. These decreases in the stand-alone business during
the quarter were offset to some extent by increases in the Company's
CashBall-TM- and SafeBuster-TM- games.

The total decrease in the stand-alone business of $2.9 million was
offset substantially by increases in revenues recorded from the Joint Venture
and related activities. Joint Venture revenues were $18.5 million for the three
months ended March 31, 1999, an increase of $2.4 million or 14.9% from $16.1
million for the three months ended March 31, 1998. At March 31, 1999 there were
more than 6,200 games, primarily Wheel of Fortune-TM-, operating within the
Joint Venture, as compared to approximately 5,000 games at March 31, 1998.

The Company expects the trend of decreased year over year revenue
comparisons for Wheel of Gold-TM-, Silver Strike-TM-, Clear Winner-TM- and Totem
Pole-TM- to continue due to the market maturity of these proprietary games.
These operations are also influenced by seasonal fluctuations as a result of
weather and casino patron traffic patterns. The Company expects that these
seasonal trends will continue in both the Joint Venture operations and the
proprietary games operations outside of the Joint Venture. In addition, changes
in interest rates could have an effect on the earnings of the Joint Venture.
Since jackpot expense is a function of the present value of future jackpot
payments, future changes in the interest rate environment will affect the
profitability of the Joint Venture. Specifically, decreases in interest rates
will increase the then current period's jackpot expense of the Joint Venture
while future increases in interest rates will decrease the then current period's
jackpot expense of the Joint Venture.

During the quarter ended March 31, 1999, the Company's installed base
of stand-alone proprietary games, without regard to its Joint Venture games or
Silver Strike product, decreased 5.7% from the quarter ended December 31, 1998.
The average net win per unit for the installed base of stand-alone proprietary
games also decreased during the same period. The Company

-12-
<PAGE>

cannot predict to what extent, if any, these declining trends in its
stand-alone proprietary games business will continue.

During the quarter ended March 31, 1999, a bill sponsored by the
Nevada Resort Association came before the Nevada legislature. This bill
attempted to define the conditions under which Nevada gaming machine
manufacturers would be required to sell gaming devices, to restrict the
pricing and ability to participate in the revenues of such gaming machines,
to regulate certain aspects of wide-area progressive slot machine systems,
and to force manufacturers to pay gaming taxes on their share of revenues.
The bill was later amended to provide increased regulatory review of wide
area progressives, address market accessibility to games and to require
manufacturers and casino operators to pay their proportionate share of state
gaming taxes. The amended bill excluded restrictions on manufacturer's
required sales, pricing and participation in revenue of gaming machines. The
bill passed the Nevada Assembly in April 1999 and is currently awaiting
action in the Nevada Senate. The bill is expected to be signed into law
before the scheduled completion of the Nevada legislative session on May 31,
1999. The financial effects of this legislation will likely result in
increased gaming tax expense associated with Nevada revenues in the Joint
Venture which will decrease the Company's earnings from the Joint Venture
and, to a lesser extent, will increase gaming tax expense in the Company's
stand-alone proprietary games operations outside of the Joint Venture.
Although the Company cannot predict the ultimate effect of this legislation,
the Company estimates the annualized effect of the increased taxes on the
Company's earnings, given the existing base of both stand-alone and Joint
Venture proprietary game installations, will be approximately $3 million
before income taxes. The timing and specific application of the bill is still
uncertain.

During the quarter ended December 31, 1998, the Company received Nevada
regulatory approval, and placed in casinos on a limited basis, the first units
of the conversion game Tic Tac Disco-TM-. This was the first title introduced
under what is referred to by the Company as the conversion opportunity. The
conversion opportunity is an Anchor Gaming operation that will be accounted for
within the Joint Venture whereby Anchor will upgrade existing, casino-owned IGT
gaming machines in exchange for a portion of the future incremental revenue
stream generated by the conversion. This upgrade will generally take the form of
placing a secondary bonusing type of event on or in the existing base unit. Tic
Tac Disco-TM- was the first of several conversion titles, some mechanical and
some video, that the Company has in various stages of development and plans to
introduce in the next twelve to eighteen months. During the quarter ended March
31, 1999, regulatory approval for Tic Tac Disco-TM- was received for several
jurisdictions in addition to Nevada. Subsequent to March 31, 1999, Nevada
regulatory approvals were received for two additional conversion titles, Pick `N
Pop-TM- and Pick `N Kick-TM-. The Company is awaiting the completion of
technology that will enable the base slot machines to accept up to 45 coins per
wager. This will provide the player with a multi-line, multi-coin spinning reel
slot machine experience. The Company will not pursue an aggressive roll out of
the conversion products until this technology is available. The Company expects
to introduce this multi-coin feature on the conversion platform during its June
1999 quarter. The Company cannot predict the level of success, if any, the
conversion opportunity will provide. The Company does not expect significant
revenue contributions from the conversion opportunity in fiscal 1999.

Revenues from casino operations were $20.9 million for the three months
ended March 31, 1999, which remained consistent with the revenues of $20.9
million for the three months

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<PAGE>

ended March 31, 1998. The Company's casinos experienced slight increases in
revenues from slot machines that were offset almost entirely by decreases in
revenues from table games. Two casinos, both larger and containing more
gaming devices, opened near the Colorado Central Station Casino as expected,
on June 24, 1998, and December 29, 1998, respectively. The Company was able
to sustain year over year revenue levels despite the increased competition
during the quarter ended March 31, 1999 versus the quarter ended March 31,
1998, but incurred increased marketing and personnel related costs as a
result of the new competition. The Company is aware of other casino projects
in various stages of planning in the Black Hawk market. The Company cannot
predict the effect that the new and proposed casino openings will have on the
Company's future Colorado casino operations. The Company expects that the
increased competition will have a continued negative effect on revenues as
well as on costs of casino operations such as promotions and costs related to
retaining and recruiting qualified employees. Historically, revenues and
casino patronage in the Colorado casino operations are highest in the summer
months and other months unaffected by inclement weather. The Company expects
this seasonality trend to continue.

Revenues from route operations were $9.4 million for the three months
ended March 31, 1999, an increase of $1.2 million or 14.6% from $8.2 million for
the three months ended March 31, 1998. Machines on route increased 51 machines
or 6.3% to 867 machines at March 31, 1999 from 816 machines at March 31, 1998
while average machines on route during the third quarter of fiscal 1999
increased 27 average machines or 3.2% to 865 average machines from 838 average
machines during the third quarter of fiscal 1998. The increase in total route
revenue was due to increased revenue from both participation and space lease
arrangements. In addition to the increase in average machines, win per unit
increased in the quarter ended March 31, 1999 as compared to 1998 due to
enhancements in the machine mix at route locations and the increased population
base in Southern Nevada, the Company's primary base of route operations. The
Company cannot predict whether this growth trend will continue or if increased
competition from expanding grocery store chains and local casinos will lead back
to the historical trend of generally flat year over year route revenue
comparisons. During the nine months ended March 31, 1999, several recently
publicized quality of life issues surrounding the route operations were settled
in a manner acceptable to both Anchor and certain governmental entities. The
slot route industry and the Company, will alcove slot machines in grocery
stores, provide better ventilation for cigarette smoke, enhance enforcement of
the supervision over minors near slot areas, and provide greater awareness of
facilities for the treatment of problem gambling. The Company cannot predict the
effect, if any, that potential future efforts by governmental or other agencies
to limit or curtail slot route operations in Nevada will have on the Company's
route operations revenues and profits.

COSTS AND EXPENSES. Total costs and expenses were $37.4 million for the
three months ended March 31, 1999, an increase of $5.3 million or 16.5% from
$32.1 million for the three months ended March 31, 1998. Total costs and
expenses as a percentage of total revenues increased to 62.5% during the third
quarter of fiscal 1999 from 54.3% during the third quarter of fiscal 1998.

Costs and expenses of proprietary games operations were $4.4 million
for the three months ended March 31, 1999 an increase of $500,000 or 12.8% from
$3.9 million for the three

-14-
<PAGE>

months ended March 31, 1998. Proprietary games costs and expenses as a
percentage of proprietary games revenues increased to 15.1% during the third
quarter of fiscal 1999 from 13.3% during the third quarter of fiscal 1998.
The increase in proprietary games costs and expenses was primarily due to
increased machine parts and increased production and service payroll. These
increases were offset to some extent by decreases in costs associated with
token sales for the Silver Strike-TM- game which experienced reduced revenues
during the quarter. The increase in proprietary games costs as a percentage
of revenue is primarily due to increased machine part and service type costs
on a maturing stand-alone game base as compared to reduced revenues from the
maturing stand-alone game base. Volatility in silver prices, which has
occurred from time to time over the past several years due to developments in
world silver markets, could also affect the future profitability of the
Silver Strike-TM- game.

Costs and expenses of casino operations were $10.9 million for the
three months ended March 31, 1999, an increase of $1.0 million or 10.1% from
$9.9 million for the three months ended March 31, 1998. Casino costs and
expenses as a percentage of casino revenue increased to 52.0% during the third
quarter of fiscal 1999 from 47.6% during the third quarter of fiscal 1998. The
increase in casino costs and expenses was primarily due to increased advertising
and promotions, and to a lesser extent increased payroll and related costs at
the Company's Colorado Central Station Casino. The Company is experiencing
increased promotion and payroll costs at the Colorado Central Station Casino as
a result of increased competition from new casino openings in Black Hawk.
Although the Company cannot predict the continued effect of the new and proposed
casino openings in Black Hawk on the Colorado Central Station Casino's
operations, the Company believes it is likely to increase both promotion and
payroll costs in future periods and as a result reduce operating margins and
potentially the casino's net income.

Costs and expenses of route operations were $6.3 million for the three
months ended March 31, 1999, an increase of $900,000 or 16.7% from $5.4 million
for the three months ended March 31, 1998. Costs and expenses of route
operations as a percentage of route revenue increased to 66.3% during the third
quarter of fiscal 1999 from 65.3% during the third quarter of fiscal 1998. The
increase in route costs and expenses was primarily due to increased location
costs directly related to the increase in participation revenue.

Selling, general, and administrative ("SG&A") expenses were $10.9
million for the three months ended March 31, 1999, an increase of $1.9 million
or 21.1% from $9.0 million for the three months ended March 31, 1998. SG&A
expenses as a percentage of total revenue increased to 18.2% during the third
quarter of fiscal 1999 compared to 15.2% during the third quarter of fiscal
1998. The increase in total SG&A expenses is primarily due to increased expenses
in the Company's proprietary games operations. These increased expenses result
from increased research and development expenses and, to a lesser extent,
increased valuation allowances related to gaming machines and increased
licensing costs. In addition, increased SG&A expenses include marketing and
property costs at the Colorado Central Station Casino and corporate development
costs. These increases were offset to some extent by decreased corporate legal
expenses related to the shareholder lawsuits.

Depreciation and amortization expense was $4.5 million for the three
months ended March 31, 1999, an increase of $1.2 million or 36.4% from $3.3
million for the three months

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<PAGE>

ended March 31, 1998. This increase is primarily due to increased
depreciation and amortization expense incurred in the Company's proprietary
games operations due to the placement of additional proprietary gaming
machines and the use of shortened lives for the additional games placed.

INCOME FROM OPERATIONS. As a result of the factors discussed above,
income from operations was $22.5 million for the three months ended March 31,
1999, a decrease of $4.6 million or 17.0% from $27.1 million for the three
months ended March 31, 1998. As a percentage of total revenues, income from
operations decreased to 37.5% during the third quarter of fiscal 1999 from 45.7%
during the third quarter of fiscal 1998.

NET INCOME. As a result of the factors discussed above, net income was
$14.5 million for the three months ended March 31, 1999, a decrease of $2.7
million or 15.7% from $17.2 million for the three months ended March 31, 1998.

NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998

REVENUES. Total revenues were $186.3 million for the nine months ended
March 31, 1999, an increase of $19.1 million or 11.4% from $167.2 million for
the nine months ended March 31, 1998.

Revenues from proprietary games operations were $93.1 million for the
nine months ended March 31, 1999, an increase of $12.0 million or 14.8% from
$81.1 million for the nine months ended March 31, 1998. The increase is
primarily due to increased equity earnings in the Joint Venture, which, for
accounting purposes, is recorded net of expense. Revenues recorded from the
Joint Venture and related activities were $56.3 million for the nine months
ended March 31, 1999 an increase of $17.9 million or 46.6% from $38.4 million
for the nine months ended March 31, 1998. This increase was offset by a
reduction in proprietary games revenues generated from Anchor's stand-alone
business, or that business operated outside of the Joint Venture and its related
activities.

Revenues generated from Anchor's stand-alone business were $36.8
million for the nine months ended March 31, 1999, a decrease of $5.9 million
or 13.8% from $42.7 million for the nine months ended March 31, 1998. The
decreased revenues resulted from a decrease in the average win per unit
during the nine months ended March 31, 1999 as compared to the nine months
ended March 31, 1998, and to a lesser extent, a decrease in the number of
units placed in casinos at March 31, 1999 as compared to March 31, 1998. Most
of the decrease during the nine-month period was due to decreased revenues
from the Company's Wheel of Gold-TM- game. To a lesser extent, stand-alone
revenues decreased during the nine-month period due to decreased revenues
generated from the sale of tokens for the Silver Strike-TM- game and
decreased revenues generated by the Clear Winner-TM- and Totem Pole-TM-
games. These decreases were offset to some extent by increased revenues
during the nine-month period from the Company's CashBall-TM- and
SafeBuster-TM- games.

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<PAGE>

fluctuations as a result of weather and casino patron traffic patterns. The
Company expects that these seasonal trends will continue in both the Joint
Venture operations and the proprietary games operations outside of the Joint
Venture. In addition, changes in interest rates could have a negative effect
on the earnings of the Joint Venture. Since jackpot expense is a function of
the present value of future jackpot payments, future decreases in interest
rates will increase the then current period's jackpot expense of the Joint
Venture while future increases in interest rates will decrease the then
current period's jackpot expense of the Joint Venture.

During the quarter ended December 31, 1998, Anchor was issued two new
patents that relate to the world of secondary events and bonusing features
within gaming machines. The Company believes that this intellectual property
provides the Company with a strategic advantage in a highly competitive game
creation marketplace. The ultimate value of these patents is uncertain, and the
Company cannot predict what benefits, if any, it can obtain as a result of
owning this intellectual property.

Revenues from casino operations were $64.0 million for the nine
months ended March 31, 1999, an increase of $4.8 million or 8.1% from $59.2
million for the nine months ended March 31, 1998. The increase is primarily
due to increased revenue at the Colorado Central Station Casino and to a
lesser extent due to increased revenue at the Colorado Grande Casino. The
increased revenues were primarily generated during the first six months of
fiscal 1999 as revenues have been flat in year over year comparisons for the
most recent three months. The competitive landscape has changed materially in
the last twelve months in the Black Hawk market, where the Company's Colorado
Central Station Casino is located. Two casinos, both larger and containing
more gaming devices, opened near the Colorado Central Station Casino as
expected, on June 24, 1998, and December 29, 1998, respectively. The Company
experienced lower year over year revenue growth than in recent periods and
increased marketing and personnel related costs as a result of the new
competition. The Company is aware of other casino projects in various stages
of planning in the Black Hawk market. The Company cannot predict the effect,
if any, that the new and proposed casino openings will have on the Company's
future Colorado casino operations. The Company expects that the increased
competition will have a continued negative effect on revenues as well as on
costs of casino operations such as promotions and costs related to retaining
and recruiting qualified employees. Historically, revenues and casino
patronage in the Colorado casino operations are highest in the summer months
and other months unaffected by inclement weather. The Company expects this
seasonality trend to continue.

Revenues from route operations were $27.9 million for the nine months
ended March 31, 1999, an increase of $2.3 million or 9.0% from $25.6 million for
the nine months ended March 31, 1998. Average machines on route during the nine
months ended March 31, 1999 was 859 machines, as compared to 822 machines during
the nine months ended March 31, 1998. The increase in route revenue was due
primarily to increased participation revenue as a result of both increased
participation units and increased participation win per unit. Route revenues
increased to a lesser extent from increased space lease revenue as a result of
increased space lease units.

The Company believes that the increased route revenue was primarily due
to enhancements in the machine mix at route locations and the increased
population base in Southern Nevada, its primary base of route operations. The
Company cannot predict whether this

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<PAGE>

growth trend will continue or if increased competition from expanding grocery
store chains and local casinos will lead back to the historical trend of
generally flat year over year route revenue comparisons. During the six
months ended December 31, 1998, several recently publicized quality of life
issues surrounding the route operations were settled in a manner acceptable
to both Anchor and certain governmental entities. The slot route industry and
the Company, will alcove slot machines in grocery stores, provide better
ventilation for cigarette smoke, enhance enforcement of the supervision over
minors near slot areas, and provide greater awareness of facilities for the
treatment of problem gambling. The Company cannot predict the effect, if any,
that potential future efforts by governmental or other agencies to limit or
curtail slot route operations in Nevada will have on the Company's route
operations revenues and profits.

COSTS AND EXPENSES. Total costs and expenses were $108.2 million for
the nine months ended March 31, 1999, an increase of $18.6 million or 20.8% from
$89.6 million for the nine months ended March 31, 1998. Total costs and expenses
as a percentage of total revenues increased to 58.1% during the nine months
ended March 31, 1999 from 53.6% during the nine months ended March 31, 1998.

Costs and expenses of proprietary games operations were $13.3 million
for the nine months ended March 31, 1999, an increase of $2.0 million or 17.7%
from $11.3 million for the nine months ended March 31, 1998. Proprietary games
costs and expenses as a percentage of proprietary games revenues increased
slightly to 14.3% during the nine months ended March 31, 1999 from 14.0% during
the nine months ended March 31, 1998. The increase in proprietary games costs is
due to increased machine part costs and increased production and service
payroll. These increases were offset to some extent by reduced costs associated
with token sales for the Silver Strike-TM- game which experienced reduced
revenues. Volatility in silver prices, which has occurred from time to time over
the past several years due to developments in world silver markets, could also
affect the future profitability of the Silver Strike-TM- game.

Costs and expenses of casino operations were $32.6 million for the nine
months ended March 31, 1999, an increase of $4.9 million or 17.7% from $27.7
million for the nine months ended March 31, 1998. Casino costs and expenses as a
percentage of casino revenue increased to 50.9% during the nine months ended
March 31, 1999 from 46.9% during the nine months ended March 31, 1998. The
increase in casino costs and expenses was primarily due to increased advertising
and promotions costs and gaming taxes, and to a lesser extent increased payroll
and related costs at the Company's Colorado Central Station Casino. Although the
Company cannot predict the continued effect of the new and proposed casino
openings in Black Hawk on the Colorado Central Station Casino's operations, the
Company believes it is likely to increase both promotion and payroll costs in
future periods and as a result reduce operating margins and potentially the
casino's net income.

Costs and expenses of route operations were $18.4 million for the nine
months ended March 31, 1999, an increase of $2.4 million or 15.0% from $16.0
million for the nine months ended March 31, 1998. Costs and expenses of route
operations as a percentage of route revenue increased to 65.8% during the nine
months ended March 31, 1999 compared to 62.4% during the nine months ended March
31, 1998. The increase in route costs and expenses was primarily due to
increased location costs directly related to the increase in participation
revenue. To a lesser

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<PAGE>

extent, the increase resulted from increased rent expense for space leases
directly associated with the increase in space lease units.

Selling, general, and administrative ("SG&A") expenses were $29.9
million for the nine months ended March 31, 1999, an increase of $6.5 million or
27.8% from $23.4 million for the nine months ended March 31, 1998. SG&A expenses
as a percentage of total revenue increased to 16.0% during the nine months ended
March 31, 1999 from 14.0% during the nine months ended March 31, 1998. The
increase in total SG&A expenses is primarily due to increased expenses in the
Company's proprietary games operations. These increased expenses are primarily
due to increased valuation allowances related to gaming machines, increased
research and development expenses and increased royalties and commissions. In
addition, increased SG&A expenses include increased marketing costs at the
Colorado Central Station Casino and increased corporate political contributions,
offset to some extent by decreased corporate development costs.

In December 1998 the Company had been in discussions with the
Ontario provincial government with respect to a settlement for the Company's
work that resulted from the Company's success in the request for proposal
conducted for charitable gaming. Those discussions are now concluded and the
Company reached a settlement with the Ontario Government. The Province of
Ontario has mandated that these discussions and their subsequent result be
held in confidence. Accordingly, the Company cannot disclose the effect of
any such settlement other than the financial effects of this matter will not
be reflected in any future period.

Depreciation and amortization expense was $12.6 million for the nine
months ended March 31, 1999, an increase of $3.4 million or 37.0% from $9.2
million for the nine months ended March 31, 1998. This increase is primarily due
to increased depreciation expense incurred in the Company's proprietary games
operations and to a lesser extent increased depreciation incurred at the
Colorado Central Station Casino and in the route operations.

INCOME FROM OPERATIONS. As a result of the factors discussed above,
income from operations was $78.1 million for the nine months ended March 31,
1999, an increase of $500,000 or 0.6% from $77.6 million for the nine months
ended March 31, 1998. As a percentage of total revenues, income from operations
decreased to 41.9% during the nine months ended March 31, 1999 from 46.4% during
the nine months ended March 31, 1998.

NET INCOME. As a result of the factors discussed above, net income was
$50.2 million for the nine months ended March 31, 1999, an increase of $300,000
or 0.6% from $49.9 million for the nine months ended March 31, 1998.

LIQUIDITY AND CAPITAL RESOURCES

Anchor's principal sources of liquidity have been cash flows from
operations. In October 1997, the Company completed a stock offering on behalf of
selling shareholders. The Company did not receive any proceeds from the October
1997 offering. Net cash provided by operating activities was $61.5 million
during the first nine months of fiscal 1999 and $46.0 million during the first
nine months of fiscal 1998. At March 31, 1999, the Company had cash and cash

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<PAGE>

equivalents of $89.3 million, working capital of $78.0 million, and a $10
million unsecured revolving bank line of credit (the "Bank Revolver").

In the first nine months of fiscal 1999, the Company spent $12.0
million on capital expenditures, primarily related to the purchase of 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 the Company's common stock, $.01 par value per share
("Common Stock"). In December 1997, the board of directors authorized a
repurchase of up to 514,000 additional shares of common stock. In October 1998,
the board of directors authorized a repurchase of up to 640,400 additional
shares of common stock bringing the number of shares authorized for repurchase
back up to 1.0 million shares at October 21, 1998. As of March 31, 1999, the
Company had repurchased 1,619,675 shares of common stock at a cost of $82.5
million: 103,500 shares were repurchased during the third quarter of fiscal 1999
at a cost of $4.3 million; 361,800 shares were repurchased during the second
quarter of fiscal 1999 at a cost of $18.4 million; 180,000 shares were
repurchased during the first quarter of fiscal 1999 at a cost of $10.1 million;
638,375 shares were repurchased during fiscal 1998 at a cost of $36.2 million;
and 336,000 shares were repurchased during fiscal 1997 at a cost of $13.5
million. At March 31, 1999, 534,700 shares remained authorized under the
repurchase program.

In April 1997, the Company entered into the Bank Revolver, which was
amended in December 1998 to expire November 30, 1999. 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
remained in compliance with the covenants throughout the term of the credit
facility. During the first nine months of fiscal 1999 the Company did not borrow
under the Bank Revolver.

The Company believes its principal liquidity requirements during the
fourth quarter of fiscal 1999 will be the purchase of additional proprietary
gaming machines in formats that have

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<PAGE>

already been introduced to the market as well as the development and purchase
of proprietary gaming machines in formats that have not yet been introduced.
Should the acquisition of Powerhouse be consummated, capital expenditure and
liquidity requirements may differ substantially.

The Company believes that cash on hand, cash flow from operations, and
available borrowings under the Bank Revolver and the Senior Credit Facility will
be sufficient to fund its currently planned capital expenditures and acquisition
plans.

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.

YEAR 2000

In the past, many computer software programs were written using two
digits rather than four to define the applicable year. As a result,
date-sensitive computer software may recognize a date using "00" as the year
1900 rather than the year 2000. This is generally referred to as the "Year 2000
Problem." If this situation occurs, the potential exists for computer system
failures or miscalculations by computer programs, which could disrupt
operations.

The Company has conducted a comprehensive review of its computer and
other systems deemed to be date sensitive (as well as those of its
unconsolidated affiliates) to assess its exposure to the Year 2000 Problem. The
Company is already in the process of modifying or replacing those systems that
are not year 2000 compliant. Based upon a comprehensive review, management
believes that the Company's systems are compliant or will be compliant by
mid-1999. However, if modifications are not made or not completed within an
adequate time frame, the Year 2000 Problem could have a material adverse effect
on the operations of the Company.

In addition, the Company has communicated, and continues to
communicate, with its major vendors and suppliers to determine their state of
readiness relative to the Year 2000 Problem and the Company's exposure to third
party year 2000 issues. However, there can be no assurance that the systems of
other companies on which the Company's systems rely will be timely converted, or
that representations made to the Company by third parties are in fact accurate.
As a result, the failure of a major vendor or supplier to adequately address
their Year 2000 Problem could have a material adverse effect on the operations
of the Company.

All costs related to the Company's Year 2000 Problem are being expensed
as incurred, while the cost of new hardware or software, is being capitalized
and amortized over its expected useful life. The costs associated with Year 2000
compliance have not been and are not anticipated to be material to the Company's
financial position or results of operations. Specifically, as of March 31, 1999,
the Company has spent less than $100,000 and anticipates spending less than
$500,000 thereafter. These costs and estimated completion dates are based upon
management's best estimates, as well as third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from these plans. The

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<PAGE>

Company does not have a contingency plan relative to the Year 2000 Problem,
although it intends to develop one before June 30, 1999.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In February 1999, the Company and the Joint Venture, filed an action
in U.S. district court against Acres Gaming, Inc. ("Acres"). The complaint
alleges infringement of the Company's recently issued secondary event patents
as well as various contract breaches by Acres. In April 1999, Acres responded
to the Company's lawsuit against Acres by filing an answer and counterclaim
against the Company and the Joint Venture. Additionally, in April 1999, Acres
filed an action in Oregon state circuit court against the Company and the
Joint Venture alleging wrongful use of Acres intellectual property and breach
of fiduciary duties. The Company believes Acres' counterclaim and state
circuit court lawsuit are without merit and intends to vigorously contest the
claims.

Several securities class action lawsuits have been filed against the
Company and certain of its current and former officers and directors. The
lawsuits were filed in various jurisdictions following the Company's
announcement in early December 1997 that the Company's results for the
December quarter might not meet analysts' expectations. The lawsuits have
been brought on behalf of certain purchasers of the stock of the Company and
allege violations of state and/or federal securities laws arising out of
alleged misstatements and omissions to state material facts about the Company
over various periods of time covered by the suits. The lawsuits were
consolidated in Nevada, both in federal and state court. The consolidated
federal action, captioned IN RE ANCHOR GAMING SECURITIES LITIGATION, Civil
Action No. CV-S-97-01751-PMP (RJJ), was dismissed on January 6, 1999 with the
court entering judgement in favor of Anchor Gaming. The consolidated state
action, captioned RYAN, ET AL. V. ANCHOR GAMING, ET AL., Civil No. A383456,
has been stayed by order of the court. Certain other actions have been
transferred and/or dismissed. The Company believes that the claims are
without merit, and the Company intends to vigorously contest the lawsuits.
The Company cannot presently state the nature of further proceedings, if any,
in the state or federal actions.

The Company is party to several routine lawsuits arising from normal
operations. Management does not believe that the outcome of such litigation
will have a material adverse effect on the consolidated financial statements
of the Company.

ITEM 6. (d) EXHIBITS

See index to exhibits

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<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized

ANCHOR GAMING
(Registrant)

Date May 12, 1999 /s/Michael D. Rumbolz
------------ ---------------------
Michael D. Rumbolz
Chief Executive Officer and
President

Date May 12, 1999 /s/Geoffrey A. Sage
------------ -------------------
Geoffrey A. Sage
Chief Financial Officer

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<PAGE>

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBITS
- --------
<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)).
9.4 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)).
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

<PAGE>

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)).
10.12 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)).
10.16 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)).
10.19 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)).

<PAGE>

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 (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)).
10.37 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)).
21.1 List of Subsidiary Corporations (Incorporated by reference to Exhibit
21.1 to the Company's June 30, 1998 Annual Report on Form 10-K (File
No. 0-23124)).
27.1* Financial Data Schedule
</TABLE>

- -----------

* Filed herewith

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 89,334,138
<SECURITIES> 0
<RECEIVABLES> 7,167,496
<ALLOWANCES> 0
<INVENTORY> 2,793,557
<CURRENT-ASSETS> 102,283,874
<PP&E> 89,914,073
<DEPRECIATION> 0
<TOTAL-ASSETS> 254,045,507
<CURRENT-LIABILITIES> 24,292,054
<BONDS> 0
0
0
<COMMON> 137,821
<OTHER-SE> 228,365,657
<TOTAL-LIABILITY-AND-EQUITY> 254,045,507
<SALES> 0
<TOTAL-REVENUES> 186,259,554
<CGS> 0
<TOTAL-COSTS> 108,197,320
<OTHER-EXPENSES> (2,527,981)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 80,590,215
<INCOME-TAX> 30,422,805
<INCOME-CONTINUING> 50,167,410
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,167,410
<EPS-PRIMARY> 4.09
<EPS-DILUTED> 4.00

</TABLE>